Happen, Inc. (LC) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Annual Report, particularly in “Part I – Item 1A. Risk Factors.”

Overview

LendingClub is America’s leading digital marketplace bank. The Company was founded in 2006 and brought a traditional credit product – the installment loan – into the digital age by leveraging technology, data science, and a unique marketplace model. In doing so, we became one of the largest providers of unsecured personal loans in the United States. In February 2021, LendingClub completed the acquisition of an award-winning digital bank, Radius, becoming a bank holding company and forming LC Bank as its wholly-owned subsidiary. We operate the vast majority of our business through LC Bank, as a lender and originator of loans and as a regulated bank in the United States.

Executive Summary

•Loan originations: Total loan originations for the year ended December 31, 2021 were $10.4 billion, improving 139% compared to the prior year. The increase was primarily driven by the growth in unsecured personal loan origination volume.

•Total net revenue: Total net revenue for the year ended December 31, 2021 was $818.6 million, improving 157% compared to the prior year and outpacing origination growth of 139%. The increase was primarily due to the growth in marketplace revenue and increased net interest income.

◦Marketplace revenue: Marketplace revenue for the year ended December 31, 2021 was $578.6 million, improving 136% compared to the prior year. The increase was primarily driven by a higher volume of marketplace loans sold.

◦Net interest income: Net interest income for the year ended December 31, 2021 was $212.8 million, improving 259% compared to the prior year. The increase was primarily driven by an increase in unsecured personal loans retained in the HFI loan portfolio at amortized cost and low-cost deposit funding replacing higher-cost third-party warehouse funding.

•Provision for credit losses: Provision for credit losses for the year ended December 31, 2021 was $138.8 million compared to $3.4 million in the prior year. The increase was primarily due to the origination of unsecured personal loans retained as HFI at amortized cost and the impact from applying CECL to the HFI portfolio and to the Radius loans upon their acquisition.

•Total non-interest expense: Total non-interest expense for the year ended December 31, 2021 was $661.4 million, increasing 32% compared to the prior year. The increase was primarily driven by an increase in variable marketing expenses based on higher origination volume and an increase in headcount due to the Acquisition and hiring in key functions.

•Consolidated net income: Consolidated net income for the year ended December 31, 2021 was $18.6 million, compared to a loss of $(187.5) million in the prior year.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

•Loans and leases held for investment: Loans and leases held for investment, net of allowance for loan and lease losses, were $2.8 billion at December 31, 2021.

•Deposits: Total deposits at December 31, 2021 were $3.1 billion and are in line with growth in loans and leases held for investment.

•Notable items: For the year ended December 31, 2021, consolidated net income of $18.6 million and diluted earnings per share of $0.18 were negatively impacted by $198.0 million of notable items (net of tax): $129.8 million of CECL provisioning, less net charge-offs, and $68.2 million of revenue deferrals, net of accretion, both driven by strong retained loan growth. These items reduced our diluted earnings per share by $1.94 in 2021.

The above summary should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in its entirety. For additional discussion related to our operating segments, see “Segment Information.”

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Financial Highlights

We regularly review several metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The following presents select financial metrics for the periods presented:

N/A – Not applicable

(1)    Calculated as the ratio of non-interest expense to total net revenue.

(2)    Assets under management (AUM) includes outstanding balances of unsecured personal loans and auto refinance loans serviced by the Company as of period end, including loans sold to investors as well as loans held for investment and held for sale by the Company.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

N/A – Not applicable

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Results of Operations

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. For discussion related to 2019 items and year-over-year comparisons between 2020 and 2019, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the year ended December 31, 2020.

The following table sets forth the Income Statement data for each of the periods presented:

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Marketplace Revenue

Marketplace revenue consists of the following:

N/M    Not meaningful.

(1)    Certain prior period valuation adjustments on available for sale (AFS) securities and Structured Program transactions were reclassified from net fair value adjustments to provision for credit losses and interest expense, respectively, to conform to the current period presentation.

Origination Fees

Origination fees recorded as a component of marketplace revenue are primarily fees earned related to originating and issuing unsecured personal loans that are held for sale. In addition, origination fees include transaction fees that were paid to the Company by issuing bank partners or education and patient service providers for the work performed in facilitating the origination of loans by the issuing banks. Following the Acquisition, LC Bank became the originator and lender for the majority of unsecured personal loans and all auto refinance loans.

