Earnings Call Transcript - LC Q2 2020

Operator, Operator

Good afternoon and welcome to LendingClub's second 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. Please go ahead.

Sameer Gokhale, Moderator

Thank you and good afternoon. Welcome everyone to LendingClub's second quarter 2020 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO and Tom Casey, CFO. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include but are not limited to the impact of COVID-19, our ability to navigate the current economic environment, the timing and benefits of our pending acquisition of Radius, platform volume 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 forms 10-K and 10-Q each as 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 statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. Also, during this call, we will present and discuss both GAAP and non-GAAP financial measures. A description of non-GAAP measures and reconciliation to GAAP measures are included in today's earnings press release and related slide presentation. The press release and accompanying presentation are available through the Investor Relations section of our website at ir.lendingclub.com. And now, I would like to turn the call over to Scott. Scott?

Scott Sanborn, CEO

Thank you Sameer and thank you everyone for joining us. I hope everyone is staying healthy. Earlier today, we reported our financial results for the second quarter, which were primarily driven by the significant decline in origination volume that we had anticipated. While it is clearly a challenging and uncertain environment, we are successfully managing our liquidity. We feel good about how we have positioned the company to ride this out. But we do believe that Q2 represents the trough in terms of loan investor demand and our reported financial results. Furthermore, we believe that this recession is allowing us to demonstrate the resilience of our asset class, the depth of our membership base and the strength of our digital underwriting and servicing capabilities. While there is certainly a long road ahead, as Q3 gets underway we are seeing the early signs of green shoots with recent sales of multiple loan portfolios at or above their carrying value and five of our Top 10 investors now back on the platform purchasing new issuance, albeit modest levels. With a gradual resumption of investor activity and our restructuring and associated costs behind us, we are appropriately sized to preserve our cash while maintaining the capacity to rebound when it appears prudent to do so. We believe we have positioned ourselves well to navigate an extended period of uncertainty until we close the bank acquisition. Once the acquisition of Radius is complete, we will become a leading digital bank with a demonstrated track record of effective underwriting through a steep downturn and have a clean balance sheet to assist in our recovery. Okay. So before I dive into the details on the quarter, I want to take a step back and talk about the economic environment, which is obviously unsettled. Unemployment rates remain high. States are pausing and even reversing their plans for reopening. And the level and timing of future government stimulus is still to be determined. Having said that, there are some factors that have helped mitigate the virus' economic impact on U.S. consumers. First, versus 2008 consumer balance sheets were relatively strong coming into this downturn with lower debt levels in relation to their assets. Second, the size and speed of government stimulus is unprecedented and has helped them weather this difficult environment. And third, consumers seem to be behaving prudently, reducing spending, accumulating savings and working hard to stay on track with their bills. Against this backdrop, I shared in May how we are directing our activities according to five guiding principles as we stabilize the business to address the effects of Coronavirus. These same principles remain in place as we transition out of defense mode, begin the recovery and make progress towards our top priority of becoming the first U.S. fintech to acquire a bank. Since the beginning of the pandemic, our number one priority has been to keep our employees safe. They have remained safe, I am pleased to say, as well as engaged and productive and delivering for our customers. Given how well it's working and the continued uncertainty around school openings, childcare availability and the path of the virus, we have told all employees that they will be able to work remotely through at least the end of this year. Our second priority is to deliver investor returns. We know the market has been questioning the ability of the personal loan asset to hold up in a recession. And we now believe we are in a position to begin to answer that question positively. Overall, we expect that our most recent pre-COVID vintages, like those that will be most impacted by the virus economy, will deliver a return of roughly 3%. While that's below our pre-COVID expectations, we are pleased with this result and it supports our view that consumers value their relationship with LendingClub and are prioritizing their loan payments accordingly. These estimates of performance are based on what we are seeing in the portfolio, including the trajectory of LC members on payment deferral plans. I will point you to slide nine on the investor presentation where the good news is, you can see from our peak in May, the number of loans