LendingClub Corp Q3 FY2024 Earnings Call

Good afternoon. Thank you for attending today's LendingClub Third Quarter 2024 Earnings Conference Call. My name is Sheila, and I'll 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 turn the conference over to our host, Artem Nalivayko, Head of Investor Relations. Artem, you may proceed.

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 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, platform volume and pricing, future products and services, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and 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 today also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. You could 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.

All right. Thank you, Artem. Welcome, everybody. We have a terrific quarter with continued product innovation and credit outperformance now supported by an improving rate environment. As a result, we delivered across all of our key operating metrics. Originations grew 6% sequentially to $1.9 billion. Revenue grew 8% to over $200 million. Pre-provision net revenue grew 19% to $65.5 million, and we delivered $14.5 million of GAAP net income. Beyond the numbers, we welcome back the first of what we hope to be many more banks to our platform supporting improved marketplace revenue. We deployed significant excess capital into the balance sheet to drive future recurring revenue, and earlier this month, we acquired the technology underlying Tally's award-winning credit card management solution to accelerate our product roadmap and drive future revenue growth. We said last quarter that we had reached an inflection point, and this quarter's results demonstrate how well we've positioned the company to benefit from improving market conditions and to capture the massive opportunity in front of us. I'll begin with our balance sheet, where, in addition to continued retention of whole loans and structured certificates, we made an opportunistic acquisition of a $1.3 billion portfolio of previously sold LendingClub loans. This transaction is similar to the portfolio purchase we made back in December 2022. We're going to hold these loans at fair value, and they will be immediately accretive to our earnings. Our balance sheet has now grown 25% since the beginning of this year to just over $11 billion in total assets. That represents a quadrupling since we acquired the bank in 2021, which speaks to our commitment to building a resilient recurring revenue stream to deliver consistent shareholder value. Marketplace demand has also been bolstered, thanks to our strong track record on credit, the attractiveness of our asset class, our commitment to marketplace innovation, our status as a regulated bank, and the improving interest rate environment. We've been focused on reengaging banks, which have historically supported higher loan sales pricing. This quarter we sold a $75 million pool of loans to a previous bank buyer that returned to the platform, and just last week, we completed a $400 million sale to a new bank partner. Importantly, we anticipate that these banks will together purchase more than $1 billion worth of additional loans over the next 12 months. Pricing on these sales will support continued improvement in our average pricing across all loan sales, which will ultimately allow us to reopen dormant direct-to-consumer marketing channels that remain uneconomic at this point. Our structured certificates program and innovation tailored to asset managers looking for leveraged returns also continues to perform well with $830 million flowing through the program this past quarter. Here, too, strong demand combined with the declining rate environment and our track record of credit outperformance is supporting increases in loan sales pricing. As a reminder, the structured certificate program is a way for us to generate efficient returns for loan buyers while delivering in-period revenue and forward interest income with reduced credit risk for LendingClub. As I mentioned, credit remains strong, and we continue to consistently perform 40% to 50% better than our competitive set across the core consumer segments we serve. Thanks to agility made possible by our advanced underwriting platform and proprietary machine learning models supported by data on over $90 billion of loan repayments, we're delivering the highest sustained returns in our history. These attractive returns are benefiting revenue from both our balance sheet and the marketplace. We will therefore remain prudent on underwriting, continuing to pursue quality over quantity to ensure we sustain leading credit performance supportive of increased loan sales pricing. I'll turn now to our member base, which I'm thrilled to say crossed the 5 million mark this past quarter. As we look to our next millions of members, our consumer strategy is focused on three areas. First, efficiently acquire satisfied customers by helping them lower the cost of their credit card debt. Second, engage members through our mobile app and through products, tools, and features that provide added value and encourage repeat visits. And third, offer additional products and product combinations in the right place at