LendingClub Corporation (LC) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the LendingClub Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Simon Mays-Smith, Vice President, Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to LendingClub’s 2019 third quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, our CFO. Our remarks today will include forward-looking statements that are based on our current expectations and forecast, and involve risks and uncertainties. These statements include, but are not limited to, our guidance for the fourth quarter and full year 2019. 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 Form 10-K and Form 10-Q filed with the SEC. 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 over the call to Scott. Scott?

Thank you, Simon. Welcome, everybody. To kick it off, we have delivered another good quarter. On the topline, we have set new records for originations and revenues and grown both in line with our expectations. On the bottomline, we are executing ahead of plan, achieving adjusted net income profit for the first time since I took over as CEO. As the numbers indicate, our continued focus on profitability is paying off and it allows us today to raise adjusted EBITDA and adjusted net income guidance. So we are pleased with the performance of the business. Taking a step back, we are the number one provider of personal loans in the country and we continue to take market share. We are leveraging our data, scale and marketplace model to execute with discipline and to compound our competitive advantages. Our simplification program and focus on partnerships is transforming the company and delivering operational and financial momentum, while increasing our resilience. And finally, we are making continued progress on our long-term strategy to become a financial health platform launching innovative new capabilities that set us up for the next stage of growth and margin expansion. Back in February, I said 2019 would be about driving responsible revenue growth, continuing to innovate, while carefully allocating capital, managing risk and simplifying our business to drop more of our growth through to the bottomline. As you can see in the results that we released today, we are continuing to make great progress. Let’s start with responsible growth. In Q3, we grew origination volume 16%, revenues 11% and adjusted EBITDA by 43%. This growth allowed us to comfortably achieve adjusted net income profitability and again within spitting distance of to breakeven on a GAAP basis. On the investor side of the marketplace, our securitization program continues to introduce us to new low cost sources of scalable capital. And once introduced these loan investors are increasingly buying directly from LendingClub via both hold whole loan purchases and structured program innovations such as certificates. In fact more than a $1 billion of funding this quarter came directly from investors who were first introduced to us through our securitization program. And our innovation on the investor side continues. Adding to the launch of the Select Plus Platform that we announced on the Q2 call we recently launched LCX, our digital loan transaction platform. This is an industry first that enables investors to bid for loans in the real-time and then settle the transaction through an automated process. Over the long-term, LCX has the potential to further improve our balance sheet velocity, while increasing the liquidity and eventually the clearing price of the assets. With the launch of LCX that brings the total number of investor platforms we offered to five. The original notes platform for our retail investors and four institutional platforms. Scale and Select which we launched in 2017 and now Select Plus and LCX. So taken together these platforms give us access to larger pools of capital, enable better execution and by providing more routes to the market they increased our resilience. Combined they are continuing to facilitate our transformation to a mainstream asset class. Okay, let me turn to the borrower side. At our Investor Day back in 2017, we outlined three focus areas to drive growth, demand generation, throughput and lifetime relationship. On demand generation, we officially drove an average of 53,000 loan applications per day in Q3. That’s up 30% year-over-year. And throughput our conversion efforts have increased the 24 hour issuance rate to 71%, that’s up 11 points year-over-year. Our increasing focus is now on the third growth driver, building a lifetime relationship by creating value through membership in the club. Club membership is important and so you are going to hear us talk more about it over the coming quarters. As Americans wrestle with debt and the spread between credit card rates and personal loans hits an all-time high, club membership is how we will empower and motivate each individual on their path to financial health. Increasing the savings we generate for them, while reducing customer acquisition costs and growing revenue per member for LendingClub. Our Visitor-to-Member and Product-to-Platform initiatives describe how we will create the lifetime relationship. Visitor-to-Member is about improving our customer experience to continue to add value beyond the first loan. And Product-to-Platform is how we are finding additional ways for members to save by leveraging both our own efforts and those are third parties to deliver additional products and services. So we are starting in a very good place. We have got more than 3 million club members and our satisfaction levels are hitting new highs. So that’s a huge installed customer base that is eager to engage with us. In September alone almost 0.5 million members logged into our member center and that’s up almost 30% year-over-year. When I talked about Visitor-to-Member on our call last quarter, I told you, we are working on upgrading our member center to make it more useful more engaging, and this quarter we began offering select members of a beta version of credit monitoring, so far almost two thirds of members who were offered this service have chosen to opt in. That is -- that’s an amazing