LendingClub Corporation (LC) Earnings Call Transcript & Summary

Good afternoon, everyone. We're very pleased to be here with the management of LendingClub. LendingClub is a leading online full-spectrum fintech marketplace and a pioneer really of the consumer lending over the Internet. The company acquired a bank in 2021 that allowed LendingClub to use its balance sheet to further support that lending business. Drew LaBenne, the CFO, is with us today. Before joining LendingClub, Drew was CFO of Bakkt Holdings, an amalgamated bank, leading both of them through their IPOs and had divisional CFO responsibilities at both JPMorgan and Capital One.

So we're going to do this in a fireside chat. And so maybe, Drew, talk to us a little bit first about what made you decide to join LendingClub, what attracted you to that opportunity?

Yes. Great. Well, Moshe, first of all, thanks for having me here. It's been a great day, meeting with investors, and this is a great way to end the day, so I really appreciate it. With regard to the LendingClub opportunity, I had followed LendingClub over the years, and I also knew Radius Bank through various acquisitions. So when LendingClub announced the acquisition of Radius Bank, I started paying attention to the possibilities of that merger. I thought it was a great deal that LendingClub struck with them, and I think the bank is transformational. When I started talking to Scott about this role and thinking about the possibilities of having this great asset-generating capability in terms of personal loans, high yield, short duration and putting it together with the online banking capabilities of Radius, I just got very excited about it. And you mentioned my time at Capital One. It sort of brought me back to early 2000s when Capital One was going through a similar transformation. So I just think there's a great amount of opportunity with the fintech banking model and the bank together.

So maybe kind of digging into that a little bit. When you think about LendingClub's key strategic advantages, you're competing to some degree, both with banks and nonbanks. But talk about what differentiates LendingClub and how they're going to -- what's going to make them successful?

Yes. So first of all, I think some people take for granted how difficult space it is to operate in the personal loan lending space. Having been the CFO of a smaller bank and contemplating going into consumer lending, unsecured consumer lending, it's a pretty daunting task to think about all the data you need, all the process you need to make sure you're making the right credit decisions and generating return for shareholders. So what LendingClub brings in terms of strategic advantages is, first of all, they've been doing this for 15 years, right? They've originated -- we have originated over $80 billion in personal loans over the life of that. And we have all the data to support what we've done there and the learnings that come along with that. But on top of it, continue to invest in the experience and the infrastructure to do that. So if you look at the originations funnel, if you look at the servicing platform, the call center, the collections capabilities, they're all top notch, and you need all of those things in order to be very successful in this space. And we've been competing with large banks, fintechs for years. And in the space we play, we've basically been #1 or #2 in originations throughout that time. So I think the model has successfully been proven in the cspace.

When you think about the market, talk to me about how big or maybe how much of that personal loan market LendingClub kind of addresses and what you think the growth opportunity is?

Yes. So the primary product that we originate from the PL side is prime, and that is all we put on to our balance sheet, our prime loans. But we also originate near prime as well, and that's more for the marketplace investors. So one of the benefits of having the bank is in the marketplace is it really allows us to go more full spectrum in terms of the credit profile that we're able to address through our lending products. When you think about the total addressable market, our primary use case for personal loans is refinancing consumers out of higher-cost credit card debt. So I'm not sure that TAM right now has ever been bigger than it is today. You have credit cards approaching almost $1 trillion in balances. You have rates probably, I think, crossing 20%. So we're still working up the repricing curve with the Fed rate increases. But we think the total addressable market out there is as big as it's ever been for LendingClub.

Fair enough. I think that's probably accurate. So you mentioned obviously debt consolidation being the primary use case. Are there others that kind of come in second and third that are -- how do you think about that?

Yes. No, as I said, definitely, that's the primary use case. I mean there are certainly, let's call it, cash seekers out there who are looking to get a personal loan to buy a TV, do some other type of purchase. We're more careful in the underwriting there to make sure we're getting the right credit outcome. Beyond personal loans, we also have an auto refinance arm. We also do purchase finance or point of sale, more in the dental and medical area. And those are more up-and-coming business lines for us with PL still being the majority of the originations. And then with the acquisition of Radius, there are a number of businesses that we acquired, some of which we've decided to deemphasize, if you will. But one business we're very excited about is the SBA government guaranteed lending space as well, which Radius did pretty well. We think it's a good adjacency to what we do at LendingClub in a place where we can be successful and grow that business as well.

Got it. Did recently buy $1 billion of loans from one of your -- essentially from one of your customers. Can you talk about what the back story essentially was? And do you think there will be other situations like that where you would want to purchase loan portfolios?

