OPRT - NASDAQ

Welcome to Oportun’s Financial Corporation Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. Today’s call is being recorded. For opening remarks and introductions, I’d like to turn the call over to Dorian Hare, Senior Vice President of Investor Relations. Mr. Hare, you may begin.

Thanks. And hello, everyone. With me to discuss Oportun’s fourth quarter 2023 result are; Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I’ll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results of operations and financial position, plan, products and services, business strategy, expense savings measures, statements regarding our senior secured term loan and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by those forward-looking statements, and we caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption, Risk Factors, including our upcoming Form 10-K for the year ended December 31st, 2023. 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 other than as required by law. Also on today’s call, we will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for the period-to-period comparisons for our core business and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. A reconciliation of all non-GAAP to GAAP financial measures is included in our earnings press release, our fourth quarter 2023 financial supplement, and the appendix section of the fourth quarter 2023 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast and an archived version will be available after the call along with a copy of our prepared remarks. With that, I will now turn the call over to Raul.

Thanks, Dorian. And good afternoon, everyone. Thank you for joining us. Today I’ll discuss our fourth quarter performance and update you on our progress in key areas of the business. Let me begin with four highlights of our Q4 performance. First, we generated revenue of $263 million to close full year 2023 with a record $1.1 billion, up 11%. Second, our Q4 annualized net charge-off rate was 12.3%, 50 basis points better than last year. In addition, for the first time since 2022, our quarterly net charge-offs, measured in dollars, were lower than the prior year. Third, our GAAP operating expenses were $129 million, down 15% year-over-year. We met our stated GAAP OpEx goal for the quarter of $125 million, when $7 million of non-recurring severance relating to cost actions announced on our Q3 earnings call are backed out. Finally, adjusted EBITDA was $6 million and represented a $40 million year-over-year increase. Overall, our team executed well in the quarter and Jonathan will provide more details on our Q4 performance shortly. Turning the Page to 2024, I’m pleased that we’re seeing early signs of a business recovery taking shape, driven by the strategic decisions and operational changes we made in 2023. I’ll now share the three areas of improvement that I find most promising. I’ll start with credit and four positive dynamics we are seeing related to our credit performance. First, as you can see on Slide 6 of our earnings presentation, loss rates are approximately 400 basis points lower for our front book of loans in comparison to our back book loans. As a reminder, the back book of loans are loans originated prior to the first material tightening in July of 2022. The front book of loans represents origination since then. You can also see on Slide 7 that the back book shrink to 21% of our owned principal balance at the end of the fourth quarter, but disproportionately accounted for 53% of our gross charge-offs. The good news is that the impact of the back book will continue to diminish throughout 2024 as we currently forecast our back book to shrink to 3% of our owned principal balance at the end of this year. Second, our 1 to 29 days delinquencies are below 2023 levels. This bodes well for future 30-plus day delinquency performance and more importantly, charge-offs in the second half of the year. The last time the early-stage buckets were running below the prior year was three years ago, when 2021 was below 2023. Third, secured personal loans finished 2023 with annualized net charge-off levels that were approximately 350 basis points better than our unsecured personal loan product. We plan on growing our secured personal loan portfolio this year as part of our strategic priority to identify sources of high quality originations. Finally, just over a year ago, we launched our integrated Oportun mobile app by leveraging the Digit Savings app platform. We now know that borrowing members who use our app have exhibited approximately 45% lower 30-plus day delinquencies, three months post disbursement than those who have not yet signed up to use the app. We plan to increase the visibility, promotion and adoption of our mobile app in 2024. Improving credit outcomes is a key priority, so we will continue our conservative underwriting stance and focus on enhancements to underwriting models, servicing efforts and our mobile app. The second promising area is expense management. As I mentioned earlier, we met our Q4 OpEx goal and as you can see on Slide 8 of our earnings presentation, we are significantly more efficient today than we were when we became a public company four years ago. Adjusted OpEx as a percentage of average managed principal balance was appreciably down to 12.5% in Q4 2023 versus 18.1% in Q4 2019. Fortifying our core business and unit economics are our priorities for 2024, and I will share additional decisions we’ve made in these areas in a few minutes. The third and final promising area of improvement that I want to highlight is funding. Our most recent $200 million securitization, which closed in February, was 10 times oversubscribed at an 8.4% weighted average interest rate, its cost is 160 basis points less than the securitization we executed in October 2023. In my view, this signifies the confidence investors have in the credit quality of our originations, as well as the improvement and strength of our business model. Again, I’m encouraged by all these signs of improvement, but there’s still work ahead to fully realize our business recovery. To that end, we’re announcing that we will continue to reduce our operating expenses this year by an additional $30 million on an annualized basis, bringing our total annualized cost reductions since Q2 ‘22 when we first started our expense management efforts to a substantial $240 million. The 2024 full year guidance that Jonathan will share with you incorporates these actions with lower OpEx levels generating significantly enhanced profitability. Finally, in order to execute our plans for 2024 and beyond, we recently completed two amendments, one to our residual facility and the other to our senior secured term loan. The amendment to our residual facility provides us with a three-month principal payment holiday and extends the term to January 2025, we will make principal payments on the senior secured term loan in the amount equal to the payments that would have been made on the residual facility. The senior secured term loan amendment reduces the minimum asset coverage ratio, which is the ratio of our unrestricted cash and equity in some of our financing facilities to the outstanding debt. We needed to lower the escalating levels of this covenant for 2024, which were set before 2023’s higher than expected losses and lower originations caused by credit tightening. Given the scheduled increases in the asset coverage ratio covenant levels for the remainder of 2024 and into 2025, we are currently evaluating refinancing options. In summary, after a very challenging 2023, I am confident that we are on the right path to achieving a stronger position for the company, driven by the strategic decisions and operational changes we’ve announced today and have made over the last twelve months. With that, I will turn it over to Jonathan for additional details on our fourth quarter 2023 financial performance, as well as our first quarter and full year 2024 guidance.

