Q4 2019 Earnings Call
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Dead dead good day and welcome to the Lending Club Corporation fourth-quarter and full-year 2019 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a contract specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone. No.
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To withdraw your question, please press * then two, please note. This event is being recorded. I would now like to turn the conference over to Simon May Smith vice president of investor relations, please go ahead.
Thank you and good afternoon. Welcome to lending club's fourth-quarter and full-year 2019 earnings conference call joining me today to talk about our results and recent events have Scott Sanborn CEO and Tom Casey CFO month or remarks today would include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties these statements include but are not limited to our guidance for the first quarter of oh, yeah twenty twenty and the expected timing and benefits of a pending acquisition certain product initiatives and obtaining a bank Charter our actual results May differ materially from those contemplated by these am looking statements that could cause these results to differ materially describes and stays press release and our most recent form 10-K and form 10-q filed with the SEC as well 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 an assumption as of today and we under
Like no obligation to update these things.
The results of new information or future events also during this call. We will present and discuss both gaap and non-gaap financial measures and description of non-gaap measures and Reconciliation to get measures suited to say these press release and related slide presentation the press release and accompanying presentation are available through the investor relations section of our website at home now. I'd like to turn the call over to Scott Scott. Okay. Thank you Simon and good afternoon, everybody exciting news today that I am absolutely thrilled to be able to share and that is that we've announced a truly transformational acquisition one made possible by all of our work over the past several years that provides a springboard to our future.
With the acquisition of radius Bank, we will dramatically enhance the resiliency and earnings trajectory of Lending Club while unlocking the ability to reimagine Banking and create a new category defining experience for our members.
expect this transaction will pay for itself in two years and will vote Lending Club towards the top of its new peer group most importantly it positions us to drive significant shareholder value over both the medium and the long-term
upon receiving regulatory approval will be a moment new group of peers, but also standing apart as the world's first Marketplace Bank bringing the ethos and culture of a technology package any directly into the world of banking.
There's so much to be excited about here that all Focus most of my remarks today on this topic. I'll leave it to Tom to cover our 2019 results and the outlook for 2028, but suffice to say I am very pleased with how we've been executing and with our financial position as we enter the year.
So now I'm going to answer three questions. Why now? Why radius and what next?
So first why now, it's a simple answer because now we're ready. We have executed against the plan. We outlined at our investor Day in 2017 and regain our Market leadership put ourselves on the path to sustainable profit and important prerequisite to becoming a bank and built the foundation for a lasting relationship with our customer.
Why radius?
Because simply put it's a perfect marriage of digital innovators that brings together the two sides of a bank balance sheet at scale Lending Club brings the leading digital asset generation platform and radius contributes a leading online deposit Gathering platforms.
Beyond that there are some unique attributes about radius that I'd like to highlight.
Radius is not a typical Bank out of a group of thousands. They are one of only a handful of digital Banks featuring a national footprint with no Legacy Branch Network.
Radius has a culture of innovation and its built-in extensible and modular technology infrastructure to deliver an award-winning Mobile Banking experience.
That customer experience has helped establish radius as a top-ranked online bank and a partner of choice for fintech leaders such as Breck's NerdWallet and North wage.
And radius has a strong mission-driven culture that mirrors lending clubs and a seasoned management team who are eager to accelerate the growth of the business office combining Lending Club and radius. We will add the capability to serve our members be on the loan to include deposits as a new funding source to our Marketplace and 2Pac existing loan investors the comfort that comes from an established regulatory framework.
Our analysis showed that the acquisition of radius is a superior route to a bank Charter than the de novo approach because we believe it will accelerate our earnings while reducing our executioner.
It's really is a one plus one equals three equation and successful execution does not require a hypothetical synergies or strategic bets to deliver compelling shareholder returns. That's because there will be three straightforward sources of value first. We recapture the dollars currently leaking from the value chain specifically v as in interest earned by our current issuing Bank partners.
Second we will significantly reduce our cost of funds as we shift from Warehouse to deposit funding and third we will increase and diversify our Revenue by BAP eating a portion of the higher grade loans. We originated to generate interest income.
As Tamil outline in more detail these factors Drive significant financial benefits for Lending Club and clearly demonstrate the power of a Marketplace Bank.
So what happens next we initiated conversations with Regulators more than a year ago. And today's announcement will formally kick off the next phase. That means like a club is rapidly gearing up for an intensive approval process that we believe will take 12 to 15 months.
During this time. Our Financial Focus will be on consolidating the gains. We've made over the last three years and making targeted Investments to set us up for Success post-approval. We expect Investments designed to maximize our medium-term growth and profitability to be focused into key areas.
First investment in our infrastructure to prepare for a bank Charter including investment in people process and systems that will allow us to hit the ground running.
