LendingClub Corporation (LC) Q4 2021 Earnings Report, Transcript and Summary

Good day, and welcome to LendingClub's Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sameer Gokhale, Head of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon. Welcome to LendingClub's fourth quarter 2021 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, 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 by email. Our remarks today will include forward-looking statements that are based on our current expectations, forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantage in strategy, macroeconomic conditions, platform volume, future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our most recent Form 10-K and 10-Q, each is filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. And now, I'd like to turn the call over to Scott.

All right. Thanks, Sameer. Good afternoon, everyone, and thank you for joining us. We closed out 2021 in the strongest position in our history. Despite the typical seasonal Q4 headwinds, we delivered record results well above expectations, while maintaining our discipline and our focus on prime consumers. Q4 caps a transformative year for LendingClub as we successfully executed the strategy we laid out back in February, achieving several milestones, including: one, creating America's first digital marketplace bank, allowing us to combine the growth and innovation of the fintech with the profit and resiliency of a bank; two, generating record revenue and profitability as we leveraged our data and member base advantages to return to scale and market leadership; and three, transforming and strengthening the economics of our business by continuing our focus on operating efficiency and benefiting from our bank capabilities, which includes adding a recurring and resilient revenue stream in the form of net interest income. We more than doubled our revenue for the full year, while notching records in each of the last two quarters while significantly increasing our earnings power. And we're just getting started. We plan to deliver another record year in 2022, delivering strong and sustainable levels of originations, revenue and earnings, while continuing to invest in our business to generate sustained growth in the years to come. Our target for the year is to deliver 40% revenue growth at the midpoint and an additional $120 million in earnings. And we believe our core capabilities and strategic advantages will allow us to successfully navigate environmental factors, such as the virus, competitive activity, credit normalization and rising interest rates. As we enter 2022, we expect consumer demand to build as credit card balances recover towards their pre-pandemic levels, increasing our total addressable market. If the country were to enter another variant driven lockdown, consumer spending could be temporarily constrained, but we do not believe our average member will be overly impacted for an extended period. While we expect the market to remain competitive, we're comfortable that our significant advantages will enable us to efficiently generate revenue at some lowest acquisition costs in the industry, particularly given our large and loyal member base. Also, with the addition of the bank, we're now able to increase our pace of testing and innovation, while also increasing the lifetime value of our customers, allowing us to further penetrate the market and capture more value. Now with respect to credit underwriting, we will maintain our consistent focus on our core membership, prime customers with an average annual income of roughly $100,000. Following a recent period of historically low delinquencies, we expect vintages beginning in the second half of 2021 to return to pre-COVID levels and have underwritten, priced and reserved accordingly. The initial data we are seeing for early delinquencies for Q3 and Q4 provides support for our assumptions. I've long said, credit is a data problem. And with 150 billion cells of data, captured on more than $70 billion in loans over 15 years through multiple credit and interest rate cycles, we have created a competitive advantage that is difficult to replicate. And our continued investment in our data infrastructure is allowing us to lean into this advantage. Lastly, it's worth touching on the general expectation of rising rates. I'd note, we've been through a rising rate environment before and have a grounded view of expectations based on our experience. I'll break it down into three buckets: impact to our borrowers, impact to loan investors and impact to LendingClub. The borrowers coming to us to refinance credit card debt, rising rates should not negatively impact demand. In fact, since cards are pegged to a floating rate, an increase in APR could actually stimulate them to look for value and alternative options like LendingClub. And with strong balance sheets and low unemployment levels, we don't expect rising rates to create significant payment stress for our core customers. For loan investors, the short duration of our asset allows us to reprice quickly and maintain attractive risk-adjusted returns. I'd remind everyone most of our marketplace loans are sold to banks, where we anticipate funding costs to rise more slowly given the significant deposits they already have on hand. And finally, for LendingClub, we expect the impact of rising rates in 2022 to be muted. We anticipate that any increase in cost of funds on new deposits used to fund our balance sheet growth will be more than offset by the increased mix of high-yielding consumer loans. So summing it all up, we feel good about our position, and we expect to deliver strong results this year given our competitive advantages, operating momentum and large addressable market. We're a leader in a small group of fintechs who have a bank. We have a proven track record of generating strong returns on our investments. And now, with the attractive economics of our marketplace bank model, this is the right time to further invest to deliver durable and even stronger earnings growth. Our investments in 2022 will be focused on three areas: one, building our on-balance sheet loan portfolio by holding 15% to 25% of personal loan originations to drive sustained recurring revenue and high ROEs. We also plan to begin holding a portion of the loans generated in our purchase finance business. In Q4, we integrated this operation onto our common platform to leverage our data and servicing capabilities. We are now expecting to generate similar returns to our core unsecured lending business, but with differentiated acquisition channels that skew towards even higher prime customers, loans in our balance sheet generates 3x the earnings of loans and the investment is accretive within 12 months. Our second investment area is in marketing and product experience to increase the percentage loans from new customers back to approximately 50% to further penetrate our market opportunity and to increase the lifetime value as they become repeat members for loans and eventually other products. Our third area of investment is in infrastructure to further integrate banking data and to move forward as a mobile-first, cloud-based digital bank. This is where the consumer is headed, and it's where we must continue to meet their expectations. Consumers want financial services that are seamless and on their terms, and they want personalized and predictive tools and information so that they can make better and faster decisions. Our marketplace bank already delivers against these needs and we're building a next-generation set of capabilities to meet future demand. Before I turn it over to Tom to discuss the financial results in detail, I'd like to give a huge shout-out to our highly engaged and resilient employee base of LendingClub. Thank you all for a great year, and I can't wait to tackle 2022 together. We are well positioned to thrive. All right, Tom, over to you.

