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Edited Transcript of LC.N earnings conference call or presentation 4-Aug-20 9:00pm GMT

Q2 2020 LendingClub Corp Earnings Call

San Francisco Aug 28, 2020 (Thomson StreetEvents) -- Edited Transcript of LendingClub Corp earnings conference call or presentation Tuesday, August 4, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sameer Shripad Gokhale

LendingClub Corporation - Head of IR

* Scott C. Sanborn

LendingClub Corporation - CEO & Director

* Thomas W. Casey

LendingClub Corporation - CFO

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Conference Call Participants

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* Eric Edmund Wasserstrom

UBS Investment Bank, Research Division - MD & Consumer Finance Analyst

* Heath Patrick Terry

Goldman Sachs Group, Inc., Research Division - MD

* Steven Matthew Wald

Morgan Stanley, Research Division - Equity Analyst

* William Haraway Ryan

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to LendingClub's Second Quarter 2020 Earnings Conference Call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

I would now like to turn the conference over to Sameer Gokhale. Please go ahead.

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Sameer Shripad Gokhale, LendingClub Corporation - Head of IR [2]

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Thank you, and good afternoon. Welcome to LendingClub's Second Quarter 2020 Earnings Conference Call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO.

Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include but are not limited to the impact of COVID-19, our ability to navigate the current economic environment, the timing and benefits of our pending acquisition of Radius, platform volume and the future performance of our business and products. Our 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 and our most recent forms 10-K and 10-Q, each as filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q.

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.

Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release and related slide presentation. The press release and accompanying presentation are available through the Investor Relations section of our website at ir.lendingclub.com.

And now I'd like to turn the call over to Scott. Scott?

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [3]

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All right. Thank you, Sameer, and thank you, everyone, for joining us. I hope everyone is staying healthy.

Earlier today, we reported our financial results for the second quarter, which were primarily driven by the significant decline in origination volume that we had anticipated. While it is clearly a challenging and an uncertain environment, we are successfully managing our liquidity. We feel good about how we've positioned the company to ride this out. So we do believe that Q2 represents the trough in terms of loan investor demand and our reported financial results. Furthermore, we believe that this recession is allowing us to demonstrate the resilience of our asset class, the depth of our membership base and the strength of our digital underwriting and servicing capabilities.

While there is certainly a long road ahead, as Q3 gets underway, we are seeing the early signs of green shoots, with recent sales of multiple loan portfolios at or above their carrying value and 5 of our top 10 investors now back on the platform purchasing new issuance, albeit at modest levels. With a gradual resumption of investor activity, and our restructuring and associated costs behind us, we are appropriately sized to preserve our cash while maintaining the capacity to rebound when it appears prudent to do so. We believe we have positioned ourselves well to navigate an extended period of uncertainty until we close the bank acquisition. Once the acquisition of Radius is complete, we will become a leading digital bank with a demonstrated track record of effective underwriting through a very steep downturn and have a clean balance sheet to assist in our recovery.

Okay. So before I dive into the details on the quarter, I want to take a step back and talk about the economic environment, which is obviously unsettled. Unemployment rates remain high, states are pausing and even reversing their plans for reopening, and the level and timing of future government stimulus is still to be determined. Having said that, there are some factors that have helped mitigate the virus' economic impact on U.S. consumers. So first, versus 2008, consumer balance sheets were relatively strong coming into this downturn with lower debt levels in relation to their assets. Second, the size and speed of government stimulus is unprecedented and has helped them weather this difficult environment. And third, consumers seem to be behaving prudently, reducing spending, accumulating savings and working hard to stay on track with their bills.

Against this backdrop, I shared in May how we are directing our activities according to 5 guiding principles as we stabilize the business to address the effects of the coronavirus. These same principles remain in place as we transition out of defense mode begin the recovery and make progress towards our top priority of becoming the first U.S. fintech to acquire a bank.

So since the beginning of the pandemic, our #1 priority has been to keep our employees safe. They have remained safe, I'm pleased to say, as well as engaged and productive in delivering for our customers. Given how well it's working and the continued uncertainty around school openings, childcare availability and the path of the virus, we have told all employees that they'll be able to work remotely through at least the end of this year.

