Concerns have emerged about consumer strength lately, especially with credit card debt hitting all-time highs. But there might be some relief on the horizon. The Federal Reserve has been reducing its benchmark interest rate, which could help ease borrowing costs and encourage consumers to consolidate their debts and take advantage of lower rates.
LendingClub (LC +3.46%) is in a prime position to ride this potential boom in refinancing. The company's recent results were impressive, and its stock soared by 10% the very next day. The stock has since given up its post-earnings pop, but I think the company is just getting started and this dip could be a buying opportunity. Here's why.
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LendingClub has drastically improved its business
Since 2015, LendingClub has evolved from a pioneer in peer-to-peer lending into a digital bank, repositioning its business model and becoming more resilient in the process. The fundamental transformation happened in 2021 with its acquisition of Radius Bank, making LendingClub an early U.S. fintech to acquire a traditional bank.
This move enabled full-stack banking capabilities, including FDIC-insured accounts, low-cost deposits, and enhanced lending capabilities. It also reduced funding costs and unlocked embedded finance opportunities through the bank's Banking-as-a-Service (BaaS) platform.
NYSE: LC
Key Data Points
One key aspect of acquiring Radius Bank was that it unlocked an opportunity for LendingClub to retain some of the loans it originates while selling the remainder. This allows the company to hold on to the highest-quality loans it makes and earn interest income on them. This interest income has been a major driver of LendingClub's growth in recent years, as it benefited from the rising interest rate environment.
LC Revenue (TTM) data by YCharts
Loan originations are robust, and demand for its products is growing
In the third quarter, LendingClub originated over $2.6 billion in loans, representing a 37% year-over-year increase. It held approximately $594 million of these loans in the quarter and generated a record $158 million in net interest income. The remainder of its loans (77%) were sold through its marketplace, which includes whole-loan sales to institutional buyers and securitized offerings.
One key to its loan sales is its Structured Loan Certificates program. These are rated asset-backed securities backed by prime consumer loans, issued through a master trust structure. This structure allows LendingClub to recycle capital efficiently while offering investors attractive, risk-adjusted returns.
Demand for its structured certificates was robust, with sales totaling $1 billion in the quarter. During the quarter, the company secured a memorandum of understanding with funds and accounts managed by BlackRock investment advisors to purchase up to $1 billion through LendingClub's marketplace programs spanning through 2026.
It is also attracting new capital through a new rated product specifically designed to attract insurance capital. This new product is "capturing strong interest" according to CEO Scott Sanborn, and is expected to help the company continue to improve loan sales and grow marketplace revenue.
Keep an eye on credit quality
Consumer lenders like LendingClub face specific risks, including those from credit, interest rates, and funding. Rising delinquencies, macroeconomic shocks, or liquidity tightening can put pressure on its margins and impair its loan portfolio. LendingClub's hybrid model helps mitigate these risks.
By holding a portion of loans on its balance sheet and selling the rest through whole-loan sales and structured certificates, LendingClub diversifies its funding and offloads risk. Its bank charter provides it with low-cost capital, reducing its reliance on volatile capital markets and enabling it to hold more loans during periods of subdued investor demand.
LendingClub's asset quality has held steady. Net charge-offs have declined year over year, from 5.4% to 2.9%. Not only that, but net charge-offs in its held-for-investment portfolio improved to $31 million from $56 million last year. The company has been proactive in tightening credit and focusing on prime borrowers since the pandemic, and its held-for-investment loans have an average FICO® Score above 700.
LendingClub's huge refinancing opportunity
If interest rates continue their downward trend, LendingClub could experience a huge wave of refinancing across its prime borrower base. Millions of consumers holding high-interest personal loans or credit card loans could be incentivized to refinance into lower-rate products. This would drive a surge in loan originations, boost fee income, and expand LendingClub's addressable market.
As a digital-first lender with a growing customer base, it's well-positioned to capture this demand. Not only that, but demand from private credit investors remains robust, which should bode well for LendingClub's future sales.
LendingClub has a strong growth opportunity ahead of it. It has adapted to the environment by adding a bank charter and generating net interest income while boosting its structured certificate program. At 11.5 times next year's projected earnings, I think LendingClub is a good value stock for investors today.