number for beta product and it’s far exceeded our expectations. When we ask customers why, why did you choose to elect this option with us they told us because LendingClub can actually help us to make use of this information and they are right. Our vision is to use the credit data to enable members to take back control of their financial health and to monitor progress towards their goals and to surface additional opportunities to save money, whether it’s getting a new personal loan with just one click or refinancing their auto loan or over time introducing trusted partners to deliver more savings through other products and services. This is how a Visitor-to-Member and Product-to-Platform come to life and it’s a substantial opportunity. Using auto as an example, 61% of LendingClub members have an auto loan, with a combined outstanding balance of $30 billion and we have a product that could save them an average of $3,000 each over the lifetime of their loans. That savings opportunity is part of the reason why we remain excited about the long-term auto opportunity. As we round the three-year mark since launch the business is tracking ahead of personal loans at the same point in its life cycle at just a fraction of the investment. We have created a world-class user experience in contrast to a process that traditionally takes weeks we are able to refinance in days and this quarter we achieved a new milestone we delivered an approval within two hours of application. In addition to this experience, we are also demonstrating the effectiveness of our credit model and are now able to begin accelerating the program. In 2020 we expect to double our auto origination volume and to have approximately a third of those originations coming from existing LendingClub members. Our ongoing analysis clearly shows us that our Product-to-Platform and Visitor-to-Member efforts would be enhanced by having a national bank charter. And as part of our broader capital allocation planning, we are actively assessing path to achieve that goal. Our vision is to build on our marketplace model and support it with a marketplace bank, which we believe will be both strategically and financially accretive for a number of reasons. First, we will be able to attract more members, better engage and serve them, and generate more data to inform our actions. Second, it will increase our resiliency by providing a source of low cost, stable funding, while also providing regulatory clarity through a direct relationship with a primary regulator. And third, a bank charter will diversify and increase our earnings by recapturing significant revenue, which is currently going to issuing banks, reducing our use of high cost warehouse line and generating additional and recurring net interest income. Bottomline by increasing our capital efficiency, we can generate higher revenues, higher margins and higher return on equity. We told you we expect to exit 2021 with a 25% adjusted EBITDA margin. After 2021, we believe the addition of a bank charter will be instrumental in achieving the 5 point improvement in adjusted EBITDA margins. Let me finish by talking about the credit outlook. The consumer continues to look good, strong spending and continued low unemployment. That said, we often get asked by investors how will LendingClub manage when the economy slows down. So, overall, we believe investor returns across the portfolio will remain relatively attractive. That’s just due to the high yield, short duration nature of this asset and our own analysis, as well as research from others like TransUnion also indicate that personal loans fall reasonably high in consumer’s repayment hierarchy, which will help relative performance. That said, vintages issued on the eve of the cycle will have weaker performance just underpinning the importance for investors and having a program of investment and reinvestment to even out their returns over time. We do believe that there will be investors looking for yield throughout the cycle and that we will be able to generate an asset that will continue to appeal to those investors. They know we will not hesitate to make credit cuts and to increase prices when required, and that’s because we believe our market power will actually grow as consumer demand for credit likely increases through the cycle, while the supply of credit becomes constrained. It’s worth adding that over the last few years we have worked to increase our own readiness to operate in a potentially more challenging environment. First, we have lowered both our unit costs and the percentage of our costs that are fixed. As of today, just about half of our cost base is variable and can be adjusted quickly if the conditions require it. Second, we have been increasing our liquidity. In addition to our strong cash position and $700 million in committed warehouse facilities, we recently added a new investor with a broad risk appetite is committed up to $900 million of funding at agreed upon pricing over the next 12 months. And third, we have been driving profitability, prioritizing profit growth over revenue growth which we will continue to do. So taken together while the current consumer signals continue to be solid, we recognize the importance of being prepared for a more challenging environment and believe the strengths of our model and the actions we are taking set us up to respond and take advantage of a variety of economic conditions. So to close, we have delivered very good results in the first nine months of 2019. We are moving with urgency to simplify our business and expand margins, and we are executing with discipline against initiatives on both sides of our platform, delivering our near-term goals and building towards our longer term vision. We are on track to hit our profit targets and have again raised our EBITDA and adjusted net income guidance. In executing our strategy over these last three years, we have taken LendingClub from recovery to growth and now back to profitability, and in the process, we are transforming the DNA of the company, our addressable market opportunity and our cash generation capacity. So, with that, Tom, over to you.

