LendingClub has seen issuance of their new CLUB Certificate reach $1bn in less than a year after first announcing the pass-through security product last December at their investor day. The CLUB Certificate was created to make it easier for institutions to invest in LendingClub originated loans.
PeerIQ released their Q4 2018 Lending Earnings Insights Report which points to a number of themes showing the economy is strong but CEOs are striking a cautious tone. Delinquencies and defaults continue to be low as consumers have seen their wages rise and taxes drop. Lenders are increasing reserves as they anticipate credit to renormalize in the near future, saying the economy right now was too good to be true.
The report covers earnings reports from big banks and fintech lenders. Stock performance was mixed with the flattening yield curve causing banks and card issuer stocks in particular to suffer. Companies covered include Enova, LendingClub, One Main Financial, OnDeck, GreenSky, Bank of America, Citibank, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Wells Fargo, Capital One, Discover, Synchrony and American Express.
One of the growing trends has been the pull back by banks lending directly to consumers and small businesses. Banks are instead increasing funding lines to non bank lenders, credit facility volume has grown 6x since 2010. The growth in originations from non bank lenders has forced regulators to look at them more closely, while the FDIC is considering granting ILC charters to non banks.
Broadly across the credit spectrum fintech lenders have seen delinquencies and charge offs remain at near record lows. All the companies in this segment saw double digit revenue and origination growth YoY. Lenders have started to raised borrowing rates, though not at the same pace as the Fed Funds Rate. The flattening yield curve has raised the cost of borrowing on credit facilities, causing margins for lenders and investors to be compressed.
Big banks experienced another strong earnings quarter as all covered in the report saw double digit increase in earnings. Revenue drivers vary from bank type to bank type. Big banks covered within the report saw deposits rise due to a better digital banking experience, an integration between wealth and banking products and a retail branch expansion. As a group the banks are growing, albeit slower than in the past, through digital means and are focused on the long term potential of products they are currently building.
Credit card issuers all saw their earnings grow by more than 20 percent YoY. Most card issuers also saw growth in revenue and their loan books. Growth in total allowances for losses outpaced loan growth, pointing to the fact that most card issuers see a credit normalization coming. Card issuers have used the partnership model with stores like Walmart, JC Penney and Lowes to grow revenues.
Overall economic health, low delinquencies and low charge offs show that the credit space is doing quite well. Though the report points out that most of these companies do not expect this environment to last forever, they are in the midst of preparing for a change while they keep growth humming along.
Separate from their earnings release, OnDeck announced significant news over the last couple of weeks. First was the announcement of their technology subsidiary called ODX, the platform that would house their lending-as-a-service offering previously called OnDeck-as-a-Service. Shortly thereafter, OnDeck announced their much anticipated second bank partner, PNC Bank which is the 9th largest bank in US.
Not surprisingly this was a hot topic on the Q&A portion of the earnings call. Here are a few takeaways from analyst questions:
- OnDeck is making $15 million of incremental investment in strategic growth initiatives including ODX. Two-thirds of this will be in ODX with the remaining one-third allocated to international investments in 2019.
- The revenue model for ODX generally speaking is technology licensing, professional services and customization with a volume based component.
- The pipeline for ODX has never been stronger. They have been working with PNC for over a year and are seeing interest both internationally and in the US. The ODX announcement has helped drive further interest in the offering.
- OnDeck is getting better at bringing banks on, making incremental improvements and aspects of on-boarding repeatable . Ultimately there is customization with every bank and OnDeck is also at the whim of banks’ decision making timeline.
- ODX and OnDeck’s on balance sheet loans are complimentary products. In the case of PNC they are serving the same customers, but providing a digital experience. OnDeck is focused on underserved small business finance which we haven’t seen traditional banks tackle.
- We will see more bank partnerships in 2019.
Moving on to Q3 2018 financials, OnDeck posted gross revenues of $103 million, up 8% from the previous quarter and 23% from the prior year period. OnDeck is benefiting from higher interest income due to rate increases as well as their origination growth while being able to decrease funding costs. Effective interest yield was 36.5%, up from 33.1% last year.