Yes. So that portfolio purchase came out of the combination of U.S. Bank completing their acquisition of MUFG Union Bank. And Union Bank had been a long-time purchaser of LendingClub loans. We've originated all of that portfolio, some of it through WebBank, some of it through LendingClub Bank after the acquisition. So when the portfolio came on the market, we're still servicing it. We were the logical buyer, obviously, went through a competitive bid process. But for us, it's a portfolio of prime loans, well-seasoned. And we had the excess capital and liquidity to be able to do the deal at year-end, and we thought it was a good trade for shareholders. So very excited we got it done. As far as other portfolios that are out there, we would do that deal over and over again. I think the fact is there are very few portfolios of that size available, but could certainly see us if the opportunity presented itself buying a few smaller portfolios in a similar manner.

And obviously, those are seasoned loans.

Very seasoned, yes. Yes, about a year left. So I think the credit outcome there is pretty well known at this point. We booked it under fair value option just given the short duration in the known credit characteristics of the portfolio.

Right. Maybe talk a little bit about the investors who actually buy the loans in your marketplace. When you think about institutional investors and various types of institutional investors and more uninstitutional investors and talk a little bit about who is buying the loans in your marketplace?

Yes. So if we go back to 2022, over half of our loans were actually purchased by banks. And so as I mentioned earlier, right, it's difficult. It's a big investment for banks to move into the unsecured consumer space. So there are several of them that just choose to purchase loans from us on a whole loan basis that we've originated. And if you include LendingClub Bank and they're well over 50% of the loans purchased in 2022 were by banks, not by asset managers or funds. But the asset managers and funds have been very active, and we've had long-standing relationships with a number of them over the years. And they've done pretty well in terms of their purchases and the returns that we've generated for them. Going into the second half of 2022, as the Fed increased rates, the cost of capital, especially for the asset managers, moved up very quickly as they're funding more off kind of the 1.5-, 2-year point on the swap curve, that moved up instantly. We reprice our loans on a lag, more in line with credit cards lagged by a cycle or 2 because that's -- we're marketing to the holders of credit card -- the borrowers of credit cards. So our ability to reprice and provide value as cost of capital is going up, has been lagging as the Fed has been moving up rates extremely quickly in the second half of the year. We're hopeful that -- I think we all hope the Fed is almost done with their tightening cycle. If that's the case, hopefully, we can catch back up with the short end of the curve and provide a closer amount of relative value for those fund managers and increased originations.

Right. I mean, my next question was going to be about how interest rates impact your business. You already started to answer that. Maybe we could just kind of dig into that just a little bit more. I mean I think you had a couple of things kind of that went against you at the same time is that rates at the 2- and 3-year levels were high and spreads were widening out. Have you seen any of that reverse itself in the last 60 days or so?

We've definitely seen kind of the midpoint of the curve come down. I think that's helpful. I would say the gears of industry seem to be turning better in January than they were in Q4. And so I think there's definitely more activity and more conversation happening. We'll see if that translates into an increase in loan originations and sales versus where we were versus what we guided to. But it definitely feels more constructive, and I saw SoFi just did another deal today.

Yes.

So I think as much as the capital markets and the ABS markets come back, that should be constructive for our loan buyers as well.

Right. I mean I would imagine that some of that uncertainty in the back half of last year was also a function of concerns about credit and both at the industrial level and at specific companies because there were some players in the industry that had, had significantly worse performance. And so I would imagine that as some of that develops during '23, you could see some of that spread narrowing.

Yes. I mean maybe if I could expand on that a little bit. As we were doing our Q4 call or preparing for our Q4 earnings call, I mean, I think there was a bit of an information gap out there in terms of our credit performance. And so we took very specific pains to make sure we were doing more disclosures on what type -- what the loan performance was in our HFI book, which again, is all prime and give some expectations on where we expect our vintages to perform from a lifetime loss and an ANCL perspective. So I think the feedback on that was good. I think we've maybe demystified what's in our portfolio, a fair amount, which has been helpful. Now the investors are turning towards, okay, when will marketplace sales and originations pick back up. So looking forward to that conversation.

Right. I mean you did discuss the question of how that would perform in a weaker economy, right? I mean that is kind of the key. So one of the questions that we get about this space, and you've answered it partially already, why do you think it is that banks don't enter this space? And what is it specifically that makes them decide to be partners of yours and marketplace buyers rather than doing it themselves? And is there any sort of size threshold over which they are less likely to do that?

