Q3 2023 LendingClub Corp Earnings Call

Ladies and gentlemen, please remain holding.

Conference call will begin momentarily.

Please remain holding your conference call will begin momentarily.

[music].

Hello, everyone.

Thank you for attending today's lending club 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.

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 Adam <unk> Vice President of Finance.

Thank you and good afternoon, welcome to lending club's third quarter earnings Conference call. Joining me today to talk about our results are Scott Sanborn CEO, Andrew <unk> CFO.

The presentation accompanying our earnings release on the Investor Relations section of our website on the call and additional 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.

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.

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 related to our performance, including tangible book value per common share 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.

Alright, Thanks, Artem welcome everyone. We delivered another profitable quarter, thanks to disciplined execution and proactive efforts to appropriately position the company and 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 nonrecurring 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 comprised 50% of our marketplace have temporarily moved to the sidelines as they focus on fortifying capital and liquidity levels.

Operator: Ladies and gentlemen, please remain holding. Your conference call will begin momentarily. Again, please remain holding. Your conference call will begin momentarily.

While we continue to have productive discussions in the appeal of our high yield short duration assets is clearer now more than ever. Thanks 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 band capability to build unique new structures to better serve asset managers and lending club in today's environment.

In Q2, we launched our structured certificates program, which is essentially a two tier private securitization and with lending club retains the senior note and sell 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 lending club earns an attractive yields with remote credit risk and without upfronts seasonal 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.

Sierra: 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.

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.

Sierra: All lines will be muted during the break. Thank you for your 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.

Not only are structured certificates, helping us to attract new investors. They are also helping us make efficient use of capital and repositioning the balance sheet to capture low risk interest income off of the senior note.

Artem Nalivayko: I would now like to pass the conference over to our host, Artem Nalivayko, Vice President of Finance. Thank you and good afternoon. Welcome to LendingClub third quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO, and Giuliano Bologna. 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.

Another advantage of our bank is our ability to hold and seasoned loans for investors, earning interest income for lending club, while increasing the certainty around future credit performance for the buyer, which is especially important in this environment.

We are 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.

Artem Nalivayko: Our remarks today will include forward-looking statements, including with respect to our competitive advantages and strategy macroeconomic conditions and outlook platform volume, future product 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 differ materially are described in today's press release and presentation. When we 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.

Now, let's turn to credit.

We remain focused on prime originations with near Prime representing an immaterial portion of our total Q3 issuance.

Of our retained portfolio.

We've adapted our underwriting standards to 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.

Note that return on equity on all vintages remains north of 20%.

Our expected lifetime losses remain within the range, we previously communicated.

Artem Nalivayko: Our remarks also include non-gap measures relating to our performance, including tangible book values for common share and pre-provisionment revenue. You can find more information on our use of non-gap measures and a reconciliation to the most directly-comparable gap measures in today's earnings release and presentation.

And better than our competitive set based on available industry data.

Looking forward, our historic refinance opportunity awaits us credit card balances have grown to one three trillion and average credit card interest rates are now above 21%.

Scott Sanborn: And now, I'd like to turn the call over to Scott. All right. Thanks, Ardom.

The 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.

Scott Sanborn: 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 with 73 million, which was well above the high end of our guidance and a couple of non-recurring items, which drew will explain. The quarters results were further supported by our ongoing expense management efforts and our difficult recent decision to allow the line staffing to current market conditions should position us to stay resilient going forward.

We have been making steady progress on key initiatives that will provide powerful differentiated solution and enhance our value proposition to both new and existing members.

<unk> for the end of this year, we will have accomplished the following <unk>.

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 will also be testing the first generation of our line of credit product.

Scott Sanborn: I want to begin by providing context on the current operating environment, which remains challenging, particularly on the investors 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 in the appeal of our high yield, short duration assets is clearer now more than ever.

Allows approved members to easily sweep accumulated credit card balances into fully amortizing payment plans.

This paves the way for our revolving line of credit product in future years and builds on the proven performance we've seen from repeat members.

Scott Sanborn: Thanks are currently focused on rightsizing 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 lending clubs in today's environment. In Q2, we launched our structure certificates program, which is essentially a two tier private securitization in which lending club retains the senior nodes and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price.

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 lending club 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, focusing on multi product member engagement.

To lead that effort I'm happy to announce that we've hired Mark Elliott Chief customer officer.

Experienced at JP, Morgan 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 am looking forward to his leadership as we March forward.

Scott Sanborn: This effectively provides low friction, low cost financing for the buyer and in exchange lending club earns an attractive yield with remote credit risk and without upfront seasonal provisioning. As a bank, this is something we are uniquely positioned to deliver from 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.

I want to close by thanking lending club's employees for their continued dedication through what has been a trying few quarters lending clubbers are demonstrating their resilience and I have no doubt there'll be ready willing and able to accelerate when the opportunity presents itself.

With that I'll turn it over to Joe.

Scott Sanborn: We can double 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 two billion dollars of signed orders for over the next six months. Not only are structured certificates helping up to attracting investors, they're also helping us make efficient use of capital and reposition the balance sheet to capture low risk and pressing income off of the senior node.

Thanks, Scott and Hello, everyone. Let me walk you through the details of our results in the third quarter, starting with the originations.

<unk> were $1 5 billion compared to $2 billion in the prior quarter.

And $3 $5 billion in the third quarter of 2022.

The $1 5 billion in originations approximately $500 million, where whole loans for the marketplace, which were primarily sold to asset managers.

