Yeah, everybody's checking to make sure their phone ringers are off. Appreciate that. Thank you very much for joining us this morning here at the Morgan Stanley Fintech Conference. We're very pleased this morning to have LendingClub, and from LendingClub, we have Scott Sanborn, CEO. Thanks for being here, Scott, and Drew LaBenne, CFO. Seems like he's very far away over there, but he'll be all right. You know, before I get started, quickly, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Maybe to kick off here, Scott, for those that are newer to LendingClub and the strategy and story, can you give us an overview of LendingClub and the value proposition that you're providing to consumers?
Yeah, we started, first loan was back in 2007. Pretty straightforward principles, which was we thought that data and technology and a focus on the customer could actually really disrupt the lending industry, which, as of that point, hadn't seen much change.
Mm-hmm.
That, that worked. We grew to become the largest originator of personal loans. We've issued more than $85 billion to almost 5 million customers. Our initial model was a marketplace funding model. We worked with, you know, a broad range of investors, banks and credit unions for high FICO borrowers, and asset managers, and insurance money for, let's call it, you know, riskier, higher returning paper. About two years ago, we acquired a bank, and now with the addition of the bank, we have our own balance sheet that's participating in the marketplace, and that has significantly enhanced the profitability and resiliency of the business model, and also allows us to do more for our customers.
Got it. Let's talk about the end markets. Clearly, there's been a lot of uncertainty across the banking landscape of late. As you mentioned there, you sell loans to both banks and non-bank institutional investors. How have those groups, I guess, respective loan buying patterns evolved recently? How have they responded to the headlines and uncertainty in the banking industry in general?
Yeah. You know, about I think it was Q1 last year, when it was clear the rate environment was gonna be shifting.
Mm-hmm.
We sort of telegraphed that we had anticipated, you know, we went through a more modest rate environment in 2018 and 2019.
Mm-hmm.
We kind of knew a little bit what to expect and said, well, what we anticipated and what we indeed saw was that asset managers that are pricing off of a forward curve are gonna see their cost of capital go way up quickly, and therefore, their appetite was gonna be curtailed until we could reprice the assets to deliver that. That's what we saw, funding shifted more towards the bank side, and the majority of our funding was coming from banks and credit unions. Now, with the recent events in banking, I'd say, we would anticipate that the banks have got to really focus on their own capital and liquidity. We might see that appetite temporarily curtailed. The good news is the assets have been largely repriced.
We're seeing capital reform on the asset manager side, so we'd anticipate near term, some of that demand shifting back towards the asset managers. I'll note, though, that, you know, they have a higher return requirement, so there will be some pressure on loan pricing, we would anticipate as we make that switch.
Got it. Then how do you manage... From your perspective, how do you manage that loan pricing differential? Like, what are you able to pass on to consumers, and how is that typically reflected?
Yeah. You know, the bank brought a lot of things you would expect.
Right.
One of the things it did, though, as well, was the role in the marketplace really changed the dynamic. You know, one, as the largest holder of LendingClub loans, it really changes the conversation with investors, right? We're not asking people to buy something that we're not comfortable putting our money into. It also allows us to be thoughtful about, you know, will we take that price or not?
Right.
We have the option to hold. You know, you've seen us be buyers. We acquired, in the fourth quarter of last year, a billion-dollar portfolio from one of our former loan buyers who was sold. We reacquired that portfolio. What, you know, what we've been able to do is kind of evaluate what the right clearing price is we're willing to accept. The other thing we're doing right now is we're actually leveraging some of the bank's capabilities to provide financing for some of our buyers who've had, you know, who need access to liquidity. We announced last quarter, we're making certificates available, where we're holding the senior note and selling the residual, effectively providing financing for loan buyers.
Got it. What about lending standards themselves? You know, how are you managing those? It seems like on average, we continue to see tightening and businesses are focusing a lot more heavily on expense management. You know, as you're kind of looking at how you're managing your own business, what you're trying to do on the expense side, what you're trying to do on lending standard side, how are you feeling like you want to manage those different inputs in terms of originating loans, et cetera?
