Earnings Call Transcript - LC Q4 2022

Operator, Operator

Good afternoon. Thank you for attending today's LendingClub Fourth Quarter 2022 Earnings Conference Call. My name is Megan and I will be your moderator for today's call. 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 Sameer Gulati with LendingClub. Please go ahead.

Sameer Gulati, Host

Thank you, and good afternoon. Welcome to LendingClub's fourth quarter and full year 2022 earnings conference call. Joining me today to talk about our results and recent events 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 that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services and future business loan 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 our most recent Forms 10-K and 10-Q as filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-K. 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. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in the presentation accompanying our earnings release. And now, I'd like to turn the call over to Scott.

Scott Sanborn, CEO

All right. Thanks, Sameer. Welcome everyone. We closed out 2022 with solid results. Both revenue and earnings were near the high end of our guidance range, and importantly, we took action to position the company well to navigate current headwinds. The power of our evolving model is evident in our numbers. Our growing stream of net interest income offset the anticipated decline in marketplace revenue and enabled us to deliver total revenue in line with the fourth quarter of 2021 despite a decline in loan originations. For the full year, we generated 45% revenue growth and a record $290 million in net income, or $146 million after you exclude tax benefits from the release of our valuation allowance. We invested our strong marketplace earnings back into our balance sheet, doubling the size of our held-for-investment loan portfolio, which allowed us to more than double our net interest income. These results begin to provide a sense of the power of this business over the long term. Our goal, when the environment stabilizes, is to continue to grow the bank balance sheet and the corresponding interest income revenue stream with marketplace revenue acting as a capital-light earnings complement, as well as a compelling membership growth driver. To reach this destination, we first need to navigate through the current environment, and we have plans to do just that. While it's unclear where exactly the Fed and the U.S. economy will land, we remain focused on what we can control and are positioning ourselves to best manage through the uncertainty. Our focus is on three key areas. One, continuing to prudently manage credit quality through the cycle; two, preserving profitability and maintaining a strong balance sheet; and three, being practical and focused in our product and technology investments. So starting with credit, we will remain laser focused on managing credit risk for both our marketplace investors and ourselves. I'd note the loans we hold on our balance sheet representing prime and high-prime customers are continuing to perform well, as you'll see on pages 16 and 17 in our presentation. For loans sold through the marketplace, we are pursuing quality over quantity. As we have spoken about for several quarters, the rate environment is putting pressure on marketplace volumes as the relative value we can provide is compressed until we can reprice our loans to reflect the dramatic increase in cost of funds for especially our non-bank investors. In this higher rate, lower volume environment, we have both the responsibility and the opportunity to be selective on credit. Our delinquencies have outperformed industry averages, but we need to remain vigilant and proactive. We anticipated and have seen pressure on our members, most notably in near-prime and especially among those consumers with lower incomes. We are also seeing a dynamic pace of change in areas like savings rates and prepayment speeds. A core strength for LendingClub is our ability to use our data advantage and our technology infrastructure to quickly adapt to emerging signals. Accordingly, we were proactive to begin tightening early in 2022 and have continued to tighten our underwriting throughout the year. For reference, our fourth quarter near-prime volumes are down more than 50% from their peak. Longer term, the opportunity to grow personal loans remains significant. With credit card balances building at an over 20% average APR, even more consumers will benefit from refinancing their high-cost credit card debt into a fixed-rate installment loan. And as interest rates stabilize and the U.S. economy regains its footing, we expect our marketplace volumes to rebound. Our second key objective is to maintain profitability and a strong balance sheet. We recently announced the difficult decision to streamline our operations to better align our expense base to our outlook. We also bolstered our net interest income by acquiring a large portfolio of seasoned, high-quality loans from one of our marketplace investors. In the near term, we expect marketplace revenue to be under pressure until the Fed slows or ideally stops with rate hikes. At the same time, we plan to maintain a stable interest income revenue stream by keeping the balance sheet at roughly its current size. Our final area of focus is to continue to prudently invest in the core product and technology capabilities that will create more value for our 4.5 million members. While we remain committed to our long-term vision, we are slowing down the pace of our investments, and our intent in 2023 is to put the building blocks in place that will support future growth opportunities as we come out of the current environment. Certainly, we will remain mindful of the macro economy and we'll continue to adjust the pace of our investment as needed. So I'm going to turn it over to Drew now to walk you through the detailed financial results and our outlook.

