Q3 2024 LendingClub Corp Earnings Call
It's such a different one please remain holding the call will begin momentarily again, please remain holding the call will begin momentarily.
[music].
Speaker Change: Good afternoon. Thank you for attending today's lending Corp, third quarter 2024 earnings Conference call. My name is Jay Leno be your moderator for today all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to turn.
Speaker Change: The conference over to our host automatic that Coke.
Speaker Change: Head of Investor Relations.
Speaker Change: You May proceed.
Speaker Change: 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 and drew a little bit 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.
Speaker Change: Be answering some of the questions that were submitted for consideration via email.
Speaker Change: Our remarks today will include forward looking statements.
With respect to our competitive advantage of this strategy macroeconomic conditions platform volume and pricing future product services and future business and financial performance.
Speaker Change: Our actual results may differ materially from those contemplated by these forward looking statements.
Speaker Change: Factors that could cause these results to differ materially are described in today's press release and presentation any forward looking statements that we make on this call are based on current expectations and assumptions and we undertake no obligation to update these statements as a result of new information or future events or remarks. Today also include non-GAAP measures related to <unk>.
Speaker Change: Our performance, including tangible book value per common share and <unk>.
Speaker Change: Provision net revenue.
Speaker Change: You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation and now I'd like to turn the call over to Scott.
Scott Sanborn: Alright, Thank you art and welcome everybody.
Scott Sanborn: We had a terrific quarter.
Scott Sanborn: With continued product innovation and credit outperformance now supported by an improving rate environment as.
Scott Sanborn: As a result, we delivered across all of our key operating metrics originations grew 6% sequentially to $1 9 billion revenue grew 8% to over 200 million.
Scott Sanborn: Pre provision net revenue grew 19% to $65 5 million and we delivered $14 5 million of GAAP net income.
Beyond the numbers.
Scott Sanborn: We welcome back the first of what we hope to be many more banks to our platform supporting improving marketplace revenue we.
Scott Sanborn: We deployed significant excess capital into the balance sheet to drive future recurring revenue and earlier. This month, we acquired the technology underlying <unk> The award winning credit card management solution to accelerate our product roadmap and drive future revenue growth.
Scott Sanborn: We said last quarter that we had reached an inflection point and this quarter's results demonstrate how well we've positioned the company to benefit from improving market conditions and to capture the massive opportunity in front of us.
I'll begin with our balance sheet, where in addition to continued retention to pool loans and structured certificates. We made an opportunistic acquisition of a $1 $3 billion portfolio of previously sold lending club loans.
Scott Sanborn: This transaction similar to the portfolio purchase we made back in December 'twenty, two we're going to hold these loans at fair value and they will be immediately accretive to our earnings.
Scott Sanborn: Our balance sheet has now grown 25% since the beginning of this year to just over $11 billion in total assets that.
Scott Sanborn: That represents a quadrupling since we acquired the bank in 2021, which speaks to our commitment to building a resilient recurring revenue stream to deliver consistent shareholder value.
Marketplace demand is also growth thanks to our strong track record on credit the attractiveness of our asset class our commitment to marketplace innovation our status as a regulated bank.
And the improving interest rate environment.
Scott Sanborn: We've been focused on re engaging banks, which have historically supported higher loan sales pricing.
Scott Sanborn: This quarter, we sold a $75 million pool of loans to a previous bank buyer that return to the platform and just last week, we completed a $400 million sale to a new bank partner <unk>.
Scott Sanborn: Accordingly, we anticipate that these banks will together purchased more than $1 billion worth of additional loans over the next 12 months.
Scott Sanborn: Pricing on these sales will support continued improvement in our average pricing across all loan sales, which will ultimately allow us to reopen dorman direct to consumer marketing channels that remain uneconomic at this point.
Scott Sanborn: Our structured certificates program and innovation tailored to asset managers looking for leverage returns also continues to perform well with $830 million flowing through the program this past quarter here.
Scott Sanborn: Tier two strong demand combined with a declining rate environment and our track record of credit outperformance is supporting increases in loans has pricing.
Scott Sanborn: As a reminder, the structure certificate program as a way for us to generate efficient returns for loan buyers, while delivering in period revenue and forward interest income with remote credit risk for lending club.
Scott Sanborn: As I've mentioned credit remains strong and we continue to consistently perform 40% to 50% better than our competitive set across the core consumer segments, we serve.
Scott Sanborn: Thanks to agility made possible by our advanced underwriting platform and proprietary machine learning models supported by data on over $90 billion of loan repayments. We are delivering the highest sustained returns in our history. These attractive returns are benefiting revenue from both our balance sheet and the marketplace. We will therefore remain.
Scott Sanborn: Prudent underwriting continuing to pursue quality over quantity to ensure we sustain leading credit performance supportive of increased loan sales pricing.
Scott Sanborn: I'll turn now to our member base, which I'm thrilled to say cross the 5 million Mark this past quarter.
Scott Sanborn: As we look to our next millions of members our consumer strategy as outlined on slide six of our presentation is focused on three areas.
Scott Sanborn: First efficiently acquire satisfied customers by helping them lower the cost of their credit card debt.
Scott Sanborn: Once acquired engage members through our mobile app and through products tools and features that provide added value and encourage repeat visits.
Scott Sanborn: And third offer additional products and product combinations in the right place at the right time to deliver new value and meet members' credit needs as they evolve, thereby creating a powerful lifetime lending relationship.
Scott Sanborn: Let me dive into each of these areas.
Scott Sanborn: So first is efficiently acquiring customers by providing meaningful savings on the cost of their credit card debt. This opportunity has never been great credit card balances remained at record highs and theyre priced at record high rates the value of refinancing credit card debt through a personal loan is the most compelling it has ever been.
According to the data analytics firm <unk> won the spread between credit card and personal loan rates is at a record high 750 basis points.
Scott Sanborn: What's more in addition to their savings on interest members also increase their credit score and average of 48 points when they pay off credit card debt with a lending personal loan. This process is highly automated and seamless which is why we have such high satisfaction scores and why 83% of our members say they want to do more with us.