Lending standards are certainly tighter. You know, through the pandemic, we never kind of when credit was so benign and everything was great, we never kind of opened up. We kept pretty disciplined, and consistent credit box pricing and all the rest. As government stimulus started to come down and people's expenses started to come up, because both they were able to travel and go to restaurants, but also, you know, inflation started hitting, we definitely saw a change in the consumer. We did anticipate it. We actually came out and said: "Hey, we're seeing changes in application behavior. We're seeing changes in prepayment behavior.
Mm.
We tightened proactively in response to that, and have continued to deliver, you know, really outperform the industry. We're one of the largest providers in this space, but our delinquencies continue to be below industry averages across all the segments of consumers that we compete in. That's where we are on credit. Right now, we expect the stuff we're issuing to perform roughly in line with what we saw in 2018 in terms of delinquencies.
Okay.
With a higher return, because the pricing to the consumer is higher. On the expense side, you know, we had anticipated, again, last year, that with the rate environment, we'd see some pressure. Earlier this year, in January, we reduced our fixed expenses by about $25 million-$30 million.
Mm.
In preparation for, you know, let's call it a more challenging environment. We've also focused quite a bit on marketing. We've traditionally had amongst the most efficient acquisition cost in the industry, and we're about 30% more efficient today than we were, call it, a year ago. Those are two areas where we're really leaning in on the expenses. You know, we've said we intend to remain profitable through this. We feel like we've got all the levers to do that. We've also invested in a few areas, though, in preparation for a more challenging environment. We've spent about $50 million on our servicing infrastructure over the last-
Right
Two to three years. We've put in a new loan servicing system, a new contact center system, new payment capabilities, all to make sure that we were gonna be able to support the borrowers, should things get more challenging.
Can I ask you, so if you had anticipated a tougher environment, and you highlighted a couple things that would've made it more difficult, including, like, banks and kind of how they're rewarding?
Did not anticipate all the bank failures.
Yeah, did not anticipate the bank failures, but we've had that. How would you characterize how the world has been versus what you were planning for, and any incremental adjustments you wanna make?
Well, I would say we kind of knew direction of travel.
Okay.
Not magnitude.
Right. Right.
Right. I, you know, if you put the graph out there of what everybody thinks the rates are going to be, and then you overlay what actually happened, I'd say the market has been kind of consistently wrong, and they've been.
Mm
Consistently higher. The impact of rates-.
Rates have been consistently higher than planned.
Yeah.
Right. Right.
That has for sure been the case. I'd say, you know, understanding the... You know, there When you're looking at your credit expectations, most of the models, when they're looking at exogenous pressure, they're all focused on unemployment. That's the driver of losses. There hasn't been a lot of data to model off of, to say: What will inflation do to borrowers?
Right. Right, right.
That has required quite a bit of, you know, there's knowing that something is coming, but then figuring out how to incorporate those signals into your models, has been. You know, I think we averaged, I wanna say, a change a day.
Wow
Last year. Just 250 changes throughout the course of last year, to really make sure we were reading these new signals for borrowers and incorporating that into our targeting, our underwriting, our pricing, and really staying in front of it. That's required. We've got a very flexible infrastructure that allows us to deploy changes quickly to test, but we leveraged that quite extensively last year.
Got it.
Yeah, I might add, I think when we were coming into this year, Scott, we anticipated the Fed would probably be leveling off, and then asset managers would get more active. I think that's played out well.
Mm-hmm.
To your point earlier, we didn't expect the banks were going to be going through all this, so I think that probably puts a little incremental pressure on the second half.
Right.
Just given versus what we had expected originally.
When you look at that, on that incremental pressure, I mean, from an OpEx perspective, are you well equipped to deal with that, or is there some incremental adjustments that you feel like you might wanna make there?
No, I'd say right now, we feel pretty good about how we've set the business up. We've got a number of levers still available to us to deploy.
Mm-hmm.
As an example, on marketing, on average, about half of our loan volume on a monthly basis is new customers, and half is existing customers. Fifty percent of our customers come back within five years for a second loan. We have the ability to lean into that more, right?
Right, right.
Those customers come at zero acquisition cost. They perform, actually, better than average on credit. Marketing is so efficient right now. At the moment, we are still acquiring half the customers are still new. That's
Mm
Like, a big lever. The amount of loans we retain on the balance sheet and the CECL provision that comes with that is another big lever we have available to us to manage in-period expenses. I'd say we feel pretty good about how we've set the business up.
