Good afternoon, and welcome to the LendingClub’s Third Quarter 2021 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 Sameer Gokhale, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to LendingClub's third quarter 2021 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via e-mail. 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, the benefits of our acquisition of Radius, platform volume, future products and services and future business and financial performance. 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 Forms 10-K and 10-Q, each is filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q. 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. And now, I'd like to turn the call over to Scott.

All right. Thanks, Sameer. Good afternoon, everyone. Our third quarter results again make very clear the power of our digital marketplace bank to generate strong, sustained performance. We, once again, achieved record revenues, up 20% sequentially, and we nearly tripled our earnings versus the second quarter. We delivered these results by leveraging our data advantage, our large and loyal member base and our vertically integrated business model. With an enormous market opportunity of roughly $1 trillion in revolving consumer loans outstanding, we have a clear path forward to further grow our personal loan business while helping our members lower their cost of credit. Our 3.8 million members appreciate the value we deliver and they want to do more with us. With our new digital banking capability, we can offer more. Our advantages are considerable and difficult to replicate and we are beginning to use them to grow our adjacent auto refinance and purchase finance businesses. When we launched back in 2007, LendingClub's vision was to leverage technology, data and our marketplace model to transform the banking industry. We began by bringing a traditional credit product, the installment loan into the digital age by moving it online, broadening access, lowering costs and delivering a fast and frictionless experience for borrowers, all while delivering attractive risk-adjusted returns for loan investors. At its core, extending credit is a data problem. And at LendingClub, we have a data advantage. We use machine learning to develop and/or power models across the loan life cycle including marketing, fraud prevention, credit underwriting and servicing and collections. These models are trained on more than 150 billion cells of data and more than a decade of experience across over $68 billion in loans. Our effectiveness is evident in our recent results. Our marketing expenses as a percentage of originations…

Thanks, Scott. Our marketplace model is more profitable than it's ever been. Before I dive into the detailed results for the quarter, I want to show you how we have transformed the financial profile of the business. As you can see on Page 13 of our earnings presentation, we originated loans of $3.1 billion this past quarter, which is comparable to the fourth quarter of 2019, the final quarter prior to the pandemic and before our marketplace bank model was in place. Now with the marketplace bank, we generated $58 million of higher revenue and $27 million of incremental earnings compared to our prior model in the fourth quarter of 2019. This reflects our numerous strategic decisions over the last 3 years, the advantages of the bank as well as our efforts to improve the efficiency of our business. Another item I want to highlight is the impact loan retention had on the quarter's results. During the third quarter, we retained $636 million of loans or about 20% of originations, in line with our 15% to 25% target. As a reminder, growing our loan portfolio reduces reported earnings during the quarter due to deferral of net origination fees as well as upfront CECL provisions. You'll see on Page 2 of our earnings press release that these 2 items negatively impacted our earnings by $51.5 million in the quarter. However, we are investing in future revenue by retaining loans, creating a highly profitable and recurring revenue stream that enhances the sustainability of our revenue and earnings growth. Now let me take you through the details of our financial performance for the third quarter. At the start of 2021, we pointed out that with the addition of the digital bank, our revenue would start to grow faster than originations, and we saw…

[Operator Instructions]. Our first question today comes from Henry Coffey with Wedbush.

Congratulations on another great quarter. This has done amazing wonders for investors. A couple of questions, and then I'll go back into the queue. You've got $65 billion worth of originations, 3.8 million customers, $2.9 billion in deposits. Can you start to give us any thoughts about how this all merges together into kind of 1 neobank? Right now, you have this great treasury function that can go to the bank whenever it needs assets, and you have this really super profitable bank. But as these 2 sides of the equation start to play together, you've got this massive customer base. What preliminary thoughts do you have about getting everybody to work together on a product and revenue front and what kind of cross-sell opportunities are there between the bank and the club, et cetera?