Once acquired our mobile App serves as our primary engagement platform meeting members, where they own we began marketing mobile app back in June and the user base has increased by about 20% each month and we're getting positive feedback we got App store ratings of four 7% and four eight and the Apple and Google.
Scott Sanborn: Stores, respectively.
Scott Sanborn: But what's really exciting is what we're seeing under the covers nearly half of new loan customers are downloading our app.
Scott Sanborn: Those who are using the app are visiting us almost 20% more often than non app users.
And that increased engagement is translating to greater issuance with app users demonstrating a higher propensity to take another product for lending club.
Scott Sanborn: We are enhancing the app with features to support our members' financial goals, we launched the first phase of that IQ, our debt monitoring and management solution earlier, this year to drive engagement and to reinforce the value of that consolidation.
Scott Sanborn: Even in its nascent state app users enrolled in that IQ are engaging with us nearly 20% more often than those not enrolled.
Scott Sanborn: We started the debt IQ journey in response to our members seeking better tools for understanding their debt how to pay it down how to pay less interested in doing so.
Scott Sanborn: And we'd filings from our own survey that the need is really clear 47% of U S card holders don't know the interest rate they are paying on their credit cards, and even those who say they know a third of them didn't know that their rates had gone up over 500 basis points in tandem with the prime rate increase.
So this lack of awareness, it's astounding and it speaks to the education and transparency that is needed to help consumers understand the true cost of their debt and to motivate them to pay it off the.
Scott Sanborn: The award winning <unk> technology, we acquired earlier this month, we will accelerate our progress on debt IQ with meaningful enhancements rolling out in phases, starting in mid 'twenty five.
Scott Sanborn: Fully realized we expect that IQ to provide our members with a holistic view of their credit card interest rates outstanding balances minimum payments due dates and more it will provide payment strategies for paying down their credit card debt and the ability to set up automated transactions and alerts to ensure payment.
Scott Sanborn: <unk> aren't missed.
Scott Sanborn: And of course, it will provide seamless integration with lending club's banking and lending products.
Ultimately that IQ will provide members with a powerful way to manage and optimize their high cost unsecured debt.
Scott Sanborn: Finally, as we create deeper engagement with our members will successfully broadened our lifetime lending relationship through products like <unk>, which allow borrowers to add funds to their existing loans, while maintaining one monthly payment.
Scott Sanborn: And over time, we will be enhancing our application funnel in our data foundation to enable smart seamless cross selling of products beyond the unsecured lending.
Scott Sanborn: In summary, we've got a clear focused high confidence strategy that will enable us to acquire customers engage them in our product ecosystem and deliver lifetime value and revenue growth.
Scott Sanborn: But we're not just focused on lending. We're also focused on helping our members earn more on what they say recent.
Scott Sanborn: We recently launched level up savings to reward members for engaging and positive savings behavior.
Members can contribute at least 250 per month to their level of savings account earn the current level up rate of five 5% versus the standard rate of four 3%.
Scott Sanborn: We've had very strong initial customer response to the program gathering over $500 million in deposits since launching just two months ago <unk>.
Scott Sanborn: Importantly, this product gives us another lever for managing deposit costs, while delivering competitive value to our members.
Scott Sanborn: We're energized about the quarter, we delivered and the trajectory we're on as we move through the next year and conditions further improve we will be growing volumes on top of a larger balance sheet and a more efficient expense base and with a more robust and differentiated consumer experience.
Scott Sanborn: We're extremely well positioned and I look forward to continuing to innovate and execute with the talented lending club team, who I'm happy to say have voted US one of newsweek's most loved workplaces for the third year in a row with that I'll turn it over to you Joe.
Joe: Thanks Scott.
Joe: We are well positioned for the future and the third quarter is starting to demonstrate our potential let's go through the details starting with originations we originated over $1 9 billion in the quarter, which is above the high end of our guidance range and a $100 million increase over the prior quarter.
The growth was driven by continued product innovation, while maintaining tight underwriting standards and industry, leading marketing efficiency.
Joe: If you turn to page 12 of our earnings presentation, you can see the origination breakdown across the four funding programs.
The issuance in the quarter was once again led by our very successful structured certificate program, which accounted for $830 million of originations.
Joe: We also sold $335 million all loans through the marketplace.
Accumulated $240 million of our held for sale extended seasoning program loans to meet future marketplace investor demand for seasoned loans.
Joe: And we retained $510 million in our held for investment portfolio.
Joe: This quarter, you again saw us increase the amount of old loans retained on our balance sheet to 39% of total originations up from 36% in the prior quarter.
Speaker Change: As Scott mentioned, we successfully won a competitive bidding process to purchase $1 $3 billion portfolio of lending club personal loans that we previously originated and sold.
On page 13 of the earnings presentation, we have provided some of the key highlights of the transaction.
Speaker Change: The purchase allows us to deploy excess capital, which will generate additional revenue and earnings over the next year.
The portfolio is forecasted to yield approximately 10% and it is worth noting that yield is net of expected credit losses.
Speaker Change: As we have done with prior purchases we have elected to book this purchase as held for investment at fair value.
Given the short remaining duration of approximately one year.
Speaker Change: It is also worth mentioning that we secured low cost short term financing for the first month of the purchase which will see reflected on our net interest margin table on page 15 of the earnings presentation.
Speaker Change: This transaction was the primary driver a 17% sequential growth of our whole loan portfolio to $6 billion.
Speaker Change: And the growth of total assets to $11 billion at the end of the quarter.
Speaker Change: We are also making steady progress with returning bank buyers to the marketplace.
Speaker Change: In addition to the two transactions that Scott mentioned, we continue to build a pipeline of additional bank buyers and are optimistic and making further progress in 2025.
Speaker Change: Now, let's move on to pre provision net revenue or <unk>, which is total net revenue less noninterest expenses.
Speaker Change: <unk> was $65 million for the quarter.
Speaker Change: 19% sequentially and came in well above our guidance.
Speaker Change: These results were driven by strong execution and improved loan pricing is.
Speaker Change: As well as a few unique items that I'll call out as a breakdown revenue and expenses.
Speaker Change: As shown on page 14, total revenue for the quarter was $202 million up from $187 million in the prior quarter.
