LendingClub Corp (LC) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the LendingClub second-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to James Samford, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon.

Welcome to LendingClub's second-quarter 2016 earnings conference call. Joining me today to talk about our results are Scott Sanborn and Carrie Dolan. And we are also joined by Brad Coleman who was recently named LendingClub's interim CFO. The format for today's call will include a business review by Scott followed by review of the financials and outlook by Carrie. We will then open up the call to questions.

Before we get started, I'd like to remind everyone that our remarks today will include forward-looking statements and the actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release, the related slide presentation on our Investor Relations website and our form 10-K filed with the SEC on February 22, 2016. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

During this call, will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and accompanying investor presentation are available on the website at IR.LendingClub.com. Unless specifically stated, all references to this quarter relate to the second quarter of 2016 and all year-over-year comments are comparisons to the second quarter in the prior year. And now I'd like to turn the call over to Scott Sanborn.

Thank you, James. Good afternoon, everyone.

Q2 was a busy quarter and the good thing is that it is now behind us. We have accomplished quite a bit since the events of May 9. Over the past three months, we've been focused on re-engaging our investors and we are very pleased with our progress to date. We believe we have stabilized the investor base with 15 of our top 20 investors now back on the platform, albeit at lower investment levels.

We took steps to enhance asset quality and investor returns by increasing rates and tightening credit. We welcomed the first '40 Act fund to our investor mix which, in addition to the resilient retail base, demonstrates the continued attractiveness of LendingClub to individual investors.

We witnessed strong demand and pricing execution and the securitization brought to market by Jefferies who has completed their diligence and have resumed purchasing. We conducted a thorough review of our internal controls and business processes and are now working on a number of initiatives to further strengthen these controls.

We added some tremendous talent to be executive team, including Sameer Gulati, joining from McKinsey as Chief Operating Officer in May. And in June, Patrick Dunne joined from Black Rock as our Chief Capital Officer. We're also excited to announce that Tim Mayopoulos, the President and CEO of Fannie Mae has joined our Board.

Given all that we have accomplished in this short time period, we feel confident about our future and believe we are on track for a strong year in 2017. That being said, we still have a lot of work ahead in the coming quarters. Before we get into details from Carrie on second-quarter financial results and our outlook, I'd like to provide more color on the actions we are taking to increase the supply of capital, boost asset performance and strengthen internal controls.

Starting first on the supply of capital. Following May 9, we faced a significant disruption in our capital supply and quickly took the following steps: First, we decreased marketing spend to slow the pace of demand from borrowers to match investor appetite. Second, we focused significant internal and external resources on satisfying investor diligence requests that are the prerequisites for their return to the platform.

Third, we developed an investor incentive program, targeting all investor types and designed to accelerate investments. Incentives were offered in tiers with higher incentives for larger volume commitments. These programs are structured to conclude at the end of August.

Fourth, as previously mentioned, we increased rates and tightened credit to further enhance the attractiveness of the assets while maintaining the value for borrowers. Fifth, in support of our capital-raising efforts, we hired a Chief Capital Officer and more recently, a new Head of Institutional that we will be naming shortly.

And finally, we leveraged our considerable balance sheet opportunistically to bridge what we recognized as a temporary imbalance between supply and demand. In Q2, we purchased $135 million in loans and then resold the majority to investors. This allowed us to fulfill borrower demand without any loan expirations or borrower disappointment.

As we have emphasized, a key strength of our model is the diversity of investors that come to LendingClub for attractive risk-adjusted returns. We divide investors into four separate categories: self-managed retail accounts, managed accounts, other institutions and banks.

Post May 9, reaction and recovery time from each investor category has varied. First, we had our self-managed retail investors who proved to be the most resilient. Retail investors remained largely active throughout the quarter, albeit at a reduced level, and have since been steadily increasing their investment volume.

While down sequentially, they grew 16% year-over-year and represented 18% of total investments post May 9 versus 15% in Q1, highlighting their resilience and importance. Retail investors represent a unique and powerful asset for LendingClub that will remain an important part of our mix.

Second is managed accounts. This is a varied group that includes our private LCA funds, dedicated third-party funds, including the new '40 Act fund and separately managed accounts. Managed accounts grew their share of originations from 30% in Q1 to 35% in Q2. While they initially paused, they were quick to recognize the value of the incentives and many were able to accelerate their return to the platform, in some cases at purchase levels higher than before May 9. Others have needed more time to complete their diligence, especially those working with a leverage provider.