Net income came in at $9.8 million for the quarter, up from a loss of $4.1 million from the prior year period.
Origination volume reached an all time high of $648 million, representing a 10% increase from the prior quarter and 22% from the prior year period. The company officially crossed the $10 billion mark in originations and also shared that their next lending product would be announced before year-end. The company ended trading today up over 30%.
OnDeck also raised 2018 guidance:
- Gross revenue of $392 million to $396 million, up from $380 million to $386 million,
- Net income of $20 million to $24 million, up from $10 to $16 million, and
- Adjusted Net income of $40 million to $44 million, up from $30 million to $36 million.
OnDeck reported before the opening bell in New York this morning and the stock closed up 32% today.
GreenSky reported record transaction volume in the third quarter of $1.4 billion, up 33% year over year. Revenue increased 29% to $113.9 million year over year. GAAP net income was $45.7 million.
CEO and Chairman David Zalik noted in the press release that they are still in the early stages of penetrating the total addressable market spanning home improvement, elective healthcare and e-commerce. However, the company adjusted guidance downwards due to anticipated seasonal headwinds in the fourth quarter along with a steeper yield curve than anticipated.
GreenSky added two new bank partnerships in the quarter with BMO Harris Bank and Flagstar Bank added to their lending consortium. Total commitments from bank partners now stand at $11.5 billion, up $3.5 billion from the prior quarter. The company relies on these commitments to fund their loan book. Last quarter we discussed GreenSky’s partnership with American Express. The cross-marketing campaign officially went live in early September and GreenSky reported over 1,000 Amex merchant referrals in 8 weeks. The Amex consumer direct installment loan pilot is slated to begin in the first quarter of 2019 in Atlanta, Chicago, Dallas, Los Angeles and Tampa. The product will be advertised as “powered by GreenSky” and will offer home improvement loans.
Along with today’s earnings the company announced a share repurchase program of up to $150 million of the company’s Class A common stock. Due to the adjustment of guidance downwards GreenSky’s stock price ended the day down significantly, almost 37%.
LendingClub had a quarter marked with a few records. Net revenues were $184.6 million, up 20% from the prior year period and originations were $2.9 billion, up 18% from last year. Applications also reached their highest levels, up 30% year over year. While originations grew slightly from the previous quarter it is important to note the steps LendingClub has taken to tighten underwriting this year which is why application growth doesn’t necessarily translate to significantly higher originations. It does however represent an opportunity for the company as they continue to improve features and better target their customers.
The company continues to drive to GAAP profitability. In Q3 2018 GAAP Consolidated Net Loss was $22.7 million, or $7.3 million if you exclude $15.5 million of expenses related to outstanding legacy issues.
The mix of investors over the quarter are relatively stable from the previous quarter as shown below.
A few other milestones from LendingClub’s perspective include the near $1 billion in investments for their CLUB Certificate program which launched less than a year ago. LendingClub also settled legacy issues with the Department of Justice, SEC and lawsuits stemming from May 2016 which we wrote about at the beginning of October. According to LendingClub, they have “continued constructive engagement with the FTC regarding ongoing litigation”. LendingClub is also opening a new facility in the Salt Lake City area to further enhance operating efficiency and customer service.
Total loans issued by the company now stands at over $40 billion.
LendingClub raised their full year guidance for Adjusted EBITDA*, adjusted net revenue projections slightly and increased the high end of projections for GAAP net losses:
- Net Revenue in the range of $688 million to $698 million.
- GAAP Consolidated Net Loss in the range of $129 million to $124 million, reflecting expenses related to outstanding legacy issues through the third quarter partly offset by higher Adjusted EBITDA guidance.
- Adjusted EBITDA in the range of $89 million to $94 million.
LendingClub reported after the closing bell but was up just over 1% as of this writing.
