What a day. Everyone is still trying to digest the big news from Lending Club this morning. More details are slowly coming to light but it is fair to say we do not have the full story and we will probably never know all the details. But we do know more than we did this morning. There are really three different pieces to the puzzle all of which contributed to the extremely negative sentiment.
First, we had the issue of the non disclosure of an investment from Lending Club CEO Renaud Laplanche. Bloomberg is reporting that one of the catalysts for Renaud’s resignation was his failure to disclose a personal investment in a company where Lending Club subsequently made an investment. This failure to disclose his investment along with Lending Club was a catalyst for his resignation according to Bloomberg. John Mack also made an investment but he has been cleared of any wrongdoing.
Second, we have the $22 million in loans that were reportedly sold to Jefferies that were against their express instructions. This one is a little confusing because the original press release from Lending Club stated that it was a non-credit and non-pricing issue. When you look at a loan the majority of the data pertains to credit or pricing. In reality this a moot point – the fact that it actually did go against the wishes of a major investor, whatever those wishes were, is the story here.
Third, we have the date change issue. This one is related to the previous issue. An internal investigation at Lending Club found that the loan application date was changed on $3 million of the aforementioned $22 million in loans. This seems to be have been the work of one or more senior executives within Lending Club who have since been let go. In some ways this last issue is the most damaging to Lending Club.
People today have been questioning the data integrity on all Lending Club loans – what else might have been changed? And if investors don’t trust the data in the loan history they will be very reticent to invest. Now, it should be pointed out that internal audits found no other problem with the data and you can be sure that many people will be combing over the new Q1 downloadable data that was made available today.
Any one of these three issues would have been headlines given Lending Club’s previously unblemished record and their oft repeated focus on transparency. To have all three items come to light today was nothing less than staggering. There is a lot of sadness and anger around the industry today – Lending Club has let us all down. And it is going to take a long time for them to earn back the trust we had.
With such big news I decided to reach out today to many industry leaders to get their comments. Some people declined to share their thoughts but below are comments from some of our industry leaders:
Matt Burton, CEO of Orchard:
We are saddened by today’s news surrounding Lending Club, and the resignation of Renaud Laplanche. Mr. Laplanche has been a central figure for marketplace lending and has done a lot to transform the industry. We believe this is a learning moment for marketplace lending and an opportunity for all participants to set the bar even higher in order for our industry to thrive.
We believe that marketplace lending, as a business model, is here to stay and that events like this — unfortunate as they are — present an opportunity for everyone to demonstrate that they provide a safe, responsible, compliant and sustainable model that is built for success during up times and down.
Al Goldstein, CEO of Avant:
At Avant, our goal is to transform the online lending industry for good. We strive to be the most transparent from a customer, capital markets and regulatory perspective. We don’t charge our customers origination fees, so what they see is what they get. This philosophy carries through to our approach to institutional investors: loans that are already originated and owned by Avant are sold to investors on a weekly basis. Operationally investors receive a file with the loans designated for sale for their review and approval before a specified sale date. We have over 50 employees dedicated to regulatory and compliance and we recently added former FDIC Chair Sheila Bair to our board.
We see a bright future ahead and we remain committed to delivering the most innovative, compliant and creative solutions for our customers and investors.
Ram Ahluwalia, CEO of PeerIQ:
The pace of institutional investment is well ahead of the quality of institutional infrastructure. Increased transparency and independence is necessary to re-build investor trust. The industry needs to invest in enhanced disclosures, asset review tests, second-level verification, and independent pricing and valuation.
This was true before the unfortunate news from Lending Club and remains true after.
Don Davis, Managing Partner at Prime Meridian Capital Management:
The loan performance on our LC book (as well as Prosper) remains strong. The firm has a ton of cash on hand making current valuation quite attractive and a candidate to go private. The internal controls and audit process at LC actually worked successfully in this case as this was caught and resolved fairly quickly. We believe the industry will continue to strengthen and grow as a result.
