LendingClub Corporation (LC) Earnings Call Transcript & Summary

Okay. We're going to get started with the next panel. Good morning, and thank you for joining us. Those of you who don't know, I'm [ Mark ], I cover the U.S. consumer finance space for Barclays. And I'm very pleased to be joined up on the stage by Drew LaBenne, the CFO of LendingClub, for the fireside chat. Drew, thank you for joining us.

Yes. Thanks for having me, Mark. Appreciate it.

So for the sake of those who are new to LendingClub, could you give us a 1-minute intro to the company and your value proposition?

Yes, sure. Absolutely. The company has been around for a long time. It was founded in 2006. It was really founded on the simple idea that while credit cards are a great way to make payments, they are a difficult way to borrow money. And so LendingClub had a different proposition, which was to take a product that existed for a long time in the personal loan, but offer it to refinance people out of their credit card debt using online channels to reach those customers. So at that time, pretty innovative in terms of what was happening. And we've been at that, as I said, since 2006. And over that time, we've built a base of 4.5 million customers. We've originated $85 billion in personal loans. And really, over time, we've grown to be the leader in the space in terms of issuance. And we've gone through different iterations of how we've gone to market, the first being what I just talked about, the online entry. We actually had peer-to-peer lending for a long period of time, and that's what LendingClub was really known for, is one of the original fintechs. And in 2021, we completed the acquisition of Radius Bank, which is really our pivot into a marketplace and banking model, which has driven the recent growth and success of LendingClub..

Okay. Great. What do those borrowers come to LendingClub for versus some of the other competitors in the personal lending space?

Yes. And this always surprises people when we talk to -- when we give the statistic. But about 50% of people who carry a credit card, who use a credit card, are carrying revolving balances as well. So if you look at where interest rates are right now, they're at all-time highs as far as the data goes back with the average rate being over 20%. And so the opportunity that we give to customers is to refinance out of that higher cost debt into a personal loan. And so really, for those customers who are looking to manage their credit more efficiently and more effectively, it's a great tool to be able to do that. And we save customers about 400 basis points on average when they're refinancing out of their credit card debt. So it's pretty impactful savings for our customers. And I would say those that come to us, we have great net promoter scores. We're over 80%. Many, many customers come back and repeat business with us. And we're always looking for ways to offer new products and to grow that relationship with these customers.

Okay. What do you think LendingClub's key strategic advantages are? You compete with banks and nonbanks. What differentiates you from the other players?

Yes, absolutely. We've been competing in this space for a long time. And we see a lot of new entrants especially when times are good. And when times aren't quite as good, we see a lot of those new entrants maybe struggle to make the model work. So one way of saying this is not a simple business to get into. And I think on the surface, it seems like maybe it would be. You're lending -- you're making a term loan to a borrower, once the money is out the door, the servicing is really pretty simple unless you go into collections activity. But what's behind that is a massive data and decisioning infrastructure. And as I said, we've been at this for a long time, done over $85 billion in loans. And what we've developed is some of the best data and analytics in the industry in terms of how we underwrite credit in the personal loan space. And on top of that, we've built some of the best infrastructure in the space in terms of the efficiency of our marketing funnel. We're maybe the most efficient or one of the most efficient in the industry in terms of our cost to acquire customers, our servicing platform, our back-end activities. All of these go into and contribute to having high returns in terms of the loans that we're originating, which is important for us as a bank that's putting these loans on the balance sheet but also in terms of the marketplace and generating a return for the investors who are purchasing our loans and helping to grow the business.

Okay. How do you think about the addressable market for personal loans and the growth opportunity there?

Yes. I would say right now in the space that we're in, it's really never been higher. So if you look at outstanding credit card debt right now, we're at $1.2 trillion, which is a record. Interest rates at 20%, as I just said, which is also a record. And that's really the majority of our TAM, right? So if you look at the $1.2 [ billion ] in credit card debt, probably about half of that is actually revolving, which is addressable for us in terms of being able to refinance customers out. So that's $600 billion. And then we don't play in subprime, we don't play in super prime, which is about -- combined about 30% of the market. But we play in the remaining 70% of that space. So $600 billion, of which 70% is the market we play in, that's a pretty massive space for us to be able to go out and continue growing the business. So I think as we're looking forward and hopefully seeing kind of the economy hold up, the rate environment stabilize, we think the TAM for us a total addressable market is as large as it's ever been.