the right time to deliver new value and meet members' credit needs as they evolve, thereby creating a powerful lifetime lending relationship. Let me dive into each of these areas. So first is efficiently acquiring customers by providing meaningful savings on the cost of their credit card debt. This opportunity has never been greater. Credit card balances remain at record highs and are priced at record high rates. The value of refinancing credit card debt through a personal loan is the most compelling it has ever been. According to the Data Analytics firm dv01, the spread between credit card and personal loan rates is at a record high 750 basis points. Moreover, in addition to their savings on interest, members also increase their credit score an average of 48 points when they pay off credit card debt with a LendingClub personal loan. This process is highly automated and seamless, which is why we have such high satisfaction scores and why 83% of our members say that they want to do more with us. Once acquired, our mobile app serves as our primary engagement platform, meeting members where they are. We began marketing the mobile app back in June, and the user base has increased by about 20% each month. We're getting positive feedback, with App Store ratings of 4.7 and 4.8 in the Apple and Google Stores, respectively. But what's really exciting is what we're seeing under the covers. Nearly half of new loan customers are downloading our app. Those who are using the app are visiting us almost 20% more often than non-app users. That increased engagement is translating to greater issuance, with app users demonstrating a higher propensity to take another product from LendingClub. We are enhancing the app with features to support our members' financial goals. We launched the first phase of DebtIQ, our debt monitoring and management solution earlier this year to drive engagement and reinforce the value of debt consolidation. Even in its nascent state, app users enrolled in DebtIQ are engaging with us nearly 20% more often than those not enrolled. We started the DebtIQ journey in response to our members seeking better tools for understanding their debt, how to pay it down, and how to pay less interest when doing so. From our own surveys, we found that the need is very clear. 47% of U.S. cardholders don't know the interest rate they're paying on their credit cards. Even those who say they know it, a third of them didn't know that their rates had gone up over 500 basis points in tandem with the prime rate increase. This lack of awareness is astounding, and it speaks to the education and transparency needed to help consumers understand the true cost of their debt and to motivate them to pay it off. The award-winning Tally Technology we acquired earlier this month will accelerate our progress on DebtIQ, with meaningful enhancements rolling out in phases starting in mid-2025. Fully realized, we expect DebtIQ to provide our members with a holistic view of their credit card interest rates, outstanding balances, minimum payments, due dates, and more. It will provide payment strategies for paying down their credit card debt and the ability to set up automated transactions and alerts to ensure payments aren't missed. It will also provide seamless integration with LendingClub's banking and lending products. Ultimately, DebtIQ will provide members with a powerful way to manage and optimize their high-cost unsecured debt. Finally, as we create deeper engagement with our members, we'll successfully broaden our lifetime lending relationship through products like TopUp, which allow borrowers to add funds to their existing loans while maintaining one monthly payment. Over time, we'll enhance our application funnel and our data foundation to enable smart, seamless cross-selling of products beyond unsecured lending. In summary, we have a clear, focused, high-confidence strategy that will enable us to acquire customers, engage them in our product ecosystem, and deliver lifetime value and revenue growth. But we're not just focused on lending; we're also focused on helping our members earn more on what they save. We recently launched LevelUp Savings to reward members for engaging in positive savings behavior. Members who contribute at least $250 per month to their LevelUp Savings account earn the current LevelUp rate of 5.15% versus a standard rate of 4.3%. We've had very strong initial customer response to the program, gathering over $500 million in deposits since launching just two months ago. Importantly, this product gives us another lever for managing deposit costs while delivering competitive value to our members. We're energized about the quarter we delivered and the trajectory we're on. As we move through the next year and conditions further improve, we will be growing volumes on top of a larger balance sheet and a more efficient expense base, all with a more robust and differentiated consumer experience. We're extremely well-positioned, and I look forward to continuing to innovate and execute with the talented LendingClub team, who, I'm happy to say, have voted us one of Newsweek's Most Loved Workplaces for the third year in a row. With that, I'll turn it over to you, Drew.

