Q1 2020 Earnings Call
[music].
Good afternoon, and welcome to the lending club first quarter 2020, <unk> earnings Conference call.
All participants will be they listen only mode.
Should you need assistance. Please signally conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask a question.
Yes. Good question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Samir go Clay Investor Relations. Please go ahead.
Thank you Andrea and welcome everyone to Lendingclub scarce quarter 2040 earnings conference call joining me today to discuss.
Results and recent events, Scott Sanborn, CEO and Tom Casey see Oh.
Oh remarks today will include forward looking statements are based on our current expectations at four cats and involve risks and uncertainties.
These statements include but not limited to the impact.
Team, our ability to navigate the current economic environment and the future performance our business and property.
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 in our most recent form 10-K filed with yet do you see is what is our subsequent filings made with the Securities Exchange Commission.
<unk>.
<unk> form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to be statement as a result, you information or future about Oh.
Also during this call. We will then discuss both GAAP and non-GAAP financial measures.
A description of non-GAAP measures and reconciliation to GAAP measures are included in todays earnings press release, I believe it's like presentation.
As you would see this quarter, we added the new sites do our investor presentation, we needed liquidity cash flows and credit quality, which we believe will be useful in the current environment. The press release, an accompanying presentation are available to the Investor Relations section of website I, our lending club Dot com.
Now I'd like to turn the call over to Scott.
Okay. Thank you see there. Thank you all for joining us.
I hope everybody is staying healthy and saying in this unsettling time.
A lots to talk about today, so I'll get right to it I'm going to provide our perspective on the environment the impact of lending club and how we are navigating through the current challenges then I'll turn it over to Tom.
To provide additional details about our Q1 financial performance and our strong liquidity position.
So clearly much has changed since we last talked in February.
Time, we had realized our goal of achieving net income profitability.
Yes, we announced a transformative acquisition to enable lending clubs next chapter of growth.
Just a few weeks later, the Corona virus true the entire global economy.
The scale and speed of its impact has no historical precedents.
Forecast vary widely on the long term effect.
With more than 30 million people filing for unemployment benefits in just the last six weeks, we are bearing witness to an enormous amount of suffering for millions of Americans.
Disruption to businesses across the country and a severe liquidity crunch and contraction of the credit markets.
Yes, deteriorating environment clearly has an impact on our outlook in Q1, we took a significant fair value mark to the loans on our balance sheet in order to incorporate elevated charge off expectations and increased liquidity premiums.
And currently we are operating with materially reduced originations to allow platform investors time to address issues affecting their capital their liquidity and the expected performance across their portfolios.
Well, we withdrew our detailed guidance back in March Oh, sure that we anticipate a 90% reduction in quarter over quarter loan volume in Q2 with growth resuming once the environment stabilizes. So today I'll share what we're monitoring what we are assuming and what actions we're taking our focus is.
On positioning lending club to navigate through the current adversity and to set ourselves up for success over the long term.
To do that.
We're directing our activities. According to fight guiding principles. These are one to keep our employees safe.
To to preserve our liquidity three to protect our platform investor returns.
For to support our members in five to stay on track for the acquisition radius night.
So I'll talk a little bit about actions we've taken in each of these areas. So our first priority is to keep employees safe, we proactively activated our crisis management plan and implemented a work from home program in early March and all of our employees have successfully made the transition and are working productively.
Oh, we also extended crisis pay to all our employees, but they did not have to choose between working or taking time off the care for themselves or a sick family member.
Our ability to support our employees working virtually and to alleviate as much of their stressed as we can means that they are better able to support our customers who need us now more than ever.
Our second focus is on preserving liquidity given that we anticipate being in an extended period of reduced revenue.
As many of you know we have a seasoned team that has weathered multiple storms and we didn't move with incredible speed to preserve a total of 550 million of estimated net liquidity at the corporate level, which close to 300 million isn't cash.
We've modeled our outlook through multiple stress scenarios and as we disclosed in April we believe we have adequate liquidity to see us through the end up 2021 under a range of macroeconomic environments.
Importantly, even in a zero origination scenario in 2020, which is not what we project our cash income from our servicing business and our loans held for sale will be sufficient to cover our re sized expenses.
A reminder, on why that's the case on the Cas expense side, our simplification program executed over the last 18 months lowered our overall cost base and increase the proportion of our costs that are variable and can be quickly ramped down.
To further lower expense based expense base, we also just announced a painful but necessary step to restructure the company through a reduction enforce impacting approximately 30% of our employees.
Importantly, this cost was not uniformly applied we especially targeted non core expansion initiatives such as auto plant migration tw as.
What's you're getting reduced emphasis for now.
All in all the combined effect of these actions will reduce our quarterly expense run rate by approximately 50% versus Q4 2019.
With the steps we've taken to reduce expenses will be able to conserve cash in the near term and gain from positive operating leverage as we resumed growth.
Moving on our third area of focus is on protecting the returns of our platform investors on the nearly 16 billion in loans that we service.
Oh here, we are enhancing our collections capabilities by applying our excellent and analytics modeling optimization and targeting all huge strengths of ours that they have enabled us to achieve our market leadership.
Clearly loan performance will be impacted by the unprecedented spike in unemployment and we expect cumulative credit losses to increase materially.
Our forecast are based on Moody's baseline scenario from April 13th which has unemployment spiking in the second quarter over 13%.
