LendingClub Corporation (LC) Q1 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Lending Club First Quarter 2017 Earnings Conference Call. [Operator Instructions] And do please note that this event is being recorded. I would now like to turn the conference over to Charly Kevers, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to Lending Club's First Quarter of 2017 Earnings Conference Call. Joining me today to talk about our results and recent events are Scott Sanborn, President and CEO; and Tom Casey, CFO. Before we get started, I'd like to remind everyone that our remarks today will include forward-looking statements, and 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 28, 2017. 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 and non-GAAP measures is included in today's earnings press release and investor presentation. The press release and accompanying investor presentation are available on our website at ir.lendingclub.com. Unless specifically stated, all references to this quarter relate to the first quarter of 2017 and all sequential comments or quarter-over-quarter comments are comparisons to the fourth quarter of 2016 and year-over-year comparisons are to the first quarter of 2016. And now I'd like to turn over the call to Scott.

Thank you, Charly. Good afternoon everyone. Today, I'll start by sharing my overall perspective on our Q1 2017 performance followed by a review of the progress we've made across the business. We've created a strong foundation for growth, and I'll share some of our plans to unleash the power of our platform, before turning it over to Tom for a detailed review of our financial performance and a discussion of our updated expectations for 2017. I'm pleased with our execution in the first quarter, which enabled us, once again, to deliver against our targets. We facilitated nearly $2 billion in originations, resulting in total net revenue ahead of our expectations at $124 million. And with acquisition costs generally in line with what we saw in Q4. We produced these results in a seasonally difficult quarter and despite the negative impact on approval rates of the January credit policy cuts, demonstrating our team's ability to drive efficient execution against plan even in changing market conditions. The end of Q1 also marks the substantial conclusion of remediation activities as we pivot the majority of our organizational energies to growth. Thanks to the focused effort from employees and the support of our partners, we have built a very strong foundation from which to execute. Let me spend a minute reviewing a few key areas of our business, starting with the team. We continue to build out our executive ranks with exceptional talent, attracting senior leaders from renowned organizations such as American Express, JPMorgan and Intuit to strengthen the business across credit, strategy and product development. Furthermore I am very excited to be in the final stages of our search for the new head of our borrower business. We look forward to announcing a seasoned executive who brings extensive experience leveraging data and technology to market and deliver consumer credit across a wide variety of products at scale. This upcoming addition to the leadership team only strengthens my confidence in executing on our growth trajectory. Demand in our investor base continues to build, with appetite from existing investors augmented by new investors joining the platform. The result is surplus demand, a clear indicator of the attractiveness of the loans we facilitate and the platform we have built, and positioning us well for the return to growth. Bank partners made up a record 40% of total originations for the quarter and continued to ramp their purchasing. As a major component of our diversified sources of capital, these bank partners remain a key differentiator for Lending Club. Their presence is a testament to the strength of our control environment, and they are an important enabler of low rates for high-quality borrowers. I'd also like to highlight our retail investor business, which grew double digit sequentially, reaching 15% of our total investor mix in Q1, another clear differentiator for Lending Club. This past quarter, we introduced new initiatives to further enhance our retail investors' experience, including the launch of LendingClub Invest, our mobile app, designed to give individual investors an even easier way to manage their portfolios. Our deliberate, transparent and proactive approach to managing credit risk is a key driver of providing attractive risk-adjusted returns to investors and of Lending Club's long-term success. We took aggressive action on policy and pricing in 2016 and early 2017. Our deep focus on data the signals we read from the marketplace and the feedback we receive from our broad base of platform investors helped us identify these trends early and we rapidly responded. Based on the most recent performance data, I'm encouraged by the early signs of credit stabilization we continue