Not So Deep Dive: LendingClub Stock
(Ryan) What they do: LendingClub was founded as a marketplace designed to bring installment loans (loan where you borrow a set amount all at once then pay it back over-scheduled payment dates) to the digital age. So people looking for loans to help say pay off their credit card debt would come to LendingClub, input a bunch of information, and LendingClub would process the data, determine their creditworthiness, and connect them with a loan offer from a 3rd party bank. That 3rd party bank would then defer the risk by selling the loans to loan investors.
Loan Investors basically include other banks, asset managers, insurance companies, hedge funds, and even some large non-bank investors. LendingClub would receive money from the 3rd party bank for essentially referrals. This was categorized as transaction revenue.
Fast forward to 2022, LendingClub has now acquired a digital bank called Radius Bancorp. So now, LendingClub no longer needs to go through 3rd party banks. Instead, LendingClub either sells the loans to loan investors themselves or originates the loan with their own capital. These loans include personal loans up to $40,000, business loans, auto refinances, and patient solutions (dentists or doctors can use LendingClub to help their patients finance their services).
(Ryan) History: LendingClub was initially launched on Facebook in 2006 as one of Facebook’s first applications. However, in 2007 LC received a $10M Series A round and then turned into a full-scale independent P2P lending platform. It grew pretty fast pre-IPO but faced a lot of regulatory headwinds. In 2014, they IPO’d but in 2016 they ran into some trouble. “In April 2016, a LendingClub employee reported to Laplanche that the dates on approximately $US 3 million in the firm's loans appeared to have been altered.”
LendingClub hired an internal auditor to investigate the issue, and it was reported “This investigation found additional problems with loans, including that $US 22 million in loans which had been sold to the Jefferies investment bank did not in fact meet the bank's investment criteria. LendingClub bought these loans back from the bank and resold them.” Following the issue, the BoD basically asked Laplanche to step down and he did. LendingClub’s stock at one point was down more than 95% from its post-IPO highs. Looks like they’ve since turned things around and put most regulatory problems in the rearview.
Management claims that their market opportunity was $120 billion in 2019
For reference, right now they are doing approximately $1 billion in originations a month, so pretty decent market share
Competitors: Banks, fintechs, Square, SoFi, Upstart, basically anyone out there lending money to people.
(Brad) Management and Ownership:
CEO Scott Sanborn
- CEO of LC since 2016 and COO and CMO since 2013 (does all 3?)
Seems like Sameer Gulati was the COO from 2016 to 2019 but then left to work for Plastiq
- Was the CRO and CMO at eHealthInsurance
- 77% glassdoor approval rating
CFO Tom Casey
- since 2016
- CFO at a company called Acelity as well
- CFO at JP Morgan for 6 years
- 10 Years as the CFO of GE Capital
Chief Administrative Officer Brandon Pace
- Former VP and GC at eBay
- worked for law firms before that
Chief Capital Officer is Valerie Kay
- climbed the ladder at Lending Club
- Spent 12 years as a managing director of Morgan Stanley before the
- Sanborn only owns about $28 million in stock -- salary is $6 million per year but there are a lot of RSUs outstanding that Brett will talk about
- Had an extremely difficult time finding primary ownership data but sources have insider ownership at around 2% of the float with institutions owning roughly 80% of shares
(Market cap was $400 million in October 2020)
Market cap of $2.5 billion, ticker LC
Return on Equity of 14%
P/E is the metric to use once this scales
P/GP of 4.2
Hard to put multiples on this thing, I would just look at the interest income, margins last quarter, and any other factors and ask “what P/E would the business have” if it had X margins you think is reasonable
11 million RSUs and 5.4 million granted first nine months of 2021 vs. shares outstanding of 100 mil
(Ryan) Earnings: I’ll start with FY guidance then move to most recent Q
For the FY of 2021, LC expects to generate $796M to $806M. That’s a 153% increase from 2020, but roughly a 5% increase from 2019.
2020 saw a 71% decline in transaction fee revenue (weaning off the 3rd party banks)
Expecting just over $10B in loan originations for the year, a double from 2019
But the revenue mix is very different today
In Q3, LC had $181M in non-interest revenue (referral revenue for selling loans) but had $65M in net interest revenue. So a 76% to 24% split.
Last year, only 18% came from interest revenue.
And their EBT was $30M for the quarter. So about a 12% margin on that
And net income margin was about 11%
So a profitable business, but certainly a different business than it used to be.
(Brad) Balance sheet and liquidity:
- Roughly $862 million in cash and equivalents with another $340 million in restricted cash and securities
- $15 million in long term debt
- $2.6 billion in interest bearing deposits
- $46 million in short ter borrowings
- $300 million in retail notes
- Looks like interest expense was around 7% of revenue in this last quarter as well
(Ryan) I’ve never applied for a payday loan, but I don’t see why I wouldn’t just price shop across all platforms.
(Brett) Would have no urge to choose them over anyone else when making a loan. Only thing that would matter to me is the lowest rate possible.
Future growth opportunities:
(Ryan) Loan originations. This is the easy one. They’re a bank now, so utilizing that to earn interest income looks like it’s where LC is heading. And it doesn’t have to be all just personal loans either, there are lots of areas for them to earn interest income. Residential mortgages, equipment financing, commercial real estate, these are all a part of their current loans and leases held for investment.
(Brett) Auto loans. They are getting into auto loan refinancing for their 3.8 million members. This is a large and lucrative market, and when they can put these loans on their balance sheet since they are a bank now it can be pretty lucrative. For reference, management says a loan on the balance sheet earns 3x compared to just an origination, so the more volume the better. Car loans are a giant market to enter and try to expand the addressable market.
(Brad) Fixing the $40 billion pay day market. People need smaller loans
Highlights and lowlights:
(Ryan) Highlights: Radius acquisition just makes LC a better business. Allows them to originate loans and gives them a cheaper funding source (consumer deposits instead of warehouse funding). They also have some experience on their side, which should give them more data to enhance their credit determinations. Lowlights: I don’t see a single competitive advantage.
(Brett) Highlights: Acquiring the bank fixed unit economics, FTC issues are settled, and rapidly growing ROE which is important for a bank, asset light model should give them cost advantage at least compared to some. Lowlights: FTC overhang, heavy dilution coming, what gives them a competitive advantage five years from now?
(Brad) Highlights – I think FICO needs a makeover and upgrade and products like this leveraging modern data science can do just that. Creates a lot of new value through risk underwriting efficiency. Lowlight – stimulus and cyclicality makes it difficult to gauge how much of their success is micro – same can be said for Upstart which I’m a huge fan of.
(Ryan) They do have some sort of data advantage. They’re able to grow customer deposits at Radius at a double digit rate for the next several years and they use those to earn solid interest income.
(Brett) If you are confident in just origination volume staying stable, loss ratios staying low, and them fully turning into a banking operation, then you will do fine here. Add on rising interest rates (net positive I think) and growing origination volume and it will be a fantastic investment.
(Brad) All of this success and loss ratio outperformance was not macro driven but instead related to the quality of their underwriting
(Ryan) Lots of bear cases imo. First off, a 2016 like scenario occurs. Second, they have no data advantage and consumers just look for the lowest possible rate. Third, they end up being just an average digital bank, which seems like the way they’re heading.
(Brett) ROE/profitability bump is one-time (it has barely been for a quarter or two). Origination volume dries up as they start losing to competitors.
(Brad) All of this success and loss ratio outperformance was macro driven and rising rates of impairment make things like acceptable residual cash flows for capital market participants tougher to come by
Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.
Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.