Q4 2018 LendingClub Platform Update
To maintain equilibrium in the LendingClub marketplace, periodic adjustments are made, taking into account investor feedback, marketplace demand, loan performance, and the general interest rate environment. In line with that objective, effective February 19, 2019, credit policy is being tightened on certain loan grades and terms, and interest rates are increasing for loan grades B-E by a weighted average of 57 basis points.
Please see below for our quarterly update on the credit environment and platform performance. We believe marketplace loans can serve as powerful diversifiers for many investors’ portfolios, especially in volatile markets.
Macroeconomic, credit, and interest rate observations
Economic fundamentals remain strong, despite increased stock market volatility and uncertainty about the longer-term macroeconomic outlook. Consumers remain healthy, with the unemployment rate, growth in payrolls, and household debt service ratios still favorable. The most recent jobs report indicated the economy added 304,000 jobs in January, outperforming most economists’ expectations. While some economists point to interest rates, uncertainty over trade, and other geopolitical risks as reasons for caution, broad economic indicators including the latest Manufacturing Institute for Supply Management (ISM) index of manufacturing activity continue to suggest the economy is healthy. GDP is expected to come in at 2.5% for the fourth quarter of 2018.
Across the industry, credit is broadly stable, and delinquency rates remain flat. However, we have seen some unsecured lenders tighten credit and make marginal pricing adjustments citing the late stage of the economic cycle and the generally high availability of consumer credit.
The Federal Reserve Board raised its benchmark federal funds rate an additional 25 basis points at its December meeting, for its fourth hike in 2018. However, following significant equity market volatility into year-end, the potential for a disorderly Brexit, and signs of softening growth in China, the Fed signaled a willingness to pause its planned 2019 rate increases at its most recent meeting “in light of global economic and financial developments.”
LendingClub employs a test-and-learn approach that enables us to prepare for a variety of credit environments. Over the past several months have seen additional tests undertaken around pricing, loan size, and user experience and enhanced our ability to detect borrowers who are more likely to default early in the loan cycle. Our continued emphasis on credit quality allows us to prepare for—and react quickly to—changes in economic conditions.
In 2018, credit policy was tightened gradually and consistently throughout the year and interest rates were raised several times. Effective today, February 19, 2019, credit policy is being tightened on certain loan grades and terms and interest rates are increasing by a weighted average of 57 basis points across grades B-E. We will 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 5.6% for new vintages, versus our projection of 5.8% last quarter. Looking across the portfolio, we are seeing stable performance overall, and improvements in higher risk segments based on changes made to the model in mid-2018. Please see the updated return forecast below. These projections incorporate the impact of new forecasts as well as the interest rate increases going into effect on February 19.
As always, we will keep investors apprised of changes on the platform.
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.
 Source: The Federal Reserve Board, “Household Debt Service and Financial Obligations Ratios,” https://www.federalreserve.gov/releases/housedebt/default.htm, as of 1/8/19.
 Source: WSJ.com, “Economists See U.S. Recession Risk Rising,” https://www.wsj.com/articles/economists-see-u-s-recession-risk-rising-11547132401, 1/10/19.
 Source: Institute for Supply Management, “January 2018 Manufacturing ISM® Report On Business,® https://www.instituteforsupplymanagement.org/about/MediaRoom/newsreleasedetail.cfm?ItemNumber=31024&SSO=1, 2/1/19.
 Source: Federal Reserve Bank of Atlanta, GDPNow, https://www.frbatlanta.org/cqer/research/gdpnow.aspx, as of 2/4/19.
 Source: Moody’s Analytics, based on personal loan data provided by the American Bankers Association.
 Source: WSJ.com, “Credit-Card Spending Limits in the Crosshairs as Issuers Grow Cautious,” https://www.wsj.com/articles/credit-card-spending-limits-in-the-crosshairs-as-issuers-grow-cautious-1540805401, 10/29/18 and Kroll Bond Rating Agency, “2018 Consumer Loan Marketplace Lending Year In Review and 2019 Outlook,” 1/31/19.
 Source: Federal Open Market Committee, “Transcript of Chairman Powell’s Press Conference,” https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf, 1/30/19.
 “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 December 2018 and calculating the interest rate that would have applied had such loans been issued following the rate and credit policy changes going into effect on February 19, 2019.
 “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 credit policy changes going into effect on February 19, 2019. Projected Charge-Off Rate is not a promise of future results and may not accurately reflect actual charge-off rates. Actual charge-off 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.
 “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.
“Interest Rate” is equal to the weighted average stated borrower interest rate for the loan grade or mix of loan grades (whichever is applicable).
“Projected Fees” for loan purchasers means the aggregate estimated impact of LendingClub’s then-applicable: servicing fee (1%), collection fee (18%), recovery fee (18%), and an administrative fee (0.10%), each as of the date above as well as the impact of interest not earned during the administrative holding period in the first month (2 business days).
“Projected Fees” for Note investors means the estimated impact of LendingClub’s applicable fees including: investor servicing fee of 1% of the amount of any borrower payments received by the payment due date or during applicable grace periods, and collection fee if applicable as well as the impact of interest not earned during the administrative holding period in the first month (2 business days). The service fee is not an annual fee and may therefore reduce annual investor returns by more or less than 1%. We estimate the collection fee based on expected charge-off rates and the expected number of late payments that will be collected on past due loans with a given grade and term. For more detail on LendingClub fees for Note investors, please click here. Individual results may vary, and projections can change. Past performance is no guarantee of future results.