LendingClub Corp Q4 FY2024 Earnings Call

Good afternoon. Thank you for joining today's LendingClub Fourth Quarter ‘24 Earnings Conference Call. My name is Cole, and I will be the moderator for this call. All lines will be muted during the presentation, and there will be a chance for questions and answers at the end. Now, I would like to hand it over to Artem Nalivayko. Please proceed.

Thank you and good afternoon. Welcome to LendingClub's fourth quarter and full year 2024 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 Investors 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 earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks today also include non-GAAP measures relating to our performance, including tangible book value per common share, pre-provision net revenue, and return on tangible common equity. 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.

Hey, thank you, Artem. Welcome everyone. We feel great about how we executed the year and how we've positioned the company both strategically and financially. In the fourth quarter, originations were up 13% year-on-year, pre-provision net revenue was up 34%, and total net revenue came in at a high for the year, up 17% to $217 million. Stepping back and looking at the year in total, I'm extremely pleased with what we accomplished. We successfully exited our new bank operating agreement on time to become one of the first fintech banks to do so. Our product innovation enabled us to grow originations while maintaining industry-leading marketing efficiency. We maintained our credit outperformance with delinquencies more than 40% better than our competitive set. Our consistent, compelling asset performance drove consecutive quarterly increases in loan sales prices. We grew our balance sheet by 20% compared to the US Bank average of 3% to 4%. We increased our deposit base by 24%, fueled by the launch of our award-winning LevelUp Savings product. And we advanced our strategy, driving adoption of our mobile app to improve engagement and member lifetime value. We are looking forward to continuing our momentum in the year ahead as we build on our strong foundation. Critical to our foundation is credit, where our data advantage, flexible technology platform, and disciplined risk management are enabling compelling returns for both us and our marketplace investors. These attractive returns, combined with our product innovation and status as a nationally chartered bank, have supported steady growth in marketplace investor demand. The result is four consecutive quarters of increasing loan sales prices, up by 170 basis points year-on-year. And marketplace loan demand is increasingly coming from banks who purchased roughly one-third of our volume in Q4, up from less than 5% when we entered the year. We continue to work on growing this percentage, and we have a healthy pipeline of bank demand that we expect to materialize over the course of 2025. Demand from private credit, which represented the majority of our loan sales in 2024, is also growing. These loan investors have been drawn to the consistent returns and seamless access provided by our structured certificate program, where we've now crossed $4 billion in total originations. To build on that success, we're now working with a major rating agency towards an investment grade rating for the senior security. This rating will open the program to investors who require a rated product, including insurance companies who collectively hold over $8.5 trillion in assets. We're currently expected to close our first rated transaction directly with an insurer in the first quarter, with a spread roughly 30 basis points tighter than our typical structured transaction. Continued improvement in loan sales pricing will, over time, support the economics of expanding back into a broader set of marketing channels to further grow originations. Based on our trajectory, we plan to begin testing our way back into currently dormant marketing channels as we exit Q1 and enter our more favorable seasonal period. We are eager to accelerate our growth as we move through the year. As I’ve said before, credit card balances and interest rates are at historic highs, and those increases have translated to higher costs for our members. For reference, our members are now paying over $180 more per month than they were paying just a few years ago, which is an increase of more than 30%. That increased expense represents a huge savings opportunity that LendingClub is uniquely well positioned to deliver. Our value proposition is quite compelling. Not only do our members save when they consolidate credit card debt through LendingClub, but they also increase their credit score, an average of 48 points. In addition to providing savings, our ability to tailor our experience to members' needs amplifies our value proposition and helps fuel our success. For example, we launched TopUp a year ago to give borrowers an easy way to consolidate their existing loan balance with new borrowing while maintaining one monthly payment. The early results have been outstanding with an approximate 80% lift in issuance dollars per member compared to offering a repeat personal loan and a net promoter score of 82. Innovations like TopUp give us a competitive edge that flows through to our marketing efficiency. After efficiently acquiring satisfied members, the second step of our strategy is to engage them through our mobile app. We began marketing the app to loan customers six months ago, and our early results confirmed that app users engage more frequently and demonstrate a higher propensity to take another product versus web-only members. Therefore, we plan to enhance the functionality of the app over the coming year with new high engagement experiences and features. This includes DebtIQ, our debt monitoring and management tool, which will help members stay on top of their debt and further highlight the urgency and value of refinancing their credit card debt. Even in its current early stage, DebtIQ is driving a nearly 50% increase in member engagement and a 25% increase in loan issuance for enrolled members. Our efforts on DebtIQ will be accelerated by last quarter's acquisition of Tally's award-winning debt management technology. We plan to release an enhanced version of DebtIQ with new features like credit card linking, automated payments, and contextual offers as we enter the third quarter. Looking ahead, with marketplace demand growing, loan sales prices improving, our marketing engine restarting, and investor and consumer innovations taking hold, we have ambitious plans as we move through the year, which the team and I are excited to deliver. That includes accelerating our originations growth, increasing mobile app adoption and user engagement, continuing to innovate on our product roadmap, and improving shareholder returns. In closing, I'm extremely proud of what LendingClub has been able to accomplish, and for that, I'd like to thank the entire team who's made it happen. So, Drew, I'll turn it over to you to go through the results in detail.

