LendingClub Corporation

Q3 2021 Earnings Conference Call

10/27/2021

spk02: Good afternoon and welcome to the Lending Club's third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Samir Gokhale, Head of Investor Relations. Please go ahead.
spk04: Thank you and good afternoon. Welcome to LendingClub's third quarter 2021 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO, and Tom Casey, CFO. You can find the presentation accompanying our earnings release On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include but are not limited to the benefits of our acquisition of Radius, platform volume, future products and Factors that could cause these results to differ materially are described in today's press release and our most recent Forms 10-K and 10-Q, each as filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. And now, I'd like to turn the call over to Scott. All right, thanks, Samir.
spk07: Good afternoon, everyone. Our third quarter results again make very clear the power of our digital marketplace banks to generate strong, sustained performance. We once again achieved record revenues, up 20% sequentially, and we nearly tripled our earnings versus the second quarter. We delivered these results by leveraging our data advantage, our large and loyal member base, and our vertically integrated business model. With an enormous market opportunity of roughly $1 trillion and revolving consumer loans outstanding, we have a clear path forward to further grow our personal loan business while helping our members lower their cost of credit. Our 3.8 million members appreciate the value we deliver, and they want to do more with us. With our new digital banking capabilities, we can offer more. Our advantages are considerable and difficult to replicate. and we are beginning to use them to grow our adjacent auto refinance and purchase finance businesses. When we launched back in 2007, LendingClub's vision was to leverage technology, data, and our marketplace model to transform the banking industry. We began by bringing a traditional credit product, the installment loan, into the digital age by moving it online, broadening access, lowering costs, and delivering a fast and frictionless experience for borrowers all while delivering attractive risk-adjusted returns for loan investors. At its core, extending credit is a data problem, and at Lending Club, we have a data advantage. We use machine learning to develop and or power models across the loan lifecycle, including marketing, fraud prevention, credit underwriting, and servicing and collections. These models are trained on more than 150 billion cells of data and more than a decade of experience across over 68 billion in loans. Our effectiveness is evident in our recent results. Our marketing expenses at the percentage of originations during Q3 were only 163 basis points. That's one of the best in the industry. Our overall loan portfolio has 35% lower delinquency rates compared to the competitive set. And for those vintages most affected by COVID, the results are even more dramatic with delinquencies 50% lower than others. Our fraud losses are less than five basis points, among the lowest in the industry. And all of this is accomplished in a highly efficient fashion, with more than 80% of our issued loans now fully automated. All of these results are in service of the customer, where we're typically lowering the cost of credit for our members by about 400 basis points versus their outstanding credit card debt. The savings and seamless experience we deliver creates loyalty. Already half of our members have come back to us for a second loan. When they return, they're rewarded with an even better experience than their first time. Lending Club is in turn rewarded with better economics, that these loans originate at a fraction of the cost compared to loans to new members and demonstrate lower credit risk. This is the dynamic for our core product, but we can do more for our members beyond personal loans. We can offer additional products and services to them that are aligned with their needs, saving them money and increasing their loyalty while also increasing the lifetime value of these relationships. One example of this is auto loan refinancing. Nearly two-thirds of our members currently hold an auto loan, and it's usually their second highest monthly debt outside of housing costs. Given the structural inefficiencies in the used car market, we can efficiently utilize our data and technology to offer customers a better rate in just a few minutes. We typically reduce the APR for our members by more than 5%, which translates into thousands of dollars of savings over the life of a loan. We've built a great product, but have been disciplined about the investment and growth rate of the auto business. During our incubation period, we've been focused on two objectives. One, building an incredible customer experience, and two, demonstrating a track record of performance. Now, with the added funding benefit of our bank, we're able to generate positive unit economics. And in Q3, we drove 85% quarter-over-quarter growth in auto refinance originations. While our current focus is on our members, the $300 billion broader addressable market for auto refinance does provide us with a substantial long-term opportunity. Next up is our Buy Now, Pay Later