Lending Club Q2 2017 Earnings – Back to Growth

Lending Club’s second quarter earnings marked an important milestone for the company – a return to growth. It seemed as though there was a general consensus that this was a make or break quarter for the company. Originations have been hovering around $1.9 billion since Q2 of last year. This quarter Lending Club announced originations of $2.15 billion for the quarter, up 10% from the prior quarter of $1.96 billion. While this is still down from their previous highs, it shows that the company is back on a growth trajectory.

Also of significance was net revenue of $139 million, up 35% year over year. The second quarter marked the second highest revenue generating quarter for the company. Lending Club anticipates that the third quarter will be their best quarter yet from a revenue perspective. Below are the other financial highlights for the company.

The earnings call focused on a couple of initiatives for the quarter. One was Lending Club’s first sponsored securitization of near prime loans. This brought in 20 new investors and is an additional revenue source for the company. Many of the analysts on the earnings call were interested in learning more about the financial impact of the securitization program. Lending Club anticipates they will do one securitization per quarter with the next one being a prime securitization.

The other initiative was focused on borrower take rates. Lending Club redesigned their website and developed testing infrastructure to better understand what prompts borrowers to say ‘yes’ to a loan. This included analysis on many different factors including testing pricing sensitivity as well as experience tests.

Bank participation has been an important part of the turnaround story for Lending Club. Last quarter the company announced banks were funding 40% of loans, but that reached higher in the second quarter to 44%. Lending Club was able to land new banks in the quarter and cited that the asset class continues to be attractive in the low interest rate environment. With bank funding stable, Sanborn stated that they would be increasing their efforts on the retail investor.

On loan performance the company continues to be vigilant due to high debt levels of consumers. However, early signs of delinquencies on recent vintages are in line with expectations which has resulted in no significant changes to pricing. With respect to auto loan refinancing, Lending Club is still working on ramping that business up and it is not making up a meaningful part of originations.

Given that Lending Club beat expectations the company adjusted their earnings outlook upwards.

Conclusion

What struck me the most in the earnings call was that this was the second highest revenue generating quarter. To close out 2017 the company expects to generate between $585 and $600 million. That is substantial revenue. Now, the company is not profitable yet, they generated a GAAP net loss of $25.4 million but they are making progress and they have come a long way since last year. Lending Club CFO, Tom Casey and CEO Scott Sanborn believe Lending Club will be able to deliver on margins while also investing in the business for further growth. It seems as though the new securitization program could be a big driver of additional revenue in quarters to come.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, the author of this article both own LC stock.

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marc
marc
Aug. 7, 2017 7:20 pm

wonder how much of the origination “growth” was just refinancing out from under their investor customers at lower rates while they pocket the fees and we have the risk of relending the money again till someone defaults.

Peter Renton
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Peter Renton(@peter)
Aug. 15, 2017 3:20 pm
Reply to  marc

Repeat borrowers have never been a big component of the origination volume at Lending Club so I don’t think that was responsible for the growth.

John
John
Aug. 9, 2017 10:01 pm

Glad Lending Club is doing so well. All 3 of my LC accounts have been stagnant for all of 2017. LC claims I’m making 5-6% on my loans but the total amount of dollars hovers around the same amount month after month. You can’t withdraw monthly interest dollars to supplement your retirement when there’s no interest dollars to withdraw. I’m in the process of liquidating my loans with LC and may try Prosper if I decide to stay in peer to peer lending. It looks like Prosper may be more concerned with the prosperity of their client lenders than simply growing their lending amounts with little regard to the ability of the borrower to pay it back.

Peter Renton
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Peter Renton(@peter)
Aug. 15, 2017 3:22 pm
Reply to  John

John,

I have had some of those months as well where the interest earned is less than the amount that was charged off. It is frustrating as an investor. Most of the problem loans I have were issued in 2015 and early 2016 when Lending Club got too aggressive with their underwriting. I expect newer loans will perform better. You should read this note from the CIO:
https://blog.lendingclub.com/q2-2017-an-update-from-our-cio/

Reginald
Reginald
Aug. 15, 2017 1:12 pm

John, I’m experiencing the exact same thing: Flat returns year over year due to higher than expected chargeoff rates. Lending Club’s NAR (net adjusted return) is built on expectations of past returns going back to your original loans. If there is a sudden spike in chargeoffs on newer loans, the actual ROI will be less in the present than in the past.

I’m very worried that this is the same thing as a boat with a lot of small leaks. Eventually the whole boat goes under. LC doesn’t have the same set of incentives to vet loans as does someone who is lending their own capital. Add to that the lack of collateral, and you have a formula for bad borrowers to try to take out a loan they cant or wont be able to pay back.

Peter Renton
Admin
Peter Renton(@peter)
Aug. 15, 2017 3:25 pm
Reply to  Reginald

Reginald,

I have heard this argument many times over the last 8 years. The fact is that LC does have the same incentive as investors – because without investors they don’t have a business. We saw an investor pullback in 2016 and LC increased interest rates (several times) to try to bring these investors back.

I still believe in the company and despite my returns this year I think it is a good investment. But there are certainly some people like yourself who have stopped investing.