LendingClub Corporation (LC) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the LendingClub Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Simon Mays-Smith, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to LendingClub's fourth quarter and full year 2019 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the first quarter and full year 2020 and the expected timing and benefit of a pending acquisition, certain product initiatives and obtaining [indiscernible]. Our 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 and our most recent Form 10-K and Form 10-Q filed with the SEC as well as our subsequent filings made with the Securities and Exchange Commission including our upcoming Form 10-K. 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 or future events. Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release and related slide presentation. The press release and accompanying presentation are available through the Investor Relations section of our Web site at ir.lendingclub.com. And now I'd like to turn over the call to Scott. Scott?

Okay. Thank you, Simon, and good afternoon everybody. The exciting news today that I'm absolutely thrilled to be able to share and that is that we have announced a truly transformational acquisition one made possible by all of our work over the past several years that provides a springboard to our future. With the acquisition of Radius Bank, we will dramatically enhance the resiliency and earnings trajectory of LendingClub, while unlocking the ability to re-imagine banking and create a category defining experience for our members. We expect this transaction will pay for itself in two years and will vote LendingClub towards the top of its new peer group. Most importantly, it positions us to drive significant shareholder value over both the medium and the long-term. Upon receiving regulatory approval, we will be among the new group of peers, but also standing apart. As the world's first marketplace bank bringing the ethos and culture of a technology company directly into the world of banking. There's so much to be excited about here that I'll focus most of my remarks today on this topic. I'll leave it to Tom to cover our 2019 results and the outlook for 2020. But suffice to say, I am very pleased with how we've been executing and with our financial position as we enter the year. So now I'm going to answer three questions. Why now? Why Radius? And what next? So first, why now? It's a simple answer because now we're ready. We have executed against the plan we outlined at our Investor Day in 2017 and regained our market leadership, put ourselves on the path to sustainable profit, an important prerequisite to becoming a bank and built the foundation for a lasting relationship with our customers. Why Radius? Because simply put, it's a perfect marriage of digital innovators that brings together the two sides of a bank balance sheet at scale. LendingClub brings the leading digital asset generation platform and Radius contributes a leading online deposit gathering platform. Beyond that there are some unique attributes about Radius that I'd like to highlight. Radius is not a typical bank out of a group of thousands they are one of only a handful of digital banks featuring a national footprint with no legacy branch network. Radius has a culture of innovation and has built an extensible and modular technology infrastructure to deliver an award-winning mobile banking experience. That customer experience has helped establish Radius as a top-ranked online bank and a partner of choice for FinTech leaders such as Brex, NerdWallet, and NorthOne. And Radius has a strong mission driven culture that mirrors LendingClub's and a seasoned management team who are eager to accelerate the growth of the business. By combining LendingClub and Radius, we will add the capability to serve our members beyond the loan, to include deposits as a new funding source to our marketplace and to provide existing loan investors the comfort that comes from an established regulatory framework. Our analysis showed that the acquisition of Radius is a superior route to a bank charter than the de novo approach because we believe it will accelerate our earnings while reducing our execution risk. This really is a one plus one equals three equation and successful execution does not require a hypothetical synergies or strategic bets to deliver compelling shareholder returns. That's because there will be three straightforward sources of value. First, we recapture the dollars currently leaking from the value chain, specifically the fees and interest earned by our current issuing bank partners. Second, we will significantly reduce our cost of funds as we shift from warehouse to deposit funding. And third, we will increase and diversify our revenue by balance sheeting a portion of the higher grade loans we originate to generate interest income. As Tom will outline in more detail, these factors drive significant financial benefits for LendingClub and clearly demonstrate the power of a marketplace bank. So what happens next? We initiated conversations with regulators more than a year ago. And today's announcement, we'll formally kick-off the next phase. That means LendingClub is rapidly gearing up for an intensive approval process that we believe will take 12 to 15 months. During this time period, our financial focus will be on consolidating the gains we've made over the last three years and making targeted investments to set us up for success post approval. We expect those investments designed to maximize our medium term growth and profitability to be focused in two key areas. First, investment in our infrastructure to prepare for a bank charter, including investment in people, process and systems that will allow us to hit the ground running. And second, further investment in customer engagement functionality that will enable us to serve our members across a broader spectrum of products and services. These investments will include a system to provide a holistic view of our customers, the development of a uniquely LendingClub checking account and the launch of one-click loans enabled by continuous underwriting and ongoing credit monitoring. Importantly, we will continue to prioritize profit growth over revenue growth in 2020 being thoughtful about risks and pulling back on some growth investment to free up financial resources to fund bank charter transition costs. It's not every day that an entity generating more than 12 billion in loans a year seeks to acquire a bank and we start the formal regulatory approval process with a collaborative spirit and cautious optimism. Before I hand it over to Tom, let me talk about how this transaction will accelerate our ability to execute on our mission, which is to empower our members on their path to financial success. Since 2006, we've helped more than 3 million customers improve their financial lives by offering an easier, lower cost, more predictable path to paying down high interest debt. But beyond the loan, our members have been on their own to manage their cash flow and as a result, they end up paying hundreds of dollars in fees, most notably overdraft and monthly fees to their traditional banks, and they find it challenging to save. So how will our marketplace bank fit in? We believe the time is right for checking and savings to be re-imagined in a way that's free from legacy practices and systems. One where the success of the institution aligns with the success of the customer and we plan to be at the forefront of that re-imagining with a brand, the champions members financial success, with fairness, simplicity [within an heart] [ph] and with products that enable consumers to both pay less when borrowing and earn more when savings. Helping them make better decisions to manage their cash flow and giving them seamless access to fair and transparent credit when the unexpected happens and the cash simply isn't flowing. Our customers seem to think it's a good idea. In fact, 90% of LendingClub members pulled in a recent survey said they would consider switching to LendingClub as their primary bank. We've very much looked forward to giving them that opportunity. With that, over to you Tom.

