Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

The story of LendingClub was captivating from the start: a cool guy with a cool yacht and a cool idea about how to use algorithms and the Internet to match people in need of loans with investors interested in funding them.  

How else can you explain the huge amount of press that's been given to a company that has yet to cross the half-a-billion dollar mark in annual revenue?

The story, of course, turned into a soap opera in May when that cool guy, Renaud Laplanche, was ousted ingloriously amid a flurry of disclosures of questionable practices in how exactly those loans were transferred to buyers.   

And a soap opera, obviously, is not the medium in which a company wants to tell its story. Why? Because if there's one thing soap opera viewers thrive on, it's drama. So those following the LendingClub saga are vigilant for drama at every plot turn, whether it's truly warranted or not. 

The good news for LendingClub is that the drama quotient has come down considerably, even if the latest episode, the company's second-quarter earnings report and some personnel announcements, provided plenty of plot twists. The biggest contributor to an $81.4 million net loss came from a forgotten-about character: a $35.4 million goodwill impairment charge from the company's acquisition of medical and education lender Springstone Financial.  

However, attention was focused primarily on the departure of a main character: Chief Financial Officer Carrie Dolan. The official statements out of the company indicate she had been planning to leave earlier this year for a different job opportunity but agreed to stay on a bit longer to help LendingClub navigate through the scandalous events of May. There doesn't necessarily seem to be any reason not to take the company at its word, but seeing "CFO resigns" in headlines is obviously going to induce some gasps from an audience on the lookout for the next juicy development.     

Of course, no soap opera is complete without some entangled romantic plotlines. In the case of LendingClub, the most important issue is how it romances the jilted investors who fund its loans. Hey, there's nothing like an expensive gift to make up for past sins, right? So LendingClub doled out about $14 million in incentives to keep investors engaged on the platform, and 15 of its 20 top investors returned, although at lower investment levels. Hedge funds largely appeared willing to take the gifts and forgive and forget, while banks appeared to be a bit more cautious. Isn't that always the case?

The damage boiled down to $1.96 billion in loan originations, a 29 percent drop from the first quarter and just 2 percent above the second quarter of last year.  

Rough Sailing
LendingClub's loan originations suffered last quarter amid a scandal that forced the ouster of its CEO
Source: Company presentations

While the drama seems to have subsided, plenty of subplots remain unresolved. Investigations by the Securities and Exchange Commission and Justice Department are two. Whether banks decide that their best bet in the long run is to continue to buy loans from operations like LendingClub or develop their own algorithms for assessing the risk of unsecured consumer loans, as Goldman Sachs appears to be doing, is another. When the company will be able to book positive net income, or at least positive Ebitda, is the big question. It doesn't look as if it will be this current quarter, according to the company's outlook.

Exiting the Club
LendingClub's shares took a hit when its CEO was ousted in May
Source: Bloomberg

Ultimately, while plenty of people are looking for loans, funding them remains the main issue for LendingClub. Bringing a mutual fund powerhouse like Western Asset Management on board is promising. But CEO Scott Sanborn has made it clear the company may need more committed capital to keep up with loan demand in the future, though he didn't tip his hand on how that might be accomplished. Raising it in the equity market could be tricky and dilutive, considering the stock is trading for less than a third of the offering price in its IPO less than two years ago.

But it's a step LendingClub may need to consider. So consider this the teaser for the next episode. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net