Scott Sanborn: Another advantage of our bank is our ability to hold in season loans for investors earning interest income for lending club while increasing the certainty around future credit requirements for the buyer, which is especially important in this environment where receiving interest from investors in the program and originated 250 million in Q3 to replenish the 200 million loans sold earlier in the quarter.

450 million were originated for the structured certificates program, which is showing strong demand as Scott mentioned.

We also accumulated approximately $250 million in the held for sale for our extended seasoning program to meet future investor demand for season loans.

And we retained over $300 million.

Our held for investment portfolio.

Scott Sanborn: 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 the bar retained portfolio. We've adapted our underwriting standards to the inflationary environment, which is resulted in consistent credit performance on new urban.

Now, let's move on to pre provision net revenue or P. PNR.

<unk> was $73 million for the quarter compared to $81 million in the prior quarter and $119 million in the third quarter of 2022.

<unk> in the third quarter included severance charges and the benefit of two nonrecurring items.

Scott Sanborn: Inflationary Pressures are visible in Vintage's originated before we began tightening, and we therefore increased our provision based on observed trends and our outlook. I know the fraternity equity on all Vintage's 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.

First the $10 million revenue benefit related to customer forfeitures of purchase incentives from the bank Investor Channel.

Accordingly, this was a onetime benefit which will not recur in the fourth quarter.

And second approximately $9 million from lower accrued variable compensation.

This was also a onetime expense benefit which is not expected to repeat in the fourth quarter.

Scott Sanborn: Looking forward, a historic refinance opportunity to deal with 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 numbers.

<unk> 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 <unk>, 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.

At $305 million in the same quarter of the prior year.

Scott Sanborn: 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.

Let's dig into the two components of our revenue.

First noninterest 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 noninterest income was primarily due to two items.

First lower fee and gain on sale revenue driven by the change in marketplace volume.

Scott Sanborn: 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 paved 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 second lower price on loan sales do 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 nonrecurring $10 million revenue benefit.

From the forfeiture of purchase incentives that I mentioned earlier.

Scott Sanborn: 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 lending club members. Taken together, these innovations will further drive member engagement and satisfaction, which in turn should translate to better credit outcomes and higher life time value.

On to net interest income, which was $137 million in the quarter.

Third 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.

This was partially offset by an increase in loans held for sale and securities from the structured certificates. These.

These securities generate a high risk adjusted return and we expect the balances to further increase in the fourth quarter.

Scott Sanborn: Our business is evolving and we're changing our focus from building a strong mobile banking foundation to focusing on multi product member engagement.

Net interest income also benefited from $1 $3 million in revenue as a result of our hedging program implemented early in the third quarter to help partially mitigate the impact of further fed rate increases.

Scott Sanborn: To lead that effort, I'm happy to announce that we've hired Mark Elliott as chief customer officer. We've experienced a JP Morgan Chase in cap 1 where he led digital banking efforts, marketing to unique background in strategy, marketing and customer focus, especially in retail banking, as well as approving ability to coordinate these areas to feel grow. I'm looking forward to his leadership as we march forward.

On the next page you can see that our net interest margin was six 9% compared to seven 1% in the prior quarter and eight 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.

Scott Sanborn: I want to close by thanking lending clubs employees for their continued dedication through what has been a trying few quarters. Lending clubbers are demonstrating their resilience and I have no doubt they'll be ready, willing and able to accelerate when the opportunity presents themselves.

Now please turn to page 11 of our earnings presentation, where I'll talk about the second component of pp in our noninterest expense.

Drew: With that, I'll turn it over to Drew. Thanks Scott, and hello everyone. Let me walk you through the details of our results in the third quarter, starting with the rigid nations. 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 hold loans for the marketplace, which were primarily sold to asset managers.

Noninterest expense of $128 million in the quarter compared favorably to $151 million in the prior quarter and one <unk>.

$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.

Drew: 450 million were originated for the structured certificates program, which is showing strong demand as Scott mentioned. We also accumulated approximately $250 million in the health per sale for our extended season program to meet future investor demand for season loans, and we retained over $300 million in our health for investment portfolio. Now let's move on to pre-provision that revenue for PPR. PPR was $73 million for the quarter compared to $81 million in the prior quarter and $119 million in the third quarter of 2022.

As Scott mentioned, we made the difficult decision to reduce head count to reflect the continued macroeconomic challenges.

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% to $35 million when compared to the second quarter of 2023.

Given all the moves in expenses, we are providing a range for non interest expense, excluding marketing expense in the fourth quarter of $115 million to $120 million.

Drew: PPR in the third quarter included seven 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 now 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. PPR also included seven charges of $5.4 million, partially offset by a $4 million reversal of previously accrued compensation for those individuals.

Next let's turn to provision provision for credit losses was $64 million for the quarter compared to $67 million in the prior quarter.

$83 million in the third quarter of 2022.

The sequential decrease was primarily the result of lower day, one seasonal 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 Youll 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.

Drew: Now let's turn to the first component of PPR, 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-interesting come with $64 million in the quarter, compared to $86 million in the prior quarter and $181 million in the same quarter of the prior year.

The estimates of eight one and eight 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 our ROE is in that 25% to 30% range.

Drew: As we indicated last quarter, the sequential change in non-interesting come was primarily due to two items. First, lower fee and gain on sale revenue driven by the change in marketplace volume. In second, lower price on loan sales due to a lower percentage of purchase coming from banks. You can see this impact in the fair value adjustment slide. These items were partially offset by a non-recurring $10 million revenue benefit from the forefature of purchase incentives that I mentioned earlier.

