LendingClub (LC) Q3 2019 Earnings Call Transcript

LendingClub (LC -0.12%)
Q3 2019 Earnings Call
Nov 05, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the LendingClub third-quarter 2019 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Simon Mays-Smith, vice president, investor relations. Please go ahead.

Simon Mays-Smith -- Vice President of Investor Relations

Thank you, and good afternoon. Welcome to LendingClub's 2019 third-quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Tom Casey, 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 fourth-quarter and full-year 2019. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our most recent Form 10-K and Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

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

Scott?

Scott Sanborn -- Chief Executive Officer

Thank you, Simon. Welcome, everybody. To kick it off, we have delivered another good quarter on the top line. We've set new records for originations and revenues and grown both in line with our expectations.

On the bottom line, we're executing ahead of plan, achieving adjusted net income profit for the first time since I took over as CEO. As the numbers indicate, our continued focus on profitability is paying off, and it allows us today to raise adjusted EBITDA and adjusted net income guidance. So we're pleased with the performance of the business. Taking a step back, we are the No.

1 provider of personal loans in the country, and we continue to take market share. We're leveraging our data, scale and marketplace model to execute with discipline and to compound our competitive advantages. Our simplification program and focusing on partnerships is transforming the company and delivering operational and financial momentum while increasing our resilience. And finally, we're making continued progress on our long-term strategy to become a financial help platform, launching innovative new capabilities that set us up for the next stage of growth and margin expansion.

Back in February, I said 2019 would be about driving responsible revenue growth continuing to innovate while carefully allocating capital, managing risk and simplifying our business to drop more of our growth through to the bottom line. As you can see in the results that we released today, we're continuing to make great progress. Let's start with responsible growth. In Q3, we grew origination volumes 16%, revenues 11% and adjusted EBITDA by 43%.

This growth allowed us to comfortably achieve adjusted net income profitability, and again, within spitting distance of breakeven on a GAAP basis. On the investor side of the marketplace, our securitization program continues to introduce us to new low-cost sources of scalable capital. And once introduced, these loan investors are increasingly buying directly from LendingClub via both whole loan purchases and structured program innovations such as certificates. In fact, more than $1 billion of funding this quarter came directly from investors who were first introduced to us through our securitization program.

And our innovation on the Investor side continues. Adding to the launch of the Select Plus platform that we announced on the Q2 call, we recently launched LCX, our digital loan transaction platform. This is an industry first that enables investors to bid for loans in real-time and then settle the transactions through an automated process. Over the long term, LCX has the potential to further improve our balance sheet velocity, while increasing the liquidity and eventually the clearing price of the asset.

With the launch of LCX, that brings the total number of investor platforms we offer to five. The original notes platform for our retail investors and four institutional platforms. Scale and Select, which we launched in 2017 and now Select Plus and LCX. So taken together, these platforms give us access to larger pools of capital, they enable better execution and by providing more routes to the market, they increased our resilience.

Combined, they're continuing to facilitate our transformation to a mainstream asset class. OK, let me turn to the borrower side. At our investor day back in 2017, we outlined three focus areas to drive growth: demand generation, throughput, and lifetime relationship. On demand generation, we officially drove an average of 53,000 loan applications per day in Q3, that's up 30% year on year.

On throughput, our conversion efforts have increased the 24-hour issuance rate to 71%. That's up 11 points year on year. Our increasing focus is now on the third growth driver, building a lifetime relationship by creating value through membership in the club. Club membership is important, and so you're going to hear us talk more about it over the coming quarters.

As Americans wrestle with debt and the spread between credit card rates and personal loans hits an all-time high, Club membership is how we will empower and motivate each individual on their path to financial health. Increasing the savings we generate for them while reducing customer acquisition costs and growing revenue per member for LendingClub. Our visitor-to-member and product-to-platform initiatives describe how we will create the lifetime relationships. Visitor-to-member is about improving our customer experience to continue to add value beyond the first loan.

And product-to-platform is how we're finding additional ways for members to save by leveraging both our own efforts and those of third parties to deliver additional products and services. So we're starting in a very good place. We've got more than 3 million club members, and our satisfaction levels are hitting new highs. So that's a huge installed customer base that is eager to engage with us.

In September alone, almost 0.5 million members logged into our member center, and that's up almost 30% year over year. When I talked about visitor-to-member on our call last quarter, I told you we were working on upgrading our member center to make it more useful, more engaging. And this quarter, we began offering Select members a beta version of credit monitoring. So far, almost two-thirds of members who were offered this service have chosen to opt in.