And second further investment in customer engagement functionality that will enable us to serve our members across a broader spectrum of products and services.
These investments will include a system to provide a holistic view of our customers the development of a uniquely Lending Club checking account and the launch of one-click loans enabled by continuous underwriting and ongoing credit monitor.
Importantly, we will continue to prioritize profit growth over Revenue growth in twenty-twenty being thoughtful about risks and pulling back on some growth investment to free up Financial Resources to fund Bank shorter transition costs.
It's not everyday that an entity generating more than $12 billion in loans a year seeks to acquire a bank and we start the formal regulatory approval process with a collaborative Spirit washes optimism.
Before I handed over to Tom, let me talk about how this transaction will accelerate our ability to execute on our mission, which is to empower our members on their path to financial success.
Since 2006 we've helped more than three million customers improve their financial lives by offering an easier lower cost more predictable path to paying down high-interest debt off.
I'll be on the loan. Our members have been on their own to manage their cash flow. And as a result, they end up paying hundreds of dollars in fees most notably overdraft in monthly fees off their traditional Banks and they find it challenging to save.
So, how will our Marketplace Bank fit in?
we
believe the time is right for checking and savings to be reimagined in a way that's free from Legacy practices and systems one where the success of the institution aligns with the success of the customer lounge and we plan to be at the Forefront of that reimagining with a brand the Champions members financial success with fairness Simplicity and heart and with products that enable consumers to both pay less when borrowing and earn more when savings
Helping them make better decisions to manage their cash flow and giving them seamless access to fair and transparent credit when the unexpected happens and the cash simply isn't flowing.
Our customers seem to think it's a good idea. In fact, ninety percent of Lending Club members pulled in a recent survey said they would consider switching to Lending Club as their primary Bank.
We very much look forward to giving them that opportunity with that over to, Utah.
Thanks guys. I'm going to spend most of my time focusing on my comments on the radius acquisition and our 2020 Outlook. Let me start by summarizing our 2019 results.
Overall, we're pleased with our performance by again prioritizing profit growth of Revenue growth. We met our goal of of being adjusted and Inca positive in the fourth quarter and over the second half of the Year wage, even in jeans adjusted net income profitability over the full year.
In line with the expectations, we set out two years ago. We also exited the year with 20% of adjusted even the margins.
I record contribution margin was the key to that profitability. We've are turned on that over the last three years growing our annual contribution dollars seventy seven per-cent to almost four billion dollars and our annual contribution. Margin seven hundred sixty basis points to 51.7%
We've been able to do that by reducing M&S and ons as a percent of originations from 3.39% in 2017 to 2.98% in 2019.
this is
12% proven efficiency despite growing loan originations by 42% or 3.6 billion dollars to twelve point three billion dollars over the same.
These step-change improvements and efficiency have been driven by four things first the success of our demand generation and conversion work second the vendor renegotiate efforts and our move to Lehigh within our simplification program third our emphasis on lower-cost re-engagement of members from a rapidly growing membership base sport package data-driven focus on the end-to-end financial performance of each Channel. This is enabling us to make better decisions through the funnel that affect credit and lifetime value.
It's usually achieving our strategic and financial goals are the last two years since us up well for our next phase of growth as we indicated through 2019, we believe a bank Charter is important part of the next phase. So let me turn to our announcement this afternoon that we requiring radius bank. That sucks got sent out creating a Market Place Bank which combines the platform characteristic of our current business with the revenue and funding diversity of radius Bank creates significant synergies and enhances our earnings power over time.
these
These are compelling. I mean that we expect to receive cash pay back on the premium and all acquisition costs in about two years.
We believe this demonstrates the enormous shareholder value generated from this transaction. In addition to the Strategic Advantage is Scott outlined.
So let me talk about how that value will be generated.
For your reference. We've posted the radius acquisition deck which you can find on our our website.
First as you can see on slide 8 radius will enable Lending Club to participate in a much broader part of the value Bank value chain specifically in savings loan issuance lower cost of financing and diversified revenue from that interesting. Come on high-quality Prime loans held for investment.
After completion radius will become a National Bank enabling Lending Club to be its own issuing bank and immediately captured the related economic benefits.
We Believe
This will streamline our banking activities and improve our annual financial performance by approximately twenty-five million dollars annually.
A second benefit is lower cost of funds.
As you can see on slide nine or expected weighted average cost of funding with radius will fall by approximately 220 basis points as we shift from higher-cost Warehouse lines to lower-cost deposit funding.
We have to make this will save approximately fifteen million dollars each year as we grow our deposit base.
And finally, we will generate additional net interest income.
But we will continue to sell most of our loans in our Marketplace. We will start to build the loan portfolio of high-quality loans learning that interest income.