Third is the category of other institutions, which includes asset managers, insurance companies, hedge funds and securitization investors. As a whole, this group experienced a significant pause and were varied in the speed of their re-engagement. Asset managers and hedge funds were some of the first large investors to come back to the platform and also the most responsive to incentives. Together, the other institutions group declined just slightly from 21% in Q1 to 20% in Q2.

Our final category, banks, has traditionally been a stable source of capital for the highest quality loans on the platform, as well as for our education and patient finance business. We have been experiencing steady growth in bank funding, which represented 34% of volume in Q1. However, post May 9, our bank a group was the most affected by our announcements. Banks have broader and more complex diligence and regulatory requirements and need to re-review our controls, reporting and compliance processes in greater detail. While they are taking more time than other investors, we are pleased with the progress and we have multiple banks already purchasing and expect more to return to the platform in Q3 and into Q4.

As evidenced with these results, diverse sources of capital are helpful because each responds differently to different circumstances. The resiliency of our retail base and the responsiveness of our managed accounts enabled us to recover from a highly unusual situation and end the quarter with close to $2 billion in issuance. In addition to the four investor categories mentioned, we are looking at new sources and structures of capital as a way of expanding diversity and resilience and we are earmarking budget for these efforts.

Now, turning to credit performance, we are constantly monitoring performance data, marketplace dynamics and other trends. This allows us to quickly adjust both pricing and credit in order to deliver value to both borrowers and investors. Throughout late 2014 and 2015, we had an excess supply of capital, which allowed us to reduce platform interest rates and therefore returns.

When the Fed raised rates in December 2015, we took the decision to raise rates. Since then, rates were increased three times this year in order to increase the appeal of the asset class. In total, rates rose by a weighted average 135 basis points since December, bringing the weighted average platform rate on our standard program to just over 13%. This average rate remains a very attractive one for unsecured consumer credit.

On the credit side, we reduced approval rates for certain targeted segments to eliminate roughly 9% of the higher-risk personal loan population that have exhibited a propensity to accumulate debt and could have the most exposure to an economic slowdown. Based on the above pricing and credit actions, standard program returns are expected to increase from 4% to 5% to more than 6% for endages after June. This makes for a very attractive investment in the current low-yield environment.

Our ability to adjust the platform based on economic conditions, credit performance and investor demand, is a key benefit of the marketplace model. The billions of dollars of capital changing hands every quarter gives us the critical mass to establish a market price and to balance supply and demand.

Now to spend a few minutes on the borrower's side, this quarter we are adjusting our reporting on origination mix to separate it into three categories: standard personal loans, custom personal loans and other custom loans. Standard personal loans, which are available to investors in the public program, represented $1.4 billion or 74% of platform originations in the second quarter. These are A- through G-grade loans with FICO stores above 660.

Custom personal loans, which have been broken out from our custom category, include near-prime and super-prime loans and amounted to $296 million, or 15% of platform originations in the second quarter. Near-prime covers the 600 to 659 FICO score population and super-prime loans are borrowers with the highest credit quality. These loans are only available to accredited and institutional investors through private transactions.

The third category is other custom loans, which includes education and patient finance and small business. This category totaled $216 million or 11% of platform originations this quarter.

Looking forward, we remain committed to future product development and expect to launch another large consumer category when the time is right. So stay tuned.

Switching gears, I'd like to spend a minute giving you an update on our controls. Our long-term success is dependent on coupling our technology and business model advantages with a relentless focus on compliance, security and risk management. Since May 9, we have initiated a comprehensive review of our controls, compliance and governance. As I highlighted at our annual meeting, we've made a number of improvements.

We are incorporating best-practice recommendations from KPMG and our third-party consultants into our processes. We are bolstering resources dedicated to compliance and oversight activities. We're evaluating how to best align business and control functions to provide a better risk management structure.

We have increased training requirements on data-change management and are enhancing our end-to-end testing framework, and we are retraining employees on code of conduct and ethics and reinforcing the importance of a high-compliance culture. Beyond our internal focus, we remain proactive with regulators, policymakers and consumer advocacy groups.

The second quarter was a true test for all of us and I am inspired by how our team has risen to the occasion. We entered the third quarter more focused than ever and I'd like to thank our employees for their outstanding dedication and efforts on behalf of our shareholders and customers.

Before I talk the call over, I wanted to share the news that Carrie has decided to leave LendingClub to pursue a new opportunity. Carrie joined when we had about 40 employees and she has been an important part of helping LendingClub grow and mature over the past six years. She approached us early this year about planning a transition and in May the Board and I asked her to postpone her plans to help us navigate recent events. I want to sincerely thank Carrie for her leadership, commitment and dedication, particularly over the last several months.

