Great. Welcome back, everyone. Thanks for joining us. We're very pleased to have with us here the management of LendingClub. LendingClub was the original online installment marketplace platform, both originating loans and then kind of distributing them to both individual and professional investors. It's since bought a bank and evolved its product and platform, you know, meaningfully, and we'll get into that with the team this afternoon. We've got both Scott Sanborn, the CEO, and Drew LaBenne, the Chief Financial Officer. So with that, Scott and Drew, thanks for being here today.
Yeah, thanks for having us.
All right, good. You know, a key theme at this point, for every company that I've hosted and every panel has been to talk a little bit about what they're seeing in terms of the underlying health of the consumer. I think investors are, maybe "confused" is not the right word, but there's conflicting messages, I guess, is what I would say. If you'd talk a little bit about the underlying health of your customers, you know, and, and, you know, how it has evolved over the last year or two and, you know, and what you think might, you know, be going on, you know, in the coming period?
Yeah. So, you know, we feel great about the, the credit we're issuing and the consumer we're booking. We've seen, you know, several quarters in a row of stable to improving delinquencies, and importantly, those delinquencies are about 40% below-
Mm-hmm
... our fintech competition. That's some-
Right
... information we shared in our earnings materials. And, you know, I think a big driver of that, and I'll talk a little bit about trends we saw and how they've changed for the consumer. You know, a big driver of that is, one, just we've been doing this a long time. We've issued $90 billion in loans to close to 5 million consumers over 17 years, so we've got an enormous amount of data powering dozens of models. And I think we've got a credit culture and a team that is really amongst the best in our space. And so we saw pressure building quite early, and we were early to talk about it and early to react to it, which was, you know, really the impacts of inflation.
Unlike unemployment, which is the typical driver of spikes in unsecured losses, and which kind of affects the 1 or 2% of people that get, you know, pushed into unemployment, inflation affects everybody. And what we started to see way back in 2021 was a pretty dramatic change in behavior of consumers, things like prepayment speeds slowing down dramatically, and savings rates slowing down. So we, you know, we track savings in about half of our customers, and so we saw savings rates, you know, sliding down dramatically, and we said, "We're not comfortable with what we're seeing." Another thing we saw was consumers being caught off guard. So most of our payments are automated, like 98-ish% are fully automated.
We send people a reminder, "Hey, you got your payment coming up." If they don't have the funds, they typically reach out to us and say, "Can we get help?" or whatever. Log in online and request help. What we started to see in 2021 was payments would fail, and we would call people, and they would say, "What? I didn't have enough money in my account? I'm surprised." So our sense was, with all of those things combined, consumers were caught off guard. They hadn't really changed their lifestyle, and because everything got more expensive, rent and gas and, you know, travel, you name it, clothing, they were still driving the same car and going out Friday at the same restaurant, but all of a sudden, there was...
You know, their income was not enough to cover that same set of expenses. So we pulled back, while others were still growing, and, you know, I think got our... You know, adjusted our credit box accordingly. What we're seeing now is, it's our view that consumers, and I think this is supported by some of the commentary outside of lending, is consumers now see it, and they are adjusting their behavior accordingly, right? They are changing the categories in which they spend. You know, I've listened to some of the, you know, casual restaurant CEOs saying, "Hey, people used to come to us for lunch, and now they're coming to dinner," right? And that's because they're kind of downgrading to a different restaurant to go to dinner. So I think consumers have their arms around it.
It's also helped by the fact that, you know, inflation is coming down, and so I'd say the pace of change that we're witnessing has slowed down dramatically.
Got it. And Scott, I like what you said about the... You know, you answered the question, the credit we are issuing, 'cause I think that's kind of been the key, is that it is, it was necessary to not be doing the same thing. When you think about it from the other side of the coin, like from the demand side, you know, for your core product, both in installment and, you know, more recently in auto, you talk about what's going on from a demand standpoint, from a competitive standpoint, and how, you know, LendingClub is positioned.