Yes. Well, and there are a lot of banks that play in this space, right? So most of the top banks have some form of a personal loan offering different than ours and probably more geared towards their existing customer base. So -- but it is a space that many banks, many of the larger banks play in. I think for a smaller institution to come in or even a midsized institution to come in, it's a big investment. You have to have the right credit people, you have to have the right data set, and you have to have the right risk appetite to do that. And banks that have a couple of those, but not all 3 of those tend to come to us and start conversations on building their exposure to unsecured consumer credit, which maybe they don't have a better way to get that exposure and diversify their balance sheet. And I think our track record in the space has been very good. We're able to show them the 15 years of data and performance that we've had and I think build the confidence that we can fit a risk profile that can excite them in a good risk-adjusted return for their balance sheet.

And are they thinking about it like as a test and learn and then take it the in-house themselves? Or is it something that they pretty much are planning, at least at the time they make that original decision that that's going to be -- that they're going to be partners on a long-term basis?

Yes. I guess I'm here 6 months, so I may not have the full history lesson on it, but I think that we have seen very few of any who sort of test and learn with us and then go into the space themselves. Not that it couldn't happen, but I think our performance and the returns we've delivered to banks has overall been very strong. And I think many of them are satisfied to let us do the hard work and clip the coupon.

Can you talk a little bit about the right-hand side of the balance sheet, kind of funding and deposits for Radius Bank. What -- how do you think about the deposit strategy? And how big would you like the bank to be?

Yes. So Radius really had 2 components to their deposit strategy when we acquired them. They actually had a pretty vibrant commercial banking and in particular labor banking space. That was actually their heritage before they built out the other component, which was the fintech capabilities and the online banking capabilities. So we've obviously leaned harder into the online banking space because for us, we're already originating tens of billions of dollars every year in originations. We needed a funding source that could keep up with that level of growth as we were putting those originations on the balance sheet. And the online banking space for us is there is so much capacity there that we're really not going to get tapped out. Now having said that, you need to pay, right? It's a high rate environment. I think we're at 4% right now in terms of our leading product, but we've had no difficulty in funding the balance sheet growth. And I don't really see that being a constraint as long as we're willing to pay the rate in terms of our growth going forward.

Right.

You had a second part to that, I think.

Well, I mean how big do you expect the bank to be or want the bank to be?

Yes. So if we look back to -- so it's about the 2-year anniversary of the Radius acquisition right now. When we acquired the bank, it was about $2.7 billion. We exited '23 -- '22. We exited '22 at just about [ $8 billion ]. So that's 65% compounded annual growth rate. So pretty good for banking, right? So very happy about what we've been able to do with the bank thus far. As we go into this year, our aspirations, at least for Q1 are a little more modest as the way that we've been powering the growth in the bank has been the marketplace and the additional earnings that marketplace there is of has provided the capital to increase the personal loans on the balance sheet, can take that up for in CECL charge. So that may be a bit more of a constraining factor in the early part of this year. But depending on how the marketplace performs in the future, that could again be an accelerating for us.

Got you. Okay. You talked a little bit about the expectations and maybe you could kind of spend another minute talking about the expectations for the vintages that you've originated in 2023. And what would happen if the economy were to weaken? Thus far, thankfully, it has not happened yet, but could you talk a little bit about what that would be and how you would expect them to perform and what other steps LendingClub could take to help in that process?

Yes, sure. So as we showed in the earnings presentation, for the 2023 vintage, what we're expecting -- we expect to generate our base case 36% marginal returns based on the investment. What that really is, is that the net interest margin less losses, less variable costs that we'll get from that vintage. What we assumed in there is a 4% annualized credit losses on that portfolio, which there is some factor in there for, let's call it, qualitative reserve and some impact of a worsened credit environment. On that same slide, we also showed what our economics look like if losses increased by 25% to 5%, which still generated a 30% marginal return. Obviously, if the economy significantly worsens, credit losses could go in excess of that. But part of the reason we showed that we talked about demystifying sort of credit performance, but we also think the returns of what we're putting on the balance sheet are very compelling, and we continue to deploy capital into putting that on the balance sheet, but balancing that with profitability at the same time. So very excited about the prospects of that, and we'll continue to update investors as we get more information on that.

Good deal. I've got a few more, but if there are any questions in the room, we can have a mic brought to you. Just raise your hand. Okay. Not seeing any. I will continue. One of the other nice things about having that vintage analysis that you showed is you can compare it to what was going on before. Obviously, during COVID, many of your borrowers became extremely liquid and their performance was strong. Can you talk about the current expectations versus what the LendingClub has seen pre-COVID?