Yes. So thanks, Henry. This is Scott. So you are correct. I think what we're showing right now is the core business that we're in, where we've got a leadership role provides the foundation for an extremely kind of profitable digital bank with a lot of growth just inherent in the model, both the available market outside of us as well as our ability to have revenue and earnings outpace just the sheer loan origination growth. So as Tom touched on a little detail in the script, our plan is to be taking that net income that is -- that we're able to generate and begin investing that into future earnings growth and the future earnings growth is, first and foremost, continuing to build the loan portfolio; the second, building the customer base; and then third, adding the new products. And the new products you touched on is we've shared some of the research before, right? I mean, more than half of our customers are already coming back to us for a second loan. So we've -- and we've really unlocked a great experience there for them. Auto, which we're really now just leaning into, we've pulled it into the bank. The lower cost of capital and the addition of the balance sheet means we've now got positive unit economics that allows us to invest in that business and grow that business. So that's an easy one that we can -- you can see us expanding the lifetime value of the customer just through that. And as we pull the purchase finance business into the platform, that is another opportunity for cross-sell, right? We are getting customers today who are -- the acquisition tack there is actually through providers and [now paying]. So the lead-in is not refinancing credit card debt, it's paying for procedures. And once we have them on board, we can do more for them. As we look ahead into next year, you're hearing us lean into credit products. Why that's the DNA of the company? Our customers are heavy users of credit, so they want us and would like to get more from us there. But we also see us, once we get these 3 businesses, which are businesses we already had coming into the bank acquisition, once we get them into the bank and begin generating the bank benefits off of those businesses, we'll be starting to look at other categories, including helping people manage their spending and their savings, right, building on the grade member rewards checking experience that we got from Radius and leaning into that. And that will be what we'll probably talk a little bit more about next year. Right now, we're just focused on getting these lending businesses into the bank.

And my second question is really around efficiency. And I thought I would just narrow the focus in on the bank, which is probably at this point, 30% or 40% of your earnings and approximately 40% of your equity capital. And I'm going to compare it to an institution that's very similar in some ways, but it doesn't have the commercial loans you have, it doesn't -- the bank has. It doesn't have some of those other assets. But you look at Discover that offers a wide range of consumer products, just like you're planning on doing and you look at the bank. And the bank has got a very high ROE already, but its efficiency ratio is around 67%. Discover’s for the first 9 months of the year was -- I think it was 36%. So lining those 2 up, is there room over time as Radius becomes more and more a “LendingClub consumer lender”, given all the efficiencies of those sorts of origination businesses, can you give us some sense if we just were to focus in on the bank, what kind of forward shift in profitability might we see? What sort of thoughts do you have about the ultimate ROA of that business? How do you think the bank's efficiency ratio should be moving over time?

Henry, this is Tom. Yes, we came in at 67.5% this quarter, which was -- puts us in amongst some of the better banks and better financial institutions. But you can see the growth we're experiencing can further bring that number down. We haven't given a specific target, but you can see the -- in just 2 full quarters of ownership, we're seeing significant improvements as we remix the balance sheet, as we continue to see fee income from our lending business, the returns are already in the mid-20s. We're benefiting from the tax NOL that we've chatted about in other meetings. And so we think there's additional opportunity here. We're not ready to give specific targets. But as Scott said, we're going to be taking some of the additional margins and reinvesting them back into the business, that gives us more confidence on our top line growth. We think their revenue growth is important and growing our membership base is important and all those things continue to drive ongoing repeatable earnings for the company. It's a new model. We've only shown you 2 quarters. We'll continue to keep you important on how we're thinking about the level of profitability as we head into next year. But we feel very good about where we are and how the business has really recovered nicely. And keep in mind, it's not just the bank, as we tried to communicate to you is -- this is really multiple years of activity. We resized the organization pretty significantly over the last few years. We continue to be well below our peak as far as headcount, for example, and our expense levels are much lower than they were even on a standalone basis. So you're seeing some of that come through as well. It's not just the acquisition of the bank.

Yes. But when you look at the bank and the net interest margin is in the 7s, but watching with 25, 30 basis point cost of funding, which may deposit costs, could go up to 50 basis points, and all of this would still be true and you're layering on more high-yield consumer loans. The losses are very, very low on those assets. When we look at that, how that flexes, it won't be surprising to see that margin closer to 10%. And it won't be surprising to see the efficiency ratio clearly at the bank level at least 1/3 lower. And I mean the contribution from the bank side suddenly becomes very big and very dramatic sometime over the next couple of years. And obviously, the more help we can get and putting pencil to those numbers, the better. But it looks like it's moving in the right direction. Anything specific about loan quality? The chart on delinquencies is very helpful and instructive.

Yes. What I'd say, Henry, is we're obviously -- the industry broadly has experienced pretty pristine results. We, in particular, as we show in those materials are outperforming the industry. The thing that I would want to make sure you heard is that in our underwriting, in our pricing and most importantly, in our reserves. We're not assuming that, that environment continues. We're actually assuming in all of those things that we're doing today that we are back at pre-COVID levels of borrower performance. So the results right now are actually above what we had put into our own outlook.

Next question comes from Giuliano Bologna with Compass Point.

I guess starting off, one of the questions I'd be curious to pick your brain on is it looks like you guys retained, call it, 20% of loans in this quarter, which kind of falls right in the middle of the guidance range that you provided in the past. Since you're generating more capital than you forecast in the past, would there be any incentive to dial up the loan you're retaining? Because you're actually building -- you're in interesting position now where you can actually build some capital, the loan growth rate will start to slow as the book seasons and matures a little bit. So is there any incentive to grow the percentage there and go towards 25 or above 25 to increase the size of the balance sheet faster?