Thanks Scott. I'm going to spend most of my time focusing on my comments on the Radius acquisition and our 2020 outlook. Let me start by summarizing our 2019 results. Overall, we're pleased with our performance, but again, prioritizing profit growth or revenue growth, we met our goal of being adjusted net income positive in the fourth quarter and over the second half of the year and even achieved adjusted net income profitability over the full year in line with the expectations we set out two years ago. We also exited the year with 20% adjusted EBITDA margins. Our record contribution margin was the key to that profitability. We've worked hard on that over the last three years growing our annual contribution dollars 77% to almost $400 million and our annual contribution margin 760 basis points to 51.7%. We've been able to do that by reducing M&S and O&S as a percent of originations from 3.39% in 2017 to 2.98% in 2019. This is 12% proven efficiency despite growing loan originations by 42% or $3.6 billion to $12.3 billion over the same period. These step change improvements in efficiency have been driven by four things. First, the success of our demand generation and conversion work. Second, the vendor renegotiation efforts and our move to Lehigh within our simplification program. Third, our emphasis on lower cost re-engagement of members from our rapidly growing membership base. Fourth, our data-driven focus on the end-to-end financial performance of each channel. This is enabling us to make better decisions through the funnel that affect credit and lifetime value. Achieving our strategic or financial goals in the last two years sets us up well for our next phase of growth. As we indicated through 2019 we believe a bank charter is an important part of that next phase. So let me turn to our announcement this afternoon that we're acquiring Radius Bank. As Scott set out, creating a marketplace bank, which combines the platform characteristics of our current business with the revenue and funding diversity of Radius Bank creates significant synergies and enhances our earnings power over time. These synergies are compelling and mean that we expect to receive cash payback on the premium and all acquisition costs in about two years. We believe this demonstrates the enormous shareholder value generated from this transaction in addition to the strategic advantages Scott outlined. So let me talk about how that value will be generated. For your reference, we posted the Radius acquisition deck which you can find on our IR website. First, as you can see on Slide 8, Radius will enable LendingClub to participate in a much broader part of the bank value chain, specifically in savings and loan issuance, lower cost of financing and diversified revenue from net interest income on high-quality prime loans held for investment. After completion Radius will become a national bank enabling LendingClub to be its own issuing bank and immediately captured the related economic benefits. We believe this will streamline our banking activities and improve our annual financial performance by approximately $25 million annually. The second benefit is lower cost of funds. As you can see on Slide 9, our expected weighted average cost of funding with Radius will fall by approximately 220 basis points as we shift from higher cost warehouse lines to lower cost deposit funding. We estimate this will save approximately $50 million each year as we grow our deposit base. And finally we will generate additional net interest income. While we will continue to sell most of our loans in our marketplace, we will start to build a loan portfolio of high-quality loans, earning net interest income. We expect to add about 10% of our loan volume per year to reconcile balance sheet. We estimate that for each $1 billion of personal loans, we hold on the balance sheet, we can generate about $40 million of economic profit per year. As we prudently grow the bank's loan portfolio, we expect that we will significantly exceed $40 million annually. In addition to earning predictable net interest income, that will diversify our revenues and increase our resiliency, it will also help us to balance the platform more efficiently. It is important to note that as we grow the Bank that our GAAP net income and EPS will differ from economic profit primarily on accounts of the current expected credit losses or CECL standard for provisioning loan losses. However, the underlying economics are immediately accretive on a cash-on-cash basis. Please note, we are only factoring in to our payback analysis structural synergies that have relatively low execution risk. We believe there are further strategic synergies from becoming a bank. That said, even when we only include the mechanical synergies, the value accretion is significant as you can see on Slide 12. We were forecasting cash payback on the purchase price premium to be approximately two years, more than a 100% accretion to adjusted earnings per share in year two and after we adjust proceeds of provisioning about 50% accretion to GAAP earnings per share by year three. And finally, we estimate that the transaction will reduce tangible book value by approximately $90 million. Suffice it to say, we believe this acquisition is very compelling, use of our capital and improvise to giving cash on cash returns and earnings growth. Once the transaction is completed and the bank is up and running and generating capital, we'll have the flexibility to make some clear and potentially substantial capital allocation decisions. So the strategic fit of Radius in addition to the projected financial returns are tremendous. Let me talk now through some of the details of the transaction. We're paying $185 million to Radius shareholders subject to certain closing adjustments, 75% of which will be in cash with remainder in equity to align and set this to LendingClub shareholders. As you can see on Slide 6, 1.72x tangible book value multiple and 8.8% core deposit premium, the purchase price premium is at the lower end of the other precedent transactions on TBV and core deposits. In addition to the purchase price, we will be paying approximately $20 million of advisor and transaction related costs as part of the purchase agreement. In