Got it. Got it. Let's talk about your customers, and really start with a two-part question here. On average, what's the credit profile of your customer base generally? And I guess as the second part of that, how should investors think about the historical delinquency and default rates of your loan portfolio versus what you're seeing today?
Yeah. the customer, we serve a broad range of customers. That's one of the ways, we're able to deliver-
Mm
... Such efficient marketing, is, you know, if you have a 600 FICO, we have a great product for you, and it is probably funded by an asset manager. If you're an 800 FICO, we have a great product for you, and the funding for that might come from a credit union or a bank, including us. I'd say, on average, who's the customer? If you look at what's on our balance sheet, we're talking about a 730 FICO, a $115,000 a year income. These are high income, high FICO borrowers. What they have in common, and what makes them such a valuable customer base, is they are heavy users of credit.
They are more likely than average to have a mortgage or an auto loan or credit card debt, and in all of those cases, those loans are larger. It's a, you know, that is a core to our DNA, our ability to serve that customer, save them off the cost of that debt, is the value proposition we bring them.
When you look at, like, what you retain versus sell, like, how are you trying to match that, like, you know, versus the market opportunity that's being presented?
Yeah.
How representative is that?
We've got a segment that's really outside the bank risk appetite.
Mm-hmm.
I'd call that, you know, the 600-660 FICO borrower.
Okay.
I'm using FICO just as a, you know, common language.
Right.
It's not part of our. You know, we're not using that in our decisioning. That is outside the bank's risk appetite. That is exclusively sold through the marketplace. For the bank-quality loans, we simply take a random allocation.
Mm
... Of those loans, the same thing that we're selling through
Got it. Got it. There's not, as somebody would say, you're typically not cherry-picking or doing anything like that.
Random allocation.
On the outside of where you're allocating those loans, how do you allocate outside? I mean, are people signed up for just strictly round robin or can you talk through that?
Yeah. We've got a number of ways, people interact with us. There are, you know, what we call kind of our scale orders, which, you know, people place a quarterly order. They tell us we grade the credit. It's a P-1 through a P-5, is our-
Mm-hmm
... Internal language. They will say, "Hey, I want whatever, $60 million of P-1 and $40 million of P-2 and $40 million of P-3." We'll take those in, and we will throughout the quarter, as loans come in, allocate accordingly. We also have a platform that we enable auctions, so people connect via API. We will list loans, and that's more dynamic bidding. All of this is transacted electronically on a platform we call LCX. You know, there's not a lot of paperwork changing hands.
Mm-hmm.
This is all done pretty seamlessly. The auction platform, what that does for us is it gives us real price discovery. We can see the loans that people are bidding up. We can see the loans that are going below par, that is an input that we say, "Hey, why are people paying more for this? Should we... You know, what are they seeing, or should we be lowering the price to borrowers to generate more of that?" If people are paying down for something, do we need to raise price to borrowers or tighten credit there? There's a bit of a feedback loop we get from that we think is very valuable and unique.
Got it. Let's go back then. I think you mentioned that your DQs, delinquencies, et cetera, were remaining, you know, kind of where you'd wanted them. Can you talk a little bit about what those historical delinquencies and default rates of your loan portfolio look like? You know, where are they today versus where do you typically want them to be?
I mean, where we are today, we basically had a period during the pandemic where obviously losses were super low.
Mm-hmm.
Credit really outperformed. We had a period of, you know, normalization as inflation really took a bite out of consumers, where we saw, especially lower income, higher risk consumers, saw them get impacted. You know, now we're back at, you know, these levels we had pre- for a clean vintage, pre-pandemic. I'm saying 2018 is... It wasn't that tail that was supported by government stimulus.
Right.
We're looking at, you know, returns to investors. In prime, let's call it a 7%. You know, if we're selling at par, you're talking about returns of 7% or 8%, and in near prime, you're talking about, call it 10-ish, 10%+.
Right, right.
... In near prime returns to investors.
Got it. Got it.
Unlevered, you know, just straight through.
You know, one of the concerns that we've seen on you know, consumer borrowing generally has been pretty rapid rise in things like delinquencies, et cetera. I mean, are you being able to manage those to about the levels that you want? Any adjustments that you've had to make, or how do you think about ongoing adjustments there? I mean, you.