We have retained global search firm and expect to name a successor in due course. In the interim, we've appointed Brad Coleman as principal accounting officer and named him interim CFO. Brad has served exceptionally as LendingClub's Corporate Controller since 2013 and has over 23 years of accounting and financial reporting experience. So Carrie is leaving the Company a very capable hands and I have complete confidence that Brad can shepherd us through this transition.

With that, I'd like to wish Carrie well in her next endeavor and turn it over to you, Carrie.

Thanks, Scott.

Before I review of our financial results, I'd first like to say thank you to Scott for his kind remarks. I'm extremely proud of this Company. Since I joined to six years ago, we have lowered the cost of credit for over 1 million borrowers through our marketplace, while also providing investors with attractive risk-adjusted returns. We have done this with a capital light model and by leveraging technology. This business model works.

I would like to acknowledge and thank the over 1,500 employees at LendingClub for their hard work in building this Company, with a special thanks for the dedication over the last three months. I believe this Company is in great hands and now that investors are re-engaging with the platform, I'm excited to begin my next chapter. Thank you for an incredible six years.

With that, let's turn to the results and the outlook. As Scott shared, this quarter started off strong in April. Then following the announcement we made on May 9, many investors initially paused or reduced their investment activity. We were able to quickly respond to the decrease in investor capital by cutting back on our marketing spend to more closely match borrower loan applications with investor supply.

At the same time, we created an investor incentive program to help clear borrower loan applications in our pipeline and to accelerate diligence and subsequent capital flows. We are pleased with the progress we are making in re-engaging investors and the momentum that has carried us into the third quarter.

Today, I'll start with our second-quarter results and then discuss our guidance before opening the call up for questions. As a reminder, all year-over-year comments are comparisons to the second quarter in the prior year, and all operating expenses discussed exclude stock-based compensation, depreciation and amortization.

With that, let's turn to the results. Total originations in the second quarter were $1.96 billion, an increase of 2% compared to last year. The slower origination growth was due to a slowdown in investor capital that occurred post May 9. Roughly 51% of the second quarter volume was originated prior to May 9 which represented 42% of the quarter in terms of calendar days.

Operating revenue in the first quarter was $102.4 million, up 6.5% year over year. The slower operating revenue growth was mainly driven by the pace of originations and also includes two unusual items: investor incentives and a servicing adjustment.

Transaction fees, which are earned when a loan is originated, represented 94% of operating revenues and totaled $96.6 million, up 13% year over year. Our transaction fee yield increased 46 basis points year over year to 4.94% during the quarter. As a reminder, we increased transaction fees during March this year and a full quarter impact of this pricing change added $9.2 million year over year. Our transaction fee also increased quarter over quarter by 41 basis points, mainly driven by a full quarter of this pricing change.

Servicing and management fees, which are earned over the life of the investment, totaled $14.7 million in the second quarter, up 62% from last year. Included in these fees is a servicing adjustment that delays the recognition timing as to $2.8 million in servicing revenue. We retain servicing for loans that are sold and as a result, we recognize servicing revenue over the life of the loan. This income stream is recorded as either an asset or a liability, depending on the degree to which the contractual loan servicing fee charged to investors is above or below our estimated market rate for servicing.

During the second quarter of 2016, the Company increased its estimated market rate of loan servicing from 57 to 63 basis points per annum, based on its review of estimated third-party servicing rates. This increase in the estimated market rate caused the value of our servicing rights to decrease, leading to the $2.8 million adjustment. This adjustment does not affect the contractual servicing fees we collect from whole loan investors; it merely adjusts the revenue recognition timing.

Servicing and management fees as a percent of origination increased 28 basis point year over year to 75 basis points, driven by higher relative growth in our servicing portfolio, higher mix of sold loan volume at inherently higher servicing rates and higher collection fees, offset by the servicing adjustment previously discussed. In the second quarter our servicing portfolio reached $10.7 billion, up $4.2 billion or 64%, from last year. For more details showing of the trends in our servicing revenue, please refer to page 27 in our earnings presentation.

Other revenue reflected a loss of $8.9 million during the second quarter. We offered a total of $14 million in investor incentives during the quarter, which was higher than our $9 million estimate, due mainly to higher volumes as participants pulled money forward to take advantage of these incentives. These incentives were recorded as a contra revenue in our other revenue line and averaged 1.45% across post-May 9 volumes. Excluding investor incentives, other revenue would have been $5.1 million, roughly in line with prior quarters.

