2. Summary of Significant Accounting Policies

Change in Fiscal Year

On December 19, 2012, our Board of Directors approved a change in our fiscal year-end from March 31^st to December 31^st. The change was effective as of December 31, 2012 and we filed a transition report with the Securities and Exchange Commission (“SEC”) which covered the nine-month period ending December 31, 2012. The accompanying condensed consolidated financial statements covers the period from January 1, 2013 through June 30, 2013, representing two quarters of our newly adopted fiscal year period and should be read in conjunction with our audited financial statements and notes thereto for the period ended December 31, 2012.

Consolidation Policies

Our consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, LC Advisors, LLC (“LCA”), a registered investment advisor, and LC Trust I (the “Trust”), a Delaware business trust. Our policy is to consolidate the accounts of entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or variable interest entity (“VIE”) and if the accounting guidance requires consolidation.

Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entities’ operations. For these types of entities, our determination of whether we have a controlling financial interest is based on ownership of a majority of the entities’ voting equity interest or through control of management of the entities.

VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We determine whether we have a controlling financial interest in a VIE by considering whether our involvement with the VIE is significant and whether we are the primary beneficiary based on the following:

We have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance;

The aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE; and,

Qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE.

VIEs in which we are the primary beneficiary are consolidated into our financial statements. The Company’s beneficial ownership of a controlling financial interest in the Trust has qualified and continues to qualify as an equity investment in a VIE that should be consolidated for financial accounting and reporting purposes. All intercompany accounts between the Company, the Trust and LCA have been eliminated. We perform on-going reassessments on the status of the entities and whether facts or circumstances have changed in relation to our involvement in VIEs which could cause our conclusion to change.

Use of Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, assumptions and estimates include but are not limited to the following: (i) revenue recognition; (ii) fair value determinations for Member Loans, Notes and Certificates; (iii) stock-based compensation expense; (iv) provision for income taxes, net of valuation allowance for deferred tax assets; and (v) loan servicing asset/liability value determination. These judgments, estimates and assumptions are inherently subjective in nature; actual results may differ from these judgments, estimates and assumptions, and the differences could be material.

Cash and Cash Equivalents

Cash and cash equivalents include various unrestricted deposits with financial institutions in checking, money market and short-term certificate of deposit accounts. We consider all highly liquid investments with stated maturity dates of three months or less from the date of purchase to be classified as cash equivalents. Cash equivalents are recorded at cost, which approximates fair value.

Restricted Cash

Restricted cash consists of the Company’s funds in certain checking, money market, certificate of deposit accounts and a letter of credit that are: (i) pledged to or held in escrow by our correspondent banks as security for transactions processed on or related to our platform; (ii) pledged through a credit support agreement with a Certificate holder; (iii) received from Member investors but not yet applied to their accounts on the platform and transferred to segregated bank accounts that hold investors’ funds; and (iv) used to guarantee lease obligations related to our headquarters.

Member Loans

All Member Loans purchased from April 7, 2008 through November 2012, have been held for investment on our balance sheet based on management’s intent and ability to hold such loans for the foreseeable future or to maturity. In addition to Member Loans purchased to be held for investment, beginning December 2012, certain Member Loans have been purchased and sold to third parties.

Beginning October 13, 2008, Member Loans were able to be financed by Notes issued by us to investors, and the majority of Member Loans purchased since that date have been financed in that manner. These Notes are special limited recourse obligations of LendingClub, in that LendingClub has no obligation to make a payment on a Note until LendingClub receives a payment from the underlying member borrower. Each series of Notes corresponds to a single Member Loan facilitated through our platform and the payments to investors in the Notes are directly dependent on the timing and amounts of payments received on the related Member Loan. If we do not receive a payment on the Member Loan, we are not obligated to and will not make any payments on the corresponding Notes. In conjunction with this financing structure effective as of October 13, 2008, we adopted the provisions of ASC 825-10, which permits companies to choose to measure certain financial instruments and certain other items at fair value. Accordingly, we have elected the fair value option for Member Loan purchases that were financed by Notes (“Member Loans at fair value”) and also for the related Notes. Since March 2011, we have also elected the fair value option for all Member Loan purchases financed by Certificates and the related Certificates. The estimated unrealized gains and losses on financial instruments for which the fair value option has been elected are reported in earnings.