That is -- that's an amazing number for a beta product, and it far exceeded our expectations. When we ask customers why, why did you choose to elect this option with us? They told us because LendingClub can actually help us make use of this information. And they're right. Our vision is to use the credit data to enable members to take back control of their financial health and to monitor progress toward their goals and to surface additional opportunities to save money.

Whether it's getting a new personal loan with just one click or refinancing their auto loan or over time, introducing trusted partners to deliver more savings through other products and services. This is how visitor-to-member and product-to-platform come to life, and it's a substantial opportunity. Using auto as an example, 61% of LendingClub members have an auto loan, with a combined outstanding balance of $30 billion. And we have a product that could save them an average of $3,000 each over the lifetime of their loan.

That savings opportunity is part of the reason why we remain excited about the long-term auto opportunity. As we round the three-year mark since launch, the business is tracking ahead of personal loans at the same point in its life cycle, at just a fraction of the investment. We've created a world-class user experience in contrast to a process that traditionally takes weeks, we're able to refinance in days. And this quarter, we achieved a new milestone, we delivered an approval within two hours of application.

In addition to this experience, we're also demonstrating the effectiveness of our credit model, and are now able to begin accelerating the program. In 2020, we expect to double our auto origination volume and to have approximately a third of those originations coming from existing LendingClub members. Our ongoing analysis clearly shows us that our product-to-platform and visitor-to-member efforts would be enhanced by having a national bank charter. And as part of our broader capital allocation planning, we are actively assessing paths to achieve that goal.

Our vision is to build on our marketplace model and to support it with a marketplace bank, which we believe will be both strategically and financially accretive for a number of reasons. First, we'll be able to attract more members, better engage and serve them and generate more data to inform our actions. Second, it'll increase our resiliency by providing a source of low-cost, stable funding, while also providing regulatory clarity through a direct relationship with a primary regulator, and third, a bank charter will diversify and increase our earnings by recapturing significant revenue, which is currently going to issuing banks, reducing our use of high-cost warehouse lines and generating additional and recurring net interest income. Bottom line, by increasing our capital efficiency, we can generate higher revenues, higher margins and higher return on equity.

We've told you we expect to exit 2021 with a 25% adjusted EBITDA margin. After 2021, we believe the addition of a bank charter will be instrumental in achieving the next 5-point improvement in adjusted EBITDA margins. Let me finish by talking about the credit outlook. The consumer continues to look good, strong spending and continued low unemployment.

That said, we often get asked by investors how will LendingClub manage when the economy slows down. So overall, we believe investor returns across the portfolio will remain relatively attractive, that's just due to the high yield, short duration nature of this asset. And our own analysis, as well as research from others like TransUnion, also indicate that personal loans fall reasonably high in consumers' repayment hierarchy, which will help relative performance. That said, vintages issued on the eve of a cycle will have weaker performance, just underpinning the importance for investors of having a program of investment and reinvestment to even out their returns over time.

We do believe that there will be investors looking for yield throughout the cycle and that we'll be able to generate an asset that will continue to appeal to those investors. They know we will not hesitate to make credit cuts and to increase prices when required, and that's because we believe our market power will actually grow as consumer demand for credit likely increases through the cycle, while the supply of credit becomes constrained. It's worth adding that, over the last few years, we've worked to increase our own readiness to operate in a potentially more challenging environment. First, we've lowered both our unit costs and the percentage of our costs that are fixed.

As of today, just about half of our cost base is variable and can be adjusted quickly if the conditions require it. Second, we've been increasing our liquidity in addition to our strong cash position and $700 million in committed warehouse facilities, we recently added a new investor with a broad risk appetite who's committed up to $900 million of funding at agreed upon pricing over the next 12 months. And third, we've been driving profitability, prioritizing profit growth over revenue growth, which we will continue to do. So taken together, while the current consumer signals continue to be solid, we recognize the importance of being prepared for a more challenging environment and believe the strengths of our model and the actions we are taking set us up to respond and take advantage of a variety of economic conditions.

So to close, we've delivered very good results in the first nine months of 2019. We are moving with urgency to simplify our business and expand margins. And we're executing with discipline against initiatives on both sides of our platform, delivering our near-term goals and building toward our longer-term vision. We're on track to hit our profit targets and have again raised our EBITDA and adjusted net income guidance.