Thanks, Scott. Our strong financial results reflect the power of our new digital marketplace banking model, which combines our industry-leading marketplace technology with the strategic and financial advantages of our digital banking platform. Our efforts to radically transform over the last year are now complete as promised and position LendingClub to continue to build on this strong momentum as we enter 2022. Before I get into the quarterly results, I would like to ask those listening to the call today to please have our earnings presentation and press release open as I'll be referencing them in my remarks today. During the quarter, we were pleased to drive better-than-expected results through solid execution. Revenues grew 7% sequentially to $262 million, exceeding our range of $240 million to $250 million. Net income for the quarter was $29.1 million also well above our target range of $20 million to $25 million. During the quarter, we benefited from better-than-expected credit performance and reinvested those benefits into increased loan retention. Our revenue growth again exceeded origination growth as the mix of our recurring net interest income increased 27% for the quarter and now represents 32% of our quarterly revenue. As you'll see on Page 12 of our earnings presentation, our net interest margin at the bank continued to increase during the quarter, to 8.25%, up 119 basis points sequentially due to the higher mix of consumer loans. As a reminder, this growth in net interest margin also factors in 8 basis points of increase in funding costs during the quarter. Total loan originations for the quarter were $3.1 billion, exceeding our guidance range of $2.8 billion to $3 billion despite seasonally lower loan demand we typically see in the fourth quarter. Marketplace revenues were down a modest 2% from the third quarter, reflecting fewer loans sold and higher HFI portfolio retention of 25% in the quarter compared to 20% in 3Q. Reminder, we earned about 3x more income on loans we retained versus selling them. So keeping more loans on the balance sheet provides a very attractive return on investment. With respect to our recurring stream of net interest income, it's worth highlighting that it continues to exceed our loan loss provisions on increased volume of retained loans. This is an important milestone for our business model as this net interest income essentially funds the CECL provision as we grow our loan portfolio, creating a highly profitable recurring revenue stream that will continue to accelerate our overall revenue growth. We also continue to see favorable credit performance in our loan portfolio, and you can see this on Slide 14. While recent market growth is disproportionately in lower quality credit, on the left side of the page, you'll see that we have continued to maintain a focus on our high-quality prime customers with average FICOs well above 700 and incomes above $100,000. You can also see that our held for investment portfolio is even higher quality and that early delinquencies have performed very well compared to pre-pandemic vintages. Importantly, our underwriting, pricing and provisioning all assumed normalization of credit. For the fourth quarter, you'll see on Page 6 of our earnings release that net charge-offs on our consumer portfolio were $5.4 million, up from $3.1 million last quarter. We expect charge-offs to continue to increase as we grow our consumer loan portfolio and credit performance normalizes. As you can see on Page 5 of our earnings release, our allowance for loan and lease losses on consumer loans held for investment are approximately 6.4% to cover expected losses over the life of the loan. Also on Page 6, you can see our health for investment consumer loan portfolio grew to over $2 billion or 18% sequentially at the end of the quarter. The consumer portfolio growth was impacted by the intended sale of the yacht loan portfolio, where we transferred approximately $250 million of loans to get held for sale. Over the course of 2022, we would expect to offset the sale of the yacht portfolio with growth in our consumer loans, including secured auto and patient finance products. During the quarter, we also grew our deposit base by 11% to $3.1 billion with average interest preparing deposit rates increasing to 38 basis points from 30 basis points as we grew our savings deposits by $304 million. In 2022, we expect interest rates