purchase finance business, which is designed for planned large-ticket purchases, and elective medical, dental, and education. We've been in this business for several years through issuing bank partnerships and are now deploying our banking capabilities to issue these loans and take better advantage of our personal loans infrastructure. This will allow us to not only capture more of the value chain economics, but also significantly improve the member experience. I'll plan to talk more about this business next quarter. Going forward, you'll hear more from us every quarter about how we're leveraging our expertise and our advantages to offer our member base a broader set of integrated financial solutions. During the third quarter, we added more than 100,000 members to our base to bring us to a total of 3.8 million. We're creating a powerful flywheel effect that will help our loyal and member growing base with additional financial solutions that save them money while also increasing their lifetime value to us. This in turn helps us continue to drive strong and sustainable revenue and earnings growth, which opens up more opportunity for us to invest in customer acquisition as we offer them more reasons to join the club. As you've seen in our results this year, the investments and choices we made in 2018, 2019, and 2020 have been paying off. Not just the decision to acquire a digital bank, but the lowering of our operating costs and our strategic investments in data, technology, and digitization all of which are bearing considerable fruit. Over the next 12 to 18 months, we plan to accelerate our growth investments, particularly in infrastructure and new products, while continuing to grow our profit. We expect these investments to enhance our ability to serve our members and to drive sustainable growth to our top and bottom line over time. I want to thank our employees for their commitment to our customers, our company, and our mission. We would not have been able to achieve these results without their dedication and hard work. So with that, I'll turn the call over to you, Tom, to take you through the financial results for the third quarter and our outlook for Q4.
spk05: Thanks, Scott. Our marketplace model is more profitable than it's ever been. Before I dive into the detailed results of the quarter, I want to show you how we have transformed the financial profile of the business. As you can see on page 13 of our earnings presentation, We originated loans of $3.1 billion this past quarter, which is comparable to the fourth quarter of 2019, the final quarter prior to the pandemic and before our Marketplace Bank model was in place. Now, with the Marketplace Bank, we generated $58 million of higher revenue and $27 million of incremental earnings compared to our prior model in the fourth quarter of 2019. This reflects our numerous strategic decisions over the last three years, the advantages of the bank, as well as our efforts to improve the efficiency of our business. Another item I want to highlight is the impact loan retention had on the quarter's results. During the third quarter, we retained $636 million of loans, or about 20% of originations, in line with our 15% to 25% target. As a reminder, growing our loan portfolio reduces reported earnings during the quarter due to deferral of net origination fees as well as upfront CECL provisions. You'll see on page two of our earnings press release that these two items negatively impact their earnings by $51.5 million in the quarter. However, we are investing in future revenue by retaining loans, creating a highly profitable and recurring revenue stream that enhances the sustainability of our revenue and earnings growth. Now let me take you through the details of our financial performance for the third quarter. At the start of 2021, we pointed out that with the addition of the digital bank, our revenue would start to grow faster than our originations. And we saw that again this quarter. Total sequential revenue growth of 20% for the quarter primarily reflects a 15% sequential increase in marketplace revenue and a 42% sequential increase in our recurring stream of net interest income from loans held for investment. Let me talk a little about the increase of each of these revenue drivers separately. We've added pages 9 and 10 of our earnings presentation to help illustrate these drivers. First, you'll see on page 9 that the 15% increase in marketplace revenue was in line with the growth in loan originations during the quarter, as well as strong investor demand for loans. Our recovery revenue stream from retained loans grew 42% as the mix of consumer loans increased during the quarter. You'll see on page 10 of the earnings presentation that our average consumer loan balances grew by over $400 million to $1.5 billion. Average commercial and PPP loans decreased by 15%, or $186 million, primarily reflecting the continued runoff of PPP loans. I should remind everyone that while the PPV loans are decreasing as expected, the rollout of the bank's program was very successful and speaks to the effectiveness of its digital capabilities. Our bank was able to process a huge volume of applications, disperse funding very efficiently without any operational challenges. Average total deposits grew 7% sequentially to 2.6 billion, and deposit costs remained