10-Q 1 d794350d10q.htm FORM 10-Q Form 10-Q
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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 September 30, 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 September 30, 2014, there were 60,921,190 shares of the registrant’s common stock outstanding.

 

 

 


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LENDINGCLUB CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

Condensed Consolidated Balance Sheets

     3   

Condensed Consolidated Statements of Operations

     4   

Condensed Consolidated Statements of Cash Flows

     5   

Notes to Condensed Consolidated Financial Statements

     6   

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

     26   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     64   

Item 4. Controls and Procedures

     64   

PART II. OTHER INFORMATION

     65   

Item 1. Legal Proceedings

     65   

Item 1A. Risk Factors

     65   

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

     66   

Item 3. Defaults Upon Senior Securities

     66   

Item 4. Mine Safety Disclosures

     66   

Item 5. Other Information

     67   

Item 6. Exhibits

     67   

SIGNATURES

     68   

EXHIBIT INDEX

     69   


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Except as the context requires otherwise, as used herein, “Lending Club,” “LC,” the “Company,” “we,” “us,” and “our,” refer to LendingClub Corporation and its wholly owned subsidiaries; Springstone Financial, LLC (“Springstone”) and LC Advisors, LLC, (“LCA”). “Trust” refers to LC Trust I, an independent Delaware business trust that acquires loans through the Lending Club marketplace and holds the loans for the sole benefit of certain investors that purchase certificates issued by the Trust and that are related to the 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, expected losses, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “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;

 

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

 

    interest rates and origination fees on loans charged by the issuing bank;

 

    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 and other third-party banking institutions as the issuer of loans facilitated by our marketplace;

 

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

 

    our ability to successfully integrate our recent acquisition of Springstone;

 

    our ability to expand the number of providers that use the products provided through Springstone;

 

    the available functionality of a secondary market trading program for notes;

 

    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 employees and appropriately staff our operations;

 

    our ability to prevent security breaches, disruptions in service or comparable events that could compromise the personally identifiable or confidential information held in our data systems, reduce the attractiveness of the marketplace 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 regarding our marketplace.

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.

 

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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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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LendingClub Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share amounts)

 

     September 30, 2014     December 31, 2013  
ASSETS     

Cash and cash equivalents

   $ 82,674      $ 49,299   

Restricted cash

     25,221        12,208   

Loans at fair value (includes $1,580,656 and $1,158,302 from consolidated Trust at September 30, 2014 and December 31, 2013, respectively)

     2,533,671        1,829,042   

Accrued interest receivable (includes $13,849 and $10,061 from consolidated Trust at September 30, 2014 and December 31, 2013, respectively)

     22,348        15,975   

Property, equipment and software, net

     23,686        12,595   

Intangible assets, net

     37,690        —     

Goodwill

     72,592        —     

Other assets

     16,521        23,921   

Due from related parties

     443        355   
  

 

 

   

 

 

 

Total Assets

   $ 2,814,846      $ 1,943,395   
  

 

 

   

 

 

 
LIABILITIES     

Accounts payable

   $ 3,354      $ 4,524   

Accrued interest payable (includes $15,939 and $11,176 from consolidated Trust at September 30, 2014 and December 31, 2013, respectively)

     25,723        17,741   

Accrued expenses and other liabilities

     26,004        9,128   

Payable to investors

     17,366        3,918   

Notes and certificates, at fair value (includes $1,580,656 and $1,158,302 from consolidated Trust at September 30, 2014 and December 31, 2013, respectively)

     2,551,640        1,839,990   

Term loan

     49,219        —     
  

 

 

   

 

 

 

Total Liabilities

     2,673,306        1,875,301   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 17)

    
STOCKHOLDERS’ EQUITY     

Preferred stock

   $ 177,300      $ 103,244   

Common stock, $0.01 par value; 372,000,000 and 360,000,000 shares authorized at September 30, 2014 and December 31, 2013, respectively; 60,921,190 and 54,986,640 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     609        138   

Additional paid-in capital

     37,817        15,041   

Accumulated deficit

     (74,186     (50,329
  

 

 

   

 

 

 

Total Stockholders’ Equity

     141,540        68,094   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,814,846      $ 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
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Operating revenue

        

Transaction fees

   $ 52,622      $ 25,239      $ 133,835      $ 55,214   

Servicing fees

     3,053        888        6,301        2,485   

Management fees

     1,608        869        4,163        2,083   

Other revenue (expense)

     (745     409        (438     4,708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     56,538        27,405        143,861        64,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense):

        

Total interest income

     94,038        51,386        252,298        124,771   

Total interest expense

     (94,460     (51,370     (253,054     (124,727
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     (422     16        (756     44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value adjustments, loans

     (33,809     (15,613     (84,963     (37,877

Fair value adjustments, notes and certificates

     33,757        15,607        84,865        37,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after fair value adjustments

     (474     10        (854     15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     56,064        27,415        143,007        64,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     21,001        10,460        60,808        26,577   

Origination and servicing

     10,167        4,996        26,135        11,044   

General and administrative

     31,848        9,331        78,862        22,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     63,016        24,787        165,805        60,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (6,952     2,628        (22,798     4,450   

Income tax expense (benefit)

     419        (85     1,059        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (7,371   $ 2,713      $ (23,857   $ 4,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.12   $ —        $ (0.41   $ —     

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

   $ (0.12   $ —        $ (0.41   $ —     

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

     59,844,394        53,312,412        57,958,838        50,457,948   

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

     59,844,394        80,001,460        57,958,838        79,153,912   

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)

 

     Nine Months Ended September 30,  
     2014     2013  

Cash flows from operating activities:

    

Net (loss) income

   $ (23,857   $ 4,450   

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

    

Fair value adjustments of loans, notes and certificates, net

     99        29   

Change in loan servicing liability carried at fair value

     2,776        731   

Change in loan servicing asset carried at fair value

     (986     (153

Stock-based compensation and warrant expense, net

     25,889        3,345   

Depreciation and amortization

     6,620        907   

Loss (gain) on sales of loans at fair value

     2,110        (3,862

Other, net

     238        —     

Loss on disposal of property, equipment and software

     212        —     

Purchase of whole loans held for sale

     (1,096,592     (246,571

Proceeds from sales of whole loans held for sale

     1,094,482        250,433   

Net change in operating assets and liabilities excluding the effects of the acquisition:

    

Accrued interest receivable

     (6,373     (7,280

Other assets

     13,184        (153

Due from related parties

     (88     (197

Accounts payable

     (1,107     1,120   

Accrued interest payable

     7,982        7,871   

Accrued expenses and other liabilities

     10,806        5,532   
  

 

 

   

 

 

 

Net cash provided by operating activities

     35,395        16,202   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of loans at fair value

     (1,534,276     (1,115,774

Principal payments of loans at fair value

     739,505        341,256   

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

     5,178        1,180   

Payments for business acquisition, net of cash acquired

     (109,464     —     

Net change in restricted cash

     (11,432     (1,264

Purchase of property, equipment and software

     (14,989     (7,736
  

 

 

   

 

 

 

Net cash used in investing activities

     (925,478     (782,338
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net change in payable to investors

     12,933        (1,593

Proceeds from issuance of notes and certificates

     1,534,010        1,115,694   

Principal payments on notes and certificates

     (732,342     (339,048

Payments on notes and certificates from recoveries and sales of related charged off loans at fair value

     (5,153     (1,139

Proceeds from term loan, net of debt discount

     49,813        —     

Payment for debt issuance costs

     (1,192     —     

Principal payment on term loan

     (625     —     

Prepaid offering costs

     (1,887     —     

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

     64,803        —     

Proceeds from stock options exercised

     2,997        1,531   

Proceeds from exercise of warrants to acquire common stock

     101        326   
  

 

 

   

 

 

 

Net cash provided by financing activities

     923,458        775,771   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     33,375        9,635   

Cash and cash equivalents, beginning of period

     49,299        52,551   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 82,674      $ 62,186   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 244,531      $ 116,746   

Non-cash investing activity - accruals for property, equipment and software

   $ 1,132      $ —     

Non-cash financing activitiy - accruals for prepaid offering costs

   $ 1,053      $ —     

Non-cash financing activitiy - exercise of common stock warrants

   $ 86      $ 137   

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

   $ 2,762      $ —     

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 September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013, respectively have been prepared 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.

We 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 and nine months ended September 30, 2014 and 2013, respectively.

In our opinion, all necessary adjustments (including 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 condensed 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.

Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no impact on previously reported results of consolidated operations.

On April 15, 2014, a 2 for 1 equity stock split approved by our Board of Directors became effective, 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. Additionally, another 2 for 1 equity stock split became effective on September 5, 2014, 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 these stock splits. The par value of each of the outstanding shares remains the same at $0.01.

On April 17, 2014, we acquired all the outstanding limited liability company interests of Springstone. Our condensed consolidated financial statements include Springstone’s results of operations and financial position from this date (see Note 9 – Springstone Acquisition).

2. Summary of Significant Accounting Policies

Our significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in our 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 nine months of 2014 except for our initial application of the acquisition method in accounting for a business combination, the accounting for intangible assets, including goodwill and the accounting for servicing assets and liabilities, as described below.

Goodwill and Intangible Assets

Goodwill represents the fair value of acquired businesses in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is April 1. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit (defined as business for which financial information is available and reviewed regularly by management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, or company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities and merger or acquisition activity.

If we elect to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management will estimate the fair values of our reporting units and compare them to their carrying values. The estimated fair values of the reporting units will be established using an income approach based on a discounted cash flow model or a market approach which compares each reporting unit to comparable companies in their respective industries.

 

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Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We do not have any indefinite-lived intangible assets.

Servicing Asset/Liability

We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or when the servicing contract commences. The gain or loss on a loan sale is recorded in “Other Revenue” while the component of the gain or loss that is based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee is recorded as an offset in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Other Assets” and “Accrued Expenses and Other Liabilities,” respectively, on the condensed consolidated balance sheets. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are reported in “Servicing Fees” on the condensed consolidated statement of operations in the period in which the changes occur.

We use a discounted cash flow model to estimate the fair value of the loan servicing asset or liability which considers the contractual servicing fee revenue we earn on the loans, estimated market rate servicing fee to service such loans, the current principal balances of the loans and projected servicing revenues over the remaining terms of the loans.

Impact of New Accounting Standards

In May, 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” which provides a single comprehensive revenue recognition model for all contracts with customers. The standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. This ASU is effective for annual reporting periods beginning after December 15, 2016 for public entities. Early adoption is not permitted. We are currently evaluating the impact of the new update on our condensed consolidated financial statements.

In August, 2014, FASB issued ASU 2014-13 “Consolidation (Topic 810)—Measuring the Financial Assets and The Financial Liabilities of a Consolidated Collateralized Financing Entity” to amend the existing standards. This ASU provides an alternative to current fair value measurement guidance to an entity that consolidates a collateralized financing entity (“CFE”) that has elected the fair value option for the financial assets and financial liabilities. If elected, the entity could measure both the financial assets and the financial liabilities of the CFE by using the fair value of the financial assets or financial liabilities, whichever is more observable. The election would effectively eliminate any measurement difference previously reflected in earnings and attributed to the reporting entity in the condensed consolidated statements of operations. The guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. We are currently evaluating the impact of the new update on our condensed consolidated financial statements.

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

Basic net income (loss) per share (“EPS”) is the amount of net income (loss) available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of net income (loss) available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares to be issued assuming the exercise of 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 both basic and diluted EPS using the two-class method. The two-class method allocates net income 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, net income allocated to these participating securities, which include participation rights in undistributed earnings (see Note 13 – Stockholders’ Equity), is subtracted from net income to determine total undistributed net income 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 income (loss) per share (in thousands, except share and per share data):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net (loss) income

   $ (7,371   $ 2,713      $ (23,857   $ 4,450   

Less: Net income allocated to participating securities (1)

     —          (2,713     —          (4,450
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (7,371   $ —        $ (23,857   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     59,844,394        53,312,412        57,958,838        50,457,948   

Weighted average effect of dilutive securities:

        

Stock Options

     —          25,930,812        —          27,170,816   

Warrants

     —          758,236        —          1,525,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     59,844,394        80,001,460        57,958,838        79,153,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

        

Basic

   $ (0.12   $ —        $ (0.41   $ —     

Diluted

   $ (0.12   $ —        $ (0.41   $ —     

 

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

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

Loans, Notes and Certificates

Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are unsecured, fixed rate, three or five year personal loans in amounts ranging from $1,000 to $35,000 made to borrowers meeting strict credit criteria, including a FICO score of at least 660. Custom program loans are generally new offerings and loans that do not meet the requirements of the standard program and/or loans with longer maturities that we believe to be attractive to most investors. Currently, custom program loans include small business, education and patient finance loans. Small business loans are unsecured and fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities between one and five years. Education and patient finance loans are issued in amounts ranging from $499 to $40,000 and various maturities between six and 72 months.

Investors can invest in loans that are offered through our marketplace. We issue notes and the Trust issues certificates.

At September 30, 2014 and December 31, 2013, loans and notes and certificates (in thousands) were:

 

     Loans     Notes and Certificates  
     September 30,
2014
    December 31,
2013
    September 30,
2014
    December 31,
2013
 

Aggregate principal balance outstanding

   $ 2,566,477      $ 1,849,042      $ 2,584,441      $ 1,859,982   

Fair value adjustments

     (32,806     (20,000     (32,801     (19,992
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

   $ 2,533,671      $ 1,829,042      $ 2,551,640      $ 1,839,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans facilitated by Springstone are originated, owned and serviced by the issuing banks and are therefore not recorded on our condensed consolidated balance sheet nor are the loans’ cash flows recorded on our condensed consolidated statement of cash flows.

 

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At September 30, 2014, outstanding loans underlying notes and certificates had original maturities between 12 months and 60 months and are paid monthly with fixed interest rates ranging from 5.42% to 29.90% and various maturity dates through September 2019. At December 31, 2013, outstanding loans underlying notes and certificates had original terms of 36 months or 60 months, were paid monthly with fixed interest rates ranging from 5.42% to 26.06% and had various maturity dates through December 2018.

