LendingClub Corporation

Hello, everyone. Thank you for attending today's Lending Club second quarter earnings conference call. My name is Sierra and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers around the end. If you'd like to ask a question, press star one on your telephone keypad. I would now like to pass the conference over to Artem Naliveko, Vice President of Finance with Lending Club. Please proceed.

Thank you and good afternoon. Welcome to LendingClub's second quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO, and Drew Laben, CFO. You can find the presentation accompanying our earnings release on the investor relations section of our website. On the call, in addition to the 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, loan, and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results different 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 obligations to update these statements as a result of new information or future events. Our remarks today also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provisioned net revenue. 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 directly comparable GAAP measures in the presentation accompanying our earnings release. And now, I'd like to turn the call over to Scott.

All right. Thanks, Artem. Welcome, everyone. We delivered solid results in the quarter thanks to disciplined execution and by continuing to leverage the strategic advantages of our marketplace bank model. The quarter's $2 billion in originations was in line with our guidance, reflecting planned lower balance sheet retention. Total revenue was $232 million, and pre-provision net revenue, which is revenue less non-interest expenses, was $81 million. which was exceeding the high end of our guidance range and made possible by continued marketing and operating expense efficiency. As a result, we delivered our ninth straight quarter of profitability. Now, let me provide some context on the current operating dynamic. The bank portion of our business is demonstrating its resilience with net interest income stable quarter over quarter. However, we are facing what we believe to be temporary headwinds in the marketplace, which is resulting in pressure on our outlook for non-interest income. First, as we signaled last quarter and as is evident in regional bank earnings reported thus far, banks are currently moving to the sidelines as they address their capital and liquidity concerns, and their pullback will have an impact on our near-term origination volume. And while we continue to have productive discussions with our bank partners, and though the appeal of our high-yield, short-duration asset is more clear now than ever, banks' capacity to invest is, for now, likely to remain restricted. And second, to strengthen their capital positions, banks are selling loan portfolios at deep discounts. That's adding significant supply to a market that's already saturated with investment options. On the positive side, asset managers are raising capital and they are stepping in to buy. However, they're seeking higher yields to offset their higher cost of capital. And this is putting pressure on loan sales pricing. We don't believe that this market dynamic is sustainable. And in the meantime, we're leaning into our bank advantages to create new profitable structures to support marketplace volumes. I mentioned our structured loan certificate program last quarter. which is essentially a two-tier private securitization in which Lending Club retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price. This effectively provides low-friction, low-cost financing for the buyer, and in exchange, Lending Club earns an attractive yield with remote credit risk and without upfront CECL provisioning. So as a bank, this is something we are uniquely positioned to deliver for our marketplace investors. We've had good initial reception to the program, and we have a solid pipeline of forward interest. Another advantage of our bank is our ability to hold and season loans for investors, earning interest income for Lending Club while increasing the certainty around future credit performance for the buyer, which is especially important in this environment. We recently sold 200 million of season loans at a gain, and we are receiving interest from investors to broaden the program. I should also note that to deliver the returns required by loan investors in this rate environment, we are continuing to raise coupons. We've now priced in the majority of the Fed rate increases for near prime originations, where we generally compete with non-bank lenders. Pricing on our prime portfolio, where we generally compete with banks, is now up roughly 265 basis points. We're being deliberate and disciplined here to avoid adverse selection, and we're continuing to test our way up on pricing. Now let's turn to credit, where our data advantage from over $85 billion in loans, our flexible infrastructure, and our seasoned team has enabled us to continue delivering losses below the competition. And while we're pleased with our credit performance and the strong returns we're generating in our helper investment portfolio, delinquencies are modestly above our expectations on vintages booked before the prolonged inflation fully manifested and before we evolved our underwriting strategies and models. The actions we have taken since then have resulted in consistent credit performance and we'll continue to read the signals and adapt to maintain strong credit for loan investors and for ourselves. Looking ahead, federal student loan payments are set to resume this fall after a multi-year hiatus. And while we're carefully preparing ourselves and our members for this new financial reality, we currently believe that any impact to the portfolio will be muted and that's given 12-month on-ramp period, the government is providing the many reduced payment options available, proactive credit actions we've taken to reduce exposure to what we believe are the higher risk segments of this population. Even so, we are taking additional steps to make sure our members stay on track, and that includes educational outreach to ensure that student loan debtors understand the size and timing of coming payments. They're aware of the reduced payment options available to them from the government, and if needed, of custom hardship plans on their lending club loan if they need to bridge a gap. As we demonstrated during COVID, a high-touch proactive approach to helping our members can result in lower delinquency rates and increased loyalty. Our long-term ambition remains growing our member base and surrounding them with products and services that help them keep more of what they earn and earn more on what they save. We have continued to innovate, and starting over the next six months, we plan to test and launch an integrated mobile app that combines lending, spending, and savings into a single experience, debt monitoring and management tools fully integrated into this mobile experience, allowing members to easily view their debts and prioritize and optimize their payments to reduce cost, and a pre-approved installment line of credit that allows existing members to seamlessly sweep any new credit balances into a loan at a fixed rate. Importantly, this last feature will be built on a new revolving platform that will be able to eventually support additional new products. So as I said earlier, the environment will continue to challenge our ability to drive meaningful growth for at least the remainder of 2023. But we do believe this period is temporary, resulting from a confluence of macro events that won't persist over the long term. And we remain prepared to accelerate when the environment stabilizes. And we see the following. The Fed stops raising interest rates and ideally begins to lower them. banks have repositioned their capital and liquidity levels enabling their return to the marketplace and or the current oversupply of investment options has subsided as the partner of choice in this asset class we expect to be a primary beneficiary of a return to more normal market conditions and we believe that we are well positioned to capture a historic opportunity to refinance record high credit card balances at record high rates Until that happens, we're leveraging the benefits of our marketplace bank business model to maintain near-term profitability, bolster our long-term resiliency, and create a more differentiated member experience. As always, I want to thank the Lending Club employees for their continued hard work and commitment to building towards our bigger future. And with that, I'll turn it over to you, Drew.