LendingClub (LC) Q4 2019 Earnings Call Transcript

LendingClub (LC -2.08%)
Q4 2019 Earnings Call
Feb 18, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Simon Mays-Smith -- Vice President of Investor Relations

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 benefits of a pending acquisition, certain product initiatives and obtaining a bank charter. 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 website at ir.lendingclub.com. And now I'd like to turn the call over to Scott.

Scott?

Scott Sanborn -- Chief Executive Officer

OK. Thank you, Simon, and good afternoon, everybody. Exciting news today that I am absolutely thrilled to be able to share, and that is that we've 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 reimagine banking and create a category-defining experience for our members.

We expect this transaction will pay for itself in two years and will vault LendingClub toward 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 a 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 it 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're 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 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 will 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 in 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 reimagined 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 reimagining, with a brand that champions members' financial success with fairness, simplicity and heart, 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 polled in a recent survey said they would consider switching to LendingClub as their primary bank.

We very much look forward to giving them that opportunity. With that, over to you, Tom.

Tom Casey -- Chief Financial Officer

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 were pleased with our performance.

But again, prioritizing profit growth over 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 a 12% improvement in 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 Lehi within our simplification program; third, our emphasis on lower cost reengagement 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 and financial goals over 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 the value will be generated. For your reference, we've 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 on 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 capture 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 $15 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 our consolidated 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 it 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 account 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 into 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 we only include the mechanical synergies, the value accretion is significant, as you can see on Slide 12. We are forecasting cash payback on the purchase price premium to be approximately two years, more than 100% accretion to adjusted earnings per share in year 2. And after we adjust for CECL provisioning, about 50% accretion to GAAP earnings per share by year 3. 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 provides significant 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, the remainder in equity to align incentives to LendingClub shareholders. As you can see on Slide 6, 1.72 times tangible book value multiple, an 8.8% core deposit premium, the purchase price premium is at the lower end of the other precedent transactions on TDV and core deposits. In addition to the purchase price, we will be paying approximately $20 million of advisory and transaction-related costs as part of the purchase agreement. In parallel to the approval process of the acquisition of 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 to nonvoting 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 stockholders' rights agreement, to maintain compliance with ownership thresholds under federal banking regulations by limiting accumulation of shares.

This agreement 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 consolidated 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 the 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 two LendingClub-specific factors before jumping into our detailed 2020 guidance. First, while we do not expect Radius to directly impact our 2020 results given the regulatory time frame, we do expect to accelerate some investments in our systems, compliance and regulatory reporting to prepare for Radius and also incur some nonrecurring integration costs.

And second, as with 2019, we will be prioritizing profitable growth. To be clear, what we mean by that is we're managing the business to increase contribution margin dollars as a percent of originations because that leverages our scale, which drives profitable growth, and profitable growth is sustainable growth. We've been phenomenally successful with doing this, driving up contribution margin dollars as a 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, geolocation and vendor consolidation drives contribution margin higher. Investing in new structures and channels to attract new investors puts pressure on fair-value adjustments in the short term but by growing demand and reducing illiquidity premium 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 margin even higher. 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 in transaction fee revenue with rapidly growing repeat customer originations. On the investor side of the marketplace, we expect good growth in net invested revenue, primarily generated by investor fees on our growing loan service portfolio.

We expect growth in our structured program to drive gain on sale revenues higher, with offsetting growth in fair value adjustments, reflecting our continued investment in growing our investment breadth and depth. We expect adjusted EBITDA to be in the range of $150 million to $170 million, driven by operating leverage from revenue growth, the annualization of the simplification program boosting contribution margin and continued tight control on costs. This implies adjusted EBITDA margins between 19% and 21%, up from 17.8% in 2019. Equally important, the improvement in the underlying cash flow, 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 nonrecurring costs, including the Shanda exchange. Q1 is our seasonally smallest quarter, and also our toughest comparable from 2019.

