LendingClub Corporation (LC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to LendingClub's Fourth Quarter of 2015 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to James Samford, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to LendingClub's fourth quarter of 2015 earnings conference call. Joining me today to talk about our results are Renaud Laplanche, Founder and CEO; and Carrie Dolan, CFO. Before we get started I'd like to remind everyone that our remarks today will reflect forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release, the related slide presentation, and our Investor Relations website and our Form 10-K filed with the SEC on February 27, 2015 and our Form 10-Q filed on November 3, 2015. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information of our future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and the accompanying investor presentation are available on our website at ir.lendingclub.com. Unless specifically stated, all references to this quarter relate to the fourth quarter of 2015 and all year-over-year comments are comparisons to the fourth quarter in the prior year. And now I'd like to turn the call over to Renaud.

Good morning. We had an amazing company performance in 2015. We continue to deliver on our mission to profoundly transform the banking system and make credit more affordable and investing more rewarding. We reached 1.4 million customers, have continued to deliver record level of customer satisfaction, paid consumers hundreds of millions of dollars in the cost of credit and generated an average 7.8% net return to platform investors. We enabled $8.4 billion in loans, doubled revenue and tripled our EBITDA. I’d like to thank all of our employees, customers, investors and partners, for making 2015 such a magic bond year. We are now looking ahead at 2016 with much confidence in terms of our ability to continue to grow at a rapid pace while maintaining high credit standards, investor returns, profitability, customer satisfaction and operational discipline. We believe the market for personal loans will continue to grow rapidly as more consumers discover the benefits of installment loans as well as a way to refinance the credit card balance or avoid charging their credit card altogether. A survey from Bankrate.com [deBanked] found that an estimated 24 million Americans or 10% of the adult U.S. population expect to take a personal loan in the next 12 months. In addition as previously announced, we will be entering into a new major consumer credit category in the first half of this year. Carrie will be discussing the results of the fourth quarter and the details of our efforts, but today I’d like to spend the rest of my time discussing the breadth and depth of our investor base, looking at our credit performance and highlighting some of the marketplace dynamics that continue to play in our favor and we believe would become even more of a competitive advantage in changing economic conditions. I will then conclude with a marketing products and regulatory update. Last year we focused our earnings goals mostly on borrower dynamics and marketing efficiencies. Today I’d like to spend more time on the investor side of the platform. In particular, given recent market conditions, I’d like to give you our views on how our market base will perform for investors in the event of an economic downturn and how we’d expect credit performance to impact supply of capital in that scenario. Carrie will later share more insight into what we’d expect our own financial performance to be in that scenario. Starting with supply of capital, we believe that one of our competitive advantages and benefits of the market based model is the broad diversification of our funding process including a strong retail investor base. In 2015, 54% of the $8.4 billion invested on our platform came from 115,000 individual investors who invested in a self directed way or through a dedicated fund or managed account. Banks and finance companies provided 25% of the funding and other institutional investors such as pension funds, insurance companies and asset managers provided the remaining 21%. We believe that retail investors will continue to be a dependable source of capital especially in the event of an economic downturn. Accordingly, we are investing in more products, management and marketing resources into our retail capabilities this year. We have opened in 15 new states over the last 12 months and our platform is now available in 43 states and in the District of Columbia. Slide 13 of our earnings presentation shows the growth in average retail account value over time by vintage of account opening and the extraordinary loyalty and predictability of retail investors. This is a differentiated competitive advantage and a strategic asset for Lending Club. Another dependable source of capital is the outstanding loan portfolio itself. We ended 2015 with a total servicing portfolio of $9 billion generating significant principal and interest payments that can be reinvested into new loans. In 2015 the loan portfolio generated over $4.1 billion of principal and interest payments and we estimate that in 2016 we will deliver at least $7 billion of principal and interest payments to investors, most of which will be available to fund new originations. That stream of payments from the existing portfolio is our most predictable source of capital provided that we can continue to deliver attractive returns, predictability and diversification benefits to investors relative to other investments. And this leads me to credit performance. I am not currently seeing any signs of