10-Q 1 d706350d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-54752

 

 

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, California

  94105
(Address of principal executive offices)   (Zip Code)

(415) 632-5600

(Registrant’s telephone number, including area code)

 

 

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  x    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  x    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   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2014, there were 28,646,018 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

LENDINGCLUB CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     2   

Item 1. Financial Statements

     2   

Condensed Consolidated Balance Sheets

     2   

Condensed Consolidated Statements of Operations

     3   

Condensed Consolidated Statements of Cash Flows

     4   

Notes to Condensed Consolidated Financial Statements

     5   

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

     17   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     46   

Item 4. Controls and Procedures

     46   

PART II. OTHER INFORMATION

     47   

Item 1. Legal Proceedings

     47   

Item 1A. Risk Factors

     47   

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

     48   

Item 3. Defaults Upon Senior Securities

     48   

Item 4. Mine Safety Disclosures

     48   

Item 5. Other Information

     48   

Item 6. Exhibits

     48   

SIGNATURES

     49   

EXHIBIT INDEX

     50   


Table of Contents

Except as the context requires otherwise, as used herein, “Lending Club,” “LC,” “we,” “us,” and “our,” refer to LendingClub Corporation, “LCA” refers to LC Advisors, LLC, a wholly owned subsidiary of LendingClub and “Trust” refers to LC Trust I, 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.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”), as amended, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), as amended, that involve substantial risks and uncertainties. Those sections of the Securities Act and Exchange Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

All statements, other than statements of historical facts, included in this Report regarding borrowers, credit scoring, Fair Isaac Corporation (“FICO”) or other credit scores, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” 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:

 

    our ability to attract potential borrowers to our marketplace;

 

    the degree to which potential borrowers apply for, are approved for and actually borrow via a loan (“Loan”);

 

    the status of borrowers, the ability of borrowers to repay loans and the plans of borrowers;

 

    interest rates and origination fees on Loans;

 

    our ability to service loans and our ability, or the ability of third party collection agents, to pursue collection of delinquent and defaulted loans;

 

    our ability to retain WebBank or another third party banking institution as the issuer of Loans facilitated through our platform;

 

    our ability to attract additional investors to the platform, to our funds, to separately managed accounts (“SMAs”) or to purchase loans;

 

    the ability to sell member payment dependent notes (“Notes”), Certificates and Loans to investors;

 

    the available functionality of a secondary market trading program;

 

    expected rates of return provided to investors;

 

    our financial condition and performance, including our ability to remain cash flow positive;

 

    our ability to retain and hire competent employees and appropriately staff our operations;

 

    our ability to prevent security breaks, disruption in service, and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;

 

    our ability to prevent and detect identity theft;

 

    our ability to develop and maintain effective internal controls;

 

    our compliance with applicable local, state and federal laws, including the Investment Advisors Act of 1940, the Investment Company Act of 1940 and other laws; and

 

    our compliance with applicable regulations and regulatory developments.

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, including the “Risk Factors” section of our Annual Report on Form 10-K, for a description of certain risks 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.

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LendingClub Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

 

     March 31, 2014     December 31, 2013  
ASSETS     

Cash and cash equivalents

   $ 64,599      $ 49,299   

Restricted cash

     15,967        12,208   

Loans at fair value (includes $1,336,553 and $1,158,302 from consolidated Trust at March 31, 2014 and December 31, 2013, respectively)

     2,109,818        1,829,042   

Accrued interest receivable (includes $5,880 and $5,671 from consolidated Trust at March 31, 2014 and December 31, 2013, respectively)

     17,428        15,975   

Property, equipment and software, net

     14,989        12,595   

Other assets

     6,180        23,921   

Due from related parties

     379        355   
  

 

 

   

 

 

 

Total Assets

   $ 2,229,360      $ 1,943,395   
  

 

 

   

 

 

 
LIABILITIES     

Accounts payable

   $ 3,218      $ 4,524   

Accrued interest payable (includes $5,880 and $5,671 from consolidated Trust at March 31, 2014 and December 31, 2013, respectively)

     19,408        17,741   

Accrued expenses and other liabilities

     10,106        9,128   

Payable to investors

     7,590        3,918   

Notes and Certificates, at fair value (includes $1,336,553 and $1,158,302 from consolidated Trust at March 31, 2014 and December 31, 2013, respectively)

     2,120,227        1,839,990   
  

 

 

   

 

 

 

Total Liabilities

     2,160,549        1,875,301   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 12)

    
STOCKHOLDERS’ EQUITY     

Preferred stock

   $ 103,244      $ 103,244   

Common stock, $0.01 par value; 180,000,000 shares authorized at March 31, 2014 and December 31, 2013, respectively; 28,336,450 and 27,493,320 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively

     142        138   

Additional paid-in capital

     23,053        15,041   

Accumulated deficit

     (57,628     (50,329
  

 

 

   

 

 

 

Total Stockholders’ Equity

     68,811        68,094   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,229,360      $ 1,943,395   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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LendingClub Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share amounts)

 

     Three Months Ended March 31,  
     2014     2013  

Non-Interest Revenue:

    

Origination fees

   $ 35,412      $ 13,582   

Servicing fees

     1,780        715   

Management fees

     1,094        494   

Other revenue

     416        1,452   
  

 

 

   

 

 

 

Total Non-Interest Revenue

     38,702        16,243   
  

 

 

   

 

 

 

Net Interest Income:

    

Total interest income

     73,048        32,364   

Total interest expense

     (73,000     (32,325
  

 

 

   

 

 

 

Net Interest Income

     48        39   
  

 

 

   

 

 

 

Fair value adjustments, Loans

     (24,749     (9,217

Fair value adjustments, Notes and Certificates

     24,717        9,186   
  

 

 

   

 

 

 

Net Interest Income after fair value adjustments

     16        8   
  

 

 

   

 

 

 

Total Net Revenue

     38,718        16,251   
  

 

 

   

 

 

 

Operating expenses:

    

Sales and marketing

     20,582        7,707   

Origination and servicing

     7,402        2,634   

General and administrative

     18,033        5,870   
  

 

 

   

 

 

 

Total Operating Expenses

     46,017        16,211   
  

 

 

   

 

 

 

Net (Loss) Income

   $ (7,299   $ 40   
  

 

 

   

 

 

 

Basic net loss per share attributable to common stockholders

   $ (0.26   $ 0.00   

Diluted net loss per share attributable to common stockholders

   $ (0.26   $ 0.00   

Weighted-average shares of common stock used in computing basic net income per share

     27,890,322        23,818,258   

Weighted-average shares of common stock used in computing diluted net income per share

     27,890,322        37,748,048   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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LendingClub Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

     Three Months Ended March 31,  
     2014     2013  

Cash flows from Operating Activities:

    

Net (loss) income

   $ (7,299   $ 40   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Fair value adjustments of Loans, Notes and Certificates, net

     32        31   

Change in loan servicing liability carried at fair value

     285        221   

Change in loan servicing asset carried at fair value

     (330     —     

Stock-based compensation and warrant expense, net

     7,033        526   

Depreciation and amortization

     1,007        174   

Loss (Gain) on sales of Loans at fair value

     71        (1,160

Other, net

     5        (7

Purchase of Whole Loans sold at fair value

     (265,653     (38,906

Proceeds from sales of Whole Loans at fair value

     265,582        40,066   

Net change in:

    

Accrued interest receivable

     (1,453     (2,009

Other assets

     18,070        (564

Due from related parties

     (24     (93

Accounts payable

     (131     817   

Accrued interest payable

     1,667        2,103   

Accrued expenses and other liabilities

     1,232        902   
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,094        2,141   
  

 

 

   

 

 

 

Cash flows from Investing Activities:

    

Purchase of Loans at fair value

     (511,219     (312,830

Principal payments of Loans at fair value

     204,950        88,846   

Proceeds from recoveries and sales of charged-off Loans at fair value

     744        —     

Net change in restricted cash

     (3,759     (4,263

Purchase of property, equipment and software

     (5,005     (1,406
  

 

 

   

 

 

 

Net cash used in investing activities

     (314,289     (229,653
  

 

 

   

 

 

 

Cash flows from Financing Activities:

    

Payable to Investors

     3,672        1,835   

Proceeds from issuance of Notes and Certificates

     510,962        312,812   

Payments on Notes and Certificates

     (205,274     (88,883

Payments on charged-off Notes and Certificates from recoveries and sales of related charged off Loans at fair value

     (734     —     

Proceeds from exercise of warrants to acquire Series A convertible preferred stock

     —          20   

Proceeds from exercise of warrants to acquire common stock

     89        —     

Proceeds from stock options exercised

     780        482   
  

 

 

   

 

 

 

Net cash provided by financing activities

     309,495        226,266   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     15,300        (1,246

Cash and cash equivalents, beginning of period

     49,299        52,551   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 64,599      $ 51,305   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 71,296      $ 30,135   

Non-cash investing activity—accrual of property, equipment and software, net

   $ 385      $ 240   

Non-cash financing activity—reclassification of early-exercise liability relating to stock options

   $ 174      $ —     

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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LENDINGCLUB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and March 31, 2013, have been prepared by LendingClub Corporation in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The company did not have any items of other comprehensive income/(loss) during any of the periods presented in the condensed consolidated financial statements as of and for the three months ended March 31, 2014 and 2013.

In the opinion of management, all necessary adjustments (including only those of a normal recurring nature) have been made for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full fiscal year. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2013.

The preparation of our condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions 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 certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.

The Company’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to these accounting policies during the first three months of 2014.

On April 15, 2014, the Board of Directors approved a 2 for 1 equity stock split in which each outstanding share of each series or class of equity capital stock was split into two outstanding shares of such series or class of equity capital stock. All share and per share data has been adjusted to reflect this stock split.

2. Loans at Fair Value and Notes and Certificates at Fair Value

We use fair value measurements to record fair value adjustments to Loans and the related Notes and Certificates that are recorded at fair value on a recurring basis.

Loans and the related Notes and Certificates do not trade in an active market with readily observable prices. Accordingly, the fair value of Loans and the related Notes and Certificates are determined using a discounted cash flow methodology utilizing assumptions market participants use for credit losses, changes in the interest rate environment and other factors. Fair value measurements of our Loans and the related Notes and Certificates use significant unobservable inputs and, accordingly, we classify them as Level 3.

We have ongoing monitoring procedures in place for our Level 3 assets and liabilities that use such valuation methods and models. These procedures are designed to provide reasonable assurance that internal valuation models continue to perform as expected after approved. All internal valuation models are subject to ongoing review by business-unit-level management and the executive management team.

 

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At March 31, 2014 and December 31, 2013, Loans and Notes and Certificates (in thousands) were:

 

     Loans     Notes and Certificates  
     March 31, 2014     December 31, 2013     March 31, 2014     December 31, 2013  

Aggregate principal balance outstanding

   $ 2,131,152      $ 1,849,042      $ 2,141,557      $ 1,859,982   

Fair value adjustments

     (21,334     (20,000     (21,330     (19,992
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

   $ 2,109,818      $ 1,829,042      $ 2,120,227      $ 1,839,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

We determined the fair values of Loans and Notes and Certificates using inputs and methods that are categorized in the fair value hierarchy, as follows (in thousands):

 

     Level 1 Inputs      Level 2 Inputs      Level 3 Inputs      Fair Value  

March 31, 2014

           

Assets

           

Loans at fair value

   $ —         $ —         $ 2,109,818       $ 2,109,818   

Liabilities

           

Notes and Certificates

   $ —         $ —         $ 2,120,227       $ 2,120,227   

December 31, 2013

           

Assets

           

Loans at fair value

   $ —         $ —         $ 1,829,042       $ 1,829,042   

Liabilities

           

Notes and Certificates

   $ —         $ —         $ 1,839,990       $ 1,839,990   

Instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. Our fair value approach for Level 3 instruments primarily uses unobservable inputs, but 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 presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurements at March 31, 2014:

 

          March 31, 2014     December 31, 2013  
          Range of Inputs     Range of Inputs  
    

Unobservable Input

   Minimum     Maximum     Minimum     Maximum  

Loans

   Discount rate      5.6     16.9     5.9     15.9
   Net cumulative expected loss      2.0     21.6     2.1     23.7

Notes & Certificates

   Discount rate      5.6     16.9     5.9     15.9
   Net cumulative expected loss      2.0     21.6     2.1     23.7

The valuation technique used for our Level 3 assets and liabilities, as presented in the previous table, is described as follows:

Discounted cash flow – Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.

