Lending Club Beats The Street, Wants To Be BFFs With Banks

Lending Club managed to do something yesterday that it hasn’t been quite able to pull off in six months — it shocked The Street with good news.

Shocking the street, of course, has become unfortunately par for the course for the last half-year or so, but none of those surprises were good.  A parcel of illegally underwritten loans, the superstar founding CEO suddenly resigning as the news about the bad loans and some conflict-of-interest heavy investment coming to light at the same time, upper level staff departures, higher than expected default rates among borrowers, investors fleeing the marketplace — it’s been a lot of bad news for Lending Club’s investors for the last half of 2016, and the bulk of it came as a series of rather unfortunate surprises.

But all throughout the barrage of worrisome headlines, Lending Club’s new CEO Scott Sanborn has been working hard to convince investors that appearances not withstanding, the bumps in Lending Club’s road thus far have been just that. Bumps, hiccups and one-offs, the perils of a firm with a fundamentally strong and scalable product coming up against growing pains as it inhabits its post-disruptive start-up life as a publicly traded firm.

One might expect such a message from Lending Club’s CEO — and thus far the message hasn’t been getting as much traction as Sanborn might have liked.

But that was before the latest earnings release — which gave investors enough confidence to send the share price rocketing skyward 19 percent.

This is not to say that Lending Club is completely fixed — those skyrocketing shares still put it at less than half of its 2014 IPO price, meaning there is still a long way to climb. But Lending Club did managed to beat the Street by a fair margin — and is showing signs of stabilizing and expanding its efforts.

What are the need-to-knows?

By The Numbers

The most touted stats out of Lending Club’s earnings report were on loan orginations, which seem to have finally settled down after the surprise ouster of Laplanche in May. Between July and September of 2016, Lending Club extended $1.97 billion in loans — a decline from the previous year but a slight uptick over the previous quater.  Lending Club also saw its numbers get a lift from emerging funds that allow public investors to invest in marketplace loans. According to Sanborn, 55 percent of Lending Club’s Q3 loans were purchased by managed fund accounts — a big pick up from the 36 or so percent during the same time period last year.

Net revenue beat Wall Street expectations — anaysts polled by Reuters were anticipating $103.65 million in total revenue, but the actual figure clocked in at$114.56 million.  That was a pretty notable beat — though it does represent a decline of 1.5 year-over-year.

Speaking of notable, losses were — Q3 logged $36.5 million or 9 cents a share.  But it is also a notable improvement on Q2, when Lending Club reported losses of $81.4 billion — or 21 cents a share. A year ago Lending Club was recording a profit of $950,000 (a break-even result on a per share basis).

“We feel pretty good about really being able to…start to put the majority of this behind us,” Mr. Sanborn said in an interview.

New Steps Forward: Bringing Back The Banks

The bulk of Sanborn’s efforts have been in drawing investors, particularly banks, back to the platform to invest in the loans — an effort that has been costly. During Q3 Lending Club awarded money managers who bought its loans during July and August with about  $11 million in cash incentives.

On the upside, that is less than the approximately $22 million Sanborn said the firm had planned to pay out. Also, they are seeing the results they want.

“Virtually all our bank partners are back,” Sanborn said on a call with analysts on Monday. “We actively re-engaged with investors of all types to deliver on our plan and enable $2 billion in loan originations.”

As of Q3, banks accounted for 15 percent of origination volumes in September, according to Lending Club — with a target of getting up to 25 percent by the end of Q4 2016.

Lending Club announced that Atlanta-based Credigy Solutions — a subsidiary of National Bank of Canada that invests in consumer credit — will purchase up to $1.3 billion in Lending Club loans over the next 12 months.  Lending Club had previously been considering a similarly large loan-purchase agreement with hedge funds, but that deal would have required Lending Club to pony up 10 percent equity in the company.

Credigy is “a significantly more beneficial deal to us” than others that were on the table, Mr. Sanborn said.

One good earnings report does not a turn-around make, of course — and Lending Club has a fair amount of red ink to purge from its books.  But they are clearly winning back the confidence of at least some investors — and perhaps beginning to start a new chapter in the firm’s life.  It’s not a guarantee of a happy ending — but after the last six months, turning the page is progress.