So I'll move on to our second priority, which is to deliver investor returns. We know the market has been questioning the ability of the personal loan asset to hold up in a recession, and we now believe we are in a position to begin to answer that question positively. So overall, we expect, based on what we're seeing, that our most recent pre-COVID vintages that those that will be most impacted by the virus economy will deliver a return of roughly 3%. While that's below our pre-COVID expectations, we are pleased with this result, and it supports our view that consumers value their relationship with LendingClub and are prioritizing their loan payments accordingly. These estimates of performance are based on what we're seeing in the portfolio, including the trajectory of LC members on payment deferral plans.

I'll point you to Slide 9 on the investor presentation, where the good news is, you can see from our peak in May, the number of loans deferring payments has dropped from 12% -- that was our peak -- down to 5%. And 2/3 of borrowers coming off deferral plans are now paying in full. And for the minority of borrowers who have indicated ongoing hardship, most are now choosing to make partial payments through an interest-only plan we introduced in Q2. So we see this as an encouraging sign both for borrowers, who are taking steps to stay on track; as well as investors, who are receiving these payments.

Also, and as the second graph on Slide 9 of the investor presentation indicates, for the vast majority of our members who are not enrolled in any hardship programs, they're performing even better than they were pre-COVID. So all in all, this is an encouraging current read on performance for our servicing portfolio.

So let's talk about new loans. As we discussed last quarter, new originations are significantly different from Q1. Higher income, higher FICO, lower payment-to-income ratios. And importantly, our new loans are heavily focused on our existing 3 million members, those who have demonstrated successful past payment history with LendingClub. This is because loans to existing members have exhibited significantly lower losses than loans for new members with similar credit profiles, and they also come at a much lower cost of acquisition. So our ability to leverage this data and these relationships is a key competitive asset for LendingClub and will help us deliver our targeted 5% IRRs for investors.

The returns that we are expecting to deliver is slowly bringing investors back to the platform, albeit at a reduced volume, with the first ones to return being those with their own strong views on credit, and that includes companies who build businesses and credit models focused on marketplace investing. We expect all of our investors to be closely watching the performance of new vintages to our higher-quality member base manifest over the next few months, and we anticipate that this future book will provide attractive risk-adjusted returns for a broad range of investors, including for LendingClub, as we become a bank and buy loans on the same basis as our current platform investors.

Beyond personal loans, I'll make a quick note, the auto loans continue to surpass yield and loss expectations of investors despite the economic environment, and our patient finance business is recovering very well. Origination volume there is now getting close to pre-COVID levels.

So that's it's for delivering investor returns. I'm going to move on to our third priority, which was preserving liquidity. Tom will talk in more detail about this. What I'll say is now that we've resized our expense base, we are well positioned here. Our current focus is on increasing our strong cash position to maximize flexibility and prepare for the acquisition and capitalization of the bank. And accordingly, we've taken steps to convert loans on our balance sheet to cash with sales of $100 million in June, with more balance sheet sales to come this quarter, Q3, to prepare us for our next priority, which is staying on track for Radius.

So our team is working hard towards becoming a bank. Not too much to add today beyond saying that I want to thank the regulators for working with us so collaboratively and effectively even as we have all moved to this virtual environment. I am more excited than ever about this transformative acquisition. Today's environment is a stark reminder of the benefits of access to stable deposit funding. Of course, in addition to the funding, the attractive financial economics, the resiliency and the regulatory clarity that the acquisition will provide, it will also enable us to create a category-defining experience for our members and help us help them achieve financial success.

So that brings me to our final priority, which is to support our members. During this crisis, we have remained focused on helping members navigate this difficult period, no matter where they are in their financial journeys. We recently rolled out multiple ways to help those most affected, including new hardship plans, new ways to pay through self-service options on the web and by phone and many other innovations. We also launched our new member center in May, which provides a variety of tools and resources to help members manage their finances more effectively. Approximately 0.5 million members visit this member center every month, and this speaks to how much our members want to repay their LC loans as well as to their overall engagement with LendingClub.

