LC - NYSE

Good afternoon. Thank you for attending today's LendingClub 2Q '24 Earnings Conference Call. My name is Sheila, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Artem Nalivayko, Head of Investor Relations. Artem, you may proceed.

Thank you, and good afternoon. Welcome to LendingClub's second quarter earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements, including with respect to our competitive advantages and strategy, macroeconomic conditions, platform volume, future products and services, and future business and financial performance. 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 presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share, pre-provision net revenue and risk-adjusted revenue. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. And now, I'd like to turn the call over to Scott.

All right. Thank you, Artem. Welcome everyone. I'm pleased to report that we had a strong quarter of growth, with originations climbing 10% sequentially to $1.8 billion, pre-provision net revenue growing 13% to $55 million, and GAAP net income growing 21% to nearly $15 million, all while sustaining our industry outperformance on credit, growing our balance sheet by nearly 9% year-to-date and continuing to innovate on a truly differentiated experience for our growing member base. We have calibrated the business to the current operating environment and have achieved a solid foundation from which to efficiently grow. Strong credit performance is key to that growth, supporting higher marketplace loan sales prices and maximizing risk-adjusted revenue from the balance sheet. Accordingly, it's worth highlighting that we continue to consistently outperform our competitive set with 40% better delinquency rates across all core segments we serve. Our outperformance is due to several proprietary advantages, including dozens of custom models, visibility into millions of repayment events across varying economic environments, a team that brings decades of human experience and intelligence to interpreting signals and trends, and an asset class and underwriting technology platform that allows us to rapidly respond to changing macro conditions. We're seeing strong returns with stable or improving credit losses across all vintages, and within our held-for-investment portfolio, delinquencies and charge-offs are trending lower, as expected, as our portfolio ages. For marketplace investors, our strong credit stewardship combined with our bank-enabled innovation is reinforcing our reputation as a partner of choice. The striving heightened demand, which is supporting an increase in originations and incremental improvements in loan sales pricing. Our structured certificate program continues to provide buyers with an attractive alternative to warehouse lines or securitizations. By holding A note, we generate fee revenue and capital-efficient risk remote interest income without an upfront CECL charge. This past quarter, we crossed $3 billion in lifetime origination through the program with a solid pipeline of forward interest. We're also meeting investor demand through our extended seasoning program, which provides us with interest income until we sell the loans. We executed over $80 million in season loan sales this past quarter with prices above our carrying value. Going forward, we plan to continue driving loan prices up by maintaining strong credit performance, continuing to innovate on products and structures that meet evolving investor needs, and reengaging banks where we continue to have productive discussions in anticipation of sales beginning in the back half of this year. Obviously, we also stand to benefit from improvements in loan sales pricing and deposit costs should the rate environment turn in our favor, in line with current expectations. With strong credit performance and growing marketplace investor demand, we're well positioned to resume growth and help more customers pay off their credit card balances, which stand at historically high levels, priced at historically high rates. We've already delivered real value for our 5 million members. These are highly sought after customers who tend to be high FICO and high income, but also high users of debt. They are digitally savvy and eager to take steps to improve their financial outcomes, and our personal loans are a tool they turn to for the tangible value we provide, with over 80% saying our products help them keep more of what they earn and nearly 90% saying that LendingClub has helped them successfully manage their overall debt burden. Strategically, we plan to use our industry-leading capabilities to efficiently acquire more of these customers, use our mobile app to engage them and keep them coming back, and leverage our product innovation engine to build a lifetime lending relationship that serves their needs. Our Q2 results illustrate the promise of this strategy. We grew originations 10% this past quarter, while maintaining flat unit acquisition costs, which are already at industry-leading levels. When loan sales pricing improves more materially, we'll be able to restart our inactive marketing channels to drive incremental originations growth. We're also benefiting from investments in efficiency elsewhere in the organization. Within servicing operation, for example, we've upgraded our systems, increased automation, and implemented digital servicing tools. As a result, we've lowered the operational cost to originate a personal loan by one-third in the past year. Our mobile app provides a powerful platform for engaging members after acquisition. Following a limited release earlier in the year, we began marketing the app for personal loan customers more broadly this quarter, leading to a doubling of first-time downloads at the end of the quarter and a roughly 20% month-over-month increase in app users in June. With self-service functionality in the first phase of our comprehensive debt monitoring and management solution embedded in the app, mobile users are finding more reasons to engage with us. In fact, they're logging in about 20% to 25% more often than web-only users, providing a growing, active, and engaged audience for communicating new offers and services. We're also seeing early signs of success in the app's ability to drive positive payment outcomes and to reengage inactive members. As members engage with us more frequently, we can do more for them and build what we call a lifetime lending relationship. Today, about half of our members return for a second loan through an expedited process. And this repeat behavior is important for several reasons. First, they return to us at near-zero acquisition costs. Second, their credit performance is up to 20% better than new borrowers with a similar profile. Third, they have high satisfaction rates. In fact, our NPS score for repeat members grows after their second loan and keeps climbing as their relationship builds. And fourth, their growing satisfaction leads 83% of our members to want to do more with us, which we're happy to accommodate. Doing more starts with meeting more of their lending needs through innovations like top-up, which allow existing members to obtain additional funds while maintaining one monthly payment. Early results are promising with strong response and take rates and a 93% satisfaction rate, which exceeds that of our flagship personal loan product. Clean Sweep, our new line of credit product that allows members to easily refinance newly-accumulated debt and pay it back in installment plans is equally promising, with early results above expectations and satisfaction at 90%. Products like these, which are uniquely enabled by our bank, not only meet new use cases, but they form the basis of a lifetime lending relationship that can keep our members coming back. To enable us to offer these products to the right customer at the right time, we recently launched a pre-approval platform. We're already seeing benefits from the platform with higher offer and response rates and improved credit profiles. This pre-approval infrastructure can be extended outside of LendingClub, and we see it as another potential opportunity for origination's growth over the longer term. To test this thesis, we're currently piloting the solution with a partner. Before I turn it over to Drew, I'll conclude by saying that the company is well positioned for continued success. The historically rapid increase in rates and the resulting downstream impacts on the financial services sector has made for an extremely difficult operating environment these past two years. I'm incredibly proud of how the LendingClub team has risen to the challenge. As this quarter's results show, we have calibrated the business to this new environment and further streamlined and focused our operations, all of which will deliver outsized benefits as conditions improve. With a historic opportunity in front of us, I look forward to building on our momentum in the quarters ahead. With that, I'll turn it over to you, Drew.

