Q4 2021 LendingClub Corp Earnings Call
[music].
Good day, and welcome to lending club's fourth quarter and full year 2021 earnings conference call. All participants would be will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Sameer Gokhale head of Investor Relations. Please go ahead Sir.
Thank you and good afternoon, welcome to lending club's fourth quarter and full year 2021 earnings conference call.
Joining me today to talk about our results and recent events are stopped Sanborn CEO and Tom Casey 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 all the questions that were submitted for consideration by email.
Our remarks today will include forward looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.
These statements include but are not limited to our competitive advantage and strategy.
Economic conditions, I phone volume and future products and services and future business and financial performance. Our actual results may differ materially from those authenticated by these forward statements.
Factors that could cause these results to differ materially are described in today's press release and our most recent forms 10-K 10-Q, each as filed with the SEC as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-K any forward looking statements that we make on this call are based on assumptions as of today and we undertake no.
Obligation to update these statements as a result of new information or future events and now I'd like to turn the call over to Scott.
Yeah.
Alright, Thanks, Samir good afternoon, everyone and thank you for joining us.
We closed out 2021 in the strongest position in our history.
Despite the typical seasonal Q4 headwinds, we delivered record results well above expectations, while maintaining our discipline and our focus on prime consumers.
Q4 capped a transformative year for lending club as we successfully executed the strategy, we laid out back in February achieving several milestones, including one creating America's first digital marketplace bank, allowing us to combine the growth and innovation of the Fintech with the profit and resiliency of our bank.
Yeah.
Two generating record revenue and profitability as we leveraged our data and member base advantages to return to scale and market leadership.
And three transforming and strengthening the economics of our business by continuing our focus on operating efficiency and benefiting from our bank capabilities, which includes adding a recurring and resilient revenue stream in the form of net interest income.
We more than doubled our revenue for the full year, while Notching records in each of the last two quarters, while significantly increasing our earnings power.
And we're just getting started.
We plan to deliver another record year in 2022, delivering strong and sustainable levels of originations revenue and earnings while continuing to invest in our business to generate sustained growth in the years to come.
Our target for the year is to deliver 40% revenue growth at the midpoint and an additional $120 million in earnings and we believe our core capabilities and strategic advantages will allow us to successfully navigate environmental factors such as the virus competitive activity credit normalization and rising.
Interest rates.
As we enter 2022, we expect consumer demand to build his credit card balances recover towards their pre pandemic levels, increasing our total addressable market.
If the country word of enter another variant driven lockdown consumer spending could be temporarily constrained, but we do not believe our average member will be overly impacted for an extended period.
While we expect the market to remain competitive we are comfortable that our significant advantages will enable us to efficiently generate revenue at some of the lowest acquisition costs in the industry, particularly given our large and loyal member base.
Also with the addition of the bank, we're now able to increase our pace of testing and innovation, while also increasing the lifetime value of our customers, allowing us to further penetrate the market and capture more value.
Now with respect to credit underwriting, we will maintain our consistent focus on our core membership prime customers with an average annual income of roughly $100000.
Following the recent period of historically low delinquencies, we expect vintages beginning in the second half of 2021 to return to pre COVID-19 levels and have underwritten priced and reserved accordingly.
The initial data we are seeing for early delinquencies for Q3, and Q4 provides support for our assumptions.
I've long said credit is a data problem and.
With 150 billion cells of data captured on more than 70 billion in loans over 15 years through multiple credit and interest rate cycles. We have created a competitive advantage that is difficult to replicate and our continued investment in our data infrastructure is allowing us to lean into this advantage.
Lastly, it's worth touching on the general expectation of rising rates.
No we've been through a rising rate environment before and have a grounded view of expectations based on our experience.
It down into three buckets impact to our borrowers impact alone investors and impact of lending club.
For borrowers coming to us to refinance credit card debt rising rates should not negatively impact demand.
In fact since cards are pegged to a floating rate and increase in APR could actually stimulate them to look for value and alternative options like lending club.