I'll note that while personal loans have become more mainstream since the last recession, there are still some lessons to take from 2008. TransUnion released a study last week showing that personal loan repayments performed as well as credit cards during the Great Recession, and our internal data for the current crisis supports this assertion. Our payment rates reflect the ability of our team and our platform to adapt to a rapidly changing environment in support of our borrowers.

I've listened in on many member calls of those looking for help to stay current on their payments, and it's been extremely gratifying to hear how our Lending Care call center associates are able to support and reassure our members and provide a range of payment solutions. Tough times are when brands build the strongest relationships with our customers, and we believe our work to help our members during this time will pay dividends when we can offer them an even broader array of products after we become a bank.

I speak for the whole company when I say that we can't wait to bring this reimagined banking experience to life for our members.

Okay. With that, I'd like to hand it over to Tom.

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Thomas W. Casey, LendingClub Corporation - CFO [4]

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Thank you, Scott. Before I get into the details for the quarter, I'd like to provide a high-level overview. Results for the quarter largely reflected the impact of significantly lower origination volumes, which we had anticipated. This contrasts with our first quarter results where origination volumes were closer to our historical levels but reflected significant fair value marks on our loans and securities as the economic outlook deteriorated and credit spreads widened.

For the second quarter, we opportunistically sold loans from our balance sheet, indicating some improvement in the market compared to Q1. Our origination volumes have come off the bottom, with July volumes doubling from our low point in May, as investors have managed through their liquidity issues and have seen the recent performance of LendingClub loans. As Scott mentioned earlier, we have prioritized generating higher levels of liquidity and intend to capitalize Radius Bank with cash.

Our estimated net liquidity position remained strong at $554 million and increased slightly from Q1. Our expenses also decreased significantly as we took decisive action during the quarter to better align our expenses with revenue. Looking ahead, with a strong level of liquidity, high levels of cash and significantly reduced cash expenses, we believe we are well positioned to successfully navigate through this challenging environment and acquire and capitalize Radius Bank.

So let's turn to the financials. For Q2, we reported GAAP net loss of $0.87 per common share and adjusted net loss of $0.60 per share. The quarter's results primarily reflect a net $147 million decrease in revenue compared to the second quarter of 2019, offset partly by an $86 million reduction in expenses. The reduction in revenue was primarily the result of a decline in transaction fees as originations decreased by 90%, in line with our call last quarter. Transaction fees decreased to $4 million from $152 million in the second quarter of 2019 as origination volumes decreased to $326 million from $3.1 billion in the quarter a year ago. While loan origination volumes were down in line with our expectations, we're seeing some recovery, and our Q3 trajectory of volume is between $500 million to $600 million.

Last quarter, I shared with you that loan prepayment rates significantly decreased as consumers conserve cash and we saw an increase in consumers seeking hardship plans. In the second quarter, we saw a rapid recovery in the prepayment rates back to pre-COVID levels, indicating borrowers have resumed their historical personal loan payment patterns. For the quarter, the recovery in prepayment rates had 2 impacts: One, we issued a pro rata refund of the transaction fee for borrowers who prepay their loan balances early and hold the reserve-based on prepayment estimates. So when prepayment speeds go up, we increase our reserve liability. And two, prepayment speeds are an input into the valuation of our servicing assets, which is derived as the present value of the future cash flows from our servicing and collection portfolio. So when prepayment speeds go up, projected cash flows come down. Taken together, these 2 items impacted revenue for the quarter by a negative $19 million.

Now let's turn to net interest income and net fair value adjustments. As I mentioned in my opening remarks, we did not see additional credit marks this quarter. Net fair value adjustments for the quarter were negative $6 million compared to negative $102 million last quarter. The negative $6 million fair value adjustment in the second quarter primarily reflected 3 things: first, a negative $8.5 million fair value adjustment related to the natural decline in present value future cash flows of loans on our books offset by $22.8 million in net interest income we generated in the quarter; second, a $6 million positive fair value adjustment related to loan sales from our balance sheet above carrying value as liquidity premiums have tightened; and third, the remaining negative $3.5 million was primarily related to the pricing discounts we've been using to incentivize our loan investors to return to the platform. And then just rounding out, other revenue decreased $2.5 million as the referral revenues declined due to lower volumes.

