LendingClub Corp (LC) 2021 Q2 法說會逐字稿

Good day, and welcome to the LendingClub's Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Sameer Gokhale, Investor Relations. Please go ahead.

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 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 is 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.

And now I'd like to turn the call over to Scott.

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've resumed marketing and returned to a more normalized credit posture with a continued focus on higher quality issuance. The outperformance of our credit relative to our competitor 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 dv01, 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 3x the earnings compared to selling them. So 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 fund 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.

Furthermore, we continue to focus on serving our large and loyal base of over 3.5 million members. While we are attracting new members to our platform at an accelerating pace, a large portion of our loan volume continues to go to our existing customers, reflecting the expanding lifetime value we're generating and the affinity created by offering seamless access to low-cost credit.

Finally, and as I mentioned earlier, consumer demand also appears to be ticking back up though currently remaining below pre-COVID levels.

Taken together, we believe we have one of the lowest customer acquisition costs among our competitive set, which is a significant differentiator built on our unique advantages including our larger loyal member base, our marketplace model and our data supremacy.

Along with improved marketing efficiency, we also had a substantial improvement in operating efficiency reflecting actions we took over the last 2 years to streamline our expense base. Specifically, our fixed cost base now reflects the benefits of our business simplification initiatives in 2019, actions we took last year to further reduce our expenses and efficiency gains from more recent technology investments in our [services] infrastructure.

So where do we go from here? As I've said before, it's hard to imagine a better time to be growing a digital bank. We believe our actions over the past several years, our core capabilities and the overall accelerated trend that digital banking have set us up well to win. We believe we can deliver sustained profit while investing in our future to bring to life a next-generation digital bank that will transform the experience and reimagine banking for our customers.

I want to take a moment to thank our employees for their commitment to our customers, our company and our mission. We would not have been able to achieve these great results without their dedication and hard work. So with that, I will turn it over to Tom for a more detailed discussion of our financial performance. Tom?

Thank you, Scott. The speed of our transformation, and 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, of which we sold $2.2 billion through our marketplace. We also retained $541 million of loans as we continue to build a new revenue stream by growing our highly profitable consumer loan portfolio.

In Q2, revenues grew 93% sequentially on origination growth of 84%. As Scott mentioned, we expected revenue growth would outpace origination growth as we continue to grow our new stream of recurring interest income by building our consumer loan portfolio.

Consumer loan balances grew 44% to $1.3 billion, while the total held for investment portfolio grew at 12% to $2.4 billion, reflecting some runoff of PPP loans. In the second quarter, total deposits grew to $2.5 billion, while deposit rates were in line with 1Q at 29 basis points.

Noninterest income grew 81% sequentially primarily due to increased marketplace loan sales, which more than doubled transaction fees to $114 million from $56 million last quarter, while gain on sales revenue also more than doubled to $19 million.

Net interest income grew sequentially by 148% to $46 million, primarily reflecting growth in our personal loan portfolio as the bank's NIM expanded from 3.3% to 5.51%.

As you can see on Page 9 of the earnings release, this portfolio generates a very attractive interest rate with an average yield of over 15%. We expect our personal loans to generate risk-adjusted margins of 78% over time as they season. However, accounting standards require us to recognize expected losses when we add them to the balance sheet, and then we recognize the interest income over the life of the loan. And this is what Scott highlighted earlier in his comments, as the income from retaining consumer loans generates 3x the profitability of marketplace loans. Due to this power benefit, we expect continued growth in this portfolio.

We also generated significant positive operating leverage during Q2 as our revenue growth of 93% outpaced our noninterest expense growth of only 19%. Excluding marketing expenses, which are variable expenses and directly tied to origination volumes, our noninterest expense grew by only $10 million from Q1, which also captured a full quarter's expense from the bank acquisition that closed on February 1 of this year. Our ability to contain expense growth reflects the actions we took over 2 years ago to substantially increase our efficiency while enabling our infrastructure to scale as we grew.

For example, in the second quarter, our revenue increased $99 million, and our GAAP earnings improved $56 million. We expect to continue to generate positive operating leverage which will fund future investments in our infrastructure and capabilities.

In Q2, we maintained our marketing efficiency with marketing expenses of $35 million, up 80% sequentially and as we continue to grow origination volumes by leveraging our vast data advantage, our loyal member base and our ability to leverage our predictive science and credit decision platform to drive higher conversion rates.

During the quarter, we reported a noncash credit loss provision of $35 million, primarily reflecting the retention of $541 million of personal and auto refinanced loans on the balance sheet. There were minimal charge-offs in the second quarter, and we'd expect charge-offs to start to normalize gradually over the remainder of 2021 as loans typically season over 9 to 12 months.