Yeah. So demand is record high in, for the-
Yeah
... for our core product. So the dominant use case, but though by no means the exclusive, you can use a personal loan for anything, but the dominant use case that is quite easy to market is that for the, you know, half of all Americans who don't pay off their credit card balance in full every month, they have a loan. It's a crappy loan, with interest rates today at, you know-
An expensive loan.
... 25% floating rate. And so, the largest use case is we reach out to them and say, "Hey, you have a loan. It's not a very good one. We can save you quite a bit of money. We'll pay off your cards for you directly. By the way, your FICO score will go up, and you'll be out of debt in three years." That TAM has never been larger. There's, you know, well north of $1 trillion in credit card balances. They are priced at a record high rate. The amount of savings we can offer is, you know, the highest we've ever been able to offer.
Mm.
So that demand is really, really intact. On, you know, the competition to get that demand, it's shifted. This is a competitive space. There's lots of players. There's banks, there's fintech, there's specialty finance, there's credit unions, and so what we've seen is a bit of a shift in who's playing, and, you know, we've been through multiple rounds of competitive shifts and dynamics. I'd say fintechs really were gaining share for a while, but this high rate environment has had a real impact on fintechs and, you know, the marketplace lenders in particular. And so what we've seen is kind of more banks and credit unions competing for that higher prime customer because that's also where the appetite has shifted.
Right
... is up credit quality to high prime. But, you know-
Yeah
... we're able to effectively, very effectively compete there. We're running at some of our lowest marketing acquisition costs kind of in the history of the company.
That's good to hear. On your first quarter earnings call, you did talk about some two new products. You know, kind of can you talk about them a little bit and, maybe, you know, describe how they're gonna be able to add to your ability to serve customers, you know, and increase volumes?
Yeah. So, you know, one of the things about our product is, if you think about that use case I described, I think the idea you might have is, oh, they come, they, you know, pay off their credit card debt, and then they ride into the sunset and never to be heard from again. That's actually not the case, because for, again, most Americans, they go in and out of credit card debt, and-
Right
... and/or they find our product, they realize, "Wow, this was easy. It took me 2 minutes to apply. I got approved, and the money was in my account the next day." And they come back for a different use case. Like, you know, they might have come to us to pay off credit card debt, but they come back to finish the kitchen remodel or add the deck on the back of their house or get braces for their kids. And so when we looked at that, we said, "Okay, we're seeing these other use cases people are doing. We haven't really tailored the product for that." So if, you know, if you've already paid off your first loan and you come back, you can get a second loan, that's great, but if you're...
You know, say, you're 2 years into a 3-year loan, and, you know, some, whatever, tree fell on your garage, and you now need the money to do that, what you would do in the past was take out a second loan. Often, you would take out a second loan, and then you'd pay off the first loan just so you had one loan. And we said, "Well, why don't we make it easy and do that for you?" So that's our TopUp product, which is, you know, you took out a loan, you've paid it down, you've demonstrated successful history. You need a little more money. We'll just roll it in, one simple payment, an incremental balance on top of that. Keeps your one payment, and we take care of all the, the back office work.
The other product that we've put out is what's called the Clean Sweep, which is, you know, typically, this is pretty common. People will come in, and they will pay down some, but not all of their balances, or they'll pay down their balances, and again, whatever, their bonus wasn't as big as they thought, or they had a medical accident, and they got into more credit card debt. So what Clean Sweep is, is it's on a revolving platform, and it's that... It, it acts like an installment loan, but it's basically an open line of credit that allows people to sweep any additional incremental balance in to the loan product.
We're pairing that with an experience that we're currently, you know, in kind of beta testing, meaning invite only to a select group of people, of an experience we call DebtIQ, which allows people to monitor their credit card debt and manage it. It's the one bill they have that isn't on auto pay or their credit card bills, and most people have five cards, different balances, different APRs, and by the way, they don't know the APRs. Different minimum payments due on those balances, different due dates, so keeping track of all that is a lot of work.
So we're building something that says, "Here's all your cards, here's your APR, here are your balances, and oh, by the way, you know, you can pay them from a LendingClub banking account, or you could pay them with, you know, sweep them into Clean Sweep, and we'll, you know, provide you a lower-cost credit." So those are all in, you know, kind of in some version of testing for this year. The initial consumer response has been well above our expectations. But, you know, lots of work to do this year to make sure we understand the profile and get the credit perfectly right and how to position it to the customer.
