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LENDINGCLUB CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Consolidated Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
In addition to historical information, this quarterly 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 Consolidated 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; and
adverse financial, customer and employee consequences that might result to us if
litigation were to be initiated and resolved in an adverse manner to us. For a
more detailed discussion of the risks relating to our business, readers should
refer to Part II Item 1A found later in this report entitled "Risk Factors," as
well as the "Risk Factors" section of the prospectus for the Notes dated
August 15, 2011, and filed with the SEC, as may be amended or supplemented from
time to time. 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 quarterly report. We assume no obligation to update these
forward-looking statements.
Overview
We are an online financial platform. We allow qualified borrower members to
obtain loans (which we refer to as "Member Loans") with interest rates that they
find attractive. From the launch of our platform in May 2007 until April 7,
2008, our platform allowed investor members to purchase assignments of Member
Loans directly. Since October 13, 2008, investors have had the opportunity to
purchase Member Payment Dependent Notes (which we refer to as the "Notes")
issued by us, with each series of Notes corresponding to an individual Member
Loan originated on our platform. The Notes are dependent for payment on the
related Member Loan and offer interest rates and credit characteristics that the
investors find attractive. The vast majority of Member Loans originated since
October 13, 2008, have been financed by Notes. Since November 2007, we have also
financed portions of certain Member Loans ourselves using sources of funds other
than Notes, with the intent and ability to hold these loans for the foreseeable
future or to maturity. We receive the same terms on Member Loans that we finance
as the terms received by other Note investors.
All Member Loans are unsecured obligations of individual borrower members with
fixed interest rates, three-year or five-year maturities, minimum amounts of
$1,000 and maximum amounts up to $35,000. The Member Loans are posted on our
website, funded and issued by WebBank, an FDIC-insured, state-chartered
industrial bank organized under the laws of the state of Utah, at closing and
immediately sold to us after closing. As a part of operating our lending
platform, we verify the identity of members, obtain borrower members' credit
characteristics from consumer reporting agencies such as TransUnion, Experian or
Equifax and screen borrower members for eligibility to participate in the
platform and facilitate the posting of Member Loans. Also, after acquiring the
Member Loans from WebBank, we service the Member Loans on an ongoing basis.
We were incorporated in Delaware in October 2006, and in May 2007, began
operations as an application on Facebook.com. In August 2007, we conducted a
venture capital financing round and expanded our operations with the launch of
our public website, www.lendingclub.com. The Company established a wholly-owned
subsidiary, LCA, a registered investment adviser, in October 2010 for the
purpose of expanding the pool of investor capital to invest in Notes and similar
obligations. The Company established the Trust, a Delaware business trust in
February 2011 to acquire and hold Member Loans for the sole benefit of investors
that purchase Trust Certificates (Certificates) issued by the Trust and related
to the underlying Member Loans. The Certificates may only be settled with cash
flows from the related Member Loans held by the Trust consistent with the member
payment dependent design of the Certificates; Certificate holders do not have
recourse to the general credit of the Company or other investors.
In February and March 2011, LCA became the general partner in two investment
funds that were formed to enable accredited investors to invest in Certificates.
As of December 31, 2011, the lending platform has facilitated 42,535 member
loans since our launch in May 2007.
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We have been operating since December 2007 pursuant to an agreement with
WebBank. WebBank serves as the lender for all member loans originated through
our platform. Our agreement with WebBank has enabled us to make our platform
available to borrower members on a uniform basis nationwide, except that as of
December 1, 2011, we do not currently offer member loans in Idaho, Iowa,
Indiana, Maine, Mississippi, Nebraska, North Dakota and Tennessee. We pay
WebBank a monthly service fee based on the amount of loan proceeds disbursed by
WebBank in each month, subject to a minimum monthly fee.
We have a limited operating history and have incurred net losses since our
inception. Our net loss was $2,867,100 and $9,320,135 for the three and nine
months ended December 31, 2011. We earn revenues from fees, primarily loan
origination fees charged to borrower members, investor servicing fees and,
beginning in 2011, management fees charged to limited partners in two private
investment funds that purchase Trust Certificates (Certificates). We also earn
net interest income on Member Loans on our balance sheet. To date, we have
funded our operations primarily with proceeds from our venture capital
financings, our credit facilities and debt and equity issuances, which are
described under "Liquidity and Capital Resources". The remaining borrowing
capacity under our non-revolving credit facilities is zero. Over time, we expect
that the number of borrower and investor members and the volume of Member Loans
originated through our platform will increase, and that we will generate
increased revenue from borrower origination fees, investor service fees and
management fees.