We expect to add about 10% of our loan volume per year to our Consolidated balance sheet. We estimate that for each one billion dollars of personal loans. We hold on the balance sheet. We can generate money generate about forty million dollars of economic profit per year.
As we prudently grow the bank's loan portfolio. We expect people to give you any exceed forty billion dollars annually.
In addition to earning predictable and industries income doubled diversify revenues and increase our resiliency. It will also help us to balance the platform more efficiently.
It is important to note that as we grow the bag that our gaap net income and EPS will differ from economic profit primarily on account of the current expected credit losses or ceasing a standard for provisioning loan losses.
Whatever the underlying economics are immediately accretive on a cash on cash basis.
Please note. We are only factoring in to our payback analysis structural synergies that have relatively low execution risk.
We believe there are further strategic synergies from becoming a bank. That's that even when we only include the mechanical synergies. The value accretion is significant as you can see on June 12th.
Casting cash pay back on the purchase price premium to be approximately two years more than 100% increase in to adjusted earnings per share in your two and after we should see some provisioning about 50% accretion to gaap earnings per share by your three.
And finally, we estimate that the transaction will reduce tangible Book value by approximately ninety million dollars.
Suffice it to say we believe this acquisition is very compelling.
Use of our capital and provides significant cash-on-cash returns and earnings growth.
Once the transaction is completed and the bank is up and running and generating Capital will have the flexibility to make some clear and potentially substantial Capital allocation decisions off.
So the Strategic fit of radius in addition to the projected Financial returns are tremendous.
Let me talk now through some of the details of the transaction. We're paying $185 million dollars to radio shareholders subject to certain closing adjustments 75% off which will be in cash with the remainder inequity to a line and set this The Lending Club shareholders.
as you can see
And slide 61.7 two times tangible Book value multiple and 8.8% core deposit premium. The purchase price premium is at the lower end of the other presidential actions on TV and core deposits.
In addition to the purchase price, we will be paying approximately $20 of adviser and transaction-related costs as part of the purchase agreement.
In parallel to the approval process of the acquisition radius. We are undertaking a number of Bank Charter related initiatives specifically the regulatory review process and Bank Charter preparation wage.
Taking the regulatory process first. We remain in close contact with regulars who are focused on controls capital and profitability. This underpins the investment. We are making a 2020.
And reinforces our focus on prioritizing profitable growth.
You'll see that reflected when I lay out our guidance for 2020.
I also want to highlight two other prerequisites to clearing our path to any Bank Charter First to comply with Federal Banking ownership regulations. And the support is action. Our largest shareholder. Shonda has agreed to exchange all of its voting common stock for non-voting stock.
As far as the exchange Shonda will receive payment of 50.2 million dollars while significant this payment unlocked substantial shareholder value and clears the path for the application of radius.
And second the company is also adopting a temporary Bank Charter protection agreement also known as a stock holders rights agreement to maintain compliance with ownership threshold under Federal Banking regulations by limiting accumulation of shares.
This agreement will expire on the earlier of the completion of the transaction or eighteen months.
So let's move on to our plans for twenty twenty which consolidate the gains we made over the last three years and prepare us to maximize the benefits from radius.
I'll start by sketching out the macro assumptions behind our guidance.
First we assume the economy continues to grow but more slowly given we are in the late stages of the economic cycle.
Given that while we assume the consumer demand remains strong, we expect continued credit tightening across the market that will slow the overall personal loan market growth.
Second we assume late cycle recession concerns will continue and Market liquidity premiums will remain elevated and that lower interest rates may be offset by Volvo credit spreads out.
So that is background. Let me go through to Lending Club specific factors before jumping into our detail twenty-twenty guidance.
First what would you not expect radius to directly impact our 2020 results given the regulatory time frame. We do expect to accelerate some investments in our systems compliance channels are reporting to prepare for radius and also encourage some non-recurring integration costs.
And second as with 2019 we will be prioritizing profitable growth.
to be clear what we mean by that is we're managing the business to increase contribution margin dollars as a percent of imaginations because that leverages our scale which drives profitable growth
No problem, bro. You sustainable growth?
We've been phenomenally successful with doing this driving up contribution margin dollars as a percentage of originations by 64 basis points over the last three years to 3.19%
Profitable growth is the financial core behind much of our actions. For example, simplifying Lending Club through business process Outsourcing geo-location and vendor consolidation name is contribution margin higher investing a new structures and channels to attract new investors puts pressure on Fair Value Johnson's in the short term, but by growing demand and reducing monthly premium for a sick for the asset class. It drives contribution margin higher over the longer term.
focusing on
Higher Revenue per member and lower customer acquisition costs by driving into and profitability of loan originations purposely slows origination growth but drives contribution margin higher.
And with radius we expect to drive Revenue per member hire a customer acquisition costs lower there by driving contribution margin even higher.
