UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
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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, 20192021
Commission File Number: 001-36771
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| LendingClub Corporation |
| (Exact name of registrant as specified in its charter) |
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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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| 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, | |
| San Francisco, | CA | 94105 | |
| (Address of principal executive 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. Yes ý No ¨
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 ¨ No ý
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. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
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.
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| Large accelerated filer | | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | | ☐ | | Smaller reporting company | ☐ |
| | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2019,2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,091,456,815$1,622,720,682 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 14, 2020,January 31, 2022, there were 88,911,078101,043,924 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Definitive Proxy Statement for the Registrant’s 20202022 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, 2019.2021.
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 20192021
TABLE OF CONTENTS
Glossary
The following is a list of common acronyms and terms LendingClub Corporation regularly uses in its financial reporting:
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| Acquisition | Acquisition of Radius Bancorp, Inc. |
| AFS | Available for Sale |
| ACL | Allowance for Credit Losses (includes both the allowance for loan and lease losses and the reserve for unfunded lending commitments) |
| ALLL | Allowance for Loan and Lease Losses |
| Annual Report | Annual Report on Form 10-K for the year ended December 31, 2021 |
| ASU | Accounting Standards Update |
| AUM | Assets Under Management (outstanding balances of Loan Originations serviced by the Company including loans sold to investors as well as loans held for investment and held for sale by the Company) |
| Balance Sheet | Consolidated Balance Sheets |
| LC Bank or LendingClub Bank | LendingClub Bank, National Association |
| CECL | Current Expected Credit Losses (Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) |
| CET1 | Common Equity Tier 1 |
| CET1 Capital Ratio | Common Equity Tier 1 capital divided by total risk-weighted assets as defined under the U.S. Basel III capital framework |
| DCF | Discounted Cash Flow |
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| EPS | Net Income (Loss) Per Share |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FRB or Federal Reserve | Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s) |
| GAAP | Accounting Principles Generally Accepted in the United States of America |
| HFI | Loans which are retained by the Company and held for investment |
| HFS | Held for sale loans expected to be sold to investors, including Marketplace Loans |
| Income Statement | Consolidated Statements of Operations |
| LendingClub, LC, the Company, we, us, or our | LendingClub Corporation and its Subsidiaries |
| Loan Originations | Unsecured personal loans and auto refinance loans originated by the Company or facilitated by third-party issuing banks. |
| Marketplace Loans | Loan Originations designated as HFS and subsequently sold to investors |
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| N/M | Not meaningful |
| Parent Company | LendingClub Corporation (the Parent Company of LendingClub Bank, National Association and other subsidiaries) |
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| PPP Loans | Loans originated pursuant to the U.S. Small Business Administration’s Paycheck Protection Program |
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| Radius | Radius Bancorp, Inc. |
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| ROA | Return on Average Total Assets |
| ROE | Return on Average Equity |
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| SEC | United States Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
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| Structured Program transactions | Asset-backed securitization transactions and Certificate Program transactions (CLUB and Levered certificates), where certain accredited investors and qualified institutional buyers have the opportunity to invest in securities backed by a pool of unsecured personal whole loans. |
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| Tier 1 Capital Ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III capital framework. |
| Tier 1 Leverage Ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III capital framework. |
| Total Capital Ratio | Total capital, which includes Common Equity Tier 1 capital, Tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as Tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III capital framework. |
| Unsecured personal loans | Unsecured personal loans originated on the Company’s platforms, including an online direct to consumer platform and a platform connected with a network of education and patient finance providers. |
| VIE | Variable Interest Entity |
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:
Various wholly-owned Delaware limited liability companies established to enter into warehouse credit agreements with certain lenders for secured credit facilities.
Variousincluding LendingClub Bank, National Association (LC Bank), and 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 opportunity to invest in senior and subordinated securities backed by a pool of unsecured personal whole loans.Program.
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 issued by the LC Trust and that are related to specific underlying loans for the benefit of the investor.
Springstone Financial, LLC (Springstone), a wholly-owned Delaware limited liability company that facilitates the origination of education and patient finance loans by third-party issuing banks.
Forward-LookingForward-looking Statements
This Annual Report on Form 10-K (Report)for the year ended December 31, 2021 (Annual Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 193319333, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934.1934, as amended (Exchange Act). Forward-looking statements in this Annual 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, expected market 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 new members, to expand our product offerings and services, to improve revenue and generate recurring earnings, to capture expense benefits, to increase resiliency, and to enhance regulatory clarity;
•our ability, and that of third-party partners or providers, to address stricter or heightened regulatory or supervisory requirements and expectations;
•our compliance, and that of third-party partners or providers, with applicable local, state and federal laws, regulations and regulatory developments or court decisions affecting our business;
•the impact of COVID-19 and our ability to effectuate, and the effectiveness of, certain operational and strategic initiatives in light of COVID-19;
•our ability to successfully navigate the current economic climate;
•our ability to sustain the business under adverse circumstances;
•the effects of natural disasters, public health crises, acts of war or terrorism and other external events on our customers and business;
•the impact of changes in laws or the regulatory or supervisory environment, including as a result of legislation, regulation, policies or changes in government officials or other personnel;
•the impact of changes in monetary, fiscal, or trade laws or policies, including as a result of actions by governmental agencies, central banks, or supranational authorities;
•the impact of new accounting standards or policies, including the Current Expected Credit Losses (CECL) standard;
•the results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, increase our allowance for loan losses, increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits;
•our ability, and that of third-party partners or providers, to maintain an enterprise risk management framework that is effective in mitigating risk;
•our ability to effectively manage capital or liquidity to support our evolving business or operational needs, while remaining compliant with regulatory or supervisory requirements and appropriate risk-management standards;
•our ability to attract and retain loan borrowers;
•our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities;
•the impact of changes in consumer spending, borrowing and saving habits;
•the impact of the continuation of or changes in the short-term and long-term interest rate environment;
•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 retain existing sources and secure new or additional sources of investor commitments for our platform;
•the performance of our loan products and expected rates of return for investors;
•platform volume, pricing and balance;
•the effectiveness of our platform’s credit scoring models;
•our ability to innovate and the adoption and success of new product initiatives;products and services;
•the adequacy of our ability to obtain or add bank functionalitycorporate governance, risk-management framework and a bank charter;compliance programs;
•the impact on the business from obtaining or adding bank functionalityof, and a bank charter;
our ability to resolve, pending litigation and governmental inquiries and private litigation, and the terms of such resolution(s);investigations;
•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 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,partners and providers, 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;including recessions or other adverse circumstances;
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;
•changes in the effectiveness and reliability of our ability to successfully relocate peopleinformation technology and services;computer systems, including the impact of any security or privacy breach;
•the impact of expense initiatives;initiatives and our ability to control our cost structure;
•our ability to manage and repay our indebtedness; and
•other risk factors listed from time to time in reports we file with the SEC.United States Securities and Exchange Commission (SEC).
We caution you that the foregoing list may not contain all of the forward-looking statements in this Annual 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 “Risk Factors” section of this Annual Report, as well as in our consolidated financial statements, related notes, and other information appearing elsewhere in this Annual Report and our other filings with the Securities and Exchange Commission,SEC that could, among other things, cause actual results or events to differ materially from forward-looking statements contained in this Annual 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 Annual 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
Introduction
LendingClub is America’s leading digital marketplace bank. As a digitally native, vertically integrated, customer-focused company, and one of a small number of fintech companies with a national bank charter, we are uniquely positioned to create a next generation of financial products and services to improve our members’ financial health. We do this by bringing together the best of both worlds – fintech and banking – leveraging data and technology to increase consumer access to credit, lower their borrowing costs, and improve the return on their savings while delivering a seamless experience that focuses on fairness and simplicity.
LendingClub
The Company was incorporatedfounded in Delaware on October 2, 2006 and is currentlybrought a traditional credit product – the installment loan – into the digital age by leveraging technology, data science, and a unique marketplace model. In doing so, we became one of the largest providerproviders of unsecured personal loans in the US. We operate America’s largest online lending marketplace platform that connects borrowers and investors.United States. In February 2021, LendingClub provides tools that help Americans save money on their path to financial health through lower borrowing costs and a seamless, technology-driven user experience. Investors provide capital to enablecompleted the fundingacquisition of loans in exchange for earning competitive risk adjusted returns. Our marketplace enables efficient credit decisioning, pricing, servicing and support operations. We operate fully online with no traditional branch infrastructure. Our vision is to expand our marketplace model and support it with aan award-winning digital bank, charter, which we believe will be both strategically and financially accretive to the Company.
On February 18, 2020, the Company and Radius Bancorp, Inc. (Radius) entered into an Agreement, becoming a bank holding company 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 acquireforming LendingClub Bank, National Association (LC Bank), as its wholly-owned subsidiary Radius Bank (the Merger), in a cash and stock transaction valued at $185 million (ofthrough 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 ofwe operate 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.
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 competitive 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 LendingClub and its partners.
Through 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 our 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 lifetime valuevast majority of our customer base through increased revenue per memberbusiness (the Acquisition). The result is a combination of complementary strengths that create an economically attractive and lower member acquisition costs.resilient digital marketplace bank.
Our market opportunity
LendingClub is the market leader in unsecured personal loans in the United States,LendingClub’s loan customers – our “members” – can gain access to 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 refinance record levels of revolving credit card 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 potential to save thousands of dollars compared to traditional credit cards. Researchers at the Philadelphia Federal Reserve Bank have analyzed LendingClub data and concluded that we’re operating in areas where banks are closing their branches, improving pricing and the quality 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 make better financial decisions that result in improved money management and savings.
Our competitive advantages
The lending industry is highly competitive, rapidly changing, highly innovative and subject to regulatory scrutiny and oversight. We compete against a widebroader range of financial products and companiesservices designed to help them digitally optimize their lending, spending, and savings. Economic volatility and the current rising costs of healthcare, housing, education, and more have contributed to millions of everyday Americans having insufficient financial reserves or living paycheck to paycheck, including approximately 40% of those earning over $100,000 annually. They often turn to a limited set of higher cost debt solutions to bridge cashflow gaps and manage their financial lives. Our mission is to empower our high-income, high-FICO members on a path to better financial health, giving them new ways to pay less on their debt and earn more on their savings. Since 2007, approximately 4 million individuals have become members, joining the Club to help achieve their financial goals.
Strategic and financial benefits of the Acquisition include:
•Increased and more stable revenue driven by the addition of net interest income from loans held for investment, complementing existing marketplace revenue streams;
•Increased opportunity to attract new members and deepen relationships with existing members through the addition of new digital banking products and services that attract borrowers and/or investors.leverage LendingClub’s marketing and brand strengths;
With respect•Expense benefits by capturing the fees that were historically paid to borrowers, we primarily compete with other online consumer lending marketplacesthird-party issuing banks.
Our business model and traditional financial institutions, such as banks, credit unions,competitive advantages
We offer key business model and credit card issuers. LendingClub’s key competitive advantages over both traditional banks and fintech marketplaces. These include:
Price efficiency:•Unmatched data and analytics, which power our customer experience and underwriting results. We believe that lending is essentially a data problem and that we have the technology and expertise to solve it. We serve members across a wide band of the credit spectrum and have facilitated more than $70 billion of loans to approximately 4 million members since the Company was founded. Through our interactions with applicants and members we have collected more than 150 billion cells of performance and behavioral data across thousands of attributes and various economic cycles. That data informs our activities across the
customer lifecycle – from marketing to underwriting, pricing, and servicing – and informs our proprietary credit decisioning and machine learning models to rapidly adapt and adjust our operations to changing environments. As a result of our data advantage and iterative credit modeling, we believe we are able to assess credit risk more effectively than traditional scoring models, which allows us to expand access to credit and generate savings for members while also generating attractive risk-adjusted returns. We also believe those advantages promote lower customer acquisition costs and give us a deep understanding of our members, which helps us anticipate their needs, informs future product offerings, and enables us to effectively customize offers.
•Strong, growing, and engaged customer base. Our scalable technology marketplace, customer-focused culture, and use of data and analytics has enabled us to provide loans to millions of members, representing a wide band of the credit spectrum. Our typical member is among the industry’s most sought-after consumers: borrowers who are relatively high income (between $90,000 and $100,000 annual income), high FICO score (over the last three years our average FICO score has remained well above 700), and between mid-30s to mid-50s in age. Many of them have accumulated higher-cost debt as a result of relying on a limited set of available credit options to bridge cash flow gaps or disruptions. They want better, lower-cost solutions. In a December 2020 survey of our members, 83% of respondents told us that they want to do more with us. Our efficient marketplace model generatesenables us to generate savings for borrowersmembers by matching them with the lowest available cost of capitalfunding provided by investors.investors on our marketplace, including LC Bank. Our high net promoter score reflects the strong affinity our members have for our brand and the unique value we provide. In fact many of our members return to us for a subsequent loan and these “repeat members” have very low acquisition costs for us and better loan performance. Overall, our members’ engagement provides a launching pad for deepening relationships beyond personal loans and extending into future products.
Marketing efficiency:•Financially attractive and resilient business model. LendingClub operating a national bank has both immediate and long-term benefits. As the originating bank, we save on fees from third-party issuing banks, which compares favorably to nonbank fintechs. We now benefit from two distinct revenue streams: marketplace revenue in the form of origination fees from borrowers and servicing fees on loans sold to investors, which provide attractive in-period income; and net interest income earned from retaining a portion of our prime loan originations for investment, which provides a recurring and resilient revenue source. We are able to adjust the relative percentage of loans held for investment and loans sold through the marketplace depending on market conditions. In addition to improving our loan-level economics, our banking capabilities also substantially increase the long-term resiliency of our business by providing access to more stable deposit funding, which replaces higher-cost and more volatile third-party warehouse funding. Finally, as a digital-first marketplace bank we are better able to leverage technology to meet customers where they are and provide them with efficient and effective solutions.
Our marketplace not only allows us to serve a broad spectrum of borrowers, it also opens up a diverse ecosystem of capital to a new asset class of consumer debt. These marketplace investors innovationinclude a broad range of institutions that range from banks to institutional funds and returning members enable us to serve more borrowers and enhance our marketing efficiency.
Scale, data and innovative technology: our innovative technology and online platform enables us to generate and convert demand efficiently and at scale, while managing price and credit risk effectively.
With respect to investors, weasset managers. 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 for marketplace investors include:
Generating competitive•Competitive risk-adjusted returns efficiently: the naturereturns. We have a decade-and-a-half track record of the asset class available through, and the scale of, our marketplace platform enables us to efficiently generategenerating competitive risk-adjusted returns for marketplace investors. Our loans compare favorably to other alternative investment options due to their higher yield and lower duration. Further, our returns are competitive in different market environments, given our ability to dynamically price loans based on a variety of inputs, such as competitive insights, supply and demand, and prevailing interest rates.
•Portfolio diversification: unsecured personal loansdiversification. Loans we sell through our marketplace can offer duration, geographic, and/or asset diversification to investors.
•Innovative and easy-to-use technology platform. The investor marketplace brings the traditional loan trading model into the digital age with faster, more efficient transactions that enable borrowers and investors alike to achieve better outcomes. LendingClub’s electronic marketplace enables participating investors to purchase loans quickly and easily. The marketplace provides same day automated settlements,
flexible real-time market-based pricing, and the ability to customize investor portfolios and trading activity. Investors can use passive portfolio or active loan selection strategies.
•Regulated and resilient counterparty. As a national bank subject to regulatory oversight and an investor in our own loans, LendingClub is a trusted partner for banks participating on our marketplace.
Our loan origination and deposit gathering model
Our sales and marketing efforts are designed to efficiently attract and retain members and build brand awareness. We use an array of marketing channels and constantly seek to improve and optimize the member experience, both online and offline, to achieve efficiency and high levels of member satisfaction.
We attract and retain members directly through our website and through targeted online advertising, online aggregation partners, direct mail, and other channels, including search engines, social media, and strategic relationship referrals. Our growing member base often returns directly to LendingClub if they need another loan or deposit product – at very low acquisition cost for us – which increases the lifetime value of our members while helping them improve their financial health.
Our primary consumer products include unsecured personal loans, secured auto refinance loans, and patient and education finance loans (Consumer Loans). Since the Acquisition in February 2021, we have transitioned the origination of all Consumer Loans to LC Bank, except for a portion of education and patient finance loans, which continue to be innovativeoriginated by a third-party issuing bank.
Once a loan application is received, our multivariable and automated processes enable us to extend these competitive advantages.
In additionassess risk and present approved applicants with various loan options, including the term, rate, and amount for which the applicant qualifies. Although the approval of the vast majority of our loans are automated, we may perform additional verifications on the applicant. Once any verifications are completed, the loan is originated and proceeds of the loan are issued to the discussionborrower, net of any origination or transaction fee retained by us.
We currently offer 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 directly 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). These loan products are underpinned by a scalable technology platform and capabilities targeted directly at our members’ core needs to either lower the cost of their debt and/or improve the returns on their savings.
Our commercial lending business includes commercial and industrial loans, commercial real estate loans, small business loans, and equipment loans and leases. Commercial loans are sourced through relationship managers who maintain and build relationships with businesses across the country. We underwrite loans based on the creditworthiness of commercial clients, including an assessment of cash flows, and on the underlying value of collateral such as equipment or real estate.
For consumer depositors, we offer checking accounts, high-yield savings accounts, and certificates of deposit (CDs). Our checking accounts deliver an award-winning digital experience, customer friendly features, such as ATM fee rebates, no overdraft fees, early direct deposits, rewards, and competitive interest rates. We also offer a range of small business accounts, including checking accounts and U.S. Small Business Administration (SBA) lending programs.
Our marketplace
Our Consumer Loans are either: (i) sold to investors or (ii) retained by LC Bank. Our commercial loans are generally retained by LC Bank.
Loan Sales (Marketplace Activity): We sell loans to institutional investors, such as banks, asset managers, insurance companies, investment funds, and other large non-bank investors, through our innovative and proprietary marketplace. The marketplace is underpinned by LCX, our real-time electronic platform and settlement technology. This proprietary investor platform can easily be customized to meet the needs of individual investors thereby making transacting on our marketplace fast, easy, and repeatable. This marketplace has a variety of benefits derived from its unique features:
•A diverse, multifaceted investor market, which enables LendingClub to offer loans to a greater number of customers across a wider credit spectrum than what LC Bank retains on its balance sheet.
•A competitive, dynamically priced market that allows a broad array of investors to instantly buy loans at variable prices (at, below, or above par). The market’s competitive nature enables LendingClub to offer lower prices to customers. It also provides us with real-time information on current market prices and demand for certain types of loans, which helps inform our credit models.
•A flexible and adaptable platform that enables LendingClub to test new products or potential underwriting expansions with limited credit or market risk to LC Bank.
•Quick and efficient trading at scale, which allows investors to quickly deploy their strategies and change their approaches as conditions warrant.
•Unconstrained scale because there is no prescribed limit or capital considerations to the volume of loans we can originate and sell through the marketplace, which enables LendingClub to originate more loan volume than it would be able to if all loans were retained on LC Bank’s balance sheet.
LendingClub Bank: LC Bank buys a representative sample of high-quality prime loans from the marketplace and funds those loans directly with its own capital and deposits, which are typically stable and low cost. We retain these loans for investment on LC Bank’s balance sheet and recognize this source of recurring revenue over the life of the loans.
Retail Notes. Investors had historically been able to purchase LendingClub Member Payment Dependent Notes (Retail Notes), which are securities for which cash flows to investors were dependent upon principal and interest payments made by borrowers of certain unsecured personal loans. As of December 31, 2020, and in this section, seeanticipation of the closing of the Acquisition, LendingClub ceased offering and selling Retail Notes. The total balance of outstanding Retail Notes and related loans will continue to decline as underlying borrower payments are made. The Company does not share in any interest rate or credit risk on the related loans. In connection with the cessation of the Retail Notes program, many of those investors have become customers of LC Bank by participating in LC Bank’s high yield savings product.
Seasonality
Historically, personal loan volume on our marketplace is generally lower in the first and fourth quarters of the year, primarily due to seasonality of borrower behavior, which can impact volume. These seasonal trends contribute to fluctuations in our operating results.
Revenue
We originate Consumer Loans through the Company’s marketplace, either selling them directly to investors, which generates a majority of related revenue immediately, or using our own capital to hold the loans for investment, which generates revenue over the life of the loan.
Revenue from loans held for sale (HFS) is recorded in “Marketplace revenue” and “Interest income” on our Consolidated Statements of Operations (Income Statement). Marketplace revenue includes origination fees recorded at the time of loan origination and is monetized as cash from loan investor sale proceeds. Marketplace revenue also includes the gain on sales of loans (recognition of servicing asset), servicing fees received from investors over the life of the loan, and net fair value adjustments (gains or losses from sale prices in excess of or less than the loan principal amount). We also earn interest income on loans HFS between the time of origination and the settlement date of the loan sales to investors.
Revenue from loans held for investment (HFI) is recorded in “Interest income” on our Income Statement. Origination fees and applicable costs on loans HFI are deferred and are accreted through interest income, over the life of the loans and are accelerated when loans are paid in full before their maturity date. The Current Expected Credit Losses (CECL) allowance for HFI loans is calculated using a discounted cash flow (DCF) approach and is an estimate of the net present value of lifetime expected credit losses, which is initially recognized through earnings (as “Provision for credit losses”) at the time of origination, while the loan interest received and the accretion of deferred fees and costs are recognized according to the loan’s contractual payment terms. Due to the timing difference caused by origination fee deferrals and upfront credit loss provisioning, earnings are disproportionately impacted from the strong expected organic growth in our HFI loan portfolio before benefiting from higher levels of interest income in later periods.
Competition
The financial services industry is highly competitive, rapidly changing, highly innovative, and subject to regulatory scrutiny and oversight. We compete with financial services providers such as banks, credit unions, and finance companies. We also face increased competition from non-bank institutions such as online and marketplace lending companies, as well as from financial services subsidiaries of commercial and manufacturing companies. Many of these competitors have fewer regulatory constraints and some may have lower cost structures. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services.
See “Item 1A. Risk Factors – Substantial and increasing competition in our industry may harm our business.business” for further discussion of the potential impact of competition on our business.
Our modelRegulation and Supervision
Our salesGeneral
The U.S. financial services and marketing efforts are designedbanking industry is highly regulated. The bank regulatory regime is intended primarily for the protection of customers, the public, the financial system and the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC), rather than our stockholders or creditors.
The legal and regulatory regime affects virtually all aspects of our operations. Statutes, regulations and policies govern, among other things, the scope of activities that we may conduct and the manner in which we may conduct them; our business plan and growth; our board, management, and risk management infrastructure; the type, terms, and pricing of our products and services; our loan and investment portfolio; our capital and liquidity levels; our reserves against deposits; our ability to attractpay dividends, buy-back stock or distribute capital; and retain borrowers and investors and build brand awareness. We use a diverse array of marketing channels and constantly seekour ability 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,engage in mergers, acquisitions and other channels (including search engines, social media,strategic initiatives. The legal and strategic relationship referrals)regulatory regime is continually under review by legislatures, regulators and other governmental bodies, and changes regularly occur through the enactment or amendment of laws and regulations or through shifts in policy, implementation or enforcement. Changes are difficult to predict and could have significant effects on our business.
The material regulatory requirements that are applicable to us and our subsidiaries are summarized below. The description below, as well as other descriptions of laws and regulations in 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 andAnnual Report, are not commingled with our monies. If insufficient investor commitments are received and the Company does not electintended to purchase loans with its own capital, the loan is not funded.
Regulatory Framework
We are subject to regulation and supervision by multiple regulatory bodies. As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956 (BHCA) and is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the Board of Governors of the Federal Reserve System (FRB). The FRB’s jurisdiction also extends to any company that is directly or indirectly controlled by a bank holding company.
As a national bank, LC Bank is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the Office of the Comptroller of the Currency (OCC). The OCC charges fees to national banks, including LC Bank, in connection with its supervisory activities.
LC Bank’s deposits are insured by the DIF of the FDIC up to applicable legal limits. As an FDIC-insured depository institution, LC Bank is subject under certain circumstances to supervision, regulation and examination by the FDIC. The FDIC charges deposit insurance assessments to FDIC-insured institutions, including LC Bank, to fund and support the DIF. The rate of these deposit insurance assessments is based on, among other things, the risk characteristics of LC Bank. The FDIC has the power to terminate LC Bank’s deposit insurance if it determines LC Bank is engaging in unsafe or unsound practices. Federal banking laws provide for the appointment of the FDIC as receiver in the event LC Bank were to fail, such as in connection with undercapitalization, insolvency, unsafe or unsound condition or other financial distress. In a receivership, the claims of LC Bank’s depositors (and those of the FDIC as subrogee of LC Bank) would have priority over other general unsecured claims against LC Bank.
We are subject to the disclosure and regulatory requirements of the Securities Act and the Exchange Act, both as administered by the SEC. Our common stock is listed on the New York Stock Exchange (NYSE) under the trading symbol “LC” and therefore we are also subject to the rules of the NYSE for listed companies.
Broad Powers to Ensure Safety and Soundness
A principal objective of the U.S. bank regulatory system is to ensure the safety and soundness of banking organizations. Safety and soundness is a broad concept that includes financial, operational, compliance and reputational considerations, including matters such as capital, asset quality, quality of board and management oversight, earnings, liquidity, and sensitivity to market and interest rate risk. As part of its commitment to maintain safety and soundness, at the time the Company acquired LC Bank, LC Bank entered into an Operating Agreement with the OCC (the Operating Agreement). The Operating Agreement sets forth key parameters within which LC Bank must operate, such as with respect to its business plan, minimum capital, directors and senior executive officers, risk management and compliance.
The banking and financial regulators have broad examination and enforcement authority. The regulators require banking organizations to file detailed periodic reports and regularly examine the operations of banking organizations. Banking organizations that do not meet the regulators’ supervisory expectations can be subjected to increased scrutiny and supervisory criticism. The regulators have various remedies available, which may be public or of a confidential supervisory nature, if they determine that an institution’s condition, management, operations or risk profile is unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things:
•require affirmative actions to correct any violation or practice;
•issue administrative orders that can be judicially enforced;
•direct increases in capital;
•direct the sale of subsidiaries or other assets;
•limit dividends and distributions;
•restrict growth and activities;
•set forth parameters, obligations and/or limitations with respect to the operation of our business;
•assess civil monetary penalties;
•remove officers and directors; and
•terminate deposit insurance.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject us and our subsidiaries or their officers, directors and institution-affiliated parties to a broad variety of sanctions or remedies, including those described above.
Limits on Activities and Approval Requirements
The BHCA generally restricts the Company’s ability, directly or indirectly, to engage in, or acquire more than 5% of any class of voting securities of a company engaged in, activities other than those determined by the FRB to be so closely related to banking as to be a proper incident thereto. The Gramm-Leach-Bliley Act expanded the scope of permissible activities to include those that are financial in nature or incidental or complementary to a financial activity for a bank holding company that elects to be a financial holding company, which requires the satisfaction of certain conditions. We have not elected financial holding company status.
The bank regulatory regime, including through the Operating Agreement, requires that we obtain prior approval of one or more regulators for various initiatives or corporate actions, including acquisitions or minority investments, the establishment of branches, certain changes to our board or senior management, certain dividends or capital distributions, and significant deviations from LC Bank’s previously approved business plan. Regulators take into account a range of factors in determining whether to grant a requested approval, including the supervisory status of the applicant and its affiliates. Thus, there is no guarantee that a particular proposal by us would receive the required regulatory approvals.
The Community Reinvestment Act (CRA) requires federal banking regulators, in their review of certain applications by banking organizations, to take into account the applicant’s record in helping meet the credit needs of its community, including low- and moderate-income neighborhoods. LC Bank is subject to periodic examination under the CRA by the OCC, which will assign ratings based on the methodologies set forth in its regulations and guidance. Less favorable CRA ratings, or concerns raised under the CRA, may adversely affect LC Bank’s ability to obtain approval for certain types of applications.
Company as Source of Strength for LC Bank
Federal law and FRB policy require that a bank holding company serve as a source of financial and managerial strength for any FDIC-insured depository institution that it controls. Thus, if LC Bank were to be in financial distress or to otherwise be viewed by the regulators as in an unsatisfactory condition, then the regulators could require the Company to provide additional capital or liquidity support, or take other action, in support of LC Bank, even if doing so is not otherwise in the best interest of the Company.
Regulatory Capital Requirements and Prompt Corrective Action
The banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain a specified level of capital relative to the amount and types of assets they hold. While capital can serve as an
important cushion against losses, higher capital requirements can also adversely affect an institution’s ability to grow and/or increase leverage through deposit-gathering or other sources of funding.
The Company and LC Bank are each subject to generally similar capital requirements adopted by the FRB and the OCC, respectively. These requirements establish required minimum ratios for common equity tier 1 (CET1) risk-based capital, Tier 1 risk-based capital, total risk-based capital and a Tier 1 leverage ratio; set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; require an additional capital conservation buffer over the minimum required capital ratios in order to avoid certain limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses; and define what qualifies as capital for purposes of meeting the capital requirements. Specifically, the capital thresholds in order to be regarded as a well-capitalized institution under the Basel Committee on Banking Supervision standardized approach for U.S. banking organizations are as follows: a CET1 risk-based capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%.
The regulators assess any particular institution’s capital adequacy based on numerous factors and may require a particular banking organization to maintain capital at levels higher than the generally applicable minimums. In this regard, and unless otherwise directed by the OCC, we have made commitments for LC Bank to maintain a common equity Tier 1 risk-based capital ratio of 11%, a Tier 1 risk-based capital ratio above 11%, a total risk-based capital ratio above 13% and a Tier 1 leverage ratio of 11% for a minimum of three years following its formation.
The Federal Deposit Insurance Act provides for a system of “prompt corrective action” (PCA). The PCA regime provides for capitalization categories ranging from “well-capitalized” to “critically undercapitalized.” An institution’s PCA category is determined primarily by its regulatory capital ratios. The PCA requires remedial actions and imposes limitations that become increasingly stringent as an institution’s condition deteriorates and its PCA capitalization category declines. Among other things, institutions that are less than well-capitalized become subject to increasingly stringent restrictions on their ability to accept and/or rollover brokered deposits.
In addition to capital requirements, depository institutions are required to maintain non-interest bearing reserves at specified levels against their transaction accounts and certain non-personal time deposits.
Regulatory Limits on Dividends and Distributions
The ability of the Company or LC Bank to pay dividends, repurchase stock and make other capital distributions is limited by regulatory capital rules and other aspects of the regulatory regime. For example, a policy statement of the FRB provides that, among other things, a bank holding company generally should not pay dividends if its net income for the past year is not sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.
Dividends and capital distributions by LC Bank are also limited by the regulatory regimes. For example, the Operating Agreement requires LC Bank to obtain a prior written determination of non-objection from the OCC before declaring any dividend. Taking into account a wide range of factors, the OCC may object and therefore prevent LC Bank from paying dividends to the Company. Other laws and regulations generally applicable to national banks also limit the amount of dividends and capital distributions that may be made by a national bank and/or require prior approval of the OCC. Because substantially all of our business activities, income and cash flow are expected to be generated by LC Bank, an inability of LC Bank to pay dividends or distribute capital to the Company would adversely affect the Company’s liquidity.
See“Part II – Item 8. Financial Statements and Supplementary Data– Notes to Consolidated Financial Statements – Note 20. Regulatory Requirements” for additional information.
Consumer Protection
We are subject to a broad array of federal, state and local laws and regulations that govern almost every aspect of our business relationships with consumers. These laws relate to, among other things, the content and adequacy of disclosures, pricing and fees, fair lending, anti-discrimination, privacy, cybersecurity, usury, mortgages and housing finance, lending to service members, escheatment, debt collection, loan servicing, collateral secured lending, and unfair, deceptive or abusive acts or practices.
The Consumer Financial Protection Bureau (CFPB) is generally responsible for rulemaking with respect to certain federal laws related to the provision of financial products and services to consumers. In addition, the CFPB has examination and primary enforcement authority with respect to federal consumer financial protection laws with respect to banking organizations with assets of $10 billion or more. LC Bank has assets less than $10 billion; therefore, we are not currently subject to the examination and enforcement jurisdiction of the CFPB. However, many consumer protection rules adopted or amended by the CFPB do apply to us and are the subject of examination and enforcement with respect to us by the OCC.
If we fail to comply with these laws and regulations, we may be subject to significant penalties, judgments, other monetary or injunctive remedies, lawsuits (including putative class action lawsuits and actions by state and local attorneys general or other officials), customer rescission rights, supervisory or enforcement actions, and civil or criminal liability.
Anti-Money Laundering, Sanctions and Financial Crime
We are subject to a wide range of laws related to anti-money laundering (AML), economic sanctions and prevention of financial crime, including the Bank Secrecy Act, the USA PATRIOT Act and economic sanctions programs. We are required to, among other things, maintain an effective anti-money laundering and counter-terrorist compliance program, identify and file suspicious activity and currency transaction reports, and block transactions with sanctioned persons or jurisdictions. Compliance with these laws requires significant investment of management attention and resources. These laws are enforced by a number of regulatory authorities, including the FRB, OCC, Office of Foreign Assets Control, the Financial Crimes Enforcement Network, the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. Failure to comply with these laws, or to meet our regulators’ supervisory expectations in connection with these laws, could subject us to supervisory or enforcement action, significant financial penalties, criminal liability and/or reputational harm.
Third-Party Relationship Risk Management
We utilize third-party service providers to perform a wide range of operations and other functions, which may present various risks. Our regulators will expect us to maintain an effective program for managing risk arising from third-party relationships, which should be commensurate with the level of risk and complexity of our business and our third-party relationships. If not managed effectively, the use of third-party service providers may expose us to risks that could result in regulatory action, financial loss, litigation, and reputational harm.
Privacy, Information Technology and Cybersecurity
We are subject to various laws related to the privacy of consumer information. For example, the Company and its subsidiaries are required under federal law periodically to disclose to their retail clients the Company’s policies and practices with respect to the sharing of nonpublic client information with their affiliates and others, and the confidentiality and security of that information. In some cases, LC Bank must obtain a consumer’s consent before sharing information with an unaffiliated third party, and LC Bank must allow a consumer to opt out of LC Bank’s sharing of information with its affiliates for marketing and certain other purposes. We are also subject to laws and regulatory requirements related to information technology and cybersecurity. For example, the Federal Financial Institutions Examination Council (FFIEC), which is a council comprised of the primary federal banking regulators, has issued guidance and supervisory expectations for banking organizations with respect to information technology
and cybersecurity. Our regulators regularly examine us for compliance with applicable laws, and adherence to industry best practices, with respect to these topics. For example, they will evaluate our security of user and customer credentials, business continuity planning, and the ability to identify and thwart cyber-attacks.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. For example, the California Privacy Rights Act of 2020 is expected to become fully operative on January 1, 2023.We expect this trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which our clients are located.
Limitations on Transactions with Affiliates and Loans to Insiders
Banks are subject to restrictions on their ability to conduct transactions with affiliates and other related parties under federal banking laws. For example, federal banking laws impose quantitative limits, qualitative requirements, and collateral standards on certain extensions of credit and other transactions by an insured depository institution with, or for the benefit of, its affiliates. In addition, most types of transactions by an insured depository institution with, or for the benefit of, an affiliate must be on terms substantially the same or at least as favorable to the insured depository institution as if the transaction were conducted with an unaffiliated third party. Federal banking laws also impose restrictions and procedural requirements in connection with the extension of credit by an insured depository institution to directors, executive officers, principal stockholders (including the Company) and their related interests. In addition, purchases and sales of assets between an insured depository institution and its executive officers, directors, and principal stockholders may also be limited under such laws. The Sarbanes-Oxley Act generally prohibits loans by public companies to their executive officers and directors. However, there is a specific exception for loans by financial institutions, such as LC Bank, to its executive officers and directors that are made in compliance with federal banking laws.
Acquisition of a Significant Interest in the Company
Banking laws impose various regulatory requirements on parties that may seek to acquire a significant interest in the Company. For example, the Change in Bank Control Act of 1978 would generally require that any party file a formal notice with, and obtain non-objection of, the FRB prior to acquiring (directly or indirectly, whether alone or acting in concert with any other party) 10% or more of any class of voting securities of the Company. Further approval requirements and significant ongoing regulatory consequences would apply to any company that (directly or indirectly, whether alone or as part of an association with another company) seeks to acquire “control” of the Company or LC Bank for purposes of the BHCA. The determination whether a party “controls” a depository institution or its holding company for purposes of these laws is based on applicable regulations and all of the facts and circumstances surrounding the investment.
Certain Regulatory Developments Relating to the COVID-19 Pandemic CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was passed by Congress and signed into law by the President. Below is a brief overview of some of the provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and LC Bank.
Paycheck Protection Program (PPP). A principal provision of the CARES Act amended the Small Business Administration’s (SBA) loan program to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations, and self-employed persons during the COVID-19 pandemic. On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, additional legislation authorizing the SBA to resume accepting PPP
applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020 was signed. Subsequently, the SBA was authorized to resume accepting PPP applications through May 31, 2021. As a participating lender in the PPP, LC Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.
Temporary Regulatory Capital Relief Related to Impact of Current Expected Credit Losses (CECL). Concurrent with enactment of the CARES Act, federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on borrowings and changes in reserve requirements with respect to deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. The FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. Although we conduct stress tests to measure and prepare for the impact of potential changes in monetary policy, we cannot predict with certainty the nature of future monetary policies and the effect of such policies on our business and earnings.
Issuing Bank Model
Prior to acquiring Radius and establishing LC Bank, our issuing bank for unsecured personal and auto refinance loans iswas 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 and originated by WebBank and (ii) a servicing agreement that governs our loan servicing obligations for loans during the period of time that the loans are owned by WebBank. WebBank pays us a transaction fee for our role in processing loan applications through our lending marketplace on WebBank’s behalf. The transaction fee we earn corresponds with the origination 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 minimum 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.
bank. Our issuingpartner banks for education and patient finance loans arewere NBT Bank and Comenity Capital Bank, which originate and service education and patient financesuch loans. These issuing banks retain some of these loans while others are offered to private investors or 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 loan 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 marketplace and we do not have backup issuing bank arrangements.
Small and Medium-Sized Business (SMB) loans are provided through partnerships with Opportunity Fund and Funding Circle.
Our business
Our customers
Borrowers: Our marketplace facilitates unsecured personal loans that are 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 (including home improvement, education and healthcare costs) or for other purposes.
Borrowers applying for loans through our programs must meet certain minimum credit requirements, including a FICO score, satisfactory debt-to-income ratios, satisfactory 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. For auto loans, loan amounts are between $5,000 to $55,000, with maturities ranging between two to seven years, monthly amortizing payments, and 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 offer 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 (Notes).
A portion of the standard loan program (Prime Loans) are randomly allocated and listed based on demand at a grade and term level to retail investors purchasing interests in fractions of 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 Prime Loans issued through our lending marketplace since its inception.
When an investor opens an account with us, the investor enters into an investor agreement that governs the investor’s purchases of Notes. Our Notes channel is supported by our website and our Investor Services group, which provides basic customer support to these investors.
Investor cash balances (excluding payments in process) 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 facilitated 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 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 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 to service and collect the loans in the trust. We use our own capital to purchase certain of the loans that are subsequently contributed to these deals. We are required to retain a portion of the credit risk in these securitization transactions. As a result of our securitization capability, we have broadened our platform’s access to a large and liquid asset-backed securities market, reached new institutional investors, and provided a capital markets financing alternative for the Company.
Certificate Program Transactions: The Company sponsors the sale of unsecured personal whole loans through the issuance 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 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. As the sponsor for Certificate Program transactions, the Company manages the completion of the transaction. We have ongoing obligations to the master trust and series trusts, including to repurchase loans in certain circumstances and to service and collect the loans in the trusts. We use our own capital to purchase certain of the loans that are subsequently contributed to these transactions. We are required to retain a portion of the credit risk in these securitization transactions. The sale of certificate securities under our Certificate Program results in more liquidity and demand for unsecured personal loans facilitated through our platform. These securities are tailored for institutional investors seeking access the consumer credit asset class.
Company purchases: LendingClub funds certain loans directly with its own capital to balance the marketplace and to 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 LCX.
Scale: Investors purchase unsecured personal prime loans at scale by providing LendingClub with standing instructions to purchase 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 clearing price. LCX also lays the foundation to develop secondary market capabilities and our ability to sell loans at prices other than par.
Product and platform innovation continue to support LendingClub’s ambitions to develop the unsecured personal loans asset class with investors by enabling more investors to purchase loans.
Institutional investor concentration: Our success is dependent on investors participating on our lending marketplace and, as 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 investors, including us, represent a large percentage of the capital on our platform, which enable the funding of loans and our associated 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 investor concentration.
Credit scoring and decisioning
Our lending marketplace provides an integrated and automated loan application and credit decisioning and scoring process that 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. Borrowers 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, in accordance with the issuing bank’s credit policy. We utilize an outsourced provider to assist us in the processing of certain loan 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 make modifications to the models. This information assists 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.
We believe we have the experience and capabilities to effectively evaluate a borrower’s credit worthiness and likelihood of default, offering competitive risk-adjusted return opportunities for loan investors.
Loan Servicing
We service the 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.
Payments for loans that we service are 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 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. There is no collection fee charged if no loan payments are
recovered. We sell most loans that have been charged-off to third parties. All proceeds received on these sales are subject to a collection 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 interest income. Fair value adjustments are impacted 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. Investor fee revenue related to whole loans sold also includes the change in fair value of our servicing assets and liabilities associated with the loans.
Gain (Loss) on Sales of Loans connected to whole loan sales and Structured Program 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.
Referral Revenue fees are earned from third-party companies when customers referred by 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 (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 bank whose loans we facilitate, is subject to oversight by the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. NBT Bank and Comenity Capital 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)OCC and was phased out as a partner in 2021. Comenity Capital Bank is subject to oversight by the FDIC and the Utah Department of Financial Institutions.Institutions, and will continue to be a partner in 2022. These authorities impose obligations and restrictions on our activities and the loans facilitated through our lending marketplace.marketplace through issuing and partner banks.
As part of our ongoing compliance program, weThere have customer identification processes in placebeen challenges 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 regulations. In addition to our identification and transaction monitoring compliance programs, we use technology to assist us in complying with applicable federal anti-money laundering laws on both sides of our platform for borrowers and investors.
Regulations and Licensing
The lending and securities industries are highly regulated 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 facilitated through our lending marketplace and are subject to regulation by the FDIC and/or other relevant federal and state regulators.
Further, federal and state governmental authorities impose additional obligations, direct oversight and restrictions on our activities and the loans facilitated through our lending marketplace as part of their oversight of the third-party service providers of the issuing banks. While compliance with such requirements is at times complicated by our business model, the Company strives to ensure compliance with all 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 and some enforcement authorities and private parties have challenged the ability of nonbank agents in certain lending programs, in some cases with similaritiesa bank to ours, to rely on legislative and judicial authority that permits an FDIC-insured depository institution, such as WebBank, to "export"“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 forlocated. For example, 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.
In June 2019, certain Capital One and Chase credit card holders filed putative class actions in U.S. District Court in 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’s2015 decision in Madden v. Midland Funding, LLC that interpretedled to an increase in inquiries, regulatory proceedings and litigation relating to the scopeapplication of federal preemption under the NBAstate usury restrictions and held thatlimitations and lending arrangements where a non-bank debt collector that purchasedbank or other third party has made a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury.
and then sells and assigns it. 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 a 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 20192020, the OCC issued a proposed rulemaking to amend its regulations to clarifyfinal rule clarifying 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.loan (the OCC Rule). The FDIC issued a similar proposal that isfinal rule in 2020 applicable to FDIC insured state-chartered banks. Various commentsbanks (the FDIC Rule). Since these final rules, several federal district courts have declined to the proposed rules were submitted from a variety of companies and other regulators. It is unclear what impact the position of these various regulators onfollow the Madden decision, will haveincluding in existingColorado, Massachusetts and New York. On February 8, 2022, a federal district court granted summary judgment in favor of the OCC and FDIC in lawsuits brought by multiple states seeking to invalidate the OCC Rule and FDIC Rule (California, et al. v. The Office of the Comptroller of the Currency, et al., No. 4:20-cv-05200-JSW (N.D. Cal.); California, et al. v. Federal Deposit Insurance Corporation, No. 4:20-cv-05860-JSW (N.D. Cal.)).
Regulatory Examinations and Actions Relating to the Company’s Pre-Acquisition Business
The Company is routinely subject to examination for compliance with applicable laws and regulations in the states in which it is licensed. Prior to the Acquisition, the Company conducted its business through nonbank entities, some
of which maintain or future litigation or regulatory proceedings involving argumentsmaintained various financial services licenses in numerous jurisdictions. Since the Acquisition, the vast majority of federal preemption ofthe Company’s business is conducted through LC Bank pursuant to the laws applicable to national banks. Accordingly, many state usury laws.
In addition,level regulations and licensing requirements no longer apply to the Company post-Acquisition in part because: (i) it is a bill was passed in late 2017 by the House of Representatives that could clarify that any loan originated bybank holding company operating a national bank would be entitledand therefore subject to the benefits of federal preemption on claims of usury provided that certain criteria are met. However, the bill was never passed by the Senate and we do not know whether this bill 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 be or its potential impact on our business.
Although we believe that our program is factually distinguishable from the Madden case, an extensionpurview of the applicationfederal banking regulations and regulators, and (ii) post-Acquisition, the Company has ceased certain types 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.
Financial Technology 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 perspectiveoperations that were unique to the California Department of Business Oversight. The application of state laws to ourits pre-Acquisition 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,model, such as the Truth in Lending ActRetail Notes program.
Therefore the Company’s nonbank entities have returned, and are continuing to return, certain state financial services licenses. Nevertheless, even after state financial services licenses are returned, 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 are subject to the regulatory and enforcement authority of the CFPB, as a facilitator, servicer or acquirer of consumer credit. Since its creation, the CFPB has announced “larger participant rules” to expand its supervisory authority in various areas of the financial industry. The CFPB has announced larger participant rules for auto lenders, and as our auto refinance business grows, weCompany 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, because of our issuing bank model, we are exempt from or satisfy relevant licensing requirements with respect to the origination of loans we facilitate. However, we may need, and have obtained, one or more state licenses to broker, acquire, service and/or enforce loans. As needed, we have endeavored to apply for and obtain the appropriate licenses. 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, but 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, and we have experienced, are currently and will likely continue to be subject to the regulation, supervision and experience exams byenforcement of various state regulators. These examinations have and mayregulatory authorities with respect to legacy or residual activities. Furthermore, the Company’s nonbank entities continue to result in findings or recommendations that require usmaintain certain state licenses, which continue to modifysubject the Company to the regulation, supervision and enforcement of some state regulatory authorities.
The Company has periodically had discussions with various regulatory agencies regarding our internal controls and/orpre-Acquisition business practices.
See “Item 1A. Risk Factors – Risks Relatedmodel. For example, the Company is subject to Our Business and Regulation,”“Part II – Item 7. Management’s Discussion and Analysisexamination by the New York Department of Financial ConditionServices (NYDFS) with respect to the period prior to the Acquisition and Resultsbecoming a bank holding company operating a national bank. At times these historic exams have included the application of Operations – Regulatory Environment”state usury rates and “Part II – Item 8. Financial Statementslending arrangements where a bank or other third party has made a loan and Supplementary Data – Notesthen sells and assigns it 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 businessan entity that 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 practicesengaged in connectionassisting with the deliveryorigination or servicing 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. While 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 exercised this power. If a loan made through our lending marketplace were deemed to be subject to the usury laws of states or U.S. territories (because such state or U.S. territory has opted-out of the rate exportation regime or otherwise), we could become subject to fines, penalties and possible forfeiture of amounts charged to the 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. 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 the issuing bank’s TILA disclosure during the loan application process. If the amount of the loan the borrower chooses to accept during the application process changes after the TILA disclosure is presented to the borrower, we provide an updated TILA 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 facilitates a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers 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. Prospective 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), 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 persons 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 or received from a third party and requires 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 report on the applicant and we also obtain explicit consent from applicants 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 applicant on WebBank’s behalf at the time the applicant is rejected that includes all the required 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 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 inloan. During the course of debt collection. Whilesuch discussions with the FDCPA appliesNYDFS, the Company decided 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 professional third-party debt collection agencies to collect delinquent accounts. They are required tovoluntarily comply with all applicable laws in collecting delinquent accounts of borrowers.
Privacycertain rules and Data Security Laws. The federal Gramm-Leach-Bliley Act (GLBA) andregulations while it was not a bank holding company operating a national bank. Post-Acquisition, the Company has returned its New York state privacy laws include limitations on financial institutions’ disclosure of nonpublic personal information aboutlicense to the NYDFS, but is subject to 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 practicestwo-year lookback period, which remains ongoing, with respect to information sharingcompliance with affiliatedNYDFS regulations.
Additionally, prior to discontinuing the offer and nonaffiliated entities as well assale of Retail Notes in December 2020, the Company undertook a review of its portfolio of licenses and had discussions with regulators in Texas, Arizona, New York, Florida and North Dakota concerning the licensing/registration required for the issuance of Retail Notes to safeguard personal customer information. We have a detailed privacy policy,investors in these states and applied for registrations in these states to facilitate these operations. The Company has reached resolutions with Texas, Arizona and North Dakota to resolve their concerns, the outcome of which is accessible from every page ofnot material to our website. We maintain consumers’ personal information securely, and use and share such information in accordance with our privacy policy and/operations 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 rule’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.
Banking Regulations
As disclosed above, we are pursuing the acquisition of Radius which, if closed, will result infinancial position. Because the Company becoming subject to the Bank Holding Company Acthas ceased offering and selling Retail Notes, it has returned Retail Notes related state licenses and withdrew 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.
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 our issuing banks, we have implemented various anti-money laundering policies and procedures to comply with applicable federal 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 BSA 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, 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 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 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.
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 BusinessRegulation, Supervision and RegulationCompliance.”
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.
At
The Company and its consolidated subsidiaries had 1,384 employees as of December 31, 2019,2021, all of whom were located in the United States. Our workforce has increased from 980 employees as of December 31, 2020, with much of the increase coming from the Acquisition and hiring in key functions to support our growth and enhance our compliance environment.