for these savings accounts will increase. However, just as we saw in the fourth quarter, the higher mix of consumer loans will more than offset the higher funding costs, allowing our net interest margin to further increase. Lastly, a reminder that our loan portfolio has a very short duration of about 1.5 years on average. So as rates increase and the portfolio runs off, we have the ability to re-price the loans to reflect the new rate environment. Our strong bottom line earnings for the quarter continues to generate ample capital, allowing us to continue to grow our loan portfolio. At the end of the year, our Tier 1 leverage ratio at the bank was 14.3% compared to our targeted level of 11%. In addition, we have a deferred tax asset of approximately $200 million, which currently has a 100% valuation allowance reported against it. Over time, with continued profitability, we expect the valuation allowance to be reversed, further adding to our book value. Scott mentioned earlier, a number of investments we're making in 2022, and I'd like to share some comments on how we're thinking about the returns. I want to be clear that we will continue to make investments when we believe that they have an attractive payback. Our investments in growing the consumer loan portfolio are generally generating material returns, and you saw that in 2021, and we'll see the impact on our guidance for 2022. Marketing investments are increasing our member base and delivering very attractive lifetime value. And finally, our technology investments are modernizing our platform, integrating banking and loan products, providing more products and services for our members. We currently have an incredible opportunity to strengthen our position over our competitors by leveraging the economic power of our business, and we believe that positive results of these investments will become even more apparent over time. Now before I go into 2022, I want to bring your attention to Page 8 of our earnings presentation. What this page shows is the significant transformation of our company over the past two years. On similar origination volumes in the fourth quarter 2019 and the fourth quarter of 2021, we're now earning $74 million of additional revenue and $29 million of additional net income quarterly. This has fundamentally changed the revenue income profile of the Company and positions us well for 2022 and beyond. Now let's turn to the operating environment we expect in 2022. First, as Scott indicated earlier, our guidance assumes generally favorable conditions while acknowledging the dynamic nature of the environment. Second, while we expect the market for consumer loans to continue to be strong amid higher interest rates, and we remain focused on revenue growth. And while originations are important, they are no longer the sole driver of our quarterly revenue. As such, we believe is not efficient to manage our total originations to artificial quarterly targets. For the year, we expect total originations to be approximately $13 billion. And third, we expect to continue to grow investments in the areas we have discussed. Portfolio growth with 15% to 25% of originations retained, increased member acquisition and further development of our technology infrastructure. All these investments have very high rates of return, increase our revenue growth long term and make our business model more durable over time. So with that as backdrop, we expect to continue to build our revenue and net income growth trajectory. For 2022, we expect revenues between $1.1 billion to $1.2 billion for the full year, which implies an annual growth rate of 34% to 47%. We project another strong year of earnings between $130 million, $150 million for the year, which is 6x to 7x the increase over our 2021 results. Now let's shift to the first quarter guidance. The first quarter is seasonally our lowest quarter. For the quarter, we are guiding to $255 million to $265 million of revenue and net income of $25 million to $30 million. When you compare this to 1Q of '21, revenues were up $149 million to $159 million, and net income is up $72 million to $77 million. As you can see, we have a very exciting year ahead of us to further improve our financial profile and continue to drive long-term shareholder value. Let me turn it over to the call to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from David Chiaverini with Wedbush. Please go ahead.

