LendingClub Corporation (LC) Q3 2022 Earnings Call Transcript

Operator

Thank you. [Operator Instructions] And please stand by for a moment, while we audit today’s queue. The first question we have on the phone lines comes from David Chiaverini from Wedbush. Please go ahead, when you are ready.

David Chiaverini

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

Scott Sanborn

Hey. And maybe I’ll start and David …

David Chiaverini

Sure.

Scott Sanborn

…then talk you Drew. Hey David, actually, the bigger driver of the retention in the quarter was the earnings capacity that we had. I think we’ve given everybody a range. That’s what we use in our planning of 20% to 25%.

But we said, look, we’re intended to be at the top end of that range, if we can afford it and deliver the outlook that we communicated. So with the tax benefit we got in the quarter, we basically just reinvested that into the loans to your point, to because it’s the right way to manage the business for the long-term. And Drew, do you want to talk about the outlook?

Drew Labenne

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

David Chiaverini

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

Scott Sanborn

Yeah. So first of all, if we look at total interest-earning assets, we were actually up 30 basis points. I think you’re probably looking at the — in particular, the unsecured personal loans, which were down sequentially.

So there’s a few yield on those down sequentially. So I think there’s, a few factors going on. The first is we’re remixing the portfolio to a lower risk profile, in terms of what we’re putting on the balance sheet. Also, we are seeing some increase in slowdown in prepayment speeds, which is impacting yields. And…

Drew Labenne

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

Scott Sanborn

Yeah.

Drew Labenne

Yeah, go ahead.

Scott Sanborn

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

Drew Labenne

And just to be clear, because I understand where the question is coming from, to be clear, we are moving rates, right? At this point, the Fed has moved 300. Credit cards have moved roughly 250, we’ve moved as of today, roughly 200. So we are — this is proceeding as we had indicated we thought it would, which is the Fed moves, then the cards move and then we move. So you’re seeing that play out.

David Chiaverini

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

Scott Sanborn

Yeah. I think the high-yield savings market is a very large NIM. And I think as much as we are still higher up on the rate tables, we’ll be able to generate the deposit growth that we need to. We did have another benefit this quarter versus what we expected.

There’s one set of large depositor that was expected to move out in Q3. That’s going to move out in Q4. So that may slow our deposit growth a little bit going into Q4, but we think the full capacity is there that we need to be able to grow the balance sheet.

David Chiaverini

Thanks very much.

Operator

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

Bill Ryan

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

Scott Sanborn

Yeah. So I’ll just give you the context, Bill, we talked about temporary, what Drew just brought up is one of them, we held on to some pretty sizable deposits that we knew were going to be and had to leave the building. We held on them longer so we saved on deposit costs there. We also had some one-off campaigns and then we had the benefit of retention.

I’d say if you look going forward, we would expect to be back at the same historical range we’ve guided to and have been delivering in the prior quarters. And if we go back to our priorities for the year, when we started the year, we said priority one, invest in the balance sheet; priority two, invest in new members; and priority three, start building towards our multi-product future.

Those are in orders of priority. We are ahead of the game on one. We’ve been successful at really building the balance sheet, I’d say, we are on the slightly ahead of target on two, and three is the one where we’ve moderated our investments more recently.

But as we look ahead, specific to the marketing line, I’d say, we’d expect to go back to those traditional levels, and we’ll be targeting that same — our plan right now is to the extent we can — we got the capacity to do it. We’ll continue to acquire new customers because they’ve got a pretty strong and pretty immediate payback. So we’d anticipate still being in that 50/50 range in Q4.

Bill Ryan

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

Scott Sanborn

Good question. We haven’t historically given that breakout. So I’ll give you a few points on where we’re at provision right now. So first of all, the majority of it really comes from two things. It comes from the new loans that we’re putting on the balance sheet, which as you noted, that will change based on the mix — the level of that will change based on the mix that we put on. And then we have accretion of the back book. So as the back book grows, we’re going to have more accretion coming through the provision line.

And then we have, which is what a smaller part of the provision is the economic overlays, which are really driven by a number of different inputs. We certainly look at the Moody’s data and all the scenarios that we’re putting out there. We look at unemployment rate, but maybe a little different than others. We also look at unemployment insurance claims as more of the forward driver that helps to inform our qualitative reserves as well. So we are watching. We’re adding qualitative reserves as we have been throughout the year, and we’re reserving at the appropriate levels.

Bill Ryan

Okay. Thank you.

Operator

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

Giuliano Bologna

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

A – Scott Sanborn

Yes. So there’s a few things going on there. The first is the remix, which we discussed. So as we’re going to higher quality loans that will have an impact on the yield that we’re putting on the balance sheet. That’s one.