Our success depends, in large part, on our ability to recruit, develop, motivate, and retain employees with the skills to execute our long-term strategy. We participate in a competitive market for talent and aim to distinguish ourselves by offering our employees the opportunity to make a meaningful positive impact on the financial health of Americans in an innovative technology-oriented environment. We also offer competitive compensation and benefits. Our compensation programs consist primarily of base salary, corporate bonus, and equity awards. We periodically conduct pay equity surveys to ensure our compensation programs are applied equitably across our workforce. Our benefits programs consist of comprehensive health, dental, and welfare benefits, including a 401(k) matching program and online mental health tools.
We are committed to advancing a safe work environment for our employees. Our commitment to diversity, equality and inclusion has won multiple awards and we had 1,538 employeeshave also been recognized as a Top Workplace in the U.S. We adhere, and contract employees. Noneexpect all of our employees are representedto adhere, to our Code of Business Conduct and Ethics, which, among other things, sets forth numerous policies designed to provide for a safe, ethical, respectful and compliant work environment. During the COVID-19 pandemic, our commitment to our employees has been guided by a labor union. Wecore principle: keeping our employees safe. With that principle in mind, in March 2020, we rapidly and effectively implemented a work from home program and the majority of our workforce continues to work exclusively from home. As we have not experienced any work stoppages,begun to reopen our physical offices, we have grounded our return to office strategy in legal requirements and public health guidance in combination with the needs of our employees.
Diversity and inclusion are core to our corporate culture and we considercontinue to strive to improve the diversity of talent within the financial services industry. Diversity and inclusion is an important consideration in hiring decisions and we strive for a 50% diverse candidate slate and interview panel for open roles. In addition to anti-racism, inclusive hiring, and breaking bias trainings for all of our employees, we have executive-sponsored programs designed to provide women and under-represented individuals with leadership training and growth opportunities. Further, we have employee relationsresource groups and allyship programs designed to be good.empower our employees to advocate for the growth of minorities and build a more diverse and inclusive workplace. With respect to our board of directors, the current composition does not reflect the gender or racial diversity we want. Accordingly, we are committed to appointing future candidates that bring increased diversity. As of December 31, 2021, our full-time workforce was 43% female and 48% non-white.
Available Information
The address of our principal executive offices is LendingClub Corporation, 595 Market Street, Suite 200, San Francisco, California, 94105. Our website address is www.lendingclub.com. At our investor relations website, 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 as soon as reasonably practicable after they are electronically filed with, or furnished to, the 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)blog.lendingclub.com,) and Twitter 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 SEC maintains a 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 “Part“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 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 “
Item 1. Business.”
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 Statea number 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. 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. Our 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 marketplace and we do not have a backup origination arrangement.
We believerisks that our relationship with WebBank is critical to our current 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 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 not successful in developing a financial and bank capitalization plan or enhancing, as needed, our 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 certain 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 and 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 harmed.
We are regularly subject to litigation, and government and regulatory investigations, inquiries and requests.
We are regularly subject to claims, individual and class action lawsuits, lawsuits alleging regulatory violations such as the Telephone Consumer Protection Act (TCPA), 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 are also subject to significant litigation and regulatory inquiries, as discussed more fully in “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 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) 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, (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.
A portion of the loans facilitated through our platform are purchased by the Company for a variety of reasons, including, but not limited to: (i) to support structured program transactions, (ii) to facilitate certain whole loan sales initiatives, (iii) to enable the testing or initial launch of alternative loan terms, programs or channels, and (iv) to mitigate marketplace imbalances on our platform for limited grades or terms, which arise when there is insufficient investor demand for certain loans available for purchase.
We may hold 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 borrowers. In the event of a decline or volatility in the credit profile of these borrowers the value of these held loans may decline. This may adversely impact the liquidity of these 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.
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 provide incentives to investors to purchase such loans from the Company or we 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 prior to its sale. However, selling loans with incentives or at prices less than par may discourage investors from purchasing loans on our 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 results.
If we are unable to develop and commercialize 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 new 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 compelling products, services or enhancements in the meantime. 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 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.
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.
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 arrangements 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 more information.
If a borrower or 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 and repayment of principal and interest to borrowers and 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 interest rates for personal loans, all of which would substantially reduce our operating efficiency and attractiveness to investors and may materially adversely affect our business, financial condition and results of operations.
The regulatory framework for our business is complex, evolving These risks are discussed more fully below and uncertain as federal and state governments consider new laws to regulate online lending marketplaces such as ours.
The
Risks Related to Regulation, Supervision and Compliance
•operating within the bank 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 “Item 1. Business – Regulatory and Compliance Framework.”
Any failure or perceived failure to comply with existing or new laws, regulations, or orders of any government authority (including changes to or expansion of the interpretation of those laws, regulations, or orders), including those discussed in 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 foregoing could, individually or in the aggregate, harm our reputation, damage our brands and business, and adversely affect our results of operations and financial condition.
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 “Item 1. Business – Regulatory 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 “Item 1. Business – Regulatory 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 Consumer Protection Laws
As discussed in “Item 1. Business – Consumer Protection Laws” 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 and to communications with or to customers or prospective customers.
Banking Regulations
As disclosed above, we are pursuing a Transaction which, if closed, will result in the Company becoming subject to the 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. 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 regulationsregime and to the satisfaction of the banking regulators. If we are not successfulregulators;
•our compliance with applicable laws and regulations (including foreign laws);
•the adequacy of our allowance for loan losses;
•operating within capital and liquidity regulations and requirements;
•the adequacy and effectiveness of our risk management framework;
•the impact of any changes to the legal and regulatory regime; and
•our participation in developing and remaining compliant with a financial and bank capitalization plan and enhancing our governance, compliance, controls and management infrastructure and capabilities, the Federal Paycheck Protection Program.
Risks Related to Operating Our Business
•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 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.
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 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 seek to 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 or that we will be in full compliance with all applicable requirements. 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.
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 held 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 holdholding 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 to occur, we may be obligated to repurchase the affected loans, 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.
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 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, 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 brand and reputation and reducing our business.
If we are unable to accurately forecast demand for loans, our business could be harmed.
We 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 borrower demand at a given credit rate exceeds investor demand for that product for a given period, we may fund the loans and hold them on our balance sheet, which carries certain risks. The vast majority of investor funding on our platform is non-committed and therefore it is challenging to precisely forecast investor demand. In addition to the discussion in this section, see “Holding loans on our balance sheet exposes us to credit, liquidity and interest rate risk, which may adversely affectrisk;
•maintaining our financial performance.”deposit base;
Alternatively,•the impact of litigation and regulatory investigations, inquiries and requests;
•M&A activity, including our recent Acquisition;
•disruptions in our technology systems or failures in our technology initiatives;
•maintaining, protecting and promoting our brand;
•offering a breadth and volume of investment opportunities for platform investors;
•managing, and the event that investor demand at a given return exceeds borrowerimpact of, fraudulent activity;
•forecasting demand for that product for a given period, there may be insufficient inventoryloans;
•maintaining and increasing loan originations;
•the ability of platform investors to satisfy investor demand. If investors do not believe their demand can be met on exert influence over us;
•our platform, they may seek alternative investments from oursuse of the issuing bank partnership model;
•breaches of certain representations and our business may suffer.warranties made to others; and
Liquidity risk could impair •our ability to manage and grow our operations, which may adversely affect our financial condition.indebtedness.
As stated above, a portionRisks Related to Macroeconomic Conditions or Other External Factors
•the impact of the loans facilitated through our platform are purchased by us for a variety of reasons. Purchasing loans requires liquidityCOVID-19 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 fundingnavigate the current economic environment;
•fluctuations in amounts adequate to finance our currentinterest rates;
•negative publicity and projected operationsmedia coverage;
•the political environment and on terms attractive to us, eachfiscal/monetary policies;
•a decline in overall social and economic conditions; and
•the impact of which could be impaired by factors specific to us or the financial markets generally. A lack of sufficient liquidity may adversely affect our financial condition by, amongnatural disasters, infrastructure failures and other things, impairing our ability to meet investor demand for structured program transactions or forcing us to alter our operations in a manner that may reduce origination volume.business interruptions.
In addition, if we are required
•the accuracy and effectiveness of our credit decisioning models; and
•the effectiveness of our collections efforts.
Risks Related to rely more heavilyOur Industry
•our ability to compete; and
•the soundness of other financial institutions.
Risks Related to Personnel and Third Parties
•attracting and retaining employees;
•the impact of any misconduct or errors; and
•our reliance on, more expensive funding sourcesand relationship with, third parties.
Risks Related to support existing operations and/or future growth,Data, Intellectual Property and Privacy
•security incidents, failures and bugs in our revenues may not increase proportionatelysystems;
•the impact of cyber-attacks suffered by third parties;
•the collection, storage and use of personal data;
•protecting our intellectual property rights; and
•our use of open source software.
Risks Related to cover Tax and Accounting
•our costs which may adversely affectability to use our operating marginsdeferred tax asset;
•our net loss position; and profitability.
Furthermore, if we obtain a bank 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 business.
If we do not maintain or continue to increase loan originations facilitated through our lending marketplace, or expand our lending marketplace to new markets, we may not succeed•changes in maintaining and/or growing our business, and as a result our business and results of operations could be adversely affected.
To maintain and 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 lendingaccounting standards and newincorrect estimates and existing investorsassumptions.
Risks Related to invest in these loans.the Ownership of Our ability to attract qualified borrowers and attract new and retain existing investors each depends in large part on Common Stock
•the successvolatility of our marketing efforts, stock price and fluctuations in quarterly results;
•the availability and content of research and reports by analysts;
•future equity dilution;
•our visibility, placementanti-takeover provisions and customer reviews on third-party platforms,restrictions in accumulating a position in the Company; and
•our intention to not pay dividends in the foreseeable future.
RISKS RELATED TO REGULATION, SUPERVISION AND COMPLIANCE
We operate in a highly regulated environment that affects virtually all aspects of our operations, and the competitive advantage of our products, particularly as we continue to grow our lending marketplace and introduce new 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. Additionally, changes in the way third-party platforms operate, including changes in our participation on such platforms, could make the maintenance and promotion of our products and services, and 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 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 is insufficient investor 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 business and financial results may be adversely affected. Furthermore, if we restructure our 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.
A small number of investors, including LendingClub, account for a large dollar amount of investment through our lending marketplace and if these investors pause or cease their participation or exert influence over us, our business, financial condition and results of operations may be harmed.
A small number of loan investors, including the Company, account for a large dollar amount of capital on our platform. 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 events 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. For example, if investors other than the Company pause or discontinue their investment activity, we may need to provide incentives or discounts and/or enter into unique structures or terms to attract investor capital to the platform. These arrangements may have a number of different structurescomply with applicable laws, regulations and terms, including alternative fee arrangements or other
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 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 materialsupervisory expectations can materially impact on our business, financial condition and results of operations.
A declineWe are subject to extensive regulation, supervision and legal requirements that affect virtually all aspects of our operations. The regulatory regime governing banking organizations is generally intended to protect customers, depositors, the Deposit Insurance Fund (DIF) and the overall financial stability of the United States, not our stockholders or creditors. See “Item 1. Business – Regulation and Supervision” for information on the regulation and supervision framework which governs our Company and its activities.
We are regularly examined and inspected by our regulators, including the FRB and OCC. Our regulators have extensive authority and discretion in socialtheir interpretation, implementation, supervision and economic conditionsenforcement of the regulatory regime, including on matters related to:
•dividends or capital distributions by LC Bank or the Company;
•capital and liquidity requirements applicable to us, including the imposition of requirements more stringent than those required under generally applicable laws;
•the types and terms of products we offer, activities we may conduct or investments we may make;
•the composition, risk characteristics, potential adverse classification, allowance and risk reserves in connection with our loans or other assets;
•our deposit-gathering and other funding sources;
•the quality of our board and management oversight;
•the effectiveness of our risk management and compliance programs, including with respect to consumer protection, information technology, cybersecurity, third-party risk management, anti-money laundering and sanctions;
•LC Bank’s commitment to helping meet the credit needs of low- and moderate-income neighborhoods under the Community Reinvestment Act of 1967;
•their willingness to approve applications, such as for changes in our business plan, the establishment of new branches, the commencement of new activities, or the conduct of mergers and acquisitions; and
•our rate of growth and other expansionary or strategic initiatives.
The Company became a bank holding company on February 1, 2021, with its acquisition of Radius, and therefore has only recently become subject to the bank regulatory regime. We continue to devote substantial time and resources to compliance and meeting our regulators’ supervisory expectations, which will adversely affect our profitably and 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 payment(s) on the corresponding loan, the investor will not be entitled to the 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. In 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 would decline as compared to a loan that was timely paid in accordance with the amortization 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, which could negatively affect our business and results of operations. In addition to the discussion in this section, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current Economic and Business Environment.”
Our growth depends in part on the success of our strategic relationships with third parties.
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.pursue advantageous business opportunities.
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 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. The 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 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 are 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 borrower loans. We generally use our in-house collections department as a first step when a borrower misses a payment. Because we make payments ratably on an investor’s investment 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 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 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 on 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 a significant increase in the number of delinquent or charged-off loans 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 connectioncomply 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 inapplicable laws, regulations or limit operations in those states. Regardless of any such registration, qualificationcommitments, 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 yieldour regulators’ supervisory 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 ofamong other things, supervisory or enforcement action, which could adversely affect our business, financial condition and results of operations.
WeIf we do not comply with applicable laws, regulations or commitments, if we are exposeddeemed to cyber-attacks, data breaches, internal employeehave engaged in unsafe or unsound conduct, or if we do not satisfy our regulators’ supervisory expectations, then we may be subject to increased scrutiny, supervisory criticism, governmental or private litigation and/or a wide range of potential monetary penalties or consequences, enforcement actions, criminal liability and/or reputational harm. Such actions could be public or of a confidential nature, and arise even if we are acting in good faith or operating under a reasonable interpretation of the law and could include, for example, monetary penalties, payment of damages or other insider misconduct, computer viruses, physicalmonetary relief, restitution or disgorgement of profits, directives to take remedial action or to cease or modify practices, restrictions on growth or expansionary proposals, denial or refusal to accept applications, removal of officers or directors, prohibition on dividends or capital distributions, increases in capital or liquidity requirements and/or termination of LC Bank’s deposit insurance. Additionally, compliance with applicable laws, regulations and electronic break-inscommitments requires significant investment of management attention and similar disruptions that may adversely impactresources. Any failure to comply with applicable laws, regulations or commitments could have an adverse effect on our ability to protect the confidential informationbusiness, financial condition and results of our borrowers and our investors and that could adversely impact our reputation, business approach and financial performance.operations.
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 dataallowance 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, whichloan losses 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.cover actual losses.
Cyber-attacks suffered by third parties could negatively affect our business.
We utilize certain information providedmaintain an allowance for loan losses to provide for loan defaults and non-performance. We reserve for loan losses by third parties to facilitate the marketing, distribution, servicing and collectionestablishing an allowance that is based on our assessment of loans. A cyber-attack suffered by a third-party that provides data to us could impactloan losses in 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 productsloan portfolio. Further, 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 resultits adoption of the releaseCECL model, the Financial Accounting Standards Board (FASB) has implemented a new accounting model to measure credit losses for financial assets measured at amortized cost, which includes the vast majority of personally identifiableour loan portfolio. Under this new model, the allowance is established to reserve for management’s best estimate of expected lifetime losses inherent in our finance receivables and loan portfolio.
The process for determining the amount of the allowance requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. Changes in economic conditions affecting borrowers, revisions to accounting rules and related guidance, new qualitative or quantitative information from a third-party platform, we could experienceabout existing loans, identification of additional problem loans, changes in the size or composition of our finance receivables and loan portfolio, changes to our loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of our control, may require an increase in fraudulentthe allowance for loan applications or investor accounts. Under our policies, we reimburse investors for any loan obtained as a resultlosses.
A decline in the national economy and the local economies of a verified identity fraud and any increasethe areas in identity theftwhich the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased reimbursement costs.charge-off amounts and the need for additional loan loss allowances in future periods. In addition, our regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance.
We may incur substantial indebtednessare subject to stringent capital and any failure to meet our debt obligations could adversely affect our business.liquidity regulations and requirements.
We haveLendingClub Corporation is the parent company of and may continue to enter into arrangements pursuant to which we can incur significant indebtedness. For example,a separate and distinct legal entity from LC Bank. Legal entity liquidity is an important consideration as of December 31, 2019, we had $60.0 million in debt outstanding under our Revolving Facilitythere are legal, regulatory, contractual and $387.3 million in debt outstanding, in the aggregate, under our 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 dependother limitations on our ability to pay with available cash utilize liquidity from one legal entity to satisfy the liquidity requirements of another, which could result in adverse liquidity events at either LendingClub Corporation and/or generate cash in the future. This, to a certain extent,LC Bank. In particular, LC Bank is subject to financial, competitive, legislative,laws that restrict dividend payments, or authorize regulatory and other factors that are beyond our control. In addition, if we cannot service our indebtedness, we may havebodies to take actions such as utilizing available capital, limitingblock or reduce the facilitationflow of additional loans, selling assets, selling equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impedefunds from those subsidiaries to 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 CLUB Certificate product. To support these offerings and other initiatives, we have and will likely continue to use 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 offeringsparent company 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 impactsubsidiaries. Applicable laws and regulations, including capital and liquidity requirements, could restrict our ability to repay our indebtedness when duetransfer funds between LC Bank and divert resources away from other projects and initiatives.
Some of our debt carries a floating rate of interest linked to the 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 through 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. While these agreements generally include alternative rates to LIBOR, if a change in indices results in interest rate increases on our debt, debt service requirements will increase,LendingClub Corporation, which could adversely affect our cash flow and operating results. Furthermore, for those agreements whichfinancial condition. Additionally, applicable laws and regulations may restrict what LendingClub Corporation is able to do not include alternative rates to LIBOR, while we plan on working in good faith with the lenders thereto to establish an alternate benchmark rate, in the event that an agreement cannot be reached on an appropriate benchmark rate, the availability of borrowings under these agreements could be adversely impacted. At this time, the Companyliquidity it does not expect a materially adverse change to its financial condition or liquidity as a result of any such changes or any other reforms to LIBOR thatpossess, which may be enacted in the United Kingdom or elsewhere.
Certain of our credit 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 Commitment Termination Dates of these 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 Commitment Termination Dates would be repaid as an amortizing term loan, which would preclude our ability to draw additional funds from such facility and may adversely impact our ability to fund 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 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 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 transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
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 resources 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 subject 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 or disposed 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 performance of any acquired loan portfolios;
potential disruptions to our ongoing businesses; and
unexpected costs and unknown risks and liabilities associated with the acquisition.
We may 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 offset the associated costs or may not otherwise result in the intended 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 may not be realized at all, which could adversely affect our business and operating results.results of operations.
Any transactions, combinations, acquisitions, dispositions or alliances may alsoBank holding companies, including the Company, are subject to capital and liquidity standards. Further, we have made certain commitments to the banking regulators which require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses relatedhold capital incremental to intangible assets or write-offs of goodwill,the minimum required under the applicable standards, which could adversely affect our results of operationsthereby impact the Company’s ability to invest in assets. From time to time, regulators may implement changes to these capital adequacy 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 products and services or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable. Further, we may also choose to divest certain businesses or product lines that no longer fit with our strategic objectives.liquidity requirements. 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 fails to ongoing obligationsmeet these minimum capital adequacy and liabilities.
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject ourliquidity guidelines and other regulatory requirements, its 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. federalactivities, including lending, 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 utilizeexpand could be limited. It could also result in the Company being required to take steps to increase its NOLs to offset future taxable income. Future changes in our stock ownership as well as other changesregulatory capital that may be outside of our control, could resultdilutive or adverse to stockholders, including limiting the Company’s ability to pay dividends to stockholders or limiting the Company’s ability to invest in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law.assets even if deemed more desirable from a financial and business perspective.
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, 2019 may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Our business may be adversely affected if our risk management framework does not effectively identify, assess and mitigate risk.
Our risk management framework seeks to appropriately balance risk and return and mitigate our risks.risks, including risks attributable to third parties. 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 risk.
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 risk 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 incur unexpected losses or otherwise be adversely affected. In addition, the information we use may be inaccurate or incomplete, both of which may be difficult to detect and avoid. Additionally, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated.
Finally, our risk management framework may be deemed insufficient or inadequate by our regulators, which have in the past required, and we expect to continue to require, that we invest additional resources into remediating any deficiencies and adversely impact our ability to operate our business until such time as the revised framework is deemed sufficient and adequate by our regulators.
Changes in the legal and regulatory regime could adversely affect our business, financial condition, and results of operations.
Laws, regulations and supervisory expectations, and the manner in which they are interpreted and enforced, are constantly changing. For example, governments could pass legislation or adopt policies based on changes in leadership, shifting priorities or in response to current financial conditions. We cannot predict what changes, if any, will be made to the legal and regulatory regime or the effect that such changes may have on our future business and earnings prospects. Changes to the legal and regulatory regime may require material modifications to our products, services and operations, require significant investments of management attention and resources, or expose us to potential liability for past practices. Changes to the legal and regulatory regime, such as through amendments to laws and regulations, imposition of supervisory action, or shifts in governmental or regulatory policies, practices or priorities may have a material adverse impact on our operations, including the cost to conduct business, our results of operations and what products and services we can offer.
We have participated as a lender in the Federal Paycheck Protection Program (PPP) and have certain risks attributable to lenders under PPP.
The PPP loans made by LC Bank (which in this risk factor includes its predecessor entity Radius Bank) under the federal CARES Act are guaranteed by the SBA. If PPP loan funds are used by the borrower for specific purposes as provided under the PPP, the loan may be fully or partially forgiven by the SBA and LC Bank will receive funds directly from the SBA. If, however, the PPP borrower fails to qualify for loan forgiveness then we may end up holding these loans at unfavorable interest rates as compared to the interest rate that we otherwise would have applied.
There was and continues to be uncertainty regarding some of the laws, rules and guidance relating to the PPP. If the SBA or other regulators determine that LC Bank has not complied with all PPP laws, rules and guidance, we could be required to refund some or all of the fees related to PPP loans that we have earned or be subject to other regulatory enforcement action. Furthermore, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by LC Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from LC Bank. PPP lenders, including LC Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. Any financial liability or litigation related to LC Bank’s participation in PPP could adversely impact our business, financial condition, and results of operations.
Participation by non-U.S. residents on our marketplace bank may result in non-compliance with foreign laws.
From time to time, non-U.S. residents invest in loans directly through our marketplace bank. 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 all 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.
RISKS RELATED TO OPERATING OUR BUSINESS
If we are unable to develop and commercialize new products and services and enhancements to existing products and services, our business may suffer.
The financial services and banking industry is evolving rapidly and changing with disruptive technologies and the introduction of new products and services. We derive a significant portion of our revenue from transaction-based fees we collect in connection with 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 compelling products, services or enhancements in the meantime. Competitors also may develop or adopt technologies or introduce innovations that make our marketplace bank platform less attractive to our borrowers and/or investors.
If we are unable to develop and commercialize timely and attractive products and services, our growth may be limited and our business may be materially and adversely affected.
Holding loans on our balance sheet exposes us to credit, liquidity and interest rate risk, which may adversely affect our financial performance.
We may hold loans purchased by the Company or issued by LC Bank 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 borrowers. In the event of a decline or volatility in the credit profile of these borrowers the value of these held loans may decline. This may adversely impact the liquidity of these loans, which could produce losses if we are 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 our products and services, which could impact our results of operations.
From time to time, we may provide incentives to investors to purchase such loans from us or we 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 prior to its sale. However, selling loans with incentives or at prices less than par may discourage investors from purchasing loans on our platform without incentives or at par value, cause us 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 results.
We may not be able to maintain our deposit base.
We rely on deposits as a principal source of funding for our lending activities. As of December 31, 2021, we had approximately $3.1 billion in deposits, which consisted of $2.2 billion in core deposits and $0.9 billion in brokered deposits. Our future growth and strategy will largely depend on our ability to maintain core deposits to provide a less costly and stable source of funding. The deposit markets are competitive, and therefore it may prove difficult to
grow our core deposit base. Changes we make to the rates offered on our deposit products may affect our finances and liquidity. We also have brokered deposits, which may be more price sensitive than other types of deposits and may become less available if alternative investments offer higher returns. In addition, our ability to maintain existing or obtain additional deposits may be impacted by factors, including factors beyond our control, including perceptions about our reputation, financial strength or branchless banking generally, which could reduce the number of consumers choosing to place deposits with us.
Our ability to obtain deposit funding and offer competitive interest rates on deposits is also dependent on capital levels of LC Bank and being considered “well-capitalized” by the banking regulators. Our regulators can adjust the requirements to be “well-capitalized” at any time and have authority to place limitations on our deposit businesses, including the interest rate we pay on deposits and the amount of brokered deposits we can accept. We also derive a portion of our deposits through our Banking-as-a-Service relationships. If a Banking-as-a-Service relationship were to terminate, our deposit base would decrease. An inability to develop and maintain a strong deposit base could have a material adverse impact on our business, financial condition and results of operations.
An inability to maintain adequate liquidity could jeopardize our business and financial condition.
Liquidity is essential to our business. Although we believe that we currently have an adequate amount of liquidity to support our business, there are a number of factors that could reduce and/or deplete our existing liquidity position, including results of operations that are reduced relative to our projections, costs related to existing or future litigation or regulatory matters, the pursuit of strategic business opportunities (whether through acquisition or organic) and unanticipated liabilities. Additionally, as noted above, we are subject to stringent capital and liquidity regulations and requirements and need to manage our liquidity position at both LendingClub Corporation and LC Bank within the parameters and terms set forth by applicable regulations and regulators. LC Bank is subject to various legal, regulatory and other restrictions on its ability to make distributions and payments to the Company. Any inability to maintain an adequate liquidity position could adversely affect our operations, our compliance with applicable regulations and the performance of our business.
Further, our ability to raise additional capital, should that be deemed beneficial and/or necessary, depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the financial services and banking industry, market conditions, governmental activities, and our financial condition and performance. Accordingly, we may be unable to raise additional capital if needed or on acceptable terms, which may adversely affect our liquidity, business, financial condition and results of operations.
We are regularly subject to litigation, and government and regulatory investigations, inquiries and requests.
We are regularly subject to claims, individual and class action lawsuits, lawsuits alleging regulatory violations such as the Telephone Consumer Protection Act (TCPA), 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, cybersecurity, anti-money laundering, 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. For example, since our acquisition of Radius, we are subject to supervision, regulation, examination and enforcement by multiple federal banking regulatory bodies. Specifically, as a bank holding company, the Company is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the FRB. Further, as a national bank, LC Bank is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. Accordingly, we have been and continue to invest in regulatory compliance and to be subject to certain parameters, obligations and/or limitations set forth by the banking regulations and regulators with respect to the operation of our business. We are also subject to significant litigation and regulatory inquiries, as discussed more fully in “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies,” below.
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, penalties or other monetary, injunctive or declaratory relief, which may materially and adversely affect our business. These claims, lawsuits, proceedings, exams, investigations, a requests could also: (i) result in reputational harm, criminal sanctions, consent decrees, orders preventing us from offering certain features, functionalities, products or services, (ii) limit our access to credit, (iii) result in a modification or suspension of our business practices, (iv) require certain parameters, obligations and/or limitations with respect to the operation of our business, (v) require us to develop non-infringing or otherwise altered products or technologies, (vi) prompt ancillary claims, lawsuits, proceedings, investigations, inquiries and requests, (vii) consume financial and other resources which may otherwise be utilized for other purposes, such as advancing our products and services, (viii) cause a breach or cancellation of certain contracts, or (ix) result in a loss of customers, 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 us, 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.
Our acquisitions and other strategic transactions, including our recent Acquisition, may not yield the intended benefits.
We have historically and may continue to 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 transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
In particular, on February 1, 2021, we acquired Radius and thereby its wholly-owned subsidiary, Radius Bank. The Company anticipates that this Acquisition will continue to be transformational for the Company from both a financial and strategic perspective. However, any acquisition (including our Acquisition), disposition or other strategic transactions involves risks, including:
•difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business, which may require ongoing investment in development and enhancement of additional operational and reporting processes and controls;
•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 resources 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 organization;
•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 subject 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 any acquired technology;
•liability for activities of the acquired or disposed 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 performance of any acquired loan portfolios;
•potential disruptions to our ongoing businesses; and
•unexpected costs and unknown risks and liabilities associated with the acquisition.
Accordingly, any acquisition, disposition or other strategic transaction may not be successful, may not benefit our business strategy, may not generate sufficient revenue to offset the associated costs or may not otherwise result in the intended benefits. Additionally, it may take us longer than expected to fully realize the anticipated benefits and synergies of these transactions (including the acquisition of Radius), and those benefits and synergies may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results.
The acquisition of Radius represents a significant transformation for us. While we are optimistic in our ability to integrate the Radius business and the strategic and financial opportunities the Acquisition will enable, there is significant risk in the execution of the transformation and integration. For example, we are now subject to extensive regulation by the federal banking regulators and accordingly we are continuing to rapidly evolve our compliance programs so that we, and certain of our third-party partners and providers, have adequate processes and staffing to satisfy the applicable regulations and our regulators. Similarly in connection with the Acquisition, we now offer a broader suite of products and services and there is a risk that there will be interruptions in the operation and support of these products and services while we complete the integration of the Radius business and personnel. Any failure, delay or interruptions related to this transformation and integration could adversely impact our business, financial condition, and results of operations. Finally, while we are undergoing this transformation, new operations and integration, certain of the other risks described in “Item 1A. Risk Factors” and elsewhere in our Annual Report, such as our attrition risk, compliance with the bank regulatory regime, and resolution of regulatory and compliance matters associated with our prior regulatory regime, may be heightened. For example, we have transitioned from an issuing bank partnership model to one in which we directly originate the vast majority of our loans, which subjects us to an array of rules and regulations for which non-compliance may adversely impact our business, financial condition and results of operations.
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 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 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 be profitable.
Finally, we may also choose to divest certain businesses or product lines that no longer fit with our strategic 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 us to ongoing obligations and liabilities.
Any significant disruption in our technology systems, including events beyond our control, or failure in our technology initiatives could have a material adverse effect on our operations.
We believe the technology platform that powers our marketplace bank enables us to deliver solutions to customers 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 underlying network infrastructure may impair our ability to attract new and retain existing customers, which could have a material adverse effect on our operations.
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 customers 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 loans, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability, and cause customers to abandon our marketplace bank, any of which could adversely affect our business, financial condition and results of operations.
We depend on our technology infrastructure to conduct and grow our business and operations and accordingly we invest in system upgrades, new solutions and other technology initiatives. Many of these initiatives take a significant amount of time to develop and implement, are tied to critical systems and require significant human and financial resources. While we take steps to mitigate the risks and uncertainties associated with these initiatives, these initiatives may not be implemented on time (or at all), within budget or without negative financial, operational or customer impact. Further if and when implemented, these initiatives may not perform as we or our customers and other stakeholders expect. We also may not succeed in anticipating or keeping pace with future technology needs, technology demands of our customers or the competitive landscape for technology. The failure to implement new and maintain existing technologies could adversely affect our business, financial condition and results of operations.
Failure to maintain, protect and promote our brand may harm our business.
Maintaining, protecting and promoting our brand is critical to achieving widespread acceptance of our products and services and expanding our base of borrowers and investors.customers. 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 ability to maintain trust.
Our brand can be harmed in many ways, including failure by us or our partners to satisfy expectations of service and quality, inadequate protection of sensitive information, failure 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 the future be, the target of incomplete, inaccurate and/or misleading statements about our company, our business, and/or our products and services. Furthermore, our ability to maintain, protect and promote our brand 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 unable to maintain and/or expand our base of borrowers and investors,customers, which may materially harm our business.
Third partyIf we are unable to offer platform investors a satisfactory breadth and volume of investment opportunities, our business and results of operations may be materially harmed.
We invest in our marketplace bank platform and regularly iterate our processes to provide improved and more efficient investment opportunities, which includes efforts to provide platform 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.
Some of our agreements with platform investors contain provisions regarding the manner in which our marketplace bank platform product operates that could constrain the manner in which our marketplace bank platform product can develop, particularly with respect to how loans are selected for investment. These agreements could constrain the
development of our marketplace bank, 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 platform investors 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 and results of operations.
Fraudulent activity associated with our marketplace bank 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 marketplace bank, 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 past, third parties have attempted to defraud individuals, some of whom may be potential customers of ours, by misappropriating our logos and representing 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 brand and reputation and reducing our business.
If we are unable to accurately forecast demand for loans, our business could be harmed.
We operate a marketplace bank 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 borrower demand at a given credit rate exceeds investor demand for that product for a given period, we may fund the loans and hold them on our balance sheet, which carries certain risks. The vast majority of investor funding on our platform is non-committed and therefore it is challenging to precisely forecast investor demand. In addition to the discussion in this section, see the risk factor “Holding loans on our balance sheet exposes us to credit, liquidity and interest rate risk, which may adversely affect our financial performance.”
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 and our business may suffer.
If we do not maintain or continue to increase loan originations through our marketplace bank, or expand our marketplace bank 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 adversely affected.
To maintain and continue to grow our business, we must continue to increase loan originations through our marketplace bank 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, our visibility, placement and customer reviews on third-party platforms, and the competitive advantage of our products, particularly as we continue to grow our marketplace bank and introduce new 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 and retain existing customers in a cost-effective manner or convert potential customers into active customers in our marketplace bank. Additionally, changes in the way third-party platforms operate, including changes in our participation on such platforms, could make the maintenance and promotion of our products and services, and thereby maintaining and growing loan originations, more expensive or more difficult. If loan originations through our platform stagnate or decrease, for any reason, our business and financial results may be adversely affected.
If investors on our marketplace bank pause or cease their participation or exert influence over us, our business, financial condition and results of operations may be harmed.
Our success depends in significant part on the financial strength of investors participating on our marketplace bank platform. Investors could, for any reason, experience financial difficulties and cease participating on our platform or fail to pay fees when due. Further, the financial returns on loans we offer on our platform may prove to be unsatisfactory to certain platform investors and, therefore, such investors may choose to deploy their capital elsewhere. The occurrence of one or more of these events 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. For example, if investors pause or discontinue their investment activity, we may need to provide incentives or discounts and/or enter into unique 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 incentives. 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 final terms will be. Failure to attract investor capital on reasonable terms may result in a reduction in origination volume. For example, a number of our largest platform investors ceased or significantly reduced their purchases of our products in the Spring of 2020, which resulted in a material reduction in our origination volume and revenue. Similar actions may have a material impact on our business, financial condition and results of operations.
Any challenge to or adverse consequence from our use of the issuing bank partnership model may harm our business.
We believe that our use of the issuing bank partnership model is appropriate for all the jurisdictions in which we operate and we have worked with federal, state and local regulatory agencies to help them understand the model. However, we operate in a complex and evolving regulatory environment at the federal and state level and some enforcement authorities and private parties have challenged the ability to rely on legislative and judicial authority that permits a bank to “export” interest rates permitted by the laws of the state where the bank is located.
For example, 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 and held that a nonbank assignee of a loan originated by a national bank may not be 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. However, in 2020, the OCC issued a final rule clarifying 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 OCC Rule). The FDIC issued a similar final rule in 2020 applicable to FDIC-insured state-chartered banks (the FDIC Rule). Since these final rules, several federal district courts have declined to follow the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, including in Colorado, Massachusetts and New York. On February 8, 2022, a federal district court granted summary judgment in favor of the OCC and FDIC in lawsuits brought by multiple states seeking to invalidate the OCC Rule and FDIC Rule (California, et al. v. The Office of the Comptroller of the Currency, et al., No. 4:20-cv-05200-JSW (N.D. Cal.); California, et al. v. Federal Deposit Insurance Corporation,
No. 4:20-cv-05860-JSW (N.D. Cal.)).While we believe that our use of the issuing bank model is appropriate and factually distinguishable from the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, the case could create potential liability under state statutes such as usury statutes.
Any challenge to or adverse consequence of our use of the issuing bank partnership model (where it is still used in our business) could adversely affect that business (including requiring that we alter our business model for impacted products), financial condition and results of operations.
If we breach representations or warranties that we made in our securitization, whole loan, CLUB Certificate or LendingClub Loan Certificate transactions, or if we suffer a direct or indirect loss in our retained interests in these transactions, our financial condition could be harmed.
We have sponsored a number of sales of unsecured personal whole loans through asset-backed securitizations. In connection with these securitizations, as well as our whole loan, CLUB Certificate and LendingClub Loan Certificate transactions, we make 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 purchasing entity, replace the affected loans with other 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.
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 are likely to entail similar and other substantial risks.
Indebtedness could adversely affect our business and financial results.
In the past, we have had a significant amount of indebtedness. While our indebtedness has recently materially decreased, if our debt service disruptionsobligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, more of our cash flow from operations would need to be allocated to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to execute our strategic plan and withstand competitive pressures and could reduce our flexibility in responding to changing business and economic conditions.
Should we desire to obtain additional indebtedness we may require a guarantee by LC Bank, where substantially all of our operations are being conducted. Any such guarantee would require approval of the banking regulators and there can be no assurance that we would be able to obtain such a guarantee. To extent that we are not able to obtain a guarantee from LC Bank, it may be more difficult or expensive for us to borrow money.
Our ability to make payments on our debt, to repay our existing indebtedness when due, and to fund our business, 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 beingentering into transactions that would otherwise benefit our business and/or adversely affect our business and financial results. We also may not be able to scorerefinance our indebtedness or take such other actions, if necessary, on commercially reasonable terms, or at all.
RISKS RELATED TO MACROECONOMIC CONDITIONS OR OTHER EXTERNAL FACTORS
Our business has been and decisionwill likely continue to be negatively impacted by the COVID-19 pandemic.
The COVID-19 pandemic and the mitigation efforts by governments to attempt to control its spread, including the closure of non-essential businesses and shelter in place orders, resulted in an unprecedented reduction in economic activity and significant dislocation on consumers, businesses, capital markets and the broader economy. In particular, the impact of COVID-19 on the finances of our borrowers has been profound as many have been, and may continue to be, impacted by unemployment, reduced earnings and/or elevated economic disruption and insecurity.
In response to the impact of COVID-19, we undertook a number of initiatives to support our borrowers, protect investor returns, and preserve capital and liquidity. For example, we added customer support capacity and instituted new payment and hardship plans, adjusted our credit and underwriting processes and standards, and undertook a number of measures that aimed to balance the platform without further use of our balance sheet. Although we have since reverted certain of these measures, we will continue to actively monitor the situation, assess possible implications to our business and take appropriate actions in an effort to mitigate the adverse consequences of COVID-19. However, there can be no assurances that any initiatives we take will be sufficient or successful.
There are no comparable recent events to accurately predict the effect COVID-19 may have, and, as a result, its ultimate impact is highly uncertain and subject to change. COVID-19 has had, and may again have, a number of adverse effects on our business and results of operations, including materially decreased demand for our products and negative pressure on overall platform returns, including as a result of increased credit risk of borrowers (including elevated delinquencies and charge-off rates) and the implementation of forbearance plans.
Further, our compliance with measures to contain the spread of, or otherwise related to, COVID-19 has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key vendors and counterparties, for an indefinite period of time. Despite the prevalence of remote working within and beyond our company, the disruptions in workforce and collaboration caused by COVID-19 may result in inefficiencies and delays in product development, marketing, operations and customer service efforts that we cannot fully mitigate.
The extent to which COVID-19 will continue to negatively impact our business and results of operations will depend on future developments which are highly uncertain and cannot be accurately predicted, including the duration of the pandemic, actions taken to treat or control the spread of COVID-19, future strains or mutations of COVID-19, any re-emergence of COVID-19 or related diseases, and the intermediate and longer-term impact on consumers, businesses and the broader economy. For example, COVID-19 raises the possibility of a prolonged global economic downturn, which could further affect the performance of and demand for our products and services and adversely impact our business and results of operations even after the pandemic is contained.
The COVID-19 pandemic, and its impact, may also have the effect of heightening many of the other risks described in “Item 1A. Risk Factors” and elsewhere in our Annual Report, such as managing our liquidity, growing platform volume and our exposure to litigation, and government and regulatory investigations, inquiries and requests.
Any one or a combination of the factors identified above could have a material adverse impact on our business, financial condition and results of operations.
Fluctuations in interest rates could negatively affect transaction volume and our net interest income.
We offer loan applicants,products with both fixed and variable interest 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.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates will cause our net interest income and margin to increase or decrease. 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 platform investors. Fluctuations in the interest rate environment may impact our net interest income and/or discourage investors and borrowers from participating in our marketplace bank and may reduce our loan originations, any which may adversely affect our business.
The credit decisioningNotwithstanding the above, we monitor interest rates and scoring models we utilizehave certain avenues to manage our interest rate risk exposure, including changing the interest rate offered on deposits and the interest rate on our loan products. If our interest rate risk management strategies are basednot appropriately monitored or executed, these activities may not effectively mitigate our interest rate sensitivity or have the desired impact on algorithms that evaluate a numberour results of factors and currently depend on sourcing certain information from third parties, including consumer reporting agencies such as TransUnion, Experianoperations or Equifax. In the event that any 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.financial condition.
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 bank, effectiveness of the credit decisioning or scoring models used in the lendingour marketplace bank, the effectiveness of our collection efforts, statements regarding investment returns, changes to our lending marketplace bank, 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 bank, products or services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our lending marketplace,bank, products and services, 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,marketplace banks, 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.
Our business and operating results could be adversely affected by the political environment and governmental fiscal and monetary policies.
An unpredictable or volatile political environment in the United States, including any related social unrest, could negatively impact business and market conditions, economic growth, financial stability, and business, consumer, investor, and regulatory sentiments, any one or more of which in turn could cause our business and financial results to suffer.
Our business and financial results are also significantly affected by the fiscal and monetary policies of the U.S. government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States in pursuit of maximum employment, stable prices, and moderate long-term interest rates. The FRB and its policies influence the availability and demand for loans and deposits, the rates and other terms for loans and deposits, the conditions in equity, fixed-income, currency, and other markets, and the value of securities and other financial instruments. Additionally, tax and other fiscal policies impact not only general economic and market conditions but also give rise to incentives or disincentives that affect how we and our customers prioritize objectives, deploy resources, and run households or operate businesses. Both the timing and the nature of any changes in monetary or fiscal policies, as well as their consequences for the economy and the markets in which we operate, are beyond our control and difficult to predict but could adversely affect our business and operating results.
A decline in social and economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.
As a marketplace bank, 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, abroad and the regional areas where our customers reside. Economic factors include interest rates, unemployment levels, the impact of a federal government shutdown, natural disasters, public health emergencies, pandemics, 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 pass through collected borrower payments to investors or 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 payment(s) on the corresponding loan, the investor will not be entitled to the corresponding amount(s) or 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 their loan obligation. In 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 would decline as compared to a loan that was timely paid in accordance with its amortization schedule. There is no penalty to borrowers if they choose to pay their loan early.
We strive to establish a marketplace bank 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, which could negatively affect our business and results of operations. In addition to the discussion in this section, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”
Our business operations may be adversely impacted by political events, terrorism, cyber-attacks, public health issues, natural disasters, severe weather, climate change, infrastructure failure or outages, labor disputes and other business interruptions.
Our business operations are subject to interruption by, among other things, political events, terrorism, cyber-attacks, public health issues, natural disasters, severe weather, climate change, infrastructure failure or outages, labor disputes and other events which could decrease demand for our products and services or make it difficult or impossible for us to deliver a satisfactory experience to our customers. Such events could affect the stability of our deposit base, impair the ability of our borrowers to repay their outstanding loans, cause significant property damage or otherwise impair the value of collateral securing our loans, and result in loss of revenue and/or cause us to incur additional expenses. Although we have established disaster recovery plans and procedures, and we monitor the effects of any such events on our loans, properties and investments, the occurrence of any such event could have a material adverse impact on our business, financial condition and results of operations.
Furthermore, in the event of any disruption to our operations or those of the companies with whom we do business with, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume or maintain operations, any of which could have a material adverse impact on our business, financial condition and results of operations.
RISKS RELATED TO CREDIT AND COLLECTIONS
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 customers could be harmed, our market share could decline and the value of loans held on our balance sheet may be adversely affected.
Our ability to attract customers to, and build trust in, our marketplace bank 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 through our marketplace bank 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. 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 on our balance sheet may be adversely affected.
We continually refine these algorithms based on new data and changing macroeconomic 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 to occur, we may be obligated to repurchase the affected loans, 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 marketplace bank for loans.
If 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 marketplace bank desirable.
Many of our loan products, including all of our personal loans, 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 or 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. The 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, bankruptcy or the economic and/or social factors referenced above in the risk factor “A decline in social and economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.”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 are limited in our ability to collect loans.
In addition, most investors must depend on us or our third-party servicers and collection agents to pursue collection on delinquent borrower loans. Because we make payments ratably on an investor’s investment 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 will not be entitled to any payments under the terms of the investment. Further, if collection action must be taken in respect of a loan, we or the collection agency may charge a collection fee on 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 and our business may suffer.
In addition, because our servicing fees depend on the collectability of the loans, if we experience a significant increase in the number of delinquent or charged-off loans 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 made through our marketplace bank.
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. We assign loan grades to loan requests based on our marketplace bank’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 or loan grade may be based on outdated, incomplete or inaccurate data, including consumer reporting data, and we do not verify the information obtained from a 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, including information that is included in the loan listings on our marketplace bank, and this information 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.
RISKS RELATED TO OUR INDUSTRY
Substantial and increasing competition in our industry may harm our business.
The financial services and banking industry is increasingly competitive. We compete with financial products and companies that attract borrowers, investors or both, as described in “Item 1. Business – Competition.”
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 customers. 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 customers, we may not be able to compete effectively against our competitors and our business and results of operations may be materially harmed. Additionally, competition may drive us to take actions that we might otherwise avoid, such as lowering interest rates or fees on loans or raising interest rates on deposits, and that may adversely affect our business and results of operations.
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.
RISKS RELATED TO PERSONNEL AND THIRD PARTIES
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, banking, 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 positive culture and work environment that reinforces our values is also critical to attracting and retaining employees.
We have had a high attrition rate from employees and expect our attrition rate to 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 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.
Misconduct and errors by our employees, contractors and third-party service providers could harm our business and reputation.
We are exposed to many types of operational risk, including the risk of misconduct and errors by our employees and other third-party service providers. Our business depends on our employees, contractors and third-party service providers to facilitate the operation of our business and process a large number of increasingly complex transactions, and if any of our employees, contractors or third-party service providers provide unsatisfactory service
or take, convert or misuse funds, documents or data (including customer and/or internal documents or data), or fail to follow protocol when interacting with customers, we could lose customers, harm our reputation, 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 us against these risks, we could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.
Additionally, our use of third-party vendors is subject to increasingly demanding regulatory requirements and attention by our regulators. Regulations require us to perform due diligence of, perform ongoing monitoring of and exercise certain controls over our third-party vendors and other ongoing third-party business relationships. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships.
Any of these occurrences could result in our diminished ability to operate our business, potential liability to customers, inability to attract future customers, reputational damage, regulatory intervention, enforcement action and financial harm, which could negatively impact our business, financial condition and results of operations.
Our growth depends in part on the success of our strategic relationships with third parties.
In order to grow our business and effectuate our business 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 business 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.
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 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.
RISKS RELATED TO DATA, INTELLECTUAL PROPERTY AND PRIVACY
Security incidents, system failures, bugs in our system, and similar disruptions could impair our operations, compromise the confidential information of our borrowers and our investors, damage our reputation, and harm our business and financial performance.
We believe the technology platform that powers our marketplace bank enables us to deliver solutions to customers and provides a significant time and cost advantage over traditional banks. The satisfactory performance, reliability and availability of our technology and underlying network infrastructure are critical to our operations, customer service and reputation. Like all information systems and technology, our systems may contain or develop material errors, failures, vulnerabilities or bugs, particularly when new features or capabilities are released, and may be
subject to computer viruses or other malicious code, break-ins, phishing impersonation attacks, attempts to overload our servers with denial-of-service or other attacks, ransomware and similar incidents or disruptions from unauthorized use of our computer systems, as well as unintentional incidents causing data leakage, any of which could lead to interruptions, delays or make it difficult or impossible for us to deliver a satisfactory experience to our customers. Our failure to maintain satisfactory performance, reliability and availability of our technology and underlying network infrastructure may impair our ability to attract new customers and retain existing customers, which could have a material adverse effect on our business.
Our business involves the collection, storage, processing and transmission of customers’ personal information, including their financial information. The highly automated nature of our marketplace bank, 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, ransomware, physical or electronic break-ins and similar disruptions. While we have taken steps to protect confidential information that we collect, create, or have access to, our security measures or those of our third-party vendors and business partners are subject to breach. Unauthorized access to our proprietary business information or customer data may be obtained through, among other things, break-ins, sabotage, computer malware, viruses, social engineering, ransomware attacks, hacking into the systems or facilities of us or our partners, vendors, or customers, exposing and exploiting design flaws in our software, or other misconduct, including by state-sponsored and other sophisticated organizations. Such incidents have become more prevalent in recent years and may target our systems or facilities or those of our partners, vendors, or customers. For example, outside parties have attempted to fraudulently induce employees, vendors, customers, and others to disclose sensitive or confidential information in order to gain access to our systems. Our security measures could also be compromised by our personnel, theft or errors, or be insufficient to prevent exploitation of security vulnerabilities in software or systems on which we rely.
Cyber-attacks have occurred on our systems in the past and may occur on our systems in the future. Although to date we have not suffered material costs or disruption to our business from any such incident, unauthorized access to our marketplace bank and servicing systems can result in confidential borrower and investor information being stolen and potentially used for criminal purposes. Breaches of our security measures could negatively impact our relationships with customers, lead to interruptions or delays or make it difficult or impossible for us to deliver a satisfactory experience to our customers, and expose us to liability related to the loss of the information, time-consuming expensive litigation and negative publicity. Moreover, any future security breach may also result in the theft of our intellectual property, proprietary data, or trade secrets, which could have a material adverse impact on our reputation, business operations and financial performance.
We also may be required to notify regulators and affected individuals about any actual or perceived data breach involving personal information within strict time periods. This 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 customers 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.