Thanks, Scott. I agree we are well-positioned for the future and the third quarter is starting to demonstrate our potential. Let's go through the details starting with originations. We originated over $1.9 billion in the quarter, which is above the high end of our guidance range and a $100 million increase over the prior quarter. The growth was driven by continued product innovation while maintaining tight underwriting standards and industry-leading marketing efficiency. If you turn to Page 12 of our earnings presentation, you can see the origination breakdown across the four funding programs. The issuance in the quarter was once again led by our very successful structured certificate program, which accounted for $830 million of originations. We also sold $335 million of whole loans through the marketplace, accumulated $240 million of our held-for-sale extended seasoning program loans to meet future marketplace investor demand for seasoned loans, and we retained $510 million in our held-for-investment portfolio. This quarter, we again increased the amount of whole loans retained on our balance sheet to 39% of total originations, up from 36% in the prior quarter. As Scott mentioned, we successfully won a competitive bidding process to purchase a $1.3 billion portfolio of LendingClub personal loans that we previously originated and sold. On Page 13 of the earnings presentation, we have provided some of the key highlights of the transaction. The purchase allows us to deploy excess capital, which will generate additional revenue and earnings over the next year. The portfolio is forecasted to yield approximately 10%, and it is worth noting that the yield is net of expected credit losses. As we have done with prior purchases, we have elected to book this purchase as held-for-investment at fair value given the short remaining duration of approximately one year. It is also worth mentioning that we secured low-cost short-term financing for the first month of the purchase, which we'll see reflected on our net interest margin table on Page 15 of the earnings presentation. This transaction was the primary driver of 17% sequential growth of our whole loan portfolio to $6 billion and the growth of total assets to $11 billion at the end of the quarter. We are also making steady progress with returning bank buyers to the marketplace. In addition to the two transactions that Scott mentioned, we continue to build a pipeline of additional bank buyers and are optimistic in making further progress in 2025. Now, let's move on to pre-provision net revenue or PPNR, which is total net revenue less non-interest expenses. PPNR was $65 million for the quarter, up 19% sequentially and came in well above our guidance. These results were driven by strong execution and improved loan pricing, as well as a few unique items that I'll call out as I breakdown revenue and expenses. As shown on Page 14, total revenue for the quarter was $202 million, up from $187 million in the prior quarter. Let's go into the two components of revenue starting with non-interest income. Non-interest income was $62 million in the quarter, up marginally from the prior quarter. The sequential improvement was driven by higher marketplace loan pricing, partially offset by fewer loans sold as we made the decision to retain more loans on our balance sheet. Pricing this quarter represents the third quarter in a row of improved sales prices. We also had two largely offsetting impacts in the quarter. First, a $9 million markup of our held-for-sale portfolio reflecting higher sales prices and therefore a lower discount rate. This benefit was largely offset by an $8 million servicing fee online during the period as a result of the portfolio purchase. Now that we own the loans and are collecting the interest income, there is no servicing revenue and hence the reversal. Now, let's move on to net interest income, which was $140 million in the quarter, up from $129 million in the prior quarter. The increase was primarily driven by growth in our interest-earning assets as a result of the portfolio purchase we mentioned earlier. On Slide 15, you can see our net interest margin was down slightly this quarter at 5.63% as expected. The main driver was the growth in the senior securities from the structured certificates, which have a lower yield but are also risk-remote and come with no provision for credit losses. We expect net interest margin to be slightly down again in the fourth quarter due to lower balances in the extended seasoning portfolio related to the $400 million bank sale in October. We will get a $6 million benefit to revenue on the sale of that portfolio. After the fourth quarter, net interest margin should begin expanding, assuming the Fed continues lowering interest rates and our deposit funding costs decrease as a result. Please turn to Page 16 of our presentation, which refers to the second component of PPNR, non-interest expense. As I indicated last quarter, expenses increased by $4 million to $136 million as we position the company for 2025 and absorbed a legacy one-time non-cash item in the quarter. While we will continue to remain disciplined, we expect another step up in expenses in the fourth quarter due to higher depreciation related to the completion of some of the initiatives Scott discussed earlier, as well as the impact of the recent hiring we have done to accelerate our product roadmap and position the organization for a strong 2025. Now, let's turn to provision. On Page 17, you will see provision for credit losses was $48 million during the quarter, compared to $36 million in the prior quarter. The sequential increase was primarily driven by higher day one CECL on higher held-for-investment loans retained compared to the prior quarter. Credit continues to perform as expected, as evidenced by our net charge-offs on our held-for-investment portfolio declining 16% sequentially, down $11 million to $56 million in the quarter. The net charge-off ratio was 5.4% in the third quarter, down from 6.2% in the prior quarter. Delinquencies on the consumer portfolio also continued to improve. On Page 18, we have updated our personal loan lifetime loss expectation for the 2022 and 2023 held-for-investment vintages. As we indicated last quarter, the 2021 vintage has largely run its course with less than 10% of the original principal balance remaining, so we have removed that vintage from the disclosure. The 2023 vintage continues to season, and we have maintained the lifetime loss expectations provided last quarter. The forecast for the 2022 vintage reflects an adjustment for lower expected recovery rates on previously charged-off loans and modestly higher lifetime charge-offs. We continue to expect strong marginal ROEs north of 20% across all vintages. That brings us to net income. Net income for the quarter was $14.5 million or $0.13 per share, and our tangible book value per common share increased to $11.19, up 10% compared to last year. It's worth noting it is up 72% since we acquired the bank in 2021. Now, let's move on to guidance. For the fourth quarter, we anticipate originations between $1.8 billion and $1.9 billion. We expect continued product innovation and modest increases in paid marketing to offset the negative seasonality we typically see in the fourth and first quarters. We are very close to achieving sales price improvements that will allow us to open up additional marketing channels as we enter the seasonally favorable second and third quarters of next year. We are increasing our PPNR guidance range to $60 million to $70 million, reflecting growing revenue and improving operating leverage and expenses, as well as the $6 million benefit from the $400 million portfolio sale I mentioned earlier. We plan to continue delivering positive net income in the fourth quarter with continued reinvestment in the balance sheet to provide stronger returns in 2025. Our goal is to roughly maintain the size of our whole loan portfolio under CECL until originations accelerate after Q1 of next year. For the next couple of quarters, this will translate to retaining roughly $550 million to $650 million of held-for-investment loans under CECL per quarter. All in all, it was a great quarter, and we continue to set ourselves up to take advantage of this momentum in 2025. With that, we'll open it up for Q&A.