Drew LaBenne, CFO

Thanks, Scott. And hello everyone. Let me take you through our financials in greater detail, starting with the originations and our balance sheet. Originations for the quarter were $2.5 billion, compared to $3.1 billion in the prior year and $3.5 billion in the third quarter of 2022. As Scott discussed earlier, originations were impacted by a combination of higher interest rates curtailing investor demand for loan purchases and our continued discipline in underwriting to maintain strong credit quality. As we deploy capital to retain more of our highly profitable personal loans, we showed significant growth in the balance sheet compared to the previous quarter and over the course of 2022. Total assets increased 63% year-over-year to $8 billion in Q4, with our held-for-investment loan portfolio up 104% over the same period, primarily due to growth in personal loans. We also grew deposits 104% year-over-year now that we have scaled the online banking platform that we acquired. Since the closing of the Radius acquisition in the first quarter of 2021, we have grown the bank from $2.7 billion in assets to $7.6 billion in assets, which is a compounded annual growth rate of over 70% and firmly highlights the benefits of bringing LendingClub's strength of loan originations together with the digital banking model. Earlier, Scott mentioned the portfolio we acquired in December. We are accounting for the portfolio under the fair value option as the short remaining duration in high credit quality limit volatility around its expected performance. We expect this portfolio to generate very attractive returns and have broken it out separately in the net interest margin table in our earnings materials. Now on to revenue. Total revenue was essentially flat year-over-year as net interest income growth of 63% was offset by a 29% decline in non-interest income. Revenue decreased sequentially by $42 million, reflecting lower originations sold through the marketplace and the price on those sales. Our decision to increase loan retention in 2022 has enhanced the resiliency of our franchise during a more difficult environment for the marketplace. Net interest margin increased to 7.8% from 7.6% in the prior year period due to an increase in the proportion of higher yielding consumer loans on the balance sheet. As expected, we saw a sequential drop from 8.3% in the third quarter of 2022, primarily due to the current lag between our ability to pass along higher interest rates on new personal loans relative to the repricing of online deposits. We expect the net interest margin to decline again in the first quarter of 2023 as these trends continue and for the pressure to abate should the Fed's slow rate increases or stop them all together. Total net interest expense for the quarter improved $8 million compared to the same quarter in 2021 and was a reduction of $6 million from the previous quarter. Compensation and benefits expense included $4.4 million in severance charges from the previously announced expense reduction plan. Marketing efficiency was better than expected given the use of more efficient channels and lower competitive pressure. Marketing expenses improved by $11 million compared to the third quarter, primarily reflecting lower origination volumes. Our consolidated efficiency ratio moved to 68.5% from 61% in the third quarter as revenues decreased sequentially. As Scott discussed, the reduction in staff was a difficult decision, but necessary given the more challenging near-term outlook. The reductions will generate $25 million to $30 million of annual run rate savings in compensation and benefits. These savings came primarily from an improved efficiency in our management structure, the slowdown in some strategic initiatives and ceasing originations in two commercial businesses, commercial real estate and equipment finance that we acquired from Radius. We will take the remaining severance charge of $1.3 million in the first quarter. Slide 15 shows the pre-provision net revenue, or PPNR, and the net income for the quarter along with other metrics. In 2023, we will move to PPNR as the key metric, which provides a better gauge on income statement performance. PPNR is a useful measure for evaluating the underlying performance of our company without the quarterly volatility caused by credit loss provisioning. For the fourth quarter, we had PPNR of $82.7 million which increased 12% compared to the same quarter in 2021. We remain pleased with the performance of credit in our portfolio. Our provision for credit losses was $62 million, $21 million lower than