LendingClub - Q1 2024

Transcript

Operator (participant)

Good afternoon. Thank you for attending the LendingClub first quarter 2024 earnings conference call. My name is Jayla, 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 pass the conference over to our host, the Head of Investor Relations, Artem Nalivayko.

Artem Nalivayko (Head of Investor Relations)

Thank you and good afternoon. Welcome to LendingClub's first 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 and outlook, platform volume, future products and services, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and presentation.

Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. And now, I'd like to turn the call over to Scott.

Scott Sanborn (CEO)

All right. Thank you, Artem. Welcome, everybody. We kicked off the year with another solid quarter, and we're pleased with how well we're executing against the factors we can control, de-risking the business while also advancing our strategy and setting the stage for future growth. Our operating discipline, credit outperformance, and continued innovation are resulting in a sustainable operating rhythm that has us well-positioned to outperform as conditions improve. Let's start with our loan volumes. Total originations for the quarter came in just above $1.6 billion, which was in line with the prior quarter, despite typical adverse seasonality. Pre-provision net revenue of $48 million came in above the high end of our range, thanks to strong execution, combined with temporary benefits in both expenses and loan sales prices.

Importantly, we delivered net income of $12 million, marking 12 straight quarters of GAAP profitability since we became a bank. A notable feat, given the turbulent macro environment over the last two years. In February, we successfully exited the three-year operating agreement required of us as a new bank, a milestone in our evolution that gives us more flexibility in how we manage the business. Our management priority is currently deploying our excess capital to build the balance sheet and bolster our net interest income, which we believe is the best way to drive durable shareholder value in a higher-for-longer environment. For example, this past quarter, we grew the balance sheet by $415 million, adding new originations in the form of whole loans and securities and a repurchase of a portfolio of previously sold LendingClub loans.

These actions to increase the balance sheet will support a return to growth and net interest income going forward. Now, turning to credit, where we continue to demonstrate our leadership. You'll see on page 9 of our earnings presentation that we've delivered our 13th consecutive quarter of material outperformance versus our competitive set across all core customer segments that we serve. This outperformance reflects our vast data advantage, derived from over $90 billion in issued loans, our flexible technology platform that allows us to rapidly respond to changing market dynamics, and the efforts of our highly seasoned team with the human intelligence to look ahead and beyond the models. Our sustained credit performance gives us confidence in our ability to increase shareholder value through a sustained elevated interest rate environment, and it firmly reinforces our position as the partner of choice for marketplace investors.

Turning to the marketplace, where asset manager demand for our Structured Certificate Program remains strong. We sold over $785 million of new issuance through the program this quarter, generating fee revenue and capital-efficient, risk-remote interest income without an upfront CECL charge. Beyond asset managers, conversations with select banks are gaining momentum. Depending on the rate environment, we are cautiously optimistic that we'll see engagement beginning in the back half of this year, which should help drive up pricing and corresponding marketplace revenue. Given the consistent demand that we're seeing from asset managers and the momentum that's building with banks, we are increasing our held-for-sale portfolio, which provides interest income near term and the potential for sales at higher gains down the road.

Stepping back, as credit card balances and average APRs hit new highs, our TAM has never been larger, and our value to consumers has never been more compelling. Refinancing credit card debt through a LendingClub loan provides substantial savings and has been shown to increase a borrower's credit score by an average of 48 points. And we make it easy, with new borrowers able to apply in a matter of minutes and existing members able to redeem a pre-approved offer in a few clicks. For LendingClub, these borrowers deliver strong credit performance, high marketing efficiency, and a powerful opportunity to engage and reward them over time. Given the historic refinance opportunity in front of us, we're focused on coiling the spring to enable accelerated growth when conditions permit.

We're building on our 15+ years of industry leadership and further elevating and differentiating our offering through several initiatives that include: an increasingly robust set of credit monitoring and management tools that provides members with visibility into their credit profile, current debt, and the cost of that debt, all of which serves to highlight the personal loan value proposition. With just the credit profile portion of the functionality live, we're seeing enrolled members visiting us close to 50% more often than those who haven't. With these positive early results, we're excited about the broader debt monitoring portion of the experience that's currently live in testing with a select group of members in advance of a broader release later this year. A second initiative is a turnkey embedded finance integration that enables digital delivery of personalized, pre-screened loan offers via advertising.

We are testing this functionality on our own site, where we're seeing substantial lifts in response and approval rates from high-quality borrowers, and we hope to offer the integration to select partners as we exit the year. We're also iterating on unique to LendingClub member products, such as Top-Up and CleanSweep, that offer members a powerful benefit to staying engaged with us. Top-Up allows members to easily add incremental funds to their existing loan balance while maintaining a single payment within their budget. We're currently testing our way into the program, and we're seeing materially higher response rates and issuance volumes. CleanSweep is a revolving line of credit that gives existing members a way to easily sweep new credit card balances into a fixed payment plan, allowing them to get the card rewards they love while saving on interest if they need to carry a balance.

CleanSweep provides a compelling, easy-to-access experience that is unique to LendingClub and drives ongoing engagement. It's also the first step towards offering other revolving use cases down the road. While we have an extensive learning agenda here, early results again show extremely positive response and take rates. These and other new initiatives are helping us deliver on our promise to relentlessly advantage our members by delivering financial solutions that are smart, simple, and rewarding. The positive early results help us offset our typical seasonality in Q1, and we expect them to deliver nearly $500 million in new high-quality issuance this year. Equally importantly, these initiatives further differentiate LendingClub's offering in the market and set the stage for longer term growth.