Thanks for taking the question. I wanted to start with the origination guidance. When I look at the $13 billion for 2022 and compare that to the average for the second half of 2021, it looks like it's about 5% above that level, which seems conservative to me, but could you provide some commentary around that?

Yes, David, this is Scott. Thanks for the question. The business is seasonal. So looking at the second half of the year, what -- I think what makes a little more sense as you may recall, Q2 and Q3 are our strongest quarters seasonally. Q4 and Q1 are seasonally slower quarters. And so what we're really looking at is kind of how we're exiting the year and going into it. Where we are right now is we're roughly at the pre-COVID levels, which is Q4 data isn't out yet on the overall market. So we don't have that yet, but we're assuming the market is around that as well. But the disproportionate growth over the course of the last 12 months has really come from subprime and near prime, which is not a place that -- where we over participate. That's why in our prepared remarks, we're really focused on reiterating that our resumption of growth is back into our core prime customer base. That market, we do anticipate to grow, but it is lagging, right? They did not disproportionately benefit from government support. And therefore, their balances have come down. They've been conservative. So, we'll see how the year progresses. But what we'd look at is Q4 to Q1, we typically would see us being slower with business picking up afterwards. And we'll be well positioned if the market. If the prime market, which is our core growth, we believe we're well positioned to participate in that. But at this point, it's early.

And in terms of the mix of originations, you guys have spoken about auto refi. Can you talk about how much auto refi is in there, if at all? And what type of kind of tailwind that could provide as you scale into it?

Yes. I mean, the numbers for auto, I'm not going to give a specific guide on that. I mean we're -- the numbers are small. The growth rate is obviously quite high coming off of the base. And I'd say we're out of scale this year where that business is able to kind of cover its cost, and we expect the growth to be disproportionate, but not a meaningful contributor the financials in the near future. And just a reminder, that's the refi business that we're in is essentially saving customers money off of their existing car loans. So, the core growth is going to come from us further penetrating the market in the personal loan space.

Okay. And then last one on originations. You guys retained about 25% for the balance sheet. Is that -- and I know you've historically have said 15 to 25 is a good range. Has that range changed at all? Should we be thinking about 25% on a go-forward basis?

David, I think, as we said, 15 to 25 is our guys -- we went up to the higher end of the range this quarter in part because we did see some favorability in credit we just redeployed all that back into the balance sheet. It has such a high return. We're obviously motivated since we earn every time as much money on it as we do a sale. So it just made sense for us to defer some of the revenue that we would have recognized on a sale and put it into the balance sheet and improve the net interest income for next year, so pretty conscious decision. You'll see us ebb and flow in that range. Obviously, we're motivated to make it as high as we can, but it is based on facts and circumstances to what the market looks like, what our profile is and as well as our capital levels.

Our next question will come from Bill Ryan with Seaport Research Partners. Please go ahead.

Thanks for taking my questions. First one, just on the provisioning rate and sort of looking at, obviously, you retained a little bit more loans. So you put up a little bit more provision. I think the percentage was a little bit higher. And I know you're using a present value approach on the -- establishing the CECL reserves. What kind of provisioning rate as a percent of retained originations should we be thinking about through the course of 2022, and over time, as you kind of like as the portfolio matures and the present value effect unwinds? Thanks.

Yes. So I think we put up about probably around 6% on a present value basis. So that will creep up from there over the life of the loan. So I think for modeling purposes, you're probably in that range of, call it, around 6% or so, 6% to 7%, depending on the pace of growth. As you know, the early portfolios will come in, as I said, about 6% to 6.5%, and then we're going to get that accretion, which does add a little bit. But again, it's proportional because you've got quarters now of seasoned portfolio that are all accreting at slightly different rates. But I would say in the ballpark of around 6%, 6.5% seems to be a good guide for where we think we'll be. Keep in mind that we did see some favorability this quarter, and so you see that go through the provision line a little bit. But that's an example where you're putting up pretty significant amounts of CECL reserves when we retain these assets. So the fact that we held another 5 points, that's a pretty significant impact on revenue and earnings. You factor in the lost revenue and the provision. It's about 10 points per dollar. So, it's a significant mix shift in our earnings. And we want to make sure everyone -- we call that out for you in our press release to make sure you understand the implications of that. But that's about a $10 million swing for the additional loans we held this quarter.

Okay. And just as a follow-up, your marketing expense as a percentage of originations, I'd say, inched up in the quarter, not a whole lot from relative to Q3. Historically, you kind of talked about it being pre-pandemic, 1.9, 1.95 as a percent origination and you expect it to increase over time if you pursue new customers. What is the -- how should we think about the cadence of that as well?

