Summary of Significant Accounting Policies

3 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Consolidation Policies

The consolidated financial statements include the accounts of the Company and its subsidiary, LC Advisors, LLC, a California limited liability company (“LCA”) and LC Trust I, a Delaware business trust (“Trust”). The Company’s policy is to consolidate entities in which it directly or indirectly has a controlling financial interest. The Company considers for consolidation those entities in which it has an equity investment or ownership interest greater than 50% and has control over significant operating, financial and investing decisions.

LCA is wholly-owned by the Company. The Company consolidates LCA’s operations and all intercompany accounts have been eliminated. Additionally, although we only hold an immaterial interest in the Trust, the Company, as sponsor of the Trust, has substantive control and as a result has consolidated the Trust’s operations and all intercompany accounts have been eliminated.

Management Fees

LCA as general partner of two private investment funds receives management fees. The management fee is payable monthly, in arrears. The management fee ranges from 0.55% to 0.75% based upon a limited partner’s capital account balance as of the end of each month. This fee can be modified or waived at the discretion of the general partner.

Liquidity

We have incurred operating losses since our inception. For the three months ended June 30, 2011 and 2010, we incurred net losses of $3,106,678 and $2,525,235, respectively. For the three months ended June 30, 2011 and 2010, we had negative cash flows from operations of $2,876,546 and $2,469,094, respectively. Additionally, we have an accumulated deficit of $44,561,329 since inception and a stockholders’ deficit of $40,206,633, as of June 30, 2011.

Since our inception, we have financed our operations through debt and equity financing from various sources. We are dependent upon raising additional capital or seeking additional debt financing to fund our current operating plans. Failure to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve our business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which any required financing and capital might be available, if at all.

Subsequent to June 30, 2011, we issued 7,027,604 shares of Series D convertible preferred stock for aggregate cash consideration of approximately $25,000,000, see Note 14 — Subsequent Events.

Use of estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Material estimates that are particularly susceptible to change in the near term relate to allowance for loan losses and fair value of CM Loans, Notes and loan servicing rights. Actual results may differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents include various deposits with financial institutions in checking and short-term money market accounts. We consider all highly liquid investments with original maturity dates of three months or less to be cash equivalents.

Restricted cash

Restricted cash consisted primarily of funds held in escrow in certificates of deposit or money market accounts, at the banks associated with the loan facilities described in Note 6 — Loans Payable, and by our operating banks as security for transactions on our platform.

Member loans held for investment

From time to time, we fund member loans ourselves to ensure a sufficient level of funding for borrower members. The majority of funds for such loans were obtained through our borrowings under loan facilities with various entities (see Note 6 — Loans Payable). For the three months ended June 30, 2011 and June 30, 2010, we had funded an aggregate total of $1,096,825 and $974,325, respectively, of member loans to borrower members. These member loans are classified as held for investment based on management’s intent and ability to hold such member loans for the foreseeable future or to maturity. Member loans held for investment are carried at amortized cost reduced by a valuation allowance for estimated credit losses incurred as of the balance sheet date. A member loan’s cost includes its unpaid principal balance net of unearned income, comprised of fees charged to borrower members, offset by incremental direct costs for loans originated by us. Unearned income is amortized ratably over the member loan’s contractual life using the effective interest method.

Allowance for loan losses

We may incur losses in connection with member loans we hold for investment if the borrower members fail to pay their monthly scheduled loan payments. The allowance for loan losses is a valuation allowance established as losses are estimated to have occurred at the balance sheet date through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.

The allowance for loan losses is evaluated on a periodic basis by management, and represents an estimate of potential credit losses based on a variety of factors, including the composition and quality of the loan portfolio, loan specific information gathered through our collection efforts, delinquency levels, probable expected losses, current and historical charge-off and loss experience, current industry charge-off and loss experience, and general economic conditions. Determining the adequacy of the allowance for loan losses is subjective, complex and requires judgment by management about the effect of matters that are inherently uncertain, and actual losses may differ from our estimates.

Our estimate of the required allowance for loan losses is developed by estimating both the rate of default of the loans within each credit score band using the FICO credit scoring model, a loan’s collection status, the borrower’s FICO score at or near the evaluation date, and the amount of probable loss in the event of a borrower member default.

Impaired Loans

A member loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. We make an initial assessment of whether a loan is impaired no later than the 90th day of delinquency of that loan. Our member loan portfolio is comprised primarily of small groups of homogeneous, unsecured loans made to borrower members, which loans are evaluated for impairment at least quarterly based on their payment status and information gathered through our collection efforts. Once a loan is deemed uncollectible, 100% of the net investment is charged-off, no later than the 150^th day of delinquency.

CM Loans and Notes held for investment at fair value

Starting October 13, 2008, our investors have had the opportunity to buy Notes issued by us. These Notes are special limited recourse obligations of LendingClub. Each series of Notes corresponds to a single corresponding member loan, or CM Loan, originated through our platform. In conjunction with this new operating structure effective as of October 13, 2008, for CM Loans and Notes, we adopted the provisions of FASB ASC 825-10 guidance on the fair value option for financial assets, which permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that estimated unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We applied the fair value option to the Notes and CM Loans.

