UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
Commission File Number: 001-36771
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LendingClub Corporation |
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| Delaware | | | 51-0605731 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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| | 595 Market Street, Suite 200, | |
71 Stevenson Street, Suite 1000 | | |
San Francisco, California | CA | 94105 | | 94105 |
(Address of principal executive offices) | | (Zip Code)offices and zip code) |
(415) (415) 632-5600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class: | Trading Symbol | Name of each exchange on which registered: |
| Common Stock, par value $0.01 per share | LC | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesýNo¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨Noý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesýNo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | ý☒ | | Accelerated filer | o☐ |
| Non-accelerated filer | | o (Do not check if a smaller reporting company)
☐ | | Smaller reporting company | o☐ |
Emerging growth company | | o | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐Noý☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017,2019, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,784,167,126$1,091,456,815 based on the closing price reported for such date on the New York Stock Exchange. Shares of the registrant’s common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.
As of February 16, 2018,14, 2020, there were 417,579,73588,911,078 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Definitive Proxy Statement for the Registrant’s 20182020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2017.2019.
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 20172019
TABLE OF CONTENTS
Except as the context requires otherwise, as used herein, “LendingClub,” “Company,” “we,” “us,” and “our,” refer to LendingClub Corporation, a Delaware corporation, and, where appropriate, its consolidated subsidiaries and consolidated variable interest entities (VIEs):, including:
LendingClub Asset Management, LLC (LCAM), a wholly-owned registered investment advisor with the Securities and Exchange Commission (SEC) that acts as the general partner for certain private funds and as advisor to separately managed accounts and funds of which LCAM’s wholly-owned subsidiaries are the general partners.
Springstone Financial, LLC (Springstone), aVarious wholly-owned Delaware limited liability company that facilitatescompanies established to enter into warehouse credit agreements with certain lenders for secured credit facilities.
Various entities established to facilitate loan sale transactions under LendingClub’s Structured Program, including sponsoring asset-backed securities transactions and Certificate Program transactions, where certain accredited investors and qualified institutional buyers have the originationopportunity to invest in senior and subordinated securities backed by a pool of education and patient finance loans by third-party issuing banks.unsecured personal whole loans.
LC Trust I (the LC Trust), an independent Delaware business trust that acquires loans from LendingClub and holds them for the sole benefit of certain investors that have purchased trust certificates (Certificates) issued by the LC Trust and that are related to specific underlying loans for the benefit of the investor.
In connection with its role as sponsor of an asset-backed securities transaction, LendingClub owns a 56% interest in a majority-owned affiliate (MOA), LendingClub Operated Aggregator Note (LOAN) NP I, LLC. The Company holds a controlling financial interest in and is the primary beneficiary of the MOA.
Consumer Loan Underlying Bond DepositorSpringstone Financial, LLC (Depositor)(Springstone), a wholly-owned Delaware limited liability company established to facilitate LendingClub-sponsored asset-backed securities transactions.that facilitates the origination of education and patient finance loans by third-party issuing banks.
Consumer Loan Underlying Bond Credit Trust 2017-P2 (Credit Trust), a Delaware statutory trust established to facilitate a LendingClub-sponsored asset-backed securities transaction.
Consumer Loan Underlying Bond Grantor Trust 2017-P2, a grantor trust established to facilitate a LendingClub-sponsored asset-backed securities transaction.
Consumer Loan Underlying Bond Certificate Issuer Trust I, a Delaware statutory trust organized in series that provides certain institutional investors the opportunity to invest in trust certificates (CLUB Certificates), each representing interests in a segregated pool of unsecured personal whole loans.
LendingClub Warehouse I LLC (Warehouse) and LendingClub Warehouse II LLC (Warehouse II), wholly-owned Delaware limited liability companies established to enter into warehouse credit agreements with certain lenders for secured revolving credit facilities.
Forward-Looking Statements
This Annual Report on Form 10-K (Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Report include, without limitation, statements regarding borrowers, credit scoring, our strategy, future operations, expected losses, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth.growth and our ability to obtain a bank charter and the impact on our business. You can identify these forward-looking statements by words such as “anticipate,” “appear,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “opportunity,” “plan,” “predict,” “project,” “should,” “strategy,” “target,” “will,” “would,” or similar expressions.
These forward-looking statements include, among other things, statements about:
our ability to attract and retain borrowers;
the ability of borrowers to repay loans and the plans of borrowers;
our ability to maintain investor confidence in the operation of our platform;
the likelihood of investors to continue to, directly or indirectly, invest through our platform;
our ability to secure new or additional sources of investor commitments for our platform;
expected rates of return for investors;
the effectiveness of our platform’s credit scoring models;
our ability to innovate and the success of new product initiatives;
our ability to obtain or add bank functionality and a bank charter;
the impact on the business from obtaining or adding bank functionality and a bank charter;
our ability to resolve pending governmental inquiries and private litigation, and the terms of such resolution(s);
the use of our own capital to purchase loans;
maintaining liquidity and capital availability to support purchase of loans, contractual commitments and obligations (including repurchase obligations or other commitments to purchase loans), regulatory obligations to fund loans, and general strategic directives (such as with respect to product testing or supporting our Structured Program transactions, which include sponsoring asset-backed securities initiatives)securitization transactions and Certificate Program transactions), and to support marketplace equilibrium across our platform;
the impact of holding loans on and our ability to sell loans off our balance sheet;
transaction fees or other revenue we expect to recognize after loans are issued by the issuing banks who originate loans facilitated through our platform;
interest income on our loans invested in by the Company and the negative fair value adjustments on associated loans;
our financial condition and performance, including the impact that management’s estimates have on our financial performance and the relationship between the interim period and full year results;
our ability, and that of third-party vendors, to maintain service and quality expectations;
capital expenditures;
interest rate risk and credit performance associated with the outstanding principal balance of loans and other securities and their impact to investor returns and demand for our products;
the impact of new accounting standards;
the impact of pending litigation and regulatory investigations and inquiries;
our compliance with applicable local, state and Federal laws, regulations and regulatory developments or court decisions affecting our business;
our compliance with contractual obligations or restrictions;
investor, borrower, platform and loan performance-related factors that may affect our revenue;
the potential adoption rates and returns related to new products and services;
the potential impact of macro-economic developments that could impact the credit performance of our loans, notes, certificates and secured borrowings, and influence borrower and investor behavior;
the effectiveness of our cost structure simplification efforts and ability to control our cost structure;
our ability to develop and maintain effective internal controls;
our ability to recruit and retain quality employees to support current operations and future growth;
our ability to successfully relocate people and services;
the impact of expense initiatives;
our ability to manage and repay our indebtedness; and
other risk factors listed from time to time in reports we file with the SEC.
We caution you that the foregoing list may not contain all of the forward-looking statements in this Report. We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. We have included important factors in the cautionary“Risk Factors” section of this Report, as well as in our consolidated financial statements, includedrelated notes, and other information appearing elsewhere in this Report particularly inand our other filings with the “Risk Factors” section,Securities and Exchange Commission, that could, among other things, cause actual results or events to differ materially from forward-looking statements contained in this Report. Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Report carefully and completely and with the understanding that actual future results may be materially different from what we expect. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, actual results, future events or otherwise, other than as required by law.
PART I
Item 1. Business
Our MissionIntroduction
TransformingLendingClub was incorporated in Delaware on October 2, 2006, and is currently the banking system to make credit more affordable and investing more rewarding.
Overview
LendingClub operateslargest provider of unsecured personal loans in the US. We operate America’s largest online lending marketplace platform that connects borrowers and investors. We believeLendingClub provides tools that help Americans save money on their path to financial health through lower borrowing costs and a technology-powered lending marketplace is a more efficient mechanismseamless, technology-driven user experience. Investors provide capital to allocate capital between borrowers and investors thanenable the traditional banking system. Qualified consumers and small business owners borrow through LendingClub to lower the cost of their credit and enjoy a better experience than that provided by traditional banks.
The LendingClub platform offers investors access to an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. Loans that are facilitated through our platform are funded by the issuance of notes to our retail investors, by the issuance of certificates, by direct investment by us or the sale of whole loans to institutional investors, including high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments. We provide these investors with access to a variety of tools and products that seek to address their level of sophistication and desired level of interaction, which can range from low-touch self-directed accounts to high-touch funds and managed accounts. To expand our investor base, we recently developed the capability to support the issuance of various types of asset-backed securities for which poolsfunding of loans facilitated through our platform serve as collateral.
We have developed our proprietary technology platform to support our lendingin exchange for earning competitive risk adjusted returns. Our marketplace and offer a variety of our issuing banks’ loan products to interested investors. Our proprietary technology automates certain key aspects of our operations, including administration of the borrower application process, data gathering, applyingenables efficient credit decisioning, scoringpricing, servicing and underwriting standards of the related issuing bank to an application, loan funding, investing and servicing, regulatory compliance and fraud detection.support operations. We operate fully online with no traditional branch infrastructure. Our platform offers analytical tools and data to facilitate investor decision making and the ability to assess their portfolios. Our proprietary technology platform has allowed usvision is to expand our offerings from personal loansmarketplace model and support it with a bank charter, which we believe will be both strategically and financially accretive to include educationthe Company.
On February 18, 2020, the Company and patient finance, automotiveRadius Bancorp, Inc. (Radius) entered into an Agreement and small business loans,Plan of Merger, by and among the Company, a wholly owned-subsidiary of the Company, and Radius, pursuant to expand investor classes from individualswhich the Company will acquire Radius and thereby acquire its wholly-owned subsidiary, Radius Bank (the Merger), in a cash and stock transaction valued at $185 million (of which $138.75 million is in cash and $46.25 million is in stock), plus certain purchase price and expense adjustments of up to institutions$22 million. The closing of the Merger is subject to regulatory approval and through various investment vehicles.other customary closing conditions, which the Company anticipates can be completed within 15 months, as well as customary transaction costs. The Company believes that acquiring Radius and operating with a national bank charter will enhance LendingClub’s ability to serve its members, grow its market opportunity, increase and diversify revenue and earnings, and provide both funding resilience and regulatory clarity. With the talent, infrastructure and capabilities Radius possesses, the Company intends to enhance customer engagement by offering a broader range of member products and services aimed at supporting members and improving their financial health.
In order to facilitate compliance with federal banking regulations by the Company’s largest stockholder, Shanda Asset Management Holdings Limited and its affiliates (Shanda), on February 18, 2020, the Company entered into a Share Exchange Agreement pursuant to which Shanda will exchange, subject to certain closing conditions, all shares of the Company’s common stock held by Shanda for newly issued non-voting convertible preferred stock, series A (the Exchange). In connection with the Exchange, the Company will provide Shanda registration rights and a one-time cash payment of approximately $50 million. To deter future ownership positions in the Company’s securities in excess of thresholds set forth by the Federal Reserve under the Bank Holding Company Act, the Company adopted a Temporary Bank Charter Protection Agreement (the Charter Protection Agreement) which provides for the dilution of any person or group of persons that acquires: (i) 25% or more equity interest in the Company, or (ii) 7.5% or more of any class of the Company’s voting securities, which threshold shall automatically increase to 10% in connection with the closing of the Exchange. The Charter Protection Agreement is effective as of February 18, 2020, and will automatically expire on the earlier of the closing of the Merger or 18 months.
Our mission
We provide tools that help Americans save money on their path to financial health through lower borrowing costs and a seamless, technology-driven user experience. We help investors efficiently generate revenue primarilycompetitive risk-adjusted returns through diversification.
Our strategy
Our strategy is to increase member engagement with LendingClub’s marketplace and leverage that engagement to offer a broad range of products and services from transaction fees from our platform’s role in acceptingLendingClub and decisioning applications on behalf of our bank partners to enable loan originations, investor fees that include servicing fees from investors for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on our balance sheet.its partners.
Industry Background and Trends
We believe a transparent and open marketplace where borrowers and investors have access to information, complemented by technology and tools, can make credit more affordable, redirect existing pools of capital trapped inside the banking system, and attract new sources of capital to a new asset class. We believe that online lending marketplaces have the power to transform the traditional banking system, facilitate more efficient deployment of capital, and improve the global economy.
Lending Is EssentialThrough sustained innovation and investment in demand generation and conversion, LendingClub has already built the leading unsecured personal loan marketplace with rapid decisioning and high member satisfaction. There are two parts to the Economyour strategy:
Visitor to Member: aims to increase member engagement with LendingClub through a member center, which is intended to give members current data on their financial health.
Product to Platform: aims to leverage member engagement by presenting offers from LendingClub and its partners that may save members money.
We believe our strategy will generate more savings for members, provide more avenues for LendingClub to serve borrowers and investors, and grow the abilitylifetime value of individualsour customer base through increased revenue per member and small businesseslower member acquisition costs.
Our market opportunity
LendingClub is the market leader in unsecured personal loans in the United States, a $160 billion industry in 2019. In the United States, unsecured personal loans are the fastest growing segment of consumer credit as consumers seek to access affordablerefinance record levels of revolving credit is essential to stimulating and sustaining a healthy, diverse and innovative economy. Lending to consumers provides financial flexibility and gives households better control over when and how to purchase goods and services.
Borrowers Are Inadequately Served by the Traditional Banking System
We believe the traditional banking system generally is burdened by its high cost of underwriting and services, in part due to its physical infrastructure and labor- and paper-intensive business processes, compounded by an increasingly complex regulatory environment. As a result, we believe the traditional banking system is ill-suited to meet consumer and small business demand in a fair and affordable way for borrowers. Banks have historically managed the demand for small balance loans by issuing credit cards, which require less personalized underwriting and have higher interest rates. While credit cards are convenient as a payment mechanism, they are an expensive long-term financing solution for borrowers. Borrowers who carry a balance on their cards are often subject tocard debt, with decade high variable interest rates, and are searching online for convenient ways to get better fixed rates. According to TransUnion, “FinTech loans now (2019) comprise 38% of all unsecured personal loan balances.” That’s up significantly from just 5% of outstanding balances in 2013.
LendingClub helps customers find an easier, less expensive path to paying down debt by replacing variable high-interest credit card payments with fixed lower-rate loans and predictable, more affordable payments. With LendingClub loans, members have the possibilitypotential to save thousands of incurring additional feesdollars compared to traditional credit cards. Researchers at the Philadelphia Federal Reserve Bank have analyzed LendingClub data and penalties. Additionally, a broad population of borrowersconcluded that we’re operating in areas where banks are charged the same high interest rates onclosing their balances, regardless of an individual’s specific risk profile, so low-risk borrowers often subsidize high-risk borrowers.
Investors Have Had Limited Options to Participate in Consumer and Small Business Credit
Historically, access to most consumer and small business loans as an investment product was limited to the banks that hold loans on their balance sheet or to structured securitized products that were syndicated to large institutional investors. Depositors effectively fund the loans made by the banking system, but they share little in the direct returns of these loans as evidenced by the low yields on various fixed income investment or deposit products offered by banks. We believe many investors should have access to invest in structured products directly and be able to invest in consumer and small business credit in a meaningful way. Our lending platform and products seek to address both of these needs. We believe the additional capital that could be invested in consumer and small business loans can be more effectively deployed on our lending marketplace than alternatives.
Online Marketplaces Have Proliferated Throughout the Economy
Online marketplaces have emerged to connect buyers and sellers across many industries to increase choice, improve quality, accelerate the speed of decision making and lower costs. We believe a successful online marketplace must act as a trusted intermediary providing transparency, security, supply and demand balance, and ease of use to give marketplace participants an incentive to interactbranches, improving pricing and the confidencequality of credit decisioning, and increasing financial inclusion.
With 160M+ US consumers currently using digital banking, LendingClub’s online platform is well positioned for growth by empowering customers to do business together. Initial online marketplaces connected buyersmake better financial decisions that result in improved money management and sellers of goods and services – primarily moving demand from offline to online and making the transaction process more efficient. Online marketplaces have more recently evolved to unlock supply and demand that could not previously be matched in an efficient manner offline. The “sharing economy,” a term that describes this marketplace trend, enables a better use of resources by allowing owners of underutilized assets to offer them to people who want them while capturing an economic benefit.savings.
Our Marketplace Solutioncompetitive advantages
The lending industry is highly competitive, rapidly changing, highly innovative and subject to regulatory scrutiny and oversight. We believe that our lending marketplace provides the following benefits to borrowers:
Access to Affordable Credit. Our proprietary lending marketplace model, easily accessible online delivery and process automation enable us to offercompete against a wide range of financial products and companies that attract borrowers interest rates that are lower on average thanand/or investors.
With respect to borrowers, we primarily compete with other online consumer lending marketplaces and traditional financial institutions, such as banks, credit unions, and credit card issuers. LendingClub’s key competitive advantages include:
Price efficiency: our marketplace model generates savings for borrowers by matching them with the rates chargedlowest available cost of capital provided by banks for credit cards,investors.
Marketing efficiency: our broad spectrum of investors, innovation and makereturning members enable us highly competitive within the lending marketplace space for installment loans.
to serve more borrowers and enhance our marketing efficiency.Superior Borrower Experience. We offer a fastScale, data and easy-to-use online application process and provide borrowers with access to live supportinnovative technology: our innovative technology and online tools throughout the processplatform enables us to generate and over the life of the loan.convert demand efficiently and at scale, while managing price and credit risk effectively.
With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds and short-term fixed income securities. LendingClub’s key competitive advantages include:
Generating competitive risk-adjusted returns efficiently: the nature of the asset class available through, and the scale of, our marketplace platform enables us to efficiently generate competitive risk-adjusted returns for investors.
Portfolio diversification: unsecured personal loans can offer duration, geographic and/or asset diversification to investors.
We continue to be innovative to extend these competitive advantages.
In addition to the discussion in this section, see “Item 1A. Risk Factors – Substantial and increasing competition in our industry may harm our business.” for further discussion of the potential impact of competition on our business.
Our model
Our sales and marketing efforts are designed to attract and retain borrowers and investors and build brand awareness. We use a diverse array of marketing channels and constantly seek to improve and optimize our experience both on- and offline to achieve efficiency and a high level of borrower and investor satisfaction.
We attract and retain borrowers through direct mail, online aggregation partners, and other channels (including search engines, social media, and strategic relationship referrals) and this continues to drive growth in our borrower and investor base. Our demand generation has been enhanced through significant funnel conversion efficiency improvements. As our growing member base frequently returns directly to LendingClub if they need another loan, we are growing the lifetime value of our members and lowering our average customer acquisition cost.
Once a loan application is received, we present the applicant with various loan options, including the term, rate and amount for which the applicant qualifies. After the applicant selects their personalized financing option and completes the application process, we may perform additional verifications on the applicant. Once the verifications are completed and a loan has been funded through one of the investment channels discussed below, the issuing bank originates and issues proceeds of the loan to the borrower, net of the origination fee charged and retained by the issuing bank. After the loan is issued, we use the proceeds from investors to purchase the loan from the issuing bank. Investor cash balances are held in segregated bank or custodial accounts and are not commingled with our monies. If insufficient investor commitments are received and the Company does not elect to purchase loans with its own capital, the loan is not funded.
Transparency. The installment
LENDINGCLUB CORPORATION
Our issuing bank for unsecured personal and auto loans is WebBank, a Utah-chartered industrial bank, member Federal Deposit Insurance Corporation (FDIC), that handles a variety of consumer financing programs. We have entered into: (i) a marketing and program management agreement with WebBank that governs the terms and conditions between us and WebBank with respect to loans facilitated through our lending marketplace featureand originated by WebBank and (ii) a fixed rateservicing agreement that is clearly disclosed to the borrowergoverns our loan servicing obligations for loans during the application process, with fixed monthly payments, an originationperiod of time that the loans are owned by WebBank. WebBank pays us a transaction fee and the ability to prepay the balance at any time without penalty. Our platform utilizes an automated, rules-based engine for applying the underwriting standards of the related issuing bank partner to an application and income verification, which significantly reduces the human bias associated with reviewing applications.
Fast and Efficient Decisioning. We leverage online data and technology to assess risk, detect fraud, determine a credit rating and assign appropriate interest rates quickly.
We believe thatour role in processing loan applications through our lending marketplace provideson WebBank’s behalf. The transaction fee we earn corresponds with the following benefits to investors:
Accessorigination fee that WebBank charges the borrower. We pay WebBank a monthly program fee based on the amount of loans issued by WebBank and purchased by us or our investors in a given month, subject to a New Asset Class. Allminimum monthly fee.
Under contractual agreements, WebBank may sell us loans without recourse two business days after WebBank originates the loan. The marketing and program management agreement and the loan and receivable sale agreement both initially terminate in January 2023, with two additional automatic one-year renewal terms, subject to certain early termination provisions set forth in the agreements.
Our issuing banks for education and patient finance loans are NBT Bank and Comenity Capital Bank, which originate and service education and patient finance loans. These issuing banks retain some of these loans while others are offered to private investors can investor purchased by us. In instances where we are unable to arrange for private investors to purchase education and patient finance loans, we are contractually required to purchase them. For our role in personalloan facilitation, we recognize transaction fees paid by the issuing banks and education and patient service providers once the loan is issued and the proceeds are delivered to the borrower.
As of the date of this Report, no backup issuing banks have originated any loans facilitated through our standard loan program. Additionally, qualified investors can invest in loans facilitated through our custom loan program in private transactions. These asset classes have historically been funded and held by financial institutions or large institutional investors.
Attractive Risk-Adjusted Returns. We seek to provide investors with attractive risk-adjusted returns on loans facilitated through our lending marketplace.
Transparency. We seek to provide investors with transparency and choice in building their loan portfolios.
Easy-to-Use Tools. We seek to provide investors with tools to easily build and modify customized and diversified portfolios by utilizing the provided application programming interface (API) to invest in loans tailored to their investment objectives and to assess the returns on their portfolios. Retail investors can also enroll in automated investing, a free service that automatically invests any available cash in loans according to investor-specified criteria.
Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and provide us with competitive advantages in realizing the potential of our market opportunity:
Leading Online Lending Marketplace. We are America’s largest online lending marketplace connecting borrowers and investors, based on approximately $9.0 billion in loan originations during the year ended December 31, 2017, as further discussed in “Part II – Item 7. Management’s Discussion and Analysis – Overview.”
Robust Network Effects. Our online lending marketplace exhibits network effects that are driven by the number of participants and investments enabled through our lending marketplace. More participation leads to greater potential to match borrowers with investors. Additionally, increased participation also results in the generation of substantial data that is used to improve the effectiveness of our credit decisioning and scoring models, enhancing our performance record and generating increasing trust in our lending marketplace. As trust increases, we believe investors will continue to demonstrate a willingness to accept lower risk premiums (all else being equal), which will allow us to offer lower interest rates and attract additional high-quality borrowers, thereby reinforcing our track record and fueling a virtuous cycle for our business.
Technology Platform. Our technology platform powers our online lending marketplace and enables us to deliver proprietary solutions to borrowerswe do not have backup issuing bank arrangements.
Small and investors. Our technology platform automates our operationsMedium-Sized Business (SMB) loans are provided through partnerships with Opportunity Fund and we believe, provides a significant time and cost advantage over many traditional banks.
Funding Circle.
Proprietary Risk Assessment. We use proprietary algorithms that leverage behavioral data, transactional data, bank data and employment information to supplement traditional risk assessment tools, such as Fair Isaac Corporation (FICO) scores. We have built our technology platform to automate the application of these proprietary algorithms to each individual borrower’s application profile at scale. This approach allows us to evaluate and segment each potential borrower’s risk profile and price the loan accordingly.
Products
Borrowers
Our lending marketplace facilitates several types of loan products for consumers and small businesses.business
Personal Loans.Our lendingcustomers
Borrowers: Our marketplace facilitates unsecured personal loans that can beare primarily used to refinance credit card balances and secured personal loans, that are primarily used to re-finance auto loans. Unsecured loans are also used to make major purchases refinance credit card balances(including home improvement, education and healthcare costs) or for other purposes. Personal
Borrowers applying for loans are offered through both our standard and custom loan programs. Personal loans approved through our standard loan program represent loans made to prime borrowers that are publicly available to note investors and through certificates, loan sales and securitizations to private investors, and include amounts from $1,000 to $40,000, maturities of three or five years, fixed interest rates, and no prepayment penalties or fees. These loansprograms must meet certain minimum credit requirements, including a FICO score, of at least 660, satisfactory debt-to-income ratios, 36 months ofsatisfactory credit history and a limited number of credit inquiries in the previous six months. After a credit scoring and decisioning process, an issuing bank partner offers loans to successful applicants. For personal prime loans under our standard program, loan amounts are between $1,000 to $40,000, with maturities of three or five years, fixed interest rates, monthly amortizing payments, and no prepayment penalties. Personal loans that fall outside of the credit criteria for the standard program, including loans made to super-prime and near-prime borrowers, might qualify under our custom program and include amounts from $1,000 to $50,000, maturities of three or five years, fixed interest rates, and no prepayment penalties or fees.
Education and Patient Finance Loans. We facilitate unsecured education and patient installmentpenalties. For auto loans, and true no-interest loans through Springstone and its issuing bank partners. Installment loan terms include amounts from $2,000 to $50,000, maturities from two to seven years, fixed interest rates and no prepayment penalties. The true no-interest loan terms include amounts ranging from $499 to $32,000 and no required interest payment if the balance is paid in full during the promotional period, which can be six, 12, 18 or 24 months. There is no prepayment penalty and borrowers have the flexibility to pay as much or as little, subject to applicable minimums, of the outstanding principal balance during the promotional period as they choose.
Auto Refinancing Loans. We facilitate secured auto refinance loans that can be used to help eligible consumers save money by refinancing into more affordable loans with better rates and clear terms. Installment loan terms include amounts ranging fromare between $5,000 to $55,000, with maturities ranging frombetween two to six years. Borrowers are required to makeseven years, monthly amortizing payments, and there are no prepayment penalties. Loans facilitated through our platform do not have interest rates or annual percentage rates in excess of 36%, which is often regarded as a benchmark for responsible lending.
We currently facilitateoffer borrowers multiple features to lower their cost of debt and enhance their financial health, including: balance transfers, where a borrower’s existing credit card debt is paid down and the loan is consolidated into a fixed-rate term loan; and joint applications, where borrowers may receive a better rate when they jointly apply for a personal loan.
Investors: Once an account has been opened and funded, investors may purchase LendingClub Member Payment Dependent Notes, which are securities for which cash flows to investors are dependent upon principal and interest payments made by borrowers with unsecured prime personal loans in 29 states, with plans to expand to more states in 2018.(Notes).
Small Business Loans. We facilitate unsecured small business loans that enable small business owners to expand their business, purchase equipment or inventory, or meet other obligations at an affordable rate. Small business loans are fixed-rate loans in amounts ranging from $5,000 to $300,000, with maturitiesA portion of one to five years, and contain no prepayment penalties or fees.
Investors
Investors have the opportunity to invest in a wide range of loans based on term and credit characteristics. Personal loans that are approved through the standard loan program (Prime Loans) are offeredrandomly allocated and listed based on demand at a grade and term level to all investors on our platform, with the exception of certain F & G grade notes the Company decided to suspend offering for investment by retail investors as discussedpurchasing interests in “Part II – Item 7. Management’s Discussion and Analysis – Current Economic and Business Environment.” Custom program loans, which include education and patient finance, auto refinance, small business, new offerings, and loans that fall outsidefractions of the credit criteria of the standard program, are offered to private investors only. Investors receive monthly cash flow and risk-adjusted returns.unsecured personal loans. All investors are provided access to a borrower’s proprietary credit grade and credit profile data on each approved and listed loan, as well as historical performance data on loansPrime Loans issued through our lending marketplace since its inception. The lending marketplace
enables broad diversification of each investor’s capital by allowing distribution of investments in loans in increments as small as $25.
Investors can invest in loans through one or all of the following channels:
Notes: We issue notes pursuant to an effective shelf registration statement (Note Registration Statement). Investors who meet the applicable financial suitability requirements and have completed our investor account opening process may purchase unsecured, borrower payment dependent notes that correspond to payments received on an underlying standard program loan selected by the investor. When an investor registersopens an account with us, the investor enters into an investor agreement with us that governs the investor’s purchases of notes.Notes. Our noteNotes channel is supported by our website and our Investor Services group, which provides basic customer support to these investors.
Securitizations: To expand the Company’s institutional investor base,Investor cash balances (excluding payments in 2017 we developed the capability to support the self-sponsored securitizationprocess) are held in segregated bank or custodial accounts and are not commingled with our monies.
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| 2. | Institutional Investors |
Products: The majority of loans infacilitated through our lending marketplace are funded by either: (i) the sale of whole loans to banks and other institutional investors or (ii) the issuance of securities through our Structured Programs. Structured Program transactions include (i) asset-backed securities transactions. We sponsored four securitization transactions and (ii) Certificate Program transactions. Certificate Program transactions include CLUB Certificate and Levered Certificate transactions.
Whole Loan Purchases: Certain institutional investors, such as banks, asset managers, insurance companies, hedge funds and other large non-bank investors, seek to hold whole loans on their balance sheets. To meet this need, we sell whole loans to these investors through loan purchase and sale agreements.
Securitizations:The Company securitizes a portion of the unsecured personal loans we facilitate through asset-backed securitization transactions. The Company is the sponsor and establishes trusts to ultimately purchase the loans from the Company and/or third-party loan investors. Securities issued from our asset-backed securitizations are senior or subordinated based on the waterfall criteria of loan payments to each security class. The residual interests issued from these transactions are first to absorb credit losses in 2017,accordance with the waterfall criteria. As the sponsor for securitization transactions, the Company manages the completion of the transaction. We have ongoing obligations to the trusts, including to repurchase loans in certain circumstances and we usedto service and collect the loans in the trust. We use our own capital to purchase certain of the loans that wereare subsequently contributed to these deals. We are broadeningrequired to retain a portion of the credit risk in these securitization transactions. As a result of our platformsecuritization capability, we have broadened our platform’s access to tap into a large and liquid asset-backed securities market, reachreached new institutional investors, and provideprovided a capital markets financing alternative.alternative for the Company.
Whole Loan Purchases: Certain institutional investors, such as banks, seek to hold the actual loan on their balance sheet. To meet this need, we sell entire standard or custom program loans to these investors through purchase agreements. UponCertificate Program Transactions: The Company sponsors the sale of unsecured personal whole loans through the loan, the investor owns all rights, titleissuance of certificate securities that are assigned a CUSIP number and are collateralized by loans transferred to a series of a master trust. The CLUB Certificate issued securities are pass-through securities of which each owner has an undivided and equal interest in the loan. We establishunderlying loans of each transaction. The Levered Certificate issued securities include senior and subordinated securities based on the investors’ accounts andwaterfall criteria of loan payments to each security class. As the proceduressponsor for Certificate Program transactions, the purchase of loans, including any purchase amount limitations, which we control. We andCompany manages the investor also make limited representations and warranties and agree to indemnify each other for breachescompletion of the purchase agreement. Fortransaction. We have ongoing obligations to the vast majority of our wholemaster trust and series trusts, including to repurchase loans sold, the investor also agrees to simultaneously enter into a servicing agreement with usin certain circumstances and to service and collect the sold loan.loans in the trusts. We can be removed asuse our own capital to purchase certain of the servicerloans that are subsequently contributed to these transactions. We are required to retain a portion of the credit risk in limited circumstances. For certain whole loans,these securitization transactions. The sale of certificate securities under our contractual relationships weCertificate Program results in more liquidity and demand for unsecured personal loans facilitated through our platform. These securities are not the servicer. For regulatory purposes, the investor also has access to the underlying borrower information, but is prohibited from contacting or marketing to the borrower in any manner and agrees to hold such borrower information in compliance with all applicable privacy laws. Whole loan purchases are attractivetailored for some investors as it enables them to account for the loan as an asset, which can offer favorable financial reporting and capital reserve treatment and also allows them more flexibility on using their assets as collateral. In the third quarter of 2017, we began a recurring process to aggregate pools of whole loans on balance sheet, for subsequent sale to third-party investors. The typical period for holding such pools on balance sheet is less than three months. In 2017, the Company also began to sell loan participations to certain institutional investors in limited circumstances.
CLUB Certificates: In December 2017, we introduced a whole loan transaction structured as a tradeable, pass-through security called a CLUB Certificate. The instrument trades in the over-the-counter market with a CUSIP and is cleared through the Depository Trust and Clearing Company. The CLUB Certificate is tailored for an institutional investor seeking a liquid vehicle with which to access the consumer credit asset class.
CertificatesCompany purchases: LendingClub funds certain loans directly with its own capital to balance the marketplace and Investment Funds: Previously, accreditedto build inventory for its Structured Programs. Although the majority of these loans are subsequently sold, LendingClub retains certain loans to full term, primarily related to the risk retention requirements of its Structured Programs, but also where it is testing new products (for example, auto loans or new underwriting strategies), maintaining marketplace equilibrium or holding loans not sold through the marketplace.
Platforms: We make personal loans available for investment to institutional investors through four platforms – Scale, Select, Select Plus and qualified purchasers were ableLCX.
Scale: Investors purchase unsecured personal prime loans at scale by providing LendingClub with standing instructions to establishpurchase loans by grade and term.
Select: Institutional investors can select unsecured personal prime loans to purchase by individual borrower credit attributes.
Select Plus: Sophisticated investors identify opportunities to approve borrowers who fall outside the current credit criteria on the LendingClub platform. Loans originated through the Select Plus platform are sold directly to investors.
LCX: Investors dynamically bid on fully funded whole loans with same-day settlement functionality. As liquidity builds on LCX, we believe that LCX will enable the Company to reduce the amount of time loans are held on its balance sheet due to the ability to dynamically locate a relationship with LCAM or another third-party advisor in orderclearing price. LCX also lays the foundation to indirectly invest in certificates, or they were abledevelop secondary market capabilities and our ability to directly purchase a certificate. The certificates, which were issued by the Trust, are unsecured and settled with cash flows from underlyingsell loans selected by the investor. Effective December 2016, the Trust ceased offering new certificates, but legacy investors may continue to receive cash flows from and make new investments via previously-issued certificates. Investors in certificates generally pay an asset-based management fee instead of cash flow-based servicing fee paid by note investors. In addition, accredited investors and qualified purchasers may purchase a limited partnership interest in one of four private LCAM investment funds that purchase whole loans. Neither certificates nor limited partnership interests could be nor can be purchased through our website.at prices other than par.
Technology
The LendingClubProduct and platform is based on technology that is scalable and flexible. Our culture of innovation has ledcontinue to support LendingClub’s ambitions to develop the filing of over ten patent applications in 2017. Key elements of our technology include:
Highly Automated. Our borrower and investor acquisition process, registration, credit decisioning and scoring, servicing and payment systems are highly automated using our internally developed software. Our proprietary cash management software processes electronic cash movements, records platform entries and calculates cash balances in our borrower and investor fund accounts. In nearly all payment transactions, an Automated Clearing House (ACH) electronic payment network is usedunsecured personal loans asset class with investors by enabling more investors to disburse loan proceeds, collect borrower loan payments on outstanding loans, receive funds from investors and disburse payments to investors.
Scalable Platform. Our scalable infrastructure utilizes standard techniques, such as virtualization, load-balancing and high-availability platforms. Our application and database tiers are designed to be scaled horizontally by adding additional servers as needed. In addition, a portion of our infrastructure runs on a cloud-based platform, giving instantaneous scalability and rapid business agility.
Proprietary Fraud Detection. We use a combination of third-party data, sophisticated analytical tools and current and historical data obtained during the loan application process to help assess fraud risk. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. High-risk loan applications are subject to further investigation. In cases of confirmed fraud, the application is cancelled, and we identify and flag characteristics of the loan application to help refine our fraud detection efforts.
Data Integrity and Security. We maintain an effective information security program based on well-established security standards and best practices, including ISO2700x and NIST 800 series. The program establishes policies and procedures to safeguard the confidentiality, integrity and availability of borrower and investor information. The program also addresses risk assessment, training, access control, encryption, service provider oversight, an incident response program and continuous monitoring and review.
Application Programming Interface. Our application programming interface, referred to as our API, provides investors and partners access to publicly available loan attributes and allows them to analyze the data and place orders meeting their criteria without visiting our website. Investors and partners may create their own software that uses our API or they may use a variety of third-party services that invest via our API.
LendingClub Open Integration (LCOI). LCOI allows online advisors and broker-dealers to offer LendingClub investments quickly and easily to their client bases, using a suite of API services that integrate directly into their websites. This allows these advisors and broker-dealers to provide the same functionality that currently exists on our website, including money movement, investing, reinvesting, real-time reporting of cash and holdings, and tax reporting.
Relationships with Issuing Bank Partners
Loans facilitated through our lending marketplace are originated by our issuing bank partners. Our primary issuing bank is WebBank, a Utah-chartered industrial bank that handles a variety of consumer and commercial financing programs. Our contractual arrangements with WebBank provide WebBank with a right to originate a certain percentage of loans facilitated through our platform. Additionally, we rely on NBT Bank and Comenity Capital Bank as issuing banks for our education and patient financepurchase loans.
We have entered into a loan account program agreement with WebBank that governs the terms and conditions between us and WebBank with respect to loans facilitated throughInstitutional investor concentration: Our success is dependent on investors participating on our lending marketplace and, originated by WebBank, including our obligations for servicing the loans during the period of time that the loans are owned by WebBank. Under the termsas of the date of this Report, we have a variety of investors on our platform that enable us to support the origination volume we facilitate. However, a relatively small number of loan account program agreement, we pay WebBankinvestors, including us, represent a monthly program fee basedlarge percentage of the capital on our platform, which enable the amountfunding of loans issued by WebBank and purchased by us or our partners in a given month, subject to a minimum monthly fee.
WebBank pays us aassociated transaction fee revenue. See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investments in Quarterly Originations by Investment Channel and Investor Concentration” for further discussion of and information regarding our role in processing loan applications through our lending marketplace on WebBank’s behalf. Under a loan sale agreement, WebBank may sell us the loan without recourse two business days after WebBank originates the loan. The loan account program agreement and the loan sale agreement initially terminate in January 2020, with two additional automatic, one-year renewal terms, subject to certain early termination provisions as set forth in the agreements.investor concentration.
Our issuing banks for education and patient finance loans originate and service each education and patient finance loan issued. Our issuing banks retain some of these loans while others are offered to private investors. For our role in loan facilitation, we recognize transaction fees paid by the issuing banks and education and patient service providers once the loan is issued by the issuing bank and the proceeds are delivered to the borrower.
Credit Decisioningscoring and Scoring Processdecisioning
Our lending marketplace provides an integrated and automated loan application and credit decisioning and scoring process that is extensible to a variety of loan products.incorporates underwriting, pricing and fraud detection. Borrowers come to our platform to apply online for a loan. During the simple application process, our platform uses proprietary risk algorithms that leverage behavioral data, transactional data and employment information to supplement traditional risk assessment tools, such as FICO scores, to assess a borrower’s risk profile. OurBorrowers are then assigned a loan grade based on their risk profile, loan term and loan amount. For certain loans, our verification processes and analysts then verify the borrower’s identity, income or employment by connecting with various data providers to determine whether to approve the loan request. Borrowers are then assigned onerequest, in accordance with the issuing bank’s credit policy. We utilize an outsourced provider to assist us in the processing of 35certain loan grades, from A1 through G5 based on this risk profile, loan term and loan amount.applications.
Our lending marketplace’s credit decisioning and scoring models are evaluated on a regular basis and the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate are leveraged through machine learning and can be rapidly deployed to continually improvemake modifications to the models. In September 2017, we facilitated the launch of our next-generation credit model and made adjustments to credit and pricing policies to adapt to current market conditions. This information will assistassists us in assessing if and when to propose further changes to the credit model or pricing for consideration by the issuing banks who originate loans facilitated through our platform. Our lending marketplace’s credit decisioning and scoring models assign each loan offered on our lending marketplace a corresponding interest rate and origination fee. Our investors’ returns are a function of the assigned interest rates and prepayments for each particular loan invested in less any defaults over the term of the applicable loan.
We believe we have the experience and capabilities to effectively evaluate a borrower’s credit worthiness and likelihood of default, offering attractivecompetitive risk-adjusted return opportunities for loan investors.
Loan Issuance Mechanism
Once a loan application is approved, we present the borrower with various loan options, including term, rate and amount, for which they qualify. After the applicant selects their personalized financing option and completes the application process, we perform additional verifications on the borrower. Once the verifications are completed, the loan will be listed for at least 14 days and up to 30 days on our platform to attract investor commitments. Once sufficient investor commitments are received, the issuing bank originates and issues the loan to the borrower, net of the origination fee charged and retained by the issuing bank. After the loan is issued, we use the proceeds from these investors to purchase the loan from the issuing bank. Investor cash balances (excluding payments in process) are held in segregated bank or custodial accounts and are not commingled with our monies. If insufficient investor commitments are received, the Company may purchase loans with its own capital.
Loan Servicing
We service allthe majority of the loans facilitated through our lending marketplace, except for patient and education finance loans and auto refinance loans. Loan servicing includes account maintenance, collections, processing payments from borrowers and distributions to investors. We utilize a business process outsourcing provider and various third-party collection agencies to assist us in the servicing of certain loans. We also have made arrangements for backup servicing with First Associates Loan Servicing, LLC and Millennium Trust Company, LLC.
For the month of December 2017, approximately 98% of loan paymentsPayments for loans that we service wereare primarily made through an ACH withdrawal from the borrower’s bank account. Principal and interest payments on loans are then remitted to investors utilizing ACH. This automated process allows us to avoid the time and expense of processing a significant volume of mailed payments and provides a higher degree of certainty for timely payments. This process also provides us with prompt notice in the event of a missed payment, which allows us to respond quickly to attempt to resolve the delinquency with the borrower. Generally, in the first 30 days that a loan is delinquent, our Payment Solutions team works to bring the account current. Once the loan becomes more than 30 days delinquent, we will typically outsource subsequent servicing efforts to third-party collection agencies.
The servicing fee paid by investors is designed to cover the day-to-day processing costs of loans. If a loan needs more intensive collection focus, whether internal or external, we may charge investors a collection fee to compensate us for the costs of this collection activity. This fee varies, with a maximum of up to 35% of the amount
recovered. There is no collection fee charged if there are no loan payments are
recovered. We sell most loans that have been charged-off to certain third parties. All proceeds received on these sales are subject to a collection fee,fee.
Seasonality
Personal loan volume on our platform is generally lower in the first quarter of the year, primarily due to seasonality of borrower behavior. Additionally, in the fourth quarter of the year, we typically observe fluctuations in marketing effectiveness and borrower behavior due to the holidays, which can impact volume. These seasonal trends contribute to fluctuations in our operating results and operating cash flow.
Revenue
Transaction Fees: We generate revenue primarily from transaction fees paid by issuing banks or education and patient service providers to us for our platform’s role in marketing to borrowers, and accepting and decisioning applications for our issuing bank partners to facilitate loan originations. The amount of these fees is based upon the terms of the loan, including amount, grade, term, channel and other factors.
Net Investor Revenue includes net interest income and fair value adjustments of loans and securities available for sale, gain on sales of loans invested in by the Company and investor fees from servicing of loans.
Net Interest Income and Fair Value Adjustments reflectearned interest income and assumed principal and interest rate risk on loans during the period that we own the loans. We have financed a portion of the purchase of these loans with draws on our credit facilities and securities sold under repurchase agreements and the associated interest expense reduces net proceedsinterest income. Fair value adjustments are distributedimpacted by timing differences between changes in market interest rates, interest rates on loans, credit performance and investor yield expectations, which may result in a difference between the actual yield and the investor required yield on a loan. This allows us to adjust the effective yield on a loan through its sale price, thereby maintaining marketplace equilibrium. Any discount to par will result in negative fair value adjustments.
Investor Fees compensate us for the costs we incur in servicing loans, including managing payments from borrowers, collections, payments to investors, maintaining investors’ account portfolios, providing information and issuing monthly statements. The amount of investor fee revenue earned is predominantly affected by the servicing rates paid by investors, the outstanding principal balance of loans and the amount of principal and interest collected from borrowers and remitted to investors.
Competition
We compete with financial products and companies that attract borrowers, investors or both. With respect Investor fee revenue related to borrowers, we primarily compete with traditional financial institutions, such as banks, credit unions, credit card issuers and other consumer finance companies. We believe our proprietary lending marketplace model, online delivery and process automation enable us to operate more efficiently and with more competitive rates and higher borrower satisfaction than these competitors.
With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds and short-term fixed income securities. We believe that our diverse and customizable investment options give uswhole loans sold also includes the flexibility to offer attractive risk-adjusted returns that are generally uncorrelated with other asset classes.
We compete with other online lending marketplaces and other lenders. We anticipate that more established internet, technology and financial services companies that possess large, existing customer bases, substantial financial resources and established distribution channels may enter the marketchange in the future. We believe that our brand, scale, network effect, and historical data provide us with significant competitive strengths over current and future competitors.
Sales and Marketing
Our marketing efforts are designed to attract and retain borrowers and investors and build brand awareness and reputation. We dedicate significant resources to our marketing and brand advertising efforts and strategic relationships. We use a diverse array of marketing channels and are constantly seeking to improve and optimize our experience both on- and offline to achieve efficiency and a high level of borrower and investor satisfaction. Currently, we believe reputation, word of mouth and our direct to consumer marketing activities through online and offline channels, including paid search, email, online aggregators and mail drives, continue the growth in our investor and borrower base.
We also continue to invest in our strategic relationships to raise awarenessfair value of our platformservicing assets and attract borrowersliabilities associated with the loans.
Gain (Loss) on Sales of Loans connected to whole loan sales and investorsStructured Program transactions are recognized based on the level to our lending marketplace. For example,which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Additionally, we haverecognize transactions costs as a strategic partnership relationship with a consortiumloss on sale of community banks for our lending marketplace to offer co-branded personal loans to the participating banks’ customers. As part of this relationship, each community bank is provided initial access to invest in loans soughtloans.
Referral Revenue fees are earned from third-party companies when customers referred by their own customers, which may include standard program loans. The loans that do not meet the community bank’s investment criteria are then made available for investment through the lending marketplace. All other loans will continue to be available on our lending marketplace and accessible on an equal basis and are originated by our issuing banks.us consider or purchase products or services from such third-party companies.
Regulatory and Compliance Framework
The regulatory environment for lending and online marketplaces such as ours is complex, evolving and uncertain, creating both challenges and opportunities that could affect our financial performance. We are subject to extensive and complex rules and regulations, licensing and examination by various federal, state and local government authorities designed to, among other things, protect borrowers (such as truth in lending, equal credit opportunity, fair credit reporting and fair debt collection practices) and investors.investors (such as the anti-fraud provisions of the federal securities laws).
State and federal laws may limit the fees that may be assessed on the loans facilitated through our platform, require extensive disclosure to, and consents from, borrowers and investors, prohibit discrimination and unfair, deceptive,
or abusive acts or practices and may impose multiple qualification and licensing obligations on our activities and the loans facilitated through our lending marketplace. Failure to comply with any of these rules, regulations or requirements may result in, among other things, lawsuits (including class action lawsuits) or administrative enforcement actions seeking monetary damages, fines or civil monetary penalties, restitution or other payments to borrowers or investors, modifications to business practices, revocation of required licenses or registrations, or voiding of loan contracts.
Our compliance framework is a cornerstone of the lending marketplace that allows investors to participate in consumer credit as an asset class. Our relationship with issuing banks is a key component of our compliance framework, as described below.
WebBank, the primary issuing bank WebBank,whose loans we facilitate, is subject to oversight by the Federal Deposit Insurance Corporation (FDIC) and the StateUtah Department of Utah. The other two issuing banks areFinancial Institutions. NBT Bank and Comenity Capital Bank.Bank, whose education and patient finance loans we facilitate, are our two other issuing banks. NBT Bank is subject to oversight by the Office of the Comptroller of the Currency (OCC) and the New York Department of Financial
Services, and Comenity Capital Bank is subject to oversight by the FDIC and the Utah Department of Financial Institutions. These authorities impose obligations and restrictions on our activities and the loans facilitated through our lending marketplace. For example, these rules limit the fees that may be assessed on the loans, require certain amounts of capital against outstanding loans, require extensive disclosure to, and consents from, the borrowers and lenders, prohibit discrimination and unfair, deceptive, or abusive acts or practices and may impose multiple qualification and licensing obligations on our activities.
Our compliance framework is a cornerstone of the lending marketplace that allows investors to participate in consumer and commercial credit as an asset class. Our relationship with issuing banks is a key component of our compliance framework, as described below.
As part of our ongoing compliance program, we have customer identification processes in place to enable us to detect and prevent fraud, money laundering, and terrorist financing, and identify customers who may be on government watchlists, such as those from the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network. We compare users’ identities against these lists at least twice a month for continued compliance and oversight. If a user were to appear on a list, we would take appropriate action to resolve the issue in accordance with company policies and anti-money laundering obligations.regulations. In addition to our continued identification and transaction monitoring compliance programs, we use our proprietary technology to assist us in complying with applicable federal anti-money laundering laws on both sides of our business model,platform for borrowers and investors.
Regulations and Licensing
The lending and securities industries are highly regulated. Weregulated and we are subject to direct oversight by a number of federal and state governmental authorities. In certain respects, we are regulated differently than a bank because, unlike a bank, we do not take deposits or issue our own loans under a bank charter. Our current issuing banks originate all of the loans offeredfacilitated through our lending marketplace and are subject to regulation by the FDIC and/or other relevant federal and state regulators.
The Company and the loans made through our lending marketplace are highly regulated. State and federal laws limit the fees that may be assessed on the loans, require extensive disclosure to, and consents from, the borrowers and lenders, prohibit discrimination and unfair, deceptive, or abusive acts or practices and may impose multiple qualification and licensing obligations on our activities. Failure to comply with any of these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of the loan contracts, class action lawsuits, administrative enforcement actions and civil and criminal liability.
Further, federal state and localstate governmental authorities impose additional obligations, and restrictions on our activities and the loans facilitated through our lending marketplace. These authorities impose obligationsdirect oversight and restrictions on our activities and the loans facilitated through our lending marketplace as part of their oversight of the third partythird-party service providers of the issuing banks. While compliance with such requirements is at times complicated by our unique business model, we believe we are in substantialthe Company strives to ensure compliance with theseall applicable rules and regulations.
Current Regulatory Environment
We believe that our issuing bank partnership model is appropriate for all the jurisdictions in which we operate and we strive to work with federal, state and local regulatory agencies to help them understand our model and its benefits for consumers. However, we operate in a complex and evolving regulatory environment at the federal and state level. level and some enforcement authorities and private parties have challenged the ability of nonbank agents in certain lending programs, in some cases with similarities to ours, to rely on legislative and judicial authority that permits an FDIC-insured depository institution, such as WebBank, to "export" interest rates permitted by the laws of the state where the bank is located, regardless of the usury limitations imposed by the laws of the state of the borrower’s residence.
Madden and Regulatory Landscape Relating to Bank Partnership Model
In May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC that interpreted the scope of federal preemption under the National Bank Act (NBA) and held that a nonbank assignee of a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit’s decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. An extension of the application of the Second Circuit's decision, either within or outside the states in the Second Circuit, could challenge the federal preemption of state laws setting interest rate limitations for loans made by issuing bank partners in those states. The defendant petitioned the U.S. Supreme Court to review the decision and in March 2016, the Court invited the Solicitor General to file a brief expressing the views of the U.S. on the petition. The Solicitor General filed an amicus brief that stated the Second Circuit decision was
incorrect, but that the case was not yet ready to be heard by the Supreme Court. In June 2016, the Supreme Court declined to hear the case. The Federal
In June 2019, certain Capital One and Chase credit card holders filed putative class actions in U.S. District Court is now hearingin New York against certain non-bank Capital One and Chase special purpose entities and trusts, and the trustees thereof, that purchased and/or played a role in facilitating the securitization of Capital One and Chase credit card receivables. The plaintiffs allege that the preemption of New York usury laws by the National Bank Act (NBA) ceased once the credit card receivables were purchased and securitized by or via the non-bank defendants and therefore any interest being charged on the securitized receivables in excess of New York’s usury limits violates New York law. The plaintiffs seek to recoup the allegedly excessive interest payments and an order requiring the defendants to cease their allegedly wrongful conduct, among other relief. The plaintiffs in these lawsuits aim to leverage the Second Circuit’s decision in Madden v. Midland Funding, LLC that interpreted the scope of federal preemption under the NBA and held that a non-bank debt collector that purchased a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury.
In September 2019, the OCC and the FDIC filed an amicus brief in U.S. District Court in Colorado supporting a bankruptcy court’s rejection of the Madden case in regardsa case before it. In re Rent-Rite Super Kegs West Ltd., Case No. 1:19-cv-015520-REB (D. Colo.), Dkt.11. In addition, in late 2019 the OCC issued a proposed rulemaking to Midland’s alternative claimamend its regulations to clarify that interest on a loan that is lawful under federal law for national banks and federal savings associations remains lawful upon the sale, assignment or other transfer of the loan. The FDIC issued a choicesimilar proposal that is applicable to FDIC insured state-chartered banks. Various comments to the proposed rules were submitted from a variety of law analysis,companies and applicationother regulators. It is unclear what impact the position of these various regulators on the Madden decision will have in existing or future litigation or regulatory proceedings involving arguments of federal preemption of state law.usury laws.
While we believe that our program is factually distinguishable from the case, in 2016 we revised our agreement with our primary issuing bank to further distinguish the operation of the program from the court’s analysis of the facts in Madden. Under the revised program structure, an additional component of the program fee arrangement was created. This additional program fee component is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans. Under this revised program structure the majority of the bank’s revenue related to the loans facilitated on our platform is therefore tied to the terms and performance of the loans. The bank also maintains an ongoing contractual relationship with borrowers, who may seek additional credit through the LendingClub program in the future.
In addition, federal legislationa bill was introducedpassed in late 2017 by the House of Representatives that could clarify that any loan originated by a national bank would be entitled to the benefits of federal preemption on claims of usury provided that certain criteria are met. WeHowever, the bill was never passed by the Senate and we do not know whether this legislationbill will be reintroduced in the current Congress or, if it is, whether it will pass or, if it does pass, what its final terms will providebe or its potential impact on our business.
In August 2016, a federal district court in the Central District of California considered a case brought by the Consumer Finance Protection Bureau (CFPB) against CashCall, Inc. In that case, CashCall had an arrangement with a lender owned by a member of the Cheyenne River Sioux Tribe in which loans were offered to borrowers at APR’s that could exceed 300 percent. The district court ruled that, under the facts presented in the case, CashCall should be deemed the “true lender” and could not charge interest rates in excess of state usury laws. In January 2017, the court issued an order staying the decision for interlocutory appeal to the United States Court of Appeals for the Ninth Circuit, over the CFPB’s objections. The defendants then filed a petition for appeal with the Ninth Circuit, which was ultimately denied. WeAlthough we believe that our program is factually distinguishable from the CashCall case.
Separately, in September 2016 in Beechum v. Navient Solutions, Inc., alsoMadden case, an extension of the application of the Second Circuit's decision, either within or outside the states in the Second Circuit, could challenge the federal district courtpreemption of state laws setting interest rate limitations for loans made by issuing bank partners in the Central District of California, the court considered a program in which a national bank had a bank partnership with a nonbank, the Student Loan Marketing Association (SLMA), in which borrowers could receive loans originated by the bank through the SLMA. The court in Beechum rejected the argument that the SLMA was the “true lender,” holding that the face of the borrower transactions showed that the bank had originated the loans and any further analysis to look behind the face of the transaction was inappropriate.those states.
In December 2016, the Office of the Comptroller of the Currency (the OCC) released a white paper and sought public comment on whether to charter a new type of special purpose national bank to facilitate the provision of core banking activities through financial technology. We, along with other interested parties, submitted responses to the OCC’s proposed special purpose charter (Fintech Charter) in January 2017. In March 2017, the OCC issued a Licensing Manual Draft Supplement for Evaluating Charter Applications From Financial Technology Companies (Draft Manual Supplement) explaining how the OCC intends to apply the licensing standards and requirements in existing regulations and policies to fintech companies applying for special purpose national bank charters. In response to the Draft Manual Supplement, the Conference of State Bank Examiners and the New York Department of Financial Services (NYDFS) each filed suit challenging the authority of the OCC to issue charters to financial technology companies. In December 2017, the suit filed by the NYDFS was dismissed without prejudice on the ground that the claims were not ripe because no charters had yet been issued under the Draft Manual Supplement and that the OCC has yet to definitively conclude whether to move forward. Representatives of the OCC have made statements that they believe they have the legal right to issue charters to financial technology companies but that the new OCC administration is reviewing the Draft Manual Supplement and associated rules to determine whether, and on what basis, to move forward with such charters.Industry Regulatory Environment
At the state level, certain states are considering the scope of their regulation and oversight of the financial technology industry. For example, we have participated with other financial technology companies in providing information and perspective to the California Department of Business Oversight; the New York State Legislature
passed a law requiring the New York Department of Financial Services to issue a report on online lending by July of 2018, focusing on, among other things, existing state and federal laws and regulations that apply to online lending and their impact on consumers, start-ups, and emerging businesses; the Colorado Department of Law has brought suit against two lending marketplace platforms with business models similar to ours, alleging that they are the “true lenders” of the loans originated through their platforms, and we are exploring a potential settlement with the State of Colorado permitting us to continue operating under our model pending the resolution of these lawsuits.Oversight. The application of state laws to our business, now or as they may be written or interpreted in the future, could have a significant impact on our
ability to do business in any given state. See“Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulatory Environment”for further discussion of applicable matters in Colorado and New York.
The CFPB, which commenced operations in July 2011, has broad authority over the businesses in which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions, such as our issuing banks, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. While weWe are subject to the regulatory and enforcement authority of the CFPB, as a facilitator, servicer or acquirer of consumer credit,credit. Since its creation, the CFPB has recently announced that it intends“larger participant rules” to expand its supervisory authority throughin various areas of the use of “larger participant rules,” to cover larger marketplace lenders, non-bank installment lenders and auto lenders.financial industry. The CFPB has announced larger participant rules for auto lenders, and as our auto refinance business grows, we may eventually meet the definition of a “larger participant” in the auto loan arena and become subject to supervision, examination and greater oversight by the CFPB. The CFPB has not yet announced specifics regarding its proposed rulemaking for installment loan lenders and, consequently, there continues to be uncertainty as to how the CFPB’s strategies and priorities, including any final rules, will impact our unsecured installment loan business and our results of operations going forward.
Also in July 2018, the United States Department of the Treasury (Treasury) issued a report entitled, “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” (Treasury Report). In the Treasury Report, the Treasury sought to identify “improvements to the regulatory landscape that will better support nonbank financial institutions, embrace financial technology, and foster innovation.” In the Treasury Report, the Treasury recommended that Congress codify (or regulators clarify) that a bank originating loans through a partnership with a third party (including financial technology companies) remains the “true lender” and that the loans may be fully enforceable according to their terms.
State Licensing Requirements
In most states we believe, that the applicablebecause of our issuing bank as originator of loans facilitated through our lending marketplace, satisfies anymodel, we are exempt from or satisfy relevant licensing requirements with respect to the origination of loans applicablewe facilitate. However, we may need, and have obtained, one or more state licenses to our operations.broker, acquire, service and/or enforce loans. As needed, we seekhave endeavored to apply for and obtain the appropriate authorizationslicenses. In addition, we have applied for and obtained certain licenses in a number of states that we believe are not necessary to conduct our current activities, in the respective state. Statebut which may facilitate potential evolutions of our business model and provide transparency and an opportunity for interaction with state licensing authorities.
Where we have obtained licenses, state licensing statutes may impose a variety of requirements and restrictions on us, including:
record-keeping requirements;
restrictions on servicing practices, including limits on finance charges and fees;
restrictions on collections;
usury rate caps;
disclosure requirements;
examination requirements;
surety bond and minimum net worth requirements;
financial reporting requirements;
notification requirements for changes in principal officers, stock ownership or corporate control;
restrictions on marketing and advertising;
data security and privacy requirements; and
review requirements for loan forms.
These statutes may also subject us to the supervisory and examination authority of state regulators in certain cases.cases, and we have experienced, are currently and will likely continue to be subject to and experience exams by state regulators. These examinations have and may continue to result in findings or recommendations that require us to modify our internal controls and/or business practices.
See “Item 1A. Risk Factors – Risks Related to Our Business and Regulation,”“Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulatory Environment” and “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies”for additional discussion and disclosure on state inquiries and requests, including the risk factors titled “We are regularly subject to litigation, and government and regulatory investigations, inquiries and requests,” “If the loans facilitated through our lending marketplace were found to violate a state’s usury laws, and/or we were found to be the true lender (as opposed to our issuing bank(s)), we may have to alter our business model and our business could be harmed” and “The regulatory framework for our business is complex, evolving and uncertain as federal and state governments consider new laws to regulate online lending marketplaces such as ours” for more information on potential adverse outcomes and consequences resulting from a regulatory exam or related investigation, inquiry, request or proceeding.
Consumer Protection Laws
Federal and State UDAAP Laws; FTC Lawsuit. The Dodd-Frank Act contains so-called “UDAAP” provisions declaring unlawful “unfair,” “deceptive” and “abusive” acts and practices in connection with the delivery of consumer financial services, and gives the CFPB the power to enforce UDAAP prohibitions and to adopt UDAAP rules defining unlawful acts and practices. Additionally, “UDAP” provisions of the Federal Trade Commission Act (FTC Act) prohibit “unfair” and “deceptive” acts and practices in business or commerce and give the FTC enforcement authority to prevent and redress violations of this prohibition. Virtually all states have similar UDAP laws. Whether a particular act or practice violates these laws frequently involves a highly subjective and/or fact-specific judgment. On April 25, 2018, the Federal Trade Commission (FTC) filed a lawsuit in the Northern District of California (FTC v. LendingClub Corporation, No. 3:18-cv-02454) alleging causes of action for violations of the FTC Act, including claims of deception in connection with disclosures related to the origination fee associated with loans available through the Company’s platform, and in connection with communications relating to the likelihood of loan approval during the application process, and a claim of unfairness relating to certain unauthorized charges to borrowers’ bank accounts. The Company denies and will vigorously defend against the allegations.See“Part II –Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies”for further discussion regarding the FTC lawsuit.
State Usury Limitations. Our business model is based on our relationship with WebBank and other issuing banks and the power under federal law for national banks and FDIC-insured banks to make loans nationwide at the rate allowed by the laws of the state where the bank is located. The following authorities permit FDIC-insured depository institutions, such as WebBank, to “export” the interest rate permitted by the laws of the state or U.S. territory where the bank is located, regardless of the usury limitations imposed by the state law of the borrower’s residence unless the state has chosen to opt out of the exportation regime: Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (DIDA); Section 85 of the National Bank Act (NBA); federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri, 85 U.S. 409 (1874), and Marquette National Bank of Minneapolis v. First Omaha Service Corporation, 439 U.S. 299 (1978); and FDIC advisory opinion 92-47.
WebBank is located in Utah, and Utah law accordingly governs the permissible rate of interest that may be charged on loans originated by WebBank. Title 70C of the Utah Consumer Credit Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our lending marketplace. OnlyWhile states may opt out of the regime created by federal statute that allow state banks to export to other states the interest charges allowed in the state where the bank is located, only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA. We believe, however, if a state or U.S. territory in which we operate opted out of rate exportation, judicial interpretations support the view that such opt outs would apply only to loans “made” in those states. We believe that the “opt-out” of any state would not affect the ability of our lending marketplace to benefit from the exportation of rates.exercised this power. If a loan made through our lending marketplace were deemed to be subject to the usury laws of astates or U.S. territories (because such state or U.S. territory that hadhas opted-out of the rate exportation regime or otherwise), we could become subject to fines, penalties and possible forfeiture of amounts charged to borrowers, andthe borrower, if the interest charges on the
loan exceeded the applicable state usury rate cap. As a result, we could decide not to facilitate loans in that jurisdiction, refrain from making certain loans available for investment by certain investors, or only facilitate loans with interest charges that do not exceed the limits in that jurisdiction, which could adversely impact our growth.
State Disclosure Requirements and Other Substantive Lending Regulations. We are also subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, and debt collection and unfair, deceptive, or abusive acts or practices.collection. Our ongoing compliance program seeks to comply with these requirements.
Truth in Lending Act. The Truth in Lending Act (TILA), and Regulation Z, which implements it, require lenders to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to our issuing banks as the creditors for loans facilitated through our lending marketplace, but because the transactions are carried out on our hosted website, we facilitate compliance. For closed-end credit transactions of the type provided through our lending marketplace, these disclosures include, among others, providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide these disclosures before a loan is consummated. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our lending marketplace provides borrowers with athe issuing bank’s TILA disclosure atduring the time a borrower posts a loan request on the platform.application process. If the borrower’s request is not fully funded andamount of the loan the borrower chooses to accept a lesser amount offered,during the application process changes after the TILA disclosure is presented to the borrower, we provide an updated TILA disclosure.disclosure reflecting the information relating to the changed loan amount. We also seek to comply with TILA’s disclosure requirements related to credit advertising.
Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from loan applicants and from using advertising or making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as the creditor for loans facilitated through our lending marketplace as well as to a party such as ourselves that regularly participates infacilitates a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of notes if they are deemed to regularly participate in credit decisions. In the underwriting of loans offered through our lending marketplace, and in all aspects of operations, both WebBank and we seek to comply with ECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers and certain small businesses with timely notices of adverse action taken on credit applications. WebBank and we provide prospectiveProspective borrowers who apply for a loan through our lending marketplace but are denied credit are provided with an adverse action notice in compliance with applicable requirements.
Fair Credit Reporting Act. The federal Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), administered by the CFPB, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report and requires furnishers to reportpersons that furnish loan payment information to credit bureaus to report such information accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBankreport or received from a third party and we haverequires creditors who use consumer reports in establishing loan terms to provide risk-based pricing or credit score notices to affected consumers. When an applicant applies for a loan on our marketplace, a permissible purpose exists for obtaining a credit reportsreport on potential borrowers,the applicant and we also obtain explicit consent from borrowersapplicants to obtain such reports. As the servicer for the loan, we report loan payment and delinquency information to appropriate consumer reporting agencies. We provide an adverse action notice to a rejected borrowerapplicant on WebBank’s behalf at the time the borrowerapplicant is rejected that includes
all the required disclosures.disclosures and also comply with risk-based pricing requirements of the FCRA. We also have processes in place to ensure that consumers are given “opt-out” opportunities, as required by the FCRA, regarding the sharing of their personal information. We have also implemented an identity theft prevention program.program that is designed to detect, prevent and mitigate identify theft.
Fair Debt Collection Practices Act. The federal Fair Debt Collection Practices Act (FDCPA) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. In addition, the CFPB prohibits unfair, deceptive or abusive acts or practices in debt collection, including first-party debt collection. Our agreement with investors prohibits investors from attempting to collect directly on the loan. Actual collection efforts in violation of this agreement are unlikely given that investors generally do not learn the identity of borrowers. We use our internal collection team and a professional third-party debt collection agentagencies to collect delinquent accounts. They are required to comply with the FDCPA and all other applicable laws in collecting delinquent accounts of our borrowers.
Privacy and Data Security Laws. The federal Gramm-Leach-Bliley Act (GLBA) includesand state privacy laws include limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information, and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. We have a detailed privacy policy, which complies with GLBA and is accessible from every page of our website. We maintain consumers’ personal information securely, and onlyuse and share such information with third parties for marketing purposes in accordance with our privacy policy andand/or with the consent of the consumer. In addition, we take measures to safeguard the personal information of our borrowers and investors and protect against unauthorized access to this information.
Servicemembers Civil Relief Act. The federal Servicemembers Civil Relief Act (SCRA) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires us to adjust the interest rate of borrowers who qualify for and request relief. If a borrower with an outstanding loan qualifies for SCRA protection, we will reduce the interest rate on the loan to 6% for the duration of the borrower’s active duty. During this period, the investors who have invested in such a loan will not receive the difference between 6% and the loan’s original interest rate. For a borrower to obtain an interest rate reduction on a loan due to military service, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning loan grades to borrower loan requests and we do not disclose the military status of borrowers to investors.
Military Lending Act. The Military Lending Act (MLA) restricts, among other things, the interest rate and other terms that can be offered to active military personnel and their dependents. The MLA caps the interest rate that may be offered to a covered borrower to a 36% military annual percentage rate, or “MAPR,” which includes certain fees such as application fees, participation fees and fees for add-on products. Prior to a recent amendment of the rules under the MLA, the MLA applied only to certain short-term loans. The rulesrule’s amendment extends the 36% rate cap to most types of consumer credit. The MLA also requires certain disclosures and prohibits certain terms, such as mandatory arbitration if a dispute arises concerning the consumer credit product.
The Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010,Banking Regulations
As disclosed above, we are pursuing the Dodd-Frank Act was signed into law. The Dodd-Frank Act is extensive and significant legislation that includes consumer protection provisions. Among other things,acquisition of Radius which, if closed, will result in the Dodd-Frank Act created the CFPB, which commenced operations in July 2011 and has authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions, such as our issuing banks, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. We areCompany becoming subject to the CFPB’s jurisdiction,Bank Holding Company Act and its restrictions and requirements, including capital requirements and shareholder requirements. In addition, we would become subject to supervision and regulation by the Federal Reserve as well as other federal bank regulators.
including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities.
Other Regulations
Electronic Fund Transfer Act and NACHA Rules. The federal Electronic Fund Transfer Act (EFTA) and Regulation E that implements it provide guidelines and restrictions on the electronic transfer of funds from
consumers’ bank accounts. In addition, transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (NACHA). Most transfers of funds in connection with the origination and repayment of loans are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. We also comply with the requirement that a loan cannot be conditioned on the borrower’s agreement to repay the loan through automatic fund transfers. Transfers of funds through our platform are executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines. Recently, the NACHA Board of Directors approved a change in the NACHA Operating Rules that requires ACH Originators to utilize commercially reasonable fraudulent transaction detection systems. The rule change, effective on March 19, 2021, will require ACH Originators to perform account validation as part of their commercially reasonable fraudulent transaction detection system. This rule change may require changes to our fraud detection systems and increase our costs associated with ACH electronic transfers.
Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act. The federal Electronic Signatures in Global and National Commerce Act (ESIGN), and similar state laws, particularly the Uniform Electronic Transactions Act (UETA), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions and to provide disclosures to consumers, to obtain the consumer’s consent to receive information electronically. When a borrower or investor registers on our platform, we obtain his or her consent to transact business electronically, receive electronic disclosures and maintain electronic records in compliance with ESIGN and UETA requirements.
Bank Secrecy Act. In cooperation with WebBank,our issuing banks, we have implemented various anti-money laundering policies and procedures to comply with applicable federal law.law, such as the designation of a Bank Secrecy Act (BSA) officer, conducting an annual risk assessment, developing internal controls, independent testing, training, and suspicious activity monitoring and reporting. With respect to new borrowers and investors, we apply the customer identification and verification program rules and screen names against the list of specially designated nationals maintained by the U.S. Department of the Treasury and OFAC pursuant to the USA PATRIOT Act amendments to the Bank Secrecy ActBSA and its implementing regulations.
New Laws and Regulations. From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending.our business. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business.
In addition, see “Item 1A – Risk Factors – Risks Related to Our Business and Regulation.”
Foreign Laws and Regulations. We do not permit non-U.S. based individuals to register as borrowers on the platform and the Company does not facilitate loans to borrowers outside the United States. Therefore, we do not believe that we are subject to foreign laws or regulations with respect to borrowers. Our investor business, however, may be subject to foreign laws and regulations.
For more information on how the regulatory environment, enforcement actions, findings and ratings could also have an impact on our strategies, the value of our assets, or otherwise adversely affect our business see “Item 1A. Risk Factors – Risks Related to Our Business and Regulation”for further discussion regarding our regulatory environment.
Intellectual Property
To establish and protect our technology and intellectual property rights, we rely on a combination of copyright, trade secret and other rights, as well as confidentiality procedures, non-disclosure agreements with third parties,
employee disclosure and invention assignment agreements, and other contractual rights. We are not dependent on any one patent or related group of patents or any other single right to use intellectual property. Despite our efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or
otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our solution. In addition, our competitors may develop products that are similar to our technology. Policing all unauthorized use of our intellectual property rights is nearly impossible, and we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.
Employees
At December 31, 2017,2019, we had 1,8371,538 employees and contract employees. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our employee relations to be good.
Available Information
The address of our principal executive offices is LendingClub Corporation, 71 Stevenson595 Market Street, Suite 1000,200, San Francisco, California, 94105. Our website address is www.lendingclub.com, andwww.lendingclub.com. At our investor relations website, is located at ir.lendingclub.com. ir.lendingclub.com, we make available free of charge the following information and capabilities:
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports are available free of charge on our investor relations website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.SEC;
Press releases, including with respect to our quarterly earnings;
Announcements of public conference calls and webcasts;
Corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, committee charters, business conduct and ethics policy, and other governance-related policies;
Other news and market data that we may post from time to time that investors might find useful or interesting; and
Opportunity to sign up for email notifications.
In addition to announcing material financial information through our investor relations website, press releases, SEC filings, and public conference calls and webcasts, we also intend to use other online and social media channels, including our Blog (http://blog.lendingclub.com), Twitter handle (@LendingClub)handles (@LendingClub and @LendingClubIR) and Facebook page (https://www.facebook.com/LendingClubTeam) to disclose material non-public information and to comply with our disclosure obligations under Regulation FD.
The contents of the websites referred to above are not incorporated into this filing or in any other report or document on file with the SEC. Further, our references to the URLs for these websites are intended to be inactive textual references only.
The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet sitea website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K (Report), including the section titled “Item 7“Part II –Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and the consolidated financial statements and related notes. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected.
RISKS RELATED TO OUR BUSINESS AND REGULATION
If we do not compete effectively in our target markets, increase the loan originations facilitated through our lending marketplace, or expand our lending marketplace to new markets, we may not succeed in growing our business, and as a result our business and results of operations could be adversely affected.
The consumer and small business lending market is competitive and evolving. We compete with financial products and companies that attract borrowers, investors or both, as described in “Part I – Item 1 – Business – Competition.” Many of our competitors have significantly greater financial resources and less expensive access to capital than we do and may have a greater market share, offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have different profitability expectations than us. As a consequence, certain competitors may be able to offer lower rates to borrowers than we are able to offer, or they may be able to structure their loan products in a manner that would appear to be more attractive to a potential borrower.
To continue to grow our business, we must continue to increase loan originations through our lending marketplace by attracting a large number of new borrowers who meet our platform’s lending standards and new and existing investors to invest in these loans. Our ability to attract qualified borrowers and attract new and retain existing investors each depends in large part on the success of our marketing efforts and the competitive advantage of our products, particularly as we continue to grow our lending marketplace and introduce new loan products. If any of our marketing channels become less effective, or the cost of these channels were to significantly increase, we may not be able to attract new borrowers and attract new and retain existing investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors in our lending marketplace. If we are unable to continue to develop and successfully implement compelling and competitive product offerings, we may not be able to attract new borrowers and attract new and retain existing investors. If our loan offerings are priced less favorably than those offered by our competitors, potential borrowers may choose to take an offer from a competitor rather than ours. If there are not sufficient qualified loans facilitated on the platform, investors may be unable to deploy their capital in a timely or efficient manner and may seek other investment opportunities. If the performance of loans facilitated through our platform is lower than expected, we may be unable to attract new and retain existing investors. If there are insufficient investor commitments or participation, borrowers may be unable to obtain investment capital for their loans and may stop using our lending marketplace for their borrowing needs, which will impact our business results. If loan originations through our platform decrease, for any reason, our financial results may be adversely affected. Furthermore, in response to the competitive landscape, if we restructure our loan products, including lowering or eliminating our transaction fees, our financial results may be adversely affected even if we are able to maintain or increase loan originations through our platform.
We incur expenses and expend resources upfront to develop, acquire and market new loan products and platform enhancements to incorporate additional features, improve functionality or otherwise make our lending marketplace more desirable to borrowers and investors.
If we are unable to maintain our relationships with issuing banks, our business will suffer.
We rely on issuing banks to originate all loans and to comply with various federal, state and other laws, as discussed more fully above in “Part I – Item 1 –1. Business – Relationships with Issuing Bank Partners..”
Our agreements with WebBank are non-exclusive and do not prohibit WebBank from working with our competitors or from offering competing services. WebBank currently offers loan programs through other online lending marketplaces and other alternative lenders. WebBank could decide that working with us is not in its interest or could decide to enter into exclusive or more favorable relationships with our competitors. In addition, WebBank may not perform as expected under our agreements, including potentially being unable to accommodate our projected growth in loan volume. We could in the future have disagreements or disputes with WebBank or other issuing banks, which could negatively impact or threaten our relationship. As a result of our efforts to obtain a bank charter, our relationships with one or more of our issuing banks could change or negatively impact our business and operations.
WebBank is subject to oversight by the FDIC and the State of Utah and must comply with complex rules and regulations, licensing and examination requirements, including requirements to maintain a certain amount of regulatory capital relative to its outstanding loans. We are a service provider to WebBank, and as such, we are subject to audit by WebBank in accordance with FDIC guidance related to management of third-party vendors. We are also subject to the examination and enforcement authority of the FDIC as a bank service company covered by the Bank Service Company Act. We have indemnification obligations and exposure under our agreements with WebBank, including with respect to our compliance with certain applicable laws. In the event that our relationships with such backup issuing banks change, we may need to enter into alternative arrangements with different issuing banks. If WebBank were to suspend, limit or cease its operations or our relationship with WebBank were to otherwise terminate, we would need to implement a substantially similar arrangement with another issuing bank, obtain additional state licenses or curtail our operations. ToOur agreement with WebBank has an initial term ending in January 2023 and renews automatically for two successive terms of one year each, unless either party provides notice of non-renewal to the other party in accordance with the provisions of the agreement. As of the date of this Report, no backup issuing banks have originated any loans facilitated through our platformmarketplace and we do not believe that we have a backup origination arrangement that could be in a position to originate loans without significant investment in time and resources, resulting in a disruption to the business. Our relationships with such backup issuing banks are subject to a number of risks and may be subject to change or termination with appropriate notice.arrangement.
We believe that our relationship with WebBank is critical to our business. However, ifcurrent business model. If we are unsuccessful in maintaining our relationships with WebBank, our ability to provide loan products could be materially impaired and our operating results would suffer. If we need to enter into alternative arrangements with a different issuing bank to replace our existing arrangements, we may not be able to negotiate a comparable alternative arrangement. Transitioning loan originations to a new issuing bank is untested and may result in delays in the issuance of loans or, if our platform becomes inoperable, may result in our inability to facilitate loans through our platform. If we were unable to enter in an alternative arrangement with a different issuing bank, we would need to obtain or activate a state license in each state in which we operate to enable us to originate loans, as well as comply with other state and federal laws, which would be costly, time-consuming and time-consuming.may necessitate that we materially alter our business and operations.
We are pursuing a potentially transformational transaction, which is subject to regulatory approvals and other closing conditions and, during the closing period, necessitated the adoption of a temporary bank charter protection agreement which may diminish interest in our stock. If consummated, the transaction will subject us to significant additional regulation.
As previously disclosed, we believe a bank charter will improve our capital efficiency and generate higher revenues, margins and return on equity by: (i) recapturing significant revenue which is currently going to issuing banks, (ii) reducing the use of higher cost warehouse lines, and (iii) generating additional and recurring net interest income. Accordingly, our management, with the support of the board of directors (Board), has been working diligently on obtaining a bank charter through either the establishment of a new bank through a “de novo process” or by means of an acquisition.
On February 18, 2020, we entered into a definitive agreement to acquire Radius Bancorp, Inc. (Radius), a savings and loan holding company (the Transaction). As part of the Transaction, we will acquire Radius’ wholly-owned subsidiary, Radius Bank, a federal savings association, which will convert to a national bank simultaneously with the Transaction. We believe that the Transaction has the potential to be transformational for the Company by enabling us to add additional benefits, products and/or functionality to the LendingClub platform which may, among other things, facilitate our ability to develop and maintain a longer-term relationship with our customers. Additionally, we believe the Transaction would provide access to a new source of relatively lower cost funding to our marketplace and give our business greater resilience and regulatory certainty.
However, closing the Transaction is subject to regulatory approvals and other customary closing conditions which we believe will take some time to completely satisfy. The satisfaction of all of the required conditions could delay the completion of the Transaction for a significant period of time or prevent it from occurring. Any delay in completing the Transaction could cause us not to realize some or all of the benefits mentioned above that we expect to achieve if the Transaction is successfully completed within its expected time frame. Further, there can be no assurance that the required regulatory approvals necessary to complete the Transaction will be obtained, or whether all of the other conditions to the closing of the Transaction will be satisfied or waived or that the Transaction will be completed.
In particular, the Transaction is subject to regulatory approvals, including approvals from the Federal Reserve and the Office of the Comptroller of the Currency (the OCC) under the Bank Holding Company Act and the National Bank Act, respectively.
The Federal Reserve is prohibited from approving any merger transaction under Section 3 of the Bank Holding Company Act that would have anti-competition effects, unless the Federal Reserve finds that the anti-competitive effects of the merger transaction are clearly outweighed in the public interest by the probable effect of the merger transaction in meeting the convenience and needs of the communities to be served. In addition, among other things, in reviewing the Transaction, the Federal Reserve must consider (i) the financial condition and future prospects, as applicable, of the resulting organization; (ii) the competence, experience, and integrity of the officers, directors and principal stockholders, as applicable, of the resulting organization; (iii) the convenience and needs of the communities to be served, including any record of performance under the Community Reinvestment Act of 1977, as amended (the CRA); (iv) the Company’s and Radius’ effectiveness in combating money-laundering activities; and (v) the risk to the stability of the United States banking or financial system presented by the Transaction.
In connection with Radius Bank’s conversion to a national bank and other matters that may require OCC approval, the OCC will consider (i) Radius Bank’s financial condition, management, and regulatory capital requirements; (ii) Radius Bank’s conformance with statutory and regulatory criteria, including maintaining a safe and sound banking system, encouraging fair access to financial services, ensuring compliance with laws and regulations, and promoting fair treatment of customers; (iii) whether Radius Bank has obtained all necessary regulatory and shareholder or member approvals; (iv) adequacy of Radius Bank’s policies, practices, and procedures; and (v) CRA record of performance.
The process for obtaining all the required regulatory approvals has become substantially more difficult since the global financial crisis, and our ability to obtain the requisite approvals for the Transaction depends on the bank regulators’ views as to the Company or Radius’ capital levels, quality of management, and overall condition, in addition to their assessment of a variety of other factors, including the Company and Radius’ compliance with law. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we or Radius has, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, CRA issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other similar laws and regulations. If the regulators impose conditions on the completion of the Transaction or require changes to the terms of the Transaction, such conditions or changes could have the effect of delaying or preventing completion of the Transaction or imposing additional costs on or limiting the revenues of the Company following the Transaction, any of which might have an adverse effect on the Company following the Transaction. Regulatory approvals could also be adversely impacted based on the status of any ongoing investigation of us or Radius or either party’s customers, including subpoenas to provide information or investigations by a federal, state or local governmental agency. We cannot guarantee that we will be able to obtain all required regulatory approvals, the timing of those approvals or whether any conditions will be imposed.
In order to obtain the requisite regulatory approvals, we need to develop a financial and bank capitalization plan and may need to enhance our governance, compliance, controls and management infrastructure and capabilities to be compliant with all applicable regulations and operate to the satisfaction of the banking regulators before we close the Transaction, which may require substantial time, monetary and human resource commitments. If we are unsuccessfulnot successful in maintainingdeveloping a financial and bank capitalization plan or enhancing, as needed, our relationships with WebBank,governance, compliance, controls and management infrastructure and capabilities, our ability to close the Transaction and obtain a bank charter and/or bank functionality through other avenues may be jeopardized.
Ultimately, if the Transaction does not close for any reason, including due to failure to obtain the necessary regulatory approvals or complete the exchange with Shanda described below, and we are unable to find an alternative pathway to obtaining a bank charter and/or bank functionality, then our ability to offer a broader range of products and services, and our stock price, may be adversely affected. Our stock price may also decline to the extent that the current market price reflects a market assumption that the Transaction will be completed. In addition, we would have to recognize the substantial expenses in connection with the negotiation and completion of the Transaction without realizing the expected benefits of the Transaction.
Further, if the Transaction closes, we will become subject to the Bank Holding Company Act and its restrictions and requirements, including capital requirements and shareholder requirements. We will become subject to the supervision and regulation by the Federal Reserve as well as other federal bank regulators. Our efforts to comply with such additional regulation may require substantial time, monetary and human resource commitments. If any new regulations or interpretations of existing regulations to which we are subject impose requirements on us that are impractical or that we cannot satisfy, our ability to offer a broader range of products and services, and our stock price, may be adversely affected.
Additionally, should the Transaction close, certain of our stockholders may need to comply with applicable federal banking regulations, including the applicable provisions of the Bank Holding Company Act. Specifically, stockholders holding above 9.9% of the Company’s voting interests may be required to provide loancertain information and/or commitments on a confidential basis to, among other regulators, the Federal Reserve. In connection with the execution of the definitive agreement for the Transaction and in order to facilitate the regulatory approvals of the Transaction, as well as to avoid the incurrence of the informational obligations for stockholders holding above 9.9% of the Company’s voting interests, we entered into an agreement whereby our largest stockholder, Shanda Asset Management Holdings Limited and its affiliates (collectively, Shanda), will exchange, subject to certain closing conditions, all shares of our common stock held by Shanda for newly issued non-voting convertible preferred stock. In connection with the exchange, the Company will provide Shanda registration rights and a one-time cash payment. In an effort to protect the Company’s ability to obtain the necessary bank regulatory approvals without the support or assistance of another stockholder, the Board approved the adoption of a Temporary Bank Charter
Protection Agreement (the Charter Protection Agreement). The Charter Protection Agreement is designed to deter ownership positions in the Company’s stock in excess of certain thresholds set forth by the Federal Reserve under the Bank Holding Company Act by diluting any stockholder who amasses an ownership position in excess of such thresholds without the Company’s approval. To ensure the arrangement is tailored to protect the Company and does not unduly infringe on the rights of stockholders, the rights distributed pursuant to the Charter Protection Agreement shall automatically be redeemed upon the earlier of 18 months after its adoption or the close of the Transaction. Nonetheless, the Charter Protection Agreement may deter certain existing or potential stockholders from purchasing shares of the Company’s common stock, which may suppress demand for the stock and cause the price to decline.
Substantial and increasing competition in our industry may harm our business.
The lending industry is increasingly competitive. We compete with financial products couldand companies that attract borrowers, investors or both, as described in “Item 1. Business – Our competitive advantage.”
Many of our competitors have significantly greater financial resources and may have access to less expensive capital than we do, and may offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have different profitability expectations than us. Certain competitors may be able to offer lower rates to borrowers than we are able to offer and/or structure their products in a manner that is more attractive to potential borrowers and investors. Additionally, some of our competitors may also be subject to less burdensome licensing and other regulatory requirements.
If we do not offer, price and develop attractive products and services for our borrowers and investors, we may not be able to compete effectively against our competitors and our business and results of operations may be materially impaired and our operating results would suffer.harmed.
We are regularly subject to litigation, and government and regulatory investigations, inquiries and requests, including matters related to our legacy management and the resignation of our former Chief Executive Officer.requests.
We are regularly subject to claims, individual and class action lawsuits, lawsuits alleging regulatory violations such as the Telephone Consumer Protection Act (TCPA) or, Fair Credit Reporting Act (FCRA), Unfair and Deceptive Acts and Practices (UDAP) or Unfair, Deceptive or Abusive Acts or Practices (UDAAP) violations, government and regulatory exams, investigations, inquiries or requests, and other proceedings involving consumer protection, privacy, labor and employment, intellectual property, privacy, data protection, information security, securities, tax, commercial disputes,record retention and other matters. The number and significance of these claims, lawsuits, exams, investigations, inquiries and requests have increased as our business has expanded in scope and geographic reach, and our products and services have increased in complexity. We haveare also been subject to significant litigation and regulatory inquiries, following our 2016 Board Review and the resignation of our former CEO, as discussed more fully in “Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –Note 18. – Note 19. Commitments and Contingencies,” below. In particular, note that on April 25, 2018, the Federal Trade Commission (FTC) filed a complaint in the Northern District of California (FTC v. LendingClub Corporation, No. 3:18-cv-02454) alleging causes of action for violations of the Federal Trade Commission Act of 1914, as amended, including claims of deception in connection with disclosures related to the origination fee associated with loans available through the Company’s platform, and in connection with communications relating to the likelihood of loan approval during the application process, and a claim of unfairness relating to certain unauthorized charges to borrowers’ bank accounts. The FTC’s complaint also alleged a violation of the Gramm-Leach-Bliley Act regarding the Company’s practices in delivering its privacy notice.