Thanks, Raul. And good afternoon, everyone. As Raul mentioned, we executed solidly in the fourth quarter. We are on track to substantially enhance our profitability in 2024 and beyond by being laser-focused on our three differentiated core products alongside our ongoing cost reduction initiatives and our tight credit posture. As shown on Slide 10, Oportun delivered total revenue of $263 million, the impact of net change in fair value and a higher interest expense drove an adjusted net loss of $21 million or an adjusted loss per share of $0.54. We continue to be focused on credit quality rather than quantity with originations of $437 million which were down 28% year-over-year. Sequentially, originations were down 9% from the third quarter with further tightening of our credit posture dominating traditional seasonal patterns for originations growth. Despite lower originations, total revenue was virtually flat year-over-year due to 100 basis points higher portfolio yield resulting from our pricing increases along with higher non-interest income. Our credit tightening actions led to lower originations than previously anticipated, causing us to fall short of our 200 basis points year-over-year increased target. However, I am pleased that our Q4 risk adjusted portfolio yield, which includes charge-offs, increased year-over-year by a strong 155 basis points. We will continue to enhance yield while remaining committed to our 36% APR cap. Net revenue was $72 million, down 50% year-over-year due to unfavorable fair value mark-to-market adjustments and higher interest expense. Our total net decrease in fair value of $139 million was primarily driven by current period charge-offs of $91 million, marks on loans sold of $31 million, and a mark-to-market adjustment on our asset-backed notes of $24 million, partially offsetting these unfavorable fair value drivers, the mark-to-market adjustments on our loan portfolio increased by $14 million due to a 60 basis points sequential increase in our loan portfolios fair value to 102% on a decline in discount rate. Before continuing, I want to point out a change we’ve made in the presentation of our loans receivable at fair value on the balance sheet. We previously recorded accrued interest and fees separately on the balance sheet and now, these are included in loans receivable at fair value. We made this change so our financial presentation would be more consistent with other companies that fair value their loans. We have updated our historical balance sheet to reflect this change. To be clear, none of our aggregate numbers have changed. We’ve only combined two balance sheet line items, so this is a re-class and not a restatement. Given this change, the fair value prices for our loans now include the accrued interest and fees and thus reflect higher figures than the prices excluding accrued interest and fees that we have quoted in the past. Interest expense of $52 million was up $16 million year-over-year. This was primarily driven by increased debt outstanding and the increase in our cost of debt to 7.1% versus 4.8% in the year ago period, reflecting the higher rate environment. Turning now to operating expenses and efficiency, we continue to see the benefits of our previously announced cost structure optimization initiatives. Our $129 million in total operating expenses in Q4 reflected a 15% reduction from the prior year period and included a $7 million non-recurring charge for severance related to our previously announced headcount reductions. We made significant strides through 2023 in improving our quarterly operating expense run rate, and we will continue to drive our cost structure lower in 2024 with the $30 million of additional annualized operating expense reductions that Raul announced, partially enabled by our streamlined product suite, we are now targeting $97.5 million in Q4 GAAP operating expenses. In the fourth quarter, our sales and marketing expenses were just over $18 million, down 15% year-over-year. For the quarter, we recorded adjusted net loss of $21 million, compared to a $5 million net profit in the prior year quarter, and an adjusted net loss per share of $0.54 versus prior year net earnings per share of $0.14. The decline in adjusted profitability was primarily driven by non-cash fair value marks and higher interest expense. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and our notes, was $6 million in the fourth quarter. This reflected a strong year-over-year increase of $40 million, driven by our sharply reduced cost structure. Now on Slide 11, let me discuss Q4 credit performance. Our annualized net charge-off rate of 12.3% was at the midpoint of our guidance range, this compared to 12.8% in the prior year period. Our 30-plus day delinquency rate increased year-over-year by 30 basis points to 5.9%. In addition to what Raul mentioned earlier on 1 to 29 day delinquencies improving, we’ve recently seen our 30-plus delinquency rates begin to decline, and we expect this trend to continue. Based upon data through last week, we expect the first quarter 30-plus day delinquency rate to be between 5.1% and 5.3%. These improved delinquency trends are not surprising given the percentage of underwritten loans with vintage scores of 660 or greater increased to 51% during Q4 ‘23, up from 33% for Q2 ‘22 prior to the start of our tightening actions. Regarding our capital and liquidity, net cash flow from operations for the fourth quarter remain near record levels at $106 million, up 20% year-over-year. Furthermore, I’m