Well, I think there's a couple of things to highlight. I think the numbers I gave you are still pretty good. We think we'll get back to kind of the pre-pandemic type of range of marketing. We feel very good about our efficiency there. One thing that will be going through that line item is some of the growth we're expecting in funding. So, on the deposit side, you'll see some impact from deposit market. So that's probably somewhere in the, call it, $10 million or so next year that we really didn't have to do this year because we had acquire radius and they had a lot of extra deposits. So we didn't really start marketing really until maybe the third and fourth quarter. So what you'll see next year is a full year of funding activities and as well as the efficiency that we get on the personal loans, we think will continue, but we will be ramping up some of our focus on new members feel very good about our lifetime value there. So we're encouraged to take some of the additional margin we do have in the business and put it into growing our member base. But those numbers are still pretty good in that range pre-pandemic, we were running around 2% or so. So that number is, I think, historically where we've been. And again, we'll make an evaluation of that on a quarterly basis. But we feel good about our efficiency and our ability to attract new members.

Yes. Just I'd add to that. For next year, I think that number is the right place to anchor. And as Tom mentioned, given that our value from customers is going up, the actual return on that investment is also going up. But in terms of the quarter-over-quarter, I'll just note that flat marketing spend in a seasonally slower quarter, while still increasing our mix of new customers, we actually think it was a positive outcome.

Our next question will come from Giuliano Bologna with Compass Point. Please go ahead.

Thanks for taking my questions. One of the first things I want to kind of trying rooms around was thinking about some of the investments that you're making. And if there's any sense of kind of the magnitude of the additional investments on kind of the technology side and some of the other sides. And the reason why I ask that is, if I dial up retention to 25, obvious that increases your model, at least. And dial up marketing significantly higher on find some other expenses in kind of trying to get an understanding of how much the investments in technology in the platform will be?

Yes, a couple of things and -- yes, I think we can probably provide some context for you. So let me give you some things that are evolving in the model that we want to make sure everyone understands. We've told you we're going to invest in three areas. We're going to continue to invest in the portfolio and at today's guide that would indicate about $300 million more retention at the midpoint of 20%. So that alone is approximately $20 million of earnings, just investment, if you will, that we're deferring, which improves our revenue stream, increased our total lifetime value. So we're going to continue to do that one. As far as the investments we're making, as I mentioned, we're going to be picking up marketing. We think that's somewhere in the neighborhood of about $25 million. That's going to be split between deposits and new member and obviously growing our volumes in total. So that's about $25 million. On the tech side, we've got about $25 million earmarked for investments in a number of things, including modernizing our technology stack, bringing some of the banking systems to the cloud and really engaging our customers with mobile application design and engaging the banking and lending products. So those are some of the big tech things that we're going to do. And so, I think these are all some of the big investments we're making. Then also, we benefited this year for taxes. And so, we're going to obviously benefit from that as well. So those numbers are kind of off the run rate, if you will, Giuliano.

Benefit from taxes that reverses, exactly. So, we will be paying tax.

Yes. So we've probably somewhere in that neighborhood of about 10%. As I mentioned in my prepared remarks, obviously, we have this large NOL. The tax number could move depending on fact and circumstances throughout the year. But those are some of the big drivers. And then we also have some wage inflation in our expense base. So those are some of the key drivers. And again, those numbers are kind of off our 4Q run rate.

And then as I kind of roll forward from thinking from a model perspective. One of the areas that I guess I'm trying to also understand a little bit more detail is marketing, I think last quarter, you guys mentioned about 100,000 new customers. I'm not sure if you got any indication of where that -- so this quarter, on my math, that was probably that probably implied maybe 40% -- 35% to 40% new customers, and you're talking about getting to 50%. Is there a sense around how much higher your marketing expenses as a percentage of volumes might go as you transition or how that relative impact might flow through?

Yes, I think that's what I was saying to Bill earlier that, that 195, 2% seems to be a pretty good circa 2%. Obviously, I don't want to guide specifically by quarter here, but -- but I think our pre-pandemic levels were in that range and maybe even a little higher pre-pandemic. But we think 2% is probably where we'll shake out. Obviously, facts and circumstances, depending on the market, but we think that's sufficient to meet the goals that we have on new members.