In closing, I'm incredibly proud of what we've been able to accomplish through this environment, including delivering consistent GAAP profitability, remaining strong stewards of credit, rapidly innovating to meet investor needs, innovating on new tools, features, and experiences to deliver value for our members, and successfully exiting our operating agreement. We're now reaching a sustainable baseline from which we can expect to grow originations, our balance sheet, and our member base. We will do so modestly if the current rate conditions persist, with a more pronounced acceleration as the Fed's interest rate policy eases. I'll again thank the entire LendingClub team for their continued innovation and dedication to our mission. Thanks to their hard work, we're well-positioned to capture the incredible opportunity in front of us. With that, I'll turn it over to Drew.

Drew LaBenne (CFO)

Thanks, Scott, and hello, everyone. Let me walk through the details of our first quarter results, starting with originations. As Scott mentioned, we originated over $1.6 billion in line with the prior quarter and the high end of our guidance. Last quarter, we added page 10 to our earnings presentation to illustrate the relative economics of the four primary programs we have at our disposal to sell or retain loan originations. Whole loan and structured certificate sales allow us to take more upfront economics and operate in a capital-light manner without credit risk, whereas loans that we hold or season on balance sheet provide the strongest returns. On page 11, you can see the origination volumes of the four programs.

The issuance in the quarter was once again led by our very successful Structured Certificate Program, which was approximately $785 million of the originations in the quarter. We also sold $320 million of whole loans through the marketplace, accumulated $255 million into held for sale for our Extended Seasoning Program to meet future marketplace investor demand for seasoned loans, and we retained $285 million in our held-for-investment portfolio. This quarter, you saw us increase the amount of whole loans retained on our balance sheet between the held-for-investment and Extended Seasoning Program, which represented 32% of total originations, up from 17% in the prior quarter.

We plan to maintain these higher levels of whole loan retention to offset the maturation of our existing portfolio, keeping our total loan portfolio essentially flat through the remainder of the year. Importantly, the total balance sheet will continue to grow as we add structured certificate securities throughout the year. Now, let's move on to pre-provision net revenue, or PPNR. PPNR was $48 million for the quarter and came in above our guidance range due to temporary outperformance on expenses, as well as rate-driven improvements in marketplace economics. Let's move into the two components of PPNR, starting with revenue, where you can see the detail on page 12 of our earnings presentation. Total revenue for the quarter was $181 million, compared to $186 million in the prior quarter. Let me break revenue down into the two components, starting with non-interest income.

Non-interest income was $58 million in the quarter, up from $54 million in the prior quarter. The improvement was primarily driven by better marketplace loan pricing, as we saw continued strong demand, combined with lower interest rates in the period. The pricing benefit was partially offset by lower origination fees, as we retained more loans in our held-for-investment portfolio, where the origination fee is deferred over the life of the loan. Now, on to net interest income, which was $123 million in the quarter, compared to $131 million in the prior quarter. The change in net interest income was primarily due to the continued shift towards putting structured certificate securities on the balance sheet, which have no provision due to the risk-remote nature of the A-note security, but come with a lower asset yield.

This is the third quarter since we started the shift in balance sheet composition, and going forward, we should see modest improvements in net interest income, with further benefits when the Fed begins to lower interest rates. As Scott noted, we purchased a $235 million LendingClub issued loan portfolio from a marketplace investor at the end of the quarter, which we accounted for under fair value, and funded it with short-term Federal Home Loan Bank advances that have been repaid as of this call. As you have seen us do in the past, we will be opportunistic about secondary portfolio purchases of LendingClub issued paper. We see this as a way to quickly deploy excess capital and earn attractive returns while providing liquidity for our marketplace investors.

Risk-adjusted revenue, which is net revenue less provision, increased to $149 million this quarter from $144 million in the prior quarter, which was the result of the lower provision as we continued growing the Structured Certificate and Extended Seasoning programs. We introduced this metric last quarter, as we believe it illustrates the lower risk nature of the assets we have been using to grow the balance sheet. The continued evolution on the asset side of the balance sheet has had the expected impact on net interest margin. On slide 13, you can see that our net interest margin was 5.8% in the quarter, compared to 6.4% in the prior quarter.

We expect the rate of net interest margin decline to moderate going forward from what we've experienced in recent quarters, assuming the Fed is done increasing rates. Now, please turn to slide 14 of our earnings presentation, which refers to the second component of PPNR, non-interest expense. Non-interest expense was $132 million in the quarter, compared to $130 million in the prior quarter. While we will continue to remain disciplined on expenses, we do expect a step up in variable spend to support growth, as well as higher depreciation from some of the recently completed technology builds you heard Scott discuss earlier. Now, let's turn to provision. On page 15, you will see provision for credit losses was $32 million for the quarter, compared to $42 million in the prior quarter.

