Sempra Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 11 speakers on the call.

Operator

Good afternoon. Thank you for attending today's LendingClub Third Quarter 2024 Earnings Conference Call. My name is Jalen. I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Operator

I'd now like to turn the conference over to our host, Autumn Nalivadko, Head of Investor Relations. Autumn, you may proceed.

Speaker 1

Thank you, and good afternoon. Welcome to LendingClub's 3rd quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO and Drew Leben, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via e mail.

Speaker 1

Our remarks today will include forward looking statements, including with respect to our competitive advantages and strategy, macroeconomic conditions, platform volume and pricing, future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are described in today's press release and presentation. Any forward looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks today also include non GAAP measures relating to our performance, including tangible book value per common share and pre provision net revenue.

Speaker 1

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.

Speaker 2

All right. Thank you, Arvind. Welcome, everybody. We had a terrific quarter with continued product innovation and credit outperformance now supported by an improving rate environment. As a result, we delivered across all of our key operating metrics.

Speaker 2

Originations grew 6% sequentially to $1,900,000,000 revenue grew 8% to over 200,000,000 pre provision net revenue grew 19 percent to CAD65.5 million and we delivered CAD14.5 million of GAAP net income. Beyond the numbers, we welcome back the first of what we hope to be many more banks to our platform, supporting improving marketplace revenue. We deployed significant excess capital into the balance sheet to drive future recurring revenue. And earlier this month, we acquired the technology underlying Tali's award winning credit card management solution to accelerate our product roadmap and drive future revenue growth. We said last quarter that we have reached an inflection point and this quarter's results demonstrate how well we've positioned the company to benefit from improving market conditions and to capture the massive opportunity in front of us.

Speaker 2

I'll begin with our balance sheet, where in addition to continued retention of full loans and structured certificates, we made an opportunistic acquisition of a $1,300,000,000 portfolio of previously sold LendingClub loans. This transaction is similar to the portfolio purchase we made back in December 2022. We're going to hold these loans at fair value and they will be immediately accretive to our earnings. Our balance sheet has now grown 25% since the beginning of this year to just over $11,000,000,000 in total assets. That represents a quadrupling since we acquired the bank in 2021, which speaks to our commitment of building a resilient recurring revenue stream to deliver consistent shareholder value.

Speaker 2

Marketplace demand is also growth. Thanks to our strong track record on credit, the attractiveness of our asset class, our commitment to marketplace innovation, our status as a regulated bank and the improving interest rate environment. We've been focused on reengaging banks, which have historically supported higher loan sales pricing. This quarter, we sold a $75,000,000 pool of loans to a previous bank buyer that returned to the platform. And just last week, we completed a $400,000,000 sale to a new bank partner.

Speaker 2

Importantly, we anticipate that these banks will together purchase more than $1,000,000,000 worth of additional loans over the next 12 months. Pricing on these sales will support continued improvement in our average pricing across all loan sales, which will ultimately allow us to reopen dormant direct to consumer marketing channels that remain uneconomic at this point. Our structured certificates program and innovation tailored to asset managers looking for leverage returns also continues to perform well with $830,000,000 flowing through the program this past quarter. Here too, strong demand combined with the declining rate environment and our track record of credit outperformance is supporting increases in loan sales pricing. As a reminder, the structured certificate program is a way for us to generate efficient returns for loan buyers while delivering in period revenue and forward interest income with remote credit risk for LendingClub.

Speaker 2

As I've mentioned, credit remains strong and we continue to consistently perform 40% to 50% better than our competitive set across the core consumer segments we serve. Thanks to agility made possible by our advanced underwriting platform and proprietary machine learning models supported by data on over $90,000,000,000 of loan repayments, we're delivering the highest sustained returns in our history. These attractive returns are benefiting revenue from both our balance sheet and the marketplace. We will therefore remain prudent on underwriting continuing to pursue quality over quantity to ensure we sustain leading credit performance supportive of increased loan sales pricing. I'll turn now to our member base, which I'm thrilled to say crossed the 5,000,000 mark this past quarter.

Speaker 2

As we look to our next millions of members, our consumer strategy, as outlined on Slide 6 of our presentation, is focused on 3 areas. First, efficiently acquire satisfied customers by helping them lower the cost of their credit card debt. 2nd, once acquired, engage members through our mobile app and through products, tools and features that provide added value and encourage repeat visits. And 3rd, offer additional products and product combinations in the right place at the right time to deliver new value and meet members' credit needs as they evolve, thereby creating a powerful lifetime lending relationship. Let me dive into each of these areas.

Speaker 2

So first is efficiently acquiring customers by providing meaningful savings on the cost of their credit card debt. This opportunity has never been great. Credit card balances remain at record highs and they're priced at record high rates. The value of refinancing credit card debt through a personal loan is the most compelling it has ever been. According to the data analytics firm, DB01, the spread between credit card and personal loan rates is at a record high 7 50 basis points.

Speaker 2

What's more, in addition to their savings on interest, members also increased their credit score an average of 48 points when they pay off credit card debt with a LendingClub personal loan. This process is highly automated and seamless, which is why we have such high satisfaction scores and why 83% of our members say that they want to do more with us. Once acquired, our mobile app serves as our primary engagement platform, meeting members where they are. We began marketing mobile app back in June and the user base has increased by about 20% each month. And we're getting positive feedback.

