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

At September 30, 2013 and December 31, 2012, Member Loans and Notes and Certificates measured at fair value on a recurring basis (in thousands) were:


	Member Loans at fair value						Notes and Certificates at fair value
	September 30, 2013			December 31, 2012			September 30, 2013			December 31, 2012
Aggregate principal balance outstanding	$	1,534,340		$	791,774		$	1,540,631		$	795,842
Fair valuation adjustments		(17,664	)		(10,559	)		(17,656	)		(10,526	)

Fair Value	$	1,516,676		$	781,215		$	1,522,975		$	785,316

We determined the fair values of Member Loans and Notes and Certificates using inputs and methods that are categorized in the fair value hierarchy of ASC 820, as follows (in thousands):


	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Fair Value
September 30, 2013
Assets
Member Loans at fair value	$	—	$	—	$	1,516,676	$	1,516,676
Liabilities
Notes and Certificates at fair value	$	—	$	—	$	1,522,975	$	1,522,975
December 31, 2012
Assets
Member Loans at fair value	$	—	$	—	$	781,215	$	781,215
Liabilities
Notes and Certificates at fair value	$	—	$	—	$	785,316	$	785,316

Instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. Our fair value approach for Level 3 instruments primarily uses unobservable inputs, but may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2013 (in thousands):


	Member Loans			Notes and Certificates
Fair value at December 31, 2012	$	781,215		$	785,316
Issuances		1,366,207			1,115,694
Principal repayments		(341,256	)		(339,048	)
Loans sold to third parties		(250,433	)		—
Recoveries from sale and collection of charged-off loans		(1,180	)		(1,139	)

Carrying value before fair value adjustments		1,554,553			1,560,823
Fair valuation adjustments, included in earnings		(37,877	)		(37,848	)

Fair value at September 30, 2013	$	1,516,676		$	1,522,975

At September 30, 2013, Member Loans underlying Notes and Certificates have original terms of 36 months or 60 months and are paid monthly with fixed interest rates ranging from 6.03% to 26.06% and various maturity dates through September 2018.

As discussed previously in Note 2 – Summary of Significant Accounting Policies, fair values for Member Loans and the related Notes and Certificates are determined using a discounted cash flow model utilizing estimates for credit losses, prepayments, changes in the interest rate environment, and other factors. For Notes and Certificates, we also consider risk factors such as the Company’s continued profitability, ability to operate on a cash-flow positive basis and liquidity position. The majority of fair valuation adjustments included in earnings is attributable to changes in estimated instrument-specific future credit losses. All fair valuation adjustments were related to Level 3 instruments for the nine months ended September 30, 2013. A specific loan that is projected to have higher future default losses than previously estimated has lower expected future cash flows over its remaining life, which reduces its estimated fair value. Conversely, a specific loan that is projected to have lower future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its fair value. Because the payments to holders of Notes and Certificates directly reflect the payments received on Member Loans, a reduction or increase of the expected future payments on Member Loans will decrease or increase the estimated fair values of the related Notes and Certificates. Expected losses and actual loan charge-offs on Member Loans are offset to the extent that the loans are financed by Notes and Certificates that absorb the related loan losses.

Fair value adjustment gains/(losses) for Member Loans were $(15.6 million) and $(7.2 million) for the three months ended September 30, 2013 and 2012, respectively, and $(37.9 million) and $(15.6 million) for the nine months ended September 30, 2013 and 2012, respectively. The fair value adjustments for Member Loans were largely offset by the fair value adjustments of the Notes and Certificates due to the member payment dependent design of the Notes and Certificates and because the principal balances of the Member Loans were very close to the combined principal balances of the Notes and Certificates. Accordingly, the net fair value adjustment gains/(losses) for Member Loans, Notes and Certificates were $(0.006 million) and $(0.141 million) for the three months ended September 30, 2013 and 2012, respectively, and $(0.029 million) and $(0.229 million) for the nine months ended September 30, 2013 and 2012, respectively.

At September 30, 2013, we had 1,097 Member Loans that were 90 days or more past due including non-accrual loans and loans where the borrower has filed for bankruptcy or is deceased, which had a total outstanding principal balance of $12.3 million, aggregate adverse fair value adjustments totaling $10.9 million and an aggregate fair value of $1.4 million. At December 31, 2012, we had 576 Member Loans that were 90 days or more past due including non-accrual loans and loans where the borrower has filed for bankruptcy or is deceased, which had a total outstanding principal balance of $6.4 million, aggregate adverse fair value adjustments totaling $5.7 million and an aggregate fair value of $0.7 million.

Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at September 30, 2013 (in thousands):


					Range of Inputs
	Fair Value		Valuation Techniques	Unobservable Input	Minimum			Maximum
Member Loans	$	1,516,676	Discounted cash flow	Discount rate		5.5	%		13.2	%
				Net cumulative expected loss		2.1	%		29.3	%
Notes & Certificates	$	1,522,975	Discounted cash flow	Discount rate		5.5	%		13.2	%
				Net cumulative expected loss		2.1	%		29.3	%

The valuation technique used for our Level 3 assets and liabilities, as presented in the previous table, is described as follows:

Discounted cash flow – Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.

Significant unobservable inputs presented in the previous table are those we consider significant to the estimated fair values of the Level 3 assets and liabilities. We consider unobservable inputs to be significant, if by their exclusion, the estimated fair value of the Level 3 asset or liability would be impacted by a significant percentage change, or based on qualitative factors such as the nature of the instrument and significance of the unobservable inputs relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the table.

Discount rate – Discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, the fair value, of a financial instrument. The discount rates for the projected net cash flows of 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. The discount rates for the projected net cash flows of the Notes and Certificates are our estimates of the rates of return 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 grades of Member Loans. Discount rates for existing Member Loans, Notes and Certificates are adjusted to reflect the time value of money. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.

Net cumulative expected loss – Net cumulative expected loss is an estimate of the net cumulative principal payments that will not be repaid over the entire life of a new Member Loan, Note or Certificate, expressed as a percentage of the original principal amount of the Member Loan, Note or Certificate. The estimated net cumulative loss is the sum of the net losses estimated to occur each month of the life of a new Member Loan, Note or Certificate. Therefore, the total net losses estimated to occur over the remaining maturity of existing Member Loans, Notes and Certificates are less than the estimated net cumulative losses of comparable new Member Loans, Notes and Certificates. A given month’s estimated net losses are a function of two variables:

(i)

estimated default rate, which is an estimate of the probability of not collecting the remaining contractual principal amounts owed and,

(ii)

estimated net loss severity, which is the percentage of contractual principal cash flows lost in the event of a default, net of the average net recovery, expected to be received on a defaulted Loan, Note or Certificate.

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

The discounted cash flow technique that we use to determine the fair value of our Level 3 Member Loans, Notes and Certificates at fair value requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. For example, increases in the discount rate and estimated net cumulative loss rates will reduce the estimated fair value of Member Loans, Notes and Certificates. When multiple inputs are used within the valuation technique of a Loan, Note or Certificate at fair value, a change in one input in a certain direction may be offset by an opposite change in another input.