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

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

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

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

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

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

Thank you, Giuliano.

I am interested in knowing about the recent loan sales and where you are currently valuing the loan book, both before and after the sales.

We experienced an improvement of about 20 basis points in price quarter-over-quarter, which is encouraging. Regarding loan sales, the data indicates that we sold approximately $110 million in loans through the marketplace. However, when comparing quarter-over-quarter sales to the amount added to the held-for-sale portfolio, there was a decrease of around $50 million.

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

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

That sounds very good. And then, I'd be curious, you're obviously working on some of your new programs and rolling them out. You've got kind of reference on being running ahead of schedule and performing better than expected. When you think about those new programs, I'm curious, are they driving kind of any measurable amount of volume at this point, or do you expect them to drive any measurable amount of volume over the next few quarters, or is that more of a 2025 or later event?

I would say if you look at our ability to achieve the top end of the range in Q1 and Q2 and the fact that we are raising our guidance again, this is mainly due to the new initiatives. We're accomplishing this while keeping acquisition costs flat, thanks to a selection of these new initiatives. Overall, they may be relatively small, but they are significantly contributing to our growth at these efficient acquisition costs. Regarding the top-up program, both programs are performing better than expected in terms of customer response rates and take rates. We want to let Clean Sweep run for a while before fully embracing it since it is a different revolving credit program. Top-up aligns well with the underwriting for repeat loans, which gives us a lot of confidence. Another encouraging aspect is the high satisfaction rates we are seeing; we are addressing different consumer needs through how these products are distributed, better aligning to consumer requirements. We are excited about these results. Additionally, as I mentioned during the call, we are starting to observe that even users who downloaded the app but opted out of marketing emails are seeing these offers, resulting in an uptick. Overall, we are seeing positive early results.

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

We also had a sale of our small A Note that we just agreed to.

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

That's extremely helpful. I wanted to ask about your substantial capital given your CET1 ratio of 17.9%. Your Tier 1 leverage ratio is slightly decreasing from a balance sheet perspective. I'm interested in your capacity to push further in the near term and what the limits might be. Additionally, would it be sensible to consider selling some A notes to create more space on the balance sheet for additional whole loan retention or similar strategies in the upcoming quarters?

Currently, we have sufficient capital for growth at the bank level from our existing balance sheet, and we have around $120 million in cash at the holding company that we could allocate to the bank to further expand the balance sheet. In the long run, selling the A notes might be a viable option to create capacity on the balance sheet, but at this moment, we prefer to retain the asset on our balance sheet. We appreciate the 20% risk weighting, and it is delivering good returns. Therefore, we plan to originate new assets and keep them on the balance sheet to continue growing.

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

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

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

We are observing a steady increase in sales prices quarter over quarter, primarily due to consistent credit performance and a solid demand pipeline for structured certificates. In the whole loans segment, there is notable upward momentum in our order book, indicating increased interest in purchases and a broader time horizon from potential buyers. This growing interest supports our confidence in expanding our held-for-sale portfolio, especially as several new buyers are considering making bulk purchases. On the consumer front, our research indicates that about half of consumers are carrying credit card balances, yet they largely remain unaware of the current interest rates on their cards. Among those who believe they know their rates, many are misguided, not realizing that rates have increased significantly by 500 basis points since the Fed began its adjustments. For those on the call who do not carry a balance, I would encourage you to check your own credit card interest rates, as it can be surprisingly challenging to locate that information. We recognize that, despite serving higher credit quality consumers, there is still price sensitivity at the upper end. We have adjusted rates by approximately 280 basis points for consumers, but many are not aware that their card rates have shifted. The average card rate is around 21%, and some individuals, including myself, have been surprised to find rates as high as 34% on certain cards. The demand for loans remains strong, driven by substantial credit card balances. We see an opportunity for education here, leading to higher take rates by showing consumers that they are paying more in interest than they realize. If we offer loans at around 15%, it represents considerable savings compared to their current card rates. Overall, consumer demand isn't the issue; the existing large balances are evident.

