An operating agreement between LendingClub and its regulator expired Friday, which provides the company an expanded runway for growth as it hits the three-year anniversary of its acquisition of a bank.
The San Francisco-based fintech entered into an agreement with the Office of the Comptroller of the Currency back in 2021, when it bought Radius Bancorp. The pact imposed capital constraints on LendingClub in an effort to temper fast growth.
In an interview, LendingClub CEO Scott Sanborn said that fintechs get huge benefits from obtaining bank charters, but those changes also bring more responsibility and regulatory oversight.
"The operating agreement, by design, in some ways slows you down," Sanborn said. "It does that for very good reasons: to make sure you understand the obligations that you now have to manage your risk, and to create a thought process and a culture to do that independently."
Now LendingClub can pursue options to take advantage of its capital position, which should spur a higher return on equity, Sanborn said. Still, he added that growth will be gradual as the company evaluates appropriate capital ratios.
Back in 2018, LendingClub drafted a detailed operating plan for regulators, which didn't account for the pandemic, rapidly rising inflation or more recent interest rate hikes. The company later had to stay in close dialogue with the OCC to make changes or additions to its plan, seeking permission for major strategic shifts like the launch of new products and the hiring of new executives.
Notably, LendingClub was bound to a tight Tier 1 leverage ratio, which it reported at 12.9% in the fourth quarter of 2023, as well as a constrained common equity Tier 1 ratio. That figure was 17.9% at the end of the fourth quarter.
Now that the agreement has expired, Stephens analyst Vincent Caintic expects LendingClub to have about $400 million in excess capital, which represents more than 40% of its $990 million market capitalization. He said the company should have enough capital to buy back nearly half of its stock, though that's not a probable outcome.
In the second half of last year, LendingClub introduced a new product called a structured certificate, which has been "a success," Jefferies analysts wrote in a recent research note. The company can pool loans into a two-tiered private securitization and retain the senior note on its balance sheet, while an institutional investor buys the residual certificate, which can act like financing.
Because the OCC agreement is no longer in effect, LendingClub can
"[The end of the operating agreement] gives Lending Club more options in how to expand the return on its business," Caintic said. "I think they're still going to ease into it, not be too aggressive. They still have regulators, of course, but they can seize more of that growth opportunity and expand both their assets as well as the return on equity of those assets in a faster period of time."
LendingClub is one of a few fintechs — others are SoFi Technologies and Varo Money — that have a bank charter. The benefits of a charter include a lower cost of funding through deposits.
CEO Scott Sanborn said it's unclear when demand from banks to buy the fintech's loans will return.
When LendingClub entered into the OCC agreement in 2021, its bread-and-butter business was selling loans to institutional investors in what it called its lending marketplace.
Sanborn said this week that the company's objective in buying a bank was to get to a place where it was delivering a strong return from its own balance sheet, and selling loans in the marketplace was "icing on the cake."
Three years later, LendingClub is starting the "journey" of expanding without the agreement's constraints, though Sanborn noted that the bank will still operate under its regulator's purview.
Analysts are optimistic that the operating agreement exit will be a catalyst for growth, and Sanborn said he's confident LendingClub can manage credit and originations in a way that improves the company's value.
