0001409970-16-002140.txt : 20160516 0001409970-16-002140.hdr.sgml : 20160516 20160516172552 ACCESSION NUMBER: 0001409970-16-002140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160516 DATE AS OF CHANGE: 20160516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LendingClub Corp CENTRAL INDEX KEY: 0001409970 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36771 FILM NUMBER: 161655299 BUSINESS ADDRESS: STREET 1: 71 STEVENSON ST. STREET 2: 3RD FL. CITY: SAN FRANCISCO STATE: CA ZIP: 94115 BUSINESS PHONE: 415-632-5666 MAIL ADDRESS: STREET 1: 71 STEVENSON ST. STREET 2: 3RD FL. CITY: SAN FRANCISCO STATE: CA ZIP: 94115 10-Q 1 q11610q.htm 10-Q SEC Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
Commission File Number: 001-36771
 
LendingClub Corporation
(Exact name of registrant as specified in its charter)

Delaware
51-0605731
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
71 Stevenson Street, Suite 300, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 632-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  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
 
x

Accelerated filer
¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
As of April 29, 2016, there were 381,621,026 shares of the registrant’s common stock outstanding.



LENDINGCLUB CORPORATION
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Except as the context requires otherwise, as used herein, “Lending Club,” “Company,” “we,” “us,” and “our,” refer to LendingClub Corporation, a Delaware corporation, and, where appropriate, its three subsidiaries:

LC Advisors, LLC (LCA), a wholly-owned, registered investment advisor with the Securities and Exchange Commission (SEC) that acts as the general partner for certain private funds and as advisor to separately managed accounts.
Springstone Financial, LLC (Springstone), a wholly-owned company that facilitates education and patient finance loans.
RV MP Fund GP, LLC, a wholly-owned subsidiary of LCA that acts as the general partner for a private fund, while LCA acts as the investment manager of this private fund.

LC Trust I (the Trust) is an independent Delaware business trust that acquires loans from the Company and holds them for the sole benefit of certain investors that have purchased a trust certificate (Certificate) issued by the Trust and that are related to specific underlying loans for the benefit of the investor.

Forward-Looking Statements

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

These forward-looking statements include, among other things, statements about:

the status of borrowers, the ability of borrowers to repay loans and the plans of borrowers;
our ability to maintain investor confidence in the operation of our platform;
the likelihood of investors to continue to, directly or indirectly, invest through our platform;
our intent to possibly seek additional sources of investor commitments for our platform;
interest rates and origination fees on loans charged by issuing banks;
expected rates of return for investors;
the effectiveness of our platform’s credit scoring models;
commitments or investments in loans to support: contractual obligations, such as to Springstone’s issuing bank for Pool B loans or repurchase obligations, regulatory commitments, such as direct mail, short-term marketplace equilibrium, the testing or initial launch of alternative loan terms, programs or channels that we do not have sufficient performance data on, or customer accommodations;
transaction fee or other revenue we expect to recognize after loans are issued by our issuing bank partners;
our financial condition and performance, including the impact that management’s estimates have on our financial performance and the relationship between the interim period and full year results;
capital expenditures;
the impact of new accounting standards;
investor, borrower, platform and loan performance-related factors that may affect our revenue;
our ability to develop and maintain effective internal controls, and to remediate a material weakness in our internal controls;
our compliance with applicable local, state and Federal laws;
our compliance with applicable regulations and regulatory developments or court decisions affecting our marketplace; and
other risk factors listed from time to time in reports we file with the SEC.


1


We caution you that the foregoing list may not contain all of the forward-looking statements in this Report. We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. We have included important factors in the cautionary statements included in this Report, particularly in “Part II Other Information Item 1A Risk Factors” in this Report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, that could, among other things, cause actual results or events to differ materially from forward-looking statements contained in this Report. Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LENDINGCLUB CORPORATION
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 
March 31, 
 2016
 
December 31, 
 2015
Assets
 
 
 
Cash and cash equivalents
$
583,842

 
$
623,531

Restricted cash
104,485

 
80,733

Securities available for sale
284,300

 
297,211

Loans at fair value (includes $3,037,233 and $3,022,001 from consolidated trust, respectively)
4,716,156

 
4,556,081

Accrued interest receivable (includes $24,536 and $24,477 from consolidated trust, respectively)
39,108

 
38,081

Property, equipment and software, net
64,194

 
55,930

Intangible assets, net
29,715

 
30,971

Goodwill
72,683

 
72,683

Other assets
53,860

 
38,413

Total assets
$
5,948,343

 
$
5,793,634

Liabilities and Stockholders Equity
 
 
 
Accounts payable
$
5,860

 
$
5,542

Accrued interest payable (includes $26,950 and $26,719 from consolidated trust, respectively)
41,637

 
40,244

Secured borrowings
15,113

 

Accrued expenses and other liabilities
50,088

 
61,243

Payable to investors
71,917

 
73,162

Notes and certificates at fair value (includes $3,050,728 and $3,034,586 from consolidated trust, respectively)
4,713,449

 
4,571,583

Total liabilities
4,898,064

 
4,751,774

Stockholders’ Equity
 
 
 
Common stock, $0.01 par value; 900,000,000 shares authorized at both March 31, 2016 and December 31, 2015; 381,363,565 and 379,716,630 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
3,836

 
3,797

Additional paid-in capital
1,150,877

 
1,127,952

Accumulated deficit
(84,081
)
 
(88,218
)
Treasury stock, at cost; 2,282,700 and 0 shares at March 31, 2016 and December 31, 2015, respectively
(19,485
)
 

Accumulated other comprehensive loss
(868
)
 
(1,671
)
Total stockholders’ equity
1,050,279

 
1,041,860

Total liabilities and stockholders’ equity
$
5,948,343

 
$
5,793,634


See Notes to Condensed Consolidated Financial Statements.

3


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

 
Three Months Ended  
 March 31,
 
2016
 
2015
Operating revenue:
 
 
 
Transaction fees
$
124,508

 
$
72,482

Servicing fees
16,942

 
5,392

Management fees
3,545

 
2,215

Other revenue
6,270

 
956

Total operating revenue
151,265

 
81,045

Net interest income:

 
 
Total interest income
177,879

 
113,472

Total interest expense
(176,683
)
 
(113,280
)
Net interest income
1,196

 
192

Fair value adjustments, loans, notes and certificates
(167
)
 
(5
)
Net interest income and fair value adjustments
1,029

 
187

Total net revenue
152,294

 
81,232

Operating expenses: (1)
 
 
 
Sales and marketing
66,575

 
34,470

Origination and servicing
19,198

 
12,201

Engineering and product development
24,198

 
13,898

Other general and administrative
38,035

 
26,410

Total operating expenses
148,006

 
86,979

Income (loss) before income tax expense
4,288

 
(5,747
)
Income tax expense
151

 
627

Net income (loss)
$
4,137

 
$
(6,374
)
Net income (loss) per share attributable to common stockholders:
 
 
 
Basic
$
0.01

 
$
(0.02
)
Diluted
$
0.01

 
$
(0.02
)
Weighted-average common shares - Basic
380,266,636

 
371,959,312

Weighted-average common shares - Diluted
392,397,825

 
371,959,312

(1) 
Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1 – Basis of Presentation” for additional information.