So what does all this mean for twenty twenty guidance?
We expect Revenue to grow between $700 to $790 to $800 million on the bar side of the marketplace. We expect solid growth in transaction fee Revenue with rapidly gained a repeat customer resignations on the other side of the marketplace. We expect good growth and that invested Revenue primarily generated by investor fees on our growing Loan Servicing portfolio would expect growth in our structure program to drive gained on sale revenues higher with offsetting growth in Fair Value adjustments reflecting our continued investment in growing our investment breath
We expect adjusted.
Either be in the range of 150 million to 170 million dollars driven by operating leverage from revenue growth the annualization of the simplification program boosted contribution margin and continue type control on costs.
This implies adjusted even the margins between nineteen and twenty 1% up from 17.8% in 2019 equally important the Improvement in the underlying cash flow. The company is broadly tracking even done less capex, and we expect another year of good cash flow generation in 2020.
We expect stock-based compensation charges or approximately $79 and depreciation amortization and other net adjustment charges of approximately 54 million.
We therefore expect Gap and adjusted net income profit between Seventeen and thirty-seven million dollars.
As usual our gaap net income guidance excludes Legacy expenses acquisition expenses and other non-recurring costs, including the shun them exchanged.
To 1 is our seasonally smallest quarter and also our toughest repairable from 2019. That means we expect you when revenues to be broadly flat year-on-year at the back of our guidance range of 170 to 180 million dollars. We expect adjusted ebitda between 25 million and thirty million dollars implying adjusted even the margins are between 15 to 60%
We expect stock-based compensation charges of approximately 19 million and depreciation amortization and other net adjustments charges of approximately $11.
We expect adjusted net income loss of between 0 and -5 million dollars.
As you've heard it all remarks, we made great progress over the last few years to reach Gap that income probability. We're excited about radius and believe it is a game-changer for Lending Club.
Well, we still have a lot of work to do the opportunity to grow our profitability and further build resiliency and our Marketplace gives us further confidence in 2020 and Beyond.
Scott
Back to you. All right. Thank you Tom as I'm sure everyone can hear we are really looking forward to kick off this next phase of Lending Club. And we see this as a really transformative transaction that is going to be enabled us to deliver extremely compelling shareholder returns. So I'd like to thank shareholders and employees and partners for their commitment to Lending Club and helping us get to hear and extend a special hello to the radius team at welcome to the club. Everyone should look forward to building an amazing brand and a business together with you. I'm sure everybody is eager to get the questions. So let's go ahead and open it up.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key. If at anytime your question has been addressed and you would like to withdraw your question, please press star then to our first question today will come from Henry coffee with wedbush Securities, please go ahead good afternoon. This this is amazing news. I'm sorry. I I know I'm supposed to be hardcore analyst but you know, my my thought process is had always been you to acquire, you know, some fairly ignoble bank and then use that, you know for all its advantages but instead I I I see that you're buying from a a a significant Institution.
so congratulate
Patience when we start when we start to think about the numbers here a couple of questions number one. Do you have any idea or are you sure anything with people in terms of what we should expect from radius and twenty20 as a I mean what what is what what in 2021 when you in the bank what kind of provision charge think we'll be looking at what? Yep any sense of what sort of net charge-offs we should expect or is it too early to talk on those terms? So I'll start Henry Georgia. We agree, you know, one of the things we said is if you were looking for really a perfect match for Lending Club finding somebody who excels off the online customer experience are on deposit Gathering and brings a branchless footprint is is really a very unique opportunity so long
We agree and it's one of the reasons.
Why we're so pleased about alternate to you Tom to Henry Henry. Thank you, you know, obviously there's a lot of a lot of other work these take place before we can give specific guidance and and I am a radius colleagues are happy. They're not a public company giving guidance. So that is not something that we're providing for them. But suffice it to say, you know, this is a very very exciting opportunity to bring the radius teams capabilities and deposits and and lending and add them to us.
Obviously the the big thing that will will be working with all of you on is how to understand how the balance sheet will grow and and what the corresponding provision bill will be the allowance build off. So it just give you some framing, you know, obviously our loans are much much higher returning than than you know, consumer real estate loans. For example, we would expect our our our our our yields to be significantly higher keep in mind that we earn origination fees today transaction fees. And so they was would start to suck being deferred to the extent we held them on our balance sheet. So we would expect as we said about ninety million dollars of of economic profit over the life of of a million dollars of of personal loans, so you can see pretty compelling the the flow of how that's recognized with Cecil now for those of you that are new to this every month,
just to take a recognition of the allowance upfront and so that will change the
File of the earnings of the company but as the balance sheet bills, we believe we can generate significant Capital through earnings and and and cash. So we're quite excited about and but it's too early to give specifics on exactly how that would play out in in twenty Twenty-One. Well, you know, we're not going to get Gap financials out of range, but we can look at their wine Ines when you go through that regulatory filing. Are there any sort of adjustments we should think about as we start thinking how this all merged together in 2021.
