Earnings Call Transcript - LC Q1 2020

Operator, Operator

Good afternoon and welcome to the LendingClub First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sameer Gokhale, Investor Relations. Please go ahead.

Sameer Gokhale, Investor Relations

Thank you, Andrea, and welcome everyone to LendingClub’s First Quarter 2020 Conference Call. Joining me today to discuss 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 the impact of COVID-19, our ability to navigate the current economic environment, and the future performance of our business and products. Our actual results may differ materially from those contemplated by the 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 filed with the SEC as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q. Any forward-looking statement that we make on this call is 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. As you will see this quarter we added some new slides to our investor presentation related to our liquidity, cash flows and credit quality, which we believe will be useful in the current environment. The press release and accompanying presentation are available to the Investor Relations section of our website at ir.lendingclub.com. And now, I'd like to turn the call over to Scott.

Scott Sanborn, CEO

Okay. Thank you, Samir, and thank you all for joining us. I hope everybody is staying healthy and sane in this unsettling time. A lot to talk about today, so I'll get right to it. I'm going to provide our perspective on the environment, the impact to LendingClub and how we are navigating through the current challenges. Then, I'll turn it over to Tom to provide additional details about our Q1 financial performance and our strong liquidity position. So, clearly, much has changed since we last talked in February. At that time, we had realized our goal of achieving net income profitability and we announced the transformative acquisition to enable LendingClub's next chapter of growth. But just a few weeks later, the coronavirus shook the entire global economy. The scale and speed of its impact have no historical precedents. Our forecasts vary widely on the long-term effects but with more than $30 million people filing for unemployment benefits in just the last six weeks, we are bearing witness to an enormous amount of suffering for millions of Americans, a disruption to businesses across the country, and a severe liquidity crunch and contraction of the credit markets. This deteriorating environment clearly has an impact on our outlook. In Q1, we took a significant fair value mark to the loans on our balance sheet in order to incorporate elevated charge-off expectations and increased liquidity premiums. Currently, we are operating with materially reduced originations to allow platform investors time to address issues affecting their capital, their liquidity and the expected performance across their portfolios. While we withdrew our detailed guidance back in March, I'll share that we anticipate a 90% reduction in quarter-over-quarter loan volume in Q2 with growth resuming once the environment stabilizes. So today, I'll share what we're monitoring, what we are assuming and what actions we're taking. Our focus is on positioning LendingClub to navigate through the current adversity and to set ourselves up for success over the long term. To do that, we're directing our activities according to five guiding principles. These are; one, to keep our employees safe; two, to preserve our liquidity; three, to protect our platform investor returns; four, to support our members; and five, to stay on track for the acquisition of Radius Bank. So I'll talk a little bit about actions we've taken in each of these areas. Our first priority is to keep employees safe. We proactively activated our crisis management plan and implemented a work-from-home program in early March and all of our employees have successfully made the transition and are working productively. We also extended crisis pay to all our employees so they would not have to choose between working or taking time off to care for themselves or a sick family member. Our ability to support our employees working virtually and to alleviate as much of their stress as we can means that they are better able to support our customers who need us now more than ever. Our second focus is on preserving liquidity, given that we anticipate being in an extended period of reduced revenue. As many of you know, we have a seasoned team that has weathered multiple storms. We moved with incredible speed to preserve a total of $550 million of estimated net liquidity at the corporate level, of which close to $300 million is in cash. We've modeled our outlook through multiple stress scenarios. As we disclosed in April, we believe we have adequate liquidity to see us through the end of 2021 under a range of macroeconomic environments. Importantly, even in a zero origination scenario in 2020, which is not what we project, our cash income from our servicing business and our loans held for sale will be sufficient to cover our resized expense base. A reminder on why that's the case: on the cash expense side, our simplification program executed over the last 18 months lowered our overall cost base and increased the proportion of our costs that are variable and can be quickly ramped down. To further lower our expense base, we also just announced a painful but necessary step to restructure the company through a reduction in force impacting approximately 30% of our employees. Importantly, this cut was not uniformly applied. We especially targeted non-core expansion initiatives such as auto and our planned migration to AWS, which are getting reduced emphasis for now. All in all, the combined effect of these actions will reduce our quarterly expense run rate by approximately 50% versus Q4 of 2019. With the steps we've taken to reduce expenses, we'll be able to conserve cash in the near term and gain from positive operating leverage as we resume growth. Moving on, our third area of focus is on protecting the returns of our platform