Yes. So the '21 vintage, I think, was pretty great from a performance perspective, right? And I don't think we're alone in having that outcome. So we definitely outperformed our expectations. And the '21 vintage was probably mixed a little more higher risk than what we're putting on today is we've been remixing our originations to prepare just in case the environment gets a little more difficult for us. So 2022, on average is probably a little bit less good than we expected when we modeled out the originations. But well -- the returns generated on that as well were still very attractive, and you put them together, great performance overall. But everything has modeled in fairly close to what we expected based on pre-COVID levels overall. So we're continuing to see good performance. We're being cautious. As we've said many times, we're remixing to a higher quality of borrowers on our balance sheet, and we've been doing that through the second half of 2022. It's quite possible we look back and go, maybe we're being too cautious if the economic trends we're seeing really continue to hold up. But if they don't, we want to be prepared.

Right. As you look out to competitors in the market, are there -- is there like a class of competitor that you are most concerned about? Are the -- how do you think about not singling out any one bank, but the banks kind of as a class of competitor, there was an advent in this part of the cycle of -- for lack of a better term, artificial intelligence-enabled competitors. You kind of think about the various categories, some of them have been less successful. Some have been moderately successful. What -- who do you think are the ones that you'll be competing with in the next couple of [ months ]?

Yes. I think that those that have a bank or are a bank, I think they're going to prove to be -- I'm not going to say anything you probably don't really know, right? I think they're going to prove to be much more resilient through the cycle. And they, along with others, they still have a lot of capital to continue to originate and be competitive. But we've been competing in this space for 15 years against big banks, small banks. We've always had a pretty decent amount of success. What I would say, I probably am more concerned about is some continued level of underperformance in the industry because it paints the asset class and it paints the model with a broad brush that maybe isn't deserved across all the lenders. And so I hope we get to a spot where everyone is making economically rational decisions and deploying capital in a way that makes sense for the industry.

You alluded before to some of the other areas of growth, other loan products and the like or -- and let's maybe talk about that a little bit. What are the -- what are they? And kind of what's the order in which you kind of pursue them?

Yes. So in the consumer lending space, auto refi is a business that we've had for a number of years and have continued to invest in. Given where the rate environment is right now, that's become probably a more difficult space to have a compelling value proposition for consumers in the near term. Long term, we still really like that business. We're going to continue to focus on capabilities and be ready for the next wave of refinancing that becomes -- that makes that business super attractive. The purchase finance business is one that we've had for a few years and we acquired a business back in 2015. We've sort of rededicated ourselves to that space, and I think we've made a lot of good inroads with some new partners. So this would be, for example, you're going to get kind of dental work. And I don't mean a cavity field like broad spectrum dental work. It's a point-of-sale product where we work with the -- in this example, the dental providers to actually provide a loan in that space. And the key to success there is, one, you have to have the network and the relationship with the practices. But on top of that, you have to be able to go more full spectrum in terms of the credit you're offering, not full, full spectrum, but you need to be able to have a certain level of approval rates that will make it compelling for those partners to use you. And so having the bank and we do actually sell some of those loans as well through the marketplace. Having that broader set of capabilities makes us more competitive to the practice owners to be able to use that.

Got it. And any sense of that -- is that going to be a significant product in '23 or...

It will definitely have -- not definitely, we plan on growing the originations in '23. I think it will be at least a year or 2 more before it really, I think, pops the origination story, but it's definitely a growth factor.

Are there any other nonlending services that either -- I mean you talked a little bit -- not that it is not lending, but you're talking about the small business through the bank. Are there any other things like that, that would be kind of growth areas for the LendingClub?

Yes. I mean there are definitely some things we're working on in the background, probably not ready to discuss them yet. But with the Radius acquisition, we are very focused on the banking experience. Obviously, high-yield savings has been a great product for us. We have a pretty good online checking account as well, but it can be better. And I think as we make improvements, we'll be ready to talk about those more openly.

Got you. I mean one of the big topics with many of the banks at this conference has been this whole late fee controversy and the CFPB. Certainly, that is something that could drive borrowers, it could increase the likelihood of needing to consolidate what is or formerly was credit card debt. How do you think about that process? Do you have a late fee? And do you think that's something that could be something that actually helps the available market for LendingClub?

Yes. Great. Well, let me start with us and then talk about maybe the implications going forward, which a bit speculative. But for us, we don't -- since the beginning of the pandemic, we stopped charging late fees on personal loans. And we haven't reinstated that yet. It doesn't mean we won't at some point. But late fees are really more of a collections tool for us than income stream. So we would use a late fee to kind of negotiate a payment or settlement or something to that effect. So no impact really on us on our current financial state. I didn't get to hear much of the Capital One talk, so I don't know what the answer was from Rich, but I could imagine that if that income stream is impaired by new legislation or new rule-making, I could see them making it up in the APRs, right? And so if that's the case, our value proposition to customers just becomes more compelling because we're able to provide even a more differential in the rate that they could refinance with us.