to broadly observe in the loan portfolio. In addition, thanks to the efforts from our team and recent investments in our technology and infrastructure, we're seeing improvements in the effectiveness of our collections efforts, which will help support our ability to drive solid returns. On the borrower side we continue to see strong demand for our products, with the number of loan applications in Q1 growing sequentially and year-over-year. As we move into the second quarter of the year, we are well positioned to accelerate the strategic initiatives that will support our future growth, helping us serve more people at attractive rates with a frictionless process to get them the credit that they deserve. Now let me dig in on some of the strategic initiatives that will drive our return to growth. We have built a unique technology platform and are now well positioned to unleash the power of that platform for the benefit of our borrowers, platform investors, and you, our shareholders. We'll be doing this in a number of ways. First, our data, gathered over a decade of lending, is a unique competitive advantage. Constant analysis of our considerable data on borrower applications and loan performance and the continual evaluation of a growing range of supplemental data sources, including proprietary and unique sources, inform our credit, pricing, underwriting and behavioral models. Over time we're able to significantly increase the number of variables we will consider in credit decisioning and we'll further refine the granularity with which we can uniquely identify creditworthy customers to further access our market and to get people the credit they deserve. We are also beginning to leverage the data that only a two sided marketplace can provide. A window into price sensitivity, on both sides that has the potential to unlock new sources of value creation for Lending Club. So to provide a few examples, after a year of testing, we've introduced our enhanced joint application loan program, allowing two borrowers to apply together. This initiative offers benefits for borrowers by giving them a lower rate and access to larger loan amounts; and for investors, given the lower risk of having two borrowers jointly responsible to pay off the loan. Separately, we've recently started leveraging new data sources and technologies to automate employment and income verification in order to reduce fraud, accelerate the approval process and further enhance the borrower experience. The excess demand for our loans will enable us to evaluate more dynamic approaches to pricing, generating additional economics we can use to improve our borrower conversion rates and drive additional growth. Beyond personal loans, we are also using unique data sources to support the growth of our auto refi business and developing an in-depth understanding of how to effectively operate a collateralized lending offering, which will prove valuable in quarters to come. Our focus on data is supported by heavy investments in our technology infrastructure. These platform improvements add speed, ease and agility to optimizing our models. For example, we recently launched the first phase of our new enterprise decisioning platform, which lets data scientists update credit models and incorporate new data sources without involving engineering resources. We've also made significant investments in our data services team, one of the fastest-growing groups in the company, working on structuring our data for easier access to enable faster and better analytics across our functions. Underscoring these investments in data and infrastructure, we have reinforced our technology architecture for scale, migrating several key services to the cloud. This dynamic technology environment allows us to test and implement new features and functionalities much faster than ever before, all essential investments in future growth. This quarter, we'll celebrate Lending Club's 10th year. Thanks to the hard work and dedication from our employees, our technology-powered marketplace model not only distinguishes us from online lenders and traditional banks, but is a more innovative, cost-effective and efficient way to deliver affordable credit to borrowers and solid risk-adjusted returns to investors. Lending Club has fundamentally changed the game for the deployment of capital and access to credit. Over the last decade, we have served close to two million customers and facilitated the origination of more than $26 billion in total loan issuance. We help more people get credit each quarter than many competing platforms do in a year. I'm inspired by our accomplishments to date and, more importantly, confident that we continue to be the best positioned to lead the industry through its next phase of expansion. We have a team in place that knows how to execute and we are excited to deliver. Now I'll turn it over to Tom for a detailed review of our financial performance from the quarter and a discussion of our updated expectations for 2017.