Okay. That was interesting. I didn't realize you didn't go after the super prime segment. I mean, the subprime, I get, it's obviously a tougher segment to lend into. But what is it about the super prime segment? Is it just hypercompetitive? Or harder to identify like what balances are actually revolving versus truly transacting? And...

Yes, part of it is economics and part of it is just how our channel works and the competition. So the super prime space is really dominated by the larger banks. So I think in the PL space, a lot of people think about us, they think about SoFi, Upstart, other fintechs competing in the space. But larger banks Discover, Citi, Wells Fargo, they all have some version of the personal loan that they're offering as well usually to either prospect new clients or to their existing client base. And that's really where the super prime market is centered in that piece. And we're always testing a little up, testing a little down and figuring out where is the sweet spot for us to be executing our business model. But that near prime, prime, high prime space is really where we found our sweet spot for execution.

Okay. I think we just hit on the profile of your borrowers. But can you discuss the differences between loans sold for your marketplace and loans retained on your balance sheet?

Yes certainly. So let's just talk about who's borrowing our loans first. So at the current time, probably up to 70% of our loans are purchased by banks, including LendingClub Bank. So LendingClub Bank is the #1 purchaser and holder of the loans that we originate. So we're eating our own cooking in terms of what we're putting on the balance sheet. For our balance sheet, we are only putting prime loans on. Near prime is sold exclusively through the marketplace. But we sell from near prime all the way up to high prime in the marketplace. The banks tend to purchase -- banks that purchase from us tend to play in the higher end of that credit spectrum, whereas the asset managers, hedge funds, portfolio managers, they tend to go across the spectrum. And obviously, we're continually reporting to them on our performance, and they'll shift up or down depending on where they see the economics that are most attractive to them. But we'd like to go as full spectrum as we can because it creates efficiency in the funnel, and it just increases the TAM and the borrowers that we're able to go after.

Okay. Changing tracks a bit. How is the ongoing turmoil in the banking industry impacting your business? And how are you navigating the current challenging environment?

Yes. This has -- it's been an interesting start to the year. I've been in banking, I guess, like over 25 years. This is my, I guess, third banking crisis so I get a little PTSD as I'm going through these. But I think LendingClub has held up extremely well. Obviously, going into first quarter earnings, there was a lot of attention on all the banks and how are the banks looking on their liquidity positions, how are they looking on their marks on their investment portfolio, their marks on their loans portfolio, et cetera. And I think we showed the power of the model that we've built, the marketplace and the bank. And just to step back a little bit in terms of the Radius Bank acquisition, when we acquired that bank, it was $2.7 billion in assets and they had a mixture of commercial deposits and online deposits -- or online deposit product, which was good, that it really needed to be built out for scale. And we spent the past 2 years building an award-winning product, high-yield savings product, which competes in the online deposit market. That really paid dividends during this crisis because if you look -- and I'm sure many in the audience know this, but if you look at how deposits and funds slowed over the first quarter as Silicon Valley Bank, Signature, First Republic were playing out, uninsured deposits really -- banks that had a large amount of uninsured deposits really took a hit. The online banks were actually a beneficiary in a flight to safety for many of those funds. And so we saw a significant growth. We actually grew our deposits 13% nonannualized in the first quarter, and we moved our insured deposits up to 86%. So very, very strong channel for continuing to grow deposits, very low uninsured deposit base, which just makes it more stable. So on the funding side, we were great. We ended the quarter with $1.6 billion in cash, $4 billion in available liquidity. So no concerns there from us or from our investors. But on top of that, had a very small investment portfolio with minimal AOCI, other comprehensive income marks on the balance sheet. And the fair value of our loans versus carrying value was actually positive. We are one of the few banks that carried loans at higher fair value versus what we were carrying on the books, which really differentiated us from all the other -- the other banks that were under stress either because of liquidity or because of concerns of the marks on their portfolio.

So have you seen any pullback from bank buyers in your marketplace around the product just out of concerns for making sure they're holding a higher percentage of more liquid assets? Because I assume these are not like very tradable loans once they buy them.