Speaker 2

We've got app store ratings of 4.74.8 in the Apple and Google stores respectively. But what's really exciting is what we're seeing under the covers. Nearly half of new loan customers are downloading our app. Those who are using the app are visiting us almost 20% more often than non app users. And that increased engagement is translating to greater issuance with app users demonstrating a higher propensity to take another product from LendingClub.

Speaker 2

We are enhancing the app with features to support our members' financial goals. We launched the first phase of Debt IQ, our debt monitoring and management solution earlier this year to drive engagement and to reinforce the value of debt consolidation. Even in its nascent state, app users enrolled in Debt IQ are engaging with us nearly 20% more often than those not enrolled. We started the Debt IQ journey in response to our members seeking better tools for understanding their debt, how to pay it down, how to pay less interest when doing so. And we've found from our own surveys that the need is really clear.

Speaker 2

47% of U. S. Cardholders don't know the interest rate they're paying on their credit cards. And even those who say they know it, a third of them didn't know that their rates have gone up over 500 basis points in tandem with the prime rate increase. So this lack of awareness is astounding and it speaks to the education and transparency that's needed to help consumers understand the true cost of their debt and to motivate them to pay it off.

Speaker 2

The award winning tally technology we acquired earlier this month will accelerate our progress on Debt IQ with meaningful enhancements rolling out in phases starting in mid-twenty 25. Fully realized, we expect Debt IQ to provide our members with a holistic view of their credit card interest rates, outstanding balances, minimum payments, due dates and more. It will provide payment strategies for paying down their credit card debt and the ability to set up automated transactions and alerts to ensure payments aren't missed. And of course, it will provide seamless integration with LendingClub's banking and lending products. Ultimately, Debt IQ will provide members with a powerful way to manage and optimize their high cost and secure DUC.

Speaker 2

Finally, as we create deeper engagement with our members, we'll successfully broaden our lifetime lending relationship through products like TopUp, which allow borrowers to add funds to their existing loans while maintaining 1 monthly payment. And over time, we'll be enhancing our application funnel and our data foundation to enable smart, seamless cross selling of products beyond unsecured lending. In summary, we've got a clear, focused, high confidence strategy that will enable us to acquire customers, engage them in our product ecosystem and deliver lifetime value and revenue growth. But we're not just focused on lending. We're also focused on helping our members earn more on what they save.

Speaker 2

We recently launched LevelUp Savings to reward members for engaging in positive savings behavior. Members who contribute at least $2.50 per month to their LevelUp Savings account earned the current LevelUp rate of 5.15% versus the standard rate of 4.3%. We've had very strong initial customer response to the program gathering over $500,000,000 in deposits since launching just 2 months ago. Importantly, this product gives us another lever for managing deposit costs while delivering competitive value to our members. We're energized about the quarter we delivered and the trajectory we're on.

Speaker 2

As we move through the next year and conditions further improve, we will be growing volumes on top of a larger balance sheet and a more efficient expense base and with a more robust and differentiated consumer experience. We're extremely well positioned and I look forward to continuing to innovate and execute with the talented LendingClub team, who I'm happy to say have voted us one of Newsweek's most loved workplaces for the 3rd year in a row. With that, I'll turn it over to you, Drew. Thanks, Scott.

Speaker 3

I agree we are well positioned for the future and the Q3 is starting to demonstrate our potential. Let's go through the details starting with originations. We originated over $1,900,000,000 in the quarter, which is above the high end of our guidance range and a $100,000,000 increase over the prior quarter. The growth was driven by continued product innovation while maintaining tight underwriting standards and industry leading marketing efficiency. If you turn to Page 12 of our earnings presentation, you can see the origination breakdown across the 4 funding programs.

Speaker 3

The issuance in the quarter was once again led by our very successful structured certificate program, which accounted for $830,000,000 of originations. We also sold $335,000,000 of whole loans through the marketplace, accumulated $240,000,000 of our held for sale extended seasoning program loans to meet future marketplace investor demand for season loans. And we retained $510,000,000 in our held for investment portfolio. This quarter, you again saw us increase the amount of hold loans retained on our balance sheet to 39% of total originations, up from 36% in the prior quarter. As Scott mentioned, we successfully won a competitive bidding process to purchase $1,300,000,000 portfolio of LendingClub personal loans that we previously originated and sold.

Speaker 3

On Page 13 of the earnings presentation, we have provided some of the key highlights of the transaction. The purchase allows us to deploy excess capital, which will generate additional revenue and earnings over the next year. The portfolio is forecasted to yield approximately 10% and it is worth noting that yield is net of expected credit losses. As we have done with prior purchases, we have elected to book this purchase as held for investment at fair value given the short remaining duration of approximately 1 year. It is also worth mentioning that we secured low cost short term financing for the 1st month of the purchase, which you will see reflected on our net interest margin table on Page 15 of the earnings presentation.

Speaker 3

This transaction was the primary driver of 17% sequential growth of our whole loan portfolio to $6,000,000,000 and the growth of total assets to $11,000,000,000 at the end of the quarter. We are also making steady progress with returning bank buyers to the marketplace. In addition to the 2 transactions that Scott mentioned, we continue to build a pipeline of additional bank buyers and are optimistic in making further progress in 2025. Now let's move on to pre provision net revenue or PPNR, which is total net revenue less non interest expenses. PP and R was $65,000,000 for the quarter, up 19% sequentially and came in well above our guidance.

