LendingClub (LC) Q2 2019 Earnings Call Transcript

LendingClub (LC 1.45%)
Q2 2019 Earnings Call
Aug 06, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the LendingClub Corporation second-quarter 2019 earnings conference call and webcast. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference 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 second-quarter earnings conference call. Joining me today to talk about our results, and recent events are Scott Sanborn, our CEO; and Tom Casey, our CFO. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties.

These statements include, but are not limited to, our guidance for the third-quarter and full-year 2019. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our most recent Form 10-K and Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

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

Scott?

Scott Sanborn -- Chief Executive Officer

Thank you, Simon, and welcome, everyone. We've had a good second quarter, building on the strong results from Q1. And in what continues to be a dynamic environment, we are firmly on track to deliver against our key goals for the year. On the top line, we grew originations and revenue in line with our expectations, setting new records for both.

On the bottom line, we're executing ahead of schedule, generating record contribution margins and enabling us to raise adjusted EBITDA and adjusted net income guidance. And we're making continued progress on our long-term strategy, launching innovative new capabilities that will set us up for the next stage of growth and margin expansion. For some perspective on the Q2 numbers, since I took over as CEO three years ago, we have increased originations by 60% while tripling contribution dollars. We are leveraging our data, scale and marketplace model to execute with discipline and compound our competitive advantages.

We're the No. 1 provider of personal loans in the country, and we're gaining market share, up 80 basis points to 10.5% in Q1. It took us five years to generate $1 billion of originations, and we now generate $1 billion every month. 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 business operations to drop more of our top line growth through to the bottom line.

And we're making great progress on all fronts. Let's start with responsible growth. Against our toughest comparable quarter from last year, we grew originations volume 11% and revenues 8%. And we translated that growth into 52% contribution margin and record adjusted EBITDA.

We expect Q3 revenue growth and adjusted EBITDA to be better than Q2, placing LendingClub at an important inflection point as we move to adjusted net income profitability. In our investor franchise, our marketplace model and ongoing product innovation is driving our transformation from an alternative asset to a mainstream asset class. In the second quarter, we facilitated a record $3.1 billion worth of loans. We issued our first Moody's-rated securitization, which brought four new investors to the platform, increased the appetite from existing investors and supported improved pricing.

In July, we launched Levered Certificates, a new addition to our very successful CLUB Certificates program. Levered Certificates use built-in financing to deliver competitive risk-adjusted returns to two separate investors, each with different credit and risk profiles. This structure is more efficient for investors and more efficient for LendingClub than a traditional securitization, and early indications suggest that we'll get demand from both new and existing investors. For reference on how product innovation is supporting our growth this quarter, more than $1 billion in loans or roughly a third of our volume was in our structured program, which did not even exist just two years ago.

Let me turn to the borrower side and start with demand generation where we continue to excel. We are leveraging our scale, data and testing to improve our customer acquisition costs while growing new channels and marketing partnerships. In throughput, our efforts to drive conversion by removing sources of friction and confusion is paying off in terms of both customer satisfaction and our bottom line. Better use of data, increased automation and new communication approaches have increased our conversion rate, reduced our unit cost of operation and accelerated time to approval.

For example, in Q2, 72% of our personal loan customers went from application to approval within 24 hours. That is up from 46% only a year ago. Part of this improvement came from our work to build a lifetime relationship with our members, and this is unlocking a large, long-term opportunity for LendingClub. On lifetime relationship, we're executing against a two-part strategy.

The first is what we call visitor to member. It's centered around delivering an amazing experience that provides ongoing value to our more than 3 million borrowers. It starts by recognizing and rewarding returning customers through product and experience enhancements that deliver a true welcome back experience with a dramatically streamlined application process. Our vision is to deliver our members a one-click loan, enabled by continuous underwriting, which will expand the use cases of our product and create a competitive moat.

In support of this vision, we've redesigned our Member Center, and we included ongoing credit monitoring so that the 450,000 members who visit us every month can track progress against their financial health and eventually be presented with targeted opportunities to increase their savings. So that's visitor to member. The second part of our lifetime relationship strategy is what we call product to platform. Our long-term vision is to create an integrated ecosystem of partners delivering a broad range of products and services to LendingClub's 14 million annual applicants, and 3 million members.

Product to platform will leverage our world-class demand generation and throughput capabilities to seamlessly deliver more ways for members to improve their financial health. We are making good progress on product to platform as well. In April, we announced our partnership with Opportunity Fund and Funding Circle to increase access to affordable credit for small businesses. And today, we are launching the Select Plus Platform, which opens up our marketplace to sophisticated investors to identify opportunities to approve borrowers across the credit spectrum who fall outside the current criteria.