And with strong balance sheets, and low unemployment levels, we don't expect rising rates to create significant payment stress for our core customers.
Yeah.
For loan investors the short duration of our asset allows us to reprice quickly and maintain attractive risk adjusted returns.
I'd remind everyone most of our marketplace loans are sold to banks, where we anticipate funding costs to rise more slowly given our significant deposits they already have on hand.
And finally for lending club, we expect the impact of rising rates in 2022 to be muted.
We anticipate that any increase in cost of funds on new deposits used to fund our balance sheet growth will be more than offset by the increased mix of high yielding consumer loans.
So summing it all up we feel good about our position and we expect to deliver strong results. This year, given our competitive advantages operating momentum in large addressable market.
We're a leader in a small group of fin techs, who have a bank charter.
We have a proven track record of generating strong returns on our investments and now with the attractive economics of our marketplace Bank model. This is the right time to further invest to deliver durable and even stronger earnings growth.
Our investments in 2022 will be focused on three areas.
One building our on balance sheet loan portfolio by holding 15% to 25% of personal loan originations to drive sustained recurring revenue at high Roe.
We also plan to begin holding a portion of the loans generated in our purchase finance business in Q4, we integrated this operation onto a common platform to leverage our data and servicing capabilities. We are now expecting to generate similar returns to our core unsecured lending business, but with differentiated acquisition channels that skewed.
Even higher prime customers.
Holding loans on our balance sheet generates three times the earnings at selling loans and the investment is accretive within 12 months.
Yeah.
Our second investment area is in marketing and product experience to increase the percentage of loans from new customers back to approximately 50% to further penetrate our market opportunity and to increase the lifetime value if they become repeat members for loans and eventually other products.
Yeah.
Our third area of investment is in infrastructure and further integrate banking data and to move forward as a mobile first cloud based digital bank.
This is where the consumer is headed and Thats, where we must continue to meet their expectations.
On financial services that are seamless on their terms and they want personalized and predictive tools and information so that they can make better and faster decisions.
Market place bank already delivers against these needs and we're building a next generation set of capabilities to meet future demand.
Before I turn it over to Tom to discuss the financial results in detail I'd like to give a huge shout out to our highly engaged and resilience employee base for lending club. Thank.
Thank you all for a great year, and I can't wait to tackle 2022, together, we are well positioned to thrive.
Tom over to you.
Thanks Scott.
<unk> financial results reflect the power of our new digital marketplace banking model, which combines our industry, leading marketplace technology with the strategic and financial advantages of our digital banking platform.
Our efforts to radically transform over the last year are now complete as promised and position lending club to continue to build on this strong momentum as we enter 2022.
Before I get into the quarterly results I would like ask those listening to the call today to please have our earnings presentation and press release open as I'll be referencing them in my remarks today.
During the quarter, we were pleased to drive better than expected results through solid execution.
Revenues grew 7%, 7% sequentially to $262 million exceeding a range of $240 million to $250 million.
Net income for the quarter was $29 $1 million also well above our target range of $20 million to $25 million.
During the quarter, we benefited from better than expected credit performance and reinvested those benefits due to increased loan retention.
Our revenue growth again exceeded origination growth as the mix of our recurring net interest income increased 27% for the quarter and now represents 32% of our quarterly revenue.
As you'll see on page 12 of our earnings presentation. Our net interest margin at the bank continued to increase during the quarter to $8, two 5% up 119 basis points sequentially due to the higher mix of consumer loans.
As a reminder, this growth in net interest margin also factors in eight basis points of increase in funding costs during the quarter.
Total loan originations for the quarter with $3 1 billion exceeding.
Exceeding our guidance range of $2 $83 billion, despite seasonally lower loan demand, we typically see in the fourth quarter.
Marketplace revenues were down a modest 2% from the third quarter, reflecting fewer loans sold and higher E. H F I portfolio retention of 25% in the quarter compared to 20% in <unk>.
A reminder, we earn about three times more income on loans, we retained versus selling them. So keeping more loans on the balance sheet provides a very attractive return on investment.
