LendingClub's (LC) CEO Scott Sanborn on Q2 2016 Results - Earnings Call Transcript

| About: LendingClub Corporation (LC)

LendingClub Corporation (NYSE:LC)

Q2 2016 Earnings Conference Call

August 08, 2016 05:00 PM ET

Executives

James Samford - Head of IR

Scott Sanborn - President and Acting CEO

Carrie Dolan - CFO

Analysts

James Faucette - Morgan Stanley

Heath Terry - Goldman Sachs

Brad Berning - Craig Hallum

Mark May - Citi

Eric Wasserstorm - Guggenheim Securities

Bob Ramsay - FBR

Stephen Ju - Credit Suisse

Michael Tarkan - Compass Point

Operator

Good afternoon and welcome to the LendingClub Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [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.

James Samford

Thank you and 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're 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 a 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, we 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 comparison to the second quarter in the prior year.

And now, I’d like to turn the call over to Scott Sanborn.

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 9th. Over the past three months, we’ve been focused on re-engaging our investor and we are very pleased with our progress to-date. We believe we've 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 Lending Club to individual investors. We witnessed strong demand and pricing execution and a 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 the 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're 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 9th, 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 of the 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 is 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 disappointments.

As we have emphasized, a key strength of our model is the diversity of investors that come to Lending Club for attractive risk-adjusted returns. We divide investors into four separate categories: self-managed retail accounts, managed accounts, other institutions and banks. Post May 9th, 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 9th versus 15% in Q1, highlighting their resilience and importance. Retail investors represent a unique and powerful asset for Lending Club 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 9th. 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 reengagement. 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’ve been experiencing steady growth in bank funding, which represented 34% of volume in Q1. However posted May 9th our bank 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 respond 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 year marking budget through these efforts.

Now turning to credit performance, we are constantly monitoring performance data, market place 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 of 2015 we took the decision to raise rate. 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 bond from secured 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 vintages 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 side. This quarter we’re adjusting our reporting on origination mix to separate it into three categories. Standard personal loans, custom personal loan 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 scores 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 for borrowers with the highest credit quality. These loans are only available to our credited and institutional investors through private transactions.

The third category is other custom loans, which include 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 9th 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 turn the call over, I wanted to share the news that Carrie has decided to leave Lending Club to pursue a new opportunity. Carrie joined when we had about 40 employees, and she has been an important part of helping Lending Club grow and mature over the past six years. She approached us early this year by 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 a 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 Lending Club’s Corporate Controller since 2013 and has over 23 years of accounting and financial reporting experience.

So Carrie is leaving the company in 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?

Carrie Dolan

Thanks, Scott. Before I review our financial results, I first like to say thank you to Scott for his kind remarks. I’m extremely proud of this company. Since I joined 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 Lending Club 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 9th, many investors initially paused or reduced their investment activity. We were able to quickly respond to decrease - 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 reengaging 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 the slowdown in investor capital that occurred post-May 9th. Roughly 51% of the second quarter volume was originated prior to May 9th, 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 the 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 this fees is a servicing adjustment that delays the recognition timing as to $2.8 million as servicing revenue. We retained servicing for loans that are sold and as a result we recognized 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 service 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 cause the value of our servicing rates 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 adjust the revenue recognition timing.

Servicing and management fees as a percent of originations increased 28 basis points year-over-year to 75 basis points driven by higher relative growth in our servicing portfolio. Higher mix of sold loan volume and 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 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 estimates, due mainly to higher volumes as participants pulled money forward to take advantage of these incentives.

These incentives were recorded as a counter revenue in our other revenue line and averaged 1.45% across posed May 9th volume. 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 from higher transaction fees, 28 basis points from higher servicing and management fees, offset by 53 basis point decline in gain on sale, primarily driven by investor incentives.

The 26 basis points quarter-over-quarter decline was driven by 68 basis point reduction on gain on sales mainly driven by investor incentives, offset by 41 basis points from higher transaction fees and one basis point from higher servicing and management fees.