parallel to the approval process of the acquisition Radius, we are undertaking a number of bank charter related initiatives, specifically the regulatory review process and bank charter preparation work. Taking the regulatory process first, we remain in close contact with regulators who are focused on controls, capital and profitability. This underpins the investment we are making in 2020 and reinforces our focus on prioritizing profitable growth. You'll see that reflected when I lay out our guidance for 2020. I also want to highlight two other prerequisites to clearing our path to any bank charter. First, to comply with federal banking ownership regulations and the support of the transaction, our largest shareholder Shanda has agreed to exchange all of its voting common stock for non-voting stock. As part of the exchange, Shanda will receive payment of $50.2 million. While significant, this payment unlocks substantial shareholder value and clears the path for the acquisition of Radius. And second, the company is also adopting a temporary bank charter protection agreement, also known as a stockholder's rights agreement to maintain compliance with ownership thresholds under federal banking regulations by limiting accumulation of shares, disagreement will expire on the earlier of the completion of the transaction or 18 months. So let's move on to our plans for 2020 which consolidate the gains we made over the last three years and prepare us to maximize the benefits from Radius. I'll start by sketching out the macro assumptions behind our guidance. First, we assume the economy continues to grow, but more slowly given we are in the late stages of the economic cycle. Given that, while we assume that consumer demand remains strong, we expect continued credit tightening across the market that will slow the overall personal loan market growth. Second, we assume late cycle recession concerns will continue and market liquidity premiums will remain elevated and that lower interest rates may be offset by volatile credit spreads. So with that as background, let me go through the two LendingClub's specific factors before jumping into our detailed 2020 guidance. First, while we not expect Radius to directly impact our 2020 results given the regulatory timeframe, we do expect to accelerate some investments in our systems, compliance and regulatory reporting to prepare for Radius and also incur some non-recurring integration costs. And second, as with 2019, we will be prioritizing profitable growth. To be clear, what we mean by that is, we are managing the business to increase contribution margin dollars as a percent of originations because that leverages our scale, which drives profitable growth. Profitable growth is sustainable growth. We've been phenomenally success by doing this, driving up contribution margin dollars as the percentage of originations by 64 basis points over the last three years to 3.19%. Profitable growth is the financial core behind much of our actions. For example, simplifying LendingClub through business process outsourcing, geo-location and vendor consolidation drives contribution margin higher. Investing in new structures and channels to attract new investors, puts the pressure on fair value adjustments in the short term, but by growing demand and reducing in liquidity premium for ASIC for the asset class, it drives contribution margin higher over the longer term. Focusing on higher revenue per member and lower customer acquisition costs by driving end-to-end profitability of loan originations purposely slows origination growth, but drives contribution margin higher. And with Radius, we expect to drive revenue per member higher and customer acquisition costs lower, thereby driving contribution margins even higher. So what does all this mean for 2020 guidance? We expect revenue to grow between $790 million to $820 million, on the borrower side of the marketplace, we expect solid growth and transaction fee revenue with rapidly growing repeat customer originations. On the investor side of the marketplace, we expect good growth and net invested revenue, primarily generated by investor fees on our growing loan service portfolio. We expect growth in our structure program to drive gain on sale revenues higher with offsetting growth and fair value adjustments reflecting our continued investment in growing our investment breadth and depth. We expect adjusted EBIDTA to be in the range of $150 million to $170 million driven by operating leverage from revenue growth, the annualization of the simplification program, who is the contribution margin and continued tight control on costs. This implies to adjusted EBITDA margin between 19% and 21% up from 17.8% in 2019. Equally important, the improvement in the underlying cash flow of the company is broadly tracking EBITDA less CapEx and we expect another year of good cash flow generation in 2020. We expect stock-based compensation charges of approximately $79 million and depreciation, amortization and other net adjustment charges of approximately $54 million. We therefore expect GAAP and adjusted net income profit of between $17 million to $37 million. As usual, our GAAP net income guidance excludes legacy expenses, acquisition expenses and other non-recurring costs including the Shanda exchange. Q1 is our seasonally smallest quarter and also our toughest comparable from 2019 that means we expect Q1 revenues to be broadly flat year-on-year at the midpoint of our guidance range of $170 million to $180 million. We expect adjusted EBITDA between $25 million and $30 million implying adjusted EBTIDA margins between 15% to 17%. We expect stock-based compensation charges of approximately $19 million and depreciation, amortization and other net adjustments charges of approximately $11 million. We expect adjusted net income loss of between 0 and negative $5 million. As you have heard in our remarks, we made great progress over the last few years to reach GAAP net income profitability. We're excited about Radius and believe it is a game changer for LendingClub. While we have still had a lot of work to do, the opportunity to grow our profitability and further build resiliency in our marketplace gives us further confidence in 2020 and beyond. Scott, back to you.