Let's go into the two components of revenue starting with non interest income.
Speaker Change: Noninterest income was $62 million in the quarter up marginally from the prior quarter.
Speaker Change: The sequential improvement was driven by higher marketplace low pricing, partially offset by fewer loans sold as we've made the decision to retain more loans on our balance sheet.
Speaker Change: Pricing this quarter represents the third quarter in a row of improved sales prices.
Speaker Change: We also had two largely offsetting impacts in the quarter.
Speaker Change: First a $9 million markup of our held for sale portfolio, reflecting higher sales prices and therefore, a lower discount rate.
Speaker Change: This benefit was largely offset by an $8 million servicing fee unwind during the period as a result of the portfolio purchase.
Speaker Change: Now there'll be able to loans that are collecting the interest income there is no servicing revenue and hence the reversal.
Speaker Change: Now, let's move on to net interest income, which was $140 million in the quarter up from $129 million in the prior quarter.
Speaker Change: The increase was primarily driven by growth in our interest earning assets as a result of the portfolio purchase we mentioned earlier.
Speaker Change: On Slide 15, you can see our net interest margin was down slightly this quarter at 563% as expected.
The main driver was the growth in the senior securities from the structured certificates, which have a lower yield but are also risk remote income with no provision for credit losses.
We expect net interest margin to be slightly down again in the fourth quarter due to lower balances in the extended seasoning portfolio related to the $400 billion bank sale in October.
Speaker Change: We will get a $6 million benefit to revenue on the sale of that portfolio.
Speaker Change: After the fourth quarter net interest margin should begin expanding assuming the fed continues lowering interest rates on our deposit funding costs decreased as a result.
Speaker Change: Please turn to page 16 of our presentation.
Speaker Change: Which reversed in the second component of PPE and are non.
Speaker Change: Noninterest expense.
Speaker Change: As I had indicated last quarter expenses increased by $4 million to $136 million as we position the company for 2025.
Speaker Change: And absorbed a legacy one time noncash item in the quarter.
Speaker Change: While we will continue to remain disciplined we do expect another step up in expenses in the fourth quarter due to higher depreciation related to the completion of some of the initiatives you heard Scott discussed earlier.
Speaker Change: As well as the impact of the recent hiring we have done to accelerate our product roadmap and position the organization for a strong 2025.
Speaker Change: Now, let's turn to provision.
Speaker Change: On page 17, you will see provision for credit losses was $48 million during the quarter compared to $36 million in the prior quarter.
Speaker Change: The sequential increase was primarily driven by higher day, one seasonal on higher held for investment loans retained compared to the prior quarter.
Speaker Change: Credit continues to perform as expected as evidenced by our net charge offs on our held for investment portfolio declining, 16% sequentially down $11 million to $56 million in the quarter.
Speaker Change: The net charge off ratio was five 4% in the third quarter down from six 2% in the prior quarter.
Speaker Change: Delinquencies on the consumer portfolio also continued to improve.
Speaker Change: On page 18, we have updated our personal loan lifetime loss expectation for the 2022 and 2023 held for investment vintages.
Speaker Change: As we had indicated last quarter. The 2021 vintage has largely run its course with less than 10% of the original principal balance remaining so we have reviewed that being did from the disclosure.
Speaker Change: The 2023 vintage continues to season and we've maintained the lifetime loss expectations provided last quarter.
Speaker Change: <unk> for the 2022 vintage reflects an adjustment for lower expected recovery rates on previously charged off loans and modestly higher lifetime charge offs.
Speaker Change: We continue to expect strong marginal <unk> north of 20% across all vintages.
Speaker Change: That brings us to net income net income for the quarter was $14 5 million or.
Speaker Change: <unk> 13 per share and our tangible book value per common share increased to $11 19.
Speaker Change: Up 10% compared to last year.
Speaker Change: And it's worth noting it is up 72% since we acquired the bank in 2021.
Speaker Change: Now, let's move on to guidance.
Speaker Change: For the fourth quarter, we anticipate originations between one eight and $1 $9 billion as we expect continued product innovation and modest increases in paid marketing to offset the negative seasonality, we typically see in the fourth and first quarters.
Speaker Change: We're very close to achieving sales price improvements that will allow us to open up additional marketing channels as we enter the seasonally favorable second and third quarters of next year.
Speaker Change: We are increasing our PPA in our guidance range to $60 million to $70 million.
Speaker Change: Collecting growing revenue and improving operating leverage and expenses as.
As well as the $6 million benefit from the $400 million portfolio sale I mentioned earlier.
We plan to continue delivering positive net income in the fourth quarter with continued reinvestment in the balance sheet to provide stronger returns in 2025.
Speaker Change: Our goal is to roughly maintain the size of our core loan portfolio under seasonal until originations accelerate after Q1 of next year.
Speaker Change: For the next couple of quarters. This will translate to retaining roughly $550 million to $650 million of held for investment loans under seasonal third quarter.
Speaker Change: All in all it was a great quarter and we continue to set ourselves up to take advantage of this momentum in 2025.
Speaker Change: With that we'll open it up for Q&A.
Speaker Change: Well begin our question and answer session. At this time, if you'd like to ask a question. Please press star followed by one.
Speaker Change: Our first question comes from 10, let's say with the company Kathy therapies.
Your line is now open.
Hey, good afternoon, and thank you for taking my questions.
Speaker Change: Hey, Tim Hey, Tim.
Speaker Change: The first question I had was on the pretty significant improvement and <unk>.
Speaker Change: Loan sale pricing you saw this quarter going from.
Speaker Change: Marketplace discount from three 5% to two 5%.
Speaker Change: I would imagine is only $75 million, there's not a lot of that was really driven by the bank.
Speaker Change: <unk>.
Can you kind of provide some details on.
Speaker Change: Whats driving that I'm sure, it's a lower cost of funding for asset managers and then what's your.
Speaker Change: No expectation going forward on continued improvement as rates keep moving lower and then potential further upside if more banks jump.
Speaker Change: <unk> backend.
Speaker Change: Yes, yes, great Great question. Thanks, Tim.
