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LendingClub (NYSE:LC)
Q1 2019 Earnings Call
May. 07, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by for today's LendingClub conference call. The call will begin momentarily. If anyone should need assistance while you're waiting please press star and zero. Once again, we thank you for joining.

The call will begin shortly. Good day, everyone, and welcome to the LendingClub Corporation first-quarter 2019 conference call and webcast. [Operator instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Simon Mays-Smith, VP of investor relations.

Please go ahead.

Simon Mays-Smith -- Vice President of Investor Relations

Thank you and good afternoon. Welcome to LendingClub's 2019 first-quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, CFO. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risk and uncertainties.

These statements include but are not limited to our guidance for the second-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 the 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 the accompanying presentation are available through the investor relations sector of our website at ir.lendingclub.com. And now I'd like to turn you over to Scott.

Scott Sanborn -- Chief Executive Officer

Thank you, Simon. Welcome, everyone. I'll start by saying we're off to a good start to the year, and we are on track to achieve our 2019 goals. The operating environment outside of us remains dynamic, but it hasn't really changed much since our last call, and we are acting with urgency to deliver on our plan.

We're continuing to execute with discipline, leveraging our data, scale and marketplace model to our advantage. We also just passed a new milestone, serving our 3 millionth customer on their path to financial health. To put that in perspective, that means we have more CLUB members than the state of Mississippi has residents. It's a testament to the value we provide and the opportunity that we can further unlock.

We're focused and delivering on both sides of our platform with more tools and partnerships to improve our borrowers' financial health and deepening relationships with our largest platform investors.  Back in February, I said LendingClub would drive responsible revenue growth in 2019, continuing to innovate while carefully allocating capital, managing risk and simplifying our operations to drop more of our top-line growth through to the bottom line. We have lots more to do, but let me share what we've accomplished so far this year. First, the investor base we've worked hard to build over the last several years is giving us an important advantage and range of risk appetite and cost of capital, meaning we're able to offer more attractive rates to more borrowers. That, coupled with our work on demand generation, throughput and lifetime value, has translated into strong, responsible growth in Q1 with applications up 31%, loan volumes up 18% and revenues up 15% year on year, so overall, solid numbers.

One area we are working through is the difference between loan growth and revenue growth rates. This is driven primarily by fair value marks as we use pricing to balance the platform for higher risk prime. As Tom will talk about in a minute, we believe that the size of the difference in these rates will be temporary as the impact of exchanges we made to credit and pricing over the last 12 months manifest in performance over the back half of this year. Our demand generation is a real bright spot.

We grew applications 31% year over year, and we increased the efficiency of our marketing despite tightening our credit policy and increasing interest rates throughout the year. We continue to leverage our scale, data and testing to improve our targeting and messaging while expanding into new channels and marketing partnerships. In throughput, our focus on driving conversion by removing sources of friction and confusion is also paying off in terms of customer satisfaction and our bottom line. New data sources, better use of existing data, increased automation and new communications approaches have reduced our unit cost of operations and increased the speed of approval and our ability to convert applicants into customers.

Let me give you a number for reference, which is, in Q1 of 2019, 73% of our personal loan customers went from application to approval within 24 hours. That 73% represents a 28% increase from a year ago, and unsurprisingly, it's driving us to new highs in customer satisfaction. Our ability to efficiently find new prospects and seamlessly convert them into customers are powerful keys that will unlock a much more broader opportunity for LendingClub, which is creating CLUB members with a lifetime relationship. And we're making great progress on this front.

Essentially, we're working to recognize and reward loyalty and positive payment history through product and experience enhancements. What we're creating is a welcome back experience that allows us to recognize returning customers, deliver targeted offers and dramatically streamline their application and approval process. We're excited about the opportunities here and have a longer-term vision of continuous underwriting delivering seamless credit on demand, and this can fundamentally evolve the use case for the product and the relationship we have with our borrowers. Now turning to our investor franchise where we are focused on transforming from an alternative asset to a mainstream asset class.

In the quarter, we facilitated $2.7 billion worth of loans with capital provided by some of the largest fixed income managers in the world, and almost 40% of these loans were sold through our structured programs. These are channels and capabilities that did not even exist just 18 months ago. As our origination and distribution capabilities grow, we're generating significant interest from large investors, reflecting our ability to deliver attractive risk-adjusted returns at scale. And as our significance to our investors grows, we're building closer partnerships to give them greater visibility and certainty of flow so that they can build meaningful investments in the asset class.

