Q4 2020 LendingClub Corp Earnings Call
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Good afternoon, and welcome to the lending club fourth quarter and full year 2020 earnings call on.
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After today's presentation there'll be an opportunity to ask questions asked the question you May Press Star then one on your Touchtone phone for withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Sameer Gokhale head of Investor Relations. Please go ahead.
Thank you and good afternoon, welcome to lending club's fourth quarter and full year 2020 earnings conference call.
Joining me today to talk about our results and recent events are Scott Sanborn, CEO and Tom Casey CFO. Please note that in addition to the presentation. We usually provide with our quarterly results. We are also sharing a lending club bank presentation, but provides information about our business, including our new banking capabilities you can.
On both presentations accompanying our earnings release on the Investor Relations section of our website.
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 future products and services the effectiveness of certain strategy initiatives anticipated financial results and the impact and benefits of the biggest acquisition and resulting bank charter on our business.
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 as filed with the SEC.
Well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming form 10-K.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
Also during this call, we will present and discuss both GAAP and non-GAAP financial measures for description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings release and related slide presentation.
This release and accompanying presentations are available through the Investor Relations section of our website at IR Doc lending club Dot com.
And now I'd like to turn the call over to Scott.
Thank you Samir good afternoon, everybody and thank you for joining US today, we are very excited to share the update on our business now that the acquisition of radius is complete.
We've worked long and hard to get to this point and we are very bullish about how we're positioned to add value to our customers and deliver consistent and sustained multi year earnings growth for our shareholders.
It's really hard to imagine a better time to be launching a digital bank.
We have got a lot of information to share today and the financial expression of our business will be changing considerably so Tom and I are going to split this up I will focus my time on how the addition of the bank enhances our business and enables us to deliver on our strategy.
And I'll, let Tom provide the details on last quarter's results and how the acquisition informs our financial outlook for the year.
When we launched back in 2007 lending club's vision was to leverage technology data and on marketplace model to transform the banking industry.
We began by bringing a traditional credit product the installment loans into the digital age I'm moving it online broadening access lowering costs and delivering a fast and frictionless experience.
We've redefined the category and by 2019 personal loans were the fastest growing segment of consumer finance and we became the largest personal loan company in America generating more than 1 billion in loan volume per month, and helping more than 3 million customers lower their cost of credit and get on the path to eliminating their credit card.
Yes.
Getting out of debt is in fact, our members number one goal and they love us for what we're doing for them. Our NPS score is approaching a truly outstanding 80, that's well above many leading brands and traditional banks and the pandemic has demonstrated that they prioritize our loans above many of their.
Their debt obligations, including even credit cards and half of them returned to US again within five years, providing us virtually free source of loan volume, which we reward with a further simplified process and even lower rates compared to their first loan.
Easy access to responsible low cost unsecured credit is a primary pain point for our members and it represents a huge immediately addressable market that's expected to grow at more than 20 per cent annually over the coming years, but it's not the only pain point and our mission to empower our members on their path to financial.
<unk> doesn't end here.
I know our customers are not the under banked for those shut out of the financial system.
These are high income highly credit worthy individuals who are already fully utilizing bank services in.
In fact, there's some retail banking's most profitable customers, it's just working out better for the banks than it is for that.
That's because together with or higher than average income. They also have higher than average debt, including credit card auto and student loans.
They want to put this debt behind them and they are highly motivated and willing to take action to get there.
And as a digital marketplace bank, we can now do so much more to help.
And our members tell us they are ready and eager for us to do so in a recent survey 83% said they are interested in more products and services from lending club.
With the digital Bank acquisition closed we can take the next step.
First up we will be building on radius is multi award winning online and mobile deposit offering to make it very easy for our customers to manage their lending spending and savings in a holistic fashion.
Because we are vertically integrated we can capture more value both from lending and from spending and can use this together with the behavioral data will be collecting to offer powerful benefits and value to our customers. This debt funding club apart from the Neo bank and Fintech competition.
What's even more exciting is that the bank is being added to an already formidable platform with two sizable benefits.