See Notes to Condensed Consolidated Financial Statements.


4


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

 
Three Months Ended  
 March 31,
 
2016
 
2015
Net income (loss)
$
4,137

 
$
(6,374
)
Other comprehensive income, before tax:
 
 
 
Change in net unrealized loss on securities available for sale
803

 

Other comprehensive income, before tax
803

 

Income tax effect

 

Other comprehensive income, net of tax
803

 

Comprehensive income (loss)
$
4,940

 
$
(6,374
)

See Notes to Condensed Consolidated Financial Statements.

5


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

 
Three Months Ended 
 March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
4,137

 
$
(6,374
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Net fair value adjustments of loans, notes and certificates
167

 
5

Change in fair value of loan servicing liabilities
(2,078
)
 
424

Change in fair value of loan servicing assets
(232
)
 
(1,315
)
Stock-based compensation, net
15,021

 
11,593

Excess tax benefit from share-based awards
(39
)
 

Depreciation and amortization
6,655

 
4,693

Gain on sales of loans
(4,699
)
 
(95
)
Other, net
30

 
18

Purchase of whole loans to be sold
(1,308,463
)
 
(622,050
)
Proceeds from sales of whole loans
1,308,463

 
622,145

Net change in operating assets and liabilities:
 
 
 
Accrued interest receivable
(1,027
)
 
(2,315
)
Other assets
657

 
(2,074
)
Due from related parties
(242
)
 
(57
)
Accounts payable
(123
)
 
(1,812
)
Accrued interest payable
1,393

 
2,719

Accrued expenses and other liabilities
(9,679
)
 
990

Net cash provided by operating activities
9,941

 
6,495

Cash Flows from Investing Activities:
 
 
 
Purchases of loans
(921,825
)
 
(852,827
)
Principal payments received on loans
586,159

 
369,379

Proceeds from recoveries and sales of charged-off loans
10,191

 
3,472

Purchases of securities available for sale
(3,661
)
 

Proceeds from maturities, redemptions and paydowns of securities available for sale
17,374

 

Investment in Cirrix Capital
(10,000
)
 

Net change in restricted cash
(23,752
)
 
7,516

Purchases of property, equipment and software, net
(10,483
)
 
(6,240
)
Net cash used in investing activities
(355,997
)
 
(478,700
)
Cash Flows from Financing Activities:
 
 
 
Change in payable to investors
(1,245
)
 
(7,924
)
Proceeds from issuances of notes and certificates
901,258

 
852,715

Proceeds from secured borrowings
15,113

 

Principal payments on notes and certificates
(583,982
)
 
(365,711
)

6


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

 
Three Months Ended 
 March 31,
 
2016
 
2015
Payments on notes and certificates from recoveries/sales of related charged-off loans
(10,177
)
 
(3,461
)
Repurchases of common stock
(19,485
)
 

Proceeds from stock option exercises and other
4,846

 
863

Excess tax benefit from share-based awards
39

 

Other financing activities

 
68

Net cash provided by financing activities
306,367

 
476,550

Net (Decrease) Increase in Cash and Cash Equivalents
(39,689
)
 
4,345

Cash and Cash Equivalents, Beginning of Period
623,531

 
869,780

Cash and Cash Equivalents, End of Period
$
583,842

 
$
874,125

Supplemental Cash Flow Information:
 
 
 
Cash paid for interest
$
175,224

 
$
110,562

Non-cash investing activity:
 
 
 
Accruals for property, equipment and software
$
4,286

 
$
1,184


See Notes to Condensed Consolidated Financial Statements.


7


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




1. Basis of Presentation

LendingClub Corporation (Lending Club) is an online marketplace connecting borrowers and investors. LC Advisors, LLC (LCA), is a registered investment advisor with the Securities and Exchange Commission (SEC) and wholly-owned subsidiary of Lending Club that acts as the general partner for certain private funds and advisor to separately managed accounts (SMAs) and a fund of which its wholly-owned subsidiary RV MP Fund GP, LLC, is the general partner. RV MP Fund GP, LLC, is a wholly-owned subsidiary of LCA that acts as the general partner for a private fund. Springstone Financial, LLC (Springstone), is a wholly-owned subsidiary of Lending Club that facilitates education and patient finance loans. LC Trust I (the Trust) is an independent Delaware business trust that acquires loans from Lending Club and holds them for the sole benefit of certain investors that have purchased a trust certificate (Certificate) issued by the Trust and that are related to specific underlying loans for the benefit of the investor.

Historically, the Company's overall business model has not been premised on using its balance sheet and assuming credit risk for loans facilitated by our marketplace. In order to support contractual obligations (Pool B loans and repurchase obligations), regulatory commitments (direct mail), short-term marketplace equilibrium, customer accommodations, or other needs, the Company may use its capital on the platform from time to time on terms that are substantially similar to other investors. Additionally, the Company may use its capital to invest in loans associated with the testing or initial launch of new or alternative loan terms, programs or channels to establish a track record of performance prior to facilitating third-party investments in these loans. In the five business days since the announcement of the internal board review described below, the Company has been actively exploring ways to restore investor confidence in its platform and obtain additional investment capital for the platform. These efforts may take a number of different structures and terms, including equity or debt transactions, alternative fee arrangements or other inducements including equity. These structures may enable the Company or third-parties to purchase loans through the platform. There is no assurance that the Company may be able to enter into any of these transactions, or if it does, what the final terms will be beneficial to the Company. If the Company's attempts to secure additional investor capital to meet platform origination volume are not successful, it likely may need to use a greater amount of its own capital to purchase loans on its platform compared to prior periods, particularly in light of regulatory commitments to purchase loans solicited by direct mail and other contractual purchase obligations. The Company also may need to reduce its platform’s origination volume. These actions likely may have material adverse impacts on the Company's business, financial condition (including its liquidity), results of operations and ability to sustain and grow loan volume. For additional information, see in “Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Board Review.

The Company believes based on its projections and ability to reduce loan volume if needed, that its cash on hand, funds available from its line of credit, and its cash flow from operations are expected to be sufficient to meet its liquidity needs for the next twelve months.

The accompanying unaudited condensed consolidated financial statements include Lending Club, its subsidiaries (collectively referred to as the Company, we, or us) and the Trust. All intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information necessary for the fair statement of the results and financial position for the periods presented. These accounting principles require management to make certain estimates and assumptions that affect the amounts in the accompanying financial statements. These condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. These adjustments are of a normal recurring nature. Actual results may differ from those estimates and results reported in the interim periods are not necessarily indicative of the results for the full year or any other interim period.


8


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



In the fourth quarter of 2015, the Company disaggregated the expense previously reported as “General and administrative” into “Engineering and product development” and “Other general and administrative” expense. Additionally, the Company reclassified certain operating expenses between “Sales and marketing,” “Origination and servicing,” “Engineering and product development” and “Other general and administrative” expense to align such classification and presentation with how the Company currently manages the operations and these expenses. These changes had no impact to “Total operating expenses.” Prior period amounts have been reclassified to conform to the current presentation.