So let's move on to how we're allocating capital, innovating for long-term growth while managing operational and regulatory risk today. Our focus is on evolving from being a lending club to a financial health club. We've built a world-class demand generation machine that's able to efficiently deliver broad access to affordable credit with an experience that delights customers and brings them back wanting more. However, we only get a small fraction of our applicants into a loan, and we only have a narrow range of loan products, so we can and we should do more.

We should say yes to more of our applicants, and we should offer our customers other products and services that support their intent and our brand vision. Our strategy to realize this opportunity is long term, and it's multilayered. We'll leverage our in-house resources and capabilities to strategic advantage where that makes sense, and we'll enhance them with best-of-breed partners where it doesn't, effectively transforming LendingClub into a multisided platform. For example, we work with dozens of highly sophisticated fixed-income investors who have their own view on credit.

You can expect us to open up our applicant pool to a select few of these partners to turn some of our nos into yeses, posting alternative credit models to deliver seamless LendingClub experience. In terms of other products, we're clearly investing in building out our auto lending capabilities, but as announced recently, we're now partnering with others to deliver small business loans. Over time, we'll add other capabilities that go beyond lending to offer integrated experiences that deliver on our mission and better monetize our demand generation and converging capabilities. Right now we're investing in the data infrastructure and the user experience that will enable this move from product-focused to platform-enabled, which will allow us to offer more value to customers and transform their relationship with us from today's visitor to tomorrow's member at the CLUB.

So that's our strategy. We're often asked whether possessing a bank charter would help us to achieve that strategy. And the answer, there would clearly be benefits from having a bank charter. It would not only enable us to offer a broader range of products and services, which will be a significant growth opportunity for LendingClub, but also deliver significant cost savings and margin improvement.

And we're providing additional source of low-cost and resilient funding to add to our marketplace and revenue mix while also giving us greater regulatory clarity and certainty. But the benefits aside, obtaining a bank charter is a significant undertaking and it's a long road. There's a lot to evaluate. And that evaluation will take time and will involve some expense, so we'll update you as our thinking evolves.

Let me finish by talking about our simplification program. We've got a bottoms-up zero-based budget, and we're now executing against more than 200 projects designed to lower our operating cost base. We've made great progress so far, and we are confident that the benefits will come through in the form of adjusted net income profitability in the second half of this year. This program is enabling us to lower our unit cost, shift more of our cost to a variable basis and focus our engineering and operations talent on areas of competitive advantage.

But more importantly, it's transforming the way we operate the business and the culture of the company, and I'd like to take a moment to thank everyone at LendingClub for their tremendous dedication as we transform the business and absorb these significant changes. So to finish, we've had a good start to the year. We are growing responsibly and with discipline, leveraging our advantages to successfully navigate a dynamic environment. We know we can do more, and we are executing with urgency to simplify our business and expand margins and are on track to hit our 2019 financial goals and to be adjusted net income profitable over the second half of the year.

And we're executing on our longer-term strategy, innovating and investing to grow our addressable market opportunity. The management team and I remain energized to deliver on 2019 and beyond. Tom, I'll turn it over to you.

Tom Casey -- Chief Financial Officer

Thanks, Scott. We've got a busy start to the year, so let's get right into it. I'll start by reviewing our Q1 performance and then update you on or cost simplification initiatives, including details on our second site in Lehi and then finish with our Q2 and full-year outlook. As I noted last quarter, we continue to deliver targeted returns to our investors using our price, mix, credit and scale, and this gives us great strength and flexibility.

While we still have much to do, our strong performance so far this year is encouraging and we see good opportunities to grow revenues and expand margins in 2019. Perhaps more importantly, we can already see that our simplification program is fundamentally transforming the way we operate our business, giving us a road map over the medium term to adjusted EBITDA margins of 25% and beyond. So let's start with Q1 revenues, which were up 15% to $174 million. On the borrower side of the platform, transaction fees grew 22% in Q1 to $135 million on the back of 18% growth in originations and a 14-basis-points increase in transaction fee yield as we continue to optimize transaction fee and other pricing levers to balance investor returns, borrower demand and LendingClub economics.