(Disclosure: Peter Renton, the founder of Lend Academy owns less than one thousand shares of both OnDeck and LendingClub)
In April 2018, LendingClub provided us with $5,000 to open a brand new account. Since then we have been chronicling the status of the account on a quarterly basis. Below are links to the full series of blog posts in chronological order:
- How to Open Up a New LendingClub Account in 2018
- Setting Up LendingClub’s Automated Investing Tool
- New LendingClub Account Performance – Q2 2018
Last quarter we discussed that any reported returns from screenshots of the account should be taken with a grain of salt. Once this account becomes seasoned around the 18 month mark we will begin to provide returns using the XIRR calculation.
Note that the account currently has a weighted average age of 6.5 months. The below chart depicts a gradual decrease of adjusted annualized return until returns finally settle. With this account I took a balanced allocation to loan grades which has resulted in a weighted average interest rate of 12.76%. All notes are purchased through LendingClub’s automated investment feature. Returns are likely to fall in the middle of the road as you can see other investors have experienced as evidenced by the red dots below.
Last week there were significant developments in the legal troubles that have dogged both LendingClub and former CEO Renaud Laplanche since May, 2016. When Renaud was forced to resign as CEO back then, that triggered dual investigations from the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). Both investigations wrapped up on Friday.
These investigations have been hanging over the industry for more than two years and we have been waiting for their conclusion. So, let’s dig in to each of these settlements in turn to see what they found and what the consequences will be for those involved. For the record, I spoke with both a representative from LendingClub and with Renaud to get background for this story.
LendingClub Advisors, Renaud Laplanche and Carrie Dolan Agreed to Pay a Fine
We will start with the SEC action. In their press release the SEC made the following claims about LendingClub Advisors (LCA), now called LendingClub Asset Management, former CEO Renaud Laplanche and former CFO Carrie Dolan:
LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded, to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty. The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.
What is most interesting to me is that these are both issues we have known about for some time. In a Form 8-K LendingClub filed with the SEC on June 22, 2016 these two issues were disclosed based on LendingClub’s own internal investigation.
The reality is that most fintech companies today in the US are private. We often learn of key milestones through press releases, but we often don’t get full transparency into what is happening in the business. This is why we’ve always taken great interest in the publicly traded online lenders. Today, OnDeck, GreenSky and Lending Club all reported their Q2 2018 earnings. Below we share the highlights of each from our perspective.
GreenSky went public just a few months ago on May 24, 2018. Their IPO was significant for a couple of reasons. One was the lack of US based fintech IPOs over the last few years and the second was that GreenSky is a wildly successful business. Last year they reported $139 million in net income on revenues of $326 million.
In the second quarter of 2018, the company grew revenue 28.3% to $105.7 million quarter over quarter and adjusted EBITDA was $52.1 million. In the prepared statement as part of the press release, CEO David Zalik noted that crossing $100 million in revenue and $50 million in adjusted EBITDA were milestones for the company. The company also increased transaction volume by 36% with the increase of home improvement merchants and elective health care providers utilizing the platform. Pro forma net income for the quarter was $33.5 million and the company ended the quarter with $236.6 million in cash.
Also of significance was a strategic partnership that was announced yesterday with American Express. This will further Greensky’s reach by accessing merchants who accept American Express. Under the partnership, customers will have access to point of sale loans for large purchases. What’s also interesting is the two companies are piloting a direct-to-consumer installment loan offering to some American Express Card Members. This will be first focused on the home improvement space in select markets, but if this pilot goes well it wouldn’t be surprising to see this partnership being the first example of a fintech and credit card company teaming up to tackle the broader personal loan category.
OnDeck reported net income of $5.8 million for the quarter with gross revenues of $95.6 million, up 10% year over and 6% from the previous quarter. Originations grew to $587 million, up 26% from the prior year period, but down slightly from the previous quarter. The company’s trend of increasing the number of loans funded and decreasing the average loan size continues. [Read more…]
Back in April 2018 we shared that LendingClub had provided us with $5,000 to start a brand new LendingClub account. We wanted to both report on the new investor experience and also share the performance of the account over time. In the last blog post I included a video which went through LendingClub’s automated investing tool. Before we get into the details of the account I also want to mention any changes that happened within the quarter that LendingClub investors should be aware of. On May 8th, 2018 LendingClub announced interest rate changes:
Effective May 8, 2018, interest rates on the LendingClub Corporation (“LendingClub”) platform have been updated. The changes are an increase of 0.12% for loan grades A2-A5, 0.15% for loan grades B1-B5, and 0.45% for loan grades C1-C5.