pleased that our resilient top line performance and sharply reduced cost structure allowed for this operating cash flow to fully finance our $97 million in cash used in investing activities, principally loan disbursements, net of repayments and net debt repayment of $3 million. As of December 31st, total cash was $206 million, of which $91 million was unrestricted and $115 million was restricted. Further bolstering our liquidity was $409 million in available funding capacity under our warehouse lines and remaining whole loan sale agreement capacity of $317 million. And continuing to ensure that Oportun is funded to grow in a responsible and sustainable fashion since quarter end, we closed a $200 million asset-backed securitization. This financing brings our total executed funding agreement since June to almost $1.2 billion. Before I leave our discussion of capital and liquidity, I want to inform you that we’re making good progress evaluating strategic options for our credit card product and expect to have an update for you soon. Before providing you with our initial guidance relating to 2024, I wanted to update you on two changes we are making this year to the adjusted performance metrics we provide to the investment community. As shown on Slide 13, first, going forward, we will be excluding the impact of fair value mark-to-market adjustments on our asset-backed notes at fair value from adjusted net income and adjusted EPS. Second, we are adjusting our calculation of adjusted EBITDA to be more in line with those of other companies in our space. Now, let me share more detail with you regarding the rationale for each decision. Our decision to update our adjusted net income calculation is driven by our election last year to stop fair valuing our new debt financings. By the end of 2025, nearly all our existing asset-backed notes at fair value will have been paid off, so there will be no mark-to-market adjustments for our debt after that time. Between then and now, we expect to recognize on a GAAP basis, $94 million of negative mark-to-market adjustments as our asset-backed debt currently valued at 95%, converges to par at maturity. This $94 million reduction in pre-tax earnings is a reflection of the higher interest rate environment rather than an indicator of the health of our business. So going forward, we will be backing it out from our adjusted net income and adjusted EPS metrics. Additionally, for adjusted net income beginning in Q1 ‘24, we will no longer be adding back acquisition and integration related expense since our acquisition of Digit closed over two years ago. With respect to adjusted EBITDA, we are simplifying our calculation to be more consistent with the calculations of other companies in our space. Going forward, we will no longer adjust for origination fees net, since this is not an adjustment we see other companies making in their calculation of adjusted EBITDA. Originations on our loans are fully earned at the time of disbursement and are non-refundable, and we no longer feel that we need to adjust our EBITDA to reflect the timing difference in the receipt of that cash. Had we applied these changes for 2023 reporting, full year adjusted net income would have been $53 million higher at an adjusted net loss of $71 million. However, had we applied these changes for 2022 reporting, full year adjusted net income would have been $152 million lower at an adjusted net loss of $83 million. Full year adjusted EBITDA for 2023 would have been $17 million higher at $19 million, while full year adjusted EBITDA for 2022 would have been $27 million higher at $17 million. Turning now to our guidance, as shown on Slide 14, our outlook for the first quarter is, total revenue of $233 million to $238 million. Annualized net charge-off rate of 12.1% plus or minus 15 basis points. Adjusted EBITDA of negative $14 million to negative $12 million. Our guidance for the full year is total revenue of $975 million to 1 billion. Annualized net charge-off rate of 11.9% plus or minus 50 basis points. Adjusted EBITDA of $60 million to $70 million. With respect to our adjusted EBITDA guidance, which is on our new calculation basis, this guidance would have been negative $20 million to negative $18 million for the first quarter of 2024 and $27 million to $37 million for full year 2024, had we not changed our calculation. Before handing the call back to Raul to close, I’d like to share with you what we believe long-term investor returns for Oportun could look like. The unit economics of our personal loan business are quite strong at over 32% APR, even while we deliver value well in excess of what the alternatives are for our borrowing members. Add to that, non-interest income, predominantly from our savings product, and we see a 36% total revenue yield as a percentage of principal balance to be sustainable. Conservatively, assuming an 8% cost of funds and 9% to 11% annualized net charge-off rate, a 17% to 19% risk adjusted yield remains. And assuming operating expenses over the long-term of 12.5% of owned principal balance, we see a 3% to 4% return on assets as attainable. Lastly, with a 6 to 1 debt to equity ratio enabled by our robust risk adjusted yield and diversified funding sources, we see the potential for a very strong 20% to 28% ROE over the long-term. Given the significant changes and improvements we have made to strengthen our business and tighten our product focus, we see ourselves making progress towards this goal over the next several years. Raul, back over to you.