Our revenue yield, which is operating revenue as a percent of originations, was 5.24%, up 21 basis points year over year and down 26 basis points sequentially. The 21 basis point year-over-year increase was driven by 46 basis points of higher transaction fees, 28 basis points from higher servicing and management fees, offset by a 53 basis point decline in gain on sale, primarily driven by investor incentives. The 26 basis point quarter-over-quarter decline was driven by a 68-basis point reduction on gain on sales, mainly driven by investor incentives, offset by 41 basis points from higher transaction fees and 1 basis point from higher servicing and management fees.

Now turning to expenses, in light of the lower volume run rate post May 9, and recognizing that fully re-engaging investors may take some time, we adjusted our cost structure, which included eliminating 179 positions at the end of June. The majority of the position eliminations were in the volume-related teams, which added $2.8 million in severance-related costs in the second quarter. In addition, we incurred a number of unusual expenses this quarter for employee retention, legal, advisory fees, Board review, audit, remediation and other due diligence activities.

Sales and marketing expenses in the second quarter were $48.3 million, up from $37.8 million a year ago, but down from $64.7 million last quarter, as we were able to quickly reduce our variable marketing expenses to align with lower volumes. Sales and marketing expenses included $3.7 million of expenses related to severance, retention and advisory fees to support investor capital acquisition.

As a percent of originations, sales and marketing expenses were 2.47% this quarter, which was 49 basis points higher than a year ago, and 12 basis points higher sequentially, due primarily to the unusual expenses. Excluding these unusual expenses, sales and marketing as a percentage of origination would have been 2.28%, down 7 basis points sequentially.

Origination and servicing expenses in the second quarter were $20 million, up $6 million from last year. As a percent of originations, origination and servicing expenses were 29 basis points higher than last year and were up 35 basis points quarter over quarter, at 1.02%. Headcount that supports our origination activities was scaled for a planned higher origination volumes.

As a result of the volume reduction post May 9, we reduced headcount at the end of June to align with our new volume expectations. Severance and retention-related expenses added approximately $1.3 million to our origination and servicing costs in the second quarter. Separately, while our variable costs associate with originations declined roughly in line with volume, our variable servicing expenses increased in line with the growth in our servicing portfolio.

As we shared last quarter, our issuing bank fees increased in March when we restructured our issuing bank relationship in order to give the bank an ongoing economic interest in the loan even if the loan is sold. During the second quarter, these changes added $1.3 million or 7 basis points to our fees relative to second-quarter last year.

Both sales and marketing and origination and servicing expenses are netted against our operating revenue to derive contribution income and a contribution margin which focuses on the sufficiency of how we drive our revenue. On a dollar basis, our contribution income in the first quarter was $34.1 million, down 23% year over year and includes $19 million of incentives and other unusual expenses.

Contribution margin, which is contribution income as a percent of operating revenues, was down 13 points year over year at 33.3% and down 12 points sequentially. Excluding the unusual expenses, contribution income would have been $53.1 million with a margin of 45.6% or 50 basis points lower year over year.

As noted, investor incentives are temporary. However, over the long run we do anticipate some higher level of investor acquisition costs as we continue to diversify our investor mix. Structural changes in our investor acquisition costs may move our longer-term contribution margin to the mid to high 40% range.

The second set of expenses that are outside of contribution margin, but are included in our adjusted EBITDA margin are engineering, product development and other G&A costs. In the second quarter, engineering and product development expenses were up $7.8 million year over year and were up $3.8 million a sequentially at $19.8 million. We continue to proactively invest in our product and technology in order to enable future growth, improve our customer experience, enhance existing product features and support our control environment. Other G&A expenses increased $17.5 million sequentially to $44.4 million.

As we shared a few weeks ago, we have a number of expenses this quarter related to our Board review, May 9 announcement and staffing reductions. Specifically, other G&A was an additional $1.5 million in severance and retention costs and $13 million in incremental legal, audit and PR fees related to the Board review and the consequences of May 9.

Adjusted EBITDA for the quarter came in at a loss of $30.1 million, down from a positive $13.4 million in the prior year. Excluding the $33.9 million in unusual expenses, adjusted EBITDA would have been positive at roughly $3.8 million.

Our GAAP net loss was $81.4 million, or negative $0.21 per diluted share compared to a loss of $4.1 million a year ago. The difference between GAAP and adjusted EBITDA was $56.2 million and includes stock-based compensation of $13.4 million, depreciation, amortization and intangibles at $7.4 million and a goodwill impairment charge of $35.4 million.

