LendingClub Corp (LC) Q4 2022 Earnings Call Transcript

LendingClub Corp (NYSE:LC) Q4 2022 Earnings Call dated Jan. 25, 2023.

Corporate Participants:

Sameer Gulati — Chief Operations Officer

Scott Sanborn — Chief Executive Officer

Drew LaBenne — Chief Financial Officer

Analysts:

Bill Ryan — Seaport Research — Analyst

David Chiaverini — Wedbush Securities — Analyst

Giuliano Bologna — Compass Point — Analyst

John Rowan — Janney Montgomery — Analyst

Michael Perito — KBW — Analyst

Presentation:

Operator

Good afternoon. Thank you for attending today’s LendingClub Fourth Quarter 2022 Earnings Conference Call. My name is Megan and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

I would now like to pass the conference over to our host Sameer Gulati with LendingClub. Please go ahead.

Sameer Gulati — Chief Operations Officer

Thank you, and good afternoon. Welcome to LendingClub’s fourth quarter and full year 2022 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email.

Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services and future business loan and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today’s press release and our most recent Forms 10-K and 10-Q is filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-K.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in the presentation accompanying our earnings release.

And now, I’d like to turn the call over to Scott.

Scott Sanborn — Chief Executive Officer

All right. Thanks, Sameer. Welcome everyone. We closed out 2022 with solid results. Both revenue and earnings were near the high end of our guidance range, and importantly, we took action to position the company well to navigate current headwinds. The power of our evolving model is evident in our numbers. Our growing stream of net interest income offset the anticipated decline in marketplace revenue and enabled us to deliver total revenue in line with fourth quarter of 2021 despite a decline in loan originations. For the full year, we generated 45% revenue growth and a record $290 million in net income, or $146 million after you exclude tax benefits from the release of our valuation allowance.

We invested our strong marketplace earnings back into our balance sheet, doubling the size of our held for investment loan portfolio, which allowed us to more than double our net interest income. These results begin to provide a sense of the power of this business over the long-term. Our goal, when the environment stabilizes, is to continue to grow the bank balance sheet and the corresponding interest income revenue stream with marketplace revenue acting as a capital-light earnings complement, as well as a compelling membership growth driver. To reach this destination, we first need to navigate through the current environment, and we have plans to do just that. While it’s unclear where exactly the Fed and the US economy will land, we remain focused on what we can control and are positioning ourselves to best manage through the uncertainty.

Our focus is on three key areas. One, continuing to prudently manage credit quality through the cycle; two, preserving profitability and maintaining a strong balance sheet; and three, being practical and focused in our product and technology investments. So starting with credit, where we will remain laser focused on managing credit risk for both our marketplace investors and ourselves. I’d note the loans we hold on our balance sheet representing prime and high prime customers are continuing to perform well as you’ll see on Pages 16 and 17 in our presentation. For loans sold through the marketplace, we are pursuing quality over quantity. As we have spoken about for several quarters, the rate environment is putting pressure on marketplace volumes as the relative value we can provide is compressed until we can reprice our loans to reflect the dramatic increase in cost of funds for especially our non-bank investors.

In this higher rate lower volume environment, we have both the responsibility and the opportunity to be selective on credit. Our delinquencies have outperformed industry averages, but we need to remain vigilant and proactive. We anticipated and have seen pressure on our members, most notably in near prime and especially among those consumers with lower incomes. We are also seeing a dynamic pace of change in areas like savings rates and prepayment speeds. A core strength for LendingClub is our ability to use our data advantage and our technology infrastructure to quickly adapt to emerging signals. Accordingly, we were proactive to begin tightening early in 2022 and have continued to tighten our underwriting throughout the year.

For reference, our fourth quarter near-prime volumes are down more than 50% from their peak. Longer term, the opportunity to grow personal loans remains significant. With credit card balances building at an over 20% average APR, even more consumers will benefit by refinancing their high-cost credit card debt into a fixed-rate instalment loan. And as interest rates stabilize and the US economy regains its footing, we expect our marketplace volumes to rebound. Our second key objective is to maintain profitability and a strong balance sheet. We recently announced the difficult decision to streamline our operations to better align our expense base to our outlook. We also bolstered our net interest income by acquiring a large portfolio of seasoned, high-quality loans from one of our marketplace investors.

