Quarterly Investor Update from Our CIO
A core strength of LendingClub’s marketplace model is the ability to incorporate data insights to quickly and responsibly adapt for the benefit of borrowers and investors.
We update our investors regularly on what’s happening on the platform to give them a sense of what they can expect. Today LendingClub’s Chief Investment Officer Sid Jajodia sent his quarterly update to investors, which included observations on platform performance and the economy, and updates on forecasts and projected investor returns. Since our last quarterly update, delinquency rates across most grades and terms in the existing loan portfolio have continued to stabilize and projected returns remain solid, ranging from 4-9%. Please see the full text of his letter below, and feel free to reach out to email@example.com with any questions.
A key aspect of LendingClub’s mission is delivering solid, risk-adjusted returns to investors. As our investors know, we provide quarterly updates on platform performance and any changes to credit criteria.
Over the past quarter, delinquency rates across most grades and terms in the existing loan portfolio continued to stabilize. Projected returns on the platform overall1 are largely unchanged relative to our last update in January 2017. Projected returns remain solid, ranging from 4% to 9% across the platform.
We adjust our forecasts regularly to keep investors up-to-date. This quarter we have refined our loss projections to reflect the latest data on seasoned loan performance. As per our regular process, we have also optimized interest rates within subgrades this quarter.
Observations on Platform Performance
Our approach to risk management is a continuous, proactive process. We test and monitor borrower results and, when necessary, adjust using a disciplined, deliberate and data-driven approach.
We made several changes in 2016 and early 2017 designed to reduce risk on the platform. (Changes included higher interest rates as well as credit policy tightening designed to remove borrower populations with an increased propensity to accumulate debt. We also invested in additional tools to drive collections effectiveness.)
As mentioned above, delinquency rates across most grades and terms in the existing loan portfolio continued to stabilize during the past quarter.
Q1 2017 Update
A range of factors influence returns on the LendingClub platform, including the overall U.S. economy, borrower performance, and prevailing interest rates. We have provided an update on a few factors that influence returns on the platform below:2
- Economic Backdrop. The American economy remains robust but growth remains slow. Unemployment remains at historically low levels, measuring at 4.5% as of March 2017. On the other hand, GDP grew at an annual pace of just 0.7% in the first quarter of 2017, its slowest quarterly growth rate since the first quarter of 2014.
- Borrower Performance. Recent vintage performance is coming in broadly in line with our expectations. We see delinquency rates stabilizing across most grades and terms which we attribute to changes made in 2016.
- Interest Rates. The overall interest rate environment remains low, though the Federal Reserve raised its target rate by 25 bps in March. Effective May 4, 2017, interest rates on the LendingClub platform are being optimized within subgrades. In total, interest rates for the platform are increasing slightly (by a weighted average of 30 basis points).3
We continuously refine our methodology and update loss forecasts quarterly to give investors a sense of what they can expect. This quarter, we recalibrated our forecast to reflect the latest data on seasoned loan performance.
Projected investor returns (IRRs) for loans issued after today are substantially unchanged relative to last quarter. Please see the summary table below, which includes the impact of interest rates effective May 4, 2017 and the new forecast.
Our continuous enhancement cycle and quarterly loss forecast process help us anticipate and adapt faster on behalf of borrowers and investors alike. The difference between LendingClub and other financial institutions is the degree of transparency we provide to investors so they can make quick and informed decisions on their portfolios.
As always, we will continue to keep our investors apprised of changes on the platform. Please feel free to reach out to our team with any questions. We look forward to continuing to have you as an investor for years to come.
LendingClub Chief Investment Officer
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. Lending Club 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. Lending Club 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.
1Platform overall means the weighted average projected return for loans or Notes issued after May 4, 2017.
2Investor returns are also impacted by other factors, such as prepayment rates, the size and diversity of a portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans, or borrowers, as well as other externalities and macroeconomic conditions.
3Calculated using the grade and maturity mix for issued loans for the six weeks ending March 15, 2017, adjusted to reflect interest rate changes and credit policy changes effective May 4, 2017.
4“Average Interest Rate” is based on weighted average interest rates using the grade and maturity mix for issued loans for the six weeks ending March 15, 2017, adjusted to reflect interest rate changes and credit policy changes effective May 4, 2017.
5“Projected Annualized Net Credit Loss (w/ Prepayment)” (also known as Expected Charge-Off Rate) is Lending Club’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 all loans issued under the Prime Program after May 4, 2017. Projected Annualized Net Credit Loss (w/ Prepayment) 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 (meaning for all funds then invested in Notes or loans) using an internal rate of return (IRR) methodology using a monthly term. 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 Expected Charge-Off Rate minus Expected Fees. Monthly IRR figures are annualized by multiplying the monthly IRR figure by 12. Projected Returns are calculated based on grade and maturity mix for issued loans for the six weeks ending March 15, 2017, adjusted to reflect interest rate changes and credit policy changes effective May 4, 2017. 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. 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 vary. “Interest Rate” is equal to the weighted average stated borrower interest rate for the loan grade or mix of loan grades (whichever is applicable) using the grade and maturity mix for issued loans for the six weeks ending March 15, 2017, adjusted to reflect interest rate changes and credit policy changes effective May 4, 2017. “Expected Charge-Off Rate” is defined above as “Projected Annualized Net Credit Loss (w/Prepayment).” “Expected Fees” for loan purchasers means the aggregate estimated impact of Lending Club’s servicing fee (1%), collection fee (18%), recovery fee (18%), and an administrative fee (0.10%). “Expected Fees” for Note investors means the estimated impact of all applicable fees as well as the impact of interest not earned during the administrative holding period in the first month (2 business days). Applicable fees are Lending Club’s service fee and collections fee. Lending Club charges an investor service fee of 1% of the amount of payments received within 15 days of the payment due date. 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 Lending Club fees for Note investors, please click here. Individual results may vary and projections can change. Past performance is no guarantee of future results.