The accompanying interim condensed consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Annual Report). The Company's significant accounting policies are included in “Note 2 – Summary of Significant Accounting Policies.

2. Summary of Significant Accounting Policies

The Company's significant accounting policies are discussed in “Part II – Item 8 – Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies” in the Annual Report. There have been no significant changes to these significant accounting policies during the first quarter of 2016, except as noted below.

Transaction Fee Revenue

Transaction fees are paid by issuing banks or patient service providers to Lending Club for the work Lending Club performs through its platform and Springstone’s platform in facilitating loans for its issuing bank partners. These fees are recognized as a component of operating revenue at the time of loan issuance. Factors affecting the amount of fees paid to the issuing bank by the borrower and from the bank to the Company include initial loan amount, term, credit quality, and other factors.

Commencing with the origination fee increase announced in March 2016, in the event a borrower prepays a loan in full before maturity, the Company assumes the issuing bank partner's obligation under Utah law to refund the pro-rated amount of the fee received by the bank in excess of 5%. Additionally, the Company may provide refunds to patient finance borrowers when the borrower cancels the loan under certain conditions. Since Lending Club can estimate refunds based on loan cancellation or prepayment experience, the Company records transaction fee revenue net of estimated refunds at the time of loan issuance.

Restricted Cash

Restricted cash consists primarily of checking, money market and certificate of deposit accounts that are: (i) pledged to or held in escrow by the Company’s correspondent banks as security for transactions processed on or related to Lending Club’s platform or activities by certain investors; (ii) pledged through a credit support agreement with a certificate holder or (iii) investors’ funds transactions-in-process that have not yet been applied to their accounts on the platform and transferred to segregated bank accounts that hold investors’ funds.

Investor cash balances (excluding transactions-in-process) are held in segregated bank or custodial accounts and are not commingled with the Company’s monies or held on the Company’s balance sheet.

Consolidation of Variable Interest Entities

A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its own operations, whose equity holders do not have the power to direct the activities most significantly affecting the economic outcome of those activities, or whose equity holders do not share proportionately in the losses or receive

9


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



the residual returns of the entity. The determination of whether an entity is a VIE requires a significant amount of judgment. When the Company has a controlling financial interest in a VIE, it must consolidate the results of the VIE’s operations into its condensed consolidated financial statements. A controlling financial interest exists if the Company has both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance (power) and the obligation to absorb losses or receive benefits that could be potentially significant to the VIE (economics).

LC Trust I

The Company has determined that the Trust is a VIE and that the Company has a controlling financial interest in the Trust and therefore must consolidate the Trust in its condensed consolidated financial statements. The Company established the Trust in February 2011 and funded it with a nominal residual investment. The Company is the only residual investor in the Trust. The purpose of the Trust is to acquire and hold loans for the benefit of investors who have invested in certificates issued by the Trust. The Trust conducts no other business other than purchasing and retaining loans or portions thereof for the benefit of the investment funds and their underlying limited partners. The Trust holds loans, none of which are financed by the Company. The cash flows from the loans held by the Trust are used to repay obligations under the certificates. The Trust’s assets and liabilities were reflected in the Company's consolidated financial statements at March 31, 2016 and December 31, 2015.

In connection with the formation of the investment funds, it was determined that in order to achieve success in raising investment capital, the assets to be invested in by the investment funds must be held by an entity that was separate and distinct from the Company (i.e. bankruptcy remote) in order to reduce this risk and uncertainty. In the event of the Company's insolvency, it is anticipated that the assets of the Trust would not become part of the bankruptcy estate, but that outcome is uncertain.

The Company's capital contributions, which are the only equity investments in the Trust, are insufficient to allow the Trust to finance the purchase of a significant amount of loans without the issuance of certificates to investors. Therefore, the Trust’s capitalization level qualifies the Trust as a VIE. The Company has a financial interest in the Trust because of its right to returns related to servicing fee revenue from the Trust, its right to reimbursement for expenses, and its obligation to repurchase loans from the Trust in certain instances. Additionally, the Company performs or directs activities that significantly affect the Trust’s economic performance through or by (i) operation of the platform that enables borrowers to apply for loans purchased by the Trust; (ii) credit underwriting and servicing of loans purchased by the Trust; (iii) LCA's selection of the loans that are purchased by the Trust on behalf of advised Certificate holders; and (iv) LCA’s role to source investors that ultimately purchase limited partnership interests in a fund or Certificates, both of which supply the funds for the Trust to purchase loans. Collectively, the activities described above allow the Company to fund more loans than would be the case without the existence of the Trust, to collect the related loan transaction fees and for LCA to collect the management fees on the investors’ capital used to purchase certificates. Accordingly, the Company is deemed to have power to direct activities most significant to the Trust and economic interest in the activities because of loan funding and transaction and management fees. Therefore, the Company concluded that it is the primary beneficiary of the Trust and consolidated the Trust’s operations in its condensed consolidated financial statements.

Investment In Cirrix Capital

On April 1, 2016, the Company closed its $10.0 million investment, for an approximate ownership interest of 15%, in Cirrix Capital (Investment Fund), a holding company to a family of funds that purchases loans and interests in loans from the Company. Per the partnership agreement, the family of funds can invest up to 20% of their assets outside of whole loans and interests in whole loans facilitated by the Company. At March 31, 2016, 100% of the family of funds' assets were comprised of whole loans and interests in loans facilitated by Lending Club's platform. The Company's former Chief Executive Officer (former CEO) and a board member (together, Related Party

10


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



Investors) also have limited partnership interests in the Investment Fund that resulted in an aggregate ownership of approximately 31% in the Investment Fund at April 1, 2016 by the Related Party Investors and the Company.

The Company's investment is deemed to be a variable interest in the Investment Fund because the limited partnership interest shares in the expected returns and losses of the Investment Fund. The expected returns and losses of the Investment Fund result from the net returns of the family of funds owned by the Investment Fund, which are derived from interest income earned from loans and interests in whole loans that are purchased by the Investment Fund and were facilitated by the Company. Additionally, the Investment Fund is considered a VIE. The Company is not the primary beneficiary of the Investment Fund because the Company does not have the power to direct the activities that most significantly affect the Investment Fund’s economic performance. As a result, the Company does not consolidate the operations of the Investment Fund in financial statements of the Company. The Company accounts for this investment under the equity method of accounting, which approximates its maximum exposure to loss as a result of its involvement in the Investment Fund. At March 31, 2016, the Company had subscribed to invest $10.0 million in the Investment Fund, which was recorded in other assets in the condensed consolidated balance sheet.