roughly flat for the second quarter at 30 basis points. As the mix of our consumer loans grows, we expect our net interest margin will continue to expand. On page 11, you'll see that our growing consumer loan portfolio was the primary driver of the 160 basis points increase in our net interest margin to 7.1%. Provisions for credit losses increased 8% sequentially to $37.5 million, primarily reflecting the increase in retained loans during the quarter. Net charge-offs remain low at $4.3 million and are mostly from the legacy radius portfolio. As the consumer portfolio starts the season, we will start to see our charge-offs normalize, but we're comfortable with our reserve levels as our loss provisions are intended to capture estimated life of loan charge-offs up front. Now let's turn to expenses and how we're driving positive operating leverage. Our sequential revenue growth of 20% outpaced total non-interest expense growth of 12%. Importantly, the increase in expenses was driven almost entirely by investing in consumer acquisition, which was the big driver of origination growth in Q3. These new customers come back to us over time and provide future revenue growth and operating efficiencies. Repeat members typically demonstrate better credit performance at lower acquisition costs, thereby driving higher lifetime value for us. As we continue to help our members over time, their loyalty also creates attractive economics for us, which in turn helps us deliver more savings to them, creating a virtuous cycle. This is especially true given our data advantages, vertically integrated model, and strong member loyalty, which enables us to capture more of the economics. All other expenses were roughly flat the last quarter. We're also pleased to see the operating leverage of our new business model reflected in our core earnings results. Net income for the quarter was $27.2 million, was up roughly three times sequentially. We believe that our investment in the digital bank that started almost three years ago and the financial performance we've produced to date in 2021 is a great example of the power that smart investments can have on a business. We also know that it's critical for us to continue to innovate and build upon our leadership position. As such, we want to capitalize on the powerful economics of our business model and strong capital generation to invest in three areas of the business. First, building our consumer loan portfolio to grow and diversify our revenue. Second, investing in marketing to drive new member and acquisitions. And three, further investing in our technology and infrastructure to build new products and services for our members. We'll provide updates as we make progress on each of these initiatives over the coming quarters. Next, let's turn to our financial outlook. Our guidance assumes continued but moderating economic growth and normal seasonality we typically see in the fourth quarter and the first quarter of each year. Specifically, in the fourth quarter, We tend to see a decline in application volumes during the holiday season, and lower demand also persists into the first quarter as tax refunds reduce borrowed demand. Our guidance also incorporates the revenue expense impact from increased investments in the three areas I just described, building the portfolio, marketing to new customers, and incremental infrastructure and technology initiatives. Specifically, our strong and sustainable year-to-date results have again allowed us to raise our guidance. We are increasing our full-year revenue guidance to a range of 796 to $806 million, up from 750 to $780 million, implying a Q4 guidance of approximately 240 to $250 million. We're also raising our full-year origination guidance to a range of 10.1 to $10.3 billion, up from $9.8 to $10.2 billion, implying Q4 originations between $2.8 and $3 billion. Finally, we're raising our full-year net income guidance to a range of $9 to $14 million versus a loss of $3 to $13 million. This implies a net income to be in the range of $20 to $25 million. Again, we're very pleased with the results we're already experiencing from the transformation to a digital marketplace bank. The investments we've made over the last three years are clearly paying off, and we look forward to delivering sustainable growth and profitability for our investors over the long term. With that, we'd like to open the call for questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Henry Coffey with Wedbush.
spk05: Yes, good afternoon and congratulations on another great quarter. This has done amazing wonders for investors. A couple of questions and then I'll go back into the queue. You know, if you've got $65 billion worth of originations, 3.8 million in customers, 2.9 billion in deposits. Can you start to give us any thoughts about how this all merges together into kind of one neobank? You know, right now you have this great treasury function that can go to the bank whenever it needs assets, and you have this really super profitable bank. But, you know, as these two sides of the equation start to play together. You've got this massive customer base. What preliminary thoughts do you have about getting everybody to work together on a product and revenue front, and what kind of cross-sell opportunities are there between the bank and the club, et cetera?