Thanks, Scott. We met our goal of being adjusted net income positive in the third quarter. This is an important milestone that demonstrates that our strategy is working and it sets us up well as for the next phase of growth. So let me start by reviewing Q3 results then move on to across simplification update and finish with our Q4 and full year outlook. Starting with 3Q revenues, we had another in-line quarter with revenues up 11% to $205 million. On the borrower side of the platform, transaction fees grew 17% to $161 million, on the back of 60% growth in originations and a 4 basis points increase in transaction fee, reflecting the benefit of the pricing changes we made in the fourth quarter of 2018, partly offset by ongoing mix shifts. Net investor revenue was down $5.7 million to $39.7 million, with growth in investor fees and gain on sale loans offset by higher net fair value adjustments. As we use the balance sheet to balance the platform. Fair value adjustments improve quarter-on-quarter in both dollar terms, as well as percent of originations. Investor fee -- fees and gain on sale both related to our loan servicing business, combined revenues grew 21% year-over-year to $48.6 million, reflecting growth in our loan servicing portfolio and growth in loans sold. Other revenue was $4 million with the increase primarily reflecting the rental income we are earning from subletting our San Francisco facilities and Product-to-Platform referral revenue from our partnership with Opportunity Fund and Funding Circle, our small business loans. Before I get into details of tech and G&A, I want to highlight the efficiencies we are driving in our variable costs. This is an important area as we are seeing our M&S and O&S efficiency continue improve, which drove up our contribution margin by 370 basis points from last year. Marketing and sales expense were $74.3 million, up 3.5% year-over-year on origination growth of 16%, with M&S as a percent of originations down 27 basis points year-over-year to 2.22%. This is especially notable considering we grew volume and tightened credit. The 11% improvement in market efficiency was in part driven by our efforts in conversion, demand generation and from vendor renegotiations within our simplification program. But we also continue to benefit from an improved mix with our returning member base again growing as a proportion of our total origination volume. Origination serving cost -- servicing cost were up 2% to $24.8 million. O&S cost as a percent of originations was down 10 basis points or 12% to 74 basis points. To give you some perspective, the combined M&S and O&S as a percent of originations average 3.3% in 2017, at 2.96% in Q3 2019, M&S and O&S is 30% more efficient than two years ago and has resulted in a significant reduction in our customer acquisition and servicing costs. As a result, contribution dollars hit new records at $105.8 million, with margins of 51.6%, up 370 basis points year-over-year. Let’s talk about fixed expenses in engineering and G&A. Total cash engineering expenditures declined 4% to $32 million, with engineering operating expenses up 11% to $25.2 million and engineering CapEx expense of $7.2 million, down 35%. As we have indicated over the last few quarters, we are optimizing our technology infrastructure to support key initiatives that will drive differentiation for LendingClub. As we use more infrastructure partners and transition to the cloud, we are shifting a mix of our engineering spend from CapEx to OpEx, lowering our future depreciation and amortization cost. G&A expenses were up 7% to $40.5 million. Again, the revenue from subletting our San Francisco property appears in other revenue, while the rental cost of our Lehigh lease is in G&A If you strip out the effects of this mismatch, G&A expenses only grew about half of our revenue growth rate. With the benefit of our hard work on M&S, O&S and G&A efficiency, adjusted EBITDA grew 43% to a record $40 million. Put another way, revenue was up $20.3 million and EBITDA was up by $12 million, reflecting a 59% pull through from revenue down to the adjusted EBITDA line. This resulted in Q3 adjusted EBITDA margins of 19.5%, up 4.3 percentage points year-over-year, which sets us up nicely for 2020. So now let’s now move down to GAAP net income. Stock-based compensation was $18.1 million, declining 188 basis points as a percent of revenue to 8.8%. At $40 million depreciation and amortization and other net adjustments came in slightly lower than expected in part reflecting the shift in engineered CapEx to OpEx that I just mentioned. All of our work to grow topline, while driving margin expansion, meant we were able to report 3Q adjusted net income profit of $8 million. We set this goal two years ago and we are excited to reach it. What has been most encouraging is how we have been able to generate gains on both our fixed and variable cost base, which positions us well to generate attractive returns from our future growth. Moving down P&L, non-recurring costs totaled $8.3 million. This included $4.1 