The scope, timing, outcome, consequences and impact of claims, lawsuits, proceedings, investigations, inquiries and requests that we are subject to cannot be predicted with certainty. Determining reserves for our pending litigation is a complex, fact-intensive process that requires significant judgment. Furthermore, resolution of such claims, lawsuits, proceedings, investigations, inquiries and requests could result in substantial fines and penalties, which may materially and
adversely affect our business. These claims, lawsuits, proceedings, exams, investigations, inquiries and requests could also: (i) result in reputational harm, criminal sanctions, consent decrees, orders preventing us from offering certain features, functionalities, products or services, (ii) impose third party monitoring obligations,limit the Company’s access to credit, (iii) result in a modification or suspension of our business practices (including limiting the maximum interest
rate on certain loans facilitated through our platform and/or refraining from making certain loans available for investment by certain investors), (iv) require us to develop non-infringing or otherwise altered products or technologies.technologies, (v) prompt ancillary claims, lawsuits, proceedings, investigations, inquiries and requests, (vi) consume financial and other resources which may otherwise be utilized for other purposes, such as advancing the Company’s products and services, (vii) cause a breach or cancellation of certain contracts, or (viii) result in a loss of borrowers, investors and/or ecosystem partners, any of which may adversely affect our business and operations. Furthermore, even following the resolution of any claims, lawsuits, proceedings, exams, investigations, inquiries and requests against the Company, a regulatory enforcement agency could take action against one or more individuals or entities, which may require us to continue to incur significant expense for indemnification for any such individual or entity until such matters may be resolved. Any of these consequences could materially and adversely affect our business.
Holding loans on our balance sheet exposes us to credit, liquidity and interest rate risk, which may adversely affect our financial performance.
For a variety of reasons, aA portion of the loans facilitated through our platform are purchased by the Company. OneCompany for a variety of these reasons, isincluding, but not limited to: (i) to support structured program transactions, (ii) to facilitate certain whole loan sales initiatives, (iii) to enable the Company’s securitizationstesting or initial launch of alternative loan terms, programs or channels, and other structured finance initiatives. Another reason is(iv) to mitigate temporary portfoliomarketplace imbalances on our platform for limited grades or terms, which arise when there is insufficient investor demand for certain loans available for purchase.
CircumstancesWe may require us to hold these loans purchased by the Company for a short period or for a longer term. While these loans are on our balance sheet we earn interest on the loans, but we have exposure to the credit risk of the counterparties to the loans (i.e., the borrowers).borrowers. In the event of a decline or volatility in the credit riskprofile of these borrowers the value of these held loans may decline. This may adversely impact the liquidity of these held loans, which could produce losses if the Company is unable to realize their fair value or manage declines in their value, each of which may adversely affect our financial performance. Further, utilizing our balance sheet to purchase loans at greater than forecasted amounts may impair our ability to allocate sufficient financial resources for other purposes, such as advancing the Company’s products and services, which could impact our results of operations.
Separately,With respect to a portion of loans facilitated through our platform and purchased by the Company, including a portion of those that are purchased to mitigate marketplace imbalances for certain grades or terms from time to time, we may also use our capitalprovide incentives to invest ininvestors to purchase such loans associated withfrom the testingCompany or initial launch of alternativewe may sell the loans at a price that is less than par. Any incentive or difference to par may be partially or wholly offset by other factors, such as interest earned on the loan terms, programs or channels to establish a track record of performance prior to facilitating third-party investments in these loans.
In the event we retain a significant inventory ofits sale. However, selling loans with incentives or at prices less than par may discourage investors from purchasing loans on our balance sheet,platform without incentives or at par value, cause the Company to realize less revenue than expected with respect to such loans or prompt dissatisfaction and complaints from investors unable to purchase incentivized or discounted loans, each of which may adversely affect our business and financial condition, liquidityresults.
If we are unable to develop and resultscommercialize new products and services and enhancements to existing products and services, our business may suffer.
The lending industry is evolving rapidly and changing with disruptive technologies and the introduction of operations will becomenew products and services. We derive a significant portion of our revenue from transaction-based fees we collect in connection with facilitating the origination of unsecured personal loans. To enhance customer engagement and diversify our revenue streams, we are undertaking a strategy to broaden the scope of our products and services we offer. Failure to broaden the scope of our products and services leaves us dependent on a single revenue stream and vulnerable to competitors offering a suite of products and services. Accordingly, a key part of our success depends on our ability to develop and commercialize new products and services and enhancements to existing products and services.
We incur expenses and expend resources to develop and commercialize new products and services and enhancements to existing products and services. However, we may not assign the appropriate level of resources,
priority or expertise to the development and commercialization of these new products, services or enhancements. We also could utilize and invest in technologies, products and services that ultimately do not achieve widespread adoption and, therefore, are not as attractive or useful to our customers as we anticipate. Moreover, we may not realize the benefit of new technologies, products, services or enhancements for many years, and competitors may introduce more dependent uponcompelling products, services or enhancements in the performancemeantime. Competitors also may develop or adopt technologies or introduce innovations that make our lending marketplace platform less attractive to our borrowers and/or investors.
If we are unable to develop and commercialize timely and attractive products and services for our borrowers and investors, our growth may be limited and our business may be materially and adversely affected.
A disruption or failure in services provided by third parties could materially and adversely affect our business.
We increasingly rely on third parties to provide and/or assist with certain critical aspects of our business, including: (i) customer support, (ii) collections, (iii) loan origination, (iv) data verification and (v) cloud computing. These third parties may be subject to cybersecurity incidents, privacy breaches, service disruptions and/or financial, legal, regulatory, labor or operational issues; any of which may result in the held loans.third party providing inadequate service levels to us or our customers. In addition, these third parties may breach their agreements with us and/or refuse to continue or renew these agreements on commercially reasonable terms. If any third party provides inadequate service levels or fails to provide services at all, we may face business disruptions, customer dissatisfaction, reputational damage and/or financial and legal exposure; any of which may harm our business.
Fluctuations in interest rates could negatively affect transaction volume.
All personal, auto, and small businessIf the loans facilitated through our lending marketplace are issued with fixed interest rates, and education and patient finance loans are issued with fixed were found to violate a state’s usury laws, and/or variable rates, depending onwe were found to be the type of loan. If interest rates continuetrue lender (as opposed to rise, investors who have already committed capital may lose the opportunity to take advantage of the higher rates, or may seek to invest capital in alternative investments. Additionally, potential borrowers could seek to defer loans as they wait for interest rates to settle, and borrowers of variable rate loans may be subject to increased interest rates. If interest rates decrease after a loan is made, borrowers through our lending marketplace may prepay their loans to take advantage of the lower rates. Investors through our lending marketplace would lose the opportunity to collect the above-market interest rate payable on the corresponding loan and may delay or reduce future loan investments. As a result, fluctuations in the interest rate environment may discourage investors and borrowers from participating in our lending marketplace and may reduce our loan originations, which may adversely affect our business.
If the credit decisioning, pricing, loss forecasting and scoring models we use contain errors, do not adequately assess risk, or are otherwise ineffective, our reputation and relationships with borrowers and investors could be harmed and our market share could decline.
Our ability to attract borrowers and investors to, and build trust in, our lending marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and likelihood of default. To conduct this evaluation, we utilize credit decisioning, pricing, loss forecasting and scoring models that assign each loan offered
on our lending marketplace a grade and a corresponding interest rate. Our models are based on algorithms that evaluate a number of factors, including behavioral data, transactional data, bank data and employment information, which may not effectively predict future loan losses. If we are unable to effectively segment borrowers into relative risk profiles,issuing bank(s)), we may be unablehave to offer attractive interest rates for borrowersalter our business model and risk-adjusted returns for investors. Additionally, if these models fail to adequately assess the creditworthiness of our borrowers, we may experience higher than forecasted losses. We continually refine these algorithms based on new data and changing macro-economic conditions. However, there is no guarantee that the credit decisioning, pricing, loss forecasting and scoring models that we use have accurately assessed the creditworthiness of our borrowers, or will be effective in assessing creditworthiness in the future.
Similarly, if any of these models contain programming or other errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. While we have not incurred any material liabilities to date, if these errors were to occur in the future, investors may try to rescind their affected investments or decide not to invest in loans in the future or borrowers may seek to revise the terms of their loans or reduce the use of our lending marketplace for loans.
If we are unable to accurately forecast demand for loans, our business could be harmed.
The interest rates that are charged to borrowers and that form the basis of payments to investors through our lending marketplace are enabled by legal principles including (i) the application of federal law to enable an issuing bank that originates the loan to “export” the interest rates of the jurisdiction where it is located, (ii) the application of common law “choice of law” principles based upon factors such as the loan document’s terms and where the loan transaction is completed to provide uniform rates to borrowers, or (iii) the application of principles that allow the transferee of a loan to continue to collect interest as provided in the loan document. WebBank, the primary issuing bank of the loans facilitated through our lending marketplace, is chartered in, and operates out of, Utah, which allows parties to generally agree by contract to any interest rate. Certain states, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate. In some jurisdictions, the maximum rate is less than the current maximum rate offered by WebBank through our platform. If the laws of such jurisdictions were found to govern the loans facilitated through our lending marketplace (in conflict with the principles described above), those loans could be in violation of such laws.
We operate in a complex and evolving regulatory environment at the federal and state level and although we strive to work with federal, state and local regulatory agencies to help them understand our model and its benefits for consumers, our issuing bank partnership model may be deemed to be inappropriate for certain of the jurisdictions in which we operate. Specifically, note that as discussed in “Item 1. Business – Regulatory and Compliance Framework” above, in May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC that interpreted the scope of federal preemption under the National Bank Act (NBA) and held that a nonbank assignee of a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit’s decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. While we believe that our program is factually distinguishable from such case, the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC could create potential liability under state statutes such as usury and consumer protection statutes.
In addition, there have been (and may continue to be) regulatory inquiries and/or litigation challenging lending marketplacearrangements where a bank or other third-party has made a loan and then sells and assigns it to an entity that is engaged in assisting with the origination and servicing of a loan. See “Item 1. Business – Regulatory and Compliance Framework” above for consumer credit, balancingmore information.
If a borrower demandor a state were to successfully bring claims against us for state usury law violations, and the rate on that borrower’s personal loan was greater than that allowed under applicable state law, we could be subject to fines and penalties, including the voiding of loans against investor demand for risk-adjusted returns. We offer creditand repayment of principal and interest to borrowers acrossand investors, and may be in breach of certain representation and warranties we make to our platform investors. In some states, we have decided to limit the maximum interest rate on loans facilitated through our platform. Additionally, we might decide to further modify or suspend certain of our business practices, including limiting the maximum interest rate on certain loans facilitated through our platform and/or refraining from making certain loans available for investment by certain investors, and we might decide to originate loans under state-specific licenses, where such a ruling is applicable. These actions could adversely impact our business. Further, if we were unable to partner with another issuing bank or obtain a bank charter, we would have to substantially modify our business operations from the manner currently contemplated and would be required to maintain state-specific licenses and only provide a limited range of credit profilesinterest rates for personal loans, all of which would substantially reduce our operating efficiency and ratesattractiveness to investors and we offer investment opportunities across a range of risk-adjusted returns. In the event that borrower demand at a given credit rate exceeds investor demand for that product for a given period, we may need to fund the loans due to regulatory requirements or borrower relations reasons and hold those loans on our balance sheet, which carries certain risks. See “Holding loans on our balance sheet exposes us to credit, liquidity and interest rate risk, which maymaterially adversely affect our business, financial performance.”condition and results of operations.
Alternatively, in the event that investor demand at a given return exceeds borrower demand for that product for a given period, there may be insufficient inventory to satisfy investor demand. If investors do not believe their demand can be met on our platform, they may seek alternative investments from ours. In the event we are unable to meet investor demand, we may be unable to meet our growth projections and our business may suffer.
The regulatory framework for our business is complex, evolving and uncertain as federal and state governments consider new laws to regulate online lending marketplaces such as ours. New laws and regulations, including uncertainty as to how the actions of any federal or state regulator could impact our business or that of our issuing banks.
The regulatory framework for online lending marketplaces such as ours is evolving and uncertain. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our lending marketplace and the way in which we interact with borrowers and investors. Furthermore, the costs associated with staying current and complying with the regulatory framework may divert significant resources which otherwise might be utilized for other purposes, such as advancing the Company’s products and services, which could negatively impact our results of operations. For a discussion of how government regulation impacts key aspects of our business, see “Part I – Item 1 –1. Business – Regulatory and Compliance Framework,Framework.”“Part I – Item 1 – Business – Current Regulatory Environment, Consumer Protection Laws and Other Regulations” and “Part II – Item 7 – Management’s Discussion and Analysis
Any failure or perceived failure to comply with existing or new laws, regulations, or orders of Financial Condition and Resultsany government authority (including changes to or expansion of Operations – Regulatory Environment.”
Federal Regulatory Framework
OCC Guidance
Asthe interpretation of those laws, regulations, or orders), including those discussed in “Part I – Item 1 – Business – Current Regulatory Environment” above,this risk factor, may subject us to significant fines, penalties, criminal and civil lawsuits, forfeiture of significant assets, and enforcement actions in one or more jurisdictions; result in additional compliance and licensure requirements; cause us to lose existing licenses or prevent or delay us from obtaining additional licenses that may be required for our business; increase regulatory scrutiny of our business; restrict our operations; and/or force us to change our business practices, make product or operational changes, or delay planned transactions, product launches or improvements. Any of the OCC has consideredforegoing could, individually or in the adoption of a Fintech Charter. We cannot predict whether or when the OCC will begin accepting applications for Fintech Charters, if we will pursue a Fintech Charter or other banking charter, or how this new Fintech Charter could impactaggregate, harm our industry,reputation, damage our brands and business, and adversely affect our results of operations going forward.and financial condition.
LENDINGCLUB CORPORATION
While we have developed policies designed to assist in compliance with these laws and regulations, no assurance can be given that these policies will be effective in preventing violations of these laws and regulations and there can be no assurance that we will not violate such laws and regulations.
Consumer Financial Protection Bureau
As discussed in “Part IItem 1. Business – Item 1 – Business – Current Regulatory Environment”and Compliance Framework” above,the CFPB previously announced that it intends to expand its supervisory authority through the use of “larger participant rules.” The CFPB has not announced specifics regarding its proposed rulemaking, and recently announced that it intends to review its
policies and priorities. Consequently, there continues to be uncertainty as to how the CFPB’s strategies and priorities, including any final rules, will impact our businesses and results of operations going forward.
State Regulatory Framework
As discussed in “Part IItem 1. Business – Item 1 – Business – Current Regulatory Environment”and Compliance Framework” above, at the state level, certain states are considering the scope of their regulation and oversight of the financial technology industry. The application of state laws to our business, including the application of usury laws, now or as they may be written or interpreted in the future, could have a significant impact on our ability to do business in any given state and may impact our business and results of operations going forward.
Federal and State Borrower and Consumer Protection Laws
As discussed in “Part I – Item 1 –1. Business – Consumer Protection Laws and Other Regulations”” above, we and our issuing bank partners must comply with regulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our lending marketplace. Certain state laws generally regulate interest rates and other charges and require certain disclosures. In addition, other federal and state laws may apply to the origination and servicing of loans facilitated through our lending marketplace.marketplace and to communications with or to customers or prospective customers.
WhileBanking Regulations
As disclosed above, we have developed policiesare pursuing a Transaction which, if closed, will result in the Company becoming subject to the Bank Holding Company Act and procedures designedits restrictions and requirements, including capital requirements and shareholder requirements. In addition, we would become subject to assistsupervision and regulation by the Federal Reserve, as well as other federal bank regulators. We will need to develop a financial and bank capitalization plan and may need to enhance certain of our governance, compliance, controls and management infrastructure and capabilities to be compliant with all applicable regulations and to the satisfaction of the banking regulators. If we are not successful in developing and remaining compliant with a financial and bank capitalization plan and enhancing our governance, compliance, controls and management infrastructure and capabilities, our ability to close the Transaction, obtain a bank charter and/or bank functionality through other avenues, and/or maintain a bank charter may be jeopardized.
Other Regulations
As discussed in “Item 1. Business – Consumer Protection Laws” above, we and our issuing bank partners must comply with theseregulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our lending marketplace. Certain state laws generally regulate interest rates and regulations, no assurance can be given that these policiesother charges and procedures will be effective in preventing violationsrequire certain disclosures. In addition, other federal and state laws may apply to the origination and servicing of these laws and regulations.loans facilitated through our lending marketplace.
In particular, the USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with FinCEN. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.accounts and monitoring their transactions. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently several banking institutions have received large fines for non-compliance with these laws and regulations.
Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agency’s ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect our servicing fee with respect to the uncollected principal or interest, and investors may be discouraged from investing in loans. In addition, non-compliance could subject us to damages, revocation of
required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and our ability to maintain our lending marketplace and may result in borrowers rescinding their loans.
State Licensing Requirements
Where applicable, we will seek to comply with state small loan, lender, solicitation, credit service organization, loan broker, servicing and similar statutes. In U.S. jurisdictions with licensing or other requirements that we believe may be applicable to us, we believe we comply with or are exempt from the relevant requirements through the operation of our lending marketplace with issuing banks and/or licenses that we possess or will be seekingseek to obtain required licenses.obtain. Although we periodically evaluate the need for licensing in various jurisdictions, there is a risk that, at any given time, we will not have the necessary licenses to operate in all relevant jurisdictions.jurisdictions or that we will be in full compliance with all applicable requirements. If we are found to not have complied with applicable laws, and regulations or requirements, we couldcould: (i) lose one or more of our licenses or
authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face otherlawsuits (including class action lawsuits), sanctions or penalties, (iv) be in breach of certain contracts, which may void or cancel such contracts, (v) decide or be compelled to modify or suspend certain of our business practices (including limiting the maximum interest rate on certain loans facilitated through our platform and/or refraining from making certain loans available for investment by certain investors), or (vi) be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans through our lending marketplace, perform our servicing obligations or make our lending marketplace available to borrowers in particular states,states; any of which may harm our business.
If the credit decisioning, pricing, loss forecasting and scoring models we use contain errors, do not adequately assess risk, or are otherwise ineffective, our reputation and relationships with borrowers and investors could be harmed, our market share could decline and the value of loans facilitated throughheld on our balance sheet may be adversely affected.
Our ability to attract borrowers and investors to, and build trust in, our lending marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and likelihood of default. To conduct this evaluation, we utilize credit decisioning, pricing, loss forecasting and scoring models that assign each loan offered on our lending marketplace a grade and a corresponding interest rate. Our models are based on algorithms that evaluate a number of factors, including behavioral data, transactional data, bank data and employment information, which may not effectively predict future loan losses. If we are unable to effectively segment borrowers into relative risk profiles, we may be unable to offer attractive interest rates for borrowers and risk-adjusted returns for investors. Additionally, if these models fail to adequately assess the creditworthiness of our borrowers, we may experience higher than forecasted losses. Furthermore, as stated above, we hold loans on our balance sheet for a variety of reasons. We periodically assess the value of these loans and in doing so we review and incorporate a number of factors including forecasted losses. Accordingly, if we fail to adequately assess the creditworthiness of our borrowers such that we experience higher than forecasted losses, the value of the loans held our balance sheet may be adversely affected.
We continually refine these algorithms based on new data and changing macro-economic conditions. However, there is no guarantee that the credit decisioning, pricing, loss forecasting and scoring models that we use have accurately assessed the creditworthiness of our borrowers, or will be effective in assessing creditworthiness in the future.
Similarly, if any of these models contain programming or other errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. If these errors were found to violate a state’s usury laws, and/occur, we may be obligated to repurchase the affected loans, investors may try to rescind their affected investments or we were founddecide not to invest in loans in the future or borrowers may seek to revise the terms of their loans or reduce the use of our lending marketplace for loans.
Fraudulent activity associated with our lending marketplace could negatively impact our operating results, brand and reputation and cause the use of our products and services to decrease and our fraud losses to increase.
We are subject to the risk of fraudulent activity associated with our lending marketplace, issuing bank(s), borrowers, investors and third parties handling borrower and investor information. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. Under our agreements with investors, we are obligated to repurchase loans in cases of confirmed identity theft. The level of our fraud charge-offs and our results of operations could be materially and adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity or significant increases in fraudulent activity could lead to regulatory intervention, negatively impact our operating results, brand and reputation and lead us to take steps to reduce fraud risk, which could increase our costs.
In addition, in the true lender (as opposedpast, third parties have attempted to defraud individuals, some of whom may be potential customers of ours, by misappropriating our logos and represented themselves as LendingClub in e-mail campaigns to e-mail addresses that have been obtained outside of LendingClub. In one particular scheme, third parties represented to individuals that they might obtain a loan if they paid an “advance fee.” Individuals who believe that the campaigns are genuine may make payments to these unaffiliated third parties. Although we take commercially reasonable steps to prevent third-party fraud, we cannot always be successful in preventing individuals from suffering losses as a result of these schemes. Individuals who suffer damages due to the actions of these unaffiliated third parties may negatively view LendingClub, causing damage to our issuing bank(s)),brand and reputation and reducing our business.
If we may haveare unable to alter our business model andaccurately forecast demand for loans, our business could be harmed.
The interest rates that are chargedWe operate a lending marketplace for consumer credit, balancing borrower demand for loans against investor demand for risk-adjusted returns. We offer credit to borrowers across a range of credit profiles and rates and we offer investment opportunities across a range of risk-adjusted returns. In the event that formborrower demand at a given credit rate exceeds investor demand for that product for a given period, we may fund the basisloans and hold them on our balance sheet, which carries certain risks. The vast majority of payments to investors throughinvestor funding on our lending marketplace are enabled by legal principles including (i) the application of federal law to enable an issuing bank that originates the loan to export the interest rates of the jurisdiction whereplatform is non-committed and therefore it is located, (ii)challenging to precisely forecast investor demand. In addition to the application of common law “choice of law” principles based upon factors such as the loan document’s termsdiscussion in this section, see “Holding loans on our balance sheet exposes us to credit, liquidity and where the loan transaction is completed to provide uniform rates to borrowers, or (iii) the application of principles that allow the transferee of a loan to continue to collect interest as providedrate risk, which may adversely affect our financial performance.”
Alternatively, in the loan document. WebBank, the primary issuing bankevent that investor demand at a given return exceeds borrower demand for that product for a given period, there may be insufficient inventory to satisfy investor demand. If investors do not believe their demand can be met on our platform, they may seek alternative investments from ours and our business may suffer.
Liquidity risk could impair our ability to manage and grow our operations, which may adversely affect our financial condition.
As stated above, a portion of the loans facilitated through our lending marketplace, is charteredplatform are purchased by us for a variety of reasons. Purchasing loans requires liquidity and therefore managing our liquidity has become essential to our business.
If we have insufficient liquidity to support loan purchases, we may undertake measures to improve liquidity, including altering operations to require less liquidity, accelerating the sale of existing loans held on our balance sheet, incurring additional indebtedness or raising additional capital. Incurring additional indebtedness and raising additional capital depend on our ability to secure funding in amounts adequate to finance our current and operates outprojected operations and on terms attractive to us, each of Utah, which allows partiescould be impaired by factors specific to generally agreeus or the financial markets generally. A lack of sufficient liquidity may adversely affect our financial condition by, contractamong other things, impairing our ability to any interest rate. Certain states, including Utah, have no statutory interest rate limitationsmeet investor demand for structured program transactions or forcing us to alter our operations in a manner that may reduce origination volume.
In addition, if we are required to rely more heavily on personal loans, while other jurisdictions havemore expensive funding sources to support existing operations and/or future growth, our revenues may not increase proportionately to cover our costs which may adversely affect our operating margins and profitability.
Furthermore, if we obtain a maximum rate. In some jurisdictions, the maximum rate is less than the current maximum rate offered by WebBank throughbank charter, we would be required to establish and maintain significant levels of capital, which could make it more difficult to maintain sufficient liquidity to operate our platform. business.
If the laws of such jurisdictions were foundwe do not maintain or continue to govern the loansincrease loan originations facilitated through our lending marketplace, (in conflict with the principles described above), those loansor expand our lending marketplace to new markets, we may not succeed in maintaining and/or growing our business, and as a result our business and results of operations could be in violation of such laws.adversely affected.
As discussed in “Part I – Item 1 – Business – Current Regulatory Environment” above, the decision of the U.S. Court of Appeals for the Second Circuit in decision in Madden v. Midland Funding, LLC could create potential liability under state statutes such as usuryTo maintain and consumer protection statutes.
In addition, there has been (and may continue to be) other litigation challenging lending arrangements where a bank or other third-party has made agrow our business, we must continue to increase loan and then sells and assigns it to an entity that is engaged in assisting with the origination and servicing of a loan. In January 2017, the Colorado Administrator of the Uniform Consumer Credit Code filed suit against Avant, Inc., an online consumer loan platform. The Administrator asserts that loans to Colorado residents facilitated through the Avant platform were required to comply with Colorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated by WebBank, the federally regulated issuing bank who originates loans through Avant’s platform, as well asoriginations through our platform. In March 2017, WebBank filed its own lawsuitlending marketplace by attracting a large number of new borrowers who meet our platform’s lending standards and new and existing investors to invest in federal district court forthese loans. Our ability to attract qualified borrowers and attract new and retain existing investors each depends in large part on the Districtsuccess of Colorado seeking declaratory relief that loans originated by WebBank are “valid when made”our marketing efforts, our visibility, placement and are subjectcustomer reviews on third-party platforms, and the competitive advantage of our products, particularly as we continue to federal requirements that preempt Colorado state requirements. No assurance can be given as togrow our lending marketplace and introduce new products. If any of our marketing channels become less effective, or the timing or outcomecost of these matters. However,channels were to significantly increase, we may not be able to attract new borrowers and attract new and retain existing investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors in our lending marketplace. Additionally, changes in the Colorado Departmentway third-party platforms operate, including changes in our participation on such platforms, could make the maintenance and promotion of Law has reached out to us to implement a temporary resolution of any dispute regarding these issues, pending the outcome of the litigation. These matters could potentially impact the Company’s business, including the maximum interest ratesour products and fees that can be chargedservices, and application of certain consumer protection statutes.thereby maintaining and growing loan originations, more expensive or more difficult.
If there are not sufficient qualified loans facilitated on the platform, investors may be unable to deploy their capital in a borrower were to successfully bring claims against us for state usury law violations,timely or efficient manner and may seek other investment opportunities. If the rate on that borrower’s personal loan was greater than that allowed under applicable state law, we could be subject to fines and penalties, including the voidingperformance of loans and repayment of principal and interest to borrowers and investors. We might decide to limit the maximum interest rate on certain loans facilitated through our platform is lower than expected, we may be unable to attract new and we might decideretain existing investors. If there is insufficient investor participation, borrowers may be unable to originateobtain investment capital for their loans under state-specific licenses, where such a ruling is applicable. These actions could adverselyand may stop using our lending marketplace for their borrowing needs, which will impact our business. Further,business results. If loan originations through our platform decrease, for any reason, our business and financial results may be adversely affected. Furthermore, if we were unable to partner with another issuing bank,restructure our products, including lowering or eliminating our transaction fees, our financial results may be adversely affected even if we would have to substantially modify our business operations from the manner currently contemplated and would be requiredare able to maintain state-specific licenses and only provide a limited range of interest rates for personal loans, all of which would substantially reduceor increase loan originations through our operating efficiency and attractiveness to investors and possibly result in a decline in our operating results.platform.
A relatively small number of investors, including LendingClub, account for a large dollar amount of investment in loans funded through our lending marketplace and otherif these investors maypause or cease their participation or exert influence over us, if we experience a slowdown in a significant amountour business, financial condition and results of investment capital on our platform.operations may be harmed.
A small number of loan investors, including the Company, account for a large dollar amount of capital on our platform. Accordingly,See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investments in Quarterly Originations by Investment Channel and Investor Concentration”for further discussion of and information regarding our investor concentration.
Our success depends in significant part on the financial strength of investors participating on our lending marketplace. Investors could, for any reason, experience financial difficulties and cease participating on our lending marketplace or fail to pay fees when due. The occurrence of one or more of these loanevents with a significant number of investors could, alone or in combination, have a material and adverse effect on our business, financial condition and results of operation.
Additionally, investors may exert significant influence over us, our management and operations.
If For example, if investors other than the Company pause or discontinue their investment activity, we may need to provide incentives andor discounts and/or enter into different additional incentiveunique structures or terms to attract investor capital to the platform. These arrangements may have a number of different structures and terms, including alternative fee arrangements or other inducements such as
inducements. There is also no assurance that we will be able to enter into any of these transactions if necessary, or if we do, what the use of our equity.final terms will be. Failure to attract investor capital on reasonable terms may result in us having to use additional capital to invest in loans or reduce origination volume. Such actions may have a material impact on our business, financial condition and results of operations and may be costly or dilutive to existing stockholders. There is no assurance that we will be able to enter into any of these transactions if necessary, or if we do, what the final terms will be.operations.
If these inducements or investment structures are not favorable to us, or are unsuccessful in attracting sufficient investment capital to our platform, we may use a greater amount of our own capital, compared to past experience, to fulfill regulatory purchase obligations or support short-term marketplace equilibrium.
A decline in social and economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.
As a lending marketplace, we believe our customers are highly susceptible to uncertainties and negative trends in the markets driven by, among other factors, general social and economic conditions in the United States and abroad. Economic factors include interest rates, unemployment levels, the impact of a federal government shutdown, natural disasters, gasoline prices, adjustments in monthly payments, adjustable-rate mortgages and other debt payments, the rate of inflation, relative returns available from competing investment products and consumer perceptions of economic conditions. Social factors include changes in consumer confidence levels and changes in attitudes with respect to incurring debt and the stigma of personal bankruptcy.
These social and economic factors may affect the ability or willingness of borrowers to make payments on their loans. Because we make payments to investors ratably only to the extent we receive the borrower’s payments on the corresponding loan, if we do not receive paymentspayment(s) on the corresponding loan, the investor will not be entitled to any paymentsthe corresponding payment(s) under the terms of the investment or whole loan purchase agreement. In some circumstances, economic and/or social factors could lead to a borrower deciding to pre-pay his or her loan obligation. WhileIn the event of a prepayment, while the investor would receive the return of principal, interest would no longer accrue on the loan. Accordingly, the return for the investor or wholewould decline as compared to a loan purchaser would decline. Personal loans facilitated through our lending marketplace are not secured by any collateral, not guaranteed or insured by any third-party, and not backed by any governmental authoritythat was timely paid in any way. We are therefore limited in our ability to collect onaccordance with the loans if a borrower is unwilling or unable to repay. Similarly, thereamortization schedule. There is no penalty to borrowers if they choose to pay their loan early.
We strive to establish a lending marketplace in which annual percentage rates are attractive to borrowers and returns, including the impact of credit losses and prepayments, are attractive to investors. These external economic and social conditions and resulting trends or uncertainties could also adversely impact our customers’ ability or desire to participate on our platform as borrowers or investors, thus adversely impacting the credit performance of the loans, notes, certificates and secured borrowings, which could negatively affect our business and results of operations. See In addition to the discussion in this section, see “Part II – Item 7 –7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current Economic and Business Environment.Environment.”
Our growth depends in part on the success of our strategic relationships with third parties.
LENDINGCLUB CORPORATION
In order to grow our business and effectuate our product to platform strategy, we anticipate that we will depend in part on our ability to develop and expand our strategic relationship with third parties to offer additional products and services on our platform.
Identifying suitable partners, and negotiating and documenting relationships with them, requires significant time and resources. In some cases, we also compete directly with our partners’ product offerings, and if these partners cease their strategic relationship with us it could result in fewer product and service offerings on our platform, which may impede our ability to execute on our product to platform strategy. Further, if we are unsuccessful in establishing or maintaining our relationships with third parties, or realizing the anticipated benefits from such partnerships, our ability to compete and to grow our revenue could be impaired and our operating results may suffer.
If our collection efforts on delinquent loans are ineffective or unsuccessful, the return on investment for investors in those loans would be adversely affected and investors may not find investing through our lending marketplace desirable.
With the exception of our auto loan products and certain small business loan products, loans facilitated on our platform are unsecured obligations of borrowers, and they are not secured by any collateral. None of the loans facilitated on our platform are guaranteed or insured by any third party nor backed by any governmental authority in
any way. We are the loan servicer for all loans supporting notes, all certificates and certain secured borrowings, and we are the loan servicer for most, though not all, loans sold as whole loans. OurThe ability to collect on the loans is dependent on the borrower’s continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including job loss, divorce, death, illness, personal bankruptcy or personal bankruptcy.the economic and/or social factors referenced above. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. Accordingly, we and our designated third-party servicers and collection agencies may beare limited in our ability to collect loans.
In addition, most investors must depend on LendingClub or our third-party servicers and collection agents to pursue collection on delinquent memberborrower loans. We generally use our in-house collections department as a first step when a borrower member misses a payment. Because we make payments ratably on an investor’s investment (or whole loan buyer’s loans) only if we receive the borrower’s payments on the corresponding loan, if we, or third parties on our behalf, cannot adequately perform collection services, the investor or whole loan buyer will not be entitled to any payments under the terms of the investment. In the event that our initial in-house attempts to contact a borrower member are unsuccessful, we generally refer the delinquent account to the outside collection agent. Further, if collection action must be taken in respect of a loan, we or the collection agency may charge a collection fee up to 35% ofon any amounts that are obtained (excluding litigation). These fees will correspondingly reduce the amounts of any payments received by an investor.
Similarly, the returns to investors may be impacted by declines in market rates for sales of charged-off loans to third party purchasers. Ultimately, if delinquencies impair our ability to offer attractive risk-adjusted returns for investors, they may seek alternative investments from ours and our business may suffer.
In addition, because our servicing fees depend on the collectability of the loans, if we experience an unexpecteda significant increase in the number of borrowers who fail to repay theirdelinquent or charged-off loans or an increase in the principal amount of the loans that are not repaid, we will be unable to collect our entire servicing fee for such loans and our revenue could be adversely affected.
Credit and other information that we receive from borrowers or third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may cause us to inaccurately price loans facilitated through our lending marketplace.
Our ability to review and select qualified borrowers depends on obtaining borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and other third parties and we assign loan grades to loan requests based on our lending marketplace’s credit decisioning and scoring models that take into account reported credit score, other information reported by the consumer reporting agencies and the requested loan amount, in addition to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower’s credit report.
Additionally, there is a risk that, following the date of the credit report or other third-party data that we obtain and review, a borrower may have:
become delinquent in the payment of an outstanding obligation;
defaulted on a pre-existing debt obligation;
taken on additional debt; or
sustained other adverse financial events.
In addition, borrowers supply a variety of information that is included in the loan listings on our lending marketplace, and it may be inaccurate or incomplete. To verify a borrower’s identity, income or employment, our verification process and teams connect to various data sources, directly or through third-party service providers, contact the human resources department of the borrower’s stated employer, or request pay stubs. However, we often do not verify a borrower’s stated tenure, job title, home ownership status or intention for the use of loan proceeds.
The factors above may result in loans being issued to otherwise non-qualified borrowers and/or impact our ability to effectively segment borrowers into relative risk profiles, each of which may impair our ability to offer attractive risk-adjusted returns for investors, which may cause investors to seek alternative investments from ours and our
business may suffer. Additionally, if borrowers default on loans that are not priced correctly because the information provided by the borrowers or third parties is inaccurate, investors may try to rescind their affected investments in these loans or the loans may not perform as expected and our reputation may be harmed.
Our ability to offer our notes depends upon our compliance with requirements under federal or state securities laws.
We issue member payment dependent notes sold pursuant to the Note Registration Statement. We qualify as a “well-known seasoned issuer,” which allows us to file automatically effective registration statements with the Securities and Exchange Commission (SEC). Under SEC rules, for certain material updates, we must file post-effective amendments, which, if we do not qualify as a “well-known seasoned issuer,” do not become effective until declared effective by the SEC. We may fail to maintain our “well-known seasoned issuer” status if we do not file SEC reports on a timely manner or for other reasons. In addition, if we fail to file our Annual Reports on Form 10-K or quarterly reports on Form 10-Q on a timely basis or are otherwise required to suspend use of a registration statement for the notes, we could be required to suspend offering of our notes until the deficiency is resolved. Because we offer notes on a continuous basis, securities law restrictions may also limit our ability to market or advertise to potential investors.
We are also currently required to register or qualify for an exemption in every state in which we offer securities. Qualification in a state can be a time-consuming process, often requiring periodic renewals. Failure to timely renew these registrations may require us to pay penalties, suspend further offerings until we regain compliance and make rescission offers in connection with previously completed investments.
Certain states in which we offer notes also impose special suitability standards and other conditions for operation in their states, restricting the persons and conditions under which we may make offerings in these states. We do not offer our notes in all states due to the restrictions of certain states. While we believe that we may now rely on federal preemption of state registration and qualification requirements, states may interpret federal law as applied to our notes differently, possibly requiring us to continue to make filings in or limit operations in those states. Regardless of any such registration, qualification or preemption, we are subject to both state and federal antifraud rules of each state in which we operate.
As a result of these requirements, actual or alleged non-compliance with federal or state laws or changes in federal or state law or regulatory policy could limit our ability to offer notes in certain states, require us to pay fines or penalties, or curtail our operations.
Fluctuations in interest rates could negatively affect transaction volume.
As of the date of this Report, all personal, auto, and small business loans facilitated through our lending marketplace are issued with fixed interest rates, and education and patient finance loans are issued with fixed or variable rates, depending on the type of loan. If interest rates rise, potential borrowers could seek to defer taking new loans as they wait for interest rates to decrease and/or settle, and borrowers of variable rate loans may be subject to increased interest rates, which could increase default risk. If interest rates decrease after a loan is made, existing borrowers may prepay their loans to take advantage of the lower rates. Furthermore, investors would lose the opportunity to collect the higher interest rate payable on the corresponding loan and may delay or reduce future loan investments. To the extent that we hold loans for sale on our balance sheet, we will be at risk to rising interest rates between origination and sale. In order to sell such loans, we may need to reduce the sale price in order to satisfy the yield expectations of our investors.
Since the most recent recession, the U.S. Federal Reserve has taken actions which have resulted in low interest rates prevailing in the marketplace for a historically long period of time. In 2018, the U.S. Federal Reserve raised its benchmark interest rate on multiple occasions. Although in 2019 the benchmark interest rate was lowered by the U.S. Federal Reserve, the interest rate environment is dynamic and interest rate increases may materially and negatively affect us, as rising interest rates could have a dampening effect on overall economic activity and/or the
financial condition of our customers, either or both of which could negatively affect demand for our products and services.
For many reasons, including those stated above, fluctuations in the interest rate environment may discourage investors and borrowers from participating in our lending marketplace and may reduce our loan originations, which may adversely affect our business.
Any significant disruption in service on our platform or in our technology systems, including events beyond our control, could have a material adverse effect on our operations.
We believe the technology platform that powers our lending marketplace enables us to deliver solutions to borrowers and investors and provides a significant time and cost advantage over traditional banks. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, customer service and reputation. Our failure to maintain satisfactory performance, reliability and availability of our technology and our underlying network infrastructure may impair our ability to attract new and retain existing borrowers and investors, which could have a material adverse effect on our operations.
Our platform systems are mirrored between two third-party owned and operated facilities. Our primary location is in Las Vegas, Nevada and is operated by Switch, Inc. Our secondary location is located in Santa Clara, California and is operated by CenturyLink. Our operations depend on each provider’s ability to protect its and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If our arrangement with either provider is terminated or if there is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.
Any interruptions or delays in our technology systems or service, whether as a result of third-party error, our error, natural disasters, terrorism, other man-made problems, or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowers and investors to abandon our lending marketplace, any of which could adversely affect our business, financial condition and results of operations.
We are exposed to cyber-attacks, data breaches, internal employee and other insider misconduct, computer viruses, physical and electronic break-ins and similar disruptions that may adversely impact our ability to protect the confidential information of our borrowers and our investors and that could adversely impact our reputation, business approach and financial performance.
Our business involves the collection, storage, processing and transmission of customers’ personal data, including financial information of borrowers and investors. The highly automated nature of our lending marketplace, our reliance on digital technologies and the types and amount of data collected, stored and processed on our systems make us an attractive target and subject to cyber-attacks, computer viruses, physical or electronic break-ins and similar disruptions. In addition, in certain circumstances we utilize third-party vendors, including cloud applications and services, to facilitate the servicing of borrower and investor accounts. Under these arrangements, these third-party vendors require access to certain customer data for the purpose of servicing the accounts. While we have taken steps to protect confidential information that we have access to, our security measures or those of our third-party vendors are subject to breach. These security breaches and other unauthorized access to our lending marketplace and servicing systems can result in confidential borrower and investor information being stolen and potentially used for criminal purposes. Security breaches or unauthorized access to confidential information expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. Breaches of
our security measures because of third-party action, employee error, third-party vendor error, malfeasance or otherwise, or because of design flaws in our software that are exposed and exploited, could adversely impact our relationships with borrowers and investors, and we could incur significant liability.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or customers’ data, disable or degrade service, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until after they have been launched against a target. Unauthorized parties can and have attempted to gain access to our systems and facilities through various means, including, among others, hacking into the systems or facilities of us or our partners or customers, or attempting to fraudulently induce our employees, partners, customers or others into disclosing user names, passwords, or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be state-sponsored and supported by significant financial and technological resources, making them even more difficult to detect. Computer malware, viruses and hacking, phishing and denial of service attacks by third parties have become more prevalent in our industry, and have occurred on our systems in the past and may occur on our systems in the future. Although to date the Company has not suffered material costs or disruption to our business caused by any such incident, any future security breach could have a material adverse impact on our relationships with our borrowers and our reputation, business operations and financial performance.
Federal and state regulators and many federal and state regulations require notice if data security breaches involve certain personal data. The notice may be difficult to provide in a timely fashion for many reasons, including due to the complexity of gathering, verifying and analyzing relevant information. Furthermore, these mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause borrowers and investors to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, we could lose borrowers, investors and ecosystem partners and our business and operations could be adversely affected. Additionally, our insurance policies carry a self-insured retention and coverage limits, which may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.
Cyber-attacks suffered by third parties could negatively affect our business.
We utilize certain information provided by third parties to facilitate the marketing, distribution, servicing and collection of loans. A cyber-attack suffered by a third-party that provides data to us could impact our ability to market, distribute, service or collect for borrowers or investors. For example, Equifax announced a significant cyber breach that impacted millions of consumers. We utilize certain information from Equifax to allow us to market our products through pre-screened offers to qualified borrowers. If a consumer elects to “freeze” their credit data, we will not be able to access their information to make these pre-screened offers.
In addition, if consumers cease to trust credit reporting agencies or other third-party data providers because of cyber-attacks, they may be less willing to participate in borrowing or investing activities generally, which could impact our business. Further, as a result of the release of personally identifiable information from a third-party platform, we could experience an increase in fraudulent loan applications or investor accounts. Under our policies, we reimburse investors for any loan obtained as a result of a verified identity fraud and any increase in identity theft could result in increased reimbursement costs.
We may incur substantial indebtedness and any failure to meet our debt obligations could adversely affect our business.
We have and may continue to enter into arrangements pursuant to which we can incur a significant amount of debt under our $120.0 million secured revolving credit facility and our $250.0 million warehouse credit facility. Asindebtedness. For example, as of December 31, 2017,2019, we have nohad $60.0 million in debt outstanding balance under the secured revolving credit facilityour Revolving Facility and $32.1$387.3 million in debt outstanding, in the aggregate, under our warehouse credit facilities.Warehouse Facilities. We may enter into additional financing arrangements, which could increase the aggregate amount of indebtedness we can incur.
Our ability to make payments on our debt, to repay our existing indebtedness when due, and to fund our business and operations and significant planned capital expenditures will depend on our ability to pay with available cash or generate cash in the future. This, to a certain extent, is subject to financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, if we cannot service our indebtedness, we may have to take actions such as utilizing available capital, limiting the facilitation of additional loans, selling assets, selling equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of our business strategy, prevent us from entering into transactions that would otherwise benefit our business and/or negatively affect our business. We also may not be able to refinance our indebtedness or take such other actions, if necessary, on commercially reasonable terms, or at all.
Furthermore, as stated earlier, we have and may increasingly securitize assets and offer other similar structured instruments, such as our new ClubCLUB Certificate product. To support these offerings and other initiatives, we have and will likely continue to use our credit facilities to finance the purchasing and holding of loans on our balance sheet,
to ultimately be used in connection with such offerings and initiatives. If, however, we are unable to consummate these types of offerings or other initiatives in accordance with our expectations, we may be required to hold loans on our balance sheet for longer than expected, or until the maturity of the loans. This may adversely impact our ability to repay our indebtedness when due and divert resources away from other projects and initiatives.
Some of our debt carries a floating rate of interest linked to variousthe London Inter-bank Offered Rate (LIBOR). On July 27, 2017, the United Kingdom Financial Conduct Authority (FCA) announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, while the FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices includingthrough 2021 to allow for an orderly transition to an alternative reference rate, it is possible that beginning in 2022, LIBOR will no longer be available as a reference rate. In particular, the interest rate of borrowings under our Personal Loan and Auto Loan Warehouse Credit Facilities, Revolving Facility and repurchase agreements are predominately based upon LIBOR. IfWhile these agreements generally include alternative rates to LIBOR, if a change in indices including the discontinuation or modification of LIBOR, results in interest rate increases on our debt, debt service requirements will increase, which could adversely affect our cash flow and operating results.
Credit and other information that we receive from borrowers or third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, Furthermore, for those agreements which may cause us to inaccurately price loans facilitated through our lending marketplace.
Our ability to review and select qualified borrowers depends on obtaining borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and we assign loan grades to loan requests based on our lending marketplace’s credit decisioning and scoring models that take into account reported credit score, other information reported by the consumer reporting agencies and the requested loan amount, in addition to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verifyinclude alternative rates to LIBOR, while we plan on working in good faith with the information obtained from the borrower’s credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:
become delinquentlenders thereto to establish an alternate benchmark rate, in the paymentevent that an agreement cannot be reached on an appropriate benchmark rate, the availability of an outstanding obligation;
defaulted onborrowings under these agreements could be adversely impacted. At this time, the Company does not expect a pre-existing debt obligation;
taken on additional debt;materially adverse change to its financial condition or
sustained other adverse financial events.
In addition, borrowers supply a variety of information that is included in the loan listings on our lending marketplace, and it may be inaccurate or incomplete. To verify a borrower’s identity, income or employment, our verification process and teams connect to various data sources, directly or through third-party service providers, contact the human resources department of the borrower’s stated employer, or request pay stubs. However, we often do not verify a borrower’s stated tenure, job title, home ownership status or intention for the use of loan proceeds.
If borrowers default on loans that are not priced correctly because the information provided by the borrowers or third parties is inaccurate, investors may try to rescind their affected investments in these loans or the loans may not perform as expected and our reputation may be harmed.
Our quarterly results may fluctuate significantly and may not fully reflect the longer term underlying performance of our business.
Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly liquidity as a result of a variety of factors, including as a result ofany such changes or any other reforms to LIBOR that may be enacted in the risks set forth in this “Risk Factors” section. The increased useUnited Kingdom or elsewhere.
Certain of our balance sheetcredit facilities have “Commitment Termination Dates,” at which point the Company’s ability to borrow additional funds ends under such facilities. We are working to amend and extend the timingCommitment Termination Dates of capital markets transactions has had an impactthese three facilities, or to replace them with substantially similar facilities. We are also evaluating additional facilities with existing and new financial institutions. Under the respective agreements, if not amended, extended, or replaced, any outstanding debt on the quarterly performance of the business in recent quarters, leading usCommitment Termination Dates would be repaid as an amortizing term loan, which would preclude our ability to reduce the earnings guidance or perform below the expectation of equity investors in a given period. Fluctuation in quarterly resultsdraw additional funds from such facility and may adversely affect the price ofimpact our common stock.
Our ability to offerfund certain projects and initiatives.
From time to time we may evaluate and potentially consummate acquisitions or other strategic transactions, which could require significant management attention, disrupt our notes depends uponbusiness and adversely affect our compliance with requirements under federal or state securities laws.financial results.
We issue borrower payment dependent notes sold pursuantmay evaluate and consider strategic transactions, combinations, acquisitions, dispositions or alliances. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be successful in negotiating favorable terms and/or consummating the Note Registration Statement. We qualify as a “well-known seasoned issuer,” which allows us to file automatically effective registration statements with the SEC. Under SEC rules, for certain material updates, we must file post-effective amendments, which,transaction and, even if we do not qualifyconsummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
as a “well-known seasoned issuer,” do not become effective until declared effective byAny strategic transaction, combination, acquisition, disposition or alliance will involve risks encountered in business relationships, including:
difficulties in assimilating and integrating the SEC. We may failoperations, personnel, systems, data, technologies, products and services of the acquired business;
inability of the acquired technologies, products or businesses to maintainachieve expected levels of revenue, profitability, productivity or other benefits;
difficulties in retaining, training, motivating and integrating key personnel;
diversion of management’s time and resources from our “well-known seasoned issuer” status if we do not file SEC reports on a timely mannernormal daily operations;
difficulties in successfully incorporating licensed or for other reasons. In addition, if we fail to fileacquired technology and rights into our Annual Reports on Form 10-K or quarterly reports on Form 10-Q on a timely basis or are otherwise required to suspend useplatform;
difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
difficulties in retaining relationships with customers, employees and suppliers of a registration statement for the notes, we could be required to suspend offeringacquired business;
risks of our notes until the deficiency is resolved. Because we offer notes on a continuous basis, securities law restrictions may also limit our ability to market or advertise to potential investors.
We are also currently required to register or qualify for an exemption in every stateentering markets in which we offer securities. Qualificationhave no or limited direct prior experience;
regulatory risks, including remaining in a state can be a time-consuming process, often requiring periodic renewals. Failuregood standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to timely renew these registrations maynew regulators with oversight over an acquired business;
assumption of contractual obligations that contain terms that are not beneficial to us, require us to pay penalties, suspend further offerings until we regain compliance and make rescission offers in connection with previously completed investments.
Certain states in which we offer notes also impose special suitability standards and other conditions for operation in their states, restricting the persons and conditions under which we may make offerings in these states. We do not offer our notes in all states due to the restrictions of certain states. While we believe that we may now rely on federal preemption of state registration and qualification requirements, states may interpret federal law as applied to our notes differently, possibly requiring us to continue to make filings inlicense or limit operations in those states. Regardless of any such registration, qualification or preemption, we are subject to both state and federal antifraud rules of each state in which we operate.
As a result of these requirements, actual or alleged non-compliance with federal or state laws or changes in federal or state law or regulatory policy or could limit our ability to offer notes in certain states, require us to pay fines or penalties, or curtail our operations.
Any failure to protect our ownwaive intellectual property rights could impairor increase our brand,risk for liability;
failure to successfully further develop the acquired technology;
liability for activities of the acquired or subject usdisposed of business before the acquisition or disposition, including patent and trademark infringement claims, violations of laws, regulatory actions, commercial disputes, tax liabilities and other known and unknown liabilities;
difficulty in separating assets and replacing shared services;
assumption of exposure to claims for alleged infringement by third parties, which could harmperformance of any acquired loan portfolios;
potential disruptions to our business.ongoing businesses; and
unexpected costs and unknown risks and liabilities associated with the acquisition.
We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisionsmay not make any transactions, combinations, acquisitions, dispositions or alliances, or any future transactions, combinations, acquisitions, dispositions or alliances may not be successful, may not benefit our business strategy, may not generate sufficient revenue to protect our proprietary technology, underwriting and credit decisioning credit data, processes and other intellectual property. However,offset the steps we take to protect our intellectual property rightsassociated costs or may be inadequate. Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to be infringing on such rights. We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our technology or services.
In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and couldnot otherwise result in the impairmentintended benefits. It may take us longer than expected to fully realize the anticipated benefits and synergies of these transactions, and those benefits and synergies may ultimately be smaller than anticipated or loss of portions of our intellectual property. In addition, any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our loan products or operating our platform or require that we comply with other unfavorable terms. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.
Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent us from processing or posting payments on loans, reduce the attractiveness of our lending marketplace and result in a loss of borrowers or investors.
In the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process applications or make loans available on our lending marketplace would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are
critical to our operations, customer service, reputation and our ability to attract new and retain existing borrowers and investors. Our platform systems are mirrored between two third-party owned and operated facilities. Our primary location is in Las Vegas, Nevada and is operated by Switch, Inc. Our secondary location is located in Santa Clara, California and is operated by CenturyLink. Our operations depend on each provider’s ability to protect its and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If our arrangement with either provider is terminated or if there is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.
Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters, terrorism, other man-made problems, or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recoverbe realized at all, data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowers and investors to abandon our lending marketplace, any of which could adversely affect our business financial condition and operating results.
Any transactions, combinations, acquisitions, dispositions or alliances may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations.
Fraudulent activity associated with our lending marketplace could negatively impact our operating results, brandoperations and reputationdilute the economic and cause the usevoting rights of our loanstockholders and the interests of holders of our indebtedness.
In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced products and services or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to decrease and our fraud lossesbe profitable. Further, we may also choose to increase.
We are subject to the risk of fraudulent activity associateddivest certain businesses or product lines that no longer fit with our lending marketplace, issuing banks, borrowers, investorsstrategic objectives. If we decide to sell assets or a business, we may have difficulty obtaining terms acceptable to us in a timely manner, or at all. Additionally, the terms of such potential transactions may expose the Company to ongoing obligations and third parties handling borrower and investor information. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. Under our agreements with investors, we are obligated to repurchase loans in cases of confirmed identity theft. The level of our fraud charge-offs and results of operations could be materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity or significant increases in fraudulent activity could lead to regulatory intervention, negatively impact our operating results, brand and reputation and lead us to take steps to reduce fraud risk, which could increase our costs.liabilities.
In addition, in the past, third parties have attempted to defraud individuals, some of whom may be potential customers of ours, by misappropriating our logos and represented themselves as LendingClub in e-mail campaigns to e-mail addresses that have been obtained outside of LendingClub. In one particular scheme, these third parties have represented to individuals that they may obtain a loan if they pay an “advance fee.” Individuals who believe that the campaigns are genuine may forward funds to these unaffiliated third parties. We take steps to prevent these and other third-party fraud schemes; however, we cannot always be successful in preventing individuals from suffering losses in these schemes. Individuals who suffer damages due to the actions of these unaffiliated third parties may negatively view LendingClub, causing damage to our brand and reputation and reducing our business.
Our ability to protectuse our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liabilities.
We may be limited in the confidential informationportion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. The Tax Cuts and Jobs Act (the Tax Act) enacted on December 22, 2017, makes broad and complex changes to the U.S. tax code. While future interpretative guidance of
the Tax Act and how many U.S. states will incorporate these federal law changes may have an impact on our business, the Tax Act’s reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, has reduced our deferred tax asset associated with net operating loss carryforwards (NOLs). A lack of future taxable income would adversely affect our ability to utilize our NOLs.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Future changes in our stock ownership as well as other changes that may be outside of our borrowerscontrol, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law.
We assess the available positive and investorsnegative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Finally, further changes to the federal or state tax laws or technical guidance relating to the Tax Act that would further reduce the corporate tax rate could operate to effectively reduce or eliminate the value of any deferred tax asset. Our tax attributes as of December 31, 2019 may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Our business may be adversely affected by cyber-attacks, internal employee or other insider misconduct, computer viruses, physical or electronic break-ins or similar disruptions.if our risk management framework does not effectively identify, assess and mitigate risk.
Our business involvesrisk management framework seeks to appropriately balance risk and return and mitigate our risks. We have established policies intended to regularly identify and assess our risk profile, including credit risk, pricing risk, liquidity risk, strategic risk and operational risk, and then implement appropriate processes and controls to mitigate the collection, storage, processing and transmission of customers’ personal data, including financial information of borrowers and investors. The highly automated naturerisk.
If our risk management framework does not effectively identify, assess and/or mitigate our risk profile, we could suffer unexpected losses or be adversely affected, which could have a material adverse effect on our business. For example, assessment of our lending marketplace and our reliance on digital technologiesrisk profile depends, in part, upon the use of forecasting models. If these models are ineffective at predicting future losses or are otherwise inadequate, we may make it an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physicalincur unexpected losses or electronic break-ins or similar disruptions.otherwise be adversely affected. In addition, in certain circumstances we utilize third-party vendors, including cloud applications and services, to facilitate the servicing of borrower and investor accounts. Under these arrangements, these third-party vendors require access to certain customer data for the purpose of servicing the accounts. While we have taken steps to protect confidential information that we have
access to, our security measures or those of our third-party vendors could be breached. Any accidental or willful security breaches or other unauthorized access to our lending marketplace or servicing systems could cause confidential borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information time-consuming and expensive litigation and negative publicity. If security measures are breached becausewe use may be inaccurate or incomplete, both of third-party action, employee error, third-party vendor error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our relationships with borrowers and investors could be severely damaged, and we could incur significant liability.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or customers’ data, disable or degrade service, or sabotage systems are constantly evolving,which may be difficult to detect quickly, and often areavoid. Additionally, there may be risks that exist, or that develop in the future, that we have not recognized until after they have been launched against a target. Unauthorized partiesappropriately anticipated, identified or mitigated.
Failure to maintain, protect and promote our brand may attemptharm our business.
Maintaining, protecting and promoting our brand is critical to gain accessachieving widespread acceptance of our products and services and expanding our base of borrowers and investors. Maintaining, protecting and promoting our brand depends on many factors, including our ability to continue to provide useful, reliable, secure and innovative products and services, as well as our systems or facilities through various means,ability to maintain trust.
Our brand can be harmed in many ways, including among others, hacking into the systems or facilities offailure by us or our partners or customers, or attempting to fraudulently induce our employees, partners, customers or others into disclosing user names, passwords, or othersatisfy expectations of service and quality, inadequate protection of sensitive information, whichfailure to maintain or provide adequate or accurate documentation and/or disclosures, compliance failures, failure to comply with contractual obligations, regulatory requests, inquiries or proceedings, litigation and other claims, employee misconduct and misconduct by our partners. We have also been, and may in turnthe future be, usedthe target of incomplete, inaccurate and/or misleading statements about our company, our business, and/or our products and services. Furthermore, our ability to accessmaintain, protect and promote our information technology systems. Certain effortsbrand is partially dependent on visibility and customer reviews on third-party platforms. Changes in the way these platforms operate could make the maintenance, protection and promotion of our products and services and our brand more expensive or more difficult. If we do not successfully maintain, protect and
promote our brand we may be state-sponsored and supported by significant financial and technological resources, making them even more difficultunable to detect.
Federal and state regulators and many federal and state regulations require notice if data security breaches involve certain personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may causemaintain and/or expand our base of borrowers and investors, to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, wouldwhich may materially harm our reputation, we could lose borrowers, investors and ecosystem partners and our business and operations could be adversely affected. Additionally, our insurance policies carry a self-insured retention and coverage limits, which may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.
Cyber-attacks suffered by third parties could negatively affect our business.
We utilize certain information provided by third parties to facilitate the marketing, distribution, servicing and collection of loans. A cyber-attack suffered by a third-party that provides data to us could impact our ability to market, distribute, service or collect for borrowers or investors. For example, Equifax recently announced a significant cyber breach that impacted millions of consumers. We utilize certain information from Equifax to allow us to market our products through pre-screened offers to qualified borrowers. If a consumer elects to “freeze” their credit data, we will not be able to access their information to make these pre-screened offers.
In addition, if consumers cease to trust credit reporting agencies or other third-party data providers because of cyber-attacks, they may be less willing to participate in borrowing or investing activities generally, which could impact our business. Further, as a result of the release of personally identifiable information from a third-party platform, we could experience an increase in fraudulent loan applications or investor accounts. Under our policies, we reimburse investors for any loan obtained as a result of a verified identity fraud and any increase in identity theft could result in increased reimbursement costs.
Third party service disruptions may prevent us from being able to score and decision loan applicants, which may adversely affect our business.
OurThe credit decisioning and scoring models we utilize are based on algorithms that evaluate a number of factors and currently depend on sourcing certain information from third parties, including consumer reporting agencies such as TransUnion, Experian or Equifax. In the event that any of third party from which we source information experiences a service disruption, whether as a result of maintenance, error, natural disasters, terrorism or security breaches, whether accidental or willful, our ability to score and decision loan applications may be adversely impacted. This may result in us being unable to approve otherwise qualified applicants, which may adversely impact our business by negatively impacting our reputation and reducing the number of loans we are able to facilitate.
Negative publicity and unfavorable media coverage could negatively affect our business.
Negative publicity about our industry or our company, including with respect to the quality and reliability of our lending marketplace, effectiveness of the credit decisioning or scoring models used in the lending marketplace, the effectiveness of our collection efforts, statements regarding investment returns, changes to our lending marketplace, our ability to grow our borrower and investor base at a rate expected by the market, our ability to effectively manage and resolve borrower and investor complaints, our ability to manage borrower and investor accounts in compliance with regulatory requirements which may not be clear, privacy and security practices, use of loan proceeds by certain borrowers of ours or other companies in our industry for illegal purposes, litigation, regulatory activity and the experience of borrowers and investors with our lending marketplace or services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our lending marketplace, which could harm our business and operating results. Harm to our reputation can arise from many sources, including employee misconduct, misconduct by our partners or partners of partners, other online lending marketplaces, outsourced service providers or other counterparties, failure by us or our partners to meet minimum standards of service and quality, inadequate protection of borrower and investor information and compliance failures and claims.
The collection, processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
We receive, transmit and store a large volume of personally identifiable information and other user data. There are federal, state and foreign laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations in numerous U.S. and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. Governments, regulators, the plaintiffs’ bar, privacy advocates and customers have increased their focus on how companies collect, process, use , store, share and transmit personal data. This regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertaincontinue doing so for the foreseeable future.future, which creates uncertainty. For example, the California Consumer Privacy Act (CCPA) of 2018, which became effective January 1, 2020, imposes more stringent requirements with respect to California data privacy. The CCPA will, among other things, give California residents expnaded rights to access and delete certain personal information, opt out of certain personal information sharing, and receive detailed information about how certain personal information is used. Additionally, the California Department of Justice published draft regulations to implement the CCPA. We cannot yet predict the full impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. We could also be adversely affected if other legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. Any actual or perceived failure to comply with data privacy laws or regulations, or related contractual or other obligations, or any perceived privacy rights violation, could lead to investigations, claims, and proceedings by governmental entities and private parties,
damages for contract breach, and other significant costs, penalties, and other liabilities, as well as harm to our reputation and market position.
We post on our website our privacy policies and practices concerning the collection, use, and disclosure of information. We also obtain consent from our borrowers to share information under certain conditions. Our failure, real or perceived, to comply with applicable privacy policies or federal, state or foreign laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user data could damage our reputation, discourage potential borrowers or investors from using our lending marketplace or result in fines or proceedings brought against us, our issuing banks or other third parties by governmental agencies, borrowers, investors or other third parties, one or all of which could adversely affect our business, financial condition and results of operations. In addition to laws, regulations and other applicable common law rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. We could also be subject to liability for the inappropriate use of information made available by us. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit use of our lending marketplace and harm our business.
Any failure to protect our own intellectual property rights could impair our brand, or subject us to claims for alleged infringement by third parties, which could harm our business.
We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, underwriting and credit decisioning credit data, processes and other intellectual property. However, the steps we take to protect our intellectual property rights may be inadequate. Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing. Further, as our business continues to expand we may increase our dependence on third parties to provide additional products and services. Third parties who are contractually obligated to protect our intellectual property may be the target of data breaches or may breach their obligations and disseminate, misappropriate or otherwise misuse our proprietary technology, underwriting and credit decisioning credit data, processes and other intellectual property. Additionally, our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to be infringing on such rights. We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our technology or services.
In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. In addition, any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products or operating our platform or require that we comply with other unfavorable terms. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.
Risk retention rules and recent developments in our business may increase our compliance costs, impair our liquidity and otherwise adversely affect our operating results.
We have been using, and may increasingly use, securitizations and other structured financingprogram transactions, like our CLUB Certificates, as a source of liquidity and financing for our business. Such transactions provide us with additional sources of investor demand for the consumer loans facilitated through our platform. If credit rating downgrades, market volatility, market disruptions, regulatory requirements or other factors impede our ability to
complete additional structured financingprogram transactions on a timely basis or upon terms acceptable to us, our ability to fund our business may be adversely affected.
Effective as of December 24, 2016, “risk retention” rules promulgated by U.S. federal regulators under the Dodd-Frank Act (the U.S. Risk Retention Rules) require a “securitizer” or “sponsor” of a securitization transaction to retain, directly or through a “majority-owned affiliate” (each as defined in the U.S. Risk Retention Rules), in one or more prescribed forms, at least 5% of the credit risk of the securitized assets. For the securitization transactions for which we have acted as “sponsor,” we have sought to satisfy the U.S. Risk Retention Rules by retaining a “vertical interest” (as defined in the U.S. Risk Retention Rules) through either a majority-owned affiliate (MOA) or directly on our balance sheet. For any CLUB Certificate transactions, we have sought to satisfy the U.S. Risk Retention Rules by retaining a 5% interest in the CLUB Certificate issued by the applicable series trust. See “PartIn addition to the discussion in this section, see“Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” Presentation”and “Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 6.7. Securitizations and Variable Interest Entities.” In addition, in order to facilitate certain investor offerings in Europe, we have structured twocertain of the securitizationssecuritization transactions for which we have acted as “sponsor” in 2017prior to complyJanuary 1, 2019 so they complied with the risk retention and ongoing monitoring and diligence requirements of (i) Articles 404-410 of the CRR,European Capital Requirements Regulation, as supplemented by E.U. secondary legislation, includingthe Commission Delegated Regulation (EU) No. 625/2014 and Commission Implementing Regulation (EU) No. 602/2014 (the CRR Requirements), (ii) Article 17 of the European Union Alternative Investment Fund Managers Directive and Articles 50-56 of the Alternative Investment Fund Managers Regulation (EU) No. 231/2013 (the AIFM Regulation,Requirements), and (iii) Article 135(2) of EU Directive 2009/138/EC, as supplemented by Articles 254-257 of the Commission Delegated Regulation (EU) No. 2015/35 (the Solvency II Regulation,Requirements, together with any related technical standards or guidelines (the E.U.the CRR Requirements and the Solvency II Requirements, the Old EU Risk Retention Rules). We have sought to satisfy the E.U.Old EU Risk Retention Rules with respect to such securitization transactions by retaining a “material net economic interest” (as defined in the E.U.Old EU Risk Retention Rules) directly on our balance sheet.
Furthermore, weThe Old EU Risk Retention Rules were replaced by new requirements that are applicable to securitizations in respect of which the relevant securities were issued on or after January 1, 2019. For securitizations in respect of which the relevant securities were issued before January 1, 2019, the Old EU Risk Retention Rules continue to apply. The new requirements were adopted by the European Parliament and the Council of the European Union as Regulation (EU) 2017/2402 of December 12, 2017 (the New EU Risk Retention Rules, together with the Old EU Risk Retention Rules and the U.S. Risk Retention Rules, the Risk Retention Rules). There can be no assurance that our securitizations issued after January 1, 2019 will fully comply with the New EU Risk Retention Rules or new EU due diligence and transparency requirements which may have a negative effect on our ability to complete additional securitization transactions.
We have also participated in other securitizations for which we have determined that we are not the “sponsor,” and accordingly, we have not sought to comply with any requirementsRisk Retention Rules that would be applicable to the “sponsor” of those transactions. The U.S. Risk Retention Rules are subject to varying interpretations, and one or more regulatory or governmental authorities could take positions with respect to the U.S. Risk Retention Rules that conflict with, or are inconsistent with, the U.S. Risk Retention Rules as understood or interpreted by us, the securitization industry generally, or past or current regulatory or governmental authorities. There can be no assurance that applicable regulatory or governmental authorities will agree with any of our determinations described above, and if such authorities disagree with such determinations, we may be exposed to additional costs and expenses, in addition to potential liability. Furthermore, we expect that compliance with the U.S. Risk Retention Rules (and other related laws and regulations), as currently understood by us, may entail the implementation of new forms, processes, procedures, controls and infrastructure. Such implementation may be costly and may adversely affect our operating results.
In addition to the increased costs we expect to be generated by our efforts to comply with the U.S.applicable Risk Retention Rules, and the E.U. Risk Retention Rules, as applicable, which may be significant, we expect the U.S.compliance with any applicable Risk Retention Rules and the E.U. Risk Retention Rules, as applicable, towill tie up our capital, which could potentially have been deployed in other ways that could have generated better value for our shareholders. Holding risk retention interests or loans in contemplation of structured financing increases our
exposure to the performance of the loans that underlie or are expected to underlie those transactions. Accordingly, although compliance with the U.S.applicable Risk Retention Rules and the E.U. Risk Retention Rules, as applicable, would be expected to more closely align our incentives with those of the investors in our loans, it is also expected that poor loan performance may have a heightened adverse effect on the value of our shares. This may exacerbate the negative effects of poor loan performance on the value of our shares.
If we breach representations or warranties that we made in our securitization, whole loan or CLUB Certificate transactions, or if either we suffer a direct or indirect loss in our retained interests in these transactions, our financial condition could be harmed.
In 2017 we sponsored fourWe sponsor a number of sales of unsecured personal whole loans through asset-backed securitizations. In connection with these securitizations, as well as our whole loan and CLUB Certificate transactions, we mademake certain customary representations, warranties and covenants. If there is a breach of those representations and warranties that materially and adversely affects the value of the subject loans, then we will be required to either cure the breach, repurchase the affected loans from the issuingpurchasing entity, replace the affected loans with another loanother loans or make a loss of value payment, as the case may be. Any losses that result could be material and have an adverse effect on our financial condition.
For a description of the interests we have retained in connection with complying with risk retention rules applicable to us as a sponsor of securitization transactions, see “Risk“Risk retention rules and recent developments in our business may increase our compliance costs, impair our liquidity and otherwise adversely affect our operating results.” In the event that we suffer losses on all or a portion of the interests in any securitization transaction that we have retained (whether to comply with applicable risk retention rules or otherwise), our financial condition could be harmed.
We may enter into similar transactions in the future and those transactions couldare likely to entail similar and other substantial risks.
From timeIf we are unable to time we may evaluateoffer investors a satisfactory breadth and potentially consummate acquisitions or other strategic transactions, which could require significant management attention, disruptvolume of investment opportunities, our business and adversely affect our financial results.
We may evaluate and consider strategic transactions, combinations, acquisitions, dispositions or alliances. These transactions could be material to our financial condition and results of operations may be materially harmed.
We invest in our lending marketplace platform and regularly iterate our processes to provide improved and more efficient investment opportunities, which includes efforts to provide investors the opportunity to invest in a broad selection of loans. However, various factors may contribute to certain loans being available only in a limited quantity or being entirely unavailable to certain investors.
With respect to our member payment dependent notes, our lending marketplace platform allows investors to select which loans to invest in manually, via an application program interface (API) or by using our automated investing service which selects notes based on investment criteria selected by the investor. Loans selected for investment by a particular investor or group of investors may not be available for investment to other investors. This variability in the availability of loans for investment may cause returns to vary from investor to investor. For example, certain loans selected via API or by manual investors may be unavailable when the automated investing service orders are placed and therefore returns of manual investors or investors utilizing API may vary from, and be higher than, the returns from our automated investing service if consummated. If wemanual investors or investors utilizing API are able to identify an appropriateand select higher performing loans.
In addition, some of our agreements with platform investors contain provisions regarding the manner in which our lending marketplace platform product operates that could constrain the manner in which our lending marketplace platform product can develop, particularly with respect to how loans are selected for investment. Some of these agreements provide for significant damages in the event of a breach and some provide for liquidated damages in the event that we are unable to perform and deliver in accordance with the contractual specifications and schedule. These agreements could constrain the development of our lending marketplace, including efforts to offer a breadth of investment opportunities for and among a variety of investors, and/or result in significant damages that could impact our results in a given period.
If investors, automated or otherwise, are unable to invest in certain categories of loans, are unable to invest at the volume they desire, perceive that they are not offered the same investment opportunities as other investors and/or are dissatisfied with the risk-adjusted return they receive from investing on our platform, they may seek alternative investments from ours which may materially harm our business opportunity,and results of operations.
If we fail to attract and retain our highly skilled employees needed to support our business, we may not be able to successfully consummateachieve our anticipated level of growth and our business could suffer.
We believe our success depends on the transactionefforts and even if we do consummate suchtalents of our employees, including software engineers, financial, credit and risk personnel and marketing professionals. Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled technical and financial personnel, particularly in the San Francisco Bay Area, is extremely intense. Building and maintaining a transaction, we may be unablepositive culture and work environment that reinforces the Company’s values is also critical to obtain the benefits or avoid the difficultiesattracting and risks of such transaction.retaining employees.
Any strategic transaction, combination, acquisition, disposition or alliance will involve risks encountered in business relationships, including:
difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;
inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
difficulties in retaining, training, motivating and integrating key personnel;
diversion of management’s time and resourcesWe have had a high attrition rate from our normal daily operations;
difficulties in successfully incorporating licensed or acquired technology and rights into our platform;
difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
risks of entering markets in which we have no or limited direct prior experience;
regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subjectexpect our attrition rate to new regulators with oversight over an acquired business;
assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
failure to successfully further develop the acquired technology;
liability for activities of the acquired business before the acquisition, including patent and trademark infringement claims, violations of laws, regulatory actions, commercial disputes, tax liabilities and other known and unknown liabilities;
assumption of exposure to performance of any acquired loan portfolios;
potential disruptions to our ongoing businesses; and
unexpected costs and unknown risks and liabilities associated with the acquisition.
remain elevated. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. Additionally, changes in U.S. immigration policy may make it difficult to renew or obtain visas for certain highly skilled employees that we have hired or are recruiting.
In addition to attracting and retaining highly skilled employees in general, our future performance depends, in part, on our ability to attract and retain key personnel, including our executive officers, senior management team and other key personnel, all of whom would be difficult to replace. The loss of the services of our executive officers or members of our senior management team, and the process to replace any transactions, combinations, acquisitions, dispositionsof them, would involve significant time and expense and distraction that may significantly delay or alliances, or any future transactions, combinations, acquisitions, dispositions or alliances may not be successful, may not benefitprevent the achievement of our business strategy, may not generate sufficient revenue to offset the associated costsobjectives or may not otherwise result in the intended benefits. Any transactions, combinations, acquisitions, dispositionsimpair our operations or alliances may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our resultsresults.
of operations and dilute the economic and voting rights of our stockholders and the interests of holders of our indebtedness. In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.
If we were required to register as a broker-dealer under federal or state law, our costs could significantly increase or our operations could be impaired.
We issue securities and, in certain instances, offer them directly to investors. We are not registered as a broker-dealer with the SEC nor do we operate as a registered broker-dealer in any jurisdiction. This limits the methods and manners by which we may market and sell our securities. If a regulatory body were to find that our activities require us to register as a broker-dealer or to market and sell our securities only through a registered broker-dealer, we may have to constrain our current business activities and we could be subject to fines, rescission offers or other penalties, and our compliance costs and other costs of operation could increase significantly.significantly, all of which could materially adversely affect our business and results of operations.
We have incurred net losses in the past and may incur net losses in the future.
As of December 31, 2017,2019, our accumulated deficit was $389.4$548.5 million. We anticipate that ourOur operating expenses willmay continue to be elevated for the foreseeable future as we continue toresolve additional matters that arose from legacy management (including indemnification legal expenses paid by the Company for former employees), settle regulatory investigations and examinations, enhance our compliance systems, reestablish the growth of our business, attract borrowers, investors and partners, continue to defend the Company and indemnify individuals in connection with ongoing litigation and regulatory matters and further enhance and develop our loan products, lending marketplace and platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We may incur additional net losses in the future and may not maintain profitability on a quarterly or annual basis.
We may have to constrain our business activities to avoid being deemed an investment company under the Investment Company Act of 1940.
In general, a company that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed to be an investment company under the Investment Company Act of 1940, as amended (Investment Company Act). The Investment Company Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company. To avoid being deemed an investment company, we may decide not to broaden our offerings, which could require us to forego attractive opportunities. We may also apply for formal exemptive relief to provide additional clarity on our status under the Investment Company Act. We may not receive such relief on a timely basis, if at all, and such relief may require us to modify or curtail our operations. If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensomeadditional compliance requirements and our activities may be restricted, which wouldcould materially adversely affect our business, financial condition and results of operations.
We design, create and offer products and services, including our platform, which incorporate proprietary technologies that involve risks and weOur business operations may not realize the degree or timing of benefits anticipated.
We operate a platform to offer proprietary credit products to borrowers and exposure to credit for investors. Our products and services operate in a very dynamic industry and, to stay relevant and effective, we will utilize technology to develop our products and design our platform for greater efficiency. We expect spending in technology and data management and science will increase over time as we add computer scientists, designers, software engineers, data scientistsbe adversely impacted by political events, terrorism, public health issues, natural disasters, labor disputes and other employees. We seekbusiness interruptions.
Our business operations are subject to invest efficiently in several areas of technologyinterruption by, among other things, political events, terrorism, public health issues, natural disasters, labor disputes and data and expansion of new and existing product categories and service offerings, such as our platform product. We also invest in our technology infrastructure to enhance the customer experience, improve our processes and more efficiently match borrower and investor demand.To best take advantage of these continued advances in technology, we are investing in initiatives to build and deploy proprietary and efficient software.
We seek to achieve growth through the design, development, and support ofother events which could decrease demand for our products and services includingor make it difficult or impossible for us to deliver a proprietary loan platform that incorporates advanced technologies. Our products and services, including our platform, change as we invest substantial amounts in research and development efforts to pursue advancements and better use our data. If our design and development efforts are delayed, or if third-party developers cannot timely deliver or performsatisfactory experience to our standards, weborrowers and investors, any of which may not meet customers’ schedules or expectations. Such issueshave a material adverse impact on our business, financial condition and results of operations. For example, a federal government shutdown could result in material additional costs, including penalties that could be assessed under existing contractual provisions. Ourimpair our ability to realizesupport our structured program initiatives and/or resolve outstanding litigation or regulatory inquiries with the anticipated benefits of our technological advancements depends on a variety of factors, including meeting development, production, third-party requirements and approval and regulatory approval schedules; execution of internal and external performance plans; availability of third-party developers and suppliers; hiring and training of qualified personnel; achieving cost and production efficiencies; identification of emerging technological trends in our markets; validation of proprietary technologies; the level of customer interest in new technologies and products; and borrower and investor acceptance of our products and products that incorporate technologies we develop. These products and services may incorporate additional technologies developed by third parties and involve additional risks and uncertainties. As a result, the performance and market acceptance of these third-party products and services could affect the level of customer interest and acceptance of our own products in the marketplace.federal government.
Any development efforts divert resources from other potential investments in our businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products or products that incorporate our technologies may not develop or grow as we anticipate. We or our customers, suppliers or subcontractors may encounter difficulties in developing and producing new products and services, and may not realize the degree or timing of benefits initially anticipated or may otherwise suffer significant adverse financial consequences. Due to the design complexity of our products, we may in the future experience delays in completing the development and introduction of platform enhancements and new products. Any delays could result in increased development costs or deflect resources from other projects.
In addition, some of our agreements with platform investors contain provisions regarding the manner in which our lending marketplace platform product operates that could constrain the manner in which our lending marketplace platform product can develop, particularly with respect to how loans are selected for investment. Some of these agreements provide for significant damagesFurthermore, in the event of a breach. These agreements could constrain the developmentany disruption to our operations or those of the marketplacecompanies with whom we do business with, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume or result in significant damages that could impact our results in a given period.
Our lending marketplace platform allows investors to select loans manually and build their portfolio note by note or, alternatively, by using our automated investing service to select loans based on investment criteria selected by the investor. Certain loans selected by manual service investors may be unavailable when the automated investing service orders are placed. Accordingly, the returnsmaintain operations, any of the note holders using the automated investing service may vary from the returns of the note holders using the manual service, which may be higher than our automated investing service if manual service investors are able to identify and select higher performing loans.
If we fail to accurately estimate our costs or the time required to support or complete a product enhancement, including any platform enhancements, the profitability of our products and services may be materially and adversely affected. Some of our contracts provide for liquidated damages in the event that we are unable to perform and deliver in accordance with the contractual specifications and schedule. In addition, we may face customer directed cost reduction targets that could have a material adverse effectimpact on our business, financial condition and results of operations.
Misconduct and errors by our employees and third-party service providers could harm our business and reputation.
We are exposed to many types of operational risk, including the profitabilityrisk of misconduct and errors by our employees and other third-party service providers. Our business depends on our employees and third-party service providers to facilitate the operation of our contracts. Furthermore, we cannot be sure that our competitors will not develop competing technologies which gain market acceptance in advancebusiness and process a large number of or insteadincreasingly complex transactions, and if any of our platformemployees or third-party service providers provide unsatisfactory service or take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and products. The possibility exists thatinvestors, we could lose customers, harm our competitors might develop new technologyreputation, be liable for damages, be subject to repurchase obligations and be subject to complaints, regulatory actions and penalties.
While we have internal procedures and oversight functions to protect the Company against this risk, we could also be perceived to have facilitated or offerings that might cause our existing technologyparticipated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and offeringstherefore be subject to become obsolete. civil or criminal liability.
Any of the foregoingthese occurrences could have a material adverse effect onresult in our competitive position,diminished ability to operate our business, potential liability to borrowers and investors, inability to attract future borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations, cash flows or financial condition.operations.
Any delay in the implementation of our technology systems could disrupt our operations and cause unanticipated increases in our costs.
We believe the technology platform that powers our lending marketplace enables us to deliver solutions to borrowers and investors and provides a significant time and cost advantage over traditional banks. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to attract new and retain existing borrowers and investors. In addition, our future growth prospects are highly dependent on our ability to implement changes to our technology platform to support the future demands of our customers and industry. Our failure to implement changes to our technology platform and adapt to our customers’ changing technological needs and requirements or to hire and retain qualified personnel and maintain our engineering and technological expertise could have a material adverse effect on our operations.
Some aspects of our platform include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Aspects of our platform include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. Open source license terms are often ambiguous, and there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses. Therefore, the potential impact of such terms on our business is somewhat unknown. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products. There can be no assurance that efforts we take to monitor the use of open source software to avoid uses in a manner that would require us to disclose or grant licenses under our proprietary source code will be successful, and such use could inadvertently occur. This could harm our intellectual property position and have a material adverse effect on our business, results of operations, cash flow, and financial condition. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use of open source software cannot be eliminated, and could adversely affect our business.
Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors, loss of revenue or liability for damages, any of which could adversely affect our business and financial results.
Misconduct and errors byIf one or more of our employees and third-party service providers could harm our business and reputation.counterparty financial institutions default on their financial or performance obligations to us or fail, we may incur significant losses.
We have significant amounts of cash and cash equivalents in accounts with banks or other financial institutions. Certain banks and financial institutions are also lenders under our credit facilities. We regularly monitor our exposure to counterparty credit risk, and actively manage this exposure to mitigate the associated risk. Despite these efforts, we may be exposed to many types of operational risk, including the risk of misconductdefault by, or deteriorating operating results or financial condition or failure of, these counterparty financial institutions. The risk of counterparty default, deterioration, or failure may be heightened during economic downturns and errors by our employees and other third-party service providers. Our business depends on our employees and third-party service providers to process a large numberperiods of increasingly complex transactions, and if anyuncertainty in the financial markets. If one of our employeescounterparties were to become insolvent or third-party service providers take, convertfile for bankruptcy, our ability to recover losses incurred as a result of default or misuse funds, documentsto access or datarecover assets that are deposited, held in accounts with, or fail to follow protocol when interacting with borrowers and investors, we couldotherwise due from, such counterparty may be liable for damages, be subject to repurchase obligations and subject to regulatory actions and penalties.
We could also be perceived to have facilitated or participated inlimited by the illegal misappropriation of funds, documents or data,counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure to follow protocol, and thereforeof one or more of our counterparties, we may be subject to civil or criminal liability.
Any of these occurrences could result in our diminished abilityunable to operate our business potential liability to borrowers and investors, inability to attract future borrowers and investors, reputational damage, regulatory interventionin the ordinary course, which would materially adversely impact our results of operations and financial harm, which could negatively impact our business, financial condition and results of operations.condition.
If we fail to attract and retain our highly skilled employees needed to support our business, we may not be able to achieve our anticipated level of growth and our business could suffer.
We believe our success depends on the efforts and talents of our employees, including software engineers, financial personnel and marketing professionals. Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled technical and financial personnel, particularly in the San Francisco Bay Area, is extremely intense. We have had a high attrition rate from employees and have seen that attrition rate increase. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. Additionally, changes in U.S. immigration policy may make it difficult to renew or obtain visas for certain highly skilled employees that we have hired or are recruiting.
In addition to attracting and retaining highly skilled employees in general, our future performance depends, in part, on our ability to attract and retain key personnel, including our executive officers, senior management team and other key personnel, all of whom would be difficult to replace. The loss of the services of our executive officers or members of our senior management team, and the process to replace any of them, would involve significant time and expense and distraction that may significantly delay or prevent the achievement of our business objectives or impair our operations or results.
If our registered investment advisor, LendingClub Asset Management, LLC (LCAM) (formerly known as LC Advisors, LLC), were found to have violated the Investment Advisers Act, our ability to raise sufficient investor commitments to meet borrower demand could be impaired.
Our subsidiary, LCAM, acts as an advisor to certain private funds and accredited investors, including those that invest in managed accounts that rely on a third-party adviser or manager to manage their investment through our lending marketplace. Registered investment advisers are subject to a number of regulatory and legal requirements, including fiduciary duties, conflicts of interest, advertising restrictions and custody requirements.
As previously described, the 2016 Board Review discovered that the investment parameters of one of the funds advised by LCAM, specifically with respect to the allocation of 60-month loans held by the fund, was out of tolerance. Further, we reviewed the methodologies used to determine the net asset values and monthly return figures reported for six private investment funds managed by LCAM and determined that adjustments were made to the valuation of the Fund’s assets that were not consistent with generally accepted accounting principles (GAAP). These adjustments affected the direction and the specific returns reported in monthly statements sent to limited partners. We reimbursed limited partners who, during the life of any fund, entered or exited the funds and were adversely impacted by these adjustments. We subsequently liquidated the assets held in six of the funds advised by LCAM and distributed the proceeds to investors, some of whom elected to roll their proceeds into newly created private funds advised by LCAM. As previously disclosed, these matters were included in the 2016 Board Review, and such matters are being reviewed by the SEC and other state and federal regulatory agencies.
We believe we have conducted, and we intend to continue to conduct, the business of LCAM in substantial compliance with the Investment Advisers Act of 1940, as amended (Investment Advisers Act) and applicable
fiduciary duties. If, however, we are deemed to have breached any of our obligations under the Investment Advisers Act, the activities of LCAM could be restricted, suspended or even terminated.
Short of any regulatory enforcement action, because LCAM is the general partner or investment manager for a series of private funds, we could be perceived as having a conflict of interest regarding access to loans versus other platform investors. While we have implemented controls and processes to mitigate any potential conflicts of interest, those controls and processes may prove to be ineffective. If this were to occur, our ability to provide investors with the opportunity to invest through private funds and managed accounts could be severely curtailed, our reputation could be damaged and we may not be able to sufficiently meet borrower and investor demand for loans, which could harm our business.
Investors in the limited partnership interests offered by LCAM or CLUB Certificates offered by the Company may be deemed to have been solicited by general solicitation or general advertising, and such investors could seek to rescind their purchase.
We offer member payment dependent notes publicly pursuant to the Note Registration Statement. In addition, the Company and LCAM offersells CLUB Certificates. Sales of CLUB Certificates and limited partnership interests, respectively. These offerings by the Company and LCAM are made privatelythrough private transactions with potential investors and are separate from the public offering of the member payment dependent notes. Because of the fact-specific
nature of what types of activities might constitute a general solicitation or general advertising, it is possible that some of thesethe CLUB Certificate investors could assert that they became interested in an investment in these private offerings by LCAM or the CompanyCLUB Certificates through a general solicitation or general advertising with regard to those offeringsCLUB Certificates or through the public offering of member payment dependent notes. If it was determined that an investor’s interest in the CLUB Certificates or limited partnership interests was the result of a general solicitation or general advertisement, the investor could claim that the sale of CLUB Certificates or limited partnership interests violated Section 5 of the Securities Act and could seek to rescind their purchase or seek other remedies, subject to any applicable statute of limitations. We would contest vigorously any claim that a violation of the Securities Act occurred, however, litigation is inherently uncertain and can be expensive and time consuming.
We have not reviewed our compliance with foreign laws regarding the participation of non-U.S. residents on our lending marketplace.
From time to time, non-U.S. residents invest in loans directly through our lending marketplace. We are not experts with respect to all applicable laws in the various foreign jurisdictions from which an investor may be located, and we cannot be sure that we are complying with applicable foreign laws. Failure to comply with such laws could result in fines and penalties payable by us, which could reduce our profitability or cause us to modify or delay planned expansions and expenditures, including investments in our growth. In addition, any such fines and penalties could create negative publicity, result in additional regulatory oversight that could limit our operations and ability to succeed, or otherwise hinder our plans to expand our business internationally.