Our annual goodwill impairment testing gate is in the second quarter. We reviewed the carrying value of Springstone which we acquired in early 2014 and supports our education and patient finance products. The write-down was driven by number of factors. While top-line growth has been generally on plan, higher expenses have reduced plan margins and several product enhancement have been delayed following the May 9 announcements. In addition, a decrease in valuation multiples for the peer group and for LendingClub also contributed to the change.

Stock-based compensation as a percent of operating revenues was roughly flat year over year at 13.1%, while depreciation and amortization increased 1.8 points to 5.7% of revenue. Adjusted net loss, which is GAAP net income excluding stock-based compensation and acquisition-related expenses was negative $35 million, or negative $0.09 per diluted share during the second quarter, compared to a adjusted net income of $10.4 million or $0.03 per diluted share in the same period last year.

Now turning to the balance sheet, as of June 30, we had $832 million in cash and securities available for sale. Our total balance sheet assets reached $5.6 billion with $4.4 billion in loans. We ended June with $35.8 million of loans on our balance sheet purchased directly by us, which is up from $23.8 million at the end of March.

With that, let me give you my thoughts about our outlook. We have planned our outlook relative to the pace of investor demand with an expectation to reduce or eliminate incentives by year-end. As a result, we expect our origination volumes to be roughly flat for the next two quarters as we work to bring back banks and restructure longer-term investor acquisition costs.

In the third quarter, we're expecting incentives to be roughly 75 to wanted to 125 basis points of total volume. On the expense side, while we expect some reduction in the unusual expenses, we anticipate our costs to remain somewhat elevated for the remainder of the year.

While we are very pleased with our progress and are currently executing well to our plan, there is still a higher level of variability in both our revenue and expense line, so we are guiding to wider ranges this quarter. For the third quarter we're providing an operating revenue outlook in the range of $95 million to $105 million and expected adjusted EBITDA loss to be in the range of $15 million to $30 million.

As noted, for the fourth quarter we anticipate origination volume to be roughly in line with third-quarter levels. While we plan to reduce or eliminate investor incentives by the that end of the third quarter, we do anticipate some higher level of investor acquisition costs in the fourth quarter, as we continue to diversify our investor mix. And some of these could be netted against revenue.

For expenses, fourth quarter has some seasonal headwinds so we expect sales and marketing expenses to increase relative to third quarter. And as noted, we expect our G&A expenses to stay relatively high as we continue our remediation and diligence work.

We believe that we will have the full mix and depth of investors reengaged with the platform by the end of the year. We believe this will put us in the position to resume revenue growth and positive margin expansions in the first half of 2017. With that, let's open up the call for questions. Operator?

(Operator Instructions)

James Faucette, Morgan Stanley.

Thank you very much. I had a couple of questions. Carrie, you talked a little bit about expenses remaining a bit elevated through the rest of the year. How much of this elevated expense would you continue to characterize perhaps as unusual as we go through the rest of the year?

Yes, so we do anticipate the unusual expenses that we've called out to fall probably through the end of the year, down maybe 80% or so. What's still to be really determined as we give further guidance is what that run rate going forward will be.

We have spent quite a bit of time taking a look at our compliance and legal and our support organizations and we've made a number of changes over the last couple of years. But we want to make sure going forward to that we are continuing to invest and have that staged correctly. And so that is work that's currently underway that will inform that cost structure.

Got it. And then you mentioned, I think, in the press release perhaps, that 15 of the top 20 investors were back on the platform. Can you give us some sense of their magnitude now versus before? And how much are you having to incent or give price breaks to these investors?

Yes, so the level of investment varies pretty much. I would say as a whole, in general, they are at low levels than pre-Mother's Day. Although, as I noted, there are exceptions to that and we do have several who are actually larger than prior levels.

Incentives were useful for us in kick-starting the platform activity post Mother's Day but we do anticipate that we will have those substantially ended by the end of this quarter. In fact, these incentives were volume-based and for smaller volume investors, they have already ended as of July. Those investors have, without exception, have continued their purchase activity into August.

Got it. Thank you very much. And just to wrap up for me, any update on SEC or DOJ investigations and timelines around those that have been communicated to you?

Yes, there's no new news to report there.

Okay. Thank you.

Heath Terry, Goldman Sachs.

Great, thanks. I was wondering if you could give us a sense, as you look to establish more stable funding for the platform, can you give us an idea of where your strategy for that could go longer term? I realize a lot of what you're dealing with right now is more the immediate needs of the Company. But as you think about what LendingClub could look like on the other side of this, is there a real change to the funding model?