But we think all this is gonna set us up to have a real competitive moat and a differentiated value proposition to go after this TAM, when, you know, ideally when the rate environment starts to shift in our favor.
Any thoughts about the, you know, what it could be in terms of, you know, how incremental? Is that something that you've talked about at all?
Yeah.
Or thought about?
What we said was the initial results are enough that, you know, we've raised our origination guidance by about $500 million for the year, on the backs of these products and a few other, you know, kind of exceeding-
Right
... our expectations for success.
Got it. That's good. So Drew, can we talk a little bit about your funding structure? I think, you know, I, you know, clearly, you know, LendingClub was probably the first big marketplace lender, and you've evolved significantly from there. Scott had commented a little bit, saying that some of those lenders that are, you know, were more in the marketplace mode have, you know, have had you know, greater difficulty. And just talk a little bit about both about where your funding structure is now and what competitive advantages that's given LendingClub.
Yeah. So yeah, for most of our history, we were a marketplace lender, and so, you know, the economics of our business, our financial performance, was really driven by, you know, how effective the marketplace was and what economic cycle we were in. We acquired a bank just over three years ago, and that's been pretty transformational for our funding structure. You know, the ability to raise deposits, put some of our production on balance sheet and grow that balance sheet to generate recurring net interest income has really allowed us to remain profitable through what's been, I think, a difficult financial cycle for many people in our industry as well. Since the three-plus years we've acquired the bank, we've actually tripled the size of the balance sheet in that time.
So we've really leaned into the banking side and the deposit funding, but we're still also a marketplace lender, and we're still actively selling loans through the marketplace. The one thing that was an unlock for us in this cycle, especially with asset managers, is using the balance sheet, the bank balance sheet, to facilitate more marketplace sales through this structured certificate program that we launched just about a year ago, where we're nearing almost $3 billion in issuance now through that program. So it's been very effective, and really, what it's allowing us to do is get higher prices from asset managers and sell the risk on the loans that we're originating, which has been very difficult for most of the other marketplace lenders out there right now.
The A- note from that private securitization that we're taking on balance sheet has just been another lever for us to grow our balance sheet and our net interest income in a risk remote way. So, huge unlock for us in terms of that banking acquisition three years ago.
Yeah, and I'd say two other things. One, just kinda simple math. When we hold a loan, we're earning roughly three times as much as when we sell a loan, and it's kind of the same activity. We're always doing the marketing, the, you know, credit assessment, servicing, and so holding a loan earn three times more, so for the same business, we obviously results in a much more profitable and resilient business. The second thing is that our status as a bank... Well, most of the benefits we got, we sort of foresaw, and we got them, and they were as good as or better than we anticipated. One thing I think we underappreciated was how our status as a bank, how our status as the largest holder of LendingClub loans, what that does from a counterparty perspective, right?
You know, when you have an option to buy from a marketplace lender, do you wanna buy from the lender that is actually eating their own cooking, or and is directly regulated and supervised or somebody else? So that's also been a benefit.
No doubt. And kind of putting together a lot of that and, you know, Drew, your comments on the structured certificate program, can you just kind of take it one step further maybe, and talk a little bit about how you're deciding how much of the loans to portfolio, how much to hold in certificate form, how much to hold, you know, and how much to sell? Is it, you know, is it kind of price and returns? Are there other considerations? You know, can you talk about-
Yeah
... that a little bit?
Yeah, so the first thing is what Scott just said, right? Which is, you know, we make three times as much holding a loan versus selling it over the life of the loan. So we want to keep an active marketplace, but we definitely want to get our allocation of loans that we want to put on the balance sheet at the same time. And the marginal returns that we're generating right now on those loans that we're putting on balance sheet are 25%-30%, so it's a very effective use of capital for us. And we still have excess capital. We're able to grow liquidity, so we're looking to continue to put more loans on balance sheet. We now have four ways that we disposition our loans. One is we sell them into the marketplace in whole loan form.