The sequential decline was a result of lower incremental provision on older vintages, partially offset by higher day one CECL provision from the higher retained loans in the period. As we indicated last quarter, we believe delinquencies and net charge-offs on our held-for-investment portfolio have peaked and are beginning to decline as the portfolio ages past the point of peak dollar net charge-offs. Delinquencies also benefited from seasonal impacts and, to a lesser extent, temporary hardship plans tailored to the inflationary environment. On page 16, we have updated our lifetime loss expectations for each of our annual vintages. We are seeing stable performance in line with the expectations we provided last quarter, and the marginal ROEs remain very strong across the vintages. As a reminder, we've applied a higher qualitative reserve to the 2023 vintage, given the longer remaining life compared to the more seasoned vintages.

On page 17, we have included the illustrative example of the credit life cycle of a single hypothetical vintage. We noted on our last call that the dollar charge-offs peak at approximately 1.5 years. Our held-for-investment portfolio is now 16.5 months old, and we saw that net charge-offs were stable sequentially as we expected. Going forward, we expect dollar net charge-offs to begin to decline as the portfolio continues to season. As a reminder, our in-period net charge-off rate will continue to increase as the portfolio ages, but on lower outstanding balances. We have already taken an upfront CECL provision for future net charge-offs on a discounted basis, which is reflected in the portfolio allowance.

Due to this timing dynamic, we continued to expect lower in-period CECL provisions compared to dollar net charge-offs in the coming quarters, and our in-period net charge-off rate will continue to increase as the portfolio ages, but on lower outstanding balances. This is in line with our previous expectations as our portfolio ages. Now, let's move to taxes. Taxes in the quarter were $4.3 million, or 26% of pre-tax income. As I've mentioned before, we will have some variability in the effective tax rate from quarter to quarter, but our long-term tax rate expectation is 27%. That brings us to net income. Net income for the quarter was $12 million, or $0.11 per share, and our tangible book value per common share increased to $10.61. As Scott mentioned, this marks our 12th consecutive quarter of profitability.

Now let's move on to guidance. For the second quarter, we anticipate stepping up originations to a range of $1.6 billion-$1.8 billion, given the success we're seeing from our recent initiatives that are driving efficient, credit-worthy borrower acquisition. Our PPNR guidance range of $30 million-$40 million reflects the forecasted originations growth and related variable expense, offset by the revenue impacts on sales price from interest rates moving higher in Q2 and the expense growth from strategic initiatives I discussed earlier. We plan to continue to deliver positive net income in the second quarter, though not at the level seen in Q1, which benefited from the one-time items I discussed earlier. As we look beyond Q2 to the back half of the year, there are a few trends I would like to call out.

As Scott mentioned, we are seeing positive early performance on our new product and marketing initiatives, which we expect to drive incremental originations throughout the year. We expect to be able to maintain PPNR in the back half of the year, in line with our Q2 guidance, with modestly increasing revenue offsetting the increase in expenses related to volume growth. While it's looking less likely that we will get significant rate relief in 2024, any potential reductions would be an accelerant to growing revenue. With that, we'll open it up for Q&A.

Operator (participant)

We will now begin our question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from Giuliano Bologna with the company Compass Point. Giuliano, your line is now open.

Giuliano Bologna (Managing Director)

Thanks, congratulations on the great quarter. The first thing I was curious about, you know, kind of asking you is, you know, roughly speaking, kind of what kind of improvement did you see on the marketplace? Obviously, the margins improved and pricing improved. I'm curious, you know, you know, where the yield kind of moved, you know, versus last quarter and what that kind of implies for, you know, the discount rate and the fair value marks.

Drew LaBenne (CFO)

Yeah. Hey, hey, Giuliano, it's Drew. Thanks for the question. Yeah, so, so in Q1, we did see price increase, and that was a combination of, you know, the interest rate environment being helpful as rates came down, you know, for most of Q1. And we also saw, I think, well, in the market, we saw credit spreads tighten as well, which really makes its way through to how asset managers think about the price they pay for the structured certificates and for our loans. So both of those things were helpful to pricing, and we definitely saw a lift there. With the discount rate, as a reminder, the discount rate for us is a result of the prices that we're receiving on the loans.

So the discount rate went down from 9%-8.5% in the quarter. Now, I would say, as we go into Q2, I think everyone obviously knows what has happened with the yield curve and rates in particular in the, you know, 1.5- and 2-year points, which are most important to us, have moved up pretty materially. So that's going to be a somewhat of a headwind on price as we go into Q2, and that's factored into our guidance already as well.

Giuliano Bologna (Managing Director)

That is. That's very helpful. And then, you know, thinking about the Extended Seasoning Program, you obviously had, you know, an earlier than expected sale last quarter and you're kind of building balances. It seems like you implied that there was an opportunity to continue to kind of grow those balances in anticipation of more demand in the back half of the year. I'm just curious, you know, how to think about, you know, how far you would be willing to take the Extended Seasoning Program balances over the, you know, into the back half of the year?

Scott Sanborn (CEO)

Yeah. Hey, Giuliano, I'll start, and maybe, Drew, you can talk about the balance sheet management. But, you know, this program started as a result of investor interest over last summer. Frankly, the demand we've had till now has been strong enough that we're not building the portfolio at the rate we'd like to because we're getting bids as we're building. The fact that we're building it right now is a bit of a sign of our confidence, which is, you know, being reinforced by both the credit performance we shared today, but also what we're hearing from investors, right? Is that, you know, people are looking to us for longer-term commitments. We're seeing really consistent, strong demand from asset managers.

