LendingClub Corporation (NYSE:LC) Q4 2024 Earnings Conference Call January 28, 2025 5:00 PM ET

Company Participants

Artem Nalivayko - IR
Scott Sanborn - CEO
Drew LaBenne - CFO

Conference Call Participants

Vincent Caintic - BTIG
Brad Capuzzi - Piper Sandler
Tim Switzer - KBW
Giuliano Bologna - Compass
Bill Ryan - Seaport Research Partners
John Hecht - Jefferies
Reggie Smith - JPMorgan

Operator

Good afternoon. Thank you for attending today's LendingClub Fourth Quarter ‘24 Earnings Conference Call. My name is Cole and I'll be the moderator for today's call.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I'd like to pass it over to Artem Nalivayko. Please go ahead.

Artem Nalivayko

Thank you and good afternoon. Welcome to LendingClub's fourth quarter and full year 2024 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 the Investors 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 email. 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 earnings 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 and return on tangible common equity. 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

Hey, thank you, Artem. Welcome everyone. We feel great about how we executed the year and how we've positioned the company both strategically and financially.

In the fourth quarter, originations were up 13% year-on-year, pre-provision net revenue was up 34%, and total net revenue came in at a high for the year, up 17% to $217 million. Stepping back and looking at the year in total, I'm extremely pleased with what we accomplished. We successfully exited our new bank operating agreement on time to become one of the first fintech banks to do so.

Our product innovation enabled us to grow originations while maintaining industry-leading marketing efficiency. We maintained our credit outperformance with delinquencies more than 40% better than our competitive set. Our consistent, compelling asset performance drove consecutive quarterly increases in loan sales prices.

We grew our balance sheet by 20% compared to the US Bank average of 3% to 4%. We increased our deposit base by 24%, fueled by the launch of our award-winning LevelUp Savings product. And we advanced our strategy, driving adoption of our mobile app to improve engagement and member lifetime value.

We are looking forward to continuing our momentum in the year ahead as we build on our strong foundation. Critical to our foundation is credit, where our data advantage, flexible technology platform, and disciplined risk management are enabling compelling returns for both us and our marketplace investors. These attractive returns, combined with our product innovation and status as a nationally chartered bank, have supported steady growth in marketplace investor demand.

The result is four consecutive quarters of increasing loan sales prices, up by 170 basis points year-on-year. And marketplace loan demand is increasingly coming from banks who purchased roughly one-third of our volume in Q4, up from less than 5% when we entered the year. We continue to work on growing this percentage, and we have a healthy pipeline of bank demand that we expect to materialize over the course of 2025.

Demand from private credit, which represented the majority of our loan sales in 2024, is also growing. These loan investors have been drawn to the consistent returns and seamless access provided by our structured certificate program, where we've now crossed $4 billion in total originations. To build on that success, we're now working with a major rating agency towards an investment grade rating for the senior security.

This rating will open the program to investors who require a rated product, including insurance companies who collectively hold over $8.5% trillion in assets. We're currently expected to close our first rated transaction directly with an insurer in the first quarter, with a spread roughly 30 basis points tighter than our typical structured transaction. Continued improvement in loan sales pricing will, over time, support the economics of expanding back into a broader set of marketing channels to further grow originations.

Based on our trajectory, we plan to begin testing our way back into currently dormant marketing channels as we exit Q1 and enter our more favorable seasonal period. We are eager to accelerate our growth as we move through the year. As I've said before, credit card balances and interest rates are at historic highs, and those increases have translated to higher costs for our members.

For reference, our members are now paying over $180 more per month than they were paying just a few years ago, which is an increase of more than 30%. That increased expense represents a huge savings opportunity that LendingClub is uniquely well positioned to deliver. Our value proposition is quite compelling.

Not only do our members save when they consolidate credit card debt through LendingClub, they also increase their credit score, an average of 48 points. In addition to providing savings, our ability to tailor our experience to members' needs amplifies our value proposition and helps fuel our success. For example, we launched TopUp a year ago to give borrowers an easy way to consolidate their existing loan balance with new borrowing while maintaining one monthly payment.

The early results have been outstanding with an approximate 80% lift in issuance dollars per member compared to offering a repeat personal loan and a net promoter score of 82. Innovations like TopUp give us a competitive edge that flows through to our marketing efficiency. After efficiently acquiring satisfied members, the second step of our strategy is to engage them through our mobile app.

We began marketing the app to loan customers six months ago, and our early results confirmed that app users engage more frequently and demonstrate a higher propensity to take another product versus web-only members. Therefore, we plan to enhance the functionality of the app over the coming year with new high engagement experiences and features. This includes DebtIQ, our debt monitoring and management tool, which will help members stay on top of their debt and further highlight the urgency and value of refinancing their credit card debt.