spk07: Yeah, so thanks, Henry. This is Scott. So you are correct. I think what we're showing right now is core business that we're in, where we've got a leadership role, provides a foundation for an extremely kind of profitable digital bank with a lot of growth just inherent in the model, both of the available market outside of us, as well as our ability to have revenue and earnings outpace just the sheer loan origination growth. So as Tom touched on a little detail in the script, our plan is to be taking that net income that we're able to generate and begin investing that into future earnings growth. And the future earnings growth is, first and foremost, continuing to build the loan portfolio. But second, building the customer base. And then third, adding the new products. And the new products you touch on is, we've shared some of the research before, right? I mean, more than half of our customers are already coming back to us for a second loan. And we've really unlocked a great experience there for them. Auto, which we're really now just leaning into, we've pulled it into the bank. The lower cost of capital and the addition of the balance sheet means we've now got positive unit economics that allows us to invest in that business and grow that business. So that's an easy one that we can, you know, you can see us expanding the lifetime value of the customer just through that. And as we pull the purchase finance business into the platform, that is another opportunity for cross-sell, right? We are getting customers today who are in, you know, the acquisition tax there is actually through providers and not in. So the lead-in is not refinancing credit card debt. It's paying for procedures. Once we have them on board, we can do more for them. As we look ahead into next year, you're hearing us lean into credit products. Why? That's the DNA of the company. Our customers are heavy users of credit, so they want and would like to get more from us there. But we also see us, once we get these three businesses, which are businesses we already had coming into the bank acquisition, once we get them into the bank and begin generating the bank benefits off of those businesses, we'll be starting to look at other categories, including helping people manage their spending and their savings, right? Building on the great member rewards checking experience that we got from Radius and leaning into that. And that'll be what we'll probably talk a little bit more about next year. Right now, we're just focused on getting these lending businesses into the bank. Thank you.
spk05: And my second question is, is really around efficiency. And I thought I would just narrow the focus in on the bank, which is probably at this point 30% or 40% of your earnings and approximately 40% of your equity capital. And I'm going to compare it to an institution that's very similar in some ways, but it doesn't have the commercial loans you have, the bank has, it doesn't have some of those other assets. But you look at Discover, that offers a wide range of consumer products, just like you're planning on doing. And you look at the bank, and the bank has got a very high ROI already, but its efficiency ratio is around 67%. Discover's for the first nine months of the year was, I think it was 36%. So, you know, lining those two up, is there room over time as Radius becomes more and more a, quote, lending club, consumer lender, given all the efficiencies of those sorts of origination businesses. Can you give us some sense, if we just were to focus in on the bank, what kind of forward shift in profitability might we see? What sort of thoughts do you have about the ultimate ROA of that business? How do you think the bank's efficiency ratio should be moving over time? This is Tom. Yeah, we came in at 67 and a half this quarter, which was, you know, puts us in, you know, amongst some of the better banks and better financial institutions. But you can see the growth that we're experiencing can further bring that number down. We haven't given a specific target, but you can see in just two full quarters of ownership, we're seeing significant improvements as we as we remix the balance sheet, as we, we continue to see being a fee income from our lending business, uh, the returns are, are already in the mid twenties. Um, we're benefiting from the, the, the tax in a well that we've chatted about in other meetings. And so we think there's a additional opportunity here. We're not, we're not ready to give specific targets, but, uh, Scott said, we're going to be taking some of the additional margins and reinvesting them back into the business that, uh, that gives us more confidence on our top line growth. We think the revenue growth is important and growing our membership base is important and all those things continue to drive ongoing, repeatable earnings for the company. It's a new model. We've only shown you two quarters. We'll continue to keep you informed on how we're thinking about the level of profitability as we head into next year. But we feel very good about where we are and how the business is It's really recovered nicely. And keep in mind, it's not just the bank. As we've tried to communicate to you, this is really multiple years of activity. We resized the organization pretty significantly over the last few years. We continue to be well below our peak as far as headcount, for example, and our expense levels are much lower than they were even on a standalone basis. So you're seeing some of that come through as well. It's not just the acquisition of the bank. Yeah, but when you look at the bank and the net interest margin is in the sevens, but watching with the 25, 30 basis point cost of funding, which may deposit costs could go up to 50 basis points, and all of this would still be true, and you're layering on more high-yield consumer loans, the losses are very, very low on those assets. When we look at how that flexes, it won't be surprising to see that margin closer to 10%. And it won't be surprising to see the efficiency ratio clearly at the bank level, you know, at least a third lower. And I mean, the contribution from the bank side suddenly becomes very big and very dramatic sometime over the next couple of years. And obviously, the more help we can get in putting pencil to those numbers, the better. But it looks like it's moving in the right direction. And anything specific about loan quality, the chart? on delinquencies is very helpful and instructive.