The following table presents loan origination volume during each of the periods set forth below:

Origination fees were $416.8 million and $207.6 million for the years ended December 31, 2021 and 2020, respectively, an increase of 101%. The increase was due to higher origination volume of marketplace loans, partially offset by the deferral of origination fees on loans held for investment. Loan origination volume of marketplace loans increased to $8.1 billion for the year ended December 31, 2021 compared to $4.3 billion for the year ended December 31, 2020, an increase of 86%.

Servicing Fees

The Company receives servicing fees to compensate it for servicing loans on behalf of investors, including managing payments from borrowers, collections and payments to those investors. Servicing fee revenue related to loans sold also includes the change in fair value of servicing assets associated with the loans.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

The table below illustrates AUM serviced on our platform by the method in which the loans were financed. Loans sold and subsequently serviced on behalf of the investor represent a key driver of our servicing fee revenue.

In addition to the loans serviced on our platform, the Company earns servicing fee revenue on $214.0 million in outstanding principal balance of commercial loans sold as of December 31, 2021.

Servicing fees were $87.6 million and $111.9 million for the years ended December 31, 2021 and 2020, respectively, a decrease of 22%. The decrease was due to lower average loan balances serviced in 2021 compared to the prior year, as origination volume was lower in 2020 as compared to 2019 due to the impact of COVID-19.

Gain on Sales of Loans

In connection with loan sales the Company recognizes a gain or loss on the sale of loans based on the level to which the contractual servicing fee is above or below an estimated market rate of servicing. Additionally, the Company recognizes any transaction costs, if any, as a loss on sale of loans.

Gain on sales of loans was $70.1 million and $30.8 million for the years ended December 31, 2021 and 2020, respectively, an increase of 128%. The increase was primarily due to an increase in the volume of marketplace loans sold.

Net Fair Value Adjustments

The Company records fair value adjustments on loans that are recorded at fair value, including gains or losses from sale prices in excess of or less than the loan principal amount sold.

Net fair value adjustments were $4.0 million and $(105.0) million for the years ended December 31, 2021 and 2020, respectively, an improvement of $109.0 million. The improvement was primarily associated with negative fair value adjustments recorded in the first quarter of 2020 due to COVID-19, which included an increase in estimated expected credit losses and an increase in liquidity premiums.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Other Non-interest Income

Other non-interest income primarily consists of referral revenue that relates to fees earned from third-party companies when customers referred by us consider or purchase products or services from such third-party companies. The table below illustrates the composition of other non-interest income for each period presented:

Net Interest Income

The table below presents net interest income information corresponding to interest-earning assets and interest-bearing funding sources on a consolidated basis for the Company.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

(1)    Prior period amounts have been reclassified to conform to current period presentation and methodology, which includes non-interest earning assets, non-interest bearing liabilities and equity.

(2)    Nonaccrual loans and any related income are included in their respective loan categories.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume and rate is as follows:

(1)     Volume and rate changes have been allocated on a consistent basis using the respective percentage changes in average balances and average rates.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Provision for Credit Losses

The allowance for loan and lease losses (ALLL) for lifetime expected losses under CECL on HFI loans and leases is initially recognized as “Provision for credit losses” at the time of origination. The ALLL is estimated using a DCF approach, where effective interest rates are used to calculate the net present value of expected cash flows. The net present value from the DCF approach is then compared to the amortized cost basis of the loans and leases to derive expected credit losses. The provision for credit losses includes the credit loss expense for HFI loans and leases, AFS securities and unfunded lending commitments. The table below illustrates the composition of the provision for credit losses for each period presented:

The provision for credit losses was $138.8 million and $3.4 million for the years ended December 31, 2021 and 2020, respectively. The increase was primarily due to the origination of unsecured personal loans retained as HFI at amortized cost and the impact from applying CECL to the HFI portfolio and to the Radius loans upon their acquisition, partially offset by reversal of impairment originally recorded in the AFS securities portfolio in the prior year.

The allowance for credit losses (ACL) totaled $145.6 million at December 31, 2021, comprised of an ALLL of $144.4 million and a reserve for unfunded lending commitments of $1.2 million. Unsecured personal loans are charged-off when a borrower is (i) contractually 120 days past due or (ii) two payments past due and has filed for bankruptcy or is deceased.

The activity in the ACL was as follows:

(1)    For acquired PCD loans, an ACL of $30.4 million was required with a corresponding increase to the amortized cost basis as of the acquisition date. For PCD loans where all or a portion of the loan balance had been previously written-off, or would be subject to write-off under the Company’s charge-off policy, an ACL of $18.0 million included as part of the grossed-up loan balance at acquisition was immediately written-off. The net impact to the allowance for PCD assets on the acquisition date was $12.4 million.