One additional item I wanted to highlight is that our digital bank generated net income of $40 million during the quarter, including a $12.5 million tax benefit, primarily from reversing the valuation allowance on its deferred tax assets. As we generate taxable income at the bank, we expect to continue to utilize our net operating loss carryforward of approximately $160 million at the holding company to reduce cash taxes, which will also provide additional regulatory capital at the bank to support loan growth.

The overall improvement in our current performance compared to pre-pandemic is significant. For example, in the third quarter of 2019, we produced our highest revenue quarter at $205 million on volumes of $3.3 billion. This past quarter, we delivered the same amount of revenue on nearly 20% less origination volume of $2.7 billion. And there's a similar efficiency story with respect to our expense base.

Again, in the third quarter 2019, we had expenses of $205 million compared to $160 million last quarter, indicating a $45 million run rate. This reflects our efforts to improve our marketing efficiency and reduce our fixed costs, both of which strengthen our ability to continue to drive operating margin expansion and improved profitability.

Now let's turn to our financial outlook. Our strong and sustainable results allow us to significantly raise our guidance. We are increasing our revenue for the year by a range of $240 million to $250 million and are projecting an increase in GAAP net income. Our guidance assumes the economy will continue to grow for the remainder of the year, albeit at a slower rate. And we realize there are significant uncertainties due to the ongoing developments with the COVID virus and impacts of government actions.

Our outlook also reflects typical seasonality with Q4 originations reflecting seasonal pressure compared to the third quarter. Our guidance also incorporates expectations for increased investments in marketing for loans and deposit growth, infrastructure and technology investments.

Specifically, for Q3, we expect to generate revenue of $215 million to $230 million on originations of $2.8 billion to $3 billion. We're also estimating net income to be between $10 million and $15 million.

For the full year, we are raising our origination guidance by more than 40% to a range of $9.8 billion to $10.2 billion. We're also raising our revenue expectations for the full year by more than 45% to a range of $750 million to $780 million. We expect to maintain positive GAAP net income over the second half of the year, and our guidance implies a range of $25 million to $35 million of GAAP net income.

One thing to note is that our GAAP net income guidance assumes a more normalized tax rate of approximately 15%.

We're very happy to share our outlook as this has been the product of years of hard work to shift our business model to provide profitability and sustainable growth for years to come. With that, let me turn it over to the operator to begin Q&A. Operator?

(Operator Instructions) And the first question comes from Henry Coffey with Wedbush.

Let me be a little exuberant here. This is amazing. This is a great accomplishment. So congratulations. When I'm looking at the numbers, I really have 3 sets of questions so please bear with me. Your origination fee to volume increased relative to the first quarter. Your overhead as a percentage of originations dropped basically from 9% to 6%. And the yields on the LendingClub loans held for investment at the bank jumped from 13.85% to 15.25%. So all of the key profitability metrics improved. I was wondering if you could 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.

Thanks, Henry. Indeed, those metrics you point to, I'd say, pretty much across the board as we indicated in the prepared remarks, pretty much all actions ended up in delivering stronger results and in fact, more quickly than we anticipated. And Tom, I'll turn it to you to talk a little bit about those couple of drivers Henry called out.

Yes. So Henry, a couple of things. First, on the origination fees. This is a product of all of the work we did in 2020 to -- 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.

And it's still below what your other public competitor that's in this business. But that's just a side observation.

Yes. 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.

And then lastly, on the yield, referring everyone to the yield on the consumer loans up at 15.25%, it's really reflecting just the full year -- excuse me, the full quarter of ownership as we ramped up our personal loans, adding another over $500 million to the portfolio. That's just a mix issue, Henry.

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

Yes. The -- as 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 2 quarters now. We really have not seen any charge-offs to speak of. But we have -- in my comments, I mentioned that these will start to mature over the next 9 to -- yes, over 9 to 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 on our books, but frankly, for the multiple vintages that are still outstanding.

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 -- or 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 in the future the LendingClub side of the business will learn to work with the banks, things you might offer club members, ways you might enhance relationships between borrowers and depositors in certain product sets. It's pretty much an open opportunity.

Yes. Thanks, Henry. You're right. I think we view this, this quarter as 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 to get that momentum going.

And as we indicated, we're -- 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 1. 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 will be the next business that we want to take the combination of the 2. And then to your point, the piece after that may be something for us to talk about after Q4 earnings would be what's the role of the bank and really the award-winning member 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 also offer more services and do it in a way that's really aligned with the brand, right? As we -- right now, we're helping people with lending, but the goal here is to move wider in breadth and help them with their spending and help them with their savings.