Speaker 3

These results were driven by strong execution and improved loan pricing as well as a few unique items that I'll call out as I break down revenue and expenses. As shown on Page 14, total revenue for the quarter was $202,000,000 up from $187,000,000 in the prior quarter. Let's go into the 2 components of revenue starting with non interest income. Non interest income was $62,000,000 in the quarter, up marginally from the prior quarter. The sequential improvement was driven by higher marketplace loan pricing, partially offset by fewer loans sold as we made the decision to retain more loans on our balance sheet.

Speaker 3

Pricing this quarter represents the 3rd quarter in a row of improved sales prices. We also had 2 largely offsetting impacts in the quarter. First, a $9,000,000 markup of our held for sale portfolio reflecting higher sales prices and therefore a lower discount rate. This benefit was largely offset by an $8,000,000 servicing fee unwind during the period as a result of the portfolio purchase. Now that we own the loans and are collecting the interest income, there is no servicing revenue and hence the reversal.

Speaker 3

Now let's move on to net interest income, which was $140,000,000 in the quarter, up from $129,000,000 in the prior quarter. The increase was primarily driven by growth in our interest earning assets as a result of the portfolio purchase we mentioned earlier. On Slide 15, you can see our net interest margin was down slightly this quarter at 5.63% as expected. The main driver was the growth in the senior securities from the structured certificates, which have a lower yield but are also risk remote and come with no provision for credit losses. We expect net interest margin to be slightly down again in the Q4 due to lower balances in the extended seasoning portfolio related to the $400,000,000 bank sale in October.

Speaker 3

We will get a $6,000,000 benefit to revenue on the sale of that portfolio. After the Q4, net interest margin should begin expanding assuming the Fed continues lowering interest rates and our deposit funding costs decrease as a result. Please turn to Page 16 of our presentation, which refers to the second component of PPNR, non interest expense. As I had indicated last quarter, expenses increased by $4,000,000 to $136,000,000 as we position the company for 2025 and absorbed a legacy one time non cash item in the quarter. While we will continue to remain disciplined, we do expect another step up in expenses in the Q4 due to higher depreciation related to the completion of some of the initiatives you heard Scott discuss earlier, as well as the impact of the recent hiring we have done to accelerate our product roadmap and position the organization for a strong 2025.

Speaker 3

Now let's turn to provision. On Page 17, you will see provision for credit losses was $48,000,000 during the quarter compared to $36,000,000 in the prior quarter. The sequential increase was primarily driven by higher day 1 CECL on higher held for investment loans retained compared to the prior quarter. Credit continues to perform as expected as evidenced by our net charge offs on our held for investment portfolio declining 16% sequentially down $11,000,000 to $56,000,000 in the quarter. The net charge off ratio was 5.4% in the 3rd quarter, down from 6.2% in the prior quarter.

Speaker 3

Delinquencies on the consumer portfolio also continued to improve. On Page 18, we have updated our personal loan lifetime loss expectation for the 20222023 held for investment vintages. As we had indicated last quarter, the 2021 vintage has largely run its course with less than 10% of the original principal balance remaining, so we have removed that vintage from the disclosure. The 2023 vintage continues to season and we have maintained the lifetime loss expectations provided last quarter. Forecast for the 2022 vintage reflects an adjustment for lower expected recovery rates on previously charged off loans and modestly higher lifetime charge offs.

Speaker 3

We continue to expect strong marginal ROEs north of 20% across all vintages. That brings us to net income. Net income for the quarter was $14,500,000 or $0.13 per share and our tangible book value per common share increased to $11.19 up 10% compared to last year. And it's worth noting, it is up 72% since we acquired the bank in 2021. Now let's move on to guidance.

Speaker 4

For the Q4,

Speaker 3

we anticipate originations between $1,800,000,000 $1,900,000,000 as we expect continued product innovation and modest increases in paid marketing to offset the negative seasonality we typically see in the 4th and the 1st quarters. We are very close to achieving sales price improvements that will allow us to open up additional marketing channels as we enter the seasonally favorable second and third quarters of next year. We are increasing our PPNR guidance range to $60,000,000 to $70,000,000 reflecting growing revenue and improving operating leverage and expenses as well as the $6,000,000 benefit from the $400,000,000 portfolio sale I mentioned earlier. We plan to continue delivering positive net income in the 4th quarter with continued reinvestment in the balance sheet to provide stronger returns in 2025. Our goal is to roughly maintain the size of our core loan portfolio under CECL until originations accelerate after Q1 of next year.

Speaker 3

For the next couple of quarters, this will translate to retaining roughly $550,000,000 to $650,000,000 of held for investment loans under CECL per quarter. All in all, it was a great quarter and we continue to set ourselves up to take advantage of this momentum in 2025. With that, we'll open it up for Q and A.

Operator

I'll begin our question and answer session. Our first question comes from Tim Switzer with the company KBW. Tim, your line is now open.

Speaker 5

Hey, good afternoon. Thank you for taking my questions.

Speaker 2

Hey, Tim. Hey, Tim.

Speaker 5

The first question I had was on the pretty significant improvement in loan sale pricing we saw this quarter going from a marketplace discount from 3.5% to 2.5%. I would imagine it's only $75,000,000 of sales, not a lot of that was really driven by the bank purchaser. Can you kind of provide some details on what's driving that? I'm sure it's lower cost of funding for asset managers. And then what's your expectation going forward on continued improvement as rates keep moving lower and then potential further upside if more banks jump back in?

