Unemployment Checks and Rolls; GDOT, LC and SQ Earnings; Rocket IPO

Greetings,

Heading into the dog days of summer, we cover (1) the latest news on unemployment rolls and the pare back of stimulus; (2) takeaways from Green Dot, LendingClub and Square earnings; and, (3) the latest from public markets (Rocket’s IPO, and Kabbage’s planning).

Let’s get to it.

On Friday, the U.S. government announced the July unemployment rate had fallen to 10.2%.

With July’s gain of 1.8MM jobs (following a combined 7.5MM gain in May and June), the U.S. economy has recovered about half of the jobs lost since the pandemic began.

There are still 13MM fewer jobs in the U.S. than there were in February, just before COVID-19 hit.

Source: WSJ, PeerIQ

The headline numbers mask a deeper, and more worrying, trend: 6.5MM people have been unemployed for at least 15 weeks, a record high, and double the 2009 peak.

As we noted previously, the easy job gains are increasingly behind us. It’s hard to move unemployment to <4% until we see a recovery in travel, hospitality, and leisure.

What Now for Forbearance?

Jobless rates are staying stubbornly high, and the federal unemployment boost has expired. Against that backdrop, here at PeerIQ, we’re paying close attention to borrower behavior as they exit forbearance.

Source: PeerIQ Analytics Platform

Extending last week’s analysis, we see pronounced inflection points of borrowers exiting forbearance into current after the 60 day mark and, starting with the April cohort, an acceleration after the 30 day mark.

While borrowers in the May cohort are recovering to current much more quickly than the others, they still appear to be capped at the “80-85% current” threshold identified last week.

This one’s worth watching closely: will any of these cohorts recover past that threshold, even as benefits dry up?

Source: PeerIQ Analytics Platform

Among borrowers exiting forbearance into delinquency, we again see an acceleration among later vintages, with the May cohort moving much more quickly into delinquency.

Unlike those becoming current, we have yet to see a clear “cap” on the delinquency rates; in fact, the share of May vintage loans in delinquency continues to climb after 60 days.

While this accelerated migration to current / delinquent status may say less about the borrowers than their lenders (specifically, limited appetite for additional forbearance extensions), we’ll be watching these patterns closely as the weeks progress.

And we will also be examining the behavior of the June cohort, with a particular focus on how these patterns may change as unemployment benefits trail off post July 31st.

Reach out to your client service contact at PeerIQ to learn more about this analysis, and the other loan-level insights available to users of our platform.

Earnings notes - GreenDot, LendingClub, Square

This week, three major industry participants - Green Dot, LendingClub, and Square - reported second quarter earnings.

Each represents a different slice of the economy, and in combination they give us a solid picture on where corporate America sees opportunities in the next normal.

Green Dot (GDOT)

• Significant PE-style leadership overhaul (operations, marketing, IT, legal, compliance, etc.) to bring in fresh talent and position the business for future growth
• GreenDot has suffered from a multi-year decline in active accounts, and new management is focused on new products and banking-as-a-service (BaaS) initiatives to turn that around
• 2Q non-GAAP revenues are up 13% to $300MM, driven by BaaS partnerships
• Highlighted key wins in BaaS partnerships, including Intuit (Quickbooks Cash bank accounts, with a TAM of 30MM small businesses), Kabbage (PPP program), WealthFront (debit and credit integration, high yield savings) and others
• GDOT indicated it is competing against the AXPs, JPMs, and digital banks of the world as a BaaS provider; however, insisted that major CapEx was not needed (we’ll see if that holds true)

LendingClub (LC)

• 2Q adjusted losses of ($0.60), missing analyst expectations by ($0.06). By the close of trading, LC had risen to $5.50 (+3.77%), recovering from an earlier drop of (-9.4%)
• Origination volume down 90% YoY ($326MM, versus $3.1Bn in 2Q 2019), and with it, transaction fees ($4MM for the quarter, versus $152MM last year); providing ballast was loan servicing ($14Bn balances), which generated $44MM in 2Q
• Bank funding partners demonstrated their resilience in the quarter: of the originations that did take place in the quarter, nearly 70% were bank-funded
• After peaking in May, payment deferral requests have declined to 5% of total loan balances (vs 16% at peak), with two thirds of borrowers “graduating” back to full payments after the expiration of first-tier hardship plan
• CEO Scott Sanborn, took an upbeat approach on the call, noting that “as Q3 get[s] underway, we are seeing the early signs of green shoots,” pointing to loan portfolio sales at or above carrying value and a “gradual resumption” of investor activity
• We’d also point out the significant amount of capital LC holds in its own cooking, with $469MM in loans HFS; this a decline of nearly $150MM since 1Q, including sales of $100MM in June, and helped contribute to the $44MM QoQ cash balance increase. Left unsaid was how much of the cash change came from portfolio amortization (we’d assume a significant portion)