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liabilities.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. The Tax Cuts and Jobs Act (the Tax Act) enacted on December 22, 2017, makes broad and complex changes to the U.S. tax code. While future interpretative guidance of the Tax Act and how many U.S. states will incorporate these federal law changes may have an impact on our business, the Tax Act’s reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, has reduced our deferred tax asset associated with net operating loss carryforwards (NOLs). A lack of future taxable income would adversely affect our ability to utilize our NOLs.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Future changes in our stock ownership as well as other changes that may be outside of our control, could
result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Finally, further changes to the federal or state tax laws or technical guidance relating to the Tax Act that would further reduce the corporate tax rate could operate to effectively reduce or eliminate the value of any deferred tax asset. Our tax attributes as of December 31, 2017 may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Our credit facilities provide our lenders with first-priority liens against substantially all of our assets and containscontain certain affirmative and negative covenants and other restrictions on our actions, and could therefore limit our operational flexibility or otherwise adversely affect our financial condition.
We have certain credit facilities that contain restrictive covenants relating to our capital raising activities and other financial and operational matters. These restrictive covenants may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.acquisitions or other strategic transactions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired, and our business may be harmed.
If we fail to perform under the loan agreements for these credit facilities by, for example, failing to make timely payments or failing to comply with the required total leverage ratio, our operations and financial condition could be adversely affected. For more information regarding the covenants and requirements, see “Part II – Item 8 –8. Financial Statements and Supplementary Data – 13. Debt” Notes to Consolidated Financial Statements – Note 14. Debt”included in this Report.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our stock price has been and will likely continue to be volatile.
Our stock price has declined significantly since the end of the first quarter of 2016 and has exhibited substantial volatility. Our stock price may continue to fluctuate in response to a number of events and factors, such as quarterly operating results; changes in our financial projections provided to the public or our failure to meet those projections; changes in the credit performance on our platform; the public’s reaction to our press releases, other public announcements and filings with the SEC; progress and resolution with respect to existing litigation and regulatory inquiries; significant transactions, or new features, products or services by us or our competitors; changes in financial estimates and recommendations by securities analysts; media coverage of our business and financial performance; the operating and stock price performance of, or other developments involving, other companies that investors may deem comparable to us; trends in our industry; any significant change in our management; and general economic conditions.
In addition, the stock market in general, and the market prices for companies in our industry, have experienced volatility that often has been unrelated to operating performance.volatility. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Price volatility over a given period may cause the average price at which we repurchase our own stock to exceed the stock’s price at a given point in time. Volatility in our stock price also impacts the value of our equity compensation, which affects our ability to recruit and retain employees. In addition, some companies that have experienced volatility in the market price of their stock, including us, have been subject to securities class action litigation. We have been the target of this type of litigation and may continue to be a target in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
If we fail to meet expectations related to future growth, profitability, or other market expectations, our stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention. A sustained decline
We are subject to ownership concentration by certain significant stockholders.
Ownership of our common stock is concentrated among certain stockholders. For example, per filings with the SEC, Shanda beneficially owns shares of our common stock representing approximately 22% of LendingClub Corporation’s voting power as of December 31, 2019.
Although we recently entered into an agreement whereby Shanda will exchange, subject to certain closing conditions, all shares of our common stock held by them for newly issued non-voting convertible preferred stock to enable the Company to pursue its bank charter initiative, any current or future stockholder or group of stockholders with a significant voting and/or economic concentration individually or in aggregate could determine to vote shares or otherwise exercise influence in a manner that may be contrary to the interests of the Company and/or other minority stockholders. For example, such stockholder(s) could sell shares in a manner that could affect our stock price or impede the Company from executing on an initiative for the benefit of all stockholders. In addition, the concentration of ownership may act as a deterrent to other potential investors purchasing our stock.
Future issuances and/or sales of common stock may result in significant dilution to our stockholders and may place downward pressure on our stock price.
We recently entered into an agreement whereby Shanda will exchange, subject to certain closing conditions, all shares of our common stock held by them for newly issued non-voting convertible preferred stock to enable the Company to pursue its bank charter initiative. In connection with the exchange, the Company will provide Shanda registration rights and a one-time cash payment. Under a registration rights agreement Shanda is entitled to certain registration rights with respect to Company securities held by it, which may facilitate their ability to sell their holdings. The market capitalizationprice of our common stock could leaddecline as a result of sales by our existing stockholders in the market, or the perception that these sales could occur.
Further, we may issue additional equity securities to impairment charges.raise capital, support acquisitions, or for a variety of other purposes. We also utilize equity-based compensation as an important tool in recruiting and retaining employees and other service providers. Additional issuances of our stock may be made pursuant to the exercise or vesting of new or existing stock options or restricted stock units, respectively. Dilution to existing holders of our common stock from equity-based compensation and other additional issuances could be substantial and may place downward pressure on our stock price.
Our quarterly results may fluctuate significantly and may not fully reflect the longer term underlying performance of our business.
Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly. These fluctuations may be due to a variety of factors, some of which are outside of our control and may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in
our quarterly financial results include our ability to attract and retain new customers, seasonality in our business, the costs associated with and outcomes of legal and regulatory matters, volatility related to fraud and credit performance, the timing of capital markets transactions, variability in the valuation of loans held on our balance sheet, changes in business or macroeconomic conditions and variety of other factors, including as a result of the risks set forth in this “Risk Factors” section. Fluctuation in quarterly results and how we perform relative to guidance may adversely affect the price of our common stock.
If we were to become subject to a bankruptcy or similar proceeding, the right of payment of investors in our member payment dependent notes may be senior to the right of payment of our stockholders and there may not be value recoverable by our stockholders.
Under the terms of the member payment dependent notes offered through our lending marketplace, we are obligated to pay principal and interest on each member payment dependent note on a non-recourse basis only if and to the extent that we receive principal, interest or late fee payments from the borrower on the corresponding loan, but the member payment dependent notes become fully recourse to us if we fail to pay such obligation, which would include being prohibited from making such payments as a result of a bankruptcy or similar proceeding, or if we breach a covenant under the indenture governing the member payment dependent notes. In a bankruptcy or similar proceeding due to a default under current or future indebtedness, an action for repurchase or rescission of securities or other event, there is uncertainty regarding whether a holder of a member payment dependent note has any right of payment from our assets other than the corresponding loan. It is possible that a member payment dependent note holder could be deemed to have a right of payment from both the corresponding loan and from some or all of our other assets, in which case the member payment dependent note holder would have a claim to the proceeds of our assets that is senior to any right of payment of the holders of our common stock, regardless of whether we have received any payments from the underlying borrower, making it highly unlikely that there would be any value recoverable by our stockholders.
We arerecently entered into an agreement whereby Shanda will exchange, subject to ownership concentration by certain significant stockholders.
Ownership of our common stock is concentrated among certain stockholders. For example, Shanda Investment Group Limited beneficially ownsclosing conditions, all shares of our common stock representing approximately 20%held by them for newly issued non-voting convertible preferred stock to enable the Company to pursue its bank charter initiative. In connection with the exchange, the Company will provide Shanda registration rights and a one-time cash payment. Under a registration rights agreement Shanda is entitled to certain registration rights with respect Company securities held by it, which may facilitate their ability to sell their holdings. Additional shares of LendingClub Corporation’s voting power as of December 31, 2017. We do not have any restrictions on any stockholderour common stock trading in favor of LendingClub Corporation other than as may be required by applicable law. Any single stockholder with a significant concentration could determine to vote shares in a manner that may be contrary to the interests of other minority stockholders, or such stockholder could sell shares in a manner that could affect our stock price. In addition, the concentration of shares may actpublic market, as a deterrent to other potential investors purchasingresult of the exercise of such registration rights, may have an adverse effect on the market price of our stock.securities.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our restated certificateCertificate of incorporationIncorporation and restated bylaws,Bylaws contain provisions that can have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit only our board of directors to establish the number of directors and fill vacancies on the board;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
require two-thirds vote to amend some provisions in our restated certificateCertificate of incorporationIncorporation and restated bylaws;Bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan (also known as a “poison pill”);
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting;
do not provide for cumulative voting; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In connection with the Company’s bank charter initiative, we have adopted a Charter Protection Agreement which is designed to deter ownership positions in the Company’s stock in excess of certain thresholds set forth by the Federal Reserve under the Bank Holding Company Act by diluting any stockholder who amasses an ownership position in excess of such thresholds without the Company’s approval. To ensure the arrangement is tailored to protect the Company and not unduly infringe on the rights of stockholders, the rights distributed pursuant to the Charter Protection Agreement shall automatically be redeemed upon the earlier of 18 months or the close of the Transaction. Nonetheless, the Charter Protection Agreement may deter certain stockholders from purchasing shares of the Company’s common stock, which may suppress demand for the stock and cause the price to decline.
LENDINGCLUB CORPORATION
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporatedIf securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our stock price and trading volume could decline.
Research and reports that securities or industry analysts publish about us or our business may be consumed by equity investors and influence their opinion of our business and/or investment in Delaware, we are governed by the provisions of Section 203our common stock. For example, if one or more of the Delaware General Corporation Law, which limits the abilityanalysts who cover us downgrades our stock, our stock price may decline. Additionally, if one or more of stockholders owning in excess of 15%these analysts cease coverage of our outstanding votingcompany or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to merge or combine with us in certain circumstances.decline.
Any provisionWe do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our restated certificate of incorporationbusiness, and we do not expect to declare or restated bylaws, or Delaware law that haspay any dividends in the effect of delaying or deterringforeseeable future. As a change in control could limit the opportunity for our stockholders toresult, an investor may only receive a premium forreturn on their sharesinvestment in our common stock if the trading price of our common stock and could also affect the price that some investors are willing to pay for our common stock.increases.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s corporate headquarters are located in San Francisco, California, and consist of approximately 169,000 square feet of space under lease agreements, the longest of which is expected to expire in June 2022. Under these lease agreements, the Company has an option to extend nearly all of the space for five years.
In April 2015, the Company entered into a lease agreement for approximately 112,000 square feet of additional office space in San Francisco, California. In August 2017, this lease agreement was amended to add 15,000 square feet of additional office space. The amended lease agreement expires in April 2026 with the right to renew the lease term for two consecutive renewal terms of five years each.
The Company has additional leased office space of approximately 26,000 square feet in Westborough, Massachusetts, under a lease agreement that expires in July 2021.
Item 3. Legal Proceedings
The information set forth under “Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Commitments and Contingencies” Leases”of this Form 10-K is incorporated herein by reference.
Item 3. Legal Proceedings
The information set forth under “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies”of this Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
LendingClub’s common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol “LC.” The following table sets forth the high and low sales price per share of LendingClub’s common stock as reported on the NYSE for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 6.79 |
| | $ | 4.99 |
| | $ | 11.25 |
| | $ | 6.34 |
|
| Second Quarter | $ | 6.17 |
| | $ | 5.17 |
| | $ | 8.41 |
| | $ | 3.44 |
|
| Third Quarter | $ | 6.47 |
| | $ | 4.92 |
| | $ | 6.58 |
| | $ | 4.03 |
|
| Fourth Quarter | $ | 6.56 |
| | $ | 3.29 |
| | $ | 6.56 |
| | $ | 4.64 |
|
Holders of Record
As of January 31, 2018,2020, there were 5836 holders of record of LendingClub’s common stock. The closing market price per share on that date was $3.66. Because many of LendingClub’s shares of common stock are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
LendingClub has not paid cash or other dividends since its inception, and does not anticipate paying cash or other dividends in the foreseeable future.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
The table below summarizes purchases made by or on behalf of LendingClub of its common stock for each calendar month in the fourth quarter of 2019:
|
| | | | | | | | | | | | | | |
| Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| October 1 - October 31 | | — |
| | $ | — |
| | — |
| | $ | — |
|
| November 1 - November 30 | | — |
| | $ | — |
| | — |
| | $ | — |
|
December 1 - December 31(1) | | 957 |
| | $ | 12.31 |
| | — |
| | $ | — |
|
| Total | | 957 |
| | $ | 12.31 |
| | — |
| | $ | — |
|
| |
(1) | Represents shares that were transferred to the Company to satisfy payment of all or a portion of the exercise price in connection with the exercise of stock options, and not as part of a publicly announced plan or program. |
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of LendingClub under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph comparesand table compare the cumulative total return to stockholders of LendingClub’s common stock relative to the cumulative total returns of the Standard & Poor’s 500 Index (S&P 500) and the Dow Jones Internet Composite Index (DJ Internet Composite).Index. An investment of $100 (with reinvestment of all dividends)dividends, when applicable) is assumed to have been made in LendingClub’s common stock and in each index at market close on December 11,31, 2014 the date LendingClub’s common stock began trading on the NYSE, and its relative performance is tracked through December 29, 2017.31, 2019. The returns shown are based on historical results and are not intended to suggest future performance.
| | | | December 11, 2014 | | December 31, 2014 | | December 31, 2015 | | December 30, 2016 | | December 29, 2017 | December 31, 2014 | | December 31, 2015 | | December 30, 2016 | | December 29, 2017 | | December 31, 2018 | | December 31, 2019 |
| LendingClub Corporation | $ | 100 |
| | $ | 107.98 |
| | $ | 47.16 |
| | $ | 22.41 |
| | $ | 17.63 |
| $ | 100 |
| | $ | 43.68 |
| | $ | 20.75 |
| | $ | 16.32 |
| | $ | 10.40 |
| | $ | 9.98 |
|
| Standard & Poor’s 500 Index | $ | 100 |
| | $ | 101.16 |
| | $ | 100.42 |
| | $ | 110.00 |
| | $ | 131.36 |
| $ | 100 |
| | $ | 99.27 |
| | $ | 108.74 |
| | $ | 129.86 |
| | $ | 121.76 |
| | $ | 156.92 |
|
| Dow Jones Internet Composite Index | $ | 100 |
| | $ | 101.72 |
| | $ | 124.20 |
| | $ | 133.23 |
| | $ | 183.97 |
| $ | 100 |
| | $ | 122.11 |
| | $ | 130.99 |
| | $ | 180.87 |
| | $ | 192.64 |
| | $ | 230.49 |
|
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with “Item 7 –7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements included in this Report (in thousands, except share and per share data):
|
| | | | | | | | | | | | | | | | | | | |
| As of and for the Year Ended December 31, | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Statement of Operations Data: | | | | | | | | | |
| Net revenue: | | | | | | | | | |
| | | | | | | | | | |
| Transaction fees | $ | 598,760 |
| | $ | 526,942 |
| | $ | 448,608 |
| | $ | 423,494 |
| | $ | 373,508 |
|
| | | | | | | | | | |
| Interest income | 345,345 |
| | 487,462 |
| | 611,259 |
| | 696,662 |
| | 552,972 |
|
| Interest expense | (246,587 | ) | | (385,605 | ) | | (571,424 | ) | | (688,368 | ) | | (549,740 | ) |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (30,817 | ) | | (2,949 | ) | | 14 |
|
| Net interest income and fair value adjustments | (46,232 | ) | | 1,169 |
| | 9,018 |
| | 5,345 |
| | 3,246 |
|
| Investor fees | 124,532 |
| | 114,883 |
| | 87,108 |
| | 79,647 |
| | 43,787 |
|
| Gain (Loss) on sales of loans | 67,716 |
| | 45,979 |
| | 23,370 |
| | (17,152 | ) | | 4,885 |
|
| Net investor revenue | 146,016 |
| | 162,031 |
| | 119,496 |
| | 67,840 |
| | 51,918 |
|
| | | | | | | | | | |
| Other revenue | 13,831 |
| | 5,839 |
| | 6,436 |
| | 9,478 |
| | 4,517 |
|
| | | | | | | | | | |
| Total net revenue | 758,607 |
| | 694,812 |
| | 574,540 |
| | 500,812 |
| | 429,943 |
|
| Operating expenses: | | | | | | | | | |
| Sales and marketing | 279,423 |
| | 268,517 |
| | 229,865 |
| | 216,670 |
| | 171,526 |
|
| Origination and servicing | 103,403 |
| | 99,376 |
| | 86,891 |
| | 74,760 |
| | 61,335 |
|
| Engineering and product development | 168,380 |
| | 155,255 |
| | 142,264 |
| | 115,357 |
| | 77,062 |
|
| Other general and administrative | 238,292 |
| | 228,641 |
| | 191,683 |
| | 207,172 |
| | 122,182 |
|
| Goodwill impairment | — |
| | 35,633 |
| | — |
| | 37,050 |
| | — |
|
| Class action and regulatory litigation expense | — |
| | 35,500 |
| | 77,250 |
| | — |
| | — |
|
| Total operating expenses | 789,498 |
| | 822,922 |
| | 727,953 |
| | 651,009 |
| | 432,105 |
|
| Loss before income tax expense | (30,891 | ) | | (128,110 | ) | | (153,413 | ) | | (150,197 | ) | | (2,162 | ) |
| Income tax expense (benefit) | (201 | ) | | 43 |
| | 632 |
| | (4,228 | ) | | 2,833 |
|
| Consolidated net loss | (30,690 | ) | | (128,153 | ) | | (154,045 | ) | | (145,969 | ) | | (4,995 | ) |
| Less: Income (Loss) attributable to noncontrolling interests | 55 |
| | 155 |
| | (210 | ) | | — |
| | — |
|
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
| Net loss per share attributable to LendingClub: | | | | | | | | | |
| Basic | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) | | $ | (1.88 | ) | | $ | (0.07 | ) |
| Diluted | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) | | $ | (1.88 | ) | | $ | (0.07 | ) |
| Weighted-average common shares – Basic | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
| | 77,552,414 |
| | 74,974,423 |
|
| Weighted-average common shares – Diluted | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
| | 77,552,414 |
| | 74,974,423 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| As of and for the Year Ended December 31, | 2017 | | 2016 | | 2015 | | 2014 (1) | | 2013 |
| Statement of Operations Data: | | | | | | | | | |
| Net revenue: | | | | | | | | | |
| Transaction fees | $ | 448,608 |
| | $ | 423,494 |
| | $ | 373,508 |
| | $ | 197,124 |
| | $ | 85,830 |
|
Investor fees (2) | 87,108 |
| | 79,647 |
| | 43,787 |
| | 17,491 |
| | 7,034 |
|
Gain (Loss) on sales of loans (2) | 23,370 |
| | (17,152 | ) | | 4,885 |
| | (3,569 | ) | | 3,862 |
|
Other revenue (2) | 6,436 |
| | 9,478 |
| | 4,517 |
| | 2,366 |
| | 1,249 |
|
| Net interest income and fair value adjustments: | | | | | | | | | |
| Interest income | 611,259 |
| | 696,662 |
| | 552,972 |
| | 354,453 |
| | 187,507 |
|
| Interest expense | (571,424 | ) | | (688,368 | ) | | (549,740 | ) | | (356,615 | ) | | (187,447 | ) |
Net fair value adjustments (2) | (30,817 | ) | | (2,949 | ) | | 14 |
| | (122 | ) | | (33 | ) |
Net interest income (expense) and fair value adjustments (2) | 9,018 |
| 8,294 |
| 5,345 |
| 3,232,000 |
| 3,246 |
| | (2,284 | ) | | 27 |
|
| Total net revenue | 574,540 |
| | 500,812 |
| | 429,943 |
| | 211,128 |
| | 98,002 |
|
Operating expenses: (3) | | | | | | | | | |
| Sales and marketing | 229,865 |
| | 216,670 |
| | 171,526 |
| | 85,652 |
| | 37,431 |
|
| Origination and servicing | 86,891 |
| | 74,760 |
| | 61,335 |
| | 37,326 |
| | 17,978 |
|
| Engineering and product development | 142,264 |
| | 115,357 |
| | 77,062 |
| | 38,518 |
| | 15,528 |
|
| Other general and administrative | 191,683 |
| | 207,172 |
| | 122,182 |
| | 81,136 |
| | 19,757 |
|
| Class action litigation settlement | 77,250 |
| | — |
| | — |
| | — |
| | — |
|
| Goodwill impairment | — |
| | 37,050 |
| | — |
| | — |
| | — |
|
| Total operating expenses | 727,953 |
| | 651,009 |
| | 432,105 |
| | 242,632 |
| | 90,694 |
|
| Income (loss) before income tax expense | (153,413 | ) | | (150,197 | ) | | (2,162 | ) | | (31,504 | ) | | 7,308 |
|
| Income tax expense (benefit) | 632 |
| | (4,228 | ) | | 2,833 |
| | 1,390 |
| | — |
|
| Consolidated net income (loss) | (154,045 | ) | | (145,969 | ) | | (4,995 | ) | | (32,894 | ) | | 7,308 |
|
| Less: Loss attributable to noncontrolling interests | (210 | ) | | — |
| | — |
| | — |
| | — |
|
| LendingClub net income (loss) | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) | | $ | (32,894 | ) | | $ | 7,308 |
|
| Net income (loss) per share attributable to LendingClub: | | | | | | | | | |
Basic (3) (4) | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) | | $ | (0.44 | ) | | $ | — |
|
Diluted (3) (4) | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) | | $ | (0.44 | ) | | $ | — |
|
Weighted-average common shares - Basic (4) (5) | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
| | 75,573,742 |
| | 51,557,136 |
|
Weighted-average common shares - Diluted (4) (5) | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
| | 75,573,742 |
| | 81,426,976 |
|
| Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents (5) | $ | 401,719 |
| | $ | 515,602 |
| | $ | 623,531 |
| | $ | 869,780 |
| | $ | 49,299 |
|
| Securities available for sale | 117,573 |
| | 287,137 |
| | 297,211 |
| | — |
| | — |
|
Loans held for investment at fair value (2) | 2,932,325 |
| | 4,295,121 |
| | 4,552,623 |
| | 2,798,145 |
| | 1,828,671 |
|
Loans held for investment by the Company at fair value (2) | 361,230 |
| | 16,863 |
| | 3,458 |
| | 360 |
| | 371 |
|
| Loans held for sale by the Company at fair value | 235,825 |
| | 9,048 |
| | — |
| | — |
| | — |
|
Total assets (1) (4) | 4,640,831 |
| | 5,562,631 |
| | 5,793,634 |
| | 3,890,054 |
| | 1,943,395 |
|
Notes, certificates and secured borrowings at fair value | 2,954,768 |
| | 4,320,895 |
| | 4,571,583 |
| | 2,813,618 |
| | 1,839,990 |
|
| Total liabilities | 3,713,074 |
| | 4,586,861 |
| | 4,751,774 |
| | 2,916,835 |
| | 1,875,301 |
|
Total LendingClub stockholders’ equity (5) | $ | 922,495 |
| | $ | 975,770 |
| | $ | 1,041,860 |
| | $ | 973,219 |
| | $ | 68,094 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of and for the Year Ended December 31, | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 243,779 |
| | $ | 372,974 |
| | $ | 401,719 |
| | $ | 515,602 |
| | $ | 623,531 |
|
| Securities available for sale | 270,927 |
| | 170,469 |
| | 117,573 |
| | 287,137 |
| | 297,211 |
|
| Loans held for investment at fair value | 1,079,315 |
| | 1,883,251 |
| | 2,932,325 |
| | 4,295,121 |
| | 4,552,623 |
|
| Loans held for investment by the Company at fair value | 43,693 |
| | 2,583 |
| | 361,230 |
| | 16,863 |
| | 3,458 |
|
| Loans held for sale by the Company at fair value | 722,355 |
| | 840,021 |
| | 235,825 |
| | 9,048 |
| | — |
|
| Total assets | 2,982,341 |
| | 3,819,527 |
| | 4,640,831 |
| | 5,562,631 |
| | 5,793,634 |
|
Notes, certificates and secured borrowings at fair value | 1,081,466 |
| | 1,905,875 |
| | 2,954,768 |
| | 4,320,895 |
| | 4,571,583 |
|
| Payable to securitization note and certificate holders | 40,610 |
| | 256,354 |
| | 312,123 |
| | — |
| | — |
|
| Credit facilities and securities sold under repurchase agreements | 587,453 |
| | 458,802 |
| | 32,100 |
| | — |
| | — |
|
| Total liabilities | 2,082,154 |
| | 2,948,546 |
| | 3,713,074 |
| | 4,586,861 |
| | 4,751,774 |
|
| Total LendingClub stockholders’ equity | $ | 900,187 |
| | $ | 869,201 |
| | $ | 927,757 |
| | $ | 975,770 |
| | $ | 1,041,860 |
|
| |
| In April 2014, the Company completed the Springstone acquisition. The Company’s consolidated financial statements include Springstone’s financial position and results of operations from the acquisition date. |
| |
(2)
| Prior period amounts have been reclassified to conform to the current period presentation. See “Part II – Item 8 – Financial Statements and Supplementary Data – Note 1. Basis of Presentation” for additional information.
|
| |
(3)
| Includes stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Sales and marketing | $ | 7,654 |
| | $ | 7,546 |
| | $ | 7,250 |
| | $ | 5,476 |
| | $ | 1,147 |
|
| Origination and servicing | 4,804 |
| | 4,159 |
| | 2,735 |
| | 1,653 |
| | 424 |
|
| Engineering and product development | 22,047 |
| | 19,858 |
| | 11,335 |
| | 6,445 |
| | 2,336 |
|
| Other general and administrative | 36,478 |
| | 37,638 |
| | 29,902 |
| | 23,576 |
| | 2,376 |
|
| Total stock-based compensation expense | $ | 70,983 |
| | $ | 69,201 |
| | $ | 51,222 |
| | $ | 37,150 |
| | $ | 6,283 |
|
| |
(4)
| In April 2014, the Company’s board of directors approved a two-for-one stock split of LendingClub’s outstanding capital stock and in August 2014, the Company’s board of directors approved another two-for-one stock split of LendingClub’s outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. |
| |
(5)
| In December 2014, LendingClub registered 66,700,000 shares of our common stock in its initial public offering at the initial offering price of $15.00 per share. In connection with this stock offering, all outstanding shares of convertible preferred stock were converted into LendingClub’s common stock. |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this Annual Report on Form 10-K (Report). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Report, particularly in “Part 1I – Item 1A –1A. Risk Factors.Factors.”
Overview
LendingClub operateswas incorporated in Delaware on October 2, 2006, and is currently the largest provider of unsecured personal loans in the US. We operate America’s largest online lending marketplace platform that connects borrowers and investors. We believeLendingClub provides tools that help Americans save money on their path to financial health through lower borrowing costs and a technology-powered lending marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Qualified consumers and small business owners borrow through LendingClub to lower the cost of their credit and enjoy a better experience than that provided by traditional banks.
The LendingClub platform offers investors access to an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. Theseamless, technology-driven user experience. Investors provide capital to invest inenable the loans enabled through our lending marketplace comes directly from a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments.
Loans that are facilitated through our lending marketplace are funded by the issuance of notes to our retail investors, the issuance of certificates or the sale of whole loans to institutional investors, or invested in directly by the Company. To expand the Company’s investor base, in 2017 the Company developed the capability to support the securitization of loans. In the second half of 2017, the Company used its own capital to purchase loans to facilitate this newly developed securitization capability, including sponsoring its first four securitization transactions and closing two CLUB Certificates transactions. We intend to use more of our capital to fund the purchasefunding of loans in exchange for future securitizations or loan sales.earning competitive risk adjusted returns. Our marketplace enables efficient credit decisioning, pricing, servicing and support operations. We also, from timeoperate fully online with no traditional branch infrastructure. Our vision is to time, useexpand our own capitalmarketplace model and support it with a bank charter, which we believe will be both strategically and financially accretive to fulfill contractual purchase obligations for loans funded without a matched third-party investor, as more fully described in “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Commitments and Contingencies – Purchase Commitments.” Additionally, we may use our own capital to invest in loans or interests backed by loans to fulfill regulatory obligations, support short-term marketplace equilibrium, make accommodations to customers, comply with risk retention requirements applicable to sponsors of securitization transactions, or to test and establish a track record of performance for new or alternative loan terms, programs, or channels.the Company.
We generate revenue primarily from transaction fees from our lending marketplace’s role in marketing to customers, accepting and decisioning applications for our bank partners to enable loan originations, investor fees that include servicing fees from investors for various services, including servicing and collection efforts, and matching available loan assets with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans sold, net interest income earned net of interest expenses and fair value gains/lossesadjustments from loans invested in by the Company and held on our balance sheet.
The transaction fees we receive from our issuing banksbank partner in connection with our lending marketplace’s role in facilitating loan originations for unsecured personal loans and auto refinance loans range from 1%0% to 7%6% of the initial principal amount of the loan. In addition, for education and patient finance loans, we also collect fees earned from issuing banks and fees from the related education and patient service providers.
Net interest income and fair value adjustments reflectearned interest income and assumed principal and interest rate risk on loans during the period that we own the loans. When we use our own capital to invest in loans, we earn interest income and record fair value adjustments attributable to changes in actual and expected credit and prepayment performance, or any difference between sale price and carrying value.
Investor fees paid to us vary based on investment channel and compensate us for the costs we incur in servicing loans, including managing payments from borrowers, collections, payments to investors, maintaining investors’ account portfolios, providing information and issuing monthly statements. Investor fees may also vary based on the delinquency status of the loan. Whole loan purchasers pay a monthly weighted-average fee of 0.9% per annum and Structured Program investors pay a monthly fee of up to 1%, which is generally based on the month-end principal balance of loans serviced by us.
Gain (Loss) on sales of loans connected to loan sale transactions are recognized based on the level to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Additionally, we recognize transactions costs as a loss on sale of loans.
Personal loan volume on our platform is generally lower in the first quarter of the year, primarily due to seasonality of borrower behavior. Additionally, in the fourth quarter of the year, we typically observe fluctuations in marketing
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Investor fees paideffectiveness and borrower behavior due to us vary based on investment channel. Note investors generally pay us a fee equalthe holidays, which can impact volume. These seasonal trends contribute to 1% of payment amounts received from the borrower. Whole loan purchasers pay a monthly fee of up to 1.3% per annum, which is generally based on the month-end principal balance of loans serviced by us. Certificate holders generally pay a monthly fee of up to 1.5% per annum of the month-end balance of assets under management or the month-end balance of unpaid principal of the underlying Certificate. Investor fees may also vary based on the delinquency status of the loan.fluctuations in our operating results and operating cash flow.
Since beginning operations in 2007,Loans facilitated through our lending marketplace has facilitated $33.6 billion in loan originations. These loans were facilitated through the following investment channels: (i) the issuance of member payment dependent notes, (ii) the sale of trust certificates, (iii)are funded by the sale of whole loans (or interests backed byto banks and other institutional investors, the sale of whole loans) either directlyloans facilitated through Structured Programs, the issuance of notes to qualifiedour self-directed retail investors, or indirectlyfunded directly by the Company with its own capital. We use our capital to fund the purchase of loans for our Structured Program transactions, to support marketplace equilibrium when a matching third-party investor is not available at time of origination, to reflect changes in market value through loan pricing, to test new product offerings, and to make accommodations to customers. The Company’s Structured Program transactions include i) asset-backed securitization transactions and ii) Certificate Program transactions. Certificate Program transactions include CLUB Certificate and Levered Certificate transactions.
In connection with asset-backed securitizations, the Company is the sponsor and establishes trusts to ultimately purchase the loans from the Company and/or (iv) investedthird-party whole loan investors. Securities issued from our asset-backed securitizations are senior or subordinated based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in byaccordance with the waterfall criteria. The loans are transferred into a trust such that the loans are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These loans can only be used to settle obligations of the underlying trusts. As the sponsor for securitization transactions, the Company manages the completion of the transaction.
In 2017,addition, the Company sponsors the sale of loans through the issuance of certificate securities under our marketplace facilitated $9.0 billionCertificate Program. The Certificate securities are collateralized by loans transferred to a series of a master trust and trade in the over-the-counter market with a CUSIP. We believe the sale of certificates results in more liquidity and demand for our unsecured personal loans. The loans are transferred into a trust such that the loans are legally isolated from the creditors of the Company and are not available to satisfy the obligations of the Company. These loans can only be used to settle obligations of the underlying Certificate Program trusts. The CLUB Certificate issued securities are pass-through securities of which each owner has an undivided and equal interest in the underlying loans of each transaction. The Levered Certificate issued securities includes senior and subordinated securities based on the waterfall criteria of loan originations, of which $1.1 billion were investedpayments to each security class. The subordinated securities issued from these transactions are first to absorb credit losses in through member payment dependent notes, $0.7 billion were invested in through trust certificates, $5.6 billion were invested in through whole loan sales, and $1.6 billion were invested in byaccordance with the Company. Of the loans invested in by the Company, $198.5 million were securitized or contributed to CLUB Certificates and sold and $791.8 million were sold to whole loan investors during the year ended December 31, 2017. In 2016, our marketplace facilitated over $8.7 billion of loan originations, of which approximately $1.3 billion were invested in through member payment dependent notes, $1.4 billion were invested in through trust certificates and $6.0 billion were invested in through whole loan sales. See “Part I – Item 1A – Risk Factors – A decline in social and economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.”waterfall criteria.
Current Economic and Business Environment
LendingClub monitors a variety of economic, credit and competitive indicators in connection with operating its online lending marketplace platform.
Our approach to risk-management is a data-driven, continuous and proactive process that runs against a constantly shifting set of conditions. Our online lending marketplace platform seeks to adapt to changing marketplace conditions including by leveraging market and loan performance datainvestors’ return on investment expectations. LendingClub monitors a variety of economic, credit and competitive indicators to propose changes to underwriting or pricing models for the related issuing bank’s approval.
During the first half of 2016, we began to observe pockets of underperformance in higher risk segments. This trend was subsequently observed across all loan grades in the second half of 2016, although it was most pronounced in higher risk grades, particularly grades E, F and G. We responded to these observations by working with the issuing banks who originate loans facilitated through our platform to implement changes intended to optimize applicablebanks’ credit policies several times in 2016, and again in January and May of 2017. We observed an increase in pre-payment rates in 2017 in the higher risk prime grades, specifically F & G grades in our standard program. Accordingly, in November 2017 we decided to suspend the offering of F & G grade notes for investment by retail investors. We are currently facilitating the issuance of F & G grade loans through our platform, but these loans are currently offered to private investors only. We currently hold these F & G grade loans on our balance sheet as we continue to observe the performance of loans within these grades, but have sold certain of these whole loans to qualified institutional investors and may continue to do so in the future.interest rates.
In September 2017, wethe fourth quarter of 2019, our marketplace facilitated the launch$3.1 billion of our next-generation credit model and made adjustments to credit and pricing policies to adapt to the current conditions we have observed. We continue to monitor credit performance on new vintages as data becomes available and any impact from changes in the broader macroeconomic and competitive environment. This information will assist us in assessing if and when to propose further changes to the credit modelloan originations, of which $1.2 billion was issued through whole loan sales, $1.7 billion was purchased or interest rates for considerationpending purchase by the issuing banks who originateCompany and $0.1 billion was issued through member payment dependent notes. Loans held by the Company at quarter end are available loan inventory for future Structured Program transactions and whole loan sales, excluding loans facilitated through our platform. We have also invested in our multifaceted collections capabilities to further mitigate risk to our existingheld by the Company as a result of consolidated trusts.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table shows the loan origination volume issued, loans purchased or pending purchase by the Company, and the available loan inventory as of the end of each period set forth below (in millions):
|
| | | | | | | | | | | |
| | December 31,
2019 | | September 30,
2019 | | June 30,
2019 |
| Loan originations | $ | 3,083.1 |
| | $ | 3,349.6 |
| | $ | 3,129.5 |
|
| Loans purchased or pending purchase by the Company during the quarter | $ | 1,749.2 |
| | $ | 1,543.5 |
| | $ | 1,182.4 |
|
LendingClub inventory (1) | $ | 718.2 |
| | $ | 755.2 |
| | $ | 419.1 |
|
LendingClub inventory as a percentage of loan originations (1) | 23 | % | | 23 | % | | 13 | % |
| |
(1) | LendingClub inventory reflects loans purchased or pending purchase by the Company during the period, excluding loans held by the Company through consolidated trusts, if applicable, and not yet sold as of the period end. |
Loan inventory purchased by LendingClub was 23% of total loan portfolio, including adding new recovery strategies, payment programsoriginations during the fourth quarter of 2019. This increase since the second quarter of 2019 was due to higher volumes and augmenting collections team capacity.mix of lower risk grade A and B loans facilitated on our marketplace, the volume of loans purchased by LendingClub for Structured Program transactions, and the timing of loan sales compared to prior periods.
As market interest rates fluctuate, our investors’ cost of funding and expectations regarding return on investment changes. We have continued to take actions to reduce exposure to certain borrower segments that have had insufficient risk-adjusted returns, especially in lower loan grades and certain FICO bands where losses have historically been more volatile. We have seen a volume and mix increase of grade A and B loans in our standard loan program. As prevailing interest rates and market conditions change, we will continue to adjust interest rates and credit criteria on the platform accordingly. Separately, we periodically adjust products available on our marketplace to reflect investor demand.
Because of timing differences between changes in market interest rates, interest rates on loans, credit performance and investor yield expectations, there may be a difference between the actual yield and the investor required yield on a loan. In addition,these circumstances we continue to actively explore waysuse our own capital to diversifypurchase loans from our investor baseissuing banks. This allows us to adjust the effective yield on a loan through its sale price, thereby maintaining marketplace equilibrium. Any discount to par will result in negative fair value adjustments.
In 2019, we reviewed our cost structure and obtain additional investment capitalhave a number of expense initiatives underway with the goal of increasing our operating efficiency. As a result of our review, we signed a lease to establish a site in a more cost-effective location in the Salt Lake City area. We started to hire full-time employees in the first quarter of 2019 in the Salt Lake City area and we have increased the use of third-party business process outsource providers. We completed the relocation of our origination and servicing operations from San Francisco, California to the Salt Lake City area by the end of 2019. In conjunction with this initiative, we have sublet some of our office space in San Francisco, California, and may sublet incremental office space in the future. Although historically we have internally developed our loan platform technology solutions, in an effort to reduce costs and improve the optimization of our engineering resources for higher value-add software development, we are increasing our usage of third-party technology for certain services. While we expect the implementation of these expense initiatives to increase expenses in the short-term, they are expected to result in overall increased operating efficiency for the platform loans. This could includeCompany.
On February 18, 2020, the strategic useCompany and Radius Bancorp, Inc. (Radius) entered into an Agreement and Plan of our balance sheetMerger, by and among the Company, a wholly owned-subsidiary of the Company, and Radius, pursuant to access new investors, monetizewhich the Company will acquire Radius and thereby acquire its wholly-owned subsidiary, Radius Bank (the Merger), in a cash and stock transaction valued at $185 million (of which $138.75 million is in cash and $46.25 million is in
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
stock), plus certain purchase price and expense adjustments of up to $22 million. The closing of the Merger is subject to regulatory approval and other customary closing conditions, which the Company anticipates can be completed within 15 months, as well as customary transaction costs. The Company believes that acquiring Radius and operating with a national bank charter will enhance LendingClub’s ability to serve its members, grow its market opportunity, increase and diversify revenue and earnings, and provide both funding resilience and regulatory clarity. With the talent, infrastructure and capabilities Radius possesses, the Company intends to enhance customer engagement by offering a broader range of member products and services aimed at supporting members and improving their financial health.The Merger will be accounted for as a business combination. The purchase price will be allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date.
In order to facilitate compliance with federal banking regulations by the Company’s largest stockholder, Shanda Asset Management Holdings Limited and its affiliates (Shanda), on February 18, 2020, the Company entered into a Share Exchange Agreement pursuant to which Shanda will exchange, subject to certain closing conditions, all shares of the Company’s common stock held by Shanda for newly issued non-voting convertible preferred stock, series A (the Exchange). In connection with the Exchange, the Company will provide Shanda registration rights and a one-time cash payment of approximately $50 million. To deter future ownership positions in the Company’s securities in excess demandof thresholds set forth by the Federal Reserve under the Bank Holding Company Act, the Company adopted a Temporary Bank Charter Protection Agreement (the Charter Protection Agreement) which provides for loans,the dilution of any person or support capital market transactionsgroup of persons that acquires: (i) 25% or more equity interest in the Company, or (ii) 7.5% or more of any class of the Company’s voting securities, which threshold shall automatically increase to provide liquidity to our existing investors.10% in connection with the closing of the Exchange. The Charter Protection Agreement is effective as of February 18, 2020, and will automatically expire on the earlier of the closing of the Merger or 18 months.
Factors That Can Affect Revenue
As an operator of a lending marketplace, we work to match the supply of loans facilitated through our platform and demand from investors while also growing the overall volume of originations and correspondingly revenue at a pace commensurate with proper planning, compliance, risk management, user experience, and operational controls that work to optimize the quality of the customer experience, customer satisfaction and long-term growth. In addition, we utilizehave been increasingly utilizing our balance sheet to support Structured Program transactions, manage marketplace equilibrium, hold loans for testing of terms and conditions of new or existing loan products repurchasingand repurchase loans that did not meet an investor’s criteria, supporting our securitization and other structured financing initiatives or managing short-term marketplace equilibrium issues.criteria. In somemost instances, we may subsequently sell those loans, recognizing a gain or loss on their sale.
The interplay of the volume, timing and quality of loan applications, investment appetite, the impact ofLoan supply, which is partly driven by borrower-related activities within our holding certainbusiness, combined with investor demand to purchase loans on balance sheet, investor confidence in our data, controls and processes and available investment capital from investors, platform as well as our own loan processing and originations, liquidity of securitization market, and the subsequent performance of loans (including credit performance and prepayment timing), which directly impacts our servicing fees and loan fair values,purchases, can affect our revenue in any particular period. These drivers collectively affect transaction fees, investor fees earned by us related to these transactions, interest income, fair value adjustments and other revenue related to loans held on balance sheet, including the performance of such loans. As these drivers can be affected by a variety of factors, both in and out of our control, revenues may fluctuate from period to period. Factors that can affect these drivers and ultimately revenue and its timing include:
investor demand for our loans;
loan performance and return on investment;
market confidence in our data, controls, and processes,processes;
announcements and terms of resolution of governmental inquiries or private litigation,litigation;
our ability to obtain or add bank functionality and a bank charter;
the impact on the business from obtaining or adding bank functionality and a bank charter;
the mix of borrower products and corresponding transaction fees,fees;
regulatory or market factors which limit products on our platform or loan interest rates borrowers can pay;
availability or the timing of the deployment of investment capital by investors,
the availability and amount of new capital from pooled investment vehicles and managed accounts that typically deploy their capital at the start of a period,
the amount of purchase limitations we can impose on larger investors as a way to maintain investor balance and fairness,
the attractiveness of alternative opportunities for borrowers or investors,
the responsiveness of applicants to our marketing efforts,
expenditures on marketing initiatives in a period,
the sufficiency of operational staff to process any manual portion of the loan applications in a timely manner,
the responsiveness of borrowers to satisfy additional income or employment verification requirements related to their application,
borrower withdrawal rates,
the percentage distribution of loans between the whole and fractional loan platforms,
platform system performance,
seasonality in demand for our platform and services, which is generally lower in the first and fourth quarters,investors;
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
the availability and amount of new capital from pooled investment vehicles and managed accounts that typically deploy their capital at the start of a period;
the amount of purchase limitations we can impose on larger investors as a way to maintain investor balance and fairness;
the attractiveness of alternative opportunities for borrowers or investors, through changes in interest rates, transaction fees, terms, or risk profile;
the responsiveness of applicants to our marketing efforts;
expenditures on marketing initiatives in a period;
the sufficiency of operational staff to process any manual portion of the loan applications in a timely manner;
the responsiveness of borrowers to satisfy additional income or employment verification requirements related to their application;
borrower withdrawal rates;
the percentage distribution of loans between the whole and fractional loan platforms;
platform system performance;
seasonality in demand for our platform and services, which is generally lowest in the first quarter and also impacts the fourth quarter;
determination to hold loans for purposes of subsequently distributing the loans through sale or securitization or other structured financing initiative,Structured Program transactions;
changes in the credit performance of our loans or market interest rates,rates;
the success of our models to predict borrower risk levels and attractiveness to investors,related investor demand; and
other factors.
At any point in time we have loan applications in various stages from initial application through issuance, as well as loans held on our balance sheet.issuance. Depending upon the timing and impact of the factors described above, loans may not be issued by the issuing banks who originate loans facilitated through our programmarketplace in the same period in which the corresponding application was originally made, resulting in a portion of that subsequent period’s revenue being earned from loan applications that were initiated in the immediately prior period. Loans may also be held on balance sheet before being subsequently sold. Consistent with our revenue recognition accounting policy under GAAP, we do not recognize the transaction fee revenue associated with a loan until the loan is issued by the issuing bank and the proceeds are delivered to the borrower. Our transaction fees are generally paid by the issuing bank (which collects an origination fee from the borrower), or in the case of education and patient finance loans, may also be paid by the participating medical or education service provider, and are accordingly independent of who is investing in a loan or how a loan is invested in.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Key Operating and Financial Metrics
We regularly review several metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The following presents our key operating and financial metrics:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Loan originations | $ | 8,987,218 |
| | $ | 8,664,746 |
| | $ | 8,361,697 |
|
Customer acquisition cost as a percent of loan originations (1) | 2.56 | % | | 2.50 | % | | 2.05 | % |
| Net revenue | $ | 574,540 |
| | $ | 500,812 |
| | $ | 429,943 |
|
| Consolidated net loss | $ | (154,045 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
Contribution (2) (3) | $ | 270,452 |
| | $ | 221,087 |
| | $ | 207,067 |
|
Contribution margin (2) (3) | 47.1 | % | | 44.1 | % | | 48.2 | % |
Adjusted EBITDA (2) (3) | $ | 44,587 |
| | $ | (12,890 | ) | | $ | 73,004 |
|
Adjusted EBITDA margin (2) (3) | 7.8 | % | | (2.6 | )% | | 17.0 | % |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Loan originations | $ | 12,290,093 |
| | $ | 10,881,815 |
| | $ | 8,987,218 |
|
| Sales and marketing expense as a percent of loan originations | 2.27 | % | | 2.47 | % | | 2.56 | % |
| Net revenue | $ | 758,607 |
| | $ | 694,812 |
| | $ | 574,540 |
|
| Consolidated net loss | $ | (30,690 | ) | | $ | (128,153 | ) | | $ | (154,045 | ) |
EPS – diluted (1) | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) |
Contribution (2) | $ | 392,294 |
| | $ | 339,328 |
| | $ | 270,452 |
|
Contribution margin (2) | 51.7 | % | | 48.8 | % | | 47.1 | % |
Adjusted EBITDA (2) | $ | 134,772 |
| | $ | 97,519 |
| | $ | 44,587 |
|
Adjusted EBITDA margin (2) | 17.8 | % | | 14.0 | % | | 7.8 | % |
Adjusted net income (loss) (2) | $ | 2,182 |
| | $ | (32,375 | ) | | $ | (73,236 | ) |
Adjusted EPS – diluted (1)(2) | $ | 0.02 |
| | $ | (0.38 | ) | | $ | (0.90 | ) |
| |
(1) | Represents salesAll share and marketing expense asper share information has been retroactively adjusted to reflect a percent of loan origination principal balances during each period presented.reverse stock split. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
| |
(2) | Contribution, Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin areRepresents non-GAAP financial measures. For more information regarding these measures and a reconciliation of these measures to the most comparable GAAP measures, see “Non-GAAP Financial Measures”Measures” below.
|
| |
(3)
| Prior period amounts have been reclassified to conform to the current presentation. See “Non-GAAP Financial Measures” below for additional information.
|
Loan Originations
We believe the volume of loans facilitated through our platform and originated by our issuing banks is a key indicator of the adoption rateattractiveness of our lending marketplace, growth of our brand, scale of our business, strength of our network effect, economic competitiveness of our products and future growth.
We classify the loans facilitated by our platform into three major loan products: standard program personal loans, custom program personal loans and other loans. The majority of the loans facilitated through our platform are standard program personal loans that represent loans made to prime borrowers that are available to institutional investors, private investors and public investors (in the form of member payment dependent notes). Custom program personal loans include all other personal loans to borrowers who are not eligible for our standard program, including loans primarily made to near-prime and super-prime borrowers, and are available only to private investors. Other loans are comprised of education and patient finance loans, auto refinance loans, and small business loans. In the second quarter of 2019, the Company announced that it will connect applicants looking for a small business loan with strategic partners and earn referral fees, instead of facilitating these loans on its platform. As a result, beginning in the third quarter of 2019 the “Other loans” category presented in the table below no longer includes small business loans.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Loan origination volume and weighted-average transaction fees (as a percent of origination balance) by its major loan products are as follows:
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| (in millions, except percentages) | Origination Volume | Weighted-Average Transaction Fees | | Origination Volume | Weighted-Average Transaction Fees | | Origination Volume | Weighted-Average Transaction Fees | Origination Volume | Weighted-Average Transaction Fees | | Origination Volume | Weighted-Average Transaction Fees | | Origination Volume | Weighted-Average Transaction Fees |
| Personal loans - standard program | $ | 6,585.0 |
| 4.9 | % | | $ | 6,400.5 |
| 4.9 | % | | $ | 6,417.6 |
| 4.4 | % | |
| Personal loans - custom program | 1,546.1 |
| 5.6 |
| | 1,437.4 |
| 5.3 |
| | 1,243.8 |
| 4.9 |
| |
| Personal loans – standard program | | $ | 8,533.4 |
| 5.03 | % | | $ | 7,936.3 |
| 4.87 | % | | $ | 6,585.0 |
| 4.93 | % |
| Personal loans – custom program | | 2,972.6 |
| 4.80 |
| | 2,096.3 |
| 4.98 |
| | 1,546.1 |
| 5.57 |
|
| Total personal loans | 8,131.1 |
| 5.1 |
| | 7,837.9 |
| 4.9 |
| | 7,661.4 |
| 4.5 |
| 11,506.0 |
| 4.97 |
| | 10,032.6 |
| 4.89 |
| | 8,131.1 |
| 5.05 |
|
| Other loans | 856.1 |
| 4.4 |
| | 826.8 |
| 4.5 |
| | 700.3 |
| 4.4 |
| 784.1 |
| 3.44 |
| | 849.2 |
| 4.29 |
| | 856.1 |
| 4.42 |
|
| Total | $ | 8,987.2 |
| 5.0 | % | | $ | 8,664.7 |
| 4.9 | % | | $ | 8,361.7 |
| 4.5 | % | $ | 12,290.1 |
| 4.87 | % | | $ | 10,881.8 |
| 4.84 | % | | $ | 8,987.2 |
| 4.99 | % |
The increase in the total weighted-average transaction fee in 2019 compared to 2018 was primarily driven by higher average transaction fees at certain grade levels within the standard program.
Personal loan origination volume for our standard loan program by loan grade werewas as follows (in millions):
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Personal loan originations by loan grade – standard loan program: | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | Amount | % of Total | | Amount | % of Total | | Amount | % of Total |
| A | $ | 1,096.9 |
| 17 | % | | $ | 1,013.5 |
| 16 | % | | $ | 1,077.4 |
| 17 | % | $ | 2,725.4 |
| 32 | % | | $ | 2,132.5 |
| 27 | % | | $ | 1,096.9 |
| 17 | % |
| B | 1,839.7 |
| 28 | % | | 1,802.8 |
| 28 | % | | 1,676.1 |
| 26 | % | 2,608.3 |
| 31 | % | | 2,289.6 |
| 29 | % | | 1,839.7 |
| 28 | % |
| C | 2,224.9 |
| 34 | % | | 1,941.5 |
| 30 | % | | 1,777.8 |
| 28 | % | 1,964.6 |
| 23 | % | | 2,052.2 |
| 26 | % | | 2,224.9 |
| 34 | % |
| D | 891.9 |
| 13 | % | | 949.8 |
| 15 | % | | 999.2 |
| 15 | % | 1,184.9 |
| 14 | % | | 1,098.3 |
| 14 | % | | 891.9 |
| 13 | % |
| E | 340.7 |
| 5 | % | | 463.9 |
| 7 | % | | 645.6 |
| 10 | % | 50.0 |
| — | % | | 290.1 |
| 3 | % | | 340.7 |
| 5 | % |
| F | 118.6 |
| 2 | % | | 179.3 |
| 3 | % | | 197.2 |
| 3 | % | 0.2 |
| — | % | | 60.4 |
| 1 | % | | 118.6 |
| 2 | % |
| G | 72.3 |
| 1 | % | | 49.7 |
| 1 | % | | 44.3 |
| 1 | % | — |
| — | % | | 13.2 |
| N/M |
| | 72.3 |
| 1 | % |
| Total personal loan originations – standard loan program | $ | 6,585.0 |
| 100 | % | | $ | 6,400.5 |
| 100 | % | | $ | 6,417.6 |
| 100 | % | |
| Total | | $ | 8,533.4 |
| 100 | % | | $ | 7,936.3 |
| 100 | % | | $ | 6,585.0 |
| 100 | % |
N/M – Not meaningful
During 2017 compared to 2016,
Credit and pricing policy changes made by the Company sawduring 2019 resulted in a shiftchange in the mix of personal loan origination volume from higher risk grades particularly grades DE through G to lower risk A through CD grades. Credit and pricing policyThese changes the Company made in 2016 and the first half of 2017 disproportionately affected the higher risk grades resulting in thisbroadly focused on tightening credit to shift in concentration. As a result of the implementation of our next-generation credit model, we expect to see this shiftoverall platform mix towards lower risk grades continue.and higher credit quality borrowers.
Loans Serviced On Our Platform
The following table provides the outstanding principal balance of loans serviced at the end of the periods indicated, by the method in which the loans were financed (in millions): |
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Notes | $ | 1,608 |
| | $ | 1,795 |
| | $ | 1,573 |
|
| Certificates | 1,291 |
| | 2,752 |
| | 3,105 |
|
| Secured borrowings | 243 |
| | — |
| | — |
|
| Whole loans sold | 8,178 |
| | 6,542 |
| | 4,289 |
|
| Total excluding loans invested in by the Company | $ | 11,320 |
| | $ | 11,089 |
| | $ | 8,967 |
|
| Loans invested in by the Company | 593 |
| | 28 |
| | 3 |
|
| Total loans serviced | $ | 11,913 |
| | $ | 11,117 |
| | $ | 8,970 |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Results of Operations
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. For discussion related to 2017 items and year-over-year comparisons between 2018 and 2017, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the year ended December 31, 2018.
The following table sets forth the Consolidated Statements of Operations data for each of the periods presented:
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | | | | | | |
| | | | | | | |
| Transaction fees | $ | 448,608 |
| | $ | 423,494 |
| | $ | 373,508 |
| $ | 598,760 |
| | $ | 526,942 |
| | $ | 448,608 |
|
Investor fees (1) | 87,108 |
| | 79,647 |
| | 43,787 |
| |
Gain (Loss) on sales of loans (1) | 23,370 |
| | (17,152 | ) | | 4,885 |
| |
Other revenue (1) | 6,436 |
| | 9,478 |
| | 4,517 |
| |
| Net interest income and fair value adjustments: | | | | | | |
| | | | | | | |
| Interest income | 611,259 |
| | 696,662 |
| | 552,972 |
| 345,345 |
| | 487,462 |
| | 611,259 |
|
| Interest expense | (571,424 | ) | | (688,368 | ) | | (549,740 | ) | (246,587 | ) | | (385,605 | ) | | (571,424 | ) |
Net fair value adjustments (1) | (30,817 | ) | | (2,949 | ) | | 14 |
| |
Net interest income and fair value adjustments (1) | 9,018 |
| 8,294 |
| 5,345 |
| — |
| 3,246 |
| |
| Net fair value adjustments | | (144,990 | ) | | (100,688 | ) | | (30,817 | ) |
| Net interest income and fair value adjustments | | (46,232 | ) | | 1,169 |
| | 9,018 |
|
| Investor fees | | 124,532 |
| | 114,883 |
| | 87,108 |
|
| Gain on sales of loans | | 67,716 |
| | 45,979 |
| | 23,370 |
|
Net investor revenue (1) | | 146,016 |
| | 162,031 |
| | 119,496 |
|
| | | | | | | |
| Other revenue | | 13,831 |
| | 5,839 |
| | 6,436 |
|
| | | | | | | |
| Total net revenue | 574,540 |
| | 500,812 |
| | 429,943 |
| 758,607 |
| | 694,812 |
| | 574,540 |
|
Operating expenses: (2) | | | | | | | | | | |
| Sales and marketing | 229,865 |
| | 216,670 |
| | 171,526 |
| 279,423 |
| | 268,517 |
| | 229,865 |
|
| Origination and servicing | 86,891 |
| | 74,760 |
| | 61,335 |
| 103,403 |
| | 99,376 |
| | 86,891 |
|
| Engineering and product development | 142,264 |
| | 115,357 |
| | 77,062 |
| 168,380 |
| | 155,255 |
| | 142,264 |
|
| Other general and administrative | 191,683 |
| | 207,172 |
| | 122,182 |
| 238,292 |
| | 228,641 |
| | 191,683 |
|
| Class action litigation settlement | 77,250 |
| | — |
| | — |
| |
| Goodwill impairment | — |
| | 37,050 |
| | — |
| — |
| | 35,633 |
| | — |
|
| Class action and regulatory litigation expense | | — |
| | 35,500 |
| | 77,250 |
|
| Total operating expenses | 727,953 |
| | 651,009 |
| | 432,105 |
| 789,498 |
| | 822,922 |
| | 727,953 |
|
| Loss before income tax expense | (153,413 | ) | | (150,197 | ) | | (2,162 | ) | (30,891 | ) | | (128,110 | ) | | (153,413 | ) |
| Income tax expense (benefit) | 632 |
| | (4,228 | ) | | 2,833 |
| (201 | ) | | 43 |
| | 632 |
|
| Consolidated net loss | $ | (154,045 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) | (30,690 | ) | | (128,153 | ) | | (154,045 | ) |
| Less: Loss attributable to noncontrolling interests | (210 | ) | | — |
| | — |
| |
| Less: Income (Loss) attributable to noncontrolling interests | | 55 |
| | 155 |
| | (210 | ) |
| LendingClub net loss | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
| |
(1) | Prior period amounts have been reclassified to conform to the current period presentation. See“Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation”Presentation” for additional information.
|
| |
(2)(2) Includes stock-based compensation expense as follows: | Includes stock-based compensation expense as follows: |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Sales and marketing | $ | 7,654 |
| | $ | 7,546 |
| | $ | 7,250 |
|
| Origination and servicing | 4,804 |
| | 4,159 |
| | 2,735 |
|
| Engineering and product development | 22,047 |
| | 19,858 |
| | 11,335 |
|
| Other general and administrative | 36,478 |
| | 37,638 |
| | 29,902 |
|
| Total stock-based compensation expense | $ | 70,983 |
| | $ | 69,201 |
| | $ | 51,222 |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Sales and marketing | $ | 6,095 |
| | $ | 7,362 |
| | $ | 7,654 |
|
| Origination and servicing | 3,155 |
| | 4,322 |
| | 4,804 |
|
| Engineering and product development | 19,860 |
| | 20,478 |
| | 22,047 |
|
| Other general and administrative | 44,529 |
| | 42,925 |
| | 36,478 |
|
| Total stock-based compensation expense | $ | 73,639 |
| | $ | 75,087 |
| | $ | 70,983 |
|
Total Net Revenue
| | | Year Ended December 31, | 2017 | | 2016 | | Change ($) | | Change (%) | 2019 | | 2018 | | Change ($) | | Change (%) |
| Net revenue: | | | | | | | | | | | | | | |
| | | | | | | | | |
| Transaction fees | $ | 448,608 |
| | $ | 423,494 |
| | $ | 25,114 |
| | 6 | % | $ | 598,760 |
| | $ | 526,942 |
| | $ | 71,818 |
| | 14 | % |
Investor fees (1) | 87,108 |
| | 79,647 |
| | 7,461 |
| | 9 | % | |
Gain (Loss) on sales of loans (1) | 23,370 |
| | (17,152 | ) | | 40,522 |
| | N/M |
| |
Other revenue (1) | 6,436 |
| | 9,478 |
| | (3,042 | ) | | (32 | )% | |
| Net interest income and fair value adjustments: | | | | | | | | |
| | | | | | | | | |
| Interest income | 611,259 |
| | 696,662 |
| | (85,403 | ) | | (12 | )% | 345,345 |
| | 487,462 |
| | (142,117 | ) | | (29 | )% |
| Interest expense | (571,424 | ) | | (688,368 | ) | | 116,944 |
| | (17 | )% | (246,587 | ) | | (385,605 | ) | | 139,018 |
| | (36 | )% |
Net fair value adjustments (1) | (30,817 | ) | | (2,949 | ) | | (27,868 | ) | | N/M |
| |
Net interest income and fair value adjustments (1) | 9,018 |
| 8,294 |
| 5,345 |
| | 3,673 |
| | 69 | % | |
| Net fair value adjustments | | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | | (46,232 | ) | | 1,169 |
| | (47,401 | ) | | N/M |
|
| Investor fees | | 124,532 |
| | 114,883 |
| | 9,649 |
| | 8 | % |
| Gain on sales of loans | | 67,716 |
| | 45,979 |
| | 21,737 |
| | 47 | % |
| Net investor revenue | | 146,016 |
| | 162,031 |
| | (16,015 | ) | | (10 | )% |
| | | | | | | | | |
| Other revenue | | 13,831 |
| | 5,839 |
| | 7,992 |
| | 137 | % |
| | | | | | | | | |
| Total net revenue | $ | 574,540 |
| | $ | 500,812 |
| | $ | 73,728 |
| | 15 | % | $ | 758,607 |
| | $ | 694,812 |
| | $ | 63,795 |
| | 9 | % |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Net revenue: | | | | | | | |
| | | | | | | | |
| Transaction fees | $ | 526,942 |
| | $ | 448,608 |
| | $ | 78,334 |
| | 17 | % |
| | | | | | | | |
| Interest income | 487,462 |
| | 611,259 |
| | (123,797 | ) | | (20 | )% |
| Interest expense | (385,605 | ) | | (571,424 | ) | | 185,819 |
| | (33 | )% |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | 1,169 |
| | 9,018 |
| | (7,849 | ) | | (87 | )% |
| Investor fees | 114,883 |
| | 87,108 |
| | 27,775 |
| | 32 | % |
| Gain on sales of loans | 45,979 |
| | 23,370 |
| | 22,609 |
| | 97 | % |
| Net investor revenue | 162,031 |
| | 119,496 |
| | 42,535 |
| | 36 | % |
| | | | | | | | |
| Other revenue | 5,839 |
| | 6,436 |
| | (597 | ) | | (9 | )% |
| | | | | | | | |
| Total net revenue | $ | 694,812 |
| | $ | 574,540 |
| | $ | 120,272 |
| | 21 | % |
N/M – Not meaningful
| |
(1)
| Prior period amounts have been reclassified to conform to the current period presentation. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” for additional information.
|
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | 2016 | | 2015 | | Change ($) | | Change (%) |
| Net revenue: | | | | | | | |
| Transaction fees | $ | 423,494 |
| | $ | 373,508 |
| | $ | 49,986 |
| | 13 | % |
Investor fees (1) | 79,647 |
| | 43,787 |
| | 35,860 |
| | 82 | % |
Gain (Loss) on sales of loans (1) | (17,152 | ) | | 4,885 |
| | (22,037 | ) | | N/M |
|
Other revenue (1) | 9,478 |
| | 4,517 |
| | 4,961 |
| | 110 | % |
| Net interest income and fair value adjustments: | | | | | | | |
| Interest income | 696,662 |
| | 552,972 |
| | 143,690 |
| | 26 | % |
| Interest expense | (688,368 | ) | | (549,740 | ) | | (138,628 | ) | | 25 | % |
Net fair value adjustments (1) | (2,949 | ) | | 14 |
| | (2,963 | ) | | N/M |
|
Net interest income and fair value adjustments (1) | 5,345 |
| — |
| 3,246 |
| | 2,099 |
| | 65 | % |
| Total net revenue | $ | 500,812 |
| | $ | 429,943 |
| | $ | 70,869 |
| | 16 | % |
N/M – Not meaningful
| |
(1)
| Prior period amounts have been reclassified to conform to the current period presentation. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” for additional information.
|
Transaction Fees
Transaction fees are fees paid by issuing banks or education and patient service providers to us for the work we perform through our lending marketplace’s role in facilitating the origination of loans by our issuing bank partners. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. As of December 31, 2017, these fees ranged from 1% to 7% of the initial principal amount of a loan. In addition, for education and patient finance loans, we also collect fees earned from issuing banks and education and patient service providers. With respect to loans for which WebBank acts as the issuing bank, we record transaction fee revenue net of program fees paid to WebBank.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Transaction Fees
Transaction fees are fees paid by issuing banks or education and patient service providers to us for the work we perform in facilitating the origination of loans by our issuing bank partners. With respect to all unsecured personal loans and auto refinance loans for which WebBank acts as the issuing bank, we record transaction fee revenue net of program fees paid to WebBank. The fees on these loans are based upon the terms of the loan, including grade, rate, term, channel and other factors. As of December 31, 2019, these fees ranged from 0% to 6% of the initial principal amount of a loan.
Transaction fees were $448.6$598.8 million and $423.5$526.9 million for the years ended December 31, 20172019 and 2016,2018, respectively, an increase of 6%14%. The increase in revenue was primarily due to a higher average transaction fee paidorigination volume and a higher volume of loansweighted-average transaction fee. Loans facilitated through our lending marketplace during 2017increased to $12.3 billion for the year ended December 31, 2019 compared to 2016.$10.9 billion for the year ended December 31, 2018, an increase of 13%. The average transaction fee as a percentage of the initial principal balance of the loan was 5.0%4.87% in 2017,2019 compared to 4.9%4.84% in 2016. Loans facilitated through our lending marketplace increased from $8.7 billion for the year ended December 31, 2016 to $9.0 billion for the year ended December 31, 2017, an increase of 4%. 2018.
In March 2016,January 2020, we increased therecognized approximately $3.6 million in transaction fee thatrevenue associated with the issuance of loans for which the loan application process had commenced prior to the end of 2019. In January 2019, we earn from our primary issuing bank partner for certain prime and near-prime C through G graded personal loans from 5% to 6%, B graded personal loans from 4% to 5%, and A graded personal loans byrecognized approximately 1% at each subgrade level for grades A2 to A5. Additional$4.2 million in transaction fee increases were maderevenue associated with the issuance of loans for A graded personal loans by approximately 1% at each subgrade level for grades A2 to A5 in June 2016. Through 2017, we have continued to evaluate and test transaction fee levels relativewhich the loan application process had commenced prior to the competitive environment and our levelsend of borrower demand.
Transaction fees were $423.5 million and $373.5 million for the years ended December 31, 2016 and 2015, respectively, an increase of 13%. The increase in revenue was primarily due to a higher average transaction fee paid during 2016. The average transaction fee as a percentage of the initial principal balance of the loan was 4.9% in 2016, compared to 4.5% in 2015. Additionally, loans facilitated through our lending marketplace increased from $8.4 billion for the year ended December 31, 2015 to $8.7 billion for the year ended December 31, 2016, an increase of 4%.
2018. In January 2018, we recognized approximately $5.5 million in transaction fee revenue associated with the issuance of loans infor which the loan application process had commenced prior to the end of 2017. In January 2017,
Net Interest Income and Fair Value Adjustments
Loans Invested in by the Company: The Company purchases loans to support Structured Program transactions. We earn interest income and assume principal and interest rate risk on loans during the period we recognized approximately $6.1 millionown the loans. We have financed a portion of the purchase of these loans with draws on our credit facilities and the associated interest expense reduces net interest income. Fair value adjustments on loans invested in transaction fee revenueby the Company are generally negative due to interest cash flow receipts and if there are expected increases and any acceleration in the timing of expected charge-offs and prepayments. As we continue to use our own capital to invest in loans for strategic business purposes, we expect the net negative fair value adjustments on loans to fluctuate due to the impact of discounts offered to meet yield expectations of our loan investors and the holding period of the loans.
Loans, Notes, Certificates and Secured Borrowings: We do not assume principal or interest rate risk on loans facilitated through our lending marketplace that are funded by notes, certificates and certain secured borrowings because loan balances, interest rates and maturities are matched and offset by an equal balance of notes, certificates or secured borrowings with the exact same interest rates and maturities. The changes in fair value of loans, notes, certificates and secured borrowings are shown on our Consolidated Statements of Operations on a net basis. Due to the payment dependent feature of the notes, certificates and secured borrowings, fair value adjustments on loans funded with notes, certificates and secured borrowings result in no net effect on our earnings, except for changes in fair value of any applicable credit support agreements related to secured borrowings.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following tables provide additional detail related to net interest income and fair value adjustments for assets invested in by the Company, assets with equal and offsetting liabilities, and total interest income, interest expense and net fair value adjustments:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 110,597 |
| | $ | 113,644 |
| | $ | (3,047 | ) | | (3 | )% |
| Securities available for sale | 14,351 |
| | 7,602 |
| | 6,749 |
| | 89 | % |
| Cash, cash equivalents and restricted cash | 6,002 |
| | 4,056 |
| | 1,946 |
| | 48 | % |
| Total | 130,950 |
| | 125,302 |
| | 5,648 |
| | 5 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (27,839 | ) | | (19,714 | ) | | (8,125 | ) | | 41 | % |
| Securitization notes and certificates | (4,353 | ) | | (3,731 | ) | | (622 | ) | | 17 | % |
| Total | (32,192 | ) | | (23,445 | ) | | (8,747 | ) | | 37 | % |
| Net interest income | $ | 98,758 |
| | $ | 101,857 |
| | $ | (3,099 | ) | | (3 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 214,395 |
| | $ | 362,160 |
| | $ | (147,765 | ) | | (41 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (214,395 | ) | | (362,160 | ) | | 147,765 |
| | (41 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 345,345 |
| | $ | 487,462 |
| | $ | (142,117 | ) | | (29 | )% |
| Interest expense | (246,587 | ) | | (385,605 | ) | | 139,018 |
| | (36 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 113,644 |
| | $ | 35,692 |
| | $ | 77,952 |
| | N/M |
|
| Securities available for sale | 7,602 |
| | 4,093 |
| | 3,509 |
| | 86 | % |
| Cash, cash equivalents and restricted cash | 4,056 |
| | 2,625 |
| | 1,431 |
| | 55 | % |
| Total | 125,302 |
| | 42,410 |
| | 82,892 |
| | 195 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (19,714 | ) | | (1,900 | ) | | (17,814 | ) | | N/M |
|
| Securitization notes and certificates | (3,731 | ) | | (675 | ) | | (3,056 | ) | | N/M |
|
| Total | (23,445 | ) | | (2,575 | ) | | (20,870 | ) | | N/M |
|
| Net interest income | $ | 101,857 |
| | $ | 39,835 |
| | $ | 62,022 |
| | 156 | % |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 362,160 |
| | $ | 568,849 |
| | $ | (206,689 | ) | | (36 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (362,160 | ) | | (568,849 | ) | | 206,689 |
| | (36 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 487,462 |
| | $ | 611,259 |
| | $ | (123,797 | ) | | (20 | )% |
| Interest expense | (385,605 | ) | | (571,424 | ) | | 185,819 |
| | (33 | )% |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
N/M – Not meaningful
The following tables provide the outstanding average balances, which are key drivers of interest income and interest expense in the periods presented:
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 12,474 |
| | $ | 140,551 |
| | $ | (128,077 | ) | | (91 | )% |
| Loans held for sale by the Company | $ | 754,693 |
| | $ | 546,959 |
| | $ | 207,734 |
| | 38 | % |
| Securities available for sale | $ | 221,166 |
| | $ | 144,046 |
| | $ | 77,120 |
| | 54 | % |
| Credit facilities and securities sold under repurchase agreements | $ | 481,960 |
| | $ | 299,419 |
| | $ | 182,541 |
| | 61 | % |
| Securitization notes and certificates | $ | 100,747 |
| | $ | 131,894 |
| | $ | (31,147 | ) | | (24 | )% |
| Loans held for investment | $ | 1,574,271 |
| | $ | 2,557,575 |
| | $ | (983,304 | ) | | (38 | )% |
| Notes, certificates and secured borrowings | $ | 1,576,877 |
| | $ | 2,599,676 |
| | $ | (1,022,799 | ) | | (39 | )% |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 140,551 |
| | $ | 44,340 |
| | $ | 96,211 |
| | N/M |
|
| Loans held for sale by the Company | $ | 546,959 |
| | $ | 152,805 |
| | $ | 394,154 |
| | N/M |
|
| Securities available for sale | $ | 144,046 |
| | $ | 211,740 |
| | $ | (67,694 | ) | | (32 | )% |
| Credit facilities and securities sold under repurchase agreements | $ | 299,419 |
| | $ | 32,008 |
| | $ | 267,411 |
| | N/M |
|
| Securitization notes and certificates | $ | 131,894 |
| | $ | 24,009 |
| | $ | 107,885 |
| | N/M |
|
| Loans held for investment | $ | 2,557,575 |
| | $ | 3,936,957 |
| | $ | (1,379,382 | ) | | (35 | )% |
| Notes, certificates and secured borrowings | $ | 2,599,676 |
| | $ | 3,971,992 |
| | $ | (1,372,316 | ) | | (35 | )% |
N/M – Not meaningful
Interest income associated with loans invested in by the issuanceCompany, securities available for sale, and cash, cash equivalents and restricted cash was $131.0 million and $125.3 million for the years ended December 31, 2019 and 2018, respectively an increase of 5%. The increase was primarily due to an increase in the average outstanding balance of securities available for sale. The impact of the increase in the outstanding balance of loans invested in whichby the loan application process had commenced priorCompany was offset by the mix shift to the end of 2016. In January 2016, we recognized approximately $2.7 million in transaction fee revenuehigher credit quality loans with lower interest rates.
Interest expense associated with credit facilities, securities sold under repurchase agreements and securitization notes was $32.2 million and $23.4 million for the issuanceyears ended December 31, 2019 and 2018, respectively, an increase of 37%. The increase was primarily due to an increase in the average outstanding balance of credit facilities, partially offset by a decrease in the average outstanding balances of securitization notes and certificates.
Net fair value adjustments were $(145.0) million and $(100.7) million for the years ended December 31, 2019 and 2018, respectively, an increase of 44%. The increase was primarily due to increases in the average outstanding balances and investor required yields related to certain loans invested in by the Company to support Structured Program transactions and whole loan sales, partially offset by a shift in overall platform mix towards lower risk and higher credit quality borrowers.
Interest income from loans held for investment and the offsetting interest expense from notes, certificates and secured borrowings were both $214.4 million and $362.2 million for the years ended December 31, 2019 and 2018, respectively, a decrease of 41%. The decrease was primarily due to a decrease in the average outstanding balances of loans in whichheld for investment and notes, certificates and secured borrowings, due to a larger portion of loans originated being sold to whole loan investors and purchases by the loan application process had commenced prior to the end of 2015.Company for Structured Program transactions.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Investor FeesNet Interest Income and Fair Value Adjustments
Loans Invested in by the Company: The tables below illustrateCompany purchases loans to support Structured Program transactions. We earn interest income and assume principal and interest rate risk on loans during the compositionperiod we own the loans. We have financed a portion of investor feesthe purchase of these loans with draws on our credit facilities and the associated interest expense reduces net interest income. Fair value adjustments on loans invested in by investment channelthe Company are generally negative due to interest cash flow receipts and if there are expected increases and any acceleration in the timing of expected charge-offs and prepayments. As we continue to use our own capital to invest in loans for eachstrategic business purposes, we expect the net negative fair value adjustments on loans to fluctuate due to the impact of discounts offered to meet yield expectations of our loan investors and the holding period presented:of the loans.
Loans, Notes, Certificates and Secured Borrowings: We do not assume principal or interest rate risk on loans facilitated through our lending marketplace that are funded by notes, certificates and certain secured borrowings because loan balances, interest rates and maturities are matched and offset by an equal balance of notes, certificates or secured borrowings with the exact same interest rates and maturities. The changes in fair value of loans, notes, certificates and secured borrowings are shown on our Consolidated Statements of Operations on a net basis. Due to the payment dependent feature of the notes, certificates and secured borrowings, fair value adjustments on loans funded with notes, certificates and secured borrowings result in no net effect on our earnings, except for changes in fair value of any applicable credit support agreements related to secured borrowings.
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | Change ($) | | Change (%) |
| Investor fees – whole loans sold | $ | 52,049 |
| | $ | 47,153 |
| | $ | 4,896 |
| | 10 | % |
| Investor fees – notes, certificates and self-directed accounts | 32,504 |
| | 26,548 |
| | 5,956 |
| | 22 | % |
Investor fees – Funds and separately managed accounts (1) | 2,555 |
| | 5,946 |
| | (3,391 | ) | | (57 | )% |
| Total investor fees | $ | 87,108 |
| | $ | 79,647 |
| | $ | 7,461 |
| | 9 | % |
(1) Funds are the private funds for which LCAM or its subsidiaries act as general partner.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2016 | | 2015 | | Change ($) | | Change (%) |
| Investor fees – whole loans sold | $ | 47,153 |
| | $ | 19,238 |
| | $ | 27,915 |
| | 145 | % |
| Investor fees – notes, certificates and self-directed accounts | 26,548 |
| | 15,361 |
| | 11,187 |
| | 73 | % |
Investor fees – Funds and separately managed accounts (1) | 5,946 |
| | 9,188 |
| | (3,242 | ) | | (35 | )% |
| Total investor fees | $ | 79,647 |
| | $ | 43,787 |
| | $ | 35,860 |
| | 82 | % |
(1) Funds are the private fundsThe following tables provide additional detail related to net interest income and fair value adjustments for which LCAM or its subsidiaries act as general partner.
For each investment channel,assets invested in by the Company, receives fees to compensate us for the costs we incur in servicing the related loan, including managing payments from borrowers, collections, payments to investors, maintaining investors’ account portfolios,assets with equal and providing informationoffsetting liabilities, and issuing monthly statements. The amount of investor fee revenue earned is predominantly affected by the various servicing rates paid by whole loan, note, self-directed investors,total interest income, interest expense and certain certificate investors, the outstanding principal balance of whole loans and loans underlying notes, certificates and secured borrowings serviced, and the amount of principal and interest collected from borrowers and remitted to whole loan, note, self-directed, and certain certificate investors. Additionally, the investor fees earned from the funds and separately managed accounts compensate us for the management and advisory services we provide related to the investment portfolios of these investors.
Investor fee revenue related to whole loans sold also includes the change innet fair value of our servicing assets and liabilities associated with the loans. Servicing rights are recorded as either an asset or liability depending on the degree to which the contractual loan servicing fee is above or below, respectively, an estimated market rate loan servicing fee. The change in fair value of servicing rights does not affect the contractual fees that we collect monthly from the whole loan investors.
Investor fees – whole loans sold:Investor fee revenue related to the servicing of whole loans sold was $52.0 million and $47.2 million for the years ended December 31, 2017 and 2016, respectively, an increase of 10%. The increase in revenue was due to a higher balance of whole loans serviced and an increase in collection fees and charged-off loan sales in 2017 compared to 2016, partially offset by an increase in the change in fair value of servicing rights of ($19.9) million in 2017.
Investor fee revenue related to the servicing of whole loans sold was $47.2 million and $19.2 million for the years ended December 31, 2016 and 2015, respectively, an increase of 145%. The increase in revenue was due to a higher balance of whole loans serviced and an increase in collection fees in 2016 compared to 2015, partially offset by an increase in the change in fair value of servicing rights.
Investor fees – notes, certificates and self-directed:Investor fee revenue related to the servicing of loans underlying notes, certificates, and self-directed accounts was $32.5 million and $26.5 million for the years ended December 31, 2017 and 2016, respectively, an increase of 22%. The increase in revenue was due to increases in collections fees, the principal and interest payments processed on loans underlying notes, and self-directed fees in 2017 compared to 2016.
Investor fee revenue related to the servicing of loans underlying notes, certificates, and self-directed accounts was $26.5 million and $15.4 million for the years ended December 31, 2016 and 2015, respectively, an increase of 73%. The increase in revenue was due to increases in self-directed fees, the principal and interest payments processed on loans underlying notes, and collection fees in 2016 compared to 2015.
Investor fees – Funds and separately managed accounts: In July 2016, certain of the private funds ceased accepting contributions and limited existing investors’ ability to make redemption requests, pursuant to the terms of theadjustments:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 110,597 |
| | $ | 113,644 |
| | $ | (3,047 | ) | | (3 | )% |
| Securities available for sale | 14,351 |
| | 7,602 |
| | 6,749 |
| | 89 | % |
| Cash, cash equivalents and restricted cash | 6,002 |
| | 4,056 |
| | 1,946 |
| | 48 | % |
| Total | 130,950 |
| | 125,302 |
| | 5,648 |
| | 5 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (27,839 | ) | | (19,714 | ) | | (8,125 | ) | | 41 | % |
| Securitization notes and certificates | (4,353 | ) | | (3,731 | ) | | (622 | ) | | 17 | % |
| Total | (32,192 | ) | | (23,445 | ) | | (8,747 | ) | | 37 | % |
| Net interest income | $ | 98,758 |
| | $ | 101,857 |
| | $ | (3,099 | ) | | (3 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 214,395 |
| | $ | 362,160 |
| | $ | (147,765 | ) | | (41 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (214,395 | ) | | (362,160 | ) | | 147,765 |
| | (41 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 345,345 |
| | $ | 487,462 |
| | $ | (142,117 | ) | | (29 | )% |
| Interest expense | (246,587 | ) | | (385,605 | ) | | 139,018 |
| | (36 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 113,644 |
| | $ | 35,692 |
| | $ | 77,952 |
| | N/M |
|
| Securities available for sale | 7,602 |
| | 4,093 |
| | 3,509 |
| | 86 | % |
| Cash, cash equivalents and restricted cash | 4,056 |
| | 2,625 |
| | 1,431 |
| | 55 | % |
| Total | 125,302 |
| | 42,410 |
| | 82,892 |
| | 195 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (19,714 | ) | | (1,900 | ) | | (17,814 | ) | | N/M |
|
| Securitization notes and certificates | (3,731 | ) | | (675 | ) | | (3,056 | ) | | N/M |
|
| Total | (23,445 | ) | | (2,575 | ) | | (20,870 | ) | | N/M |
|
| Net interest income | $ | 101,857 |
| | $ | 39,835 |
| | $ | 62,022 |
| | 156 | % |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 362,160 |
| | $ | 568,849 |
| | $ | (206,689 | ) | | (36 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (362,160 | ) | | (568,849 | ) | | 206,689 |
| | (36 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 487,462 |
| | $ | 611,259 |
| | $ | (123,797 | ) | | (20 | )% |
| Interest expense | (385,605 | ) | | (571,424 | ) | | 185,819 |
| | (33 | )% |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
respective limited partnership agreements,N/M – Not meaningful
The following tables provide the outstanding average balances, which are key drivers of interest income and in October 2017 we completed the dissolution of these funds. As a result, the assets under management associated with these funds was returned to investors. This reduction negatively affected investor fee revenue related to the funds.
Investor fee revenue related to the funds and separately managed accounts was $2.6 million and $5.9 million for the years ended December 31, 2017 and 2016, respectively, a decrease of 57%. This decrease was primarily due to a 52% decreaseinterest expense in the average assets underlying the funds as a result of the redemption requests and fund dissolutions discussed above.
Investor fee revenue related to the funds and separately managed accounts was $5.9 million and $9.2 million for the years ended December 31, 2016 and 2015, respectively, a decrease of 35%. This decrease was primarily due to a decrease in the average assets underlying the funds.
Gain (Loss) on Sales of Loans
In connection with whole loan sales, in addition to investor fees earned with respect to the corresponding loan, we recognize a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee net of transaction costs, if applicable. Gain (Loss) on sales of loans is presented net of credit support agreement expense for the year ended December 31, 2016 below.
Gain (Loss) on sales of loans was $23.4 million and $(17.2) million for the years ended December 31, 2017 and 2016, respectively. This increase for the year ended December 31, 2017 compared to the same period in 2016
was primarily due to gains on sales of loans related to the Company’s self-sponsored securitization transactions and CLUB certificate program, an increase in the volume of loans sold at a gain during 2017 compared to 2016, and the sale of loans that resulted in approximately $14.0 million and $10.7 million of incentives provided to investors in the second and third quarters of 2016, respectively.
Gain (Loss) on sales of loans was $(17.2) million and $4.9 million for the years ended December 31, 2016 and 2015, respectively. The decrease for the year ended December 31, 2016 compared to the same period in 2015, was primarily due the sale of loans that resulted in approximately $14.0 million and $10.7 million of incentives provided to investors in the second and third quarters on 2016, respectively. Prior to the second quarter of 2016, we had not historically provided such incentives.
Other Revenue (Expense)
Other revenue (expense) primarily consists of referral revenue that relates to fees earned from third-party companies when customers referred by us complete specified actions with such third-party companies, and commission for facilitating the transfer of whole loans and related certificate redemption between third-party investors.
The table below illustrates the composition of other revenue for each periodperiods presented:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | Change ($) | | Change (%) |
| Referral revenue | 5,258 |
| | 5,934 |
| | (676 | ) | | (11 | )% |
| Other | 1,178 |
| | 3,544 |
| | (2,366 | ) | | (67 | )% |
Other revenue (expense) (1) | $ | 6,436 |
| | $ | 9,478 |
| | $ | (3,042 | ) | | (32 | )% |
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 12,474 |
| | $ | 140,551 |
| | $ | (128,077 | ) | | (91 | )% |
| Loans held for sale by the Company | $ | 754,693 |
| | $ | 546,959 |
| | $ | 207,734 |
| | 38 | % |
| Securities available for sale | $ | 221,166 |
| | $ | 144,046 |
| | $ | 77,120 |
| | 54 | % |
| Credit facilities and securities sold under repurchase agreements | $ | 481,960 |
| | $ | 299,419 |
| | $ | 182,541 |
| | 61 | % |
| Securitization notes and certificates | $ | 100,747 |
| | $ | 131,894 |
| | $ | (31,147 | ) | | (24 | )% |
| Loans held for investment | $ | 1,574,271 |
| | $ | 2,557,575 |
| | $ | (983,304 | ) | | (38 | )% |
| Notes, certificates and secured borrowings | $ | 1,576,877 |
| | $ | 2,599,676 |
| | $ | (1,022,799 | ) | | (39 | )% |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2016 | | 2015 | | Change ($) | | Change (%) |
| Referral revenue | 5,934 |
| | 4,332 |
| | 1,602 |
| | 37 | % |
| Other | 3,544 |
| | 185 |
| | 3,359 |
| | N/M |
|
Other revenue (expense) (1) | $ | 9,478 |
| | $ | 4,517 |
| | $ | 4,961 |
| | 110 | % |
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 140,551 |
| | $ | 44,340 |
| | $ | 96,211 |
| | N/M |
|
| Loans held for sale by the Company | $ | 546,959 |
| | $ | 152,805 |
| | $ | 394,154 |
| | N/M |
|
| Securities available for sale | $ | 144,046 |
| | $ | 211,740 |
| | $ | (67,694 | ) | | (32 | )% |
| Credit facilities and securities sold under repurchase agreements | $ | 299,419 |
| | $ | 32,008 |
| | $ | 267,411 |
| | N/M |
|
| Securitization notes and certificates | $ | 131,894 |
| | $ | 24,009 |
| | $ | 107,885 |
| | N/M |
|
| Loans held for investment | $ | 2,557,575 |
| | $ | 3,936,957 |
| | $ | (1,379,382 | ) | | (35 | )% |
| Notes, certificates and secured borrowings | $ | 2,599,676 |
| | $ | 3,971,992 |
| | $ | (1,372,316 | ) | | (35 | )% |
N/M – Not meaningful
| |
(1)
| Prior period amounts have been reclassified to conform to the current period presentation. See “Part II – Item 8 – Financial Statements and Supplementary Data –Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” for additional information.
|
Interest income associated with loans invested in by the Company, securities available for sale, and cash, cash equivalents and restricted cash was $131.0 million and $125.3 million for the years ended December 31, 2019 and 2018, respectively an increase of 5%. The increase was primarily due to an increase in the average outstanding balance of securities available for sale. The impact of the increase in the outstanding balance of loans invested in by the Company was offset by the mix shift to higher credit quality loans with lower interest rates.
Interest expense associated with credit facilities, securities sold under repurchase agreements and securitization notes was $32.2 million and $23.4 million for the years ended December 31, 2019 and 2018, respectively, an increase of 37%. The increase was primarily due to an increase in the average outstanding balance of credit facilities, partially offset by a decrease in the average outstanding balances of securitization notes and certificates.
Net fair value adjustments were $(145.0) million and $(100.7) million for the years ended December 31, 2019 and 2018, respectively, an increase of 44%. The increase was primarily due to increases in the average outstanding balances and investor required yields related to certain loans invested in by the Company to support Structured Program transactions and whole loan sales, partially offset by a shift in overall platform mix towards lower risk and higher credit quality borrowers.