Lost in the News: Another Strong Quarter from Lending Club
Overshadowed by all this news was the fact that Lending Club released their Q1 earnings today. Despite the negativity Lending Club actually had a good quarter. Ryan has put together an analysis of the numbers below.
Revenue for Q1 2016 was $151.3 million which was an increase of 87% from the same period last year. Adjusted EBITDA was $25.2 million, an increase of 137% from last year. They reported a net income of $4.1 million compared to a loss of $6.4 million last year. The table below taken from the press release breaks down their recent performance.
Loan origination growth at Lending Club continued as they originated $2.75 billion in the quarter. This compares to $1.64 billion from the same period last year and $2.5 billion for Q4 2015. They are now approaching $19 billion in total originations. Lending Club also announced that they had their first month with over $1 billion of originations with two days at or above $99 million in originations. Despite these numbers it is apparent that growth isn’t as strong as it has been in previous quarters.
Many investors also look at Lending Club’s sales and marketing costs as a percent of originations which came in at 2.35%, the highest since they became a public company. Lending Club noted that this is in part due to seasonality as depicted in the chart below.
Beyond financials, the impact of softening interest from investors is on many minds. Below is a screenshot from Lending Club’s earnings presentation. As expected, there is a drop in “Other Institutional”. “Managed Accounts, Individuals” also saw a decrease from the previous quarter while “Banks/Finance Companies” saw a tremendous increase and “Self-Managed, individuals” saw an incremental increase. It seems as though Lending Club was able to bring on additional institutional capital from banks at a time when other companies are having difficulty funding loans.
Also in the news as of late has been the increasing interest rates at Lending Club. Since December, interest rates have increased three times. According to Lending Club, the pockets of loans affected by lower performance have been in loan grades D-G which were addressed with credit cuts and rate increases. While we often hear about interest rates, Lending Club notes below that they have eliminated 15% of loan volume from credit policy starting in April 2016.
According to the release, Lending Club has repurchased 2.3 million shares of Lending Club stock for approximately $19.5 million. This leaves $130.5 million remaining to purchase shares after the board of directors approved a $150 million share buyback. Lending Club is not providing any future guidance at this time due to the recent news. Not surprisingly, Lending Club’s stock closed down 34% today.
The full earnings presentation including an audio of the earnings call can be found on Lending Club’s investor relations page.
Conclusion
While this will go down as the most challenging quarter for Lending Club in their history it’s important to note that despite the shocking news today Lending Club continues to grow profitably. The coming quarters are going to be especially telling as the company looks to put these issues in their past and move forward.
Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, Senior Writer at Lend Academy own LC stock.
How worried are you about the 15% of loan volume eliminated due to a change in credit policy? It’s great that they are holding to higher credit standards, but well, 15% of the total pool is 15% of the total pool. That is quite a lot if they are beginning future quarters from a -15% handicap.
Also, it seems Lending Club has a habit of comparing current quarter results to the same quarter last year. Is that really relevant? It seems to me that it’s more a ploy to sensationalize results – i.e. “originations grew 68% over last year”… in realty originations grew 7% since the last quarter (and 15% the quarter before that). Is that 7% a concern? If LC grows originations each quarter by single digits then it will be some time before they’re earning more than a few pennies per share.
Hi Dlee,
The 15% reduction was not across all loan grades – as Scott Sanborn said in the Q&A of the earnings call the reduction is only for grades D-G. Grades A-C were not included and this is around 75% of the loan pool historically. So, the 15% was more like 3-4% of the total volume.
As to your second question I think that is pretty much standard fare for all public companies to compare the previous year’s results. I think it is quite possible that Q1 originations will be the high watermark for the year. The fallout from investors could take a while to recover and so I don’t expect much growth this year at all. And yes, that is a concern. But the core business is strong, as demonstrated by the results, so I think LC will weather this storm in the long run.
Peter,
Does LC only “originate” loans if they have an investor on the other side to invest in them?
