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EX-32.1 - EXHIBIT 32.1 - LendingClub Corpq315ex-321.htm
EX-10.1 - EXHIBIT 10.1 - LendingClub Corpq315ex-101.htm
EX-31.2 - EXHIBIT 31.2 - LendingClub Corpq315ex-312.htm
EX-31.1 - EXHIBIT 31.1 - LendingClub Corpq315ex-311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
Commission File Number: 001-36771
 
LendingClub Corporation
(Exact name of registrant as specified in its charter)

Delaware
51-0605731
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
71 Stevenson St., Suite 300, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 632-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨

Accelerated filer
¨

 
 
 
 
Non-accelerated filer
 
ý (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of October 30, 2015, there were 377,863,378 shares of the registrant’s common stock outstanding.



LENDINGCLUB CORPORATION
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Except as the context requires otherwise, as used herein, “Lending Club,” “Company”, “we,” “us,” and “our,” refer to LendingClub Corporation, a Delaware corporation, and, where appropriate, its two wholly owned subsidiaries:
LC Advisors, LLC (LCA), a registered investment advisor with the Securities and Exchange Commission (SEC) that acts as the general partner for certain private funds and as advisor to separately managed accounts.
Springstone Financial, LLC (Springstone), a company we acquired in April 2014 that facilitates education and patient finance loans.

Additionally, LC Trust I (Trust) is an independent Delaware business trust that acquires and holds loans for the sole benefit of certain investors that purchase trust certificates (Certificates) issued by the Trust and that are related to underlying loans.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 29A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q (Report) regarding borrowers, credit scoring, Fair Isaac Corporation (FICO) or other credit scores, our strategy, future operations, expected losses, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “appear,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “will,” or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:
the status of borrowers, the ability of borrowers to repay loans and the plans of borrowers;
interest rates and origination fees on loans charged by issuing banks;
expected rates of return for investors;
the effectiveness of our credit scoring models;
the likelihood of us having to fund contingent commitments, including commitments made to Springstone’s issuing bank and a credit support agreement we have entered into with an investor;
the potential impact of having to fund any such contingent commitments;
fee revenue we expect to recognize after loans are issued by our issuing bank partners;
our financial condition and performance, including the impact that management’s estimates have on our financial performance and the relationship between the interim period and full year results;
investor, borrower, platform and loan performance-related factors that may affect our revenue;
our ability to develop and maintain effective internal controls;
our compliance with applicable local, state and Federal laws;
our compliance with applicable regulations and regulatory developments affecting our marketplace; and
other risk factors listed from time to time in reports we file with the SEC.

We caution you that the foregoing list may not contain all of the forward-looking statements in this Report. We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. We have included important factors in the cautionary statements included in this Report, particularly in "Part II - Other Information - Item 1A - Risk Factors" in this Report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014, that could, among other things, cause actual results or events to differ materially from forward-looking statements contained in this Report. Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Report carefully and completely and with the understanding that actual future results may be materially different from what we expect. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law.


1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
LENDINGCLUB CORPORATION
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 
September 30, 
 2015
 
December 31, 
 2014
Assets
 
 
 
Cash and cash equivalents
$
579,206

 
$
869,780

Restricted cash
159,216

 
46,763

Securities available for sale
338,519

 

Loans at fair value (includes $2,639,651 and $1,772,407 from consolidated trust, respectively)
4,068,974

 
2,798,505

Accrued interest receivable (includes $22,790 and $15,209 from consolidated trust, respectively)
36,544

 
24,262

Property, equipment and software, net
47,096

 
27,051

Intangible assets, net
32,227

 
36,302

Goodwill
72,683

 
72,592

Due from related parties
606

 
467

Other assets
24,679

 
14,332

Total assets
$
5,359,750

 
$
3,890,054

Liabilities and Stockholders Equity
 
 
 
Accounts payable
$
3,756

 
$
5,892

Accrued interest payable (includes $25,868 and $16,989 from consolidated trust, respectively)
39,858

 
26,964

Accrued expenses and other liabilities
54,137

 
31,620

Payables to investors
150,880

 
38,741

Notes and certificates at fair value (includes $2,656,917 and $1,772,407 from consolidated trust, respectively)
4,095,481

 
2,813,618

Total liabilities
4,344,112

 
2,916,835

Stockholders’ Equity
 
 
 
Common stock, $0.01 par value; 900,000,000 shares authorized at September 30, 2015 and December 31, 2014, respectively; 377,289,733 and 371,443,916 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
3,773

 
3,714

Additional paid-in capital
1,105,824

 
1,052,728

Accumulated deficit
(92,787
)
 
(83,223
)
Accumulated other comprehensive loss
(1,172
)
 

Total stockholders’ equity
1,015,638

 
973,219

Total liabilities and stockholders’ equity
$
5,359,750

 
$
3,890,054


See Notes to Condensed Consolidated Financial Statements.

2


LENDINGCLUB CORPORATION
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)

 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Operating revenue:
 
 
 
 
 
 
 
Transaction fees
$
100,420

 
$
52,622

 
$
258,553

 
$
133,835

Servicing fees
8,999

 
3,053

 
20,870

 
6,301

Management fees
2,900

 
1,608

 
7,663

 
4,163

Other revenue (expense)
2,743

 
(745
)
 
5,140

 
(438
)
Total operating revenue
115,062

 
56,538

 
292,226

 
143,861

Net interest income (expense):

 
 
 
 
 
 
Total interest income
145,833

 
94,038

 
389,831

 
252,298

Total interest expense
(144,659
)
 
(94,460
)
 
(387,666
)
 
(253,054
)
Net interest income (expense)
1,174

 
(422
)
 
2,165

 
(756
)
Fair value adjustments, loans
(72,474
)
 
(33,809
)
 
(172,495
)
 
(84,963
)
Fair value adjustments, notes and certificates
72,514

 
33,757

 
172,529

 
84,865

Net interest income (expense) after fair value adjustments
1,214

 
(474
)
 
2,199

 
(854
)
Total net revenue
116,276

 
56,064

 
294,425

 
143,007

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
44,961

 
21,001

 
120,162

 
60,808

Origination and servicing
17,573

 
10,167

 
45,540

 
26,135

General and administrative
51,559

 
31,848

 
136,038

 
78,862

Total operating expenses
114,093

 
63,016

 
301,740

 
165,805

Income (loss) before income tax expense
2,183

 
(6,952
)
 
(7,315
)
 
(22,798
)
Income tax expense
1,233

 
419

 
2,249

 
1,059

Net income (loss)
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
Basic net income (loss) per share attributable to common stockholders
$
0.00

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.41
)
Diluted net income (loss) per share attributable to common stockholders
$
0.00

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.41
)
Weighted-average common shares - Basic
375,982,120

 
59,844,394

 
373,605,274

 
57,958,838

Weighted-average common shares - Diluted
401,934,880

 
59,844,394

 
373,605,274

 
57,958,838


See Notes to Condensed Consolidated Financial Statements.



3


LENDINGCLUB CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)

 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
Other comprehensive loss, before tax:
 
 
 
 
 
 
 
Change in net unrealized loss on securities available for sale
(341
)
 

 
(1,172
)
 

Other comprehensive loss, before tax
(341
)
 

 
(1,172
)
 

Income tax effect

 

 

 

Other comprehensive loss, net of tax
(341
)
 

 
(1,172
)
 

Comprehensive income (loss)
$
609

 
$
(7,371
)
 
$
(10,736
)
 
$
(23,857
)

See Notes to Condensed Consolidated Financial Statements.

4


LENDINGCLUB CORPORATION
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(9,564
)
 
$
(23,857
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Net fair value adjustments of loans, notes and certificates
(33
)
 
99

Change in fair value of loan servicing liabilities
(3,919
)
 
2,776

Change in fair value of loan servicing assets
2,467

 
(986
)
Stock-based compensation, net
37,558

 
25,889

Depreciation and amortization
15,525

 
6,620

(Gain) loss on sales of loans
(2,136
)
 
2,110

Other, net
42

 
450

Purchase of whole loans to be sold
(2,338,346
)
 
(1,096,592
)
Proceeds from sales of whole loans
2,338,346

 
1,094,482

Net change in operating assets and liabilities:
 
 
 
Accrued interest receivable
(12,282
)
 
(6,373
)
Other assets
(6,341
)
 
13,184

Due from related parties
(139
)
 
(88
)
Accounts payable
(3,071
)
 
(1,107
)
Accrued interest payable
12,893

 
7,982

Accrued expenses and other liabilities
22,350

 
10,806

Net cash provided by operating activities
53,350

 
35,395

Cash Flows from Investing Activities:
 
 
 
Purchases of loans
(2,736,698
)
 
(1,534,276
)
Principal payments received from loans
1,280,005

 
739,505

Proceeds from recoveries and sales of charged-off loans
13,729

 
5,178

Purchases of securities available for sale
(402,832
)
 

Proceeds from sales of securities available for sale
63,198

 

Payments for business acquisition, net of cash acquired

 
(109,464
)
Net change in restricted cash
(112,453
)
 
(11,432
)
Proceeds from sale of property and equipment
11

 

Purchases of property, equipment and software
(25,878
)
 
(14,989
)
Net cash used for investing activities
(1,920,918
)
 
(925,478
)
Cash Flows from Financing Activities:
 
 
 
Change in payable to investors
112,139

 
12,933

Proceeds from issuances of notes and certificates
2,736,667

 
1,534,010

Principal payments on notes and certificates
(1,268,622
)
 
(732,342
)
Payments on notes and certificates from recoveries/sales of related charged-off loans
(13,654
)
 
(5,153
)
Proceeds from term loan, net of debt discount

 
49,813


5


LENDINGCLUB CORPORATION
Condensed Consolidated Statements of Cash Flows (Continued)
(In Thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2015
 
2014
Payment for debt issuance cost

 
(1,192
)
Principal payment on term loan

 
(625
)
Prepaid offering costs

 
(1,887
)
Change in equity offering costs
90

 

Proceeds from issuance of common stock for ESPP
2,694

 

Proceeds from issuance of Series F convertible preferred stock, net of issuance costs

 
64,803

Proceeds from stock option exercises and other
7,680

 
3,098

Net cash provided by financing activities
1,576,994

 
923,458

Net (Decrease) Increase in Cash and Cash Equivalents
(290,574
)
 
33,375

Cash and Cash Equivalents, Beginning of Period
869,780

 
49,299

Cash and Cash Equivalents, End of Period
$
579,206

 
$
82,674

Supplemental Cash Flow Information:
 
 
 
Cash paid for interest
$
374,760

 
$
244,531

Non-cash investing and financing activity:
 
 
 
Issuance of Series F convertible preferred stock for business acquisition
$

 
$
2,762

Non-cash investing activity:
 
 
 
Accruals for property, equipment and software
$
3,466

 
$
1,132


See Notes to Condensed Consolidated Financial Statements.


6


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)




1. Basis of Presentation

LendingClub Corporation (Lending Club) is an online marketplace connecting borrowers and investors. LC Advisors, LLC (LCA), is a registered investment advisor with the Securities and Exchange Commission (SEC) and wholly-owned subsidiary of Lending Club that acts as the general partner for certain private funds and advisor to separately managed accounts. Springstone Financial, LLC (Springstone), is a wholly-owned subsidiary of Lending Club that facilitates education and patient finance loans. LC Trust I (the Trust) is an independent Delaware business trust that acquires and holds loans from Lending Club for the sole benefit of certain investors that purchase trust certificates (Certificates) issued by the Trust and that are related to underlying loans.

The accompanying unaudited condensed consolidated financial statements include Lending Club, the Trust, LCA and Springstone (collectively referred to as the Company, we, or us). All intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information necessary for the fair statement of the results and financial position for the periods presented. The Company's results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year or any other interim period.

The accompanying interim condensed consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (Annual Report).

The Company's significant accounting policies are included in "Part II - Item 8 - Financial Statements and Supplementary Data - Note 2 – Summary of Significant Accounting Policies" in the Annual Report. There have been no significant changes to these accounting policies during the first nine months of 2015, except as noted in "Note 4 – Securities Available for Sale" and "Note 6 – Fair Value of Assets and Liabilities" of these condensed consolidated financial statements.

2. New Accounting Standards

New Accounting Standards Not Yet Adopted

In February 2015, the Financial Accounting Standards Board (FASB) issued new guidance amending accounting for consolidations, which will be effective January 1, 2016. The guidance changes what an investor must consider in determining whether it is required to consolidate an entity in which it holds an interest. The Company is currently evaluating the impact of this guidance on the Company’s financial position, results of operations, earnings per common share, and cash flows.

In April 2015, the FASB issued new guidance amending accounting for customer's cloud based fees, which will be effective January 1, 2016. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The Company is currently evaluating the impact of this guidance on the Company’s financial position, results of operations, earnings per common share, and cash flows.