In executing our strategy over these last three years, we've taken LendingClub from recovery to growth and now back to profitability. And in the process, we are transforming the DNA of the company, our addressable market opportunity and our cash generation capacity. So with that, Tom, over to you.

Tom Casey -- Chief Financial Officer

Thanks, Scott. We met our goal of being adjusted net income positive in the third quarter. This is an important milestone that demonstrates that our strategy is working, and it sets us up well for the next phase of growth. Let me start by reviewing Q3 results, then move on to a cost implication update and finish with our Q4 and full-year outlook.

Starting with Q3 revenues, we had another in-line quarter, with revenues up 11% to $205 million. On the borrower side of the platform, transaction fees grew 17% to $161 million on the back of 16% growth in originations and a 4 basis point increase in transaction fee yield reflecting the benefit of the pricing changes we made in the fourth quarter of 2018, partly offset by ongoing mix shifts. Net investor revenue was down $5.7 million to $39.7 million with growth in investor fees and gain on sale of loans, offset by higher net fair value adjustments as we used the balance sheet to balance the platform. Fair value adjustments improved quarter on quarter in both dollar terms, as well as percent of originations.

Investor fee, fees and gain on sale, both relate to our loan servicing business, combined revenues grew 21% year over year to $48.6 million, reflecting growth in our loan servicing portfolio and growth in loans sold. Other revenue was $4 million with the increase primarily reflecting the rental income we were earning from subletting our San Francisco facilities and product-to-platform referral revenue from our partnership with Opportunity Fund and Funding Circle on small business loans. Before I get into details of tech and G&A, I want to highlight the efficiencies we are driving in our variable costs. This is an important area as we are seeing our M&S and O&S efficiency continue to improve, which drove up our contribution margin by 370 basis points from last year.

Marketing and sales expense were $74.3 million, up 3.5% year over year on origination growth of 16%. With M&S as a percent of originations, down 27 basis points year over year to 2.22%. This is especially notable considering we grew volume and tightened credit. The 11% improvement in marketing efficiency was in part driven by our efforts in conversion, demand generation and from vendor renegotiations within our simplification program.

But we also continue to benefit from an improved mix with our returning member base, again, growing as a proportion of our total origination volume. Origination and servicing costs were up 2% to $24.8 million. O&S costs as a percent of originations was down 10 basis points or 12% to 74 basis points. To give you some perspective, the combined M&S and O&S as a percent of originations averaged 3.39% in 2017.

At 2.96% in Q3 2019, M&S and O&S is 13% more efficient than two years ago and has resulted in a significant reduction in our customer acquisition and servicing costs. As a result, contribution dollars hit new records at $105.8 million, with margins of 51.6%, up 370 basis points year over year. So let's talk about fixed expenses in engineering and G&A. Total cash engineering expenditures declined 4% to $32 million, with engineering operating expenses up 11% to $25.2 million and engineering capex spend of $7.2 million, down 35%.

As we've indicated over the last few quarters, we are optimizing our technology infrastructure to support key initiatives that will drive differentiation for LendingClub. As we use more infrastructure partners and transition to the cloud, we are shifting the mix of our engineering spend from capex to opex, lowering our future depreciation and amortization costs. G&A expenses were up 7% to $40.5 million again, the revenue from subletting our San Francisco property appears in other revenue, while the rental cost of our Lehigh lease is in G&A. If you strip out the effects of this mismatch, G&A expenses only grew about half of our revenue growth rate.

With the benefit of our hard work on M&S, O&S and G&A efficiency, adjusted EBITDA grew 43% to a record $40 million. Put another way, revenue was up $20.3 million, and EBITDA was up by $12 million reflecting a 59% pull-through from revenue down to the adjusted EBITDA line. This resulted in Q3 adjusted EBITDA margins of 19.5%, up 4.3 percentage points year over year, which sets us up nicely for 2020. So now let's move down into GAAP net income.

Stock-based compensation was $18.1 million, declining 188 basis points as a percent of revenue to 8.8%. At $14 million, depreciation, amortization and other net adjustments came in slightly lower than expected, in part, reflecting the shift in engineering capex to opex that I just mentioned. All of our work to grow top line while driving margin expansion, meant we were able to report Q3 adjusted net income profit of $8 million. We set this goal two years ago, and we're excited to reach it.