The aggregate fair value of the CM Loans and Notes are reported as separate line items in the assets and liabilities sections of our balance sheet using the methods and disclosures related to fair value accounting that are described in FASB ASC 820.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Changes in fair value of the CM Loans and Notes are recognized in earnings, and fees and costs associated with the origination or acquisition of CM Loans are recognized as incurred rather than deferred.

We determined the fair value of the CM Loans and Notes in accordance with the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs, which generally requires significant management judgment, when measuring fair value. FASB ASC 820 establishes the following hierarchy for categorizing these inputs:

          Level 1 — Quoted market prices in active markets for identical assets or liabilities;

          Level 2 — Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and

          Level 3 — Significant unobservable inputs.

As observable market prices are not available for similar assets and liabilities, we believe the CM Loans and Notes should be considered Level 3 financial instruments. For CM Loans, the fair values are estimated using amortized cost adjusted for our expectation of both the rate of default of the CM Loans within each credit score band and the amount of loss in the event of default under those CM Loans. A reduction in the expected future cash flows from the CM Loans due to default and loss results in a reduction in their estimated fair values.

Our obligation to pay principal and interest on any Note is equal to the pro-rata portion of the CM Loan payments, if any, received on the related CM Loan, net of our 1.00% service charge. As such, any reduction in the expected future payments on a CM Loan due to default and loss, reduces the expected future payments on the related Note by a comparable amount, thereby reducing the fair value of the Note. The fair value of the Notes is approximately equal to the fair value of the CM Loans, adjusted for the 1.00% service charge. Unrealized gains or losses on the CM Loans and Notes are reported separately in earnings. The effective interest rate associated with a Note will be less than the interest rate earned on the related CM Loan due to the 1.00% service charge. For additional discussion on this topic, see Note 5 — CM Loans and Notes Held at Fair Value.

Revenue recognition

Revenues primarily result from interest income and transaction fees earned on member loans originated through our online platform. Transaction fees include origination fees (borrower member paid) and servicing fees (investor member paid). Together we classify interest and fees earned on member loans as interest income (See Note 12 — Net Interest Income).

Revenues related to member loan origination fees are recognized in accordance with FASB ASC 310-20 guidance on nonrefundable fees and other costs. The loan origination fee charged to each borrower member is determined by the credit grade of that borrower member’s loan and as of June 30, 2011 ranged from 2.00% to 5.00% of the aggregate member loan amount. The member loan origination fees are included in the annual percentage rate (“APR”) calculation provided to the borrower member and is subtracted from the gross loan proceeds prior to disbursement of the loan funds to the borrower member. A member loan is considered issued when we move funds on our platform from the investor members’ accounts to the borrower member’s account, following which we initiate an Automated Clearing House transaction to transfer funds from our platform accounts to the borrower member’s bank account.

Servicing fee revenue is recognized in accordance with FASB ASC 860 guidance on transfers and servicing of financial assets. Currently, a 1.00% service fee, based on any payments received, is charged to the investor at the time that we receive any payments from the borrower member. The service fee is deducted from any payments received on a member loan before the net amounts of those payments are allocated to the investors’ accounts.

Our treatment of interest and fee revenue is determined by the category that each member loan origination falls into, which are:

• Member Loans Funded Directly by Third Party Member — Member loans originated through our platform and sold to third party investor members until April 7, 2008.

• Member Loans Funded by Notes, known as CM Loans — CM Loans originated on or after October 13, 2008 and funded by Notes.

• Member Loans Funded by LendingClub — Member loans we funded ourselves, irrespective of when originated.

Member Loans Funded Directly by Third Party Members

These member loans are considered to have been sold to the investor members, whereby we assigned promissory notes directly to investor members. As such, we recognize only origination fee and servicing fee revenue on these member loans and do not provide an allowance for loan losses. We recognize a servicing asset and corresponding servicing liability as a result of this sale in accordance with FASB ASC 860, and amortize the asset into interest income as payments are received on the member loans.

Since the earnings process is deemed to be complete at the time these member loans were transferred to the investors, and because there is no recourse to us in the event of default by the borrower member, we recognized 100% of the origination fee as revenue at the time the member loan was transferred to the purchaser and included the fee in interest income.

Member Loans Funded by Notes, known as CM Loans

Investor members are no longer able to directly purchase member loans. Rather, as described above, each CM Loan is recorded as a note receivable funded by us, while Notes, which are special limited recourse obligations of LendingClub corresponding to those CM Loans, are recorded as Notes issued by us to investors. After we receive payments of principal and interest on the CM Loans, we in turn make principal and interest payments on the Notes, net of our servicing fee. These principal payments reduce the carrying value of both the CM Loans and Notes. If we do not receive a payment on the CM Loan, we are not obligated to and will not make any payments on the corresponding Notes. We account for the CM Loans and Notes at fair value.

