LendingClub Corporation
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Good afternoon, and welcome to the LendingClub Fourth Quarter and Full Year 2020 Earnings Call. All participants will be in listen-only mode. 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 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 LendingClub Bank presentation that provides information about our business, including our new banking capabilities. You can find both presentations accompanying our earnings release on the Investor Relations section of our website.

[Scott Sanborn:]

Thank you, Sameer. 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 multiyear 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, LendingClub's vision was to leverage technology, data and our marketplace model to transform the banking industry. We began by bringing a traditional credit product, the installment loan, into the digital age by moving it online, broadening access, lowering costs and delivering a fast and frictionless experience. We 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 debt.

[Tom Casey:]

Thank you, Scott. As you just heard, we are tremendously excited about the future with the addition of our new banking capabilities. After 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 in loans in 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, better loans, we experienced a temporary and anticipated reduction in net interest income.

[Operator:]

Our first question today will come from Steven Kwok with KBW.

[Steven Kwok:]

Great. 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 around the impact of the acquisition. Are those terms still the same around the beneficiaries and stuff, as we think about it?

[Tom Casey:]

Hey Steven, this is Tom. Yes, let me answer your first question and then clarify your second one. So, on the tangible book value at the bank, as I mentioned in my comments, it's about $440 million. So, we ended the year -- excuse me, at the end of the year, we were -- the total equity was about $750 million. So, we still do have additional capital at the parent. But, inside the bank, we've got about $440 million of tangible book value. The second question you had, Steven, just if you could clarify that you mentioned something about the benefits?

[Steven Kwok:]

Yes. At the time of the Radius acquisition, you had given us -- in terms of what the benefits were from the Radius Bank. Are those still largely intact on amount funding, investments and bank economics?

[Tom Casey:]

Yes. They are, Steve. Overall, we continue to feel very good about the acquisition. Things have changed a little bit, obviously. Rates are much, much lower than they were. 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 is quite larger than we expected again because of where deposit costs are right now. So, feel very good about the acquisition and the profile that Radius has as we get started integrating them this quarter.

[Steven Kwok:]

Got it. And if I could just sneak one last one in. Just around the GAAP consolidated net income. Understanding that this year, you have the onetime acquisition cost along with the CECL impact you’ve got, but when should we expect it on a GAAP basis for you guys to become profitable as we continue this acquisition, along with the loan growth?

[Tom Casey:]

Yes. So, we haven't given long-term guidance, Steven. Obviously, lots of things to work through this year. We obviously just closed the transaction. We gave you a quite a bit of information on the new model and some of the key drivers of our profits and revenue. Just to highlight a couple of things to help you navigate. As we tried to show you that the deferral of the origination fee and the provision obviously put pressure on our reported results, but I'm referring you back to page 14 to show how fast the earnings recover. You can see that pretty significantly the -- those two deferrals come back pretty quickly within the first nine months or so. So, we're not saying when we're going to be GAAP profitable, but I did say in my prepared remarks that most of the -- almost all of the GAAP loss this year is really the CECL accounting 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 2 items, that's about $165 million of the loss right there, just those two items alone. And then, you add the additional $20 million of integration-related expenses that appreciates about the midpoint of our guide.

[Scott Sanborn:]

Yes. I'll just add, Tom -- I mean, Steven. We're -- our goal here is to build a high growth, high profit machine that is driving really sustainable growth over a multiyear period. Getting to GAAP profitability soon would actually be pretty straightforward, based on the numbers Tom said. But we're making a conscious decision to add the loans to our portfolio because they're going to drive -- as you can see in the numbers, overall, as an enterprise, for every given dollar of loan origination, we can drive 30% to 40% more in earnings than our historical model. And this is really just a timing difference. So, part of the timing of GAAP profitability is going to be based on our growth rate, and our plan is to continue growing.

[Operator:]

Our next question will come from John Rowan with Janney.

[John Rowan:]

Good afternoon, guys. Just to be clear, I know there's a lot of talk about CECL. Is Radius -- Radius has already adopted CECL, correct? So, there's not a one day catch up on the allowance as you adjusted for higher lifetime losses. Is that correct?