Interest income from loans held for investment and the offsetting interest expense from notes, certificates and secured borrowings were both $214.4 million and $362.2 million for the years ended December 31, 2019 and 2018, respectively, a decrease of 41%. The decrease was primarily due to a decrease in the average outstanding balances of loans held for investment and notes, certificates and secured borrowings, due to a larger portion of loans originated being sold to whole loan investors and purchases by the Company for Structured Program transactions.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Net Interest Income and Fair Value Adjustments
Net Interest Income and Fair Value Adjustments on Loans Invested in by the Company: In the third quarter of 2017, theThe Company began to invest inpurchases loans to support securitizationsStructured Program transactions. We earn interest income and whole loan sale initiatives. We assume principal and interest rate risk on loans during the period we invest in using our own capital. The typical holding period for such pools is less than three months and we earn interest on those loans during that time.the loans. We may issue debt to financehave financed a portion of the purchase of these loans with draws on our credit facilities and the associated interest expense reducingreduces net interest income. Fair value adjustments on loans invested in by the Company are generally negative due to interest cash flow receipts and if there are expected increases and any acceleration in the timing of expected charge-offs.charge-offs and prepayments. As we expand thecontinue to use of our own capital to invest in loans for strategic business purposes, we expect the net negative fair value adjustments on loans to increase. However, we anticipate these fair value adjustments will be more than offset by the interest income earned from holding such loans.
The following table summarizes net interest income and fair value adjustments on loans invested in by the Company, available-for-sale securities and cash and cash equivalents: |
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Interest income | $ | 42,410 |
| | $ | 8,294 |
| | $ | 3,232 |
|
| Interest expense | (2,575 | ) | | — |
| | — |
|
| Net fair value adjustments | (30,817 | ) | | (2,949 | ) | | 14 |
|
| Net interest income and fair value adjustments | $ | 9,018 |
| | $ | 5,345 |
| | $ | 3,246 |
|
Interest income associated with loans invested in by the Company was $42.4 million and $8.3 million for the years ended December 31, 2017 and 2016, respectively. The increase in net interest income was primarilyfluctuate due to the increase in the average outstanding balancesimpact of loans invested in by the Company during 2017discounts offered to support Company-sponsored securitization transactions and wholemeet yield expectations of our loan sales. Interest income was $8.3 million and $3.2 million for the years ended December 31, 2016 and 2015, respectively, an increase of 157%. The increase in interest income was due to an increase in the average balance of loans invested in by the Company primarily to support platform equilibrium. Interest income also includes interest earned on cash and cash equivalents and our securities available for sale portfolio.
Interest expense associated with loans invested in by the Company was $2.6 million for the year ended December 31, 2017. There was no interest expense for the year ended December 31, 2016 or 2015. Interest expense in 2017 resulted from the use of securitization notesinvestors and the Warehouse credit facility to finance loans held for investment and held for sale byholding period of the Company, respectively.loans.
Net fair value adjustments were $(30.8) million and $(2.9) million for the years ended December 31, 2017 and 2016, respectively, primarily due to losses on fair value adjustments on loans invested in by the Company, as well as $1.5 million in other-than-temporary impairment charges during the year ended December 31, 2017 on subordinated residual certificates held as a result of Company-sponsored securitization transactions.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Net Interest Income and Fair Value Adjustments on Loans, Notes, Certificates and Secured Borrowings: We do not assume principal or interest rate risk on loans facilitated through our lending marketplace that are funded by notes, certificates and certain secured borrowings because loan balances, interest rates and maturities are matched and offset by an equal balance of notes, certificates or secured borrowings with the exact same interest rates and maturities. The changes in fair value of loans, notes, certificates and secured borrowings are shown on our Consolidated Statements of Operations on a net basis. Due to the payment dependent feature of the notes, certificates and secured borrowings, fair value adjustments on loans funded with notes, certificates and secured borrowings result in no net effect on our earnings.
The following tables provide additional detailearnings, except for changes in fair value of any applicable credit support agreements related to net interest income:secured borrowings.
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | Change ($) | | Change (%) |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 568,849 |
| | 688,368 |
| | $ | (119,519 | ) | | (17 | )% |
| Loans held for investment and held for sale by the Company at fair value | 35,692 |
| | 3,222 |
| | 32,470 |
| | N/M |
|
| Securities available for sale | 4,093 |
| | 3,244 |
| | 849 |
| | 26 | % |
| Cash and cash equivalents | 2,625 |
| | 1,828 |
| | 797 |
| | 44 | % |
| Total interest income | 611,259 |
| | 696,662 |
| | (85,403 | ) | | (12 | )% |
| Interest expense: | | | | | | | |
| Warehouse credit facility | (1,900 | ) | | — |
| | (1,900 | ) | | N/M |
|
| Securitization notes | (675 | ) | | — |
| | (675 | ) | | N/M |
|
| Notes, certificates and secured borrowings | (568,849 | ) | | (688,368 | ) | | 119,519 |
| | (17 | )% |
| Total interest expense | (571,424 | ) | | (688,368 | ) | | 116,944 |
| | (17 | )% |
| Net interest income | $ | 39,835 |
| | $ | 8,294 |
| | $ | 31,541 |
| | N/M |
|
| Average outstanding balances: | | | | | | | |
| Loans held for investment | $ | 3,936,957 |
| | $ | 4,727,434 |
| | $ | (790,477 | ) | | (17 | )% |
| Loans held for investment by the Company | $ | 44,340 |
| | $ | 13,520 |
| | $ | 30,820 |
| | N/M |
|
| Loans held for sale by the Company | $ | 152,805 |
| | $ | 10,393 |
| | $ | 142,412 |
| | N/M |
|
| Notes, certificates and secured borrowings | $ | 3,971,992 |
| | $ | 4,753,757 |
| | $ | (781,765 | ) | | (16 | )% |
N/M Not meaningful.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following tables provide additional detail related to net interest income and fair value adjustments for assets invested in by the Company, assets with equal and offsetting liabilities, and total interest income, interest expense and net fair value adjustments:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 110,597 |
| | $ | 113,644 |
| | $ | (3,047 | ) | | (3 | )% |
| Securities available for sale | 14,351 |
| | 7,602 |
| | 6,749 |
| | 89 | % |
| Cash, cash equivalents and restricted cash | 6,002 |
| | 4,056 |
| | 1,946 |
| | 48 | % |
| Total | 130,950 |
| | 125,302 |
| | 5,648 |
| | 5 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (27,839 | ) | | (19,714 | ) | | (8,125 | ) | | 41 | % |
| Securitization notes and certificates | (4,353 | ) | | (3,731 | ) | | (622 | ) | | 17 | % |
| Total | (32,192 | ) | | (23,445 | ) | | (8,747 | ) | | 37 | % |
| Net interest income | $ | 98,758 |
| | $ | 101,857 |
| | $ | (3,099 | ) | | (3 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 214,395 |
| | $ | 362,160 |
| | $ | (147,765 | ) | | (41 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (214,395 | ) | | (362,160 | ) | | 147,765 |
| | (41 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 345,345 |
| | $ | 487,462 |
| | $ | (142,117 | ) | | (29 | )% |
| Interest expense | (246,587 | ) | | (385,605 | ) | | 139,018 |
| | (36 | )% |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (44,302 | ) | | 44 | % |
| Net interest income and fair value adjustments | $ | (46,232 | ) | | $ | 1,169 |
| | $ | (47,401 | ) | | N/M |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2016 | | 2015 | | Change ($) | | Change (%) |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 688,368 |
| | $ | 549,740 |
| | $ | 138,628 |
| | 25 | % |
| Loans held for investment and held for sale by the Company at fair value | 3,222 |
| | 42 |
| | 3,180 |
| | N/M |
|
| Securities available for sale | 3,244 |
| | 2,143 |
| | 1,101 |
| | 51 | % |
| Cash and cash equivalents | 1,828 |
| | 1,047 |
| | 781 |
| | 75 | % |
| Total interest income | 696,662 |
| | 552,972 |
| | 143,690 |
| | 26 | % |
| Interest expense: | | | | | | | |
| Notes and certificates | (688,368 | ) | | (549,740 | ) | | (138,628 | ) | | 25 | % |
| Total interest expense | (688,368 | ) | | (549,740 | ) | | (138,628 | ) | | 25 | % |
| Net interest income | $ | 8,294 |
| | $ | 3,232 |
| | $ | 5,062 |
| | 157 | % |
| Average outstanding balances: | | | | | | | |
| Loans held for investment | $ | 4,727,434 |
| | $ | 3,821,448 |
| | $ | 905,986 |
| | 24 | % |
| Loans held for investment by the Company | $ | 13,520 |
| | $ | — |
| | $ | 13,520 |
| | N/M |
|
| Loans held for sale by the Company | $ | 10,393 |
| | $ | — |
| | $ | 10,393 |
| | N/M |
|
| Notes and certificates | $ | 4,753,757 |
| | $ | 3,840,241 |
| | $ | 913,516 |
| | 24 | % |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans invested in by the Company, securities available for sale, cash, cash equivalents and restricted cash, and debt: |
| Interest income: | | | | | | | |
| Loans held for investment and held for sale by the Company at fair value | $ | 113,644 |
| | $ | 35,692 |
| | $ | 77,952 |
| | N/M |
|
| Securities available for sale | 7,602 |
| | 4,093 |
| | 3,509 |
| | 86 | % |
| Cash, cash equivalents and restricted cash | 4,056 |
| | 2,625 |
| | 1,431 |
| | 55 | % |
| Total | 125,302 |
| | 42,410 |
| | 82,892 |
| | 195 | % |
| Interest expense: | | | | | | | |
| Credit facilities and securities sold under repurchase agreements | (19,714 | ) | | (1,900 | ) | | (17,814 | ) | | N/M |
|
| Securitization notes and certificates | (3,731 | ) | | (675 | ) | | (3,056 | ) | | N/M |
|
| Total | (23,445 | ) | | (2,575 | ) | | (20,870 | ) | | N/M |
|
| Net interest income | $ | 101,857 |
| | $ | 39,835 |
| | $ | 62,022 |
| | 156 | % |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
| | | | | | | | |
| Loans, notes, certificates and secured borrowings: |
| Interest income: | | | | | | | |
| Loans held for investment at fair value | $ | 362,160 |
| | $ | 568,849 |
| | $ | (206,689 | ) | | (36 | )% |
| Interest expense: | | | | | | | |
| Notes, certificates and secured borrowings | (362,160 | ) | | (568,849 | ) | | 206,689 |
| | (36 | )% |
| Net interest income | $ | — |
| | $ | — |
| | $ | — |
| | — | % |
| | | | | | | | |
| Total net interest income and fair value adjustments: |
| Interest income | $ | 487,462 |
| | $ | 611,259 |
| | $ | (123,797 | ) | | (20 | )% |
| Interest expense | (385,605 | ) | | (571,424 | ) | | 185,819 |
| | (33 | )% |
| Net fair value adjustments | (100,688 | ) | | (30,817 | ) | | (69,871 | ) | | N/M |
|
| Net interest income and fair value adjustments | $ | 1,169 |
| | $ | 9,018 |
| | $ | (7,849 | ) | | (87 | )% |
N/M – Not meaningful.meaningful
The following tables provide the outstanding average balances, which are key drivers of interest income and interest expense in the periods presented:
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 12,474 |
| | $ | 140,551 |
| | $ | (128,077 | ) | | (91 | )% |
| Loans held for sale by the Company | $ | 754,693 |
| | $ | 546,959 |
| | $ | 207,734 |
| | 38 | % |
| Securities available for sale | $ | 221,166 |
| | $ | 144,046 |
| | $ | 77,120 |
| | 54 | % |
| Credit facilities and securities sold under repurchase agreements | $ | 481,960 |
| | $ | 299,419 |
| | $ | 182,541 |
| | 61 | % |
| Securitization notes and certificates | $ | 100,747 |
| | $ | 131,894 |
| | $ | (31,147 | ) | | (24 | )% |
| Loans held for investment | $ | 1,574,271 |
| | $ | 2,557,575 |
| | $ | (983,304 | ) | | (38 | )% |
| Notes, certificates and secured borrowings | $ | 1,576,877 |
| | $ | 2,599,676 |
| | $ | (1,022,799 | ) | | (39 | )% |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| | Outstanding Average Balances |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Loans held for investment by the Company | $ | 140,551 |
| | $ | 44,340 |
| | $ | 96,211 |
| | N/M |
|
| Loans held for sale by the Company | $ | 546,959 |
| | $ | 152,805 |
| | $ | 394,154 |
| | N/M |
|
| Securities available for sale | $ | 144,046 |
| | $ | 211,740 |
| | $ | (67,694 | ) | | (32 | )% |
| Credit facilities and securities sold under repurchase agreements | $ | 299,419 |
| | $ | 32,008 |
| | $ | 267,411 |
| | N/M |
|
| Securitization notes and certificates | $ | 131,894 |
| | $ | 24,009 |
| | $ | 107,885 |
| | N/M |
|
| Loans held for investment | $ | 2,557,575 |
| | $ | 3,936,957 |
| | $ | (1,379,382 | ) | | (35 | )% |
| Notes, certificates and secured borrowings | $ | 2,599,676 |
| | $ | 3,971,992 |
| | $ | (1,372,316 | ) | | (35 | )% |
N/M – Not meaningful
Interest income associated with loans invested in by the Company, securities available for sale, and cash, cash equivalents and restricted cash was $131.0 million and $125.3 million for the years ended December 31, 2019 and 2018, respectively an increase of 5%. The increase was primarily due to an increase in the average outstanding balance of securities available for sale. The impact of the increase in the outstanding balance of loans invested in by the Company was offset by the mix shift to higher credit quality loans with lower interest rates.
Interest expense associated with credit facilities, securities sold under repurchase agreements and securitization notes was $32.2 million and $23.4 million for the years ended December 31, 2019 and 2018, respectively, an increase of 37%. The increase was primarily due to an increase in the average outstanding balance of credit facilities, partially offset by a decrease in the average outstanding balances of securitization notes and certificates.
Net fair value adjustments were $(145.0) million and $(100.7) million for the years ended December 31, 2019 and 2018, respectively, an increase of 44%. The increase was primarily due to increases in the average outstanding balances and investor required yields related to certain loans invested in by the Company to support Structured Program transactions and whole loan sales, partially offset by a shift in overall platform mix towards lower risk and higher credit quality borrowers.
Interest income from loans held for investment was $568.8and the offsetting interest expense from notes, certificates and secured borrowings were both $214.4 million and $688.4362.2 million for the years ended December 31, 20172019 and 2016,2018, respectively, a decrease of 17%41%. The decrease in interest income was primarily due to a decrease in the average outstanding balance of loans held for investment, driven by the sale of six LCAM funds and a larger portion of loans originated in 2017 being sold to whole loan investors.
Interest income from loans held for investment was $688.4 million and $549.7 million for the years ended December 31, 2016and 2015, respectively, an increase of 25%. The increase in interest income was primarily due to the increase in the average outstanding balances of loans held for investment.
Interest expense for notes, certificates and secured borrowings was $568.8 million and $688.4 million for the years ended December 31, 2017 and 2016, respectively, a decrease of 17%. The decrease in interest expense was primarily due to a decrease in the average outstanding balances of loans held for investment and notes, certificates and secured borrowings, driven bydue to a larger portion of loans originated in 2017 being sold to whole loan investors and purchases by the Company for Structured Program transactions.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Investor Fees
The tables below illustrate the composition of investor fees and the outstanding principal balance of loans serviced, which is a key driver of investor fees, by the method in which the loans were financed for each period presented:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Investors Fees: |
| Whole loans sold | $ | 100,123 |
| | $ | 82,824 |
| | $ | 17,299 |
| | 21 | % |
| Notes, certificates and secured borrowings | 24,409 |
| | 31,955 |
| | (7,546 | ) | | (24 | )% |
Funds and separately managed accounts (1) | — |
| | 104 |
| | (104 | ) | | (100 | )% |
| Total | $ | 124,532 |
| | $ | 114,883 |
| | $ | 9,649 |
| | 8 | % |
| | | | | | | | |
Outstanding Principal Balance of Loans Serviced On Our Platform (in millions) (2): |
| Whole loans sold | $ | 14,118 |
| | $ | 10,890 |
| | $ | 3,228 |
| | 30 | % |
| Notes, certificates and secured borrowings | 1,149 |
| | 2,013 |
| | (864 | ) | | (43 | )% |
| Total excluding loans invested in by the Company | $ | 15,267 |
| | $ | 12,903 |
| | $ | 2,364 |
| | 18 | % |
| Loans invested in by the Company | 744 |
| | 843 |
| | (99 | ) | | (12 | )% |
| Total | $ | 16,011 |
| | $ | 13,746 |
| | $ | 2,265 |
| | 16 | % |
| |
(1) | Funds are the private funds for which LendingClub Asset Management, LLC (LCAM), or its subsidiaries acted as general partner. In March 2019, we completed the dissolution of those funds. The Company does not expect to earn investor fees from private funds and separately managed accounts in the future. |
| |
(2) | As of the end of each respective period. |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Investor Fees: | | | | | | | |
| Whole loans sold | $ | 82,824 |
| | $ | 52,049 |
| | $ | 30,775 |
| | 59 | % |
| Notes, certificates and secured borrowings | 31,955 |
| | 32,504 |
| | (549 | ) | | (2 | )% |
Funds and separately managed accounts (1) | 104 |
| | 2,555 |
| | (2,451 | ) | | (96 | )% |
| Total | $ | 114,883 |
| | $ | 87,108 |
| | $ | 27,775 |
| | 32 | % |
| | | | | | | | |
Outstanding Principal Balance of Loans Serviced On Our Platform (in millions) (2): |
| Whole loans sold | $ | 10,890 |
| | $ | 8,178 |
| | $ | 2,712 |
| | 33 | % |
| Notes, certificates and secured borrowings | 2,013 |
| | 3,142 |
| | (1,129 | ) | | (36 | )% |
| Total excluding loans invested in by the Company | $ | 12,903 |
| | $ | 11,320 |
| | $ | 1,583 |
| | 14 | % |
| Loans invested in by the Company | 843 |
| | 593 |
| | 250 |
| | 42 | % |
| Total | $ | 13,746 |
| | $ | 11,913 |
| | $ | 1,833 |
| | 15 | % |
| |
(1) | Funds are the private funds for which LendingClub Asset Management, LLC (LCAM), or its subsidiaries acted as general partner. In March 2019, we completed the dissolution of those funds. The Company does not expect to earn investor fees from private funds and separately managed accounts in the future. |
(2) As of the end of each respective period.
The Company receives fees to compensate us for the costs we incur in servicing a loan, including managing payments from borrowers, collections, payments to investors, maintaining investors’ account portfolios, providing information, and issuing monthly statements. The amount of investor fee revenue earned is predominantly affected
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
by the servicing rates paid by investors, the outstanding principal balance of loans and the amount of principal and interest collected from borrowers and remitted to investors.
Interest expense for notesInvestor fee revenue related to whole loans sold also includes the change in fair value of our servicing assets and certificatesliabilities associated with the loans. Servicing rights are recorded as either an asset or liability in “Gain on sales of loans” in the Company’s Consolidated Statements of Operations.
Investor fees – whole loans sold:Investor fee revenue related to the servicing of whole loans sold was $688.4$100.1 million and $549.7$82.8 million for the years ended December 31, 20162019 and 2015,2018, respectively, an increase of 25%21%. The increase in interest expense was primarily due to a higher principal balance of whole loans serviced and increases in delinquent loan collections and charged-off loan sales, partially offset by the change in fair value of servicing rights.
Investor fees – notes, certificates and secured borrowings:Investor fee revenue related to the servicing of loans underlying notes, certificates and secured borrowings was $24.4 million and $32.0 million for the years ended December 31, 2019 and 2018, respectively, a decrease of 24%. The decrease was primarily due to a lower principal balance of loans serviced and a decrease in charged-off loan sales, partially offset by an increase in delinquent loan collections.
Investor fees – Funds and separately managed accounts: In July 2016, certain of the private funds ceased accepting contributions and limited existing investors’ ability to make redemption requests, pursuant to the terms of the respective limited partnership agreements, and in October 2017 we completed the dissolution of those funds. In October 2018, LCAM initiated the liquidation of the remaining private funds it manages. As a result, the assets under management associated with those funds were returned to investors and liquidation of those funds was complete as of December 31, 2018. The Company does not expect to earn investor fees from private funds and separately managed accounts in the future.
Gain (Loss) on Sales of Loans
In connection with loan sales and Structured Program transactions, in addition to investor fees earned with respect to the corresponding loan, we recognize a gain or loss on the sale of that loan based on the level to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Additionally, we recognize transactions costs as a loss on sale of loans.
Gain on sales of loans was $67.7 million and $46.0 million for the years ended December 31, 2019 and 2018, respectively, an increase of 47%. The increase was primarily due to an increase in the average outstanding balancesvolume of notesloans sold and certificates.an increase in the weighted-average contractual loan servicing fee that resulted in higher gains on sales of loans.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Other Revenue
Other revenue primarily consists of referral revenue that relates to fees earned from third-party companies when customers referred by us consider or purchase products or services from such third-party companies, and sublease revenue from our sublet office space in San Francisco, California. The table below illustrates the composition of other revenue for each period presented:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Referral revenue | $ | 5,474 |
| | $ | 3,645 |
| | $ | 1,829 |
| | 50 | % |
| Sublease revenue | 4,637 |
| | 397 |
| | 4,240 |
| | N/M |
|
Other (1) | 3,720 |
| | 1,797 |
| | 1,923 |
| | 107 | % |
| Other revenue | $ | 13,831 |
| | $ | 5,839 |
| | $ | 7,992 |
| | 137 | % |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Referral revenue | $ | 3,645 |
| | $ | 5,258 |
| | $ | (1,613 | ) | | (31 | )% |
| Sublease revenue | 397 |
| | 391 |
| | 6 |
| | 2 | % |
Other (1) | 1,797 |
| | 787 |
| | 1,010 |
| | 128 | % |
| Other revenue | $ | 5,839 |
| | $ | 6,436 |
| | $ | (597 | ) | | (9 | )% |
N/M – Not meaningful
| |
(1) | Beginning in the first quarter of 2019, the Company separately reported “Sublease revenue” from “Other” in the tables above. Prior period amounts have been reclassified to conform to the current period presentation. |
Operating Expenses
Our operating expenses consist of sales and marketing, origination and servicing, engineering and product development and other general and administrative expenses, as described below.
Sales and Marketing: Sales and marketing expense consists primarily of borrower and investor acquisition efforts, including costs attributable to marketing and selling the loans facilitated through the platform we operate. This includes costs of building general brand awareness, and salaries, benefits and stock-based compensation expense related to our sales and marketing team.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Origination and Servicing: Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense and vendor costs attributable to activities that most directly relate to facilitating the origination of loans and servicing loans for borrowers and investors. These costs relate to the credit, collections, customer support and payment processing teams and related vendors.
Engineering and Product Development: Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product management teams, and the cost of contractors who work on the development and maintenance of our platform. Engineering and product development expense also includes non-capitalized hardware and software costs and depreciation, amortization and amortizationimpairment of technology assets.
Other General and Administrative: Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting, finance, legal, risk, compliance, human resources and facilities teams, professional services fees and facilities expense.
After announcing the findings of our internal board review, and the significant decrease in the trading price of our common stock in May 2016, we offered incentive retention awards to certain members of the executive management team and other key personnel that totaled $34.9 million that were recognized as compensation expense ratably through May 2017. In addition, we have incurred and expect to continue to incur significant legal and other expenses in connection with the inquiries and private litigation that have arisen and may continue to arise from the internal board review, and our response to ongoing governmental requests for information.
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | Change ($) | | Change (%) |
| Sales and marketing | $ | 229,865 |
| | $ | 216,670 |
| | $ | 13,195 |
| | 6 | % |
| Origination and servicing | 86,891 |
| | 74,760 |
| | 12,131 |
| | 16 | % |
| Engineering and product development | 142,264 |
| | 115,357 |
| | 26,907 |
| | 23 | % |
| Other general and administrative | 191,683 |
| | 207,172 |
| | (15,489 | ) | | (7 | )% |
| Class action litigation settlement | 77,250 |
| | — |
| | 77,250 |
| | N/M |
|
| Goodwill impairment | — |
| | 37,050 |
| | (37,050 | ) | | (100 | )% |
| Total operating expenses | $ | 727,953 |
| | $ | 651,009 |
| | $ | 76,944 |
| | 12 | % |
N/M Not meaningful.
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2016 | | 2015 | | Change ($) | | Change (%) |
| Sales and marketing | $ | 216,670 |
| | $ | 171,526 |
| | $ | 45,144 |
| | 26 | % |
| Origination and servicing | 74,760 |
| | 61,335 |
| | 13,425 |
| | 22 | % |
| Engineering and product development | 115,357 |
| | 77,062 |
| | 38,295 |
| | 50 | % |
| Other general and administrative | 207,172 |
| | 122,182 |
| | 84,990 |
| | 70 | % |
| Goodwill impairment | 37,050 |
| | — |
| | 37,050 |
| | N/M |
|
| Total operating expenses | $ | 651,009 |
| | $ | 432,105 |
| | $ | 218,904 |
| | 51 | % |
N/M Not meaningful.
Sales and marketing: Sales and marketing expense was $229.9 million and $216.7 million for the years ended December 31, 2017 and 2016, respectively, an increase of 6%. The increase was primarily due to an $18.3 million increase in variable marketing expenses driven by increased loan origination volume, partially offset by a $2.6 million decrease in non-recurring advisory fees incurred in the second and third quarters of 2016. Sales and marketing expense as a percent of loan originations was 2.6% in 2017 compared to 2.5% in 2016.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Sales and marketing | $ | 279,423 |
| | $ | 268,517 |
| | $ | 10,906 |
| | 4 | % |
| Origination and servicing | 103,403 |
| | 99,376 |
| | 4,027 |
| | 4 | % |
| Engineering and product development | 168,380 |
| | 155,255 |
| | 13,125 |
| | 8 | % |
| Other general and administrative | 238,292 |
| | 228,641 |
| | 9,651 |
| | 4 | % |
| Goodwill impairment | — |
| | 35,633 |
| | (35,633 | ) | | (100 | )% |
| Class action and regulatory litigation expense | — |
| | 35,500 |
| | (35,500 | ) | | (100 | )% |
| Total operating expenses | $ | 789,498 |
| | $ | 822,922 |
| | $ | (33,424 | ) | | (4 | )% |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | Change ($) | | Change (%) |
| Sales and marketing | $ | 268,517 |
| | $ | 229,865 |
| | $ | 38,652 |
| | 17 | % |
| Origination and servicing | 99,376 |
| | 86,891 |
| | 12,485 |
| | 14 | % |
| Engineering and product development | 155,255 |
| | 142,264 |
| | 12,991 |
| | 9 | % |
| Other general and administrative | 228,641 |
| | 191,683 |
| | 36,958 |
| | 19 | % |
| Goodwill impairment | 35,633 |
| | — |
| | 35,633 |
| | N/M |
|
| Class action and regulatory litigation expense | 35,500 |
| | 77,250 |
| | (41,750 | ) | | (54 | )% |
| Total operating expenses | $ | 822,922 |
| | $ | 727,953 |
| | $ | 94,969 |
| | 13 | % |
N/M – Not meaningful
Sales and marketing: Sales and marketing expense was $216.7$279.4 million and $171.5$268.5 million for the years ended December 31, 20162019 and 2015,2018, respectively, an increase of 26%. The increase was primarily due to a $34.9 million increase in variable marketing expenses that drove higher loan originations and a $6.5 million increase in personnel-related expenses associated with higher headcount levels.
Origination and servicing: Origination and servicing expense was $86.9 million and $74.8 million for the years ended December 31, 2017 and 2016, respectively, an increase of 16%. The increase was primarily due to a $7.8 million increase in personnel-related expenses associated with higher headcount levels and a $2.7 million increase in loan processing costs driven by increased collection efforts, both resulting from higher loan origination volume in 2017 compared to 2016.
Origination and servicing expense was $74.8 million and $61.3 million for the years ended December 31, 2016 and 2015, respectively, an increase of 22%4%. The increase was primarily due to an $8.1 million increase in variable marketing expense based on higher loan origination volume, partially offset by a decrease in personnel-related expenses for full-time employees. Sales and marketing expense as a $4.4 million increase in loan processing costs, driven by higherpercent of loan originations decreased to 2.27% in 2019 from 2.47% in 2018 as a result of the Company’s cost structure simplification efforts, as well as improvements in customer acquisition targeting models.
Origination and increased collection efforts.
Engineeringservicing: Origination and product development: Engineering and product developmentservicing expense was $142.3$103.4 million and $115.4$99.4 million for the years ended December 31, 20172019 and 2016,2018, respectively, an increase of 23%4%. The increase was primarily due to incremental personnel-related expenses associated with establishing a site in the Salt Lake City area. Personnel-related expenses for full-time employees decreased from 2018, which was partially offset by an increased use of outsourced service providers.
Engineering and product development: Engineering and product development expense was $168.4 million and $155.3 million for the years ended December 31, 2019 and 2018, respectively, an increase of 8%. The increase was primarily driven by continued investment in technology and platform improvements that are focused on enhancing our credit decisioning capabilities, internal testing environment and cloud infrastructure, which included a $15.9 million increaseincreases in depreciation and impairment expense a $4.2 million increase inand equipment and software expense and a $6.0 million increase in personnel-relatedexpense. Personnel-related expenses primarily associated with higher headcount levels.for full-time employees decreased from 2018, which was partially offset by an increased use of outsourced service providers.
Engineering and product development expense was $115.4 million and $77.1 million for the years ended December 31, 2016 and 2015, respectively, an increase of 50%. The increase was primarily driven by investment in our platform and product development, which included a $23.8 millionincrease in personnel-related expenses resulting from increased headcount, salaries and retention costs, and a $12.6 million increase in equipment, software and depreciation expense.
We capitalized $45.0 million, $41.6$36.1 million and $25.4$46.8 million in software development costs for the years ended December 31, 2017, 20162019 and 2015,2018, respectively.
Other general and administrative expense: Other general and administrative expense was $191.7$238.3 million and $207.2$228.6 million for the years ended December 31, 20172019 and 2016, respectively, a decrease of 7%. The decrease was primarily due to $28.4 million in insurance reimbursements for certain legal expenses incurred as a result of the Company’s board review and related governmental and regulatory inquiries, partially offset by an increase of $7.9 million in legal expenses primarily related to such board review. Additionally, the decrease was due to a $9.3 million reduction in professional services fees related to the board review, partially offset by an increase of $7.4 million in personnel-related expenses associated with higher headcount levels.
Other general and administrative expense was $207.2 million and $122.2 million for the years ended December 31, 2016 and 2015,2018, respectively, an increase of 70%4%. The increase was primarily due to a $39.3 millionan increase in legal, audit, communications, and advisory fees primarily associated with the board review (including investigating the matters identified in the board review), government inquiries, supporting investor due diligence activities, remediation efforts and pending and potential future litigation matters. The increase was also due topersonnel-related expenses resulting from a $30.9 millionincrease in salaries and stock-based compensationhigher headcount of full-time employees, an expense related to increased headcountthe termination of a legacy contract in the second quarter of 2019 and salaries of newly hired executives, as we invested in infrastructure and support teams, retention costs, and a $8.6 millionan increase in facilities expense. Additionally, other general and administrative expense increased by $1.0 million during the year ended December 31, 2016 for the LCAM reimbursement to the Funds’ limited partners.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Class Action Litigation Settlement
On February 19, 2018, we reachedin facilities expense, partially offset by a preliminary settlement, subject to court approval, to resolve the previously disclosed class action lawsuitsreduction in federalprofessional services and California state courts arising out of legacy matters as disclosedexternal advisory fees. The increase in facilities expense was primarily associated with establishing a site in the 2016 Board Review. Class action litigation settlement expense forSalt Lake City area and having the year ended December 31, 2017, was $77.25 million, which includes $125.0 million foroffsetting sublease revenue from our sublet office space in San Francisco, California, recorded in Other revenue in the agreement between the parties, offset by $47.75 million that will be covered by insurance. See“Part II – Item 8 – FinancialCompany’s Consolidated Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Commitments and Contingencies” for additional information.of Operations.
Goodwill Impairment
We haveIn 2018, we had one reporting unit for goodwill impairment testing purposes, the patient and education finance (PEF) reporting unit. We performed a quantitative annual test for impairment as ofon April 1, 2017, for which the estimated fair value of the PEF reporting unit substantially exceeded its carrying value. We estimate the fair value of the PEF reporting unit using the discounted cash flow model, which relies on several assumptions. These assumptions include weighted-average cost of capital, as well as transaction fee revenue based on projected loan origination growth, projected revenue growth, projected operating expenses2018 and contribution margin, capital expenditures and income taxes. We believe these assumptions to be representative of assumptions that a market participant would use in valuing the PEF reporting unit, but these assumptions are inherently uncertain. If the performance of the PEF reporting unit fails to meet current forecast or if the assumptions regarding weighted-average cost of capital and income taxes are not accurate, it is possible that the carrying value of this reporting unit will exceed its fair value, which could result in recognition of a noncash impairment of goodwill that could be material.
There were no goodwill impairment expenses recorded for the years ended December 31, 2017 or December 31, 2015. We recorded a goodwill impairment expense of $37.1$35.6 million in the second quarter of 2018, resulting in full impairment of the remaining goodwill.
Class Action and Regulatory Litigation Expense
There was no class action and regulatory litigation expense related to legacy issues for the year ended December 31, 2016 related to the PEF reporting unit. See “Part II – Item 8 – Financial Statements2019. Class action and Supplementary Data – Notes to Consolidated Financial Statements – Note 10. Intangible Assets and Goodwill” for a further description of this impairment expense.
Income Taxes
Income taxregulatory litigation expense (benefit) was $0.6 million, $(4.2) million, and $2.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
For the year ended December 31, 2017,2018 was $35.5 million, which is included in “Class action and regulatory litigation expense” on the income taxCompany’s Consolidated Statements of Operations. This expense was primarily attributable to the tax effects of unrealized gains credited to other comprehensive income associated with our available for sale portfolio.
For the year ended December 31, 2016, the income tax benefit was primarily attributable to the tax effects of the impairment of tax-deductible goodwill from the acquisition of Springstone, which previously gave rise to an indefinite-lived deferred tax liability, and the tax effects of unrealized gains credited to other comprehensive income associated with our available for sale portfolio.
For the year ended December 31, 2015, income tax expense was primarily attributable to the amortization of tax deductible goodwill from the acquisition of Springstone, which gave rise to an indefinite-lived deferred tax liability, and the realization of excess tax benefits related to stock-based compensation.
Duringsignificant governmental and regulatory investigations following the first quarter of 2017, we adopted ASU 2016-09 relating to accounting for excess tax benefits associated with stock-based compensation. As a result of the adoption of ASU 2016-09, we increased our deferred tax assets by $56.7 million for previously unrecognized excess tax benefits relating to stock-based compensation,internal board review described more fully offset by a $56.7 million increase in the valuation allowance against our deferred tax assets.
LENDINGCLUB CORPORATION
“Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts – Board Review” contained in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was signed into law. SomePart II, Item 7 of the provisions ofCompany’s Annual Report on Form 10-K for the Tax Reform affecting corporations include, but are not limited to, a reduction of the federal corporate income tax rate from 35% to 21%, certain limitations on interest expense deductions and executive compensation, and the expensing of costs of acquired qualified property. We evaluated the impact of the new tax law on our financial condition and results of operations. The impact of the federal corporate income tax rate reduction to 21%, which became effective on January 1, 2018, resulted in the reduction in our deferred tax assets as ofyear ended December 31, 2017 by $53.0 million, fully offset by2016.
Income Taxes
Income tax expense (benefit) is primarily attributable to the tax effects of unrealized gains recorded to other comprehensive income associated with the Company’s available for sale portfolio and current state income taxes. We continue to recognize a $53.0 million reduction in thefull valuation allowance against our deferred tax assets.
As of December 31, 2017 and December 31, 2016, we continued to record a valuation allowance against the net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. As of December 31, 20172019 and December 31, 2016,2018, the valuation allowance was $140.6$169.5 million and $75.3169.3 million, respectively. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
Non-GAAP Financial Measures and Supplemental Financial Information
We use certain non-GAAP financial measures in evaluating our operating results. We believe that contribution, contribution margin, adjustedContribution, Contribution Margin, Adjusted Net Income (Loss), Adjusted EBITDA, adjustedAdjusted EBITDA margin,Margin, Adjusted Earnings (Loss) Per Share (Adjusted EPS) and investor fees before changes in fair value of servicing assetsNet Cash and servicing liabilitiesOther Financial Assets help identify trends in our core business results and allow for greater transparency with respect to key metrics used by our management in its decision making.
Our non-GAAP measures of contribution, contribution margin, adjusted EBITDA, adjusted EBITDA margin, and investor fees before changes in fair value of assets and liabilities have limitations as analytical tools and you should not consider them in isolation. These non-GAAP measures should not be viewed as substitutes for, or superior to, net income (loss) as prepared in accordance with GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. There are a number of limitations related to the use of these non-GAAP financial measures versus their most directly comparable GAAP measures, which include the following:
Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure.
These measures do not consider the potentially dilutive impact
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of stock-based compensation.Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Although depreciation, impairment and amortization are non-cash charges, the assets being depreciated, impaired and amortized may have to be replaced in the future and adjustedAdjusted EBITDA and adjustedAdjusted EBITDA marginMargin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements.
Adjusted EBITDA and adjusted EBITDA marginThese measures do not reflect tax payments that may represent a reduction in cash available to us.
Contribution and Contribution Margin
Contribution is a non-GAAP financial measure that is calculated as net revenue less “sales“Sales and marketing” and “origination“Origination and servicing” expenses on the Company’s Consolidated Statements of Operations, adjusted to exclude cost structure simplification and non-cash stock-based compensation expenseexpenses within these captions and (income)income or loss attributable to noncontrolling interests. These costs represent the costs that are most directly related to generating such revenue. The adjustment for cost structure simplification expense relates to a review of our cost structure and a number of expense initiatives underway, including the establishment of a site in the Salt Lake City area. The expense includes incremental and excess personnel-related expenses associated with establishing our Salt Lake City area site and external advisory fees. Contribution Marginmargin is a non-GAAP financial measure calculated by dividing Contribution by total net revenue.
Contribution and Contribution Margin are measures of overall direct product profitability that our management and board of directors find useful, and believe investors may find useful, in understanding the relationship between costs
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
most directly associated with revenue generating activities and the related revenue, and remaining amount available to support our costs of engineering and product development and other general and administrative expense to evaluate our operating performance and trends. While we believe Contribution and Contribution Margin are useful for the reasons above, they are not an overall measure of our profitability, as they exclude engineering and product development and other general and administrative expenses that are required to run our business. Factors that affect our Contribution and Contribution Margin include revenue mix, variable marketing expenses and origination and servicing expenses.
The following table shows the calculation of contributionContribution and contribution margin:Contribution Margin:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Total net revenue | $ | 574,540 |
| | $ | 500,812 |
| | $ | 429,943 |
|
| Less: Sales and marketing expense | 229,865 |
| | 216,670 |
| | 171,526 |
|
| Less: Origination and servicing expense | 86,891 |
| | 74,760 |
| | 61,335 |
|
| Total direct expenses | $ | 316,756 |
| | $ | 291,430 |
| | $ | 232,861 |
|
Add: Stock-based compensation (1) | 12,458 |
| | 11,705 |
| | 9,985 |
|
| Add: Loss attributable to noncontrolling interests | 210 |
| | — |
| | — |
|
Contribution (2) | $ | 270,452 |
| | $ | 221,087 |
| | $ | 207,067 |
|
Contribution margin (2) | 47.1 | % | | 44.1 | % | | 48.2 | % |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Total net revenue | $ | 758,607 |
| | $ | 694,812 |
| | $ | 574,540 |
|
| Sales and marketing expense | (279,423 | ) | | (268,517 | ) | | (229,865 | ) |
| Origination and servicing expense | (103,403 | ) | | (99,376 | ) | | (86,891 | ) |
| Total direct expenses | (382,826 | ) | | (367,893 | ) | | (316,756 | ) |
Cost structure simplification expense (1) | 7,318 |
| | 880 |
| | — |
|
Stock-based compensation (2) | 9,250 |
| | 11,684 |
| | 12,458 |
|
| (Income) Loss attributable to noncontrolling interests | (55 | ) | | (155 | ) | | 210 |
|
| Contribution | $ | 392,294 |
| | $ | 339,328 |
| | $ | 270,452 |
|
| Contribution margin | 51.7 | % | | 48.8 | % | | 47.1 | % |
| |
(1) | Contribution excludes the portion of personnel-related expense associated with establishing a site in the Salt Lake City area that is included in the “Sales and marketing” and “Origination and servicing” expense categories. |
| |
(2) | Contribution excludes stock-based compensation expense included in the “Sales and marketing” and “Origination and servicing” expense categories. |
| |
(2)
| Beginning in the first quarter of 2017, contribution includes net interest income to capture the full spectrum of revenue we expect to generate. Beginning in the third quarter of 2017, contribution excludes (income) loss attributable to noncontrolling interests. Prior period amounts have been reclassified to conform to the current period presentation. |
The following table presents a reconciliation of net loss to contribution for each of the periods indicated:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Consolidated net loss | $ | (154,045 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
| Engineering and product development expense | 142,264 |
| | 115,357 |
| | 77,062 |
|
| Other general and administrative expense | 191,683 |
| | 207,172 |
| | 122,182 |
|
| Class action litigation settlement expense | 77,250 |
| | — |
| | — |
|
| Goodwill impairment expense | — |
| | 37,050 |
| | — |
|
Stock-based compensation expense (1) | 12,458 |
| | 11,705 |
| | 9,985 |
|
| Income tax expense (benefit) | 632 |
| | (4,228 | ) | | 2,833 |
|
| Loss attributable to noncontrolling interests | 210 |
| | — |
| | — |
|
Contribution (2) | $ | 270,452 |
| | $ | 221,087 |
| | $ | 207,067 |
|
| Total net revenue | $ | 574,540 |
| | $ | 500,812 |
| | $ | 429,943 |
|
Contribution margin (2) | 47.1 | % | | 44.1 | % | | 48.2 | % |
| |
(1)
| Contribution excludes stock-based compensation expense included in the “Sales and marketing” and “Origination and servicing” expense categories. |
| |
(2)
| Beginning in the first quarter of 2017, contribution includes net interest income to capture the full spectrum of revenue we expect to generate. Beginning in the third quarter of 2017, contribution excludes (income) loss attributable to noncontrolling interests. Prior period amounts have been reclassified to conform to the current period presentation. |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table presents a reconciliation of LendingClub net loss to Contribution for each of the periods indicated:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
| Engineering and product development expense | 168,380 |
| | 155,255 |
| | 142,264 |
|
| Other general and administrative expense | 238,292 |
| | 228,641 |
| | 191,683 |
|
Cost structure simplification expense (1) | 7,318 |
| | 880 |
| | — |
|
| Goodwill impairment expense | — |
| | 35,633 |
| | — |
|
| Class action and regulatory litigation expense | — |
| | 35,500 |
| | 77,250 |
|
Stock-based compensation expense (2) | 9,250 |
| | 11,684 |
| | 12,458 |
|
| Income tax expense (benefit) | (201 | ) | | 43 |
| | 632 |
|
| Contribution | $ | 392,294 |
| | $ | 339,328 |
| | $ | 270,452 |
|
| Total net revenue | $ | 758,607 |
| | $ | 694,812 |
| | $ | 574,540 |
|
| Contribution margin | 51.7 | % | | 48.8 | % | | 47.1 | % |
| |
(1) | Contribution excludes the portion of personnel-related expenses associated with establishing a site in the Salt Lake City area that are included in the “Sales and marketing” and “Origination and servicing” expense categories. |
| |
(2) | Contribution excludes stock-based compensation expense included in the “Sales and marketing” and “Origination and servicing” expense categories. |
Adjusted Net Income (Loss), Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EPS
Adjusted Net Income (Loss) is a non-GAAP financial measure defined as net income (loss) attributable to LendingClub adjusted to exclude certain items that are either non-recurring, do not contribute directly to management’s evaluation of its operating results, or non-cash items, such as (1) expenses related to our cost structure simplification, as discussed above, (2) goodwill impairment, (3) legal, regulatory and other expense related to legacy issues, (4) acquisition and related expenses and (5) other items (consisting of certain non-legacy litigation and/or regulatory settlement expenses and gains on disposal of certain assets), net of tax. Legacy items are generally those expenses that arose from the decisions of legacy management prior to the board review initiated in 2016 and resulted in the resignation of our former CEO, including legal and other costs associated with ongoing regulatory and government investigations, indemnification obligations, litigation, and termination of certain legacy contracts. In the fourth quarter of 2019, we added an adjustment to Adjusted Net Income (Loss) for “Acquisition and related expenses” to adjust for costs related to the acquisition of Radius. In the second quarter of 2019, we added an adjustment to Adjusted Net Income (Loss) and Adjusted EBITDA Marginfor “Other items” to adjust for expenses or gains that are not part of our core operating results. We believe Adjusted Net Income (Loss) is an important measure because it directly reflects the financial performance of our business.
Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) beforeattributable to LendingClub adjusted to exclude certain items that are either non-recurring, do not contribute directly to management's evaluation of its operating results, or non-cash items, such as (1) cost structure simplification expense, (2) goodwill impairment, (3) legal, regulatory and other expense related to legacy issues, (4) acquisition and related expenses, (5) other items, as discussed above, (6) depreciation, impairment and amortization expense, (2)(7) stock-based compensation expense (3)and (8) income tax (benefit) expense (4) acquisition related expenses, (5) legal and regulatory expense related to legacy issues, (6) goodwill impairment and (7) (income) loss attributable to noncontrolling interests. Adjusted EBITDA margin is a non-GAAP financial measure calculated by dividing adjusted EBITDA by total net revenue.
(benefit). We believe that adjustedAdjusted EBITDA is an important measure of operating performance because it allows management, investors and our board to evaluate and compare our core operating results, including our return on capital and operating efficiencies, from period to period by removing outstanding legacy issues that will result in elevated legal costs, including ongoing regulatory and government investigations, indemnification obligations and litigation, the impact of depreciation, impairment and amortization in our asset base, other non-operating expense, and share-based compensation, and tax consequences.
In the fourth quarter of 2017, the Company included a new adjustment for outstanding legacy issues that result in elevated legal costs, including ongoing regulatory and government investigations, indemnification obligations and litigation to calculate adjusted EBITDA. These expenses in the fourth quarter of 2017 include the settlement of the two securities class action lawsuits and costs to resolve regulatory matters. We expect expenses in the future to include resolution of additional matters that arose from legacy management, including indemnification legal expenses paid by the Company for former employees, and settlements of regulatory investigations and examinations. Such legacy expenses incurred prior to the fourth quarter of 2017 were offset by insurance proceeds, resulting in no net impact to earnings in those periods. As such, prior period amounts were not recast for the change in how we calculate adjusted EBITDA.
period. Additionally, we utilize adjustedAdjusted EBITDA as an operating performance measure as an input into the Company’s calculation of the annual bonus plan. In addition to its use by management, adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of our company and other companies in our industry as well as in the broader financial services and technology industries.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table presents a reconciliation of net loss to adjustedAdjusted EBITDA for each of the periods indicated: |
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Consolidated net loss | $ | (154,045 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
| Acquisition and related expense | 349 |
| | 1,174 |
| | 2,367 |
|
| Depreciation and impairment expense: | | | | | |
| Engineering and product development | 36,790 |
| | 20,906 |
| | 13,820 |
|
| Other general and administrative | 5,130 |
| | 4,216 |
| | 2,426 |
|
| Amortization of intangible assets | 4,288 |
| | 4,760 |
| | 5,331 |
|
Legal and regulatory expense related to legacy issues (1) | 80,250 |
| | — |
| | — |
|
| Goodwill impairment | — |
| | 37,050 |
| | — |
|
| Stock-based compensation expense | 70,983 |
| | 69,201 |
| | 51,222 |
|
| Income tax expense (benefit) | 632 |
| | (4,228 | ) | | 2,833 |
|
| Loss attributable to noncontrolling interests | 210 |
| | — |
| | — |
|
Adjusted EBITDA (2) | $ | 44,587 |
| | $ | (12,890 | ) | | $ | 73,004 |
|
| Total net revenue | $ | 574,540 |
| | $ | 500,812 |
| | $ | 429,943 |
|
Adjusted EBITDA margin (2) | 7.8 | % | | (2.6 | )% | | 17.0 | % |
| |
(1)
| Includes class action litigation settlement expense of $77.25 million and expense related to regulatory matters of $3.0 million, which are included in “Class action litigation settlement” expense and “Other general and administrative” expense, respectively, on the Company’s Consolidated Statements of Operations. |
| |
(2)
| Beginning in the first quarter of 2017, adjusted EBITDA includes net interest income to capture the full spectrum of revenue we expect to generate. Beginning in the third quarter of 2017, adjusted EBITDA excludes (income) loss attributable to noncontrolling interests. Prior period amounts have been adjusted to conform to the current period presentation. |
Operating expenses include the following amounts of stock-based compensation for the periods presented:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Sales and marketing | $ | 7,654 |
| | $ | 7,546 |
| | $ | 7,250 |
|
| Origination and servicing | 4,804 |
| | 4,159 |
| | 2,735 |
|
| Engineering and product development | 22,047 |
| | 19,858 |
| | 11,335 |
|
| Other general and administrative | 36,478 |
| | 37,638 |
| | 29,902 |
|
| Total stock-based compensation expense | $ | 70,983 |
| | $ | 69,201 |
| | $ | 51,222 |
|
Investor Fees Before Changes in Fair Value of Servicing Assets and Liabilities
Investor fee revenue, excluding fair market value accounting adjustments,Margin is a non-GAAP financial measure thatcalculated by dividing Adjusted EBITDA by total net revenue.
Adjusted EPS is calculated as investor fees less the change in fair value of servicing assets and liabilities. We account for servicing assets and liabilities at fair value with changes in fair value recorded through earnings in the period of change. We believe this is a useful non-GAAP financial measure because it reflectscalculated by dividing Adjusted Net Income (Loss) by the amount of fees actually collected.weighted-average diluted common shares outstanding. We believe that Adjusted EPS is an important measure because it directly reflects the fair value adjustments to the servicing assets and liabilities is less useful in particular because the Company does not trade or transfer such servicing assets or liabilities.core operating results of our business on a per share basis.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table presents a reconciliation of investor feesLendingClub net loss to investor fees before change in fair valueAdjusted Net Income (Loss) and Adjusted EBITDA and a calculation of servicing assets and liabilities:
Adjusted EPS for each of the periods indicated: |
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Investor fees | $ | 87,108 |
| | $ | 79,647 |
| | $ | 43,787 |
|
| Change in fair value of servicing assets and liabilities | 20,826 |
| | 905 |
| | (1,392 | ) |
| Investor fees before change in fair value of servicing assets and liabilities | $ | 107,934 |
| | $ | 80,552 |
| | $ | 42,395 |
|
Investments by Investment Channel and Investor Concentration
The following table shows the percentage of loan origination volume funded by investment channel for the periods presented:
|
| | | | | | | | | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 | | June 30,
2017 | | March 31, 2017 | | December 31, 2016 |
| Originations by Investor Type: | | | | | | | | | | |
| Managed accounts | | 26 | % | | 24 | % | | 31 | % | | 33 | % | | 43 | % |
| Self-directed | | 10 | % | | 10 | % | | 13 | % | | 15 | % | | 13 | % |
| Banks | | 36 | % | | 42 | % | | 44 | % | | 40 | % | | 31 | % |
LendingClub (1) | | 11 | % | | 9 | % | | — | % | | — | % | | — | % |
| Other institutional investors | | 17 | % | | 15 | % | | 12 | % | | 12 | % | | 13 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
Cost structure simplification expense (1) | 9,933 |
| | 6,782 |
| | — |
|
| Goodwill impairment | — |
| | 35,633 |
| | — |
|
Legal, regulatory and other expense related to legacy issues (2) | 19,609 |
| | 53,518 |
| | 80,250 |
|
Acquisition and related expenses (3) | 932 |
| | — |
| | 349 |
|
Other items (4) | 2,453 |
| | — |
| | — |
|
| Adjusted net income (loss) | $ | 2,182 |
| | $ | (32,375 | ) | | $ | (73,236 | ) |
| Depreciation and impairment expense: | | | | | |
| Engineering and product development | 49,207 |
| | 45,037 |
| | 36,790 |
|
| Other general and administrative | 6,446 |
| | 5,852 |
| | 5,130 |
|
| Amortization of intangible assets | 3,499 |
| | 3,875 |
| | 4,288 |
|
| Stock-based compensation expense | 73,639 |
| | 75,087 |
| | 70,983 |
|
| Income tax expense (benefit) | (201 | ) | | 43 |
| | 632 |
|
| Adjusted EBITDA | $ | 134,772 |
| | $ | 97,519 |
| | $ | 44,587 |
|
| Total net revenue | $ | 758,607 |
| | $ | 694,812 |
| | $ | 574,540 |
|
| Adjusted EBITDA margin | 17.8 | % | | 14.0 | % | | 7.8 | % |
| | | | | | |
Weighted-average common shares – diluted (5) | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
|
| Weighted-average other dilutive equity awards | 515,439 |
| | — |
| | — |
|
Non-GAAP diluted shares (5) | 87,794,035 |
| | 84,583,461 |
| | 81,799,189 |
|
| | | | | | |
Adjusted EPS – diluted (5) | $ | 0.02 |
| | $ | (0.38 | ) | | $ | (0.90 | ) |
| |
(1) | BeginningIncludes personnel-related expenses associated with establishing a site in the thirdSalt Lake City area and external advisory fees. These expenses are included in “Sales and marketing,” “Origination and servicing,” “Engineering and product development” and “Other general and administrative” expense on the Company’s Consolidated Statements of Operations. In the fourth quarter of 2017,2018 and first quarter of 2019, also includes external advisory fees which are included in “Other general and administrative” expense on the Company introduced “LendingClub” as a new line item presented to separately show the percentageCompany’s Consolidated Statements of loan originations funded by the Company, as discussed in “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 5. Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings and Loan Servicing Rights.” The loans invested in by the Company are primarilyOperations.
|
| |
(2) | In 2019, includes legacy legal expenses, expense related to the structured program when loansdissolution of certain private funds previously managed by LCAM, and expense related to the termination of a legacy contract, which are subsequently sold either through securitizations or whole loan sales. The percentageincluded in “Other general and administrative” expense, “Net fair value adjustments,” and “Other general and administrative” expense on the Company’s Consolidated Statements of loan origination volume funded represents the loans owned by each investor asOperations, respectively. Includes class action and regulatory litigation expense of the date presented. The LendingClub percentage reflects all securitizations as sold loans$35.5 million and $77.3 million for the portionyears ended December 31, 2018 and 2017, respectively, which is included in “Class action and regulatory litigation expense” on the Company’s Consolidated Statements of securities sold to third parties.Operations. In 2018 and 2017, also includes legacy legal expenses which are included in “Other general and administrative” expense on the Company’s Consolidated Statements of Operations. |
Managed accounts include the private funds managed by LCAM, dedicated third-party funds and separately managed accounts. Self-directed investors include our self-directed retail investor base. Banks are deposit taking institutions, while other institutional investors include asset managers, insurance companies, hedge funds and other large non-bank investors.
The following table provides the percentage of loans invested in by the ten largest external investors during each of the previous five quarters (by dollars invested):
|
| | | | | | | | | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 | | June 30,
2017 | | March 31, 2017 | | December 31, 2016 |
| Percentage of loans invested in by ten largest investors | | 60 | % | | 61 | % | | 59 | % | | 61 | % | | 68 | % |
For the year ended December 31, 2017, no single investor accounted for more than 12% of the loans invested in through our lending marketplace. The composition of the top ten investors may vary from period to period. In addition to these investors, private funds associated with LCAM and publicly issued member payment dependent notes accounted for approximately 1% and 12%, respectively, of investment capital provided through our lending marketplace during the period.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
| |
(3) | In 2019, represents costs related to the acquisition of Radius. In 2017, represents incremental compensation expense required to be paid under the purchase agreement to retain key former shareholder employees of an acquired business. |
| |
(4) | In 2019, consists of expenses related to certain non-legacy litigation and regulatory matters, which are included in “Other general and administrative” expense on the Company’s Consolidated Statements of Operations. Also includes a gain on the sale of our small business operating segment. |
| |
(5) | All share and per share information has been retroactively adjusted to reflect a reverse stock split. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Supplemental Financial Information
For
The following table is provided to delineate between the year ended December 31, 2016, no single investor accounted for more than 12%assets and liabilities belonging to our member payment dependent self-directed retail program (Retail Program) note holders and certain VIEs that we are required to consolidate in accordance with GAAP. Such assets are not legally ours and the associated liabilities are payable only from the cash flows generated by those assets (i.e. Pass-throughs). As such, these debt holders do not have a secured interest in any other assets of LendingClub. We believe this is a useful measure because it illustrates the overall financial stability and operating leverage of the Company. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Retail Program (1) | Consolidated VIEs (2) (4) | All Other LendingClub (3) | Consolidated Balance Sheet | | Retail Program (1) | Consolidated VIEs (2) | All Other LendingClub (3) | Consolidated Balance Sheet |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| $ | — |
| $ | 243,779 |
| $ | 243,779 |
| | $ | — |
| $ | — |
| $ | 372,974 |
| $ | 372,974 |
|
| Restricted cash | — |
| 2,894 |
| 240,449 |
| 243,343 |
| | 15,551 |
| 17,660 |
| 237,873 |
| 271,084 |
|
| Securities available for sale | — |
| — |
| 270,927 |
| 270,927 |
| | — |
| — |
| 170,469 |
| 170,469 |
|
| Loans held for investment at fair value | 881,473 |
| 197,842 |
| — |
| 1,079,315 |
| | 1,241,157 |
| 642,094 |
| — |
| 1,883,251 |
|
Loans held for investment by the Company at fair value (4) | — |
| 37,638 |
| 6,055 |
| 43,693 |
| | — |
| — |
| 2,583 |
| 2,583 |
|
| Loans held for sale by the Company at fair value | — |
| — |
| 722,355 |
| 722,355 |
| | — |
| 245,345 |
| 594,676 |
| 840,021 |
|
| Accrued interest receivable | 5,930 |
| 1,815 |
| 5,112 |
| 12,857 |
| | 8,914 |
| 7,242 |
| 6,099 |
| 22,255 |
|
| Property, equipment and software, net | — |
| — |
| 114,370 |
| 114,370 |
| | — |
| — |
| 113,875 |
| 113,875 |
|
| Operating lease assets | — |
| — |
| 93,485 |
| 93,485 |
| | — |
| — |
| — |
| — |
|
| Intangible assets, net | — |
| — |
| 14,549 |
| 14,549 |
| | — |
| — |
| 18,048 |
| 18,048 |
|
Other assets (5) | — |
| — |
| 143,668 |
| 143,668 |
| | — |
| 530 |
| 124,437 |
| 124,967 |
|
| Total assets | $ | 887,403 |
| $ | 240,189 |
| $ | 1,854,749 |
| $ | 2,982,341 |
| | $ | 1,265,622 |
| $ | 912,871 |
| $ | 1,641,034 |
| $ | 3,819,527 |
|
| Liabilities and Equity | | | | | | | | | |
| Accounts payable | $ | — |
| $ | — |
| $ | 10,855 |
| $ | 10,855 |
| | $ | — |
| $ | — |
| $ | 7,104 |
| $ | 7,104 |
|
| Accrued interest payable | 5,930 |
| 1,737 |
| 1,593 |
| 9,260 |
| | 11,484 |
| 7,594 |
| 163 |
| 19,241 |
|
| Operating lease liabilities | — |
| — |
| 112,344 |
| 112,344 |
| | — |
| — |
| — |
| — |
|
Accrued expenses and other liabilities (5) | — |
| — |
| 142,636 |
| 142,636 |
| | — |
| 15 |
| 152,103 |
| 152,118 |
|
| Payable to investors | — |
| — |
| 97,530 |
| 97,530 |
| | — |
| — |
| 149,052 |
| 149,052 |
|
| Notes, certificates and secured borrowings at fair value | 881,473 |
| 197,842 |
| 2,151 |
| 1,081,466 |
| | 1,254,138 |
| 648,908 |
| 2,829 |
| 1,905,875 |
|
Payable to securitization note and certificate holders (4) | — |
| 40,610 |
| — |
| 40,610 |
| | — |
| 256,354 |
| — |
| 256,354 |
|
| Credit facilities and securities sold under repurchase agreements | — |
| — |
| 587,453 |
| 587,453 |
| | — |
| — |
| 458,802 |
| 458,802 |
|
| Total liabilities | 887,403 |
| 240,189 |
| 954,562 |
| 2,082,154 |
| | 1,265,622 |
| 912,871 |
| 770,053 |
| 2,948,546 |
|
| Total equity | — |
| — |
| 900,187 |
| 900,187 |
| | — |
| — |
| 870,981 |
| 870,981 |
|
| Total liabilities and equity | $ | 887,403 |
| $ | 240,189 |
| $ | 1,854,749 |
| $ | 2,982,341 |
| | $ | 1,265,622 |
| $ | 912,871 |
| $ | 1,641,034 |
| $ | 3,819,527 |
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(1) Represents loans held for investment at fair value that are funded directly by our Retail Program notes. The liabilities are only payable from the cash flows generated by the associated assets. We do not assume principal or interest rate risk on loans facilitated through our lending marketplace that are funded by our Retail Program because loan balances, interest rates and maturities are matched and offset by an equal balance of notes with the exact same interest rates and maturities. We do not retain any economic interests from our Retail Program. Interest expense on Retail Program notes of $148.0 million and $210.8 million was equally matched and offset by interest income from the related loans of $148.0 million and $210.8 million in 2019 and 2018, respectively, resulting in no net effect on our Net interest income and fair value adjustments.
(2) Represents assets and equal and offsetting liabilities of certain VIEs that we are required to consolidate in accordance with GAAP, but which are not legally ours. The liabilities are only payable from the cash flows generated by the associated assets. The creditors of the VIEs have no recourse to the general credit of the Company. Interest expense on these liabilities owned by third parties of $70.8 million and net fair value adjustments of $13.5 million in 2019 were equally matched and offset by interest income on the loans of $84.3 million, resulting in no net effect on our Net interest income and fair value adjustments. Interest expense on these liabilities owned by third parties of $154.9 million and net fair value adjustments of $15.9 million in 2018 were equally matched and offset by interest income on the loans of $170.8 million, resulting in no net effect on our Net interest income and fair value adjustments. Economic interests held by LendingClub, including retained interests, residuals and equity of the VIEs, are reflected in “Loans held for sale by the Company at fair value,” “Loans held for investment by the Company at fair value” and “Restricted cash,” respectively, within the “All Other LendingClub” column.
(3) Represents all other assets and liabilities of LendingClub, other than those related to our Retail Program and certain consolidated VIEs, but includes any economic interests held by LendingClub, including retained interests, residuals and equity of those consolidated VIEs.
| |
(4) | In the fourth quarter of 2019, the Company sponsored a new Structured Program transaction that was consolidated, resulting in an increase to “Loans held for investment by the Company at fair value” and the related “Payable to securitization note and certificate holders.” See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Debt” for additional information. |
| |
(5) | In the fourth quarter of 2019, the Company presented operating lease assets and operating lease liabilities separately from “Other assets” and “Accrued expenses and other liabilities,” respectively, on its Consolidated Balance Sheets. This change in presentation had no impact on prior period amounts presented. |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Net Cash and Other Financial Assets
The following table provides additional detail related to components of our Net Cash and Other Financial assets. We believe Net Cash and Other Financial Assets is a useful measure because it illustrates the overall financial stability and operating leverage of the Company. This measure is calculated as cash and certain other assets and liabilities, including loans and securities available for sale, which are partially secured and offset by related credit facilities, and working capital.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31,
2019 | | September 30,
2019 | | June 30,
2019 | | March 31,
2019 | | December 31,
2018 |
Cash and cash equivalents (1) | $ | 243,779 |
| | $ | 199,950 |
| | $ | 334,713 |
| | $ | 402,311 |
| | $ | 372,974 |
|
Restricted cash committed for loan purchases (2) | 68,001 |
| | 84,536 |
| | 31,945 |
| | 24,632 |
| | 31,118 |
|
| Securities available for sale | 270,927 |
| | 246,559 |
| | 220,449 |
| | 197,509 |
| | 170,469 |
|
Loans held for investment by the Company at fair value (3) | 43,693 |
| | 4,211 |
| | 5,027 |
| | 8,757 |
| | 2,583 |
|
| Loans held for sale by the Company at fair value | 722,355 |
| | 710,170 |
| | 435,083 |
| | 552,166 |
| | 840,021 |
|
Payable to securitization note and certificate holders (3) | (40,610 | ) | | — |
| | — |
| | (233,269 | ) | | (256,354 | ) |
| Credit facilities and securities sold under repurchase agreements | (587,453 | ) | | (509,107 | ) | | (324,426 | ) | | (263,863 | ) | | (458,802 | ) |
Other assets and liabilities (2) | (6,226 | ) | | (31,795 | ) | | (12,089 | ) | | (8,541 | ) | | (31,241 | ) |
Net cash and other financial assets (4) | $ | 714,466 |
| | $ | 704,524 |
| | $ | 690,702 |
| | $ | 679,702 |
| | $ | 670,768 |
|
(1) Variations in cash and cash equivalents are primarily due to variations in the amount and timing of loan purchases invested in by the Company.
(2) In the fourth quarter of 2019, we added a new line item called “Other assets and liabilities” which is a total of “Accrued interest receivable,” “Other assets,” “Accounts payable,” “Accrued interest payable” and “Accrued expenses and other liabilities,” included on our Consolidated Balance Sheets. This line item represents certain assets and liabilities that impact working capital and are affected by timing differences between revenue and expense recognition and related cash activity. In the third quarter of 2019, we added a new line item called “Restricted cash committed for loan purchases,” which represents cash and cash equivalents that are transferred to restricted cash for loans that are pending purchase by the Company. We believe this is a more complete representation of the Company’s net cash and other financial assets position as of each period presented in the table above. Prior period amounts have been reclassified to conform to the current period presentation.
| |
(3) | In the fourth quarter of 2019, the Company sponsored a new Structured Program transaction that was consolidated, resulting in an increase to “Loans held for investment by the Company at fair value” and the related “Payable to securitization note and certificate holders.” See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Debt” for additional information. |
(4) Comparable GAAP measure cannot be provided as not practicable.
Investments in Quarterly Originations by Investment Channel and Investor Concentration
Our investment channels consist of (1) Banks, which are deposit taking institutions or their affiliates, (2) LendingClub inventory, which includes loan originations purchased by the Company during the period and not yet sold as of the period end, (3) Other institutional investors and Managed accounts, which primarily include other non-bank investors, dedicated third-party funds, and public and private funds managed by third-party asset managers, and (4) self-directed retail investors.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table shows the percentage of loan origination volume issued in the period and purchased or pending purchase by each investment channel as of the end of each period presented:
|
| | | | | | | | | | | | | | |
| | December 31,
2019 | | September 30,
2019 | | June 30,
2019 | | March 31,
2019 | | December 31,
2018 |
| Investor Type: | | | | | | | | | |
| Banks | 32 | % | | 38 | % | | 45 | % | | 49 | % | | 41 | % |
| Other institutional investors | 25 | % | | 20 | % | | 21 | % | | 18 | % | | 19 | % |
LendingClub inventory (1) | 23 | % | | 23 | % | | 13 | % | | 10 | % | | 18 | % |
| Managed accounts | 17 | % | | 15 | % | | 16 | % | | 17 | % | | 16 | % |
| Self-directed retail investors | 3 | % | | 4 | % | | 5 | % | | 6 | % | | 6 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| |
(1) | LendingClub inventory reflects loans purchased or pending purchase by the Company during the period, excluding loans held by the Company through consolidated trusts, if applicable, and not yet sold as of the period end. |
The Company strategically tightened credit underwriting throughout 2019. An increase in annual volume in our business and a shift in mix to higher quality grade A and B borrowers resulted in changes to proportional purchases by investor type. The proportional reduction in the Bank investors’ share of our marketplace has been primarily offset by a proportional increase in LendingClub inventory targeted for the Company’s Structured Program and a proportional increase in purchases by institutional investors. During the fourth quarter of 2019, the Company sponsored its first securitization of exclusively grade A and B loans to attract a wider range of loan investors.
The following table provides the percentage of loans invested in through our lending marketplace. by the ten largest external investors and by the largest single investor during each of the previous five quarters (by dollars invested):
|
| | | | | | | | | | | | | | |
| | December 31,
2019 | | September 30,
2019 | | June 30,
2019 | | March 31,
2019 | | December 31,
2018 |
| Percentage of loans invested in by ten largest investors | 51 | % | | 55 | % | | 62 | % | | 65 | % | | 58 | % |
| Percentage of loans invested in by largest single investor | 19 | % | | 29 | % | | 33 | % | | 36 | % | | 29 | % |
The composition of the top ten investors may vary from period to period. In additionDuring 2019, the Company made multiple efforts to thesereduce its concentration of investors private funds associated with LCAMby introducing several new products in its Structured Program, including Levered Certificates, LCX and publicly issued member payment dependent notes accounted for approximately 3%a securitization of exclusively grade A and 16%, respectively,B loans. The percentage of investment capital provided throughloans invested in by our lending marketplace duringten largest investors decreased 4% from the period.third quarter of 2019 primarily due to a decrease in loans purchased by banks, as well as reducing our concentration to our largest investor. Our largest investor continues to invest in loans, but not at the same proportional level due primarily to the Company’s increased annual loan volume.
Effectiveness of Scoring Models
Our ability to attract borrowers and investors to our lending marketplace is significantly dependent on our platform’s ability to effectively evaluate a borrower’s credit profile and likelihood of default.profile.
Our online lending marketplace platform’s credit decisioning and scoring models are evaluated on a regular basis and the additional data on loan history experience, borrower behavior economic factors and prepayment trends that we accumulate are leveraged to continually improve theour underwriting models. We believe we have the experience to effectively evaluate a borrower’s creditworthiness and likelihood of default, offering attractive risk-adjusted return opportunities for loan investors. If our lending marketplace’s credit decisioning and scoring models ultimately prove to be ineffective, or fail to appropriately account for a decline in the macroeconomic environment, investors may experience higher than expected losses and lose confidence in our business.
In September 2017, we implemented our next-generation credit model designed to assess and differentiate risk of the applications for the standard and custom personal loan programs on the platform. The model was built using more recent data than the previous model and leverages a number of custom attributes developed by LendingClub. We worked with our primary issuing bank partner to modify credit and pricing policies, leveraging insights on current market conditions and recent vintage performance.
The charts provided below display the historical lifetime cumulative net charge-off rates (expressed as a percent of original loan balances) through December 31, 2017, by booking year, for all grades and 36 or 60 month terms of standard program loans for each of the years shown. For 2017, standard program loans accounted for approximately 73% of all loan origination volume.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
evaluate a borrower’s creditworthiness and likelihood of default. If our lending marketplace’s credit decisioning and scoring models ultimately prove to be ineffective or fail to appropriately account for a decline in future macroeconomic environment, investors may experience higher than expected losses.
Our current underwriting model leverages a number of custom attributes developed by LendingClub. We work with our primary issuing bank partner to modify their credit and pricing policies, leveraging insights on current market conditions and recent vintage performance.
The charts provided below display the historical lifetime cumulative net charge-off rates (expressed as a percent of original loan balances) through December 31, 2019, by booking year, for all standard program loans and 36-month or 60-month terms for each of the years shown. The charts display lifetime cumulative net charge-off rates using months on book for each annual vintage presented. Each annual vintage’s lifetime cumulative net charge-offs vary based on the maturity of each loan’s month on book. In the fourth quarter and year ended December 31, 2019, standard program loans accounted for 68% and 69%, respectively, of all loan origination volume.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Loan Portfolio Information and Credit Metrics
We classify the loans held on our Consolidated Balance Sheets into three major loan products: standard program personal loans, custom program personal loans and other loans. The majority of the loans facilitated through our platform and retained on our balance sheet are standard program personal loans that represent loans made to prime borrowers that are publicly available to note investors and through certificates, loan sales and securitizations to private investors. Custom program personal loans include all other personal loans that are not eligible for our standard program, including loans made to near prime borrowers, and are available only to private investors. Other loans is comprised of education and patient finance loans, auto refinance loans, and small business loans. The loans held on our Consolidated Balance Sheets are financed by notes issued by us, certificates issued by the Trust or the CLUB certificate program, or loans invested in directly by us.
Fair Value and Delinquencies
With respect to theFor loans held for investment that are backed by notes, certificates and secured borrowings on our Consolidated Balance Sheets, the outstanding principal balance, fair value and percentage of loans that are delinquent, by loan product, are as follows: | | | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| (in millions, except percentages) | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) | | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) | | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) |
| Personal loans - standard program | $ | 3,046.9 |
| 93.4 | % | 3.7 | % | | $ | 4,270.1 |
| 94.6 | % | 3.2 | % | |
| Personal loans - custom program | 92.0 |
| 91.0 |
| 7.5 |
| | 264.5 |
| 91.5 |
| 5.5 |
| |
| Personal loans – standard program | | $ | 1,144.8 |
| 93.9 | % | 3.1 | % | | $ | 1,994.1 |
| 93.5 | % | 3.5 | % |
| Personal loans – custom program | | 4.1 |
| 94.8 |
| 5.7 |
| | 19.2 |
| 92.8 |
| 7.1 |
|
Other loans (1) | 2.5 |
| 95.9 |
| 4.0 |
| | 12.5 |
| 97.1 |
| 2.5 |
| — |
| — |
| — |
| | 0.1 |
| 96.0 |
| 10.6 |
|
| Total | $ | 3,141.4 |
| 93.3 | % | 3.8 | % | | $ | 4,547.1 |
| 94.5 | % | 3.3 | % | $ | 1,148.9 |
| 93.9 | % | 3.1 | % | | $ | 2,013.4 |
| 93.5 | % | 3.5 | % |
| |
(1) | Components of other loans are less than 10% of the outstanding principal balance presented individually. |
| |
(2) | Expressed as a percent of outstanding principal balance. |
DeclinesIncreases in the fair value of loans as a percent of outstanding principal balance from December 31, 20162018 to December 31, 20172019 were primarily due to increasesa shift in the yields required by investors to purchase ourmix of personal loans notes, certificates,toward lower risk grades.
LENDINGCLUB CORPORATION
Management’s Discussion and an increaseAnalysis of Financial Condition and Results of Operations
(Tabular Amounts in expected credit lossesThousands, Except Share and prepayments.Per Share Data and Ratios, or as Noted)
With respect toFor loans invested in directly by the Company for which there were no associated notes, certificates or secured borrowings, the outstanding principal balance, fair value and percentage of loans that are delinquent, by loan product, are as follows:
| | | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| (in millions, except percentages) | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) | | Outstanding Principal Balance | Fair Value (2) | Delinquent Loans (2) | Outstanding Principal Balance (2) | Fair Value (3) | Delinquent Loans (3) | | Outstanding Principal Balance (2) | Fair Value (3) | Delinquent Loans (3) |
| Personal loans - standard program | $ | 474.8 |
| 97.2 | % | 0.6 | % | | $ | 20.3 |
| 92.7 | % | 4.3 | % | |
| Personal loans - custom program | 85.6 |
| 98.6 |
| 0.3 |
| | 2.9 |
| 89.9 |
| 17.6 |
| |
| Personal loans – standard program | | $ | 597.9 |
| 96.5 | % | 0.8 | % | | $ | 706.1 |
| 96.5 | % | 0.7 | % |
| Personal loans – custom program | | 92.8 |
| 98.1 |
| 0.4 |
| | 89.4 |
| 98.5 |
| 0.7 |
|
Other loans (1) | 53.3 |
| 96.0 |
| 2.2 |
| | 4.7 |
| 96.2 |
| 3.7 |
| 103.7 |
| 94.7 |
| 3.9 |
| | 77.7 |
| 93.9 |
| 0.2 |
|
| Total | $ | 613.7 |
| 97.3 | % | 0.7 | % | | $ | 27.9 |
| 93.0 | % | 5.6 | % | $ | 794.4 |
| 96.4 | % | 1.2 | % | | $ | 873.2 |
| 96.5 | % | 0.7 | % |
| |
(1) | Components of other loans are less than 10% of the outstanding principal balance if presented individually. |
| |
(2) | Includes both loans held for investment and loans held for sale. |
| |
(3) | Expressed as a percent of outstanding principal balance. |
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Increases inThe fair value of total loans invested in by the Company as a percent of outstanding principal balance from December 31, 20162018 to December 31, 2017 were primarily2019 remained relatively unchanged due to changesan increase in the type, payment status and average agefair value as a result of the loans investeda shift in portfolio mix to higher volume in lower risk grades, offset by the Company.higher discounts.
Net Annualized Charge-Off Rates
The following tables show annualized net charge-off rates, which isare a complementary measure of the performance of the loans held infacilitated by our portfolio fromplatform. In contrast to the graphs above. Net cumulative lifetime charge-off rates used above, show total charge-offs as a function of original principal balance, while these tables show the annualized net charge-off rates that reflect the charged-off balance of loans in a specific period as a percentage of the average outstanding balance of the loans during the periods presented.for such period.
Net annualized charge-off rates are affected by the average age and grade distribution of the loans outstanding in the portfolio for a given quarter and the credit performance of those loans. Additionally, in any particular quarter the portfolios include loans from past vintages that were originated under prior credit underwriting parameters, and thus do not reflect the current credit underwriting modelsparameters used to originate new loans.
The annualized net charge-off rates for personal loans for both standard and custom programs in total for the last five quarters arewere as follows:
| | Total Platform (1) | December 31,
2017 | September 30,
2017 | June 30,
2017 | March 31,
2017 | December 31,
2016 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 |
| Personal Loans - Standard Program: | | |
Personal loans – standard program: | | |
| Annualized net charge-off rate | 8.3 | % | 7.6 | % | 8.1 | % | 8.5 | % | 8.0 | % | 7.0 | % | 6.4 | % | 6.4 | % | 7.0 | % | 7.0 | % |
| Weighted-average age in months | 12.8 |
| 12.9 |
| 12.9 |
| 12.5 |
| 12.0 |
| 12.5 |
| 12.3 |
| 12.3 |
| 12.4 |
| 12.3 |
|
| | | |
| Personal Loans - Custom Program: | | |
Personal loans – custom program: | | |
| Annualized net charge-off rate | 14.8 | % | 13.5 | % | 14.1 | % | 15.7 | % | 14.6 | % | 11.5 | % | 10.9 | % | 10.8 | % | 12.8 | % | 12.4 | % |
| Weighted-average age in months | 10.4 |
| 10.5 |
| 10.5 |
| 10.5 |
| 9.8 |
| 9.4 |
| 9.3 |
| 9.9 |
| 9.7 |
| 9.5 |
|
| |
(1) | Total platform comprises all loans facilitated through theour lending marketplace, including whole loans sold and loans financed by notes, certificates and secured borrowings, but excluding education and patient finance loans, auto refinance loans and small business loans. |
|
| | | | | | | | | | |
| Loans Retained on Consolidated Balance Sheets | December 31,
2017 | September 30,
2017 | June 30,
2017 | March 31,
2017 | December 31,
2016 |
| Personal Loans - Standard Program: | | | | | |
| Annualized net charge-off rate | 10.7 | % | 9.9 | % | 10.2 | % | 10.9 | % | 10.4 | % |
| Weighted-average age in months | 14.4 |
| 15.2 |
| 14.9 |
| 14.2 |
| 13.5 |
|
| | | | | | |
| Personal Loans - Custom Program: | | | | | |
| Annualized net charge-off rate | 15.9 | % | 17.4 | % | 15.5 | % | 19.6 | % | 19.1 | % |
| Weighted-average age in months | 12.3 |
| 17.3 |
| 15.7 |
| 14.3 |
| 12.4 |
|
The decrease in the annualized net charge-off rate in the fourth quarter of 2019 compared to the fourth quarter of 2018 for the total platform custom personal loan program primarily reflects the effect of a greater increase in
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
outstanding loan balances (and a higher mix of lower risk loans) proportionate to the increase in actual net charge-offs.
The increase in the annualized net charge-off rates in the fourth quarter of 20172019 compared to the third quarter of 20172019 for both the total platform and loans retained on our Consolidated Balance Sheets reflect the effect of higher observed actual charge-offs in the fourth quarter of 2017. In the fourth quarter of 2017, we observed higher charge-offs in both the standard and custom personal loan programs. These increases fromprograms reflects the third quarter to the fourth quarter were driven by a combination of factors:
The loans originated between the second half of 2015 through the third quarter of 2016 continue to season and are charging off at higher rates than loans originated in prior vintages.
The effect of seasonalityhigher outstanding loan balances and a seasonal increase in actual net charge-offs.
The annualized net charge-off rates for personal loans for both standard and custom programs for loans retained on delinquencies and charge-offs. Historically,our Consolidated Balance Sheets for the fourth quarter has higher delinquencies and loss levels driven by the financial stress that consumers face with the holiday spending season. The trend reverses in February through Maylast five quarters were as consumers get the benefit of tax refunds.follows:
The increases in charge-offs were partially offset by the following: |
| | | | | | | | | | |
Loans Retained on Balance Sheet (1) | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 |
Personal loans – standard program: | | | | | |
| Annualized net charge-off rate | 7.1 | % | 6.8 | % | 7.1 | % | 8.2 | % | 9.0 | % |
| Weighted-average age in months | 12.4 |
| 12.7 |
| 15.9 |
| 15.5 |
| 14.3 |
|
| | | | | | |
Personal loans – custom program: | | | | | |
| Annualized net charge-off rate | 1.6 | % | 2.5 | % | 1.6 | % | 4.9 | % | 5.9 | % |
| Weighted-average age in months | 3.9 |
| 6.9 |
| 6.4 |
| 13.4 |
| 6.9 |
|
| |
◦(1) | An increaseLoans retained on balance sheet include loans invested in originationsby the Company as well as loans held for investment that increased the mix of younger loans in the servicing book. |
| |
◦ | The effect of credit tightening implemented in late 2016are funded directly by member payment dependent notes related to our Retail Program and early 2017. As the fourth quarter of 2016 and first quarter of 2017 vintages are beginning to season we are seeing improved loss performance vintage-over-vintage compared to the second and third quarter 2016 cohorts as a result of the tighter credit criteria after normalizing for the impact of natural disasters. |
| |
◦ | The benefits from investments made in servicing of delinquent loans, including increased staffing and improved technology infrastructure. |
| |
◦ | An increase in recovery rates as sales prices of charged-off debt have trended back up.certificates. |
We generally expectThe decrease in annualized net charge-off rates for the standard personal loan program in the fourth quarter of 2019 compared to increase withthe fourth quarter of 2018 for the loans retained on our Consolidated Balance Sheets reflects the effect of lower outstanding loan age, as new loans generally have fewer credit losses than seasoned loans. Prior to 2016, our loan portfolios grew significantly as the volume of loans facilitated increased. Asbalances and a result, the average age of the portfolio, and with it the average charge-off rate, stayed low during these prior periods. In 2016, loan originations grew at a slower rate, causing the average loan age to increase resultingdecrease in anactual net charge-offs.
The increase in the aggregate annualized net charge-off rate. See “Current Economic and Business Environment” for further discussion regarding how we responded to these observations and credit performance by implementing changesrate in the fourth quarter of 2019 compared to the credit model, increasing interestthird quarter of 2019 for the standard personal loan program is primarily due the effect of a decrease in outstanding loan balances.
The annualized net charge-off rates and supplementing collections efforts.weighted-average age in months for custom program loans retained on our Consolidated Balance Sheets reflect the change in outstanding principal balance period-over-period based on purchase and sale activity of recently issued near-prime loans.
The annualized net charge-off rates for standard program loans are higher for loans retained on our Consolidated Balance Sheets compared to loans reflected at the total platform level for each quarter because of, among other reasons, a difference in grade distribution for the two portfolios. The proportion of grade A and B loans is approximately 28%55% of the retained loan portfolio compared to approximately 42%57% for the total platform level as of December 31, 2017.2019. This difference in loan grade distribution results in higher net charge-off rates for the loans on the balance sheetConsolidated Balance Sheets compared to the total platform, as grade A and B loans have lower expected and actual credit losses.
Additionally, due to the ramp up of the LendingClub securitization program and other strategic loan sales strategies, the mix of loans on the balance sheet at the end of the fourth quarter of 2017 shifted materially relative to the third quarter of 2017.
20% of loans on balance sheet in the fourth quarter of 2017 are invested in by the Company compared to 4% for the third quarter of 2017. The loans for the securitizations on average are less seasoned than those for the loans offset by notes and certificates, resulting in the average loan age contracting from 15.2 months to 14.4 months.
Additionally, the loans held for securitization and other strategic sales resulted in an increase in the mix of 60-month loans to 47% in the fourth quarter from 45% in the third quarter for loans held on balance sheet.
Similarly, the average age of the loans retained on balance sheet from the custom program also dropped from 17.3 months to 12.3 months from the third quarter of 2017 to the fourth quarter of 2017 as a result of aggregating custom program loans for the purpose of securitization.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Regulatory Environment
AsWe are regularly subject to claims, individual and class action lawsuits, lawsuits alleging regulatory violations, government (including state agencies) and regulatory exams, investigations, inquiries or requests, and other proceedings. The number and significance of these claims, lawsuits, exams, investigations, inquiries, requests and proceedings have increased in part because our business has expanded in scope and geographic reach, and our products and services have increased in complexity. For example, we have experienced, are currently and will likely continue to be subject to and experience exams from state regulators, and our legal, compliance and other costs related to such proceedings may elevate from current levels. See “Part I – Item 1. Business – Regulatory and Compliance Framework,”“Part I – Item 1A. Risk Factors – Risks Related to Our Business and Regulation,”
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
including the risk factors titled “We are regularly subject to litigation, and government and regulatory investigations, inquiries and requests,” “If the loans facilitated through our lending marketplace were found to violate a resultstate’s usury laws, and/or we were found to be the true lender (as opposed to our issuing bank(s)), we may have to alter our business model and our business could be harmed” and “The regulatory framework for our business is evolving and uncertain as federal and state governments consider new laws to regulate online lending marketplaces such as ours. New laws and regulations, including uncertainty as to how the actions of any federal or state regulator could impact our business or that of our internal board reviewissuing bank(s).” for more information, additional discussion and resignation of our former CEO in 2016, we have received inquiriesdisclosure, including the potential adverse outcomes and consequences from governmental entities, and we continue to cooperate fully with such governmental entities. Responding to inquiries of this nature are costly and time consuming, can generate negative publicity, and could have a material and adverse effect on our business. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 18. Commitments and Contingencies” for further discussion regarding these inquiries.proceedings.
In addition, thereBank Partnership Model
There has been (and may continue to be) otheran increase in inquiries, regulatory proceedings, including exams by state regulators, and litigation challenging or raising issues relating to, among other things, the application of state usury rates and lending arrangements where a bank or other third-partythird party has made a loan and then sells and assigns it to an entity that is engaged in assisting with the origination andor servicing of a loan. In
For example, in January 2017, the Colorado Administrator (Administrator) of the Uniform Consumer Credit Code filed suit against Avant, Inc., a company that operates an online consumer loan platform. The Administrator asserts that loans to Colorado residents facilitated through the AvantAvant’s platform were required to comply with Colorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated by WebBank, the federally regulated issuing bank who originates loans through Avant’s platform, as well as through our platform. InAlthough Avant removed its case to federal court in March 2017, WebBank filed its own lawsuit in federal district courtthe United States District Court for the District of Colorado seekingissued an order in March 2018 remanding the case to the District Court for the City and County of Denver. In March 2018, the United States District Court for the District of Colorado also issued an order dismissing a parallel case brought by WebBank that sought a declaratory reliefjudgment regarding the applicability of preemption to Colorado usury laws and permanent injunctions against the Administrator that would prevent the Administrator from enforcing Colorado usury laws against WebBank and certain parties associated with loans originated by it. Avant thereafter filed a Motion to Dismiss in District Court for the State of Colorado and WebBank moved to intervene in the case. In August 2018, the Court granted WebBank’s motion but denied Avant’s motion. In November 2018, the Administrator added as defendants certain securitization trusts that had acquired Avant loans. The Administrator is seeking a penalty of ten times the amount of the “excess” finance charges. Trials in this case and in a similar case pending in Colorado against Marlette Funding and Cross River Bank are “valid when made”currently scheduled for Spring 2020.
See “Part I – Item 1. Business – Regulatory and Compliance Framework – Current Regulatory Environment” for more information, additional discussion and disclosure regarding relevant third-party litigation and related matters.
Although we believe that our program is factually distinguishable from the Madden case, an extension of the application of the Second Circuit's decision, either within or outside the states in the Second Circuit, could challenge the federal preemption of state laws setting interest rate limitations for loans made by issuing bank partners in those states.
State Inquiries and Licensing
There has been (and may continue to be) an increase in inquiries and regulatory proceedings, including exams by state regulators, with respect to licensing requirements. In most states we believe, because of our issuing bank model, we are subject to federalexempt from or satisfy relevant licensing requirements that pre-empt Colorado state requirements. No assurance can be given aswith respect to the timing or outcomeorigination of these matters.loans we facilitate. However, these matters could potentially impactas needed, we have endeavored to apply and obtain the appropriate licenses.