investors on the nearly $16 billion in loans that we service. Here, we are enhancing our collections capabilities by applying our excellence in analytics, modeling, optimization, and targeting, all huge strengths of ours that have enabled us to achieve our market leadership. Clearly, loan performance will be impacted by the unprecedented spike in unemployment, and we expect cumulative credit losses to increase materially. Our forecasts are based on Moody's baseline scenario from April 13th, which has unemployment spiking in the second quarter at over 13% before coming down to 9% to 10% and staying elevated well into next year. Clearly, these numbers are subject to change, and unemployment is already projected to be above these levels. However, our focus is on the ongoing level of unemployment and not the spike as we believe that Q2's unemployment-driven losses will be partially mitigated by several factors. One is the unprecedented government response, which has been both large and timely, to provide relief for consumers and small businesses. Two is our proactive payment deferral plans, which, together with the broad offerings of forbearance across all categories of consumer credit, will help consumers through this lockdown period. Three is the reduction in loan prepayments as borrowers preserve their cash, and this will help investor returns. We’ve developed a sound analytical framework to evaluate all of these puts and takes, but it's premature to make definitive conclusions until the data stabilizes. What we can say is that many of our investors have been purchasing loans for years and the relatively high yield and short duration nature of the asset will allow the returns of older vintages to mitigate the impact of any weaknesses in the most recent and therefore most vulnerable quarters. A reminder that we have been moving to higher credit quality over the past 18 months which does help better position the portfolio. For context, our 2019 vintage reflects customers with average annual incomes of over $90,000 and an average FICO score of more than 700 and a low payment to income burden. This is our existing book. As you'll see in slide 10 of the investor presentation, we believe our new originations are significantly different from Q1 with even higher income, higher FICO and lower payment to income ratios. New loans are heavily focused on our existing 3 million members who have demonstrated successful past payment history with LendingClub. This is because loans to existing members have historically exhibited significantly lower losses than loans for new members with similar credit profiles. They also come at a much lower cost of acquisition. In addition to this focus on existing members, we materially tightened credit. We've dramatically increased verifications of income and employment, and we've also implemented a pricing increase of between 200 and 400 basis points. We are actively evaluating additional analytical approaches and the use of incremental third-party data to enhance our underwriting capabilities. The combination of all of the actions is intended to increase investor returns in a normal environment. Clearly, we are not in a normal environment and we expect to make additional and meaningful changes from here. Once we’ve digested and revised economic data and model this impact, we will issue updated performance targets. I’ll move on to our fourth guiding principle which is supporting our members, where we've taken a number of steps to help our borrowers. We successfully implemented a two-month payment deferral plan with borrowers applying either online or via the phone. After an initial spike, new enrollments are now leveling off. As of April 30, approximately 11% of our members had enrolled which we believe is in line with our industry. If we're spending a minute on the profile of those enrolling, it shows the positive intent for which our members are engaging. They are coming to us before they have a problem. In fact, 90% of borrowers enrolled were current on their loans at the time of enrollment and 78% of those customers have never missed a payment with us. Outside of LendingClub, 76% of these enrolled borrowers have not missed a payment on any of their obligations in the last two years. The profile of our customer base and our experience in past natural disasters suggests that offering borrowers flexibility during tough times enables a significantly higher percentage of affected borrowers to avoid default. One additional observation I'll share is that borrowers not on payment deferral plans are performing well, and we are not seeing any degradation in delinquencies or lower rates there. Another critical aspect of supporting our members is operational readiness, which is flexing our operations infrastructure to meet demand. We do have the ability to virtually train and onboard LendingClub employees, and that's allowed us to maintain our service level and to be there for our borrowers. As of today, our collections team is staffed at roughly 30% increase to where we were in Q1, and we have the ability to flex in with an additional 30% if needed. We are currently developing a range of new borrower hardship options to enable further extensions, partial payment and eventual graduation back to the normal payment schedule. All of this is designed to engage our members with flexible options that support them in their time of need and help them maximize their payment success over the long term. Lastly, we continue to work towards the completion of our acquisition of Radius. We continue to believe that a bank charter will enhance the resiliency of our business and allow us to better serve our members. We remain in close contact with our regulators as we prepare for the acquisition, which we believe is on track to complete in roughly a year. We will not be providing substantial additional details today beyond saying that we do believe we have sufficient capital to both acquire and capitalize the bank. So I'll turn it over to Tom now before returning with some closing comments.