Significant unobservable inputs presented in the table above are those we consider significant to the estimated fair values of the Level 3 assets and liabilities. We consider unobservable inputs to be significant, if by their exclusion, the estimated fair value of the Level 3 asset or liability would be impacted by a significant percentage change, or based on qualitative factors such as the nature of the instrument and significance of the unobservable inputs relative to other inputs used within the valuation. The following is a description of the significant unobservable inputs provided in the table.

 

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Discount rate – Discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, the fair value, of the Loans, Notes and Certificates. The discount rates for the projected net cash flows of Loans are our estimates of the rates of return that investors in unsecured consumer credit obligations would require when investing in the various credit grades of Loans. The discount rates for the projected net cash flows of the Notes and Certificates are our estimates of the rates of return that investors in unsecured consumer credit obligations would require when investing in Notes and Certificates with cash flows dependent on specific grades of Loans. Discount rates for existing Loans, Notes and Certificates are adjusted to reflect the time value of money. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.

Net cumulative expected loss – Net cumulative expected loss is an estimate of the net cumulative principal payments that will not be repaid over the entire life of a Loan, Note or Certificate, expressed as a percentage of the original principal amount of the Loan, Note or Certificate. The estimated net cumulative loss is the sum of the net losses estimated to occur each month of the life of a new Loan, Note or Certificate. Therefore, the total net losses estimated to occur over the remaining maturity of existing Loans, Notes and Certificates are less than the estimated net cumulative losses of comparable new Loans, Notes and Certificates. A given month’s estimated net losses are a function of two variables:

 

  (i) estimated default rate, which is an estimate of the probability of not collecting the remaining contractual principal amounts owed and,

 

  (ii) estimated net loss severity, which is the percentage of contractual principal cash flows lost in the event of a default, net of the average net recovery, expected to be received on a defaulted Loan, Note or Certificate.

Our obligation to pay principal and interest on any Note or Certificate is equal to the pro-rata portion of the payments, if any, received on the related Loan subject to applicable fees. The gross effective interest rate associated with Notes or Certificates is the same as the interest rate paid on the underlying Loan. At March 31, 2014, the discounted cash flow methodology used to estimate the Notes’ and Certificates’ fair values uses the same projected net cash flows as their related Loan. The discount rates for the projected net cash flows of the Notes and Certificates are our estimates of the rates of return, including risk premiums (if significant) that investors in unsecured consumer credit obligations would require when investing in Notes and Certificates with cash flows dependent on specific credit grades of Loans.

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2014 (in thousands):

 

     Loans     Notes and
Certificates
 

Fair value at December 31, 2013

   $ 1,829,042      $ 1,839,990   

Purchases of Loans

     776,801        —     

Issuances of Notes and Certificates

     —          510,962   

Principal payments

     (204,950     (205,274

Whole Loan sales

     (265,582     —     

Recoveries and sales of charged-off loans

     (744     (734
  

 

 

   

 

 

 

Carrying value before fair value adjustments

     2,134,567        2,144,944   

Fair value adjustments, included in earnings

     (24,749     (24,717
  

 

 

   

 

 

 

Fair value at March 31, 2014

   $ 2,109,818      $ 2,120,227   
  

 

 

   

 

 

 

At March 31, 2014, outstanding Loans underlying Notes and Certificates have original terms of either 36 months or 60 months and are paid monthly with fixed interest rates ranging from 5.42% to 26.06% and various maturity dates through March 2019.

The fair value of Loans and the related Notes and Certificates are determined using a discounted cash flow model utilizing estimates for credit losses, changes in the interest rate environment, and other factors. For Notes and Certificates, we also consider risk factors such as our ability to operate on a cash-flow positive basis and liquidity position. The majority of fair value adjustments included in earnings is attributable to changes in estimated instrument-specific future credit losses. All fair valuation adjustments were related to Level 3 instruments for the three months ended March 31, 2014 and 2013. A specific Loan that is projected to have higher 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 lower future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its fair value. Because the payments to holders of Notes and Certificates directly reflect the payments received on Loans, a reduction or increase of the expected future payments on Loans will decrease or increase the estimated fair values of the related Notes and Certificates. Expected losses and actual loan charge-offs on Loans are offset to the extent that the Loans are financed by Notes and Certificates that absorb the related loan losses.

 

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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 total principal balances of the Loans were very close to the combined principal balances of the Notes and Certificates.

At March 31, 2014, we had 997 Loans that were 90 days or more past due including non-accrual loans and loans where the borrower has filed for bankruptcy or is deceased, which had a total outstanding principal balance of $10.5 million, aggregate adverse fair value adjustments totaling $9.5 million and an aggregate fair value of $1.0 million. At December 31, 2013, we had 989 Loans that were 90 days or more past due including non-accrual loans and loans where the borrower has filed for bankruptcy or is deceased, which had a total outstanding principal balance of $10.2 million, aggregate adverse fair value adjustments totaling $9.1 million and an aggregate fair value of $1.1 million.

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

The discounted cash flow technique that we use to determine the fair value of our Level 3 Loans, Notes and Certificates requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. For example, increases in the discount rates and estimated net cumulative loss rates each will reduce the estimated fair value of Loans, Notes and Certificates. When multiple inputs are used within the valuation technique of a Loan, Note or Certificate, a change in one input in a certain direction may be offset by an opposite change in another input.

3. Fair Value of Financial Instruments Not Measured at Fair Value on a Recurring Basis in the Balance Sheet

The following are descriptions of the valuation methodologies used for estimating the fair value of financial instruments not recorded at fair value on a recurring basis in the balance sheet; these financial instruments are carried at historical cost or amortized cost in the balance sheets.

 

    Short-term financial assets: Short-term financial assets include cash and cash equivalents, restricted cash, accrued interest, and other assets. These assets are carried at historical cost. The carrying amount approximates fair value due to the short term nature of the financial instruments.

 

    Short-term financial liabilities: Short-term financial liabilities include accounts payable, accrued interest payable, other accrued expenses and payables to investors. These liabilities are carried at historical cost. The carrying amount approximates fair value due to the short term nature of the financial instruments.

4. Property, Equipment and Software, net

Property, equipment and software consist of the following (in thousands):

 

     March 31, 2014     December 31, 2013  

Capitalized website and internally developed software costs

   $ 6,542      $ 4,188   

Computer equipment

     4,655        4,019   

Leasehold Improvements

     3,078        2,700   

Construction in progress

     1,580        1,978   

Furniture and fixtures

     1,221        836   

Software

     948        913   

Domain name

     26        26   
  

 

 

   

 

 

 

Total property and equipment

     18,050        14,660   

Accumulated depreciation and amortization

     (3,061     (2,065
  

 

 

   

 

 

 

Property, equipment and software, net

   $ 14,989      $ 12,595   
  

 

 

   

 

 

 

 

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5. Other Assets

Other assets consist of the following (in thousands):

 

     March 31, 2014      December 31, 2013  

Prepaid expenses

   $ 2,209       $ 3,546   

Receivable from investors

     1,578         18,116   

Loan servicing asset at fair value

     864         534   

Accounts receivable

     445         439   

Tenant improvement receivable

     376         504   

Deposits

     186         193   

Other

     522         589   
  

 

 

    

 

 

 

Total other assets

   $ 6,180       $ 23,921   
  

 

 

    

 

 

 

6. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):

 

     March 31, 2014      December 31, 2013  

Accrued service fees

   $ 4,506       $ 2,057   

Accrued compensation

     2,878         5,243   

Loan servicing liability at fair value

     1,221         936   

Deferred rent

     834         653   

Other accrued expenses

     667         239   
  

 

 

    

 

 

 

Total accrued expenses and other liabilities

   $ 10,106       $ 9,128   
  

 

 

    

 

 

 

 

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7. Stockholders’ Equity

Convertible Preferred Stock (in thousands, except share amounts)

Preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences and terms of each series. The following table provides details regarding each Series of preferred stock authorized by the Board of Directors. The outstanding shares of convertible preferred stock are not mandatorily redeemable. A description of the preferred stock including conversion, liquidation preference, dividends and voting rights are included in Note 9 – Stockholders’ Equity in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There were no changes in this information during the first three months of 2014 except for the adjustment to reflect the 2 for 1 stock split, which took place April 15, 2014.

 

     March 31,
2014
     December 31,
2013
 

Preferred stock, $0.01 par value; 123,235,032 total shares authorized at March 31, 2014 and December 31, 2013:

     

Series A convertible preferred stock, 34,012,550 shares designated at March 31, 2014 and December 31, 2013; 33,050,172 shares issued and outstanding at March 31, 2014 and December 31, 2013; aggregate liquidation preference of $17,599 at March 31, 2014 and December 31, 2013.

   $ 17,402       $ 17,402   

Series B convertible preferred stock, 32,821,052 shares designated at March 31, 2014 and December 31, 2013; 32,788,650 shares issued and outstanding at March 31, 2014 and December 31, 2013; aggregate liquidation preference of $12,268 at March 31, 2014 and December 31, 2013.

     12,164         12,164   

Series C convertible preferred stock, 31,243,218 shares designated at March 31, 2014 and December 31, 2013; 31,243,218 shares issued and outstanding at March 31, 2014 and December 31, 2013; aggregate liquidation preference of $24,490 at March 31, 2014 and December 31, 2013.

     24,388         24,388   

Series D convertible preferred stock, 18,015,356 shares designated at March 31, 2014 and December 31, 2013; 18,015,356 shares issued and outstanding at March 31, 2014 and December 31, 2013; aggregate liquidation preference of $32,044 at March 31, 2014 and December 31, 2013.

     31,943         31,943   

Series E convertible preferred stock, 7,142,856 shares designated at March 31, 2014 and December 31, 2013; 5,000,000 shares issued and outstanding at March 31, 2014 and December 31, 2013; aggregate liquidation preference of $17,500 at March 31, 2014 and December 31, 2013.

     17,347         17,347   
  

 

 

    

 

 

 
   $ 103,244       $ 103,244   
  

 

 

    

 

 

 

At March 31, 2014, we have 761,354 shares of convertible preferred Series A stock warrants authorized and reserved for future issuance. Convertible preferred Series A stock warrants are fully exercisable with exercise prices of $0.5325 or $0.535 per share. The warrants may be exercised at any time on or before August 2018.

Common Stock

At March 31, 2014, we have shares of common stock authorized and reserved for future issuance as follows:

 

Options to purchase common stock

     27,488,896   

Options available for future issuance

     3,584,524   

Common stock warrants

     361,700   
  

 

 

 

Total common stock authorized and reserved for future issuance

     31,435,120   
  

 

 

 

During the three months ended March 31, 2014, we issued 719,562 shares of common stock in exchange for proceeds of $0.8 million upon the exercise of stock options.

Common stock warrants are fully exercisable with exercise prices of $0.01 to $0.785 per share. The warrants may be exercised at any time on or before February 2021.

 

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During the three months ended March 31, 2014, we issued 123,568 common shares for proceeds of $0.09 million upon the exercise of common stock warrants.

Accumulated Deficit

For the three months ended March 31, 2014, we had a net loss of $7.30 million and net income of $0.04 million for the three months ended March 31, 2013. We have an accumulated deficit of $57.6 million and stockholders’ equity of $68.8 million, at March 31, 2014.

8. Stock-Based Compensation and Other Employee Benefit Plans

Stock Incentive Plan

Under our 2007 Stock Incentive Plan (the “Option Plan”), we may grant options to purchase shares of common stock to employees, executives, directors and consultants at exercise prices not less than the fair market value on the date of grant for incentive stock options and not less than 85% of the fair market value on the date of grant for non-statutory options. An aggregate of 41,977,268 shares have been authorized for issuance under the Option Plan. The options granted through March 31, 2014 generally expire ten years from the date of grant and generally vest 25% twelve months from the date of grant, and quarterly thereafter, provided the grantee remains continuously employed by us through each vesting date (“service-based options”); however, the Board of Directors retains the authority to grant options with different terms.

For the three months ended March 31, 2014, we granted service-based stock options to purchase 7,109,470 shares of common stock with a weighted average exercise price of $9.98 per share, a weighted average grant date fair value of $8.39 per share and a total estimated fair value of approximately $60 million.

