Good afternoon and welcome to LendingClub's second quarter 2020 earnings conference call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sameer Gokhale. Please go ahead.

Thank you and good afternoon. Welcome everyone to LendingClub'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 the 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 would like to turn the call over to Scott. Scott?

All right. Thank you Sameer 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 have positioned the company to ride this out. But 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 get 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 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 will become a leading digital bank with a demonstrated track record of effective underwriting through a 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.…

Thank you Scott. Before I get into the details for the quarter, I would like to provide a high level view. Results for the quarter largely reflected the impact of significantly lower origination volumes, which we had anticipated. This contrasts with our first quarter results where origination volumes were closer to our historical levels but reflected significant fair value marks on our loans and securities as the economic outlook deteriorated and credit spreads widened. During the second quarter, we opportunistically sold loans from our balance sheet indicating some improvement in the market compared to Q1. Our origination volumes have come off the bottom with July volumes doubling from a low point in May as investors have managed through their liquidity issues and seeing the recent performance of LendingClub loans. As Scott mentioned earlier, we have prioritized generating higher levels of liquidity and intend to capitalize Radius Bank with cash. Our estimated net liquidity position remains strong at $554 million and increased slightly from Q1. Our expenses also decreased significantly as we took decisive action during the quarter to better align our expenses with revenue. Looking ahead, with strong levels of liquidity, high levels of cash and significantly reduced cash expenses, we believe we are well-positioned to successfully navigate through this challenging environment and acquire and capitalize Radius Bank. So let's turn to the financials. For Q2, we reported GAAP net loss of $0.87 per common share and adjusted net loss of $0.60 per share. The quarter's results primarily reflect a net $147 million decrease in revenue, compared to the second quarter of 2019, offset partly by an $86 million reduction in expenses. The reduction in revenue was primarily the result of a decline in transaction fees as originations decreased by 90%, in line with our call last quarter. Transaction fees…

All right. Thanks Tom. Just a couple of quick comments before we go to questions. So the second quarter results, they were in line with our expectations. Significant drop in revenue, driven by the drops in originations. And while we remain cautious on the near term outlook, we are seeing signs of recovery and we are pleased with how our loans are performing. We have maintained our liquidity and increased our cash position in the quarter as we prepare for the bank acquisition that will drive the next chapter of the company's growth. And lastly, on behalf of the management team and the Board, I would just like to take a minute to thank the LendingClub employees. They have been working tirelessly to support our borrowers, our investors and each other in the face of countless hours of Zoom calls. And they demonstrated an incredible ability to adapt and evolve with purpose. So I am deeply grateful for that. And with this team and their commitment, I am confident that we are positioned to weather the current environment and take advantage of new opportunities when they arise. So with that, I will turn it back over to you, Sameer, to open it up for Q&A.

Thank you Scott. Before we open it up to questions, as a courtesy to others, we ask that you limit yourself to one question and a follow-up and return to the queue, if you have additional questions. Operator, please open the call up for Q&A.

[Operator Instructions]. Our first question is from Eric Wasserstrom from UBS. Go ahead.

Thank you. Can you hear me okay, Tom or Scott?

Yes.

We do.

Good. Okay. Thank you. So a couple of questions please. The first is, thanks for the information on the deferrals and how that's trending. Maybe perhaps Tom, can you give us and explain that in terms of how to think about the impending loss experience and what's embedded in terms of loss experience in that 5% IRR?

Hi. Eric, you were a little hard to hear. You broke up quite a bit. But we will give an answer that I think covers it.

You can restate the question.

Yes. I think you are asking where some of the assumptions embedded in our IRR projections, so I will start. Tom, free to add, which is, look, first is, important thing to note is that our members or if you look back at what we historically issued pre-COVID, we are talking about people whose individual income is in the $90,000-plus range. So just overall impact of this recession, which as much has been reported, is disproportionally impacting lower income people. So overall, we feel like the borrower base we came into this, with given the last two years of tightening, was in a good spot. And as we look forward, we have two different pieces we are looking at. One is the performance of the back book pre-COVID and the other is the performance of the new originations. We have done tops down, bottoms up, lots of ways of looking at this. And we have what we believe to be pretty conservative assumptions about overall stress on the portfolio. So first if you look at hardship plan, you know what we anticipated is what we modeled after with how people performed on hardship plans coming out of hurricanes. And what we are seeing is, they are performing significantly better than that, right, with the majority of people rolling back to full payment. And even those that are expressing additional hardship opting, most of them, for actually partial payments. And so we are not expecting those people to rollback to full payment to perform like they would have pre-COVID. So we are modeling additional stress on that population because they have kind of raised their hand and said that they are more vulnerable. The same thing is true for the population which is, most of our book, which is borrowers who…

Thank you for that. And can I just ask one follow-up, Tom, on your funding condition currently. Thanks for the update on the renewals. Is there anything outstanding like in process of being renewed or coming due in the near term with respect to your remaining warehouse or other debt facilities?