Tom Casey, CFO

Thank you, Scott. I will briefly discuss our Q1 results, provide further detail about the actions we took to mitigate the impact of the weaker economy on our business, and discuss our liquidity and why we believe we can navigate through the current environment. For the first quarter, we reported a GAAP net loss of $1.10 per common share and adjusted net loss of $0.44 per share. The net loss per share reflects a nonrecurring deemed dividend payment of $50 million to Shanda for their previously announced exchange of common stock into non-voting preferred shares. The quarter results reflect a $4 million decrease in revenue driven by a significant fair value mark on loans and securities, partly offset by a decrease in prepayment reserves and an increase in the fair value of our servicing asset. Let me break this down for you into the mark and loans and the impact from prepayments. As a reminder, the net fair value adjustment reflects the marks on loans and securities related to loans on our balance sheet to which LendingClub has exposure. At the end of the first quarter, loans held for sale and securities available for sale, for which we had exposure, had a fair value of approximately $825 million. I point you to page 6 of our earnings presentation, so you can see the details. In the first quarter, we recognized a fair value mark-to-market of $123 million. Of this mark, $102 million was recognized through the quarterly P&L. The remaining $21 million represents fair value marks related to liquidity on our available for sale securities and was recorded in other comprehensive income on the balance sheet. With the marks recorded in Q1, the loans and securities reflect a carrying value of approximately $0.87 on the dollar. For reference, our loans held for sale are typically marked between $0.95 to $1 on the dollar. We typically turn the portfolio quickly with the sale of club certificates or ABS transactions, so for the quarter, we marked down the value of our loans and securities by approximately 10 points, reflecting higher credit costs and lower levels of liquidity. We estimated fair value for these assets using our internal loan valuation models that incorporated Moody's April 13 baseline unemployment assumption, as well as observable ABS trade inputs for similar loans where available. We estimate that higher credit losses and the increase in liquidity premiums due to COVID-19 represent approximately $64 million of the $102 million fair value markdown for the quarter. With unemployment spiking and the cost of credit increasing significantly, we also observed a reduction in prepayment fees. The reduction in prepayment fees caused an increase in the estimated cash flows from our servicing asset; this resulted in a $7 million increase in the fair value of our servicing asset and was reflected as an increase in our investor fees for the quarter. In addition to this adjustment, the prepayment reserve on our balance sheet represents the liability we hold for any required reimbursement of origination fees on early loan prepayments. As a result, this lower prepayment fee reduced our reserve by $14 million. This is reflected in the quarter’s financials as an increase in our transaction fees. To summarize, we took a $64 million COVID-19 related fair adjustment on loans, partially offset by the $21 million in other impacted asset and liabilities I mentioned related to prepayments for a net effect of $43 million on pretax income for the quarter. Loan origination volumes decreased 18% sequentially and 8% year-over-year to $2.5 billion in the first quarter. As we proactively reduced marketing and tightened underwriting quickly to reduce origination volumes in anticipation of a more challenging environment. Due to the loan investors facing significant challenges including market calls, redemption requests and difficulty accessing capital markets, we are also seeing reduced demand for bank investors who are dealing with substantially increased loss provisions and are trying to mitigate their own credit loss exposure. Retail investors also pulled back in Q1 but are likely to increase as a percentage of total originations as we see banks and other institutions pull back. As of now, we expect Q2 loan origination volumes to be down about 90% from what we saw in the first quarter. With additional clarity around the trajectory of the economy and eventual stabilization of unemployment rates, we expect liquidity to improve and investor demand to recover. To respond to the sudden decrease in investor demand and the expectation of higher unemployment rates, we quickly tightened underwriting standards, and our only focus is on facilitating lower originations to match current available funding. We curtailed loan originations for higher risk borrowers and are primarily facilitating loans within our 3 million strong club member base as we know these customers very well. We've also implemented stricter employment and income verification requirements for our applicants. We also reduced expenses as the environment deteriorated. Fortunately, we were able to benefit from having a flexible cost base. Historically, about 40% to 50% of our cost base consisted of variable costs. This flexibility has allowed us to reduce variable expenses quickly as the origination levels decreased. For example, we eliminated third-party paid marketing channels and are only focused on utilizing unpaid marketing channels. These actions and others will allow us to reduce our quarterly run rate of marketing and origination expenses by $50 million when compared to the fourth quarter of 2019. As Scott shared with you earlier, we embarked on a simple allocation program last year to reduce our fixed cost base, expand our margins and better position us for potential downturn. We relocated our entire servicing operations to Lehigh in Utah from San Francisco; this also made our cost base more variable by increasing business process outsourcing and technology outsourcing. Additionally, we leveraged our scale and completed a vendor consolidation program last year to reduce our expense base. Last month, to further reduce our cost base, we underwent a significant restructuring which impacted 30% of our employee base. As Scott mentioned, this was an extremely painful but necessary step given the uncertainty about the economic outlook. As previously announced, we expect to record a restructuring charge of approximately $10 million in 2020, most of it primarily coming in the second quarter. The impacted areas were primarily those focused on growth opportunities and new business initiatives where we are less focused at this time given the economic outlook. We expect the restructuring to generate quarterly cost savings of approximately $20 million. So combined with our reduction in variable costs, we will reduce the quarterly run rate of our total expenses by approximately $70 million or nearly 50% when compared to the fourth quarter of 2019. Now let me turn to liquidity and how we are managing through this downturn. Over the last several years, the management team and the board have implemented a rigorous risk management process and have maintained prudent liability levels in anticipation of an eventual downturn. Because of this philosophy, we drew down $50 million of our revolver in early March, allowing us to enter this crisis with a balance sheet that positioned us to weather an extended market dislocation. Again, as you see on page 6 of our investor presentation, we have approximately $550 million of estimated net liquidity even after accounting for our loans at fair value. Given the uncertainty around the economy’s expected recovery, we have conservatively prepared for a prolonged economic downturn. With our lower expense run rate, we believe we have enough liquidity through the end of 2021 in a variety of stress scenarios. We stressed tested our liquidity through a range of moderate to severe stress assumptions on both funding and revenue. As you can see on our investor presentation on page 22, our loans servicing portfolio of $16 billion generated over $50 million in cash in the first quarter and we expect to generate additional cash from our loans and security down the balance sheet. In the most extreme scenario, even if we reduce origination levels to zero, we still expect that the cash generated by our servicing portfolio combined with the cash flows from our loan and securities portfolio will enable us to cover our normal operating costs. These cash flows combined with our strong net liquidity today gives us a significant amount of runway to weather the current environment, especially considering that we are not planning to use significant amounts of our liquidity to originate loans. I also want to add that we believe that under a range of scenarios with conservative assumptions, we still have adequate capital and liquidity to navigate through the current environment and complete the acquisition of Radius. Given the challenging environment and the economic uncertainty in the near term, we withdrew our guidance in March. We will remain focused on truly managing liquidity, capital expenses and are working closely with regulators as we prepare for the acquisition of Radius Bank. We believe that the actions we have taken have increased our resiliency and will allow us to successfully navigate the current environment. With that, let me turn it back to Scott to provide some additional thoughts.