At September 30, 2014, we had 1,304 loans that were 90 days or more past due (which includes non-accrual loans discussed below) or the borrower has filed for bankruptcy or is deceased; these loans had a total outstanding principal balance of $15.2 million, aggregate adverse fair value adjustments totaling $13.8 million and an aggregate fair value of $1.4 million. At December 31, 2013, we had 989 loans that were 90 days or more past due (which includes non-accrual loans discussed below) or the borrower has filed for bankruptcy or is deceased; these loans 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.

We place loans on non-accrual status once they are 120 days past due. At September 30, 2014, we had 51 loans that were over 120 days past due and classified as non-accrual loans, which had a total outstanding principal balance of $0.5 million, aggregate adverse fair value adjustments totaling $0.4 million and an aggregate fair value of $0.1 million. At December 31, 2013, we had 111 loans that were over 120 days past due and classified as non-accrual loans, which had a total outstanding principal balance of $1.1 million, aggregate adverse fair value adjustments totaling $0.9 million and an aggregate fair value of $0.2 million.

Loan Servicing Rights

We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or when the servicing contract commences.

At September 30, 2014, loans underlying loan servicing rights had a total principal balance of $1.37 billion, original terms between 12 and 60 months and are paid monthly with fixed interest rates ranging from 5.90% to 33.15% and various maturity dates through September, 2019. At December 31, 2013, loans underlying loan servicing rights had a total principal balance of $0.41 billion, original terms between 36 months and 60 months and are paid monthly with fixed interest rates ranging from 6.00% to 26.06% and various maturity dates through December, 2018.

5. Fair Value of Financial Instruments Measured at Fair Value

We use fair value measurements to record fair value adjustments to loans, loan servicing rights, notes and certificates that are recorded at fair value on a recurring basis. The fair values of loans, loan servicing rights, notes and certificates are determined using a discounted cash flow methodology utilizing market participant assumptions as discussed in “Valuation Method” section below.

 

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As our loans and related notes and certificates, and loan servicing rights do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure the fair value of these assets and liabilities. Accordingly, we classify them as Level 3 as follows (in thousands):

 

     Level 1 Inputs      Level 2 Inputs      Level 3 Inputs      Total  

September 30, 2014

           

Assets

           

Loans

   $ —         $ —         $ 2,533,671       $ 2,533,671   

Servicing asset

     —           —           1,520         1,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ —         $ —         $ 2,535,191       $ 2,535,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Notes and certificates

   $ —         $ —         $ 2,551,640       $ 2,551,640   

Servicing liability

     —           —           3,712         3,712   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —         $ —         $ 2,555,352       $ 2,555,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Assets

           

Loans

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

Servicing asset

     —           —           534         534   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ —         $ —         $ 1,829,576       $ 1,829,576   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Notes and certificates

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

Servicing liability

     —           —           936         936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —         $ —         $ 1,840,926       $ 1,840,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial 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.

 

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Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurements at September 30, 2014 and December 31, 2013:

 

          September 30, 2014  
          Range of Inputs  
    

Unobservable Input

   Minimum     Maximum     Weighted
Average
 

Loans, notes & certificates and servicing asset/liability

   Discount rate      5.2     23.6     10.6

Loans, notes & certificates and servicing asset/liability

   Net cumulative expected loss      0.3     21.8     9.7

Servicing asset/liability

   Market servicing rate (% per annum on loan balance)      0.5     0.7     0.5
          December 31, 2013  
          Range of Inputs  
    

Unobservable Input

   Minimum     Maximum     Weighted
Average
 

Loans, notes & certificates and servicing asset/liability

   Discount rate      5.9     15.9     10.2

Loans, notes & certificates and servicing asset/liability

   Net cumulative expected loss      2.1     23.7     10.1

Servicing asset/liability

   Market servicing rate (% per annum on loan balance)      0.4     0.4     0.4

Valuation Method

The valuation technique used for our Level 3 assets and liabilities is described below.

Loans, Notes and Certificates

Discounted cash flow – The 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.

Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents 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, including risk premiums (if significant) that investors in unsecured consumer credit obligations would require when investing in notes issued by us and certificates issued by the Trust 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.

 

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Net cumulative expected loss – The 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.

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 nine months ended September 30, 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 depend on 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 charge-offs on loans are offset to the extent that the loans are financed by notes and certificates that effectively absorb the related loan losses.

Our and the Trust’s obligation to pay principal and interest on any note or certificate, as applicable, 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 September 30, 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 loans.

The fair value adjustments for loans were largely offset by the fair value adjustments of the notes and certificates due to the member payment dependent design of the notes and certificates and because the principal balances of the loans were very close to the combined principal balances of the notes and certificates.

The following tables present additional information about Level 3 loans, notes and certificates measured at fair value on a recurring basis for the three and nine months ended September 30, 2014 and September 30, 2013 (in thousands):

 

     Three Months Ended     Three Months Ended  
     September 30, 2014     September 30, 2013  
     Loans     Notes and
Certificates
    Loans     Notes and
Certificates
 

Fair value at June 30,

   $ 2,326,202      $ 2,336,595      $ 1,237,468      $ 1,242,668   

Purchases of loans

     994,497        —          567,181        —     

Issuances of notes and certificates

     —          532,034        —          435,489   

Whole loan sales

     (462,523     —          (131,669     —     

Principal payments

     (288,102     (280,643     (140,156     (139,049

Recoveries from sale and collection of charged-off loans

     (2,594     (2,589     (535     (526
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value before fair value adjustments

     2,567,480        2,585,397        1,532,289        1,538,582   

Fair value adjustments, included in earnings

     (33,809     (33,757     (15,613     (15,607
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at September 30,

   $ 2,533,671      $ 2,551,640      $ 1,516,676      $ 1,522,975   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended     Nine Months Ended  
     September 30, 2014     September 30, 2013  
     Loans     Notes and
Certificates
    Loans     Notes and
Certificates
 

Fair value at December 31,

   $ 1,829,042      $ 1,839,990      $ 781,215      $ 785,316   

Purchases of loans

     2,628,758        —          1,366,207        —     

Issuances of notes and certificates

     —          1,534,011        —          1,115,694   

Whole loan sales

     (1,094,482     —          (250,433     —     

Principal payments

     (739,506     (732,343     (341,256     (339,048

Recoveries from sale and collection of charged-off loans

     (5,178     (5,153     (1,180     (1,139
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value before fair value adjustments

     2,618,634        2,636,505        1,554,553        1,560,823   

Fair value adjustments, included in earnings

     (84,963     (84,865     (37,877     (37,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at September 30,

   $ 2,533,671      $ 2,551,640      $ 1,516,676      $ 1,522,975   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan Servicing Rights

Discounted cash flow – The 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.

Market servicing rate – We estimate adequate servicing compensation rates of what a market participant would earn to service the loans that we sell to, or that are acquired by, third parties. We estimated these market servicing rates based on observable market rates for other loan types in the industry, adjusted for the unique loan attributes that are present in the loans we sell and service (i.e., unsecured fixed rate fully amortizing loans, ACH loan payments, intermediate terms, prime credit grades and sizes) and a market servicing benchmarking analysis performed by an independent valuation firm.

Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. The discount rates for the projected net cash flows of loan servicing rights are our estimates of the rates of return that investors in servicing rights for unsecured consumer credit obligations would require for the various credit grades of the underlying loans. Discount rates for servicing rights on existing loans 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 – The 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 expressed as a percentage of the original principal amount of the loan. The assumption regarding net cumulative losses reduces the projected balances and expected terms of the loans, which are used to project future servicing revenues. The estimated net cumulative loss is the sum of the net losses estimated to occur each month of the life of a new loan. 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.

 

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The following tables present additional information about Level 3 servicing assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2014 and September 30, 2013 (in thousands):

 

     Three Months Ended     Three Months Ended  
     September 30, 2014     September 30, 2013  
     Servicing
Assets
    Servicing
Liabilities
    Servicing
Assets
     Servicing
Liabilities
 

Fair value at June 30,

   $ 1,034      $ 2,736      $ 7       $ 455   

Additions

     727        1,810        146         374   

Changes in fair value due to:

         

Realization of expected cash flows

     (270     (715     1         (98

Changes in market inputs or assumptions used in the valuation model

     29        (119     —        
  

 

 

   

 

 

   

 

 

    

 

 

 

Fair value at September 30,

   $ 1,520      $ 3,712      $ 154       $ 731   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended     Nine Months Ended  
     September 30, 2014     September 30, 2013  
     Servicing
Assets
    Servicing
Liabilities
    Servicing
Assets
     Servicing
Liabilities
 

Fair value at December 31,

   $ 534      $ 936      $ —         $ —     

Additions

     1,885        3,464        153         899   

Changes in fair value due to:

         

Realization of expected cash flows

     (555     (1,275     1         (168

Changes in market inputs or assumptions used in the valuation model

     (344     587        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Fair value at September 30,

   $ 1,520      $ 3,712      $ 154       $ 731   
  

 

 

   

 

 

   

 

 

    

 

 

 

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Changes in the unobservable inputs discussed above 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 rate and net cumulative expected loss rate each will reduce the estimated fair value of loans, notes and certificates. For loan servicing rights, an increase in the discount rate, net cumulative expected loss rate, or market servicing rate will reduce the fair value of the loan servicing rights. When multiple inputs are used within the valuation technique of a loan, loan servicing rights, note or certificate, a change in one input in a certain direction may be offset by an opposite change in another input.

6. Fair Value of Financial Instruments Not Measured at Fair Value on a Recurring Basis

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 condensed consolidated balance sheet; these financial instruments are carried at historical cost or amortized cost in the condensed consolidated balance sheets.

 

    Short-term financial assets: Short-term financial assets include cash and cash equivalents, restricted cash, and accrued interest receivable. 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, 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.

 

    Term Loan: Based on the frequent interest reset features of the term loan, we consider the carrying value of the term loan to approximate its fair value as of September 30, 2014.

 

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7. Property, Equipment and Software, net

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

 

     September 30, 2014     December 31, 2013  

Internally developed software

   $ 12,364      $ 4,188   

Computer equipment

     7,610        4,019   

Leasehold improvements

     4,488        2,700   

Purchased software

     2,829        913   

Furniture and fixtures

     2,244        836   

Construction in progress

     126        1,978   

Other

     —          26   
  

 

 

   

 

 

 

Total property, equipment and software

     29,661        14,660   

Accumulated depreciation and amortization

     (5,975     (2,065
  

 

 

   

 

 

 

Property, equipment and software, net

   $ 23,686      $ 12,595   
  

 

 

   

 

 

 

Depreciation and amortization expense on property, equipment and software for the three months ended September 30, 2014 and 2013 was $1.8 million and $0.3 million, respectively. Depreciation and amortization expense on property, equipment and software for the nine months ended September 30, 2014 and 2013 was $4.1 million and $0.9 million, respectively.

8. Other Assets

Other assets consist of the following (in thousands):

 

     September 30, 2014      December 31, 2013  

Prepaid expenses

   $ 3,777       $ 3,546   

Prepaid compensation

     2,988         —     

Prepaid offering cost

     2,940         —     

Accounts receivable

     2,538         439   

Loan servicing assets at fair value

     1,520         534   

Debt issuance costs, net

     993         —     

Receivable from investors

     740         18,116   

Deposits

     354         193   

Tenant improvement receivable

     —           504   

Other

     671         589   
  

 

 

    

 

 

 

Total other assets

   $ 16,521       $ 23,921   
  

 

 

    

 

 

 

 

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9. Springstone Acquisition

On April 17, 2014, we acquired all of the outstanding limited liability company interests of Springstone (the “Acquisition”). As a result of the closing of the Acquisition, Springstone became our wholly owned subsidiary.

Springstone facilitates education and patient finance loans through a network of providers utilizing two issuing banks. Each of Springstone’s issuing banks originates, holds and services the loans they issue. Springstone earns fee revenue from providers for facilitating loans to their customers. The acquisition of Springstone expands the services we offer to both borrowers and will expand services we offer to lenders/investors. We have included the financial results of Springstone in the condensed consolidated financial statements from the date of acquisition.

Under the terms of the purchase agreement, the sellers received at the closing an aggregate of $113 million in cash and $25 million worth of shares of our Series F convertible preferred stock. In connection with the acquisition, we also paid $2.4 million for transaction costs incurred by Springstone. For accounting purposes, the purchase price was $111.8 million, which was comprised of $109.0 million in cash and shares of Series F convertible preferred stock with an aggregate value of $2.8 million. To secure the retention of certain key employees, a total of $25.6 million comprised of $22.1 million of shares of Series F convertible preferred stock (“Escrow Shares”) and $3.5 million of cash were placed in a third-party escrow, and are subject to certain vesting and forfeiture conditions applicable to these employees continuing employment over a three-year period from the closing. These amounts will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Additionally, $19.0 million of the cash consideration and certain Escrow Shares were placed in a third-party escrow for 15 months from the closing date to secure, in part, the indemnification obligations of the sellers under the purchase agreement.

The cash portion of the consideration was funded by a combination of cash from us and proceeds from a debt financing and Series F convertible preferred stock financing (see Note 12 – Term Loan and Note 13 – Stockholders’ Equity).

We have completed the allocation of the purchase price to acquired assets and liabilities with the exception of finalizing the determination of certain contingent liabilities and the finalization of any deferred tax asset or liability as of the acquisition date. The preliminary purchase price allocation as of the acquisition date is as follows (in thousands):

 

     Fair Value  

Assets:

  

Cash

   $ 2,256   

Restricted cash

     1,581   

Property, equipment and software

     366   

Other assets

     599   

Identified intangible assets

     40,200   

Goodwill

     72,592   

Liabilities:

  

Accounts payable

     239   

Accrued expenses and other liabilities

     5,536   
  

 

 

 

Total purchase consideration

   $ 111,819   
  

 

 

 

The goodwill balance is primarily attributed to expected operational synergies, the combined workforce, and the future development initiatives of the combined workforce. Goodwill is expected to be deductible for U.S. income tax purposes.

