LendingClub - Q3 2023

Transcript

Operator (participant)

Hello, everyone. Thank you for attending today's LendingClub Q3 2023 Earnings Conference Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, press star one on your telephone keypad. I would now like to pass the conference over to our host, Artem Nalivayko, Vice President of Finance.

Artem Nalivayko (VP, Head of FP&A, Investor Relations)

Thank you and good afternoon. Welcome to LendingClub's Q3 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 for 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. Now, I'd like to turn the call over to Scott.

Scott Sanborn (CEO)

All right, thanks, Artem. Welcome, everyone. We delivered another profitable quarter, thanks to disciplined execution and proactive efforts to appropriately position the company in what remains a dynamic environment. Our $1.5 billion in originations was in line with our expectations. Total revenue for the quarter was $201 million, and pre-provision net revenue, which is revenue less non-provision expenses, was $73 million, which was well above the high end of our guidance and aided by a couple of non-recurring items, which Drew will explain. The quarter's results were further supported by our ongoing expense management efforts, and our difficult recent decision to align staffing to current market conditions should position us to stay resilient going forward. I want to begin by providing context on the current operating environment, which remains challenging, particularly on the investor side of our marketplace.

Following the banking turmoil that emerged earlier this year, bank investors, which historically comprise 50% of our marketplace, have temporarily moved to the sidelines as they focus on fortifying capital and liquidity levels. While we continue to have productive discussions, the appeal of our high-yield, short-duration assets is clearer now more than ever, banks are currently focused on right-sizing their balance sheets, and their capacity to invest is likely to remain restricted in the near term. In anticipation of this shift in marketplace dynamics, we have been leaning into our bank capabilities to build unique new structures to better serve asset managers and LendingClub in today's environment. In Q2, we launched our Structured Certificates program, which is essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price.

This effectively provides low-friction, low-cost financing for the buyer, and in exchange, LendingClub earns an attractive yield with remote credit risk and without upfront CECL provisioning. As a bank, this is something we are uniquely positioned to deliver for marketplace investors. Interest in the program is strong and growing, which is a testament to the strength of our credit, given we're selling residuals in a market where residual sales are few and far between. We more than doubled the program in Q3 from Q2 and expect to roughly double it again to as much as $1 billion in Q4. In total, we now have close to $2 billion of signed orders for over the next six months.

Not only are Structured Certificates helping us to attract new investors, they're also helping us make efficient use of capital and reposition the balance sheet to capture low-risk interest income off of the senior note. Another advantage of our bank is our ability to hold and season loans for investors, earning interest income for LendingClub while increasing the certainty around future credit performance for the buyer, which is especially important in this environment. We're receiving interest from investors in the program and originated $250 million in Q3 to replenish the $200 million in loans sold earlier in the quarter. Now, let's turn to credit. We remain focused on prime originations, with near prime representing an immaterial portion of our total Q3 issuance and of our retained portfolio.

We've adapted our underwriting standards to the inflationary environment, which has resulted in consistent credit performance on newer vintages. Inflationary pressures are visible in vintages originated before we began tightening, and we therefore increased our provision based on observed trends and our outlook. I note that return on equity on all vintages remains north of 20%. Our expected lifetime losses remain within the range we previously communicated and better than our competitive set based on available industry data... Looking forward, a historic refinance opportunity awaits us. Credit card balances have grown to $1.3 trillion, and average credit card interest rates are now above 21%. Thanks to foundational investments we've made over the past several years, along with our proven ability to scale quickly, we are well positioned to meet massive consumer demand as conditions normalize.

We've been making steady progress on key initiatives that will provide powerful, differentiated solutions and enhance our value proposition to both new and existing members. Before the end of this year, we will have accomplished the following: included loan servicing into our banking mobile app to provide a seamless member experience across lending, spending, and savings. That's harder than it sounds. In fact, many banks have instead opted to create multiple apps serving specific product verticals. With our mobile-first, multi-product platform in place, we will have a single powerful engagement vehicle for offering new solutions to our members. We'll also be testing the first generation of a line of credit product that allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans.