Speaker 3

Yes. Great question. Thanks, Tim. I mean, first, I'd note this is our 3rd consecutive quarter with an increase in sales prices. So that's certainly been helpful in terms of how it's flowing through our income statement.

Speaker 3

Obviously, that's coming from really, I'd say, 3 factors. First, the performance we've had on our loans has been very steady and investors have are appreciating that and they're starting to pay better prices for the consistency and performance. I'd say second, the interest rate environment this last quarter was obviously very helpful. The 2 year treasury, I think end to end dropped 100 basis points. That's obviously conducive to better pricing as well.

Speaker 3

And then that better pricing leads to a mark on the remaining held for sale portfolio that also benefits those fair value marks in the quarter. So those were the biggest drivers that led to the decrease in the fair value marks or the increase in the observed price that you're seeing there as well. Yes. Going forward, obviously, changing the mix of sales to more banks will be helpful to price. I think we expect to get continued better pricing power better prices from all buyers, just again consistency of performance and improvement of the ones that they're buying.

Speaker 3

The rate environment, we expect over time that will continue to be beneficial, but with any given quarter there can be fluctuations depending on how the yield curve moves.

Speaker 5

Okay, great. Appreciate it. And I'm curious, it sounds like in one of your comments you mentioned that the $400,000,000 loan sale to a new bank partner a week ago was all season loans. Can you kind of talk about what the banks are looking for and what products they want, what they want to be putting on their balance sheet and then how the pricing might differ if it's a season loan versus a whole loan sale?

Speaker 3

Yes. We started the extended seasoning program or the held for sale program, I think maybe 3 quarters ago and maybe a little longer than that. And the initial hypothesis or the initial belief was that as loan season, we'll be able to get tighter in terms of credit expectations with the buyer if there's any difference in how that's viewed, which is absolutely true. But the other benefit is that when a buyer wants to come in and buy bulk purchase such as this bank we're discussing to get started on their journey of accumulating a larger portfolio, we have that available immediately, which in this case and the bank that we sold to in Q3 allowed us to jump start the program, the programmatic buying of those banks. And then as Scott mentioned, enter into a $1,000,000,000 flow over the next 12 months with those banks.

Speaker 3

So it's been really beneficial. I'd say even these two banks, there's a little bit of difference in terms of the type of loans that they're trying to put on balance sheet and without getting into it too much, I think banks are just going to have different profiles of risk and return that they want to put on their balance

Speaker 5

sheet. Got it. It makes total sense. I'll get back in the queue. Thank you.

Operator

Our next question comes from Vincent Kansnick with the company of BTLG. Vincent, your line is now open.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. First off, I wanted to talk about all the great detail you provided on your applications and particularly BetIQ and the Tali acquisition. I was just wondering if you could maybe put a finer point on it in terms of the what you're expecting to roll out in the second and third quarter of next year in terms of capabilities. Any sense for what that might do in terms of being able to execute on opportunities, say, in terms of higher volumes, if you could describe that?

Speaker 6

And I guess somewhat relatedly, the CFPB open banking rule, that proposal was released. I'm sort of wondering what that might do in terms of your capabilities with Debt IQ? Thank you.

Speaker 2

Yes. Yes. Great. So, Debt IQ was the product name of what we're building ourselves when we got the tally opportunity, when we saw that became available, we went after it because effectively it represents the deadIQ roadmap except fully manifested. So the acquisition of this code base and some of the talent to help stand it up in our environment will fairly materially shortcut the timeline for us to getting to the end state of our plan for Debt IQ and dramatically reduce the cost of getting there.

Speaker 2

So what is it? It's basically our customers are coming to us to pay down their credit card debt. For those we approved, we are successfully paying down their debt. In some cases, not all of the debt, just some. And then what happens is post loan from us, I think we've talked about this before, you'd like to think a consumer sells into the sunset and never racks up credit card debt again.

Speaker 2

Unfortunately, that isn't the case. People would go in and out of the need, right? You saw over this last inflationary cycle, balance is growing and people leaning more into their cards to make ends meet. And so what and what we know from our customers is some of them, some medical emergency happens, they temporarily lose a job, whatever, get a divorce, there are all kinds of drivers, life events that cause them to go back into credit card debt. So having an actual interface that helps provide them with this visibility and the capability to manage it, keeps them connected to us and keeps in front of the customer the opportunity to save off of that debt should it be required.

Speaker 2

Even when they don't have credit card debt, there's value here. So what we know from our customers is they are this is the only bill they pay manually. Everything else is on auto pay, auto ACH, right? Because everything else is fixed. Your mortgage, your core payment, your student loan is all fixed.

Speaker 2

This is a variable rate and it's off of a variable balance. And each card company calculates the minimum payment due differently. It's on different due dates. So if you have 5 cards, the process of knowing, okay, when is it all due? What payment amount is each one going to require at minimum?

Speaker 2

And what's the total payoff balance? And then importantly, which one should I pay off first based on what rate am I paying at each of these? Like, they are trying to manually keep track of that with spreadsheets and notebooks. This is basically going to give them the capability to do that. So you'll be able to see all your cards in one place, your total balance, your statement balance, your payoff amount, your main pay amount, the rates you're paying.

Speaker 2

It's going to allow you to set a payment strategy. So as an example, fully realized, I always want to have whatever $5 in my checking account, anything above that, I want you to pay off highest priced card first, but make sure you make all of my minimum payments for me. And this will allow you to kind of set that up and conduct that payment exercise from a LendingClub account and manage it. And if we see you're not paying off your credit card debt, we're going to be able to present an offer to you for a loan and help you understand how much money that's actually going to save you. So that's where you'd see things like top up and clean sweep or just a repeat personal loan would really add value and could be integrated into that experience.