Thanks, Scott. I just want to add that I'm also proud of the LendingClub team and what we were able to accomplish this year. Our investments of time, energy, and resources have put us in a great position from which to grow as we move through 2025. With that, let's go into the details of our financial results, starting with originations. We originated over $1.8 billion in the quarter, which was a 13% increase year-over-year. Originations were 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 originations breakdown across the four funding programs. You will note that this quarter, the disposition mix shifted as the return of banks allowed us to sell more whole loans at better economics. This is an encouraging development and was complemented by a separate $400 million sale from our extended seasoning portfolio at the beginning of the quarter. Our improving marketplace economics further enabled us to reinvest and retain more of our high-yielding, held-for-investment loans as we entered 2025. Now let's move on to pre-provision net revenue, or PPNR, which is total net revenue less non-interest expenses. PPNR was $74 million for the quarter, up 34% from $56 million last year, and came in above our guidance range of $60 million to $70 million. These results were driven by strong execution and improved loan sale pricing, as well as a few unique items that I'll call out as I break down revenue and expenses. As shown on Page 13, total revenue for the quarter was $217 million, up 17% from $186 million in the same quarter of the prior year. Revenue benefited from the previously mentioned $400 million loan sale as well as favorable marks at the end of the quarter due to higher sales prices. Now, let's go into the two components of revenue, starting with non-interest income. Non-interest income was $75 million in the quarter, up 38% from $54 million in the same quarter of the prior year. This increase was driven by loan sales prices which have improved each of the last four quarters. This price improvement was seen in both structured certificates as well as whole loans as banks returned to the platform. Now, let's move on to net interest income, which was $142 million in the quarter, up 8% from $131 million in the same quarter last year. The increase was primarily driven by growth in our interest-earning assets from our Structured Certificates program as well as the $1.3 billion loan portfolio purchase in the third quarter. On Slide 14, you can see our net interest margin was down slightly this quarter at 5.42% as expected. We believe this will represent the low point of our net interest margin over the coming quarters. The main driver of the sequential change was a higher mix of cash after we executed the $400 million extended seasoning sale. It's worth noting we saw substantial improvement in our funding costs during the quarter, driven by lowering our deposit rates in reaction to Fed cuts and the planned exit of our highest cost commercial deposit customer, which will lead to further funding cost improvements in Q1. Now, please turn to Page 15 of our presentation, which refers to the second component of PPNR, non-interest expense. As I had indicated last quarter, our expense space did increase coming in at $143 million. The primary step-up of expenses was in the depreciation line driven by a $4.4 million pre-tax impairment of internally developed software. This was the result of our Tally Technology purchase, which made some of our internal development work no longer fit for purpose. We were able to keep our marketing spend flat year over year despite higher origination volumes due to two items. First, the stronger customer response to our LevelUp Savings product allowed us to be more efficient in bringing in new customers. Second, we had higher deferral of marketing spend as we retained more healthcare investment loans in the period. In the first quarter, we do expect marketing expenses will move up to support the expansion of acquisition channels in future quarters. Now, let's turn to provision on Page 16. Provision for credit losses was $63 million during the quarter compared to $42 million in the same quarter of the prior year. The increase was primarily due to higher day one CECL, as we stepped up our retention of held-for-investment loans to $605 million. Provision was also higher due to two smaller items. First, we took an additional reserve for the remainder of the office property in our legacy commercial real estate portfolio that we first discussed on the second quarter earnings call. That loan is now fully reserved. Separately, we increased our economic qualitative reserves based on a modest increase in Moody's projection for future unemployment insurance claims. Taking a step back, overall credit continues to perform well as evidenced by our net charge-offs on our held-for-investment portfolio, improving to $46 million from $83 million in the same quarter of the prior year. The net charge-off ratio was 4.5% in the quarter, down from 6.6% in the same quarter last year. The net charge-off rate benefited from higher recoveries due to proceeds from a larger-than-usual sale of previously charged-off loans. Without this benefit, the net charge-off rate would have been 4.9%. Net income for the quarter was $9.7 million, which includes the $3.2 million post-tax, non-cash software impairment I mentioned earlier. Now, let's move on to guidance, which assumes stable employment and inflation and one Fed rate cut in the second half of the year. We will continue to use quarterly guidance to inform near-term expectations. We are also providing a view into our Q4 2025 exit rate to give you a better sense of our expected growth and earnings trajectory as we enter 2026. For the first quarter, we anticipate originations of $1.8 billion to $1.9 billion, up 12% year-on-year at the midpoint. We are gaining confidence that the sustained sales price improvements in the marketplace will allow us to open up additional paid marketing channels as we enter the seasonally favorable second and third quarters. We expect to be able to continue growing loan volumes as we move through the year and plan to exit the fourth quarter at or above $2.3 billion in quarterly originations or roughly 25% above our current levels. We expect PPNR in the range of $60 million to $70 million in the first quarter, up 34% year-over-year at the midpoint, reflecting the increase in paid marketing to support an acceleration of growth in future quarters. We plan to continue delivering positive net income in the first quarter with gradual improvement in earnings and return on tangible common equity or ROTCE as we move through the year. Our goal is to exit with an 8% ROTCE in the fourth quarter. All in all, we had a great 2024 and are positioned to build on the momentum as we enter 2025. Let me turn it back over to Scott for some parting thoughts.