I want to bring your attention to our income statement as we've made some modifications to more clearly report net investor revenue. We think net investor revenues as a whole will give you a better aggregate view of the investor side of our platform. Net investor revenue was down 5%, $37 million with growth in investor fees and gain on sale offset by three items in net interest income and fair value adjustments that I like to address before I go into gain on sale and other revenue: first, $2.4 million decrease in net interest income in part resulting from increased utilization of our warehouse lines in 1Q and higher market interest rates; two, $2.2 million non-recurring contra revenue item hitting fair value adjustment resulting from the wind down of LCAM, our asset management business; and third, a $3.8 million fair value adjustment to higher risk prime loans that Scott mentioned in his comments. As we've noted last quarter, investor demand has shifted to higher quality prime credits, and we have therefore discounted certain higher risk prime loans to meet investor demand and yield expectations.

We've already tightened pricing and credit at the higher risk end of prime and feel good about our credit outlook, but we do expect the fair value adjustments to be elevated for a few quarters as these pricing and credit adjustments begin to show in our performance. Let's get into the other key drivers of net investor revenue. Investor fees were up 14% to $31.7 million reflecting strong growth of the loans under management in our loan servicing portfolio, growing 18% to $14.1 billion. And gain on sale revenue was up 20% to $15.2 million.

We saw higher gain on sale revenues this quarter as we sold $2.85 billion of total assets to investors, which was approximately $150 million higher than our Q1 volumes of $2.7 billion. Other revenue was $2.1 million primarily reflecting the rental income we were earning from subletting our San Francisco property, which was freed up by our simplification program. Now let's move on to costs and how our efforts expanded adjusted EBITDA margins about 3 points year over year. Marketing sales expenses were $64.6 million in Q1 with M&S as a percent of originations 4 basis points better year over year to 2.37%, continuing improving that we've seen over the last few years.

The improved marketing efficiency reflects our focus on targeting and conversion efforts and is especially notable considering we've tightened credit and increased prices over the last year. This is another important area of focus in our simplification program, and we expect further improvement in the second half of the year from better targeting, conversion and vendor consolidation. Origination and servicing costs were $24.1 million in Q1. O&S costs as a percent of originations improved 6 basis points, benefiting from the BPO efforts we started a year ago.

We also expect additional benefits from our Lehi move in the second half of the year. Contribution was up 15% to $85.7 million at a margin of 49.1%. So let's talk about our fixed expenses in engineering and G&A. Our engineering operating expenses were up 7% to $23.9 million, and our engineering capex spend of $10.7 million was down 16%, meaning our total cash engineering spend was broadly flat.

We are optimizing our technology infrastructure and focusing our engineering to support key initiatives that will drive differentiation for LendingClub, which include personalization, user financial health and data analytics. With our use of more partners, like AWS cloud, we will start to see some shift in the mix of our engineering spend from capex to opex. The net result of these initiatives will be less capitalized engineering costs and over time, slower growth in depreciation. G&A expenses were up 6% to $39.2 million.

Taken together, engineering and G&A expenses grew 7%. We continue to see the wedge between revenue and fixed cost growth, which grew our adjusted EBITDA 47% to $22.6 million with margins improving 2.9 points to 13%. So now let's move down to GAAP net income. Stock-based compensation was $18.3 million in Q1, down 120 basis points to 10.5% of revenue.

And depreciation, amortization and other net adjustments totaled $15.8 million in Q1. As a result, our adjusted net loss, which excludes non-recurring items, equaled negative $11.5 million with the outperformance relative to our guidance range flowing through from EBITDA. Moving down to P&L. non-recurring costs totaled $8.4 million.

This included $4.1 million of legacy issue expenses of which $2.2 million related to the wind down of LCAM I mentioned earlier and $1.9 million from legal indemnification costs. non-recurring costs also included $4.3 million of simplification program costs mostly related to retention cost of our geolocation initiative. Combining these items, our reported GAAP consolidated net loss of negative $19.9 million was within our guidance range with our outperformance at the adjusted net income level offset by non-recurring items. Before I turn to our simplification program, I'd like to talk about two additional balance sheet disclosures we've made this quarter, which you'll find on Pages 12 and 13 of our press release and in our 10-Q.

They will enable you to, one, much more easily strip out the pass-through impact of our retail program and certain consolidated VIE structures on our balance sheet. As you can see, the retail and VIE assets significantly grosses up our balance sheet and represents about $1.9 billion of our total assets of $3.4 billion; and two, clearly sets out LendingClub's net cash and other financial assets, which stood at $664 million at the end of the quarter. In combination, we believe these additional disclosures will enable you to better understand the underlying net asset value of the company and better assess the components of its enterprise value. With that, let me give you an update on our simplification program.