Member Loans at Fair Value and Notes and Certificates at Fair Value

The aggregate fair values of the Member Loans at fair value and Notes and Certificates at fair value are reported as separate line items in the assets and liabilities sections of our consolidated balance sheets using the methods and disclosures related to fair value accounting that are described in ASC 820, Fair Value Measurements and Disclosures, which provides a framework for measuring the fair value of assets and liabilities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Changes in the fair value of the Member Loans at fair value and Notes and Certificates at fair value are recognized, on a gross basis, in earnings.

We determine the fair value of the Member Loans at fair value and Notes and Certificates at fair value in accordance with the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs, which generally requires significant management judgment, when measuring fair value. ASC 820 establishes the following hierarchy for categorizing these inputs:

Level 1 –

Quoted market prices in active markets for identical assets or liabilities.

Level 2 –

Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).

Level 3 –

Valuation is generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimate of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

Since observable market prices and inputs are not available for similar assets and liabilities, the Member Loans at fair value and Notes and Certificates at fair value are considered Level 3 financial instruments. We estimated the fair values of Member Loans and their related Notes and Certificates using a discounted cash flow valuation methodology. The estimated fair value of Member Loans is computed by projecting the future contractual cash flows to be received on the loans, adjusting those cash flows for our expectations of prepayments (if significant) and defaults and losses over the life of the loans, and recoveries, if any. We then discount 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. Expected recoveries reflect actual historical recovery experience for the various types of defaulted loans, the contractual arrangements with collection agencies and actual proceeds received on sales of defaulted loans. 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.

LendingClub’s and the Trust’s obligation to pay principal and interest on any Note or Certificate (as applicable) is equal to the pro-rata portion of the payments, if any, received on the related Member Loan subject to applicable fees. The gross effective interest rate associated with a Note or a Certificate is the same as the interest rate earned on the related Member Loan. At June 30, 2013, the discounted cash flow methodology used to estimate the Notes’ and Certificates’ fair values uses the same projected net cash flows as their related Member Loans. The discount rates for the projected net cash flows of the Notes and Certificates are our estimates of the rates of return, including risk premiums (if significant) that investors in unsecured consumer credit obligations would require when investing in Notes issued by LendingClub and Certificates issued by the Trust with cash flows dependent on specific credit grades of Member Loans.

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 discussed above, see Note 4 – Member Loans at Fair Value and Notes and Certificates at Fair Value.

Accrued Interest Receivable

Accrued interest receivable on Member Loans is reversed for any loan reaching 120 days of delinquency.

Property and Equipment

Property and equipment which consists of computer equipment and software, office furniture and equipment and leasehold improvements are recorded at cost, less accumulated depreciation and amortization. For computer equipment and software and office furniture and equipment, depreciation and amortization is straight-lined over the estimated useful life of each class of depreciable assets, which generally range from three to five years. For leasehold improvements, we amortize costs when the project is complete. Leasehold improvements are amortized over the terms of the lease or their estimated useful lives, whichever is shorter.

Long-lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, we evaluate potential impairments of our long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in impairment include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business and significant negative industry or economic trends. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. For the six months ended June 30, 2013 and 2012, there was no impairment of long-lived assets.

Internal Use Software and Website Development

Internal use software and website development costs are accounted for in accordance with ASC 350-40, Internal Use Software and ASC 350-50, Website Development Costs. We capitalize development costs for internal use software for the LendingClub website and other internal uses when preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software developments costs consists of salaries and payroll related costs for employees and fees paid to third-party consultants who are directly involved in development efforts.

Costs related to preliminary project activities and post implementation activities including training and maintenance are expensed as incurred. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Capitalized costs are included in “Property and equipment” in the consolidated balance sheet and are amortized on a straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on a periodic basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Deposits

The majority of the total balance of deposits placed with various service providers is attributable to a deposit we have placed with a payment service provider that processes investor payment transactions on an ongoing basis and is restricted as to withdrawal throughout the contract term and the amount of the deposit depends on the volume of payment transactions processed. As of June 30, 2013, we have terminated our contract with this payment service provider and expect our deposit to be returned to us within 90 days of the effective date of termination.