million of legacy issue expenses, $3.4 million of simplification costs, which mostly related to severance and almost $1 million in other non-recurring costs. Combining these items, we reported a small GAAP consolidated net loss of about $400,000. With that, let me give you an update on our simplification program. We remain encouraged by our progress here. We fundamentally transform the nature of our cost base in two important ways. In the third quarter 19% of our total workforce resided in our BPO partnerships, while 48% of our workforce was located outside San Francisco. Our BPO partnerships and geo-location initiatives have grown variable cost as a proportion of total cost and transform the unit cost of running the company, thereby increasing both its scalability and resiliency. The savings from these initiatives can be seen in our 2019 results and will add to adjusted EBITDA margin as they annualized in 2020. Before I move on to guidance, I’d like to know two things. First, we ended the quarter with $710 million of loans held for sale, which is composed of primarily high prime loans accumulated for our fourth quarter securitization. This year our high prime loan growth has been running about double our total loan volume growth or about 30%, over the last year we have only included a portion of high prime loans in our structured program. In the fourth quarter we are excited to be executing our first high prime securitization. Our experience over the last two years has proven that using our structured program is a great investment to reach new investors and bring them on to the platform. And second, we will soon adjust the SEC note registration filings to more closely reflect the operations of our retail program. As a reminder, the filings we currently make with the SEC include our entire standard program and after this adjustment is made, will more accurately reflect just the retail portion of this volume. We are in the process of developing our budgets for 2020, but let me finish by sharing some preliminary thoughts. First we will continue our evolution of prioritizing profit growth over revenue growth. Second, profit growth will benefit from the animalization of fixed and variable cost savings from our simplification program. That will help generate further adjusted EBITDA margin improvement. Third, our usual seasonality will again mean that the back part of the year will have stronger revenues and adjusted EBITDA margins than the first quarter. And fourth, lower simplification charges would be partly offset by expenses from our accelerated efforts to obtain bank charter. We exclude those one-off cost from adjusted EBITDA and adjusted net income, so you have a better view of the underlying performance of the business. Let me finish with our Q4 guidance, which is set out on page five of our results presentation deck. We are assuming a similar growth profile to prior years with slower growth in the fourth quarter with a revenue growth rate of between 5% and 10%, implying between $190 million and $200 million. This implies 9% to 11% revenue growth in the full year and puts us on track to generate revenues in a tightening range of $760 million to $770 million. We expect Q4 adjusted EBITDA to be in the range of $34 million to $39 million, implying margins between 17.9% and 19.5%. For the full year, this implies we are bringing up the bottom end of our range of adjusted EBITDA by another $10 million to a range of $130 million to $135 million. At the midpoint of our Q4 guidance, this puts us on track to hit 17.3% adjusted EBITDA margins in 2019, up from 14% in 2018 and 7.8% in 2017. We expect Q4 stock-based compensation charges of approximately $19 million and depreciation, amortization and other net adjustment charges of approximately $15 million. We now expect stock-based compensation charges of approximately $76 million for the full year, and depreciation and amortization and other net adjustment charges of approximately $59 million. We therefore expect adjusted net income profit in Q4 between zero and $5 million. As a result of our higher full year EBITDA guidance and lower depreciation and amortization guidance, we are raising our full year adjusted net income guidance range to step between a loss of $5 million and right around breakeven. Our GAAP net income in addition to some legacy issues and simplification costs will be encouraged some one-off expenses related to our bank charter initiative in the fourth quarter, which we intend to exclude from our adjusted EBITDA and adjusted net income numbers, as I have mentioned earlier. For the fourth quarter, we expect the total adjustments to be lower as most of the costs of our simplification program have already been recognized. As you have heard in our remarks, we are on track to have a good year, our innovation, simplification program and partnerships are transforming LendingClub, growing our market opportunity, enhance our business model and building our resilience. All of which positions us well over the short- and long-term. Scott, back to you.