Even in its current early stage, DebtIQ is driving a nearly 50% increase in member engagement and a 25% increase in loan issuance for enrolled members. Our efforts on DebtIQ will be accelerated by last quarter's acquisition of Tally's award-winning debt management technology. We plan to release an enhanced version of DebtIQ with new features like credit card linking, automated payments, and contextual offers as we enter the third quarter.

Looking ahead, with marketplace demand growing, loan sales prices improving, our marketing engine restarting, and investor and consumer innovations taking hold, we have ambitious plans as we move through the year, which the team and I are excited to deliver. That includes accelerating our origination's growth, increasing mobile app adoption and user engagement, continuing to innovate on our product roadmap, and improving shareholder returns. In closing, I'm extremely proud of what LendingClub has been able to accomplish, and for that I'd like to thank the entire team who's made it happen.

So, Drew, I'll turn it over to you to go through the results in detail.

Drew LaBenne

Thanks, Scott. I just want to add that I'm also proud of the LendingClub team and what we were able to accomplish this year. Our investments of time, energy, and resources have put us in a great position from which to grow as we move through 2025.

With that, let's go into the details of our financial results, starting with originations. We originated over $1.8% billion in the quarter, which was a 13% increase year-over-year. Originations were 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 originations breakdown across the four funding programs. You will note that this quarter, the disposition mix shifted as the return of banks allowed us to sell more whole loans at better economics. This is an encouraging development and was complemented by a separate $400 million sale from our extended seasoning portfolio at the beginning of the quarter.

Our improving marketplace economics further enabled us to reinvest and retain more of our high-yielding, held-for-investment loans as we entered 2025. Now let's move on to pre-provision net revenue, or PPNR, which is total net revenue less non-interest expenses. PPNR was $74 million for the quarter, up 34% from $56 million last year, and came in above our guidance range of $60 million to $70 million.

These results were driven by strong execution and improved loan sale pricing, as well as a few unique items that I'll call out as I break down revenue and expenses. As shown on Page 13, total revenue for the quarter was $217 million, up 17% from $186 million in the same quarter of the prior year. Revenue benefited from the previously mentioned $400 million loan sale as well as favorable marks at the end of the quarter due to higher sales prices.

Now, let's go into the two components of revenue, starting with non-interest income. Non-interest income was $75 million in the quarter, up 38% from $54 million in the same quarter of the prior year. This increase was driven by loan sales prices which have improved each of the last four quarters.

This price improvement was seen in both structured certificates as well as whole loans as banks returned to the platform. Now, let's move on to net interest income, which was $142 million in the quarter, up 8% from $131 million in the same quarter last year. The increase was primarily driven by growth in our interest earning assets from our Structured Certificates program as well as the $1.3% billion loan portfolio purchase in the third quarter.

On Slide 14, you can see our net interest margin was down slightly this quarter at 5.42% as expected. We believe this will represent the low point of our net interest margin over the coming quarters. The main driver of the sequential change was a higher mix of cash after we executed the $400 million extended seasoning sale.

It's worth noting we saw substantial improvement in our funding costs during the quarter, driven by lowering our deposit rates in reaction to Fed cuts and the planned exit of our highest cost commercial deposit customer, which will lead to further funding cost improvements in Q1. Now, please turn to Page 15 of our presentation, which refers to the second component of PPNR, non-interest expense. As I had indicated last quarter, our expense space did increase coming in at $143 million.

The primary step-up of expenses was in the depreciation line driven by a $4.4% million pre-tax impairment of internally developed software. This was the result of our Tally Technology purchase, which made some of our internal development work no longer fit for purpose. We were able to keep our marketing spend flat year over year despite higher origination volumes due to two items.

First, the stronger customer response to our LevelUp Savings product allowed us to be more efficient in bringing in new customers. Second, we had higher deferral of marketing spend as we retained more healthcare investment loans in the period. In the first quarter, we do expect marketing expenses will move up to support the expansion of acquisition channels in future quarters.

Now, let's turn to provision on Page 16. Provision for credit losses was $63 million during the quarter compared to $42 million in the same quarter of the prior year. The increase was primarily due to higher day one CECL, as we stepped up our retention of held for investment loans to $605 million.

Provision was also higher due to two smaller items. First, we took an additional reserve for the remainder of the office property in our legacy commercial real estate portfolio that we first discussed on the second quarter earnings call. That loan is now fully reserved.