deferring payments has dropped from 12%, down to 5%. Two-thirds of borrowers coming off deferral plans are now paying in full. For the minority of borrowers who have indicated ongoing hardship, most are now choosing to make partial payments or an interest-only plan we introduced in Q2. So we see this as an encouraging sign, both for borrowers who are taking steps to stay on track as well as investors who are receiving these payments. Also, as the second graph on slide nine of the investor presentation indicates, for the vast majority of our members who are not enrolled in any hardship programs, they are performing even better than they were pre-COVID. This is an encouraging current read on performance for our servicing portfolio. Regarding new loans, new originations are significantly different from Q1. Higher income, higher FICO, lower payment to income ratios and importantly, our new loans are heavily focused on our existing three million members, those who have demonstrated successful past payment history with LendingClub. This is because loans to existing members have exhibited significantly lower losses than loans for new members with similar credit profiles and they also come at a much lower cost of acquisition. Our ability to leverage this data and these relationships is a key competitive asset for LendingClub and will help us deliver our target of 5% IRRs for investors. The returns that we are expecting to deliver are slowly bringing investors back to the platform, albeit at a reduced volume with the first ones to return being those with their own strong views on credit. We expect all of our investors to be closely watching the performance of new vintages to our higher-quality member base manifest over the next few months and we anticipate that this future book will provide attractive risk-adjusted returns for a broad range of investors, including for LendingClub as we become a bank and buy loans on the same basis as our current platform investors. Beyond personal loans, the auto loans continue to surpass yield and loss expectations of investors despite the economic environment and our patient finance business is recovering very well. Origination volume there is now getting close to pre-COVID levels. That's it for delivering investor returns. I am going to move on to our third priority, which was preserving liquidity. Tom will talk in more detail about this, but I will say is that now that we resized our expense base, we are well-positioned here. Our current focus is on increasing our strong cash position to maximize flexibility and prepare for the acquisition and capitalization of the bank. Accordingly, we have taken steps to convert loans on our balance sheet to cash with sales of $100 million in June with more balance sheet sales to come this quarter, Q3, to prepare us for our next priority, which is staying on track for Radius. Our team is working hard towards becoming a bank. Not too much to add today beyond saying that I want to thank the regulators for working with us so collaboratively and effectively even as we have all moved to this virtual environment. I am more excited than ever about this transformative acquisition. Today's environment is a stark reminder of the benefits of access to stable deposit funding. In addition to the funding, the attractive financial economics, the resiliency and the regulatory clarity that the acquisition will provide will also enable us to create a category defining experience for our members and help them achieve financial success. So that brings me to our final priority, which is to support our members. During this crisis, we have remained focused on helping members navigate this difficult period, no matter where they are in their financial journeys. We recently rolled out multiple ways to help those most affected, including new hardship plans, new ways to pay through self-service options on the web and by phone and many other innovations. We also launched our new member center in May, which provides a variety of tools and resources to help members manage their finances more effectively. Approximately half a million members visit this member center every month and this speaks to how much our members want to repay their loans as well as their overall engagements with LendingClub. I will note that while personal loans have become more mainstream since the last recession, there are still some lessons to take from 2008. TransUnion released a study last week showing that personal loan repayments performed as well as credit cards during the great recession and our internal data for the current crisis supports this assertion. Our payment rates reflect the ability of our team and our platform to adapt to a rapidly changing environment and support our borrowers. I have listened in on many member calls, those looking for help, to stay current on their payments, and it's been extremely gratifying to hear how our lending care call center associates were able to support and reassure our members and provide a range of payment solutions. Tough times are when brands build the strongest relationships with their customers and we believe our work to help our members during this time will pay dividends when we can offer them an even broader array of products after we become a bank. I speak for the whole company when I say that we can't wait to bring this reimagined banking experience to life for our members. Okay. With that, I would like to hand it over to Tom.