First as you can see on slide nine of the lending club Bank presentation. We have incredible data superiority. We have for 14 years of history on 60 billion in loans to millions of customers informed by rigorous testing, resulting in 140 billion data sales added to our proprietary database.
Access to this vast and on the data gives us a significant competitive advantage on.
Our team of more than 130 data analysts from scientists mine. This historical data with leading edge machine learning and AI analytic techniques to continuously refine our dozens of proprietary models to optimize fraud risk repayment risk loan exposure and loan pricing.
And it's working our experience shows that our proprietary scoring system is 20 times more effective than traditional credit scores such as FICO at predicting default.
As a result, we can approve more borrowers offer significantly lower interest rates and price competitively for attractive risk adjusted returns across the credit spectrum.
Benchmarking data from one of the leading online Aggregators shows that our loan offers are priced very competitively and are very likely to be ranked as best in class and several independent studies, including those conducted by the Philadelphia Federal Reserve researchers confirm our ability to make credit more affordable and traditional alternatives.
Coming out of the pandemic the strength of our underwriting has now also bad and cycle tested losses on loans issued pre COVID-19 are in line with our pre pandemic expectations and loans issued since the pandemic, our some of our best performing loans in recent years.
So we haven't just collected a wealth of data, we're leveraging it and it's clearly giving us an edge.
Another key differentiator is our technology infrastructure. Our tech team encompasses nearly 400 lending clubs, we built proprietary software and systems that enable us to deliver seamless highly automated access to credit and deliver a fantastic customer experience. We've issued 13 patents and had 27.
Pending it would take others many years and the significant capital on pay to try and replicate the competitive moat that we've created.
With the acquisition of radius, we're adding to our competitive advantages by evolving to a unique and powerful new business model on marketplace Bank.
As you can see on slide 10, this model wins against both traditional banks and against Fintech marketplaces.
Versus base, we expect to grow more rapidly fueled by the combination of interest income from our high earning assets together with significant fee based income from our capital light marketplace.
We'll be even more efficient customer acquisition supported by our national footprint and our ecosystem with funding partners that allow us to serve a broader range of customers and it just to go back.
And we'll be highly adaptable at a lower operating cost as a digital first entity unencumbered by legacy tech infrastructure or high cost branches.
We also have advantages over pure fintech marketplaces, the limitations of which we understand better than anybody and that's why we book all of our business model.
Vs Fintech marketplaces, our marketplace bank will be more resilient with access to stable funding are recurring and sustained revenue stream and a clear and established regulatory framework.
And we'll be able to reach higher profitability, given our lower funding costs and higher earnings per loan.
All of these advantages position us well to capitalize on a clear trend that has been accelerated due to COVID-19 the move to digital banking.
Bank is no longer a place you go is the thing you do increasingly from your mobile phone and consumers are now more than ever weighing the importance of bad experience versus proximity to a bank branch.
With one of the best mobile experiences in the industry, we're starting from a good place here.
I've been with lending club for more than 10 years, and I have never been more excited about the combination of capabilities and market conditions for us to achieve our ambitions and transform the industry.
Our marketplace Bank begins today with industry, leading loan and deposit products.
<unk> brand and loyal customer base considerable technology and data advantages and a differentiated offering that allows us to better serve an expanded total addressable market, which will allow us to drive sustained earnings growth.
Near term personal loans will be our primary economic driver and we plan to grow originations by 45 per cent and revenue by 55 per cent this year.
As Tom will lay out for you on a minute the growth and earnings power of lending club will become quite clear after we absorb the costs and accounting implications of operational integration.
As a team we are very committed to executing on our strategy and building long term value for our shareholders together with our core unsecured lending capabilities. Our digital bank gives us a highly differentiated offering that positions us well to compete while providing cost effective financial solutions for our customers.
It is our intention to stay discipline execute and deliver in the near term while investing for the future to achieve our broader ambition and redefine banking for our customers.
Okay with that I will pass it over to you Tom.
Yeah.
Thank you Scott as you just heard we are tremendously excited about the future with the addition of a new banking capabilities.
On my time going deeper into some of the areas that Scott touched on but we'll start off covering highlights from Q4 earnings.