While we're just getting started here, over time when applied to our over 14 million annual applications, this has the potential to further grow our member base, improve the efficiency of our marketing and increase customer lifetime value. Our ongoing analysis suggests that our visitor-to-member and product-to-platform strategies would be enhanced by having a national bank charter. To be clear, our vision would be to maintain our marketplace model and support it with a marketplace bank. The marketplace bank could enhance our lifetime relationship with members through a broader range of products and services and enable us to serve our investor bank partners more efficiently.

We believe a bank charter would likely generate additional growth and margin potential over the medium term, add a new source of low-cost funding to our marketplace and give us greater resilience and regulatory certainty. That said, obtaining a national bank charter is a significant undertaking and a long road. There's a lot to get done, and it will take some time and involve investment. We'll continue to update you as things evolve.

So to finish, we've had a good first half. We are executing with discipline against initiatives on both sides of our platform, delivering against our near-term goals and building toward our longer-term vision. We know we can do more, and we are executing with urgency to simplify our business and expand margins. And importantly, we are on track to hit our 2019 financial goals, and to be adjusted net income profitable.

The management team and I are excited about the opportunities ahead to deepen the relationship with our members, grow our addressable market, widen our competitive moat, enhance our resilience and increase our margins. Our continued success is based on the hard work and innovation from LendingClubbers and from our partners, and I'd like to take this as an opportunity to thank each and every one of them. With that, Tom, I'll turn it over to you.

Tom Casey -- Chief Financial Officer

Thanks, Scott. It's been a busy quarter. But before I jump into our second quarter results, I want to emphasize two things. First, our simplification plan is ahead of schedule, and that means we are raising our full year adjusted EBITDA and adjusted net income guidance.

We're on track to be adjusted net income positive in Q3. And second, boosted by our simplification program, our 52% contribution margin in Q2 was our highest ever. As I stated last quarter, our simplification program has fundamentally transformed the way we operate, enabling us to originate new customers at lower cost. Our simplification program leverages the flywheel effect from our scale and competitive advantages, giving us the road map to our medium-term adjusted EBITDA margin goal of 25% and our new contribution margin target range of 50% to 55% over the medium term.

Moving to Q2 results. I'll start by reviewing our performance with a focus on our cost simplification initiatives and then finish with our Q3 and full-year outlook. Starting with 2Q results. We had another in-line quarter with revenue up 8% to $191 million against our strongest comparable quarter from last year.

On the borrower side of the platform, transaction fees grew 12% to $152 million on the back of 11% growth in originations, and 4 basis points increase in transaction fee yield, reflecting the benefit of our Q4 2018 price optimization efforts, partially offset by the ongoing shift toward higher-quality credit loans. Net investor revenue was down $4 million to $36 million, with growth in investor fees and gain on sale of loans offset by higher net fair value adjustments. As we noted last quarter, we've already tightened pricing and credit at the higher risk end of prime, and we feel good about our credit outlook, though we continue to expect the fair value adjustments to be elevated for a couple more quarters until those credit and pricing adjustments are reflected in investor returns. Investor fees generated from our loans under management were up 18% to $32.3 million, reflecting our loan servicing portfolio growing 18% to $14.8 billion.

The size and growth of our loans under management is significant as it represents a recurring revenue stream with strong margins, and gives you good visibility into the scale of the customer base we will leverage with our visitor-to-member and product-to-platform strategies. Gain on sales revenue was up 17% to $13.9 million driven by 18% growth in loans sold to $2.75 billion. Other revenue was $2.8 million with the increase primarily reflecting the rental income we are earning from subletting our San Francisco property, while the rental cost for our new Lehi facility appears in G&A. Before I get into the details of G&A, let me talk about our scale, and the competitive advantage that drove our contribution margin, up 390 basis points.

Marketing and sales expenses were $67.3 million, broadly level with last year. With M&S as a percent of originations, 23 basis points better year over year to 2.15%. This is especially notable considering we grew volume, tightened credit and increased prices over the last year. The 10% improvement was driven by our efforts in demand generation and conversion and also benefits from our simplification program.

To give you some perspective, M&S averaged 2.48% in 2017, 2.4% in 2018 and 2.37% in the first quarter of 2019. At 2.15%, our work to improve M&S as a percent of originations has resulted in a step-change reduction in our customer acquisition costs, and our goal is to sustain our M&S efficiency close to these levels for the remainder of the year. Origination and servicing costs were down 2% to $23.9 million. O&S cost as a percent of originations improved 11 basis points or 12%, largely as a result of our BPO program we started a year ago.

We expect to see further improvements in the second half of the year as we continue to benefit from our move to Lehi. As a result, contribution dollars and margins hit new record at $99.6 million with margins of 52.2%. As I said earlier, we are now targeting contribution margin in the range of 50% to 55% over the medium term, with the seasonality of our business and the timing of our investments contributing to variances in that range. So let's talk about our fixed expenses in engineering and G&A.