What has been most encouraging is how we've been able to generate gains on both our fixed and variable cost base, which positions us well to generate attractive returns from our future growth. Moving down the P&L. Nonrecurring costs totaled $8.3 million. This included $4.1 million of legacy issue expenses, $3.4 million of simplification costs, which mostly related to severance and almost $1 million in other nonrecurring costs.

Combined, these items, we reported a small GAAP consolidated net loss of about $400,000. With that, let me give you an update on our simplification program. We remain encouraged by our progress here. We fundamentally transformed the nature of our cost base in two important ways.

In the third quarter, 19% of our total workforce resided in our BPO partnerships, while 48% of our workforce was located outside San Francisco. Our BPO partnerships and geolocation initiatives have grown variable costs as a proportion of total costs and transformed the unit cost of running the company, thereby increasing both its scalability and resiliency. The savings from these initiatives can be seen in our 2019 results and will add to adjusted EBITDA margin as they annualize in 2020. Before I move on to guidance, I'd like to note two things.

First, we ended the quarter with $710 million of loans held for sale, which is composed of primarily high prime loans accumulated for our fourth-quarter securitization. This year, our high prime-loan growth has been running about double our total loan volume growth or about 30%. Over the last year, we've only included a portion of high prime loans in our structured programs. In the fourth quarter, we're excited to be executing our first high prime securitization.

Our experience over the last two years has proven that using our structure program is a great investment to reach new investors and bring them onto the platform. And second, we'll soon adjust the SEC note registration filings to more closely reflect the operations of our retail program. As a reminder, the filings we currently make with the SEC include our entire standard program. And after this adjustment is made, will more accurately reflect just the retail portion of this volume.

We are in the process of developing our budgets for 2020, but let me finish by sharing some preliminary thoughts. First, we will continue our evolution of prioritizing profit growth over revenue growth. Second, profit growth will benefit from the annualization of fixed and variable cost savings from our simplification program and will help generate further adjusted EBITDA margin improvement. Third, our usual seasonality will again mean that the back part of the year will have stronger revenues and adjusted EBITDA margins than the first quarter; and fourth, lower simplification charges will be partly offset by expenses from our accelerated efforts to obtain a bank charter.

We will exclude those one-off costs from adjusted EBITDA and adjusted net income, so you have a better view of the underlying performance of the business. Let me finish with our Q4 guidance, which is set out on Page 5 of our results presentation deck. We're assuming a similar growth profile to prior years, with slower growth in the fourth quarter with a revenue growth rate of between 5% and 10%, implying between $190 million and $200 million. This implies 9% to 11% revenue growth the full year and puts us on track to generate revenues in a tightened range of $760 million to $770 million.

We expect Q4 adjusted EBITDA to be in the range of $34 million to $39 million, implying margins between 17.9% and 19.5%. For the full year, this implies we are bringing up the bottom end of our range of adjusted EBITDA by another $10 million to a range of $130 million to $135 million. At the midpoint of our Q4 guidance, this puts us on track to hit 17.3% adjusted EBITDA margins in 2019, up from 14% in 2018 and 7.8% in 2017. We expect Q4 stock-based compensation charges of approximately $19 million and depreciation, amortization and other net adjustment charges of approximately $15 million.

We now expect stock-based compensation charges of approximately $76 million for the full year, and depreciation, amortization and other net adjustment charges of approximately $59 million. We, therefore, expect adjusted net income profit in Q4 between $0 and $5 million. As a result of our higher full-year EBITDA guidance and lower depreciation and amortization guidance, we are raising our full-year adjusted net income guidance range to sit between a loss of $5 million and right around breakeven. For GAAP net income, in addition to some legacy issues and simplification costs, we'll be incurring some one-off expenses related to our bank charter initiative in the fourth quarter, which we intend to exclude from our adjusted EBITDA and adjusted net income numbers, as I mentioned earlier.

For the fourth quarter, we expect the total adjustments to be lower as most of the costs of our simplification program have already been recognized. As you heard in our remarks, we're on track to have a good year. Our innovation, simplification program and partnerships are transforming LendingClub, growing our market opportunity enhancing our business model and building our resilience, all of which positions us well over the short and long term. Scott, back to you.

Scott Sanborn -- Chief Executive Officer

Thank you, Tom. I'll keep it short. We are pleased to see that our efforts are working. The business is on track to hit our financial goals in 2019, and we feel good about the progress we're making against our longer-term strategy.

So with that, I'll turn it over to take your questions.