In September 2015, the FASB amended existing guidance related to recognition of adjustments to provisional amounts recorded during purchase accounting. Changes recognized during the measurement period will be recognized prospectively as adjustments to goodwill, with corresponding changes in income or expense, such as

7


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



revised depreciation or amortization, recognized in current period earnings. This amendment is effective January 1, 2016. Since we do not currently have any open measurement periods related to any business acquisition, adoption of this standard will not have an impact on the Company's financial position, results of operations, earnings per common share, or cash flows.

3. Net Income (Loss) Per Share and Net Income (Loss) Attributable to Common Stockholders

Earnings (loss) per share (EPS) is the amount of net income (loss) available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of net income (loss) available to each share of common stock outstanding during the reporting period, adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares are excluded from the computation of diluted EPS in periods in which the effect would be antidilutive. Potentially dilutive common shares include incremental shares issued for stock options, convertible preferred stock and warrants to purchase common stock. In conjunction with the Company's Initial Public Offering (IPO) on December 11, 2014, all of its convertible preferred stock converted to common stock and all warrants to purchase convertible preferred stock were converted to warrants to purchase common stock.

The Company calculates EPS using the two-class method when applicable. The two-class method allocates net income that otherwise would have been available to common shareholders to holders of participating securities. All participating securities are excluded from basic weighted-average common shares outstanding. Prior to the Company's IPO, the Company considered all series of its convertible preferred stock to be participating securities. The Company had no participating securities as of September 30, 2015.

The following table details the computation of the basic and diluted net income (loss) per share:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income (loss) (1)
 
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
Weighted average common shares - Basic
 
375,982,120

 
59,844,394

 
373,605,274

 
57,958,838

Weighted average common shares - Diluted
 
401,934,880

 
59,844,394

 
373,605,274

 
57,958,838

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to common stockholders
 
$
0.00

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.41
)
Diluted net income (loss) per share attributable to common stockholders
 
$
0.00

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.41
)
(1) 
Also represents net income (loss) available to common stockholders. In a period with net income, both earnings and dividends (if any) are allocated to participating securities. In a period with a net loss, only declared dividends (if any) are allocated to participating securities. There were no dividends declared in the first nine months of 2015 or 2014.

4. Securities Available for Sale

The Company began purchasing securities available for sale during the second quarter of 2015. Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that a security is other-than-temporarily impaired (OTTI). Realized gains and losses from sales of securities available for sale are determined on a specific identification basis and are included in other revenue (expense).


8


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of September 30, 2015, are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Corporate debt securities
$
251,253

 
$
4

 
$
(1,144
)
 
$
250,113

Asset-backed securities
54,990

 
4

 
(35
)
 
54,959

U.S. agency securities
20,602

 
5

 
(4
)
 
20,603

Municipal securities
5,840

 
3

 

 
5,843

Other securities
7,006

 
1

 
(6
)
 
7,001

Total securities available for sale
$
339,691

 
$
17

 
$
(1,189
)
 
$
338,519


A summary of securities available for sale with unrealized losses as of September 30, 2015, aggregated by category and period of continuous unrealized loss, is as follows:
 
Less than
12 months
 
12 months
or longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate debt securities
$
241,480

 
$
(1,144
)
 
$

 
$

 
$
241,480

 
$
(1,144
)
Asset-backed securities
49,955

 
(35
)
 

 

 
49,955

 
(35
)
U.S. agency securities
11,600

 
(4
)
 

 

 
11,600

 
(4
)
Other securities
4,999

 
(6
)
 

 

 
4,999

 
(6
)
Total securities with unrealized losses(1)
$
308,034

 
$
(1,189
)
 
$

 
$

 
$
308,034

 
$
(1,189
)
(1) 
The number of investment positions with unrealized losses totaled 142.

Management evaluates whether securities available for sale are OTTI on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely than not that it will be required to sell such security before any anticipated recovery. If management determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.

A security is also OTTI if management does not expect to recover all of the amortized cost of the security. In this circumstance, the impairment recognized in earnings represents estimated credit loss, and is measured by the difference between the present value of expected cash flows and the amortized cost of the security. Management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss when necessary. Expected cash flows are discounted using the security's effective interest rate.

The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation includes the assessment of several security performance indicators, including the magnitude and duration of the unrealized loss and whether the Company has received all scheduled principal and interest payments. There were no impairment charges recognized during the first nine months of 2015.


9


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



The contractual maturities of securities available for sale at September 30, 2015, are as follows:
 
Within
1 year
After 1 year
through
5 years
After 5 years
through
10 years
After
10 years
Total
Corporate debt securities
$
28,120

$
221,993

$

$

$
250,113

Asset-backed securities

54,959



54,959

U.S. agency securities

20,603



20,603

Municipal securities

5,843



5,843

Other securities

7,001



7,001

Total fair value
$
28,120

$
310,399

$

$

$
338,519

Total amortized cost
$
28,151

$
311,540

$

$

$
339,691


Proceeds and gross realized gains and losses from sales of securities available for sale are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2015
Proceeds
$
59,689

 
$
63,198

Gross realized gains
$
58

 
$
58

Gross realized losses
$

 
$
1


5. Loans, Notes and Certificates, and Loan Servicing Rights

Loans, Notes and Certificates

At September 30, 2015 and December 31, 2014, loans, notes and certificates measured at fair value on a recurring basis were as follows: 
 
 
Loans
 
Notes and Certificates
 
September 30, 
 2015
 
December 31, 
 2014
 
September 30, 
 2015
 
December 31, 
 2014
Aggregate principal balance outstanding
$
4,149,442

 
$
2,836,729

 
$
4,175,947

 
$
2,851,837

Net fair value adjustments
(80,468
)
 
(38,224
)
 
(80,466
)
 
(38,219
)
Fair value
$
4,068,974

 
$
2,798,505

 
$
4,095,481

 
$
2,813,618

Original term
 
12 - 60 months
 
12 - 60 months
 
 
 
 
Interest rates (fixed)
 
4.99% - 29.90%
 
5.79% - 29.90%
 
 
 
 
Maturity dates
 
≤ September 2020
 
≤ December 2019
 
 
 
 

10


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



We place loans on non-accrual status at the earlier of 120 days past due or when the Compay is notified that borrowers have filed for bankruptcy or are deceased. At September 30, 2015 and December 31, 2014, loans that were 90 days or more past due (including non-accrual loans) were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
> 90 days
past due
 
Non-accrual loans(1)
 
> 90 days
past due
 
Non-accrual loans(1)
Outstanding principal balance
 
$
28,716

 
$
1,174

 
$
19,790

 
$
1,373

Net fair value adjustments
 
(27,102
)
 
(1,091
)
 
(18,825
)
 
(1,289
)
Fair value
 
$
1,614

 
$
83

 
$
965

 
$
84

# of loans (not in thousands)
 
2,512

 
94

 
1,797

 
125

(1)
Includes all loans for which the Company has been notified that the borrower has filed for bankruptcy or is deceased, or that were 120 days or more past due.

Loan Servicing Rights

Loan servicing assets and liabilities related to retained servicing rights are recorded at fair value in “Other assets” and “Accrued expenses and other liabilities,” respectively. At September 30, 2015, loans underlying loan servicing rights had a total outstanding principal balance of $3.548 billion, original terms between 3 and 84 months, monthly payments with interest rates ranging from 2.99% to 33.15% and maturity dates through September 2022. At December 31, 2014, loans underlying loan servicing rights had a total outstanding principal balance of $1.872 billion, original terms between 12 and 60 months, monthly payments with fixed interest rates ranging from 5.90% to 33.15% and maturity dates through December 2019.

6. Fair Value of Assets and Liabilities

For a description of the fair value hierarchy and the Company’s fair value methodologies, see "Part II - Item 8 - Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies" in the Annual Report. The Company did not transfer any assets or liabilities in or out of level 3 during the third quarter and first nine months of 2015 or the year ended December 31, 2014.

Financial Instruments Recorded at Fair Value

See "Part II - Item 8 - Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies" in the Company's Annual Report for a description of the fair value methodology for loans, notes and certificates. In the third quarter of 2015, the Company incorporated cumulative prepayments into the valuation of loans, notes and certificates to better reflect a market participant's view of valuation assumptions underlying unsecured consumer credit obligations. Prior to the third quarter, the effect of prepayments was reflected through an effective adjustment to the discount rates used in the fair value methodology. Cumulative prepayments are estimates of the cumulative amount of principal prepayments that will occur over the entire life of a loan expressed as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments reduces the projected balances and expected terms of the loans, notes and certificates.

When available, the Company uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of securities available for sale. The Company's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable

11


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



spreads) and weighted-average maturity for the same or similar "to-be-issued" securities. The Company compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value:
September 30, 2015
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
Loans
 
$

 
$

 
$
4,068,974

 
$
4,068,974

Securities available for sale:
 
 
 
 
 
 
 
 
Corporate debt securities
 

 
250,113

 

 
250,113

Asset-backed securities
 

 
54,959

 

 
54,959

U.S. agency securities
 

 
20,603

 

 
20,603

Municipal securities
 

 
5,843

 

 
5,843

Other securities
 

 
7,001

 

 
7,001

Total securities available for sale
 

 
338,519

 

 
338,519

Servicing assets
 

 

 
7,249

 
7,249

Total assets
 
$

 
$
338,519

 
$
4,076,223

 
$
4,414,742

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Notes and certificates
 
$

 
$

 
$
4,095,481

 
$
4,095,481

Servicing liabilities
 

 

 
4,394

 
4,394

Total liabilities
 
$

 
$

 
$
4,099,875

 
$
4,099,875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
Loans
 
$

 
$

 
$
2,798,505

 
$
2,798,505

Servicing assets
 

 

 
2,181

 
2,181

Total assets
 
$

 
$

 
$
2,800,686

 
$
2,800,686

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Notes and certificates
 
$

 
$

 
$
2,813,618

 
$
2,813,618

Servicing liabilities
 

 

 
3,973

 
3,973

Total liabilities
 
$

 
$

 
$
2,817,591

 
$
2,817,591


As our loans and related notes and certificates, and loan servicing rights do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

12


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



 
Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for our level 3 fair value measurements at September 30, 2015 and December 31, 2014:
 
 
 
 
September 30, 2015
 
 
 
 
Range of Inputs
Financial Instrument
 
Unobservable Input
 
Minimum
 
Maximum
 
Weighted- Average
Loans, notes and certificates
 
Discount rates
 
3.5
%
 
17.5
%
 
8.9
%
 
 
Net cumulative expected loss rates
 
0.3
%
 
22.0
%
 
9.7
%
 
 
Cumulative prepayment rates
 
21.9
%
 
38.5
%
 
27.7
%
 
 
 
 
 
 
 
 
 
Servicing asset/liability
 
Discount rates
 
3.5
%
 
20.5
%
 
9.6
%
 
 
Net cumulative expected loss rates
 
0.3
%
 
21.5
%
 
8.7
%
 
 
Cumulative prepayment rates
 
8.4
%
 
48.7
%
 
29.0
%
 
 
Base market servicing rates (% per annum on unpaid principal balance)(1)
 
0.50
%
 
0.75
%
 
0.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
Range of Inputs
Financial Instrument
 
Unobservable Input
 
Minimum
 
Maximum
 
Weighted- Average
Loans, notes and certificates
 
Discount rates
 
5.2
%
 
17.4
%
 
10.1
%
 
 
Net cumulative expected loss rates
 
0.3
%
 
22.0
%
 
10.0
%
 
 
 
 
 
 
 
 
 
Servicing asset/liability
 
Discount rates
 
5.3
%
 
23.7
%
 
10.7
%
 
 
Net cumulative expected loss rates
 
0.3
%
 
22.0
%
 
10.2
%
 
 
Cumulative prepayment rates
 
16.5
%
 
26.7
%
 
20.0
%
 
 
Base market servicing rates (% per annum on unpaid principal balance)(1)
 
0.50
%
 
0.70
%
 
0.50
%
(1) Excludes ancillary fees charged to investors that would be passed on to a third-party servicer.

At September 30, 2015, the discounted cash flow methodology used to estimate the notes and certificates fair values used the same projected cash flows as the related loans. As demonstrated in the following table, the fair value adjustments for loans were largely offset by the fair value adjustments of the notes and certificates due to the member payment dependent design of the notes and certificates and because the principal balances of the loans were very close to the combined principal balances of the notes and certificates.