Because there are many different cybercrime and hacking techniques and such techniques continue to evolve, we may be unable to anticipate attempted security breaches, react in a timely manner or implement adequate preventative measures. Cyber-attacks may take advantage of weaknesses in third-party technology or standards of which we are unaware or that we do not control and may not be recognized until long after they have been launched. Certain efforts may be state-sponsored or from other sophisticated organizations, and supported by significant financial and technological resources, making them even more difficult to detect. Efforts to prevent hackers from disrupting our services or otherwise accessing our systems are expensive to develop, implement, and maintain. Such efforts require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated and may limit the functionality of, or otherwise adversely impact, our service offerings and systems.
The systems we rely upon also remain vulnerable to damage or interruption from a number of other factors, including the failure of our network or software systems, natural disasters, terrorism, telecommunication failures, human error, third-party error, other-man made problems, and similar events or disruptions. Any interruptions or delays in our technology systems or service, whether accidental or willful, could harm our relationships with our customers 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 loans, impact our marketplace bank operations, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause customers to abandon our marketplace bank, any of which could adversely affect our business, financial condition and results of operations.
Cyber-attacks suffered by third parties upon which we rely could negatively affect our business.
We rely on third-party service providers to provide critical services that help us deliver our solutions and operate our business. These providers may store or otherwise process the same sensitive, proprietary, and confidential information that we handle. For example, in certain circumstances we utilize third-party vendors, including cloud applications and services, to facilitate the servicing of customer accounts. Under these arrangements, third-party vendors require access to certain customer data for the purpose of servicing the accounts. These service providers may not have adequate security measures and could experience a security incident that compromises the confidentiality, integrity, or availability of the systems they operate for us or the information they process on our behalf. Such occurrences could adversely affect our business to the same degree as if we had experienced these occurrences directly, and we may not have recourse to the responsible third-party service providers for the resulting liability we incur.
We also 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 would not be able to access their information to make these pre-screened offers. Further, as a result of the release of personal 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.
The collection, processing, storage, use, and disclosure of personal datainformation could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
We receive, transmit, store and storeprocess a large volume of personally identifiablepersonal information and other user data. There are federal, state and foreign laws regarding privacy and the storing, sharing, use, disclosure, protection and protectionother processing of personally identifiablepersonal information and other user data. Specifically, personally identifiablepersonal 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.information. This regulatory framework for privacy issues worldwide is evolving and is likely to continue doing soto evolve for the foreseeable future, which creates uncertainty. For example, in California, the California Consumer Privacy Act (CCPA) of 2018, which became effective on January 1, 2020 imposes more stringent requirements with respect toand will be modified by the California data privacy.Privacy Rights Act (CPRA), which becomes fully effective on January 1, 2023. The CCPA will,and CPRA, among other things, givegives California residents expnadedexpanded rights to access and delete certaintheir personal information, opt out of certain personal information sharing, and receive detailed information about how certain personal information is used. Additionally,used and shared. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches, which is expected to increase the volume,
cost and success of class action data breach litigation. The CPRA also established the California Department of Justice published draft regulationsPrivacy Protection Agency to implement and enforce the CCPA. CCPA and CPRA, as well as to impose administrative fines. The full impact of this law and its corresponding regulations, future enforcement activity and potential liability is unknown. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., and multiple states have enacted or proposed similar laws. There is also discussion in Congress of new comprehensive federal data protection and privacy laws which we likely would be subject to if enacted.
We cannot yet predict the full impact of the CCPA, CPRA or any other proposed or enacted state, U.S. or international data privacy legislation on our business or operations, but itsuch laws 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, disclosure and disclosureprocessing of personal information. We also obtain consent from our borrowers to share personal information under certain conditions. We are subject to the terms of our privacy policies, privacy-related disclosures, and contractual and other privacy-related obligations to our customers and other third parties. 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 identifiablepersonal information or other user data could damage our reputation, discourage potential borrowers or investors from using our lending marketplace bank 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 materially 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 groups, 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 bank 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, patent 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, patent 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 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 program 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 program 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. In addition to the discussion in this section, see“Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation”and “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 7. Securitizations and Variable Interest Entities.” In addition, in order to facilitate certain investor offerings in Europe, we structured certain of the securitization transactions for which we acted as “sponsor” prior to January 1, 2019 so they complied with the risk retention and ongoing monitoring and diligence requirements of (i) Articles 404-410 of the European Capital Requirements Regulation, as supplemented by the 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 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 Requirements, together with the CRR Requirements and the Solvency II Requirements, the Old EU Risk Retention Rules). We have sought to satisfy the Old EU Risk Retention Rules with respect to such securitization transactions by retaining a “material net economic interest” (as defined in the Old EU Risk Retention Rules) directly on our balance sheet.
The 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 Risk Retention Rules that would be applicable to the “sponsor” of those transactions. The Risk Retention Rules are subject to varying interpretations, and one or more regulatory or governmental authorities could take positions with respect to the Risk Retention Rules that conflict with, or are inconsistent with, the 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 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 applicable Risk Retention Rules, which may be significant, we expect compliance with any applicable Risk Retention Rules will 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 applicable Risk Retention Rules 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.
We 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 make 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 purchasing entity, replace the affected loans with other 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 retention rules 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 are likely to entail similar and other substantial risks.
If we are unable to offer investors a satisfactory breadth and volume of investment opportunities, our business 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 manual investors or investors utilizing API are able to identify and 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 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 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, 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 positive culture and work environment that reinforces the Company’s values is also critical to attracting and retaining employees.
We have had a high attrition rate from employees and expect our attrition rate to 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 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 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, 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, 2019, our accumulated deficit was $548.5 million. Our operating expenses may continue to be elevated as we resolve 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, and further enhance and develop our 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 additional compliance requirements and our activities may be restricted, which could materially adversely affect our business, financial condition and results of operations.
Our business operations may be adversely impacted by political events, terrorism, public health issues, natural disasters, labor disputes and other business interruptions.
Our business operations are subject to interruption by, among other things, political events, terrorism, public health issues, natural disasters, labor disputes and other events which could decrease demand for our products and services or make it difficult or impossible for us to deliver a satisfactory experience to our borrowers and investors, any of which may have a material adverse impact on our business, financial condition and results of operations. For example, a federal government shutdown could impair our ability to support our structured program initiatives and/or resolve outstanding litigation or regulatory inquiries with the federal government.
Furthermore, in the event of any disruption to our operations or those of the companies with whom we do business with, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume or maintain operations, any of which could have a material adverse impact 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 risk 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 business and process a large number of increasingly complex transactions, and if any of our employees 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 investors, we could lose customers, harm our reputation, 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 participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.
Any of these occurrences could result in our 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.
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 and grant royalty-free licenses under the affected portions of our proprietary 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 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.
RISKS RELATED TO TAX AND ACCOUNTING
Our platform and internal systems rely on softwareability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that is highly technical, and if it contains undetected errors,could subject our business couldto higher tax liabilities.
We may be adversely affected.
Our platform and internal systems rely on softwarelimited in the portion of net operating loss carryforwards 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 orcan use in the future contain, undetected errors or bugs. Some errorsto 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 only be discovered afterhave an impact on our business, the codeTax Act’s reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, 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 introductionsreduced our deferred tax asset associated with net operating loss carryforwards (NOLs). A lack of new features or enhancements, result in errors or compromisefuture taxable income would adversely affect our ability to protect borrower or investor data orutilize our intellectual property. Any errors, bugs or defects discoveredNOLs.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, 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 the software on which we relyour stock ownership as well as other changes that may be outside of our control, could result in harm to our reputation, lossadditional ownership changes under Section 382 of borrowers or investors, lossthe Internal Revenue Code, as amended. Our NOLs may also be impaired under similar provisions of revenue or liability for damages, any of which could adversely affect our business and financial results.state law.
If one or more of our counterparty financial institutions default on their financial or performance obligations to us or fail, we may incur significant losses.
We have significant amountsassess 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 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 exposurethis evaluation, a full valuation allowance has historically been recorded to counterparty credit risk, and actively manage this exposure to mitigate the associated risk. Despite these efforts, we may be exposed to the risk of default 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 periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or to access or recoverrecognize only deferred tax assets that are deposited, held in accounts with, or otherwise due from, such counterparty maymore likely than not to be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we may be unable to operate our business in the ordinary course, which would materially adversely impact our results of operations and financial condition.realized.
Investors in 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 pursuantFinally, further changes to the Note Registration Statement. In addition,federal or state tax laws or technical guidance relating to the Company sells CLUB Certificates. SalesTax Act that would further reduce the corporate tax rate could operate to effectively reduce or eliminate the value of CLUB Certificates are made through private transactions with investors and are separate from the public offering of the member payment dependent notes. Because of the fact-specificany deferred tax
nature of what types of activities might constitute a general solicitation or general advertising, it is possible that some of the CLUB Certificate investors could assert that they became interested in an investment in CLUB Certificates through a general solicitation or general advertising with regard to CLUB Certificates or through the public offering of member payment dependent notes. If it was determined that an investor’s interest in the CLUB Certificates was the result of a general solicitation or general advertisement, the investor could claim that the sale of CLUB Certificates 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 reviewedincurred net losses in the past and may incur net losses in the future.
Although we were profitable for the year ended December 31, 2021, we have incurred net losses in the past. Our operating expenses may continue to be elevated as we resolve regulatory investigations and examinations, enhance our compliance with foreign laws regardingand technology systems, continue the participationgrowth of non-U.S. residents on our lending marketplace.
From timebusiness, attract customers and partners, and further enhance and develop our products and services. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to time, non-U.S. residents invest in loans directly through our lending marketplace.offset these higher expenses. We are not experts with respect to all applicable lawsmay incur additional losses in the various foreign jurisdictions from which an investorfuture and 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 reducenot maintain profitability on a quarterly or annual basis.
If accounting standards change or if our profitabilityestimates 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 credit facilities provide our lenders with first-priority liens against substantially all of our assets and contain 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 covenantsassumptions relating to our capital raising activities and other financial and operational matters. These restrictive covenants may make it more difficult for uscritical accounting policies prove to obtain additional capital and to pursue business opportunities, including potential acquisitions or other strategic transactions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it,be incorrect, 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, ourresults of operations and financial condition could be adversely affected. For more information regarding
Our financial statements are subject to the covenantsapplication of accounting principles generally accepted in the United States of America (GAAP). The application of GAAP is also subject to varying interpretations over time. We are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and requirements, seethose who interpret the standards, such as the FASB, the SEC, and bank regulatory authorities. Those changes are beyond our control but could adversely affect our results of operations and financial condition. See “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Debt1. Summary of Significant Accounting Policies – Adoption of New Accounting Standards”included below for information on new financial accounting standards issued by the FASB. Additionally, the preparation of our financial statements in this Report.conformity with GAAP requires estimates and assumptions that affect the amounts reported and disclosed in our financial statements. While we base our estimates and assumptions on historical experience and other assumptions that we believe to be reasonable under the circumstances, our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our stock price has been and will likelymay 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; our operation of LC Bank; significant transactions or acquisitions; new features, products or services offered 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 investorsstockholders 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. 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 weof any repurchase of 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
Further, our stock could be the target of short sellers who may seek to meet expectations relateddrive down the price of shares they have sold short by disseminating negative reports or information about the Company. Such negative publicity may lead to future growth, profitability,additional public scrutiny or other market expectations,may cause further volatility in our stock price, maya decline significantly, whichin the value of a stockholder’s investment in us or reputational harm.
Any stock price decline could have a material adverse impact on investorstockholder confidence and employee retention.
If 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.
We are subject to ownership concentration
Research and reports that securities or industry analysts publish about the Company or our business may be consumed by certain significant stockholders.
Ownershipequity investors and influence their opinion of our business and/or investment in our common stock is concentrated among certain stockholders.stock. For example, per filings withif one or more of the SEC, Shanda beneficially owns sharesanalysts who cover us downgrades our stock, our stock price may decline. Additionally, if one or more 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 intereststhese analysts cease coverage of the Company and/or other minority stockholders. For example, such stockholder(s)fail to regularly publish reports on us, we could sell shareslose visibility in a manner thatthe financial markets, which could affectcause 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 deterrenttrading volume to other potential investors purchasing our stock.decline.
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 price of our common stock could decline 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 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 a 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 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 Company securities held by it, which may facilitate their ability to sell their holdings. Additional shares of our common stock trading in the public market, as a result of the exercise of such registration rights, may have an adverse effect on the market price of our securities.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our restated Certificate of Incorporation, as amended (Certificate of Incorporation), and our amended 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 of all outstanding shares of our capital stock vote to amend some provisions in our restated Certificate of Incorporation and restated 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 requirerequires 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.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
If securities In addition to these provisions, banking laws impose notice, approval, and ongoing regulatory requirements on any stockholder or industry analysts do not publish researchother party that seeks to acquire direct or reports about our business,indirect “control” of an FDIC-insured depository institution. These laws include the BHCA and the Change in Bank Control Act. These laws could delay or publish inaccurate or unfavorable research reports about our business, our stock priceprevent an acquisition. See “Item 1. Business – Regulation 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 opinionSupervision – Acquisition of our business and/or investment in our common stock. For example, if one or more of the analysts who cover us downgrades our stock, our stock price may decline. Additionally, if one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibilitya Significant Interest in the financial markets, which could cause our stock price or trading volume to decline.Company” for additional information.
We 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 business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, an investora stockholder may only receive a return on their investment in our common stock if the trading price of our common stock increases.
Also, as a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the FRB and any future payment of dividends will depend on LC Bank’s ability to make distributions and payments to the Company as our principal source of funds to pay such dividends. LC Bank is also subject to various legal, regulatory and other restrictions on its ability to make distributions and payments to the Company. In addition, in the future, we may enter into borrowing or other contractual arrangements that restrict our ability to pay dividends. As a consequence of these various limitations and restrictions, we may not be able to pay dividends on our common stock. See “Item 1. Business – Regulation and Supervision – Regulatory Limits on Dividends and Distributions”for additional information.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space for our headquarters in San Francisco, California. Further, we lease additional office space in other parts of the United States, including in the Salt Lake City, Utah and Boston, Massachusetts areas. We believe our current leased properties are adequate for our immediate business needs. For more information regarding our leases, see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Leases”of this Annual Report.
Item 3. Legal Proceedings
The information set forth under “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. 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-KAnnual Report 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.”
Holders of Record
As of January 31, 2020,2022, there were 36 35holders of record of LendingClub’s common stock. 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. Further,see“Part I – Item 1. Business – Regulation and Supervision – Regulatory Limits on Dividends and Distributions” and “Notes to Consolidated Financial Statements – Note 20. Regulatory Requirements” for a summary of certain rules and regulations that limit the ability of the Company or LC Bank to pay dividends.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
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 2019:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | 3,591 | | | $ | 24.19 | | | — | | | $ | — | |
| Total | 3,591 | | | $ | 24.19 | | | — | | | $ | — | |
|
| | | | | | | | | | | | | | |
| 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)(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.
| 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.
Given the Acquisition, LendingClub changed indexes from the Dow Jones Internet Composite Index to the KBW Nasdaq Bank Index, as it is the benchmark index for the banking sector. As such, the following graph and 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 and both the KBW Nasdaq Bank Index and the Dow Jones Internet Composite Index. An investment of $100 (with reinvestment of all dividends, when applicable) is assumed to have been made in LendingClub’s common stock and in each index at market close on December 31, 201430, 2016 and its relative performance is tracked through December 31, 2019.2021. The returns shown are based on historical results and are not intended to suggest future performance.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2015 | | December 30, 2016 | | December 29, 2017 | | December 31, 2018 | | December 31, 2019 |
| LendingClub Corporation | $ | 100 |
| | $ | 43.68 |
| | $ | 20.75 |
| | $ | 16.32 |
| | $ | 10.40 |
| | $ | 9.98 |
|
| Standard & Poor’s 500 Index | $ | 100 |
| | $ | 99.27 |
| | $ | 108.74 |
| | $ | 129.86 |
| | $ | 121.76 |
| | $ | 156.92 |
|
| Dow Jones Internet Composite Index | $ | 100 |
| | $ | 122.11 |
| | $ | 130.99 |
| | $ | 180.87 |
| | $ | 192.64 |
| | $ | 230.49 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2016 | | December 29, 2017 | | December 31, 2018 | | December 31, 2019 | | December 31, 2020 | | December 31, 2021 |
| LendingClub Corporation | $ | 100 | | | $ | 78.67 | | | $ | 50.10 | | | $ | 48.08 | | | $ | 40.23 | | | $ | 92.11 | |
| Standard & Poor’s 500 Index | $ | 100 | | | $ | 119.42 | | | $ | 111.97 | | | $ | 144.31 | | | $ | 167.77 | | | $ | 212.89 | |
| KBW Nasdaq Bank Index | $ | 100 | | | $ | 116.25 | | | $ | 93.46 | | | $ | 123.50 | | | $ | 106.67 | | | $ | 144.05 | |
| Dow Jones Internet Composite Index | $ | 100 | | | $ | 138.08 | | | $ | 147.07 | | | $ | 175.96 | | | $ | 269.23 | | | $ | 287.40 | |
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with “Item 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, | 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 |
|
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).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 Annual Report, particularly in “Part“Part I – Item 1A. Risk FactorsFactors.”
.”
Overview
LendingClub is America’s leading digital marketplace bank. The Company was incorporatedfounded in Delaware on October 2, 2006 and is currentlybrought a traditional credit product – the installment loan – into the digital age by leveraging technology, data science, and a unique marketplace model. In doing so, we became one of the largest providerproviders of unsecured personal loans in the US.United States. In February 2021, LendingClub completed the acquisition of an award-winning digital bank, Radius, becoming a bank holding company and forming LC Bank as its wholly-owned subsidiary. We operate America’s largest online lending marketplace platform that connects borrowersthe vast majority of our business through LC Bank, as a lender and investors. LendingClub provides tools that help Americans save money on their path to financial health through lower borrowing costs and a seamless, technology-driven user experience. Investors provide capital to enable the fundingoriginator of loans and as a regulated bank in exchange for earning competitive risk adjusted returns. Our marketplace enables efficient credit decisioning, pricing, servicing and support operations. We operate fully online with no traditional branch infrastructure. Our vision is to expand our marketplace model and support it with a bank charter, which we believe will be both strategically and financially accretive to the Company.United States.
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, gains on sales of loans sold, net interest income and fair value adjustments from loans invested in by the Company and held on our balance sheet.Executive Summary
The transaction fees we receive from our issuing bank partner in connection with our lending marketplace’s role in facilitating•Loan originations:Total loan originations for the year ended December 31, 2021 were $10.4 billion, improving 139% compared to the prior year. The increase was primarily driven by the growth in unsecured personal loan origination volume.
•Total net revenue: Total net revenue for the year ended December 31, 2021 was $818.6 million, improving 157% compared to the prior year and outpacing origination growth of 139%. The increase was primarily due to the growth in marketplace revenue and increased net interest income.
◦Marketplace revenue: Marketplace revenue for the year ended December 31, 2021 was $578.6 million, improving 136% compared to the prior year. The increase was primarily driven by a higher volume of marketplace loans sold.
◦Net interest income: Net interest income for the year ended December 31, 2021 was $212.8 million, improving 259% compared to the prior year. The increase was primarily driven by an increase in unsecured personal loans retained in the HFI loan portfolio at amortized cost and auto refinance loans range from 0% to 6% of the initial principal amount of the loan. In addition, for education and patient finance loans, we collect fees from issuing banks and 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•Provision for credit losses: Provision for credit losses for the costs we incur in servicing loans, including managing payments from borrowers, collections, paymentsyear ended December 31, 2021 was $138.8 million compared 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$3.4 million in the first quarter of the year,prior year. The increase was primarily due to seasonalitythe origination of borrower behavior. Additionally,unsecured personal loans retained as HFI at amortized cost and the impact from applying CECL to the HFI portfolio and to the Radius loans upon their acquisition.
•Total non-interest expense: Total non-interest expense for the year ended December 31, 2021 was $661.4 million, increasing 32% compared to the prior year. The increase was primarily driven by an increase in variable marketing expenses based on higher origination volume and an increase in headcount due to the Acquisition and hiring in key functions.
•Consolidated net income: Consolidated net income for the year ended December 31, 2021 was $18.6 million, compared to a loss of $(187.5) million in the fourth quarter of the year, we typically observe fluctuations in marketingprior year.
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)
effectiveness
•Deposits: Total depositsat December 31, 2021 were $3.1 billion and borrower behavior dueare in line with growth in loans and leases held for investment.
•Notable items: For the year ended December 31, 2021, consolidatednet income of $18.6 million and diluted earnings per share of $0.18 were negatively impacted by $198.0 million of notable items (net of tax): $129.8 million of CECL provisioning, less net charge-offs, and $68.2 million of revenue deferrals, net of accretion, both driven by strong retained loan growth. These items reduced our diluted earnings per share by $1.94 in 2021.
The above summary should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in its entirety. For additional discussion related to the holidays, which can impact volume. These seasonal trends contribute to fluctuations in our operating results and operating cash flow.segments, see “Segment Information.”
Loans facilitated through our lending marketplace are funded by the sale of whole loans to banks and other institutional investors, the sale of whole loans facilitated through Structured Programs, the issuance of notes to our self-directed retail investors, or funded 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 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 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 addition, the Company sponsors the sale of 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. 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 payments to each security class. The subordinated securities issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria.
Current Economic and Business Environment
Our online lending marketplace platform seeks to adapt to changing marketplace conditions and investors’ return on investment expectations. LendingClub monitors a variety of economic, credit and competitive indicators to propose changes to issuing banks’ credit policies and interest rates.
In the fourth quarter of 2019, our marketplace facilitated $3.1 billion of loan originations, of which $1.2 billion was issued through whole loan sales, $1.7 billion was purchased or pending purchase by the Company 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 held 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)
We regularly review several metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The following table showspresents select financial metrics for the loan origination volume issued,periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Non-interest income | $ | 605,799 | | | $ | 258,756 | | | $ | 660,566 | |
| Net interest income | 212,831 | | | 59,328 | | | 98,041 | |
| Total net revenue | $ | 818,630 | | | $ | 318,084 | | | $ | 758,607 | |
| | | | | |
| Consolidated net income (loss) | $ | 18,580 | | | $ | (187,538) | | | $ | (30,690) | |
| | | | | |
| Basic EPS | $ | 0.19 | | | $ | (2.63) | | | $ | (0.35) | |
| Diluted EPS | $ | 0.18 | | | $ | (2.63) | | | $ | (0.35) | |
| | | | | |
| LendingClub Bank Performance Metrics: | |
| | | | | |
Efficiency ratio (1) | 72.1 | % | | N/A | | N/A |
| Return on Average Equity (ROE) | 17.0 | % | | N/A | | N/A |
| Return on Average Total Assets (ROA) | 2.4 | % | | N/A | | N/A |
| | | | | |
| LendingClub Bank Capital Ratios: | | | | | |
| CET1 1 Capital Ratio | 16.7 | % | | N/A | | N/A |
| Tier 1 Leverage Ratio | 14.3 | % | | N/A | | N/A |
| | | | | |
| Consolidated LendingClub Corporation Performance Metrics: | |
| Net interest margin | 5.6 | % | | 3.0 | % | | 3.6 | % |
Efficiency ratio (1) | 80.8 | % | | N/A | | N/A |
| | | | | |
| | | | | |
| Marketing as a % of loan originations | 1.5 | % | | 1.2 | % | | 1.9 | % |
| | | | | |
| Loan Originations (in millions): | | | | | |
| Marketplace loans | $ | 8,099 | | | $ | 4,343 | | | $ | 12,290 | |
| Loan originations held for investment | 2,282 | | | — | | | — | |
| Total loan originations | $ | 10,381 | | | $ | 4,343 | | | $ | 12,290 | |
| | | | | |
AUM (in millions) (2) | $ | 12,463 | | | $ | 11,002 | | | $ | 16,011 | |
N/A – Not applicable
(1) Calculated as the ratio of non-interest expense to total net revenue.
(2) Assets under management (AUM) includes outstanding balances of unsecured personal loans purchased or pending purchaseand auto refinance loans serviced by the Company and the available loan inventory as of theperiod 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 reflectsincluding 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 originations during the fourth quarter of 2019. This increase since the second quarter of 2019 was due to higher volumesinvestors as well as loans held for investment and mix of lower risk grade A and B loans facilitated on our marketplace, the volume of loans purchased by LendingClubheld 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 these circumstances we continue to use our own capital to purchase loans from our issuing 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 have 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 Company.
On February 18, 2020, the Company and Radius Bancorp, Inc. (Radius) entered into 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
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)
| | | | | | | | | | | | | | | |
| December 31, | 2021 | | 2020 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance Sheet Data: | | | | | | | |
| Loans and leases held for investment, net, excluding PPP loans | $ | 2,486,440 | | | $ | — | | | | | |
| PPP loans | 268,297 | | | — | | | | | |
| Total loans and leases held for investment, net | $ | 2,754,737 | | | $ | — | | | | | |
| Total assets | $ | 4,900,319 | | | $ | 1,863,293 | | | | | |
| Total deposits | $ | 3,135,788 | | | $ | — | | | | | |
| Total liabilities | $ | 4,050,077 | | | $ | 1,139,122 | | | | | |
| Total equity | $ | 850,242 | | | $ | 724,171 | | | | | |
| | | | | | | |
| Allowance Ratios: | | | | | | | |
| ALLL to total loans and leases held for investment | 5.0 | % | | N/A | | | | |
| ALLL to total loans and leases held for investment, excluding PPP loans | 5.5 | % | | N/A | | | | |
| ALLL to consumer loans and leases held for investment | 6.4 | % | | N/A | | | | |
| ALLL to commercial loans and leases held for investment | 1.8 | % | | N/A | | | | |
| ALLL to commercial loans and leases held for investment, excluding PPP loans | 2.6 | % | | N/A | | | | |
N/A – Not applicable
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 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.
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 have been increasingly utilizing our balance sheet to support Structured Program transactions, manage marketplace equilibrium, hold loans for testing new or existing loan products and repurchase loans that did not meet an investor’s criteria. In most instances, we subsequently sell those loans, recognizing a gain or loss on their sale.
Loan supply, which is partly driven by borrower-related activities within our business, combined with investor demand to purchase loans on our platform as well as our own loan 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;
announcements and terms of resolution of governmental inquiries or private 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;
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;
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 Structured Program transactions;
changes in the credit performance of loans or market interest rates;
the success of our models to predict borrower risk levels and related investor demand; and
other factors.
At any point in time we have loan applications in various stages from initial application through 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 marketplace 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. 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 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, | 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)
| 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.
|
| |
(2)
| Represents 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” below.
|
Loan Originations
We believe the volume of loans facilitated through our platform and originated by our issuing banks is a key indicator of the attractiveness of our lending marketplace, growth of our brand, scale of our business, 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 major loan products are as follows:
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 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 |
| 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 | 11,506.0 |
| 4.97 |
| | 10,032.6 |
| 4.89 |
| | 8,131.1 |
| 5.05 |
|
| Other loans | 784.1 |
| 3.44 |
| | 849.2 |
| 4.29 |
| | 856.1 |
| 4.42 |
|
| Total | $ | 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 was as follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Personal loan originations by loan grade – standard loan program: | Amount | % of Total | | Amount | % of Total | | Amount | % of Total |
| A | $ | 2,725.4 |
| 32 | % | | $ | 2,132.5 |
| 27 | % | | $ | 1,096.9 |
| 17 | % |
| B | 2,608.3 |
| 31 | % | | 2,289.6 |
| 29 | % | | 1,839.7 |
| 28 | % |
| C | 1,964.6 |
| 23 | % | | 2,052.2 |
| 26 | % | | 2,224.9 |
| 34 | % |
| D | 1,184.9 |
| 14 | % | | 1,098.3 |
| 14 | % | | 891.9 |
| 13 | % |
| E | 50.0 |
| — | % | | 290.1 |
| 3 | % | | 340.7 |
| 5 | % |
| F | 0.2 |
| — | % | | 60.4 |
| 1 | % | | 118.6 |
| 2 | % |
| G | — |
| — | % | | 13.2 |
| N/M |
| | 72.3 |
| 1 | % |
| Total | $ | 8,533.4 |
| 100 | % | | $ | 7,936.3 |
| 100 | % | | $ | 6,585.0 |
| 100 | % |
N/M – Not meaningful
Credit and pricing policy changes made by the Company during 2019 resulted in a change in the mix of personal loan origination volume from higher risk grades E through G to lower risk A through D grades. These changes broadly focused on tightening credit to shift overall platform mix towards lower risk and higher credit quality borrowers.
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 20192021 and 20182020 items and year-to-year comparisons between 20192021 and 2018.2020. For discussion related to 20172019 items and year-over-year comparisons between 20182020 and 2017,2019, 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, 2018.2020.
The following table sets forth the Consolidated Statements of OperationsIncome Statement data for each of the periods presented: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Non-interest income: | | | | | |
| Marketplace revenue | $ | 578,580 | | | $ | 245,314 | | | $ | 646,735 | |
| Other non-interest income | 27,219 | | | 13,442 | | | 13,831 | |
| Total non-interest income | 605,799 | | | 258,756 | | | 660,566 | |
| | | | | |
| Interest income: | | | | | |
| Interest on loans held for sale | 29,540 | | | 72,876 | | | 109,493 | |
| Interest and fees on loans and leases held for investment | 188,977 | | | — | | | — | |
| Interest on retail and certificate loans held for investment at fair value | 57,684 | | | 115,952 | | | 214,395 | |
| Interest on other loans held for investment at fair value | 4,436 | | | 7,688 | | | 1,104 | |
| Interest on securities available for sale | 11,025 | | | 12,125 | | | 14,351 | |
| Other interest income | 1,170 | | | 1,053 | | | 6,002 | |
| Total interest income | 292,832 | | | 209,694 | | | 345,345 | |
| | | | | |
| Interest expense: | | | | | |
| Interest on deposits | 7,228 | | | — | | | — | |
| Interest on short-term borrowings | 3,677 | | | 17,837 | | | 26,826 | |
| Interest on retail notes, certificates and secured borrowings | 57,684 | | | 115,952 | | | 214,395 | |
| Interest on Structured Program borrowings | 9,638 | | | 16,204 | | | 5,070 | |
| Interest on other long-term debt | 1,774 | | | 373 | | | 1,013 | |
| Total interest expense | 80,001 | | | 150,366 | | | 247,304 | |
| | | | | |
| Net interest income | 212,831 | | | 59,328 | | | 98,041 | |
| | | | | |
| Total net revenue | 818,630 | | | 318,084 | | | 758,607 | |
| | | | | |
| Provision for credit losses | 138,800 | | | 3,382 | | | — | |
| | | | | |
| Non-interest expense: | | | | | |
| Compensation and benefits | 288,390 | | | 252,517 | | | 333,628 | |
| Marketing | 156,142 | | | 51,518 | | | 235,337 | |
| Equipment and software | 39,490 | | | 26,842 | | | 24,927 | |
| Occupancy | 24,249 | | | 27,870 | | | 29,367 | |
| Depreciation and amortization | 44,285 | | | 54,030 | | | 59,152 | |
| Professional services | 47,572 | | | 41,780 | | | 43,010 | |
| Other non-interest expense | 61,258 | | | 47,762 | | | 64,077 | |
| Total non-interest expense | 661,386 | | | 502,319 | | | 789,498 | |
| | | | | |
| Income (Loss) before income tax benefit | 18,444 | | | (187,617) | | | (30,891) | |
| Income tax benefit | 136 | | | 79 | | | 201 | |
| Consolidated net income (loss) | 18,580 | | | (187,538) | | | (30,690) | |
| Less: Income attributable to noncontrolling interests | — | | | — | | | 55 | |
| LendingClub net income (loss) | $ | 18,580 | | | $ | (187,538) | | | $ | (30,745) | |
|
| | | | | | | | | | | |
| 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: (2) | | | | | |
| 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 | ) |
| |
(1)
| See“Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” for additional information.
|
(2)
Includes stock-based compensation expense as follows:
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 NetMarketplace Revenue
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | Change (%) |
| Net revenue: | | | | | | | |
| | | | | | | | |
| Transaction fees | $ | 598,760 |
| | $ | 526,942 |
| | $ | 71,818 |
| | 14 | % |
| | | | | | | | |
| 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 |
|
| 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 | $ | 758,607 |
| | $ | 694,812 |
| | $ | 63,795 |
| | 9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | | | Change ($) | | Change (%) |
| Origination fees | $ | 416,839 | | | $ | 207,640 | | | | | $ | 209,199 | | | 101 | % |
| Servicing fees | 87,639 | | | 111,864 | | | | | (24,225) | | | (22) | % |
| Gain on sales of loans | 70,116 | | | 30,812 | | | | | 39,304 | | | 128 | % |
Net fair value adjustments (1) | 3,986 | | | (105,002) | | | | | 108,988 | | | N/M |
| Total marketplace revenue | $ | 578,580 | | | $ | 245,314 | | | | | $ | 333,266 | | | 136 | % |
|
| | | | | | | | | | | | | | |
| 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2020 | | 2019 | | | | Change ($) | | Change (%) |
| Origination fees | $ | 207,640 | | | $ | 598,760 | | | | | $ | (391,120) | | | (65) | % |
| Servicing fees | 111,864 | | | 124,532 | | | | | (12,668) | | | (10) | % |
| Gain on sales of loans | 30,812 | | | 67,716 | | | | | (36,904) | | | (54) | % |
Net fair value adjustments (1) | (105,002) | | | (144,273) | | | | | 39,271 | | | (27) | % |
| Total marketplace revenue | $ | 245,314 | | | $ | 646,735 | | | | | $ | (401,421) | | | (62) | % |
N/M – Not meaningfulmeaningful.
Origination Fees
Origination fees recorded as a component of marketplace revenue are primarily fees earned related to originating and issuing unsecured personal loans that are held for sale. In addition, origination fees include transaction fees that were paid to the Company by issuing bank partners or education and patient service providers for the work performed in facilitating the origination of loans by the issuing banks. Following the Acquisition, LC Bank became the originator and lender for the majority of unsecured personal loans and all auto refinance loans.
The following table presents loan origination volume during each of the periods set forth below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Marketplace loans | $ | 8,099,109 | | | $ | 4,343,411 | | | $ | 12,290,093 | |
| Loan originations held for investment | 2,282,206 | | | — | | | — | |
| Total loan originations | $ | 10,381,315 | | | $ | 4,343,411 | | | $ | 12,290,093 | |
Origination fees were $416.8 million and $207.6 million for the years ended December 31, 2021 and 2020, respectively, an increase of 101%. The increase was due to higher origination volume of marketplace loans, partially offset by the deferral of origination fees on loans held for investment. Loan origination volume of marketplace loans increased to $8.1 billion for the year ended December 31, 2021 compared to $4.3 billion for the year ended December 31, 2020, an increase of 86%.
Servicing Fees
The Company receives servicing fees to compensate it for servicing loans on behalf of investors, including managing payments from borrowers, collections and payments to those investors. Servicing fee revenue related to loans sold also includes the change in fair value of servicing assets associated with the loans.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Transaction Fees | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | Change ($) | | | | Change (%) |
AUM (in millions): |
| Loans sold | $ | 10,124 | | | $ | 10,139 | | | $ | (15) | | | | | — | % |
| Retail notes, certificates and secured borrowings | 238 | | | 680 | | | (442) | | | | | (65) | % |
| Loans HFI by LendingClub Bank | 2,026 | | | — | | | 2,026 | | | | | N/M |
| Other loans invested in by the Company | 75 | | | 183 | | | (108) | | | | | (59) | % |
| Total | $ | 12,463 | | | $ | 11,002 | | | $ | 1,461 | | | | | 13 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2020 | | 2019 | | Change ($) | | | | Change (%) |
AUM (in millions): |
| Loans sold | $ | 10,139 | | | $ | 14,118 | | | $ | (3,979) | | | | | (28) | % |
| Retail notes, certificates and secured borrowings | 680 | | | 1,149 | | | (469) | | | | | (41) | % |
| | | | | | | | | |
| Other loans invested in by the Company | 183 | | | 744 | | | (561) | | | | | (75) | % |
| Total | $ | 11,002 | | | $ | 16,011 | | | $ | (5,009) | | | | | (31) | % |
Transaction fees are fees paid by issuing banks or education and patient service providers
In addition to us for the work we perform in facilitatingloans serviced on our platform, 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 transactionCompany earns servicing fee revenue neton $214.0 million in outstanding principal balance of program fees paid to WebBank. The fees on thesecommercial loans are based upon the terms of the loan, including grade, rate, term, channel and other factors. Assold as of December 31, 2019, these fees ranged from 0% to 6% of the initial principal amount of a loan.2021.
TransactionServicing fees were $598.8$87.6 million and $526.9$111.9 million for the years ended December 31, 2021 and 2020, respectively, a decrease of 22%. The decrease was due to lower average loan balances serviced in 2021 compared to the prior year, as origination volume was lower in 2020 as compared to 2019 due to the impact of COVID-19.
Gain on Sales of Loans
In connection with loan sales the Company recognizes a gain or loss on the sale of loans based on the level to which the contractual servicing fee is above or below an estimated market rate of servicing. Additionally, the Company recognizes any transaction costs, if any, as a loss on sale of loans.
Gain on sales of loans was $70.1 million and 2018,$30.8 million for the years ended December 31, 2021 and 2020, respectively, an increase of 14%128%. The increase was primarily due to higher origination volume and a higher weighted-average transaction fee. Loans facilitated through our lending marketplace increased to $12.3 billion for the year ended December 31, 2019 compared to $10.9 billion for the year ended December 31, 2018, an increase in the volume of 13%. The average transaction fee as a percentage of the initial principal balance of the loan was 4.87% in 2019 compared to 4.84% in 2018.marketplace loans sold.
In January 2020, we recognized approximately $3.6 million in transaction fee revenue associated with the issuance of loans for which the loan application process had commenced prior to the end of 2019. In January 2019, we recognized approximately $4.2 million in transaction fee revenue associated with the issuance of loans for which the loan application process had commenced prior to the end of 2018. In January 2018, we recognized approximately $5.5 million in transaction fee revenue associated with the issuance of loans for which the loan application process had commenced prior to the end of 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 own 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 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 and prepayments. As we continue to use our own capital to invest in loans for strategic business purposes, we expect the net negativerecords 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 inrecorded at fair value, including gains or losses from sale prices in excess of loans, notes, certificates and secured borrowings are shown on our Consolidated Statements of Operations on a net basis. Due toor less than the payment dependent feature of the notes, certificates and secured borrowings,loan principal amount sold.
Net fair value adjustments on loans fundedwere $4.0 million and $(105.0) million for the years ended December 31, 2021 and 2020, respectively, an improvement of $109.0 million. The improvement was primarily associated with notes, certificates and secured borrowings result in no net effect on our earnings, except for changes innegative fair value adjustments recorded in the first quarter of any applicable2020 due to COVID-19, which included an increase in estimated expected credit support agreements related to secured borrowings.losses and an increase in liquidity premiums.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
Other Non-interest Income
Other non-interest income primarily consists of referral revenue that relates to fees earned from third-party companies when customers referred by us consider or purchase products or services from such third-party companies. The table below illustrates the composition of other non-interest income for each period presented:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | | | Change ($) | | Change (%) |
| Referral revenue | $ | 14,234 | | | $ | 5,011 | | | | | $ | 9,223 | | | 184 | % |
| Realized gains (losses) on sales of securities available for sale and other investments | (93) | | | 11 | | | | | (104) | | | N/M |
| Other | 13,078 | | | 8,420 | | | | | 4,658 | | | 55 | % |
| Other non-interest income | $ | 27,219 | | | $ | 13,442 | | | | | $ | 13,777 | | | 102 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2020 | | 2019 | | Change ($) | | Change (%) |
| Referral revenue | $ | 5,011 | | | $ | 5,474 | | | $ | (463) | | | (8) | % |
| Realized gains (losses) on sales of securities available for sale and other investments | 11 | | | (8) | | | 19 | | | N/M |
| Other | 8,420 | | | 8,365 | | | 55 | | | 1 | % |
| Other non-interest income | $ | 13,442 | | | $ | 13,831 | | | $ | (389) | | | (3) | % |
Net Interest Income
The following tables provide additional detail related totable below presents net interest income information corresponding to interest-earning assets and fair value adjustmentsinterest-bearing funding sources on a consolidated basis for assets invested in by the Company, assets with equal and offsetting liabilities, and total interest income, interest expense and net fair value adjustments:Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31(1), |
| 2021 | | 2020 | | 2019 |
| Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate | | Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate | | Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate |
Interest-earning assets (2) | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 754,920 | | | $ | 1,170 | | | 0.16 | % | | $ | 395,734 | | | $ | 1,053 | | | 0.27 | % | | $ | 257,185 | | | $ | 6,002 | | | 2.33 | % |
| Securities available for sale at fair value | 288,545 | | | 11,025 | | | 3.82 | % | | 217,189 | | | 12,125 | | | 5.58 | % | | 221,166 | | | 14,351 | | | 6.49 | % |
| Loans held for sale | 218,349 | | | 29,540 | | | 13.53 | % | | 489,750 | | | 72,876 | | | 14.88 | % | | 725,901 | | | 109,493 | | | 15.08 | % |
| Loans and leases held for investment: | | | | | | | | | | | | | | | | | |
| Unsecured personal loans | 863,266 | | | 122,807 | | | 15.52 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Secured consumer loans | 485,195 | | | 17,105 | | | 3.85 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Commercial loans and leases | 617,483 | | | 30,731 | | | 5.43 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| PPP loans | 487,435 | | | 18,334 | | | 4.10 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Loans and leases held for investment | 2,453,379 | | | 188,977 | | | 8.40 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Retail and certificate loans held for investment at fair value | 406,406 | | | 57,684 | | | 14.19 | % | | 815,255 | | | 115,952 | | | 14.20 | % | | 1,480,588 | | | 214,395 | | | 14.45 | % |
| Other loans held for investment at fair value | 34,938 | | | 4,436 | | | 12.70 | % | | 60,093 | | | 7,688 | | | 12.79 | % | | 10,788 | | | 1,104 | | | 10.23 | % |
| Total interest-earning assets | 4,156,537 | | | 292,832 | | | 7.46 | % | | 1,978,021 | | | 209,694 | | | 10.59 | % | | 2,695,628 | | | 345,345 | | | 12.79 | % |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| 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 |
|
56
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31(1), |
| 2021 | | 2020 | | 2019 |
| Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate | | Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate | | Average
Balance | | Interest Income/
Expense | | Average Yield/
Rate |
| Cash and due from banks and restricted cash | 112,012 | | | | | | | 114,105 | | | | | | | 251,777 | | | | | |
| Allowance for loan and lease losses | (77,223) | | | | | | | — | | | | | | | — | | | | | |
| Other non-interest earning assets | 426,323 | | | | | | | 339,746 | | | | | | | 376,252 | | | | | |
| Total assets | $ | 4,617,649 | | | | | | | $ | 2,431,872 | | | | | | | $ | 3,323,657 | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
| Checking and money market accounts | 2,071,640 | | | 5,954 | | | 0.31 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Savings accounts and certificates of deposit | 383,447 | | | 1,274 | | | 0.36 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Interest-bearing deposits | 2,455,087 | | | 7,228 | | | 0.32 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Short-term borrowings | 68,032 | | | 3,677 | | | 5.40 | % | | 387,958 | | | 17,837 | | | 4.60 | % | | 461,183 | | | 26,826 | | | 5.82 | % |
| Advances from PPPLF | 365,976 | | | 1,183 | | | 0.35 | % | | — | | | — | | | — | % | | — | | | — | | | — | % |
| Retail notes, certificates and secured borrowings | 407,471 | | | 57,684 | | | 14.16 | % | | 816,010 | | | 115,952 | | | 14.21 | % | | 1,486,715 | | | 214,395 | | | 14.45 | % |
| Structured Program borrowings | 110,579 | | | 9,638 | | | 8.72 | % | | 162,688 | | | 16,204 | | | 9.96 | % | | 100,747 | | | 5,070 | | | 5.03 | % |
| Other long-term debt | 16,355 | | | 591 | | | 3.61 | % | | 6,824 | | | 373 | | | 5.47 | % | | 20,777 | | | 1,013 | | | 4.88 | % |
| Total interest-bearing liabilities | 3,423,500 | | | 80,001 | | | 2.36 | % | | 1,373,480 | | | 150,366 | | | 10.95 | % | | 2,069,422 | | | 247,304 | | | 11.97 | % |
| | | | | | | | | | | | | | | | | |
| Non-interest bearing deposits | 126,982 | | | | | | | — | | | | | | | — | | | | | |
| Other liabilities | 289,163 | | | | | | | 272,164 | | | | | | | 372,954 | | | | | |
| Total liabilities | $ | 3,839,645 | | | | | | | $ | 1,645,644 | | | | | | | $ | 2,442,376 | | | | | |
| | | | | | | | | | | | | | | | | |
| Total equity | $ | 778,004 | | | | | | | $ | 786,228 | | | | | | | $ | 881,281 | | | | | |
| Total liabilities and equity | $ | 4,617,649 | | | | | | | $ | 2,431,872 | | | | | | | $ | 3,323,657 | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate spread | | | | | 5.10 | % | | | | | | (0.36) | % | | | | | | 0.82 | % |
| | | | | | | | | | | | | | | | | |
| Net interest income and net interest margin | | | $ | 212,831 | | | 5.56 | % | | | | $ | 59,328 | | | 3.00 | % | | | | $ | 98,041 | | | 3.64 | % |
(1) Prior period amounts have been reclassified to conform to current period presentation and methodology, which includes non-interest earning assets, non-interest bearing liabilities and equity.
(2) Nonaccrual loans and any related income are included in their respective loan categories.
|
| | | | | | | | | | | | | | |
| 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 byAn analysis of 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 increaseyear-to-year changes in the average outstanding balancecategories of securities available for sale. The impact ofinterest revenue and interest expense resulting from changes in volume and rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Compared to 2020 | | 2020 Compared to 2019 |
| Increase (Decrease)
Due to Change in: | | Increase (Decrease)
Due to Change in: |
| Average Volume(1) | Average Rate(1) | Total | | Average Volume(1) | Average Rate(1) | Total |
| Interest-earning assets | | | | | | | |
| Cash, cash equivalents and restricted cash | $ | 682 | | $ | (565) | | $ | 117 | | | $ | 2,150 | | $ | (7,099) | | $ | (4,949) | |
| Securities available for sale at fair value | 3,342 | | (4,442) | | (1,100) | | | (254) | | (1,972) | | (2,226) | |
| Loans held for sale | (37,233) | | (6,103) | | (43,336) | | | (35,159) | | (1,458) | | (36,617) | |
| Loans and leases held for investment | 188,977 | | — | | 188,977 | | | — | | — | | — | |
| Retail and certificate loans held for investment at fair value | (58,194) | | (74) | | (58,268) | | | (94,827) | | (3,616) | | (98,443) | |
| Other loans held for investment at fair value | (3,195) | | (57) | | (3,252) | | | 6,242 | | 342 | | 6,584 | |
| Total increase (decrease) in interest income on interest-earning assets | $ | 94,379 | | $ | (11,241) | | $ | 83,138 | | | $ | (121,848) | | $ | (13,803) | | $ | (135,651) | |
| Interest-bearing liabilities | | | | | | | |
| Checking and money market accounts | $ | 5,954 | | $ | — | | $ | 5,954 | | | $ | — | | $ | — | | $ | — | |
| Savings accounts and certificates of deposit | 1,274 | | — | | 1,274 | | | — | | — | | — | |
| Interest-bearing deposits | 7,228 | | — | | 7,228 | | | — | | — | | — | |
| Short-term borrowings | (16,837) | | 2,677 | | (14,160) | | | (3,875) | | (5,114) | | (8,989) | |
| Advances from PPPLF | 1,183 | | — | | 1,183 | | | — | | — | | — | |
| Retail notes, certificates and secured borrowings | (57,838) | | (430) | | (58,268) | | | (94,932) | | (3,511) | | (98,443) | |
| Structured Program borrowings | (4,723) | | (1,843) | | (6,566) | | | 4,294 | | 6,840 | | 11,134 | |
| Other long-term debt | 379 | | (161) | | 218 | | | (750) | | 110 | | (640) | |
| Total increase (decrease) in interest expense on interest-bearing liabilities | $ | (70,608) | | $ | 243 | | $ | (70,365) | | | $ | (95,263) | | $ | (1,675) | | $ | (96,938) | |
| | | | | | | |
| Increase (decrease) in net interest income | $ | 164,987 | | $ | (11,484) | | $ | 153,503 | | | $ | (26,585) | | $ | (12,128) | | $ | (38,713) | |
(1) Volume and rate changes have been allocated on a consistent basis using the increaserespective percentage changes 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)
Investor Fees
The tablesallowance for loan and lease losses (ALLL) for lifetime expected losses under CECL on HFI loans and leases is initially recognized as “Provision for credit losses” at the time of origination. The ALLL is estimated using a DCF approach, where effective interest rates are used to calculate the net present value of expected cash flows. The net present value from the DCF approach is then compared to the amortized cost basis of the loans and leases to derive expected credit losses. The provision for credit losses includes the credit loss expense for HFI loans and leases, AFS securities and unfunded lending commitments. The table below illustrateillustrates 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 financedprovision for credit losses for each period presented:
| | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | | | |
| Credit loss expense for Radius loans at acquisition | $ | 6,929 | | | $ | — | | | | | |
| Credit loss expense for loans and leases held for investment | 134,022 | | | — | | | | | |
| Credit loss expense for unfunded lending commitments | 1,231 | | | — | | | | | |
| Total credit loss expense | 142,182 | | | — | | | | | |
| (Reversal of) Impairment on securities available for sale | (3,382) | | | 3,382 | | | | | |
| Total provision for credit losses | $ | 138,800 | | | $ | 3,382 | | | | | |
|
| | | | | | | | | | | | | | |
| 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 | % |
The provision for credit losses was $138.8 million and $3.4 million for the years ended December 31, 2021 and 2020, respectively. The increase was primarily due to the origination of unsecured personal loans retained as HFI at amortized cost and the impact from applying CECL to the HFI portfolio and to the Radius loans upon their acquisition, partially offset by reversal of impairment originally recorded in the AFS securities portfolio in the prior year.