We're coming down to 9% to 10% and staying elevated well into next year.
Clearly these numbers are subject to change and unemployment is already projected to be above these levels.
However, our focus is on the ongoing level of unemployment and not the spike as we believe that Q twos unemployment driven losses will be partially mitigated by several factors.
One is the unprecedented governmental response, which has been both large and timely to provide relief for consumers and small businesses.
Who is our proactive payment deferral plans, which together with a broad offerings for Barents across all categories of consumer credit will help consumers through that's locked down period.
And three is by a reduction in loan prepayments as borrowers preserve their cash and this will help investor returns.
So we've developed a sound analytical framework to evaluate all of these puts and takes but it's premature to make definitive conclusions until the day to stabilize it's.
Well, we can't say is that many of our investors have been purchasing loans for years and the relatively high yield and short duration nature of the out that will allow the returns of older vintages to mitigate the impact of any weaknesses in the most recent and therefore most vulnerable worse.
A reminder, that we have been moving to higher credit quality over the past 18 months, which does help better position the portfolio for context, our 2019 vintage reflects customers with average annual incomes over $90000 and an average FICO more than 700, and a low payment chicken.
Burdens.
And that's our existing book.
As you'll see in slide 10 of the Investor presentation. We believe our new originations are significantly different from Q1 with even higher income higher FICO and lower income ratios on new loans are heavily focused on our existing 3 million members, who have demonstrated successfully passed payment history.
Winning.
This is because loans to existing members have historically exhibited significantly lower losses than loans from new members with similar credit profiles.
They also come at a much lower cost of acquisition.
[laughter]. In addition to this focus on existing members, we materially tightened credit we've dramatically increased verification of income unemployment and we've also implemented a pricing increase of between two and 400 basis points.
We are actively evaluating additional analytical approaches and the use of incremental third party data to enhance our underwriting capabilities.
[laughter] the combination of all the actions is intended to increase investor returns in a normal environment.
Clearly we are not in a normal environment, and we expect to make additional and meaningful changes from here.
And once we have digested the revised economic data and modeled this impact we will issue updated performance targets.
[noise], so I'll move on to our fourth guiding principle, which is supporting our members where we've taken a number of steps to help our borrowers we successfully implemented a two month payment plan with borrowers applying either online or via the phone.
And after an initial spike new enrollments are now leveling off as of April Thirtyth approximately 11% upon members had enrolled which we believe is inline with our industry.
It's worth spending a minute on the profile of those enrolling as it shows the positive intense which our members are engaging they are coming to us before they have a problem. So in fact, 90% of borrowers enrolled for current on their loans at the time of enrollments and 78% of those customers have never met.
The payment.
Oh and outside of lending club, 76% of these are enrolled borrowers have not missed the payment on any of their obligations in the last two years.
The profile of our customer base and our experience in past natural disaster I suggest that offering borrowers flexibility during tough times does enable a significantly higher percentage of affected borrowers to avoid default.
One additional observation I'll share that borrowers not deferral plans are performing well and we're not seeing any degradation in delinquencies or roll rates there.
[noise] another critical aspect of supporting our members is operational readiness, which is just flexing our operations infrastructure to meet demand.
We do have the ability to virtually train and virtually onboard new lending clubbers and that's allowed us to maintain or service levels and to be there for our borrowers.
Today, our collections team has stopped at roughly a 30% increase to where we were in Q1, and we have the ability to flex and with an additional 30% if needed.
We are currently developing a range of new bar hardship options to enable further extensions partial payment and eventual graduations back to the normal payment schedule. All of this is designed to engage our members with flexible options that support them in their time of need and help them maximize their payments success over the long term.
[noise]. Okay. Lastly, we are continuing to work towards the completion of our acquisition of radius. We continue to believe that a bank charter will enhance the resiliency of our business and allow us to better serve our members we remain in close contact with our regulators as we prepare for the acquisition which fee.
Believe is on track to complete and roughly year.
Oh, well not be providing substantial additional detail today beyond saying that we do believe we have sufficient capital to both acquire and to capitalize the back.
Oh, so I'll turn over to Tom now before returning with some closing comments.
Thank you Scott I will briefly discuss our Q1 results provide further detail about the actions we took to mitigate the impact of the weaker economy on her business and discuss our liquidity and why we believe we can navigate through the current environment.
The first quarter, we reported a GAAP net loss of $1.10 cents per common share and adjusted net loss of 44 cents for sure.
You got lost for sure, reflecting nonrecurring deemed dividend payment of $50 million to show the for the previously announced machines are common stock into non voting preferred shares.
The quarter's results also reflecting net $43 million decrease in revenue driven by a significant fair value Mark on loans and securities, partly offset by a decrease in prepayment reserves and an increase in the fair value of our servicing asset.
[noise], let me break this down you into the market alone then the impact from prepayments as a reminder, the net fair value adjustment reflects the marks on loans and securities related to loans on our balance sheet, which lending club has exposure.
At the ended the first quarter loans held for sale and securities available for sale for which we had exposure.
Fair value of approximately $825 million and I point, you to page six of our earnings presentation. So you can see the detail.
In the first quarter, we recognize the fair value mark to market a $123 million.
Well this mark 102 million was recognized through the quarterly P. you know.
The remaining $21 million represents fair value marks related to liquidity on our available for sale Securities and was recorded in other comprehensive income on the balance sheet.