We're very encouraged by our positive business trajectory in Q4, we increased originations to $912 million exceeding the high end of our guidance range and reflecting growth of 56% from the third quarter.
We ended the year with $525 million of cash, reflecting the sale of $470 million on loans for the second half of 2020, as we prepare to capitalize the bank with cash to support strong growth.
By maintaining such a high level of cash flow.
We experienced a temporary and anticipate a reduction in net interest income.
For the fourth quarter, the impact was about $20 million in revenue compared to <unk>, 2019, and $8 million compared to the third quarter of 2020.
Our results for the quarter also did not include one time benefits related to low sales and loan assets revaluation that occurred in the third quarter.
So the story for the quarter was pretty straightforward transaction fees up 77 per cent from Q3 on the back of a 56% origination growth offset by lower net interest income, reflecting prior low sales and non recurring asset revaluation benefits in Q3.
Yeah.
With that let's get into some of the financial benefits of our marketplace Bank that Scott referenced and how this sets us up for 2021 would be on.
As seen on slide 11 in the LC Bank presentation, the economics of owning a bad could truly compelling with substantial and readily achievable benefits.
For the vertically integrated digital platform, we capture the best of the marketplace and the bank creating.
Create a self sustaining high growth and highly profitable business with structural advantages.
Let me outline some of these benefits.
First with access to banking capabilities, we have significantly enhanced the resiliency of our business.
Even in the us to better serve our members.
Deposits are much more stable compared to warehouse funding use by other fintech marketplaces.
Second access to low cost deposits also reduces our borrowing cost dramatically, allowing us to generate a new and growing stream of recurring earnings.
This will help drive strong and sustainable profitability.
Third as a bank, we become vertically integrated reducing our dependency on others and eliminating the fees paid to third party issuing banks for originating loans on our behalf.
It puts us into some perspective over the last two years, our partner banks received approximately $20 million per year for originating our loans.
Fourth we intend to hold prime loans, comprising 15% to 25 per cent of our total originations while selling the rest through the marketplace.
This leverages the unique capabilities of our platform and aligns our interest with investors.
Together, we can balance are occurring and durable bank revenue stream with a capital light marketplace fee based revenue stream.
And fifth our marketplaces fueled by diverse investor base that allows us to continue serving borrowers across the credit spectrum.
This has enabled us to create a hugely efficient marketing engine, while building a more inclusive brand. It was aligned with our mission to empower members on their path to financial health.
Now, let's talk about how some of these benefits translate into enhanced financial performance.
I'll start with the positives.
As you can see on slide 12, the benefits of deposit funding are very clear.
Compared to pre pandemic levels, our borrowing costs should decline by approximately 90%.
Yes, 90 per cent in.
In 2020, the average cost of warehouse lines was $3 three per se.
Turning to our bank's deposit cost today of about 35 basis points.
To put this into perspective for every $1 billion in assets. We hold we will now save approximately $30 million per year in interest expense.
As I mentioned earlier deposit funding is more stable than warehouse funding, which can dry up when market volatility increase.
There is less funding availability when you need it.
Ending deposits in replacing these other funding vehicles is transformative for both the economics and the resiliency of our company and will enable us to drive a new stream of recurring revenue.
Our bank also has an award winning platform that brings $2 billion in deposits, which will help support our future growth.
In addition to lowering our funding cost of deposits, a new marketplace bag will capture significant financial benefits from being a bank and having a marketplace.
As you can see on the right hand side of slide 14 for every $100 million on loans, we originate we generate about $4 million or an origination and servicing fees when we sell the loans on the marketplace.
The vast majority of this fee based revenue was realized immediately without requiring a significant amount of capital.
However, it is highly dependent on origination volume.
We can now bolstered this revenue stream with bank revenue generated by loans held for investment on our balance sheet.
As you can see on the left side of the page every $100 million of loans, we hold on the balance sheet to generate additional marginal profitability of approximately $12 million.
So when you compare that to the $4 million from the marketplace. That's.
That is three times more.
And this is recurring revenue, it's not dependent on originations in any given quarter.