That mainly 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 of between $25 million and $30 million, implying adjusted EBIT margins of 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 zero and negative $5 million.

As you've heard in our remarks, we've 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 still have 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.

Scott Sanborn -- Chief Executive Officer

All right. Thank you, Tom. As I'm sure everyone can hear, we are really looking forward to kick off this next phase of LendingClub, and we see this as a really transformative transaction that is going to enable us to deliver extremely compelling shareholder returns. 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.

Questions & Answers:

Operator

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

Henry Coffey -- Wedbush Securities -- Analyst

Good afternoon. This is amazing news. I'm sorry, I know I'm supposed to be a hardcore analyst, but my thought process had always been you to acquire some fairly big, noble bank and then use that for all its advantages. But instead, I see that you're buying, frankly, a significant institution, so congratulations.

When we start to think about the numbers here, a couple of questions. Number one, do you have any idea or are you sharing anything with people in terms of what we should expect from Radius in 2020 as a -- I mean, in 2021, when you own the bank, what kind of provision charge do you think we'll be looking at? Any sense of what sort of net charge-offs we should expect, or is it too early to talk in those terms?

Scott Sanborn -- Chief Executive Officer

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 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 it.

I'll turn it to you, Tom to...

Tom Casey -- Chief Financial Officer

Yeah. Henry, thank you. Obviously, there's a lot of other work needs to take place before we can give specific guidance. And I know our Radius colleagues are happy.

They're not a public company giving guidance, so that is not something that we're providing for them. But suffice it to say this is a very, very exciting opportunity to bring the Radius team's capabilities in 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 for some framing, obviously, our loans are much, much higher-returning than in 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 would start to be deferred to the extent we held them on our balance sheet. So we would expect and we said about $90 million of economic profit over the life of $1 billion of personal loans, so you can 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. But it's too early to give specifics on exactly how that would play out in 2021.

Henry Coffey -- Wedbush Securities -- Analyst

Well, you know, 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?

Tom Casey -- Chief Financial Officer

I really do believe, as Scott said, it's one plus one equals three. The balance sheet that you'll see has been 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, 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, a 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.

Henry Coffey -- Wedbush Securities -- Analyst

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?

Scott Sanborn -- Chief Executive Officer

So this is going to be a process. The formal approval process, as we 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 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.

Henry Coffey -- Wedbush Securities -- Analyst

Well, listen, congratulations, and thanks for sharing so much with us on this.

Scott Sanborn -- Chief Executive Officer

Thank you.

Operator

Our next question will come from Eric Wasserstrom with UBS. Please go ahead.

Eric Wasserstrom -- UBS -- Analyst

Great. Thank you for taking my questions. And I guess I have one question on the financial performance, Tom, 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?

Scott Sanborn -- Chief Executive Officer

Hey, Eric, this is Scott. So I'll start. I mean, 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 dynamic across both sides of the platform, we will tweak our 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 group, 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.

Tom Casey -- Chief Financial Officer

Yes. We're quite encouraged that -- just to call out a couple of numbers here, in the fourth quarter, we had revenue growth of 4%, contribution margin of 11%, and earnings growth of 20%. So as you can see, what we've been focusing on is levering 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'll continue to participate in the market.

But I think at this point, we wanted to give a guide that reflects our focus. And if the market grows faster, we'll make different decisions. But right now, we feel very good about where we are and really just to emphasize the importance of getting this transaction done and done well.

Eric Wasserstrom -- UBS -- Analyst

And if I can maybe just follow up on Radius. Again, Scott and Tom, I think you've 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, does it currently exist? 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 1? 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?

Scott Sanborn -- Chief Executive Officer

Yes. So I'll start with the broad picture, which is we think the fact that they're bringing a diversified portfolio of $1 billion in loans is actually helpful. We like that, both because it brings diversity, 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.