All right. Thank you, Tom. As I'm sure everyone can hear, we are really looking forward to kickoff this next phase of LendingClub and we see this as a really transformative transaction that is going to be -- enable us to deliver extremely compelling shareholder return. So I'd like to thank shareholders and employees and partners for their commitment to LendingClub and helping us get to here and extend a special hello to the Radius team, welcome to the club everyone. We look forward to building an amazing brand and a business together with you. I'm sure everybody is eager to get to questions. So let's go ahead and open it up.

Thank you. [Operator Instructions] Our first question today will come from Henry Coffey with Wedbush Securities. Please go ahead.

This is amazing news. I'm sorry. I know I'm supposed to be a hardcore analyst, but my thought process is had always been you to acquire some fairly ignoble bank and then use that for all its advantages. But instead, I see that you're buying frankly a significant institution. So congratulations. Think when we start, when we start to think about the numbers here, couple of questions. Number one, do you have any idea or are you sharing anything that people, in terms of what we should expect from Radius in 2020 as a -- I mean what in 2021, when you in the bank, what kind of provision charge do you think we'll be looking at? Do you have any sense of what sort of net charge offs we should expect? Or is it too early to talk in those terms?

So I'll start. Henry, we agree. One of the things we said is, if you were looking for really a perfect match for LendingClub, finding somebody who excels at the online customer experience around deposit gathering and it brings a branchless footprint is, really a very unique opportunity. So we agree and it's one of the reasons why we're so pleased about, I'll turn it to you, Tom to…

Henry, thank you. Obviously, there's a lot of other work take place before we can give specific guidance. And I know my Radius colleagues are happy they're not a public company giving guidance, so that is not something that we're providing for them. But, it's suffice it to say, this is a very, very exciting opportunity to bring the Radius teams, capabilities and deposits and lending and add them to us. Obviously the big thing that we'll be working with all of you on is; how to understand how the balance sheet will grow and what the corresponding provision build will be -- the allowance build. So just give you some framing. Obviously, our loans are much, much higher returning than consumer real estate loans for example. We would expect our yields to be significantly higher. Keep in mind that we earn origination fees today, transaction fees. And so, they will start to be deferred to the extent we held them on our balance sheet. So we would expect as we said about $90 million of economic profit over the life of $1 billion of personal loans. So you could see pretty compelling the flow of how that's recognized with CECL now, for those of you that are new to this that requires us to take a recognition of the allowance upfront. And so that will change the profile of the earnings of the company. But as the balance sheet builds, we believe we can generate significant capital through earnings and cash. So we're quite excited about it. And let's do early to give specifics on exactly how that would play out in 2021.