We do not directly record servicing fee revenue from these CM Loans, but rather recognize interest income on our CM Loans related to these member loans based on the full amount of the loan payment at the stated interest rate to the borrower member without regard to the servicing fee. We then record interest expense on the corresponding Note based on the post-service fee payment we make to our investor members, which results in an interest expense on these Notes which is lower than that for the CM Loans. Origination fees on these CM Loans are recognized upon origination and included in interest income.

We include the estimated amount of unrealized gains or losses in earnings during the period attributable to changes in instrument-specific credit risk and as such, do not record a specific loan loss allowance related to CM Loans and Notes under the fair value option. We estimate the fair value of CM Loans and Notes by using amortized cost adjusted for our expectation of the rate of default of the CM Loans and Notes assuming zero recovery on the defaulted loans. At origination and at each reporting period, we recognize a fair valuation adjustment equal to our estimated defaults for the CM Loans and our estimated defaults on the Notes. As the CM Loans are amortizing at slightly higher interest rates than the Notes due to the impact of the servicing fee, the amount of fair valuation adjustment related to estimated defaults on the CM Loans will always be slightly higher than the estimated fair valuation adjustment from defaults on the Notes. Our fair valuation adjustment related to these CM Loans and Notes is further described in Note 12— Net Interest Income.

Member Loans Funded by LendingClub

When a member loan has been funded in whole, or in part, by us, we retain the portion of the borrower member’s monthly loan payment that corresponds to the percentage of the member loan that we have funded. In these cases, we record interest income on these member loans.

Origination fees from member loans funded by us are offset by our direct loan origination costs. The net amount is initially deferred and subsequently amortized ratably over the term of the member loan as an adjustment to yield, and is reported in the accompanying statements of operations as interest income.

Concentrations of credit risk

Financial instruments that potentially subject us to significant concentrations of credit risk, consist principally of cash, cash equivalents, restricted cash, member loans, and CM Loans. We hold our cash, cash equivalents and restricted cash in accounts at various financial institutions. We are exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet periodically exceeds the FDIC insured amounts. We perform credit evaluations of our borrower members’ financial condition and do not allow borrower members to have more than two member loans outstanding at any one time. We do not require collateral for member loans, but we maintain allowances for potential credit losses, as described above. Potential credit risk to LendingClub from CM Loans is mitigated by the corresponding Notes.

Stock-based compensation

All share-based payments made to employees, including grants of employee stock options, restricted stock and employee stock purchase rights, are recognized in the consolidated financial statements based on their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.

The fair value of share-based payment is estimated on the date of grant using an option-pricing model. We have estimated the fair value of each award as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the expected life of the award, the expected volatility of our stock price and expected future dividends, if any.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those stock-based awards that are expected to vest.

Share-based awards issued to non-employees are accounted for in accordance with provisions of ASC 505-50, Equity-Based Payments to Non-Employees, which requires that equity awards be recorded at their fair value. We use the Black-Scholes model to estimate the value of options granted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation. The volatility of common stock was based on comparative company volatility.

Reclassification of Prior Quarter Amounts

Certain prior quarter amounts for loan servicing rights, deferred revenue, fair value adjustments for CM Loans and fair value adjustments for Notes have been reclassified to conform to the current period’s presentation. The fair value of loan servicing rights was combined with prepaid expenses and other assets. Deferred revenue was combined with the carrying value of member loans. The fair value adjustments for CM Loans were reclassified out of interest income on CM Loans and the fair value adjustments for Notes were reclassified out of interest expense on Notes to be reported separately on the Consolidated Statements of Operations. These reclassifications had no impact on previously reported results of consolidated operations or consolidated stockholders’ equity.

New accounting pronouncements

In July 2010, the FASB issued Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU requires further disaggregated disclosures that improve financial statement users’ understanding of: 1) the nature of an entity’s credit risk associated with its financing receivables, and 2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For public entities, the new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011. Since we only file consolidated financial statements with the SEC and do not meet any of the conditions listed below, we are considered a nonpublic entity with respect to determination of the effective date of ASU 2010-20:

• Its debt or equity securities, including securities quoted only locally or regionally, trade in a public market either on stock exchange (domestic or foreign) or in an over-the-counter market.

• It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).

• It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.

• It is controlled by an entity covered by any of the preceding criteria.

Thus, we are required to adopt the provisions of ASU 2010-20 for the first annual reporting period ending on or after December 15, 2011. The adoption of this standard is not expected to have a material effect on the Company’s result of consolidated operations or financial position but it will require expansion of the Company’s future disclosures.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring (“TDR”), both for purposes of recording an impairment loss and for disclosure of a TDR. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to ASU Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. ASU No. 2011-02 is effective for interim and annual periods beginning on or after December 15, 2012, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. This guidance is not expected to have a material effect on our identification of troubled debt restructurings or disclosures.

The FASB has issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.