With the marks we recorded in Q1, the loans and securities reflect the carrying value of approximately 87 cents on a dollar.
For reference our loans held for sale are typically mark between 95 cents to 100 sense on a dollar.
And we typically turned the portfolio quickly.
With the sale of club certificates or ABS transactions.
So for the quarter, we marked down the value of our loans and securities by approximately 10 points.
Looking higher credit costs and lower levels of liquidity.
We estimated fair value for these assets using our internal loan valuation models that incorporated Moody's April 13th baseline unemployment assumption.
As well as observable ABS trades inputs for similar loans were available [laughter].
We estimate that higher credit losses, and the increased liquidity premiums due to cobot 19 represents approximately $64 million of the $102 million fair value marks for the quarter.
With unemployment spiking and the cost of credit increasing significantly we also observed a reduction in prepayment speeds.
The reduction in prepayment speeds caused an increase in the estimated cash flows from our servicing asset.
This resulted in a 7 million dollar increase in the fair value of our servicing asset that was reflected an increase in our investor fees for the quarter.
<unk>.
In addition to this adjustment the prepayment reserve on our balance sheet.
Represents the liability we hold.
Any required reimbursement of origination fees on early loan prepayments.
As a result, the slower prepayment speeds, we decreased our reserve by $14 million.
This is reflected in the quarters financials as an increase in our transaction fees.
[noise] so to summarize we took a $64 million kobin related fair value adjustment on loans.
Partially offset by the $21 million in other impacted assets and liabilities I mentioned related to prepayments.
For a net impact of $43 million on pretax income for the core.
Well origination volumes decreased 18% sequentially and 8% year over year to $2.5 billion in the first quarter as we proactively reduced marketing and tightened underwriting quickly through reduced origination volumes in anticipation of a more challenging environment.
Institutional investors face significant challenges, including margin calls redemption requests and difficulty obtaining access to the capital markets.
Also oh seeing reduced demand from bank investors, who are dealing with substantial increases in loss provisions and they're trying to mitigate the wrong credit loss exposure.
Retail investors also pulled back in Q1.
But are likely decrease as a percentage of total originations as we see banks and other institutions pullback.
As of now we expect to two loan origination volumes to be down about 90%.
From what we saw that first quarter.
But the additional clarity around three gretna trajectory other acted economy and international stabilization of unemployment rates, we expect liquidity to green and investor demand to recover.
In response to the sudden decrease in investor demand, an expectation of higher unemployment rates, we quickly tightened underwriting standards and are only focused on facilitating loan originations to match current available funding.
We curtailed loan originations for high risk borrowers and are primarily facilitating loans within our 3 million strong club member base as we know these customers very well.
We've also implemented stricter employment and income verification or image for our applications.
We also reduced expenses as the environment deteriorated.
Fortunately, we were able to benefit from having a flexible cost base.
Historically about 40% to 50% of our cost base, that's consistent variable costs.
This flexibility has allowed us to reduce variable expense as quickly as origination levels decrease.
For example, we eliminated third party paid marketing channels and only focused on utilizing on paid marketing channels.
These actions and others will allow us to reduce our quarterly run rate of marketing and origination expenses by $50 million when compared to the fourth quarter 2019.
As I shared with you earlier, we embarked on a simplification program last year to reduce our fixed cost base expanded our margins and better position us for potential downturn.
We relocated our entire servicing operations Lehigh Utah.
San Francisco and also made our cost base more variable <unk> increased business process outsourcing and technology.
Additionally, we leveraged our scale and completed the vendor consolidation program last year to reduce our expense base.
Last month to further reduce our cost base, we wonder and we underwent a significant restructuring which impacted 30% of our employee base.
As Scott mentioned this was an extremely painful but necessary step given uncertainty about the economic outlook.
As previously announced we expect recorded restructuring charge or approximately $10 million in 2020 or most of it primarily coming in the second quarter.
[noise] impacted areas were primarily those focused on growth opportunities in new business initiatives, where we are less focused at this time given the economic outlook.
We expect the restructuring to generate quarterly cost savings approximately $20 million.
So combined with a reduction of variable costs, we will reduce the quarterly run rate of our total expenses by approximately $70 million or nearly 50% when compared to the fourth quarter 2019.
Now, let me turn to liquidity and how we're managing through this downturn in E com.
Over the last several years the management team and the board has implemented a rigorous risk management process and have maintained <unk> liability levels in anticipation of an eventual downturn.
Because of this philosophy, we drew down $50 million of our revolver and quickly reduced volumes in early March.
Allowing us to enter this crisis when they balance sheet that positions us to whether an extended period of market dislocation.
Again as you see on page six of our Investor presentation, we have approximately $550 million estimated net liquidity.
Even after accounting for our loans at fair value.
Given the uncertainty around the economy.
It is expected to recover we have conservatively conservatively prepared for a prolonged economic downturn.
There are a lower expense run rate, we believe we have enough liquidity to the end of 2021 in variety of stress scenarios.
We stress tested our liquidity through a range of moderate to severe stress assumptions on both funding and revenue.
As you can see our investor presentation on page 22.
Our loan servicing portfolio of $16 billion generated over $50 million in cash in the first quarter and we expect to generate additional cash from our loans and securities on the balance sheet.