broad based devaluation of credit quality or increase in delinquencies. Slide 18 and 19 of our earnings presentation includes the latest loss curve by vintage of origination showing that recent credit performance remains in line with past performance. We are being cautious however about the economic environment and particularly the pace of economic growth in the U.S. While many economic indicators and most credit performance metrics remain positive, we are watching all indicators closely and that’s taken. And will continue to take in the next few months a series of precautionary measures designed to prepare our platform and make sure investor returns continue to math expectations should the U.S. economy stop devaluating. In January we raised platform interest rate by an average of 32 basis points, primarily to increase loss coverage for investors. We contemplated that increase in the higher risk grade that will be the most impacted by a slowdown in the economy. That rate adjustments came on the fear of a recordable rate increase of 25 basis points following the third rate hike in December. The combined effect of these two rate adjustments creates a buffer of 57 basis points for our investors. We constantly monitor performance indicators and used scenario analysis to model projected returns and there are variety of economic conditions particularly downturn scenarios. We illustrated on Slide 20 and 21 of our earnings presentation, the outcome simulation using the Moody's S3 scenario which models a quite severe downturn with the unemployment rates rising to 8% by the first quarter of 2017. That scenario is similar to the trespass contemplated in the Fed CCAR 2016 adverse scenario also shown on Slide 20 for comparison. Slide deck 21 shows the expected platform performance in that environment would come in at a respectable 4.9% return, which we believe would enable us to attract a significant amount of capital in such a downturn scenario. In addition we believe we’ll benefit from other trends. In an economic slowdown investors tend to [feed] the stock market and invest in fixed income. For example, Slide 22 shows that fixed income funds received significant capital inflows in the last two recessions of 2001 and 2008. So firstly, for the attractiveness of the platform in the downturn can be found in our experience in the last crisis. While we recorded our worst vintage performance in 2008, the manner in which investors experienced portfolio returns is influenced by the age of the portfolio and it did all increase in returns typically like origination by a few quarters. So the worst overall portfolio return came in the year later in 2009 with a 2.4% average return to investors. On a relative basis investors were very satisfied with these returns and we saw a continued flow of capital to the platform with 2009 net capital inflows jumping 200% from 2008. Our current downturn simulation delivers even better returns and was experienced by our investors in 2008 and 2009 due to a less severe economic scenario along with better rate management under rating models and collection capabilities that we have developed since 2009. Importantly, included in this simulation are assumptions that we will make two successive interest rate increases of 100 basis points each in 2016 and 2017. This brings me to marketplace dynamics. Our ability to adjust interest rates based on economic conditions, credit performance and investor appetite is a key benefit of the marketplace model. With billions of dollars of capital changing hands on our marketplace every quarter, we believe there is sufficient volume of transactions to quickly discover a clearing price and rapidly implement pricing changes. Any interest rates increase in the downturn will be passed on to borrowers as we gain more pricing power with the supply of credit likely drawing up in that scenario. In the downturn, banks also cut back existing lines of credits and slow down new originations under the combined effect of higher loan losses and liquidity ratio requirements being impacted by growing loan loss reserves. Specialty finance companies typically cut back even more as they are often exposed to funding risks due to the high concentration of the funding sources often residing in a couple of large warehouse lines of credit. This is where our highly diversified base of retail investors and long-term focused institutional sources of capital such as pension funds and insurance companies, we believe will make the most meaningful difference. To summarize these platform dynamics in the downturn, we believe that we will gain pricing power and face the [variable] competitive environment on the borrower side but only as to quickly address interest rates up. Therefore the adjustment combined with diversity and breadth of our investor base together with the short term nature of the loan portfolio that generates high monthly payments and makes large amounts of capital available to investors, for investors to redeploy on the platform at higher rates, will provide more than enough capital to continue growing originations in a responsible manner and rapidly capture market share, particularly as other market participants cut back. Now let me switch gears for a marketing and product update. On the borrower side, we continue to efficiently drive growth and in line with our plan recorded only a minor increase in sales and marketing costs from 1.87% of originations in Q3 to 2.01% in Q4, despite the expected adverse seasonality. We believe some of the factors that offset that negative seasonality were record high customer satisfaction, increased trust in our brand, benefits