the previous quarter, primarily due to a decrease in the dollar amount of loan originations held on the balance sheet. Our allowance coverage ratio, excluding PPP loans, increased to 6.6% from 6.4% in the previous quarter due to the effect of ongoing recognition of provision expense for discounted lifetime losses at origination. In the fourth quarter, our tax rate again benefited from a reversal of our remaining valuation allowance as well as R&D tax credits. For the quarter, we had a tax benefit of $2.4 million. As we enter 2023, we expect less volatility in taxes, and the tax rate is expected to be approximately 28%, but other factors such as share price movement will continue to impact our reported tax rate going forward on a quarter-to-quarter basis. Tangible book value per common share grew 35% year-over-year to $10.06 per share at the end of the fourth quarter. We have maintained strong capital ratios on top of a significant allowance for credit losses. This positions us to better navigate through the current environment and provide the ability to strategically deploy capital as opportunities arise. Now please turn to page 16, where we have provided you with an update to the 30-plus day delinquencies of our prime personal loan servicing portfolio as well as our held-for-investment personal loan portfolio. You will see that credit quality in the prime servicing portfolio continues to normalize as the portfolio seasons and new origination growth slows in the marketplace. The same effect is also true of our own HFI portfolio. We expect this trend will continue given the lower level of originations in the near term. Given that changing growth trends and seasoning are creating comparability issues with historical data, we are not planning to provide this slide in the future. On the next page, we have provided more detailed disclosure on our loss expectations, which we believe provides a cleaner view of performance. So on slide 17, you can see credit performance of personal loans on our balance sheet by vintage. We expect the lifetime loss of the 2021 and 2022 vintages to be up to 8% and 8.7% respectively. The estimate for both vintages includes qualitative provisions for the uncertain economic environment. The 2021 vintage delivered very strong credit performance given the effect of government stimulus during the pandemic. The 2022 vintage reflects a move to a higher quality mix of credit but also a normalization of credit trends. We expect annualized net credit losses to be approximately 5% over the life of the 2022 vintage, but that could vary if economic conditions deteriorate significantly. For each vintage, we are providing the breakout of how much in charge-offs have been realized as of the end of 2022, how much of future losses have already been reserved for in our allowance for credit losses, and how much remaining provision we estimate we will take through the income statement, which mainly represents the Day 1 CECL discounting coming through the provision expense over time. If we look at the net interest margin factor in variable expenses and annualized credit losses, we expect post-tax levered returns in the low to mid-30% range. These returns are the reason we plan to invest our available earnings in growing the balance sheet. Now let’s move to guidance and how we’re thinking about 2023. Given the broader macroeconomic uncertainty, we are moving to quarterly guidance. For the first quarter, our origination outlook is $1.9 billion to $2.2 billion, reflecting prudent underwriting and the rate-driven pressure on marketplace demand. We plan to maintain the size of our HFI balance sheet. Therefore, we expect to retain 30% to 40% of our loan originations for the quarter. For marketplace originations we sell, we expect unit economics in line with the fourth quarter. We plan to maintain positive net income levels and invest in-period earnings into loan retention to support future earnings. As we reinvest our capital, we will maintain a disciplined approach to underwriting, drive credit performance and required returns. In 2023, we want to maintain flexibility to grow the balance sheet when we generate excess earnings available for investment. The impact of the Day 1 CECL charge on loan retention can have a significant impact on earnings. With this in mind, we have evolved our focus to pre-provision net revenue, which is a more relevant guidance metric for financial services companies using CECL accounting. Our outlook using PPNR is $55 million to $70 million for the first quarter. With that, let me turn it back to Scott for closing comments.