In the near term, we expect marketplace revenue to be under pressure until the Fed slows or ideally stops with rate hikes. At the same time, we plan to maintain a stable interest income revenue stream by keeping the balance sheet at roughly its current size. Our final area of focus is to continue to prudently invest in the core product and technology capabilities that will create more value for our 4.5 million members. While we remain committed to our long-term vision, we are slowing down the pace of our investments. And our intent in 2023 is to put the building blocks in place that will support future growth opportunities as we come out of the current environment. Certainly, we will remain mindful of the macro economy and will continue to adjust the pace of our investment as needed.

So I’m going to turn it over to Drew now to walk you through the detailed financial results and our outlook.

Drew LaBenne — Chief Financial Officer

Thanks, Scott. And hello everyone. Let me take you through our financials in greater detail, starting with the originations and our balance sheet. Originations for the quarter were $2.5 billion, compared to $3.1 billion in the prior year and $3.5 billion in the third quarter of 2022. As Scott discussed earlier, originations were impacted by a combination of higher interest rates curtailing investor demand for loan purchases and our continued discipline in underwriting to maintain strong credit quality. As we deploy capital to retain more of our highly profitable personal loans, we showed significant growth in the balance sheet compared to the previous quarter and over the course of 2022.

Total assets increased 63% year-over-year to $8 billion in Q4, with our held-for-investment loan portfolio up 104% over the same period, primarily due to growth in personal loans. We also grew deposits of 104% year-over-year now that we have scaled the online banking platform that we acquired. Since the closing of the Radius acquisition in the first quarter of 2021, we have grown the bank from $2.7 billion in assets to $7.6 billion in assets, which is a compounded annual growth rate of over 70% and firmly highlights the benefits of bringing LendingClub’s strength of loan originations together with the digital banking model.

Earlier, Scott mentioned the portfolio we acquired in December. We are accounting for the portfolio under the fair value option as the short remaining duration in high credit quality limit volatility around its expected performance. We expect this portfolio to generate very attractive returns and have broken it out separately in the net interest margin table in our earnings materials. Now on to revenue. Total revenue was essentially flat year-over-year as net interest income growth of 63% was offset by a 29% decline in non-interest income. Revenue decreased sequentially by $42 million, reflecting lower originations sold through the marketplace and the price on those sales.

Our decision to increase loan retention in 2022 has enhanced the resiliency of our franchise during a more difficult environment for the marketplace. Net interest margin increased to 7.8% from 7.6% in the prior year period due to an increase in the proportion of higher yielding consumer loans on the balance sheet. As expected, we saw a sequential drop from 8.3% in the third quarter of 2022, primarily due to the current lag between our ability to pass along higher interest rates on new personal loans relative to the repricing of online deposits. We expect the net interest margin to decline again in the first quarter of 2023 as these trends continue and for the pressure to abate should the Fed’s slow rate increases or stop them all together.

Total net interest expense for the quarter improved $8 million compared to the same quarter in 2021 and was a reduction of $6 million from the previous quarter. Compensation and benefits expense included $4.4 million in severance charges from the previously announced expense reduction plan. Marketing efficiency was better than expected given the use of more efficient channels and lower competitive pressure. Marketing expenses improved by $11 million compared to the third quarter, primarily reflecting lower origination volumes. Our consolidated efficiency ratio moved to 68.5% from 61% in the third quarter as revenues decreased sequentially.

As Scott discussed, the reduction in staff was a difficult decision, but necessary given the more challenging near-term outlook. The reductions will generate $25 million to $30 million of annual run rate savings and compensation and benefits. These savings came primarily from an improved efficiency in our management structure, the slowdown in some strategic initiatives and ceasing originations in two commercial businesses, commercial real estate and equipment finance that we acquired from Radius. We will take the remaining severance charge of $1.3 million in the first quarter.