Thanks, Scott. Before we jump into the details, I just want to say that I continue to be excited with the progression of the Lending Club team's efforts. This is the third quarter since May of 2016 event that we have delivered on our guidance, following a period of significant investment and remediation and enhancing our foundation, and we are well on our way to getting back to growth. I also continue to be impressed by the many talented employees we have here at Lending Club, showing up every day to creatively tackle tough problems and deliver savings to customers. There is truly an execution-oriented culture here. I am pleased with our first quarter performance as we facilitated nearly $2 billion of originations despite the January credit policy update and a seasonally tough quarter. With banks further ramping up their purchases, we continue to benefit from strong investor demand. Similarly, on the borrower side, we enjoyed another quarter of record application volume, a leading indicator for demand and a testament to the size of the market we serve. As Scott mentioned, we have already pivoted our businesses towards growth, and much of our efforts are focused on improving the conversion rate for these applicants through new credit tools, joint applications and new testing capabilities. Before I jump into details of our first quarter performance, I'd like to update you on what I've learned over the last couple of quarters and what I'm excited for as we look to the future. First off, on the borrower side. We offer rates that save borrowers around 25% compared to what they pay on existing debt. Using proprietary credit modeling built on top of a decade of data from our $26 billion in originations, we're finding new and better ways to assess creditworthiness and accurately price loans. And beyond pure economic value, we offer a process that's far easier and faster than other options consumers have. Our scale and history, combined with our underlying technology infrastructure, allows us to provide customers affordable credit when they need it. And we're investing in ways to deliver even more convenience and satisfaction in the years to come. On the investor side, we provide unprecedented access to unsecured consumer credit. Lending Club loans appeal to a broad spectrum of investors, and we offer the ability to purchase at scale that can match institutional demand. On top of this, we offer attractive risk-adjusted returns with low duration. With 10 years of experience and heavy investments in controls and compliance, we provide a level of confidence unmatched in our industry, making us the leading access point for institutional and retail investors. So while we offer a compelling value proposition to both borrowers and investors, we also can deliver 45% to 50% contribution margin to Lending Club shareholders. The Lending Club business model creates a win-win-win among borrowers, investors and shareholders. The possibilities are tremendous and we are just starting to scratch the surface. Now let’s move on to our financial performance in the first quarter. Our total revenue came in at $124.5 million, about $5 million above the midpoint of the guidance we gave you in January. Our reported total net revenue yield came in at 6.36%, in line with the fourth quarter yield after considering the positive $4.3 million servicing adjustment we made in the fourth quarter. As we indicated earlier, originations for the quarter were flat sequentially at nearly $2 billion, even with the January credit policy update that reduced our borrower funnel by about 6%. I will note that within our standard program, we saw growth of about 3% in Category A through C loans, reflecting strong demand from our bank partners; while, as expected, D through G categories were down as most of the January credit cuts were in the higher risk loan categories. Transaction fee revenue came in at $99 million on transaction fee yield of 5.04%, down seven basis points from the fourth quarter, again reflecting the shift in loan mix. Please note, to simplify reporting, we have combined our previous servicing and manager fee revenue lines into a comprehensive investor fee line. For your convenience, we will include a reconciliation in our 10-Q. For the first quarter, investor fees totaled $21 million, and, adjusted for the fair value adjustment, we relatively – we’re relatively flat at 22 basis points of our average outstanding balance compared to 21 basis points in the fourth quarter. Other revenue came in at $2.2 million, up $1.9 million sequentially due primarily to gain on sale of $2.4 million, reflecting a mix of investor demand. Net interest income was in line with Q4 at about $2.4 million. And as a reminder, we do expect to see this revenue line, along with other revenue, increase throughout the year as we expand our securitization efforts. We still expect this revenue benefit to be approximately $10 million to $15 million in 2017, and we have already initiated activities to support the securitization of loans with external partners. Now let’s look at contribution margin. For the quarter, our contribution margin came in at 43% or $53 million, as we continued our investments in auto and staffed up for collections and Q2 growth. We continue to expect to grow into our targeted range of greater than 45% over the course of the year. Sales and marketing was $52.3 million or 2.67% of originations, down $600,000 in total. While these costs continue to run higher than we like, we were pleased to see some