Yeah. I mean, I think a couple pieces of information. First of all, we've actually been remixing. Scott talked about the grades P-1 to P-5.
Okay.
We've been proactively remixing our HFI portfolio in the bank to higher credit quality.
Got it. Got it.
More so just to make sure, you know, if the environment does deteriorate, we're holding a higher quality portfolio. In terms of, you know, delinquencies and credit performance, we've been performing as we expected. I would say, not without effort. As Scott said, we've been continually updating the credit box that we've been using over the past year. The underwriting has evolved to ensure, to make best efforts to ensure that we have the best credit possible as we're going through this cycle. Generally, delinquencies, charge-offs, performing as we expected in our models.
Got it. Got it. That's encouraging. Let's talk about the competition. You know, Scott, you've been at LendingClub and been through various iterations of the business as it has evolved and grown. How do you differentiate from your bank and non-bank competitors in the personal loan space?
As I mentioned, we've been doing this a long time, and we have successfully been competing against different waves of either, you know, incumbents when we first started, fintech, challengers coming in, and then a new wave of incumbents coming from banks. I'd say through that entire period, we've maintained leading market share, leading marketing efficiency, and delivered really, really well on credit throughout all of that. Why? One, is we have an enormous data advantage, right?
Mm-hmm.
16 years of history on $86 billion or $87 billion worth of loans that powers dozens of models across, you know, marketing, fraud, underwriting, pricing, servicing, all of that. An experience that is highly optimized for different segments of customers to really get them all through. We got a really large customer base advantage. As I mentioned, you know, our ability to serve these customers and bring them back, you know, they come to us first to typically to pay off existing credit card debts. You know, we make it super easy, right? It takes two minutes, and we're saving you money. That creates a lot of affinity. You know, we're the likely next stop if they're, you know, going for fertility treatments or doing a home improvement project, they come back again.
Our ability to make that second loan even easier and be available for them, has really driven, outsized, performance as well.
Got it. Got it. On that retention, I thought it was interesting, you're, like, 50/50. Like, what does that, you know, imply in terms of where you would like to get that? What makes sense, and what is the product lineup or portfolio today versus where, you know, you kinda would like it to get, especially if you have an opportunity to find ways to take advantage of the customers.
Yeah
That are already lending?
You want to talk about retention, and I'll talk about product?
Yeah, sure. you know, retention, we've spent the past, you know, year plus, or really since we acquired the bank-.
Mm-hmm
... Gowing the HFI portfolio so that, you know, in environments like this, we could be more resistant and have a higher level of recurring revenue. We look to do that, you know, as much as we can within our existing earnings profile.
Mm-hmm.
As Scott mentioned, every loan we retain, we're taking an upfront CECL charge, we're deferring the fee. It's capital-intensive to build that portfolio, and the marketplace revenue is really what helps that growth.
Yep.
It's a great earnings lever at the same time, because if we do feel pressure in other areas, we can pull back on retention and ensure that we're staying profitable through a more adverse environment. We like having those tools available to us. At the same time, in this environment, everyone that's, you know, predicting some level of recession coming, as I said, we've been remixing to a higher quality portfolio. As we're looking at the returns available to us, we can pretty actively mix what we're putting on portfolio to generate higher returns.
Got it. Got it. Got it. On the product front, when we acquired the bank two years ago, like, step one was, let's bring all the originating businesses into the bank. We brought in personal loans. We have a purchase finance business, where we help people finance big elective medical procedures that aren't covered by insurance. We pulled that in. We have an auto refinance business, help people save money off of their car loans. We pulled that in. That was kind of the first year. Last year, we turned our attention towards building the funding mechanism, really. Ability to attract deposits at scale online and apply all of the discipline we do on the lending side to the deposit side, so that, you know, highly optimized funnel and conversion rates and scoring and all the rest.
You know, those two things, we've, you know, tripled the interest-earning assets on the bank balance sheet over that time period. We've nearly tripled the amount of deposits, so bringing about $5 billion over the last two years. Today, you know, now what's next? I'd say, first area we're looking at is we have not yet brought to market a checking experience for our core customers.
Mm-hmm.
The customer who comes to us to save money off their debt, they have pretty unique needs of what they want from banking.