Payable to Member Investors

Payables to member investors primarily represent payments-in-process received from member investors that, as of the last day of the period, have not been credited to their accounts on the platform and transferred to the separate bank account that holds investors’ uninvested funds in trust for them.

Revenue Recognition

We recognize revenue in accordance with ASC 605, Revenue Recognition. Revenues primarily result from fees earned, gains on sales of loans to third party purchasers and net interest income. Fees include loan origination fees (paid by borrower members), servicing fees (paid by investor members and third party purchasers) and management fees (paid by certain Certificate holders).

The loan origination fee charged to each borrower member is determined by the term and credit grade of that borrower’s Member Loan and, as of June 30, 2013 and June 30, 2012, ranged from 1.11% to 5.00% of the aggregate Member Loan amount. The Member Loan origination fees are included in the annual percentage rate 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. A Member Loan is considered issued when we record the transfer of funds to the borrower member’s account on our platform, following which we initiate an ACH transaction to transfer funds from our platform’s correspondent bank account to the borrower member’s bank account.

The recognition of fee revenue, gain on sale (if applicable), and interest income is determined by the accounting method applied to each Member Loan, which include:

•

Member Loans at Fair Value – Member Loans originated on or after October 13, 2008, for which fair value accounting was elected.

•

Member Loans Sold Directly to Third Party Purchasers – Member Loans sold to third party purchasers, with servicing retained.

The recognition of fee revenue, gain on sale (if applicable) and interest income for Member Loans under the two accounting methods is described below.

Member Loans at Fair Value

Because of the election to account for Member Loans at fair value, origination fees on Member Loans at fair value are recognized upon origination of the loan and included as a component of non-interest revenue (see Note 11 – Non Interest Revenue). Direct costs to originate Member Loans at fair value are recognized as operating expenses as incurred.

We record interest income on Member Loans at fair value as earned. Loans reaching 120 days delinquent are classified as nonaccrual loans, and we stop accruing interest and reverse all accrued but unpaid interest as of such date.

Member Loans Sold Directly to Third Party Purchasers

Loans purchased that are subsequently sold to third party purchasers, and which meet the accounting requirements for a sale of loans are classified as “held for sale.” The related origination fees and direct loan origination/acquisition costs for loans classified as “held for sale” are deferred and included in the “overall net investment in the loans” purchased. Accordingly, the origination fees for such loans are not included in origination fee revenue and the direct loan origination costs for such loans are not included in operating expenses. A sale of loans to third party investors requires sale terms whereby the Company does not retain certain financial interests in, or obligations related to, the loans that require the transaction to be accounted for as a borrowing by the Company.

Loans typically are sold by the Company the same day the loan is purchased by us from WebBank. A gain or loss on the sale of loans with servicing retained is recorded on the sale date. In order to calculate the gain or loss on the sale of the loans with servicing retained, the Company first determines whether the terms of the servicing arrangement with the investor result in a net servicing asset (i.e., when contractual/expected servicing revenues adequately compensate the Company) or a net servicing liability (i.e., when contractual/expected servicing revenues do not adequately compensate the Company). When contractual/expected servicing revenues do not adequately compensate the Company, a portion of the gross proceeds of the loans sold with servicing retained are allocated to the recording of a net servicing liability. Conversely, when contractual/expected servicing revenues provide more than adequate compensation to the Company, the excess servicing compensation is allocated to the gross proceeds of the loans sold and results in the recording of a net servicing asset. The gain or loss on the sale of loans sold with servicing retained equals the net proceeds from the sale of loans, after allocation of proceeds from/(toward) the recording of any net servicing asset/(liability), minus the net investment in the loans being sold.

Additionally, the Company will record a liability for significant estimated post-sale obligations or contingent obligations to the purchaser of the loans, if any, such as delinquent/fraudulent loan repurchase obligations or excess loss indemnification obligations.

At each period-end, the Company estimates the current fair value of the loan servicing asset or loan servicing liability considering the contractual servicing fee revenue, adequate compensation for the Company’s servicing obligations, current principal balances of the loans and projected defaults and prepayments over the remaining lives of the loans.

Servicing Fees

We record the servicing fees paid by Note holders, which are based on the payments serviced on the related Member Loans at fair value, as a component of non-interest revenue when received.