This paves the way for a revolving line of credit product in future years and builds on the proven performance we've seen from repeat members. We will launch the first phase of a comprehensive debt monitoring and management experience. While in early development, this will ultimately give members a way to track, prioritize, and optimize debt payments, especially credit card payments, which will be of significant value to LendingClub members. Taken together, these innovations will further drive member engagement and satisfaction, which in turn should translate to better credit outcomes and a higher lifetime value. Our business is evolving, and we're changing our focus from building a strong mobile banking foundation to focusing on multi-product member engagement. To lead that effort, I'm happy to announce that we've hired Mark Elliott as Chief Customer Officer.

With experience at JPMorgan Chase and Cap One, where he led digital banking efforts, Mark brings a unique background in strategy, marketing, and customer focus, especially in retail banking, as well as a proven ability to coordinate these areas to fuel growth. I'm looking forward to his leadership as we march forward. I want to close by thanking LendingClub's employees for their continued dedication through what has been a trying few quarters. LendingClubbers are demonstrating their resilience, and I have no doubt they'll be ready, willing, and able to accelerate when the opportunity presents itself. With that, I'll turn it over to Drew.

Drew LaBenne (CFO)

Thanks, Scott, and hello, everyone. Let me walk you through the details of our results in the Q3, starting with originations. Originations were $1.5 billion, compared to $2 billion in the prior quarter, and $3.5 billion in the Q3 of 2022. Of the $1.5 billion in originations, approximately $500 million were whole loans for the marketplace, which were primarily sold to asset managers. $450 million were originated for the structured certificates program, which is showing strong demand, as Scott mentioned. We also accumulated approximately $250 million in held for sale for our extended seasoning program to meet future investor demand for seasoned loans, and we retained over $300 million in our held for investment portfolio. Now let's move on to pre-provision net revenue or PPNR.

PPNR was $73 million for the quarter, compared to $81 million in the prior quarter, and $119 million in the Q3 of 2022. PPNR in the Q3 included severance charges and the benefit of two non-recurring items. First, a $10 million dollar revenue benefit related to customer forfeitures of purchase incentives from the bank investor channel. Importantly, this was a one-time benefit which will not reoccur in the Q4. And second, approximately $9 million dollars from lower accrued variable compensation. This was also a one-time expense benefit, which is not expected to repeat in the Q4. PPNR also included severance charges of $5.4 million dollars, partially offset by a $4 million dollar reversal of previously accrued compensation for those individuals. Now let's turn to the first component of PPNR, which is revenue.

You can find revenue detail on page 9 of our earnings presentation. Total revenue for the quarter was $201 million, compared to $232 million in the prior quarter, and $305 million in the same quarter of the prior year. Let's dig into the two components of our revenue. First, non-interest income was $64 million in the quarter, compared to $86 million in the prior quarter, and $181 million in the same quarter of the prior year. As we indicated last quarter, the sequential change in non-interest income was primarily due to two items. First, lower fee and gain on sale revenue driven by the change in marketplace volume. And second, lower price on loan sales due to a lower percentage of purchases coming from banks.

You can see this impact in the fair value adjustments line. These items were partially offset by a non-recurring $10 million revenue benefit from the forfeiture of purchase incentives that I mentioned earlier. On to net interest income, which was $137 million in the quarter, compared to $147 million in the prior quarter, and $124 million in the same quarter of the prior year. The change in net interest income was primarily driven by lower average loans held for investment. This was partially offset by an increase in loans held for sale and securities from the Structured Certificates. These securities generate a high risk-adjusted return, and we expect the balances to further increase in the Q4.

Net interest income also benefited from $1.3 million in revenue as a result of a hedging program implemented early in the Q3 to help partially mitigate the impact of further Fed rate increases. On the next page, you can see that our net interest margin was 6.9%, compared to 7.1% in the prior quarter and 8.3% in the prior year. This change reflects the combination of our growth in high-yielding, risk-remote securities from the structured certificates program, as well as higher funding costs in the period. Now please turn to page 11 of our earnings presentation, where I'll talk about the second component of PPNR, non-interest expense.

Non-interest expense of $128 million in the quarter compared favorably to $151 million in the prior quarter, and $186 million in the same quarter last year. The sequential reduction was primarily due to three items. First, lower accrued variable compensation that I mentioned earlier. Second, lower variable marketing expense compared to the prior quarter due to fewer originations. And third, continued cost discipline across the company on non-compensation expenses. As Scott mentioned, we made the difficult decision to reduce head count to reflect the continued macroeconomic challenges. This was a necessary step to align our expense base to the current market conditions as we head into 2024.