spk07: Yeah, what I'd say, Henry, is, you know, we're obviously, the industry broadly has experienced pretty pristine results. We, in particular, as we show in those materials, are outperforming the industry. The thing that I would want to make sure, you know, you heard is that In our underwriting, in our pricing, and most importantly in our reserves, we're not assuming that that environment continues. We're actually assuming in all of those things that we're doing today that we are back at pre-COVID levels of borrower performance. So, you know, the results right now are actually above what we had put into our own outlook.
spk05: Well, listen, excellent work. Congratulations all around, and thank you. Thanks, Henry.
spk02: Our next question comes from Giuliano Bologna with Compass Point.
spk06: Good afternoon. I guess starting off, one of the questions I'd be curious to pick your brain on is it looks like you guys retained 20% of loans in this quarter, which falls right in the middle of the guidance range that you provided in the past. Since you're generating more capital than you forecast in the past, would there be any incentive to dial up the loans you're retaining? Because you're actually building, you know, you're in a position now where you can actually build some capital. The loan growth rate will start to slow as the book seasons and matures a little bit. So is there any incentive to grow the percentage there and go, you know, towards 25 or even above 25 to increase the size of the balance sheet faster?
spk05: Yeah, Juliano, I just did. Put some numbers around your question. We did come in at 14.1% capital, so you're absolutely right. With the additional earnings we're generating, that allows us to put more capital to work. We're very pleased with the performance of third quarter. That's why in our guidance, I call that out specifically, that that's an area for us to continue to invest in. That creates more ongoing revenue. Keep in mind that when we put a loan on the books, we earn about three times as much as selling a loan. So there's clearly motivations to do that. It's a benefit of us being able to ebb and flow in that range of 15 to 25. And with the capital we've got to deploy, you know, you'll probably see that over time. And, you know, we're trying to manage to make sure that we're keeping our capital deployed as efficiently as we can.
spk06: Yeah, it sounds good. And then another question, just because it's been topical across all consumer finance, you know, for all companies in the sector this quarter. I'm curious what you're seeing from a delinquency rate perspective and how it's comparing from a roll rate perspective. What kind of shift you're seeing in 30 plus, 60 plus delinquencies? I realize the book is still immature, so there's a lot of velocity going through it, but I'm just curious what kind of data you're seeing sequentially there.
spk07: Yeah, so as I kind of touched on, In my remarks, I mean, our year-on-year delinquencies are actually down. I believe in the neighborhood of about 30%, and quarter-on-quarter, we're flat. That's just on our kind of outstanding servicing portfolio as a whole. But our expectations in terms of how we've underwritten price, and when you look at the book we've taken on our own balance sheet, it's new. We started building that in Q1, so it's too early to have any kind of different you know, really significant lead, but we're in line with our expectations to ahead of our expectations there on that.
spk06: That sounds good. And not to split out too much further, I realize there's also a big impact from a servicing perspective when you're growing the book and, you know, the servicing book grew, you know, a little under 10%, but it grew a meaningful amount sequentially. I'm curious, like, X growth, Are those numbers still roughly flat or up slightly? Because obviously growth has a little bit of a dampening effect when you're layering on newly originated loans into the portfolio.
