Q3 2020 LendingClub Corp Earnings Call
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Good afternoon.
And welcome to lending club's third quarter 2020 earnings conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by Christmas car keep all the bugs.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Chris Star then one on your telephone keypad.
Please note this event is being recorded.
I would now like to turn the call because we're go play head of Investor Relations. Please go ahead.
Thank you and good afternoon welcome to lending club's third quarter 2020 earnings conference call. Joining me today to talk about our results and recent events or Scott Sanborn, CEO and Tom Casey see Oh.
Our remarks today will 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 the impact of global banking, our ability to navigate the current economic environment.
Having the benefit of our pending acquisition of media.
Phone volume and the future performance of our business and product.
Our actual results may differ materially from those contemplated by these forward looking statements factors that could cause. These results to differ materially are described in today's press release and our most recent forms 10-K and 10-Q each is filed with the FCC as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming.
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 update these statements as a result of new information or future events.
Also during this call, we will present and 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 and related slide presentation.
The press release and accompanying presentation are available through the Investor Relations section of our website at IR Dot lending club Dot com and.
And now I'd like to turn the call over to Scott.
Thanks, <unk> and thank you everyone. We know it's a busy time right now and I. Appreciate you all joining us today to discuss our third quarter results.
So let's get to it.
In what continues to be an uncertain environment, we do feel good about our ability to control what we can control we.
Well, we increased loan volume by roughly 80% quarter on quarter is in line with what we told you to expect back in August.
In Investor demand continues to build its driven by the strong performance of the Cree covered loans as well as encouraging early data on the post messages.
We are managing our business for success over the long run and we are remaining prudently conservative in the short term. We anticipate continued deliberate loan growth as we monitor the path of the virus and its impact on the economy.
She decides informed of any additional government stimulus package and observe the evolution of consumer behavior.
All while we collect additional data on the performance of our post cobot vintages and continue to test and learn on pricing and policies suited to this unique environment.
No we are not sitting still and hoping for things to get better I'd, rather we're actively strengthening our core capabilities and enhancing our adaptability. We are investing in our electronic trading platform LCR, which gives us the capability to seamlessly auction alone at above and below par prices.
Without the use of our balance sheet, which is scaling nicely. We've developed a new price testing infrastructure and are implementing a revised go to market strategy that we believe will enhance our recovery.
Yeah, we've taken steps to decrease our fixed operating costs reduced our operating risk and increase our liquidity.
So with a proactive actions we've taken to deliver a strong investor returns improve efficiency and build a substantial amount of liquidity, we are well positioned to navigate the current environment and complete the acquisition of radius, which remains our top strategic priority.
So before I go into further updates I'll spend a minute on the broader environment clearly conditions to date have been better than feared after the initial onset of cobot. A GDP is rebounding initial unemployment claims are dropping and consumer spending is recovering in many categories.
That's sad.
There are still things, we don't know initial unemployment claims remain well above pre pandemic levels. The virus continues to grow up the country and the timing and size of an additional government stimulus package is unclear.
The good news is that consumers came into this recession with strong balance sheets and they do appear to be behaving prudently with increased savings rate and a focus on paying down their debts.
We are therefore, seeing encouraging stabilization of credit performance across consumer asset classes, which.
Which is great Oh, no we're closely monitoring to see how this performance holds as the effects of stimulus and payment moratoriums fate.
Since the onset of the pandemic, we've organized our efforts around five guiding principles, though let me update you on where we stand on each of these.
Our first priority is to keep our employees safe engaged and working productively I'm pleased to say that we remain safe with few reported cases of coated and blending clubbers remain engaged productive and able to effectively operate our business and serve our customers.
The results, we are not asking them poised to return to our offices until at least the summer of next year.
Our next priority is to protect loan investor returns and we are encouraged by the data we're seeing our.
Our pre kogan vintages, which represent the bulk of our servicing portfolio are demonstrating enormous resilience I are ours are getting close to our historical average coming in at roughly 4%, which is 100 basis points higher than our most recent forecast at <unk>.
Highlights that the installment nature of our product and its short duration means that risk for loan investors is receding with every passing month.