The Company has had discussions with the Colorado Department of Law (CDL) concerning the licenses required for the Company’s business, includingservicing operations and the maximum interest rates and fees that can be charged and applicationstructure of certain consumer protection statutes.its offerings in the State of Colorado. While we believe
Liquidity and Capital Resources
Liquidity
The following table sets forth certain cash flow information for the periods presented: |
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
Net cash (used for) provided by operating activities (1) | $ | (590,814 | ) | | $ | 545 |
| | $ | 74,741 |
|
| | | | | | |
Cash flow provided by (used for) loan investing activities (2) | 819,878 |
| | (275,213 | ) | | (2,034,590 | ) |
| Cash flow provided by (used for) all other investing activities | 113,935 |
| | (147,744 | ) | | (372,110 | ) |
| Net cash provided by (used for) investing activities | 933,813 |
| | (422,957 | ) | | (2,406,700 | ) |
| | | | | | |
Cash flow (used for) provided by note, certificate, and secured borrowings financing (2) | (826,398 | ) | | 262,952 |
| | 2,034,993 |
|
| Cash flow provided by issuance of securitization notes and residual certificates and revolving credit facilities | 345,586 |
| | — |
| | — |
|
| Cash flow provided by all other financing activities | 23,930 |
| | 51,531 |
| | 50,717 |
|
| Net cash (used for) provided by financing activities | (456,882 | ) | | 314,483 |
| | 2,085,710 |
|
| Net decrease in cash and cash equivalents | $ | (113,883 | ) | | $ | (107,929 | ) | | $ | (246,249 | ) |
| |
(1)
| Cash flows used for/provided by operating activities includes loans purchased with the intent to sell. The change in net cash used for operating activities is due to the purchase of loans that were not sold at year end and loans sold that did not meet accounting sale derecognition requirements. |
| |
(2)
| Cash flows provided by/used for loan investing activities includes the purchase of loans and repayment of loans facilitated through our lending marketplace. Cash flow used for/provided by note, certificate and secured borrowings financing activities includes the issuance of notes, certificates and secured borrowings to investors and the repayment of those notes, certificates and secured borrowings. These amounts generally correspond to and offset each other. See “Note 5. Loans Held
|
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
that our program with WebBank has been structured in accordance with governing federal law, the Administrator has identified alleged “exceptions” to our compliance with provisions of the Colorado Uniform Consumer Credit Code, including with respect to permitted rates and charges. We believe that our model differs in important respects from Avant’s business model as alleged in the litigation involving Avant in Colorado. We have also had discussions with the CDL about entering into a terminable agreement with the CDL to, among other things: (i) toll the statutes of limitations on any action the CDL might bring against the Company based on the rates and charges on loans the Company facilitates and (ii) refrain from facilitating certain loans to borrowers located in Colorado available for investment by certain investors. No assurances can be given as to the timing, outcome or consequences of this matter.
We are routinely subject to examination for compliance with applicable laws and regulations in the states in which we are licensed. As of the date of this Report, we are subject to examination by the New York Department of Financial Services (NYDFS). In July 2018, the NYDFS issued an Online Lending Report (Lending Report). The Lending Report included, among other things, an analysis of the online lenders operating in New York including their methods of operations, lending practices, interest rates and costs, products offered and complaints and investigations relating to online lenders. The Lending Report also included information and recommendations regarding protecting New York’s markets and consumers. For example, although the Lending Report noted that the rapid growth of online lending demonstrates there is value to new technologies that allow financial institutions to connect with borrowers in new ways, it noted that in many cases an online lender is the “true lender” and that lending in New York, whether through banks, credit unions or online lenders, should be subject to applicable usury limits. We periodically have discussions with various regulatory agencies regarding our business model and have recently engaged in similar discussions with the NYDFS. During the course of such discussions, which remain ongoing, we decided to voluntarily comply with certain rules and regulations of the NYDFS. No assurances can be given as to the timing, outcome or consequences of this matter.
The Company has undertaken a review of its portfolio of licenses and has had discussions with regulators in Texas, Arizona, New York, Florida and North Dakota concerning the licenses required for the Company’s issuance of retail notes to investors in these states and has applied for licenses in these states to facilitate these operations. The Company has also had discussions with certain of these regulators to resolve concerns regarding the Company’s historical licensing/registration status in connection with retail notes issued. Although the Company is not able to predict with certainty the timing, outcome, or consequence of these discussions, the Company expects to receive permission to re-enter certain states in the near future. Discussions with these states could result in fines or other penalties, which are not expected to have a material adverse impact on the Company’s operations or results of operations.
Consequences
If we are found to not have complied with applicable laws, regulations or requirements, we could: (i) lose one or more of our licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions or penalties, (iv) be in breach of certain contracts, which may void or cancel such contracts, (v) decide or be compelled to modify or suspend certain of our business practices (including limiting the maximum interest rate on certain loans facilitated through our platform and/or refraining from making certain loans available for investment by certain investors), or (vi) be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans through our lending marketplace, perform our servicing obligations or make our lending marketplace available to borrowers in particular states; any of which may harm our business.
See “Part I – Item 1. Business – Regulatory and Compliance Framework” and “Part I – Item 1A. Risk Factors – Risks Related to Our Business and Regulation” for further discussion regarding our regulatory environment.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
For Investment, Loans Held For Sale, Notes, CertificatesLiquidity and Secured Borrowings and Loan Servicing Rights”for additional information.Capital Resources
Liquidity
Our short-term liquidity needs generally relate to our working capital requirements, including the purchase of loans.loans invested in by the Company. These liquidity needs are generally met through cash generated from the operations of facilitating loan originations, servicing fee revenue, proceeds from the sales of loans (both as whole loan sales and principal payments made on loans. If we experience a pause in investor capital on our platform, cash generated from facilitating loan originations could decline, in which case we may need tothrough Structured Program transactions), use ourof existing cash and cash equivalents, and draws on hand, which was $401.7 million at December 31, 2017,our credit facilities.
We use our own capital and available credit facilities to meetpurchase loans for future Structured Program transactions, whole loan sales and if we experience a reduction in available investor capital to fund loans on our working capital needs. Additionally, we had $117.6 million of available for sale securities at December 31, 2017, of which $45.3 million are subject to restrictions on transfer pursuant to regulatory risk retention rules. The consolidated net loss duringmarketplace. During the year ended December 31, 2017, along with2019, the purchaseCompany facilitated $12.3 billion of loans weon our marketplace. We used our own capital to purchase $5.3 billion in loans and $7.0 billion in loans were issued that were contemporaneously funded by loan sales and by the issuance of notes and certificates. The Company sold $5.1 billion in loans (of which $4.0 billion was sold through Structured Program transactions and intend$1.1 billion was sold to sell, and the paymentwhole loan investors). As of the 2016 corporate cash bonus in February 2017, resulted in negative operating cash flows for the year ended December 31, 2017.
2019, the fair value of loans invested in by the Company was $766.0 million, of which $551.5 million were pledged as collateral under our credit facilities. Given the member payment dependent structure of the notes, certificates and secured borrowings, principal and interest payments on notes, certificates and secured borrowings are paid only when received from borrowers on the corresponding retained loans, resulting in no material impact to our liquidity. During the year ended December 31, 2017, we purchased a total
We may use our cash, cash equivalents and securities available for sale as additional sources of $1.6 billionliquidity. Cash, cash equivalents and securities available for sale were $514.7 million (which included $174.8 million of loans through the platform using our own capital to support Company-sponsored securitization initiativessecurities pledged as collateral) and CLUB Certificates and fulfill contractual purchase obligations. Of the loans invested in by the Company, $198.5$543.4 million were securitized or contributed to CLUB Certificates and sold and $791.8(which included $53.6 million were sold to whole loan investors during the year ended December 31, 2017. The aggregate outstanding principal balance of loans in which we remained invested insecurities pledged as collateral) as of December 31, 2017 amounted to $613.7 million, of which $359.4 million were held in Consumer Loan Underlying Bond Credit Trust 2017-P2, LLC2019 and financed by term borrowings. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 13. Debt” for further information.
Cash2018, respectively. Our cash and cash equivalents are primarily held in institutional money market funds, interest-bearing deposit accounts at investment-grade financial institutions, certificates of deposit and commercial paper. CashOur securities available for sale consist of asset-backed securities related to our Structured Program transactions, corporate debt securities, certificates of deposit, other asset-backed securities, commercial paper, and cash equivalents were $401.7 million and $515.6 million at December 31, 2017, and 2016, respectively.U.S. agency securities. Changes in the balance of cash and cash equivalents are generally a result of purchases of loans to support securitization initiatives, timing related to working capital requirements, purchase or investments in or outsale of ourloans and securities available for sale, portfolio,changes in debt outstanding under our credit facilities, and changes in restricted cash and other investments.
Restricted cash consists primarily of bank deposit accounts and money market funds that are: (i) pledged to or held Changes in escrow at correspondent banks as security for transactions processed on or related to our platform or activities by certain investors; (ii) pledged through a credit support agreement with a certificate holder; (iii) received from investors but not yet been applied to their accounts on the platform and transferred to segregated bank accounts that hold investors’ funds; or (iv) as of December 31, 2016, held in a Rabbi Trust through a grantor trust agreement to satisfy obligations to participants under the 2016 Cash Retention Bonus Plan. Restricted cash was $242.6 million and $177.8 million at December 31, 2017 and 2016, respectively. The increase in restricted cash is primarily attributable to an increase in cash received from investors that has not yet been applied to their accounts.
We invest in securities classified as available for sale. The fair valuebalance of securities available for sale asare generally a result of activity related to our Structured Program transactions. Future cash requirements include certain contingent liabilities, including litigations and ongoing regulatory and government investigations primarily related to outstanding legacy issues. As of December 31, 20172019 and 2016 was $117.62018, we had $16.0 million and $287.1$12.8 million respectively. At December 31, 2017, these securities included asset-backed securities relatedin accrued contingent liabilities, respectively, but actual cash payments may vary if outcomes of legal actions or settlements are different. See “Item 8. Financial Statements and Supplementary Data – Notes to Company-sponsored securitizationsConsolidated Financial Statements – Note 19. Commitments and CLUB Certificate transactions, corporate debt securities, asset-backed securities, commercial paper, certificatesContingencies”for further information.
On February 18, 2020, the Company and Radius entered into a Merger, in a cash and stock transaction valued at $185 million (of which $138.75 million is in cash and $46.25 million is in stock), plus certain purchase price and expense adjustments of deposit, U.S. agency securities, U.S. Treasury securities,up to $22 million. The closing of the Merger is subject to regulatory approval and other securities. All securities, except forcustomary closing conditions, which the subordinated residual certificates and the most subordinated class of notes issuedCompany anticipates can be completed within 15 months, as well as customary transaction costs. Additionally, in connection with the Company-sponsored securitization transactions discussed above in Share Exchange Agreement, the Company will provide Shanda a one-time cash payment of approximately $50 million. See “Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 6. Securitizations22. Subsequent Events” for additional information.
Our credit facilities and Variable Interest Entities,” were ratedsecurities sold under repurchase agreements are comprised of secured warehouse credit facilities for personal loans and auto refinance loans (Personal Loan Warehouse Credit Facilities and Auto Loan
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
investment grade (definedWarehouse Credit Facility), a secured revolving credit facility (Revolving Facility), and repurchase agreements. Personal Loan Warehouse Credit Facilities are used to finance our personal loans on a revolving basis and have a combined borrowing capacity of $750.0 million (which will be reduced to $700.0 million on January 15, 2020), with $373.0 million of debt outstanding secured by $533.6 million of loans at fair value as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses on those securities. During the year ended December 31, 2017,2019. These Personal Loan Warehouse Credit Facilities have “Commitment Termination Dates” ranging from March 2020 to October 2020, at which point the Company recognized $1.5 million in other-than-temporary impairment chargesCompany’s ability to borrow additional funds ends. We are working to amend and extend the Commitment Termination Dates of these Personal Loan Warehouse Credit Facilities, or to replace them with substantially similar credit facilities. We are also evaluating additional warehouse facilities to finance our personal loans with existing and new financial institutions. Under the respective agreements, if not amended, extended, or replaced, any outstanding debt on its subordinated residual certificates heldthe Commitment Termination Dates would be repaid as an amortizing term loan until the facility’s final maturity dates, ranging from January 2021 to March 2022.
The Auto Loan Warehouse Credit Facility is a result of its Company-sponsored securitization transactions. Duringterm loan used to finance auto refinance loans. The amount borrowed under this Auto Loan Warehouse Credit Facility amortizes over time through regular principal and interest payments collected from the years ended December 31, 2016 or 2015, the Company recognized no other-than-temporary impairment charges.auto refinance loans that serve as collateral. As of December 31, 2017, $45.32019, the Auto Loan Warehouse Credit Facility has an outstanding debt balance of $14.3 million, which matures in June 2021 and is secured by $17.9 million of these securities were subject to regulatory risk retention rules, as mentioned above. These securities provided $4.1auto refinance loans at fair value.
The Revolving Facility has a credit limit of $120.0 million, and $3.2with $60.0 million of interest income for the years endeddebt outstanding as of December 31, 20172019, and 2016, respectively.expires in December 2020.
On October 10, 2017, LendingClub Warehouse I LLC (Warehouse),We have repurchase agreements (with scheduled repurchase dates between February 2020 and December 2026) with counterparties under which we may sell securities (subject to an obligation to repurchase such securities at a wholly-owned subsidiary of LendingClub, entered into a warehouse credit agreement (Warehouse Credit Agreement) with certain lendersspecified future date and price) in exchange for an aggregate $250.0 million secured revolving credit facility (Warehouse Credit Facility). In connection with the Warehouse Credit Agreement, the Warehouse entered into a security agreement with a large commercial bank as administrative agent and a national banking association as collateral trustee and paying agent.cash. As of December 31, 2017,2019, we had $32.1have an obligation of $140.2 million in debt outstanding under the Warehouse Credit Facility. to repurchase securities with a fair value of $174.8 million.
See “Part II – Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 13. Debt”14. Debt”for further information.
Our available liquidity resources alsoThe Personal Loan and Auto Loan Warehouse Credit Facilities, Revolving Facility and repurchase agreements have interest rates predominately based on LIBOR. The agreements generally include external sources. On December 17, 2015,alternative rates to LIBOR. We plan to renew and/or amend the facilities and agreements before the end of 2021, when it has been announced by the United Kingdom’s Financial Conduct Authority that LIBOR is intended to be phased out. In all cases, we entered into a credit and guaranty agreement with several lendersexpect the alternate rates to be based on prevailing market convention for financing arrangements of an aggregate $120.0 million secured revolving credit facility (Credit Facility). In connection with the credit agreement, we entered into a pledge and security agreement with Morgan Stanley Senior Funding, Inc., as collateral agent. Proceeds of loans made under the Credit Facility may be borrowed, repaid and reborrowed until December 17, 2020. Repayment of any outstanding proceeds are payable on December 17, 2020, but may be prepaid without penalty. As of December 31, 2017, we had no loans outstanding under the Credit Facility. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 13. Debt” for further information.equivalent nature.
We believe, based on our projections, and ability to reduce loan volume if needed, that our cash on hand, securities available for sale, available funds available from our lines of credit,Warehouse Facilities and ourrepurchase agreements (subject to amendments and extensions), and cash flow from operations is expected to beare sufficient to meet our liquidity needs for the next twelve months.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
The following table sets forth certain cash flow information for the periods presented: |
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Cash used for loan operating activities | $ | (440,192 | ) | | $ | (701,623 | ) | | $ | (634,110 | ) |
| Cash provided by all other operating activities | 169,548 |
| | 61,882 |
| | 60,722 |
|
Net cash used for operating activities (1) | $ | (270,644 | ) | | $ | (639,741 | ) | | $ | (573,388 | ) |
| | | | | | |
Cash provided by loan investing activities (2) | $ | 611,828 |
| | $ | 865,707 |
| | $ | 819,878 |
|
| Cash provided by all other investing activities | 41,940 |
| | 13,029 |
| | 178,695 |
|
| Net cash provided by investing activities | $ | 653,768 |
| | $ | 878,736 |
| | $ | 998,573 |
|
| | | | | | |
Cash used for note, certificate and secured borrowings financing (2) | $ | (626,241 | ) | | $ | (863,596 | ) | | $ | (826,398 | ) |
| Cash provided by issuance of securitization notes and certificates, credit facilities and securities sold under repurchase agreements | 112,948 |
| | 640,332 |
| | 345,586 |
|
| Cash (used for) provided by all other financing activities | (26,767 | ) | | (15,962 | ) | | 6,504 |
|
| Net cash used for financing activities | (540,060 | ) | | (239,226 | ) | | (474,308 | ) |
| Net decrease in cash, cash equivalents and restricted cash | $ | (156,936 | ) | | $ | (231 | ) | | $ | (49,123 | ) |
| |
(1) | Cash used for operating activities primarily includes the purchase and sale of loans held for sale by the Company. |
| |
(2) | Cash provided by loan investing activities includes the purchase of and repayment of loans held for investment. Cash used for note, certificate and secured borrowings financing activities includes the issuance of notes, certificates and secured borrowings to investors and the repayment of those notes, certificates and secured borrowings. These amounts generally correspond to and offset each other. |
Operating Activities. Net cash used for operating activities was $(270.6) million, $(639.7) million and $(573.4) million during the years ended December 31, 2019, 2018 and 2017, respectively. Net cash used for loan operating activities relates to proceeds from sales of loans held for sale offset by the purchase of loans held for sale. The timing of the purchases and sales of loans held for sale can vary between periods and can therefore impact the amount of cash provided by or used for operating activities. In periods where we accumulate loans held for sale that are sold in a subsequent period, cash flow from operating activities will be negatively affected. In 2018, cash provided by all other operating activities was primarily impacted by cash paid for class action and regulatory litigation costs.
Investing Activities. Net cash provided by investing activities was $653.8 million, $878.7 million and $998.6 million during the years ended December 31, 2019, 2018 and 2017, respectively. Net cash provided by loan investing activities was primarily driven by purchases of loans held for investment (under our retail program and issuance of notes) and principal receipts on those loans. Net cash provided by all other investing activities was primarily driven by purchases of securities available for sale and purchases of property, equipment and software, offset by proceeds from securities available for sale.
Financing Activities. Net cash used for financing activities was $(540.1) million, $(239.2) million and $(474.3) million during the years ended December 31, 2019, 2018 and 2017, respectively. Net cash used for financing activities was primarily driven by principal payments on and retirements of notes and certificates and principal payments on our credit facilities, offset by proceeds from our credit facilities, the issuance of notes and certificates, and proceeds from securities sold under repurchase agreements.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Capital Resources
Net capital expenditures were $44.6$50.7 million, or 7% of total net revenue, $53.0 million, or 8% of total net revenue, $51.8and $44.6 million, or 10% of total net revenue, and $39.4 million, or 9%8% of total net revenue, for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Capital expenditures generally consist of internally developed software, leasehold improvements and computer equipment, and construction in progress.equipment. Capital expenditures in 20182020 are expected to be approximately $60$45.0 million, primarily related to costs associated with the continued development and support of our online lending marketplace platform. In the future, we expect our capital expenditures related to enhancing our platform to increase as we continue to enhance our platform to support the growth in our business.
Off-Balance Sheet Arrangements
At both December 31, 20172019 and December 31, 2016,2018, a total of $5.5 million and $4.7 million, respectively, in standby letters of credit were outstanding related to certain financial covenants required for our leased facilities. To date, no amounts have been drawn against the letters of credit, which renew annually and expire at various dates through July 2026.
In the ordinary course of business, we engage in other activities that are not reflected on our Consolidated Balance Sheets, generally referred to as off-balance sheet arrangements. These activities involve our Structured Program transactions with unconsolidated variable interest entities. See entities including Company-sponsored securitizations and Certificate Program transactions. These transactions are used frequently by the Company to provide a source of liquidity to finance our business and to diversify our investor base. The Company retains at least 5% of securities and residual interests from these transactions and enters into a servicing arrangement with the unconsolidated variable interest entity. We are exposed to market risk in the securitization market. We provide additional information regarding transactions with unconsolidated variable interest entities in “Part II – Item 8 –8. Financial Statements and Supplementary Data –Notes to Consolidated Financial Statements – Note 7. Securitizations and Variable Interest Entities.”
Contingencies
Legal
For a comprehensive discussion of legal proceedings as of December 31, 2019, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies.”
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Notes to Consolidated Financial Statements – Note 6. Securitizations and Variable Interest Entities” for additional information regarding these types of activities.
Contingencies
Legal
For a comprehensive discussion of legal proceedings as of December 31, 2017, see “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Commitments and Contingencies.”
Contractual Obligations
Our principal commitments consist of obligations under our loan funding operation with WebBank and in connection with direct marketing efforts, long-term debt obligations related to our credit facilities and securities sold under repurchase agreements, operating leases for office space and contractual commitments for other support services. The following table summarizes our contractual obligations as of December 31, 20172019 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:
|
| | | | | | | | | | | | | | | | | | | |
| | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | | Total |
Loan funding obligations (1) | 166,973 |
| | — |
| | — |
| | — |
| | 166,973 |
|
| Operating lease obligations | 16,389 |
| | 34,183 |
| | 31,363 |
| | 32,645 |
| | 114,580 |
|
| WebBank purchase obligations | 54,172 |
| | — |
| | — |
| | — |
| | 54,172 |
|
| Purchase obligations | 7,065 |
| | 3,829 |
| | 401 |
| | 208 |
| | 11,503 |
|
Total contractual obligations (2) | $ | 244,599 |
| | $ | 38,012 |
| | $ | 31,764 |
| | $ | 32,853 |
| | $ | 347,228 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | | Total |
Direct mail purchase commitment (1) | $ | 3,807 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,807 |
|
Long-term debt obligations (2) | 147,575 |
| | 387,251 |
| | 107 |
| | 52,520 |
| | 587,453 |
|
Operating lease obligations (3) | 18,219 |
| | 33,659 |
| | 23,665 |
| | 74,497 |
| | 150,040 |
|
| WebBank loan purchase obligation | 91,338 |
| | — |
| | — |
| | — |
| | 91,338 |
|
| Purchase obligations | 8,265 |
| | 8,473 |
| | 208 |
| | — |
| | 16,946 |
|
Total contractual obligations (4) | $ | 269,204 |
| | $ | 429,383 |
| | $ | 23,980 |
| | $ | 127,017 |
| | $ | 849,584 |
|
| |
(1) | Represents loans as of December 31, 2017,2019, the Company could have been required to purchase resulting from direct mail marketing efforts if such loans were not otherwise invested in by investors on the platform. As of the date of this report, no loans remained without investor commitments and the Company was not required to purchase any of these loans. |
| |
(2) | Amounts based on contractual maturity dates. The amounts presented in the “3 to 5 Years” and “More than 5 Years” columns above represent the Company’s long-term debt obligations under repurchase agreements, which are paid down based on cash flows received from the underlying securities sold. The Company expects these long-term debt obligations to be satisfied within three years. |
| |
(3) | As of December 31, 2019, the Company entered into an additional operating lease which has not yet commenced and is therefore not part of the table above nor included in the lease right-of-use asset and liability. This lease will commence when the Company obtains possession of the underlying asset, which is expected to be on April 1, 2020. The lease term is nine years and has an undiscounted future rent payment of approximately $8.7 million. |
| |
(4) | The notes and certificates issued by LendingClub and the LC Trust, respectively, have been excluded from the table above because payments on those liabilities are only required to be made by us if and when we receive the related loan payments from borrowers. Our own liquidity resources are not required to make any contractual payments on the notes or certificates, except in limited instances of proven identity fraud on a related loan. |
Loan Purchase Obligation
Under our loan account program with WebBank, which serves as our primary issuing bank, WebBank retains ownershipFor a discussion of the loans it originates that are facilitated through our lending marketplace for two business days after origination. As part of this arrangement, we are committed to purchase the loans at par plus accrued interest, at the conclusion of the two business days. As of December 31, 2017 and 2016, we were committed to purchase loans with an outstanding principal balance of $54.2 million and $32.2 million at par, respectively.
Loan Repurchase Obligations
We are generally required to repurchase loans, notes or certificates in events of verified identity theft. We may also repurchase certain loans, notes or certificates in connection with certain customer accommodations. In connection with certain whole loan and CLUB Certificate sales, as well as to facilitate access securitization markets, we have agreed to repurchase loans if representations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the loans. In the case of certain securitization transactions, the Company has
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
also agreed to repurchase or substitute loans for which a borrower fails to make the first payment due under a loan. We believe such provisions are customary and consistent with institutional loan and securitization market standards.
In addition to and distinct from the repurchaseCompany’s long-term debt obligations described in the preceding paragraph, we perform certain administrative functions for a variety of retail and institutional investors, including executing, without discretion, loan investments as directed by the investor. To the extent loans do not meet the investor’s investment criteria at the time of issuance, or are transferred to the investor as a result of a system error by us, we repurchase such loans, notes or certificates at par. As a result of the loan repurchase obligations described above, we repurchased $2.2 million in loans, notes and certificates during the year ended December 31, 2017.
Purchase Commitments
As required by applicable regulations, we are obligated to purchase loans resulting from direct mail marketing efforts if such loans are not otherwise invested in by investors on the platform. We were not required to purchase any such loans during 2017. Additionally, loans in the process of being facilitated through our platform and originated by our issuing bank partner at December 31, 2017, were substantially funded in January 2018. As of the date of this report, no loans remained without investor commitments and we were not required to purchase any of these loans.
In addition, if neither Springstone nor the Company can arrange for other investors to invest in or purchase loans that Springstone facilitates and that are originated by an issuing bank partner but do not meet the credit criteria for purchase by the issuing bank partner (Pool B loans), Springstone and the Company are contractually committed to purchase these loans. As of December 31, 2017, we had a $9.0 million deposit in a bank account to secure potential future purchases of these loans, if necessary. These funds are recorded as restricted cash on our Consolidated Balance Sheets. During the year ended December 31, 2017, the Company was required to purchase $26.7 million of Pool B loans. Pool B loans are held on our Consolidated Balance Sheets and have an outstanding principal balance and fair value of $20.1 million and $18.2 million as of December 31, 2017, respectively. The Company believes it will be required2019, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Debt.” For a discussion of the Company’s operating lease obligations, loan purchase additional Pool B loans in 2018obligation, loan repurchase obligations, and purchase commitments as it seeksof December 31, 2019, see “Item 8. Financial Statements and Supplementary Data – Notes to arrange for other investors to invest in or purchase these loans.Consolidated Financial Statements – Note 18. Leases” and “Note 19. Commitments and Contingencies.”
Critical Accounting Policies and Estimates
The Company’sOur significant accounting policies are described in “Part II– Item 8 –8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2 –2. Summary of Significant Accounting Policies” of the consolidated financial statements. The Company considersWe consider certain of these policies to be critical accounting policies as they require significant judgments, assumptions and estimates which we believe are critical in understanding and evaluating our reported financial results. These judgments, estimates and assumptions are inherently subjective and actual results may differ from these estimates and assumptions, and the differences could be material.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Fair Value of Loans Held for Investment, Loans Held for Sale,Invested in by the Company, Notes and Certificates
We have elected the fair value option for loans held for investment loans held for sale, and related notes and certificates.certificates, as well as loans invested in by the Company. We primarily use a discounted cash flow model to estimate fair value based on the present value of estimated future cash flows, but we may adjust model results if we do not believe the present value reflects the fair value of an instrument.flows. This model uses both observable and unobservable inputs that are not observable but reflectand reflects our best estimates of the assumptions a market participant would use to calculate fair value. The following describes the primary inputs that require significant judgment:
Net lossesExpected loss rates – Net lossesExpected loss rates are estimates of the principal payments that will not be repaid over the life of a loan held for investment, loan held for sale,invested in by the Company, note or certificate. NetExpected loss expectationsrates are adjusted to reflect the expected principal recoveries on charged-off loans. NetExpected loss expectationsrates are primarily based on the historical performance of the loans facilitated on our platform but also incorporate discretionary adjustments based on our expectations of future credit performance.
Prepayments – Prepayments are estimates of the amount of principal payments that will occur before they are contractually required during the life of a loan held for investment, loan held for sale,invested in by the Company, note or certificate. Prepayments reduce the projected principal balances, interest payments and expected time loans are outstanding. Prepayment expectations are primarily based on the historical performance of the loans facilitated on our platform but also incorporate discretionary adjustments based on our expectations of future loan performance.
Discount rates – The discount rates applied to the expected cash flows of loans held for investment loans held for sale, and related notes and certificates, as well as loans invested in by the Company, reflect our estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics. Discount rates are based on our estimate of the rate of return investors are likely to receive on new loans facilitated on platform.our platform taking into account the purchasing price. Discount rates for aged loans are adjusted to reflect the market relationship between interest rates and remaining time to maturity.
Fair Value of Asset-backed Securities related to Company-sponsored Securitizations and CLUB CertificateStructured Program Transactions
We classifyasset-backed securities related to Company-sponsored securitizations and CLUB CertificateStructured Program transactions as securities available for sale securities.sale. These securities are recorded at fair value and unrealized gains and losses are reported, net of taxes, in “Accumulated other comprehensive income (loss)” in the Company’s Consolidated Balance Sheets unless management determines that a security is other-than-temporarily impaired (OTTI).
We estimate fair value based on the price of transactions for similar instruments if available. If market observable prices are not available, we use a discounted cash flow model to estimate fair value based on the present value of estimated future cash flows. This model uses inputs that are both observable and not observable butand reflect our best estimates of the assumptions a market participant would use to calculate fair value. The following describes the primary inputs that require significant judgment:
Discount rates – The discount rates for asset-backed securities related to Company-sponsored securitizationStructured Program transactions reflectsreflect our estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics. The primary source of discount rate observations is the rate of return implied by the sales of asset-backed securities associated with new Company-sponsored securitizationStructured Program transactions.
The CompanyWe also incorporatesincorporate estimates of net losses and prepayments in itsour estimation of asset-backed securities related to Company-sponsored securitizations and CLUB CertificateStructured Program transactions. These inputs are consistent with the assumptions used in the valuation of loans held for investment loans held for sale, and related notes and certificates.certificates, as well as loans invested in by the Company.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Fair Value of Secured Borrowings
We have elected the fair value option for secured borrowings. We primarily use a discounted cash flow model to estimate fair value based on the present value of estimated future cash flows, but we may adjust model results if we do not believe the present value reflects the fair value of an instrument. This model uses inputs that are not observable but reflect our best estimates of the assumptions a market participant would use to calculate fair value. The following describes the primary inputs that require significant judgment:
Net losses – Net losses are estimates of the principal payments that will not be repaid over the life of a secured borrowing. Net loss expectations are adjusted to reflect the expected principal recoveries on charged-off loans. Net loss expectations are primarily based on the historical performance of the loans facilitated on our platform but also incorporate discretionary adjustments based on our expectations of future credit performance. The fair value of secured borrowings varies significantly for different net loss expectations; therefore, we incorporate a variety of net loss scenarios and weight them based on their probability.
Discount rates – The discount rates applied to the expected cash flows of the secured borrowing reflect our estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics. Discount rates incorporate our estimate of the rate of return investors are likely to receive on new loans facilitated on platform as well as an estimate of the Company’s cost of capital.
We also incorporate estimates of prepayments in our estimation of the fair value of secured borrowings. These inputs are consistent with the assumptions used in the valuation of loans held for investment, loans held for sale, and related notes and certificates.
Fair Value of Servicing Assets and Liabilities
We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or we assume or acquire a servicing obligation whereby the underlying loans are not included in our financial statements. The gain or loss on a loan sale is recorded separately in “Total net revenue”“Gain on sales of loans” in our Consolidated Statements of Operations while the component of the gain or loss that is based on the degree to which the loancontractual servicing fee is above or below an estimated market rate loan servicing feerate is recorded as an offset ina servicing assets or liabilities.asset. Servicing assets and liabilities are reported in “Other assets” and “Accrued expenses and other liabilities,” respectively, on our Consolidated Balance Sheets.Sheets. Changes in the fair value of servicing assets and liabilities are reported in “Investor fees” on our Consolidated Statements of Operations in the period in which the changes occur.
We use the fair value measurement method to account for changes in servicing assets and liabilities. We use a discounted cash flow model to estimate the fair values of loan servicing assets and liabilities.assets. The cash flows in the valuation model represent the difference between the servicing fees charged to whole loan buyers and an estimated market servicing fee.rate. Since servicing fees are generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimated net expected losses and expected prepayments. The significant assumptions used in valuing our servicing assets and liabilities are:
Market servicing rates – We consider market servicing rates as those rates which a market participant would require to service the loans that LendingClub sells.we sell. We estimate these market servicing rates based on our review of available observable market servicing rates.
Discount rates – The discount rates for loan servicing rights reflect our estimates of the rates of return that investors in servicing rights for unsecured consumer credit obligations would require when investing in similar servicing
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
rights. Discount rates for servicing rights on existing loans reflect a risk premium intended to reflect the amount of compensation market participants would require due to the credit and liquidity uncertainty inherent in the instruments’ cash flows.
The CompanyWe also incorporatesincorporate estimates of net losses and prepayments in itsour estimation of fair value of servicing assets and liabilities.assets. These inputs are consistent with the assumptions used in the valuation of loans held for investment loans held for sale, and related notes and certificates.
Fair Value of Loan Trailing Fee Liability
In February 2016, we revised the agreement with our primary issuing bank partner to include an additional program fee (Loan Trailing Fee). The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, and gives the issuing bank an ongoing financial interest in the performance of the loans it originates. This fee is paid by us to the issuing bank partner over the term of the respective loans and is a function of the principal and interest payments. In the event that principal and interest payments are not made, we are not required to make this Loan Trailing Fee payment. The Loan Trailing Fee is recorded at fair value and presented as a reduction of transaction fees on our Consolidated Statements of Operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee, which considers assumptions of expected prepayment rates and future credit losses.
Goodwill and Intangible Assets
Goodwill represents the fair value of an acquired business in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever events or circumstances indicate that it is more likely than not that the estimated fair value of a reporting unit is below its carrying value. Our annual impairment testing date is April 1. Impairment exists whenever the carrying value of goodwill exceeds its estimated fair value. Adverse changes in impairment indicators such as loss of key personnel, lower than forecast financial performance, increased competition, increased regulatory oversight, or unplanned changes in our operations could result in impairment.
We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the estimated fair value of a reporting unit (generally defined as a component of a business for which financial information is available and reviewed regularly by management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital or company-specific factors, such as market capitalization in excess of net assets, trends in revenue generating activities and merger or acquisition activity.
If we do not qualitatively assess goodwill we compare a reporting unit’s estimated fair value to its carrying value. We estimate the fair value of a reporting unit using both an income approach and a market approach. We rely on the income approach (discounted cash flow method) as the primary method for determining estimated fair value. Market-based methods are used as benchmarks to corroborate the estimated fair value determined by the discounted cash flow method. Both the income approach and the market approach rely on long-term growth rates, and revenue and earnings projections.
When applying the income approach, we use a discounted cash flow model, which requires the estimation of cash flows and an appropriate discount rate. We project cash flows expected to be generated by a reporting unit inclusive of an estimated terminal value. The discount rate assumption contemplates a weighted-average cost of capital based on both market observable and company-specific factors. The discount rate is risk-adjusted to include any premiums related to equity price volatility, size, and projected capital structure of publicly traded companies in similar lines of business.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
We rely on several assumptions when estimating the fair value of a reporting unit using the discounted cash flow method. These assumptions include the current discount rate discussed above,certificates, as well as transaction fee revenue based on projected loan origination growth, projected operating expenses and contribution margin, capital expenditures and income taxes. We believe these assumptions to be representative of assumptions that a market participant would useloans invested in valuing a reporting unit, but these assumptions are inherently uncertain. Ifby the assumptions regarding business operating plans, projected loan origination growth and transaction fee rates, operating expenses, or competition in the industry are not achieved, we may be required to record goodwill impairment charges in future periods. There can be no assurances that estimates and assumptions made for purposes of goodwill impairment testing will prove accurate predictions of the future.Company.
The market approach estimates the fair value of a reporting unit based on certain market value multiples of publicly traded companies in similar lines of business, such as total enterprise value to revenue, or to EBITDA. Under the market approach, we also consider fair value implied from any relevant and comparable market transactions.
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit, which may include straight-line or accelerated methods of amortization. Intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We do not have any indefinite-lived intangible assets.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities in “Accrued expenses and other liabilities” in the Company’s Consolidated Balance Sheets.Sheets. Associated legal expense is recorded in “Other general and administrative” expense or in “Class action and regulatory litigation settlement” expenseexpense” for the losses associated with the securities class action lawsuits, as described in “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18.19. Commitments and Contingencies,” in the Company’s Consolidated Statements of Operations.Operations. Such liabilities and associated expenses are recorded when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company will also disclose a range of exposure to incremental loss when such amounts are reasonably possible and can be estimated. In estimating the Company’s exposure to loss contingencies, if an amount within the estimated range of loss is the best estimate, that amount will be accrued. However, if there is no amount within the estimated range of loss that is the best estimate, the Company will accrue the minimum amount within the range, and disclose the amount up to the high end of the range as an exposure to incremental loss, if such amount is considered reasonably possible. Such estimates are based on the best information available at the time. As additional information becomes available, we reassess the potential liability and record an adjustment to our estimate in the period in which the adjustment is probable and an amount or range can be reasonably estimated. The determination of an expected contingent liability and associated litigation expense requires the Company to make assumptions related to the outcome of these matters. Due to the inherent uncertainties of loss contingencies, our estimates may be different than the actual outcomes.
Insurance Recoveries
Insurance recoveries of all or a portion of incurred losses are recognized when realization of the claim for recovery is probable. Any insurance recoveries in excess of losses incurred are accounted for as a gain contingency. Insurance recoveries are recorded in “Other assets” in the Company’s Consolidated Balance Sheets. Insurance recoveries associated with the reimbursement of legal expenses arising from loss contingencies and legal fees are recorded as a contra-expense in “Other general and administrative” expense or, if such recoveries are associated with the securities class action lawsuits, as a contra-expense in “Class action litigation settlement” expense, in the Company’s Consolidated Statements of Operations.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits resulting from future deductions for our net operating loss carryforwards. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Consolidation of Variable Interest Entities
A variable interest entity (VIE) is a legal entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to control the entity’s activities or lack the ability to receive expected benefits or absorb obligations in a manner that’s consistent with their investment in the entity.
The most common type of VIE is a special purpose entity (SPE). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. In connection with these securitization activities, we have various forms of ongoing involvement with SPEs, which may include 1) holding senior or subordinated interests in SPEs, 2) acting as servicer for SPEs; and, 3) providing administrative services to SPEs. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
A VIE is consolidated by its primary beneficiary, the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates VIEs when it is deemed to be the primary beneficiary.
Management regularly reviews and reconsiders its previous conclusions regarding whether it holds a variable interest in potential VIEs, the status of an entity as a VIE, and whether the Company is required to consolidate such VIEs in the consolidated financial statements.
Legal Fees
Legal fees, including legal fees associated with loss contingencies, are recognized as incurred and included in “Other general and administrative” expense in the Company’s Consolidated Statements of Operations.
Stock-based Compensation
Stock-based compensation includes expense associated with restricted stock units, stock option grants, and our employee stock purchase plan (ESPP), as well as expense associated with stock issued related to our acquisition of Springstone. Stock-based compensation expense is based on the grant date fair value of the award.
The fair value of restricted stock units is based on the closing price of our common stock on the date of grant. To determine the fair value of stock options and ESPP purchase rights, we use the Black-Scholes option-pricing model, with inputs for the fair value of our common stock, expected common stock price volatility over the expected life of the stock options or ESPP purchase rights, expected term of the stock option or ESPP purchase right, risk-free interest rates and expected dividends.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
For awards issued prior to 2017, as we did not have a significant trading history for our common stock, the expected stock price volatility for our stock options and ESPP was estimated by reference to the average historical stock price volatility for our industry peers. In 2017, the Company began using the expected volatility of ESPP purchase rights and stock options based upon the weighted-average of the historical volatility of the Company’s common stock. The expected term for stock options represents the period of time that stock options are estimated to be outstanding, giving consideration to the contractual terms of the options, vesting schedules, and expectations of future exercise patterns and post-vesting employee termination behavior. Given our limited operating history, the simplified method is applied to calculate the expected term. We use a risk-free interest rate based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. We have never declared or paid any cash or other dividends and do not anticipate paying cash or other dividends in the foreseeable future, and consequently use an expected dividend yield of 0.0% in our option-pricing model.
Beginning in 2017, we elected to recognize forfeitures as they occur for equity awards with only a service condition, rather than estimated expected forfeitures.
We use a Monte Carlo simulation to fair value the total shareholder return (TSR) vesting portion of the restricted stock unit awards with performance, market, and service conditions. This valuation methodology utilizes the 20-day volume weighted-average stock price and the closing price of the common stock of the Company and our peer group on the grant date, as well as several key assumptions, including the expected volatilities of the Company and peer group’s stock price, risk-free rate of return, and estimated total shareholder return. Due to the complexity of the valuation technique we have engaged a third-party valuation firm to perform the Monte Carlo simulation.
Stock-based compensation expense related to stock options and restricted stock units that are expected to vest is recognized over the vesting period of the award, which is generally four years, on a straight-line basis. The compensation expense related to ESPP purchase rights is recognized on a straight-line basis over the requisite service period, which is generally six months.
2016 Board Review
As previously disclosed, in 2016 we conducted a review under the supervision of an independent sub-committee of the board of directors and with the assistance of independent outside counsel and other advisors. This review is complete, although it is possible that additional issues may arise as part of our response to ongoing government requests for information.
The details of the review and the findings from the review have been disclosed in prior filings, including the Company’s report on Form 10-K for the year ended December 31, 2016. Following the commencement of the review, we undertook efforts to remediate any deficiencies and we implemented additional controls.
In connection with this review, the Company concluded that its internal control over financial reporting was ineffective as of December 31, 2015 due to a material weakness and, therefore, the Company’s disclosure controls and procedures also were ineffective as disclosed in “Part II– Item 9A - Controls and Procedures” of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2015. The Company made a similar conclusion with respect to its internal control over financial reporting and its disclosure controls and procedures as of March 31, 2016, June 30, 2016, and September 30, 2016, as disclosed in Item 4 of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016, and September 30, 2016, respectively. Following the implementation of our remediation plan, as of December 31, 2016, management concluded that, as remediated, its internal control over financial reporting and its disclosure controls and procedures, were effective, as described in “Part II – Item 9A – Controls and Procedures.” Management has made a similar conclusion for each quarter of and the year ended December 31, 2017.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in market prices,discount rates and servicing rates, interest rates and credit performance of loans. We are exposed to market risk directly through loans and interest rates.securities held on our balance sheet, access to the securitization markets, investor demand for our loans, current and future debt under our credit facilities, and our servicing assets.
Market Rate Sensitivity
We are exposedMarket rate sensitivity refers to marketthe risk on loans facilitated through our lending marketplaceof loss to future earnings, values or future cash flows that are not sold or funded with offsetting notes, certificates or secured borrowings. Changes in the fair value of these loans are primarily related tomay result from changes in market discount rates credit performance and prepayments.servicing rates.
Loans Invested in by the Company. As of December 31, 2019 and 2018, we were exposed to market rate risk on $766.0 million and $842.6 million of loans invested in by the Company at fair value, respectively, which have fixed interest rates. The fair values of loans are estimated using a discounted cash flow methodology, where the discount rate represents an estimate of the required rate of return by market participants. The discount rates for our loans may change due to expected loan performance or changes in the expected returns of similar financial instruments available in the market. Any realized or unrealized losses from market rate changes on loans invested in by the Company are recorded in earnings.
During 2017, we purchased a totalThe Company’s continued facilitation of $1.6 billion of loans through the platform using our own capital, primarily to support securitization and whole loan sale initiatives, fund certain custom program loans, and fulfill contractual purchase obligations. In the third quarter of 2017, we began a recurring process to aggregate pools of whole loans on balance sheet, for subsequent sale to third-party investors. The typical holding period for such pools is less than one month, and this process represents the majority of the $990.3 million of loans we previously purchased. The outstanding principal balance of loans in which we remained invested using our own capital as of December 31, 2017 was $613.7 million. We dependoriginations depends on an active liquid market, and third-party investor demand for whole loan salesloans and successful securitization transactions. See “Part II – Item 7 – Management’s DiscussionStructured Program transactions and Analysisloan sales. The Company could respond to disruptions in ongoing investor demand due to changes in yield expectations, availability and yield of Financial Conditionalternative investments, and Resultsliquidity in capital markets with reductions in origination facilitations or sales of Operations – Current Economicloans at discounts, thereby negatively impacting revenue.
The following table presents the impact to the fair value of loans invested in by the Company due to a hypothetical change in discount rates as of December 31, 2019 and Business Environment”2018:
|
| | | | | | | |
| | Loans Invested in by the Company |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 766,048 |
| | $ | 842,604 |
|
| Discount rates | | | |
| 100 basis point increase | $ | (9,806 | ) | | $ | (10,487 | ) |
| 100 basis point decrease | $ | 10,014 |
| | $ | 10,749 |
|
Servicing Assets. As of December 31, 2019 and “Item 7 – Management’s Discussion2018, we were exposed to market servicing rate risk on $89.7 million and Analysis$64.0 million of Financial Conditionservicing assets, respectively. Our selection of the most representative market servicing rates is inherently judgmental. The following table presents the impact to the fair value of servicing assets due to a hypothetical change in the market servicing rate assumption as of December 31, 2019 and Results of Operations – Liquidity and Capital Resources – Liquidity” for additional discussion. We do not hold or issue financial instruments for trading purposes.2018:
|
| | | | | | | |
| | Servicing Assets |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 89,680 |
| | $ | 64,006 |
|
| Weighted-average market servicing rate assumption | 0.66 | % | | 0.66 | % |
| Change in fair value from: | | | |
| Servicing rate increase by 10 basis points | $ | (13,978 | ) | | $ | (10,878 | ) |
| Servicing rate decrease by 10 basis points | $ | 13,979 |
| | $ | 10,886 |
|
Interest Rate Sensitivity
We investThe fair values of certain of our assets and liabilities are sensitive to changes in securities classified as available for saleinterest rates. Fixed rates may adversely affect market value due to a rise in interest rates, while floating rates may produce less income than expected if interest rates fall. The impact of changes in interest rates would be reduced by the fact that increases or decreases in fair values of assets would be partially offset by corresponding changes in fair values of liabilities.
Loans Invested in by the Company. As of December 31, 2019 and loans that are subject2018, we were exposed to interest rate risk.risk on $766.0 million and $842.6 million of loans invested in by the Company at fair value, respectively, which have fixed interest rates. Any realized or unrealized losses from interest rate changes are recorded in earnings. The following table presents the impact to the fair value of loans invested in by the Company due to a hypothetical change in interest rates as of December 31, 2019 and 2018:
|
| | | | | | | |
| | Loans Invested in by the Company |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 766,048 |
| | $ | 842,604 |
|
| Interest rates | | | |
| 100 basis point increase | $ | (9,806 | ) | | $ | (9,945 | ) |
| 100 basis point decrease | $ | 10,014 |
| | $ | 10,163 |
|
Securities Available for Sale. As of December 31, 2019 and 2018, we were exposed to interest rate risk on $270.9 million and $170.5 million of securities available for sale, as of December 31, 2017 and 2016 was $117.6respectively, including $220.1 million and $287.1$116.8 million respectively, consisting of corporate debt securities, asset-backed securities, U.S. agency securities, certificates of deposit, commercial paper, U.S. Treasury securities, asset-backed securities related to Company-sponsored securitizations and CLUB CertificateStructured Program transactions and $50.8 million and $53.7 million of corporate debt, certificates of deposit, other securities. To mitigate the risk of loss, our investment policyasset-backed securities, commercial paper and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns.other securities, respectively. To manage this risk, the Company limitswe limit and monitorsmonitor maturities, credit ratings, performance of loans underlying asset-backed securities and residual interestsStructured Program transactions and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on our securities available for sale and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $0.6 million in the fair value of our securities available for sale as of December 31, 2017. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.6 million in the fair value of our securities available for sale as of December 31, 2017. Any unrealized gains or losses resulting from such interest rate changes would only be recorded in earnings if we sold the securities prior to maturity or if the securities were not considered other-than-temporarily impaired.
WeThe following table presents the impact to the fair value of securities available for sale due to a hypothetical change in interest rates as of December 31, 2019 and 2018:
|
| | | | | | | |
| | Securities Available for Sale |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 270,927 |
| | $ | 170,469 |
|
| Interest rates | | | |
| 100 basis point increase | $ | (2,313 | ) | | $ | (1,259 | ) |
| 100 basis point decrease | $ | 2,301 |
| | $ | 1,259 |
|
Credit Facilities and Securities Sold Under Repurchase Agreements. As of December 31, 2019 and 2018, we were exposed to interest rate risk on $387.3 million and $306.8 million of funding under the Personal Loan and Auto Loan Warehouse Credit Facilities, $60.0 million and $95.0 million of funding under the Revolving Facility, and $140.2 million and $57.0 million of funding under our repurchase agreements, respectively. Future funding activities may increase our exposure to interest rate risk, as the interest rates payable on such funding are generally tied to LIBOR.
The following table presents the impact to the annualized interest expense related to our credit facilities and securities sold under repurchase agreements due to a hypothetical change in the one-month LIBOR rate as of December 31, 2019 and 2018:
|
| | | | | | | |
| | Credit Facilities and Securities Sold Under Repurchase Agreements |
| December 31, | 2019 | | 2018 |
| Carrying value | $ | 587,453 |
| | $ | 458,802 |
|
| One-month LIBOR | | | |
| 100 basis point increase | $ | 5,875 |
| | $ | 4,588 |
|
| 100 basis point decrease | $ | (5,875 | ) | | $ | (4,588 | ) |
Cash and Cash Equivalents. As of December 31, 2019 and 2018, we had cash and cash equivalents of $401.7$243.8 million as of December 31, 2017.and $373.0 million, respectively. These amounts were held primarily in interest-bearing deposits at investment grade financial institutions, institutional money market funds, certificates of deposit, and commercial paper, which are short-term. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, we do not believe we have material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not
materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will modestly increase the interest income earned on these cash balances.
The outstanding principal balance of loans in which the Company remained invested using its own capital as of December 31, 2017 was $613.7 million, substantially all of which bears interest at fixed rates. Future funding activities, including funding under the Warehouse Credit Agreements, may increase our exposure to interest rate risk, as the interest rates payable on such funding are tied to short-term market rates.
Credit Performance Sensitivity
Credit performance sensitivity refers to the risk of loss arising from default when borrowers are unable or unwilling to meet their financial obligations. We invest in loans and asset-backed securities and(including residual interestsinterests) related to unconsolidated VIEs and Company-sponsored securitizationStructured Program transactions. The performance of these loans securities and residual interestsasset-backed securities is dependent on the credit performance of loans facilitated by the Company.us. To manage this risk, we monitor borrower payment performance and how it may impact the valuation of our investments. The valuation of these investments is based on a discounted cash flow analysis and includes Level 3 assumptions.
Any unrealized losses on asset-backed securities and(including residual interests isinterests) are evaluated for other-than-temporary impairment. The Companyimpairment and any impairment is recorded an other-than-temporary impairment charge of $1.5 million on its subordinated residual certificates held related to its Company-sponsored securitization transactions during the year ended December 31, 2017. There were no other-than-temporary impairment charges for the years ended December 31, 2016 or 2015. See “Part II – Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities Available for Sale” for additional information. in earnings. All other unrealized gains and losses are recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss).
Loans Invested in by the Company. As of December 31, 2019 and 2018, we were exposed to credit performance risk on $766.0 million and $842.6 million of loans invested in by the Company at fair value, respectively, which have fixed interest rates. The following table presents the impact to the fair value of loans invested in by the Company due to a hypothetical change in credit loss rates as of December 31, 2019 and 2018:
|
| | | | | | | |
| | Loans Invested in by the Company |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 766,048 |
| | $ | 842,604 |
|
| Credit loss rates | | | |
| 10 percent increase | $ | (9,558 | ) | | $ | (11,304 | ) |
| 10 percent decrease | $ | 9,469 |
| | $ | 11,526 |
|
Asset-backed Securities Related to Structured Program Transactions. As of December 31, 2019 and 2018, we were exposed to credit performance risk on $220.1 million and $116.8 million of asset-backed securities related to Structured Program transactions, respectively, including securities pledged as collateral. The following table presents the impact to the fair value of asset-backed securities related to Structured Program transactions due to a hypothetical change in credit loss rates as of December 31, 2019 and 2018: |
| | | | | | | |
| | Asset-backed Securities Related to Structured Program Transactions |
| December 31, | 2019 | | 2018 |
| Fair value | $ | 220,135 |
| | $ | 116,768 |
|
| Credit loss rates | | | |
| 10 percent increase | $ | (4,326 | ) | | $ | (2,643 | ) |
| 10 percent decrease | $ | 4,285 |
| | $ | 2,643 |
|
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LendingClub CorporationCorporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LendingClub Corporation and subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017,2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2018,19, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Level 3 Financial Assets and Unobservable Inputs Therein
| |
| – | Securities Available for Sale – See Note 5. Securities Available for Sale |
| |
| – | Loans Held for Investment by the Company at Fair Value – See Note 6. Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings |
| |
| – | Loans Held for Sale by the Company at Fair Value – See Note 6. Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings |
| |
| – | Fair Value of Assets and Liabilities – See Note 8. Fair Value of Assets and Liabilities |
Critical Audit Matter Description
The Company holds assets including loans held for sale by the Company, loans held for investment by the Company, asset-backed securities and asset-backed subordinated securities held in the Company’s securities available for sale portfolio whose fair values are estimated by discounted cash flow models. These Level 3 assets have inputs that are unobservable in the market but reflective of the Company’s assumptions about what market participants would use to price the asset. Their values are estimated using complex models that include assumptions and estimates, some of which are unobservable inputs that require significant judgment.
Auditing the models and unobservable inputs used by management to estimate the fair value of these Level 3 assets involves subjective and complex judgments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and unobservable inputs used by management to estimate the fair value of these Level 3 assets included the following key procedures:
We tested the effectiveness of controls, including those related to model validation, price calibration, discount rate, loss curves, and prepayment curves.
We evaluated management’s ability to accurately estimate fair value by comparing management’s historical price calibration and projected prepayment and loss curves to actual results.
We compared management’s assumptions to external sources, including the Company’s comparable market transaction data, where available.
With the assistance of our fair value specialists, we developed independent estimates of fair values and compared our estimates to the Company’s estimates.
Valuation and Disclosure of Litigation and Regulatory Matters
| |
| – | Commitments and Contingencies – See Note 19. Commitments and Contingencies |
Critical Audit Matter Description
The accrued contingent liability and associated litigation expense related to certain ongoing litigation and regulatory matters are estimated, recorded and disclosed based on the Company’s expectations regarding the probability and magnitude of any expected losses. These estimates are refined as information becomes available over the course of the associated matters. The determination of an expected contingent liability and associated litigation expense requires management to make assumptions related to the outcome of these matters. Due to the inherent uncertainty involved in the assessment of the outcome, the actual loss may be different than the Company’s estimates of expected loss. The Company’s accrued contingent liability as of December 31, 2019 was $16.0 million, with contingent liability expense for the year ended December 31, 2019 of $3.3 million.
Auditing the probability of an unfavorable outcome and the estimate of the associated exposure involves subjective and complex judgment and careful evaluation of the facts in coordination with the Company’s legal counsel as information becomes available.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to assessing the probability of outcome related to these matters and estimates of reasonably possible loss or range of loss included the following key procedures:
We tested the effectiveness of controls over the valuation of contingent liabilities related to outstanding and anticipated litigation and regulatory matters, including the evaluation of whether such exposures are probable or reasonably possible.
We tested the effectiveness of controls over the presentation and disclosure of litigation and regulatory matters.
We inspected board and committee meeting materials and minutes and attended meetings with General Counsel, Executives and the Audit Committee for updates on litigation and regulatory matters.
We sent independent third-party confirmations to external counsel and ascertained completeness of the litigation matters brought to our attention by internal counsel.
We evaluated the reasonableness of management’s estimates of loss contingencies by holding meetings with management and the Company’s internal counsel, reviewing the Company’s responses to regulators where applicable, and reviewing correspondence between the Company’s attorneys and the plaintiffs’ attorneys where applicable.
We evaluated management’s ability to estimate loss contingencies by comparing actual settlements for matters existing at the end of prior periods with their historical forecasts.
We obtained a legal letter from the Company’s internal counsel detailing the status of all material current litigation and regulatory matters commensurate with the date of our reports.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 201819, 2020
We have served as the Company’s auditor since 2013.
LENDINGCLUB CORPORATION
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
| | | December 31, | 2017 | | 2016 | 2019 | | 2018 |
| Assets | | | | | | |
Cash and cash equivalents (1) | $ | 401,719 |
| | $ | 515,602 |
| $ | 243,779 |
| | $ | 372,974 |
|
Restricted cash (1) | 242,570 |
| | 177,810 |
| 243,343 |
| | 271,084 |
|
| Securities available for sale | 117,573 |
| | 287,137 |
| |
Loans held for investment at fair value (1) (2) | 2,932,325 |
| | 4,295,121 |
| |
Loans held for investment by the Company at fair value (1) (2) | 361,230 |
| | 16,863 |
| |
| Securities available for sale (includes $174,849 and $53,611 pledged as collateral at fair value, respectively) | | 270,927 |
| | 170,469 |
|
Loans held for investment at fair value (1) | | 1,079,315 |
| | 1,883,251 |
|
Loans held for investment by the Company at fair value (1) | | 43,693 |
| | 2,583 |
|
Loans held for sale by the Company at fair value (1) | 235,825 |
| | 9,048 |
| 722,355 |
| | 840,021 |
|
Accrued interest receivable (1) | 33,822 |
| | 40,299 |
| 12,857 |
| | 22,255 |
|
| Property, equipment and software, net | 101,933 |
| | 89,263 |
| 114,370 |
| | 113,875 |
|
Operating lease assets (2) | | 93,485 |
| | — |
|
| Intangible assets, net | 21,923 |
| | 26,211 |
| 14,549 |
| | 18,048 |
|
| Goodwill | 35,633 |
| | 35,633 |
| |
Other assets (1) | 156,278 |
| | 69,644 |
| 143,668 |
| | 124,967 |
|
| Total assets | $ | 4,640,831 |
| | $ | 5,562,631 |
| $ | 2,982,341 |
| | $ | 3,819,527 |
|
| Liabilities and Equity | | | | | | |
| Accounts payable | $ | 9,401 |
| | $ | 10,889 |
| $ | 10,855 |
| | $ | 7,104 |
|
Accrued interest payable (1) | 32,992 |
| | 43,574 |
| 9,260 |
| | 19,241 |
|
Operating lease liabilities (2) | | 112,344 |
| | — |
|
Accrued expenses and other liabilities (1) | 228,380 |
| | 85,619 |
| 142,636 |
| | 152,118 |
|
| Payable to investors | 143,310 |
| | 125,884 |
| 97,530 |
| | 149,052 |
|
Notes, certificates and secured borrowings at fair value (1) | 2,954,768 |
| | 4,320,895 |
| 1,081,466 |
| | 1,905,875 |
|
Payable to securitization note and residual certificate holders (includes $1,479 and $0 at fair value, respectively) (1) | 312,123 |
| | — |
| |
Warehouse notes payable (1) | 32,100 |
| | — |
| |
Payable to securitization note and certificate holders (includes $40,610 and $0 at fair value, respectively) (1) | | 40,610 |
| | 256,354 |
|
Credit facilities and securities sold under repurchase agreements (1) | | 587,453 |
| | 458,802 |
|
| Total liabilities | 3,713,074 |
| | 4,586,861 |
| 2,082,154 |
| | 2,948,546 |
|
| Equity | | | | | | |
| Common stock, $0.01 par value; 900,000,000 shares authorized; 419,756,546 and 400,262,472 shares issued, respectively; 417,473,846 and 397,979,772 shares outstanding, respectively | 4,198 |
| | 4,003 |
| |
| Additional paid-in capital | 1,327,206 |
| | 1,226,206 |
| |
Common stock, $0.01 par value; 180,000,000 shares authorized; 89,218,797 and 86,384,667 shares issued, respectively; 88,757,406 and 85,928,127 shares outstanding, respectively (3) | | 892 |
| | 864 |
|
Additional paid-in capital (3) | | 1,467,882 |
| | 1,405,392 |
|
| Accumulated deficit | (389,419 | ) | | (234,187 | ) | (548,472 | ) | | (517,727 | ) |
| Treasury stock, at cost; 2,282,700 shares | (19,485 | ) | | (19,485 | ) | |
| Accumulated other comprehensive loss | (5 | ) | | (767 | ) | |
Treasury stock, at cost; 461,391 and 456,540 shares, respectively (3) | | (19,550 | ) | | (19,485 | ) |
| Accumulated other comprehensive income (loss) | | (565 | ) | | 157 |
|
| Total LendingClub stockholders’ equity | 922,495 |
| | 975,770 |
| 900,187 |
| | 869,201 |
|
| Noncontrolling interests | 5,262 |
| | — |
| — |
| | 1,780 |
|
| Total equity | 927,757 |
| | 975,770 |
| 900,187 |
| | 870,981 |
|
| Total liabilities and equity | $ | 4,640,831 |
| | $ | 5,562,631 |
| $ | 2,982,341 |
| | $ | 3,819,527 |
|
| |
(1) | Includes amounts in consolidated variable interest entities (VIEs) presented separately in the table below. |
| |
(2) | Prior period amounts have been reclassifiedThe Company adopted ASU 2016-02, Leases, as of January 1, 2019, and has elected not to conform torestate comparative periods presented in the current period presentation. See consolidated financial statements. For additional information, see “Notes to Consolidated Financial Statements – Note 1. Basis2. Summary of Presentation”Significant Accounting Policies” and “Notes to Consolidated Financial Statements – Note 18. Leases.”
|
| |
(3) | Prior period share information and balances have been retroactively adjusted to reflect a reverse stock split. See “Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
LENDINGCLUB CORPORATION
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
The following table presents the assets and liabilities of consolidated variable interest entities (VIEs),VIEs, which are included in the Consolidated Balance Sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. See “Notes to Consolidated Financial Statements – Note 6. Securitizations and Variable Interest Entities” for additional information.
| | | December 31, | 2017 | | 2016 | 2019 | | 2018 |
| Assets of consolidated VIEs, included in total assets above | | | | | | |
| Restricted cash | $ | 34,370 |
| | $ | — |
| $ | 30,046 |
| | $ | 43,918 |
|
| Loans held for investment at fair value | 1,202,260 |
| | 2,600,422 |
| 197,842 |
| | 642,094 |
|
| Loans held for investment by the Company at fair value | 350,699 |
| | — |
| 40,251 |
| | — |
|
| Loans held for sale by the Company at fair value | 60,812 |
| | — |
| 551,455 |
| | 739,216 |
|
| Accrued interest receivable | 15,602 |
| | 24,037 |
| 4,431 |
| | 10,438 |
|
| Other assets | 6,324 |
| | — |
| 1,359 |
| | 2,498 |
|
| Total assets of consolidated variable interest entities | $ | 1,670,067 |
| | $ | 2,624,459 |
| $ | 825,384 |
| | $ | 1,438,164 |
|
| Liabilities of consolidated VIEs, included in total liabilities above | | | | | | |
| Accrued interest payable | $ | 14,789 |
| | $ | 26,839 |
| $ | 3,185 |
| | $ | 7,594 |
|
| Accrued expenses and other liabilities | 52 |
| | — |
| 244 |
| | 1,627 |
|
| Notes, certificates and secured borrowings at fair value | 1,210,349 |
| | 2,616,023 |
| 197,842 |
| | 648,908 |
|
| Payable to securitization note and residual certificate holders | 312,123 |
| | — |
| |
| Warehouse notes payable | 32,100 |
| | — |
| |
| Payable to securitization note and certificate holders (includes $40,610 and $0 at fair value, respectively) | | 40,610 |
| | 256,354 |
|
| Credit facilities and securities sold under repurchase agreements | | 387,251 |
| | 306,790 |
|
| Total liabilities of consolidated variable interest entities | $ | 1,569,413 |
| | $ | 2,642,862 |
| $ | 629,132 |
| | $ | 1,221,273 |
|
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Amounts)
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Net revenue: | | | | | |
| | | | | | |
| Transaction fees | $ | 598,760 |
| | $ | 526,942 |
| | $ | 448,608 |
|
| | | | | | |
| Interest income | 345,345 |
| | 487,462 |
| | 611,259 |
|
| Interest expense | (246,587 | ) | | (385,605 | ) | | (571,424 | ) |
| Net fair value adjustments | (144,990 | ) | | (100,688 | ) | | (30,817 | ) |
| Net interest income and fair value adjustments | (46,232 | ) | | 1,169 |
| | 9,018 |
|
| Investor fees | 124,532 |
| | 114,883 |
| | 87,108 |
|
| Gain on sales of loans | 67,716 |
| | 45,979 |
| | 23,370 |
|
Net investor revenue (1) | 146,016 |
| | 162,031 |
| | 119,496 |
|
| | | | | | |
| Other revenue | 13,831 |
| | 5,839 |
| | 6,436 |
|
| | | | | | |
| Total net revenue | 758,607 |
| | 694,812 |
| | 574,540 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 279,423 |
| | 268,517 |
| | 229,865 |
|
| Origination and servicing | 103,403 |
| | 99,376 |
| | 86,891 |
|
| Engineering and product development | 168,380 |
| | 155,255 |
| | 142,264 |
|
| Other general and administrative | 238,292 |
| | 228,641 |
| | 191,683 |
|
| Goodwill impairment | — |
| | 35,633 |
| | — |
|
| Class action and regulatory litigation expense | — |
| | 35,500 |
| | 77,250 |
|
| Total operating expenses | 789,498 |
| | 822,922 |
| | 727,953 |
|
| Loss before income tax expense | (30,891 | ) | | (128,110 | ) | | (153,413 | ) |
| Income tax expense (benefit) | (201 | ) | | 43 |
| | 632 |
|
| Consolidated net loss | (30,690 | ) | | (128,153 | ) | | (154,045 | ) |
| Less: Income (Loss) attributable to noncontrolling interests | 55 |
| | 155 |
| | (210 | ) |
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
Net loss per share attributable to LendingClub: (2) | | | | | |
| Basic | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) |
| Diluted | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) |
Weighted-average common shares – Basic (2) | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
|
Weighted-average common shares – Diluted (2) | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Net revenue: | | | | | |
| Transaction fees | $ | 448,608 |
| | $ | 423,494 |
| | $ | 373,508 |
|
Investor fees (1) | 87,108 |
| | 79,647 |
| | 43,787 |
|
Gain (Loss) on sales of loans (1) | 23,370 |
| | (17,152 | ) | | 4,885 |
|
Other revenue (1) | 6,436 |
| | 9,478 |
| | 4,517 |
|
| Net interest income and fair value adjustments: | | | | | |
| Interest income | 611,259 |
| | 696,662 |
| | 552,972 |
|
| Interest expense | (571,424 | ) | | (688,368 | ) | | (549,740 | ) |
Net fair value adjustments (1) | (30,817 | ) | | (2,949 | ) | | 14 |
|
Net interest income and fair value adjustments (1) | 9,018 |
| | 5,345 |
| | 3,246 |
|
| Total net revenue | 574,540 |
| | 500,812 |
| | 429,943 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 229,865 |
| | 216,670 |
| | 171,526 |
|
| Origination and servicing | 86,891 |
| | 74,760 |
| | 61,335 |
|
| Engineering and product development | 142,264 |
| | 115,357 |
| | 77,062 |
|
| Other general and administrative | 191,683 |
| | 207,172 |
| | 122,182 |
|
| Class action litigation settlement | 77,250 |
| | — |
| | — |
|
| Goodwill impairment | — |
| | 37,050 |
| | — |
|
| Total operating expenses | 727,953 |
| | 651,009 |
| | 432,105 |
|
| Loss before income tax expense | (153,413 | ) | | (150,197 | ) | | (2,162 | ) |
| Income tax expense (benefit) | 632 |
| | (4,228 | ) | | 2,833 |
|
| Consolidated net loss | (154,045 | ) | | (145,969 | ) | | (4,995 | ) |
| Less: Loss attributable to noncontrolling interests | (210 | ) | | — |
| | — |
|
| LendingClub net loss | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
| Net loss per share attributable to LendingClub: | | | | | |
| Basic | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) |
| Diluted | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) |
| Weighted-average common shares - Basic | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
|
| Weighted-average common shares - Diluted | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
|
| |
(1) | Prior period amounts have been reclassified to conform to the current period presentation. See“Notes to Consolidated Financial Statements – Note 1. Basis of Presentation”Presentation” for additional information.
|
| |
(2) | All share and per share information has been retroactively adjusted to reflect a reverse stock split. See “Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
See Notes to Consolidated Financial Statements.Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| LendingClub net income (loss) | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) | |
| LendingClub net loss | | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
| Other comprehensive income (loss), before tax: | | | | | | | | | | |
| Net unrealized gain (loss) on securities available for sale | 184 |
| | 1,515 |
| | (1,671 | ) | (526 | ) | | 252 |
| | 184 |
|
| Other comprehensive income (loss), before tax | 184 |
| | 1,515 |
| | (1,671 | ) | (526 | ) | | 252 |
| | 184 |
|
| Income tax effect | (591 | ) | | 611 |
| | — |
| 216 |
| | 83 |
| | (591 | ) |
| Other comprehensive income (loss), net of tax | 775 |
| | 904 |
| | (1,671 | ) | (742 | ) | | 169 |
| | 775 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | 13 |
| | — |
| | — |
| |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | | (20 | ) | | 7 |
| | 13 |
|
| LendingClub other comprehensive income (loss), net of tax | 762 |
| | 904 |
| | (1,671 | ) | (722 | ) | | 162 |
| | 762 |
|
| LendingClub comprehensive income (loss) | (153,073 | ) | | (145,065 | ) | | (6,666 | ) | (31,467 | ) | | (128,146 | ) | | (153,073 | ) |
| Comprehensive income (loss) attributable to noncontrolling interests | 13 |
| | — |
| | — |
| (20 | ) | | 7 |
| | 13 |
|
| Total comprehensive income (loss) | $ | (153,060 | ) | | $ | (145,065 | ) | | $ | (6,666 | ) | $ | (31,487 | ) | | $ | (128,139 | ) | | $ | (153,060 | ) |
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
| | LendingClub Corporation Stockholders | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total LendingClub Stockholders’ Equity | | Noncontrolling Interests | | Total Equity | Common Stock (1) | | Additional Paid-in Capital (1) | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total LendingClub Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2014 | 371,443,916 |
| | $ | 3,714 |
| | $ | 1,052,728 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (83,223 | ) | | $ | 973,219 |
| | $ | — |
| | $ | 973,219 |
| |
| Stock-based compensation and related tax effects | — |
| | — |
| | 56,005 |
| | — |
| | — |
| | — |
| | — |
| | 56,005 |
| | — |
| | 56,005 |
| |
| Stock option exercises and other | 7,862,705 |
| | 79 |
| | 13,394 |
| | — |
| | — |
| | — |
| | — |
| | 13,473 |
| | — |
| | 13,473 |
| |
| ESPP purchase shares | 410,009 |
| | 4 |
| | 5,087 |
| | — |
| | — |
| | — |
| | — |
| | 5,091 |
| | — |
| | 5,091 |
| |
| Net unrealized loss on available for sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (1,671 | ) | | — |
| | (1,671 | ) | | — |
| | (1,671 | ) | |
| Excess tax benefit from share-based award activity | — |
| | — |
| | 738 |
| | — |
| | — |
| | — |
| | — |
| | 738 |
| | — |
| | 738 |
| |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,995 | ) | | (4,995 | ) | | — |
| | (4,995 | ) | |
Balance at December 31, 2015 | 379,716,630 |
| | $ | 3,797 |
| | $ | 1,127,952 |
| | — |
| | $ | — |
| | $ | (1,671 | ) | | $ | (88,218 | ) | | $ | 1,041,860 |
| | $ | — |
| | $ | 1,041,860 |
| |
| Stock-based compensation and related tax effects | — |
| | — |
| | 79,803 |
| | — |
| | — |
| | — |
| | — |
| | 79,803 |
| | — |
| | 79,803 |
| |
| Stock option exercises and other | 19,037,329 |
| | 191 |
| | 13,398 |
| | — |
| | — |
| | — |
| | — |
| | 13,589 |
| | — |
| | 13,589 |
| |
| Treasury stock | (2,282,700 | ) | | — |
| | — |
| | 2,282,700 |
| | (19,485 | ) | | — |
| | — |
| | (19,485 | ) | | — |
| | (19,485 | ) | |
| ESPP purchase shares | 1,508,513 |
| | 15 |
| | 5,229 |
| | — |
| | — |
| | — |
| | — |
| | 5,244 |
| | — |
| | 5,244 |
| |
| Net unrealized gain on available for sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 904 |
| | — |
| | 904 |
| | — |
| | 904 |
| |
| Excess tax benefit from share-based award activity | — |
| | — |
| | (176 | ) | | — |
| | — |
| | — |
| | — |
| | (176 | ) | | — |
| | (176 | ) | |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (145,969 | ) | | (145,969 | ) | | — |
| | (145,969 | ) | |
Balance at December 31, 2016 | 397,979,772 |
| | $ | 4,003 |
| | $ | 1,226,206 |
| | 2,282,700 |
| | $ | (19,485 | ) | | $ | (767 | ) | | $ | (234,187 | ) | | $ | 975,770 |
| | $ | — |
| | $ | 975,770 |
| 79,595,954 |
| | $ | 801 |
| | $ | 1,229,408 |
| | 456,540 |
| | $ | (19,485 | ) | | $ | (767 | ) | | $ | (234,187 | ) | | $ | 975,770 |
| | $ | — |
| | $ | 975,770 |
|
| Stock-based compensation and related tax effects | — |
| | — |
| | 81,599 |
| | — |
| | — |
| | — |
| | (1,397 | ) | | 80,202 |
| | — |
| | 80,202 |
| — |
| | — |
| | 81,599 |
| | — |
| | — |
| | — |
| | (1,397 | ) | | 80,202 |
| | — |
| | 80,202 |
|
| Stock option exercises and other | 18,174,537 |
| | 182 |
| | 13,803 |
| | — |
| | — |
| | — |
| | — |
| | 13,985 |
| | — |
| | 13,985 |
| |
| ESPP purchase shares | 1,319,537 |
| | 13 |
| | 5,598 |
| | — |
| | — |
| | — |
| | — |
| | 5,611 |
| | — |
| | 5,611 |
| |
| Net unrealized gain on available for sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 762 |
| | — |
| | 762 |
| | 13 |
| | 775 |
| |
| Net issuances under equity incentive plans, net of tax | | 3,634,908 |
| | 36 |
| | 13,949 |
| | — |
| | — |
| | — |
| | — |
| | 13,985 |
| | — |
| | 13,985 |
|
| Employee stock purchase plan (ESPP) purchase shares | | 263,907 |
| | 3 |
| | 5,608 |
| | — |
| | — |
| | — |
| | — |
| | 5,611 |
| | — |
| | 5,611 |
|
| Net unrealized gain on securities available for sale, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 762 |
| | — |
| | 762 |
| | 13 |
| | 775 |
|
| Contribution of interests in consolidated VIE | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,722 |
| | 7,722 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,722 |
| | 7,722 |
|
| Dividends paid and return of capital to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,263 | ) | | (2,263 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,263 | ) | | (2,263 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (153,835 | ) | | (153,835 | ) | | (210 | ) | | (154,045 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (153,835 | ) | | (153,835 | ) | | (210 | ) | | (154,045 | ) |
Balance at December 31, 2017 | 417,473,846 |
| | $ | 4,198 |
| | $ | 1,327,206 |
| | 2,282,700 |
| | $ | (19,485 | ) | | $ | (5 | ) | | $ | (389,419 | ) | | $ | 922,495 |
| | $ | 5,262 |
| | $ | 927,757 |
| 83,494,769 |
| | $ | 840 |
| | $ | 1,330,564 |
| | 456,540 |
| | $ | (19,485 | ) | | $ | (5 | ) | | $ | (389,419 | ) | | $ | 922,495 |
| | $ | 5,262 |
| | $ | 927,757 |
|
| Stock-based compensation and related tax effects | | — |
| | — |
| | 84,150 |
| | — |
| | — |
| | — |
| | — |
| | 84,150 |
| | — |
| | 84,150 |
|
| Net issuances under equity incentive plans, net of tax | | 2,071,518 |
| | 21 |
| | (14,552 | ) | | — |
| | — |
| | — |
| | — |
| | (14,531 | ) | | — |
| | (14,531 | ) |
| ESPP purchase shares | | 361,840 |
| | 3 |
| | 5,230 |
| | — |
| | — |
| | — |
| | — |
| | 5,233 |
| | — |
| | 5,233 |
|
| Net unrealized gain on securities available for sale, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 162 |
| | — |
| | 162 |
| | 7 |
| | 169 |
|
| Dividends paid and return of capital to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,644 | ) | | (3,644 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (128,308 | ) | | (128,308 | ) | | 155 |
| | (128,153 | ) |
Balance at
December 31, 2018 | | 85,928,127 |
| | $ | 864 |
| | $ | 1,405,392 |
| | 456,540 |
| | $ | (19,485 | ) | | $ | 157 |
| | $ | (517,727 | ) | | $ | 869,201 |
| | $ | 1,780 |
| | $ | 870,981 |
|
| Stock-based compensation and related tax effects | | — |
| | — |
| | 79,944 |
| | — |
| | — |
| | — |
| | — |
| | 79,944 |
| | — |
| | 79,944 |
|
Net issuances under equity incentive plans, net of tax (2) | | 2,665,309 |
| | 26 |
| | (19,864 | ) | | 4,851 |
| | (65 | ) | | — |
| | — |
| | (19,903 | ) | | — |
| | (19,903 | ) |
| ESPP purchase shares | | 163,970 |
| | 2 |
| | 2,410 |
| | — |
| | — |
| | — |
| | — |
| | 2,412 |
| | — |
| | 2,412 |
|
| Net unrealized loss on securities available for sale, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (722 | ) | | — |
| | (722 | ) | | (20 | ) | | (742 | ) |
| Dividends paid and return of capital to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,815 | ) | | (1,815 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (30,745 | ) | | (30,745 | ) | | 55 |
| | (30,690 | ) |
Balance at December 31, 2019 | | 88,757,406 |
| | $ | 892 |
| | $ | 1,467,882 |
| | 461,391 |
| | $ | (19,550 | ) | | $ | (565 | ) | | $ | (548,472 | ) | | $ | 900,187 |
| | $ | — |
| | $ | 900,187 |
|
| |
(1) | All share information and balances have been retroactively adjusted to reflect a reverse stock split. See “Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
LENDINGCLUB CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
| |
(2) | Includes shares purchased by the Company in lieu of issuing fractional shares in connection with a 1-for-5 reverse stock split effective on July 5, 2019 and shares that were transferred to the Company to satisfy payment of all or a portion of the exercise price in connection with the exercise of stock options. |
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Cash Flows
(in Thousands)
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities: | | | | | | | | | | |
| Consolidated net loss | $ | (154,045 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) | $ | (30,690 | ) | | $ | (128,153 | ) | | $ | (154,045 | ) |
| Adjustments to reconcile consolidated net loss to net cash (used for) provided by operating activities: | | | | | | |
| Adjustments to reconcile consolidated net loss to net cash used for operating activities: | | | | | | |
| Net fair value adjustments | 30,817 |
| | 2,949 |
| | (14 | ) | 144,990 |
| | 100,688 |
| | 30,817 |
|
| Change in fair value of loan servicing liabilities | (2,346 | ) | | (4,498 | ) | | (5,194 | ) | |
| Change in fair value of loan servicing assets | 23,172 |
| | 5,403 |
| | 3,803 |
| |
| Change in fair value of loan servicing assets and liabilities | | 58,095 |
| | 30,482 |
| | 20,826 |
|
| Stock-based compensation, net | 70,983 |
| | 69,244 |
| | 51,222 |
| 73,639 |
| | 75,087 |
| | 70,983 |
|
| Excess tax benefit from share-based awards | — |
| | 176 |
| | (738 | ) | |
| Goodwill impairment charge | — |
| | 37,050 |
| | — |
| — |
| | 35,633 |
| | — |
|
| Depreciation and amortization | 46,208 |
| | 29,882 |
| | 21,578 |
| 59,152 |
| | 54,764 |
| | 46,208 |
|
| (Gain) Loss on sales of loans | (38,850 | ) | | (13,175 | ) | | (4,885 | ) | |
| Gain on sales of loans | | (67,716 | ) | | (50,421 | ) | | (38,850 | ) |
| Other, net | 2,744 |
| | 1,791 |
| | 661 |
| 7,483 |
| | 5,471 |
| | 2,744 |
|
| Purchase of loans held for sale | (6,008,943 | ) | | (4,742,538 | ) | | (3,358,611 | ) | (7,643,996 | ) | | (7,397,886 | ) | | (6,714,946 | ) |
| Principal payments received on loans held for sale | 54,107 |
| | 4,380 |
| | — |
| 265,820 |
| | 210,831 |
| | 54,107 |
|
| Proceeds from sales of whole loans | 5,172,941 |
| | 4,731,831 |
| | 3,358,611 |
| |
| Purchase of loans held for sale by consolidated VIE | (706,003 | ) | | — |
| | — |
| |
| Proceeds from sale of securities by consolidated VIE, net of underwriting fees and costs | 853,788 |
| | — |
| | — |
| |
| Proceeds from whole loan sales and Structured Program transactions, net of underwriting fees and costs | | 6,937,984 |
| | 6,485,432 |
| | 6,026,729 |
|
| Net change in operating assets and liabilities: | | | | | | | | | | |
| Accrued interest receivable, net | 6,293 |
| | (2,218 | ) | | (13,819 | ) | (16,298 | ) | | (3,785 | ) | | 6,293 |
|
| Other assets | (71,625 | ) | | (10,140 | ) | | (15,857 | ) | 6,609 |
| | 52,708 |
| | (71,205 | ) |
| Due from related parties | 420 |
| | 179 |
| | (188 | ) | |
| Accounts payable | (1,913 | ) | | 5,582 |
| | (598 | ) | 4,158 |
| | (3,005 | ) | | (1,913 | ) |
| Accrued interest payable | (10,582 | ) | | 3,330 |
| | 13,280 |
| (9,843 | ) | | (13,372 | ) | | (10,582 | ) |
| Accrued expenses and other liabilities | 142,020 |
| | 27,286 |
| | 30,485 |
| 326 |
| | (93,424 | ) | | 142,020 |
|
| Net cash (used for) provided by operating activities | (590,814 | ) | | 545 |
| | 74,741 |
| |
Change in payable to investors (1) | | (60,357 | ) | | (791 | ) | | 17,426 |
|
| Net cash used for operating activities | | (270,644 | ) | | (639,741 | ) | | (573,388 | ) |
| Cash Flows from Investing Activities: | | | | | | | | | | |
| Purchase of loans | (1,738,710 | ) | | (2,732,669 | ) | | (3,865,565 | ) | (633,632 | ) | | (960,881 | ) | | (1,738,710 | ) |
| Principal payments received on loans | 2,397,565 |
| | 2,393,354 |
| | 1,804,719 |
| 1,191,428 |
| | 1,763,348 |
| | 2,397,565 |
|
| Proceeds from recoveries and sales of charged-off loans | 48,256 |
| | 37,277 |
| | 26,256 |
| 54,032 |
| | 63,240 |
| | 48,256 |
|
| Proceeds from sales of whole loans | 112,767 |
| | 26,825 |
| | — |
| — |
| | — |
| | 112,767 |
|
| Purchases of securities available for sale | (139,770 | ) | | (75,983 | ) | | (419,173 | ) | (144,481 | ) | | (136,445 | ) | | (139,770 | ) |
| Proceeds from sales, maturities, redemptions and paydowns of securities available for sale | 356,608 |
| | 87,158 |
| | 120,420 |
| 145,880 |
| | 153,468 |
| | 356,608 |
|
| Proceeds from paydowns of asset-backed securities related to Company-sponsored securitizations and CLUB Certificate transactions | 6,472 |
| | — |
| | — |
| |
| Investment in Cirrix Capital | — |
| | (10,000 | ) | | — |
| |
| Net change in restricted cash | (64,760 | ) | | (97,077 | ) | | (33,970 | ) | |
| Proceeds from paydowns of asset-backed securities related to Structured Program transactions | | 90,648 |
| | 47,235 |
| | 6,472 |
|
| Other investing activities | | 561 |
| | 1,747 |
| | — |
|
| Purchases of property, equipment and software, net | (44,615 | ) | | (51,842 | ) | | (39,387 | ) | (50,668 | ) | | (52,976 | ) | | (44,615 | ) |
| Net cash provided by (used for) investing activities | 933,813 |
| | (422,957 | ) | | (2,406,700 | ) | |
| Net cash provided by investing activities | | 653,768 |
| | 878,736 |
| | 998,573 |
|
| Cash Flows from Financing Activities: | | | | | | | | | | |
| Change in payable to investors | 17,426 |
| | 52,722 |
| | 34,421 |
| |
| Proceeds from issuance of notes and certificates | 1,720,884 |
| | 2,681,109 |
| | 3,861,995 |
| 632,962 |
| | 953,904 |
| | 1,720,884 |
|
| Proceeds from secured borrowings | | — |
| | — |
| | 280,495 |
|
| Repayments of secured borrowings | | (56,884 | ) | | (139,206 | ) | | (42,834 | ) |
| Principal payments on and retirements of notes and certificates | | (1,147,297 | ) | | (1,615,800 | ) | | (2,737,029 | ) |
| Payments on notes and certificates from recoveries/sales of related charged-off loans | | (55,022 | ) | | (62,494 | ) | | (47,914 | ) |
| Principal payments on securitization notes | | (58,025 | ) | | (45,709 | ) | | — |
|
| Proceeds from issuance of securitization notes and certificates | | 42,500 |
| | 258,767 |
| | 313,486 |
|
LENDINGCLUB CORPORATION
Consolidated Statements of Cash Flows
(in Thousands)
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Proceeds from secured borrowings | 280,495 |
| | 22,274 |
| | — |
|
| Repayments of secured borrowings | (42,834 | ) | | (22,274 | ) | | — |
|
| Principal payments on and retirements of notes and certificates | (2,737,029 | ) | | (2,381,372 | ) | | (1,800,859 | ) |
| Payments on notes and certificates from recoveries/sales of related charged-off loans | (47,914 | ) | | (36,785 | ) | | (26,143 | ) |
| Proceeds from issuance of securitization notes and residual certificates | 313,486 |
| | — |
| | — |
|
| Proceeds from revolving credit facilities | 283,100 |
| | — |
| | — |
|
| Principal payments on revolving credit facilities | (251,000 | ) | | — |
| | — |
|
| Payment for debt issuance costs | (5,099 | ) | | — |
| | (1,296 | ) |
| Repurchases of common stock | — |
| | (19,485 | ) | | — |
|
| Proceeds from exercise of warrants to acquire common stock | — |
| | 17 |
| | 3 |
|
| Proceeds from stock option exercises and other | 14,562 |
| | 13,209 |
| | 11,670 |
|
| Excess tax benefit from share-based awards | — |
| | (176 | ) | | 738 |
|
| Proceeds from issuance of common stock for ESPP | 5,611 |
| | 5,244 |
| | 5,091 |
|
| Purchase of noncontrolling interests in consolidated VIE | (6,307 | ) | | — |
| | — |
|
| Return of capital to noncontrolling interests in consolidated VIE | (2,191 | ) | | — |
| | — |
|
| Dividends paid to noncontrolling interests in consolidated VIE | (72 | ) | | — |
| | — |
|
| Other financing activities | — |
| | — |
| | 90 |
|
| Net cash (used for) provided by financing activities | (456,882 | ) | | 314,483 |
| | 2,085,710 |
|
| Net Decrease in Cash and Cash Equivalents | (113,883 | ) | | (107,929 | ) | | (246,249 | ) |
| Cash and Cash Equivalents, Beginning of Period | 515,602 |
| | 623,531 |
| | 869,780 |
|
| Cash and Cash Equivalents, End of Period | $ | 401,719 |
| | $ | 515,602 |
| | $ | 623,531 |
|
| Supplemental Cash Flow Information: | | | | | |
| Cash paid for interest | $ | 581,435 |
| | $ | 684,775 |
| | $ | 536,448 |
|
| Non-cash investing activity: | | | | | |
| Accruals for property, equipment and software | $ | 710 |
| | $ | 1,089 |
| | $ | 2,975 |
|
| Beneficial interests retained by consolidated VIE | $ | 54,955 |
| | $ | — |
| | $ | — |
|
| Non-cash investing and financing activity: | | | | | |
| Transfer of whole loans to redeem certificates | $ | 130,223 |
| | $ | 3,862 |
| | $ | — |
|
| Non-cash financing activity: | | | | | |
| Noncontrolling interests’ contribution of beneficial interests in consolidated VIE | $ | 7,722 |
| | $ | — |
| | $ | — |
|
| Issuance of payable to securitization residual certificate holders | $ | 1,549 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Proceeds from credit facilities and securities sold under repurchase agreements | 2,943,948 |
| | 2,125,488 |
| | 283,100 |
|
| Principal payments on credit facilities and securities sold under repurchase agreements | (2,815,475 | ) | | (1,698,214 | ) | | (251,000 | ) |
| Payment for debt issuance costs | (1,419 | ) | | (4,494 | ) | | (5,099 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
|
| Proceeds from issuances under equity incentive plans, net of tax | 820 |
| | 1,956 |
| | 14,562 |
|
| Proceeds from issuance of common stock for ESPP | 2,411 |
| | 5,233 |
| | 5,611 |
|
| Net cash inflow (outflow) from consolidation (deconsolidation) of VIE | (5,951 | ) | | (15,013 | ) | | — |
|
| Purchase of noncontrolling interests in consolidated VIE | — |
| | — |
| | (6,307 | ) |
| Other financing activities | (22,628 | ) | | (3,644 | ) | | (2,263 | ) |
| Net cash used for financing activities | (540,060 | ) | | (239,226 | ) | | (474,308 | ) |
| Net Decrease in Cash, Cash Equivalents and Restricted Cash | (156,936 | ) | | (231 | ) | | (49,123 | ) |
| Cash, Cash Equivalents and Restricted Cash, Beginning of Period | 644,058 |
| | 644,289 |
| | 693,412 |
|
| Cash, Cash Equivalents and Restricted Cash, End of Period | $ | 487,122 |
| | $ | 644,058 |
| | $ | 644,289 |
|
| Supplemental Cash Flow Information: | | | | | |
| Cash paid for interest | $ | 254,585 |
| | $ | 394,459 |
| | $ | 581,435 |
|
| Cash paid for operating leases included in the measurement of lease liabilities | $ | 16,816 |
| | $ | — |
| | $ | — |
|
| Non-cash investing activity: | | | | | |
| Accruals for property, equipment and software | $ | 1,745 |
| | $ | 2,256 |
| | $ | 710 |
|
| Securities retained (sold) from Structured Program transactions | $ | 197,267 |
| | $ | 106,609 |
| | $ | 54,955 |
|
| Non-cash investing and financing activity: | | | | | |
| Transfer of whole loans to redeem certificates | $ | 122,330 |
| | $ | 1,095 |
| | $ | 130,223 |
|
| Non-cash financing activity: | | | | | |
| Derecognition of payable to securitization note and residual certificate holders held in consolidated VIE | $ | 200,881 |
| | $ | 269,151 |
| | $ | — |
|
| Noncontrolling interests’ contribution of beneficial interests in consolidated VIE | $ | — |
| | $ | — |
| | $ | 7,722 |
|
| Issuance of payable to securitization residual certificate holders | $ | — |
| | $ | — |
| | $ | 1,549 |
|
| |
(1) | Change in payable to investors was previously presented as cash flows from financing activities. Prior period amounts have been reclassified to conform to the current period presentation. |
The following presents cash, cash equivalents and restricted cash by category within the Consolidated Balance Sheets:
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Cash and cash equivalents | $ | 243,779 |
| | $ | 372,974 |
|
| Restricted cash | 243,343 |
| | 271,084 |
|
| Total cash, cash equivalents and restricted cash | $ | 487,122 |
| | $ | 644,058 |
|
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
1. Basis of Presentation
LendingClub Corporation (LendingClub) operates an online lending marketplace platform that connects borrowers and investors. LendingClub Asset Management, LLC (LCAM), is a registered investment advisor with the Securities and Exchange Commission (SEC) andVarious wholly-owned subsidiarysubsidiaries of LendingClub that actshave been established to enter into borrowing agreements with certain lenders for secured credit facilities. Additionally, LendingClub has established various entities to facilitate loan sale transactions, including sponsoring asset-backed securitization transactions and Certificate Program transactions (collectively referred to as Structured Program transactions), where certain accredited investors and qualified institutional buyers have the general partner for certain private funds. Additionally, LCAM is an advisoropportunity to separately managed accounts (SMAs)invest in senior and fundssubordinated securities backed by a pool of which LCAM’s wholly-owned subsidiaries are the general partners. Springstone Financial, LLC (Springstone), is a wholly-owned subsidiary of LendingClub that facilitates the origination of educationunsecured personal whole loans. Certificate Program transactions include CLUB Certificate and patient finance loans by third-party issuing banks.Levered Certificate transactions. LC Trust I (the LC Trust) is an independent Delaware business trust that acquires loans from LendingClub and holds them for the sole benefit of certain investors that have purchased trust certificates (Certificates) issued by the LC Trust that are related to specific underlying loans for the benefit of the investor. Consumer Loan Underlying Bond Certificate Issuer Trust I (Master Trust)Springstone Financial, LLC (Springstone), is a Delaware statutory master trust in series that provides accredited investors and qualified institutional buyers the opportunity to invest in a pool of unsecured personal whole loans in a certificated form (CLUB Certificates). LendingClub Warehouse I LLC (Warehouse) and LendingClub Warehouse II LLC (Warehouse II) are wholly-owned subsidiariessubsidiary of LendingClub established to enter into warehouse credit agreements with certain lenders for secured revolving credit facilities.that facilitates education and patient finance loans originated by third-party issuing banks.