Thank you, Tom. I will keep it short. We are pleased to see that our efforts are working. The business is on track to hit our financial goals in 2019 and we feel good about the progress we are making against our longer term strategy. So, with that, I will turn it over to take your questions.

[Operator Instructions] Our first question comes from Brad Berning with Craig-Hallum. Please go ahead.

Good afternoon, guys, and congrats on the progress. I wanted to follow-up on the lifetime membership kind of approach here and talking specifically about auto. And I was just wondering if you could talk a little bit more about timing and how you think about balance sheet or whether you have enough credit history here from a buyer’s perspective. Just help us understand the financial implications of talking about doubling the volumes on that? And then the follow-up question is on LCX. Just talk about real time, how does that help attract a new buyer groups versus does that help reduce like the net fair value adjustment, is that the real benefit on the financial statements for LendingClub?

Okay. I will start, Tom, feel free to jump in. So, on auto, I guess, stepping back, I think, remind everybody of the value proposition on auto is we are essentially very similar to personal loans. You have got a loan, not a very good one and we can make you a better offer. These savings potential in autos actually higher, these are larger loans and for the used vehicles there’s some structural mispricing out there that we can address. We have been working on the experience in order for this to work and for us to move what is really a pretty paper based offline process online. It’s quite a bit of work. So that’s a focus one that we have been doing and that’s why when we say, hey, we have gotten the multi-week process down to a couple of days, we believe that that’s reducing the friction, reducing the friction means the marketing can begin to be more efficient. So that’s kind of one big thing. The second big thing is proving out the credit model. There is less yield cushion in auto and there are in personal loans, so -- and it’s a new asset class for us. So proving out that the model is working, it takes some time and the higher you go in the credit spectrum the kind of thinner that yield cushion is. So we have been -- as we have been working on the experience we have been using our balance sheets to facilitate the program. So now essentially adding a sizable investor allows us to essentially make more limited use of the balance sheet and begin to scale the program and lean into the experience changes we have gotten and be able to start cross-selling to our existing members, as well as using as a way to bring new people onto the platform. Setting everyone’s expectations, as I mentioned in the prepared remarks, credit businesses take time to build. So we are excited that we are kind of ahead from a volume perspective of PL and we are doing it for a lower investment. But doubling originations is positive, that’s us really beginning to ramp. But in terms of, meaning for the overall P&L we probably still have a couple of years before it starts to really show through in the financial results. But we are excited we do view this as an important milestone to start ramping.

Yeah. I agree Scott. We have been using the balance sheet to test as we have indicated in the past. We used the balance sheet for testing and very excited that now we are actually selling loans on the back of our experience, which is really a great milestone. So let me touch on LCX if I could. We are very excited about what LCX can bring to the table. We do believe it will bring additional investors onto the platform. Keep in mind what the LCX is trying to do is actually build a much broader market. You guys have heard us talk about building an asset class. This allows investors to come onto the platform and choose individual loans at par or above par or below par and allows us to deliver those in a seamless way to settle with very efficient approach using technology to do that. We do think that there is a big opportunity here as we build this out, but we expect more investors to come on the platform in the next few quarters as we continue to build out that capability and put more and more of our originated loans on there to this new platform.

Okay. The same thing in terms of expectation setting here, this is essentially building a new market for it to work. We got to have enough investor demand there to be enabling us to put the supply there. So building it out, adding those investors and understanding what works, so it will be something we use into. But what we do think over the medium-term it’s a pretty important capability and will help with liquidity of the asset class and increase the appeal of the asset over time.

Good stuff. Appreciate it. Thanks guys.

The next question is from Jed Kelly with Oppenheimer. Please go ahead.

Great. Thanks for taking my question. Looks like you had nice growth on originations and accelerated. Can you just talk about what you are doing or some of the procedures you are putting in place in terms of conversion and sort of around the sales and marketing leverage you are driving? And then just on the 4Q guidance, it does look like you took down the revenue a little lower than what we are modeling, so anything we should be aware of there?

Yeah. I will -- I will start and turn it to you again, Tom.

Sure.

So, yeah, what you are seeing, I mean, I guess, broad statements, if you think about the market right now. If you picked up in the prepared remarks but the spread between credit cards and personal loans is at a record high, that’s according to fed data. So the appeal for this asset class and the interest by consumers continues to be quite strong. We, together with others, are being increasingly picky about the loans that we are booking. And what we are focused on right now is that the -- if you take that data point I gave, 53,000 applications, that is just a lot of data that we are able to make use of and there’s a number of things we are doing everything from marketing message testing to actual experience testing, really drilling down into what channels are people coming from, what is the use case for these loans, how are they interacting with us to develop custom experiences to drive conversion and manage risk. So you see that in some of the numbers we put out there, the 24-hour approval is just increasingly automating processes and using new data sources to eliminate manual steps and very specifically eliminate friction on the part of the consumer. So there’s a lot going on there. And then when it comes to Q4, I would say, look overall, we feel quite good, demand is strong on both sides of the platform and Q4 is a continuation of what we have been doing all year, which is prioritizing profit growth over revenue growth and that with -- that really comes out to finding the right balance between investor demand and borrower demand. If you got anything to add Tom?

No. It was good.

And then anything on the 4Q guidance?