Now let's turn to our expenses. As we've said, our top priority to navigate this downturn has been to preserve our liquidity. One of our first initiatives was to resize our expense base to reflect lower revenues as we position ourselves for a rebound. We announced significant restructuring actions during the quarter to reduce both our fixed and variable costs. All together, this drove a 55% decline in our operating expenses year-over-year or a reduction of $86 million for the quarter. As a reminder, the impact in areas were primarily those focused on discretionary opportunities and new business initiatives, where we are less focused at this time given the economic outlook. We did incur $17 million of restructuring expenses in the quarter primarily related to the reduction in our workforce. The cash impact of these expenses is reflected in our cash position at the end of the quarter.

Our variable cost alone decreased by almost $69 million year-over-year, primarily reflecting a reduction in paid marketing expenses as well as savings in our operations area. This included the impact of pausing paid marketing in Q2 and focusing new originations on our large existing borrower base. As Scott mentioned in his comments, marketing to our existing members has the dual benefit of low acquisition costs and better credit performance. Now despite the rapid deterioration in the economic environment and the decline in our revenues, we were able to keep our Q2 contribution margin relatively healthy at about 49% compared to 52% a year ago. This reflects the flexibility inherent in our business model, with the ability to dial back our variable expenses very quickly, while our scale and installed base of over 3 million members still enables us to produce volumes at very low marketing costs. This will help us maintain the efficiency of our marketing expenses even as originations ramp back up.

Now compared to the second quarter of 2019, our fixed technology and G&A expenses decreased by over $17 million as we reduced headcount and third-party spend and paused growth projects and conserved cash. In addition, our senior employees, the leadership team and members of the Board agreed to base pay reductions of 20% to 30% in addition to a 30% reduction in our head count we announced last quarter. These actions were painful but necessary steps to both streamline our operations and appropriately align our expenses given top line headwinds in the near term. We expect our fixed expense run rate to benefit by over $20 million in Q3 when compared to last year, reflecting a full quarter run rate benefit of our cost reductions.

Now taken all together, these actions enabled us to resize our operating expense base with our revenue, with $554 million of estimated net liquidity, we are positioned well not only to weather the storm but also to execute against our #1 strategic objective of completing the acquisition and beginning a new chapter for our business.

Now let me turn for a moment to our balance sheet. Over the last 4 years at the company, we have focused the business on maintaining prudent liquidity and strong balance sheet in case we ever faced a challenging period, such as the one we're operating in today. With $554 million of estimated net liquidity, we are fortunate to have entered this environment from a position of strength, and as our volumes and revenues recover, we will continue to prudently manage our balance sheet liquidity. To be more specific, we have taken a number of actions with this objective in mind. As I mentioned earlier, we resized our expense base and have limited the use of our balance sheet to support new originations through structured programs. While this will have some negative impact on our short-term results, prioritizing liquidity over increasing short-term revenue and earnings has been a strategic management decision as we prepare for our business for the acquisition and capitalization of Radius Bank. The management team and the Board have determined that locking in the certainty and confidence that comes with a strong cash position as we prepare for the acquisition is imperative, especially given the volatile operating environment we are currently in.

As you notice on Page 6 of the investor presentation, we've been steadily increasing our cash and cash equivalent position, which is up to $338 million. We've been able to do this by dramatically reducing our expense base and focusing the business on our cash flows, and we have opportunistically been selling loans held in our balance sheet to increase our cash position. We've been able to sell most loans above our carrying value, and we plan to continue with this strategy to put ourselves in the strongest possible liquidity position.

As we reduce the loans held in our balance sheet, we are also reducing our debt facilities, including the warehouse lines associated with those loans. We recently renegotiated one of our existing warehouse lines for more favorable terms and also paid down $40 million of the $110 million revolving debt facility while growing our cash position. In July, we've made several additional loan sales, further increasing our cash and cash equivalent position at the end of the month.