Our operating plan allows for a continuation of the current strategy of raising
capital through debt and equity financings to finance our operations until we
reach profitability and become cash-flow positive, which we do not expect to
occur within the next twelve months. Our operating plan calls for significant
investments in sales, technology development, security, loan scoring, loan
processing and marketing before we reach profitability.
From inception of the Company through December 31, 2011, we have raised
approximately $78.8 million through preferred equity financings. Our last series
of preferred equity financing was on July 28, 2011, when we raised approximately
$25 million from the sale of 7,027,604 shares of our Series D convertible
preferred stock. On August 31, 2011 we raised approximately $1 million from the
sale of 281,104 additional shares of our Series D convertible preferred stock.
See Note 14 - Subsequent Events for additional shares of Series D convertible
preferred stock that were issued in January 2012.
Significant Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States
requires us to make certain judgments, assumptions, and estimates that affect
the amounts reported in our consolidated financial statements and accompanying
notes. We believe that the judgments, assumptions and estimates upon which we
rely are reasonable based upon information available to us at the time that
these judgments, assumptions and estimates are made. However, any differences
between these judgments, assumptions and estimates and actual results could have
a material impact on our statement of operations and financial condition. The
accounting policies, which are more fully described in Note 2 to our
consolidated financial statements, reflect our most significant judgments,
assumptions and estimates and which we believe are critical in understanding and
evaluating our reported financial results include: (1) revenue recognition;
(2) fair value determinations; (3) allowance for loan losses; and
(4) share-based compensation. These estimates and assumptions are inherently
subjective in nature, actual results may differ from these estimates and
assumptions, and the differences could be material.
Member Loans at Fair Value
We have elected fair value accounting for the vast majority of Member Loan
originations since October 13, 2008, including all Member Loans originated since
October 1, 2011, and all related Notes. The fair value election for these Member
Loans and Notes allows symmetrical accounting for the timing and amounts
recognized for both expected unrealized losses and realized losses on the Member
Loans and the related Notes, consistent with the member payment dependent design
of the Notes. All of our Member Loans are unsecured but the gross potential
credit risk to the Company from Member Loans is significantly mitigated to the
extent that loans are financed by Notes or Certificates that absorb the loans'
credit losses pursuant to the member payment dependency provision.
Absent the fair value elections for both Member Loans at fair value and Notes,
Member Loans held for investment would be accounted for at amortized cost and
would record loan loss provisions for estimated expected losses, but the related
Notes also accounted for at amortized cost would recognize losses only when and
in amounts actually realized, thereby resulting in a mismatch in the timing and
amounts of loss recognition between a Member Loan and related Notes, which is
not an appropriate representation for instruments that are designed to have
linked
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cash flows and loss realization. The loan origination fees for Member Loans at
fair value are recognized as interest income at the time of the loan
origination. The costs to originate Member Loans at fair value are recognized in
operating expenses as incurred. Interest income on Member Loans at fair value is
recorded as earned. The remaining Member Loan originations have been accounted
for at amortized cost as explained more fully below.
When we receive payments of principal and interest on Member Loans at fair
value, we make principal and interest payments on related Notes, net of any
applicable servicing fee on the payments received on the Member Loans at fair
value. The principal payments reduce the carrying values of both the Member
Loans at fair value and the related Notes. When explicit servicing fees apply,
we do not directly record servicing fee revenue related to payments on the
Member Loans at fair value. Instead, we record interest expense on the
corresponding Notes based on the post-service fee interest payments we make to
our investor members which results in an interest expense on these Notes that is
lower than the interest income on the Member Loans at fair value.
We include in earnings the estimated unrealized fair value gains or losses
during the period of Member Loans at fair value, and the offsetting estimated
fair value losses or gains attributable to the expected changes in future
payments on Notes.
At December 31, 2011, we estimated the fair values of Member Loans at fair value
and their related Notes using a discounted cash flow valuation methodology. The
estimated fair values of Member Loans are computed by projecting the future
contractual cash flows to be received on the loans, adjusting those cash flows
for our expectation of defaults and losses over the life of the loans, and
discounting those projected net cash flows to a present value, which is the
estimated fair value. Our expectation of future defaults and losses on loans is
based on analyses of actual defaults and losses that occurred on the various
credit grades of Member Loans over the past several years. The discount rates
for the projected net cash flows of the Member 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 Member Loans.
