Q1 2021 LendingClub Corp Earnings Call
Good day and welcome to the London Club Q1, 'twenty, One earnings conference call.
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I would now like to turn the conference over to the Mirror go play head of Investor Relations. Please go ahead.
Thank you and good afternoon, welcome to lending club's first quarter 2021 earnings conference call joining.
Joining me today to talk about our results of recent events are Scott Sanborn, CEO and Tom Casey CFO.
Our remarks today will include forward looking statements that are based on our current expectations and forecast.
And involve risks and uncertainties. These statements include but are not limited to timing and benefits from our acquisition of previous resulting bank charter.
Platform volume in the future of performance of our business and products.
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 more the most recent forms 10-K and 10-Q, each as filed with the SEC.
Any forward looking statements that we make all of this call are based on the assumptions as of today and we undertake no obligation of statements.
Yes.
Also during this call, we will present and discuss both GAAP and non-GAAP financial measures of description of non-GAAP measures and reconciliation to GAAP measures relating to the.
For the earnings release elevated by the presentation.
You can find both of the press release and slide presentation on the Investor Relations section of our website at IR Dot lending club Dot Com and now I'd like to turn the call for you Scott.
Okay. Thank you Samir and good afternoon, everyone and thank you for joining us when we last talked I told you that with our acquisition complete we would be evolving to a new business model that of a digital marketplace bank.
And I shared the this model would be positioned to outperform and deliver sustained growth and profit fueled by our leadership in personal loans and our considerable strategic advantages.
Accordingly, I'm happy to report that we're off to a great start for the year. Our Q1 results came in above the high end of our guidance as we accelerated originations, 63% quarter on quarter and increased revenues of 40% to $106 million.
What's even more exciting is that our Q1 activities will deliver an additional $70 million in interest income in the quarters to come representing a new recurring revenue stream that will continue to grow as we build our loan portfolio.
This is just one clear example of the benefits of adding the digital bank.
As I have said previously personal loans will be our near term economic driver and will pave the road to our broader future as of full service digital bank.
It is a great time to be launching a digital bank and we are starting from a position of strength given our ability to attract valuable credit worthy customers at scale and the save them money through a seamless experience.
In addition to our new lower funding costs lending club has multiple competitive advantages in both our Q1 results and our sustained growth over the long term will be built on how we leverage these differentiators.
So our advantages include our large and loyal base of members of our data supremacy based on information on over 60 billion in loans. Our tech platform that allows us to deliver of fast and frictionless experience, our marketplace model, which allows us to efficiently serve a broad range of customers and now our digital bank.
Which provides structural financial and strategic benefits to expand customer lifetime value to accelerate earnings growth and diversification.
Let me spend a minute on each of these.
First our members.
Our results demonstrate the continued benefit of having a large and loyal installed base of 3 million members of the majority of our loans in Q1 were to our existing member base and this drove significant marketing efficiencies. They were originated at a fraction of the cost compared to launch the new members and they also.
The trade lower credit risk.
As the economic outlook has improved and with our digital Bank acquisition complete we have ramped marketing back up to deliver a 63 per cent increase in total loan originations, which includes a 135 per cent increase in originations to new customers.
The consumer demand is currently below pre pandemic levels and the competitive market is dynamic we.
Believe that we are well positioned to outpace the markets overall growth rate and the captured significant share.
Our second key differentiator is our data and technology leadership supported by 15 years of significant investment in our experience of more than $60 billion and loves. This provides us with an enormous data advantage in both the originations and servicing.
We take this huge dataset and apply the latest analytical techniques, including neural networks and machine learning to inform our decisions. We deployed dozens of models to drive our targeting fraud underwriting pricing servicing and user experience and to manage outcomes for distinct customer segments.
This allows us to make compelling offers to customers, while providing competitive returns for platform investors.
It also allows us to automate originations and efficiently grow of loan volume without a proportional increase in head count.
As the economy recovers and we normalize our underwriting we expect more than two thirds of our loans to be automatically approved while maintaining fraud rates in the low single digit basis points. That's one of the lowest in the industry.
Our ability to assess and manage risk and the quickly adapt to the environment is evident in the results during the pandemic.
Looking at the latest performance data from DVA of one lending club is outperforming the market in all credit segments in which we compete with delinquency rates that are over 35% better than the average.