Total cash engineering expenditures grew 3% to $36 million with engineering operating expenses up 18% to $26 million and engineering capex spend of $10 million down 23%. As we indicated last quarter, we are optimizing our technology infrastructure to support key initiatives that will drive differentiation for LendingClub. As we use more infrastructure partners and transition to the cloud, we are shifting the mix of our engineering spend from capex to opex, lowering our depreciation and amortization cost. G&A expenses were up 7% to $40.4 million.

As I noted earlier, the revenue from our subletting of our San Francisco property appears in other revenue, while the rental cost of our Lehi office is in G&A. If you strip out the effect of this mismatch, G&A expenses only grew 4%, which is half of our revenue growth. With the benefit of our hard work on M&S and O&S efficiency, adjusted EBITDA grew 29% to a record $33.2 million with margins improving 2.9 points to 17.4%. Put another way, we grew revenue $13.8 million and increased EBITDA by $7.5 million, reflecting a 54% pull-through from revenue to adjusted EBITDA.

So now let's move down to GAAP net income. Stock-based compensation was $20.6 million, declining 40 basis points as a percent of revenue to 10.8%. Depreciation, amortization and other net adjustments totaled $13.9 million. As a result, our adjusted net loss, which excludes nonrecurring items, was on the cusp of breakeven at negative $1.2 million.

Moving down the P&L. Nonrecurring costs totaled $9.4 million. This includes $6.8 million of legacy issue expenses, and also $1.9 million of simplification program costs, both are related to nonrecurring personnel expenses. Combining these items, our reported GAAP consolidated net loss was $10.6 million.

Before I move on, I'd like to note one balance sheet and cash flow item. We've included our net cash and financial asset amounts on Page 13 of our press release. As you can see, net cash and financial assets ticked up quarter-over-quarter, and we expect future positive cash flow to underpin our value generation potential. With that, let me give you an update on our simplification program.

We're very encouraged by our progress here and are executing multiple initiatives across the company ahead of schedule. As you can see from our press release, we ended the quarter with over 450 operations and tech support personnel across our BPO sites, and 309 FTEs at our Lehi site where we're realizing average selling savings of approximately 25%. As a result of our BPO and geolocation initiatives, we have already reduced our real estate footprint in San Francisco by 125,000 square feet, and we'll be using 70,000 square feet in Lehi and paying about 50% less per square foot. The savings from these initiatives are obviously contributing to our 2019 results, and will add to adjusted EBITDA margin 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 program 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, which we set out on Page 5 of our results presentation deck. Origination growth was on track in the first half of the year.

We're assuming broad macro conditions remain similar over the second half of the year, so expect that origination growth to continue. As I indicated earlier, fair value adjustments will again mean that Q3 and Q4 revenue growth is slower than origination growth. We expect record revenues in Q3 between $200 million and $210 million with the growth rate between 8% and 14% depending in part on the level of fair value adjustments I just mentioned and the mix of the loans originated and sold on the platform. This implies 10% to 12% revenue growth for the first 9 months of the year and puts us well on track to land in the middle of our full year guidance range of $765 million to $795 million range.

We expect Q3 adjusted EBITDA to be in the range of $35 million to $40 million, implying margins between 16.7% and 20%. For the full year, we're tightening up the bottom end of our range of adjusted EBITDA by $5 million to a range of $120 million to $135 million. We expect Q3 stock-based compensation charges of approximately $21 million and depreciation, amortization and other net adjustment charges of approximately $14 million in the third quarter. While we still expect stock-based compensation charges of approximately $81 million for the full year, we now expect depreciation, amortization and other net adjustment charges of approximately $59 million as we benefit from the shift of our engineering spend from capex to opex that I talked about earlier.

We therefore expect adjusted net income profit in Q3 between $0 and $5 million. As a result of our higher EBITDA guidance and lower D&A guidance, our full year adjusted net income guidance range is a loss of $5 million to $20 million. As you can see on Page 5 of our Q3 investor presentation, the lower end of our full year adjusted net income range has improved when compared to our previous guidance by $9 million on the bottom end of the range and by $4 million at the top. This is due to our $5 million higher adjusted EBITDA guidance at the bottom of the range and $4 million lower depreciation and amortization cost across the range.

We've again excluded nonrecurring costs from both our GAAP consolidated net income and adjusted net income guidance to give you a better view on the underlying performance of the business. We'll update GAAP consolidated net income guidance each quarter as we incur these charges. As you heard, we've had a strong first half. Our innovation, simplification program and partnerships are transforming LendingClub, meaning our revenues are on track and we're able to raise adjusted EBITDA and adjusted net income guidance, and we remain confident in the full year.

Scott, back to you.

Scott Sanborn -- Chief Executive Officer

Thanks, Tom. As you can see, we've had a good start to the year, and we are on track to hit our 2019 financial goals. So I'll turn the call over now to Q&A.

Questions & Answers:

Operator

[Operator instructions] First question will be from Brad Berning with Craig-Hallum. Please go ahead.