Yes, but maybe more tradable than you think. They're not investment portfolio liquidity, but there's a somewhat active secondary market in terms of how these are traded. But the -- so let's sort of go back to when the Fed started raising rates because maybe I can take the narrative all the way through here. So when the Fed started there, their historic increase in rates, if you will, obviously, the asset managers that were buying from us felt the pressure first because their cost of capital went up instantly. Our ability to reprice our personal loans really moves in concert with credit cards on a lag. And so credit cards price with Fed funds, but as I said, on a lag. So our ability to raise coupon, it was significantly lagged versus the asset managers seeing the increase in cost of capital. So that really hurt the volume of purchases we were getting from asset managers going into the second half of last year. Banks are funding with deposits and they do funds transfer pricing in many cases so it's not that clean. But banks, very resilient for this and they have been earning great returns on the personal loan space. That has continued. As we're going into the second half of this year, and we spoke about this on our conference call, we think banks and their liquidity to purchase is going to go down for the exact reason you said, which is cost of liquidity for banks has gone way up now. Their cost of deposits are going up. That's going to put pressure on their ability and willingness to purchase more personal loans. I think the flip side is now that the Fed has maybe stopped or at least slowed down their rate increases, the cost of capital for asset managers is actually stabilizing, the inverted yield curve isn't hurting. We're seeing more green shoots from the asset managers coming back and looking to purchase. I think net-net, the price we get is going to be lower from the asset managers than the bank. So that's going to create some pressure. But I think the best thing for us would be the Fed takes a pause, maybe even starts lowering rates. And we don't go into a recession or maybe a shallow recession. So we're watching it. We're managing against it and taking the appropriate actions to be ready.

Okay. Turning to the deposit strategy. Can you just discuss that and how you're thinking of deposit growth relative to loan yields and the NIM?

Yes, sure. I sort of hit on this a little bit, right? But we've been -- since we acquired the bank 2 years ago, that bank was $2.7 billion when we acquired it. As of this last quarter, we were $8.8 billion. So we basically tripled the size of the bank in 2 years. And a big component of that has been the growth in high-yield savings and our ability to ramp up that channel. And for a bank of our size, double, triple our size, the opportunity to continue sourcing deposits from the online banking space is almost unlimited. There's a huge amount of capacity, and that's really where the puck is going in terms of consumer deposits now and in the future. Now you pay a higher rate to play in that space and grow at the pace we have. It's a little bit like fuel efficiency when driving the car. If you're driving the car 80 miles an hour, you're going to be much less efficient in fuel usage than if you're driving at 50 miles an hour. And we see that in the rate we're paying on deposits right now. Over time, I think we can moderate that a bit. At the same time, we've been remixing the asset side of the balance sheet. And what that has meant is while NIM has been coming down, we're still at 7.5% NIM as of the last quarter, which is I think pretty enviable for anyone who's in the banking space. And so the combination of the short-duration high-yielding personal loan with this sort of capacity to grow deposits, albeit at a higher rate, still works for us economically to generate a pretty attractive NIM, but also be able to grow the balance sheet at a rapid pace. We won't keep growing at that pace. We're going to need to slow down. But even this past first quarter, we grew the bank at 10% not annualized. So the clip has been pretty impressive.

Okay. Got it. And it sounds like you're already getting a pretty -- still getting pretty healthy NIM. And if the curve remains inverted like this, do you suspect that, that continues? Or is there a repricing of new loans that makes that a little bit more challenging to capture the same level of NIM?

Yes. I think the pricing trend right now is in our favor, right? The yield on personal loans that we originate continues to move up even while we are remixing within our portfolio. Now over the past several quarters, we've actually had a compression in personal loan yields on our balance sheet because of the remixing we've been doing and some of the post-pandemic vintages running off. This is the first quarter we've actually flattened out on that decline, and we should see that going up at a modest pace in future quarters. If the Fed really were to pull down rates pretty quickly, that would obviously change, but we'd also reprice deposits. And I think net-net, it's a large say if NIM would expand or contract from there. but we should be able to manage it pretty effectively.

Okay. Could you talk about the opportunities that had for LendingClub when the macro environment stabilizes and eventually improves?

Yes. I think the opportunity, we already spoke about in the personal loan space. And the TAM is as large as it's ever been. I think stability in rates would be a large improvement from the volatility that we've seen from the rapid increase. I think even if the Fed was only going up by 25 basis points, I think the whole market that we -- and ecosystem that we play in, would be able to absorb that and reset pretty quickly. The constant 75 basis point moves have been pretty disruptive for us and for everyone in the space and across many other industries. So I think a leveling or even dropping would be good. The TAM is the same size. It's a matter of our ability to feel more confident about credit and even go more aggressively in the future in terms of originating loans and bringing buyers back to the marketplace. So I think stability in all the macro factors you can think about would be very constructive. On top of that, as I said, we have this base of 4.5 million customers that are looking to do more with us. So we have an auto product, we have a purchase finance product, we have some traditional banking products. And we're working to build out other products as well so we can tap into that customer base and do more with the customers that already like doing business with us.

