LendingClub Corporation

Good afternoon. Thank you for attending today's Lending Club 2Q 24 earnings conference call. My name is Jayla and I'll be a 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 pass the conference over to our host, Autumn Nalizeko, Head of Investor Relations. Autumn, you may proceed.

Thank you and good afternoon. Welcome to LendingClub's second quarter earnings conference call. Joining me today to talk about our results 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 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, including with respect to our competitive advantages and strategy, macroeconomic conditions, platform volume, future products and services, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. 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. Our remarks also included non-GAAP measures relating to our performance, including tangible book value per common share, pre-provision net revenue, and risk-adjusted revenue. 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.

All right. Thank you, Artem. Welcome, everyone. I'm pleased to report that we had a strong quarter of growth, with originations climbing 10% sequentially to $1.8 billion, pre-provision net revenue growing 13% to $55 million, and gap net income growing 21% to nearly $15 million, all while sustaining our industry outperformance on credit, growing our balance sheet by nearly 9% year-to-date, and continuing to innovate on a truly differentiated experience for our growing member base. We have calibrated the business to the current operating environment and have achieved a solid foundation from which to efficiently grow. Strong credit performance is key to that growth. supporting higher marketplace loan sales prices, and maximizing risk-adjusted revenue from the balance sheet. Accordingly, it's worth highlighting that we continue to consistently outperform our competitive set with 40% better delinquency rates across all core segments we serve. Our outperformance is due to several proprietary advantages, including dozens of custom models, visibility into millions of repayment events across varying economic environments, a team that brings decades of human experience and intelligence to interpreting signals and trends, and an asset class and underwriting technology platform that allows us to rapidly respond to changing macro conditions. We're seeing strong returns with stable or improving credit losses across all vintages. And within our held for investment portfolio, delinquencies and charge-offs are trending lower, as expected, as our portfolio ages. For marketplace investors, our strong credit stewardship combined with our bank-enabled innovation is reinforcing our reputation as a partner of choice. That's driving heightened demand, which is supporting an increase in origination and incremental improvements in loan sales pricing. Our structured certificate program continues to provide buyers with an attractive alternative to warehouse lines or securitizations. And by holding the A note, we generate fee revenue and capital efficient risk remote interest income without an upfront CECL charge. This past quarter, we crossed $3 billion in lifetime originations through the program with a solid pipeline of forward interest. We're also meeting investor demand through our extended seasoning program, which provides us with interest income until we sell the loans. We executed over 80 million in seasoned loan sales this past quarter with prices above our carrying value. Going forward, We plan to continue driving loan prices up by maintaining strong credit performance, continuing to innovate on products and structures that meet evolving investor needs, and reengaging banks where we continue to have productive discussions in anticipation of sales beginning in the back half of this year. Obviously, we also stand to benefit from improvements in loan sales pricing and deposit costs should the rate environment turn in our favor in line with current expectations. With strong credit performance and growing marketplace investor demand, we're well positioned to resume growth and help more customers pay off their credit card balances, which stand at historically high levels priced at historically high rates. We've already delivered real value for our 5 million members. These are highly sought after customers who tend to be high FICO and high income, but also high users of debt. They are digitally savvy and eager to take steps to improve their financial outcomes. And our personal loans are a tool they turn to for the tangible value we provide, with over 80% saying our products help them keep more of what they earn, and nearly 90% saying that Lending Club has helped them successfully manage their overall debt burden. Strategically, we plan to use our industry-leading capabilities to efficiently acquire more of these customers, use our mobile app to engage them and keep them coming back, and leverage our product innovation engine to build a lifetime lending relationship that serves their needs. Our Q2 results illustrate the promise of this strategy. We grew originations 10% this past quarter while maintaining flat unit acquisition costs, which are already at industry-leading levels. When loan sales pricing improves more materially, we'll be able to restart our inactive marketing channels to drive incremental originations growth. We're also benefiting from investments in efficiency elsewhere in the organization. Within servicing operations, for example, we've upgraded our systems, increased automation, and implemented digital servicing tools. As a result, we've lowered the operational cost to originate a personal loan by one third in the past year. Our mobile app provides a powerful platform for engaging members after acquisition. Following a limited release earlier in the year, We began marketing the app for personal loan customers more broadly this quarter, leading to a doubling of first-time downloads at the end of the quarter and a roughly 20% month-over-month increase in app users in June. With self-service functionality in the first phase of our comprehensive debt monitoring and management solution embedded in the app, mobile users are finding more reasons to engage with us. In fact, they're logging in about 20% to 25% more often than web-only users, providing a growing, active, and engaged audience for communicating new offers and services. We're also seeing early signs of success in the app's ability to drive positive payment outcomes and to reengage inactive members. As members engage with us more frequently, we can do more for them and build what we call a lifetime lending relationship. Today, about half of our members return for a second loan through an expedited process. And this repeat behavior is important for several reasons. First, they return to us at near zero acquisition costs. Second, their credit performance is up to 20% better than new borrowers with a similar profile. Third, they have high satisfaction rates. In fact, our NPS score for repeat members grows after their second loan and keeps climbing as the relationship builds. And fourth, their growing satisfaction leads 83% of our members to want to do more with us which we're happy to accommodate. Doing more starts with meeting more of their lending needs through innovations like Top Up, which allow existing members to obtain additional funds while maintaining one monthly payment. Early results are promising with strong response and take rates and a 93% satisfaction rate, which exceeds that of our flagship personal loan product. Clean Sweep, our new line of credit product that allows members to easily refinance newly accumulated debt and pay it back in installment plans is equally promising, with early results above expectations and satisfaction at 90%. Products like these, which are uniquely enabled by our bank, not only meet new use cases, but they form the basis of a lifetime lending relationship that can keep our members coming back. To enable us to offer these products to the right customer at the right time, we recently launched a preapproval platform. We're already seeing benefits from the platform with higher offer and response rates and improved credit profiles. This pre-approval infrastructure can be extended outside of Lending Club, and we see it as another potential opportunity for Originations growth over the longer term. To test this thesis, we're currently piloting the solution with a partner. Before I turn it over to Drew, I'll conclude by saying that the company is well positioned for continued success. The historically rapid increase in rates and the resulting downstream impacts on the financial services sector has made for an extremely difficult operating environment these past two years. I'm incredibly proud of how the Lending Club team has risen to the challenge. As this quarter's results show, we have calibrated the business to this new environment and further streamlined and focused our operations, all of which will deliver outsized benefits as conditions improve. With a historic opportunity in front of us, I look forward to building on our momentum in the quarters ahead. With that, I'll turn it over to you, Drew.