The amounts of net revenue and earnings (losses) of Springstone included in our condensed consolidated statement of operations from the acquisition date of April 17, 2014 to September 30, 2014 were $10.4 million and $(4.4) million, respectively. The amounts of revenue and earnings (losses) of Springstone included in our condensed consolidated statement of operations for the three months ended September 30, 2014 were $5.7 million and $(2.7) million, respectively. We recorded acquisition-related expenses of $8 thousand and $2.3 million for the three and nine months ended September 30, 2014, respectively, which is included in general and administrative expense.

 

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The following pro forma financial information summarizes the combined results of operations for us and Springstone, as though the companies were combined as of January 1, 2013. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisition occurred as of January 1, 2013, nor is it indicative of future operating results. The pro forma results presented below include interest expense on the debt financing, amortization of acquired intangible assets, compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees, and tax expense (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Total net revenue

   $ 56,074      $ 31,437      $ 148,317      $ 75,891   

Net loss (1)

   $ (5,947   $ (843   $ (21,403   $ (15,623

Basic net loss per share attributable to common stockholders

   $ (0.10   $ (0.02   $ (0.37   $ (0.31

Diluted net loss per share attributable to common stockholders

   $ (0.10   $ (0.02   $ (0.37   $ (0.31

 

(1) Net loss for the nine months ended September 30, 2013 includes $8.6 million of one-time acquistion-related costs and compensation expenses.

10. Goodwill and Other Intangible Assets

Goodwill

Goodwill consisted of the following (in thousands):

 

Balance at December 31, 2013

   $ —     

Acquisition of Springstone

     72,592   
  

 

 

 

Balance at September 30, 2014

   $ 72,592   
  

 

 

 

There was no impairment of goodwill during the nine months ended September 30, 2014. During the third quarter of 2014, we recorded an immaterial amount of adjustment to goodwill for the finalization of the net working capital balance and a revenue refund liability as of the acquisition date.

Intangible Assets

Intangible assets as of September 30, 2014 are as follows (in thousands):

 

     September 30, 2014  
     Gross
Carrying Value
     Accumulated
Amortization
    Net
Carrying Value
     Remaining
Useful Life
(In Years)
 

Customer relationships

   $ 39,500       $ (2,382   $ 37,118         13.5   

Technology

     400         (60     340         2.5   

Brand name

     300         (68     232         1.5   
  

 

 

    

 

 

   

 

 

    

Total intangible assets subject to amortization

   $ 40,200       $ (2,510   $ 37,690         13.3   
  

 

 

    

 

 

   

 

 

    

The customer relationship intangible assets are being amortized on an accelerated basis over a 14 year period. The technology and brand name intangible assets are being amortized on a straight line basis over three and two years, respectively. Amortization expense associated with intangible assets for the three and nine months ended September 30, 2014 was $1.4 million and $2.5 million, respectively.

 

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The expected future amortization expense for intangible assets as of September 30, 2014 is as follows (in thousands):

 

Remainder of 2014

   $ 1,388   

2015

     5,287   

2016

     4,801   

2017

     4,287   

2018

     3,872   

Thereafter

     18,055   
  

 

 

 

Total

   $ 37,690   
  

 

 

 

11. Accrued Expenses and Other Liabilities

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

 

     September 30, 2014      December 31, 2013  

Accrued compensation

   $ 8,902       $ 5,243   

Accrued service fees

     7,128         2,057   

Loan servicing liability at fair value

     3,712         936   

Contingent liabilities

     1,875         —     

Deferred rent

     1,045         653   

Deferred tax liability

     1,004         —     

Transaction fee refund reserve

     682         —     

Deferred revenue

     472         —     

Early stock option exercise liability

     450         —     

Other accrued expenses

     734         239   
  

 

 

    

 

 

 

Total accrued expenses and other liabilities

   $ 26,004       $ 9,128   
  

 

 

    

 

 

 

12. Term Loan

In connection with the acquisition of Springstone, we entered into a Credit and Guaranty Agreement with several lenders on April 16, 2014, under which the lenders made a $50.0 million term loan to us. In connection with our entry into the credit agreement, we entered into a pledge and security agreement with Morgan Stanley Senior Funding, Inc. as collateral agent.

The term loan matures on April 16, 2017 and requires principal payments of $312,500 per quarter plus interest, with the remaining then unpaid principal amount payable at maturity. The term loan can be prepaid at any time without premium or penalty, subject to a minimum prepayment of $1.0 million. The term loan is required to be prepaid in certain circumstances, including upon sales of assets other than loans and upon the issuance of debt (other than notes and certificates) or redeemable capital stock.

Borrowings under the term loan bear interest, which at our option may be either (i) a floating base rate tied to an underlying index plus an additional 1.25% per annum or (ii) a Eurocurrency rate (for an interest period of one, two, three or six months) plus an additional 2.25% per annum (a “Eurocurrency Rate Loan”). If a Eurocurrency Rate Loan is selected, customary breakage costs are payable in the case of any prepayment on a date other than the last day of an interest period. The term loan was originally tied to the prime rate but was subsequently converted to a Eurocurrency Rate Loan. The weighted average interest rate on the Term Loan was 2.57% and 2.65% for the three and nine months ended September 30, 2014, respectively.

The term loan is also guaranteed by Springstone and LCA and is secured by a first priority lien and security interest in substantially all of our and our subsidiaries’ assets, not otherwise pledged or restricted, subject to certain exceptions.

The credit agreement and pledge and security agreement contain certain affirmative and negative covenants applicable to us and our subsidiaries. These covenants include restrictions on our ability to make certain restricted payments, including restrictions on our ability to pay dividends, incur additional indebtedness, place liens on assets, merge or consolidate, make investments and enter into certain transactions with our affiliates. The credit agreement also requires us to maintain a maximum total leverage ratio (as defined in the credit agreement) of less than 5.50:1 initially, and decreasing to 3.50:1 after September 30, 2015 (on a consolidated basis). The total leverage ratio as of September 30, 2014 was 2.25:1.

 

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As of September 30, 2014, the carrying value of the term loan was $49.2 million. At September 30, 2014, the current portion of the term loan was $1.2 million and the noncurrent portion of the outstanding balance was $48.0 million. We did not have a term loan outstanding balance at December 31, 2013.

In connection with the term loan, we capitalized $1.2 million of debt issuance costs. As of September 30, 2014, the net balance of debt issuance costs was $1.0 million. Interest expense on the term loan, including amortization of debt issuance cost, was $0.1 million and $0.2 million during the three and nine months ended September 30, 2014, respectively. We did not have interest expense on the term loan for the three and nine months ended September 30, 2013.

Future principal payments on the term loan are payable as follows (in thousands):

 

Remainder of 2014

   $ 312   

                       2015

     1,250   

                       2016

     1,250   

                       2017

     46,563   
  

 

 

 

Total principal payments

     49,375   

Unamortized discount, net

     (156
  

 

 

 

Total

   $ 49,219   
  

 

 

 

 

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13. Stockholders’ Equity

Convertible Preferred Stock (in thousands, except share amounts)

Preferred stock is issuable in series, and our 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 our 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 our Annual Report on Form 10-K for the year ended December 31, 2013, with the exception of Series F convertible preferred stock which is described below.

 

     September 30,
2014
    December 31,
2013
 

Preferred stock, $0.01 par value; 250,614,174 and 246,470,064 total shares authorized at September 30, 2014 and December 31, 2013, respectively:

    

Series A convertible preferred stock, 67,651,596 and 68,025,100 shares designated at September 30, 2014 and December 31, 2013, respectively; 66,422,077 and 66,100,344 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively; aggregate liquidation preference of $17,685 and $17,599 at September 30, 2014 and December 31, 2013, respectively.

   $ 17,487      $ 17,402   

Series B convertible preferred stock, 65,577,300 and 65,642,104 shares designated at September 30, 2014 and December 31, 2013, respectively; 65,577,300 shares issued and outstanding at September 30, 2014 and December 31, 2013; aggregate liquidation preference of $12,268 at September 30, 2014 and December 31, 2013.

     12,164        12,164   

Series C convertible preferred stock, 62,486,436 shares designated at September 30, 2014 and December 31, 2013; 62,486,436 shares issued and outstanding at September 30, 2014 and December 31, 2013; aggregate liquidation preference of $24,490 at September 30, 2014 and December 31, 2013.

     24,388        24,388   

Series D convertible preferred stock, 36,030,712 shares designated at September 30, 2014 and December 31, 2013; 36,030,712 shares issued and outstanding at September 30, 2014 and December 31, 2013; aggregate liquidation preference of $32,044 at September 30, 2014 and December 31, 2013.

     31,943        31,943   

Series E convertible preferred stock, 10,000,000 and 14,285,712 shares designated at September 30, 2014 and December 31, 2013, respectively; 10,000,000 shares issued and outstanding at September 30, 2014 and December 31, 2013; aggregate liquidation preference of $17,500 at September 30, 2014 and December 31, 2013.

     17,347        17,347   

Series F convertible preferred stock, 8,868,130 shares designated at September 30, 2014; 8,834,486 shares issued and outstanding at September 30, 2014; aggregate liquidation preference of $89,858 at September 30, 2014.

     89,661        —     
  

 

 

   

 

 

 

Subtotal

   $ 192,990      $ 103,244   
  

 

 

   

 

 

 

Unamortized compensation associated with Series F convertible preferred stock

     (15,690     —     
  

 

 

   

 

 

 

Total preferred stock

   $ 177,300      $ 103,244   
  

 

 

   

 

 

 

In connection with the Acquisition, we sold an aggregate of 6,390,556 shares of our Series F convertible preferred stock, par value $0.01 per share (the “Financing Shares”) for aggregate gross proceeds of approximately $65.0 million, pursuant to a Series F Preferred Stock Purchase Agreement. We sold the Financing Shares pursuant to an exemption from registration 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 we made no general solicitation for the sale of the Financing Shares. The Financing Shares are convertible into 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 our Restated Certificate of Incorporation.

In connection with the sale of Series F convertible preferred stock in April 2014, we filed a Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares that we were authorized to issue from 606,470,064 shares to 622,614,174, 372,000,000 shares of which were designated as common stock and 250,614,174 shares of which were designated as preferred stock. Of the total shares of preferred stock, 67,651,596 shares were designated as Series A convertible preferred stock, 65,577,300 shares were designated as Series B convertible preferred stock, 62,486,436 shares were designated as Series C convertible preferred stock, 36,030,712 shares were designated as Series D convertible preferred stock, 10,000,000 shares were designated as Series E convertible preferred stock and 8,868,130 were designated as Series F convertible preferred stock.

As part of the Acquisition, the sellers received shares of our Series F convertible preferred stock having an aggregate value of $25 million (the “Share Consideration”). $22.1 million of the Share Consideration is subject to certain vesting and forfeiture conditions over a three-year period for key continuing employees. This is accounted for as a compensation arrangement and expensed over the three-year vesting period. For the three and nine months ended September 30, 2014, we recognized $3.5 million and $6.4 million, respectively, of compensation expense which is reported in general and administrative expenses related to this arrangement.

At September 30, 2014, we had 1,189,392 shares of outstanding convertible preferred Series A stock warrants, which shares of preferred stock have been reserved for future issuance. The convertible preferred Series A stock warrants are fully exercisable with exercise prices of $0.2663 per share and expire in 2018.

 

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Common Stock

At September 30, 2014, we had shares of common stock authorized and reserved for future issuance as follows:

 

Options to purchase common stock

     54,587,814   

Options available for future issuance

     3,359,320   

Common stock warrants

     625,988   
  

 

 

 

Total common stock authorized and reserved for future issuance

     58,573,122   
  

 

 

 

An aggregate of 372,000,000 shares of common stock have been authorized for issuance. During the nine months ended September 30, 2014, 5,638,830 stock options were exercised in exchange for proceeds of $3.0 million. During the nine months ended September 30, 2014, we issued 295,720 common shares for proceeds of $0.1 million upon the exercise of common stock warrants. Common stock warrants are fully exercisable with exercise prices of $0.01 to $0.3919 per share and expire in 2021.

14. Stock-Based Compensation and Other Employee Benefit Plans

Stock-Based Compensation Expense

Total stock-based compensation expense recorded for stock options, warrants, and our consideration of Escrow Shares related to the Acquisition in the three and nine months ended September 30, 2014 and 2013 is summarized as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Stock-Based Compensation Expense:

           

Sales and marketing

   $ 912       $ 506       $ 5,029       $ 767   

Origination and servicing

     599         105         1,427         170   

General and administrative:

           

Engineering and product development

     1,492         519         3,487         1,019   

Other

     7,534         741         15,946         1,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 10,537       $ 1,871       $ 25,889       $ 3,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in stock-based compensation for the nine months ended September 30, 2014 was $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. There was no accelerated vesting during the three months ended September 30, 2014 or the nine months ended September 30, 2013.

We capitalized $0.6 million and $1.2 million of stock-based compensation expense associated with the cost for developing software for internal use during the three and nine months ended September 30, 2014, respectively. We did not capitalize any of the stock-based compensation expense for the three and nine months ended September 30, 2013.

Stock Incentive Plan

As of September 30, 2014, total unrecognized compensation expense was $97.8 million and this expense is expected to be recognized over the next 3.6 years. The total intrinsic values of options exercised for the nine months ended September 30, 2014 and 2013 were $40.4 million and $11.1 million, respectively. The total fair value of shares vested for the nine months ended September 30, 2014 and 2013 were $14.7 million and $3.2 million, respectively.

For the nine months ended September 30, 2014, we granted service-based stock options to purchase 18,511,572 shares of common stock with a weighted average exercise price of $5.91 per share, a weighted average grant date fair value of $4.37 per share and an aggregate estimated fair value of approximately $81.0 million.

For the nine months ended September 30, 2013, we granted service-based stock options to purchase 6,267,000 shares of common stock with a weighted average exercise price of $1.46 per share, a weighted average grant date fair value of $2.24 per share and a total estimated fair value of approximately $21.9 million.