Thanks, Drew. Before we close, I'd just like to take a minute to acknowledge the devastating fires in Los Angeles. We have activated plans to support our customers in the area, and our thoughts are with our members, employees, family, friends, and colleagues who've been affected. I'd also like to thank the many firefighters, aid workers, and other first responders for their heroic and tireless efforts. With that, I will turn it over to questions.

Our first question is from Vincent Caintic with BTIG. Your line is now open.

Hey, good afternoon. Thanks for taking my questions. Just a question first on the first quarter volume guidance. I'm just curious, seeing it flat quarter-over-quarter, if you can maybe talk about why that is versus the growth that you've been experiencing recently. And then if you could help us understand sort of what pricing you're contemplating over the course of 2025 and how sort of the change in interest rate expectations, especially in the longer end of the curve, might affect pricing and volume? Thank you.

Hey, Vincent, it’s Scott. I'll start with on volume. I think we signaled last quarter Q4, Q1 are typically our most challenging seasonal quarters in terms of customer response and kind of overall interest. I think if you look at our past pattern, it's pretty typical to see originations roughly in line Q4 to Q1. I think that was actually the case last year as well. And the big driver for us, we're planning on maintaining discipline on credit. The big driver for us is going to be reactivating marketing channels, which we're really better off doing, especially given that response models, creative testing, all that. We've got to redo all that work. Doing it in these quarters is going to be more expensive than doing it in our more seasonably beneficial quarter. So the goal would be to really start testing our way. We'll actually start to turn those things on as we exit the quarter so that we can work through them in Q2 and build from there. In terms of pricing, Drew, you want to take that one?

Yeah. In terms of, Vincent, I assume you're talking about sales prices. In terms of sales prices, even without the Fed doing further rate cuts throughout the year or maybe later in the year, we expect we'll still be able to raise sales prices as we've done over the last four quarters. I think the pace of that will depend on the mix of buyers and a little bit on the rate environment, but we continue to make traction in that space. And feel great about the performance of the loans we’re originating and selling, and that the buyers of all types have been very active, so we're encouraged by what we're seeing.