With respect to our recurring stream of net interest income it's worth highlighting that it continues to exceed our loan loss provisions on increased volume of retained loans.
This is an important milestone for our business model is this net interest income essentially fund the seasonal provision as we grow our loan portfolio, creating a highly profitable recurring revenue stream that will continue to accelerate our overall revenue growth.
Yeah.
We also continue to see favorable credit performance in our loan portfolio and you can see this on slide 14.
While recent market growth is disproportionately in lower quality credit on the left side of the page you see that we have continued to maintain a focus on our high quality prime customer with average FICO is well above 700 and incomes above 100 K.
Yeah.
You can also see that our held for investment portfolio was even higher quality and then early delinquencies have performed very well compared to pre pandemic vintages.
Importantly, our underwriting pricing and provisioning all assume normalization of credit.
For the fourth quarter, you'll see on page six of our earnings release, the net charge offs on our consumer portfolio were $5 $4 million up from $3 one last quarter.
We expect charge offs to continue to increase as we grow our consumer loan portfolio and credit performance normalizes.
As you can see on page five of our earnings release, our allowance for loan and lease losses on consumer loans held for investment are approximately six 4% to cover expected losses over the life of the alone.
Also on page six you can see our held for investment consumer loan portfolio grew to over $2 billion or 18% sequentially at the end of the quarter.
The consumer portfolio growth was impacted by the intended sale of the loan portfolio, where we transferred approximately $250 million of loans to held for sale.
Over the course of 2022 we would expect to offset the sale of the yacht portfolio with growth in our consumer loans, including secured auto and patient finance products.
During the quarter. We also grew our deposit base by 11% to $3 $1 billion with average interest bearing deposit rates, increasing to 38 basis points from 30 basis points as we grew our savings deposits by $304 million.
In 2022, we expect interest rates for these savings accounts will increase however, just as we saw in the fourth quarter, the higher mix of consumer loans more than offset the higher funding costs, allowing our net interest margin to further decrease.
Lastly.
A reminder, that our loan portfolio has a very short duration of about one and a half years on average so as rates increase in the portfolio runs off we have the ability to reprice the loans to reflect the new rate environment.
Yeah.
Our strong bottom line earnings for the quarter continues to generate ample capital, allowing us to continue to grow our loan portfolio.
At the end of the year, our tier one leverage ratio at the bank was 14, 3%.
Compared to our targeted level of 11%.
In addition, we have a deferred tax asset of approximately $200 million, which currently has a 100% valuation allowance recorded against.
Over time with continued profitability, we expect the valuation allowance to be reversed further adding to our book value.
Scott mentioned earlier, a number of investments, making 2022 and I'd like to share some comments on how we're thinking about the returns.
I want to be clear that we will continue to make investments when we believe that they have a attractive payback.
Our investments in growing the consumer loan portfolio are generally generating material returns and you saw that in 2021 and we'll see the impact on our guidance for 2022.
Marketing investments are increasing our member base is delivering very attractive lifetime value.
And finally, our technology investments are modernizing our platform integrating banking and loan products and providing more products and services for our members.
We currently have an incredible opportunity to strengthen our position over our competitors by leveraging the economic power of our business and we believe the positive results of these investments will become even more apparent over time.
Now before I go into 2022, I want to bring your attention to page eight of our earnings presentation.
What this page shows is it is the significant transformation of our company over the past two years.
On similar origination volumes in the fourth quarter 2019, and the fourth quarter 2021.
We're now earning $74 million of additional revenue and $29 million of additional net income.
Quarterly.
This has fundamentally changed the revenue income profile of the company and positions us well for 2022 and beyond.
Yeah.
Now, let's turn to the operating environment, we expect in 2022.
First as Scott indicated earlier, our guidance assumes generally favorable conditions, while acknowledging the dynamic nature of the environment.
Second while we expect the market for consumer loans to continue to be strong amid higher interest rates and we may remain focused on revenue growth.
While originations are important they're no longer the sole driver of our quarterly revenue.