Thanks, Jonathan. Before I wrap up, I want to publicly welcome our two newest Independent Board Members; Carlos Minetti and Mohit Daswani, who joined Oportun’s Board of Directors in February. Carlos Minetti has more than 35 years of experience in consumer lending and credit risk, including most recently as President, Consumer Banking at Discover Financial Services, a position he held from 2010 to 2023. Mohit Daswani is the Chief Financial Officer of ThoughtSpot, Inc., an AI-powered analytics company. His prior experiences include Executive roles at Square and PayPal, as well as time in the investment banking and private equity industries. We are pleased to have them on the Board and are already leveraging the backgrounds in consumer finance along with their extensive executive and public company experience. While we still have work to do to establish the type of long-term profitability that Jonathan just talked about, we’ve laid the foundation for recovery in 2023 and we expect 2024 to be a defining step in our journey towards sustainable, profitable growth. From a strategy perspective, we are guided by our focus on holistically addressing two of the most fundamental challenges to financial health and resilience, access to responsible and affordable credit and adequate savings. We will do so with our streamlined product assortment of personal loans, secured personal loans and savings and by executing on our three top strategic priorities, improving credit outcomes, fortifying our business economics and identifying high quality originations. We are optimistic about 2024 due to our disciplined expense management, February’s $200 million securitization and more importantly, the promising Q1 credit trends. With that, operator, let’s open up the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my question. First around the credit quality. Congrats on seeing the 30-plus day delinquency improved in the first quarter of ‘24. Just was wondering, as we look at the rate for this year, it seems like it still remains pretty elevated within your guidance, can you just talk about what’s driving that? What’s the economic environment that you’re assuming? Thanks.