of scale, a highly diversified set of marketing channels and the continued optimization of our products and user experience. As I indicated earlier, we also reallocated some marketing dollars to retail investor acquisitions as we believe retail investors will provide a dependable stable source of funding in the next economic cycle. We also rapidly expanded the number of states open to retail investors which makes our marketing spend on the investors side more efficient. Overall, we continue to see a exciting new season of manageable impact of competition coming from smaller platforms and expect that impact to further decline as venture capital funding starts slowing down. Compared to other platforms, we continue to benefit from larger scale and network effects and continue to widen the gap against our nearest competitors. We remain the undisputed market leader and grew faster than the second largest player again this quarter as in four of the last five quarters, both in percentage and dollar terms, with the second largest player growing at 7% quarterly rate compared to our 15% quarterly growth. Now let me give you a quick update on the newer products, education and pension finance and small business. Education and pension financing growth continues to accelerate year-over-year as our investments in field sales force and the redesign of some of the marketing funnels and improvements to customer experience continue to pay off. Q4 and Q1 are seasonally slower quarters, but despite of that we saw very strong results ahead of our expectations. As for our small business lending platform, in Q4 we [ordered] a new line of credit product. We are very much encouraged by the early traction of this new product, which gives small businesses convenient and flexible access to affordable credit with interest rates starting at just 5.9% and no fee on unused lines. We launched this product in November and in December it already represented over 20% of new small business originations. These new products together with the ramp up of previously announced partnerships made small business our fastest growing product last quarter in percentage terms. Separately we continue to be on track with our product development and testing plans for a major new consumer product launch in the first half of this year. Let me finish with a quick update on regulatory trends, focusing on three discreet matters, our loan origination framework, recent FDIC guidance on marketplace lending and the California DBO survey. First, in regards to our loan issuance framework, we continue to believe that the facts in the Madden versus Midland decision rendered by the Second Circuit Court of Appeals last year are very different from the way we operate. Nonetheless as a note of caution we are rolling out this quarter a number of operational and contractual changes to our relationship with our issuing banks that give us a high level of confidence that our issuance framework would meet the tests used in the Madden case if a similar action was ever brought against us. In the meantime loans made to residents of New York, Connecticut and Vermont continues to represent roughly 10% of total platform originations last quarter and were funded by the same mix of individual and institutional investors as in previous quarters. The second update concerns the FDIC publication two weeks ago, it was a very helpful communication on market based lending. The latest supervisory insights report provides another view of the market based lending model and associated risks, highlights the importance of the primary business strategy and offers resources for banks to consider when engaging in market based lending activities. This is significant as we believe this is the first time that a federal banking regulator has provided guidance to member banks on partnerships with market based lending platforms. Given our extensive relationships with banks we welcome the FDIC’s provision of a framework for its members and believe our bank partners to already be in compliance with that framework. Third the California Department of Business Oversight published an online survey in December and asked 14 companies ranging from PayPal to Lending Club to complete the survey by March 9. The purpose of this survey is to assess the industry size in California, better understand the various loan and investor programs and determine whether California State licensing regime is appropriate. We are a licensed lender in the State of California and are not expecting any significant developments to follow the completion of this survey. More generally we intend to continue to monitor and influence regulatory development. We believe that many of the likely developments will play to our strength in terms of compliance, transparency, consumer friendliness and responsible lending. We will expect any new regulation of supervision to impose greater transparency in loan terms and disclosures which are areas where we are already ahead of the market. In conclusion, 2015 was an exceptional year in terms of our company’s performance and despite recent macro concerns and market volatility, I have the utmost confidence that we can continue to deliver rapid and responsible growth in 2016. Our 1.4 million highly satisfied customers, the depth and durability of our funding sources, consumer friendly products, proactive dialog with regulators and growing network effects make me believe that we are poised for another exciting year in 2016. With that let me turn the call over to Carrie to go into more detail about our financial results, our guidance for the next quarter and full year outlook.