Okay. Got it. And this may be a tough question because I don't know if the company has lived through this. But does an inverted yield curve actually eventually, if it persists, increase demand for personal loans? And the reason I ask is because the cards are indexed to prime, right, the short end of the curve, and you're presumably making 3-year, 4-year, 5-year loans further out the curve that's lower. Does that actually increase kind of the spread differential in the savings that borrowers can get in an environment like that?

I think for a short period of time, that is the case. Inverted yield curves are usually not a long-lasting phenomenon in the cycle. A lot of this will honestly depend on why the yield curve is inverted, why rates are going down, right? So if it's a moderation of inflation and the Fed coming back to closer to 2% and the economy looks reasonably good and unemployment is not spiking, then that could be a great environment for us, right, an opportunity to refinance customers out at a lower -- even lower rate than the 400 basis points I described, that would be fantastic. If unemployment is spiking, obviously, we're going to be more cautious. The demand may be there for borrowers. We're going to be more cautious in terms of our underwriting and how we grow that portfolio.

Okay. The next question was around the buyers in the marketplace. We spent some time on that already, but maybe discuss a little more about kind of the mix of those investors, and what is their appetite to do more deals here in this environment?

Yes. So we did sort of talk about the asset managers, green shoots coming back. The banks could be impacted for some period of time while they're resetting their balance sheets and dealing with liquidity issues. So I think that will play out. The asset managers, in particular, they would benefit from an inverted yield curve as we were just discussing in terms of their ability to buy those loans. Right now, what I would say probably the biggest competition we have with asset managers is relative value. And so rates on the short end are still high, the ability to even get treasuries at 5% on the short end is a difficult competitor and the spread that we have to provide to them, the risk-adjusted yield for them to come in, is elevated. And so that creates some pricing pressure, but we're working through that. The other thing that I don't think will persist but has made asset managers may be more reluctant to come in is there is just a lot of paper on the market right now, both from, I think, banks delevering, fintechs who don't have a bank charter, having to maybe sell some of their loans at what I would call uneconomical prices. We don't want to play in that game. That's the benefit of us having a bank as we can go on balance sheet versus being forced to sell loans at steep discounts. But I think there are asset managers out there right now that are having a feast in terms of the deals they're getting and purchasing loan pools that are being forced to sell at below normal prices. I don't think that can continue forever. It could continue for another quarter or 2. I think once that subsides, that will be constructive to demand as well.

Okay. Just given some of the different -- cross currency you discussed around the strong deposit growth and some of the challenges in the marketplace, can you talk about the implications of that for the relative appeal of selling into the bank as opposed to selling into the marketplace? And kind of where do you see that trending over time?

Yes. I mean, the bank is -- we've continually grown the PL portfolio in the bank -- well, Siri didn't like what I was saying. Where was I? The -- so we would like to continue growing the bank. And especially in this environment, the net interest income and recurring revenue that the bank plus our servicing asset is throwing off, over 50% of our income right now or our revenue is coming from that source. So having the bank has allowed us to remain reasonably profitable and resilient as the marketplace has pulled back. The one constraint for us in terms of growing the bank faster has always been CECL. And so the upfront charge that we take on putting a loan on balance sheet can be anywhere from 3% to 6% in terms of the upfront charge, plus we defer the fee. It ends up being a lot of protective capital when you put the loan on balance sheet, which is great, but it also ends up being a bit of a hole in terms of the P&L. And being a bank, we're focused on being profitable. And so taking billions of extra loans on balance sheet would create an unsustainable P&L trend in the near term. So that's probably our biggest constraint on balance sheet. And then in the marketplace. Sure, we could go sell more loans at a deep discount. That's not who we are. We have the best credit performance based on the data we have in the industry. So we look to maintain price as best we can. And if that means we pull back on volume a little bit in the near term, that's what we'll do.

Okay. I'm just going to pause briefly and open it up to the audience to see if there are any questions. If not, happy to continue with these. Anyone want to ask anything to Drew?

All right. [indiscernible] today.

I know. The invitation is still up, and if something strikes you, raise your hand. We've got about 6 more minutes. Let's turn to new product innovations and what's driving those initiatives. For example, your recent foray into structured certificates.