Our obligation to pay principal and interest on any Note is equal to the
pro-rata portion of the payments, if any, received on the related Member Loan at
fair value, net of any applicable servicing fee. The effective interest rate
associated with a Note will be less than the interest rate earned on the related
Member Loan at fair value when an explicit servicing fee applies. At
December 31, 2011, the discounted cash flow methodology used to estimate the
Notes' fair values uses the same projected net cash flows as their related
Member Loans, adjusted for any applicable servicing fee. The discount rates for
the projected net cash flows of the Notes are our estimates of the rates of
return that investors in unsecured consumer credit obligations would require
when investing in Notes with cash flows dependent on specific credit grades of
Member Loans, servicing included.
For additional discussion on this topic, including the adjustments to the
estimated fair values of Loans at fair value and Notes at fair value as of
December 31, 2011, as discussed above, see Results of Operations - Fair Value
Adjustments on Member Loans at Fair Value and Notes at Fair Value, and Note 5 -
Member Loans at Fair Value and Notes at Fair Value.
Member Loans at Amortized Cost
The loan origination fees for Member Loans at amortized cost are deferred at
origination and, with the related deferred loan origination costs, are amortized
to interest income over the contractual lives of the loans using a method that
approximates the effective interest method, which loans currently have original
terms of 36 or 60 months. We record interest income on Member Loans at amortized
cost as earned. Loans reaching 120 days delinquent are classified as nonaccrual
loans.
We may incur losses if the borrower members fail to pay their monthly scheduled
loan payments. An allowance for loan losses applies only to Member Loans at
amortized cost and is a valuation allowance that is established as losses are
estimated to have occurred at the balance sheet date through a provision for
loan losses charged to earnings. Realized loan losses are charged against the
allowance when management believes the uncollectability of a loan balance is
confirmed.
The allowance for loan losses is evaluated on a periodic basis by management,
and represents an estimate of potential credit losses based on a variety of
factors, including the composition and quality of the Member Loans at amortized
cost, loan specific information gathered through our collection efforts,
delinquency levels, probable expected losses, current and historical charge-off
and loss experience, current industry charge-off and loss
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experience, and general economic conditions. Determining the adequacy of the
allowance for loan losses for Member Loans at amortized cost is subjective,
complex and requires judgment by management about the effects of matters that
are inherently uncertain, and actual losses may differ from our estimates.
Our estimate of the allowance for loan losses for Member Loans at amortized cost
is developed by estimating both the rate of default of the loans within each
credit score band using the FICO credit scoring model, a loan's collection
status, the borrower's FICO score at or near the evaluation date, and the amount
of probable loss in the event of a borrower member default.
Effective October 1, 2011, we revised the accounting policy for Member Loans to
elect the fair value accounting option for all Member Loans originated on and
after October 1, 2011. Prior to October 1, 2011, Member Loan originations
financed by Notes were accounted for at fair value and Member Loan originations
financed by us via sources of funds other than Notes were accounted for at
amortized cost. As a result of the election of fair value accounting for all
prospective loan originations, there were no new Member Loan originations
accounted for at amortized cost after September 30, 2011.
Results of Operations
Revenues
Our business model consists primarily of charging fees to both borrower members
and investor members for transactions through or related to our platform. During
the three months ended December 31, 2011 and 2010, we originated $86,864,381,
and $37,670,650 of loans, respectively, on our lending platform, an increase of
131%. During the nine months ended December 31, 2011 and 2010, we originated
$211,422,101 and $102,843,500 of loans, respectively, on our lending platform,
an increase of 106%.
Upon issuance of a loan, the borrower member pays a fee to us for providing the
services of arranging the Member Loan. The loan origination fee charged to each
borrower member is determined by the credit grade of that borrower member's loan
and as of December 31, 2011, ranged from 1.11% to 5.00% of the aggregate member
loan amount. The loan origination fees are included in the annual percentage
rate ("APR") calculation provided to the borrower member and is subtracted from
the gross loan proceeds prior to disbursement of the loan funds to the borrower
member. The loan origination fees are recognized in interest income as described
above in Significant Accounting Policies and Estimates.
Investor members that purchase Notes pay servicing fees to us on the payments
for the related Member Loans and maintaining account portfolios. Beginning in
March 2011, we began charging limited partners in two private investment funds
(Funds) monthly management fees that are based on the month-end balances of
their partners' capital accounts. These management fees, which are charged in
lieu of servicing fees on the Certificates purchased by the Funds, are recorded
in other revenue.