13


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



The following tables present additional information about level 3 loans, notes and certificates, each measured at fair value on a recurring basis, for the third quarters and first nine months of 2015 and 2014:
 
 
Loans
 
Notes and Certificates
 
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
Beginning balance at June 30, 2015
 
$
3,694,823

 
$
(57,440
)
 
$
3,637,383

 
$
3,717,556

 
$
(57,432
)
 
$
3,660,124

Purchases of loans
 
1,946,455

 

 
1,946,455

 

 

 

Issuances of notes and certificates
 

 

 

 
991,926

 

 
991,926

Whole loan sales
 
(954,770
)
 

 
(954,770
)
 

 

 

Principal payments
 
(481,701
)
 

 
(481,701
)
 
(478,189
)
 

 
(478,189
)
Charge-offs
 
(55,365
)
 
55,365

 

 
(55,346
)
 
55,346

 

Recoveries
 

 
(5,919
)
 
(5,919
)
 

 
(5,867
)
 
(5,867
)
Change in fair value recorded in earnings
 

 
(72,474
)
 
(72,474
)
 

 
(72,513
)
 
(72,513
)
Ending balance at September 30, 2015
 
$
4,149,442

 
$
(80,468
)
 
$
4,068,974

 
$
4,175,947

 
$
(80,466
)
 
$
4,095,481


 
 
Loans
 
Notes and Certificates
 
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
Beginning balance at June 30, 2014
 
$
2,351,515

 
$
(25,313
)
 
$
2,326,202

 
$
2,361,902

 
$
(25,307
)
 
$
2,336,595

Purchases of loans
 
994,497

 

 
994,497

 

 

 

Issuances of notes and certificates
 

 

 

 
532,034

 

 
532,034

Whole loan sales
 
(462,523
)
 

 
(462,523
)
 

 

 

Principal payments
 
(288,102
)
 

 
(288,102
)
 
(280,643
)
 

 
(280,643
)
Charge-offs
 
(28,910
)
 
28,910

 

 
(28,852
)
 
28,852

 

Recoveries
 

 
(2,594
)
 
(2,594
)
 

 
(2,589
)
 
(2,589
)
Change in fair value recorded in earnings
 

 
(33,809
)
 
(33,809
)
 

 
(33,757
)
 
(33,757
)
Ending balance at September 30, 2014
 
$
2,566,477

 
$
(32,806
)
 
$
2,533,671

 
$
2,584,441

 
$
(32,801
)
 
$
2,551,640


 
 
Loans
 
Notes and Certificates
 
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
Beginning balance at December 31, 2014
 
$
2,836,729

 
$
(38,224
)
 
$
2,798,505

 
$
2,851,837

 
$
(38,219
)
 
$
2,813,618

Purchases of loans
 
5,075,044

 

 
5,075,044

 

 

 

Issuances of notes and certificates
 

 

 

 
2,736,667

 

 
2,736,667

Whole loan sales
 
(2,338,346
)
 

 
(2,338,346
)
 

 

 

Principal payments
 
(1,280,005
)
 

 
(1,280,005
)
 
(1,268,622
)
 

 
(1,268,622
)
Charge-offs
 
(143,980
)
 
143,980

 

 
(143,935
)
 
143,935

 

Recoveries
 

 
(13,729
)
 
(13,729
)
 

 
(13,653
)
 
(13,653
)
Change in fair value recorded in earnings
 

 
(172,495
)
 
(172,495
)
 

 
(172,529
)
 
(172,529
)
Ending balance at September 30, 2015
 
$
4,149,442

 
$
(80,468
)
 
$
4,068,974

 
$
4,175,947

 
$
(80,466
)
 
$
4,095,481



14


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



 
 
Loans
 
Notes and Certificates
 
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
Beginning balance at December 31, 2013
 
$
1,849,042

 
$
(20,000
)
 
$
1,829,042

 
$
1,859,982

 
$
(19,992
)
 
$
1,839,990

Purchases of loans
 
2,628,758

 

 
2,628,758

 

 

 

Issuances of notes and certificates
 

 

 

 
1,534,011

 

 
1,534,011

Whole loan sales
 
(1,094,482
)
 

 
(1,094,482
)
 

 

 

Principal payments
 
(739,506
)
 

 
(739,506
)
 
(732,343
)
 

 
(732,343
)
Charge-offs
 
(77,335
)
 
77,335

 

 
(77,209
)
 
77,209

 

Recoveries
 

 
(5,178
)
 
(5,178
)
 

 
(5,153
)
 
(5,153
)
Change in fair value recorded in earnings
 

 
(84,963
)
 
(84,963
)
 

 
(84,865
)
 
(84,865
)
Ending balance at September 30, 2014
 
$
2,566,477

 
$
(32,806
)
 
$
2,533,671

 
$
2,584,441

 
$
(32,801
)
 
$
2,551,640


The following table presents additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis for the third quarters and first nine months of 2015 and 2014:
 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
 
Servicing Assets
 
Servicing Liabilities
 
Servicing Assets
 
Servicing Liabilities
Fair value at beginning of period
 
$
5,225

 
$
4,831

 
$
1,034

 
$
2,736

Issuances (1)
 
3,092

 
1,402

 
481

 
1,809

Changes in fair value, included in servicing fees
 
(1,436
)
 
(1,839
)
 
(182
)
 
(833
)
Additions, included in deferred revenue
 
368

 

 
187

 

Fair value at end of period
 
$
7,249

 
$
4,394

 
$
1,520

 
$
3,712

 
 
Nine Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2014
 
 
Servicing Assets
 
Servicing Liabilities
 
Servicing Assets
 
Servicing Liabilities
Fair value at beginning of period
 
$
2,181

 
$
3,973

 
$
534

 
$
936

Issuances (1)
 
6,476

 
4,340

 
1,355

 
3,464

Changes in fair value, included in servicing fees
 
(2,467
)
 
(3,919
)
 
(841
)
 
(688
)
Additions, included in deferred revenue
 
1,059

 

 
472

 

Fair value at end of period
 
$
7,249

 
$
4,394

 
$
1,520

 
$
3,712

(1)  
Represents the offsets to the gains or losses on sales of the related loans, recorded in other revenue (expense).


15


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
 
Certain fair valuation adjustments recorded through earnings were related to level 3 instruments for the third quarters and first nine months of 2015 and 2014. Generally, changes in the net cumulative expected loss rates, cumulative prepayment rates, and discount rates will have an immaterial net impact on the fair value of loans, notes and certificates, and servicing assets and liabilities.
 
Certain of these unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. When multiple inputs are used within the valuation techniques for loans, notes and certificates, or servicing assets and liabilities, a change in one input in a certain direction may be offset by an opposite change from another input.

A specific loan that is projected to have larger future default losses than previously estimated has lower expected future cash flows over its remaining life, which reduces its estimated fair value. Conversely, a specific loan that is projected to have smaller future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its fair value. Separately, an increase in expected prepayments will reduce the estimated fair value of a loan, whereas a decrease in expected prepayments will increase the estimated fair value of a loan.

Our selection of the most representative base market servicing rates for servicing assets and servicing liabilities is inherently judgmental. We reviewed third-party servicing rates for our loans and loans in similar credit sectors, as well as a market servicing benchmarking analysis provided by a third-party valuation firm, and determined that base market servicing rates on our products ranging from 0.40% to 0.75% per anum of outstanding principal are reasonable estimates as of September 30, 2015. The table below shows the estimated impact on the estimated fair value of servicing assets and liabilities, calculated using different base market servicing rate assumptions as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
 
Servicing Assets
 
Servicing Liabilities
 
Servicing Assets
 
Servicing Liabilities
Weighted-average base market servicing rate assumptions
0.50
%
 
0.50
%
 
0.50
%
 
0.50
%
Change in fair value from:
 
 
 
 
 
 
 
Servicing rate increase to 0.60%
$
(2,566
)
 
$
1,764

 
$
(915
)
 
$
1,416

Servicing rate decrease to 0.40%
$
2,682

 
$
(1,649
)
 
$
965

 
$
(1,366
)


16


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Financial Instruments Not Recorded at Fair Value

The following tables present the fair value hierarchy for financial instruments not recorded at fair value:
September 30, 2015
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
579,206

 
$

 
$
579,206

 
$

 
$
579,206

Restricted cash
159,216

 

 
159,216

 

 
159,216

Deposits
763

 

 
763

 

 
763

Total assets
$
739,185

 
$

 
$
739,185

 
$

 
$
739,185

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
3,756

 
$

 
$
3,756

 
$

 
$
3,756

Payables to investors
150,880

 

 
150,880

 

 
150,880

Total liabilities
$
154,636

 
$

 
$
154,636

 
$

 
$
154,636

December 31, 2014
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
869,780

 
$

 
$
869,780

 
$

 
$
869,780

Restricted cash
46,763

 

 
46,763

 

 
46,763

Deposits
657

 

 
657

 

 
657

Total assets
$
917,200

 
$

 
$
917,200

 
$

 
$
917,200

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
5,892

 
$

 
$
5,892

 
$

 
$
5,892

Payables to investors
38,741

 

 
38,741

 

 
38,741

Total liabilities
$
44,633

 
$

 
$
44,633

 
$

 
$
44,633


7. Property, Equipment and Software, Net

Property, equipment and software, net, consist of the following:
 
 
September 30, 
 2015
 
December 31, 
 2014
Internally developed software
 
$
34,107

 
$
16,023

Computer equipment
 
12,169

 
7,929

Leasehold improvements
 
8,868

 
4,802

Purchased software
 
4,843

 
3,326

Furniture and fixtures
 
4,232

 
2,405

Construction in progress
 
2,165

 
549

Total property, equipment and software
 
66,384

 
35,034

Accumulated depreciation and amortization
 
(19,288
)
 
(7,983
)
Total property, equipment and software, net
 
$
47,096

 
$
27,051



17


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Depreciation and amortization expense on property, equipment and software was $4.5 million and $1.8 million for the third quarters of 2015 and 2014, respectively. Depreciation and amortization expense on property, equipment and software was $11.4 million and $4.1 million for the first nine months of 2015 and 2014, respectively.

8. Other Assets

Other assets consist of the following:
 
 
September 30, 
 2015
 
December 31, 
 2014
Prepaid expenses
 
$
8,829

 
$
6,807

Loan servicing assets at fair value
 
7,249

 
2,181

Accounts receivable
 
3,322

 
1,744

Deferred acquisition compensation
 
1,815

 
2,695

Deposits
 
763

 
657

Receivable from investors
 
568

 
155

Other
 
2,133

 
93

Total other assets
 
$
24,679

 
$
14,332


9. Intangible Assets and Goodwill

Intangible Assets
 
The Company's intangible asset balance was $32.2 million and $36.3 million at September 30, 2015 and December 31, 2014, respectively. Amortization expense associated with intangible assets for the third quarter and first nine months of 2015 was $1.3 million and $4.1 million, respectively. Amortization expense associated with intangible assets for the third quarter and first nine months of 2014 was $1.4 million and $2.5 million, respectively.

Goodwill

The Company’s annual goodwill impairment testing date is April 1. In testing for potential impairment of goodwill on April 1, 2015, management performed an assessment of each of the Company’s goodwill reporting units (generally defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and concluded that goodwill was not impaired.

The Company's goodwill balance of $72.7 million at September 30, 2015, did not significantly change during the third quarter and first nine months of 2015. We did not record any goodwill impairment expense for the third quarter and first nine months of 2015 or 2014.


18


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



10. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:
 
 
September 30, 
 2015
 
December 31, 
 2014
Accrued compensation
 
$
23,142

 
$
13,659

Accrued expenses
 
12,818

 
6,220

Loan servicing liabilities at fair value
 
4,394

 
3,973

Deferred rent
 
4,150

 
1,377

Deferred tax liability
 
3,587

 
1,332

Deferred revenue
 
1,817

 
759

Loan funding payables
 
831

 

Contingent liabilities
 
810

 
1,995

Payable to issuing bank
 
703

 
267

Transaction fee refund reserve
 
672

 
828

Early stock option exercise and other equity-related liabilities
 
333

 
392

Other
 
880

 
818

Total accrued expenses and other liabilities
 
$
54,137

 
$
31,620


11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss represents other cumulative gains and losses that are not reflected in earnings. The components of other comprehensive loss are as follows:
Three Months Ended September 30,
2015
 
2014
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Change in net unrealized loss on securities available for sale
$
(341
)
 
$

 
$
(341
)
 
$

 
$

 
$

Other comprehensive loss
$
(341
)
 
$

 
$
(341
)
 
$

 
$

 
$

Nine Months Ended September 30,
2015
 
2014
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Change in net unrealized loss on securities available for sale
$
(1,172
)
 
$

 
$
(1,172
)
 
$

 
$

 
$

Other comprehensive loss
$
(1,172
)
 
$

 
$
(1,172
)
 
$

 
$

 
$



19


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Accumulated other comprehensive loss balances are as follows:
 
Total
Accumulated Other Comprehensive Loss
Balance at December 31, 2014
$

Change in net unrealized loss on securities available for sale
(1,172
)
Balance at September 30, 2015
$
(1,172
)

The Company did not have any items of other comprehensive income (loss) during the first nine months of 2014.