In connection with its role as the sponsor of an asset-backed securities securitization transaction, LendingClub owns a 56% interest in a majority-owned affiliate (MOA), LendingClub Operated Aggregator Note (LOAN) NP I, LLC. LendingClub holds a controlling financial interest and is the primary beneficiary of the MOA and consolidates the MOA in its financial statements. Additionally, in 2017, LendingClub established Consumer Loan Underlying Bond Depositor LLC (Depositor), a wholly-owned limited liability company, and Consumer Loan Underlying Bond Credit Trust 2017-P2, LLC (Credit Trust) and Consumer Loan Underlying Bond Grantor Trust 2017-P2, LLC (Grantor Trust), issuer and grantor trusts that facilitated a LendingClub-sponsored asset-backed securities transaction. See “Note 6. Securitizations and Variable Interest Entities” for additional information.
The accompanying consolidated financial statements include LendingClub, its consolidated subsidiaries (collectively referred to as the Company)Company, we, or us) and consolidated variable interest entities (VIEs). Noncontrolling interests are reported as a separate component of consolidated equity in the Consolidated Balance Sheets from the equity attributable to LendingClub’s stockholders for all periods presented. presented. All intercompany balances and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for financial information.
information and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the results and financial position for the periods presented. These accounting principles require management to make certain estimates judgments and assumptions that affect the amounts in the accompanying financial statements and related notes. The Company bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities.statements. These judgments, assumptions and estimates include but are not limited to the following: (i) fair value determinations for servicing assets and liabilities; (ii) fair value determinations for loans held for investment, loans held for sale, notes, certificates and secured borrowings; (iii) fair value determinations for securities available for sale; (iv) stock-based compensation expense; (v) provision for income taxes, net of valuation allowance for deferred tax assets; (vi) recoverability of property, equipment and software; (vii) carrying values of goodwill and intangible assets; (viii) consolidation of variable interest entities; and (ix) accrued liabilities for contingencies. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material. Certain prior-period amounts have been reclassified to conform to the current period presentation.
A 1-for-5 reverse stock split of the Company’s common stock became effective on July 5, 2019. As a result, prior period share and per share amounts presented in the accompanying consolidated financial statements and these related notes were retroactively adjusted accordingly. See “Note 4. Net Loss Per Share” for additional information.
In the fourth quarter of 2017,2019, the Company disaggregated “Loans”presented operating lease assets and operating lease liabilities separately from “Other assets” and “Accrued expenses and other liabilities,” respectively, on theits Consolidated Balance SheetsSheets. In the first quarter of 2019, the Company presented a new sub-total caption called “Net investor revenue” on its Condensed Consolidated Statements of Operations and also reordered the presentation of certain of its existing captions. The Company believes this new presentation allows shareholders a view of net investor revenue and our capital markets activity, which includes net interest income and fair value adjustments of loans and securities available for sale, gain on sales of loans invested in by the Company and investor fees from servicing of loans. These changes in presentation had no impact on prior period amounts presented.
The Company presents loans under a number of different captions to separately presentalign the assets to their associated liabilities, if any. “Loans held for investment”investment at fair value” are loans which are related to the Company’s retail notes, certificates and secured borrowings program. The Company is not exposed to market risk, interest rate risk or credit risk on these loans and all loan cash flows flow directly to the retail note, certificate and secured borrowing owners. The associated liability for this loan category is included in the caption “Notes, certificates and secured borrowings at fair value.” Loans included in “Loans held for investment by the Company.” Additionally,Company at fair value” and “Loans held for sale by the Company at fair value” are loans which the Company has purchased and from which the Company earns interest income and records net fair value adjustments in earnings for changes in the valuation of loans.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
separately presented “Loans held for sale by the Company” from “Loans held for sale.” These changes had no impact on “Total assets.” Prior period amounts have been reclassified to conform to current period presentation.
In the first quarter of 2017, the Company simplified the presentation of “Total net revenue” in the Consolidated Statements of Operations to present revenues from transactions with investors as a single line item reported as “Investor fees” by aggregating the revenues previously separately reported as “Servicing fees” and “Management fees.” Additionally, in the fourth quarter of 2017, the Company separately reported “Gain (Loss) on sales of loans” and “Net fair value adjustments” from “Other revenue (expense)” in the Company’s Consolidated Statements of Operations. “Net fair value adjustments” was also revised to include other-than-temporary impairment charges on subordinated residual certificates held as a result of Company-sponsored securitization transactions, which were previously included in “Other revenue. These changes had no impact on “Total net revenue.” Prior period amounts have been reclassified to conform to the current period presentation.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include the Company’s unrestricted interest-bearing deposit accountsdeposits with investment-grade financial institutions, institutional money market funds, certificates of deposit, and commercial paper. The Company considers all highly liquid investments with stated maturity dates of three months or less from the date of purchase to be cash equivalents.
Restricted Cash
Restricted cash consists primarily of bank deposit accountsdeposits and money market funds that are: (i) pledged to or held in escrow at correspondent banks as security for transactions processed on or related to LendingClub’s platform or activities by certain investors; and (ii) pledged through a credit support agreement with a certificate holder; (iii) received from investorsthe borrower and applied to the loan, but not yet been applieddistributed to the investor’s internal platform account or sent to their accounts on the platform and transferred to segregated bank accounts that hold investors’ funds; or (iv) as of December 31, 2016, held in a Rabbi Trust through a grantor trust agreement to satisfy obligations to participants under the Company’s 2016 Cash Retention Bonus Plan (Cash Retention Plan). See “Note 16. Employee Incentive and Retirement Plans” for additional information on the Cash Retention Plan.external account.
Investor cash balances (excluding transactions-in-process) are held in segregated bank or custodial accounts and are not commingled with the Company’s monies or held on the Company’s Consolidated Balance Sheets.Sheets.
Securities Available for Sale
Debt securities that the Company might not hold until maturity and marketable equity securities are classified as securities available for sale securities.sale. In Company-sponsored securitizationstructured program transactions that meet the applicable criteria to be accounted for as a sale, the Company retains certain asset-backed securities including subordinated residual interests and CLUB Certificates, which are classified as securities available for sale securities.sale. Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in “Accumulated other comprehensive income (loss)” included in Equity in the Company’s Consolidated Balance Sheets unless management determines that a security is other-than-temporarily impaired (OTTI). Realized gains and losses from sales of securities available for sale are determined on a specific identification basis and are included in “Net fair value adjustments” in the Company’s Consolidated Statements of Operations. Purchases and sales ofOperations.
Management evaluates whether debt securities available for sale are recorded on the trade date.
Management evaluates whether securities available for salewith unrealized losses are OTTI on a quarterly basis. Debt securities with unrealized losses are considered OTTI ifIf the Company intends to sell the security, or if it is more likely than not that it will be required to sell the security before recovery, an OTTI is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the debt security. However, even if the Company does not expect to sell a debt security it must evaluate the expected cash flows to be received and determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings and amounts related to factors other than credit losses are recorded in other comprehensive income. Impairment charges are recorded in “Net fair value adjustments” in the Company’s Consolidated Statements of Operations.
Loans Held for Investment by the Company and Loans Held for Sale by the Company
The Company has elected the fair value option for loans held for investment by the Company and loans held for sale by the Company. Changes in the fair value of loans held by the Company are recorded in “Net fair value adjustments” in the Consolidated Statements of Operations in the period of the fair value changes. The Company places loans held by the Company on non-accrual status at 90 days past due. Accrued interest income on loans held by the Company is calculated based on the contractual interest rate of the loan held by the Company and recorded as interest income as earned. When a loan held by the Company is placed on non-accrual status, the Company stops accruing interest and reverses all accrued but unpaid interest as of such date. The Company charges-off loans held by the Company no later than 120 days past due.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
it will be required to sell such security before any anticipated recovery. If management determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.
A security is also OTTI if management does not expect to recover all of the amortized cost of the security. In this circumstance, the impairment recognized in earnings represents estimated credit loss, and is measured by the difference between the present value of expected cash flows and the amortized cost of the security. Management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss when necessary. Expected cash flows are discounted using the security’s effective yield. Impairment charges are recorded in “Net fair value adjustments” in the Company’s Consolidated Statements of Operations.
The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation includes the assessment of several security performance indicators, including the magnitude and duration of the unrealized loss and whether the Company has received all scheduled principal and interest payments.
Loans Held for Investment and Loans Held for SaleRelated Notes and Certificates
The Company has elected the fair value option for loans held for investment and loans held for sale. Upfront fees and costs related to loans are recognized in earnings as incurred. Changes in the fair value of loans are recorded in “Net fair value adjustments” in the Consolidated Statements of Operations in the period of the fair value changes. The Company places loans on non-accrual status at 120 days past due. The Company charges-off loans no later than 120 days past due, or earlier in the event of notification of borrower bankruptcy.
Notes and Certificates
The Company has elected the fair value option for notes and certificates. Due to the payment dependent feature of the notes and certificates, changes in the fair value of the notes and certificates are offset by changes in the fair values of related loans, resulting in no net effect on ourthe Company’s earnings. Changes in the fair value ofThe Company places loans held for investment on non-accrual status at 90 days past due. Interest receivable on loans held for investment and accrued interest payable on notes and certificates are recorded in “Net fair value adjustments” inreduced when the Consolidated Statements of Operations incorresponding loan held for investment is placed on non-accrual status due to the periodpayment dependent nature of the fair value changes.
Secured Borrowings
loans held for investment and related notes and certificates. The Company has elected the fair value optioncharges-off loans held for secured borrowings. Changes in the fair value of the secured borrowings are recorded in “Net fair value adjustments” in the Consolidated Statements of Operations in the period of the fair value changes. See “Note 14. Secured Borrowings” for additional information.investment and related notes and certificates no later than 120 days past due.
Servicing Assets and Liabilities
The Company recognizesrecords servicing assets and liabilities at their estimated fair valuevalues when it sells or securitizes loans with servicing rights retained or when the Company assumes or acquires a servicing obligation whereby the underlying loans are not included in the Company’sits financial statements. The fair value of servicing assets or servicing liabilities recognized at the time of sale is a component of the gain or loss on a loan sales, whichsale is recorded separately in “Gain (Loss) on sales of loans” in the Company’s Consolidated Statements of Operations. The Company recognizesOperations while the component of the gain or loss that is based on the degree to which the contractual servicing fee is above or below an estimated market servicing rate is recorded as a servicing asset or servicing liability depending on whether the benefits of servicing are expected to more than adequately compensate the Company for performing the servicing.asset. Servicing assets and liabilities are recordedreported in “Other assets” and “Accrued expenses and other liabilities,” respectively, on the Company’s Consolidated Balance Sheets. The Company uses the fair value measurement method to account for changes in servicing assets and liabilities. As such, changesSheets. Changes in the fair value of servicing assets and liabilities are reported in “Investor fees” in the Company’s Consolidated Statements of Operations in the period in which the changes occur.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Loan Trailing Fee Liability
In February 2016, the Company revised the agreement with its primary issuing bank partner to include an additional program fee (Loan Trailing Fee). The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, and gives the issuing bank an ongoing financial interest in the performance of the loans it originates. This fee is paid by the Company to the issuing bank partner over the term of the respective loans and is a function of the principal and interest payments. In the event that principal and interest payments are not made, the Company is not required to make this Loan Trailing Fee payment. The Loan Trailing Fee is recorded at fair value and presented as a reduction of transaction fees on the Company’s Consolidated Statements of Operations.
Fair Value of Assets and Liabilities
Fair value representsis the price that would be received to sell thea financial asset or paid to transfer thea financial liability in an orderly transaction between market participants at the measurement date (an exit price). The Company uses fair value measurementmeasurements in its fair value disclosures and to record securities available for sale, loans held for investment and loans held for sale, notes and certificates, secured borrowings,and servicing assets and liabilities and loan trailing fee liability at fair value on a recurring basis.
The fair value hierarchy includes a three-level classification, which is based on whether the inputs to the valuation methodology used for measurement are observable:
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| Level 1 | — | Quoted market prices in active markets for identical assets or liabilities. |
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| Level 2 | — | Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputsInputs other than quoted prices included in Level 1 that are observable such as interest rate and yield curves, and market-corroborated inputs).for the asset or liability either directly or indirectly. |
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| Level 3 | — | Inputs that are unobservable in the market but reflective of the Company’s assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Company’s own data. Valuation techniques include discounted cash flow models and similar techniques.Unobservable inputs. |
When developing fair value measurements, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. However, for certain instruments the Company must utilize unobservable inputs in determining fair value due to the lack of observable inputs in the market, which requires greater judgment in measuring fair value. In instances where there is limited or no observable market data, fair value measurements for assets and liabilities are based primarily upon the Company’s own estimates, and the measurements reflect information and assumptions that management believes a market participant would use in pricing the asset or liability.
Loans held for investment, loans held for sale and related notes, certificates and secured borrowings, are measured
at estimated fair value using a discounted cash flow valuation methodology.model. The fair valuation methodology
considers projected prepayments, underwriting changes and uses the historical actual defaults, losses and recoveries on ourthe Company’s loans to project
future losses and net cash flows on loans.
Loan servicing assets and liabilities are measured at estimated fair value using a discounted cash flow valuation
methodology. The Net cash flows in the valuation model represent the difference between the contractual servicing fees
charged to investors andon loans are discounted using an estimatedestimate of market servicing fee. Since contractual servicing fees are generally
based on the monthly unpaid principal balancerates of the underlying loans, the expected cash flows in the model
incorporate estimates of net losses and prepayments.
The Company uses quoted prices in active markets to measure the fair value of securities available for sale, when available. When utilizing market data and bid-ask spreads, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from third-partyreturn.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Loan servicing assets are measured at estimated fair value using a discounted cash flow model. The cash flows in the valuation model represent the difference between the contractual servicing fees charged to investors and an estimated market servicing rate. Since contractual servicing fees are generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimates of net expected losses and prepayments.
The Company uses prices obtained from third-party pricing services to measure the fair value of securities available for sale. The Company’s third-party pricing services provide prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities.sale when available. The Company compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts. When quoted prices and prices provided by third-party pricing services are not available for a security, such as subordinated residual certificates and CLUB Certificates, the Company measures the fair value forof these securities available for sale using a discounted cash flow valuation methodology.
Financial Instruments Not Recorded at Fair Value
Financial instruments not recorded at fair value on a recurring basis include cashmodel incorporating inputs consistent with loans held for investment, loans held for sale and cash equivalents, restricted cash, accrued interest receivable, deposits, accrued interestrelated notes, certificates, secured borrowings, and payable accounts payable, payables to investors, and payables to securitization note holders. These assets and liabilities are recorded at historical cost. Given the nature of these instruments, the Company considers the amortized cost to approximate their fair values.certificate holders.
Accrued Interest
Accrued interest income on loans is calculated based on the contractual interest rate of the loan and recorded as interest income as earned. Loans are placed on non-accrual status upon reaching 120 days past due. When a loan is placed on non-accrual status, the Company stops accruing interest and reverses all accrued but unpaid interest as of such date. Accrued interest payable on notes, certificates and secured borrowings is also reduced when the corresponding loan is placed on non-accrual status, due to the payment dependent structure of the notes, certificates and secured borrowings.
Property, Equipment and Software, net
Property, equipment and software consists of furniture and fixtures, construction in process, leasehold improvements, computer equipment, and internally developed and purchased software, which are recordedcarried at cost less accumulated depreciation and amortization.
Furniture The Company uses the straight-line method of depreciation and amortization. Estimated useful lives range from three years to five years for furniture and fixtures, computer equipment, and purchased software are depreciated or amortized on a straight line basis over three to five years.software. Leasehold improvements are amortized over the shorter of the lease term excluding renewal periods or the estimated useful life. Internally developed software is amortized on a straight line basis over the project’s estimated useful life, generally three years.
Internally developed software is capitalized when preliminary development efforts are successfully completed and it is probable that the project will be completed, and the software will be used as intended. Capitalized costs consist of salaries and payroll relatedcompensation costs for employees, and fees paid to third-party consultants who are directly involved in development efforts. Costs related to preliminary project activitiesefforts, and post implementation activities, including training and maintenance, are expensed as incurred. Costscosts incurred for upgrades and enhancements thatto add functionality of the software. Other costs are considered to be probable to result in additional functionality are capitalized.expensed as incurred.
The Company evaluates potential impairments of its property, equipment and software whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the Company’s overall business and significant negative industry or economic trends. The determination of recoverability of these assets is based on whether an estimate of undiscounted future cash flows resulting from the
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
use of the asset and its eventual disposition exceed the net book value of the asset. If the asset is not recoverable, measurement of an impairment loss is based on the fair value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value.
Goodwill and Intangible Assets
Goodwill represents the fair value of an acquired business in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or more frequently whenever events or circumstances indicate that it is more likely than not that the estimated fair value of a reporting unit is below its carrying value. The Company’s annual impairment testing date is April 1. Impairment exists whenever the carrying value of goodwill exceeds its estimated fair value. Adverse changes in impairment indicators such as loss of key personnel, lower than forecast financial performance, increased competition, increased regulatory oversight, or unplanned changes in operations could result in impairment.
The Company can elect to qualitatively assess goodwill for impairment if it is more likely than not that the estimated fair value of a reporting unit (generally defined as a component of a businessan operating segment or one level below an operating segment for which financial information is available and reviewed regularly by management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital or company-specific factors, such as market capitalization in excess of net assets, trends in revenue-generating activities and merger or acquisition activity.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
If the Company does not qualitatively assess goodwill it compares a reporting unit’s estimated fair value to its carrying value. The Company estimates the fair value of a reporting unit using botheither an income approach and a market approach. The Company relies on the income approach (discounted cash flow method) as the primary method for determining estimated fair value. Market-based methods are used as benchmarks to corroborate the estimated fair value determined by the discounted cash flow method. Bothmodel) or the income approach andcorroborated by a market approach. Goodwill impairment loss is measured as the market approach rely on long-term growth rates, and revenue and earnings projections.amount by which the carrying amount of a reporting unit exceeds its fair value.
When applying the income approach, the Company uses a discounted cash flow model, which requires the estimation of cash flows and an appropriate discount rate. The Company projects cash flows expected to be generated by a reporting unit inclusive of an estimated terminal value. The discount rate assumption contemplates a weighted-average cost of capital based on both market observable and company-specific factors. The discount rate is risk-adjusted to include any premiums related to equity price volatility, size, and projected capital structure of publicly traded companies in similar lines of business.
The Company relies on several assumptions when estimating the fair value of a reporting unit using the discounted cash flow method. These assumptions include the current discount rate discussed above, as well as transaction fee revenue based on projected loan origination growth and revenue growth, projected operating expenses and contribution margin,Contribution Margin, direct and allocated general and administrative and technology expenses, capital expenditures and income taxes. The Company believes these assumptions to be representative of assumptions that a market participant would use in valuing a reporting unit, but these assumptions involve the use of estimates and judgments, particularly related to future cash flows, which are inherently uncertain. If the assumptions regarding business operating plans, projected loan origination growth and transaction fee rates, operating expenses, or competition in the industry are not achieved, the Company may be required to record goodwill impairment charges in future periods. There can be no assurances that estimates and assumptions made for purposes of goodwill impairment testing will prove accurate predictions of the future.
The market approach estimates the fair value of a reporting unit based on certain market value multiples of publicly traded companies in similar lines of business, such as total enterprise value to revenue, or to EBITDA. Under the market approach, the Company also considers fair value implied from any relevant and comparable market transactions.
Goodwill impairment loss is measured as the amount by which the carrying amount of a reporting unit exceeds its fair value. See “Note 11. Intangible Assets and Goodwill”for additional information.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit, which may include straight-line or accelerated methods of amortization. Intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company does not have indefinite-lived intangible assets.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities in “Accrued expenses and other liabilities” in the Company’s Consolidated Balance Sheets.Sheets. Associated legal expense is recorded in “Other general and administrative” expense or in “Class action and regulatory litigation settlement” expenseexpense” for the losses associated with the securities class action lawsuits, as described in “Note 18.19. Commitments and Contingencies,” in the Company’s Consolidated Statements of Operations.Operations. Such liabilities and associated expenses are recorded when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company will also disclose a range of exposure to incremental loss when such amounts are reasonably possible and can be estimated. In estimating the Company’s exposure to loss contingencies, if an amount within the estimated range of loss is the best estimate, that amount will be accrued. However, if there is no amount within the estimated range of loss that is the best estimate, the Company will accrue the minimum amount within the range, and disclose the amount up to the high end of the range as an exposure to incremental loss, if such amount is considered reasonably possible. Such estimates are based on the best information available at the time. As additional information becomes available, we reassessthe Company reassesses the potential liability and recordrecords an adjustment to ourits estimate in the period in which the adjustment is probable and an amount or range can be reasonably estimated. The determination of an expected contingent liability and associated litigation expense requires the
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Company to make assumptions related to the outcome of these matters. Due to the inherent uncertainties of loss contingencies, ourthe Company’s estimates may be different than the actual outcomes. Legal fees, including legal fees associated with loss contingencies, are recognized as incurred and included in “Other general and administrative” expense in the Company’s Consolidated Statements of Operations.
Insurance Recoveries
Insurance recoveries of all or a portion of incurred losses are recognized when realization of the claim for recovery is probable. Any insurance recoveries in excess of losses incurred are accounted for as a gain contingency. Insurance recoveries are recorded in “Other assets” in the Company’s Consolidated Balance Sheets.Sheets. Insurance recoveries associated with the reimbursement of legal expenses arising from loss contingencies and legal fees are recorded as a contra-expense in “Other general and administrative” expense or, if such recoveries are associated with the securities class action lawsuits, as a contra-expense in “Class action and regulatory litigation settlement” expense,expense” in the Company’s Consolidated Statements of Operations.Operations.
Debt
For debt instruments carried at amortized cost, the Company defers specific incremental costs directly related to issuing debt or entering into revolving debt arrangements. Debt issuance costs associated with debt liabilities are presented as a direct deduction of the carrying amount of debt liability and subsequently amortized to interest expense over the contractual life of the debt. Debt issuance costs associated with revolving debt arrangements are presented as an asset and subsequently amortized over the term of the revolving debt arrangement.
Revenue Recognition
Transaction Fees: The Company has a single performance obligation to provide customers access to the Company’s platform. Transaction fees are considered revenue from contracts with customers, including issuing banks and education and patient service providers. The Companyrecognizes transaction fee revenue each time a loan is facilitated by the Company, who provides loan application processing and loan facilitation services, resulting in a loan issued by the customers.
Transaction fees are based on the initial principal amount of the loans facilitated by the Company and paid by the issuing banks and education and patient service providers at theeach time thea loan is issued by the issuing bankbanks. Transaction fees to which the Company expects to be entitled are variable consideration because loan volume originated over the contractual term is not known at the contract’s inception. The transaction fee is determined each time a loan is issued based on that loan’s initial principal amount.
The Company pays WebBank a loan trailing fee to give WebBank an ongoing financial interest in the performance of the loans it originates and the proceeds are deliveredsells to the borrower.Company. The Company records transaction fee revenue net of program fees paid to WebBank. See “Loan Trailing Fee Liability” above for further discussion.
Atis paid over time based on the timeamount and timing of principal and interest payments made by borrowers of the underlying loans. The Loan Trailing Fee is consideration payable to WebBank and the loan issuance by the issuing bank and delivery of proceeds to the borrower,trailing fee liability is recorded at fair value. Additionally, the Company recognizes estimated refunds for potential assumption ofassumes the issuing bank’s obligation under Utah law to refund the pro-rated amount of the transaction fee in excess of 5% in the event the borrower prepays the loan in full before maturity. Additionally, for patient solutions products, the Company may provide refunds to borrowers when the borrower cancelsBoth the loan under certain conditions. The Company recordstrailing fees and transaction fee refunds are recorded as a reduction of transaction fee revenue netin the Company’s Consolidated Statements of estimated refunds.
Investor Fees:Note investors, certain certificate holdersOperations and whole loan purchasers typically pay LendingClub a servicing fee on each payment received from a borrower orare included in “Accrued expenses and other liabilities” on the investors’ month-end principal balanceCompany’s Consolidated Balance Sheets.
Other Revenue: Other revenue primarily consists of loansreferral fee revenue and sublease revenue from our sublet office space in San Francisco, California. The Company is entitled to receive referral fees from third-party companies when customers referred by the Company consider or purchase products or services from such third-party companies. Referral contracts contain a single performance obligation. The Company recognizes referral fees for each distinct instance when the criteria for receiving the referral fee has been satisfied. Sublease revenue is recognized on a straight-line basis over the term of the lease.
Stock-based Compensation
Stock-based compensation includes expense associated with restricted stock units (RSUs) and performance-based restricted stock units (PBRSUs), stock options, and the Company’s employee stock purchase plan (ESPP), as well as expense associated with stock issued related to acquisitions. Stock-based compensation expense is based on the
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
serviced. The servicing fee compensates the Company for managing payments from borrowers and payments to investors and maintaining investors’ platform account. The Company records servicing fees when received as a component of “Investor fees” in the Consolidated Statements of Operations. Servicing fees can be, and have been, modified or waived at management’s discretion. Investor fees also include the change in fair value of loan servicing assets and liabilities.
Qualified investors can invest in investment funds managed by LCAM. LCAM charges limited partners in the investment funds a management fee payable monthly in arrears, based on a limited partner’s capital account balance at month end. LCAM also earns management fees on separately managed accounts (SMAs), payable monthly in arrears, based on the month-end balances in the SMAs. Management fees are recorded as earned as a component of “Investor fees” in the Consolidated Statements of Operations. Management fees can be, and have been, modified or waived at the discretion of LCAM.
Gain (Loss) on Sales of Loans: In connection with whole loan sales, in addition to investor fees earned with respect to the corresponding loan, the Company recognizes a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Gain (Loss) on sales of loans is presented net of credit support agreement expense on the Company’s Consolidated Statements of Operations.
Other Revenue: Other revenue primarily consists of referral revenue that relates to fees earned from third-party companies when customers referred by us complete specified actions with such third-party companies, and commission for facilitating the transfer of whole loans and related certificate redemption between third-party investors.
Legal Fees
Legal fees, including legal fees associated with loss contingencies, are recognized as incurred and included in “Other general and administrative” expense in the Company’s Consolidated Statements of Operations.
Stock-based Compensation
Stock-based compensation includes expense associated with restricted stock units (RSUs), stock options, and the Company’s employee stock purchase plan (ESPP), as well as expense associated with stock issued related to its acquisition of Springstone. Stock-based compensation expense is based on the grant date fair value of the award.
The fair value of restricted stock unitscost is based on the closing price of the Company’s common stock on the date of grant. To determine the fair value of stock options and ESPP purchase rights, the Company uses the Black-Scholes option-pricing model, with inputs for the fair value of its common stock, expected common stock price volatility over the expected life of the stock options or ESPP purchase rights, expected term of the stock option or ESPP purchase right, risk-free interest rates and expected dividends.
For awards issued prior to 2017, as the Company did not have a significant trading history for its common stock, the expected stock price volatility for its stock options and ESPP was estimated by reference to the average historical stock price volatility for its industry peers. In 2017, the Company began using the expected volatility of ESPP purchase rights and stock options based upon the weighted-average of the historical volatility of the Company’s common stock. The expected term for stock options represents the period of time that stock options are estimated to be outstanding, giving consideration to the contractual terms of the options, vesting schedules, and expectations of future exercise patterns and post-vesting employee termination behavior. Given the Company’s limited operating history, the simplified method is applied to calculate the expected term. The Company uses a risk-free interest rate based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. The Company has never declared or paid any cash or other dividends and does not anticipate paying cash or
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
other dividends in the foreseeable future, and consequently uses an expected dividend yield of 0.0% in its option-pricing model.
Beginning in 2017, the Company elected to recognize forfeitures as they occur for equity awards with only a service condition, rather than estimated expected forfeitures. The Company recorded a $1.4 million reclassification to 2017 beginning accumulated deficit to remove the estimate of forfeitures as of January 1, 2017.
The Company uses a Monte Carlo simulation to fair value the total shareholder return (TSR) vesting portion of the restricted stock unit awards with performance, market, and service conditions. This valuation methodology utilizes the 20-day volume weighted-average stock price and the closing price of the common stock of the Company and its peer group on the grant date, as well as several key assumptions, including the expected volatilities of the Company and peer group’s stock price, risk-free rate of return, and estimated total shareholder return. Due to the complexity of the valuation technique, the Company has engaged a third-party valuation firm to perform the Monte Carlo simulation.
Stock-based compensation expense related to stock options and RSUs that are expected to vest isgenerally recognized over the vesting period of the award, which is generally four years, on a straight-line basis. The compensation expense related to ESPP purchase rights isForfeitures are recognized on a straight-line basis over the requisite service period, which is generally six months.as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.method. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was signed into law which reduced the federal corporate income tax rate from 35% to 21%, effective on January 1, 2018.
The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers the available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized. If the Company determines that it is able to realize its deferred tax assets in the future in excess of the net recorded amount, the Company decreases the deferred tax asset valuation allowance, which reduces the provision for income taxes.
The Company accounts for uncertainUncertain tax positions using a two-step process whereby (i) it determines whetherare recognized only when we believe it is more likely than not that the tax positionsposition will be sustainedupheld on examination by the basis oftaxing authorities based on the technical merits of the position (“more-likely-than-not recognition threshold”) and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
position. The Company recognizes interest and penalties, accrued onif any, unrecognizedrelated to uncertain tax benefits as a component ofpositions in “Income tax expense (benefit)” in the Consolidated Statements of Operations.
Net Income (Loss) Per Share
Earnings (Loss) per share (EPS) is the amount ofBasic net income (loss) availableper share (Basic EPS) attributable to each sharecommon stockholders is computed by dividing net income (loss) attributable to LendingClub by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted EPS is the amount of net income (loss) availableper share (Diluted EPS) is computed by dividing net income (loss) attributable to each shareLendingClub by the weighted-average number of
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
shares of common stock outstanding during the reporting period, adjusted for the effects of dilutive shares of common stock, which include incremental shares issued for RSUs, PBRSUs, and stock options. PBRSUs are included in dilutive shares to include the effectextent the pre-established targets have been or are estimated to be satisfied as of potentiallythe reporting date. The dilutive common shares. Potentially dilutivepotential common shares are computed using the treasury stock method. The effects of outstanding RSUs, PBRSUs, and stock options are excluded from the computation of dilutedDiluted EPS in periods in which the effect would be antidilutive. Potentially dilutive common shares include incremental shares issued for stock options and warrants to purchase common stock. The Company calculates diluted EPS using the treasury stock method. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Consolidation of Variable Interest Entities
A variable interest entity (VIE) is a legal entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to controlcharacteristics of a controlling financial interest. The Company’s variable interest arises from contractual, ownership or other monetary interests in the entity, which change with fluctuations in the fair value of the entity’s activities or lack the ability to receive expected benefits or absorb obligations in a manner that’s consistent with their investment in the entity.
The most common type of VIE is a special purpose entity (SPE). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. In connection with its securitization activities, the Company has various forms of ongoing involvement with SPEs, which may include (i) holding senior or subordinated interests in SPEs; (ii) acting as servicer for SPEs; and (iii) providing administrative services to SPEs. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of thenet assets.
A VIE is consolidated by its primary beneficiary, the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates VIEsa VIE when it is deemed to be the primary beneficiary.
Management regularly reviews and reconsiders its previous conclusions regarding The Company assesses whether or not it holds a variable interest in potential VIEs,is the statusprimary beneficiary of an entity as a VIE on an ongoing basis.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and whether the Company is required to consolidate such VIEs in the consolidated financial statements.Per Share Amounts, Ratios, or as Noted)
Noncontrolling Interests
Noncontrolling interests represent the noncontrolling holders’ share of income or losses, and share of total equity, from a consolidated subsidiary or consolidated VIE in which the Company holds less than 100% ownership.
Transfers of Financial Assets
The Company accounts for transfers of financial assets as sales when it has surrendered control over the transferred assets. Control is generally considered to have been surrendered when the transferred assets have been legally isolated from the Company, the transferee has the right to pledge or exchange the assets without any significant constraints, and the Company has not entered into a repurchase agreement, does not hold significantunconditional call options and has not written significant put options on the transferred assets. In assessing whether control has been surrendered, the Company considers whether the transferee would be a consolidated affiliate and the impact of all arrangements or agreements made contemporaneously with, or in contemplation of the transfer, even if they were not entered into at the time of transfer. The Company recognizesmeasures gain or loss on sale of financial assets by comparingas the net sales proceeds (including fair value of any servicing asset or liability and recourse obligation recognized) toreceived on the sale less the carrying amount of the loans sold. The net proceeds of the sale represent the fair value of any assets sold.obtained or liabilities incurred as part of the transaction, including, but not limited to servicing assets, retained securities, and recourse obligations.
Transfers of financial assets that do not qualify for sale accounting are reported as secured borrowings. Accordingly, the related assets remain on the Company’s Consolidated Balance Sheets and continue to be reported and accounted
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with related interest expense recognized over the life of the related assets.
Adoption of New Accounting Standards
The Company adopted the following accounting standards during the year ended December 31, 2017:2019:
Accounting Standards Update (ASU) 2016-09 Compensation – Stock Compensation2016-02, Leases (Topic 718): Improvements842), requires lessees to Employee Share-Based Payment Accounting (ASU 2016-09), simplifiesrecord on their balance sheets a lease liability for the accountingobligation to make lease payments and a right-of-use (ROU) asset for employee share-based payment transactions, including the associated accountingright to use the underlying asset for income taxes, forfeitures, and classification in the statement of cash flows.lease term. The Company adopted ASU 2016-09 effectiveTopic 842 as of January 1, 2017,2019 and has elected not to restate comparative periods presented in the consolidated financial statements. The Company has chosen not to elect the practical expedients permitted under the modified retrospective method withtransition guidance within the cumulative effect of adoption recorded as a reclassificationnew standard, which among other things, permits entities to 2017 beginning accumulated deficit.carry forward their historical lease identification. The Company also electedhas made an accounting policy election to presentnot recognize lease liabilities and ROU assets for short-term leases, which are leases with initial terms of 12 months or less and for which there is not a purchase option that is reasonably certain to be exercised. All leases within the change in classification in its Company’s portfolio are classified as operating leases.
Adoption of Topic 842 had an impact on the Company’s Consolidated Balance Sheets but did not have an impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows related. The most significant impact was the recognition of ROU assets and lease liabilities of $95.2 million and $110.1 million at the time of adoption, respectively, with 0 cumulative effect in retained earnings. The difference between the ROU assets and lease liabilities is the unamortized balance of deferred rent, which prior to excess tax benefits prospectivelyJanuary 1, 2019, was included as a separate liability within Accrued expenses and therefore, prior period amounts have not been adjusted.
Under ASU 2016-09, the Company now recognizes the excessother liabilities. The operating lease expenses are included in Other general and administrative expense and sublease income tax benefits or deficiencies from stock-based compensationis recorded in “Income tax expense (benefit)”Other revenue in the Company’s Consolidated Statements of Operations and as an operating activity in the Company’s Consolidated Statements of Cash Flows. Additionally, excess tax benefits and tax deficiencies are now excluded from the calculation of assumed proceeds under the treasury stock method when computing fully diluted earnings per share. Upon the adoption of this standard, the Company recognized a $56.7 million deferred tax asset with a full valuation allowance (net zero impact upon adoption) in the Consolidated Balance Sheets for the excess income tax benefits from stock-based compensation as of January 1, 2017.
. The Company also elected to recognize forfeitures as they occur for equity awards with only a service condition, rather than estimate expected forfeitures, as permittedincluded the disclosures required by ASU 2016-09. The Company recorded a $1.4 million reclassification to 2017 beginning accumulated deficit to remove the estimate of forfeitures as of January 1, 2017.2016-02 in “Note 18. Leases.”
ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, simplifies the accounting for goodwill impairments by eliminating Step 2 of the goodwill impairment test. Under ASU 2017-04, a goodwill impairment loss is now measured as the amount by which the carrying amount of a reporting unit exceeds its fair value. The Company elected to early adopt ASU 2017-04 effective January 1, 2017. The adoption did not have an effect on the Company’s consolidated financial statements for the year ended December 31, 2017.
New Accounting Standards Not Yet Adopted
In May 2017,July 2019, the Financial Accounting Standards Board (FASB) issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, (ASU 2017-09), which2019-07, Codification Updates to SEC Sections. The ASU clarifies when to account for a change toand/or improves the terms or conditionsdisclosure and presentation requirements of a share-based payment award asvariety of codification topics by aligning them with the Securities and Exchange Commission’s regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU became effective upon issuance and did not have a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. The Company will adopt this standard in the first quarter of 2018. Thesignificant impact of this adoption will prospectively impact any modifications that occur after adoption of this ASU.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to address the diversity in the classification and presentation of changes in restricted cash in the statement of cash flows, by requiring entities to combine the changes in cash and cash equivalents and restricted cash in one line. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Additionally, if more than one line item is recorded on the balance sheet for cashCompany’s consolidated financial statements and cashrelated disclosures.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
equivalents and restricted cash, a reconciliation between the statement of cash flows and balance sheet is required. The guidance is effective for interim and annual periods beginning on or after December 15, 2017 using a retrospective transition method. Early adoption is permitted. The Company will adopt this standard in the first quarter of 2018. The Company is evaluating the impact this ASU will have on its statement of cash flows.New Accounting Standards Not Yet Adopted
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, to address diversity in practice in how certain cash receipts and payments are presented and classified in the statements of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for interim and annual periods beginning on or after December 15, 2017 using a retrospective transition method, with early adoption permitted. The Company will adopt this standard in the first quarter of 2018. The Company is evaluating the impact of this ASU will have on its statement of cash flows.
In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will bebecame effective on January 1, 2020. TheFor loans accounted for at amortized cost, the guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. TheBecause the Company accountshas elected the fair value option for its loans and loans accounted for at fair value through net income which isare outside the scope of Topic 326.326, the Company expects no impact on its loan portfolios upon adoption. For accrued interest receivable related to such loans, the Company has made an accounting policy election not to measure an allowance for credit losses on accrued interest receivable as the Company writes off uncollectible accrued interest receivable in a timely manner. Uncollectible accrued interest receivable amounts are written off to interest income.
For debt securities available for sale, debt securities, the guidance will requireTopic 326 requires recognition of expected credit losses by recognizing an allowance for credit losses when the fair value of the security is below amortized cost and the recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. The standard eliminates the existing guidance for purchased credit impaired assets but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. The measurement guidance for purchased financial assets with credit deterioration also applies to beneficial interests classified as available for sale where there is a significant difference between contractual and expected cash flows at the date of recognition.
Upon adoption, the amendments in Topic 326 will be recognized through a cumulative-effect adjustment to retained earnings, except for debt securities with prior other-than-temporary impairment whereby Topic 326 is applied prospectively. The Company made substantial progress in line with the established project plan and determined there was not a transition adjustment upon adoption of the standard on January 1, 2020. The targeted amendments to the debt securities available for sale impairment model do not have a material impact on the Company’s financial position, results of operations, cash flows, and disclosures for transition securities; the Company is still evaluating the impact for new securities acquired on and after January 1, 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and valuation processes for Level 3 fair value measurements. The ASU adds new disclosure requirements for Level 3 measurements. The new guidance became effective on January 1, 2020. The Company is finalizing the impact this ASU will have on its disclosures and does not expect such adoption to have a material impact.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software – (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard became effective on January 1, 2020 and the Company adopted the standard using the prospective approach. The Company has reviewed existing cloud computing arrangements and determined which ones are service contracts. Implementation costs that are not from internal developers related to service contracts that satisfy the criteria for capitalization under ASC 350-40 will be presented with “Other assets” on the Company’s Consolidated Balance Sheets, amortization expense will be presented in the same line on the income statement as the fees for the associated hosted service on the Company’s Consolidated Statements of Operations, and the cash flows will be presented consistent with the presentation of cash flows for the fees related to the hosted service, generally as cash flows from operations, on the Company’s Consolidated Statements of Cash Flows. The Company does not expect such adoption will have a material impact on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to record on their balance sheets a lease liability for the obligation to make lease payments and a right-of-use (ROU) asset for the right to use the underlying asset for the lease term. Lessees may elect to not recognize lease liabilities and ROU assets for leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives, and the lessee’s initial direct costs. For operating leases, lease expense will generally be recognized on a straight-line basis over the lease term. Lessor accounting activities are largely unchanged from existing lease accounting. The new standard is effective January 1, 2019 and requires modified retrospective transition approach, with early adoption permitted. The Company expects to adopt the new standard in the first quarter of 2019. The Company is evaluating the impact of this guidance on its financial position, results of operations, cash flows and related disclosures.
In January 2016, the FASB issued ASU 2016-01 Financial Instruments – Overall (Subtopic: 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is effective January 1, 2018. The amendment changes the accounting for equity investments, changes disclosure requirements related to instruments at amortized cost and fair value, and clarifies how entities should evaluate deferred tax assets for securities classified as available for sale. The guidance also requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability under the fair value option. The Company is evaluating the impact of this guidance on its financial position, results of operations, cash flows and related disclosures.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which is effective January 1, 2018. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts both the likelihood of payment and the timing of the related transfer of goods or performance of services. In March 2016, the FASB issued an amendment (ASU 2016-08) to the new revenue recognition guidance clarifying how to determine if an entity is a principal or agent in a transaction. In April (ASU 2016-10), May (ASU 2016-12), and December (ASU 2016-20) of 2016, the FASB further amended the guidance to include performance obligation identification, licensing implementation, collectability assessment and
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
other presentation
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is part of the FASB’s initiative to reduce complexity in accounting standards. The proposed ASU eliminates certain exceptions to the general principles of ASC 740, Income Taxes, and transition clarifications.simplifies income tax accounting in several areas. The standard is effective date and transition requirementson January 1, 2021 with early adoption permitted. The Company plans to adopt early for the amendments is the same as for ASU 2014-09.interim period ending March 31, 2020. The Company is evaluating the impact this ASU will adopt thehave on its financial position, results of operations, cash flows, and disclosures, but does not expect such adoption to have a material impact.
3. Revenue from Contracts with Customers
The Company’s revenue recognition guidance beginning January 1, 2018 using the modified retrospective method of adoption.
The Company has performed an assessment of our revenuefrom contracts and concluded that there will be no change to (1) the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606, whichwith customers includes transaction fees managementand referral fees. Referral fees are presented as a component of “Other revenue” in the Consolidated Statements of Operations.
The following table presents the Company’s revenue from contracts with customers, disaggregated by revenue source for services transferred over time, for the years ended December 31, 2019 and 2018:
|
| | | | | | | |
| Year Ended December 31, | 2019 | | 2018 |
| Transaction fees | $ | 598,760 |
| | $ | 526,942 |
|
| Referral fees | 5,474 |
| | 3,645 |
|
| Total revenue from contracts with customers | $ | 604,234 |
| | $ | 530,587 |
|
The Company recognizes transaction and referral fees (2)at each distinct instance after the presentation of revenue as gross versus net, or (3) the amount of capitalized contract costs upon adoption of Topic 606. Because there will be no change to the timing and pattern of revenue recognition, we believe there will be no material changes to the Company’s processes and internal controls. As part of our implementation process to date, we are evaluating new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions ofCompany satisfies its performance obligations. The Company will make such disclosureshad 0 bad debt expense for the years ended December 31, 2019 and 2018. Because revenue is recognized at the same time that payments are received, the Company had 0 contract assets, contract liabilities, or deferred contract costs recorded as of December 31, 2019 and 2018. Additionally, the Company did not recognize any revenue from performance obligations related to prior periods (for example, due to changes in transaction price) for the first quarteryears ended December 31, 2019 and 2018. For additional detail on the Company’s accounting policy regarding revenue recognition, see “Note 2. Summary of 2018.Significant Accounting Policies” above.
3.4. Net Loss Per Share
The following table details the computation of the Company’s basic and diluted net loss per share:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) |
Weighted-average common shares – Basic (1) | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
|
Weighted-average common shares – Diluted (1) | 87,278,596 |
| | 84,583,461 |
| | 81,799,189 |
|
Net loss per share attributable to LendingClub: (1) | | | | | |
| Basic | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) |
| Diluted | $ | (0.35 | ) | | $ | (1.52 | ) | | $ | (1.88 | ) |
| |
(1) | All share and per share information has been retroactively adjusted to reflect the reverse stock split discussed below. |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| LendingClub net loss | $ | (153,835 | ) | | $ | (145,969 | ) | | $ | (4,995 | ) |
| Weighted-average common shares – Basic | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
|
| Weighted-average common shares – Diluted | 408,995,947 |
| | 387,762,072 |
| | 374,872,118 |
|
| Net loss per share attributable to LendingClub: | | | | | |
| Basic | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) |
| Diluted | $ | (0.38 | ) | | $ | (0.38 | ) | | $ | (0.01 | ) |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
4.The following table summarizes the weighted-average common shares that were excluded from the Company’s diluted net loss per share computation because their effect would have been anti-dilutive for the periods presented:
|
| | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Stock options | 455,627 |
| | 893,425 |
| | 1,176,534 |
|
| RSUs and PBRSUs | 59,812 |
| | 63,959 |
| | 10,363 |
|
Total (1) | 515,439 |
| | 957,384 |
| | 1,186,897 |
|
| |
(1) | All share information has been retroactively adjusted to reflect the reverse stock split discussed below. |
A 1-for-5 reverse stock split of the Company’s common stock became effective on July 5, 2019 (the Reverse Stock Split). All share and per share information contained in these consolidated financial statements has been retroactively adjusted to reflect the Reverse Stock Split. The par value per share of the Company’s common stock was not adjusted as a result of the Reverse Stock Split. Accordingly, the change in total par value was recorded in additional paid-in capital and has been retroactively adjusted for all periods in these consolidated financial statements.
5. Securities Available for Sale
The Company’s Structured Program transactions include i) asset-backed securitization transactions and ii) Certificate Program transactions. Certificate Program transactions include CLUB Certificate and Levered Certificate transactions.
In connection with asset-backed securitizations, the Company is the sponsor and establishes trusts to ultimately purchase the unsecured personal loans from the Company and/or third-party whole loan investors. Securities issued from our asset-backed securitizations are senior or subordinated based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying trusts. The asset-backed securitization senior securities and subordinated residual interests retained by the Company are presented as “Asset-backed senior securities” and “Asset-backed subordinated securities,” respectively, in the securities available for sale tables below.
In addition, the Company sponsors the sale of unsecured personal loans through the issuance of certificate securities under our Certificate Program. The certificate securities are collateralized by loans transferred to a series of a master trust and trade in the over-the-counter market with a CUSIP. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying Certificate Program trusts. The CLUB Certificate issued securities are pass-through securities of which each owner has an undivided and equal interest in the underlying loans of each transaction. The Levered Certificate issued securities include senior and subordinated securities based on the waterfall criteria of loan payments to each security class. The subordinated securities issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. The CLUB Certificate issued securities retained by the Company are presented as “CLUB Certificate asset-backed securities” in the securities available for sale tables below.
The Levered Certificate issued senior and subordinated securities retained by the Company are presented in aggregate with securities from asset-backed securitizations as “Asset-backed senior securities” and “Asset-backed subordinated securities,” respectively, in the tables below. The “Other asset-backed securities” caption in the tables below primarily includes investment-grade rated bonds that are collateralized by automobile loan receivables.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of December 31, 20172019 and 2016,2018, were as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2019 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Asset-backed senior securities (1) | $ | 108,780 |
| | $ | 597 |
| | $ | (38 | ) | | $ | 109,339 |
|
CLUB Certificate asset-backed securities (1) | 90,728 |
| | 41 |
| | (1,063 | ) | | 89,706 |
|
Asset-backed subordinated securities (1) | 20,888 |
| | 423 |
| | (221 | ) | | 21,090 |
|
| Corporate debt securities | 14,333 |
| | 11 |
| | (1 | ) | | 14,343 |
|
| Certificates of deposit | 13,100 |
| | — |
| | — |
| | 13,100 |
|
| Other asset-backed securities | 12,075 |
| | 6 |
| | (1 | ) | | 12,080 |
|
| Commercial paper | 9,274 |
| | — |
| | — |
| | 9,274 |
|
| U.S. agency securities | 1,995 |
| | — |
| | — |
| | 1,995 |
|
Total securities available for sale (2) | $ | 271,173 |
| | $ | 1,078 |
| | $ | (1,324 | ) | | $ | 270,927 |
|
| | | | | | | | |
| | | | | | | | |
| December 31, 2018 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Asset-backed senior securities (1)(2) | $ | 56,363 |
| | $ | 188 |
| | $ | (62 | ) | | $ | 56,489 |
|
CLUB Certificate asset-backed securities (1) | 48,505 |
| | 150 |
| | (225 | ) | | 48,430 |
|
| Corporate debt securities | 17,339 |
| | 1 |
| | (12 | ) | | 17,328 |
|
| Certificates of deposit | 14,929 |
| | — |
| | — |
| | 14,929 |
|
Asset-backed subordinated securities (1) | 11,602 |
| | 249 |
| | (2 | ) | | 11,849 |
|
| Other asset-backed securities | 11,232 |
| | — |
| | (7 | ) | | 11,225 |
|
| Commercial paper | 9,720 |
| | — |
| | — |
| | 9,720 |
|
| Other securities | 499 |
| | — |
| | — |
| | 499 |
|
| Total securities available for sale | $ | 170,189 |
| | $ | 588 |
| | $ | (308 | ) | | $ | 170,469 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Asset-backed senior securities related to Company-sponsored securitizations (1) | 36,953 |
| | 73 |
| | (6 | ) | | 37,020 |
|
| Certificates of deposit | 24,758 |
| | — |
| | — |
| | 24,758 |
|
| Corporate debt securities | 16,268 |
| | 1 |
| | (11 | ) | | 16,258 |
|
| Asset-backed securities | 14,843 |
| | 1 |
| | (1 | ) | | 14,843 |
|
| Commercial paper | 14,665 |
| | — |
| | — |
| | 14,665 |
|
Asset-backed subordinated residual certificates related to Company-sponsored securitizations and CLUB Certificate transactions (1) | 10,058 |
| | 11 |
| | (40 | ) | | 10,029 |
|
| Total securities available for sale | $ | 117,545 |
| | $ | 86 |
| | $ | (58 | ) | | $ | 117,573 |
|
| | | | | | | | |
| December 31, 2016 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Corporate debt securities | $ | 181,359 |
| | $ | 63 |
| | $ | (199 | ) | | $ | 181,223 |
|
| Certificates of deposit | 27,501 |
| | — |
| | — |
| | 27,501 |
|
| Asset-backed securities | 25,369 |
| | 4 |
| | (9 | ) | | 25,364 |
|
| Commercial paper | 20,164 |
| | — |
| | — |
| | 20,164 |
|
| U.S. agency securities | 19,602 |
| | 21 |
| | — |
| | 19,623 |
|
| U.S. Treasury securities | 2,493 |
| | 3 |
| | — |
| | 2,496 |
|
| Other securities | 10,805 |
| | — |
| | (39 | ) | | 10,766 |
|
| Total securities available for sale | $ | 287,293 |
| | $ | 91 |
| | $ | (247 | ) | | $ | 287,137 |
|
| |
(1) | Approximately $45.3As of December 31, 2019 and 2018, $219.0 million and $115.1 million, respectively, of the asset-backed securities related to Company-sponsored securitizations and CLUB CertificateStructured Program transactions at fair value are subject to restrictions on transfer pursuant to the Company’s obligations as a “sponsor” under the U.S. Risk Retention Rules (as more fully described in “Part II. Other InformationI – Item 1A. Risk Factors – Risk retention rules and recent developments in our business may increase our compliance costs, impair our liquidity and otherwise adversely affect our operating results.”)
|
| |
(2) | As of December 31, 2019 and 2018, includes $174.8 million and $53.6 million, respectively, of securities pledged as collateral at fair value. |
The senior securities and the subordinated residual certificates related to the securitization transactions are accounted for as securities available for sale, as described in “Note 6. Securitizations and Variable Interest Entities.” The senior securities and subordinated residual certificates are included in asset-backed securities related to Company-sponsored securitizations and CLUB Certificate transactions in the table above. The senior securities are valued using prices obtained from third-party pricing services (Level 2 of the fair value hierarchy), as described in “Note 2. Summary of Significant Accounting Policies.” The subordinated residual certificates and CLUB Certificates retained interests are valued using discounted cash flow models that incorporate contractual payment terms and estimated discount rates, credit losses, and prepayment rates (Level 3 of the fair value hierarchy). The fair value of the subordinated residual certificates and retained CLUB Certificates was $10.0 million at December 31, 2017.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
A summary of securities available for sale with unrealized losses as of December 31, 20172019 and 2016,2018, aggregated by period of continuous unrealized loss, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| December 31, 2017 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Asset-backed securities related to Company-sponsored securitizations and CLUB Certificate transactions | $ | 26,534 |
| | $ | (46 | ) | | $ | — |
| | $ | — |
| | $ | 26,534 |
| | $ | (46 | ) |
| Corporate debt securities | 14,368 |
| | (11 | ) | | — |
| | — |
| | 14,368 |
| | (11 | ) |
| Asset-backed securities | 4,401 |
| | (1 | ) | | — |
| | — |
| | 4,401 |
| | (1 | ) |
Total securities with unrealized losses (1) | $ | 45,303 |
| | $ | (58 | ) | | $ | — |
| | $ | — |
| | $ | 45,303 |
| | $ | (58 | ) |
| | | | | | | | | | | | |
| | Less than
12 months | | 12 months
or longer | | Total |
| December 31, 2016 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| Corporate debt securities | $ | 107,862 |
| | $ | (185 | ) | | $ | 11,682 |
| | $ | (14 | ) | | $ | 119,544 |
| | $ | (199 | ) |
| Asset-backed securities | 6,628 |
| | (8 | ) | | 1,870 |
| | (1 | ) | | 8,498 |
| | (9 | ) |
| Other securities | 6,800 |
| | (3 | ) | | 3,966 |
| | (36 | ) | | 10,766 |
| | (39 | ) |
Total securities with unrealized losses (1) | $ | 121,290 |
| | $ | (196 | ) | | $ | 17,518 |
| | $ | (51 | ) | | $ | 138,808 |
| | $ | (247 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| December 31, 2019 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Asset-backed securities related to Structured Program transactions | $ | 91,350 |
| | $ | (1,287 | ) | | $ | 1,875 |
| | $ | (35 | ) | | $ | 93,225 |
| | $ | (1,322 | ) |
| Corporate debt securities | 4,613 |
| | (1 | ) | | — |
| | — |
| | 4,613 |
| | (1 | ) |
| Other asset-backed securities | 3,062 |
| | (1 | ) | | — |
| | — |
| | 3,062 |
| | (1 | ) |
Total securities with unrealized losses (1) | $ | 99,025 |
| | $ | (1,289 | ) | | $ | 1,875 |
| | $ | (35 | ) | | $ | 100,900 |
| | $ | (1,324 | ) |
| | | | | | | | | | | | |
| | Less than
12 months | | 12 months
or longer | | Total |
| December 31, 2018 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| Asset-backed securities related to Structured Program transactions | $ | 49,047 |
| | $ | (285 | ) | | $ | 1,745 |
| | $ | (4 | ) | | $ | 50,792 |
| | $ | (289 | ) |
| Corporate debt securities | 14,538 |
| | (12 | ) | | — |
| | — |
| | 14,538 |
| | (12 | ) |
| Other asset-backed securities | 11,208 |
| | (7 | ) | | — |
| | — |
| | 11,208 |
| | (7 | ) |
Total securities with unrealized losses (1) | $ | 74,793 |
| | $ | (304 | ) | | $ | 1,745 |
| | $ | (4 | ) | | $ | 76,538 |
| | $ | (308 | ) |
| |
(1) | The number of investment positions with unrealized losses at December 31, 20172019 and 20162018 totaled 2470 and 72,56, respectively. |
During the yearyears ended December 31, 2019, 2018 and 2017, the Company recognized $3.6 million, $3.0 million and $1.5 million, respectively, in other-than-temporary impairment charges on its subordinated residual certificates held as a result of its Company-sponsored securitizationasset-backed securities related to Structured Program transactions. There were no0 credit losses recognized into earnings for other-than-temporarily impaired securities held by the Company during the yearyears ended December 31, 2019, 2018 and 2017 for which a portion of the impairment was previously recognized in other comprehensive income. During the years ended December 31, 2016 or 2015, the Company recognized no other-than-temporary impairment charges.
The contractual maturities of securities available for sale at December 31, 2017,2019, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Within 1 year | | After 1 year through 5 years | | After 5 years through 10 years | | After 10 years | | Total |
| Asset-backed securities related to Company-sponsored securitizations and CLUB Certificate transactions | $ | — |
| | $ | — |
| | $ | 45,256 |
| | $ | 1,793 |
| | $ | 47,049 |
|
| Certificates of deposit | 24,758 |
| | — |
| | — |
| | — |
| | 24,758 |
|
| Corporate debt securities | 16,258 |
| | — |
| | — |
| | — |
| | 16,258 |
|
| Asset-backed securities | 14,843 |
| | — |
| | — |
| | — |
| | 14,843 |
|
| Commercial paper | 14,665 |
| | — |
| | — |
| | — |
| | 14,665 |
|
| Total fair value | $ | 70,524 |
| | $ | — |
| | $ | 45,256 |
| | $ | 1,793 |
| | $ | 117,573 |
|
| Total amortized cost | $ | 70,534 |
| | $ | — |
| | $ | 45,215 |
| | $ | 1,796 |
| | $ | 117,545 |
|
|
| | | | | | | |
| | Amortized Cost | | Fair Value |
| Within 1 year: | | | |
| Corporate debt securities | $ | 14,333 |
| | $ | 14,343 |
|
| Certificates of deposit | 13,100 |
| | 13,100 |
|
| Other asset-backed securities | 7,756 |
| | 7,758 |
|
| Commercial paper | 9,274 |
| | 9,274 |
|
| U.S. agency securities | 1,995 |
| | 1,995 |
|
| Total | 46,458 |
| | 46,470 |
|
| After 1 year through 5 years: | | | |
| Other asset-backed securities | 4,319 |
| | 4,322 |
|
| Total | 4,319 |
| | 4,322 |
|
| Asset-backed securities related to Structured Program transactions | 220,396 |
| | 220,135 |
|
| Total securities available for sale | $ | 271,173 |
| | $ | 270,927 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
During the yearyears ended December 31, 2019, 2018 and 2017, the Company’sCompany, Consumer Loan Underlying Bond Depositor LLC (Depositor), a subsidiary of the Company, and MOAa majority-owned affiliate (MOA) of the Company sold a combined $4.5 billion, $2.0 billion and $831.1 million, respectively, in asset-backed securities related to the Company-sponsored securitizationStructured Program transactions. There were no0 realized gains or losses related to such sales. See For further information see “Note 6.7. Securitizations and Variable Interest Entities” for additional information.Entities.” Proceeds and gross realized gains and losses from other sales of securities available for sale were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Proceeds | $ | 12,548 |
| | $ | 497 |
| | $ | 125,522 |
|
| Gross realized gains | $ | 9 |
| | $ | 1 |
| | $ | 196 |
|
| Gross realized losses | $ | (1 | ) | | $ | (3 | ) | | $ | (26 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Proceeds | $ | 125,522 |
| | $ | 2,494 |
| | $ | 120,420 |
|
| Gross realized gains | $ | 196 |
| | $ | 2 |
| | $ | 133 |
|
| Gross realized losses | $ | (26 | ) | | $ | — |
| | $ | 4 |
|
5.6. Loans Held Forfor Investment, Loans Held Forfor Sale, Notes, Certificates and Secured Borrowings and Loan Servicing Rights
Loans Held Forfor Investment, Loans Held For Sale, Notes, Certificates and Secured Borrowings
The Company sells loans and issues member payment dependent notes and the LC Trust issues certificates as a means to allow investors to invest in the corresponding loans. At December 31, 20172019 and 2016,2018, loans held for investment, notes, certificates and secured borrowings measured at fair value on a recurring basis were as follows:
|
| | | | | | | | | | | | | | | |
| | Loans Held for Investment | | Notes, Certificates and Secured Borrowings |
| December 31, | 2019 | | 2018 | | 2019 | | 2018 |
| Aggregate principal balance outstanding | $ | 1,148,888 |
| | $ | 2,013,438 |
| | $ | 1,148,888 |
| | $ | 2,033,258 |
|
| Net fair value adjustments | (69,573 | ) | | (130,187 | ) | | (67,422 | ) | | (127,383 | ) |
| Fair value | $ | 1,079,315 |
| | $ | 1,883,251 |
| | $ | 1,081,466 |
| | $ | 1,905,875 |
|
|
| | | | | | | | | | | | | | | |
| | Loans Held For Investment | | Notes, Certificates and Secured Borrowings |
| December 31, | 2017 | | 2016 | | 2017 | | 2016 |
| Aggregate principal balance outstanding | $ | 3,141,391 |
| | $ | 4,547,138 |
| | $ | 3,161,080 |
| | $ | 4,572,912 |
|
| Net fair value adjustments | (209,066 | ) | | (252,017 | ) | | (206,312 | ) | | (252,017 | ) |
| Fair value | $ | 2,932,325 |
| | $ | 4,295,121 |
| | $ | 2,954,768 |
| | $ | 4,320,895 |
|
In October 2017, LCAM initiated the full wind down of sixfunds by redeeming the Certificates issued by the fundsAt December 31, 2019 and transferring the loan participations underlying the redeemed Certificates to third party investors. The Company received $384.7 millionin proceeds from the sale of loan participations with2018, a fair value of $103.8$18.0 million and issued secured borrowings with a fair value of $282.5 million. The secured borrowings are collateralized by loan participations with a fair value of $280.9 million. The Company paid $386.1 million to certificate holders with a $1.4 million net cash outflow recorded in “Net fair value adjustments” in the Consolidated Statements of Operations. At December 31, 2017, $242.7 million of the aggregate principal balance outstanding and a fair value of $228.1$76.5 million included in “Loans held for investment” wereinvestment at fair value” was pledged as collateral for secured borrowings.borrowings, respectively. See “Note 14.15. Secured Borrowings”Borrowings” for additional information.
At December 31, 2017 and 2016, loans invested in byThe following table provides the Company for which there were no associatedbalances of notes, certificates orand secured borrowings were as follows:at fair value at the end of the periods indicated:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Notes | $ | 863,488 |
| | $ | 1,176,333 |
|
| Certificates | 197,842 |
| | 648,908 |
|
| Secured borrowings | 20,136 |
| | 80,634 |
|
| Total notes, certificates and secured borrowings | $ | 1,081,466 |
| | $ | 1,905,875 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Loans Invested in by the Company |
| | Loans Held For Investment | | Loans Held For Sale | | Total |
December 31,
2017 | | December 31,
2016 | | December 31,
2017 | | December 31,
2016 | | December 31,
2017 | | December 31,
2016 |
| Aggregate principal balance outstanding | $ | 371,379 |
| | 18,515 |
| | $ | 242,273 |
| | $ | 9,345 |
| | $ | 613,652 |
| | $ | 27,860 |
|
| Net fair value adjustments | (10,149 | ) | | (1,652 | ) | | (6,448 | ) | | (297 | ) | | (16,597 | ) | | (1,949 | ) |
| Fair value | $ | 361,230 |
| | 16,863 |
| | $ | 235,825 |
| | $ | 9,048 |
| | $ | 597,055 |
| | $ | 25,911 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Loans Invested in by the Company
At December 31, 2019 and 2018, loans invested in by the Company for which there were no associated notes, certificates or secured borrowings (with the exception of $40.3 million and $286.3 million in loans in consolidated trusts as of December 31, 2019 and 2018, respectively) were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Invested in by the Company |
| | Loans Held for Investment | | Loans Held for Sale | | Total |
| December 31, | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Aggregate principal balance outstanding | $ | 47,042 |
| | $ | 3,518 |
| | $ | 747,394 |
| | $ | 869,715 |
| | $ | 794,436 |
| | $ | 873,233 |
|
| Net fair value adjustments | (3,349 | ) | | (935 | ) | | (25,039 | ) | | (29,694 | ) | | (28,388 | ) | | (30,629 | ) |
| Fair value | $ | 43,693 |
| | $ | 2,583 |
| | $ | 722,355 |
| | $ | 840,021 |
| | $ | 766,048 |
| | $ | 842,604 |
|
The net change in fair value adjustments of $(28.4) million, $(30.6) million and $(16.6) million represent net unrealized losses recorded in earnings on loans invested in by the Company wasat December 31, 2019, 2018 and 2017, respectively. Total fair value adjustments recorded in earnings on loans invested in by the Company of $(141.0) million, $(102.0) million and $(25.8) million during the yearyears ended December 31, 2017. This change was offset by $35.7 million2019, 2018 and 2017, respectively, include net realized losses and changes in net unrealized losses. Net interest income earned on the loans heldinvested in by the Company during the yearyears ended December 31, 2017.2019, 2018 and 2017 was $80.9 million, $90.9 million and $39.8 million, respectively.
The Company used its own capital to purchase $1.6$5.3 billion in loans during 2017the year ended December 31, 2019 and sold $990.3 million$5.1 billion in loans during 2017,the year ended December 31, 2019, of which $198.5 million$4.0 billion was securitized or contributedsold to CLUB Certificatesseries trusts in connection with the Company’s Certificate Program and sold and $791.8 million$1.1 billion was sold to whole loan investors. The aggregate principal balance outstandingfair value of loans invested in by the Company was $613.7$766.0 million at December 31, 2017, of2019, which $242.3 million was held for sale primarily to support upcoming securitization initiativesfor future anticipated Structured Program transactions and sales to whole loan investors. In the fourth quarter of 2019, the Company sponsored a new Structured Program transaction that was consolidated, resulting in the recognition of $40.3 million in loans held for investment by the Company at fair value and a related payable to securitization note and certificate holders of $40.6 million as of December 31, 2019. In May 2019, the Company deconsolidated a securitization trust, which resulted in the derecognition of $236.3 million in loans held for sale by the Company at fair value. See “Note 7. Securitizations and Variable Interest Entities” and “Note 14. Debt” for further discussion on the Company’s consolidated trusts and “Note 8. Fair Value of Assets and Liabilities”Liabilities” for a fair value rollforward of loans invested in by the Company for the years ended December 31, 20172019 and 2016.2018.
At December 31, 2017, $359.42019 and 2018, loans with a fair value of $551.5 million of the aggregate principal balance outstandingand $453.0 million included in “Loans held for investment” were pledged as collateral for payables to securitization note and residual certificate holders. Additionally, $62.1 million ofsale by the aggregate principal balance outstanding included in “Loans held for sale” wereCompany at fair value” was pledged as collateral for the WarehouseCompany’s warehouse credit facility.facilities, respectively. See “Note 13. Debt”14. Debt” for additional information related to these debt obligations.
The Company continues to evaluate the impact of natural disasters on loans held by LendingClub and investors. Temporary relief measures on payment obligations have been provided to borrowers who reside in the affected areas. At December 31, 2017, $14.0 million of loans invested in by the Company were to borrowers who reside in the affected areas. The Company has reviewed its portfolio for potential losses from these recent natural disasters and reflected additional expected credit losses for these loans in the valuation of loans invested in by the Company. The Company continues to monitor performance of these loans.
Loans that were 90 days or more past due (including non-accrual loans) were as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | > 90 days past due | | Non-accrual loans | | > 90 days past due | | Non-accrual loans |
| Loans held for investment and loans held for sale: | | | | | | | |
| Outstanding principal balance | $ | 36,588 |
| | $ | 3,289 |
| | $ | 45,207 |
| | $ | 4,965 |
|
| Net fair value adjustments | (30,071 | ) | | (2,675 | ) | | (39,734 | ) | | (4,312 | ) |
| Fair value | $ | 6,517 |
| | $ | 614 |
| | $ | 5,473 |
| | $ | 653 |
|
| Number of loans (not in thousands) | 3,779 |
| | 591 |
| | 3,887 |
| | 465 |
|
| | | | | | | | |
| Loans invested in by the Company: | | | | | | | |
| Outstanding principal balance | $ | 1,015 |
| | $ | 122 |
| | $ | 511 |
| | $ | 90 |
|
| Net fair value adjustments | (861 | ) | | (107 | ) | | (449 | ) | | (80 | ) |
| Fair value | $ | 154 |
| | $ | 15 |
| | $ | 62 |
| | $ | 10 |
|
| Number of loans (not in thousands) | 257 |
| | 34 |
| | 154 |
| | 18 |
|
Loan Servicing Rights
Loans underlying loan servicing rights had a total outstanding principal balance of $8.18 billion and $6.54 billion as of December 31, 2017 and 2016, respectively.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
6.Loans that were 90 days or more past due (including non-accrual loans) were as follows:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Loans held for investment: | | | |
| Outstanding principal balance | $ | 10,755 |
| | $ | 19,707 |
|
| Net fair value adjustments | (9,663 | ) | | (16,166 | ) |
| Fair value | $ | 1,092 |
| | $ | 3,541 |
|
| Number of loans (not in thousands) | 1,428 |
| | 2,309 |
|
| | | | |
| Loans invested in by the Company: | | | |
| Outstanding principal balance | $ | 2,315 |
| | $ | 2,060 |
|
| Net fair value adjustments | (2,016 | ) | | (1,710 | ) |
| Fair value | $ | 299 |
| | $ | 350 |
|
| Number of loans (not in thousands) | 338 |
| | 356 |
|
7. Securitizations and Variable Interest Entities
In the normal course of business, the Company engages in a variety of activities with VIEs. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with the variable interest entity and reconsiders that conclusion continually. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity. The consolidation analysis can generally be performed qualitatively, however if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. If the Company is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Company is determined not to be the primary beneficiary of a VIE such VIE is not consolidated. See “Note 2. Summary of Significant Accounting Policies” for additional information.
VIE Assets and Liabilities
The Company has segregated its involvement with VIEs between those VIEs which are consolidated and those VIEs which are not consolidated. The following tables provide the classifications of assets and liabilities on the Company’s Consolidated Balance Sheets for its transactions with consolidated and unconsolidated VIEs at December 31, 20172019 and 2016:
2018. Additionally, the assets and liabilities in the tables below exclude intercompany balances that eliminate in consolidation: | | | December 31, 2017 | Consolidated VIEs | | Unconsolidated VIEs | | Total | |
| December 31, 2019 | | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | | | | | | |
| Restricted cash | $ | 34,370 |
| | $ | — |
| | $ | 34,370 |
| $ | 30,046 |
| | $ | — |
| | $ | 30,046 |
|
| Securities available for sale | — |
| | 47,049 |
| | 47,049 |
| |
| Securities available for sale at fair value | | — |
| | 220,135 |
| | 220,135 |
|
| Loans held for investment at fair value | 1,202,260 |
| | — |
| | 1,202,260 |
| 197,842 |
| | — |
| | 197,842 |
|
| Loans held for investment by the Company at fair value | 350,699 |
| | — |
| | 350,699 |
| 40,251 |
| | — |
| | 40,251 |
|
| Loans held for sale by Company at fair value | 60,812 |
| | — |
| | 60,812 |
| |
| Loans held for sale by the Company at fair value | | 551,455 |
| | — |
| | 551,455 |
|
| Accrued interest receivable | 15,602 |
| | 407 |
| | 16,009 |
| 4,431 |
| | 877 |
| | 5,308 |
|
| Other assets | 6,324 |
| | 15,779 |
| | 22,103 |
| 1,359 |
| | 52,098 |
| | 53,457 |
|
| Total assets | $ | 1,670,067 |
| | $ | 63,235 |
| | $ | 1,733,302 |
| $ | 825,384 |
| | $ | 273,110 |
| | $ | 1,098,494 |
|
| Liabilities | | | | | | | | | | |
| Accrued interest payable | $ | 14,789 |
| | $ | — |
| | $ | 14,789 |
| $ | 3,185 |
| | $ | — |
| | $ | 3,185 |
|
| Accrued expenses and other liabilities | 52 |
| | 300 |
| | 352 |
| 244 |
| | — |
| | 244 |
|
| Notes, certificates and secured borrowings at fair value | 1,210,349 |
| | — |
| | 1,210,349 |
| 197,842 |
| | — |
| | 197,842 |
|
| Payable to securitization note and residual certificate holders | 312,123 |
| | — |
| | 312,123 |
| |
| Warehouse notes payable | 32,100 |
| | — |
| | 32,100 |
| |
| Credit facilities and securities sold under repurchase agreements | | 387,251 |
| | — |
| | 387,251 |
|
| Payable to securitization note and certificate holders at fair value | | 40,610 |
| | — |
| | 40,610 |
|
| Total liabilities | 1,569,413 |
| | 300 |
| | 1,569,713 |
| 629,132 |
| | — |
| | 629,132 |
|
| Total net assets | $ | 100,654 |
| | $ | 62,935 |
| | $ | 163,589 |
| $ | 196,252 |
| | $ | 273,110 |
| | $ | 469,362 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | |
| December 31, 2018 | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | |
| Restricted cash | $ | 43,918 |
| | $ | — |
| | $ | 43,918 |
|
| Securities available for sale at fair value | — |
| | 116,768 |
| | 116,768 |
|
| Loans held for investment at fair value | 642,094 |
| | — |
| | 642,094 |
|
| Loans held for sale by the Company at fair value | 739,216 |
| | — |
| | 739,216 |
|
| Accrued interest receivable | 10,438 |
| | 1,214 |
| | 11,652 |
|
| Other assets | 2,498 |
| | 29,206 |
| | 31,704 |
|
| Total assets | $ | 1,438,164 |
| | $ | 147,188 |
| | $ | 1,585,352 |
|
| Liabilities | | | | | |
| Accrued interest payable | $ | 7,594 |
| | $ | — |
| | $ | 7,594 |
|
| Accrued expenses and other liabilities | 1,627 |
| | — |
| | 1,627 |
|
| Notes, certificates and secured borrowings at fair value | 648,908 |
| | — |
| | 648,908 |
|
| Payable to securitization note and certificate holders | 256,354 |
| | — |
| | 256,354 |
|
| Credit facilities and securities sold under repurchase agreements | 306,790 |
| | 57,012 |
| | 363,802 |
|
| Total liabilities | 1,221,273 |
| | 57,012 |
| | 1,278,285 |
|
| Total net assets | $ | 216,891 |
| | $ | 90,176 |
| | $ | 307,067 |
|
|
| | | | | | | | | | | |
| December 31, 2016 | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | |
| Loans held for investment at fair value | $ | 2,600,422 |
| | $ | — |
| | $ | 2,600,422 |
|
| Accrued interest receivable | 24,037 |
| | — |
| | 24,037 |
|
| Other assets | — |
| | 10,122 |
| | 10,122 |
|
| Total assets | $ | 2,624,459 |
| | $ | 10,122 |
| | $ | 2,634,581 |
|
| Liabilities | | | | | |
| Accrued interest payable | $ | 26,839 |
| | $ | — |
| | $ | 26,839 |
|
| Notes, certificates and secured borrowings at fair value | 2,616,023 |
| | — |
| | 2,616,023 |
|
| Total liabilities | 2,642,862 |
| | — |
| | 2,642,862 |
|
| Total net assets | $ | (18,403 | ) | | $ | 10,122 |
| | $ | (8,281 | ) |
Consolidated VIEs
The Company consolidates VIEs when it is deemed to be the primary beneficiary. See “Note 2. Summary of Significant Accounting Policies”for additional information.
LC Trust Certificates
The Company established the LC Trust for the purpose of acquiring and holding loans for the sole benefit of certain investors that have purchased trust certificates issued by the Trust based on its power to direct the activities that most significantly impact the economic outcomes of the Trust through involvement in the design and ongoing activities and significant variable interest held in theLC Trust. The Company consolidates the loans held and the certificates issued by the Trust as it is the primary beneficiary of the Trust. As the primary beneficiary of the Trust, the Company is obligated theto ensure that the LC Trust meets minimum capital requirements with respect to funding the administrative activities and maintaining the operations of the LC Trust.
SecuritizationsConsolidated Trusts
The Company established LOAN, Depositor, Credit Trustestablishes trusts to facilitate the sale of loans and Grantor Trust forissuance of senior and subordinated securities. If the purpose of maintaining at least 5% ongoing interest to comply with regulatory credit risk retention rules in connection with securitizations of personal whole loans. The Company consolidates LOAN, Depositor, Credit Trust and Grantor Trust in its consolidated financial statements as it holds a controlling financial interest and is the primary beneficiary. The Company is the primary beneficiary of LOAN, Depositor, Credit Trustthe trust, it is a consolidated VIE and Grantor Trust based on its powerwill reflect senior and subordinated securities held by third parties as a “Payable to directsecuritization note and certificate holders” in the activities that most significantly impactCompany’s Consolidated Balance Sheets. If subsequently the economic outcomesCompany is not the primary beneficiary of the securitizations through its role as sponsortrust, the Company will deconsolidate the VIE. See “Note 2. Summary of Significant Accounting Policies” and servicer and significant variable interests through its interests in these VIEs.“Note 14. Debt” for additional information.
Warehouse Credit FacilityFacilities
The Company established Warehousecertain entities (deemed to be VIEs) to enter into warehouse credit facilities for the purpose of purchasing non-revolving personal whole loans from LendingClub, financing the purchase or acquisition of such assets through facility agreements and warehousing the assetsLendingClub. See “Note 14. Debt” for securitization or loan sales. The Company consolidates Warehouse in its consolidated financial statements as it is the primary beneficiary. The Company is the primary beneficiary of Warehouse based on its power to direct the activities that most significantly impact the economic outcomes of the VIE through role in the design and ongoing activities and significant variable interest held in the VIE.additional information.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The following table presents a summary of financial assets and liabilities from the Company’s involvement with consolidated VIEs at December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | |
| December 31, 2017 | Assets | | Liabilities | | Net Assets |
| Trust Certificates | $ | 1,226,957 |
| | $ | (1,224,473 | ) | | $ | 2,484 |
|
| Securitizations | 375,607 |
| | (312,832 | ) | | 62,775 |
|
| Warehouse Credit Facility | 67,503 |
| | (32,108 | ) | | 35,395 |
|
| Total consolidated VIEs | $ | 1,670,067 |
| | $ | (1,569,413 | ) | | $ | 100,654 |
|
|
| | | | | | | | | | | |
| December 31, 2019 | Assets | | Liabilities | | Net Assets |
| LC Trust | $ | 201,696 |
| | $ | (199,520 | ) | | $ | 2,176 |
|
| Consolidated Trusts | 43,300 |
| | (40,687 | ) | | 2,613 |
|
| Warehouse credit facilities | 580,388 |
| | (388,925 | ) | | 191,463 |
|
| Total consolidated VIEs | $ | 825,384 |
| | $ | (629,132 | ) | | $ | 196,252 |
|
|
| | | | | | | | | | | |
| December 31, 2016 | Assets | | Liabilities | | Net Assets |
| Trust Certificates | $ | 2,624,459 |
| | $ | (2,642,862 | ) | | $ | (18,403 | ) |
| Total consolidated VIEs | $ | 2,624,459 |
| | $ | (2,642,862 | ) | | $ | (18,403 | ) |
|
| | | | | | | | | | | |
| December 31, 2018 | Assets | | Liabilities | | Net Assets |
| LC Trust | $ | 657,339 |
| | $ | (656,088 | ) | | $ | 1,251 |
|
| Consolidated Trusts | 297,821 |
| | (256,901 | ) | | 40,920 |
|
| Warehouse credit facility | 483,004 |
| | (308,284 | ) | | 174,720 |
|
| Total consolidated VIEs | $ | 1,438,164 |
| | $ | (1,221,273 | ) | | $ | 216,891 |
|
The creditors of the VIEs above have no recourse to the general credit of the Company as the primary beneficiary of the VIEs and the liabilities of the VIEs can only be settled by the respective VIE’s assets.
Unconsolidated VIEs
The Company’s transactions with unconsolidated VIEs include asset-backed securitizations, Certificate Program transactions and loan sale transactions of unsecured personal whole loans and sales of personal whole loans to investment funds sponsored by LCAM.loans. The Company has various forms of involvement with VIEs, including servicing of loans and holding senior or subordinated residual interests in the VIEs. The accounting for these transactions is based on a primary beneficiary analysis to determine whether the underlying VIEs should be consolidated. If the VIEs are not consolidated and serving as the investment manager for sponsored investment funds.transfer of the loans from the Company to the VIE meets sale accounting criteria, then the Company will recognize a gain or loss on sales of loans. The Company considers continued involvement in an unconsolidated VIE insignificant when it relates to third-party sponsored VIEs for which it was not the transferor, unlessif it is servicer and has other significant forms of involvement, or if it was the sponsor only or sponsor and servicer butand does not have anyhold other forms of significant involvement.variable interests. In these instances, the Company’s involvement with the VIE is in the role as an agent and without significant participation in the economics of the VIE.
Securitizations
The Company sponsors securitizations of unsecured personal whole loans through issuances of fixed-rate asset-backed securities, which are collateralized by loans transferred to a VIE. Securitizations typically involve the transfer of unsecured personal whole loans to these VIEs with the transfer accounted for as a sale. In addition, the Company enters into separate servicing agreements with the VIEs and holds at least 5% of the beneficial interests issued by the VIEs. In certain instances,VIEs to comply with regulatory risk retention rules. The beneficial interests retained by the Company may service unsecured personal loan securitizations structured by third parties whose loans were transferred to the VIE by a party other than the Company. In the caseconsist of certain securitization transactions, the Company has also agreed to repurchase or substitute loans for which a borrower fails to make the first payment due under a loan.The Company has determined that the variable interests it holds with respect to the securitizationssenior securities and subordinated securities and are not potentially significant to the VIE, and as such, the Company is not the primary beneficiary.
CLUB Certificates
The Company sponsors the sale of unsecured personal whole loans through issuance of pass-through securities called CLUB Certificates, which are collateralized by loans transferred to a VIE. In December 2017, the Company introduced the CLUB Certificate, which is an instrument that trades in the over-the-counter market with a CUSIP. For each CLUB Certificate transaction, Master Trust establishes a series of the Master Trust (Series Trust). The CLUB Certificate transaction typically involves the transfer of unsecured personal whole loans to a Series Trust with the transfer accounted for as asecurities available for sale. In addition, the Company enters into a servicing agreementconnection with each applicable Series Trustthese transactions, we make certain customary representations, warranties and holds at least 5%covenants. See “Note 2. Summary of the beneficial interests issued by the Series Trust. The Company has determined that the variable interests it holds with respect to CLUB Certificates are not potentially significant to the VIE and as such, the Company is not the primary beneficiary.Significant Accounting Policies”for additional information.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Investment Fund
The Company has an equity investment in a holding companyprivate fund (Investment Fund) tothat participates in a family of funds thatwith other unrelated third parties. This family of funds purchases whole loans and interestinterests in loans from the Company, as well as other assets from third parties unrelated to the Company. As of December 31, 2019, the Company had an ownership interest of approximately 23% in the Investment Fund. The Company’s investment is deemed to be a variable interest in the Investment Fund because the limited partnership interestCompany shares in the expected returns and losses of the Investment Fund. However,At December 31, 2019, the CompanyCompany’s investment was $7.7 million, which is notrecognized in “Other assets” on the primary beneficiary of the Investment Fund because the Company does not have the powerCompany’s Consolidated Balance Sheets.