Thanks, Renaud. This has been a phenomenal year for Lending Club and given our continued business momentum, consistency and resiliency of our business model, it gives us confidence in our 2016 outlook for rapid and responsible growth along with continued margin expansion. I’d like to start today by walking you through our fourth quarter results. Following up on Renaud’s downturn scenario comments, I would then like to give you our thoughts on how we would expect our financial model to perform in an economic downturn. I will then wrap up our 2016 first quarter and full year guidance before opening up the call for questions. As a reminder, all year-over-year comments are comparisons to the fourth quarter and the prior year. Before reviewing our fourth quarter results, I wanted to highlight that we made a few adjustments between our operating expense lines. During the quarter we reviewed and refined the definitions we used to classify expenses. Our objective was to ensure that the expenses in our contribution margin directly relate to current revenue generation. As a result, some expenses were moved up into the contribution margin expense lines, while others were moved down into technology or G&A. The net change of these movements lowered our contribution margin expenses by roughly $1.8 million in the fourth quarter of 2015, which increased our contribution margin by 1.4 percentage points. To help facilitate comparability to prior quarters, we re-casted our prior period financials to reflect these expense adjustments. It is important to note that this recasting did not change or impact revenue, total expenses, adjusted EBITDA or our GAAP results. Page 41 in our earnings deck summarizes the impact within each expense lines over the last eight quarters. In addition, as a one-time accommodation, we have posted an excel file on our IR website with these changes. The 10-K will also reflect these adjustments and all of my comments today will be comparisons to the re-casted historical results. With that, let's turn to the results. The fourth quarter was another solid quarter for us with our financial results again topping our expectations. Total originations in the fourth quarter were $2.6 billion, an increase of 82% compared to last year. Operating revenue in the fourth quarter was $134.5 million, up 93% year-over-year. We are pleased to report that our revenue growth continued to outpace origination growth as revenue yields continue to expand this quarter. Our revenue yields, which is operating revenue as a percent of originations was 5.21%, up 6 basis points sequentially and 29 basis points year-over-year. 4 basis points of the sequential yield increase was due to a one-time adjustment driven by the collection fee changes made last quarter. On a go forward basis we expect our revenue yield to trend closer to 5.15%. Transaction fees, which are earned immediately after a loan is originated, represented roughly 85% of operating revenue and totaled $115 million, up 82% year-over-year. Transaction fees as a percent of originations were down 3 basis points sequentially to 4.46% and were lower by 2 basis points from last year, primarily driven by slight mix changes within our three products divisions. Servicing and management fees, which are earned over the life of an investment totaled $15.3 million in the fourth quarter, up 117% from last year. Servicing and management fees as a percent of originations increased 9 basis points year-over-year to 59 basis points. As we have previously discussed, in the fourth quarter of 2014, we started charging investors collection fees, which accounted for the majority of the 9 basis point year-over-year increase. On a quarter-on-quarter basis, servicing and management fees increased another 6 basis points of which 4 basis points was due to a one-time adjustment. The remaining improvement is from favorable investor mix trends with demand coming from investors who pay marginally higher servicing fees. In the fourth quarter, our servicing portfolio which is comprised of all the loans we serviced and include loans that we sold but continue to service reached $9 billion, up $4.3 billion or 90% from last year. Servicing and management fees as a percent of our average servicing portfolio increased 5 basis points year-over-year to 18 basis points, and were 2 basis points higher than the third quarter. As noted, favorable investor mix trends and collection fees drove the annual improvement. Details showing these trends are noted on Page 37 in our earnings presentation. Other revenue, which grew $5 million from the prior year, grew as a result of higher gains associated with selling home loans at more favorable rates and added 22 basis points to the year-over-year revenue yield expansion. Now turning to expenses. Sales and marketing expenses in the fourth quarter were $51.8 million, up from $25.2 million a year ago. As a percent of originations, sales and marketing expenses were 2.1% this quarter, which was 23 basis points higher than a year ago and 14 basis points higher sequentially. As expected, costs were higher in the fourth quarter due to seasonal headwinds. Given the seasonality that also exists in Q1, we expect costs to stay at elevated levels. Origination and servicing expenses in the fourth quarter were $16.9 million, up from $11.1 million last year. As a percent of originations, origination and servicing expenses were 13 basis points lower than last year and quarter-over-quarter were down 6 basis points to 66 basis points. Our technology investments in automation and scale continue to provide significant margin leverage. Both sales and marketing and origination and servicing expenses are netted against our operating revenue to derive contribution income and a contribution margin, which focuses on the efficiency at how we drive our revenue. On a dollar basis, our contribution income in the fourth quarter was $65.7 million, up 98% year-over-year. As a percent of operating revenues, our contribution margin remained strong at 48.9% in the seasonally weaker fourth quarter up from 47.8% in the prior year. As a percent of operating revenues, our core personal loan contribution margin continue to exceed our long-term 50% margin targets, while our two less mature products, education and patient financing and small business remained a bit less efficient. The second set of expenses that are outside our contribution margins, but are included in our adjusted EBITDA margins, are engineering, product development and other G&A costs. In Q4 we increased engineering and product development expenses $2.3 million sequentially to $16.4 million, which grew in line with revenue quarter-over-quarter and remained relatively constant as a percent of operating revenues at 12.2%. We remain focused on hiring top talent to support our product development pipeline and continue to build up automation, scale and security as key competitive advantages. Other G&A expenses were $24.7 million in the fourth quarter, up 50% year-over-year. Operating leverage this quarter drove G&A expenses as a percent of operating revenues to 18.4% down 5.3 percentage points from 23.7% in the prior year. To derive our adjusted EBITDA we subtract engineering, product development and other G&A expenses from our contribution income. Fourth quarter adjusted EBITDA was a record $24.6 million up 210% from the fourth quarter last year, and exceeding our total adjusted EBITDA for all of 2014. Our adjusted EBITDA margin was 18.3%, up 6.9 percentage points from the prior year. Our stronger than planned revenue growth and continued G&A leverage during the fourth quarter drove the majority of our higher than planned adjusted EBITDA margins. Adjusted net income, which is GAAP net income excluding stock based compensation and acquisition related expenses was $20.8 million or $0.05 per diluted share during the fourth quarter versus $4.2 million or $0.01 per diluted share in the same period last year. Our GAAP net income was again positive at $4.6 million or $0.01 per diluted share compared to a loss of $9 million a year ago. The difference between GAAP and adjusted net income is primarily due to stock based compensation, which increased $2.4 million year-over-year to $13.7 million. Stock based compensation as a percent of operating revenue declined from 16.2% last year to 10.2% this quarter. Now turning to the balance sheet. As a reminder, in contrast to traditional banks and other balance sheet lenders, in our model capital to investment loans is provided from loan sales and securities issued to investors rather than from equity deposits or borrowed fund. As a result we do not assume credit risk and the loan sales and securities issued to investors math the balances, interest rates and maturities as the loans issued to borrowers. When reviewing our balance sheet you will see both the loans as an asset and the corresponding notes or certificates as the offsetting liability. The changes in values of these loans' notes and certificates generally offset one another and do not impact our equity. As of December 31st, total balance sheet assets reached $5.8 billion. Of this $4.6 billion is in loans, $921 million is in cash and securities available for sale and the remaining $317 million is in other assets. We think about our cash reserves in terms of two buckets. First, we want to keep a robust operating reserve for any unexpected challenges; and second, we want to have sufficient reserves for strategic opportunities including potential acquisitions that could help accelerate our product roadmap or give us access to new distribution channels. We believe we have sufficient reserves in these two buckets and can allocate additional unused liquidity including free cash flows from operations to a share buyback program that we believe is accretive to shareholder value at current prices. We believe our growth prospects and ability to effectively manage risks to growth are not fully reflected in our valuation at the present time. Looking at investment options from a peers' financial standpoint, we have not come across any potential acquisition target offering this kind of value particularly in light of our growth rates and our level of visibility into future growth and margin expansion. Accordingly, our Board has authorized a share buyback program of up to $150 million over the next 12 months, which is roughly equivalent to our adjusted EBITDA guidance over that same period. With $921 million in current cash and securities, we believe the buyback program could create long-term shareholder value by retiring at the current stock price level over 20 million shares, while leaving a robust operating cushion and sufficient reserves for strategic investments and acquisitions. Before sharing our guidance thoughts, I wanted to spend a few minutes talking about how we believe our financial model might perform in an economic slowdown. As we have discussed, we are different from traditional balance sheet lenders in that we do not earn net interest income and do not reserve the loan losses. As a result, our revenues and margins would not be directly impacted by higher funding costs or credit losses as these changes flow through equally each side of our marketplace, while for balance sheet lenders revenue and profitability would compress as loan returns fall and cost of funds rise. On our marketplace, changes in demand for loans and supplier capital would impact origination volumes, which could impact our profitability. As Renaud shared, we believe we can minimize potential volume impacts by rebalancing supply and demand through pricing adjustments and continue to grow originations even in periods of slower economic growth. However, in a scenario where we do experience a slowdown in origination growth, we believe our revenue yield and contribution margin would remain relatively consistent with today's levels. Our contribution margin expenses directly drive revenue and are roughly 75% variable. These variable costs are driven by originations and include borrower and investor acquisition costs, issuing bank fees, and credit data cost. Given this level of variable costs, we believe we would be able to maintain our contribution margin in the mid to high 40% area even if our volumes were significantly lower. Our historical performance supports this estimate. In the fourth quarter of 2013, we facilitated approximately $700 million in loan originations, which is about a quarter of our current run rate and posted a contribution margin of 47.5%. We also have significant leverage in our adjusted EBITDA margins. As we’ve shared, our technology and G&A spending has not been a function of current growth or revenue. This spend is highly discretionary. The pace of our investments have been forward looking as we develop new products and reinforce our infrastructure for future growth. As a result, we believe we could slow our planned spending in technology, product development and G&A today and still support our 72% growth in 2016. Under this scenario, we again believe we would show solid margin expansion. While slowing our technology and G&A investments could increase margins and free cash flow in the short term, the trade off would give us less support for maintaining rapid growth in late 2017 and beyond. With that, let me give you our thoughts about 2016 and first quarter guidance. Given our large addressable market, positive growth trends, resiliency of our online marketplace, the strength of the Lending Club brand, and the depth and diversity of our investor base, we are raising our full year growth target midpoint from 70% to 72% year-over-year and also increasing our target adjusted EBITDA margin midpoint from 18% to 19%. Our full year operating revenue range increases to $730 million to $740 million, up from our previous range of $714 million to $717 million, based on prior growth expectation of 70% and stronger 2015 results. Full year adjusted EBITDA is now expected to increase from roughly $129 million to a range of $130 million to $145 million implying a midpoint margin of approximately 19% or 240 basis points of margin expansion compared to 2015's annual margin of 16.3%. For the first quarter we are providing operating revenue outlook in the range of $147 million to $149 million and expect first quarter adjusted EBITDA to be in the range of $25 million to $27 million, representing an adjusted EBITDA margin of 17.6%. As a reminder and similar to last year’s pattern we expect negative seasonal pressures in the first and fourth quarters and stronger quarterly growth in both the second and third quarters. With that, let's open up the call for questions. Operator?