To a lesser extent, we also generate revenue from the net interest income earned
on Member Loans at amortized cost that we finance with sources of funds other
than Notes.
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Net Interest Income
The following table summarizes interest income, interest expense and net
interest income as follows:
September 30, September 30, September 30, September 30,
Three Months Ended December 31, Nine Months Ended December 31,
2011 2010 2011 2010
Interest income:
Member Loans at fair value:
Interest income $ 8,191,032 $ 3,349,664 $ 19,460,367 $ 7,855,636
Origination fees 3,738,312 1,399,568 9,122,449 4,066,478
Total interest income, Member Loans at
fair value 11,929,344 4,749,232 28,582,816 11,922,114
Member Loans at amortized cost 181,291 187,605 524,819 637,945
Cash and cash equivalents 4,537 9,981 14,579 26,783
Total interest income $ 12,115,172 $ 4,946,818 29,122,214 $ 12,586,842
Interest expense:
Notes:
Gross interest expense $ 8,076,114 $ 3,349,664 $ 19,291,665 $ 7,855,636
Interest expense reduction for servicing
fee
(275,582 ) (209,646 ) (783,341 ) (426,720 )
Net interest expense, Notes 7,800,532 3,140,018 18,508,324 7,428,916
Loans Payable:
Interest expense 29,019 167,047 143,719 567,631
Amortization of loan discounts 20,939 67,811 78,056 217,479
Total interest expense, Loans Payable 49,958 234,858 221,775 785,110
Total interest expense $ 7,850,490 $ 3,374,876 $ 18,730,099 $ 8,214,026
Net Interest Income $ 4,264,682 $ 1,571,942 $ 10,392,115 $ 4,372,816
We had net interest income of $4,264,682 and $1,571,942 for the three months
ended December 31, 2011 and 2010, respectively, an increase of 171%, and
$10,392,115 and $4,372,816 for the nine months ended December 2011 and 2010,
respectively, an increase of 138%. The main drivers of our net interest revenue
are the loan origination fees we collect from borrower members and, to a lesser
extent, the servicing fees we collect from investor members. Loan origination
fees are a function of the volume of Member Loans originated and the average fee
charged to the borrower members.
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The following tables present the average balances of interest-earning assets and
interest-bearing liabilities, the components of interest income, interest
expense, and net interest income for the three and nine month periods ended
December 31, 2011 and 2010.
September 30, September 30, September 30, September 30, September 30, September 30,
Average Balance of Interest-Bearing Assets & Liabilities, Yields and Costs
Three Months Ended December 31, 2011 Three Months Ended December 31, 2010
Estimated Interest Average Estimated Interest Average
Average Income / Yield / Average Income / Yield /
Balance 1 (Expense) Cost 2 Balance 1 (Expense) Cost 2
Interest-Earning Assets:
Member Loans:
Member Loans at fair value, principal balance $ 268,496,373 $ 8,191,032 12.10 % $ 117,463,562 $ 3,349,664 11.31 %
Member Loan at fair value, origination fees 3,738,312 1,399,568
Member Loans at fair value, interest and fees 268,496,373 11,929,344 17.63 % 117,463,562 4,749,232 16.04 %
Member Loans at amortized cost 2,945,232 181,291 24.42 % 6,696,226 187,605 11.12 %
Cash, cash equivalents & restricted cash 31,032,737 4,537 0.06 % 19,777,879 9,981 0.20 %
Total Interest-Earning Assets $ 302,474,342 12,115,172 15.89 % $ 143,937,668 4,946,818 13.64 %
Interest-Bearing Liabilities:
Notes at fair value, principal balance $ 265,928,486 (7,800,532 ) 11.64 % $ 117,395,672 (3,140,018 ) 10.61 %
Loans payable 1,040,842 (49,958 ) 19.04 % 4,834,868 (234,858 ) 19.27 %
Total Interest-Bearing Liabilities $ 266,969,328 (7,850,490 ) 11.67 % $ 122,230,540 (3,374,876 ) 10.95 %
Net Interest Income $ 4,264,682 $ 1,571,942
Net Interest Spread 3 4.22 % 2.68 %
Net Interest Margin 4 5.59 % 4.33 %
1. The estimated average balance represents the average of the month-end
balances from the beginning through the end of the period.
2. Yields and costs are annualized based on actual number of days in the period.
3. Net interest spread equals the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
4. Net interest margin equals net interest income divided by average
interest-earning assets, annualized.
