LendingClub Corporation

Good afternoon. Thank you for attending the Lending Club second quarter 2022 earnings call. My name is Matt and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Sameer Gokhale, Head of Investor Relations for Lending Club. Sameer, please go ahead.

Thank you and good afternoon. Welcome to LendingClub's second quarter 2022 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 investor relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include but are not limited to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services, and future business and financial performance. Our actual results may differ materially from those not completed by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our most recent Form 10-K, 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.

Thanks, Samir. Good afternoon, everyone. I am pleased to report another quarter of record revenue, earnings, and loan volume, all exceeding our guidance. Tom will give you the details shortly, but let me share a few highlights. Revenue grew 61% year-on-year, outpacing originations growth of 41%, and demonstrating the power of our combined marketplace and portfolio revenue stream. and our net income, excluding a one-time tax benefit, quadrupled year over year. Our digital marketplace bank model is proving to be resilient, and we are reiterating our guidance for the full year. We're very pleased with our results in the first half, but as we noted last quarter, the macro environment is shifting. The Fed has become more hawkish in their battle with inflation, which has implications for our business and for the economy overall. In the face of these changes, we are confident that we have positioned the company well to capitalize when we see quality growth opportunities while remaining mindful and prudent with respect to risks. So, let me talk about what we're seeing and what we expect across the marketplace in terms of borrower demand, credit performance, and investor demand. Credit card balances are now back above pre-pandemic levels, and credit card rates are rising. This is driving strong borrower demand for personal loans. Accordingly, we grew loan volume by 19% quarter over quarter, while simultaneously increasing our marketing efficiency. We expect borrower demand to remain strong in Q3 and come down in Q4 due to typical seasonality. Switching to credit, which we highlight in our presentation on pages 16 and 17, our loans are currently performing very well on both an absolute and relative basis. And our most recent season vintages, including those from the back half of 2021, are continuing to perform above expectations with delinquencies below pre-pandemic levels and better than industry averages. As a reminder, we are primarily focused on prime borrowers who have proven to be more resilient through economic cycles. Our core consumer has an average income of 112,000 and a FICO score of 721. We firmly believe there is an element of positive selection in our member base, as they have made a conscious decision to strengthen their financial position by refinancing out of higher-cost debt. Continued strong performance in credit is an important foundation as we move to talk about investor marketplace demand. Last quarter, we spent a lot of time discussing our loan allocation strategy and our decision to deliberately partner with loan investors who would be less exposed to rising rates. Our record high loan volume in Q2 is evidence of the success of our strategy in action. That said, the rapid pace of interest rate movements, with another increase announced just today, is putting pressure on the entire investment community as it drives up the cost of capital and corresponding yielded requirements. I'd like to remind everyone of the transition period that we need to go through as rates rise. For certain investors, their funding costs will move based on the forward curve, meaning where the Fed is expected to go. These investors are seeking more yield to cover their increased costs. We will eventually be able to pass price increases on to the borrowers, who will see their cost of credit move as the prime rate moves. However, there is a lag between the timing of these price movements. So we need to bridge the gap, and we do have tools to do so. First are the coupons to borrowers. we are continuously testing and implementing increased price points to drive up yields to investors while making sure we maintain expected credit quality. We've made a series of price increases already, and we plan to continue to do so through the back half of the year. A second tool to increase investor returns is credit adjustments, where we're leveraging the strong borrower demand to trim lower returning segments, especially in near prime, to drive up asset returns. So as we make coupon changes and optimize credit, we'll be using our proprietary loan auction platform, LCX, to read the clearing price and moderate loan volume to match investor demand at the yield we can expect to consistently deliver. We have the most experience of any personal loan provider in delivering loan investor returns, and we're using that expertise in this environment. So this should give you a sense of how we're managing our marketplace. Let me talk a little bit about how we're managing our business. As a reminder, roughly 50% of our total expenses are variable in nature, with marketing being the largest one. Our marketing spend is strongly correlated to origination volumes, allowing us to adjust expense levels based on market conditions. Furthermore, we have the advantage of a large and loyal member base of more than 4 million members who deliver stronger credit performance than new customers and come at a lower acquisition cost. As we evaluate marketplace demand in the back half of the year, we will calibrate total marketing spend and the percentage of our volume coming from our existing members. In terms of fixed expenses, we are moderating our rate of hiring until we have a better view of the long-term environment. We remain committed to delivering our strategic roadmap, but believe it's prudent to adjust the pace at which we get there. One area where we will continue to invest is in growing our balance sheet. This is important as we want to continue to increase the amount of recurring revenue generated from our HFI portfolio. While we understand that this impacts our importer revenue and earnings, it is the right decision for the business on track. We've been talking about the best of both worlds and the self-reinforcing flywheel of our transformed business model for a few quarters. And while we cannot control or predict the macro economy, we are leveraging our enhanced set of tools to control what we can control. In a bull market, we can leverage the capitalized advantages of a pure fintech to seize market share. And in a bear market, we can lean on the funding stability and advantages of a bank to drive resiliency and profitability. In today's environment, we're leaning more towards the bank model, being conservative on credit and using our low-cost deposit funding to hold more loans for investment and drive recurring revenue. As the economy improves, we'll be ready to lean into our fintech advantages. dialing up the marketplace to drive scale and capture market share. To use an analogy, we are reducing our speed heading into the corner, but we're planning on retaining momentum and accelerating as we come out of it to carry out our bold ambitions to create a next-generation, multi-product, digital first bank that will deliver a new banking experience for our members and strong multi-year revenue and earnings growth for our shareholders. I'd like to thank the team of lending clubbers for their continued dedication and for helping us deliver these great results. Now, let me turn it over to Tom for his comments.