Well, we're not going to get GAAP financials out of Radius, but we can look at their Y-9s. When you go through that regulatory filing, are there any sort of adjustments we should think about as we start thinking how this all merges together in 2021?

I really do believe as Scott said, it's one plus one equals three. The balance sheet that you'll see as we built over many years, Mike Butler and the team have done a nice job. We continue to see the trends that they have been experiencing over the last few years, growing their deposit base, a good strong asset growth. And we think with our membership base and our origination capability, we can continue to grow deposits and fund our loans to make a very nice stable net interest income. We think that there's really compelling mathematics here as you know, and allows us to participate in the value stream, partner with our investors. Keep in mind, we're only looking to hold about 10% of our volume per year, so still majority of our loans will be sold, but this allows us to build our resiliency, diversify our revenue sources and really benefit from what we've been building over the last 10 years, which is the largest asset -- personal loan asset generator in the country.

So, obviously this is what you had told us going in, that this would not be a source of loan funding. What are the regulatory hurdles and how far down that path are you already?

So, this is going to be a process -- the formal approval process as we've mentioned on the call, we've been in dialogue for quite some time. The approval process for an acquisition is slightly different than the approval process for the de novo path. But it will be -- it'll involve getting the federal regulators comfortable with the processes and controls that we've got in place. And as we mentioned, we anticipated that we'll be able to get this done in between 12 and 15 months. And we are kicking it off in earnest as we speak. Operator Our next question will come from Eric Wasserstrom with UBS. Please go ahead.

And it's I guess I have one question on the financial performance time and then one question naturally on the Radius acquisition. Just with respect to the financial performance. Obviously, you've given a lot of context around the emphasis on profitability over revenue growth, which makes a lot of sense particularly with the pending acquisition coming. But in terms of the originations that we saw in this period, how should we think about that relative to perhaps like a run rate target for LendingClub from here?

Hey, Eric. This is Scott. So, I'll start. I mean what you are correct, just to kind of make sure everyone on the call understands how we're thinking about our priorities. Part of the work we did throughout last year was really do a deep dive on end-to-end loan economics and loan profitability by customer type, by channel and all the rest. And really give ourselves the visibility and the capability to be optimizing for that outcome, which is end-to-end loan profitability. So, that's why we don't give guidance on loan originations because, there are -- depending on the time of the year that we're in and what we're seeing in dynamics on across both sides of the platform. We will tweak that lever up and down and what you can see in Q4 and really in the guide for Q1 is, we're able to drive really significant earnings growth in a way that isn't directly linked to origination growth in the way it historically was. Because we're able to kind of dial some of our mechanisms up or down to focus on that bottom-line profitability as opposed to top-line.

We're quite encouraged that just to call out a couple of numbers here. In the fourth quarter, we had a revenue growth of 4%, contribution margin of 11% and an earnings growth of 20%. So as you can see, what we've been focusing on is, is leveraging our scale really driving efficiency to show the real value in the model and continuing to grow our presence. So we had a very good 2019, took some share. And we will continue to participate in the market, but I think at this point, we wanted to give a guidance that reflects our focus and if the market grows faster, moving different decisions, but right now we feel very good about where we are. And really just emphasize the importance of getting this transaction done and done well.

Thank you for that. And if I could maybe just follow-up on Radius. Again Scott and Tom, I think you articulated a very clear vision for what the combined entity looks like in the future. And that the value in Radius to you is on the liability side of the balance sheet. But just looking at their asset side for a moment as it currently exists, it seems that the emphasis is more on commercial assets and on the consumer side, the asset classes look perhaps a little more esoteric. So how should we think about, what that brings to you guys on day one, and can you give us a sense of what kind of credit diligence you were able to conduct on that as it looks like they're carrying a reserve of about 80 basis points, which I know it's hard to judge whether that's robust or not from this data.

Yes. So I'll start with the broad picture, which is we think the fact they're bringing a diversified portfolio of $1 billion in loans is actually helpful. We like that both because it brings diversity to the mix and it allows us to kind of start from a run as opposed to from a standstill. And that's one of the things that makes the acquisition so much more immediately accretive.