Now turning to expenses. In light of the lower volume run rate post May 9th and recognizing that fully reengaging 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 cost 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 acquisitions. As a percent of originations, sales and marketing expenses were at 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 percent of originations 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 planned higher origination volumes. As a result of the volume reduction post May 9th, the originated 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 cost in the second quarter.

Separately, while our variable costs associated with originations declined roughly in line with volumes, 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 drive contribution income and a contribution margin, which focuses on the efficiency 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 margins, 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 cost as we continue to diversify our investor mix.

Structural changes in our investor acquisition cost may move our longer term contribution margins 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 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 9th announcement and staffing reduction.

Specifically other G&A includes 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 9th. 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 with $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 of $7.4 million and a goodwill impairment charge of $35.4 million. Our annual goodwill impairment testing date 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 a number of factors. While top-line growth has been generally unplanned, higher expenses have reduced plan margins and several product enhancements have been delayed following the May 9th announcements.

In addition, a decrease in valuation multiples for the peer group and for Lending Club 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 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 30th, 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 volume 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 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 plans, 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 are 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 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 have the full - 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 a position to resume revenue growth and positive margin expansion in the first half of 2017.

With that, let’s open up the call for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from James Faucette of Morgan Stanley.

James Faucette

Thanks very much. I had a couple of questions. Carrie, you touched 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?

Carrie Dolan

Yeah, so we do anticipate kind of 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 kind of as we give further guidance as 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 that we are continuing to invest and have that stage correctly. And so that is work that’s currently underway that will form that cost structure.

James Faucette

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?

Scott Sanborn

So the level of investment varies pretty much. I would say as a whole in general they are lower levels than pre-Mother's Day, although as I noted they are all 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 and those investors have without exception have continued their purchase activity into August.

James Faucette

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

Scott Sanborn

Yeah. There is no new news to report there.

James Faucette

Okay, thank you.

Operator

And our next question will come from Heath Terry of Goldman Sachs.

Heath Terry

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 sort of what are your strategy for that could go longer term I realize a lot what you are dealing with right now is more sort of the immediate needs of the company. But as you think about what Lending Club could look like on the other side of this is there a real change to the funding model?

Scott Sanborn

So to your point our immediate focus has been on reengaging with our preexisting investors and that’s kind of been our primary focus and as noted we feel like we are 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 and that would include committed capital that we think might be a beneficial addition to our overall mix.

Now that will come at a cost having a committed capital out there. So we are being thoughtful about the size and scale of that, but that’s absolutely something we will be exploring actively once we’ve got our preexisting investors fully reengaged.

Heath Terry

Got it, thank you.

Operator

Next we have a question from Brad Berning of Craig Hallum.

Brad Berning

Good afternoon. Can you talk a little bit more on the expense side of more specifically what 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 on the expense side?

Carrie Dolan

Yeah, so the various buckets we talked about investor incentives we gave guidance specifically that kind of if you take a look at overall volume we’re anticipating those to be somewhere between 75 and 125 basis points, kind of across volume that today is netted against revenue, of the remaining expenses that were unusual obviously we had employee related severance cost. Those were definitely one time that we were not anticipating repeating that.

The expenses related to legal and due diligence and the reviews, those are things where we’re continuing to due 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 to the fourth quarter.

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

Brad Berning

And then just a follow-up, I know some other investors have been asking this already. And just 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? And on the volumes just to help us understand kind of how things have been going on the recovery side on the volumes?

Carrie Dolan

So on volumes, we do have - we did talk about that many investors paused initially after May 9th. And so certainly the volume or the momentum have increased more in June certainly than it did in May.

And we’re seeing even from June into kind of the momentum continuing. And it was really based on kind of the various investor types in terms of how fast that momentum change. We do have - 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 kind of what that look like. And we’re not certainly breaking it out for May and June, but certainly June was a heavier month than May.