 

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Assumed forfeiture rate (annual %)

     5.0     N/A  (1)      5.0     5.0

Expected dividend yield

     0.0     N/A  (1)      0.0     0.0

Weighted average assumed stock price volatility

     50.5     N/A  (1)      54.0     63.5

Weighted average risk-free rate

     1.9     N/A  (1)      1.9     1.1

Weighted average expected life (years)

     6.25        N/A  (1)      6.38        6.25   

 

(1)  We did not grant any stock options during the third quarter of 2013.

Option activity under the Option Plan for the nine months ended September 30, 2014 is summarized as follows:

 

     Options Outstanding  
     Number of
Shares
    Weighted-
Average
Exercise Price
Per Share
     Weighted-Average
Remaining
Contractual Life
(in years)
     Aggregate Intrinsic
Value
 

Outstanding at December 31, 2013

     43,314,728      $ 0.94         

Options Granted

     18,511,572      $ 5.91         

Options Exercised

     (5,638,830   $ 0.53         

Options Forfeited/Expired

     (1,599,656   $ 2.41         
  

 

 

         

Outstanding at September 30, 2014

     54,587,814      $ 2.63         8.16       $ 480,704,398   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at September 30, 2014

     51,863,779      $ 2.53         8.11       $ 466,380,050   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2014

     20,138,530      $ 0.58         6.84       $ 218,438,183   
  

 

 

   

 

 

    

 

 

    

 

 

 

401(k) Plan

We maintain a 401(k) defined contribution plan that covers substantially all of our employees. Participants may elect to contribute a portion of their annual compensation up to the maximum limit allowed by federal tax law. In the second quarter of 2014, management approved an employer 401(k) match of up to 3% of an employee’s eligible compensation with a maximum annual match of $5,000 per employee. For fiscal year 2014, the 401(k) match will be retroactively applied to employees’ eligible contributions from January 1, 2014. The total 401(k) match expense for the three and nine months ended September 30, 2014 was $0.3 million and $0.6 million, respectively.

 

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15. Income Taxes

For the three and nine months ended September 30, 2014, we recorded $0.4 million and $1.1 million of income tax expense, respectively. The $1.1 million of income tax expense relates to the amortization of tax deductible goodwill from the Acquisition which gives rise to an indefinite-lived deferred tax liability. There was no income tax benefit recorded on the pre-tax loss due to an increase in the deferred tax asset valuation allowance. We recorded no income tax expense for the nine month period ended September 30, 2013 because the corporate income tax liabilities due on our taxable income were offset by usage of prior years’ net operating losses and tax credit carryforwards.

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, 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.

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 September 30, 2014, will increase or decrease significantly in the next twelve months.

16. Related Party Transactions

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

The following table summarizes deposits and withdrawals made by related parties whose transactions totaled $120,000 or more for the nine months ended September 30, 2014 and 2013 (in thousands):

 

            Nine Months Ended  
            September 30, 2014  

Related Party

   Role      Deposits      Withdrawals  

Daniel Ciporin

     Director       $ 500       $ 63   

John J. Mack

     Director         950         69   

Larry Summers

     Director         200         —     
     

 

 

    

 

 

 

Total

      $ 1,650       $ 132   
     

 

 

    

 

 

 
            Nine Months Ended  
            September 30, 2013  

Related Party

   Role      Deposits      Withdrawals  

Daniel Ciporin

     Director       $ 600       $ 109   

Jeffrey Crowe

     Director         400         —     

John J. Mack

     Director         405         239   

Larry Summers

     Director         363         —     
     

 

 

    

 

 

 

Total

      $ 1,768       $ 348   
     

 

 

    

 

 

 

 

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17. Commitments and Contingencies

Operating Lease Commitments

Corporate Headquarters. We have several operating lease agreements for space at 71 Stevenson Street in San Francisco, California, where our corporate headquarters is located. On August 12, 2014, we amended one of our lease agreements to lease additional office space. The majority of the additional space is expected to commence in the third quarter of 2015. These leases expire on June 30, 2022. On October 1, 2014, we entered into a single master lease agreement for our Corporate Headquarters that superseded all other existing lease agreements for the space. Under this lease agreement, we generally have an option to extend the leases for five years.

Other Real Estate.

We also have an operating lease agreement for space in Westborough, Massachusetts where Springstone is headquartered. On September 15, 2014, we amended our lease agreement to lease additional office space. This lease expires on January 31, 2020 with a renewal option that would extend the lease for five years.

Total facilities rental expense for the three and nine months ended September 30, 2014 was $1.0 million and $2.5 million, respectively. Total facilities rental expense for the three and nine months ended September 30, 2013 was $0.5 million and $1.3 million, respectively. 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. At September 30, 2014, there were 722 such loans on the platform with an unfunded balance of $9.0 million. All of these loans were fully funded by investors by October 8, 2014.

In connection with transitional activities related to the Acquisition, in June 2014 we entered into a contingent loan purchase agreement with an issuing bank that originates loans facilitated by Springstone and a third-party investor that has agreed to purchase certain of those loans from such bank (“Contingent Loan Purchase Commitment”). The Contingent Loan Purchase Commitment provides that we will purchase such loans from the bank if the third-party investor defaults on its loan purchase obligations to the bank through December 31, 2014. The Contingent Loan Purchase Commitment limits the aggregate amount of such loan originations from inception of the Contingent Loan Purchase Commitment through December 31, 2014 to a maximum of $5.0 million. As of September 30, 2014, the amount remaining under the overall limit on the cumulative amount of such loan originations through December 31, 2014 was $2.2 million. We were not required to purchase any such loans pursuant to the Contingent Loan Purchase Commitment during the quarter ended September 30, 2014. We do not expect we will be required to purchase any such loans under the Contingent Loan Purchase Commitment through its expiration on December 31, 2014.

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 cumulative credit losses on loans underlying the investor’s Certificate, that are in excess of a specified, aggregate cumulative 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 September 30, 2014, cash of $3.4 million was pledged and restricted to support this contingent obligation. The amount pledged and restricted to support this contingent obligation has not changed since July 31, 2013.

As of September 30, 2014, the cumulative credit losses pertaining to the investor’s Certificate have not exceeded the specified threshold, nor are future cumulative 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

In the second quarter of 2014, we offered to settle a dispute with a consultant that previously performed work for us. The dispute arose over how much compensation for the work performed was to be provided in cash and in equity and as to equity what valuations were to be used. In the third quarter of 2014, we amended our offer to the claimant for 120,000 shares of our common stock and cash consideration of $215,000. Subsequent to September 30, 2014, this offer was further amended to 80,000 shares of our common stock, an option to purchase 40,000 shares of our common stock, and cash consideration of $215,000.

 

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During the second quarter of 2014, we also received notice from the California Employment Development Department (“EDD”) that it had commenced an examination of our records concerning the employment relationship of certain individuals who performed services for us from 2011 through 2014. Based on the EDD’s determination, certain of these individuals should have been classified as employees with appropriate tax withholding and employer related taxes incurred and paid. The EDD has completed its examination and issued a Final Notice of Assessment, which serves as the EDD’s official notice of its determination relating to this matter. We intend to pay the assessment during the fourth quarter of 2014 and have recorded a liability for this payment as of September 30, 2014.

Additionally, we settled a claim, which arose in a prior quarter by a former employee who had asserted a claim of wrongful termination.

In connection with these matters, we recorded an additional net charge to operations of $0.2 million during the third quarter of 2014. As of September 30, 2014, the accrued liability for these matters was $1.9 million. This aggregate amount represents the probable estimate of tax and settlement liabilities. As settlements have been agreed upon, for the matters indicated above, during the quarter or subsequent to the quarter-end, we do not believe the ultimate liability for such matters will be significantly different from the accrued aggregate liability at September 30, 2014.

We received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) dated June 5, 2014 related to the operations of Springstone. The purpose of the investigation is to determine whether Springstone is engaging in unlawful acts or practices in connection with the marketing, issuance, and servicing of loans for healthcare related financing. As of September 30, 2014, we had provided all of the documents requested by the CFPB. We are continuing to evaluate this matter. As of September 30, 2014, there are no probable or estimable losses related to this matter.

In addition to the foregoing, we may be subject to legal proceedings and regulatory actions in the ordinary course of business. 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.

18. Subsequent Event

On October 17, 2014, we entered into a lease agreement to lease additional office space at our corporate headquarters. The lease agreement commences in the fourth quarter of 2014 with a lease term of 4.5 years and an option to extend the leases for five years. The annual lease payments for this additional lease are approximately $1.2 million.

 

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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 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

Lending Club is the world’s largest online marketplace connecting borrowers and investors. We believe a technology-powered marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has historically been closed to individual investors and only available on a limited basis to institutional investors. Our mission is to transform the banking system to make credit more affordable and investing more rewarding.

Since beginning operations in 2007, our marketplace has facilitated over $6 billion in loans with nearly $1.2 billion of loans facilitated during the third quarter of 2014. We believe the attractiveness of our online marketplace will continue to grow to the extent the number of participants and investments enabled through our marketplace increases. We refer to this as a “network effect.”

Our trusted brand, scale and network effect drives significant borrowing and investing activity on our marketplace. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from investors. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. We operate with a lower cost structure than traditional banks due to our innovative model, online delivery and process automation, without the physical branches, legacy technology or high overhead associated with the traditional banking system.

Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are unsecured, fixed rate, three or five year personal loans in amounts ranging from $1,000 to $35,000 made to borrowers meeting strict credit criteria, including a FICO score of at least 660. Custom program loans are generally new offerings and loans that do not meet the requirements of the standard program and/or loans with longer maturities that we believe to be attractive to most investors. Currently, custom program loans include small business and education and patient finance loans. Small business loans are fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities between one and five years. Education and patient finance loans are issued in amounts ranging from $499 to $40,000 with various maturities between six and 72 months. Standard program loans are visible through our public website and can be invested in through notes. Separately, qualified investors may also invest in standard program loans in private transactions not facilitated through our website. Custom program loans are only invested in through private transactions with qualified investors and cannot be invested in through notes.

The transaction fees we receive from issuing banks in connection with our marketplace’s role in enabling loan originations range from 1% to 6% of the initial principal amount of the loan as of September 30, 2014. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. Servicing fees paid to us vary based along investment channels. Note investors pay us a servicing fee equal to 1% of each payment amount received from the borrower; whole loan purchasers pay a servicing fee that ranges up to 1.3% per year of the month-end principal balance of sold loans outstanding; and certificate holders generally pay a management fee typically ranging from 0.7% to 1.2% of the assets under management.

 

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Loans to qualified borrowers are originated by our issuing banks. Investors can invest in loans that are offered through our marketplace in one or all of the following channels:

 

    Notes. Pursuant to an effective shelf registration statement, investors who meet the applicable financial suitability requirements and have completed our investor account opening process may purchase unsecured, borrower payment dependent notes issued by us that correspond to payments received on an underlying standard program loan selected by the investor.

 

    Certificates and Funds. Accredited investors and qualified purchasers who have established a relationship with LC Advisors, LLC (“LCA”), a registered investment advisor and our wholly owned subsidiary, can purchase trust certificates or interests in limited partnerships that purchase trust certificates. The Trust certificates are settled with cash flows from underlying standard or custom program loans in a manner similar to the notes. These loans may be standard program or custom program loans.

 

    Whole Loan Purchases. Certain institutional investors, such as banks, seek to hold the actual loan on their balance sheet. To meet this need, we sell entire standard or custom program loans to investors. In connection with these sales, the investor owns all right, title and interest in each loan. For regulatory purposes, the investor also has access to the underlying borrower information, but is prohibited from contacting or marketing to the borrower in any manner and agrees to hold such borrower information in compliance with all applicable privacy laws. We continue to service these loans after they are sold and can only be removed as the servicer in limited circumstances.

Our note channel consists of the notes that we issue. When an investor registers, the investor enters into an investor agreement with us that governs the investor’s purchases of notes. Our investor services team provides customer support to these investors.

Our certificate channel consists of funds and accounts managed by LCA Certificate investors typically seek to invest larger amounts as compared to the average note investor and desire a more “hands off” approach to investing. Certificates are sold in private transactions between LC and the Trust to investors who have an established relationship with LCA. The Trust acquires and holds these loans for the sole benefit of certificate investors. Investors in certificates generally pay an asset-based management fee instead of the cash flow-based servicing fee paid by investors in notes.

LCA manages several funds that purchase certificates. Each fund provides a passive investment strategy around target loan grade and term allocation, such as 36-month 60% A and 40% B loans, and allows investors to more easily deploy large investment amounts and reinvest payments of principal and investment returns. LCA also manages separately managed accounts (“SMAs”). Investors who utilize SMAs often have investment criteria that differ from the LCA funds’ investment strategies and desire more control over their investment strategies.

Our whole loan channel consists of the whole loans that we or our issuing banks sell in their entirety to investors. Under the whole loan purchase agreements, we establish the investors’ accounts and set out the procedures for the purchase of loans, including any purchase amount limitations, which we control in our discretion. We and the purchaser also make limited representations and warranties and agree to indemnify each other for breaches of the purchase agreement. The purchaser also agrees to simultaneously enter into a servicing agreement with us acting as servicer. Our institutional group is the primary point of contact for whole loan purchasers throughout the life cycle of the relationship, from sourcing and establishing the relationship, negotiating the purchase and servicing agreement and managing the ongoing relationship.

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

Stock Split

On April 15, 2014, a 2 for 1 equity stock split approved by our Board of Directors became effective, 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. Additionally, another 2 for 1 equity stock split became effective on September 5, 2014, 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 these stock splits. The par value of each of the outstanding shares remains the same at $0.01.