In the most extreme scenario, even if we reduced origination levels to zero, we still expect that the cash generated by our servicing portfolio combined with the cash flows for a long the securities portfolio will enable us to recover.
Our normal operating costs.
These cash flows combined with our strong net liquidity today gives us a significant amount of runway to whether the current environment.
Especially considering that we're not planning to use significant amounts of our liquidity to originate new loans.
I also want to add that we believe that under a range of scenarios with conservative assumptions, we still have adequate capital and liquidity to navigate through the current environment and complete the acquisition radius.
[noise], given the challenging environment and the economic uncertainty in near term, we withdrew our guidance in March.
We will remain focused on truly managing liquidity capital expenses and working closely with regulators as we prepare for the acquisition ready spec.
Believed that the actions we have taken have increased our resiliency and will enable us to successfully navigated current environment.
With that let me turn it back to Scott provides some additional thoughts.
Alright, Thanks, Tom So clearly these are challenging and uncertain times a there is no current consensus on the path that the virus will take nor the speed of the recovery that we can anticipate.
However, we believe the actions we've taken position lending club to navigate a variety of scenarios and to be prepared to take advantage of opportunity when it arises.
We are the leading player in our space with an experienced team significant tech and data advantages and the ability to rapidly test learn and of all.
The asset class, we have helped build over the last 13 years, we'll continue to be attractive because it not only solves a real problem for borrowers. It also generates competitive risk adjusted returns for investors.
This asset class saw significant growth coming out at the last downturn and we expect to see strong growth again as the unemployment rate levels off borrowers graduate from their hearts your plans and liquidity returns to the capital markets.
For lending club the difference between the last downturn and this one is the foundation, we felt including our base of 3 million members and our ecosystem of investors, who are telling us they do plan to reengage more fully when the situation stabilizes.
We will be ready.
On behalf of the management team and our board I'd like to Ticketmaster Bank lending club employees who've been working tirelessly to support our members our investors and each other.
No one enjoys 10 hours of zoom calls today and our people have demonstrated time and time again, there are extraordinary resilience and the ability to grow and adapt to change and for that I am both enormously proud and deeply grateful.
With their commitment and the steps we've taken a I am confident that we are well positioned to whether the current diversity and take advantage of new opportunities.
So now I will turn it over to Samir and open up the call for questions.
Thank you Scott before we open it up the questions. They couldn't see two others. We ask that you limit yourselves to one question and a follow up and returned to the Q. If you have additional questions. Andrew Please open the call up acuity.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the Keith.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Henry Coffey of Wedbush. Please go ahead.
Yes. Good morning, I said were excuse me good afternoon, everyone.
I've seen lending club coming out of Oh, tough economy, and the clinic growth opportunities to create it didnt.
They were pretty spectacular having remember at all that as you look forward you know it.
It is it time to change this strategy is it time to think instead of lending club acquiring acquiring a bank.
And positioning itself as a source of straight to the bank is it time for a bank.
To be acquiring lending club and maybe lending club sinking up themselves as a product.
It's a product for the institution once once we get on the other side of the the so called crisis.
Every this is Tom.
I think that you know we feel good about where we are.
Well position I think everyone in the financial services industry is feeling the pain is different different levels of or other portfolios.
I think.
We are obviously managing what we can control in this environment and feel good about our liquidity in our capital be able to weather the storm.
We think that keep my do we have significant amount of capital to be able to emerge with the with radius and fully to diversify our our strategy, which includes a much deeper online relationship which includes a broader banking products.
At a in a a diversified portfolio. So we feel good about where we are and I think the.
The current environment only.
Strengthens our resolve to ER to acquire radius bank, and ER and diversify our risk profile, our revenue profile and accounts employment. So oh, we're a we're on track for that and well this is a challenging environment.
Feel good about our ability to whether through it.
Yes.
I just add on that Henry that Ah you know to me and if the current environment <unk> in a way really validates and confirms the ER for us the path that we've been on over the last 18 months or so and and a lot of or the changes that we've been making.
And in terms of you know what the other side looks like I I certainly agree with your question you know we evaluating.
What opportunities will look like as a broad statement I think is the right way of thinking about it at this point, it's too soon to say how consumer behavior is going to change.
And what the implications of that will be on on it but it is certain that it will create new opportunities. We do we do feel that in addition to that our core product offering that we have today will continue to be a compelling had interesting.
Because you know as we come out of its people the opportunity for people to save money, a will be more valuable than ever.
So what is the dialogue been like with your regulators say in the last three or four weeks the true if you're free to comment on any of that.
Yeah, I mean, obviously, a those conversations are privileged to all I'll say is you know they've been continue to be extremely productive a we are highly highly engaged and the process is is moving forward and as I as I think Tom.
Touched on in his script.
We are we as a company how bad preparing both for our positioning ourselves within the directly regulated frame as well as positioning ourselves for a downturn bikes by implementing liquidity management tools and processes and and setting ourselves up to be able to access what we need so.
Oh that has helped make the conversations constructive.
Great.
Unusual period, and we'll leave it at that so thank you for answering my questions.
Couldn't agree more like center.
Our next question comes from Jed Kelly of Oppenheimer. Please go ahead.
[laughter], Hey, I'm great. Thanks for taking my question I guess first for you time.
Can you just lay out how you think this current recession plays out I know its top plays out compared to compare to the financial crisis.
And sort of what you see happening and what changes and challenges might lie ahead.