Thanks, Scott. And I'll add that for the two years I've been here, I've been extremely impressed with how the Lending Club team has transformed the business and prepared for the future. With that, let me walk through the details of our second quarter results, starting with originations. As Scott mentioned, we originated over $1.8 billion which is a 10% increase over the prior quarter and above the high end of our guidance range. The growth was driven by continued product innovation while maintaining tight underwriting standards. On page 10, you can see the origination volumes of the four funding programs, which we described in detail on the prior page. The issuance in the quarter was once again led by our very successful structured certificate program, which accounted for $885 million of originations. We also sold $270 million of hold loans through the marketplace, accumulated $320 million for our held for sale extended seasoning program to meet future marketplace investor demand for season loans, and we retained $335 million in our held for investment portfolio. This quarter, you again saw us increase the amount of hold loans retained on our balance sheet to 36% of total originations, up from 32% in the prior quarter. This was comprised of the held for investment in extended seasoning programs. This level of retention will allow us to keep hold loans on the balance sheet roughly flat through the remainder of the year, while maintaining the option to sell loans out of our extended seasoning portfolio at higher prices. Now let's move on to pre-provision net revenue, or PPNR, which is total net revenue less non-interest expense. Mike Nygren, PPNR was $55 million for the quarter and came in above our guidance. These results were driven by strong execution, as well as a few unique items that I'll call out as I break down revenue and expense. Mike Nygren, Total revenue for the quarter was $187 million up from $181 million in the prior quarter. Let's go into the two components of revenue, starting with non-interest income. Non-interest income was $59 million in the quarter, up marginally from the prior quarter. As I mentioned earlier, the improvement was primarily driven by higher marketplace loan originations and improved average loan sales pricing throughout the quarter, partially offset by fair value adjustments on loans held for sale. I'd like to pause here to call out an important dynamic on how the yield on held for sale loans will flow through our income statements. These loans will generate a constant yield over the life of the loan, assuming no change in cash flow assumptions. The revenue impact from held for sale loans will be reflected in both net interest income and non-interest income in the following way. The coupon will come through interest income, while the credit losses and changes in fair value, including any upfront discount, will come through the net fair value adjustments line within non-interest income. As the portfolio grows, this will result in higher net interest income, partially offset by incremental fair value adjustments. So going forward, the driver of net fair value adjustments will include the above impacts, in addition to the day one sales pricing on marketplace loans. Now let's move on to net interest income, which was $129 million in the quarter, up from $123 million in the prior quarter. The increase was primarily driven by growth in our interest earning assets due to the growth in securities related to the structured certificates program, as well as growth in the extended seasoning portfolio. Net interest income also benefited from one large structured certificate transaction that was accumulated over the quarter and generated approximately $2 million of incremental revenue from the sale. Risk adjusted revenue, which is net revenue less provision for credit losses, increased to $152 million this quarter from $149 million in the prior quarter. We introduced this metric two quarters back, as we believe it illustrates the lower risk nature of the assets we have been using to grow the balance sheet. On slide 12, you can see our net interest margin was flat this quarter at 5.75%. which is a result of improving yields on our interest earning assets, offsetting the slowing pace of increase in our funding costs. We expect the net interest margin to be flat to slightly down in the third quarter, and then begin to improve on a lag when the Fed lowers interest rates. Now please turn to page 13 of our presentation, which refers to the second component of PPNR, non-interest expense. Non-interest expense was flat to the prior quarter at $132 million. While we did expect expenses to increase when we had our Q1 earnings call, we had some delays in those expense increases and some one-time benefits, most notably in compensation expense, which resulted in approximately $5 million of benefit during the quarter. We were also able to deliver stronger than expected marketing efficiency despite the growth in origination volumes. While we continue to remain disciplined on expenses, we do expect a step up in expenses in the third quarter related to continued volume growth, as well as higher depreciation related to the completion of some of the initiatives you heard Scott discuss earlier. Now let's turn to provision. On page 14, you will see provision for credit losses was $36 million during the quarter, compared to $32 million in the prior quarter. The sequential increase is primarily driven by higher day one CECL provision from higher health or investment loans retained in the period and the impact of higher provision in our CRE portfolio due to one office loan. As a reminder, we discontinued CRE originations at the end of 2022. We still have a legacy portfolio of office loans with under $50 million in balances, which were predominantly originated before we acquired Radius Bank. These office assets are less than 1% of our whole loan portfolio. One office loan has been downgraded, and we took a $5.3 million reserve on the loan. The remaining balance represents an adjusted loan to value of approximately 25% compared to the sales price of the property in 2018. The remaining loans in this portfolio have less than $40 million of balances and are paying according to plan. On page 15, we have updated our personal loan lifetime loss expectations for each of our annual vintages. We are seeing some modest improvement compared to the expectations we provided last quarter, and the marginal ROEs remain very strong. We have used a range for 2023 loss performance where we have seen improvement in early stage results. However, outcomes may vary due to the longer remaining life at the vintage. The 2021 vintage has largely run its course with approximately 10% remaining of the original principal balance, which will rapidly amortize over the next few quarters. We plan to remove this vintage from the disclosure going forward. The last thing I'll note on credit is net charge-offs were down $14 million, or 17% sequentially. Delinquencies on the consumer portfolio have also improved from the previous quarter and are down $9 million sequentially. Now let's move to taxes. Taxes in the quarter were $4.5 million, or 23% of pre-tax income. As I've mentioned before, we will have some variability in the effective tax rate from quarter to quarter, but our long-term tax rate expectation is 27%. That brings us to net income. Net income for the quarter was $15 million, or 13 cents per share, and our tangible book value for common share increased to $10.75. Now let's move on to guidance. For the third quarter, we anticipate originations growing to a range of $1.8 to $1.9 billion, given the success we're seeing from our recent initiatives that are driving efficient, creditworthy borrower acquisition supported by improving marketplace demand. We are also increasing our PPNR guidance range to $40 to $50 million, reflecting stable revenue and modest increases in expenses, which I mentioned earlier. And we plan to continue to deliver positive net income in the third quarter, though not at the level seen in the first half of 2024, as we continue to reinvest in the balance sheet to provide stronger returns in 2025.