As such we believe is not efficient to manage our total originations to artificial quarterly targets.
For the year, we expect total originations to be approximately $13 billion.
And third we expect to continue to grow investments in the areas we've discussed.
Portfolio growth with 15% to 25% of originations routine.
Increased member acquisition and further development of our technology infrastructure.
Yeah.
All these investments have very high rates of return increase our revenue growth long term and make our business model more durable over time.
So with that as backdrop, we expect to continue to build our revenue and net income growth trajectory.
For 2022 we expect revenues between $1 1 billion to $1 2 billion for the full year.
Which implies an annual growth rate of 34% to 47%.
We project another strong year of earnings between $130 million to $150 million for the year, which is six six to seven ex the increase over our 2021 results.
Now, let's shift to the first quarter's guidance the first quarter is seasonally our lowest quarter.
For the quarter were guiding to 255 million to $265 million in revenue and net income of $25 million to $30 million.
When you compare this to <unk> 21 revenues are up $149 million to $159 million.
And net income is up $72 million to $77 million.
As you can see we have a very exciting year ahead of us to further improve our financial profile and continue to drive long term shareholder value.
Let me turn it over the call to the operator for Q&A.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the case if at anytime you question. That's been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks for taking the questions I wanted to start with the origination guidance when I look at the 13 billion for 2022 and compare that to the average for the second half of 2021 it looks like it's about 5% above that level, which you see.
Conservative to me, but could you provide some commentary around that.
Yeah.
Yeah. David This is a this is scott thanks for the question.
The business is seasonal so looking at the second half of the year a what.
I think what makes a little more sense.
You May recall Q2, and Q3 are our strongest quarters seasonally Q4 and Q1 are.
Seasonally slower quarters, and so what you know what we're.
Really looking at is kind of how we're we're exiting the year and going into it you know where we are right now as we're you know we're roughly at the pre COVID-19 level, which as you know Q4 data isn't out yet on the overall market. So you know we don't have that yet, but we're assuming the market is around that as well.
Disproportionate growth over the course of the last 12 months has really come from subprime and near Prime which is not a place that where we over participate that's why in our prepared remarks were really focused on reiterating that our our resumption of growth is back into our core prime customer base.
That market, we do anticipate to grow but it is lagging right. They did not disproportionately benefit from government support and therefore you know.
Their their balances have come.
Come down they've been conservative so we'll see how the year progresses, but what we'd look at as you know.
Q4 to Q1, we typically would see that's being slower with business picking up afterwards.
We will be well positioned if the market if the if the prime market, which is our core growth. We believe we're well positioned to participate in that but you know at this point it's a.
Yeah, it's early.
Thanks for that and then in terms of the mix of originations you guys have spoken about you know auto refi can you talk about how much auto refi is in there if at all and what what type of kind of tailwind that could provide as you scale into it.
Yeah, I mean, the numbers for Ottawa.
Not going to give a specific guide on that I mean, where the numbers are small the growth rates, obviously are quite high coming off of the base and I'd say, we're you know we're at a scale this year, where that business is able to kind of cover its costs and we expect the growth to be disproportionate, but not a meaningful contributor to the financial.
You know in the near future and just a reminder, that the refi business that we're in.
Essentially saving customers money out for their existing car long so what the core growth is going to come from US you know further penetrating the market in the personal loan space.
Okay, and then last one on originations you guys retained about 25% for the balance sheet is that and I know you've historically have said 15 to 25 is a good range has that range changed at all should we be thinking about 25% on a go forward basis.
David I think as we said 15 to 25 is our guide.
We went up to the higher end of the range this quarter.
And in part because we did see some favorability in credit we just redeployed all of that back into the balance sheet. That's such a high return were obviously motivated.
Three times as much money on and as we do a sale.
Made sense for us to defer some of the revenue that we would have recognized on the sale and put it into the balance sheet and and improve the net interesting income from extra so.
Pretty conscious decision, you'll see us ebb and flow in that range. Obviously, we're motivated to make it as high as we can but it is based on facts and circumstances are what the market looks like what our profile is and as well as our capital levels.