This will result in approximately $6.7 million of severance-related charges, $5.4 million of which were incurred in the Q3, with the remainder coming in the Q4. We expect to realize an annualized compensation benefit of $30-$35 million when compared to the Q2 of 2023. Given all the moves and expenses, we are providing a range for non-interest expense, excluding marketing expense in the Q4 of $115-$120 million. Next, let's turn to provision. Provision for credit losses was $64 million for the quarter, compared to $67 million in the prior quarter, and $83 million in the Q3 of 2022.

The sequential decrease was primarily the result of lower day one CECL, due to fewer loans retained into held for investment in the quarter, partially offset by an increase in loss reserves, primarily for the 2021 and 2022 vintages. As you will see on page 13 of our earnings presentation, we have incorporated this increase in reserves and updated our estimates for the expected net lifetime loss rate on the 2021 and 2022 vintages. The estimates of 8.1% and 8.8% respectively, are within the ranges we provided last quarter and include both quantitative and qualitative reserves.

While it's still early to judge the ultimate performance of the 2023 vintage, our initial observations are that it is showing stable performance, benefiting from the tightened underwriting we've implemented over the last several quarters, and we continue to expect ROEs in the 25%-30% range. As Scott mentioned, our current ROE projections for all annual held for investment vintages are north of 20%. Now let's move to taxes. Taxes in the Q3 were $3.3 million, or 40% of pre-tax income. As I've mentioned before, we will have some variability in the effective rate from quarter to quarter, primarily due to variation in the stock price between the vesting date and the grant date of restricted stock units. Year to date, our effective tax rate is 29%, roughly in line with our long-term expectation of 27%.

Now let me touch on the balance sheet. Total assets were up modestly to $8.5 billion, compared to $8.3 billion at the end of the previous quarter. This is the Q1 where we've had a meaningful shift to more securities from our Structured Certificates and a modest decrease in our held-for-investment loan portfolio, which ultimately should lead to strong risk-adjusted returns, given the efficient use of capital. More specifically, Structured Certificates increased by approximately $300 million, reflecting the growth in the program. As you'll see on page 15 of our earnings presentation, over a third of consumer volume production held on balance sheet in the quarter was via the Structured Certificates program. We expect that to increase to 60%-70% in the Q4.

Loans held for sale at fair value were $363 million at the end of the quarter, as we sold approximately $200 million in season loans during the quarter and held an additional $250 million of originations as we begin growing a season portfolio for future sales. Our consolidated capital levels remain strong, with 13.2% Tier 1 leverage and 16.9% CET1 capital ratios. Our available liquidity remains healthy, with $1.3 billion of cash on hand and 86% of our deposits are insured. Additionally, we continue to maintain substantial amounts of unused borrowing capacity at both the Federal Home Loan Bank and the Federal Reserve Bank, with a total of approximately $3.8 billion of available capacity at September 30th. Now, let's move on to guidance for the Q4.

Given the interest in the certificate program, we're anticipating a modest increase in originations with a range of $1.5 billion-$1.7 billion. This volume increase will largely offset incremental pressure on pricing, as Q4 will represent the Q1 without meaningful bank investor participation. The marginal economics of marketplace loan sales are nearing breakeven, and therefore our go-forward earnings should be less sensitive to changes in marketplace volume. We expect PPNR to range from $35 million-$45 million. We plan to have positive net income for the quarter. While we are not providing 2024 guidance at this time, we do expect current conditions to persist into the first half of 2024, with volume and pricing at similar levels to our Q4 outlook.

As we are exiting the year, we have taken steps to position the company to operate in a difficult environment, including leveraging our bank capabilities by growing and remixing the balance sheet to more structured certificate securities, improving resiliency, including the cost actions we have taken throughout the year. As a result, we plan to remain profitable and preserve shareholder capital while investing in new capabilities to maintain our readiness for growth when conditions permit. With that, we'll open it up for Q&A.

Operator (participant)

If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. If you are using a speakerphone today, please pick up your handset before asking your question. Our first question today comes from Bill Ryan with Seaport Research Partners. Please proceed.

Bill Ryan (Senior Analyst)

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

Drew LaBenne (CFO)

Yeah. Hey, Bill, it's Drew. Thanks for the question.

