LendingClub Corp. (NYSE:LC) shares surged nearly 10% in Monday’s premarket trade, despite continuing losses, as LC stock holders bought the company’s housecleaning and the return of its investors.
LendingClub reported a loss of $36.5 million, or 9 cents per share, for the quarter ending in September, but that was well below the loss of $81.4 million, or 21 cents per share, reported in the June quarter.
LC still expects a loss for the fourth quarter, ranging from $38 million to $48 million, but it expects growth in operating revenue to $116 million to $124 million, about where it was a year ago.
That was before LendingClub revealed in May that founder Renaud Laplanche had a problem with $22 million in loans, leading to his ouster from the board and a government investigation. The news hammered LC stock, cutting its value in half.
Today’s good news does not repair the damage, but it could return the shares to their October level of $6 from their Nov. 4 close of $5.13. For investors who bought last week, that’s a handsome gain.
The Good News
CEO Scott Sanborn told his company conference call that investors have returned to the platform, moved by a bonus on funds invested back. The bonus plan was ended at the end of August.
Sanborn said LC wound up using only half the incentives it planned for, re-engaging its largest investors, bringing banks back to the platform and enabling $2 billion in new loans.
“We delivered $113 million in operating revenue, a 10% increase over the second quarter and ahead of our plan,” he said.
LendingClub has four categories of investors. These are retail investors, managed accounts, large institutions like hedge funds, and banks. Sanborn said that managed accounts invested over $1 billion during the quarter, 55% of total investment, and took advantage of most of the incentives. “They were able to move quickly and at scale,” he said. The level of self-directed retail investment remained stable.
Banks, however, needed to do extensive due diligence before returning.
“We dedicated a lot of resources to supporting banks as they worked through their due diligence,” he said. “All our banks are back on the platform. The banks went from 12% to 15% of originations during the quarter, and Sanborn hopes to get that to 25%.
The best news Sanborn reported was that the National Bank of Canada (OTCMKTS:NTIOF) committed $1.3 billion to loans through LendingClub over the next year, through Credigy, its consumer finance arm. “The first $325 million is already deployed,” he said.
LendingClub Cleans House
After what Sanborn repeatedly called “the events of May,” he cleaned house, recruiting a new management team from companies like Paypal Holdings Inc (NASDAQ:PYPL) and Morgan Stanley (NYSE:MS). Lower-level employees were offered delayed stock incentives to stay.
LendingClub took a large hit on legal expenses, and new CFO Tom Casey admitted those costs will remain elevated in the current quarter, but they are falling. Goodwill was written down by $117 million.
Sanborn said the company “bolstered our control environment” in the third quarter. “Investments in compliance control and reporting give us a competitive advantage,” he claimed. “We are continuing to work on improving controls, and improving our training to focus on a high compliance culture.”
“This will serve as the foundation for the 2017 plan,” Casey said.
Next Up for LC Stock
Lending Club was created for unsecured personal loans, giving investors a 6% return while delivering lower costs to consumers, A big part of Sanborn’s growth plan involves moving into other markets.
This starts with auto loans. Lending Club launched an auto loan product in California during the quarter, and expects to roll that into other states over the next few quarters.
“The secured auto loan market is one of the most stable asset classes and performed well in the last recession,” Sanborn said. “Auto loans are not as transparent as they could be, and many used car borrowers are seeing extra costs. People aren’t generally aware they can refinance. Auto lenders aren’t reaching out because they have channel conflict.
“Just as in unsecured personal loans, we are putting money back into car owners’ pockets. It’s quick, you can qualify in minutes, you can do it online, and the only paper in states where they require a signature.” Cutting the average percentage rate just a few points can mean thousands of dollars in savings over the life of a loan, he said.
Sanborn said Lending Club will remain a technology company, making loans in real time, rather than in a batch mode. “There is a strong appreciation that powerful information can increase access to affordable credit,” he said. “The difference is the speed and granularity with which we change. We raised rates four times over the last year and increased requirements three times.”
The key to the future for LC stock will be turning LendingClub from a business into an institution.
“We offer a weighted average return that platform investors will find attractive while generating savings for borrowers,” he said. “Our investors see this as an asset class.”
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