LENDINGCLUB CORPORATION
Notes to direct the activities that most significantly affect the Investment Fund’s economic performance. As a result, the Company does not consolidate the operations of the Investment FundConsolidated Financial Statements
(Tabular Amounts in its consolidated financial statements.Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The following tables summarize unconsolidated VIEs with which the Company has significant continuing involvement, but is not the primary beneficiary at December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | Carrying Value |
| | Total VIE Assets | | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Net Assets |
| Securitizations | $ | 863,589 |
| | $ | 45,256 |
| | $ | 391 |
| | $ | 5,446 |
| | $ | (300 | ) | | $ | 50,793 |
|
| CLUB Certificates | 36,833 |
| | 1,793 |
| | 16 |
| | 315 |
| | — |
| | 2,124 |
|
| Investment Fund | 40,494 |
| | — |
| | — |
| | 10,018 |
| | — |
| | 10,018 |
|
| Total unconsolidated VIEs | $ | 940,916 |
| | $ | 47,049 |
| | $ | 407 |
| | $ | 15,779 |
| | $ | (300 | ) | | $ | 62,935 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | Carrying Value |
| | Total VIE Assets | | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Securities Sold Under Repurchase Agreements | | Net Assets |
| Unconsolidated Trusts | $ | 1,909,219 |
| | $ | 93,881 |
| | $ | 362 |
| | $ | 18,768 |
| | $ | — |
| | $ | — |
| | $ | 113,011 |
|
| Certificate Program | 2,585,957 |
| | 126,254 |
| | 515 |
| | 25,588 |
| | — |
| | — |
| | 152,357 |
|
| Investment Fund | 34,170 |
| | — |
| | — |
| | 7,742 |
| | — |
| | — |
| | 7,742 |
|
| Total unconsolidated VIEs | $ | 4,529,346 |
| | $ | 220,135 |
| | $ | 877 |
| | $ | 52,098 |
| | $ | — |
| | $ | — |
| | $ | 273,110 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Maximum Exposure to Loss |
| | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Total Exposure |
| Securitizations | $ | 45,256 |
| | $ | 391 |
| | $ | 5,446 |
| | $ | 300 |
| | $ | 51,393 |
|
| CLUB Certificates | 1,793 |
| | 16 |
| | 315 |
| | — |
| | 2,124 |
|
| Investment Fund | — |
| | — |
| | 10,018 |
| | — |
| | 10,018 |
|
| Total unconsolidated VIEs | $ | 47,049 |
| | $ | 407 |
| | $ | 15,779 |
| | $ | 300 |
| | $ | 63,535 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Maximum Exposure to Loss |
| | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Securities Sold Under Repurchase Agreements | | Total Exposure |
| Unconsolidated Trusts | $ | 93,881 |
| | $ | 362 |
| | $ | 18,768 |
| | $ | — |
| | $ | — |
| | $ | 113,011 |
|
| Certificate Program | 126,254 |
| | 515 |
| | 25,588 |
| | — |
| | — |
| | 152,357 |
|
| Investment Fund | — |
| | — |
| | 7,742 |
| | — |
| | — |
| | 7,742 |
|
| Total unconsolidated VIEs | $ | 220,135 |
| | $ | 877 |
| | $ | 52,098 |
| | $ | — |
| | $ | — |
| | $ | 273,110 |
|
| | | December 31, 2016 | | | Carrying Value | | Maximum Exposure to Loss | |
| December 31, 2018 | | Carrying Value |
| | Total VIE Assets | | Other Assets | | Net Assets | | Other Assets | | Total Exposure | Total VIE Assets | | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Securities Sold Under Repurchase Agreements | | Net Assets |
| Unconsolidated Trusts | | $ | 1,359,367 |
| | $ | 68,338 |
| | $ | 958 |
| | $ | 11,838 |
| | $ | — |
| | $ | (57,012 | ) | | $ | 24,122 |
|
| Certificate Program | | 973,815 |
| | 48,430 |
| | 256 |
| | 9,115 |
| | — |
| | — |
| | 57,801 |
|
| Investment Fund | $ | 50,523 |
| | $ | 10,122 |
| | $ | 10,122 |
| | $ | 10,122 |
| | $ | 10,122 |
| 35,157 |
| | — |
| | — |
| | 8,253 |
| | — |
| | — |
| | 8,253 |
|
| Total unconsolidated VIEs | $ | 50,523 |
| | $ | 10,122 |
| | $ | 10,122 |
| | $ | 10,122 |
| | $ | 10,122 |
| $ | 2,368,339 |
| | $ | 116,768 |
| | $ | 1,214 |
| | $ | 29,206 |
| | $ | — |
| | $ | (57,012 | ) | | $ | 90,176 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | Maximum Exposure to Loss |
| | Securities Available for Sale | | Accrued Interest Receivable | | Other Assets | | Accrued Expenses and Other Liabilities | | Securities Sold Under Repurchase Agreements | | Total Exposure |
| Unconsolidated Trusts | $ | 68,339 |
| | $ | 958 |
| | $ | 11,838 |
| | $ | — |
| | $ | — |
| | $ | 81,135 |
|
| Certificate Program | 48,431 |
| | 256 |
| | 9,115 |
| | — |
| | — |
| | 57,802 |
|
| Investment Fund | — |
| | — |
| | 8,253 |
| | — |
| | — |
| | 8,253 |
|
| Total unconsolidated VIEs | $ | 116,770 |
| | $ | 1,214 |
| | $ | 29,206 |
| | $ | — |
| | $ | — |
| | $ | 147,190 |
|
“Total VIE Assets” represents the remaining principal balance of loans held by unconsolidated VIEs with respect to securitizations and CLUB Certificates,Unconsolidated Trusts, Certificate Program transactions, and the net assets held by the investment fundInvestment Fund using the most current information available. “Securities Available for Sale,” “Accrued Interest Receivable,” “Other Assets” and “Accrued Expenses and Other Liabilities” are the balances in the Company’s Consolidated Balance Sheets
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
related to its involvement with the unconsolidated VIEs. “Other Assets” includes the Company’s servicing assets associated with loans transferred as part of securitizations and CLUB Certificatesservicing receivables and the Company’s equity investment with respect to the Investment Fund. “Total Exposure” refers to the Company’s maximum exposure to loss from its involvement with unconsolidated VIEs. It represents estimated loss that would be incurred under severe, hypothetical circumstances, for which the Company believes the possibility is extremely remote, such as where the value of
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
interests and any associated collateral declines to zero. Accordingly, this required disclosure is not an indication of expected losses.
Personal Whole Loan Securitizations
The Company securitizes certain prime and near-prime unsecured personal whole loans through asset-backed securitization transactions. The loans are facilitated through the Company’s lending marketplace with the Company and third-party whole loan investors contributing loans. In connection with the securitizations, the Company established VIEs to purchase the loans from the Company and third-party whole loan investors and simultaneously transferred the loans to a securitization trust with the transfer accounted for as a sale of financial assets. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company are not available to satisfy its obligations. These assets can only be used to settle obligations of the securitization trust or other securitization vehicle.
During the year ended December 31, 2017, securitization trusts issued senior securities and subordinated residual certificates and Master Trust issued CLUB Certificates by the respective VIEs as consideration for the transferred loans. The VIEs sold 95% of the senior securities to third-party investors and then distributed the cash and the subordinated residual certificates to the Company and third-party whole loan investors. The Company subsequently sold a portion of its allocated subordinated residual certificates in prime unsecured personal whole loans to a third-party whole loan investor.
To comply with regulatory credit risk retention rules, the Company retained at least 5% of each of the senior securities, subordinated residual certificates and CLUB Certificates. Additionally, the Company’s continued involvement includes loan servicing responsibilities for which it receives servicing fees over the life of the underlying loans.
The senior securities, subordinated residual certificates and CLUB Certificates are accounted for as securities available for sale. See “Note 2. Summary of Significant Accounting Policies” and “Note 7. Fair Value of Assets and Liabilities” for additional information.
The following table summarizes activity related to the unconsolidated personal whole loan securitizationstrusts and personal whole loan CLUB CertificatesCertificate Program trusts, with the transfers accounted for as a sale on the Company’s consolidated financial statements for the yearyears ended December 31, 2017:2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 |
| | Unconsolidated Trusts | | Unconsolidated Certificate
Program
Trusts | | Unconsolidated Trusts | | Unconsolidated Certificate
Program
Trusts |
| Principal derecognized from loans securitized or sold | $ | 1,553,847 |
| | $ | 2,868,709 |
| | $ | 1,300,838 |
| | $ | 1,145,616 |
|
| Net gains (losses) recognized from loans securitized or sold | $ | 4,809 |
| | $ | 32,417 |
| | $ | 6,039 |
| | $ | 10,483 |
|
Fair value of asset-backed senior and subordinated securities, and CLUB Certificate asset-backed securities retained upon settlement (1) | $ | 75,924 |
| | $ | 140,825 |
| | $ | 65,653 |
| | $ | 56,764 |
|
| Cash proceeds from loans securitized or sold | $ | 1,212,521 |
| | $ | 2,555,713 |
| | $ | 867,875 |
| | $ | 1,088,212 |
|
| Cash proceeds from servicing and other administrative fees on loans securitized or sold | $ | 16,961 |
| | $ | 17,071 |
| | $ | 13,725 |
| | $ | 3,650 |
|
| Cash proceeds for interest received on senior securities and subordinated securities | $ | 5,022 |
| | $ | 7,717 |
| | $ | 3,049 |
| | $ | 1,747 |
|
|
| | | | | | | |
| Year Ended December 31, | 2017 |
| | Personal Whole Loan Securitizations | | Personal Whole Loan CLUB Certificates |
| Principal derecognized from loans securitized or sold | $ | 999,128 |
| | $ | 37,779 |
|
| Net gains (losses) recognized from loans securitized or sold | $ | 4,987 |
| | $ | (177 | ) |
Fair value of senior securities and subordinated certificates retained upon settlement (1) | $ | 53,154 |
| | $ | 1,802 |
|
| Cash proceeds from loans securitized or sold | $ | 812,851 |
| | $ | 34,575 |
|
| Cash proceeds from subordinated certificates sold | $ | 6,300 |
| | $ | — |
|
| Cash proceeds from servicing and other administrative fees on loans securitized or sold | $ | 2,641 |
| | $ | 21 |
|
| Cash proceeds for interest received on senior securities and subordinated certificates | $ | 300 |
| | $ | 5 |
|
| |
(1) | For personal whole loan securitizations,Structured Program transactions, the Company retained asset-backed senior securities of $43.4$98.7 million and $57.3 million, CLUB Certificate asset-backed securities of $101.3 million and $56.8 million, and asset-backed subordinated certificatessecurities of $9.7 million.$16.8 million and $8.3 million for the years ended December 31, 2019 and 2018, respectively. |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
There were no activities related to Company-sponsored securitizations or CLUB Certificate transactions during the years ended December 31, 2016 and 2015.
Off-Balance Sheet Loans
Off-balance sheet loans primarily relate to securitized unsecured personal whole loansStructured Program transactions for which the Company has some form of continuing involvement, including as servicer. Delinquent loans containare comprised of loans 31 days or more past due, including non-accrual loans. For loans securitized,related to Structured Program transactions where servicing is the only form of continuing involvement, the Company would only experience a loss if it was required to repurchase a delinquent loan due to a breach in representations and warranties associated with ourits loan sale or servicing contracts.
As of December 31, 2017,2019, the aggregate unpaid principal balance of the off-balance sheet loans pursuant to Company-sponsored securitization transactions and CLUB CertificateStructured Program transactions was $900.4 million,$4.4 billion, of which $26.5$145.6 million was attributable to off-balance sheet loans that were 31 days or more past due. As of December 31, 2016, there were no2018, the aggregate unpaid principal balance of the off-balance sheet loans relatedpursuant to Company-sponsored securitization transactions.Structured Program transactions was $2.3 billion, of which $87.1 million was attributable to off-balance sheet loans that were 31 days or more past due.
Retained Interests from Unconsolidated VIEs
The Company and other investors in the subordinated residual certificates have rights to cash flows after the investors holding the senior securities issued by the securitization trusts have first received their contractual cash flows. The investors and the securitization trusts have no recourse to the Company’s assets, and holders of the securities issued by the securitization trusts can look only to the assets of the securitization trusts that issued their securities for payment. The beneficial interests held by the Company and MOA are subject principally to the credit and prepayment risk stemming from the underlying personal whole loans. The Company holds a portion of each issuance of CLUB Certificates. Accordingly, the Company has exposure to the loans underlying this pass through security.
The fair value sensitivity of the senior securities, subordinated residual certificates and CLUB Certificates to adverse changes in key assumptions are as follows:
|
| | | | | | | | | | | |
| | December 31, 2017 |
| | Asset-Backed Securities Related to Company-Sponsored Securitizations and CLUB Certificate Transactions |
| | Senior
Securities | | Subordinated Residual Certificates | | CLUB Certificates |
| Fair value of interests held | $ | 37,020 |
| | $ | 8,236 |
| | $ | 1,793 |
|
| Expected weighted-average life (in years) | 1.0 |
| | 1.5 |
| | 1.4 |
|
| Discount rates | | | | | |
| 100 basis point increase | $ | (326 | ) | | $ | (105 | ) | | $ | (41 | ) |
| 200 basis point increase | $ | (644 | ) | | $ | (208 | ) | | $ | (76 | ) |
| Expected credit loss rates on underlying loans | | | | | |
| 10% adverse change | $ | (1 | ) | | $ | (1,060 | ) | | $ | (15 | ) |
| 20% adverse change | $ | (2 | ) | | $ | (2,118 | ) | | $ | (25 | ) |
| Expected prepayment rates | | | | | |
| 10% adverse change | $ | (1 | ) | | $ | (265 | ) | | $ | (21 | ) |
| 20% adverse change | $ | (3 | ) | | $ | (513 | ) | | $ | (42 | ) |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
There wereRetained Interests from Unconsolidated VIEs
The Company and other investors in the subordinated interests issued by trusts and Certificate Program trusts have rights to cash flows only after the investors holding the senior securities issued by the trusts have first received their contractual cash flows. The investors and the trusts have no activitiesdirect recourse to the Company’s assets, and holders of the securities issued by the trusts can look only to the assets of the trusts that issued their securities for payment. The beneficial interests held by the Company and the Company’s MOA are subject principally to the credit and prepayment risk stemming from the underlying unsecured personal whole loans.
See “Note 8. Fair Value of Assets and Liabilities” for additional information on the fair value sensitivity of asset-backed securities related to Company-sponsored securitizations or CLUB Certificate transactions during the year ended December 31, 2016.Structured Program transactions.
7.8. Fair Value of Assets and Liabilities
For a description of the fair value hierarchy and the Company’s fair value methodologies, see “Note 2. Summary of Significant Accounting Policies.” The Company records certain assets and liabilities at fair value as listed in the following tables.
Financial Instruments, Assets and Liabilities Recorded at Fair Value
The following tables present the fair value hierarchy for assets and liabilities measured at fair value:value at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| December 31, 2019 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | |
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 1,079,315 |
| | $ | 1,079,315 |
|
| Loans held for investment by the Company | — |
| | — |
| | 43,693 |
| | 43,693 |
|
| Loans held for sale by the Company | — |
| | — |
| | 722,355 |
| | 722,355 |
|
| Securities available for sale: | | | | | | | |
| Asset-backed senior securities and subordinated securities | — |
| | 109,339 |
| | 21,090 |
| | 130,429 |
|
| CLUB Certificate asset-backed securities | — |
| | — |
| | 89,706 |
| | 89,706 |
|
| Corporate debt securities | — |
| | 14,343 |
| | — |
| | 14,343 |
|
| Certificates of deposit |
|
| | 13,100 |
| | — |
| | 13,100 |
|
| Other asset-backed securities | — |
| | 12,080 |
| | — |
| | 12,080 |
|
| Commercial paper | — |
| | 9,274 |
| | — |
| | 9,274 |
|
| U.S. agency securities | — |
| | 1,995 |
| | — |
| | 1,995 |
|
| Total securities available for sale | — |
| | 160,131 |
| | 110,796 |
| | 270,927 |
|
| Servicing assets | — |
| | — |
| | 89,680 |
| | 89,680 |
|
| Total assets | $ | — |
| | $ | 160,131 |
| | $ | 2,045,839 |
| | $ | 2,205,970 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Notes, certificates and secured borrowings | $ | — |
| | $ | — |
| | $ | 1,081,466 |
| | $ | 1,081,466 |
|
| Payable to securitization note and certificate holders | — |
| | — |
| | 40,610 |
| | 40,610 |
|
| Loan trailing fee liability | — |
| | — |
| | 11,099 |
| | 11,099 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 1,133,175 |
| | $ | 1,133,175 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | |
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 2,932,325 |
| | $ | 2,932,325 |
|
| Loans held for investment by the Company | — |
| | — |
| | 361,230 |
| | 361,230 |
|
| Loans held for sale by the Company | — |
| | — |
| | 235,825 |
| | 235,825 |
|
| Securities available for sale: | | | | | | | |
| Asset-backed senior securities related to Company-sponsored securitizations | — |
| | 37,020 |
| | — |
| | 37,020 |
|
| Certificates of deposit | — |
| | 24,758 |
| | — |
| | 24,758 |
|
| Corporate debt securities | — |
| | 16,258 |
| | — |
| | 16,258 |
|
| Asset-backed securities | — |
| | 14,843 |
| | — |
| | 14,843 |
|
| Commercial paper | — |
| | 14,665 |
| | — |
| | 14,665 |
|
| Asset-backed subordinated residual certificates related to Company-sponsored securitizations and CLUB Certificate transactions | — |
| | — |
| | 10,029 |
| | 10,029 |
|
| Total securities available for sale | — |
| | 107,544 |
| | 10,029 |
| | 117,573 |
|
| Servicing assets | — |
| | — |
| | 33,676 |
| | 33,676 |
|
| Total assets | $ | — |
| | $ | 107,544 |
| | $ | 3,573,085 |
| | $ | 3,680,629 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Notes, certificates and secured borrowings | — |
| | — |
| | 2,954,768 |
| | 2,954,768 |
|
| Payable to securitization residual certificate holders | — |
| | — |
| | 1,479 |
| | 1,479 |
|
| Servicing liabilities | — |
| | — |
| | 833 |
| | 833 |
|
| Loan trailing fee liability | — |
| | — |
| | 8,432 |
| | 8,432 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 2,965,512 |
| | $ | 2,965,512 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | |
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 1,883,251 |
| | $ | 1,883,251 |
|
| Loans held for investment by the Company | — |
| | — |
| | 2,583 |
| | 2,583 |
|
| Loans held for sale by the Company | — |
| | — |
| | 840,021 |
| | 840,021 |
|
| Securities available for sale: | | | | | | | |
| Asset-backed senior securities and subordinated securities | — |
| | 56,489 |
| | 11,849 |
| | 68,338 |
|
| Certificates of deposit | — |
| | 14,929 |
| | — |
| | 14,929 |
|
| Corporate debt securities | — |
| | 17,328 |
| | — |
| | 17,328 |
|
| Other asset-backed securities | — |
| | 11,225 |
| | — |
| | 11,225 |
|
| Commercial paper | — |
| | 9,720 |
| | — |
| | 9,720 |
|
| CLUB Certificate asset-backed securities | — |
| | — |
| | 48,430 |
| | 48,430 |
|
| Other securities | — |
| | 499 |
| | — |
| | 499 |
|
| Total securities available for sale | — |
| | 110,190 |
| | 60,279 |
| | 170,469 |
|
| Servicing assets | — |
| | — |
| | 64,006 |
| | 64,006 |
|
| Total assets | $ | — |
| | $ | 110,190 |
| | $ | 2,850,140 |
| | $ | 2,960,330 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Note, certificates and secured borrowings | $ | — |
| | $ | — |
| | $ | 1,905,875 |
| | $ | 1,905,875 |
|
| Loan trailing fee liability | — |
| | — |
| | 10,010 |
| | 10,010 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 1,915,885 |
| | $ | 1,915,885 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | |
| Loans held for investment | $ | — |
| | $ | — |
| | $ | 4,295,121 |
| | $ | 4,295,121 |
|
| Loans held for investment by the Company | — |
| | — |
| | 16,863 |
| | 16,863 |
|
| Loans held for sale by the Company | — |
| | — |
| | 9,048 |
| | 9,048 |
|
| Securities available for sale: | | | | | | | |
| Corporate debt securities | — |
| | 181,223 |
| | — |
| | 181,223 |
|
| Certificates of deposit | — |
| | 27,501 |
| | — |
| | 27,501 |
|
| Asset-backed securities | — |
| | 25,364 |
| | — |
| | 25,364 |
|
| Commercial paper | — |
| | 20,164 |
| | — |
| | 20,164 |
|
| U.S. agency securities | — |
| | 19,623 |
| | — |
| | 19,623 |
|
| U.S. Treasury securities | — |
| | 2,496 |
| | — |
| | 2,496 |
|
| Other securities | — |
| | 10,766 |
| | — |
| | 10,766 |
|
| Total securities available for sale | — |
| | 287,137 |
| | — |
| | 287,137 |
|
| Servicing assets | — |
| | — |
| | 21,398 |
| | 21,398 |
|
| Total assets | $ | — |
| | $ | 287,137 |
| | $ | 4,342,430 |
| | $ | 4,629,567 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Notes and certificates | $ | — |
| | $ | — |
| | $ | 4,320,895 |
| | $ | 4,320,895 |
|
| Loan trailing fee liability | — |
| | — |
| | 4,913 |
| | 4,913 |
|
| Servicing liabilities | — |
| | — |
| | 2,846 |
| | 2,846 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 4,328,654 |
| | $ | 4,328,654 |
|
As presented in the tables above, the Company has elected the fair value option for certain liabilities. Changes in the fair value of these financial liabilities caused by a change in the Company’s risk are reported in other comprehensive income (OCI). For the year ended December 31, 2019, the amount reported in OCI is zero because these financial liabilities are either payable only upon receipt of cash flows from underlying loans or secured by cash collateral.
Financial instruments are categorized in the valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. Since the Company’s loans held for investment and related notes, certificates and secured borrowings, loans held for sale, loan servicing rights, asset-backed securities related to consolidated VIEs,Structured Program transactions, and loan trailing fee liability do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, changes in fair value for assets and liabilities within the Level 2 or Level 3 categories may include changes in fair value that were attributable to observable and unobservable inputs, respectively. The Company did not transfer any assets or liabilities in or out of Level 3 during the years ended December 31, 2017 or 2016.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Significant Unobservable Inputs
The Company primarily uses a discounted cash flow model to estimate the fair value of Level 3 instruments based on the present value of estimated future cash flows. This model uses inputs that are inherently judgmental and reflect our best estimates of the assumptions a market participant would use to calculate fair value. The Company did not transfer any assets or liabilities in or out of Level 3 during the years ended December 31, 2019 or 2018.
Fair valuation adjustments are recorded through earnings related to Level 3 instruments for the years ended December 31, 2019 and 2018. Certain unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. When multiple
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
inputs are used within the valuation techniques, a change in one input in a certain direction may be offset by an opposite change from another input.
Loans Held for Investment, Notes, Certificates and Secured Borrowings
Significant Unobservable Inputs
The following tables presenttable presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans held for investment, notes, certificates and secured borrowings at December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Loans Held for Investment, Notes, Certificates and Secured Borrowings |
| | | | | | | | December 31, 2019 | | December 31, 2018 |
| | | | | | | | Minimum | | Maximum | | Weighted- Average | | Minimum | | Maximum | | Weighted- Average |
| Discount rates | | 6.0 | % | | 12.0 | % | | 7.9 | % | | 6.3 | % | | 16.4 | % | | 9.1 | % |
Net cumulative expected loss rates (1) | | 3.6 | % | | 34.9 | % | | 11.9 | % | | 2.8 | % | | 36.9 | % | | 12.8 | % |
Cumulative expected prepayment rates (1) | | 28.7 | % | | 38.6 | % | | 31.7 | % | | 27.8 | % | | 40.3 | % | | 31.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | December 31, 2017 |
| | | | Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings (1) | | Asset-Backed Securities Related to Consolidated VIEs |
| | | | | | | | Minimum | | Maximum | | Weighted Average | | Minimum | | Maximum | | Weighted Average |
| Discount rates | | 1.7 | % | | 17.2 | % | | 8.5 | % | | 5.8 | % | | 15.0 | % | | 9.5 | % |
Net cumulative expected loss rates (2)(4) | | 0.4 | % | | 41.8 | % | | 13.8 | % | | 10.9 | % | | 37.2 | % | | 19.7 | % |
Cumulative expected prepayment rates (2)(4) | | 11.3 | % | | 51.0 | % | | 31.6 | % | | 28.3 | % | | 33.7 | % | | 30.5 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | December 31, 2017 |
| | | | Servicing Assets/Liabilities | | Loan Trailing Fee Liability |
| | | | | | | | Minimum | | Maximum | | Weighted Average | | Minimum | | Maximum | | Weighted Average |
| Discount rates | | | | | | | 1.9 | % | | 17.1 | % | | 8.8 | % | | 1.9 | % | | 17.1 | % | | 8.9 | % |
Net cumulative expected loss rates (2) | | 0.4 | % | | 41.8 | % | | 12.4 | % | | 0.8 | % | | 41.8 | % | | 13.2 | % |
Cumulative expected prepayment rates (2) | | 11.3 | % | | 51.0 | % | | 31.7 | % | | 11.3 | % | | 51.0 | % | | 31.4 | % |
Total market servicing rates (% per annum on outstanding principal balance) (3) | | 0.66 | % | | 0.90 | % | | 0.66 | % | | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Loans Held for Investment, Loans Held for Sale, Notes and Certificates (1) | | Servicing Assets/Liabilities | | Loan Trailing Fee Liability |
| | Minimum | | Maximum | | Weighted Average | | Minimum | | Maximum | | Weighted Average | | Minimum | | Maximum | | Weighted Average |
| Discount rates | 1.2 | % | | 16.6 | % | | 7.2 | % | | 3.4 | % | | 15.1 | % | | 7.8 | % | | 3.4 | % | | 15 | % | | 7.7 | % |
Net cumulative expected loss rates (2) | 0.3 | % | | 33.9 | % | | 14.6 | % | | 0.3 | % | | 33.9 | % | | 12.8 | % | | 0.3 | % | | 33.9 | % | | 13.5 | % |
Cumulative expected prepayment rates (2) | 8.0 | % | | 42.7 | % | | 30.7 | % | | 8.0 | % | | 42.7 | % | | 29.3 | % | | 8.0 | % | | 42.7 | % | | 28.3 | % |
Total market servicing rates (% per annum on outstanding principal balance) (3) | N/A |
| | N/A |
| | N/A |
| | 0.63 | % | | 0.90 | % | | 0.63 | % | | N/A |
| | N/A |
| | N/A |
|
N/A Not applicable
| |
(1) | Loans held for investment and loans held for sale include loans invested in by the Company. |
| |
(2)
| Expressed as a percentage of the original principal balance of the loan, note, certificate or secured borrowing, except for asset-backed securities. |
| |
(3)
| Includes collection fees estimated to be paid to a hypothetical third-party servicer. |
| |
(4)
| For asset-backed securities, expressed as a percentage of the outstanding collateral balance.borrowing. |
Significant Recurring Level 3 Fair Value Input Sensitivity
At December 31, 20172019 and 2016,2018, the discounted cash flow methodology used to estimate the note, certificate and secured borrowings’ fair values used the same projected net cash flows as their related loans. As demonstrated by the following tables, the fair value adjustments for loans held for investment and loans held for sale were largely offset by the corresponding fair value adjustments due to the payment dependent design of the notes, certificates and secured borrowings.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
the following tables, the fair value adjustments for loans held for investment and loans held for sale were largely offset by the fair value adjustments of the notes, certificates and secured borrowings due to the payment dependent design of the notes, certificates and secured borrowings and because the principal balances of the loans were close to the combined principal balances of the notes, certificates and secured borrowings.Fair Value Reconciliation
The following table presents additional information about Level 3 loans held for investment, loans held for sale, and notes, certificates and secured borrowings measured at fair value on a recurring basis for the years ended December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held For Investment | | Loans Held for Sale | | Notes, Certificates and Secured Borrowings |
| | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value |
| Balance at December 31, 2017 | $ | 3,141,391 |
| | $ | (209,066 | ) | | $ | 2,932,325 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,161,080 |
| | $ | (206,312 | ) | | $ | 2,954,768 |
|
| Purchases | 953,034 |
| | 26 |
| | 953,060 |
| | 3,141,891 |
| | (5,714 | ) | | 3,136,177 |
| | — |
| | — |
| | — |
|
| Transfers (to) from loans held for investment and/or loans held for sale | (1,180 | ) | | (22,152 | ) | | (23,332 | ) | | 1,180 |
| | 22,152 |
| | 23,332 |
| | — |
| | — |
| | — |
|
| Issuances | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 953,904 |
| | — |
| | 953,904 |
|
| Sales | — |
| | — |
| | — |
| | (3,143,071 | ) | | 1,548 |
| | (3,141,523 | ) | | — |
| | — |
| | — |
|
| Principal payments and retirements | (1,754,293 | ) | | — |
| | (1,754,293 | ) | | — |
| | — |
| | — |
| | (1,756,212 | ) | | 111 |
| | (1,756,101 | ) |
| Charge-offs, net of recoveries | (325,514 | ) | | 263,022 |
| | (62,492 | ) | | — |
| | — |
| | — |
| | (325,514 | ) | | 263,020 |
| | (62,494 | ) |
| Change in fair value recorded in earnings | — |
| | (162,017 | ) | | (162,017 | ) | | — |
| | (17,986 | ) | | (17,986 | ) | | — |
| | (184,202 | ) | | (184,202 | ) |
| Balance at December 31, 2018 | $ | 2,013,438 |
| | $ | (130,187 | ) | | $ | 1,883,251 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,033,258 |
| | $ | (127,383 | ) | | $ | 1,905,875 |
|
| Purchases | 632,962 |
| | (21 | ) | | 632,941 |
| | 2,490,734 |
| | (26,560 | ) | | 2,464,174 |
| | — |
| | — |
| | — |
|
| Transfers (to) from loans held for investment and/or loans held for sale | (123,036 | ) | | — |
| | (123,036 | ) | | 122,330 |
| | — |
| | 122,330 |
| | — |
| | — |
| | — |
|
| Issuances | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 632,962 |
| | — |
| | 632,962 |
|
| Sales | — |
| | — |
| | — |
| | (2,613,064 | ) | | 24,789 |
| | (2,588,275 | ) | | — |
| | — |
| | — |
|
| Principal payments and retirements | (1,183,670 | ) | | — |
| | (1,183,670 | ) | | — |
| | — |
| | — |
| | (1,326,526 | ) | | 14 |
| | (1,326,512 | ) |
| Charge-offs, net of recoveries | (190,806 | ) | | 138,857 |
| | (51,949 | ) | | — |
| | — |
| | — |
| | (190,806 | ) | | 135,785 |
| | (55,021 | ) |
| Change in fair value recorded in earnings | — |
| | (78,222 | ) | | (78,222 | ) | | — |
| | 1,771 |
| | 1,771 |
| | — |
| | (75,838 | ) | | (75,838 | ) |
| Balance at December 31, 2019 | $ | 1,148,888 |
| | $ | (69,573 | ) | | $ | 1,079,315 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,148,888 |
| | $ | (67,422 | ) | | $ | 1,081,466 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held For Investment | | Loans Held for Sale | | Notes, Certificates and Secured Borrowings |
| | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value |
| Balance at December 31, 2015 | $ | 4,678,209 |
| | $ | (125,586 | ) | | $ | 4,552,623 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,697,169 |
| | $ | (125,586 | ) | | $ | 4,571,583 |
|
| Purchases | 2,653,589 |
| | — |
| | 2,653,589 |
| | 4,638,436 |
| | — |
| | 4,638,436 |
| | — |
| | — |
| | — |
|
| Transfers (to) from loans held for investment (from) to loans held for sale | 20,573 |
| | — |
| | 20,573 |
| | (20,573 | ) | — |
| — |
| | (20,573 | ) | | — |
| | — |
| | — |
|
| Issuances | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,681,109 |
| | — |
| | 2,681,109 |
|
| Sales | — |
| | — |
| | — |
| | (4,617,863 | ) | | — |
| | (4,617,863 | ) | | — |
| | — |
| | — |
|
| Principal payments and retirements | (2,385,102 | ) | | — |
| | (2,385,102 | ) | | — |
| | — |
| | — |
| | (2,385,234 | ) | | — |
| | (2,385,234 | ) |
| Charge-offs | (420,131 | ) | | 420,131 |
| | — |
| | — |
| | — |
| | — |
| | (420,132 | ) | | 420,132 |
| | — |
|
| Recoveries | — |
| | (36,784 | ) | | (36,784 | ) | | — |
| | — |
| | — |
| | — |
| | (36,785 | ) | | (36,785 | ) |
| Change in fair value recorded in earnings | — |
| | (509,778 | ) | | (509,778 | ) | | — |
| | — |
| | — |
| | — |
| | (509,778 | ) | | (509,778 | ) |
| Balance at December 31, 2016 | $ | 4,547,138 |
| | $ | (252,017 | ) | | $ | 4,295,121 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,572,912 |
| | $ | (252,017 | ) | | $ | 4,320,895 |
|
| Purchases | 1,720,343 |
| | 5 |
| | 1,720,348 |
| | 5,232,503 |
| | 6,420 |
| | 5,238,923 |
| | — |
| | — |
| | — |
|
| Transfers (to) from loans held for investment (from) to loans held for sale | (253,124 | ) | | (4,112 | ) | | (257,236 | ) | | 253,124 |
| | 4,112 |
| | 257,236 |
| | — |
| | — |
| | — |
|
| Issuances | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,019,316 |
| | (17,937 | ) | | 2,001,379 |
|
| Sales | — |
| | — |
| | — |
| | (5,483,146 | ) | | 8,067 |
| | (5,475,079 | ) | | — |
| | — |
| | — |
|
| Principal payments and retirements | (2,383,510 | ) | | — |
| | (2,383,510 | ) | | (2,481 | ) | | — |
| | (2,481 | ) | | (2,941,692 | ) | | 31,606 |
| | (2,910,086 | ) |
| Charge-offs | (489,456 | ) | | 489,456 |
| | — |
| | — |
| | — |
| | — |
| | (489,456 | ) | | 489,456 |
| | — |
|
| Recoveries | — |
| | (47,913 | ) | | (47,913 | ) | | — |
| | — |
| | — |
| | — |
| | (47,914 | ) | | (47,914 | ) |
| Change in fair value recorded in earnings | — |
| | (394,485 | ) | | (394,485 | ) | | — |
| | (18,599 | ) | | (18,599 | ) | | — |
| | (409,506 | ) | | (409,506 | ) |
| Balance at December 31, 2017 | $ | 3,141,391 |
| | $ | (209,066 | ) | | $ | 2,932,325 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,161,080 |
| | $ | (206,312 | ) | | $ | 2,954,768 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Loans Invested in by the Company
Significant Unobservable Inputs
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans invested in by the Company at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Loans Invested in by the Company |
| | | | | | | | December 31, 2019 | | December 31, 2018 |
| | | | | | | | Minimum | | Maximum | | Weighted-
Average | | Minimum | | Maximum | | Weighted-
Average |
| Discount rates | | 6.0 | % | | 11.5 | % | | 7.8 | % | | 5.9 | % | | 16.7 | % | | 9.4 | % |
Net cumulative expected loss rates (1) | | 3.6 | % | | 36.6 | % | | 10.9 | % | | 2.6 | % | | 36.8 | % | | 13.2 | % |
Cumulative expected prepayment rates (1) | | 27.3 | % | | 41.0 | % | | 31.6 | % | | 27.0 | % | | 45.5 | % | | 32.5 | % |
| |
(1) | Expressed as a percentage of the original principal balance of the loan. |
Significant Recurring Level 3 Fair Value Input Sensitivity
The fair value sensitivity of loans invested in by the Company to adverse changes in key assumptions as of December 31, 2019 and 2018, are as follows:
|
| | | | | | |
| | December 31, 2019 | December 31, 2018 |
| Fair value of loans invested in by the Company | $ | 766,048 |
| $ | 842,604 |
|
| Expected weighted-average life (in years) | 1.5 |
| 1.4 |
|
| Discount rates | | |
| 100 basis point increase | $ | (9,806 | ) | $ | (10,487 | ) |
| 200 basis point increase | $ | (19,410 | ) | $ | (20,720 | ) |
| Expected credit loss rates on underlying loans | | |
| 10% adverse change | $ | (9,558 | ) | $ | (11,304 | ) |
| 20% adverse change | $ | (19,136 | ) | $ | (22,504 | ) |
| Expected prepayment rates | | |
| 10% adverse change | $ | (2,429 | ) | $ | (2,422 | ) |
| 20% adverse change | $ | (4,740 | ) | $ | (4,785 | ) |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Fair Value Reconciliation
The following table presents additional information about Level 3 loans invested in by the Company measured at fair value on a recurring basis for the years ended December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held For Investment by the Company | | Loans Held For Sale by the Company | | Total Loans Invested in by the Company |
| | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value |
Balance at December 31, 2017 | $ | 371,379 |
| | $ | (10,149 | ) | | $ | 361,230 |
| | $ | 242,273 |
| | $ | (6,448 | ) | | $ | 235,825 |
| | $ | 613,652 |
| | $ | (16,597 | ) | | $ | 597,055 |
|
| Purchases | 8,697 |
| | (876 | ) | | 7,821 |
| | 4,353,458 |
| | (2,739 | ) | | 4,350,719 |
| | 4,362,155 |
| | (3,615 | ) | | 4,358,540 |
|
| Transfers (to) from loans held for investment and/or loans held for sale | (324,626 | ) | | 22,152 |
| | (302,474 | ) | | 324,626 |
| | (22,152 | ) | | 302,474 |
| | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | (3,862,910 | ) | | 72,742 |
| | (3,790,168 | ) | | (3,862,910 | ) | | 72,742 |
| | (3,790,168 | ) |
| Principal payments and retirements | (47,552 | ) | | — |
| | (47,552 | ) | | (172,334 | ) | | — |
| | (172,334 | ) | | (219,886 | ) | | — |
| | (219,886 | ) |
| Charge-offs, net of recoveries | (4,380 | ) | | 3,633 |
| | (747 | ) | | (15,398 | ) | | 15,223 |
| | (175 | ) | | (19,778 | ) | | 18,856 |
| | (922 | ) |
| Change in fair value recorded in earnings | — |
| | (15,695 | ) | | (15,695 | ) | | — |
| | (86,320 | ) | | (86,320 | ) | | — |
| | (102,015 | ) | | (102,015 | ) |
Balance at December 31, 2018 | $ | 3,518 |
| | $ | (935 | ) | | $ | 2,583 |
| | $ | 869,715 |
| | $ | (29,694 | ) | | $ | 840,021 |
| | $ | 873,233 |
| | $ | (30,629 | ) | | $ | 842,604 |
|
| Purchases | 2,993 |
| | (2,303 | ) | | 690 |
| | 5,343,146 |
| | 1 |
| | 5,343,147 |
| | 5,346,139 |
| | (2,302 | ) | | 5,343,837 |
|
| Transfers (to) from loans held for investment and/or loans held for sale | 49,996 |
| | (1,471 | ) | | 48,525 |
| | (49,290 | ) | | 1,471 |
| | (47,819 | ) | | 706 |
| | — |
| | 706 |
|
| Sales | — |
| | — |
| | — |
| | (5,122,450 | ) | | 119,369 |
| | (5,003,081 | ) | | (5,122,450 | ) | | 119,369 |
| | (5,003,081 | ) |
| Principal payments and retirements | (5,214 | ) | | — |
| | (5,214 | ) | | (268,366 | ) | | — |
| | (268,366 | ) | | (273,580 | ) | | — |
| | (273,580 | ) |
| Charge-offs, net of recoveries | (4,251 | ) | | 2,169 |
| | (2,082 | ) | | (25,361 | ) | | 23,973 |
| | (1,388 | ) | | (29,612 | ) | | 26,142 |
| | (3,470 | ) |
| Change in fair value recorded in earnings | — |
| | (809 | ) | | (809 | ) | | — |
| | (140,159 | ) | | (140,159 | ) | | — |
| | (140,968 | ) | | (140,968 | ) |
Balance at December 31, 2019 | $ | 47,042 |
| | $ | (3,349 | ) | | $ | 43,693 |
| | $ | 747,394 |
| | $ | (25,039 | ) | | $ | 722,355 |
| | $ | 794,436 |
| | $ | (28,388 | ) | | $ | 766,048 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held For Investment by the Company | | Loans Held For Sale by the Company | | Total Loans Invested in by the Company |
| | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value |
Balance at December 31, 2015 | $ | 3,462 |
| | $ | (4 | ) | | $ | 3,458 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,462 |
| | $ | (4 | ) | | $ | 3,458 |
|
| Purchases | 79,736 |
| | (656 | ) | | 79,080 |
| | 104,102 |
| | — |
| | 104,102 |
| | 183,838 |
| | (656 | ) | | 183,182 |
|
| Transfers (to) from loans held for investment (from) to loans held for sale | (55,984 | ) | | — |
| | (55,984 | ) | | 55,984 |
| | — |
| | 55,984 |
| | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | (144,655 | ) | | — |
| | (144,655 | ) | | (144,655 | ) | | — |
| | (144,655 | ) |
| Principal payments | (6,705 | ) | | — |
| | (6,705 | ) | | (5,927 | ) | | — |
| | (5,927 | ) | | (12,632 | ) | | — |
| | (12,632 | ) |
| Charge-offs | (1,994 | ) | | 1,994 |
| | — |
| | (159 | ) | | 159 |
| | — |
| | (2,153 | ) | | 2,153 |
| | — |
|
| Recoveries | — |
| | (493 | ) | | (493 | ) | | — |
| | — |
| | — |
| | — |
| | (493 | ) | | (493 | ) |
| Change in fair value recorded in earnings | — |
| | (2,493 | ) | | (2,493 | ) | | — |
| | (456 | ) | | (456 | ) | | — |
| | (2,949 | ) | | (2,949 | ) |
Balance at December 31, 2016 | $ | 18,515 |
| | $ | (1,652 | ) | | $ | 16,863 |
| | $ | 9,345 |
| | $ | (297 | ) | | $ | 9,048 |
| | $ | 27,860 |
| | (1,949 | ) | | $ | 25,911 |
|
| Purchases | 19,069 |
| | (707 | ) | | 18,362 |
| | 1,629,228 |
| | (192 | ) | | 1,629,036 |
| | 1,648,297 |
| | (899 | ) | | 1,647,398 |
|
| Transfers (to) from loans held for investment (from) to loans held for sale | 354,410 |
| | 4,112 |
| | 358,522 |
| | (354,410 | ) | | (4,112 | ) | | (358,522 | ) | | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | (990,267 | ) | | 5,871 |
| | (984,396 | ) | | (990,267 | ) | | 5,871 |
| | (984,396 | ) |
| Principal payments | (16,433 | ) | | — |
| | (16,433 | ) | | (49,248 | ) | | — |
| | (49,248 | ) | | (65,681 | ) | | — |
| | (65,681 | ) |
| Charge-offs | (4,182 | ) | | 4,182 |
| | — |
| | (2,375 | ) | | 2,375 |
| | — |
| | (6,557 | ) | | 6,557 |
| | — |
|
| Recoveries | — |
| | (343 | ) | | (343 | ) | | — |
| | — |
| | — |
| | — |
| | (343 | ) | | (343 | ) |
| Change in fair value recorded in earnings | — |
| | (15,741 | ) | | (15,741 | ) | | — |
| | (10,093 | ) | | (10,093 | ) | | — |
| | (25,834 | ) | | (25,834 | ) |
Balance at December 31, 2017 | $ | 371,379 |
| | $ | (10,149 | ) | | $ | 361,230 |
| | $ | 242,273 |
| | $ | (6,448 | ) | | $ | 235,825 |
| | $ | 613,652 |
| | (16,597 | ) | | $ | 597,055 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Asset-Backed Securities Related to Structured Program Transactions
Significant Unobservable Inputs
The following table presents additionalquantitative information about the significant unobservable inputs used for the Company’s Level 3 servicing assets and liabilities measured at fair value on a recurring basismeasurements for the years endedasset-backed securities related to Structured Program transactions at December 31, 20172019 and 2016:2018:
|
| | | | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair value at December 31, 2015 | $ | 10,250 |
| | $ | 3,973 |
|
Issuances (1) | 16,546 |
| | 3,371 |
|
| Changes in fair value, included in investor fees | (5,403 | ) | | (4,498 | ) |
| Other net changes included in deferred revenue | 5 |
| | — |
|
| Fair value at December 31, 2016 | $ | 21,398 |
| | $ | 2,846 |
|
Issuances (1) | 34,950 |
| | 333 |
|
| Changes in fair value, included in investor fees | (23,172 | ) | | (2,346 | ) |
| Other net changes included in deferred revenue | 500 |
| | — |
|
| Fair value at December 31, 2017 | $ | 33,676 |
| | $ | 833 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Asset-Backed Securities Related to Structured Program Transactions |
| | | | | | | | December 31, 2019 | | December 31, 2018 |
| | | | | | | | Minimum | | Maximum | | Weighted-
Average | | Minimum | | Maximum | | Weighted-
Average |
| Discount rates | | 3.4 | % | | 20.7 | % | | 8.8 | % | | 3.2 | % | | 19.6 | % | | 8.8 | % |
Net cumulative expected loss rates (1) | | 4.5 | % | | 37.9 | % | | 19.2 | % | | 6.3 | % | | 43.9 | % | | 18.4 | % |
Cumulative expected prepayment rate (1) | | 17.3 | % | | 35.1 | % | | 29.4 | % | | 21.0 | % | | 33.0 | % | | 30.1 | % |
| |
(1) | Represents the gains or losses on salesExpressed as a percentage of the related loans.outstanding collateral balance. |
The following table presents additional information about the Level 3 loan trailing fee liability measured at fair value on a recurring basis for the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| Year Ended December 31, | 2017 | | 2016 |
| Fair value at beginning of period | $ | 4,913 |
| | $ | — |
|
| Issuances | 7,470 |
| | 5,843 |
|
| Cash payment of loan trailing fee | (4,358 | ) | | (1,174 | ) |
| Change in fair value, included in origination and servicing | 407 |
| | 244 |
|
| Fair value at end of period | $ | 8,432 |
| | $ | 4,913 |
|
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Fair valuation adjustments are recorded through earnings relatedThe following tables present adverse changes to Level 3 instruments for the years ended December 31, 2017, 2016 and 2015. Certain unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value sensitivity of the financial instrument for a given changeLevel 2 and Level 3 asset-backed securities related to Structured Program transactions to changes in that input. When multiple inputs are used within the valuation techniques for loans, notes, certificateskey assumptions at December 31, 2019 and secured borrowings, servicing assets and liabilities, and loan trailing fee liability, a change in one input in a certain direction may be offset by an opposite change from another input.2018:
A specific loan that is projected to have larger future default losses than previously estimated has lower expected future cash flows over its remaining life, which reduces its estimated fair value. Conversely, a specific loan that is projected to have smaller future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its estimated fair value.
|
| | | | | | | | | | | |
| | December 31, 2019 |
| | Asset-Backed Securities Related to
Structured Program Transactions |
| | Senior
Securities | | Subordinated Securities | | CLUB Certificates |
| Fair value of interests held | $ | 109,339 |
| | $ | 21,090 |
| | $ | 89,706 |
|
| Expected weighted-average life (in years) | 1.1 |
| | 1.4 |
| | 1.1 |
|
| Discount rates | | | | | |
| 100 basis point increase | $ | (1,050 | ) | | $ | (300 | ) | | $ | (823 | ) |
| 200 basis point increase | $ | (2,076 | ) | | $ | (513 | ) | | $ | (1,627 | ) |
| Expected credit loss rates on underlying loans | | | | | |
| 10% adverse change | $ | — |
| | $ | (2,162 | ) | | $ | (2,163 | ) |
| 20% adverse change | $ | — |
| | $ | (4,273 | ) | | $ | (4,311 | ) |
| Expected prepayment rates | | | | | |
| 10% adverse change | $ | — |
| | $ | (814 | ) | | $ | (654 | ) |
| 20% adverse change | $ | — |
| | $ | (1,495 | ) | | $ | (1,279 | ) |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Asset-Backed Securities Related to
Structured Program Transactions |
| | Senior
Securities | | Subordinated Securities | | CLUB Certificates |
| Fair value of interests held | $ | 56,489 |
| | $ | 11,849 |
| | $ | 48,430 |
|
| Expected weighted-average life (in years) | 1.0 |
| | 1.3 |
| | 1.2 |
|
| Discount rates | | | | | |
| 100 basis point increase | $ | (526 | ) | | $ | (149 | ) | | $ | (472 | ) |
| 200 basis point increase | $ | (1,032 | ) | | $ | (293 | ) | | $ | (932 | ) |
| Expected credit loss rates on underlying loans | | | | | |
| 10% adverse change | $ | — |
| | $ | (1,573 | ) | | $ | (1,070 | ) |
| 20% adverse change | $ | — |
| | $ | (3,159 | ) | | $ | (2,112 | ) |
| Expected prepayment rates | | | | | |
| 10% adverse change | $ | — |
| | $ | (786 | ) | | $ | (291 | ) |
| 20% adverse change | $ | — |
| | $ | (1,599 | ) | | $ | (562 | ) |
Fair Value Reconciliation
The following table presents additional information about Level 3 asset-backed securities related to Structured Program transactions measured at fair value sensitivity of loans invested in byon a recurring basis for the Company to adverse changes in key assumptions as ofyears ended December 31, 2017, are2019 and 2018:
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Fair value at beginning of period | $ | 60,279 |
| | $ | 10,029 |
|
| Additions | 118,721 |
| | 65,098 |
|
| Redemptions | (17,900 | ) | | (2,742 | ) |
| Cash received | (45,701 | ) | | (9,329 | ) |
| Change in unrealized gain (loss) | (992 | ) | | 201 |
|
| Other-than-temporary impairment | (3,611 | ) | | (2,978 | ) |
| Fair value at end of period | $ | 110,796 |
| | $ | 60,279 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as follows:Noted)
Servicing Assets
Significant Unobservable Inputs
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for servicing assets at December 31, 2019 and 2018:
|
| | | |
| | December 31, 2017 |
| Fair value of loans invested in by the Company | $ | 597,055 |
|
| Expected weighted-average life (in years) | 1.5 |
|
| Discount rates | |
| 100 basis point increase | $ | (7,449 | ) |
| 200 basis point increase | $ | (14,715 | ) |
| Expected credit loss rates on underlying loans | |
| 10% adverse change | $ | (10,090 | ) |
| 20% adverse change | $ | (18,935 | ) |
| Expected prepayment rates | |
| 10% adverse change | $ | (3,548 | ) |
| 20% adverse change | $ | (5,894 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Servicing Assets |
| | | | | | | | December 31, 2019 | | December 31, 2018 |
| | | | | | | | Minimum | | Maximum | | Weighted-
Average | | Minimum | | Maximum | | Weighted-Average |
| Discount rates | | 2.9 | % | | 14.8 | % | | 8.6 | % | | 4.8 | % | | 16.7 | % | | 9.0 | % |
Net cumulative expected loss rates (1) | | 3.7 | % | | 36.1 | % | | 12.4 | % | | 2.8 | % | | 38.7 | % | | 12.5 | % |
Cumulative expected prepayment rates (1) | | 27.5 | % | | 41.8 | % | | 32.5 | % | | 13.9 | % | | 42.9 | % | | 31.9 | % |
Total market servicing rates (% per annum on outstanding principal balance) (2) | | 0.66 | % | | 0.66 | % | | 0.66 | % | | 0.66 | % | | 0.66 | % | | 0.66 | % |
| |
(1) | Expressed as a percentage of the original principal balance of the loan. |
| |
(2) | Includes collection fees estimated to be paid to a hypothetical third-party servicer. |
Significant Recurring Level 3 Fair Value Input Sensitivity
The fair value sensitivity of loans invested in by the Company to adverse changes in key assumptions as of December 31, 2016, was not material.
The Company’s selection of the most representative market servicing rates for servicing assets and servicing liabilities is inherently judgmental. The Company reviews third-party servicing rates for its loans, loans in similar credit sectors, and market servicing benchmarking analyses provided by third-party valuation firms, when available. The table below shows the impact on the estimated fair value of servicing assets, and liabilities, calculated using different market servicing rate assumptions as of December 31, 20172019 and 2016:2018:
| | | | December 31, 2017 | | December 31, 2016 | Servicing Assets |
| | Servicing Assets | | Servicing Liabilities | | Servicing Assets | | Servicing Liabilities | December 31, 2019 | | December 31, 2018 |
| Weighted-average market servicing rate assumptions | 0.66 | % | | 0.66 | % | | 0.63 | % | | 0.63 | % | 0.66 | % | | 0.66 | % |
| Change in fair value from: | | | | | | | | | | |
| Servicing rate increase by 0.10% | $ | (7,749 | ) | | $ | 233 |
| | $ | (5,673 | ) | | $ | 964 |
| $ | (13,978 | ) | | $ | (10,878 | ) |
| Servicing rate decrease by 0.10% | $ | 7,760 |
| | $ | (222 | ) | | $ | 5,812 |
| | $ | (825 | ) | $ | 13,979 |
| | $ | 10,886 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Financial Instruments, Assets, and Liabilities Not Recorded at Fair Value Reconciliation
The following tables present thetable presents additional information about Level 3 servicing assets measured at fair value hierarchyon a recurring basis for financial instruments, assets,the years ended December 31, 2019 and liabilities not recorded at fair value:2018:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | |
Cash and cash equivalents (1) | $ | 401,719 |
| | — |
| | $ | 401,719 |
| | $ | — |
| | $ | 401,719 |
|
| Restricted cash | 242,570 |
| | — |
| | 242,570 |
| | — |
| | 242,570 |
|
| Servicer reserve receivable | 13,685 |
| | — |
| | 13,685 |
| | — |
| | 13,685 |
|
| Deposits | 855 |
| | — |
| | 855 |
| | — |
| | 855 |
|
| Total assets | $ | 658,829 |
| | — |
| | $ | 658,829 |
| | $ | — |
| | $ | 658,829 |
|
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities | $ | 13,856 |
| | $ | — |
| | $ | — |
| | $ | 13,856 |
| | $ | 13,856 |
|
| Accounts payable | 11,151 |
| | — |
| | 11,151 |
| | — |
| | 11,151 |
|
| Payable to investors | 143,310 |
| | — |
| | 143,310 |
| | — |
| | 143,310 |
|
| Payable to securitization note holders | 310,644 |
| | — |
| | 310,644 |
| | — |
| | 310,644 |
|
| Warehouse notes payable | 32,100 |
| | — |
| | — |
| | 32,100 |
| | 32,100 |
|
| Total liabilities | $ | 511,061 |
| | $ | — |
| | $ | 465,105 |
| | $ | 45,956 |
| | $ | 511,061 |
|
|
| | | |
| Servicing Assets |
| Fair value at December 31, 2017 | $ | 33,676 |
|
Issuances (1) | 55,403 |
|
| Change in fair value, included in investor fees | (31,233 | ) |
| Other net changes included in deferred revenue | 6,160 |
|
| Fair value at December 31, 2018 | $ | 64,006 |
|
Issuances (1) | 79,692 |
|
| Change in fair value, included in investor fees | (58,172 | ) |
| Other net changes included in deferred revenue | 4,154 |
|
| Fair value at December 31, 2019 | $ | 89,680 |
|
| |
(1) | Carrying amount approximates fair value due toRepresents the short maturitygains or losses on sales of these financial instruments.the related loans. |
Loan Trailing Fee Liability
Significant Unobservable Inputs
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loan trailing fee liability at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | |
Cash and cash equivalents (1) | $ | 515,602 |
| | $ | — |
| | $ | 515,602 |
| | $ | — |
| | $ | 515,602 |
|
| Restricted cash | 177,810 |
| | — |
| | 177,810 |
| | — |
| | 177,810 |
|
| Servicer reserve receivable | 4,938 |
| | — |
| | 4,938 |
| | — |
| | 4,938 |
|
| Deposits | 855 |
| | — |
| | 855 |
| | — |
| | 855 |
|
| Total assets | $ | 699,205 |
| | $ | — |
| | $ | 699,205 |
| | $ | — |
| | $ | 699,205 |
|
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities | $ | 10,981 |
| | $ | — |
| | $ | — |
| | $ | 10,981 |
| | $ | 10,981 |
|
| Accounts payable | 10,889 |
| | — |
| | 10,889 |
| | — |
| | 10,889 |
|
| Payable to investors | 125,884 |
| | — |
| | 125,884 |
| | — |
| | 125,884 |
|
| Total liabilities | $ | 147,754 |
| | $ | — |
| | $ | 136,773 |
| | $ | 10,981 |
| | $ | 147,754 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Loan Trailing Fee Liability |
| | | | | | | | December 31, 2019 | | December 31, 2018 |
| | | | | | | | Minimum | | Maximum | | Weighted
Average- | | Minimum | | Maximum | | Weighted
Average- |
| Discount rates | | 2.9 | % | | 14.8 | % | | 9.3 | % | | 4.8 | % | | 16.7 | % | | 9.5 | % |
Net cumulative expected loss rates (1) | | 3.7 | % | | 36.0 | % | | 14.4 | % | | 2.8 | % | | 38.7 | % | | 14.0 | % |
Cumulative expected prepayment rates (1) | | 28.5 | % | | 41.7 | % | | 33.0 | % | | 16.5 | % | | 43.1 | % | | 32.2 | % |
| |
(1) | Carrying amount approximates fair value due toExpressed as a percentage of the short maturityoriginal principal balance of these financial instruments.the loan. |
Significant Recurring Level 3 Fair Value Input Sensitivity
The fair value sensitivity of the loan trailing fee liability to adverse changes in key assumptions would not result in a material impact on the Company’s financial position.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
8. Property, Equipment and Software, NetFair Value Reconciliation
Property, equipment and software, net, consist ofThe following table presents additional information about the following:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
Internally developed software (1) | $ | 107,370 |
| | $ | 75,202 |
|
| Leasehold improvements | 26,949 |
| | 22,637 |
|
| Computer equipment | 20,324 |
| | 18,080 |
|
| Purchased software | 8,284 |
| | 7,598 |
|
| Furniture and fixtures | 7,567 |
| | 6,827 |
|
| Construction in progress | 1,202 |
| | 707 |
|
| Total property, equipment and software | 171,696 |
| | 131,051 |
|
| Accumulated depreciation and amortization | (69,763 | ) | | (41,788 | ) |
| Total property, equipment and software, net | $ | 101,933 |
| | $ | 89,263 |
|
| |
(1)
| Includes $10.7 million and $7.4 million in development in progress as of December 31, 2017 and 2016, respectively. |
Depreciation and amortization expenseLevel 3 loan trailing fee liability measured at fair value on property, equipment and software was $40.3 million, $25.1 million and $16.2 milliona recurring basis for the years ended December 31, 2017, 20162019 and 2015, respectively. 2018:
|
| | | | | | | |
| Year Ended December 31, | 2019 | | 2018 |
| Fair value at beginning of period | $ | 10,010 |
| | $ | 8,432 |
|
| Issuances | 7,815 |
| | 7,614 |
|
| Cash payment of Loan Trailing Fee | (7,908 | ) | | (6,803 | ) |
| Change in fair value, included in Origination and Servicing | 1,182 |
| | 767 |
|
| Fair value at end of period | $ | 11,099 |
| | $ | 10,010 |
|
Financial Instruments, Assets, and Liabilities Not Recorded at Fair Value
The Companyfollowing tables present the fair value hierarchy for financial instruments, assets, and liabilities not recorded impairment expense of $2.4 million, $1.1 million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
9. Other Assets
Other assets consist of the following:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Insurance reimbursement receivable | $ | 52,119 |
| | $ | — |
|
| Loan servicing assets, at fair value | 33,676 |
| | 21,398 |
|
| Prepaid expenses | 23,427 |
| | 16,960 |
|
| Servicer reserve receivable | 13,685 |
| | 4,938 |
|
| Other investments | 10,268 |
| | 10,372 |
|
| Accounts receivable | 10,005 |
| | 7,572 |
|
| Deferred financing costs | 2,952 |
| | 1,032 |
|
| Receivable from investors | 2,318 |
| | 1,566 |
|
| Tenant improvement receivable | 348 |
| | 3,290 |
|
| Other | 7,480 |
| | 2,516 |
|
| Total other assets | $ | 156,278 |
| | $ | 69,644 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | |
Cash and cash equivalents (1) | $ | 243,779 |
| | $ | — |
| | $ | 243,779 |
| | $ | — |
| | $ | 243,779 |
|
Restricted cash (1) | 243,343 |
| | — |
| | 243,343 |
| | — |
| | 243,343 |
|
| Servicer reserve receivable | 73 |
| | — |
| | 73 |
| | — |
| | 73 |
|
| Deposits | 953 |
| | — |
| | 953 |
| | — |
| | 953 |
|
| Total assets | $ | 488,148 |
| | $ | — |
| | $ | 488,148 |
| | $ | — |
| | $ | 488,148 |
|
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities | $ | 24,899 |
| | $ | — |
| | $ | — |
| | $ | 24,899 |
| | $ | 24,899 |
|
| Accounts payable | 10,855 |
| | — |
| | 10,855 |
| | — |
| | 10,855 |
|
| Payable to investors | 97,530 |
| | — |
| | 97,530 |
| | — |
| | 97,530 |
|
| Credit facilities and securities sold under repurchase agreements | 587,453 |
| | — |
| | 77,143 |
| | 510,310 |
| | 587,453 |
|
| Total liabilities | $ | 720,737 |
| | $ | — |
| | $ | 185,528 |
| | $ | 535,209 |
| | $ | 720,737 |
|
| |
(1) | Carrying amount approximates fair value due to the short maturity of these financial instruments. |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
10. Intangible Assets |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | |
Cash and cash equivalents (1) | $ | 372,974 |
| | $ | — |
| | $ | 372,974 |
| | $ | — |
| | $ | 372,974 |
|
Restricted cash (1) | 271,084 |
| | — |
| | 271,084 |
| | — |
| | 271,084 |
|
| Servicer reserve receivable | 669 |
| | — |
| | 669 |
| | — |
| | 669 |
|
| Deposits | 1,093 |
| | — |
| | 1,093 |
| | — |
| | 1,093 |
|
| Total assets | $ | 645,820 |
| | $ | — |
| | $ | 645,820 |
| | $ | — |
| | $ | 645,820 |
|
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities | $ | 18,483 |
| | $ | — |
| | $ | — |
| | $ | 18,483 |
| | $ | 18,483 |
|
| Accounts payable | 7,104 |
| | — |
| | 7,104 |
| | — |
| | 7,104 |
|
| Payable to investors | 149,052 |
| | — |
| | 149,052 |
| | — |
| | 149,052 |
|
| Payable to securitization note and certificate holders | 256,354 |
| | — |
| | 256,354 |
| | — |
| | 256,354 |
|
| Credit facilities and securities sold under repurchase agreements | 458,802 |
| | — |
| | 57,012 |
| | 401,790 |
| | 458,802 |
|
| Total liabilities | $ | 889,795 |
| | $ | — |
| | $ | 469,522 |
| | $ | 420,273 |
| | $ | 889,795 |
|
| |
(1) | Carrying amount approximates fair value due to the short maturity of these financial instruments. |
9. Property, Equipment and GoodwillSoftware, Net
Intangible Assets
Intangible assets consistsProperty, equipment and software, net, consist of the following:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
Internally developed software (1) | $ | 117,510 |
| | $ | 141,233 |
|
| Leasehold improvements | 39,315 |
| | 31,109 |
|
| Computer equipment | 26,669 |
| | 24,204 |
|
| Purchased software | 11,846 |
| | 10,139 |
|
| Furniture and fixtures | 9,406 |
| | 8,468 |
|
| Construction in progress | 4,937 |
| | 4,106 |
|
| Total property, equipment and software | 209,683 |
| | 219,259 |
|
| Accumulated depreciation and amortization | (95,313 | ) | | (105,384 | ) |
| Total property, equipment and software, net | $ | 114,370 |
| | $ | 113,875 |
|
| |
(1)�� | Includes $21.3 million and $10.3 million in development in progress as of December 31, 2019 and 2018, respectively. |
|
| | | | | | | | | | | |
| December 31, 2017 | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Customer relationships | $ | 39,500 |
| | $ | (17,577 | ) | | $ | 21,923 |
|
| Technology | 400 |
| | (400 | ) | | — |
|
| Brand name | 300 |
| | (300 | ) | | — |
|
| Total intangible assets | $ | 40,200 |
| | $ | (18,277 | ) | | $ | 21,923 |
|
|
| | | | | | | | | | | |
| December 31, 2016 | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Customer relationships | $ | 39,500 |
| | $ | (13,329 | ) | | $ | 26,171 |
|
| Technology | 400 |
| | (360 | ) | | 40 |
|
| Brand name | 300 |
| | (300 | ) | | — |
|
| Total intangible assets | $ | 40,200 |
| | $ | (13,989 | ) | | $ | 26,211 |
|
The customer relationship intangible assets are amortizedDepreciation and amortization expense on an accelerated basis over a 14 year period. The technologyproperty, equipment and brand name intangible assets were amortized on a straight line basis over three yearssoftware was $51.6 million, $47.0 million and one year, respectively. At December 31, 2017, the weighted-average amortization period for remaining intangibles was 14 years. Amortization expense associated with intangible assets$40.3 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015 was $4.3respectively. The Company recorded impairment expense on its internally developed software of $3.9 million, $4.8$3.8 million and $5.3$2.4 million respectively.
The expected future amortization expense for intangible assets as ofthe years ended December 31, 2019, 2018 and 2017, is as follows:respectively. The Company records impairment expense on its internally developed software in “Engineering and product development” expense in the Consolidated Statements of Operations.
|
| | | |
| Year Ending December 31, | |
| 2018 | $ | 3,872 |
|
| 2019 | 3,498 |
|
| 2020 | 3,122 |
|
| 2021 | 2,746 |
|
| 2022 | 2,370 |
|
| Thereafter | 6,315 |
|
| Total | $ | 21,923 |
|
Goodwill
Goodwill consists of the following:
|
| | | |
| Balance at December 31, 2015 | $ | 72,683 |
|
| Goodwill impairment | (37,050 | ) |
| Balance at December 31, 2016 | 35,633 |
|
| Other changes in goodwill | — |
|
| Balance at December 31, 2017 | $ | 35,633 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
10. Other Assets
Other assets consist of the following:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
Loan servicing assets, at fair value (1) | $ | 89,680 |
| | $ | 64,006 |
|
| Accounts receivable | 19,017 |
| | 19,322 |
|
| Prepaid expenses | 14,862 |
| | 25,598 |
|
| Other investments | 8,242 |
| | 8,503 |
|
| Deferred financing costs | 1,484 |
| | 2,117 |
|
| Other | 10,383 |
| | 5,421 |
|
Total other assets | $ | 143,668 |
| | $ | 124,967 |
|
| |
(1) | Loans underlying loan servicing rights had a total outstanding principal balance of $14.1 billion and $10.9 billion as of December 31, 2019 and 2018, respectively. |
11. Intangible Assets and Goodwill
Intangible Assets
Intangible assets consist of customer relationships. The Company has onereporting unit for goodwill impairment testing purposes, the patientgross and education finance (PEF) reporting unit. The Company performed a quantitative annual test for impairmentnet carrying values and accumulated amortization as of April 1, 2017, according to which the estimated fair value of the PEF reporting unit substantially exceeded its carrying value. The Company estimates the fair value of the PEF reporting unit using the discounted cash flow model, which relies on several assumptions. These assumptions include weighted-average cost of capital,December 31, 2019 and 2018, were as well as transaction fee revenue based on projected loan origination growth, projected revenue growth, projected operating expenses and contribution margin, capital expenditures and income taxes. The Company believes these assumptions to be representative of assumptions that a market participant would use in valuing the PEF reporting unit, but these assumptions are inherently uncertain. Upon completion of the annual impairment test in the second quarter of 2017, the Company did not record any goodwill impairment.follows:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Gross Carrying Value | $ | 39,500 |
| | $ | 39,500 |
|
| Accumulated Amortization | (24,951 | ) | | (21,452 | ) |
| Net Carrying Value | $ | 14,549 |
| | $ | 18,048 |
|
The Company recordedcustomer relationship intangible assets are amortized on an accelerated basis over a goodwill impairment14 year period. Amortization expense of $37.1 million for the year ended December 31, 2016 related to the PEF reporting unit. There were no goodwill impairment expenses recordedassociated with intangible assets for the years ended December 31, 2019, 2018 and 2017 orwas $3.5 million, $3.9 million and $4.3 million, respectively.
The expected future amortization expense for intangible assets as of December 31, 2015.
11. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:2019, is as follows:
|
| | | |
| Year Ending December 31, | |
| 2020 | $ | 3,122 |
|
| 2021 | 2,746 |
|
| 2022 | 2,370 |
|
| 2023 | 1,994 |
|
| 2024 | 1,618 |
|
| Thereafter | 2,699 |
|
| Total | $ | 14,549 |
|
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Contingent liabilities | $ | 129,887 |
| | $ | — |
|
Accrued compensation (1) | 30,549 |
| | 27,009 |
|
| Accrued expenses | 21,317 |
| | 19,734 |
|
| Deferred rent | 14,734 |
| | 11,638 |
|
| Transaction fee refund reserve | 14,528 |
| | 9,098 |
|
| Loan trailing fee liability, at fair value | 8,432 |
| | 4,913 |
|
| Deferred revenue | 3,415 |
| | 2,556 |
|
| Payable to issuing banks | 1,894 |
| | 1,658 |
|
| Loan servicing liabilities, at fair value | 833 |
| | 2,846 |
|
| Credit loss coverage reserve | — |
| | 2,529 |
|
| Reimbursement payable to limited partners of LCAM private funds | — |
| | 2,313 |
|
| Other | 2,791 |
| | 1,325 |
|
| Total accrued expenses and other liabilities | $ | 228,380 |
| | $ | 85,619 |
|
| |
(1)
| Includes accrued cash retention awards of $3.0 million as of December 31, 2016. There was no accrued cash retention awards as of December 31, 2017. See “Note 16. Employee Incentive and Retirement Plans” for additional information on the Company’s Cash Retention Plan.
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
12. Accumulated Other Comprehensive LossGoodwill
Accumulated other comprehensive loss represents other cumulative gains and losses that are not reflected in earnings. The componentsGoodwill consists of Other comprehensive income (loss) were as follows:the following:
|
| | | |
| Balance at December 31, 2017 | $ | 35,633 |
|
| Goodwill impairment | 35,633 |
|
| Balance at December 31, 2018 | $ | — |
|
| Goodwill impairment | — |
|
| Balance at December 31, 2019 | $ | — |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 184 |
| | $ | (591 | ) | | $ | 775 |
|
| Other comprehensive income (loss) | $ | 184 |
| | $ | (591 | ) | | $ | 775 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2016 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 1,515 |
| | $ | 611 |
| | $ | 904 |
|
| Other comprehensive income (loss) | $ | 1,515 |
| | $ | 611 |
| | $ | 904 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2015 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | (1,671 | ) | | $ | — |
| | $ | (1,671 | ) |
| Other comprehensive income (loss) | $ | (1,671 | ) | | $ | — |
| | $ | (1,671 | ) |
Accumulated other comprehensive loss balances were as follows:
|
| | | |
| | Total Accumulated Other Comprehensive Loss |
| Balance at December 31, 2015 | $ | (1,671 | ) |
| Change in net unrealized gain (loss) on securities available for sale | 904 |
|
| Balance at December 31, 2016 | $ | (767 | ) |
| Change in net unrealized gain (loss) on securities available for sale | 775 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 13 |
|
| Balance at December 31, 2017 | $ | (5 | ) |
13. Debt12. Accrued Expenses and Other Liabilities
Revolving Credit Facilities
Warehouse Credit Facility
On October 10, 2017,Accrued expenses and other liabilities consist of the Company’s wholly-owned subsidiary, LendingClub Warehouse I LLC (Warehouse), entered into a warehouse credit agreement (Warehouse Credit Agreement) with certain lenders for an aggregate $250 million secured revolving credit facility (Warehouse Credit Facility). In connection with the Warehouse Credit Agreement, the Warehouse entered into a security agreement with a large commercial bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Credit Facility may only be used to purchase certain unsecured consumer loans and related rights and documents from the Company and to pay fees and expenses related to the Warehouse Credit Facility.
following:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Accrued expenses | $ | 36,797 |
| | $ | 42,507 |
|
| Accrued compensation | 30,484 |
| | 36,105 |
|
| Transaction fee refund reserve | 25,541 |
| | 19,543 |
|
Contingent liabilities (1) | 16,000 |
| | 12,750 |
|
| Deferred revenue | 13,688 |
| | 9,420 |
|
| Loan trailing fee liability, at fair value | 11,099 |
| | 10,010 |
|
| Payable to issuing banks | 1,332 |
| | 1,182 |
|
Deferred rent (2) | — |
| | 16,211 |
|
| Other | 7,695 |
| | 4,390 |
|
| Total accrued expenses and other liabilities | $ | 142,636 |
| | $ | 152,118 |
|
| |
(1) | See “Note 19. Commitments and Contingencies” for further information. |
| |
(2) | The Company adopted ASU 2016-02, Leases, as of January 1, 2019. As such, effective January 1, 2019, deferred rent is included within operating lease liabilities on the Company’s consolidated balance sheets. For additional information, see “Note 2. Summary of Significant Accounting Policies” and “Note 18. Leases.” |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Proceeds13. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) represents other cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | (526 | ) | | $ | 216 |
| | $ | (742 | ) |
| Other comprehensive income (loss) | $ | (526 | ) | | $ | 216 |
| | $ | (742 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 252 |
| | $ | 83 |
| | $ | 169 |
|
| Other comprehensive income (loss) | $ | 252 |
| | $ | 83 |
| | $ | 169 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 |
| | Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 184 |
| | $ | (591 | ) | | $ | 775 |
|
| Other comprehensive income (loss) | $ | 184 |
| | $ | (591 | ) | | $ | 775 |
|
Accumulated other comprehensive income (loss) balances were as follows:
|
| | | |
| | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2017 | $ | (5 | ) |
| Change in net unrealized gain (loss) on securities available for sale | 169 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 7 |
|
| Balance at December 31, 2018 | $ | 157 |
|
| Change in net unrealized gain (loss) on securities available for sale | (742 | ) |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | (20 | ) |
| Balance at December 31, 2019 | $ | (565 | ) |
14. Debt
Credit Facilities and Securities Sold Under Repurchase Agreements
The Company may enter into arrangements in the ordinary course of business pursuant to which the Company can incur indebtedness. Below is a description of certain of these arrangements:
Warehouse Credit Facilities
Through wholly-owned subsidiaries, the Company entered into secured warehouse credit facilities (Warehouse Facilities) with certain lenders from 2017 to 2019 to finance the Company’s personal loans madeand auto refinance loans and to pay fees and expenses related to the applicable facilities. Each subsidiary entered into a credit agreement and
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
security agreement with a commercial bank as administrative agent and a national banking association as collateral trustee and paying agent.
As of December 31, 2019, the warehouse facilities used to finance our personal loans (Personal Loan Warehouse Credit Facilities) have a combined borrowing capacity of $750.0 million (which will be reduced to $700.0 million on January 15, 2020) on a revolving basis and have “Commitment Termination Dates” ranging from March 2020 to October 2020, at which point the Company’s ability to borrow additional funds ends. Under the respective agreements, if not amended, extended, or replaced, any outstanding debt on the Commitment Termination Dates would be repaid as an amortizing term loan until the facility’s final maturity date. The Company is working to amend and extend the Commitment Termination Dates of these Personal Loan Warehouse Credit Facilities. The final maturity date occurs at the earlier of twelve months after the Commitment Termination Date and three years after these Personal Loan Warehouse Credit Facilities were executed, and any remaining debt is due in full at such time. Under the respective agreements, the Personal Loan Warehouse Credit Facilities mature between January 2021 and March 2022.
The warehouse facility to finance auto refinance loans (Auto Loan Warehouse Credit Facility) is a $34.2 million term loan that matures in June 2021, which has an outstanding balance of $14.3 million as of December 31, 2019. The amount borrowed under thethis Auto Loan Warehouse Credit Facility may be borrowed, repaidamortizes over time through regular principal and reborrowed untilinterest payments collected from the earliestauto refinance loans that serve as collateral.
The creditors of October 10, 2019 or another event that constitutes a “Commitment Termination Date” under the Personal Loan and Auto Loan Warehouse Credit Agreement. RepaymentFacilities have no recourse to the general credit of any outstanding proceeds is due on October 10, 2019, but may be prepaid without penalty.
the Company. Borrowings under the Warehouse Credit Facilitythese facilities bear interest at an annual benchmark rate based onof LIBOR rate plus a spread of 2.00% to 7.25%,(London Inter-bank Offered Rate) or at an alternative commercial paper rate (which is either (i) the per annum rate equivalent to the weighted-average of the per annum rates at which all commercial paper notes were issued by suchcertain lenders to fund advances or maintain its loan were sold,loans, or (ii) the daily weighted-average of LIBOR, as definedset forth in the applicable credit agreement), plus a spread ranging from 1.85% to 2.50%. Benchmark rate borrowings may be prepaid at any time without penalty. Interest is payable monthly. Additionally,Borrowings may be prepaid without penalty. In addition, the Company was required to pay an upfront commitment fee to the lendersPersonal Loan Warehouse Credit Facilities require payment of 0.75% of the initial $250.0 million available under the revolving loan facility and a monthly unused commitment fee of 0.50%ranging from 0.375% to 1.25% per annum on the average undrawn portion available under the revolving loan facility.available.
The Personal Loan and Auto Loan Warehouse Credit Facility and credit and security agreementsFacilities contain certain covenants applicable to the Company, including restrictions on the Company’s ability to pay dividends, incur indebtedness, pledge assets, merge or consolidate, make investments, and enter into certain affiliate transactions. The Warehouse Credit Facility also requires the Company to maintain a maximum total net leverage ratio (defined as the ratio of net debt to Adjusted EBITDA, on a consolidated basis for the four most recent Fiscal Quarter periods) of 3.25:1.00 initially, and which decreases over the term of the Warehouse Credit Facility to 3.00:1.00 on and after June 30, 2018 (on a consolidated basis).covenants. As of December 31, 2017,2019, the Company was in material compliance with all applicable covenants under the total net leverage ratio requirements, calculated as defined in the Warehouse Credit Facility.respective credit agreements.
As of December 31, 2017,2019 and 2018, the Company had $32.1$387.3 million and $306.8 million in aggregate debt outstanding under the Personal Loan and Auto Loan Warehouse Credit Facility secured by aggregate outstanding principal balanceFacilities, respectively, with collateral consisting of $62.1loans at fair value of $551.5 million and $453.0 million included in “Loans held for sale by the Company at fair value”value,” respectively, and Restrictedrestricted cash of $4.1$25.1 million and $25.2 million included in the Consolidated Balance Sheets. The Company incurred $2.4 million of capitalized debt issuance costs, which will be recognized as interest expense through October 10, 2019.Sheets, respectively.
Revolving Credit Facility
OnIn December 17, 2015, the Company entered into a credit and guaranty agreement with several lenders for an aggregate $120.0 million unsecured revolving credit facility (Credit Facility). In connection with the credit agreement, the Company entered intoand a pledge and security agreement with Morgan Stanley Senior Funding, Inc.,several lenders and a financial services company, as collateral agent.agent, for an aggregate $120.0 million secured revolving credit facility (Revolving Facility).
Proceeds of loans madeThe Company may borrow under the CreditRevolving Facility may be borrowed, repaid and reborrowed until December 17, 2020. Repayment of any outstanding proceeds are payable on December 17, 2020, but may be prepaid without penalty.
Borrowings under the CreditRevolving Facility bear interest, at the Company’s option, at an annual rate based onof LIBOR rate plus a spread of 1.75% to 2.00%, which is fixed for a Company-selected interest period of one, two, three, six or 12twelve months, or at an alternative base rate (which is tied to either the prime rate, federal funds effective rate plus 0.50%, or the adjusted eurocurrency rate plus 1.00%, as defined in the credit agreement) plus a spread of 0.75% to 1.00%.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Base rate borrowings may be prepaid at any time without penalty, however pre-payment of LIBOR-based borrowings before the end of the selected interest period may result in the Company incurring expense to compensate the lenders for their funding costs through the end of the interest period. Interest is payable quarterly. Additionally, the Company is required to pay a quarterly commitment fee to the lenders of between 0.25% and 0.375% per annum, depending on the Company’s total net leverage ratio, on the average undrawn portion available under the revolving loan facility.Revolving Facility.
The Revolving Facility contains certain covenants. As of December 31, 2019, the Company was in material compliance with all applicable covenants in the credit and guaranty agreement.
The Company had $60.0 million and $95.0 million in debt outstanding under the Revolving Facility as of December 31, 2019 and 2018, respectively.
Repurchase Agreements
In 2018 and 2019, the Company entered into repurchase agreements pursuant to which the Company may sell securities (subject to an obligation to repurchase such securities at a specified future date and price) in exchange for cash, primarily to finance securities retained from the Company’s Structured Program transactions. The Company is subject to margin calls based on the fair value of the securities to be repurchased. As of December 31, 2019 and 2018, the Company had $140.2 million and $57.0 million in aggregate debt outstanding under its repurchase agreements, respectively, of which, at December 31, 2019, $64.5 million had contractual repurchase dates ranging from February 2020 to December 2026 and $75.7 million is subject to a repurchase date in March 2020 that requires counterparty approval to extend such repurchase date. The contractual repurchase dates correspond to either a set repurchase schedule or to the maturity dates of the underlying securities, which have a weighted-average estimated life from 1.1 to 1.4 years. The repurchase agreements bear interest at a rate that is based on a benchmark of the three-month LIBOR rate or the weighted-average interest rate of the securities sold plus a spread of 0.65% to 2.50%. Securities sold are included in “Credit facilities and securities sold under repurchase agreements” on the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the Company had $174.8 million and $64.1 million, respectively, of underlying assets sold under repurchase agreements.
Payable to Securitization Note and Certificate Holders
In November 2019, the Company sponsored a securitization transaction through a master trust consisting of $44.7 million in unsecured personal whole loans. The trust sold certificate participations to third-party investors in an amount equal to 95% of the loans for $42.5 million in net proceeds. The remaining certificate participations and the residual interest were retained by the Company. The Company is the primary beneficiary of the trust, which is consolidated. As of December 31, 2019, the certificate participations held by third-party investors of $40.6 million are included in “Payable to securitization note and certificate holders” in the Consolidated Balance Sheets and were secured by loans held for investment by the Company at fair value of $40.3 million and restricted cash of $2.9 million included in the Consolidated Balance Sheets.
As of December 31, 2018, the Company was the primary beneficiary of a securitization trust that was consolidated. The notes held by third-party investors and the related unamortized debt issuance costs of $256.4 million are included in “Payable to securitization note and certificate holders” in the Consolidated Balance Sheets and were secured by loans held for sale by the Company at fair value of $286.3 million and restricted cash of $9.3 million included in the Consolidated Balance Sheets. In May 2019, the Company sold a portion of the residual certificates and no longer holds significant variable interest in the securitization trust. As a result, the Company deconsolidated the securitization trust, including the derecognition of the payable to securitization note holders.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The Credit Facility and pledge and security agreement contain certain covenants applicable to the Company, including restrictions on the Company’s ability to pay dividends, incur indebtedness, pledge our assets, merge or consolidate, make investments, and enter into certain affiliate transactions. The Credit Facility also requires the Company to maintain a maximum total net leverage ratio (defined as the ratio of net debt to Adjusted EBITDA, on a consolidated basis for the four most recent Fiscal Quarter periods) of 4.00:1.00 initially, and which decreases over the term of the Credit Facility to 3.00:1.00 on and after June 30, 2018 (on a consolidated basis). As of December 31, 2017 and 2016, the Company was in compliance with the total net leverage ratio requirements, calculated as defined in the Credit Facility.
The Company did not have any loans outstanding under the Credit Facility during the year ended December 31, 2016. On October 11, 2017, the Company did a Base Rate borrowing of $5.0 million under the Credit Facility and repaid the amount in full on October 13, 2017. The Company did not have any loans outstanding under the Credit Facility as of December 31, 2017. In 2015, the Company incurred $1.3 million of capitalized debt issuance costs, which will be recognized as interest expense through December 17, 2020.
Payable to Securitization Note and Residual Certificate Holders
On December 6, 2017, the Company sponsored an asset-backed securities securitization transaction consisting of approximately $368.0 million in unsecured personal whole loans facilitated through the Company’s platform. In connection with this securitization, the Company’s Depositor purchased the loans and simultaneously transferred the loans to a securitization trust, which held the transferred loans and issued notes and residual certificates.
The Depositor sold 95% of the notes to third party-investors for $310.5 million in net proceeds and then distributed cash and 4.1% of residual certificates to original whole loan investors. The securitization trust used to effect the transaction is a VIE that the Company consolidates because the Company is the primary beneficiary of the VIE.
The notes and residual certificates held by third-party investors are classified as debt in the Company’s Consolidated Balance Sheets. The notes are carried at amortized cost. The associated debt issuance costs of $2.9 million are deferred and amortized into interest expense over the weighted-average contractual life of the notes. The Company has elected the fair value option for the residual certificates. Both the notes and residual certificates held by third-party investors and the unamortized debt issuance costs of $312.1 million are included in “Payable to securitization note and residual certificate holders” in the Consolidated Balance Sheets as of December 31, 2017 and are secured by aggregate outstanding principal balance of $359.4 million included in “Loans held for investment by the Company at fair value” and restricted cash of $18.7 million included in the Consolidated Balance Sheets as of December 31, 2017.
14.15. Secured Borrowings
In October 2017, LCAMLendingClub Asset Management, LLC (LCAM), a wholly-owned subsidiary of LendingClub that previously acted as the general partner for certain private funds, initiated the full wind downwind-down of six6 funds by redeeming the CertificatesLC Trust certificates issued byto the funds and transferring the loan participations underlying the redeemed Certificatescertificates to third party investors. The Company transferredCertain of the loan participations with a fair value of $280.9 millionthat were accounted for as an issuance of secured borrowings at a fair value of $282.5 million and the proceeds from issuance were used to redeem certificates; these loan participations are pledged as collateral. The loan participation for two2 of the funds transferred did not meet the definition of participating interests because the Company provided a credit support agreement under which the investor has a recourse to the Company for credit losses in excess of certain minimum loss coverage hurdle. The Company’s maximum exposure to loss under this credit support agreement was limited to $7.5 million as of December 31, 2017.losses. The transfer of thethese loan participations infrom these two2 funds was accounted for as a secured borrowingsborrowing and the underlying whole loans were not derecognized from the Company’s Consolidated Balance Sheets.Sheets. The credit support agreement embedded in the secured borrowings is not required to be bifurcated and accounted for separately. The Company has elected the fair value option for the secured borrowings.
As of December 31, 2017,2019, the fair value of the secured borrowings was $232.4$20.1 million, secured by aggregate outstanding
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
principal balanceloans at fair value of $242.7$18.0 million included in “Loans held for investment by the Company at fair value” in the Consolidated Balance Sheets as. As of December 31, 2017.2018, the fair value of the secured borrowings was $80.6 million, secured by loans at fair value of $76.5 million included in “Loans held for investment at fair value” in the Consolidated Balance Sheets. Changes in the fair value of the secured borrowings are partially offset by the associated loan participations, and the net effect isresults in changes in fair value of the credit support agreement through earnings. As of December 31, 2017,2019 and 2018, the fair value of this credit support agreement was $2.2 million and $2.8 million.million, respectively. The fair value of the credit support agreement is equal to the present value of the probability-weighted estimate of expected payments over a range of charge-offloss scenarios. See “Note 5.6. Loans Held Forfor Investment, Loans Held Forfor Sale, Notes, Certificates and Secured Borrowings and Loan Servicing Rights”” for additional information.
During the second quarter of 2016, the Company repurchased $22.3 million of near-prime loans from a single institutional investor that did not meet a non-credit, non-pricing requirement of the investor, of which $15.1 million were originally sold to the investor prior to March 31, 2016. As a result, these loans were accounted for as secured borrowings at March 31, 2016. During the second quarter of 2016, the Company resold the loans to a different investor at par. This subsequent transfer qualified for sale accounting treatment, and the loans were removed from the Company’s Consolidated Balance Sheets and the secured borrowings liability was reduced to zero in the second quarter of 2016. There were no secured borrowing liabilities as of December 31, 2016.
15. Stockholders’16. Employee Incentive and Retirement Plans
The Company’s 2014 Equity
Share Repurchases
On February 9, 2016, the board of directors approved a share repurchase program under which LendingClub may repurchase up Incentive Plan (EIP) provides for granting awards, including RSUs, PBRSUs and stock options to $150.0 million of the Company’s common shares in open market or privately negotiated transactions in compliance with Securitiesemployees, officers and Exchange Act Rule 10b-18. This repurchase plan was valid for one year and did not obligatedirectors. In addition, the Company offers a retirement plan to acquire any particular amount of common stock. In the first quarter of 2016, the Company repurchased 2,282,700 shares of its common stock at a weighted-average purchase price of $8.52 per share for an aggregate purchase price of $19.5 million. There were no shares repurchased during the second, third or fourth quarters of 2016, or first quarter of 2017.eligible employees.
