LENDINGCLUB CORP The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this Annual Report on Form 10-K (Report). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Report, particularly in "Part I - Item 1A. Risk Factors."
Overview
LendingClub was incorporated inDelaware onOctober 2, 2006 , and is currently the largest provider of unsecured personal loans in the US. We operate America's largest online lending marketplace platform that connects borrowers and investors.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 funding 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 a bank charter, which we believe will be both strategically and financially accretive to the Company. We generate revenue primarily from transaction fees from our lending marketplace's role in marketing to customers, accepting and decisioning applications for our bank partners to enable loan originations, investor fees that include servicing fees from investors for various services, including servicing and collection efforts, 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. The transaction fees we receive from our issuing bank partner in connection with our lending marketplace's role in facilitating loan originations for unsecured personal loans 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 reflect earned interest income and assumed principal and interest rate risk on loans during the period that we own the loans. When we use our own capital to invest in loans, we earn interest income and record fair value adjustments attributable to changes in actual and expected credit and prepayment performance, or any difference between sale price and carrying value. Investor fees paid to us vary based on investment channel and compensate us for the costs we incur in servicing loans, including managing payments from borrowers, collections, payments to investors, maintaining investors' account portfolios, providing information and issuing monthly statements. Investor fees may also vary based on the delinquency status of the loan. Whole loan purchasers pay a monthly weighted-average fee of 0.9% per annum and Structured Program investors pay a monthly fee of up to 1%, which is generally based on the month-end principal balance of loans serviced by us. Gain (Loss) on sales of loans connected to loan sale transactions are recognized based on the level to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Additionally, we recognize transactions costs as a loss on sale of loans. Personal loan volume on our platform is generally lower in the first quarter of the year, primarily due to seasonality of borrower behavior. Additionally, in the fourth quarter of the year, we typically observe fluctuations in marketing 53 --------------------------------------------------------------------------------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 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.
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. 54 --------------------------------------------------------------------------------LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
The following table shows the loan origination volume issued, loans purchased or
pending purchase by the Company, and the available loan inventory as of the end
of each period set forth below (in millions):
December 31, September 30, June 30,
2019 2019 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)
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 byLendingClub was 23% of total loan originations during the fourth quarter of 2019. This increase since the second quarter of 2019 was due to higher volumes and mix of lower risk grade A and B loans facilitated on our marketplace, the volume of loans purchased byLendingClub 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 theSalt Lake City area. We started to hire full-time employees in the first quarter of 2019 in theSalt 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 fromSan Francisco, California to theSalt Lake City area by the end of 2019. In conjunction with this initiative, we have sublet some of our office space inSan 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. OnFebruary 18, 2020 , the Company andRadius 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 55 --------------------------------------------------------------------------------LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
stock), plus certain purchase price and expense adjustments of up to $22
million . The closing of the Merger is subject to regulatory approval and other
customary closing conditions, which the Company anticipates can be completed
within 15 months, as well as customary transaction costs. The Company believes
that acquiring Radius and operating with a national bank charter will enhance
LendingClub's ability to serve its members, grow its market opportunity,
increase and diversify revenue and earnings, and provide both funding resilience
and regulatory clarity. With the talent, infrastructure and capabilities Radius
possesses, the Company intends to enhance customer engagement by offering a
broader range of member products and services aimed at supporting members and
improving their financial health. The Merger will be accounted for as a business
combination. The purchase price will be allocated to the assets acquired and
liabilities assumed based on their fair values at the acquisition date.
In order to facilitate compliance with federal banking regulations by the
Company's largest stockholder, Shanda Asset Management Holdings Limited and its
affiliates (Shanda), on February 18, 2020 , the Company entered into a Share
Exchange Agreement pursuant to which Shanda will exchange, subject to certain
closing conditions, all shares of the Company's common stock held by Shanda for
newly issued non-voting convertible preferred stock, series A (the Exchange). In
connection with the Exchange, the Company will provide Shanda registration
rights and a one-time cash payment of approximately $50 million . To deter future
ownership positions in the Company's securities in excess 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;
56
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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 orinvestors, 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.
57
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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
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
)
(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.
58
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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
2019 2018 2017
Origination Weighted-Average Origination Weighted-Average Origination Weighted-Average (in millions, except percentages) Volume Transaction Fees
Volume Transaction Fees Volume 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 loanprogram: 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. 59
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Results of Operations
This section of this Form 10-K generally discusses 2019 and 2018 items and
year-to-year comparisons between 2019 and 2018. For discussion related to 2017
items and year-over-year comparisons between 2018 and 2017, see "Part II -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Annual Report on Form 10-K for the year ended December 31,
2018 .