of our marketing efficiency efforts pay off, enabling us to keep this metric flat relative to year-end despite the reduction in our borrower funnel in January. Plus as I mentioned earlier, we are seeing record levels of applications, which are up since Q4 and up double digits over the same period last year, with an overall improvement in cost per application. As Scott mentioned, some of the growth we expect for the rest of 2017 will result from successfully executing on strategic initiatives to get consumers the credit they deserve. We also expect that getting the new head of our borrower will help further drive our marketing efforts. Origination and servicing expenses in the fourth quarter were $19 million, up $2.2 million sequentially, driven primarily by collections and volume-driven headcount to match our anticipated growth in Q2. Total engineering costs were $21.4 million, up $1.7 million sequentially as we continue to invest in technology and platform improvements. As Scott mentioned, we are focused on enhancing our credit decision capabilities, internal testing environment and cloud infrastructure. These investments will help Lending Club iterate faster, test assumptions and improve efficiency as we grow. G&A costs were $31.6 million, down from $42 million in Q4. We have some items impacting the quarter’s G&A so I want to highlight a few things for you. During the quarter, we had $10.6 million in nonrecurring expenses mostly in G&A and primarily attributable to our 2016 board review. These unusual expenses were partially offset by a successfully negotiated settlement of $9.6 million in the first year of our D&O insurance coverage. As I mentioned on our fourth quarter call, I expect nonrecurring costs to continue to be elevated and mostly impacting the first half of 2017. I continue to see this playing out with some litigation costs coming in higher than expected. As such, I’m adjusting full year nonrecurring expenses by $5 million to $10 million, which will bring full year nonrecurring expenses to approximately $25 million to $30 million. So that would mean approximately $15 million to $20 million remaining for the year. While we may get some insurance recovery benefit to offset these nonrecurring expenses, the timing and magnitude will be difficult to predict. I know everyone’s trying to model out our core G&A, and I will continue to call out the impacts of nonrecurring costs and insurance recoveries on our quarterly earnings calls. The combination of all above results in a breakeven adjusted EBITDA. Without the benefit of insurance recoveries, we would have come in at the low end of our guidance as a result of our increased investments in technology infrastructure to support future growth. GAAP net loss was $29.8 million compared to $32.3 million in Q4, and earnings per share came in at a loss of $0.07 per diluted share, compared to a loss of $0.08 last quarter. The difference between GAAP and adjusted EBITDA was $30 million and includes stock-based compensation of $19.5 million, depreciation and amortization of $9.1 million. Stock-based compensation as a percentage of total net revenue decreased sequentially to 16%, about 2% lower than the fourth quarter. We expect stock-based compensation will continue to decline as a percent of revenue throughout the year. We ended the quarter with $781 million of cash and securities available for sale and no debt. Now let’s turn to our outlook for the second quarter and the full year. As we move into the second quarter, we feel good about raising full year guidance. We are increasing the midpoint of revenue and adjusted EBITDA to reflect the over-performance in the first quarter and the benefit of our insurance reimbursement, tempered by the $5 million to $10 million of additional expense – nonrecurring expenses I just mentioned. As a result, for the full year, we expect total net revenue to be in the range of $575 million to $595 million, adjusted EBITDA in the range of $45 million to $55 million and GAAP net loss between $77 million and $67 million loss, which includes stock-based compensation, depreciation and amortization of about $122 million. In the second quarter, we expect to return to top line growth. Our revenue guidance range implies sequential growth of 8% at the midpoint and 10% growth on the high end of the range, and year-over-year growth of approximately 30%. We expect growth to be driven by multiple borrower initiatives, continued strong demand from both borrowers and investors, and positive seasonality typically seen in the second quarter. We expect adjusted EBITDA margins in the second quarter to be around breakeven, with about $2.5 million of variability on either side, primarily due to uncertainty around nonrecurring expenses and insurance recoveries. As such, in Q2, we’re forecasting total net revenue in the range of $132 million to $137 million; adjusted EBIT to be flat at, plus or minus $2.5 million; with stock-based compensation, depreciation and amortization about $32 million. GAAP net loss is expected to be between negative $35 million and negative $30 million. We continue to be very excited about 2017. This second quarter will see us returning to growth, and we’re executing towards our goal of exiting the year with EBITDA margins in the range of 15% to 20%. Thanks for your time. With that, let’s open up the call for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first questioner today is going to be James Faucette with Morgan Stanley. Please go ahead with your question.

