LendingClub Corporation

Good afternoon, and welcome to Lending Club Second Quarter 2020 Earnings Conference Call. Our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Samir Gopre. Please go ahead.

Thank you and good afternoon. Welcome to Lending Club's second quarter 2020 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, the impact of COVID-19, our ability to navigate the current economic environment, the timing and benefits of our pending acquisition of Radius, platform volume, and the future performance of our business and products. 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 as 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. 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 website at ir.lendingclub.com. And now I'd like to turn the call over to Scott. Scott?

All right. Thank you, Samir, and thank you, everyone, for joining us. I hope everyone is staying healthy. Earlier today, we reported our financial results for the second quarter, which were primarily driven by the significant decline in origination volume that we had anticipated. While it is clearly a challenging and an uncertain environment, we are successfully managing our liquidity. We feel good about how we've positioned the company to ride this out. We do believe that Q2 represents the trough in terms of loan investor demand and our reported financial results. Furthermore, we believe that this recession is allowing us to demonstrate the resilience of our asset class, the depth of our membership base, and the strength of our digital underwriting and servicing capabilities. While there is certainly a long road ahead, as Q3 gets underway, we are seeing the early signs of green shoots. with recent sales of multiple loan portfolios at or above their carrying value, and five of our top 10 investors now back on the platform purchasing new issuance, albeit at modest levels. With a gradual resumption of investor activity and our restructuring and associated costs behind us, we are appropriately sized to preserve our cash while maintaining the capacity to rebound when it appears prudent to do so. We believe we have positioned ourselves well to navigate an extended period of uncertainty until we close the bank acquisition. Once the acquisition of Radius is complete, we'll become a leading digital bank with a demonstrated track record of effective underwriting through a very steep downturn and have a clean balance sheet to assist in our recovery. Okay, so before I dive into the details on the quarter, I want to take a step back and talk about the economic environment, which is obviously unsettled. Unemployment rates remain high, states are pausing and even reversing their plans for reopening, and the level and timing of future government stimulus is still to be determined. Having said that, there are some factors that have helped mitigate the virus's economic impact on U.S. consumers. So first, versus 2008, consumer balance sheets were relatively strong coming into this downturn, with lower debt levels in relation to their assets. Second, the size and speed of government stimulus is unprecedented and has helped them weather this difficult environment. And third, consumers seem to be behaving prudently, reducing spending, accumulating savings, and working hard to stay on track with their bills. Against this backdrop, I shared in May how we are directing our activities according to five guiding principles as we stabilize the business to address the effects of the coronavirus. These same principles remain in place as we transition out of defense mode, begin the recovery, and make progress towards our top priority of becoming the first U.S. fintech to acquire a bank. So since the beginning of the pandemic, our number one priority has been to keep our employees safe. They have remained safe, I'm pleased to say, as well as engaged and productive in delivering for our customers. Given how well it's working and the continued uncertainty around school openings, child care availability, and the path of the virus, we have told all employees that they'll be able to work remotely through at least the end of this year. So I'll move on to our second priority, which is to deliver investor returns. We know the market has been questioning the ability of the personal loan asset to hold up in a recession. And we now believe we are in a position to begin to answer that question positively. So overall, we expect, based on what we're seeing, that our most recent pre-COVID vintages, that's those that will be most impacted by the virus economy, will deliver a return of roughly 3%. While that's below our pre-COVID expectations, we are pleased with this result. and it supports our view that consumers value their relationship with Lending Club and are prioritizing their loan payments accordingly. These estimates of performance are based on what we're seeing in the portfolio, including the trajectory of LC members on payment deferral plans. I'll point you to slide nine on the investor presentation, where the good news is you can see from our peak in May, the number of loans deferring payments has dropped from 12%, that was our peak, down to 5%. And two-thirds of borrowers coming off deferral plans are now paying in full. And for the minority of borrowers who have indicated ongoing hardship, most are now choosing to make partial payments through an interest-only plan we introduced