No, Eric, you were garbled a little bit. But I think the question is, where are with the warehouse lines and any additional renegotiations. As I mentioned, we did renegotiate our warehouse lines. Keep in mind, our warehouse lines are used for our structured programs. And so that fact that we paused them, we don't need a lot of those warehouse lines for the current loans we have. They are in warehouses and we are managing that. As Scott indicated and I did as well in my commentaries, we are selling loans from the balance sheet that are held for sale and correspondingly paying down those warehouse lines. So we did modify one warehouse line in the quarter or actually in July. And more importantly, we actually paid down the revolver by $40 million. So we feel very good about our liquidity profile. We are managing that over the quarter and really feel that we are in good shape. Again emphasizing the cash burn is very low and allows us to really navigate our way through the environment.

Okay. Thanks very much.

Our next question is from Steven Wald from Morgan Stanley. Go ahead.

Great. Thanks. Can you hear me?

Yes.

Yes.

Okay. Perfect. Well, thanks for taking the questions guys and appreciate all the color you are able to provide. Maybe if we could just start off on some of the comments I think you made at the end there, Scott, about where we are now relative to the end of the quarter. I think we ended the quarter sort of down in the 90% range and it sounded like it doubled off that bottom. I just wanted to make sure I understood that properly. Is that to imply we are sort of in the down 70% to 80% off of, let's call it, normal 2019 levels on originations?

Yes. This is Tom. I indicated in my prepared remarks. We think we are on a trajectory of about 4500 million to $600 million of volume for the third quarter. But clearly, you are actually right. The lows were probably in the April, May timeframe. June was better than May and July is better yet again. So we saw a nice doubling, but it was off a pretty low amount, frankly. And so we wanted to provide some context on where we think the quarter will be. So $500 million to $600 million is where we think that's gong to come out. Again, we are managing, tightening underwriting, working with a number of five out of our 10 investors to get back to recovery mode as we navigate away through this.

Yes. What we are looking to do right now is just keep our finger on the pulse of the credit while we look for the returns of these new post-COVID vintages to manifest. Because we think, as those results come back and that will correspond with investors being able to really kind of see what can happen, because six months of data starts to be able to confidently put your finger on what you think the full vintage is going to perform at.

Right. That's very helpful. Maybe if I could to squeeze in one follow-up on a separate subject. With Radius, I heard the commentary about keeping in dialogue with regulators and getting their help in terms of figuring out what it needed to close. I guess I am just curious, following up on some prior thread of comments that you guys had made about the shifting goals that you are looking to deliver around showing them the processes and risk management initiatives in place. And obviously, Tom, with all the areas you outlined of shoring up cash, I am wondering, is that generally in line officially with kind of where the goalposts are from the regulator's side? And then separately, as you have gone through the diligencing on the Radius deal, what additional areas of investment might be required to build out a product suite to serve the deposit side of the balance sheet?

Yes. So a couple of things. I think we feel very good about where we are with the regulatory process and in line with our risk management processes and profile. Obviously, we did a lot of work during the quarter to stabilize and improve our liquidity profile. And so we wanted to share that with you. Obviously, that's always consistent with the regulatory outlook. So that's in line. As far as the investments that are being made with Radius, keep in mind that we have a lot of infrastructure already that we have been building. Our cost base already reflects a lot of that. We are spending some dollars to get the bank ready and finalizing our application. As far as this acquisition goes, this is really a one plus one equals three, where we provide great lending capabilities and they have got terrific deposit products. And so there is really an opportunity for us to bring both of these together in two of our strengths. So yes, there will be some cost associated with integration and things like that but I don't see at this time a massive lift on investments for deposit products or lending products since we already have those in place. Scott, I don't know if you want to share anything else but that's my thoughts.

No. That sounded good.

That's great and I appreciate it and glad to hear everyone healthy.

Our next question is from Heath Terry from GS. Go ahead.

Great. Thank you. I was just wondering if you could kind of give us a sense of the loans that you have sort of taken or that did sort of sell out of the loan book this quarter versus the ones that you decided to retain, is there a difference in the profile just in terms of grade, duration, profile of the borrower that we should be thinking about? And then also to the extent that people are clearly in need of financing in this environment, understanding that you have very good reason to want to tighten your standards, is there a way to monetize that traffic that you are getting, that demand that you are seeing in some way just to the benefit of the company? And I got just one housekeeping question at the end.

Yes. So in terms of the loan portfolio, starting there. We went to the market first with some of our higher yielding borrowers. And that's because that's where the capital was kind quickest to recover. We got good response from that and have moved to more of the core part of our prime portfolio. I think we went out an initial pool and we are very pleased with the results we got and ended up selling, I would say, more than we had initially anticipated as we were pleased with the amount of interest.

They were oversubscribed. So we felt very good about where we had marked them at the end of, really, actually going all the way back to March, frankly, actually liquidity premiums actually have tightened. Overall, things have started to be a little bit more liquid. And so we were able to sell those loans as we indicated at carry or above. So we felt pretty good about moving that from a loan into cash during the quarter and actually into the third quarter as well.