In February, we told you about our zero-based budget work and we are now in the process of executing multiple initiatives across the company in business process outsourcing, geolocation, leveraging our scale and a number of other initiatives. In BPO, we ended the quarter with over 400 operation support personnel across our BPO sites, offering more flexible and variable cost support to our business at lower unit cost when compared to San Francisco. In geolocations, we had 76 FTEs at our Lehi site at the end of March and expect to fill most of the 550 capacity by the end of the year as we transfer operations to the new site with average salary savings of approximately 25%. As a result of our BPO and geolocation initiatives, we've been able to let expire about 30,000 square feet of San Francisco property leases and to sublease another 60,000 square feet at rates, which will be earning accretive for the duration of the leases.

By the end of 2019, we will have reduced our real estate footprint in San Francisco by 123,000 square feet, and we'll be using 70,000 square feet in Lehi, obtaining about 50% less per square foot. One thing to help your modeling is that you will see the benefits from the subleasing in our other revenue, while the rental cost of our Lehi lease will be going into G&A. The savings from these and other initiatives already under way underpin our goal to be adjusted and income profitable in the second half of 2019 and will add to adjusted EBITDA margins as they annualize in 2020. As I mentioned earlier, we can already see that our simplification program is transforming the way we operate our business.

Now that we have our December 2017 Investor Day goal of 20% adjusted EBITDA margins in sight, we believe that our revenue growth and the annualization of savings from the simplification programs in 2020 and further benefits in 2021 give us a medium-term road map to our next milestone of 25% adjusted EBITDA margins with further opportunities beyond that. Let me finish with our guidance. So for Q2, the strong underlying demand that we saw in the first quarter has continued, and we're expecting broad macro conditions to remain similar in Q1. We expect record revenues in Q2 between $185 million and $195 million, reflecting our toughest comparable from last year but implying a growth rate of between 9% and 12% in the first half.

And we are on track to meet our 10% to 14% revenue growth target for the year. We expect adjusted EBITDA to be in the range of $25 million to $30 million in Q2, implying margins of between 13.5% and 15.4%. We've again excluded simplification charges and legacy issues and non-recurring costs from both our GAAP consolidated net income and adjusted net income guidance to give you a better view of the underlying performance of the business. We'll update GAAP consolidated net income guidance in each quarter as we incur these charges.

We expect stock-based compensation charges of approximately $21 million; depreciation, amortization and other net adjustments of approximately $15 million in Q2. We therefore expect GAAP net loss to be between negative $11 million and negative $6 million in Q2. Our full-year guidance is unchanged, and we're still targeting adjusted net income profitability over the second half of the year with healthy revenue growth and the benefits of our simplification program flowing through EBITDA. There will be further simplification charges in Q2, and we continue to expect the costs related to the program to broadly break even for the year with a net negative impact on the first half and a positive impact on the second half as we head into 2020.

As you've heard, we've started the year well and our simplification program is on track. Through innovation, our simplification program and partnerships, we're transforming LendingClub, enabling it to sustain strong operational and financial momentum in 2019 and beyond. Scott, back to you.

Scott Sanborn -- Chief Executive Officer

Thanks, Tom. All I would do is wrap up with an overview. Clearly, we've had a good start to the year. We are executing well and are on track to deliver against our 2019 financial goals.

So we're eager to turn it over now and take your questions.

Questions & Answers:


Operator

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

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Good afternoon, guys. Thanks on the update on the expense side and the confidence in that sounds, I think, pretty good. But I wanted to touch on the guidance on the revenue side a little bit. If you could get into little bit deeper on kind of the timing of the growth rates, it sounds like it decelerated a bit, next quarter, acceleration second half.

And I think you mentioned fair value adjustments. But you can maybe talk about whether what's impacting some of that and your confidence to kind of reaccelerate growth in the second half a little bit relative to 2Q. So maybe you can get a little bit deeper on kind of your thoughts around revenue timing.

Tom Casey -- Chief Financial Officer

Hey, Brad, thanks. Couple of things. Actually, we're executing right on track with where we expected. I'll have you -- I'd point to last year, if you recall, we were at the 27% revenue growth on 31% origination growth.

So clearly, we've got some mathematical comparables that are making it look like we're decel-ing, but actually, we're right on track with our guide right around that 10% growth for the first half. We've indicated in the past that a lot of the savings will come in the back half. So we're right on track where we thought we'd be and see great momentum in the business.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Understood. And then also, if you could touch a little bit on the FTC, you put a different thing on your website a little bit. Maybe you can expand upon that just so -- you guys didn't touch on it on the call.