However from the standpoint of GAAP profitability loans held for investment have accounting requirements, such as diesel allowance for credit losses, and the deferral of origination fees, which result in a loss at the time on origination.
Diesel provisions or less of an issue in loan balances are flat or growing at a low level income.
In contrast, we expect to grow loans at a relatively rapid pace.
Therefore, the cumulative layering of expected credit losses upfront well pressure short term GAAP income.
But as we continue to grow this portfolio will establish an ongoing annuity of future earnings.
So I want to underscore that even though GAAP accounting result on the Frontloading of expenses relative revenue the cash economics of retaining loans are very attractive.
As growth normalizes and the impact of upfront expenses recognition becomes less pronounced GAAP and economic profitability of loans held on the balance sheet will converge.
The combination of revenue streams from the Bay and the marketplace should enable us to go faster and better navigate through challenging periods.
In addition to the apparel marketplace Bank model, we benefit from being a leader in a very attractive asset class slide.
Slide 15 shows that even after adjusting for credit losses lending club's direct to consumer personal loans generate risk adjusted margins of approximately seven five per cent.
Representing more than two times the margin for traditional banks.
So as we increase the proportion of consumer loans over time will generate a highly profitable earning stream at industry leading margins.
With that overview of the financial drivers of our new business model, Let me provide some context and details behind our near term outlook.
I'd note our guidance excludes any potential impact from the FTC, which we hope to get resolved by the end of the year.
2020 was a year of repositioning as we navigated the pandemic reduced our fixed costs by 30 per cent and prepare for the acquisition of radius.
'twenty 'twenty, one what was the year in which we prime the pump as we begin to build our consumer loan portfolio integrate the bank and accelerate our origination growth.
All of this will set the company up to generate strong multi year earnings growth.
A reminder, with our new model, there's no longer an immediate one to one connection between origination volume or revenue.
That's because for loans we hold.
Well the origination fees and then interest income will be recognized over time rather than at origination.
And you can see this dynamic play out as follows.
For Q1, we expect originations to grow faster than revenues because.
Of the deferral of origination fees.
We expect originations to grow 30% to 40 per said versus last quarter, while revenues will be growing at 15 to 25 per cent.
However, when you look at the full year, you see the opposite where revenues outpaced originations driven by growth of interest income.
For the year, we expect origination growth of about 45 per cent and revenue growth at 55 per cent.
You can see a similar dynamic of timing differences play out in our net income.
Which has impacted not only by the deferral of revenue at origination, but also by the upfront diesel driven recording a charge offs that occur over the life of the loans.
Accordingly, we expect to report a GAAP net losses, <unk>, ranging between 75 and $85 million and for the year, we expect a net loss of $175 million to $200 million.
No no.
This losses almost entirely due to the change in accounting convention for loans held at the bank due to adopting seasonal accounting and origination fee deferrals.
I want to note that we've also included a roughly $20 million of one time costs related to the acquisition of radius.
These investments will prime the pump for recurring high margin earnings for years to come and we expect to earn more than two times the amount of the seasonal provision over the lives of the loan.
Our outlook is consistent with the financial plan, we submitted to the regulators for the bank acquisition.
Over time, we anticipate that our GAAP earnings will drive industry, leading ROE vs and catch up to our high growth cash earnings.
I also wanted to provide you with two additional details.
We used approximately $140 million of our $525 million cash position for.
For the purchase of radius.
We also capitalize the bank with an additional $250 million of cash from the LC bank equity to approximately $440 million.
Staying on the theme of capital at the end of 'twenty 'twenty, we had a valuation allowance of $211 million against our entire deferred tax assets.
Over time as we generate GAAP earnings we expect to reverse the valuation allowance, which will substantially increase our tangible book value and generate substantial savings on cash taxes.
So I know we went through a lot of information today and I appreciate your interest in the company.
Before we get into the questions. Let me leave you with three key takeaways.
First we have a cycle tested and differentiated business model with data and technology advantages.
Our unique business model allows us to leverage the benefits of both our capital light marketplace and.
Our bank enable us to further disrupt the banking industry.
Third we are a leader in a large and growing market for substantial growth ahead.