 

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Springstone Acquisition

In April, 2014, we acquired all of the outstanding limited liability company interests of Springstone, a company that facilitates education and patient finance loans through two issuing banks. For its role in loan facilitation, Springstone earns transaction fees paid by the issuing bank or service provider at the time of origination, which averaged approximately 5.0% of the initial loan balance as of September 30, 2014. Currently, Springstone does not earn any servicing fees, as loans are originated, retained and serviced by the respective issuing bank. We currently intend to continue to have these loans funded and serviced through existing issuing banks while we develop plans to integrate these loans into our standard program over time.

Key Operating and Financial Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

The following table includes key operating and financial data (in thousands except percentages):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Loan originations

   $ 1,165,226      $ 567,142      $ 2,962,520      $ 1,366,253   

Contribution (1)

   $ 26,881      $ 12,560      $ 63,374      $ 27,806   

Contribution margin (1)

     47.5     45.8     44.1     43.1

Adjusted EBITDA (1)

   $ 7,517      $ 4,927      $ 13,384      $ 8,713   

Adjusted EBITDA margin (1)

     13.3     18.0     9.3     13.5

 

(1) Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see “Non-GAAP Financial Measures.”

Loan Originations

Loans to qualified borrowers are originated by our issuing bank partners. We generate revenue from transaction fees from our role in matching borrowers with investors to enable loans originations. We believe loan originations are a key indicator of the adoption rate of our marketplace, growth of our brand, scale of our business, strength of our network effect, economic competitiveness of our products and future growth. Total loan originations include loans acquired by us, which are either retained by us and financed primarily by notes and certificates or sold to unrelated third parties, and other loan originations by our issuing bank partners that we facilitated, but did not participate as a purchaser of the loan. Loan originations have increased significantly over time due to the increased awareness of our brand, our high borrower and investor satisfaction rates, the effectiveness of our borrower acquisition channels, a strong track record of loan performance and the expansion of our capital sources. Factors that could affect loan originations include the interest rate and economic environment, the competitiveness of our products, the success of our operational efforts to balance investor and borrower demands, any limitations on the ability of our issuing banks to originate loans, our ability to develop new products or enhance existing products for borrowers and investors, the success of our sales and marketing initiatives and the success of borrower and investor acquisition and retention.

 

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Non-GAAP Financial Measures

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

In evaluating contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation.

Contribution and Contribution Margin

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

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Reconciliation of Net Income (Loss) to Contribution:

        

Net income (loss)

   $ (7,371   $ 2,713      $ (23,857   $ 4,450   

Net interest expense (income) and other adjustments

     474        (10     854        (15

General and administration expense

     31,848        9,331        78,862        22,434   

Stock-based compensation (1)

     1,511        611        6,456        937   

Income tax expense (benefit)

     419        (85     1,059        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution

   $ 26,881      $ 12,560      $ 63,374      $ 27,806   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

   $ 56,538      $ 27,405      $ 143,861      $ 64,490   

Contribution margin

     47.5     45.8     44.1     43.1

 

(1) Consists of stock-based compensation expense not included in general and administrative expense as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Stock-based compensation expense:

           

Sales and marketing

   $ 912       $ 506       $ 5,029       $ 767   

Origination and servicing

     599         105         1,427         170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,511       $ 611       $ 6,456       $ 937   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenue. Adjusted EBITDA is a measure used by our management and board of directors to understand and evaluate our core operating performance and trends. Adjusted EBITDA has generally improved over time due to our increased revenue and efficiencies in the scale of our operations.

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 except percentages):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Reconciliation of Adjusted EBITDA:

        

Net income (loss)

   $ (7,371   $ 2,713      $ (23,857   $ 4,450   

Net interest expense (income) and other adjustments

     474        (10     854        (15

Acquisition and other related expenses

     301        —          2,819        —     

Depreciation and amortization

     1,769        438        4,110        932   

Amortization of intangible assets

     1,388        —          2,510        —     

Stock-based compensation

     10,537        1,871        25,889        3,346   

Income tax expense (benefit)

     419        (85     1,059        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 7,517      $ 4,927      $ 13,384      $ 8,713   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

   $ 56,538      $ 27,405      $ 143,861      $ 64,490   

Adjusted EBITDA margin

     13.3     18.0     9.3     13.5

 

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Results of Operations

Overview

The following tables summarized our result of operations for the three and nine months ended September 30, 2014 and 2013 (in thousands except percentages):

Consolidated Statement of Operations Data:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     % Change     2014     2013      % Change  

Operating revenues:

             

Transaction fees

   $ 52,622      $ 25,239        108   $ 133,835      $ 55,214         142

Servicing fees

     3,053        888        244     6,301        2,485         154

Management fees

     1,608        869        85     4,163        2,083         100

Other revenue (expense)

     (745     409        N/M        (438     4,708         N/M   
  

 

 

   

 

 

     

 

 

   

 

 

    

Total operating revenue

     56,538        27,405        106     143,861        64,490         123
  

 

 

   

 

 

     

 

 

   

 

 

    

Net interest income (expense) and other adjustments

     (474     10        N/M        (854     15         N/M   
  

 

 

   

 

 

     

 

 

   

 

 

    

Total net revenue

     56,064        27,415        105     143,007        64,505         122
  

 

 

   

 

 

     

 

 

   

 

 

    

Operating expenses:

             

Sales and marketing

     21,001        10,460        101     60,808        26,577         129

Origination and servicing

     10,167        4,996        104     26,135        11,044         137

General and administrative

     31,848        9,331        241     78,862        22,434         252
  

 

 

   

 

 

     

 

 

   

 

 

    

Total operating expenses

     63,016        24,787        154     165,805        60,055         176
  

 

 

   

 

 

     

 

 

   

 

 

    

Income (loss) before income taxes

     (6,952     2,628        N/M        (22,798     4,450         N/M   

Income tax expense (benefit)

     419        (85     N/M        1,059        —           N/M   
  

 

 

   

 

 

     

 

 

   

 

 

    

Net income (loss)

   $ (7,371   $ 2,713        N/M      $ (23,857   $ 4,450         N/M   
  

 

 

   

 

 

     

 

 

   

 

 

    

N/M - Not meaningful.

Net revenue was $56.1 million for the three months ended September 30, 2014, a 105% increase over the three months ended September 30, 2013 primarily due to higher transaction fees paid by issuing banks from increased loan originations. Operating expenses were $63.0 million for the three months ended September 30, 2014, a 154% increase over the three months ended September 30, 2013 primarily due to higher compensation costs, credit decisioning costs, borrower acquisition costs, and operational costs related to Springstone.

Net revenue was $143.0 million for the nine months ended September 30, 2014, a 122% increase over the nine months ended September 30, 2013 primarily due to higher transaction fees paid by issuing banks from increased loan originations. Operating expenses were $165.8 million for the nine months ended September 30, 2014, a 176% increase over the nine months ended September 30, 2013 primarily due to higher compensation costs, credit decisioning costs, borrower acquisition costs, acquisition-related expenses and operational costs for Springstone.

Revenue

Our primary sources of revenue consist of transaction fees paid to us by issuing banks related to loan originations facilitated by us, as well as servicing fees and management fees which are charged to investors. During the three months ended September 30, 2014 and 2013, we facilitated $1,165.2 million and $567.1 million of loans, respectively, through our marketplace. During the nine months ended September 30, 2014 and 2013, we facilitated $2,962.5 million and $1,366.3 million of loans, respectively, through our marketplace.

 

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The following table summarizes our revenue for the three and nine months ended September 30, 2014 and 2013 (in thousands except percentages):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013      % Change     2014     2013      % Change  

Transaction fees

   $ 52,622      $ 25,239         108   $ 133,835      $ 55,214         142

Servicing fees

     3,053        888         244     6,301        2,485         154

Management fees

     1,608        869         85     4,163        2,083         100

Other revenue (expense)

     (745     409         N/M        (438     4,708         N/M   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total operating revenue

     56,538        27,405         106     143,861        64,490         123
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income (expense) after fair value adjustments

     (474     10         N/M        (854     15         N/M   
  

 

 

   

 

 

      

 

 

   

 

 

    

Net revenue

   $ 56,064      $ 27,415         105   $ 143,007      $ 64,505         122
  

 

 

   

 

 

      

 

 

   

 

 

    

N/M - Not meaningful.

Transaction Fees

Transaction fees are fees paid by the issuing banks to us for the work we perform through our marketplace in facilitating originations. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. As of September 30, 2014, these fees ranged from 1% to 6% of the initial principal amount of a loan. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. These fees are recognized as a component of operating revenue at the time of loan issuance.

Transaction fees were $52.6 million and $25.2 million for the three months ended September 30, 2014 and 2013, respectively, an increase of 108%. The increase in these fees was primarily due to an increase in loan originations through our marketplace. Originations were $1,165.2 million and $567.1 million for the three months ended September 30, 2014 and 2013 respectively, an increase of 105%. The average transaction fees as a percentage of the principal amount of the loan were 4.5% and 4.4% of the principal amount of loans facilitated for the three months ended September 30, 2014 and 2013, respectively. This increase in the average loan transaction fee was primarily due to higher percentages of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees, and the addition of education and patient finance loans.

Transaction fees were $133.8 million and $55.2 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 142%. The increase in these fees was primarily due to an increase in loan originations through our marketplace. Originations were $2,962.5 million and $1,366.3 million for the nine months ended September 30, 2014 and 2013 respectively, an increase of 117%. In addition, during the nine months ended September 30, 2013, $4.9 million in transaction fees recognized between January 1, 2013 and June 30, 2013, were included in the gain on sale of whole loans, which was included in other revenue. Effective July 1, 2013, we elected to account for loans we intended to sell to whole loan purchasers at fair value and as a result, transaction fees on loans sold are now reflected in transaction fees and not in other revenue on the condensed consolidated statement of operations. The average transaction fees as a percentage of the principal amount of loan were 4.5% and 4.4% of the principal amount of loans facilitated for the nine months ended September 30, 2014 and 2013, respectively. This increase in the average loan transaction fee was primarily due to higher percentages of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees, and the addition of education and patient finance loans.

Loan originations have increased significantly over time, including the three and nine months ended September 30, 2014, due to the increased awareness of our brand, our high borrower and investor satisfaction rates, the effectiveness of our borrower acquisition channels, a strong track record of loan performance and the expansion of our capital sources.

 

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Servicing Fees

Investors typically pay us a servicing fee on each payment received from a borrower or on the investors’ month-end balance of loans serviced. 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 fees are typically 1% of each loan payment received from the borrower or up to 1.3% per year of the month-end principal balance of sold loans outstanding.

Servicing fees were $3.1 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, an increase of 244%. Servicing fees were $6.3 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 154%. These increases were primarily due to increased loan payments and balances of notes and certain certificates and sold loans outstanding serviced by us for the three and nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013, partially offset by changes in the fair value of servicing assets and liabilities.

The following table provides the outstanding principal balance of loans that we serviced at the end of the periods indicated, broken out by the method that the loans were financed (in millions).

 

Loans Serviced by Method Financed

   September 30, 2014      December 31, 2013      September 30, 2013  

Notes

   $ 983.3       $ 688.3       $ 599.6   

Certificates

     1,601.1         1,171.7         941.0   

Whole loans sold

     1,372.1         406.5         237.5   

Financed by Lending Club

     0.3         0.4         0.4   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,956.8       $ 2,266.9       $ 1,778.5   
  

 

 

    

 

 

    

 

 

 

Management Fees

Accredited investors and qualified purchasers can invest in limited partner interests in investment funds managed by LCA. LCA typically charges these certificate holders a management fee based on their assets under management, ranging from 0.7% to 1.2% per year. This fee may be waived or reduced for individual limited partners at the discretion of the general partner. LCA does not earn any carried interest from the investment funds.

LCA earned management fees of $1.6 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, an increase of 85%. LCA earned management fees of $4.2 million and $2.1 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 100%. The increase in management fees was due primarily to an increase in assets under management and outstanding certificate balances.

Other Revenue (Expense)

Other revenue consists of revenue from gains and losses on sales of whole loans and referral revenue. Certain investors investing through our marketplace acquire standard or custom loans in their entirety. In connection with these whole loan sales, in addition to the transaction fee earned in respect of the corresponding loan, we recognize a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate servicing fee (loans are typically sold at par).

Other (expense) revenue was $(0.7) million and $0.4 million for the three months ended September 30, 2014 and 2013, respectively, a decrease of 282%. The decrease was primarily due to a $1.3 million decrease in gain on sale of whole loans to third party purchasers.

Other (expense) revenue was $(0.4) million and $4.7 million for the nine months ended September 30, 2014 and 2013, respectively, a decrease of 109%. The decrease was primarily due to a $6.0 million decrease in gain on sale of whole loans to third party purchasers, which was offset by the increase in referral commissions. From January 1, 2013 through June 30, 2013, we included $4.9 million of transaction fees that was earned in respect of those loans in the gain calculation on whole loan sales, which resulted in higher gains on sale and lower transaction fees.

 

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Net Interest Income (Expense) and Other Adjustments

The following table summarizes interest income, interest expense, fair value adjustments, net interest income (expense) and other adjustments, and average outstanding balances of loans, notes and certificates for the three and nine months ended September 30, 2014 and 2013, as follows (in thousands except percentages):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     % Change     2014     2013     % Change  

Interest income:

            

Loans

   $ 94,036      $ 51,385        83   $ 252,293      $ 124,760        102

Cash and cash equivalents

     2        1        100     5        11        -55
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest income

     94,038        51,386        83     252,298        124,771        102
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense:

            

Notes and certificates

     (94,019     (51,370     83     (252,212     (124,727     102

Term loan

     (441     —          N/M        (842     —          N/M   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest expense

     (94,460     (51,370     84     (253,054     (124,727     103
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income (expense)

     (422     16        N/M        (756     44        N/M   

Fair value adjustments on loans, notes and certificates, net

     (52     (6     N/M        (98     (29     238
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income (expense) and other adjustments

   $ (474   $ 10        N/M      $ (854   $ 15        N/M   
  

 

 

   

 

 

     

 

 

   

 

 

   

Average outstanding balances:

            

Loans

     2,491,736        1,389,846        79     2,246,575        1,138,193        97

Notes and certificates

     2,505,378        1,395,357        80     2,258,254        1,144,528        97

Except in certain limited circumstances, we do not assume principal or interest rate risk on loans originated through our marketplace as it matches borrowers and investors. We are obligated to make principal and interest payments on notes and certificates related to the corresponding loans only to the extent we receive borrower payments. As a result, on our statement of operations for any period and balance sheet as of any date (i) interest income on loans corresponds to the interest expense on notes and certificates and (ii) loan balances correspond to note and certificate balances, with any variations largely resulting from timing differences between the crediting of principal and interest payments on loans versus the disbursement of those payments to investors.