As Scott mentioned, our current ROE projections for all annual held for investment vintages are north of 20%.

Now, let's move to Texas, Texas in the third quarter were $3 3 million or 40% of pretax 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%.

Drew: Onto 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, health, or investment. This was partially offset by an increase in loans, health, or sale and securities from the structured certificates. These securities generate a high risk of just a return and we expect the balances to further increase in the fourth quarter.

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.

Drew: 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 rates, on the next page you can see that our net interest margin was 6.9 percent compared to 7.1 percent in the prior quarter and 8.3 percent in the prior year. This change reflects the combination of our growth in high yielding risk for most 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.

Reflecting the growth in the program.

As Youll 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, but we expect that to increase to 60% to 70% in the fourth quarter.

Loans held for sale at fair value were $363 million at the end of the quarter as we sold approximately $200 million seasoned 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 remained strong with 13.

Drew: We're all talk about the second component of PPR, 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.

<unk>, 2% tier one leverage and 16, 9% CET one 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 30.

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 one five to $1 7 billion.

Drew: As Scott mentioned, we made the difficult decision to reduce that 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 third quarter with the remainder coming in the fourth quarter. We expect to realize an annualized compensation benefit of $30 to $35 million 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 to $120 million.

This volume increase will largely offset incremental pressure on pricing is 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 <unk> to range from 35% to $45 million.

We plan to have positive net income for the quarter.

While we are not providing 2020 for 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 were exiting the year, we have taken steps to position the company to operate in a difficult environment, including.

Drew: Next, let's turn to provision. Revision 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 one seasonal due to fewer loans retained into health or investment in the quarter. Partially offset by an increase in loss reserves primarily for the 2021 and 2022 vintage. 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 vintage.

Leveraging our bank capabilities by growing and Remixing the balance sheet more structured securities.

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.

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 Tim.

And if you are using a speakerphone today. Please pickup your handset before asking your question.

Drew: 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 ROE's in the 25 to 30% range. As Scott mentioned, our current ROE projections for all annual health or investment advantages are north of 20%.

Our first question today comes from Bill Ryan with Seaport Research partners.

Please proceed.

Good afternoon, Thanks for taking my questions.

First one is sort of credit related and the provision.

And I was wondering if you could.

Maybe quantify what the dollar amount at the additional true up was for the held for investment portfolio.

And what gives you confidence that you have based on your analysis that you've got it covered at least based on what you know now about the macro environment.

Drew: Now let's move to taxes. Taxes in the third quarter were $3.3 million or 40% of free tax income. As I 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. 15. Year to date, our effective tax rate is 29%, roughly in line with our long-term expectation of 27%.

Yeah, Hey, Bill it's drew thanks for the question.

Yes 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 out and obviously under Cecil.

When we're redoing our provision estimates, we're taking the new expected discounted lifetime losses into the provision all at once so the estimate that we're putting forth here in Q3 is our best estimate at this time.

Drew: Now let me touch on the balance sheet. Total assets were 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 in more securities from our structured certificates and a modest decrease in our health 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 will continue to watch it.

But I would 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 so while taking it all upfront creates a little bit of a larger provision this isn't a I won't call. It a massive move in and the expected performance of the portfolio.

Yes, Bill one other thing to add and just kind of understanding the dynamics.

When at least when you kind of look at the 21 book It it's really been the initial outperformance was really strong right that post COVID-19 outperformance.

Drew: We expect that to increase to 60% to 70% in the fourth quarter. Loan sale for sale at the fair value were $363 million at the end of the quarter as we sold approximately 200 million season loans during the quarter and held an additional 250 million of originations as we begin growing a season portfolio for future sales.

If you look at kind of lifetime losses within the half we kind of there was a period of outperformance were actually released a provision.

I know, you've probably heard others in the industry are talking about.

Those charge offs Didnt go away, they just got deferred and.

That's kind of what youre seeing so like basically release did 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.

Drew: Our consolidated capital levels remained strong with 13.2% tier 1 leverage and 16.9% CET-1 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 30.

Okay.

One just follow up on the volume side of the equation.

The question of thing kind of coming up I mean, obviously you dialed back in your volume you talked about the bank investors, which are have historically been a 50%.

Buying 50% of the originations that has kind of gone.

But there's also a question about competition is irrational pricing by some competitors maybe differ.

Drew: Now, let's move on to guidance for the quarter. Given the interest in the certificate program, we're anticipating a modest increase in originations with a range of $1.5 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 break even and therefore our go-forward earnings should be less sensitive to changes in marketplace burden. We expect PPR to range from $35 to $45 million. We plan to have positive net income for the quarter.

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 yeah.

Yes, the dominant the dominant piece is really not on the borrower side of the house. The dominant piece is really invest our supply of capital. When you look at the competitive space a couple of nuances, maybe we're talking about is.

<unk>.

Competition in the lower FICO bands.

That will be lessened.

Right Theres, 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.

Drew: While we are now 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 remitting the balance sheets, more structured kit 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.

Pretty much most people have shifted there.

We have always been a very effective competitor with that.

Highly optimized processes, we have in 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 and in terms of who we're competing with.

I guess, if you looked at three categories kind of the.

Those with bank charters that are either direct bank for our new bank charters.

Theyre, obviously still competing I'd say fintech that raised significant capital within the last two years are still competing and then.

Operator: With that, we'll open it up for Q and A. If you would like to ask a question, please press star followed by one or your telephone keypad. To remove your question, press star followed by Thank you. And if you are using a speakerphone today, please pick up your handset before asking your question.