Separately, we increased our economic qualitative reserves based on a modest increase in Moody's projection for future unemployment insurance claims. Taking a step back, overall credit continues to perform well as evidenced by our net charge-offs on our held for investment portfolio, improving to $46 million from $83 million in the same quarter of the prior year. The net charge-off ratio was 4.5% in the quarter, down from 6.6% in the same quarter last year.

The net charge-off rate benefited from higher recoveries due to proceeds from a larger-than-usual sale of previously charged off loans. Without this benefit, the net charge-off rate would have been 4.9%. Net income for the quarter was $9.7% million, which includes the $3.2% million post-tax, non-cash software impairment I mentioned earlier.

Now, let's move on to guidance, which assumes stable employment and inflation and one Fed rate cut in the second half of the year. We will continue to use quarterly guidance to inform near-term expectations. We are also providing a view into our Q4 2025 exit rate to give you a better sense of our expected growth and earnings trajectory as we enter 2026.

For the first quarter, we anticipate originations of $1.8% billion to $1.9% billion, up 12% year-on-year at the midpoint. We are gaining confidence that the sustained sales price improvements in the marketplace will allow us to open up additional paid marketing channels as we enter the seasonally favorable second and third quarters. We expect to be able to continue growing loan volumes as we move through the year and plan to exit the fourth quarter at or above $2.3% billion in quarterly originations or roughly 25% above our current levels.

We expect PPNR in the range of $60 million to $70 million in the first quarter, up 34% year-over-year at the midpoint, reflecting the increase in paid marketing to support an acceleration of growth in future quarters. We plan to continue delivering positive net income in the first quarter with gradual improvement in earnings and return on tangible common equity or ROTCE as we move through the year. Our goal is to exit with an 8% ROTCE in the fourth quarter.

All in all, we had a great 2024 and are positioned to build on the momentum as we enter 2025. Let me turn it back over to Scott for some parting thoughts.

Scott Sanborn

Thanks, Drew. Before we close, I'd just like to take a minute to acknowledge the devastating fires in Los Angeles. We have activated plans to support our customers in the area, and our thoughts are with our members, employees, family, friends, and colleagues who've been affected.

I'd also like to thank the many firefighters, aid workers, and other first responders for their heroic and tireless efforts. With that, I will turn it over to questions.

Operator

[Operator Instructions] Our first question is from Vincent Caintic with BTIG. Your line is now open.

Vincent Caintic

Hey, good afternoon. Thanks for taking my questions. Just a question first on the first quarter volume guidance.

I'm just curious, seeing it flat quarter-over-quarter, if you can maybe talk about why that is versus the growth that you've been experiencing recently. And then if you could help us understand sort of what pricing you're contemplating over the course of 2025 and how sort of the change in interest rate expectations, especially in the longer end of the curve, might affect pricing and volume. Thank you.

Scott Sanborn

Hey, Vincent, it’s Scott. I'll start with on volume. I think we signaled last quarter Q4, Q1 are typically our most challenging seasonal quarters in terms of customer response and kind of overall interest.

I think if you look at our past pattern, it's pretty typical to see originations roughly in line Q4 to Q1. I think that was actually the case last year as well. And the big driver for us, we're planning on maintaining discipline on credit. The big driver for us is going to be reactivating marketing channels, which we're really better off doing, especially given that response models, creative testing, all that.

We've got to redo all that work. Doing it in these quarters is going to be more expensive than doing it in our more seasonably kind of beneficial quarter. So the goal would be to really start testing our way.

We'll actually start to turn those things on as we exit the quarter so that we can work through them in Q2 and build from there. In terms of pricing, Drew, you want to take that one.

Drew LaBenne

Yeah. In terms of, Vincent, I assume you're talking about sales prices. In terms of sales prices, even without the Fed doing further rate cuts throughout the year or maybe later in the year, we expect we'll still be able to raise sales prices as we've done over the last four quarters.

I think the pace of that will depend on the mix of buyers and a little bit on the rate environment, but we continue to make traction in that space. And feel great about the performance of the loans we’re originating and selling, and that the buyers of all types have been very active, so we're encouraged by what we're seeing.

Scott Sanborn

Yeah, and just to maybe touch on what we said in the prepared remarks, there's banks which, up to about a third of our volume in Q4, and we feel good about the pipeline. Again, I think we've said this before, exactly nailing down the end timeline of bank due diligence can be difficult. So, in the meanwhile, we've got other ways to get prices up, and that includes the rated product that we talked about on the calls, another way to drive an increase in prices without any help from the Fed.

Vincent Caintic

Okay, great. Thank you for that. And then focusing a bit more long-term.