On new post Kobin issuance, we're seeing equally encouraging early data and currently expect to time portfolio IR ours to be in the 5% to 6% range. This is well above our historical averages and provides a good buffer against any potential future volatility.
So these strong results to date are driving investor confidence and our resulting in an increase in Q4 purchase orders as well as interest from new investors to come onto the platform.
While we are pleased by what we're seeing we are responsible stewards of credit and we'll continue to maintain a prudent approach with a relatively tight credit box is we got a few more months of data and closely monitor the broader environment.
Our new issuance is primarily focused on existing members at these loans performed better and cost less to acquire then lost a first time borrowers.
I'd remind everybody that weve been sharpening our focus on the existing member and existing member experience for some time in order to improve utilization we've streamlined the experience we develop customized underwriting by leveraging the richer data available.
We see this loyal member base is a key competitive advantage, which will become even more valuable when we can offer additional products and services at the back.
Which is why building and maintaining a strong member base is the next strategic priority I'll touch on that.
One of the reasons lending club had such high net promoter scores and return rates just because our customers know that were genuinely committed to helping them improve their financial wellbeing.
Since the onset of the pandemic, we've helped more than 217000 up our members with much needed for parents really we've rolled out new payment plans payment options and new ways for them to reach.
And as you can see in the results.
Yeah.
Onto our fourth priority preserving liquidity, where it's worth calling out that we increased net cash this quarter to 445 million, while paying down our warehouse line and pay off all of our revolving debt. We're now in a strong position to navigate the current environment and to acquire radius.
After the acquisition, we will be a very different company, we will be the first public Neal bank and the only full spectrum fintech marketplace back in the U.S.
[noise], what does that mean, what's the marketplace back put simply we will maintain the benefits of our marketplace, while retaining a portion of our installment loans on our balance sheet finance with the low cost deposits radius and delivered through our branch lift infrastructure.
The attractive economics generated by this combination will enable us to price competitively and deliver value to both depositors and borrowers.
And perhaps most importantly checking experienced an accompanying mobile application will give us a platform for ongoing member engagement that provides for an ever deeper understanding of our customers. So that we can identify additional opportunities for them to save well driving a significant increase in the lifetime value of each relationship.
In addition to these member benefits there are significant strategic and financial benefits, the lending club or the acquisition, including access to stable funding wider margins and recurring revenue.
So acquiring radius won't be a win for our members our loan investors and our shareholders.
In slide seven of the earnings presentation, We show the progress we've made as we work towards completing the acquisition.
We filed our why three application with the Federal Reserve on September 25th deployed cross functional teams across both organizations and announced the first of our intended new deposit products. We are working hard to complete the acquisition within the timeline, we laid out in February.
So with that I'm going to turn the call over to Tom for a detailed discussion of our financial results.
Thank you Scott.
Turning to the second quarter, our results primarily reflected the next step in our recovery efforts and the impact of significantly improving our liquidity profile.
Specifically loan originations grew seven ever say quarter over quarter as investors continue to see the resiliency of our loan performance.
We also reduced loans held for sale by selling $410 million of loans off the balance sheet.
In addition, we materially de leverage the balance sheet by paying down a warehouse lines almost completely.
And fully paid up our.
Our outstanding revolver, well, increasing our cash builds to $445 million.
Furthermore, our results reflect the steps we took to successfully reduce our expense base and drive efficiency through our marketing efforts.
For the third quarter, we reported GAAP loss of 38 cents per share compared to a loss of 87 cents per share in the second quarter of 2020.
Excluding the impacts of nonrecurring items, we reported an adjusted loss of 25 cents per share.
Which compared to an adjusted loss of 60 cents per share in the second quarter.
In Q3 loan originations increased to $584 million, we grew originations, while maintaining tight underwriting criteria increased pricing and focusing on marketing primarily to our existing member base.
We are in the process of gradually reopening paid marketing channels as we maintain a prudently cautious approach to driving growth.
As Scott mentioned earlier, our loans continue to perform well with ire ours are pre coded messages returning to historical levels of approximately 4%.
