Long-suffering shareholders of LendingClub (LC +0.87%) got extremely good news yesterday, after the company reported blowout second-quarter earnings. But more than the mere earnings beat, the second quarter also marked the first full quarter since its acquisition of Radius Bank, which closed back in February. Now as a hybrid digital marketplace bank, rather than a mere fintech platform, LendingClub's new business model appears to be bearing fruit in a big way.
That sea change is why the company was up more than 40% after hours following the report on Wednesday evening.
LendingClub shareholders are celebrating today. Image source: Getty Images.
A shocking blowout quarter
LendingClub didn't just beat its own guidance and analyst expectations for the quarter, it absolutely destroyed them. Instead of growing loan originations 15% to 28% quarter over quarter as forecast, the company grew originations 84%. Instead of growing revenue 23% to 32%, revenue surged an even higher 93%. And instead of a net loss according to generally accepted accounting principles (GAAP) of $30 million to $40 million, LendingClub logged a net profit of $9.4 million.
Going forward, LendingClub now projects between $9.8 billion and $10.2 billion in loan originations for the year, $750 million to $780 million in revenue, and GAAP net losses of just $13 million to $3 million. That's far better than recent full-year guidance for $6.8 billion to $7.3 billion in originations, $500 million to $530 million in revenue, and net losses between $167 million and $142 million.
A better new business model, but with the same old competitive advantages
LendingClub was a first mover in developing its marketplace model for personal loans, and that afforded it certain competitive advantages. As the largest-scale personal loan originator, it has tons of data going back more than a decade, and its high customer satisfaction scores have brought in many loyal repeat borrowers.
However, LendingClub has also had some complications in reaching its potential. Namely, since it wasn't a bank, it had to temporarily fund its loans with warehouse debt before it could sell them to investors. That not only raised costs, but also perhaps put pressure on the company's transaction fees, since it constantly had to move loans through its system.
Now that LendingClub has become a bank via the acquisition of Radius, LendingClub has access to lower-cost deposits. In the second quarter, deposits rose from $2.06 billion to $2.37 billion quarter over quarter with an interest rate of just 0.29%.
Not only do bank deposits lower its own costs, but LendingClub can also now hold more of its own loans on its balance sheet, guiding for holding between 15% and 25% of its originations itself. That may enable LendingClub to perhaps maintain better transaction fees, since it's not in a hurry to move loans through its marketplace to others if it doesn't want to, and it will give even more confidence to loan investors, since the company is "eating more of its own cooking."
Moreover, holding more loans will actually increase the lifetime profitability of each loan for LendingClub over a mere one-time transaction and ongoing servicing fee. You can already see the benefits in the second-quarter results, as the company's net interest margin grew from 3.33% to 5.51% just in one quarter.
Why there could be even more upside ahead
It's interesting to see LendingClub spring back into action so fast coming out of the pandemic. The massive growth seen this quarter is especially notable since two of its public competitors, Discover Financial Services (DFS +0.00%) and SoFi Technologies (SOFI +0.63%) have been retreating a bit from the personal loan market to focus more on credit cards and home loans, respectively. Of course, with tremendous loan growth comes risks with underwriting, but LendingClub management has indicated it hasn't seen any problems, and the economy is currently in very good shape, thanks to government stimulus.
This dynamic could lead LendingClub to consolidate this fragmented industry even more, even though it's already a leader. And now that LendingClub is a bank with more flexibility, it could begin to branch out into to other products, such as auto loans, in a more meaningful way. So even though the stock surged roughly 40% as of this writing, at a market cap of just $2.1 billion, there still appears to be lots of runway for this transformed fintech.