Scott Sanborn, CEO

All right. Thanks, Tom. So clearly these are challenging and uncertain times. There is no current consensus on the path that the virus will take nor the speed of the recovery that we can anticipate. However, we believe the actions we've taken position LendingClub to navigate a variety of scenarios and to be prepared to take advantage of opportunities when it arises. We are the leading player in our space with an experienced team, significant technological and data advantages, and the ability to rapidly test, learn and evolve. The asset class we have helped build over the last 13 years will continue to be attractive because it not only solves a real problem for borrowers; it also generates competitive risk-adjusted returns for investors. This asset class saw significant growth coming out of the last downturn, and we expect to see strong growth again as the unemployment rate levels off, borrowers graduate from their hardship plan and liquidity returns to the capital markets. For LendingClub, the difference between the last downturn and this one is the foundation we've built, including our base of 3 million members and our ecosystem of investors who are telling us they do plan to reengage more fully when the situation stabilizes. We will be ready. On behalf of the management team and our board, I'd like to take a minute to thank LendingClub employees who've been working tirelessly to support our members, our investors, and each other. No one enjoys 10 hours of Zoom calls a day, and our people have demonstrated time and time again their extraordinary resilience and the ability to grow and adapt to change. For that, I am both enormously proud and deeply grateful. With their commitment and the steps we've taken, I am confident that we are well positioned to weather the current adversity and take advantage of new opportunities. So, now I will turn it over to Sameer and open up the call for questions.

Sameer Gokhale, Investor Relations

Thank you, Scott. Before we open it up for questions, as a courtesy to others, we ask that you limit yourself to one question and a follow-up and return to the queue if you have additional questions. Andrea, please open the call up for Q&A.

Operator, Operator

We will now start the question-and-answer session. Our first question will come from Henry Coffey of Wedbush. Please go ahead.

Henry Coffey, Analyst

Yes. Good morning – good afternoon, everyone. I've seen LendingClub coming out of a tough economy and the kind of growth opportunities it created, and they were pretty spectacular. Having remembered all that, as you look forward, is it time to change the strategy? Is it time to think instead of LendingClub acquiring a bank and positioning itself as a source of strength to the bank? Is it time for a bank to be acquiring LendingClub and maybe LendingClub thinking of themselves as a product, a source of product for the institution once we get on the other side of the current crisis?

Tom Casey, CFO

Henry, this is Tom. I think that we feel good about where we are. We’re well positioned, I think, everyone in the financial services industry is feeling this pain at different levels of their portfolios. I think we are obviously managing what we can control in this environment and feel good about our liquidity and our capital to weather the storm. Keep in mind we have a significant amount of capital to be able to emerge with Radius and fully diversify our strategy, which includes a much deeper online relationship that includes broader banking products and a diversified portfolio. So we feel good about where we are, and I think the current environment only strengthens our resolve to acquire Radius and diversify our risk profile, our revenue profile, and capital deployment. So we're on track for that, and while this is a challenging environment, we feel good about our regulatory relationships.

Scott Sanborn, CEO

I’ll just add on that, Henry, that to me the current environment in a way really validates and confirms for us the path that we've been on over the last 18 months or so and a lot of the changes that we've been making. And in terms of what the other side looks like, I certainly agree with your question of evaluating what opportunities will look like as a broad statement; I think is the right way of thinking about it. At this point, it's too soon to say how consumer behavior is going to change and what the implications of that will be, but it is certain that it will create new opportunities. We do feel that in addition to that, our core product offering that we have today will continue to be compelling and interesting because as we come out of this, the opportunity for people to save money will be more valuable than ever.

Henry Coffey, Analyst

What has the dialogue been like with your regulators, say, in the last three or four weeks, if you're free to comment on any of that?

Scott Sanborn, CEO

Yeah. I mean, obviously, those conversations are privileged. All I'll say is they've been – continue to be extremely productive. We are highly, highly engaged, and the process is moving forward. We as a company have been preparing both for positioning ourselves within the directly regulated frame, as well as preparing ourselves for a downturn by implementing liquidity management tools and processes and setting ourselves up to access what we need. So that has helped make the conversations constructive.

Henry Coffey, Analyst

Great. Unusual period and we'll leave it at that. So thank you for answering my question.

Scott Sanborn, CEO

Couldn’t agree more.

