Yahoo Finance LendingClub Corporation (NYSE:LC) Q1 2024 Earnings Call Transcript
LendingClub Corporation (NYSE:LC) Q1 2024 Earnings Call Transcript April 30, 2024
LendingClub Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Thank you for attending the LendingClub First Quarter 2024 Earnings Conference Call. My name is Jayla and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host the Head of Investor Relations, Artem Nalivayko.
Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub's first quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on our 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 including with respect to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services, and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements.
Factors that could cause these results to differ materially are described in today's press release and presentation. Any forward-looking statements that we make on this call are based on current expectation and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share, and pre-provision net revenue. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. And now, I'd like to turn the call over to Scott.
Scott Sanborn: All right. Thank you, Artem. Welcome, everybody. We kicked off the year with another solid quarter, and we're pleased with how well we're executing against the factors we can control, derisking the business while also advancing our strategy and setting the stage for future growth. Our operating discipline, credit outperformance, and continued innovation are resulting in a sustainable operating rhythm that has us well-positioned to outperform as conditions improve. Let's start with our loan volumes. Total originations for the quarter came in just above $1.6 billion, which was in line with the prior quarter despite typical adverse seasonality. Pre-provisioned net revenue of $48 million came in above the high end of our range, thanks to strong execution combined with temporary benefits in both expenses and loan sales prices.
Importantly, we delivered net income of $12 million, marking 12 straight quarters of GAAP profitability since we became a bank, a notable feat given the turbulent macro environment over the last two years. In February, we successfully exited the three-year operating agreement required of us as a new bank, a milestone in our evolution that gives us more flexibility in how we manage the business. Our management priority is currently deploying our excess capital to build the balance sheet and bolster our net interest income, which we believe is the best way to drive durable shareholder value in a higher for loan growth environment. For example, this past quarter we grew the balance sheet by $415 million, adding new originations in the form of whole loans and securities and a repurchase of a portfolio of previously sold LendingClub loans.
These actions to increase the balance sheet will support a return to growth and net interest income going forward. Now turning to credit, where we continue to demonstrate our leadership, you'll see on Page 9 of our earnings presentation that we've delivered our 13th consecutive quarter of material outperformance versus our competitive stat across all core customer segments that we serve. This outperformance reflects our vast data advantage derived from over $90 billion in issued loans, our flexible technology platform that allows us to rapidly respond to changing market dynamics, and the efforts of our highly seasoned team with the human intelligence to look ahead and beyond the models. Our sustained credit performance gives us confidence in our ability to increase shareholder value through a sustained, elevated interest rate environment, and it firmly reinforces our position as the partner of choice for marketplace investors.
Turning to the marketplace where asset manager demand for our structured certificate program remains strong. We sold over $785 million of new issuance through the program this quarter, generating fee revenue and capital efficient risk remote interest income without an upfront CECL charge. Beyond asset managers conversations with select banks are gaining momentum. Depending on the rate environment, we are cautiously optimistic that we'll see engagement beginning in the back half of this year, which should help drive up pricing and corresponding marketplace revenue. Given the consistent demand that we're seeing from asset managers and the momentum that's building with banks, we are increasing our held for sale portfolio, which provides interest income near-term and the potential for sales at higher gains down the road.
Stepping back as credit card balances and average APRs hit new highs, our TAM has never been larger and our value to consumers has never been more compelling. Refinancing credit card debt through a LendingClub loan provides substantial savings and has been shown to increase a borrower's credit score by an average of 48 points. And we make it easy with new borrowers able to apply in a matter of minutes and existing members able to redeem a pre-approved offer in a few clicks. For LendingClub, these borrowers delivered strong credit performance, high marketing efficiency and a powerful opportunity to engage and reward them over time. Given the historic refinance opportunity in front of us, we're focused on coiling the spring to enable accelerated growth when conditions permit.
We're building on our 15 plus years of industry leadership and further elevating and differentiating our offering through several initiatives that include, an increasingly robust set of credit monitoring and management tools that provides members with visibility into their credit profile, current debt and the cost of that debt, all of which serves to highlight the personal loan value proposition. With just the credit profile portion of the functionality live, we're seeing enrolled members visiting us close to 50% more often than those who haven't. With these positive early results, we're excited about the broader debt monitoring portion of the experience that's currently live and testing with a select group of members in advance of a broader release later this year.
