Down 75% From 2021 Highs, History Says This Fintech Could Rocket Again

Financial stocks are particularly interesting right now. In the span of just five years, the sector has been battered by the COVID-19 downturn, rising interest rates, and the bankruptcies of several regional banks. But in a "normal" period of steady growth and an uninverted yield curve, these overlooked names could be in for a comeback.

One intriguing financial stock is personal loan provider LendingClub (NYSE: LC). While the stock has nearly tripled since its late 2023 lows, it nevertheless remains 75% below its 2021 highs.

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LendingClub had to be nimble during the recent downturn as the marketplace demand for its loans dried up amid rapidly rising interest rates. But with rates on the path to normalizing and long-term yields now above short-term yields once again, LendingClub is arguably in a much stronger position today than even in early 2021.

I recently had the pleasure of speaking with CEO Scott Sanborn, who detailed all the moves LendingClub made in response to adversity and how those moves have positioned the company to thrive in the years ahead.

LendingClub's rough five years

Like most fintechs, LendingClub pulled back on lending when the pandemic broke out. But after the "pandemic dip," 2021 was a seminal year for the company. Not only did LendingClub ramp up originations again, but it also acquired Radius Bank in February of that year.

The move allowed LendingClub to take on deposits and hold loans on its balance sheet rather than being 100% dependent on loan sales. Armed with a second home for its loans, LendingClub's originations took off, peaking at $3.8 billion in Q2 2022, marking 41% year-over-year growth.

However, the high-inflation environment and the fastest-ever interest rate increases in 2022 once again caused turmoil in marketplace funding. Originations eventually fell to just $1.5 billion back in Q3 2023. While they have recovered since, last quarter saw just $1.85 billion -- a long way from the levels of 2021 and early 2022.

How LendingClub innovated its way through

Investors may not actually realize how much LendingClub had to pivot during the 2022-2023 downturn. In my conversation with Sanborn, he detailed just how volatile the funding environment became and how the company quickly adapted.

Going into the downturn, about half of LendingClub's loan buyers were banks. Due to their lower cost of capital, banks generally bought safer, lower-yielding loans. The other half were asset managers, who had higher-rate warehouse lines for funding and generally went for the highest yields.

When interest rates rapidly increased in 2022, asset managers' costs of capital also increased rapidly. Asset managers typically fund themselves with warehouse lines of credit based on the forward curve, where investors expect interest rates to land a couple of years out.

So, when the Federal Reserve was raising rates very quickly, asset managers' cost of capital immediately rocketed higher, causing them to stop buying LendingClub loans. Banks, on the other hand, don't raise rates on deposits as quickly and were able to continue buying. As a result, LendingClub's loan sales went from 50-50 to 90-10 in favor of banks.

But in the Spring of 2023, the Silicon Valley Bank bankruptcy and ensuing regional bank crisis led to a credit crunch. Suddenly, banks were concerned about selling assets and raising capital, not buying new loans. Thus, they left LendingClub's marketplace as well.

So, LendingClub then had to figure out how to lure back asset managers. In response, management came up with an elegant invention. Since LendingClub was now a bank, it could actually provide them with capital in a way. So, management came up with the Structured Loan Certificate (SLC).

Under the SLC program, a portfolio of loans is pooled into a private securitization. That securitization was divided into an "A" senior note comprising a majority of the loan, say 85%, or whatever portion an asset manager would typically finance. The remaining 15% or so would be the "B" note. The A note would get paid first, but its yield would be capped at, say, 7%. The remaining note would then get what was left over at a much higher rate and bear the risk of first losses up to its principal.

It was a great win-win. LendingClub benefited not only from the interest income on the A note but also the risk-remote nature of those notes. For regulatory purposes, SLC A notes were only 20% risk-weighted on LendingClub's balance sheet, whereas whole loans were 100% risk-weighted. So, while these A notes were lower-returning, LendingClub could hold five times as many without affecting its capital ratios, allowing the company to originate more loans.

Since their rollout in the second quarter of 2023, the B notes have delivered roughly mid- to high-teens levered returns and have been successful in luring asset managers back. By the end of 2023, the ratio of LendingClub loan buyers had completely flipped to 90-10 in favor of asset managers! Talk about whiplash in the span of just one year.

LendingClub CEO Scott Sanborn. Image source: LendingClub.

LendingClub gets A notes rated by Fitch: Why that's a big deal

Even though short-term interest rates have begun to normalize, LendingClub hasn't stopped innovating. Recently, the company found a way to sell its A notes more profitably, instead of needing to hold them.

On Feb. 13, the company announced it had secured an investment-grade rating on $100 million worth of SLC A notes from Fitch, one of the big three ratings agencies. With a rating, the security now trades on the Depository Trust and Clearing Corporation (DTCC) exchange with a Committee on Uniform Security Identification Procedures (CUSIP) number, allowing for increased liquidity.

Why is this a big deal? Having a rated, liquid security opens up another category of loan buyers: insurance companies. LendingClub said this landmark $100 million security was sold directly to a "top global insurance company."

Historically, insurance companies invested in unsecured consumer credit through a fund managed by an asset manager. But with the new rated product, insurers can now directly invest in the asset class. Thus, the insurer steps in for LendingClub to provide financing via the senior note with a very low-risk return, while the fund manager still gets the B note.

Since LendingClub can now go directly to the insurance companies with $8.5 trillion in assets globally and a rated, liquid product, it opens up more demand. Thus, LendingClub will be able to sell its A notes at a higher price than previously, which should benefit its profitability going forward.

LendingClub has more tools in the toolbox

Prior to the 2022 downturn, LendingClub didn't have its SLC Program or other innovations, such as Extended Seasoning, which holds loans for a period of time so buyers can become comfortable with a portfolio's loss curves before buying. In the case of another funding crunch, LendingClub now has many more options to appeal to all different types of loan buyers. And in good times, the company has more options to maximize returns.

Still, the market was disappointed in LendingClub's guidance for the quarter that ended in December 2025, with a forecast for $2.3 billion in originations, which would amount to 25% growth. While that exit rate may have underwhelmed, Sanborn assured it isn't due to a lack of demand from borrowers or buyers. Rather, loan prices are just now increasing to the point where LendingClub can go back to higher-cost marketing channels, such as direct mail, which LendingClub abandoned in 2022.

LendingClub plans to re-enter those marketing channels in Q2, but they won't be optimized or efficient right away. This is why LendingClub gave a Q4 target of $2.3 billion but didn't lay out the path to get there during Q2 and Q3. Those quarters will still have marketing in "test mode" and will take a couple of quarters to ramp.

But once the marketing channels are tuned, there doesn't seem to be a reason LendingClub can't return to 2021-type growth levels. As long as the macroeconomic environment returns to a relatively normal state, LendingClub could surprise investors to the upside heading into 2026. Trading at just over book value, the stock still looks like a bargain.

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Billy Duberstein and/or his clients have positions in LendingClub. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.