Thanks, Scott. And I'll add that for the two years I've been here, I've been extremely impressed with how the LendingClub team has transformed the business and prepared for the future. With that, let me walk through the details of our second quarter results, starting with originations. As Scott mentioned, we originated over $1.8 billion, which is a 10% increase over the prior quarter and above the high end of our guidance range. The growth was driven by continued product innovation while maintaining tight underwriting standards. On Page 10, you can see the origination volumes of the four funding programs, which we described in detail on the prior page. The issuance in the quarter was once again led by our very successful structured certificate program, which accounted for $885 million of originations. We also sold $270 million of whole loans through the marketplace, accumulated $320 million for our held-for-sale extended seasoning program to meet future marketplace investor demand for season loans, and we retained $335 million in our held-for-investment portfolio. This quarter, you again saw us increase the amount of whole loans retained on our balance sheet to 36% of total originations, up from 32% in the prior quarter. This was comprised of the held-for-investment and extended seasoning programs. This level of retention will allow us to keep whole loans on the balance sheet roughly flat through the remainder of the year, while maintaining the option to sell loans out of our extended seasoning portfolio at higher prices. Now let's move on to pre-provisioned net revenue, or PPNR, which is total net revenue less non-interest expense. PPNR was $55 million for the quarter and came in above our guidance. These results were driven by strong execution, as well as a few unique items that I'll call out as I break down revenue and expense. Total revenue for the quarter was $187 million, up from $181 million in the prior quarter. Let's go into the two components of revenue, starting with non-interest income. Non-interest income was $59 million in the quarter, up marginally from the prior quarter. As I mentioned earlier, the improvement was primarily driven by higher marketplace loan originations and improved average loan sales pricing throughout the quarter, partially offset by fair value adjustments on loans held-for-sale. I'd like to pause here to call out an important dynamic on how the yield on held-for-sale loans will flow through our income statement. These loans will generate a constant yield over the life of a loan, assuming no change in cash flow assumptions. The revenue impact from held-for-sale loans will be reflected in both net interest income and non-interest income in the following way. The coupon will come through interest income, while the credit losses and changes in fair value, including any upfront discount, will come through the net fair value adjustments line within non-interest income. As the portfolio grows, this will result in higher net interest income, partially offset by incremental fair value adjustments. So going forward, the driver of net fair value adjustments will include the above impacts in addition to the day one sales pricing on marketplace loans. Now, let's move on to net interest income, which was $129 million in the quarter, up from $123 million in the prior quarter. The increase was primarily driven by growth in our interest-earning assets due to the growth in securities related to the structured certificates program, as well as growth in the extended seasoning portfolio. Net interest income also benefited from one large structured certificate transaction that was accumulated over the quarter and generated approximately $2 million of incremental revenue from the sale. Risk-adjusted revenue, which is net revenue less provision for credit losses, increased to $152 million this quarter from $149 million in the prior quarter. We introduced this metric two quarters back as we believe it illustrates the lower risk nature of the assets we have been using to grow the balance sheet. On Slide 12, you can see our net interest margin was flat this quarter at 5.75%, which is a result of improving yields on our interest-earning assets, offsetting the slowing pace of increase in our funding costs. We expect the net interest margin to be flat to slightly down in the third quarter, and then begin to improve on a lag when the Fed lowers interest rates. Now please turn to Page 13 of our presentation, which refers to the second component of PPNR, non-interest expense. Non-interest expense was flat to the prior quarter at $132 million. While we did expect expenses to increase when we had our Q1 earnings call, we had some delays in those expense increases and some one-time benefits, most notably in compensation expense, which resulted in approximately $5 million of benefit during the quarter. We were also able to deliver stronger-than-expected marketing efficiency despite the growth in origination volumes. While we continue to remain disciplined on expenses, we do expect a step up in expenses in the third quarter related to continued volume growth as well as higher depreciation related to the completion of some of the initiatives you heard Scott discuss earlier. Now, let's turn to provision. On Page 14, you will see provision for credit losses was $36 million during the quarter compared to $32 million in the prior quarter. The sequential increase is primarily driven by higher day one CECL provision from higher held-for-investment loans retained in the period and the impact of higher provision in our CRE portfolio due to one office loan. As a reminder, we discontinued CRE originations at the end of 2022. We still have a legacy portfolio of office loans with under $50 million in balances, which were predominantly originated before we acquired Radius Bank. These office assets are less than 1% of our whole loan portfolio. One office loan has been downgraded and we took a $5.3 million reserve on the loan. The remaining balance represents an adjusted loan-to-value of approximately 25% compared to the sales price of the property in 2018. The remaining loans in this portfolio have less than $40 million of balances and are paying according to plan. On Page 15, we have updated our personal loan lifetime loss expectations for each of our annual vintages. We are seeing some modest improvement compared to the expectations we provided last quarter and the marginal ROE has remained very strong. We have used a range for 2023 loss performance where we have seen improvement in early stage results. However, outcomes may vary due to the longer remaining life of the vintage. The 2021 vintage has largely run its course with approximately 10% remaining of the original principal balance, which will rapidly amortize over the next few quarters. We plan to remove this vintage from the disclosure going forward. The last thing I'll note on credit is net charge-offs were down $14 million or 17% sequentially. Delinquencies on the consumer portfolio have also improved from the previous quarter and are down $9 million sequentially. Now let's move to taxes. Taxes in the quarter were $4.5 million, or 23% of pre-tax income. As I've mentioned before, we will have some variability in the effective tax rate from quarter to quarter, but our long-term tax rate expectation is 27%. That brings us to net income. Net income for the quarter was $15 million, or $0.13 per share, and our tangible book value per common share increased to $10.75. Now let's move on to guidance. For the third quarter, we anticipate originations growing to a range of $1.8 billion to $1.9 billion given the success we're seeing from our recent initiatives that are driving efficient, credit-worthy borrower acquisition supported by improving marketplace demand. We are also increasing our PPNR guidance range to $40 million to $50 million, reflecting stable revenue and modest increases in expenses, which I mentioned earlier. And we plan to continue to deliver positive net income in the third quarter, though not at the level seen in the first half of 2024, as we continue to reinvest in the balance sheet to provide stronger returns in 2025. With that, we'll open it up for Q&A.