The following table sets forth the Consolidated Statements of Operations data
for each of the periods presented:
Year Ended December 31, 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:
60
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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
Total Net 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, 2018 2017 Change ($) Change (%) Net revenue: Transaction fees$ 526,942 $ 448,608 $ 78,334 17 % Interest income 487,462 611,259 (123,797 ) (20 )% Interest expense (385,605 ) (571,424 ) 185,819 (33 )% Net fair value adjustments (100,688 ) (30,817 ) (69,871 ) N/M Net interest income and fair value adjustments 1,169 9,018 (7,849 ) (87 )% Investor fees 114,883 87,108 27,775 32 % Gain on sales of loans 45,979 23,370 22,609 97 % Net investor revenue 162,031 119,496 42,535 36 % Other revenue 5,839 6,436 (597 ) (9 )% Total net revenue$ 694,812 $ 574,540 $ 120,272 21 % N/M - Not meaningful 61
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Transaction Fees
Transaction fees are fees paid by issuing banks or education and patient service
providers to us for the work we perform in facilitating the origination of loans
by our issuing bank partners. With respect to all unsecured personal loans and
auto refinance loans for which WebBank acts as the issuing bank, we record
transaction fee revenue net of program fees paid to WebBank . The fees on these
loans are based upon the terms of the loan, including grade, rate, term, channel
and other factors. As of December 31, 2019 , these fees ranged from 0% to 6% of
the initial principal amount of a loan.
Transaction fees were $598.8 million and $526.9 million for the years ended
December 31, 2019 and 2018, respectively, an increase of 14%. 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 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.
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 negative fair value adjustments on loans to
fluctuate due to the impact of discounts offered to meet yield expectations of
our loan investors and the holding period of the loans.
Loans, Notes, Certificates and Secured Borrowings: We do not assume principal or
interest rate risk on loans facilitated through our lending marketplace that are
funded by notes, certificates and certain secured borrowings because loan
balances, interest rates and maturities are matched and offset by an equal
balance of notes, certificates or secured borrowings with the exact same
interest rates and maturities. The changes in fair value of loans, notes,
certificates and secured borrowings are shown on our Consolidated Statements of
Operations on a net basis. Due to the payment dependent feature of the notes,
certificates and secured borrowings, fair value adjustments on loans funded with
notes, certificates and secured borrowings result in no net effect on our
earnings, except for changes in fair value of any applicable credit support
agreements related to secured borrowings.
62
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
The following tables provide additional detail related to net interest income
and fair value adjustments for assets invested in by the Company, assets with
equal and offsetting liabilities, and total interest income, interest expense
and net fair value adjustments:
Year Ended December 31, 2019 2018 Change ($) Change (%)
Loans invested in by the Company, securities available for sale, cash, cash equivalents and
restricted cash, and debt:
Interest income:
Loans held for investment and held
for sale by the Company at fair
value $ 110,597 $ 113,644 $ (3,047 ) (3 )%
Securities available for sale 14,351 7,602 6,749 89 %
Cash, cash equivalents and
restricted cash 6,002 4,056 1,946 48 %
Total 130,950 125,302 5,648 5 %
Interest expense:
Credit facilities and securities
sold under repurchase agreements (27,839 ) (19,714 ) (8,125 ) 41 %
Securitization notes and
certificates (4,353 ) (3,731 ) (622 ) 17 %
Total (32,192 ) (23,445 ) (8,747 ) 37 %
Net interest income $ 98,758 $ 101,857 $ (3,099 ) (3 )%
Net fair value adjustments (144,990 ) (100,688 ) (44,302 ) 44 %
Net interest income and fair value
adjustments $ (46,232 ) $ 1,169 $ (47,401 ) N/M
Loans, notes, certificates and secured borrowings: Interest income: Loans held for investment at fair value$ 214,395 $ 362,160 $ (147,765 ) (41 )% Interest expense: Notes, certificates and secured borrowings (214,395 ) (362,160 ) 147,765 (41 )% Net interest income $ - $ - $ - - % Total net interest income and fair value adjustments: Interest income$ 345,345 $ 487,462 $ (142,117 ) (29 )% Interest expense (246,587 ) (385,605 ) 139,018 (36 )% Net fair value adjustments (144,990 ) (100,688 ) (44,302 ) 44 % Net interest income and fair value adjustments$ (46,232 ) $ 1,169 $ (47,401 ) N/M N/M - Not meaningful 63
