LendingClub Corporation (NYSE:LC) Q3 2023 Earnings Call Transcript

LendingClub Corporation (NYSE:LC) Q3 2023 Earnings Call Transcript October 25, 2023

LendingClub Corporation beats earnings expectations. Reported EPS is $0.05, expectations were $0.037.

Operator: Hello, everyone. Thank you for attending today's LendingClub Third Quarter 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. [Operator Instructions] I would now like to pass the conference over to our host Artem Nalivayko, Vice President of Finance.

Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub's third quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to the 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.

A businessperson on a laptop analyzing a chart of credit card loan data.

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 expectation 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: Alright. 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-provisioned 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 and 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 capability 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 a billion dollars in Q4.

In total, we now have close to $2 billion of signed orders for over the next six months. Not only our 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 in-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 and vintages originated before we began tightening and we therefore increased our provision based on observed trends and our outlook. I note the 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. And 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 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 Elliot as Chief Customer Officer. With experience at JPMorgan Chase and CAP1, 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. LendingClubber’s 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: Thanks, Scott, and hello, everyone. Let me walk you through the details of our results in the third quarter, starting with originations. Originations were $1.5 billion, compared to $2 billion in the prior quarter and $3.5 billion in the third quarter 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 season program to meet future investor demand for season loans and we retained over $300 million in our held for investment portfolio.

Now let's move on to pre-provisioned net revenue or PPNR. PPNR was $73 million for the quarter, compared to $81 million in the prior quarter and $119 million in the third quarter of 2022. PPNR in the third quarter included severance charges and the benefit of two non-recurring items. First, the $10 million revenue benefit related to customer forfeitures of purchase incentives from the bank investor channel. Importantly, this was a one-time benefit which will not recur in the fourth quarter. And second, approximately $9 million from lower accrued variable compensation. This was also a one-time expense benefit, which is not expected to repeat in the fourth quarter. PPNR also included severance charges of $5.4 million, partially offset by a $4 million 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 nine 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 fourth quarter. Net interest income also benefited from $1.3 million in revenue as a result of a hedging program implemented early in the third quarter 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 headcount 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 third quarter with the remainder coming in the fourth quarter. We expect to realize an annualized compensation benefit of $30 million to $35 million dollars when compared to the second quarter of 2023. Given all the moves and expenses, we are providing a range for non-interest expense excluding marketing expense in the fourth quarter of $115 million to $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 third quarter of 2022.

The sequential decrease was primarily the result of lower Day 1 CECL due to fewer loans retained and to help 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.

We continue to expect ROEs in the 25% to 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 third quarter were $3.3 million, or 40% of free 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 first quarter 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 certificate program. We expect that to increase to 60% to 70% in the fourth quarter. Loans held for sale at the 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 fourth quarter. Given the interest in the certificate program, we're anticipating a modest increase in originations with a range of $1.5 billion to $1.7 billion. This volume increase will largely offset incremental pressure on pricing as Q4 will represent the first full quarter 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 to $45 million. We plan to have positive net income for the quarter. But 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. So 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 and conditions permit.

With that, we'll open it up for Q&A..

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