Tom Casey, CFO

Thank you Scott. Before I get into the details for the quarter, I would like to provide a high level view. Results for the quarter largely reflected the impact of significantly lower origination volumes, which we had anticipated. This contrasts with our first quarter results where origination volumes were closer to our historical levels but reflected significant fair value marks on our loans and securities as the economic outlook deteriorated and credit spreads widened. During the second quarter, we opportunistically sold loans from our balance sheet indicating some improvement in the market compared to Q1. Our origination volumes have come off the bottom with July volumes doubling from a low point in May as investors have managed through their liquidity issues and seeing the recent performance of LendingClub loans. As Scott mentioned earlier, we have prioritized generating higher levels of liquidity and intend to capitalize Radius Bank with cash. Our estimated net liquidity position remains strong at $554 million and increased slightly from Q1. Our expenses also decreased significantly as we took decisive action during the quarter to better align our expenses with revenue. Looking ahead, with strong levels of liquidity, high levels of cash and significantly reduced cash expenses, we believe we are well-positioned to successfully navigate through this challenging environment and acquire and capitalize Radius Bank. Let's turn to the financials. For Q2, we reported a GAAP net loss of $0.87 per common share and adjusted net loss of $0.60 per share. The quarter's results primarily reflect a net $147 million decrease in revenue compared to the second quarter of 2019, offset partly by an $86 million reduction in expenses. The reduction in revenue was primarily the result of a decline in transaction fees as originations decreased by 90%, in line with our call last quarter. Transaction fees decreased to $4 million from $152 million in the second quarter of 2019 as origination volumes decreased to $326 million from $3.1 billion in the quarter a year ago. While loan origination volumes were down in line with our expectations, we are seeing some recovery in our Q3 trajectory of volume between $500 million to $600 million. Last quarter, I shared with you that loan prepayment rates significantly decreased as consumers conserved cash and we saw an increase in consumers seeking hardship plans. In the second quarter, we saw a rapid recovery in the prepayment rates back to pre-COVID levels indicating borrowers have resumed their historical personal loan payment patterns. For the quarter, the recovery in prepayment rates had two impacts. One, we issued a pro-rata refund of the transaction fee for borrowers who prepaid their loan balances early and hold the reserve based on prepayment estimates. So when prepayment speeds go up, we increase our reserve liability. Two, prepayment fees are an input into the valuation of our servicing asset, which is derived as the present value of the future cash flows from our servicing and collection portfolio. When prepayment speeds go up, projected cash flows come down. Taken together, these two items impacted revenue for the quarter negatively by $19 million. Now let's turn to net interest income and net fair value adjustments. As I mentioned in my opening remarks, we did not see additional credit marks this quarter. Net fair value adjustments for the quarter were negative $6 million compared to negative $102 million last quarter. The negative $6 million fair value adjustment in the second quarter primarily reflected three things. First, a negative $8.5 million fair value adjustment related to the natural decline in present value of future cash flows on loans on our books offset by $22.8 million in net interest income we generated in the quarter. Second, a $6 million positive fair value adjustment related to loan sales from our balance sheet above carrying value as liquidity premiums have tightened. Third, the remaining negative $3.5 million was primarily related to the pricing discounts we have been using to incentivize our loan investors to return to the platform. Rounding out other revenue, it decreased by $2.5 million as our referral revenues declined due to lower volumes. Now let’s turn to our expenses. Our top priority to navigate this downturn has been to preserve our liquidity. One of our first initiatives was to resize our expense base to reflect lower revenues as we position ourselves for a rebound. We announced significant restructuring actions during the quarter to reduce both our fixed and variable costs. Altogether, this drove a 55% decline in our operating expenses year-over-year or a reduction of $86 million for the quarter. As a reminder, the impacted areas were primarily those focused on discretionary opportunities and new business initiatives, which we are less focused on at this time given the economic outlook. We incurred $17 million of restructuring expenses in the quarter primarily related to the reduction in our workforce. The cash impact of these expenses is reflected in