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Year Ended December 31, 2018 2017 Change ($) Change (%)
Loans invested in by the Company, securities available for sale, cash, cash equivalents and
restricted cash, and debt:
Interest income:
Loans held for investment and held
for sale by the Company at fair
value $ 113,644 $ 35,692 $ 77,952 N/M
Securities available for sale 7,602 4,093 3,509 86 %
Cash, cash equivalents and
restricted cash 4,056 2,625 1,431 55 %
Total 125,302 42,410 82,892 195 %
Interest expense:
Credit facilities and securities
sold under repurchase agreements (19,714 ) (1,900 ) (17,814 ) N/M
Securitization notes and
certificates (3,731 ) (675 ) (3,056 ) N/M
Total (23,445 ) (2,575 ) (20,870 ) N/M
Net interest income $ 101,857 $ 39,835 $ 62,022 156 %
Net fair value adjustments (100,688 ) (30,817 ) (69,871 ) N/M
Net interest income and fair value
adjustments $ 1,169 $ 9,018 $ (7,849 ) (87 )%
Loans, notes, certificates and secured borrowings: Interest income: Loans held for investment at fair value$ 362,160 $ 568,849 $ (206,689 ) (36 )% Interest expense: Notes, certificates and secured borrowings (362,160 ) (568,849 ) 206,689 (36 )% Net interest income $ - $ - $ - - % Total net interest income and fair value adjustments: Interest income$ 487,462 $ 611,259 $ (123,797 ) (20 )% Interest expense (385,605 ) (571,424 ) 185,819 (33 )% Net fair value adjustments (100,688 ) (30,817 ) (69,871 ) N/M Net interest income and fair value adjustments$ 1,169 $ 9,018 $ (7,849 ) (87 )% N/M - Not meaningful
The following tables provide the outstanding average balances, which are key drivers of interest income and interest expense in the periods presented:
Outstanding Average Balances
Year Ended December 31, 2019 2018 Change ($) Change (%) Loans held for investment by the Company$ 12,474 $ 140,551 $
(128,077 ) (91 )%
Loans held for sale by the Company
38 %
Securities available for sale
77,120 54 % Credit facilities and securities sold under repurchase agreements$ 481,960 $ 299,419 $ 182,541 61 %
Securitization notes and certificates
$ 1,574,271 $ 2,557,575 $ (983,304 ) (38 )% Notes, certificates and secured borrowings$ 1,576,877 $ 2,599,676 $ (1,022,799 ) (39 )% 64
--------------------------------------------------------------------------------
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
N/M
Securities available for sale $ 144,046 $ 211,740 $ (67,694 ) (32 )%
Credit facilities and securities
sold under repurchase agreements $ 299,419 $ 32,008 $ 267,411 N/M
Securitization notes and
certificates $ 131,894 $ 24,009 $ 107,885 N/M
Loans held for investment $ 2,557,575 $ 3,936,957 $ (1,379,382 ) (35 )%
Notes, certificates and secured
borrowings $ 2,599,676 $ 3,971,992 $ (1,372,316 ) (35 )%
N/M - Not meaningful
Interest income associated with loans invested in by the Company, securities
available for sale, and cash, cash equivalents and restricted cash was
$131.0 million and $125.3 million for the years ended December 31, 2019 and
2018, respectively an increase of 5%. The increase was primarily due to an
increase in the average outstanding balance of securities available for sale.
The impact of the increase in the outstanding balance of loans invested in by
the Company was offset by the mix shift to higher credit quality loans with
lower interest rates.
Interest expense associated with credit facilities, securities sold under
repurchase agreements and securitization notes was $32.2 million and
$23.4 million for the years ended December 31, 2019 and 2018, respectively, an
increase of 37%. The increase was primarily due to an increase in the average
outstanding balance of credit facilities, partially offset by a decrease in the
average outstanding balances of securitization notes and certificates.
Net fair value adjustments were $(145.0) million and $(100.7) million for the
years ended December 31, 2019 and 2018, respectively, an increase of 44%. The
increase was primarily due to increases in the average outstanding balances and
investor required yields related to certain loans invested in by the Company to
support Structured Program transactions and whole loan sales, partially offset
by a shift in overall platform mix towards lower risk and higher credit quality
borrowers.
Interest income from loans held for investment and the offsetting interest
expense from notes, certificates and secured borrowings were both $214.4 million
and $362.2 million for the years ended December 31, 2019 and 2018, respectively,
a decrease of 41%. The decrease was primarily due to a decrease in the average
outstanding balances of loans held for investment and notes, certificates and
secured borrowings, due to a larger portion of loans originated being sold to
whole loan investors and purchases by the Company for Structured Program
transactions.
