To ensure balance in our marketplace, we make periodic adjustments based on investor feedback, marketplace demand, loan performance, and the general interest rate environment.
Please see below for this quarter’s update.
Macroeconomic, Credit, and Interest Rate Observations
Consumers’ continued resilience in tandem with support from the Fed, helped the broader U.S. economy avoid a downturn in 2019, despite the technical recession in manufacturing.1 The jobs market continues to show historic strength. Following lackluster numbers in November and December, January’s 225,000 gain in nonfarm payrolls beat economists’ estimates.2 The strong gain brought the three-month average gain to 211,000, with the unemployment rate holding relatively stable at 3.6%.3
Household debt service burdens are still low overall.
The Fed cut rates three times last year, for a total of 75 basis points, before pausing. With recession fears calmed and inflation still below expectations, the Fed left rates unchanged at its first meeting of 2020. Consistent with its last statement, it conditioned future rate actions on, among other things, labor market conditions, inflation, and overall economic readings.4
Our “test and learn” approach enables us to better calibrate investment offerings, balancing demand while flexibly adjusting to changes in borrower behavior. As an example, we are seeing ongoing demand for our balance transfer product, which enables borrowers to use all or a portion of their loan proceeds to pay down existing debt, and we expect continued expansion in the future. Overall, these loans appear to be performing favorably compared with loans of similar credit risk that we facilitate.
We are also seeing growth in our most recently launched investor platforms: LCX, Levered Certificates, and Select Plus, which collectively are moving us toward our goal of expanded access and liquidity.
Among other initiatives, we are testing a variation of our Levered Certificates product that could attract a broader pool of investors as well as the introduction of loan products with additional terms/maturities to our offerings.
We continue to monitor the interest rate environment to inform potential future changes.
Updated Target & Historical Returns
We take our role in managing returns seriously, continually monitoring the tradeoffs between risk and reward. We cut 8-10% of Prime program loan origination volume over the course of 2019, as we adjusted our portfolio mix away from higher risk borrower segments and toward our core population of debt consolidators. We have budgeted a similar scale of cuts for 2020, with some trimming having already taken place in January.
We believe that last year’s credit changes, bolstered by tools such as our early delinquency model, which has enhanced our ability to detect borrowers more likely to default earlier in the loan cycle, leave us in a solid position for 2020. Following the investments we have been making in technological and other capabilities, we are seeing favorable results on our collections effectiveness, which we have not yet incorporated in our target returns.
Lastly, beginning this quarter we will transition from publishing forecasted returns to instead presenting target returns. We will take reasonable steps to try to achieve these performance targets. Alongside target return figures, we will present vintage returns to provide a gauge of recent performance.
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. Institute for Supply Management, “PMI® at 47.2%; GDP Growing at 1.3%; December Manufacturing ISM® Report On Business®,” https://www.prnewswire.com/news-releases/pmi-at-47-2-gdp-growing-at-1-3-december-manufacturing-ism-report-on-business-300979292.html
, January 3, 2020.
2. “Employment Situation Summary, “https://www.bls.gov/news.release/empsit.nr0.htm
, February 7, 2020, and The Wall Street Journal “Economic Forecasting Survey,” https://www.wsj.com/graphics/econsurvey/
3. “Employment Situation Summary,” https://www.bls.gov/news.release/empsit.nr0.htm
, February 7, 2020; and CNBC, “January adds a much stronger-than-expected 225,000 jobs, with a boost from warm weather,” https://www.cnbc.com/2020/02/07/us-nonfarm-payrolls-january-2019.html,
February 7, 2020.
4. Federal Reserve, “Federal Reserve issues FOMC statement,”https://www.federalreserve.gov/newsevents/pressreleases/monetary20200129a.htm
, January 29, 2020.
5. Average Interest Rate: the weighted average interest rates estimated using the subgrade and maturity mix for issued Prime Program loans in December 2019 while adjusting the measure for any rate and/or credit policy changes going into effect on February 18, 2020.
6. Target Net Charge-Off Rate: the net charge-off rate LendingClub takes reasonable steps to achieve. The net charge-off rate is defined as 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 February 18, 2020. During the management process, LendingClub does not make any efforts to manage to or target certain prepayment or recovery rates. Target Net Charge-Off Rate, and the underlying estimated recovery and prepayment rates, are not a promise of future results and may not accurately reflect actual charge-off, prepayment, or recovery rates. Actual charge-off, prepayment, and recovery 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. Actual charge-off rates only include loans that have been issued for more than 120 days. Loans issued for less than 120 days are excluded from the calculation as these loans are unlikely to reach charged-off status within this time frame.
7. Target Return: the return that LendingClub takes reasonable steps to achieve. Target Return is not a promise of future results and may not accurately reflect actual returns. Target Returns shown are generated utilizing an internal rate of return (IRR) methodology. 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 targets are subject to change.
8. Vintage Return: included in Vintage Return are the most recent four (2018Q2 – 2019Q1) and twenty quarterly vintages (2014Q2 – 2019Q1) with at least eight months of actual performance history available. Vintages are weighted equally and a constant grade and term mix is assumed. For future months where actual performance is not available, future cash flows are estimated by utilizing historical data in a model that accounts for delinquency rate, roll rate, and loss and prepayment curve shape. Vintage Return is an annualized return rate on invested principal and is shown as an internal rate of return (IRR). Vintage Return is not a guarantee of future results and should not be relied upon. Vintage Return is not equivalent to NAR or ANAR.