You know, like really do believe it's got said it's one plus one equals three, you know, these the balance sheets and you'll see as we built over many years Mike Butler and the team I've done a nice job. We continue to see the trends that they have been been experiencing over the last few years growing their deposit base a good strong asset growth and we think with with our member membership base and our origination capability. We can continue to grow deposits and and fund our loans to make a very nice stable net interest income. We think that you know, there's really compelling mathematics here as as as you know, and allows us to participate in the value stream partner with our investors. Keep mine were only looking too long to hold about 10% of our volume 4 year. So it's still a majority of our loans would be sold, but this allows us to to build our resiliency diversify our Revenue source.
just and and really
Benefit from what we've been building over the last ten years, which is the largest asset personal loan asset generator in the country. So so obviously this is what you had told us going in at this would not be a source of of loan funding. What are the regulatory hurdles, you know, and how far down that path. Are you already?
So, you know, this is going to be a process of the formal approval process as we mentioned on the call, you know, we've been in dialogue for for quite some time off the approval process for an acquisition is slightly different than the approval process for the de novo path, but it would be you know, it'll involve getting getting the federal Regulators of comfortable with the processes and controls that we we've got in place and Thursday. We mentioned we anticipated that the will be able to get this done in between 12 and 15 months and we are kicking it off in Earnest as we speak.
Well, listen.
Gratulations and thanks for sharing so much with us on this.
Thank you. Our next question will come from Eric Wasserstrom with UBS, please go ahead great. Thank you for for taking my questions and off. Yeah, it's I guess we have one question on on on the financial performance time and then one question naturally on the on the radius acquisition just with respect to the to the financial performance. Um, obviously you've given a lot of context around the emphasis on profitability over Revenue growth which makes a lot of sense particularly with the pending acquisition coming wage. But in terms of the origination that we saw on this. How should we think about that relative to perhaps like a run rate target for for Lending Club from here?
Hey, Eric, Scott's. Well, I'll start I mean what you are correct just to kind of make sure everyone on the call understands how we're thinking about our priorities part of the work. We did throughout last year was really do a deep-dive on end-to-end loan economics and loan profitability wage by customer type by Channel and all the rest and really give ourselves the visibility and the capability to be optimizing for for that that outcome which is end and Loan profitability. So, you know, that's why we don't give guidance on loan originations because you know, they are, you know, depending on the time of the year that we're in and what we're seeing in Dynamics on across both sides of the platform. We will tweak that level of birth.
and what you can see and
You know Q4 and and really in the guide for q1 as we're able to drive really significant earnings growth in a way that isn't directly linked to origination growth and the way it historically was because we're able to kind of dial some of our our mechanisms up or down to focus on that bottom-line profitability as opposed to top-line Thursday. We're we're quite quite encouraged just to call out a couple of numbers here, you know in the fourth quarter, we had Revenue growth of 4% contribution margin of 11% off and and earnings growth of of 20% So as you can see the you know, what we've been focusing on is is leveraging our scale really driving efficiency to show the real value in the model and continuing to to grow our our presents. So we had a very good 2019 took some share when will dead
I need to participate in the market.
But I think at this point we wanted to give a guy that reflects our focus and you know, if the market goes faster when we make different decisions, but right now we feel very good about where we are off and and really just emphasize the importance of of getting this this transaction done and and done. Thank you for that. And if I could maybe just follow up on on radius again Scott in in time. I think you've articulated a very clear vision for for what the combined entity looks like in the future and at the office and radius to you is on the the liability side of the of the balance sheet, but just looking at their assets side for a moment as it currently exists. Um, it seems that the emphasis is more on on Commercial a second on the consumer side has two classes. Look perhaps a little more esoteric. So how should we think about you know that you know what that brings to to you guys dead.
You know on day one and can you give us a sense of what kind of credit diligence you were able to conduct on on that?
Looks like they're tearing reserve of about 80 basis points, which I know it's hard to judge whether that's you know, robust or or not from from the status. Yeah, so I'll stick with the the broad picture which is you know, we think the fact that they're bringing a diversified portfolio of a billion dollars in loans is actually helpful. We we like that both because it brings diversity the mix and it allows us to you know to kind of start from from from a run as opposed from as opposed to from from a standstill off and you know, and that's one of the things that makes the acquisition so so much more immediately accretive like I think I think that the teams are nice job building out a diversified portfolio. You know, I think we did quite a bit of work when working on this for quite some time. So I think we have done wage.