Sure I think first of all is very different than the 2008 crisis in the that crisis was mostly focused on real estate and and valuations and leverage.
This one is very very different in the obviously endemic in and affecting so many so many industries.
And the government has a implemented stimulus program lightning speed.
Keep in mind that you know consumers didn't get much relief until probably may of 2009 coming out of 2000 Christian so the scene, which.
And the tools that are at the fits disposal have been you use but also the health of the consumer balance sheet going into this its feel better. So so I think very very different I think in that regard.
You know we don't we don't fully appreciate the impact of the stimulus consumer behavior and obviously, the big thing would be the speed in which we get.
Let me back on track.
Yeah. We are we are using some pretty difficult environment assumptions to whether oh do our modeling to weather the storm.
We do not expect.
A quick view recovery, we expect the just to take a few quarters as they have markets stabilize unemployment.
Levels off and we have a better view of where the economy is going that allows us to two to read yet you reengagement and start expanding our our offerings Smith with.
Pricing so in a in that market. So I think I think that though we're trying to be prudent. We obviously are prepared you know the expense.
Initiatives, we had retain a lot of capabilities, so and so we have quite a bit of.
Capability to recover quickly.
We see a the market expanding quickly, but we would expect that address the 2020 is gonna be more challenging.
Yes, one other.
Sorry, just one other note I'd add on one well what's different is not only the government response in this case, but also the response from the financial institutions right. The ER the offering of hardship plans pretty universally across all categories of consumer credit.
As a is providing a bit of a bridge through this kind of locked down period, which we do we do think will be will be helpful for consumers, but it kinda sets up that question as you know when there's a lot from period ended what does the new normal look like which I think is where you see the very wide range of attach.
Outcomes made all the more complex five what does the virus or decide to do in that environment.
And then I I under stress tests.
Did you provide a monthly cash outflow currently what you're assuming and then any update on the.
Tc lawsuit.
So just a couple a couple of comments. So so the when thinking about this is <unk>, we have a unique asset in the servicing asset, which there was up more cash than it does revenue. So we put that in the back section to show you on page 22. So you can see that our servicing assets.
Throws off about $50 million alone. So that's a pretty significant amount then the 800 million of loans are either in a long form or in a in our securities portfolio.
They threw off additional approximately.
$25 million to $35 million per quarter. So you have significant.
Cash inflows.
And that's not even including any origination fees based on our volumes. So that covers you know our opex at op ex expenses somewhere in the call circa 60 million $65 million. So you can see that we're we're not positive just on a cash cash revenue cash expenses, it's hard to get all that from the facing the incomes.
Because the accounting convention, but that's a that the ballpark that we see a for the next few quarters.
Because we're just with regards to the FCC obviously, we're in the process of Oh waiting for our court. They are two well do go through that we don't have any other updates at this time, a it's very likely the that court date gets pushed out given the a shutdown some.
The civil cases that are happening courts are close right now so I don't know what stay tuned on that we don't really have much else to update John.
Alright, thank you.
Our next question will come from Eric Wasserstrom of you'd be yes. Please go ahead.
But thank you.
No. The continued there now.
Yes, well little muscle, though I think we'll be able to get it [laughter] alright, alright. Thanks.
So I just want to preface my comment by saying that you know my hats really off to a to you and Tom and the entirety of the lending club team in terms of dealing with what is obviously, an unprecedented and in many ways unimaginable circumstance.
I've I've two questions.
Related really to to just the origination forecast.
In the absence of anything else, if you would simply pointing to your underwriting standards to their to their current level.
What would have been the impact of that on origination in isolation can you give us a sense of that figure.
Yeah. So I think let me just make sure I understand your question is hey, as their production volume or just due to investor funding or is it due to too crowded. The answer is it is both however.
However, we we could or some kind of re frame what are we doing we're focusing on our existing members and within the existing member base. We are focused on you know where we've got tightened a front end box as well as tighten verifications well, we could do a significantly above where we are today call. It.
I don't know instead of being down 90% maybe down.
60% to 70% a with within that sandbox.
Roughly I'm doing that now quick am I had that's roughly where we could be.
Oh, yes, but as we mentioned you know the the issue right now for investors is there's just a lot of there's a lot of dust in the air for them to what's happening across their portfolios redemption requests valuation issues liquidity issues capital issues and just a question of you know how do you prudently underwrite in a world where.
There you know.
Unemployment claims are going up by many multiples.
Historic Records.
So that's why we think once.
So a ideally that says lockdown ends we start to get back to work and we see if it can be sustained or that we do believe stats that can best and you know again investors are staying quite engaged with us and they're all expressing an interest or turn they just need to sort out their own issues before they're ready to do that.
And what one of the they'd be helpful is a just to give everyone kind of a quick primmer on how this works right. So clearly unemployment is escalating spiking, even a and so as a result losses are going up but there are also so important features of this product Scott mentioned on one episode.
Short duration, which really means that.
Investors are getting back their principal very very quickly in these loans so alone that was originated.
Just the in the fourth quarter 2019, you'd almost half of that principle is back already so their net exposure drops dramatically.
In addition, you know in certain products. The prepayment speeds I mentioned are slowing down prepayments speeds are important factor in understanding return these vintages as prepayments slow or the good loans are staying longer and therefore, we're able to.
