Hello, everyone. Thank you for attending today's LendingClub's 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.

[Operator Instructions] I would now like to pass the conference over to Artem Nalivayko, Vice President of Finance with LendingClub. 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 LaBenne, 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 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.

Our remarks today also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision 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..

th`e 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 is 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 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 LendingClub 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..

Thanks, Scott, and hello, everyone. Let me walk you through the details of the results. I'll start with originations in the second quarter. Originations were $2 billion compared to $2.3 billion in the prior quarter and $3.8 billion in the second quarter of 2022.

Of the $2 billion in originations, marketplace sold loans were $1.4 billion, up $67 million compared to the previous quarter. As Scott mentioned, we've had early success in facilitating marketplace sales through the structured certificates. We issued approximately $180 million in the quarter, which helped drive growth in marketplace sales.

Loan retention came back within our expected 30% to 40% range to $657 million, down from $1 billion in the first quarter as we normalized retention levels in line with our available earnings. Now let's move on to pre-provision net revenue, or PPNR.

PPNR was $81 million for the quarter compared to $88 million in the prior quarter and $121 million in the second quarter of 2022.

The outperformance compared to our guidance was driven by a $3 million revenue gain from a pending portfolio sale that was completed in early July, and a $6 million sequential improvement in expenses, primarily due to our previous streamlining of operations as well as proactive expense management in marketing and other areas.

As Scott mentioned, we are seeing increasing investor demand for personal loans that have been seasoned, and we are originating a portfolio of approximately $250 million in loans for this purpose in the third quarter. These loans will come on the books at fair value with discount that approximates our observed whole loan sale prices.

Total revenue for the quarter was $232 million compared to $246 million in the prior quarter and $330 million in the same quarter of the prior year. Let's dig into the two components of our revenue. You can find revenue details starting at Page 9 of our earnings presentation.

First, net interest income was a $147 million, flat sequentially and up 26% over the prior year. Our net interest margin was 7.1% compared to 7.5% in the prior quarter and 8.5% in the prior year.

The change was primarily due to higher average cash balances as well as increased cost of interest bearing deposits, which was partially offset by a higher yield on unsecured consumer loans. Marketplace revenue was $83 million in the quarter compared to $96 million in the prior quarter and $206 million in the same quarter of the prior year.

The change in marketplace revenue was primarily due to lower loan pricing, as well as a non-recurring $9 million benefit in the first quarter. Now, please turn to Page 13 of our earnings presentation where I'll discuss expenses.

Non-interest expense of $151 million in the quarter compared favorably to $157 million in the prior quarter and $209 million in the same quarter last year. The sequential reduction was primarily due to lower variable expenses in marketing and operations. Comp and benefits also improved as a result of slowing our pace of hiring across the company.

Our expense run rate fully reflects the $30 million annual cost savings target we had communicated at the beginning of the year in which we are on track to exceed. Now let's turn to provision. Provision for credit losses was $67 million for the quarter compared to $71 million in both the prior quarter and the second quarter of 2022.

The sequential decrease was primarily the result of lower day one CECL due to fewer loans retained in the quarter, partially offset by more accretion on a larger back book of loans and an increase in reserves on the 2021 and 2022 vintage.

As you will see on Page 15 of our earnings presentation, we have modestly increased our range of estimates for the expected net lifetime loss rates on the 2021 and 2022 vintage, which reflects the impacts of inflationary pressure on borrowers.

While it's still early to judge the ultimate performance of the 2023 vintage, our initial observations are that it is now showing stable performance, benefiting from the tightened underwriting we've implemented over the last several quarters.

On Page 16, we have updated our marginal return on equity on personal loans to a range of 25% to 30% to reflect a lower net interest margin due to higher funding costs and higher quality mix.

In addition, we thought it would be helpful to share the marginal returns on our structured certificates, which generated a marginal ROE of approximately 20% and using our current balance sheet leverage.

It is also important to note that the risk weighting on these securities is 20%, which means that these returns are even more attractive on a risk-adjusted basis. Now, let's move to taxes. Taxes in the quarter were $4.7 million, or 32% of pre-tax income.

As I mentioned in the last quarter, we will have some variability in the effective rate from quarter to quarter. Our effective tax rate is 27% year-to-date, and we continue to expect that to be in line with our long-term tax rate. Now, let me touch on the balance sheet. Few things to note here.

Total assets were $8.3 billion for the quarter compared to $8.8 billion at the end of the previous quarter. The decrease was primarily due to lower cash balances as a result of the planned maturity of brokered deposits. Our securities portfolio grew to $524 million in the quarter.