With that, we'll open it up for Q&A.

We will now begin our question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We'll pause briefly here as questions are registered. Our first question is from Juliano Bolano with the company Compass Point. Juliano, your line is now open.

Well, congratulations on that. A great quarter. So great to see the progress. Finally starting to accelerate and improve here. So the first thing I was curious about asking you about was in terms of some of the loan sales, I'm sure, and kind of roughly where you're marking the loan book at the moment, kind of post-sale. I'm curious where both those stand at the moment.

Yeah, so as far as the mark, we were we were up about 20 basis points in terms of price quarter over quarter. So, you know, some some improvement in price, which which felt very good. And as far as the loan sales, if you look at the marketplace sales and the disclosure, you can just see we were up about one hundred and ten million in loans that were sold through the marketplace in terms of the amount that actually

were sold quarter over quarter versus put into the health for sale portfolio it was probably it was about 50 million i think down quarter over quarter that sounds good that's very helpful uh then you know last quarter in this quarter you've kind of highlighted some conversations that you're having with uh banks potentially returning to purchasing loans in the marketplace I'm curious, you know, it seems like the commentary is fairly similar about, you know, hoping to see banks return to buy and own some marketplace at some point in the second half. I'm curious, you know, where things stand or if there's any progress with those discussions. And, you know, is that potentially something that could be a 3Q event or is it more likely a 4Q event?