Reflecting the resiliency of our personal loans as an asset class.
Mechanism of our strong underwriting servicing and collection efforts and likely some impact of the government stimulus programs.
Early performance indications are that post coven, Vince is on track to deliver Iris a 5% to 6%.
Reflecting tighten underwriting an increase loan pricing.
Our data indicates that bar payment patterns continue to be in line with historical patterns and recent third party research firms confirms the personal loan payments rank relatively high in the heart to your consumer debt.
Coming in just above credit cards and below auto sales.
In Q3, our transaction fees increased 24 million from $4 million.
Approximately half of the increase reflects higher origination volumes in the quarter, but the rest due to the increase in prepayment assumptions to pre cobot levels.
The increase in Q3 originations is consistent with increased investor demand on our platform.
For the quarter, our investors doubled their purchases from Q2 levels and confidence continues to build in Q4.
Existing investors are increasing their orders and we're seeing greater interest from new investors and loan pricing overall is higher.
Net interest income and fair value adjustments decreased to $14 million from $60 million, reflecting a decrease in net interest income.
Offset partly by an improvement in fair value adjustments.
Net interest income decreased by $8 million as a result of loan sales and our decision to increase cash and de leverage the balance sheet.
In Q3, we did not see any significant marks on our loans.
In fact, we sold $410 million of loans from the balance sheet, primarily originated pre cobot at approximately their carrying values.
Net interest income and fair value adjustments. This quarter includes a benefit of $5 million, reflecting positive fair value marks on our loan and securities portfolios driven by improving well performance.
Investor fees increased to $26 billion from $19 million, primarily reflecting return a prepayment assumptions to pre covert levels.
Our results during the quarter also reflected a significant increase in our contribution margin to 71% from 49% of the prior quarter.
Adjusted for asset sales and updated fair value impact the contribution margin would have been about 62%.
This compared to our historical contribution margin of approximately 50%.
Highlights the benefits of marketing primarily to our existing members.
Given the better credit performance and low marketing cost returning member takes a second personal loan has three times the lifetime value of first time customers, we do not.
With the cost efficiencies, we gained by focusing on our existing members as well as our re sized operating expense base. We believe that we can return to operating profitability at an origination volume of approximately $1.5 billion for quarter or roughly half that of our quarterly run rate in 2019.
Now, let's turn to some of our liquidity management actions, we took this quarter.
As we mentioned last quarter, we intend to sell assets and generate additional liquidity to purchase radius and provided the bank with a strong and clean balance sheet.
As you can see on slide eight of our earnings presentation. Since the end of Q1 reduced our balance sheet loan exposure from $940 million to $270 million, primarily as a result of sales through Twoq and Threeq, you, mostly at or above our carrying values from one Q.
During the third quarter, our cash and cash equivalents increased to $445 million or $330 million.
Flexing the loan sales as well as an increase in our operating cash flows.
We also fully paid off our revolving credit facility of $70 million and pay down debt at our warehouse lines by $290 million, leaving only about $19 million outstanding at the end of the quarter, which is pay Downs October.
Our only remaining debt had been turned out effectively eliminating all risk of capital calls from our balance sheet.
As you can see on page 15 of our earnings release, we have a strong balance sheet with $720 million of tangible equity.
Excluding loans and securities that are required to be consolidated but which we have no risk exposure, our tangible equity to asset ratio was almost 70%.
Which is significantly higher compared to most banks, especially finance goes.
Furthermore, this does not consider our deferred tax asset of $170 million against which we have a full valuation allowance.
With our strong liquidity position and de risking the balance sheet, we are well positioned to complete the radius acquisition and capitalized the bank with a strong balance sheet will also be prepared for a protracted economic downturn.
Our decision to strengthen and de risk our balance sheet does have a negative impact on our earnings in the near term.
By selling loans and building, our cash position as well as causing our structured products, we have reduced our use of the balance sheet and.
And we will report lowered interest income in Q4.
We estimate the quarterly impact of lower net interest income to be approximately $20 million when compared or what's your results.