Speaker Change: First I would note. This is our third consecutive quarter with an increase in sales prices. So that's certainly been helpful. In terms of how it's flowing through our income statement, obviously, that's coming from really I'd say three factors first.
Speaker Change: The performance we've had on our loans has been very steady and investors have are appreciating that and they are starting to pay better prices for the consistency in performance, let's say second the interest rate environment. This last quarter was obviously very helpful. The two year Treasury I think end to end drops 100 base.
Speaker Change: This points, that's obviously conducive.
Speaker Change: To better pricing as well and then that better pricing leads to a mark on the remaining held for sale portfolio that also benefits those fair value marks in the quarter. So those were the biggest drivers.
Speaker Change: That led to the decrease in the fair value marks are the increase in the observed price that youre seeing there as well.
Forward obviously.
Speaker Change: Changing the mix of sales to more banks will be helpful to price I think we expect to get about a continued better pricing power.
Speaker Change: Prices better prices from all buyers, just again consistency of performance and improvement of.
Speaker Change: So they are buying the rate environment, we expect over time that will continue to be beneficial, but with any given quarter. There can be fluctuations depending on how the yield curve moves.
Speaker Change: Okay, Great I appreciate it.
Speaker Change: Im curious if.
Speaker Change: It sounds like one of your comments, you mentioned that the $400 million loan sale too.
Speaker Change: New bank partner a.
Speaker Change: A week ago was all season loans can you kind of talk about what the things, they're looking for and what products. They want what they want to be putting on the balance sheet and then.
Speaker Change: How the pricing might differ if its a season loan versus a whole loan sale.
Speaker Change: Yes, we started the extended seasonal program or the held for sale program I think maybe three quarters ago.
Speaker Change: And then maybe a little longer than that.
Speaker Change: Initial hypothesis or the initial belief was that as loans season, we'll be able to get tighter in terms of credit expectations with the buyer if theres any difference in and how that's viewed which is absolutely true, but the other benefit is that.
When a buyer wants to come in and buy a bulk purchase such as this bank we're discussing to get started on their journey.
Speaker Change: Accumulating a larger portfolio, we have that available immediately which in this case and the bank that we sold to in Q3 allowed us to jumpstart the program the programmatic buying of those banks and then as Scott mentioned enter into a $1 billion flow over the next 12 months with those banks so it.
Speaker Change: Ben it's been really beneficial I'd say.
Speaker Change: Even these two banks theres a little bit of difference in terms of the type of loans that theyre trying to put on balance sheet and without getting into too much I think banks are just going to have different profiles of risk and return that they want to put on their balance sheet.
Speaker Change: Got it makes total sense I will get back in the queue. Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from Sam Kemp conflict with company <unk>. Your line is now open.
Hey, good afternoon, thanks for taking my questions.
Sam Kemp: First off wanted to talk about.
Speaker Change: All the great detail you provided on your applications and.
Particularly if that IQ in the tally acquisition I was just wondering if you could maybe put a finer point on it in terms of the the.
Speaker Change: What you are expecting to rollout in the second and third quarter of next year in terms of capabilities any sense for what what that might do in terms of being able to execute on opportunities say in terms of.
Speaker Change: Higher volumes, if you can describe that and I guess somewhat relatedly.
The CFPB open banking rule that proposal listen we need some sort of wondering what that might do in terms of your capabilities with IQ. Thank you.
Speaker Change: Yes, yes, great. So.
Speaker Change: So <unk> with the product name of what we're building ourselves when.
Speaker Change: When we got the tally opportunity.
Speaker Change: We solve that became available we went after it because effectively it.
Speaker Change: Represents the debt IQ roadmap, except fully manifested so the acquisition of this code base and some of the talent to help stand it up in our environment will firmly materially.
Shortcut the timeline for us to getting to the end state of our plan for that IQ and dramatically reduce the cost of getting there.
Speaker Change: <unk>.
Speaker Change: So what is it it's basically our customers are coming to us to pay down their credit card debt.
Speaker Change: For those we approved we are successfully paying down our debt in some cases not all of the debt just sung.
Speaker Change: And then what happened is post post loan from US I think we've talked about this before you'd like to think of consumer sales into the sunset and never racks up credit card debt again, Unfortunately that that isn't the case people who go in and out of the need right you saw over the last inflationary cycle balances growing and people.
Speaker Change: Leaning more into their cards to make ends meet.
Speaker Change: And so what and what we know from our customers that some of them. Some medical emergency happens a temporarily lose a job whatever get a divorce. There are all kinds of drivers life event that caused them to go back into credit card debt. So having an actual interface that helps provide them with this visibility and the capability to manage.
It keeps them connected and keeps in front of the customer the opportunity to save off of that debt should should it be required even when they don't have credit card debt there's value here. So what we what we know from our customers is they are and this is the only build a pay manually everything else is on auto pay auto ACI right.
Speaker Change: Because everything else is fixed your mortgage or a car payment your student loan is all fixed.
Speaker Change: This is a variable rate and it's off of a variable balance and each card company calculates amendment payment do differently on different due dates if you have five cards that process of knowing okay.
Speaker Change: When is it all do what payment amount as it is.
Speaker Change: Each one is going to require at minimum and whats the total payout balance and then importantly, which one should I pay off first based on what rate am I paying at each of these like they are trying to manually keep track of that with spreadsheets and notebooks. This is basically going to give them the capability to do that so you'll be able to see all your cards in one place here.
Speaker Change: Total balance your statement balance you pay off your men pay amount the rates you're paying.
Speaker Change: That's going to allow you to set our payment strategy. So.
Speaker Change: As an example fully realized.
Speaker Change: Wanted to have whatever five grand in my checking account anything above that I want you to pay off highest price card first.
Speaker Change: But make sure you make all of my minimum payments for me.
Speaker Change: And this will allow you to kind of set that up.
And conduct that payment exercise from a lending club account.
And manage it and if we see youre not paying off your credit card debt, we're going to be able to present, an offer to you four alone and help you understand how much money, that's actually going to save you, So thats, where youll see things like top up and clean sweep or just a repeat personal loan would really.
Really add value and could be integrated into that experience.