Right. Maybe, I guess, the question of that element of how you think about the, number one, the consumers need willingness to refinance? And I mean, how does that kind of also relate to -- and one of the things that you and I spoke about the last time we talked was this whole thing of where the personal loan sits in that consumers, how important it is to that consumer. So do you think that this loan product now is actually, to some degree, is it replacing the credit card in that respect? Is it becoming more important in terms of when they think of what they have to pay back?

Yes. I mean there's definitely some studies out there that say it is above credit card in the hierarchy. To be fair, I've seen a couple of studies that say it's below as well. So I think it ends up being kind of a close call depending on the situation, probably depending on the borrower as well. The people -- the borrowers who come to us at least for the refinancing on the credit card side, if you think about the process they're going through, they're saying, okay, yes, I'm getting a lower rate, but I'm probably actually getting a higher monthly payment by making this trading coming into a personal loan. So just almost from a risk splitting may be overstating it, but I'll say it from a risk plan standpoint, you have people who are willing to take on a higher payment to either save interest costs or improve their financial condition. I think that alone gives some bias to the type of consumer that's coming into the product. And so I think that bodes well for them thinking about how they're going to make payments on this product going forward.

So I think one of the issues that this business had in its earlier iterations was that people quickly reloaded. And they didn't -- I mean they only temporarily improved their financial position. So I think that's really going to be kind of a key question are these consumers that are actually looking to consistently improve that financial position?

Yes. And it's -- in some ways, we don't underwrite to 0 losses, right? We always know we're going to have some charge-offs in every vintage that we're originating. And so in many ways, it's -- you're studying the data. You're making a decision based on the probability of outcomes and you learn from that -- not AI. You learn from that data, you take your experience and your intuition -- and not intuition, your experience and your data and you make decisions on that. But we're going to have some borrowers that show that behavior, but by and large we should have many more that don't.

Okay. Good. I mean I think the -- maybe if there's -- as you think about kind of the -- you have -- now have a forecast out like just for this coming quarter.

Yes.

But as you think about what could drive significantly better performance for LendingClub in 2023 or worse? Like what are the things, obviously, put aside employment for the moment. But are there any other things that we should be thinking about that are going to significantly drive that performance as you work through the year?

Yes. I mean if you look at just the impacts that -- the trends in our financial performance over the past few quarters and the guidance we gave in Q1, the #1 factor there is sales through the marketplace, right? So our ability to drive compelling value to the loan purchasers and compete against relative value versus other asset classes. The Fed has been -- the increase in rates, as I said before, has been the main reason for that. I think probably the #1 thing that would be helpful for our business in 2023 would be great if the Fed paused, even better if they lowered rates, although there might be some reasons why they do that, that we may not like. But I think even a pause by the Fed at this point would be extremely helpful, allow us to catch up with that lag that we have from the rate increases that have already happened. And then that would be great. And then the capital markets -- the ABS market is coming back, we don't fund there, but it's a very good corollary to many of our marketplace loan buyers.

Right. So maybe -- yes, that's a good -- when you talk about that lag and has the issue been or the competitive dynamic not been supportive, I guess, of raising prices faster. Like in other words, I have to believe that a good portion of your competitors have less robust funding, right? Some of them are out there doing securitizations. That used to be 2% and are now 7%, right?

Yes.

I mean it's not -- it's a full 500 or 550 basis points higher cost of funds. And so do you think that there will be some easing from a competitive standpoint in terms of that pricing during '23?

I think so. It gets back to sort of the economic rationality that we're hoping to see across the industry. Maybe I misunderstand some of their economics, and it is rational. But I think if we go back to Q4 for a moment, I would say I've sort of described Q4 as a sloppy fixed income quarter, right? Like every asset class seemed to be on sale. You had banks who were divesting portfolios, clean up for year-end. I think Q1, hopefully, as we enter Q1 here, we have less of that dynamic going forward and pricing gets more in line with what we could expect. And listen, I'm sure we could originate loans and sell them at a deep discount and have originations higher. That's not a profitable or sustainable business model. That's not what we're going to do. So again, I think that if we can get to a spot where us and our competitors are able to provide compelling value to loan buyers again, which I think the Fed is a big driver of that, I think it will be a much more stable 2023.

Very good. So with that, please join me in thanking Drew and the LendingClub.