Well congratulations on a job well done.

The next question comes from Giuliano Bologna with Compass Point.

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 impacts that drove the quarter. Obviously, origination volumes were significantly above expectations. I'd be curious if there are 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 the additional volumes.

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, with both our kind of servicing infrastructure, which we're getting some of the efficiency and loan performance benefits of today, but also our credit decisioning infrastructure.

And what that has allowed us do is move more -- it's kind of simplistic to say, hey, we just went back to marketing. It doesn't just -- you don'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've been able to do it much more quickly.

And so it was really a combination of kind of everything working. As we mentioned, consumer demand while 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 it across the board in all key metrics.

That's great. And going back to what you previously guided to was retaining somewhere between 15% and 25% of loans. And the previous guidance also included relatively worse net income results, at least in 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're obviously generating more capital than you expected where you'll be in a better capital position, and you're taking on more loans faster than you'd probably originally indicated to the market. So I'm kind of curious how those 2 play together and if there's any change to that guidance or if there's any room to the upside over time there?

Yes. So a couple of things to capture there is that we've used the 15% to 25%. We think it's a good range to kind of keep a nice, healthy marketplace, but also participate 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 to the extent volumes go up, that actually funds a lot of the capital that's needed for the provisioning and the capital that's 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 of 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.

That's great. And a little bit more on the funding side. Obviously, you know to grow the deposit franchise. And you obviously -- I'd be curious -- well, I guess what I'd be curious about is how much you think you can scale the deposit franchise or how fast you can scale 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, if there's any change in demand on that side of the platform.

Well, I'll maybe start on the investor side, Tom, and you can talk a little bit about the liabilities. 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 recall, 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 in how we view the importance of credit quality.

So I'd say those things make rational sense, but until you see them 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...

Yes. And I'd just touch on the deposit side. I think we commented earlier, when we closed Radius, we actually got a lot more deposits than we had anticipated. So we had a great priming of the pump there. We have been putting some of that cash to work. We did see growth for the quarter in interest-bearing deposits. And I think that will 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, up 12% total, and our NIM is expanding 200 basis points to 5.5%. That is a unique characteristic of our model, which is being able to originate and hold loans and grow this income stream at today's very low cost deposits. But even as deposits may increase, the margins 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.

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

The next question comes from Steven Kwok with KBW.

I'd like to echo my comments around congratulations on a great quarter as well. Just quickly around the originations. If I just take the midpoint of your guidance, it would imply about $2.9 billion for the next 2 quarters, which essentially puts you back at 2019 run rate levels. I was just wondering, as we think about going forward, how fast can you grow off of that base?

Well, Steven, this is Tom. I think we have obviously trying to factor in the environment. Obviously, we still are trying to track the path of the virus and what the implications will be for consumer spending and the economy at large. But we think this asset class, as Scott mentioned in his comments, is growing 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. We've given you 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 the second quarter if demand improves. So we can -- go ahead.

Yes, maybe just add a little color on kind of what's happening underneath the covers. So one macro industry and one specific to 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 use case, that demand temporarily is down more significantly than other use cases. Correspondingly, we've seen growth in other use 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 are -- that have been lagging in spending are taking off again. Credit card spending did start to tick back up. So we think that will 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 activity 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 grow slightly faster than the market due to the capabilities of the combined entity.

Got it. And just a 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?

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 that's driving demand.

And the thing -- the important thing I would point out is unlike the model prior to the acquisitions, 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.

And congrats on the quarter.

Thanks.

(Operator Instructions) The next question comes from John Rowan with Janney.

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?

Yes. I think 2 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 thing you'll see is that the -- it will be impacted by the accretion because remember that CECL is a present value number on the day of origination. So you've got those dynamics. But I don't think those would be that material to the number.

As you see the portfolio start to mature, I think that number will stabilize a little bit. But obviously, it grew quite a bit in an absolute dollar amount reflecting that we just retained about $200 million more loans in the quarter.

Okay. And then, Tom, just to clarify. You said that the guidance in the back half of the year reflects a normalized tax rate of 15%. I'm just curious why taxes when 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 percent rate?

No. Unfortunately, it's state tax driven. Some states have paused the ability to utilize NOL carryforwards. So you're seeing the impact of that in the financials that we're projecting for the rest of the year.

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

We think it's probably somewhere in the 25%, 27% range. We'll obviously make sure we understand that, get a better view once we start getting to that. But that -- I'll tell you that we have a $160 million NOL, so it's about at an effective rate of, call it, 20%, that's 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.

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

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.

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