Worked on the performance of these loans, you know, it's part of any acquisition that will will continue to look at how they fit into our portfolio, but we want to have a diversified portfolio. And so this is something we'll look at and see how we can grow them how they fit into the orc but we're encouraged if what they built and and we'll we'll we'll learn more as we as we as we start our integration activities.
And and just on the credit diligence.
Yeah, the current diligence we we obviously, you know in order to come up with all the synergies we just talked about we've estimated what we think the the credit and interest-rate fair value mark would be on these and off at factor that into our creation outlet that we gave you but we I mean the diligence process has been pretty extensive since since early fall is when we kicked him off and supported by a number of advisers with particular expertise in in areas that Lending Club did not have it. So for example, we brought in a special needs to focus on deposits to help with valuations some of the assets so
All right. Well, thank you very much and congratulations on this announcement. Thank you.
Our next question will come from Jed Kelly with Oppenheimer, please go ahead great. Thanks. Thanks for taking my question and congratulations on the potential acquisition. My first question is and I guess you did your diligence, but is there a risk to this not closing giving where you know, the FTC seems to be around Acquisitions. I mean walking over, you know, the combined entity is a and the total Market. It's still relatively small. This is relatively small acquisition. But any risk. Closing and a potential backup plan?
Yeah.
As we mentioned we feel we feel good about the the path to approval here. And we think that the acquisition path actually wage is a lower risk half in terms of our timeline versus de-novo because you know, we've we've built the capabilities and processes and controls around lending, but frankly, we you know, those don't exist for us on the deposit side. So requiring somebody who is running that in a directly regulated frame is actually we believe sets of something better for this process. I think the risk is more around timing than and destination. But again, that's why we said we could feel good about our ability to get this done in in twelve to Fifteen months. Is it and then post the acquisition closing is this Thursday?
Packed you know your your current.
Buyers of loans and turns of do you think they would switch to other platforms or you know, how do you manage the banks and financial companies that are already buying your loan and how you segment? What loans you hold and page you don't yeah, I would say on the on the contrary. This is viewed very positively by our partners just you know, just for a for a couple of reasons life is you know for the banks that are buying from us knowing that we are directly supervised and held accountable to the same standards that they are is deeply comforting. I think we sit on a previous call, you know, we had I believe 40 examinations last year by or different banking partners. And so, you know, this is going to give them a lot of comfort that we've got the necessary controls off that that's one to you know, keep in mind. We're doing 12 billion in loan volume. And as Tom mentioned are are are thinking out of the gate subject to regulatory approval is really the only home
10% on our balance sheet that 10% will be randomly allocated as
Part of our scale program so we won't be we won't be kind of competing in that way or or or picking loans. So we think this will be viewed as a as a real positive and then you know, the final is just the regular bulb Clarity that this provides I think is also a good thing for our partners.
And then just two more one on the 2020 guidance. So does your Revenue growth rate imply that you're growing with the market and off, you know, and then as as you get the become a more digitized Bank, you know, you are competing against a peer group that's you know, raise a significant amount of private funding and then marketing pretty heavily. Right? So, I mean, how does this how do you kind of you know Envision yourself competing with companies that that you know seem to be spending a significant amount of money on customer acquisition. Yeah. So I just start with you know, if you look at really the last last year as a as an indicator, you know, we actually took share in the market, you know walk in at the market leader and we actually took chair throughout the year, but that in and of itself isn't our our goal. Our goal is really delivering on these these bottom line off.
first as we look to next year
You can see the you know, you can think about the top end of the guide being what what we would roughly expect the market to grow at next year off and the next thing I'd say is I think you were getting a desk but I'll I'll make sure I double click on it, which is given the earning capacity of Lending Club with a bank Charter our ability to you know, make more to have more flexibility in our Capital allocation decisions, whether that's you know, returning Capital to shareholders or investing in growth is going to be significantly greater than it is today under our current operating framework. So right now we're saying well, you know acquisition cost may make good sense. When you look at the lifetime value of the customers if they don't make immediate sense, you know, we're currently off.
Very thoughtful about how far we push into it under a banking frame. We can take a longer-term view on that.
Thank you.
Our next question will come from Steven walled with Morgan Stanley. Please give a headache. Thanks. Congratulations on the deal. You just one quick one on sort of the concept of radius and the assets versus the deposit base, but you guys were asking sort of talked about you know, the loan book and the marks and all that but just in terms of how we think about sort of looks like 120% off or deposit ratio on that bank and obviously, you know, looks like it's kind of outside of what maybe you guys would be focusing on based on your prior comments. But just if you could just walk us through how do you think about the gap between the deposit base being online and digital base versus the loan book and how you think about retaining those customers long-term growing those or does it have to really come from more the Legacy Lending Club deposit base and just sort of how do you think about retaining all that? And and and whether that's that's part of the constraint in terms of the 10% that you're going to retain on the loan portfolio.