The yield on average interest-earning assets rose 2.25% to 15.89% for the three
months ended December 31, 2011, from 13.64% for the same period in the preceding
year primarily due to the increase in the proportion of balances in
higher-yielding Member Loans relative to the balances in low-yielding cash and
cash equivalents, and to a lesser extent, the 1.59% increase in the average
yield on Member Loans at fair value to 17.63% from 16.04%, which was
attributable to increased origination fees in the current quarter and a 0.79%
increase in the average interest rate on Member Loans at fair value in the
current quarter relative to the same quarter in the preceding year. The cost of
average interest-bearing liabilities increased 0.72% to 11.67% for the three
months ended December 31, 2011, from 10.95% for the same period in the preceding
year as the decline in the proportion of balances in higher-cost loans payable
only partially offset the 1.03% increase in the average interest cost of Notes
to 11.64% from 10.61%. As a result of the factors described above, the net
interest margin for the three months ended December 31, 2011, rose 1.26% to
5.59% from 4.33% for the same period in the preceding year.
We originated $86,864,381 and $35,144,975 of Member Loans at fair value in the
three months ended December 31, 2011, and 2010, respectively, an increase of
147%, and we collected origination fees on those loan originations of $3,738,312
and $1,399,568 in those periods, respectively, an increase of 167%. The average
loan origination fees were 4.30% and 3.98% of the principal amount of loans
originated in the three months ended December 31, 2011, and 2010, respectively.
The increase in the average loan origination fee in the current period was
primarily due to an increase in the origination of certain five year loans that
carry higher origination fees than three year loans of the same credit grade.
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September 30, September 30, September 30, September 30, September 30, September 30,
Average Balance of Interest-Bearing Assets & Liabilities, Yields and Costs
Nine Months Ended December 31, 2011 Nine Months Ended December 31, 2010
Estimated Interest Average Estimated Interest Average
Average Income / Yield / Average Income / Yield /
Balance 1 (Expense) Cost 2 Balance 1 (Expense) Cost 2
Interest-Earning Assets:
Member Loans:
Member Loans at fair value, principal balance $ 220,789,354 $ 19,460,367 11.70 % $ 93,635,862 $ 7,855,636 11.14 %
Member Loan at fair value, origination fees 9,122,449 4,066,478
Member Loans at fair value, interest and fees 220,789,354 28,582,816 17.18 % 93,635,862 11,922,114 16.90 %
Member Loans at amortized cost 4,276,265 524,819 16.29 % 7,255,759 637,945 11.67 %
Cash, cash equivalents & restricted cash 22,788,210 14,579 0.08 % 19,967,116 26,783 0.18 %
Total Interest-Earning Assets $ 247,853,829 29,122,214 15.60 % $ 120,858,738 12,586,842 13.82 %
Interest-Bearing Liabilities:
Notes at fair value, principal balance $ 219,245,311 (18,508,324 ) 11.20 % $ 93,591,462 (7,428,916 ) 10.54 %
Loans payable 1,706,685 (221,775 ) 17.25 % 6,315,435 (785,110 ) 16.50 %
Total Interest-Bearing Liabilities $ 220,951,996 (18,730,099 ) 11.25 % $ 99,906,897 (8,214,026 ) 10.91 %
Net Interest Income $ 10,392,115 $ 4,372,816
Net Interest Spread 3 4.34 % 2.91 %
Net Interest Margin 4 5.57 % 4.80 %
1. The estimated average balance represents the average of the month-end
balances from the beginning through the end of the period.
2. Yields and costs are annualized based on actual number of days in the period.
3. Net interest spread equals the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
4. Net interest margin equals net interest income divided by average
interest-earning assets, annualized.
The yield on average interest-earning assets rose 1.78% to 15.60% for the nine
months ended December 31, 2011, from 13.82% for the same period in the preceding
year primarily due to the increase in the proportion of balances in
higher-yielding Member Loans relative to the balances in low-yielding cash and
cash equivalents, and to a lesser extent, the 0.56% increase in the average
interest rate on Member Loans at fair value, to 11.70% from 11.14%. The cost of
average interest-bearing liabilities rose 0.34% to 11.25% for the nine months
ended December 31, 2011, from 10.91% for the same period in the preceding year
as the 0.66% increase in the average interest cost of Notes to 11.20% from
10.54% (which corresponded with the increase in the average interest rate on
Member Loans at fair value) was partially offset by the decline in the
proportion of balances in higher-cost loans payable. As a result of the factors
described above, the net interest margin for the nine months ended December 31,
2011, rose 0.77% to 5.57% from 4.80% for the same period in the preceding year.