As we mentioned in the call, we're cautiously optimistic. Well, we don't expect banks en masse to be back where they were kind of, you know, pre-Q1 of last year. We are certainly seeing, you know, building momentum with a group of, I'd call them idiosyncratic institutions that have got capital to deploy. And, you know, in general, people are looking to start with a portfolio of some size, and so that's what's giving us the confidence to begin accumulating for that.

Drew LaBenne (CFO)

Yeah. The only thing I would add, Giuliano, is that transaction we did in Q1, you know, it's worth noting that we actually executed that through the Structured Certificate Program. So I think there's also the opportunity to combine the Structured Certificates with the Extended Seasoning in terms of how we execute transactions in the future, not exclusively, but on a case-to-case basis.

Scott Sanborn (CEO)

I'd say in terms of total size, I don't think we're giving a destination there, Giuliano, but we'll be measured. This will be informed by stress testing and liquidity management and all those, all those pieces. So it'll be, it'll be measured, it'll be part of the mix.

Drew LaBenne (CFO)

Yeah. And just as a reminder, Giuliano, last thing, I promise. You know, we put those loans on the books at a discount, which I think is important because as we're holding them and seasoning them, as we're getting principal payback before we sell, we're getting that payback at par. So that results, after we take the initial discount, putting it on the books, it results in higher yield while we're holding it on the balance sheet.

Giuliano Bologna (Managing Director)

Yeah, that's very helpful. Then I just had one, you know, hopefully very quick one. I think I didn't hear you guys very well when you mentioned the size of the portfolio that you repurchased of, you know, existing LendingClub loans, but I'm not sure if it was $235 or $285. Just wanted to confirm.

Drew LaBenne (CFO)

$230, $235, $235. Yeah.

Giuliano Bologna (Managing Director)

Got it.

Drew LaBenne (CFO)

$235.

Giuliano Bologna (Managing Director)

Thank you so much for that. That's where we got. Thank you so much. Yeah, and, you know, congrats on the great quarter, and it's good to see, you know, great progress. I'll jump back in the queue now.

Scott Sanborn (CEO)

Great. Thank you.

Operator (participant)

Our next question comes from Bill Ryan with the company Seaport Research Partners. Bill, your line is now open.

Bill Ryan (Senior Analyst)

Thanks, and good afternoon. I wanted to follow up on your comments about some of the idiosyncratic banks that are kind of, you know, testing the waters here about buying some of your loans. Historically, they have paid, you know, higher premiums relative to asset managers, and I'm wondering if you could maybe tell us how far along you are in these discussions, and is the pricing opportunity looking opportunistic relative to what you've been seeing from asset managers in recent periods?

Scott Sanborn (CEO)

So, you know, in terms of how far along we are, we mentioned we're optimistic that we'd see, you know, some activity and engagement here in the back half of this year. You know, banks' onboarding cycle is typically longer than an asset manager, given the requirements for them on third-party oversight. And indeed, you know, due to the cost of capital advantages, they typically come at a higher price than asset managers, and we anticipate that in this case as well.

Bill Ryan (Senior Analyst)

Okay, that's definitely good news. And kind of a follow-up on credit, looking at it is also positive that you kind of held your cumulative loss expectations on the 2022, but more importantly, 2023 vintage constant. Looking at the slide deck, it looks like you're assuming maybe a 7.8% cumulative loss rate on the newer vintages that you're doing right now. Is that kind of the correct way to look at the slides? And what gives you the confidence of the lower cumulative loss rate expectations on some of the newer loans you're making?

Drew LaBenne (CFO)

Yeah. Bill, I think you're maybe referring to the illustrative example that had-

Bill Ryan (Senior Analyst)

Yes

Drew LaBenne (CFO)

- the 7.8%. And, yeah, I don't - we're not - we haven't given any information yet on, you know, the new vintages that we're building in HFI. So I would truly look at that slide as illustrative, and I think we're really trying to use it to focus more on the timing of an aging portfolio and how the charge-off trends and NCO rates or net charge-off rates, you know, materialize over the course of that. But I would say, and I would add, the 2024 vintage, I mean, we feel very good about the credit we're originating and seeing great, stable performance, as Scott mentioned in the prepared remarks.

Bill Ryan (Senior Analyst)

Okay. Fair enough. And then, one last quick one on, one of the credit card companies had mentioned that, they're reducing credit lines on, borrowers that consolidate their debt, obviously, you know, preventing them from, potentially reloading. You know, have you seen any, increased instances—incidents of that, or has it been pretty stable relative to the past?

Scott Sanborn (CEO)

Yeah, no, we're, ours is, is pretty stable, Bill. No, no change in, in trends there. As you know, we mentioned on the call that, that use case because we know the use of proceeds, right? Unlike, call it a home improvement use case or some of the others, because we know the use of proceeds. We've seen, you know, pretty predictable credit performance there and are leaning in. And in, in terms of, you know, post, post-loan behavior, we're not seeing any significant changes there. And I kind of make that true across the board, as you can see in the, you know, you're, you're looking, what we shared on slide 9 of the earnings presentation is month on book nine delinquencies and hardships.

What you're seeing is, you know, across the board, pretty stable rates of stable to improving delinquencies across all FICO bands. I'd say the same thing, by the way, is true for the last couple of years in prepayments.

Bill Ryan (Senior Analyst)

Okay. Thank you.

Operator (participant)

Thank you, Bill. Our next question comes from David Chiaverini with the company Wedbush Securities. David, your line is now open.