Common Stock Reserved for Future Issuance
As of December 31, 20172019 and 2016,2018, the Company had shares of common stock reserved for future issuance as follows:
| | | December 31, | 2017 | | 2016 | 2019 | | 2018 |
| Options and unvested RSUs outstanding | 47,538,097 |
| | 62,082,821 |
| |
| Available for future stock option and RSU grants | 49,277,465 |
| | 28,449,336 |
| |
| Unvested RSUs, PBRSUs and stock options outstanding | | 12,323,868 |
| | 12,047,376 |
|
| Available for future RSU, PBRSU and stock option grants | | 12,861,058 |
| | 10,387,200 |
|
| Available for ESPP | 8,695,999 |
| | 5,408,441 |
| 3,123,203 |
| | 2,307,400 |
|
Total reserved for future issuance | 105,511,561 |
| | 95,940,598 |
| 28,308,129 |
| | 24,741,976 |
|
| |
(1) | All share information has been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
16. Employee Incentive and Retirement Plans
The Company’s equity incentive plans provide for granting stock options and RSUs to employees, consultants, officers and directors. In addition, the Company offers a retirement plan and an ESPP to eligible employees.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Stock-based Compensation
Stock-based compensation expense was as follows for the periods presented:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| RSUs and PBRSUs | $ | 70,772 |
| | $ | 66,005 |
| | $ | 54,116 |
|
| Stock options | 2,383 |
| | 7,387 |
| | 15,103 |
|
| ESPP | 484 |
| | 1,695 |
| | 1,605 |
|
| Stock issued related to acquisition | — |
| | — |
| | 159 |
|
| Total stock-based compensation expense | $ | 73,639 |
| | $ | 75,087 |
| | $ | 70,983 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Stock options | $ | 15,103 |
| | $ | 23,203 |
| | $ | 30,717 |
|
| RSUs | 54,116 |
| | 41,737 |
| | 9,185 |
|
| ESPP | 1,605 |
| | 1,686 |
| | 1,904 |
|
| Stock issued related to acquisition | 159 |
| | 2,575 |
| | 9,416 |
|
| Total stock-based compensation expense | $ | 70,983 |
| | $ | 69,201 |
| | $ | 51,222 |
|
The following table presents the Company’s stock-based compensation expense recorded in the Consolidated Statements of Operations:Operations:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Sales and marketing | $ | 6,095 |
| | $ | 7,362 |
| | $ | 7,654 |
|
| Origination and servicing | 3,155 |
| | 4,322 |
| | 4,804 |
|
| Engineering and product development | 19,860 |
| | 20,478 |
| | 22,047 |
|
| Other general and administrative | 44,529 |
| | 42,925 |
| | 36,478 |
|
| Total stock-based compensation expense | $ | 73,639 |
| | $ | 75,087 |
| | $ | 70,983 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Sales and marketing | $ | 7,654 |
| | $ | 7,546 |
| | $ | 7,250 |
|
| Origination and servicing | 4,804 |
| | 4,159 |
| | 2,735 |
|
| Engineering and product development | 22,047 |
| | 19,858 |
| | 11,335 |
|
| Other general and administrative | 36,478 |
| | 37,638 |
| | 29,902 |
|
| Total stock-based compensation expense | $ | 70,983 |
| | $ | 69,201 |
| | $ | 51,222 |
|
The Company capitalized $9.2$6.3 million, $9.8$9.1 million and $4.4$9.2 million of stock-based compensation expense associated with developing software for internal use during the years ended December 31, 2017, 2016,2019, 2018 and 2015,2017, respectively.
In addition, the Company recognized $0.2 million in tax deficits and $0.7 million in tax benefits from exercised stock options and RSUs for the years ended December 31, 2016 and 2015, respectively. During the first quarter of 2017, the Company adopted ASU 2016-09 relating to accounting for excess tax benefits associated with stock-based compensation. As a result of the adoption of ASU 2016-09, the Company recorded previously unrecognized excess tax benefits relating to stock-based compensation through December 31, 2016 to retained earnings with an equal and offsetting adjustment due to the Company’s full valuation allowance against its deferred tax assets. See “Note 17. Income Taxes” for additional information.
In the second quarter of 2016, the board of directors or the compensation committee of the board of directors, as appropriate, approved incentive retention awards to certain members of the executive management team and other key personnel. These incentive awards consisted of an aggregate of $16.3 million of RSUs and $18.6 million of cash. These incentive retention awards were recognized as compensation expense ratably through May 2017.
Restricted Stock Units
The cash retention awards were granted underfollowing table summarizes the Cash Retention Plan. Underactivities for the terms ofCompany’s RSUs during the Cash Retention Plan, employees who received an award were eligible to earn a cash retention bonus on the terms and in the amounts specified in their respective cash retention bonus award agreement, subject to continued services and other vesting requirements set forth in such agreement. Funds associated with the remaining retention liability as ofyear ended December 31, 2016, were held in a Rabbi Trust established under2019:
|
| | | | | | |
| | Number of Units (1) | | Weighted- Average Grant Date Fair Value (1) |
| Unvested at December 31, 2018 | 8,639,802 |
| | $ | 20.23 |
|
| Granted | 7,531,283 |
| | $ | 15.23 |
|
| Vested | (3,545,198 | ) | | $ | 20.43 |
|
| Forfeited/expired | (3,028,483 | ) | | $ | 18.49 |
|
| Unvested at December 31, 2019 | 9,597,404 |
| | $ | 16.78 |
|
| |
(1) | Amounts have been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
During the Cash Retention Plan and recorded as restricted cash on the Company’s Consolidated Balance Sheets. There was no remaining retention liability under the Cash Retention Plan, and therefore no associated funds held in the Rabbi Trust as ofyear ended December 31, 2017.2019, the Company granted 7,531,283 RSUs with an aggregate fair value of $114.7 million.
The Company adopted ASU 2016-09 on January 1, 2017. See “Note 2. Summary of Significant Accounting Policies,” for additional information.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Equity Incentive Plans
The Company has two equity incentive plans: the 2007 Stock Incentive Plan (2007 Plan) and the 2014 Equity Incentive Plan (2014 Plan). Upon the Company’s IPO in 2014, the 2007 Plan was terminated and all shares that remained available for future issuance under the 2007 Plan at that time were transferred to the 2014 Plan. As of December 31, 2017, 15,500,667 options2019, there was $151.0 million of unrecognized compensation cost related to purchase common stockunvested RSUs, which is expected to be recognized over the next 2.8 years.
Performance-based Restricted Stock Units
PBRSUs are equity awards that are earned, and eligible for time-based vesting, based upon the achievement of certain pre-established performance metrics over a specific performance period. Depending on the level of achievement of the pre-established performance targets, the PBRSUs earned and eligible for time-based vesting can range from 0%to 200%of the target amount. PBRSUs granted under the 2007 Plan remain outstanding. If cancelled,Company’s EIP generally have a one-year performance period with the earned shares, if any, vesting over an additional approximately two-year period. Over the performance period, the number of PBRSUs that may be earned and the related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the pre-established performance metrics.
During the first quarter of 2019, the Company expanded the use of its PBRSU program to nearly all of the executive team. The following table summarizes the activities for the Company’s PBRSUs during the year ended December 31, 2019:
|
| | | | | | |
| | Number of Units (1) | | Weighted- Average Grant Date Fair Value (1) |
| Unvested at December 31, 2018 | 254,643 |
| | $ | 18.54 |
|
| Granted | 373,810 |
| | $ | 16.42 |
|
| Vested | (97,776 | ) | | $ | 18.91 |
|
Forfeited/expired (2) | (59,088 | ) | | $ | 17.32 |
|
| Unvested at December 31, 2019 | 471,589 |
| | $ | 16.94 |
|
| |
(1) | Amounts have been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
| |
(2) | Represents the portion of PBRSUs granted in 2018 that were unearned as a result of not achieving certain pre-established performance metrics during the performance period. |
For the years ended December 31, 2019, 2018 and 2017, the Company recognized $3.9 million, $2.8 million and $1.0 million in stock-based compensation expense related to these options are eligible for transfer into the 2014 Plan, which would increase shares available for grant within the 2014 Plan. PBRSUs, respectively.
As of December 31, 2017,2019, there was $3.3 million of unrecognized compensation cost related to unvested PBRSUs, which is expected to be recognized over the total number of shares reserved for future grants under the 2014 Plan was 49,277,465 shares, including shares transferred from the 2007 Plan.next 1.7 years.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Stock Options
The following table summarizes the activities for the Company’s stock options during 2017:2019:
|
| | | | | | | | | | | | |
| | Number of Options | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (1) |
| Outstanding at December 31, 2016 | 30,669,177 |
| | $ | 4.79 |
| | | | |
| Granted | — |
| | $ | — |
| | | | |
| Exercised | (7,213,167 | ) | | $ | 2.01 |
| | | | |
| Forfeited/Expired | (3,046,670 | ) | | $ | 8.09 |
| | | | |
| Outstanding at December 31, 2017 | 20,409,340 |
| | $ | 5.28 |
| | 6.0 | | $ | 22,485 |
|
| Vested and expected to vest at December 31, 2017 | 20,409,340 |
| | $ | 5.28 |
| | 6.0 | | $ | 22,485 |
|
| Exercisable at December 31, 2017 | 16,471,522 |
| | $ | 4.76 |
| | 5.7 | | $ | 22,485 |
|
|
| | | | | | | | | | | | |
| | Number of Options (1) | | Weighted-Average Exercise Price Per Share (1) | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (2) (in thousands) |
| Outstanding at December 31, 2018 | 3,152,929 |
| | $ | 25.80 |
| | | | |
| Granted | — |
| | $ | — |
| | | | |
| Exercised | (470,666 | ) | | $ | 1.85 |
| | | | |
| Forfeited/Expired | (427,375 | ) | | $ | 33.74 |
| | | | |
| Outstanding at December 31, 2019 | 2,254,888 |
| | $ | 29.27 |
| | 4.2 | | $ | 5,528 |
|
| Exercisable at December 31, 2019 | 2,193,730 |
| | $ | 29.16 |
| | 4.1 | | $ | 5,528 |
|
| |
(1) | Amounts have been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
| |
(2) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $4.13$12.62 as reported on the New York Stock Exchange on December 29, 2017.31, 2019. |
For the year ended December 31, 2016, the Company granted service-based stock options to purchase 7,482,011 shares of common stock with a weighted-average exercise price of $7.22 per option share, a weighted-average grant date fair value of $3.61 per option share and an aggregate estimated fair value of $27.0 million. Stock options granted during the year ended December 31, 2016 included 265,987 shares of fully-vested stock options granted in lieu of cash bonuses to be paid to certain employees for the 2015 performance period. In the third quarter of 2016, a portion of these options were modified and the cash bonuses were paid.
For the year ended December 31, 2015, the Company granted service-based stock options to purchase 1,164,929 shares of common stock with a weighted-average exercise price of $20.00 per option share, a weighted-average grant date fair value of $9.80 per option share and an aggregate estimated fair value of $11.4 million.
The aggregate intrinsic value of options exercised was $27.0$5.9 million, $74.4$1.9 million and $103.5$27.0 million for the years ended December 31, 2017, 2016,2019, 2018 and 2015,2017, respectively. The total fair value of stock options vested for the years ended December 31, 2019, 2018 and 2017 2016,was $2.8 million, $9.8 million and 2015 was $19.6 million, $32.9 million and $36.8 million, respectively.
As of December 31, 2017,2019, the total unrecognized compensation cost related to outstanding stock options was $13.9$0.8 million, which is expected to be recognized over the next 1.80.5 years.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
|
| | | | | |
| Year Ended December 31, | 2016 | | 2015 |
| Expected dividend yield | — |
| | — |
|
| Weighted-average assumed stock price volatility | 51.6 | % | | 49.4 | % |
| Weighted-average risk-free interest rate | 1.34 | % | | 1.61 | % |
| Weighted-average expected life (in years) | 6.15 |
| | 6.25 |
|
There were no0 stock options granted during the yearyears ended December 31, 2019, 2018 and 2017.
Restricted Stock Units
The following table summarizes the activities for the Company’s RSUs during the year ended December 31, 2017:
|
| | | | | | |
| | Number of Units | | Weighted- Average Grant Date Fair Value |
| Unvested at December 31, 2016 | 31,413,644 |
| | $ | 6.61 |
|
| Granted | 12,955,901 |
| | $ | 5.31 |
|
| Vested | (11,087,906 | ) | | $ | 6.18 |
|
| Forfeited/expired | (6,703,341 | ) | | $ | 7.07 |
|
| Unvested at December 31, 2017 | 26,578,298 |
| | $ | 6.03 |
|
| Expected to vest after December 31, 2017 | 26,578,298 |
| | $ | 6.03 |
|
As of December 31, 2017, the Company granted 12,955,901 RSUs with an aggregate fair value of $68.8 million.
As of December 31, 2017, there was $150.4 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over the next 2.9 years.
Employee Stock Purchase Plan
The Company’s ESPPemployee stock purchase plan (ESPP) became effective on December 11, 2014. The Company’s ESPP allowsallowed eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions, subject to plan limitations. Payroll deductions arewere accumulated during six-month offering periods. The purchase price for each share of common stock iswas 85% of the lower of the fair market value of the common stock on the first business day of the offering period or on the last business day of the offering period. In connection with the Company’s cost structure simplification efforts, future purchases through the Company’s ESPP were suspended effective upon the completion of the most recent offering period on May 10, 2019.
The Company’s employees purchased 1,319,537, 1,508,513163,970, 361,840 and 410,009261,907 shares of common stock under the ESPP during the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. As of December 31, 2017, 20162019, 2018 and 2015,2017, a total of 8,695,9993,123,203, 5,408,4412,307,400 and 2,589,9911,739,199 shares remain reserved for future issuance, respectively.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The fair value of stock purchase rights granted to employees under the ESPP iswas measured on the grant date using the Black-Scholes option pricing model. The compensation expense related to ESPP purchase rights iswas recognized on a straight-line basis over the 6-monthsix-month requisite service period. We used the following assumptions in estimating the fair value of the grants under the ESPP, which arewere derived using the same methodology applied to stock option assumptions:
|
| | | | | |
| Year Ended December 31, | 2018 | | 2017 |
| Expected dividend yield | — |
| | — |
|
| Weighted-average assumed stock price volatility | 54.6 | % | | 45.1 | % |
| Weighted-average risk-free interest rate | 2.29 | % | | 1.21 | % |
| Weighted-average expected life (in years) | 0.50 |
| | 0.50 |
|
|
| | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Expected dividend yield | — |
| | — |
| | — |
|
| Weighted-average assumed stock price volatility | 45.1 | % | | 50.1 | % | | 43.7 | % |
| Weighted-average risk-free interest rate | 1.21 | % | | 0.51 | % | | 0.23 | % |
| Weighted-average expected life (in years) | 0.50 |
| | 0.50 |
| | 0.46 |
|
For the years ended December 31, 2017, 2016,2018 and 2015,2017, the dates of the assumptions were May 11, 2018 and November 11, 2018 and May 11, 2017 and November 11, 2017, May 11, 2016 and November 11, 2016 and June 11, 2015 and November 11, 2015, respectively. There were no dates of assumption under the ESPP in 2019.
Stock Issued Related to Acquisition
As part of the Springstone acquisition in 2014, the sellers received shares of the Company’s Series F convertible preferred stock having an aggregate value of $25.0 million (Share Consideration). $22.1 million of the Share Consideration is subject to certain vesting and forfeiture conditions over a three-year period for key continuing employees. This was accounted for as a compensation agreement and expensed over the three-year vesting period. In conjunction with the conversion of preferred stock upon the IPO, these preferred shares were converted into common shares.
Retirement Plan
Upon completing 90days of service, employees may participate in the Company’s qualified retirement plan that is governed by section 401(k) of the IRS Code. Participants may elect to contribute a portion of their annual compensation up to the maximum limit allowed by federal tax law. In the first quarter of 2016, the Company approved an employer match of up to 4% of an employee’s eligible compensation with a maximum annual match of $5,000 per employee. Prior to 2016, the Company approved an employer match of up to 3% of an employee’s eligible compensation with a maximum annual match of $5,000 per employee. The total expense for the employer match for the years ended December 31, 2019, 2018 and 2017 2016,was $4.5 million, $5.0 million and 2015 was $4.4 million,, $3.9 respectively.
Stock Issued Related to Acquisition
As part of the Springstone acquisition in 2014, the sellers received shares of the Company’s Series F convertible preferred stock having an aggregate value of $25.0 million (Share Consideration). $22.1 million of the Share Consideration was subject to certain vesting and $2.1 million, respectively.forfeiture conditions over a three-year period for key continuing employees. This was accounted for as a compensation agreement and expensed over the three-year vesting period. In conjunction with the conversion of preferred stock upon the IPO, these preferred shares were converted into common shares.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
One-Time Severance Costs
On June 22, 2016, the Board of the Company approved a plan to reduce the number of employees, which includes payment of severance benefits to certain employees whose positions were affected. The plan authorized the reduction of up to 179 positions, or approximately 12% of the Company’s workforce. The purpose of the action was to reduce costs, streamline operations and more closely align staffing with anticipated loan volumes. As a result, the Company recorded and paid $2.7 million in severance costs during 2016 related to this reduction in employees, which were predominately comprised of cash severance. No such reduction plans were implemented during the years ended December 31, 2017 or 2015. The following table presents the severance expense recorded in the Company’s Consolidated Statements of Operations for the year ended December 31, 2016:
|
| | | | |
| Year Ended December 31, | | 2016 |
| Sales and marketing | | $ | 772 |
|
| Origination and servicing | | 1,174 |
|
| Engineering and product development | | 134 |
|
| Other general and administrative | | 650 |
|
| Total severance expense | | $ | 2,730 |
|
Performance-based Restricted Stock Units
During the first quarter of 2017, the Company’s chief executive officer received performance-based restricted stock units (PBRSUs). PBRSUs are equity awards that may be earned based on achieving pre-established performance metrics over a specific performance period. Depending on the probability of achieving the pre-established performance targets, the PBRSUs issued could range from 0%to 200%of the target amount. PBRSUs granted under the Company’s equity incentive plans generally have a one-year performance period with one-half of the grant vesting in one year following the completion of the performance period and the remaining one-half vesting in two years following the completion of the performance period. Over the performance period, the number of PBRSUs that may be earned and the related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the pre-established performance targets against the performance metrics.
17. Income Taxes
Loss before income tax expense (benefit) less lossincome (loss) attributable to non-controlling interestnoncontrolling interests was $(153.2)$(30.9) million, $(150.2)$(128.3) million and $(2.2)$(153.2) million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Income tax expense (benefit) consisted of the following for the periods shown below:
| | | Year Ended December 31, | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Current: | | | | | | | | | | |
| Federal | $ | 498 |
| | $ | (515 | ) | | $ | — |
| $ | (141 | ) | | $ | (57 | ) | | $ | 498 |
|
| State | 134 |
| | (267 | ) | | 720 |
| (60 | ) | | 100 |
| | 134 |
|
| Total current tax expense (benefit) | $ | 632 |
| | $ | (782 | ) | | $ | 720 |
| $ | (201 | ) | | $ | 43 |
| | $ | 632 |
|
| | | | | | | | | | | |
| Deferred: | | | | | | | | | | |
| Federal | $ | — |
| | $ | (2,589 | ) | | $ | 1,405 |
| $ | — |
| | $ | — |
| | $ | — |
|
| State | — |
| | (857 | ) | | 708 |
| — |
| | — |
| | — |
|
| Total deferred tax (benefit) expense | $ | — |
| | $ | (3,446 | ) | | $ | 2,113 |
| |
| Total deferred tax expense (benefit) | | $ | — |
| | $ | — |
| | $ | — |
|
| Income tax expense (benefit) | $ | 632 |
| | $ | (4,228 | ) | | $ | 2,833 |
| $ | (201 | ) | | $ | 43 |
| | $ | 632 |
|
Income tax benefit and expense for the years ended December 31, 2019 and 2017, respectively, were primarily attributable to the tax effects of unrealized gains recorded to other comprehensive income associated with the Company’s available for sale portfolio. Income tax expense for the year ended December 31, 2018 was primarily attributable to current state income taxes, partially offset by the tax effects of unrealized gains recorded to other comprehensive income associated with the Company’s available for sale portfolio.
A reconciliation of the income taxes expected at the statutory federal income tax rate and income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017, is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Tax at federal statutory rate | $ | (6,499 | ) | | $ | (26,936 | ) | | $ | (52,089 | ) |
| State tax, net of federal tax benefit | (60 | ) | | 100 |
| | 42 |
|
| Stock-based compensation expense | 4,773 |
| | 6,559 |
| | 3,171 |
|
| Research and development tax credits | (2,336 | ) | | (7,839 | ) | | (5,022 | ) |
| Change in valuation allowance | (802 | ) | | 19,140 |
| | (3,532 | ) |
| Change in unrecognized tax benefit | 1,168 |
| | 3,920 |
| | 2,922 |
|
| Tax rate change | — |
| | — |
|
| 53,048 |
|
| Non-deductible expenses | 3,250 |
| | 5,143 |
| | 2,212 |
|
| Other | 305 |
| | (44 | ) | | (120 | ) |
| Income tax expense (benefit) | $ | (201 | ) | | $ | 43 |
| | $ | 632 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Income tax expense for the year ended December 31, 2017 was primarily attributable to the tax effects of unrealized gains credited to other comprehensive income associated with the Company’s available for sale portfolio. Income tax benefit for the year ended December 31, 2016 was primarily attributable to the tax effects of the impairment of tax-deductible goodwill from the acquisition of Springstone, which previously gave rise to an indefinite-lived deferred tax liability, and the tax effects of unrealized gains credited to other comprehensive income associated with the Company’s available for sale portfolio. Income tax expense for the year ended December 31, 2015 was primarily attributable to the amortization of tax deductible goodwill from the acquisition of Springstone, which gave rise to an indefinite-lived deferred tax liability, and the realization of excess tax benefits related to stock-based compensation.
A reconciliation of the income taxes expected at the statutory federal income tax rate and Income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015, is as follows:
|
| | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Tax at federal statutory rate | $ | (52,089 | ) | | $ | (51,072 | ) | | $ | (738 | ) |
| State tax, net of federal tax benefit | 42 |
| | (1,028 | ) | | 1,277 |
|
| Stock-based compensation expense | 3,171 |
| | 3,509 |
| | 549 |
|
| Research and development tax credits | (5,022 | ) | | (688 | ) | | (1,068 | ) |
| Change in valuation allowance | (3,532 | ) | | 42,714 |
| | 2,686 |
|
| Change in unrecognized tax benefit | 2,922 |
| | 2,817 |
| | (62 | ) |
| Tax rate change | 53,048 |
| | — |
| 44,026,000 |
| — |
|
| Other | 2,092 |
| | (480 | ) | | 189 |
|
| Income tax expense (benefit) | $ | 632 |
| | $ | (4,228 | ) | | $ | 2,833 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 20172019 and 20162018 were:
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 118,090 |
| | $ | 128,193 |
|
| Stock-based compensation | 11,480 |
| | 11,434 |
|
| Reserves and accruals | 23,008 |
| | 25,373 |
|
| Operating lease liabilities | 33,824 |
| | — |
|
| Goodwill | 19,818 |
| | 21,580 |
|
| Intangible assets | 3,074 |
| | 2,782 |
|
| Tax credit carryforwards | 16,679 |
| | 14,363 |
|
| Other | 498 |
| | 908 |
|
| Total deferred tax assets | 226,471 |
| | 204,633 |
|
| Valuation allowance | (169,526 | ) | | (169,291 | ) |
| Deferred tax assets – net of valuation allowance | $ | 56,945 |
| | $ | 35,342 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Internally developed software | $ | (20,225 | ) | | $ | (21,813 | ) |
| Servicing fees | (4,389 | ) | | — |
|
| Depreciation and amortization | — |
| | (4,137 | ) |
| Operating lease assets | (28,224 | ) | | — |
|
| Change in tax method | (3,988 | ) | | (7,349 | ) |
| Other | (119 | ) | | (2,043 | ) |
| Total deferred tax liabilities | $ | (56,945 | ) | | $ | (35,342 | ) |
| Deferred tax asset (liability) – net | $ | — |
| | $ | — |
|
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 95,611 |
| | $ | 47,451 |
|
| Stock-based compensation | 18,117 |
| | 26,838 |
|
| Reserves and accruals | 56,111 |
| | 18,409 |
|
| Goodwill | 5,666 |
| | 9,855 |
|
| Intangible assets | 3,364 |
| | 3,978 |
|
| Tax credit carryforwards | 7,499 |
| | 2,483 |
|
| Other | 637 |
| | 82 |
|
| Total deferred tax assets | 187,005 |
| | 109,096 |
|
| Valuation allowance | (140,623 | ) | | (75,308 | ) |
| Deferred tax assets – net of valuation allowance | $ | 46,382 |
| | $ | 33,788 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Internally developed software | $ | (19,340 | ) | | $ | (21,436 | ) |
| Accrued receivables | (13,838 | ) | | — |
|
| Servicing fees | (8,630 | ) | | (6,445 | ) |
| Depreciation and amortization | (3,047 | ) | | (5,907 | ) |
| Other | (1,527 | ) | | — |
|
| Total deferred tax liabilities | $ | (46,382 | ) | | $ | (33,788 | ) |
| Deferred tax asset (liability) – net | $ | — |
| | $ | — |
|
The table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2016, related to tax deductions for equity-based compensation greater than the compensation recognized for financial reporting excess tax benefits. During the first quarter of 2017, the Company adopted ASU 2016-09 relating to accounting for excess tax benefits associated with stock-based compensation. As a result of the adoption of ASU 2016-09, the Company increased its deferred tax assets by $56.7 million for previously unrecognized excess tax benefits relating to stock-based compensation, fully offset by a $56.7 million increase in the valuation allowance against its deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform) was signed into law. Some of the provisions of the Tax Reform affecting corporations include, but are not limited to, a reduction of the federal corporate income tax rate from 35% to 21%, certain limitations on interest expense deduction and executive compensation, and expensing of cost of acquired qualified property. The Company evaluated the impact of the new tax law on its financial condition and results of operations. The impact of the federal corporate income tax rate reduction to 21%, which is effective on January 1, 2018, resulted in the reduction in the Company’s deferred tax assets as of December 31, 2017 by $53.0 million, fully offset by a $53.0 million reduction in the valuation allowance against its deferred tax assets.
The Company continues to recognize a full valuation allowance against net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. As of December 31, 20172019 and 2016,2018, the valuation allowance was $140.6$169.5 million and $75.3$169.3 million, respectively.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
As of December 31, 2017,2019, the Company had federal and state net operating loss (NOL) carryforwards of approximately $342.5$397.3 million and $323.8$442.3 million, respectively, to offset future taxable income. The federal and majority of state NOL carryforwards will expire beginningstart expiring in 2026 and 2028, respectively. Additionally, as of December 31, 2017,2019, the Company had federal and state research and development credit carryforwards of $6.2$16.3 million and $5.8$16.4 million, respectively. The federal research credit carryforwards will expire beginning in 2026 and the state research credits may be carried forward indefinitely. As of December 31, 2017,2019, the Company also had other state tax credit carryforwards of $2.3$2.2 million, which will expire beginning in 2020.
In general, a corporation’s ability to utilize its NOL and research and development credit carryforwards may be substantially limited due to the ownership change limitations as required by Section 382 and 383 of the Internal Revenue Code of 1986, as amended (Code), as well as similar state provisions. The federal and state Section 382 and 383 limitations may limit the use of a portion of the Company’s domestic NOL and tax credit carryforwards. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
A reconciliation of the beginning and ending balance of total unrecognized tax benefits for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Beginning balance | $ | 13,377 |
| | $ | 7,784 |
| | $ | 3,246 |
|
| Gross increase for tax positions related to prior years | — |
| | 2,744 |
| | 2,330 |
|
| Gross increase for tax positions related to the current year | 2,621 |
| | 2,849 |
| | 2,208 |
|
| Ending balance | $ | 15,998 |
| | $ | 13,377 |
| | $ | 7,784 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Beginning balance | $ | 3,246 |
| | $ | 429 |
| | $ | 491 |
|
| Gross increase (decrease) for tax positions related to prior years | 2,330 |
| | 677 |
| | (310 | ) |
| Gross increase for tax positions related to the current year | 2,208 |
| | 2,140 |
| | 248 |
|
| Ending balance | $ | 7,784 |
| | $ | 3,246 |
| | $ | 429 |
|
If the unrecognized tax benefit as of December 31, 20172019 is recognized, there will be no effect on the Company’s effective tax rate as the tax benefit would increase a deferred tax asset, which is currently offset with a full valuation allowance. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. As of December 31, 2017,2019, the Company had no accrued interest and penalties related to unrecognized tax benefits. The Company does not expect any significant increases or decreases to its unrecognized benefits within the next twelve months.
The Company files income tax returns in the United States and various state jurisdictions. As of December 31, 2017,2019, the Company’s federal tax returns for 20132015 and earlier, and the state tax returns for 20122014 and earlier were no longer subject to examination by the taxing authorities. However, tax periods closed in a prior period may be subject to audit and re-examination by tax authorities for which tax carryforwards are utilized in subsequent years.
18. Leases
The Company has operating leases for its headquarters in San Francisco, California, as well as additional office space for its origination and servicing operations in the Salt Lake City area, Utah, and Westborough, Massachusetts. As of December 31, 2019, the lease agreements have remaining lease terms ranging from approximately two years to ten years. Some of the lease agreements include options to extend the lease term for up to an additional fifteen years and some of them include options to terminate the lease with six months’ prior notice. In addition, the Company is the sublessor of a portion of its office space in San Francisco, with lease terms ranging from two years to three years. As of December 31, 2019, the Company pledged $0.9 million of cash and $5.5 million in letters of credit as security deposits in connection with its lease agreements.
Balance sheet information as of December 31, 2019 related to leases was as follows: |
| | | |
| ROU Assets and Lease Liabilities | December 31, 2019 |
| Operating lease assets | $ | 93,485 |
|
Operating lease liabilities (1) | $ | 112,344 |
|
| |
(1) | The difference between operating lease assets and operating lease liabilities is the unamortized balance of deferred rent, which prior to January 1, 2019 was included as a separate liability within “Accrued expenses and other liabilities.” |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Components of net lease costs for the years ended December 31, 2019, 2018 and 2017, were as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| Net Lease Costs | Income Statement Classification | 2019 | | 2018 | | 2017 |
Operating lease costs (1) | Other general and administrative expense | $ | (19,502 | ) | | $ | (17,183 | ) | | $ | (15,780 | ) |
| Sublease revenue | Other revenue | 4,637 |
| | 397 |
| | 391 |
|
| Net lease costs | | $ | (14,865 | ) | | $ | (16,786 | ) | | $ | (15,389 | ) |
| |
(1) | Includes variable lease costs of $1.6 million, $0.6 million and $0.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
Supplemental cash flow information related to the Company’s operating leases for the year ended December 31, 2019 was as follows:
|
| | | |
| Year Ended December 31, | 2019 |
| Non-cash operating activity: | |
Leased assets obtained in exchange for new operating lease liabilities (1) | $ | 15,277 |
|
| |
(1) | Represents non-cash activity and, accordingly, is not reflected in the Consolidated Statements of Cash Flows. |
The Company’s future minimum undiscounted lease payments under operating leases and anticipated sublease revenue as of December 31, 2019 were as follows:
|
| | | | | | | | | | | |
| | Operating Lease Payments | | Sublease Revenue | | Net |
| 2020 | $ | 18,219 |
| | $ | (6,369 | ) | | $ | 11,850 |
|
| 2021 | 18,649 |
| | (6,560 | ) | | 12,089 |
|
| 2022 | 15,010 |
| | (2,906 | ) | | 12,104 |
|
| 2023 | 11,663 |
| | — |
| | 11,663 |
|
| 2024 | 12,002 |
| | — |
| | 12,002 |
|
| Thereafter | 74,497 |
| | — |
| | 74,497 |
|
Total lease payments (1) | $ | 150,040 |
| | $ | (15,835 | ) | | $ | 134,205 |
|
| Discount effect | 37,696 |
| | | | |
| Present value of future minimum lease payments | $ | 112,344 |
| | | | |
| |
(1) | As of December 31, 2019, the Company entered into an additional operating lease which has not yet commenced and is therefore not part of the table above nor included in the lease right-of-use asset and liability. This lease will commence when the Company obtains possession of the underlying asset, which is expected to be on April 1, 2020. The lease term is nine years and has an undiscounted future rent payment of approximately $8.7 million. |
The weighted-average remaining lease term and discount rate used in the calculation of the Company’s operating lease assets and liabilities were as follows:
|
| | |
| Lease Term and Discount Rate | December 31, 2019 |
| Weighted-average remaining lease term (in years) | 9.67 |
|
| Weighted-average discount rate | 5.75 | % |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
19. Commitments and Contingencies
Operating Lease Commitments
TheFor discussion regarding the Company’s corporate headquarters are located in San Francisco, California, and consist of approximately 169,000 square feet of space underoperating lease agreements, the longest of which is expected to expire in June 2022. Under these lease agreements, the Company has an option to extend nearly all of the space for five years.commitments, see “Note 18. Leases.”
In April 2015, the Company entered into a lease agreement for approximately 112,000 square feet of additional office space in San Francisco, California. In August 2017, this lease agreement was amended to add approximately 15,000 square feet of additional office space. The amended lease agreement expires in April 2026, with the right to renew the lease term for two consecutive renewal terms of five years each.
The Company has additional leased office space of approximately 26,000 square feet in Westborough, Massachusetts, under a lease agreement that expires in July 2021.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Total facilities rental expense for the years ended December 31, 2017, 2016 and 2015 was $15.7 million, $14.2 million and $7.4 million, respectively. Sublease rental income for the year ended December 31, 2017 was $0.4 million. The Company had nosublease rental income for the years ended December 31, 2016 and 2015. Minimum lease payments for the years ended December 31, 2017, 2016 and 2015 were $15.1 million, $11.9 million and $6.0 million, respectively. As of December 31, 2017, the Company pledged $0.8 million of cash and $5.5 million in letters of credit as security deposits in connection with its lease agreements.
The Company’s future minimum payments under non-cancelable operating leases in excess of one year and anticipated sublease income as of December 31, 2017, were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | Operating Leases | | Subleases | | Net |
| 2018 | $ | 16,389 |
| | $ | 310 |
| | $ | 16,079 |
|
| 2019 | 16,626 |
| | 39 |
| | 16,587 |
|
| 2020 | 17,557 |
| | — |
| | 17,557 |
|
| 2021 | 17,844 |
| | — |
| | 17,844 |
|
| 2022 | 13,519 |
| | — |
| | 13,519 |
|
| Thereafter | 32,645 |
| | — |
| | 32,645 |
|
| Total | $ | 114,580 |
| | $ | 349 |
| | $ | 114,231 |
|
Loan Purchase Obligation
Under the Company’s loan account program with WebBank, which serves as the Company’s primary issuing bank for loans facilitated through the Company’s platform, WebBank retains ownership of the loans it originates that are facilitated through the Company’s lending marketplace for two2 business days after origination. As part of this arrangement, the Company is committed to purchase the loans at par plus accrued interest, at the conclusion of the two business days. As of December 31, 20172019 and 2016,2018, the Company was committed to purchase loans with an outstanding principal balance of $54.2$91.3 million and $32.2$55.9 million at par, respectively.
Loan Repurchase Obligations
The Company is generally required to repurchase loans notes or certificatesinterests therein in eventsthe event of verified identity theft.theft or certain other types of fraud on the part of the borrower or education and patient service providers. The Company may also repurchase certain loans notes or certificatesinterests therein in connection with certain customer accommodations. In connection with certain whole loan and CLUB certificateCertificate Program sales, as well as to facilitate access to securitization markets, the Company has agreed to repurchase loans if representations and warranties made with respect to such loans are breached and such breach has a material adverse effect on the loans.under certain circumstances. In the case of certain securitization transactions, the Company has also agreed to repurchase or substitute loans for which a borrower fails to make the first payment due under a loan. The Company believes such provisions are customary and consistent with institutional loan and securitization market standards.
In addition to and distinct from the repurchase obligations described in the preceding paragraph, the Company performs certain administrative functions for a variety of retail and institutional investors, including executing, without discretion, loan investments as directed by the investor. To the extent loans do not meet the investor’s investment criteria at the time of issuance, or are transferred to the investor as a result of a system error by the Company, the Company repurchases such loans notes or certificatesinterests therein at par.
As a result of the loan repurchase obligations described above, the Company repurchased $2.2$5.5 million, $4.0 million and $46.7$2.2 million in loans notesor interests therein during 2019, 2018 and certificates during 2017 and 2016, respectively.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Purchase Commitments
As required by applicable regulations, the Company is requiredmust make firm offers of credit with respect to purchase loans resulting fromprescreened direct mail marketing efforts ifit sends out to prospective applicants provided such applicants continue to meet the credit worthiness criteria which were used to screen them at the time of their application. If such loans are accepted by the applicants but not otherwise invested infunded by investors on the platform.platform, the Company is required to facilitate funding for the loans directly with its issuing bank partners. The Company was not required to purchase any such loans during 2017.2019. Additionally, loans in the process of being facilitated through the Company’s platform and originated by the Company’s issuing bank partner at December 31, 2017,2019, were substantially funded in January 2018.2020. As of the date of this report, noReport, 0 loans remained without investor commitments and the Company was not required to purchase any of these loans.
In addition, if neither Springstonethe Company nor the CompanySpringstone can arrange for other investors to invest in or purchase loans that Springstone facilitates and that are originated by an issuing bank partner but do not meet the credit criteria for purchase by the issuing bank partner, (Pool B loans), Springstone and the Company and Springstone are contractually committed to purchase these
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
loans. As of December 31, 2017,2019 and 2018, the Company had a $9.0 million deposit in a bank account to secure potential future purchases of these loans, if necessary. The funds are recorded as restricted cash on the Company’s Consolidated Balance Sheets.Sheets. During the year ended December 31, 2017,2019, the Company was required to purchase $26.7$45.3 million of Pool B loans. Pool Bloans facilitated by Springstone. These purchased loans are held on the Company’s Consolidated Balance Sheets and have an outstanding principal balance anda fair value of $20.1$45.7 million and $18.2$26.6 million as of December 31, 2017,2019 and 2018, respectively. The Company believes it will be required to purchase additional Pool B loans facilitated by Springstone in 20182020 as it seeks to arrange for other investors to invest in or purchase these loans.
Credit Support Agreements
In connection with a significant platform purchase agreement, the Company entered into a credit support agreement with a third-party whole loan investor that required the Company to reimburse the investor for credit losses in excess of a specified percentage of the original principal balance of whole loans acquired by the investor during a 12-month period. During 2017, the Company paid the investor $13.0 million under this agreement, which terminated in October 2017. As of December 31, 2017, the Company had no further liability under this agreement.
The Company is also subject to a credit support agreement with Cirrix Capital (Investment Fund). The credit support agreement requires the Company to pledge and restrict cash in support of its contingent obligation to reimburse the Investment Fund for net credit losses on loans underlying the Investment Fund’s certificates that are in excess of a specified, aggregate net loss threshold. On April 14, 2017, the credit support agreement was terminated effective December 31, 2016. However, the Company remains subject to the credit support agreement for credit losses on loans underlying the Investment Fund’s certificates that were issued on or prior to December 31, 2016. The Company pledged and restricted cash in the amount of $2.2 million and $3.4 million as of December 31, 2017 and December 31, 2016, respectively, to support this contingent obligation. The Company’s maximum exposure to loss under this credit support agreement was limited to $6.0 million as of December 31, 2017, for which no liability has been accrued as of December 31, 2017.
Legal
The Company is subject to various claims brought in a litigation or regulatory context. The Company is required to defend significant class actionThese matters include lawsuits and derivative lawsuits filed in 2016; continues to address federal regulatory actions, relatingincluding but not limited to putative class action lawsuits, derivative lawsuits, and arising fromlitigation with the internal board review described more fullyFTC. In addition, the Company continues to cooperate in“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Board Review” contained in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the Board Review); federal and state regulatory examinations, investigations, and actions relating to the Company’s business practices and licensing;licensing, and is a party to a number of routine litigation matters arising in the ordinary course of business. The majority of these claims and proceedings relate to or arise from alleged state or federal law and regulatory violations, or are alleged commercial disputes and allegedor consumer complaints. The Company accrues for costs related to contingencies when a loss from such claims is
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
probable and the amount of loss can be reasonably estimated. In determining whether a loss from a claim is probable and if it is possible to estimate the loss can be reasonably estimated, the Company reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If the Company determines an unfavorable outcome is not probable or the amount of loss cannot be reasonably estimated, the Company does not accrue for a potential litigation loss. In those situations, the Company discloses an estimate or range of the probable losses or a range ofreasonably possible losses, if such estimates can be made. Except as otherwise specifically noted below, at this time, the Company does not believe that it is possible to estimate the reasonably possible losses or a range of reasonably possible losses related to the matters described below.
Settlement of Class Action and Derivative Lawsuits Filed In 2016
State and Federal Securities Class Actions. During the year ended December 31, 2016, several putative class action lawsuits alleging violations of federal securities laws were filed in California Superior Court, naming as defendants the Company, current and former directors, certain officers, and the underwriters in the December 2014 initial public offering (the IPO). All of these actions were consolidated into a single action (Consolidated State Court Action), entitled In re LendingClub Corporation Shareholder Litigation, No. CIV537300. In August 2016, plaintiffs filed an amended complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Securities Act) based on allegedly false and misleading statements in the IPO registration statement and prospectus. Following multiple demurrers, which were granted in part and denied in part, the Plaintiffs filed a Second Amended Consolidated Complaint, which became the operative pleading. In April 2017 the plaintiffs filed their motion for class certification, which the Company opposed. The motion was granted in part in a June 2017 Order. The Court set the trial date for October 2018. During the discovery, the Company vigorously defended against the claims.
In May 2016, two related putative securities class actions (entitled Evellard v. LendingClub Corporation, et al., No. 16-CV-2627-WHA, and Wertz v. LendingClub Corporation, et al., No. 16-CV-2670-WHA) were filed in the United States District Court for the Northern District of California, naming as defendants the Company and certain of its officers and directors. In August 2016, the two actions were consolidated into a single action. The Company moved to dismiss the amended complaint filed in the fourth quarter of 2016. The Court held a hearing on this motion in the first quarter of 2017 and ultimately granted in part and denied in part the motion. The plaintiffs thereafter amended their complaint consistent with the May 2017 Order and the parties began discovery. In September 2017 the plaintiffs filed their motion for class certification, which the Company opposed. The motion was granted in an October 2017 Order. In that Order, the Court also granted a motion by the plaintiffs in the Consolidated State Court Action to intervene in the federal action. All parties (including the intervening state court plaintiffs) were ordered to participate in a mediation on November 28, 2017. The Company participated in the mediation in good faith, but the parties did not reach a settlement, nor did the parties establish a range in which a settlement could be reached. Notwithstanding the fact that the parties did not reach a settlement in November 2017, the parties jointly requested a further mediation date, and on December 29, 2017, the Court ordered the parties to participate in a second mediation on January 29, 2018. As a result of that second mediation, the Company agreed to a preliminary settlement in which the Company would pay a total of $125.0 million in exchange for a dismissal of both the federal and state securities class actions with prejudice. Of that amount, $47.75 million will be paid from insurance. The settlement is subject to final approval by the Court. In the event the settlement is approved, these matters will be dismissed with prejudice and settlement proceeds will be distributed to members of the impacted class. In the event that this or any other settlement is not approved, the matter will continue to proceed to trial and the Company will continue to vigorously defend against the claims.
The Company was self-insured for the deductible amount under its director and officers’ liability insurance policy for these matters. The Company exceeded the deductible in 2016 and was being reimbursed by insurance carriers for costs related to the litigations and investigations prior to the settlement. As a result of the costs and settlement, the available insurance policies are exhausted of their policy limits.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Derivative Lawsuits. In May 2016 and August 2016, respectively, two2 putative shareholder derivative actions were filed (Avila v. Laplanche, et al., No. CIV538758 and Dua v. Laplanche, et al., CGC-16-553731) against certain of the Company’s current and former officers and directors and naming the Company as a nominal defendant. Both actions were voluntarily dismissed without prejudice. On December 14, 2016, a newanother putative shareholder derivative action was filed in the Delaware Court of Chancery (Steinberg, et al. v. Morris, et al., C.A. No. 12984-CB), against certain of the Company’s current and former officers and directors and naming the Company as a nominal defendant. In addition, on August 18, 2017, another putative shareholder derivative action was filed in the Delaware Court of Chancery (Fink et.(Fink, et al. v. Laplanche, et.et al., CaseC.A. No. 2017-0600). Both of these actions are based on allegations similarThese matters arise from claims that the Board allegedly breached its fiduciary duty by failing to those inprovide adequate oversight over the securities class action litigation, as described above. In September 2017, the Steinberg plaintiffsCompany’s practices and Fink plaintiffs each filed motionsprocedures, and purport to consolidate the twoplead derivative suits and for the designation of lead plaintiff(s) and lead counsel. In October 2017, the Steinberg and Fink plaintiffs reached an agreement regarding consolidation and submitted a proposed consolidation order to the court.claims under Delaware law. The court entered that order consolidatingCourt ultimately consolidated the cases, selecting the Steinberg plaintiffs as lead plaintiffs, and designating the Steinberg complaint as the operative complaint. Thecomplaint (consolidated Delaware matter). In June 2018, the Company and the individual defendants movedbrought a motion to dismiss the consolidated Delaware matter on demand futility grounds or in the alternative to stay the matter. Defendants in the consolidated Delaware matter later consented to the filing of a supplemental consolidated complaint in the case, and the plaintiffs filed that supplemental complaint on January 11, 2019. The Company and individual defendants in the case filed motions to dismiss the supplemental complaint on February 22, 2019. A hearing on these matters in lightmotions was held on July 17, 2019. On October 31, 2019, the Court issued a ruling dismissing the supplemental complaint for failure to plead that a majority of the other pending proceedings. directors on the Company’s board would have been unable to impartially consider a pre-suit demand. Plaintiffs did not file an appeal of the Court’s ruling by the deadline to file an appeal. The consolidated Delaware matter is therefore concluded.
On November 6, 2017, a newanother putative shareholder derivative action was filed in the U.S. District Court for the Northern District of California (Sawyer v. Sanborn, et al., No. 3:17-cv-06447) against certain of the Company’s
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
current and former officers and directors and naming the Company as a nominal defendant. This action was based on allegations similar to those in a consolidated putative securities class action litigation (In re LendingClub Securities Litigation, No. 16-cv-02627 (N.D. Cal.)) that was successfully settled in 2018. The plaintiffs in the consolidated Delaware matter were permitted to join with the plaintiffs in the Sawyer action for the purposes of settlement. The Court in the Sawyer action concurrently ordered all parties (including the intervening consolidated Delaware matter plaintiffs) to participate in a mediation in May 2018, but that mediation did not result in a settlement.
In July 2018, the Company and the individual defendants brought a motion to dismiss the Sawyer matter on the grounds that the action was not filed within the applicable statute of limitations. The Court granted that motion and judgment was entered in favor of the defendants. The Sawyer plaintiff also attempted to intervene in a previously filed derivative action in the U.S. District Court for the Northern District of California (Stadnicki v. LaPlanche, et al., No. 3:16-cv-03072). The Company and the individual defendants opposed the intervention, and the original Stadnicki plaintiff moved to voluntarily dismiss the case. The motion to intervene was denied and the motion to voluntarily dismiss the Stadnicki action was granted. Notices of appeal were filed in both the Sawyer and Stadnicki actions. The appeal in the Sawyer matter has been dismissed at the Sawyer plaintiff’s request. The appeal in the Stadnicki matter remains pending and oral argument in that appeal was heard on February 3, 2020. It is not possible for the Company to predict the outcome of the Stadnicki action at this time.
FTC Lawsuit
In 2016, the Company received a formal request for information from the Federal Trade Commission (FTC). The FTC commenced an investigation concerning certain of the Company’s policies and practices and related legal compliance.
On April 25, 2018, the FTC filed a complaint in the Northern District of California (FTC v. LendingClub Corporation, No. 3:18-cv-02454) alleging causes of action for violations of the FTC Act, including claims of deception in connection with disclosures related to the origination fee associated with loans available through the Company’s platform, and in connection with communications relating to the likelihood of loan approval during the application process, and a claim of unfairness relating to certain unauthorized charges to borrowers’ bank accounts. The FTC’s complaint also alleged a violation of the Gramm-Leach-Bliley Act regarding the Company’s practices in delivering its privacy notice. In June 2018, the Company brought a motion to dismiss the FTC’s complaint, which was heard on September 13, 2018. In an order dated October 3, 2018, the Court denied the motion in part and granted the motion in part, providing the FTC with leave to amend its pleadings. On October 22, 2018, the FTC filed an amended complaint which reasserted the same causes of action from the original complaint. On November 13, 2018, the Company filed an answer to the amended complaint. The FTC subsequently filed a motion seeking to strike certain affirmative defenses pled in the answer and the Company filed an opposition to the motion. On April 29, 2019, the Court issued a ruling denying the FTC’s motion in part and granting it in part and allowing the Company to replead certain of the affirmative defenses that were the subject of the FTC’s motion. The Company filed an amended answer in the case on May 29, 2019. The discovery period in the case is closed. The Court has issued scheduling orders that set various deadlines in the case, including a June 22, 2020 trial commencement date. The Company denies, and will continue to vigorously defend against, the claims asserted in this case. Notwithstanding the Company’s vigorous defense, the Company and the FTC have participated in voluntary settlement conferences and may engage in additional settlement discussions. No assurances can be given as to the timing, outcome or consequences of this matter.
Class Action Lawsuits Following Announcement of FTC Litigation
In May 2018, following the announcement of the FTC’s litigation against the Company, putative shareholder class action litigation was filed in the U.S. District Court of the Northern District of California (Veal v. LendingClub Corporation et.al., No. 5:18-cv-02599) against the Company and certain of its current and former officers and
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
directors alleging violations of federal securities laws in connection with the Company’s description of fees and compliance with federal privacy law in securities filings. The Court appointed lead plaintiffs and lead counsel for the litigation in November 2018. On January 7, 2019, the lead plaintiffs filed a consolidated amended class action complaint which asserts the same causes of action as the original complaint and adds additional allegations. On March 8, 2019, the Company and the individual defendants in the case filed motions to dismiss the consolidated amended class action complaint. A hearing on these motions was held on September 26, 2019. On November 4, 2019, the Court issued a written order granting defendants’ motions to dismiss with leave to amend. Plaintiff filed a Second Amended Complaint on December 19, 2019, which modifies and adds certain allegations and drops one of the former officer defendants as a defendant in the case, but otherwise advances the same causes of action. Defendants filed a motion to dismiss the Second Amended Complaint on January 28, 2020. This lawsuit is in the early stages. The Company denies and will vigorously defend against the allegations. No assurances can be given as to the timing, outcome or consequences of this matter.
In July 2019, a putative class action lawsuit was filed against the Company in federal court in the State of New York (Shron v. LendingClub Corp., 1:19-cv-06718) alleging various claims including fraud, unjust enrichment, breach of contract, and violations of the federal Truth-in-Lending Act and New York General Business Law sections 349 and 350, et seq., based on allegations, among others, that the Company made misleading or inadequate statements or omissions in relation to the total cost and origination fee associated with loans available through the Company’s platform. The plaintiff seeks to represent classes of similarly situated individuals in the lawsuit. The Company has filed a motion to compel arbitration of plaintiff’s claims on an individual basis. The timing of a ruling on that motion is unclear. This matter is in the early stages. The Company denies and will vigorously defend against the allegations. No assurances can be given as to the timing, outcome or consequences of this matter.
Derivative Lawsuits Following FTC Litigation
In July 2018, a putative shareholder derivative action was filed in the U.S. District Court for the Northern District of California (Baron v. Sanborn, et al. No. 3:18-cv-04391) against certain of the Company’s current and former officers and directors and naming the Company as a nominal defendant. This action is based on allegations similarthat the individuals breached their fiduciary duties to thosethe Company and violated federal securities laws by, among other things, permitting the actions alleged in the FTC litigation and the description of fees and other practices in the Company’s securities classfilings. In January 2019, a second putative shareholder derivative action litigation, as described above. The defendants are working to stay this matterwas filed in light of the other pending proceedings.
Regulatory Investigations Following the Board Review
On May 9, 2016, following the announcement of the Board Review, the Company received a grand jury subpoena from the U.S. DepartmentDistrict Court for the Northern District of Justice (DOJ). The Company also received formal requests for information from the SEC and Federal Trade Commission (FTC). The FTC Staff is investigating questions concerningCalifornia (Cheekatamarla v. Sanborn, et al., No. 3:19-cv-00563) against certain of the Company’s policiescurrent officers and practicesdirectors and related legal compliance. We have worked and continue to work to respondnaming the Company as a nominal defendant. Like the Baron action, this action is based on allegations that the individuals breached their fiduciary duties to the FTC’s information requests,Company and have cooperated closely with FTC Staff as they evaluate potential claims of deception or unfairness underviolated federal securities laws by, among other things, permitting the actions alleged in the FTC Actlitigation and the description of fees and other consumer protection laws enforcedpractices in the Company’s securities filings. Pursuant to a stipulation by the FTC. While we are not ableparties in both of these derivative cases, the Court consolidated the two cases and stayed the consolidated action pending further developments in Veal. In September 2019, co-lead counsel for plaintiffs in the consolidated action filed a notice and proposed order to predict with certaintylift the timing, outcome, or consequence of this investigation, we believe that we are in compliance with all applicable federaltemporary stay and state laws relatedthe Court issued an order lifting the stay. Subsequent to this matter.
The Company continues cooperating withorder, the DOJ, SEC, FTC,case was reassigned and other governmental or regulatory authorities or agencies.the new Court issued an order staying the consolidated action pending resolution of the Veal action. No assuranceassurances can be given as to the timing, outcome or outcomeconsequences of these matters. However,this consolidated matter.
In August 2019, a putative shareholder derivative action was filed in the Court of Chancery for the State of Delaware (Fisher v. Sanborn, et al., Case No. 2019-0631) against certain of the Company’s current and former officers and directors and naming the Company as a nominal defendant. This lawsuit advances allegations similar to those in the consolidated Baron/Cheekatamarla actions and the Veal action discussed above and accuses the individual defendants of breaching their fiduciary duties by failing to adequately monitor the Company and prevent it from engaging in the purported regulatory violations alleged by the FTC and by causing the Company to make allegedly false and misleading public statements (as alleged in the Veal action). The lawsuit also alleges that certain of the individual defendants breached their fiduciary duties by selling Company shares while in possession of
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
material, non-public information. On October 11, 2019, the Company and the individual defendants filed a motion to dismiss the complaint. In November 2019, rather than opposing defendants motion to dismiss, the plaintiff filed an amended complaint. That same month, the Company and the individual defendants named in the amended complaint filed a motion to dismiss that amended complaint. On January 17, 2020, rather than opposing defendants motion to dismiss, the plaintiff filed a second amended complaint. On January 24, 2020, defendants filed a motion to strike the second amended complaint as improper. No assurances can be given as to the extent that the Company continues to incur expenses to defendtiming, outcome or respond to these investigations, insurance policy coverage limits have been met, as described above, so that the Company will not have insurance available to offset any costs.consequences of this matter.
Regulatory Action ByInvestigation by the State of Massachusetts
In June 2018, the Company received a civil investigative demand from the office of the Attorney General of the State of Massachusetts. The investigation relates to the advertisement, provision and servicing of personal loans to Massachusetts’ consumers facilitated by the Company. The Company is currently in discussionscooperating with the investigation. The Company and the Attorney General’s Office have recently communicated regarding questions and concerns the Attorney General’s Office has regarding the Company’s compliance with the Massachusetts Small Loan Law and the Small Loan Rate Order promulgated under it. The Attorney General’s Office has also sent additional information requests to the Company. The Company has finalized an Assurance of Discontinuance with the Attorney General’s Office to resolve the investigation, the terms of which are not material to the Company’s financial position or results of operations.
In December 2019, the Massachusetts Division of Banks (Massachusetts DOB) regardingraised concerns pertaining to the licensing of the activities of the Company and its subsidiary, Springstone Financial, within the State of Massachusetts. Among other matters, the Massachusetts DOB is examining whether: (i) Springstone Financial engaged in the business of arranging small loans for a fee from April 2014 through the present without a valid small loan company license; and (ii) whether the Company should have obtained a servicing license. The Company continues to cooperateCompany’s compliance with the Massachusetts DOBSmall Loan Law similar to resolvethose the matter.Massachusetts Attorney General’s Office raised during its investigation of the Company. No assurances can be given as to the timing, outcome or consequences of this matter; however, it could result in claims or actions against the Company, including litigation, regulatory enforcement actions, injunctions, monetary damages, fines or penalties, impact our licenses in Massachusetts, or require us to change our business practices or expend operational resources, all of which could result in a material loss or otherwise harm our business.
Regulatory Examinations and Actions Relating to the Company’s Business Practices and Licensing
The Company has been subject to periodic inquiries and enforcement actions brought by federal and state regulatory agencies relating to the Company’s business practices, the required licenses to operate its business, and its manner of operating in accordance with the requirements of its licenses. In the past, the Company has successfully resolved
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
inquiries in a manner that was not material to its results of financial operations in any period and that did not materially limit the Company’s ability to conduct its business. At the state level, the
The Company is currently inhas had discussions with the Colorado Department of Law (CDL) concerning the licensing oflicenses required for the Company’s servicing operations and the structure of itits offerings in the State of Colorado. The Company has also had discussions with the CDL about entering into a terminable agreement with the CDL to, among other things: (i) toll the statutes of limitations on any action the CDL might bring against the Company based on the rates and charges on loans the Company facilitates and (ii) refrain from facilitating certain loans to borrowers located in Colorado available for investment by certain investors. No assuranceassurances can be given as to the timing, outcome or outcomeconsequences of anythis matter.
The Company is routinely subject to examination for compliance with applicable laws and regulations in the states in which it is licensed. As of these matters.
In addition,the date of this Report, the Company has also respondedis subject to inquiries from the California Department of Business Oversight andexamination by the New York Department of Financial Services (NYDFS). The Company periodically has discussions with various regulatory agencies regarding its business model and has recently engaged in similar discussions with the operationNYDFS. During the course of such discussions, which remain ongoing, the Company decided to voluntarily comply with certain rules and regulations of the NYDFS. No assurances can be given as to the timing, outcome or consequences of this matter.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Putative Class Actions
In September 2018, a lawsuit was filed against the Company in the State of New York (Accardo v. Lending Club, et al., 2:18-cv-05030-JS-AKT) asserting an individual claim under the federal Fair Credit Reporting Act against the Company. In early 2019, the plaintiff filed a motion for leave to amend his complaint in the case to assert a putative class claim under the Fair Credit Reporting Act. The plaintiff’s proposed amended complaint contends that LendingClub failed to conduct a reasonable investigation into plaintiff’s identity theft dispute and plaintiff seeks to represent a class of similarly situated individuals. The Company filed an opposition to plaintiff’s motion for leave to amend and also filed a motion to compel arbitration of plaintiff’s claim against the Company on an individual basis. The Court has denied the Company’s businessmotion to compel arbitration and has ordered a trial on whether an arbitration agreement exists between the Company and Plaintiff. The Court also denied without prejudice Plaintiff’s motion for leave to amend. The Company has reached a tentative settlement with the plaintiff to resolve this matter, the terms of which are not material to the Company’s financial position or results of operations, and the overall “FinTech” industry, butparties are working to date has had no indication that these inquiriesfinalize a written settlement agreement. The Company denies and will lead to any enforcement or other actions.
Litigation Matters Arisingvigorously defend against the allegations in the Ordinary Courseevent the litigation continues. No assurances can be given as to the timing, outcome or consequences of Businessthis matter.
In December 2017,February 2020, a putative class action lawsuit was filed against the Company in the StateU.S District Court for the Northern District of NevadaCalifornia (MosesErceg v. Lending Club, 2:17-cv-03071-JAD-PAL)LendingClub Corporation, No. 3:20-cv-01153). The lawsuit alleges violations of California and Massachusetts law based on allegations that LendingClub recorded a call with plaintiff without notifying him that it would be recorded. Plaintiff seeks to represent a purported class of similarly situated individuals who had phone calls recorded by LendingClub without their knowledge and consent. LendingClub has not yet filed a formal response to plaintiff's complaint. No assurances can be given as to the timing, outcome or consequences of this matter.
California Private Attorneys General Lawsuit
In September 2018, a putative action under the California Private Attorney General Act was brought against the Company in the California Superior Court (Brott v. LendingClub Corporation, et al., CGC-18-570047) alleging violations of the Fair Credit Reporting Act.California Labor Code. The complaint by a former employee alleges that the Company improperly accessedfailed to pay certain hourly employees for all wages owed, pay the credit reportcorrect rate of pay including overtime, and provide accurate wage statements. The lawsuit alleges that the plaintiff and aggrieved employees are entitled to recover civil penalties under the California Labor Code. On January 11, 2019, the Company filed a petition to compel arbitration of the plaintiff, who had formerly hadplaintiff’s claims and stay the litigation pending a loan serviced byruling on the Company. The complaint further alleges, on informationmotion and belief, that the Company improperly accessed credit reports of other similarly situated individuals. The lawsuit is in its early stages and the Company denies the allegationsarbitration of the complaintmatter. Pursuant to the parties’ stipulation, in March 2019, the Court issued an order staying the lawsuit pending the parties’ participation in a mediation in September 2019. The parties have reached a resolution of this matter, the terms of which are not material to the Company’s financial position or results of operations. The resolution will require court approval. The parties have finalized a written settlement agreement and will vigorously defend againstseek the allegations.Court’s approval of the negotiated resolution.
At December 31, 2017,Certain Financial Considerations Relating to Litigation and Investigations
With respect to the matters discussed above, the Company had $129.9$16.0 million and $12.8 million in accrued contingent liabilities as of December 31, 2019 and $52.12018, respectively. The increase in accrued contingent liabilities as of December 31, 2019 compared to December 31, 2018 was primarily related to litigation and regulatory matters of $3.3 million during 2019, which is included in insurance reimbursement receivable associated with“Other general and administrative” expense on the matters discussed above. Company’s Consolidated Statements of Operations.
Class action and regulatory litigation expense related to significant governmental and regulatory investigations following the internal board review described more fully in “Management’s Discussion and Analysis of Financial
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Condition and Results of Operations – Board Review” contained in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, was $35.5 million and $77.3 million for the years ended December 31, 2018 and 2017, respectively. This expense is included in “Class action and regulatory litigation expense” on the Company’s Consolidated Statements of Operations. The Company had 0 class action and regulatory litigation expense for the year ended December 31, 2019.
In addition to the foregoing, the Company is subject to, and may continue to be subject to, legal proceedings and regulatory actions in the ordinary course of business. No assurance can be given as to the timing, outcome or outcomeconsequences of any of these matters.
19.20. Segment Reporting
The Company defines operating segments to be components of the Company for which discrete financial information is evaluated regularly by the Company’s executive management committee as chief operating decision maker (CODM). For purposes of allocating resources and evaluating financial performance, the Company’s CODM reviews financial information by loan product types of personal, education and patient finance, small business, and auto. These product types are individually reviewed as operating segments but are aggregated to represent one1 reportable segment because the education and patient finance small business, and auto loan product types are immaterial both individually and in the aggregate. In the second quarter of 2019, the Company sold certain assets relating to its small business operating segment and announced that it will connect applicants looking for a small business loan with strategic partners and earn referral fees, instead of facilitating these loans on its platform.
Substantially allAll of the Company’s revenue is generated in the United States. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.
20.21. Related Party Transactions
Related party transactions must be reviewed and approved by the Audit Committee of the Company’s board of directors when not conducted in the ordinary course of business subject to the standard terms of the Company’s lending marketplace or certificate investment program. Any material amendment or modification to an existing related party transaction is also subject to the review and approval of the Audit Committee. Related party transactions may include any transaction between entities under common control or with a related person that has occurred since the beginning of the Company’s latest fiscal year or is currently proposed. The Company has defined related persons as members of the board of directors, executive officers, principal owners of the Company’s outstanding stock and any immediate family members of each such related person, as well as any other person or entity with significant influence over the Company’s management or operations.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Several of the Company’s executive officers and directors (including immediate family members) have made deposits and withdrawals to their investor accounts and purchased loans notes and certificates or have investments in private funds managed by LCAM.interests therein. The Company believes all such transactions by related persons were made in the ordinary course of business and were transacted on terms and conditions that were not more favorable than those obtained by similarly situated third-party investors.
In October 2017, LCAM initiated the full wind downAs of six funds by redeeming the certificates issued by the funds and transferring the loan participations underlying the redeemed certificates to third-party investors. The redemptions of the certificates of $386.1 millionto certificate holders were transacted on terms and conditions that were not more favorable than those observed by similarly situated third-party investors. See “Note 5. Loans Held For Investment, Loans Held For Sale, Notes, Certificates and Secured Borrowings and Loan Servicing Rights” and “Note 14. Secured Borrowings” for additional information.
On April 1, 2016,December 31, 2019, the Company closed its $10.0had a $7.7 million investment and an approximate 23% ownership interest in thean Investment Fund, a holding companyprivate fund that participates in a family of funds with other unrelated third parties andparties. This family of funds purchases whole loans and interests in loans from the Company, as well as other assets from third parties unrelated to the Company. As of December 31, 2017, the Company and Mr. John Mack, one of theThe Company’s board members, had an ownership interest of approximately 25% and 1%, respectively,investment in the Investment Fund. At December 31, 2017, the Company’s investment was $10.0 million, whichFund is recognizedrecorded in “Other assets” on the Company’s Consolidated Balance Sheets.Sheets.
During 2019, 2018 and 2017, this Investment Fundthe family of funds purchased $77 thousand, $6.6 million and $53.3 million, respectively, of whole loans and interests in whole loans. During 2019, 2018 and 2017, the Company earned $93 thousand, $262 thousand and $734 thousand in investor fees from this family of funds, and paid interest of $7.4$778 thousand, $2.9 million and
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
$7.4 million on the funds’ interests in whole loans, to the family of funds.respectively. The Company believes that the sales of whole loans and interests in whole loans, and the investor fees charged were on terms and conditions that were not more favorable than those obtained by other third-party investors.
During 2016, this Investment Fund purchased $256.7 million of whole loans and interests in whole loans. During 2016, the Company earned $1.8 million in investor fees from this family of funds, and paid interest received from the borrowers of the underlying loans of $8.6 million to the family of funds. The Company believes that the sales of whole loans and interests in whole loans, and the servicing and management fees charged were on terms and conditions that were not more favorable than those obtained by other third-party investors.
21.22. Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to December 31, 2017,2019, through the date the consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed within these consolidated financial statements and related notes, including as disclosed below, the Company has determined none of theseno additional subsequent events were required to be recognized or disclosed.
EntryOn February 18, 2020, the Company and Radius Bancorp, Inc. (Radius) entered into Warehouse Credit Facility II
On January 23, 2018, LendingClub Warehouse II LLC (Warehouse II),an Agreement and Plan of Merger, by and among the Company, a wholly owned-subsidiary of the Company, and Radius, pursuant to which the Company will acquire Radius and thereby acquire its wholly-owned subsidiary, Radius Bank (the Merger), in a cash and stock transaction valued at $185 million (of which $138.75 million is in cash and $46.25 million is in stock), plus certain purchase price and expense adjustments of up to $22 million. The closing of the Merger is subject to regulatory approval and other customary closing conditions, which the Company anticipates can be completed within 15 months, as well as customary transaction costs. The Merger will be accounted for as a business combination. The purchase price will be allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date.
In order to facilitate compliance with federal banking regulations by the Company’s largest stockholder, Shanda Asset Management Holdings Limited and its affiliates (Shanda), on February 18, 2020, the Company entered into a warehouse credit agreement (Warehouse CreditShare Exchange Agreement II) with certain lenderspursuant to which Shanda will exchange all shares of the Company’s common stock held by Shanda for an aggregate $200 million secured revolving credit facility (Warehouse Credit Facility II)newly issued non-voting convertible preferred stock, series A (the Exchange). In connection with Warehouse Credit Agreement II, Warehouse II entered into a security agreement with a large commercial bank as administrative agentthe Exchange, the Company will provide Shanda registration rights and a national banking association as collateral trustee and paying agent. Proceedsone-time cash payment of approximately $50 million. To deter future ownership positions in the Company’s securities in excess of thresholds set forth by the Federal Reserve under Warehouse Credit Facility II may only be used to purchase certain unsecured consumer loans and related rights and documents fromthe Bank Holding Company Act, the Company adopted a Temporary Bank Charter Protection Agreement (the Charter Protection Agreement) which provides for the dilution of any person or group of persons that acquires: (i) 25% or more equity interest in the Company, or (ii) 7.5% or more of any class of the Company’s voting securities, which threshold shall automatically increase to 10% in connection with the closing of the Exchange. The Charter Protection Agreement is effective as of February 18, 2020, and to pay fees and expenses related to Warehouse Credit Facility II.will automatically expire on the earlier of the closing of the Merger or 18 months. The Company is evaluating the impact the Exchange will have on its consolidated financial statements.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
22.23. Quarterly Results of Operations (Unaudited)
The following table sets forth our unaudited Consolidated Statements of Operations data for each of the eight quarters ended December 31, 2017.2019. The unaudited quarterly statements of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statements of operations data. Our historical results are not necessarily indicative of our future operating results. The following quarterly consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Report.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | | | | | |
| Quarters Ended | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 |
| Net revenue: | | | | | | | |
| Transaction fees | $ | 120,697 |
| | $ | 121,905 |
| | $ | 107,314 |
| | $ | 98,692 |
|
Investor fees (1) | 24,313 |
| | 20,499 |
| | 21,116 |
| | 21,180 |
|
Gain (Loss) on sales of loans (1) | 10,353 |
| | 6,680 |
| | 4,445 |
| | 1,892 |
|
Other revenue (1) | 1,366 |
| | 1,375 |
| | 1,949 |
| | 1,746 |
|
| Net interest income and fair value adjustments: | | | | | | | |
| Interest income | 141,471 |
| | 151,532 |
| | 157,260 |
| | 160,996 |
|
| Interest expense | (122,796 | ) | | (139,681 | ) | | (150,340 | ) | | (158,607 | ) |
Net fair value adjustments (1) | (18,949 | ) | | (8,280 | ) | | (2,171 | ) | | (1,417 | ) |
Net interest income and fair value adjustments (1) | (274 | ) | | 3,571 |
| | 4,749 |
| | 972 |
|
| Total net revenue | 156,455 |
| | 154,030 |
| | 139,573 |
| | 124,482 |
|
| Operating expenses: | | | | | | | |
| Sales and marketing | 60,130 |
| | 59,570 |
| | 55,582 |
| | 54,583 |
|
| Origination and servicing | 23,847 |
| | 21,321 |
| | 21,274 |
| | 20,449 |
|
| Engineering and product development | 37,926 |
| | 32,860 |
| | 35,718 |
| | 35,760 |
|
| Other general and administrative | 48,689 |
| | 46,925 |
| | 52,495 |
| | 43,574 |
|
| Class action litigation settlement | 77,250 |
| | — |
| | — |
| | — |
|
| Total operating expenses | 247,842 |
| | 160,676 |
| | 165,069 |
| | 154,366 |
|
| Loss before income tax expense | (91,387 | ) | | (6,646 | ) | | (25,496 | ) | | (29,884 | ) |
| Income tax expense (benefit) | 711 |
| | 13 |
| | (52 | ) | | (40 | ) |
| Consolidated net loss | (92,098 | ) | | (6,659 | ) | | (25,444 | ) | | (29,844 | ) |
| Less: Income (Loss) attributable to noncontrolling interests | (91 | ) | | (129 | ) | | 10 |
| | — |
|
| LendingClub net loss | $ | (92,007 | ) | | $ | (6,530 | ) | | $ | (25,454 | ) | | $ | (29,844 | ) |
Other data (2): | | | | | | | |
Loan originations (3) | $ | 2,438,267 |
| | $ | 2,442,867 |
| | $ | 2,147,335 |
| | $ | 1,958,749 |
|
| Weighted-average common shares - Basic | 416,005,213 |
| | 412,778,995 |
| | 406,676,996 |
| | 400,308,521 |
|
| Weighted-average common shares - Diluted | 416,005,213 |
| | 412,778,995 |
| | 406,676,996 |
| | 400,308,521 |
|
| Net loss per share attributable to LendingClub: | | | | | | | |
| Basic | $ | (0.22 | ) | | $ | (0.02 | ) | | $ | (0.06 | ) | | $ | (0.07 | ) |
| Diluted | $ | (0.22 | ) | | $ | (0.02 | ) | | $ | (0.06 | ) | | $ | (0.07 | ) |
|
| | | | | | | | | | | | | | | |
| Quarter Ended | December 31,
2019 | | September 30,
2019 | | June 30,
2019 | | March 31,
2019 |
| Net revenue: | | | | | | | |
| | | | | | | | |
| Transaction fees | $ | 149,951 |
| | $ | 161,205 |
| | $ | 152,207 |
| | $ | 135,397 |
|
| | | | | | | | |
| Interest income | 74,791 |
| | 77,820 |
| | 92,562 |
| | 100,172 |
|
| Interest expense | (49,251 | ) | | (55,060 | ) | | (66,916 | ) | | (75,360 | ) |
| Net fair value adjustments | (42,659 | ) | | (31,628 | ) | | (35,974 | ) | | (34,729 | ) |
| Net interest income and fair value adjustments | (17,119 | ) | | (8,868 | ) | | (10,328 | ) | | (9,917 | ) |
| Investor fees | 30,258 |
| | 30,271 |
| | 32,272 |
| | 31,731 |
|
| Gain on sales of loans | 20,373 |
| | 18,305 |
| | 13,886 |
| | 15,152 |
|
Net investor revenue (1) | 33,512 |
| | 39,708 |
| | 35,830 |
| | 36,966 |
|
| | | | | | | | |
| Other revenue | 5,023 |
| | 3,983 |
| | 2,770 |
| | 2,055 |
|
| | | | | | | | |
| Total net revenue | 188,486 |
| | 204,896 |
| | 190,807 |
| | 174,418 |
|
| Operating expenses: | | | | | | | |
| Sales and marketing | 67,222 |
| | 76,255 |
| | 69,323 |
| | 66,623 |
|
| Origination and servicing | 22,203 |
| | 27,996 |
| | 24,931 |
| | 28,273 |
|
| Engineering and product development | 41,080 |
| | 41,455 |
| | 43,299 |
| | 42,546 |
|
| Other general and administrative | 57,607 |
| | 59,485 |
| | 64,324 |
| | 56,876 |
|
| Total operating expenses | 188,112 |
| | 205,191 |
| | 201,877 |
| | 194,318 |
|
| Income (Loss) before income tax expense | 374 |
| | (295 | ) | | (11,070 | ) | | (19,900 | ) |
| Income tax expense (benefit) | 140 |
| | 97 |
| | (438 | ) | | — |
|
| Consolidated net income (loss) | 234 |
| | (392 | ) | | (10,632 | ) | | (19,900 | ) |
| Less: (Loss) Income attributable to noncontrolling interests | — |
| | (9 | ) | | 29 |
| | 35 |
|
| LendingClub net income (loss) | $ | 234 |
| | $ | (383 | ) | | $ | (10,661 | ) | | $ | (19,935 | ) |
| Other data: | | | | | | | |
Loan originations (2) | $ | 3,083,129 |
| | $ | 3,349,613 |
| | $ | 3,129,520 |
| | $ | 2,727,831 |
|
Weighted-average common shares – Basic (3) | 88,371,672 |
| | 87,588,495 |
| | 86,719,049 |
| | 86,108,871 |
|
Weighted-average common shares – Diluted (3) | 88,912,677 |
| | 87,588,495 |
| | 86,719,049 |
| | 86,108,871 |
|
Net income (loss) per share attributable to LendingClub: (3) | | | | | | | |
| Basic | $ | 0.00 |
| | $ | 0.00 |
| | $ | (0.12 | ) | | $ | (0.23 | ) |
| Diluted | $ | 0.00 |
| | $ | 0.00 |
| | $ | (0.12 | ) | | $ | (0.23 | ) |
| |
(1) | Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1. Basis of Presentation” Presentation” for additional information.
|
| |
(2) | See “Part II – Item 7 – Management’s Discussion and Analysis – Key Operating and Financial Metrics” for additional information regarding loan originations.
|
| |
(3)
| Loan originations include loans facilitated through the platform plus outstanding purchase commitments at period end. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Operating and Financial Metrics” for additional information. |
| |
(3) | All share and per share information has been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | | | | | |
| Quarters Ended | December 31,
2016 | | September 30,
2016 | | June 30,
2016 | | March 31,
2016 |
| Net revenue: | | | | | | | |
| Transaction fees | $ | 101,568 |
| | $ | 100,813 |
| | $ | 96,605 |
| | $ | 124,508 |
|
Investor fees (1) | 26,027 |
| | 18,477 |
| | 14,656 |
| | 20,487 |
|
Gain (Loss) on sales of loans (1) | 115 |
| | (11,519 | ) | | (10,447 | ) | | 4,699 |
|
Other revenue (1) | 1,492 |
| | 4,838 |
| | 1,577 |
| | 1,571 |
|
| Net interest income and fair value adjustments: | | | | | | | |
| Interest income | 167,230 |
| | 171,868 |
| | 179,685 |
| | 177,879 |
|
| Interest expense | (164,645 | ) | | (169,444 | ) | | (177,596 | ) | | (176,683 | ) |
Net fair value adjustments (1) | (1,265 | ) | | (477 | ) | | (1,040 | ) | | (167 | ) |
Net interest income and fair value adjustments (1) | 1,320 |
| | 1,947 |
| | 1,049 |
| | 1,029 |
|
| Total net revenue | 130,522 |
| | $ | 114,556 |
| | 103,440 |
| | 152,294 |
|
| Operating expenses: | | | | | | | |
| Sales and marketing | 55,457 |
| | 44,901 |
| | 49,737 |
| | 66,575 |
|
| Origination and servicing | 18,296 |
| | 16,332 |
| | 20,934 |
| | 19,198 |
|
| Engineering and product development | 32,522 |
| | 29,428 |
| | 29,209 |
| | 24,198 |
|
| Other general and administrative | 56,740 |
| | 58,940 |
| | 53,457 |
| | 38,035 |
|
| Goodwill impairment | — |
| | 1,650 |
| | 35,400 |
| | — |
|
| Total operating expenses | 163,015 |
| | 151,251 |
| | 188,737 |
| | 148,006 |
|
| Income (Loss) before income tax expense | (32,493 | ) | | (36,695 | ) | | (85,297 | ) | | 4,288 |
|
| Income tax expense (benefit) | (224 | ) | | (209 | ) | | (3,946 | ) | | 151 |
|
| Consolidated net income (loss) | (32,269 | ) | | (36,486 | ) | | (81,351 | ) | | 4,137 |
|
| Less: Income (Loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
| LendingClub net income (loss) | $ | (32,269 | ) | | $ | (36,486 | ) | | $ | (81,351 | ) | | $ | 4,137 |
|
Other data (2): | | | | | | | |
Loan originations (3) | $ | 1,987,278 |
| | $ | 1,972,034 |
| | $ | 1,955,401 |
| | $ | 2,750,033 |
|
| Weighted-average common shares - Basic | 395,877,053 |
| | 391,453,316 |
| | 382,893,402 |
| | 380,266,636 |
|
| Weighted-average common shares - Diluted | 395,877,053 |
| | 391,453,316 |
| | 382,893,402 |
| | 392,397,825 |
|
| Net loss per share attributable to LendingClub: | | | | | | | |
| Basic | $ | (0.08 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | 0.01 |
|
| Diluted | $ | (0.08 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | 0.01 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended | December 31,
2018 | | September 30,
2018 | | June 30,
2018 | | March 31,
2018 |
| Net revenue: | | | | | | | |
| | | | | | | | |
| Transaction fees | $ | 142,053 |
| | $ | 137,781 |
| | $ | 135,926 |
| | $ | 111,182 |
|
| | | | | | | | |
| Interest income | 106,170 |
| | 115,514 |
| | 127,760 |
| | 138,018 |
|
| Interest expense | (83,222 | ) | | (90,642 | ) | | (100,898 | ) | | (110,843 | ) |
| Net fair value adjustments | (25,865 | ) | | (19,554 | ) | | (26,556 | ) | | (28,713 | ) |
| Net interest income and fair value adjustments | (2,917 | ) | | 5,318 |
| | 306 |
| | (1,538 | ) |
| Investor fees | 30,419 |
| | 29,169 |
| | 27,400 |
| | 27,895 |
|
| Gain on sales of loans | 10,509 |
| | 10,919 |
| | 11,880 |
| | 12,671 |
|
Net investor revenue (1) | 38,011 |
| | 45,406 |
| | 39,586 |
| | 39,028 |
|
| | | | | | | | |
| Other revenue | 1,457 |
| | 1,458 |
| | 1,467 |
| | 1,457 |
|
| | | | | | | | |
| Total net revenue | 181,521 |
| | 184,645 |
| | 176,979 |
| | 151,667 |
|
| Operating expenses: | | | | | | | |
| Sales and marketing | 68,353 |
| | 73,601 |
| | 69,046 |
| | 57,517 |
|
| Origination and servicing | 25,707 |
| | 25,431 |
| | 25,593 |
| | 22,645 |
|
| Engineering and product development | 39,552 |
| | 41,216 |
| | 37,650 |
| | 36,837 |
|
| Other general and administrative | 61,303 |
| | 57,446 |
| | 57,583 |
| | 52,309 |
|
| Goodwill impairment | — |
| | — |
| | 35,633 |
| | — |
|
| Class action and regulatory litigation expense | — |
| | 9,738 |
| | 12,262 |
| | 13,500 |
|
| Total operating expenses | 194,915 |
| | 207,432 |
| | 237,767 |
| | 182,808 |
|
| Loss before income tax expense | (13,394 | ) | | (22,787 | ) | | (60,788 | ) | | (31,141 | ) |
| Income tax expense (benefit) | 18 |
| | (38 | ) | | 24 |
| | 39 |
|
| Consolidated net loss | (13,412 | ) | | (22,749 | ) | | (60,812 | ) | | (31,180 | ) |
| Less: Income attributable to noncontrolling interests | 50 |
| | 55 |
| | 49 |
| | 1 |
|
| LendingClub net loss | $ | (13,462 | ) | | $ | (22,804 | ) | | $ | (60,861 | ) | | $ | (31,181 | ) |
| Other data: | | | | | | | |
Loan originations (2) | $ | 2,871,019 |
| | $ | 2,886,462 |
| | $ | 2,818,331 |
| | $ | 2,306,003 |
|
Weighted-average common shares – Basic (3) | 85,539,436 |
| | 84,871,828 |
| | 84,238,897 |
| | 83,659,860 |
|
Weighted-average common shares – Diluted (3) | 85,539,436 |
| | 84,871,828 |
| | 84,238,897 |
| | 83,659,860 |
|
Net loss per share attributable to LendingClub: (3) | | | | | | | |
| Basic | $ | (0.16 | ) | | $ | (0.27 | ) | | $ | (0.72 | ) | | $ | (0.37 | ) |
| Diluted | $ | (0.16 | ) | | $ | (0.27 | ) | | $ | (0.72 | ) | | $ | (0.37 | ) |
| |
(1) | Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1. Basis of Presentation”Presentation” for additional information.
|
| |
(2) | See “Part II – Item 7 – Management’s Discussion and Analysis – Key Operating and Financial Metrics” for additional information regarding loan originations.
|
| |
(3)
| Loan originations include loans facilitated through the platform plus outstanding purchase commitments at period end. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Operating and Financial Metrics” for additional information. |
| |
(3) | All share and per share information has been retroactively adjusted to reflect a reverse stock split. See “Note 4. Net Loss Per Share” for additional information. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2017.2019. In designing and evaluating its disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, of achieving the desired control objectives, and is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures as of December 31, 2017,2019, were designed and functioned effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities and Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Under the supervision and with the participation of the Company’s CEO and CFO, management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2017,2019, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2017,2019, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Deloitte & Touche LLP, has independently audited the effectiveness of our internal control over financial reporting and its report is included below.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended December 31, 2017,2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LendingClub Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LendingClub Corporation and subsidiaries (the “Company”) as of December 31, 2017,2019, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -– Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017,2019, of the Company and our report dated February 21, 2018,19, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 201819, 2020
Item 9B. Other Information
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 will be included in our Proxy Statement under the headings “Corporate Governance at LendingClub” and “Section 16(a) Beneficial Ownership Reporting Compliance,”definitive proxy statement with respect to our 2020 Annual Meeting of Stockholders (Proxy Statement) and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the 20172019 fiscal year.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Proxy Statement under the headings “Director“Board of Directors and Corporate Governance – Director Compensation,” “Compensation Discussion“Executive Compensation” and Analysis,” “Named Executive Officer“Report of the Compensation” “Compensation Committee, Interlocks and Insider Participation” and “Compensation Committee Report,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the 2017 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will be included in the Proxy Statement under the headings “Security Ownership”Ownership of Certain Beneficial Owners and “EquityManagement” and “Securities Authorized for Issuance Under Equity Compensation Plans,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the 2017 fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be included in the Proxy Statement under the headings “Related PersonParty Transactions” and “Director“Board of Directors and Corporate Governance – Director Independence,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the 2017 fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 will be included in the Proxy Statement under the heading “Ratification of SelectionAppointment of Independent Auditors,Registered Public Accounting Firm,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the 2017 fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) Documents filed as part of this Annual Report on Form 10-K:
The following consolidated financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
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| 2. | Financial Statement Schedule |
Financial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is shown in the Consolidated Financial Statements or Notes thereto.
The documents listed in the Exhibit index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein on the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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| | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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| 101 | The following financial information from LendingClub Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements. | | | | | X |
| 104 | Cover Page Interactive Data File (as formatted as Inline XBRL and contained in Exhibit 101) | | | | | |
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| * | Confidential treatment has been requested for certain portions of this Exhibit. The omitted material has been filed separately with the SEC. |
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| ** | Certain information in the exhibit was omitted pursuant to Item 601(b)(2) of Regulation S-K because it is both not material and would be competitively harmful if publicly disclosed. The Company undertakes to furnish, supplementally, a copy of the unredacted exhibit to the SEC upon request. |
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| † | Schedules have been omitted as they are not material, not applicable or not required. They will be furnished supplementally to the SEC upon request. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 21, 201819, 2020
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| | | |
| | LENDINGCLUB CORPORATION |
| | | |
| | By: | | /s/ Scott Sanborn |
| | Scott Sanborn |
| | Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott Sanborn and Thomas Casey, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
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| Signature | | Title | | Date |
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| /s/ Scott Sanborn | | Chief Executive Officer | | February 21, 201819, 2020 |
| Scott Sanborn | | | | |
| | | | | |
| /s/ Thomas W. Casey | | Chief Financial Officer | | February 21, 201819, 2020 |
| Thomas W. Casey | | | | |
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| /s/ Fergal Stack | | Principal Accounting Officer | | February 21, 201819, 2020 |
| Fergal Stack | | | | |
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| /s/ Susan Athey | | Director | | February 19, 2020 |
| Susan Athey | | | | |
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| /s/ Daniel T. Ciporin | | Director | | February 21, 201819, 2020 |
| Daniel T. Ciporin | | | | |
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| /s/ Kenneth Denman | | Director | | February 21, 201819, 2020 |
| Kenneth Denman | | | | |
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/s/ John J. Mack | | Director | | February 21, 2018 |
John J. Mack | | | | |
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| /s/ Timothy J. Mayopoulos | | Director | | February 21, 201819, 2020 |
| Timothy J. Mayopoulos | | | | |
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| /s/ Patricia McCord | | Director | | February 21, 201819, 2020 |
| Patricia McCord | | | | |
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| | Director | | |
Mary Meeker | | | | |
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| /s/ John C. Morris | | Director | | February 21, 201819, 2020 |
| John C. Morris | | | | |
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/s/ Lawrence Summers | | Director | | February 21, 2018 |
Lawrence Summers | | | | |
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| /s/ Simon Williams | | Director | | February 21, 201819, 2020 |
| Simon Williams | | | | |
EXHIBIT INDEX
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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| | | Incorporated by Reference | |
Exhibit
Number
| Exhibit Description | Form | File No. | Exhibit | Filing
Date
| Filed
Herewith
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| /s/ Michael Zeisser | | Director | | February 19, 2020 |
101.INS | XBRL Instance DocumentMichael Zeisser | | | | | X |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | | | | X |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | | | | | X |
101.LAB | XBRL Taxonomy Extension Label Linkbase | | | | | X |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | | | | | X |
* Confidential treatment has been requested for certain portions of this Exhibit. The omitted material has been filed separately with the Securities and Exchange Commission.