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

We are focused on increasing loan sales pricing to open up more marketing channels. Currently, some channels are inactive due to higher costs, and selling at a discount isn't sustainable. Therefore, we are enhancing our operational and marketing efficiencies. As our performance builds investor confidence and market rates improve, we expect to see more buyers and a limited availability of assets, leading to higher prices. As prices rise, we will unlock additional marketing opportunities. A key part of our strategy with Data IQ is to improve consumer education, as many people don't understand that making only the minimum payment can extend their credit card debt repayment over 20 years. We aim to make consumers aware of what they owe, the size of their balances, and empower them to take action through tools like Clean Sweep.

Thank you. I just wanted to clarify for Drew about the PPNR guidance for the third quarter, which is between $40 million and $50 million, compared to $54 million in the second quarter. So, you would subtract $5 million from the second quarter to determine the run rate for the third quarter. Is that correct? Is this a good run rate to consider going forward when thinking about the third quarter as a building point?

You're breaking up a bit, but I believe I understand your question. Yes, the guidance for the third quarter is $40 million to $50 million in PPNR. At this point, most of us are expecting rate cuts in the future. However, those changes are not likely to have a significant impact in Q3; they may be more beneficial in Q4. We will update our guidance based on the evolving market conditions and what we observe.

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

Good afternoon, Scott and Drew. I have a couple of questions. First, on a high level, I noticed a slight increase in origination expectations from Q2 to Q3. As you evaluate your business, what do you identify as the main constraints preventing more significant increases in volume? You mentioned moving into higher-cost marketing channels, which suggests improvements in the fair value of your offerings. Can you elaborate on whether that is the primary barrier to achieving higher volume and if there are any additional factors?

I would say that it's positive we saw prices increase by about 20 basis points this quarter on the sold volume. However, compared to three years ago, we're still down more than 300 basis points. This margin is crucial as it enables us to explore additional marketing channels. We can raise prices without relying on the Fed, but if the Fed takes actions that benefit us, which seems increasingly possible, that will enhance our efforts over time. So, you have the overall perspective.

Okay. And as a follow-up...

The way we interpret our numbers, Bill, is that our marketing efficiency, as reflected in the P&L, is currently about 25% to 30% lower than it was when we were operating at full volume across all channels.

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

If they return in the fourth quarter as we are hoping and starting to anticipate, we do expect some price improvements. Regarding the fair value marks, several factors contribute to that, including the entrance of bank buyers, which is influencing prices and creating upward pressure on fair value marks. However, we do not use the highest prices to assess our book; instead, we lean towards the lowest prices. Therefore, you shouldn't expect a significant increase in fair value marks, but the effective prices we receive and the resulting revenue should certainly be positive.

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

I believe that in Q4, we are hoping to bring in the first couple of banks, which will help our progress, but I think we can expect to see more significant growth from the banks in 2025 if everything goes according to plan.

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

We are observing stable to improving performance across all segments. The segments with higher yields and lower FICO scores have seen the most decline but are also experiencing the most recovery, with strong returns in those areas. Overall, we have calibrated the environment well, and we're witnessing consistent, stable behavior across the board now.

Great. And a follow-up, yes.

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

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

I wouldn't say that the macro environment is causing significant changes, except that consumers are accumulating balances on their cards. This trend is observable beyond our company as well. The rate of accumulation seems to be slowing, which is a positive indication for consumers. Generally, it appears that consumers have adapted to their circumstances. They seem less surprised by the increases in their cost of living and feel they have adjusted accordingly. Our organization has also adapted to this environment, which gives us confidence in our bookings. As noted, our lifetime loss expectations are either stable or decreasing since our last discussion.

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

There are two types of benefits. First, regarding deposit costs, we noticed that our pace of increase has slowed this quarter. Depending on our growth plans, particularly if we're looking to grow the balance sheet faster, we will need more deposits. Over time, as rates decrease, applying 25 basis points across our entire deposit base will have a significant positive impact when we are able to make that adjustment. On the investor side, for asset managers, there are fairly formulaic deals based on the forward curve. As rate expectations stabilize and decrease, we will start to see the effects on pricing over time since these deals typically span multiple quarters.

Yeah, agree.