Scott Sanborn, CEO

Thank you, Drew. Clearly, the multiple economic variables that are at play here have affected our near-term outlook, but I do believe we’ve positioned the company well and that we have strategic and structural advantages that will help us outperform over time. As we finish off the year, I just wanted to take a step back to recap the progress we’ve made since we acquired the bank. In two years, we have completely transformed the financial profile of the business. We’ve more than doubled the balance sheet, cut tens of millions in issuance costs, added a new recurring revenue stream that represents almost half of our quarterly revenue, and we’ve significantly grown our equity. These strong fundamentals will help us manage through what will ultimately be temporary headwinds. As interest rates stabilize and credit card balances and APRs remain at or near-record highs, we believe that our core business of credit card refinancing will be well-positioned to quickly resume growth and drive marketplace revenue. With that, I wanted to say a sincere thanks to all of my fellow LendingClubbers, both those who are with us today and those who we recently had to say goodbye to, for their contributions to our company and to our customers. That’s it. Thanks again for your time, and I’ll open it up for questions.

Operator, Operator

Thank you. Our first question comes from Bill Ryan with Seaport Research. Your line is now open.

Bill Ryan, Analyst

Thank you for taking my question. To start with the guidance, I noticed you have projected pre-provision net revenue of $55 million to $70 million, along with originations between $1.9 billion and $2.2 billion. If we take the midpoint, your reserve on the consumer portfolio was, if I recall correctly, set at 8.8% of retained originations. Based on that calculation, it seems like you could be breakeven, give or take, in the first quarter. Is the 8.8% figure accurate? Should that be the figure we rely on, or is there something additional in the provision? Additionally, regarding expenses, how long will it take for the cost reductions, including the charge for reducing fixed costs along with your 50% variable cost structure, to begin reflecting in the financials? Will any of this impact the first quarter guidance, or will it extend more into the second quarter?

Drew LaBenne, CFO

Yes. Great. Thanks, Bill, for the question. So let me start with the provision question first. So you’re correct on that ratio. Keep in mind that the components that go into the provision are the day one CECL. The accretion of the discount we have on day one and then other qualitative factors as well. And so one thing about that accretion of the discount is, it really hits more heavily in the first and second quarter after origination. So if you look back at our origination trends, this quarter had a higher amount of that back book accretion coming in. As we look forward to Q1, I don’t want to talk about the ratio as much, but if you think about it in terms of dollar amounts, we’re remixing to higher quality credit. We should probably have less accretion just because of the recent trends in originations. And so right now, we would expect that provision to actually come down quarter-over-quarter. But obviously as I just said, it’s a very volatile measure. So there are a lot of different outcomes that are possible on the provision line in any given quarter. Second on expenses, so on the 50% variable cost market…

Scott Sanborn, CEO

Sorry, just one other thing to add, Bill, is the other important part of the message we want to make sure you hear is, our intention is to maintain the balance sheet given the details we’ve shared on the attractiveness of the loans we’re planning to continue to add. To the extent that we’ve got available earnings, we would put those into the balance sheet. That’s one of the other reasons why we’re not guiding to that. There’s both the volatility of the provision and also just the intent to be able to continue to grow the balance sheet should the earnings permit it.

Drew LaBenne, CFO

Yes. In Q1, I should mention the provision as well. As we move towards higher quality loans, we anticipate that the upfront charge will be lower for these higher quality loans added to the balance sheet, which will also positively impact the provision. Regarding expenses, most of the annualized savings we reported are fixed costs; less than 10% is from variable costs associated with that reduction. The largest decrease in our variable cost base, as originations decrease, will come from marketing. You have already observed that decline each quarter as originations have also fallen.

Bill Ryan, Analyst

But as in terms of timing, both of those expenses come through?

Drew LaBenne, CFO

Yes, the savings from the reduction in force will be reflected in Q1, with the majority of the impact realized, except for the remaining severance charge I mentioned. Additionally, there may be some lagged reductions in variable costs from lower originations, but I wouldn't consider that significant compared to the $25 million to $30 million we are citing in overall reductions.

Bill Ryan, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is now open.

David Chiaverini, Analyst

Hi, thank you for taking my questions. I wanted to follow up on the topic of the provision. I assume that since the loan portfolio is essentially flat, the provision moving forward would mainly reflect the loss content of the loans with minimal reserve building. Because the loan portfolio isn’t expanding, there’s no need to set aside additional reserves that have already been accounted for. Therefore, I believe the provision would align closely with the net charge-offs for the quarter. Is that the correct way to consider it, that you don’t need to reserve much with a flat loan portfolio?

Drew LaBenne, CFO

No, that’s not quite correct. To maintain a flat loan portfolio, we need to continue originating loans to balance out the runoff. The new loans we create will also incur a day one CECL charge that we have to account for. Additionally, there will still be accretion occurring on the existing loans. As I mentioned, this accretion is more pronounced in the first couple of quarters after origination, but it will persist over time as well.

David Chiaverini, Analyst

I see. Okay. And then shifting over to, you mentioned about kind of reinvesting capital to grow the balance sheet is, so is the right way to think of your kind of comfort level on capital ratios is where they ended in the fourth quarter? Is there any other kind of constraint on growing the balance sheet? Because when I look at your deposit growth over the past several quarters, you’ve had significant success in garnering deposits. So, could you talk about what’s constraining your balance sheet growth?