The fair value of the shares of common stock underlying stock options has historically been established by the Board of Directors primarily based upon a valuation provided by an independent third-party valuation firm. Because there is no public market for our common stock, our Board of Directors has relied upon this independent valuation and other factors, including, but not limited to, the current status of the technical and commercial success of our operations, our financial condition, the stage of our product design and development and our competition to establish the fair value of our common stock at the time of the option grant.

We used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:

 

     Three Months Ended March 31,  
     2014     2013  

Assumed forfeiture rate (annual %)

     5.0     5.0

Expected dividend yield

     0.0     0.0

Weighted average assumed stock price volatility

     54.7     63.5

Weighted average risk-free rate

     1.90     1.12

Weighted average expected life (years)

     6.33        6.25   

The assumed forfeiture rate is the annual percentage of unvested stock options that are assumed to be forfeited or cancelled due to grantees discontinuing employment with us. Because service-based stock options normally vest over a four year period, the forfeiture assumption is used to estimate the number of stock options that are expected to vest in future periods, which affects the estimate of the forfeiture-adjusted aggregate stock-based compensation expense related to the stock options. The forfeiture assumption was developed considering our actual annual forfeiture rates for unvested stock options over the past four years and analyzing the distribution of unvested stock options held by executive officers, senior managers and other employees as of March 31, 2014. Holding other assumptions constant, a higher forfeiture rate reduces the number of options expected to vest in future periods, which lowers the estimated forfeiture-adjusted aggregate stock-based compensation expense related to any affected stock options.

We have paid no cash dividends and do not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of 0.0% in our option-pricing model.

The stock price volatility assumption is derived using a set of peer group public companies. The peer group includes small-, mid- and large-capitalization companies that conduct business in the consumer finance, investment management and technology sectors.

 

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The expected life represents the period of time that stock options are estimated to be outstanding, giving consideration to the contractual terms of the awards and vesting schedules. Given our limited operating history, the simplified method was applied to calculate the expected term. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.

Options activity under the Option Plan for the three months ended March 31, 2014 is summarized as follows:

 

     Stock Options Issued
and
Outstanding
    Weighted
Average
Exercise Price
 

Balances, December 31, 2013

     21,657,364      $ 1.88   

Options Granted

     7,109,470        9.98   

Options Exercised

     (719,562     1.08   

Options Forfeited/Expired

     (558,376     3.69   
  

 

 

   

Balances, March 31, 2014

     27,488,896      $ 3.96   
  

 

 

   

Options to purchase 719,562 shares with a total intrinsic value (fair value less exercise price) of $6.4 million were exercised during the three months ended March 31, 2014.

A summary of outstanding options, options vested and options vested and expected to vest as of March 31, 2014, is as follows:

 

     Stock Options Issued
and
Outstanding
     Weighted Average
Remaining
Contractual Life
(Years)
     Weighted
Average
Exercise Price
 

Options Outstanding

     27,488,896         8.35       $ 3.96   

Vested Options

     8,838,852         6.64       $ 0.57   

Options Vested and Expected to Vest

     25,894,148         8.28       $ 3.77   

A summary by weighted average exercise price of outstanding options, options vested, and options vested and expected to vest at March 31, 2014, is as follows:

 

Exercise Price Range

   Stock Options
Outstanding
     Weighted Average
Remaining Contractual
Life of Outstanding Stock
Options (Years)
     Number of
Stock Options
Vested
     Number of Stock
Options Vested and
Expected to Vest
 

$0.01 - $0.50

     9,689,718         6.77         6,768,142         9,587,852   

$0.51 - $2.50

     5,461,208         8.12         1,783,134         5,226,356   

$2.51 - $5.00

     2,156,500         9.12         274,102         2,021,429   

$5.01 - $10.00

     10,181,470         9.81         13,474         9,058,511   
  

 

 

       

 

 

    

 

 

 

$0.01 - $10.00

     27,488,896         8.35         8,838,852         25,894,148   
  

 

 

       

 

 

    

 

 

 

We recognized $7.3 million and $0.5 million of stock-based compensation expense related to stock options for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 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 and capitalized $0.3 million as internally developed software costs. For the three months ended March 31, 2013, we did not accelerate vesting of stock options or capitalize stock-based compensation as internally developed software costs.

No net income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

401(k) Plan

We maintain a 401(k) defined contribution plan that covers substantially all of our employees. Participants may elect to contribute their annual compensation up to the maximum limit imposed by federal tax law. On April 15, 2014, we announced an employer 401(k) match up to 3% of an employee’s eligible earnings with a maximum annual match of $5,000 per employee.

 

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9. Income Taxes

For the three months ended March 31, 2014 and 2013, respectively, we recorded no provision or benefit for income taxes due to a full valuation allowance against our deferred tax asset.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has been recorded to recognize only deferred tax assets that are more likely than not to be realized.

At December 31, 2013, we had federal and state net operating loss (“NOL”) carry forwards of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. These federal and state net operating loss carry forwards will begin expiring in 2027 and 2016, respectively. Additionally, at December 31, 2013, we had federal and state research and development (“R&D”) tax credit carry forwards of approximately $0.6 million and $0.5 million, respectively. The federal credit carry forwards will begin expiring in 2016 and the state credits may be carried forward indefinitely.

In general, a corporation’s ability to utilize its NOL and R&D carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the capital (as defined) of a company by certain stockholders or public groups.

Due to the nature of the unrecognized tax benefits and the existence of tax attributes, we have not accrued any interest or penalties associated with unrecognized tax benefits in the Condensed Consolidated Statement of Operations nor have we recognized a liability in the Condensed Consolidated Balance Sheet.

We do not believe the total amount of unrecognized tax benefit as of March 31, 2014, will increase or decrease significantly in the next twelve months.

10. Net Income (Loss) Attributable to Common Stockholders

Basic earnings (loss) per share (EPS) is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings 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 include incremental shares issued for stock options, convertible preferred stock and warrants. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive.

We calculate EPS using the two-class method. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. We consider all series of our convertible preferred stock to be participating securities due to their non-cumulative dividend rights. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings (see Note 7– Stockholders’ Equity), are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. All participating securities are excluded from basic weighted-average common shares outstanding.

 

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The following table details the computation of the basic and diluted net loss per share (in thousands, except share and per share data):

 

     Three Months Ended March 31,  
     2014     2013  

Net (loss) income

   $ (7,299   $ 40   

Less: Earnings allocated to participating securities (1)

   $ —        $ (40

Net (loss) available to common shareholders after required adjustments for the calculation of basic and diluted earnings per common share

   $ (7,299   $ —     
  

 

 

   

 

 

 

Basic weighted average common shares outstanding

     27,890,322        23,818,258   

Weighted average effect of dilutive securities:

    

Stock Options

     —          13,037,136   

Warrants

     —          892,654   
  

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     27,890,322        37,748,048   

Loss per common share

    

Basic

   $ (0.26   $ 0.00   

Diluted

   $ (0.26   $ 0.00   

 

(1) 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 dividends (if any) are allocated to participating securities.

11. 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 funded portions of Loans via purchases of Notes and Certificates. All Note and Certificate purchases made by related parties were conducted on terms and conditions that were not more favorable than those obtained by other investors.

The following table summarizes deposits and withdrawals made by related parties for the three months ended March 31, 2014 and 2013 and ending account balances, which is comprised of cash and Notes and Certificate balances, as of March 31, 2014 and December 31, 2013 (in thousands).

 

                                                                                           
     Three Months Ended March 31,  
     2014      2013  

Related Party

   Deposits      Withdrawals      Deposits      Withdrawals  

Directors

   $ 200       $ 91       $ —         $ 6   

Executive Officers

     —           4         968         105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 200       $ 95       $ 968       $ 111   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of March 31,
2014
     As of December 31,
2013
 

Related Party

   Account Balance      Account Balance  

Directors

   $ 5,227       $ 5,026   

Executive Officers

     42         39   
  

 

 

    

 

 

 

Total

   $ 5,269       $ 5,065   
  

 

 

    

 

 

 

12. Commitments and Contingencies

Commitments

Operating Lease Commitments

We have several operating lease agreements for space at 71 Stevenson Street in San Francisco, California, where our corporate headquarters are located. These leases expire in June 2019 with a renewal option that would extend the leases for five years to June 2024. In January 2014, we terminated a lease for our New York City office.

 

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Total facilities rental expense for the three months ended March 31, 2014 and 2013 was $0.7 million and $0.4 million, respectively. We did not have any sublease rental expense for the three months ended March 31, 2014. Sublease rental expense for the three months ended March 31, 2013 was $0.3 million. We did not have any minimum rental expense for the three months ended March 31, 2013. Minimum rental expense for the three months ended March 31, 2014 was $0.6 million. As part of these lease agreements, we currently have pledged $0.2 million of cash and arranged for a $0.2 million letter of credit as security deposits.

Loan Funding Commitments

For loans listed on the platform as a result of direct marketing efforts, we have committed to invest in such loans if investors do not provide funding for all or a portion of such loans. All loan listings obtained from direct marketing campaigns that were on the platform as of March 31, 2014 were fully funded by investors.

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 this contingent obligation to reimburse the investor for credit losses on Loans underlying the investor’s Certificate, that are in excess of a specified, aggregate loss threshold. The amount of cash to be pledged varies based on the investor’s Certificate purchase volume and cannot exceed $5.0 million. As of March 31, 2014, approximately $3.4 million was pledged and restricted to support this contingent obligation.

As of March 31, 2014, the credit losses pertaining to the investor’s Certificate have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and thus no liability has been recorded. If losses related to the credit support agreement are later determined to be probable to occur and are reasonably estimable, results of operations could be affected in the period in which such losses are recorded.

Legal

We may be subject to pending legal proceedings and regulatory actions in the ordinary course of business. After consultation with legal counsel, we do not anticipate 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.

13. Subsequent Events

On April 17, 2014, we acquired all of the outstanding limited liability company interests of Springstone Financial, LLC (“Springstone”), a Delaware limited liability company (the “Acquisition”). Springstone provides affordable financing options for consumers looking to finance private education and elective medical procedures through a network of over 14,000 schools and healthcare providers. The acquisition of Springstone expands the services we offer to help consumers achieve their goals.

Under the terms of the Acquisition, the sellers received at closing an aggregate of $115.0 million in cash and approximately $25.0 million worth of shares of Lending Club’s Series F Preferred Stock (the “Share Consideration”). For accounting purposes the purchase price was $114.4 million which was comprised of $111.6 million in cash and $2.8 million of Share Consideration. Additionally, a total of $25.6 million comprised of $22.1 million of Share Consideration and $3.5 million of cash was placed in a third party escrow, and is subject to certain vesting and forfeiture conditions applicable to certain key continuing employees over a three-year period from the closing. This consideration will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Springstone became a wholly owned subsidiary of Lending Club effective April 17, 2014.

In connection with the Acquisition, on April 16, 2014, we sold an aggregate of 3,195,278 shares of its Series F Preferred Stock, par value $0.01 per share to certain new “accredited investors” (as defined under Rule 501 of Regulation D) for aggregate gross proceeds of approximately $65.0 million, pursuant to a Series F Preferred Stock Purchase Agreement dated April 16, 2014. Lending Club sold the shares pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended; and Lending Club made no general solicitation for the sale of the Series F Preferred Stock. Series F Preferred Shares are convertible into shares of Lending Club common stock, par value $0.01 per share, on a one-for-one basis, as adjusted from time to time pursuant to the anti-dilution provisions of the Lending Club Restated Certificate of Incorporation.

Additionally, on April 16, 2014, we entered into a Credit and Guaranty Agreement with joint lead arrangers and joint bookrunners led by Morgan Stanley Senior Funding, Inc., along with Credit Suisse Securities (USA) LLC, Silicon Valley Bank, Citicorp North America Inc., and JPMorgan Chase Bank, N.A., under which the Lenders agreed to make a $50.0 million term loan (the “Term Loan”) to Lending Club.

 

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The Term Loan was drawn in a single borrowing to partially finance the Acquisition and pay related fees and expenses, including fees and expenses related to the Credit and Guaranty Agreement. We may request that the Lenders establish new term loan facilities, provided that the aggregate principal amount of all new term loan facilities do not exceed $75.0 million. Unless the facility is so increased, no additional amounts are available for borrowing.

The following table provides details of the preliminary purchase price as though the Acquisition had occurred on March 31, 2014 (in thousands).

