LendingClub: Platform Investors Reengage

| About: LendingClub Corporation (LC)


LendingClub reported mixed Q2 results.

The online lending platform made progress in reengaging investors that left after the founding CEO was forced out.

The stock remains appealing below $5 as the platform rebuilds.

For LendingClub (NYSE:LC), the best hope on for Q2 results were some sort of stability that the company could build on going forward. The departure of the founding-CEO left the online lending marketplace on shaky ground.

The stock has tread water below $5 since that time period. The valuation is extremely compelling at these levels with the market focused on quarterly results, but the real question remains whether platform investors will reengage at previous levels.

The initial signs are that all investor categories are reengaging in the online lending platform. LendingClub already has 15 of the top 20 investors back on the platform. The biggest issue is that the volumes are lower though some investors have taken advantage of attractive rates and incentives to actually increase investments.

Possibly the best sign is that the investor mix was largely dictated by the investor type and the regulatory requirements for due diligence. Investor types such as self-managed individuals and managed accounts were less impacted by the May 9th events with the investor groups more focused on investment returns than regulatory restrictions.

The banks were not surprisingly the ones most impacted. This group reduced the funding of LendingClub loans by roughly $400 million sequentially for Q2. The managed accounts that includes the LCA investment funds only saw a minor $123 million dip in loan funding despite a Q1 investment level similar to banks.

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The following chart better highlights the investment scenario after May 9. As LendingClub highlighted on the earnings call, the origination volumes after May 9 amounted to 49% of the $1,955 million for the quarter or $958 million. Based on only 12% funding after May 9, the banks invested only $115 million on the platform despite the period covering 58% of the quarter.

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In possibly the best sign that real value exists in the platform loans were how new dedicated funds joined the platform to push the managed account category to 54% of the investments after May 9. These funds invested an incredible $517 million when times got difficult after only investing what amounts to $171 million through May 9.

In total, LendingClub generated $111.2 million in revenue for the normal transaction, servicing, and management fees categories. The revenues were hurt due to $14 million in incentives to get funds to invest on the platform.

The somewhat weak guidance for Q3 takes into account that LendingClub expects to eliminate the incentives at the end of August. As well, the guidance for revenues around $100 million assumes investor incentives of up to 125 basis points of originations that will reduce the revenues somewhere in the range of $10 million. The Q2 incentives of $14 million amounted to 145 basis points.

In essence, normalized quarterly revenues for the Q2 origination volumes are around $110 million. This assumes LendingClub can retain volumes without incentives, but no signs exist that loan performances were impacted. The immediate addition of funds is a prime example of how the loans are attractive even during the upheaval.

The key investor takeaway is that LendingClub is far from out of the woods yet. The stock valuation though is attractive on dips with stable revenues in the $400 million range and $832 million in cash for a stock worth only $1.8 billion.

The stock is definitely appealing on any dips, especially if the CFO exit causes negative headlines that pressure the stock.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LC over the next 72 hours.

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