Now looking ahead to the second half of 2020, I wanted to share some thoughts before I pass it back to Scott. As I said, we've been able to significantly resize our cost base to reduce the cash burn and position us to maintain strong liquidity while maintaining core competencies to return to growth. We've been able to sell a significant portion of our loans held for sale at prices at or above our carrying values, adding to our cash and liquidity, and we continue to engage with regulators and are working hard towards the acquisition of Radius and the National Banking Charter.

And while there is still a lot of uncertainty, we have seen some early signs of recovery. Our borrowers have demonstrated resiliency, and we expect to deliver positive investor returns. Monthly loan volumes have more than doubled from the recent bottom in the second quarter, and 5 out of our top 10 investors have resumed purchasing. Our loyal existing customer base allows us to maintain lower marketing costs while growing volumes and maintaining prudent credit standards. And the borrower profiles of our new originations have improved significantly, including higher average incomes and FICO scores.

If the last Great Recession was any indication, we firmly believe that our borrowers can continue to restructure their balance sheets by refinancing out of higher-cost credit card debt and expect investor demand for our loans to be strong as the economy recovers. With the acquisition of Radius and the possibilities that come with a national bank charter, we'll be able to help members to a much greater extent while maintaining prudent underwriting and increasing our operating efficiency even further.

With that overview of our financial results, let me turn it back over to Scott for his comments.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [5]

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All right. Thanks, Tom. Just a couple of quick comments before we go to questions. So the second quarter's results, they were in line with our expectations: significant drop in revenue driven by the drop in originations. And while we remain cautious on the near-term outlook, we are seeing signs of recovery. And we're pleased with how our loans are performing. We've maintained our liquidity and increased our cash position in the quarter as we prepare for the bank acquisition that will drive the next chapter of the company's growth.

And lastly, on behalf of the management team and the Board, I'd just like to take a minute to thank the LendingClub employees. They have been working tirelessly to support our borrowers, our investors and each other in the face of countless hours of Zoom calls, and they've demonstrated an incredible ability to adapt and evolve with purpose. So I am deeply grateful for that. And with this team and their commitment, I am confident that we are positioned to weather the current environment and take advantage of new opportunities on when they arise.

So with that, I will turn it back over to you, Sameer, to open it up for Q&A.

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Sameer Shripad Gokhale, LendingClub Corporation - Head of IR [6]

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Thank you, Scott. Before we open it up to questions, as a courtesy to others, we ask that you limit yourselves to one question and a follow-up and return to the queue if you have additional questions.

Operator, please open the call up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Eric Wasserstrom from UBS.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [2]

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So a couple of questions, please. The first is -- thanks for the information on the deferrals and how that's trending. I'm wondering, perhaps, Tom, can you give us a kind of framework to -- in terms of how to think about the impending experience from the loss curves? And kind of what's embedded in terms of loss experience in that 5% IRR?

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [3]

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Eric, you were a little hard to hear. You broke up quite a bit, but we'll give an answer that I think covers...

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Thomas W. Casey, LendingClub Corporation - CFO [4]

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Can you restate the question?

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [5]

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I think you're asking what are some of the assumptions embedded in our IRR projections. So I'll start. Tom, feel free to add, which is -- look, we've -- first, just important thing to note is that our members are -- if you look back at what we historically issued pre COVID, we're talking about people whose individual income is in the $90,000-plus range. So just overall impact of this recession, which is as much has been reported, is disproportionately impacting lower-income people. So overall, we feel like the borrower base we came into this with, given the last 2 years of tightening, was in a good spot.

And as we look forward, we have 2 different pieces we're looking at, one is the performance of the back book pre COVID, and the other is the performance of the new origination. We've done tops-down, bottoms-up, lots of ways of looking at this. And we have what we believe to be pretty conservative assumptions about overall stress on the portfolio. So first, if you look at the hardship plans, what we anticipated is -- what we modeled after was how people performed on hardship plans coming out of hurricanes. And what we're seeing is they're performing significantly better than that, right? With the majority of people rolling back to full payments and even those that are expressing additional hardship opting -- most of them for actually partial payment. And so we are not expecting those people who roll back to full payment to perform like they would have pre COVID. So we are modeling additional stress on that population because they've kind of raised their hand and said that they are more vulnerable.