David Chiaverini (Equity Research Analyst)

Hi, thanks. So I had a follow-up on the credit buyer demand question. So you mentioned about the Structured Certificate Program, demand is strong, Extended Seasoning, demand is strong. Curious about credit to buyer demand for regular whole loans. Are you seeing any change in the appetite there?

Drew LaBenne (CFO)

No, not really. I mean, probably one thing to think about is once we introduce the Structured Certificate Program for certain asset managers, they are often getting what they wanted to get out of a whole loan purchase with more efficient execution. So I wouldn't bifurcate. I wouldn't totally bifurcate those two buckets in your thinking about demand, right? So some of the whole loan demand has pulled into structured certificates because of the advantage of that structure.

David Chiaverini (Equity Research Analyst)

Great, thanks for that. On the secondary portfolio purchase, the $235 million, how much of a discount, if any, were you able to purchase those?

Drew LaBenne (CFO)

Well, maybe I'll just go straight to the yield that we put on there. So we expect those to yield about 12.65 when they come on, which is just a little bit less than where I think that other portfolio is at that's been, you know, obviously paying down over the past year. So pretty healthy yield that we're getting from the purchase.

David Chiaverini (Equity Research Analyst)

Great. Last one for me is on shifting to capital management. You alluded to in February, you know, exiting the operating agreement with, with regulators. Is the priority, you know, organic growth from here? Or are you considering any other contemplated actions on the capital front?

Scott Sanborn (CEO)

Yeah, I mean, as we said in the prepared remarks, I mean, the good news here is we've got optionality now. We've got more flexibility. I think we're consistently going to be looking and evaluating all options. The priority is certainly building the balance sheet for sustained profitable growth, especially now, given the higher for longer environment, right? So what's really driving the business is the fact that, you know, since we acquired the bank, we've tripled the balance sheet and grown net interest income from about $20 million a quarter when we acquired the bank to, you know, the majority of our revenue now, $120 million a quarter.

So until we get a bit more clarity on the outlook, it's our view that that's really, you know, focused on sustained profitable growth, which we know can come through investing in the balance sheet as sort of the first priority. But, you know, continuing to look at all options.

David Chiaverini (Equity Research Analyst)

Makes sense. Thanks very much.

Operator (participant)

Thank you, David. Our next question comes from John Hecht with the company Jefferies. John, your line is now open.

John Hecht (Equity Analyst)

Afternoon, guys. Thanks very much for taking my questions. I'm just—you know, I think, Drew, I think you commented on Q2, but I'm wondering what you guys just assuming a higher for longer environment, but stable, interest rates and then maybe dropping in the latter part of the year, how do we think about the fair value marks on the loans sold, you know, and the cadence throughout the year? And is there different channels that are paying different amounts to you guys at this point?

Drew LaBenne (CFO)

Yeah, I mean, the largest driver of the fair value mark is going to be through the Structured Certificate Program because that's where the majority of the sales are happening. So, and again, pricing on that generally goes off the two-year point, 1.5- to 2-year point. So as I was saying, as I was saying previously, obviously, as we came into Q1, there were expectations that the Fed was going to cut and cut soon. Those points on the curve came down pretty nicely, snapped back pretty much at the end of Q1 and have gone up from there. So that's going to have an impact on pricing in the near term, and that's included in our guide, in our PPNR guide. So we are assuming this high-rate environment.

Yeah, I think as we talked about earlier, if we stay in this environment for a sustained period of time, we can operate in this environment. I mean, the pricing will be a bit thinner on the structured certificates in a higher rate environment, but we believe we can operate profitably going forward.

Scott Sanborn (CEO)

Yeah, and in terms of, of, you know, pricing on the fair value portfolio, yeah, obviously, a big driver now that is outside of our control is the rate environment. The one that's inside of our control is credit. And so one of the things that's been pressuring prices has been uncertainty about the broader macro outlook, uncertainty on the, the, you know, health of the consumer, future credit losses, trajectory of unemployment. So as we post, you know, quarter-after-quarter of consistent results here, and then you add in seasoning where, you know, you hold loans for, call it seven, eight, nine months, you really have a low range of potential outcomes. You get a lot of certainty in the credit outlook. So some of that stressing of future losses goes away.

So that's a piece that we can actually control, and that would somewhat offset, at least part of the rate volatility.

John Hecht (Equity Analyst)

Okay. And then you mentioned a couple new programs to drive incremental growth, like the embedded finance program. What kind of partners will you look to kind of add on to that program to drive some growth?

Scott Sanborn (CEO)

Yeah. Hey, just one other thing. I'll answer it. Just one other thing on the portfolio sales. Just one of the other things we've seen and one of the things that's driving the purchase demand is, you know, some of our partners' capital deployment needs can be lumpy, right? And so they've got capital they need to deploy. Our ability to present a seasoned pool, we can actually get better execution on that than the normal slow programs because there's a moment in time need. So that's just another thing that's playing into our conviction to build this because we've seen it multiple times now. So, yeah, on the new program you mentioned, so again, just to explain what it is, it's basically...

