LendingClub Corporation

thank you for joining i would like to welcome you all to the learning club third quarter 2022 earnings conference school my name is brika and i will be your event specialist operating today's event after the speaker's remarks you have the opportunity to ask a question and to do so please press start followed by the number one on your telephone keypad if you change your mind at any time please press star two and for operator assistance at any point please press start zero I would now like to hand the call over to the host of today, Sameer Goldplay, Head of Investor Relations, to begin. So, Sameer, please go ahead when you're ready.

Thank you and good afternoon. Welcome to LendingClub's third quarter 2022 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO, and Drew Leven, 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 contemplated by these forward 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 STC, 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. Our remarks also include non-GAAP measures relating to our performance including tangible book value for common share. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most correctly comparable GAAP measures in the presentation accompanying our earnings release. And now I'd like to turn the call over to Scott.

Thanks, Samir. Hello and welcome, everyone. Our solid third quarter results demonstrate the effectiveness of our efforts and the resilience of our marketplace bank business model as we continue to leverage our enhanced set of tools to control what we can in the current environment. We produce year-over-year revenue and earnings per share growth of 24 percent and 58 percent respectively. driven by strong growth and recurring interest income and improved operating efficiency. Importantly, we continue to grow our held for investment portfolio of high quality prime loans, building a durable future revenue stream that is demonstrating continued strong performance. As I shared on our last two calls, this will be a year of two halves. The first half featuring strong investor loan demand, boosting originations and corresponding marketplace revenue, on top of our growing net interest income revenue stream, and the back half with more tempered loan volumes and marketplace revenue due to the rapidly changing rate environment temporarily affecting loan investor demand. With the pace and scale of rate changes now more significant than prior expectations, the anticipated dynamic is more material. A quick reminder about how we expect this to play out in the marketplace. certain loan investors cost of capital is based on forward interest rate expectations as expectations go up their cost of capital goes up and so does their yield requirement expectations for the terminal fed funds rate have gone up another 140 basis points just since july putting meaningful pressure on funding costs and therefore on return requirements we do expect to be able to deliver more yield to investors by passing on an increase in rates to borrowers, but we need to do it over time. That's because we're competing mainly against credit cards, which while they are pegged to floating rates and are moving higher, they only do so after the Fed takes action. And even then, typically lag the Fed's moves by one or two billing cycles. It's only when the consumer sees and experiences the impact of those increases that we can move rates without losing competitive advantage or causing adverse selection. We also consider other market factors to ensure that changing pricing will not create credit volatility. So during this transition period, the benefits of our bank capabilities could not be more clear. Our strong earnings profile enabled us to increase the amount of loans we retained to a record 1.2 billion. This allows us to help more borrowers while further building our recurring revenue stream. Combined with servicing fees, almost half of our total revenue is now recurring. This will contribute to our efforts to mitigate marketplace revenue pressure until interest rates and the environment stabilize, or at least the pace of change slows. On the borrower side, demand remains strong. The majority of our members come to us to consolidate credit card debt, and the impact of the earliest FedRite hikes are showing up in their credit card bills. With card rates and balances at record highs, and with additional increases on the horizon, our fixed-rate, closed-end loans continue to be a highly attractive way for consumers to save money. Our prime members have high incomes and high FICO scores, with balance sheets that remain healthy throughout the pandemic. And that, combined with our prudent approach to underwriting, has meant that we haven't seen broad-based or systemic stress in our credit performance. Our focus remains solely on the higher prime segments who are held for investment portfolio. Slide 16 in our prepared materials show that delinquency rates on our prime loans remain below pre-pandemic levels and are continuing to normalize. And our held for investment portfolio is also performing, with delinquencies remaining within projected levels as the portfolio grows and matures. However, as we told you last quarter, we are seeing inflation driven pressure in certain segments at the lower end of the credit spectrum. And we've taken disciplined steps to address these pockets through tightened underwriting. This includes most notably near prime loans, which now make up 10 to 12% of personal loan originations down from prior quarters. Until there's clarity on the economic outlook and a more stable interest rate environment, we're focused on controlling what we can and using our full suite of tools to manage. First, we'll maintain our disciplined approach to underwriting and pricing, and we'll remain good stewards of credit, not reaching for growth or compromising on our standards. We have longstanding relationships with many of our marketplace investors who rely on our market-leading data analytics, our discipline, and our judgment to deliver attractive risk-adjusted returns. And as the largest holder of our loans, protecting investor returns continues to be paramount. Second, we will continue to lean into the strategic advantages of our digital first bank and invest in retaining prime loans to generate recurring revenue independent of new loan volume. This is a key advantage for us, supported by our strong balance sheet and over $5 billion in bank deposits. Third, as you saw this quarter, we will remain focused on managing expenses prudently. and we have a number of variable expense levers we can pull if needed. We remain committed to our multi-product vision, which we believe will drive substantial future shareholder value, and we are continuing to make investments to build that future. We are, however, moderating the pace of these investments in the near term to reflect the environment. If you remember, I used a car analogy last quarter when I said that we're reducing our speed heading into the curve so that we can accelerate coming out of it. We are in the curve right now, but as we look further down the track, I would note that some of the negative dynamics in today's market will point to future opportunities. Most notably, record high credit card balances at record high interest rates should be a boon to our core refinance business. Our marketplace revenue has a proven ability to quickly rebound as our rapid return to record volumes following the pandemic pullback indicates. When combining the scalability of our marketplace with the resiliency of our digital first bank, we believe we can deliver long-term value for our shareholders. I'd like to thank our team of lending clubbers for their continued dedication and partnership in helping us deliver a solid third quarter. And with that, let me welcome one of our newest lending clubbers, Drew Levin, to his first earnings call. Drew joined us three months ago and officially took over as CFO on September 1st. He brings a wealth of banking experience from Capital One and J.P. Morgan and is uniquely qualified to help lead Lending Club going forward. He's also, just generally, a great guy. So over to you.