I will start the question-and-answer session. Our first question is from Tim Switzer at KBW. Tim, your line is now open.

Hey, good afternoon. Thank you for taking my question.

Hey, Tim.

Hey, Tim.

The first question I had was on the pretty significant improvement in loan sale price when we saw this quarter going from a marketplace discount from 3.5% to 2.5%. I would imagine it's only $75 million in sales. Not a lot of that was really driven by the bank purchaser. Can you kind of provide some details on what's driving that? I'm sure it's lower cost of funding for asset managers. And then what's your expectation going forward on continued improvement as rates keep moving lower and then potential further upside if more banks jump back in?

Thanks for your question, Tim. First, I want to highlight that this marks our third consecutive quarter of rising sales prices, which has positively impacted our income statement. This improvement stems from three main factors. Firstly, our loan performance has remained steady, which investors are recognizing, leading them to offer better prices for this consistency. Secondly, the interest rate environment in the last quarter was very favorable, with the two-year treasury yield dropping by 100 basis points, promoting better pricing. Additionally, this improved pricing has positively influenced the remaining held-for-sale portfolio, impacting the fair value marks for the quarter. These elements were the primary reasons behind the changes in fair value marks and the observed price increase. Looking ahead, we believe shifting sales towards more banks will enhance pricing dynamics. We expect continued pricing improvements from all buyers due to the consistency of performance and enhancement in the loans being sold. Over time, we anticipate the rate environment to remain advantageous, although there may be fluctuations each quarter depending on shifts in the yield curve.

Okay, great. Appreciate it. And I'm curious, it sounds like in one of your comments you mentioned that the $400 million loan sale to a new bank partner a week ago was all seasoned loans. Can you kind of talk about what the banks are looking for and what products they want, what they want to be putting on their balance sheet? And then how the pricing might differ if it's a seasoned loan versus a whole loan sale?

Yes. We started the extended seasoning program or the held-for-sale program I think maybe three quarters ago, and the initial hypothesis or the initial belief was that as loans season, we would be able to get tighter in terms of credit expectations with the buyer, if there's any difference in how that's viewed, which is absolutely true. But the other benefit is that when a buyer wants to come in and buy bulk purchase, such as this bank we're discussing to get started on their journey of accumulating a larger portfolio, we have that available immediately, which in this case and the bank that we sold to in Q3 allowed us to kickstart the programmatic buying of those banks. And then as Scott mentioned, enter into $1 billion flow over the next 12 months with those banks. So it's been really beneficial. I'd say even these two banks, there's a little bit of difference in terms of the type of loans that they're trying to put on the balance sheet. Without getting into it too much, I think banks are just going to have different profiles of risk and return that they want to put on their balance sheet.

Got it. Makes total sense. I'll get back in the queue. Thank you.

Good afternoon. Thank you for my questions. First, I wanted to discuss the detailed information you shared about your applications, especially DebtIQ and the Tally acquisition. Could you clarify what you expect to implement in the second and third quarters of next year regarding capabilities and how that might impact your ability to seize opportunities, such as handling higher volumes? Additionally, I'm curious about the recent CFPB open banking rule proposal and its potential effects on your capabilities with DebtIQ. Thank you.

Yes, yes, great. So DebtIQ was the product name of what we were building ourselves when we got the Tally opportunity. When we saw that become available, we went after it because effectively it represents the DebtIQ roadmap, except fully manifested. So the acquisition of this code base and some of the talent that helped stand it up in our environment will fairly materially shortcut the timeline for us in getting to the end state of our plan for DebtIQ and dramatically reduce the cost of getting there. So what is it? It's basically our customers are coming to us to pay down their credit card debt. For those we approve, we are successfully paying down their debt. In some cases, not all of the debt, just some. And then what happens is post-loan from us, I think we talked about this before. You'd like to think a consumer sails into the sunset and never racks up credit card debt again. Unfortunately, that isn't the case. People go in and out of the need, right? You saw over this last inflationary cycle, balances growing and people leaning more into their cards to make ends meet. What we know from our customers is some of them face challenges such as medical emergencies, temporarily losing a job, or other life events that cause them to go back into credit card debt. So having an actual interface that helps provide them with this visibility and the capability to manage it keeps them connected to us and keeps in front of the customer the opportunity to save off of that debt should it be required. Even when they don't have credit card debt, there's value here. This is the only bill they pay manually. Everything else is on autopay, auto ACH, right? Because everything else is fixed. Your mortgage, your car payments, your student loan is all fixed. This is a variable rate and it's off of a variable balance. Each card company calculates the minimum payment due differently. You have five cards. The process of knowing, okay, when is it all due? What payment amount is each one going to require at minimum and what's the total payoff balance? Moreover, importantly, which one should I pay off first based on what rate am I paying at each of these? They are trying to manually keep track of that with spreadsheets and notebooks. This will basically give them the capability to do that. So you'll be able to see all your cards in one place, see your total balance, your statement balance, your payoff amount, your min pay amount, the rate you're paying. It will allow you to set a payment strategy. So as an example, fully realized, I always want to have whatever $5,000 in my checking account, anything above that, I want you to pay off the highest price card first but ensure you make all of my minimum payments for me. This will allow you to set that up and conduct that payment exercise from a LendingClub account and manage it. If we see you're not paying off your credit card debt, we're going to be able to present an offer to you for a loan and help you understand how much money that's actually going to save you. This will promote products like TopUp and Clean Sweep or just a repeat personal loan, which would add value and could be integrated into that experience. And remember that these repeat customers come at low to no acquisition cost, and they deliver better credit performance. This creates a bit of a flywheel in our member base. And what does open banking do for all of that? This plays right into it; it effectively accelerates, I think, all the trends we've seen over the last decade, which tend to be in our favor, which is that banks' core business is relying on a lot of inertia and a lot of, let's call it, lack of transparency of information. The ability for customers to see what they're getting paid on their checking and savings accounts, what they're being charged on their credit cards, and to compare that to what LendingClub is going to charge them on their loans and what we're going to pay them for their savings accounts is another way to demonstrate value and help us acquire customers and keep them close to the brand.