We originated $210,358,320 and $98,703,900 of Member Loans at fair value in the
nine months ended December 31, 2011, and 2010, respectively, an increase of
113%, and we collected origination fees on those loan originations of $9,122,449
and $4,066,478, in those periods respectively, an increase of 124%. The average
loan origination fees were 4.34% and 4.12% of the principal amount of loans
originated in the nine months ended December 31, 2011, and 2010, respectively.
The increase in the average loan fees in the current period was primarily due to
an increase in the origination of certain five year loans that carry higher
origination fees than three year loans of the same credit grade.
Borrower Origination Fees
Our borrower members pay a one-time origination fee to us for arranging a Member
Loan. This fee is determined by the loan grade of the member loan.
Beginning January 7, 2011, our origination fees for three year loans changed,
and ranged from 2.00% to 5.00% of the aggregate principal amount of the Member
Loan, as set forth below:
September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,
Loan
Grade A1-A2 A3-A5 B C D E F G
Fee 2.00 % 3.00 % 4.00 % 5.00 % 5.00 % 5.00 % 5.00 % 5.00 %
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Beginning January 7, 2011, our origination fees for five year loans changed, and
ranged from 3.00% to 5.00% of the aggregate principal amount of the Member Loan,
as set forth below:
September 30, September 30, September 30, September 30, September 30, September 30, September 30,
Loan
Grade A B C D E F G
Fee 3.00 % 5.00 % 5.00 % 5.00 % 5.00 % 5.00 % 5.00 %
Beginning September 8, 2011, our origination fees for three year loans changed,
and ranged from 1.11% to 5.00% of the aggregate principal amount of the Member
Loan, as set forth below:
September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,
Loan
Grade A1 A2 A3-A5 B C D E F G
Fee 1.11 % 2.00 % 3.00 % 4.00 % 5.00 % 5.00 % 5.00 % 5.00 % 5.00 %
We do not receive an origination fee if a member loan request does not close.
Loan origination fees on Member Loans at fair value were $3,738,312 and
$1,399,568 for the three months ended December 31, 2011 and 2010, respectively,
an increase of 167%, and $9,122,449 and $4,066,478 for the nine months ended
December 2011 and 2010, respectively, an increase of 124%. The increases in
these loan fees recognized in interest income was primarily due to increases in
loan origination volumes during the three and nine month periods ended
December 31, 2011, versus the comparable periods ended December 31, 2010.
Interest Income on Member Loans at Fair Value and Interest Expense on Notes
Beginning October 13, 2008, we began recording interest income, including
borrower origination fees, from Member Loans at fair value and corresponding
interest expense from the Notes. We charge investor members an ongoing service
fee in respect of Member Loans at fair value that are financed by Notes that the
investor members have purchased through our platform. The servicing fee offsets
the costs we incur in servicing Member Loans at fair value, including managing
payments from borrower members, payments to investor members and maintaining
investors account portfolios. This service fee is charged on amounts paid by us
to an investor member in respect of a Member Loan.
During the three months ended December 31, 2011 and 2010, we recorded interest
income from Member Loans at fair value, excluding loan origination fees, of
$8,191,032 and $3,349,664, respectively. Conversely, for the Notes, we recorded
interest expense of $7,800,532 and $3,140,018, respectively, for the three
months ended December 31, 2011 and 2010. Comparatively, during the nine months
ended December 31, 2011 and 2010, we recorded interest income from Member Loans
at fair value, excluding loan origination fees, of $19,460,367 and $7,855,636,
respectively. Conversely, for the Notes, we recorded interest expense of
$18,508,324 and $7,428,916, respectively, for the nine months ended December 31,
2011 and 2010.
The servicing fees earned from Note holders, or the difference between the
interest on Member Loans at fair value and interest expense on Notes, were
$275,582 and $209,646 for the three months ended December 31, 2011 and 2010,
respectively, an increase of 31%, and $783,341 and $426,720 for the nine months
ended December 2011 and 2010, respectively, an increase of 84%. The increases in
the servicing fees earned from Note holders were primarily due to increased
balances of Notes during the three and nine month periods ended December 31,
2011, versus the comparable periods ended December 31, 2010. The amount of
servicing fees earned depends on the balances of Notes that have explicit
servicing fees (versus holders of Certificates that pay management fees) and the
average servicing fee paid by the Note holders.
