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 consumer lending over the internet. The company acquired a bank in 2021 and 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 Backed Holdings, an amalgamated bank, leading both of them through their IPOs and had divisional CFO responsibilities at both JP Morgan and Capital One. We're gonna do this in a fireside chat. Maybe, Drew, talk to us a little bit first about what made you decide to join LendingClub. What attracted you to, you know, to that opportunity?
Yeah, great. Mosha, first of all, thanks for having me here. It's been a great day of meeting with investors. This is a great way to end the day, so I really appreciate it. You know, with regard to the LendingClub opportunity, you know, I had followed LendingClub over the years. I also knew Radius Bank through various acquisitions. When LendingClub announced the acquisition of Radius Bank, you know, I started paying attention to the possibilities of that merger. I thought it was a great deal that LendingClub struck with them. I think the bank is transformational. When I started talking to Scott about this role and thinking about the possibilities of having this, 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. You know, 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. You know, I just think there's a great amount of opportunity with the fintech banking model and the bank together.
Maybe kinda digging into that a little bit. When you think about LendingClub's key strategic advantages, you know, you're competing to some degree both with banks and non-banks. Talk about what differentiates LendingClub and, you know, how they're gonna, you know, what's gonna make them successful.
Yeah. First of all, I think some people take for granted how difficult a space it is to operate in, 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. What LendingClub brings in, 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. 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, you know, continue to invest in the experience and the infrastructure to do that. 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. You need all of those things in order to be very successful in this space. You know, we've been competing with large banks, fintechs for years. In the space we play, you know, we've basically been number one or number two in originations throughout that time. I think the model has successfully been proven in the PL space.
When you think about, you know, the, the market, talk to me about the, you know, how big or maybe how much of that personal loan market LendingClub kinda addresses and what you think the growth opportunity is.
Yeah. The primary product that we originate from the PL side is Prime. That is all we put onto our balance sheet, our Prime loans. We also originate Near Prime as well. That is more for the marketplace investors. One of the benefits of having the bank is in the marketplace is it really allows us to go more for full spectrum in terms of the credit profile that we are able to address, through our lending products. When you think about the, you know, the total addressable market, our primary use case for personal loans is refinancing consumers out of higher-cost credit card debt. I am not sure that TAM right now has ever been bigger than it is today. You know, you have credit cards approaching almost $1 trillion in balances. You have rates probably, I think, crossing 20%. We're still, you know, working up the repricing curve with the Fed rate increases. 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. You mentioned, obviously, debt consolidation being the primary use case. Are there others that kind of come in second or third? How do you think about that?
Yeah. No, as I said, definitely that's the primary use case. I mean, there are certainly, you know, let's call it cash seekers out there who are looking to get a personal loan to, you know, buy a TV, do some other type of purchase. You know, 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. Those are more up-and-coming business lines for us, with PL still being the majority of the originations. With the acquisition of Radius, there are a number of businesses that we acquired, some of which we've decided to de-emphasize, if you will.
You know, 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. You did recently buy a billion dollars of loans from one of your, essentially from one of your customers. Can you talk about, you know, what that, you know what that backstory, you know, essentially was? Do you think there will be other, you know, situations like that where you would wanna, you know, purchase loan portfolios?
Yeah. Yeah. That portfolio purchase came out of the combination of U.S. Bank completing their acquisition of MUFG Union Bank. Union Bank had been a long-time purchaser of LendingClub loans. We've originated, you know, all of that portfolio, some of it through WebBank, some of it through LendingClub Bank after the acquisition. When the portfolio came on the market, you know, we're still servicing it. We were the logical buyer. Obviously, went through a competitive bid process. For us, it's a portfolio of Prime loans, well-seasoned. You know, we had the excess capital and liquidity to be able to do the deal at year-end. We thought it was a good trade for shareholders. Very excited we got it done.
As far as other portfolios that are out there, you know, we would do that deal over and over again. I think the fact is there are very few portfolios of that size available. Could certainly see us, if the opportunity presented itself, buying a few smaller portfolios in a similar manner.
Obviously, those are seasoned loans.
Very seasoned. Yep. Yep. About a year left. I think the credit outcome there is, is, you know, pretty well known at this point. We booked it under fair value option just given the short duration and the, the known, credit, characteristics of the portfolio.