Sure, Steven. This is Raul. Nice to hear from you. So when we think about Q1, right, we’re saying that we expect 5.1% to 5.3% DQs, 30-plus delinquencies for Q1. That compares to last year’s rate of 5.5%. So we’re actually really optimistic about what we’re seeing right now. In terms of the full year guidance, I think what you’re seeing from us is, just appropriately what we think is an appropriate level of conservatism. It’s still early in the year. We’re only 10 weeks into the year. So we would hope that what we’re seeing in terms of the early delinquencies, right, I mentioned that 1 to 29 day delinquencies are below the prior year, which hasn’t happened in three years. We would expect that if it continues to hold to translate into better loss performance in the second half of the year, Steven. But right now, what you’re seeing is just what we think is appropriately conservative guidance.

Got it. And then, I noticed you guys took further tightening credits within the fourth quarter. Could you just talk about that and then help us think through the 2023 vintage? If we were to use earning deck plotted against the 2022 and 2021, how would that look like today? Thanks.

So in terms of just the tightening actions that we took in the last quarter, one of the things that we continued to do was just take a look at, could we go ahead and reduce loan sizes and terms, in particular, some of the larger loans, say loans over $6,000. We think that in this environment, it still makes sense to try to give shorter loans with smaller loan amounts. So that’s some of the tightening that we did. And so far, we are pleased with the results. I think if you saw on Page 6 of our earnings deck, where we plotted what the vintages look like on the front book, we like the fact that Q1, Q2 and Q3 ‘23 are all below the lines of Q4 and Q3 of ‘22. So we like the way that those vintages look on Page 6. Steven, if you’re asking me what would I expect the 2023 static pool loss rates to look like, I think it’s a little early to project that. But as you know, we give an update every quarter on what those static pools look like. So we’ll all get a look at that over time.

Great. Thanks for taking my questions.

Yeah. Thank you, Steven.

Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.

Yeah, just apologize I’m just trying to kind of get my – head around the EBITDA reconciliation for the fiscal year ‘24 guidance, I mean – you give us like around a $50 million loss. Does that – it looks like that does not include mark-to-mark, you don’t have any of the fair value marks including. Does that include the $94 million of a fair value mark on the debt that you mentioned, Jonathan? Or I guess maybe can you just talk – tell us what’s in that $50 million net loss you’re projecting?

Sorry, John, this is Raul. Before I have Jonathan go ahead and dive into the question, just to be clear, are you talking about adjusted EBITDA or adjusted net income? Because we guided to adjusted EBITDA, but I’m not sure if your question is about the changes on adjusted net income.

No. Well, in the – on Slide 33, you give a net loss as the starting point to get to the adjusted EBITDA. And I’m just wondering, and it says no fair value mark, no fair value mark-to-market adjustments will be in that net income or that net loss. So I’m wondering, can you kind of bridge to us what’s in that and what’s not in that?

Sure. I’m happy to do that, John. And, this is the presentation we’ve been using since last year for this reconciliation table. Since we haven’t been guiding to adjusted net income, because some of the volatility in the marks, this view of net losses is excluding, and this is what the starred asterisk footnote says, is excluding our forecast of the marks, right. So if the net marks were positive, this would be a higher number. If the net marks turn out to be negative, it would be a lower number, right. But adjusted EBITDA continues to fully back out all the marks like it has before, Right. It was – so here we’re saying that we’re expecting to have on the new calculation basis, 60 million to 70 million of adjusted EBITDA for 2024. Is that helpful?

I probably need some time to get my hands around this. But did you mention something like a $94 million fair value adjustment on the debt between now and the end of the year?

No, let me clarify. That’s over two years, right. So we made changes both to our calculation going forward to adjusted EBITDA and to adjusted net income. For adjusted EBITDA, it has always added back the full fair value mark-to-market. That hasn’t – that part of adjusted EBITDA hasn’t changed. What we’re changing for adjusted net income is that, going where previously we had not made any mark-to-market changes, now we’re going to be backing out the impact of the mark on the fair value asset-backed notes, right. So just recall that starting last year, we stopped electing fair value for any new financings we did. And so, those fair value notes that are still on our balance sheet, they are going to run off, right. And currently they are marked at a $95 price, right. And so there is $94 million of discount relative to par, right. As bonds go to maturity, right, they go to par. And so over the next two years, not one year, over the next two years, we would expect in our GAAP net income to realize that full impact, right. So we’re going to be –

So I’m clear. But that’s not in the net loss that you put for fiscal year ‘24.

That’s right.

[technical difficulty]

That’s right. So let’s just use simple math to do an example together, right. Let’s say it’s half and half. Let’s say that $94 million that we would recognize half of that in ‘24 and the other half in ‘25, right. So half of that is $48 million, right. So when we report adjusted net income for the year, one, it will have a benefit of whatever happens on the fair value side for the loans. But two, if there is, over the course of the year, a negative $48 million impact on the notes, we’ll back that out, basically, which will mean the number will be – the adjusted number will be higher. You may have noticed elsewhere in our materials and in our remarks that we expect to have profitability on this adjusted net income basis for 2024.