Well, just as Scott said on the 4Q guidance, I think, that we are continuing to focus on a profitable growth. We think all year we have been lower on revenue, our guide is in line with that and as we are at the top end of the guidance on the EBITDA, so I think that’s consistent where we have been all year. I wouldn’t over think, it typically the fourth quarter is seasonally lower volumes anyway. We are seeing some transaction fee declines year-over-year. As you remember we made some changes last year, but with the growth in high prime those coming as slowly -- certainly slowly lower transaction fees so that’s also part of it. So when you think of mix being high prime that comes in a slower -- at a slightly lower transaction fee and that’s also some of it. But that’s kind of what’s driving it. But it’s very consistent throughout the year.

Yeah. A key data point, well, the total book this quarter is an example group of loan origination 16%, AMB volume grew 30% year-on-year, so that’s a pretty material mix shift that’s continued.

Thank you.

The next question is from Henry Coffey with Wedbush. Please go ahead.

Good afternoon and thanks for taking my call. Before I get into the details, it’s a great quarter. It’s been years of work on your part, so congratulations. In terms of most of what my questions are always focused on the funding side of the business, because I know you will take care of the marketing and the operating side. Back in September, there was some news about you changing your retail buying in nine different states, seems to have had a very small impact on the overall funding equation, but I have been getting a lot of questions about it as of late?

Okay. I will take that one. So, I guess, big picture, I think, you know as well as anyone. We operate in a fairly complex regulatory environment activities on both sides of our platform. We have multiple activities on both the borrower and the investor side that are regulated both at the state level, as well as in a variety of places in the federal level. We, as part of our overall preparation for the bank charter, we did an updated view of our licensing requirements. We identified some that we have that we don’t need and some that we believe we need that we don’t have. And that’s where you are seeing it was five states, not nine. And you are correct, overall impact of funding really not material disappointing customer experience for the investors in those five states. So we are working very quickly to get that resolved.

And the idea of being that when you get your -- the licenses that you are comfortable with, you will go back to the process of letting them buy loans?

Absolutely.

What was it, just -- is it the difference between state and federal regulations on the security side of the business?

Yeah. And that’s exactly right.

Yeah. We are all somewhat familiar with that. And then, I also know -- I know Tom, I think, you addressed most of this. But the buildup in inventory in the third quarter is all prep for your securitization in the fourth, is that the thought process there?

Yeah. So what we were trying to do is change the cadence on our securitizations. We typically were doing them in the third month of each quarter, because they require a level of seasoning with us bringing our securitization target in November. There are more loans held at the end of the quarter. That was why I wanted to call that out.

The preceding quarter.

The preceding quarter, so that’s what you see the 930 [ph] increase in the balance sheet in anticipation of the securitization in November.

Are we going to see more of this sort of cadences as you get a more sophisticated balance sheet and I am just going to get off I will listen in to your answer?

Yeah. I -- we have done about -- we continue to do around 10% to 15% of our volume in securitization. As we mentioned, this is something that we have been doing for a couple of years now. It is important for us to continue to reach out to new investors, so we do see those investments reach new investors that are learning about the product. We have demonstrated that over the last couple of years in our higher risk prime area. And so what we are encouraged with our current focus on high prime. But we think it’s important to have that you know another good 10% to 15% type of range of total volumes.

Thank you.

The next question is from Eric Wasserstrom with UBS. Please go ahead.

Thanks very much. Scott, maybe you have been, I think, now very explicit about the benefit of the bank charter and your intent to pursue one. So can you maybe give us the next couple of milestones, I guess, really two questions related to that. The first is, are there other elements of preparing yourself internally that you are pursuing prior to the actual filing of an application? And then the related question is, what as you move through this process or the next couple of milestones that we should pay attention to?

Yeah. Hey, Eric. So an important thing to think about and certainly as part of the equation we had in our evaluation is that, a lot of the internal preparation in our case are already in place. So if you think about the nature of who’s buying loans from us and the kinds of activities banks, who’s providing capital to our other loan investors, banks and the activity that we are engaged in, banking, we have got a lot of the infrastructure in place already three lines of the defense, the right policies and procedures. So there is a little more to do for us but it’s kind of on the margins so we have brought on some advisors others to help us do that GAAP assessment and get the remaining pieces in place. But it’s not overall substantial. The other piece for us is going to be developing the overall business plan, because that’s an important piece of the picture is, what will be the structure of the bank? How it will capitalize? So that’s what we will be working on next.

Great. Thanks very much.

The next question is from Heath Terry with Goldman Sachs. Please go ahead. Mr. Terry, your line is open on our end. Is it possibly muted on yours?

