Friday, February 4, 2022

A Small Cap Equity holding: LendingClub (LC, $18.76): “Banking on Strong Fundamentals” By: Anwar Ahmed, AIM Student at Marquette University

 LendingClub (LC, $18.76): “Banking on Strong Fundamentals”

By: Anwar Ahmed, AIM Student at Marquette University

Disclosure: The AIM Small-Cap Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it, and I have no business relationship with any company whose stock is mentioned in this article.


LendingClub Corp. (NYSE:LC) Is a digital lender leveraging cutting edge machine learning technology to offer a full suite of banking products including personal loans, auto loans, checking accounts, and investment solutions.   

  • LC posted a record net income of $29.1M and EPS of $0.27 in 4Q21 beating consensus by 23.85%.
  • Share price fell sharply after earnings release due to management forecasting slower growth rates in 2022.
  • The company closed out the year with record setting results of $818.6M in revenue (up 157% YoY) and net income of $18.6M compared to a net loss in 2020.
  • LendingClub earned a perfect score from the Human Rights Campaign Foundation’s corporate equality index and is recognized by Bloomberg’s gender quality index for their commitment to diversity and inclusion in the workplace.

Key points: 2021 was a crucial year for LendingClub as their focus was integrating the Radius Bank acquisition completed back in February. The company underwent a business model transformation. Their stellar FY21 results show the vertically integrated bank/loan marketplace business model is a key driver of profitability. Compared to preacquisition 4Q19, LC generated an additional $73.7M of revenue and $28.9M of net income on the same loan origination volume in 4Q21. These results confirmed managements perspective on the value proposition of integrating a bank business model.

LC continues to focus on interest income as a key top line driver. Net interest income grew 27% QoQ while non-interest revenue stayed relatively flat. This was primarily driven by a 36% QoQ increase in their customer loan portfolio. The recurring and predictable nature of interest income archives stability in earnings and is crucial for the company to scale. Their proprietary AI origination process has reduced loan losses 21% below pre-pandemic levels and continues to be a key competitive advantage.

LendingClub’s new business model also provides greater operating leverage that allows exponential profitability from scalability and growth. Total non-interest expenses have fallen from 136% of revenue in 4Q20 to 72% of revenue in 4Q21. Compensation expense has also steadily fallen as a % of revenue from 70% to 30% over the same period. This indicates that LC’s growth is creating exponential value for shareholders and is being accomplished organically. Over the same period, net interest margin expanded from 0.7% to 7.6%. This has greatly improved overall company fundamentals.  

What has the stock done lately?

Since the start of 2022, LC stock has declined 24.99% despite announcing strong financial results. This is primarily attributed to management forecasting slower growth in 2022 due to macroeconomic factors and the rising interest rate environment. General market conditions have contributed to the declining price as January saw the largest decline in stock prices since 2020.  

Past Year Performance:

Over the past year, LC has risen an impressive 66.90% from the complete business model overhaul. Over the same period, the S&P 500 rose 19.65% and the Russell 2000 index declined 4.60%.

Source: FactSet

My Takeaway

LendingClub’s FY21 results serve as a proof of concept of their ability to successfully operate in the digital banking space. Their strong earnings growth, growing customer base, and overall financial strength make them an attractive investment opportunity. LC combines the growth and technology of a fintech with the profitability of a bank. With the banking business model, they have reduced business model risk with a strong growth narrative. Despite LC’s recent underwhelming stock performance, it has a sound long term strategy to deliver value to its customers and shareholders.

Source: FactSet