65
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LENDINGCLUB CORPORATIONManagement's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Investor Fees
The tables below illustrate the composition of investor fees and the outstanding
principal balance of loans serviced, which is a key driver of investor fees, by
the method in which the loans were financed for each period presented:
Year Ended December 31, 2019 2018 Change ($) Change (%)
Investors Fees:
Whole loans sold $ 100,123 $ 82,824 $ 17,299 21 %
Notes, certificates and secured
borrowings 24,409 31,955 (7,546 ) (24 )%
Funds and separately managed
accounts (1) - 104 (104 ) (100 )%
Total $ 124,532 $ 114,883 $ 9,649 8 %
Outstanding Principal Balance of Loans Serviced On Our Platform (in millions) (2): Whole loans sold
$ 14,118 $ 10,890 $ 3,228 30 % Notes, certificates and secured borrowings 1,149 2,013 (864 ) (43 )% Total excluding loans invested in by the Company$ 15,267 $ 12,903 $ 2,364 18 % Loans invested in by the Company 744 843 (99 ) (12 )% Total$ 16,011 $ 13,746 $ 2,265 16 % (1) Funds are the private funds for whichLendingClub Asset Management, LLC (LCAM), or its subsidiaries acted as general partner. InMarch 2019 , we completed the dissolution of those funds. The Company does not expect to
earn investor fees from private funds and separately managed accounts in the
future.
(2) As of the end of each respective period.
Year Ended December 31, 2018 2017 Change ($) Change (%) Investor Fees: Whole loans sold$ 82,824 $ 52,049 $ 30,775 59 % Notes, certificates and secured borrowings 31,955 32,504 (549 ) (2 )% Funds and separately managed accounts (1) 104 2,555 (2,451 ) (96 )% Total$ 114,883 $ 87,108 $ 27,775 32 %
Outstanding Principal Balance of Loans Serviced On Our Platform (in millions) (2): Whole loans sold
$ 10,890 $ 8,178 $ 2,712 33 % Notes, certificates and secured borrowings 2,013 3,142 (1,129 ) (36 )% Total excluding loans invested in by the Company$ 12,903 $ 11,320 $ 1,583 14 % Loans invested in by the Company 843 593 250 42 % Total$ 13,746 $ 11,913 $ 1,833 15 % (1) Funds are the private funds for whichLendingClub Asset Management, LLC (LCAM), or its subsidiaries acted as general partner. InMarch 2019 , we completed the dissolution of those funds. The Company does not expect to
earn investor fees from private funds and separately managed accounts in the
future.
(2) As of the end of each respective period.
The Company receives fees to compensate us for the costs we incur in servicing a
loan, including managing payments from borrowers, collections, payments to
investors, maintaining investors' account portfolios, providing information, and
issuing monthly statements. The amount of investor fee revenue earned is
predominantly affected
66
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)by the servicing rates paid by investors, the outstanding principal balance of loans and the amount of principal and interest collected from borrowers and remitted to investors.
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 endedDecember 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 endedDecember 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: InJuly 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 inOctober 2017 we completed the dissolution of those funds. InOctober 2018 , LCAM initiated the liquidation of the remaining private funds it manages. As a result, the assets under management associated with those funds were returned to investors and liquidation of those funds was complete as ofDecember 31, 2018 . The Company does not expect to earn investor fees from private funds and separately managed accounts in the future.
Gain (Loss) on Sales of Loans
In connection with loan sales and Structured Program transactions, in addition to investor fees earned with respect to the corresponding loan, we recognize a gain or loss on the sale of that loan based on the level to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee. Additionally, we recognize transactions costs as a loss on sale of loans. Gain on sales of loans was$67.7 million and$46.0 million for the years endedDecember 31, 2019 and 2018, respectively, an increase of 47%. The increase was primarily due to an increase in the volume of loans sold and an increase in the weighted-average contractual loan servicing fee that resulted in higher gains on sales of loans. 67
--------------------------------------------------------------------------------
LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Other Revenue
Other revenue primarily consists of referral revenue that relates to fees earned
from third-party companies when customers referred by us consider or purchase
products or services from such third-party companies, and sublease revenue from
our sublet office space in San Francisco, California . The table below
illustrates the composition of other revenue for each period presented:
Year Ended December 31, 2019 2018 Change ($) Change (%)
Referral revenue $ 5,474 $ 3,645 $ 1,829 50 %
Sublease revenue 4,637 397 4,240 N/M
Other (1) 3,720 1,797 1,923 107 %
Other revenue $ 13,831 $ 5,839 $ 7,992 137 %
Year Ended December 31, 2018 2017 Change ($) Change (%)
Referral revenue $ 3,645 $ 5,258 $ (1,613 ) (31 )%
Sublease revenue 397 391 6 2 %
Other (1) 1,797 787 1,010 128 %
Other revenue $ 5,839 $ 6,436 $ (597 ) (9 )%
N/M - Not meaningful (1) Beginning in the first quarter of 2019, the Company separately reported
"Sublease revenue" from "Other" in the tables above. Prior period amounts
have been reclassified to conform to the current period presentation.
Operating Expenses
Our operating expenses consist of sales and marketing, origination and servicing, engineering and product development and other general and administrative expenses, as described below.