We will now begin our question-and-answer session. [Operator Instructions] Our first question is from Giuliano Bologna with the company Compass Point. Giuliano, your line is now open.

Well, so, congratulations on a great quarter. It's great to see the progress finally starting to accelerate and improve here.

Thank you, Giuliano.

Of course. The first thing I was curious about asking you about was, in terms of some of the loan sales, I'm sure -- and kind of roughly where you're marking the loan book at the moment and kind of post sale, I'm curious where both of those stand at the moment.

Yeah. So, as far as the mark, we were up about 20 basis points in terms of price quarter-over-quarter. So, some improvement in price, which felt very good. And as far as the loan sales, if you look at the marketplace sales in the disclosure, you can just see we were up about $110 million in loans that were sold through the marketplace. In terms of the amount that actually were sold quarter-over-quarter versus put into the held-for-sale portfolio, it was probably -- it was about $50 million, I think, down quarter-over-quarter.

Sounds good. That's very helpful. Then, last quarter and this quarter you kind of highlighted some conversations that you're having with banks potentially returning to purchasing loans in the marketplace. I'm curious, it seems like the commentary is fairly similar about hoping to see banks return to buying loans in the marketplace at some point in the second half. I'm curious where things stand or if there's been any progress with those discussions, and is that potentially something that could be a 3Q event or is it more likely a 4Q event?