Right. Maybe talk a little bit about the investors who actually buy the loans in your marketplace. You know, when you think about institutional investors and various types of institutional investors and, you know, not, you know, more uninstitutional investors, and, you know, talk a little bit about the, you know, who is buying the loans on your marketplace.
Yeah. If we go back to 2022, over half of our loans were actually purchased by banks. As I mentioned earlier, it's difficult. It's a big investment for banks to move into the unsecured consumer space. There are several of them that just choose to purchase loans from us on a whole-loan basis that we've originated. If you include LendingClub Bank in there, well over 50% of the loans purchased in 2022 were by banks, not by asset managers or funds. The asset managers and funds have been very active. We've had long-standing relationships with a number of them over the years. 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 one-and-a-half, two-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 two because that's who we're marketing to, to, you know, the holders of credit cards or 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, you know, 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 increase originations.
Right. I mean, my next question was gonna be about how, how interest rates impact your business. And you've already started to answer that.
Yep.
Maybe we could just kinda dig into that just a little bit more. I mean, I think you had a couple of things kinda that went against you at the same time is that rates at the two and three-year levels were high and spreads were widening out.
Mm-hmm.
Have you seen any of that reverse itself, in the last, you know, 60, 60 days or so?
Yeah. 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. 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 got it to. It definitely feels more constructive. I saw SoFi just did another deal.
Yes.
Today, 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, I, I, you would imagine that some of that uncertainty in the back half of last year was also a function of concerns about credit.
Mm-hmm.
Both at the industrial level and at specific companies because there were some players in the industry that had, you know, significantly worse performance. I would imagine that as some of that develops during 2023, you could see some of that spread narrowing.
Yeah. Yeah. 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. We took very specific pains to make sure we were doing more disclosures on 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 ACL perspective. 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. You know, now the investors are turning towards, okay, when will marketplace sales and originations pick back up? Looking forward to that conversation.
Right. I mean, you did discuss the question of, you know, how that would perform in a weaker economy, right? I mean, that's the yeah. That is kinda the key. One of the questions that we get about this space, and you've, you've answered it partially already, you know, is, is why do you think it is that banks, you know, don't enter this space? And, you know, what is it specifically that, you know, makes them decide to be partners of yours and marketplace buyers rather than doing it themselves? Is there any sort of size, you know, threshold over which they are, you know, are less likely to do that?
Yeah. And there are a lot of banks that play in this space, right? 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. 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 mid-sized 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.
You have to have the right risk appetite to do that. You know, banks that have a couple of those but not all three of those tend to come to us and start conversations on, you know, building their exposure to unsecured consumer credit, which maybe they do not have a better way to get that exposure and diversify their balance sheet. I think our track record in the space has been very good. We are able to show them, you know, the 15 years of data and performance that we have 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.
Are they thinking about it like as a test and learn and then take it in then in-house themselves? Or is it something that they pretty much, you know, are planning, at least at the time they make that original decision, that that's gonna be that they're gonna be partners, you know, in, you know, on a on a long-term basis?
Yeah. I guess I'm here six months, so I may not have the full history lesson on it. But I think that we have seen very few, if any, who sort of test and learn with us and then go into the space themselves. Not that it couldn't happen. I think our performance and the returns we've delivered to banks has overall been very strong. 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, you know, for Radius Bank? What, you know, how do you think about the deposit strategy and, you know, how big would you like, you know, the bank to be?
Yeah. Radius really had two 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. We have obviously leaned harder into the online banking space because for us, you know, 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. You know, the online banking space for us is, you know, there is so much capacity there that we're really not gonna 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. We have had no difficulty in funding the balance sheet growth. I do not 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. The other part.
I mean, you know, how, how big do you expect the bank to be or want the bank to be?
Yeah. So, you know, if we look back to, so it's about the two-year anniversary of the Radius acquisition right now. When we acquired the bank, it was about $2.7 billion. We exited 2023—in 2022, thank you—we exited 2022 at just about $8 billion. So that's, you know, 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 throws off has provided the capital to, you know, increase the personal loans on the balance sheet and take that up for unceasable charge. That may be a bit more of a constraining factor in the early part of this year, but, you know, depending on how the marketplace performs in the future, that could, again, be an accelerant for us.
Gotcha. Okay. You know, you talked a little bit about the expectations. And maybe you could kinda spend another minute talking about the expectations for the vintages that you've originated, you know, in 2023. What would happen if the economy were to weaken? You know, thus far, thankfully, it has not happened yet. Could you talk a little bit about what that would be and how you would expect them to perform and what other steps, you know, you know, LendingClub could take, you know, to help in that process?
Yeah. Sure. As we showed in the earnings presentation for the 2023 vintage, you know, what we're expecting, we expect to generate our base case 36% marginal returns based on the investment. What that really is, is that's the net interest margin, less losses, less variable cost 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, you know, let's call it qualitative reserve and some, you know, impact of a worsening 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. You know, obviously, if the economy significantly worsens, you know, credit losses could go in excess of that.
You know, part of the reason we showed that, we talked about demystifying sort of credit performance. 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. Yeah, very, very excited about the prospects of that. We'll continue to update investors, you know, as we get more information on that.
Good deal. I've got a few more. 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, you know, nice things about having that vintage analysis that you, you know, 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 you, you know, LendingClub had seen pre-COVID?
Yeah. You know, the 2021 vintage, I think, was pretty great from a performance perspective, right? I do not think we are alone in having that outcome. We definitely outperformed our expectations. The 2021 vintage was probably mixed a little more higher risk than what we are putting on today as we have been remixing our originations to prepare just in case the environment gets a little more difficult for us. Say 2022, on average, was probably a little bit less good than we expected when we modeled out the originations. While the returns generated on that as well were still very attractive, and you put them together, great performance overall. Everything has modeled in fairly close to what we expected based on pre-COVID levels overall. We are continuing to see good performance. We are being cautious.
As we've said many times, you know, 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. You know, it's quite possible we look back and go, "Maybe we're being too cautious if, if, you know, the economic trends we're seeing really continue to hold up." But if they don't, we wanna be prepared.
Right. As you look out to, you know, competitors in the market, are there, is there a, like, a class of competitor that you are, you know, most concerned about? Are the, you know, how do you think about, you know, not singling out any one bank but the banks kind of as a class of competitor? You know, there was an advent in this part of the cycle of, you know, for lack of a better term, you know, artificial intelligence-enabled competitors. You kinda think about the various categories. You know, some of them have, you know, been less successful. Some have been, you know, have been moderately successful. What, you know, who do you think are the ones that you'll be competing with, you know, in the next couple of years?
Yeah. You know, I think that those that have a bank or are a bank, I think they're gonna prove to be, I'm not gonna say anything you probably don't already know, right? I think they're gonna prove to be much more resilient through this cycle. They, along with others, they still have a lot of capital to continue to originate and be competitive. 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, you know, 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. 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, you know, or, you know, and you can, you know, let's maybe talk about that a little bit. What are the, you know, you know, what, what are they and, you know, kinda what's the order in which you, you know, kinda pursue them?
Yeah. 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. You know, 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, you know, we still really like that business. We're gonna 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. This would be, for example, you're going to get kind of dental work. I don't mean a cavity-filled like.
Right.
You know, broad-spectrum, dental work. It's a point-of-sale product where we work with, the, for in this example, the dental providers to actually provide a loan in that space. The key to success there is, one, you have to have the network and the relationship with the practices. 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. 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. Any sense of the, you know, is that gonna be, you know, a significant product in 2023 or?
You know, it will definitely have a, or not definitely. We plan on growing the originations in 2023. I think it will be at least a year or two more before it really, I think, pops in the origination story. But it is definitely a growth factor.
Gotcha. Are there any other non-lending services, you know, that either, I mean, you talked a little bit, not that it's not lending, but you talked about the small business, through the bank. Are there any other things like that that, you know, that would be kinda growth areas for LendingClub?
Yeah. I mean, there are definitely some things we're working on in the background, probably not ready to discuss them yet. With the Radius acquisition, you know, 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. It can be better. I think as we make improvements, we'll be ready to talk about those more openly.
Gotcha. I mean, one of the big topics with many of the banks at this conference has been this whole late fee controversy.
Yeah.
and the CFPB. Certainly, that is something that could drive borrowers, you know it could increase the, the likelihood of, needing to consolidate, what is or formerly was credit card debt. How do you, how do you think about that, you know, that process? Do you have a late fee? And do you think that's something that could be, you know, something that actually helps, the, the available market for LendingClub?
Yeah. Great. Let me start with us and then, you know, talk about maybe the implications going forward, which, you know, a bit speculative. For us, we don't, since the beginning of the pandemic, we stopped charging late fees on personal loans. We haven't reinstated that yet. Doesn't mean we won't at some point. Late fees are really more of a collections tool for us than an income stream. We would use a late fee to, you know, kind of a negotiated payment or settlement or something to that effect. No impact really on us on our current financial state. I didn't get to hear much of the Capital One talk. I don't know what the answer was from Rich.
You know, I could imagine that if that income stream is impaired by new legislation or new rulemaking, I could see them making it up in the APRs, right? If that's the case, our value proposition to customers just becomes more compelling 'cause we're able to provide even a more differential in the rate that they could refinance with us.
Right. Right. Maybe, I guess, you know, the question of, you know, that element of how you think about the number one, the consumer's, you know, 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 consumer's, you know, where it, how important it is to that consumer. So do you think that this loan product now is actually, to some degree, you know, 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?
Yeah. I mean, there are definitely, you know, some studies out there that say it is above credit card in the hierarchy. To be fair, I've seen a couple studies that say it's below as well. I think it ends up being, you know, kind of a close call depending on the situation, probably depending on the borrower as well.
Right.
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 trade and coming into a personal loan." Just almost from a risk splitting, maybe overstating it, but I'll say it from a risk splitting 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. I think that bodes well for, you know, them thinking about how they're going to make payments on this product going forward.
Right. I think one of the issues that this business had in its earlier iterations was that people quickly reloaded.
Mm-hmm.
They only temporarily improved their financial position. I think that's really gonna be, you know, kind of a key, you know, a key question is, are these consumers that are actually looking to, you know, to consistently improve, you know, improve that financial position?
Yeah. I'd say, you know, it's, in some ways, we don't underwrite to zero losses, right? We always know we're going to have some charge-offs in every vintage that we're originating. In many ways, it's, it's a you're studying the data.
Right.
You're making a decision based on the probability of outcomes. You learn from that data, not AI. You learn from that data. You take your experience and your intuition, and not intuition, your experience and your data. You know, make decisions on that. We're going to have some borrowers that show that behavior. By and large, we should have many more that don't.
Okay. Good. I mean, I think the, you know, maybe if there's, you know, as you think about kind of the, you know, the you, you, you have now have a forecast out, like, just for this coming quarter.
Yes.
As you know, as you think about what could drive, you know, significantly better performance for LendingClub in 2023 or worse, like, what are the, you know, what are the things, obviously, you know, that, put aside employment for the moment.
Mm-hmm.
Are there any other things that we should be thinking about that are gonna significantly drive that performance, you know, as you work through the year?
Yeah. 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, you know, the number one 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 number one 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.
I think even a pause by the Fed at this point would be extremely helpful, allow us to catch up, you know, with that lag that we have from the rate increases that have already happened. I think that would be great. And then, you know, the capital markets, the ABS markets coming back, we do not fund there.
Right.
It is a very good corollary to many of our marketplace loan buyers.
Right. Maybe, yeah, that's a good, you know, when you talk about that, that lag and, you know, has the issue been or, you know, 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, you know, doing securitizations that used to be 2% and are now 7%.
Yep.
Right? I mean, it's, you know, it's, it's not, you know, it's a full 500 or 550 basis points higher cost of funds. And so, you know, do you think that there, there will be, you know, some easing from a competitive standpoint in terms of that pricing during 2023?
I think so. It gets back to sort of the economic rationality that we're hoping to see across the industry. They maybe, maybe I misunderstand some of their economics. And it is rational. I think, you know, if we go back to Q4 for a moment, I would say I, 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. Pricing gets more in line with what we could expect. Listen, we, 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. You know, 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'll be a much more stable 2023.
Very good. With that, please join me in thanking Drew and LendingClub. Thanks.