Scott Sanborn -- Chief Executive Officer

Hey, Brad. This is Scott. Pretty unorthodox for us to be commenting in the middle of litigation, but we do know it's a common question we get. So we pretty much put in the blog post really everything that we have to say on the topic at the moment.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Understood. I'll get back in the queue. Thanks, guys.

Operator

Our next question comes from Jed Kelly from Oppenheimer. Please go ahead with your question.

Jed Kelly -- Oppenheimer -- Analyst

Great. Just circling back on the guidance. Can you speak to some of the trends you're seeing in April, how they compare to 1Q and how that's actually been projecting?

Tom Casey -- Chief Financial Officer

Hey, Jed. We don't typically comment specifically on the months, but I know that people are tracking that with the various agencies or services out there. We continue to be on track where we expected. Typically, the second and third quarters are typically are stronger quarters than the first quarter.

And so we continue to see ourselves in good position for 2Q and started the quarter off right as we would have expected.

Jed Kelly -- Oppenheimer -- Analyst

And then when you raised your EBITDA guidance, I guess your medium-term EBITDA guidance to 25%, can you just discuss, your biggest expense is still sales and marketing, just how should we view the leverage you can drive out of that line item? And then as a follow-up, as we get later in the credit cycle or in any cycle, businesses with a tremendous amount of scale such as yours, usually it presents an opportunity to take share gains. And how do you just balance profitability versus growth? And how should we think about that?

Tom Casey -- Chief Financial Officer

So Jed, I'll touch on the expense discussion, and then Scott may talk about market share. So first, we feel very good about the work we did. As Scott mentioned, we've got a pretty extensive zero-based budget and we've got line of sight clearly to 20%. And now we're targeting another five points.

We think that's going to come out of a couple different places. First, in M&S and O&S, we have a number of things happening here. First, with moving to Lehi, we're going to get facility savings as well as salaries and benefits savings. So that was already in flight, and we can see that improving our contribution margin.

I would expect that additional 5 points of margin going from 20% EBITDA margin to 25% that a piece of that is going to come from the productivity we're seeing in variable cost. Our ability to convert customers at a higher rate, as Scott mentioned, is really a big focus of ours, and we would start to see our contribution margin go over 50% and add a couple of points or more to that EBITDA margin expansion. Clearly, on the fixed cost, when we think about tech and G&A, we see additional margin expansion on that as well as we start to really take advantage of our scale that we've mentioned. So it's coming from both areas.

It's consistent with the move from 15% to 20%. 20% to 25% is the next step we see line of sight to. So we're feeling very good about really starting to leverage our scale and really hone the investments we're making and the returns we're seeing on some of those investments. Scott, you want to talk maybe a little bit about the market?

Scott Sanborn -- Chief Executive Officer

Yeah. Hey, Jed. First and foremost, as we've said multiple times in the last couple calls, our primary driver is to grow responsibly, make sure we are being good stewards of credit on behalf of our investors. And we are doing that in a way that if you look over the course of last year, we're doing that in a way that is -- we're actually growing ahead of the pace of the overall market.

And we're doing that while also optimizing the performance of our credit and adjusting pricing. So overall, we feel really good about our ability to not only defend our share as the largest participant in the market but actually to be able to grow and leverage the unique advantages that come with operating at this kind of a scale. And if the share is there for the taking responsibly, we absolutely won't hesitate to do it. And what we also talked about is we are looking at, over time, ways of increasing lifetime value of customers, and that'll -- that thinking right now where our acquisition is really based on profitability on their initial contact with us, but over time, we will see opportunities to expand the relationship and the value that we give to customers and the value we get in return.

Thank you.

Operator

Our next question comes from Eric Wasserstrom from UBS. Please go ahead with your question.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Maybe, Scott, to ask a similar question maybe a slightly different way, has anything occurred recently in the competitive or operational environment that has changed your approach to your growth investment coming into this year?

Scott Sanborn -- Chief Executive Officer

So I'll start. Tom, if you want to finish, I'd say go. I mean we see the environment right now is pretty much in line with what we've been seeing over the last several quarters. We are on track to execute against the plan that we laid out.

Tom Casey -- Chief Financial Officer

Yeah. And what I would say, Eric, we are organizing around the opportunities that Scott mentioned. We are modifying our resources to be more focused on this lifetime value, the ability for us to really take advantage of the very, very high NPS scores that we have. Consumers are coming back to us at a higher rate, and we see opportunities to continue to serve them as this product becomes a part of how they manage their credit.