Julian, just to put some numbers around your question, we do commit at 14.1% capital, so you're absolutely right. With the additional earnings we're generating, that allows us to put more capital to work. We're very pleased with the performance in the third quarter. That's why in our guidance, I called that out specifically that's an area for us to continue to invest in that creates more ongoing revenue. Keep in mind that when we put a loan on the books, we earn about 3x as much as selling a loan. So there's clearly motivations to do that. As the benefit of us being able to ebb and flow in that range of 15 to 25. And with the capital we've got to deploy, you'll probably see that over time. And we're trying to manage to make sure that we're keeping our capital deployed as efficiently as we can.

And then another question just has been topical across all consumer finance, subsectors, for all the companies in the sector. This quarter was -- I'm curious if you're seeing -- what you're seeing kind of from a delinquency perspective and how it's comparing from a roll rate perspective, if you're seeing what kind of shift you're seeing in 30-plus, 60-plus delinquencies? I realize the book is still immature, so there's a lot of velocity going through it. But I'm kind of just curious what kind of data you're seeing sequentially there?

Yes. So as I kind of touched on in my remarks, I mean, our year-on-year delinquencies are actually down I believe in the neighborhood of about 30% and quarter-on-quarter were flat. That's just on our kind of outstanding servicing portfolio as a whole. But our expectations in terms of how we've underwritten price -- and when you look at the book we've taken on our own balance sheet, it's new. We started building that in Q1. So it's too early to have any kind of different, really significant lead, but we're in line with our expectations to ahead of our expectations there on that.

That sounds good. And not to split out too much for that. I realize there's also a big impact from a servicing perspective when you're growing but -- and the servicing book grew, call it, low under 10%, but grew a meaningful amount sequentially. I'm curious like ex growth, are those numbers still roughly flat or up slightly because, obviously, growth has a little bit of a dampening effect when you're layering on newly originated loans into the portfolio?

Giuliano, we're monitoring this by individual vintages. So Scott's giving you a composite view, but we're monitoring these by vintages. And so we're not seeing any kind of this averaging. We feel very good about all the vintages since 1Q, 2Q, 3Q are all in line. And so now, there's no real stacking issue that you would refer to as blending in our allowances. They're all -- we raised our allowances another 5.25% this quarter, reflecting CECL just like we did in the previous quarter.

That sounds good. The other thing I was curious about was one of the strategy points was growing marketing, obviously, and growing the balance sheet. There's essentially some data out there about like shifts in demand for direct mail -- I would say the data is fun, not always perfectly accurate, but it looks like we stepped back on direct mail relative to a lot of peers in the sector. I'm curious if you're seeing anything on direct mail that's changing or if that's just more of a pivot to other channels? And what might be driving shifts in your marketing strategy and marketing channels?

I'd say the biggest thing for us is, as you know, last year, we kind of pulled out of the majority of the marketing channels and really just focused on serving our existing members who had need for credit. This year, we're stepping back in and tuning our efforts kind of per channel, our targeting models and response models on a per-channel basis. I'd say, across the board, we're pretty pleased with what we're seeing. As I've said before, that -- it is a competitive market, we anticipate it will continue to be a competitive market, but we like our position a lot, because we've got just more data than anyone else. And we're able to capture more economics, right, with the addition of not only the fee revenue, but also the net interest income. We're able to capture more economics off of the initial loan and drive really good repeat behavior and lifetime value. So we're optimizing per channel. Anything you see would be -- I wouldn't call it indicative of any broader trend so much as us optimizing per channel.

Our next question comes from Steven Kwok with KBW.

I guess I have 2 questions. One was just around the yield on the unsecured personal loans. It seems like the yield ticked up again about 70 basis points sequentially. Could you just talk about the drivers there and what led to the sequential increase and how we should think about it going forward?

Steven, it's Tom. What we've been doing all year is if you think about what portfolio and the volume we had in the first quarter and then where we are today, where we've gotten to now $3.1 billion. And so as we open it up channels, we now have a more representative sample of our entire prime portfolio, what you're just seeing is that normal evolution of the growth and the mix going into paid channels, as Scott mentioned, recovering in some of the channels that we had exited in 2020. And now you're starting to see kind of that normalized yield portfolio going in. So it's just a normal progression of the average mix of our loans that typically go to banks. So we're a representative sample of those loans that we sell to banks. So that's just the evolution of the growth in the market.

And said another way, we don't expect it to change much from there. It's just us at this point having the market mix actually. I don't know if we talked about it, Steven, in the call, but just a reminder, what we're holding is prime consumer loans, same loans we sell to a few dozen community and regional banks, customer you're talking about here is -- average FICO is about [715]. Income is on the low end of high income or the high end of middle, somewhere in the $90,000 to $100,000 range for individual income and you're talking about average loan sizes of, call it, $14,000, $15,000. Main use case is pay off credit card debt. And then on average, we're lowering the cost there for them by about 400 basis points.