our cash position at the end of the quarter. Our variable costs alone decreased by almost $69 million year-over-year primarily reflecting a reduction in paid marketing expenses and savings in our operations area. As Scott mentioned, marketing to our existing members has the dual benefits of low acquisition costs and better credit performance. Despite the rapid deterioration in the economic environment and the decline in our revenues, we were able to keep our Q2 contribution margin relatively healthy at about 49% compared to 52% a year ago. This reflects the flexibility inherent in our business model with the ability to dial back our variable expenses very quickly while our scale and installed base of over three million members still enables us to reduce volumes at very low marketing costs. This will help us maintain the efficiency of our marketing expenses even as originations went back up. Compared to the second quarter of 2019, our fixed technology and G&A expenses decreased by over $17 million as we reduced headcount and third-party spend, paused growth projects and conserved cash. In addition, our senior employees, the leadership team, and members of the Board agreed to base pay reductions of 20% to 30% in addition to a 30% reduction in our headcount we announced last quarter. These actions were painful but necessary steps to streamline our operations and appropriately align our expenses given topline headwinds in the near term. We expect our fixed expense run rate to benefit by over $20 million in Q3 compared to last year, reflecting a full quarter run rate benefit of our cost reductions. Taken altogether, these actions enabled us to resize our operating expense base with our revenue. With $554 million of estimated net liquidity, we are positioned well not only to weather the storm but also to execute against our number one strategic objective of completing the acquisition and beginning a new chapter for our business. Now let me turn for a moment to our balance sheet. Over the last four years at the company, we have focused on maintaining prudent liquidity and a strong balance sheet in case we ever face a challenging period such as the one we are operating in today. We are fortunate to have entered this environment from a position of strength and as our volumes and revenues recover, we will continue to prudently manage our balance sheet liquidity. We have been steadily increasing our cash and cash equivalent position which is up to $338 million. We have been able to do this by dramatically reducing our expense base and focusing the business on our cash flows. We have been optimistically selling loans held on our balance sheet to increase our cash position. We have been able to sell most loans above our carrying value and plan to continue with this strategy to put ourselves in the strongest possible liquidity position. As we reduce the loans held on our balance sheet, we are also reducing our debt facilities including the warehouse lines associated with those loans. We recently renegotiated one of our existing warehouse lines for more variable terms and also paid down $40 million of the $110 million revolving debt facility while growing our cash position. In July, we made several additional loans sales further increasing our cash and cash equivalent position at the end of the month. Looking ahead to the second half of 2020, I wanted to share some thoughts before I pass it back to Scott. As I said, we have been able to significantly resize our cost base to reduce cash burn and position us to maintain strong liquidity while maintaining core competencies to return to growth. We have been able to sell a significant portion of our loans held for sale at prices at or above our carrying values adding to our cash and liquidity. We continue to engage with regulators and are working hard towards the acquisition of Radius and a national bank charter. While there is still a lot of uncertainty, we have seen some early signs of recovery. Our borrowers have demonstrated resiliency and we expect to deliver positive investor returns. Monthly loan volumes have more than doubled from the recent bottom in the second quarter and five out of our Top 10 investors have resumed purchasing. Our loyal existing customer base allows us to maintain lower marketing costs while growing volumes and maintaining prudent credit standards. The borrower profiles of our new originations have improved significantly, including higher average incomes and FICO scores. If the last great recession was any indication, we firmly believe that our borrowers can continue to restructure their balance sheets by refinancing out of higher-cost credit card debt, and we expect investor demand for our loans to be strong as the economy recovers. With the acquisition of Radius and the possibilities that come with a national bank charter, we will be able to help members to a much greater extent while maintaining prudent underwriting and increasing our operating efficiency even further. With that overview of our financial results, let me turn it back over to Scott for his comments.