spk05: So, Julian, we're monitoring this by individual vintages. So Scott's giving you a composite view, but we're monitoring these by vintages. And so we're not seeing any kind of this averaging. We feel very good about all the vintages since 1Q, 2Q, 3Q are all in line. And So, no, there's no real, you know, stacking issue that you would refer to as, you know, blending in our allowances. They're all, you know, we raised our allowances another five and a quarter percent this quarter, reflecting CECL just like we did in the previous course.
spk06: That sounds good. The other thing I was curious about was one of the strategy points was growing marketing, obviously, and growing the balance sheet. There seems to be some data out there about, like, you know, shifts in demand for direct mail. Obviously, the data is not always perfectly accurate, but it looks like LendingClub stepped back on direct mail relative to a lot of peers in the sector. I'm curious if you're seeing anything on direct mail that's changing or if that's just more of a pivot to other channels and what might be driving shifts in your marketing strategy and marketing channels.
spk07: No, I'd say that the biggest thing for us is, as you know, last year, we kind of pulled out of the majority of the marketing channels and really just focused on serving our existing members who had need for credit. This year, we're stepping back in and tuning our efforts kind of per channel, our targeting models and response models on a per channel basis. I'd say across the board, we're pretty pleased with what we're seeing, as I've said before this It is a competitive market. We anticipate it will continue to be a competitive market, but we like our position a lot because we've got just more data than anyone else. And we're able to capture more economics with the addition of not only the fee revenue, but also the net interest income. We're able to capture more economics off of the initial loan and drive really good repeat behavior and lifetime value. So You know, we're optimizing per channel. Anything you see would be, I wouldn't call it indicative in a broader trend so much as us optimizing per channel.
spk06: That's great. I appreciate it. And I'll jump back in the queue.
spk02: Our next question comes from Steven Kwok with KBW.
spk01: Good quarter, guys, and thanks for taking my questions. I guess I have two questions. One was just around the yield on the unsecured personal loans. It seems like the yield picked up again about 70 basis points sequentially. Could you just talk about the drivers there and what led to the sequential increase and how we should think about it going forward?
spk05: My name is Tom. What we've been doing all year is you think about what portfolio and the volume we had in the first quarter, and then where we are today where, you know, we've gotten to now $3.1 billion. And so as we open it up channels, we now have a more representative sample of our, of our entire prime portfolio. And what you're just seeing is that normal evolution of the growth and the mix going into pay channels, as Scott mentioned, recovering in some of the channels that we had exited in 2020. And now you're starting to see kind of that, that normalized yield portfolio coming in. So it's just this, normal progression of the average mix of our loans that typically go to banks. So we're a representative sample of those loans that we sell to banks. So that's just the evolution of the growth of the market.
spk07: And said another way, we don't expect it to change much from there. It's just us at this point having the market mix. That's right. No, no, actually, I don't know if we talked about it, Stephen, in the call, but just a reminder, you know, what we're holding is prime consumer loans, same loans we sell to, you know, a few dozen community and regional banks. Customer you're talking about here is average FICO is about 715. Income is, you know, on the low end of high income or the high end of middle, somewhere in the 90 to $100,000 range for individual income. And you're talking about, you know, average loan sizes of call it $14,000, $15,000. Main use case is payoff credit cards, payoff credit card debt. And then on average, we're lowering the cost there for them by about 400 basis points.
spk01: Understood. And then just following up on the marketing side, you mentioned that it was 160 basis points of origination. And if we go back to the last two prior quarters, it was running more like 130 basis points. Are you guys just leaning more into marketing to drive the originations growth? I'm just curious as to what you're seeing around the competitive landscape and how we should think of that 160 basis points going forward.
spk07: Yeah, so again, if you go back a little bit further in history and you look at you know, how we were managing that spend and our mix of new versus, you know, let's call it repeat members. We're basically after sort of doing the lending club equivalent of sheltering in place last year and not really doing a lot of external marketing. We really ramped that up and are back in the mode of acquiring new customers to build the member base. So we added mentioned, we added about a hundred thousand new customers this quarter. And, you know, if you go back and just look at our historic marketing cost of the percentage of CPI, you'll see that it was, we were getting closer to, I think, 190 to two. And, you know, given we're actually capturing more economics now than we were then, that's certainly a decent way to think about, you know, our willingness to invest in building the member.