Fintech that Havent raised capital in the last two years I would say are less visible in this environment.

Okay. Thanks for taking my questions.

Our next question comes from David <unk> with Wedbush Securities. Please proceed.

William Ryan: Our first question today comes from Bill Ryan with C-PART research partners. Please proceed.

William Ryan: Good afternoon. Thanks for taking my questions. [inaudible] When we're reviewing 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 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 backlog. I think we're up 7%.

Hi, Thanks, I wanted to ask about the volume of loans sold through through the marketplace. The net fair value adjustments that negative $41 million in the quarter I was curious.

At what percent of par or loans or were loans sold that in the third quarter.

So our average sales price was.

Low 90 six's.

In terms of where we sold so just about a four point discount little less.

And I think if I heard you right during the prepared comments looking out to the fourth quarter did you allude to that being closer to par or how should we think about the fair value adjustments looking forward.

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 96 is about where we view near breakeven on the sales so going any lower than that.

Lower any any going lower than that would.

William Ryan: At this point so while taking it all up front, pretty it's a little bit of a larger provision. This isn't a, you know, I would call it a massive move in the expected performance of the portfolio. Yeah, and Bill, hey, 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's really been, you know, the initial out performance was really strong right that post COVID out performance.

Not really makes sense to us from an issuance standpoint.

Yep got it got it Okay and then.

Follow up on the credit quality side, so the net charge off rate of five 1% in the quarter.

With the portfolio kind of stable here over the past four quarters around 5 billion call. It.

Yeah.

Should we think of this as being kind of around the stable stable kind of going forward in this 5% range on net charge offs.

William Ryan: So, if you look at kind of lifetime losses within that we kind of there was a period of out performance were actually released a provision and, you know, I know you've probably heard others in the industry talking about, you know, those charge off didn't go away. They just got deferred 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.

Well, we will continue to move upward if we don't grow.

<unk> portfolio, so the charge off rate Youre looking at is just.

The held for investment portfolio, which as we're doing more extended seasoning and more sales through the <unk> program.

You have less HSI coming on which means the average age of that book is going to increase so we will see a slowdown effect and charge offs should continue to still move upwards, probably until the first half of 'twenty four I would say.

William Ryan: Okay, and wouldn't just fall upon the volume side of the equation. So question thing kind of coming up. I mean, obviously you dial back in your volume. You talked about the bank investors, which are historically been 50% buying 50% of the originations that 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, was it mostly just related or pretty much just mostly related to the bank buyer buyers withdrawing from the market.

Now keep in mind. This again this is under seasonal we've taken the reserves on a discounted basis for for all these estimated charge offs that are coming through.

And if we assume a kind of a lifetime loss assumption in the high eights, let's use the 2022 as an example, eight 8% and we assume a one and a half year.

Average life that would equate to five 9% net charge off rate is that the way to kind of think about roughly the upper end of where those could trend over the next several quarters.

William Ryan: Yeah, yeah, the dominant, the dominant piece is really it's not on the borrower side of the house, the dominant piece is really investors supply of capital. You look at the competitive space, you know, couple nuances, maybe we're talking about is, you know, competition in the lower fight go bands is 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 fight go, you know, that pretty much most people have shifted there.

Yes, I mean, the math is it isn't quite as simple as that if you took the because it depends on the speed of pay off of the balances.

And the weighted average life is an exactly one five.

But for example, if you look at the 23 vintage and what we're putting on there we're at 4% to 5% ANC Ellis our estimate right now in terms of where that's coming on EAA in CLI and the 2022 vintage is.

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

Lower we haven't given a range, but it's lower than then.

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 are taking very few charge offs at high balances. So it pulls down the overall ANC all over the life.

Yes, just the thing to think about is that prepayment speeds over the last couple of years have changed pretty dramatically. So the duration on the 'twenty. One vintage is actually fairly short because of consumers had enough excess liquidity that they were paying down faster and that's really normalized <unk>.

Till today.

Got it thanks for that and then last one for me.

I appreciate the guide on expenses ex marketing the $150 220.

William Ryan: Okay, thanks for taking my questions.

Zooming in on the marketing expense most recent quarter $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.

David Chiaverini: Our next question comes from David Chiaverini with What Bush Securities. Please proceed. Hi, thanks. I wanted to ask about the volume of loans sold through through the marketplace, the net fair value adjustments that negative 41 million in the quarter. I was curious, you know, at what percent of par our loans or were loans. So that in the third quarter. So our average sales price was low 96 is in terms of where we sold so just about a four point discount little less.

$20 million and then if we're at the low end of that guidance range. It could be roughly the same as $20 million and any commentary on the marketing expense going forward.

Yes, I think youre thinking about it right assuming the same marketing efficiency, which is a good assumption that math should hold.

I'll hold until once we really get back in growth mode. We've obviously optimized right now for the lowest cost channels.

And.

Yes, we are also maintaining our 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.

David Chiaverini: And I think if I heard you right during the prepared comments, looking out to the fourth quarter, did you allude to that being closer to par, or how should we think about the fair value adjustments looking forward. No, I think it's going to remain pre consistent. Probably there should be a little bit of a drop as we go into Q4, but you know 96 is about where we view near break even on the sales so going any lower than that much lower any going lower than that would not really make sense to us for an issue at standpoint.