So it was helpful to see for your guidance for fourth quarter 2025 and the volume growth right there. I guess when we think long-term about the volume and the ROE, in the past, like in 2019, we've seen $3 billion per quarter run rates, and that was just in the marketplace, loan volume. And then in ROEs, I think your marginal ROEs in the 20% plus range.

I'm just wondering what we should think about long term in terms of both that sort of volume and ROE metrics and what does it take to get to maybe that long, mature run rate. Thank you.

Scott Sanborn

Yeah, so I'll take first volume. If you look over the past five plus years, you can see that we've routinely been at, call it, $3 billion to $4 billion a quarter in issuance. Given some of the data we've shared on the size of the TAM and the amount of savings we can provide, we don't see why we can't get back there and eventually beyond, even with, let's call it a tighter credit box.

I think the question on timing of the when will be one of the reasons we thought about the guide this year, the reason we split it into kind of Q1 versus Q4 exit is, as I mentioned, we haven't really dropped direct mail in a couple of years. We haven't been active in paid search, digital advertising, and the pace at which those response models get tuned, we find the right creative, we tune the user experience. It's hard to predict that exactly.

We're confident that we'll get it done over the course of the next couple of quarters. And our intent and belief is we'll continue to grow from there. That's -- our exit rate is not our destination in either volume or ROTCE.

If you want to.

Drew LaBenne

Yeah, I was going to make that same point. I mean, as we're giving the exit rate ROTCE for 2025 greater than 8%, that's not meant to be our destination. 2025 is a year where we're improving performance and passing through to 2026 and beyond.

So, we still haven't given obviously the long-term guidance on where we expect to be, but we would expect the end of 2025 to be a stepping stone to further improvement.

Scott Sanborn

Yeah, and one other comment Drew mentioned, we're assuming one rate cut which comes in the back half of the year, so there's no real material benefit in our results from that this year. Should the tone change there and things shift in the other direction, that will obviously be constructive. So the guide we're giving really doesn't assume much benefit from the broader rate environment within the year.

Vincent Caintic

Great. Very helpful. Thank you.

Operator

Our next question is from Brad Capuzzi with Piper Sandler. Your line is now open.

Brad Capuzzi

Hi, guys. Thanks for taking my question. Just given the higher origination outlook, has there been any change regarding loan performance between different cohorts of consumers between prime, near prime, and from the lower end consumers.

Scott Sanborn

Yeah. So, based on what you can see in some of the presentation materials, we're continuing to see quite stable performance across the board, similar to what I think you hear from lenders across multiple categories. I'd say stable but elevated is the right way of thinking about it.

The degree of active management that's required, let's call it today versus maybe a year ago is certainly lower, but it's not static. We continue to, on the margins, tweak here and there. Things are pretty much coming in in line with our expectations.

I'd say maybe a bit of a brighter spot at the bottom end of the spectrum, call it in that near prime space where we're seeing outperformance. I'd hesitate to say to conclude that that's maybe broader and due to the consumer versus potentially our own underwriting there, a little difficult to parse those two out, but we're seeing performance consistent with our expectations across the board and some outperformance down there.

Brad Capuzzi

Thanks. And then just in terms of your decision to hold more loans on balance sheet, especially as loan sale pricing improves, coming from bank buyers especially. Can you just talk about your pacing there throughout 2025.

And then since we're about a year out from the bank operating agreement expiring, is there any updates to your capital deployment strategy going forward.

Drew LaBenne

Yeah, so we held $605 million this quarter in terms of loans we put on balance sheet into held for investment. I think we will look to retain in the similar amounts of loans on the balance sheet. But one of the areas we want to increase the amount of hold is in the held for sale portfolio. We sold, obviously as we mentioned a couple of times on the call already, we sold $400 million out of there, and we're going to look to replenish some of the inventory in the held-for-sale portfolio because we think we'll continue to see demand there.

We'll also maintain a healthy level of HFI as we go through the year. May not quite be at the $600 million level each quarter, but we'll continue to hold an HFI as well. And obviously price and demand will drive some of that decision making quarter to quarter.

Scott Sanborn

I’d say, in general, operating conditions in the marketplace have improved quite significantly. I'm sure you're looking at capital markets activities even outside of us. So intent is to lean into that this year.

The held for sale -- the building of that portfolio and that strategy has been very successful and we want to make sure we have inventory available because what we're seeing is that large buyers, like the capability to get started with a decent size upfront and then can move to an ongoing purchase to maintain their portfolio size. So the plan is to facilitate that.

Brad Capuzzi

Thanks. I appreciate you taking my questions.

Operator

We have a question from Tim Switzer with KBW. Your line is now open.

Tim Switzer

Hey, good afternoon. Thanks for taking my questions.

Scott Sanborn

Hi, Tim.