We expect that interest revenues and expenses related to Member Loans at fair
value and Notes will continue to increase as we grow our platform.
Interest Earned on Member Loans at Amortized Cost
Between April 7, 2008 and October 13, 2008, while we sought to register the
offering of the Notes, we financed Member Loan originations with sources of
funds other than Notes, which generate interest income on Member Loans at
amortized cost. Subsequent to the effectiveness of our registration statement
related to our Notes in October 2008, we periodically originated some Member
Loans at amortized cost. However, as we have increased our investor marketing
efforts to increase the issuance of Notes to finance loans, the originations and
outstanding balances of Member Loans at amortized cost have diminished. As noted
earlier, we changed our accounting policy to elect fair value accounting for all
loans originated on and after October 1, 2011. Accordingly, during the three
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and nine months ended December 31, 2011, we originated $0 and $1,063,821 of
Member Loans at amortized cost, while during the three and nine months ended
December 31, 2010, we originated $2,525,675 and $4,139,600 of Member Loans at
amortized cost, respectively. We expect the remaining balance of Member Loans at
amortized cost to decline to zero over the next several years.
During the three months ended December 31, 2011 and 2010, we recorded interest
income on Member Loans at amortized cost of $181,291 and $187,605, respectively.
Comparatively, during the nine months ended December 31, 2011 and 2010, we
recorded interest income on Member Loans at amortized cost of $524,819 and
$637,945, respectively. The decline in interest income on Member Loans at
amortized cost is primarily due to the decline in the balances of Member Loans
at amortized cost for the three and nine month periods ended December 31, 2011,
versus the balances of Member Loans at amortized cost in the comparable periods
ended December 31, 2010.
Interest Earned on Cash and Investments
Interest income from cash and cash equivalents is recorded as it is earned. For
the three and nine months ended December 31, 2011, we recorded $4,537 and
$14,579 respectively, of interest income earned on cash and cash equivalents.
Comparatively, for the three and nine months ended December 31, 2010, we
recorded $9,981 and $26,783, respectively, in interest income earned on cash and
cash equivalents. The differences in interest income are a function of the
balances of cash on hand and the low interest rate climate during the relevant
periods. We do not expect interest income from cash and cash equivalents to be a
significant part of our future revenue.
Interest Expense on Loans Payable
Interest expense, other than that described above with regard to Notes, consists
primarily of cash and non-cash interest on loans payable. For the three months
ended December 31, 2011 and 2010, we incurred interest expense of $29,020 and
$167,046, respectively, for interest payments due on our loans payable. For the
three months ended December 31, 2011 and 2010, we also recorded $20,939 and
$67,812, respectively, for non-cash interest expense related to debt discounts
due to warrants on our loans payable. Comparatively, for the nine months ended
December 31, 2011 and 2010, we incurred interest expense of $143,719 and
$567,630, respectively, for interest payments due on our loans payable. For the
nine months ended December 31, 2011 and 2010, we also recorded $78,055 and
$217,480, respectively, for non-cash interest expense related to debt discounts
due to warrants on our loans payable.
As we have no additional availability under our various non-revolving loan
payable agreements, we expect interest expense on our loans payable to decrease
over the next year as we repay these loans.
Fair Value Adjustments on Member Loans at Fair Value and Notes at Fair Value
As discussed earlier, at December 31, 2011, we estimated the fair values of
Member Loans and their related Notes using a discounted cash flow valuation
methodology. The fair valuation methodology uses the historical actual defaults
and losses on our loans over the past several years to project future losses and
net cash flows on loans. The evolution and improvement of our credit risk
management policies and practices over the past several years has resulted in
improving realized loss rates on loans in recent years. Accordingly, the fair
valuation methodology projects lifetime losses on loans based on the historical,
improving loss rates.
Fair value adjustment gains/(losses) for Member Loans were $5,115,409 and
$(2,350,786) for the three months ended December 31, 2011 and 2010,
respectively, and $(1,938,253) and $(6,168,219) for the nine months ended
December 2011 and 2010, respectively.
Fair value adjustment gains/(losses) for Notes were $(4,981,726) and $2,345,804
for the three months ended December 31, 2011 and 2010, respectively, and
$1,977,213 and $6,160,178 for the nine months ended December 2011 and 2010,
respectively.