Growth mode, and we go into higher cost channels. They will there'll be some upward movement on that but we won't do that I want to come back into your question on pricing I think there is a little maybe ticked 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 goal right now from here is to optimize price, we don't see let's say a lot of pressure on price because they are not really going to sell below what we're selling at today.

<unk>.

No.

David Chiaverini: Yep. Got it. Okay. And then follow up on the on the credit quality side so that the net charge of rate 5.1% 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 net charge offs. Now we'll continue to move upward if we don't grow the HFI portfolio.

Where that would show up as.

Volume or not and for us to be doing more volume, we're going to meaningfully more volume, we're going to look for better pricing.

Great. Thanks very much.

Our next question comes from John Hecht with Jefferies.

Please proceed.

Hey, guys.

Thanks, very much just a couple of questions on the structured certificate program.

Yes, 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.

David Chiaverini: So the charge operator looking at is just the health for investment portfolio, which as we're doing more extended seasoning in more sales through the slick program. We 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 in charge of should continue to still move upwards, probably till the first half of 24, I would say. Now keep in mind that again, this is under seasonal.

Relative to other call it.

Liquidating outlets over the course of 'twenty four 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.

Yes, so so I think for 'twenty four it's a little early I think to call the ball on how much we're going to allocate to this program.

Our initial goal when we set it up was to get multiple buyers in good demand up for the program, which I think we have now accomplished and then start to work on price as we go into 'twenty four 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.

David Chiaverini: We've taken the reserves on a discounted basis for for all these estimated charge offs that are coming through. And if we assume a kind of lifetime loss assumption in the in the high eight, let's use 2022 as an example, 8.8%. And we assume a one and a half 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.

Also price that we're getting through the various structures and we will seek to optimize based on price and return on capital as we go through there. So I think we need more visibility into 24 before were making that final allocation look to come back on the next call with more details as far as NIM I mean, obviously.

David Chiaverini: Yeah, I mean, the math isn't quite as simple as that if you took the, because it depends on the speed of payoff of the balances and in the weighted average length as an exactly 1.5. But for example, if you look at the 23 vintage and what we're putting on there, we're at 4 to 5% ANCl is the rest of it right now in terms of where that's coming on. The ANCl on the 2022 vintage is lower than given the range, but it's lower than what you're citing there.

Structured certificates given that they're pretty risk remote in terms of taking a loss they come with a.

With a thinner coupon, which is going to bring NIM down but for me. 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.

Yes.

Okay.

Just as a reminder, I think.

I will say just as a reminder, I think its 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.

David Chiaverini: And the main difference in the kelp 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. 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 21ment is just actually fairly short, because consumers had enough excess liquidity that they were paying down faster, and that's really normalized up to through till today.

Potentially gives us some more latitude to think about where our target should be from a leverage and our risk based capital ratio.

Yeah.

And then.

And then on that topic, you guys you guys mentioned, 20%.

Whatever risk adjusted waiting for the structured certificate program is that is that what we should think about what it would be in terms of the.

David Chiaverini: Got it, thanks for that. And then last one for me, appreciate the guide on expenses X marketing the 115 to 120. Kind of zooming in on the marketing expense, most recent quarter, you know, 20 million is a 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 roughly the same of 20 million, any commentary on the marketing expense going forward.

Regulatory capital ratios.

Is that something that's just that can change over time.

That is as we are booking needs.

Hey notes these securities they are coming with a 20% risk weighting as far as our for example, our CET one capital.

Certainly situations, where credit significantly deteriorated that could go to a 50% risk weighting.

100% risk weighting, but assuming our credit outlook is.

<unk> then.

They're very efficient from that perspective.

David Chiaverini: Yeah, I think you're thinking about it right, you know, assuming the same marketing efficiency, which is a good assumption that that math should hold. 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 and building the membership base today.

Okay, and then last question just kind of on the front end of the funnel I mean, you guys cite a big kind of pool of unsecured debt at fairly high rates of interest, yes. So growing Tam for you I'm, just wondering kind of in the application side.

Are you in terms of like the characteristics of applications for loans and kind of the funnel approval rates and this and that is there any anything you can point to in terms of trend changes or characteristics that are developing.

David Chiaverini: So when we get back into growth mode and we go into higher cost channels, there'll be some upward moving on that, but we won't do that. I just want to come back in your question on pricing. I think there's a little maybe tick down and 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 are, you know, goal right now from here is to optimize price.

Okay.

Yes.

I would say, mostly coming from us consumer demand remains intact right. There is continuing to see their credit card balances move up.

And Theyre seeing there the size of their bill move up in proportion to that plus there right. So on the demand side. It remains strong we are we have.

David Chiaverini: We don't see a lot of pressure on price because we're not really going to sell below what we're selling at today. So, you know, where that would show up as volume or not, and for us to be doing more volume, we're going to, you know, meaningfully more volume. We're going to look for better pricing. Great. Thanks very much.

Moved even more of our origination to that use case and away from <unk>.

Other alternative use cases.

That would just result in providing people more cash given that we were anticipating the potential for continued strain and our.

<unk> due to the inflationary environment.

We are overall.

David Chiaverini: Our next question, Cushion John Hitt with Jeffries. Please proceed. Hey, guys, thanks very much.

Our tighter overall on the front end in terms of who we're allowing in that said.

John Hitt: I'm just a couple of questions in the structure, certificate program. Yeah, I mean, I think you've given us sort of a 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 with rates drop? And then what does kind of a nymph trajectory look like thinking about those different scenarios?

Some of the things I touched on.

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 are approved for.