 

Purchase consideration (1)

   $ 114,386   

Cash

     10,020   

Restricted cash

     1,536   

Property, equipment and software

     414   

Other assets

     891   

Due from related parties

     172   

Identified intangible assets

     39,900   

Goodwill

     65,169   

Accounts payable

     (1,485

Accrued expenses and other liabilities

     (2,231
  

 

 

 

Total purchase consideration

   $ 114,386   
  

 

 

 

 

(1) Excludes $25.6 million accounted for as compensation arrangements for key continuing employees.

Costs related to the Acquisition were $1.1 million and included in General and administrative operating expenses in LC’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2014.

The following table contains pro-forma net revenue and net loss as though the Acquisition had occurred on January 1, 2013 (in thousands).

 

     Three Months Ended March 31,  
     2014     2013  

Total Net Revenue

   $ 43,720      $ 19,951   

Net Loss

   $ (7,879   $ (3,457

On April 15, 2014, the Board of Directors approved a 2 for 1 stock split in which each outstanding share of each series or class of equity capital stock was split into two outstanding shares of such series or class of equity capital stock. All share and per share data presented in this Report has been adjusted to reflect this stock split.

 

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

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Report. In addition to historical information, this Report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Part II Item 1A, “Risk Factors.” Actual results could differ materially. Important factors that could cause actual results to differ materially include, but are not limited to; the level of demand for our products and services; the intensity of competition; our ability to effectively expand and improve internal infrastructure; maintenance of positive cash flows from operations, and adverse financial, customer and employee consequences that might result to us if litigation were to be initiated and resolved in an adverse manner to us. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this Report. We assume no obligation to update these forward-looking statements.

Overview

General Corporate Overview

Lending Club is an online marketplace that facilitates loans to consumers and businesses and offers investors an opportunity to finance the loans. Our goal is to transform the banking and consumer finance industry to make it more cost efficient, transparent and consumer friendly. We replace traditional bank operations with an online marketplace that uses technology and a more efficient funding process to lower operational costs and deliver a better experience to both borrowers and investors.

Lending Club is headquartered in San Francisco, California, was incorporated in 2006 and began operations in 2007.

At March 31, 2014, our marketplace had facilitated 296,879 Loans totaling approximately $4.0 billion since inception.

At March 31, 2014, we had 475 employees and contractors.

Business Overview

Our marketplace connects borrowers and investors and provides a variety of services including screening borrowers for loan eligibility and facilitating payments from borrowers to investors. Our model has significantly lower operating costs than traditional bank lending and consumer finance institutions because there are no physical branches and related infrastructure, no deposit-taking activities, an automated loan underwriting and servicing process and other technology-enhanced processes. We believe that the interest rates offered to borrowers through our platform are generally better, on average, than the rates those borrowers could pay on outstanding credit card balances or unsecured installment loans from a traditional bank.

We also believe that our marketplace enables investors to earn attractive returns and enjoy a more direct, low cost access to consumer credit as an investment asset class. Our investors include both individuals and institutions. We believe that diversity of our investor base allows us to rely on more predictable funding sources with a wide range of investment strategies and risk appetite, which helps us facilitate a wide range of loans.

Our platform offers consumer loans, which are unsecured obligations of individual borrowers that are issued in amounts ranging from $1,000 up to $35,000, depending on the applicable policy, with fixed interest rates, and three-year or five-year original maturities (“Consumer Loans”). Consumer Loans that have a FICO score of at least 660 and meet other strict credit criteria are classified as Public Policy Loans and are issued under WebBank’s Public Credit Policy and can be invested in through member payment dependent notes (“Notes”) pursuant to our shelf registration statement (“Note Shelf”). We and WebBank, a FDIC-insured, state chartered industrial bank organized under the laws of Utah, are also partnering with other sophisticated institutional investors to tailor credit and underwriting specifications for Consumer Loans to meet specific credit and investment criteria of these investors (“Custom Credit Policy”) that are outside of the Public Credit Policy and therefore are not publicly available (“Custom Policy Loans”). In addition, in March 2014, we launched a pilot program focused on loans to small businesses (“SB Loans”) with loan amounts between $15,000 to $100,000, fixed interest rates and maturities between one and five years. SB Loans and Consumer Loans are referred to as Loans in this Report.

 

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Investors can invest through three channels – (1) the public offering of Notes pursuant to our Note Shelf, (2) private placements to accredited investors and qualified purchasers of Certificates and limited partnership interests in funds (“Funds”) managed by LCA, our investment advisor subsidiary, or (3) Loan sales to unrelated third party institutions, each described below:

 

    Public Offering of Notes Available to Investors: Pursuant to a prospectus, investors have the opportunity to purchase, directly on our website, Notes issued by us, with each Note corresponding to an individual Public Policy Loan facilitated through our platform. The Notes are unsecured and the payment of principal and interest on the Notes is dependent on the receipt of principal and interest on the related Public Policy Loan.

 

    Private Placements of Certificates and Funds: We offer private placements of funds to accredited investors and qualified purchasers. To facilitate these private placement offerings, we established the Trust, a separate entity, to acquire and hold Loans for the sole benefit of investors who purchase Certificates in private transactions. Accredited investors and the Funds each purchase a Certificate from the Trust and the Trust uses these proceeds to acquire and hold Loans for the sole benefit of the Certificate holders. Payment of principal and interest on the Certificates are dependent on the receipt of principal and interest on the corresponding Loans. The Certificates can only be settled with cash flows from the underlying Loans and the Certificate holder does not have recourse to the general credit or other assets of the Trust, LC, borrowers or other investors.

 

    Whole Loan Sales to Third Party Institutions: We began selling Consumer Loans and SB Loans to unrelated third party institutions through our platform in December 2012 and March 2014, respectively. We have retained the servicing rights on these sold Loans.

We have funded our operations with proceeds from debt financing, preferred stock issuances and common stock issuances. Currently, we are able to fund our operations with the cash flow generated from operations, which are described under “Liquidity and Capital Resources” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” From inception through March 31, 2014, we have raised approximately $103.2 million (net) through preferred stock equity financings. On April 16, 2014, we sold an aggregate of 3,195,278 shares of Series F Preferred Stock for aggregate gross proceeds of $65.0 million and on April 17, 2014 we issued 1,221,965 shares of Series F Preferred Stock related to the acquisition of Springstone, which is described in Note 13 – Subsequent Events.

For the three months ended March 31, 2014 and 2013, our net loss was $7.30 million and net income was $0.04 million, respectively. For the three months ended March 31, 2014, we were cash-flow positive on an operating basis. If our assumptions regarding continued growth and operating plan are incorrect, we may need to slow our investment spending, which could slow our rate of growth or ability to continue operating on a cash-flow positive basis, and our current liquidity resources may be consumed.

We earn revenues primarily from origination fees charged to borrowers, investor servicing fees and management fees. We expect that the number of borrowers, investors and unrelated third party purchasers and the volume of Loans facilitated through our platform will continue to increase, and that we will generate increased revenue from these fees.

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.

 

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The following table includes key operating and financial data (in thousands, except per share data):

 

     Three Months Ended March 31,  
     2014     2013  

Loan originations

   $ 791,348      $ 352,885   

Total Non-Interest Revenue

   $ 38,702      $ 16,243   

Revenue yield

     4.9%        4.6%   

Total Net Revenue

   $ 38,718      $ 16,251   

Total Operating Expenses

   $ 46,017      $ 16,211   

Net (Loss) Income

   $ (7,299   $ 40   

Adjusted EBITDA

   $ 1,881      $ 734   

EBITDA as % of Net Revenue

     4.9%        4.5%   

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

   $ (0.26   $ 0.00   

Diluted net (loss) income per share attributable to common stockholders

   $ (0.26   $ 0.00   

Originations

Originations are a key indicator of the growth of our brand and the competitiveness of our products. Originations include all Loans facilitated through our platform whether they were retained or subsequently sold to investors. Growth in originations depends, in part, on our ability to successfully develop and market our products and services to borrowers and investors.

Revenue Yield

Revenue yield is a non-GAAP return metric that takes into account our product pricing and channel mix strategies. Revenue yield is calculated by dividing total non-interest revenue (which includes origination, servicing, management fees and other revenue as defined in the Results of Operations Section below) by total Loan originations.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: provision (benefit) for income taxes; net interest (income) expense related to cash and cash equivalents and notes payable, if any; depreciation and amortization, acquisition related expense and stock-based compensation and warrant expense. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial measure should consider the types of events and transactions for which adjustments have been made.

Adjusted EBITDA is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends. We use Adjusted EBITDA because we believe it facilitates operating performance comparisons from period to period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and debt discounts and the impact of stock-based compensation expense and warrant expense.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    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 does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation and warrant expense;

 

    Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

    Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

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In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses and earn income similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net (loss) income and other GAAP results.

Net (loss) income is the most comparable GAAP measure to Adjusted EBITDA. The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for each of the periods indicated (in thousands):

 

     Three Months Ended March 31,  
     2014     2013  

Reconciliation of Adjusted EBITDA:

    

Net (loss) income

   $ (7,299   $ 40   

Net interest income

     (1     (6

Acquisition related expense

     1,141        —     

Depreciation and amortization

     1,007        174   

Stock-based compensation, net (1)

     7,033        526   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,881      $ 734   
  

 

 

   

 

 

 

 

(1) Stock-based compensation expense includes warrant expense and is net of amounts capitalized in internally developed software capitalization. Internally developed software amortization is included in depreciation and amortization.

Results of Operations

Overview

The following table summarizes our net (loss) income for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Three Months Ended March 31,               
     2014     2013      $ Change     % Change  

Net Revenue

   $ 38,718      $ 16,251       $ 22,467        138%   

Operating Expenses

     46,017        16,211         29,806        184%   
  

 

 

   

 

 

    

 

 

   

Net (Loss) Income

   $ (7,299   $ 40       $ (7,339     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

N/M—Not meaningful.

Net revenues were $38.7 million for the three months ended March 31, 2014, a 138% increase over the three months ended March 31, 2013 primarily due to higher Loan originations. Operating expenses were $46.0 million for the three months ended March 31, 2014, a 184% increase over the three months ended March 31, 2013 primarily due to higher compensation costs and higher Loan volume related operational and marketing expenses.

Revenues

Our primary sources of revenues consist of fees charged to borrowers and investors for transactions through or related to our platform. During the three months ended March 31, 2014 and 2013, we facilitated $791.3 million and $352.9 million of Loans, respectively, through our platform.

The following table summarizes our revenue for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Three Months Ended March 31,               
     2014      2013      $ Change     % Change  

Origination fees

   $ 35,412       $ 13,582       $ 21,830        161%   

Servicing fees

     1,780         715         1,065        149%   

Management fees

     1,094         494         600        121%   

Other revenue

     416         1,452         (1,036     -71%   
  

 

 

    

 

 

    

 

 

   

Total Non-Interest Revenue

     38,702         16,243         22,459        138%   
  

 

 

    

 

 

    

 

 

   

Net Interest Income after fair value adjustments

     16         8         8        100%   
  

 

 

    

 

 

    

 

 

   

Net Revenue

   $ 38,718       $ 16,251       $ 22,467        138%   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Origination Fees

Origination fees are determined by the term and grade of the loan and as of March 31, 2014 ranged from 1.11% to 5.00% of the issued principal balances. The fee is deducted from the loan proceeds at the time of issuance.

Origination fees are recognized as a component of non-interest revenue at the time of loan issuance and were $35.4 million and $13.6 million for the three months ended March 31, 2014 and 2013, respectively, an increase of 161%. The increase in these fees was primarily due to an increase in Loan volume.

Average loan origination fees were 4.5% and 4.3% of the principal amount of Loans facilitated for the three months ended March 31, 2014 and 2013, respectively. The increase in the average loan origination fee was primarily due to a higher percentage of 60 month loans and a higher percentage of D-G grade loans that have higher origination fees.

Servicing Fees

We charge investors ongoing service fees for Notes, sold Loans and certain Certificates. The servicing fee compensates us for the costs we incur in servicing the related Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. These service fees are primarily based upon the borrower loan payment amounts received by us on behalf of a Note, Loan or Certificate holder, and to a lesser degree, the principal balance of Loans.

Servicing fees were $1.8 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively, an increase of 149%, primarily due to increased balances of Notes, sold Loans and Certificates outstanding during the three months ended March 31, 2014, versus the three months ended March 31, 2013.