Yeah, and just to maybe touch on what we said in the prepared remarks, there's banks which, up to about a third of our volume in Q4, and we feel good about the pipeline. Again, I think we've said this before, exactly nailing down the end timeline of bank due diligence can be difficult. So, in the meanwhile, we've got other ways to get prices up, and that includes the rated product that we talked about on the calls, another way to drive an increase in prices without any help from the Fed.

Okay, great. Thank you for that. And then focusing a bit more long-term. So it was helpful to see for your guidance for fourth quarter 2025 and the volume growth right there. I guess when we think long-term about the volume and the ROE, in the past, like in 2019, we've seen $3 billion per quarter run rates, and that was just in the marketplace, loan volume. And then in ROEs, I think your marginal ROEs in the 20% plus range. I'm just wondering what we should think about long term in terms of both that sort of volume and ROE metrics and what does it take to get to maybe that long, mature run rate? Thank you.

I’ll address the volume first. Over the past five years, we've consistently issued around $3 billion to $4 billion each quarter. Considering the data we've provided regarding the total addressable market and the savings we can offer, we believe there's no reason we can't return to that level and even exceed it, despite a tighter credit environment. The timing of this return is something we contemplated when providing our guidance this year, which is why we delineated between Q1 and Q4. It's important to note that we haven't utilized direct mail or been active in paid search or digital advertising for a couple of years now. The speed at which those response models are optimized, along with finding the right creative and enhancing the user experience, makes precise predictions challenging. Nevertheless, we are confident that we will achieve our goals over the next few quarters, and we believe we will continue to grow from there. Our exit rate should not be viewed as our ultimate goal in terms of volume or return on tangible common equity.

Yeah, I was going to make that same point. I mean, as we're giving the exit rate ROTCE for 2025 greater than 8%, that's not meant to be our destination. 2025 is a year where we're improving performance and passing through to 2026 and beyond. So, we still haven't given obviously the long-term guidance on where we expect to be, but we would expect the end of 2025 to be a stepping stone to further improvement.

Yeah, and one other comment Drew mentioned, we're assuming one rate cut which comes in the back half of the year, so there's no real material benefit in our results from that this year. Should the tone change there and things shift in the other direction, that will obviously be constructive. So the guide we're giving really doesn't assume much benefit from the broader rate environment within the year.

Great. Very helpful. Thank you.

Our next question is from Brad Capuzzi with Piper Sandler. Your line is now open.

Hi, guys. Thanks for taking my question. Just given the higher origination outlook, has there been any change regarding loan performance between different cohorts of consumers between prime, near prime, and from the lower-end consumers?

Yeah. So, based on what you can see in some of the presentation materials, we're continuing to see quite stable performance across the board, similar to what I think you hear from lenders across multiple categories. I'd say stable but elevated is the right way of thinking about it. The degree of active management that's required, let's call it today versus maybe a year ago is certainly lower, but it's not static. We continue to, on the margins, tweak here and there. Things are pretty much coming in in line with our expectations. I'd say maybe a bit of a brighter spot at the bottom end of the spectrum, call it in that near-prime space where we're seeing outperformance. I'd hesitate to say to conclude that that's maybe broader and due to the consumer versus potentially our own underwriting there, a little difficult to parse those two out, but we're seeing performance consistent with our expectations across the board and some outperformance down there.

Thanks. And then just in terms of your decision to hold more loans on the balance sheet, especially as loan sale pricing improves, coming from bank buyers especially. Can you just talk about your pacing there throughout 2025? And then since we're about a year out from the bank operating agreement expiring, is there any updates to your capital deployment strategy going forward?

Yeah, so we held $605 million this quarter in terms of loans we put on balance sheet into held for investment. I think we will look to retain in the similar amounts of loans on the balance sheet. But one of the areas we want to increase the amount of hold is in the held for sale portfolio. We sold, obviously as we mentioned a couple of times on the call already, we sold $400 million out of there, and we're going to look to replenish some of the inventory in the held-for-sale portfolio because we think we'll continue to see demand there. We'll also maintain a healthy level of HFI as we go through the year. May not quite be at the $600 million level each quarter, but we'll continue to hold an HFI as well. And obviously price and demand will drive some of that decision-making quarter to quarter.