So let me recap some are positive trends, we're seeing and how we're managing through this period.
As I mentioned low volume was up 79% quarter over quarter in Q3, and the credit outlook or loans has improved.
Reflecting the resiliency of this asset class or efforts to support our members and the impact of government stimulus.
Post cobot underwriting is delivering attractive investor returns with Iris, 5% to 6% for investors.
Investors are increasing their purchases and we're seeing new investors starting to buy loans and the platform in Q4 was pricing a loan sales continue to improve.
We are gradually reopening marketing channels.
In fourth quarter that are continuously testing and learning from the performance of our post covert bone vintages.
In Q4, we expect the consistent increase in originations of between 250 $300 million, bringing us to approximately 850 million to $900 million for the quarter.
I reduce cost base and marketing efficiencies are driving better operating leverage and improving our margins.
We have de lever the balance sheet through loan sales pay down warehouse lines. It turned out our other debt to prove the resiliency of our company.
Our cash and security balance of $465 million positions us well to medicines environment.
Liquidity for both radius and future growth.
With all these actions we've taken we believe that we are well positioned to benefit from an economic recovery.
So with that overview of our earnings and our financial position, Let me turn it back to Scott for his comments.
Alright, Thanks, Tom I think you summed it up pretty well I just say overall, we feel the recovery is well underway. We feel good about how things are progressing how we feel well positioned.
To to navigate and to complete the transaction with radius, which we believe will in turn help further accelerate the recovery just before I turn it over to Q anyway, I would like to say thank you to.
Lending club employees, a we are eight months into this thing and he working from home and soon presented special challenges and deeply appreciate how everyone continues to soldier on and stay engaged and serve our customers. So without a smear. Let's go ahead and open up to questions.
Great. Thank you Scott before we open it up to questions of the currency to others. We ask that you limit yourselves to one question and a follow up and return to the queue. If you have additional questions. Chad. Please open the call up for acuity.
Certainly at this time 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 keys to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Stephen Walker with Morgan Stanley. Please go ahead.
Thanks, and good evening. Thanks, Thanks for all the commentary there it's much appreciated maybe one place to start off would be on the radius deal and I know you guys. You know there's a limit to what you guys can say, but certainly you've gone through a lot of steps prepared a lot of day. One you know sort of stimulation a management steps to show regulators your.
Ready to go showed your risk management, you filed your wine I'd see I guess I'm kind of curious.
If there's a way you can sort of speak to whether the filing of the why 90 is more of a formality or at this point you know anything that would've been a I guess de railing to the process probably would've been communicated at this point is there anything you guys can offer on that <unk> in that regard.
Yeah. Thanks for thanks for the question I mean, I would say look this is just a one the other step in the process. One further milestones and you know the process isn't complete until its until it's complete yeah. We did include in the earnings presentation bit of an overview of some of the things we've been it's been working on.
But what I'd say is we continue to believe we're on track for the timeline to be laid out back in February which puts us at a 12 to 15 month approval process.
And again as as in our prepared remarks, you mentioned you know part of our repositioning of the balance sheet was really to to show that we already.
Understood and then maybe as my follow up I know Tommy threw in there that you guys can run back to operating profitability at about one one and a half billion ER volumes I believe and I assume that's on a.
Isn't it looks like based on the tracker you know track record your honor the trajectory you're on it looks like that could be as soon as first half of 21, maybe maybe by mid year, assuming things recover certainly if you were to add radius on there I'm curious how much that would I guess rightsize your ability to add more fun.
Being as I believe last quarter and I'm curious if you could update us on it. It was about 50 50 of the constraint on your ability to underwrite was due to funding availability and the rest was due to a sort of credit concerns and I'm curious, how you think about that and what sort of trajectory would be on.
In terms of getting back to the operating profit volume threshold organically versus from radius.
Hey, Stephen a couple of things as we mentioned so we're on a good glide path, we've been very deliberate in growing our volumes to or about $250 million to $300 million.
We did that this quarter, we expect to do next quarter as well and then really what we've been saying is that we want to see the performance of those those vintages and then we'll start to end the year well start to see that and take into account plus the environment and I put ourselves on a trajectory of of getting getting ourselves back to a higher level of volume.