(2)    Relates to $110.8 million of unfunded commitments.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

The ALLL represented 5.0% of total loans and leases HFI as of December 31, 2021, or 5.5% of total loans and leases HFI excluding PPP loans. Average loans and leases HFI were $2.5 billion during the year ended December 31, 2021. Net charge-offs represented 0.4% of average loans and leases HFI during the year ended December 31, 2021.

For additional information on the ACL, see“ Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies” and “Note 6. Loans and Leases Held for Investment, Net of Allowance For Loan and Lease Losses.”

The following table presents nonaccrual loans and leases (1):

(1)    Excluding PPP loans, there were no loans that were 90 days or more past due and accruing as of December 31, 2021.

Nonaccrual loans and leases represented 0.3% of total loans and leases HFI, or 0.4% of total loans and leases HFI excluding PPP loans, as of December 31, 2021. The ALLL represented 1446% of nonaccrual loans and leases as of December 31, 2021.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Non-interest Expense

Non-interest expense primarily consists of (i) compensation and benefits, which include salaries and wages, benefits and stock-based compensation expense, (ii) marketing, which includes costs attributable to borrower acquisition efforts and building general brand awareness, (iii) equipment and software, (iv) occupancy, which includes rent expense and all other costs related to occupying our office spaces, (v) depreciation and amortization and (vi) professional services, which primarily consist of legal and accounting fees.

Compensation and benefits expense was $288.4 million and $252.5 million for the years ended December 31, 2021 and 2020, respectively, an increase of 14%. The increase was primarily due to an increase in headcount due to the Acquisition and hiring in key functions during 2021. In addition, compensation and benefits expense in 2020 was impacted by salary and headcount reductions resulting from the COVID-19 pandemic.

Marketing expense was $156.1 million and $51.5 million for the years ended December 31, 2021 and 2020, respectively, and increase of 203%. The increase was primarily due to an increase in variable marketing expenses based on higher origination volume, partially offset by the deferral of applicable marketing expenses for HFI loans.

Equipment and software expense was $39.5 million and $26.8 million for the years ended December 31, 2021 and 2020, respectively, an increase of 47%. The increase was primarily due to an increase in expenses associated with the integration of Radius.

Occupancy expense was $24.2 million and $27.9 million for the years ended December 31, 2021 and 2020, respectively, a decrease of 13%. The decrease was primarily due to lease impairment expenses in the prior year resulting from the impact of COVID-19.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Depreciation and amortization expense was $44.3 million and $54.0 million for the years ended December 31, 2021 and 2020, respectively, a decrease of 18%. The decrease was primarily due to a decrease in internally-developed software impairment and depreciation expense in 2021 compared to 2020, partially offset by an increase in the amortization of intangible assets resulting from the Acquisition.

Professional services were $47.6 million and $41.8 million for the years ended December 31, 2021 and 2020, respectively, an increase of 14%. The increase was primarily due to an increase in professional fees associated with the Acquisition.

Income Taxes

For the year ended December 31, 2021, we recorded an income tax benefit of $136 thousand primarily related to a tax benefit associated with the Acquisition, partially offset by income tax expense for state jurisdictions that limit net operating loss utilization. For the year ended December 31, 2020, we recorded an income tax benefit of $79 thousand primarily attributable to current state income taxes.

We continue to recognize a full valuation allowance against net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the future realization of all or some portion of these deferred tax assets. Our recent and forecast profitability are examples of positive evidence that we are assessing in determining the amount of the valuation allowance required. Changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions are recorded as current period income tax expense.

Income taxes are recorded on a separate entity basis whereby each operating segment determines income tax expense or benefit as if it filed a separate tax return. Differences between separate entity and consolidated tax returns are eliminated upon consolidation.

Segment Information

The Company defines operating segments to be components of the Company for which discrete financial information is evaluated regularly by the Company’s chief executive officer and chief financial officer to allocate resources and evaluate financial performance. This information is reviewed according to the legal organizational structure of the Company’s operations with products and services presented separately for the parent bank holding company and its wholly-owned subsidiary, LC Bank.

LendingClub Bank

The LC Bank operating segment represents the national bank legal entity and reflects post-Acquisition operating activities. This segment provides a full complement of financial products and solutions, including loans, leases and deposits. It originates loans to individuals and businesses, retains loans for investment, sells loans to investors and manages relationships with deposit holders.