Drew LaBenne, CFO

Sure, if we consider the factors necessary for expanding the balance sheet, I would highlight capital, liquidity, and earnings. The third factor might be up for discussion, but not really for us based on the guidance we’re providing. We continue to have capital available for growth, with a Tier 1 leverage ratio of 12.5%, and we're generating capital every quarter. That 12.5% is at the bank level. Regarding liquidity, we have more than enough to support our growth in the online deposit sector for the foreseeable future, so no concerns there. However, when aiming to grow the balance sheet and issue more loans, this results in additional CECL charges that impact profitability. While we strive to remain profitable each quarter, we need to balance that goal. We haven't used this factor in our guidance recently, which provides us with some added flexibility.

David Chiaverini, Analyst

Got it. And then the last one for me, on slide 17, you mentioned about your net credit loss rate of approximately 5%. Can you talk about how this 5% compares to what your kind of long-term expectation was for these vintages and on a go forward basis?

Drew LaBenne, CFO

Yes. Go ahead, Scott.

Scott Sanborn, CEO

Yes. So, if you look at that page, you can see 2021 and 2022, 2021 given that you still had some of the stimulus benefit from the pandemic was better, marginally better than our expectation. 2022 was marginally below, you put the two together and we’re pretty much on expectation across those two vintages as a total, which is roughly in line with what our expectation is for the year end.

Drew LaBenne, CFO

Yes. And I would just add. The 2022 vintage may be marginally less than we expected, but still highly accretive in terms of value created for shareholders by putting it on the balance sheet at least as it’s performing thus far.

David Chiaverini, Analyst

Got it. Thanks very much.

Operator, Operator

Thank you. The next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Giuliano Bologna, Analyst

Thank you for taking my questions. Starting off, one thing I’d be curious about is thinking about how pricing is evolving and kind of thinking about the marketplace. Because you seem to have talked about in previous quarters that there’s kind of a couple month lag on pricing. And now that we’re kind of getting closer to kind of at least a slowdown in the Fed’s trajectory and hopefully, very soon an end to the hike cycle. Is that really what you think will drive a return to volume as pricing catches up once that happens on the marketplace and just in general for the platform as a whole? And then when I think about the pricing that you’re getting, it looks like pricing was still a little bit lower in Q4 versus Q3. As we go forward, as pricing moved up, kind of going back to the commentary last quarter where you were saying that you’ve been pricing higher on different loan categories during the quarter. I’m curious if we think about the yield starting to increase on new originations versus the current HFI book on a go forward basis.

Scott Sanborn, CEO

I’ll start, Giuliano. I'll try to recall all the questions that were asked. If I overlook any, please let me know. To summarize, the primary factor behind the volume reduction is the rate-driven pressure, particularly affecting non-bank investors who have experienced a significant rise in their capital costs. This pressure is mainly felt by buyers of non-prime and lower-prime loans. As a result, we are reducing volume in that segment due to these pressures while working on raising prices and sharing some of the economics in that area. In the last quarter, the percentage of loans sold to banks has risen, with our share now being in the 70s. The buyers are currently shifting toward banks. We have continued to increase prices, testing various price points across all of our risk categories. It's essential to maintain take rates and understand the profiles of incoming borrowers during this stable environment. We have raised prices by roughly 40 basis points over the quarter and plan to persist in this direction. We anticipate that as the Federal Reserve slows down, and ideally stops, there will be a lag before the credit card market and overall market respond. As this pressure eases, we expect the marketplace to start to recover. We have seen this rebound occur quickly in the past, assuming the credit and unemployment environments remain stable, which is certainly on our minds and that of our investors. This is why we are maintaining a proactive and prudent approach to credit.

Sameer Gulati, Host

I’ll add to that. Juliana, regarding the HFI portfolio, the NIM table shows that unsecured consumer loans increased from 13.52% in Q3 to 13.6% in Q4. The majority of that decline was due to deferred items, with fees and expenses causing the yield to decrease because prepayments have slowed as anticipated. Therefore, in terms of the actual coupon pricing entering the book, the back book has mostly reached its limit now, and that pressure is lessening.

Giuliano Bologna, Analyst

That makes a lot of sense. When I examine the table that leads to the 30% to 36% marginal ROE on 2023 originations, it suggests an implied NIM of 10.1%. The footnote indicates that brokered and CDs are being used as the benchmark test, and it seems that capital currently sits around 4%, with even the high yields at about 4%. Does this imply that you anticipate achieving an incremental loan yield of around 14% or higher on the loan portfolio? Is this expectation more related to the first quarter, or do you think it will average out over the full year?