12. Employee Incentive and Retirement Plans

The Company’s equity incentive plans provide for granting stock options and restricted stock units (RSUs) to employees, consultants, officers and directors. In addition, the Company offers a retirement plan and an Employee Stock Purchase Plan (ESPP) to eligible employees.

Stock-based compensation expense was as follows for the periods presented:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options
 
$
8,101

 
$
6,996

 
$
23,314

 
$
19,484

ESPP
 
491

 

 
1,416

 

RSUs
 
3,037

 

 
5,262

 

Stock issued related to acquisition
 
1,850

 
3,541

 
7,566

 
6,405

Total stock-based compensation expense
 
$
13,479

 
$
10,537

 
$
37,558

 
$
25,889


The following table presents the Company's stock-based compensation expense recorded in the condensed consolidated statements of operations:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Sales and marketing
 
$
2,048

 
$
912

 
$
5,373

 
$
5,029

Origination and servicing
 
817

 
599

 
2,405

 
1,427

General and administrative:
 
 
 
 
 
 
 
 
   Engineering and product development
 
2,554

 
1,492

 
6,392

 
3,487

   Other
 
8,060

 
7,534

 
23,388

 
15,946

Total stock-based compensation expense
 
$
13,479

 
$
10,537

 
$
37,558

 
$
25,889


Additionally, we capitalized $1.3 million and $0.6 million of stock-based compensation expense associated with the cost of developing software for internal use during the third quarters of 2015 and 2014, respectively. We capitalized $3.1 million and $1.2 million of stock-based compensation expense associated with the cost of developing software for internal use during the first nine months of 2015 and 2014, respectively.


20


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Stock Options

There were no significant changes to the Company's incentive plans or valuation methodology for stock options during the third quarter and first nine months of 2015.

The Company used the following assumptions in the Black-Scholes option pricing model to estimate the fair value of stock options granted during the periods presented:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Expected dividend yield
 

 

 

 

Weighted-average assumed stock price volatility
 
48.7
%
 
50.5
%
 
49.4
%
 
54.0
%
Weighted-average risk-free rate
 
1.67
%
 
1.87
%
 
1.61
%
 
1.91
%
Weighted-average expected life (in years)
 
6.25

 
6.25

 
6.25

 
6.38


The following table summarizes the activities for the Company's stock options during the first nine months of 2015:
 
 
Number of Options
 
Weighted-
Average
Exercise Price Per Share
 
Weighted-Average Remaining Contractual Life (in years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2014
 
57,386,829

 
$
3.15

 
 
 
 
Options granted
 
1,164,929

 
$
20.00

 
 
 
 
Options exercised
 
(5,407,540
)
 
$
1.46

 
 
 
 
Options forfeited/expired
 
(1,844,875
)
 
$
6.45

 
 
 
 
Outstanding at September 30, 2015
 
51,299,343

 
$
3.59

 
7.3
 
$
503,203

Vested and expected to vest at September 30, 2015
 
50,807,451

 
$
3.54

 
7.3
 
$
500,401

Exercisable at September 30, 2015
 
26,216,233

 
$
1.58

 
6.5
 
$
306,781


For the first nine months of 2015, we granted service-based stock options to purchase 1,164,929 shares of common stock with a weighted average exercise price of $20.00 per share, a weighted average grant date fair value of $9.80 per option share and an aggregate estimated fair value of $11.4 million. For the first nine months of 2014, we granted service-based stock options to purchase 18,511,572 shares of common stock with a weighted average exercise price of $5.91 per option share, a weighted average grant date fair value of $4.37 per share and a total estimated fair value of $81.0 million.

Options to purchase 5,407,540 shares with a total intrinsic value of $75.3 million were exercised during the first nine months of 2015. Options to purchase 5,638,830 shares with a total intrinsic value of $40.4 million were exercised during the first nine months of 2014.

The total grant date fair value of stock options vested during the first nine months of 2015 and 2014 was $26.0 million and $14.7 million, respectively. For the first nine months of 2014, we incurred $3.0 million of expense for the accelerated vesting of stock options for a terminated employee that was accounted for as a stock option modification. We did not accelerate vesting of any stock options during the third quarter and first nine months of 2015.


21


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



As of September 30, 2015 total unrecognized compensation cost was $100.8 million, which is expected to be recognized over the next 2.6 years.

Since the Company holds a full valuation allowance against all deferred tax benefits, no income tax benefit has been recognized for stock-based compensation expense or for exercised stock options.

During the second quarter of 2015, the Company launched a rescission offer allowing certain holders of outstanding, unexercised options and shares of common stock to rescind the grant of options and sale of shares back to the Company. The rescission offer was required by the California Department of Business Oversight to address California securities laws compliance issues raised in connection with the Company's permit for qualification filed in July 2014. The offer expired on July 15, 2015 and there were no material acceptances of the rescission offer.

Restricted Stock Units

During the first quarter of 2015, the Company began issuing RSUs to certain employees, officers, and directors. The following table summarizes the activities for the Company's RSUs during the first nine months of 2015:
 
Number of RSUs
 
Weighted-
Average
Grant Date
Fair Value
Unvested at December 31, 2014

 
$

RSUs granted
3,518,967

 
$
16.60

RSUs vested
(99,300
)
 
$
20.29

RSUs forfeited/expired
(106,694
)
 
$
19.53

Unvested at September 30, 2015
3,312,973

 
$
16.39

Expected to vest after September 30, 2015
3,177,419

 
$
16.42


For the first nine months of 2015, we granted 3,518,967 RSUs with an aggregate fair value of $58.4 million.

As of September 30, 2015, there was $54.3 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over the next 3.6 years.

Employee Stock Purchase Plan

Under the Company’s ESPP, eligible employees can purchase shares of the Company’s common stock using amounts withheld through payroll deductions, subject to plan limitations. Payroll deductions are accumulated during six-month offering periods. The purchase price for each share of common stock is 85% of the lower of the fair market value of the common stock on the first business day of the offering period or on the last business day of the offering period. During the third quarter of 2015, the Company did not purchase any shares under the ESPP. The Company's employees purchased 211,256 shares under the ESPP during the first nine months of 2015. As of September 30, 2015, a total of 2,788,744 shares of common stock were reserved for issuance under the ESPP.


22


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



The fair value of stock purchase rights granted to employees under the ESPP is measured on the grant date using the Black-Scholes option pricing model. The compensation expense related to ESPP purchase rights is recognized on a straight-line basis, net of estimated forfeitures, over the six-month requisite service period. We used the following assumptions in estimating the fair value of the grant under the ESPP on June 11, 2015, which are derived using the same methodology applied to stock option assumptions:
Expected dividend yield

Weighted-average assumed stock price volatility
38.8
%
Weighted-average risk-free rate
0.10
%
Weighted-average expected life (in years)
0.42


13. Income Taxes

For the third quarter and first nine months of 2015 we recorded income tax expense of $1.2 million and $2.2 million, respectively, due to the recognition of the amortization of tax deductible goodwill that gives rise to an indefinite-lived deferred tax liability. Income tax expense was $0.4 million and $1.1 million for the third quarter and first nine months of 2014, respectively.

The Company continues to recognize a full valuation allowance against deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. As of September 30, 2015, the valuation allowance was $41.3 million.

14. Commitments and Contingencies

Operating Lease Commitments

The Company's corporate headquarters are located in San Francisco, California, and consist of approximately 155,000 square feet of space under lease agreements, most of which expire in June 2022. Under these lease agreements, the Company has an option to extend nearly all of the space for five years.
 
On April 16, 2015, the Company entered into a lease agreement for additional office space in San Francisco, California. The lease agreement commenced in the second quarter of 2015 with delivery of portions of the leased space to occur in stages through March 2017. The lease agreement expires on March 31, 2026, with the right to renew the lease term for two consecutive renewal terms of five years each.
 
The Company has additional leased office space of approximately 26,000 square feet in Westborough, Massachusetts, under a lease agreement that expires in July 2021.

Total facilities rental expense for the third quarter and first nine months of 2015 was $2.0 million and $5.0 million, respectively. Total facilities rental expense for the third quarter and first nine months of 2014 was $1.0 million and $2.5 million, respectively. Minimum lease payments for the third quarter and first nine months of 2015 were $1.5 million and $4.1 million, respectively. Minimum lease payments for the third quarter and first nine months of 2014 were $0.9 million and $2.2 million, respectively. As of September 30, 2015, we have pledged $0.7 million of cash as a security deposit under these lease agreements.


23


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



Expected annual minimum rental payments under these leases at September 30, 2015, are as follows:
(in millions)
Minimum
Rental Payments
2015
$
1.9

2016
11.4

2017
14.1

2018
15.1

2019
14.6

Thereafter
71.1

Total
$
128.2


Loan Funding and Purchase Commitments

The Company commits to fund loans resulting from our direct marketing efforts if such loans are not otherwise funded by investors on our platform. During the third quarter and first nine months of 2015, the Company was not required to fund any such loans. Additionally, loans in the process of being facilitated and originated by our issuing bank partner at September 30, 2015, were fully funded in October 2015 and the Company was not required to fund any of these loans.

Springstone has a commitment to purchase certain loans that it facilitates that are originated by an issuing bank partner if Springstone cannot arrange investors to purchase such loans. In connection with this arrangement, in June 2014 the Company entered into a contingent purchase agreement with the issuing bank and a third-party investor who agreed to purchase 100% participation interests in certain loans originated by the issuing bank through the Springstone platform. In March 2015, this agreement was extended to January 2016. The Company's contingent purchase commitment provides that if the third-party investor defaults on its purchase obligation then the Company will purchase such loans from the issuing bank. The remaining limit of this contingent loan purchase commitment under the March 2015 agreement was $32.2 million at September 30, 2015.

In July 2015, the issuing bank, the Company and a second third-party investor entered into a second loan participation purchase agreement with respect to the same type of loans covered by the March 2015 agreement. With respect to this second agreement, the Company also has a contingent purchase obligation in the event that the second third-party investor defaults on its purchase obligation. Although this second agreement does not have a purchase limit, Springstone may cease facilitating loans that are subject to these purchase commitments upon proper notice to the issuing bank.

During the third quarter and first nine months of 2015 we were not required to purchase any loan participation interests pursuant to these contingent purchase commitments. The Company does not anticipate that the Company will be required to purchase loan participation interests under these commitments.

Credit Support Agreement

We are subject to a credit support agreement with a certificate investor. The credit support agreement requires us to pledge and restrict cash in support of our contingent obligation to reimburse the investor for credit losses on loans underlying the investor’s certificates that are in excess of a specified, aggregate loss threshold. We are contingently obligated to pledge cash, not to exceed $5.0 million, to support this contingent obligation. As of September 30, 2015, and December 31, 2014, approximately $3.4 million was pledged and restricted to support this contingent obligation.
 

24


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



As of September 30, 2015, the credit losses pertaining to the investor’s certificates have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and thus no liability has been recorded. We currently do not anticipate recording losses under this credit support agreement. If losses related to the credit support agreement are later determined to be likely to occur and are estimable, results of operations could be affected in the period in which such losses are recorded.

Loan Purchase Obligation

Under our loan account program with WebBank, a Utah-chartered industrial bank that serves as our primary issuing bank, WebBank retains ownership of the loans facilitated through our marketplace for two business days after origination. As part of this arrangement, we have committed to purchase the loans at par plus accrued interest, at the conclusion of the two business days. As of September 30, 2015, we were committed to purchase loans with an outstanding principal balance of $14.0 million at par plus accrued interest. At December 31, 2014, we were committed to purchase loans with an outstanding principal balance of $4.1 million at par plus accrued interest.

Legal

On June 5, 2014, Springstone received a Civil Investigative Demand from the Consumer Financial Protection Bureau, referred to as CFPB, related to the period from 2009 through May 2014. The purpose of the investigation was to determine whether Springstone engaged in unlawful acts or practices in connection with the marketing, issuance, and servicing of loans for certain healthcare related financings during the period. On August 19, 2015, Springstone agreed to settle with the CFPB related to the CFPB's concerns about possible borrower confusion of the terms of a deferred interest product, which was terminated by the Company in December 2014. To resolve this matter, Springstone agreed to pay restitution of $700 thousand to certain borrowers under the Springstone finance program between 2009 and 2014. The settlement amount has been recorded as a liability as of September 30, 2015. The settlement amount is fully covered by the indemnification provisions of the Springstone purchase agreement and, therefore, did not result in an adverse financial charge to the Company.

In addition to the foregoing, we may be subject to legal proceedings and regulatory actions in the ordinary course of business. We do not believe it is probable that the ultimate liability, if any, arising out of any such matter will have a material effect on our financial condition, results of operations or cash flows.

15. Segment Reporting

The Company reports segment information using the “management approach.” Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by us for purposes of evaluating performance and allocating resources. Based on this approach, the Company has one reportable segment. The Company's management reporting process is based on our internal operating structure.