A second initiative is a turnkey embedded finance integration that enables digital delivery of personalized, prescreened loan offers via advertising. We are testing this functionality on our own site where we're seeing substantial lifts in response and approval rates from high quality borrowers, and we hope to offer the integration to select partners as we exit the year. We're also iterating on unique to LendingClub member products such as Top-up and CleanSweep that offer members a powerful benefit to staying engaged with us. Top-up allows members to easily add incremental funds to their existing loan balance while maintaining a single payment within their budget. We're currently testing our way into the program and we're seeing materially higher response rates and issuance volumes.
CleanSweep is a revolving line of credit that gives existing members a way to easily sweep new credit card balances into a fixed payment plan, allowing them to get the card rewards they love while saving on interest if they need to carry a balance. CleanSweep provides a compelling, easy to access experience that is unique to LendingClub and drives ongoing engagement. It's also the first step towards offering other revolving use cases down the road. While we have an extensive learning agenda here, early results again show extremely positive response and take rates. These and other new initiatives are helping us deliver on our promise to relentlessly advantage our members by delivering financial solutions that are smart, simple and rewarding.
The positive early results help us offset our typical seasonality in Q1, and we expect them to deliver nearly $0.5 billion in new high quality issuance this year. Equally importantly, these initiatives further differentiate LendingClub's offering in the market and set the stage for longer-term growth. In closing, I'm incredibly proud of what we've been able to accomplish through this environment, including delivering consistent GAAP profitability, remaining strong stewards of credit, rapidly innovating to meet investor needs, innovating on new tools, features and experiences to deliver value for our members, and successfully exiting our operating agreement. We're now reaching a sustainable baseline from which we can expect to grow originations, our balance sheet, and our member base.
We will do so modestly if the current rate conditions persist with a more pronounced acceleration as the Fed's interest rate policy eases. I'll again thank the entire LendingClub team for their continued innovation and dedication to our mission. Thanks to their hard work, we're well-positioned to capture the incredible opportunity in front of us. With that, I'll turn it over to Drew.
Drew LaBenne: Thanks, Scott, and hello everyone. Let me walk through the details of our first quarter results starting with originations. As Scott mentioned, we originated over $1.6 billion in line with the prior quarter and the high end of our guidance. Last quarter, we added Page 10 to our earnings presentation to illustrate the relative economics of the four primary programs we have at our disposal to sell or retain loan originations. Whole loan and structured certificate sales allow us to take more upfront economics and operate in a capital like manner without credit risk, whereas loans that we hold or season on balance sheet provide the strongest returns. On Page 11, you can see the origination volumes of the four programs.
The issuance in the quarter was once again led by our very successful structured certificate program, which was approximately $785 million of the originations in the quarter. We also sold $320 million of whole loans through the marketplace, accumulated $255 million in to held for sale for our extended seasoning program to meet future marketplace investor demand for season loans, and we retained $285 million in our held for investment portfolio. This quarter, you saw us increase the amount of whole loans retained on our balance sheet between the held for investment and extended seasoning programs, which represented 32% of total originations, up from 17% in the prior quarter. We plan to maintain these higher levels of whole loan retention to offset the maturation of our existing portfolio, keeping our total loan portfolio essentially flat through the remainder of the year.
Importantly, the total balance sheet will continue to grow as we add structured certificate securities throughout the year. Now, let's move on to pre-provisioned net revenue or PPNR. PPNR was $48 million for the quarter and came in above our guidance range due to temporary outperformance on expenses as well as rate driven improvements in marketplace economics. Let's move into the two components of PPNR, starting with revenue, where you can see the detail on Page 12 of our earnings presentation. Total revenue for the quarter was $181 million compared to $186 million in the prior quarter. Let me break revenue down into the two components, starting with non-interest income. Non-interest income was $58 million in the quarter, up from $54 million in the prior quarter.
The improvement was primarily driven by better marketplace loan pricing as we saw continued strong demand combined with lower interest rates in the period. The pricing benefit was partially offset by lower origination fees as we retain more loans in our held for investment portfolio where the origination fee is deferred over the life of the loan. Now, on to net interest income, which was $123 million in the quarter, compared to $131 million in the prior quarter. The change in net interest income was primarily due to the continued shift towards putting structured certificate securities on the balance sheet, which have no provision due to the risk remote nature of the VA note security, but come with a lower asset yield. This is the third quarter since we start the shift in balance sheet composition and going forward we should see modest improvements in net interest income with further benefits when the Fed begins to lower interest rates.