Hey, Giuliano, it's Scott. Yeah, what I'd say is the, you know, pipeline there continues to be, you know, pretty strong. You know, as we said last time, just repeating, you know, we don't expect banks, barring, you know, a more meaningful move downward in rates, 25, 50 base points are going to get there. We don't expect banks to get back to the same levels as they were prior to the rate increase anytime soon. But we do have a A good pipeline of idiosyncratic banks. I'd say the timing is, you know, bank diligence takes a while, so it's hard to kind of place it specifically. That's why I said I think, you know, back half of the year, more likely to be a Q4 event. Is it possible some of them, you know, that we get something in Q3? It's possible, but it's kind of timelines that are, you know, driven by a lot of internal processes, so hard to say specifically. Justin Fields , City of Boulder OSMP, But I'd say we you know continue to feel good about the level of interest there.

Justin Fields , City of Boulder OSMP, sounds very good and then i'd be curious to you're obviously working on, you know some of your new programs and long enough you've got a reference on being running ahead of schedule and performing better than we expected. When you think about those new programs, are they driving any measurable amount of volume at this point, or do you expect them to drive a meaningful amount of volume over the next two quarters, or is that more of a 25 or later event?

Yeah, I would say if you look at our ability to both deliver top end of the range in Q1 and in Q2, and the fact that we're taking guidance up again, that is really largely a result of the new initiatives. We're able to do that, by the way, while keeping acquisition costs flat, right, which is effectively coming from a selection of these new initiatives. So in the scheme of our total, I'd say they're relatively small, but in terms of what's driving the growth at these efficient acquisition costs, they're more meaningful. As we said, I'd say on the top-up program, You know, both programs are running ahead of expectations in terms of customer response rates and take rates to the offer. I'd say Clean Sweep, you know, we want to let that run for quite a bit before we really lean into it because it is a different, you know, it's a revolving line. It's a different credit program. Top Up is pretty much in line with the underwriting for repeat loans, so we've got a lot of confidence there. And then, you know, the other big piece we think that is really encouraging to see is, That you know the satisfaction rates, there are really high right that people with you know we're solving slightly different needs. With how these products are distributed or let me say the use case is more perfectly tuned to the consumer needs so we're really excited to see those. You know those those results come in and i'd say as well as I touched on the call we're starting to see that you know even people who. And people who've downloaded the app who are not maybe marketing to through email because they've opted out of marketing emails are seeing these offers and we're seeing uptick there. So it's a way to re-engage people who, you know, to come back to us. So it's all positive early results.

Hey, and Giuliano, this is Drew again. I just wanted to clarify what I'd said before. We were 50 million lower on whole loan sales, but we're actually, 100 million higher on structured certificate sales, so 50 million up net. The one thing I didn't mention, which I think is also worth mentioning, is we also agreed to sell another 80 million out of our extended seasoning health for sale portfolio that closed in July. So, yeah, that all up, we're actually up 130 million quarter over quarter on loans sold out the door, including the early July sale.

We also drew, you might want to talk. We also have a sale of our small a note. So yeah, that's true. We've done that.

We actually, well, it'll, it'll close here shortly, but we agreed to sell a small amount of our a notes for the first time to someone who was buying from the structured certificate program as well. And while I don't know that that will be an ongoing program for us, it was good just to test the market and ensure that these securities are as liquid as we believe they are. And we sold that just above our current carry. So also encouraging.

That's extremely helpful. You know, very helpful call on me. You know, one thing I was curious about was, you know, you obviously have, you know, a fair amount of capital, you know, looking at your CTC one ratio of 17.9%. Your tier one leverage ratio is coming down a little bit, obviously, kind of as you TAB, Ryan Schuchard, LGO Admissions College of Business Administration and Employment Services. TAB, Ryan Schuchard, LGO Admissions College of Business Administration and Employment Services. TAB, Ryan Schuchard, LGO Admissions College of Business Administration and Employment Services. TAB, Ryan Schuchard, LGO Admissions College of Business Administration and Employment Services.

James Rattling Leafs, yeah I mean as of right now, we still have capital for growth, you know at the bank level from our existing balance sheet, and we have 120 million or so. James Rattling Leafs, of cash sitting at the old code that we can deploy down to the bank to further expand the balance sheet, so you know there's maybe in the distant future, you know selling the a notes would make sense to make room on the balance sheet. James Rattling Leafs, But for now, and we may. You know, there's also structures where, at origination, we may just sell the A note and the residual at the same time through the structured certificate program. But as of right now, we like the asset on our balance sheet. We like the 20% risk weighting. It's providing good returns. And so, you know, we still plan to originate and keep that on balance sheet and grow the balance sheet.

That's very helpful. I think Monopolo has more of a, more of my fair share of the Q&A. So I appreciate the time, and I will jump back into the Q&A.

Our next question is from Vincent Kentik with the company BTIG. Vincent, your line is now open.

