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Why LendingClub Just Got Off to a Promising Start on Its Otherwise Uncharted Journey

By Bram Berkowitz - May 1, 2021 at 7:10AM

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The marketplace bank is really a new concept, and the company's first-quarter earnings show its strong potential.

The marketplace bank LendingClub (LC 1.20%) just reported a loss of roughly $47 million in the first quarter of the year. But I believe most investors are actually going to be pretty happy with these results if they dig deeper into the quarter and look at where the company is headed. This was the first quarter that LendingClub has officially had the bank charter it got when it purchased the Boston-based digital bank Radius Bank, which it closed on Feb. 1. LendingClub is one of the first fintechs to secure a bank charter, and will combine its high-churn personal loan marketplace with the backbone and stability of a traditional bank.

A promising start

I know what you're probably thinking: Another fintech just reported another quarterly loss, come talk to me when it's profitable. But, again, I implore you to look at what's baked into these results.

The first great thing about the quarter is that LendingClub did total loan originations of nearly $1.5 billion, up 63% from the previous quarter. Now, that's down year over year, and loan origination in the back half of 2020 was much lower than normal, as LendingClub transitioned and focused on getting regulatory approval of Radius. But most banks in the first quarter reported declining loan volumes in just about every category, so this is still great to see. CEO Scott Sanborn said LendingClub got the majority of its loans from its 3 million existing members, which significantly reduces the loan origination costs.

Picture of digital looking graphics with the word bank.

Image source: Getty Images.

LendingClub also began another big part of its new business model by retaining $344 million of loans on its balance sheet. The company previously sold the bulk of its loans into the secondary market. But now LendingClub plans to retain 15% to 25% of its originations on the balance sheet, which it says is three times more profitable than selling them into the secondary market and provides recurring revenue.

In the first quarter, LendingClub made $18.5 million of net interest income, reflecting two months of interest income from Radius' legacy assets and consumer loans the company retained on balance sheet. Sanborn also said that loans put on the balance sheet in the first quarter will generate an additional $70 million in interest income through the rest of the year.

LendingClub's personal loans had an effective interest rate of 14%, but still make up only 15% of total loans on the balance sheet, the low end of the guidance the company has provided. The company had a net interest margin (the difference between what it makes on interest-earning assets, such as loans, and pays out on interest-bearing liabilities, such as deposits) of 4.5% at the end of the first quarter. That's already very solid in this low-rate environment, but will improve as more of the high-yielding personal loans come onto the balance sheet.

Finally, LendingClub raised its full-year guidance. It is now projecting total loan originations of $7.3 billion, total revenue of $530 million, and a net loss of $142 million.

Digging into the loss

The other encouraging sign about LendingClub's earnings was that the loss the company reported was mainly due to some non-recurring expenses that should eventually decline.

For instance, nearly $9 million of the loss was due to the acquisition of Radius. There could be more expenses due to Radius -- LendingClub CFO Tom Casey said on the company's fourth-quarter earnings call that management expects to have $20 million in one-time costs related to the Radius deal. Regardless, these are one-time costs and should be well worth it in the long run.

Also, because LendingClub is now a bank and plans to hold loans on its balance sheet, it is subject to bank accounting rules. The company in the first quarter took a provision for potential credit losses of nearly $21.5 million. That's because banks are now subject to the current expected credit losses (CECL) accounting method that requires them to provision for all expected future losses on the life of a loan as soon as it hits the balance sheet. This results in banks front-loading reserves. The $21.5 million provision gives the company a total allowance of more than $36 million to cover potential losses on all $2.1 billion of the Radius and LendingClub assets currently on the balance sheet. That's a big charge, but it's front-loaded and fully transitions LendingClub to CECL, so CECL provisions going forward should be smaller. Remember, management said that loans put on the balance sheet in the first quarter will generate an additional $70 million in interest income through the rest of the year, making it well worth the provision. Additionally, seeing as LendingClub can pick and choose which loans to retain, I imagine it will only hold personal loans of the highest quality. If losses don't materialize, CECL expenses could go down over time.

The last part of LendingClub's loss in the first quarter was for $14 million, but for deferred revenue.

A path to profitability

While Sanborn could not cite an exact quarter for when the company would achieve profitability, I think there is a clear path. I thought LendingClub was being conservative on its loan origination projections last quarter and it probably is again, especially if economic activity really picks up in the second half of the year.

The Radius expenses will eventually go away. CECL expenses will continue to come as loans hit the balance sheet, but they should be lower going forward now that LendingClub has made the transition to the new accounting system. The tradeoff for recurring revenue is also worth the credit expenses over time. Ultimately, I am very happy with LendingClub's start and believe the company is well positioned for strong returns in the long term.

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