Yes. And when it comes to the demand in the market, keep in mind, as we said, exiting Q1, we virtually turned off the paid marketing. So really the demand, of course there is always some organic demand, but the demand we are generating coming from our member base, which is why we think it's important to be able to serve them from a brand perspective, which is why that's where our focus is. We do think as we look ahead and again, as our investors get their arms around their own capital issues, that we will be able to make use of some of the tools that we have been investing in such as, if you remember, our Select Plus program which allows investors to deploy for their own credit models against the application pool and LCX, which allows investors to at least apply their own view on credit, detailed credit criteria against applications as they come in on the primary market. So those weren't a big focus in Q2, but we expect probably as we enter Q4, those will be tools that we will start to deploy based on, like I said, investors kind of getting their legs under them, understanding their own capital issues and situations and being able to reposition themselves for resumption.

Yes. And Heath, just to get some numbers on there, obviously, origination is down 90%, but so is marketing. So we are not disproportionately spending on marketing that we kind of need to monetize further. Clearly, we think as we move towards the bank and being able to engage our members as well as the marketing funnel in the future, that's really where we see the opportunity to extend that relationship. But right now where we are, we feel like the ability to reposition our expense base as fast as we have is an indication of how agile our model is and how fast we are able to resize the marketing dollars and costs.

Yes. Certainly, sort of makes sense. And then just to follow-up on the transaction fee refund reserve that you talked about earlier. Do you expect that will continue to go up over the next couple of quarters as prepayment levels continue to improve? And are you seeing those same sort of trends into Q3? Mostly just trying to understand what the impact on GAAP revenue is going to be and if we should expect sort of similar trends to Q2 going forward?

Yes. I think in the first quarter, we definitely saw prepayments slow. And frankly, we were seeing a lot of hardship plans. So we are really capturing data in real time, if you will. But they are all back to historical levels they were. We don't expect it to further increase as far as the prepayment levels. What we are encouraged by is that the personal loan payment profile is getting back to normal. So while we are seeing trends of an income cost in the 30% type of prepayment, that's actually good for the credit of the product. We have slightly some variability on liability, but I don't expect that kind of variability in the future. I don't see prepayments, for example, accelerating significantly from here. I think we just saw a lot of gyration between 1Q and 2Q now we seem to be back to normal. So that's what I would say.

Yes. And just as you think about going forward, a couple of thoughts of things that will be moving, right, what's evolving. Well, lots is obviously moving but a couple of things that will be evolving will be interest income coming in as we sell loans on our portfolio. They will obviously be coming down. The servicing book, Tom mentioned, you know, will continue to pay down over time. And then the next piece is, as Tom also mentioned, as we ramp back up volume, we are supporting that volume with pricing with investors. We think there is a benefit to get our investors back engaged with the platform participating. But until we think the performance of these new vintages fully manifest, we don't think pricing is going to get back to where it was pre-COVID. That's also further kind of exacerbated by the fact that there is a lot of portfolios in the market right now that are hitting that are available for sale at more distressed prices.

Great. Thank you both.

[Operator Instructions]. Our next question is from Bill Ryan from Compass Point. Go ahead.

Good afternoon. Thanks for taking my questions. First, I just want to kind of go back on the regulator question as it relates to the acquisition. If you can maybe give us a little bit more granular color on what they are specifically looking at and you are working with them on? And just any type of color that you have on that matter, including maybe the FTC lawsuit? And then second, if you could just quickly remind us what the amount of capital that you expect to inject into the bank once the acquisition is closed? Thanks.

So, you know, I understand the request for more detail. Obviously, the conversations we are having with the regulators has got to stay between us and the regulators. What I can tell you is, the timeline that we laid out, we feel good that we are on track to hit that. We have remained very closely engaged with the regulators and we have been very productive and moving. So we have not been set back by the move to virtual in the process. So I think that's, broadly speaking, a good thing. And as you can hear on our action, we are taking steps to prepare for that long term strategy by positioning ourselves with cash. In terms of the FTC, I would say the real update there is, you all might remember, the trial date is set for October. We have requested a stay, given that the Supreme Court is going to be hearing a case that is challenging the FTC's ability to seek monetary damages and the extent to which those monetary damages can be. So we are requesting a stay of the trial until after that case is heard. And there is more comments on that in the 10-Q.

Okay. And just the amount of capital that you are --

Yes.

Sorry, go ahead.

Sorry Bill. Obviously it's preliminary at this point as far as the dollars. But I think you can see our actions today of accelerating the conversion of loans into cash, consistent with capitalizing the bank. We have not communicated a specific number until we are further along at this point, okay. So we will be updating you as we have more information that's finalized.

Okay. Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Sameer Gokhale for closing remarks.

Great. Thank you operator and thank you all for joining us today. If you have any questions, please contact investor relations and we will be happy to assist you.

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