Questions & Answers:

Operator

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

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

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

Scott Sanborn -- Chief Executive Officer

OK. I'll start. Tom, feel free to jump in. So on auto, I guess, stepping back, I think, can remind everybody of the value proposition on auto is we're essentially very similar to personal loans.

You've got a loan, it's not a very good one, and we can make you a better offer. The savings potential in auto is actually higher. These are larger loans and for the used vehicles, there's some structural mispricing out there that we can address. We've been working on the experience in order for this to work and for us to move what is really a pretty paper-based offline process online, it's quite a bit of work.

So that's at focus, one that we've been doing, and that's why when we say, hey, we've gotten a multi-week process down to a couple of days. We believe that that's reducing the friction, reducing the friction means the marketing can begin to be more efficient. So that was kind of one big thing. The second big thing is proving out the credit model.

There is less yield cushion in auto than there are in personal loans. So -- and it's a new asset class for us, so proving out -- proving out that the model is working, takes some time. And the higher you go in the credit spectrum, the kind of thinner that yield cushion is. So we have been as we've been working on the experience, we've been using our balance sheet to facilitate the program.

So now essentially adding a sizable investor allows us to -- allows us to essentially make more limited use of the balance sheet and begin to scale the program and lean into the experience changes we've gotten and be able to start cross-selling to our existing members, as well as using it as a way to bring new people on to the platform. Setting everyone's expectations, as I mentioned in the prepared remarks, credit businesses take time to build. So we're excited that we're kind of ahead from a volume perspective of PL, and we're doing it for a lower investment, but doubling originations is positive. That's us really beginning to ramp.

But in terms of meaning for the overall P&L, we probably still have a couple of years before it starts to really show through in the financial results, but we're excited. We do view this as an important milestone to start ramping.

Tom Casey -- Chief Financial Officer

I agree Scott. We've been using the balance sheet to test, as we've indicated in the past, we used the balance sheet we're testing. I'm very excited that now we're actually selling loans on the back of our experience, which is really a great milestone. So let me touch on LCX, if I could.

We're very excited about what LCX can bring to the table. We do believe it will bring additional investors onto the platform. Keep in mind, what LCX is trying to do is actually build a much broader market. You guys have heard us talk about building an asset class.

This allows investors to come on to the platform and choose individual loans at par, above par or below par and allows us to deliver those in a seamless way to settle, with a very efficient approach using technology to do that. We do think that there is a big opportunity here as we build this out, we expect more investors to come on to the platform in the next few quarters as we continue to build out that capability and put more and more of our originated loans on there to this new platform.

Scott Sanborn -- Chief Executive Officer

OK. The same thing in terms of expectation setting here. This is essentially building a new market for it to work. We've got to have enough investor demand there to be enabling us to put the supply there.

So building it out, adding those investors and understanding what works, it'll be something we ease into. But we do think over the medium term, it's a pretty important capability and will help with liquidity of the asset class and increase the appeal of the asset over time.

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

Good stuff. Appreciate it. Thanks, guys.

Operator

Next question is from Jed Kelly with Oppenheimer. Please go ahead.

Jed Kelly -- Oppenheimer and Company Inc. -- Analyst

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

So anything we should be aware of there?

Scott Sanborn -- Chief Executive Officer

Yes. I will -- I'll start. Turn it to you again, Tom. So what you're seeing -- I mean, I guess, broad statements, if you think about the market right now, if you picked up in the prepared remarks, but the spread between credit cards and personal loans is at a record high, that's according to Fed data.

So the appeal for this asset class and the interest by consumers continues to be quite strong. We, together with others, are being increasingly picky about the loans that we're booking. And what we are focused on right now is that if you take that data point I gave, 53,000 applications, that is just a lot of data that we are able to make use of. And there's a number of things we're doing, everything from marketing message testing to actual experience testing, really drilling down into what channels are people coming from? What is the use case for these loans? How are they interacting with us to develop custom experiences to drive conversion and manage risk.

So you see that in some of the numbers we put out there, the 24-hour approval is just increasingly automating processes and using new data sources to eliminate manual steps and very specifically eliminate friction on the part of the consumer. So there's a lot going on there. And then when it comes to Q4, I would say, look, overall, we feel quite good. Demand is strong on both sides of the platform.

And Q4 is a continuation of what we've been doing all year, which is prioritizing profit growth over revenue growth. And that really comes out to finding the right balance between investor demand and borrower demand. I don't know if you got anything to add, Tom?