The increase of $143 million primarily reflects growth in our structured certificate program. As I mentioned earlier, we retained the senior tranche of the security and hold it on our balance sheet. In addition to the senior tranche, we also hold a 5% whole loan security as required by Dodd Frank.

You will see the securities portfolio continuing to grow as the program scales. Loans held for sale at fair value were $250 million at the end of the quarter as we moved approximately $200 million in held for investment loans into held for sale for the transaction that was completed in early July, which I spoke to earlier.

As I mentioned, we are seeing increased demand for these types of seasoned loans. We are planning on growing this program and completing more transactions in the future. Our consolidated capital levels remained strong with 12.4% Tier 1 leverage and 16.1% CET1.

Our available liquidity remains healthy with $1.2 billion of cash on hand and 85% of our deposits are insured. Additionally, we continue to maintain substantial amounts of unused borrowing capacity at both the Federal Home Loan Bank and Federal Reserve Bank, with a total of approximately $4 billion at June 30.

Now let's move to our guidance for the third quarter. As Scott mentioned, we expect bank demand to be constricted with marketplace volume going primarily to asset managers at lower prices. This is informing our outlook. For the third quarter, we expect originations between $1.4 billion and $1.7 billion.

And we expect PPNR to range from $40 million to $50 million, which includes up to $10 million of one-time benefit related to recouping volume-based purchase incentives from the bank investor channel.

It is our objective to remain profitable for the quarter on a GAAP basis by continuing to execute with discipline on expenses, and reducing our held for investment loan retention. Our guidance for the quarter assumes 30% to 40% balance sheet retention, which includes both held for investment and held for sale originations.

Putting it all together, we are planning to maintain the size of our balance sheet in third quarter through a combination of held for investment whole loans, growing the structured certificates program, and held for sale extended seasoning.

Held for investment loans will reflect the upfront CECL provisioning of structured certificates, and held for sale loans will be under fair value accounting.

We continue to diversify our balance sheet through these new structures and programs, which will enable us to earn attractive recurring revenue via interest income while also helping to facilitate marketplace sales.

We believe that a recovery in the marketplace will take longer than initially expected given the continued pressure on banks and aggressively priced secondary loan sales. While we're not giving fourth quarter guidance at this time, we expect these pressures to continue at least for the remainder of the year.

But regardless of the market conditions, we have a resilient business, and we will remain focused on profitability versus growth. As we look further ahead, there's a massive opportunity in front of us. We are well positioned to accelerate quickly as conditions improve.

In the meantime, we will continue to execute with discipline, innovate on our offerings, and leverage our strategic advantages as a bank to evolve the marketplace. With that, we'll open it up for Q&A..

[Operator Instructions] Our first question comes from Bill Ryan with Seaport Research Partners. Please proceed..

Good afternoon. Thanks for taking my questions. First question is just on your origination volume. I mean, kind of looking at it, you're within guidance this last quarter.

And looking at it year-over-year, it just seems like you're either tightening up on credit again right now because the volume of -- range that you're giving relative to a year ago, looks like it's going to be a little bit softer on a year-over-year comp basis, or are you just kind of originating based on what you see the investor demand is right now and then what you can put on the balance sheet?.

Hey, Bill. This is Scott. Yes, it's really the latter, which is basically with the impact of bank purchases. As we mentioned in the prepared remarks, it's really -- we're originating for the available investor demand economics that we find acceptable. So, we're -- it's not a credit story.

We are, of course, continuing as always to manage credit, but origination volumes are really targeted to demand at the prices that we're willing to take..

Okay. And a follow-up question just on the NIM. We....

And I'm sorry, Bill. Just....

Yes..

Just stating the obvious, the TAM right now is enormous. I mean, we touched on it in the remarks, but, credit card interest rates have moved up yet again. They're currently at 20.7%, the highest they've ever been and it's over $1 trillion in assets there. So, we are -- this is not about borrower demand..

Okay. And just to follow-up on the NIM outlook. You guided last quarter that it would be down talking about the structured certificates buildup of liquidity on the balance sheet.

Sort of looking forward, are we getting close to a bottom here, or do you see potentially a little bit further margin compression from here?.

Hey, Bill. It's Drew. First of all, exactly correct on the decrease from Q1 -- in NIM from Q1 and Q2, about half of that decrease was the buildup in cash.

Going forward, we'll continue to have, I think, more modest pressure on NIM downward for a quarter or two, but I would say it does depend on, if the Fed does anything else in the future and kind of the competitive nature of the deposit market and if that evolves in any way.