Since some of the losses and then finally the activity we put in place and our archon plans. The first phase going out you know we've seen that they have benefited borrowers greatly and reducing the overall losses for them and so we're spending a lot of time with our investors to make sure.
I understand the implications of these factors on their portfolios.
And and the risk Saudi associated with so you know obviously this is a or an event that forces us to too quickly respond to the inquiries from our investors and we hope we're doing that as fast as possible. So they understand how we're thinking about the risks and the sensitivities associated with it so I wanted to.
Sure that with everyone.
Thank you for that time in just my one follow up is.
And I'm looking here at page 17 for for reference, but as I recall from from sort of Alaska crisis like event at lending club, but show back I think in May 15.
May 20 person the.
Or of the the platform investors.
You know the managed accounts in the self directed accounts, which are today, a much smaller proportion of the total.
Proved to be very resilient through that through that event I'm wondering what it is in your view that you know maybe causing their behavior to be a little bit different this time around.
Yeah, very very very different environment.
Yeah, when you think about the 2016 event.
That was a compliance issue and so the the ability for banks to do their due diligence comeback get on the platform.
It did take some time in so they were the other funding sources, where resilient as we intend to them to stay on the platform and ER and continue to purchase they were more quickly able to get a their arms around the issues.
But we do expect a capital formation come in in different ways, and it's very possible that that becomes a a new a new in larger piece of our of our business going forward love to see how this immersions, but you know your typical crisis of credit or new capital for me.
It is I'm looking for or outsize returns and we would expect to similar rotation and profile is that over the next few months.
Thanks very much.
Our next question comes from Stephen Wallet of Morgan Stanley. Please go ahead.
Yeah. Good evening, just maybe to start out.
I appreciate you guys trying to give as much color as you can and what is a very unfamiliar and then tough visibility environment. So thank you for that.
I wanted to follow up on thing it Eric was talking about sort of what drives it right the investor side versus the borrower side and maybe we could talk about both of those quickly first on the sort of the down 90% on the investor side.
Got it seems some banks this corner talk about maybe reducing appetite over time for third party platforms in general So maybe if you could talk about.
Some of the conversations longer term or if you're you've been able to have those conversations right now with some of your investor partners or is it sort of like a you know we want to come back the we'll see how the ones performed type conversation and then on the borrowers side I was hoping you could talk through how your model thinks about things like adverse credit migration, obviously credit scores are lagging.
King.
And your models, they're gonna say something different than what those are saying, but as you tighten the box how you think about that and maybe just if you could touch on.
That 11% hardship like what's driving that is that just job loss or does it not even take job loss for someone to end up needing that kind of assistance.
Hey, you cheated that with lots of questions [laughter] I'll take a star first on the partners. One so weak Oh, we are in a constant contact with our investors.
And you know a reminder, a huge chunk of these investors are in the business of investing in our loans and stand in the loans as some of the broader ecosystem.
And ER and then we've got things like Bank partners for whom we are a very important strategic part of their portfolio are both for return and for asset diversification purposes. So we're in we're in a lot of a we're in constant and regular contact with them.
And you know the issues each of those different investor types are facing are also are also different right. Some of the banks are right now or you know activating their contingency plan.
Preserving capital focused on their their portfolio and the PDP loans that they're trying to serve to preserve their you know that their lending and their customer base, whereas let's say you know somebody or some of the you know asset managers are dealing with warehouse line issue.
And capital issues. So the issues are there and also by the way you know it to the extent, they're investing in Austin multiple other players you know certain asset classes are more exposed than others right. Obviously small business lending is right now and the eye of the storm. So there's lots of different issues, there, but what we.
I can say is you know we are very engaged with all of them people are telling us that they do you anticipate returning to the platform and different investors our need to see different things in order to tighten that and in many of those things are whereas we mentioned earlier there's.
Comic thing, there's things specific to their own businesses and then there is what we can control and so we're we're obviously just focus on the things that we can control which is.
You know really demonstrating our excellence and servicing and we feel really good about the team. We have there we feel good about the the strategy and the systems. We got in place and then focusing on a compelling new go to market strategy, which we believe we also.
So house. So that's that's really our focus to get that going.
And they enter a more focusing on our existing members, who we know how they demonstrated better or a loss history.
Next question you asked was about the 11% skip a pay so I don't know if I said this in the prepared remarks, but you know, we actually thought pre seed or the unemployment spikes. So these are people coming to us in advance of the issues actually manifesting in terms of reported unemployment claims and.
No. The data on this is really hard to compare because it's changing so quickly but you know you can certainly see you know as of a few weeks ago. When lending club was that roughly an eight ish percent enrollment and skip a pay some of the key mortgage originators were at six and a half or sell so you're seeing it at all categories.
I think student loans is significantly higher.
Then personal loans, but you're you're you're seeing it across all categories and it's really a you know what we're hearing from our customers. We did some research on our own customer base.
And ER yeah. They are they are telling us that the majority of them anticipate that they will need four months or less of bridge because they are anticipating that they will be rehired.
And that's currently how they're thinking about it. So this skip a pay is meant to just be a bridge between a loss of income and the resumption of income.
And you know and how this performs obviously will be a factor of both our ability to get them onto some kind of resumed payment plan combined with how the overall economy recovers and then you had a question on.
Oh on adverse credit migration can you try rephrasing that for me and left home you understood. I think he was referring to kind of the underwriting point I think Oh, we would say Steve is is as Guy mentioned, we were focusing on repeat borrowers. So these are folks that are a part of a 3 million club member base.