We commented on 1.5 billion, because that's kind of the you'd if you will the traditional business model to give everyone. An indication of the efforts we put in place to besides your expense base efficiency, we're in a in marketing and ER and puts us back to profitability, where we were in the fourth quarter of 2019.
We are continuing to grow our cash flow, which is great but continued to be positive cash flow.
Operations, that's all positive.
With the with the radius acquisition, we just think that accelerates. Our efforts are obviously, a with a more stability in funding lower cost funding, we start to benefit from a from some of the things that are that we get from radius as far as being an issue of bank. So all of those things are all continue to be very positive.
We will start to grow the balance sheet. So a pre provision revenue will start to grow nicely. We would have to put up the sea supervision. So reported results would be impacted by the provision, but we would be able to start to grow or held for investment portfolio at a pretty delivered great. So that the oh the business.
Plan, obviously as Scott mentioned timing is or is not clear, but we're working towards our goal of Oh.
15 months and well give you more information as we as we get closer you might want to touch on Tom just you.
You know that the it will absolutely that the addition of the bank charter will improve our earnings profile, but how that flow through the income statement will be a little different yes. So keep in mind that with the bank, we actually earn more but obviously the income profile a little bit different we get it.
Transaction fees in the marketplace lending, whereas in the bank, we would prefer all that and get interest income and net interest margin. So the Oh, we have to book a provision. So the total income will be higher or loan a the recognition of the income would be overtime as opposed to a time of issuance.
Yeah and on and on your comments on you know kind of what's happening on platform balance. We this is also in the earnings presentation, but were make were remaining at the moment pretty prudent on the credit underwriting a week about a 40 or 50% reduction in kind of a.
Model throughput if you will in addition to the increased prices.
While we while we kind of establish the performance of the vintages post cobot.
So we we are maintaining that we had said way back in Q1, we were going to maintain that for six months. So were in month four right now, we'll we'll exit the year with a horse I guess one of those five now where we'll exit the year with a full six months well reevaluate that.
Yeah.
No. It's it's our belief that that posture. You know this has been a question over us as how will these loans due in a recession and hey lending club given that you are in your current model. Your incentive is to originate how are you going to manage through it you know.
We believe we're kind of it's important that we show that we are good stewards of credit and investors are seeing that so we are seeing the order book building, we are seeing interest.
Increasing or they are.
Our existing investors are very encouraged by the data.
That is coming in and we are seeing you know not only existing investors increase their orders, but we're seeing new investors with interests are trying to platform because the relative value.
We believe are providing in this environment is very compelling.
I appreciate the comprehensive response got stay safe.
And the next question will be from Henry Coffey with Wedbush. Please go ahead.
Yes, good evening, everyone. Thank you for taking my questions I.
I think it's fair to say you've done everything right in terms of managing through this crisis and building up the balance sheet.
Well when I I know there were a couple of comments on your outlook I was wondering if you could expand around a few of them, including some some of your views on net interest income over the next couple of quarters as you approach the bank.
And other sort of relevant factors.
So hi, Henry This is Tom you know I think the like.
My comment on net interest income is that with the balance sheet coming down from almost $1 billion.
Less than 300, we have Ah.
We think we will reduce net interest income by about $20 million per quarter. So going from a typical run rate of about 25 million per quarter down to about five.
So that's temporary because we haven't deployed the capital, but as you know a deploying that capital into a bank and being able to generate.
More stable funding and obviously larger net interest margins Oh, we see significant opportunities to grow that net interest income, but as part of our revenue sources and to have the durability and.
Predictability of that revenue, so obviously that will be dependent upon our timing of closing and this piece of our asset growth and I'll be able to provide those details when we get better better view on on.
Timing and size of the balance sheet. So, but we know this is a temporary impact, but we think it's prudent as you said that the position of the company.
Appropriately for the next wave of a strategic growth that we've been working towards.
On the on the other side of the equation.
We see a pretty deep into thinking about the bank.
Liked about certain deposit programs et cetera, what.