Hey, good afternoon. Thanks for taking my questions. And I apologize in advance for the background noise. I wanted to talk about the change in the environment. So two points. First, and you kind of highlighted this in your slide deck about how your product compares against the credit cards and so i'm wondering if you could talk about um your consumer engagement and how loan demand has changed um as credit card rates have been uh continue to increase if you're able to add more price to the consumer so that's point one and then second question kind of on the environment as well but um if you could talk about how your investor uh investor partner conversations have changed she highlighted the banks i'm just wondering if there's um

of any change any additional appetite broadly and what might be driving that uh just appreciate it thank you yeah so i guess maybe start on the investor side as as we indicated you know as you're seeing in the sales prices right it's it's incremental but it's a steadily quarter by quarter as we've shown the consistency of the credit performance and the results and we've built the pipeline for demand and structured certificates and in whole loans we're You know, we're definitely seeing upward pressure in a good way on the order book, meaning we got more people talking to us about purchases, you know, including overall a longer time horizon. And it's one of the reasons we got the confidence in building the held for sale portfolio is certainly a couple of the new potential buyers we're talking to are looking to, you know, make bulk purchases out of that portfolio. On the consumer side, you know, the interesting thing there is we'll do some research. This will be something we'll release probably later in the year. But we did some of our own research with consumers. And, you know, half of all consumers are roughly are carrying a credit card balance. And interestingly, it's the same percentage of consumers. They don't know the interest rates on their cards. And then of the 50% who say they do know the interest rate on their cards, They actually don't. They're wrong because they don't know that card rates have gone up by 500 basis points since the Fed started moving. For those of you on the call, most of you probably don't carry a balance, but I challenge you, go try to find your credit card interest rate and look how difficult it is. They don't make it easy to find for a reason. What we see is that, you know, for higher credit quality consumers, there's still price sensitivity at the top of the range. So the highest, you know, where we're playing with the majority of our portfolio right now, higher credit quality consumers, you know, we have passed on, call it, I don't know, 280-ish basis points or so to the consumer, but they really don't know that their cards have moved. So said another way, the saving spread that we're currently providing is, is amongst the largest we've ever delivered in our history. It's just if they don't know it, if they don't know that their cards have moved to, you know, it's an average of 21%. But, you know, I looked in my own card portfolio and I have a card in my rewards card that's a 34% interest rate, right? So I didn't know that myself. So people just don't know it. So we're seeing strong demand just because the balances are strong. I'd say we think we have an opportunity through education to get take rate up. by saying, hey, you're not only carrying a balance, you're paying a lot more than you currently think. So if we're offering you a loan at, call it, 15%, it's actually well below what you're paying on your card. So that's a future opportunity. But overall, I'd say the constraint right now is not really consumer demand, because the balances are large that are out there.

OK, that's really helpful. And maybe to tie in your discussion about the apps,

how do you um i guess educate the customer about that and make the customer know how much savings they can get um you talked about the apps you talked about higher marketing and just curious if there's anything in particular because it does seem like there's a huge opportunity with those savings there yeah as we said you know the big thing we're trying to do is really kind of push up loan sales pricing because as we push up loan sales pricing it allows us to unlock more marketing channels we're you know, we've got a number of inactive channels because they're on the higher side. And when we're selling at a discount, it's just not economical, which is why we're leaning into our efficiency initiatives, both on, you know, our operations side, but also marketing and product. But as, you know, as our performance continues to reinforce investors' confidence as the rate environment moves in our favor, As we get more buyers and, you know, have a bit more scarcity and the availability of the asset, we expect prices to continue to move up. And as prices move up, we'll open up more marketing channels. And then within the marketing we're doing, you know, part of, you know, what our plan is for Debt IQ is to just make visible. I mean, it's a bit of a tragedy that the lack of consumer education goes beyond the APR. I mean, people also Not everybody even understands that when they're making the minimum payment, they're going to be paying their credit card debt for 20 years, right? That that's going to be a longstanding payment in their life. So part of our goal with DebtIQ is to really get this information in front of consumers so that they're aware of what they're paying, they're aware of the size of their balances, and they're able to easily take action through things like Clean Sweep to take care of it.

Thank you. And then last question, just wanted to clarify for Drew. So the PB&R guy for the third quarter, $40 to $50 million, I guess, versus the second quarter, $54 million. So you would subtract $5 million from the second quarter to get to a run rate for the third quarter.

And then, so is that right? I mean, is this a good run rate to look at going forward when you're thinking about sort of the third quarter to get building off points?

You're breaking up a bit there, but I think, you know, so let me sort of say what I think you asked. Yeah, guide for third quarter, 40 to 50 million in PPNR. You know, obviously, I think we're, most all of us now are anticipating rate cuts in the future. Those aren't going to have a substantial benefit given the timing in Q3. Maybe more benefit in Q4, at which point, you know, we'll update our guidance you know, based on kind of where the market's evolving and what we're seeing happening. Okay, great. Thanks so much.

Next question comes from Bill Ryan with the company Seaport Research Partners. Bill, your line is now open.