That sounds good. And then one last one. You were talking about some of the purchase rate loans and retaining those. Is there any sense of magnitude around the originations were in there? And how much retention could be

Yes. This is something that I am glad you asked because I didn't mention it another headwind. We're really excited about the purchase finance business. So we now are the issuing bank for about 30% of that business now, and we'll be retaining that on our books. And so, that's a pretty significant impact year-over-year. That and the sale, some of the lost interest income on the sale, that's about $50 million as we kind of redeploy moving cash into HFI on these loans versus the gain on sale model we had in 2021. So that's about circa $300 million, so pretty material impact year-over-year. But again, it repositions that business, makes a lot more profitable. They're high-yielding prime loans, very similar to personal loan economics, and we're excited to get that into the model. So, there is that transition amount as well. So, we're building a lot of revenue streams into the future. You can see that. That's why we're giving you the details, so you understand that these investments have pretty sizable and very visible returns. And I want to make sure that you guys understand what we're trying to do. We're deploying the capital that we do have efficiently, and we think that will drive many years of revenue growth.

And I was curious, is there any sense of kind of where the -- what kind of origination volumes you guys were doing with that product before and what the magnitude of the originations has historically looked like for that product?

We haven't broken out the non-TLPs. Obviously, that's a very, very different product. It's obviously a lot smaller as well. So, the level of precision there tends to be a bit of a round at the consolidated with $13 billion in total, but we just haven't broken that specifically down to that business.

I would say a smaller base, but again similar to auto, we do anticipate outsized growth in that portfolio. And what I think we mentioned, but it probably bears repeating is in addition to providing a differentiated source of acquisition for new customers, customers coming through that, there's a real positive there. So the profile of these customers, you're talking 740-ish FICO. So, these are really high prime. So it's a great, great additional asset to bring into the mix.

Our next question will come from John Rowan with Janney. Please go ahead.

Forgive me if you address this. What was the charge-off rate at the bank? And what do you think that number is with a fully mature book?

Yes. The charge-off rate was about, I think, I said 190 basis points for the quarter. Obviously, the portfolio, John, is starting to season given the growth that we expect, we'll never hit kind of our -- you'll never see kind of the full annualized charge-offs. But we think it's probably somewhere in the 4% to 4.5% range depending on the mix. We don't see that actually occurring until well into next year 2023 because the growth is still quite high and the denominator effect will keep that charge-off number down. The charge-off number will go up, though as these portfolios mature. So as I said, 1% this quarter, I expect it to go up throughout the year. But as we said, we put up 6.5% on these loans on day one. And we also indicated that we saw some favorability in the first half of 2021 vintages. We have not assumed any favorability in our CECL day one season provisioning or any update for that matter. We're obviously watching it closely, but feel very, very good about our risk profile. And -- but those are the numbers I think you'd expect over time as the portfolio gets matured.

And obviously, the margin profile of the bank has changed considerably as you're putting on higher-yielding assets. How much -- it's ramped up quite quickly over the last few quarters. How much more do you think there is to move up on the margin?

Yes, you're talking about the NIM, John?

Correct.

Yes. So we've seen nice growth in the NIM over the last few quarters, 8.25 this quarter. It's been quite on some trajectory as we've been remixing. I think that based on where we're going, it's probably somewhere in that circa 9% type level. So maybe another 75 to a point here, I think it will be dependent on some of the things we just talked about with auto, for example, and some of the other mix pieces. We're obviously also grow some of our commercial businesses. So I think circa 9% seems to be kind of an internal target. We're trying to take is that the right settling end point for us is as obviously, we're absorbing all this mix into the portfolio.

[Operator Instructions] Our next question will come from Stephen Kwok with KBW. Please go ahead.

Thanks for taking my question. I just had a follow-up around the unsecured consumer loan yield. I know the yield came down a little bit, like about 30 basis points sequentially. I was just wondering, was that related to mix? Or is it seasonality? And what type of yields are you putting on in the fourth quarter and what we should expect for the 2022? Thanks.