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

Good afternoon, guys. Congratulations on the execution in the quarter. Wanted to touch base a little bit more on the controllables and the operating efficiencies that you're driving, if you could go a little bit deeper on the sales and marketing. You talked about second half being similar to the current levels despite that seasonally tougher period usually.

So can you talk about where do you think ultimately you can go? Can you go back to where you were a couple years ago on the initiatives that you're seeing? Or should we think about these are kind of the new levels to think about? And then secondly, as a follow-up, you talked about getting to 25%-plus past the medium term. Just talk about what you're seeing for additional scalability as you've gotten deeper into the simplification process as well.

Scott Sanborn -- Chief Executive Officer

Hey, Brad, it's Scott. I'll start and then, Tom, maybe I'll toss it to you. So first question on sales and marketing, what's driving the efficiency. As you can see, kind of total dollars spent year over year are pretty much in line on significantly more volume.

And it's a combination of things. We talked last year about investing in our targeting databases, and that is starting to pay off. We are making good use of the scale. Just the amount of volume flowing through our processes allow us to test messaging, experiences and really optimize for the different consumer segments and audiences.

The third is the conversion efforts we've been working on, which are driving more people through the process more quickly. So we're picking up value there. And the last is really leveraging our scale in terms of our vendors and our external relationships. So all of those are kind of contributing to driving the results.

As Tom mentioned, as we look toward the end of the year, we expect to be able to maintain those even as a percentage basis as we head toward the back half of the year. I wouldn't anticipate them coming down substantially as we continue to drive growth. And the other thing I would say is as -- I talked a little bit on the call about the lifetime relationship strategy. And as we begin to unlock that, we'll be increasing the customer value to LendingClub, which will also give us a little more fuel to be investing and building our membership base overall.

So more to come on that when we talk about next year and beyond, but that's kind of how I would think about it. Tom, I don't know if you have anything to add.

Tom Casey -- Chief Financial Officer

Yeah, I would -- just add -- I would give you a lot of information today. But one of the things I want to make sure you understood is that in the first half now, we've seen a pretty significant restructure of our cost base. And so what you're seeing is our contribution margin come up nicely. We will get some additional benefit between now and the second half.

But most importantly, we have now put ourselves in a position where our growth is more profitable. So for every dollar that we're bringing through the revenue, more of that is hitting the bottom line. I think that's the most important thing for everyone to understand is the cost of growth has been reset and is -- we are more efficient. And so we're encouraged with the progress we've made and leveraging our scale and all the efforts that Scott mentioned.

But it's a combination of all the expense initiatives, as well as, all of the data and process changes and marketing activity we're doing.

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

Appreciate the color. I'll get back in the queue.

Operator

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

Henry Coffey -- Wedbush Securities -- Analyst

Yes. Good afternoon, everyone. I'm a bit hoarse so I apologize. So the operational issues are very clear and they're all moving in the right direction.

What is the profitability of the sort of alternative relationships that you have, the new platform with four more sophisticated consumer investors and then, of course, a small business? Well, is that impactful? Or is it just a part of the rounding?

Scott Sanborn -- Chief Executive Officer

Well, I would say right now, we're just getting started. But in terms of how to think about it, it has the potential to be very meaningful. And in terms of the contribution in exchange for the effort, it is highly accretive because the way to think about our marketing acquisition is most of those costs are sunk to bring people to the website. So our ability to not only deliver a better experience to the customer and give them what they came to get but take the marketing dollars that we already spent and turn it into revenue that we wouldn't have already gotten is meaningful.

I want to make sure, as you think about the launch of the Select Plus Platform, just to give a little more color on how we're thinking about that as we get it off the ground. It really is addressing customers across the credit spectrum. So this is not -- when we say there are people outside the criteria, that could be people that the average FICO we're seeing already through that is in line with our overall platform average. So just people who have a different view of credit or a different segment.

So we talk about the fact that over the past year, we've cut credit somewhere close to 28%. And we had investors coming to us saying, hey, we like some of that risk, and frankly, this allows them to put their money where their mouth and where their analytics are, right? And it's, like I said, better experience for the customer, more efficient marketing for us. And it also eliminates any kind of funding risk or fair value risk associated with that method of disposition. So just getting started, first partner live.

So right now, is it meaningful -- is it a meaningful contributor to our earnings? The answer is no. But I mean, in exchange for the effort we're doing, it is highly profitable as an individual business, and we think it has the potential to grow. So we'll -- goal would be to add a few partners, optimize that platform over the course of the coming six months, and then work on our long-term strategy. All of this fitting into the broader product-to-platform idea of just opening up our marketplace to other people who can serve the consumers that we have validated identity and income, and assessed credit worthiness, how else can we serve them not just through our own efforts but through the efforts of others.