A simple way to think about it is like the process you use to run an offline program, say, direct mail, where you're, you know, pulling a list, pulling credit, qualifying people, mailing them offers, and kind of this batch-based process. We're making it more real time and bringing it online, right? So the way to think about it is, as opposed to emailing people and saying, "Hey, we have an offer for you, come visit us," and redeem it. As we build these engagement platforms, you know, we mentioned we put our app into the market for loan buyers, and we're seeing, but still without marketing, as we, you know, optimize that program, we're seeing, you know, 15,000 downloads a month coming at us. And those people we're seeing visit us more often. We're adding this credit and debt monitoring.

We expect that to drive higher visitation. You know, our banking experience will drive higher visitation. So as we get higher visitation, we're moving to the ability of when you come to us, we should be able to present to you right there in the moment, a pre-approved offer, and then, you know, export that. So the partners, the experience will vary depending on the partner, but the, the basic idea would be, you know, let's call it for an existing use case, where we have a purchase finance business, to the extent that, you know, some of these partners of ours have a client list of people who are debating certain procedures. We can go to them and say, "Hey, we can pre-qualify your list.

You can actually invite people in and tell them that they're pre-approved for an offer." There's also partners who are in the, you know, third-party credit monitoring and management space, where we could effectively deliver a remote offer on their site, right? So, you know, think about the people out there that are helping people manage their credit profiles. That'd be another use case.

John Hecht (Equity Analyst)

Will those be loans you retain or the mix will be consistent with what you originate right now?

Scott Sanborn (CEO)

Yeah, you can just think about it as another source of qualified traffic. You know, the point I tried to make on the call, but it bears repeating, is what we're seeing here is, you know, versus a broad-based, you know, non-qualified outreach, a targeted outreach where you're saying you are pre-approved, you actually get higher loan volume because the response is so much higher when you tell someone you're approved, and we also get a better credit profile through. So we're continuing to optimize our efforts, and our focus is continuing to drive credit performance, and this is a way for us to actually get better credit quality through at strong volumes, to help drive that performance.

John Hecht (Equity Analyst)

Perfect. Thanks very much.

Operator (participant)

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

Brad Capuzzi (Assistant VP of Equity Research)

Thanks for taking my question, and congrats on the quarter. I know you mentioned during the prepared remarks, uptick in expenses from higher volume. Are you able to give a range for the second quarter, and the impact of seasonality on different expense items, and then just your outlook for the remainder of the year, you know, between generating better operating leverage versus investment/growth in the company?

Drew LaBenne (CFO)

Yeah. So the uptick in Q2 is gonna be driven by higher volume, which is... You know, think of that as marketing spend and some variable spend, and then we're going to have an uptick in expenses ex marketing, which, you know, the biggest driver there is forecasted to be, you know, depreciation on some of the new projects that we completed, along with some other expenses. Once we have that uptick in Q2, we are expecting expenses ex marketing to be relatively flat from that Q2 level for the rest of the year. So think of it as one-time uptick and then flattening on non-marketing expense. Marketing and variable expense will move with volumes as-

Scott Sanborn (CEO)

When we're expecting marketing, we're expecting to be able to retain the efficiency, you know, the efficiency levels that you saw from us in Q1-

Drew LaBenne (CFO)

Yeah.

Scott Sanborn (CEO)

... so, you know, slightly more volume.

Drew LaBenne (CFO)

Yeah. So if you take it to the rest of the year, you know, without giving explicit full year guidance, you know, we gave the PPNR range for Q2, and, you know, we expect we can hold that as we go through the year, and obviously, we're gonna work to do better than that, where opportunity presents.

Brad Capuzzi (Assistant VP of Equity Research)

Thanks for the color there. And then just in terms of deposits, how are you viewing deposit growth going forward with, you know, with LendingClub being at the high end on advertised APRs, and do you expect to maintain similar rates in the near term, absent Fed cuts?

Drew LaBenne (CFO)

Yeah, I'd say the... You know, we made the pivot from CDs back to high-yield savings, because we were moving back into growth mode, faster growth mode after exiting the operating agreement, and that's the channel that can drive the highest amount of growth. Right now, we're seeing great growth through that product, and, you know, we continue to leverage CDs as well, so I think we can continue to grow at rates similar to where we're at right now in this rate environment. Obviously, if the Fed, you know, moves down, that'd be great. If the Fed moves up, well, we would probably need to react to that, honestly. But I think assuming the Fed kind of holds from here, I think we can operate pretty efficiently with current rates.

Scott Sanborn (CEO)

Yeah, I'd say that's, that's near term. Just to talk a little bit about, you know, more medium term. I mean, near term reminder, the bank we acquired was not set up to, you know, more than triple deposits online in a very brief window. So, you know, our focus was really on building the acquisition funnel, the fraud models, the user experience, both to get, you know, launch CDs, but also get high-yield savings out there. It, you know, it is- for, for the banks that have been around a long time, there's nothing particularly new there, although I think what we're doing online is, is, is differentiated. We do, we do believe that we've got some optimization we can do against those tools. So you'll hear more from us on that later.

I think Drew's answer was appropriate for kind of the near term.

Brad Capuzzi (Assistant VP of Equity Research)

Awesome. Thanks for taking my question, and congrats on the quarter.

Scott Sanborn (CEO)

Thanks.

Operator (participant)

Thank you, Brad. Our next question comes from Reggie Smith with the company J.P. Morgan. Reggie, your line is now open.

