LendingClub's Attractive Business Prospects Are On Sale At Current Prices

LendingClub (NYSE:LC) boasts 4.7MM members and offers a combination of both solid profitability, and high future growth prospects. 40% of American households carry over $1 trillion of revolving debt, paying roughly $111B in fees and interests in 2021 alone. In 2022, their average credit card rate increased by over 400 bps to over 20%, which is a trend that is continuing into 2023. LendingClub's business model is designed to help consumers consolidate high-cost credit card debt to more reasonable rates via personal loans. LendingClub originates loans both for its third-party Marketplace and its own bank balance sheet, which is funded by reasonably low-cost consumer deposits. LendingClub's stock is trading at very attractive levels, as concerns about a banking crisis and a pending recession have outweighed the bright prospects of the company.

On April 26th, LC recorded a decent 1st quarter. Net revenue declined by 6% due to a 23% decline in Marketplace revenue, partially offset by Net Interest Income growth of 8%. Marketplace revenue of $99MM was down from $127.5MM in Q4, and $189.5MM in Q1 2022, as loan investors face a rapidly increasing cost of capital after the rate hikes. Management proactively reduced non-interest expenses to combat the weaker Marketplace revenues, with total non-interest expenses of $157.3MM in Q1, down from $180MMin Q4 and $191.2MM at the same time last year. Marketing as a percentage of revenue was only 10.9%, down from 13.4% sequentially and 19% YoY. Net interest income of $146.7MM was driven by an average HFI loan portfolio growth of 15%. Ending HFI growth was up 5% to $6.2B, which includes loans held for investment at fair value. The net interest margin was 7.5%, down a bit from 7.8% in Q4, due to higher deposit costs. Earnings per share were $.13, down $.09 QoQ, on higher provisioning and weaker Marketplace revenues. Net income of $13.7MM was down from $23.6MM in Q4 and $40.8MM in Q1 of 2022. Book value per share grew from $10.93 to $11.08, while tangible book value grew from $10.06 to $10.23.

Total Originations of $2.288B were higher than the $1.9-$2.2B guidance. $1.3B of loan originations came from the Marketplace, while the bank retained $1B, or 44% of total originations. Very encouragingly, pre-provision net revenue (PPNR) of $88.4MM dramatically exceeded the guidance of $55MM to $70MM. $9MM of this beat was due to slower prepayment speeds, while lower expenses as a result of cost reductions also helped materially. PPNR was up from $82.7MM in Q4, but down from $98.3MM at the same time last year. The Tier 1 Leverage ratio of 12.8% is very healthy, and the company only has a small AOCI loss of $34MM, which is less than 3% of total equity. LC's HFI loans are short duration personal loans with a fair value in excess of the carrying values, so precisely the opposite situation in relation to the idiosyncratic banks that have run into major duration problems. LC being a new bank has benefitted from the lack of material exposure to long-term fixed rate mortgages at extremely low rates, or other low-rate government securities, which has plagued many of its peers. Whether that is luck or design, LC has benefitted.

After the dramatic collapse of both SVB and Signature Bank, dwindling deposits have been a massive concern for banks of all shapes and sizes. LendingClub is in a great position having generated 13% total deposit growth of $826MM, up to $7.2B. Just as importantly, 86% of deposits are insured, up from 78% at the end of Q4, and the bank has $1.6B of cash on hand, or 19% of total assets. The bank balance sheet has grown at a 70% CAGR since its acquisition. 70% of its revenue is recurring from NII and servicing fees. LC's deposits have grown by 81% annually and the average cost of funds was 3.46%. This is a very affordable funding cost for LC given it originates unsecured loans in the mid-teens, with an average HFI loan yield of 11.67%. Being that we are likely near the end of the rate hiking cycle, net interest margins should start expanding again towards the end of the year.

LC's credit quality has held up reasonably well with the 2021 vintages outperforming due to stimulus and spending patterns. The company refined its originations in 2022 as inflation took its toll on the economy, focusing more on higher quality credits compared to 2021. As other competitors have pulled back in their lending, LC has been able to utilize its data and be more selective in its loan origination. The company has also been able to reduce its marketing spending, focusing on quality and not quantity. Lifetime Net Loss Rates have translated to annualized Net Credit Losses of roughly 5%. Delinquency rates are in line with expectations and are outperforming many peers. LC estimates that its marginal levered return on equity on personal loans is between 30-36%, depending on loss estimates, with an unleveraged yield of between 4.4% and 5.4%. These returns provide a nice cushion to deal with volatility in credit performance.

Management has a history of conservative guidance and I believe we are seeing that again with total originations guidance for Q2 of $1.9B to $2.1B. PPNR is slated to come in between $60-70MM. The company intends to continue focusing on higher credit quality loans, while expecting Marketplace revenues to remain pressured due to higher rates. LC plans on retaining 30-40% of its originations to maintain HFI portfolio balances that are roughly flat to Q1. The company expects to remain profitable and reinvest those profits into the balance sheet.

At a recent price of $7.04, LC trades at just 69% of tangible book value per share of $10.23. Current profitability is being masked by heavy CECL provisioning on new originations. Provisions for credit losses in Q1 were $70.584MM, up from $61.512MM in Q4, and $52.509MM a year ago. PPNR grew QoQ and was only down $10MM with very strong results one year ago, when Marketplace revenues were nearly double what they are now. Net interest income is up nearly 50% YoY, which is a good precursor for where future earnings will be coming from. I believe LC's normalized earnings power is conservatively between $1.50-$2.25 per share, which would put the current P/E to normalized earnings at 3.1-4.7. This is obviously an obscene valuation reflecting very dire scenarios for LC. I do believe credit is likely to get worse in the near term, but LC's high-yield originations and willingness to cut operating expenses should allow the company to manage any additional provisioning necessary. I'm very encouraged by the continued deposit growth and the low percentage of uninsured deposits, which greatly reduces the risk given the current banking climate. I believe LC could be a $20 stock within 2-3 years as we get to the other side of the current economic turmoil and fear.