Thank you. I just wanted to ask a couple of questions around marketing and conversion. You indicated that you’ve increased a bit the marketing expense beyond what you maybe anticipated at the beginning of the quarter, at least that’s the way I interpreted your comment. Can you talk a little bit about why that decision was made, et cetera? And as a follow-up, I think, previously, you had talked about, as you were tightening that in the credit box or funnel a little bit, that the people that you were getting applications from that were qualified were taking a little longer to close, et cetera, on loans. Can you talk about if you’ve made any progress there or how you’re feeling about those efforts to bring the better-qualified borrowers through the entire process?

James, thanks for your question. This is Scott. A couple of things. So first, we actually did not increase marketing spend quarter-over-quarter, we actually decreased it slightly by about $600,000. So marketing actually was more efficient on driving applications and roughly as efficient at driving loan issuance through the other side. So that’s essentially saying we executed well on the marketing to offset the decrease in approval rates, which came together with the credit cuts. In terms of – I didn’t completely follow your second question, so I’ll make a couple of comments and feel free to clarify if I missed the mark. In terms of credit quality, so you do see different credit quality in different channels. You actually also do see different credit quality at different times of the year. Q1 as an example, you tend to see more self-employed people applying. And so those different populations at different dynamic can have a different impact on your relative ability to get populations through the process. I touched a little bit in my talk on some of the things we’ve done that will help with that. So automating income and employment verification using some new technologies would be a way to reduce the friction in that process, speed up the process and help get more people through. We have a number of other things in the works that we’ll be talking about at future calls but – in that direction.

So just to be clear that – the change that you’ve made, are you seeing an impact yet or you’re just indicating that you’ve made the changes that you think should help there and were kind of...

Yes, we're seeing – we've exited the quarter feeling very good and seeing acceleration as we left the quarter due to some of those changes.

Okay, great. Thanks.

And the next questioner today is going to be Bob Ramsey with FBR. Please go ahead with your question.

Hey, good afternoon guys. I guess, it looks like you guys have just increased pricing on some of your loans again. I'm just wondering if you could talk through the pricing changes and the motivation there.

Yes, this is Tom. As we've said in the past, the pricing changes we put in place is an ongoing process, something that we look at consistently every single quarter. We made very, very small changes this quarter. We just issued the 8-K today so you'll see those. But we feel very, very good about our credit performance coming out of our cuts that we made, and even into last year, we're seeing good performance. But this is an ongoing kind of dialogue with our credit team and our investor base, and we feel pretty good about where we are right now with the pretty small changes in our pricing this quarter.

Yes, and just to talk broadly about drivers of those changes. Quarterly, we absolutely review, but we review much more frequently than that based on dynamics around, we're monitoring very closely investor demand at the grade interim. And even individual loan attribute level, we're looking at borrower take rates and acceptance rates. We're looking at what's happening in the macro environment. So we're looking at all of those things and that's sort of the input, if you will, into that process and – where we're making those tweaks to really optimize the platform supply and demand.

Okay, fair enough. And then I noticed that you guys have revised the outlook for stock-based comp expense for the full year materially lower. I'm just kind of curious what it was that drove that change in the outlook.

Well, a couple of things. I think we had a discussion at the – at our last meeting that they're running at higher levels, we expect them to come down. I'm not sure we really have changed our outlook on SBC very much. This quarter, we had the benefit of some forfeitures that came through the financials. But I think our stock-based comp has always been – we've indicated that would trend down throughout the year.

In fact, Scott, I think maybe...

I think last quarter, you had guided to $91 million for the year and now you're saying $78 million, so – and that is coming down a bit.

Yes, I'm not sure I've ever guided to a specific SBC number, so – it's incorporated into my GAAP guidance. That obviously has got other things in it, including depreciation, amortization, all the non-cash activities. So it's not all SBC.

And a reminder, last year was – sorry, last year was particularly high given some efforts we put in place to retain employees through what we anticipated would be added asks over the course of the year as well as the hiring of our new executive team.

Okay, great. We’ll follow-up offline. Thank you.

And the next question today is from Eric Wasserstrom with Guggenheim. Please go ahead with your question.

Thanks very much. Just on the – two quick things. Just on the – first, on the bank participation in the quarter. Did Credigy do more or less their pro rata amount in the period?

Yes, they were right on line with their expectations so nothing unique with their purchasing pattern at all.