Slide 15 shows the pre-provision net revenue or PPNR, and the net income for the quarter along with other metrics. In 2023, we will move to PPNR as the key metric, which provides a better gauge on income statement performance. PPNR is a useful measure for evaluating the underlying performance of our company without the quarterly volatility caused by credit loss provisioning. For the fourth quarter, we had PPNR of $82.7 million, which increased 12% compared to the same quarter in 2021. We remain pleased with the performance of credit in our portfolio. Our provision for credit losses was $62 million, $21 million lower than the previous quarter, primarily due to a decrease in the dollar amount of loan originations held on balance sheet. Our allowance coverage ratio, excluding PPP loans, increased to 6.6% from 6.4% in the previous quarter due to the effect of ongoing recognition of provision expense for discounted lifetime losses at origination.

In the fourth quarter, our tax rate again benefited from a reversal of our remaining valuation allowance as well as R&D tax credits. For the quarter, we had a tax benefit of $2.4 million. As we enter 2023, we expect less volatility in taxes, and the tax rate is expected to be approximately 28%, but other factors such as share price movement will continue to impact our reported tax rate going forward on a quarter-to-quarter basis. Tangible book value per common share grew 35% year-over-year to $10.06 per share at the end of the fourth quarter. We have maintained strong capital ratios on top of a significant allowance for credit losses. This positions us to better navigate through the current environment and provide the ability to strategically deploy capital as opportunities arise.

Now please turn to Page 16, where we have provided you with an update to the 30-plus day delinquencies of our prime personal loan servicing portfolio as well as our held-for-investment personal loan portfolio. You will see that credit quality in the prime servicing portfolio continues to normalize as the portfolio seasons and new origination growth slows in the marketplace. The same effect is also true of our own HFI portfolio. We expect this trend will continue given the lower level of originations in the near-term. Given that changing growth trends and seasoning are creating comparability issues with historical data, we are not planning to provide this slide in the future. On the next page, we have provided more detailed disclosure on our loss expectations, which we believe provides a cleaner view of performance.

So on Slide 17, you can see credit performance of personal loans on our balance sheet by vintage. We expect the lifetime loss of the 2021 and 2022 vintages to be up to 8% and 8.7% respectively. The estimate for both vintages includes qualitative provisions for the uncertain economic environment. The 2021 vintage delivered very strong credit performance given the effect of government stimulus during the pandemic. The 2022 vintage reflects a move to a higher quality mix of credit but also a normalization of credit trends. We expect annualized net credit losses to be approximately 5% over the life of the 2022 vintage, but that could vary if economic conditions deteriorate significantly.

For each vintage, we are providing the breakout of how much in charge-offs have been realized as of the end of 2022, how much of future losses have already been reserved for in our allowance for credit losses, and how much remaining provision we estimate we will take through the income statement, which mainly represents the day one CECL discounting coming through the provision expense over time. If we look at the net interest margin factor in variable expenses and annualized credit losses, we expect post-tax levered returns in the low to mid-30% range. These returns are the reason we plan to invest our available earnings and growing the balance sheet.

Now let’s move to guidance and how we’re thinking about 2023. Given the broader macroeconomic uncertainty, we are moving to quarterly guidance. For the first quarter, our origination outlook is $1.9 billion to $2.2 billion, reflecting prudent underwriting and the rate-driven pressure on marketplace demand. We plan to maintain the size of our HFI balance sheet. Therefore, we expect to retain 30% to 40% of our loan originations for the quarter. For marketplace originations we sell, we expect unit economics in line with the fourth quarter. We plan to maintain positive net income levels and invest in-period earnings into loan retention to support future earnings.

As we reinvest our capital, we will maintain a disciplined approach to underwriting, drive credit performance and required returns. In 2023, we want to maintain flexibility to grow the balance sheet when we generate excess earnings available for investment. The impact of the day one CECL charge on loan retention can have a significant impact on earnings. With this in mind, we have evolved our focus to pre-provision net revenue, which is a more relevant guidance metric for financial services companies using CECL accounting. Our outlook using PPNR is $55 million to $70 million for the first quarter.

With that, let me turn it back to Scott for closing comments.