It was about $440 million of capital in a business that will generate earnings to support future growth. We are very excited about the road ahead.
Well positioned we are to create significant shareholder value.
Now, let me open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing Ricky.
Draw. Your question. Please press Star then two.
Our first question today will come from Steven Kwok with K B W.
Alright, Thanks for taking my questions and congratulations on the closing of the radius acquisition I guess the first question I have was just around pro forma tangible book value post the radius acquisition. If you could provide an update of that and then you guys have given us.
Highlights of round.
The impact of the acquisition are those.
On terms still the same around the beneficiaries and stuff as we think about it.
Hey, Steve This is Tom Yeah, Let me let me answer your first question and then just to clarify your second one so on tangible book value at the bank.
And in my comments, it's about $440 million.
So we ended the year excuse me at the end of the year. We were at total equity was about $750 million.
So you still have to have additional capital at the parent.
But inside the bank.
We've got about four and from 40 of Oh.
Book value.
Second question, you had Steve and just if you could clarify that you mentioned something about the benefits.
Yeah at the time of day, a radius acquisition you had given us in terms of what the benefits were from the radius bank are those still largely intact from alley funding investments in bank debt economics.
Yeah, they are Steven overall.
Feel very good about the acquisition.
Things have changed a little bit obviously rates are much much lower than they were in <unk> and radius has delivered a lot more deposits than we originally modeled so clearly that's a much bigger benefit, but we still get all the benefits that we talked about as far as the issuing bank fees.
And obviously the lower cost of funding that I mentioned in my prepared remarks are very significant so and then obviously the interest income.
It's quite a quaint.
Larger than we expected again, because it works.
Deposit costs on right now so feel very good about the acquisition and <unk>.
And the profile that.
Radius has as we can.
It started integrating them this quarter.
Got it and if I could just sneak one last one then just around the GAAP consolidated net income on understanding that this year you have the one time acquisition costs, along with the seasonal impacts and stuff, but when should we expect that on a GAAP basis. So you guys can become profitable as we continue this.
Acquisition, along with the loan growth.
Yeah. So we haven't given long term guidance, even though obviously lots of things to work through this year you obviously just closed.
The transaction, we gave up giving you quite a bit of information on the new model on some of the key drivers of our profits and revenue.
Just to highlight a couple of things.
To help you navigate.
As we've tried to show you is that the you know the deferral of the origination fee and the provision obviously put pressure on our reported results, but I'd refer you back to page 14 to show how fast the earnings recover.
You can see that you have pretty significantly.
Those two deferrals come back pretty quickly within the first nine months or so so we're.
We're not we're not saying when we're gonna be GAAP profitable, but I did say on my prepared remarks debt.
Most of the almost all of the GAAP losses. This year is really the.
The seasonal cash.
<unk> provisions that require losses to be recognized upfront and the deferral of fees.
Just some quick math for you if you were to take those two items.
That's about $165 million of the of the loss rate. There just those two items alone and then you add the additional $20 million of of integration related expenses debt.
Right about the midpoint of our guidance.
Yeah, I would just add Tom I mean, Steven work.
Our goal here is to build a high growth high profit machine that is driving really sustainable growth over a multi year period getting to GAAP profitability soon would actually be pretty straightforward based on the number as Tom said, but yes, we're making a conscious decision.
To add the loans to our portfolio because theyre going to drive you know as you can see in the numbers overall as an enterprise for ever given dollar of loan origination we can drive 30% to 40% more in earnings than on our historical model and this is really just a timing difference. So you know part of part of the timing of GAAP profitability is going to be based on our grew.
Right and our plan is to continue growing.
Alright, great. Thanks for taking my question.
Yeah.
Yeah.
Our next question will come from John Rowan with Janney.
Good afternoon guys.
Just to be clear on there there's a lot of talk about Cecil is radius radius has already adopted seasonal correct. So theres not a one day you know catch up on the allowance that you adjusted for you know higher higher lifetime losses is that correct.
Yeah, John though they they they were not subject to seasonal so they day.
We've adopted seasonal as part of the acquisition.
Leave that complexity out of money.
Narrative, but yes, they will have a conversion of Mt.