Okay. And then remind me, the – how do I think about fair value mark on loans sold in the coming year?

Yeah. That’s included within our estimate of adjusted EBITDA. We’ll treat that in the same way, right. So we’ve got a forecast that sits behind our guidance, and that forecast includes an assumption for a fair value loans sold.

Okay. I might have to take this offline to understand the changes. The GAAP.

Hey, John. We’d be happy to do that. I think the only thing I would is, though the marks have created noise, right, over the years, because you’ve certainly followed the company for years. One of the things that I’m really optimistic about and that we were trying to communicate in our comments, Jonathan mentioned in his comments the fact that we expect to substantially enhance our profitability in 2024. You can see that in adjusted EBITDA, Jonathan mentioned, we expect that in adjusted net income as well. And again, I think though there has been noise in GAAP net income, we do expect a significant improvement in GAAP net income year-over-year as well, because the three profitability measures, by and large, tend to track each other, right. Again, though, there can be a bit of noise. So that is one of the things that makes us feel really good about turning the corner. We look at the trajectory in losses, we look at the positive indications in funding, and we do see now the benefits of also the significant OpEx reductions. So, happy to spend more time right offline. Like you said, it takes a little bit to wrap one’s head around it, but we do expect significant improvement in all the profitability measures this year.

And then the fair value adjustment on the loans you can have mark-to-market adjustments. But then there is also you net out charge-offs in that, correct?

Yeah, well, right. Charge-offs are not added back to any of these metrics, right. Charge-offs reduce all of our earnings metrics.

So do the – I apologize and I’ll get back in the queue. Does the net loss have anticipated charge-offs in it as stated there?

Yes.

Okay. So it’s charge-offs are in it, but not fair value marks?

That’s –

The mark-to-market mark.

Yeah, that’s right. That’s always been true of adjusted EBITDA, and that continues to be true.

But losses – on Page 33, losses are absolutely included in those numbers.

Okay so. Okay, I think I got it. I’ll schedule a follow-up call with you guys.

Okay. Sure.

Sure, John.

Thanks, guys.

Sure.

Thanks, John.

Thank you. Our next question comes from the line of Hal Goetsch with B. Riley Securities. Please proceed with your question.

Hey, guys, I got two questions. One is on the unit economics bridge. You have a 12.5% operating expense ratio. Is that a number that’s targeted for a certain level of the size of the portfolio of how big? And can you refresh our memory with the increased cost cuts, where do you think your quarterly expenses are going to kind of be the goal for a level? Thanks. – yeah, thank you.

Yeah, no, great question, Hal. So just to remind you, we actually said – I said in earnings that we are targeting now with these additional cost cut actions, that fourth quarter of this year, 2024, GAAP OpEx will be around $97.5 million.

I missed that, thank you.

Yeah. And so then getting back to your question about the operating expenses, we also said that we expect the portfolio to be generally flat year end. So let’s say that that true – that comes to pass as anticipated. And so if you took that $97.5 million of GAAP OpEx and you divide it by the owned receivables in the fourth quarter and annualized, you would come up with a number in the mid 13s, right. So you can get to 12.5% in the future with just some incremental growth.

Okay. And could you add a little color on the demand side? Clearly, investors at 10 times oversubscribed suggest there’s a lot of investor demand for this high-yielding paper. Could you comment on that? And then two, on the demand side for consumers, you mentioned another tightening, but could you just give us a feel for what’s coming in the top of funnel? Is demand quite high on the consumer side? So just give us your feel for both sides of the platform. Thanks.

Sure. So starting with the funding side, our ABS deal that we did in February was 10 times oversubscribed. It certainly is a strong market and we benefited from that. But it’s also particularly indicative of the strong following Oportun’s securitization platform has in the asset-backed market since we’ve been doing deals for over 10 years now. And certainly it represents confidence in our future loss performance as well as the business model. So that’s terrific, right. We priced at 8.4%, a 160 basis points better than where we were in October. And the market continues to be strong, and we would expect it would come to market again this year. Certainly one of the things investors looked at and we actually included in our deck was the Slide that you saw on Page 6, which shows how well the recent vintages are performing, right. And this deal basically only included those more recent vintages or primarily. And certainly investors were happy to take exposure to that loss performance, given our strong risk adjusted yield. Raul, do you want to take the consumer question?