Tim Switzer

There's a very nice decrease on the deposit costs this quarter. Can you talk about what has been the customer response and what are your expectations on managing deposit costs going forward and if you're able to maybe quantify at all the planned exit of your commercial deposit customer, that would be really helpful.

Drew LaBenne

Yeah, so we had a few factors which I outlined on the call. The first one you just mentioned was this large commercial customer that had been with us for many years and contractually we were paying just above Fed funds on that deposit. And in the fourth quarter that contract was up and so we were able to exit off that deposit which was really the last of our sort of large legacy relationships.

So that's going to have more carry-forward benefit as we go into Q1. As you look at sort of the liquid deposits or the non-CD deposits, we were able to effectively reprice about an 80% beta compared to the Fed lowering rates this quarter. I don't know that we'll continue at quite that pace going forward, but I think what was also encouraging was the competitive dynamic in the market around deposit pricing was very rational, I'd say, I guess, and I think many competitors also moved, allowing us to keep our deposit costs moving down more in line with Fed funds as it happened.

And do you want to talk about level of savings.

Scott Sanborn

Yeah, yeah, so just, we launched that product in August. We were able to bring in $1.2% billion in total deposit, so very, very successful. We've won multiple awards for that experience.

And savings behavior, we're seeing there, in line with the brand promise where we're trying to reward people for engaging in good financial behavior. So, you get our best rate if you are adding to your savings account every month. And what we're seeing is more than 70% of our customers are doing that.

So, I think it's both a good product for the customer and has been successful for us. So -- and it gives us another tool in the toolkit to manage as rates are coming down. So we're pretty pleased with the response.

I think Drew mentioned, in fact, customer response to the product was so high that we were able to actually save on some of our marketing expenses because the response and efficiency was really strong.

Tim Switzer

Okay, got it. Thank you. And I had a follow-up on your comment about your held for investment loans potentially not going over the $600 million mark.

Again, was that a comment just for Q1 or for the rest of 2025. And if so, why not increase your HFI loans as you have an opportunity to continue increasing originations overall and profitability.

Scott Sanborn

Yeah, listen, I think first of all, we'll take it quarter by quarter and see how things play out to determine exactly where we end up. That's first and foremost. I don't see us being down as low as we were at the beginning of this year.

But I think, at least as we look into Q1, we'll probably be a little bit under where we were in Q4, but at the same time, we'll be building up some of the held-for-sale portfolio, so that we have more inventory available to sell as the buyers keep coming back and prices are moving up.

Drew LaBenne

Yeah, the total balance sheet will be growing. Division between the senior note, the held for sale portfolio, and the held for investment portfolio might change based on different market conditions.

Tim Switzer

Okay, got it. Thank you, guys.

Operator

We have a question from Giuliano Bologna with Compass. Your line is now open.

Giuliano Bologna

Hi, good afternoon and congrats on the quarter. Maybe digging into the guidance and the outlook, I have a couple of questions around that. And one thing I'd be curious is thinking about seasonality.

First quarter is usually the weakest, fourth quarter is usually the second weakest, and 2Q, 3Q are the strongest. When we think about the $2.3% billion plus for the fourth quarter, should we think about that having any kind of normal seasonal impact from the kind of the 3Q to 4Q role or should it be kind of around throughout the throughout the years what's -- what you're implying with the guidance and what's implied in the fourth quarter at this point.

Drew LaBenne

Yeah, so if, again, if you think about just about seasonality and strip out any actions we may be taking where things were doing to drive growth, let's say what we typically do is we push our way into new partnerships, new channels, test new products and experiences, grow the volume in Q2 and Q3, and then try to basically hold it there, Q4 and Q1. So roughly in line, this past Q4, just due to where some of the holidays fell right, both Christmas and New Year's fallen, and kind of hitting a bit in the middle of the week, say the seasonality there is a little stronger than typical years. But, say, the general rule ramp-up Q2 and Q3, try to hold roughly flat.

And by roughly, I mean, if there's 2%, 3% down, that's us counteracting, maybe an inherent 4% or 5% seasonal pressure that we typically see.

Giuliano Bologna

That's helpful. And there's an earlier question about some historical trends getting into the $3 billion to $4 billion quarterly run rate. I'd be curious when you think about rolling out the new programs or the new kind of re-engaging in dormant marketing programs.

I'm curious what your typical turnaround time is to get a sense of what the response rate is and if you have any kind of enhanced or beneficial kind of response rates from that, how does the funding capacity look. Can you execute and push through the incremental volume to loan buyers. Do you have private credit buyers, banks, or [structure] (ph) product, or have a structured buyers that could step in and fill that void if you had incremental volume that was within your credit box and that you could originate.

