During the first quarter, LendingClub is typically affected by the seasonality of the lending business so it’s beneficial to look both at the last quarter as well as the prior year period. In the first quarter of 2018, LendingClub posted originations of $2.3 billion. This represents a 5% decrease from the previous quarter, but an increase of 18% from the prior year period.
Revenue came in at $151.7 million, down 3% from the previous quarter but up 22% from the prior year period. They incurred a GAAP net loss of $31.2 million which included legal expenses related to legacy issues of $17 million.
One of the most interesting things to look at every quarter is LendingClub’s platform mix. Below I’ve included data which includes platform mix all of the way back to Q1 2015. Together, these charts tell the story of LendingClub’s evolution over time. In Q1 2018 banks funded 48% of loans on the platform. Over time we’ve also seen loans funded by retail investors, marked “self-directed” below continue to fall to its lowest point in the data included below. Individual investors funded $222 million of loans in Q1 2018 or about 10% of originations.
LendingClub provided two operational highlights from their perspective which were included in the press release. One was the strong response to their Direct Payoff program where borrowers use funds directly towards their credit card balances. In exchange, borrowers receive a better rate on their loan. This feature has also increased conversion rates for the company. LendingClub is looking to make this program more broadly available throughout 2018.
LendingClub also touted the success over their CLUB Certificates which totaled $160 million in the quarter. These CLUB Certificates were first introduced in late 2017 and are a security which allows asset managers to purchase a pool of loans instead of participating in the whole loan program. One of the major benefits is the flexibility and liquidity that these securities provide.
There were several mentions of the FTC complaint which we reported on two weeks ago. Not surprisingly they weren’t able to comment much beyond their response to the complaint, but CEO Scott Sanborn emphasized that a majority of the items are pointing to issues that were self identified by the company that were remedied prior to any dealings with the FTC. One open item is the disclosure of the origination fee which LendingClub believes is unwarranted and that they are in compliance with current rules.
One analyst asked whether they had many any changes to applications, disclosures, promotional materials or the website as a result of the complaint. Sanborn noted that no changes had been made directly related to the complaint, but at any given time they have 80 or 90 tests going on for marketing purposes which look at user flow, product features presented etc. This is an area where we typically don’t get much insight into so it was interesting to hear that data point. LendingClub is constantly looking for ways to optimize the platform for the borrower. Sanborn also said that LendingClub has not seen any changes in terms of borrower behavior related to the complaint.
Also of interest was the increase in borrower activity. LendingClub noted that they have received 2.8 million applications, a 36% increase in activity. The vast majority of these applications are denied but this is a very exciting opportunity for potential growth in the future as LendingClub looks to monetize these declines.
Looking forward, LendingClub provided the below guidance for the second quarter and full year:
Second Quarter 2018
- Total Net Revenue in the range of $162 million to $172 million
- Net Income (Loss) in the range of $(20) million to $(10) million
- Adjusted EBITDA in the range of $12 million to $22 million
Full Year 2018
- Total Net Revenue in the range of $680 million to $705 million
- Net Income (Loss) in the range of $(70) million to $(55) million
- Adjusted EBITDA in the range of $75 million to $90 million
Conclusion
LendingClub is still facing some headwinds due to ongoing legal expenses related to legacy issues in 2016. Beyond these one off expenses, LendingClub delivered a strong quarter compared to the prior year period and clearly has developed some strong partnerships with banks which will likely serve them well over the long term. They are projecting an improvement in their net loss for next quarter so it is going to be interesting to see if they can deliver.
Hi Peter,
Any idea why lending club would tap into their credit facility to originate loans instead of using their cash? They seems puzzling to me given that they are holding even less loans on balance sheet than last quarter.
That also puzzles me. Would be great to hear your opinion on this, Peter.
Just noticed this article was written by Ryan not peter but would love to hear from any of you if you have any insights
Hi Mo, it’s a good question and I don’t have a solid answer for you. However, the chart that I included above is footnoted for LendingClub inventory:
“Represents the percentage of loan originations in the period that were owned by the Company as of the period end. It is the Company’s expectation that most of these loans will be included in future
structured transactions or sold in whole loan format in subsequent periods.”
Obviously the loans are anticipated to be sold off eventually, but in case that doesn’t happen I imagine there is the benefit of flexibility. I think we’ll see this amount and percentage of total originations continue to fluctuate based on when loans are actually sold off to investors in the quarter and as the investor mix continues to be fluid based on demand from their various types of investors.
It a bit ironic for a company in lending space who touts their focus on consumer health to then borrow money at variable rate in a rising interest rate environment, and then use that money to originate loans that will be marked down before sale in a rising interest rate environment. So they are taking on two interest risks risk and in general paying interest when they absolutely don’t need to. They have a very comfortable cash position and their lifetime of loans is short term too (1.5 years for most). Furthermore, they have been comfortable with lower cash positions before and they have been EBIDTA positive for sometime and are accumulating cash. They literally just touted their Direct Payoff feature because it encourages people to avoid doing the same thing they just did.
And this would make sense if they launched a massive share buyback program which they didn’t (unfortunately). So the only reason thing that could kinda make sense is if they are planning to do an acquisition soon (Upgrade?) but otherwise lending club should really provide an explanation they would do such a thing.