Right.
We think that we can offer a pretty compelling value proposition to say, "Hey, we're saving you $80 a month off your car loan. Why don't you let us put it into a LendingClub savings account, which you're approved for right now? And when you're done paying off your car loan, you'll have $5,000 in savings." "Hey, we can save you off of your credit card debt. Why don't you put it into a LendingClub checking account, and we'll help you monitor your credit card debt and stay on top of it going forward?" That's something we're working on. Our pace of investment in that is lower now than we sort of had initially intended coming into the year. We are gonna continue to push forward on that.
Over time, as I mentioned, this customer is disproportionately using all forms of credit. Over time, you know, we would seek to offer them, you know, all of those products.
Got it. You know, when you look at things like personal loan versus auto refi, you mentioned like elective, et cetera, what is the like, is there a difference in potential frequency of lending opportunity there? Once you start to engage on or be able to attract customers, with the checking product, how does that change, do you think?
Yeah. personal loans, just to take the... You know, that's the biggest driver-
Mm-hmm
of our revenue. It is not a one and done. As I mentioned, customers are coming back for second, third, loans. That said, the nature of that relationship is more episodic, right?
Right.
You come in, we pay off your credit card debt, you pay down the loan. When you come back, it's either another life event, you know, medical emergency or a divorce, and you've racked up credit card debt again, or you're doing a project. The addition of the checking account, we see that bring a couple benefits. , is we get more data. You know, we can really see what's happening in their financial life. Then two, it just ups the interaction level. Instead of coming back, you know, once every few years because you need to change your payment date, you know, you're coming back weekly, right? You coming back weekly and us gathering more data is gonna present more opportunities for us to engage with you, add value, help solve other financial challenges.
Got it. Got it. We've got about 10 minutes left here. If there's anybody from the audience that has any questions, please raise your hand and we'll get you a microphone. Got a question here. Jeff?
Yeah. Hi, thanks for taking my question. Just wondering if you've given any thought into how the end of the student loan moratorium impacts you, what your borrower base looks like. Maybe have you disclosed or thought about how much are student borrowers, and maybe whether that also represents an opportunity for you as well, as people struggle with cash flow from here?
Great question. For those of you not following it, the federal student loan repayments after a couple of year moratorium are set to resume end of August or September. We've got about a third of our borrowers have student loans, and about half of those are federal that are not paying. About 15% or 16% of our borrowers that will see those student loan payments resume. We have been underwriting them with the presumption that these payments would resume. In our, you know, in our outlook and, you know, analysis of capacity to pay, we have been, you know, assuming those payments would resume.
That said, you know, putting it in a mathematical model and then having a consumer have to make the extra room for a $400 or $500 payment, right, there's still there's the theory, and then there'll be the practice. We are certainly preparing and gonna help our customers prepare for this to resume and make sure we're there to help kind of support them and get them ready for that. In terms of opportunity, obviously, we don't currently offer student loan refinance. I don't know that right now the market for lowering people's rates versus what they got is there, but certainly an opportunity to help maybe restructure or re-amortize the payments could be valuable.
That's certainly something that we could look at as a partnership, but we're not, you know, we're not in that space right now.
Got it. Any other questions from the audience right now? Thanks for that, Jeff. It was interesting the way you started the introduction, Scott, on to LendingClub and the long history that you have looking at data and data analytics. I think, you know, I don't know that we could get through a conversation like this without asking about AI and the buzz that has, both conceptually and just as a buzzword.
Did you ask ChatGPT to write these questions?
Yeah. No, I did not. I don't think we did we? No, we didn't. You know, that has been obviously a part of your business for quite a while.
Yeah
part of the process. Can you expand on the use of the technology as, particularly as it relates to credit risk assessment, fraud detection, or other areas you think would move the needle, either from a revenue or expense perspective?
Yeah. You are correct that, you know, advanced analytics techniques have been a core part of our operations, really since forever.
Mm-hmm.