Separately, the Company is subject to a credit support agreement that requires it to pledge and restrict cash in support of its contingent obligation to reimburse the Investment Fund for net credit losses on loans underlying the interests in whole loans that are in excess of a specified, aggregate net loss threshold. The Related Party Investors and the Company are excluded from receiving any benefits, if provided, from this credit support agreement. As of March 31, 2016, the Company has not been required to nor does it anticipate recording losses under this agreement. In conjunction with the Company's determination that the Company has a variable interest in a VIE, the Investment Fund, it is required to disclose the Company's maximum exposure to loss under this credit support agreement, which was $39.0 million and $34.4 million at March 31, 2016 and December 31, 2015, respectively, and assumes all loans covered under this credit support agreement default.

The Investment Fund passes along credit risk to the limited partners. The Company did not design the Investment Fund’s investment strategy and cannot require the Investment Fund to purchase loans. Additionally, the Company reviewed whether it collectively, with the Related Party Investors, had power to control the Investment Fund and concluded that it did not based on the unilateral ability of the general partner to exercise power over the limited partnership and the inability of the limited partners to remove the general partner. See “Note 18 – Related Party Transactions” for additional information.

LCA Managed or Advised Private Funds

In conjunction with the adoption of a new accounting standard that amends accounting for consolidations effective January 1, 2016, the Company reviewed its relationship with the private funds managed or advised by LCA and concluded that it does not have a variable interest in the private funds. As of March 31, 2016, the Company does not hold any investments in the private funds. Certain of the Company's related parties have investments in the private funds, as discussed in “Note 18 – Related Party Transactions.” The Company charges the limited partners in the private funds a management fee based on their account balance at month end for services performed as the general manager, including fund administration, and audit, accounting and tax preparation services. Accordingly, the Company's fee arrangements contain only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. These fees are solely compensation for services provided and are commensurate with the level of effort required to provide those services. The Company does not have any other interests in the private funds and therefore does not have a variable interest in the private funds.

Management regularly reviews and reconsiders its previous conclusions regarding whether it holds a variable interest in potential VIEs, the status of an entity as a VIE, and whether the Company is required to consolidate such VIEs in the condensed consolidated financial statements.

11


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




Servicing Rights

As a result of the nature of servicing rights on the sale of loans, the Company is a variable interest holder in certain entities that purchase these loans. For all of these entities the Company either does not have the power to direct the activities that most significantly affect the VIE's economic performance or it does not have a potentially significant economic interest in the VIE. In no case is the Company the primary beneficiary and as a result none of these entities are consolidated on the Company's condensed consolidated financial statements.

Debt

The Company has elected to record certain costs directly related to issuing its secured revolving credit facility as an asset included in other assets on the Company’s condensed consolidated balance sheets. These costs are amortized as interest expense over the contractual term of the secured revolving credit facility. On a limited basis, the Company may transfer loans to investors that do not meet sale criteria for accounting purposes. These loans are recorded as secured borrowings on the condensed consolidated balance sheets.

Adoption of New Accounting Standard

In February 2015, the Financial Accounting Standards Board (FASB) issued new guidance amending accounting for consolidations, which was effective January 1, 2016. The guidance changes what an investor must consider in determining whether it is required to consolidate an entity in which it holds an interest. The adoption of this guidance did not have an impact on the Company's financial position, results of operations, earnings per share (EPS) or cash flows. The adoption of this guidance is further discussed above in “Consolidation of Variable Interest Entities.

New Accounting Standards Not Yet Adopted

In March 2016, the FASB amended guidance related to the accounting for share-based payments, which will be effective January 1, 2017. The guidance simplifies the accounting for share-based payments related to the income tax consequences of share-based awards, the classification of awards in a company's financial statements, and estimating forfeitures of awards. The Company is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS and cash flows.

In May 2014, the FASB issued new guidance on revenue recognition, which will be effective January 1, 2018. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts both the likelihood of payment and the timing of the related transfer of goods or performance of services. In March 2016, the Board issued an amendment to the new revenue recognition guidance clarifying how to determine if an entity is a principal or agent in a transaction. The effective date and transition requirements for this amendment is the same as those for the new revenue guidance. The Company is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS and cash flows.

In February 2016, the FASB amended guidance related to the lease accounting, which will be effective January 1, 2019. The guidance requires an entity to recognize a right-of-use asset and lease liability for most lease arrangements. The standard also requires additional disclosures related to lease arrangements. The Company is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS, and cash flows.

In January 2016, the FASB amended guidance related to recognition and measurement of financial instruments, which will be effective January 1, 2018. The amendment changes the accounting for equity investments, change

12


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



disclosure requirements related to instruments at amortized cost and fair value, and clarifies how entities should evaluate deferred tax assets for securities classified as available-for-sale. The Company is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS, and cash flows.

In November 2015, the FASB amended guidance related to the presentation of deferred income taxes, which will be effective January 1, 2017. The guidance simplified the presentation to require that all deferred income taxes be presented as noncurrent on a classified statement of financial position. The Company does not currently present a classified statement of financial position and accordingly does not expect this guidance to have any impact on its disclosures.

There have been no other changes to these significant accounting policies during the first quarter of 2016.

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

The following table details the computation of the Company's basic and diluted net income (loss) per share:
 
 
Three Months Ended  
 March 31,
 
 
2016
 
2015
Net income (loss) (1)
 
$
4,137

 
$
(6,374
)
Weighted average common shares - Basic (2)
 
380,266,636

 
371,959,312

Weighted average common shares - Diluted (2)
 
392,397,825

 
371,959,312

Net income (loss) per share attributable to common stockholders:
 
 
 
 
Basic
 
$
0.01

 
$
(0.02
)
Diluted
 
$
0.01

 
$
(0.02
)
(1) 
Also represents net income (loss) available to common stockholders. In a period with net income, both earnings and dividends (if any) are allocated to participating securities. In a period with a net loss, only declared dividends (if any) are allocated to participating securities. There were no dividends declared in the first quarters of 2016 or 2015. The Company had no participating securities as of March 31, 2016 or March 31, 2015.
(2) 
Net of 2,282,700 shares repurchased in the first quarter of 2016 under the Company's share repurchase program. See “Note 14 – Employee Incentive and Retirement Plans – Share Repurchases” for additional information.


13


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



4. Securities Available for Sale

The Company began purchasing securities available for sale during the second quarter of 2015. The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of March 31, 2016 and December 31, 2015, were as follows:
March 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Corporate debt securities
$
209,955

 
$
93

 
$
(877
)
 
$
209,171

Asset-backed securities
48,116

 
5

 
(42
)
 
48,079

U.S. agency securities
16,602

 
2

 
(21
)
 
16,583

U.S. Treasury securities
3,490

 
26

 

 
3,516

Other securities
7,005

 

 
(54
)
 
6,951

Total securities available for sale
$
285,168

 
$
126

 
$
(994
)
 
$
284,300

 
 
 
 
 
 
 
 
December 31, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Corporate debt securities
$
217,243

 
$
2

 
$
(1,494
)
 
$
215,751

Asset-backed securities
54,543

 

 
(134
)
 
54,409

U.S. agency securities
16,602

 
1

 
(25
)
 
16,578

U.S. Treasury securities
3,489

 

 
(4
)
 
3,485

Other securities
7,005

 

 
(17
)
 