Good afternoon, Scott and Drew. A couple of questions. First, kind of like on a high level, but And I think you kind of hit on that a little bit earlier, but in the sense of your volume, we got a little bit of a bump in origination expectations from Q2 to Q3. But as you're looking at your business, what do you kind of highlight as the binding constraints for more meaningful increases in volume? I think you kind of alluded to moving into higher cost marketing channels, and that would be reflective of improvements in the fair value of what you're receiving. But if you can kind of talk about, you know, if that's the key component impediment to higher volume and if there's any others.

Yeah, I mean, Bill, I'd say that's it. You got it. You know, the fact that we got prices up, call it roughly 20 basis points this quarter on the sold volume, that's great news. But versus where we were three years ago, it's still down more than 300. And, you know, that's That margin is effectively what fuels our ability to open up some of these other marketing channels. That's really why we've been focusing on these key levers around driving up returns to investors by keeping our delinquencies low so that they're willing to pay more, and then working to bring in a broader set of buyers. Those are ways we can get the price up without the benefit of the Fed. you know, when the Fed moves in our favor, which is looking increasingly likely, that'll that'll kind of accelerate those efforts over time. So you but you got the you got the big picture. OK, so in the way you see it in our numbers, Bill, is if you look at what we're running out for marketing efficiency on the face of the PNL, right, we're called what, 25, 30 percent below where we were when we were running at you know, full volume on all channels open.

Okay. And then I know you may not want to answer the next question, but it kind of relates to the bank buyers that may be reentering or entering the market in the fourth quarter. But as far as loan pricing, obviously banks have historically been the higher bidders given their lower costs of funds. How material Could that be to the fair value marks that you're experiencing today? I mean, obviously, you noted there was a little bit of improvement quarter over quarter, but if they actually enter the market, what kind of change in the fair value marks might you see? And as a percentage of your marketplace originations, how material might these things become?

Yeah, I mean, I think for, you know, if they come back in Q4, as we're hoping, starting to anticipate, Mike SanClements, You know, we do expect we'll get some price lift out of that. Mike SanClements, As far as the fair value marks are concerned, there's a there's a number of dynamics to go into that, but certainly them bank bank buyers coming into the mix that that is driving price and therefore the fair value marks will create some upward pressure. But we don't take the highest price that we're getting to mark the book. We actually take closer to the lowest price we're getting to mark the book. And so you're not going to see a large, I wouldn't expect you to see a large movement up in the fair value marks, but in the effective price that we're getting and revenue, that should definitely be constructive.

Okay. And then just part of that question was how material might they become as a part of your marketplace or your sales?

I mean, I think in Q4 we're talking about hopefully bringing in the first few banks into the first couple banks into the mix, which will be constructive, but I think 2025 is probably where we would see, you know, if all goes well, where we would see more lift coming from the banks.

Okay. Thank you for taking my questions.

Next question comes from David. with the company Wedbush Securities. David, your line is now open.

Thanks. The first question, I want to ask about bigger picture, you know, trends in loan performance of prime borrowers or the upper end of your borrowers versus near prime or the lower end of your borrowers. Any difference in the credit performance of these cohorts?

Let's say, you know, you can see in our disclosures that we're seeing stable to improving performance across all segments. You know, the lower, let's call it the higher yielding, lower FICO band segments experience the most deterioration and therefore also experiencing the most recovery. We're seeing returns there be really, really strong. um but i'd say we're you know across the board we're seeing kind of you know when i mentioned that we feel like we've really calibrated the environment we're seeing pretty consistent stable behavior across the board now right and they uh follow up kind of yeah i was gonna say just more broadly outside of us yeah the the broader signals on the consumer you know they're they're There's a lot to point out to feel good about, right? Wage growth, outpacing inflation, and fairly manageable debt service burdens and all the rest. But no, we still have a very tight underwriting box. Given the cost of funds environment and given our desire to deliver outside yields, we're still underwriting at a pretty meaningful reduction versus where we were before.

And is it fair to say we've hit a point in the macro environment, kind of an inflection where you're able to convert borrowers due to the improving macro backdrop? Is that fair to say based on kind of the origination trends that we're seeing?

I don't know that I would say that the macro is – Thriving a big change beyond the fact that, you know, consumers have been accumulating balances in cards. Right. And I think you're seeing that outside of us again. I think the pace of that is slowing, which I think is a good sign for consumers. And, you know, we're seeing more, let's say in general, we're feeling like consumers have adjusted as well. Consumers have calibrated themselves to the environment and we're seeing less of the let's call it more caught off guard by how their cost of living has been growing. And consumers feel like they've adjusted to the environment. Our box is adjusted to this environment. And, you know, that's giving us a lot of confidence in what we're booking. And as you can see, our lifetime loss expectations are either stable or actually coming down since the last time we talked.