So so a couple of things what we think it's a great marriage between our online assets generation capability and their online deposit capability the deposit the the loans that they have or more traditional banking lending. Whereas ours are more All Digital so clearly there's a there's a distinction there. But again, we think that we have a great opportunity to bring leverage our membership base and our marketing funnel. Keep in mind that you know applications again this year. We're up double-digits. We're seeing a lot of people come through or channel that we believe we can make a channel offers to so we think that we can grow our deposit nicely and and fund that 10% We're using 10% as a as a guide depending on Thursday at our at our at our approval process. We think that's a good number to start with clearly. We could grow it faster. We have a keep in mind. We've got about nine hundred million dollars in tangible capital tanjung.
Book value today and so
nipping in the middle of the capital to to deploy and and that's why we're excited is there's a a large Capital efficiency by doing this transaction and and that's why you're seeing some of the synergies that we're talking about being so so so robust
But I guess it's put a fine point on, you know, 10% is where we're getting started, you know, we'll have the decision to re-evaluate. It's really not a capital constraint at some point. It's just dead, you know, we're going from zero to ten which is a billion dollars and we'll have the ability to re-evaluate that over time again as we as we get as as we demonstrate that the bank is up and running smoothly and it is generating significant Capital will have the ability to decide what what we do and and how to best deploy that
Understood and if I could just sneak one more follow-up in if we think about the expense and the provisions of a run-rate. I know you guys didn't want to give it a specific twenty Twenty-One goals, but in terms of what's Driven off the assumptions around the payback and the accretion could you talk to us about like what you're thinking in terms of you know, it sounds like these are pretty Cecil. But you know how you're thinking about the provision rate on the deal closed closed and also the maybe the efficiency for radius and how you think about that in the context of I think last quarter you talked about getting to 25% ebitda margins and then getting another 3500 potentially from the bank some sort of watershed moment there and how you how that how that might be updated from. You know now having the transaction year is let me let me tell your last first cuz I think that's really important. We we feel great about the efficiency when drive you you've heard that I think on the call today. So, uh, we picked up four points of view with the margin this year. We're projecting wage.
No broken, even the margin in.
2020 so that story is going to continue and and we don't need the radius acquisition to continue to see that kind of margin expansion. So we feel very very very good about that long just a couple of things on the portfolio to make sure that everyone's grounded. I will give you a couple of numbers. First of all keep in mind that radius is portfolio is is is a high-quality portfolio off and we we will be doing the same we expect of to hold high-quality Prime loans on our balance sheet that that portfolio will generate, you know, approximately call it $11 unless you would be 11% coupons. They do have kind of an annualized charge office of about 5% 5 percent, but the season provision will be front-loaded. So, we'll be finalizing that but it's probably what's greater than 5% So we know that we've got to bring the season provision inside in in the first year. So the synergies that we expect again dead.
Is the the issuing cost fees that we talked about the lower cost of funny which are pretty straightforward and then then is just income is just going to be building the balance sheet over time. So you can imagine it's doing that other thing that I would say is that we also have a significant net operating loss that currently own a fully reserved for and one of the things that we didn't include in. This is that by bringing it radius together with Lending Club and our income profile being that much higher will be able to utilize that that is a much faster accelerated way. So there's lots of synergies that we do not include in here, but we think we feel very good about the ones we've laid out and and demonstrates the how reasonable the premium is and how fast the payback is on cash on cash basis.
All right. Thanks.
With KBW, please go ahead. Right. Thanks for taking my questions. The first one I just saw was around the the revenue guidance for 2020 given that it's at the midpoint about 6% growth versus this year. You guys deliver closer to like 9% was wondering. How much is that if you contribute to like competition, how much is it is related not just spending more time on the acquisition and then I know you guys also talked about the fact that you're looking at more profitable growth like just wondering if you can help reconcile the the revenue off expected in 2020. Yeah. I mean, I think like if you look at our results, it's really not just over the past year, but the past several years. I think we've demonstrated Thursday. We are able to compete extraordinarily effectively in the market. We have actually gained share now for a couple of years and we've done that while increasing
The efficiency of our marketing and increasing the efficiency efficiency of our origination and Servicing.
Group, so this really is a prioritization in a reprioritization on the business of getting to what we see as our number one strategic objective which is getting the approval of this transaction because it unlocks so much prunings capability for for the company in order to do that are phone cases on you know, the Investments we need to make to be ready so that we hit the ground running and you know, as we mentioned being thoughtful about the Investments were making and growth most notably customer growth versus the Investments were making in Readiness around around the bank who is really more of a a deliberate shift on our side seems to be able to demonstrate consisted, you know core operating profit to the to The Regulators over the course of the coming year.