in Q2. So we see this as an encouraging sign, both for borrowers who are taking steps to stay on track, as well as investors who are receiving these payments. Also, and as the second graph on slide nine of the investor presentation indicates, for the vast majority of our members who are not enrolled in any hardship programs, they're performing even better than they were pre-COVID. So all in all, this is an encouraging current read on performance for our servicing portfolio. So let's talk about new loans. As we discussed last quarter, new originations are significantly different from Q1. Higher income, higher FICO, lower payment-to-income ratios. And importantly, our new loans are heavily focused on our existing 3 million members, those who have demonstrated successful past payment history with Lending Club. This is because loans to existing members have exhibited significantly lower losses than loans for new members with similar credit profiles. And they also come at a much lower cost of acquisitions. So our ability to leverage this data and these relationships is a key competitive asset for Lending Club and will help us deliver our targeted 5% IRRs for investors. The returns that we are expecting to deliver is slowly bringing investors back to the platform, albeit at a reduced volume, with the first ones to return being those with their own strong views on credit. That includes companies who build businesses and credit models focused on marketplace investing. We expect all of our investors to be closely watching the performance of new vintages to our higher quality member base manifest over the next few months. We anticipate that this future book will provide attractive risk-adjusted returns for a broad range of investors, including for Lending Club, as we become a bank and buy loans on the same basis as our current platform investors. Beyond personal loans, I'll make a quick note. The auto loans continue to surpass yield and loss expectations of investors, despite the economic environment. And our patient finance business is recovering very well. Origination volume there is now getting close to pre-COVID levels. So that's it for delivering investor returns. I'm going to move on to our third priority, which was preserving liquidity. Tom will talk in more detail about this. What I'll say is now that we've resized our expense base, we are well positioned here. Our current focus is on increasing our strong cash position to maximize flexibility and prepare for the acquisition and capitalization of the bank. And accordingly, we've taken steps to convert loans on our balance sheet to cash with sales of $100 million in June, with more balance sheet sales to come this quarter, Q3, to prepare us for our next priority, which is staying on track for Radius. So our team is working hard towards becoming a bank. Not too much to add today beyond saying that I want to thank the regulators for working with us so collaboratively and effectively, even as we have all moved to this virtual environment. I am more excited than ever about this transformative acquisition. Today's environment is a stark reminder of the benefits of access to stable deposit funding. Of course, in addition to the funding, the attractive financial economics, the resiliency, and the regulatory clarity that the acquisition will provide, it'll also enable us to create a category-defining experience for our members and help us help them achieve financial success. So that brings me to our final priority, which is to support our members. During this crisis, we have remained focused on helping members navigate this difficult period, no matter where they are in their financial journeys. We recently rolled out multiple ways to help those most affected, including new hardship plans, new ways to pay through self-service options on the web and by phone, and many other innovations. We also launched our new member center in May, which provides a variety of tools and resources to help members manage their finances more effectively. Approximately half a million members visit this member center every month, and this speaks to how much our members want to repay their LC loans, as well as to their overall engagement with lending clubs. I'll note that while personal loans have become more mainstream since the last recession, there are still some lessons to take from 2008. TransUnion released a study last week showing that personal loan repayments performed as well as credit cards during the Great Recessions. And our internal data for the current crisis supports this assertion. Our payment rates reflect the ability of our team and our platform to adapt to a rapidly changing environment in support of our borrowers. I've listened in on many member calls of those looking for help to stay current on their payments. And it's been extremely gratifying to hear how our lending care call center associates are able to support and reassure our members and provide a range of payment solutions. Tough times are when brands build the strongest relationships with their customers, and we believe our work to help our members during this time will pay dividends when we can offer them an even broader array of products after we become a bank. I speak for the whole company when I say that we can't wait to bring this reimagined banking experience to life for our members. Okay, with that, I'd like to hand it over to Tom.