Bill Ryan (Senior Analyst)

Mm-hmm. Yeah, of the, of the additional provision that we took on the back book, that was, that was about $20 million between the two vintages that we put on. And, you know, obviously under CECL, when we're, when we're redoing our provision estimates, we're taking the new expected discounted lifetime losses into the provision all at once. So, you know, the estimate that we're putting forth here at Q3 is our, our best estimate at this time, and, you know, we'll continue to watch it. But I'd say just in the grand scheme of kind of how the provision has moved on that back book, I think we're up 7% at this point.

Drew LaBenne (CFO)

So while taking it all up front creates a little bit of a larger provision, this isn't a you know, I wouldn't call it a massive move in the expected performance of the portfolio.

Scott Sanborn (CEO)

Yeah, and Bill, hey, one, one other thing to add and just kind of understanding the dynamics is when, at least when you kind of look at the 21 book, it, it's really been... You know, the initial outperformance was really strong, right? That post-COVID outperformance. So if you look at kind of lifetime losses within that, we kind of, there was a period of outperformance where we actually released a provision. And, you know, I, I know you've probably heard others in the industry talking about, you know, those charge-offs didn't go away, they just got deferred.

Bill Ryan (Senior Analyst)

Mm-hmm.

Scott Sanborn (CEO)

And, you know, that's kind of what you're seeing. So, like, basically released it and are now taking it back. It's not actually a meaningful move off of what we thought day one. It was just, we thought it got better, and then it came back to what we had initially thought.

Bill Ryan (Senior Analyst)

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

Scott Sanborn (CEO)

Yeah. Yeah. Yeah, the dominant piece is really, it's not on the borrower side of the house. The dominant piece is really investor supply of capital. You look at the competitive space, you know, a couple nuances maybe worth talking about is, you know, competition in the lower FICO bands has definitely lessened. Right? There's just not a lot of investor appetite for that particular profile at the moment, and so a lot of people have pulled back. But competition in the higher FICO, you know, that pretty much most people have shifted there. You know, we have always been a very effective competitor with, you know, the highly optimized processes we have and the data advantages we have. You can see our marketing remains amongst the most efficient in the space. So it's really, competition isn't driving it.

In terms of who we're competing with, you know, I, I guess if you looked at three categories, kind of the, those with bank charters that are either direct banks or, or, or, you know, new bank charters, they're obviously still competing. I'd say fintechs that raised significant capital within the last two years are still competing, and then, you know, fintechs that haven't raised capital in the last two years, I'd say, are, are less visible in this environment.

Bill Ryan (Senior Analyst)

Okay. Thanks for taking my questions.

Operator (participant)

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

David Chiaverini (Managing Director, Equity Research)

Hi, thanks. Wanted to ask about the volume of loans sold through the marketplace. The net fair value adjustments, that -$41 million in the quarter. I was curious, you know, at what % of par are loans or were loans sold at in the Q3?

Drew LaBenne (CFO)

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

David Chiaverini (Managing Director, Equity Research)

And I think if I heard you right, during the prepared comments, looking out to the Q4, did you allude to that being closer to, to par? Or how should we think about the fair value adjustments looking forward?

Drew LaBenne (CFO)

No, I think it's going to remain pretty consistent. Probably there should be a little bit of a drop as we go into Q4, but, you know, 96 is about where, you know, we view near breakeven on the sales. So going any lower than that, much lower, any going lower than that would not really make sense to us from an issuance standpoint.

David Chiaverini (Managing Director, Equity Research)

Yep. Got it. Got it. Okay, and then, follow-up on the, on the credit quality side. So the, the net charge-off rate, 5.1% in, in the quarter. With the portfolio, kind of stable here over the past four quarters around, you know, $5 billion, call it, should we think of this as being kind of around the stable, stable kind of going forward in this 5% range on, on net charge-offs?

Drew LaBenne (CFO)

No, we'll continue to move upward if we don't grow the HFI portfolio. So the charge-off rate you're looking at is just the held for investment portfolio, which as we're doing more extended seasoning and more sales through the SLIC program, we'll have also have less HFI coming on, which means the average age of that book is going to increase. So we'll see a slowdown effect, and charge-offs should continue to still move upwards probably till the first half of 2024, I would say. Now, keep in mind, this again, this is under CECL. We've taken the reserves on a discounted basis for all these estimated charge-offs that are coming through.