The allowance for credit losses (ACL) totaled $145.6 million at December 31, 2021, comprised of an ALLL of $144.4 million and a reserve for unfunded lending commitments of $1.2 million. Unsecured personal loans are charged-off when a borrower is (i) contractually 120 days past due or (ii) two payments past due and has filed for bankruptcy or is deceased.
The activity in the ACL was as follows:
| | | | | | | | |
| | Year Ended
December 31, 2021 |
| Allowance for loan and lease losses, beginning of period | | $ | — | |
| Credit loss expense for loans and leases held for investment | | 140,951 | |
Initial allowance for purchased credit deteriorated (PCD) loans acquired during the period(1) | Funds are the private funds | 12,440 | |
| Charge-offs | | (10,452) | |
| Recoveries | | 1,450 | |
Allowance for which LendingClub Asset Management, LLC (LCAM), or its subsidiaries acted as general partner. In March 2019, we completed the dissolutionloan and lease losses, end of those funds. The Company does not expect to earn investor fees from private funds and separately managed accounts in the future.period | | $ | 144,389 | |
| | |
| Reserve for unfunded lending commitments, beginning of period | | $ | — | |
| Credit loss expense for unfunded lending commitments | | 1,231 | |
Reserve for unfunded lending commitments, end of period(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 | % |
| $ | 1,231 | |
(1)
| Funds are the private funds for which LendingClub Asset Management, LLC (LCAM), or its subsidiaries acted |
(1) For acquired PCD loans, an ACL of $30.4 million was required with a corresponding increase to the amortized cost basis 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 endacquisition date. For PCD loans where all or a portion of each respective period.the loan balance had been previously written-off, or would be subject to write-off under the Company’s charge-off policy, an ACL of $18.0 million included as part of the grossed-up loan balance at acquisition was immediately written-off. The net impact to the allowance for PCD assets on the acquisition date was $12.4 million.
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 balanceThe ALLL represented 5.0% of total loans and the amount of principal and interest collected from borrowers and remitted to investors.
Investor fee revenue related to whole loans sold also includes the change in fair value of our servicing assets and liabilities 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 $100.1 million and $82.8 million for the years ended December 31, 2019 and 2018, respectively, an increase of 21%. The increase 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 completeleases HFI as of December 31, 2018. The Company does not expect to earn investor fees from private funds2021, or 5.5% of total loans and separately managed accounts inleases HFI excluding PPP loans. Average loans and leases HFI were $2.5 billion during 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 yearsyear ended December 31, 20192021. Net charge-offs represented 0.4% of average loans and 2018, respectively, an increaseleases HFI during the year ended December 31, 2021.
For additional information on the ACL, see“ Notes to Consolidated Financial Statements – Note 1. Summary of 47%. The increase was primarily due to an increase in the volumeSignificant Accounting Policies” and “Note 6. Loans and Leases Held for Investment, Net of loans soldAllowance For Loan and an increase in the weighted-average contractual loan servicing fee that resulted in higher gains on sales of loansLease Losses.”
The following table presents nonaccrual loans and leases (1): | | | | | |
| December 31, 2021 |
| Unsecured personal | $ | 1,676 | |
| Residential mortgages | 1,373 | |
| Secured consumer | 3,011 | |
| |
| Total nonaccrual consumer loans held for investment | 6,060 | |
| |
| Equipment finance | 603 | |
| Commercial real estate | 989 | |
| Commercial and industrial | 2,333 | |
| Total nonaccrual commercial loans and leases held for investment | 3,925 | |
| |
| Total nonaccrual loans and leases held for investment | $ | 9,985 | |
(1) Excluding PPP loans, there were no loans that were 90 days or more past due and accruing as of December 31, 2021.
Nonaccrual loans and leases represented 0.3% of total loans and leases HFI, or 0.4% of total loans and leases HFI excluding PPP loans, as of December 31, 2021. The ALLL represented 1446% of nonaccrual loans and leases as of December 31, 2021.
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 revenueNon-interest expense 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,(i) compensation 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 salesbenefits, which include salaries 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,wages, benefits and stock-based compensation expense, related to our sales and(ii) marketing, team.
Origination and Servicing: Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense and vendorwhich includes costs attributable to activities that most directly relateborrower acquisition efforts and building general brand awareness, (iii) equipment and software, (iv) occupancy, which includes rent expense and all other costs related to facilitatingoccupying our office spaces, (v) depreciation and amortization and (vi) professional services, which primarily consist of legal and accounting fees.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | Change ($) | | Change (%) |
| Non-interest expense: | | | | | | | |
| Compensation and benefits | $ | 288,390 | | | $ | 252,517 | | | $ | 35,873 | | | 14 | % |
| Marketing | 156,142 | | | 51,518 | | | 104,624 | | | 203 | % |
| Equipment and software | 39,490 | | | 26,842 | | | 12,648 | | | 47 | % |
| Occupancy | 24,249 | | | 27,870 | | | (3,621) | | | (13) | % |
| Depreciation and amortization | 44,285 | | | 54,030 | | | (9,745) | | | (18) | % |
| Professional services | 47,572 | | | 41,780 | | | 5,792 | | | 14 | % |
| Other non-interest expense | 61,258 | | | 47,762 | | | 13,496 | | | 28 | % |
| Total non-interest expense | $ | 661,386 | | | $ | 502,319 | | | $ | 159,067 | | | 32 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2020 | | 2019 | | Change ($) | | Change (%) |
| Non-interest expense: | | | | | | | |
| Compensation and benefits | $ | 252,517 | | | $ | 333,628 | | | $ | (81,111) | | | (24) | % |
| Marketing | 51,518 | | | 235,337 | | | (183,819) | | | (78) | % |
| Equipment and software | 26,842 | | | 24,927 | | | 1,915 | | | 8 | % |
| Occupancy | 27,870 | | | 29,367 | | | (1,497) | | | (5) | % |
| Depreciation and amortization | 54,030 | | | 59,152 | | | (5,122) | | | (9) | % |
| Professional services | 41,780 | | | 43,010 | | | (1,230) | | | (3) | % |
| Other non-interest expense | 47,762 | | | 64,077 | | | (16,315) | | | (25) | % |
| Total non-interest expense | $ | 502,319 | | | $ | 789,498 | | | $ | (287,179) | | | (36) | % |
Compensation and benefits expense was $288.4 million and $252.5 million for the originationyears ended December 31, 2021 and 2020, respectively, an increase of loans and servicing loans for borrowers and investors. These costs relate14%. The increase was primarily due to an increase in headcount due to the credit, collections, customer supportAcquisition and payment processing teamshiring in key functions during 2021. In addition, compensation and related vendors.benefits expense in 2020 was impacted by salary and headcount reductions resulting from the COVID-19 pandemic.
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
Equipment and software costsexpense was $39.5 million and depreciation, amortization$26.8 million for the years ended December 31, 2021 and impairment2020, respectively, an increase of technology assets.47%. The increase was primarily due to an increase in expenses associated with the integration of Radius.
Other General and Administrative: Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting, finance, legal, risk, compliance, human resources and facilities teams, professional services fees and facilities expense.
LENDINGCLUB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | Change ($) | | 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
SalesDepreciation and marketing: Sales and marketingamortization expense was $279.4$44.3 million and $268.5$54.0 million for the years ended December 31, 20192021 and 2018,2020, respectively, a decrease of 18%. The decrease was primarily due to a decrease in internally-developed software impairment and depreciation expense in 2021 compared to 2020, partially offset by an increase in the amortization of intangible assets resulting from the Acquisition.
Professional services were $47.6 million and $41.8 million for the years ended December 31, 2021 and 2020, respectively, an increase of 4%14%. The increase was primarily due to an 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 percent 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 servicing: Origination and servicing expense was $103.4 million and $99.4 million for the years ended December 31, 2019 and 2018, respectively, an increase of 4%. The increase was primarily due to incremental personnel-related expensesprofessional fees 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.Acquisition.
Income Taxes
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 increases in depreciation and impairment expense and equipment and software expense. Personnel-related expenses for full-time employees decreased from 2018, which was partially offset by an increased use of outsourced service providers.
We capitalized $36.1 million and $46.8 million in software development costs for the years ended December 31, 2019 and 2018, respectively.
Other general and administrative expense: Other general and administrative expense was $238.3 million and $228.6 million for the years ended December 31, 2019 and 2018, respectively, an increase of 4%. The increase was primarily due to an increase in personnel-related expenses resulting from a higher headcount of full-time employees, an expense related to the termination of a legacy contract in the second quarter of 2019 and an increase
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)
in facilities expense, partially offset by a reduction in professional services and external advisory fees. The increase in facilities expense was primarily associated with establishing a site in the Salt Lake City area and having the offsetting sublease revenue from our sublet office space in San Francisco, California, recorded in Other revenue in the Company’s Consolidated Statements of Operations.
Goodwill Impairment
In 2018, we had one reporting unit for goodwill impairment testing purposes, the patient and education finance reporting unit. We performed a quantitative annual test for impairment on April 1, 2018 and recorded a goodwill impairment expense of $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 forFor the year ended December 31, 2019. Class action and regulatory litigation2021, we recorded an income tax benefit of $136 thousand primarily related to a tax benefit associated with the Acquisition, partially offset by income tax expense for state jurisdictions that limit net operating loss utilization. For the year ended December 31, 2018 was $35.5 million, which is included in “Class action and regulatory litigation expense” on the Company’s Consolidated Statements2020, we recorded an income tax benefit of Operations. This expense was related to significant governmental and regulatory investigations following the internal board review described more fully 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.
Income Taxes
Income tax expense (benefit) is$79 thousand 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 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, 2019 and 2018, the valuation allowance was $169.5 million and $169.3 million, respectively. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversalfuture realization of all or some portion of these allowances.deferred tax assets. Our recent and forecast profitability are examples of positive evidence that we are assessing in determining the amount of the valuation allowance required. Changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions are recorded as current period income tax expense.
Non-GAAP Financial Measures and Supplemental Financial
Segment Information
We use certain non-GAAPThe Company defines operating segments to be components of the Company for which discrete financial measures in evaluating our operating results. We believe that Contribution, Contribution Margin, Adjusted Net Income (Loss), Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Earnings (Loss) Per Share (Adjusted EPS)information is evaluated regularly by the Company’s chief executive officer and Net Cashchief financial officer to allocate resources and Other 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 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 similarevaluate financial performance. This information is reviewed according to the adjustments in this presentation. There arelegal organizational structure of the Company’s operations with products and services presented separately for the parent bank holding company and its wholly-owned subsidiary, LC Bank.
LendingClub Bank
The LC Bank operating segment represents the national bank legal entity and reflects post-Acquisition operating activities. This segment provides a numberfull complement of limitations relatedfinancial products and solutions, including loans, leases and deposits. It originates loans to individuals and businesses, retains loans for investment, sells loans to investors and manages relationships with deposit holders.
LendingClub Corporation (Parent Only)
The LendingClub Corporation (parent only) operating segment represents the holding company legal entity and predominately reflects the operations of the Company prior to the useAcquisition. This activity includes, but is not limited to, the purchase and sale of these non-GAAP financial measures versus their most directly comparable GAAP measures, which include the following:loans and issuances of education and patient finance loans that were originated by issuing bank partners.
Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure.
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)
Although depreciation, impairment and amortization are non-cash charges,Financial information for the assets being depreciated, impaired and amortized may have to be replacedsegments is presented in the future and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements.following table:
These measures do not reflect tax payments that may represent a reduction in cash available to us.
Contribution and Contribution Margin
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LendingClub
Bank | | LendingClub
Corporation
(Parent only) | | Intercompany
Eliminations | | Consolidated Total |
| Eleven Months Ended December 31, | | Year Ended December 31, | | Eleven Months Ended December 31, | | Year Ended December 31, |
| 2021 | | 2021 | | 2020 | | 2019 | | 2021 | | 2021 | | 2020 | | 2019 |
| Non-interest income: | | | | | | | | | | | | | | | |
| Marketplace revenue | $ | 462,821 | | | $ | 115,759 | | | $ | 245,314 | | | $ | 646,735 | | | $ | — | | | $ | 578,580 | | | $ | 245,314 | | | $ | 646,735 | |
| Other non-interest income | 94,953 | | | 16,718 | | | 13,442 | | | 13,831 | | | (84,452) | | | 27,219 | | | 13,442 | | | 13,831 | |
| Total non-interest income | 557,774 | | | 132,477 | | | 258,756 | | | 660,566 | | | (84,452) | | | 605,799 | | | 258,756 | | | 660,566 | |
| | | | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | | | | |
| Interest income | 210,739 | | | 82,093 | | | 209,694 | | | 345,345 | | | — | | | 292,832 | | | 209,694 | | | 345,345 | |
| Interest expense | (8,412) | | | (71,589) | | | (150,366) | | | (247,304) | | | — | | | (80,001) | | | (150,366) | | | (247,304) | |
| Net interest income | 202,327 | | | 10,504 | | | 59,328 | | | 98,041 | | | — | | | 212,831 | | | 59,328 | | | 98,041 | |
| | | | | | | | | | | | | | | |
| Total net revenue | 760,101 | | | 142,981 | | | 318,084 | | | 758,607 | | | (84,452) | | | 818,630 | | | 318,084 | | | 758,607 | |
| | | | | | | | | | | | | | | |
| Reversal of (provision for) credit losses | (142,182) | | | 3,382 | | | (3,382) | | | — | | | — | | | (138,800) | | | (3,382) | | | — | |
| Non-interest expense | (547,799) | | | (198,039) | | | (502,319) | | | (789,498) | | | 84,452 | | | (661,386) | | | (502,319) | | | (789,498) | |
| Income (Loss) before income tax benefit (expense) | 70,120 | | | (51,676) | | | (187,617) | | | (30,891) | | | — | | | 18,444 | | | (187,617) | | | (30,891) | |
| Income tax benefit (expense) | 9,171 | | | 44,013 | | | 79 | | | 201 | | | (53,048) | | | 136 | | | 79 | | | 201 | |
| Consolidated net income (loss) | $ | 79,291 | | | $ | (7,663) | | | $ | (187,538) | | | $ | (30,690) | | | $ | (53,048) | | | $ | 18,580 | | | $ | (187,538) | | | $ | (30,690) | |
Contribution is a non-GAAP financial measure that is calculated as net revenue less “Sales and marketing” and “Origination and servicing” expenses on
The Company integrated the Acquisition into its reportable segments in the first quarter of 2021. As the Company’s reportable segments are based on legal organizational structure and LC Bank was formed upon the Acquisition, an analysis of the Company’s results of operations and material trends for the year ended December 31, 2021 compared to the year ended December 31, 2020 is provided on a consolidated basis in “Consolidated StatementsResults of Operations, adjusted.”
Supervision and Regulatory Environment
We are regularly subject to exclude cost structure simplificationclaims, individual and non-cash stock-based compensation expenses within these captionsclass action lawsuits, lawsuits alleging regulatory violations. Further, we are subject to periodic exams, investigations, inquiries or requests, enforcement actions and 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 structureother proceedings from federal and a number of expense initiatives underway,state regulatory agencies, including the establishmentfederal banking regulators that directly regulate the Company and/or LC Bank. The number and significance of these claims, lawsuits, exams, investigations, inquiries, requests and proceedings have been increasing in part because our products and services have been increasing in scope and complexity and in part because we have become a sitebank holding company operating a national bank. Although historically the Company has generally resolved these matters in a manner that was not materially adverse to its financial results or business operations, no assurance can be given as to the timing, outcome or consequences of any of these matters 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 margin 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 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 Contribution and Contribution Margin:future.
|
| | | | | | | | | | | |
| 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. |
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 reconciliationRegulatory Actions Taken in Relation to COVID-19
Regulators and government officials at the federal government level and in states across the country have issued orders, passed laws or otherwise issued guidance in connection with COVID-19. Some of LendingClub net lossthese orders and laws have placed restrictions on debt collection activity, all or certain types of communications with delinquent borrowers or others, required that borrowers be allowed to Contribution for eachdefer payments on outstanding debt, governed credit reporting and the use of credit reporting, and placed certain restrictions and requirements on operations in the workplace. We have taken steps to monitor regulatory developments relating to COVID-19 and to comply with orders and laws applicable to our business. Given the ongoing nature of the periods indicated:pandemic, it is possible that additional orders, laws, or regulatory guidance may still be issued. We are not able to predict the extent of the impact on our business from any regulatory activity relating to or resulting from COVID-19.
|
| | | | | | | | | | | |
| 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
Since our acquisition of Radius, we are subject to supervision, regulation, examination and Adjusted EPS
Adjusted Net Income (Loss)enforcement by multiple federal banking regulatory bodies. Specifically, as a bank holding company, the Company is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the FRB. Further, as a non-GAAP financial measure defined as net income (loss) attributablenational bank, LC Bank is subject to LendingClub adjustedongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. Accordingly, we have been and continue to excludeinvest in regulatory compliance and be subject to 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 litigationparameters, obligations and/or regulatory settlement expenseslimitations set forth by the banking regulations and gains on disposal of certain assets), net of tax. Legacy items are generally those expenses that arose from the decisions of legacy management priorregulators with respect 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 for “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 performanceoperation of our business.
Adjusted EBITDA 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) 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, (7) stock-based compensation expense and (8) income tax expense (benefit). We believe that Adjusted 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. Additionally, we utilize Adjusted EBITDA as an input into the Company’s calculation of the annual bonus plan.
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)
Adjusted EBITDA Margin is a non-GAAP financial measure calculated by dividing Adjusted EBITDA by total net revenue.
Adjusted EPS is a non-GAAP financial measure calculated by dividing Adjusted Net Income (Loss) by the weighted-average diluted common shares outstanding. We believe that Adjusted EPS is an important measure because it directly reflects the 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 LendingClub net loss to Adjusted Net Income (Loss) and Adjusted EBITDA and a calculation of Adjusted EPS for each of the periods indicated: |
| | | | | | | | | | | |
| 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)
| Includes personnel-related expenses associated with establishing a site in the Salt 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 2018 and first quarter of 2019, also includes external advisory fees which are included in “Other general and administrative” expense on the Company’s Consolidated Statements of Operations.
|
| |
(2)
| In 2019, includes legacy legal expenses, expense related to the dissolution of certain private funds previously managed by LCAM, and expense related to the termination of a legacy contract, which are included in “Other general and administrative” expense, “Net fair value adjustments,” and “Other general and administrative” expense on the Company’s Consolidated Statements of Operations, respectively. Includes class action and regulatory litigation expense of $35.5 million and $77.3 million for the years ended December 31, 2018 and 2017, respectively, which is included in “Class action and regulatory litigation expense” on the Company’s Consolidated Statements of 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.
|
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
The following table is provided to delineate between the 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 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. During 2019, the Company made multiple efforts to reduce its concentration of investors by introducing several new products in its Structured Program, including Levered Certificates, LCX and a securitization of exclusively grade A and B loans. The percentage of loans invested in by our ten largest investors decreased 4% from the 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.
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 and prepayment trends that we accumulate are leveraged to continually improve our underwriting models. We believe we have the experience to effectively
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
Fair Value and Delinquencies
For 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, 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) |
| 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) | — |
| — |
| — |
| | 0.1 |
| 96.0 |
| 10.6 |
|
| Total | $ | 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. |
Increases in the fair value of loans as a percent of outstanding principal balance from December 31, 2018 to December 31, 2019 were primarily due to a shift in the mix of personal loans toward lower risk grades.
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 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, 2019 | | December 31, 2018 |
| (in millions, except percentages) | Outstanding Principal Balance (2) | Fair Value (3) | Delinquent Loans (3) | | Outstanding Principal Balance (2) | Fair Value (3) | Delinquent Loans (3) |
| 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) | 103.7 |
| 94.7 |
| 3.9 |
| | 77.7 |
| 93.9 |
| 0.2 |
|
| Total | $ | 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. |
The fair value of total loans invested in by the Company as a percent of outstanding principal balance from December 31, 2018 to December 31, 2019 remained relatively unchanged due to an increase in fair value as a result of a shift in portfolio mix to higher volume in lower risk grades, offset by higher discounts.
Net Annualized Charge-Off Rates
The following tables show annualized net charge-off rates, which are a measure of the performance of the loans facilitated by our platform. In contrast to the graphs above, these tables show the annualized charged-off balance of loans in a specific period as a percentage of the average outstanding balance for such period.
Net annualized charge-off rates are affected by the average age and grade distribution of the loans outstanding 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 parameters 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 were as follows:
|
| | | | | | | | | | |
Total Platform (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 | 7.0 | % | 6.4 | % | 6.4 | % | 7.0 | % | 7.0 | % |
| Weighted-average age in months | 12.5 |
| 12.3 |
| 12.3 |
| 12.4 |
| 12.3 |
|
| | | | | | |
Personal loans – custom program: | | | | | |
| Annualized net charge-off rate | 11.5 | % | 10.9 | % | 10.8 | % | 12.8 | % | 12.4 | % |
| Weighted-average age in months | 9.4 |
| 9.3 |
| 9.9 |
| 9.7 |
| 9.5 |
|
| |
(1)
| Total platform comprises all loans facilitated through our 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.
|
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 2019 compared to the third quarter of 2019 for both the standard and custom personal loan programs reflects the effect of higher 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 our Consolidated Balance Sheets for the last five quarters were as follows:
|
| | | | | | | | | | |
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)
| Loans retained on balance sheet include loans invested in by the Company as well as loans held for investment that are funded directly by member payment dependent notes related to our Retail Program and certificates. |
The decrease in annualized net charge-off rates for the standard personal loan program in the fourth quarter of 2019 compared to the fourth quarter of 2018 for the loans retained on our Consolidated Balance Sheets reflects the effect of lower outstanding loan balances and a decrease in actual net charge-offs.
The increase in the annualized net charge-off rate in the fourth quarter of 2019 compared to the third 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 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 55% of the retained loan portfolio compared to 57% for the total platform level as of December 31, 2019. This difference in loan grade distribution results in higher net charge-off rates for the loans on the Consolidated Balance Sheets compared to the total platform, as grade A and B loans have lower expected and actual credit losses.
Regulatory Environment
We 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 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 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 bank(s).” for more information, additional discussion and disclosure, including the potential adverse outcomes and consequences from such proceedings.
Bank Partnership Model
There has been (and may continue to be) an 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 party has made a loan and then sells and assigns it to an entity that is engaged in assisting with the origination or servicing of a loan.
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 Avant’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. Although Avant removed its case to federal court in March 2017, the United States District Court for the District of Colorado issued 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 judgment 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 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 exempt from or satisfy relevant licensing requirements with respect to the origination of loans we facilitate. However, as 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 servicing operations and the structure of its offerings in the State of Colorado. While we believe
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, penalties, or penalties,other monetary losses due to judgments, orders, or settlements, (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(vi) be unable to execute on certain loans facilitated through our platform and/Company initiatives, or refraining from making certain loans available for investment by certain investors), or (vi)(vii) be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans throughoperate and/or evolve our lending marketplace perform our servicing obligations and other products and/or make our lending marketplace available to borrowers in particular states;services; any of which may harm our business.business or financial results.
See “Part I – Item 1. Business – RegulatoryRegulation and Supervision,” “Part I – Item 1A. Risk Factors – Risks Related to Regulation, Supervision and Compliance, Framework” and “Part I – Item 1A. Risk Factors – Risks Related to Operating Our Business and Regulation”of this Annual Report for further discussion regarding our supervision and regulatory environment.
Capital Management
The prudent management of capital is fundamental to the successful achievement of our business initiatives. We actively manage capital through a process that continuously assesses and monitors the Company’s overall capital adequacy. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations.
The formation of LC Bank as a nationally chartered association and the organization of the Company as a bank holding company subjects us to various capital adequacy guidelines issued by the OCC and the FRB, including the requirement to maintain regulatory capital ratios in accordance with the Basel Committee on Banking Supervision standardized approach for U.S. banking organizations (U.S. Basel III). As a U.S. Basel III standardized approach institution, we selected the one-time election to opt-out of the requirements to include all the components of accumulated other comprehensive income included in common stockholder’s equity. The minimum capital
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)
Liquidityrequirements under the U.S. Basel III capital framework are: a CET1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%. Additionally, a Capital Resources
Liquidity
Our short-term liquidity needs generally relate to our workingConservation Buffer (CCB) of 2.5% must be maintained above the minimum risk-based capital requirements includingin order to avoid certain limitations on capital distributions, stock repurchases, and certain discretionary bonus payments. In addition to these guidelines, the purchase of loans invested inbanking regulators may require a banking organization to maintain capital at levels higher than the minimum ratios prescribed under the U.S. Basel III capital framework. In this regard, and unless otherwise directed by the Company. These liquidity needs are generally met through cash generated fromFRB and the operations of facilitating loan originations, servicing fee revenue, proceeds from the sales of loans (both as whole loan sales and through Structured Program transactions), use of existing cash and cash equivalents, and draws on our credit facilities.
We use our own capital and available credit facilities to purchase loansOCC, we have made commitments for future Structured Program transactions, whole loan sales and if we experience a reduction in available investor capital to fund loans on our marketplace. During the year ended December 31, 2019, the Company facilitated $12.3 billionand LC Bank (until February 2024) to maintain a CET1 risk-based capital ratio of loans on our marketplace. We used our own11.0%, a Tier 1 risk-based capital to purchase $5.3 billion in loansratio above 11.0%, a total risk-based capital ratio above 13.0%, and $7.0 billion in loans were issued that were contemporaneously funded by loan salesa Tier 1 leverage ratio of 11.0%. See “Part I – Item 1. Business – Regulation and by the issuance of notesSupervision – Regulatory Capital Requirements and certificates. The Company sold $5.1 billion in loans (of which $4.0 billion was sold through Structured Program transactionsPrompt Corrective Action” and $1.1 billion was sold to whole loan investors). As of December 31, 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.
We may use our cash, cash equivalents and securities available for sale as additional sources of liquidity. Cash, cash equivalents and securities available for sale were $514.7 million (which included $174.8 million of securities pledged as collateral) and $543.4 million (which included $53.6 million of securities pledged as collateral) as of December 31, 2019 and 2018, 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. Our 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 U.S. agency securities. Changes in the balance of cash and cash equivalents are generally a result of timing related to working capital requirements, purchase or sale of loans and securities available for sale, changes in debt outstanding under our credit facilities, and changes in restricted cash and other investments. Changes in the balance of securities available for sale are 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, 2019 and 2018, we had $16.0 million and $12.8 million in 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 Consolidated Financial Statements – Note 19. Commitments and Contingencies”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 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. Additionally, in connection with the Share Exchange Agreement, the Company will provide Shanda a one-time cash payment of approximately $50 million. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 22. Subsequent Events20. Regulatory Requirements” ”of this Annual Report for additional information.
OurThe following table summarizes LC Bank’s regulatory capital amounts and ratios (in millions):
| | | | | | | | | | | | | | | | | | | |
| LendingClub Bank | | Required Minimum plus Required CCB for Non-Leverage Ratios | | |
| December 31, 2021 | Amount | | Ratio | | |
CET1 capital (1) | $ | 523.7 | | | 16.7 | % | | 7.0 | % | | |
| Tier 1 capital | $ | 523.7 | | | 16.7 | % | | 8.5 | % | | |
| Total capital | $ | 563.7 | | | 18.0 | % | | 10.5 | % | | |
| Tier 1 leverage | $ | 523.7 | | | 14.3 | % | | 4.0 | % | | |
| Risk-weighted assets | $ | 3,130.4 | | | N/A | | N/A | | |
| Quarterly adjusted average assets | $ | 3,667.7 | | | N/A | | N/A | | |
N/A – Not applicable
(1) Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.
The following table presents the regulatory capital and ratios of the Company (in millions):
| | | | | | | | | | | | | | | | | | | |
| LendingClub | | Required Minimum plus Required CCB for Non-Leverage Ratios | | |
| December 31, 2021 | Amount | | Ratio | | |
CET1 capital (1) | $ | 710.0 | | | 21.3 | % | | 7.0 | % | | |
| Tier 1 capital | $ | 710.0 | | | 21.3 | % | | 8.5 | % | | |
| Total capital | $ | 767.9 | | | 23.0 | % | | 10.5 | % | | |
| Tier 1 leverage | $ | 710.0 | | | 16.5 | % | | 4.0 | % | | |
| Risk-weighted assets | $ | 3,333.2 | | | N/A | | N/A | | |
| Quarterly adjusted average assets | $ | 4,301.7 | | | N/A | | N/A | | |
N/A – Not applicable
(1) Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.
The higher risk-based capital ratios for the Company reflect generally lower risk-weights for assets held by LendingClub Corporation as compared with LC Bank.
In response to the COVID-19 pandemic, the FRB, OCC, and FDIC adopted a final rule related to the regulatory capital treatment of the allowance for credit facilities and securities soldlosses under repurchase agreements are comprised of secured warehouse credit facilities for personal loans and auto refinance loans (Personal Loan Warehouse Credit Facilities and Auto LoanCECL. As permitted by the rule, the Company elected to
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)
Warehouse Credit Facility),
Liquidity
We manage liquidity to meet our cash flow and collateral obligations in a secured revolving credit facility (Revolving Facility),timely manner at a reasonable cost. We must maintain operating liquidity to meet our expected daily and repurchase agreements. Personal Loan Warehouse Credit Facilities are usedforecasted cash flow requirements, as well as contingent liquidity to financemeet unexpected funding requirements.
As our personalprimary business at LC Bank involves taking deposits and making loans, on a revolving basiskey role of liquidity management is to ensure that customers have timely access to funds from deposits and have a combinedfor loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.
LendingClub Bank Liquidity
The primary sources of LC Bank short-term liquidity include cash, unencumbered AFS debt securities, and unused borrowing capacity with the Federal Home Loan Bank (FHLB). LC Bank also relies on our deposit base to generate liquidity over time. The primary uses of $750.0 million (which will be reduced to $700.0 millionLC Bank liquidity include withdrawals and maturities of deposits; payment of interest on January 15, 2020), with $373.0 million of debt outstanding secured by $533.6 milliondeposits; funding of loans and securities purchases; compensation and benefits expense; taxes; capital expenditures, including internally developed software, leasehold improvements and computer equipment; and costs associated with the continued development and support of our online lending marketplace platform.
Net capital expenditures were $34.4 million, or 4% of total net revenue, $31.1 million, or 10% of total net revenue and $50.7 million, or 7% of total net revenue, for the years ended December 31, 2021, 2020 and 2019, respectively. Capital expenditures in 2022 are expected to be approximately $50 million, primarily related to costs associated with the continued development and support of our online lending marketplace platform, including regulatory compliance costs.
As of December 31, 2021, cash and cash equivalents at fair valueLC Bank were $659.9 million and deposits were $3.2 billion. Outstanding PPPLF borrowings were $271.9 million at December 31, 2021 and are collateralized by PPP loans originated by the Company. In addition, LC Bank has available Federal Home Loan Bank of Des Moines secured borrowing capacity totaling $173.4 million. LC Bank also has secured borrowing capacity available under the FRB Discount Window totaling $75.2 million.
LendingClub Holding Company Liquidity
The primary source of liquidity at the holding company is $88.3 million in cash and cash equivalents as of December 31, 2019. These Personal Loan Warehouse Credit Facilities have “Commitment Termination Dates” ranging from March 2020 to October 2020, at which point2021. Additionally, the Company’sholding company has the ability to borrowaccess the capital markets through additional funds ends. We are working to amendregistrations and extendpublic equity offerings.
Uses of cash at the Commitment Termination Datesholding company include the routine cash flow requirements as a bank holding company, such as interest and expenses (including those associated with our office leases), the needs of these Personal Loan Warehouse Credit Facilities, or to replace them with substantially similar credit facilities. We are also evaluatingLC Bank for additional warehouse facilities to finance our personal loans with existingequity and, new financial institutions. Under the respective agreements, if not amended, extended, or replaced, any outstandingas required, its need for debt on the 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.financing and support for extraordinary funding requirements when necessary.
Factors Impacting Liquidity
The Auto Loan Warehouse Credit Facility isCompany’s liquidity could be adversely impacted by deteriorating financial and market conditions, the inability or unwillingness of a term loan usedcreditor 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 auto refinance loans that serve as collateral. As of December 31, 2019, the Auto Loan Warehouse Credit Facility hasprovide funding, an outstanding debt balance of $14.3 million, which matures in June 2021 and is secured by $17.9 million of auto refinance loans at fair value.
The Revolving Facility hasidiosyncratic event (e.g., a credit limit of $120.0 million, with $60.0 million of debt outstanding as of December 31, 2019, and expires in December 2020.
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 atmajor loss, causing a specified future date and price) in exchange for cash. As of December 31, 2019, we have an obligation of $140.2 million to repurchase securities with a fair value of $174.8 million.
See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Debt”for further information.
The Personal Loan and Auto Loan Warehouse Credit Facilities, Revolving Facility and repurchase agreements have interest rates predominately based on LIBOR. The agreements generally include alternative rates to LIBOR. We plan to renew and/perceived 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 expect the alternate rates to be based on prevailing market convention for financing arrangements of an equivalent nature.
We believe, based on our projections, that our cash on hand, securities available for sale, available funds from our Warehouse Facilities and repurchase agreements (subject to amendments and extensions), and cash flow from operations are 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)
We believe, based on our projections, that our cash on hand, AFS securities, available funds, and cash flow from operations is sufficient to meet our liquidity needs for the next twelve months, as well as beyond the next twelve months. See “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” for additional detail regarding our cash flows.
Market Risk
Market risk represents the risk of potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices, and/or other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. Interest rate risk arises from financial instruments including loans, securities and borrowings, all entered into for purposes other than trading.
Our net interest income is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, and the level and composition of deposits and liabilities.
Interest Rate Sensitivity
LendingClub Bank
Loans HFI at LC Bank are funded primarily through our deposit base, and the majority of loans on LC Bank’s balance sheet, at any point in time, are retained in the HFI portfolio and accounted for at amortized cost. As a result, the primary component of interest rate risk on our financial instruments at LC Bank arises from the impact of fluctuations in loan and deposit rates on our net interest income. Therefore, we measure this sensitivity by assessing the impact of hypothetical changes in interest rates on our net interest income results.
The following table sets forth certain cash flow informationpresents the change in projected net interest income for the periods presented:next twelve months due to a hypothetical instantaneous parallel change in interest rates relative to current rates as of December 31, 2021:
|
| | | | | | | | | | | |
| 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)200 basis point increase
| 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.(0.8) | % | | |
| 100 basis point decrease | (0.2) | % | | |
Operating Activities.
Net cash used for operating activities was $(270.6) million, $(639.7) million and $(573.4) million during the years ended
The impact of these hypothetical interest rate changes are not significant to LC Bank’s net interest income. Non-maturity deposit rates at December 31, 2019, 2018 and 2017, respectively. Net cash used for loan operating activities relates2021 are significantly below the 100 basis point hypothetical interest rate reduction which results in an insignificant negative impact 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.net interest income.
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 $50.7 million, or 7%The following table presents the maturities of total net revenue, $53.0 million, or 8%loans and leases held for investment as of total net revenue, and $44.6 million, or 8% of total net revenue, for the years ended December 31, 2019, 2018 and 2017, respectively. Capital expenditures generally consist of internally developed software, leasehold improvements and computer equipment. Capital expenditures in 2020 are expected to be approximately $45.0 million, primarily related to costs associated with2021:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in
1 Year or Less | | Due After
1 Year Through
5 Years | | Due After
5 Years
Through
15 Years | | December 31, 2021 | | |
| Unsecured personal | $ | — | | | $ | 1,801,803 | | | $ | 2,775 | | | $ | 1,804,578 | | | |
| Residential mortgages | 1,542 | | | 2,287 | | | 147,533 | | | 151,362 | | | |
| Secured consumer | 10 | | | 32,630 | | | 33,336 | | | 65,976 | | | |
| | | | | | | | | |
| Total consumer loans held for investment | 1,552 | | | 1,836,720 | | | 183,644 | | | 2,021,916 | | | |
| Equipment finance | 10,791 | | | 100,970 | | | 37,394 | | | 149,155 | | | |
| Commercial real estate | 18,949 | | | 68,271 | | | 223,179 | | | 310,399 | | | |
| Commercial and industrial | 35,766 | | | 266,889 | | | 115,001 | | | 417,656 | | | |
| Total commercial loans and leases held for investment | 65,506 | | | 436,130 | | | 375,574 | | | 877,210 | | | |
| Total loans and leases held for investment | $ | 67,058 | | | $ | 2,272,850 | | | $ | 559,218 | | | $ | 2,899,126 | | | |
| Loans and leases due after one year at fixed interest rates | $ | — | | | $ | 2,219,619 | | | $ | 202,409 | | | $ | 2,422,028 | | | |
| Loans and leases due after one year at variable interest rates | $ | — | | | $ | 53,231 | | | $ | 356,809 | | | $ | 410,040 | | | |
For the continued development and support of our online lending marketplace platform. Inweighted-average yields on the future, we expect our capital expenditures related to enhancing our platform to increase as we support the growth in our business.
Off-Balance Sheet Arrangements
At both December 31, 2019 and 2018, a total of $5.5 million 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 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% ofCompany’s AFS 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 inportfolio, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 7. Securitizations and Variable Interest Entities.5. Securities Available for Sale.”
LendingClub Holding Company
At the holding company level, we continue to measure interest rate sensitivity by evaluating the change in fair value of certain assets and liabilities due to a hypothetical change in interest rates. Principal payments on our loans HFI continue to reduce the outstanding balance of this portfolio, and, as a result, the fair value impact from changes in interest rates continues to diminish.
Contingencies
Legal
For a comprehensive discussion of legal proceedingscontingencies as of December 31, 2019,2021, 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)
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, 2019 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 |
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, 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. |
For a discussion of the Company’s long-term debt obligations as of December 31, 2019, 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 obligation, loan repurchase obligations, and purchase commitments as of December 31, 2019, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Leases” and “Note 19. Commitments and Contingencies.”
Critical Accounting Estimates
Our significant accounting policies are described in “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2.1. Summary of Significant Accounting PoliciesPolicies.” of the consolidated financial statements. We 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.
Allowance for Credit Losses
We reserve for expected credit losses on our loan and lease portfolio through the ALLL and for expected credit losses in our unfunded lending commitments through “Other liabilities.” Changes in the ACL are reflected on the Income Statement through “Provision for credit losses.” Changes in the credit risk profile of our loans and leases result in changes in “Provision for credit losses” with a resulting change, net of charge-offs and recoveries, in the ACL 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)
Fair ValueThe ACL represents our estimate of Loans Heldexpected lifetime credit losses over the contractual life of the loan and lease portfolios and on the unfunded lending commitments. Our determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancellable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information. Estimates of expected future loan and lease losses are determined by using statistical models and management’s judgement. The models are designed to forecast probability and timing of default, exposure at default and loss rate and recovery by correlating certain macroeconomic forecast data to historical experience. The models are generally applied at the portfolio level to pools of loans with similar risk characteristics. The macroeconomic data used in the models is based on forecast variables for Investment, Loans Investedthe reasonable and supportable period of two years. Beyond this forecast period the models gradually revert to long-term historical loss conditions over a one-year period. Expected losses are estimated through contractual maturity, giving appropriate consideration to estimated prepayments unless the borrower has a right to renew that is not cancellable or it is reasonably expected that the loan will be modified as a TDR.
A qualitative allowance which incorporates management’s judgement is also included in bythe estimation of expected future loan and lease losses, including qualitative adjustments in circumstances where the model output is inconsistent with management’s expectations with respect to expected credit losses. This allowance is used to adjust for limitations in modeled results related to the current economic conditions and capture risks in the portfolio such as considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which the Company Notesconducts business.
Loans and Certificatesleases that do not share common risk characteristics and significant loans that are considered collateral-dependent are individually evaluated. For these loans, the ALLL is determined through review of data specific to the borrower and related collateral, if any. For TDRs, default expectations and estimated prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are grouped generally by product type and significant loan portfolios are assessed for credit losses using statistical models. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to change, sometimes materially and rapidly.
We have electedThe methodology used to determine an estimate for the reserve for unfunded commitments is similar to that used to determine the funded component of the ALLL and is measured over the period there is a contractual obligation to extend credit that is not unconditionally cancellable. The reserve for unfunded commitments is adjusted for factors specific to binding commitments, including the probability of funding and exposure at default.
Valuation of Business Combination
Assets acquired and liabilities assumed as part of the Acquisition are recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value optionof assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, loans (including PCD loans) and liabilities acquired based on DCF analysis or other valuation techniques requires management to make estimates that are highly subjective in nature based on available information. The fair value of acquired loans from the Acquisition was based on a DCF methodology using contractual cash flows adjusted for loans held for investment and related notes and certificates, as well as loans invested in by the Company. We primarily use a discountedkey cash flow modelassumptions such as prepayment rate, default rate, loss severity rate, discount rate and market pricing. For additional information, see “Notes to estimate fair value based on the present value of estimated future cash flows. This model uses both observable and unobservable inputs and 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:
Expected loss ratesConsolidated Financial Statements – Expected loss rates are estimates of the principal payments that will not be repaid over the life of a loan held for investment, loan invested in by the Company, note or certificate. Expected loss rates are adjusted to reflect the expected principal recoveries on charged-off loans. Expected loss rates 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.Note 2. Business Acquisition.”
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 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 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 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 Structured Program Transactions
We classify asset-backed securities related to Structured Program transactions as securities available for 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 and 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 Structured Program transactions reflect 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 Structured Program transactions.
We also incorporate estimates of net losses and prepayments in our estimation of asset-backed securities related to Structured Program transactions. These inputs are consistent with the assumptions used in the valuation of loans held for investment and related notes and certificates, as well as loans invested in by the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For a comprehensive discussion regarding quantitative and qualitative disclosures about market risk, see “Item 7. 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 Servicing Assets
We record servicing assets at their estimated fair values when we sell loans 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 “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 contractual servicing fee is above or below an estimated market servicing rate is recorded as a servicing asset. Servicing assets are reported in “Other assets” on our Consolidated Balance Sheets. Changes in the fair value of servicing assets are reported in “Investor fees” on our Consolidated Statements of Operations in the period in which the changes occur.
We use a discounted cash flow model to estimate the fair values of loan servicing assets. The cash flows in the valuation model represent the difference between the servicing fees charged and an estimated market servicing 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 are:
Market servicing rates – We consider market servicing rates as those rates which a market participant would require to service the loans that 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 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.
We also incorporate estimates of net losses and prepayments in our estimation of fair value of servicing assets. These inputs are consistent with the assumptions used in the valuation of loans held for investment and related notes and certificates, as well as loans invested in by the Company.
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. Associated legal expense is recorded in “Other general and administrative” expense or in “Class action and regulatory litigation expense” 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 19. Commitments and Contingencies,” in the Company’s Consolidated Statements of 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.
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 discount rates and servicing rates, interest rates and credit performance of loans. We are exposed to market risk directly through loans and 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
Market rate sensitivity refers to the risk of loss to future earnings, values or future cash flows that may result from changes in market discount rates and 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.
The Company’s continued facilitation of loan originations depends on an active liquid market, third-party investor demand for loans and successful Structured Program transactions and loan sales. The Company could respond to disruptions in ongoing investor demand due to changes in yield expectations, availability and yield of alternative investments, and liquidity in capital markets with reductions in origination facilitations or sales of loans 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 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 2018, we were exposed to market servicing rate risk on $89.7 million and $64.0 million of servicing 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 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
The fair values of certain of our assets and liabilities are sensitive to changes in interest 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 2018, we were exposed to interest 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. 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, respectively, including $220.1 million and $116.8 million of asset-backed securities related to Structured Program transactions and $50.8 million and $53.7 million of corporate debt, certificates of deposit, other asset-backed securities, commercial paper and other securities, respectively. To manage this risk, we limit and monitor maturities, credit ratings, performance of loans underlying Structured Program transactions and concentrations within the investment portfolio. 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 considered other-than-temporarily impaired.
The 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 $243.8 million 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. 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.
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 (including residual interests) related to Structured Program transactions. The performance of these loans and asset-backed securities is dependent on the credit performance of loans facilitated by 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 (including residual interests) are evaluated for other-than-temporary impairment and any impairment is recorded 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 Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LendingClub Corporation and subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, 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, 2019,2021, and the related notes (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, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, 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, 2019,2021, 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 19, 2020,11, 2022, 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 Therein1) Loans acquired in the Radius Bank acquisition – Refer to “Note 2. Business Acquisition” to the consolidated financial statements
| |
– | 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 holdscompleted the acquisition of Radius Bancorp, Inc. (Radius) on February 1, 2021. Total assets includingand liabilities acquired were approximately $2.7 billion and $2.5 billion respectively. The acquisition date fair value of the acquired loans held for sale(including Purchased Credit Deteriorated Assets (PCD) loans) was approximately $1.6 billion. These PCD assets are acquired financial assets (or groups of financial assets with similar risk characteristics) that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company,an acquirer’s assessment.
The fair value of acquired 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 bywas based on a discounted cash flow models. These Level 3 assets have inputs that are unobservable in themethodology using contractual cash flows adjusted for key cash flow assumptions such as prepayment rate, default rate, loss severity rate and discount rate as well as market but reflectiveloan sale data.
The assessment 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 estimates encompassed the evaluation of these Level 3 assets involvesthe fair value methodologies for acquired loans, including the identification of PCD loans and the methodologies used to estimate their key assumptions.
Given the significance of the estimates and the subjective nature of the judgment applied by management, auditing the estimated fair values involved a high degree of auditor judgment and complex judgments.required specialized knowledge and significant effort, including the need to involve valuation specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and unobservable inputs used by management to estimateassessment of the fair value estimates of these Level 3 assetsthe acquired loans included the following, key procedures:among others:
◦We evaluated the reasonableness of valuation techniques utilized by the Company and assessed if the techniques are appropriate in relation to the Company’s business, industry and environment.
◦We tested the effectiveness of internal controls including those related to model validation, price calibration, discount rate, loss curves,over acquisition initial measurement, valuation assumptions, inputs and prepayment curves.methods utilized by the Company.
◦We evaluated management’s abilitythe Company’s process to accurately estimatedevelop the fair value estimates by comparing management’s historical price calibrationtesting certain sources of data and projected prepaymentkey assumptions and loss curvesconsidered the accuracy and completeness of such data and assumptions.
◦We involved valuation specialists with industry knowledge and experience who assisted in:
•Reviewing the Company’s methodology to actual results.develop the fair value estimates for compliance with U.S. generally accepted accounting principles.
•Assessing reasonableness of the valuation assumptions used in the fair value analysis and whether the valuation assumptions were consistent with what market participants would use in pricing the acquired loans.
•Performing independent valuation for a selection of acquired loans.
•Evaluating whether the fair value model used was appropriate considering the circumstances and valuation premise identified (e.g., the assumptions, methods, and circumstances in aggregate form an appropriate model).
◦We compared management’s assumptions to external sources,tested the inputs into the fair value estimates including the Company’s comparable market transaction data, where available.reasonableness of the identification of PCD loans.
With the assistance
2) Allowance for loans and lease losses – Consumer Loans – Refer to “Note 6. Loans and Leases Held for Investment, Net of our fair value specialists, we developed independent estimates of fair valuesAllowance for Loan and compared our estimatesLease Losses,” to the Company’s estimates.consolidated financial statements
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 basedallowance for credit losses (ACL) on consumer loans represents the Company’s expectations regarding the probability and magnitudeestimate of any expected losses. These estimates are refined as information becomes availablelifetime credit losses over the coursecontractual life of the associated matters.loan. 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 carefulACL is based on periodic evaluation of the factsconsumer loan portfolio considering a number of underlying factors, including key assumptions and evaluation of quantitative and qualitative information. Estimates of expected future loan losses are determined using statistical models and management’s judgement.
Expected credit losses are statistically modeled using a discounted cash flow approach and known and estimated data such as current probability and timing of default, loss rate and recovery exposure at default, timing and amount of estimated prepayments, and relevant risk characteristics to estimate the shortfall in coordination withcontractual cash flows for each loan pool over the Company’s legal counselremaining life of the pools.
Qualitative adjustments to the modeled estimate of expected credit losses are also considered to address certain identified elements that are not directly captured by the statistically modeled expected credit loss.
We identified the allowance for loan losses relating to consumer loans as information becomes available.a critical audit matter given the subjective nature of estimating the losses, auditing the balance involved a high degree of auditor judgment and an increased extent of effort including the need to involve our credit specialists to evaluate the reasonableness of qualitative assumptions, management’s models and interpretation of results.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to assessing the probability of outcome relatedmodels and assumptions used by management to these matters and estimates of reasonably possible loss or range of lossestimate the allowance for loan losses included the following, key procedures:among others:
◦We tested the effectiveness of the controls over the valuationdetermination of contingent liabilitiesthe allowance for loan losses including those related to outstandingthe models and anticipated litigation and regulatory matters, including the evaluation of whether such exposures are probable or reasonably possible.significant management assumptions.
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 estimatesaggregation of loss contingenciesthe current loan data and historical loan data established by holding meetings with managementthe Company and its appropriateness in supporting the Company’s internal counsel, reviewingestimate.
◦We assessed the reasonableness of qualitative adjustments considered based on market conditions and loan portfolio and significant assumptions in context of applicable financial reporting framework.
◦We evaluated the appropriateness of the Company’s responsesaccounting policies and methodologies involved in the application of the applicable accounting standards.
◦We involved an internal credit specialist to regulators where applicable,evaluate the reasonableness of significant assumptions and reviewing correspondence betweenmethods as utilized by the Company’s attorneysCompany in their estimation for loan losses, including key assumptions, statistical models, and the plaintiffs’ attorneys where applicable.judgments.
