LendingClub Corporation
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good day, and welcome to the LendingClub Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Sameer Gulati, Investor Relations. Please go ahead.

[Sameer Gulati:]

Thank you, and good afternoon. Welcome to LendingClub’s second quarter 2021 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO. You can find the presentation 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 the benefits of our acquisition of Radius, platform volume, future of products and services and future business and financial performance. 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 has filed with the SEC 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.

[Scott Sanborn:]

All right. Thank you, Sameer. Good afternoon, everybody. Thank you for joining us. Q2 reflects our first full quarter as a digital marketplace bank, and we significantly outperformed our expectations. Across the board the actions we took as we reentered the market drove better results on a faster timeline than we had anticipated. Notably, we achieved record profitability, which we expect to sustain and grow as our new recurring revenue stream of net interest income continues to build. In addition to the benefits received from our recently acquired digital bank, our Q2 profitability was driven in large part by revenue growth from our marketplace, combined with operating efficiencies across our platform. Revenue growth in the marketplace was driven by growth in originations, which were up 84% sequentially. We resumed marketing and return to a more normalized credit posture, with a continued focus on higher quality issuance. The outperformance of our credit relative to our competitors set is driving strong investor demand and we added several new banks and institutional investors to our platform. Banks, including LendingClub Bank, now make up more than half of our loan funding. During the quarter, we leaned into our competitive advantages to quickly tune our efforts to current market conditions and tap into the nascent recovery in consumer demand. I’d note that as the unsecured credit market is recovering, fintech is growing faster than the market and we are growing faster than other fintechs. According to DVO1, which tracks market share data for personal loans, we have returned to market leadership. It’s worth highlighting that our sequential revenue growth of 93% outpaced originations growth during the quarter. This primarily reflects significant growth in our new recurring net interest income revenue stream, as we took advantage of our low cost digital bank deposits and grew our loan portfolio. We expect revenue growth to continue to outpace originations growth as this income stream builds. Tom will provide details, but it’s important to note that as we invested in growing our loan portfolio to build this new revenue stream, we sacrificed about $54 million in potential earnings in the quarter. We did it, because we expect holding loans to eventually generate three times the earnings compared to selling them, to the near term trade off is more than worth it. As I mentioned, our strong revenue growth was combined with efficiency gains across the income statement. We improved our marketing efficiency by leveraging our marketplace model, which allows us to say yes to a broader range of customers, leveraging our data advantages to enhance our targeting, underwriting and pricing models. These models are built on more than 150 billion cells of data and more than a decade of experience across over $65 billion in loans. We also optimized our application funnel, and drove automated decision rates back to north of 70%. As a result, end-to-end funnel conversion was up significantly, reflecting improvements in offer rates, take rates and issuance rates.

[Tom Casey:]

Thank you, Scott. The speed of our transformation, the power of our business model was evident in Q2. We far outpaced our expectations, as we started to hit an inflection point for earnings growth at LendingClub. For the second quarter of 2021, we reported record net income of $9 million and diluted EPS of $0.09 per share, as we accelerated our return to GAAP profitability. In Q2 originations were $2.7 billion, which we sold $2.2 billion through our marketplace. We also retain $541 million of loans as we continue to build a new revenue stream by growing our highly profitable consumer loan portfolio.

[Operator:]

And the first question comes from Henry Coffey with Wedbush. Please go ahead.

[Henry Coffey:]

Let me be a little exuberant here. This is amazing. This is a great accomplishment. So congratulations. What I’m looking at the numbers, I really have – I really have three sets of questions. So please bear with me. Your origination fee or your – to volume increased relative to the first quarter, your overhead as a percentage of originations dropped, basically from 9% to 6%. And the yield on the LendingClub loans held for investment at the bank jumped from 13.85% to 15% in quarter. So, all of the key profitability metrics improved. I was wondering if you give some insight; give us some insight into the improvement in origination related fees, and the improvement in yields on the loans held on balance sheet.

[Scott Sanborn:]

Thanks, Henry. It indeed, and those metrics you point to, I’d say pretty much across the board, as we indicate in the prepared remarks, pretty much all actions ended up in delivering stronger results, and in fact, more quickly than we anticipated a ton of alternative to you to talk a little bit about those couple drivers and we called out.

[Tom Casey:]

Yes, so Henry, a couple of things. First, on the origination fees, this is a product of all of the work we did in 2022, with our data and decision science to understand price elasticity, and we were able to generate some additional fee as well as the mix. We also expanded, in all of our marketing channels and expanded our reach and so you’re seeing the origination fee grow accordingly.

[Henry Coffey:]

And still below what your other public competitor, that’s in this business, but that’s just a side observation.