Yes, so to your point, our immediate focus has been on re-engaging with our pre-existing investors and that's been our primary focus. And as noted, we feel like we're making very good progress there.

Going forward, we are exploring what -- adding some additional sources and/or structures of capital to increase resiliency and diversity. That would include committed capital that we think might be a beneficial addition to our overall mix. That will come at a cost, having committed capital out there. We're being thoughtful about the size and scale of that, but that's absolutely something we will be exploring actively once we've got our pre-existing investors fully reengaged.

Got it, thank you.

Brad Berning, Craig-Hallum.

Good afternoon. Can you talk a little bit more on the expense side of, more specifically which expenses are going to be more likely in the fourth quarter versus the third quarter? Can you talk about the magnitude of expenses in the third quarter that you think will go away? Just to help us to think through more of the second half of the year and the expense side.

Yes, so the various buckets, we talked about investor incentives. We gave guidance specifically that if you take a look at overall volume, we're anticipating those to be somewhere between 75 and 125 basis points across volume. That today is netted against revenue.

Of the remaining expenses, that were unusual, obviously, we had employee-related severance costs. Those were definitely one-time that we're not anticipating repeating that.

The expenses related to legal and due diligence and the reviews, those are things where we're continuing to do diligence, we're continuing to use outside consultants to help with a number of those pieces. Obviously, that is then work that is over time and we're anticipating that into the third and into the fourth quarter.

And as I mentioned, in the first question, I think on a relative basis with these particular expenses, that modeling them coming down to maybe roughly 80% -- down 80% from the current levels by year-end, would be a reasonable assumption at this stage.

And then follow-up. I know some other investors have been asking this already, and could you walk us through the cadence more on a month-by-month basis so we can all be in one place and understand a little bit better how June, July recovered a little bit on the volumes, just to help us understand how things have been going on the recovery side on the volumes?

So on volumes, we did talk about that many investors paused initially after May 9. And so certainly the volume, or the momentum, increased more in June, certainly, than it did in May. And we're seeing even from June into -- the momentum continuing.

It was really based on the various investor types in terms of how fast that momentum changed. We did say that roughly 51% of the volume was pre-Mother's Day. So you can get some sort of sense with that latter half, what that looked like. We're not necessarily breaking it out for May and June but certainly June was a heavier month then May.

Understood. I'll get back in the queue. Thank you.

Mark May, Citi.

Thank you. Just a couple on the incentives. Can you remind us -- I'm sorry if I missed this already -- where that's booked on the P&L? And did you mention what portion of the originations in the quarter were incentivized?

And what gives you comfort in terms of forecasting the origination volumes as you reduce or eliminate these incentives? And I have a follow-up, if I could. Thanks.

Sure. I'll start with the expenses. So the actual incentives are booked as a net revenue.

Okay.

So we had $14 million, essentially that reduced revenue based on this. And I said in my comments that really roughly 51% of the volume for the quarter was before Mother's Day. And so essentially that 49% included incentives of that $14 million which works out to roughly the [$145 million].

Going into the third quarter, Mark, we think that incentives across our entire volume will be somewhere between 75 to 125 basis points. We structurally put in these incentive programs earlier. So we feel we have very good visibility on how they are structured and the tiers of them.

So for example, if an investor came back earlier with high dollars, they got a higher percentage. Or if they bought inventory that was a little more scarce, they've got a higher percentage, et cetera. And these programs are designed to run through the end of July and also the end of August.

And you talked about quickly lowering the marketing spend but if I've calculating it correctly, the marketing efficiency on a origination volume basis is continuing to go down. I'm trying to understand, maybe a question for Scott, given how close he is to the marketing side.

What is happening on a like-for-like basis in terms of the marketing efficiency when you take out some of the noise that you've seen in the last quarter? And what is our expectation going forward? Do you think we'll see a stabilization and marketing efficiency when we look out over the next 6 to 12 months? Thanks.

Yes, so Q2 was -- there was quite a bit of a noise in there, which makes it a little harder to read. I think Kerry indicated there was a number of expenses in the sales and marketing line that actually are not related to borrower acquisition. Those include advisory fees for capital raising, severance costs and all of that.

So I think when we -- Carrie, help guide me a little bit on how we want to talk going forward. I would say --

Yes, while we were without the unusual expenses, what I just mentioned was we were 2.28% in sales and marketing which was down 7 basis points sequentially. Certainly both second quarter and third quarter tend to be our seasonably more favorable quarters relative to first and fourth quarter. So I think that you would certainly want to take that into account in terms of the momentum.