In general, operating conditions in the marketplace have improved quite significantly. You're likely observing capital market activities beyond our own. Our intent is to engage more in that this year. The development of our held-for-sale portfolio and strategy has been very successful, and we want to ensure we have inventory available because we've noticed that large buyers prefer to start with a substantial initial purchase and then shift to ongoing acquisitions to maintain their portfolio size. Therefore, our plan is to support that approach.

We have a question from Tim Switzer with KBW. Your line is now open.

Hey, good afternoon. Thanks for taking my questions.

Hi, Tim.

There's a very nice decrease on the deposit costs this quarter. Can you talk about what has been the customer response and what are your expectations on managing deposit costs going forward and if you're able to maybe quantify at all the planned exit of your commercial deposit customer, that would be really helpful.

Yeah, so we had a few factors which I outlined on the call. The first one you just mentioned was this large commercial customer that had been with us for many years and contractually we were paying just above Fed funds on that deposit. And in the fourth quarter that contract was up and so we were able to exit off that deposit which was really the last of our sort of large legacy relationships. So that's going to have more carry-forward benefit as we go into Q1. As you look at sort of the liquid deposits or the non-CD deposits, we were able to effectively reprice about an 80% beta compared to the Fed lowering rates this quarter. I don't know that we'll continue at quite that pace going forward, but I think what was also encouraging was the competitive dynamic in the market around deposit pricing was very rational, I'd say, I guess, and I think many competitors also moved, allowing us to keep our deposit costs moving down more in line with Fed funds as it happened. And do you want to talk about level of savings?

We launched that product in August and successfully brought in $1.2 billion in total deposits. We've received multiple awards for that experience. We're seeing savings behavior align with our brand promise to reward customers for good financial practices. Customers earn our best rate by adding to their savings accounts each month, and over 70% of our customers are doing that. This makes it a beneficial product for our customers and successful for us. It also provides us with another tool to manage as interest rates decline. We're very satisfied with the response, and Drew noted that customer interest was so high that we actually saved on some marketing expenses due to the strong response and efficiency.

Okay, got it. Thank you. And I had a follow-up on your comment about your held for investment loans potentially not going over the $600 million mark. Again, was that a comment just for Q1 or for the rest of 2025? And if so, why not increase your HFI loans as you have an opportunity to continue increasing originations overall and profitability?

Yeah, listen, I think first of all, we'll take it quarter by quarter and see how things play out to determine exactly where we end up. That's first and foremost. I don't see us being down as low as we were at the beginning of this year. But I think, at least as we look into Q1, we'll probably be a little bit under where we were in Q4, but at the same time, we'll be building up some of the held-for-sale portfolio, so that we have more inventory available to sell as the buyers keep coming back and prices are moving up.

Yeah, the total balance sheet will be growing. The division between the senior note, the held-for-sale portfolio, and the held-for-investment portfolio might change based on different market conditions.

We have a question from Giuliano Bologna with Compass. Your line is now open.

Hi, good afternoon and congratulations on the quarter. I have a couple of questions regarding the guidance and outlook. I'm curious about seasonality. The first quarter is typically the weakest, followed by the fourth quarter as the second weakest, while the second and third quarters are the strongest. Considering the $2.3 billion plus for the fourth quarter, should we anticipate any normal seasonal impact transitioning from the third to fourth quarter, or should we view it as consistent with what you are suggesting in the guidance and what is currently indicated for the fourth quarter?

Yeah, so if, again, if you think about just about seasonality and strip out any actions we may be taking where things were doing to drive growth, let's say what we typically do is we push our way into new partnerships, new channels, test new products and experiences, grow the volume in Q2 and Q3, and then try to basically hold it there, Q4 and Q1. So roughly in line, this past Q4, just due to where some of the holidays fell right, both Christmas and New Year's fell in kind of hitting a bit in the middle of the week, say the seasonality there is a little stronger than typical years. But say the general rule ramp-up Q2 and Q3, try to hold roughly flat. And by roughly, I mean, if there's 2%, 3% down, that's us counteracting, maybe an inherent 4% or 5% seasonal pressure that we typically see.