Brad Berning

Understood, I’ll get back in queue. Thank you.

Operator

And next, we have a question from Mark May of Citi.

Mark May

Thank you. Just a couple on the incentives. Can you just remind us, I’m sorry if I missed this already, whether that's booked on the P&L?

And did you mention what portion of the originations in the quarter were incentivized? And kind of what gives you comfort in terms of forecasting the origination volumes as you reduce or eliminate these incentives? And I had a follow-up, if I could. Thanks.

Carrie Dolan

Sure, I’ll start with the expenses. So the actual incentives are booked as a net revenue. So we had $14 million essentially that reduced revenue based on this. And we did say that - I said in my comments that really there are 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.

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 putting these incentive programs earlier. So we have - we feel we have very good visibility on how they’re structured and the tiers.

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 got a higher percentage, et cetera. And these in programs that are designed to run through the end of July and also at the end of August.

Mark May

And you talked about quickly lowering the marketing spend. But if I calculating it correctly, kind of the marketing efficiency on an origination volume basis is continuing to go down.

I guess I’m just trying to understand, maybe a question for Scott, given how close he is to the marketing side is - what’s happening on kind of like-for-like basis in terms of the marketing efficiency when you start to take out some of the noise that you’ve seen in the last quarter?

And kind of what is your expectation going forward? Do you think we’ll see a stabilization in marketing efficiency when we look out over the next 6 to 12 months?

Scott Sanborn

Yeah, so Q2 was - there was quite a bit of noise in there, which makes it a little harder to read. I think Carrie indicated there is 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 guide me a little bit how we want to talk going forward I would say…

Carrie Dolan

Yeah 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 kind of 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 kind of going forward the other thing we can certainly talk about is that the environment currently in terms of how we’re looking at conversion. So one of the things is that we adjust rates and certainly adjust credit that has an impacted 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.

Operator

And our next question comes from Eric Wasserstorm of Guggenheim Securities.

Eric Wasserstorm

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. I mean it looks like I know on a percentage basis to decline quarter to quarter wasn’t that big, but on a dollar basis it looks like it roughly halved. So how is that ground - how are you confident that that ground is regained so quickly?

Scott Sanborn

Yeah so I think an important distinction for the banks is maybe I didn’t give - 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 their internal risk framework and decision making as well as vis-à-vis their regulators. I’d say what gives us confidence is that we’ve got a quite clear working plan with the banks meaning we have their diligence lifts, we are making very good progress at taking 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. And it probably wouldn’t surprise you here that sort of the larger the institution, the longer that process is going to take.

Eric Wasserstorm

Yeah no I’m sure that’s true. And just a follow-up on that last point Scott, once an institution overcomes the hurdle of re-accomplishing diligence why not return to their prior level of investment if one bad loan is as bad as 10 bad loans right, so what prevents them from buying at the previous level?

Scott Sanborn

Yeah so I think with banks that’s a reasonable expectation for us that it’s basically we’ve got to meet the requirements full stop. I think people are exhibiting right now a desire to just kind of 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 it’s just a question of course of time.

And that’s again a little than the third party funds who they’ve got to raise capital on their own so they have a different set of who they need to go through with in order to assign additional funds.

Eric Wasserstorm

Thanks for the explanation.

Operator

And the next question comes from Bob Ramsay of FBR.

Bob Ramsay

Hey, good evening. Just wondering it looks like you guys sort of hold before year guidance as we think about the fourth quarter with similar origination volumes with no severance, with no or very low incentives. Are you guys back at a point where you’re adjusted EBITDA positive in the fourth quarter?

Carrie Dolan

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 reengaging is sound, but there is still a number of pieces of in terms of how we are working to satisfy diligence, what we are doing internally in terms of kind of bills and so forth. That leaves a little bit less kind of 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 cost 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 kind of 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.