Makes sense, thanks very much.
Yep.
Our next question will come from Bill Ryan with Seaport Research partners. Please go ahead.
Good evening, Thanks for taking my questions first one.
Just on the provisioning rate cancer, we're looking at obviously you retain a little bit more loans. So you put up a little bit more provision.
I think the percentage was a little bit higher and I know, you're using a present value approach.
On the establishing the seasonal reserves.
What kind of provisioning rate as a percent of retained origination should we be thinking about through the course of 2022 and over time as you kind of like as the portfolio matures and the present value effect on white.
Yeah.
So I think.
We put up about probably around 6% and on a present value basis, So that will accrete up from there over the life of alone. So.
So I think for me.
Modeling purposes, you know, you're probably in that range of call it around 6% or so six to seven.
Depending on the pace of growth as you know the the early portfolios will come in at as I said about six to six and a half and then we're going to get that accretion, which does add a little bit but again, it's it's proportional because you've got four quarters now of.
A seasoned portfolio that they're all accretive at slightly different rates, but I would say you know in the ballpark of around 6% six 5% seems to be a good a good guide for where we think we'll be keep in mind that we.
We did see some favorability this quarter and so you see that go through the provision line a little bit but.
That's an example, where you know you're putting up a pretty significant amounts of seasonal reserves. When we retain these assets. So in fact, we held another five points you know that's a pretty significant.
Having an impact on revenue and earnings.
Actor in the lost revenue and the provision you know, it's about 10 points or per dollar. So it's a significant mix shift in our earnings and then we want to make sure everyone, calling yes, we call that out for you in our press release to make sure you understand the implications of that but that's about a $10 million swing.
They are the additional wells to be able to score.
Okay, and just as a follow up on your marketing expense as a percentage of originations I say.
Inched up in the quarter not a whole lot from a relative to Q3.
Historically, you've kind of talked about it being you know pre pandemic one nine when <unk> is from central origination.
And do you expect it to increase over time, if you pursue new customers.
Is the you know how should we think about the cadence of that as well.
Well I think Theres a couple of things there.
Highlight I think your the numbers I gave you were still pretty good I think we'll get back to kind of the pre pre pandemic type of range of of marketing Oh feel very good about our efficiency. There one thing that won't be going through that line item is some of the growth we're expecting in funding so on the deposit side, you'll see some in.
Pack from from deposit market so.
That's probably you know somewhere in the.
Call It a 10.
10 million Bucks or so next year that you know, we really didnt have to do this year because we did.
Acquire radius and they had a lot of extra deposit. So we didn't really start marketing really until maybe the third and fourth quarter. So what youll see next year as a full year of funding activities and as well as the efficiency that we get out of the.
Personal loans, we think will continue but we will be ramping up some of our focus on new members feel very good about our lifetime value. There. So we're encouraged to take some of the additional margin. We do have in the business and put it into into growing our member base, but those numbers are still pretty good.
That range pre pre pandemic, we were running around at around 2% or so so that that number is.
I think historically, where we've been and again, we'll we'll make an evaluation of that on a quarterly basis, but I feel good about.
Our efficiency and our ability to attract new members, yes, just I'd add to that.
For next year, I think that number is that the right place to anchor and as Tom mentioned, given that our value from customers going up.
The actual return on that investment is also going up but in terms of the quarter over quarter I'll just note that flat marketing spend.
In a seasonally slower quarter, while still increasing our mix of new customers. We actually think it was a positive outcome.
Okay. Thanks.
Yeah.
Our next question will come from Giuliano Bologna with Compass point. Please go ahead.
Thanks for taking my question so.
One of the first things I want to kind of.
I'm trying to wrap my arms around this and thinking about some of the investments that you're making and if theres any sense of kind of the magnitude of the additional investments on the technology side and some of the other sides.
And the reason why I ask that is if.
If I dial up returns from 225 per cent charge, so that increases your provision in my model at least.
And Oh, my dialogue marketing significantly higher enrollment basis yeah.
