To ensure balance in our marketplace, we make periodic adjustments based on investor feedback, marketplace demand, loan performance, and the general interest rate environment.
In line with that goal, we continue to optimize our portfolio mix through targeted cuts to certain loan grades and terms within the standard loan program.
Please see below for this quarter’s commentary.
Macroeconomic, Credit, and Interest Rate Observations
The U.S. economy continues to show strength, with resilient consumers offsetting weakness in industrial sectors of the economy. October’s jobs report showed unemployment at a 50-year low in addition to upward revisions to jobs data from the two prior months.1
Household debt service burdens are still low overall.2 Looking across consumer credit, asset performance continues to be in line with expectations.
At its October meeting, the Federal Reserve cut rates for the third time this year, meeting consensus expectations for a 25-basis point cut.3 At the same time, it signaled October’s cut could mark the end of a series that has come amid pressure from financial markets and the Trump administration, and against a backdrop of still strong economic growth.
We continue to employ a “test and learn” approach, optimizing investment offerings to proactively balance investor demand and borrower behavior. One example of this is the launch of our balance transfer loan product, which early indications suggest is having a positive impact on loss rates.
We launched three new investor products in the third quarter (Levered Certificates, Select Plus, and LCX), which should collectively enable more investment through our marketplace.
In tandem with the adjustments we have been making across all loan grades, we continue to monitor the interest rate environment to inform potential future changes.
Updated Pricing & Return Forecast
Overall, we expect weighted average returns at a portfolio level to be 5.1% versus 5.3% for the last quarter for new vintages, reflecting updates to our forecasts.
Over the last several quarters we have focused on tightening certain higher risk segments, specifically borrowers seeking loans for purposes other than debt consolidation. This quarter, we are enhancing our tools and capabilities in collections. We anticipate all of these efforts, in addition to increasing our balance transfer population, should leave us better positioned to meet potential future changes in the economic environment.
Please see the updated return forecast below.
Platform Summary and Projections as of November 5, 20194, 5, 6
We will keep you informed as and when we make changes.
Safe Harbor Statement
Some of the statements above are “forward-looking statements.” The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “project,” “will,” “would” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual performance of the overall platform has differed from projected performance in the past and could differ in the future. Factors that could cause actual results to differ materially from those contemplated by these forward statements include: increases to unemployment rates, particularly if such increases are concentrated in populations with a greater propensity to take loans facilitated by our platform; changes to consumer credit behaviors; stagnation or reduction in the growth of the nation’s gross domestic product or uncertainties created by political changes associated with a change in presidential administrations, the Company’s ability to continue to attract and retain new and existing retail and institutional investors; competition; and demand for the types of loans facilitated by the Company and those factors set forth in the section titled “Risk Factors” in the Annual Report on Form 10-K, filed with the SEC. LendingClub 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. Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements. LendingClub does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
1. Source: Bureau of Labor Statistics: https://www.bls.gov/news.release/empsit.nr0.htm
2. Source: Moody’s Analytics.
3. Source: Wall Street Journal: https://www.wsj.com/graphics/econsurvey/
4. “Average Interest Rate” is the hypothetical weighted average interest rates we obtained by using the subgrade and maturity mix for issued Prime Program loans in September 2019 and calculating the interest rate that would have applied had such loans been issued following the rate and/or credit policy changes going into effect on November 5, 2019.
5. “Projected Charge-Off Rate” is LendingClub’s projection of the aggregate dollar amount of loan principal charged-off, net of any amounts recovered and accounting for the impact of amounts prepaid, as an annualized percentage of the aggregate dollar amount of loan principal for Prime Program loans issued following the rate and/or credit policy changes going into effect on November 5, 2019. Projected Charge-Off Rate is not a promise of future results and may not accurately reflect actual charge-off or prepayment rates. Actual charge-off and prepayment rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single loan, borrower or group of loans or borrowers, as well as macroeconomic conditions.
6. “Projected Return” is a measure of the estimated annualized return rate on invested principal using an internal rate of return (IRR) methodology. The IRR is computed using monthly cash flow projections. Monthly cash flow projections are calculated as follows: the scheduled principal and interest payments based on the Interest Rate, minus the amount of such principal and interest payments lost due to the Projected Charge-Off Rate, minus Projected Fees (as disclosed below). Monthly IRR figures are annualized by multiplying the monthly IRR figure by 12, then converted to percentages. Projected Returns are calculated based on grade and maturity mix described in the “Average Interest Rate” disclaimer above. Projected Return is not a promise of future results and may not accurately reflect actual returns. Actual returns experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans or borrowers, as well as macroeconomic conditions. Individual results may vary, and projections are subject to change. The information presented is not intended to be investment advice, guidance, or a guarantee of the performance of any Note or loan. Notes are offered by prospectus filed with the SEC and investors should review the risks and uncertainties described in the prospectus prior to investing. Actual results may be materially worse.