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^stto 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 interim condensed consolidated financial statements cover the period from January 1, 2013 through September 30, 2013, representing three quarters of our newly adopted fiscal year period and should be read in conjunction with our audited financial statements and notes thereto for the nine-month period ended December 31, 2012.

Consolidation Policies

Our condensed 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 of the VIE 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.

We believe our 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 and LCA have been eliminated. In addition, due to the financial consolidation of the Trust we have also eliminated transactions between these entities and the Trust. 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 condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our condensed 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 fair value determination. These judgments, estimates and assumptions are inherently subjective in nature and 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 primarily of the Company’s funds in certain checking, money market and certificate of deposit accounts 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 and (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.

Member Loans

Beginning October 13, 2008, we have elected the fair value option for Member Loan investments that were financed by Notes and also for the related Notes. Since March 2011, we have also elected the fair value option for all Member Loan investments financed by Certificates and the related Certificates. Under this election, origination fees and all costs incurred in the origination process are recognized in earnings as earned or incurred. Member Loans accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. Interest income on Member Loans is calculated based on the interest rate of the Member Loan and recorded as interest income.

The fair value election for Member Loans, Notes and Certificates allows symmetrical accounting for the timing and amounts recognized for both expected unrealized losses and charge-offs on the Member Loans and the related Notes and Certificates, consistent with the member payment dependent design of the Notes and Certificates.

Member Loans Sold to Unrelated Third Party Purchasers

From January 1, 2013 through June 30, 2013, origination fees and direct Member Loan origination/acquisition costs for loans that were subsequently sold to unrelated third party purchasers and met the accounting requirements for a sale of loans were deferred and included in the overall net investment in the loans purchased. Accordingly, the origination fees for such loans were not included in origination fee revenue and the direct loan origination costs for such loans were not included in operating expenses. A gain or loss on the sale of loans was recorded on the sale date. As part of the sale agreement, we retained the rights to service these sold loans and calculated a gain or loss on the sale of loans sold with servicing retained based on 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. Gains on loans sold were previously reported in “Gain on Sale of Member Loans” and have been reclassified to “Other revenue” in the Condensed Consolidated Statement of Operations.

Effective July 1, 2013, we elected the fair value option for loans that are sold to unrelated third party purchasers. Under this election, all origination fees and all direct costs incurred in the origination process are recognized in earnings as earned or incurred and are not deferred. Beginning July 1, 2013, origination fees for loans purchased and subsequently sold to unrelated third party purchasers are included in “Origination Fees” and direct loan origination costs are included in “Origination and Servicing” operating expense on the Condensed Consolidated Statement of Operations. Loans sold to unrelated third party purchasers that are accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement at fair value are recognized in earnings.

For loans sold to unrelated third party purchasers with servicing retained, we estimate the fair value of the loan servicing asset or liability considering the contractual servicing fee revenue, adequate compensation for our servicing obligation, the current principal balances of the loans and projected servicing revenues given projected defaults and prepayments (if significant) over the remaining lives of the loans. We initially record servicing assets and liabilities at fair value. Subsequently, servicing assets and liabilities are carried at fair value and changes in fair value are reported in non-interest income in the period in which the change occurs.

Additionally, we 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.

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

We use fair value measurements to record Member Loans and Notes and Certificates at fair value on a recurring basis and in our fair value disclosures. The aggregate fair values of the Member Loans and underlying Notes and Certificates are reported as separate line items in the assets and liabilities sections of our condensed 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 and Notes and Certificates are recognized, on a gross basis, in earnings.

We determine the fair value of the Member Loans and Notes and Certificates 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. 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 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 and Notes and Certificates 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), 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 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 Notes or Certificates is the same as the interest rate earned on the underlying Member Loans. At September 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 and Notes and Certificates, as discussed above, see Note 4 – Member Loans at Fair Value and Notes and Certificates at Fair Value.

Accrued Interest Receivable

Interest income on Member Loans is calculated based on the interest rate of the loan and recorded as interest income as earned. Member Loans reaching 120 days delinquent are classified as non-accrual loans, and we stop accruing interest and reverse all accrued but unpaid interest as of such date.

Property, Equipment and Software

Property, equipment and software consists of computer equipment and software, office furniture and equipment, construction in progress, leasehold improvements and internal use software and website development costs are recorded at cost, less accumulated depreciation and amortization.

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For computer equipment and software and office furniture and equipment: Depreciation and amortization is straight-lined over the estimated useful life of each asset class, which generally ranges from two to five years.

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For construction in progress: When the project is complete, costs associated with the project are transferred to the leasehold improvement account or software account and amortized accordingly.

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For leasehold improvements: Costs are amortized over the terms of the lease or the estimated useful life, whichever is shorter.

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For internal use software and website development costs: Development costs are capitalized 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. Internal use software and website development costs are amortized on a straight line basis over the project’s estimated useful life, generally three years.

Capitalized internal use software development costs consist 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.

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, 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 nine months ended September 30, 2013 and 2012, there was no impairment of long-lived assets.

Payable to Member Investors

Payable to member investors primarily represents 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. Fees include loan origination fees (paid by borrower members), servicing fees (paid by investor members and certain Certificate holders) and management fees (paid by certain Certificate holders).

Origination Fees

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 September 30, 2013 and September 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 and we initiate an ACH transaction to transfer funds from our platform’s correspondent bank account to the borrower member’s bank account.

Because of the election to account for Member Loans at fair value, origination fees on Member Loans are recognized upon origination of the loan as a component of non-interest revenue.

Servicing Fees

We record servicing fees paid by Note and certain Certificate holders, which are based on the payments serviced on the related Member Loans, as a component of non-interest revenue when received. Servicing fees can be, and have been, modified or waived at management’s discretion.

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 or any carried interest. Each Fund invests in a Certificate pursuant to a set investment strategy. LCA charges limited partners in the Funds a management fee, payable monthly in arrears, based on a limited partner’s capital account balance at month end.

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

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

Sales, Marketing and Advertising Expense

Sales, marketing and advertising costs, including borrower and investor acquisition costs, are expensed as incurred and included in “Sales and marketing” on the condensed 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, and the offsetting estimated unrealized fair value losses or gains on related Notes and Certificates. As discussed earlier in Note 2, at September 30, 2013, we estimated the fair values of Member Loans 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 and the related Notes and Certificates. The fair valuation adjustment for a given principal amount of a Member Loan 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 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 September 30, 2013, the Company has net credit risk exposure on $0.4 million of fair value of Member Loans held that were financed directly by LendingClub. At September 30, 2012, we had net credit risk exposure on $0.5 milloin of fair value of Member Loans held that were financed directly by LendingClub.

Stock-based Compensation

All stock-based awards made to employees are recognized in the condensed 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 or if future forfeitures are expected to differ from recent actual or previously expected forfeitures. 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 option pricing 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

During the third quarter of 2013, we changed the definitions used to classify operating expenses. Operating expenses were formerly classified as Sales, marketing and customer service, Engineering, and General and administrative. Our new categories of operating expenses are Sales and marketing, Origination and servicing, and General and administrative. As a result of the new classification, loan origination and servicing costs which were previously included in Sales, marketing and customer service are now included as a separate financial statement line and engineering costs which represent technology related expenses are categorized within General and administrative expenses. The changes had no impact to the total operating expenses or net income. Prior period amounts have been reclassified to conform to the current presentation.

Impact of New Accounting Standards

We do not expect recently issued accounting pronouncements to have any impact on our results of operations, financial position, or cash flow for the three and nine months ended September 30, 2013.