Scott Sanborn, CEO

Yes, I think, yes, the math mostly right, it’s actually a little better because the proxy, the broker proxy we’re using is closer to 5% than 4%. So, we’re not using our actual high yield savings. We’re saying if we go out match, use a match duration brokered CD; we’re applying that rate right now. So, we’re taking sort of the interest rate risk component out of the equation here.

Giuliano Bologna, Analyst

That’s very helpful. Please continue. Sorry.

Drew LaBenne, CFO

No, that’s fine. You got it. Go ahead.

Giuliano Bologna, Analyst

Sounds good. One thing I wanted to wrap was just, maybe just as kind of a clarifying question was that you guys were talking about keeping the balance sheet relatively flat and then maybe potentially growing a little bit somewhere earnings and capital shake out. I’m assuming that you mean that inclusive of the acquired portfolio that doesn’t have CECL reserves. So you’re still mixing into more of a portfolio with CECL reserves as you kind of replaced the runoff in that portfolio this year. Is that a good way of thinking of it?

Drew LaBenne, CFO

Yes, that’s correct. We’ve experienced strong balance sheet growth, but we’re clearly going to be slowing down in the near term. However, we want to ensure we don’t lose momentum, which includes replacing the runoff of that portfolio. It’s important you brought that up because that portfolio, being fairly seasoned, will run off fairly quickly. Therefore, the significant addition will pay down more rapidly than our newer generations.

Giuliano Bologna, Analyst

That’s great. Thank you for answering my questions and I will jump back in the queue.

Operator, Operator

Thank you. Our next question comes from the line of John Rowan with Janney Montgomery. Your line is now open.

John Rowan, Analyst

Good afternoon. Just I want to make sure I understood your answer to the prior question correct. The flat loan portfolio that includes the acquired portfolio as well, or that, on an average basis, would earning assets in the 1Q look higher than the fourth quarter, obviously, given the timing of the deal?

Drew LaBenne, CFO

Yes. On loans, it should because we only had one month of, as I’m sure you’re picking up, we only had one month of average balances for that quarter. So we will get the full quarters worth in Q1. Now the portfolio does run off quick, so it won’t be about the 900 million we ended the year at. So it will come down from there over the course of Q1.

John Rowan, Analyst

Okay. You mentioned bank demand in the marketplace, and I’m curious about the impact of the U.S. bank acquisition and its sale of the portfolio. Did the previous buyer from the marketplace play a significant role in your bank demand? I'm interested in whether this change will affect future bank demand, especially since they may no longer be participating in the market.

Scott Sanborn, CEO

So that was a $1 billion portfolio. It represents a large client who has been a long-term significant partner of ours. However, when the acquisition was announced, we began working with them to reduce their overall participation in anticipation that the new owner may not maintain the relationship. While there was some impact from this change, their purchases decreased significantly as we worked to draw them down between the announcement and the approval of the deal.

John Rowan, Analyst

Okay. All right. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Michael Perito with KBW. Your line is now open.

Michael Perito, Analyst

Good afternoon, everyone. I appreciate you taking my questions. I wanted to ask about operating expenses, perhaps directed to you, Drew. In the fourth quarter, you reported around $180 million, which I believe included approximately $4 million in restructuring charges, so it could be considered about $176 million. I'm curious about the two components here. If we annualize that and exclude the $25 million to $30 million, but I understand you are still investing, so I'm assuming there will be some growth. The question is how much growth should we anticipate? I expect it will be significantly less than last year, but there should still be some growth, and I would appreciate any additional context you can provide on that.

Drew LaBenne, CFO

Yes. So regarding marketing, the trend is largely dependent on volume, along with some differences in rates. The reason we discussed compensation and debt was to provide you and the investors with clear figures for calculations. You should take the $88 million, subtract the one-time charge, and then factor in the run rate savings. Keep in mind that we do have a bit more severance to account for in Q1. As for the other line items, there are some fluctuations, but we do not anticipate any significant changes. We will strive to manage our spending efficiently while also making some necessary investments. However, we will experience a slight drag from depreciation and amortization as new projects begin production. Overall, this should not significantly impact your modeling from our current position.