We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Vasu Govil with Morgan Stanley. Please go ahead.

I guess I'll start out with guidance. It appears that you guys are continuing to see pretty healthy growth despite increasing fears about a potential downturn. At this point are you baking in any conservatism in your view based on potential for economic stress or is it more of a business as usual approach?

We’re obviously watching the environment with I think as much question as of investors out there. We’re not currently seeing any sign of devaluation either in credit quality or in consumer demand for credit, or in investors' appetite for credit investments. What we have done is essentially raised yield on the platform quite a bit over the last couple of months with two interest rate hikes of 25 basis points and then another 32 basis points on average. That really gives investors additional loss coverage in case the economy does start slowing down later this year. So, with that in mind we are essentially confident to raise our guidance from where we were just a few months ago and continue to have a high level of confidence in our ability to deliver that growth.

And just a quick follow-up. There has been some recent press articles floating around that suggest that Lending Club may be open to securitizing its own loans for the first time. Just want to track if there is appetite to do that? And if there is, what sort of balance sheet risk would that expose you guys to?

We’re very attached to the market based model. We think it is a superior model than any other models. We have no intention as a matter of business model to start up investing our balance sheet and then take balance sheet risk in our loans. As we said in the past, we kind of always use our balance sheet on a temporary basis for test programs, but this will always be very small. So again no change in the business model. I think what’s going to continue to happen is some of our investors on the platform can turn around and refinance themselves on the securitization method and we want to support them and do what’s right for them.

Our next question comes from Ralph Schackart with William Blair. Please go ahead.

Renaud on the call today you talked about a change in the investor mix and potentially more of a shift to retail investors that may be potentially a little bit sticky here in a softening economy. Can you talk about the marketing programs you have in place there? And then as a follow-up, as the VC funding environment assumingly sort of drying up, can you maybe talk about some more of the rational issues you’re seeing in the marketing channels and have some of your competitors started to kind of pull back in some of that rational spend? Thanks.

We continue to like the retail base. We started as a pure retail platform. I think over time we got into a rate of healthy mix of institutional and individual capital. So as the churn level, they -- so in the last quarter if you look at the standard program we had 45% of the funding coming from individual investors investing in managed account or fund and then another 17% investing on a [subjective] basis. So essentially the very vast majority, so 62% of the funding already comes from individual investors and we want to preserve and then potentially grow that share of retail investors. So make sure we are allocating more resources to that side of the marketplace and ramping up not just marketing programs but also product development and those management resources so we’re growing the retail theme factor than we had in previous years. So you’re going to see more focus on retail coming from us this year. And by the way, leading to your second question around competition, we really think that retail is a core competency and a core competitive advantage of Lending Club and pretty much no other platform has any scale in retail distribution. So we think that’s going to be a nice differentiator, particularly if and when the economy starts slowing down, because to your point we believe retail is more sticky than any other source of capital. But the competitive environment in general, I think you’re absolutely right to point out that I think venture capital investments in general and particularly in [syntax] has reached its peak last year and so we anticipate it's going to continue to slow down this year. So presumably providing less capital to smaller players and we expect as a result to start seeing the less competition from the smaller platforms. That being said we said last year that we didn’t see much of an impact from the increased competition. So in parallel we are not anticipating a huge boost from a lower spend from the smaller platforms, but still are going to be marginally helpful.

Next question comes from Stephen Ju with Credit Suisse. Please go ahead.

So Renaud your SMB focus business is still relatively nascent versus your consumer business, so can you give us your perspective on the similarities and differences there in terms of the data you can collect? How you’re scoring works differently? How many SMBs you have cumulatively reached and how many you think can be addressable? And Carrie I think this is consistent with your prior quarter disclosure and your contribution margin for the core consumer lending product is now above 50% and your newer categories are below that. So what needs to happen I guess from a product perspective with the other categories to someday approach the levels of consumer? Thanks.

