The fallout from the departure of former Lending Club CEO Renaud Laplanche is still on the minds of many. Although this undoubtedly will have consequences in the years to come for the company it seems as though we may be moving towards the recovery phase. This morning, Lending Club issued a press release providing several updates on the company, including the conclusion of the internal investigation. They also hosted their annual shareholders meeting after postponing it earlier this month.
In the press release the board of directors officially named Scott Sanborn as Lending Club’s CEO and President. He was previously the acting CEO following the departure of Renaud Laplanche. This isn’t too surprising given that Scott has been with the company in various leadership roles since 2010. He began as the Chief Marketing Officer and starting in 2013 took on the role of Chief Operating Officer.
With the internal investigation coming to a close, two previously unknown items were brought to light. First, six funds that were managed by Lending Club’s subsidiary LC Advisors (LCA) were not valuing assets consistent with generally accepted accounting principles. This affected the net asset values as well as the monthly return figures for the funds. Lending Club is reimbursing investors in these funds. Subsequently, Lending Club enlisted the help of an independent valuation firm to make changes which includes an independent governing board.
Second, Renaud Laplanche and three family members took out loans in December 2009 totaling $722,800 to inflate origination numbers. Back in 2009 Lending Club still reported loan origination numbers on a monthly basis. NSR Invest shared with us that originations in November 2009 were $6,848,875 and December 2009 came in at $7,126,475. This is a difference of $277,600 which means December would have been a down month but for these loans from Renaud and his family. Lending Club noted that they are confident that there are no other situations where loans were inappropriately originated after December 2009
Not surprisingly Lending Club shared that originations for Q2 are slated to be one third lower than the first quarter of 2016. It’s important to note that the Lending Club debacle began mid-quarter so this estimate doesn’t show the full impact to the platform. It’s possible that Q3 2016 originations could come in even lower than Q2 depending on investor confidence. In Q1 2016, Lending Club originated $2.75 billion of loans. Assuming the one third drop estimate is accurate, we will see originations fall to around $1.8 billion in Q2. For historical perspective, Lending Club originated around $1.6 billion in Q1 2015 and $1.9 billion in Q2 2015. Unfortunately the recent issues and lower volume has resulted in Lending Club eliminating 179 positions.
Lending Club also announced several actions they have recently taken including:
- Increasing testing of data changes.
- Increasing compliance and oversight resources.
- Aligning business and control functions into a better risk management structure.
- Retraining employees on code of conduct and ethics and reinforcing importance of a high compliance culture.
- New policies on pledging Lending Club shares.
- Prohibiting the company from making investments in ecosystem partners that invest in Lending Club loans.
Lending Club 2016 Annual Shareholders Meeting Review
Hans Morris, Lending Club’s chairman began the meeting by apologizing for delaying the shareholder meeting originally scheduled for early June. He stated that the company needed additional time for review and that they now believe the review is substantially complete.
Scott and the rest of the team highlighted the difficulty in Q1 2016 with investors and borrowers as well as the investor demand as of late. They shared that many investors paused investing following the news on May 9th, but many investors are coming back with most having satisfied their diligence process. Larger investors, such as banks will take longer to come back to the platform. To attract investors, Lending Club has offered incentives to investors which will total approximately $9 million.
As a result of the decreased capital demand Lending Club reduced their variable marketing to realign loan volume with current investor capital demand. Of the 179 positions that were eliminated, a majority of them came from loan volume oriented teams.
Lending Club continues to believe the marketplace model remains efficient. However with their strong balance sheet, they are open to investing in their own loans with the intent to resell them once demand stabilizes. By the end of June, Lending Club will have about $40 million of loans on their balance sheet which equates to approximately 2% of originations.
There were just a few questions that were asked which I’ve paraphrased below:
Q: Did the board act in the best interest of shareholders in letting CEO go?
A (Hans Morris): Unquestionably yes, Lending Club conducted a very thorough and fair review with the help of outside independent counsel. We were also aware the news would affect the company. If we insist everyone in this company has to have unquestionable trust and accountably those characteristics apply to everyone, especially in senior leadership. We took swift and decisive action and acted in the long term best interest of investors. We were profoundly disappointed as Renaud was a friend of many. The fact is, they know the decision made the company better and Scott is the right guy.
Q: How are conversations with investors going?
A (Scott Sanborn): We are making good progress, but are not at the volumes we were at in Q1. The assets we generate provide great returns and that hasn’t changed. Lending Club needs to support investors in diligence process. Different investors are coming back at different rates of speed with banks understandably taking longer. All of the classes of investors are back on the platform. An example of a new investor is an asset manager that began diligence over a year ago. They did a re-underwriting process in May and have long term targets. They have purchased $200 million since May 9 and expect to have $1 billion invested soon.
Q: Why Scott to be CEO?
A (Hans Morris): Any CEO has to have 3 characteristics
- Absolute integrity
- Deep knowledge of the industry
- Must good cultural fit with company and rest of board
At first we were open minded with no decision having been made. The last 7 weeks have been quite the test and we are confident Scott has these characteristics. Scott is honest, makes high quality decisions, knows the business and the team believes in him.
Q: How is credit performing? Why raising rates?
A (Scott Sanborn): We recently released updated loss curves that show stable losses especially in A-C loans which account for a majority of originations. Lending Club also increased rates of about 50 bps on average. We see adjustments of signs of functioning marketplace to balance supply and demand and believe the assets are more attractive to investors.
Conclusion
While Lending Club still has a lot of work to do, it is nice to see at least their internal investigation triggered by Renaud Laplanche’s departure come to a close. We still have to wait to hear about the DOJ Grand Jury subpoena as well as the SEC investigation. Now that Lending Club officially has a new CEO and have put measures in place to prevent issues in the future, the company can begin to shift the focus to moving forward. Expectations for Q2 2016 have been set but we will need to wait and see if and when they can get back to where they once were.