Yes. I think that the team has done a nice job of building out a diversified portfolio. I think we did quite a bit of work -- we've been working on this for quite some time. So we have done deep work on the performance of these loans, part of any acquisition that we'll continue to look at how they fit into our portfolio, but we want to have a diversified portfolio. And so this is something that we'll look at and see how we can grow them and how they fit into the org. But, we're encouraged with what they've built and we'll learn more as we start our integration activities.

And just on the credit diligence, Tom?

Yes. On the credit diligence, we obviously in order to come up with all those synergies we just talked about, we've estimated what we think the credit and interest rate fair value mark would be on these and that factor that into our accretion outlook that we gave you.

I mean, the diligence process has been pretty extensive, since our early fall is when we kicked this thing off as supported by a number of advisors with particular expertise in areas that LendingClub did not have it. So for example, we brought in a specialized party to focus on deposits to help with valuation, some of the assets. So…

Our next question will come from Jed Kelly with Oppenheimer. Please go ahead.

Great. Thanks for taking my question. And congratulations on the potential acquisition. My first question is and I guess you did your diligence, but is there a risk to this not closing, giving where the FDC seems to be around acquisitions. I mean, looking over the combined entity as a total market. It's still relatively small and this is relatively small acquisition, but any risks not closing and a potential backup plan?

Yes. I mean, as we mentioned, we feel good about the path to approval here. And we think that the acquisition path actually is a lower risk half in terms of our timeline versus de novo because we've built the capabilities and processes and controls around lending. But frankly, those don't exist for us on the deposit side. So acquiring somebody who is running that in a directly regulated frame actually we believe sets us up better for this process. I think the risk is more around timing then end destination. But again, that's why we said we feel good about our ability to get this done in 12 to 15 months.

And then, post the acquisition closing. Does this impact your current buyers of loans in terms of, do you think they would switch to other platforms, how do you manage the banks and financial companies that are already buying your loans and how you segment what loans you, all the ones you don't?

Yes. I would say on the contrary, this is viewed very positively by our partners. Just for a couple of reasons. One is for the banks that are buying from us, knowing that we are directly supervised and held accountable to the same standards because they are deeply comforting, I think we said on a previous call, we had -- I believe 40 examinations last year by our different banking partners. And so, this is going to give them a lot of comfort that we've got the necessary controls. That's one. Two, keep in mind, we're doing 12 billion in loan volume. And as Tom mentioned, our thinking out of the gate subject to regulatory approval is really the only hold 10% on our balance sheet. That 10% will be randomly allocated as part of our scale program. So we won't be kind of competing in that way or picking loans. So, we think this will be viewed as a real positive. And then, the final is just the regulatory clarity that this provides, I think is also a good thing for our partners.

And then, just two more, one on the 2020 guidance. So does your revenue growth rate imply that you're growing with the market and then as you get to become a more digitized bank, you are competing against a peer group that's raise a significant amount of private funding and marketing pretty heavily, right? So, I mean, how does this, how do you kind of envision yourself competing with companies that seem to be spending a significant amount of money on customer acquisition?

Yes. So just start with, if you look at really the last year as an indicator, we actually took share in the market. We went in as the market leader and we actually took share throughout the year. But that in and of itself isn't our goal. Our goal is really delivering on these bottom-line numbers. As we look to next year, you can see the -- you can think about the top-end of the guide being what we would roughly expect the market to grow at next year. And the next thing I'd say is, I think you were getting at this, but I'll make sure I double-click on it, which is given the earnings capacity of LendingClub with a bank charter, or ability to make -- fit more -- to have more flexibility in our capital allocation decisions. Whether that's returning capital to shareholders or investing in growth is going to be significantly greater than it is today under our current operating framework. So, right now we're saying while acquisition costs may make good sense when you look at the lifetime value of the customers, if they don't make immediate sense, we're currently being very thoughtful about how far we push into it and under a banking frame we can take a longer term view on that.

Our next question will come from Steven Wald with Morgan Stanley. Please go ahead.

Congratulations on the deal. Maybe just one quick one on sort of the concept of on Radius and the assets versus the deposit base, but you guys were asking, sort of talked about the loan book and the marks and all that, but just in terms of how we think about sort of looks like 120% loan to core deposit ratio on that bank. And obviously, it looks like it's kind of outside of what maybe you guys would be focusing on based on your prior comments, but just if you could just walk us through how you think about the gap between the deposit base being online and digital base versus the loan book and how you think about retaining those customers long-term growing those, or does it have to really come from more the legacy LendingClub deposit base and just sort of how you think about retaining all of that and whether that's part of the constraint in terms of the 10% that you're going to retain on the loan portfolio.