Source: LendingClub, PeerIQ

Source: LendingClub, PeerIQ

Source: LendingClub, PeerIQ

Square (SQ) - focused on growing Cash App ecosystem; Omni-Channel/Contact less; seller volumes recovering better than expected

• Market Cap: $64 Bn, $4.7 Bn Revenues, P/E: 215 [!], P/S: 10
• Market reaction: up 150% YTD, Up 20%+ in 2-days post announcement
• Q2 gross profit was $597 MM, up 28% YoY or 32% growth. Net loss was $11MM. Adjusted EBITDA was $98MM. Primarily driven by:
  • a stronger recovery than anticipated in the seller business
    • GPV from online channels up more than 50% YoY
    • 1 in 3 new online sellers onboarded in the second quarter were entirely new to Square, many of these sellers adopted other parts of our ecosystem, including in-person commerce. 
  • out-performance in Cash App business
    • expects gross profit growth of 200% in July alone. 30MM active accounts in June.

PPP as a Trading Opportunity?

We’ve been hearing increasing chatter in recent days about how many banks are looking at the PPP repayment process with dread. Banks are looking for opportunities to sell down their PPP exposure rather than deal with the administrative burden of the forgiveness process.

American Banker dives into the topic this week, noting that many nonbank lenders (perhaps some among you, dear readers) are more than happy to take on the responsibility. Cross River also appears to be purchasing PPP portfolios, you may want to reach out to learn more.

Rocket Goes Up, Kabbage Heads for the Exit?

Rocket Companies, the parent of Quicken Loans, officially debuted on the NYSE this week, closing up nearly 20% on the day. The IPO pop came after Rocket agreed to cut back on both the IPO size and price.

By midafternoon Friday, RKT had continued its upward trajectory, adding another 8% gain to its IPO day pop.

For the VC & entrepreneur crowd, we recommend reading “Yes Before No: How Dan Gilbert Conquered Mortgage Lending.” It includes war stories and highlights the key turning points that transformed Rocket Loans into the largest non-bank lender in the U.S. today.

Kabbage is rumored to be considering a sale as well, reported Barron’s, hiring investment bankers to explore the possibility after receiving inbound interest. Sources say the firm could trade for $750MM to $1Bn - a strong outcome relative to other small business lenders and a category that is generally in decline. Bids due next month.

In the News:

• Unemployment Rate Fell to 10.2% in July, U.S. Employers Added 1.8 Million Jobs (WSJ, 8/7/2020) July’s unemployment rate fell to 10.2% after hitting a peak of nearly 15% in April.
• The Fed is Expected to Make a Major Commitment to Ramping up Inflation Soon (CNBC, 8/4/2020) In the next few months, the Fed will be solidifying a policy outline that would commit it to low rates for years.
• FDIC Chairman Encourages Small Business to Continue Working with Banks (Yahoo Finance, 8/5/2020) FDIC Chair, Jelena McWilliams, believes there is enough liquidity for small businesses to continue to work with banks in order to secure funding amid COVID-19.
• Why an OCC Payments Charter May Not Become Reality (American Banker, 8/5/2020) The OCC’s long-running effort to create a FinTech license, which is a charter unique to payments companies, could face a court challenge.
• More Banks Opt to Sell PPP Loans as Heavy Lifting Nears (American Banker, 8/5/2020) More banks want to sell their PPP loans and some nonbank lenders will be more than happy to take them over.
• Banks Ready New Tech Tools to Tackle Debt Collection (American Banker, 8/4/2020) Banks are using self-service portals, robotic processing automation, and virtual assistants to digitize the collections process.
• Uber’s Departure From Financial Services: A Speed Bump On The Path To Embedded Finance (Forbes, 8/3/2020) What Uber Money’s departure means for the embedded finance landscape.
• Quicken Loans Parent Edges Higher in Trading Debut (WSJ, 8/6/2020) Rocket opens above its initial offering price of $18 per share.

Lighter Fare:

• These Insects Preserved in Amber are Still Stunningly Colorful Even After 99 Million Years (Allthatsinteresting.com, 7/1/2020) A swarm of fossilized prehistoric insects shows us how vibrantly colored the world was 99 million years ago.