Sales and Marketing: Sales and marketing expense consists primarily of borrower and investor acquisition efforts, including costs attributable to marketing and selling the loans facilitated through the platform we operate. This includes costs of building general brand awareness, and salaries, benefits and stock-based compensation expense related to our sales and marketing team. Origination and Servicing: Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense and vendor costs attributable to activities that most directly relate to facilitating the origination of loans and servicing loans for borrowers and investors. These costs relate to the credit, collections, customer support and payment processing teams and related vendors. Engineering and Product Development: Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product management teams, and the cost of contractors who work on the development and maintenance of our platform. Engineering and product development expense also includes non-capitalized hardware and software costs and depreciation, amortization and impairment of technology assets.
Other General and Administrative: Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting, finance, legal, risk, compliance, human resources and facilities teams, professional services fees and facilities expense.
68
--------------------------------------------------------------------------------
LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
Year Ended December 31, 2019 2018 Change ($) Change (%)
Sales and marketing $ 279,423 $ 268,517 $ 10,906 4 %
Origination and servicing 103,403 99,376 4,027 4 %
Engineering and product
development 168,380 155,255 13,125 8 %
Other general and administrative 238,292 228,641 9,651 4 %
Goodwill impairment - 35,633 (35,633 ) (100 )%
Class action and regulatory
litigation expense - 35,500 (35,500 ) (100 )%
Total operating expenses $ 789,498 $ 822,922 $ (33,424 ) (4 )%
Year Ended December 31, 2018 2017 Change ($) Change (%)
Sales and marketing $ 268,517 $ 229,865 $ 38,652 17 %
Origination and servicing 99,376 86,891 12,485 14 %
Engineering and product
development 155,255 142,264 12,991 9 %
Other general and administrative 228,641 191,683 36,958 19 %
Goodwill impairment 35,633 - 35,633 N/M
Class action and regulatory
litigation expense 35,500 77,250 (41,750 ) (54 )%
Total operating expenses $ 822,922 $ 727,953 $ 94,969 13 %
N/M - Not meaningful
Sales and marketing: Sales and marketing expense was $279.4 million and
$268.5 million for the years ended December 31, 2019 and 2018, respectively, an
increase of 4%. 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 expenses associated with establishing a site in the Salt Lake
City area. Personnel-related expenses for full-time employees decreased from
2018, which was partially offset by an increased use of outsourced service
providers.
Engineering and product development: Engineering and product development expense
was $168.4 million and $155.3 million for the years ended December 31, 2019 and
2018, respectively, an increase of 8%. The increase was primarily driven by
continued investment in technology and platform improvements that are focused on
enhancing our credit decisioning capabilities, internal testing environment and
cloud infrastructure, which included 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
Other general and administrative expense: Other general and administrative expense was$238.3 million and$228.6 million for the years endedDecember 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 69 --------------------------------------------------------------------------------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 for the year endedDecember 31, 2019 . Class action and regulatory litigation expense for the year endedDecember 31, 2018 was$35.5 million , which is included in "Class action and regulatory litigation expense" on the Company's Consolidated Statements 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 endedDecember 31, 2016 .
Income Taxes
Income tax expense (benefit) is primarily attributable to the tax effects of unrealized gains recorded to other comprehensive income associated with the Company's available for sale portfolio and current state income taxes. We continue to recognize a 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 ofDecember 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 reversal of all or some portion of these allowances.
Non-GAAP Financial Measures and Supplemental Financial Information
We use certain non-GAAP financial measures in evaluating our operating results. We believe that Contribution, Contribution Margin, Adjusted Net Income (Loss), Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Earnings (Loss) Per Share (Adjusted EPS) andNet Cash 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 similar to the adjustments in this presentation. There are a number of limitations related to the use of these non-GAAP financial measures versus their most directly comparable GAAP measures, which include the following:
• Other companies, including companies in our industry, may calculate these
measures differently, which may reduce their usefulness as a comparative
measure.
70
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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,
the assets being depreciated, impaired and amortized may have to be
replaced 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.
• These measures do not reflect tax payments that may represent a reduction
in cash available to us.
Contribution and Contribution Margin
Contribution is a non-GAAP financial measure that is calculated as net revenue less "Sales and marketing" and "Origination and servicing" expenses on the Company's Consolidated Statements of Operations, adjusted to exclude cost structure simplification and non-cash stock-based compensation expenses within these captions 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 structure and a number of expense initiatives underway, including the establishment of a site in theSalt Lake City area. The expense includes incremental and excess personnel-related expenses associated with establishing ourSalt 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: 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
"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.
71
--------------------------------------------------------------------------------
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
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
"Sales and marketing" and "Origination and servicing" expense categories.
(2) Contribution excludes stock-based compensation expense included in the
"Sales and marketing" and "Origination and servicing" expense categories.