Great. Thank you. Just wanted to get a bit of an update on the customer acquisition side of things, particularly as you look at the relationship between loan growth in sales and marketing, this has been sort of another quarter where you have been able to get a degree of leverage at least against what net revenue and origination. How much further do you think you can push that and is there a point that you are going to want to get to where you begin to reinvest in and accelerating growth on that side of things? And then, to the extent that we have -- you have talked a good bit in the past about the relationship between transaction fees as a percentage of revenue and the make shifts there, this is another quarter where that percentage has come down. I know you have suggested that in the past that that’s more or less going to be flat, but as AMV [ph] growth keeps coming down, I am just wondering if that’s something that we should continue to model?

Great. So, I will start on the acquisition costs. I’d say, I am very pleased with the progress we have made today that as Tom kind of covered. We are seeing it in both places which is the marketing costs, as well as in our O&S, so all of those costs where we are gaining efficiency. And it’s really a combination of things are testing, or channel development, or conversion efforts, the use of our data for targeting and new targeting models, really leveraging the data, as well as the scale also in our vendor contract. It is building out our returning member experience to drive better conversion and cost structure. So we have done a lot. In terms of where we are going, I’d say, we feel good about the level we are at. And in terms of watching that it would be as we build out from our lifetime value over time and really start to fill in what is right now kind of the vision we are moving towards. As we start to add these other proof points we are able to drive lifetime value up for the customers. Then I think we will be in a position to evaluate what the right level is for that spent based on the value we are getting back. I don’t know Tom you want to take that yield, anything to add there?

Yeah. So I think this is the classic example of how our scale is differentiating us. The fact that we can take our change of mix, where we right now in the cycle take the transaction fees down a little bit or more than offset by the efficiencies we are gathering in. The things just -- Scott just talked about. Moving to low cost locations, getting full annualize benefit of that next year. All the targeting we are doing. So continue to see that importance of our scale now, with G&A not growing as fast as it was in the past and improving our contribution margins are really, really important. That’s why we took up the contribution margin to the 50% to 55%. That’s offsetting, in fact, we actually grew contribution margin, despite the transaction fees. So that’s putting a little bit of pressure on the revenue. We are seeing nice improvement in the contribution margin line.

Great. Thank you, both.

The next question is from Rob Wildhack with Autonomous Research. Please go ahead.

Hi, guys. I wanted to ask for an update on the competitive landscape. I think some of the other bigger players have maybe de-emphasized growth and Scott you highlight some market share gains. So just wondering the extent to which those should be related and wanted to hear your updated thoughts on what’s out there in the market? Thank you.

Yeah. I guess I’d distinguish two things, which I think are important. One is marketing activity, which remains an extremely high level, despite, I think, the individual commentary of some players. So if you just look at the kind of available third-party data, things like overall mail volume and those kind of pieces, you are going to see that with some shifting between players, the overall category competitive intensity remains quite high. However, we have been talking in the past about some pressure on credit, driven by what we saw as supply side pressure. So I think across the Board, you are seeing a number of people LendingClub included kind of prudently pulling in and tightening a little bit on the credit they are offering. So I’d say the dynamic is, lots of people marketing, approving less people and there is some -- you are seeing the benefits of scale here that at least what we can see in the data is the smaller players are having a more difficult time in this environment, because if you don’t have the data to differentiate your offerings and optimize your offerings, it’s harder to get the pull-through like you are seeing in the LendingClub.

Okay. Thank you.

The next question is from James Faucette with Morgan Stanley. Please go ahead.

Yeah. Hi. Good evening. It’s Steve Walter on for James. And maybe just one quick one, as I look at the 4Q guidance and I look at some of the initiatives you are doing. I guess we would have thought that initiatives like the Select Plus where you are sort of be able to open the credit box, find more loans for what you are already have coming through the pipeline would add to that, I think, you guys referred to as profitable growth. Is it just too early to see that coming through in the fourth quarter? Should we expect that maybe over the next year? Could you maybe just update us on what you are thinking there in terms of the growth boost from those initiatives?

Yeah. Thanks, James. That’s -- you got it exactly right. So reminder for everybody what Select Plus is, it’s essentially an opportunity for us to host alternative models to our own and turn what is currently a no into a yes for people who either have specific populations that specialize in or it’s just a different view on the data. It is a profit play not a volume play, meaning we -- and although at different market conditions, I think, the size of this could vary based on what’s happening. In general, let’s say, it’s more of a profit play than a volume play. And we are excited about it but it is early at this point. We have our first investor live. We worked out with any new program, we worked out some integration issues, but that’s now up to the scale that we had looked for when we got this thing live and we will be adding our second investor as we exit the year. Keep in mind, similar to the conversation we had on auto, right? These are people who are introducing new models into a data set. So they are going to start out the same way we started out in auto, which is lets book a few loans, see how they do, that will give us the comfort to ramp up our exposure. So even the investors that we will be pulling in, they are not wide open, I mean, we are not exposing them to the full suite of our decline population. We are essentially testing our way in and they are testing their way in on this. So we do think it will be valuable over time. We are on track with getting one live and the second one coming, but it will be something that builds throughout the course of over the next 18 months.