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 19, 202011, 2022
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, | 2021 | | 2020 |
| Assets | | | |
| Cash and due from banks | $ | 35,670 | | | $ | 5,197 | |
| Interest-bearing deposits in banks | 651,456 | | | 519,766 | |
| Total cash and cash equivalents | 687,126 | | | 524,963 | |
Restricted cash (1) | 76,460 | | | 103,522 | |
| Securities available for sale at fair value ($256,170 and $159,164 at amortized cost, respectively) | 263,530 | | | 142,226 | |
Loans held for sale (includes $142,370 and $121,902 at fair value, respectively) (1) | 391,248 | | | 121,902 | |
| Loans and leases held for investment | 2,899,126 | | | — | |
| Allowance for loan and lease losses | (144,389) | | | — | |
| Loans and leases held for investment, net | 2,754,737 | | | — | |
Retail and certificate loans held for investment at fair value (1) | 229,719 | | | 636,686 | |
Other loans held for investment at fair value (1) | 21,240 | | | 49,954 | |
| Property, equipment and software, net | 97,996 | | | 96,641 | |
| Goodwill | 75,717 | | | — | |
Other assets (1) | 302,546 | | | 187,399 | |
| Total assets | $ | 4,900,319 | | | $ | 1,863,293 | |
| Liabilities and Equity | | | |
| Deposits: | | | |
| Interest-bearing | $ | 2,919,203 | | | $ | — | |
| Noninterest-bearing | 216,585 | | | — | |
| Total deposits | 3,135,788 | | | — | |
| Short-term borrowings | 27,780 | | | 104,989 | |
| Advances from Paycheck Protection Program Liquidity Facility (PPPLF) | 271,933 | | | — | |
Retail notes, certificates and secured borrowings at fair value (1) | 229,719 | | | 636,774 | |
Payable on Structured Program borrowings (1) | 65,451 | | | 152,808 | |
| Other long-term debt | 15,455 | | | — | |
Other liabilities (1) | 303,951 | | | 244,551 | |
| Total liabilities | 4,050,077 | | | 1,139,122 | |
| Equity | | | |
| Series A Preferred stock, $0.01 par value; 1,200,000 shares authorized; 0 and 43,000 shares issued and outstanding, respectively | — | | | — | |
| Common stock, $0.01 par value; 180,000,000 shares authorized; 101,043,924 and 88,149,510 shares issued and outstanding, respectively | 1,010 | | | 881 | |
| Additional paid-in capital | 1,609,820 | | | 1,508,020 | |
| Accumulated deficit | (767,634) | | | (786,214) | |
| Accumulated other comprehensive income | 7,046 | | | 1,484 | |
| | | |
| | | |
| Total equity | 850,242 | | | 724,171 | |
| Total liabilities and equity | $ | 4,900,319 | | | $ | 1,863,293 | |
(1) Includes amounts in variable interest entities (VIEs) presented separately in the table below.
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Assets | | | |
| Cash and cash equivalents | $ | 243,779 |
| | $ | 372,974 |
|
Restricted cash (1) | 243,343 |
| | 271,084 |
|
| 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) | 722,355 |
| | 840,021 |
|
Accrued interest receivable (1) | 12,857 |
| | 22,255 |
|
| Property, equipment and software, net | 114,370 |
| | 113,875 |
|
Operating lease assets (2) | 93,485 |
| | — |
|
| Intangible assets, net | 14,549 |
| | 18,048 |
|
Other assets (1) | 143,668 |
| | 124,967 |
|
| Total assets | $ | 2,982,341 |
| | $ | 3,819,527 |
|
| Liabilities and Equity | | | |
| Accounts payable | $ | 10,855 |
| | $ | 7,104 |
|
Accrued interest payable (1) | 9,260 |
| | 19,241 |
|
Operating lease liabilities (2) | 112,344 |
| | — |
|
Accrued expenses and other liabilities (1) | 142,636 |
| | 152,118 |
|
| Payable to investors | 97,530 |
| | 149,052 |
|
Notes, certificates and secured borrowings at fair value (1) | 1,081,466 |
| | 1,905,875 |
|
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 | 2,082,154 |
| | 2,948,546 |
|
| Equity | | | |
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 | (548,472 | ) | | (517,727 | ) |
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 | 900,187 |
| | 869,201 |
|
| Noncontrolling interests | — |
| | 1,780 |
|
| Total equity | 900,187 |
| | 870,981 |
|
| Total liabilities and equity | $ | 2,982,341 |
| | $ | 3,819,527 |
|
| |
(1)
| Includes amounts in consolidated variable interest entities (VIEs) presented separately in the table below. |
| |
(2)
| The Company adopted ASU 2016-02, Leases, as of January 1, 2019, and has elected not to restate comparative periods presented in the consolidated financial statements. For additional information, see “Notes to Consolidated Financial Statements – Note 2. Summary of 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 VIEs, which are included inon the Consolidated Balance Sheets (Balance Sheet) 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.
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Assets of consolidated VIEs, included in total assets above | | | |
| Restricted cash | $ | 13,462 | | | $ | 15,983 | |
| Loans held for sale at fair value | 41,734 | | | 98,190 | |
| Retail and certificate loans held for investment at fair value | 10,281 | | | 52,620 | |
| Other loans held for investment at fair value | 20,929 | | | 50,102 | |
| Other assets | 584 | | | 1,270 | |
| Total assets of consolidated VIEs | $ | 86,990 | | | $ | 218,165 | |
| Liabilities of consolidated VIEs, included in total liabilities above | | | |
| Retail notes, certificates and secured borrowings at fair value | $ | 10,281 | | | $ | 52,620 | |
| Payable on Structured Program borrowings | 65,451 | | | 152,808 | |
| Other liabilities | 467 | | | 729 | |
| Total liabilities of consolidated VIEs | $ | 76,199 | | | $ | 206,157 | |
|
| | | | | | | |
| December 31, | 2019 | | 2018 |
| Assets of consolidated VIEs, included in total assets above | | | |
| Restricted cash | $ | 30,046 |
| | $ | 43,918 |
|
| Loans held for investment at fair value | 197,842 |
| | 642,094 |
|
| Loans held for investment by the Company at fair value | 40,251 |
| | — |
|
| Loans held for sale by the Company at fair value | 551,455 |
| | 739,216 |
|
| Accrued interest receivable | 4,431 |
| | 10,438 |
|
| Other assets | 1,359 |
| | 2,498 |
|
| Total assets of consolidated variable interest entities | $ | 825,384 |
| | $ | 1,438,164 |
|
| Liabilities of consolidated VIEs, included in total liabilities above | | | |
| Accrued interest payable | $ | 3,185 |
| | $ | 7,594 |
|
| Accrued expenses and other liabilities | 244 |
| | 1,627 |
|
| Notes, certificates and secured borrowings at fair value | 197,842 |
| | 648,908 |
|
| 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 | $ | 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 |
|
| |
(1)
| See“Notes to Consolidated Financial Statements – Note 1. Basis of Presentation” for additional information.
|
| |
(2)
| All share and per share information has been retroactively adjusted to reflect a reverse stock split.
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | 2021 | | 2020 | | 2019 | Non-interest income (1): | | | | | | | Marketplace revenue | $ | 578,580 | | | $ | 245,314 | | | $ | 646,735 | | | Other non-interest income | 27,219 | | | 13,442 | | | 13,831 | | | Total non-interest income | $ | 605,799 | | | $ | 258,756 | | | $ | 660,566 | | | | | | | | Interest income (1): | | | | | | | Interest on loans held for sale | 29,540 | | | 72,876 | | | 109,493 | | | Interest and fees on loans and leases held for investment | 188,977 | | | — | | | — | | | Interest on retail and certificate loans held for investment at fair value | 57,684 | | | 115,952 | | | 214,395 | | | Interest on other loans held for investment at fair value | 4,436 | | | 7,688 | | | 1,104 | | | Interest on securities available for sale | 11,025 | | | 12,125 | | | 14,351 | | | Other interest income | 1,170 | | | 1,053 | | | 6,002 | | | Total interest income | 292,832 | | | 209,694 | | | 345,345 | | | | | | | | Interest expense (1): | | | | | | | Interest on deposits | 7,228 | | | — | | | — | | | Interest on short-term borrowings | 3,677 | | | 17,837 | | | 26,826 | | | Interest on retail notes, certificates and secured borrowings | 57,684 | | | 115,952 | | | 214,395 | | | Interest on Structured Program borrowings | 9,638 | | | 16,204 | | | 5,070 | | | Interest on other long-term debt | 1,774 | | | 373 | | | 1,013 | | | Total interest expense | 80,001 | | | 150,366 | | | 247,304 | | | | | | | | Net interest income (1) | 212,831 | | | 59,328 | | | 98,041 | | | | | | | | Total net revenue (1) | 818,630 | | | 318,084 | | | 758,607 | | | | | | | | Provision for credit losses (1) | 138,800 | | | 3,382 | | | — | | | | | | | | Non-interest expense (1): | | | | | | | Compensation and benefits | 288,390 | | | 252,517 | | | 333,628 | | | Marketing | 156,142 | | | 51,518 | | | 235,337 | | | Equipment and software | 39,490 | | | 26,842 | | | 24,927 | | | Occupancy | 24,249 | | | 27,870 | | | 29,367 | | | Depreciation and amortization | 44,285 | | | 54,030 | | | 59,152 | | | Professional services | 47,572 | | | 41,780 | | | 43,010 | | | Other non-interest expense | 61,258 | | | 47,762 | | | 64,077 | | | Total non-interest expense | 661,386 | | | 502,319 | | | 789,498 | | | | | | | | | Income (Loss) before income tax benefit | 18,444 | | | (187,617) | | | (30,891) | | | Income tax benefit | 136 | | | 79 | | | 201 | | | Consolidated net income (loss) | 18,580 | | | (187,538) | | | (30,690) | | | Less: Income attributable to noncontrolling interests | — | | | — | | | 55 | | | LendingClub net income (loss) | $ | 18,580 | | | $ | (187,538) | | | $ | (30,745) | |
LENDINGCLUB CORPORATION Consolidated Statements of Operations (In Thousands, Except Share and Per Share Amounts)
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | 2021 | | 2020 | | 2019 | Net income (loss) per share: (2) | | | | | | | | | | | | | Basic EPS – common stockholders | $ | 0.19 | | | $ | (2.63) | | | $ | (0.35) | | | Diluted EPS – common stockholders | $ | 0.18 | | | $ | (2.63) | | | $ | (0.35) | | | Weighted-average common shares – Basic | 97,486,754 | | | 77,934,302 | | | 87,278,596 | | | Weighted-average common shares – Diluted | 102,147,353 | | | 77,934,302 | | | 87,278,596 | | | | | | | | | Basic EPS – preferred stockholders | $ | 0.19 | | | $ | 1.39 | | | $ | 0.00 | | | Diluted EPS – preferred stockholders | $ | 0.00 | | | $ | 1.39 | | | $ | 0.00 | | | Weighted-average common shares, as converted – Basic | 653,118 | | | 12,505,393 | | | — | | | Weighted-average common shares, as converted – Diluted | — | | | 12,505,393 | | | — | |
(1) Prior period amounts have been reclassified to conform to the current period presentation. See “Notes to Consolidated Financial Statements – Note 4. Net Loss Per Share” for additional information. |
See Notes to Consolidated Financial Statements.– Note 1. Summary of Significant Accounting Policies” for additional information.
(2) See “Notes to Consolidated Financial Statements – Note 4. Net Income (Loss) Per Share” for additional information.
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
| | | Year Ended December 31, | 2019 | | 2018 | | 2017 | Year Ended December 31, | 2021 | | 2020 | | 2019 |
| LendingClub net loss | $ | (30,745 | ) | | $ | (128,308 | ) | | $ | (153,835 | ) | |
| LendingClub net income (loss) | | LendingClub net income (loss) | $ | 18,580 | | | $ | (187,538) | | | $ | (30,745) | |
| Other comprehensive income (loss), before tax: | | | | | | Other comprehensive income (loss), before tax: | |
| Net unrealized gain (loss) on securities available for sale | (526 | ) | | 252 |
| | 184 |
| Net unrealized gain (loss) on securities available for sale | 5,562 | | | 2,044 | | | (526) | |
| Other comprehensive income (loss), before tax | (526 | ) | | 252 |
| | 184 |
| Other comprehensive income (loss), before tax | 5,562 | | | 2,044 | | | (526) | |
| Income tax effect | 216 |
| | 83 |
| | (591 | ) | Income tax effect | — | | | (5) | | | 216 | |
| Other comprehensive income (loss), net of tax | (742 | ) | | 169 |
| | 775 |
| Other comprehensive income (loss), net of tax | 5,562 | | | 2,049 | | | (742) | |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | (20 | ) | | 7 |
| | 13 |
| |
| Less: Other comprehensive loss attributable to noncontrolling interests | | Less: Other comprehensive loss attributable to noncontrolling interests | — | | | — | | | (20) | |
| LendingClub other comprehensive income (loss), net of tax | (722 | ) | | 162 |
| | 762 |
| LendingClub other comprehensive income (loss), net of tax | 5,562 | | | 2,049 | | | (722) | |
| LendingClub comprehensive income (loss) | (31,467 | ) | | (128,146 | ) | | (153,073 | ) | LendingClub comprehensive income (loss) | 24,142 | | | (185,489) | | | (31,467) | |
| Comprehensive income (loss) attributable to noncontrolling interests | (20 | ) | | 7 |
| | 13 |
| |
| Comprehensive loss attributable to noncontrolling interests | | Comprehensive loss attributable to noncontrolling interests | — | | | — | | | (20) | |
| Total comprehensive income (loss) | $ | (31,487 | ) | | $ | (128,139 | ) | | $ | (153,060 | ) | Total comprehensive income (loss) | $ | 24,142 | | | $ | (185,489) | | | $ | (31,487) | |
See Notes to Consolidated Financial Statements.
LENDINGCLUB CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LendingClub Corporation Stockholders |
| | Preferred Stock | | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Accumulated
Deficit | | Total
LendingClub Stockholders’
Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 | — | | | — | | | — | | | — | | | 79,944 | | | — | | | — | | | — | | | — | | | 79,944 | | | — | | | 79,944 | |
Net issuances under equity incentive plans, net of tax (1)(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 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 66,626 | | | — | | | — | | | — | | | — | | | 66,626 | | | — | | | 66,626 | |
Net issuances under equity incentive plans, net of tax (2) | — | | | — | | | 3,692,185 | | | 36 | | | (6,914) | | | 5,658 | | | (71) | | | — | | | — | | | (6,949) | | | — | | | (6,949) | |
Net issuances of preferred stock in exchange for common stock (3) | 43,000 | | | — | | | (4,300,081) | | | (43) | | | 43 | | | — | | | — | | | — | | | (50,204) | | | (50,204) | | | — | | | (50,204) | |
| Retirement of treasury stock | — | | | — | | | — | | | (4) | | | (19,617) | | | (467,049) | | | 19,621 | | | — | | | — | | | — | | | — | | | — | |
| Net unrealized gain on securities available for sale, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,049 | | | — | | | 2,049 | | | — | | | 2,049 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (187,538) | | | (187,538) | | | — | | | (187,538) | |
Balance at
December 31, 2020 | 43,000 | | | $ | — | | | 88,149,510 | | | $ | 881 | | | $ | 1,508,020 | | | — | | | $ | — | | | $ | 1,484 | | | $ | (786,214) | | | $ | 724,171 | | | $ | — | | | $ | 724,171 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 69,762 | | | — | | | — | | | — | | | — | | | 69,762 | | | — | | | 69,762 | |
Net issuances under equity incentive plans, net of tax (2) | — | | | — | | | 4,833,300 | | | 48 | | | (9,343) | | | 4,251 | | | (92) | | | — | | | — | | | (9,387) | | | — | | | (9,387) | |
Net issuances of stock related to acquisition (4) | — | | | — | | | 3,761,114 | | | 38 | | | 41,424 | | | — | | | — | | | — | | | — | | | 41,462 | | | — | | | 41,462 | |
| Exchange of preferred stock for common stock | (43,000) | | | — | | | 4,300,000 | | | 43 | | | (43) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Retirement of treasury stock | — | | | — | | | — | | | — | | | — | | | (4,251) | | | 92 | | | — | | | — | | | 92 | | | — | | | 92 | |
| Net unrealized gain on securities available for sale, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,562 | | | — | | | 5,562 | | | — | | | 5,562 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,580 | | | 18,580 | | | — | | | 18,580 | |
Balance at
December 31, 2021 | — | | | $ | — | | | 101,043,924 | | | $ | 1,010 | | | $ | 1,609,820 | | | — | | | $ | — | | | $ | 7,046 | | | $ | (767,634) | | | $ | 850,242 | | | $ | — | | | $ | 850,242 | |
(1) 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LendingClub Corporation Stockholders |
| | 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 | | |
Balance at
December 31, 2016 | 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 |
|
| 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 |
|
| Dividends paid and return of capital to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,263 | ) | | (2,263 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (153,835 | ) | | (153,835 | ) | | (210 | ) | | (154,045 | ) |
Balance at
December 31, 2017 | 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)(2) Includes 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.
| 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(3) Includes a payment of $50.2 million that was recorded as a deemed dividend within accumulated deficit related to the beneficial conversion feature of the Series A Preferred Stock issued on March 20, 2020.
(4) Stock issued as part of the consideration paid related to the Acquisition. See “Notes to Consolidated Financial Statements of Changes in Stockholders’ Equity– Note 2. Business Acquisition.”
(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, | 2021 | | 2020 | | 2019 |
Cash Flows from Operating Activities(1): | | | | | |
| Consolidated net income (loss) | $ | 18,580 | | | $ | (187,538) | | | $ | (30,690) | |
| Adjustments to reconcile consolidated net income (loss) to net cash provided by (used for) operating activities: | | | | | |
| Net fair value adjustments | (3,986) | | | 105,002 | | | 144,273 | |
| Provision for credit losses | 138,800 | | | 3,382 | | | — | |
| Change in fair value of loan servicing assets | 54,108 | | | 58,730 | | | 58,172 | |
| Stock-based compensation, net | 66,759 | | | 61,533 | | | 73,639 | |
| Depreciation, amortization, and accretion | 5,575 | | | 56,526 | | | 62,151 | |
| Gain on sales of loans | (70,116) | | | (30,812) | | | (67,716) | |
| Other, net | 8,654 | | | 12,506 | | | 5,829 | |
| Net change to loans held for sale | 4,856 | | | 435,245 | | | (440,192) | |
| Net change in operating assets and liabilities: | | | | | |
| Other assets | (9,733) | | | 34,483 | | | 1,499 | |
| Other liabilities | 26,372 | | | (131,026) | | | (77,609) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used for) operating activities | 239,869 | | | 418,031 | | | (270,644) | |
Cash Flows from Investing Activities(1): | | | | | |
| Acquisition of company | (145,344) | | | — | | | — | |
| Cash received from acquisition | 668,236 | | | — | | | — | |
| Net change in loans and leases | (1,517,132) | | | 7,151 | | | 9,150 | |
| Net decrease in retail and certificate loans | 437,870 | | | 411,428 | | | 602,678 | |
| Purchases of securities available for sale | (100,474) | | | (53,736) | | | (144,481) | |
| Proceeds from sales of securities available for sale | 106,192 | | | 6,217 | | | 12,548 | |
| Proceeds from maturities and paydowns of securities available for sale | 143,402 | | | 225,458 | | | 223,980 | |
| Purchases of property, equipment and software, net | (34,413) | | | (31,147) | | | (50,668) | |
| Other investing activities | (12,747) | | | 400 | | | 561 | |
| | | | | |
| Net cash (used for) provided by investing activities | (454,410) | | | 565,771 | | | 653,768 | |
Cash Flows from Financing Activities(1): | | | | | |
| Net change in demand deposits and savings accounts | 1,126,659 | | | — | | | — | |
| Proceeds from PPPLF | 325,194 | | | — | | | — | |
| Repayment on PPPLF | (474,223) | | | — | | | — | |
| Proceeds from issuance of retail notes and certificates | — | | | 314,995 | | | 632,962 | |
| Principal payments on retail notes and certificates | (438,032) | | | (729,405) | | | (1,259,203) | |
| Principal payments on Structured Program borrowings | (90,187) | | | (73,710) | | | (58,025) | |
| Proceeds from issuance of notes and certificates from Structured Program transactions | — | | | 186,190 | | | 42,500 | |
| Principal payments on short-term borrowings | (87,640) | | | (1,662,199) | | | (2,801,824) | |
| Principal payments on long-term debt | (2,834) | | | (14,419) | | | (13,651) | |
| Proceeds from short-term borrowings | — | | | 1,195,261 | | | 2,943,948 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Deemed dividend paid to preferred stockholder | — | | | (50,204) | | | — | |
| Other financing activities | (9,295) | | | (8,948) | | | (26,767) | |
| Net cash provided by (used for) financing activities | 349,642 | | | (842,439) | | | (540,060) | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 135,101 | | | 141,363 | | | (156,936) | |
| Cash, Cash Equivalents and Restricted Cash, Beginning of Period | 628,485 | | | 487,122 | | | 644,058 | |
| Cash, Cash Equivalents and Restricted Cash, End of Period | $ | 763,586 | | | $ | 628,485 | | | $ | 487,122 | |
| | | | | |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities: | | | | | |
| Consolidated net loss | $ | (30,690 | ) | | $ | (128,153 | ) | | $ | (154,045 | ) |
| Adjustments to reconcile consolidated net loss to net cash used for operating activities: | | | | | |
| Net fair value adjustments | 144,990 |
| | 100,688 |
| | 30,817 |
|
| Change in fair value of loan servicing assets and liabilities | 58,095 |
| | 30,482 |
| | 20,826 |
|
| Stock-based compensation, net | 73,639 |
| | 75,087 |
| | 70,983 |
|
| Goodwill impairment charge | — |
| | 35,633 |
| | — |
|
| Depreciation and amortization | 59,152 |
| | 54,764 |
| | 46,208 |
|
| Gain on sales of loans | (67,716 | ) | | (50,421 | ) | | (38,850 | ) |
| Other, net | 7,483 |
| | 5,471 |
| | 2,744 |
|
| Purchase of loans held for sale | (7,643,996 | ) | | (7,397,886 | ) | | (6,714,946 | ) |
| Principal payments received on loans held for sale | 265,820 |
| | 210,831 |
| | 54,107 |
|
| 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 | (16,298 | ) | | (3,785 | ) | | 6,293 |
|
| Other assets | 6,609 |
| | 52,708 |
| | (71,205 | ) |
| Accounts payable | 4,158 |
| | (3,005 | ) | | (1,913 | ) |
| Accrued interest payable | (9,843 | ) | | (13,372 | ) | | (10,582 | ) |
| Accrued expenses and other liabilities | 326 |
| | (93,424 | ) | | 142,020 |
|
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 | (633,632 | ) | | (960,881 | ) | | (1,738,710 | ) |
| Principal payments received on loans | 1,191,428 |
| | 1,763,348 |
| | 2,397,565 |
|
| Proceeds from recoveries and sales of charged-off loans | 54,032 |
| | 63,240 |
| | 48,256 |
|
| Proceeds from sales of whole loans | — |
| | — |
| | 112,767 |
|
| Purchases of securities available for sale | (144,481 | ) | | (136,445 | ) | | (139,770 | ) |
| Proceeds from sales, maturities, redemptions and paydowns of securities available for sale | 145,880 |
| | 153,468 |
| | 356,608 |
|
| 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 | (50,668 | ) | | (52,976 | ) | | (44,615 | ) |
| Net cash provided by investing activities | 653,768 |
| | 878,736 |
| | 998,573 |
|
| Cash Flows from Financing Activities: | | | | | |
| Proceeds from issuance of notes and certificates | 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, | 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. |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Supplemental Cash Flow Information: | | | | | |
| Cash paid for interest | $ | 77,334 | | | $ | 143,840 | | | $ | 254,585 | |
| Cash paid for operating leases included in the measurement of lease liabilities | $ | 20,546 | | | $ | 16,679 | | | $ | 16,816 | |
Non-cash investing activity(2): | | | | | |
| Loans and leases held for investment transferred to loans held for sale | $ | 402,960 | | | $ | — | | | $ | — | |
| Net securities retained from Structured Program transactions | $ | — | | | $ | 43,458 | | | $ | 197,267 | |
| Accruals for property, equipment and software | $ | — | | | $ | 686 | | | $ | 1,745 | |
| Non-cash investing and financing activity: | | | | | |
| Transfer of whole loans to redeem certificates | $ | — | | | $ | 17,414 | | | $ | 122,330 | |
| Net issuances of stock related to acquisition | $ | 41,462 | | | $ | — | | | $ | — | |
| Non-cash financing activity: | | | | | |
| Exchange of common stock for preferred stock | $ | — | | | $ | 207,244 | | | $ | — | |
| | | | | |
| | | | | |
| Derecognition of payable on Structured Program borrowings | $ | — | | | $ | — | | | $ | 200,881 | |
| | | | | |
| | | | | |
(1) Prior period amounts have been reclassified to conform to the current period presentation. See “Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies” for additional information.
(2) See “Notes to Consolidated Financial Statements – Note 8. Fair Value of Assets and Liabilities” for other non-cash investing activity.
The following presents cash, cash equivalents and restricted cash by category within the Consolidated Balance Sheets:Sheet:
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Cash and cash equivalents | $ | 687,126 | | | $ | 524,963 | |
| Restricted cash | 76,460 | | | 103,522 | |
| Total cash, cash equivalents and restricted cash | $ | 763,586 | | | $ | 628,485 | |
|
| | | | | | | |
| | 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. Summary of Significant Accounting Policies
Basis of Presentation
On February 1, 2021, LendingClub Corporation (LendingClub) completed the acquisition of Radius Bancorp, Inc. (Radius), whereby LendingClub became a bank holding company and formed LendingClub Bank, National Association (LC Bank) as its wholly-owned subsidiary. The Company operates an online lending marketplace platform that connects borrowers and investors. Various wholly-owned subsidiariesthe vast majority of LendingClub have 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 opportunity to invest in senior and subordinated securities backed by a pool of unsecured personal whole loans. Certificate Program transactions include CLUB Certificate and Levered Certificate transactions.its business through 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 issued by the LC Trust that are related to specific underlying loans for the benefit of the investor. Springstone Financial, LLC (Springstone), is a wholly-owned subsidiary of LendingClub that facilitates education and patient finance loans originated by third-party issuing banks.
The accompanying consolidated financial statements include LendingClub, its subsidiaries (collectively referred to as the Company, we, or us) and consolidated variable interest entities (VIEs). Noncontrolling interests are reportedBank, as a separate componentlender and originator of consolidated equity fromloans and as a regulated bank in the equity attributable to LendingClub’s stockholders for all periods presented. United States.
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 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 and assumptions that affect the amounts in the accompanying financial statements. These 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
The acquisition of Radius (the Acquisition) significantly changed the presentation of the Company’s financial statements, which are now structured according to the presentation requirements for bank holding companies under Article 9 of the United States Securities and Exchange Commission’s (SEC) Regulation S-X. Prior period amounts in the financial statements and related footnotes 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 Share2. Business Acquisition” for additional information.
Inwhich illustrates 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. 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 valuereclassification 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 captionsmade to align with the assets to their associated liabilities, if any. “Loans held for 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 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.current presentation.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include the Company’s unrestricted deposits 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 dateshave original maturities of three months or less and include cash on hand, cash items in transit, and amounts due from or held with other depository institutions, primarily with the date of purchase to be cash equivalents.Federal Reserve Bank (FRB).
Restricted Cash
RestrictedCash items held with other depository institutions in which the ability to withdraw funds is restricted by contractual provisions is classified as restricted cash. Such amounts include: (i) cash consists primarily of bank deposits and money market funds that are: (i) pledged as security for transactions processed on or related to LendingClub’s platform orissuing bank activities byand transactions with certain investors; and (ii) cash received from the borrowerborrowers on loans owned and applied to the loan, but not yet distributed to the investor’s internal platform account or sent to their 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.
Securities Available for Sale
Debt securities thatpurchased and asset-backed securities retained from the Company might not hold until maturitysale of loans are classified as securities available for sale. In structured 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 available for sale (AFS) securities. AFS securities represent investment securities with readily determinable fair values that the Company: (i) does not hold for trading purposes and (ii) does not have the positive intent and ability to hold to maturity. AFS securities are recordedmeasured at fair value, andwith unrealized gains and losses are reported net of taxes, in “Accumulated other comprehensive income” within the equity section of the Balance Sheet. The amount reported in “Accumulated other comprehensive income” is net of any valuation allowance and applicable income (loss)” included in Equity in the Company’s taxes.
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 included in “Net fair value adjustments” in the Company’s Consolidated Statements of Operations.
Management evaluates whether debt AFS securities available for sale with unrealized losses are OTTIimpaired on a quarterly basis. IfFor any security that has declined in fair value below its amortized cost basis, the Company intendsrecognizes an impairment loss in current period earnings if management has the intent 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)
be required to sell the security before recovery of its amortized cost basis. The assessment of impairment also considers whether the decline in fair value below the security’s amortized cost basis is attributable to credit-related factors. If credit-related factors exist, credit-related impairment has occurred regardless of the Company’s intent to hold the security until it recovers. The credit-related portion of impairment is recognized as provision for credit loss expense in earnings with a corresponding valuation allowance for AFS securities on the Balance Sheet, to the extent the allowance does not reduce the value of the security below its fair value.
AFS securities where the expected cash flows are significantly lower than that of the contractual future cash flows at the time of acquisition are considered to be purchased with credit deterioration (PCD). The discounted differential in expected and contractual cash flows is included with the purchase price of the asset to determine amortized cost of the security with an equal and offsetting valuation allowance for credit losses.
Equity securities that do not have readily determinable fair values are generally recorded at cost adjusted for impairment, if any. These securities include FRB stock and Federal Home Loan Bank stock and are reported as “Nonmarketable equity investments” in “Other assets” on the Balance Sheet.
Loans Held for Investment and Related Notes and CertificatesLeases
The Company has electedinitially classifies loans and leases as either held for sale (HFS) or held for investment (HFI) based on management’s assessment of its intent and ability to hold the loans for the foreseeable future or until maturity. Management’s intent and ability with respect to certain loans may change from time to time. In order to reclassify loans to HFS, management must have the intent to sell the loans and the ability to reasonably identify the specific loans to be sold.
HFI loans, with the exception of HFI loans accounted for under the fair value option, are measured at historical cost and reported at their outstanding principal balances net of any charge-offs, unamortized deferred fees and costs on originated loans, and for purchased loans, heldnet of any unamortized premiums and discounts. Leases are recorded at the discounted amounts of lease payments receivable plus the estimated residual value of the leased asset, net of unearned income and unamortized deferred fees and costs. Lease payments receivable reflect contractual lease payments adjusted for investmentrenewal or termination options that the Company believes the customer is reasonably certain to exercise. Unearned income, deferred fees and costs, and discounts and premiums are accreted and amortized to interest income over the contractual life of the loan using its effective interest rate. HFI loans measured at fair value under the Company’s election of the fair value option include retail and certificate loans and the related notes and certificates. Fees and costs for loans accounted for under the fair value option are recognized in earnings at the inception of the loan and are not deferred. 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 the Company’s earnings.
Loans initially classified as HFS are reported at their fair value with the Company’s election of the fair value option. Origination fees are recognized in earnings within “Marketplace revenue” on the Consolidated Statements of Operations (Income Statement) at the time of loan origination. Changes in the fair value are recorded in “Net fair value adjustments” included in “Marketplace revenue” on the Income Statement. In certain circumstances, the Company may transfer loans from HFI to HFS. At the time of transfer, these loans are valued at the lower of amortized cost or fair value.
Accrued Interest Income and Non-Accrual Policy
Interest income is accrued as earned. The Company places loans held for investmentaccrual of interest income is discontinued, and the loan or lease is placed on non-accrualnonaccrual status at 90 days past due.due or when reasonable doubt exists as to timely collection. Past due status is based on the contractual terms of the loan or lease. When a loan or lease is placed on nonaccrual status, all income previously accrued but not collected is reversed against the current period’s interest income. Because the Company has a nonaccrual policy which results in the timely reversal of past-due accrued interest, it does not record an allowance for credit losses (ACL) on accrued interest receivable. Interest receivablecollections on nonaccrual loans and leases
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. Nonaccrual loans and leases are returned to accrual status when there no longer exists concern over collectability, the borrower has demonstrated, over time, both the intent and ability to repay and the loan or lease has been brought current and future payments are reasonably assured. HFI loans accounted for under the fair value option and HFS loans are not reported as nonaccrual.
Allowance for Credit Losses
The ACL represents management’s estimate of expected credit losses in the loan and lease portfolio, excluding loans accounted for under the fair value option. The ACL is measured based on a lifetime expected loss model, which does not require a loss event to occur before a credit loss is recognized. Under the lifetime expected credit loss model, the Company estimates the allowance based on relevant available information related to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. The ACL is estimated using a discounted cash flow (DCF) approach where effective interest rates are used to calculate the net present value of expected cash flows. The effective interest rate is calculated based on the periodic interest income received from the loan’s contractual cash flows and the net investment in the loan, which includes deferred origination fees and costs, to provide a constant rate of return over the term.
The Company evaluates its estimate of expected credit losses each reporting period and records any additions to the allowance on the Income Statement as “Provision for credit losses.” Amounts determined to be uncollectible are charged-off to the allowance. Estimates of expected credit losses include expected recoveries of amounts previously charged-off and amounts expected to be charged-off. If amounts previously charged off are subsequently expected to be collected, the Company may recognize a negative allowance, which is limited to the amount that was previously charged off.
Under applicable accounting guidance, for reporting purposes, the loan and lease portfolio is categorized by portfolio segment. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine the ACL. The Company’s two portfolio segments are consumer and commercial. The Company further disaggregates its portfolio segments into various classes of financing receivables based on their underlying risk characteristics. The classes within the consumer portfolio segment are unsecured consumer, secured consumer and residential mortgages. The classes within the commercial portfolio segment are commercial and industrial, commercial real estate, and equipment finance.
The ACL is measured on a collective basis when loans share similar risk characteristics. Relevant risk characteristics for the consumer portfolio include product type, risk rating, loan term, and monthly vintage. Relevant risk characteristics for the commercial portfolio include product type, risk rating and PCD status. Loans measured on a collective basis generally have an ACL comprised of a quantitative, or modeled, component that is supplemented by a framework of qualitative factors, as discussed below.
The Company will continue to monitor its loan pools on an ongoing basis and adjust accordingly as the risk characteristics of the financial assets may change over time. If a given financial asset does not share similar risk characteristics with other financial assets, the Company shall measure expected credit losses on an individual, rather than on a collective basis. Loans evaluated on an individual basis generally have an ACL that is measured in reference to any collateral securing the loan and/or expected cash flows which are specific to the borrower.
Allowance Calculation Methodology
The Company generally estimates expected credit losses over the contractual term of its loans. The contractual term is adjusted for estimated prepayments when appropriate. Expected renewals and extensions do not adjust the contractual term unless the extension or renewal option is through a troubled debt restructuring (TDR) that is reasonably expected to occur or represents an unconditionally cancellable option held by the borrower.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The quantitative, or modeled, component of the ACL is primarily based on statistical models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. Known and estimated data include current probability and timing of default, loss rate and recovery exposure at default, timing and amount of estimated prepayments, timing and amount of expected draws (for unfunded lending commitments), and relevant risk characteristics. Certain of the Company’s commercial portfolios have limited internal historical loss data and use external credit loss information, including historical charge-off and balance data for peer banking institutions.
The Company obtains historical and forecast macroeconomic information to inform its view of the long-term condition of the economy. Forward-looking macroeconomic factors considered in the Company’s macroeconomic variable integrated statistical models include gross domestic product (GDP), unemployment rate, unemployment insurance claims, housing prices, and retail sales. Forward-looking macroeconomic factors are incorporated into the Company’s models for a two-year reasonable and supportable economic forecast period followed by a one-year reversion period during which expected credit losses are expected to revert back on a straight-line basis to historical losses unadjusted for economic conditions. The reasonable and supportable economic forecast period and reversion methodology are accounting estimates which may change in future periods as a result of changes to the current macroeconomic environment.
The Company’s statistical models produce expected cash flows, which are then discounted at the effective interest rate to derive net present value. The effective interest rate is calculated based on the periodic interest income received from the loan’s contractual cash flows and the net investment in the loan, which includes deferred origination fees and costs, to provide a constant rate of return over the term. This net present value is then compared to the amortized cost basis to derive the expected credit losses. As a result, the quantitative, or modeled, portion of ACL is estimated using a DCF approach.
The Company also considers the need for qualitative adjustments to the modeled estimate of expected credit losses. For this purpose, the Company established a qualitative factor framework to periodically assess qualitative adjustments to address certain identified elements that are not directly captured by the statistically modeled expected credit loss. These factors may include the impact of risk rating downgrades, changes in credit policies, problem loan trends, identification of new risks not incorporated into the modeling framework, credit concentrations, changes in lending management, non-modeled macroeconomic outlook and other external factors.
Zero Credit Loss Expectation Exception
The Company has a zero loss expectation when the loans, or portions thereof, are issued or guaranteed by certain U.S. government entities or agencies, as those entities or agencies have a long history of no defaults and the highest credit ratings issued by rating agencies. Loans held for investment, or portions thereof, which meet this criterion do not have an ACL.
Reserve for Unfunded Lending Commitments
The ACL includes an estimate for expected credit losses on off-balance sheet commitments to extend credit and accrued interest payableunused lines of credit. The Company estimates these expected credit losses for the unfunded portion of the commitments that are not unconditionally cancellable depending on notesthe likelihood that funding will occur. The reserve for unfunded lending commitments is reported in “Other liabilities” on the Balance Sheet.
Individually Assessed Loans
Loans that do not share similar riskcharacteristics with other financial assets, including those whose terms have been modified in a TDR and certificatescollateral-dependent loans, are reducedindividually assessed for purposes of measuring expected credit losses using the DCF approach.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
For loans that are determined to be collateral dependent, the ACL is determined based on the fair value of the collateral. Loans are considered collateral dependent when the corresponding loan held for investmentborrower is placed on non-accrual status due to the payment dependent natureexperiencing financial difficulty and repayment of the loan is expected to be substantially satisfied through sale or operation of the collateral. For such loans, held for investmentthe ACL is calculated as the difference between the amortized cost basis and related notes and certificates.the fair value of the underlying collateral less costs to sell, if applicable.
Purchased Credit Deteriorated Assets
PCD assets are acquired financial assets (or groups of financial assets with similar risk characteristics) that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. The Company charges-offconsiders indicators such as loan rating, FICO score, days past due status, nonaccrual status, TDR status, charge-off status, bankruptcy, modifications or risk rating to determine whether an acquired asset meets the definition of PCD.
PCD assets are recorded on the acquisition date at their purchase price plus any related initial ACL, which results in a “gross-up” of the asset’s initial amortized cost basis. Recognition of the initial ACL upon the acquisition of PCD assets does not impact net income. Changes in estimates of expected credit losses after acquisition are recognized through the provision for credit losses. Acquired non-PCD assets are accounted for in a manner similar to originated financial assets, whereby any initial ACL is recorded through the “Provision for credit losses” on the Income Statement.
Charge-Offs
Charge-offs are recorded when the Company determines that a loan balance is uncollectible or a loss-confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include borrower delinquency status, bankruptcy, foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. A full or partial charge-off reduces the amortized cost basis of the loan and the related ACL. Unsecured personal loans held for investment and related notes and certificates no later thanare charged-off when a borrower is (i) contractually 120 days past due.due or (ii) two payments past due and has filed for bankruptcy or is deceased.
For acquired PCD loans where all or a portion of the loan balance had been charged off prior to acquisition, and for which active collection efforts are still underway, the ACL included as part of the grossed-up loan balance at acquisition is immediately charged off if required by the Company’s existing charge off policy. Additionally, the Company is required to consider its existing policies in determining whether to charge off any financial assets, regardless of whether a charge-off was recorded by the predecessor company. The initial ACL recognized on PCD assets includes the gross-up of the loan balance reduced by immediate charge-offs for loans previously charged off by the acquired company or which meet the Company’s charge-off policy on the date of acquisition. Charge-offs against the allowance related to such acquired PCD loans do not result in an income statement impact.
Servicing Assets
Servicing assets are capitalized as separate assets when loans are sold and servicing is retained. The Company records servicing assets at their estimated fair values when it sellsvalues. Servicing asset fair value is based on the excess of the contractual servicing fee over an estimated market servicing rate. When servicing assets are recognized from the sale of loans or whenoriginated by the Company, assumes or acquiresthe fair value of the servicing asset is included as a servicing obligation whereby the underlying loans are not included in its financial statements. The gain or loss on a loan sale is recorded separately in “Gain on sales of loans” in the Company’s Consolidated Statements of Operations while the component of the gain or loss that is based on the degree toloan sale and reported within “Marketplace revenue” on the Income Statement. Subsequent changes in fair value are reported within “Servicing fees” in “Marketplace revenue” during the period in which the contractual servicing fee is above or below an estimated market servicing rate is recorded as a servicing asset.changes occur. Servicing assets are reported in “Other assets” on the Company’s Consolidated Balance SheetsSheet.
. Changes in the fair value of servicing assets 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)
Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date (andate. Fair value is based on an exit price). price notion that maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The Company uses fair value measurements in its fair value disclosures and to record securities available for sale, loans held for investment and loans held for sale, notes and certificates, and servicingmeasures certain assets and liabilities at fair value when permitted or mandated by accounting standards, when the Company has elected the fair value option, and to fulfill fair value disclosure requirements. Assets and liabilities are recorded at fair value on a recurring or nonrecurring basis. Assets and liabilities that are recorded at fair value on a recurring basis require a fair value measurement at each reporting period. Such assets include AFS securities, HFS and HFI loans in which the Company has elected the fair value option, and servicing assets.
The Company has elected the fair value option for certain loans and servicing assets and uses fair value measurements to record the assets on a recurring basis. The Company also uses fair value measurements for AFS securities.
The fair value hierarchy includes a three-level classification, which is based on whetherhierarchy that assigns the inputshighest priority to unadjusted quoted prices in active markets and the valuation methodology used for measurement are observable:
lowest priority to unobservable inputs. |
| | | | | | | |
| Level 1 | — | Quoted market prices in active markets for identical assets or liabilities. |
| | |
| Level 2 | — | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. |
| | |
| Level 3 | — | Unobservable inputs. |
When developing fair value measurements, the Company maximizes the use of observableUnobservable 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 requiresrequire 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 model. The fair valuation methodology considers projected prepayments, underwriting changes and the historical actual defaults, losses and recoveries on the Company’s loans to project future losses and net cash flows on loans. Net cash flows on loans are discounted using an estimate of market rates of return.
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 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. When third-party pricing services are not available for a security, such as subordinated residual certificates and CLUB Certificates, the Company measures the fair value of these securities using a discounted cash flow model incorporating inputs consistent with loans held for investment, loans held for sale and related notes, certificates, secured borrowings, and payable to securitization note and certificate holders.
Property, Equipment and Software, net
Property, equipment and software are carried at cost less accumulated depreciation and amortization. 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 software. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life.
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 compensation costs for employees, fees paid to third-party consultants who are directly involved in development efforts, and costs incurred for upgrades and enhancements to add functionality of the software. Other costs are expensed as incurred.
The Company evaluates 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. 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 an 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)
Goodwill is recorded when the purchase price of an acquired business exceeds the fair value of the net assets acquired. Goodwill is assigned to the Company’s reporting units at the acquisition date according to the expected economic benefits that the acquired business will provide to the reporting unit. A reporting unit is a business operating segment or a component of a business operating segment. The Company identifies its reporting units based on how the operating segments and reporting units are managed. Accordingly, the Company allocated goodwill to the LC Bank operating segment.
The goodwill of each reporting unit is tested for impairment annually or more frequently in certain circumstances. The Company’s annual impairment testing is performed in the fourth quarter of each calendar year. Impairment exists when the carrying value of goodwill exceeds its estimated fair value. Adverse changes in impairment indicators such as lower than forecast financial performance, increased competition, increased regulatory oversight, or unplanned changes in operations could result in impairment.
The Company can elect to either qualitatively assess goodwill for impairment, or bypass the qualitative test and proceed directly to a quantitative test. If the Company doesperforms a qualitative assessment of goodwill to test for impairment and concludes it is more likely than not qualitatively assess goodwill it compares a reporting unit’sthat the estimated fair value to its carrying value. The Company estimates the fair value of a reporting unit using either an income approach (discounted cash flow model) or the income approach corroborated byis greater than its carrying value, a market approach. Goodwill impairment lossquantitative test is measured as the amount by which thenot required. However, if we determine it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a quantitative assessment is performed to determine if goodwill impairment exists. Under the quantitative impairment assessment, the fair values of the Company’s reporting units are determined using a combination of income and market-based approaches.
Other intangible assets with determinable lives are recorded at their fair value upon completion of a reporting unit exceeds its fair value.
When applyingbusiness acquisition or certain other transactions, and generally represent 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, 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. 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,customer contracts 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.
Intangiblerelationships. Such 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. IntangibleOther intangible assets are reviewed for impairment quarterly and wheneverwhen events or changes in circumstances indicate that thetheir carrying amount of such assets may not be recoverable. The Company does not have indefinite-lived intangible assets.assets other than goodwill. Intangible assets are reported in “Other assets” on the Balance Sheet.
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“Other liabilities” inon the Company’s Consolidated Balance Sheets.Sheet. Associated legal expense is recorded in “Other general and administrative” expense or in “Class action and regulatory litigationnon-interest expense” for the losses associated with the securities class action lawsuits, as described in “Note 19. Commitments and Contingencies,” inon the Company’s Consolidated Statements of Operations.Income Statement. 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 can be estimated and are reasonably possible and can be estimated.to occur in future periods. 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, the Company reassesses the potential liability and records an adjustment to its 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, the 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”“Professional services” 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. 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 expense” in the Company’s Consolidated Statements of Operations.
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 each time a loan is issued by the issuing banks. 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 sells to the Company. The Loan Trailing Fee is paid over time based on the amount 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 trailing fee liability is recorded at fair value. Additionally, the Company assumes 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. Both the loan trailing fees and transaction fee refunds are recorded as a reduction of transaction fee revenue in the Company’s Consolidated Statements of Operations and are included in “Accrued expenses and other liabilities” on the Company’s Consolidated Balance Sheets.
Other Revenue: Other revenue primarily consists of referral 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)
Stock-based compensation includes expense primarily associated with restricted stock units (RSUs) and performance-based restricted stock units (PBRSUs), as well as expense associated with stock issued related to acquisitions. Stock-based compensation expense is based on the grant date fair value of the award. The cost is generally recognized over the vesting period on a straight-line basis. Forfeitures are recognized as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability 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.
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.
Uncertain tax positions are recognized only when we believethe Company believes it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. The Company recognizes interest and penalties, if any, related to uncertain tax positions in “Income tax expense (benefit)” inon the Consolidated Statements of Operations.Income Statement.
Net Income (Loss) Per Share
Basic net income (loss) per share (Basic EPS) attributable to common stockholders is computed by dividing net income (loss) attributable to LendingClub by the weighted-average number of shares of common stockshares outstanding during the period. Diluted net income (loss) per share (Diluted EPS) is computed by dividing net income (loss) attributable to LendingClub by the weighted-average number of shares of common stockshares outstanding during the period, adjusted for the effects of dilutive issuances of shares of common stock, which predominantly include incremental shares issued for outstanding RSUs, PBRSUs, and stock options. PBRSUs are included in dilutive shares to the extent the pre-established performance targets have been or are estimated to be satisfied as of the reporting date. The dilutive potential common shares are computed using the treasury stock method. The effects of outstanding RSUs, PBRSUs, and stock options are excluded from the computation of Diluted EPS in periods in which the effect would be antidilutive. For periods with more than one class of common shares, the Company computes Basic and Diluted EPS using the two-class method, which is an allocation of net income (loss) among the holders of each class of common shares.
Beneficial Conversion Feature
The Company accounts for the beneficial conversion feature (BCF) on its Series A Preferred Stock in accordance with ASC 470-20, Debt with Conversion and Other Options. The Company accretes the BCF discount from the date of issuance to the earliest conversion date, which was March 20, 2020. All of the BCF discount was accreted and recognized as a deemed dividend in “Accumulated deficit” on the Balance Sheet.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Consolidation of Variable Interest Entities
A variable interest entity (VIE)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 characteristics 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 net 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 a VIE when it is deemed to be the primary beneficiary. The Company assesses whether or not it is the primary beneficiary of a VIE on an ongoing basis.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
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 unconditional call options and has not written 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 measures gain or loss on sale of financial assets as the net proceeds received on the sale less the carrying amount of the loans sold. The net proceeds of the sale represent the fair value of any assets 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 SheetsSheet and continue to be reported and accounted 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 followingdid not adopt any new accounting standards during the year ended December 31, 2019:
New Accounting Standards Not Yet Adopted
In March 2020, the FASB issued Accounting Standards Update (ASU) 2016-02,2020-04, LeasesReference Rate Reform (Topic 842), 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,requires lessees which, if certain criteria are met, provides optional expedients and exceptions for applying generally accepted accounting principles to record on their balance sheets a lease liability fortransactions affected by reference rate reform. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. The provisions of the obligation to make lease payments and a right-of-use (ROU) asset fornew standard may be adopted as of the right to usebeginning of the underlying asset forreporting period when the lease term.election is made until December 31, 2022. The Company adopted Topic 842 asis evaluating the impact this ASU and is not expected to have a material impact on its financial position, results of January 1, 2019operations, cash flows and has elected not to restate comparative periods presented in the consolidated financial statements.disclosures. The Company has chosen not to elect the practical expedients permitted under the transition guidance within the new standard, which among other things, permits entities to carry forward their historical lease identification. The Company has madeelected an accounting policy election to not 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 Company’s portfolio are classified as operating leases.adoption date.
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. 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 January 1, 2019, was included as a separate liability within Accrued expenses and other liabilities. The operating lease expenses are included in Other general and administrative expense and sublease income is recorded in Other revenue in the Company’s Consolidated Statements of Operations. The Company included the disclosures required by ASU 2016-02 in “Note 18. Leases.”