In addition to our outperformance the asset class more broadly has validated its place in the payment of hierarchy. A recently released study from Transunion confirms our internal data the customers prioritize payment of their personal loan obligations above many others, including credit cards.
These compelling results for the category in general and for lending club in particular are boosting loan investor demand for our assets.
This is critical because even with the addition of our digital bank. The majority of our personal loans continue to be funded through our marketplace, which is our third key differentiator of our broad range of investors allows us to serve a wide range of customers at competitive prices, which helps support our industry, leading marketing efficiency.
Our final differentiator is our digital bank, where we are immediately capturing the following financial benefits.
One funding costs are down approximately 300 basis points versus what we paid in 2020.
Two we lowered our origination costs by eliminating fees to third party banks.
And three as I already mentioned, we're building a significant new revenue stream from retained loans that will drive higher revenue per loan and accelerate our growth.
We also continue to win accolades in March see net recognized our consumer checking account as best overall eating out both traditional and online only banks.
And our digital bank was recognized by selling the leading research firm focused on technology for financial institutions for our innovation on P. P. P. In.
In just six days, we released an offering that has cumulatively delivered over $870 million in loans that help small businesses keep more than 75000 people employed.
So taken together, our large and loyal member base, our data and technology leadership, the marketplace itself and of course, our digital banks create a powerful new business model.
Relative to the banks, we expect to grow more rapidly and be more efficient in customer acquisition compared to traditional fin techs will be higher earning and more resilient.
We are on a mission to help our members manage their lending spending and savings and to make it easy for them to make the smart choices with their money.
In closing I'd like to thank all of the lending club employees, who work to get us off to such a strong start and especially thank the team of radius Bank, who are now lending covers and are working hard to accomplish our Zen based integration.
With that I'll pass it over to you Tom.
Yeah.
Thank you Scott and good afternoon, everyone as Scott mentioned, we delivered a strong quarter and grew originations by 63% with 40% growth in revenues and an entirely new revenue stream building beginning to build.
Our results came in well above the upper end of our guidance range for originations revenue and earnings.
We have lowered our funding costs and eliminate our issuance costs and as we continue growing originations, we expect commensurate growth in our marketplace revenue.
Strong growth in marketplace revenue will generate capital, which will allow us to fund growth in our highly profitable consumer loan portfolio.
This will accelerate our overall revenue growth of prime the pump for recurring high margin earnings for years to come.
Yeah.
So with our differentiated marketplace Bank model, we benefit for all the best of both worlds are capital light fee based marketplace business and our high margin Bank model.
Now, let me walk you through the new financial reporting format, we adopted with the closing of the digital Bank acquisition.
We believe the new format will help facilitate the better understanding of the key drivers of profitability and comparisons to our peers.
And we're moving away from our historical focus on adjusted EBITDA and shifting our focus to managing the GAAP financial results.
So let's walk through the financials.
Again, Q1 revenues grew 40% sequentially compared to our expectations of 15% to 25%.
Reflecting stronger loan origination growth as we open some of our marketing channels.
The difference between our origination growth and revenue growth is due to the deferral of fees associated with balls and retain all of the balance sheet, which will generate recurring revenue over time.
Adjusted for the use deferrals revenue growth for the quarter would have been in line with the origination growth at 64 per cent.
Net interest income for the quarter was $18 $5 million up for $2 $9 million in the prior quarter.
This reflects two months of interest income from radius assets as well as the interest income from consumer loans, we started to retained during the quarter.
In Q1, we recorded six of provision of $21 million, which included $7 million per day. Once you sort of expense to build credit loss reserves for the inquiry of radius portfolio.
Operating expenses for the quarter were $134 million of.
Approximately $10 million reflected radiant opex for two months as well as in the increase in compensation expenses as employee salaries return to pre pandemic levels.
The first.
Yeah.
Marketing expenses also increased for the quarter, reflecting the opening of marketing channel I mentioned earlier.
And lastly, we incurred approximately $9 million nonrecurring acquisition related expenses.
Yeah.
So just to recap we have three items that drove almost all our GAAP loss for the quarter.
Revenues of pearls net of cost of $14 million.
$21 million of seats of provisions over actual credit losses, and non recurring acquisition expenses of $9 million.
Taken together these items represent $44 million of our GAAP loss of $47 million.
In terms of capital Recapitalize, the bank with $250 million of cash and we held $76 million of unrestricted cash at the holding company.
At the end of the quarter of the bank had a CET ratio of 22, 2% of tier one leverage ratio of $12 nine per se.