Scott Sanborn — Chief Executive Officer

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

With that, I wanted to say a sincere thanks to all of my fellow LendingClubbers, both those who are with us today and those who we recently had to say goodbye to, for their contributions to our company and to our customers. That’s it. Thanks again for your time, and I’ll open it up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Bill Ryan with Seaport Research. Your line is now open.

Bill Ryan — Seaport Research — Analyst

Thanks for taking my question. Starting with kind of the guidance, I was looking at it, you have PPNR of $55 million to $70 million, and you look at it with your originations of $1.9 billion to $2.2 billion. You take a midpoint. Your reserve on the consumer portfolio was, I believe, a provision was 8.8% of retained originations. So assuming that math, it looks like you might be breakeven, plus or minus in Q1. So is the 8.8% correct? Is that kind of a good number to use? Or was there something incremental in the provision? And kind of tying with that, the expenses, the charge that you took to reduce the fixed cost and then you’ve got a 50% variable cost structure. How long before the cost reduction start to kick in? Is there any of it really in the Q1 guidance or does that kind of roll — spill over more into Q2?

Drew LaBenne — Chief Financial Officer

Yeah. Great. Thanks Bill for the question. So let me start with the provision question first. So you’re correct on that ratio. Keep in mind that the components that go into the provision are the day one CECL. The accretion of the discount we have on day one and then other qualitative factors as well. And so one thing about that accretion of the discount is, it really hits more heavily in the first and second quarter after origination. So if you look back at our origination trends, this quarter had a higher amount of that back book accretion coming in.

As we look forward to Q1, I don’t want to talk about the ratio as much, but if you think about it in terms of dollar amounts, we’re remixing to higher quality credit. We should probably have less accretion just because of the recent trends in originations. And so right now, we would expect that provision to actually come down quarter-over-quarter. But obviously as I just said, it’s a very volatile measure. So there are a lot of different outcomes that are possible on the provision line in any given quarter. Second on expenses, so on the 50% variable cost market —

Scott Sanborn — Chief Executive Officer

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

Drew LaBenne — Chief Financial Officer

Yeah. And in Q1, we — I should have added just back on the provision as well. In Q1, as we’re going to higher quality loans, we expect that sort of the upfront charge will be lower on the higher quality loans that we’re putting on the balance sheet, which also benefits the provision. On expenses, the vast majority of the savings that — annualized savings that we reported are fixed cost, there is some portion less than 10%, which is variable cost of that reduction. But then the biggest reduction you’ll see in our variable cost base as originations comes down is marketing. And you’ve obviously already seen that come down each quarter as originations have also declined.

Bill Ryan — Seaport Research — Analyst

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

Drew LaBenne — Chief Financial Officer

Yeah. The — sorry, so the savings that we’re getting from the reduction in force, those will come through in Q1. So we will get almost the full impact of those except for the remaining severance charge that I mentioned. And then there’s a little bit of variable cost that may still come down over time that’s a little more lagged in reductions in — from the reductions in originations, but I wouldn’t call that meaningful compared to the $25 million to $30 million that we’re citing in the overall reductions.

Bill Ryan — Seaport Research — Analyst

Okay. Thank you.

Operator

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

David Chiaverini — Wedbush Securities — Analyst

Hi, thanks for taking the questions. I wanted to follow-up on that question about the provision. I would imagine that with the loan portfolio essentially being flat that the provision going forward would basically be the loss content of the loans with minimal reserve building, since you wouldn’t — since the loan portfolio isn’t growing, you don’t have to necessarily set aside additional reserves that have already been taken, so to speak. So I would think it would — essentially the provision would match the net charge offs in the quarter. Is that the right way to think of it that you basically don’t have to reserve much with a flat loan portfolio?

Drew LaBenne — Chief Financial Officer

No, that’s not quite correct, because in order to keep a flat loan portfolio, we need to keep originating loans to offset the runoff. And those new loans we originate are going to have a day one CECL charge that we need to take as well. And then you will still have accretion that occurs on the bad book, but as I said, that’s more loaded to the first couple — that’s more front loaded to the first couple quarters after origination, but there’s still a tail on that as well.