Scott mentioned the speed in which we're able to decision and get customers their money is another example where we we're changing the use case, and we're organizing around that. So it's -- if you remember, we did a lot of work last year on demand gen, a lot of work on conversion, and now we're really focusing on the lifetime value of the customer.

Scott Sanborn -- Chief Executive Officer

Yes and the only other thing I'd add, Eric, is evolution of where we've been, we've been talking about overall health of the consumer. We see us continuing to be strong with unemployment low, wages starting to come up. Overall performance across credit, pretty benign including in our portfolio but what we see as a supply side-driven pressure on higher risk prime. We do believe that we've largely addressed that with the changes that we've made, so there's nothing right now that we're seeing that represents a change in overall environment we're bearing.

Eric Wasserstrom -- UBS -- Analyst

Great. And just, Tom, just one clarification. I just want to make sure I understood your EBITDA commentary because obviously you've just sort of improved the medium-term guidance from 20% to 25%. But did I also understand that you think there's incremental margin opportunity even beyond that?

Tom Casey -- Chief Financial Officer

Yes. Sorry, what I give is the -- our outlook on a medium term. So as we get the benefits, full-year benefits in 2020 and then another leg of initial items we see in 2020 going into '21, it's kind of medium term to sometime in '21, we believe we can deliver those types of numbers. May not be for the full year but clearly, that's where we're headed.

But I think what's happened is, Scott mentioned in his comments, we're changing the culture of the organization to be focusing on driving level of profitability organization. So the way we approach our business, the way we're leveraging our scale has shifted as a part of this exercise. It's not just about the mathematics. It's about how we think about investments and how we are targeting returns.

So we think that this business has an entitlement above that. We don't have specifics right now, but let us get -- if you remember, went from 7% to 15%, 15% to 20%, now we're going from 20% to 25%. We're sharing with you our current thinking, but to the extent we can execute on some of the things we've talked about today, I'll give you an update when I think we can hit above 25%.

Eric Wasserstrom -- UBS -- Analyst

Excellent. Thanks very much.

Operator

Our next question comes from Heath Terry from Goldman Sachs. Please go ahead with your question.

Heath Terry -- Goldman Sachs -- Analyst

Great. I know the growth and profitability trade-off question has been asked, but I kind of wanted to get a sense from you that -- is there something magic about 25% that I don't think you feel like it's the right number to get to? And I mean you just referenced sort of getting beyond 25% that you feel better about being at that level versus reinvesting that back into the business in terms of faster growth. I guess what level of EBITDA is -- of EBITDA margin is sort of high enough for you to want to start putting money back into the business for faster growth? And then, Scott, maybe a sort of higher level question sort of related to the quarter itself. But as you look at the company's use of data and the way that you're assessing risk in the portfolio or loan applicants, can you just give us a bit of an update on where you are in the use of alternative data and particularly to the extent that you're seeing a divergence in the performance of your grades of loans versus the comparable number would be on a credit-score basis?

Tom Casey -- Chief Financial Officer

So let me get the first one. So the information that I've been laying out over the last couple of quarters, the 20% EBITDA number is critical because, at that point, we start to cover all of our stock-based compensation depreciation, so we start to get profitable on a GAAP basis. We think that's an entitlement that the business needs to demonstrate and allows us to show the true profitability of the company. As we move to 20% to 25%, that will obviously -- that's an indication that we see additional GAAP profitability above that level so not just hitting 20% but being able to then demonstrate net income growth beyond that.

I think your point's a good one. That's why I paused. It's not to give an indication of going beyond 25% because to the extent that we do see opportunities to double down on an investment, we want to have that flexibility to do that. But right now we feel very well positioned to continue to grow.

We're not -- We have plenty of opportunity to reinvest at the level of growth that we're seeing, and it doesn't seem to be slowing at that. We think we can do both, and it's important for us to do both.

Scott Sanborn -- Chief Executive Officer

And I'd circle back, if I could, Tom, on the -- we are investing now in areas that we're being very, very selective about. So auto, as I mentioned on the call, is clearly an area we're investing. And we are investing in our data infrastructure and analytics infrastructure because we know those can drive long-term growth. And then there are other areas we're being thoughtful about what is the best use of capital.

Is it us building ourselves? Or is it partnerships? Cut you off, I don't know if you'd add anything...

Tom Casey -- Chief Financial Officer

No, no, I think you got it, Scott. Those are the key things.