Our next question will come from Steven.
great and just yeah just
Call on these expenses that investment that you're making like how much of it will stick and how much of it is just temporary in nature until the acquisition comes on. So, I think the way we're doing it and initiatives guy didn't put anything that we have to incur that's going to be recurring nature, you know, Billy out our credit app or maybe some additional compliance activities. Those are all going to go in through our ongoing operating earnings where we'll we'll break out for you is anything that is deal related one-time in nature building a certain things technology would have would have you integration type expenses. So you'll you'll get a sense but it's got mentioned in his remarks. We have a lot of these costs already moved in in our in our base plan, you know, that was a burden early on in our life. We've been able to demonstrate with our scale that even with that high cost base that's required in this business name.
Be able to be able to drive.
And probability now with with that we see with the opportunity with radius. We see being able to leverage those costs across so much broader income a profile and there's drive drive a very attractive margins.
Got it. Thanks for taking my questions.
As a reminder, if you would like to ask you a question, please press * then 1 hour. Next question will come from Juliana bologna, please go ahead. Well. Congratulations on Thursday the transactions great to see as an outside position of radius. And obviously, I think it'll be impactful going forward would really be interesting is trying to think about how you plan on working capital because if you think about kind of your your forward guidance, you know, if you can add a roughly eighty million dollars of additional that income or pre-tax income in 21, you can start talking about, you know, a return on tangible common equity in the High Teens called sixteen Seventeen eighteen percent range, depending on where you end up, you know, do you have any sense of how you plan on allocate your Capital at that point? Because that will kind of dictate wage and what you plan on doing going forward. Yeah. It's it's it's a good question and and you're absolutely right. We definitely see higher returns just to caveat a couple of things to eighty million is the cash piece.
To mention that the Cecil peace will will be uh a bit of a drag in the early years, but we feel very good about the the Investments. We're making what I would say though is that you know, as I mentioned we got
I know a million dollars of tangible Book value in in Lending Club today. And and so we believe we can capitalize the bank, you know with approximately call it, you know somewhere in the back 350 range the key thing here is that we pick that number is because we think the gearing between the tangible Book value we contribute to the bank plus the earnings from radius plus Thursday evenings, we get off of our of our 10% acid starts to generate Capital within the bank and sustains itself at a very nice growth profile that allows us to maintain good source of strength and the holding company and that's that's the the Scott was mentioning about having that Capital flexibility by generating significant earnings and and being able to deploy our capital. And so we feel good about the capital allocation that we've been that we that we projected and it does generate you know, that that you know that double-digit wage.
R o e type of returns over time as you start to get the balance sheet up and running and running through some of these early day Provisions. It can be quite a creative.
That makes sense.
And when you think about capitalizing the bank obviously called three hundred three hundred fifty million of capital. Would you you you obviously you obviously have all the liquidity you would need to do that but would you consider, you know doing a preferred wage the bank level or would you do you just think you would contribute the capital that you already have on the balance due today?
Yeah, I think right now our viewers do just take the cap that we have today and and and contribute it down. You know some of the things you're talking about. Those are some of the optimizations that we may look at in the future to to keep our Capital the most efficient and can be so none of that is in our plan today. But those are the types of a problems will have in the future which is how to how to optimize our capital.
That sounds good. And if you go to get a sense of see you rolled out the platform recently. Have you seen a reduction in kind of in the number of loans or the percentage of loans that you're facilitating wage in capital since the launch of the program, you know, we had so much to talk about this this quarter. I didn't make the list but it's very very exciting. Very very exciting. This is faith those you may not recall. It is our uh bases are digital Marketplace that allows us to connect with investors and settle loans electronic wage. It's it's up and running. It's we we've got we're adding new investors every week. We've hit new new milestones and team is really doing quite well need option for quite excited about it. Maybe no next call will give you more details, but it's it's very very exciting for us. What it does. Is it increases the speed of velocity job?
A loan is coming.
To the balance sheet and and settling them in in a much faster way. It gives us lots of feedback on where prices are for certain credit risks and allows us to Thursday to adjust accordingly. So we're quite excited about this new capability in in in our in our platform. We also have recently started off a what we call our Select Plus platform as well. We're we're bringing additional folks onto our platform underwriting they're using their underwriting criteria. So there's a lot of exciting things going on in the big box. And that's what's driving frankly a lot of these efficiencies like you're seeing the leveraging or scale. Our diverse investor mix allows us to do a lot of really really exciting things and position as well for this acquisition.
That's great. Well, thanks for answering my questions and let you as get back to questions. I appreciate it. Thank you. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Scott Sanborn for any closing remarks. All right. Well, thanks everybody for for joining us today. We recognize we've given everybody a lot to digest and if you have additional questions don't hesitate to to reach out. We look forward to updating everybody on the progress at the next month.
Conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
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