Great, Frank. Thanks for that. And then last one for me is As it relates to, you know, potential Fed rate cuts, all else being equal, are you able to, you know, opine on, you know, how much of a benefit to loan pricing or gain on sale margins could occur for each 25 basis point rate cut?

Yeah. I mean, there's two ways it benefits us, right? First is going to be deposit costs, which you saw this quarter, you know, our pace of increase has slowed. And so we would expect, depending on our growth aspirations, right, if we're going to balance sheet faster, we're going to want more deposits. But over time, as rates come down, you know, applying 25 basis points across our entire deposit base, that's going to be a pretty meaningful good guy when we're able to move. And then on the investor side of the house, you know, there's some for the asset managers purchasing. These are kind of fairly formulaic deals based on the forward curve. So as TAB, Mark McIntyre:" rate expectations solidify and come down we're going to end again on a lag, because these are multi quarter deals but we'll we'll start to see that come through in pricing there. TAB, Mark McIntyre:" agree. TAB, Mark McIntyre:" And pretty directly right yeah.

TAB, Mark McIntyre:" Great thanks very much.

Next question comes from Reggie Smith with the company JPMorgan. Reggie, your line is now open.

Thank you. I appreciate all the disclosure. The slide will show, I think, the four different funding options, obviously the pros and cons of each. I'm curious, longer term, how do you think about the optimal mix of funding? And then also kind of thinking about your leverage ratio, Where do you think that kind of settles out longer term?

Yeah, listen, I think they all have different characteristics on how they hit the balance sheet and if they hit the balance sheet and the income statement. And obviously, in this environment, we've leaned into the structured certificates where, you know, we're getting the lower risk weighting. We're getting the upfront gain that's been very valuable to us at a time where maybe the rest of the marketplace has been falling back. Ideally, over time, we would like to get more loans into Helper Investment where we're going to earn the longest returns for the business three times where we sell it. But at the same time, we want to keep capacity for the marketplace and make sure we're keeping our partners and selling effectively through that. The one place that is relatively new for us is the extended seasoning in the Helper sale. And I think that's where you will see the most optionality in terms of how we use the balance sheet. Because while prices are low right now, we're seasoning those loans, we're not taking the upfront CECL and we're getting an effective return. But as prices improve, we're going to have optionality to sell that and take the gain and then create room on the balance sheet for more loans and A notes to put on in the future. TAB, Mark McIntyre, I think it will read you, I think it will depend a bit on the environment and where we see it going but we're going to be optimizing across the four mechanisms for the economics at that point in time and long term. TAB, Mark McIntyre, As far as the leverage. TAB, Mark McIntyre, leverage ratio. TAB, Mark McIntyre, Go ahead, Richard. No, you go ahead. Leverage ratio, I'll follow up. Go ahead. I wasn't going to tell you anything. No, I'm just kidding. We still have room to expand the balance sheet, and you can see that as our leverage ratio is coming down. We haven't disclosed a target because we're going to continue to use our stress testing capabilities and the target mix of the balance sheet longer term to have that leverage target evolve, but Just know right now between room on the bank balance sheet and the cash of the whole code, we have room to continue expanding the balance sheet and putting more assets on the balance sheet.

And then just kind of following up on the extended seasoning, just so we understand, are those the entities buying those? Would those have been the same entities that would have bought full loans previously? And if so, what do you think it will take to kind of get them back into that bucket? And I guess an extension of that is, to your knowledge, how are these portfolios performing relative to your investors' benchmarks? My guess is that they're probably doing a little bit better than that the investors were expecting. Maybe I'm off with that.

Yeah, no, I think let let me let me I might answer your question a little bit differently. Just so first of all, let's talk about how investors are doing with the loans they've been purchasing recently. Keep in mind, most of our TAB, Mark McIntyre, purchases this year have actually been through the structured certificate program and I think it's been very successful, I think the you know the residuals are performing very well meeting and exceeding expectations and that's why we're seeing demand come through that Program. TAB, Mark McIntyre, And we expect that to continue on on the extended seasoning, you know these are essentially the same loans, we put on balance sheet, sometimes the the. The mixes in the grades that we're putting on are a little bit different based on where we think investor demand is going to be in the returns we're seeing. We've done sales to whole loan buyers that have bought from us previously. We've done a sale to a new buyer. And we've actually done a sale using extended seizing loans through the structured certificate program as well. So it's really just on balance sheet loan inventory. where we can have more control of when the sale happens and we can provide more scale in one cell than we can if we're accumulating from origination for the deal. So if someone comes to us and says, hey, I want to buy 300 million because all of a sudden I have investor capital and I need to put it for use, we'd say, great. The price on that's going to be this versus the price if you want us to accumulate is this. And we can have a different conversation on the dynamics around

price and size even it's already available on the balance sheet for sale so more flexibility for us more flexibility for buyers and if i could sneak one last question in um you kind of alluded to this but i was just curious uh with some of your agreement are there any that you agreed to where the pricing is expiring or up for renegotiation so for example for instance you know maybe you had agreed four years type relationship at a certain pricing that may be rolling off in a few months. Is that happening with any of your structures?