Okay, great. That's really exciting. Looking forward to seeing that next year. I guess, the second question and kind of a follow-up on pricing, so it was nice to see the pricing increase this quarter. I'm just sort of wondering at what price would you feel comfortable, or do you think that meaningful volume can be generated? And if you could perhaps give the sensitivity to your improving credit trends and to the expected Fed rate cuts on pricing that would be helpful. Thank you.

We are pleased to see that prices are recovering as we anticipated, thanks to our ability to deliver strong and consistent returns. However, we are still below the average rate we have sold at for about 16 out of the last 17 or 18 years. We have previously mentioned that achieving a mid to high 98 is necessary for us to expand into digital pay, increased paid search, direct mail, and other channels that have been inactive since the shift in the rate environment. We are not there yet, but we are clearly on that path. We are confident that we will reach that point sometime in Q1, which aligns perfectly with our positive seasonality kicking in during Q2 and Q3. We expect to start testing those channels in Q1 to refine our response models, allowing us to capitalize on them next year.

Okay, great. That's very helpful. Thanks very much.

Hi, can you hear me?

Hi, David.

Yes, now we can.

Hi, David.

Okay. Okay. I didn't hear the introduction. Thanks for taking the questions. Great, great. So how should we think about balance sheet growth from here? Now that you just acquired this $1.3 billion of loans, does that kind of set you back in terms of balance sheet growth going forward or how much capacity? Can you talk about that?

Yes, absolutely. As we've mentioned previously, our long-term goal is to continue expanding our balance sheet, which will enable us to generate a more stable stream of recurring revenue and earnings for both the company and its investors. The recent portfolio acquisition provided a significant boost, bringing us to $11 billion relatively quickly, which is fantastic. However, as we look ahead to the next quarter, some developments may temporarily decrease our balance sheet before we resume growth into 2025. I would anticipate one quarter of slight decline, but by 2025, we should be able to start growing the balance sheet again.

Great. And out of curiosity, when during the quarter did you close on that $1.3 billion?

That was in the beginning of August.

Got it, got it. Great. And then in terms of can you comment on credit buyer demand, whether you're seeing it increase, decrease about the same. It sounds as if the environment is clearly improving and that demand could be on the up and up. But can you provide some commentary there?

Yes, obviously, I think we just spoke about the banks, right? The banks are starting to come back as we predicted. We don't expect to be at a 50:50 mix of banks and asset managers in the near future, but we've made great progress this quarter and highlighted what's coming next quarter. We're excited that that is coming back as a growth channel. I'd say the private credit asset managers have been very active in the space obviously, as evidenced by the structured certificate program. The best proxy is just to look at the ABS markets, especially for unsecured consumer—they've been very active. Spreads have come in, and so I'd say the markets feel very healthy for those loan buyers, and the Fed continuing to lower rates should be just a further catalyst to activity in that space. As long as we always say, as long as the Fed cutting rates is for a soft landing and not a hard landing.

And the last one for me is more of an industry question—in terms of the consumer loan market overall, are you expecting that to grow meaningfully over the next 12 months or so or remain about the same? A follow-up to that is can you comment on the level of competition that you're seeing and if you're seeing any competitors with irrational pricing out there to gain share.