That's helpful. And there's an earlier question about some historical trends getting into the $3 billion to $4 billion quarterly run rate. I'd be curious when you think about rolling out the new programs or the new kind of re-engaging in dormant marketing programs. I'm curious what your typical turnaround time is to get a sense of what the response rate is and if you have any kind of enhanced or beneficial kind of response rates from that, how does the funding capacity look? Can you execute and push through the incremental volume to loan buyers? Do you have private credit buyers, banks, or structured product, or have structured buyers that could step in and fill that void if you had incremental volume that was within your credit box and that you could originate?

Yeah, I mean, so one, I'd say we're not starting from scratch. We've been active in these channels for most of our history. So we have some sense of the range of outcomes. Getting to the range we like best, which is highly optimized and what will take some time. In terms of marketplace demand, yeah, I mean, what's really evolved over the last couple of quarters is what we think of as what's called our fill rate, meaning are we selling everything we can produce, or is there more demand than we're producing? That's really started to shift really markedly in Q4, and we expect to continue in Q1, which is we have more purchase capacity, which is why we're saying, hey, it's time to turn on the marketing and increase our production. So we're not concerned about our ability to sell the loans that we produce.

And then maybe one last on the marketing expenses and kind of the percentage of volume. There's obviously some benefit to more HFI loans. And it kind of seems like you might be pushing a little bit more into the HFS book and some other channels as you grow based on some liability kind of $600-ish million HFI commentary. How should we think about that? Where your marketing should go as percentage of volume? Just thinking about that as you reopen some of the channels and push further into some of those newer channels at this point.

Yeah, I mean, we're clearly in our most efficient channels right now, right? So as we grow, we're going to have a little bit of increase in the level of marketing expense, the kind of marketing expense rate or the CAC, if you will, as we bring in those accounts. Also, if we shift more volume to HFS, I think what you're identifying is we won't defer the marketing expense. But as a reminder, we'll also get to recognize the origination fee upfront, not defer that as well. And so that's a positive trade in the immediate P&L when we make that shift. So I think over time, you can look back at our history and see what our marketing efficiency look like at higher volumes and we would expect it to be similar trajectory as we grow, but we'll always be looking to see if we can improve upon that as we move forward.

That's very helpful. I appreciate the time, and I will jump back into queue.

Our next question is from Bill Ryan with Seaport Research Partners. Your line is now open.

Hi, good afternoon. Thanks for taking my questions. First, on the PPNR guide for Q1, you talked about $60 million to $70 million. It's a little bit below consensus $73 million, and the $74 million you reported in the fourth quarter. And you also called out a couple of special expense items in the fourth quarter. So as we think about the Q1 number of $60 million to $70 million, what are the key drivers of it being a little bit lower relative to Q4? Just sort of like expense driven or some of the revenue expectations if you could kind of talk about that a little bit.

I think the most significant factor will be an increase in marketing spending, which is expected to return to normal levels in Q1. Additionally, we will see a ramp-up in our marketing channels throughout the quarter, leading to higher marketing spend. This will likely be the main element affecting PPNR from one quarter to the next. We do anticipate a slight increase in revenue; however, we had some advantages from the $400 million sale and portfolio marks that we do not expect to repeat in Q1. Therefore, we are looking for revenue to be flat to slightly up, but we will not have the benefits we experienced in Q4.

Okay. And just to follow up on the competition, obviously people on the call watch some of the competitors and what's going on. How would you describe the competitive landscape? Is it getting quite a bit more aggressive or is there plenty of origination volume potential for everybody out there?

We haven't noticed any significant changes in the competitive landscape. This market has always been competitive, and it remains so. We discussed deposit rates, and we were at approximately an 80% beta as they increased. We anticipate being at about an 80% beta as they decrease. When looking at loan coupons, which is one way to measure competitive activity, we were around a 60% beta on the way up and expect to be similar on the way down, and there hasn't been much movement so far. Our exit rate for coupons was likely between 10 and 30 basis points as we wrapped up the quarter, indicating minimal change. Additionally, we haven't highlighted this before, but as Drew mentioned, we are focused on our most efficient channels. Since the rate environment shifted, we've concentrated on becoming increasingly efficient and productive in these channels. For example, our conversion rate on some of the leading aggregators is about twice that of others, which demonstrates our strong ability to transition from an offer to a converted loan. We haven't seen any significant changes in that area. The key will be activating more channels to boost our volume, as borrower demand is present, and we are confident in our ability to meet it.