[Tom Casey:]

Yes. John, no, they were not subject to CECL. So, they've -- we've adopted CECL as part of the acquisition. I did leave that complexity out of my narrative. But yes, they will have a conversion amount. We're working through the purchase accounting now, but there will be a conversion amount to establish a new provision. We recognized that in the first quarter. And that's included in my guidance.

[John Rowan:]

Okay. So the day one CECL adjustment to the allowance for Radius Bank is included in the GAAP loss figure for 1Q and for 2021, correct? Just to make sure I have this right.

[Tom Casey:]

That's correct. And that's one of the reasons why you see that loss so large in the first quarter. That's part of it.

[John Rowan:]

How much -- I mean how much you’re bringing up their allowance? And why is the day one CECL adjustment here not just a charge to equity as it was on day one 2020?

[Tom Casey:]

Yes. So, we didn't own them on day one, 2020, and they did not adopt CECL. So, as part of the acquisition, since we had already adopted CECL in our own books, we adopt CECL for them through purchase accounting. And that's the piece I was just referring to. So, there is a day one charge as part of our purchase accounting. I'll break that out for you in 1Q. It is in our guidance, though. We've finalized the number, and we're in the process of finalizing that number, but it's all in my guide right now.

[John Rowan:]

Okay. And then, just last question. You guided us to how loans held through the bank are 3 times more profitable versus the traditional marketplace model. Has there been any change in the guidance that you provided that about 10% of the loans are going to be funded -- 10% of the LendingClub loans are going to be funded through Radius, or is that -- is there an update to that guidance figure?

[Tom Casey:]

Yes. I gave you in my prepared remarks that we're targeting about 15% to 25%, depending on the final volumes for the year. So, we think that's a good range to again build a new recurring revenue stream that accelerates our earnings growth, but at the same time, maintains a -- plenty of volume for our partners on the investor side to buy our loans.

[Scott Sanborn:]

I just want to make sure everybody is tracking, when we say funding through Radius. What we're referring to, to make sure that's the answer to your question is, what percent of loans are we holding, that's 15% to 25%, what percent of loans are being sold through the marketplace, that's 75% to 85%. That's it.

[Operator:]

And our next question comes from Henry Coffey with Wedbush.

[Scott Sanborn:]

Henry, I think you might be on mute.

[Operator:]

We'll go ahead and go to our next question from Bill Ryan with Compass Point.

[Bill Ryan:]

A couple of questions. First off, in the discussions with regulators, and I know it's probably baked into your guidance, but did they put limitations on, if you will, sort of the retention of loans going forward? Because I know a lot of -- thinking back to some of the companies I followed 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 CECL side of the equation, I had in my note 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? Thanks.

[Tom Casey:]

Yes. So, the first one on the restrictions, all the information we provided to you is what we've used for our regulatory approval. So, these are -- 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. We don't see any of the agreements we made with regulators causing any concern on any of the things we laid out for you today. So, we feel that this is a very, very good profile. And the accelerated growth that I had talked about is consistent with that. With regard to CECL, year six to seven is what I would 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, these have a duration typically on our three-year loans, about 1.5 years. So, your peak losses are going to come in maybe in the 12-month timeframe. But, they'll come in over the life of the loan as opposed to, as you know, the CECL charge is upfront…

[Bill Ryan:]

Right.

[Tom Casey:]

Go ahead.

[Bill Ryan:]

Just a question, you said the discount. So, you approach -- or you're taking the discounted valuation approach to CECL?

[Tom Casey:]

That's right. So, it takes about a point off of it, Bill. So, I showed you five on day one. And then, the numbers I showed you on page 14 are net of any additional CECL increases over time, if any.

[Operator:]

Seeing no further questions, I'd like to turn the call back over to Scott Sanborn for any closing remarks.

[Scott Sanborn:]

All right. Well, as I hope you could hear in our prepared remarks, myself and the rest of the team are very excited to take this combined business forward. And we thank everybody for their patience. We know we were a little delayed in getting this out to you. And we look forward to talking to many of you offline.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.