Servicing Asset/Liability

For loans sold to third party purchasers, the Company estimates the current fair value of the loan servicing asset or loan servicing liability considering the contractual servicing fee revenue, adequate compensation for the Company’s servicing obligations, the current principal balances of the loans and projected defaults and prepayments over the remaining lives of the loans.

Management Fees

LCA acts as the general partner for certain private funds (the “Funds”) in which it has made no capital contributions and does not receive any allocation of the Funds’ income, expenses, gains, losses nor any carried interest. Each Fund invests in a Certificate issued by the Trust pursuant to a set investment strategy. LCA charges limited partners in the Funds a monthly management fee, payable monthly in arrears, based on a limited partner’s capital account.

LCA also earns management fees paid by separately managed account (“SMA”) investors, paid monthly in arrears, based on the month-end balances in the SMA accounts.

These management fees are classified as a component of non-interest revenue in the consolidated statements of operations and are recorded as earned. Management fees can be, and have been, modified or waived at the discretion of LCA.

Marketing and Advertising Expense

Marketing and advertising costs are expensed as incurred and included in “Sales, marketing and operations” on the consolidated statement of operations.

Fair Valuation Adjustments of Member Loans at Fair Value and Notes and Certificates 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 unrealized fair value losses or gains on related Notes and Certificates at fair value. As discussed earlier in this Note 2, at June 30, 2013, we estimated the fair values of Member Loans at fair value and related Notes and Certificates using a discounted cash flow valuation methodology. At each reporting period, we recognize fair valuation adjustments for the Member Loans at fair value and for the Notes and Certificates. The fair valuation adjustment for a given principal amount of a Member Loan at fair value will be approximately equal to the corresponding estimated fair valuation adjustment on the combined principal amounts of related Notes and Certificates because the same net cash flows of the Member Loan and the related Notes and/or Certificates are used in the discounted cash flow valuation methodology.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, Member Loans financed directly by LendingClub and the related accrued interest receivable, and deposits with service providers. We hold our cash and cash equivalents and restricted cash in accounts at quality regulated domestic financial institutions. We are exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds the FDIC insured amounts. As of June 30, 2013, the Company has net credit risk exposure on $0.4 million fair value of Member Loans held that were financed with sources of funds other than Notes or Certificates.

We obtain third-party credit reports and perform other evaluations of our borrower members’ financial condition, as needed, and do not allow borrower members to have more than two Member Loans outstanding at any one time. All of our loans are unsecured but we maintain a fair value allowance for Member Loans. Additionally, the potential gross credit risk to the Company from Member Loans is significantly mitigated to the extent that loans are financed by Notes or Certificates which absorb the loans’ credit losses pursuant to the member payment dependency provision.

The deposit placed with the payment service provider is short-term and generally may be applied toward amounts due to the provider as services are rendered. The deposit is ongoing throughout the contract term and is required to be returned to us when payment transaction volumes decline and upon termination or expiration of the agreement. The payment services agreement is cancelable by us at any time.

Stock-based Compensation

All stock-based awards made to employees, including grants of employee stock options, restricted stock and employee stock purchase rights, are recognized in the consolidated financial statements based on their respective grant date fair values. Any benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash inflow and cash outflow from operating activities. The stock-based compensation related to awards that are expected to vest is amortized using the straight-line method over the vesting term of the stock-based award, which is generally four years.

The fair value of share-option awards is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the expected term of the option award, expected volatility of our stock price and expected future dividends, if any.

Forfeitures of awards are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those stock-based awards that are expected to vest.

Stock-based awards issued to non-employees are accounted for in accordance with provisions of ASC 718-505-50, Equity-Based Payments to Non-Employees, which requires that equity awards be recorded at their fair value. We use the Black-Scholes model to estimate the value of options granted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation. The assumed volatility of the price of our common stock was based on comparative public-company stock price volatility.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation for accrued interest receivable, prepaid and other assets, accrued interest payable, accrued expenses and other liabilities, and payable to investor members. These reclassifications had no impact on previously reported results of consolidated operations or consolidated stockholders’ equity.

Impact of New Accounting Standards

We do not expect the adoption of recently issued accounting pronouncements to have any impact on our results of operations, financial position, or cash flow.