Hey, Giuliano. It's Scott. Yeah, what I'd say is pipeline there continues to be pretty strong. As we said last time, just repeating, we don't expect banks barring a more meaningful move downward in rates, 25 basis points, 50 basis points, we're going to get there. We don't expect banks to get back to the same levels as they were prior to the rate increase anytime soon, but we do have a good pipeline of idiosyncratic banks. I'd say the timing is bank diligence takes a while, so it's hard to kind of place it specifically. That's why I said I think back half of the year, more likely to be a Q4 event. Is it possible some of them that we get something in Q3? It's possible, but it's kind of timelines that are driven by a lot of internal processes, so hard to say specifically, but I'd say we continue to feel good about the level of interest there.

That sounds very good. And then, I'd be curious, you're obviously working on some of your new programs and rolling them out. You've got kind of reference on being running ahead of schedule and performing better than expected. When you think about those new programs, I'm curious, are they driving kind of any measurable amount of volume at this point, or do you expect them to drive [indiscernible] equal amount of volume over the next few quarters, or is that more of a '25 or later event?

Yeah. I would say if you look at our ability to kind of both deliver top end of the range in Q1 and in Q2 and the fact that we're taking guidance up again, that is really largely a result of the new initiatives. We're able to do that, by the way, while keeping acquisition cost flat, right, which is effectively coming from a selection of these new initiatives. So, in the scheme of our total, I'd say they're relatively small, but in terms of what's driving the growth at these efficient acquisition costs, they're more meaningful. As we said -- I'd say on the top-up program, both programs are running ahead of expectations in terms of customer response rates and take rates to the offer. I'd say Clean Sweep, we want to let that run for quite a bit before we really lean into it because it is a different -- it's a revolving line. It's a different credit program. Top-up is pretty much in line with the underwriting for repeat loans. So, we've got a lot of confidence there. And then, the other the other big piece we think that is really encouraging to see is that the satisfaction rates there are really high, right, that people -- we're solving slightly different needs with how these products are distributed, or let me say the use case is more perfectly tuned to the consumer needs. So, we're really excited to see those results come in. And I'd say, as well as I touched on the call, we're starting to see even people who downloaded the app, who not maybe marketing to through email because they've opted out marketing emails, are seeing these offers, and we're seeing uptick there. So, it's a way that we engage people who took to come back to us. So, it's all positive early results.

Hey. And Giuliano, this is Drew again. I just want to clarify what I'd said before. We were $50 million lower on whole loan sales, but we're actually $100 million higher on structured certificate sales, so $50 million up net. The one thing I didn't mention, which I think is also worth mentioning is we also agreed to sell another $80 million out of our extended seasoning held-for-sale portfolio that closed in July. So yeah, that all up, we're actually up $130 million quarter-over-quarter on loans sold out the door including the early July sale.

We also -- Drew, you might want to talk, we also had a sale of our -- a small A Note sale that [indiscernible].

Yeah, that's true. We actually, well, it'll close here shortly, but we agreed to sell a small amount of our A notes for the first time to someone who was buying from the structured certificate program as well. And while I don't know that that will be an ongoing program for us, it was good gist to test the market and ensure that these securities are as liquid as we believe they are. And we sold that just above our current carry, so also encouraging.

That's extremely helpful. And it's very helpful color on A note. One thing I was curious about was you obviously have a fair amount of capital with your CET1 ratio of 17.9%. Your Tier 1 leverage ratio is coming down a little bit, obviously, from a balance sheet perspective. But, I'd be curious, how much room you have to kind of keep pushing in the near term and what the [covenant] (ph) will be, and along those lines, would it make sense to try and pursue some sales of A notes to clear up some capacity on the balance sheet to push more whole loan sale or -- sorry, whole loan retention or anything like that over the next few quarters?

Yeah, I mean, as of right now, we still have capital for growth at the bank level from our existing balance sheet and we have $120 million or so of cash sitting at the holdco that we could deploy down to the bank to further expand the balance sheet. So, there's -- maybe in the distant future, selling the A notes would make sense to make room on the balance sheet, but for now -- and we may -- there's also structures where at origination, we may just sell the A note and the residual at the same time through the structured certificate program, but as of right now, we like the asset on our balance sheet. We like the 20% risk weighting. It's providing good returns. And so, we still plan to originate and keep that on balance sheet and grow the balance sheet.

That's very helpful. I think, I monopolized more of my fair share of the Q&A. So, I appreciate the time, and I will jump back in the queue.

Our next question is from Vincent Caintic with the company BTIG. Vincent, your line is now open.

Hey, good afternoon. Thanks for taking my questions. And I apologize in advance for background noise. I wanted to talk about the change in the environment. So, two points. First, you kind of highlighted this in your slide deck about how your product compares against credit cards. And so, I'm wondering if you could talk about your consumer engagement and how loan demand has changed? As credit card rates have been continue to increase, if you're able to add more price to consumers? So that's point one. And then second question kind of on the environment as well, but if you could talk about how your investor/partner conversations have changed? You highlighted the banks. I was just wondering if there's kind of any change, any additional appetite broadly and what might be driving that. I appreciate it. Thank you.