The second, as Scott said, is we started to put price — we’ve started to increase pricing on new PL loans in Q3. We’ve actually just put in some more pricing increases in Q4. So that will start to come through the yield except the adjustments I just talked on in terms of the profile and what we’re putting on. So we should, over time, start to see more of those increases come through in terms of the yield you’re seeing in the NIM table. But I think the remix will continue for a bit longer as well and sort of mitigate that impact.

Giuliano Bologna

Got it. That makes sense. And then thinking about on the provisioning on side. Is there some roughly what the provision rate was for how loans that you’re adding this quarter? And how that’s moved on the road compared to previous quarters, excluding the step-up on the balance — already on the balance sheet.

A – Scott Sanborn

Yes. So — and I’ll just talk about PL here. So just a reminder on our PL portfolio, everything we’re putting on balance sheet is prime. And so we have been using — since the pandemic, we’ve been using a CECL curve or a lifetime loss curve that is based on results pre-pandemic.

We are not yet seeing — we are not yet at levels post-pandemic that match pre-pandemic levels. So we’re actually holding a bit more in reserves, adjusted for the risk profile. So net-net, we’re still provisioning at the same rate on the base CECL reserve for day one for the portfolio we’re putting on. The changes you’re seeing are the other factors, the mix that we’re putting on, the back book accretion and the qualitative. Does that make sense?

Giuliano Bologna

That does. In my initial modeling, I think, what I’ve been trying to work out in some ways is what some of the actual multiple drivers, volumes would be coming down or [indiscernible] up, yeah, provisions moving around in the next quarter. Is there a general sense when you think about your marketing trends, I’m assuming that should be pre-muted on a relative basis given the fact there’s less competition out there at the moment. our assumption the general mix to you’re probably — your marketing expenses as a percentage of volume might be similar to where you were in the third quarter.

A – Drew Labenne

Well, the marketing expense as a percent of volume, we had a very nice quarter in Q3. We’re going to move back up to where we were before. So that — again, that those factors that Scott talked about. There’s a little bit of seasonality. We had lower deposit marketing because of the slower runoff than expected and we just had some higher performance on a few marketing efforts that we don’t expect to repeat. So I would look back at the ratio historically and apply that going.

Scott Sanborn

And I guess to your point, there was kind of a bit of a sudden pullback early on in the third quarter in competition, but that’s resumed from what we can see overall, the market is pulled back, Lending Club is more than holding its own and share market likely went up in the third quarter. We don’t know that for sure because the data doesn’t come up for a while.

But we don’t expect competition. Remember that the fintech competitive stuff is a little bit of an originate or die. Right. They do not have half of their revenue coming off of a balance sheet, so they’ve got to keep originating. So, we wouldn’t expect a competitive dynamic to be significantly altered over the near term.

Giuliano Bologna

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

Operator

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

Michael Perito

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

Scott Sanborn

Hi Michael.

Michael Perito

I wanted to follow up on that last line of questioning there. So, I’m just trying to do some quick math here as you guys are kind of walking through everything and looking at the guide and it seems like ballpark, you guys are kind of implying an origination figure next quarter and maybe like the two and a half, maybe slightly higher billion range.

So I’m just curious, even if that number is not exactly right and you guys don’t want to comment just that step down sequentially, I mean, you kind of alluded to it sounds like it’s more you guys maybe pulling back a little on credit than anything kind of market — slower market driven. I just want to confirm or just get a little bit more color there?

Scott Sanborn

Yeah. So if you recall when we kicked off the year, we gave an originations guide and we said given that we feel this is going to be a year of two halves, we do not want to be chasing originations because the job number one is to be good stewards of credit. Let’s say if we look at the total year, we think we’re solidly going to deliver on that guide that we gave you towards the upper end of the range.

The dynamic and volumes is not credit, it’s really the rate environment, putting pressure on investor returns. That’s really the big driver, which is I was just saying on the prior comment for us, we want our investors to get the returns they need, but there’s no benefit to us in selling loans below a certain threshold.

So we’re basically making the loans we can profitably make and that meet the needs of our investors and it’s really that not credit. The credit stuff is really, as we talked about, pretty pockets outside of the prime book.

Michael Perito

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

Scott Sanborn

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

Michael Perito

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

Drew LaBenne

Yes. I think there’s a lot of variables. I think in the near term, there’s going to be some pressure downwards in — let’s call it, just the next quarter for now. I think longer term — let’s wait until we’re talking about 2023 before we give that. I think the other thing worth noting is, obviously, as we’re growing our deposit base at a healthy clip here, and we’re out in the market with high rates to do that, there’s obviously a little growth map in those deposit costs as well that we’re absorbing through the NIM.