Tom Casey -- Chief Financial Officer

No, that's good.

Jed Kelly -- Oppenheimer and Company Inc. -- Analyst

Then on anything on the 4Q guidance?

Tom Casey -- Chief Financial Officer

Well, just as Scott said on the 4Q guidance, I think that we're continuing to focus on profitable growth. We think all year, we've been lower on revenue. Our guide is in line with that, and as we're at the top end of the guide on EBITDA. So I think that's consistent where we've been all year.

I wouldn't overthink it. Typically, the fourth quarter is seasonally lower volumes anyway. We are seeing some transaction fee declines year over year. As you remember, we made some changes last year.

But with the growth in high prime, those come in slowly, slightly lower transaction fees, so that's also part of it. So when you think of mix being high prime. That comes in at a slightly lower transaction fee. That's also some of it.

But that's kind of what's driving it, but very consistent throughout the year.

Scott Sanborn -- Chief Executive Officer

Yes, a key data point, well, the total book this quarter as an example, grew loan originations, 16% A and B, volume grew 30% year on year. So that's a pretty material mix shift that's continued.

Jed Kelly -- Oppenheimer and Company Inc. -- Analyst

Thank you.

Operator

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

Henry Coffey -- Wedbush Securities -- Analyst

Good afternoon, and thanks for taking my call. Before I get into the details, great quarter. It's been years of work on your part. So congratulations.

In terms of -- most of what my questions are always focused on the funding side of the business because I know you'll take care of the marketing and the operating side. Back in September, there was some news about you changing your retail buying in nine different states. Seems to have had a very small impact on the overall funding equation, but I've been getting a lot of questions about it as of late.

Scott Sanborn -- Chief Executive Officer

OK. I'll take that one. So I guess, big picture, I think you know, as well as anyone. We operate in a fairly complex regulatory environment activities on both sides of our platform.

We have multiple activities on both the borrower and the investor side that are regulated, both at the state level, as well as in a variety of places in the federal level. As part of our overall preparation for the bank charter, we did an updated view of our licensing requirements. We identified some that we have that we don't need and some that we believe we need that we don't have, and that's what you're seeing. It was five states, not nine.

And you're correct, the overall impact of funding really not material -- disappointing customer experience for the investors in those five states. So we're working very quickly to get that resolved.

Henry Coffey -- Wedbush Securities -- Analyst

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

Scott Sanborn -- Chief Executive Officer

Absolutely.

Henry Coffey -- Wedbush Securities -- Analyst

And what was it? Just -- is it the difference between state and federal regulations on the security side of the business?

Scott Sanborn -- Chief Executive Officer

Yes, that's exactly right.

Henry Coffey -- Wedbush Securities -- Analyst

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

Tom Casey -- Chief Financial Officer

Yes. So what we were trying to do is change the cadence on our securitizations. We typically were doing them in the third month of each quarter because they require a level of seasoning with us bringing our securitization target to be in November. There are more loans held at the end of the quarter.

So that was why I wanted to call it on the quarter -- the preceding quarter. So it's -- what you see is the 930 increase in the balance sheet in anticipation in the securitization in November.

Henry Coffey -- Wedbush Securities -- Analyst

Are we going to see more of this sort of cadence as you get a more sophisticated balance sheet? And I'm just going to get off. I'll listen in on -- to your answer.

Tom Casey -- Chief Financial Officer

We have done about -- we continue to do around 10% to 15% of our volume in securitization. As we mentioned, this is something that we've been doing for a couple of years now. It is important for us to continue to reach out to new investors, so we do see it as an investment to reach new investors that are learning about the product. We've demonstrated that over the last couple of years in our high risk prime area.

And so we're encouraged with our current focus on high prime. But we think it's important to have that at another good 10%, 15% type of range of total volumes.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you.

Operator

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

Eric Wasserstrom -- UBS -- Analyst

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

Scott Sanborn -- Chief Executive Officer

Yes, Eric. So an important thing to think about, and certainly, as part of the equation we had in our evaluation is that a lot of the internal preparations, in our case, are already in place. So if you think about the nature of who's buying loans from us and the kinds of activities? Banks. Who is providing capital to our other loan investors? Banks.

And the activity that we're engaged in? Banking. We've got a lot of the infrastructure in place already. Three lines of defense, the right policies and procedures. So there is a little more to do for us, but it's kind of on the margin.