We've seen over over the years, they perform quite quite well, we were able to monitor their performance.
And even with that you can see that we put in there and are prepared materials on page.
Ted just to the migration Oh improve bayko income and joint application, which we are all indicators of Oh credit risk and also everything's income as well. So all these things were just tightening the criteria for a in this environment.
Obviously want monitoring levels of increases unemployment monitoring.
More exposed areas verify.
Employment and income so lots of things we've done in this environment to to make sure. We got to a good credit profile or let's say probably not done done prudently a we believe that you know supporting our members is good for both our borrowers and our investors and analysts environment.
That's all much appreciate the color and since like you pointed out I threw a bunch in there I will get the follow up for that so thank you [laughter].
Our next question comes from Steven Kwok of KBW. Please go ahead.
Hi, Thanks for taking my questions and hope you want it going well my first question and just a round the liquidity petitioned thanks for giving us the disclosures around back just as I looked at slide seven that seems to be some maturity.
At the ended the year and.
Middle of next year I was just wondering like how do you think about the liquidity assay program. If things were to remain the same given that some of these are up for renewal I can is it possible to have these renewals and at this current environment and then also argue counterparties the many more collateral.
From some of the warehouse lines and everything thanks.
Yeah. So let me be really really clear is in my prepared remarks, so Scott and I mentioned.
In the most stress scenario, we just assume everything matures everything has to be.
All the terms and conditions needs to be a require us to pay downs has as appropriate on the contract. So.
So that's a assumption that there's some kind of the worst case scenario, so and we're still fine.
Your specific question about managing liquidity of one is I want to make sure you understand as we've got a good prudent profile in the so keep in mind. Some of these warehouse lines are collateralized by by loans. A there is there is no advance.
Yeah.
Requirement or change in advance rates, rather that would require us to put additional collateral is they do have some terms and conditions that are looking at delinquencies or in age, but again, we factored all those into our assumptions. How we'll manage this obviously is a proactively just like we we've gotten here, it's a user terming out.
Certain financing renegotiating certain terms, but as we like we're not a in a distressed situation here at all we're actually feel pretty good about our ability to manage through this or even with a the that short dated maturities are coming at us. So.
Keep in mind that you know the number I gave you over $300 million in cash $550 million of estimated that liquidity. This is the amount of and no no pressure from cash expenses.
It allows them to weather the storm and it has a lot of flexibility to to a two to either finance ourselves through these lines or other lines or if not available to allow them to go into either run off or otherwise keep mind that the a the revolver is really the of the one that's coming due.
We've also assume the the repo or the evergreen.
Actually my when we do with mismanagement liquidity or said, we just assume that that all this is a subject to the t's and c's of the contract. So we've stressed a pretty hard and I still feel very good about her profile.
Hi, Thanks, Thanks to the insight.
My follow up question. It just around the prepayment rates have you seen a pick up in prepayment rates has consumers have gotten this stimulus chats and everything.
Yeah. So we did see a bomb a small bump when those checks came and especially with consumers on the lower income side are we did we didn't know this out but over overall prepayments are down quite materially, but we did see the effect of the stimulus checks arriving.
Great. Thanks for taking my question.
Just to add to that for everybody. It's obviously, a really good sign about again engagement with the company and intentions.
That <unk> that we did see that bump.
Okay.
Our next question comes from Bill Ryan of Compass point. Please go ahead.
Good afternoon. Thanks for taking my question. So a couple of quick things first kinda people look at hitting on the issue of just the amortization of the portfolio you talked about $16 billion servicing portfolio looking back my model.
You know it amortizes pretty rapidly over the course of a year, but I know, there's a lot of extenuating factors right now you know with the Forbearances with slower pay downs.
Yeah. So the first question is how should we think about the rate of amortization of the 16 billion servicing portfolio that you have a presently in the second one is just a clarification issue you talked about the 70 million at expense savings.
And I think he says 50% of expenses with that 50% of the cash expenses. Thanks.
Yes, I'll take the first when you take the second sure again, so on the portfolio. If you know again not our plan, but just to show an extreme set stress scenario. If we were to not originate for the remainder of 2020, we would expect a two to still have about 10 billion outstanding as we exit the year.
Roughly half the portfolio would run off by the end of Q1 next year.
Okay.
On the expense side.
Result, I referenced the for Q2 thousand 19 is that's kind of her most normal quarter. A this first quarter was kind of a hybrid if you will because of the impact of us pulling back Saar in March but that's 70 million is intended to be a 7 million down from the fourth quarter expense reported numbers.
Not the cash numbers, they're not that dissimilar, but for for that that metric I gave you was off the face of the income statement. Okay. Thank you.
Our next question comes from Heath Terry of Goldman Sachs. Please go ahead.
Great just had a.
Question again, but lights as with the same caveat that everyone else as mentioned in the World is world is critical lots, but.
Obviously difficult operating environment, but you guys are in a much better positioned to whether it than a lot of your competitors are do you have a sense of how they're being competitive being impacted by those are maybe put a put another way you know coming coming through this do you have a sense of what youre.
Sure.
Market share or market share gains might look like either either in the current environment or you know what could look like on the on the other side of the this is I'm sorry. The other companies also trying to originate loans that also tried to acquire customers in the personal lending space.