Michael Perito

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

Scott Sanborn

Well, obviously, I’ll start with that direct bit. Yes, too early to give you the answer. We’ll obviously be back in January with an outlook for the year. But, if — as a broad statement, we said this year was going to be a year or two halves. Based on all the current outlooks and expectations, Moody’s said, all the rest, next year will be a year of two halves in the opposite direction, right?

First half, we’ll be continuing with the elevated rate environment and back half, as we mentioned, we’re going to — credit card rates are at a record high. Credit card balances are back near their record highs, and rates have not finished moving, we are going to have a very, very large TAM in a very compelling offer. And the investor dynamics, with the rate — the terminal rate curve continues on the downward flow.

All these dynamics work in the opposite direction, right, and it should be very good for the business. But as you said, FFF [ph], right? So we have to just more data to watch and more to see around what the Fed does and where rates go, and how the — job market is holding very, very strong. So that’s great. But we have to see where it all goes before we can really determine the exact timing of that rebound.

Michael Perito

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

Scott Sanborn

Thank you.

Operator

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

Vincent Caintic

Hey. Thanks for taking my questions. First one, just to drill down on the net interest margin discussion again. If you could maybe talk about the — so understanding the unsecured consumer loan yields went up because your mix shift is to higher-quality loans. Just wanted to get a sense of your appetite for going further into higher quality loans, moving further up market and what could that imply for yield? And then if I think about the funding cost side of that NIM discussion, you have a healthy deposit platform. Are there other forms of funding that maybe might also make sense to consider as part of the bank funding structure as your held for investment is growing.

Drew LaBenne

Yes. So first of all, I think in terms of the mix, in terms of higher quality borrowers, we’ve been on that journey for several quarters now. So, that leading into the portfolio causes some pressure on NIM, but it’s not a change, but I don’t want to imply there’s a change enough even going further up market in terms of high quality, at least not now because we like what we see and we like the profile of what we’re putting on the balance sheet at this time.

On the deposits, so obviously, high-yield savings is an incredible growth engine for us. I think we’re being very successful in the market right now. Over time, we also have a portfolio of commercial deposits. There are different avenues where we can go out and also raise deposit funding. It’s probably not as flexible or as rapid, but it’s there longer term to be able to maybe provide a lower cost of funding profile to the bank. And then obviously, we have the more traditional channels, which can be rate effective from time to time, brokered CDs, FHLB borrowings, et cetera. We really haven’t tapped those in any heavy way, but they’re just available liquidity as needed for us to tap into.

Vincent Caintic

Okay. Thanks for that. And just a follow-up question, just to talk about the marketplace again. So, I appreciate the discussion on the consumer side. So if the Fed’s raising 300 basis points and card is raising the rate to 250 and you’re able to price in 200 right now. I guess in terms of the marketplace and those marketplace investors, how do they — how quickly do they react? And how — what are the discussions you’re having in terms of they have appetite, but they want to wait until rates stop moving, or just kind of any help you can have on the sensitivity and maybe when that would pick up again. Thank you.

Scott Sanborn

Yes. Yes. So I’ll go back to — coming into this, we feel like we set ourselves up with the right mix of investors who would be less exposed to the — there’s — as we talked about last time, there’s a range of, let’s call it, vulnerability or sensitivity to the rising rate environment. And we’ve tried to position our investor mix to be less sensitive. That’s one of the drivers of the fact that our volume on a relative basis is holding up so well in addition to the fact that our performance is also holding up very well on a relative basis.

And the conversation with investors, as we’ve talked about, these — the people we work with were — these aren’t trades, right? These are long-term relationships. They are in the space. They have — if you’re a bank, they set their capital allocations at the beginning of the year, and so these are pretty durable relationships. So there’s not so much the wait and see so much as the relative appetite depending on the yield profile can go up or down.

And then keep in mind that they’re relatively less sensitive, but there’s not — they’re not insensitive. So even the bank buyers, which now represent a higher percentage of our mix than, let’s say, when we came into the year because they are less sensitive, but funding costs are going up for banks, too.

And so it’s really — the conversation is around what is the targeted yield. We try to understand that for each of our investors. What is their cost of capital. We try to understand that, too. And we view it as our job to help deliver against their required return profile. And in the event we can’t, that’s when somebody might need to go away. But having low-cost investors who are relatively less sensitive to this is how we’re continuing to navigate

Vincent Caintic

Okay Great. That sounds very helpful. Thank you.

Operator

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

Sameer Gokhale

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

A – Scott Sanborn

So, the short answer is, no. The — but the slightly longer answer is, we are big believers in the quality of LendingClub’s paper, and we are the largest holder of LendingClub loans. And if there were clients who had liquidity issues, we are — would certainly be open and willing to take a look at that and support them and increase the balance sheet.

End of Q&A

Sameer Gokhale

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

Operator

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