Management Fees and Assets Under Management

LCA is the general partner to five Funds: Broad Based Consumer Credit Fund, L.P. (“BBF”), Broad Based Consumer Credit (Q) Fund, L.P. (“BBF-QP”), Broad Based Consumer Credit II Fund, L.P. (“BBF II”), Conservative Consumer Credit Fund, L.P. (“CCF”), and Conservative Consumer Credit (Q) Fund, L.P. (“CCF-QP”). In connection with the Funds, the Trust acts as a bankruptcy remote entity for holding portions of Loans related to Certificates purchased by the Funds separate and apart from the Loans and other assets of ours. We and the Trust have entered into a loan purchase agreement and a servicing agreement whereby we service the loans acquired by the Trust in a manner identical to other Loans; the Trust earns a fee equal to 40 basis points for each Certificate holder and we earn a servicing fee equal to 35 basis points, which is paid by the Trust.

LCA charges most Certificate holders a management fee based on their capital account balances in lieu of charging a servicing fee. LCA earned management fees totaling $1.1 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively, an increase of 121%. The increase in management fees was due primarily to an increase in assets under management, which were $807.9 million at March 31, 2014 ($700.3 million in the Funds and $107.6 million in SMAs) and $443.1 million at March 31, 2013.

As of March 31, 2014, the Funds had $700.3 million in assets with $11.3 million of pending capital contributions from limited partners in escrow, which was contributed to the Funds on the first business day of April 2014. LCA earns a management fee paid by the limited partners of the Funds, paid monthly in arrears, which ranges from 0.70% to 1.25% (annualized) of the month-end balances of partners’ capital accounts. These management fees can be modified or waived for individual limited partners at the discretion of the general partner.

Investors with SMAs invest in Certificates issued by the Trust. As of March 31, 2014, LCA managed $107.6 million in assets in SMAs. LCA earns management fees paid by SMA investors, monthly in arrears, based on cash and Certificate balances in SMAs. These management fees can be modified or waived for individual SMA investors at the discretion of LCA.

 

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The table below presents our summary of changes in assets under management for LCA (in millions):

 

Balance at December 31, 2013

   $  740.2   

Net capital contributions

     52.0   

Appreciation

     15.7   
  

 

 

 

Balance at March 31, 2014

   $ 807.9   
  

 

 

 

Other Revenue

Other revenue consists primarily of gains on sale of whole loans and referral revenue.

Other revenue was $0.4 million and $1.5 million for the three months ended March 31, 2014 and 2013, respectively, a decrease of 71%. The decrease in other revenue was primarily due to a $1.2 million decrease in gain on sale of whole loans to unrelated third party purchasers. Through June 30, 2013, we accounted for the net revenues from whole loan sales as gains on sales of whole loans. This was comprised primarily of the origination fees for such whole loans sold, reduced by certain loan origination expenses and loan servicing net revenues (obligations). Beginning July 1, 2013, we adopted the fair value option for whole loan sales that resulted in the origination fees for the loans to be reported as origination fees rather than included in gain on sale of loans.

Net Interest Income

The following table summarizes interest income, interest expense and net interest income for the three months ended March 31, 2014 and 2013, as follows (in thousands):

 

     Three Months Ended March 31,  
     2014     2013  

Interest Income

    

Loans

   $ 73,047      $ 32,358   

Cash and cash equivalents

     1        6   
  

 

 

   

 

 

 

Total Interest Income

     73,048        32,364   
  

 

 

   

 

 

 

Interest Expense

    

Notes and Certificates

   $ (73,000   $ (32,325
  

 

 

   

 

 

 

Total Interest Expense

     (73,000     (32,325
  

 

 

   

 

 

 

Net Interest Income

   $ 48      $ 39   
  

 

 

   

 

 

 

Due to the payment dependent feature of Notes and Certificates for payments on related loans, interest income earned on loans equals the interest expense on the Notes and Certificates associated with such loans. Differences between reported interest income earned on loans and interest expense on Notes and Certificates is due to interest earned on loans in which we have invested for which there is no corresponding Note or Certificate.

We had net interest income of $0.05 million and $0.04 million for the three months ended March 31, 2014 and 2013, respectively. Net interest income increased in the three months ended March 31, 2014, when compared to the same period in the prior year primarily due to the increase in loans financed by us.

For the three months ended March 31, 2014 and 2013, interest income from loans was $73.0 million and $32.4 million, respectively. The increase in interest income is primarily due to the increase in the outstanding balances of loans. The average balance of loans outstanding during the three months ended March 31, 2014, was $1,994.3 million as compared to an average balance of $888.6 million during the three months ended March 31, 2013, an increase of 124%.

For the three months ended March 31, 2014 and 2013, we recorded interest expense for Notes and Certificates of $73.0 million and $32.3 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of Notes and Certificates. The average balance of Notes and Certificates outstanding during the three months ended March 31, 2014, was $2,002.6 million as compared to the average balance of $892.7 million during the three months ended March 31, 2013, an increase of 124%.

 

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Fair Value Adjustments on Loans and Notes and Certificates

At March 31, 2014, we estimated the fair value of loans and their related Notes and Certificates using a discounted cash flow valuation methodology. The discounted cash flow valuation methodology uses the historical defaults and losses and recoveries on our loans over the past several years to project future losses and net cash flows on loans.

The fair value adjustments for loans were largely offset by the fair value adjustments of the Notes and Certificates at fair value due to the member payment dependent design of the Notes and Certificates, and because the principal balances of the loans are similar to the combined principal balances of the Notes and Certificates. Accordingly, the net fair value adjustment losses for loans and Notes and Certificates were $0.03 million and $0.03 million for the three months ended March 31, 2014 and 2013, respectively.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2014 and 2013, respectively (in thousands).

 

     Three Months Ended March 31,                
     2014      2013      $ Change      % Change  

Sales and marketing

   $ 20,582       $ 7,707       $ 12,875         167%   

Origination and servicing

     7,402         2,634         4,768         181%   

General and administrative: Technology

     5,722         2,248         3,474         155%   

General and administrative: Other

     12,311         3,622         8,689         240%   
  

 

 

    

 

 

    

 

 

    

Total Operating Expenses

   $ 46,017       $ 16,211       $ 29,806         184%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales and Marketing

Sales and marketing expense consists primarily of borrower and investor acquisition costs and salaries, benefits and stock-based compensation expense related to our sales and marketing staff. Sales and marketing expenses for the three months ended March 31, 2014 and 2013 were $20.6 million and $7.7 million, respectively, an increase of 167%. The increase was primarily due to an increase in marketing costs and an increase in stock compensation expense related to the accelerated vesting of stock options for a terminated employee.

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 staff and vendor costs associated with facilitating and servicing loans. Origination and servicing expenses for the three months ended March 31, 2014 and 2013 were $7.4 million and $2.6 million, respectively, an increase of 181%. The increase was primarily due to an increase in compensation expense as we expanded our credit and customer support teams due to increasing loan applications and an increase in consumer reporting agency and loan processing costs which was also driven by higher loan volume.

General and Administrative: Technology

Technology expense consists primarily of salaries, benefits and stock-based compensation expense for our technology team and the cost of subcontractors who work on the development and maintenance of our platform. Technology expense also includes non-capitalized hardware and software costs and depreciation and amortization of technology assets. Technology expenses for the three months ended March 31, 2014 and 2013 were $5.7 million and $2.2 million, respectively, an increase of 155%. The increase was primarily due to an increase in personnel related expenses resulting from increased headcount and contract labor expense as we enhanced our website tools and functionality, an increase in expensed equipment and software and an increase in depreciation expense reflecting our continued investment in technology infrastructure.

During the three months ended March 31, 2014 and 2013, we capitalized $2.4 million and $0.4 million of software development costs, respectively. These costs generally are amortized over a three year period.

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 staff, professional fees related to legal and accounting and facilities expense. Other general and administrative expenses for the three months ended March 31, 2014 and 2013 were $12.3 million and $3.6 million, respectively, an increase of 240%. The increase was primarily due to an increase in compensation expense due to an increase in full-time employees and an increase in professional services related to the Acquisition and an increase in audit fees.

 

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Income Taxes

We recorded no provision or benefit for income taxes for the three month period ended March 31, 2014 due to a full valuation allowance against our deferred tax assets. Deferred tax assets, such as the future benefit of net operating loss deductions against future taxable income, can be recognized if realization of such tax-related assets is more likely than not. Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for our net operating loss carry forwards. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets.

Liquidity and Capital Resources

At March 31, 2014, we had $64.6 million in available cash and cash equivalents. We primarily hold our excess unrestricted cash in short-term interest-bearing money market funds at highly-rated financial institutions. We believe that our current cash position is sufficient to meet our current liquidity needs. Our current operating plan calls for continued investments in technology, new business development, security infrastructure, underwriting, credit processing and marketing. If assumptions regarding our continued growth and our operating plan are incorrect, we may need to slow our investment spending, which could slow our rate of growth or ability to continue operating on a cash-flow positive basis. To date, we have funded our cash requirements with proceeds from the sale of our equity securities, issuance of loans payable and more recently through operations.

At March 31, 2014, we had $16.0 million in restricted cash. Restricted cash at March 31, 2014 consisted primarily of pledges of $3.0 million as security for WebBank, $3.4 million for an investor as part of a credit support agreement, $7.7 million of investor cash and $1.7 million as security for a correspondent bank that clears our borrowers’ and investors’ cash transactions.

The following table summarizes our cash flows for the three months ended March 31, 2014 and 2013 (in thousands).

 

     Three Months Ended March 31,  
     2014     2013  

Cash provided by (used in)

    

Operating activities

   $ 20,094      $ 2,141   

Investing activities

     (314,289     (229,653

Financing activities

     309,495        226,266   
  

 

 

   

 

 

 

Net increase (decrease) in cash

   $ 15,300      $ (1,246
  

 

 

   

 

 

 

Net cash provided by operating activities for the three months ended March 31, 2014 was positive primarily due to collection of outstanding investor receivables. Net cash used in investing primarily represents acquisitions of loans (excluding acquisition of loans sold to unrelated third parties which is included in cash flow from operations along with the corresponding proceeds from sale of loans), offset by repayment of loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes and Certificates, partially offset by payments on Notes and Certificates.

Subsequent Events

On April 17, 2014, we acquired all of the outstanding limited liability company interests of Springstone. Springstone provides affordable financing options for consumers looking to finance private education and elective medical procedures through a network of over 14,000 schools and healthcare providers. The acquisition of Springstone expands the services we offer to help consumers achieve their goals.

Under the terms of the Acquisition, the sellers received at closing an aggregate of $115.0 million in cash and $25.0 million worth of shares of Lending Club’s Series F Preferred Stock. For accounting purposes the purchase price was $114.4 million which was comprised of $111.6 million in cash and $2.8 million of Share Consideration. Additionally, a total of $25.6 million comprised of $22.1 million of Share Consideration and $3.5 million of cash was placed in a third party escrow, and is subject to certain vesting and forfeiture conditions applicable to certain key continuing employees over a three-year period from the closing. This will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Springstone became a wholly owned subsidiary of Lending Club effective April 17, 2014.

In connection with the Acquisition, on April 16, 2014, we sold an aggregate of 3,195,278 shares of its Series F Preferred Stock, par value $0.01 per share to certain new investors for aggregate gross proceeds of approximately $65.0 million, pursuant to a Series F Preferred Stock Purchase Agreement dated April 16, 2014. Lending Club sold the shares pursuant to an exemption from registration

 

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under Section 4(a)(2) of the Securities Act of 1933, as amended; all investors in the Preferred Stock Financing were “accredited investors” (as defined under Rule 501 of Regulation D) and Lending Club made no general solicitation for the sale of the Series F Preferred Stock. Series F Preferred Shares are convertible into shares of Lending Club common stock, par value $0.01 per share, on a one-for-one basis, as adjusted from time to time pursuant to the anti-dilution provisions of the Lending Club Restated Certificate of Incorporation.

Additionally, on April 16, 2014, we entered into a Credit and Guaranty Agreement with joint lead arrangers and joint bookrunners led by Morgan Stanley Senior Funding, Inc., along with Credit Suisse Securities (USA) LLC, Silicon Valley Bank, Citicorp North America Inc., and JPMorgan Chase Bank, N.A., under which the Lenders agreed to make a $50.0 million term loan to Lending Club. The Credit Agreement also requires Lending Club to maintain a maximum total leverage ratio of 5.50:1 initially, and decreasing to 3.50:1 after September 30, 2015 (on a consolidated basis).