Got it. That’s helpful. And then just maybe one quick follow-up on the -- you guys mentioned stripping out some of the costs and you walk through some of those in terms of what you have taken on to explore the marketplace bank model. Could you parse out, I assume you will probably strip out the one-time costs related to exploring it, but just in terms of anything you bring on more permanently that would be included in the run rate for adjusted EBITDA right? I mean that’s not going to adjusted out?

Yeah. Absolutely. In my comments I was referring to the consulting and advisory cost. Scott, just mentioned these are just one-time cost. Keep in mind we already have a lot of our infrastructure costs already in our numbers. The fastest growing areas in our G&A line are credit and compliance. So we already have a lot of those are on our run rate and don’t expect significant increases of those in the fourth quarter.

Great. Thank you.

The next question is from Giuliano Bologna with BTIG. Please go ahead.

Thank you and congratulations on a great quarter.

Thank you.

I guess I was kind of jumping back to the auto topic. I have obviously heard your comments about how, because there is large opportunity especially with -- even within your current base? Well, I will be curious as if you have any plans of thinking about kind of a secured loan offering and if there are opportunities to go further downstream in the credit spectrum with that or to offer more that consolidation opportunities to existing clients who might be applying for a personal loan now. Because if you look at the data on your site, it looks like you can get extend larger loans to lower credit cohorts with lower APRs. So I’d just curious about the opportunities you might have there?

I would say your assessment of the opportunity is accurate and that was part of the driver for us of this as the next adjacent category. We looked at the -- where do our customers hold balances. Where can we provide value and where is a real strategic synergy. You don’t need to look too far outside the LendingClub to see that some of the other larger unsecured players have a very significant portion of their business in secured personal loans, secured through the auto title. So the capabilities that we are building are directly applicable there. Again, getting the friction out of the system so that you can take a branch-based paperwork intensive experience online is one of the key requirements. But we do see that as a real growth factor, which is essentially taking our current personal loan applications turning some nose into yeses turning some higher rates into potentially lower rates and turning some capped extensions into larger loans. We think all of that is on our medium-term roadmap.

That sounds good. And then thinking about what you are describing on the membership side and offering some credit monitoring solutions, obviously, the incremental modernization and being able to monetize the same clients over and over would be extremely helpful to the platform and margins over time. You have a couple of loan products right now, would you think about partnering for other loan products that might be useful to those clients and other revenue opportunities there before -- yeah, assuming new partner versus building in the near-term?

Yeah. That’s exactly what this -- when we talk about Product-to-Platform that that’s exactly what we mean with that strategy which is. So if you think about for a decent percentage of our customers today, we have the ability to see their transactions and their cash flow. We are now going to have the ability to see their -- again both of these with the customer’s permission, the ability to monitor their credit. So, our ability to provide an engaging experience for consumers and identify opportunities to add value, we can see what’s happening in your financial life is really powerful. And so there will be some things we build and offer ourselves. So for a personal loan, we have talked about the fact this is not a one and done product. People do come back. They come in and out of the need. And that’s kind of getting us to this place. Can we get to a one quick loan for returning numbers and we are making -- we have been investing in the data infrastructure and the user models and all those pieces to move us down that path. Then you have auto. And then, absolutely, we are -- there are categories of credit that we don’t offer that for the right partner who would integrate with us and essentially be able to accept the credentials that we pass. That’s part of the value of membership, right, that we are able to say, hey, we see you have a mortgage, rates have come down. You -- here you go. Can you be preapproved for an offer to save, integrate it into your LendingClub experience. So that is -- again setting everybody’s expectations, those will be something we build to over time, but that’s absolutely where we are going.

That makes a lot of sense. Well, thank you for answering my questions.

And that will help, obviously, with lifetime value of the members, which will feed our acquisition engine and drive profits.

Excellent. That’s great. Thank you so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Sanborn for any closing remarks.

All right. That’s it. Thanks everybody for joining us today. Obviously anyone with additional questions, please reach out to Simon and we look forward to connecting with everybody in February.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.