In July 2019,August 2020, the Financial Accounting Standards Board (FASB)FASB issued ASU 2019-07,2020-06, Codification UpdatesDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full or modified retrospective adoption for fiscal periods beginning after December 15, 2021. The Company plans to SEC Sections. Theadopt this ASU clarifies and/or improvesin the disclosure and presentation requirementsfirst quarter of a variety of codification topics by aligning them with2022 under 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 significant impact on the Company’s consolidated financial statements and related disclosures.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
New Accounting Standards Not Yet Adopted
In June 2016,modified retrospective approach. As a result of the FASB amended guidanceadoption, the deemed dividend recorded in 2020 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 became effective on January 1, 2020. For 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. Because the Company has elected the fair value option for loans and loans accounted for at fair value through net income are outside the scope of Topic 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, Topic 326 requires recognition of expected credit losses by recognizing an allowance for credit losses when the fair valuebeneficial conversation feature 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 326convertible preferred stock will be recognized through a cumulative-effect adjustmentreclassified from accumulated deficit to retained earnings, except for debt securities with prior other-than-temporary impairment whereby Topic 326 is applied prospectively. The Company made substantial progressadditional paid 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.capital within equity. The Company is finalizingevaluating its disclosure around this transaction under the impact thisASU. This ASU will have on its disclosures and doesis not expect such adoptionexpected 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 orand cash flows.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
On February 1, 2021, the Company completed the Acquisition. Upon closing, LendingClub acquired all outstanding voting equity interests of Radius in exchange for total consideration as follows:
| | | | | |
| Cash paid | $ | 140,256 | |
Fair value of common stock issued (1) | 40,808 | |
Consideration related to share-based payments (2) | 5,742 | |
| Total consideration paid | $ | 186,806 | |
(1) Calculated using the closing stock price of $10.85 on January 29, 2021, the most recent trading day preceding the Acquisition, multiplied by 3,761,114 shares issued pursuant to the Plan of Merger.
(2)In December 2019,connection with the FASB issued ASU 2019-12, Income Taxes (Topic 740): SimplifyingAcquisition, LendingClub agreed to convert equity awards held by Radius employees into cash and LendingClub awards pursuant to the AccountingPlan of Merger.
The Acquisition was accounted for Income Taxes, which is partas a purchase business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values determined as of the FASB’s initiative to reduce complexity in accounting standards. The proposed ASU eliminates certain exceptions to the general principlesAcquisition date. Determining fair value of ASC 740, Income Taxesidentifiable assets, particularly intangibles, loans (including PCD loans), and simplifies income tax accountingliabilities acquired and assumed based on DCF analysis or other valuation techniques requires management to make estimates that are highly subjective in several areas.nature based on available information. The standard is effectivefair value of acquired loans was based on January 1, 2021 with early adoption permitted. The Company plans to adopt early for the interim period ending March 31, 2020. The Company is evaluating the impact this ASU will have on its financial position, results of operations,a DCF methodology using contractual cash flows adjusted for key cash flow assumptions such as prepayment rate, default rate, loss severity rate, discount rate and disclosures, but does not expect such adoption to have a material impact.
3. Revenue from Contracts with Customers
The Company’s revenue from contracts with customers includes transaction fees and 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 at each distinct instance after the Company satisfies its performance obligations. The Company had 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 years ended December 31, 2019 and 2018. For additional detail on the Company’s accounting policy regarding revenue recognition, see “Note 2. Summary of Significant Accounting Policies” above.
4. Net Loss Per Share
The following table details the computationan allocation of the Company’s basictotal consideration paid to the fair value of the identifiable tangible and diluted net loss per share:intangible assets acquired and liabilities assumed:
|
| | | | | | | | | | | |
| 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 | ) |
| | | | | |
| Assets acquired: | |
| Cash and due from banks | $ | 18,184 | |
| Interest-bearing deposits in banks | 650,052 | |
| Total cash and cash equivalents | 668,236 | |
| Securities available for sale at fair value | 259,037 | |
| Loans and leases held for investment | 1,589,054 | |
| Allowance for loan and lease losses | (12,440) | |
| Loans and leases held for investment, net | 1,576,614 | |
| Property, equipment and software | 1,926 | |
| Goodwill | 75,717 | |
| Other assets | 86,482 | |
| Total assets | 2,668,012 | |
| |
(1)Liabilities assumed:
| All share and per share information has been retroactively adjusted to reflect the reverse stock split discussed below. |
| Non-interest bearing deposits | 146,187 | |
| Interest-bearing deposits | 1,862,272 | |
| Total deposits | 2,008,459 | |
| Short-term borrowings | 9,870 | |
| Advances from PPPLF | 420,962 | |
| Other long-term debt | 18,630 | |
| Other liabilities | 23,285 | |
| Total liabilities | 2,481,206 | |
| |
| Total consideration paid | $ | 186,806 | |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The following table summarizespurchase price exceeded 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 splitestimated fair value of the Company’s common stock became effective on July 5, 2019 (the Reverse Stock Split). All sharetangible 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 adjustedidentifiable intangible assets acquired and liabilities assumed and, as a result of the Reverse Stock Split. Accordingly,purchase allocation, the changeCompany recorded goodwill of $75.7 million, which is not deductible for tax purposes. The goodwill recognized is attributable primarily to strategic and financial benefits of the Acquisition, including increased resiliency with access to stable, low-cost deposit funding replacing higher-cost and more volatile third-party warehouse funding; increased and more stable revenue driven by increased net interest income from loans HFI; expense benefits by capturing the fees that were historically paid to the Company’s third-party issuing banks; and the ability to attract new members and deepen relationships with existing members through the addition of banking services.
The carrying amounts of cash, AFS securities, short-term borrowings, advances from PPPLF, and certain other assets and liabilities were determined to be a reasonable estimate of the fair value of such items. The following is a description of the methods used to determine the fair values of significant assets and liabilities.
Securities available for sale: The Company acquired a debt securities portfolio containing U.S. agency residential mortgage-backed securities, municipal securities, U.S. agency securities, commercial mortgage-backed securities and other asset-backed securities. The Acquisition date fair value of the securities was based on third-party dealer quotes which reflect exit prices pursuant to the guidance on fair value measurement.
Loans and leases held for investment: Fair values for loans and leases were primarily based on a discounted cash flow methodology that considered contractual terms, credit loss expectations, market interest rates, and other market factors such as liquidity from the perspective of a market participant. Loan portfolios were pooled together according to similar characteristics such as product type, lien position, risk grade, credit deterioration status, FICO score, and collateral type. Loan pools were treated in total parthe aggregate when applying various valuation techniques. The contractual terms, default rates, loss given default rates, loss severity and recovery lag, and prepayment rates were the key assumptions embedded into the estimated cash flow valuation. These assumptions were informed by internal data on loan characteristics, historical loss experience, and current and forecasted economic conditions. The discount rates used are based on current market rates for new originations of comparable loans and include adjustments for liquidity. All of the merged loans were marked to fair value as of the Acquisition date and, therefore, there was no carryover of the ACL that had previously been recorded by Radius. Immediately following the Acquisition, the Company recorded an ACL on non-PCD loans of $6.9 million through an increase to the provision for credit losses. The initial ACL for PCD loans of $12.4 million was recorded through an adjustment to the amortized cost basis of the loans.
Core deposit intangible: This intangible asset represents the value of the relationships with certain deposit clients and is included in “Other assets” on the Balance Sheet. The fair 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 subordinatedestimated based on an after-tax cost savings method of the waterfall criteriaincome approach. Under this method, fair value is equal to the present value of loan payments to each security class.the after-tax cost savings or differential cash flows generated by the acquired deposit base. Cost savings is defined as the difference between the effective cost of funds on deposits and the cost of an equal amount of funds from an alternative source. Deposits were pooled by product type and channel. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. Thediscount rates used for Core Deposit Intangible (CDI) assets are transferred intobased on current market participant rates. The CDI is being amortized over 10 years based upon the estimated economic benefits received.
Other Investments: The fair value of an investment in a trust suchprivate entity that was sold after the assets are legally isolated fromAcquisition was determined based upon the creditorsprice expected to be received in the subsequent sale. This investment was included in “Other assets” on the Balance Sheet.
Interest-bearing deposits: In determining the fair value of certificates of deposit, the cash flows of the Company and are not available to satisfy obligationscontractual interest payments during the specific period of the Company. These assets can only be usedcertificates of deposit and scheduled principal payout were discounted to settle obligationspresent value at market-based interest rates.
Subordinated debt: The fair value of the underlying trusts. The asset-backed securitization senior securities and subordinated residual interests retaineddebt was determined by the Company are presented as “Asset-backed senior securities” and “Asset-backed subordinated securities,” respectively,using a DCF method using a market participant discount rate for similar instruments. Subordinated debt is included 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“Other long-term debt” 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 gainsCompany incurred approximately $16 million of expenses, primarily included in “Professional services” on the Income Statement, in connection with the Acquisition.
The table below presents certain unaudited pro forma financial information for illustrative purposes only, for the years ended December 31, 2021 and losses, and2020, as if the Acquisition took place on January 1, 2020. The pro forma information combines the historical results of Radius with the Company’s, adjusting for the estimated impact of certain fair value of securities availableadjustments for salethe respective periods. The pro forma information does not reflect changes to the provision for credit losses resulting from recording loan assets as offair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.
| | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 |
| Total net revenue | $ | 825,701 | | | $ | 392,377 | |
| Consolidated net income (loss) | $ | 11,644 | | | $ | (190,120) | |
For the year ended December 31, 2019 and 2018, were as follows:2021, total net revenue of $73.6 million from the Acquisition is included on the Income Statement.
|
| | | | | | | | | | | | | | | |
| 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 |
|
| |
(1)
| As of December 31, 2019 and 2018, $219.0 million and $115.1 million, respectively, of the asset-backed securities related to Structured 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 I – Item 1A. Risk Factors – Risk retention rules 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. |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
A summary
The classification of securities available for sale with unrealized losses as of December 31, 2019 and 2018, aggregated by period of continuous unrealized loss, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2019 and 2018 totaled 70 and 56, respectively. |
During the years 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 asset-backed securities related to Structured Program transactions. There were 0 credit losses recognized into earnings for other-than-temporarily impaired securities helditems presented by the Company duringin its consolidated financial statements under GAAP has been adjusted to align with the years ended December 31, 2019, 2018 and 2017 for which a portionpresentation requirements under Article 9 of the impairment was previously recognized in other comprehensive income.SEC’s Regulation S-X for bank holding companies. The presentation shown below is reflective of what is used by the combined company under GAAP.
The contractual maturities of securities available for sale at December 31, 2019, were as follows: | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| LendingClub Historical Presentation | | Reclassification Adjustments | | LendingClub Reclassified Amounts |
| Assets | | | | | |
| Cash and cash equivalents | $ | 524,963 | | | $ | (524,963) | | | $ | — | |
| Cash and due from banks | — | | | 5,197 | | | 5,197 | |
| Interest bearing deposits in banks | — | | | 519,766 | | | 519,766 | |
| Total cash and cash equivalents | — | | | 524,963 | | | 524,963 | |
| Restricted cash | 103,522 | | | — | | | 103,522 | |
| Securities available for sale at fair value | 142,226 | | | — | | | 142,226 | |
| Loans held for investment at fair value | 636,686 | | | (636,686) | | | — | |
| Loans held for investment by the Company at fair value | 49,954 | | | (49,954) | | | — | |
| Loans held for sale by the Company at fair value | 121,902 | | | (121,902) | | | — | |
| Loans held for sale at fair value | — | | | 121,902 | | | 121,902 | |
| Retail and certificate loans held for investment at fair value | — | | | 636,686 | | | 636,686 | |
| Other loans held for investment at fair value | — | | | 49,954 | | | 49,954 | |
| Accrued interest receivable | 5,205 | | | (5,205) | | | — | |
| Property, equipment and software, net | 96,641 | | | — | | | 96,641 | |
| Operating lease assets | 74,037 | | | (74,037) | | | — | |
| Intangible assets, net | 11,427 | | | (11,427) | | | — | |
| Other assets | 96,730 | | | 90,669 | | | 187,399 | |
| Total assets | $ | 1,863,293 | | | $ | — | | | $ | 1,863,293 | |
| Liabilities and Equity | | | | | |
| Accounts payable | $ | 3,698 | | | $ | (3,698) | | | $ | — | |
| Accrued interest payable | 4,572 | | | (4,572) | | | — | |
| Operating lease liabilities | 94,538 | | | (94,538) | | | — | |
| Accrued expenses and other liabilities | 101,457 | | | (101,457) | | | — | |
| Payable to investors | 40,286 | | | (40,286) | | | — | |
| Credit facilities and securities sold under repurchase agreements | 104,989 | | | (104,989) | | | — | |
| Short-term borrowings | — | | | 104,989 | | | 104,989 | |
| Retail notes, certificates and secured borrowings at fair value | 636,774 | | | — | | | 636,774 | |
| Payable on Structured Program borrowings | 152,808 | | | — | | | 152,808 | |
| Other liabilities | — | | | 244,551 | | | 244,551 | |
| Total liabilities | 1,139,122 | | | — | | | 1,139,122 | |
| Equity | | | | | |
| Common stock | 881 | | | — | | | 881 | |
| Additional paid-in capital | 1,508,020 | | | — | | | 1,508,020 | |
| Accumulated deficit | (786,214) | | | — | | | (786,214) | |
| Accumulated other comprehensive income | 1,484 | | | — | | | 1,484 | |
| Total equity | 724,171 | | | — | | | 724,171 | |
| Total liabilities and equity | $ | 1,863,293 | | | $ | — | | | $ | 1,863,293 | |
|
| | | | | | | |
| | 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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| LendingClub Historical Presentation | | Reclassification Adjustments | | LendingClub Reclassified Amounts |
| Net Revenue | | | | | |
| Transaction fees | $ | 207,640 | | | $ | (207,640) | | | $ | — | |
| Interest income | 209,694 | | | (209,694) | | | — | |
| Interest expense | (141,503) | | | 141,503 | | | — | |
| Net fair value adjustments | (117,247) | | | 117,247 | | | — | |
| Net interest income and fair value adjustments | (49,056) | | | 49,056 | | | — | |
| Investor fees | 111,864 | | | (111,864) | | | — | |
| Gain on sales of loans | 30,812 | | | (30,812) | | | — | |
| Net investor revenue | 93,620 | | | (93,620) | | | — | |
| Other revenue | 13,442 | | | (13,442) | | | — | |
| Total net revenue | 314,702 | | | (314,702) | | | — | |
| Non-interest income | | | | | |
Marketplace revenue (1) | — | | | 245,314 | | | 245,314 | |
| Other non-interest income | — | | | 13,442 | | | 13,442 | |
| Total non-interest income | — | | | 258,756 | | | 258,756 | |
| Interest income | | | | | |
| Interest on loans held for sale | — | | | 72,876 | | | 72,876 | |
| | | | | |
| Interest on retail and certificate loans held for investment at fair value | — | | | 115,952 | | | 115,952 | |
| Interest on other loans held for investment at fair value | — | | | 7,688 | | | 7,688 | |
| Interest on securities available for sale | — | | | 12,125 | | | 12,125 | |
| Other interest income | — | | | 1,053 | | | 1,053 | |
| Total interest income | — | | | 209,694 | | | 209,694 | |
| Interest expense | | | | | |
| | | | | |
| Interest on short-term borrowings | — | | | 17,837 | | | 17,837 | |
| Interest on retail notes, certificates and secured borrowings | — | | | 115,952 | | | 115,952 | |
| Interest on Structured Program borrowings | — | | | 16,204 | | | 16,204 | |
| Interest on other long-term debt | — | | | 373 | | | 373 | |
Total interest expense (2) | — | | | 150,366 | | | 150,366 | |
| Net interest income | — | | | 59,328 | | | 59,328 | |
Total net revenue (3) | — | | | 318,084 | | | 318,084 | |
Provision for credit losses (3) | — | | | 3,382 | | | 3,382 | |
| Operating expenses | | | | | |
| Sales and marketing | 79,055 | | | (79,055) | | | — | |
| Origination and servicing | 71,193 | | | (71,193) | | | — | |
| Engineering and product development | 139,050 | | | (139,050) | | | — | |
| Other general and administrative | 213,021 | | | (213,021) | | | — | |
| Total operating expenses | 502,319 | | | (502,319) | | | — | |
| Non-interest expense | | | | | |
| Compensation and benefits | — | | | 252,517 | | | 252,517 | |
| Marketing | — | | | 51,518 | | | 51,518 | |
| Equipment and software | — | | | 26,842 | | | 26,842 | |
| Occupancy | — | | | 27,870 | | | 27,870 | |
| Depreciation and amortization | — | | | 54,030 | | | 54,030 | |
| Professional services | — | | | 41,780 | | | 41,780 | |
| Other non-interest expense | — | | | 47,762 | | | 47,762 | |
| Total non-interest expense | — | | | 502,319 | | | 502,319 | |
| Loss before income tax expense | (187,617) | | | — | | | (187,617) | |
| Income tax benefit | (79) | | | — | | | (79) | |
| Consolidated net loss | $ | (187,538) | | | $ | — | | | $ | (187,538) | |
During the years ended December 31, 2019, 2018 and 2017, the Company, Consumer Loan Underlying Bond Depositor LLC (Depositor), a subsidiary of the Company, and a 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 Structured Program transactions. There were 0 realized gains or losses related to such sales. For further information see “(1)Note 7. Securitizations and Variable Interest 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 | ) |
6. Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings
Loans Held for Investment, Notes, Certificates and Secured Borrowings
The Company 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, 2019 and 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 |
|
At December 31, 2019 and 2018, a fair value of $18.0 million and $76.5 million included in “Loans held for investment at fair value” was pledged as collateral for secured borrowings, respectively. See “Note 15. Secured Borrowings3. Marketplace Revenue” for additional information.detail.
(2)The following table provides the balances of notes, certificates and securedincrease in total interest expense relates to valuation adjustments on Structured Program borrowings atreclassified from net fair value atadjustments to interest expense.
(3) The increase in total net revenue from the end of the periods indicated:historical presentation relates to credit valuation adjustments on AFS securities reclassified from net fair value adjustments to provision for credit losses.
|
| | | | | | | |
| 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 |
|
94
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| LendingClub Historical Presentation | | Reclassification Adjustments | | LendingClub Reclassified Amounts |
| Net Revenue | | | | | |
| Transaction fees | $ | 598,760 | | | $ | (598,760) | | | $ | — | |
| Interest income | 345,345 | | | (345,345) | | | — | |
| Interest expense | (246,587) | | | 246,587 | | | — | |
| Net fair value adjustments | (144,990) | | | 144,990 | | | — | |
| Net interest income and fair value adjustments | (46,232) | | | 46,232 | | | — | |
| Investor fees | 124,532 | | | (124,532) | | | — | |
| Gain on sales of loans | 67,716 | | | (67,716) | | | — | |
| Net investor revenue | 146,016 | | | (146,016) | | | — | |
| Other revenue | 13,831 | | | (13,831) | | | — | |
| Total net revenue | 758,607 | | | (758,607) | | | — | |
| Non-interest income | | | | | |
Marketplace revenue (1) | — | | | 646,735 | | | 646,735 | |
| Other non-interest income | — | | | 13,831 | | | 13,831 | |
| Total non-interest income | — | | | 660,566 | | | 660,566 | |
| Interest income | | | | | |
| Interest on loans held for sale | — | | | 109,493 | | | 109,493 | |
| | | | | |
| Interest on retail and certificate loans held for investment at fair value | — | | | 214,395 | | | 214,395 | |
| Interest on other loans held for investment at fair value | — | | | 1,104 | | | 1,104 | |
| Interest on securities available for sale | — | | | 14,351 | | | 14,351 | |
| Other interest income | — | | | 6,002 | | | 6,002 | |
| Total interest income | — | | | 345,345 | | | 345,345 | |
| Interest expense | | | | | |
| | | | | |
| Interest on short-term borrowings | — | | | 26,826 | | | 26,826 | |
| Interest on retail notes, certificates and secured borrowings | — | | | 214,395 | | | 214,395 | |
| Interest on Structured Program borrowings | — | | | 5,070 | | | 5,070 | |
| Interest on other long-term debt | — | | | 1,013 | | | 1,013 | |
Total interest expense (2) | — | | | 247,304 | | | 247,304 | |
| Net interest income | — | | | 98,041 | | | 98,041 | |
| Total net revenue | — | | | 758,607 | | | 758,607 | |
| Provision for credit losses | — | | | — | | | — | |
| Operating expenses | | | | | |
| Sales and marketing | 279,423 | | | (279,423) | | | — | |
| Origination and servicing | 103,403 | | | (103,403) | | | — | |
| Engineering and product development | 168,380 | | | (168,380) | | | — | |
| Other general and administrative | 238,292 | | | (238,292) | | | — | |
| Total operating expenses | 789,498 | | | (789,498) | | | — | |
| Non-interest expense | | | | | |
| Compensation and benefits | — | | | 333,628 | | | 333,628 | |
| Marketing | — | | | 235,337 | | | 235,337 | |
| Equipment and software | — | | | 24,927 | | | 24,927 | |
| Occupancy | — | | | 29,367 | | | 29,367 | |
| Depreciation and amortization | — | | | 59,152 | | | 59,152 | |
| Professional services | — | | | 43,010 | | | 43,010 | |
| Other non-interest expense | — | | | 64,077 | | | 64,077 | |
| Total non-interest expense | — | | | 789,498 | | | 789,498 | |
| Loss before income tax expense | (30,891) | | | — | | | (30,891) | |
| Income tax benefit | (201) | | | — | | | (201) | |
| Consolidated net loss | (30,690) | | | — | | | (30,690) | |
| Less: Income attributable to noncontrolling interests | 55 | | | — | | | 55 | |
| LendingClub net loss | $ | (30,745) | | | $ | — | | | $ | (30,745) | |
Loans Invested in by the Company
At December 31, 2019 and 2018, loans invested in by the Company(1) See “Note 3. Marketplace Revenue” 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 |
|
(2)The increase in total interest expense relates to valuation adjustments on Structured Program borrowings reclassified from net 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 at 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 years ended December 31, 2019, 2018 and 2017, respectively, include net realized losses and changes in net unrealized losses. Netto interest income earned on loans invested in by the Company during the years ended December 31, 2019, 2018 and 2017 was $80.9 million, $90.9 million and $39.8 million, respectively.
The Company used its own capital to purchase $5.3 billion in loans during the year ended December 31, 2019 and sold $5.1 billion in loans during the year ended December 31, 2019, of which $4.0 billion was securitized or sold to series trusts in connection with the Company’s Certificate Program and $1.1 billion was sold to whole loan investors. The fair value of loans invested in by the Company was $766.0 million at December 31, 2019, which was held for sale primarily for future anticipated Structured Program transactions and sales to 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” for a fair value rollforward of loans invested in by the Company for the years ended December 31, 2019 and 2018.expense.
At December 31, 2019 and 2018, loans with a fair value of $551.5 million and $453.0 million included in “Loans held for sale by the Company at fair value” was pledged as collateral for the Company’s warehouse credit facilities, respectively. See “Note 14. Debt” for additional information related to these debt obligations.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
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. SecuritizationsMarketplace revenue consists of (i) origination fees, (ii) servicing fees, (iii) gain (loss) on sales of loans and Variable Interest Entities
VIE Assets and Liabilities
Origination Fees: Origination fees are primarily fees earned related to originating and issuing unsecured personal loans that are held for sale.
Servicing Fees: The Company receives servicing fees to compensate it for servicing loans on behalf of investors, including managing payments and collections from borrowers and payments to those investors. The amount of servicing fee revenue earned is predominantly affected by the servicing rates paid by investors and the outstanding principal balance of loans serviced for investors. Servicing fee revenue related to loans sold also includes the associated change in fair value of servicing assets.
Gain (Loss) on Sales of Loans: In connection with loan sales the Company recognizes a gain or loss on the sale of loans based on the level to which the contractual servicing fee is above or below an estimated market rate of servicing. Additionally, the Company recognizes transaction costs, if any, as a loss on sale of loans.
Net Fair Value Adjustments: The Company records fair value adjustments on loans that are recorded at fair value,
including gains or losses from sale prices in excess of or less than the loan principal amount sold.
The following tables providetable presents components of marketplace revenue for the classificationsyears presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Origination fees | $ | 416,839 | | | $ | 207,640 | | | $ | 598,760 | |
| Servicing fees | 87,639 | | | 111,864 | | | 124,532 | |
| Gain on sales of loans | 70,116 | | | 30,812 | | | 67,716 | |
Net fair value adjustments (1) | 3,986 | | | (105,002) | | | (144,273) | |
| Total marketplace revenue | $ | 578,580 | | | $ | 245,314 | | | $ | 646,735 | |
(1) Certain prior period valuation adjustments on AFS securities and Structured Program borrowings were reclassified from net fair value adjustments to provision for credit losses and interest expense, respectively, to conform to the current period presentation.
Revenue from Contracts with Customers
The Company’s revenue from contracts with customers includes (i) transaction fees received from issuing bank partners and (ii) referral fees from third-party companies. Transaction fees are presented as a component of assets“Origination fees” in “Marketplace revenue” and liabilitiesreferral fees are presented as a component of “Other non-interest income” on the Company’s Income Statement.
Transaction FeesConsolidated Balance Sheets: for its transactionsThe Company has a single performance obligation to provide customers access to the Company’s platform. Transaction fees are considered revenue from contracts with consolidatedcustomers, including issuing banks and unconsolidated VIEseducation 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 each time a loan is issued by the issuing banks. 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
December 31, 2019 and 2018. Additionally, the
assets and liabilities in the tables below exclude intercompany balances that eliminate in consolidation: |
| | | | | | | | | | | |
| December 31, 2019 | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | |
| Restricted cash | $ | 30,046 |
| | $ | — |
| | $ | 30,046 |
|
| Securities available for sale at fair value | — |
| | 220,135 |
| | 220,135 |
|
| Loans held for investment at fair value | 197,842 |
| | — |
| | 197,842 |
|
| Loans held for investment by the Company at fair value | 40,251 |
| | — |
| | 40,251 |
|
| Loans held for sale by the Company at fair value | 551,455 |
| | — |
| | 551,455 |
|
| Accrued interest receivable | 4,431 |
| | 877 |
| | 5,308 |
|
| Other assets | 1,359 |
| | 52,098 |
| | 53,457 |
|
| Total assets | $ | 825,384 |
| | $ | 273,110 |
| | $ | 1,098,494 |
|
| Liabilities | | | | | |
| Accrued interest payable | $ | 3,185 |
| | $ | — |
| | $ | 3,185 |
|
| Accrued expenses and other liabilities | 244 |
| | — |
| | 244 |
|
| Notes, certificates and secured borrowings at fair value | 197,842 |
| | — |
| | 197,842 |
|
| 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 | 629,132 |
| | — |
| | 629,132 |
|
| Total net assets | $ | 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 |
|
Consolidated VIEs
The Company consolidates VIEs when it is deemed to be the primary beneficiary. See “Referral FeesNote 2. Summary of Significant Accounting Policies:”for additional information.
LC Trust
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 LC Trust. The Company is obligatedentitled to ensure thatreceive referral fees from third-party companies when customers referred by the LC Trust meets minimum capital requirementsCompany 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.
Upon the Acquisition, the Company’s principal sources of revenue are marketplace revenue and interest income on loans, which are outside the scope of ASC 606, Revenue from Contracts with respect to funding the administrative activities and maintaining the operationsCustomers. The remainder of the LC Trust.
Consolidated Trusts
The Company establishes trusts to facilitatefollowing table presents the saleCompany’s revenue from contracts with customers, disaggregated by revenue source for services transferred over time, for the years presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Transaction fees | $ | 32,673 | | | $ | 207,640 | | | $ | 598,760 | |
| Referral fees | 14,234 | | | 5,011 | | | 5,474 | |
| Total revenue from contracts with customers | $ | 46,907 | | | $ | 212,651 | | | $ | 604,234 | |
4. Net Income (Loss) Per Share
The following table details the computation of loansthe Company’s basic and issuancediluted EPS of seniorcommon stock and subordinated securities. IfSeries A Preferred Stock:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Common Stock | Preferred Stock(1) | | Common Stock | Preferred Stock(1) | | Common Stock |
| Basic EPS: | | | | | | | |
| Allocation of undistributed LendingClub net income (loss) | $ | 18,456 | | $ | 124 | | | $ | (154,664) | | $ | (32,874) | | | $ | (30,745) | |
| Deemed dividend | — | | — | | | (50,204) | | 50,204 | | | — | |
| Net income (loss) attributable to stockholders | $ | 18,456 | | $ | 124 | | | $ | (204,868) | | $ | 17,330 | | | $ | (30,745) | |
| Weighted-average common shares – Basic | 97,486,754 | | 653,118 | | | 77,934,302 | | 12,505,393 | | | 87,278,596 | |
| Basic EPS | $ | 0.19 | | $ | 0.19 | | | $ | (2.63) | | $ | 1.39 | | | $ | (0.35) | |
| | | | | | | |
| Diluted EPS: | | | | | | | |
| Allocation of undistributed LendingClub net income (loss) | $ | 18,580 | | $ | — | | | $ | (154,664) | | $ | (32,874) | | | $ | (30,745) | |
| Deemed dividend | — | | — | | | (50,204) | | 50,204 | | | — | |
| Net income (loss) attributable to stockholders | $ | 18,580 | | $ | — | | | $ | (204,868) | | $ | 17,330 | | | $ | (30,745) | |
| Weighted-average common shares – Diluted | 102,147,353 | | — | | | 77,934,302 | | 12,505,393 | | | 87,278,596 | |
| Diluted EPS | $ | 0.18 | | $ | 0.00 | | | $ | (2.63) | | $ | 1.39 | | | $ | (0.35) | |
(1) Presented on an as-converted basis.
In February 2020, the Company is the primary beneficiaryentered into an exchange agreement with its largest stockholder, Shanda Asset Management Holdings Limited and its affiliates (Shanda), pursuant to which, on March 20, 2020, Shanda exchanged all of the trust, it is a consolidated VIE and will reflect senior and subordinated securities19,562,881 shares of LendingClub common stock, par value of $0.01 per share, held by third parties asit for (i) 195,628 newly issued shares of mandatorily convertible, non-voting, Series A Preferred Stock, par value of $0.01 per share, and (ii) a “Payableone-time cash payment of $50.2 million. The Series A Preferred Stock is considered a separate class of common shares for purposes of calculating EPS because it participates in earnings similar to securitization note and certificate holders” in the Company’s Consolidated Balance Sheets. If subsequently the Company is not the primary beneficiary of the trust, the Company will deconsolidate the VIE. See “Note 2. Summary of Significant Accounting Policies” and “Note 14. Debt” for additional information.
Warehouse Credit Facilities
The Company established certain entities (deemed to be VIEs) to enter into warehouse credit facilities for the purpose of purchasing loans from LendingClub. See “Note 14. Debt” for additional information.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
common stock and does not receive any significant preferences over the common stock. As a result of the preferred stock outstanding during 2020 and the first quarter of 2021, Basic and Diluted EPS were computed using the two-class method, which is a net income (loss) allocation that determines EPS for each class of common stock according to dividends declared and participation rights in undistributed income (loss). Shanda sold the remainder of its preferred stock during the first quarter of 2021 and, therefore, there were no shares of preferred stock outstanding as of March 31, 2021.
The following table presents a summary of financial assets and liabilitiessummarizes the weighted-average common shares that were excluded from the Company’s involvement with consolidated VIEs at December 31, 2019 and 2018:diluted EPS computation because their effect would have been anti-dilutive for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Preferred stock | — | | | 12,505,393 | | | — | |
| Stock options | — | | | 221,949 | | | 455,627 | |
| RSUs and PBRSUs | — | | | 299,747 | | | 59,812 | |
| Total | — | | | 13,027,089 | | | 515,439 | |
5. Securities Available for Sale
|
| | | | | | | | | | | |
| 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, 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 creditorsamortized cost, gross unrealized gains and losses, credit valuation allowance, and fair value of the VIEs above have no recourse to the general credit of the CompanyAFS securities were as the primary beneficiary of the VIEs and the liabilities of the VIEs can only be settled by the respective VIE’s assets.follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Credit ValuationAllowance | | Fair
Value |
| U.S. agency residential mortgage-backed securities | $ | 125,985 | | | $ | — | | | $ | (2,286) | | | $ | — | | | $ | 123,699 | |
| Asset-backed senior securities | 28,057 | | | 72 | | | — | | | — | | | 28,129 | |
| U.S. agency securities | 26,902 | | | 1 | | | (731) | | | — | | | 26,172 | |
| Other asset-backed securities | 26,112 | | | 151 | | | (130) | | | — | | | 26,133 | |
| Commercial mortgage-backed securities | 26,649 | | | 1 | | | (552) | | | — | | | 26,098 | |
| CLUB Certificate asset-backed securities | 15,049 | | | 3,236 | | | — | | | — | | | 18,285 | |
| Asset-backed subordinated securities | 4,119 | | | 7,643 | | | — | | | — | | | 11,762 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Municipal securities | 3,297 | | | — | | | (45) | | | — | | | 3,252 | |
Total securities available for sale (1)(2) | $ | 256,170 | | | $ | 11,104 | | | $ | (3,744) | | | $ | — | | | $ | 263,530 | |
Unconsolidated VIEs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Credit ValuationAllowance | | Fair
Value |
| Asset-backed senior securities | $ | 75,332 | | | $ | 67 | | | $ | (27) | | | $ | — | | | $ | 75,372 | |
| CLUB Certificate asset-backed securities | 54,525 | | | 576 | | | (772) | | | (4,190) | | | 50,139 | |
| Asset-backed subordinated securities | 29,107 | | | 2,128 | | | (174) | | | (14,546) | | | 16,515 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other securities | 200 | | | — | | | — | | | — | | | 200 | |
Total securities available for sale (1)(2) | $ | 159,164 | | | $ | 2,771 | | | $ | (973) | | | $ | (18,736) | | | $ | 142,226 | |
The Company’s transactions with unconsolidated VIEs include asset-backed securitizations, Certificate Program transactions and loan sale transactions of unsecured personal 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 the 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 if it is the sponsor and servicer and does not hold other significant 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. The Company enters into separate servicing agreements with the VIEs and holds at least 5% of the beneficial interests issued by the VIEs to comply with regulatory risk retention rules. The beneficial interests retained by the Company consist of senior securities and subordinated securities and are accounted for as securities available for sale. In connection with these transactions, we make certain customary representations, warranties and covenants. See “(1)Note 2. Summary of Significant Accounting Policies”for additional information.
Investment Fund
The Company has an equity investment in a private fund (Investment Fund) that participates in a family of funds with other unrelated third parties. 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, 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 Company shares in the expected returns2021 and losses2020, $13.3 million and $119.3 million, respectively, of the Investment Fund. Atasset-backed securities related to Structured 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.
(2) As of December 31, 2019, the Company’s investment was $7.72021 and 2020, includes $236.8 million which is recognized in “Other assets” on the Company’s Consolidated Balance Sheets.and $133.5 million, respectively, of securities pledged as collateral at fair value.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The Company’s AFS portfolio includes debt securities primarily obtained in the first quarter of 2021 upon the Acquisition and asset-backed securities related to the Company’s Structured Program transactions.
A summary of AFS securities with unrealized losses for which a credit valuation allowance has not been recorded aggregated by period of continuous unrealized loss, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than
12 months | | 12 months
or longer | | Total |
| December 31, 2021 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| U.S. agency residential mortgage-backed securities | $ | 123,668 | | | $ | (2,286) | | | $ | — | | | $ | — | | | $ | 123,668 | | | $ | (2,286) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| U.S. agency securities | 24,175 | | | (731) | | | — | | | — | | | 24,175 | | | (731) | |
| Other asset-backed securities | 13,224 | | | (130) | | | — | | | — | | | 13,224 | | | (130) | |
| Commercial mortgage-backed securities | 25,927 | | | (552) | | | — | | | — | | | 25,927 | | | (552) | |
| Municipal securities | 3,252 | | | (45) | | | — | | | — | | | 3,252 | | | (45) | |
| | | | | | | | | | | |
Total securities with unrealized losses (1) | $ | 190,246 | | | $ | (3,744) | | | $ | — | | | $ | — | | | $ | 190,246 | | | $ | (3,744) | |
| | | | | | | | | | | |
| Less than
12 months | | 12 months
or longer | | Total |
| December 31, 2020 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| Asset-backed securities related to Structured Program transactions | $ | 26,678 | | | $ | (855) | | | $ | 6,052 | | | $ | (118) | | | $ | 32,730 | | | $ | (973) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total securities with unrealized losses (1) | $ | 26,678 | | | $ | (855) | | | $ | 6,052 | | | $ | (118) | | | $ | 32,730 | | | $ | (973) | |
(1) The number of investment positions with unrealized losses at December 31, 2021 and 2020 totaled 145 and 55, respectively.
During 2020, the Company recorded a credit valuation allowance on those securities where there was a deterioration in future estimated cash flows. The Company also recorded unrealized losses on securities with fair value price reductions due to higher liquidity premiums observed as a result of market dislocation related to COVID-19.
The following tables summarize unconsolidated VIEs with whichpresent the Company has significant continuing involvement, but is not the primary beneficiary at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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, 2018 | 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 | $ | 1,359,367 |
| | $ | 68,338 |
| | $ | 958 |
| | $ | 11,838 |
| | $ | — |
| | $ | (57,012 | ) | | $ | 24,122 |
|
| Certificate Program | 973,815 |
| | 48,430 |
| | 256 |
| | 9,115 |
| | — |
| | — |
| | 57,801 |
|
| Investment Fund | 35,157 |
| | — |
| | — |
| | 8,253 |
| | — |
| | — |
| | 8,253 |
|
| Total unconsolidated VIEs | $ | 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 Unconsolidated Trusts, Certificate Program transactions, and the net assets held by the Investment Fund using the most current information available. “Securities Available for Sale,” “Accrued Interest Receivable,” “Other Assets” and “Accrued Expenses and Other Liabilities” are the balancesactivity in the Company’s Consolidated Balance Sheetscredit valuation allowance for AFS securities, by major security type:
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| Credit Valuation Allowance | CLUB Certificate asset-backed securities | | Asset-backed subordinated securities | | Total | | | | |
| Beginning balance as of December 31, 2020 | $ | (4,190) | | | $ | (14,546) | | | $ | (18,736) | | | | | |
| Reversal of credit loss expense | 236 | | | 3,146 | | | 3,382 | | | | | |
| Reversal of allowance arising from PCD financial assets | 3,954 | | | 11,400 | | | 15,354 | | | | | |
| Ending balance as of December 31, 2021 | $ | — | | | $ | — | | | $ | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Credit Valuation Allowance | CLUB Certificate asset-backed securities | | Asset-backed subordinated securities | | Total | | | | |
| Beginning balance as of January 1, 2020 | $ | — | | | $ | — | | | $ | — | | | | | |
| Provision for credit loss expense | (236) | | | (3,146) | | | (3,382) | | | | | |
| Allowance arising from PCD financial assets | (3,954) | | | (11,400) | | | (15,354) | | | | | |
| Ending balance as of December 31, 2020 | $ | (4,190) | | | $ | (14,546) | | | $ | (18,736) | | | | | |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
AFS securities purchased with credit deterioration were as follows:
| | | | | | | |
| | | Year Ended December 31, 2020 |
| Purchase price of PCD securities at acquisition | | | $ | 27,034 | |
| Credit valuation allowance on PCD securities at acquisition | | | 15,354 | |
| Par value of acquired PCD securities at acquisition | | | $ | 42,388 | |
There were no AFS securities purchased with credit deterioration during the year ended December 31, 2021.
The contractual maturities of AFS securities were as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | Amortized Cost | | Fair Value | | Weighted- average Yield(1) |
| | | | | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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| | | | | |
| Due after 5 years through 10 years: | | | | | |
| U.S. agency residential mortgage-backed securities | $ | 710 | | | $ | 703 | | | |
| Other asset-backed securities | 1,092 | | | 1,109 | | | |
| Commercial mortgage-backed securities | 4,204 | | | 4,092 | | | |
| U.S. agency securities | 1,998 | | | 1,992 | | | |
| Municipal securities | 627 | | | 620 | | | |
| Total due after 5 years through 10 years | 8,631 | | | 8,516 | | | 1.59 | % |
| Due after 10 years: | | | | | |
| U.S. agency residential mortgage-backed securities | 125,275 | | | 122,996 | | | |
| Other asset-backed securities | 25,020 | | | 25,024 | | | |
| Commercial mortgage-backed securities | 22,445 | | | 22,006 | | | |
| U.S. agency securities | 24,904 | | | 24,180 | | | |
| Municipal securities | 2,670 | | | 2,632 | | | |
| Total due after 10 years | 200,314 | | | 196,838 | | | 1.57 | % |
| Asset-backed securities related to Structured Program transactions | 47,225 | | | 58,176 | | | 18.89 | % |
| Total securities available for sale | $ | 256,170 | | | $ | 263,530 | | | 4.76 | % |
(1) The weighted-average yield is computed using the amortized cost at December 31, 2021.
Proceeds and gross realized gains and losses from AFS securities were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Proceeds | $ | 106,192 | | | $ | 6,217 | | | $ | 12,548 | |
| Gross realized gains | $ | 708 | | | $ | 14 | | | $ | 9 | |
| Gross realized losses | $ | (952) | | | $ | (3) | | | $ | (1) | |
6. Loans and Leases Held for Investment, Net of Allowance for Loan and Lease Losses
LendingClub records certain loans and leases HFI at amortized cost, whereas loans initially classified as HFS are recorded at fair value. Prior to the Acquisition and becoming a bank holding company, all loans were recorded at fair value. Therefore, the following disclosures apply to loans and leases HFI at amortized cost.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Accrued interest receivable is excluded from the amortized cost basis of loans and leases HFI and is reported within “Other assets” on the Balance Sheet. Accrued interest within that caption related to loans and leases HFI was $15.6 million as of December 31, 2021.
Loans and Leases Held for Investment
The Company defines its loans and leases HFI portfolio segments as (i) consumer and (ii) commercial. The following table presents the components of each portfolio segment by class of financing receivable:
| | | | | |
| December 31, 2021 |
| Unsecured personal | $ | 1,804,578 | |
| Residential mortgages | 151,362 | |
| Secured consumer | 65,976 | |
| |
| Total consumer loans held for investment | 2,021,916 | |
Equipment finance (1) | 149,155 | |
| Commercial real estate | 310,399 | |
Commercial and industrial (2) | 417,656 | |
| Total commercial loans and leases held for investment | 877,210 | |
| Total loans and leases held for investment | 2,899,126 | |
| Allowance for loan and lease losses | (144,389) | |
Loans and leases held for investment, net (3) | $ | 2,754,737 | |
(1) Comprised of sales-type leases for equipment. See “Note 18. Leases” for additional information.
(2) Includes $268.3 million of pledged loans under the Paycheck Protection Program (PPP).
(3) As of December 31, 2021, the Company had $149.2 million in loans pledged as collateral under the FRB Discount Window.
| | | | | | | | | | | | | | |
| December 31, 2021 | Gross | ALLL | Net | Allowance Ratios (1) |
| Total consumer loans held for investment | $ | 2,021,916 | | $ | 128,812 | | $ | 1,893,104 | | 6.4 | % |
Total commercial loans and leases held for investment (2) | 877,210 | | 15,577 | | 861,633 | | 1.8 | % |
Total loans and leases held for investment (2) | $ | 2,899,126 | | $ | 144,389 | | $ | 2,754,737 | | 5.0 | % |
(1) Calculated as the ratio of allowance for loan and lease losses (ALLL) to loans and leases HFI.
(2) Excluding the $268.3 million of PPP loans, the ALLL represented 2.6% of commercial loans and leases HFI and 5.5% of total loans and leases HFI. PPP loans are guaranteed by the Small Business Administration (SBA) and, therefore, the Company determined no ACL is required on these loans.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The activity in the ACL by portfolio segment was as follows:
| | | | | | | | | | | | | | | | | |
| |
| Year Ended December 31, 2021 | Consumer | | Commercial | | Total |
| Allowance for loan and lease losses, beginning of period | $ | — | | | $ | — | | | $ | — | |
Credit loss expense for loans and leases held for investment (1) | 136,789 | | | 4,162 | | | 140,951 | |
Initial allowance for PCD loans acquired during the period (2) | 603 | | | 11,837 | | | 12,440 | |
Charge-offs (3) | (8,789) | | | (1,663) | | | (10,452) | |
| Recoveries | 209 | | | 1,241 | | | 1,450 | |
| Allowance for loan and lease losses, end of period | $ | 128,812 | | | $ | 15,577 | | | $ | 144,389 | |
| | | | | |
| Reserve for unfunded lending commitments, beginning of period | $ | — | | | $ | — | | | $ | — | |
| Credit loss expense for unfunded lending commitments | — | | | 1,231 | | | 1,231 | |
Reserve for unfunded lending commitments, end of period (4) | $ | — | | | $ | 1,231 | | | $ | 1,231 | |
(1) Includes $6.9 million of credit loss expense for Radius loans at acquisition.
(2) For acquired PCD loans, an ACL of $30.4 million was required with a corresponding increase to the amortized cost basis as of the acquisition date. For PCD loans where all or a portion of the loan balance had been previously written-off, or would be subject to write-off under the Company’s charge-off policy, an ACL of $18.0 million included as part of the grossed-up loan balance at acquisition was immediately written-off. The net impact to the allowance for PCD assets on the acquisition date was $12.4 million.
(3) Unsecured personal loans are charged-off when a borrower is (i) contractually 120 days past due or (ii) two payments past due and has filed for bankruptcy or is deceased.
(4) Relates to $110.8 million of unfunded commitments.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Consumer Lending Credit Quality Indicators
The Company evaluates the credit quality of its consumer loan portfolio based on the aging status of the loan and by payment activity. Loan delinquency reporting is based upon borrower payment activity relative to the contractual terms of the loan. The following table presents the classes of financing receivables within the consumer portfolio segment by credit quality indicator based on delinquency status and origination year:
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| December 31, 2021 | | Term Loans and Leases by Origination Year | | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Within Revolving Period | | Total |
| Unsecured personal | | | | | | | | | | | | | | | | |
| Current | | $ | 1,796,678 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,796,678 | |
| 30-59 days past due | | 3,624 | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,624 | |
| 60-89 days past due | | 2,600 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,600 | |
| 90 or more days past due | | 1,676 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,676 | |
| Total unsecured personal | | 1,804,578 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,804,578 | |
| Residential mortgages | | | | | | | | | | | | | | | | |
| Current | | 36,732 | | | 37,620 | | | 26,798 | | | 7,277 | | | 2,682 | | | 37,685 | | | 1,265 | | | 150,059 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | 142 | | | — | | | 142 | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | 92 | | | — | | | — | | | 92 | |
| 90 or more days past due | | — | | | — | | | — | | | — | | | 251 | | | 818 | | | — | | | 1,069 | |
| Total residential mortgages | | 36,732 | | | 37,620 | | | 26,798 | | | 7,277 | | | 3,025 | | | 38,645 | | | 1,265 | | | 151,362 | |
| Secured consumer | | | | | | | | | | | | | | | | |
| Current | | 62,731 | | | — | | | — | | | — | | | — | | | — | | | 10 | | | 62,741 | |
| 30-59 days past due | | 171 | | | — | | | — | | | — | | | — | | | — | | | — | | | 171 | |
| 60-89 days past due | | 53 | | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | |
| 90 or more days past due | | — | | | — | | | — | | | 2,629 | | | 382 | | | — | | | — | | | 3,011 | |
| Total secured consumer | | 62,955 | | | — | | | — | | | 2,629 | | | 382 | | | — | | | 10 | | | 65,976 | |
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| | | | | | | | | | | | | | | | |
| Total consumer loans held for investment | | $ | 1,904,265 | | | $ | 37,620 | | | $ | 26,798 | | | $ | 9,906 | | | $ | 3,407 | | | $ | 38,645 | | | $ | 1,275 | | | $ | 2,021,916 | |
Commercial Lending Credit Quality Indicators
The Company evaluates the credit quality of its commercial loan portfolio based on regulatory risk ratings. The Company categorizes loans and leases into risk ratings based on relevant information about the quality and realizable value of collateral, if any, and the ability of borrowers to service their debts, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases based on their associated credit risk and performs this analysis whenever credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less than annually for large balance loans. Risk rating classifications consist of the following:
Pass – Loans and leases that the Company believes will fully repay in accordance with the contractual loan terms.
Special Mention – Loans and leases with a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Company’s credit position at some future date.
Substandard – Loans and leases that are inadequately protected by the current sound worth and paying capacity of the obligator or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Normal payment from the borrower is in jeopardy, although loss of principal, while still possible, is not imminent.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Doubtful – Loans and leases that have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
Loss – Loans and leases that are considered uncollectible and of little value.
The following table presents the classes of financing receivables within the commercial portfolio segment by risk rating and origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Term Loans and Leases by Origination Year | | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Within Revolving Period | | Total |
| Equipment finance | | | | | | | | | | | | | | | | |
| Pass | | $ | 52,440 | | | $ | 35,398 | | | $ | 26,918 | | | $ | 15,457 | | | $ | 6,184 | | | $ | 8,814 | | | $ | — | | | $ | 145,211 | |
| Special mention | | 1,531 | | | — | | | 1,810 | | | — | | | — | | | — | | | — | | | 3,341 | |
| Substandard | | — | | | — | | | — | | | 603 | | | — | | | — | | | — | | | 603 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total equipment finance | | 53,971 | | | 35,398 | | | 28,728 | | | 16,060 | | | 6,184 | | | 8,814 | | | — | | | 149,155 | |
| Commercial real estate | | | | | | | | | | | | | | | | |
| Pass | | 55,613 | | | 55,202 | | | 54,460 | | | 39,981 | | | 22,366 | | | 57,235 | | | — | | | 284,857 | |
| Special mention | | — | | | 8,397 | | | — | | | 1,366 | | | 1,018 | | | 7,242 | | | — | | | 18,023 | |
| Substandard | | — | | | — | | | 277 | | | 2,496 | | | — | | | 4,179 | | | — | | | 6,952 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | 567 | | | — | | | 567 | |
| Total commercial real estate | | 55,613 | | | 63,599 | | | 54,737 | | | 43,843 | | | 23,384 | | | 69,223 | | | — | | | 310,399 | |
| Commercial and industrial |
| Pass | | 241,368 | | | 108,574 | | | 24,106 | | | 7,874 | | | 14,756 | | | 8,058 | | | 599 | | | 405,335 | |
| Special mention | | — | | | — | | | 2,207 | | | 463 | | | 1,467 | | | 40 | | | — | | | 4,177 | |
| Substandard | | — | | | 1,122 | | | 862 | | | 1,858 | | | 1,525 | | | 1,571 | | | 87 | | | 7,025 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | 52 | | | 4 | | | 1,063 | | | — | | | 1,119 | |
Total commercial and industrial (1) | | 241,368 | | | 109,696 | | | 27,175 | | | 10,247 | | | 17,752 | | | 10,732 | | | 686 | | | 417,656 | |
| Total commercial loans and leases held for investment | | $ | 350,952 | | | $ | 208,693 | | | $ | 110,640 | | | $ | 70,150 | | | $ | 47,320 | | | $ | 88,769 | | | $ | 686 | | | $ | 877,210 | |
(1) Includes $268.3 million of PPP loans.