And remember that these repeat customers they come at low to no acquisition costs, they deliver better credit performance. So it kind of creates a bit of a flywheel and our member base and what is open banking do for all of that this plays right into it.
Speaker Change: Effectively it just accelerates I think all the trends that we've seen over the last decade, which.
Speaker Change: Tend to be in our favor which is <unk>.
Speaker Change: Banks core business is rock is relying on a lot of inertia and a lot of.
Let's call it a lack of transparency of information so the ability for customers to be able to see what they're getting paid and they're checking and savings accounts, what they're being charged on their credit cards and to compare that to what lending club is going to charge them on their loans and what we're going to pay them for their savings accounts I just think it's another.
Way to show the value that we're able to deliver it.
Speaker Change: To acquire customers and keep them close to the brand.
Speaker Change: Okay, Okay, great Thats really exciting looking forward assuming that next year.
Speaker Change: I guess the second question kind of a follow up on pricing. So it was nice to see the pricing increase this quarter I'm just sort of wondering at what price.
Speaker Change: Would you feel comfortable or do you think that.
Meaningful volume can be generated.
Speaker Change: And if you could perhaps give.
Speaker Change: The sensitivity to your improving credit trends and to the.
Speaker Change: The fed rate cuts on pricing that would be helpful. Thank you.
Speaker Change: So just starting with the first one.
Speaker Change: Uh huh.
Speaker Change: Agree we're really pleased to see that.
Speaker Change: We're getting the recovery premium prices, that's what we had anticipated based on our ability to deliver these.
Speaker Change: Strong and consistent returns.
Speaker Change: We're still below our.
Speaker Change: Our average rate, we sold that for call it <unk>.
Speaker Change: <unk> out of the last 17 or 18 years.
Speaker Change: And we've said before kind of mid to high 90 eights is what gives us enough margin to open up.
Speaker Change: <unk> digital more paid search direct mail all of these other channels, which which we then.
Speaker Change: Dormant and since the rate environment shifted so it's R.
Speaker Change: We're not there yet, but we're clearly on that trajectory and we've got a lot of confidence that we'll be getting there sometime in Q1, which is really perfect timing for us given that our positive seasonality starts to really kick in in Q2 and Q3. So we would anticipate that we can start doing some testing.
Speaker Change: <unk> of those channels in Q1, just get our response models and everything going so that we're able to take advantage of it next year.
Speaker Change: Okay, Great. That's very helpful. Thanks very much.
Speaker Change: Okay.
Speaker Change: Okay.
David Please ensure your line is not on mute.
Hi can you hear me.
Speaker Change: Hi, David Yes, now we can David.
Okay.
David: Okay, I didn't hear the introduction and thanks for.
Speaker Change: Taking the questions.
Speaker Change: Great Great. So how should we think about balance sheet growth from here now that you just acquired this $1 3 billion of loans does that kind of set you back in terms of balance sheet growth going forward or how much capacity can you talk about that.
Speaker Change: Yes, sure absolutely I mean as I think we've.
Speaker Change: We have said before our goal over the longer our carriers that we want to continue growing the balance sheet and in doing so create a higher stream of recurring revenue and recurring earnings.
Speaker Change: The company and investors can rely upon so obviously this portfolio acquisition.
Speaker Change: Gave us gave us a jolt and put us to $11 billion.
Speaker Change: Really quickly which is great.
Speaker Change: We look forward to next quarter, we're going to have a few things happen that will probably cause us to.
Speaker Change: B, maybe come down a little bit before we start to grow again as we get into 2025. So I would say you could probably expect one quarter of maybe a little bit of.
Speaker Change: Decline in the balance sheet and from there in 2025, we should be back to prevent in the balance sheet again.
Speaker Change: And out of curiosity when during the quarter did you close on that one 3 billion.
Speaker Change: That was in beginning of August.
Speaker Change: Got it.
Speaker Change: Got it great and then in terms of can you comment on credit buyer.
Speaker Change: Demand, whether you are seeing it increase decrease about the same.
Speaker Change: It sounds as if the environment is clearly improving and that demand could be on the up and up but can you provide some commentary there.
Speaker Change: Yes, obviously I think we just spoke about the banks right and the banks are starting to come back as we predicted it we don't expect to be at a 50 50 mix of banks and asset managers in the near future, but we're seeing we just made great progress this quarter and highlighted what's tone.
Speaker Change: Next quarter. So we're excited that that is coming back as a growth channel I'd say, the private credit asset managers.
Speaker Change: Been very active in the space, obviously as evidenced by the structured certificate program and probably the best proxy is just to look at the the ABS market, especially for <unk>.
Speaker Change: Unsecured consumer they've been very active.
<unk> come in and so I'd say the markets feel very healthy for those those loan buyers.
The effect continuing the lower rates should be just a further catalyst to activity in that space as long as.
Speaker Change: As we always say as long as the fed cutting rates is.
Speaker Change: For a soft landing and not a hard landing.
Speaker Change: And the last one for me.
Speaker Change: More of our industry.
Speaker Change: And in terms of the consumer loan market overall are you expecting that to grow meaningfully over the next 12 months or so or remain about the same and I guess as a follow up to that is can you comment on.
Speaker Change: The level of competition that youre seeing and if youre seeing any any competitors with irrational pricing out there to gain share.
Speaker Change: So we do expect it to grow as we've talked about the Tam. That's available is very very significant and the savings opportunity for consumers is quite significant.
What what has been constructing it has really been.
Speaker Change: Kind of the the availability at the right price of capital in the Fintech space for sure.
Speaker Change: And that is 40% to 50% of the total market. So that matters for total volume in the personal loan market again banks credit unions. They have continued to operate and really didn't see the same kind of pullback there. So as the fintech players come back in and we expect the market to.
Speaker Change: <unk> to be growing in terms of competition.
Speaker Change: We almost always have an irrational player at any given time.
Speaker Change: And.
Speaker Change: We've seen many many waves of competition many waves of new entrants over over our history. We monitor this stuff extremely closely across all channels. I think we've mentioned before we're constantly conducting price point test across channels across segments across use cases, so that we can mark.
Monitor what's happening and.
Make sure that we're positioned the right way nothing really noteworthy to point out I think we said on the last call. We would we'd anticipate the pricing pressure to manifest first in high prime.
