When it launched in 2006, LendingClub (NYSE:LC) was a pioneer in peer-to-peer lending, offering a digital marketplace for individuals and businesses to obtain loans from one another instead of going through a traditional bank. Over the next 10 years, it grew to become the largest company of its kind.
But in 2016, a federal investigation alleged that LendingClub had misled its loan originator in an effort to increase the loan volume on its platform. The matter was settled in 2018 when LendingClub agreed to a $2 million civil penalty, but that didn't stop the slide for investors. The stock price plummeted from a high of around $126 per share in December of 2014 to less than $5 per share in October 2020.
Since then, though, the stock has steadily climbed back, and at Monday's prices it's risen more than 40% since the beginning of the year. Is this a blip, or is the comeback for real?
LendingClub's momentum is real for one major reason -- it has acquired its own bank. On Feb. 1, LendingClub closed on the acquisition of Radius Bancorp, a digital, branchless bank based in Boston with $2.4 billion in assets and $1.7 billion in deposits. With the acquisition, LendingClub also acquired Radius' bank charter, making it the first fintech to gain one (beating Square by a month). Radius comes with a tremendous reputation, voted best online bank of 2020 by Bankrate for its usability, functionality, and customer service.
This is a big deal for LendingClub because previously, it had to use an external bank to fund loans and paid a higher rate, 3.3%, to do so. Now, with Radius in the fold, it can use the deposits on its balance sheet to fund the loans at a cost of 0.35% -- a reduction of 90%. "To put this into perspective, for every $1 billion in assets we hold we will now save approximately $30 million per year in interest expenses," CEO Scott Sanborn said on the fourth-quarter earnings call. This is in addition to the cost-cutting initiatives in 2020 where the company reduced fixed costs by 30%.
In addition to the fees the company generates for selling loans into the marketplace, it will now also generate interest income on loans from the bank. "In addition to lowering our funding costs of deposits, our new marketplace bank will capture significant financial benefits from being a bank and having a marketplace," Sanborn said.
As he explained, for every $100 million in loans the bank originates, it makes about $4 million through an origination and servicing fee when the loans are sold into the marketplace. Now, for every $100 million of loans held on the balance sheet, the bank should generate an additional $12 million in interest income: "We can now bolster this revenue stream with bank revenue generated by loans held for investment on our balance sheet."
The acquisition of Radius should be a game changer for LendingClub, providing not only cost efficiencies, but new and expanded revenue opportunities. The company expects loan originations to grow about 45% this year and revenue to jump around 55%. There's one other point worth mentioning. LendingClub's online marketplace has some 3 million users and, as Sanborn said, this acquisition offers the opportunity to "more deeply engage" with them through its new capabilities and offerings. That could lead to additional revenue streams.
Officials expect a net loss of $75 million to $85 million in the first quarter and $175 million to $200 million for the year -- which is roughly on par with 2020. Most of that is due to acquisition costs and accounting changes.
But with economic growth expected to be robust for the next few years, that's great news for this beaten-down stock. With its low valuation, low overhead, and excellent revenue potential from the bank, the future is bright for LendingClub. It looks like a good buy now and for the long term.