But I think we're -- if those two things remain stable, then I think we're close to the bottom on NIM, little bit further to go..

Okay. Thanks..

Our next question comes from Reggie Smith with JPMorgan. Please proceed..

Good evening, and thanks for taking the question. I guess a follow-up to Bill's question earlier. So, it sounds like, like you said, the volume or rather the demand for loans is still high. And just kind of looking across the landscape, it feels as though most personal loan issuers are kind of pulling back now.

So my question is, with that dynamic, why aren't you able or maybe you are able to charge more either APR or origination fee? Like, what's the sensitivity? Because it would seem that with a smaller origination basis, you could probably squeeze in pricing out.

What am I missing there?.

Yeah. Hey, Reggie. So, I'll try to touch on this. It really depends on what segment of the market you're talking about.

So, in, let's call it, the near prime portion of the portfolio where the competition is non-bank lenders, that includes fintech, but also specialty finance companies, whose cost of funds is moving and locked up with the forward curve, we are able to pass the price on, and indeed, we've done that already.

So, the pricing on our near prime portfolio that we're -- we don't hold that, but the stuff we're issuing is actually pretty close to the amount that the Fed has already moved. But in the prime space, we've moved up credit quality, given the environment we're in.

And given the outlook, we've moved most of our origination upmarket, both for what we hold, but also what we sell, because that's where the investor interest is highest right now.

We're competing with banks, right? And so, you can think about our ability to move prices corresponding somewhat to bank betas on their deposit, right? Banks are moving as they're realizing their own cost of funding going up, that lags, right? And so, pricing, we're always in the market testing in a variety of price points.

So, we are monitoring that through the door of population to make sure we understand what we're getting, and that the population is stable. And so, we are moving as we can. As we see take rates stabilize at higher price points and population stabilize, we move. But because we're competing with banks there, that's just at a different rate..

Got it. Okay. I understand. If I could sneak one more question in. Did you guys suggest or indicate that the decline in kind of marketplace yield -- I think you said it was a $9 million non-recurring benefit in the first quarter.

Does that explain most of that ticked down in your marketplace revenues as a percentage of marketplace volume?.

Well, I'll let Drew answer this specific on the $9 million, but while he's getting his head around that, I'd say, broadly as you're thinking about the marketplace over the course of the last year, what we're seeing pressure on is loan pricing. And so, the driver of that is cost of funding.

In this environment, especially the asset managers, their cost of funding has gone up on the forward curve, so where the Fed is expected to go. That is putting pressure on their cost of funding. That puts pressure on their yield requirements, which gets reflected in the marketplace price.

What we're seeing -- what we mentioned that we think is temporary, but we are seeing right now is in addition to that kind of relative need for higher yield offset higher cost of funding, there's also just a glut of paper in the market right now.

I mean, I'm sure you're seeing the same stuff we are, which is we got one of our former competitors shopping $4.5 billion portfolio of loans. You've got the portfolios coming off of the failed institutions from earlier this year. They're in the market. And then you've got any number of regional banks that are trying to clean up their balance sheet.

So they're solar loans, RV loans, auto loan portfolios all in the market. So, not all in our space, but asset managers have got a lot to choose from right now. And, yes, good news, capital is forming and is rising to the need. But I'd say bad news, at least temporarily with this amount of supply, there's further pressure on price.

So that was partially reflected in Q2. And in our outlook for Q3, we're expecting that pressure to actually continue and in fact increase, because the bank buyers with the lower cost of capital are able to pay a higher price than the asset managers, the bank buyers are constricted.

So at least some of that volume is being swapped with kind of lower priced buyers, if you will. But that was the general question. I don't know, Drew, if you got a....

Yes, I forgot what Reggie was asking. No. I'm just kidding. Yes, in terms of the decline in marketplace revenue, Reggie, Q1 to Q2, so the $9 million is part of the answer. And as a reminder, that was because of slower prepayments that we are seeing in the portfolio causing a upward valuation in the servicing asset. That was the primary reason for that.

But on top of that, we are getting lower pricing on loan sales. So that's the other impact in marketplace revenue this quarter. And as we indicated from the comments, we expect that pricing pressure will increase as we get into Q3, which is included in our guidance..

Got it.

And I guess it's -- you kind of alluded to it in your presentation, but even with that, I guess, your pre-provision profit estimate for the quarter -- next quarter, you still expect to remain GAAP -- at least GAAP neutral from an earnings perspective?.

Yes. We're targeting being profitable on a GAAP basis for Q3..

Perfect. Thank you..

Our next question comes from Alexander Villalobos with Jefferies. Please proceed..