The difference between these ratios primarily reflects the significant about cash and securities on the bank's balance sheet.
We intend to redeploy of significant about of the excess liquidity into loans over time driving higher net interest income.
And we will remain prudent about how we manage our capital.
We've had a very good start for the year looking.
Looking at the second quarter of the rest of the 'twenty 'twenty. One we expect continued strong growth in the marketplace and will continue to build our portfolio driving very profitable recurring earnings stream.
The marketing channels that were shut down at the last year are up and running and we're seeing strong investor demand.
Now, let's turn to our outlook for <unk> and the full year.
We expect <unk> revenue to be in the range of $130 million to $140 million up 23% to 32% sequentially.
With full year guidance, increasing $480 million to a range of 500, the 500 of $30 million.
With the success, we saw the more Q, we are projecting Q2 originations to a range between $1 7 billion and $1 $9 billion of 15 to 28 per cent.
And for the full year, we're increasing our outlook of $6 $3 billion to a range of $6 eight.
The $7 $3 billion.
Our GAAP earnings will continue to reflect deferred revenue is due to provisions depending on the amount of loans of routine.
We expect <unk> GAAP net loss of between $40 million of $30 million and for the full year, our guiding to improving the in our full year results from a previous range of $200 $275 million for our current outlook of 167 million to $142 million.
This quarter, you've gotten a glimpse of what our new marketplace bank, while it can do and we look forward to share more with you as we progress throughout the year with the.
Let me open it up to Q&A.
Okay.
We will now begin the question and answer session.
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Our first question comes from Henry Coffey with Wedbush. Please go ahead.
Yes, good afternoon, everyone and.
Scott and Tom and severe of congratulations on a job well done and I'm sure of the whole team has worked really hard.
A couple of questions first and trying to understand the bank.
Can you tell us what that portfolio is made up of and how.
How is that how outside of excluding the consumer loan held for investment are busy.
How that portfolio is likely to change in size over time.
And so the thing.
Henry in just a couple of details we did do a schedule in the earnings release for your reference.
Page nine we broke out the the assets of the bank and the Holdco debt.
It's a lot easier for you to see.
Where are the real earnings are going to be coming from for the <unk>.
Total loans in the banks are.
Or just.
It's about two point of.
$1 billion.
Those are made up of about the $324 million, we had at the end of the quarter of of consumer loans and then the remaining.
For the commercial business.
The acquired for me it keep in mind that about 661 of that was PPP loans. So obviously the balance sheet as the.
The slightly higher because of the growth of both of them.
The loss.
That's the that's the makeup of the of the earning assets. We do obviously have some securities that we also hold of.
Of about 151 million of.
And then we would go about $792 million of cash sitting in the bank.
Shall we expect the bank related loans and I'm separating all of this from the lending club consumer business to decline over time or is.
Is that also going to be a growing debt.
So I think we're going to see the fastest growing piece of the business will be the consumer because we don't have anything in there right. Now. So we just started building of the portfolio. We expect that to be about 15 to 25 per cent of our volume per quarter.
That will grow faster than the origination volume of the consumer that's right of the origination volume, but all the all of the portfolios are expected to grow some in 2021.
And then finally and this is the question I get most frequently.
You look at balancing growth and integration cost in all of these different moving parts of it.
Articulated for it.
What is the per at what is the path the GAAP profitability.
Yeah.
How long does that take.
How do you balance that against growth for that.
Obviously, there's a lot of growth to be at for putting the loans on balance sheet versus selling them for somebody else.
Yeah, So hey, Henry of its Scott.
I'll start Tom maybe you can.
<unk> come over at the top of any details, but what we're what we're trying to show with most of the prepared remarks, and then in the materials, we share and separately the.
<unk> is highly profitable right, where it's supported by a new revenue stream that for the same activities. We were doing prior to the acquisition. We're now generating significant revenue and we've lowered our cost base also pretty substantially.
You know for US there is obviously a tradeoff between the timing of profit versus the size of the eventual of profits and we're going for the latter.
Right. So our in period results are going to be impacted by loan retention, but thats kind of maximize our long term profit and.
We plan to you know we're building this business for the long term, we want to maximize that long term profit so and we think as I said in the call. We feel really good about the credit we're generating and about the returns we're going to get on this and we think that sets us up.
For the long term significant growth in profit.
One of your thoughts about the mix Yeah, I'm sorry go on top.