Okay. And was there any – in terms of the bank channel, was there any new participant? Or was the increase otherwise just the same group participating to a greater extent?

No, we had several new additions into the mix.

And does the pipeline there continue to build still or is that group...

Yes, it does. And that's important, obviously, with the loan mix that I mentioned during our call, our prepared remarks. We're seeing significant demand in the – from the banks.

Okay, thanks very much.

And the next questioner today is Henry Coffey with Wedbush. Please go ahead with your question.

Hello and thank you for taking my call. Can we start talking about growing originations? I know you talked about your data analytics. Is it originating more loans inside the same credit window? Or is by the use of better analytics, you're going to be able to open up the credit box a little bit?

It's going to be a combination of multiple things. It'll be opening up new channels. It will be increasing borrower take rate through pricing optimization. Tom touched on, but something that we've implemented in, in Q1 is a new testing infrastructure that allows us to really optimize the overall experience. It'll be product features. Joint app is the visible one we've touched on but there are more things to come there that are in line with that. And then there's also the additions of some new data sources that'll give us a better window into individuals’ overall financial condition as well as stability.

So do you think you'll be quote offering up more credit risk to your investors? Or the same credit risk, just better analyzed?

Well, I mean, in general, risk-neutral expansion is always the goal and it – within the associated grades that we set out.

Henry, some of the things that we've talked about is just making the experience easier for borrowers actually results in increasing our take rates. So no change in credit, but taking more and more friction out of the process can improve our volumes.

And then just the last – I'm sorry. Go ahead, sir.

The only other thing I would mention is we've actually seen in the joint app where we actually can reduce credit and increase – and risk rather, credit risk, and increase the volumes. Because you're providing more opportunity for consumers to manage their own credit, save money as well as increase our volumes, that maybe they wouldn't have qualified on their own.

And then with the auto product, there's a lot of noise around that right now in general. Have you thought about how you would deal with potential depreciation in used car values and collections of those complicated issues?

Yes. I mean, I think the current environment for auto is not something that is kind of coming out by surprise. I think the – there's been an anticipation of supply hitting the market, vehicles coming off lease, a decline in residual values. And we actually built all of that in. We built in a fairly material decline to collateral value into our overall credit model and underwriting. So we were really looking to be in a position to be ready to be greedy when others are fearful, it's a similar time that we came into the personal loan market if you go back a few years. And at this point, we're really just working on optimizing the product experience and learning, and we're really pleased with what we're seeing. I mean, we're – our NPS scores, even though this product has not had millions of people go through to help us improve the experience, our NPS scores are actually in line with our personal loan product. And we're saving people an average of about $1,500 per loan, which is ahead of what we had anticipated. So we're...

Great, thank you – I'm sorry?

No, that's fine.

Thank you.

And our next questioner today is John Davis with Stifel. Please go ahead with your question.

Hey, good afternoon, guys. Just want to touch on the transaction yield for a second here. I guess I would've expected it to be down a little bit more, given the increase in bank funding and also the credit cuts. So maybe talk a bit about the impact of pricing, how sustainable it is and what you think about the transaction yield going forward throughout the rest of the year?

Yes, this is Tom, thanks. I think that the transaction yields – clearly, we benefited this quarter and we mentioned that it's really due to mix. We did see some origination fees come down because of the fact that most of the portfolio shifted to lower credit risk. So that's something that we do expect to continue and put some pressure on us. But on the other side, we also earned a gain on sale on the other side when we do sell loans and so we benefited from that this quarter. That's something – just the mix of investors that each quarter we try to manage as best we can. And with the banks buying that puts some additional revenue in the quarter.

Okay, thanks. And maybe just to follow-up. I think you cut credit, I think for the couple of times recently, most recently in January. How often do you look at it? Do you anticipate cutting the, I guess, credit pie, if you will, more throughout the rest of the year? Or are you pretty comfortable with where you are? Maybe just talk about how you look at credit versus origination growth.