Adjusted Net Income (Loss), Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EPS
Adjusted Net Income (Loss) is a non-GAAP financial measure defined as net income (loss) attributable toLendingClub adjusted to exclude certain items that are either non-recurring, do not contribute directly to management's evaluation of its operating results, or non-cash items, such as (1) expenses related to our cost structure simplification, as discussed above, (2) goodwill impairment, (3) legal, regulatory and other expense related to legacy issues, (4) acquisition and related expenses and (5) other items (consisting of certain non-legacy litigation and/or regulatory settlement expenses and gains on disposal of certain assets), net of tax. Legacy items are generally those expenses that arose from the decisions of legacy management prior to the board review initiated in 2016 and resulted in the resignation of our former CEO, including legal and other costs associated with ongoing regulatory and government investigations, indemnification obligations, litigation, and termination of certain legacy contracts. In the fourth quarter of 2019, we added an adjustment to Adjusted Net Income (Loss) for "Acquisition and related expenses" to adjust for costs related to the acquisition of Radius. In the second quarter of 2019, we added an adjustment to Adjusted Net Income (Loss) and Adjusted EBITDA 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 performance of our business. Adjusted EBITDA is a non-GAAP financial measure defined as net income (loss) attributable toLendingClub 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. 72 --------------------------------------------------------------------------------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.
73
--------------------------------------------------------------------------------
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
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
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.
74
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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 andregulatory 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.
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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 ofLendingClub . 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 Consolidated All Other Consolidated Retail Consolidated All Other Consolidated Program (1) VIEs (2) (4) LendingClub (3) Balance Sheet Program (1) VIEs (2) LendingClub (3) 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 76
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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.
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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 provides additional detail related to components of ourNet Cash and Other Financial assets. We believeNet 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, September 30, June 30, March 31, December 31, 2019 2019 2019 2019 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. 78 --------------------------------------------------------------------------------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, September 30, June 30, March 31, December 31,
2019 2019 2019 2019 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)
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 inLendingClub 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, September 30, June 30, March 31, December 31,
2019 2019 2019 2019 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
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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 byLendingClub . 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) throughDecember 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 endedDecember 31, 2019 , standard program loans accounted for 68% and 69%, respectively, of all loan origination volume.
[[Image Removed: a36monthchartv2.jpg]]
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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)[[Image Removed: a60monthchartv2a01.jpg]]
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 Outstanding Fair Delinquent Outstanding Fair Delinquent
percentages) Principal Balance Value (2) Loans (2) Principal Balance Value (2) 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
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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
Outstanding Outstanding
(in millions, except Principal Fair Delinquent Principal Fair Delinquent
percentages) Balance (2) Value (3) Loans (3) Balance (2) Value (3) 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 fromDecember 31, 2018 toDecember 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:
December 31, September 30, June 30, March 31, December 31,
Total Platform (1) 2019 2019 2019 2019 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
82
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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 December 31, September 30, June 30, March 31, December 31, Sheet (1) 2019 2019 2019 2019 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 ofDecember 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,"
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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, inJanuary 2017 , theColorado Administrator (Administrator) of the Uniform Consumer Credit Code filed suit againstAvant, Inc. , a company that operates an online consumer loan platform. The Administrator asserts that loans toColorado residents facilitated through Avant's platform were required to comply withColorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated byWebBank , 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 inMarch 2017 , theUnited States District Court for the District of Colorado issued an order inMarch 2018 remanding the case to theDistrict Court for the City and County of Denver . InMarch 2018 , theUnited States District Court for the District of Colorado also issued an order dismissing a parallel case brought byWebBank that sought a declaratory judgment regarding the applicability of preemption toColorado usury laws and permanent injunctions against the Administrator that would prevent the Administrator from enforcingColorado usury laws againstWebBank and certain parties associated with loans originated by it. Avant thereafter filed a Motion to Dismiss inDistrict Court for the State of Colorado andWebBank moved to intervene in the case. InAugust 2018 , the Court grantedWebBank's motion but denied Avant's motion. InNovember 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 inColorado againstMarlette Funding andCross 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
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
that our program with WebBank has been structured in accordance with governing
federal law, the Administrator has identified alleged "exceptions" to our
compliance with provisions of the Colorado Uniform Consumer Credit Code,
including with respect to permitted rates and charges. We believe that our model
differs in important respects from Avant's business model as alleged in the
litigation involving Avant in Colorado . We have also had discussions with the
CDL about entering into a terminable agreement with the CDL to, among other
things: (i) toll the statutes of limitations on any action the CDL might bring
against the Company based on the rates and charges on loans the Company
facilitates and (ii) refrain from facilitating certain loans to borrowers
located in Colorado available for investment by certain investors. No assurances
can be given as to the timing, outcome or consequences of this matter.