I would find some other expenses I'm kind of trying to turn on trying to get an understanding of how much the investments in technology and the platform will be.
Yeah, Yeah, a couple a couple of things and yeah. I think we can probably provide some context for you. So let me give you some.
Some things that are evolving and the model that we want to make sure everyone understands we've told you we're going to invest in.
In three areas, where we're going to continue to invest in our portfolio and you know what today's guide that would indicate about $300 million more retention at the midpoint of 20% so that that alone is approximately.
Approximately $20 million of earnings just.
Of investment if you will that would.
Deferring.
Which improves our revenue stream increased their total lifetime value. So we're going to continue to do that so that's one.
As far as the investments, we're making you know as I mentioned, we're going to be picking up marketing, we think that's somewhere in the neighborhood of about $25 million.
That's going to be split between deposits and new member and obviously growing our volumes and <unk>.
Total so that's about $25 million.
On the Tech side, you know, we've got about $25 million earmarked for investments in a number of things including.
Modernizing our technology stack, bringing some of the banking systems to the cloud and really engaging our customers with mobile application design in and engaging them with our banking and lending products. So those are some of the big things that we were going to do.
And so and so I think these are all but some of the big investments, we're making there also.
We benefited this.
This year for taxes, and and so we're gonna obviously benefit from that as well. So those numbers are kind of off the run rate. If you will giuliano so they're not a benefit from taxes.
Just kind of Arizona that reverses exactly so we won't be paying taxes, yeah. So.
We'll probably be somewhere in that.
The neighborhood of about 10% as I mentioned in my prepared remarks, obviously, we have large NOL the tax number could move depending on.
And circumstances throughout the year, but those are some of the big drivers and then you know we also have some some wage inflation in our expense base. So those are some of the key drivers and again those numbers are kind of off our <unk> run rate.
Alright.
And then.
As I kind of roll forward from.
I think from a model perspective.
One of the areas that yep Yep.
Yeah.
Yeah, So I'm trying to kind of a trend also understand that a little bit more how do you tell us.
Marketing I think last quarter, you guys mentioned about 100000, new customers I'm not sure. If you go to any kind of indication of where that showed this quarter yeah.
Just on my math I was probably that probably implied that you were 40%, 35% to 40% new customers and you're talking about getting to 50%.
Is there a sense around how much higher marketing expenses as a percentage of volumes might go.
Hum.
Or how is that relative impact of my poker.
Yeah, I think that's what I was saying the bill earlier that you know that 195, 2% seems to be a pretty good circa 2%, obviously I don't want to tie specifically by quarter here, but but you know.
I think our pre pandemic levels, where we're in that range and maybe even a little higher pre pandemic, but we think 2% is probably where it will shake out.
Obviously facts and circumstances, depending on the market but.
We think that's sufficient to do to meet the goals that we have.
On new members.
Well it sounds good.
One last one you were talking about some of the purchase loans and retaining those is there any sense of magnitude around the originations from there and how much of the country could be yeah.
Yeah. This is this is something that I'm glad you asked that because I didn't I didn't mention is another headwind.
We're really excited about the purchase finance business. So we now are the issuing bank for about 30% of that that business now and.
We will be retaining that on our books.
So that's a pretty.
Pretty significant impact our year over year that end the yacht sale. Some of the lost interest income on the yards. So that's about $50 million as we kind of redeploy.
Moving moving cash into Asia by these loans versus the gain on sale model. We had in 2021. So that's about you know circa $300 million of pretty pretty material impact our year over year, but again and repositioned that business makes a lot more profitable they're high they're high.
High yielding hum.
I'm loans very similar to the person personal loan economics.
And we're excited to get that into the into the model. So there is a that there is that transition amount as well. So we are we're building a lot of revenue streams into the future you can see that that's why we're we're giving you the.
The details so you understand that these investments are pretty.
The sizable and very visible returns and want to make sure that you guys understand what we're trying to do with deploying the capital that we do have efficiently and we think that will drive.
You know many years of revenue growth.