As a reminder, this account was setup to invest in LendingClub’s suggested ‘All Grades’ automated investing strategy. Below is a screenshot of my target allocation shortly after account setup with about half of my capital allocated to LendingClub notes.
Below is a screenshot as of today with all $5,000 invested which now closely resembles my target allocation.
You’ll notice that investing across LendingClub’s All Grades is skewed towards being conservative as opposed to allocating the same percentage across loan grades. Nearly 80% of my loans in this account are A, B or C grade loans.
At time of account opening, LendingClub noted historical returns range from 2.94% – 6.98%. This has decreased slightly based on the most up to date historical returns. Below is a snapshot of my LendingClub Summary. It’s important to note that Adjusted Net Annualized Return is not a good metric until the loans have seasoned. As we move further along in this experiment we will start to get a better idea of where returns are trending and will begin to include return calculations using XIRR.
The current status of my LendingClub account is very typical for new investors. A handful of loans have been paid in full while just a couple have entered either grace period or the late 31-120 days stage. A majority of the loans are issued and current. As loans begin to season we will see more enter grace period at which point some borrowers will catch up on their payments and some will ultimately become late and eventually charge off. We’ll publish our next update in early October to provide a full update on the third quarter.
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. [Read more…]
In our last post and accompanying video we outlined how to setup a LendingClub account in 2018. One of the benefits of doing this was being able to see all of the recent changes LendingClub has made to the investor experience.
In the latest video we review the interface which allows LendingClub investors to enable automated investing. This functionality has been around for quite some time, but LendingClub has changed the way it looks from a user’s perspective.
In this video I discuss:
- The three ways you can invest in LendingClub loans
- The benefits of LendingClub’s automated investing tool
- The options within automated investing including custom mix and platform mix
- How fast $5,000 was deployed through automated investing
Now that funds have been invested in LendingClub loans I am beginning to receive principal and interest payments. Our next post in this series will focus on the current performance of the account.
If you have any questions about automated investing or opening up a LendingClub account please let us know in the comments below.
Peter Renton, the Founder of Lend Academy opened his first LendingClub account in mid-2009. I opened my first LendingClub account in early 2013. While we are intimately familiar with the platform and the changes over the years things are on autopilot from the investment perspective. It has been a long time since we have gone through the process of opening a new LendingClub account.
Recently LendingClub reached out to us offering to fund a new LendingClub account so we could go through the new investor experience step by step. We wanted to take this opportunity to take a fresh look at opening and investing through LendingClub as a complete beginner. As outlined after the video below we’ll be sharing video content and blog posts along the way as this account matures.
Opening up a new LendingClub Account
The new LendingClub account setup is a simple, straight forward process, taking less than five minutes. As you’ll see in the video below LendingClub asks for some basic information during the signup process and then asks for information for the initial funding of the account.
Although I had to link my bank account manually in the video below, LendingClub now has the ability to connect your bank account quickly, simply by using your bank’s login credentials. Up to 15,000+ banks are available for linking, including USAA, Citi, Bank of America, and Chase.
New LendingClub Experiment
As mentioned earlier, LendingClub is funding our new account with an initial deposit of $5,000. This is part of a new program they are launching this year with a small subset of bloggers in the investing space. While they paid to fund this account we have complete freedom to write whenever and whatever we want. We considered this a good opportunity to start a new account from scratch and share the experience as both my and Peter’s accounts at LendingClub have been open for many years.
Once we invest this initial capital all principal and interest payments will be reinvested in new loans. Every quarter we will detail what is going on with this account, much like Peter shares his own returns.
In this series of posts we hope to answer several questions new investors may have such as:
- What does signing up for a LendingClub account entail?
- How do I setup automated investing?
- How long does it take to deploy funds?
- What returns could a potential investor expect starting in 2018?
Stay tuned in the coming weeks for our next video as we outline how to setup automated investing.