The same thing is true for the population, which is most of our book, which is borrowers who have never gone into the hardship plan. They are performing better than ever, significantly better than they were pre COVID. You can see that in our public delinquency numbers. We did not assume that, that holds. So in our outlook, we're actually assuming they go back to performing like they would on average pre COVID.

So we feel like we're being -- obviously, it's an uncertain environment. There is still a lot yet to come, but we have put in some pretty conservative assumptions.

And the only other thing I'd add when I talk about that servicing portfolio, Eric, is that keep in mind how quickly this portfolio pays down, right? Within a year post issuance, you've got close to half of your principal back. So the longer these results hold, the more quickly we are paying down the risk and reducing the risk. So that's the back book. When you talk about new issuance, we're looking at -- as we indicated, we're focused on our existing members. We know they perform better. We have additional data on them. We're doing 100% virtually verification of income and employment and have a tighter credit box.

So we -- the profile looks quite good, and it's still too early to say how's credit, right, because you're only a few months in. That's something that we're definitely going to see that will start to -- we'll get a 6-month read come Q4. But the early data is -- looks very, very good. But I would emphasize it's early data.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [6]

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And can I just ask one follow-up, Tom, on the -- on your funding condition currently? Thanks for the update on the renewals. Is there anything outstanding (inaudible) like outstanding like in process of being renewed or coming due in the near-term with respect to your remaining warehouse or other debt facilities?

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Thomas W. Casey, LendingClub Corporation - CFO [7]

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No, Eric. You were garbled a little bit, but I think the question is, where are we with our warehouse lines and any additional renegotiations? As I mentioned, we did renegotiate our warehouse lines. Keep in mind, our warehouse lines are used for our structured programs, and so the fact that we paused them, we don't need a lot of those warehouse lines the current loans we have. They're in warehouses, and we're managing that. As Scott indicated and I did as well in my commentaries, we are selling loans from the balance sheet that are held for sale and correspondingly paying down those warehouse lines. So we did modify one warehouse line in the quarter -- or actually in July. And more importantly, we actually paid down the revolver by $40 million.

So we feel very good about our liquidity profile and managing that over the quarter and really feel that we're in good shape, again, emphasizing the cash burn is pretty -- very low and allows us to really navigate our way through the environment.

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Operator [8]

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Our next question is from Steven Wald from Morgan Stanley.

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Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [9]

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Maybe if we could just start off on some of the comments, I think, you made at the end there, Scott, about where we are now relative to the end of the quarter. I think we ended the quarter sort of down in the 90% range, and it sounded like it doubled off that bottom. I just wanted to make sure I understood that properly. Is that to imply we're sort of in the down 70% to 80% off of, let's call it, normal 2019 levels on originations?

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Thomas W. Casey, LendingClub Corporation - CFO [10]

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Yes. I -- this is Tom. I indicated in my prepared remarks we think we're on a trajectory of about $500 million to $600 million of volume for the third quarter. So clearly, you're absolutely right. The lows were probably in the April, May time frame. June was better than May, and July was better yet again. So we saw a nice doubling, but it was off a pretty low amount, frankly. And so we wanted to provide some context on where we think the quarter will be. So $500 million to $600 million is where we think that's going to come out. Again, we're managing -- tightening underwriting, working with a number -- 5 of our 10 investors to get back to recovery mode as we navigate our way through this.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [11]

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Yes. Just to add. I think what we are looking to do right now is just keep our finger on the pulse of credit while we look for the returns of these new post-COVID vintages to manifest. Because we think, as those results come back in, that will correspond with investors being able to really kind of see what can happen because 6 months of data starts to be able to confidently put your finger on what you think the full vintage is going to perform at.

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Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [12]

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Right. That's very helpful. Maybe if I could squeeze in one follow-up on a separate subject. With Radius, I heard the commentary about keeping in dialogue with regulators and getting their help in terms of figuring out what is needed to close. I guess I'm just curious following up on some prior thread of comments that you guys have made about the shifting goals that you're looking to deliver around showing them you had the processes and risk management initiatives in place. And obviously, Tom, with all the areas you outlined of shoring up cash. I'm wondering, is that generally in line officially with kind of where the goalposts are from the regulator side?

