Lending Club Surprises With Profits On Higher Loan Volume

Exactly two weeks ago today (April 25), LendingClub‘s stock hit an all-time low with the announcement of an FTC-backed lawsuit alleging that it loading up its borrowers with hidden fees on loans proffered through its marketplace – and, in some cases, that it attempted to collect on loans that had already been paid off.

The market was displeased, and the online lender’s stock dropped 14 percent to $2.80 a share, bringing its total losses so far this year to 32 percent. Since its initial public offering, LendingClub’s stock has declined 80 percent.

Perhaps unsurprisingly, going into earnings today, expectations were a bit muted.

But, by the numbers, things turned out somewhat better than analysts were expecting.

By the Numbers

Despite recent drama, Q1 revenue was up 22 percent from this time in 2017, hitting $152 million. Unadjusted earnings came in at $15.3 million, slightly above the top estimates put out by analysts pre-release.

Lending volume also showed surprise strength during the first three months of the year, rising 18 percent year-on-year to $2.3 billion in organizations. The firm also reported improved contribution margin, to 49.1 percent from 42 percent in the same quarter last year.

Other notable figures include 2.8 million applications processed during the three-month period ending in April, a 36 percent increase in activity over last year. On whole loans, banking partners purchased 48 percent of loans, up from 36 percent in Q4 2017. According to CEO Scott Sanborn, the increase in share is driven by the firm’s “shift to higher credit quality assets.”

“On the investor side of the business, we saw strong demand for our recent innovation, CLUB Certificates, a first in marketplace lending,” Sanborn noted during the earnings call. “In Q1, we issued a $162 million in CLUB Certificates to leading U.S. asset management firms that are new to LendingClub.”

Despite those better-than-expected numbers, however, LendingClub is forecasting that 2018 will be its fifth non-profitable year in a row, due to its ever-elevated legal expenses.

Official figures indicated that LendingClub took an accrual of $17 million in the quarter for legal costs related to outstanding probes into the 2016 scandal by the Department of Justice and the Securities and Exchange Commission.

The firm also faced indemnification costs for the previous management team.

Beyond the Numbers

“We feel good about how we’ve kicked off the year, and the fundamentals of our business continue to be strong. Our strategic initiatives are working on both sides of our marketplace, and we’ll keep innovating to help more Americans on their journey to financial success,” Sanborn noted of the firm’s overall Q1 performance, despite difficulties.

One such difficulty, its looming legal troubles with the FTC, were a point of analyst interest.

“I think it’s hard to really kind of point to any specifics,” Sanborn noted. “I mean, overall, what I would say is, we can’t really indicate or speculate on any kind of changes that would be required of the business operation. As I think we made pretty clear in our public response, we believe our practices are currently in compliance.”

LendingClub had previously countered that the regulator’s position was unfair and essentially incorrect. The company also maintains that its business has attracted very few complaints to a database logged by the Consumer Financial Protection Bureau (CFPB), which has more than one million entries.

“We believe the complaint is really factually unwarranted and that we are in compliance with the requirements,” Sanborn said.

Moving away from the FTC compliance, Sanborn continued to plug the positive effects of increased underwriting standards and resultant borrower quality.

“Higher quality borrowers mean lower fees, which has driven transaction fees down. That’s where we have some of the most demand in our platform. So, we feel very good about that mix,” Sanborn noted, explaining that the higher-quality borrowers did mean lower loan costs, which means that transaction yields will be an issue in the future.

On the whole, however, Sanborn said the firm remains committed to – and confident in – its ability to deliver on its original vision for marketplace lending.

“Throughout 2018, our business will grow and we’ll focus on operational efficiencies to drive our profitability while simultaneously investing in the future of this company,” he said. “Ten years ago, we transformed the lending industry with a whole new way to help Americans pay down their debt. Today, we are closing the credit gap in America by lending in areas where banks are pulling back and closing, offering better and more competitive prices, and we’re increasing financial inclusion.”