The Term Loan was drawn in a single borrowing to partially finance the Acquisition and pay related fees and expenses, including fees and expenses related to the Credit and Guaranty Agreement. We may request that the Lenders establish new term loan facilities, provided that the aggregate principal amount of all new term loan facilities do not exceed $75.0 million. Unless the facility is so increased, no additional amounts are available for borrowing.

On April 15, 2014, the Board of Directors approved a 2 for 1 stock split in which each outstanding share of each series or class of equity capital stock was split into two outstanding shares of such series or class of equity capital stock. All share and per share data presented in this Report has been adjusted to reflect this stock split.

Critical Accounting Policies

Certain 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 Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to these critical accounting estimates during the first three months of 2014.

 

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Statistical Information on the Public Policy Loan Portfolio

The tables and charts set forth below relate only to Public Policy Loans.

In regards to the following historical information, prior performance is no guarantee of future results or outcomes.

From inception to March 31, 2014, we facilitated Public Policy Loans with an average original principal amount of $13,913 and an aggregate original principal amount of $3.9 billion. Out of 278,126 facilitated Public Policy Loans, 45,138 Public Policy Loans with an aggregate original principal amount of $522.0 million, or 13.49%, were fully paid.

The following table presents aggregated information about Public Policy Loans for the period from inception to March 31, 2014, grouped by the loan grade assigned by us:

Public Policy Loans Issued from Inception to March 31, 2014 by Grade

 

Loan

Grade

   Number of
Loans
     Average
Interest Rate
    Total Amount
Issued
 

A1

     5,947         5.99   $ 69,086,825   

A2

     6,510         6.59     75,287,425   

A3

     7,994         7.51     102,250,000   

A4

     11,808         7.87     151,449,850   

A5

     13,198         8.78     179,124,750   

B1

     14,544         9.90     179,321,000   

B2

     17,654         10.92     230,473,775   

B3

     21,596         11.85     272,960,150   

B4

     19,831         12.69     260,807,950   

B5

     14,898         13.27     186,679,625   

C1

     16,208         13.90     209,910,675   

C2

     15,631         14.62     211,071,175   

C3

     14,505         15.18     206,963,050   

C4

     13,688         15.77     201,803,050   

C5

     12,606         16.51     190,147,550   

D1

     10,606         17.16     148,694,000   

D2

     9,467         17.68     126,416,675   

D3

     8,125         18.13     111,445,900   

D4

     7,624         18.67     114,694,500   

D5

     6,483         19.31     103,801,175   

E1

     4,472         19.73     76,336,025   

E2

     4,623         20.40     80,179,575   

E3

     3,772         20.91     67,014,200   

E4

     3,398         21.51     62,635,925   

E5

     2,882         21.96     53,344,825   

F1

     2,382         22.51     43,838,250   

F2

     1,884         22.88     36,572,425   

F3

     1,655         23.43     30,590,625   

F4

     1,277         23.65     25,647,075   

F5

     954         23.87     20,688,300   

G1

     664         24.17     14,351,050   

G2

     474         24.27     10,018,775   

G3

     329         24.38     7,124,575   

G4

     234         23.46     4,973,800   

G5

     203         23.40     3,858,850   
  

 

 

      

 

 

 

Total

     278,126         13.96   $ 3,869,563,375   
  

 

 

      

 

 

 

 

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Table of Contents

The following table presents aggregated consumer reporting agency information for Public Policy Loans issued from our inception to March 31, 2014, grouped by the loan grade assigned by us. This information is reported in the table as of the time of the loan application. As used in this table, “Delinquencies in the Last Two Years” means the number of 30+ days past-due incidences of delinquency in the borrower’s credit file for the preceding two years from the date of loan application. We do not independently verify this information. All figures other than loan grade are agency reported at the time of application.

Consumer Reporting Agency Information for Public Policy Loans issued from Inception to March 31, 2014, grouped by Grade

 

Loan

Grade

   Average
FICO
     Average
Open Credit
Lines
     Average
Total
Credit
Lines
     Average
Revolving
Credit
Balance
     Average
Revolving
Line
Utilization
    Average
Inquiries in the
Last Six Months
     Average
Delinquencies in
the Last Two
Years
     Average Months
Since Last
Delinquency
 

A1

     772         11         27       $ 14,009         24.59     0         0         41   

A2

     753         11         26         14,743         31.20     1         0         39   

A3

     741         11         26         16,635         36.69     1         0         38   

A4

     732         11         25         16,149         42.10     1         0         37   

A5

     724         11         25         17,646         46.14     1         0         37   

B1

     713         11         25         15,722         49.54     1         0         36   

B2

     708         11         25         16,341         52.84     1         0         36   

B3

     702         11         24         15,560         55.64     1         0         35   

B4

     699         11         24         15,671         56.84     1         0         35   

B5

     695         11         24         14,737         58.47     1         0         35   

C1

     693         11         24         15,423         59.40     1         0         35   

C2

     692         11         24         15,131         60.55     1         0         34   

C3

     691         11         24         15,743         60.73     1         0         34   

C4

     688         11         24         16,120         62.45     1         0         34   

C5

     687         11         24         16,211         63.05     1         0         34   

D1

     684         11         24         15,545         64.40     1         0         34   

D2

     683         11         24         15,093         64.26     1         0         34   

D3

     684         11         23         15,087         64.40     1         0         34   

D4

     684         11         24         15,431         65.71     1         0         34   

D5

     684         11         24         16,505         65.88     1         0         34   

E1

     683         11         25         16,227         66.78     1         0         33   

E2

     683         11         25         16,861         66.34     1         0         32   

E3

     682         11         25         17,247         67.64     1         0         33   

E4

     681         11         25         17,870         68.25     1         0         33   

E5

     680         11         25         18,062         68.25     1         0         32   

F1

     679         11         25         17,748         68.85     1         0         32   

F2

     679         11         25         17,515         69.10     1         0         32   

F3

     678         11         24         16,858         69.14     1         0         31   

F4

     677         12         26         17,625         69.48     2         0         31   

F5

     677         12         27         19,060         70.35     2         0         33   

G1

     675         12         26         17,935         68.88     2         1         29   

G2

     674         12         26         22,065         72.01     2         0         28   

G3

     675         12         26         19,380         72.86     2         1         28   

G4

     673         14         30         23,947         70.53     2         0         30   

G5

     669         13         29         32,628         72.33     3         0         29   

Average

     702         11         24       $ 15,946         56.68     1         0         35   

 

27


Table of Contents

The following table presents additional aggregated information for Public Policy Loans issued from our inception to March 31, 2014, about current and paid off Public Policy Loans, grouped by the loan grade assigned by us.

 

Loan

Grade

   Number of
Current
Loans
     Current Loan
Outstanding
Principal ($)
     Number of
Loans Fully
Paid
     Fully Paid ($)      Fully Paid (%) of
Originated Issued
Loans
    Number of
All Issued
Loans
     Total Origination
Amount for All
Issued Loans
 

A1

     4,361       $ 38,228,984         1,341       $ 11,649,350         16.86     5,947       $ 69,086,825   

A2

     4,446         41,285,025         1,654         13,261,875         17.61     6,510         75,287,425   

A3

     5,384         57,635,522         1,989         17,483,175         17.10     7,994         102,250,000   

A4

     7,937         79,101,440         2,865         28,151,950         18.59     11,808         151,449,850   

A5

     9,134         102,144,535         2,920         30,480,650         17.02     13,198         179,124,750   

B1

     11,027         110,091,778         2,269         24,168,675         13.48     14,544         179,321,000   

B2

     13,616         142,737,129         2,612         29,318,425         12.72     17,654         230,473,775   

B3

     16,195         157,949,591         3,435         40,048,850         14.67     21,596         272,960,150   

B4

     14,969         158,187,291         3,016         34,838,800         13.36     19,831         260,807,950   

B5

     10,214         101,395,619         2,728         30,443,350         16.31     14,898         186,679,625   

C1

     11,829         123,765,256         2,475         27,944,825         13.31     16,208         209,910,675   

C2

     11,299         127,853,492         2,398         27,871,550         13.20     15,631         211,071,175   

C3

     10,803         136,185,101         1,867         21,443,700         10.36     14,505         206,963,050   

C4

     10,228         134,963,982         1,750         20,411,975         10.11     13,688         201,803,050   

C5

     9,261         126,227,532         1,618         19,089,725         10.04     12,606         190,147,550   

D1

     7,665         93,406,486         1,407         16,397,800         11.03     10,606         148,694,000   

D2

     6,508         73,070,345         1,451         17,078,500         13.51     9,467         126,416,675   

D3

     5,633         63,835,131         1,232         15,512,125         13.92     8,125         111,445,900   

D4

     5,373         68,977,292         1,108         14,532,550         12.67     7,624         114,694,500   

D5

     4,550         62,943,716         944         13,727,550         13.22     6,483         103,801,175   

E1

     2,995         45,097,409         651         9,824,825         12.87     4,472         76,336,025   

E2

     3,217         49,263,707         636         9,733,575         12.14     4,623         80,179,575   

E3

     2,559         40,438,820         552         8,656,025         12.92     3,772         67,014,200   

E4

     2,372         38,350,893         449         7,781,375         12.42     3,398         62,635,925   

E5

     1,991         32,546,474         395         6,816,575         12.78     2,882         53,344,825   

F1

     1,674         26,709,806         304         5,304,450         12.10     2,382         43,838,250   

F2

     1,312         22,580,992         254         4,734,750         12.95     1,884         36,572,425   

F3

     1,163         19,034,919         206         3,727,275         12.18     1,655         30,590,625   

F4

     887         16,066,247         155         2,835,100         11.05     1,277         25,647,075   

F5

     650         12,726,285         119         2,421,400         11.70     954         20,688,300   

G1

     419         8,223,485         99         1,999,800         13.93     664         14,351,050   

G2

     311         5,905,662         68         1,329,300         13.27     474         10,018,775   

G3

     206         4,278,803         56         1,109,825         15.58     329         7,124,575   

G4

     123         2,446,064         57         1,084,250         21.80     234         4,973,800   

G5

     90         1,885,153         58         775,000         20.08     203         3,858,850   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total

     200,401       $ 2,325,539,966         45,138       $ 521,988,925         13.49     278,126       $ 3,869,563,375   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

28


Table of Contents

The following graph presents the dollar weighted average interest rate for Public Policy Loans issued from inception to March 31, 2014, by grade.

 

LOGO

 

29


Table of Contents

The following table presents outstanding Public Policy Loan balances in dollars, delinquent Public Policy Loan balances in dollars, principal amount of Public Policy Loans charged-off during the quarter, delinquency rate and annualized charge-off rate as of March 31, 2014. This information excludes Public Policy Loans that we classified as identity theft. In cases of verified identity theft, we write-off the Public Policy Loan and pay the holder of the related Notes or Certificates an amount equal to the unpaid principal balances due. Dollars presented below in thousands.