Speaker 2

And remember that these repeat customers, they come at low to no acquisition costs, they deliver better credit performance. So it kind of creates a bit of a flywheel in our member base. And what does open banking do for all of that? This plays right into it. I mean, effectively, it just accelerates, I think, all the trends that we've seen over the last decade, which tend to be in our favor, which is banks' core business is relying on a lot of inertia and a lot of, let's call it, lack of transparency of information.

Speaker 2

So the ability for customers to be able to see what they're getting paid in their checking and savings accounts, what they're being charged on their credit cards and to compare that to what LendingClub is going to charge them on their loans and what we're going to pay them for their savings accounts. I just think it's another way to show the value that we're able to deliver to acquire customers and keep them close to the brand.

Speaker 6

Okay, great. It's really exciting. Looking forward to seeing that next year. I guess the second question and kind of a follow-up on pricing. So it was nice to see the pricing increase this quarter.

Speaker 6

I'm just sort of wondering, at what price would you feel comfortable or would you think that meaningful volume can be generated? And if you could perhaps give the sensitivity to your improving credit trends and to the expected Fed rate cuts on pricing, that would be helpful. Thank you.

Speaker 2

So just starting with the first one, agree we're really pleased to see that we're getting the recovery in prices. That's what we had anticipated based on our ability to deliver these strong and consistent returns. We're still below our average rate. We've sold that for, call it, 16 out of the last 17 or 18 years. And we've said before, kind of mid to high 98s is what gives us enough margin to open up paid digital, more paid search, direct mail, all of these other channels, which we've been dormant in since the rate environment shifted.

Speaker 2

So, it's our we're not there yet, but we're clearly on that trajectory and we've got a lot of confidence that we'll be getting there sometime in Q1, which is really perfect timing for us given that our positive seasonality starts to really kick in Q2 and Q3. So, we would anticipate that we can start doing some testing of those channels in Q1, just get our response models and everything going, so that we're able to take advantage of it next year.

Speaker 6

Okay, great. That's very helpful. Thanks very much.

Operator

David, please ensure your line is not on mute.

Speaker 7

Hi, can you hear me?

Operator

Hi, David.

Speaker 2

Yes. Now we can.

Speaker 3

Hi, David.

Speaker 7

Okay. I didn't hear the introduction. Thanks for taking the questions. Great, great. So how should we think about balance sheet growth from here?

Speaker 7

Now that you just acquired this $1,300,000,000 of loans, does that kind of set you back in terms of balance sheet growth going forward? Or how much capacity? Can you talk about that?

Speaker 3

Yes, sure. Absolutely. I mean, as I think we've said before, our goal over the longer arc here is that we want to continue growing the balance sheet and in doing so create a higher stream of recurring revenue and recurring earnings that the company and investors can rely upon. So obviously this portfolio acquisition gave us a jolt and put us to 11,000,000,000 dollars fairly quickly, which is great. As we look forward to next quarter, we're going to have a few things happen that will probably cause us to be maybe come down a little bit before we start to grow again as we get into 2025.

Speaker 3

So I'd say you could probably expect 1 quarter of maybe a little bit of decline in the balance sheet. And from there in 2025, we should be back to preparing the balance sheet

Speaker 7

again. Great. And out of curiosity, when during the quarter did you close on that 1,300,000,000

Speaker 3

That was in beginning of August.

Speaker 7

Got it. Got it. Great. And then in terms of can you comment on credit buyer demand, whether you're seeing it increase, decrease about the same? It sounds as if the environment is clearly improving and that demand could be on the up and up, but can you provide some commentary there?

Speaker 3

Yes. Obviously, I think we just spoke about the banks, right? And the banks are starting to come back as we predicted it. We don't expect to be at a fifty-fifty mix of banks and asset managers in the near future. But we're seeing we just made great progress this quarter and highlighted what's coming next quarter.

Speaker 3

So we're excited that that is coming back as a growth channel. I'd say the private credit asset managers have been very active in the space obviously as evidenced by the structured certificate program. And probably the best proxy is just to look at the ABS market especially for unsecured consumer. They've been very active. Spreads have come in.

Speaker 3

And so I'd say the markets feel very healthy for those loan buyers. And the Fed continuing the lower rate should be just a further catalyst to activity in that space as long as we always say as long as the Fed cutting rates is for a soft landing and not a hard landing.

Speaker 7

And the last one for me is more of an industry question. In terms of the consumer loan market overall, are you expecting that to grow meaningfully over the next 12 months or so or remain about the same? And I guess a follow-up to that is, can you comment on the level of competition that you're seeing and if you're seeing any competitors with irrational pricing out there to gain share?

Speaker 2

So we do expect it to grow as we've talked about the TAM that's available is very, very significant and the savings opportunity for consumers is quite significant. What has been constricting and has really been the kind of the availability at the right price of capital in the FinTech space for sure. And that is 40% to 50% of the total market. So that matters for total volume in the personal loan market. Again, banks, credit unions, they have continued to operate and really didn't see the same kind of pullback there.