6,988

Total securities available for sale
$
298,882

 
$
3

 
$
(1,674
)
 
$
297,211



14


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



A summary of securities available for sale with unrealized losses as of March 31, 2016 and December 31, 2015, aggregated by period of continuous unrealized loss, is as follows:
 
Less than
12 months
 
12 months
or longer
 
Total
March 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate debt securities
$
166,436

 
$
(877
)
 
$

 
$

 
$
166,436

 
$
(877
)
Asset-backed securities
35,235

 
(42
)
 

 

 
35,235

 
(42
)
U.S. agency securities
14,582

 
(21
)
 

 

 
14,582

 
(21
)
Other securities
6,950

 
(54
)
 

 

 
6,950

 
(54
)
Total securities with unrealized losses(1)
$
223,203

 
$
(994
)
 
$

 
$

 
$
223,203

 
$
(994
)
 
Less than
12 months
 
12 months
or longer
 
Total
December 31, 2015
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate debt securities
$
212,018

 
$
(1,494
)
 
$

 
$

 
$
212,018

 
$
(1,494
)
Asset-backed securities
54,409

 
(134
)
 

 

 
54,409

 
(134
)
U.S. agency securities
14,578

 
(25
)
 

 

 
14,578

 
(25
)
U.S. Treasury securities
3,485

 
(4
)
 

 

 
3,485

 
(4
)
Other securities
6,988

 
(17
)
 

 

 
6,988

 
(17
)
Total securities with unrealized losses(1)
$
291,478

 
$
(1,674
)
 
$

 
$

 
$
291,478

 
$
(1,674
)
(1) 
The number of investment positions with unrealized losses at March 31, 2016 and December 31, 2015 totaled 109 and 141, respectively.

There were no impairment charges recognized during the first quarter of 2016.

The contractual maturities of securities available for sale at March 31, 2016, were as follows:
 
Within
1 year
After 1 year
through
5 years
After 5 years
through
10 years
After
10 years
Total
Corporate debt securities
$
48,374

$
160,797

$

$

$
209,171

Asset-backed securities
1,221

46,858



48,079

U.S. agency securities

16,583



16,583

U.S. Treasury securities
1,000

2,516



3,516

Other securities
1,999

4,952



6,951

Total fair value
$
52,594

$
231,706

$

$

$
284,300

Total amortized cost
$
52,648

$
232,520

$

$

$
285,168


There were no sales of securities available for sale during the first quarter of 2016.


15


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



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

Loans, Notes and Certificates

The Company sells loans and issues notes and the Trust issues certificates as a means to allow investors to invest in the associated loans. At March 31, 2016 and December 31, 2015, loans, notes and certificates measured at fair value on a recurring basis were as follows:
 
Loans
 
Notes and Certificates
March 31, 
 2016
 
December 31, 
 2015
 
March 31, 
 2016
 
December 31, 
 2015
Aggregate principal balance outstanding
$
4,932,346

 
$
4,681,671

 
$
4,929,468

 
$
4,697,169

Net fair value adjustments
(216,190
)
 
(125,590
)
 
(216,019
)
 
(125,586
)
Fair value
$
4,716,156

 
$
4,556,081

 
$
4,713,449

 
$
4,571,583

Original term
12 - 60 months

 
12 - 60 months

 
 
 
 
Interest rates (fixed)
4.99% - 31.89%

 
4.99% - 29.90%
 
 
 
 
Maturity dates
≤ March 2021

 
≤ December 2020

 
 
 
 

Loans at fair value include $23.8 million of loans purchased by the Company, of which $15.1 million are pledged under a loan transfer that was accounted for as secured borrowings at March 31, 2016. See “Note 12 – Secured Borrowings” for additional information.

At March 31, 2016 and December 31, 2015, loans that were 90 days or more past due (including non-accrual loans) were as follows:
 
March 31, 2016
 
December 31, 2015
 
> 90 days
past due
 
Non-accrual loans
 
> 90 days
past due
 
Non-accrual loans
Outstanding principal balance
$
28,398

 
$
2,904

 
$
30,094

 
$
4,513

Net fair value adjustments
(23,622
)
 
(2,398
)
 
(25,312
)
 
(3,722
)
Fair value
$
4,776

 
$
506

 
$
4,782

 
$
791

# of loans (not in thousands)
2,440

 
282

 
2,606

 
382


Loan Servicing Rights

At March 31, 2016, loans underlying loan servicing rights had a total outstanding principal balance of $5.27 billion, original terms between 12 and 84 months, monthly payments with interest rates ranging from 2.99% to 33.15% and maturity dates through March 2023. At December 31, 2015, loans underlying loan servicing rights had a total outstanding principal balance of $4.29 billion, original terms between 3 and 84 months, monthly payments with interest rates ranging from 2.99% to 33.15% and maturity dates through December 2022.

6. Fair Value of Assets and Liabilities

For a description of the fair value hierarchy and the Company’s fair value methodologies, see “Note 2 – Summary of Significant Accounting Policies.” The Company did not transfer any assets or liabilities in or out of Level 3 during the first quarters of 2016 or 2015.


16


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



Financial Instruments Recorded at Fair Value

The following tables present the fair value hierarchy for assets and liabilities measured at fair value:
March 31, 2016
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
Loans
$

 
$

 
$
4,716,156

 
$
4,716,156

Securities available for sale:
 
 
 
 
 
 
 
Corporate debt securities

 
209,171

 

 
209,171

Asset-backed securities

 
48,079

 

 
48,079

U.S. agency securities

 
16,583

 

 
16,583

U.S. Treasury securities

 
3,516

 

 
3,516

Other securities

 
6,951

 

 
6,951

Total securities available for sale

 
284,300

 

 
284,300

Servicing assets

 

 
16,964

 
16,964

Total assets
$

 
$
284,300

 
$
4,733,120

 
$
5,017,420

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes and certificates
$

 
$

 
$
4,713,449

 
$
4,713,449

Servicing liabilities

 

 
2,827

 
2,827

Total liabilities
$

 
$

 
$
4,716,276

 
$
4,716,276


December 31, 2015
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
Loans
$

 
$

 
$
4,556,081

 
$
4,556,081

Securities available for sale:
 
 
 
 
 
 
 
Corporate debt securities

 
215,751

 

 
215,751

Asset-backed securities

 
54,409

 

 
54,409

U.S. agency securities

 
16,578

 

 
16,578

U.S. Treasury securities

 
3,485

 

 
3,485

Other securities

 
6,988

 

 
6,988

Total securities available for sale

 
297,211

 

 
297,211

Servicing assets

 

 
10,250

 
10,250

Total assets
$

 
$
297,211

 
$
4,566,331

 
$
4,863,542

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes and certificates
$

 
$

 
$
4,571,583

 
$
4,571,583

Servicing liabilities

 

 
3,973

 
3,973

Total liabilities
$

 
$

 
$
4,575,556

 
$
4,575,556


As the Company's loans and related notes and certificates, and loan servicing rights do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the

17


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



significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for the Company's Level 3 fair value measurements at March 31, 2016 and December 31, 2015:
 