Our bank account have the ability to service your alone 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 car your mortgage all of the rest of those are fixed payments credit card that varies in amount every month, both based on the <unk>.

John Hitt: Yeah, so I think for 24, where it's a little early, I think to call the ball on how much we're going to allocate to this program. 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 24 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.

Balance in 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 will help them do that as well as a line of credit products that as we're seeing those balances build will be able to allow them to kind of sweep that automatically into an installment payoff plan. So.

Those will all be kind of in the background and development and optimization right now until the time is right, but we plan to be in a position to leverage all of that too.

John Hitt: So it's, I think we need, we need more visibility into 24 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, with a thinner coupon, which is going to bring NIM down, but for me, you know, they also come with no provisions.

What we think will be a pretty powerful competitive moat when the time is right.

Great I appreciate the color guys. Thanks.

Our next question comes from Reggie Smith with Jpmorgan. Please proceed.

Hey, good evening, thanks for taking the question.

Just wanted to clarify a comment that you just made.

John Hitt: 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. Okay, I think this is a reminder, I think this is a reminder, 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.

Did you suggest that.

You had kind of pivoted your <unk>.

Underwriting towards people that we're refinancing credit card debt as opposed to.

John Hitt: Yep, and then on that topic, you guys, you guys mentioned 20% whatever risk adjusted waiting for the structured certificate program is that is that what we should think about what it would be in terms of the regulatory capital ratios or is that something that's just that can change over time. That is, as we are booking these these ainots, these securities, they are coming with the 20% risk weighting as far as our seat, for example, or CET one capital, you know, there are certainly situations where credit significantly deteriorated, that could go to a 50% risk weighting, or I guess 100% risk weighting, but you assume our credit outlook is, you know, holds, then they're very efficient from that perspective.

Using the proceeds or something else.

Well.

It's always been our kind of largest use case, it's always been our dominant use case because the.

Yeah.

On average we're able to offer people, let's say a price thats $4 to 500 basis points below their part.

And.

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 and know that we can improve them and reach out and say, we got a better a better deal for you.

Yeah.

But there are other use cases, especially for repeat members once they see how easy it is to work with lending club.

And they are in our system.

They can come back and use it for a whole variety of other things home improvement.

You name it weddings moving.

So those latter alternative use cases, they are still in the mix, but there are smaller percentage of what they would've been two years ago, we're not talking about significant shifts we're talking about on the margin, but yes that is that is how we have.

One of the many ways we have adapted we have also.

John Hitt: 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. Yeah, so a growing tan for you, I'm just wearing kind of in the application side, you know, are you are in terms of like the characteristics of applications for loans and kind of the fun all approval rates and this and that.

<unk> tightened up our approval rates for people with federal student loans over a year and a half ago. The number of ways. We've adapted to this environment. That's just one.

Yeah.

Okay.

Can you talk a little bit about your average APR on new originations. This period, maybe contextualize as compared to last period, maybe a year ago.

John Hitt: Is there any anything you can point to in terms of, you know, trend changes or characteristics that are developing. Yeah, I mean, we're, I'd say mostly coming from us, consumer demand remains intact, right, there's continuing to see their credit card balances move up. And they're seeing their 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.

Yes, so in the private space, where we're originating the coupons range anywhere from 10%.

Yes, 18, 19%, but on average we're skewing towards the higher end of that population, so theyre going to be in the low teens in terms of the coupons that were putting on the books for ourselves.

In terms of coupon we've passed on work were roughly in the near Prime space, we pretty much passed on all of the rate increases to that borrower.

Thus, we mentioned where there's less competition in the prime space, we're probably closer to just under 300 of the call. It 500 reps.

John Hitt: 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 as the experience we're working on and plan to have ready for when we resume growth.

Great increase.

Got it and I think you guys talked about.

Our sale price on loans at the 96.

It rains during your prepared remarks, or maybe it was a question earlier.

Is there a way to kind of contextualize what the.

The required returns.

John Hitt: We'll 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, 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.

Buyers are looking for.

Gross to net.

Today, maybe versus.

A year ago or kind of frame that difference there.

Yes, I mean, I would say prior to the rate increase side on the Prime credit you were looking at an Unlevered return of call. It.

4% to 5%.

John Hitt: 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 polistically. So we are working on an experience that will help them do that as well as a line of credit products that as we're seeing those balances bill will be able to allow them to kind of sweep that automatically into an installment payoff plan.

For Prime and call it seven to eight for near Prime.

Say those numbers today are more like <unk>.

John Hitt: So, you know, we're, those will all be kind of in the background in development and optimization right now and so 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 mode on the time is right.

Eight to 10 for prime and north of that for Neurocrine. So the way you get there as well.

Higher coupon lower losses, and a discount and I.

I guess the other thing I would notice coming into this rate environment, we were selling loans at or above par I think.

101.

So.

Pretty pretty big pretty big difference in pricing given the pressure on returns.

Part of that.

Return equation is due to the loss of the <unk> right.

And because the banks on prime can absorb a lower return.

John Hitt: Great, appreciate it, hello guys, thanks.

But without them in the mix with asset managers that are.

Reginald Smith: Our next question comes from Reggie Smith with JP Morgan, please proceed. David Evening, thanks for taking the question. I just 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 or something else? Well, we've, you know, it's always been our kind of largest use case, it's always been our dominant use case because the, you know, on average, we're able to offer people, let's say a price that's four to 500 basis points below their card and, you know, it's a big market right half of all US 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.

Often warehouse funded they need that higher return.