16. Related Party Transactions

Several of our executive officers and directors (including immediate family members) have opened investor accounts with us, made deposits and withdrawals to their accounts, and purchased notes or certificates. All note and certificate purchases made by related parties were transacted on terms and conditions that were not more favorable than those obtained by unaffiliated third-party investors.

The deposits made by related parties whose transactions totaled $120 thousand or more were $500 thousand during the third quarter of 2014 and $750 thousand and $1.65 million during the first nine months of 2015 and 2014, respectively. There were no deposits made by related parties during the third quarter of 2015. The withdrawals made by related parties whose transactions totaled $120 thousand or more were $99 thousand and $22 thousand during the

25


LENDINGCLUB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Amounts, Ratios, or as Noted)
(Unaudited)



third quarters of 2015 and 2014, respectively, and $553 thousand and $132 thousand during the first nine months of 2015 and 2014, respectively.

17. Springstone Acquisition

In April 2015, we completed the allocation of the purchase price of our acquisition of Springstone to acquired assets and liabilities. There were no material adjustments to the preliminary purchase price allocation as included in "Part II - Item 8 - Financial Statements and Supplementary Data - Note 17 - Springstone Acquisition" in our Annual Report.
The following 2014 pro forma financial information summarizes the combined results of operations for Lending Club and Springstone, as though the companies were originally combined as of January 1, 2013. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisition occurred as of January 1, 2013, nor is it indicative of future operating results. The pro forma results presented below include interest expense on the debt financing, amortization of acquired intangible assets, compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees, and tax expense. Results for the third quarter and first nine months of 2015, as presented in the Condensed Consolidated Statements of Operations, reflect consolidated results, including Springstone, for the full period.
 
Three Months Ended  
 September 30, 2014
 
Nine Months Ended 
 September 30, 2014
Total net revenue
$
56,074

 
$
148,317

Net loss
$
(5,947
)
 
$
(21,403
)
Basic net loss per share attributable to common stockholders
$
(0.10
)
 
$
(0.37
)
Diluted net loss per share attributable to common stockholders
$
(0.10
)
 
$
(0.37
)

18. Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to September 30, 2015, through the date the condensed consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed within these condensed consolidated financial statements and related notes, the Company has determined none of these events were required to be recognized or disclosed.

26


LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes that appear in this Quarterly Report on Form 10-Q (Report). In addition to historical condensed 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 elsewhere in this Report, particularly in "Part II - Other Information - Item 1A - Risk Factors" in this Report and "Part I - Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (Annual Report).

Overview
 
Lending Club is the world’s largest online marketplace connecting borrowers and investors. We believe a technology-powered marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors.
 
Since beginning operations in 2007, our marketplace has facilitated $13.4 billion in loan originations. These loans were facilitated through the following investment channels: (i) the issuance of notes, (ii) the sale of certificates, or (iii) the sale of whole loans to qualified investors. In the third quarter of 2015, our marketplace facilitated $2.2 billion of loan originations, of which approximately $0.3 billion were invested in through notes, $0.7 billion were invested in through certificates and $1.2 billion were invested in through whole loan sales.
 
Our trusted brand, scale and network effect drives significant borrowing and investing activity on our marketplace. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees from investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from investors. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. We operate with a lower cost structure than traditional banks due to our innovative model, online delivery and process automation, without the physical branches, legacy technology or high overhead associated with the traditional banking system.

Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans which are part of the publicly available program, are three- or five-year unsecured personal loans that are offered to borrowers with a FICO score of at least 660 and that meet other strict credit criteria. These loans can be invested in through the purchase of notes issued pursuant to a note registration statement, and are only available through our website. Separately, qualified investors may also invest in standard program loans in private transactions not facilitated through our website. Custom program loans are only invested in through private transactions with qualified investors, for which notes are not available and loans are not facilitated through our website. Custom program loans include secured and unsecured small business loans, super prime consumer loans, loans facilitated by our lending platform program, education and patient finance loans and personal loans that do not meet the requirements of standard program loans.


27


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)

Generally, the transaction fees we receive from our issuing banks in connection with our marketplace’s role in facilitating loan originations range from 1% to 6% of the initial principal amount of the loan as of September 30, 2015. For education and patient finance loans, transaction fees we receive from education and patient service providers may exceed 6%. Servicing fees paid to us vary based on investment channel. Note investors generally pay us a servicing fee equal to 1% of payment amounts received from the borrower; whole loan purchasers pay a monthly servicing fee up to 1.3% per annum on the month-end principal balance of loans serviced and certificate holders generally pay a monthly management fee up to 1.5% per annum of the month-end balance of assets under management.
 
Loans to qualified borrowers are originated by issuing banks. Investors can invest in loans that are offered through our marketplace in one or all of the following channels:

Notes: The Company issues notes pursuant to an effective shelf registration statement. Investors who meet the applicable financial suitability requirements and have completed our investor account opening process may purchase unsecured, borrower payment dependent notes that correspond to payments received on an underlying standard program loan selected by the investor. When an investor registers with us, the investor enters into an investor agreement with us that governs the investor’s purchases of notes. Our note channel is supported by our website and our investor services group, which provides basic customer support to these investors.

Certificates and Investment Funds: Accredited investors and qualified purchasers may establish a relationship with LCA or another third-party advisor in order to indirectly invest in certificates, or they may directly purchase a certificate or a limited partnership interest in one of six private funds that purchase certificates. The certificates are issued by the Trust and are unsecured and settled with cash flows from underlying loans selected by the investor. Neither certificates nor limited partnership interests can be purchased through our website. Certificate investors typically seek to invest larger amounts as compared to the average note investors and often desire a more “hands off” approach to investing. Investors in certificates generally pay an asset-based management fee instead of cash flow-based servicing fee paid by note investors.

Whole Loan Purchases: Certain institutional investors, such as banks, seek to hold the actual loan on their balance sheet. To meet this need, we sell entire standard or custom program loans to these investors through purchase agreements. Upon the sale of the loan, the investor owns all right, title and interest in the loan. We establish the investors’ accounts and the procedures for the purchase of loans, including any purchase amount limitations, which we control at our discretion. We and the investor also make limited representations and warranties and agree to indemnify each other for breaches of the purchase agreement. The investor also agrees to simultaneously enter into a servicing agreement with us which designates us as the loan servicer for the sold loan. We continue to service these loans after they are sold and can only be removed as the servicer in limited circumstances. For regulatory purposes, the investor also has access to the underlying borrower information, but is prohibited from contacting or marketing to the borrower in any manner and agrees to hold such borrower information in compliance with all applicable privacy laws.

For all investment channels, we agree to repurchase loans in cases of confirmed identity theft.

Springstone

In April 2014, we acquired all of the outstanding limited liability company interests of Springstone. See "Part II - Item 8 - Financial Statements and Supplementary Data - Note 17 - Springstone Acquisition" in our Annual Report for more information.


28


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 a number of 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:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Loan originations
 
$
2,235,647

 
$
1,165,226

 
$
5,782,496

 
$
2,962,520

Operating revenue(1)
 
$
115,062

 
$
56,538

 
$
292,226

 
$
143,861

Contribution(2)
 
$
55,393

 
$
26,881

 
$
134,302

 
$
63,374

Contribution margin(2)
 
48.1
%
 
47.5
%
 
46.0
%
 
44.1
%
Adjusted EBITDA(2)
 
$
21,157

 
$
7,517

 
$
45,202

 
$
13,384

Adjusted EBITDA margin(2)
 
18.4
%
 
13.3
%
 
15.5
%
 
9.3
%
Net income (loss)
 
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
(1)
See "Factors That Can Affect Revenue" for more information regarding operating revenue.
(2)
Contribution, Contribution margin, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For more information regarding these measures and a reconciliation of these measures to the most comparable GAAP measure, see "Part I - Financial Information - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliations of Non-GAAP Financial Measures."

Loan Originations

Originations are a key indicator of the adoption rate of our marketplace, growth of our brand, scale of our business, strength of our network effect, economic competitiveness of our products and future growth. Loan originations have grown significantly over time due to increased awareness of our brand, our high borrower and investor satisfaction ratings, the effectiveness of our borrower acquisition channels, a strong track record of loan performance and the expansion of our capital resources. Factors that could affect loan originations include the interest rate and economic environment, the competitiveness of our products, the success of our operational efforts to balance investor and borrower demand, any limitations on the ability of our issuing banks to originate loans, our ability to develop new products or enhance existing products for borrowers and investors, the success of our sales and marketing initiatives and the success of borrower and investor acquisition and retention.

Contribution, Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin

Contribution is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, general and administrative expense, stock-based compensation expense and income tax expense (benefit). Contribution margin is a non-GAAP financial measure calculated by dividing contribution by total operating revenue. Contribution and contribution margin are measures used by our management and board of directors to understand and evaluate our core operating performance and trends. Contribution and contribution margin have varied from period to period and have generally increased over time. Factors that affect our contribution and contribution margin include revenue mix, variable marketing expenses and origination and servicing expenses.


29


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 is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is a non-GAAP financial measure calculated as adjusted EBITDA divided by total operating revenue. Adjusted EBITDA is a measure used by our management and board of directors to understand and evaluate our core operating performance and trends. Adjusted EBITDA has generally improved over time due to our increased revenue and efficiencies in the scale of our operations. For more information regarding the limitations of contributions, contribution margins, adjusted EBITDA and adjusted EBITDA margin and a reconciliation of net income (loss) to adjusted EBITDA, see "Part I - Financial Information - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliations of Non-GAAP Financial Measures."

Effectiveness of Scoring Models

Our ability to attract borrowers and investors to our marketplace is significantly dependent on our platform's ability to effectively evaluate a borrower’s credit profile and likelihood of default. We evaluate our marketplace’s credit decisioning and scoring models on a regular basis and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve the models. If we are unable to effectively evaluate borrowers’ credit worthiness, borrowers and investors may lose confidence in our marketplace. Additionally, our ability to effectively segment borrowers into relative risk profiles impacts our ability to offer attractive interest rates for borrowers as well as our ability to offer investors attractive risk-adjusted returns, both of which directly relate to our users’ confidence in our marketplace. Our marketplace's credit decisioning and scoring models assign each loan offered on our marketplace a corresponding interest rate and origination fee. Our investors’ returns are a function of the assigned interest rates for each particular loan invested in less any defaults over the term of the applicable loan. We believe we have a history of effectively evaluating borrowers' credit worthiness and likelihood of defaults, as evidenced by the performance of various loan vintages facilitated through our marketplace. The following charts display the historical lifetime cumulative net charge-off rates through September 30, 2015, by booking year, for all grades and 36 or 60 month terms of standard program loans for each of the years shown.


30


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)

    

31


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)

    
 
Product Innovation
 
We have made, and intend to continue to make, substantial investments and incur expenses to research and develop or otherwise acquire new financial products for borrowers and investors. Our revenue growth to date has been a function of, and our future success will depend in part on, successfully meeting borrower and investor demand with new and innovative loan and investment options. For example, in early 2014, our platform began offering small business loans to qualified investors, bringing the benefit of our innovative marketplace model, online delivery and process automation to small business owners. In the latter part of 2014, we launched through our platform super prime consumer loans and a true no interest product for the education and patient finance market. For investors, we have introduced automated investing, application programming interface (API), investment funds and separately managed accounts, that make investing in loans easier. Failure to successfully develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of new products.

Marketing Effectiveness and Strategic Relationships

We intend to continue to dedicate significant resources to our marketing and brand advertising efforts and strategic relationships. Our marketing efforts are designed to build awareness of Lending Club and attract borrowers and investors to our marketplace. We use a diverse array of marketing channels and are constantly seeking to improve and optimize our experience both on- and offline to achieve efficiency and a high level of borrower and investor satisfaction. We also continue to invest in our strategic relationships to raise awareness of our platform and attract borrowers and investors to our marketplace. Our operating results and ability to sustain and grow loan volume will

32


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)

depend, in part, on our ability to continue to make effective investments in marketing and the effectiveness of our strategic relationships.

In February 2015, Lending Club announced that it had entered into a strategic partnership with a consortium of community banks for its platform to offer co-branded personal loans to the participating banks' customers. As part of this partnership, each community bank is provided initial access to invest in loans sought by their own customers, which may include standard program loans. The customer loans that do not meet the community bank's investment criteria are then made available for investment through the marketplace. All loans are originated by our issuing banks.

