LendingClub announced an agreement Tuesday to buy Radius Bancorp in a deal that will give the San Francisco-based fintech the bank charter it has been seeking.
The stock-and-cash transaction, which is valued at $185 million and requires regulatory approval, represents a landmark for the U.S. online lending industry. LendingClub is poised to become the first company in the sector’s history to purchase a bank.
Boston-based Radius is a $1.4 billion-asset company with a reputation as an innovator in digital banking. LendingClub said in a press release that the acquisition will allow for the creation of a scaled-up, digitally native bank that will enable customers to pay less when borrowing and earn more when saving.
“By combining with Radius, we will create a category-defining experience for our members that will dramatically enhance the resilience and earnings trajectory of our business,” LendingClub CEO Scott Sanborn said in a press release.
During a conference call with analysts, Sanborn said that Radius is one of only a handful of digital banks in the U.S. with a national footprint and no legacy branch network. He indicated that LendingClub plans to compete for online deposits with a strategy that emphasizes fairness to customers. Many neobanks have taken a similar approach in recent years, seeking out depositors who are fed up with unexpected fees.
“We believe the time is right for checking and savings to be reimagined in a way that’s free from legacy practices and systems, one where the success of the institution aligns with the success of the customer,” Sanborn told analysts. “We plan to be at the forefront of that reimagining.”
LendingClub plans to pay 75% of the purchase price in cash — by tapping into its stockpile of cash on hand — and the remaining 25% in stock. The company said that it will also spend approximately $20 million on advisory and transaction-related costs, plus $50.2 million as part of an agreement with its largest shareholder that will enable compliance with federal banking ownership regulations.
In the first three hours after the deal’s announcement, shares in LendingClub fell by 2.8% in after-hours trading.
The Silicon Valley lender, which specializes in consumer installment loans, said that it expects to derive a wide range of benefits from the acquisition.
The company noted, for instance, that it will no longer have to share its revenue with a partner bank. LendingClub, which has long partnered with Utah-based WebBank so that it can offer loans across the country without getting licensed in each state, estimated that it will save approximately $25 million annually by jettisoning the partnership model.
LendingClub also said Tuesday that adding deposits as a low-cost, stable source of funding will enhance the company’s resiliency over the economic cycle and allow the firm to reduce its use of higher-cost funding sources. The company estimated that its weighted average cost of funds will fall from 4% to 1.8% for an annual savings of roughly $15 million.
In addition, LendingClub said that it will be able to sell more products to its customers and attract new customers as result of the combination. And the fintech stated that it will achieve regulatory clarity because it will have a direct relationship with its primary regulator.
LendingClub made clear that it does not plan to abandon the marketplace lending model that it pioneered, though it does plan to hold more loans on its own balance sheet.
Under LendingClub’s current approach, the company derives most of its revenue from transaction fees while matching potential borrowers with loan investors, including both individual savers and financial institutions.
The company said in a presentation Tuesday it now derives only
about 11% of its revenue from net interest income, and that the figure might rise to around 30% following the Radius acquisition.
LendingClub said that it expects the transaction to close in the next 12 to 15 months, and that it anticipates the combined entity will be substantially accretive with a cash payback of the purchase price premium and all costs in two years.
Radius President and CEO Mike Butler said he looks forward to leveraging the strengths of both companies’ employees.
“This is a perfect marriage, with LendingClub bringing the leading digital asset generation platform, and Radius contributing a leading online deposit gathering platform, to position the combined company for long-term success,” Butler said in the press release.