I think that going forward the other thing we can certainly talk about is that the environment, currently in terms of how we are looking at conversion. So one of the things is as we adjust rates and certainly adjust credit, that has an impact as well which can be a little bit of a headwind, depending on how much we cut. So I think there is momentum with seasonal timeframe into the third quarter but also we've made some additional cuts as well.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much. Maybe just a follow-up on some of the questions that were just raised. Can you help me understand what it is that give you conviction in the banks returning to invest in loans at the same degree as they previously were, particularly ex-incentives?

It looks like, I know on a percentage basis, the decline quarter to quarter wasn't that big. But on a dollar basis it looks like it roughly halved. How are you confident that ground is regained so quickly?

I think an important distinction for the banks is -- maybe I can give a little more color than what I said in the prepared remarks -- is that the banks have not been as motivated by the incentives. They have very clear and quite lengthy diligence requirements that have been articulated to us that we are working through. So unlike, let's say, some of the third-party funds or managed accounts that were able to respond quickly and see the economic benefit available to them, the banks just have a longer process they need to go through, both through their internal risk framework and decision-making as well as vis-a-vis the regulators.

What gives us confidence is that we've got a quite clear working plan with the banks, meaning we have their diligence lists. We are making very good progress at ticking through them. We've got timelines that we've agreed to in terms of what we deliver by when and what needs to happen on their side.

And as I indicated, we've got many banks back already buying today. It probably wouldn't surprise you to hear that the larger the institution, the longer that process is going to take.

Yes, I'm certain that's true. And to follow up on that lot point, Scott, once an institution overcomes the hurdle of the re-accomplishing diligence, why not return to their prior level of investment? Because one bad loan is as bad as 10 bad loans, right? So what prevents them from buying at the previous level?

I think with banks that's a reasonable expectation for us, is that it's basically we've got to meet their requirements, full stop. I think people are exhibiting right now a desire to test the pipes a little bit and ease back into it. But we are cautiously optimistic that once we have cleared all of these questions, that we will be able to get back to where we were. Is just a question, of course, of time. And that's a little different from the third-party funds, who -- they've got to raise capital on their own so they have a different set of loops they need to go through in order to assign additional funds.

Thanks for the explanation.

Bob Ramsay, FBR.

Hey, good evening. Just wondering, it looks like you guys pulled the full-year guidance. As you think about the fourth quarter with similar origination volumes but with no severance with no or very little incentives, are you guys back at a point where you're adjusted EBITDA-positive in the fourth quarter?

As I mentioned with the third quarter, we did provide a bit more range in both revenue and EBITDA. I think our confidence about investors re-engaging is sound but there is still a number of pieces in terms of how we are working to satisfy diligence, what we're doing internally in terms of builds and so forth, that leaves a little bit less certainty to the numbers.

So at this point -- and I also mentioned that we are looking at other types of investor structures that actually could have some sort of investor acquisition costs to them. I think that one of the things when we look back at this experience and certainly over the last couple of years, we've talked about being both neither supply- nor demand-constrained.

And so on the capital side of the business, the actual cost of acquiring investors has been really low to almost zero. Structurally, going forward if we know that we have more certainty in that investor side of the business, I think that we definitely would want to structurally begin to think about changes like that, and Scott mentioned that.

To the extent that those types of things, or those types of arrangements, are things that we put into place later this year, that would also introduce a level of variability. So while we feel very much like we're healing and moving out, we, at this stage, felt confident about one quarter out. Looking at doing annual guidance again would be something that we would be thinking about for next quarter.

Okay. And thinking a little further out, and at this level of originations, the level in the second quarter, the level you expect in the third and fourth, when you get through all of the noise, this is the level you expect to be able to be EBITDA positive?

I'm sorry. What was just the last part again?

Yes, can you generate positive adjusted EBITDA at this level of originations once you get through all of the noise?

Yes, sorry. We've talked in the past about the variability in the model and having an extreme amount of leverage. And so to the extent that we wanted to move to EBITDA-positive, it's not based on a volume level. I think I've share this in the past that even several years ago at the $1 billion of originations, we were EBITDA-positive.

We actually, when we made our recent job eliminations, we actually did very little in, for example, our technology engineering area. Our focus on wanting to invest in the future and make sure that we have the infrastructure for that growth is a trade-off that we made.