Speaker Change: Because that's where everybody shifted to generate the volume.
Speaker Change: And we expect the market will be competitive.
It's never not been competitive so I would say as we resume growth we would anticipate competition, we feel like we're well prepared.
Speaker Change: To compete there.
Speaker Change: Thanks very much.
Speaker Change: Our next question comes from Giuliano Bologna with the company at this point Giuliana. Your line is now open.
Giuliano Bologna: Congratulations on the continued great performance.
Speaker Change: One thing I'd be curious about.
Giuliano Bologna: It seems like there are small sell through.
Giuliano Bologna: Turning bank Youre doing 400 million to a new bank. When you were talking about the additional $1 billion.
Giuliano Bologna: $1 billion number is that inclusive of the 400 or is that incremental to the $400 million and then have related to that I'm curious where discussions are about potential other banks are coming back to the platform.
Giuliano Bologna: Yes.
Speaker Change: <unk> is all incremental.
Speaker Change: Both transactions think of it as a bulk purchase upfront to get their portfolio started and then ongoing monthly quarterly purchases too.
Speaker Change: Yes continue building the portfolio.
Speaker Change: And then as far as other conversations I mean, there's a healthy pipeline of different sized banks I would say most of them are probably new to the platform. So they take a little longer too.
Speaker Change: To ramp up but.
I'd say were excited that theres more opportunities in front of us.
Speaker Change: And just to make sure im thinking about this correctly.
Speaker Change: Im assuming that 400 million dollar loan that was coming out of the HRS portfolio at fair value.
Speaker Change: With the additional loan sales.
Speaker Change: The extra billion dollars without all flow through the hff's broker would that flow through in the marketplace.
Speaker Change: For the marketplace as whole loan sales.
Speaker Change: Yeah.
Speaker Change: Okay. That's very helpful and then yes.
Speaker Change: Yes.
Speaker Change: Very helpful guidance around.
So I consider this a script of HFF.
Speaker Change: And I am curious, where youre seeing loan pricing.
Speaker Change: Yes.
Speaker Change: And if you are seeing.
Speaker Change: Alright, how youre seeing that trend versus deposits.
Speaker Change: Because I'm, assuming you are quite a long way to cutting your competitor deposit rate versus some other carriers out there because you're obviously building out payoff balances.
Speaker Change: The portfolio acquisition I was curious about growing in the quarter. So a good way to think of it where you are now.
Speaker Change: Yes, I mean, there is I think in Q4, there will be a lot of things happening with the deposit portfolio that are all positive. So yes. It is.
Speaker Change: As we noted we launched level up savings, which gives us two liquid deposit products that allow us to think about tradeoffs between rate paid and volume growth at the same time, so that will be that will be a great tool to have in the kit.
Speaker Change: We do have CD pricing from a year ago, starting to roll off at pretty high rates, which will be a tailwind on pricing as well and then we're actually about two <unk>.
Speaker Change: <unk> one of our legacy commercial customers, that's probably about the highest rate paid which we've been waiting for that to contractually end date that will exit in Q4, as well, which will be helpful to our overall deposit pricing going forward, so but net net net we're growing the portfolio as expected.
Speaker Change: Pretty pretty excited about the progress that we've made in terms of product and pricing.
Speaker Change: Awesome site.
Speaker Change: That's very helpful. Hopefully.
Speaker Change: On your question.
Speaker Change: Sorry go ahead.
Speaker Change: Okay.
Speaker Change: No.
Speaker Change: Question.
Are we.
Hugo.
Speaker Change: Sorry for that.
Speaker Change: By the way along.
I was going to ask you about was.
Speaker Change: Obviously.
Speaker Change: It's a fairly new program the level of program looks like you've cut their level operated by 13 basis points from the standard rate question, Steve I'm curious if theres any sense of like what the mix looks like on the deposit base there between the percentage of our level up versus standard.
Speaker Change: I don't know if the program is fairly new so.
David: David It's probably not that's probably imperfect restaurant.
Speaker Change: So if you are talking about between our kind of plain vanilla high yield savings versus will level up or are you talking im assuming youre talking within level up who is engaging in the <unk>.
Speaker Change: Ongoing savings behavior, it's a little early since we just launched in August so not that many people have rolled through the kind of promo period, but we're at roughly 70% of the people are engaging in the positive ongoing behavior.
Speaker Change: <unk>.
Speaker Change: So.
Speaker Change: We'll see if that sticks, but that's where we are today.
Speaker Change: That's very helpful. I appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from John Hecht with Jefferies. John Your line is now open.
John Hecht: Afternoon, guys. Thanks for taking my questions and congratulations on a good quarter.
John Hecht: First question is.
I know theres a lot of factors that are dynamic, where you guys kind of decide where to where to place alone during the quarter, meaning that whether you want to sell it or to retain it or put it in the seasoning portfolio.
John Hecht: And so forth.
John Hecht: I'm wondering what can you describe kind of the framework you go through I'm sure it's tied to.
John Hecht: Our return on capital of some type, but theres also some consequences to near and intermediate term earnings depending on that kind of where you place. It may be can you give.
John Hecht: Give us like the decision tree that you think about or what kind of prioritization as you have in mind when you think about the mix.
John Hecht: Yes, certainly I mean, it's probably important to note first as we enter any quarter.
Speaker Change: We have obviously an estimation of what we think we're going to originate over the quarter in terms of volume and the mix of products that we're going to originate.
Speaker Change: And we have an order book, which is maybe not totally complete but call. It largely complete so we're always balancing filling orders with the amount of production.
Speaker Change: Reduction that we have at the correct.
Speaker Change: <unk>.
Speaker Change: At the right profile of borrower as well so what we're what we're always working against it is making sure we fill as many orders as we can but also setting aside some of that volume for balance sheet growth. That's important for all the reasons that we were talking about before and within that as a price optimization.
Speaker Change: <unk> that happens on how we filled the orders what product we fill them through.
Speaker Change: And then also determining how much for example, <unk>, we want to take on balance sheet, given how the earnings profile is evolving as we go through the quarter.
Speaker Change: So.