David Chiaverini (Managing Director, Equity Research)

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

Drew LaBenne (CFO)

Yeah, I mean, the math isn't quite as simple as that. If you took the... 'cause it depends on the speed of payoff of the balances and the weighted average life isn't exactly 1.5. But for example, if you look at the 2023 vintage and what we're putting on there, we're at 4%-5% ANCL is our estimate right now in terms of where that's coming on. The ANCL on the 2022 vintage is lower. We haven't given the range, but it's lower than what you're citing there. And the main difference in the calc is at the very beginning of the loan, you have a six-month period, so we're taking very few charge-offs at high balances, so it pulls down the overall ANCL over the life.

Scott Sanborn (CEO)

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

David Chiaverini (Managing Director, Equity Research)

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

Drew LaBenne (CFO)

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

Scott Sanborn (CEO)

Yeah, that'll hold until, you know, once we really get back in growth mode. We've obviously optimized right now for the lowest cost channels. And, you know, yet we are also maintaining our historical balance of new customers versus repeat members, right? So we're still investing in building the membership base today. So, when we get back into growth mode and we go into higher cost channels, there'll be some upward movement on that, but we won't do that. I just wanna come back on your question on pricing. I think there's a little maybe tick down in pricing in Q4, but as Drew said in his prepared remarks, we're really pleased with the amount of demand we're seeing for the programs we're offering. Our, you know, goal right now from here is to optimize price.

We don't see, we don't see a lot of pressure on price 'cause we're not really gonna sell below what we're selling at today. So, you know, where that would show up is vol, you know, volume or not, and for us to be doing more volume, we're gonna, you know, meaningfully more volume, we're gonna look for better pricing.

David Chiaverini (Managing Director, Equity Research)

Great. Thanks very much.

Operator (participant)

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

John Hecht (Managing Director, Senior Equity Analyst)

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

Scott Sanborn (CEO)

... Yeah. So I think for 2024, it's a little early, I think, to call the ball on how much we're going to allocate to this program. You know, our initial goal when we set it up was to get multiple buyers in, get demand up for the program, which I think we have now accomplished, and then start to work on price. As we go into 2024, and we think about how we're going to allocate capital and how we're going to allocate balance sheet, it will be a function of obviously demand, but also price that we're getting through the various structures, and we'll seek to optimize based on price and return on capital as we go through there.

So it's I think we need more visibility into 2024 before we're making that final allocation, but look to come back on the next call with more details. As far as NIM, I mean, obviously, the structured certificates, given that they're pretty risk remote in terms of taking a loss, they come with a thinner coupon, which is going to bring NIM down. But from a you know, they also come with no provision. So we're making a trade here where we're going to have a little bit we're going to have some pressure on NIM, but we should have lower provision over time as well.

John Hecht (Managing Director, Senior Equity Analyst)

Okay. And just-

Scott Sanborn (CEO)

Just as a reminder, I would say, just as a reminder, I think, you know, I think it's probably clear from the presentation, but we have a 20% risk weighting on those securities right now. So as we're going into next year and we're thinking about our capital levels, you know, that potentially gives us some more latitude to think about where our targets should be from a leverage and a risk-based capital ratio.

John Hecht (Managing Director, Senior Equity Analyst)

Yep. And then on that topic, you guys mentioned 20%, whatever, risk-adjusted weighting for the structured certificate program. Is that what we should think about what it would be and when it—you know, in terms of the, like, the regulatory capital ratios, or is that something that's just—that can change over time?

Scott Sanborn (CEO)

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

John Hecht (Managing Director, Senior Equity Analyst)

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

Scott Sanborn (CEO)

Yeah, I mean, we're—I'd say mostly coming from us, consumer demand remains intact, right? They're continuing to see their credit card balances move up, and they're seeing their, the size of their bill move up in proportion to that, plus their rate. So on the demand side, it remains strong. We are—you know, we have moved even more of our origination to that use case and away from, you know, other alternative use cases that would just result in providing people more cash, given that we—you know, we're anticipating the potential for continued strain and/or stress due to the inflationary environment. We are overall, you know, we are tighter overall on the front end in terms of who we're allowing in.