Drew LaBenne

Yeah, I mean, so one, I'd say we're not starting from scratch. We've been active in these channels for most of our history. So we have some sense of the range of outcomes.

Getting to the range we like best, which is highly optimized and what will take some time. In terms of marketplace demand, yeah, I mean, what's really evolved over the last couple of quarters is what we think of as what's called our fill rate, meaning are we selling everything we can produce, or is there more demand than we're producing. That's really started to shift really markedly in Q4, and we expect to continue in Q1, which is we have more purchase capacity, which is why we're saying, hey, it's time to turn on the marketing and increase our production.

So we're not concerned about our ability to sell the loans that we produce.

Giuliano Bologna

And then maybe one last on the marketing expenses and kind of the percentage of volume. There's obviously some benefit to more HFI loans. And it kind of seems like you might be pushing a little bit more into the HFS book and some other channels as you grow based on some liability kind of $600-ish million HFI commentary.

How should we think about that. Where your marketing should go as percentage of volume. Just thinking about that as you reopen some of the channels and push further into some of those newer channels at this point.

Scott Sanborn

Yeah, I mean, we're clearly in our most efficient channels right now, right. So as we grow, we're going to have a little bit of increase in the level of marketing expense, the kind of marketing expense rate or the CAC, if you will, as we bring in those accounts. Also, if we shift more volume to HFS, I think what you're identifying is we won't defer the marketing expense.

But as a reminder, we'll also get to recognize the origination fee upfront, not defer that as well. And so that's a positive trade in the immediate P&L when we make that shift. So I think over time, you can look back at our history and you can see what our marketing efficiency look like at higher volumes and we would expect it to be similar trajectory as we grow but we'll always be looking to see if we can improve upon that as we move forward.

Giuliano Bologna

That's very helpful. I appreciate the time, and I will jump back into queue.

Operator

Our next question is from Bill Ryan with Seaport Research Partners. Your line is now open.

Bill Ryan

Hi, good afternoon. Thanks for taking my questions. First, on the PPNR guide for Q1, you talked about $60 million to $70 million.

It's a little bit below consensus $73 million, and the $74 million you reported in the fourth quarter. And you also called out a couple of special expense items in the fourth quarter. So as we think about the Q1 number of $60 million to $70 million, what are the key drivers of it being a little bit lower relative to Q4.

Just sort of like expense driven or some of the revenue expectations if you could kind of talk about that a little bit.

Scott Sanborn

Yeah. I think probably the most relevant piece is going to be an increase in marketing spend which will happen both probably deposit levels -- marketing spending deposits getting back to normal levels in Q1, but also the ramp in the channels that will begin. As we go throughout Q1, we will have a higher level of marketing spend coming through as well.

That's probably the biggest factor that will change in PPNR as we go quarter to quarter. We do expect revenue to go up a little bit, but we had some benefits from the $400 million sale and portfolio marks that we're not assuming repeat as we go into Q1 as well. So, we expect revenue flat to up, but we won't have those benefits that we had in Q4 coming through.

Bill Ryan

Okay. And just to follow up on the competition, obviously people on the call watch some of the competitors and what's going on. How would you describe the competitive landscape.

Is it getting quite a bit more aggressive or is there plenty of origination volume potential for everybody out there.

Scott Sanborn

We haven't really seen any shift in the competitive landscape. I'd say, as I said before, this market has always been competitive, and it continues to be so. We talked a little bit about deposit rates, and we were at roughly an 80% beta on the way up. We expect to be at roughly an 80% beta on the way down.

If you look at coupons which is one measure of -- loan coupons which is one measure of competitive activity, we were at roughly a 60% beta on the way up, and we expect to be similar on the way down, and it hasn't moved that much yet. I think our exit rate was maybe somewhere between 10 and 30 basis points on coupons as we exited the quarter. So not seeing a ton of change there.

For us, something we haven't talked about, but if you look at what Drew mentioned, we're in our most efficient channels. And what we've been really focused on since the rate environment shifted is getting more and more efficient and productive in those channels. And so like -- you look at our conversion rate on some of the leading aggregators, we converted roughly twice the rate as anybody else, right.

So our ability to go from an offer all the way through to a converted loan, and we haven't seen any meaningful change in that. It's really going to just be a question of, as I mentioned, lighting up some additional channels to really drive that volume through. The borrower demand is there and I'd say borrower demand is there and we feel quite confident about our ability to convert it.

Bill Ryan

Okay, thank you.

Operator

We have a question from John Hecht with Jefferies. Your line is now open.