David Chiaverini — Wedbush Securities — Analyst

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

Drew LaBenne — Chief Financial Officer

Sure, yeah. So if we think about the ingredients that go into growing the balance sheet I would say capital liquidity and earnings, right? And the third one’s maybe debatable, but not really for us with our — with the guidance we’re giving. So we still have capital to grow. Our Tier 1 leverage was 12.5% and we’re generating capital each quarter. We had — sorry, that was at the bank level, 12.5%. And liquidity, we have ample liquidity and the online deposit space has been large enough to continue to fund our growth for the foreseeable future. No concerns there. But that up — when we want to grow the balance sheet and originate more loans for the balance sheet, that means more CECL charge that we take, which goes against profitability. So as much as we have the goal of remaining profitable on a net income basis every quarter, we do still need the balance against that. We just haven’t used that as the guidance we’re giving you any longer. So that gives us some more flexibility.

David Chiaverini — Wedbush Securities — Analyst

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

Drew LaBenne — Chief Financial Officer

Yes. Go ahead, Scott.

Scott Sanborn — Chief Executive Officer

Yeah. So if you look at that page, you can see ’21 and ’22, ’21 given that you still had some of the stimulus benefit from the pandemic was better — marginally better than our expectation. 2022 was marginally below, you put the two together and we’re pretty much on expectation across those two vintages as a total, which is roughly in line with what our expectation is for the year end.

Drew LaBenne — Chief Financial Officer

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

David Chiaverini — Wedbush Securities — Analyst

Got it. Thanks very much.

Operator

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

Giuliano Bologna — Compass Point — Analyst

Thank you for taking my questions. Starting off, one thing I’d be curious about is thinking about how pricing is evolving and kind of thinking about the marketplace. Because you seem to have talked about in previous quarters is that there’s kind of a couple month lag on pricing and now that we’re kind of getting closer to kind of at least a slowdown in the Fed’s trajectory and hopefully very soon an end to the hike cycle. Is that really what you think will drive a return to volume as pricing catches up once that happens on the marketplace and just in general for the platform as a whole. And then when I think about the pricing that you’re getting, it looks like pricing was still a little bit lower in 4Q versus 3Q. As we go forward, as pricing moved up, kind of going back to the commentary last quarter where you were saying that you’ve been pricing higher on different loan categories during the quarter. I’m curious if we think about the yield starting to increase on new originations versus the current HFI book on a go forward basis.

Scott Sanborn — Chief Executive Officer

I’ll start, Giuliano. I’ll see if I can remember all the questions that were in there. So if I missed one let me know. So, the step back, the rate-driven pressure is the biggest driver of the volume reduction for especially the non-bank investors who’ve seen their cost of capital really, significantly increase. That’s where you’re seeing the pressure, and those buyers are primarily the non — buyers of the non-prime and the lower prime. And so we are both curtailing volume there due to that rate driven pressure and having to until we can get the price up share some economics in that same space. We’re now the last quarter, including us, the percentage of loans sold the banks is, we’re — we got to be in the 70’s of percent. So it’s really shifted to the bank buyers right now. We have continued to move prices up. We mentioned — we’ve testing at all times, price points across all of our risk cells and we think it’s important in an environment that is in and of itself is stable, making sure we maintain, take rates and understand the profile of the borrowers coming through.

We are being deliberate about that. So, we’ve moved prices up another; I want to say roughly 40 basis points or so over the quarter. And we’re going to continue to push on that. So, we would expect, as the Fed slows down, again, ideally stops there’s a lag as you — as we mentioned before, Fed, the Fed moves, then credit cards move, then the market moves, and we move, and that, and so we would expect as that pressure abates there’s the opportunity for the marketplace to begin to reignite. And as we’ve shown, as recently as last year, the marketplace can rebound pretty quickly. That all assumes that the credit environment, the unemployment environment is solid. And so obviously that is a factor that I’m sure is, certainly on our minds and it’s on the minds of our investors. That’s one of the reasons why we’re continuing our focus on being proactive and prudent on credit.

Drew LaBenne — Chief Financial Officer

And I’ll jump in. Guiliano, just on the HFI portfolio, if you look at the NIM table unsecured consumer loans went from 13.52% in Q3, 13.6% in Q4, the vast majority of that decline was actually the deferred — the deferred items, fees and expense coming — the yield coming down from that because prepayments have slowed as expected. So, I think in terms of the actual coupon pricing coming into the book, the back book has mostly run its course now, and that pressure is abating.

