LendingClub Corporation (LC) Earnings Call Transcript

All right. I think we're going to go ahead and get started. Sitting across from me is Tom Casey, the CFO of LendingClub. So welcome, Tom. It's great to see you in person.

Good to see you, too. Thanks for having us.

Awesome.

So let's get right to it. You guys have been public for quite a while now. And I think the last time you guys presented here, I think you were still private. I think we might have had Renaud on the stage, and that was a long time ago. But you have since gone through a pretty spectacular transformation with the acquisition of Radius, which I think closed February of 2021, and the new marketplace bank model. So for those who are, once again, like reacquainting themselves with LendingClub, can you talk about your history and specifically the progress you have made over the last 2 years leading up to where you are today?

Yes, yes. Well, thanks, Steve. Thanks for having us. Yes, it's been a wild ride. The company was public in 2015 and we've gone through a lot of transformation. We started with obviously disrupting the credit card industry with personal loans, and that's been really one of our big drivers of our profit. But we also now have started to offer up auto loans and also our purchase finance loans. But it's been -- over the last few years, we really have transitioned from a company that had high infrastructure costs because we were selling to banks -- and so I always tell people we were -- our expense base was like a bank but we weren't earning like a bank. And so what we've done now back in 2018, we decided to seek either a de novo charter and then, ultimately, the Radius acquisition. And so what the Radius acquisition allows us to do is really fully integrate the value chain -- no longer dependent upon a third-party issuing banks. So we're issuing our own loans and that saves us about $35 million a year. We also now are participating in the value chain through holding loans on our balance sheet, about 15% to 25%. And that allows us to provide more value and more services to our customers because we have more of the value chain. And it's already starting to show that in our profit in the second and third quarter this year.

Yes. Let's go a little bit deeper into the Radius acquisition like, why did that asset make sense versus others you might have evaluated at the time or going to the direction of getting the bank charter yourselves?

Well, we initially started as maybe doing de novo. We felt that some of the uncertainty about regulatory clarity and being dependent on funding with the capital markets, we felt it was really important for us to own, if you will, our future. And so we felt a bank was important. So as I said, we did look at de novo but we also saw an opportunity to really, when we met the team at Radius, really bring together a team that had a world-class deposit operation. They had won multiple awards on their deposits capabilities and didn't have very, very good assets. Yet on the other hand, we had a terrific asset generation capability without any deposits. So it was really a unique opportunity to bring the 2 businesses together. They had no branches, for example: They had already closed their branches and went full digital back in 2017. So this is a culturally aligned 2 businesses that really, together, really demonstrate a lot of synergies between the 2. This is not a big cost takeout. This is really a revenue growth story.

Yes, got you. Now over the last couple of years, I think you've seen a lot more fintech and neobank companies go public with -- there's obviously increasing investor interest in the space. So could you outline the competitive landscape and who you view as your primary competitors in the unsecured consumer credit space? And what do you think your competitive differentiation is and what gives you the right to win?

Yes. Well, it's great to see some additional fintechs come to market and now be in the public viewing, so we really can get true apples-to-apples comparison. So previously, we had not had that. But we've had competition now for the last 10 years. It started with the traditional banks, then it was in new start-ups like Prosper and Marlette and then Discover and big banks came in as well. And so we've been dealing with competition for quite some time. And so for us, the real differentiator for us is, first and foremost, we have been doing this a long time. We have 150 billion cells of data, over 2,000 attributes. And it's not just data in the last 2 years, it's data over the last 10 years: rising interest rate environment, declining interest rate environment, tightening credit; widening of credit; and also behavioral aspects like what we just went through in the pandemic was very similar to things that we saw in other crises in our portfolio in other scenarios. So again, we have this deep data that allows us to perform quite well. The second 1 is now we're vertically integrated, so now we have the full value chain. As I mentioned, we're not dependent on the credit markets. We're not dependent on the issuing banks and we have the full value chain. So that allows us to actually pass on more value to the borrower. That's one of our mission statements is to figure out how to provide more value to the borrower by sharing some of the benefits we're getting of the bank. And then lastly, we have 3.8 million members, and this is a real competitive advantage because as part of our cost to originate, the ability to actually service these members, what used to be seen as a one-and-done product, we've now demonstrated the ability to engage these customers on their journey of credit through multiple cycles. So about 50% of our existing members come back to take out a loan a second time. And that's obviously at a very, very low cost to acquire. So we feel very good about our competitive profile.

Yes. Speaking of those 3.8 million members that you've accumulated over the years, like what is the typical attribute for a LendingClub customer, a borrower?