John Hecht

Hello. Congratulations, and thanks very much for taking my questions. I guess the first one's more of an extension to some of the discussion points and that is that you guys have a lot of programs for funding now, whether it's the securities program or holding loans on the balance sheet or extended aging.

And I know over time you've talked about you know going after the one or using the one that's probably the most -- highest from a return perspective at the time. But there's a lot of different, I guess, factors to consider now because some markets might have more favorable pricing dynamics for you guys or economic dynamics, but some are a little bit more reliable over the intermediate term. So, I guess the question is just other than some of the primary focus on return on capital, what are some other secondary factors that you guys prioritize in terms of allocating against the different funding channels.

Scott Sanborn

Yeah, so maybe I'll start and Drew, feel free to jump in. So, as we mentioned in the past, our belief is our ability to deliver consistency and size is generally rewarded in terms of both price and predictability. We are not, in general, locking in a lot of longer term large deals like you're reading about elsewhere because we believe the price -- we have seen and believe will continue the price trajectory is up And what we're seeing is, if the bank buyers or great buyers of fine paper, as they come back, we're going to sell more whole loans.

You saw that. You can see in our presentation, you'll see that the mix of whole loans went up because banks are buying whole loans and therefore, and they're buying at better pricing. So we'll move there.

When it comes to the certificates, there's a way to get those prices up too, which is the rated product. So we are being deliberate in how we evolve the mix and also drive within the static mix price increases. And it's our expectation that over the course of 2025, we're going to be able to continue to drive that lift in pricing, which will, again, allow us to feed more into marketing to drive faster top line growth.

John Hecht

Okay. And then, follow-up question. I mean, Scott, you did, I did hear you say, I think you even said all parts of the balance sheet, all buckets should grow this year.

But I'm wondering, considering your capital and your goals with respect to capital levels and the ability to use a secondary marketplace, what do you think, what's kind of balance sheet growth that you think, but is there a range of growth that you're striving for just for kind of modeling purposes.

Scott Sanborn

Yeah, this year we obviously experienced, actually the last several years since we bought the bank, we've experienced pretty robust balance sheet growth. We expect to grow above the industry again this year in terms of balance sheet growth. Probably not quite at the levels that we grew balance sheet in previous years, but we're still expecting robust growth compared to the industry.

As far as capital, we still have excess capital at the holding company that we can deploy down to the bank. So capital at this point isn't a constraint. We're not viewing it as a constraint to our growth.

John Hecht

Okay, super helpful. Thanks guys.

Operator

Our next question is from Reggie Smith with JPMorgan. Your line is now open.

Reggie Smith

Hey guys, I'm kind of piecing together the storyline here. It sounds like you guys have shifted or had historically shifted away from direct mail and I guess paid search and focus more on the aggregated sites. My question, one, is that correct.

But then two, as you move to direct mail and paid search, what are some of the trade-offs. How does it change the applicant pool, maybe how price-sensitive they are. Are there any changes there as you kind of shift over.

And then how are you guys thinking about turned down service. So I would imagine as you kind of expand your marketing aperture you'll probably get people in here where there's a higher rejection rate. Is there a way to monetize those rejections.

And then I have a follow-up. Thank you.

Drew LaBenne

Yeah. So, Reggie on the channels, what I'd say is, when the rate environment shifted and loan pricing went from, par to 101 down to, call it 96.5%, unit margin went way down, which meant ability to afford more expensive marketing channels came down. And there's some other aspects when you use pre-screen channels, direct mail is an example.

You have an obligation to provide credit. So if you're in an environment where there's some funding uncertainty and you have an obligation to provide credit, you got to be thoughtful about that. So we kind of retrenched to our most efficient channels that included aggregators amongst others, other partnerships, and those are our own channels, our mobile app, our existing customer base, and that's how we -- how and why we invested in the lending mobile app as well as the top-up program to drive that repeat business as well.

We go back into the other channel, it doesn't change our credit box. We roughly maintain 50% new to 50% repeat on a monthly basis. We'll still be -- we'll maintain the same kind of credit criteria, but different channels can appeal to different audiences and your point is accurate that there are some different price sensitivities in different channels.

For example, when you're in a comparison shopping site versus you're giving independent offers. So all of that is factored into our pricing strategy and our return strategy. We wouldn't expect to see any kind of meaningful shift in the returns we're delivering to investors or to ourselves because all that's factored into how we go after all of those categories.

And yeah, I think to your next question is, when we think about maintaining a pretty strong discipline on credit, is there opportunity to open that up to people to do second looks, the answer to that is absolutely and that can feed into our growth as we go through the year.

Reggie Smith

Yeah. On that last point, has that opportunity improved incrementally in the last few months. It sounds like one of your competitors is kind of leaning into that.