So a couple of things. One we think it's a great marriage between our online asset generation capability and their online deposit capability. The deposit, the loans that they have are more traditional banking lending whereas ours are more all digital. So clearly there's a distinction there. But again, we think that we have a great opportunity to leverage our membership base and our marketing funnel. Keep in mind that, applications again, this year were up double digits. We're seeing a lot of people come through our channel that we believe we can make additional offers to. So we think that we can grow our deposits nicely and fund that 10%. We're using 10% as a guide depending on our application and our approval process. We think that's a good number to start with. Clearly, we could grow it faster. We have -- keep in mind we've got about $900 million in tangible capital book value today, and so significant amount of capital to deploy. And that's why we're excited there's a large capital efficiency by doing this transaction. And that's why you're seeing some of the synergies that we're talking about are being so robust.

But I guess to put a fine point on it, 10% is where we're getting started. We'll have the decision to reevaluate. It's really not a capital constraint some point. We're going from zero to 10, which is $1 billion, and we'll have the ability to reevaluate that over time. Again, as we get -- as we demonstrate that the bank is up and running smoothly and it is generating significant capital, we'll have the ability to decide what we do and how to best deploy that.

Understood. And then if I could just sneak one more follow up in. If we think about the expense and the provisions of a run rate, I know you guys didn't want to give it specific 2021 goals, but in terms of what's driving the assumptions around the payback and the accretion could you talk to us about like what you're thinking in terms of, it sounds like these are pretty CECL, but how you're thinking about the provision run rate on the deal close to close and also the, maybe the efficiency for Radius and how you think about that in the context of -- I think last quarter you talked about getting to 25% EBITDA margins and then getting another 500 potentially from the bank sort of watershed moment there. And how that might be updated from now having the transaction here.

So let me hit on your last one first because I think that's really, really important. We feel great about the efficiency you've been driving. You heard that I think on the call today. So we picked up 4 points of EBITDA margin this year. We're projecting additional growth in EBITDA margin in 2020. So that story is going to continue and we don't need the Radius acquisition to continue to see that kind of margin expansion. So we feel very, very good about that. Just a couple of things on the portfolio to make sure that everyone's grounded. I will give you a couple of numbers. First of all, keep in mind that Radius' portfolio is a high-quality portfolio and we will be doing the same. We expected to hold high-quality prime loans on our balance sheet. That portfolio will generate approximately call it $11 million, assuming 11% coupons. They do have kind of an annualized charge offs of about 5%. But the CECL provision will be front loaded. So we'll be finalizing that, but it's probably greater than 5%. So we know that we've got to bring the season provision inside in the first year. So the synergies that we expect again is the issuing cost fees that we talked about, the lower cost of funding, which are pretty straightforward. And then, enters your thinking, is this going to be building the balance sheet over time? You can imagine as doing that. The other thing that I would say is that, we also have a significant net operating loss that currently is fully reserved for. And one of the things that we didn't include in this is that by bringing Radius together with LendingClub and our income profile being that much higher, we'll be able to utilize that NOL as much faster accelerated way. So there's lots of synergies that we did not include in here, but we think we feel very good about the ones that we've laid out and demonstrate the -- how reasonable the premium is and how fast the payback is on a cash on cash basis.

Our next question will come from Steven Kwok with KBW. Please go ahead.

The first one I just saw was around the revenue guidance for 2020. Given that it's at the midpoint about like 6% growth versus this year, you guys delivered closer to like 9%. I was wondering how much is that, if you could attribute it to like competition, how much is related to just spending more time on the acquisition. And then, I know you guys also talked about the fact that you're looking at more profitable growth. Like just wondering if you can help reconcile the revenue growth expected in 2020?

Yes. I mean, I think, if you look at our results, it's really not just over the past year for past several years. I think we've demonstrated that we are able to compete extraordinarily effectively in the market. We have actually gained share now for a couple of years. And we've done that while increasing the efficiency of our marketing and increasing the efficiency of our origination and servicing group. So this really is a prioritization and a re-prioritization on the business of getting to what we see as our number one strategic objective, which is getting the approval of this transaction because it unlocks so much earnings capability for the company. And in order to do that, our focus is on the investments we need to make to be ready so that we hit the ground running. And as we mentioned being thoughtful about the investments we're making in growth, most notably customer acquisition growth versus the investments we're making and readiness around the bank. So it was really more of a deliberate shift on our side to be able to demonstrate consistent core operating profit to the regulators over the course of the coming year.