Yeah. So, I guess, maybe start on the investor side. As we indicated, as you're seeing in the sales prices, right, it's incremental, but I'd say steadily quarter by quarter as we've shown the consistency of the credit performance and the results and we've built the pipeline for demand and structured certificates. And in whole loans, we're definitely seeing upward pressure in a good way on the order book, meaning we got more people talking to us about purchases, including overall a longer-time horizon. And it's one of the reasons we got the confidence in building the held-for-sale portfolio is certainly a couple of the new potential buyers we're talking to are looking to make bulk purchases out of that portfolio. On the consumer side, the interesting thing there is, we will do some research. This will be something we'll release probably later in the year, but we did some of our own research with consumers and half of all consumers are roughly are carrying a credit card balance. And interestingly, it's the same percentage of consumers, they don't know the interest rates on their cards. And then, of the 50% who say they do know the interest rate on their cards, they actually don't. They're wrong, because they don't know that card rates have gone up by 500 basis points since the Fed started moving. And for those of you on the call, most of you probably don't carry a balance, but I challenge you, go try to find your credit card interest rate and look how difficult it is. So, they don't make it easy to find for a reason. So, what we see is that for higher credit quality consumers, there's still price sensitivity at the top of the range. So, the highest spike -- where we're playing with the majority of our portfolio right now, higher credit quality consumers, we have passed on, call it, I don't know, 280-ish basis points or so to the consumer, but they really don't know that their cards have moved. So, said another way, the saving spread that we're currently providing is amongst the largest we've ever delivered in our history. It's just, if they don't know it, if they don't know that their cards have moved to -- it's an average of 21%, but I looked in my own card portfolio, and I have a card, in my rewards card that's a 34% interest rate, right? So, I didn't know that myself. So, people just don't know it. So, we're seeing strong demand just because the balances are strong. I'd say, we think we have an opportunity through education to get take rate up by saying, hey, you're not only carrying a balance, you're paying a lot more than you currently think. So, if we're offering you a loan at, call it, 15%, it's actually well below what you're paying on your card. So that's a future opportunity. But overall, I'd say, the constraint right now is not really consumer demand because the balances are large that are out there.

Okay. That's really helpful. And maybe to tie in your discussion about the apps, I mean, how do you, I guess, educate the customer about that and make the customer know how much savings they can get? You talked about the ad, you talked about the higher marketing. I'm just curious if there's anything particular because it does seem like it's a huge opportunity with those savings there.

Yeah. As we said, the big thing we're trying to do is really kind of push up loan sales pricing, because as we push up loan sales pricing, it allows us to unlock more marketing channels. We've got a number of inactive channels because they're on the higher side, and when we're selling at a discount, it's just not economical, which is why we're leaning into our efficiency initiatives both on our operations side, but also marketing and product. But as our performance continues to reinforce investors' confidence as the rate environment moves in our favor, as we get more buyers and have a bit more scarcity and the availability of the asset, we expect prices to continue to move up. And as prices move up, we'll open up more marketing channels. And then, within the marketing we're doing, part of what our plan is for [data IQ] (ph) is to just make visible -- I mean, it's a bit of a tragedy that the lack of consumer education goes beyond the APR. I mean, people also -- not everybody even understands that when they're making the minimum payment, they're going to be paying their credit card debt for 20 years, right, that they're -- that's going to be a long-standing payment in their life. So, part of our goal with that IQ is to really get this information in front of consumers, so that they're aware of what they're paying, they're aware of the size of their balances, and they're able to easily take action through things like Clean Sweep to take care of it.

Thank you. And then last question, just wanted to clarify, for Drew. So, the PPNR guide for the third quarter, $40 million to $50 million, I guess, versus the second quarter of $54 million, so you would subtract $5 million for the second quarter to get to a run rate for the third quarter. And then -- so is that right? I mean, is this a good run rates to look at going forward when you're thinking about sort of the third quarter [to be] (ph) building off point?

You're breaking up a bit there, but I think -- so let me sort of say what I think you asked. Yeah, guide for third quarter, $40 million to $50 million in PPNR. Obviously, I think we're -- most all of us now are anticipating rate cuts in the future. Those aren't going to have a substantial benefit given the timing in Q3, maybe more benefit in Q4, at which point we'll update our guidance based on kind of where the market is evolving and what we're seeing happening.

Okay, great. Thanks so much.

Next question comes from Bill Ryan with the company Seaport Research Partners. Bill, your line is now open.