And I was just curious if that opportunity was there for you guys as well.

Scott Sanborn

I would say the more volume we're generating top of funnel, the more there is, as long as assuming a steady credit box, the more there is available at the bottom of the funnel. So as we move into the latter part of the year, we would expect that opportunity to improve.

Reggie Smith

Got it. And then last question from me. I believe you guys talked about getting some of these structured securities rated.

And I want to make sure I understand that correctly. This would be the senior tranche would get a rating. And so you could essentially sell both buckets, the senior supported tranche, as well as the more equity-based tranche, where today you're only selling the equity tranche to someone else.

Is that the right way to think about it.

Scott Sanborn

That's correct, yes. The senior security, the senior tranche, it can be sold now, but getting a rating on it gets you a tighter spread, opens the pool of buyers, such as insurance, as we said on the call. So it's a more economically attractive way to do the same transaction.

And it's not a small fee to have gotten, or to almost be on the verge of getting this rating from a major. So we're pretty excited about it, and it opens up some different avenues and potentially better pricing for structured certificates going forward.

Reggie Smith

Yeah, it feels like I might be getting ahead of myself that, there is a lot more funding available to you, a lot more optionality that may not be fully appreciated by the market.

Drew LaBenne

I think the funding markets are very active right now. We talked a lot about the banks coming back because that is something we have all been very focused on. But I would say if you just look at private credit, asset managers, insurance who sometimes comes through private credit, all very active.

There is a lot of liquidity in the market looking for a home. So we're excited about how that space will perform in 2025.

Scott Sanborn

Again, that, Reggie, that is informing, trying to optimize to get the best possible price, but that's also informing our strategy as we think about how we go forward, right. The ability to sell the aid and let those spreads get tighter, as well as the opportunity for us to build the HFS portfolio. If we're selling it in [indiscernible] of $400 million, we need to have that available to these potential buyers.

Reggie Smith

Yeah, and I guess you guys made the point that 2.3% for 4Q ‘25 is kind of your minimum. It could very well be stronger than that if some things fall in line.

Scott Sanborn

Yeah, I'd say we are very confident in that number. And as we go through the course of the year and see how the competitive environment plays out and how our execution is rolling through, obviously we can give an update, but we're confident in that number. And again, we're confident in that number as being on the way to something larger than that.

Reggie Smith

Sounds good. Congrats, guys.

Scott Sanborn

Thanks, Reggie.

Operator

And now I'd like to turn the call over to Artem Nalivayko for some questions submitted via email.

Artem Nalivayko

All right, thank you, Cole. So, Scott and Drew, we have a few questions here that were submitted via email. The first question is, so the LendingClub name was appropriate when the company was primarily a peer-to-peer lending platform.

This is no longer the case as you are full-fledged neo bank. Has management given any consideration to changing the name of the company to something more descriptive.

Scott Sanborn

Love this question. It's a great question and a great observation. So obviously when all we were doing was lending and that lending was initially powered by retail investors, the name really worked.

It does not reflect the scope of our ambition or even frankly our evolving product mix. So it is very top of mind for management. We actually do have in our budget this year to be doing some work and research on what's the current perception of the brand and how might a rebranding influence that consumer perception.

So, no decisions made yet, but it is very top of mind. If we think about the year ahead as we get DebtIQ into the market, we do anticipate having a checking experience specifically for our borrowers that we'll be marketing as we exit the year next year. The name is limiting in its current form, so it's definitely top of mind for us.

Artem Nalivayko

All right. Great. Thanks, Scott.

So here's the second question. Have you considered acquiring any entities to grow your 5 million member base further.

Scott Sanborn

I guess I'll start. Maybe, Drew, you can finish this. The rate environment has certainly rippled through FinTech broadly and definitely through LendTech within FinTech.

So there are numerous opportunities available. And we are absolutely open to enhancing our capabilities, accelerating our roadmap. The Tally acquisition we announced last quarter is an example of that.

But we will remain pretty disciplined on the hurdles that that needs to clear. Tally is an example. We were building that capability ourselves.

So our ability to acquire it at a fraction of the cost that it was going to cost us to build was a pretty easy decision. I don't know if Drew, anything you'd add there.

Drew LaBenne

I would add just that, as we're looking at it, doing any acquisitions, we're obviously very conscious of using our shareholders' capital wisely and appropriately and making sure if we ever do any type of M&A, that we're generating an appropriate return for shareholders while we're doing that. And obviously thus far, we've been extremely disciplined on that dimension.

Scott Sanborn

Perfect.

Artem Nalivayko

Okay. Thank you both. I think that's all the time we have.

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