Reggie Smith (Executive Director of Equity Research)

Thank you. Thanks for taking the question. Congrats on exiting the operating agreement. I wasn't sure if you shared or was able to kind of share, like, your thinking on, you know, kind of what's the optimal Tier 1 capital ratio or leverage ratio for the company in terms of, like, where you feel comfortable running this? Obviously, you're not going to run out and grow the balance sheet overnight, but is there a way that we could kind of map that out?

Drew LaBenne (CFO)

Yeah, well, I mean, we are going to grow the balance sheet overnight, but we won't, we won't grow it wildly so, right? So, yeah, it just as a reminder for everyone, our constraint was Tier 1 leverage at 11% at the bank. You know, we're at 12.5% right now, consolidated. So we have a lot of opportunity to expand the balance sheet, and we will go lower than 11%. We're not at a point where we're going to disclose our target ratios, because I think it will be an evolution. And the way we make those decisions is stress testing. So the limits will be informed by stress testing and also by the composition of our balance sheet and how that evolves over time.

Needless to say, we have room to grow with our current capital right now and intend to do so.

Reggie Smith (Executive Director of Equity Research)

Yeah, I mean, maybe give our risk-based capital breakdown, right?

Drew LaBenne (CFO)

Yeah, and I mean, in risk-based capital, we were at 17.6% CET1. So, you know, as our balance sheet has been evolving and we've been moving to a lower risk, more capital-efficient balance sheet over the course of this year, that certainly gives us opportunity to optimize as we go forward.

Reggie Smith (Executive Director of Equity Research)

Understood. And yeah, actually, the second, I guess, personal loan issuer to mention in recent days, its spreads have kind of narrowed during the quarter. So my question is: what do you think drives the volatility in spreads? Is it more volatility around what the Fed is going to do? Is it comfort with consumer credit? And then, I guess, kind of, the Fed said, like, where are spreads, you know, today, a month after the quarter ended, relative to, you know, kind of where you marked the books, just given, you know, what the Fed has said and things like that? Just curious how volatile those spreads are and what drives that.

Drew LaBenne (CFO)

Yeah, I mean, there's a lot of things that drive spread. But I would say, you know. Let me give some factors, and I'm not sure at any given point I can, you know, quantify each factor and how it contributes, but one is certainly going to be overall rates. As rates go up, spread. As rates go up, risk premiums tend to go down because the overall yield that's being offered to the buyer of the security is higher, and so it's meeting their spread requirements against funding. So I think part of that dynamic is driving that. I think there is more appetite for product from the asset managers right now, and that's driving down spread, driving down risk premium to get more volume.

And I think the just the general economic environment has been strong, and so truly, the amount of risk that people see in assets has been coming down as well. We have not, at least thus far into April, observed any change to risk premium appetite or risk premiums. Though, you know, I think it'll be dependent on the economy and on the Fed.

Reggie Smith (Executive Director of Equity Research)

Got it. And if I could sneak one more in. Just thinking about, I guess, pricing, not so much with your loan buyers, but, you know, one of your larger competitors is kind of retrenched on the personal loan side, and I was just curious if that has had any impact on, you know, maybe where APRs are in the space and, and competitiveness, on the personal loan side in terms of, you know, like, winning business and, and pricing. Thank you.

Scott Sanborn (CEO)

Yeah. So, you know, I would say the two factors are kind of, let's say, consumer demand and then, you know, competitive activity. On the consumer side, as I mentioned on the call, you know, the value proposition has never been greater and the sort of TAM has never been greater. On the competition side, traditionally this is occasionally skewed or temporarily, and occasionally in a channel or two, but broadly speaking, this space has multiple parties in it, who have been here for a long time, and that includes big banks as well as Fintech.

So who you're competing with changes over time, but I'd say, we haven't seen. You know, there are occasionally people who jump into the market, maybe not equipped with all of the data, and can skew things temporarily. But I'd say for the seasoned players, we don't notice a big difference in activity when somebody, you know, flexes up or down. As you know, you may recall, we began pulling back in the market in mid, well, Q4 of 2021, we started pulling back on our originations, and then we slowed down more dramatically in the second half of 2022. But I wouldn't expect that to be a big change. We're seeing the competition has shifted, as we mentioned before, the bottom end of prime.

There's less competition down there in near prime because the fintech players are having more difficulty operating. But up in prime, at the top end of the market, where you're typically competing with banks. You know, those banks are all still there. And that's why we've been more successful at passing price on to the borrowers in, you know, near prime and the bottom end of prime than in the top end of prime.

Drew LaBenne (CFO)

That makes sense. Great. Thanks a lot, guys. Congrats on the quarter.

Reggie Smith (Executive Director of Equity Research)

Thank you.

Scott Sanborn (CEO)

Thanks.

Operator (participant)

Thank you, Reggie. Our next question comes from Tim Switzer with the company KBW. Tim, your line is now open.

Tim Switzer (VP)

Hey, good evening. Thanks for taking my question. I was hoping you guys could expand on your comments about how the conversations with banks are picking up, and how much of that do you think is kind of driven by the better environments of banks since March of 2023 versus simply, you know, the forward rate expectations are changing, we're getting closer to Fed rate cuts?