So we are very happy with the fourth quarter in small business. As I mentioned earlier we just launched a new line of credit products that have got some instant traction and so we don’t track for that in November, by December that was already 20% of our origination volume due to small businesses. And it's a great product. It's a very low cost and convenient access to capital for small business owners with temporary cash flow needs. So you asked about differences and similarities with consumers. Maybe a lot of similarities in terms of the process we have in place, in terms of the marketing, the acquisition funnel, in terms of the sources of capital to fund these loans. Now there are lot of differences in terms of specific marketing channels that work with small business owners and also a lot of differences in the data available to us. The data used on the consumer side is really mostly credits that are enhanced with financial and a bit of transactional data and some macro data. With small business we have little bit more freedom in terms of being more innovative in terms of data sources, because I think there was less of a privacy concern from small business owners. I think they’re more willing more to share information about the business than an consumer would be willing to share about themselves and there is more data available on line that can be used to underwrite businesses. So we are using these additional data sources to the full expense. But just back to the small business compared to consumers I think the big news in the quarter was that the small business platform was the largest growing, the fastest growing segment of the portfolio. And that doesn’t have the same level of efficiency as consumer side yet but it's also a matter of scale. I think it's just not as mature, not as predictable and not as efficient as the consumer business, but that has been up and running for eight years. We only launched small business 18 months ago.

Yes, just to add to Renaud’s comments Stephen is that, I would also say in addition to the efficiency. I mean we are still testing new channels and really investing in building the businesses, and that will continue to keep those margins a lot sufficient over time. And as we continue to grow beyond what we’re doing today over the next couple of years, the efficiencies will just come based on the track record and the diversity of how we acquire new borrowers.

The next question is from Heath Terry with Goldman Sachs. Please go ahead.

The guidance for Q1 obviously implies some acceleration and given how far we already are in the quarter I would assume it’s largely because of what you’re seeing in the market. Can we get us a sense of to the extent that you are seeing acceleration? How much of that do you feel like is coming from share gains that are the result of your improving competitive position or some of your competitors being in a relatively weaker position given some of the changes in the market, versus an overall acceleration for demand as the space becomes more mature or consumers start to focus a little bit more on what they’re actually paying for credit?

I think we continue to see interest on -- but a lot of appetite both sides. I think with the awareness coming up on the consumer side and even the general level of interest rates coming up you see more need for refinancing and you see more consumers being aware of personal loans as an alternative to credit card. And there is this bank rate survey out there showing that 10% of U.S. adult population was considering taking a personal loan sometime in the next 12 months. So that's a very big increase in terms of awareness and likely able to transact compared to previous years, so a lot of tailwind on the consumer side. And on the investor side I think the markets are turbulent and so we see sometimes divergence of behavior from different buckets of capital but that’s where the diversification of funding sources really shows the power of the model. And in any type of environment, any type of interest rates or economic environment, we can increase the focus or decrease the focus on different sources of capital whether it's retail, or institutional. And within institutional there are very different behavior from asset managers, pension funds and insurance companies, but have different risk appetite and different investment objectives. So I think what you’re seeing reflected in our confidence is again the diversity and the breadth of the platform participants on both sides, borrowers and investors.

The next question comes from Josh Beck with Pacific Crest. Please go ahead.

I had a regulatory question for Renaud. It sounds like the operational and contractual changes that you’re putting in place with your issuing bank partners, is under the assumption that the current Madden decision is upheld and does not go to the Supreme Court where it maybe get overturned. Are those changes already in place and do you foresee any other changes in who you use as your primary issuing bank partner?

No. We do not foresee any other change and you are right, changes are being made now as we speak and will be completed by the end of this quarter. I wouldn’t put too much focus on this particular change. I think the main message regarding Madden is we strongly believe that we’re in a very different position than the parties were in that case and particularly our cash flow situation is very different. The changes we’re making really are made as of -- being made as in the balance of caution and desire to be prudent. But if you look at what’s happening on the platform we aren’t seeing as of any change in the volume of origination coming from or going into Connecticut, New York and Vermont, or any change in the mix of institutional and individual investors, investing in these loans. So really no change from that standpoint.

And when you think about any changes that would maybe prompt you to move to a series of state licenses, how are you thinking about that and is that a possibility of that at some point?

I think that’s a possibility, but it's an unlikely possibility. So certainly we have a large number of state licenses. We started operating under state licenses when we launched in 2007, that’s the way we operated. And what we found is that a bank issuance network, a bank issuance framework is more efficient, it's more cost efficient, it's a better experience for consumers who all get the same terms irrespective of their state of residence. I think it's more fair from that standpoint. And it's also a framework that provides more oversight because then you have a [majority] of regulated entities, so essentially providing -- receiving from in the case of Fed Bank from the FDIC and then providing a lot of oversight into the program. So we think it's better for consumers, it's a safer model and it's a more efficient model.