 

Outstandings (1)

 

                                                             
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

  $ 2,630,408      $ 2,189,446      $ 1,750,365      $ 1,377,064      $ 1,058,994      $ 805,763      $ 614,889      $ 464,367      $ 372,220      $ 300,982      $ 242,941      $ 198,898   

Grade A

    352,276        295,722        230,596        199,205        167,636        130,845        108,620        89,352        74,014        56,698        45,181        35,321   

Grade B

    741,021        645,779        524,253        416,396        328,331        241,219        184,015        136,785        108,647        86,459        69,078        56,298   

Grade C

    736,004        595,967        471,686        351,184        253,472        169,706        122,985        89,615        70,357        57,785        47,470        39,948   

Grade D

    423,880        325,608        249,749        199,912        153,861        127,701        94,518        67,603        53,708        44,555        37,435        31,683   

Grade E

    239,745        200,315        166,245        130,030        99,329        86,250        65,673        50,562        41,236        34,243        26,804        21,554   

Grade F

    110,870        102,390        88,311        66,519        46,617        40,439        30,864        23,707        18,277        15,680        12,230        9,864   

Grade G

    26,612        23,665        19,525        13,818        9,748        9,603        8,214        6,743        5,981        5,562        4,743        4,230   

Outstandings of Delinquent Loans (2)

 

                                                 
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

  $ 33,644      $ 32,904      $ 24,628      $ 17,262      $ 14,850      $ 12,789      $ 9,587      $ 7,375      $ 5,527      $ 5,850      $ 5,502      $ 4,007   

Grade A

    1,290        1,373        1,172        1,037        986        845        646        502        244        356        273        187   

Grade B

    5,981        6,243        4,975        3,485        2,866        2,283        1,852        1,449        1,283        1,110        1,061        774   

Grade C

    7,894        7,994        5,763        3,588        3,026        2,552        1,991        1,300        1,163        1,172        1,204        963   

Grade D

    7,599        7,215        5,393        3,964        3,605        2,870        2,070        1,492        1,163        1,364        1,279        959   

Grade E

    5,938        5,623        4,298        2,681        2,335        2,329        1,613        1,240        1,009        951        849        691   

Grade F

    3,719        3,552        2,502        1,970        1,450        1,461        1,014        1,086        438        582        532        282   

Grade G

    1,223        904        525        537        582        449        401        306        227        315        304        151   

Charge-Off Amount (3)

 

                                                 
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

  $ 25,788      $ 18,425      $ 12,500      $ 10,598      $ 8,950      $ 6,117      $ 4,878      $ 3,342      $ 3,366      $ 2,888      $ 1,757      $ 1,659   

Grade A

    1,052        906        849        858        655        516        361        130        226        157        107        90   

Grade B

    5,228        3,692        2,731        2,156        1,833        1,265        932        709        602        551        366        486   

Grade C

    6,639        4,645        2,574        2,122        1,672        1,252        972        868        722        728        500        319   

Grade D

    5,531        4,105        2,724        2,585        1,880        1,283        853        694        653        588        378        328   

Grade E

    4,066        3,113        1,921        1,468        1,608        963        854        632        554        470        289        242   

Grade F

    2,707        1,661        1,261        992        1,029        607        736        220        372        288        64        132   

Grade G

    565        303        440        417        273        232        170        89        237        106        53        62   

Delinquent Rate (4)

 

                                                 
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

    1.28     1.50     1.41     1.25     1.40     1.59     1.56     1.59     1.48     1.94     2.26     2.01

Grade A

    0.37     0.46     0.51     0.52     0.59     0.65     0.59     0.56     0.33     0.63     0.60     0.53

Grade B

    0.81     0.97     0.95     0.84     0.87     0.95     1.01     1.06     1.18     1.28     1.54     1.38

Grade C

    1.07     1.34     1.22     1.02     1.19     1.50     1.62     1.45     1.65     2.03     2.54     2.41

Grade D

    1.79     2.22     2.16     1.98     2.34     2.25     2.19     2.21     2.17     3.06     3.42     3.03

Grade E

    2.48     2.81     2.59     2.06     2.35     2.70     2.46     2.45     2.45     2.78     3.17     3.20

Grade F

    3.35     3.47     2.83     2.96     3.11     3.61     3.29     4.58     2.40     3.71     4.35     2.86

Grade G

    4.60     3.82     2.69     3.89     5.97     4.67     4.88     4.54     3.79     5.66     6.41     3.57

Annualized Charge-off Rate (5)

 

                                                 
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

    3.92     3.37     2.86     3.08     3.38     3.04     3.17     2.88     3.62     3.84     2.89     3.34

Grade A

    1.19     1.23     1.47     1.72     1.56     1.58     1.33     0.58     1.22     1.11     0.95     1.02

Grade B

    2.82     2.29     2.08     2.07     2.23     2.10     2.03     2.07     2.22     2.55     2.12     3.45

Grade C

    3.61     3.12     2.18     2.42     2.64     2.95     3.16     3.87     4.11     5.04     4.22     3.20

Grade D

    5.22     5.04     4.36     5.17     4.89     4.02     3.61     4.11     4.86     5.28     4.04     4.14

Grade E

    6.78     6.22     4.62     4.52     6.47     4.47     5.20     5.00     5.37     5.49     4.32     4.48

Grade F

    9.77     6.49     5.71     5.97     8.83     6.00     9.54     3.72     8.14     7.35     2.09     5.34

Grade G

    8.49     5.13     9.02     12.06     11.21     9.65     8.27     5.26     15.83     7.63     4.44     5.91

 

1) Principal balance at quarter-end.
2) Principal balance as of quarter-end for Public Policy Loans that are “Late 31-120” or in Default status at quarter-end.
3) Principal balance charged off during the quarter.
4) Principal balance at quarter-end for Public Policy Loans that are “Late 31-120” or in Default status at quarter-end divided by Principal balance at quarter-end.
5) Principal balance charged off during the quarter multiplied by four then divided by Principal balance at quarter-end.

 

30


Table of Contents

The following table presents dollars collected on delinquent Public Policy Loans and recoveries received on charged-off Public Policy Loans (which include collection recoveries on charged-off Public Policy Loans and proceeds from the sale of charged-off Public Policy Loans), in the quarter presented. This information excludes Public Policy Loans that we classified as identity theft. In cases of verified identity theft, we write-off the Public Policy Loan and pay the holder of the related Notes or Certificates an amount equal to the unpaid principal balances due. Dollars presented below in thousands.

 

Dollars Collected From Delinquent Loans (1)

 

                                                 
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

  $ 2,660      $ 1,892      $ 1,207      $ 943      $ 1,029      $ 739      $ 652      $ 507      $ 681      $ 533      $ 424      $ 342   

Grade A

    165        82        81        66        96        66        45        44        40        30        38        17   

Grade B

    533        392        244        159        237        151        161        128        143        109        78        74   

Grade C

    588        467        242        228        188        154        105        77        171        149        103        94   

Grade D

    609        410        291        187        191        156        139        106        137        122        106        80   

Grade E

    397        227        185        168        137        121        106        77        136        74        58        40   

Grade F

    256        251        141        71        111        51        62        61        33        27        27        22   

Grade G

    112        63        23        64        69        40        34        14        21        22        14        15   

Recoveries (2)

 

                                                       
    2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2  

Total

  $ 1,733      $ 704      $ 463      $ 460      $ 549      $ 105      $ 78      $ 383      $ 89      $ 36      $ 91      $ 52   

Grade A

    66        42        30        35        39        9        8        15        3        3        19        —     

Grade B

    377        126        83        66        120        10        2        76        10        6        5        6   

Grade C

    375        178        90        101        107        39        27        84        22        10        23        22   

Grade D

    369        150        104        103        113        11        14        110        15        6        15        9   

Grade E

    317        117        88        76        88        14        13        54        12        4        3        1   

Grade F

    199        68        47        59        58        8        2        24        18        4        23        12   

Grade G

    30        23        21        20        24        14        12        20        9        3        3        2   

 

1) Dollars collected during the quarter for Public Policy Loans that are in “Late 31-120” or in Default status.
2) Total payments received from borrowers of charged-off Public Policy Loans and proceeds from sale of charged-off Public Policy Loans.

 

31


Table of Contents

Cumulative Charge-off Rate – 36 Month Public Policy Loans

The graph and corresponding tables below show the cumulative net lifetime charge-offs for Public Policy Loans with original terms of 36 months by grade and by annual vintage booked from January 1, 2008 through March 31, 2014, as a percentage of the aggregate principal amount of originations. The charge-offs are tracked by annual vintage, meaning each line represents all loans originated in that year.

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: All
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.3     0.1     0.1     0.1     0.1

6

     0.0     0.9     0.3     0.3     0.3     0.2

7

     0.1     1.3     0.7     0.5     0.5     0.3

8

     0.4     1.6     0.9     0.7     0.8     0.4

9

     1.2     2.2     1.1     0.9     1.2  

10

     1.7     2.8     1.4     1.1     1.5  

11

     2.7     3.2     1.8     1.4     1.9  

12

     3.0     3.6     2.3     1.7     2.3  

13

     3.3     4.1     2.5     1.9     2.7  

14

     3.8     4.5     3.0     2.2     3.1  

15

     4.9     4.8     3.2     2.4     3.5  

16

     5.7     5.3     3.5     2.6     3.8  

17

     6.6     5.5     3.8     2.8     4.1  

18

     7.1     6.0     4.0     3.1     4.3  

19

     8.1     6.2     4.2     3.4     4.5  

20

     8.9     6.4     4.4     3.5    

21

     10.2     6.8     4.6     3.7    

22

     11.0     7.0     4.8     3.9    

23

     11.9     7.3     5.0     4.1    

24

     12.3     7.6     5.1     4.2    

25

     12.7     7.9     5.3     4.3    

26

     13.1     8.1     5.4     4.5    

27

     13.3     8.3     5.5     4.6    

28

     13.6     8.4     5.6     4.7    

29

     13.9     8.5     5.7     4.8    

30

     14.0     8.7     5.8     4.9    

31

     14.2     8.7     5.9     4.9    

32

     14.3     8.8     5.9     4.9    

33

     14.4     8.9     6.0      

34

     14.5     9.0     6.1      

35

     14.6     9.0     6.2      

36

     14.7     9.0     6.2      

 

32


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: A
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.0     0.0     0.0     0.1     0.0

6

     0.0     0.0     0.0     0.0     0.2     0.0

7

     0.0     0.0     0.0     0.2     0.4     0.1

8

     0.1     0.1     0.0     0.3     0.6     0.1

9

     0.1     0.1     0.1     0.4     0.7  

10

     0.1     0.2     0.2     0.5     0.9  

11

     0.1     0.4     0.2     0.6     1.1  

12

     0.6     0.7     0.4     0.8     1.2  

13

     0.6     0.8     0.5     0.9     1.4  

14

     0.6     1.5     0.6     1.2     1.6  

15

     0.8     1.6     0.6     1.4     1.8  

16

     1.1     1.8     0.8     1.5     2.0  

17

     1.1     1.8     0.9     1.6     2.1  

18

     1.1     2.1     0.9     1.7     2.2  

19

     1.8     2.3     1.0     1.9     2.3  

20

     2.0     2.4     1.2     2.0    

21

     2.0     2.5     1.3     2.2    

22

     2.0     2.5     1.3     2.3    

23

     2.1     2.6     1.4     2.3    

24

     2.3     2.8     1.4     2.4    

25

     2.3     2.8     1.4     2.4    

26

     2.3     3.0     1.5     2.5    

27

     2.6     3.1     1.5     2.6    

28

     2.6     3.3     1.6     2.6    

29

     2.7     3.4     1.6     2.7    

30

     3.3     3.4     1.7     2.7    

31

     3.3     3.5     1.7     2.7    

32

     3.3     3.5     1.8     2.7    

33

     3.3     3.6     1.8      

34

     3.3     3.6     1.8      

35

     3.3     3.6     1.8      

36

     3.3     3.7     1.9      

 

33


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: B
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.2     0.1     0.1     0.1     0.0

6

     0.0     0.8     0.2     0.2     0.2     0.1

7

     0.0     1.2     0.5     0.4     0.5     0.1

8

     0.4     1.4     0.7     0.6     0.7     0.2

9

     0.6     1.6     0.9     0.8     0.9  

10

     0.7     2.4     1.1     1.1     1.2  

11

     1.3     2.9     1.3     1.3     1.5  

12

     1.7     3.0     1.9     1.4     1.9  

13

     1.7     3.4     2.1     1.6     2.2  

14

     2.3     3.8     2.7     1.7     2.6  

15

     2.8     4.2     2.8     2.0     2.9  

16

     3.0     4.5     3.0     2.3     3.3  

17

     4.1     4.8     3.1     2.5     3.5  

18

     4.3     5.5     3.2     2.7     3.7  

19

     5.1     5.5     3.3     3.0     3.9  

20

     6.5     5.7     3.5     3.1    

21

     7.6     5.8     3.6     3.3    

22

     8.0     6.0     3.8     3.5    

23

     8.3     6.3     3.9     3.6    

24

     8.8     6.6     4.1     3.8    

25

     9.2     6.8     4.2     3.9    

26

     9.5     7.0     4.2     4.0    

27

     9.7     7.1     4.3     4.2    

28

     9.8     7.3     4.4     4.3    

29

     10.1     7.3     4.4     4.4    

30

     10.2     7.4     4.5     4.4    

31

     10.3     7.5     4.6     4.5    

32

     10.3     7.6     4.7     4.5    

33

     10.3     7.6     4.7      

34

     10.4     7.7     4.8      

35

     10.5     7.7     4.9      

36

     10.6     7.7     4.9      

 

34


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: C
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.2     0.3     0.4     0.1     0.1