 
 
 
March 31, 2016
 
 
 
 
Range of Inputs
Financial Instrument
 
Unobservable Input
 
Minimum
 
Maximum
 
Weighted- Average
Loans, notes and certificates
 
Discount rates
 
3.0
%
 
22.7
%
 
8.1
%
 
 
Net cumulative expected loss rates(1)
 
0.3
%
 
27.5
%
 
11.6
%
 
 
Cumulative prepayment rates(1)
 
8.0
%
 
44.3
%
 
32.6
%
 
 
 
 
 
 
 
 
 
Servicing asset/liability
 
Discount rates
 
3.5
%
 
21.6
%
 
9.0
%
 
 
Net cumulative expected loss rates(1)
 
0.3
%
 
27.5
%
 
9.7
%
 
 
Cumulative prepayment rates(1)
 
8.0
%
 
44.3
%
 
36.6
%
 
 
Total market servicing rates (% per annum on unpaid principal balance)(2)
 
0.57
%
 
0.90
%
 
0.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
Range of Inputs
Financial Instrument
 
Unobservable Input
 
Minimum
 
Maximum
 
Weighted- Average
Loans, notes and certificates
 
Discount rates
 
2.9
%
 
17.5
%
 
9.0
%
 
 
Net cumulative expected loss rates(1)
 
0.3
%
 
22.0
%
 
9.9
%
 
 
Cumulative prepayment rates(1)
 
23.4
%
 
36.4
%
 
30.8
%
 
 
 
 
 
 
 
 
 
Servicing asset/liability
 
Discount rates
 
3.5
%
 
16.3
%
 
9.4
%
 
 
Net cumulative expected loss rates(1)
 
0.3
%
 
22.0
%
 
8.8
%
 
 
Cumulative prepayment rates(1)
 
8.0
%
 
36.4
%
 
30.5
%
 
 
Base market servicing rates (% per annum on unpaid principal balance)(3)
 
0.50
%
 
0.75
%
 
0.50
%
(1)  
Expressed as a percentage of the original principal balance of the loan, note or certificate.
(2)  
Includes ancillary fees estimated to be paid to a hypothetical third-party servicer.
(3)  
Excludes ancillary fees that would be passed on to a hypothetical third-party servicer. As of December 31, 2015, the market rate for ancillary fees was assumed to be 7 basis points for a weighted-average total market servicing rate of 57 basis points.

At March 31, 2016 and December 31, 2015, the discounted cash flow methodology used to estimate the notes and certificates' fair values used the same projected net cash flows as their related loans. As demonstrated by the following table below, the fair value adjustments for loans were largely offset by the fair value adjustments of the

18


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



notes and certificates due to the 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 first quarters of 2016 and 2015:
 
 
Loans
 
Notes and Certificates
 
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
 
Outstanding Principal Balance
 
Valuation Adjustment
 
Fair Value
Beginning balance at December 31, 2015
 
$
4,681,671

 
$
(125,590
)
 
$
4,556,081

 
$
4,697,169

 
$
(125,586
)
 
$
4,571,583

Purchases of loans
 
2,230,288

 

 
2,230,288

 

 

 

Issuances of notes and certificates
 

 

 

 
901,258

 

 
901,258

Whole loan sales
 
(1,308,463
)
 

 
(1,308,463
)
 

 

 

Principal payments
 
(586,159
)
 

 
(586,159
)
 
(583,982
)
 

 
(583,982
)
Charge-offs
 
(84,991
)
 
84,991

 

 
(84,977
)
 
84,977

 

Recoveries
 

 
(10,191
)
 
(10,191
)
 

 
(10,177
)
 
(10,177
)
Change in fair value recorded in earnings
 

 
(165,400
)
 
(165,400
)
 

 
(165,233
)
 
(165,233
)
Ending balance at March 31, 2016
 
$
4,932,346

 
$
(216,190
)
 
$
4,716,156

 
$
4,929,468

 
$
(216,019
)
 
$
4,713,449

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

 
$
(38,224
)
 
$
2,798,505

 
$
2,851,837

 
$
(38,219
)
 
$
2,813,618

Purchases of loans
 
1,474,972

 

 
1,474,972

 

 

 

Issuances of notes and certificates
 

 

 

 
852,715

 

 
852,715

Whole loan sales
 
(622,145
)
 

 
(622,145
)
 

 

 

Principal payments
 
(369,379
)
 

 
(369,379
)
 
(365,711
)
 

 
(365,711
)
Charge-offs
 
(43,821
)
 
43,821

 

 
(43,807
)
 
43,807

 

Recoveries
 

 
(3,472
)
 
(3,472
)
 

 
(3,461
)
 
(3,461
)
Change in fair value recorded in earnings
 

 
(47,820
)
 
(47,820
)
 

 
(47,815
)
 
(47,815
)
Ending balance at March 31, 2015
 
$
3,276,356

 
$
(45,695
)
 
$
3,230,661

 
$
3,295,034

 
$
(45,688
)
 
$
3,249,346


The following table presents additional information about Level 3 servicing assets and liabilities measured at fair value on a recurring basis for the first quarters of 2016 and 2015:
 
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
 
 
Servicing Assets
 
Servicing Liabilities
 
Servicing Assets
 
Servicing Liabilities
Fair value at beginning of period
 
$
10,250

 
$
(3,973
)
 
$
2,181

 
$
(3,973
)
Issuances (1)
 
5,631

 
(932
)
 
1,508

 
(1,412
)
Changes in fair value, included in servicing fees
 
232

 
2,078

 
(491
)
 
988

Additions, included in deferred revenue
 
851

 

 
298

 

Fair value at end of period
 
$
16,964

 
$
(2,827
)
 
$
3,496

 
$
(4,397
)
(1) 
Represents the offsets to the gains or losses on sales of the related loans, recorded in other revenue.

19


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




A portion of the servicing fee revenue increase in the first quarter of 2016 compared to the same period in 2015 was due to an increase in the Company's servicing asset valuation. This resulted from an increase in the Company's expected cash flows from ancillary fees (collection and recovery fees) due to contractual servicing fee increases.

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Certain fair valuation adjustments recorded through earnings related to Level 3 instruments for the first quarters of 2016 and 2015. Generally, changes in the net cumulative expected loss rates, cumulative prepayment rates, and discount rates will have an immaterial net impact on the fair value of loans, notes and certificates, and servicing assets and liabilities.

Certain of these unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. When multiple inputs are used within the valuation techniques for loans, notes and certificates, or servicing assets and liabilities, a change in one input in a certain direction may be offset by an opposite change from another input.