Henry Coffey -- Wedbush Securities -- Analyst

You know conceptually, a bank would obviously be very exciting whether you think about it from the point of view of a product offering or from the point of view of the stability that it gives you in the financial services sector. There are probably more than one bank analyst on the call. And the environment for new bank charters waxes and wanes. Sometimes it's zero, and sometimes there's a lot of excitement over it.

What is the dialogue with the various regulatory parties like right now?

Scott Sanborn -- Chief Executive Officer

Yes, so we agree. We do think the addition of a marketplace bank charter to our funding mix and to our overall customer offering gives us a lot of opportunities. And I would say we are -- we're really pleased with the engagement we are getting from the regulators. We've been at this now 12 years, and we've invested considerably in our overall controls and compliance infrastructure.

And I think given the size that we're at, right, as I mentioned, 10% of unsecured lending in the country, I think being a direct part of the system is a positive all around.

Henry Coffey -- Wedbush Securities -- Analyst

The balance sheet is where it all finally gets told. I mean I know -- I'm not a TMT analyst. I tend to think more like a finance analyst. But you did add $12 million of cash.

You're growing your net receivable balance, which is also a source of liquidity, and it sounds like we're going to be seeing more of that as the business evolves to higher levels of profitability?

Tom Casey -- Chief Financial Officer

I think -- so Henry, this is Tom. Look, I don't think that we're generating or trying to build a portfolio. We clearly have assets that come through our balance sheet to facilitate some of our structured programs to reach new investors, but this is not a originate the whole model. That's why Scott mentioned it would be a -- it's a marketplace light, and we are generating free cash flow as you mentioned.

Our cash grew this quarter, and our operating cash even grew more. When you look at our EBITDA less our capex, we estimate we generated about $16 million of operating cash flow this quarter. Obviously, restructuring charges took a little bit off that. So that -- you see the net impact on the financials on Page 13.

We're up about $7 million in cash. So we feel like cash generation is important and obviously, we have a lot of capital to support a lot of our efforts, including our risk management.

Henry Coffey -- Wedbush Securities -- Analyst

I mean I'm just looking at the combination of cash and securities, which is up $12 million this year. Is that where the cash is going to build? Or do you see it sort of falling into other places on the balance sheet?

Tom Casey -- Chief Financial Officer

No, I think -- look, I don't think that -- what you're seeing is the output of our ongoing growth of originations, and us pulling loans off the platform to sell in these various structures. Nothing noteworthy on how we're using the balance sheet different than we have in the past.

Henry Coffey -- Wedbush Securities -- Analyst

It looks very good though. So thank you.

Tom Casey -- Chief Financial Officer

Thanks.

Operator

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

Jed Kelly -- Oppenheimer -- Analyst

Great. Thanks for taking my question. Just a couple. So last week, one of your largest marketing partners touched on higher competition in the personal loan space.

However, judging by your origination growth and your marketing leverage, you've been able to combat those -- some of those competitive factors. So can you touch on that? And then my apologies if I missed this in the opening remarks, but your transaction yield was down quarter over quarter. Can you talk about what drove that?

Scott Sanborn -- Chief Executive Officer

Yeah. Hey, Jed, this is Scott. So on the competitive front, I think what you're correctly seeing is the real benefit of this model, our ability to be really covering across the spectrum and driving toward the lowest cost of capital which drives toward the value for borrowers and our ability to create all these different experiences, means we are very formidable as a competitor. And we're in kind of wave three of competition.

We've seen multiple waves come and go. I wouldn't -- I'd say who we're competing with changes quarter to quarter. But I wouldn't say the overall level of competition, that that is manifesting to us in Q2 differently than, say, Q1. I'd say who is competing and how they're competing is continuing to evolve.

But we've got the ability to leverage the full breadth of the platform, the scale of the data that we're doing to really pivot to the channels and segments at any given quarter that are working. The question on the transaction fee, I don't know if you have any color, Tom, but it's really a mix question.

Tom Casey -- Chief Financial Officer

Yeah. I do. Yes, that's right. We're down about 10 basis points from 1Q to 2Q.

Pretty straightforward. It's just the mix, Jed, on the more and more As and Bs in the mix that are coming in a little bit of transaction fees. Our investors are looking for higher-quality loans. They come in at a slightly lower transaction fee for us.

Jed Kelly -- Oppenheimer -- Analyst

All right. And then one more. I mean if you just sort of look at the value of your stock on any PEG ratio, EBIT, EBITDA, it looks attractively priced pretty cheap. You just said you had $670 million of net cash.

I mean what's preventing you from doing any buybacks? Just how should we look at capital deployment?

Scott Sanborn -- Chief Executive Officer

So we're very open to thinking through future uses of the capital, including a return to shareholders. But as we've talked about, there's a couple of things that take near-term priority. Those include resolving the legacy issues and capitalizing the bank. So as those two things become clear, we'll be in a position to evaluate all the other uses of capital.