Scott Sanborn -- Chief Executive Officer

So Heath, on your other question on use of data, alternative use of data, now I believe we talked about before, our core models that are powering fraud, pricing, credit decisioning, underwriting already are really taking a look at things outside of traditional metrics roughly half of the variables in our model, and we've got over 100 variables in the core decisioning model, are proprietary to us and have been developed by us. And we are continuing to see success. The direct application of course is in areas like fraud and underwriting where they can be very powerful, and alternative data can be very powerful on making sure the individuals that are applying are who they say they are, work where they say they work and earn what they say they earn but increasingly, also using those in decisioning. An example is we talked about -- I believe about a year ago today, we talked about using cash flow based underwriting through bank accounts.

That's a program that's been successful for us, and it's continuing to expand, delivering strong returns for investors and allowing us to increase access to credit for people whose bureaus might not otherwise -- might otherwise not look attractive but whose actual demonstrated experience and their ability to build balances and maintain balances is strong. So in terms of where we are, I'd say never done. That's why we're investing in the infrastructure, our team, our tools and our processes to continue to identify opportunities.

Heath Terry -- Goldman Sachs -- Analyst

Thank you both.

Operator

Our next question comes from Mark May from Citi. Please go ahead with your question.

Mark May -- Citi -- Analyst

Thanks. I just had one. I wanted to reconcile or make sure I understood. In your prepared remarks, you talked about some of the issues that you saw in the quarter around high-risk classes of loans, but I think you also talked about, going forward, you have some plans to really try to bring in a new class of institutional investors that can help you scale that end of the class spectrum.

So just trying to reconcile those two things and get a better sense of what's happening there. Thanks.

Tom Casey -- Chief Financial Officer

Yes. Thanks, Mark. Actually, they're highly related, so let me kind of give you a view. To the extent that we did $2.7 billion of originations this quarter, we sold $2.85 billion of loans, so massive scale.

To the extent that we're seeing a difference between targeted returns and the coupon on our bonds or returns on our loans rather, we will step in and clear the market. You see that with our fair value market I mentioned in my prepared remarks. That is something that we're constantly using our balance sheet. To the extent that we can partner with others that have a specific credit underwriting capability that want to fund specific loans across a different spectrum that we may not be able to sell in scale, those are opportunities for us to leverage all the marketing, all the underwriting and infrastructure we've put in place.

That goes back to even some of the comments I made earlier about margin expansion by being able to further convert customers with a different profile or a different view on credit, that is a real growth opportunity for us. It's something that we're looking for partners to do, to do just that. So they're highly related, and to the extent that we can put those in place, they can be very accretive.

Scott Sanborn -- Chief Executive Officer

Just add to that, if you look at the overall shift in mix over the last 18 months, we've clearly been moving with -- together with investor demand and to the higher quality credit overall, you see that on our shift of increasing mix of banks. And if you'll note the growth in our custom loan program, the fastest growing segment of that is our AAs, which is our highest quality credit, the Super Prime credit.

Mark May -- Citi -- Analyst

That make sense. Thank you.

Operator

Our next question comes from Henry Coffey from Wedbush. Please go ahead with your question.

Henry Coffey -- Wedbush Securities -- Analyst

Yes, good afternoon and thank you for taking my questions. I want you to kind of indulge me because I want to ask the same question just to make sure I understand it. So you've had loans that you originated where the returns were not perfect, so you held those on balance sheet or sold them at a discount. Is that what we should understand about the fair value market?

Tom Casey -- Chief Financial Officer

Yeah. So Henry, what we do -- and want you to think of this as velocity. When we say hold on the balance sheet these are within 30 to 45 days on average. These are moving quite quickly.

To the extent that the returns are not hitting the investors' expectations, we will evaluate providing a slight discount. That's what I'm referring to.

Henry Coffey -- Wedbush Securities -- Analyst

Yeah, that's what I thought. And then -- but on the other side, for most of the last almost two-plus years, the discussion's been around narrowing the credit box and finding growth channels, like you said, on the AA program. But now it sounds like, in addition to the fact that you're willing to sort of sell them at a discount should you have to and everybody has to do that, you're also talking about in a very selective way in a customized program opening the credit box a little bit.

Tom Casey -- Chief Financial Officer

So there is -- we're always focusing on how to maximize the margins in our business. It could be through originations on our side. Keep in mind that our transaction fees continue to be quite stable, and so it still makes sense for us to provide a small discount to clear the platform. To the extent that another market participant would be interested in leveraging our sales and marketing and ability to use our systems and infrastructure to generate loans that they are selecting, that's a -- opening our platform.

It may or may not be opening specific credit. It could be just different attributes that they believe are indication of the value. So it's going to vary. We don't have specifics to give you today.