That's kind of our legacy, and we continue to do that. The second is we retain them on balance sheet, in HFI, and, you know, we have to deal with that seasonal charge that all of us banks love. We have an extended seasoning program now, which we just launched, where we actually bring loans onto the balance sheet in held for sale. We season them, and then we sell them at a later date. So we're earning an attractive return while we're seasoning for certain buyers that actually want paper that's been more seasoned. And then the last one, which we were just talking about, the structured certificate program, you know, very effective, but those last three have all been mechanisms for us to continue growing the balance sheet and using a different risk profile and a different economic profile, depending on the situation.
You know, if we have excess earnings that we can take more loans in HFI and absorb that upfront CECL charge, you know, we, we'd love to grow the balance sheet that way. But when we need to sort of balance the earnings profile, we can use the structured certificates, the A- note that comes on balance sheet, or the extended seasoning program to continue to grow in a more capital efficient way in period, in terms of how we're doing that.
And one-
I would add-
... important distinction, is that we don't-- we're not picking loans, right? It's a random allocation of our, of our grades.
Right.
So we're buying the same mix and pools that our investors are purchasing.
Yeah. So our, you know, our priority is gonna continue to be growing the balance sheet, reinvesting our excess capital, and putting loans on balance sheet, but at the same time, making sure we're maintaining a healthy marketplace, and our loan buyers, our institutional investors, are still having access to production and keeping that relationship moving forward.
... and I would assume that extended seasoning program kind of gives you a little bit more kind of firepower to handle those CECL charges because you know you've found a way to kind of increase the amount of loans that are eventually kind of transitioned off the balance sheet. So I think that probably has been a plus.
Yeah, that and, you know, yes, and I think also, you know, the risk weighting on those A- notes that we're keeping, the senior security. 20% risk weighting obviously comes with a little bit thinner margin, but from a risk-adjusted return standpoint, extremely attractive on the balance sheet.
Right. Yeah, Scott had talked a little bit about, you know, your confidence in the credit characteristics of the loans you're originating, and you've got some really good disclosures, you know, as part of your, you know, quarterly packages about, you know, what you're seeing, how that compares to peers, what you're... You know, can you talk through that for the audience a little bit, you know, as to what you're seeing in terms of the portfolios and, you know, were there periods where, you know, where it differed from your expectations? And, you know, where does that sit right now?
Yeah, I mean, what we've seen is pretty dynamic environment over the last, let's call it, three years. I'd say less so, as we mentioned, maybe over the past one year, but the three years preceding that, you know, we had pretty dramatic outperformance of the early post-COVID vintages, and then underperformance when, you know, call it those sort of 2022 vintages. But all and in all cases, still very, very strong returns for all of the loans we issued, you know. So just, that's just versus expectations. I think still most banks would love to have the asset on their balance sheet, even in the.
Right
... even in the thinner years. You know, we're underwriting right now to expecting a lifetime loss on these loans of 8% or 9%, and as Drew mentioned, kind of marginal ROE of 25%-30%. We are kind of pretty heavily skewed right now towards the upper end of prime. If you look at our... Our historically, we're, you know, we are a prime shop. The, the majority of our loans, call it 80%-85%, have always been 660+, but I'd say we've shifted from a, call it, a 715 average FICO to more like a 740 average FICO, as part of our, you know, move when we were seeing pressure on the consumer.
Got it. Just as a, maybe as a follow-up to that is, I assume that some of that is, as you mentioned, the pressure on the consumer, but also those better quality consumers, many of them do have revolving credit card debt or other, you know, kind of floating rate debt that they're looking to refinance. How do you think that evolves in terms of, you know, the customer that you'd be targeting as you kind of go through, you know, over the next 2-3 years?