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

Additionally, interest income (expense) includes interest income earned on cash and cash equivalents and interest expense incurred on the term loan that was drawn by the Company in April 2014.

Interest Income on Loans

Interest income on loans was $94.0 million and $51.4 million for the three months ended September 30, 2014 and 2013, respectively. Interest income from loans was $252.3 million and $124.8 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest income on loans is primarily due to the increase in the outstanding balances of loans.

Interest Expense on Notes and Certificates

Interest expense on notes and certificates was $94.0 million and $51.4 million for the three months ended September 30, 2014 and 2013, respectively. We recorded interest expense for notes and certificates of $252.2 million and $124.7 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest expense on notes and certificates was primarily due to the increase in the outstanding balances of notes and certificates.

 

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Interest Expense on Term Loan

Interest expense on term loan was $0.4 million and $0.8 million for the three and nine months ended September 30, 2014, respectively. We did not incur any interest on term loan for the three and nine months ended September 30, 2013.

Fair Value Adjustments on Loans and Notes and Certificates

We estimate 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 on loans were largely offset by the fair value adjustments on the notes and certificates at fair value due to the borrower 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 related notes and certificates. Accordingly, the net fair value adjustment (losses) gains for loans and notes and certificates were immaterial for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2014 and 2013.

Net Interest Income (Expense) and Other Adjustments

We had net interest income (expense) and other adjustments of $(0.5) million and $10 thousand for the three months ended September 30, 2014 and 2013, respectively. The decrease in net interest income (expense) and other adjustments was primarily due to interest expense incurred on the term loan. We had net interest income (expense) and other adjustments of $(0.9) million and $15 thousand for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net interest income (expense) and other adjustments was primarily due to the interest expense incurred on the term loan.

Operating Expenses

Our operating expenses consist of sales and marketing expense, origination and servicing expense and general and administrative expense, including engineering and product development and other general and administrative expense. The following table summarizes our operating expenses for the three and nine months ended September 30, 2014 and 2013 (in thousands except percentages):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014      2013      % Change     2014      2013      % Change  

Sales and marketing

   $ 21,001       $ 10,460         101   $ 60,808       $ 26,577         129

Origination and servicing

     10,167         4,996         104     26,135         11,044         137

General and administrative

                

Engineering and product development

     9,235         3,849         140     22,987         9,140         151

Other

     22,613         5,482         312     55,875         13,294         320
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Operating Expenses

   $ 63,016       $ 24,787         154   $ 165,805       $ 60,055         176
  

 

 

    

 

 

      

 

 

    

 

 

    

Sales and Marketing

Sales and marketing expense consists primarily of variable marketing expenses, including those related to borrower and investor acquisition and retention and general brand and awareness building, and salaries, benefits and stock-based compensation expense related to our sales and marketing staff. Sales and marketing expenses for the three months ended September 30, 2014 and 2013 were $21.0 million and $10.5 million, respectively, an increase of 101%. The increase was primarily due to a $9.3 million increase in borrower acquisition costs. Sales and marketing expenses for the nine months ended September 30, 2014 and 2013 were $60.8 million and $26.6 million, respectively, an increase of 129%. The increase was primarily due to a $29.1 million increase in variable marketing expenses.

 

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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 September 30, 2014 and 2013 were $10.2 million and $5.0 million, respectively, an increase of 104%. The increase was primarily due to a $3.3 million increase in compensation expense as we expanded our credit and customer support teams due to increasing loan applications and a $1.7 million increase in consumer reporting agency and loan processing costs, which was primarily driven by higher loan volume.

Origination and servicing expenses for the nine months ended September 30, 2014 and 2013 were $26.1 million and $11.0 million, respectively, an increase of 137%. The increase was primarily due to a $10.3 million increase in compensation expense as we expanded our credit and customer support teams due to increasing loan applications and a $4.2 million increase in consumer reporting agency and loan processing costs, which was primarily driven by higher loan volume.

General and Administrative

General and administrative expenses are incurred by our engineering and product development and other administrative teams to support the overall business.

Engineering and Product Development

Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product development team and the cost of subcontractors who work on the development and maintenance of our platform. Engineering and product development expense also includes non-capitalized hardware and software costs and depreciation and amortization of technology assets.

Engineering and product development expenses for the three months ended September 30, 2014 and 2013 were $9.2 million and $3.8 million, respectively, an increase of 140%. The increase was primarily due to a $3.6 million increase in personnel-related expenses resulting from increased headcount and contract labor expense as we enhanced our website tools and functionality and a $1.6 million increase in expensed equipment and software, support and maintenance and depreciation expense reflecting our continued investment in technology infrastructure.

Engineering and product development expenses for the nine months ended September 30, 2014 and 2013 were $23.0 million and $9.1 million, respectively, an increase of 151%. The increase was primarily due to a $9.7 million increase in personnel-related expenses resulting from increased headcount and contract labor expense as we enhanced our website tools and functionality and a $3.8 million increase in expensed equipment and software, support and maintenance and depreciation expense reflecting our continued investment in technology infrastructure.

During the three and nine months ended September 30, 2014, we capitalized $3.4 million and $8.2 million of software development costs, respectively. During the three and nine months ended September 30, 2013, we capitalized $0.9 million and $2.0 million of software development costs, respectively. These costs generally are amortized over a three-year period.

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, facilities expense and compensation expense related to the acquisition of Springstone. Other general and administrative expenses for the three months ended September 30, 2014 and 2013 were $22.6 million and $5.5 million, respectively, an increase of 312%. The increase was primarily due to a $11.7 million increase in compensation expense, $3.5 million of which was the amortization of the compensation arrangement related to certain key continuing employees of Springstone with the remainder primarily related to an increase in headcount and stock based compensation expense and a $2.6 million increase in professional services and amortization of intangibles.

Other general and administrative expenses for the nine months ended September 30, 2014 and 2013 were $55.9 million and $13.3 million, respectively, an increase of 320%. The increase was primarily due to a $26.7 million increase in compensation expense, $6.4 million of which was the amortization of the compensation arrangement related to certain key continuing employees of Springstone with the remainder primarily related to an increase in headcount and stock based compensation expense, a $8.3 million increase in professional services and amortization of intangibles and a $2.1 million increase in contingent legal liabilities.

 

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Springstone Acquisition

As a result of the closing of the Acquisition, Springstone became our wholly owned subsidiary and we have included the financial results of Springstone in the consolidated financial statements from the date of acquisition. The financial results of Springstone are included in our consolidated financial statements from April 17, 2014, the date of acquisition.

Under the terms of the purchase agreement, the sellers received at the closing an aggregate of $113 million in cash and $25 million worth of shares of our Series F convertible preferred stock. In connection with the acquisition, we also paid $2.4 million for transaction costs incurred by Springstone. For accounting purposes, the purchase price was $111.8 million, which was comprised of $109.0 million in cash and shares of Series F convertible preferred stock with an aggregate value of $2.8 million. To secure the retention of certain key employees, a total of $25.6 million comprised of $22.1 million of shares of Series F convertible preferred stock (“Escrow Shares”) and $3.5 million of cash were placed in a third-party escrow and are subject to certain vesting and forfeiture conditions applicable to these employees continuing employment over a three-year period from the closing. These amounts will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Additionally, $19.0 million of the cash consideration and certain Escrow Shares were placed in a third-party escrow for 15 months from the closing date to secure, in part, the indemnification obligations of the sellers under the purchase agreement. We funded the cash portion of the purchase price with proceeds from our Series F convertible preferred stock financing and a $50.0 million term loan with a syndicate of lenders led by Morgan Stanley Senior Funding, Inc.

Income Taxes

For the three and nine months ended September 30, 2014, we recorded $0.4 million and $1.1 million of income tax expense, respectively. The $1.1 million of income tax expense related to the amortization of tax deductible goodwill from the Acquisition which gives rise to an indefinite-lived deferred tax liability. There was no income tax benefit recorded on the pre-tax loss due to an increase in the deferred tax asset valuation allowance. We recorded no income tax expense for the nine month period ended September 30, 2013 because the corporate income tax liabilities due on our taxable income were offset by usage of prior years’ net operating losses and tax credit carryforwards.

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

From inception through September 30, 2014, we have raised approximately $168.0 million, net of issuance costs, through preferred stock financings. Historically, we have funded our operations with proceeds from debt financing, preferred stock issuances and common stock issuances. For the nine months ended September 30, 2014 and 2013, we generated positive cash flows from operations.

At September 30, 2014, we had $82.7 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 for at least the next twelve months.

At September 30, 2014, we had $25.2 million in restricted cash that consisted primarily of pledged cash of $3.0 million as security for our primary issuing bank, $3.4 million for an investor as part of a credit support agreement, $16.8 million of cash received from investors and not yet applied to their accounts and $1.5 million as security for a correspondent bank that clears our borrowers’ and investors’ cash transactions.

At September 30, 2014, the net outstanding balance on the term loan was $49.2 million. This term loan matures on April 16, 2017 and requires principal payments of $0.3 million per quarter, with the remaining then unpaid principal amount payable at maturity. The weighted average interest rate on the term loan was 2.57% and 2.65% for the three and nine months ended September 30, 2014, respectively. At September 30, 2014, we were in compliance with the leverage ratio covenant.

 

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The following table summarizes our cash flows for the nine months ended September 30, 2014 and 2013 (in thousands).

 

     Nine Months Ended September 30,  
     2014     2013  

Cash provided by (used in)

    

Operating activities

   $ 35,395      $ 16,202   

Investing activities (1)

     (925,478     (782,338

Financing activities (1)

     923,458        775,771   
  

 

 

   

 

 

 

Net increase in cash

   $ 33,375      $ 9,635   
  

 

 

   

 

 

 

 

(1) Cash used in investing activities includes the purchase of loans and repayment of loans originated through our marketplace. Cash provided by financing activities includes the issuance of notes and certificates to investors and the repayment of those notes and certificates. These amounts generally correspond to each other.

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2014 was $35.4 million. Cash flow provided by operating activities was primarily driven by changes in certain components of our working capital, including a decrease in other assets of $13.2 million that was primarily related to payments of receivables due from investors, and an increase in accrued expenses and other liabilities of $10.8 million. Additionally, $10.4 million of net cash provided by operating activities was generated by the net loss for the nine months ended September 30, 2014 of $23.9 million, adjusted for non-cash stock-based compensation and warrant expense of $25.9 million, depreciation and amortization expense of $6.6 million and non-cash changes in the fair values of servicing assets and liabilities of $1.8 million, net. Also included in cash flows from operations were the purchases and sales of loans that we intended to sell, along with the gain or loss on such sales, and changes in accrued interest receivable and payable, which largely offset one another.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2014 was $925.5 million. Cash used in investing activities primarily resulted from $1.5 billion of cash used to purchase loans at fair value, $109.5 million for the Springstone acquisition, $15.0 million of purchases of property, equipment and software and a $11.4 million increase in restricted cash, partially offset by $739.5 million of principal payments received on loans at fair value.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2014 was $923.5 million. Cash provided by financing activities primarily resulted from $1.5 billion of proceeds from issuance of notes and certificates, $64.8 million net proceeds from our sale of Series F convertible preferred stock in connection with the Springstone acquisition, $49.8 million of net proceeds from the issuance of a term loan and an $12.9 million increase in the amount payable to investors, partially offset by $732.3 million in principal payments made on notes and certificates.

Term Loan

In connection with the Springstone acquisition, we entered into a Credit and Guaranty Agreement with several lenders in April 2014, under which the lenders made a $50.0 million term loan to us. In connection with our entry into the credit agreement, we entered into a Pledge and Security Agreement with Morgan Stanley Senior Funding, Inc.

The term loan matures in April 2017 and requires principal payments of $0.3 million per quarter plus interest, with the remaining then-unpaid principal amount payable at maturity. The term loan can be prepaid at any time without premium or penalty, subject to a minimum prepayment of $1.0 million. The term loan is required to be prepaid in certain circumstances, including upon sales of assets other than loans and upon the issuance of debt (other than notes and certificates) or redeemable capital stock. Borrowings under the credit agreement accrued interest at a weighted-average rate of 2.57% and 2.65% per annum for the three and nine months ended September 30, 2014, respectively.

The term loan is also guaranteed by Springstone and LCA and is secured by a first priority lien and security interest in substantially all of our and our subsidiaries’ assets, not otherwise pledged or restricted, subject to certain exceptions.

 

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The credit and pledge agreements contain certain affirmative and negative covenants applicable to us and our subsidiaries. These include restrictions on our ability to make certain restricted payments, including restrictions on our ability to pay dividends, incur indebtedness, place liens on assets, merge or consolidate, make investments and enter into certain transactions with our affiliates. The credit agreement also requires us to maintain a maximum total leverage ratio (as defined in the credit agreement) of 5.50:1 initially, and decreasing to 3.50:1 after September 30, 2015 (on a consolidated basis). The total leverage ratio as of September 30, 2014 was 2.25:1.

The credit agreement also contains customary events of default, including nonpayment of principal when due, nonpayment of interest, fees or other amounts after a grace period, material inaccuracies of representations and warranties and breaches of covenants, subject in certain cases to a grace period, cross-default to defaults in indebtedness in excess of $25.0 million, bankruptcy, judgments, change in control and other material events. The credit agreement and ancillary agreements provide customary remedies upon an event of default.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements in the fiscal year ended December 31, 2013 or the nine months ended September 30, 2014.

