LendingClub Corporation
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good day. And welcome to the LendingClub Q1 ‘21 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sameer Gokhale, Head of Investor Relations. Please go ahead.

[Sameer Gokhale:]

Thank you and good afternoon. Welcome to LendingClub’s first quarter 2021 earnings conference call. Joining me today to talk about our results and 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 forecasts, and involve risks and uncertainties. These statements include, but are not limited to, timing and benefit from our acquisition of Radius and resulting bank charter, platform volume and the future performance of our business and products. Our actual results may differ materially from those contemplated by these forward-looking statements.

[Scott Sanborn:]

Okay. Thank you, Sameer. Good afternoon, everybody, and thank you for joining us. When we last talked, I told you that with our acquisition complete, we will be evolving to a new business model, that of a digital marketplace bank. And I shared that this model would be positioned to outperform and deliver sustained growth and profits, fueled by our leadership in personal loans and our considerable strategic advantages. Accordingly, I’m happy to report that we are off to a great start to the year. Our Q1 results came in above the high end of our guidance, as we accelerated originations 63% quarter-on-quarter and increase revenues 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 a 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 creditworthy customers at scale and to save their money through a seamless experience. In addition to our new lower funding costs, LendingClub has multiple competitive advantages. And 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, our data supremacy based on information on over $60 billion in loans, our tech platform that allows us to deliver a 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 and to accelerate earnings growth and diversification.

[Tom Casey:]

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.

[Operator:]

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

[Henry Coffey:]

Yes. Good afternoon, everyone. And Scott and Tom and Sameer congratulations on a job well done and I’m sure the whole team has worked really hard. I have couple of questions. First, in trying to understand the bank, can you tell us what that portfolio is made up of and how that -- how outside excluding the consumer loan held for investment business, how that portfolio is likely to change in size over time?

[Tom Casey:]

So, thanks. Thanks, Henry. And just a couple of details, we did do a schedule in the earnings release for your reference. On page nine, we broke out the assets of the bank and the holdco. So it’s a lot easier for you to see where the holdco earnings are going to be coming from. So the total loans in the bank are just about $2.1 billion. Those are made up of about $324 million we had at the end of the quarter of consumer loans and then the remaining were the commercial business that we acquired from Radius. Keep in mind that about $661 of that was PPP loans. So, obviously, the balance sheet is slightly higher, because of the gross up of the PPP loans. That’s the makeup of the earning assets. We do obviously have some securities that we also hold about $151 million and then we do have about $792 million in cash sitting in the bank.

[Henry Coffey:]

Should we expect the bank related loans and I’m separating all this from the LendingClub consumer business to decline over time or is that also going to be a growing business?

[Tom Casey:]

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 a portfolio. We expect that to be about 15% to 25% of our volumes per quarter. So that will grow faster than the…

[Scott Sanborn:]

Origination volume of the consumer loan.

[Tom Casey:]

That’s right. Of our origination volume. But all the portfolios are expected to grow some in 2021.

[Henry Coffey:]

And then, finally, and this is the question I get most frequently, as you look at balancing growth and integration costs, and all these different moving parts that you’ve articulated for us, what is the prep -- what is the path to GAAP profitability and how long does that take? How do you balance that against growth? Because, obviously, there’s a lot of growth we had from putting the loans on balance sheet versus selling them to somebody else?

[Scott Sanborn:]

Yeah. So, hey, Henry, it’s Scott. I will start. Tom maybe you can come over at the top with any details. And what we’re trying to show with most of the prepared remarks and then in materials we shared separately is, the model is highly profitable, right? We’re -- it 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. So it’s -- for us, there’s, obviously, a trade-off between the timing to profit versus the size of the eventual profits and we’re going for the later, right? So our in period results are going to be impacted by loan retention, but that’s going to maximize our long-term profit. And we planned it -- 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 are generating and about the returns we’re going to get on this. We think that sets us up for long-term significant growth and profit.

[Henry Coffey:]

Why don’t you talk about the mix? Yeah. I’m sorry, go on, Tom.

[Tom Casey:]

No. I was going to say, Henry, this is to call out some things I said in my prepared remarks. The $47 million loss, we did have a number of items in there, obviously, the non-recurring item of $9 million just related to the closing of the transaction. And then we had about $28 million of items related to CECL for loans being put on the books and deferral of the origination fee. So you can see that a lot of that impact on the GAAP results were the result of the accounting convention, burning fees and having the book losses. So we feel very good about the line of sight. But we’re going to continue to put loans on the books and we’ll continue to have this impact on our revenue and earnings because of the accounting convention. So we indicated 15% to 25% is 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 about 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.

[Henry Coffey:]

Great. And thank you and congratulations on all the work that went into this process.

[Scott Sanborn:]

Thanks.

[Tom Casey:]

Thank you, Henry.

[Operator:]

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

[Steven Kwok:]

Hi. Good quarter and thanks for taking my questions. I guess, the first question I had was just around the strong originations growth and expected that to continue by raised guidance. Can you just talk about the competitive landscape? What are you seeing there and what’s the secret sauce behind the strong originations growth? Thanks.

[Scott Sanborn:]

You got it. As we mentioned last quarter, we’ve -- in Q1 we really just relit up the marketing channels for the first time. And we’re in the process of going back out into the market and we’re really optimizing and tuning on a channel-by-channel basis. And we feel very good about how we’re positioned. I mean, the secret sauce, if you will, is both the data advantage, I talked about, the fact that we have a combination of new customers we are bringing in, but also our existing member base that’s 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 increase the speed and dynamism with which we can respond to signals we’re getting in the market and we’ve been able to do that as we go through the different marketing channels. And in terms of the environment, I will say, it is competitive. Basically everyone who is out there pre-COVID is back. I don’t know they were post-COVID yet, but they’re back in the current environment and there’s even some new players. And we expect the environment to continue to be fairly intense and that a lot of people are looking for yield and consumer demand is below pre-COVID levels. 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 all the reasons we articulated. We’re going to have a broader approval rate than the bank competition. We’re going to have higher earnings per loan and lower funding costs in the fintechs and we’ve got a big data advantage. So -- and spreads right now, margins are little 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 guidance.

[Steven Kwok:]

Great. And you mentioned about the increase in sales and marketing. How should we think about the expense base I think going forward? It’s relatively stable over the last three quarters, as we look ahead, if you can help guide us there? Thanks.

[Scott Sanborn:]

Tom, do you want to take that?

[Tom Casey:]

Yeah. So, Steven, you’re right, we have -- we took a big, big effort last year to resize our expense base. You see a little bit of a hiccup 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 expect that in the second quarter. But we feel like we’re at a point where we’ve got a lot of capacity to handle this growth. You’ll see us continue to invest in new capabilities. But we feel like we’ve got a lot of scale that can continue to be utilized as we ramp up our volume. So, we obviously continue to monitor that, but we feel very good about the expense base right now and we didn’t really lose a lot of capabilities with our expense actions last year and we feel good about kind of where we’re headed for the rest of the year. We’ll have some growth in expenses, but I don’t think a significant call outs at this time.

[Steven Kwok:]

Thanks.

[Scott Sanborn:]

To say another way, we preserve the capabilities to get back to 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 origination is a number that’s going to be growing, right? So it’s just another lens, our denominator will be changing there, because we’re going to be able to generate more revenue from our each loan that we’re producing.

[Steven Kwok:]

Got it. Good quarter, guys. Thanks.

[Operator:]

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

[Sameer Gokhale:]

Thank you very much, everyone, for joining us today and if you have any further questions, please contact the Investor Relations team 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.