Scott Sanborn, CEO

Thanks, Tom. Just a couple of quick comments before we go to questions. The second quarter results were in line with our expectations. There was a significant drop in revenue driven by the drops in originations. While we remain cautious on the near-term outlook, we are seeing signs of recovery and we are pleased with how our loans are performing. We have maintained our liquidity and increased our cash position in the quarter as we prepare for the bank acquisition that will drive the next chapter of the company's growth. Lastly, on behalf of the management team and the Board, I would just like to take a minute to thank the LendingClub employees. They have been working tirelessly to support our borrowers, our investors, and each other in the face of countless hours of Zoom calls. They have demonstrated an incredible ability to adapt and evolve with purpose. I am deeply grateful for that. With this team and their commitment, I am confident that we are positioned to weather the current environment and take advantage of new opportunities when they arise. With that, I will turn it back over to you, Sameer, to open it up for Q&A.

Sameer Gokhale, Moderator

Thank you, Scott. Before we open it up to 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. Operator, please open the call up for Q&A.

Operator, Operator

Our first question is from Eric Wasserstrom from UBS. Please go ahead.

Eric Wasserstrom, Analyst

Thank you. Can you hear me okay, Tom or Scott?

Scott Sanborn, CEO

Yes.

Tom Casey, CFO

We do.

Eric Wasserstrom, Analyst

Good. Okay. Thank you. So a couple of questions please. The first is, thanks for the information on the deferrals and how that's trending. Maybe perhaps Tom, can you give us and explain that in terms of how to think about the impending loss experience and what's embedded in terms of loss experience in that 5% IRR?

Scott Sanborn, CEO

Hi, Eric, you were a little hard to hear. You broke up quite a bit. But we will give an answer that I think covers it.

Tom Casey, CFO

You can restate the question.

Scott Sanborn, CEO

Yes. I think you are asking where some of the assumptions embedded in our IRR projections, so I will start. Tom, feel free to add. The important thing to note is that our members, if you look back at what we historically issued pre-COVID, we are talking about people whose individual income is in the $90,000-plus range. The overall impact of this recession, which has been reported, is disproportionately impacting lower-income people. So overall, we feel like the borrower base we came into this, given the last two years of tightening, was in a good spot. As we look forward, we have two different pieces we are looking at. One is the performance of the back book pre-COVID and the other is the performance of the new originations. We have done top down, bottoms up, lots of ways of looking at this. We believe we have pretty conservative assumptions about overall stress on the portfolio. First if you look at hardship plans, you know what we anticipated is what we modeled after how people performed on hardship plans coming out of hurricanes. What we are seeing is that they are performing significantly better than that, with the majority of people rolling back to full payment. Even those that are expressing additional hardship are opting, most of them, for partial payments. We are not expecting those people to roll back to full payment to perform like they would have pre-COVID. We are modeling additional stress on that population because they have raised their hands and said that they are more vulnerable. The same applies to the population which is most of our book, which is borrowers who have never gone under the hardship plan. They are performing better than ever, significantly better than they were pre-COVID. You can see that in our public delinquency numbers. We did not assume that that holds. In our outlook, we are actually assuming they go back to performing like they would on average pre-COVID. We feel like we are being, obviously it's an uncertain environment, there is still a lot yet to come but we have put in some pretty conservative assumptions. The only other thing to add when I talk about that servicing portfolio, Eric, is that keep in mind how quickly this portfolio paid down. Within a year post-issuance, you got close to half of your principal back. So the longer these results hold, the more quickly we are paying down the risk and reducing the risk. That’s the back book. When you talk about new issuance, we are focused on our existing members. We know they perform better. We have additional data on them. We are doing 100% virtual verification of income and employment and have tighter credit box. If the profile looks quite good, it's still too early to say how credit is doing because you are only a few months in. That's something that we are definitely going to see; we will get a six months read come Q4, but the early data looks very, very good. But I would emphasize, it's early data.

Eric Wasserstrom, Analyst

Thank you for that. Can I just ask one follow-up, Tom, on your funding condition currently? Thanks for the update on the renewals. Is there anything outstanding like in process of being renewed or coming due in the near term with respect to your remaining warehouse or other debt facilities?

Tom Casey, CFO

No, Eric, you were garbled a little bit. But I think the question is, where are we with the warehouse lines and any additional renegotiations? As I mentioned, we did renegotiate our warehouse lines. Keep in mind, our warehouse lines are used for our structured programs. The fact that we paused them, we don't need a lot of those warehouse lines for the current loans we have. They are in warehouses and we are managing that. As Scott indicated and I did as well in my commentaries, we are selling loans from the balance sheet that are held for sale and correspondingly paying down those warehouse lines. We did modify one warehouse line in the quarter or actually in July. More importantly, we actually paid down the revolver by $40 million. So we feel very good about our liquidity profile. We are managing that over the quarter and really feel that we are in good shape. Again emphasizing that our cash burn is very low and allows us to really navigate our way through the environment.

Operator, Operator

Our next question is from Steven Wald from Morgan Stanley. Go ahead.

Steven Wald, Analyst

Great. Thanks. Can you hear me?

Scott Sanborn, CEO

Yes.

Tom Casey, CFO

Yes.