[Scott Sanborn:]

So on the second one, on the overhead, again, not to overstate it, but it’s throughout the numbers, you’re seeing productivity come through just the operating leverage of getting that volume up and the scale that we have coming through. We’ve done a lot of hard work resizing the business over the last few years and you’re seeing that now with the growth in volumes and revenues. But keep in mind also the revenue is also, we have our new revenue stream coming with the net interest income, which will further create more operating leverage for the company.

[Henry Coffey:]

Then again, the second question, can you again that the reserve level that you’re putting up relative to your losses is multiple, but that’s all this oddities of CECL, can you give us some insight into how the LendingClub combined consumer loan portfolio is performing?

[Tom Casey:]

Yes, the Scott mentioned in his prepared remarks, the entire book of business is performing extremely well. We’re very pleased with how our loans have performed with regard to the loans on our books. We’ve only been building that portfolio for two quarters now. We really have not seen any charge-offs to speak of. But we have in my comments I mentioned that CECL will start to mature over the next – over nine and 12 months from origination. That’s typically where we see charge-offs come in. So the next couple of quarters you’ll start to see a little bit more color on the pattern of the charge-offs. But overall, we’re feeling very good about the credit performance, not just the recent vintages that are but frankly for the multiple vintages that are still outstanding.

[Henry Coffey:]

And then my third question, this is more for Scott. But obviously for both of you, what we’re seeing today is the advantage of LendingClub joining up with the bank? And but my real question – I think the next opportunity, the one we’re going to see, sort of out there is the bank joining up with LendingClub. So, can you give us some insight, besides getting great loans on their books? Can you give us some thoughts about how and in the future, the LendingClub side of the business will learn to work with the banks, think you might offer club members, ways you might enhance relationships between borrowers and depositors and certain product sets? It’s pretty much an open opportunity.

[Scott Sanborn:]

Yes, thanks. Thanks, Henry. You’re right. I think we view this quarter is really demonstrating, the advantages LendingClub brought to the table, right with our data, our membership base, and kind of data science capabilities – adding in the bank to generate, new revenue stream, lower cost of capital. And where we’re getting started is, obviously this particular financial engine, because we – this is what is going to drive the profit of the business. So, we wanted to get this part of the business get that momentum going. And as we indicated where we expected to get here, but the velocity at which we got here was faster than we anticipated. But when we look ahead, this is really just phase one. And taking this engine we’ve got, which is the ability to acquire really satisfied customers at scale, profitably. And take that to do more for those customers, we shared in a previous call that, 80% of customers say, they want to do more with us, we’ll – that’s the next phase. So, we’ve got the momentum building here, the next thing we’ll turn to, is the auto business within the bank. And maybe Tom, we can plan on talking a little bit more about that next quarter, that’ll be the next business, that we want to take the combination of the two and then to your point, the piece after that, maybe something for us to talk about after Q4 earnings would be, what’s the role of the bank, and really the award winning member of checking product that we’ve acquired with Radius, how we see that fitting in, but the basic story is, we see that as a real engagement platform for us. It’s a way rather than people coming back once every few years, when they need access to low cost credit. We have a way to be communicating with and adding value to our members, much more dynamically and much more frequently generating more data to inform and, give us insight about what they need and inform our underwriting. And I’d also offer more services and do it in a way that’s really aligned with the brand right is, we – right now we’re helping people with lending. But the goal here is to move wider in breath and help them with their spending and help them with their savings.

[Henry Coffey:]

Well, congratulations on a job well done. So thank you all.

[Operator:]

The next question comes from Giuliano Bologna with Compass Point. Please go ahead.

[Giuliano Bologna:]

Well, I’ll echo, what Henry just said, congratulations on an incredible quarter. Then jumping in, I’d be curious to get your perspective on some of the impacts that drove the quarter. Obviously, origination volumes were significant above expectations. I’d be curious if there any channels or different products within the mix, or if there are any credit tiers that outperformed or if it was broad-based across the board in terms of generating additional volumes.

[Scott Sanborn:]

Yes, thanks. It was really one thing we didn’t talk much about. But we did talk about it last year, when we pulled back on volume. And, we’re in let’s call it capital preservation mode. We had indicated to you all that we were taking this opportunity to be investing in our infrastructure was both our kind of servicing infrastructure, which were getting some of the efficiency and loan performance benefits of today, but also our credit decisioning infrastructure. And what that has allowed us to do is move, more, it’s kind of simplistic to say, hey, we just went back to marketing, it doesn’t just, turn channels on and they work great, you’ve got to tune things, right tune your offer, tune pricing. With the infrastructure we put in place, we’re unable to do it much more quickly. And so it’s really a combination of kind of everything working, as we mentioned, consumer demand well below pre-COVID, picked back up. Our take rate, and our issuance rate picked back up to drive funnel conversion, investor demand for loans was up, which drove pricing up there. So we really saw across the board in all key metrics.

[Giuliano Bologna:]

That’s great. And going back to, we previously guided to was retaining somewhere to 15% to 25% of loans. And the previous guidance also included a relatively worse net income results from 2021. And I’d be curious, now that you’re originating a larger volume earlier, and retaining more loans, how the kind of capital generation to loan your ability to retain, 15% to 25%, of originations will unfold, because you obviously generating more capital than you expected, or you’ll be in a better capital position, and you’re taking on more loans faster than you’d probably originally, indicated to market. So, I’m kind of curious how those two play together and if there’s any change to that guidance, or if there’s any room to the upside over time there?

[Scott Sanborn:]

Yes, so a couple of things to capture there is that we use the 15% to 25%. We think it’s a good range to kind of keep a nice healthy marketplace, but also participate and in that revenue stream and grow it. The way to think about it is, as you think about growing originations like we did this quarter, you saw us actually increase the amount of purchases we did. So, we did about, right about 20%, this quarter. So as to the extent volumes go up, that actually funds a lot of the capitalists needed for the provisioning. And the capital is needed. What you saw this quarter, and I highlighted on my remarks, is the bank is actually generating GAAP net income as well. So it’s building its own capital, and starting to be able to support growth. And then also, with becoming GAAP profitable, we are also starting to benefit from the utilization of our net operating loss, I mentioned about $160 million. So that all starts to bring additional capital into the bank to be able to support the ongoing growth of assets. So, we still think that’s still a good number 15% to 25%. And we think that there’s sufficient capital generation within the volumes, as well as some of the things I mentioned, on the call, and we feel very good about our ability to flex up or flex down depending on the environment.

[Giuliano Bologna:]

That’s great. And little more on the funding side, obviously, a grow the deposit franchise, obviously, I’d be curious, like I said, what I’d be curious about is, how much you think you can scale that positive franchise or how fast you can steal it. And then along similar lines, I’m kind of curious if there’s been any difference in the mix of marketplace loan buyers on the other side of the platform. And if there’s any change in demand on that sort of platform?

[Scott Sanborn:]

I’ll maybe start on the, the investor side, Tom and you can talk a little bit about the liability. So there we’ve seen strong investor demand of kind of across the spectrum of investor types. As we mentioned, we’ve added year-to-date, both quarters, several new multiple asset managers and multiple banks. And if you call the last quarter, we talked about how, as a whole, the asset class held up really well last year, and LendingClub specifically held up better than the competitive set, I think one of the things we perhaps didn’t anticipate was that our status as a bank does do something for us in multiple ways, one for banks evaluating the asset, they know we’re held to the same standard as they are from a regulatory perspective. And the second is, we’re eating our own cooking right. So that gives people a lot of confidence and how we view the importance of credit quality. So say those things, make rational sense but he until you see him in action, which we really saw this quarter. There were some benefits that we perhaps underappreciated coming into the combination. Tom, do you want to talk about?

[Tom Casey:]

Yes, I’d just touch on the deposit side. I think we commented earlier, when we close Radius, we actually got a lot more deposits than we had anticipated. So, we had a great priming of the pump there. We’ve been putting some of that cash to work. We did see growth for the quarter in interest bearing deposits. And I think there’ll be a story that we’ll start talking about is our deposit generation capability to fund loans, I think it’s quite important for everyone to understand is that, unlike what you may be seeing in other banks, we are actually growing our loans of 12% total. And our name is expanding 200 basis points to 5.5%. That is a unique characteristic of our model, which is being able to originate home loans and grow this income stream at today’s very low cost deposits. But even as deposits may increase, the margin we’re getting on our new loan growth is well in excess of that and throws off a very nice return that will drive expanding ROEs.

[Giuliano Bologna:]

That’s great. I appreciate the time and congratulations on a great quarter. I’ll jump back in the queue now.

[Operator:]

The next question comes from Steven Kwok with KBW. Please go ahead.

[Steven Kwok:]

Hi guys, I’d like to echo my comments and congratulations on a great quarter as well. Scott, quickly around the origination side, if I just take the midpoint of your guidance that would imply about $2.9 billion hope for next two quarters, which essentially puts you back at 2019 fundraise level, but just wondering, as we think about going forward, how fast can you grow off of that base?