Regulatory Environment

The regulatory environment for credit and online marketplaces such as ours is evolving and uncertain, creating both challenges and opportunities that could affect our financial performance. We expect to continue to spend significant resources to comply with various federal and state laws and various licensing requirements designed to, among other things, protect borrowers (such as truth in lending, equal credit opportunity, fair credit reporting and fair debt collections practices) and investors. Our marketplace incorporates a number of automated features to help comply with these laws in an efficient and cost effective manner. While new laws and regulations or changes under existing laws and regulations could make facilitating loans or investment opportunities more difficult to achieve on acceptable terms, or at all, these events could also provide new product and market opportunities. In July 2015, the U.S. Treasury Department issued a request for information (RFI) regarding various business models and products offered by online credit participants, the potential for online marketplace lending to expand access to credit to historically underserved borrowers and how the financial regulatory framework should evolve to support the safe growth of the industry. We, along with many other interested groups, submitted responses to the Treasury's RFI by the September 30, 2015 deadline. Although the Treasury Department is in the information-gathering stage and no interpretive guidance has been released, there is a possibility that our business may become subject to additional or different regulations in the future. To the extent we seek to grow internationally, we would become subject to additional foreign regulation and related compliance requirements and expense.

Factors That Can Affect Revenue

As a marketplace, we work toward matching supply and demand while also growing originations and correspondingly revenue at a pace commensurate with proper planning, risk management, user experience, and operational controls, that work to optimize the quality of the customer experience, customer satisfaction and long term growth.

The interplay of the following drivers can affect our revenue in any particular period:
the volume, timing and quality of:
loan applications from borrowers,
investment appetite and available investment capital from investors,
platform loan processing and originations, and
the subsequent performance of loans, which directly impacts our servicing fees.

These drivers collectively result in transaction, servicing or management fees earned by us related to these transactions and their future performance. 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: the mix of loans, the timing of the deployment of investment capital by investors, the amount of new capital from pooled investment vehicles and managed accounts that typically deploy their capital

33


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)

at the start of a period, the amount of purchase limitations we can impose on larger investors as a way to maintain investor balance and fairness, the attractiveness of alternative opportunities for borrowers or investors, the responsiveness of applicants to our marketing efforts, expenditures on marketing initiatives in a period, the sufficiency of operational staff to process any manual portion of the loan applications in a timely manner, the responsiveness of borrowers to satisfy additional income or employment verification requirements related to their application, borrower withdrawal rates, the percentage distribution of loans between the whole and fractional loan platforms, platform system performance and other factors. In addition, there may be some seasonality in demand for personal loans, which is generally lower in the first and fourth quarters.

Given these 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 these factors, loans may not be issued by our issuing bank 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 associated transaction fee revenue with a loan until the loan is issued by our issuing bank and the proceeds are delivered by the bank to the borrower.



34


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

The following tables set forth the Condensed Consolidated Statements of Operations data for each of the periods presented: 
 
Three Months Ended  
 September 30,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Operating revenues:
 
 
 
 
 
 
 
Transaction fees
$
100,420

 
$
52,622

 
$
47,798

 
91
%
Servicing fees
8,999

 
3,053

 
5,946

 
195
%
Management fees
2,900

 
1,608

 
1,292

 
80
%
Other revenue (expense)
2,743

 
(745
)
 
3,488

 
N/M

Total operating revenue
115,062

 
56,538

 
58,524

 
104
%
Net interest income (expense) after fair value adjustments
1,214

 
(474
)
 
1,688

 
N/M

Total net revenue
116,276

 
56,064

 
60,212

 
107
%
Operating expenses (1):


 


 
 
 
 
Sales and marketing
44,961

 
21,001

 
23,960

 
114
%
Origination and servicing
17,573

 
10,167

 
7,406

 
73
%
General and administrative:


 


 
 
 
 
Engineering and product development
18,320

 
9,235

 
9,085

 
98
%
Other
33,239

 
22,613

 
10,626

 
47
%
Total operating expenses
114,093

 
63,016

 
51,077

 
81
%
Income (loss) before income tax expense
2,183

 
(6,952
)
 
9,135

 
131
%
Income tax expense
1,233

 
419

 
814

 
194
%
Net income (loss)
$
950

 
$
(7,371
)
 
$
8,321

 
113
%
(1)    Includes stock-based compensation expense as follows:
 
 
Three Months Ended  
 September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
 
Sales and marketing
$
2,048

 
$
912

 
$
1,136

 
125
%
 
Origination and servicing
817

 
599

 
218

 
36
%
 
General and administrative:

 
 
 
 
 
 
 
Engineering and product development
2,554

 
1,492

 
1,062

 
71
%
 
Other
8,060

 
7,534

 
526

 
7
%
 
Total stock-based compensation expense
$
13,479

 
$
10,537

 
$
2,942

 
28
%
N/M - Not meaningful.


35


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)

 
Nine Months Ended 
 September 30,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Operating revenues:
 
 
 
 
 
 
 
Transaction fees
$
258,553

 
$
133,835

 
$
124,718

 
93
 %
Servicing fees
20,870

 
6,301

 
14,569

 
N/M

Management fees
7,663

 
4,163

 
3,500

 
84
 %
Other revenue (expense)
5,140

 
(438
)
 
5,578

 
N/M

Total operating revenue
292,226

 
143,861

 
148,365

 
103
 %
Net interest income (expense) after fair value adjustments
2,199

 
(854
)
 
3,053

 
N/M

Total net revenue
294,425

 
143,007

 
151,418

 
106
 %
Operating expenses(1):


 
 
 
 
 


Sales and marketing
120,162

 
60,808

 
59,354

 
98
 %
Origination and servicing
45,540

 
26,135

 
19,405

 
74
 %
General and administrative:


 
 
 
 
 


Engineering and product development
46,710

 
22,987

 
23,723

 
103
 %
Other
89,328

 
55,875

 
33,453

 
60
 %
Total operating expenses
301,740

 
165,805

 
135,935

 
82
 %
Loss before income tax expense
(7,315
)
 
(22,798
)
 
15,483

 
(68
)%
Income tax expense
2,249

 
1,059

 
1,190

 
112
 %
Net loss
$
(9,564
)
 
$
(23,857
)
 
$
14,293

 
(60
)%
(1)    Includes stock-based compensation expense as follows:
 
 
Nine Months Ended 
 September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
 
Sales and marketing
$
5,373

 
$
5,029

 
$
344

 
7
%
 
Origination and servicing
2,405

 
1,427

 
978

 
69
%
 
General and administrative:

 
 
 
 
 
 
 
Engineering and product development
6,392

 
3,487

 
2,905

 
83
%
 
Other
23,388

 
15,946

 
7,442

 
47
%
 
Total stock-based compensation expense
$
37,558

 
$
25,889

 
$
11,669

 
45
%
N/M - Not meaningful.


36


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)

Total Net Revenue
 
Three Months Ended  
 September 30,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Transaction fees
$
100,420

 
$
52,622

 
$
47,798

 
91
%
Servicing fees
8,999

 
3,053

 
5,946

 
195
%
Management fees
2,900

 
1,608

 
1,292

 
80
%
Other revenue (expense)
2,743

 
(745
)
 
3,488

 
N/M

Total operating revenue
115,062

 
56,538

 
58,524

 
104
%
Net interest income (expense) after fair value adjustments
1,214

 
(474
)
 
1,688

 
N/M

Total net revenue
$
116,276

 
$
56,064

 
$
60,212

 
107
%

 
Nine Months Ended 
 September 30,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Transaction fees
$
258,553

 
$
133,835

 
$
124,718

 
93
%
Servicing fees
20,870

 
6,301

 
14,569

 
N/M

Management fees
7,663

 
4,163

 
3,500

 
84
%
Other revenue (expense)
5,140

 
(438
)
 
5,578

 
N/M

Total operating revenue
292,226

 
143,861

 
148,365

 
103
%
Net interest income (expense) after fair value adjustments
2,199

 
(854
)
 
3,053

 
N/M

Total net revenue
$
294,425

 
$
143,007

 
$
151,418

 
106
%
N/M - Not meaningful.

Our primary sources of net revenue consist of fees received for transactions through or related to our marketplace and include transaction, servicing and management fees.

Transaction Fees: Transaction fees are fees paid by issuing banks or education and patient service providers to us for the work we perform through our marketplace's role in facilitating loan originations. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. These fees are recognized as a component of operating revenue at the time of loan issuance.

Transaction fees were $100.4 million and $52.6 million for the third quarters of 2015 and 2014, respectively, an increase of 91%. The increase was primarily due to an increase in loans facilitated through our marketplace from $1.2 billion for the third quarter of 2014 to $2.2 billion for the third quarter of 2015, an increase of 92%. The average transaction fee as a percentage of the initial principal balance of the loan was 4.5% for both the third quarters of 2015 and 2014. Transaction fees for the third quarter of 2015 included approximately $13.5 million of revenue associated with the issuance of loans in which the loan application process had commenced prior to end of the second quarter of 2015.

Transaction fees were $258.6 million and $133.8 million for the first nine months of 2015 and 2014, respectively, an increase of 93%. The increase was primarily due to an increase in loans facilitated through our marketplace from $3.0 billion for the first nine months of 2014 to $5.8 billion for the first nine months of 2015, an increase of 95%. The average transaction fee as a percentage of the initial principal balance of the loan was 4.5% for both the first nine months of 2015 and 2014. Transaction fees for the first nine months of 2015 included approximately

37


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)

$8.7 million of revenue associated with the issuance of loans in which the loan application process had commenced prior to the end of 2014.

In the month of October 2015 the Company recognized approximately $11.7 million in transaction fee revenue associated with the issuance of loans in which the loan application process had commenced prior to the end of the third quarter of 2015.

Servicing Fees: Servicing fees paid to us vary based on investment channel. The servicing fee compensates us for the costs we incur in servicing the related loan, including managing payments from borrowers, collections, payments to investors and maintaining investors’ account portfolios. The amount of servicing revenue earned is predominantly affected by the various servicing rates paid by investors in the applicable investment channels, the unpaid principal balance for whole loans serviced, and the amount of principal and interest collected from borrowers and remitted to note and certain certificate investors. Additionally, servicing fee revenue is affected by the change in fair value of our servicing assets and liabilities associated with loans that we sell. We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third parties or when the servicing contract commences. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are included in servicing fees in the period in which the changes occur.

Servicing fee revenue increased for the third quarter and first nine months of 2015 compared to the same periods in 2014 due to increases in both the balances of whole loans sold and the loan balances that underlie the notes and certificates. The following table provides the outstanding principal balance of loans that we serviced at the end of the periods indicated, by the method that the loans were financed (in millions):
 
 
September 30, 2015

 
December 31, 2014
Notes
 
$
1,457.5

 
$
1,055.2

Certificates
 
2,692.0

 
1,796.6

Whole loans sold
 
3,548.3

 
1,873.7

Total
 
$
7,697.8

 
$
4,725.5



38


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 tables below illustrate the composition of servicing fees by source for each period presented:
 
Three Months Ended  
 September 30,
 
 
 
2015
 
2014
 
Change (%)
Servicing fees related to whole loans sold
$
4,935

 
$
1,193

 
N/M

Note and certificate servicing fees
3,661

 
1,493

 
145
%
Total servicing fees before change in fair value of servicing assets and liabilities
8,596

 
2,686

 
N/M

Change in fair value of servicing assets and liabilities, net
403

 
367

 
10
%
Total servicing fees
$
8,999

 
$
3,053

 
195
%
 
Nine Months Ended 
 September 30,
 
 
 
2015
 
2014
 
Change (%)
Servicing fees related to whole loans sold
$
11,022

 
$
2,420

 
N/M

Note and certificate servicing fees
8,396

 
4,033

 
108
%
Total servicing fees before change in fair value of servicing assets and liabilities
19,418

 
6,453

 
N/M

Change in fair value of servicing assets and liabilities, net
1,452

 
(152
)
 
N/M

Total servicing fees
$
20,870

 
$
6,301

 
N/M

N/M - Not meaningful.

Management Fees: Certain investors can invest in investment funds managed by LCA, the general partner in the funds. LCA typically charges these investors a monthly management fee based on the month-end balance of their assets under management, ranging from 0.7% to 1.5% per annum. LCA does not earn any carried interest from the investment funds. For managed account certificate holders, LCA earns a management fee typically ranging up to 1.2% per annum of the month-end balance of their assets under management. These fees may be waived or reduced at the discretion of LCA.

Management fees were $2.9 million and $1.6 million for the third quarters of 2015 and 2014, respectively, an increase of 80%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.

Management fees were $7.7 million and $4.2 million for the first nine months of 2015 and 2014, respectively, an increase of 84%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.

Other Revenue (Expense): Other revenue (expense) primarily consists of gains and losses on sales of whole loans and referral revenue. Certain investors investing through our marketplace purchase standard or custom program loans in their entirety. In connection with these whole loan sales, in addition to the transaction and servicing fees earned with respect to the corresponding loan, we recognize a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee (loans are typically sold at par). Referral revenue consists of fees earned from partner companies when customers referred by us complete specified actions with a partner company. The specified action ranges from clicking on a link to visit a partner company’s website to obtaining a loan from the partner company.