Giuliano Bologna — Compass Point — Analyst

That makes a lot of sense. Then going from there, but when I look at that table that kind of build up to kind of the 30% to 36% marginal ROE on ’23 originations, you’re looking at any kind of implied NIM of 10.1% and you’re — and the footnote says you’re using brokered and CDs as the benchmark test — across capital looks like that’s currently in the 4% zip code at the moment, and you’re even your high yields are even 4% at the moment. So, does that kind of imply that you think you’re going to be getting on the incremental loans, somewhere in the 14% or low — 14% or higher yield on the loan portfolio, and is that kind of thinking more about 1Q or is that something that you think it’ll blend for the full year?

Scott Sanborn — Chief Executive Officer

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

Giuliano Bologna — Compass Point — Analyst

That’s very helpful. We’re going back to — go ahead. Sorry.

Drew LaBenne — Chief Financial Officer

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

Giuliano Bologna — Compass Point — Analyst

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

Drew LaBenne — Chief Financial Officer

Yes. Yeah, that’s correct. We don’t — we’ve had great balance sheet growth. We’re clearly going to be slowing down in the near term, but we don’t want to lose ground that includes replacing the runoff of that portfolio. But it’s good that you called that out because that portfolio, given that it’s already, fairly seasoned, is going to run off pretty quickly. And so the big addition that will pay down more quickly than our newer generations.

Giuliano Bologna — Compass Point — Analyst

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

Operator

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

John Rowan — Janney Montgomery — Analyst

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

Drew LaBenne — Chief Financial Officer

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

John Rowan — Janney Montgomery — Analyst

Okay. And then just you mentioned obviously bank demand in the marketplace and I’m just — I’m wondering if, obviously, when US bank acquired, made the acquisition and then turned around and sold the portfolio. I mean, was the predecessor that bought those from the marketplace, were they a big component of your bank demand? I’m just curious if that change indicates that there’ll be any difference in, or were they a big client, does that make a material impact in bank demand going forward, assuming they’re not in the market anymore?

Scott Sanborn — Chief Executive Officer

So that was $1 billion portfolio. It represents a large client. So they were a long — very long-term significant partner of ours. But when the acquisition was announced — where the intended acquisition was announced, we did work with them to begin reducing their overall participation in the mix in anticipation that the new owner may not continue the relationship. So I won’t say that there was no impact, but their purchases drew down. We worked to draw them down materially, like in between when the deal was announced and when it was approved.

John Rowan — Janney Montgomery — Analyst

Okay. All right. Thank you.

Operator

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

Michael Perito — KBW — Analyst

Hey, good afternoon, guys. Thanks for taking my questions.

Drew LaBenne — Chief Financial Officer

Hi.

Michael Perito — KBW — Analyst

I wanted to ask on the opex side, maybe a question for you Drew. So if we look at the fourth quarter, you were about $180 million, I think that included about $4 million of the restructuring charges. So maybe call it $176 million. I mean as it — because there’s kind of two components, right, so if you annualize that and then you take out the 25 to 30, but you guys still some with your investing. So I’m assuming there’s going to be some growth on that. Just the question is how much? I was wondering if you can give maybe some thoughts around that. I’m assuming it’s going to be a lot less than what we saw last year, but not nothing and just was hoping for some more context there?

Drew LaBenne — Chief Financial Officer

Yeah. So marketing, I think you probably understand the trend on marketing. It’s just going to tie largely to volume with some rate differences, right? The reason we specifically talked about comp and debt, I gave, I think, a pretty precise number — somewhat precise ranges so that you could — you could, you and all the investors could do the math out of it. But you should take that $88 million, you should subtract out the one-time charge, and then apply the run rate savings that we’re going to get. Just don’t forget we have a little more severance to take in Q1. All the other line items, I mean, there’s some puts and takes there, but we’re not expecting dramatic changes. We are going to be working — we’ll be working to be efficient in spend where we need to and make some investments, but there’s a little bit of drag we’ll get, for example, on depreciation and amortization because new projects will come into production, but nothing that should, I think, majorly alter your modeling from where we’re at today.