[Tom Casey:]

Well, Steven, this is Tom, I think, we have, obviously trying to factor in the environment. Obviously, we were still trying to attract the path of the virus and what the implications will be for consumer spending and the economy is large. But we think that – we think this asset class, as Scott mentioned, his comment is growing quite very quickly and the fintechs are growing the fastest. We’re not going to give specific guidance on how fast we think we can grow and give me a kind of an indication of continued sequential growth in the back half of the year. But we acknowledge that we have to be thoughtful about what dynamics are in the environment. We obviously think there’s more upside more demand. We think we’re well positioned to capture the share that we’ve demonstrated in second quarter, if demand improved. So we can, go ahead, Scott.

[Scott Sanborn:]

Yes, maybe just add a little color on kind of what’s happening underneath the covers. So, one macro industry and one specific LendingClub, so within the industry, given the state of consumer balance sheets, government stimulus, all those pieces, the credit card consolidation part of the business, which has been our – kind of major loan used case, that demand temporarily is down more significantly than other used cases. Correspondingly, we’ve seen growth in other used cases, home improvement loans, major purchases, that’s one that’s an industry as a whole. That’s what we’re seeing. And we don’t expect that to be durable, right? As the economy reopens, you’re already seeing many categories, or that have been lagging and spending or taking off again, credit card spending did start to pick back up. So, we think that’ll drive that. And then the next is what are we doing and with our focus on our membership base, and as we lean into the new banking capabilities, we’re really increasing the utilization and the usage of the product, right? Starting to, rather than waiting for you to rack up credit card debt, which we then refinance for you. If you’re going to make a major purchase just come to us first. So that’s something that we’re actively driving by making that by – the fact that we know these members know them well and are able to offer a really, really seamless experience for that returning member is actively we’re driving. That’s why we said look, I don’t think anyone has a perfect crystal ball for the period ahead, but the market is anticipated to grow. And we believe that we can maintain leadership and even growth slightly faster in the market to the capabilities of the combined entity.

[Steven Kwok:]

Got it. And just to follow-up around the consumer side, as stimulus wears off, are you starting to see a bit of a pent up demand and the need for your loans and stuff?

[Scott Sanborn:]

Yes, I think, yes, that’s right. As we mentioned this quarter, it’s hard to read. So getting a perfect view is hard, because there’s so many dynamic things going on. But yes, we are seeing a tick up in consumer demand. We saw that quarter-over-quarter. And we do think it’s because as the economy reopens people resume spending, in other categories, that’s driving demand. And the thing – the important thing would point out is unlike the model prior to the acquisition, we’re now able to grow revenue faster than we’re growing loan volume, which is an important thing to think about as you’re looking ahead.

[Steven Kwok:]

Got it? Thanks. And thanks for taking time out to answer my questions and congrats on the quarter.

[Scott Sanborn:]

Thanks.

[Operator:]

Thanks. The next question comes from John Rowan with Janney. Please go ahead.

[John Rowan:]

Good evening, guys.

[Scott Sanborn:]

Hi, John.

[John Rowan:]

I will echo everyone’s sentiment on the good quarter. But just a couple of housekeeping-ish type questions. The allowance build in the bank was quite significant sequentially. Are we at the right level of allowances going forward to where we should see that percentage hold steady with growth?

[Scott Sanborn:]

Yes, I think two things are happening, John. One is the mix will change slightly quarter-to-quarter. So each type of loan gets a slightly different index. But that’s just a little bit of mix. The other things you’ll see is that the it will be impacted by the accretion because remember this CECL is a present value number on the day of origination. So, you got those types of those dynamics. But I don’t think those are be that material to the number. As you see the portfolio starting to ensure, I think that number will stabilize a little bit, but obviously, it grew quite a bit in an absolute dollar amount, reflecting that we’ve retained about $200 million more loans in the quarter.

[John Rowan:]

Okay. And the Tom, just to clarify, you said that the guidance in the back half of the year reflects in normalized tax rate of 15%. I’m just curious, why taxes and you have $160 million NOL, or is that 15% still eating away at the NOL between what would be 15% and maybe a more normalized 20%-ish rate?

[Tom Casey:]

Now, unfortunately, it’s a tax driven, some states have passed the ability to utilize and it will carry forward. So, you’re seeing the impact of that in the financials that we’re projecting for the rest of the year.

[John Rowan:]

So, when the NOL is exhausted, what will the tax rate be?

[Tom Casey:]

We think it’s probably somewhere in the 25%, 27% range. Well, obviously make sure we understand that get a better view once we start getting enough of that. But I’ll tell you that – it weighs over $160 million NOLs. So it’s about an effective rate of call 28% is about $550 million of earnings. So, we have a ways to go, but we don’t expect to be paying a lot of cash taxes in the near term or even medium term.

[John Rowan:]

Okay, thank you.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Sameer Gulati for any closing remarks.

[Sameer Gulati:]

Okay, great. Thank you, Tom. And thank you all for joining us today. If you have any questions, please contact Investor Relations and we’ll be happy to assist you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.