Yeah, I mean, what we've seen is pretty dynamic environment over the last, let's call it, 3 years. I'd say less so, as we mentioned, maybe over the past 1 year, but the 3 years preceding that, you know, we had pretty dramatic outperformance of the early post-COVID vintages, and then underperformance when, you know, call it those sort of 2022 vintages. But all and in all cases, still very, very strong returns for all of the loans we issued, you know. So just, that's just versus expectations. I think still most banks would love to have the asset on their balance sheet, even in the, uh-
Right
... even in the thinner years. You know, we're underwriting right now to expecting a lifetime loss on these loans of 8 or 9%, and as Drew mentioned, kind of marginal ROE of 25%-30%. We are kind of pretty heavily skewed right now towards the upper end of prime. If you look at our... Historically, we're, you know, we are a prime shop. The majority of our loans, call it, 80-85%, have always been 660+, but I'd say we've shifted from a, call it, a 715 average FICO to more like a 740 average FICO as part of our move when we were seeing pressure on the consumer.
Got it. Just as a maybe as a follow-up to that, I assume that some of that is, as you mentioned, the pressure on the consumer, but also those better quality consumers, many of them do have revolving credit card debt or other, you know, kind of floating rate debt that they're looking to refinance. How do you think that evolves in terms of, you know, the customer that you'd be targeting as you kind of go through, you know, over the next 2-3 years?
Yeah, I mean, I'd say the interesting thing, and it's likely hard for most people on this call to imagine, but the interesting thing is, up until you hit a real point of real wealth, the reality is the higher your income, the higher your debt, up until a certain point. So what, you know, what we see is the customer that we're serving today, or where we're, let's call it, indexing today versus in the past, they are higher FICO, they are higher income. You're talking about individual incomes now of, call it, $140,000-ish. But they're higher debt. They, you know, tend to have a larger auto loan and a larger credit card balance than somebody earning $80K or $90K.
So, you know, the demand both for us until we see where the economy, you know, shakes out, as well as, I'd say, from the marketplace, is really up there. So we're doing very... Even though there's very little competition in, let's call it, the near prime space, even though the returns we're generating there are record high, and they have again, also been quite consistent, there has been less demand by, by marketplace investors in that space, and I don't see that shifting near-term.
Got it. Gotcha. You know, again, one of the other areas that you actually do quite a bit of good and differentiated disclosure on is how you think about, well, we just talked a little about credit losses, how you think about the reserves and, you know, kind of what's in your reserves relative to that. Any thoughts about how the evolution that you're seeing in the portfolio will be reflected, you know, kind of in the reserve that you carry?
Yeah, I mean, we, as you said, we've been disclosing our reserve levels every quarter, and, you know, CECL, especially on an installment loan or a personal loan, closed end, you know, you're taking most of that provision upfront, most of that reserve upfront. So the disclosures we've been showing is the evolution every quarter of our loss expectation at the vintage level. And, you know, last quarter it was consistent compared to the previous quarter. Before that, slight uptick, and I'd say over the past year, earlier in 2023, there were some slight upticks, but it's been pretty stable performance as we've gone through time in terms of loss expectations. And, you know, we added some new disclosures on our outperformance versus the industry.
But if you go back to, you know, why is our structured certificate program so successful? Why are we still selling loans, selling the risk? It's really that stability and credit that we've been able to show consistently over the past several quarters that has kept people comfortable or asset managers comfortable buying the risk, knowing that we have that stable performance. And of course, we're always properly reserved, Moshe.
... Right. No, no doubt. And I, you know, I guess, I mean, we sort of talked about this, but Drew, since you brought it up, you know, again, you know, is there a way to measure just how much more that structured certificate program has kind of broadened out your ability? So I think, you know, when you think about obviously you've got a bank, but you're also creating, you know, non-bank financing and just everything that you can do that enhances your financing methods, it's got to be, you know, you know, finding, you know, buyers of different tranches of risk or different, you know, different types of things has always been, you know, the key, you know, the key to success.
Uh.
So, I mean, any other, or maybe the question really is, any other innovations that you'd be thinking about on the right-hand side of the balance sheet?
Yeah. Maybe I'll give a first, you know, kind of contextual landscape view here. You know, in normal environment, the marketplace operates roughly half of the loans get sold to banks and credit unions, and roughly half were getting sold to asset managers.
Right.
When the rate environment shifted, we expected, we telegraphed to the market, "Hey, asset managers, they're pricing off the forward curve. Their cost of funds is going to go up faster than borrowers' actual cost of borrowing. We're going to probably lose some asset managers temporarily, but we expect to get more banks." And that was a driver of us moving up credit, was also to serve the banks who are the buyers.