Speaker Change: Some of the decisions are made before we even get into the quarter and then other decisions are made as we go through through the quarter to end up as best we can with a certain earnings profile.
Speaker Change: Coming out of the quarter.
Speaker Change: But I think some other some other things to think through we have in our deck in our materials I think it's slide 11, we've got a page that kind of gives us a view into what economics too we recognized immediately.
Speaker Change: For the different disposition channels versus what is the lifetime value look like.
Speaker Change: Held for investment at amortized cost is three times better three times higher earnings than selling alone. However.
As you know, we take a big upfront provision so it's a big drag on earnings and then the other channels or somewhere in between those two I'd say, when we think about whole loans versus structured certificates at the same price, we'd do the structures and with capital available would do the structured certificate because we get the upfront in period value.
Speaker Change: And we get an order.
Speaker Change: Ongoing income stream from the senior security.
Speaker Change: What we're starting to get with the return of banks is they are not at the same price for an asset manager, we're getting a higher price for the structured certificates. That's why you've seen us really pivot to do more of those as banks come back theyre going to be buyers of whole loans. They are coming in typically at a premium to.
Speaker Change: Asset manager pricing, so youll see us do more whole loan sales because it's a stronger sales probably stronger in period earnings and we will utilize some of those earnings to do more HSI.
Speaker Change: Okay that all makes great sense appreciate that color of that in.
Speaker Change: Second question.
Speaker Change: Just.
Speaker Change: Observe just a lot of capital raising in the private credit markets.
A lot of which is being allocated toward consumer.
Speaker Change: Pools of loans, yet with the forward flow agreements and so forth that we're seeing structured in the market I am wondering in your guys opinion.
Speaker Change: How does that affect things I mean, if you've got a lot more money coming into system I assume it can affect pricing it can affect liquidity. It can affect competition. How do you see that manifesting itself and does that affect you guys in the way you think about strategy as well.
Speaker Change: I think it's obvious to us that there is more capital coming into private credit the asset managers and it's looking to be deployed and maybe with a bit more urgency than it has in the past given that rates appear to be coming down for the foreseeable future and locking in yield is import.
Speaker Change: And where you can do it.
Speaker Change: Do you think that gives all players in our space.
Speaker Change: I think a little more pricing power in terms of.
Speaker Change: How we're negotiating sales prices and structures and things of that nature.
Speaker Change: We've been very happy with the structured certificate program, we've been able to move prices up.
Speaker Change: Maybe some of that is due to more capital. So I think it's also a testament to the consistent performance and returns we've delivered since we launched the program.
Speaker Change: And at.
Speaker Change: I Dare to say were probably getting some of the higher prices in the industry right now that are coming from private credit and asset prices and I think also a fairly simple a lot of these.
Speaker Change: These deals that are being announced you don't see exactly what all the structures are around at loss protection and discounts and all the rest.
Speaker Change: But it says there is more capital coming in but certainly some of the names we're hearing about.
Speaker Change: The price the yield requirements for some of that capital versus the yield requirements. For example for banks are pretty different so when it comes to how does that translate into borrower pricing. We're glad we're announcing the bank partnerships.
Speaker Change: Okay.
Speaker Change: Super helpful. Thanks, guys.
Speaker Change: Our next question comes from Brad <unk> with accompanying Piper Sandler Your line is now open.
Speaker Change: Thanks for taking my questions I appreciate it most of them have been answered, but I. Just wanted to can you talk about the loan performance between different cohorts of consumers between prime near Prime and some of the lower end consumers.
<unk>.
Speaker Change: Yes, I mean, we're seeing stability across the board across all segments. We serve I'd say, we're seeing actual outperformance and the higher yielding stuff right now the returns there have been very very strong I mean in general and I think I mentioned this on.
Speaker Change: The call. These are the highest.
Speaker Change: Post COVID-19 vintages or whatever our COVID-19 vintages.
Speaker Change: <unk> extreme extremely strong, but they were an anomaly what we're seeing now is we're delivering very strong sustained returns quarter after quarter. After quarter. I think we mentioned last call. We are now more than a year and the structured certificates program. So.
Buyers have been able to see.
Several quarters of consistent strong returns.
Speaker Change: You can see in the earnings materials that are delinquencies by cohort are stable to declining on a vintage.
Speaker Change: Basis.
Speaker Change: And the higher yielding stock is actually performing even better that's somewhat of a factor of four.
Sure.
Speaker Change: We really tightened the credit box they are quite substantially early on.
Speaker Change: But we're focused on that because we do believe that over time, we're going to need to shift back to let's call. It a more normal mix of who's buying what asset where we've been over the last two years is.
Speaker Change: People with higher yield requirements buying lower yielding paper and they're meeting their return hurdles through our discounts.
Speaker Change: And over time, what we'd like to see is those.
Speaker Change: Let's call it higher yield seeking buyer getting it from the consumer base that naturally deliver stat and banks and credit unions being back at the top end. So I think it's important we're showing a really strong track record down there. So people are comfortable.
Speaker Change: Moving a little bit down the credit spectrum.
Speaker Change: Awesome I appreciate it and then just last one quickly I know you aren't giving guidance on expenses further out, but just high level, where do you view expenses trending as we head into 2025.
Speaker Change: I think the amount of increase we saw.
Speaker Change: This quarter versus Q2, probably see a similar amount maybe a little more as we go from that level of increase as we go from Q3 to Q4 and that will again thats going to be some of the amortization from the tax from the tech projects that we've been implementing starting to roll through the P&L will be the largest driver at all.
Speaker Change: Great I appreciate you taking my questions.
Speaker Change: Next question comes from Eddie Smith, whereas the company J P. Morgan your.
Speaker Change: Your line is now open.
Eddie Smith: Hey, Thank you congrats on the quarter.
Eddie Smith: I was hoping to get I.
Eddie Smith: I get some additional color on the purchase during the quarter was curious like how much visibility do you guys have and to win those opportunities.
Eddie Smith: Come up just curious on how quickly this came together.
Eddie Smith: Im not sure if you've disclosed the price a relative to par and.
And whether or not taken.