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

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

I believe each option impacts the balance sheet and income statement differently. In the current environment, we've focused on structured certificates which offer lower risk weighting and immediate gains that are particularly beneficial as others in the market scale back. Over time, our goal is to increase the number of loans categorized as held-for-investment, allowing us to earn returns that are three times greater than if we were to sell them. However, we also want to maintain capacity in the marketplace and effectively engage our partners in selling. The extended seasoning and held-for-sale approach is relatively new for us and should provide significant flexibility in how we manage the balance sheet. With current low prices, we're seasoning those loans without incurring the upfront CECL and achieving a strong return. As prices rise, we will have the option to sell those loans, realize gains, and create space on the balance sheet for additional loans and A notes in the future. Ultimately, the approach will vary based on the market conditions and our long-term strategy, as we'll be optimizing across all four funding mechanisms. Regarding the leverage ratio, feel free to proceed, Reggie.

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

I wasn't going to tell you anything, just kidding. We still have room to expand the balance sheet, and you can see that as our leverage ratio decreases. We haven't set a specific target yet because we will continue to use our stress testing capabilities and the target mix of the balance sheet in the long term to evolve that leverage target. Just know that right now, with the space on the bank balance sheet and the cash at the holding company, we can continue expanding the balance sheet and adding more assets.

Following up on the extended seasoning, I’d like to clarify if the buyers in question are the same entities that previously purchased full loans. If they are, what do you believe it will take to bring them back into that category? Additionally, can you provide any insights on how these portfolios are performing compared to your investors' benchmarks? My assumption is that their performance might be slightly better than what the investors expected, but I could be mistaken.

Sure, let me address your question from a different perspective. Firstly, let's discuss how investors are faring with the loans they've purchased recently. It's important to note that most of our purchases this year have come through the structured certificate program, which has been quite successful. The residuals are performing well, often meeting or exceeding expectations, driving ongoing demand for that program. We anticipate this trend will continue. Regarding the extended seasoning, these loans are similar to those we have placed on our balance sheet, though the mix in grades may vary based on anticipated investor demand and the returns we are observing. We have made sales to previous whole loan buyers and also transacted with a new buyer, including sales involving extended seasoning loans through the structured certificate program. This approach allows us to have more control over timing and scale of sales when it comes to our balance sheet loan inventory, compared to accumulating from origination for a deal. If a buyer approaches us indicating they want to purchase $300 million quickly due to available investor capital, we can discuss pricing based on whether they choose immediate availability or a longer accumulation process. This offers us and our buyers greater flexibility.

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

Normally, when we establish these structured certificate programs with buyers, some of them involve planning a quarter ahead. This means that if you make three purchases with us, we set a pricing formula for how those will be priced. The price itself isn't fixed, but the formula remains set for the upcoming quarter. This is quite standard. There are also some arrangements, which are a smaller portion of our sales, that extend over a couple of quarters and utilize a more complex formula that provides us incentives to increase prices based on market rates. There are various programs in place, but as mentioned earlier, we are not aiming to lock in all our deals for the coming year. The current pricing does not meet our expectations, and we believe there is potential to increase prices as time progresses.

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

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

We feel confident about our performance, as we've had several quarters where consumer results have met or exceeded expectations. We're pleased with what we are projecting. While we prioritize returns for our investors and are delivering some of the highest returns we've seen, we are still approaching things conservatively. This conservative stance is not due to major concerns about the outlook but rather a focus on maximizing returns for our investors to maintain our pricing strategy.

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

And then, metrics on go ahead.

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

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

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

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

I would say it improved more than we expected, which is also reflected in the vintage disclosures we provided. We've seen pretty rapid improvement. I anticipate that dollar charge-offs will continue to improve, although it may be at a more modest pace. The charge-off rate could move in either direction at this point, but I believe we should continue to see improvements in dollar charge-offs as we enter the next quarter for the held-for-investment portfolio.

Great. Okay. And if I could have one more quick question, I know we're nearing the end here, but you mentioned an increase in expenses, and I believe you said there’s a $5 million benefit this quarter compared to your expectations. Should we anticipate a $5 million increase from last quarter? Is this solely reflected in the depreciation line, or are there other areas involved as well?

Not all of it is related to depreciation, although that will be part of it. Keep in mind, if originations increase, marketing spend will also rise. So, that's included in the guidance for rising expenses that we're providing. Without stating a specific number, you’re likely in the right range regarding the anticipated figures, but as I noted, there were expense increases this quarter, and I was mistaken in my earlier predictions. There is some volatility in this area regarding how it will be reflected.

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

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

All right. Thank you.

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.