That said, you know, some of the things I touched on is the experience we're working on and plan to have ready for when we resume growth, will be the ability to get approved for a personal loan at the same time as you're approved for, you know, a bank account, have the ability to service your loan in a mobile app, and within that mobile app, also be able to manage your credit card debt. You know, one of the things that's really different about credit card debt is unlike most of your, you know, your car, your mortgage, all the rest, those are fixed payments. Your credit card debt varies in amount every month, both based on the balance and the rate, but also based on whether you pay the minimum payment or you pay it off or something in between.

So consumers really don't have a very good way to see all of that data and manage it holistically. So we are working on an experience that'll help them do that, as well as a line of credit product that, as we're seeing those balances build, we'll be able to allow them to kind of sweep that automatically into an installment payoff plan. So you know, those will all be kind of in the background in development and optimization right now until the time is right. But we plan to be in a position to leverage all of that to, you know, with what we think will be a pretty powerful competitive moat when the time is right.

John Hecht (Managing Director, Senior Equity Analyst)

Great. Appreciate the call, guys. Thanks.

Operator (participant)

Our next question comes from Reggie Smith with J.P. Morgan. Please proceed.

Reggie Smith (Executive Director, Equity Research)

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

Scott Sanborn (CEO)

Well, you know, it's always been our kind of largest use case. It's always been our dominant use case because the, you know, the, on average, we're able to offer people, let's say, a price that's 400-500 basis points below their card. And, you know, it's a big market, right? Half of all U.S. consumers are carrying credit card debt, and so we're able to know who they are, know that we can approve them and reach out and say, "We got a better, better deal for you."... But there are other use cases, especially for repeat members.

You know, once they see how easy it is to work with LendingClub, and, you know, they're in our system, they can come back and use it for a whole variety of other things: home improvement, you know, you name it, weddings, moving. So those latter alternative use cases, you know, they're still in the mix, but they're a smaller percentage of what they would have been two years ago. We're not talking about significant shifts, we're talking about on the margin. But yeah, we, that is, that is how we have. One of the many ways we've adapted. We've also, you know, tightened up our approval rates for people with federal student loans over a year and a half ago. You know, there are a number of ways we've adapted to this environment. That's just one.

Reggie Smith (Executive Director, Equity Research)

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

Scott Sanborn (CEO)

Yeah. So in the prime space where we're originating, I mean, the, the coupons range anywhere from 10% to, you know, 18, 19%, but on average, we're skewing towards the higher end of that population, so they're going to be in the low teens in terms of the coupons that we're putting on the books for ourselves. And in terms of coupon we've passed on, we're, we're roughly in the, the near prime space. We've pretty much passed on all of the rate increases to that borrower. As we mentioned, where there's less competition in the prime space, we're probably closer to just under 300 of the, call it, 500 rough, rate increase.

Reggie Smith (Executive Director, Equity Research)

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

Scott Sanborn (CEO)

Yeah, I mean, I'd say, you know, prior to the rate increase, right on the prime credit, you were looking at an unlevered return of, call it, you know, 4%-5%, for prime, and call it 7%-8% for near prime. I'd say, you know, those numbers today are more like 8%-10% for prime and north of that for near prime. So, you know, the way you get there is higher coupons-

Reggie Smith (Executive Director, Equity Research)

Yeah

Scott Sanborn (CEO)

... lower losses and a discount. And, you know, and I guess, I guess the other thing you'd note is, you know, coming into this rate environment, we were selling loans at or above par. I think, we were at 101.

Reggie Smith (Executive Director, Equity Research)

Yeah.

Scott Sanborn (CEO)

You know, so, you know, pretty, pretty big, pretty big difference in, in pricing, given the pressure on returns. Now, that and that, you know, part of that return equation is due to the loss of the banks, right? And, you know, because the banks on prime can absorb a lower return, but without them in the mix, with asset managers that are, you know, often warehouse funded, you know, they need that higher return. And, you know, Reggie, it's one of the things you said-

Reggie Smith (Executive Director, Equity Research)

I got it.

Scott Sanborn (CEO)

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

Reggie Smith (Executive Director, Equity Research)

I got one more, one more question, kind of a two-parter. On that, that structured note security, just can you remind us the buyers of, of that, equity tranche or residual tranche, are those, new partners or are they existing partners that kind of moved over... It's like existing asset managers have moved over to this structure? And then the second part of that question is: Is there an opportunity to possibly move, further down the credit spectrum, maybe enhance the yields there, given the, the support? Or would that breach anything, related to it being, you know, something that's able to be non-ceasable, non-reserved? Thanks.