6

     0.2     1.2     0.5     0.8     0.3     0.2

7

     0.2     1.9     0.7     0.9     0.5     0.3

8

     0.2     2.3     1.0     1.5     0.9     0.5

9

     0.9     3.2     1.1     1.8     1.4  

10

     1.6     3.6     1.4     1.9     1.8  

11

     1.9     3.9     2.1     2.5     2.3  

12

     2.2     4.4     2.5     3.4     2.7  

13

     2.4     4.9     2.8     3.8     3.3  

14

     3.5     5.1     3.4     4.2     3.8  

15

     4.1     5.5     3.7     4.5     4.3  

16

     4.8     5.9     4.0     4.8     4.7  

17

     6.1     6.3     4.5     5.3     5.0  

18

     7.4     6.5     4.9     5.5     5.3  

19

     8.0     6.5     5.2     5.8     5.5  

20

     8.5     6.7     5.3     6.1    

21

     9.9     7.1     5.5     6.2    

22

     10.8     7.5     5.8     6.6    

23

     11.7     7.8     5.9     6.8    

24

     12.1     8.0     6.1     7.1    

25

     12.2     8.4     6.3     7.4    

26

     12.8     8.4     6.7     7.5    

27

     12.9     8.6     6.8     7.7    

28

     13.0     8.8     6.9     7.8    

29

     13.5     9.0     7.1     7.8    

30

     13.6     9.1     7.2     7.9    

31

     13.8     9.2     7.3     7.9    

32

     13.8     9.4     7.4     7.9    

33

     14.0     9.4     7.5      

34

     14.1     9.6     7.5      

35

     14.1     9.6     7.5      

36

     14.1     9.6     7.5      

 

35


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: D
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.5     0.1     0.2     0.2     0.2

6

     0.0     1.0     0.5     0.4     0.4     0.4

7

     0.3     1.3     1.4     0.9     0.8     0.8

8

     0.6     1.7     2.1     1.1     1.2     1.1

9

     2.5     2.8     2.6     1.4     1.9  

10

     2.7     3.6     3.1     1.7     2.5  

11

     4.3     4.3     3.6     2.1     3.1  

12

     4.5     4.6     4.3     2.6     3.7  

13

     5.3     5.2     4.5     3.1     4.3  

14

     5.3     5.6     5.1     3.4     4.9  

15

     7.8     5.9     5.3     3.7     5.5  

16

     8.4     6.6     5.7     3.8     6.1  

17

     9.4     6.8     6.3     4.1     6.4  

18

     9.5     7.3     6.5     4.8     6.8  

19

     10.8     7.5     6.6     5.4     7.1  

20

     11.8     8.0     7.1     5.7    

21

     13.1     8.6     7.6     5.8    

22

     14.5     9.0     7.8     6.3    

23

     16.2     9.5     8.2     6.6    

24

     16.8     9.8     8.3     6.8    

25

     17.2     10.1     8.5     7.0    

26

     17.5     10.3     8.6     7.7    

27

     18.2     10.4     8.8     7.8    

28

     19.3     10.5     8.9     8.0    

29

     19.4     10.6     9.1     8.1    

30

     19.4     10.7     9.2     8.1    

31

     19.6     10.9     9.3     8.2    

32

     19.9     11.0     9.3     8.2    

33

     20.0     11.0     9.4      

34

     20.1     11.0     9.6      

35

     20.2     11.0     9.8      

36

     20.2     11.1     9.8      

 

36


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: E
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.7     0.2     0.1     0.0     0.5

6

     0.0     2.0     0.4     0.3     0.5     0.8

7

     0.0     2.2     0.7     0.8     0.6     1.0

8

     0.1     3.3     1.0     0.8     1.4     1.5

9

     0.6     3.9     1.1     1.4     2.2  

10

     1.1     4.3     1.2     1.8     2.5  

11

     3.6     4.8     1.8     1.9     3.4  

12

     4.5     5.9     2.3     2.1     4.2  

13

     4.8     7.0     3.4     2.8     5.5  

14

     4.8     7.5     4.2     3.0     6.1  

15

     5.6     7.7     5.8     3.4     6.9  

16

     7.4     8.8     6.1     3.4     7.1  

17

     7.9     9.6     6.6     3.8     7.4  

18

     8.2     10.4     7.5     4.5     8.0  

19

     9.0     11.3     8.2     5.0     8.2  

20

     9.8     11.3     8.5     5.6    

21

     10.7     11.5     8.7     5.7    

22

     11.8     11.8     8.7     6.0    

23

     12.2     12.2     8.7     6.0    

24

     12.8     12.2     9.1     6.3    

25

     13.0     12.5     9.5     6.6    

26

     13.7     13.0     9.8     7.4    

27

     13.7     13.5     9.8     7.6    

28

     14.0     13.5     9.9     7.6    

29

     14.4     13.8     10.1     8.2    

30

     14.6     14.1     10.2     8.2    

31

     14.6     14.1     10.3     8.2    

32

     15.0     14.1     10.6     8.2    

33

     15.2     14.3     10.6      

34

     15.5     14.3     10.6      

35

     15.5     14.3     11.0      

36

     15.6     14.3     11.0      

 

37


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 36 Months Grade: F+G
 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0     0.0     0.0

5

     0.0     0.0     0.0     0.0     0.7     0.9

6

     0.0     1.2     0.4     1.1     0.7     1.5

7

     0.0     2.7     3.6     1.1     1.1     2.3

8

     1.6     3.5     5.1     1.1     2.3     2.5

9

     2.6     3.8     5.8     1.1     4.4  

10

     4.6     5.1     6.2     6.8     4.4  

11

     6.0     6.0     9.5     6.8     5.0  

12

     6.0     6.7     11.8     6.8     7.7  

13

     6.0     7.1     11.8     6.8     8.7  

14

     7.4     7.9     11.8     10.4     9.7  

15

     9.5     10.0     13.5     10.4     10.7  

16

     11.3     10.3     14.7     10.4     10.7  

17

     11.9     10.3     14.7     10.4     10.7  

18

     12.8     10.9     14.7     10.8     10.7  

19

     15.5     12.6     15.5     11.1     10.7  

20

     16.0     13.3     15.5     11.1    

21

     19.2     14.3     15.5     11.1    

22

     19.3     14.3     17.4     14.4    

23

     21.7     14.6     17.9     14.4    

24

     21.7     15.4     18.4     15.4    

25

     22.9     16.8     19.6     15.4    

26

     23.5     17.3     19.9     16.6    

27

     23.9     18.5     20.4     16.6    

28

     23.9     18.7     20.5     16.9    

29

     24.0     18.8     20.5     16.9    

30

     24.0     19.1     20.5     16.9    

31

     24.2     19.1     20.5     16.9    

32

     24.2     19.2     20.8     16.9    

33

     24.2     19.8     21.0      

34

     24.7     19.8     21.1      

35

     25.1     19.8     21.2      

36

     25.3     19.8     21.2      

 

38


Table of Contents

Cumulative Charge-off Rate – 60 Month Public Policy Loans

The graph and corresponding tables below show the cumulative net lifetime charge-offs for Public Policy Loans with original terms of 60 months by grade and by annual vintage booked from May 1, 2010 through March 31, 2014, as a percentage of the aggregate principal amount of originations. The charge-offs are tracked by annual vintage, meaning each line represents all loans originated in that year.

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 60 Months Grade: (All)
 

Mo #

   Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0

5

     0.0     0.2     0.1     0.1

6

     0.2     0.5     0.4     0.2

7

     0.4     0.9     0.8     0.3

8

     0.9     1.4     1.3     0.5

9

     1.3     2.0     1.9  

10

     1.6     2.7     2.5  

11

     2.2     3.4     3.2  

12

     2.8     3.8     3.7  

13

     3.3     4.6     4.4  

14

     4.1     5.1     5.1  

15

     4.6     5.7     5.9  

16

     5.3     6.3     6.6  

17

     5.7     6.9     7.1  

18

     6.1     7.5     7.5  

19

     6.6     8.0     7.9  

20

     6.9     8.6    

21

     7.3     9.0    

22

     7.7     9.4    

23

     8.0     9.9    

24

     8.4     10.4    

25

     8.7     10.8    

26

     9.2     11.3    

27

     9.7     11.7    

28

     10.1     12.0    

29

     10.4     12.2    

30

     10.7     12.4    

31

     10.9     12.6    

32

     11.1     12.7    

33

     11.4      

34

     11.5      

35

     11.7      

36

     11.9      

37

     12.1      

38

     12.3      

39

     12.4      

40

     12.6      

41

     12.7      

42

     12.8      

 

39


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 60 Months Grade: A
 

Mo #

   Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0

5

     0.0     0.0     0.0     0.0

6

     0.0     0.0     0.0     0.0

7

     0.0     0.0     1.1     0.0

8

     0.3     0.0     1.1     0.2

9

     0.3     0.0     1.1  

10

     0.3     0.0     1.1  

11

     0.6     0.0     1.1  

12

     0.9     0.0     1.1  

13

     1.3     0.6     1.1  

14

     1.3     0.6     1.1  

15

     1.5     0.6     1.4  

16

     1.5     0.6     1.4  

17

     1.7     0.6     1.4  

18

     1.9     0.6     1.4  

19

     1.9     0.6     1.4  

20

     1.9     1.2    

21

     1.9     1.7    

22

     1.9     1.7    

23

     2.1     2.2    

24

     2.1     2.2    

25

     2.1     2.2    

26

     2.1     2.7    

27

     2.1     2.9    

28

     2.1     2.9    

29

     2.4     2.9    

30

     2.4     2.9    

31

     2.4     2.9    

32

     2.5     2.9    

33

     2.5      

34

     2.5      

35

     2.5      

36

     2.7      

37

     2.7      

38

     2.7      

39

     2.8      

40

     2.9      

41

     2.9      

42

     2.9      

 

40


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans—Term: 60 Months Grade: B
 

Mo #

   Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0

5

     0.0     0.0     0.1     0.0

6

     0.0     0.2     0.2     0.1

7

     0.1     0.4     0.4     0.1

8

     0.5     0.6     0.6     0.3

9

     1.0     1.0     1.1  

10

     1.4     1.4     1.4  

11

     1.8     1.7     1.8  

12

     2.4     1.9     2.1  

13

     2.7     2.2     2.4  

14

     3.1     2.5     2.8  

15

     3.4     3.0     3.2  

16

     3.7     3.2     3.3  

17

     4.3     3.7     3.7  

18

     4.7     3.9     4.0  

19

     5.3     3.9     4.1  

20

     5.5     4.2    

21

     5.7     4.4    

22

     6.2     4.8    

23

     6.3     5.3    

24

     6.6     5.6    

25

     6.9     5.9    

26

     7.4     6.4    

27

     7.6     6.6    

28

     7.6     6.8    

29

     7.8     6.9    

30

     8.3     7.1    

31

     8.6     7.1    

32

     8.7     7.2    

33

     8.9      

34

     8.9      

35

     9.0      

36

     9.2      

37

     9.3      

38

     9.5      

39

     9.7      

40

     9.9      

41

     10.0      

42

     10.0      

 

41


Table of Contents

 

LOGO

 

     Net Cumulative Lifetime Charge-off Rates by Booking Year
All Public Policy Loans - Term: 60 Months Grade: C
 

Mo #

   Y2010     Y2011     Y2012     Y2013  

1

     0.0     0.0     0.0     0.0

2

     0.0     0.0     0.0     0.0

3

     0.0     0.0     0.0     0.0

4

     0.0     0.0     0.0     0.0

5

     0.2     0.3     0.1     0.0

6

     0.3     0.9     0.3     0.1

7

     0.5     1.1     0.6     0.1

8

     0.9     1.6     0.9     0.2

9

     1.1     2.1     1.4  

10

     1.4     2.5     1.8  

11

     2.1     3.0     2.3  

12

     2.5     3.6     2.8  

13

     2.8     4.1     3.2  

14

     3.4     4.5     3.6  

15

     3.8     5.0     3.9  

16

     4.3     5.3     4.2  

17

     4.7     5.8     4.3  

18

     5.0     6.2     4.6  

19

     5.4     6.3     4.7  

20

     5.5     6.7    

21

     5.8     6.9    

22

     6.1     7.3    

23

     6.2     7.6    

24

     6.4     8.0    

25

     6.7     8.4    

26

     7.1     8.6    

27

     7.4     8.7    

28

     7.5     8.9    

29

     7.8     9.0