Tom Casey -- Chief Financial Officer

Yes. Look, I think that the team has done a nice job of building out diversified portfolio. I think we did quite a bit of work. We've been working on this for quite some time, so I think we have done a deep work on the performance of these loans.

As 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, 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.

Eric Wasserstrom -- UBS -- Analyst

Great. And just on the credit diligence, Tom?

Tom Casey -- Chief Financial Officer

Yeah. On the credit diligence, 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 factor that into our accretion outlook that we gave you.

Scott Sanborn -- Chief Executive Officer

But I mean, the diligence process has been pretty extensive since early fall is when we kick 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 valuations in some of the assets.

Eric Wasserstrom -- UBS -- Analyst

Great. All right. Thank you very much, and congratulations on this announcement.

Scott Sanborn -- Chief Executive Officer

Thank you.

Operator

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

Jed Kelly -- Oppenheimer and Company -- Analyst

Great. Thanks. 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 given where the FTC seems to be around acquisitions? I mean, looking over the combined entity as a total market, it's still relatively small.

This is a relatively small acquisition. But any risk not closing and a potential backup plan?

Scott Sanborn -- Chief Executive Officer

Yeah. 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 path 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 than end destination. But again, that's why we said we feel good about our ability to get this done in 12 to 15 months.

Jed Kelly -- Oppenheimer and Company -- Analyst

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? Or how do you manage the banks and financial companies that are already buying your loans and how you segment what loans you hold and ones you don't?

Scott Sanborn -- Chief Executive Officer

Yeah. I would say on the contrary, this is viewed very positively by our partners, again, 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 that they are is 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 are thinking out of the gate, subject to regulatory approval, is really 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.

Jed Kelly -- Oppenheimer and Company -- Analyst

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 raised a significant amount of private funding and marketing pretty heavily, right? I mean, how do you kind of envision yourself competing with companies that seem to be spending a significant amount of money on customer acquisition?

Scott Sanborn -- Chief Executive Officer

Yes. So I'll just start with, you know, 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 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, our ability to make it 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.

Under a banking frame, we can take a longer-term view on that.

Jed Kelly -- Oppenheimer and Company -- Analyst

Thank you.

Operator

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

Steven Wald -- Morgan Stanley -- Analyst

Thanks. Congratulations on the deal. Maybe just one quick one on sort of the concept on Radius and the assets versus the deposit base that you guys were asked and 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 will 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-based 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 of the legacy LendingClub deposit base? And just sort of how you think about retaining all that and whether that's part of the constraint in terms of the 10% that you're going to retain on the loan portfolio.

Tom Casey -- Chief Financial Officer

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 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. Keep in mind, we've got about $900 million in tangible book value today and so a significant amount of capital to deploy. And that's why we're excited is that 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.

Scott Sanborn -- Chief Executive Officer

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, something just -- we're going from 0% to 10%, which is $1 billion, and we'll have the ability to reevaluate that over time. Again, as we demonstrated, 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.

Steven Wald -- Morgan Stanley -- Analyst

Understood. And then if I could just sneak one more follow-up in. If we think about the expense and the provisions at a run rate, I know you guys didn't want to give a specific 2021 goals. But in terms of what's driving the assumptions around the payback and the accretion, could you talk to us about what you're thinking in terms of -- it sounds like these are pre-CECL, but how you're thinking about the provision run rate on the deal post close and also 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.

Tom Casey -- Chief Financial Officer

Yes. So let me get on to your last one first because I think that's really, really important. We feel great about the efficiency we drive. You've heard that, I think, on the call today.

So we picked up four points of EBITDA margin this year. We're projecting additional growth with the 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, very good about that.

Just a couple of things on the portfolio to make sure that everyone's got it, 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 expect to hold high-quality prime loans on our balance sheet. That portfolio will generate approximately, call it, $11 million -- excuse me, 11% coupons.