Is there usually a huge short fall between prospective lenders and prospective borrowers?
I guess I’m wondering what drives the ship – the presence of lenders or borrowers. You would think that borrowers will continue to approach LC in droves these coming quarters and years as publicity begins to spread.
If no investors though does that force the breaks?
In the past, there has been large investor demand, and investor demand has exceeded borrower demand. All the platforms, LC, Prosper, etc have to spend money (ie marketing, advertising, etc) to capture borrowers. They pretty much did this to the level they wished to grow.
Now the situation has changed.
They started with individual investors, and then as they grew, attracted the interest of institutional investors. In the last couple of years, the institutional investors have dominated. Interestingly, RL has been explicit at many times in the past about the risk that institutional investors could at some point pull back in herd-like fashion. It appears that is what has happened.
If they usually have more investor demand than borrower demand, does it ultimately matter if they have investor pullback?
I assumed that borrowers are the driving force, not the investors. Is that thinking correct?
It will matter if there is significant investor pullback. This will mean they will have to scale back on the borrowers which is what I think will happen for the next few months.
It is a two-sided marketplace and for the last several years there has been more investor demand than borrower demand. That will now switch at LC I expect.
What has gotten lost in this madness is attention to the fact that LC has invested their own equity into a buyer of their loans. Independent of the disclosure issue here, this fact alone is troubling. A terrible conflict of interest. What a MESS.
Agree on both counts. A terrible conflict of interest and a mess.
Has there been a pullback in investor demand? If there were, I’d expect to see more loans available for investment. I’m not seeing that at all. It’s been fairly constant the last month+.
With automation, my investors still only get maybe 1-3 loans per posting and they have assets sitting idle due to lack of loans and the need to diversify.
If you are only looking at the retail investor platform then I don’t think you will notice much changes. The number of available borrowers fluctuates dramatically there from the low hundreds to several thousand. And I expect demand to remain consistent. Where the real changes will happen is on the institutional which should be reflected in the whole loan pool.
I posted a piece on the same subject this morning: https://crowdfundattny.com/2016/05/11/trouble-in-paradise-lending-club-and-prosper/.
I think it’s very important to recognize that there was no fraud at Lending Club, not even a whiff of fraud. The disconnect is that Lending Club is a small company with a small company, entrepreneurial culture, where not every T gets crossed necessarily. Lending Club isn’t a bank. In contrast, they’re selling loans to institutions that want bank-like controls. So something has to give.
Only time will tell if the Lending Club board made the right call. They made a call designed to improve Lending Club’s image on Wall Street. I guess that’s naturally where they see their future, but I’m not sure they’re right.
I really like your post and article. As someone both in the control and big banking business I think this point is spot on. It’s actually a good thing that the issues were internally detected in a timely manner, this only shows they are maturing their control environment. I do think that regardless of who their biggest customer will ultimately be (wall st. or the avg. investor) good controls are necessary and more importantly reliable and good data quality is essential. I attended one LendIt two years ago and while it was great to see all the enthusiasm, the industry was clearly drunk/high on growth and now its just coming down to reality a bit. That’s ok. Fintech and the P2P model is here to stay. The biggest service LC and others can do for the overall industry is to make sure the regulators don’t screw it up by basically taking the retail investor out of it and ironically destroying a model that creates some true equilibrium in opportunities for the little man. I hope we get back to a renewed focus on Retail where this all started at with Prosper v1 all these years ago!
agree – this company is going private or being acquired by a strategic. its over for them, sadly
I would be interested in any thoughts on how this might impact the risk to those who, like me, lend through LendingClub. On their balance sheet, they show the notes as both assets and liabilities. This suggests that in the event of bankruptcy, those who invested through the platform would be unsecured creditors. They do not have any debt, but what if lawsuits and fines dragged them under?
Also, how significant is the news of the pullback of institutional investors? It appears that they sell over half of their loans. Has this channel then been completely cut off?