Good afternoon, Scott and Drew. Couple of questions. First, kind of, like, on a high level, but -- and I think you kind of hit on that a little bit earlier, but in the sense of your volume, we got a little bit of a bump in origination expectations from Q2 to Q3, but as you're looking at your business, what do you kind of highlight as the binding constraints for more meaningful increases in volume? I think you kind of alluded to moving into higher-cost marketing channels and that would be reflective of improvements in the fair value of what you're receiving, but if you can kind of talk about, if that's the key impediment to higher volume and if there's any others?

Yeah. I mean, Bill, I'd say the simple -- that's it, you got it. The fact that we got prices up, call it, roughly 20 basis points this quarter on the sold volume, that's great news, but versus where we were three years ago, it's still down more than 300 basis points. And that's -- that margin is effectively what fuels the -- some of these -- our ability to kind of open up some of these other marketing channels. So that's really why we've been focusing on these key levers around driving up returns to investors by keeping our delinquencies low so that they're willing to pay more and then working to bring in a broader set of buyers. So, those are ways we can get the price up without the benefit of the Fed. And when the Fed moves in our favor, which is looking increasingly likely, that'll kind of accelerate those efforts over time. So -- but you got the big picture.

Okay. And as a follow-up...

And just -- and the way we see it in our numbers, Bill, is, if you look at what we're running at for marketing efficiency on the face of the P&L, right, we're, call it what, 25%, 30% below where we were when we were running at full volume on all channels open.

Okay. And then, I know you may not want to answer the question, but it kind of relates to the bank buyers that may be re-entering or entering the market in the fourth quarter. But as far as loan pricing, obviously, banks have historically been the higher bidders given their lower cost of funds. How material could that be to the fair value marks that you're experiencing today? I mean, obviously, you know that there was a little bit of improvement quarter-over-quarter, but if they actually enter the market, what kind of change in the fair value marks might you see? And as a percentage of your marketplace originations, how material might these things become?

Yeah, I mean, I think for -- if they come back in Q4 as we're hoping, starting to anticipate, we do expect we'll get some price lift out of that. As far as the fair value marks are concerned, there's a number of dynamics that go into that, but certainly them, bank buyers coming into the mix that is driving price and, therefore, the fair value marks will create some upward pressure, but we don't take the highest price that we're getting to mark the book. We actually take closer to the lowest price we're getting to mark the book. And so, you're not going to see a large -- I wouldn't expect you to see a large movement up in the fair value marks, but in the effective price that we're getting and revenue, that should definitely be constructive.

Okay. And then, just part of that question was how material might they become as a part of your marketplace or your sales?

I mean, I think in Q4, we're talking about hopefully bringing in the first few banks into -- first couple of banks into the mix, which will be constructive, but I think 2025 is probably where we would see -- if all goes well, where we would see more lift coming from the banks.

Okay. Thank you for taking my questions. Operator Next question comes from David Chiaverini with the company Wedbush Securities. David, your line is now open.

Thanks. The first question, I wanted to ask about bigger picture, trends in loan performance of prime borrowers or the upper end of your borrowers versus near prime or the lower end of your borrowers. Any difference in the credit performance of these cohorts?

Let's say, you can see in our disclosures that we're seeing stable to improving performance across all segments. The lower -- let's call it, the higher-yielding lower FICO band segments experienced the most deterioration and therefore also experiencing the most recovery. We're seeing returns there be really, really strong. But I'd say we're -- across the board, we're seeing kind of -- when I mentioned that we feel like we've really calibrated the environment, we're seeing pretty consistent, stable behavior across the board now.

Great. And a follow-up kind of -- yeah.

I was going to say just more broadly outside of us, the broader signals on the consumer, there's a lot to point out to feel good about, right? Wage growth outpacing inflation and fairly manageable debt service burdens and all the rest, but no, we still have a very tight underwriting box given the cost of funds environment and given our desire to deliver outsized yields, we're still underwriting at a pretty meaningful reduction versus where we were before.

And is it fair to say we've hit a point in the macro environment kind of an inflection where you're able to convert borrowers due to the improving macro backdrop? Is that fair to say based on kind of the origination trends that we're seeing?

I don't know that I would say that the macro is driving a big change beyond the fact that consumers have been accumulating balances in cards, right? And I think you're seeing that outside of us again. I think the pace of that is slowing, which I think is a good sign for consumers. And we're seeing more -- let's say, in general, we're feeling like consumers have adjusted as well. Consumers have calibrated themselves to the environment, and we're seeing less of the, let's call it, more caught-off guard by how their cost of living has been growing, and consumers feel like they've adjusted to the environment. Our box has adjusted to this environment, and that's giving us a lot of confidence in what we're booking. And as you can see, our lifetime loss expectations are either stable or actually coming down since the last time we talked.