I was curious is there any sense of kind of where the you know what kind of origination like volumes you guys were doing it got product before.
What's the what's the manager of the originations.
It's historically looked like for that product.
We haven't broken out the the non P. L piece, obviously, that's a you know a very very different product is obviously a lot smaller as well so the level of precision there tends to be a bit of a rounding error.
Consolidated with $13 billion in total, but we just haven't broken that specifically down for that business.
What I would say that but you know, it's a small smaller base, but again similar to auto we do anticipate outside's growth in that portfolio and what I think we mentioned, but it probably bears repeating is in addition to providing a differentiated source of acquisition for new customers customers coming through that Theres a rail.
Positive select there so the profile of these customers you were talking you know 700 Fortyish FICO. So these are these are really high prime so it's a great great additional outlet to bring into the mix.
Perfect. Thank you for my questions.
Yeah.
Our next question will come from John Rowan with Janney. Please go ahead.
Afternoon, guys.
Forgive me if you addressed this what was the charge off rate at the bank and what are what do you think that number is with a fully mature book.
Yeah. The charge off rate was about I think you said 118 basis points.
For the quarter, obviously the portfolio John is just starting to season, you know given the growth that we expect.
We will never hit kind of our you'll never see kind of the the the full annualized charge offs, but we think it's probably somewhere in the four to four 5% range.
Depending on the mix.
We don't see that actually occurring until well into next year in 2023.
Because the growth is still quite high.
And the denominator effect will keep that charge off number down the charge off number will go up though.
These portfolios.
Mature so as I said, 1% this quarter I expect it to go up.
Throughout the year, but you know as we said we put up six 5% of these loans on day, one and.
We also indicated that we saw some favorability.
In the first half of 2021 vintages.
We have not assumed any favorability.
Favorability.
In arc.
Our seasonal day once you some commissioning.
Or any update for us for that matter, we're obviously watching it closely but feel very very good about our risk profile and so those are the numbers I think you'd expect over time as the portfolio gets mature.
And obviously the margin profile of the bank has changed considerably as you are putting on higher yielding assets how much.
It's ramped up quite quickly over the last few quarters, how much more do you think there is to move up on the margin. Thank you.
Yeah, you're talking about on the NIM John correct.
Yeah. So we've seen nice growth in the NIM over the last few quarters.
825, this quarter, it's been quite quiet on some trajectory as we've been remixing.
No I think that based on where we're going it's probably somewhere in that.
Circa 9% type level so.
So maybe another 75 to a point here.
You know I think it will be.
It depends on in some of the things you just talked about with auto for example in some of the other mixed pieces are.
We're obviously trying to also grow in some of our commercial businesses. So so I think circa 9% seems to be a kind of an internal target. We're trying to say is that the right selling endpoint for US is it's obviously, we're absorbing all of this.
It's a mix into the portfolio.
Alright, that's it for me thank you.
Again, if you have a question. Please press Star then one our next question will come from Steven Kwok with K B W. Please go ahead.
Hi, Thanks for taking my question I guess I had a follow up around the unsecured.
Consumer loan yields I noticed the yield came down a little bit like about 30 basis points sequentially I was just wondering.
What was that related to mix or was it seasonality and what type of yields are you putting on in the fourth quarter and what we should expect for the 2022.
Yeah. So so some of the yields.
That you see in the.
Financial statements I want to make sure everyone is just tracking that is the the coupon plus the impact of deferring.
Our fees and costs that being cost comes in as additional interest income.
What you're seeing in the third quarter and then in the fourth quarter, just some of the impact of Prepays, Stephen So as Prepays pick up the remaining.
Meaning unamortized.
He has brought into interest income so you've got this slightly higher.
Yield then you would expect some of that impacts the.
The absolute rate it was pretty consistent quarter over quarter.
What you saw mostly that is just mix.
Just higher quality mix Scott mentioned, we're obviously.
Focused on the high quality prime and so to the extent, we have a slight mix difference, but we're talking pretty nominal shift here I think we had a total of maybe 30 basis points. So it's not us.
