Brad Capuzzi: Thanks for the color there. And then just in terms of deposits, how are you viewing deposit growth going forward with LendingClub being at the high end on advertised APRs? And do you expect to maintain similar rates in the near-term absent Fed cuts?
Drew LaBenne: Yes. I’d say the — we made the pivot from CDs back to high yield savings because we were moving back into growth mode, faster growth mode after exiting the operating agreement. And that’s the channel that can drive the highest amount of growth. Right now we’re seeing great growth through that product and we continue to leverage CDs as well. So I think we can continue to grow at rates similar to where we’re at right now in this rate environment. Obviously, if the Fed moves down, that’d be great. The Fed moves up, we would probably need to react to that honestly. But I think if assuming the Fed kind of holds from here, I think we can operate pretty efficiently with current rates.
Scott Sanborn: Yes. I’d say that’s near-term. Just to talk a little bit about more medium-term, near-term reminder, the bank we acquired was not set up to more than triple deposits online in a very brief window. So our focus was really on building the acquisition funnel, the fraud model, the user experience, both to get launch CDs, but also get high yield savings out there. For the banks that have been around a long time, there’s nothing particularly new there. Although, I think what we’re doing online is differentiated. We do believe that we’ve got some optimization we can do against those tools. So you’ll hear more from us on that later. But I think Drew’s answer was appropriate for kind of the near-term.
Operator: Thank you, Brad. Our next question comes from Reggie Smith with the company JP Morgan. Reggie, your line is now open.
Reggie Smith: Thank you for taking the question. So, congrats on exiting the operating agreement. I wasn’t sure if you shared or was able to kind of share like you’re thinking on kind of, what’s the optimal Tier 1 capital ratio or leverage ratio for the company in terms of, like, where you feel comfortable running this. Obviously, you’re not going to run out and grow the balance sheet overnight, but is there a way that we could kind of map that out?
Drew LaBenne: Yes. Well, I mean, we are going to grow the balance sheet overnight, but we won’t grow it wildly, so, right? So, just as a reminder for everyone, our constraint was Tier 1 leverage at 11% at the bank. We’re at 12.5% right now, consolidated. So we have a lot of opportunity to expand the balance sheet, and we will go lower than 11%. We’re not at a point where we’re going to disclose our target ratios because I think it will be an evolution. And the way we make those decisions is stress testing. So the limits will be informed by stress testing and also by the composition of our balance sheet and how that evolves over time. But needless to say, we have room to grow with our current capital right now and intend to do so.
Reggie Smith: Yes. Maybe give our risk based capital where we now have.
Drew LaBenne: Yes. I mean, in risk based capital, we were at 17.6% CET1. So as our balance sheet has been evolving and we’ve been moving to a lower risk, more capital efficient balance sheet over the course of this year, that certainly gives us opportunity to optimize as we go forward.
Reggie Smith: And actually the second, I guess first on issue or the mission in recent days, it spreads. It kind of narrowed during the quarter. My question is what you think drives the volatility in spreads? Is it more volatility around what the Fed is going to do? Is it comfort with consumer credit? And then I guess kind of with that said, like where are spreads, today, a month after the quarter ended relative to kind of where you mark the books, just given what the Fed has said and things like that, just curious how volatile those spreads are and what drives that.
Drew LaBenne: Yes. I mean, there’s a lot of things that drive spread, but I would say let me give some factors, and I’m not sure at any given point I can quantify each factor and how it contributes, but one is certainly going to be overall rates. As rates go up, risk premiums tend to go down because the overall yield that’s being offered to the buyer of the security is higher, and so it’s meeting their spread requirements against funding. So I think part of that dynamic is driving that. I think there is more appetite for product from the asset managers right now, and that’s driving down spread that driving down risk premium to get more volume. And I think the — just the general economic environment has been strong. And so truly the amount of risk that people see in assets has been coming down as well.
We have not, at least thus far in April, observed any change to risk premium appetite or risk premiums, though I think it will be dependent on the economy and on the Fed.
Reggie Smith: Got it. If I could sneak one more in. Just thinking about, I guess, pricing not so much with your loan buyers, but one of your larger competitors is kind of retrenched in a personal loan sign. I was just curious if that has had any impact on maybe where APRs are in the space and competitiveness on the personal loan side in terms of like winning business and pricing. Thank you.
Scott Sanborn: Yes. So I would say the two factors are kind of, let’s say, consumer demand and then competitive activity. On the consumer side, as I mentioned on the call, the value proposition has never been greater and the sort of TAM has never been greater. On the competitor side, this is occasionally skewed temporarily and occasionally in a channel or two. But broadly speaking, this space has multiple parties in it who have been here for a long time, and that includes big banks as well as fintech. So who you’re competing with changes over time. But I’d say we haven’t seen, there are occasionally people who jump into the market, maybe without equipped, maybe not equipped with all of the data and can skew things temporarily.
But I’d say for the seasoned players, we don’t notice a big difference in activity when somebody flexes up or down. As you may recall, we began pulling back in the market in mid well, Q4 of 2021, we started pulling back on our originations and then we slowed down more dramatically in the second half of 2022. But I wouldn’t expect that to be a big change. We’re seeing the competition has shifted. As we mentioned before, the bottom end of prime, there’s less competition down there and near prime because the fintech players are having more difficulty operating. But up in prime, at the top end of the market, where you’re typically competing with banks, those banks are all still there. And so that’s why we’ve been more successful at passing price on to the borrowers in near prime and the bottom end of prime than in the top end of prime.