Speaker 2

So as the fintech players come back in, we expect the market to be growing. In terms of competition, we almost always have an irrational player at any given time. And we've seen many, many waves of competition, many waves of new entrants over our history. We monitor this stuff extremely closely across all channels. I think we've mentioned before, we're constantly conducting price point tests across channels, across segments, across use cases, so that we can monitor what's happening and make sure that we're positioned the right way.

Speaker 2

Nothing really noteworthy to point out. I think we said on the last call, we would anticipate the pricing pressure to manifest first in high prime because that's where everybody shifted to generate the volume. And we expect the market will be competitive. It's never not been competitive. So I'd say as we resume growth, we'd anticipate competition.

Speaker 2

We feel like we're well prepared to compete there.

Speaker 7

Thanks very much.

Operator

Our next question comes from Giuliano Bologna with the company Compass Point. Giuliano, your line is now open.

Speaker 4

Congratulations on the continued great performance. One thing I'd be curious about is it seems like you did a small sell through a returning bank, you did $400,000,000 to a new bank. When you were talking about the additional $1,000,000,000 or the $1,000,000,000 number, is that inclusive of the $400,000,000 or is that all incremental to the $400,000,000 And then kind of related to that, I'm curious where discussions are about potential other bank fires coming back to the platform.

Speaker 3

Yes. The $1,000,000,000 is all incremental. Think of just both transactions. Think of it as a bulk purchase upfront to get their portfolio started and then ongoing monthly quarterly purchases to continue building the portfolio. And then as far as other conversations, I mean, there's a healthy pipeline of different sized banks.

Speaker 3

I'd say most of them are probably new to the platform, so they take a little longer to ramp up. But I'd say we're excited that there's more opportunities in front of us.

Speaker 4

And just to make sure I'm thinking about this correctly, I'm assuming the $400,000,000 loan sales coming out of the HFS portfolio at fair value. Would the additional loan sales on kind of the extra $1,000,000,000 would that all flow through the HFS book or would that flow through the marketplace?

Speaker 3

Through the marketplace as whole loan sales.

Speaker 4

Got it. That's very helpful. And then you gave some very helpful guidance around the 5.50 to 6.50 of HFIR retention. And I'm curious where you're seeing loan pricing since the 50 basis point rate cut and if you're seeing I mean, how you're seeing that trend versus deposits because I'm assuming you're quite a little late to cutting your deposit rate versus some other peers out there because you're obviously building up balances for the portfolio acquisition of securities about growing in the quarter. Is that a good way to think of it where you are now?

Speaker 2

Yes. I mean, there's I think in

Speaker 3

Q4, there will be a lot of things happening with the deposit portfolio that are all positive. So as we noted, we launched LevelUpSavings, which gives us 2 liquid deposit products that allow us to think about trade offs between rate paid and volume growth at the same time. So that will be that's a great tool to have in the kit. We do have CD pricing from a year ago starting to roll off at pretty high rates, which will be a tailwind on pricing as well. And then we're actually about to exit one of our legacy commercial customers that's probably about the highest rate paid, which we've been waiting for that to actually end.

Speaker 3

That will exit in Q4 as well, which will be helpful to our overall deposit pricing going forward. So but net net, we're growing the portfolio as expected, pretty excited about with the progress that we've made in terms of product and pricing on the deposit side.

Speaker 4

That's very helpful. And hopefully, I

Speaker 2

think Julian, on your question.

Speaker 4

Go ahead, sorry. Go ahead. The only thing I was going to ask is that we're

Speaker 2

going to do are we

Speaker 4

Sorry about that, DeMoss, I just wanted to lay on one. What I was going to ask you about was, you obviously cut it's a fairly new program, the LevelUp program. Looks like you cut the Level Up rate by 15 basis points from the standard rate by 50 basis points. I'm curious if there's any sense of like what the mix looks like on the deposit base there between the percentage of Level Up versus standard rate. And I realize the program is fairly new.

Speaker 4

So if you have a data that's probably not yes, that's probably in progress at this point.

Speaker 2

So if you're talking about between our kind of plain vanilla high yield savings versus level up or are you talking I'm assuming you're talking within LevelUp who's engaging in the ongoing savings behavior? It's a little early since we just launched it in August. So not that many people have rolled through the kind of promo period. But we're at roughly 70% of the people are engaging in the positive ongoing behavior. So we'll see if that sticks, but that's where we are today.

Speaker 4

That's very helpful. I appreciate it. And I'll jump back in the queue. Thank you.

Operator

Our next question comes from John Hecht with the company Jefferies. John, your line is now open.

Speaker 8

Afternoon, guys. Thanks for taking my questions and congratulations on a good quarter. First question is, I know there's a lot of factors that are dynamic when you guys kind of decide where to place a loan during a quarter, meaning that whether you want to sell it or retain it or put it in the seasoning portfolio and so forth. I'm wondering what can you describe kind of the framework you go through? I'm sure it's tied to a return on capital of some type, but there's also some consequences to near and intermediate term earnings depending on that kind of where you place it.

Speaker 8

Maybe can you give us like the decision tree that you think about or what kind of prioritizations you have in mind when you think about the mix?

Speaker 3

Yes, certainly. I mean, it's probably important to note first, as we enter any quarter, we have obviously an estimation of what we think we're going to originate over the quarter in terms of volume and the mix of products that we're going to originate. And we have an order book, which is maybe not totally complete, but call it largely complete. So we're always balancing filling orders with the amount of production that we have at the correct at the right profile of borrower as well. So what we're always working against is making sure we fill as many orders as we can, but also setting aside some of that volume for balance sheet growth that's important for all the reasons that we were talking about before.