We do expect it to grow. As we've talked about, the total addressable market that's available is very significant, and the savings opportunity for consumers is quite significant. What has been constricting has really been the availability at the right price of capital in the fintech space for sure. That is 40% to 50% of the total market. So that matters for total volume in the personal loan market. Again, banks and credit unions have continued to operate and really didn't see the same kind of pullback there. So as the fintech players come back in, we expect the market to be growing. In terms of competition, we almost always have an irrational player at any given time, and we've seen many, many waves of competition, many waves of new entrants over our history. We monitor this stuff extremely closely across all channels. I think we mentioned before we're constantly conducting price point tests across channels, across segments, across use cases so that we can monitor what's happening and make sure that we're positioned the right way. Nothing really noteworthy to point out. I think we said on the last call we would anticipate the pricing pressure to manifest first in high prime because that's where everybody shifted to generate the volume. We expect the market will be competitive. It's never not been competitive. So I'd say as we resume growth, we would anticipate competition. We feel like we're well-prepared to compete there.

Thanks very much.

Our next question comes from Giuliano Bologna with the company Compass Point. Giuliano, your line is now open.

Congratulations on the continued great performance. One thing I'd be curious about is it seems like you did a small sale to a returning bank. You're doing $400 million to a new bank. When you were talking about the additional billion dollars or the billion dollar number, is that inclusive of the $400 million or is that all incremental to the $400 million? And then kind of related to that. I'm curious where discussions are about potential other bank buyers coming back to the platform.

Yes, yes, the billion is all incremental. Think of it as bulk transactions, think of it as a bulk purchase upfront to get their portfolio started and then ongoing monthly quarterly purchases to continue building the portfolio. As far as other conversations, I mean, there's a healthy pipeline of different sized banks. I'd say most of them are probably new to the platform, so they take a little longer to ramp back up. But we're excited that there's more opportunities in front of us.

And just to make sure I'm thinking about this correctly, the I'm assuming that $400 million loan sales coming out of the HFS portfolio at fair value. Would the additional loan sales on kind of the extra billion dollars, would that all flow through the HFS book or would that flow through the marketplace?

For the marketplace, as whole loan sales.

Okay. That's very helpful. And then you get some very helpful guidance around the $550 million to $650 million of HFI retention. I'm curious where you're seeing loan pricing since the 50 basis point rate cut and how you're seeing that trend versus deposits. I'm assuming you were probably a little late to cutting your deposit rate versus some other peers out there because you were obviously building up balances for the portfolio acquisition of the securities book growing in the quarter. Is that a good way to think of it? Where you are now?

Yes, I believe that in the fourth quarter, we will see numerous positive developments with the deposit portfolio. As mentioned, we have launched LevelUp Savings, which provides us with two liquid deposit products that enable us to consider the trade-offs between interest rates and volume growth simultaneously. This is a valuable tool for us. Additionally, we are starting to see high-rate CD pricing from last year roll off, which will positively impact our pricing. We are also about to exit a legacy commercial client that has been paying one of the highest rates, and this contractual end will occur in the fourth quarter, benefiting our overall deposit pricing. Overall, we are growing the portfolio as planned and are pleased with the progress we have made regarding our deposit products and pricing.

That's right. Hopefully, we will see improvements.

Giuliano, regarding your question, we're actually about to end our relationship with one of our older commercial customers, which has been one of the highest-paying accounts. This contractual conclusion will take place in Q4 and should positively impact our overall deposit pricing moving forward. Overall, we are successfully growing the portfolio and are pleased with the advancements we've made in product and pricing related to deposits.

Go ahead, sorry.

Go ahead. You go.

Apologies for that. I wanted to ask about the LevelUp program, which has recently been modified. It seems you've reduced the LevelUp rate by 15 basis points from the standard rate of 50. I'm interested to know the composition of your deposit base in terms of the ratio between LevelUp and the standard rate. I understand that since the program is relatively new, the data may still be developing.

If you're talking about between our kind of plain vanilla high-yield savings versus LevelUp or you're talking, I'm assuming you're talking within LevelUp, who's engaging in the ongoing savings behavior. It's a little early since we just launched it in August, so not that many people have rolled through the kind of promo period. But we're at roughly 70% of the people are engaging in the positive ongoing behavior. So we'll see if that sticks. But that's where we are today.

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

Good afternoon, everyone. Thank you for answering my questions and congratulations on a successful quarter. My first question is about the various factors you consider when deciding how to place loans in a given quarter, such as whether to sell them, retain them, or move them to the seasoning portfolio. Can you explain the framework you use for these decisions? I assume it relates to some form of return on capital, but there are also implications for short- and medium-term earnings based on where you place the loans. Could you outline the decision-making process or the priorities you have in mind concerning the loan mix?

