LendingClub investors headed for the exits, sending the stock down as much as 20 percent after hours when the company posted third-quarter results that topped expectations, showing loan growth and declining losses. Yet fourth-quarter guidance came in below consensus on initiatives to tighten credit and put new lending models into place at the company.
The shares were changing hands after hours at roughly $4.40.
Looking at the headline numbers for the quarter that just ended, the company said loan originations were up to $2.4 billion – 24 percent higher than last year. In tandem with loan growth, the top line was also up (at $154 million) at an increase of 34 percent, though it was $3.5 million below Street estimates. Net losses were $6.7 million, compared to the $36.5 million loss seen a year ago.
In callouts to investors during the earnings conference call, CEO Scott Sanborn and CFO Thomas Casey pointed to a few milestones, including notching more than two million borrowers on its platform, and 10 new investors in a second securitization sponsored by the company. The company has said that it took eight years to get their first million borrowers, and only two years to get the second million.
Yet it was the guidance that spooked investors, where the company said that revenues should be in the range of $158 million to $163 million, while the Street had pegged $173 million.
It is the recent release of the fifth-generation credit model that signals the use of machine learning in making credit decisions.
As the CEO noted on the call, throughout 2016 and in January of this year, the company implemented a series of adjustments to tighten the edges of credit in its prime portfolio. As part of that strategy, the firm debuted its newest scoring mode, which leverages machine learning techniques to derive more than 100 customized behavioral attributes. The model does not rely on FICO scores, instead evaluating credit behavior as seen over extended periods of time.
“In our prime portfolio, this new model does represent a tightening, with an overall shift to higher quality grade and higher quality approvals,” said Sanborn.
The company is also looking to tighten the volume of its F and G grade loans, he told analysts, which are among the highest-risk loans and represent about three percent of the total loan book. According to the CEO, those loans are “not currently meeting expectations” and will temporarily be unavailable to investors, with an eye toward conducting product and price tests designed to reduce defaults. Thus, volumes may be impacted over the near term, Sanborn said.