Michael Perito — KBW — Analyst

Okay.

Drew LaBenne — Chief Financial Officer

Is that helpful?

Michael Perito — KBW — Analyst

Yeah. No, it is. Thanks for that. And then just, I guess, kind of a big picture question, Scott. I mean, obviously it’s a tough environment just to make kind of definitive statements. But I guess one element that’s kind of coming to my mind here as I think of other banks in my coverage universe now, like diversity can often help. And obviously, you guys are pretty heavily tied to the personal lending asset class, which is obviously what you do so well. But just curious what your kind of high-level thoughts around that are, I mean, does it make sense longer term to diversify the business more? I mean just kind of more of a philosophical question. I’m just curious how you think about it?

Scott Sanborn — Chief Executive Officer

Yeah. I mean, we are certainly thinking about this in a couple of phases that we’ll be pursuing in parallel, but some will reach fruition more quickly. One is transitioning the model, as we’ve talked about, from 100% marketplace revenue to where we are now, call it, 50-50 interest income to marketplace to more on balance, more of the revenue coming off the balance sheet because it is a more resilient income stream than the marketplace revenue is. The marketplace has real value. It’s a capital-light way to grow. We can serve customers. We wouldn’t serve with the bank balance sheet. But as we’re seeing, it is less resilient in the face of market shocks like we have today. So that’s one part of the transition that we are eager to continue.

And I think last year shows you that the power of when that is working together, and you can think for yourself as the balance sheet gets bigger and you maintain the marketplace, we think that will be pretty powerful as an earnings generator. And then yeah, the second piece, which we are committed to but are slowing down this year is really finding other ways we can help our consumers. And we know it’s a very valuable consumer, they are strong credit, high income, and they like us. And so we are eager to do more for them and that is our plan. It’s just that — I think this year, getting new credit products off the ground and services off the ground is, that takes a bit of time, and it requires investments. So we’ll be — we are slowing it down, but we are not stopping it.

Michael Perito — KBW — Analyst

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

Scott Sanborn — Chief Executive Officer

So there are three pieces to commercial. There’s the GGL, the SBA lending, commercial real estate and equipment finance. So the GGL business, which is closer and what we do in terms of, those small — those are smaller businesses that are closer to the consumer. It’s also a variable rate product that has similar dynamics where there’s a robust market should you choose to sell it, but you can also hold it. So, I’d say that we are the set that piece, that Government Guaranteed Lending piece, we are continuing to grow. But commercial real estate and equipment finance, in this environment just not as attractive returns for the bank or for shareholders. So, we aren’t originating new loans there. So yeah, over time you could expect those balances to go down. Now they paid down more slowly than —

Michael Perito — KBW — Analyst

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

Drew LaBenne — Chief Financial Officer

And I think we will grow the SBA Government Guaranteed Lending business faster. That is part of our intention as well. They should run off slower than PL to grow, so less predictable, right. It just, we may have customers who decide to refinance or diversify their banking relationships, but we’re expecting it to be slower over the course of ’23.

Michael Perito — KBW — Analyst

Okay. Perfect. Thank you guys.

Operator

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

Sameer Gulati — Chief Operations Officer

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

Scott Sanborn — Chief Executive Officer

Yeah, I mean we tried to touch on that in the, the prepared remarks. I think, we believe there is a very, very material opportunity for us on the other side, which is these, the balances are massive and these things that are acting as headwinds for us now, should turn into tailwinds, which is investor cost of capital will come down based on forward expectations. Credit card, the Fed will not have moved yet, credit cards will not have moved yet. And we will be able to offer real value to our loan buyers and we’ll be able to offer even more compelling value to our borrowers. And, it is our intention to be in a position to take advantage of that opportunity and use the earnings that generates to really continue our — the evolution we talked about earlier, which is growing the bank balance sheet and diversifying our overall set of products and services we offer to borrowers.

Sameer Gulati — Chief Operations Officer

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

Operator

[Operator Closing Remarks].