Michael Perito, Analyst

Okay. Just, I guess, kind of a big picture question, Scott. I mean, obviously, it's a tough environment just to make kind of definitive statements. But I guess one element that's kind of coming to my mind here as I think of other banks in my coverage universe now, like diversity can often help. And obviously, you guys are pretty heavily tied to the personal lending asset class, which is obviously what you do so well. But just curious what your kind of high-level thoughts around that are, I mean, does it make sense longer term to diversify the business more? I mean just kind of more of a philosophical question. I'm just curious how you think about it?

Scott Sanborn, CEO

Yes. I mean we are certainly thinking about this in a couple of phases that we'll be pursuing in parallel, but some will reach fruition more quickly. One is transitioning the model, as we've talked about, from 100% marketplace revenue to where we are now, call it, 50-50 interest income to marketplace to more on balance, more of the revenue coming off the balance sheet because it is a more resilient income stream than the marketplace revenue is. The marketplace has real value. It's a capital-light way to grow. We can serve customers. We wouldn't serve with the bank balance sheet. But as we're seeing, it is less resilient in the face of market shocks like we have today. So that's one part of the transition that we are eager to continue. And I think last year shows you that the power of when that is working together, and you can think for yourself as the balance sheet gets bigger and you maintain the marketplace, we think that will be pretty powerful as an earnings generator. And then yes, the second piece which we are committed to but are slowing down this year is really finding other ways we can help our consumers. And we know it's a very valuable consumer. They are strong credit, high income, and they like us. And so we are eager to do more for them and that is our plan. It's just that, I think this year, getting new credit products off the ground and services off the ground is, that takes a bit of time, and it requires investments. So we'll be, we are slowing it down, but we are not stopping it.

Michael Perito, Analyst

Yes. Okay. And then just one last one for me, I want to make sure I heard this correctly. Did you guys say that the commercial lending team from the stay over from the Radius Banc was kind of no longer with you guys? And so therefore, if so, would we be safe to assume that the commercial balances will kind of run down to nothing from this point forward? Or did I misinterpret that?

Scott Sanborn, CEO

There are three components to commercial: GGL, SBA lending, and commercial real estate and equipment finance. The GGL business, which focuses on smaller businesses that are nearer to the consumer, is a variable rate product with a strong market for selling or holding. We are continuing to grow the Government Guaranteed Lending segment. However, in the current environment, commercial real estate and equipment finance do not offer attractive returns for the bank or shareholders, so we are not originating new loans in those areas. Consequently, you can expect those balances to decrease over time, although they will pay down more slowly.

Michael Perito, Analyst

Yes, that was going to be my follow-up. Maybe for Drew, just what’s the amortization there, because it’s correct to assume that those will be replaced with more profitable personal loans if you are keeping the balance sheet flat, correct?

Drew LaBenne, CFO

And I think we will grow the SBA Government Guaranteed Lending business faster. That is part of our intention as well. They should run off slower than PL to grow, so less predictable, right. It just, we may have customers who decide to refinance or diversify their banking relationships, but we’re expecting it to be slower over the course of 2023.

Michael Perito, Analyst

Okay. Perfect. Thank you, guys.

Operator, Operator

Thank you. There are no additional questions waiting at this time. So, I’ll pass the conference back over to Sameer.

Sameer Gulati, Host

Thanks, Megan. So, we do have a question from one of our retail investors. And the question is, with credit card rates and balances at all-time highs, how do you see this affecting your business?

Scott Sanborn, CEO

Yes, we addressed that in the prepared remarks. We believe there is a significant opportunity ahead of us, as the current challenges will likely turn into advantages. The cost of capital for investors is expected to decrease, and the Federal Reserve has not made changes yet regarding credit cards. This will allow us to provide substantial value to our loan buyers and even greater value to our borrowers. We aim to capitalize on this opportunity and use the resulting earnings to further our evolution by expanding our bank's balance sheet and diversifying the range of products and services we provide to borrowers.

Sameer Gulati, Host

Great. Well thank you all for joining us for the earnings call and if you have any follow-up questions, please contact investor relations. Thank you.

Operator, Operator

That concludes the LendingClub’s Fourth Quarter 2022 Earnings Conference Call. Thank you for your participation. Have a wonderful evening.