Contingencies

Loan Funding Commitments

For loans listed in the marketplace 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. At September 30, 2014, there were 722 such loans in the marketplace with an unfunded balance of $9.0 million. All of these loans were fully funded by investors by October 8, 2014.

In connection with transitional activities related to the Acquisition, in June 2014 we entered into a contingent loan purchase agreement with an issuing bank that originates loans facilitated by Springstone and a third-party investor that has agreed to purchase certain of those loans from such bank (“Contingent Loan Purchase Commitment”). The Contingent Loan Purchase Commitment provides that we will purchase such loans from the bank if the third-party investor defaults on its loan purchase obligations to the bank through December 31, 2014. The Contingent Loan Purchase Commitment limits the aggregate amount of such loan originations from inception of the Contingent Loan Purchase Commitment through December 31, 2014 to a maximum of $5.0 million. As of September 30, 2014, the amount remaining under the overall limit on the cumulative amount of such loan originations through December 31, 2014 was $2.2 million. We were not required to purchase any such loans pursuant to the Contingent Loan Purchase Commitment during the quarter ended September 30, 2014. We do not expect we will be required to purchase any such loans under the Contingent Loan Purchase Commitment through its expiration on December 31, 2014.

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 cumulative credit losses on loans underlying the investor’s Certificate, that are in excess of a specified, aggregate cumulative loss threshold. We are currently obligated to pledge cash, not to exceed $5.0 million, to support this contingent obligation, which cash balance is premised upon the investor’s certificate purchase volume. As of September 30, 2014, cash of approximately $3.4 million was pledged and restricted to support this contingent obligation. The amount pledged and restricted to support this contingent obligation has not changed since July 31, 2013.

As of September 30, 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 expense or liability has been recorded. If losses related to the credit support agreement are later determined to be likely to occur and are reasonably estimable, results of operations could be affected in the period in which such losses are recorded.

 

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Legal

In the second quarter of 2014, we offered to settle a dispute with a consultant that previously performed work for us. The dispute arose over how much compensation for the work performed was to be provided in cash and in equity and as to equity what valuations were to be used. In the third quarter of 2014, we amended our offer to the claimant for 120,000 shares of our common stock and cash consideration of $215,000. Subsequent to September 30, 2014, this offer was further amended to 80,000 shares of our common stock, an option to purchase 40,000 shares of our common stock, and cash consideration of $215,000.

 

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During the second quarter of 2014, we also received notice from the California Employment Development Department (“EDD”) that it had commenced an examination of our records concerning the employment relationship of certain individuals who performed services for us from 2011 through 2014. Based on the EDD’s determination, certain of these individuals should have been classified as employees with appropriate tax withholding and employer related taxes incurred and paid. The EDD has completed its examination and issued a Final Notice of Assessment, which serves as the EDD’s official notice of its determination relating to this matter. We intend to pay the assessment during the fourth quarter of 2014 and have recorded a liability for this payment as of September 30, 2014.

Additionally, we settled a claim, which arose in a prior quarter by a former employee who had asserted a claim of wrongful termination.

In connection with these matters, we recorded an additional net charge to operations of $0.2 million during the third quarter of 2014. As of September 30, 2014, the accrued liability for these matters was $1.9 million. This aggregate amount represents the probable estimate of tax and settlement liabilities. As settlements have been agreed upon, for the matters indicated above, during the quarter or subsequent to the quarter-end, we do not believe the ultimate liability for such matters will be significantly different from the accrued aggregate liability at September 30, 2014.

We received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) dated June 5, 2014 related to the operations of Springstone. The purpose of the investigation is to determine whether Springstone is engaging in unlawful acts or practices in connection with the marketing, issuance, and servicing of loans for healthcare related financing. As of September 30, 2014, we had provided all of the documents requested by the CFPB. We are continuing to evaluate this matter. As of September 30, 2014, there are no probable or estimable losses related to this matter.

In addition to the foregoing, we may be subject to legal proceedings and regulatory actions in the ordinary course of business. 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.

Critical Accounting Policies

Our significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in our 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 nine months of 2014 except for our initial application of the acquisition method in accounting for a business combination, the accounting for intangible assets, including goodwill and the accounting for servicing assets and liabilities, as described below.

Goodwill and Intangible Assets

Goodwill represents the fair value of acquired businesses in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is April 1. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit (defined as business for which financial information is available and reviewed regularly by management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, or company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities and merger or acquisition activity.

If we elect to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management will estimate the fair values of our reporting units and compare them to their carrying values. The estimated fair values of the reporting units will be established using an income approach based on a discounted cash flow model or a market approach which compares each reporting unit to comparable companies in their respective industries.

Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We do not have any indefinite-lived intangible assets.

Servicing Asset/Liability

We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or when the servicing contract commences. The gain or loss on a loan sale is recorded in “Other Revenue” while the component of the gain or loss that is based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee is recorded as an offset in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Other Assets” and “Accrued Expenses and Other Liabilities,” respectively, on the condensed consolidated balance sheets. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are reported in “Servicing Fees” on the condensed consolidated statement of operations in the period in which the changes occur.

 

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We use a discounted cash flow model to estimate the fair value of the loan servicing asset or liability which considers the contractual servicing fee revenue we earn on the loans, estimated market rate servicing fee to service such loans, the current principal balances of the loans and projected servicing revenues over the remaining terms of the loans.

Impact of New Accounting Standards

In May, 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” which provides a single comprehensive revenue recognition model for all contracts with customers. The standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. This ASU is effective for annual reporting periods beginning after December 15, 2016 for public entities. Early adoption is not permitted. We are currently evaluating the impact of the new update on our condensed consolidated financial statements.

In August, 2014, FASB issued ASU 2014-13 “Consolidation (Topic 810)—Measuring the Financial Assets and The Financial Liabilities of a Consolidated Collateralized Financing Entity” to amend the existing standards. This ASU provides an alternative to current fair value measurement guidance to an entity that consolidates a collateralized financing entity (“CFE”) that has elected the fair value option for the financial assets and financial liabilities. If elected, the entity could measure both the financial assets and the financial liabilities of the CFE by using the fair value of the financial assets or financial liabilities, whichever is more observable. The election would effectively eliminate any measurement difference previously reflected in earnings and attributed to the reporting entity in the condensed consolidated statements of operations. The guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. We are currently evaluating the impact of the new update on our condensed consolidated financial statements.

 

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Statistical Information on the Standard Program Loan Portfolio

The tables and charts set forth below relate only to loans issued under the standard program.

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

From inception to September 30, 2014, we facilitated standard program loans with an average original principal amount of $14,180 and an aggregate original principal amount of $5.6 billion. Out of 392,201 facilitated standard program loans, 70,207 standard program loans with an aggregate original principal amount of $852.7 million, or 15.33%, were fully paid as of September 30, 2014.

 

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The following table presents aggregated information about standard program loans for the period from inception to September 30, 2014, grouped by the loan grade assigned by us:

Standard Program Loans Issued from Inception to

September 30, 2014 by Grade

 

Loan Grade

   Number of
Loans
     Average
Interest Rate
    Total Amount
Issued
 

A1

     8,718         6.00   $ 108,001,575   

A2

     8,751         6.57     107,857,625   

A3

     10,358         7.46     137,996,925   

A4

     15,936         7.83     211,421,125   

A5

     17,947         8.71     247,819,250   

B1

     19,606         9.74     246,709,250   

B2

     23,078         10.78     303,022,575   

B3

     27,739         11.71     354,343,950   

B4

     26,260         12.49     346,530,125   

B5

     21,206         13.08     269,108,725   

C1

     22,218         13.70     292,166,450   

C2

     22,178         14.30     301,762,750   

C3

     21,112         14.85     303,567,650   

C4

     19,859         15.43     294,370,350   

C5

     18,723         16.06     284,990,050   

D1

     15,974         16.71     233,261,450   

D2

     14,373         17.30     204,757,300   

D3

     12,544         17.82     183,072,825   

D4

     11,723         18.38     183,477,575   

D5

     9,764         19.04     158,164,650   

E1

     7,397         19.52     125,552,825   

E2

     7,215         20.15     125,243,475   

E3

     5,803         20.74     102,697,150   

E4

     4,999         21.40     90,093,000   

E5

     4,309         22.04     75,512,025   

F1

     3,397         22.78     59,021,025   

F2

     2,585         23.20     48,132,825   

F3

     2,380         23.76     41,738,675   

F4

     1,789         24.05     33,697,675   

F5

     1,336         24.36     27,032,525   

G1

     950         24.66     19,320,950   

G2

     726         24.81     14,708,525   

G3

     523         24.94     10,952,200   

G4

     381         24.40     8,214,750   

G5

     344         24.49     6,899,500   
  

 

 

      

 

 

 

Total

     392,201         13.96   $ 5,561,219,300   
  

 

 

      

 

 

 

 

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Table of Contents

The following table presents aggregated consumer reporting agency information for standard program loans issued from our inception to September 30, 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 Standard Program Loans Issued from Inception to September 30, 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

     766         11         27       $ 14,506         27.58     0         0         41   

A2

     749         11         27         15,390         33.14     1         0         39   

A3

     739         11         26         16,969         37.98     1         0         38   

A4

     729         11         26         16,597         42.95     1         0         37   

A5

     721         11         26         17,583         46.71     1         0         37   

B1

     712         11         25         15,843         49.33     1         0         36   

B2

     706         11         25         16,204         52.41     1         0         35   

B3

     701         11         24         15,451         54.91     1         0         35   

B4

     697         11         25         15,539         56.10     1         0         35   

B5

     694         11         24         14,808         57.26     1         0         35   

C1

     693         11         25         15,390         57.90     1         0         34   

C2

     692         11         24         15,164         59.29     1         0         34   

C3

     691         11         25         15,778         59.49     1         0         34   

C4

     689         11         25         16,078         61.11     1         0         34   

C5

     687         11         25         16,219         61.77     1         0         33   

D1

     685         11         25         15,681         62.72     1         0         34   

D2

     684         11         24         15,644         62.82     1         0         33   

D3

     684         11         24         15,580         63.06     1         0         33   

D4

     684         11         24         15,997         64.01     1         0         33   

D5

     683         11         25         16,635         64.64     1         0         33   

E1

     683         11         25         16,337         65.07     1         0         33   

E2

     683         11         25         16,646         64.86     1         0         32   

E3

     681         11         25         17,146         66.20     1         0         33   

E4

     681         11         25         17,463         66.69     1         0         33   

E5

     680         11         25         17,651         66.71     1         0         32   

F1

     679         11         25         17,268         67.48     1         0         32   

F2

     679         12         25         17,339         67.20     1         0         31   

F3

     678         11         24         16,308         66.87     1         0         31   

F4

     678         12         25         17,040         67.58     2         0         31   

F5

     677         12         26         18,286         68.43     2         0         32   

G1

     676         12         26         18,103         67.66     2         0         29   

G2

     675         12         26         20,211         69.14     2         0         28   

G3

     676         12         26         18,933         70.41     2         0         29   

G4

     674         13         29         22,375         68.26     2         0         30   

G5

     672         13         28         28,432         70.10     2         0         29   

Average

     699         11         25       $ 15,982         56.27     1         0         34   

 

45


Table of Contents

The following table presents additional aggregated information for standard program loans issued from our inception to September 30, 2014, about current and paid off standard program 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
Issued Loans
    Number of
All Issued
Loans
     Total Origination
Amount for All
Issued Loans
 

A1

     6,103       $ 58,465,341         2,040       $ 19,038,500         17.63     8,718       $ 108,001,575   

A2

     5,817         57,107,790         2,358         20,703,925         19.20     8,751         107,857,625   

A3

     6,916         73,531,296         2,805         27,527,650         19.95     10,358         137,996,925   

A4

     10,885         111,986,592         4,092         42,894,500         20.29     15,936         211,421,125   

A5

     12,854         139,745,756         4,033         44,984,650         18.15     17,947         247,819,250   

B1

     14,888         144,883,467         3,553         38,593,725         15.64     19,606         246,709,250   

B2

     17,345         170,805,382         4,301         50,776,050         16.76     23,078         303,022,575   

B3

     20,461         192,839,703         5,390         63,504,600         17.92     27,739         354,343,950   

B4

     19,390         195,149,576         4,929         58,495,100         16.88     26,260         346,530,125   

B5

     15,385         153,759,107         4,106         47,385,075         17.61     21,206         269,108,725   

C1

     16,274         169,239,152         3,994         46,642,875         15.96     22,218         292,166,450   

C2

     16,542         184,809,138         3,751         44,814,725         14.85     22,178         301,762,750   

C3

     16,185         198,280,508         3,060         37,787,775         12.45     21,112         303,567,650   

C4

     15,180         193,864,205         2,855         35,962,600         12.22     19,859         294,370,350   

C5

     14,377         192,051,179         2,698         34,472,850         12.10     18,723         284,990,050   

D1

     12,036         153,412,866         2,347         29,270,650         12.55     15,974         233,261,450   

D2

     10,483         131,444,441         2,265         27,234,125         13.30     14,373         204,757,300   

D3

     9,238         117,179,294         1,912         24,617,325         13.45     12,544         183,072,825   

D4

     8,664         118,271,969         1,728         23,583,400         12.85     11,723         183,477,575   

D5

     7,114         99,748,300         1,521         22,771,850         14.40     9,764         158,164,650   

E1

     5,467         81,860,245         1,037         16,396,250         13.06     7,397         125,552,825   

E2

     5,266         80,100,159         1,058         17,002,425         13.58     7,215         125,243,475   

E3

     4,205         65,750,839         865         14,179,200         13.81     5,803         102,697,150   

E4

     3,544         55,173,261         734         12,846,650         14.26     4,999         90,093,000   

E5

     3,056         46,074,774         624         10,858,425         14.38     4,309         75,512,025   

F1

     2,391         34,965,202         487         8,536,525         14.46     3,397         59,021,025   

F2

     1,750         27,741,625         412         7,592,075         15.77     2,585         48,132,825   

F3

     1,668         24,902,583         325         5,994,175         14.36     2,380         41,738,675   

F4

     1,202         19,353,223         253         4,798,050         14.24     1,789         33,697,675   

F5

     865         15,006,456         192         3,982,125         14.73     1,336         27,032,525   

G1

     609         10,690,936         147         3,127,675         16.19     950         19,320,950   

G2

     482         8,558,310         107         2,101,675         14.29     726         14,708,525   

G3

     350         6,726,704         76         1,538,750         14.05     523         10,952,200   

G4

     223         4,451,945         82         1,617,375         19.69     381         8,214,750   

G5

     199         4,050,081         70         1,055,400         15.30     344         6,899,500   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total

     287,414       $ 3,341,981,405         70,207       $ 852,688,725         15.33     392,201       $ 5,561,219,300   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

46


Table of Contents

The following graph presents the dollar weighted average interest rate for standard program loans issued from inception to September 30, 2014, by grade.