So we certainly are focused on moving back to being EBITDA-positive and wanted to make sure that we structure and think about doing that on a relatively quick basis. But at least at this point we're not giving a sense of when that quarter might turn. But certainly it's a focus and with the caveat that we do recognize that we have a bit of a higher expense base based on some of these unusual expenses and also a higher investment in our technology team.

Okay. Fair enough. Last question and I'll hop out. I know you said, Carrie, you had given your notice early this year. I'm just curious when the firm engaged the outside recruiting firm to work on the replacement process and what the timeline looks like from here with that.

Specifically we're not sharing the specifics of when we engaged the retained firms. Scott, do you want to talk a little bit about the process?

Yes, I would say we are very encouraged by the level of candidates that we are seeing. I think it's evidenced by some of the key hires we've made with Patrick Dunne and Tim Mayopoulos on the Board. We've been really very pleased with who we've got in motion. So we do expect in due course to be making an announcement.

Okay. Thank you.

Stephen Ju, Credit Suisse.

Thanks. Scott, investors are probably more aware of the events of May 9 versus borrowers. I'm wondering if you're seeing any sort of impact of borrowers willingness to choose LendingClub versus somebody else? And how that might be filtering through to your guidance parameters?

And also wondering in relation to the population reduction, especially lower credit tranches, were these eliminated or reduced tranches more easily or were the more difficult to acquire? And looking longer-term, as you reestablish your relationships with the investors, are the eliminated tranches something you can think about reestablishing longer term? Or this permanently off the table? Thanks.

On the question on borrowers, your assessment is right in that they are less likely to be exposed to recent events. And in fact, we have seen really no impact at all on borrower response rate. Our MPS has remained strong.

We've been anecdotally gotten almost no questions on the topic. Our response rates remain very solid. So it's really no impact there. And as I mentioned, we were pleased that even with this extraordinary series of events, that we were able to deliver on our commitments and fund that the approved applications.

On the credit reductions, I think a way to think about this population is -- it's really around I would view this a bit of a normalization of credit. As this recovery gets longer, credit has become more available and these individuals in particular have shown a propensity to be building debt, coming into the loan and then continuing to accumulate debt after the LendingClub loan, as opposed to leveraging the loan to pay off, pay off their debt.

So is it permanent? I think this credit as a whole is pretty organic and it's something that is living and breathing. And I think these changes reflect the current environment, so I don't think it's permanent. There are things that we can do to manage this population differently through things like direct pay, which we launched earlier this year that essentially is part of the application process, pays down existing debt.

So I think if you couple that maybe with some monitoring tools, that would be the kind of thing that over time we could add. But given our more modest near-term volume ambitions and our desire to really boost the attractiveness of the asset, this was the right decision for now. I think that's evidenced by the investor demand that we are seeing.

Thank you.

Michael Tarkan, Compass Point.

Thanks for taking my question. Scott, you mentioned looking at securing committed capital and some costs associated with that. Can you walk us through a little bit of the magnitude that you're thinking about there in terms of how big that capital could be? And what forms of costs those could take, whether it's waiving servicing fees or issuing some sort of warrants or equity. Any color there would be helpful.

The way we're thinking about it, first and foremost it needs to make rational business sense. So I know, and I'm sure you've seen it, Michael, there's been a lot of speculation in the press. I would say that it's a broad statement.

Our asset stands on its own and is something that is delivering attractive returns in and of itself. That's the first and foremost principle.

In exchange for committed capital, we certainly do recognize that there is a cost associated with that on behalf of the investor. And I think on our side we would be view it as needing to fit within the business model and make economic sense for us.

It would not be something we would necessarily look to obtain across the entire platform. But I think a minority of our funding that, when you have this together with the retail funding, we have a very solid base of which to operate from, regardless of macroeconomic conditions.

Okay. And then on the retail side, can you just give us an update as to where things stand with LC Advisors? I know there were some heavy redemption requests by the end of June. I'm just wondering about has abated, though.

Similar to what I talked about across a lot of our categories, I think the way an LCA investor signals a desire to pause is a redemption, and indeed we saw that. We have been quite busy taking a number of steps to improve our management, communication, governance over LCA funds.

We believe in the value that LCA provides. It's low-cost access to this asset class in a passive index format. So we are confident that over time we will be able to grow that particular source of funding again, but we do have some work to do on our side to get us there.

Okay. And then last one for me. I know one of your private competitors got a letter from the regulators in Colorado regarding lending under the Colorado laws. Did you guys receive a similar letter? And if so, any impact from that?

No. We have not received a similar letter.

Okay, thank you.

And this concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.