Operator: Thank you, Reggie. Our next question comes from Tim Switzer with the company KPW. Tim, your line is now open.
Tim Switzer: Hey, good evening. Thanks for taking my question. I was hoping you guys could expand on your comments about the conversations banks are picking up and how much of that do you think is kind of driven by the better environment for banks since March of 2023 versus simply the forward rate expectations are changing. We’re getting closer to Fed rate cuts.
Scott Sanborn: Unfortunately, none of those things. But maybe that’s opportunity for the future. It’s really about, it’s institution dependent. I would say, broadly speaking, given that the rate environment is not letting up and deposit competition remains high. That means the banks that have got liquidity issues, and OCI issues, they still have those. But what we’re finding is there are certain institutions that are recognizing the value of a short duration, high yield product on their balance sheet within their mix. We realizing that there are other options for generating. They’re not able to generate those assets. And the assets they traditionally would generate are less attractive in this market, either due to competitive dynamics or market forces there.
And so — and they’ve got capital to deploy. So I’d say it’s more just a select group of institutions who have capital to deploy and they like our asset as an option. And we’re really seeing our status as a bank be a difference maker here. So when they look at the space and they look at the options available to them, the fact that we’re a nationally chartered OCC bank, who is the largest eater of our own cooking and who’s been outperforming the market on credit is really kind of benefiting us in those conversations.
Tim Switzer: Okay. Thank you. That was helpful. And could you also expand on your comments around the embedded finance initiative? You guys are working on how the economics of that will be shared with your partners? And then what is the lift been on your guide side from like a technology and personnel perspective to put that in place?
Scott Sanborn: Yes. It’s really a kind of a data foundation. I mentioned last year that we had some work to do, right? We’re on this journey from web based on-prem data center, lending focused company to a cloud-based mobile first multiproduct company doing lending and spending. So integrating our user IDs, our data platform, and kind of bringing it to a place where it can be available real time. This is a particular output of that. There will be many outputs of that for like seamless logins and multi-products, kind of integrated application processes and other things. The economics would be similar to how we’re working on marketing today. We have different partners, you have different deals with, but a standard deal would be a cost per issuance that you’re paying.
Partners we’re generally pretty easy to work with because we’re able to, due to our marketplace model, we’re able to say yes to a broad range of customers, right? Unlike a bank that’s we able to approve and hold at the top end, we’re able to approve and sell. And we — given the many, many years of funnel optimization and models to pull people through, we’ve got kind of a high pull-through rate. So the typical structure would be we generally get top billing. And with a product like this, which will be at the moment unique to us, it’s kind of a no brainer, right? If you’re trying to serve your customers, rather than saying, hey, to take the opposite experience, here’s a ping tree, go apply at five different places. You’re able to get a high certainty approval rate and a pull-through.
We think it’ll be pretty attractive. More work to do there. But like I mentioned, I think it’ll be efficient acquisition as well as high credit quality pull-through.
Operator: Thank you, Tim. And I would like to hand the conference call back over to Artem. I’ll leave that floor to ask a few questions submitted via email. Artem?
Artem Nalivayko: All right. Thank you, Jayla. So Scott and Drew, we’ve got a few questions here for you that were submitted via email by some of our retail shareholders. First question here is, what are the company’s plans to increase shareholder value. And are there any plans to do a stock buyback given where the shares are trading and the fact that you’re now out of the operating agreement?
Scott Sanborn: So I feel like we’ve already answered that. So I’ll try to keep this one brief. We’ve got more options now that we’re out of the operating agreement for how we deploy our capital. That includes inorganic growth that includes share buybacks, as well as growing the balance sheet. It’s our view that in a higher prolonger environment that putting it into the balance sheet to drive sustainable, profitable growth is the right priority right now. But we are consistently reviewing all of our options with the Board and those could change as conditions change. This does drive shareholder value. I kind of gave some of the elements we talked about before, but just looking at what kind of TBV growth we’ve had since we acquired the bank, but we’ve more than doubled our tangible book values since we acquired the bank. And as we look at a higher for longer world, we do feel like this is a way for us to kind of drive sustainable growth.
Artem Nalivayko: All right. Great. Thank you. Here’s the second question. So what happens if there are no interest rate cuts in the foreseeable future?
Scott Sanborn: Well, first, I’ll emphasize we came into this year positioning the company for no rate cuts. This was a conversation with the executive team, conversation with our Board. We decided we needed to be able to control our own destiny. That’s why we took some of the difficult decisions we did last year to really reposition the expense base of the company. To be honest, as of January of this year, that felt like that view was too conservative when the market was predicting fixed rate cuts. So right now, we feel quite glad we did it, as I think the — at least the prospect of none is very real. Our focus right now, as you heard in the remarks is really what we’re internally calling coil to spring, which is creating a set of experiences and features that will allow us to lean into our kind of most proven use case to really go after this massive opportunity as rates drop.