Or a deal with its environment with without the resources, but up the balance sheet that you do.
And then I guess somewhat related to say that as you know.
We also see the online advertising space negatively impacted this was reports or add pricing down 30% or so you have to what level do you see yourself, taking advantage of that to.
Acquire or celebrate your customer acquisition or add more customers to the or to the to the plot in one place obviously, you've got the ROI targets in the credit targets that are important to you, but there could what degree dust is cheaper advertising factor into your two year equation.
Oh, Yeah, hi, he's HM so yeah, we feel.
Oh anybody feels good and this environment, but I'd say, we feel good about car relative position in terms of the competitive landscape. We do believe we moved more quickly than most on on all fronts. Both to you know draw down our revolver or turned off the origination.
The acquisition, we were very proactive, meaning before we got signals from our loan investors. We were we were battening down the hatches.
And when we look at how we're positioned now again.
The scale of this company will be helpful. The depth of the analytical expertise the tools and systems, we have available to be applying to end just frankly, as we mentioned the size of our existing customer base to ease back into originations in a low to essentially zero cost way.
I think will set us up to to be ready to ramp we do think they're gonna be a number of puts and takes you know do we expect a sort of oh winnowing over the competitive heard I think that's probably likely oh, but it'll be puts and takes everywhere you know credit to the credit approval box you know given the movies for.
Passed by the way it has unemployment spiking in Q2 and coming down, but then actively continuing to creep up and that's factored into our outlook, which as you know some businesses might make it through the locked down.
Whether supported or artificially or not but after that we expect them to continue to fail or some to continue to be failing and have an impact on the on the consumer so they'll be there will be puts and takes with that the credit box the pricing cost to capital would be a whole bunch of factors to consider we do think the marketing landscape should be.
Less competitive so on balance a those costs will come down he that was bad we get a lot of questions from analysts.
Analysts and investors about how we would respond in a more challenging environment. I think you getting that which is a demonstrating you know variable cost base being able to shut off we don't have any branches were online there's no real estate cost overhang that word dependent upon or speak salesforce all those costs are gone.
So we skinny down really quick you don't have a cash right. That's a huge just demonstration of the model it happened in a matter weeks.
We've already made or adjustments to our cost base and here. We are six weeks into this and we're feeling pretty good about our positioning I think as we come out of this recovery, obviously, we're going to be well positioned as all of a data and install base that we invested in over the last 10 years. So that gives us a lot of Ah Ah near adjacent.
ER relationships and ER, and frankly, a contribution margin to be able to navigate a what the new world may be so we're not we're not saying we know the world's gonna be but we're trying to demonstrate that we've got the capabilities and flexibility to navigate what whatever the environment would be without.
Having short term liquidity pressures that make you do things that I really value destructive. So that's that's kinda. The you know a that'll happen last six weeks so.
I think that's a that's kind of what we're trying to show today.
Great. Thank you so much.
Our next question comes from Giuliano Valonia BTI Ji. Please go ahead.
Good afternoon, Bob Thanks for taking my questions. It's.
Great to see all the progress that you've been able to make around a bit costs are going initiatives.
I guess thinking into the servicing I said for a second just see a little bit more detailed I'm, assuming that the majority of the cash flow running above revenue is because of the amortization of the capitalized servicing asset which is running as a contra revenue item and because as a follow up to that do you know if you guys have the figure for the value of that asset as with the first quarter.
You are correct on the amortization Giuliano what was what was your question on what value servicing assets Oh valuation on the servicing as itself at the end of the quarter when I know what up $7 million, but I don't have the absolute number.
My control is gonna yell at me, but its it really hasn't changed much in the first quarter just by that servicing adjustment.
But you know I think it's going to be somewhere in the 60 million to $80 million range I apologize I don't have the exact number of thought my head, but that's about where it is.
That's right I'm actually looking at the time case, that's 89.7 million and so it's probably roughly up 7 million see you got me to the the answer [laughter], Okay. The roundabout way.
Right I guess I guess as a follow up to that.
As you've given us a little bit of fruit.
Trajectory around the <unk> kind of roll off in the persistency of a the servicing outside of your lungs.
It would it be fair to think of it you know because you're saying that you could you should effectively be cash flow neutral with the cash flows from a servicing I said that incremental revenue and incremental contribution from originations and fees would put you in cash flow positive territory in the near term.
Yeah actually in the near term, we actually are our cash flow positive in the once we get the <unk> the expense a red fully beneficial in Threeq Houston Threeq to Fourq, you or even without a lot of originations were still casual positive as we're getting 2021.
That starts to turn slightly but not materially and then we point to just the amount of cash we have so plenty of Ah of of cash to handle either one but wanted to try to you know give you. Some idea how we sized our expense reductions efforts is that it did not have them be a burden for us.
For a at least for the rest of 2020 and even as we get into early 2021, they're not material until Oh until.
Ah Ah later in 2021 skewed my that's beyond what we do the radius transactions and keep in mind on just like the servicing asset.
We also have principal payment eight out as well so just like the service. He asked it runs down these assets run down as well. So we also get principal and interest net of the warehouse line advance and so that also come back to us as well.
That is very critical I really appreciate a hope and I will jump back into queue. Thank you very much.
Thank you.
Okay no more questions.
Color or call. It a route. Thank you everybody we look forward to connecting with you all a one on one offline.
Thanks.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.