Reginald Smith: But there are other use cases, especially for repeat members, you know, once they see how easy it is to work with funding clubs and, you know, they're in our system of they can come back and use it for a whole variety of other things, full 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.

And that's one of the things that if we look in the space at who we're competing with.

<unk>.

I don't I.

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 notes.

And captured some yield while also giving efficient financing I think is pretty differentiated than if this environment grinds on I think it's going to be pretty important as a differentiator for our ability to continue to maintain profitability.

Okay place.

I got one more one more question kind of a two parter on that debt structure No securities just can you remind us.

The buyers of that equity tranche tranche are those new partners are they existing partners that kind of moved over.

It's an asset manager that 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 of wood that breached anything related to <unk>.

Reginald Smith: 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 or approval rates for people with federal student loans over a year and a half ago, you know, the number of ways we've adapted to this environment, that's just one. So, you talk a little bit about your average APR on new origination this period, maybe contextualize compared to last period maybe a year ago.

Something that's able to be non seasonal non reserved.

And in terms of the partners. It's a combination we had some investors that Pat were sidelined due to the cost of the warehouse lines that we brought back.

We've also added several new partners.

To the platform.

Sort of the bigger names in private credit.

Hum.

Come on to the some of the key names that come onto the platform and as we mentioned what.

Reginald Smith: Yeah, so in the frog space where we're originating, I mean, 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. In terms of coupon, we passed on work for roughly in the near prime space, we pretty much passed on all of the rate increases to that bar, 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.

What we like is these are these are players that have got significant capital to deploy and they are looking for.

<unk> kind of visibility into longer term flow. So we've got we've got agreements now that extend out through Q1.

Obviously.

Yeah.

Returns are going to keep coming in and.

Won't call that committed capital, but the fact that we've got people, who have signed up to make purchases of the <unk>.

$2 billion over the next six to eight months, we think is a real strength in terms of moving further down the spectrum. We certainly think that was the area that we.

Reginald Smith: Great increase. Got it. I think you guys talked about a sale price on loans at the 96. Vincent Range during your period of remarks, or maybe it was a question earlier, I guess is there a way to kind of contextualize what the required return, your buyers are looking for, the growth in that today, maybe versus a year ago, or I was kind of framed that difference there. Yeah, I mean, let's say, you know, prior to the rating increase, right on the, the prime credit, you were looking at an unlevered return of call it, you know, 4 to 5% for prime and call it 7 to 8 for near prime, I'd say, you know, those numbers today are more like 8 to 10 for prime and north of that for near prime.

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.

What we're able to deliver there'll be an opportunity for us to potentially grow that marginally, but right now investor appetite is slower and it's certainly not out of the question that it could go into a structure like the structure Certificate program drew anything yet.

Clearly they'll have a different structure right the advance rate would be would be much.

Much lower on something that has a higher higher credit loss content than what we've been doing now, but yes, we're definitely we're definitely able to off of that structure.

We could probably even sell some of our season months through that structure. Eventually we wanted to so we havent done that yet, but certainly possible.

That was actually another question I had for you guys, but it's good to know.

That's an option as well okay.

Reginald Smith: So, you know, the way you get there is higher coupon, lower losses in a discount. And, you know, and I guess the other good note is, you know, coming into this rate environment, we were selling loans at or above par, I think we were at 101, you know, so, you know, pretty, pretty big, pretty big difference 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, without that managers that are, you know, often warehouse funded, you know, they need that higher return.

So Matt.

Our next question comes from Tim Switzer with <unk>. Please proceed.

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

Okay.

And you guys can expand it hey, there I was hoping you guys could expand on the comments you guys made earlier.

And here at the beginning of the question session, where you mentioned about.

There's more and more competition.

Higher.

Higher credit quality higher FICO space, among the personal lending.

And can you help quantify maybe.

How many.

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 impacted your market share specifically I don't know if you have any numbers behind that but just curious.

Reginald Smith: And, you know, Reg, it's one of the things that if we look into spaces 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 and marketplace.

No I mean, I guess the number of offers that are visible to customers has certainly come down if you look at a place like some of the aggregators like a lending tree 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 when terms of <unk>.

Sure.

Yes.

The best source of data for that'll Btu, which comes out on a big lag I'll tell you we're not.

Reginald Smith: I got one more, one more question, kind of a two-parter on that that structure, note security, just keep your mind is the buyers of that equity trunch over digital trunch are those new partners are the existing partners that kind of moved over. So, like if you can ask that managers to move 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 yield there, given the support of what that breach anything related to being, you know, something that's able to be non-seasal non-reserved. Thanks.

Long term, we've consistently been a leader in this space in this particular market that is not a metric that we're managing too where we're most focused on delivering predictable return for ourselves and our buyers but.

What.

But I would expect to see is that.

Certainly some of the <unk>.

The banks that are playing in prime that are direct banks right that their business model is to be adding the assets of the balance sheet.

To continue to operate.

Okay.

Okay.

And you guys comments about the first half of 'twenty four probably looking similar to Q4.

Does that mean, we should probably assume a similar outlook on expenses or is there actions you guys could take that would maybe help lower one way or.

Reginald Smith: In terms of the partners, it's a combination. We had some investors that had worked sideline to do to the cost of the warehouse lines that we brought back, but we've also added several new partners to the platform, you know, sort of the bigger names in private credit. You know, have come onto the some of the key names have come onto the platform and, you know, as we mentioned what. What we like is, you know, these are players that have got significant capital to deploy and they are looking for, you know, kind of visibility into longer-term flows.