LendingClub Corporation (Parent Only)

The LendingClub Corporation (parent only) operating segment represents the holding company legal entity and predominately reflects the operations of the Company prior to the Acquisition. This activity includes, but is not limited to, the purchase and sale of loans and issuances of education and patient finance loans that were originated by issuing bank partners.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Financial information for the segments is presented in the following table:

The Company integrated the Acquisition into its reportable segments in the first quarter of 2021. As the Company’s reportable segments are based on legal organizational structure and LC Bank was formed upon the Acquisition, an analysis of the Company’s results of operations and material trends for the year ended December 31, 2021 compared to the year ended December 31, 2020 is provided on a consolidated basis in “Results of Operations.”

Supervision and Regulatory Environment

We are regularly subject to claims, individual and class action lawsuits, lawsuits alleging regulatory violations. Further, we are subject to periodic exams, investigations, inquiries or requests, enforcement actions and other proceedings from federal and state regulatory agencies, including the federal banking regulators that directly regulate the Company and/or LC Bank. The number and significance of these claims, lawsuits, exams, investigations, inquiries, requests and proceedings have been increasing in part because our products and services have been increasing in scope and complexity and in part because we have become a bank holding company operating a national bank. Although historically the Company has generally resolved these matters in a manner that was not materially adverse to its financial results or business operations, no assurance can be given as to the timing, outcome or consequences of any of these matters in the future.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Regulatory Actions Taken in Relation to COVID-19

Regulators and government officials at the federal government level and in states across the country have issued orders, passed laws or otherwise issued guidance in connection with COVID-19. Some of these orders and laws have placed restrictions on debt collection activity, all or certain types of communications with delinquent borrowers or others, required that borrowers be allowed to defer payments on outstanding debt, governed credit reporting and the use of credit reporting, and placed certain restrictions and requirements on operations in the workplace. We have taken steps to monitor regulatory developments relating to COVID-19 and to comply with orders and laws applicable to our business. Given the ongoing nature of the pandemic, it is possible that additional orders, laws, or regulatory guidance may still be issued. We are not able to predict the extent of the impact on our business from any regulatory activity relating to or resulting from COVID-19.

Federal Banking Regulator Supervision

Since our acquisition of Radius, we are subject to supervision, regulation, examination and enforcement by multiple federal banking regulatory bodies. Specifically, as a bank holding company, the Company is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the FRB. Further, as a national bank, LC Bank is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. Accordingly, we have been and continue to invest in regulatory compliance and be subject to certain parameters, obligations and/or limitations set forth by the banking regulations and regulators with respect to the operation of our business.

Consequences

If we are found to not have complied with applicable laws, regulations or requirements, we could: (i) lose one or more of our licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions, penalties, or other monetary losses due to judgments, orders, or settlements, (iv) be in breach of certain contracts, which may void or cancel such contracts, (v) decide or be compelled to modify or suspend certain of our business practices, (vi) be unable to execute on certain Company initiatives, or (vii) be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to operate and/or evolve our lending marketplace and other products and/or services; any of which may harm our business or financial results.

See “Part I – Item 1. Business – Regulation and Supervision,” “Part I – Item 1A. Risk Factors – Risks Related to Regulation, Supervision and Compliance,” and “Part I – Item 1A. Risk Factors – Risks Related to Operating Our Business” of this Annual Report for further discussion regarding our supervision and regulatory environment.

Capital Management

The prudent management of capital is fundamental to the successful achievement of our business initiatives. We actively manage capital through a process that continuously assesses and monitors the Company’s overall capital adequacy. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations.

The formation of LC Bank as a nationally chartered association and the organization of the Company as a bank holding company subjects us to various capital adequacy guidelines issued by the OCC and the FRB, including the requirement to maintain regulatory capital ratios in accordance with the Basel Committee on Banking Supervision standardized approach for U.S. banking organizations (U.S. Basel III). As a U.S. Basel III standardized approach institution, we selected the one-time election to opt-out of the requirements to include all the components of accumulated other comprehensive income included in common stockholder’s equity. The minimum capital

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

requirements under the U.S. Basel III capital framework are: a CET1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%. Additionally, a Capital Conservation Buffer (CCB) of 2.5% must be maintained above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases, and certain discretionary bonus payments. In addition to these guidelines, the banking regulators may require a banking organization to maintain capital at levels higher than the minimum ratios prescribed under the U.S. Basel III capital framework. In this regard, and unless otherwise directed by the FRB and the OCC, we have made commitments for the Company and LC Bank (until February 2024) to maintain a CET1 risk-based capital ratio of 11.0%, a Tier 1 risk-based capital ratio above 11.0%, a total risk-based capital ratio above 13.0%, and a Tier 1 leverage ratio of 11.0%. See “Part I – Item 1. Business – Regulation and Supervision – Regulatory Capital Requirements and Prompt Corrective Action” and “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 20. Regulatory Requirements” of this Annual Report for additional information.