A massive shift but it is a slight mix issue.
So that youre seeing and you'll you'll continue to see some of that is that's where we're at.
We're selling the yacht yacht loans for example, the PPP loans are coming off so you'll continue to see some some movement on the total interest earning asset number but for.
On your point on the prepayments prepayments were elevated during the pandemic, we expect them over the course of this year to return to normal levels as those returned to normal levels that'll that'll you'll see a slight deals or deals like that yeah exactly.
Got it and so should we assume kind of like mid 15, or 15% range has like a good run rate for the deal.
Yeah.
It's hard to say Steve.
It really does depend on.
Where prepayments are and yeah not if.
If I could predict prepayments are that would be great, but I think it really does.
Lot of consumers, particularly in our book by book.
Our are in very good health and are performing well and that results in a lot of customers prepaying, and and with Omicron and Delta variant and other things happening.
They're not spending as much and and so theyre able to deleverage quite quite quite effectively so I don't know how long that will we'll run for it.
No.
Got it thanks for taking my question.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Sameer Gokhale for pre submitted questions.
Thanks, Matt So a few questions came in from our retail investors. So why don't we go ahead and try to address some of those so the first question. We got was based on increasing you know profitability since becoming a bank does that change your willingness to spend.
More than pre COVID-19 levels on customer acquisition or a.
Expanding your credit box to.
To get from our customers so.
In terms of you know as has our lifetime value goes up clearly we have the capacity to invest more in customer acquisition, because we're going to earn more from the customers, but as Tom mentioned for at least for this year. Our expectation is we'll be back at the pre pandemic levels in terms of credit box.
You know the typically when you hear that question. It means would you would you be willing to go down more in credit and that's not where our focus is going to be but what it does open up is the ability to participate in.
In the upper end or better participate in the upper end of the market because we've got a lower cost of funds.
Now than we had prior to the bank acquisition, so it's going to give us the ability to competitively price and compete in that space.
Great. Thanks go to the next question.
The Investor asks will we be looking at reserve releases as vintages season.
Credit performance continues to perform strongly or would we have less upfront provisioning required for the newly acquired loans how will this be presented in the future.
So it's a good question. So some of the dynamics are that we're growing our loan portfolio very very rapidly.
It's one of the power of the model that Youre seeing is our ability to do originate these very high quality loans.
A portion of our of our originations and put them on the balance sheet to the extent, we see a favorable credit vintage.
That will reduce our provision, but we don't expect to be releasing provisions, we actually expect to be adding more loans to the balance sheet and so as you add more loans to the balance sheet. Your net provision may may go down as a percentage, but the provision will continue to be high.
Due to the seasonal counting as where we are fully expecting to grow our balance sheet next year as I said.
Last year, we had about two point.
$3 billion of.
The loans that we retain in the next year.
Current guidance to $2 six at the midpoint. So so we clearly want to put.
Assets to work we think this.
It's a very very attractive income stream.
It's very very good visibility of future revenue it reduces our sensitivity to two absolute movements in the market on a quarterly basis and so this is what we've been building and you can see.
You already can see it now in 2020 . One we have three full quarters now you can see the momentum we're building in that net interest income line. So we're going to continue to do that.
Great and then just one last question is are you guys planning to sell auto loans or balance sheet all of your production.
How long until the auto business gets to scale.
So similar to or purchase finance and our personal loan business. This will be a combination of marketplace and balance sheet and we think that gives us the ability to you know.
Say, yes to a broad range of customers, which drives efficient marketing it enables us to balance strong in period revenue with long term recurring revenue.
And also you know be nimble in a variety of market conditions. So we like that model and that's what we're using on auto as well in terms of scale like I said, we're not we're not giving the specific origination numbers there, but as a measure of scale, we anticipate that business well.
You know be able to cover its own cost. So it's not a kind of a net investment if you will this year.
That's how we're thinking about it.
Okay, great well I think those are all the questions. We have time for today. Thank you all for joining us on the call and if you have any additional questions. Please feel free to reach out to the Investor relations. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.