Thanks, guys, for taking my question. Just wanted to get a little more sense on the credit side. Saw net charge offs at 4.4%. Just give us kind of like prospects for the next few quarters? And also the ALLL was at 6.4%.

Like, are you guys thinking it might tick up a little bit and then stick around that range? Or -- just to get a sense of how we should think about that. Thank you..

Yes. So, just let me start off again by just reminding everyone how CECL works. So with CECL, for us, we are reserving for the discounted lifetime losses day one. So what -- so as we're seeing the charge off rate go up, we've already anticipated that in terms of the reserve in the ACL that we've taken on balance sheets or provision up to that point.

So -- and then the way that the personal loan product works as it closed an amortizing product is, over the life of each vintage, as principles going down, we will see the charge off rate go up.

So part of the phenomenon that is -- or part of what we're seeing right now with charge offs increasing, it's just the average age of the portfolio increasing as, one, as the '21 and '22 vintages are obviously aging, but on top of that, as we're slowing down originations in the '23 vintage, the average age of that portfolio is going to get even older in subsequent quarters.

So, would expect that charge off rate to keep going up, but we factor that into our provisioning in our ACL..

Perfect. Again, normalization, everyone's going through that. I totally understand. And then I saw you guys did really well on the OpEx side, controlling expenses. Just also wanted to get a sense if we should kind of think about the same level of OpEx for the next few quarters? Just to get a sense on the expense side as well. Thanks..

Yes, sure. Probably the main expense that you could expect to move next quarter is marketing, just because that's a variable expense tied to originations. It does depend how much we put on balance sheet versus sell, but there should be a little bit of a benefit there.

And then, other operating expenses, there might be a little bit of benefit, but we've now realized most of the run rate benefit from the actions we took at the beginning of Q1..

Okay. Awesome. Thanks, guys, and congrats on the quarter..

Thanks, Alex..

Our next question comes from Giuliano Bologna with Compass Point. Please proceed..

I'd be curious, going back to the structured notes, so if I can. In the near term, it's probably somewhat dilutive because you're getting a lower yield on those. And, obviously, as you can kind of lever them up, that will have a benefit.

But I'm curious if you have a sense of how much of the balance sheet you'd like to pivot into those structured certificates over time and how fast that could happen..

Yes. So, I don't think we have a target yet that we want to put out there, but let me say a few things about the program. I think I mentioned in the prepared remarks that we did a $180 million this quarter with our first buyer, we are -- we have several other -- we have a lot of interest and we have several other buyers that are very close.

So I think in the next quarter, that volume will increase and we'll have multiple buyers is our expectation. So, we will use more of the balance sheet for this product going forward. We're obviously, conscious that it creates some NIM dilution.

But I think over time, as we can -- as we think about our targets for capital, this obviously gives us some latitude to maneuver given the lower risk weight and the risk [around the] (ph) nature of the security..

That makes sense. And then just thinking about funding costs, it looks like high-yield savings pricing came up 25-or-so basis points in the last couple of weeks.

Is that a good trajectory for where, at least, the savings and CDs will go in 3Q, or should [indiscernible] a little more beta, obviously, with some rate hikes coming up rolling through into the portfolio?.

Listen, it's a little hard to predict. We have -- given that our balance sheet growth slowed or actually slightly decreased in Q2, and we're planning on being roughly flat for the rest of the year, at least that's our current outlook, we don't need to be as aggressive on deposit pricing in terms of where we sit in the tables.

It doesn't mean we can be uncompetitive either, though. So, we will need to stay somewhat competitive to keep what we have and show a small amount of growth. But I think we're easing -- we're moving down a bit in the rate tables being a little less aggressive on price.

And hopefully that can translate into -- it already has translated into somewhat slower deposit pricing recently. Hopefully, that can continue..

That's very helpful. And this might be jumping a little bit too far ahead into the future, but thinking about this, the structure [indiscernible].

Do you have any sense of -- or there're some discussion last quarter about being able to sell those, maybe you're recognizing gains on the -- on the risk [indiscernible] I'd be curious, what you need to see happen before you start going down after that [indiscernible] or would it have to be growing the balance sheet some more from here? There's a way to kind of do make the balance sheet more efficient..

Yes, sorry.

So you mean selling the [ALLL] (ph) portion we are holding on the balance sheet right now?.

That's right..

That's true. Yes. So listen, I think that's definitely an option for the future. The rate environment does impact -- I think would impact the price if we were actually out there selling them right now. So if the Fed is near done, then the new vintages we put on, it may make sense to sell those and free up space to do more volume on balance sheet.