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

The Company's selection of the most representative market servicing rates for servicing assets and servicing liabilities is inherently judgmental. The Company reviewed estimated third-party servicing rates for its loans and loans in similar credit sectors, as well as a market servicing benchmarking analysis provided by a third-party valuation firm, and determined that estimated total market servicing rates on its loans ranging from 0.57% to 0.90% per annum of outstanding principal are reasonable estimates as of March 31, 2016 and base market servicing rates on its loans, ranging from 0.50% to 0.75% per annum of outstanding principal, are reasonable estimates as of December 31, 2015. The table below shows the impact on the estimated fair value of servicing assets and liabilities, calculated using different market servicing rate assumptions as of March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015
 
Servicing Assets
 
Servicing Liabilities
 
Servicing Assets
 
Servicing Liabilities
Weighted-average market servicing rate assumptions(1)
0.57
%
 
0.57
%
 
0.50
%
 
0.50
%
Change in fair value from:
 
 
 
 
 
 
 
Servicing rate increase by 0.10%
$
(4,852
)
 
$
1,235

 
$
(3,504
)
 
$
1,589

Servicing rate decrease by 0.10%
$
4,960

 
$
(1,127
)
 
$
3,610

 
$
(1,483
)
(1) 
Represents total market servicing rates, which include ancillary fees, at March 31, 2016, and base market servicing rates, which exclude ancillary fees, at December 31, 2015. As of December 31, 2015, the market rate for ancillary fees was assumed to be 7 basis points for a weighted-average total market servicing rate of 57 basis points.


20


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



Financial Instruments Not Recorded at Fair Value

The following tables present the fair value hierarchy for financial instruments not recorded at fair value:
March 31, 2016
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
583,842

 
$

 
$
583,842

 
$

 
$
583,842

Restricted cash
104,485

 

 
104,485

 

 
104,485

Deposits
872

 

 
872

 

 
872

Total assets
$
689,199

 
$

 
$
689,199

 
$

 
$
689,199

Liabilities:
 
 
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
1,699

 
$

 
$

 
$
1,699

 
$
1,699

Accounts payable
$
5,860

 
$

 
$
5,860

 
$

 
$
5,860

Payables to investors
71,917

 

 
71,917

 

 
71,917

Total liabilities
$
79,476

 
$

 
$
77,777

 
$
1,699

 
$
79,476

December 31, 2015
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
623,531

 
$

 
$
623,531

 
$

 
$
623,531

Restricted cash
80,733

 

 
80,733

 

 
80,733

Deposits
871

 

 
871

 

 
871

Total assets
$
705,135

 
$

 
$
705,135

 
$

 
$
705,135

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
5,542

 
$

 
$
5,542

 
$

 
$
5,542

Payables to investors
73,162

 

 
73,162

 

 
73,162

Total liabilities
$
78,704

 
$

 
$
78,704

 
$

 
$
78,704


7. Property, Equipment and Software, Net

Property, equipment and software, net, consist of the following:
 
March 31, 
 2016
 
December 31, 
 2015
Internally developed software
$
50,413

 
$
40,709

Computer equipment
14,724

 
14,076

Leasehold improvements
13,540

 
11,559

Purchased software
6,311

 
5,336

Furniture and fixtures
5,413

 
5,086

Construction in progress
2,866

 
2,870

Total property, equipment and software
93,267

 
79,636

Accumulated depreciation and amortization
(29,073
)
 
(23,706
)
Total property, equipment and software, net
$
64,194

 
$
55,930



21


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



Depreciation and amortization expense on property, equipment and software was $5.4 million and $3.1 million for the first quarters of 2016 and 2015, respectively.

8. Other Assets

Other assets consist of the following:
 
March 31, 
 2016
 
December 31, 
 2015
Loan servicing assets, at fair value
$
16,964

 
$
10,250

Prepaid expenses
13,825

 
16,283

Other investments
10,250

 
250

Accounts receivable
5,745

 
4,976

Receivable from investors
1,706

 
1,117

Deferred financing cost
1,229

 
1,296

Deferred acquisition compensation
1,228

 
1,521

Due from related parties (1)
897

 
655

Deposits
872

 
871

Tenant improvement receivable
778

 
778

Other
366

 
416

Total other assets
$
53,860

 
$
38,413

(1) Represents management fees due to LCA from certain private funds for which LCA acts as the general partner.

9. Intangible Assets and Goodwill

Intangible Assets

The Company's intangible asset balance was $29.7 million and $31.0 million at March 31, 2016 and December 31, 2015, respectively. Amortization expense associated with intangible assets for the first quarters of 2016 and 2015 was $1.3 million and $1.5 million, respectively.

Goodwill

The Company's goodwill balance was $72.7 million at March 31, 2016, and December 31, 2015. The Company did not record any goodwill impairment expense for the first quarters of 2016 or 2015. Between annual goodwill impairment testing dates, the Company is required to evaluate qualitative and quantitative factors to determine whether it is more likely than not that the fair value of its goodwill reporting unit is more than its carrying value. These factors may include loss of key personnel, increased regulatory oversight, unplanned changes in our operations, 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. As of March 31, 2016, after weighing all the negative and positive available evidence, the Company concluded that it was more likely than not that the fair value of its reporting unit exceeded the carrying value. Therefore, the Company did not record a goodwill impairment charge during the first quarter of 2016.

Subsequent to March 31, 2016, the Company announced that the board of directors accepted the resignation of Renaud Laplanche as CEO and Chairman. The Company considers loss of key personnel to be an adverse indicator of potential goodwill impairment. The loss of the services of our executive officers or members of our senior

22


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



management team, and the process to replace any of them, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives. In addition, the Company may be subject to litigation related to the events surrounding the resignation of Mr. Laplanche. Moreover, the Company has been contacted by regulatory authorities requesting information related to the events surrounding the resignation of Mr. Laplanche, and the Company intends to cooperate fully with those inquiries. These occurrences could result in adverse publicity and adversely affect the Company’s brand. As a result, the Company could record goodwill impairment expense upon completion of the annual goodwill impairment test in the second quarter of 2016.

10. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:
 
March 31, 
 2016
 
December 31, 
 2015
Accrued expenses
$
19,486

 
$
14,054

Accrued compensation
10,387

 
28,780

Deferred rent
5,473

 
4,615

Deferred tax liability
3,623

 
3,446

Deferred revenue
3,402

 
2,551

Loan servicing liabilities, at fair value
2,827

 
3,973

Payable to issuing bank
1,820

 
955

Transaction fee refund reserve
1,292

 
578

Early stock option exercise and other equity-related liabilities
71

 
83

Contingent liabilities
39

 
700

Other
1,668

 
1,508

Total accrued expenses and other liabilities
$
50,088

 
$
61,243


11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss represents other cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income were as follows:
Three Months Ended March 31,
2016
 
2015
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Change in net unrealized loss on securities available for sale
$
803

 
$

 
$
803

 
$

 
$

 
$

Other comprehensive income
$
803

 
$

 
$
803

 
$

 
$

 
$


Accumulated other comprehensive loss balances were as follows:
 
Total
Accumulated Other Comprehensive Loss
Balance at December 31, 2015
$
(1,671
)
Change in net unrealized loss on securities available for sale
803

Balance at March 31, 2016
$
(868
)


23


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



12. Secured Borrowings

Subsequent to March 31, 2016, the Company repurchased $22.3 million of near-prime loans from a single institutional investor that did not meet a non-credit, non-pricing requirement of the investor, of which $15.1 million were originally sold to the investor prior to March 31, 2016. As a result, these loans were accounted for as secured borrowings at March 31, 2016. For additional information, see “Note 16 – Commitments and Contingencies.” On April 26, 2016, the Company resold the loans to a different investor at par. This subsequent transfer qualified for sale accounting treatment, and the loans were removed from the Company's condensed consolidated balance sheet and the secured borrowings liability was reduced to zero in the second quarter of 2016.