The following table summarizes LC Bank’s regulatory capital amounts and ratios (in millions):

N/A – Not applicable

(1)     Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.

The following table presents the regulatory capital and ratios of the Company (in millions):

N/A – Not applicable

(1)     Consists of common stockholders’ equity as defined under U.S. GAAP and certain adjustments made in accordance with regulatory capital guidelines, including the addition of the CECL transitional benefit and deductions for goodwill and other intangible assets.

The higher risk-based capital ratios for the Company reflect generally lower risk-weights for assets held by LendingClub Corporation as compared with LC Bank.

In response to the COVID-19 pandemic, the FRB, OCC, and FDIC adopted a final rule related to the regulatory capital treatment of the allowance for credit losses under CECL. As permitted by the rule, the Company elected to

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

delay the estimated impact of CECL on regulatory capital through 2021. As a result, a capital benefit of $35.5 million was included in the computation of the Company’s CET1 capital at December 31, 2021. Beginning on January 1, 2022, this benefit will be phased out over a three-year transition period at a rate of 25% each year through January 1, 2025.

Liquidity

We manage liquidity to meet our cash flow and collateral obligations in a timely manner at a reasonable cost. We must maintain operating liquidity to meet our expected daily and forecasted cash flow requirements, as well as contingent liquidity to meet unexpected funding requirements.

As our primary business at LC Bank involves taking deposits and making loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.

LendingClub Bank Liquidity

The primary sources of LC Bank short-term liquidity include cash, unencumbered AFS debt securities, and unused borrowing capacity with the Federal Home Loan Bank (FHLB). LC Bank also relies on our deposit base to generate liquidity over time. The primary uses of LC Bank liquidity include withdrawals and maturities of deposits; payment of interest on deposits; funding of loans and securities purchases; compensation and benefits expense; taxes; capital expenditures, including internally developed software, leasehold improvements and computer equipment; and costs associated with the continued development and support of our online lending marketplace platform.

Net capital expenditures were $34.4 million, or 4% of total net revenue, $31.1 million, or 10% of total net revenue and $50.7 million, or 7% of total net revenue, for the years ended December 31, 2021, 2020 and 2019, respectively. Capital expenditures in 2022 are expected to be approximately $50 million, primarily related to costs associated with the continued development and support of our online lending marketplace platform, including regulatory compliance costs.

As of December 31, 2021, cash and cash equivalents at LC Bank were $659.9 million and deposits were $3.2 billion. Outstanding PPPLF borrowings were $271.9 million at December 31, 2021 and are collateralized by PPP loans originated by the Company. In addition, LC Bank has available Federal Home Loan Bank of Des Moines secured borrowing capacity totaling $173.4 million. LC Bank also has secured borrowing capacity available under the FRB Discount Window totaling $75.2 million.

LendingClub Holding Company Liquidity

The primary source of liquidity at the holding company is $88.3 million in cash and cash equivalents as of December 31, 2021. Additionally, the holding company has the ability to access the capital markets through additional registrations and public equity offerings.

Uses of cash at the holding company include the routine cash flow requirements as a bank holding company, such as interest and expenses (including those associated with our office leases), the needs of LC Bank for additional equity and, as required, its need for debt financing and support for extraordinary funding requirements when necessary.

Factors Impacting Liquidity

The Company’s liquidity could be adversely impacted by deteriorating financial and market conditions, the inability or unwillingness of a creditor to provide funding, an idiosyncratic event (e.g., a major loss, causing a perceived or

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or others.

We believe, based on our projections, that our cash on hand, AFS securities, available funds, and cash flow from operations is sufficient to meet our liquidity needs for the next twelve months, as well as beyond the next twelve months. See “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” for additional detail regarding our cash flows.

Market Risk

Market risk represents the risk of potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices, and/or other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. Interest rate risk arises from financial instruments including loans, securities and borrowings, all entered into for purposes other than trading.

Our net interest income is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, and the level and composition of deposits and liabilities.

