In February 2020, LendingClub announced the acquisition of Radius Bank, intending to create the first “marketplace bank”. The strategy was to retain a portion of the loan originations on the company’s balance sheet, over time building a loan portfolio that can provide an income “cushion” for the periods, when the demand for marketplace loans weakens. A year later, LendingClub completed the acquisition and we got to witness the company’s loan portfolio growing consistently, quarter over quarter, reaching $4.5 billion by the end of the last reporting cycle.

Last week LendingClub reported its Q3 2022 results, and the key takeaway was that the demand for marketplace loans finally started weakening. Investors increased their return expectations as the Federal Reserve keeps rising rates, and the company is being cautious about passing through those rate increases to the borrowers. The uncertainty about the economy doesn’t give a reason to believe that this is a temporary bump on the road, so, I guess, we now get to witness a period of that on-balance-sheet portfolio being the key revenue driver.

Let’s review the company’s Q3 2022 results, but before we do that…I believe LendingClub’s management deserves a round of applause for buying Radius Bank. It would be a very sad earnings report if not for the banking charter.

If you are new to LendingClub, I suggest reading my previous reviews:
✔️ LendingClub Q4 2021 Earnings Review: transition to the Marketplace Bank model continues as planned
✔️ LendingClub Q1 2022 Earnings Review: when a Fintech company buys a bank, the magic happens
✔️ LendingClub Q2 2022 Earnings Review: strong results, conservative guidance

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Loan Originations

LendingClub reported $3.54 billion in loan originations in Q3 2022, which represents a 13.9% increase compared to Q3 2021, and a 7.8% decline compared to the previous quarter. The company retained 32.6% of the total originations on its balance sheet (“Loan originations held for investment” in the table below) and sold the remaining 67.4% through its marketplace (“Marketplace loans” in the table below). This was the higher percentage of retained loans since the company started building its loan book after completing the acquisition of Radius Bank.

The sequential decline in loan originations is the result of weaker demand from institutional investors. Thus, as you can see from the chart below, the volume of loans sold through the marketplace declined by $433 million or 15% compared to the previous quarter. If you follow Upstart, a competing online lender, then weakening demand from institutional investors should not be a surprise. Federal Reserve is raising rates rapidly, and online lenders struggle to pass the rate increase to borrowers (to provide an attractive return for loan buyers).

Luckily, LendingClub has its own balance sheet and can fund a portion of loan originations using deposits (in retrospect, buying Radius Bank was a genius move). However, its capacity to retain loans is determined by the growth in deposits, sufficiency of capital, and the management’s willingness to sacrifice profits in the short term (the company needs to book provisions for credit losses that negatively impact net income).

Loan Book and Deposits

At the end of Q3 2022, LendingClub had $4.5 billion in loans on its balance sheet (net of allowance for losses), representing a 73.1% increase compared to Q3 2021 and an 18.2% increase to the previous quarter. Unsecured consumer loans represented 76% of the total loan book at the end of the quarter, up from just 46% a year ago, as the company continued to run down commercial and industrial (including loans issued under the Paycheck Protection Program), as well as secured consumer loan portfolios.

The company’s management continues to methodically build a portfolio of high-yield personal loans, a strategy that they committed to with the acquisition of Radius Bank. What I am curious about is what happens next. If my calculation is correct, then retaining 20-25% (and even 30%) of the total originations will start having only a marginal income impact in late 2023 / late 2024 (as the volume of retained loans will be almost equal to amortization of the portfolio). Thus, LendingClub will have to either retain a larger share of originations (to the point of keeping all of them) or build a new lever of growth (i.e. commercial lending).

LendingClub reported $5.1 billion in total deposits at the end of the quarter, which represents an 80.5% increase compared to Q3 2021, and a 13.2% increase sequentially. The company keeps building its deposit base by offering competitive rates on savings accounts (3.12% APY as of this writing). As can be seen from the breakdown below, the balance on the savings accounts increased by 349% compared to Q3 2021, and 44% sequentially, while the balance on the checking accounts remained almost unchanged.

As per the management’s comments during the earnings call, high-yield savings accounts will remain the key source of funding in the near future. It should also be noted, that the company “inherited” from Radius Bank a portfolio of business clients, which are an additional source of potential funding. At least for now, it doesn’t look like deposits would be a limiting factor for growth in the short term.