The fair value adjustments for Member Loans were largely offset by the fair
value adjustments of the Notes due to the member payment dependent design of the
Notes and because the principal balances of the Member Loans at fair value were
very close to the principal balances of the Notes. Accordingly, the net fair
value adjustment gains/(losses) for Member Loans and Notes were $133,683 and
$(4,982) for the three months ended December 31, 2011 and 2010, respectively,
and $38,960 and $(8,041) for the nine months ended December 2011 and 2010,
respectively.
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Provision for Loan Losses
Loan loss provisions arise only for Member Loans at amortized cost. Loan loss
provisions were $204,728 and $72,755 for the three months ended December 31,
2011 and 2010, respectively, and $359,872 and $346,475 for the nine months ended
December 2011 and 2010, respectively.
The allowance for loan losses, which management evaluates on a periodic basis,
represents an estimate of expected credit losses inherent in the portfolio of
Member Loans at amortized cost that we hold for investment and is based on a
variety of factors, including the composition and quality of the loan portfolio,
loan specific information gathered through our collection efforts, delinquency
levels, our historical charge-off and loss experience, current industry
charge-off and loss experience, and general economic conditions. Determining the
adequacy of the allowance for loan losses is subjective, complex, and requires
judgment by management about the effect of matters that are inherently uncertain
(see Note 2 - Significant Accounting Policies, Allowance for loan losses).
Expected losses on Member Loans at fair value are recognized through their fair
value adjustments and are offset to the extent that the loans are financed by
Notes that absorb the related expected loan losses.
Operating Expenses:
The following table summarizes our operating expenses for the three month
periods ended December 31, 2011 and 2010, and the nine month periods ended
December 31, 2011 and 2010.
Three Months Ended December 31, Nine Months Ended December 31,
2011 2010 % Change 2011 2010 % Change
Sales, Marketing & Customer Service $ 4,589,830 $ 3,058,648 50 % $ 12,737,145 8,433,373 51 %
Engineering 663,426 514,377 29 % 1,850,301 1,512,946 22 %
General & Administrative 2,007,711 902,311 123 % 5,316,045 2,682,501 98 %
Total Operating Expenses $ 7,260,967 $ 4,475,336 $ 19,903,491 $ 12,628,820
Sales, Marketing and Customer Service Expense
Sales, marketing and customer service expense consists primarily of salaries,
benefits and stock-based compensation expense related to sales, marketing,
customer service, credit and collections personnel, costs of marketing campaigns
and costs of borrower acquisitions such as credit scoring and screening. Sales,
marketing and customer service expenses for the three months ended December 31,
2011 and 2010, were $4,589,830 and $3,058,648, respectively, an increase of
approximately 50%. Comparatively, sales, marketing and customer service expenses
for the nine months ended December 31, 2011 and 2010, were $12,737,145 and
$8,433,373, respectively, an increase of approximately 51%. The increases in
spending during the three and nine months ended December 31, 2011 relative to
the same periods of the prior year primarily occurred in three areas: increases
in personnel related expense, increases in platform related spending such as
customer credit scoring and platform hosting costs, and increases in spending on
new & ongoing marketing programs to attract borrowers and increase investment
activity on the platform.
Engineering Expense
Engineering expense consists primarily of salaries, benefits and stock-based
compensation expense of engineering personnel, and the cost of subcontractors
who work on the development and maintenance of our platform and software
enhancements that run our platform. Engineering expenses for the three months
ended December 31, 2011 and 2010, were $663,426 and $514,377, respectively, an
increase of 29%. Comparatively, engineering expenses for the nine months ended
December 31, 2011 and 2010, were $1,850,301 and $1,512,946, respectively, an
increase of 22%. The increase for the three and nine months ended December 31,
2011 versus the same periods prior year was primarily due to increased contract
labor. We expect these expenses to continue to increase as we grow our business.
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General and Administrative Expense
General and administrative expense consists primarily of salaries, benefits and
stock-based compensation expense related to general and administrative
personnel, professional fees primarily related to legal and accounting fees,
facilities expenses and the related overhead, and expenses related to platform
fraud prevention and remediation. General and administrative expenses for the
three months ended December 31, 2011 and 2010, were $2,007,711 and $902,311,
respectively, an increase of approximately 123%. Comparatively, general and
administrative expenses for the nine months ended December 31, 2011, were
$5,316,045 and $2,682,501, respectively, an increase of approximately 98%. The
increases were primarily the result of higher expenses for personnel, facilities
costs, licenses, permit and fees, and bank service charges. We expect that
general and administrative expenses will decrease as a percentage of overall
operating expenses as we grow our sales efforts in greater proportion than our
general and administrative expenses.
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