And 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 began to think about changes like that and Scott mentioned that. So to the extent that those types of things or those types of arrangements or I think that we put into place later this year that would also introduce a level of variability. So while we feel very much like we are healing and moving out we at this stage felt confident about one quarter out. We - looking at doing annual guidance again would be something that we would be thinking about for next quarter.

Bob Ramsay

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

Carrie Dolan

I’m sorry, what’s just the last part again?

Bob Ramsay

Yeah. Can you generate positive adjusted EBITDA at this level of originations once you get through all the noise?

Carrie Dolan

So we have talked in the past about the kind of variability in the model and having 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 and I think I have shared this in the past that even several years ago $1 billion of origination we were EBITDA positive. We actually - when we made our recent job elimination we actually did very little in for example our technology engineering area and our focus on wanting to invest in the feature and make sure that we have kind of the infrastructure for that growth is a trade-off that we made.

So we certainly are focused on moving back to be EBITDA positive and I wanted to make sure that restructure and think about kind of 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 it certainly it’s the 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 expense and also a higher investment in our technology team.

Bob Ramsay

Okay, fair enough. Last question and then I’ll hop out. But I know you said Carrie I guess you had given sort of you noticed 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?

Carrie Dolan

Specifically we are not sharing the specifics of when we engage the retain firm. Scott do you want to talk a little bit about the process?

Scott Sanborn

Yeah, I would say we are very encouraged by the level of candidates that we are seeing, I think is 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.

Bob Ramsay

Okay, thank you.

Operator

And next, we have a question from Stephen Ju of Credit Suisse.

Stephen Ju

Thanks. So Scott, investors are probably more aware of the events of May 9th versus borrowers. And I’m wondering, if you’re seeing any sort of impactful borrowers’ willingness to choose Lending Club versus somebody else?

And how that might be filtering through to your guidance parameters? And also wondering, in relation to the population reduction, especially in lower credit tranches, were these eliminated or reduced tranches more easily or more difficult? Were they 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 is this permanently off the table? Thanks.

Scott Sanborn

Yeah, so 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 rates. Our NPS has remained strong. We’ve even anecdotally gotten almost no questions on the topic. Our response rate remain very solid, so really no impact there.

And as I mentioned, we were pleased that even with this kind of extraordinary series of events that we were able to deliver on our commitments and fund 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 as 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 kind of coming into the loan and then continuing to accumulate debt after the Lending Club loan as oppose to leveraging the loan to kind of 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. Also, there are things that we can do to manage this population differently through things like Direct Pay, which we launched earlier this year and essentially as 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. And I think that’s evidenced by the investor demand that we’re seeing.

Stephen Ju

Thank you.

Operator

The next question comes from Michael Tarkan of Compass Point.

Michael Tarkan

Thanks for taking my question. Scott, you mentioned looking at securing committed capital and some costs associated with that. Can you just kind of 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 then what forms of cost those could take, whether it’s waiving servicing fees or issuing some sort of warrants or equity? Any color there would be helpful.

Scott Sanborn

Yeah, I mean, I - the way we’re thinking about it. First and foremost, it needs to make a rational business sense. So I know and I’m sure you’ve seen it Michael, there has 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. So that’s kind of the first and foremost principle.

And 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 view it as needing to kind of fit within the business model and make economic sense for us. It would not be something we would necessarily look to obtain kind of 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 at which to operate from kind of regardless of macroeconomic conditions.

Michael Tarkan

Okay. And then on the retail side, can you just give us an update us to where thing stand with LC advisers? I know there were some heavy redemption requests by the end of June, I'm just wondering if that has abated at all?

Scott Sanborn

So similar to what I talked about across a lot of our categories, I think the way NLCA investor signals the desired to plause 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 kind of 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.

Michael Tarkan

Okay. And then last one for me, I know one of your private competitor got a letter from the regulators in Colorado regarding lending under the Colorado law, just did you guys receive a similar letter and if so is it any impact from that?

Scott Sanborn

No, we have not received a similar letter.

Michael Tarkan

Okay, thank you.

Operator

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

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