Operator, Operator

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

Jed Kelly, Analyst

Hey. Great. Thanks for taking my question. I guess first for you, Tom. Can you just lay out how you think this current recession plays out – I know it's tough – compares to the financial crisis and sort of what you see happening and what changes and challenges might lie ahead?

Tom Casey, CFO

Sure. I think, first of all, it’s very different than the 2008 crisis. That crisis was mostly focused on real estate and valuations and leverage. This one is very, very different in that obviously a pandemic is affecting so many industries. The government has implemented programs at lightning speed. Keep in mind that consumers didn't receive much relief until probably in May of 2009, coming out of the last crisis. The tools that are at the Fed's disposal have been used extensively.

Scott Sanborn, CEO

Also, the health of the consumer balance sheet going into that is also better.

Tom Casey, CFO

So I think it’s very, very different. I think in that regard we don't fully appreciate the impact of the stimulus on consumer behavior. The big thing will be the speed at which we get the economy back on track. We are using some pretty difficult environment assumptions to weather – and do our modeling to weather the storm. We do not expect a quick big recovery. We expect this to take a few quarters as the capital markets stabilize, unemployment levels off, and we have a better view of where the economy is going. That allows us to re-gauge and start expanding our offerings with pricing in that market. We are trying to be prudent. We obviously are prepared. The expense initiatives we had retained a lot of capabilities, and so we have quite a bit of capability to recover quickly if we see the market expanding quickly. But we would expect the rest of 2020 to be more challenging.

Jed Kelly, Analyst

And then...

Scott Sanborn, CEO

Just one other – sorry, Jed, just one other note I’d add on what’s different is not only the government response in this case but the response from the financial institutions. The offering of hardship plans pretty universally across all categories of consumer credit is providing a bit of a bridge through this kind of lockdown period, which we do think will be helpful for consumers, but it sets up that question of when does the lockdown period end, and what does the new normal look like, which I think is where you see the very wide range of potential outcomes, made all the more complex by what does the virus decide to do in that environment.

Jed Kelly, Analyst

And then on your stress test, did you provide a monthly cash outflow and currently what you're assuming? And then, any update on the FTC lawsuit?

Scott Sanborn, CEO

So, Jed, just a couple of comments. The way to think about this is, we have a unique asset in the servicing asset, which throws off more cash than it does revenue. We put that in the back section to show you on page 22, so you can see that our servicing asset was up about $50 million alone. That’s a pretty significant amount. Then the $800 million of loans, either in loan form or in our securities portfolio, throws off an additional approximately $25 million to $35 million per quarter, so you have significant cash inflows and that’s not even including any origination fees based on our volumes. So, that covers our OpEx expenses somewhere in the call at, circa $60 million, $65 million. You can see that we’re net positive just on a cash revenue, cash expenses. It’s hard to get all that from the – based on the income statement because of the accounting convention, but that’s the ballpark that we see for the next few quarters. With regard to the FTC, obviously, we’re in the process of waiting for our court date to go through that. We don't have any other updates at this time. It's very likely that court date gets pushed out, given the shutdowns, some of the civil cases that are happening.

Tom Casey, CFO

The courts are closed right now, so…

Scott Sanborn, CEO

Yeah. So, stay tuned on that. We don't really have much else to update you on.

Jed Kelly, Analyst

All right. Thank you.

Operator, Operator

Our next question will come from Eric Wasserstrom of UBS. Please go ahead.

Eric Wasserstrom, Analyst

Good. Thank you. Tom, can you hear me okay?

Scott Sanborn, CEO

Yes. A little muffled. But I think we'll be able to get it.

Eric Wasserstrom, Analyst

All right. Thanks, guys. So, first, I just want to preface my comments by saying my hat's really off to you and Tom and the entirety of the LendingClub team in terms of dealing with what is obviously an unprecedented and in many ways unimaginable circumstance. I have two questions related really to just the origination forecast. In the absence of anything else, if you would simply tighten your underwriting standards to the current level, what would have been the impact of that on originations in isolation? Can you give us a sense of that figure?

Scott Sanborn, CEO

Yeah. So I think let me just make sure I understand your question is, hey, is the reduction in volume just due to investor funding or is it due to credit? The answer is it is both. However, we could reframe what are we doing. We're focusing on our existing members. Within the existing member base, we're focused on – we've got tightened front-end boxes as well as tightened verifications. We could do significantly above where we are today, call it, I don't know, instead of being down 90%, maybe down 60% to 70% within the same box. Roughly, I'm doing that math quick in my head but that's where we could be. But as we mentioned, the issue right now for investors is there's just a lot of dust in the air for them too. What's happening across their portfolios, redemption requirements, valuation issues, liquidity issues, capital issues, and just a question of how do you prudently underwrite in a world where unemployment claims are going up by many multiples of historic records so that's why – and we think once – ideally this lockdown ends we start to get back to work and we see if it can be sustained that – we do believe that that’s invested. Again, investors are staying quite engaged with us and they are expressing interest to return. They just need to sort out their own issues before they're ready to do that.