Great. Thanks for that. And then, last one for me is, as it relates to potential Fed rate cuts, all else being equal, are you able to opine on how much of a benefit to loan pricing or gain on sale margins could occur for each 25 basis point rate cut?

Yeah. I mean, there's two ways of benefits, that's right. First is going to be deposit costs, which you saw this quarter, our pace of increase has slowed, and so we would expect depending on our growth aspirations, right, if we're growing the balance sheet faster, we're going to want more deposits, but over time, as rates come down, applying 25 basis points across our entire deposit base, that's going to be a pretty meaningful good guy when we're able to move. And then, on the investor side of the house, there's some for the asset managers purchasing, these are kind of fairly formulaic deals based on the forward curve. So, as rate expectations solidify and come down, we're going to -- and again, on a lag, because these are multi-quarter deals, but we'll start to see that come through in pricing there.

Yeah, agree.

And pretty directly.

Yeah. Great. Thanks very much.

Next question comes from Reggie Smith with the company, JPMorgan. Reggie, your line is now open.

Thank you. I appreciate all the disclosure. The slide where you show, I think, the four different funding options, obviously, the pros and cons in each. I'm curious, longer term, how do you think about the optimal mix of funding? And then also kind of thinking about your leverage ratio, where do you think that kind of settles out longer term?

Yeah. Listen, I think the they all have different characteristics on how they hit the balance sheet and if they hit the balance sheet and the income statement. And obviously, in this environment, we've leaned into the structured certificates where we're getting the lower risk weighting, we're getting the upfront gain that's been very valuable to us at a time where maybe the rest of the marketplace has been pulling back. Ideally, over time, we would like to get more loans into held-for-investment where we're going to earn the longest returns for the business three times where we sell it, but at the same time, we want to keep capacity for the marketplace and make sure we're keeping our partners and selling effectively through that. The one place where that is relatively new for us is the extended seasoning and the held-for-sale. And I think that's where you will see the most optionality in terms of how we use the balance sheet, because while prices are low right now, we're seasoning those loans, we're getting -- we're not taking the upfront CECL and we're getting an effective return. But as prices improve, we're going to have optionality to sell that and take the gain and then create room on the balance sheet for more loans and A notes to put on in the future. So, I think it will -- Reggie, I think it will depend a bit on the environment and where we see it going, but we're going to be optimizing across the four mechanisms for the economics at that point in time and long term. As far as the leverage ratio -- just on the leverage ratio -- go ahead, Reggie.

No. You go ahead. Leverage ratio, I'll follow-up. Go ahead.

Yeah. I wasn't going to tell you anything. No, I'm just kidding. It's -- listen, we still have room to expand the balance sheet, and you can see that as our leverage ratio is coming down. We haven't disclosed a target, because we're going to continue to use our stress testing capabilities and the target mix of the balance sheet longer term to have that leverage target evolve. But just know right now between room on the bank balance sheet and the cash at the holdco, we have room to continue expanding the balance sheet and putting more assets on the balance sheet.

And then just kind of following up on the extended seasoning, just so we understand, are those the -- I think if you're buying those, would those have been the same entities that would have bought full loans previously? And if so, like, what do you think it will take to kind of get them back into that bucket? And I guess, an extension of that is, to your knowledge, like how are these portfolios performing relative to your investors' benchmarks? My guess is that they're probably doing a little bit better than the investors were expecting. Maybe I'm off with that.

Yeah. No, I think -- let me -- I might answer your question a little bit differently, just -- so first of all, let's talk about how investors are doing with the loans they've been purchasing recently. Keep in mind, most of our purchases this year have actually been through the structured certificate program, and I think it's been very successful. I think the residuals are performing very well, meeting and exceeding expectations, and that's why we're seeing demand come through that program. And we expect that to continue. On the extended seasoning, these are essentially the same loans we put on balance sheet. Sometimes the mix in the grades that we're putting on are a little bit different based on where we think investor demand is going to be and the returns we're seeing. We've done sales to whole loan buyers that have bought from us previously. We've done a sale to a new buyer, and we've actually done a sale using extended seasoning loans through the structured certificate program as well. So, it's really just on balance sheet loan inventory where we can have more control of when the sale happens and we can provide more scale in one sell than we can if we're accumulating from origination for the deal. So, if someone comes to us and said, hey, I want to buy $300 million, because all of a sudden, I have investor capital, and I need to put it for use, we'd say, great. The price on that's going to be this versus the price if you want us to accumulate is this. And we can have a different conversation on the dynamics around price and size, given it's already available on the balance sheet for sale. So, more flexibility for us, more flexibility for buyers.

Got it. If I could sneak one last question in, you kind of alluded to this, but I was just curious, with some of your agreements, are there any that you agreed to where the pricing is expiring or up for renegotiation? So, for instance, maybe you had agreed for a year-type relationship at a certain pricing that may be rolling off in a few months. Is that happening with any of your structures?