Understood. And then just following up on the marketing side. You mentioned that it was up 160 basis points of origination. And if we go back to the last 2 prior quarters, it was running more like 130 basis points. Are you guys just leaning more into marketing to drive the originations growth. I'm just curious as to what you're seeing around the competitive landscape and how we should think of that 160 basis points going forward?

Yes. So it's -- again, it's -- if you go back a little bit further in history and you look at how we are managing that spend and our mix of new versus, let's call it, repeat members, we're basically after sort of doing the LendingClub equivalent of sheltering in place last year and not really doing a lot of external marketing. We really ramp that up and are back in the mode of acquiring new customers to build the member base. So we had -- I mentioned we added about 100,000 new customers this quarter. And if you go back and just look at our historic marketing cost as a percentage of CPI, you'll see that it was -- we were getting closer to, I think...

[1.90, 2].

[1.90 to 2]. And given we're actually capturing more economics now than we were then, that's certainly a decent way to think about our willingness to invest in building the member...

Yes. Just saving the money on the issuing bank as -- just as an example, gives us more economics.

[Operator Instructions]. Our next question comes from John Rowan with Janney.

So you guys had a 7% net interest margin in the quarter. I mean -- I just want to step back, is this -- are we still looking at 7% as the right number going forward, including the provision expense? I know we kind of talked about a 9% margin, less 2% provision expense. Is that still kind of the long-term target of the bank?

So the net interest margin doesn't have any impact on the provision. We do expect it to continue to go up as we increase the mix of consumer to commercial. Obviously, that's the largest growth that we have and also the highest net interest margin. So that is expected to go a little bit higher as we continue to remix the balance sheet. With regard to the provision, kind of given everyone an indication that we are on CECL, we are putting these reserves up on day 1. And so you have the timing issue between the recognition of the provision and the interest income. So we continue to accrue at about 5.25%. I think we did this quarter on originations that we retained. So I think this is a pretty good frame. I think we've done now a couple of quarters in a row and start to give you a frame of what you can expect. It will get a little complicated because we'll start to have some charge-offs and we'll have -- we'll be adding new loans, but I'll be breaking those out for you so you can see the roll forward. But right now, the portfolio is performing very, very well as we indicated, and I do expect net interest margin to inch up a little bit.

And -- okay. So just back to kind of your comment, what do you expect the long-term charge-off rate to be in the portfolio?

So the charge-off rate is still going to be somewhere as the loss rate is still going to be in that somewhere. It depends on the quality, obviously. But overall, it's probably going to be in the 5% to 7% range, is depending on where we are in the various quality. But overall, that's kind of a little bit higher than we've given you in February, but consistent generally where we think long term it will be.

At this time, I'm showing no further questions on the line. So I'd like to turn it over to Sameer to take some questions submitted from our retail investors.

Great. Thanks, [Eiley]. There are a couple of questions that came in through the inbox that we can just go through. I'll paraphrase here. The first one was asking whether why we don't license our algorithm and data analytics to other banks and credit unions to earn service?

Yes. So an interesting question. That's certainly willing to confirm we certainly have something that is of a lot of interest to banks, which is the ability to assess the credit risk and efficiently underwrite it. And the way we've chosen to work with banks is that when we make loans available to them, to hold on their balance sheet. They are taking, therefore, the credit risk in exchange for earning the income. So that is 40% to 50% of our funding that way. Turning this into a software-as-a-service business, that's a different business and no criticism of it. Great business, it's just very different. Our focus is on building the direct-to-consumer franchise, really leaning into the customer base that is this very creditworthy high-income customer who is a reasonably heavy user of credit and surrounding them with value-added services. And therefore, for us being able to actually own that customer relationship, being able to communicate with that customer and kind of help them on their financial journey is where we're going to be investing.

And then the other question that came in was whether LendingClub has any plans to offer other innovative and unique customer products?

I guess short answer is certainly, yes. We touched on it on the call today. Like I said, first priority this year is pulling our lending products into the banking infrastructure because that both gives us cost efficiencies. It gives us incremental revenue and it allows us to leverage the full power of our platform, our data science platform, servicing platform, our payments, all of the things we do to drive loan performance. But as we look into next year, we'll come back and talk about. We see over time a broad range of products, helping our customers manage their lending, spending and savings.

Terrific. Well, with that, I think we'll end the Q&A on this call. Thank you all for joining us on the earnings call today. If you have any follow-ups, please contact the Investor Relations team, and we'll be able to help you out. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.