Banks have curbed their appetite for Lending Club loans, and that is a big reason why the embattled marketplace lender will be dealing with the damage from a recent scandal through the end of 2016 and beyond.
Banks purchased $546 million in Lending Club loans in the second quarter, down from $947 million in the prior quarter. The shift followed the abrupt ouster of the firm's founder and longtime chief executive.
Lending Club matches consumers seeking personal loans of $1,000 to $40,000 with investors, a category that includes individuals as well as banks, hedge funds and other institutional investors. It is trying to lure banks and other loan buyers back with higher incentive payments.
Even with the pie sweetened, Lending Club acknowledged that certain loan buyers, particularly banks, remain reluctant to take another bite. Moreover, those payments are compounding its expenses.
"Management continues to take prudent steps to shore up funding, but we believe achieving sustained stability will remain challenging," Michael Tarkan, an analyst at Compass Point Research & Trading, wrote in a note published Tuesday.
Lending Club said that its operating revenue, which peaked at $151 million in the first quarter before falling to $102 million between April and June, is expected to range from $95 million to $105 million during the last two quarters of the year. The San Francisco-based marketplace lender also expects its costs to remain elevated for some time because of the higher incentive payments and for other reasons.
The sharp drop in revenue represents a major comedown for a firm that went public in December 2014 on the promise of explosive growth. Shares in Lending Club were down by about 1.5% on Tuesday, and they were off by more than 55% since Jan. 1.
The firm's second quarter took an ugly turn on May 9, when CEO Renaud Laplanche was forced out after the Lending Club board learned that executives had falsified certain data in order to meet the specifications of a particular loan buyer.
Lending Club announced another high-level departure on Monday, saying that Chief Financial Officer Carrie Dolan is leaving the firm to pursue a new opportunity.
The $5.6 billion-asset company derives most of its revenue from loan origination fees, so it depends more heavily than most lenders on continuing growth. Loan growth reversed in the second quarter, falling by 29% from the prior quarter to $1.96 billion.
Still, there were a few kernels of encouraging news in Lending Club's second-quarter earnings report.
Despite its recent troubles, Lending Club has not dipped deep into its war chest of cash. On June 30, the company held $832 million in cash, cash equivalents and securities available for sale, down just $36 million from the prior quarter.
In addition, Lending Club said that its investor incentive program is scheduled to conclude at the end of August, which should rid the firm of some of the additional costs it has incurred.
Furthermore, many of Lending Club's largest loan buyers resumed making purchases in June and July, according to the company.
"We believe we have stabilized the investor base, with 15 of our top 20 investors now back on the platform, albeit at lower investment levels," CEO Scott Sanborn said during a call with analysts.
But for Lending Club, banks are proving harder to win back over than some other institutional investors.
Banks have traditionally provided a stable source of capital for lower-risk loans on Lending Club's platform, according to the firm.
"Asset managers and hedge funds were some of the first large investors to come back to the platform," Sanborn said. "Banks have broader and more complex diligence and regulatory requirements and need to re-review our controls, reporting and compliance processes in greater detail."
He added that multiple banks have resumed purchasing Lending Club loans and said that he expects more to start buying again during the second half of the year.
Beyond Lending Club's specific problems, broader forces in the financial markets are causing contraction across the marketplace lending industry.
OnDeck Capital, which keeps some loans on its own balance sheet while selling others to investors, saw its gain on sales of loans dip to $2.8 million during the second quarter. That number was down from $11.7 million in the same period a year earlier, according to results released Monday.
Howard Katzenberg, OnDeck's CFO, suggested Monday that investors are now seeing more attractive opportunities in fixed-income markets than they are in marketplace lending.
"They are now demanding more return for the same level of risk than they did a year ago," Katzenberg said during a call with analysts.
Andy Peters contributed to this article.