Speaker 3

And within that is a price optimization exercise that happens on how we fill the orders, what product we fill them through, and then also determining how much for example HFI we want to take on balance sheet given how the earnings profile is evolving as we go through the quarter. So some of the decisions are made before we even get into the quarter and then other decisions are made as we go through the quarter to end up as best we can with a certain earnings profile coming out of the quarter.

Speaker 2

I think some other things to think through. We have in our deck and our materials, I think it's Slide 11. We've got a page that kind of gives a view into what economics do we recognize immediately for the different disposition channels versus what is the lifetime value look like. Held for investment at amortized cost is 3x better, 3x higher earnings than selling the loan. However, as you know, we take a big upfront provision, so it's a big drag on earnings.

Speaker 2

And then the other channels are somewhere in between those 2. I'd say when we think about whole loans versus structured certificates at the same price, we do the structures and with capital available, we do the structured certificate because we get the upfront in period value and we get an ongoing income stream from the senior security. What we're starting to get with the return to banks is they're not at the same price. So for an asset manager, we're getting a higher price for the structured certificates. That's why you've seen us really pivot to do more of those.

Speaker 2

As banks come back, they're going to be buyers of whole loans. They are coming in typically at a premium to asset manager pricing. So you'll see us do more whole loan sales because it's a stronger sales price, stronger in period earnings and we will utilize some of those earnings to do more HFI.

Speaker 8

Okay. That all makes great sense. Appreciate that color. And second question, just we've observed just a lot of capital raising in the private credit markets and a lot of which is being allocated toward consumer pools of loans with the forward flow agreements and so forth that we're seeing structured in the market. I'm wondering in your guys' opinion, how does that affect things?

Speaker 8

I mean, you've got about more money coming into system. I assume it can affect pricing, it can affect liquidity, it can affect competition. How do you see that manifesting itself? And does that affect you guys in the way you think about strategy as well?

Speaker 3

I think there's it's obvious to us that there's more capital coming into private credit, the asset managers and it's looking to be deployed and maybe with a bit more urgency than it has in the past given that rates appear to be coming down for the foreseeable future and locking in yield is important where you can do it. I do think that gives all players in our space, I think a little more pricing power in terms of how we're negotiating sales prices and structures and things of that nature. We've been very happy with the structured certificate program. We've been able to move prices up. Maybe some of that is due to more capital.

Speaker 3

But I think it's also a testament to the consistent performance and returns we've delivered since we launched the program. And I dare say we're probably getting some of the higher prices in the industry right now that are coming from private credit and asset management?

Speaker 2

Higher prices and I think also fairly simple. A lot of these deals that are being announced, you don't see exactly what all the structures are around it, loss protection and discounts and all the rest. What it says, there's more capital coming in, but certainly some of the names we're hearing about the price, the yield requirements for some of that capital versus the yield requirements, for example for banks are pretty different. So when it comes to how does that translate into borrower pricing, we're glad we're announcing the bank partnerships.

Speaker 1

Okay, super helpful. Thanks guys.

Operator

Our next question comes from Brad Capuzzi with the company Piper Sandler. Brad, your line is now open.

Speaker 9

Thanks for taking my questions. Appreciate it. Most of them have been answered, but just wanted to can you talk about the loan performance between different cohorts consumers between prime, near prime and some of the lower end consumers? Thanks.

Speaker 2

Yes. I mean, we're seeing stability across the board across all segments we serve. I'd say we're seeing actual outperformance in the higher yielding stuff right now. The returns there have been very, very strong. I mean, in general, and I think I mentioned this on the call, these are the highest our post COVID vintages or whatever our COVID vintages were extremely strong, but they were an anomaly.

Speaker 2

What we're seeing now is we're delivering very strong sustained returns quarter after quarter after quarter. I think we mentioned last call, we are now more than a year into the structured certificates program. So those buyers have been able to see several quarters of consistent strong returns. You can see in the earnings materials that our delinquencies by cohort are stable to declining on a vintage basis and the higher yielding stock is actually performing even better. That's somewhat of a factor of we're we've really tightened the credit box there quite substantially early on.

Speaker 2

But we're focused on that because we do believe that over time, we're going to need to shift back to, let's call it, a more normal mix of who's buying what asset. Where we've been over the last 2 years is people with higher yield requirements buying lower yielding paper and they're meeting their return hurdles through our discount. And over time, what we'd like to see is those that let's call it higher yield seeking buyer getting it from the consumer base that naturally delivers that and banks and credit unions being back at the top end. So, I think it's important we're showing a really strong track record down there, so people are comfortable moving a little bit down the credit spectrum.

Speaker 9

Awesome. I appreciate it. And then just last one quickly. I know you aren't giving guidance on expenses further out, but just high level, where do you view expenses trending as we head into 2025?

Speaker 3

I think the amount of increase we saw this quarter versus Q2 probably see a similar amount, maybe a little more as we go from of that level of increase as we go from Q3 to Q4. And that will again, that's going to be some of the amortization from the tech projects that we've been implementing, starting to roll through the P and L will be the largest driver of that.

Speaker 9

Great. I appreciate you taking my questions.

Operator

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

Speaker 10

Hey, thank you. Congrats on the quarter. I was hoping to get, I guess, some additional color on the purchase during the quarter. I was curious like how much visibility do you guys have into when those opportunities come up? Just curious on how quickly this came together.