Right.
That, that played out roughly as we expected. Then what happened, which we did not expect, nor do I believe, and many others expected, was we had the bank failures. And when that happened, we telegraphed. We don't. You know, we think this is likely going to cause issues with banks who need to much more tightly manage liquidity and capital. And so we launched this structured certificate program as a way to bring asset managers back. One of the huge benefits for them has been just the friction, and the expense associated with typically buying a whole loan, and then separately dealing with somebody to set up a warehouse line and pay origination fees and undrawn fees, and all of those things, and manage that. So on that perspective, it's been, you know, really well-received.
And I think, you know, the demand that we've seen there, we've added, you know... we went from, you know, launching the program to it being the majority of our sold volume going through that program. Are we done with product innovation? I'd say certainly not. But I don't think anything to talk about on this call yet.
We're not ready to tell you yet.
Not the time or the place. Not the time or the place.
Yeah.
I got it.
Yeah.
Um-
The one thing I'd just add to what Scott said is for asset managers, private credit that are looking for leverage when they purchase loans.
Right
... I think our program is always going to be more efficient. This probably becomes the predominant way that we sell to those asset managers who are looking for leverage, 'cause we're just going to get a higher price versus just selling them the whole loan, and then them having to go-
Right
... through all the mechanics of levering it. And I think the other evolution probably eventually in this program is, we don't actually need to keep the A- note, the senior security. We choose to keep it. Over time, we may do this and sell-
Right
... the note as part of that as well. That's an option we have.
Yeah. And just to kind of compare and contrast this, you know, you obviously can only do this if you are a bank. If you look at some of the other marketplace lenders, how are they selling? And what they're generally doing is sort of the opposite, right? They're holding the risk, and they're selling with typically, you know, loss protection and/or coverage, so kind of some residual liability, which, you know, we've been able to avoid that.
Right. Regulatory, you know, anything that is either opportunities or, you know, kind of risks out there, and how do you view the CFPB's late fee? Does that present an opportunity if it's enacted?
Yeah. Yeah, there's certainly a lot to talk about there. You know, vis-à-vis us, we're in a great spot. We just exited our Operating Agreement, which we're required to enter-
Right
... like all new banks, but we exited it on time, which I think is no small feat, given the dynamic environment we've had to manage through. You know, the CFPB's late fee rule, it obviously applies to cards, not to us, but we stopped charging late fees when COVID hit, and don't expect to be going back in our business. But on the card side, you know, on balance, I'd call it probably a positive for us, although not material. You know, the card issuers that are really-
Right
... where for whom late fees is really a big part of their business, tend to be more on the lower credit quality side. But to the extent it affects people, you know, in the core audience, my guess is, you know, credit card companies have lots of levers they can pull. They will- I don't think what this is going to result in is lower margins. I think what it's going to result in is some other way that the consumer is paying this bill, and that's just going to result, in the end, in higher APRs, which is going to make our product-
Right
... all the more compelling.
All the more compelling, yeah. I would agree. So with that, we have one minute left, so I'm just going to throw it back to you guys, Scott and Drew, if there's anything that I didn't ask about that you wanted to kind of, you know, kind of say at the end, and, you know, if you've got any kind of, you know, kind of final comments. If not, you know, just say thank you and-
Yeah
... enjoy the weekend.
Yeah, I mean, I'd say, you know, as we indicated on our last call, you know, we're feeling like we've navigated the business to a really good spot.
Yeah.
We've got, you know, we're pleased with how credit is performing. We've got good visibility into the marketplace, order pipeline. Based on the success of this new program, we think our TAM is as exciting as it's ever been, and we think we've got a product roadmap that's going to allow us to go after that. And, you know, our customer acquisition costs are, you know, profitable on day one, and with these programs, we're going to be increasing the lifetime value and doing more. So, you know, we feel really good about how we've got ourselves positioned.
Very good. Thanks, thanks for doing this, and you know, thanks for all your insights that you shared with us. Thank you.
All right. Thanks for having us.