Steven Wald, Analyst

Okay. Perfect. Well, thanks for taking the questions guys and appreciate all the color you are able to provide. If we could start off on some of the comments I think you made at the end there, Scott, about where we are now relative to the end of the quarter. I think we ended the quarter sort of down in the 90% range and it sounded like it doubled off that bottom. I just wanted to make sure I understood that properly. Is that to imply we are sort of down 70% to 80% off of, let's call it, normal 2019 levels on originations?

Tom Casey, CFO

Yes. This is Tom. I indicated in my prepared remarks that we think we are on a trajectory of about $500 million to $600 million of volume for the third quarter. You are right. The lows were probably in the April, May timeframe. June was better than May and July is better yet again. We saw a nice doubling, but it was off a pretty low amount. We wanted to provide some context on where we think the quarter will be. So $500 million to $600 million is where we think it's going to come out. Again, we are managing, tightening underwriting, working with a number of, five out of our ten investors to get back to recovery mode as we navigate our way through this.

Scott Sanborn, CEO

What we are looking to do right now is just keep our finger on the pulse of the credit while we look for the returns of these new post-COVID vintages to manifest. We think, as those results come back, it will correspond with investors being able to really see what can happen, because six months of data starts to allow us to confidently put our finger on what we think the full vintage is going to perform at.

Steven Wald, Analyst

That's very helpful. Maybe if I could to squeeze in one follow-up on a separate subject. With Radius, I heard the commentary about keeping in dialogue with regulators and getting their help in terms of figuring out what is needed to close. I guess I am just curious, following up on some prior thread of comments that you guys had made about the shifting goals that you are looking to deliver around showing them the processes and risk management initiatives in place. Obviously, Tom, with all the areas you outlined of shoring up cash, I am wondering, is that generally in line with where the goalposts are from the regulators' side? As you have gone through the diligence on the Radius deal, what additional areas of investment might be required to build out a product suite to serve the deposit side of the balance sheet?

Tom Casey, CFO

Yes, so a couple of things. I think we feel very good about where we are with the regulatory process and in line with our risk management processes and profile. Obviously, we did a lot of work during the quarter to stabilize and improve our liquidity profile. We wanted to share that with you. That's consistently in line with the regulatory outlook. As far as the investments being made with Radius, keep in mind that we have a lot of infrastructure already that we have been building. Our cost base already reflects a lot of that. We are spending some dollars to get the bank ready and finalize our application. This acquisition is really a one plus one equals three, where we provide great lending capabilities and they have terrific deposit products. There is an opportunity for us to bring both of these together in two of our strengths. There will be some cost associated with integration and things like that, but I don't see at this time a massive lift on investments for deposit products or lending products since we already have those in place.

Scott Sanborn, CEO

No. That sounded good.

Operator, Operator

Our next question is from Heath Terry from GS. Go ahead.

Heath Terry, Analyst

Great. Thank you. I was just wondering if you could kind of give us a sense of the loans that you have sort of taken or that did sort of sell out of the loan book this quarter versus the ones that you decided to retain. Is there a difference in the profile just in terms of grade, duration, profile of the borrower that we should be thinking about? And then also to the extent that people are clearly in need of financing in this environment, understanding that you have very good reason to want to tighten your standards, is there a way to monetize that traffic that you are getting, that demand that you are seeing in some way just to the benefit of the company? And I got just one housekeeping question at the end.

Scott Sanborn, CEO

In terms of the loan portfolio, starting there. We went to the market first with some of our higher-yielding borrowers because that's where the capital was quickest to recover. We got a good response and moved to more of the core part of our prime portfolio. I think we went out with an initial pool and we were very pleased with the results we got and ended up selling more than we had initially anticipated as we were pleased with the amount of interest.

Tom Casey, CFO

They were oversubscribed. We felt very good about where we had marked them at the end of March. Liquidity premiums had tightened. Things started to be a little bit more liquid. We could sell those loans as we indicated at or above carrying value. We felt pretty good about moving that from a loan into cash during the quarter and into the third quarter as well.