Yes. So structured certificates is a product for asset managers. So I actually didn't touch on this before, but as the Fed has been increasing rates through the second half of '22 and a little bit in '23, asset managers had a higher cost of capital because rates were going up. But also the risk premium that was being charged for their warehouse lines or additional cost of capital coming in is also constraining purchases. So what a typical asset manager will do is, they will buy our loans, they will establish a warehouse line with someone like Barclays. And they basically end up with a residual. They pay -- they get a 70% to 80% advance rate, maybe less. They pay -- it's not LIBOR anymore, SOFR plus some spread first. And then everything else they get the cash flows in what I would call the residual. What we've done is, since we are a bank, we underwrite the assets, we have the ability to effectively simulate that warehouse line by taking a pool of loans, putting them into the trust, creating an A note and then a residual. The asset managers are buying the residual, which gives them the same effect as buying our loans and establishing a warehouse line, except we can provide a better advance rate because we underwrote the collateral. We understand it. We take out the friction costs of establishing a warehouse line, or worse yet, doing a securitization. But they still get the same effect of the leverage they want on the residual. We get the A note, which goes into our investment portfolio. We've done one deal that we announced on the earnings call. We're doing more this quarter. But effectively, we end up with an A note that has 15% subordination. The first deal we did was a 7% yield on the investment portfolio. And that's a somewhat liquid asset. We can -- we've already had inquiries for people asking if they can buy the A note from us sort of appealing to someone like an insurance fund that is looking for a well-protected asset with a higher yield. So there's different things we can do with this over time and the structure is very flexible. But it's a tool to keep liquidity in the market and actually leverage our advantage of having a bank balance sheet to be able to do some of these programs.

Okay. Turning to Radius, could you talk more about some of the benefits there? I know we talked about the deposits, but maybe focus a little more on the revenue side.

Yes. So when LendingClub did not have a bank and we used to originate through WebBank. We would pay tens of millions of dollars every year just to Web to originate those loans, right? So we become a bank, we instantly get to not pay those fees anymore, right? We still get the servicing asset on originating the loans we sell and then we get all the other benefits of being a bank. We also get all the oversight and the regulatory costs, so there's some trade-offs on doing that as well. But the ability to sort of control our own debts in terms of originating loans through the bank, being able to get away from Web, who was a great partner, but also took a fair amount of the economics. So it has been a great advantage for us as well.

Okay. Got it. Could you talk about how you're prepared for a potential recession?

Yes. So I'll give all the credit to Scott and the previous CFO. In Q4 of 2021, they were watching the trends in terms of what was happening, particularly in near prime, how savings were dropping as government stimulus ended. And some of the pressure that was going to build in that space and started to take action pretty early in terms of restructuring the credit box and how we are doing underwriting and becoming more conservative in terms of what we are putting on the balance sheet. So we've been pivoting the balance sheet, in particular, throughout 2022 and making adjustments to the underwriting box in both prime and near prime to make sure that we were ahead of any types of credit impacts that were happening -- that may happen as the economic environment evolves. So I think that has paid dividends, if you will, as we've gone into this environment. We've cut near prime now by well over 50% in terms of our issuance. I think the near prime space has actually gone through a lot of their transition and hopefully is coming out in a better space. But dealing with things like credit warping and other things that have affected the industry, I think the experience that the LendingClub team and our underwriting team has, having been through multiple economic environments, has helped prepare us to be ready for whatever is coming at us for the remainder of 2023.

Good. Final question for me is, could you discuss whether you have plans to diversify into more asset classes or offer more products and services to your members? And if so, when do you plan to do that?

Yes. There's a couple of things in the works right now that we'll probably talk about later this year. As I said, we -- PL is still obviously the main product. Purchase finance is another business line that we've been very active in. Auto, we have business there, but auto refinance is a pretty difficult business in this environment. But it will come back and we'll be ready to serve our members with that capacity as well. And then we also have a government-guaranteed lending business, which is an SBA business that we've been making investments in this. This came from Radius Bank, which we think is a natural adjacency to consumer lending in a space that we'll probably look to build out more in the future. And I think there's a lot more traditional products that we'll continue to explore and see if it makes sense to offer to our 4.5 million members.

Okay. Great. Well, I think we're going to end it there. Please join me in thanking Drew for his time.

Thanks, Mike. Appreciate it.