No I was going to say Henry just to call out of some things I said in my prepared remarks.
The $47 million of loss.
We did have a number of items in there obviously, the the nonrecurring items of $9 million interest related to the closing of the transaction and then we had about the $28 million of of items related to seasonal or loans being put on the books and deferral of the origination fees. So you can see the a lot of that.
The impact on the on the GAAP results were the result of is the kind of the convention, earning fees and.
And having the book losses, though.
We feel very good about the line of sight, but you know what.
The way to continue to put loans on the books and we will continue to have this the gist.
This impact on our revenue and earnings because of the kind of conversion. So we we.
Indicators of 15 to 25 per cent of the right number for US right. Now we think that's a good balance between the growth and profitability, but as Scott said, it's really bad how much profitability. We think we can generate and how that will fuel the rest of our ambitions.
By having a very very nice revenue stream coming at us.
Great. Thank you and congratulations on all of the work that went into this process.
Thanks.
But again, if you'd like to ask a question. Please press Star then one of our.
Next question comes from Steven Kwok with <unk>. Please go ahead.
Alright, great quarter, and thanks for taking my questions I guess the for the first question I have was just around the.
The strong originations growth than expected.
That's the continues I you raised guidance can you just talk about the competitive landscape. What are you seeing there and you know what's the secret sauce behind the strong originations growth. Thanks.
You got it the.
You know as we mentioned last quarter in Q1, we really just re lit up the marketing channels for the first time and we're in the process of going back out into the market and it really optimizing and tuning on the channel by channel basis.
We feel.
Very good about how we're positioned I mean, the secret sauce. If you will is as both the the data advantage I talked about the fact that were of a combination of new customers for bringing in but also our existing member base that generating some of our volume.
And if you recall last year.
We had mentioned that we rebuilt our decision infrastructure.
And that's enabled us to really Hum.
Increase the speed and the dynamism with which we can respond to the signals we're getting in the market.
And we've been able to do that as we go through the different marketing channels now in terms of the environment I will say it is it is competitive basically everyone who is out there of pre COVID-19 is back.
No they were post COVID-19, yet, but they are back in the in the current environment and Theres, even some new players.
And we expect the environment to continue to be you know.
Fairly fairly intense and that you know lot of people are looking for yield and consumer demand is below pre COVID-19 levels are we think that's temporary and we're certainly seeing spending start to recover but.
Within that framework of temporarily reduced consumer demand and a lot of competition.
We believe we could not possibly be better positioned for for all of the reasons. We articulated we're going to have a broader approval rate than the bank competition.
And of higher earnings per loan and lower funding costs and the <unk> and we've got a big data advantage, so and spreads right now margins are of wide credit is performing exceptionally well. So we feel good about our ability to compete in this market and that's why we were confident to increase the other guy.
Great and you mentioned about the the increase in sales and marketing how should we think about the expense base I think going forward.
It's Raul T be stable over the last three quarters and as we look ahead. If he can help guide us there. Thanks.
The only take that yeah, so even though you're right. We have a we took a big big.
Effort last year to resize, our expense base, you see a little bit of a pick up with the addition of radius I commented about $10 million that was just for two months remember so it would be a little bit higher on a run rate basis. So we expect that in the second quarter, but you know we feel like we're at a point where.
We've got a lot of capacity.
Capacity to handle this growth.
You'll see us continue to invest in new capabilities, but you know we feel like we've got a lot of scale.
That can continue to do.
The utilized as of as we ramp up our volume so.
Yeah, well, obviously continue to monitor that but we feel very good about the expense base right now and in the.
Didn't really lose a lot of capabilities with the expense actions last year and we feel good about the.
Kind of where we're headed for the rest of the year, we'll have some growth in expenses, but I don't think.
The significant call outs for this time.
So said another way, we preserved for the capabilities to get back to the.
The level of originations and drive the growth that we're currently seeing I guess the only other thing I'd say is.
The revenue per originator.
Origination is the number that's going to be growing. So that's just another lens that you know of our denominator will be changing.
Because we're going to be able to generate more revenue from.
Are each loan debt we're producing.
Yes.
Got it the quarter guys. Thanks.
This concludes our question and answer session I would like to turn the conference back over to some of your go play for any closing remarks.
Well. Thank you very much everyone for joining us today and if you have any further questions. Please contact the investor relations team of that we'd be happy to assist you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.