For additional information regarding these matters, see “Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Board Review” and “Item 4 – Controls and Procedures.

13. Debt

Revolving Credit Facility

On December 17, 2015, the Company entered into a credit and guaranty agreement with several lenders for an aggregate $120 million secured revolving credit facility (Credit Facility). In connection with the credit agreement, the Company entered into a pledge and security agreement with Morgan Stanley Senior Funding, Inc., as collateral agent.

Proceeds of loans made under the Credit Facility may be borrowed, repaid and reborrowed until December 17, 2020. Repayment of any outstanding proceeds are payable on December 17, 2020, but may be prepaid without penalty.

Borrowings under the Credit Facility bear interest, at the Company’s option, at an annual rate based on the one-year LIBOR rate plus a spread of 1.75% to 2.00%, which is fixed for a Company-selected interest period of one, two, three, six or 12 months, or at an alternative base rate (which is tied to either the prime rate, federal funds effective rate, or the adjusted euro currency rate, as defined in the credit agreement). Base rate borrowings may be prepaid at any time without penalty, however, prepayment of LIBOR-based borrowings before the end of the selected interest period may result in the Company incurring expense to compensate the lenders for their funding costs through the end of the interest period. Interest is payable quarterly. Additionally, the Company is required to pay a quarterly commitment fee to the lenders of between 0.25% and 0.375% per annum, depending on the Company’s total net leverage ratio, on the average undrawn portion available under the revolving loan facility.

The Credit Facility and pledge and security agreement contain certain covenants applicable to the Company, including restrictions on the Company’s ability to pay dividends, incur indebtedness, pledge its assets, merge or consolidate, make investments, and enter into certain affiliate transactions. The Credit Facility also requires the Company to maintain a maximum total net leverage ratio (defined as the ratio of net debt to Adjusted EBITDA, on a consolidated basis for the four most recent Fiscal Quarter periods) of 4.00:1.00 initially, and which decreases over the term of the Credit Facility to 3.00:1.00 on and after June 30, 2018 (on a consolidated basis). As of March 31, 2016, the total net leverage ratio, calculated as defined in the Credit Facility, was 0%.

The Company did not have any loans outstanding under the Credit Facility during the first quarter of 2016. The Company incurred $1.3 million of capitalized debt issuance costs, which will be recognized as interest expense through December 17, 2020.


24


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



14. Employee Incentive and Retirement Plans

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

Stock-based compensation expense was as follows for the periods presented:
 
Three Months Ended  
 March 31,
 
2016
 
2015
Stock options
$
7,657

 
$
7,086

RSUs
5,126

 
481

ESPP
388

 
479

Stock issued related to acquisition
1,850

 
3,547

Total stock-based compensation expense
$
15,021

 
$
11,593


The following table presents the Company's stock-based compensation expense recorded in the condensed consolidated statements of operations:
 
Three Months Ended  
 March 31,
 
2016
 
2015 (1)
Sales and marketing
$
1,904

 
$
1,508

Origination and servicing
746

 
606

Engineering and product development
3,723

 
1,798

Other general and administrative
8,648

 
7,681

Total stock-based compensation expense
$
15,021

 
$
11,593

(1) 
Prior period amounts have been reclassified to conform to the current period presentation. See “Note 1 – Basis of Presentation” for additional information.

The Company capitalized $1.9 million and $0.8 million of stock-based compensation expense associated with developing software for internal use during the first quarters of 2016 and 2015, respectively. In addition, the Company recognized $39 thousand in tax benefits from exercised stock options and RSUs during the first quarter of 2016. There was no net income tax benefit recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options and RSUs due to the full valuation allowance during the first quarter of 2015.

Equity Incentive Plans

The Company has two equity incentive plans: the 2007 Stock Incentive Plan (2007 Plan) and the 2014 Equity Incentive Plan (2014 Plan). Upon the Company’s IPO in 2014, the 2007 Plan was terminated and all shares that remained available for future issuance under the 2007 Plan at that time were transferred to the 2014 Plan. As of March 31, 2016, 42,810,226 options to purchase common stock granted under the 2007 Plan remain outstanding. As of March 31, 2016, the total number of shares available for future grants under the 2014 Plan was 44,040,590 shares, including shares transferred from the 2007 Plan.


25


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



Stock Options

The following table summarizes the activities for the Company's stock options during the first quarter of 2016:
 
Number of Options
 
Weighted-
Average
Exercise Price Per Share
 
Weighted-Average Remaining Contractual Life (in years)
 
Aggregate Intrinsic Value (1)
Outstanding at December 31, 2015
48,208,911

 
$
3.60

 
 
 
 
Granted
4,547,230

 
$
8.48

 
 
 
 
Exercised
(3,822,799
)
 
$
1.26

 
 
 
 
Forfeited/Expired
(478,682
)
 
$
6.97

 
 
 
 
Outstanding at March 31, 2016
48,454,660

 
$
4.21

 
7.1
 
$
221,874

Vested and expected to vest at March 31, 2016
48,091,745

 
$
4.20

 
7.1
 
$
220,963

Exercisable at March 31, 2016
26,444,648

 
$
2.36

 
6.2
 
$
163,676

(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $8.30 as reported on the New York Stock Exchange on March 31, 2016.

For the first quarter of 2016, the Company granted service-based stock options to purchase 4,547,230 shares of common stock with a weighted average exercise price of $8.48 per option share, a weighted average grant date fair value of $4.26 per option share and an aggregate estimated fair value of $19.4 million. Stock options granted during the first quarter of 2016 included 265,987 shares of fully vested stock options granted in lieu of cash bonuses to be paid to certain employees for the 2015 performance period.

For the first quarter of 2015, the Company granted service-based stock options to purchase 768,500 shares of common stock with a weighted average exercise price of $20.81 per option share, a weighted average grant date fair value of $10.27 per option share and an aggregate estimated fair value of $7.9 million.

The aggregate intrinsic value of options exercised was $27.9 million and $10.8 million for the first quarters of 2016 and 2015, respectively. The total fair value of stock options vested for the first quarters of 2016 and 2015 was $10.3 million and $6.1 million, respectively.

As of March 31, 2016, the total unrecognized compensation cost, net of forfeitures, related to outstanding stock options was $85.9 million, which is expected to be recognized over the next 1.3 years.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
 
 
Three Months Ended  
 March 31,
 
 
2016
 
2015
Expected dividend yield
 

 

Weighted-average assumed stock price volatility
 
51.9
%
 
49.9
%
Weighted-average risk-free interest rate
 
1.39
%
 
1.56
%
Weighted-average expected life (in years)
 
6.18

 
6.25



26


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