39


LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)


Other revenue (expense) was $2.7 million and $(0.7) million for the third quarters of 2015 and 2014, respectively, and $5.1 million and $(0.4) million for the first nine months of 2015 and 2014, respectively. These increases were primarily due to gains on sales of whole loans and increases in referral revenue for the third quarter and first nine months of 2015 compared to the same periods in 2014.

The tables below illustrate the composition of other revenue (expense) for each period presented:
 
 
Three Months Ended  
 September 30,
 
 
 
 
2015
 
2014
 
Change (%)
Referral revenue
 
$
987

 
$
565

 
75
%
Gain (loss) on sales of loans
 
1,685

 
(1,330
)
 
N/M

Other
 
71

 
20

 
N/M

Other revenue (expense)
 
$
2,743

 
$
(745
)
 
N/M

 
 
Nine Months Ended 
 September 30,
 
 
 
 
2015
 
2014
 
Change (%)
Referral revenue
 
$
2,906

 
$
1,614

 
80
%
Gain (loss) on sales of loans
 
2,140

 
(2,111
)
 
N/M

Other
 
94

 
59

 
59
%
Other revenue (expense)
 
$
5,140

 
$
(438
)
 
N/M

N/M - Not meaningful.

Net Interest Income (Expense) After Fair Value Adjustments

We do not assume principal or interest rate risk on loans facilitated through our marketplace because loan balances, interest rates and maturities are matched and offset by an equal balance of notes or certificates with the exact same interest rates and maturities. We only make principal and interest payments on notes and certificates to the extent that we receive borrower payments on loans. As a servicer, we are only required to deliver borrower payments to the extent that we actually receive them. As a result, on our statement of operations for any period and balance sheet as of any date, (i) interest income on loans corresponds to the interest expense on notes and certificates and (ii) loan balances correspond to note and certificate balances with variations resulting from timing differences between the crediting of principal and interest payments on loans and the disbursement of those payments to note and certificate holders.

We may make limited loan investments without issuing a corresponding note or certificate, resulting in differences between interest income from loans and interest expense from notes and certificates on our statement of operations and total loans and notes and certificates balances on our balance sheets. These loan investments have been related primarily to customer accommodations and have not been material. We do not anticipate that such investments will be material in the foreseeable future.


40


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)

Additionally, interest income (expense) includes interest income earned on cash and cash equivalents and the securities available for sale portfolio. Our investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. The following tables provide additional detail related to net interest income (expense) and fair value adjustments:
 
 
Three Months Ended September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
144,663

 
$
94,036

 
$
50,627

 
54
%
Securities available for sale
 
899

 

 
899

 
N/M

Cash and cash equivalents
 
271

 
2

 
269

 
N/M

Total interest income
 
145,833

 
94,038

 
51,795

 
55
%
Interest expense:
 
 
 
 
 
 
 
 
Notes and certificates
 
(144,659
)
 
(94,460
)
 
(50,199
)
 
53
%
Total interest expense
 
(144,659
)
 
(94,460
)
 
(50,199
)
 
53
%
Net interest income (expense)
 
1,174

 
(422
)
 
1,596

 
N/M

Fair value adjustments on loans, notes and certificates, net
 
40

 
(52
)
 
92

 
177
%
Net interest income (expense) after fair value adjustments
 
$
1,214

 
$
(474
)
 
$
1,688

 
N/M

Average outstanding balances:
 
 
 
 
 
 
 
 
Loans
 
$
3,930,221

 
$
2,491,736

 
$
1,438,485

 
58
%
Notes and certificates
 
$
3,951,541

 
$
2,505,378

 
$
1,446,163

 
58
%
N/M - Not meaningful.

 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
387,697

 
$
252,293

 
$
135,404

 
54
%
Securities available for sale
 
1,447

 

 
1,447

 
N/M

Cash and cash equivalents
 
687

 
5

 
682

 
N/M

Total interest income
 
389,831

 
252,298

 
137,533

 
55
%
Interest expense:
 
 
 
 
 
 
 
 
Notes and certificates
 
(387,666
)
 
(253,054
)
 
(134,612
)
 
53
%
Total interest expense
 
(387,666
)
 
(253,054
)
 
(134,612
)
 
53
%
Net interest income (expense)
 
2,165

 
(756
)
 
2,921

 
N/M

Fair value adjustments on loans, notes and certificates, net
 
34

 
(98
)
 
132

 
135
%
Net interest income (expense) after fair value adjustments
 
$
2,199

 
$
(854
)
 
$
3,053

 
N/M

Average outstanding balances:
 
 
 
 
 
 
 
 
Loans
 
$
3,512,666

 
$
2,246,575

 
$
1,266,091

 
56
%
Notes and certificates
 
$
3,530,424

 
$
2,258,254

 
$
1,272,170

 
56
%
N/M - Not meaningful.

Interest income from loans was $144.7 million and $94.0 million during the third quarters of 2015 and 2014, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.

41


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 Company recorded interest expense for notes and certificates of $144.7 million and $94.5 million during the third quarters of 2015 and 2014, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.

Interest income from loans was $387.7 million and $252.3 million during the first nine months of 2015 and 2014, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans. For the first nine months of 2015 and 2014, the Company recorded interest expense for notes and certificates of $387.7 million and $253.1 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.
 
Fair Value Adjustments on Loans, Notes and Certificates: We estimate the fair value of loans and their related notes and certificates using a discounted cash flow valuation methodology that is described in "Part II - Item 8 - Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies" in the Annual Report. In the third quarter of 2015, the Company incorporated cumulative prepayments into the valuation of loans, notes and certificates. Cumulative prepayments are estimates of the cumulative amount of principal prepayments that will occur over the entire life of a loan, expressed as a percentage of the original principal amount of the loan. Cumulative prepayments reduce the projected balances and effective maturities of the loans, notes and certificates. Additionally, assumptions regarding cumulative prepayments are incorporated into the valuation process to estimate the fair value of loan servicing assets and liabilities as they are key valuation assumptions used by investors in servicing rights for unsecured consumer credit obligations.

The changes in fair value of loans, notes and certificates are shown on our condensed consolidated statements of operations on a gross basis. Due to the payment dependent feature of the notes and certificates, fair value adjustments on the loans are offset by the fair value adjustments on the notes and certificates, resulting in no net effect on our earnings. From time to time, however, we may make limited loan investments without issuing a corresponding note or certificate, resulting in differences between total loans and notes and certificates balances on our balance sheets. These loan investments have been related primarily to customer accommodations and have been insignificant. We do not anticipate that such investments will be material in the foreseeable future.

The net fair value adjustments were immaterial for the third quarters and first nine months of 2015 and 2014. The losses from fair value adjustments on loans were largely offset by the gains from fair value adjustments on notes and certificates due to the borrower payment dependent design of the notes and certificates and due to the principal balances of the loans being similar to the combined principal balances of the notes and certificates.


42


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)

Operating Expenses
 
 
Three Months Ended September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Sales and marketing
 
$
44,961

 
$
21,001

 
$
23,960

 
114
%
Origination and servicing
 
17,573

 
10,167

 
7,406

 
73
%
General and administrative:
 
 
 
 
 
 
 
 
Engineering and product development
 
18,320

 
9,235

 
9,085

 
98
%
Other
 
33,239

 
22,613

 
10,626

 
47
%
Total operating expenses
 
$
114,093

 
$
63,016

 
$
51,077

 
81
%

 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Sales and marketing
 
$
120,162

 
$
60,808

 
$
59,354

 
98
%
Origination and servicing
 
45,540

 
26,135

 
19,405

 
74
%
General and administrative:
 
 
 
 
 
 
 
 
Engineering and product development
 
46,710

 
22,987

 
23,723

 
103
%
Other
 
89,328

 
55,875

 
33,453

 
60
%
Total operating expenses
 
$
301,740

 
$
165,805

 
$
135,935

 
82
%

Our operating expenses consist of sales and marketing, origination and servicing and general and administrative expenses, which includes engineering and product development and other general and administrative expenses.

Sales and Marketing: Sales and marketing expense consists primarily of borrower and investor acquisition efforts. In addition, this includes general brand and awareness building, and salaries, benefits and stock-based compensation expense related to our sales and marketing team.

Sales and marketing expense was $45.0 million and $21.0 million for the third quarters of 2015 and 2014, respectively, an increase of 114%. The increase was primarily due to a $15.2 million increase in variable marketing expenses that drove higher loan originations and a $7.1 million increase in personnel-related expenses associated with higher headcount levels. Sales and marketing expense was $120.2 million and $60.8 million for the first nine months of 2015 and 2014, respectively, an increase of 98%. The increase was primarily due to a $38.3 million increase in variable marketing expenses that drove higher loan originations and a $15.9 million increase in personnel-related expenses associated with higher headcount levels.

Origination and Servicing: Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense related to our credit, collections, customer support and payment processing teams and vendor costs associated with facilitating and servicing loans.

Origination and servicing expense was $17.6 million and $10.2 million for the third quarters of 2015 and 2014, respectively, an increase of 73%. The increase was primarily due to a $4.6 million increase in personnel-related expenses and a $2.0 million increase in consumer reporting agency and loan processing costs, both driven by higher loan originations and a higher outstanding balance of loans serviced. Origination and servicing expense was $45.5 million and $26.1 million for the first nine months of 2015 and 2014, respectively, an increase of 74%. The increase was primarily due to a $10.7 million increase in personnel-related expenses and a $6.9 million increase in

43


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)

consumer reporting agency and loan processing costs, both driven by higher loan originations and a higher outstanding balance of loans serviced.

General and Administrative – Engineering and Product Development: Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product development team and the costs 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 and amortization of technology assets.

Engineering and product development expense was $18.3 million and $9.2 million for the third quarters of 2015 and 2014, respectively, an increase of 98%. The increase was primarily driven by continued investment in our platform and product development, which included a $5.5 million increase in personnel-related expenses resulting from increased headcount and a $3.0 million increase in equipment, software and the related support and maintenance, and depreciation expense.

Engineering and product development expense was $46.7 million and $23.0 million for the first nine months of 2015 and 2014, respectively, an increase of 103%. The increase was primarily due to a $13.6 million increase in personnel-related expenses resulting from increased headcount and a $8.5 million increase in equipment, software and depreciation expense.

We capitalized $7.5 million and $3.4 million in software development costs for the third quarters of 2015 and 2014, respectively. We capitalized $18.1 million and $8.2 million in software development costs for the first nine months of 2015 and 2014, respectively.

General and Administrative – Other: Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting and finance, business development, legal, human resources and facilities teams, professional fees related to legal and accounting, and facilities expense and compensation expense related to the acquisition of Springstone.

Other general and administrative expense was $33.2 million and $22.6 million for the third quarters of 2015 and 2014, respectively, an increase of 47%. The increase was primarily due to a $6.8 million increase in salaries and share-based compensation expense related to increased headcount as we continued to invest in back office infrastructure, as well as a $2.0 million increase in facilities expense as we continue to expand and build out our corporate headquarters in San Francisco to accommodate our growing headcount.

Other general and administrative expense was $89.3 million and $55.9 million for the first nine months of 2015 and 2014, respectively, an increase of 60%. The increase was primarily due to a $23.7 million increase in share-based compensation expense and salaries related to increased headcount as we continued to invest in back office infrastructure and stock consideration issued related to the Springstone acquisition, as well as a $5.3 million increase in facilities expense as we continue to expand and build out our corporate headquarters in San Francisco to accommodate our growing headcount.

Income Taxes
 
For the third quarter and first nine months of 2015 we recorded income tax expense of $1.2 million and $2.2 million, respectively, due to recognition of the amortization of tax deductible goodwill that gives rise to an indefinite-lived deferred tax liability. Income tax expense was $0.4 million and $1.1 million for the third quarter and first nine months of 2014, respectively.


44


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 Company continues to recognize a full valuation allowance against deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. As of September 30, 2015, the valuation allowance was $41.3 million.

Reconciliations of Non-GAAP Financial Measures

Our non-GAAP measures of contribution, contribution margin, adjusted EBITDA, and adjusted EBITDA margin have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. These non-GAAP measures should not be viewed as substitutes for, or superior to, net income (loss) as prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure. These measures do not consider the potentially dilutive impact of stock-based compensation. Although depreciation and amortization are non-cash charges, the assets being depreciated 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. Adjusted EBITDA and adjusted EBITDA margin do not reflect tax payments that may represent a reduction in cash available to us.