Yeah. On the consumer side, as I mentioned earlier, right, we certainly continue to have a conservative underwriting stance. Marketing we shared in our earnings. If you look at the earnings deck that we spent $18 million in marketing in Q4, that was down 15% year-over-year. So I think from a demand perspective, we actually feel good about the demand that we see right now at the top of the funnel, given the lower marketing expenditures. We did share that the credit quality is something also that we’re pleased with in terms of who’s coming through the door and who were attracting with our marketing efforts. So we think as the economy continues to normalize and if we continue to see this good credit performance that we’re really optimistic about how we could see ourselves potentially starting to open up in the second half of the year and trying to drive more demand.

And last follow-up, I think in the third quarter call, you mentioned a little bit of potential weakness in vintages that were after the first tightening. And is it safe to say that either those fears or that initial performance cured itself or improved? That’s what might be my takeaway from the commentary today. Let’s make sure I heard that right. Is that the message today?

That’s a great memory, Hal. So if you look at that same page that Jonathan was talking about, that first tightening would be, say, kind of the very tail end of Q2 or the beginning of Q3. So Q2, you could see, is right on top of Q1, right. That gray line. We didn’t start to see the separation. Q3, there is some separation, but we like the fact that the more recent vintages are even below that purple Q3 line. So this is what we were hoping for as we continued to tighten in ‘22 and ‘23, was just continuing to see the lines be below the prior quarter. And like we shared in our comments, and as Jonathan mentioned, this is one of the things that led to that really successful securitization when we look at early kind of that 1 to 29 delinquencies running below prior year, and our view that Q1 delinquencies could be below what we reported last year in Q1, 2023, right. Those are the things that are giving us confidence that if these things hold, we’ve really started to turn the corner from a credit perspective, you combine that then with the positive indications on funding, right, the improved profitability from the OpEx reduction, including our desire to run even leaner with these new $30 million, and we think we’re setting ourselves up for a good ‘24 and certainly a good ‘25.

Thank you.

Thank you, Hal.

Thank you. Our next question comes from the line of Rick Shane with JP Morgan. Please proceed with your question.

Hi, guys. It’s [Melissa] [ph] on for Rick today. Wanted to ask – hi. Wanted to dig in a little bit on sort of the trajectory or the cadence of NCO expectations during the year. I mean, given the extra tightening actions that you’ve taken sort of over the last 18 months or so, but also with the shift towards the front book that you expect to continue over the rest of this year, should we be thinking about anything differently on NCO trajectory, or should we expect the normal seasonality?

Yeah, Melissa, it’s Jonathan. I would expect normal seasonality. I think most of the elements of our business this year will return to normal seasonality. So I think that’s probably the best assumption to use for modeling.

Okay, thanks. And then to the comment in the slide deck about incorporating a new risk model to account for some of the learnings from an inflationary period. I’m curious what that has done to sort of the contours of originations? Does that mean skewing more towards secured? Does it change some geographic dynamics? What are you seeing in that?

I think that there are a couple of elements that we’re seeing. Number one, we think we’ve made some adjustments that are going to allow us to look for individuals that aren’t necessarily taking on as much debt after they’ve taken out the Oportun loan. I think it’s given us a chance in some ways, Melissa, to go back to the thinner file individuals that historically have been a strong niche for us, but at the same time also finding the individuals with the high vantage scores that we mentioned. And then certainly the ability to go ahead and find some people that we think are willing to accept the lower losses in shorter terms that I mentioned. All of those are things that we think we’ve been able to execute with the improvements in the models, one of which we talked about today. Your comment on secured personal loan also is going to be something that we think is going to be able to drive good credit performance in the remainder of the year. We share that losses in 2023 for secured personal loans were about 350 basis points lower than for the unsecured loans. And one of our objectives this year is to be able to grow that book of secured personal loans.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I’d like to pass the call back over to Raul Vazquez for closing remarks.

We want to thank everyone once again for joining us on today’s call, and we look forward to speaking with you again soon. Thank you.