We are routinely subject to examination for compliance with applicable laws and
regulations in the states in which we are licensed. As of the date of this
Report, we are subject to examination by the New York Department of Financial
Services (NYDFS). In July 2018 , the NYDFS issued an Online Lending Report
(Lending Report). The Lending Report included, among other things, an analysis
of the online lenders operating in New York including their methods of
operations, lending practices, interest rates and costs, products offered and
complaints and investigations relating to online lenders. The Lending Report
also included information and recommendations regarding protecting New York's
markets and consumers. For example, although the Lending Report noted that the
rapid growth of online lending demonstrates there is value to new technologies
that allow financial institutions to connect with borrowers in new ways, it
noted that in many cases an online lender is the "true lender" and that lending
in New York , whether through banks, credit unions or online lenders, should be
subject to applicable usury limits. We periodically have discussions with
various regulatory agencies regarding our business model and have recently
engaged in similar discussions with the NYDFS. During the course of such
discussions, which remain ongoing, we decided to voluntarily comply with certain
rules and regulations of the NYDFS. No assurances can be given as to the timing,
outcome or consequences of this matter.
The Company has undertaken a review of its portfolio of licenses and has had
discussions with regulators in Texas , Arizona , New York , Florida and North
Dakota concerning the licenses required for the Company's issuance of retail
notes to investors in these states and has applied for licenses in these states
to facilitate these operations. The Company has also had discussions with
certain of these regulators to resolve concerns regarding the Company's
historical licensing/registration status in connection with retail notes issued.
Although the Company is not able to predict with certainty the timing, outcome,
or consequence of these discussions, the Company expects to receive permission
to re-enter certain states in the near future. Discussions with these states
could result in fines or other penalties, which are not expected to have a
material adverse impact on the Company's operations or results of operations.
Consequences
If we are found to not have complied with applicable laws, regulations or requirements, we could: (i) lose one or more of our licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions or penalties, (iv) be in breach of certain contracts, which may void or cancel such contracts, (v) decide or be compelled to modify or suspend certain of our business practices (including limiting the maximum interest rate on certain loans facilitated through our platform and/or refraining from making certain loans available for investment by certain investors), or (vi) be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans through our lending marketplace, perform our servicing obligations or make our lending marketplace available to borrowers in particular states; any of which may harm our business.
See "Part I - Item 1. Business - Regulatory and Compliance Framework" and "Part I - Item 1A. Risk Factors - Risks Related to Our Business and Regulation" for further discussion regarding our regulatory environment.
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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)Liquidity and Capital Resources
Liquidity
Our short-term liquidity needs generally relate to our working capital requirements, including the purchase of loans invested in by the Company. These liquidity needs are generally met through cash generated from the operations of facilitating loan originations, servicing fee revenue, proceeds from the sales of loans (both as whole loan sales and 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 loans 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 endedDecember 31, 2019 , the Company facilitated$12.3 billion of loans on our marketplace. We used our own capital to purchase$5.3 billion in loans and$7.0 billion in loans were issued that were contemporaneously funded by loan sales and by the issuance of notes and certificates. The Company sold$5.1 billion in loans (of which$4.0 billion was sold through Structured Program transactions and$1.1 billion was sold to whole loan investors). As ofDecember 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 ofDecember 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, andU.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 ofDecember 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. OnFebruary 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 Events" for additional information.
Our credit facilities and securities sold under repurchase agreements are
comprised of secured warehouse credit facilities for personal loans and auto
refinance loans (Personal Loan Warehouse Credit Facilities and
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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), a secured revolving credit facility (Revolving
Facility), and repurchase agreements. Personal Loan Warehouse Credit Facilities
are used to finance our personal loans on a revolving basis and have a combined
borrowing capacity of $750.0 million (which will be reduced to $700.0 million on
January 15, 2020 ), with $373.0 million of debt outstanding secured by
$533.6 million of loans at fair value as of December 31, 2019 . These Personal
Loan Warehouse Credit Facilities have "Commitment Termination Dates" ranging
from March 2020 to October 2020 , at which point the Company's ability to borrow
additional funds ends. We are working to amend and extend the Commitment
Termination Dates of these Personal Loan Warehouse Credit Facilities, or to
replace them with substantially similar credit facilities. We are also
evaluating additional warehouse facilities to finance our personal loans with
existing and new financial institutions. Under the respective agreements, if not
amended, extended, or replaced, any outstanding debt on 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 .
The Auto Loan Warehouse Credit Facility is a term loan used to finance auto
refinance loans. The amount borrowed under this Auto Loan Warehouse Credit
Facility amortizes over time through regular principal and interest payments
collected from the auto refinance loans that serve as collateral. As of
December 31, 2019 , the Auto Loan Warehouse Credit Facility has an outstanding
debt balance of $14.3 million , which matures in June 2021 and is secured by
$17.9 million of auto refinance loans at fair value.