We'll evaluate that when it happens or if and when it happens. But we aren't actively engaging in that yet. But I think we'll have a lot of flexibility on how to manage that in the future..

Sounds great. Well, thank you for taking my questions, and I will jump back in the queue..

Thank you..

Our next question comes from Tim Switzer with KBW. Please proceed..

Hey. Good evening. I'm on for Mike Perito. Thanks for taking my question..

Yes, hi, Tim..

My first one -- yes. I have one real quick on, you guys have mentioned about the pricing pressure from -- shifting from the bank purchasers to the asset managers. And it looks like the gain on sale margin in the marketplace went from about 5.5% to 5.2%, which is kind of the low that you've reported historically.

Can you help us kind of quantify or give us an idea of how much lower that could go?.

Yes. I mean, it's -- we think that next quarter, we'll probably take this steepest drop. And rather than quote that to you maybe, I think our gain on sale prices, we're expecting to drop probably approximately 200 basis points. So, I think that would directly translate from the 5.2% downward.

So that's going to be a pretty -- that's going to be a decent size hit in terms of the gain on sale that we're getting on those loans as we pivot to asset managers. But that's also factored into our guidance for Q3..

Yes. I'd add, as we mentioned in the prepared remarks, we are still quite actively engaged with bank buyers, both our long-term partners, but also new partners who are looking to join the program, both banks and credit unions. Based on the tenor of those conversations, though, I'd say, they're all in internal management mode for now.

And so that's why we talked about -- we certainly anticipate a return to the platform, but not until they've got some of their own issues addressed..

Okay. Yes, that makes sense. And then on the NII side of things, if you're holding the balance sheet flat, I guess that implies a little bit lower on an average basis compared to Q2.

Can you kind of give us an idea of how NII should trend over the rest of the year? Is it down in Q3, but then maybe flat in Q4?.

Yes, I think it's a couple of things. So, one, the decline in average assets in Q3 is largely going to be from the cash impact that we spoke about before. So -- and then the $200 million in loans we sold will have some impact as well.

So, Q3, we'll have a, I think, a modest dip with the recovery back in Q4 in terms of net interest income, at least the way we see it right now dependent on what the Fed does and other factors..

Okay. That's helpful. That's all for me. Thank you..

Thank you for your questions. [Operator Instructions] There are no further questions waiting. So, I would like to turn the call over to Artem Nalivayko for answers and questions submitted by the email..

All right. Thanks, Sierra. So, Scott and Drew, we do have a few questions here for you that was submitted via email by our shareholders.

So the first question here is, has LendingClub looked into launching any new products with something like better credit card for your members?.

So I touched on this very, very briefly on the calls. We are, in the next quarter, in Q3, going to be launching on a new revolving platform.

The first use case of the revolving platform is going to be enabling an installment line of credit for existing customers who build back up credit card balances or for whom we didn't pay off all their credit card balance in the first-go, and they've demonstrated good payment, and we can go after the rest.

That'll be in combination with this debt management and monitoring dashboard that we're working on to help them see that. That'll be the first use case of the revolve platform.

We also have our purchase finance business that currently has a revolving product that we partner for to distribute that, that we could capture more economics by taking that over long term. 99% of our customers have credit cards. We know what kind of cards they have. We know what they use them for.

So that's certainly something when conditions allow that we would be interested in exploring and we think that our customers would be open to..

Great. Thank you.

And the second question is, would you consider signing any funding agreements or forward flow agreements and announcing these publicly to drive further origination growth?.

Yes, sure. I'll take that one. I mean, first thing I'd note is we sign agreements all the time with our potential -- with our loan buyers. And oftentimes, when we sign those agreements, there's financial incentives attached to them where if a buyer continues making purchases all the way through the agreement, there'll be some type of rebate.

And as you can see from our Q3 guidance, it's possible that one of those rebates is going to come back to us. It's in fact one of the bank buyers -- a couple of bank buyers stopped their purchasing. So, we like to structure deals that way that have a longer-term flow, but also have some financial incentives within them.

In terms of structuring something with long-term committed capital, I think first of all, those difficult -- those agreements are difficult. And in this environment, they're going to be very expensive to set up as well, and you never have a 100% certainty that they would be fulfilled in a much more difficult environment.

So, we're not sure now is the right time just to lock in an extended agreement of economics that might be unattractive to us and our shareholders..

All right. Great. Thanks, Drew. So with that, we will wrap up our second quarter earnings conference call. Thanks for joining us. And if you have any questions, please feel free to email us at ir@lendingclub.com..

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line..