They do have kind of annualized charge-offs of about 5%. But the CECL provision will be front-loaded. So we'll be finalizing that, but it's probably -- it's greater than 5%, so we know that we've got to bring the CECL 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 the net interest income is just going to be building the balance sheet over time, as you can imagine us 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 it, Radius together with LendingClub and our income profile being that much higher, we'll be able to utilize that NOL in a much faster accelerated way. So there's lots of synergies that we do not include in here.

But we think we feel very good about the ones we've laid out and demonstrate how reasonable the premium is and how fast the payback is on a cash-on-cash basis.

Steven Wald -- Morgan Stanley -- Analyst

All right. Thanks.

Operator

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

Steven Kwok -- KBW -- Analyst

Right. Thanks for taking my questions. The first one is just sort of 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 of that, if you contribute 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. I'm just wondering if you can help out reconcile the revenue growth expected in 2020.

Scott Sanborn -- Chief Executive Officer

Yeah. I mean, I think, look, if you look at our results, it's really not just over the past year but 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 originations and servicing group.

So this really is a prioritization and a reprioritization on the business of getting to what we see as our No. 1 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 in readiness around the bank. So this is 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 years.

Steven Kwok -- KBW -- Analyst

Great. And yes, just a 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?

Tom Casey -- Chief Financial Officer

So I think what we're doing in this year's guidance, 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 to go into our ongoing operating earnings. Where we'll break out for you is anything that is deal-related, onetime 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 have been 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.

Steven Kwok -- KBW -- Analyst

Got it. Thanks for taking my questions.

Operator

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

Giuliano Bologna -- Analyst

Well, congratulations on the transaction. It's great to see you guys announce the acquisition of Radius, and obviously, I think it will be impactful going forward. What would really be interesting is trying to think about how you plan on allocating capital because if you think about kind of your full-year guidance, if you can add roughly $80 million of additional net income or pre-tax income in '21, you can start talking about a 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 you plan doing going forward?

Tom Casey -- Chief Financial Officer

Yeah. 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, as 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, as I mentioned, we've got a $900 million of tangible book value in LendingClub today, and so we believe we can capitalize the bank with approximately, call it, somewhere in the $300 million to $350 million 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 got of our 10% asset 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 at the 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 a more efficient way.

So we feel good about capital allocation that we projected, and it does generate that double-digit kind of ROE-type of returns over time. As you start to get the balance sheet up and running and earning through some of these early day provisions, it can be quite accretive.

Giuliano Bologna -- Analyst

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

Tom Casey -- Chief Financial Officer

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.

Giuliano Bologna -- Analyst

That sounds good. And if you get to get a sense of -- obviously, 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 using your own capital since the launch of the program?

Tom Casey -- Chief Financial Officer

Yes. We had so much to talk about this quarter. We didn't make the list, but it's very, very exciting. For those of you who don't -- may not recall, LCX is basically our digital marketplace that allows us to connect with investors and settle loans electronically.

It's up and running. We're adding new investors every week. We've hit new milestones and the team is really doing quite well in the adoption, we're quite excited about it. Maybe on the next call, we'll give you more details but it's very, very valued for us.

What it does, it increases the speed of 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 recently started what we call our Select Plus Platform as well, where we're bringing additional folks onto our platform, underwriting their -- 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 us well for this acquisition.

Giuliano Bologna -- Analyst

That's great. Well, thanks for answering my questions. Appreciate it. Thank you.

Tom Casey -- Chief Financial Officer

Thank you.

Operator

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

Scott Sanborn -- Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Simon Mays-Smith -- Vice President of Investor Relations

Scott Sanborn -- Chief Executive Officer

Tom Casey -- Chief Financial Officer

Henry Coffey -- Wedbush Securities -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Jed Kelly -- Oppenheimer and Company -- Analyst

Steven Wald -- Morgan Stanley -- Analyst

Steven Kwok -- KBW -- Analyst

Giuliano Bologna -- Analyst

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