The following table presents an analysis of the past due loans and leases HFI within the commercial portfolio segment (1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | 30-59
Days | | 60-89
Days | | 90 or More
Days | | Total Days Past Due | | | | |
| Equipment finance | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Commercial real estate | 104 | | | — | | | 609 | | | 713 | | | | | |
Commercial and industrial (1) | — | | | — | | | 1,410 | | | 1,410 | | | | | |
| Total commercial loans and leases held for investment | $ | 104 | | | $ | — | | | $ | 2,019 | | | $ | 2,123 | | | | | |
(1) Past due PPP loans are excluded from the table.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Nonaccrual Assets
Nonaccrual loans and leases are those for which accrual of interest has been suspended. Loans and leases are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection does not warrant further accrual.
The following table presents nonaccrual loans and leases:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | Nonaccrual(1) | | Nonaccrual with no related ACL(2) | | | | | | |
| Unsecured personal | $ | 1,676 | | | $ | — | | | | | | | |
| Residential mortgages | 1,373 | | | 1,373 | | | | | | | |
| Secured consumer | 3,011 | | | 3,011 | | | | | | | |
| | | | | | | | | |
| Total nonaccrual consumer loans held for investment | 6,060 | | | 4,384 | | | | | | | |
| | | | | | | | | |
| Equipment finance | 603 | | | — | | | | | | | |
| Commercial real estate | 989 | | | 989 | | | | | | | |
| Commercial and industrial | 2,333 | | | 1,061 | | | | | | | |
| Total nonaccrual commercial loans and leases held for investment | 3,925 | | | 2,050 | | | | | | | |
| | | | | | | | | |
| Total nonaccrual loans and leases held for investment | $ | 9,985 | | | $ | 6,434 | | | | | | | |
(1) There were no loans that were 90 days or more past due and accruing as of December 31, 2021.
(2) Subset of total nonaccrual loans and leases.
| | | | | | | | | | | | | | |
| December 31, 2021 | Nonaccrual | Nonaccrual Ratios (1) | | | | | | |
| Total nonaccrual consumer loans held for investment | $ | 6,060 | | 0.3 | % | | | | | | |
| Total nonaccrual commercial loans and leases held for investment | 3,925 | | 0.4 | % | | | | | | |
Total nonaccrual loans and leases held for investment (2)(3) | $ | 9,985 | | 0.3 | % | | | | | | |
(1) Calculated as the ratio of nonaccruing loans and leases to loans and leases HFI.
(2) The ALLL represented 1446% of nonaccrual loans and leases as of December 31, 2021.
(3) Nonaccruing loans and leases represented 0.4% of total loans and leases HFI, excluding PPP loans.
Collateral-Dependent Assets
Certain loans on non-accrual status and certain TDR loans may be considered collateral-dependent loans if the borrower is experiencing financial difficulty and repayment of the loan is expected to be substantially through sale or operation of the collateral. Expected credit losses for the Company’s collateral-dependent loans are calculated as the difference between the amortized cost basis and the fair value of the underlying collateral less costs to sell, if applicable.
Purchased Financial Assets with Credit Deterioration
Acquired loans are recorded at their fair value, which may result in the recognition of a discount or premium. In addition, the purchase price of PCD loans is grossed-up upon acquisition for the initial estimate of ACL. Subsequent changes to the ACL are recorded as additions to or reversals of credit losses on the Income Statement.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Acquired PCD loans were as follows:
| | | | | |
| |
| December 31, 2021 |
| Purchase price | $ | 337,118 | |
Allowance for credit losses (1) | 30,378 | |
| Discount attributable to other factors | 12,204 | |
| Par value | $ | 379,700 | |
(1) For acquired PCD loans, an ACL of $30.4 million was required with a corresponding increase to the amortized cost basis as of the acquisition date. For PCD loans where all or a portion of the loan balance had been previously written-off, or would be subject to write-off under the Company’s charge-off policy, an ACL of $18.0 million included as part of the grossed-up loan balance at acquisition was immediately written-off. The net impact to the allowance for PCD assets on the acquisition date was $12.4 million.
7. Securitizations and Variable Interest Entities
For additional information regarding the consolidation of VIEs, see “Note 1. Summary of Significant Accounting Policies.”
VIE Assets and Liabilities
The following tables provide the classifications of assets and liabilities on the Balance Sheet for its transactions with consolidated and unconsolidated VIEs. Additionally, the assets and liabilities in the tables below exclude intercompany balances that eliminate in consolidation:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | |
| Restricted cash | $ | 13,462 | | | $ | — | | | $ | 13,462 | |
| Securities available for sale at fair value | — | | | 58,177 | | | 58,177 | |
| Loans held for sale at fair value | 41,734 | | | — | | | 41,734 | |
| Retail and certificate loans held for investment at fair value | 10,281 | | | — | | | 10,281 | |
| Other loans held for investment at fair value | 20,929 | | | — | | | 20,929 | |
| Other assets | 584 | | | 17,156 | | | 17,740 | |
| Total assets | $ | 86,990 | | | $ | 75,333 | | | $ | 162,323 | |
| Liabilities | | | | | |
| Retail notes, certificates and secured borrowings at fair value | $ | 10,281 | | | $ | — | | | $ | 10,281 | |
| Payable on Structured Program borrowings | 65,451 | | | — | | | 65,451 | |
| Other liabilities | 467 | | | — | | | 467 | |
| Total liabilities | 76,199 | | | — | | | 76,199 | |
| Total net assets | $ | 10,791 | | | $ | 75,333 | | | $ | 86,124 | |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | Consolidated VIEs | | Unconsolidated VIEs | | Total |
| Assets | | | | | |
| Restricted cash | $ | 15,983 | | | $ | — | | | $ | 15,983 | |
| Securities available for sale at fair value | — | | | 142,026 | | | 142,026 | |
| Loans held for sale at fair value | 98,190 | | | — | | | 98,190 | |
| Retail and certificate loans held for investment at fair value | 52,620 | | | — | | | 52,620 | |
| Other loans held for investment at fair value | 50,102 | | | — | | | 50,102 | |
| Other assets | 1,270 | | | 32,865 | | | 34,135 | |
| Total assets | $ | 218,165 | | | $ | 174,891 | | | $ | 393,056 | |
| Liabilities | | | | | |
| Retail notes, certificates and secured borrowings at fair value | $ | 52,620 | | | $ | — | | | $ | 52,620 | |
| Payable on Structured Program borrowings | 152,808 | | | — | | | 152,808 | |
| Other liabilities | 729 | | | — | | | 729 | |
| Total liabilities | 206,157 | | | — | | | 206,157 | |
| Total net assets | $ | 12,008 | | | $ | 174,891 | | | $ | 186,899 | |
Unconsolidated VIEs
The Company’s transactions with unconsolidated VIEs include Structured Program transactions. The Company has various forms of involvement with VIEs, including servicing of loans and holding senior or subordinated residual interests in the VIEs.
The following tables present total unconsolidated VIEs with which the Company has significant continuing involvement, but is not the primary beneficiary:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Total VIE Assets | | Securities Available for Sale | | Other Assets | | | | | | Net Assets |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Carrying value | $ | 1,386,279 | | | $ | 58,177 | | | $ | 17,156 | | | | | | | $ | 75,333 | |
| Total exposure | N/A | | $ | 58,177 | | | $ | 17,156 | | | | | | | $ | 75,333 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | Total VIE Assets | | Securities Available for Sale | | Other Assets | | | | | | Net Assets |
| Carrying value | $ | 3,233,416 | | | $ | 142,026 | | | $ | 32,865 | | | | | | | $ | 174,891 | |
| Total exposure | N/A | | $ | 142,026 | | | $ | 32,865 | | | | | | | $ | 174,891 | |
N/A – Not applicable
“Total VIE Assets” represents the remaining principal balance of loans held by unconsolidated VIEs. “Net Assets” continue to decline due to the ongoing paydown of loan balances from prior Structured Program transactions.“Securities Available for Sale” and “Other Assets” are the balances on the Balance Sheet related to its involvement with the unconsolidated VIEs. “Other Assets” primarily includes the Company’s servicing assets and servicing receivables and the Company’s equity investment with respect to the Investment Fund.receivables. “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 interests and any associated collateral declines to zero. Accordingly, this required disclosure is not an indication of expected losses.
The following table summarizes activity related to the unconsolidated trusts and Certificate Program trusts, with the transfers accounted for as a sale on the Company’s consolidated financial statements for the years ended December 31, 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 |
|
| |
(1)
| For Structured Program transactions, the Company retained asset-backed senior securities of $98.7 million and $57.3 million, CLUB Certificate asset-backed securities of $101.3 million and $56.8 million, and asset-backed subordinated securities of $16.8 million and $8.3 million for the years ended December 31, 2019 and 2018, respectively. |
Off-Balance Sheet Loans
Off-balance sheet loans primarily relate to Structured Program transactions for which the Company has some form of continuing involvement, including as servicer. Delinquent loans are comprised of loans 31 days or more past due, including non-accrual loans. For loans 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 loan due to a breach in representations and warranties associated with its loan sale or servicing contracts.
As of December 31, 2019, the aggregate unpaid principal balance of the off-balance sheet loans pursuant to Structured Program transactions was $4.4 billion, of which $145.6 million was attributable to off-balance sheet loans that were 31 days or more past due. As of December 31, 2018, the aggregate unpaid principal balance of the off-balance sheet loans pursuant to 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.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Retained Interests from Unconsolidated VIEs | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 |
| Unconsolidated Trusts | | Unconsolidated Certificate
Program
Trusts | | Unconsolidated Trusts | | Unconsolidated Certificate
Program
Trusts |
Principal derecognized from loans securitized or sold (1) | $ | — | | | $ | — | | | $ | 255,203 | | | $ | 971,738 | |
| Net gains (losses) recognized from loans securitized or sold | $ | — | | | $ | — | | | $ | (20) | | | $ | 7,897 | |
Fair value of asset-backed senior and subordinated securities, and CLUB Certificate asset-backed securities retained upon settlement (2) | $ | — | | | $ | — | | | $ | 12,707 | | | $ | 35,836 | |
| Cash proceeds from loans securitized or sold | $ | — | | | $ | — | | | $ | 237,764 | | | $ | 598,694 | |
| | | | | | | |
| Cash proceeds from servicing and other administrative fees on loans securitized or sold | $ | 9,141 | | | $ | 14,445 | | | $ | 17,684 | | | $ | 26,822 | |
| Cash proceeds for interest received on senior securities and subordinated securities | $ | 2,978 | | | $ | 6,158 | | | $ | 4,559 | | | $ | 8,251 | |
(1) Includes non-cash purchase and sale of loans requested by investors to facilitate a Structured Program transaction during the third quarter of 2020.
(2) For Structured Program transactions, the Company retained asset-backed senior securities of $26.3 million, CLUB Certificate asset-backed securities of $18.3 million, and asset-backed subordinated securities of $4.0 million for the year ended December 31, 2020.
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 direct recourse to the Company’s assets, and holders of the securities issued by the 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 the Company’s MOA are subject principally to the credit and prepayment risk stemming from the underlying unsecured personal whole loans.
Off-Balance Sheet Loans
See “
Note 8. Fair Value
Off-balance sheet loans pursuant to unconsolidated VIE’s primarily relate to Structured Program transactions for which the Company has some form of Assets and Liabilitiescontinuing involvement, including as servicer.
” for additional information on
As of December 31, 2021, the fair value sensitivityaggregate unpaid principal balance of asset-backed securitiesthe off-balance sheet loans related to Structured Program transactions.
8. Fair Valuetransactions was $1.3 billion, of Assets and Liabilities
For a descriptionwhich $35.0 million was attributable to off-balance sheet loans that were 31 days or more past due. As of December 31, 2020, the aggregate unpaid principal balance of the fair value hierarchyoff-balance sheet loans related to Structured Program transactions was $3.2 billion, of which $94.8 million was attributable to off-balance sheet loans that were 31 days or more past due. For such loans, the Company would only experience a loss if it was required to repurchase a loan due to a breach in representations 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.warranties associated with its loan sale or servicing contracts.
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 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 |
|
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 |
|
As presentedFor a description of the fair value hierarchy and the Company’s fair value methodologies, see “Note 1. Summary of Significant Accounting Policies.” The Company records certain assets and liabilities at fair value as listed in the tables above, the Company has electedbelow.
Financial Instruments, Assets and Liabilities Recorded at Fair Value
The following tables present the fair value optionhierarchy for certain liabilities. Changesassets and liabilities measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at
Fair Value |
| Assets: | | | | | | | |
| Loans held for sale at fair value | $ | — | | | $ | — | | | $ | 142,370 | | | $ | 142,370 | |
| Retail and certificate loans held for investment at fair value | — | | | — | | | 229,719 | | | 229,719 | |
| Other loans held for investment at fair value | — | | | — | | | 21,240 | | | 21,240 | |
| Securities available for sale: | | | | | | | |
| U.S. agency residential mortgage-backed securities | — | | | 123,699 | | | — | | | 123,699 | |
| Asset-backed senior securities and subordinated securities | — | | | 28,129 | | | 11,762 | | | 39,891 | |
| U.S. agency securities | — | | | 26,172 | | | — | | | 26,172 | |
| Other asset-backed securities | — | | | 26,133 | | | — | | | 26,133 | |
| Commercial mortgage-backed securities | — | | | 26,098 | | | — | | | 26,098 | |
| CLUB Certificate asset-backed securities | — | | | — | | | 18,285 | | | 18,285 | |
| Municipal securities | — | | | 3,252 | | | — | | | 3,252 | |
| | | | | | | |
| Total securities available for sale | — | | | 233,483 | | | 30,047 | | | 263,530 | |
| Servicing assets | — | | | — | | | 67,726 | | | 67,726 | |
| Other assets | — | | | 2,812 | | | 3,312 | | | 6,124 | |
| Total assets | $ | — | | | $ | 236,295 | | | $ | 494,414 | | | $ | 730,709 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Retail notes, certificates and secured borrowings | $ | — | | | $ | — | | | $ | 229,719 | | | $ | 229,719 | |
| Payable on Structured Program borrowings | — | | | — | | | 65,451 | | | 65,451 | |
| Other liabilities | — | | | — | | | 12,911 | | | 12,911 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 308,081 | | | $ | 308,081 | |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts 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 loansThousands, Except Share and Per Share Amounts, Ratios, or secured by cash collateral.as Noted)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | |
| Loans held for sale at fair value | $ | — | | | $ | — | | | $ | 121,902 | | | $ | 121,902 | |
| Retail and certificate loans held for investment at fair value | — | | | — | | | 636,686 | | | 636,686 | |
| Other loans held for investment at fair value | — | | | — | | | 49,954 | | | 49,954 | |
| Securities available for sale: | | | | | | | |
| Asset-backed senior securities and subordinated securities | — | | | 75,372 | | | 16,515 | | | 91,887 | |
| CLUB Certificate asset-backed securities | — | | | — | | | 50,139 | | | 50,139 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other securities | — | | | 200 | | | — | | | 200 | |
| Total securities available for sale | — | | | 75,572 | | | 66,654 | | | 142,226 | |
| Servicing assets | — | | | — | | | 56,347 | | | 56,347 | |
| Total assets | $ | — | | | $ | 75,572 | | | $ | 931,543 | | | $ | 1,007,115 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Retail notes, certificates and secured borrowings | $ | — | | | $ | — | | | $ | 636,774 | | | $ | 636,774 | |
| Payable on Structured Program borrowings | — | | | — | | | 152,808 | | | 152,808 | |
| Other liabilities | — | | | — | | | 12,270 | | | 12,270 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 801,852 | | | $ | 801,852 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Financial instruments are categorized in the valuation hierarchy based on the significance of observable or unobservable factors in the overall fair value measurement. SinceFor 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 Structured Program transactions, and loan trailing fee liabilityfinancial instruments listed in the tables above that 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 primarily uses a discounted cash flowDCF 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 ourthe Company’s best estimates of the assumptions a market participant would use to calculate fair value. Due to changes in the availability of market observable inputs, the Company transferred $517 thousand of asset-backed securities related to Structured Program transactions out of Level 3 during the year ended December 31, 2020. The Company did not transfer any other assets or liabilities in or out of Level 3 during the yearsyear ended December 31, 2019 or 2018.2021.
Loans Held for Sale at Fair valuation adjustments are recorded through earnings related to Level 3 instruments for the years endedValue
As of December 31, 20192021, the majority of loans HFS were sold shortly after origination and 2018. Certain unobservable inputs may (in isolation) have either a directionally consistent or opposite impact onat committed prices. Therefore, the Company is generally not exposed to fair value fluctuations as a result of the financial instrument for a given changeadverse changes in that input. When multiplekey assumptions.
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 table 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, 2019 and 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 | % |
| |
(1)
| Expressed as a percentage of the original principal balance of the loan, note, certificate or secured borrowing. |
Significant Recurring Level 3 Fair Value Input Sensitivity
The sensitivity of loans held for sale at fair value to adverse changes in key assumptions are as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Loans held for sale at fair value | $ | 142,370 | | | $ | 121,902 | |
| Expected weighted-average life (in years) | 1.3 | | 1.1 |
| Discount rates | | | |
| 100 basis point increase | $ | (1,540) | | | $ | (1,151) | |
| 200 basis point increase | $ | (3,055) | | | $ | (2,282) | |
| Expected credit loss rates on underlying loans | | | |
| 10% adverse change | $ | (608) | | | $ | (1,099) | |
| 20% adverse change | $ | (1,236) | | | $ | (2,220) | |
| Expected prepayment rates | | | |
| 10% adverse change | $ | (1,450) | | | $ | (273) | |
| 20% adverse change | $ | (2,997) | | | $ | (556) | |
Fair Value Reconciliation
The following tables present additional information about Level 3 loans held for sale at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | | | Outstanding Principal Balance | | Valuation Adjustment | | Fair Value | | | | | | |
| Balance at December 31, 2019 | | | | | | | $ | 747,394 | | | $ | (25,039) | | | $ | 722,355 | | | | | | | |
| Purchases | | | | | | | 1,568,844 | | | (6) | | | 1,568,838 | | | | | | | |
| Transfers to loans held for investment | | | | | | | (41,431) | | | — | | | (41,431) | | | | | | | |
| Sales | | | | | | | (1,907,446) | | | 87,723 | | | (1,819,723) | | | | | | | |
| Principal payments and retirements | | | | | | | (207,483) | | | — | | | (207,483) | | | | | | | |
| Charge-offs, net of recoveries | | | | | | | (27,278) | | | 25,627 | | | (1,651) | | | | | | | |
| Change in fair value recorded in earnings | | | | | | | — | | | (99,003) | | | (99,003) | | | | | | | |
| Balance at December 31, 2020 | | | | | | | $ | 132,600 | | | $ | (10,698) | | | $ | 121,902 | | | | | | | |
| Originations and purchases | | | | | | | 7,507,695 | | | (1,629) | | | 7,506,066 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Sales | | | | | | | (7,386,633) | | | 5,124 | | | (7,381,509) | | | | | | | |
| Principal payments and retirements | | | | | | | (98,530) | | | — | | | (98,530) | | | | | | | |
| Charge-offs, net of recoveries | | | | | | | (7,939) | | | 3,441 | | | (4,498) | | | | | | | |
| Change in fair value recorded in earnings | | | | | | | — | | | (1,061) | | | (1,061) | | | | | | | |
| Balance at December 31, 2021 | | | | | | | $ | 147,193 | | | $ | (4,823) | | | $ | 142,370 | | | | | | | |
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Retail and Certificate Loans and Related Notes, Certificates and Secured Borrowings
The Company does not assume principal or interest rate risk on loans that were funded by its member payment dependent self-directed retail program (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. At December 31, 20192021 and 2018,2020, the discounted cash flowDCF methodology used to estimate the retail note, certificate and secured borrowings’ fair values used the same projected net cash flows as their related loans. As demonstrated by the following tables,Therefore, the fair value adjustments for retail 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 retail 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)
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, 2019 and 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 |
|
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:
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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:
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| | | | | | |
| | 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, 2019 and 2018:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
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 quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for asset-backed securities related to Structured Program transactions at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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)
| Expressed as a percentage of the outstanding collateral balance. |
Significant Recurring Fair Value Input Sensitivity
The following tables present adverse changes to the fair value sensitivity of Level 2 and Level 3 asset-backed securities related to Structured Program transactions to changes in key assumptions at December 31, 2019 and 2018: |
| | | | | | | | | | | |
| | 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 on a recurring basis for the years ended December 31, 2019 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 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:relating to loans sold to investors:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | December 31, 2021 | | December 31, 2020 |
| | | | | | | Minimum | | Maximum | | Weighted-
Average | | Minimum | | Maximum | | Weighted-Average |
| Discount rates | | 7.5 | % | | 16.4 | % | | 10.0 | % | | 4.8 | % | | 16.4 | % | | 9.9 | % |
Net cumulative expected loss rates (1) | | 2.4 | % | | 26.4 | % | | 10.2 | % | | 4.5 | % | | 26.3 | % | | 12.5 | % |
Cumulative expected prepayment rates (1) | | 32.1 | % | | 45.9 | % | | 38.4 | % | | 27.0 | % | | 38.9 | % | | 31.2 | % |
Total market servicing rates (% per annum on outstanding principal balance) (2) | | 0.62 | % | | 0.62 | % | | 0.62 | % | | 0.62 | % | | 0.62 | % | | 0.62 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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) (2) Includes collection fees estimated to be paid to a hypothetical third-party servicer.
| 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 Company’s selection of the most representative market servicing rates for servicing assets 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, calculated using different market servicing rate assumptions asassumptions:
| | | | | | | | | | | | | | |
| | | |
| December 31, 2021 | | December 31, 2020 |
| Weighted-average market servicing rate assumptions | 0.62 | % | | | 0.62 | % | | |
| Change in fair value from: | | | | | | |
| Servicing rate increase by 0.10% | $ | (9,495) | | | | $ | (7,379) | | | |
| Servicing rate decrease by 0.10% | $ | 9,495 | | | | $ | 7,379 | | | |
The following table presents the fair value of December 31, 2019 and 2018:servicing assets to adverse changes in key assumptions:
| | | | | | | | | | | | | | |
| | | |
| December 31, 2021 | | December 31, 2020 |
| Fair value of Servicing Assets | $ | 67,726 | | | | $ | 56,347 | | | |
| Discount rates | | | | | | |
| 100 basis point increase | $ | (558) | | | | $ | (455) | | | |
| 200 basis point increase | $ | (1,115) | | | | $ | (911) | | | |
| Expected loss rates | | | | | | |
| 10% adverse change | $ | (693) | | | | $ | (346) | | | |
| 20% adverse change | $ | (1,386) | | | | $ | (691) | | | |
| Expected prepayment rates | | | | | | |
| 10% adverse change | $ | (2,401) | | | | $ | (1,596) | | | |
| 20% adverse change | $ | (4,802) | | | | $ | (3,192) | | | |
|
| | | | | | | |
| | Servicing Assets |
| | December 31, 2019 | | December 31, 2018 |
| Weighted-average market servicing rate assumptions | 0.66 | % | | 0.66 | % |
| Change in fair value from: | | | |
| Servicing rate increase by 0.10% | $ | (13,978 | ) | | $ | (10,878 | ) |
| Servicing rate decrease by 0.10% | $ | 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)
Fair Value Reconciliation
The following table presents additional information about Level 3 servicing assets measured at fair value on a recurring basis for the years ended December 31, 2019 and 2018:
| | | | | | | |
| | | |
| Servicing Assets |
Fair value at December 31, 20172019 | $ | 33,67689,680 |
| | |
Issuances (1) | 55,40333,990 |
| | |
Change in fair value, included in investor feesMarketplace Revenue | (31,233(58,730) | ) | | |
Other net changes included in deferred revenueDeferred Revenue | 6,160(8,593) |
| | |
Fair value at December 31, 20182020 | $ | 64,00656,347 |
| | |
Issuances (1) | 79,69269,075 |
| | |
Change in fair value, included in investor feesMarketplace Revenue | (58,172(56,561) | ) | | |
Other net changes included in deferred revenueDeferred Revenue | 4,154(1,135) |
| | |
Fair value at December 31, 20192021 | $ | 89,68067,726 |
|
| |
(1)
| Represents the gains or losses on sales of the related loans. |
Loan Trailing Fee Liability(1) Represents the gains or losses on sales of the related loans.
Significant Unobservable InputsFinancial Instruments, Assets, and Liabilities Not Recorded at Fair Value
The following table presents quantitative information abouttables present the significant unobservable inputs used for the Company’s Level 3 fair value measurementshierarchy for loan trailing fee liabilityfinancial instruments, assets, and liabilities not recorded at December 31, 2019 and 2018:fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at
Fair Value |
| Assets: | | | | | | | | | |
| Loans held for sale | $ | 248,878 | | | $ | — | | | $ | — | | | $ | 251,101 | | | $ | 251,101 | |
| Loans and leases held for investment, net | 2,754,737 | | | — | | | — | | | 2,964,691 | | | 2,964,691 | |
| Other assets | 18,274 | | | — | | | 15,630 | | | 2,644 | | | 18,274 | |
| Total assets | $ | 3,021,889 | | | $ | — | | | $ | 15,630 | | | $ | 3,218,436 | | | $ | 3,234,066 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
Deposits (1) | $ | 68,405 | | | $ | — | | | $ | — | | | $ | 68,405 | | | $ | 68,405 | |
| Short-term borrowings | 27,780 | | | — | | | 17,595 | | | 10,185 | | | 27,780 | |
| Advances from PPPLF | 271,933 | | | — | | | — | | | 271,933 | | | 271,933 | |
| Other long-term debt | 15,455 | | | — | | | — | | | 15,455 | | | 15,455 | |
| Other liabilities | 51,655 | | | — | | | 22,187 | | | 29,468 | | | 51,655 | |
| Total liabilities | $ | 435,228 | | | $ | — | | | $ | 39,782 | | | $ | 395,446 | | | $ | 435,228 | |
(1) Excludes deposit liabilities with no defined or contractual maturities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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)
| 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 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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at
Fair Value |
| Assets: | | | | | | | | | |
Total cash and cash equivalents (1) | $ | 524,963 | | | $ | — | | | $ | 524,963 | | | $ | — | | | $ | 524,963 | |
Restricted cash (1) | 103,522 | | | — | | | 103,522 | | | — | | | 103,522 | |
| Other assets | 914 | | | — | | | 914 | | | — | | | 914 | |
| Total assets | $ | 629,399 | | | $ | — | | | $ | 629,399 | | | $ | — | | | $ | 629,399 | |
| Liabilities: | | | | | | | | | |
| Short-term borrowings | $ | 104,989 | | | $ | — | | | $ | 65,121 | | | $ | 39,868 | | | $ | 104,989 | |
| Other liabilities | 57,536 | | | — | | | 43,984 | | | 13,552 | | | 57,536 | |
| | | | | | | | | |
| Total liabilities | $ | 162,525 | | | $ | — | | | $ | 109,105 | | | $ | 53,420 | | | $ | 162,525 | |
Fair Value Reconciliation
The following table presents additional information about the Level 3 loan trailing fee liability measured at(1) Carrying amount approximates fair value due to the short maturity of these financial instruments.
9. Property, Equipment and Software, Net
Property, equipment and software, net, consist of the following:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
Internally developed software (1) | $ | 96,171 | | | $ | 101,953 | |
| Leasehold improvements | 36,556 | | | 35,140 | |
| Computer equipment | 29,598 | | | 27,030 | |
| Purchased software | 22,403 | | | 19,004 | |
| Furniture and fixtures | 8,346 | | | 8,203 | |
| Construction in progress | 3,319 | | | 2,761 | |
| Total property, equipment and software | 196,393 | | | 194,091 | |
| Accumulated depreciation and amortization | (98,397) | | | (97,450) | |
| Total property, equipment and software, net | $ | 97,996 | | | $ | 96,641 | |
(1) Includes $14.7 million and $13.9 million of software development in progress as of December 31, 2021 and 2020, respectively.
Depreciation and amortization expense on a recurring basisproperty, equipment and software was $38.2 million, $45.2 million and $51.6 million for the years ended December 31, 2021, 2020 and 2019, and 2018:respectively.
|
| | | | | | | |
| 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,The Company recorded impairment expense on its leasehold improvements and Liabilities Not Recorded at Fair Value
The following tables presentCompany recorded impairment expense on its internally developed software of $0.8 million, $5.7 million and $3.9 million for the fair value hierarchy for financial instruments, assets,years ended December 31, 2021, 2020 and liabilities not recorded at fair value:2019, respectively.
The Company records the above expenses in “Depreciation and amortization” expense on the Income Statement.
|
| | | | | | | | | | | | | | | | | | | |
| 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)
|
| | | | | | | | | | | | | | | | | | | |
| 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 Software, NetIn connection with the Acquisition in the first quarter of 2021, the Company recognized Goodwill of $75.7 million, which is fully allocated to the LC Bank operating segment. Goodwill is not amortized, but will be subject to annual impairment tests. For additional detail, see “Note 1. Summary of Significant Accounting Policies.”
Property, equipment and software, net,Intangible Assets
Intangible assets consist of customer relationships. Intangible assets, net of accumulated amortization, are included in “Other assets” on the following:Balance Sheet. The gross and net carrying values and accumulated amortization were as follows:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Gross Carrying Value | $ | 54,500 | | | $ | 39,500 | |
| Accumulated Amortization | (33,319) | | | (28,073) | |
| Net Carrying Value | $ | 21,181 | | | $ | 11,427 | |
|
| | | | | | | |
| 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. |
Depreciation and amortizationThe customer relationship intangible assets are amortized on an accelerated basis from ten to fourteen years. Amortization expense on property, equipment and software was $51.6 million, $47.0 million and $40.3 millionassociated with intangible assets for the years ended December 31, 2021, 2020 and 2019 2018 and 2017, respectively. The Company recorded impairment expense on its internally developed software of $3.9was $5.2 million, $3.8$3.1 million and $2.4$3.5 million, respectively. There was no impairment loss for the years ended December 31, 2019, 20182021, 2020 and 2017, respectively. The Company records impairment expense on its internally developed software in “Engineering and product development” expense in the Consolidated Statements of Operations.2019.
The expected future amortization expense for intangible assets as of December 31, 2021, is as follows: | | | | | |
| 2022 | $ | 4,847 | |
| 2023 | 4,198 | |
| 2024 | 3,549 | |
| 2025 | 2,901 | |
| 2026 | 2,252 | |
| Thereafter | 3,434 | |
| Total | $ | 21,181 | |
11. Other Assets
Other assets consist of the following:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Operating lease assets | $ | 77,316 | | | $ | 74,037 | |
Servicing assets (1) | 70,370 | | | 56,347 | |
| Nonmarketable equity investments | 31,726 | | | 8,275 | |
Intangible assets, net (2) | 21,181 | | | 11,427 | |
| | | |
| | | |
| | | |
| Other | 101,953 | | | 37,313 | |
Total other assets | $ | 302,546 | | | $ | 187,399 | |
(1) Loans underlying servicing assets had a total outstanding principal balance of $10.3 billion and $10.1 billion as of December 31, 2021 and 2020, respectively.
(2) See “Note 10. Goodwill and Intangible Assets” for additional detail.
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 assetsDeposits 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
2021 | | |
| Interest-bearing deposits: | | | |
| Checking accounts | $ | 1,993,809 | | | |
Savings and 2018, respectively.money market accounts | 856,989 | | | |
| Certificates of deposit | 68,405 | | | |
| Total | $ | 2,919,203 | | | |
| Noninterest-bearing deposits | 216,585 | | | |
| Total deposits | $ | 3,135,788 | | | |
11. Intangible Assets and GoodwillTotal certificates of deposit at December 31, 2021 are scheduled to mature as follows:
| | | | | |
| 2022 | $ | 53,740 | |
| 2023 | 13,579 | |
| 2024 | 462 | |
| 2025 | 178 | |
| 2026 | 446 | |
| |
| Total certificates of deposit | $ | 68,405 | |
Intangible Assets
Intangible assets consistThe following table presents the amount of customer relationships. The gross and net carrying values and accumulated amortizationcertificates of deposit with denominations exceeding the Federal Deposit Insurance Corporation (FDIC) limit of $250 thousand, segregated by time remaining until maturity, as of December 31, 2019 and 2018, were as follows:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months or less | | Over 3 months through
6 months | | Over 6 months through
12 months | | Over
12 months | | Total |
| Certificates of deposit | $ | 12,338 | | | $ | 806 | | | $ | 250 | | | $ | 588 | | | $ | 13,982 | |
|
| | | | | | | |
| 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 customer relationship intangible assets are amortized on an accelerated basis over a 14 year period. Amortization expense associated with intangible assets for the years ended December 31, 2019, 2018 and 2017 was $3.5 million, $3.9 million and $4.3 million, respectively.
The expected future amortization expense for intangible assets as of December 31, 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 |
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Goodwill
Goodwill consists of 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 | $ | — |
|
During the annual testing for potential impairment of goodwill in 2018, management performed an assessment of the Company's patient and education finance reporting unit (PEF), which is the only reporting unit with goodwill. Upon completion of the annual impairment test, the Company recorded a goodwill impairment expense of $35.6 million during the second quarter of 2018, resulting in full impairment of the remaining goodwill of PEF.Short-term Borrowings:
12. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the 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)
13. 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 and 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 this Auto Loan Warehouse Credit Facility amortizes over time through regular principal and interest payments collected from the auto refinance loans that serve as collateral.
The creditors of the Personal Loan and Auto Loan Warehouse Credit Facilities have no recourse to the general credit of the Company. Borrowings under these facilities bear interest at an annual benchmark rate of LIBOR (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 certain lenders to fund advances or maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the applicable credit agreement), plus a spread ranging from 1.85% to 2.50%. Interest is payable monthly. Borrowings may be prepaid without penalty. In addition, the Personal Loan Warehouse Credit Facilities require payment of a monthly unused commitment fee ranging from 0.375% to 1.25% per annum on the average undrawn portion available.
The Personal Loan and Auto Loan Warehouse Credit Facilities contain certain covenants. As of December 31, 2019, the Company was in material compliance with all applicable covenants under the respective credit agreements.
As of December 31, 2019 and 2018, the Company had $387.3 million and $306.8 million in aggregate debt outstanding under the Personal Loan and Auto Loan Warehouse Credit Facilities, respectively, with collateral consisting of loans at fair value of $551.5 million and $453.0 million included in “Loans held for sale by the Company at fair value,” respectively, and restricted cash of $25.1 million and $25.2 million included in the Consolidated Balance Sheets, respectively.
Revolving Credit Facility
In December 2015, the Company entered into a credit and guaranty agreement and a pledge and security agreement with several lenders and a financial services company, as collateral agent, for an aggregate $120.0 million secured revolving credit facility (Revolving Facility).
The Company may borrow under the Revolving Facility until December 17, 2020. Repayment of any outstanding proceeds are payable on December 17, 2020, but may be prepaid without penalty.
Borrowings under the Revolving Facility bear interest, at the Company’s option, at an annual rate of LIBOR plus a spread of 1.75% to 2.00%, which is fixed for a Company-selected interest period of one, two, three, six or twelve 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 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, theThe Company entered into repurchase agreements pursuant to which the Company may sellsold 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.cash. As of December 31, 20192021 and 2018,2020, the Company had $140.2$27.8 million and $57.0$105.0 million in aggregate debt outstanding under its repurchase agreements, respectively, of which atis amortized over time through regular principal and interest payments collected from the pledged securities. At December 31, 2019, $64.5 million had2021, a majority of the Company’s repurchase agreements have contractual repurchase dates ranging from February 2020September 2022 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. The2028. These contractual repurchase dates correspond to either a set repurchase schedule or to the maturity dates of the underlying securities, which have a remaining weighted-average estimated life from 1.1 to 1.4 years. Theof less than one year. At December 31, 2021 and 2020, the repurchase agreements bearbore interest at a rate that isrates ranging from 3.12% to 6.72% and 3.05% to 4.00%, respectively, which are either fixed or 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)
15. Secured Borrowings
In October 2017, LendingClub Asset Management, LLC (LCAM), a wholly-owned subsidiary of LendingClub that previously acted as the general partner for certain private funds, initiated the wind-down of 6 funds by redeeming the LC Trust certificates issued to the funds and transferring the loan participations underlying the redeemed certificates to third party investors. Certain of the loan participations for 2 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. The transfer of these loan participations
Long-term Debt:
Advances from these 2 funds was accounted for as a secured borrowing and the underlying whole loans were not derecognized from the Company’s PPPLF
Consolidated Balance Sheets. The Company elected the fair value option for the secured borrowings.
As of December 31, 2019,2021, outstanding PPPLF borrowings were $271.9 million and are collateralized by SBA PPP loans originated by the fair valueCompany. The maturity date of the PPPLF borrowings matches the maturity date of the SBA PPP loans. When loans are forgiven by the SBA, the corresponding PPPLF advance is paid by the Company. The interest rate on the PPPLF borrowings is fixed at 0.35%.
Retail Notes, Certificates, and Secured Borrowings
The Company issued Retail Notes and LC Trust I issued certificates as a means to allow investors to invest in the corresponding loans. Investors were able to purchase Retail Notes, where the cash flows to investors were dependent upon principal and interest payments made by borrowers of the underlying unsecured personal loans. As of December 31, 2020, LendingClub ceased offering and selling Retail Notes. The total balance of outstanding Retail Notes will continue to decline as underlying borrower payments are made. The Company does not assume principal or interest rate risk on loans that were funded by Retail Notes because loan balances, interest rates and maturities were matched and offset by an equal balance of notes with the exact same interest rates and maturities.
The following table provides the balances of retail notes, certificates and secured borrowings was $20.1 million, secured by loans at fair value as of $18.0the periods indicated:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Retail notes | $ | 219,435 | | | $ | 583,219 | |
| Certificates | 10,281 | | | 52,620 | |
| Secured borrowings | 3 | | | 935 | |
| Total retail notes, certificates and secured borrowings | $ | 229,719 | | | $ | 636,774 | |
Payable on Structured Program Borrowings
As of December 31, 2021 and 2020, the certificate participations and securities of certain consolidated VIEs held by third-party investors of $65.5 million and $152.8 million, respectively, are included in “Loans“Payable on Structured Program borrowings” on the Balance Sheet and were secured by “Other loans held for investment at fair value” in the and “Loans held for sale” of $62.7 million and $148.3 million and restricted cash of $11.2 million and $13.5 million, respectively.
Other Long-term Debt
Consolidated Balance Sheets
. As
The Company has subordinated notes with an outstanding amount of $15.3 million as of December 31, 2018,2021. The subordinated notes are at a 6.5% fixed to floating rate and are due June 30, 2027. Fixed interest payments are due semiannually in arrears on June 30 and December 30. Subsequent to June 30, 2022, the fair valuerate resets quarterly at a rate equal to 3-month London Interbank Offered Rate (LIBOR) plus 4.64%. The subordinated notes are junior in right to the repayment in full of all existing claims of creditors and depositors of the secured borrowings was $80.6 million, secured by loansCompany. The subordinated notes may be redeemed, in whole or in part, at fair value of $76.5 million included in “Loans held for investmentpar plus accrued unpaid interest after June 2022 at fair value” in the Consolidated Balance Sheets. Changes in the fair valueoption of the secured borrowings are partially offset by the associated loan participations, and the net effect results in changes in fair value of the credit support agreement through earnings. As of December 31, 2019 and 2018, the fair value of this credit support agreement was $2.2 million and $2.8 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 loss scenarios. See “Company.
Note 6. Loans Held for Investment, Loans Held for Sale, Notes, Certificates and Secured Borrowings” for additional information.
16. Employee Incentive and Retirement Plans
The Company’s 2014 Equity Incentive Plan (EIP) provides for granting awards, including RSUs, PBRSUs and stock options to employees, officers and directors. In addition, the Company offers a retirement plan to eligible employees.
Common Stock Reserved for Future Issuance
As of December 31, 2019 and 2018, the Company had shares of common stock reserved for future issuance as follows:
|
| | | | | |
| December 31, | 2019 | | 2018 |
| 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 | 3,123,203 |
| | 2,307,400 |
|
Total reserved for future issuance (1) | 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.
|
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
14. Other Liabilities
Other liabilities consist of the following:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Accounts payable and accrued expenses | $ | 100,972 | | | $ | 46,885 | |
| Operating lease liabilities | 91,588 | | | 94,538 | |
| | | |
| Payable to investors | 22,187 | | | 40,286 | |
| | | |
| | | |
| Other | 89,204 | | | 62,842 | |
| | | |
| | | |
| Total other liabilities | $ | 303,951 | | | $ | 244,551 | |
15. 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, | 2021 |
| Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 5,562 | | | $ | — | | | $ | 5,562 | |
| Other comprehensive income (loss) | $ | 5,562 | | | $ | — | | | $ | 5,562 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2020 |
| Before Tax | | Tax Effect | | Net of Tax |
| Change in net unrealized gain (loss) on securities available for sale | $ | 2,044 | | | $ | (5) | | | $ | 2,049 | |
| Other comprehensive income (loss) | $ | 2,044 | | | $ | (5) | | | $ | 2,049 | |
| | | | | | | | | | | | | | | | | |
| 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) | |
Accumulated other comprehensive income (loss) balances were as follows:
| | | | | |
| Total
Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2019 | $ | (565) | |
| Change in net unrealized gain (loss) on securities available for sale | 2,049 | |
| Balance at December 31, 2020 | $ | 1,484 | |
| Change in net unrealized gain (loss) on securities available for sale | 5,562 | |
| Balance at December 31, 2021 | $ | 7,046 | |
16. Employee Incentive Plans
The Company’s equity incentive plans provide for granting awards, including RSUs, PBRSUs, cash awards and stock options to employees, officers and directors.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance was as follows:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Available for future RSU, PBRSU and stock option grants | 15,172,055 | | | 12,552,761 | |
| Unvested RSUs, PBRSUs and stock options outstanding | 13,029,414 | | | 14,631,526 | |
| Available for ESPP | 5,161,860 | | | 4,134,033 | |
| Total reserved for future issuance | 33,363,329 | | | 31,318,320 | |
Stock-based Compensation
Stock-based compensation expense was as follows for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| RSUs and PBRSUs | $ | 66,552 | | | $ | 60,745 | | | $ | 70,772 | |
| Stock options | 599 | | | 788 | | | 2,383 | |
ESPP (1) | — | | | — | | | 484 | |
| Total stock-based compensation expense | $ | 67,151 | | | $ | 61,533 | | | $ | 73,639 | |
|
| | | | | | | | | | | |
| 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 |
|
The following table presents the Company’s stock-based compensation expense recorded in the Consolidated Statements of 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 |
|
The Company capitalized $6.3$4.4 million, $9.1$5.1 million and $9.2$6.3 million of stock-based compensation expense associated with developing software for internal use during the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
In 2016, the board of directors 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 following table summarizes the activities for the Company’s RSUs during the year ended December 31, 2019:RSUs:
| | | | | | | | | | | |
| Number
of Units | | Weighted-
Average
Grant Date
Fair Value |
| Unvested at December 31, 2020 | 11,395,112 | | | $ | 11.26 | |
| Granted | 5,792,679 | | | $ | 14.39 | |
| Vested | (5,033,976) | | | $ | 11.98 | |
| Forfeited/expired | (2,450,064) | | | $ | 12.58 | |
| Unvested at December 31, 2021 | 9,703,751 | | | $ | 12.44 | |
| | | |
|
| | | | | | |
| | 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 year ended December 31, 2019,2021, the Company granted 7,531,2835,792,679 RSUs with an aggregate fair value of $114.7$83.4 million.
As of December 31, 2021, there was $109.7 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over the next 2.1 years.
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, 2019, there was $151.0 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over the next 2.8 years.
Performance-based Restricted Stock Units
PBRSUs are equityrestricted stock unit awards that are earned and eligible for time-based vesting (if applicable) based upon the achievement of certain pre-established performance metrics over a specific performance period. Depending on the level of achievementThe Company’s PBRSU awards have a separate market-based component and/or a performance-based component. Certain of the pre-established performance targets, the PBRSUs earned and eligible forCompany’s PBRSU awards have additional time-based vesting can range from 0%for any earned shares. With respect to 200%PBRSU awards with market-based metrics, the compensation expense of the target amount. PBRSUs granted underaward is fixed at the 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 numbertime of PBRSUs that may be earned and the related stock-based compensation expense that is recognized is adjusted upward or downward based upongrant (incorporating the probability of achieving the pre-establishedmarket-based metrics) and expensed over the performance metrics.
Duringand vesting period. With respect to PBRSU awards with performance-based metrics, the first quarter of 2019, the Company expanded the use of its PBRSU program to nearly allcompensation expense of the executive team. award is set at the time of grant (assuming a target level of achievement), adjusted for actual performance during the performance period and expensed over the performance and vesting period.
The following table summarizes the activities for the Company’s PBRSUs during the year ended December 31, 2019:PBRSUs:
| | | | | | | | | | | |
| Number
of Units | | Weighted-
Average
Grant Date
Fair Value |
| Unvested at December 31, 2020 | 1,441,311 | | | $ | 5.31 | |
| Granted | 568,285 | | | $ | 22.54 | |
| Vested | (79,604) | | | $ | 22.59 | |
| Forfeited/expired | (158,123) | | | $ | 12.41 | |
| Unvested at December 31, 2021 | 1,771,869 | | | $ | 9.72 | |
| | | |
|
| | | | | | |
| | 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, 20182021, 2020 and 2017,2019, the Company recognized $3.9$7.0 million, $2.8 million and $1.0$3.9 million in stock-based compensation expense related to these PBRSUs, respectively.
As of December 31, 2019,2021, there was $3.3$10.5 million of unrecognized compensation cost related to unvested PBRSUs, which is expected to be recognized over the next 1.71.5 years.
Stock Options
The following table summarizes the activities for the Company’s stock options:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted-Average
Exercise
Price Per
Share | | Weighted-Average
Remaining
Contractual Life (in years) | | Aggregate Intrinsic Value (1) (in thousands) |
| Outstanding at December 31, 2020 | 1,795,116 | | | $ | 29.99 | | | | | |
| Granted | 188,626 | | | $ | 5.32 | | | | | |
| Exercised | (264,826) | | | $ | 9.22 | | | | | |
| Forfeited/Expired | (165,109) | | | $ | 15.12 | | | | | |
| Outstanding at December 31, 2021 | 1,553,807 | | | $ | 32.12 | | | 3.06 | | $ | 6,913 | |
| | | | | | | |
| Exercisable at December 31, 2021 | 1,511,469 | | | $ | 32.87 | | | 2.96 | | $ | 6,115 | |
(1) 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 $24.18 as reported on the New York Stock Exchange on December 31, 2021.
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 summarizesAs part of the activities forAcquisition, the Company’sCompany granted service-based stock options during 2019:to purchase 188,626 shares of common stock with a weighted-average exercise price of $5.32 per option share, a weighted-average grant date fair value of $6.25 per option share and an aggregate estimated fair value of $1.2 million.
|
| | | | | | | | | | | | |
| | 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 $12.62 as reported on the New York Stock Exchange on December 31, 2019. |
The aggregate intrinsic value of options exercised was $5.9$5.1 million, $1.9$1.8 million and $27.0$5.9 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. The total fair value of stock options vested for the years ended December 31, 2021, 2020 and 2019 2018was $0.3 million, $1.0 million and 2017 was $2.8 million, $9.8 million and $19.6 million, respectively.
As of December 31, 2019, the total2021, there was $38.0 thousand in unrecognized compensation cost related to outstanding stock options was $0.8 million, which is expected to be recognized over the next 0.5 years.options.
There were 0no stock options granted during the years ended December 31, 2019, 20182020 and 2017.2019.
Employee Stock Purchase Plan
The Company’s employee stock purchase plan (ESPP) became effective on December 11, 2014. The Company’s ESPP allowed eligible employees to purchase shares
Income tax benefit consisted of the Company’s common stock atfollowing for the periods shown below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | — | | | $ | (1) | | | $ | (141) | |
| State | 3,541 | | | (78) | | | (60) | |
| Total current tax expense (benefit) | $ | 3,541 | | | $ | (79) | | | $ | (201) | |
| | | | | |
| Deferred: | | | | | |
| Federal | $ | (2,066) | | | $ | — | | | $ | — | |
| State | (1,611) | | | — | | | — | |
| Total deferred benefit | $ | (3,677) | | | $ | — | | | $ | — | |
| Income tax benefit | $ | (136) | | | $ | (79) | | | $ | (201) | |
Income tax benefit for the year ended December 31, 2021 was primarily related to a discount through payroll deductions, subject to plan limitations. Payroll deductions were accumulated during six-month offering periods. The purchase price for each share of common stock was 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 connectiontax benefit associated with the Company’s cost structure simplification efforts, future purchases throughAcquisition, partially offset by income tax expense for state jurisdictions that limit net operating loss utilization. Income tax benefit for the Company’s ESPP were suspended effective uponyear ended December 31, 2020 was primarily attributable to current state income taxes. Income tax benefit for the completion of the most recent offering period on May 10, 2019.