Yes, certainly. I mean, it's probably important to note first, as we enter any quarter, we have obviously an estimation of what we think we're going to originate over the quarter in terms of volume and the mix of products that we're going to originate. We have an order book, which is maybe not totally complete, but call it largely complete. So we're always balancing filling orders with the amount of production we have at the correct, at the right profile of borrowers. So what we're always working against is making sure we fill as many orders as we can, but also setting aside some of that volume for balance sheet growth. That's important for all the reasons we were talking about before. And within that is a price optimization exercise that happens on how we fill the orders, what product we fill them through, and then also determining how much, for example, HFI we want to take on balance sheet, given how the earnings profile is evolving as we go through the quarter. Some of the decisions are made before we even get into the quarter, and then other decisions are made as we go through the quarter to end up with a certain earnings profile coming out of the quarter.

I think some other things to think through: we have in our deck, in our materials, I think it's Slide 11, we've got a page that gives overall economics we recognize immediately for different disposition channels versus what the lifetime value looks like. Held-for-investment at amortized cost is three times better—three times higher earnings than selling the loan. However, as you know, we take a big upfront provision, so it's a big drag on earnings. The other channels fall somewhere in between those two. When we think about whole loans versus structured certificates, at the same price, we do the structured and with capital available, we do the structured certificate because we get the upfront in-period value, and we get an ongoing income stream from the senior security. What we're starting to get with the return of banks is they're not at the same price. So for an asset manager, we're getting a higher price for the structured certificates. That's why you've seen us pivot to do more of those. As banks come back, they're going to be buyers of whole loans. They're coming in typically at a premium to asset manager pricing. So you'll see us do more whole loan sales because it's a stronger sales price, stronger in-period earnings, and we will utilize some of those earnings to do more HFI.

Okay. That, that all makes great sense. Appreciate that color. And second question, just we've observed just a lot of capital raising in the private credit markets, and a lot of which is being allocated toward consumer pools of loans with the forward flow agreements and so forth that we're seeing structured in the market. I'm wondering in your guys' opinion, does that affect things? I mean, if you've got a lot more money coming into system, I assume it can affect pricing, it can affect liquidity, it can affect competition. How do you see that manifesting itself, and does that affect you guys and the way you think about strategy as well?

I think there is—it's obvious to us that there's more capital coming into private credit, the asset managers, and it's looking to be deployed, maybe with a bit more urgency than it has in the past, given that rates appear to be coming down for the foreseeable future and locking in yield is important where you can do it. I do think that gives all players in our space a little more pricing power in terms of how we're negotiating sales, prices, and structures and things of that nature. We've been very happy with the structured certificate program. We've been able to move prices up; maybe some of that is due to more capital. But I think it's also a testament to the consistent performance and returns we've delivered since we launched the program. I dare say we're probably getting some of the higher prices in the industry right now that are coming from private credit and asset managers.

Higher prices, I think, also fairly simple: a lot of these deals that are being announced, you don't see exactly what all the structures are around it, loss protection and discounts and all the rest. What I'd say is there's more capital coming in, but certainly some of the names we're hearing about the pricing, the yield requirements for some of that capital versus the yield requirements, for example, for banks, are pretty different. When it comes to how that translates into borrower pricing, we're glad we're announcing the bank partnerships.

Okay. Super helpful. Thanks, guys.

Our next question comes from Brad Capuzzi with the company Piper Sandler. Brad, your line is now open.

Thanks for taking my questions. Appreciate it. Most of them have been answered. But I just wanted to can you talk about the loan performance between different cohorts of consumers, between prime, near-prime, and some of the lower-end consumers? Thanks.

Yes. I mean, we're seeing stability across the board, across all segments we serve. I'd say we're seeing actual outperformance in the higher yielding stuff right now. The returns there have been very, very strong. I mean, in general, these are the highest. Our post-COVID vintages were extremely strong, but they were an anomaly. What we're seeing now is we're delivering very strong sustained returns quarter after quarter after quarter. I think we mentioned last call; we are now more than a year into the structured certificates program. So those buyers have been able to see several quarters of consistent strong returns. You can see in the earnings materials that our delinquencies by cohort are stable to declining on a vintage basis, and the higher yielding stuff is performing even better. That's somewhat of a factor; we really tightened the credit box there quite substantially early on. We're focused on that because we do believe that over time we're going to need to shift back to a more normal mix of who's buying what asset. Where we've been over the last two years is people with higher yield requirements buying lower yielding paper, and they're meeting their return hurdles through our discount. Over time, what we'd like to see is those that want higher yield seeking buyers getting it from the consumer base that naturally delivers that, and banks and credit unions back at the top end. We're showing the strong track record down there so people are comfortable moving a bit down the credit spectrum.

Awesome. I appreciate it. And then just the last one quickly, I know you aren't giving guidance on expenses further out, but just high level, where do you view expenses trending as we head into 2025?

I think the amount of increase we saw this quarter versus Q2 probably see a similar amount, maybe a little more as we go from that level of increase as we go from Q3 to Q4, and again, that's going to be some of the amortization from the tech projects we've been implementing starting to roll through the P&L will be the largest driver of that.

Next question comes from Reggie Smith with the company JP Morgan. Reggie, your line is now open.