Yeah, normally when we set up these structured certificate programs with buyers, we have some buyers where we're going one quarter in advance, meaning you're going to do three purchases with us and we set a formula on the spread at which those will price. So the price isn't locked in, but the pricing formula is locked in for the next quarter. That's pretty typical. We have some arrangements, which I would call the minority of the sales we've been making that have been extended out for a couple of quarters on a more complex formula that gives us incentives to raise prices and depends on where market rates are. So there are different programs out there, but As we said before, we're not looking to lock in all our deals for the next year because the pricing isn't, you know, still not ideal from our perspective where we're at. And I think there's opportunity to raise price as we go forward.

Understood. Thank you.

Next question comes from Brad Capuzzi with the company Piper Sandler. Brad, your line is not open.

I can definitely congrats on a great quarter. Um, most of my questions have been answered, but just wanted to ask a quick one. You know, I know you mentioned a lot of the origination growth is driven by, you know, loan pricing and the capacity to keep originating. Um, you know, how are you feeling about the consumer? I know credit metrics are improving, but what factors, um, does macro uncertainty and the health of the consumer have to do with the willingness to increase originations?

Yeah, I mean, as we mentioned, we're keeping a, I think we said last call, we feel good. This hasn't been a quarter or two. We've had multiple quarters in a row of consumer performance coming in at or kind of ahead of expectations. So we feel quite good about what we're booking. We are still optimizing for returns for investors, right? And still trying to, you know, we're delivering Just in terms of straight IRRs on the asset, we're delivering the highest returns we've ever delivered, really, outside of normal periods like the post-COVID period, but on a consistent basis. And so we're keeping a conservative box, not because we've got a lot of concerns about the outlook so much as we just want to make sure that we're driving returns up to investors so that we can get it back in terms of pricing.

And then, you know, metrics.

Go ahead. Sorry. Yeah, just the last one for me on a, you know, just from a competitive standpoint, have you seen competitors pull back or push for growth? And what do you see APRs trending in the space? Thanks.

Yeah, I mean, the space remains pretty competitive and dynamic, like always over the 15 plus years we've been doing this. We see new entrants come in and out. We see some irrational behavior. We've seen people dropping coupons, going out in terms, changing where they operate on the spectrum. I'd say, as usual, we kind of maintain the course and aren't chasing any of that. because, you know, over time it comes home to roost. So I would say, yes, we're seeing change, but it's the normal change we see in the space, which is new entrants coming in and or people who are trying to achieve their own objectives, changing their behaviors, not necessarily in response to macro or consumer.

Thank you. That's it for me.

Thank you. Our next question comes from Tim Switzer with the company KPW. Tim, your line is now open.

Hey, good afternoon. Thanks for taking my questions. One of the things I wanted to ask about, you've touched on the credit a few times here, but I believe if I remember, your guys' guidance last quarter was for net charge-off dollars to decline, but the rate to continue increasing. And the net charge-off rate improved, you know, fairly meaningfully this quarter. Were trends just that much better than you expected, or what was happening there? And what are your expectations, I guess, going forward? Is it still net charge-up dollars to decline?

Yeah, I would say it improved more than we expected, and you saw that also in the vintage disclosures that we put out there. So, you know, I think we've seen pretty rapid improvement. dollar charge-offs will continue to improve, might be a bit more modest. The charge-off rate probably could go a bit in either direction at this point, but I think we should continue to see dollar charge-off improvements as we go into the next quarter on the health care investment portfolio.

Great. Okay. And if I could have one more quick one, and I know we're getting to the end here, but you guys mentioned a step-up in exceeding And I think your comment was along the lines of there's a $5 million benefit this quarter relative to your expectations. So should we expect a $5 million increase quarter over quarter? And is all that on the depreciation line or are there some other areas too?

Not all on the depreciation line, although that will be some of it. You know, keep in mind if originations go up, marketing spend will go up. So you're going to, that's, you know, included in the expenses going up. uh guidance that that we're giving there um you know without without giving you a number i mean you're probably not in the wrong ballpark there in terms of where where the numbers are going um but you know as i predicted expense increases this quarter and was wrong so there is some volatility in the line in terms of how it's how it's going to come through okay yeah totally understandable that's all for me thank you guys

And now I'd like to turn the call back over to Artem Naliveko for additional questions.

Thank you, Jayla. So we had some additional questions that were submitted via email, but I actually think we covered off on all the questions in the analyst Q&A. So with that, we'll wrap up our second quarter earnings conference call. Thank you for joining us today. And if you have any questions, please email us at ir.lendingclub.com. Thank you.

That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.