Scott Sanborn, CEO

When it comes to the demand in the market, keep in mind, as we said, exiting Q1, we virtually turned off the paid marketing. The demand in the market comes from our member base, which is why we think it's important to serve them from a brand perspective. As we look ahead and again, as our investors get their arms around their own capital issues, we will be able to make use of some of the tools that we have been investing in such as, if you remember, our Select Plus program which allows investors to deploy their own credit models against the application pool and LCX, which allows investors to apply their own view on credit, detailed credit criteria against applications as they come in on the primary market. Those weren't a big focus in Q2, but we expect that as we enter Q4, those will be tools that we will start to deploy as investors get a better understanding of their capital issues.

Tom Casey, CFO

To get some numbers on there, origination is down 90%, but so is marketing. We are not disproportionately spending on marketing that we need to monetize further. We think as we move towards the bank and engage our members, that is really where we see the opportunity to extend that relationship. Right now we feel that our ability to reposition our expense base as fast as we have is an important indication of how agile our model is.

Heath Terry, Analyst

Yes. Certainly, sort of makes sense. And then just to follow-up on the transaction fee refund reserve that you talked about earlier. Do you expect that will continue to go up over the next couple of quarters as prepayment levels continue to improve? And are you seeing those same trends into Q3? Mostly just trying to understand what the impact on GAAP revenue is going to be and if we should expect sort of similar trends to Q2 going forward?

Tom Casey, CFO

Yes. I think in the first quarter, we definitely saw prepayments slow. We were seeing a lot of hardship plans. We are really capturing data in real time. But they are all back to historical levels they were. We don't expect it to further increase as far as the prepayment levels. We are encouraged that the personal loan payment profile is getting back to normal. While we see trends of an income cost in the 30% type of prepayment, that's good for the credit of the product. We have slightly some variability on liability, but I don't expect that kind of variability in the future. I don't see prepayments accelerating significantly from here. I think we just saw a lot of gyration between Q1 and Q2 – now we seem to be back to normal.

Scott Sanborn, CEO

As you think about going forward, a couple of things that will be moving. A lot is moving, but a couple of things that will be evolving will be interest income coming in as we sell loans on our portfolio. They will be coming down. The servicing book, Tom mentioned, will continue to pay down over time. As we ramp back up volume, we will be supporting that volume with pricing with investors. We think there is a benefit to get our investors back engaged with the platform participating. Until we think the performance of these new vintages fully manifests, we don't think pricing will get back to where it was pre-COVID. That's further exacerbated by the fact that there are a lot of portfolios in the market right now that are available for sale at more distressed prices.

Heath Terry, Analyst

Great. Thank you both.

Operator, Operator

Our next question is from Bill Ryan from Compass Point. Go ahead.

Bill Ryan, Analyst

Good afternoon. Thanks for taking my questions. First, I just want to kind of go back on the regulator questions as it relates to the acquisition. If you can maybe give us a little more granularity on what they are specifically looking at and working with you on? Any type of color that you have on that matter, including maybe the FTC lawsuit? And then second, if you could just quickly remind us what the amount of capital that you expect to inject into the bank once the acquisition is closed?

Scott Sanborn, CEO

I understand the request for more detail. Obviously, the conversations we are having with the regulators have to stay between us and the regulators. What I can tell you is that the timeline we laid out; we feel good that we are on track to hit that. We have remained very closely engaged with the regulators and have been productive in moving. We have not been set back by the move to virtual in the process. That's broadly speaking a good thing. As for the FTC, the real update there is that the trial date is set for October. We have requested a stay, given that the Supreme Court is going to be hearing a case challenging the FTC's ability to seek monetary damages and the extent to which those monetary damages can be assessed. We are requesting a stay of the trial until after that case is heard. There are more comments on that in the 10-Q.

Tom Casey, CFO

Yes.

Scott Sanborn, CEO

Sorry, go ahead.

Tom Casey, CFO

Obviously, it's preliminary at this point as far as the dollars. But I think you can see our actions today of accelerating the conversion of loans into cash, consistent with capitalizing the bank. We have not communicated a specific number until we are further along at this point. We will be updating you as we have more finalized information.

Bill Ryan, Analyst

Okay. Thank you.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Sameer Gokhale for closing remarks.

Sameer Gokhale, Moderator

Great. Thank you operator and thank you all for joining us today. If you have any questions, please contact investor relations and we will be happy to assist you.

Operator, Operator

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