Recap: This is part of a series of posts. I invested weekly from Nov 2011 through Dec 2013 until I hit $10,000 (actual deposits were $9,460). Beginning January 1, 2014, I have withdrawn at a 6% rate ($150/Quarter) and let the balance move where it moves (I expect a 6% net return, so anything above $10K represents a higher return than expectation) The return percentage listed in the topic heading is what is reported by LC. Specific stats are below. I have made previous monthly and quarterly posts that provide some history of my experience and a lot more detail and background (probably good background to read if you missed them to bridge to what is below). Search under “Acorn” and “Lending Club” and you should find the various numbered entries. I generally post these the last day of each quarter.

Here is the update of my stats/experience to date, followed by a number of observations:

The total real return for 2014 was 7.35%.

5 year/3 year note mix: 96%/4%. All notes are $25 lots.

1 A Notes; 6.83% average yield
179 B Notes; 10.95% average yield
404 C Notes; 14.64% average yield
10 D Notes; 18.36% average yield
2 E Notes; 22.40% average yield
0 F Notes;
0 G Notes;

Payments Received to Date:
Principal: $9,624
Interest: $2,546
Late Fees: $0.54 (clearly, late fees are hardly ever collected)
Recoveries $44.24
Default Losses ($953 – original principal amount on these defaulted notes was $1,225)

Current forecasted monthly cash flow rate: $493 (includes both principal and interest)

Current Average Yield – 13.59% The primary difference between the return to date and the average yield primarily is defaulted notes. In addition, a small piece of the difference is service fees, or ½% for fees to LC to administer my loans; to date, I have paid $125 in fees, and those are netted out of the returns.

Here is my note count rollup by status:
Not yet issued: 14 notes, plus some idle cash
Issued and Current: 568 notes
Fully paid: 177 notes
In Grace Period: 7 notes
Late 16 to 30 days: 1 notes
Late 31 to 120 days: 14 notes
Default: 0 note
Written off: 49 notes

A few observations:

As you may recall from 6 months ago, I opined that perhaps this isn’t a good long term investment due to the default risk. Nothing in this quarter has changed my mind as I had 16 defaults and $288 for those losses, but I am still on the proverbial fence. I continue to debate in my mind if this is a good “annuity play” but default risk plays key in that determination…On that subject, I started second test about a year ago with some retirement money, to test that very purpose, as an annuity. I invested a significantly larger amount of money and thus far, that return is 11.89%. I want to see how that does through a recession before I commit something substantial in an income producing process.

It is getting more difficult each quarter to find something new to report or some new angle to analyze. Hard to believe I started this thing 3 ½ years ago. I would be interested in hearing some of your experiences, either with this, or other developments in the market. I mentioned RealtyMogul.com the last couple of posts. At some point in the future, I expect to try that out as an income generating medium also. I am getting older and I am sick of working, so income producing assets are looking more interesting each and every day…

Since my post was a bit lacking and my schedule was flexible this morning, I decided this morning to go out and review their SEC filings. I was kind of surprised that LC lost money in 2014 ($32 million). My expectation was that they would be profitable this year (I used to look at these quarterly, but haven’t reviewed for a while). I took a look at their cash flow statement – they generated cash from operations, but primarily because they recorded $37 million in stock compensation (non-cash). It has been a while since I paid attention to Black Sholes, so I haven’t thought that all the way through and don’t have the will to do it today…

I took a little bit deeper dive on the 10K and noticed the following:

1. They raised 827 million in their public offering
2. Their revenues have exploded, but so has their expenses
3. Sales and marketing expenses doubled, SG&A expenses quadrupled. I did read a little more on this. They blamed a big chunk of it on an acquisition. Will be worth watching going forward.

For those that participated in their IPO at $15 a share, they were doing much better, because the stock has dropped back down to $19 but got as high as $29. It looks like their market capitalization is just under $1.5 billion.

Their to-date volume now stands at $8 billion. As I perused through the management discussion, there is an interesting discussion about historical charge off rates. I have mentioned many times that the default rate concerns me, but that chart is very helpful in estimating how default rates might differ in an economic slowdown. On the chart, it shows that for 2010-2014, charge off rates were approximately 5-7%. In 2009, they were about 9% and in 2008 they were about 15%. Using a gross generalization, it appears that during an economic downturn, you might experience a 10% decline versus historical returns.

Obviously, this is very high level data, but if you could expect a 10% decline in return (going from 6% in normal years to negative 4% in a recessionary year), lots of moving parts to consider…Right now, you can find utility dividend rates in the 4% range. If you assume one year of negative 4% return and four years of 6% returns, it averages out to 4% a year over a five year economic cycle (assumed). Diversification in another asset class is a plus, but I am not completely sold yet and will continue exploring… One question that still nags me. What happens in a normal rate environment? When the rates all go up 4-5% higher? Will their LC’s rate advantage (versus unsecured credit cards) be as strong when rates increase to more historical norms?

Holy smoke – I have wasted waaaay too much time on this today…

You may have seen my post today earlier begging for a return of the reciprocal ignore. The one troubling thing with CB is this: it is almost impossible to share an idea with CB and not have some pinhead start pontificating about it when he doesn’t know what he is talking about. A different example...I must be getting old based on my intolerance with dealing with people whose profile reads they are a garbage man or a dairy farmhand. Funny, I really respect those two professions as they are filled with good, hardworking and some of the most down to earth people on the planet. I have never understood why people feel the need to pull others down simply to be bigger. One more example of a pinhead…sometimes it is all I can do not to power tool some of these people back….but enough for that distraction and the negativity. I needed to blow off a little steam, but if I disappear from CB, you will know why.

I wish I was in Utah so I could meet more of you guys at functions. Make sure and let me know if you enjoy this subject and I will continue taking one for the team. Even better, if there is something interesting out there, let us know. I expect lots of products like this that expand investment alternatives and remove the middleman through the power of the internet.