Scott Sanborn (CEO)

Yeah. In terms of the partners, it's a combination. We had some investors that were sidelined due to the cost of the warehouse lines that we've brought back. But we've also added several new partners to the platform. You know, so sort of the bigger names in private credit, you know, have come onto the platform. Some of the key names have come onto the platform. And, you know, as we mentioned, what we like is, you know, these are players that have got, you know, significant capital to deploy, and they are looking for, you know, kind of visibility into longer-term flow. So we've got agreements now that extend out through Q1.

Obviously, you know, returns have got to keep coming in and, you know, this—we won't call that committed capital, but the fact that we've got people who've signed up to make purchases of the $2 billion over the next 6-8 months, we think is a real strength. In terms of moving further down the spectrum, we certainly think, you know, that was the area that we, you know, really tightened the most and the longest to go, and we're certainly seeing solid returns from that segment. So we do think over time, as more of that data comes in to show, you know, what we're able to deliver, there'll be an opportunity for us to potentially grow that marginally.

But right now, investor appetite is lower, and certainly, it's not out of the question that it could go into a structure like the Structured Certificate program. Drew, anything to add?

Drew LaBenne (CFO)

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

Reggie Smith (Executive Director, Equity Research)

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

Operator (participant)

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

Speaker 8

Hey, I'm on for Mike Perito. Thanks for taking my question.

Scott Sanborn (CEO)

Hey.

Drew LaBenne (CFO)

Hi, there.

Speaker 8

Hey, there. I was hoping you guys could expand on the comments you guys made earlier in the near the beginning of the question session, where you mentioned about, you know, there's more competition in the higher higher side of credit quality, higher FICO space among the personal lending market. You know, can you help quantify us maybe how many, you know, competitors who have stepped up from lower FICO to higher FICO and kind of crept into your space a little bit, and maybe how that's impacted your market share specifically? I don't know if you have any numbers behind that, but just curious.

Scott Sanborn (CEO)

No, I mean, I guess the number of offers that are visible to customers has certainly come down. If you look at a key place, like some of the aggregators, like a LendingTree or a Credit Karma. So the number of people participating has come down. It's more pronounced in the lower FICO than in the high FICO. And, you know, in terms of share, yeah, you know, the best source of data for that will be TU, which comes out on a big lag. I'll tell you, we're not... You know, long term, we've consistently been a leader in the space. In this particular market, that is not a metric that we're managing to. We're, you know, we're most focused on delivering a predictable return for ourselves and our buyers.

But you know, what I would expect to see is that, you know, certainly some of the, you know, the banks that are playing in Prime, that are direct banks, right, that are their business model is to be adding the assets to the balance sheet, you know, are gonna continue to operate.

Speaker 8

Okay. And about your guys' comments about the first half of 2024 probably looking similar to Q4, does that mean we should probably assume a similar outlook on expenses? Or, you know, are there actions you guys could take that would maybe help lower one way or, you know, if there's any investments you would want to make that could have it go up?

Drew LaBenne (CFO)

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

Speaker 8

From-

Drew LaBenne (CFO)

Okay. Roughly flat from the Q4 numbers.

Scott Sanborn (CEO)

Yeah, from the Q2.

Speaker 8

Right, from Q2.

Drew LaBenne (CFO)

From Q2.

Scott Sanborn (CEO)

From Q2. Sorry. Yeah.

Speaker 8

All right. Yeah, that's understood. And then, yeah, that's all for me. Thank you, guys.

Operator (participant)

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

Artem Nalivayko (VP, Head of FP&A, Investor Relations)

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

Scott Sanborn (CEO)

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

Artem Nalivayko (VP, Head of FP&A, Investor Relations)

Okay, great. Thank you. Here's a second question. So with the shares trading at such a steep discount to tangible book value, is there a reason the company is not buying back shares?

Drew LaBenne (CFO)

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

Scott Sanborn (CEO)

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

Artem Nalivayko (VP, Head of FP&A, Investor Relations)

All right. Great. Thank you. So with that, we'll wrap up our Q3 earnings conference call. Thank you for joining us today, and if you have any additional questions, please email us at [email protected]. Thank you.

Operator (participant)

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