The Company’s employees purchased 163,970, 361,840 and 261,907 shares of common stock under the ESPP during the yearsyear ended December 31, 2019 2018was primarily attributable to 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 2017, respectively. As of December 31, 2019, 2018 and 2017, a total of 3,123,203income tax benefit is as follows:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Tax at federal statutory rate | $ | 3,873 | | | $ | (39,399) | | | $ | (6,499) | | | |
| State tax, net of federal tax benefit | 1,524 | | | (81) | | | (60) | | | |
| Stock-based compensation expense | (11,839) | | | 8,044 | | | 4,773 | | | |
| Research and development tax credits | (4,354) | | | (994) | | | (2,336) | | | |
| Change in valuation allowance | 7,867 | | | 29,728 | | | (802) | | | |
| Change in unrecognized tax benefit | 2,177 | | | 497 | | | 1,168 | | | |
| | | | | | | |
| Non-deductible expenses | 742 | | | 2,278 | | | 3,250 | | | |
| Other | (126) | | | (152) | | | 305 | | | |
| Income tax benefit | $ | (136) | | | $ | (79) | | | $ | (201) | | | |
| | | | | | | |
| | | | | | | |
, 2,307,400 and 1,739,199 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 was measured on the grant date using the Black-Scholes option pricing model. The compensation expense related to ESPP purchase rights was recognized on a straight-line basis over the six-month requisite service period. We used the following assumptions in estimating the fair value of the grants under the ESPP, which were 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 |
|
For the years ended December 31, 2018 and 2017, the dates of the assumptions were May 11, 2018 and November 11, 2018 and May 11, 2017 and November 11, 2017, respectively. There were no dates of assumption under the ESPP in 2019.
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. The total expense for the employer match for the years ended December 31, 2019, 2018 and 2017 was $4.5 million, $5.0 million and $4.4 million, 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 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)
17. Income Taxes
Loss before income tax expense (benefit) less income (loss) attributable to noncontrolling interests was $(30.9) million, $(128.3) million and $(153.2) million for the years ended December 31, 2019, 2018 and 2017, respectively. Income tax expense (benefit) consisted of the following for the periods shown below:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | (141 | ) | | $ | (57 | ) | | $ | 498 |
|
| State | (60 | ) | | 100 |
| | 134 |
|
| Total current tax expense (benefit) | $ | (201 | ) | | $ | 43 |
| | $ | 632 |
|
| | | | | | |
| Deferred: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | — |
| | — |
| | — |
|
| Total deferred tax expense (benefit) | $ | — |
| | $ | — |
| | $ | — |
|
| Income tax expense (benefit) | $ | (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)
The significant components of the Company’s deferred tax assets and liabilities
as of December 31, 2019 and 2018 were:
| | | | | | | | | | | |
| December 31, | 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating loss (NOL) carryforwards | $ | 144,510 | | | $ | 163,381 | |
| Allowance for loan and lease losses | 41,170 | | | — | |
| Stock-based compensation | 11,721 | | | 10,218 | |
| Reserves and accruals | 13,051 | | | 15,652 | |
| Operating lease liabilities | 25,807 | | | 28,032 | |
| Goodwill | 14,737 | | | 17,375 | |
| Intangible assets | — | | | 3,151 | |
| Tax credit carryforwards | 19,339 | | | 18,215 | |
| Other | 3,492 | | | 868 | |
| Total deferred tax assets | 273,827 | | | 256,892 | |
| Valuation allowance | (223,367) | | | (211,228) | |
| Deferred tax assets – net of valuation allowance | $ | 50,460 | | | $ | 45,664 | |
| | | |
| Deferred tax liabilities: | | | |
| Internally developed software | $ | (17,431) | | | $ | (16,956) | |
| Servicing fees | (2,452) | | | (2,780) | |
| | | |
| Operating lease assets | (21,614) | | | (22,048) | |
| Leases | (6,961) | | | — | |
| Intangible assets | (440) | | | — | |
| Change in tax method | — | | | (1,769) | |
| Other | (1,562) | | | (2,111) | |
| Total deferred tax liabilities | $ | (50,460) | | | $ | (45,664) | |
| Deferred tax asset (liability) – net | $ | — | | | $ | — | |
|
| | | | | | | |
| 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 | $ | — |
| | $ | — |
|
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, 20192021 and 2018,2020, the valuation allowance was $169.5$223.4 million and $169.3$211.2 million, respectively.
As of December 31, 2019,2021, the Company had federal and state net operating loss (NOL)NOL carryforwards (prior to the application of statutory tax rates) of approximately $397.3$464.8 million and $442.3$620.0 million. Federal and state NOLs of approximately $211.6 million respectively, to offset future taxable income. The federal and majority of state NOL carryforwards$36.8 million carry forward indefinitely and the remainder start expiring in 2026 and 2028,2025, respectively. Additionally, as of December 31, 2019,2021, the Company had federal and state research and development credit carryforwards of $16.3$21.7 million and $16.4$15.8 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, 2019, the Company also had other state tax credit carryforwards of $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, 2019, 2018 and 2017, is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Beginning balance | $ | 17,626 | | | $ | 15,998 | | | $ | 13,377 | |
| Gross increase for tax positions related to prior years | 1,272 | | | — | | | — | |
| Gross increase for tax positions related to the current year | 3,614 | | | 1,628 | | | 2,621 | |
| Ending balance | $ | 22,512 | | | $ | 17,626 | | | $ | 15,998 | |
|
| | | | | | | | | | | |
| 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 |
|
If the unrecognized tax benefit as of December 31, 20192021 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, 2019,2021, 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, 2019,2021, the Company’s federal tax returns for 20152017 and earlier, and the state tax returns for 20142016 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
Lessor Arrangements
The Company has operatinglessor arrangements which consist of sales-type leases for its headquarters in San Francisco, California, as well as additional office space for its origination and servicing operations inequipment (Equipment Finance). Such arrangements may include options to renew or to purchase the Salt Lake City area, Utah, and Westborough, Massachusetts. As of December 31, 2019,leased equipment at the lease agreements have remaining lease terms ranging from approximately two years to ten years. Someend of the lease agreements include options to extendterm. For 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 ofyear ended December 31, 2019,2021, interest earned on Equipment Finance was $10.8 million and is included in “Interest and fees on loans and leases held for investment” on the Company pledged $0.9 millionIncome Statement.
The components of cash and $5.5 million in lettersEquipment Finance assets are as follows:
| | | | | | | |
| December 31, | 2021 | | |
| Lease receivables | $ | 122,927 | | | |
| Unguaranteed residual asset values | 36,837 | | | |
| Unearned income | (10,989) | | | |
| Deferred fees | 380 | | | |
| Total | $ | 149,155 | | | |
Future minimum lease payments based on maturity of credit as security deposits in connection with its lease agreements.
Balance sheet informationthe Company’s lessor arrangements as of December 31, 2019 related to leases was2021 were as follows: |
| | | |
| ROU Assets and Lease Liabilities | December 31, 2019 |
| Operating lease assets | $ | 93,485 |
|
Operating lease liabilities (1) | $ | 112,344 |
|
| | | | | |
| 2022 | $ | 43,907 | |
| 2023 | 35,803 | |
| 2024 | 27,374 | |
| 2025 | 16,235 | |
| 2026 | 9,084 | |
| Thereafter | 4,382 | |
| Total lease payments | $ | 136,785 | |
| Discount effect | (13,858) | |
| Present value of future minimum lease payments | $ | 122,927 | |
| |
| 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)
Lessee Arrangements
The Company has operating leases for its headquarters in San Francisco, California, as well as additional office space in the Salt Lake City, Utah, and Boston, Massachusetts areas. As of December 31, 2021, the lease agreements have remaining lease terms ranging from approximately one year to nine years. Some of the lease agreements include options to extend the lease term for up to an additional fifteen years. In addition, the Company is the sublessor of a portion of its office space in San Francisco, with remaining lease terms of less than one year. As of December 31, 2021, 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.
The Company reviewed operating lease right-of-use (ROU) assets for impairment. For the year ended December 31, 2021, the Company recognized an impairment expense of $1.0 million on operating lease assets, included in “Occupancy expense.” For the year ended December 31, 2020, the Company recognized an impairment expense of $3.6 million on operating lease assets.
Balance sheet information related to leases was as follows:
| | | | | | | | | | | | | |
| ROU Assets and Lease Liabilities | Balance Sheet Classification | December 31, 2021 | December 31, 2020 | | |
| Operating lease assets | Other assets | $ | 77,316 | | $ | 74,037 | | | |
Operating lease liabilities (1) | Other liabilities | $ | 91,588 | | $ | 94,538 | | | |
(1) The difference between operating lease assets and operating lease liabilities is the unamortized balance of deferred rent.
Components of net lease costs were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Net Lease Costs | Income Statement Classification | 2021 | | 2020 | | 2019 |
Operating lease costs (1) | Occupancy | $ | (18,773) | | $ | (17,346) | | $ | (19,502) |
| Sublease revenue | Other non-interest income | 6,149 | | | 6,146 | | | 4,637 | |
| Net lease costs | | $ | (12,624) | | | $ | (11,200) | | | $ | (14,865) | |
(1) Includes variable lease costs of $1.3 million, $1.5 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, 2018 and 2017, were as follows:respectively.
|
| | | | | | | | | | | | |
| | 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, | 2021 | 2020 | 2019 | | |
| Non-cash operating activity: | | | | | |
Leased assets obtained in exchange for new and amended operating lease liabilities (1) | $ | 12,914 | | $ | 84 | | $ | 15,277 | | | |
(1) Represents non-cash activity and, accordingly, is not reflected on the Consolidated Statements of Cash Flows. Amount includes noncash remeasurements of the operating lease ROU asset.
|
| | | |
| Year Ended December 31, | 2019 |
| Non-cash operating activity: | |
Leased assets obtained in exchange for new operating lease liabilities (1) | $ | 15,277 |
|
| |
(1)LENDINGCLUB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted) | 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, 20192021 were as follows:
| | | | | | | | | | | | | | | | | |
| Operating Lease
Payments | | Sublease
Revenue | | Net |
| 2022 | $ | 15,947 | | | $ | (2,918) | | | $ | 13,029 | |
| 2023 | 12,465 | | | — | | | 12,465 | |
| 2024 | 12,810 | | | — | | | 12,810 | |
| 2025 | 13,163 | | | — | | | 13,163 | |
| 2026 | 13,375 | | | — | | | 13,375 | |
| Thereafter | 48,975 | | | — | | | 48,975 | |
| Total lease payments | $ | 116,735 | | | $ | (2,918) | | | $ | 113,817 | |
| Discount effect | 25,147 | | | | | |
| Present value of future minimum lease payments | $ | 91,588 | | | | | |
|
| | | | | | | | | | | |
| | 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, 20192021 | | | | |
| Weighted-average remaining lease term (in years) | 9.678.43 |
| | | |
| Weighted-average discount rate | 5.755.42 | % | | | | |
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
For discussion regarding the Company’s operating lease commitments, see “Note 18. Leases.”
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 for 2 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, 2019 and 2018, the Company was committed to purchase loans with an outstanding principal balance of $91.3 million and $55.9 million at par, respectively.
Loan Repurchase Obligations
The Company is generally required to repurchase loans or interests therein in the event of identity theft or certain other types of fraud on the part of the borrower or education and patient service providers. The Company may also repurchase loans or interests therein in connection with certain customer accommodations. In connection with certain whole loan and Certificate 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 arewere breached under certain circumstances. In the case of certain securitization transactions, the Company has also agreed to repurchase or substitute loans for which a borrower failsfailed 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 or interests therein at par.
As a result of the loan repurchase obligations, described above, the Company repurchased $5.5$1.0 million, $4.0$3.3 million and $2.2$5.5 million in loans or interests therein during 2019, 20182021, 2020 and 20172019 respectively.
PurchaseUnfunded Loan Commitments
As required by applicable regulations, the Company must make firm offers of credit with respect to prescreened direct mail it 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 funded by investors on the 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 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, 2019, were substantially funded in January 2020. As2021, the contractual amount of unfunded loan commitments was $110.8 million. See “Note 6. Loans and Leases Held for Investment, Net of Allowance For Loan and Lease Losses” for additional detail related to the date of this Report, 0 loans remained without investor commitments and the Company was not required to purchase any of these loans.reserve for unfunded lending commitments.
In addition, if neither the Company nor Springstone 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, 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, 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. During the year ended December 31, 2019, the Company was required to purchase $45.3 million of loans facilitated by Springstone. These purchased loans are held on the Company’s Consolidated Balance Sheets and have a fair value of $45.7 million and $26.6 million as of December 31, 2019 and 2018, respectively. The Company believes it will be required to purchase additional loans facilitated by Springstone in 2020 as it seeks to arrange for other investors to invest in or purchase these loans.
Legal
The Company is subject to various claims brought in a litigation or regulatory context. These matters include lawsuits, and federal regulatory actions, including but not limited to, putative class action lawsuits derivative lawsuits, and litigation with the FTC. In addition, the Company continues to cooperate in federal and state regulatory examinations, investigations, and actions relating to the Company’s business practices and licensing, and is a party to a number of routine litigation matters arising in the ordinary course of business. In addition, the Company, and its business practices and compliance with licensing and other regulatory requirements, is subject to periodic exams, investigations, inquiries or requests, enforcement actions and other proceedings from federal and state regulatory agencies, including from the federal banking regulators that directly regulate the Company and/or LC Bank. 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 or consumer complaints. The Company accrues for costs related to contingencies when a loss from such claims is probable and the amount of loss can be reasonably estimated. In determining whether a loss from a claim is probable and 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 reasonably 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.
Derivative Lawsuits
In May 2016
The Company is and August 2016, respectively, 2 putative shareholder derivativehas been subject to periodic inquiries and enforcement actions were filed (Avila v. Laplanche, et al., No. CIV538758brought 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 and the regulatory framework applicable to its business.
Dua v. Laplanche, et al., CGC-16-553731) against
The Company is routinely subject to examination for compliance with applicable laws and regulations in the states in which it is licensed. The Company is subject to examination by the New York Department of Financial Services (NYDFS) and other regulators. The Company periodically has discussions with various regulatory agencies regarding its business model and has engaged in similar discussions with the NYDFS. During the course of such discussions with the NYDFS, which remain ongoing, the Company decided to voluntarily comply with certain rules and regulations of the Company’s current and former officers and directors and namingNYDFS while it was not a bank holding company operating a national bank.
In the past, the Company ashas successfully resolved such matters in a nominal defendant. Both actions were voluntarily dismissed without prejudice. On December 14, 2016, another putative shareholder derivative actionmanner that was filednot material to its results of financial operations in the Delaware Court of Chancery (Steinberg, et al. v. Morris, et al., C.A. No. 12984-CB), against certain ofany period and that did not materially limit the Company’s current and former officers and directors and naming the Companyability to conduct its business. However, no assurances can be given 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 al. v. Laplanche, et al., C.A. No. 2017-0600). These matters arise from claims that the Board allegedly breached its fiduciary duty by failing to provide adequate oversight over the Company’s practices and procedures, and purport to plead derivative claims under Delaware law. The Court ultimately consolidated the cases, selecting the Steinberg plaintiffs as lead plaintiffs, and designating the Steinberg complaint as the operative complaint (consolidated Delaware matter). In June 2018, the Company and the individual defendants brought 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 filingtiming, outcome or consequences 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 motions 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 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, another 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,matters or other similar matters if 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
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
delivering its privacy notice. In June 2018,Following the Company broughtCourt’s ruling on a motion to dismiss filed by 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,Company, the FTC filed an amended complaint on October 22, 2018, 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 filedFollowing a motion seekingby the FTC 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,
On February 27, 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,both the Company and the FTC have participated in voluntary settlement conferencesfiled various motions with the Court, including motions to exclude expert testimony and may engage in additional settlement discussions. No assurances can be givenmotions for summary judgment as to some or all of the timing, outcome or consequencesclaims in the case. The FTC also filed a motion for partial judgment on the pleadings in the case. These motions were heard by the Court on April 27, 2020. On June 1, 2020, the Court issued an order granting in part and denying in part both the Company’s and the FTC’s motions for summary judgment. The Court also denied the motions to exclude expert testimony and granted in part and denied in part the FTC’s motion for partial judgment on the pleadings. The FTC’s Gramm-Leach-Bliley Act claim has been dismissed from the case, but issues relating to the FTC’s three other claims will need to be tried. On July 30, 2020, the Company filed a motion to stay the litigation pending the U.S. Supreme Court’s decisions in two cases (F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C.) that raise the issue whether the FTC is entitled to seek monetary relief under Section 13(b) of the FTC Act. On August 20, 2020, the Court issued an order granting the Company’s motion to stay proceedings in the case until the U.S. Supreme Court issues its decision in the Credit Bureau Center and AMG Capital Management cases. As a result of this matter.order, the trial that was scheduled for October 19, 2020 will need to be rescheduled at a later date following the Supreme Court’s ruling. The Supreme Court has vacated its prior grant of review in the Credit Bureau Center case but heard oral argument in the AMG Capital Management case on January 13, 2021. The impact of the Supreme Court decision could impact the Company’s case which is why the trial was stayed pending the Supreme Court decision. On April 22, 2021, the Supreme Court ruled in favor of AMG Capital Management ordering that the FTC does not currently have the authority to obtain equitable monetary relief under the statute that is also applicable in the Company’s matter with the FTC. On July 14, 2021, the Company entered into an agreement with the FTC to conclude the FTC’s investigation and litigation (the Settlement). Pursuant to the terms of the Settlement, LendingClub made an $18 million payment for consumer remediation. The Settlement does not include any admission of liability, and LendingClub does not expect that the Settlement will impact its current operations. On July 19, 2021, the Court approved the Settlement and this matter is now concluded.
Class Action LawsuitsLawsuit Following Announcement of FTC Litigation
In May 2018, following the announcement of litigation by the FTC’s litigationFTC 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.et. al., No. 5:18-cv-02599) against the Company and certain of its current and former officers and 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. On January 7, 2019, the lead plaintiffs filed a consolidated amended class action complaint which asserted the same causes of action as the original complaint and added additional allegations. That complaint was subsequently dismissed by the District Court with leave to amend. The lead plaintiffs filed a Second Amended Complaint on December 19, 2019, which modified and added certain allegations and dropped one of the former officer defendants as a defendant in the case, but otherwise advanced the same causes of action. On June 12, 2020, the District Court issued an order granting a motion to dismiss by the defendants without leave to amend, in part, and with leave to amend, in part. On July 27, 2020, the lead plaintiffs filed a notice with the District Court indicating their intention not to file a Third Amended Complaint and requesting that the District Court enter judgment. The District Court entered judgment and dismissed all claims in the case the same day. The lead plaintiffs appealed the judgment to the U.S. Court of Appeals for the Ninth Circuit (Veal et al. v. LendingClub Corporation, et al., No. 20-16603). The Court of Appeals held oral arguments for the appeal on September 2, 2021. On September 21, 2021, the Court of Appeals affirmed the District Court’s dismissal of all claims against the defendants and the period for the U.S. Supreme Court to grant certiorari expired in December 2021.Accordingly, this matter is now concluded.
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 that the individuals breached their fiduciary duties to the 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 filings. In January 2019, a second putative shareholder derivative action was filed in the U.S. District Court for the Northern District of California (Cheekatamarla v. Sanborn, et al., No. 3:19-cv-00563) against certain of the Company’s current officers and directors and naming 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 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 filings. Pursuant to a stipulation by the parties 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 lift the temporary stay and the Court issued an order lifting the stay. Subsequent to this order, the case was reassigned and the new Court issued an order staying the consolidated action pending resolution of the Veal action. No assurances can be given as to the timing, outcome or consequences of 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 timing, outcome or consequences of this matter.
Regulatory Investigation 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 cooperating 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 raised concerns pertaining to the Company’s compliance with the Massachusetts Small Loan Law similar to those the 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 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.
The Company has had discussions with the Colorado Department of Law (CDL) concerning the licenses required for the Company’s servicing operations and the structure of its 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 assurances can be given as to the timing, outcome or consequences of this 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 the date of this Report, the Company is subject to examination 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 NYDFS. 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 motion 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 parties are working to finalize a written settlement agreement. The Company denies and will vigorously defend against the allegations in the event the litigation continues. No assurances can be given as to the timing, outcome or consequences of this matter.
In February 2020, a putative class action lawsuit was filed against the Company in the U.SU.S. District Court for the Northern District of California (Erceg v. LendingClub Corporation, No. 3:4:20-cv-01153). The lawsuit alleges violations of California and Massachusetts law based on allegations that LendingClubthe Company 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 LendingClubthe Company without their knowledge and consent. LendingClub has not yetThe Company filed a formal responsemotion to plaintiff'sdismiss certain of plaintiff’s claims, strike nationwide class allegations, and, alternatively, to stay the litigation. Rather than oppose that motion, plaintiff filed an amended complaint. The Company again filed a motion to stay, or alternatively to dismiss certain of the claims in the amended complaint and to strike nationwide class allegations. That motion was heard by the Court on July 9, 2020. On July 28, 2020, the Court entered an order granting the Company’s motion to stay plaintiff’s California claims pending a decision by the California Supreme Court in a case involving the California Invasion of Privacy Act (Smith v. LoanMe, Inc.), dismissing with prejudice plaintiff’s claim under Massachusetts law, and denying the Company’s motion to strike plaintiff’s nationwide class allegations. In April 2021, the California Supreme Court issued a decision in the LoanMe case in a manner that permits plaintiff’s claims in the Company’s case to continue. The Company then filed its answer to plaintiff’s complaint and discovery began. The parties have since reached a tentative settlement, the terms of which are not material to the Company. No assurances can be given as to the timing, outcome or consequences of this matter.
California Private Attorneys General Lawsuit
In September 2018,February 2021, a putative class action under the California Private Attorney General Actlawsuit was broughtfiled against the Company in the California SuperiorU.S. District Court for the Southern District of Texas (BrottBradford v. LendingClubLending Club Corporation et al., CGC-18-570047) alleging violationsNo. 4:21-cv-00588). The lawsuit asserts a cause of action under the California Labor Code. The complaint by a former employee allegesFair Credit Reporting Act (FCRA) based on allegations that the Company improperly failed to pay certain hourly employees for all wages owed, pay the correct rate of pay including overtime,obtained plaintiff’s credit report without his consent or authorization and provide accurate wage statements. The lawsuit alleges that the plaintiff and aggrieved employees are entitled to recover civil penaltieswithout a permissible purpose under the California Labor Code. On January 11, 2019,FCRA. Plaintiff seeks to represent a class of allegedly similarly situated persons in the case and seeks monetary, injunctive, and declaratory relief, among other relief. Plaintiff has amended the complaint to assert additional allegations regarding the Company’s purported requests for plaintiff’s credit report from another credit reporting agency. The Company has since filed a petitionits answer to compel arbitration of the plaintiff’s claimscomplaint and stay the litigation pending a ruling on the motion and arbitration of the matter. Pursuantdiscovery has begun. The Court has scheduled this matter for trial in September 2022. No assurances can be given as 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 resolutiontiming, outcome or consequences 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 seek the Court’s approval of the negotiated resolution.matter.
Certain Financial Considerations Relating to Litigation and Investigations
With respect to the matters discussed above, theThe Company had $16.0$2.5 million and $12.8$21.6 million in accrued contingent liabilities as of December 31, 20192021 and 2018,2020, respectively. The increasedecrease in accrued contingent liabilities as of December 31, 2019 compared to December 31, 2018 was primarily relateddue to litigation and regulatory matters of $3.3the $18 million during 2019, which is includedsettlement with the FTC in “Other general and administrative” expense on the 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 consequences of any of these matters.
20. Regulatory Requirements
LendingClub and LC Bank are subject to comprehensive supervision, examination and enforcement, and regulation by the FRB and the Office of the Comptroller of the Currency (OCC), including generally similar capital adequacy requirements adopted by the FRB and the OCC, respectively. These requirements establish required minimum ratios for Common Equity Tier 1 (CET1) risk-based capital, Tier 1 risk-based capital, total risk-based capital and a Tier 1 leverage ratio; set risk-weighting for assets and certain other items for purposes of the risk-based capital ratios; and define what qualifies as capital for purposes of meeting the capital requirements. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The minimum capital requirements under the Basel Committee on Banking Supervision standardized approach for U.S. banking organizations (U.S. Basel III) capital framework are: a CET1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%. Additionally, a Capital Conservation Buffer (CCB) of 2.5% must be maintained above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases, and certain discretionary bonus payments. In addition to these guidelines, the regulators assess any particular institution’s capital adequacy based on numerous factors and may require a particular banking organization to maintain capital at levels higher than the generally applicable minimums prescribed under the U.S. Basel III capital framework. In this regard, and unless otherwise directed by the FRB and the OCC, we have made commitments for the Company and LC Bank (until February 2024) to maintain a CET1 risk-based capital ratio of 11.0%, a Tier 1 risk-based capital ratio above 11.0%, a total risk-based capital ratio above 13.0%, and a Tier 1 leverage ratio of 11.0%.
The following table summarizes LC Bank’s regulatory capital amounts and ratios (in millions):
| | | | | | | | | | | | | | | | | | | |
| LendingClub Bank | | Required Minimum plus Required CCB for Non-Leverage Ratios | | |
| December 31, 2021 | Amount | | Ratio | | |
CET1 capital (1) | $ | 523.7 | | | 16.7 | % | | 7.0 | % | | |
| Tier 1 capital | $ | 523.7 | | | 16.7 | % | | 8.5 | % | | |
| Total capital | $ | 563.7 | | | 18.0 | % | | 10.5 | % | | |
| Tier 1 leverage | $ | 523.7 | | | 14.3 | % | | 4.0 | % | | |
| Risk-weighted assets | $ | 3,130.4 | | | N/A | | N/A | | |
| Quarterly adjusted average assets | $ | 3,667.7 | | | N/A | | N/A | | |
N/A – Not applicable
(1) Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.
The following table presents the regulatory capital and ratios of the Company (in millions):
| | | | | | | | | | | | | | | | | | | |
| LendingClub | | Required Minimum plus Required CCB for Non-Leverage Ratios | | |
| December 31, 2021 | Amount | | Ratio | | |
CET1 capital (1) | $ | 710.0 | | | 21.3 | % | | 7.0 | % | | |
| Tier 1 capital | $ | 710.0 | | | 21.3 | % | | 8.5 | % | | |
| Total capital | $ | 767.9 | | | 23.0 | % | | 10.5 | % | | |
| Tier 1 leverage | $ | 710.0 | | | 16.5 | % | | 4.0 | % | | |
| Risk-weighted assets | $ | 3,333.2 | | | N/A | | N/A | | |
| Quarterly adjusted average assets | $ | 4,301.7 | | | N/A | | N/A | | |
N/A – Not applicable
(1) Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.
In response to the COVID-19 pandemic, the FRB, OCC, and FDIC adopted a final rule related to the regulatory capital treatment of the allowance for credit losses under CECL. As permitted by the rule, the Company elected to delay the estimated impact of CECL on regulatory capital through 2021. As a result, a capital benefit of $35.5 million was included in the computation of the Company’s CET1 capital at December 31, 2021. Beginning on January 1, 2022, this benefit will be phased out over a three-year transition period at a rate of 25% each year through January 1, 2025.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
The Federal Deposit Insurance Act provides for a system of “prompt corrective action” (PCA). The PCA regime provides for capitalization categories ranging from “well-capitalized” to “critically undercapitalized.” An institution’s PCA category is determined primarily by its regulatory capital ratios. The PCA requires remedial actions and imposes limitations that become increasingly stringent as its PCA capitalization category declines, including the ability to accept and/or rollover brokered deposits. At December 31, 2021, the Company’s and LC Bank’s regulatory capital ratios exceeded the thresholds required to be regarded as well-capitalized institutions and met all capital adequacy requirements to which they are subject. There have been no events or conditions since December 31, 2021 that management believes would change the Company’s categorization.
Federal laws and regulations limit the dividends that a national bank may pay. Dividends that may be paid by a national bank without the express approval of the OCC are limited to that bank’s retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the OCC, consist of net income less dividends declared during the period. Additionally, under the OCC Operating Agreement, LC Bank is required to obtain a written determination of non-objection from the OCC before declaring any dividend. No dividends were declared by LC Bank in 2021.
Federal law restricts the amount and the terms of both credit and non-credit transactions between a bank and its nonbank affiliates. These covered transactions may not exceed 10% of the bank’s capital and surplus (which for this purpose represents tier 1 and tier 2 capital, as calculated under the risk-based capital rules, plus the balance of the ACL excluded from tier 2 capital) with any single nonbank affiliate and 20% of the bank’s capital and surplus with all its nonbank affiliates. Covered transactions that are extensions of credit may require collateral to be pledged to provide added security to the bank.
21. Other Non-interest Income and Other Non-interest Expense
Other non-interest income consists of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Referral revenue | $ | 14,234 | | | $ | 5,011 | | | $ | 5,474 | |
| Realized losses on sales of securities available for sale and other investments | (93) | | | 11 | | | (8) | |
| Other | 13,078 | | | 8,420 | | | 8,365 | |
| Total other non-interest income | $ | 27,219 | | | $ | 13,442 | | | $ | 13,831 | |
Other non-interest expense consists of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Consumer credit services | $ | 16,214 | | | $ | 13,229 | | | $ | 26,707 | |
| Other | 45,044 | | | 34,533 | | | 37,370 | |
| Total other non-interest expense | $ | 61,258 | | | $ | 47,762 | | | $ | 64,077 | |
22. 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 chief executive management committee asofficer and chief operating decision maker (CODM). For purposes of allocatingfinancial officer to allocate resources and evaluatingevaluate financial performance,performance. This information is reviewed according to the legal organizational structure of the Company’s CODM reviews financial information by loan product types of personal, educationoperations with products and patient finance,services presented separately for the parent bank holding company and auto. These product typesits wholly-owned subsidiary, LC Bank. Taxes are individually reviewed as operating segments but are aggregated to represent 1 reportable segment because the education and patient finance 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 businessrecorded on a separate entity basis whereby each operating segment determines income tax expense or benefit as if it filed a separate tax return. Differences between separate entity and announced that it will connect applicants lookingconsolidated tax returns are eliminated upon consolidation.
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
LendingClub Bank
The LC Bank operating segment represents the national bank legal entity and reflects post-Acquisition operating activities. This segment provides a full complement of financial products and solutions, including loans, leases and deposits. It originates loans to individuals and businesses, retains loans for a small business loaninvestment, sells loans to investors and manages relationships with strategic partners and earn referral fees, instead of facilitating these loans on its platform.deposit holders.
All 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.
LendingClub Corporation (Parent Only) 21. Related Party Transactions
Related party transactions must be reviewedThe LendingClub Corporation (parent only) operating segment represents the holding company legal entity and approved bypredominately reflects the Audit Committeeoperations of the Company’s board of directors when not conducted in the ordinary course of business subjectCompany prior to the standard terms of the Company’s lending marketplace or certificate investment program. Any material amendment or modification to an existing related party transactionAcquisition. This activity includes, but is also subjectnot limited to, the reviewpurchase and approvalsale 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 beginningloans and issuances 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 stockeducation 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.
Several of the Company’s executive officers and directors (including immediate family members) have made deposits and withdrawals to their investor accounts and purchasedpatient finance loans or 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 obtainedoriginated by similarly situated third-party investors.
As of December 31, 2019, the Company had a $7.7 million investment and an approximate 23% ownership interest in an Investment Fund, a private fund that participates in a family of funds with other unrelated third parties. 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. The Company’s investment in the Investment Fund is recorded in “Other assets” on the Company’s Consolidated Balance Sheets.
During 2019, 2018 and 2017, the family of funds purchased $77 thousand, $6.6 million and $53.3 million, respectively, of 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 $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 onFinancial information for the funds’ interests in whole loans, respectively. The Company believes that the investor fees charged were on terms and conditions that were not more favorable than those obtained by other third-party investors.
22. Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to December 31, 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 no additional subsequent events were required to be recognized or disclosed.
On February 18, 2020, the Company and Radius Bancorp, Inc. (Radius) entered into 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 millionsegments 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 Share Exchange Agreement pursuant to which Shanda will exchange 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 positionspresented 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. The Company is evaluating the impact the Exchange will have on its consolidated financial statements.following table:
23. Quarterly Results of Operations (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LendingClub
Bank | | LendingClub
Corporation
(Parent only) | | Intercompany
Eliminations | | Consolidated Total |
| Eleven Months Ended December 31, | | Year Ended December 31, | | Eleven Months Ended December 31, | | Year Ended December 31, |
| 2021 | | 2021 | | 2020 | | 2019 | | 2021 | | 2021 | | 2020 | | 2019 |
| Non-interest income: | | | | | | | | | | | | | | | |
| Marketplace revenue | $ | 462,821 | | | $ | 115,759 | | | $ | 245,314 | | | $ | 646,735 | | | $ | — | | | $ | 578,580 | | | $ | 245,314 | | | $ | 646,735 | |
| Other non-interest income | 94,953 | | | 16,718 | | | 13,442 | | | 13,831 | | | (84,452) | | | 27,219 | | | 13,442 | | | 13,831 | |
| Total non-interest income | 557,774 | | | 132,477 | | | 258,756 | | | 660,566 | | | (84,452) | | | 605,799 | | | 258,756 | | | 660,566 | |
| | | | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | | | | |
| Interest income | 210,739 | | | 82,093 | | | 209,694 | | | 345,345 | | | — | | | 292,832 | | | 209,694 | | | 345,345 | |
| Interest expense | (8,412) | | | (71,589) | | | (150,366) | | | (247,304) | | | — | | | (80,001) | | | (150,366) | | | (247,304) | |
| Net interest income | 202,327 | | | 10,504 | | | 59,328 | | | 98,041 | | | — | | | 212,831 | | | 59,328 | | | 98,041 | |
| | | | | | | | | | | | | | | |
| Total net revenue | 760,101 | | | 142,981 | | | 318,084 | | | 758,607 | | | (84,452) | | | 818,630 | | | 318,084 | | | 758,607 | |
| | | | | | | | | | | | | | | |
| Reversal of (provision for) credit losses | (142,182) | | | 3,382 | | | (3,382) | | | — | | | — | | | (138,800) | | | (3,382) | | | — | |
| Non-interest expense | (547,799) | | | (198,039) | | | (502,319) | | | (789,498) | | | 84,452 | | | (661,386) | | | (502,319) | | | (789,498) | |
| Income (Loss) before income tax benefit (expense) | 70,120 | | | (51,676) | | | (187,617) | | | (30,891) | | | — | | | 18,444 | | | (187,617) | | | (30,891) | |
| Income tax benefit (expense) | 9,171 | | | 44,013 | | | 79 | | | 201 | | | (53,048) | | | 136 | | | 79 | | | 201 | |
| Consolidated net income (loss) | $ | 79,291 | | | $ | (7,663) | | | $ | (187,538) | | | $ | (30,690) | | | $ | (53,048) | | | $ | 18,580 | | | $ | (187,538) | | | $ | (30,690) | |
| Capital expenditures | $ | 32,602 | | | $ | 1,811 | | | $ | 31,147 | | | $ | 50,668 | | | $ | — | | | $ | 34,413 | | | $ | 31,147 | | | $ | 50,668 | |
| Depreciation and amortization | $ | 4,569 | | | $ | 39,716 | | | $ | 54,030 | | | $ | 59,152 | | | $ | — | | | $ | 44,285 | | | $ | 54,030 | | | $ | 59,152 | |
The following table sets forth our unaudited Consolidated Statements of Operations data for each of the eight quarters ended December 31, 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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LendingClub Bank | | LendingClub Corporation
(Parent only) | | Intercompany
Eliminations | | Consolidated Total |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 |
| Assets | | | | | | | | | | | | | | | |
| Total cash and cash equivalents | $ | 659,919 | | | $ | — | | | $ | 88,268 | | | $ | 524,963 | | | $ | (61,061) | | | $ | — | | | $ | 687,126 | | | $ | 524,963 | |
| Restricted cash | — | | | — | | | 76,540 | | | 103,522 | | | (80) | | | — | | | 76,460 | | | 103,522 | |
| Securities available for sale at fair value | 205,730 | | | — | | | 57,800 | | | 142,226 | | | — | | | — | | | 263,530 | | | 142,226 | |
| Loans held for sale | 335,449 | | | — | | | 55,799 | | | 121,902 | | | — | | | — | | | 391,248 | | | 121,902 | |
| Loans and leases held for investment, net | 2,754,737 | | | — | | | — | | | — | | | — | | | — | | | 2,754,737 | | | — | |
| Retail and certificate loans held for investment at fair value | — | | | — | | | 229,719 | | | 636,686 | | | — | | | — | | | 229,719 | | | 636,686 | |
| Other loans held for investment at fair value | — | | | — | | | 21,240 | | | 49,954 | | | — | | | — | | | 21,240 | | | 49,954 | |
| Property, equipment and software, net | 36,424 | | | — | | | 61,572 | | | 96,641 | | | — | | | — | | | 97,996 | | | 96,641 | |
| Investment in subsidiary | — | | | — | | | 557,577 | | | — | | | (557,577) | | | — | | | — | | | — | |
| Goodwill | 75,717 | | | — | | | — | | | — | | | — | | | — | | | 75,717 | | | — | |
| Other assets | 254,075 | | | — | | | 168,042 | | | 187,399 | | | (119,571) | | | — | | | 302,546 | | | 187,399 | |
| Total assets | 4,322,051 | | | — | | | 1,316,557 | | | 1,863,293 | | | (738,289) | | | — | | | 4,900,319 | | | 1,863,293 | |
| Liabilities and Equity | | | | | | | | | | | | | | | |
| Total deposits | 3,196,929 | | | — | | | — | | | — | | | (61,141) | | | — | | | 3,135,788 | | | — | |
| Short-term borrowings | 165 | | | — | | | 27,615 | | | 104,989 | | | — | | | — | | | 27,780 | | | 104,989 | |
| Advances from PPPLF | 271,933 | | | — | | | — | | | — | | | — | | | — | | | 271,933 | | | — | |
| Retail notes, certificates and secured borrowings at fair value | — | | | — | | | 229,719 | | | 636,774 | | | — | | | — | | | 229,719 | | | 636,774 | |
| Payable on Structured Program borrowings | — | | | — | | | 65,451 | | | 152,808 | | | — | | | — | | | 65,451 | | | 152,808 | |
| Other long-term debt | — | | | — | | | 15,455 | | | — | | | — | | | — | | | 15,455 | | | — | |
| Other liabilities | 218,775 | | | — | | | 150,727 | | | 244,551 | | | (65,551) | | | — | | | 303,951 | | | 244,551 | |
| Total liabilities | 3,687,802 | | | — | | | 488,967 | | | 1,139,122 | | | (126,692) | | | — | | | 4,050,077 | | | 1,139,122 | |
| Total equity | 634,249 | | | — | | | 827,590 | | | 724,171 | | | (611,597) | | | — | | | 850,242 | | | 724,171 | |
| Total liabilities and equity | $ | 4,322,051 | | | $ | — | | | $ | 1,316,557 | | | $ | 1,863,293 | | | $ | (738,289) | | | $ | — | | | $ | 4,900,319 | | | $ | 1,863,293 | |
|
| | | | | | | | | | | | | | | |
| 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)
| See “Note 1. Basis of Presentation” for additional information.
|
| |
(2)
| 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)
23. LendingClub Corporation – Parent Company-Only Financial Statements
Upon the Acquisition in 2021, the Company became a bank holding company and formed LC Bank. Prior to the Acquisition, the consolidated financial results of the Company were the LendingClub Corporation (Parent Company) financial results. See “Item 8. Financial Statements and Supplementary Data – Consolidated Financial Statements of LendingClub Corporation” for the 2020 and 2019 comparative results. Investment in the LC Bank subsidiary is accounted for by the Parent Company using the equity method for this presentation. Results of operations of the Parent Company’s bank subsidiary is therefore classified in the Parent Company’s investment in subsidiary account. VIEs in which the Parent Company is the primary beneficiary are included in the Parent Company-only financial statements.
Statement of Operations | | | | | | | | | |
| Year Ended December 31, | 2021 | | | | |
| Non-interest income: | | | | | |
| Marketplace revenue | $ | 115,759 | | | | | |
| Other non-interest income | 16,718 | | | | | |
| Total non-interest income | 132,477 | | | | | |
| | | | | |
| Interest income: | | | | | |
| Interest on loans held for sale at fair value | 11,025 | | | | | |
| Interest on retail and certificate loans held for investment at fair value | 57,684 | | | | | |
| Interest on other loans held for investment at fair value | 4,436 | | | | | |
| Interest on securities available for sale | 8,922 | | | | | |
| Other interest income | 26 | | | | | |
| Total interest income | 82,093 | | | | | |
| | | | | |
| Interest expense: | | | | | |
| Interest on short-term borrowings | 3,676 | | | | | |
| Interest on retail notes, certificates and secured borrowings | 57,684 | | | | | |
| Interest on Structured Program borrowings | 9,638 | | | | | |
| Interest on other long-term debt | 591 | | | | | |
| Total interest expense | 71,589 | | | | | |
| | | | | |
| Net interest income | 10,504 | | | | | |
| | | | | |
| Total net revenue | 142,981 | | | | | |
| | | | | |
| Reversal of credit losses | (3,382) | | | | | |
| | | | | |
| Non-interest expense: | | | | | |
| Compensation and benefits | 31,010 | | | | | |
| Marketing | 5,460 | | | | | |
| Equipment and software | 2,459 | | | | | |
| Occupancy | 17,751 | | | | | |
| Depreciation and amortization | 39,716 | | | | | |
| Professional services | 14,666 | | | | | |
| Other non-interest expense | 86,977 | | | | | |
| Total non-interest expense | 198,039 | | | | | |
| | | | | |
| Loss before income tax benefit | (51,676) | | | | | |
| Income tax benefit | 44,013 | | | | | |
| Loss before undistributed earnings of subsidiary | (7,663) | | | | | |
| Equity in undistributed earnings of subsidiary | 79,291 | | | | | |
| Net income | $ | 71,628 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 | ) |
134
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
In accordance with federal laws and regulations, dividends paid by LC Bank to the Company are subject to certain restrictions. See “Note 20. Regulatory Requirements” for more information.
Statement of Comprehensive Income
| | | | | |
| Year Ended December 31, | 2021 |
| Net income | $ | 71,628 | |
| Other comprehensive income, net of tax: | |
| Net unrealized gain on securities available for sale | 9,153 | |
| Equity in other comprehensive loss of subsidiary | (2,619) | |
| Other comprehensive income, net of tax | 6,534 | |
| Total comprehensive income | $ | 78,162 | |
Balance Sheet
| | | | | | | |
| December 31, | 2021 | | |
| Assets | | | |
| Cash and due from banks | $ | 58,284 | | | |
| Interest-bearing deposits in banks | 29,984 | | | |
| Total cash and cash equivalents | 88,268 | | | |
| Restricted cash | 76,540 | | | |
| Securities available for sale at fair value ($47,225 at amortized cost) | 57,800 | | | |
| Loans held for sale at fair value | 55,799 | | | |
| Retail and certificate loans held for investment at fair value | 229,719 | | | |
| Other loans held for investment at fair value | 21,240 | | | |
| Property, equipment and software, net | 61,572 | | | |
| Investment in subsidiary | 634,249 | | | |
| Other assets | 168,042 | | | |
| Total assets | $ | 1,393,229 | | | |
| Liabilities and Equity | | | |
| Short-term borrowings | 27,615 | | | |
| Retail notes, certificates and secured borrowings at fair value | 229,719 | | | |
| Payable on Structured Program borrowings | 65,451 | | | |
| Other long-term debt | 15,455 | | | |
| Other liabilities | 150,727 | | | |
| Total liabilities | 488,967 | | | |
| Equity | | | |
| | | |
| Common stock, $0.01 par value; 180,000,000 shares authorized; 101,043,924 shares issued and outstanding | 1,010 | | | |
(1)Additional paid-in capital
| See “1,609,820 Note 1. Basis of Presentation” for additional information.
|
| | |
(2)Accumulated deficit
| Loan originations include loans facilitated through the platform plus outstanding purchase commitments at period end. See “(714,586)Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Operating and Financial Metrics” for additional information.
|
| | |
(3)Accumulated other comprehensive income
| All share8,018
| | | |
| Total equity | 904,262 | | | |
Total liabilities and per share information has been retroactively adjusted to reflect a reverse stock split. See “equity | Note 4. Net Loss Per Share$ | ” for additional information.1,393,229 | | | |
LENDINGCLUB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
Statement of Cash Flows
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| Year Ended December 31, | 2021 | | | | |
| Cash Flows from Operating Activities: | | | | | |
| Parent company net income | $ | 71,628 | | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Equity in undistributed earnings of subsidiary | (79,291) | | | | | |
| Income tax benefit | (44,013) | | | | | |
| Net fair value adjustments | (5,936) | | | | | |
| Reversal of credit losses | (3,382) | | | | | |
| Change in fair value of loan servicing assets | 37,138 | | | | | |
| Stock-based compensation, net | 14,506 | | | | | |
| Depreciation, amortization, and accretion | 39,935 | | | | | |
| Gain on sales of loans | (3,372) | | | | | |
| Other, net | 9,107 | | | | | |
| Net change to loans held for sale | 90,609 | | | | | |
| Net change in operating assets and liabilities: | | | | | |
| Other assets | (29,556) | | | | | |
| Other liabilities | (95,737) | | | | | |
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| Net cash provided by operating activities | 1,636 | | | | | |
| Cash Flows from Investing Activities: | | | | | |
| Acquisition of company | (145,344) | | | | | |
| Payments for investments in and advances to subsidiary | (250,001) | | | | | |
| Cash received from Acquisition | 658 | | | | | |
| Net change in loans and leases | 1,360 | | | | | |
| Net decrease in retail and certificate loans | 437,870 | | | | | |
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| Proceeds from maturities and paydowns of securities available for sale | 103,258 | | | | | |
| Purchases of property, equipment and software, net | (1,811) | | | | | |
| Other investing activities | 8,146 | | | | | |
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| Net cash provided by investing activities | 154,136 | | | | | |
| Cash Flows from Financing Activities: | | | | | |
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| Principal payments on Structured Program borrowings | (90,187) | | | | | |
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| Principal payments on retail notes and certificates | (438,032) | | | | | |
| Principal payments on short-term borrowings | (81,935) | | | | | |
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| Other financing activities | (9,295) | | | | | |
| Net cash used for financing activities | (619,449) | | | | | |
| Net Decrease in Cash, Cash Equivalents and Restricted Cash | (463,677) | | | | | |
| Cash, Cash Equivalents and Restricted Cash, Beginning of Period | 628,485 | | | | | |
| Cash, Cash Equivalents and Restricted Cash, End of Period | $ | 164,808 | | | | | |
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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)Act) as of December 31, 2019.2021. 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, 2019,2021, 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 1934Exchange 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, 2019,2021, 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, 2019,2021, 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)Act) occurred during the fiscal quarter ended December 31, 2019,2021, 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, 2019,2021, 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, 2019,2021, 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, 2019,2021, of the Company and our report dated February 19, 2020,11, 2022, 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 19, 2020
Item 9B. Other Information
Not Applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 will be included in our definitive proxy statement with respect to our 20202022 Annual Meeting of Stockholders (Proxy Statement) and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange CommissionSEC pursuant to Regulation 14A within 120 days of the end of the 20192021 fiscal year.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Proxy Statement under the headings “Board of Directors and Corporate Governance – DirectorCompensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Executive Compensation” and “Report of the Compensation Committee,” and is incorporated herein by reference.
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 of Certain Beneficial Owners and Management” and “Securities“Executive Compensation – Securities Authorized for Issuance Under Equity Compensation Plans,” and is incorporated herein by reference.
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 Party Transactions” and “Board of Directors and Corporate Governance – Director Independence,” and is incorporated herein by reference.
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 Appointment of Independent Registered Public Accounting Firm,” and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement ScheduleSchedules
(a) Documents filed as part of this Annual Report on Form 10-K:Report:
1. Financial Statements
The following consolidated financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:Report:
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2. | Financial Statement Schedule |
2. Financial Statement Schedules
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.
3. Exhibits
The documents listed in the Exhibit indexIndex 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.Report.
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. |
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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LENDINGCLUB CORPORATION
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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 | LENDINGCLUB CORPORATION |
Exhibit
Number
| Exhibit Description | Form | File No. | Exhibit | Filing
Date
| Filed
Herewith
|
| | | /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 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 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 and Director | | February 11, 2022 |
| Scott Sanborn | | | | |
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| /s/ Thomas W. Casey | | Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002and Director | | | | | |
101Thomas W. Casey | | | | |
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| /s/ Fergal Stack | | Principal Accounting Officer | | February 11, 2022 |
| Fergal Stack | | | | |
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| /s/ Susan Athey | | Director | | February 11, 2022 |
| Susan Athey | | | | |
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| /s/ Allan Landon | | Director | | February 11, 2022 |
| Allan Landon | | | | |
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| /s/ Timothy J. Mayopoulos | | Director | | February 11, 2022 |
| Timothy J. Mayopoulos | | | | |
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| /s/ Patricia McCord | | Director | | February 11, 2022 |
| Patricia McCord | | | | |
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| /s/ John C. Morris | | Director | | February 11, 2022 |
| John C. Morris | | | | |
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| /s/ Erin Selleck | | Director | | February 11, 2022 |
| Erin Selleck | | | | |
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| /s/ Michael Zeisser | | Director | | February 11, 2022 |
| Michael Zeisser | | | | |
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 |
| 101 | The following financial information from LendingClub Corporation’s Annual Report on Form 10-K for the year ended December 31, 20192021 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 19, 2020
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| LENDINGCLUB CORPORATION |
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| 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. |
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Signature | | Title | | Date |
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/s/ Scott Sanborn | | Chief Executive Officer | | February 19, 2020 |
Scott Sanborn | | | | |
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/s/ Thomas W. Casey | | Chief Financial Officer | | February 19, 2020 |
Thomas W. Casey | | | | |
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/s/ Fergal Stack | | Principal Accounting Officer | | February 19, 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 19, 2020 |
Daniel T. Ciporin | | | | |
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/s/ Kenneth Denman | | Director | | February 19, 2020 |
Kenneth Denman | | | | |
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/s/ Timothy J. Mayopoulos | | Director | | February 19, 2020 |
Timothy J. Mayopoulos | | | | |
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/s/ Patricia McCord | | Director | | February 19, 2020 |
Patricia McCord | | | | |
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/s/ John C. Morris | | Director | | February 19, 2020 |
John C. Morris | | | | |
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/s/ Simon Williams | | Director | | February 19, 2020 |
Simon Williams | | | | |
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/s/ Michael Zeisser | | Director | | February 19, 2020 |
Michael Zeisser | | | | |