Jed Kelly -- Oppenheimer -- Analyst

Thank you.

Operator

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

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Scott, a couple of different questions just to follow-up on some of the strategic items that you talked through in the -- earlier in the call. In terms of the bank charter, what would be the next milestone that we should look for in terms of the evolution of that thought process?

Scott Sanborn -- Chief Executive Officer

So as I've said on the call, this is a -- it's a long process, involves multiple regulators. Where we are right now is we're -- as we said last quarter, we're kind of in the evaluation phase. We're at a point now where we feel like in weighing the pros and cons, benefits and advantages. We're in the pro phase.

We do believe that this is accretive to the long-term business. In terms of the next steps, right now we're in the business planning phase of what would that look like for a discussion with the regulators to make sure we've got a plan that everyone is comfortable with.

Eric Wasserstrom -- UBS -- Analyst

Got it. And on the Select Plus announcement, I guess I'm struggling a little bit to understand how that's distinct from just the more typical operation of the LendingClub platform in which there's capital available, looking for a return at a certain level of credit risk. How is this distinct from that?

Scott Sanborn -- Chief Executive Officer

Yeah, this -- thanks for asking that clarifying question. It is different. And so the biggest difference being on the core platform, it operates in such a way that the -- there is a credit box available and investors -- and that results in loans that get presented to investors for funding. And depending on the program they're participating in, they can choose to buy an index of all or select individual loans based on credit profiles that they prefer.

The difference here is it is out -- this program is outside of that core LendingClub criteria. This is investors who have worked to develop investment criteria that falls outside of our boxes. So these would be people -- it is not people that have been given a yes and accepted a loan offer that investors are choosing to fund. These would be people that would otherwise have gotten a no based on the criteria that we currently apply that are getting funds.

So this is truly incremental. And so -- and this program, it's really the investors, again, who have a different view potentially on credit, might have insight into a particular population. Reminder that we've got investors on the platform that have -- that come from credit backgrounds from some of the big card companies and or specialty finance companies that might have knowledge of different segments. So it's really incremental approvals and again, across the spectrum, with offers that we would not otherwise be making.

Eric Wasserstrom -- UBS -- Analyst

Got it. So in other words, they might have their own box, and they're plugging in to your platform to basically fill that box with credit that no one else on your platform would be seeking?

Scott Sanborn -- Chief Executive Officer

That's right.

Eric Wasserstrom -- UBS -- Analyst

And how is LendingClub going to drive economics from that?

Scott Sanborn -- Chief Executive Officer

It's our standard economics. Our standard transaction fee applies. An investor earns all the interest. We earn the transaction fee, and we do the servicing.

Eric Wasserstrom -- UBS -- Analyst

Got it. And --

Scott Sanborn -- Chief Executive Officer

So it's indistinct from our core platform.

Eric Wasserstrom -- UBS -- Analyst

Got it. So it is, in fact, a clear incremental monetization of volume that is otherwise not currently being monetized today?

Scott Sanborn -- Chief Executive Officer

I wish I said it that clearly.

Eric Wasserstrom -- UBS -- Analyst

OK. Thanks. That's all for me. Thank you very much.

Scott Sanborn -- Chief Executive Officer

Thanks, Eric.

Operator

The next question will be from Heath Terry with Goldman Sachs. Please go ahead.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you. I was wondering if we could just dig a little bit -- some comments in your prepared remarks around sales and marketing efficiency. Wondering, could we just dig into that a bit? When we look at the 300 basis points of leverage roughly that you picked up year over year, how do you think about the value of continuing to get leverage on that line versus driving faster originations or revenue growth associated with that? And as we look at the -- as we look at sort of the competitive environment such that it is, how much of a role does that play in your cost of customer acquisition or the way you look at that sales and marketing efficiency?

Tom Casey -- Chief Financial Officer

Heath, this is Tom. First, I would say that usually there's a trade-off between efficiency and growth. We're actually seeing both go in line today. We're actually seeing our growth complemented by higher margins.

And that's why we're saying earlier, we feel like we can continue to grow and maintain that level of efficiency. This is just a clear example of the leverage of our scale. All the things that Scott mentioned, some of the investments we've made in our data, in our targeting, but also just on our expense base. So a pretty significant lift, and we expect that to continue through the end of the year and we see opportunities to further enhance that as we get some of these other ancillary fees that Scott just mentioned.

From a competitive standpoint, we feel that this positions us extremely well because of the investments we've made in our systems, in our speed, in our underwriting is real competitive advantage. And what you're seeing is that we're able to grow and actually drive profit, and I think that's the key thing we wanted to share with you this quarter. We've been working on it, frankly, for a year in a lot of areas, and you're starting to see those returns this quarter, and we've got them in our outlook for the rest of the year.