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. The following tables present a reconciliation of net income (loss) to contributions for each of the periods indicated:
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Reconciliation of Net Income (Loss) to Contribution:
2015
 
2014
 
2015
 
2014
Net income (loss)
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
Net interest (income) expense after fair value adjustments
(1,214
)
 
474

 
(2,199
)
 
854

General and administrative expense:
 
 
 
 
 
 
 
Engineering and product development
18,320

 
9,235

 
46,710

 
22,987

Other
33,239

 
22,613

 
89,328

 
55,875

Stock-based compensation expense(1)
2,865

 
1,511

 
7,778

 
6,456

Income tax expense
1,233

 
419

 
2,249

 
1,059

Contribution
$
55,393

 
$
26,881

 
$
134,302

 
$
63,374

Total operating revenue
$
115,062

 
$
56,538

 
$
292,226

 
$
143,861

Contribution margin
48.1
%
 
47.5
%
 
46.0
%
 
44.1
%
 
(1)   Contribution also excludes stock-based compensation expense included in the sales and marketing and origination and servicing expense categories, as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Sales and marketing
$
2,048

 
$
912

 
$
5,373

 
$
5,029

 
Origination and servicing
817

 
599

 
2,405

 
1,427

 
Total
$
2,865

 
$
1,511

 
$
7,778

 
$
6,456


45


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)

 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
2015
 
2014
 
2015
 
2014
Net income (loss)
$
950

 
$
(7,371
)
 
$
(9,564
)
 
$
(23,857
)
Net interest (income) expense after fair value adjustments
(1,214
)
 
474

 
(2,199
)
 
854

Acquisition and related expense
937

 
301

 
1,634

 
2,819

Depreciation expense:
 
 
 
 
 
 
 
Engineering and product development
3,808

 
1,447

 
9,813

 
3,326

Other
708

 
322

 
1,636

 
784

Amortization of intangible assets
1,256

 
1,388

 
4,075

 
2,510

Stock-based compensation expense
13,479

 
10,537

 
37,558

 
25,889

Income tax expense
1,233

 
419

 
2,249

 
1,059

Adjusted EBITDA
$
21,157

 
$
7,517

 
$
45,202

 
$
13,384

Total operating revenue
$
115,062

 
$
56,538

 
$
292,226

 
$
143,861

Adjusted EBITDA margin
18.4
%
 
13.3
%
 
15.5
%
 
9.3
%

Liquidity and Capital Resources

At September 30, 2015, the Company had $579.2 million in available unrestricted cash and cash equivalents primarily held in institutional money market funds and interest-bearing deposit accounts at investment grade financial institutions. The Company believes that the current cash position is sufficient to meet the liquidity needs for the next twelve months.

During the second quarter of 2015, the Company purchased securities available for sale to invest excess cash. The fair value of securities available for sale as of September 30, 2015 was $338.5 million. These securities include corporate debt securities, asset back securities, U.S. agency securities, and municipal and other securities. As of September 30, 2015, all securities in the available for sale portfolio were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses.

At September 30, 2015, the Company had $159.2 million in restricted cash that primarily consisted of $150.9 million of cash received for investors and not yet applied to their accounts, $3.4 million for an investor as part of a contingent credit support agreement, and $3.0 million of cash pledged as security for our primary issuing bank.

46


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:
 
 
Nine Months Ended September 30,
Condensed Cash Flow Information:
 
2015
 
2014
Net cash provided by operating activities
 
$
53,350

 
$
35,395

 
 
 
 
 
Cash flow from loan investing activities (1)
 
(1,442,964
)
 
(789,593
)
Cash flow from all other investing activities
 
(477,954
)
 
(135,885
)
Net cash used for investing activities
 
(1,920,918
)
 
(925,478
)
 
 
 
 
 
Cash flow from note/certificate financing (1)
 
1,454,391

 
796,515

Cash flow from all other financing activities
 
122,603

 
126,943

Net cash provided by financing activities
 
1,576,994

 
923,458

Net (decrease) increase in cash and cash equivalents
 
$
(290,574
)
 
$
33,375

(1) 
Cash flow from loan investing activities includes the purchase of loans and repayment of loans facilitated through our marketplace. Cash flow from note/certificate financing activities includes the issuance of notes and certificates to investors and the repayment of those notes and certificates. These amounts generally correspond and offset each other.

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the first nine months of 2015 was $53.4 million. Cash flow provided by operating activities was driven by the Company's net loss for the first nine months of 2015 of $9.6 million, adjusted for non-cash stock-based compensation expense of $37.6 million and depreciation and amortization expense of $15.5 million. Further, cash provided by operating activities was primarily driven by changes in certain components of our working capital, including an increase in accrued expenses and other liabilities of $22.4 million, offset by an increase in other assets of $6.3 million and a decrease in accounts payable of $3.1 million.

Net cash provided by operating activities for the first nine months of 2014 was $35.4 million. Cash flow from operating activities primarily resulted from the net loss for the first nine months of 2014 of $23.9 million, adjusted for non-cash stock-based compensation expense of $25.9 million. Additionally, operating cash flows were generated due to changes in certain components of our working capital, including a decrease in other assets of $13.2 million that was primarily related to payments of receivables due to investors, and an increase in accrued expenses and other liabilities of $10.8 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the first nine months of 2015 was $1.92 billion. Cash used in investing activities primarily includes $2.74 billion of cash used to purchase loans at fair value, $402.8 million used to purchase securities available for sale, a $112.5 million increase in restricted cash, and $25.9 million used to purchase property, equipment and software, partially offset by $1.28 billion of principal payments received from loans at fair value and $63.2 million of proceeds received from sales of securities available for sale.

Net cash used in investing activities for the first nine months of 2014 was $925.5 million, which primarily resulted from $1.53 billion of cash used to purchase loans at fair value, $109.5 million for the Springstone acquisition, $15.0 million of cash used to purchase property, equipment and software, and a $11.4 million increase in restricted cash, partially offset by $739.5 million of principal payments received on loans at fair value.

47


LENDINGCLUB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)


Net Cash Provided by Financing Activities

Net cash provided by financing activities for the first nine months of 2015 was $1.58 billion. Cash provided by financing primarily includes $2.74 billion of proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates and a $112.1 million decrease in the amount payable to investors, partially offset by $1.27 billion in principal payments made on notes and certificates.

Net cash provided by financing activities for the first nine months of 2014 was $923.5 million, which primarily resulted from $1.53 billion of proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates, $64.8 million net proceeds from our sale of Series F convertible preferred stock in connection with the Springstone acquisition, $49.8 million of net proceeds from the issuance of a term loan and a $12.9 million increase in the amount payable to investors, which was partially offset by $732.3 million of principal payments made on notes and certificates.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the first nine months of 2015 and 2014.

Contingencies
 
The Company's contingencies as of September 30, 2015 are included in "Part I - Financial Information - Item 1 - Financial Statements - Note 14 - Commitments and Contingencies."

Critical Accounting Policies and Estimates

Certain of the Company's accounting policies that involve a higher degree of judgment and complexity are discussed in "Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates" in the Annual Report. There have been no significant changes to these critical accounting estimates during the first nine months of 2015.

The Company’s annual goodwill impairment testing date is April 1. In testing for potential impairment of goodwill on April 1, 2015, management performed an assessment of each of the Company’s goodwill reporting units (generally defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and concluded that goodwill was not impaired.


48

LENDINGCLUB CORPORATION


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices or interest rates.

Because balances, interest rates and maturities of loans are matched and offset by an equal balance of notes and certificates with the exact same interest rates and maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined loan, note and certificate portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.

The fair values of loans and the related notes and certificates are determined using a discounted cash flow methodology. The fair value adjustments for loans are largely offset by the fair value adjustments of the notes and certificates due to the borrower payment dependent design of the notes and certificates and due to the total principal balances of the loans being very close to the combined principal balances of the notes and certificates.

We had cash and cash equivalents of $579.2 million as of September 30, 2015. These amounts were held primarily in interest-bearing deposits at investment grade financial institutions and institutional money market funds, which are short-term. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, we believe that we do not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will modestly increase the interest income earned on these cash balances.

Interest Rate Sensitivity

The Company also holds securities in an available for sale portfolio. At September 30, 2015, the fair value of our securities available for sale portfolio was $338.5 million, consisting of corporate debt securities, asset-backed securities, U.S. agency securities, and municipal and other securities. To mitigate the risk of loss, our investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, the Company limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and securities available for sale and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $3.7 million in the fair value of our securities available for sale as of September 30, 2015. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $3.6 million in the fair value of our securities available for sale as of September 30, 2015. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2015. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control Over Financial Reporting

No change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the first nine months of 2015, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

49

LENDINGCLUB CORPORATION


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of legal proceedings, see "Part 1 - Financial Information - Item 1 - Financial Statements - Note 14 - Commitments and Contingencies - Legal."
 
Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described below, together with all of the other information in this Report, including the section titled "Part I - Financial Information - Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" and the condensed consolidated financial statements and related notes, and "Part I - Item 1A - Risk Factors" in the Company's Annual Report.

RISKS RELATED TO COMPLIANCE AND REGULATION

If the loans originated through our marketplace were found to violate a state’s usury laws, we may have to alter our business model and our business could be harmed.

The interest rates that are charged to borrowers and that form the basis of payments to investors through our marketplace are enabled by legal principles including (i) the application of federal law to enable an issuing bank that originates the loan to export the interest rates of the jurisdiction where it is located, and (ii) the application of common law “choice of law” principles based upon factors such as the loan document’s terms and where the loan transaction is completed to provide uniform rates to borrowers, and (iii) the application of principles that allow the transferee of a loan to continue to collect interest as provided in the loan document. WebBank, the primary issuing bank of the loans originated through our marketplace, is chartered in, and operates out of, Utah, which allows parties to generally agree by contract to any interest rate. The annual percentage rates offered by WebBank through our marketplace for personal loans as of September 30, 2015 range from 5.99% to 32.99%, which equate to interest rates for investors that range from 4.65% to 28.47%. Certain states, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate. In some jurisdictions, the maximum rate is less than the current maximum rate offered by WebBank through our platform. If the laws of such jurisdictions were found to apply to the loans originated through our marketplace, those loans could be in violation of such laws.

In May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC that interpreted the scope of federal preemption under the National Bank Act (“NBA”) and held that a non-bank assignee of a loan originated by a national bank, based on the facts of that case in which the national bank no longer had any interest in the loan, was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit remanded the case to address state law issues, such as choice of law. The Second Circuit denied the defendant's motion to reconsider the decision. The Second Circuit's decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. If applied to any of the loans originated through our marketplace, the decision could adversely impact our business.

If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrower’s personal loan was greater than that allowed under applicable state law, we could be subject to fines and penalties, including the voiding of loans and repayment of principal and interest to borrowers and investors. We might decide to limit the maximum interest rate on certain loans originated through our marketplace, and we might decide to originate loans under state-specific licenses, where this ruling is applicable. These actions could adversely impact our business.


50

LENDINGCLUB CORPORATION


The regulatory framework for our business is evolving and uncertain as federal and state governments consider new laws to regulate online marketplaces such as ours. New laws and regulations, including taxes on services provided by us, as well as continued uncertainty regarding potential new laws or regulations, may negatively affect our business.

The regulatory framework for online marketplaces such as ours is evolving and uncertain. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our marketplace and the way in which we interact with borrowers and investors.

Recognizing the growth in online marketplaces such as ours, in July 2015 the U.S. Treasury Department issued a request for information (RFI) to study the various business models and products offered by online marketplace lenders, the potential for online marketplace lending to expand access to credit to historically underserved borrowers and how the financial regulatory framework should evolve to support the safe growth of the industry. The RFI seeks information about a number of topics, including how credit marketplaces manage the risk of fraud and security breaches, how they protect consumers against scams or default, how much investors in the loans rely on borrowed money, and whether the lenders should have to retain some risk relating to the loans they originate or underwrite.

Although the Treasury Department is in the information-gathering stage and no interpretive guidance has been released, there is a possibility that our business may become subject to additional or different regulations in the future. The cost and complexity to comply with new laws or regulations could be significant and result in the need to modify our operations and increase our operating expenses, and we may be unable to pass any such costs on to borrowers and investors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

51

LENDINGCLUB CORPORATION


Item 6. Exhibits

See Exhibit Index. The exhibits noted in the accompanying Exhibit Index are filed or incorporated by reference as a part of this Report and such Exhibit Index is incorporated herein by reference.
 
 
Incorporated by Reference
 
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing
Date
Filed Herewith
10.1
Form of Borrower Loan Agreement
 
 
 
 
X
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
101.INS
XBRL Instance Document
 
 
 
 
X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
X


52

LENDINGCLUB CORPORATION


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
 
LENDINGCLUB CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
Date:
November 3, 2015
 
/s/ RENAUD LAPLANCHE
 
 
 
 
Renaud Laplanche
 
 
 
Chief Executive Officer
 
 
 
 
 
Date:
November 3, 2015
 
/s/ CARRIE DOLAN
 
 
 
 
Carrie Dolan
 
 
 
Chief Financial Officer


53