But to the extent that we can increase loan volume off of the current cost and scale that we have, that's additional profit for us.

Scott Sanborn -- Chief Executive Officer

Yes. A way to think about it, we're generating 40,000 applications a day. A small fraction of those are getting into an actual loan. And given the investor base we work with, many of whom have investment managers who worked at some of the leading unsecured consumer credit shops across the country, they -- we have people who have different views.

So there are places where we have hard cuts. We don't go below, for example, 600 FICO. We don't go above a certain level of DTI. They might have different views based on experience with new to credit or thin file.

And based on that experience, they might be willing to take some of our applicants and run them through a custom model and book them. We're already attracting the applicants. We're pulling the credits, so we can take that duty underwriting, deliver an integrated LendingClub experience and with a custom program like that. So be...

Henry Coffey -- Wedbush Securities -- Analyst

No, now it makes perfect sense. And you're not so much opening the credit box as much as letting someone else define what the box for them might look like.

Tom Casey -- Chief Financial Officer

That's exactly...

Scott Sanborn -- Chief Executive Officer

That's exactly right. That's exactly right.

Henry Coffey -- Wedbush Securities -- Analyst

And then just some trivial questions. I noticed on your servicing -- investor fees, there was a difference between the adjusted number, which runs around 30 basis points and the reported number. What was that -- what's the difference there?

Tom Casey -- Chief Financial Officer

Right now, it's mostly probably the charges related to the redundancy that we had for the quarter, Henry. We did have some retention in place as we were transitioning to Lehi, so. I'm assuming that's the number you're referring to. But we saw productivity in both...

Henry Coffey -- Wedbush Securities -- Analyst

I'm talking about the gross fee, which was -- the gross fee was up -- the adjusted fee was unchanged at like 29 to 30 basis points year over year, but the reported number on your GAAP financials was different. Is that -- it's on the revenue side I was asking about.

Tom Casey -- Chief Financial Officer

No, I don't know of anything specific. The piece that's helping that number grow is the current servicing portfolio now has gone over $14 billion, and also our average servicing rate has also gone up. So you're getting both of those impacting that number. That's the -- I think that's what you're looking at.

Henry Coffey -- Wedbush Securities -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Steven Kwok from KBW. Please go ahead with your question. Mr. Kwok your line is open.

Is it possible your phone is on mute. And our -- we'll move on to a follow-up question from Brad Berning from Craig-Hallum. Please go ahead with your question.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Yeah, one more follow-up on the user experience on the application by speeding up the process there. And I was just wondering if you could talk a little bit about differentiating yourselves in the market on that user experience and if you have line of sight on any further improvements on that too to help scale saying yes more often by being more efficient and effective at doing so.

Scott Sanborn -- Chief Executive Officer

Yeah. We -- in terms of market, there is -- it's a pretty broad range of experiences because we serve a broad range of customers. The experience you'd get in a, let's talk for a self-employed customer or let's call it someone with a FICO of 600 versus a FICO of 700 is pretty different. I would say we feel very good overall about both the amount of data and the amount of process improvement, communication skills we're bringing overall to drive that experience further and continue to improve the -- those customer satisfaction rates.

In terms of is there more row to hoe there, the answer is definitively yes. We had a pretty solid road map last year. That's exceeded our expectations, and we've got another very exciting road map this year to continue to make gains there.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Was TurboTax part of that improvement that you've already seen? Or is that part of the road map that already...

Scott Sanborn -- Chief Executive Officer

No. Yes, that's part of the road map. That's part of the road map to come. The example I gave ties pretty much to that.

An area where TurboTax can be very useful is with self-employed borrowers for whom it's harder to get a handle on pay stubs.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

And then do you have any thoughts on what kind of turndown rates you have on self-employed currently versus the nonself-employed?

Scott Sanborn -- Chief Executive Officer

Nothing I'd give specifically, but I will say that they are certainly a much more difficult to -- more confident to underwrite customer. They just tend to have more fluctuations in income and be harder to, in a structured way, validate.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Understood. Much appreciated thoughts.

Operator

And ladies and gentlemen, at this point, I'm showing no further questions. I'd like to turn the conference back over to management for any closing remarks.[Audio gap]

Duration: 57 minutes

Call participants:

Simon Mays-Smith -- Vice President of Investor Relations

Scott Sanborn -- Chief Executive Officer

Tom Casey -- Chief Financial Officer

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Jed Kelly -- Oppenheimer -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Mark May -- Citi -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

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