Those loans influence your <unk> and <unk> origination anything to share along those lines would be would be great and then a few follow ups. Thank you.
Speaker Change: Yes. So so this was this is obviously given the size of the portfolio. This is a previous buyer, who we've worked with pretty extensively in the past and.
Speaker Change: So we had visibility that there was going to be a sale.
Speaker Change: It's probably important to note. This sale was part of <unk>.
Capital optimization exercise.
Speaker Change: Involving the entire corporation. So it wasn't just this one portfolio that was contemplated to be sold but it was a competitive bidding situation. We werent just handed this portfolio to buy.
Speaker Change: We can't disclose the price, but it's a season portfolio and those those always traded at a bit of a discount.
Speaker Change: Compared to the bit of a further discount compared to parks are further in their seasoning process.
Speaker Change: But yes, no very excited we got it I didn't I didn't understand your question. Your last part of your question Regina originations.
Speaker Change: Yes, so I guess, taking down about $1 $3 billion portfolio was curious why that influence I guess your origination.
Speaker Change: There are <unk> and maybe even what you are willing to do on <unk> given that the amount that you've grown.
Balance sheet.
Speaker Change: Already the.
Speaker Change: Following.
Speaker Change: Yes, yes.
Speaker Change: I understand that.
Speaker Change: Yes.
Speaker Change: Yes unrelated I mean, as we've said before we have excess capital at the Holdco for growth, we had well over $100 million at the end of last quarter, we have $90 million in cash sitting at the Holdco at the end of this quarter. So that's available most of that is available for.
Speaker Change: Sure.
Speaker Change: Used for continued growth in the balance sheet.
Speaker Change: Got it and if I can sneak two more in there I think you guys gave.
Speaker Change: A soft range of life something in the 98% range kind of allows you to open up.
Speaker Change: Youre marketing aperture I was just curious if you could kind of frame.
Speaker Change: That's kind of.
Speaker Change: The bounds of that so obviously 19.
Speaker Change: 19, it's where you'd love to be whaler.
Pricing was pricing during the pandemic, one when rates were zero versus probably.
Speaker Change: The worst point when inflation was was was kind of running away. If you can provide some bounds around that just so I can contextualize, where 98 fits relative to the best days in the kind of the worst days.
Speaker Change: Yes, I would say 99 to 101 is sort of steady state.
Speaker Change: And par if you just had to pick you were modeling out over a much longer time period.
That's where you would aim to settle and there are certain things drive you slightly above or slightly below at any given time. So we will still be skinnier than historical average run rate but.
Speaker Change: Yes.
Speaker Change: It's enough there to allow us to begin to push up that marginal price and importantly, as our.
Speaker Change: As our repeat rate goes up and the value of a newly acquired customer goes up.
Speaker Change: Our capacity to invest in marketing will also increase.
Speaker Change: Yeah.
Speaker Change: Got it that makes sense and if I can sneak one last one in on the bank channel might be hard to answer but curious what you think is driving the renewed interest and if you were to kind of allocate points to interest rates their own consumer credit outlook, and then balance sheet capacity.
Speaker Change: How those factors.
Speaker Change: And a hard question to answer but like how those factors you think impacting their decision to come back to the.
Speaker Change: The loan by market.
Speaker Change: Maybe rank them yes.
I'd start by saying, yes, I would start by saying if you think of if you think of what caused has caused issues for banks.
Speaker Change: In this most recent cycle, it's been it's been.
Speaker Change: Underestimating the duration of the assets they had on their balance sheet its been concentration in certain areas like.
Speaker Change: Consumer I'm, sorry, commercial real estate.
Speaker Change: Our asset class provides a lot of advantages to banks that don't have it available on the balance sheet high yield short duration, yes. It comes with more credit risk, but it but it also we have a history and track record of being able to manage that that credit risk and so some of these banks that have come back and some that are in the pipeline.
Speaker Change: They want the asset class on the balance sheet.
Speaker Change: Like the short duration. They are now finding the capital <unk> liquidity available to deploy.
Speaker Change: And I think if the fed continues lowering rates <unk> more time passes we believe there will be more banks that that come to the table once their.
Speaker Change: Once capacity allows us from a balance sheet standpoint.
Speaker Change: Understood. Thank you.
Speaker Change: Yes, Thanks, Rick Thank you Rajeev.
Speaker Change: And now I'd like to turn the conference back over to Adam.
Adam Arnaud: Arnaud you May proceed.
Adam Arnaud: Great. Thank you. So we do have a couple of questions here that were submitted via retail.
Adam Arnaud: The first question is what is lending club pay for the acquisition of <unk> technologies.
Adam Arnaud: Yes.
Adam Arnaud: Yes.
Speaker Change: We didn't disclose the number it is.
Speaker Change: The important thing here is it will be capitalized will come in over time and what I did say is we're very pleased.
Speaker Change: The acquisition cost for this vis vis the development cost.
Speaker Change: And it won't really be noticeable in our financials.
Speaker Change: And as I mentioned very excited the degree to which this accelerates the roadmap got a very high degree of conviction that our customers are going to really value. This tool.
Speaker Change: Alright, Great. We also received a lot of questions around banks coming back to the marketplace. Some questions around the product roadmap and shareholder value, which I think most of which we've we've addressed in the prepared remarks, So Scott turn it back to you anything you'd like to say as we wrap up.
No I think importantly, hopefully what's what's visible in these numbers.
Scott Sanborn: As we're seeing inflection in all the key operating metrics the outlook in front of us.
Scott Sanborn: We're making traction on our own we're executing without help from the fed but as the fed moves to become more supportive it is definitely <unk>.
Scott Sanborn: Pouring in acceleration and getting us back to our kind of target operating state. We're very excited about next year.
Scott Sanborn: I have got a really clear strategy, we are executing against the early indications we have.
Scott Sanborn: But I shared some of which on the call is really supporting that this is the right strategy that it will work and that's going to deliver strong returns for our shareholders. So we're excited to deliver against that next year.
Speaker Change: Thank you so with that we'll wrap up our third quarter earnings conference call. Thank you for joining us today and if you have any questions. Please E mail us at IR at <unk> Dot com. Thank you.
Speaker Change: That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.