Heath Terry -- Goldman Sachs -- Analyst

No, that's really helpful. On -- just I guess somewhat related, when we look at sort of the broader rate environment, and obviously, we've had sort of no shortage of swings there, as you get more and more data points out of this, and I know you guys have been quite answering this question since long before you even went public. What are you learning about the way that your customers and -- on both sides, both on the funding and borrowing side, respond to different rate environments into these sort of swings?

Scott Sanborn -- Chief Executive Officer

Heath, I'll start. And indeed, we have been. Although when we answered this question before we went public, we had to talk about it theoretically, and now we can talk about it in practice. And the good news is, is that it's played out pretty much the way we had anticipated it would in that this model is showing its ability to flex in different environments.

As we talked about, when rates went up, the rate -- the prime rate went up, and therefore the cost of new balances on cards went up, which drove more consumers to look for ways to find savings. Cost of capital also went up. And so we moved rates up but not necessarily in lockstep with the markets on the way up. We saw cost of capital for different investors move at different paces.

The asset manager's capital cost moved up more quickly. And so we adjusted rates on the higher end of prime more quickly and bank costs moved up more slowly, and so we were able to move more slowly there. Now for the first time in, I think, 10.5 years, rates ticked down even if only modestly. We expect for the platform to continue to perform.

If nothing changes, meaning pricing doesn't change to borrowers and all the rest, then effectively, what's happening is cost of capital just went down for investors. And if we don't move prices, the relative yield on our assets and the attractiveness of our asset goes up. What we expect will happen is that people will start to move on pricing and we will be watching those signals, watching our investor signals, watching our borrower signals, and finding the right clearing prices across the platform. So there is adjustment to be made and that -- you see part of that in the fair value marks, right, as you absorb the changes in the environment.

But the model is really able to operate through that, and we are doing more and building more tools and capabilities to digest that data, and move it into our management and operational processes with higher velocity.

Tom Casey -- Chief Financial Officer

And Scott, I would only add is one of the unique things we get and share everyone is that we get direct feedback from all of our investors. They tell us what their risk profile is every day with what they buy and what returns they're requiring. So I've told a lot of people, when you think about different cycles, sometimes you see people reaching for credit on the higher risk of prime. In this example, you're seeing us actually toward the higher-quality prime.

And so we've made that adjustment over the last year and it's that unique feedback loop that we get from investors that others may not get, and it allows us to remix our platform very quickly.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you, both. I really appreciate that.

Operator

The next question comes from Steven Kwok with KBW. Please go ahead.

Steven Kwok -- KBW -- Analyst

Hi, thanks for taking my question. I just had a question around the guidance and then the implied fourth quarter numbers. When I look at the guidance for the third quarter, there's about like a $5 million delta, right, with adjusted EBITDA. But looking at full year, it's like $15 million.

And then similarly on the revenue side, it's $10 million for the third quarter and $30 million. Just was wondering if you can help us bridge the gap. Like, why is the range a bit more wider for the full year? And then secondarily, when I use the midpoint of both numbers, it would imply like the margin -- EBITDA margin coming down in the fourth quarter. Is that typically what happens seasonally? Thanks.

Tom Casey -- Chief Financial Officer

Hey, Steven, it's Tom. This is the power of numbers. We started with a guide for the year of $20 million on EBITDA. We've tightened it down to $15 million now.

And so what you're seeing is with our guide from 3Q of being only $5 million, that leaves a wide guide for the back half of the fourth quarter, the implied guide. Look, we feel very good about where we're coming out through the second half, during the first half, and we have an outlook for the full year that's right around -- right in the middle of our guide for revenue. We feel good about the operational leverage we've had. And we've taken up the low side, but that results in a wider implied guide for 4Q.

So we're feeling pretty good about where we are, feel this is prudent from a full-year guidance perspective. And we'll be happy to update you at our next call on where we think the fourth quarter will come out, but this is where we are right now.

Scott Sanborn -- Chief Executive Officer

But in terms of Q4, there is seasonality to this business. Q2 and Q3, historically, are stronger. Q4 and Q1 are historically, lighter in terms of overall consumer demand. You can see that in the patterns of originations.

Steven Kwok -- KBW -- Analyst

Great. Thanks for taking my questions.

Operator

Our next question will be from Rob Wildhack with Autonomous. Please go ahead.

Rob Wildhack -- Autonomous Research -- Analyst

Hey, guys. One more on the Select Plus platform. Is there any way you can quantify or give us a sense for the incremental approvals you think this platform can ultimately generate?

Scott Sanborn -- Chief Executive Officer

Yeah, I mean, early days right now. So as I mentioned earlier, it's not a meaningful contributor to overall originations. But in the course of time, depending on where we are in the cycle and as the platform evolves, we think it has the potential to become more significant.