So one of the things that I want to make sure everyone understands, we service a broad spectrum. We start -- we go all the way as high as super, super prime, where we're selling those loans to banks down to 600 FICO where we sell those to institutions. So our customer typically is an average FICO of about 700. They're making between $90,000 and $100,000 a year. They typically are mid-40s. So they're pretty well established. And what we see is an opportunity for them to really change the way they're using credit and help consolidate their debt. We see opportunities to provide more, if you will, say yes to more people because when people come into our funnel, we don't know where they'll be on the credit spectrum and we need to be able to provide them with an offering. And so for us, the fact that we're broad spectrum allows us to serve more customers.

Yes, got you. You touched on the data advantage earlier. I think you guys started to underwrite loans or make loans starting in 2007, right? So you've been collecting data for a long, long time. And so can you explain at a more, I guess, a more granular level, like how this data extends the advantages to your platform and how you utilize it to the benefit of the member? And given this data advantage, like how much of your loan volume is automatically sorted?

Yes. So when we think of data, we think of it in a couple of different ways. First, it's important to have the data, but then what do you do with it and what's the output of it? Like what is the measurable benefits of having all this data? So we've recently started to supply some additional information to investors along a couple of spectrums. The first one is fraud. So how are you doing with fraud? So we actually have about less than 5 basis points of fraud. And this reflects our deep data and analytical capability on the front end to identify fraud. And so our ability to systematically identify and work around it has been -- is really great. So I think we're industry-leading at that level. And that also allows us to have what we call straight-through processing. So we're able to underwrite a loan at about 80% without having to do anything manual. So this is where we're validating income, validating employment, identification, all electronically. So that's a second output of, okay, having lots of data, how can you get it through? But there's also things on the credit side. How have you performed? So in our recent earnings call, we provided some additional information for investors. When you looked at the third quarter and the fourth quarter of 2020 -- excuse me, 2019, we illustrated that those cohorts actually performed about 50% better than the industry. And that's another reflection of our ability to actually use data decisioning on the collection side. And this also reflects our underwriting initially, the mix of our members but also our underwriting standards. So you're seeing our performance on the back end, on charge-offs and delinquencies, improve as well. So you're starting to see these benefits come out. And we think that's really, really important to demonstrate because it's not just about data, it's about really what is the data doing to improve your operations and your credit performance?

Yes. And I think one of the criticisms of the stock back in the day was, ah, they haven't been through a real cycle. So at this point, you've been through various market environments, right? So how do you anticipate the macro and interest rate environment to progress from here? And how might that impact your business and capital planning?

Well, there's really 2 things that are going on. I think we've been in a long tail of low interest rates. But if you remember back in '17, '18, interest rates started to move up and then they came back down again. And so we've been through that cycle of understanding both pricing and underwriting risk profiles at the borrower side as well as on the investor side, what types of issues are they dealing with. So we have a pretty good history of that kind of interaction. Now with the bank, now we're putting some loans on the books and benefiting from the -- our low-cost funding that we got from Radius. The good news there is we're not really that sensitive to interest rates. Our loans are very short duration. And so the fact that we're funding with short duration liabilities, we have a pretty good match between our liabilities and our assets. And so with rates rising from here, we don't expect a significant impact on that because our assets are repricing so fast that the impact on short-term swings or even moderate swings in interest rates really are not going to be that material. And we have a very, very large and growing net interest margin, which is insulating us from significant changes in interest rates.

Got it. Now let's dig a little bit into the new model, right? So I think you've spoken to it, commanding 3x the unit economics versus the prior marketplace model. So can you walk us through sort of an illustrative example of how exactly you've unlocked this value and where you're getting the greatest amount with?

Yes. So in the pre-banking frame and in our marketplace, we generate about $4 for every $100 of loans, so that's about 4% yield. And that's in the form of an origination fee that the borrower pays as well as a service fee that the investor pays, the loan investor. So it's about 4%. We have no ongoing credit risk in those portfolios and all we're doing is servicing the portfolio. When we put a loan on the balance sheet, the accounting convention results in some unique timing aspects of when revenue and earnings are recognized. So we do take a charge upfront for the CECL charge, which is the lifetime credit loss. We also defer some of that fee revenue I mentioned. However, over the life of the loan, we'll actually earn $12. So when we sell a loan, we'll earn $4. When we hold a loan, we'll earn $12. And so right there, just a significant value creation. It extends the lifetime value of the customer pretty dramatically. It allows us to provide more products and services to customers, it helps fund the investments we want to make going forward and provides us with a very durable income stream. So we're highly motivated to hold as many loans as we can to make our -- this new revenue stream grow as fast as we can.

Yes. And I think looking at your most recent results, right, I think you're now at 2019 origination levels?

Pretty close, that's right.

And profitability is now materially ahead, right?