 

LOGO

 

47


Table of Contents

The following table presents outstanding standard program loan balances in dollars, delinquent standard program loan balances in dollars, principal amount of standard program loans charged-off during the quarter, delinquency rate and annualized charge-off rate as of September 30, 2014. This information excludes standard program loans that we classified as identity theft. In cases of verified identity theft, we write-off the standard program 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-Q3     2014-Q2     2014-Q1     2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3  

Total

  $ 3,590,850      $ 3,118,617      $ 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   

Grade A

    474,847        409,525        352,276        295,722        230,596        199,205        167,636        130,845        108,620        89,352        74,014        56,698        45,181   

Grade B

    909,138        829,946        741,021        645,779        524,253        416,396        328,331        241,219        184,015        136,785        108,647        86,459        69,078   

Grade C

    1,001,528        878,362        736,004        595,967        471,686        351,184        253,472        169,706        122,985        89,615        70,357        57,785        47,470   

Grade D

    668,561        548,745        423,880        325,608        249,749        199,912        153,861        127,701        94,518        67,603        53,708        44,555        37,435   

Grade E

    359,814        299,648        239,745        200,315        166,245        130,030        99,329        86,250        65,673        50,562        41,236        34,243        26,804   

Grade F

    137,223        121,781        110,870        102,390        88,311        66,519        46,617        40,439        30,864        23,707        18,277        15,680        12,230   

Grade G

    39,739        30,610        26,612        23,665        19,525        13,818        9,748        9,603        8,214        6,743        5,981        5,562        4,743   

Outstandings of Delinquent Loans (2)

 

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

Total

  $ 50,114      $ 39,498      $ 33,644      $ 32,904      $ 24,628      $ 17,262      $ 14,850      $ 12,789      $ 9,587      $ 7,375      $ 5,527      $ 5,850      $ 5,502   

Grade A

    1,639        1,276        1,290        1,373        1,172        1,037        986        845        646        502        244        356        273   

Grade B

    8,380        6,064        5,981        6,243        4,975        3,485        2,866        2,283        1,852        1,449        1,283        1,110        1,061   

Grade C

    12,804        10,197        7,894        7,994        5,763        3,588        3,026        2,552        1,991        1,300        1,163        1,172        1,204   

Grade D

    11,818        8,752        7,599        7,215        5,393        3,964        3,605        2,870        2,070        1,492        1,163        1,364        1,279   

Grade E

    8,539        7,275        5,938        5,623        4,298        2,681        2,335        2,329        1,613        1,240        1,009        951        849   

Grade F

    5,654        4,778        3,719        3,552        2,502        1,970        1,450        1,461        1,014        1,086        438        582        532   

Grade G

    1,280        1,156        1,223        904        525        537        582        449        401        306        227        315        304   

Charge-Off Amount (3)

 

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

Total

   $ 32,856       $ 26,610       $ 25,788       $ 18,425       $ 12,500       $ 10,598       $ 8,950       $ 6,117       $ 4,878       $ 3,342       $ 3,366       $ 2,888       $ 1,757   

Grade A

     1,117         1,005         1,052         906         849         858         655         516         361         130         226         157         107   

Grade B

     5,265         4,908         5,228         3,692         2,731         2,156         1,833         1,265         932         709         602         551         366   

Grade C

     8,933         6,422         6,639         4,645         2,574         2,122         1,672         1,252         972         868         722         728         500   

Grade D

     7,342         6,007         5,531         4,105         2,724         2,585         1,880         1,283         853         694         653         588         378   

Grade E

     5,743         4,554         4,066         3,113         1,921         1,468         1,608         963         854         632         554         470         289   

Grade F

     3,621         2,718         2,707         1,661         1,261         992         1,029         607         736         220         372         288         64   

Grade G

     837         996         565         303         440         417         273         232         170         89         237         106         53   

Delinquent Rate (4)

 

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

Total

     1.40     1.27     1.28     1.50     1.41     1.25     1.40     1.59     1.56     1.59     1.48     1.94     2.26

Grade A

     0.35     0.31     0.37     0.46     0.51     0.52     0.59     0.65     0.59     0.56     0.33     0.63     0.60

Grade B

     0.92     0.73     0.81     0.97     0.95     0.84     0.87     0.95     1.01     1.06     1.18     1.28     1.54

Grade C

     1.28     1.16     1.07     1.34     1.22     1.02     1.19     1.50     1.62     1.45     1.65     2.03     2.54

Grade D

     1.77     1.59     1.79     2.22     2.16     1.98     2.34     2.25     2.19     2.21     2.17     3.06     3.42

Grade E

     2.37     2.43     2.48     2.81     2.59     2.06     2.35     2.70     2.46     2.45     2.45     2.78     3.17

Grade F

     4.12     3.92     3.35     3.47     2.83     2.96     3.11     3.61     3.29     4.58     2.40     3.71     4.35

Grade G

     3.22     3.78     4.60     3.82     2.69     3.89     5.97     4.67     4.88     4.54     3.79     5.66     6.41

Annualized Charge-off Rate (5)

 

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

Total

     3.66     3.41     3.92     3.37     2.86     3.08     3.38     3.04     3.17     2.88     3.62     3.84     2.89

Grade A

     0.94     0.98     1.19     1.23     1.47     1.72     1.56     1.58     1.33     0.58     1.22     1.11     0.95

Grade B

     2.32     2.37     2.82     2.29     2.08     2.07     2.23     2.10     2.03     2.07     2.22     2.55     2.12

Grade C

     3.57     2.92     3.61     3.12     2.18     2.42     2.64     2.95     3.16     3.87     4.11     5.04     4.22

Grade D

     4.39     4.38     5.22     5.04     4.36     5.17     4.89     4.02     3.61     4.11     4.86     5.28     4.04

Grade E

     6.38     6.08     6.78     6.22     4.62     4.52     6.47     4.47     5.20     5.00     5.37     5.49     4.32

Grade F

     10.55     8.93     9.77     6.49     5.71     5.97     8.83     6.00     9.54     3.72     8.14     7.35     2.09

Grade G

     8.42     13.02     8.49     5.13     9.02     12.06     11.21     9.65     8.27     5.26     15.83     7.63     4.44

 

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

 

48


Table of Contents

The following table presents dollars collected on delinquent standard program loans and recoveries received on charged-off standard program loans (which include collection recoveries on charged-off standard program loans and proceeds from the sale of charged-off standard program loans), in the quarter presented. This information excludes standard program loans that we classified as identity theft. In cases of verified identity theft, we write-off the standard program 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-Q3      2014-Q2      2014-Q1      2013-Q4      2013-Q3      2013-Q2      2013-Q1      2012-Q4      2012-Q3      2012-Q2      2012-Q1      2011-Q4      2011-Q3  

Total

   $ 2,656       $ 2,448       $ 2,660       $ 1,892       $ 1,207       $ 943       $ 1,029       $ 739       $ 652       $ 507       $ 681       $ 533       $ 424   

Grade A

     120         129         165         82         81         66         96         66         45         44         40         30         38   

Grade B

     474         492         533         392         244         159         237         151         161         128         143         109         78   

Grade C

     684         575         588         467         242         228         188         154         105         77         171         149         103   

Grade D

     627         539         609         410         291         187         191         156         139         106         137         122         106   

Grade E

     374         402         397         227         185         168         137         121         106         77         136         74         58   

Grade F

     303         233         256         251         141         71         111         51         62         61         33         27         27   

Grade G

     74         78         112         63         23         64         69         40         34         14         21         22         14   

Recoveries (2)

 

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

Total

   $ 2,637       $ 2,566       $ 1,733       $ 704       $ 463       $ 460       $ 549       $ 105       $ 78       $ 383       $ 89       $ 36       $ 91   

Grade A

     74         81         66         42         30         35         39         9         8         15         3         3         19   

Grade B

     405         462         377         126         83         66         120         10         2         76         10         6         5   

Grade C

     688         576         375         178         90         101         107         39         27         84         22         10         23   

Grade D

     575         533         369         150         104         103         113         11         14         110         15         6         15   

Grade E

     493         472         317         117         88         76         88         14         13         54         12         4         3   

Grade F

     307         355         199         68         47         59         58         8         2         24         18         4         23   

Grade G

     94         87         30         23         21         20         24         14         12         20         9         3         3   

 

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

 

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Table of Contents

Cumulative Charge-off Rate – 36 Month Standard Program Loans

The graph and corresponding tables below show the cumulative net lifetime charge-offs for standard program loans with original terms of 36 months by grade and by annual vintage booked from January 1, 2008 through September 30, 2014, as a percentage of the aggregate principal amount of originations. The charge-offs are tracked by annual vintage, meaning each line represents all 36 month standard program loans originated in that year.

 

LOGO

Net Cumulative Lifetime Charge-off Rates by Booking Year

Standard Program Loans - Term: 36 Months      Grade: All

 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013     Y2014  

1

     0.0     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     0.0

3

     0.0     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     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     0.4  

8

     0.4     1.6     0.9     0.7     0.8     0.6  

9

     1.2     2.2     1.1     0.9     1.2     0.8  

10

     1.7     2.8     1.4     1.1     1.5     1.1  

11

     2.7     3.2     1.8     1.4     1.8     1.3  

12

     3.0     3.6     2.3     1.6     2.3     1.5  

13

     3.3     4.0     2.5     1.9     2.7     1.7  

14

     3.8     4.5     3.0     2.1     3.1     1.9  

15

     4.9     4.8     3.2     2.4     3.5    

16

     5.7     5.3     3.5     2.6     3.9    

17

     6.6     5.5     3.8     2.8     4.2    

18

     7.1     6.0     4.0     3.1     4.5    

19

     8.1     6.2     4.2     3.4     4.8    

20

     8.9     6.4     4.4     3.5     5.0    

21

     10.2     6.8     4.6     3.7     5.3    

22

     10.9     7.0     4.8     3.9     5.5    

23

     11.9     7.3     5.0     4.0     5.7    

24

     12.3     7.6     5.1     4.2     5.9    

25

     12.6     7.9     5.3     4.3     5.9    

26

     13.0     8.0     5.4     4.5      

27

     13.3     8.2     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     8.6     5.8     4.9      

31

     14.1     8.7     5.8     5.0      

32

     14.2     8.8     5.9     5.1      

33

     14.3     8.9     6.0     5.1      

34

     14.5     8.9     6.1     5.1      

35

     14.6     9.0     6.1     5.2      

36

     14.7     9.0     6.2        

 

50


Table of Contents

 

LOGO

Net Cumulative Lifetime Charge-off Rates by Booking Year

Standard Program Loans - Term: 36 Months      Grade: A

 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013     Y2014  

1

     0.0     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     0.0

3

     0.0     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     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     0.1  

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     0.2  

10

     0.1     0.2     0.2     0.5     0.8     0.2  

11

     0.1     0.4     0.2     0.6     1.0     0.3  

12

     0.6     0.7     0.4     0.8     1.2     0.4  

13

     0.6     0.8     0.5     0.9     1.4     0.4  

14

     0.6     1.5     0.6     1.2     1.6     0.5  

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     2.2    

18

     1.1     2.1     0.9     1.7     2.3    

19

     1.8     2.3     1.0     1.9     2.4    

20

     2.0     2.4     1.2     2.0     2.5    

21

     2.0     2.5     1.3     2.2     2.6    

22

     2.0     2.5     1.3     2.3     2.7    

23

     2.1     2.6     1.4     2.3     2.8    

24

     2.3     2.8     1.4     2.4     2.9    

25

     2.3     2.8     1.4     2.4     3.0    

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     2.8      

31

     3.3     3.5     1.7     2.8      

32

     3.3     3.5     1.8     2.8      

33

     3.3     3.6     1.8     2.9      

34

     3.3     3.6     1.8     2.9      

35

     3.3     3.6     1.8     2.9      

36

     3.3     3.6     1.9        

 

51


Table of Contents

LOGO

Net Cumulative Lifetime Charge-off Rates by Booking Year

Standard Program Loans - Term: 36 Months      Grade: B

 

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013     Y2014  

1

     0.0     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     0.0

3

     0.0     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     0.0

5

     0.0     0.2     0.1     0.0     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     0.4     0.2  

8

     0.4     1.4     0.7     0.6     0.7     0.3  

9

     0.6     1.6     0.9     0.8     0.9     0.5  

10

     0.7     2.4     1.1     1.1     1.2     0.7  

11

     1.3     2.9     1.3     1.3     1.5     0.8  

12

     1.7     3.0     1.9     1.4     1.9     1.0  

13

     1.7     3.4     2.1     1.6     2.2     1.2  

14

     2.3     3.8     2.7     1.7     2.6     1.3  

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     3.6    

18

     4.3     5.5     3.1     2.7     3.9    

19

     5.1     5.5     3.2     3.0     4.1    

20

     6.5     5.7     3.5     3.1     4.4    

21

     7.5     5.8     3.6     3.3     4.6    

22

     7.9     6.0     3.8     3.5     4.8    

23

     8.3     6.3     3.9     3.6     5.0    

24

     8.7     6.6     4.1     3.7     5.1    

25

     9.1     6.8     4.2     3.9     5.2    

26

     9.5     7.0     4.2