Interest Rate Sensitivity

LendingClub Bank

Loans HFI at LC Bank are funded primarily through our deposit base, and the majority of loans on LC Bank’s balance sheet, at any point in time, are retained in the HFI portfolio and accounted for at amortized cost. As a result, the primary component of interest rate risk on our financial instruments at LC Bank arises from the impact of fluctuations in loan and deposit rates on our net interest income. Therefore, we measure this sensitivity by assessing the impact of hypothetical changes in interest rates on our net interest income results.

The following table presents the change in projected net interest income for the next twelve months due to a hypothetical instantaneous parallel change in interest rates relative to current rates as of December 31, 2021:

The impact of these hypothetical interest rate changes are not significant to LC Bank’s net interest income. Non-maturity deposit rates at December 31, 2021 are significantly below the 100 basis point hypothetical interest rate reduction which results in an insignificant negative impact to net interest income.

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LENDINGCLUB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

The following table presents the maturities of loans and leases held for investment as of December 31, 2021:

For the weighted-average yields on the Company’s AFS securities portfolio, see “Notes to Consolidated Financial Statements – Note 5. Securities Available for Sale.”

LendingClub Holding Company

At the holding company level, we continue to measure interest rate sensitivity by evaluating the change in fair value of certain assets and liabilities due to a hypothetical change in interest rates. Principal payments on our loans HFI continue to reduce the outstanding balance of this portfolio, and, as a result, the fair value impact from changes in interest rates continues to diminish.

Contingencies

For a comprehensive discussion of contingencies as of December 31, 2021, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 19. Commitments and Contingencies.”

Critical Accounting Estimates

Our significant accounting policies are described in “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies.” We consider certain of these policies to be critical accounting policies as they require significant judgments, assumptions and estimates which we believe are critical in understanding and evaluating our reported financial results. These judgments, estimates and assumptions are inherently subjective and actual results may differ from these estimates and assumptions, and the differences could be material.

Allowance for Credit Losses

We reserve for expected credit losses on our loan and lease portfolio through the ALLL and for expected credit losses in our unfunded lending commitments through “Other liabilities.” Changes in the ACL are reflected on the Income Statement through “Provision for credit losses.” Changes in the credit risk profile of our loans and leases result in changes in “Provision for credit losses” with a resulting change, net of charge-offs and recoveries, in the ACL balance.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

The ACL represents our estimate of expected lifetime credit losses over the contractual life of the loan and lease portfolios and on the unfunded lending commitments. Our determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancellable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information. Estimates of expected future loan and lease losses are determined by using statistical models and management’s judgement. The models are designed to forecast probability and timing of default, exposure at default and loss rate and recovery by correlating certain macroeconomic forecast data to historical experience. The models are generally applied at the portfolio level to pools of loans with similar risk characteristics. The macroeconomic data used in the models is based on forecast variables for the reasonable and supportable period of two years. Beyond this forecast period the models gradually revert to long-term historical loss conditions over a one-year period. Expected losses are estimated through contractual maturity, giving appropriate consideration to estimated prepayments unless the borrower has a right to renew that is not cancellable or it is reasonably expected that the loan will be modified as a TDR.

A qualitative allowance which incorporates management’s judgement is also included in the estimation of expected future loan and lease losses, including qualitative adjustments in circumstances where the model output is inconsistent with management’s expectations with respect to expected credit losses. This allowance is used to adjust for limitations in modeled results related to the current economic conditions and capture risks in the portfolio such as considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which the Company conducts business.

Loans and leases that do not share common risk characteristics and significant loans that are considered collateral-dependent are individually evaluated. For these loans, the ALLL is determined through review of data specific to the borrower and related collateral, if any. For TDRs, default expectations and estimated prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are grouped generally by product type and significant loan portfolios are assessed for credit losses using statistical models. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to change, sometimes materially and rapidly.

The methodology used to determine an estimate for the reserve for unfunded commitments is similar to that used to determine the funded component of the ALLL and is measured over the period there is a contractual obligation to extend credit that is not unconditionally cancellable. The reserve for unfunded commitments is adjusted for factors specific to binding commitments, including the probability of funding and exposure at default.

Valuation of Business Combination

Assets acquired and liabilities assumed as part of the Acquisition are recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, loans (including PCD loans) and liabilities acquired based on DCF analysis or other valuation techniques requires management to make estimates that are highly subjective in nature based on available information. The fair value of acquired loans from the Acquisition was based on a DCF methodology using contractual cash flows adjusted for key cash flow assumptions such as prepayment rate, default rate, loss severity rate, discount rate and market pricing. For additional information, see “Notes to Consolidated Financial Statements – Note 2. Business Acquisition.”

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