Yeah. Normally, when we...

Or you still might independently?

Yeah. When we set up these structured certificate programs with buyers, we have some buyers where we're going one quarter in advance, meaning you're going to do three purchases with us and we set a formula on the spread at which those will price. So, the price isn't locked in, but the pricing formula is locked in for the next quarter. That's pretty typical. We have some arrangements, which I would call the minority of the sales we've been making that have been extended out for a couple of quarters on a more complex formula that gives us incentives to raise prices and depends on where market rates are. So, there are different programs out there, but as we said before, we're not looking to lock in all our deals for the next year because the pricing isn't -- still not ideal from our perspective where we're at and we think there's opportunity to raise price as we go forward.

Understood. Thank you.

Next question comes from Brad Capuzzi with the company Piper Sandler. Brad, your line is now open.

Good afternoon. Congrats on a great quarter. Most of my questions have been answered, but just wanted to ask a quick one. I know you mentioned a lot of the origination growth is driven by loan pricing and the capacity to keep originating. How are you feeling about the consumer? I know credit metrics are improving, but what factors does macro uncertainty in the health of the consumer have to do with the willingness to increase originations?

Yeah. I mean, as we mentioned, we're keeping a -- I think we said last call, we feel good. This hasn't been a quarter or two. We've had multiple quarters in a row of consumer performance coming in at or kind of ahead of expectations. So, we feel quite good about what we're booking. We are still optimizing for returns for investors, right, and still trying to -- we're delivering -- just in terms of straight IRRs on the asset, we're delivering the highest returns we've ever delivered really outside of abnormal periods like the post-COVID period, but on a consistent basis. And so, we're keeping a conservative box, not because we've got a lot of concerns about the outlook so much as we just want to make sure that we're driving returns up to investors so that we can get it back in terms of pricing.

Thank you. And just the last one for me...

And then, metrics on -- go ahead.

Got you. Sorry. Yeah, just the last one for me. On a -- just from a competitive standpoint, have you seen competitors pull back or push for growth? And where do you see APRs trending in the space? Thanks.

Yeah. I mean, the space remains pretty competitive and dynamic, like always. Over the 15-plus years we've been doing this, we see new entrants come in and out. We see, I think, some irrational behavior. We've seen people dropping coupons, going out in terms, changing where they operate on the spectrum. I'd say, as usual, we kind of maintain the course and aren't chasing any of that, because over time, it comes home to roost. So, I would say, yes, we're seeing change, but it's the normal change we see in the space, which is new entrants coming in and/or people who are trying to achieve their own objectives, changing their behaviors, not necessarily in response to macro or consumer.

Thank you. That's it for me.

Thank you. Our next question comes from Tim Switzer with the company KBW. Tim, your line is now open.

Hey. Good afternoon. Thanks for taking my questions. One of the things I wanted to ask about, you've touched on the credit a few times here, but I believe I remember your guys' guidance last quarter was for net charge-off dollars to decline, but the rate to continue increasing. And, the net charge-off rate improved fairly meaningfully this quarter. Returns is that much better than you expected, or what was happening there? And what are your expectations, I guess, going forward? Is it still net dollar -- net charge-off dollars to decline?

Yeah. I would say it improved in -- more than we expected and you saw that also in the vintage disclosures that we put out there. So, I think the -- we've seen pretty rapid improvement. I think dollar charge-offs will continue to improve, might be a bit more modest. The charge-off rate probably could go a bit in either direction at this point, but I think, we should continue to see dollar charge-off improvements as we go into the next quarter on the held-for-investment portfolio.

Great. Okay. And if I could have one more quick one, I know we're getting to the end here, but you guys mentioned a step up in expenses, and I think your comment was along the lines of there's a $5 million benefit this quarter relative to your expectations. So, should we expect a $5 million increase quarter-over-quarter? And is all that on the depreciation line, or is there -- are there some other areas too?

Not all on the depreciation line, although that will be some of it. Keep in mind, if originations go up, marketing will -- spend will go up. So, you're going to -- that's included in the expenses going up guidance that we're giving there. Without giving you a number, I mean, you're probably not in the wrong ballpark there in terms of where the numbers are going, but as I predicted, expense increases this quarter and was wrong. So, there is some volatility in the line in terms of how it's going to come through.

Okay. Yeah, totally understandable. That that's all for me. Thank you, guys.

And now I'd like to turn the call back over to Artem Nalivayko for additional questions.

Thank you, Jayla. So, we had some additional questions that were submitted via email, but I actually think we covered off on all the questions in the analyst Q&A. So with that, we'll wrap up our second quarter earnings conference call. Thank you for joining us today. And if you have any questions, please email us at [email protected].

All right. Thank you.