So we're looking at credit all the time and we're looking at not only the data that we're taking in. As I indicated, we're also looking at investor behavior and getting feedback from our investors. And we do have the infrastructure and ability to be reacting. Quarterly is when we adjust our loss expectations. And our current view is we took pretty aggressive action last year because we recognized that long-term success for Lending Club comes from being good stewards of credit for our investors. And the data is still early, but we now have a couple of quarters under our belt where we're seeing that delinquency – early delinquency rates are coming in, in line with our expectations. They are stabilizing. And as I mentioned, we're seeing improvements in our collections efforts. So those two things combined have us currently feeling good about the current status. Obviously, credit's dynamic, it's always changing and we'll continue to watch. But we are feeling good about the changes we've made and also about some additional new data sources we're looking at to increase our intelligence here.

Okay. And then last one from me if I can. Just the cash balance, I think, was down about $20 million from the end of the fourth quarter. Maybe just talk a little bit about what that was spent on or how should we think about that going forward.

Yes. The only big driver there was just the pad of the annual bonuses that come through in the first quarter is kind of seasonally built all year and then that liability is paid down. We would expect as we get back to positive EBITDA that the cash flow would continue to improve throughout the year.

Okay. That's it for me.

I do want just to – perhaps just to clarify, I misunderstood your question. We did take stock-based comp down from $91 million to $78 million, and that's reflecting – it is reflecting the forfeitures I mentioned with some of the executive movement we had in end of the year in first quarter. So I just want to clarify that for everybody.

And our next questioner today is going to be Heath Terry with Goldman Sachs. Please go ahead with your questions.

Thanks. I was just wondering if you could give us a sense if you're seeing any change in use of proceeds among your lenders or borrowers. I know you guys have talked a lot in the past about credit consolidation, home improvement and that whole of sort of being the big categories. Curious, as this rate environment changes, how that use of proceeds might be evolving.

I haven't seen anything. Scott, I'm not sure if you…

No. No significant shifts.

Where we thought – what we have done is where we're seeing increased credit risk, that's where we're actually taking the action that we mentioned. But we haven't seen anything in the use of proceeds.

And to the extent that you're trying to drive incremental demand to the platform, is there targeted marketing or anything that you can say about sort of cost of customer acquisition within those lower-risk pools that you're trying to target that changes the economics of the business or how we should think about the cost structure in the forward quarters?

So I think broadly speaking we expect our marketing costs to remain on the high side, but come down from where we are right now. I don't know if…

Yes. I think a lot of our efforts that we try to lay out for you today is we're spending a lot of money to get folks to fill out the application, and we're trying to find ways to convert them into borrowers using technology, reducing friction in the application process, new products and features. We mentioned the joint app, which is an important one, because it provides credit where a borrower may have not gotten it before. So we're trying to make ourselves more efficient. The demand is there, and what we're trying to do is give more tools to borrowers to manage their credit. The joint app is just one example, we have many others that we're testing and evaluating to improve that conversion rate.

And that will include things that will enable us to better assess risk, and therefore better price, i.e., offer lower rates to those lower-risk customers. So that will be something you'll be seeing more of.

All right. Thank you.

And the next questioner is going to be Rob Wildhack with Autonomous Research. Please go ahead with your questions.

Hi, guys. Origination and servicing costs seemed to have ticked higher in the past few quarters. I think you mentioned increased headcount here. But anything else in particular driving the increase, and then, how should we think about the level of those costs going forward? Thanks.

Yes, I think the origination and servicing was up. Again, we talked about that, really two big drivers. The first one is, I think Scott mentioned in his prepared remarks, we continue to increase collection activities through year-end and into the first quarter, and that's about half of that growth. And then the other half is getting folks up-trained. We talked about a little bit of exiting the quarter with some momentum. And so we did commence some hiring in the quarter to position us for 2Q. So it's a really – it's in pretty good shape as we head into the rest of the year.

Great. Thanks.

The next questioner is going to be Jed Kelly with Oppenheimer. Please go ahead with your questions.

Great. Thanks for taking my question. My apologies if you already touched on this, I jumped on the call a little late. But do you still feel there may be some pay channels that you're still under-indexed to?

Sorry. Say that again.