And Carrie I had a question for you on the sales and marketing efficiency. I know there is little bit of a reclassification in the last two quarters that healthcare, SMB and education was basically 12 basis points to 15 basis points headwind on a year-over-year basis. Restated does that change much and is there any further color you can give us on the Q4 impact from those channels?

So, previous comments around the mix between personal loans and the other business that I’ve shared hasn’t changed. This quarter the driver year-over-year and quarter-over-quarter was all due to personal loans, both education and patient finance and small business were relatively flat, relatively stable.

Our next question comes from Bob Ramsay with FBR. Please go ahead.

I just wanted to touch on, you mentioned that the increase in rates in January provided investors with a higher degree of loss coverage, whether you guys are not seeing any signs of higher delinquencies or softness anywhere in the book. I am just curious what prompted that change?

So I think environment, the global environment has changed quite a bit over the last just 40 days. There are more concerns about the global growth in the economy and hence concerns about how it's going to impact the U.S. economy. I think we don’t pretend to know more than anybody else as to where we’re going. But I think in times of uncertainty it pays to be prudent and that’s why we have acted. Essentially we represented a need for a rate increase and provided that additional loss coverage to investors and rates are very dynamic on the platform. So depending on how the economy evolves and we’re watching for any sign of potential slow down very carefully, both in terms of the economy in general but also in terms of our own portfolio. And if we see any other sign of degradation -- any sign of degradation we will act on it by raising interest rates and vice versa, if the economic outlook improves we might take interest rates down again. It's a very dynamic process. I think it's really a benefit of the market based model to be able to discover pricing equilibrium in a very nimble and quick way and adjust quickly. So we’re planning to take advantage of that and continue to be -- to continue to adjust rates on the platform as the environment continues to change and as we gain more visibility going into the future.

And I am curious did the change come following discussions with some of your larger institutional buyers of your loans or did it reflect any shifts you’ve seen in demand to invest in the loan product, or is this something that was more initiated purely from your zone?

Every interest rate decision is informed by what we see on the platform and that’s what I mean by the online marketplace and the discovery process. There is now other volume going through the platform where billions of dollars of capital changing hands on any given quarter. And we have a large number of touch points and we have some discussions and traditional investors. As I said it's a market, our investors -- many investors have different views in this market. So, there was no need to increase interest rates as a matter of driving the capital inflows. But there are definitely investors on the platform and in general in the market who have more bearish views on the economy and we incorporate that includes into our own views and again decided to be prudent.

Then just last question on this subject, in terms of rate sensitivity on the part of the borrowers from -- in the categories where you did change rates. Have you seen any real change in the demand for the product or have you seen other competitors in the place make other adjustments in rates as well?

So I think in general our customers are fairly rate sensitive. The rate increase was concentrated in the higher risk grades that are the least price sensitive. If you look at the areas of A, B, and C grade, higher credit quality, very price sensitive customers who’ve a lot of options, no particular need for additional credit and are making decisions, very rational decisions of optimizing the cost of their credit. As you move to down the grade there is less price sensitivity but also greater variability in different economic environment. So that’s what also led us to concentrate the rate increase in that segment.

Shifting gears, so just wanted to touch base on the buyback. I mean I think that obviously shows how undervalued, yes?

We’re going to have to shift to the next caller's question, sorry about that.

Our next question comes from Michael Graham with Canaccord. Please go ahead.

Just want to ask a couple of questions about your different products. First of all on the education and patient products. Is there any significant overlap there with your credit card consolidators? I am wondering, also if you could comment on repeat borrowing in the quarter and any trends you’re seeing there? And then just lastly quickly, do you have any update on sort of you just got a big new product coming later this year. Is your goal to become a broad based platform for consumers' financial needs, or is it more modest than that? Thanks.

The stated goal is quite ambitious and we believe we can profoundly transform the way consumers access credit, and the value we deliver to consumers and make credits in general more affordable. But also on the other side make investing more evolving and we can achieve both goals by operating efficiency at a low cost and delivering passing on the cost savings to both sides of borrowers and investors. And so more specifically in terms of consumer credit products, our goal is eventually to cover the entire range of credit products including the auto mortgages, student loans. So essentially it’d be helpful to our customers at every stage of their life when credits can be useful to them. So we said previously and then just confirmed on this call that we are now gearing up for a major consumer credit product launch in the first half of this year. And so that would be really the first of major expansion to our product suite but it's not going to be the last. The plan is really to cover all credit needs of a bank.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.