And then separately, as you've gone through the diligence-ing on the Radius deal, what additional areas of investment might be required to build out a product suite to serve the deposit side of the balance sheet?

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Thomas W. Casey, LendingClub Corporation - CFO [13]

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Yes. So a couple of things. I think we feel very good about where we are with the regulatory process and in line with our risk management processes and profile. Obviously, we did a lot of work during the quarter to stabilize and improve our liquidity profile, and so we wanted to share that with you. Obviously, that's always consistent with the regulatory outlook. So that's -- it's in line.

As far as investments that are being made with the -- with Radius, keep in mind that we have a lot of infrastructure already that we've been building. Our cost base already reflects a lot of that. We are spending some dollars to get the bank ready and finalizing our application. As far as this acquisition goes, this is really a 1 plus 1 equals 3, where we provide great lending capability, and they've got terrific deposit products. And so there's really an opportunity for us to bring both these together in our -- 2 of our strengths. So yes, there will be some costs associated with integration and things like that, but I don't see, at this time, a massive lift on investments for deposit products or lending products because we already have those in place.

Scott, I don't know you want to share anything else, but that's my thoughts.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [14]

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No, no. That sounded good.

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Operator [15]

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Our next question is from Heath Terry from GS.

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Heath Patrick Terry, Goldman Sachs Group, Inc., Research Division - MD [16]

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Great. Just wondering if you could kind of give us a sense, of the loans that you have sort of taken -- or that you did sort of sell out of the loan book this quarter versus the ones that you decided to retain, is there a difference in the profile just in terms of grade, duration, profile of the borrower that we should be thinking about?

And then also, to the extent that people are clearly in need of financing in this environment, understanding that you have very good reason to want to tighten your standards, is there a way to monetize that traffic that you're getting, that demand that you're seeing in some way just to the benefit of the company? And then I've got just one kind of housekeeping question at the end.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [17]

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Yes. So in terms of the loan portfolio, starting there, we went to the market first with some of our higher-yielding borrowers. And that's because that's where the capital was kind of quickest to recover. We got good response from that and have moved to more of the core part of our prime portfolio. I think we went out with an initial pool, and we're very pleased with the results we got and ended up selling, I'd say, more than we had initially anticipated because we're pleased with the amount of interest.

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Thomas W. Casey, LendingClub Corporation - CFO [18]

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They were oversubscribed, Heath. So we felt very good about where we had marked them at the end of -- really actually going all the way back to March, frankly. Actually, liquidity premiums actually have tightened. Overall, things have started to be a little bit more liquid. And so we were able to sell those loans, as we indicated, at carry or above. So we felt pretty good about moving that from a loan into cash during the quarter and actually into the third quarter as well.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [19]

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Yes. When it comes to the demand in the market. Keep in mind, as we said, exiting Q1, we virtually turned off the paid marketing, Heath. So really, the demand -- of course, there's always some organic demand, but the demand we're generating is coming from our own member base, which is why we think it's important to serve -- be able to serve them from a brand perspective, which is why that's where our focus is.

But we do think as we look ahead and, again, as our investors get their arms around their own capital issues, that we'll be able to make use of some of the tools that we have been investing in, such as, if you remember, our Select Plus program, which allows investors to deploy their own credit models against the application pool; and LCX, which allows investors to at least apply their own view on credit detailed credit criteria against applications as they come in on the primary market. So those weren't a big focus in Q2, but we expect probably as we enter Q4, those will be tools that we will start to deploy based on, like I said, investors kind of getting their legs under them, understanding their own capital issues and situations and being able to reposition themselves for a resumption.

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Thomas W. Casey, LendingClub Corporation - CFO [20]

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Yes. And Heath, just to get some numbers on there, obviously, origination is down 90% but so was marketing. So we're not disproportionately spending on marketing that we feel like we need to monetize further. Clearly, we think as we move towards the bank and being able to engage our members as well as the marketing funnel and the future, that's really where we see the opportunity to extend that relationship.

But right now where we are, we feel like the ability to reposition our expense base as fast as we have is an indication of just how agile the model is and how fast we're able to resize the marketing dollars and the costs.