Tom Casey, CFO

Yeah. Eric, one of the things that may be helpful is just to give everyone kind of a quick primer on how this works, right? So, clearly, unemployment is escalating, spiking even, and so as a result losses are going up but there are also some important features of this product. Scott mentioned, I want to emphasize it, a short duration which really means that investors are getting back their principle very, very quickly in these loans. So a loan that was originated just in the fourth quarter of 2019, almost half of that principal is back already so their next exposure drops dramatically. In addition, in certain products, the prepayment fees that I mentioned are slowing down. Prepayment fees are an important factor in understanding return on these vintages. As prepayments slow, the good loans are staying longer and therefore are able to offset some of the losses. We are spending a lot of time with our investors to make sure they understand the implications of these factors on their portfolios and the risk associated with it. We hope we're doing that as fast as possible, so that they understand how we're thinking about the risks and the sensitivities associated with it. I want to share that with everyone.

Eric Wasserstrom, Analyst

Thank you for the time. Just my one follow-up is – and I'm looking here at page 17 for reference, but as I recall from sort of the last crisis-like event at LendingClub, which was back, I think, in May 2015, of the platform investors, the managed accounts and the self-directed accounts, which are today a much smaller proportion of the total proved to be very resilient through that event. I'm wondering what it is, in your view, that may be causing their behavior to be a little bit different this time around?

Scott Sanborn, CEO

Yeah. Very, very different environment. When you think about the 2016 event, that was a compliance issue, and so the ability for banks to do their due diligence, come back again on the platform did take some time. The other funding sources were resilient as we intended them to stay on the platform and continue to purchase. They were more quickly able to get their arms around the issues. We do expect capital formation to come in different ways. It’s very possible that that becomes a new and larger piece of our business going forward. We'll have to see how this emerges but it’s a difficult crisis of credit, new capital formulated and looking for outside returns and we would expect a similar rotation and profile over the next few months.

Eric Wasserstrom, Analyst

Okay. Thanks very much.

Operator, Operator

Our next question comes from Steven Wald of Morgan Stanley. Please go ahead.

Steven Wald, Analyst

Yeah. Good evening. Just maybe just start out. Appreciate you guys trying to give as much color as you can in what is a very unfamiliar and tough visibility environment. So, thank you for that. I just wanted to follow up on something that Eric was talking about the sort of what drives the right the investor side versus the borrower side and maybe we can talk about both of those quickly. First on the sort of the down 90% on the investor side. We’ve seen some banks this quarter talk about maybe reducing appetite over time for third-party platforms in general. So maybe if you could talk about some of the conversations longer term or if you're even able to have those conversations right now with some of your investor partners or is it sort of like a – we want to come back but we'll see how the ones perform type conversation.

Scott Sanborn, CEO

We are in constant contact with our investors and a reminder that a huge chunk of these investors are in the business of investing in our loans and the loans of some of the broader ecosystem. We are in constant and regular contact with them. The issues each of those different investor types are facing are also different, right? Some of the banks are right now activating their contingency plans, preserving capital, focused on their portfolio and PPP loans that they're trying to serve to preserve their lending and their customer base, whereas let's say some of the asset managers are dealing with warehouse line issues and capital issues. So, the issues are there. And also, by the way, to the extent they’re investing in us and multiple other players, certain asset classes are more exposed than others. Obviously, small business lending is right now in the eye of the storm. So there's lots of different issues there but what we can say is we are very engaged with all of them. People are telling us that they do anticipate returning to the platform and different investors need to see different things in order to time that. Many of those things are macroeconomic things, things specific to their own business, and then things that we can control. We are focusing on the things that we can control which is really demonstrating our excellence in servicing and we feel really good about the team we have there. We feel good about the strategy and the systems we've got in place, and then focusing on a compelling new go-to market strategy which we believe we also have. So that's really our focus to get that going. In the interim, we're focusing on our existing members who we know have demonstrated better loss history.

Steven Wald, Analyst

And then on the borrower's side, just hoping you could talk through how your model thinks about things like adverse credit migration. Obviously, credit scores are lagging, and your models are going to say something different than what those are saying. But as you tighten the box how you think about that and maybe just if you could touch on that 11% hardship piece. What's driving that? Is that just job loss or does it not even take job loss for someone to end up needing that kind of assistance?

Scott Sanborn, CEO

Well, I don't know if I said this in the prepared remarks but we actually saw it precede the unemployment spikes. So these were people coming to us in advance of the issues actually manifesting in terms of reported unemployment claims. We can see as of a few weeks ago when LendingClub was at roughly an 8%-ish enrollment in hardship programs, some of the key mortgage originators were at 6.5% or so. We're seeing it in all categories. The student loans are significantly higher than personal loans, but we're seeing it across all categories. Our customers have told us through research that the majority of them anticipate that they will need four months or less of bridge because they are anticipating that they will be rehired. This Skip-a-Pay is meant to just be a bridge between a loss of income and the resumption of income, and how this performs will depend on both our ability to get them on to some kind of resumed payment plans combined with how the overall economy recovers.

Tom Casey, CFO

We are spending a lot of time with our investors to make sure they understand the implications of these factors on their portfolios and the risk associated with it. Obviously, this event forces us to quickly respond to the inquiries from our investors.