What would the loan mix look like is it still going to be a business where lending clubs own originations or.
I mean, it sounds like it's going to be a business where lending clubs own originations are now going to be a much bigger part of the bank's balance sheet than originally anticipated and I know that that they also have their own book of business. So could you sort of give us a sense of what to ultimately expect in terms of Oh loan mix equation.
Yeah, Henry I'll start and then maybe let Tom follow up you know even in the banking framework. We continue to see the marketplace is a very important playing a very important role in the business. The marketplace is what's going to allow us to serve a broad range of customers, which keeps the marketing dollars.
Very efficient and also allows us to really build a member base abroad member base.
And we think that the fee income that we're gonna be generating off about its going to help offset some of the provisions to enable us to grow the balance sheet and be generating our own capital. So while we will be participating by holding some of the loans you know the majority of the loans are going through we're still going to be sold.
To investors.
So we like that you know a good mix obviously the release portfolio with with ours. Obviously, you are loans, the personal loan portfolio as well as our patient finance and auto loans will obviously be a faster growing because there will be new to the balance sheet and the.
Metal loans that we generate per year allows us to put a portion on the balance sheet and grow it.
At a reasonable rate. So you know I think we you will see a mix a good mix of Ah a personal loans and the continuation of some of the Copel is radius Oh, helping us diversify the portfolio grew.
Great. Thank you very much.
Once again, if youd like to ask a question. Please press Star then one.
The next question will be from Bill Ryan with Compass point. Please go ahead.
Good evening.
Questions around your you know you talk about your origination volume going North of 800 million in Q3, and then targeting kind of 1.5.
Billion to be breakeven, but you also commented that most of your volume right now is from existing customers.
Just kind of looking at it what percentage is coming from existing customers and.
You know when do you think you might start to open up a little bit for new customers and is that kind of instrumental in driving it up to the 1.5 billion.
And second question might be three but.
Would be just in heavy user proceeds changed at all and lot of COVID-19, and what's your what's happening in the economy. Thanks.
Hi, Tom I'll start again so.
Yes, we have been really focusing on existing members to two reasons right. Now one is with the more limited funding capacity right now we want to make sure were there to reward our loyal customer base first and that they can get access to credit.
That's reason one reason too is they obviously cost a lot left to acquire you can see that in our marketing expenses and reason three as they perform significantly better on credit but.
But that's not a that's not a long term strategy. That's just a really kind of in the.
You know this current time period, we thought was that was the right focus we are in the process of opening back up marketing channel. So we're still majority repeat called that in the 80 ish percent range, but we are opening back up the marketing channels to begin to bring new members or into the club and that's you know those are investments.
We absolutely think are important to make a in our future and so you'll see that you know mix continue to evolve over the coming couple of quarters or as we come out of that and to your question. On you know proceeds yeah. We are we are seeing a shift I kinda entered it out in the prepared remarks.
Oh, both [laughter] evolving consumer behavior as well as our evolving strategy that we are working on which as you know are you you've probably seen consumers our de leveraging more broadly and so we're seeing the credit card refinanced use case come down it is still a massive massive.
Market you know that it comes down there's still close to I think it's not.
900 billion and Outstandings, there, but we are seeing an increase in things like major purchase home improvement loans and those kinds of things. So we're we're adapting our approach to to fit those use cases.
And to give you a bill I'm, just I'm just saying.
I mentioned I think this is probably the cleanest quarter, where you can really see the return on investment that we were getting from the marketing dollars over the last few years as Scott mentioned.
Oh, how frequently consumers come back borrowers come back for it for a second loan. This is the utilization and we've been talking about for quite some time.
And so our ability to repeat.
Increased utilization is really really important and it really has not been seen has been growing so fast oh.
Well, you're trying to explain this to a to investors now you see it this quarter on how you can generate loans are pretty low low now and that can be part of our future as a as we have those members engage them more and more ways.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to severe go clay for any closing remarks.
Thank you Karen and thank you all for joining US today. If you have any questions. Please contact investor relations and we'd be happy to assist you.
Thank you conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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