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Heath Patrick Terry, Goldman Sachs Group, Inc., Research Division - MD [21]

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Yes. No, certainly makes sense. And then just to follow-up on the transaction fee refund reserve that you talked about earlier. Do you expect that, that will continue to go up over the next couple of quarters as prepayment levels continue to improve? And are you seeing those sort of -- those same sort of trends into Q3? Mostly just trying to understand what the impact on GAAP revenue is going to be and if we should expect sort of similar trends to Q2 going forward.

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Thomas W. Casey, LendingClub Corporation - CFO [22]

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Yes. I think we -- in the first quarter, we definitely saw prepayments slow, and frankly, we were seeing a lot of hardship plans. We're really capturing data real time, if you will. But they're all back to historical levels. So we don't expect it to further increase as far as the prepayment levels. What we're encouraged by is that the personal loan payment profile is getting back to normal. So while we're seeing trends of within -- kind of, call it, in the 30% type of prepayment, that's actually good for the credit of the product. We have slightly some variability on the liability, but I don't expect that kind of variability in the future. I don't see prepayments, for example, accelerating significantly from here. I think we just saw a lot of a lot of gyration between 1Q and 2Q, and now we seem to be back to normal. So that's what I would...

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [23]

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Yes. And just as you think about going forward, a couple of thoughts of things that will be moving, right, what's evolving. Well, lots is obviously moving. But a couple of things that will be evolving will be interest income coming in as we sell loans on our portfolio. That will obviously be coming down. The servicing book, Tom mentioned, will continue to pay down over time. And the next piece is, as Tom also mentioned, is as we ramp back up volume, we are supporting that volume with pricing with investors. We think there's a benefit to get our investors back engaged with the platform participating. But until we think the performance of these new vintages fully manifest, we don't think pricing is going to get back to where it was pre COVID. That's also further kind of exacerbated by the fact that there's a lot of portfolios in the market right now that are hitting -- that are available for sale at more distressed prices.

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Operator [24]

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(Operator Instructions) Our next question is from Bill Ryan from Compass Point.

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William Haraway Ryan, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [25]

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First, just want to kind of go back on the regulator question as it relates to the acquisition, if you can maybe give us a little bit more granular color on what they're specifically looking at and you're working with them on. And just any type of color that you have on that matter, including maybe the FTC lawsuit?

And then second, if you could just quickly remind us what the amount of capital that you expect to inject into the bank once the acquisition is closed.

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [26]

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So I understand the request for more detail. Obviously, the conversations we're having with the regulators have got to stay between us and the regulators. What I can tell you is, the time line that we laid out, we feel good that we are on track to hit that, that we have remained very closely engaged with the regulators, and we've been very productive and moving. So we have not been set back by the move to virtual in the process. So I think that's, broadly speaking, a good thing. And as you can hear in our actions, we are taking steps to prepare for that long-term strategy by positioning ourselves with cash.

In terms of the FTC, I'd say the real update there is, you all might remember, the trial date is set for October. We have requested a stay given that the Supreme Court is going to be hearing a case that is challenging the FTC's ability to seek monetary damages and the extent to which those monetary damages can be. So we are requesting a stay of the trial so until after that case is heard, and there's more comments on that in the 10-Q.

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William Haraway Ryan, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [27]

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Okay. And just the amount of capital that you're...

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Scott C. Sanborn, LendingClub Corporation - CEO & Director [28]

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Sorry. Go ahead.

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Thomas W. Casey, LendingClub Corporation - CFO [29]

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Yes. So obviously -- sorry, Bill. Obviously, preliminary at this point as far as the dollars, but I think you can see our actions today of accelerating the conversion of loans into cash consistent with capitalizing the bank. We have not communicated a specific number until we're further along at this point, okay? So we'll be updating you as we -- as more information is finalized.

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Operator [30]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Sameer Gokhale for closing remarks.

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Sameer Shripad Gokhale, LendingClub Corporation - Head of IR [31]

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Great. Thank you, operator, and thank you all for joining us today. If you have any questions, please contact Investor Relations, and we will be happy to assist you.

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Operator [32]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.