Eric Wasserstrom, Analyst

Scott Sanborn, CEO

Yeah. Very, very different environment. When you think about the 2016 event that was a compliance issue, and so the ability for banks to do their due diligence, come back again on the platform did take some time, but we do expect capital formation to come in different ways. It’s very possible that that becomes a new and larger piece of our business going forward. We'll have to see how this emerges, but this is a difficult crisis of credit, new capital formulated and looking for outside returns, and we would expect a similar rotation and profile over the next few months.

Operator, Operator

Our next question comes from Steven Kwok of KBW. Please go ahead.

Steven Kwok, Analyst

Hi. Thanks for taking my questions and hope everyone is doing well. My first question is just around the liquidity position. Thanks for giving us the disclosures around that. Just as I look at slide 7, there seems to be some maturity at the end of the year and middle of next year. I was just wondering, like, how do you think about the liquidity as we progress and if things were to remain the same given that some of these are up for renewal? Is it possible to have these renewed under this current environment, and then also are your counterparties demanding more collateral from some of these warehouse lines and everything?

Scott Sanborn, CEO

Yeah. So let me be really, really clear. In my prepared remarks, both Scott and I mentioned, in the most stressed scenario, we just assume everything matures. Everything has to be – all the terms and conditions need to be – require us to pay down as appropriate on the contract. That’s the assumption that is kind of the worst-case scenario, and we’re still fine. Your specific question about managing the liquidity, one of the things I want to make sure you understand is we've got a good prudent profile in this. Some of these warehouse lines are collateralized by loans. There is no change in advance rates that would require us to put additional collateral in. They do have some terms and conditions that are looking at delinquencies or age, but we factor all those into our assumptions. How we'll manage this obviously is proactively; just like we've gotten here, either terming out certain financing, renegotiating certain terms, but we're not in a distressed situation here at all. We actually feel pretty good about our ability to manage through this even with the short-dated maturities that are coming at us. So keep in mind that the number I gave you, over $300 million in cash, $550 million of estimated net liquidity, allows us to weather this storm. This gives us a lot of flexibility to either finance ourselves through these lines or other lines or if not available to allow them to go into either run-off or otherwise. Keep in mind that the revolver is really the one that's coming due; we've also assumed the repo that has the evergreen. Keeping in mind when we do risk management, liquidity risk management, we just assume that all of this is subject to the terms and conditions of the contract. So we've stretched it pretty hard and still feel very good about our profile.

Steven Kwok, Analyst

Right. Thanks. Thanks for the insight. My follow-up question is just around prepayment rates. Have you guys seen a pickup in prepayment rates as consumers have gotten their stimulus checks and everything?

Scott Sanborn, CEO

Yeah. We did see a bump, a small bump when those checks came in, especially with consumers on the lower income side. We did notice that. But overall prepayments are down quite materially. But we did see the effect of the stimulus checks arriving.

Steven Kwok, Analyst

Great. Thanks for taking my questions.

Operator, Operator

Our next question comes from Bill Ryan of Compass Point. Please go ahead.

Bill Ryan, Analyst

Good afternoon, and thanks for taking my questions. A couple of quick things first, kind of people are hitting on the issue of just the amortization of the portfolio and you talked about a $15 billion servicing portfolio. I was looking back at my model. It amortizes pretty rapidly over the course of the year, but I know there are a lot of extenuating factors right now with the forbearances and slower pay-downs. The first question is how should we think about the rate of amortization of the $16 billion servicing portfolio that you have presently? And the second one is just a clarification issue; you talked about the $70 million of expense savings, and I think you said it's 50% of the expenses. Was that 50% of the cash expenses?

Scott Sanborn, CEO

I'll take the first one. You take the second one.

Tom Casey, CFO

Sure. Okay.

Scott Sanborn, CEO

So, on the portfolio, again not our plan, but just to show an extreme stress scenario. If we were to not originate for the remainder of 2020, we would expect to still have about $10 billion outstanding as we exit the year. Roughly half the portfolio would run off by the end of Q1 next year.

Bill Ryan, Analyst

Okay.

Scott Sanborn, CEO

On the expense side, the reason I referenced Q4 2019 is that’s kind of our most normal quarter. This first quarter was kind of a hybrid due to pullback in March. But that $70 million is intended to be $70 million down from the fourth quarter expense reported numbers, not the cash numbers. They’re not that dissimilar, but for that metric I gave you was off the base of the income statement.

Operator, Operator

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

Heath Terry, Analyst

Great. Just had a question again, with the same caveat that everyone else is mentioning, the world is changing a lot. But obviously it’s a difficult operating environment, but you guys are in a much better position to weather it than a lot of your competitors are. Do you have a sense of how they’re being impacted by this, or maybe put another way, coming through this, do you have a sense of what your market share or market share gains might look like either in the current environment or what could look like on the other side as some of the other companies also trying to originate loans and also trying to acquire customers in the personal lending space or deal with this environment without the resources, without the balance sheet that you do? And then I guess somewhat related to that, as you know we also see the online advertising space negatively impacted with reports of ad pricing down 30% or so. To what level do you see yourself taking advantage of that to acquire or accelerate your customer acquisition or add more customers to the platform in place, obviously you've got the ROI targets and the credit targets that are important to you. But to what degree does cheaper advertising factor into your equation?