Tom Casey -- Chief Financial Officer

I would say that this is just another example of leveraging our scale. As Scott mentioned, 14 million applications. We're here to solve customers' financial challenges, and we feel that partnering with large, sophisticated investors allows us to say yes to those customers seeking savings and they add to our membership, leverages our scale, and increases our margin. So --

Scott Sanborn -- Chief Executive Officer

And importantly, I didn't say that -- and importantly, we're also doing this within the context of a product LendingClub would offer to its customers. So this falls within our range of APRs. These are installment loans with fixed rates. So this is boxed within what we feel good about putting the LendingClub brand name on as well.

Rob Wildhack -- Autonomous Research -- Analyst

OK. And then I noticed the June securitization had a higher mix of A- and B-graded loans in the deal, and also excluded the E loans. Is there anything to extrapolate from that? And maybe more broadly, are you seeing any shifts in the types of loans being demanded through the various funding channels?

Tom Casey -- Chief Financial Officer

Yeah, a couple things. You're absolutely right. It did include more A, Bs. And the Es, we actually have de-emphasized those.

As I mentioned, our investors are moving up to higher-quality prime. And so we are generating more As and Bs as we're targeting those customers. So by its nature, you would see us have more As and Bs in our securitization. I think that's just the natural outcome of our mix.

And it also resulted in us getting our first rating of our securitization by Moody's, which is also a first for us, and one that we want to continue to bring new investors into the platform using those products. So that's just a reflection of kind of the mix we're currently run -- running with.

Rob Wildhack -- Autonomous Research -- Analyst

OK. Thank you.

Operator

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

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks. Most of my questions have been answered, but I do have a couple of follow-ups. First, did you talk about what application growth was in the quarter? I know you mentioned improvements in rate of conversion, etc.

But what was the application growth?

Scott Sanborn -- Chief Executive Officer

Yeah, consumer demand continues to be strong. Applications were up about 23% year on year, again, against our toughest comparable quarter last year. And as you can see in our guide for the third quarter, we feel good about that trend continuing. Just one other thing, James, one other thing worth mentioning is as we are focused on improving marketing efficiency and driving conversion, the application-to-loan ratio varies pretty widely by different types of channels.

And we're pretty focused on identifying the apps we can convert and paying for those apps. So as a overall indicator of consumer demand, I think that one will be less predictive as going forward we get smarter and smarter about where we're driving applications.

James Faucette -- Morgan Stanley -- Analyst

Got it. And then a couple of follow-ups maybe for Tom is that in your prepared remarks, you seem to indicate that getting beyond your medium-term outlook of 25% operating margin would be reasonable. And that makes sense given how quickly you're making progress on that. But from a timing perspective, how do you think about like continuing to push to the bottom line versus reinvesting in faster development of margins in the other parts of the business?

Tom Casey -- Chief Financial Officer

Yeah, so look, we've indicated that 25% is our new goal. We believe we can get there in 2021. Timing is obviously important, and the important thing though is to make sure that we are actually reinvesting some of these savings. So you're not seeing all the savings actually come through.

We're actually reinvesting some of those already in things that I talked about. So you saw our tech expense go up a little bit this quarter, for example, where we're really pushing ourselves to use some third parties in the cloud, AWS and things like that that is different from where we were building everything inside. So there is a big push of investments back in. Scott also mentioned the efforts we're putting in with visitor to member and product to platform.

These are two very, very important pillars of our strategy. We are spending tech resources, and aligning our resources in our organization around those. They're critically important for our growth, and so we're continuing to invest in those areas. So we are balancing it already.

What you're seeing is just the amount of opportunity that we had that we're executing against.

James Faucette -- Morgan Stanley -- Analyst

Got it. And then last question, Tom, can you help us kind of cut through the fair value adjustments, and think about what kind of a good run rate is for net interest income, at least for modeling purposes?

Tom Casey -- Chief Financial Officer

Yeah, so the net interest income has moved around a little bit as you know because of the average asset for the balance sheet. We come out of the year with a slightly higher balance than we did in 2Q. And so you're going to see some of that movement. What we try to do is look at it at a bottom line net interest income and fair value adjustments because that kind of brings everything together, tries to give you the timing.

That's been running about $10 million negative for the first two quarters. And in my prepared remarks, I indicated that we expect those levels to be in line with the second half of the year. But it's difficult to get the specific lines because they do vary based upon how long we hold the loan, and what the absolute amount of those loans are. So I would focus you on the net interest income, and fair value adjustment as a total number.

James Faucette -- Morgan Stanley -- Analyst

Awesome. Thanks a lot, gentlemen.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Scott Sanborn -- Chief Executive Officer

Just like to thank everybody. As we hope you heard today, we feel good that the plan we set out, actually going back to Investor Day 2017, is working. We feel good with the progress against the results, and we look forward to updating everyone after Q3.

Operator

[Operator signoff]

Duration: 65 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

Henry Coffey -- Wedbush Securities -- Analyst

Jed Kelly -- Oppenheimer -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Steven Kwok -- KBW -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

James Faucette -- Morgan Stanley -- Analyst

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