Okay, thank you.

We have a question from John Hecht with Jefferies. Your line is now open.

Hello. Congratulations, and thank you very much for taking my questions. The first question is an extension of some previous discussion points regarding your various funding programs, such as the securities program, holding loans on the balance sheet, or extended aging. I understand that over time you've mentioned the approach of selecting the option that yields the highest return at any given moment. However, there are numerous factors to consider now, as certain markets may offer more favorable pricing or economic conditions, while others might provide more consistent reliability in the intermediate term. So, aside from focusing primarily on return on capital, what are some other secondary factors that you prioritize when allocating funds across the different channels?

I'll begin, and Drew can chime in if needed. As we have indicated previously, we believe that our capacity to provide consistency and scale is typically rewarded through both pricing and predictability. Generally, we are not locking in many long-term large deals, as reported elsewhere, because we expect the price trajectory to continue upward. As bank buyers return to the market for fine paper, we anticipate an increase in whole loan sales. This is evident, as shown in our presentation, where the proportion of whole loans has increased due to banks purchasing them at improved pricing. Additionally, there are methods to enhance the pricing of certificates, particularly through rated products. We are being strategic about how we adjust our mix while also pursuing price increases within our existing offerings. Our expectation is that throughout 2025, we will be able to maintain our pricing increases, which will enable us to allocate more resources towards marketing and achieve quicker top-line growth.

Okay. And then, follow-up question. I mean, Scott, you did, I did hear you say, I think you even said all parts of the balance sheet, all buckets should grow this year. But I'm wondering, considering your capital and your goals with respect to capital levels and the ability to use a secondary marketplace, what do you think, what's kind of balance sheet growth that you think, but is there a range of growth that you're striving for just for kind of modeling purposes?

Yeah, this year we obviously experienced, actually the last several years since we bought the bank, we've experienced pretty robust balance sheet growth. We expect to grow above the industry again this year in terms of balance sheet growth. Probably not quite at the levels that we grew balance sheet in previous years, but we're still expecting robust growth compared to the industry. As far as capital, we still have excess capital at the holding company that we can deploy down to the bank. So capital at this point isn't a constraint. We're not viewing it as a constraint to our growth.

We have a question from Reggie Smith with JPMorgan. Your line is now open.

Hey guys, I'm kind of piecing together the storyline here. It sounds like you guys have shifted or had historically shifted away from direct mail and I guess paid search and focus more on the aggregated sites. My question, one, is that correct? But then two, as you move to direct mail and paid search, what are some of the trade-offs? How does it change the applicant pool, maybe how price-sensitive they are? Are there any changes there as you kind of shift over? And then how are you guys thinking about turned down service? So I would imagine as you kind of expand your marketing aperture you'll probably get people in here where there's a higher rejection rate. Is there a way to monetize those rejections? And then I have a follow-up. Thank you.

So, regarding the channels, when the rate environment changed and loan pricing dropped from par to around 96.5, our unit margin decreased significantly. This impacted our ability to invest in more expensive marketing channels. Additionally, when using pre-screen channels like direct mail, we have a responsibility to provide credit. In a situation with funding uncertainty, we must be cautious about that. Therefore, we focused on our most efficient channels, which included aggregators and our own platforms like our mobile app and existing customer base. This is why we invested in the lending mobile app and the top-up program to encourage repeat business. As we explore other channels, our credit criteria remains unchanged, maintaining roughly a 50% balance of new and repeat customers monthly. Different channels attract different audiences, and your observation about varying price sensitivities is valid. For instance, comparison shopping sites differ from independent offers, and all this informs our pricing and return strategies. We don't anticipate significant changes in the returns we're providing to investors because everything is incorporated into our approach across all categories. Regarding maintaining stringent credit discipline, we certainly see opportunities to consider second looks for applicants, which could contribute to our growth throughout the year.

Yeah. On that last point, has that opportunity improved incrementally in the last few months? It sounds like one of your competitors is kind of leaning into that. And I was just curious if that opportunity was there for you guys as well?