Scott Sanborn, CEO

Hi, Heath. While no one feels great about the current environment, we believe our position is relatively strong. We have acted more swiftly than many in the competitive landscape by drawing down our credit line and halting acquisitions proactively, even before receiving signals from our loan investors. Our current standing benefits from the scale of our company, as well as our deep analytical expertise and the tools we possess. We plan to gradually increase our originations at minimal cost, which we think will prepare us for a ramp-up. We anticipate some shifts in the market, likely resulting in fewer competitors. However, many variables, including credit and approval processes, will play a role. The Moody's forecast indicates a spike in unemployment in Q2, followed by a gradual rise, impacting our outlook as some businesses might survive the lockdown but will likely continue to struggle afterward, affecting consumers. Thus, there are many factors to consider regarding credit, pricing, and capital costs. We expect the marketing landscape to become less competitive overall, leading to decreased costs.

Tom Casey, CFO

Yeah. I would add we get a lot of questions from analysts and investors about how we would respond to a more challenging environment. I think you're getting that which is demonstrating variable cost base being able to shut them off. We don't have any branches. We're all online. There's no real estate cost overhang that we're dependent upon or big sales force. All those costs are gone. And so, we scaled down really quickly. We don't have a cash track. That's a huge just demonstration of the model. It happened in a matter of weeks. We’ve already made our adjustments to our cost base, and here we are six weeks into this, and we’re feeling pretty good about our positioning. I think as we come out of this recovery, obviously, we’re going to be well positioned with all of our data and the install base that we’ve invested in over the last 10 years. This gives us a lot of new adjacent data relationships and, frankly, contribution margin to be able to navigate what the new world may be. We’re not saying we know what the world’s going to be, but we're trying to demonstrate that we've got the capability and the flexibility to navigate whatever the environment may be without having short-term liquidity pressures that make you do things that are really value-destructive. That’s kind of the – and that will happen in the last six weeks. That’s kind of what we're trying to show today.

Operator, Operator

Our next question comes from Giuliano Bologna of BTIG. Please go ahead.

Giuliano Bologna, Analyst

Good afternoon, all. Thanks for taking my questions. It's great to see all the progress that you've been able to make around the cost-saving initiatives. I guess, digging into the servicing asset for a second, just to get a little more detail. I'm assuming that the majority of the cash flow running above revenue is because of the amortization of the capitalized servicing asset, which is running as a counter-revenue item. And then as a follow-up to that, do you know if you have the figure for the value of that asset as of the first quarter?

Tom Casey, CFO

You are correct on the amortization, Giuliano. What was your question on…

Giuliano Bologna, Analyst

What value are the servicing assets?

Tom Casey, CFO

Oh, valuation of the servicing asset itself at the end of the quarter – I know it went up $7 million but I don’t have the absolute number. My controller is going to yell at me. But it really hasn’t changed much in the first quarter, just by that servicing adjustment. It should be somewhere in the $60 million range. For an email and dollar range, I probably don't have the exact number off the top of my head, but that’s where it is.

Giuliano Bologna, Analyst

That's right. I'm actually looking at the 10-Ks. That’s $89.7 million, and so finally roughly up $7 million. So you got me to the answer in a roundabout way.

Tom Casey, CFO

Okay. All right.

Giuliano Bologna, Analyst

Thanks. I guess as a follow-up to that is you've given us a little bit of trajectory around the roll-off and the persistency of the servicing asset in your loans. Would it be fair to think of it because you're saying that you – you should effectively be cash flow neutral with the cash flows in the servicing asset, that incremental revenue and rental contribution from originations and fees would put you in cash flow positive territory in the near term?

Tom Casey, CFO

Actually, in the near term we actually are cash flow positive. Once we get to the expenses out fully beneficial 3Qs and 3Q, 4Q without a lot of originations. We're still cash flow positive. As we get to 2021, that starts to turn slightly but not materially. I point to just the amount of cash we have. Plenty of cash to hand either one, but one to try to give you some idea of how we sized our expense reductions efforts is to not have them be a burden for us for, at least, for the rest of 2020. Even as we get into early 2021, they're not material until later in 2021. Keep in mind that beyond when we do the Radius transaction, just like the servicing asset, we also have principal payment – pay-down as well. Just like the servicing asset runs down, these assets run down as well, and so we also get the principal and interest. And then in the warehouse line advance and so that also comes back to us as well.

Giuliano Bologna, Analyst

That is very great. Well, I really appreciate the help, and I will jump back in the queue. Thank you very much.

Tom Casey, CFO

Thank you.

Sameer Gokhale, Investor Relations

Okay. No more questions.

Scott Sanborn, CEO

We'll call it a wrap. Thank you, everybody. We look forward to connecting with you all one-on-one offline.

Sameer Gokhale, Investor Relations

Thanks.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.