Scott Sanborn (CEO)

Unfortunately, none of those things, but maybe that's opportunity for the future. It's really about, it's institution dependent. I would say broadly speaking, you know, given that the rate environment is not letting up and, you know, deposit competition remains high, that means the banks that have got liquidity issues and, you know, OCI issues, they still have those. But what we're finding is, there are certain institutions that are A, recognizing the value of a short-duration, high-yield product on their balance sheet within their mix. B, realizing that there are other options for generating. You know, they're not able to generate those assets, and the assets they traditionally would generate are less attractive in this market, either due to, you know, due to competitive dynamics or market forces there. And so and they've got capital to deploy.

So I'd say it's more just a select group of institutions who have capital to deploy, and they like our asset as an option, and we're really seeing our status as a bank be a difference maker here. So, you know, they, when they look at the space and they look at the options available to them, the fact that we're a, you know, nationally chartered OCC bank, who is the largest eater of our own cooking, and who's been outperforming the market on credit, is really kind of, you know, benefiting us in those conversations.

Tim Switzer (VP)

Okay, thank you. That was helpful. And could you also expand on your comments around the embedded finance initiative you guys are working on? How the economics of that will be shared with your partners, and then what has the lift been on your guys' side from, like, a technology and personnel expected perspective to put that in place?

Scott Sanborn (CEO)

Yeah, it's really a kind of a data foundation. I mentioned last year that, you know, we had some work to do, right? We're on this journey from web-based, on-prem data center, you know, lending-focused company to a cloud-based, mobile-first, multi-product company doing lending and spending. So integrating, you know, our user IDs, our data platform, and kind of bringing it to a place where it can be available real time. This is a particular output of that. There'll be many outputs of that for, like, seamless logins and, you know, multi-product, kind of, integrated application processes and other things. The economics would be similar to how we're working on marketing today. We... You know, different partners you have different deals with, but, you know, a standard deal would be a cost per issuance that you're paying.

Partners, we're generally pretty easy to work with because, you know, we're able to, due to our marketplace model, we're able to say yes to a broad range of customers, right? Unlike a bank that's only able to approve and hold at the top end, we're able to approve and sell. And we've, you know, given the many, many years of funnel optimization and models to pull people through, we've got kind of a high pull-through rate. So the typical structure would be, we generally get top billing, and with a product like this, which will be, at the moment, unique to us, it's kind of a no-brainer, right?

If you're trying to serve your customers rather than saying, "Hey," you know, to take the opposite experience, "Here's a ping tree, go apply at five different places." You know, you're able to get a high certainty approval rate and a pull-through, we think it'll be pretty attractive. You know, more work to do there, but like I mentioned, I think it'll be efficient acquisition as well as high credit quality pull-through.

Tim Switzer (VP)

Great. Thank you for answering my question.

Operator (participant)

Thank you, Tim. I would like to hand the conference call back over to Artem Nalivayko to ask a few questions submitted via email. Artem?

Artem Nalivayko (Head of Investor Relations)

All right. Thank you, Jayla. So Scott and Drew, we've got a few questions here for you that were submitted via email by some of our retail shareholders. The first question here is: What are the company's plans to increase shareholder value, and are there any plans to do a stock buyback, given where the shares are trading and the fact that you're now out of the operating agreement?

Scott Sanborn (CEO)

So I, I feel like we've already answered that, so I'll try to keep this one brief. You know, we've got more options now that we're out of the operating agreement for how we deploy our capital. That includes inorganic growth, that includes share buybacks, as well as growing the balance sheet. It's our view that in a higher for longer environment, that putting it into the balance sheet to drive sustainable, profitable growth is the right priority right now. But we are consistently reviewing all of our options with the board, and, you know, those could change as, as conditions change. You know, this, this does drive shareholder value. I kind of gave some of the, the elements we talked about before, but just looking at, you know, what kind of TBV growth we've had since we acquired the bank.

You know, we've more than doubled our tangible book value since we acquired the bank. As we look at a higher for longer world, we do feel like this is a way for us to kind of drive sustainable growth.

Artem Nalivayko (Head of Investor Relations)

All right, great. Thank you. Here's the second question: So what happens if there are no interest rate cuts in the foreseeable future?

Scott Sanborn (CEO)

Well, you know, first, I'll emphasize, we came into this year positioning the company for no rate cuts. This was a conversation with the executive team, conversation with our board, and we decided, you know, we needed to be able to control our own, our own destiny. That's why we took some of the difficult decisions we did last year to really reposition the expense base of the company. To be honest, as of January of this year, that felt like that view was too conservative when the market was predicting six rate cuts. So right now, we feel quite glad we did it, as I think the... at least the prospect of none is very real.

Our focus right now, as you heard in the remarks, is really what we're internally calling coil the spring, which is creating a set of experiences and features that will allow us to lean into our kind of most proven use case to really go after this massive opportunity as rates drop. If we were to become convinced that that was further out, we absolutely have tools at our disposal, you know, as we look into next year, to find growth, and we would refocus on that. So it's, we're not dependent on it to maintain consistently, consistent profitability. Our focus is on, you know, delivering outsized growth on the other side.

If it's gonna be a much longer prolonged environment, we will, you know, reorient our activities and deliver growth in that environment, albeit more modest.

Artem Nalivayko (Head of Investor Relations)

All right, great. Thank you. So with that, we'll wrap up our first quarter earnings conference call. Thank you for joining us today, and if you have any questions, please email us at [email protected].

Operator (participant)

That concludes the LendingClub first quarter 2024 earnings conference call. Thank you for your participation, and enjoy the rest of your day.