Given the, you know, data-intensive nature of the entire business, how we apply that in different places, and also given the regulatory intensity of how and where you can apply that does vary. For example, in fraud, it's a very robust implementation where, you know, we've got industry-leading, fraud performance. You know, our identity theft is, you know, low single-digit basis points of our...or our platform
Mm
That's driven by these techniques. The ability to you know, is this person real? Is the, you know? Is the behavior they're exhibiting authentic? You know, there, use it. You can use it in marketing to make sure you're delivering the right message to the right audience. In underwriting, certainly for variable, developing the variables that you input and what criteria you're going to use, yes. You, you know, you can't really run a black box model where some system is doing something that you don't know what it's doing or
Right, right.
How it's coming to that output. You can use it to help develop your models and identify variables. Also in servicing, of course, in things like your chatbots and all of that. It's used throughout the kind of customer performance life cycle.
Got it. You know, you kind of alluded to it there. You know, as people or as policymakers think about, kind of guidelines and just, like, where it makes sense to introduce some sort of restrictions or constraints on the technology, et cetera, what do you think makes sense versus maybe doesn't?
Yeah.
'Cause, you know, there could be a lot of policy objectives that may be at odds, right?
Yeah. I think, you know, one of the contested debates right now is inputs versus outputs.
Mm.
Should you be focusing on what data goes in at the top, or are you more focused on results? We're more advocates for the latter.
Okay
Which is, let's make sure that the output is equitable and fair, and let's make sure that the results of this. Let's, let's use everything we can to increase access to credit, to lower the cost of credit. We didn't really talk about that, but, you know, one of the things that's clear in the data and, you know, there's been, this isn't us saying it, there's been multiple Federal Reserve studies looking at LendingClub and saying, "Hey, we are making credit more affordable, and we're making it more accessible than traditional models." That is a very, very positive outcome.
Right. Right.
for the consumer.
Right, right.
You know, there's a lot of opportunity still to come there.
Got it. Lastly, to wrap up, M&A, you recently completed the acquisition of Radius Bancorp. How do you constantly incremental M&A, and what types of assets or geographies would you be targeting? What are you seeing in the marketplace for private asset multiples, specifically? Like, kind of, where are you looking, and where are you targeting, and what are valuations looking like right now?
You know, we don't need M&A really to drive growth.
Mm
Our TAM right now, it is the largest it's ever been. If our core use case for the introduction to new customers is, "Hey, you didn't pay off your credit card last month. That means you have a loan. It's a crappy loan. Do this instead. We'll save you money." There is now over $1 trillion in outstanding credit card debt, and credit card interest rates are at record high levels. From that perspective, you know, there is a massive TAM that is building daily right now. That said, given what I just mentioned about, you know, our customers, you know, they want to do more with us. We aspire to deliver on that.
Mm-hmm.
That represents a range of products, as well as experiences. There certainly could be opportunities for us to accelerate that roadmap through M&A. You know, prices are coming down. They've come down slowly.
Right.
You know, our currency has also come down, so, you know, we would be thoughtful. You know, the acquisition of the bank was a no-brainer. The, you know, the strategic benefits were clear, but the financial benefits were, you know, immediate.
Right. Right, right.
You know, we knocked out costs. We added a new revenue stream. you know, we're certainly open to things that can be transformative, but we'll be thoughtful given the state of our own currency.
Look, to me, it always seems like, you know, there are a couple of different potential acquisition types for LendingClub. As clearly, as you said, there can be technology or product related.
Mm-hmm.
You know, on... back on the bank side, is there anything incremental that you would need to do? Or with Radius, do you have everything that you need and want, from, ability to drive deposit growth and gain efficiencies?
You know, certainly, diversifying the funding side.
Okay
The balance sheet is another, you know, potential opportunity there. We, you know, we've grown primarily. The bank we acquired had about $2 billion in deposits. It was a mix of some commercial accounts. It had a big trade union business, which we've kept and are growing
Mm
You know, the deposits that we added over the course of the last 18 months have primarily been high-yield savings. That's where the growth has come from. you know, opportunities to further diversify that side of the balance sheet would certainly be potentially interesting.
Yep.
Agree.
Got it. Drew, Scott, thank you very much for joining us today. always great to catch up with you, and it's an interesting period, especially as, you know, I think, I always think about LendingClub as having been one of the leaders in the evolution. you know, you see other companies that have tried to emulate your model, but I think ultimately they end up kind of gravitating towards the path you've already broken. appreciate you guys being here today.
Thanks, Jamie.
Thanks.