LendingClub explains recent layoffs, strategy shift in posting 4Q results

LendingClub has tightened credit standards, cut a chunk of its staff and shifted its business model as rising interest rates and high inflation have put pressure on its previously core strategy, the company announced in its fourth-quarter earnings call on Wednesday evening.

The San Francisco-based online lender has made a major round of layoffs, slowed investments in new products and steered away from certain lines of business to offset decreasing loan originations, mitigate expenses and align with shifts to its business model. Last quarter, the neobank continued to move away from selling loans in the marketplace, once its sole revenue stream, as institutional investors' cost of capital rises with interest rates, and the risk of the loans increases with inflation. 

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Loan sales have declined for online lenders in the rising rate environment, although LendingClub is better positioned than many other fintechs thanks to its bank charter, analysts said in interviews earlier this month. SoFi, another fintech lender with a bank charter, can also tap into deposit-based funding and hold loans on its balance sheet. Nonbank fintechs like Upstart have pulled back on lending due to decreased loan demand from investors.

About 50% of the LendingClub's revenue now comes from holding prime loans on its balance sheet, CEO Scott Sanborn said in an interview with American Banker before the earnings call. He added that loans held on the balance sheet, a capability enabled by the bank charter LendingClub acquired in 2021, earn three times as much as the loans LendingClub sells, and offer predictable income.

"Our goal is to keep evolving," Sanborn said in the interview. "We value the marketplace, we'll retain the marketplace. It helps us serve a broader base of customers because there are some customers that we serve that we don't hold on the bank balance sheet. It also allows us to scale without capital constraints when times are good. But we are evolving the model to be more net interest income."

LendingClub's loan originations of $2.5 billion in the fourth quarter were down 29% from the previous quarter, because the company tightened its underwriting standards and because of decreased marketplace demand. It provided guidance only for the first quarter of 2023 given economic uncertainty, but said it expects loan originations to drop to between $1.9 billion and $2.2 billion.

Wedbush analysts David Chiaverini and Brian Violino wrote in a note that despite economic turbulence, they expect LendingClub to outperform relative to other neobanks given its ability to tap into deposit-based funding using its bank charter. They added that moving more loans to the balance sheet should enable self-funded growth. 

A Keefe, Bruyette & Woods analyst note gave LendingClub a "market perform" rating because of the unclear immediate future of interest rates and inflation. 

"However, proactive actions taken by management on the expense side helped soften the blow, and we model [LendingClub] to be profitable every quarter for the next two years," the KBW note said. "We'd also note that earnings visibility right now isn't great; however, that could change, and if originations and [net interest margin' pick up (i.e. rates stabilize or even get cut), our earnings forecast would likely be too conservative."

LendingClub's total net revenue of $262.7 million dropped from the previous quarter's $304.9 million. Net interest income increased to $135.2 million from $123.7 million. Net interest margin dipped in the fourth quarter to 7.8% from 8.3% in the prior quarter. Total assets increased to nearly $8 billion in the last quarter from $6.8 billion in the third quarter, including a $1.05 billion loan book acquired from the parent company of MUFG Union Bank.

LendingClub's stock dropped 11% to $9.18 per share after the earnings call, as of Thursday afternoon.

The fintech also said that its previously announced layoffs were a result of its strategy shift. LendingClub announced earlier this month it had cut 225 employees, or 14% of its staff. The company is halting its origination of loans in commercial real estate and equipment finance, two lines of business it gained with its bank acquisition in 2021, and those teams were a chunk of the layoffs. The layoffs also included Chief Capital Officer Valerie Kay, effective Feb. 25, who has been primarily responsible for bringing in and retaining marketplace investors. The company is eliminating her role.

"We did not want to be in a position that we needed to chase revenue and chase loan originations if we didn't think we could prudently go after them," Sanborn said in the interview. "We wanted to take these actions at a time when we've got the ability to be mindful about it, to be able to take care of the employees and not do it in response to a sudden business condition."

The CEO added in the interview that LendingClub started its expense management by reevaluating and consolidating vendor contracts and marketing efficiency. The company is also slowing the pace of investments, and doesn't expect to roll out new credit products this year.

Sanborn said that although the company has been preparing to weather an uncertain economic environment, he thinks that rising rates will provide a "massive opportunity" for LendingClub's core business of credit card refinancing once the economy stabilizes.