So we have brought on some advisors to help us do that GAAP assessment and get the remaining pieces in place, but it's not overall substantial. The other piece for us is going to be developing the overall business plan because that's an important piece of the picture is what will be the structure of the bank, how will it be capitalized, so that's what we'll be working on next.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks very much.

Operator

The next question is from Heath Terry with Goldman Sachs. Please go ahead. Mr. Terry, your line is open on our end.

Is it possibly muted on yours?

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you. Just wanted to get a bit of an update on the customer acquisition side of things, particularly as you look at the relationship between loan growth and sales and marketing. This has been sort of another quarter where you've been able to get a degree of leverage, at least against net revenue and origination.

How much further do you think you can push that? And is there a point that you're going to want to get to where you begin to reinvest and accelerating growth on that side of things? And then to the extent that we've -- you've talked a good bit in the past about the relationship between transaction fees as a percentage of revenue and the mix shift there. This is another quarter where that percentage has come down. I know you've suggested that in the past that that's more or less going to be flat. But as A and B growth keeps coming down, I'm just wondering if that's something that we should continue to model?

Scott Sanborn -- Chief Executive Officer

Great. So I'll start on the acquisition cost. Very pleased with the progress we've made to date, as Tom kind of covered. We're seeing it in both places, which is the marketing cost, as well as in our O&S.

So all of those costs we're gaining efficiency. And it's really a combination of things, it's our testing, our channel development, our conversion efforts, the use of our data for targeting and new targeting models, really leveraging the data, as well as the scale. Also in our vendor contracts, it is building out our returning member experience to drive a better conversion and cost there. So we've done a lot.

In terms of where we're going, I'd say we feel good about the level we're at. And in terms of watching that, it would be, as we build out our lifetime value over time and really start to fill in what is right now kind of the vision we're moving toward. And as we start to add these other proof points, and we're able to drive lifetime value up for the customers, then I think we'll be in a position to evaluate what the right level is for that spend based on the value we're getting back. I don't know, Tom, do you want to take that field, anything to add there?

Tom Casey -- Chief Financial Officer

I think the -- this is a classic example of how our scale is differentiating us. The fact that we can take our change in mix where we are right now in the cycle, take the transaction fees down a little bit are more than offset by the efficiencies we're gathering. And the things Scott just talked about, moving to low-cost locations, getting the full annualized benefit of that next year, all the targeting we're doing. So continue to see that importance of our scale now with the G&A not growing as fast as it was in the past and improving our contribution margins are really, really important.

That's why we took up the contribution margin to that 50% to 55%. That's offsetting. In fact, we actually grew contribution margin despite the transaction fee. So while I was putting a little bit of pressure on the revenue, we're seeing nice improvement in the contribution margin line.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you both.

Operator

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

Rob Wildhack -- Autonomous Research -- Analyst

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

Scott Sanborn -- Chief Executive Officer

Yes. I guess I'd distinguish two things, which I think are important. One is marketing activity, which remains at an extremely high level despite, I think, the individual commentary of some players. So if you just look at the kind of available third-party data, things like overall mail volume and those kind of pieces, you're going to see that with some shifting between players, the overall category, competitive intensity remains quite high.

However, we've been talking in the past about some pressure on credit, driven by what we saw as supply side pressure. So I think across the board, you're seeing a number of people LendingClub included kind of prudently pulling in and tightening a little bit on the credit they're offering. So I'd say the dynamic is lots of people marketing, approving less people. And there is some -- you are seeing the benefits of scale here, at least what we can see in the data, the smaller players are having a more difficult time in this environment because if you don't have the data to differentiate your offerings and optimize your offerings, it's harder to get the pull-through like you're seeing at LendingClub.

Rob Wildhack -- Autonomous Research -- Analyst

OK. Thank you.

Operator

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

Steven Wald -- Morgan Stanley -- Analyst

Yeah. Hi. Good evening. It's Steven Wald on for James.

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

Scott Sanborn -- Chief Executive Officer

Yeah. Thanks, James. That's -- you got it exactly right. So a reminder for everybody, what Select plus is, it's essentially an opportunity for us to host alternative models to our own and turn what is currently a no into a yes, for people who either have specific populations they specialize in or just a different view on the data.

It is a profit play, not a volume play, meaning we -- and although different market conditions, I think the size of this could vary based on what's happening. In general, I'd say it's more of a profit play than a volume play. And we are excited about it, but it is early. At this point, we have our first investor live.