As Scott noted, we purchased $235 million LendingClub issued loan portfolio from a marketplace investor at the end of the quarter, which we accounted for under fair value and funded it with short-term Federal Home Loan Bank advances that have been repaid as of this call. As you have seen us do in the past, we will be opportunistic about secondary portfolio purchases of LendingClub issue paper. We see this as a way to quickly deploy excess capital and earn attractive returns while providing liquidity for our marketplace investors. Risk adjusted revenue, which is net revenue less provision, increased to $149 million this quarter from $144 million in the prior quarter, which was the result of the lower provision as we continued growing the structured certificate and extended seasoning programs.
We introduced this metric last quarter as we believe it illustrates the lower risk nature of the assets we have been using to grow the balance sheet. The continued evolution on the asset side of the balance sheet has had the expected impact on net interest margin. On Slide 13, you can see that our net interest margin was 5.8% in the quarter, compared to 6.4% in the prior quarter. We expect the rate of net interest margin decline to moderate going forward from what we've experienced in recent quarters assuming the Fed has done increasing rates. Now, please turn to Slide 14, of our earnings presentation, which refers to the second component of PPNR non-interest expense. Non-interest expense was $132 million in the quarter compared to $130 million in the prior quarter.
While we will continue to remain disciplined on expenses, we do expect a step up in variable spend to support growth as well as higher depreciation from some of the recently completed technology builds you heard Scott discuss earlier. Now, let's turn to provision. On Page 15, you will see provision for credit losses was $32 million for the quarter compared to $42 million in the prior quarter. The sequential decline was a result of lower incremental provision on older vintages partially offset by higher day one CECL provision from the higher retained loans in the period. As we indicated last quarter, we believe delinquencies and net charge-offs on our held for investment portfolio have peaked and are beginning to decline as the portfolio ages past the point of peak dollar net charge-offs.
Delinquencies also benefited from seasonal impacts and to a lesser extent, temporary hardship plans tailored to the inflationary environment. On Page 16, we have updated our lifetime loss expectations for each of our annual vintages. We are seeing stable performance in line with the expectations we provided last quarter and the marginal ROEs remain very strong across the vintages. As a reminder, we have applied a higher qualitative reserve to the 2023 vintage given the longer remaining life compared to the more seasoned vintages. And on Page 17, we have included the illustrative example of the credit lifecycle of a single hypothetical vintage. We noted on our last call that the dollar charge-offs peak at approximately 1.5 years. Our health or investment portfolio is now 16.5 months old and we saw that net charge-offs were stable sequentially as we expected.
Going forward, we expect dollar net charge-offs to begin to decline as the portfolio continues to season. As a reminder, our in-period net charge-off rate will continue to increase as the portfolio ages, but on lower outstanding balances. We have already taken an upfront CECL provision for future net charge-offs on a discounted basis, which is reflected in the portfolio allowance. Due to this timing dynamic, we continue to expect lower in-period CECL provisions compared to dollar net charge-offs in the coming quarters, and our in-period net charge-off rate will continue to increase as the portfolio ages, but on lower outstanding balances. This is in line with our previous expectations as our portfolio ages. Now, let's move to taxes. Taxes in the quarter were $4.3 million, or 26% of pre-tax income.
As I've mentioned before, we will have some variability in the effective tax rate from quarter-to-quarter, but our long-term tax rate expectation is 27%. That brings us to net income. Net income for the quarter was $12 million, or $0.11 per share and our tangible book value per common share increased to $10.61. As Scott mentioned, this marks our 12th consecutive quarter of profitability. Now, let's move on to guidance. For the second quarter, we anticipate stepping up originations to a range of $1.6 billion to $1.8 billion, given the success we're seeing from our recent initiatives that are driving efficient, creditworthy borrower acquisition. Our PPNR guidance range of $30 million to $40 million reflects the forecasted originations growth and related variable expense offset by the revenue impacts on sales price from interest rates moving higher in Q2 and the expense growth from strategic initiatives I discussed earlier.
And we plan to continue to deliver positive net income in the second quarter, though not at the level seen in Q1, which benefited from the one-time items I discussed earlier. As we look beyond Q2 to the back half of the year, there are a few trends I would like to call out. As Scott mentioned, we are seeing positive early performance on our new product and marketing initiatives, which we expect to drive incremental originations throughout the year. We expect to be able to maintain PPNR in the back half of the year, in line with our Q2 guidance with modestly increasing revenue offsetting the increase in expenses related to volume growth. While it's looking less likely that we will get significant rate relief in 2024, any potential reductions would be an accelerant to growing revenue.
With that, we'll open it up for Q&A.
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