I would say the more volume we're generating top of funnel, the more there is, as long as assuming a steady credit box, the more there is available at the bottom of the funnel. So as we move into the latter part of the year, we would expect that opportunity to improve.

Got it. And then last question from me. I believe you guys talked about getting some of these structured securities rated. And I want to make sure I understand that correctly. This would be the senior tranche would get a rating. And so you could essentially sell both buckets, the senior supported tranche, as well as the more equity-based tranche, where today you're only selling the equity tranche to someone else. Is that the right way to think about it?

That's correct, yes. The senior security, the senior tranche, it can be sold now, but getting a rating on it gets you a tighter spread, opens the pool of buyers, such as insurance, as we said on the call. So it's a more economically attractive way to do the same transaction. And it's not a small fee to have gotten, or to almost be on the verge of getting this rating from a major. So we're pretty excited about it, and it opens up some different avenues and potentially better pricing for structured certificates going forward.

Yeah, it feels like I might be getting ahead of myself that there is a lot more funding available to you, a lot more optionality that may not be fully appreciated by the market.

I think the funding markets are very active right now. We talked a lot about the banks coming back because that is something we have all been very focused on. But I would say if you just look at private credit, asset managers, insurance who sometimes comes through private credit, all very active. There is a lot of liquidity in the market looking for a home. So we're excited about how that space will perform in 2025.

Reggie, this is about informing and optimizing to achieve the best possible price, while also shaping our strategy for the future. The ability to sell the aid and tighten those spreads gives us an opportunity to build the HFS portfolio. If we are pricing it around $400 million, we need to ensure that it is available to potential buyers.

Yeah, and I guess you guys made the point that 2.3 for 4Q ‘25 is kind of your minimum. It could very well be stronger than that if some things fall in line.

Yeah, I'd say we are very confident in that number. And as we go through the course of the year and see how the competitive environment plays out and how our execution is rolling through, obviously we can give an update, but we're confident in that number. And again, we're confident in that number as being on the way to something larger than that.

Sounds good. Congrats, guys.

Thanks, Reggie.

And now I'd like to turn the call over to Artem Nalivayko for some questions submitted via email.

All right, thank you, Cole. So, Scott and Drew, we have a few questions here that were submitted via email. The first question is, so the LendingClub name was appropriate when the company was primarily a peer-to-peer lending platform. This is no longer the case as you are a full-fledged neo bank. Has management given any consideration to changing the name of the company to something more descriptive?

Love this question. It's a great question and a great observation. So obviously when all we were doing was lending and that lending was initially powered by retail investors, the name really worked. It does not reflect the scope of our ambition or even frankly our evolving product mix. So it is very top of mind for management. We actually do have in our budget this year to be doing some work and research on what's the current perception of the brand and how might a rebranding influence that consumer perception. So, no decisions made yet, but it is very top of mind. If we think about the year ahead as we get DebtIQ into the market, we do anticipate having a checking experience specifically for our borrowers that we'll be marketing as we exit the year next year. The name is limiting in its current form, so it's definitely top of mind for us.

All right. Great. Thanks, Scott. So here's the second question. Have you considered acquiring any entities to grow your 5 million member base further?

I guess I'll start. Maybe, Drew, you can finish this. The rate environment has certainly rippled through FinTech broadly and definitely through LendTech within FinTech. So there are numerous opportunities available. And we are absolutely open to enhancing our capabilities, accelerating our roadmap. The Tally acquisition we announced last quarter is an example of that. But we will remain pretty disciplined on the hurdles that that needs to clear. Tally is an example. We were building that capability ourselves. So our ability to acquire it at a fraction of the cost that it was going to cost us to build was a pretty easy decision. I don't know if Drew, anything you'd add there?

I would add just that, as we're looking at it, doing any acquisitions, we're obviously very conscious of using our shareholders' capital wisely and appropriately and making sure if we ever do any type of M&A that we're generating an appropriate return for shareholders while we're doing that. And obviously thus far, we've been extremely disciplined on that dimension.

Perfect.

Okay, thank you both. I think that's all the time we have. So with that, we'll wrap up our fourth quarter earnings conference call. Thank you for joining us today. And if you have any questions, please email us at ir@lendingclub.com.