Sdigital market bank hares Loan Club (NYSE: LC) have risen throughout the month, as more investors begin to understand the power of the bank’s new hybrid model and gear up for third quarter results on October 27. After acquiring Radius Bank earlier this year and being granted a banking charter, LendingClub, which uses technology and data to streamline personal lending online, has started to keep a quarter of the loan volume it generates on its balance sheet and to generate recurring interest income. The banking charter also allows LendingClub to use cheap deposits to fund loans and save on set-up costs.

After a great second quarter with this model in place, here are two reasons I’m optimistic about LendingClub’s third quarter earnings report.

1. A chance to further prove your model

I see several ways that LendingClub can prove its model to investors. The company’s business model is heavily dependent on the volume of loan issuance. The company is also the leader in terms of personal loan market share. Therefore, if there is good overall personal lending activity in the segment in the third quarter, I have no doubt that LendingClub will achieve significant origination volume and have a great quarter.

However, I am not clear on the activity level at Q3. On the one hand, many banks that reported profits in the third quarter said the consumer was in very good health, credit and debit spending was high, and credit card loan issuance resumed in the third quarter. trimester. Unsecured personal loans are not the same as credit card loans but are an alternative to them, so heavy credit card origination activity could be a good sign.

On the flip side, if you look at Federal Reserve data, non-revolving debt, to which LendingClub’s unsecured personal loans belong, grew at a slower pace during the first two months of the third quarter. The total volume of non-revolving debt increased by about $ 66 billion in the second quarter. In July and August, non-revolving debt only increased by $ 23 billion, with one month remaining in the quarter, although it may have picked up in September as cases of the delta variant began to stabilize.

Image source: Getty Images.

It might be bad for personal lenders, but even if the origination business wasn’t there, LendingClub could still outperform its peers with its customer acquisition capabilities. In the second quarter, LendingClub granted $ 2.7 billion in loans. Despite adding 500,000 customers during the quarter, LendingClub CEO Scott Sanborn said on the company’s second quarter earnings call that “much” of its origin has gone to members. existing. New members in T2 or others of its existing 3.5 million members could translate into Q3 lending volume.

Additionally, LendingClub saw growth in home improvement loans and those used to make big purchases in the second quarter, and those use cases appear to have stayed hot. A survey conducted by Goldman Sachs in September showed that more than a quarter of those polled were planning to make improvements to their homes after the pandemic.

Finally, LendingClub at the end of the second quarter still had $ 512 million in high yield unsecured personal loans and nearly $ 2.3 billion in total loans on its balance sheet (including legacy Radius loans). These loans generate recurring monthly interest income, which can partially offset any weakness in origination activity and help the fintech company beat its peers.

2. Management has been careful with directions

Since implementing the new model, management has been careful not to make excessive promises. As a result, the company beat quarterly results handily in each of the first two quarters of the year. In the first quarter of the year, although the bank reported a loss of nearly $ 0.50 in earnings per share, it exceeded the consensus estimate by 40%.

In the second quarter, the bank completely exceeded analysts’ estimates, generating a profit of $ 0.09 on revenue of about $ 204 million. The consensus estimate was a loss of $ 0.40 on revenue of $ 129 million. LendingClub was not expected to reach profitability until the end of this year or early 2022. The blowout results pushed the stock up 50% within a week of the results and led management to significantly raise its funds. forecasts for the whole year.

At the start of the year, LendingClub forecast total creations of $ 3 billion, revenue of $ 250 million, and a loss of about $ 140 million. After the second quarter results, management estimated loan origination in 2021 to be between $ 9.8 billion and $ 10.2 billion; revenues between $ 750 million and $ 780 million; and net income ranging from a loss of $ 13 million to a loss of $ 3 million.

Despite the unpredictability of the third quarter with the increase in cases of delta variants, management still provided the new directions almost a third of the quarter, so they probably had a sense of where origins and revenues were going. Additionally, while the economy has had its ups and downs recently, the consumer has remained strong and the economy has not stopped like it did in 2020 – vaccines have been shown to be effective in reducing hospitalizations and deaths, and the world has learned to live with COVID-19.

Therefore, I find it unlikely that LendingClub’s third quarter results will not at least meet management expectations, which would be a good performance.

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Bram Berkowitz owns shares of LendingClub and has the following options: Long January 2023, $ 45 calls on LendingClub. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.