We worked out with any new program, we worked out some integration issues, but that's now up to the scale that we had looked for when we got this thing live, and we'll be adding our second investor as we exit the year. And keep in mind, similar to the conversation we had on auto, right? These are people who are introducing new models into a data set. So they are going to start out the same way we started out in auto, which is let's book a few loans, see how they do, that'll give us the comfort to ramp up our exposure. So even the investors that we will be pulling in, they are not -- they're not wide open.

I mean, we're not exposing them to the full suite of our decline population. We're essentially testing our way in, and they are testing their way in on this. So we do think it will be valuable over time. We're on track with getting one live and a second one coming, but it'll be something that builds throughout the course of over the next 18 months.

Steven Wald -- Morgan Stanley -- Analyst

Got it. That's helpful. And then just maybe one quick follow-up on the -- I think you guys mentioned, stripping out some of the costs and you walked through some of those in terms of what you've taken on to explore the marketplace bank model. Could you just parse out, I assume you'll probably strip out the onetime costs related to exploring it.

But just in terms of anything you bring on more permanently, that would be included in the run rate for adjusted EBITDA, right? I mean, that's how you get it adjusted out.

Tom Casey -- Chief Financial Officer

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

Steven Wald -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

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

Giuliano Bologna -- BTIG -- Analyst

Thank you, and congratulations on a great quarter.

Scott Sanborn -- Chief Executive Officer

Thank you.

Giuliano Bologna -- BTIG -- Analyst

I guess kind of jumping back to the auto topic. Obviously, I heard your comments about how -- there's this large opportunity, especially with even within your current base. But I'd be curious if you have any plans of thinking about kind of secured loan offering? And if there are opportunities to go further downstream in the credit spectrum with that or to offer more debt consolidated opportunities to existing clients who might be applying for a personal loan now because if you look at the data on your site, it looks like you could extend larger loans to lower credit cohorts with lower APRs. So just curious about the opportunities you might have there?

Scott Sanborn -- Chief Executive Officer

I would say your assessment of the opportunity is accurate, and that was part of the driver for us of this as the next adjacent category. We looked at the -- where do our customers hold balances, where can we provide value and where is their real strategic synergy. You don't need to look too far outside of LendingClub to see that some of the other larger unsecured players have a very significant portion of their business in secured personal loans, secured through the auto title. So the capabilities that we're building are directly applicable there.

Again, getting the friction out of the system so that you can take a branch-based paperwork intensive experience online is one of the key requirements, but we do see that as a real growth vector, which is essentially taking our current personal loan applications, turning some nos into yeses, turning some higher rates into potentially lower rates, and turning some capped extensions into larger loans. We think all of that is on our medium-term road map.

Giuliano Bologna -- BTIG -- Analyst

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

Scott Sanborn -- Chief Executive Officer

Yes, that's exactly what this -- when we talk about product-to-platform, that's exactly what we mean with that strategy, which is -- so if you think about for a decent percentage of our customers today, we have the ability to see their transactions and their cash flow. We're now going to have the ability to see there, again, both of these with the customer's permission, their ability to monitor their credit. So our ability to provide an engaging experience for consumers and identify opportunities to add value. We can see what's happening in your financial life is really powerful.

And so there'll be some things we build and offer ourselves. So for a personal loan, we've talked about the fact this is not a one-and-done product. People do come back, they come in and out of the need, and that's kind of getting us to this place. So can we get to a one-click loan for returning members, and we're making we've been investing in the data infrastructure and the user models and all those pieces to move us down that path.

Then you have auto. And then absolutely, we're -- there are categories of credit that we don't offer that for the right partner who would integrate with us and essentially be able to accept the credentials that we pass. That's part of the value of membership, right, that we're able to say, hey, we see you have a mortgage, rates have come down, here you go. Can you be pre-approved for an offer to save integrated into your LendingClub experience? So that is, again, setting everybody's expectations, this will be something we build to over time, but that's absolutely where we're going.

Giuliano Bologna -- BTIG -- Analyst

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

Scott Sanborn -- Chief Executive Officer

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

Giuliano Bologna -- BTIG -- Analyst

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

Operator

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

Scott Sanborn -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 63 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 and Company Inc. -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

Steven Wald -- Morgan Stanley -- Analyst

Giuliano Bologna -- BTIG -- Analyst

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