spk05: Just saving the money on more economics.
spk01: Great. Thanks for taking my question.
spk02: If you have further questions, please press star then one to join our queue. Our next question comes from John Rowan with Danny.
spk03: Good evening, guys. Hey, John. So you guys have a 7% net interest margin in the quarter. I just want to step back. Is this are we still looking at 7% as the right number going forward, including the provision expense? I know we kind of talked about a 9% margin less 2% provision expense. Is that still kind of the long-term target of the bank?
spk05: So the net interest margin doesn't have any impact on the provision, we do expect it to continue to go up as we increase the mix of consumer to commercial. Obviously, that's the largest growth that we have and also the highest net interest margins. So that is expected to go a little bit higher as we continue to remix the balance sheet. With regard to the provision, kind of giving everyone an indication that we are on CISA, we are putting these reserves up on day one. And so you have the timing issue between the recognition of the provision and the interest income. So we continue to accrue at about five and a quarter percent. I think we did this quarter on originations that we retained. So I think this is a pretty good frame. I think we've done it a couple of quarters in a row, started to give you a frame of what you can expect. It will get a little more complicated because we'll start to have some charge-offs and we'll be adding new loans, but I'll be breaking those out for you so you can see the roll forward. But Right now, the portfolio is performing very, very well, as we indicated, and I do expect the initial margin to inch up a little bit.
spk03: And, well, okay, so just back to kind of your comment, what do you expect the long-term charge-off rate to be in the portfolio?
spk05: So the charge-off rate is still going to be somewhere, you know, the loss rate is still going to be in that, you know, somewhere. It depends on the quality, obviously, but overall, it's probably going to be in the 5% to 7% range is depending on where we are in the various quality. But overall, that's kind of, you know, a little bit higher than we've given you in February, but consistent generally where we think long-term the deal will be. Okay. Thank you.
spk02: At this time, I'm showing no further questions on the line. So I'd like to turn it over to Samir to take some questions submitted from our retail investors.
spk04: Great. Thanks, Ali. There are a couple of questions that came in through the inbox that we can just go through. I'll paraphrase here. The first one was asking why we don't license our algorithm and data analytics to other banks and credit unions to earn services.
spk07: Yeah. Interesting question. That's certainly, you know, one, I'd confirm, we certainly have something that is of a lot of interest to banks, which is the ability to assess the credit risk and efficiently underwrite it. And the way we've chosen to work with banks is that we make loans available to them to hold on their balance sheet. They are taking, therefore, the credit risk in exchange for earning the income. So, you know, that is 40 to 50% of our funding that way. Turning this into a software as a service business, that's a different business. And no criticism of it. Great business. It's just very different. Our focus is on building the direct-to-consumer franchise, really leaning into the customer base that is this very credit-worthy, high-income customer who is a reasonably heavy user of credit and surrounding them with value-added services. And therefore, for us, being able to actually own that customer relationship, being able to communicate with that customer and kind of help them on their financial journey is where we're going to be investing.
spk04: Great. Thank you. And then the other question that came in was whether LendingClub has any plans to offer other innovative and unique customer products.
spk07: I guess short answer is certainly yes. We touched on it on the call today. Like I said, first priority this year is pulling our lending products into the banking infrastructure because that both gives us cost efficiencies, it gives us incremental revenue, and it allows us to leverage the full power of our platform, our data science platform, servicing platform, our payments, all of the things we do to drive loan performance. But as we look into next year, we'll come back and talk about, we see over time, a broad range of products helping our customers manage their lending, spending, and savings.
spk04: Terrific. Well, with that, I think we'll end the Q&A and the call. Thank you all for joining us on the earnings call today. If you have any follow-ups, please contact the investor relations team and we'll be able to help you out. Thank you.
spk02: The conference has now concluded. you for attending today's presentation. You may now disconnect.
Disclaimer

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Q3LC 2021

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