Great. And just follow up on these expenses, that investments that you're making, like how much of it will stick and how much of it is just temporary in nature until the acquisition comes on?

So I think the way we're doing it in this year's guidance, what were anything that we have to incur it's going to be recurring in nature, building out our credit team or maybe some additional compliance activities. Those are all going go into our ongoing operating earnings. where we'll break out for you is anything that is deal related one time in nature, building out certain things technology, whatever, what have you, integration type expenses. So you'll get a sense. But as Scott mentioned in his remarks, we have a lot of these costs already in our base plan. That was a burden early on in our life. We've been able to demonstrate with our scale that even with that high cost base that's required in this business, we're able to drive for profitability. Now with what we see with the opportunity with Radius, we see being able to leverage those costs across a much broader income profile and therefore drive very attractive margins.

[Operator Instructions] Our next question will come from Giuliano Bologna. Please go ahead.

Congratulations on the transaction. It's great to see you guys announced the acquisition of Radius and obviously I think it will be impactful going forward. Would really be interesting is -- trying to think about how you plan on allocating capital. Because if you think about kind of your forward guidance, if you can add a roughly $80 million additional net income or pretax income in 21, you can start talking about, the return on tangible common equity in the high teens call it 16%, 17%, 18% range depending on where you end up. Do you have any sense of how you plan on allocating your capital at that point because that will kind of dictate to what is your plan doing going forward?

Yes. It's a good question and you're absolutely right. We definitely see higher returns, just to caveat a couple of things, the 80 million is the cash piece. As I mentioned, that the CECL piece will be a bit of a drag in the early years, but we feel very good about the investments we're making. What I would say though is that, I think we mentioned, we've got a $900 million of tangible book value in LendingClub today. And so we believe we can capitalize the bank of -- with approximately call it, somewhere into 300, 350 range. The key thing here is that, we picked that number is because we think the gearing between the tangible book value we contribute to the bank plus the earnings from radius plus the earnings. We get off of our 10% assets starts to generate capital within the bank and sustains itself at a very nice growth profile that allows us to maintain good source of strength as a holding company. And that's what Scott was mentioning about having that capital flexibility by generating significant earnings and being able to deploy our capital in more efficient ways. So we feel good about the capital allocation that we've been that we've projected and it does generate, that double-digit ROE type of returns over time as you start to get the balance sheet up and running and the earning to do some of these early day provisions. And it can be quite a creative.

That makes sense. And when you think about capitalizing the bank, obviously 300 million, 350 million of capital, would you -- you obviously have all the liquidity you'd need to do that. But would you consider doing a preferred rate at the bank level or would you think you would contribute the capital that you already have on the balance sheet today?

Yes. I think right now our view is to just take the capital we have today and contribute it down. Some of the things you're talking about, those are some of the optimizations that we may look at in the future to keep our capital the most efficient it can be. So none of that is in our plan today, but those are the types of problems we'll have in the future, which is how to optimize our capital.

That sounds good. And if you get to get a sense of, let's say you rolled out the LCX platform recently, have you seen a reduction in kind of the -- in the number of loans or the percentage of loans that you're facilitating of your own capital since going into the program?

Yes. We had so much to talk about this quarter. We didn't make the list, but it's very, very exciting. This is for those of you that don't -- may not recall, LCX is -- [indiscernible] is our digital marketplace that allows us to connect with investors and settle loans electronically. It's up and running. And so we've got -- we're adding new investors every week. We pit new milestones and team is really doing quite well in the adoption. We're quite excited about it. Maybe in the next call we'll give you more details, but it's very, very exciting for us. What it does is, it increases the speed of a velocity of loans coming through the balance sheet and settling them in a much faster way. It gives us lots of feedback on where prices are for certain credit risks and allows us to adjust accordingly. So we're quite excited about this new capability in our platform. We also have recently started, what we call our select plus platform as well, where we're bringing additional folks onto our platform underwriting -- using their underwriting criteria. So there's a lot of exciting things going on in the base business and that's what's driving frankly a lot of these efficiencies that you're seeing. The leveraging our scale, our diverse investor mix allows us to do a lot of really, really exciting things and positions as well for this acquisition.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Sanborn for any closing remarks.

All right. Well, thanks everybody for joining us today. We recognize we've given everybody a lot to digest. And if you have additional questions, don't hesitate to reach out. We look forward to updating everybody on the progress at the next call.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.