The Revolving Facility has a credit limit of
We have repurchase agreements (with scheduled repurchase dates betweenFebruary 2020 andDecember 2026 ) with counterparties under which we may sell securities (subject to an obligation to repurchase such securities at a specified future date and price) in exchange for cash. As ofDecember 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/or amend the facilities and agreements before the end of 2021, when it has been announced by theUnited 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. 87 --------------------------------------------------------------------------------LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)
The following table sets forth certain cash flow information for the periods
presented:
Year Ended December 31, 2019 2018 2017
Cash used for loan operating activities
$ (634,110 ) Cash provided by all other operating activities 169,548 61,882
60,722
Net cash used for operating activities (1)
Cash provided by loan investing activities (2)
$ 819,878 Cash provided by all other investing activities 41,940 13,029
178,695
Net cash provided by investing activities
Cash used for note, certificate and secured borrowings financing (2)$ (626,241 ) $ (863,596 ) $ (826,398 ) Cash provided by issuance of securitization notes and certificates, credit facilities and securities sold under repurchase agreements 112,948 640,332
345,586
Cash (used for) provided by all other financing activities (26,767 ) (15,962 )
6,504
Net cash used for financing activities (540,060 ) (239,226 ) (474,308 ) Net decrease in cash, cash equivalents and restricted cash$ (156,936 ) $ (231 ) $ (49,123 )
(1) Cash used for operating activities primarily includes the purchase and sale
of loans held for sale by the Company.
(2) Cash provided by loan investing activities includes the purchase of and
repayment of loans held for investment. Cash used for note, certificate and
secured borrowings financing activities includes the issuance of notes,
certificates and secured borrowings to investors and the repayment of those
notes, certificates and secured borrowings. These amounts generally
correspond to and offset each other.
Operating Activities. Net cash used for operating activities was
$(270.6) million , $(639.7) million and $(573.4) million during the years ended
December 31, 2019 , 2018 and 2017, respectively. Net cash used for loan operating
activities relates to proceeds from sales of loans held for sale offset by the
purchase of loans held for sale. The timing of the purchases and sales of loans
held for sale can vary between periods and can therefore impact the amount of
cash provided by or used for operating activities. In periods where we
accumulate loans held for sale that are sold in a subsequent period, cash flow
from operating activities will be negatively affected. In 2018, cash provided by
all other operating activities was primarily impacted by cash paid for class
action and regulatory litigation costs.
Investing Activities. Net cash provided by investing activities was
$653.8 million , $878.7 million and $998.6 million during the years ended
December 31, 2019 , 2018 and 2017, respectively. Net cash provided by loan
investing activities was primarily driven by purchases of loans held for
investment (under our retail program and issuance of notes) and principal
receipts on those loans. Net cash provided by all other investing activities was
primarily driven by purchases of securities available for sale and purchases of
property, equipment and software, offset by proceeds from securities available
for sale.
Financing Activities. Net cash used for financing activities was
$(540.1) million , $(239.2) million and $(474.3) million during the years ended
December 31, 2019 , 2018 and 2017, respectively. Net cash used for financing
activities was primarily driven by principal payments on and retirements of
notes and certificates and principal payments on our credit facilities, offset
by proceeds from our credit facilities, the issuance of notes and certificates,
and proceeds from securities sold under repurchase agreements.
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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% of total net revenue,
$53.0 million , or 8% 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 with the continued development and support of our online lending
marketplace platform. In the future, we expect our capital expenditures related
to enhancing our platform to increase as we support the growth in our business.
Off-Balance Sheet Arrangements
At bothDecember 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 throughJuly 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% of securities and residual interests from these transactions and enters into a servicing arrangement with the unconsolidated variable interest entity. We are exposed to market risk in the securitization market. We provide additional information regarding transactions with unconsolidated variable interest entities in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 7. Securitizations and Variable Interest Entities." Contingencies Legal For a comprehensive discussion of legal proceedings as ofDecember 31, 2019 , see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 19. Commitments and Contingencies." 89 --------------------------------------------------------------------------------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 More than
1 Year 1 to 3 Years 3 to 5 Years 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
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
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 onthose 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 ofDecember 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 ofDecember 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. Summary of Significant Accounting Policies" 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.
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)Fair Value of Loans Held for Investment, Loans Invested in by the Company, Notes and Certificates
We have elected the fair value option for loans held for investment and related notes and certificates, as well as loans invested in by the Company. We primarily use a discounted cash flow model to estimate fair value based on the present value of estimated future cash flows. 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 rates - 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. 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.
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LENDINGCLUB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of
Operations(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as
Noted)Fair Value of 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.
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LENDINGCLUB CORPORATION © Edgar Online, source