Yes. So some of the yields that you see in the financial statements, I want to make sure everyone is tracking. That is the coupon plus the impact of deferring fees and costs. That fee and cost comes in as additional interest income. What you're seeing in the quarter and then in the fourth quarter, is some of the impact of prepays, Steven. So as prepays pick up, the remaining unamortized fee is brought in through interest income. So you've got a slightly higher yield than you would expect. Some of that impacts absolute rate. It was pretty consistent quarter-over-quarter. What you saw mostly then is just some mix, just higher quality mix. Scott mentioned, we're obviously focused on the high quality prime. And so to the extent that we have a slight mix difference. But if we're taking pre-model shift here, I think we had a total maybe 30 basis points. So it's not a massive shift, but it is a slight mix issue that just you're seeing. And you'll continue see some of that as we're selling the yacht loans, for examples, the PPP loans are coming off. So you'll continue to see some movement on the total interest earning asset number. But...

And just to reiterate on your point on the prepayments. Prepayments were elevated during the pandemic. We expect them over the course of this year to return to normal levels as those return to normal levels, that will...

You'll see our slide down.

Got it. And so should we assume something like mid 15% or 15% range as like as good run rate or the yield?

Yes. It's hard to say, Steve, it really does depend on where prepayments are. And yes, I'm not -- if I could predict prepayments, and that would be great. But I think it really does -- a lot of consumers, particularly in our book, prime book are in very good health and performing well, and that results in a lot of customers prepaying. And with Omicron and Delta variant and other things happening, they're not spending as much. And so, they're able to deleverage quite effectively. So I don't know how long that will run for it. So...

This concludes our question-and-answer session. I would like to turn the conference back over to Sameer Gokhale for pre-submitted questions.

Thanks Matt. So few questions came in from our retailer investors. So why don't we go ahead try some of those. So the first question we got was based on the increasing your profitability since becoming a bank. Has that changed your willingness to spend more than pre-COVID levels on customer acquisitions or expanding your credit box to get more customers?

So in terms of -- as our lifetime value goes up, clearly, we have the capacity to invest more in customer acquisition because we're going to earn more from the customers. As Tom mentioned for, at least for this year, our expectation is will be back at the pre-pandemic levels. In terms of credit box, they -- typically, when you hear that question, it means would you be willing to go down more in credit, and that's not where our focus is going to be. But what does open up is the ability to participate in the upper end or better participate in the upper end of the market because we've got a lower cost of funds. -- now than we had prior to the bank acquisition. So it's going to give us the ability to competitively price and compete in that space.

Great. Let's go to the next question. The investor asks, will we be looking at reserve releases as vintages season and credit performance continues to perform strongly or will we have less upfront provisioning required for the newly acquired loans? How will this be presented in the future?

Yes. So it's a good question. So, some of the dynamics are that we're growing our loan portfolio very, very rapidly. It's one of the power of the model that you're seeing is our ability to originate these very high-quality loans, take a portion of our originations and put them on the balance sheet. To the extent we see a favorable credit vintage, that will reduce our provision, but we don't expect to be releasing provisions, we actually expect to be adding more loans to the balance sheet. And so as you add more loans to the balance sheet, your net provision may go down as a percentage, but the provision will continue to be high due to the CECL accounting as we're fully expecting to grow our balance sheet next year. As I said, last year, we had about $2.3 billion of loans that we retained. And next year, and our current guide is 2.6% at the midpoint. So we clearly want to put assets to work. We think this creates a very, very attractive income stream. It provides very, very good visibility of future revenue. It reduces our sensitivity to absolute movements in the market on a quarterly basis. And so -- this is what we've been building. And you can security can see it now in 2021, we have three full quarters now. You can see the momentum we're building in that net interest income line. So we're going to continue to do that.

Great. And then just one last question is, are you guys planning to sell auto loans or balance sheet all of your production? And how long until the auto business gets scaled?

So similar to our purchase finance and our personal loan business, this will be a combination of marketplace and balance sheet. We think that gives us the ability to say yes to a broad range of customers, which drives efficient marketing, it enables us to balance strong in-period revenue with long-term recurring revenue and also be nimble in a variety of market conditions. So we like that model, and that's what we're using on auto as well. In terms of scale, like I said, we're not giving the specific origination numbers there. But as a measure of scale, we anticipate that business will be able to cover its own costs. So it's not a kind of a net investment, if you will, this year. So that's how we're thinking about it.

Okay. Great. Well, I think those are all the questions we have time for today. Thank you all for joining us on the call. And if you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you.

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