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LendingClub relies on bank charter benefits amid rising interest rates

LendingClub is reaping the benefits from the bank charter it acquired last year. The online lender is holding more loans on its balance sheet and planning its next banking product for consumers.

San Francisco-based LendingClub, which primarily refinances credit card debt, is taking advantage of its 2021 bank acquisition as it reels in deposits, high yield products and high-quality held-for-investment loans. LendingClub is also working on creating a more comprehensive checking account product and mobile banking app, CEO Scott Sanborn said in a Wednesday interview right before the company's third quarter earnings call.

"I'd say the next big thing we want to do is a checking experience that is specifically tailored for the LendingClub member," Sanborn said in the interview. "These are creditworthy people with high income, high debt. So a checking experience that helps them manage their spending and savings, while also tracking their lending behavior or helping  them save on their lending products."

High-yield savings will be a growth engine for the company, Sanborn added on the Wednesday evening earnings call. In the third quarter, deposits were up 80% year over year, to $5.1 billion. The deposits will help LendingClub fund the high-yielding consumer loans on its balance sheet.

LendingClub's stock had dropped about 9%, trading at $10.60, as of Thursday afternoon.

As the Federal Reserve raises interest rates at a rapid clip, institutional investors that previously bought loans from LendingClub face a higher cost of capital. Credit card rate increases lag the Fed's rates, and LendingClub has raised rates about 200 basis points to date. The company's loans have thus become less appealing to investors seeking high returns. The fintech has combated this shift by targeting more loan sales to banks, which often have a slightly lower cost of capital, and increasing the amount of loans it holds on its balance sheet.

The company held 33% of loan originations in the quarter, up from 27% in Q2 and well above its 20% to 25% projected range. Chief Financial Officer Drew LeBenne said on the earnings call that LendingClub would use the same projected range each quarter, and only invest higher when opportunity allowed. 
While rising interest rates create a tighter environment to sell loans in the marketplace, Sanborn added on the call that when the economic environment stabilizes, higher rates will likely create an opportunity as more consumers look to refinance their debt.

Holding more prime personal loans on its balance sheet helps LendingClub positively differentiate itself from other neobanks that don't have banking charters, said Wedbush equity analyst David Chiaverini in a note following the earnings call. The company also remixed its loan portfolio to hold more lower-risk loans, LeBenne said on the earnings call.

Total net revenue dipped slightly from last quarter, from $330.1 million to $304.9 million. Net interest income increased to $123.7 million. LendingClub also announced it was tightening annual revenue guidance to $1.18 billion to $1.19 billion from the previously reported $1.15 billion to $1.25 billion. 

Sanborn told American Banker that the loans on the company's balance sheet represent consumers with an average FICO score of 730 and income around $115,000. These consumers have higher liquidity than they did before the pandemic, higher levels of prepayments and strong credit performance, he said.

The fintech's marketplace tells a different consumer story.

"One of the reasons we have a marketplace, not just a bank, is so that we can serve a broader range of consumers," he said. "There's non-bank-quality loans that we make available. There, we do see pockets of stress. We see signals that indicate that this compounding inflation we're seeing is putting a strain on people's ability to meet their obligations. It's where you would expect it to be – lower income, less credit-worthy people."

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