If there is any investments you would want to make that can have it go up.

I'd say within.

I would say think of expenses as being roughly flat there is always a little bit of.

Friction as time goes on.

It increases things of that nature of that come through but I would say roughly flat to slightly up as we go into next year.

Okay, roughly flat from the Q4.

From the keyboard right from Q2 from Q2.

Reginald Smith: So we've got agreements now that extend out through Q1, obviously, you know, returns we've got to keep coming in and, you know, 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 dollars over the next 68 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, had, you know, really tightened the most and the longest ago and we're certainly seeing solid returns from that segment.

Yes, Sir.

Yes.

Alright, yes, that's understood.

And then yes.

That's all for me. Thank you guys.

Okay.

Thank you for your questions.

There are no questions waiting at this time, so I will pass the conference back over to <unk> for some additional questions.

Thank you Sara and Scott and Joe We've got a couple questions for you here that were submitted by our shareholders.

First question is have you considered rebranding so another name.

Any clubs more than just the letter yet.

Yeah.

Great question, so as we talked about.

Reginald Smith: So we do think, over time, as more of that data comes in to show, you know, what we're able to deliver will be an opportunity for us to potentially grow that marginally, but right now, investor appetite is lower. And it's certainly, it's not out of question that it could go into a structure like the structure certificate program through anything else. Yeah, you would, you would clearly don't have a different structure, right?

The ways, we can serve our members is evolving.

As we get to a place where we've got an integrated app that will cover <unk>.

Spending and savings in addition to lending.

The reason why we brought in March I talked about on the call.

To oversee marketing brand communications and bring that also that deposit expertise so.

Reginald Smith: The advanced rate would be, would be much, much lower on something that has a higher, higher credit loss content than what we've been doing now. But yet, we're definitely, we're definitely able to offer that structure. You know, we could probably even sell some of our season notes through that structure eventually if we wanted to. So we haven't done that yet, but certainly possible.

I 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 into the brand and what evolutions and they need to make.

Okay, great. Thank you.

Here's a second question so with the shares trading at such a steep discount to tangible book value.

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

Is there a reason the company is not buying back shares.

Yes, well I think it's probably worth just a reminder to everyone. We're in the third year of our operating agreement that we entered into as part of the radius acquisition.

Tim Switzer: Our next question comes from Tim Switzer with KVW. Please proceed. Hey, I'm on for Mike Priro. Thanks for taking my question. I think you guys could expand it. Hey there.

And some of the.

The restrictions around that operating agreement makes it difficult for us to execute any type of share buyback at this point.

Tim Switzer: I was hoping you guys could expand in the comments you guys made earlier in the beginning of the question session where you mentioned about, you know, there's more, more competition in the higher. Higher, higher set of credit quality, higher FICO space among the personal lending. Market and, you know, can you help quantifies 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.

But I will add however that.

The discount that we're seeing is certainly not lost on us.

I don't believe it represents the value that.

That we will be creating with this multi arm one of the largest individual shareholders in the company.

And then selling any shares and at the recent board meeting I indicated.

Post this earnings.

I would be considering to purchase in the open market and.

Tim Switzer: I don't know if you have any numbers behind that which is curious. 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 lending tree 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, when terms of share, yeah, you know, the best source of data for that will be to you, 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 the predictable return for ourselves and our buyers.

I wouldn't be surprised if some of the board members at.

At the same.

Alright, great. Thank you.

With that we'll wrap up our third quarter earnings conference call. Thank you for joining us today and if any additional questions. Please email us at IR at lending club Dot com. Thank you.

That will conclude today's conference call. Thank.

Thank you all for your participation you may now disconnect your line.

Thank you all for your participation you may now disconnect your line.

Tim Switzer: But I, you know, what What I would expect to see is the head, you know, certainly some of the, you know, the banks that are playing and prime that are direct banks, right, that are their business model is to be adding the assets of the balance you know are going to continue to operate.

Tim Switzer: Okay, okay, and about your guys comments about the first half of 24 probably looking similar to Q4, does that mean we should probably assume a similar outlook on expenses or, you know, is there actions you guys could take that maybe help lower one way or, you know, if there's any investment you would want to make that could have it go up. I'd say within, I would say think of expenses as being roughly flat there's always a little bit of 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. From, okay, from the Q4, from the Q4, from the Q4, from the Q4, from the Q4. All right, yeah, that's understood and then yeah, that's all for me, thank you guys. Thank you for your questions.

Artem Nalivayko: There are no questions waiting at this time, so I will pass the conference back open on Aram Nalivayko for some additional questions. Thank you, Sarah. So Scott Drew, we've got a couple questions for you here that were submitted by our shareholders.

Scott Sanborn: The first question is, have you considered rebranding to another name since plenty of clubs more than just the lender now. Great question. So as, 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, but 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.

Scott Sanborn: So I 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 into the brand and what evolutions we need to make.

Scott Sanborn: Great, thank you. And here's the second question. So with the shares trading at the discount to tangible book value. There are reason the company is not buying back shares. 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 on that operating agreement make it difficult for us to execute any type of share my back at this point.

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

Scott Sanborn: All right, great. Thank you.

Sierra: So with that, we'll wrap up our third quarter earnings conference fall.

Operator: Thank you for joining us today, and if you haven't any additional questions, please email us at irapplendingclub.com. Thank you.

Operator: That will conclude today's conference fall. Thank you for your participation.

Operator: You may now disconnect your line. Thank you for your participation.

Operator: You may now disconnect your line.