Hey, thank you. Congrats on the quarter. I was hoping to get, I guess, some additional color on the purchase during the quarter. I was curious about how much visibility do you guys have into when those opportunities come up? Just curious how quickly this came together. I'm not sure if you disclosed the price paid relative to par and whether or not, taking on those loans influenced your 3Q and 4Q origination. Anything you could share along those lines would be great. I've got a few follow-ups. Thank you.

Yes. This was—given the size of the portfolio, this is through a previous buyer who we've worked with extensively in the past and had visibility that there was going to be a sale. This sale was part of a capital optimization exercise involving the entire corporation. It wasn't just this one portfolio that was contemplated to be sold; it was a competitive bidding situation. We can't disclose the price, but it's a seasoned portfolio, and those always trade at a further discount compared to a bit of a discount based on their seasoning process. Very excited we got it. I didn't understand your question, your last part of your question, Reggie, on originations?

Yes. I guess, taking down that $1.3 billion portfolio, I was curious whether that influenced your origination during 3Q and what you're willing to do in 4Q given the amount that you've grown your balance sheet already. You follow me?

Yes, yes, I understand. No, no, no. As we've said before, we have that excess capital at the holdco for growth. At the end of last quarter, we had well over $100 million. We have $90 million in cash sitting at the holdco at the end of this quarter. Most of that is available for continued use for growth in the balance sheet.

Got it. If I can sneak two more in there, I think you guys gave a soft range of like something in the 98% range, kind of allows you to open up your marketing aperture. I was just curious if you could frame where that's kind of the bounds of that. Clearly, 98% is where you'd love to be like where were pricing? Where is pricing during the pandemic when rates were zero versus probably the worst point when inflation was kind of running away? If you could provide some bounds around that just so I can contextualize where 98% fits relative to the best days and kind of the worst days.

Yes, I would say 99% to 101% is sort of steady state and par, if you just had to pick, you were modeling out over a much longer time period, that's where you'd aim to settle. There are certain things that drive you slightly above or slightly below at any given time. We'll still be skinnier than the historical average run rate, but it's enough there to allow us to begin to push up that marginal price. Importantly, as our repeat rate goes up and the value of a newly acquired customer goes up, our capacity to invest in marketing will also increase.

Got it. That makes sense. If I could sneak one last one in on the bank channel. Might be hard to answer, but curious what you think is driving the renewed interest. If you were to allocate points to interest rates, their own consumer credit outlook, and then balance sheet capacity—how are those factors affecting their decision to come back to the loan buying market, maybe rank them.

Yes, well, I'd start by saying—if you think of what has caused issues for banks in this most recent cycle, it's been underestimating the duration of the assets they had on their balance sheet. It's been concentration in certain areas like consumer; I'm sorry, commercial real estate. Our asset class provides a lot of advantages to banks that don't have it on the balance sheet—high yield, short duration. Yes, it comes with more credit risk, but we have a history and track record of being able to manage that credit risk. Some of these banks that have come back and some of them are in the pipeline want the asset class on the balance sheet. They like the short duration. They're now finding the capital and/or liquidity available to deploy. If the Fed continues lowering rates and/or more time passes, we believe there will be more banks that come to the table once their capacity allows it from a balance sheet standpoint.

Understood. Thank you.

Yes, thanks, Reggie.

Thank you, Reggie. And now I'd like to turn the conference back over to Artem Nalivayko. Artem, you may proceed.

All right. Great. Thank you. We do have a couple of questions here that were submitted via retail. The first question is, what did LendingClub pay for the acquisition of Tally Technologies?

Yes. We didn't disclose the number. I think the important thing here is it will be capitalized. We'll come in overtime on. What I did say is we are very pleased at the acquisition cost for this vis-à-vis the development cost, and it won't be noticeable in our financials. As I mentioned, we're very excited about the degree to which this accelerates the roadmap. We've got a very high degree of conviction that our customers are going to really value this tool.

Great. We also received a lot of questions around banks coming back to the marketplace, some questions around the product roadmap and shareholder value, which I think most of which we've addressed in the prepared remarks. So Scott and Drew, turn it back to you. Anything you'd like to say as we wrap up?

No, I think importantly, hopefully, what's visible in these numbers is we're seeing inflection in all the key operating metrics, the outlook in front of us. I think we're making traction on our own. We're executing without help from the Fed. As the Fed moves to become more supportive, it is definitely supporting an acceleration in getting us back to our kind of target operating state. We're very excited about next year and have got a really clear strategy we're executing against. Early indications we have that I shared, some of which on the call is really supporting that this is the right strategy, that it will work and it's going to deliver strong returns for shareholders. So we're excited to deliver against that next year.

Okay, perfect. 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 questions, please email us at ir@lendingclub.com. Thank you.

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.