Speaker 10

And I'm not sure if you disclosed the price pay relative to par and whether or not taking on those loans influence your 3Q and 4Q originations? Anything you could share along those lines would be great. And I've got a few follow ups. Thank you.

Speaker 3

Yes. So this was this is obviously given the size of the portfolio. This is a previous buyer who we've worked with pretty extensively in the past. And so it had visibility that there was going to be a sale. It's probably important to note, this sale was part of a capital optimization exercise involving the entire corporation.

Speaker 3

So it wasn't just this one portfolio that was contemplated to be sold. But it was a competitive bidding situation. We weren't just handed this portfolio to buy. We can't disclose the price, but it's a seasoned portfolio and those always trade at a bit of a discount, compared to bit of a further discount compared to products. They're further in their seasoning process.

Speaker 3

But yes, very excited we got it. I didn't understand your question, your last part of your question, Reggie, on originations?

Speaker 10

Yes. So I guess taking down that $1,300,000,000 portfolio, I was curious whether that influenced, I guess, your origination during 3Q and maybe even what you're willing to do in 4Q given the amount that you've grown your balance sheet already. You follow me?

Speaker 3

Yes. Or maybe those things are related to the side. Yes. Yes. The unrelated, I mean, as we've said before, we have excess capital at the holdco for growth.

Speaker 3

We had well over $100,000,000 at the end of last quarter. We have $90,000,000 in cash sitting at the holdco at the end of this quarter. So that's available most of that is available for use for continued growth in the balance sheet.

Speaker 10

Got it. And if I can sneak 2 more in there. I think you guys gave a soft range of like something in the 98% range, kind of allows you to open up your marketing aperture. I was just curious if you could kind of frame where that's kind of the bounds of that? So obviously, 98 is where you'd love to be like where were pricing where is pricing during the pandemic when rates were 0 versus probably the worst point when inflation was kind of running away.

Speaker 10

If you could provide some bounds around that, just so I can contextualize where 98 sits relative to the best days and the kind of the worst days?

Speaker 2

Yes, I would say 99 to 101 is sort of steady state. And par, if you just had to pick, you were modeling out over a much longer time period, that's where you'd aim to settle and there are certain things drive you slightly above or slightly below at any given time. So we'll still be skinnier than historical average run rate, but it's enough there to allow us to begin to push up that marginal price. And importantly, as our repeat rate goes up and the value of a newly acquired customer goes up, our capacity to invest in marketing will also increase.

Speaker 10

Got it. That makes sense. And if I could sneak one last one in on the bank channel, might be hard to answer, but curious what you think is driving the renewed interest and if you were to kind of allocate points to interest rates, their own consumer credit outlook and then balance sheet capacity, like what how are those factors, I know hard question to answer, but like how are those factors you think impacting their decision to come back to the loan buying market, maybe rank them?

Speaker 3

Yes. Well, I'd start by saying, if you think of what caused has caused issues for banks in this most recent cycle, it's been lot underestimating the duration of the assets they had on their balance sheet. It's been concentration in certain areas like consumer I'm sorry, commercial real estate. Our asset class provides a lot of advantages to banks that don't have it available on the balance sheet, high yield, short duration. Yes, it comes with more credit risk, but it also we have a history and track record of being able to manage that credit risk.

Speaker 3

And so some of these banks that have come back and some of them are in the pipeline, they want the asset class on the balance sheet. They like the short duration. They're now finding the capital and or liquidity available to deploy. And I think if the Fed continues lowering rates and or more time passes, we believe there will be more banks that come to the table once their once capacity allows it from a balance sheet standpoint.

Speaker 10

Understood. Thank you.

Speaker 3

Yes. Thanks, Rajeev.

Operator

Thank you, Rajeev. And now I'd like to turn the conference back over to Artem Vallejo. Artem, you may proceed.

Speaker 1

All right, great. Thank you. So, we do have a couple of questions here that were submitted via retail. The first question is, what did LendingClub pay for the acquisition of Tali Technologies?

Speaker 2

Yes. We didn't disclose the number. It is I think the important thing here is it will be capitalized. We'll come in over time. And what I did say is we are very pleased at the acquisition cost for this visavis the development cost, and it won't really be noticeable in our financials.

Speaker 2

And as I mentioned, very excited the degree to which this accelerates the roadmap, got a very high degree of conviction that our customers are going to really value this tool.

Speaker 1

All right, great. We also received a lot of questions around banks coming back to the marketplace, some questions around the product roadmap and shareholder value, which I think most of which we've addressed in the prepared remarks. So Scott and Drew, turn it back to you. Anything you'd like to say as we wrap up?

Speaker 2

No. I think importantly, hopefully what's visible in these numbers is we're seeing inflection in all the key operating metrics, the outlook in front of us. I think we're making traction on our own. We're executing without help from the Fed. But as the Fed moves to become more supportive, it is definitely supporting an acceleration in getting us back to our kind of target operating state.

Speaker 2

We're very excited about next year and have got a really clear strategy we're executing against. Let's say the early indications we have that I shared some of which on the call is really supporting that this is the right strategy that it will work and it's going to deliver strong returns for shareholders. So we're excited to deliver against that next year.

Speaker 1

Thank you. So with that, we'll wrap up our Q3 earnings conference call. Thank you for joining us today. And if you have any questions, please email us at irlendclub.com. Thank you.

Operator

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

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Earnings Conference Call
Sempra Q3 2024
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