We're working through the purchase accounting now, but there will be there will be a conversion about to establish a new provision.
It will recognize that in the first quarter and Thats included in my guidance.
Okay. So the day, one Cecil adjustment to the allowance for radius Bank is included in the GAAP loss figure for <unk> for 2021, correct for make sure I have that right correct on that.
And that's one of the reasons why you see that net loss so large in the first quarter as part of it.
How much I mean, how would you bringing up their allowance and why is the day once useful adjustment here not not just you know a charge to equity as it was on day one 2020.
Yeah, So we didn't own them on.
Day, one on 2020, and they did not adopt Cecil so as part of the acquisition since we had already adopted diesel in our own books, we adopt Cecil for them from purchase accounting and that's the piece I was just referring to so there was a day one charge as part of our purchase accounting to break that out for you <unk>. It is in our.
And so would finalize the number.
And for the prostate violate that number but it's up.
So it's all on my Guy right now.
Okay and then just last question you know you you.
Got it on as to how you know loans held through the bank growth three times more profitable versus the traditional marketplace model is has there been any change in the guidance that you provided that about 10% of the loans are gonna be funded temperature lending club loans are gonna refunded for radius or is that is there an update to that guidance figure.
Yeah, I I gave in my prepared remarks that we're targeting about 15% to 25 per cent.
Depending on the final volumes for the year.
So we think that's a good range to again build a new recurring revenue stream.
It accelerates our earnings growth, but at the same time are maintained.
Plenty of volume for.
Our partners and on the Investor side.
Two to via loans. So just want to make sure everybody is tracking with when we say funding for radius, what what we're referring to to make sure that the answer to your question is what percent of loans or are we holding that 15 to 25 per cent what percent of loans are being sold through the marketplace about 75% to 85% that's right.
Okay. Thank you.
Yes, Thanks John.
And our next question comes from Henry Coffey with Wedbush.
Okay.
Henry I think he might be on mute.
Yeah.
Well go ahead and go to our next question from Bill Ryan with Compass point.
Thanks, and good afternoon, a couple of questions first.
First off in the discussions with regulators on I know, it's probably baked into your guidance, but the day did they put limitations on.
If you will sort of retention of loans going forward, because I know a lot of you know I'm thinking back to some of the companies I follow that converted to banks. They were limited in the amount of growth on balance sheet that they could have.
Whether it was deposits or loans. So if you could talk about any possible restrictions and then the second thing on the seasonal side of the equation.
No I had on my notes sort of a 6% to 7% loss reserve upfront established on new originations is that still the right number and when will kind of charge offs follow behind it over what kind of time period.
Yeah. So for the first one on the restrictions all the information. We provided you is what we've used for a regulatory approval. So these are the the guidance. We gave you reflects that.
And obviously with any approval process there are.
Business plans that we lay out and so our profile that we're showing you today is consistent with that.
Don't see any of any the agreements we made with regulators closing any.
Concern on on any of the things we laid out for you today.
We feel that this is a very very good profiling of the accelerated growth that I talked about is consistent with that.
With regard to seasonal your 67 is a what I'll call on a nominal basis. So the five I showed you was on a discounted basis.
And.
So the recognition of the actual charge offs for these.
Have a duration typically on our three year loans about one and a half years. So your peak losses are going to come in maybe in the 12 month time frame.
But they'll come in over the life of the loan as opposed to as you know the seasonal charges upfront alright, and then though.
Oh I just a question you said the discount so you're you're but you approached or you're taking the discounted valuation approach to.
Cecil.
That's right. So it takes about a point off of it.
Bill.
You know that I showed you five on day, one and then the numbers I showed you on page 14 are net of any additional.
On a seasonal increases overtime if any okay.
If there are any further questions. Please press star and then one could join our keel.
Seeing no further questions I'd like to turn the call back over to Scott Sanborn for any closing remarks.
Alright, well as I hope you could hear in our prepared remarks myself from the rest of the team are very excited to take this combined business forward and we thank everybody for for their patients. We know we were a little a little delayed in and.
And getting this axiom and look forward to talking to many of you offline.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.