I mean, do you still feel that there's some pay channels that you're still under-indexed to that you could be driving more efficiency from?

Absolutely.

Absolutely.

Could you touch on like what…

Yes, without – trying to think of generic examples that don't really tell too much of some of the things we're working on. I'd say kind of some things to think about are there's obviously – I think, much of the online advertising environment continues to evolve quite quickly with your ability to target based on behavioral attributes. And another piece is adaptations to the product to better match certain use cases will allow us to be more effective in penetrating certain channels because we can tailor a product to the – just as an example, home improvement tends to be larger items, larger amounts that need to be spent, also tends to have lower risk associated with it. Whereas, people who are doing consolidation, there might be things we can do to enable them to better manage that existing debt and also ensure that that existing debt is paid down. So there'll be features we add to the product to help us crack channels either more deeply or new ones altogether.

Thank you.

[Operator Instructions] And our next questioner today is going to be Brad Berning with Craig-Hallum. Please go ahead with your questions.

Good afternoon. Can you go through each of the custom loan programs and talk where you're at in your development there, your appetite for kind of driving some growth? I know some of things got put on pause last year, and talk about where your initiatives are and your appetite for various programs. I know you touched on auto already, but you've got a number of others. My follow-up question will be, can you give us an update on where you're at in discussions with banks and going to some direct lending approaches with them instead of the marketplace approach? And I was just wondering if you can give us an update on that evolution.

Hey, Brad, this is Tom. I'll give you my thoughts, and maybe Scott has some. But if you go to our prepared deck in the – that we posted, actually the custom volume has actually come down, down about $28 million, which is almost 10%. Again, that's reflecting some of the additional rate changes and credit changes we made throughout last year and in January. So that program continues to be healthy, but it is obviously most impacted when you're trying to cut credit. As far as direct to banks, we're very happy with the strategy we have with the banks and their access to the platform. They obviously have very low cost of capital. And so the prime book of business is very attractive for them and they generate significant returns as a result of it. So I don't see any specific shifts associated with getting into a direct channel at this time. It's something that we look at on occasion, but the platform's working quite well for them right now.

Very helpful. Thank you.

And the next questioner today is Michael Tarkan with Compass Point. Please go ahead with your questions.

Thanks. Just a couple of quick modeling ones. Did you guys mention how much gain on sale revenue you generated this quarter? And how do you see that sort of trending throughout the year?

I think I did – I think I mentioned it in my comments about – I think it was up about $2 million to $2.5 million. I think that we haven't given specifics on that for the year. I think what's important to understand is that what I think the revenue profile of the business is going to continue to evolve with – obviously with growth, but also with some of these developments we're putting in with regard to securitization that will continue to have positive impacts for us. They may not come through on a gain on sale line, it may come through as net interest income. But it could come through as also a gain on a securitization activity. So we'll continue to – as we evolve, we'll continue to break those out for you, but for the quarter, it was up about $2.5 million.

All right. Thanks. And then I guess along the same lines there, over time, how do you guys view sort of the transaction fee? I know it's come down a little bit, but just in lieu of just more of a traditional leading space assets with lower or no origination fees. Just is this going to evolve where you're getting revenue from different sources and that'll cover maybe a little decline in transaction fees?

Yes. Again, we look at this marketplace as a real competitive advantage, being able to understand supply and demand on both sides. And as I think Scott intimated, we're looking at things like that. When we say pricing, it's not just rate, it can also be origination fees as well that may change behavior on the part of a borrower. So we're testing a lot of those different types of things to maximize the marketing dollars that we're putting in place and trying to increase our take rate.

Okay. And then the last one, I guess, the new $5 million to $10 million of one-time expenses, that's going to stick a little bit longer. I guess, any specifics on what that's really related to? Thank you.

Yes, it's mostly legal. We've moved into a bit of discovery phase and that's – tends to increase the costs. But as we mentioned, most of the remediation activities have been addressed, and we're dealing mostly with some ongoing litigation and some burn-off of some retention activities we put in place in the second quarter. So that increase is mostly due to legal-related expenses.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session and today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines.