Welcome to Oportun Financial Corporation’s Second Quarter 2022 Earnings Conference Call. Today’s call is being recorded. For opening remarks and introduction, 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 today to discuss Oportun’s second quarter ‘22 results are Raul Vazquez, Chief Executive Officer and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer.

I will 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 positions, planned products and services, business strategy and plans and objectives of management for our future operations.

Actual results may differ materially from those contemplated or implied by these 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-Q filing for the quarter ended June 30, 2022.

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 of 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 non-GAAP to GAAP measures is included in our earnings press release, our second quarter 2022 financial supplement and the appendix section of the second quarter 2022 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In addition, this call is being webcast and an archived version will be available after the call, along with the script of our prepared remarks.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’d like to discuss our second quarter financial performance, followed by an update on how the macroeconomic environment is impacting Oportun and its members and close with an update on our strategic initiatives. I am pleased with our results for the second quarter.

Let me start by sharing the headlines. We achieved second quarter originations of $878 million, up 103% from the second quarter of 2021. Originations growth continued to be driven by high demand for our loans, including our expansion into new states where we are taking share.

We delivered revenue of $226 million, up 63%, along with adjusted net income of $3.8 million or adjusted EPS of $0.11. We delivered a solid quarter of credit results as evidenced by our annualized net charge-off rate of 8.6%, in line with last quarter and the midpoint of our prior guidance. Overall, we have had a very strong first half of 2022.

Since the end of the quarter, however, we have observed that the weakening macroeconomic environment, including higher inflation and gas prices, have started impacting our numbers more than it previously had. Credit is the most important metric in our business.

And as we said on the last earnings call, we have been tightening since the third quarter of 2021. Since the end of the second quarter, we have seen an uptick in delinquencies, particularly among borrowers with lower free cash flows and those with smaller loans with shorter maturities.

We expect this to lead to increased charge-offs in the second half of 2022. We have taken further swift actions towards tightening our credit standards to address the rising delinquencies. Let me provide further details.

We are reducing our exposure to new borrowers and increasing our exposure to more profitable returning borrowers who have already successfully repaid at least one loan to Oportun. In July, 35% of our loans were to new borrowers as compared to 51% in the first quarter.

Returning borrowers have materially lower loss rates compared to new borrowers so we expect this action will help us return losses to our target range. Additionally, we have taken further steps to responsibly increase our portfolio yield to offset increased cost of funds. Finally, we are focused on a significant reduction of operating expense growth.

We now expect our operating expense in the second half of the year to be flat compared to the first half of the year. Oportun is taking these steps now to put the company on the strongest possible footing to achieve our long-term objectives while advancing our mission.

The revised full year guidance that Jonathan will detail with you today will feature higher revenue reflecting our strong first half portfolio growth. However, we are lowering our full year origination guidance to reflect the additional credit tightening actions we have already implemented.

We are also upwardly revising our full year charge-off guidance by 80 basis points and lowering our profit expectations, which we believe is prudent given the weakening macroeconomic environment. While in the short term, we are making necessary changes. Our long-term strategic priorities have not changed.

Let me tell you about our progress on our three strategic priorities for the year that support our long-term outlook for profitable and sustainable growth. Our first strategic priority is to grow our members.

We ended the second quarter with 1.8 million members, up from 1.7 million at the end of the last quarter, a 38% annualized growth rate, so we are very pleased with the pace of member growth. Our second strategic priority is to increase multi-product relationships with our members.

In the second quarter, products grew at an annualized rate of 45%, faster than our member growth of 38%. Our third strategic priority is enhancing our platform capability to meet the everyday financial needs of hard-working people. We continue to make progress towards creating a seamless unified app to increase growth in members and products.

We anticipate this unified app will increase Oportun and Digit member multiproduct relationships by enabling seamless access to all products in 1 multi-tab app, increase Digit membership by bringing the app to the center of the expanding Oportun ecosystem and increased member satisfaction, leading to increased brand loyalty.

We currently intend to be in the market in the testing phase with our unified app during the fourth quarter. This and other aspects of the Digit integration continue to progress nicely. Now let me share with you more detail regarding our progress across our newer products.

For our secured personal loan product, we ended the second quarter with $100 million in receivables, up 620% year-over-year. In April, we expanded our secured personal loan product to Arizona and in May to New Jersey.

Our secured personal loan growth continues to benefit from the fact that it is offered through the same acquisition funnel along with our unsecured personal loans. We also saw good progress this quarter from our credit card product.

Receivables grew 511% year-over-year to $190 million, and we now have more than 193,000 members who have an Oportun-branded credit card. Finally, we have also continued to make great progress with our Lending-as-a-Service offering.

During the second quarter, we scaled our Lending-as-a-Service network to include 294 partner locations, up from 108 a year ago, and we still expect to complete 2022 with over 500 partner locations.

Additionally, our partnership with Sezzle, a buy now, pay later company and our first digital lending as a service relationship, remains on track to launch in the second half of the year. With that, I’d like to turn it over to Jonathan for additional details on our financial performance and our revised guidance..

Aggregate originations between $650 million and $675 million; total revenue between $240 million and $245 million; adjusted net loss between $4 million and $2 million; and adjusted EPS between negative $0.12 and negative $0.06.

Our updated guidance for the full year is aggregate originations between $3.15 billion and $3.18 billion, total revenue between $930 million and $940 million, adjusted net income between $40 million and $45 million, and adjusted EPS between $1.19 and $1.34.

Given our focus on prudent growth in this current macro environment, we are reducing our forecast for year-end secured personal loan receivables from $140 million to $130 million, and for year-end credit card receivables from $150 million to $130 million.

We are closely monitoring all of the macroeconomic developments that factored into our guidance, including inflation, consumer confidence, unemployment rates, wage growth, interest rates and economic growth.

Although a number of our larger states have announced stimulus for consumers in light of increased pricing pressures, we have not specifically factored this into our forecast models.

I’d note that while credit tightening has already been implemented and future loans we make will meet these new standards, we do expect increased charge-offs over the next two quarters, as Raul talked about. For the third quarter, we are guiding to 9.8% annualized net charge-offs, plus or minus 15 basis points.

For the full year, we are increasing our guidance by 80 basis points to 9.6% net charge-offs, plus or minus 15 basis points. Approximately 20 basis points of the increase in rate for the full year is reflective of the denominator effect of credit tightening leading to reduced origination amounts and lower average daily receivables.

It is important to keep in mind that because the average life of our portfolio is only 0.9 years, the portfolio will turn over more than once per year. This means that the loans we have started originating under tighter credit standards will make up the vast majority of the portfolio a year from now.

While we expect to have elevated loss rates for the third and fourth quarters of this year, our current projection is that losses will start decreasing in the first quarter of 2023 and return to our target 7% to 9% range within a year.

We manage the business for consistent, profitable growth and are tightening our underwriting standards and managing expense growth as appropriate in the uncertain economic environment.

It’s notable that with the exception of 2020, we’ve been profitable every year going back to 2016, and our guidance reflects that 2022 will be another profitable year for Oportun. Part of how we’ve been able to achieve this profitability is through our strong risk-adjusted yields.

While Oportun delivers significant savings compared to alternatives for our members, for instance, payday loans being 9x more expensive, the business generated a gross yield of 32.3% during the first half of this year.

Accounting for our now anticipated full year 2022 net charge-off rate of 9.6% at the midpoint, our risk-adjusted yield is currently 22.7%. After servicing fees of 5%, a strong 17.7% unlevered contribution yield remains. This provides a solid base for sustainable profitability on an annual basis.

In summary, I’m pleased that we delivered another solid quarter and that we still expect to deliver a profitable 2022 despite the challenges in the macro environment. With that, I will now turn it back over to Raul for some final comments before we open the line for questions..

Thanks, Jonathan. I want to thank all of the employees at Oportun for a strong first half of the year. Our mission to provide inclusive, affordable financial services that empower our members to build a better future has never been more pertinent and will continue to guide us and drive our financial results.

As the macroeconomic environment has weakened, we have taken prudent measures to tighten our credit exposure and reduce our expense growth. We have confidence in our ability to navigate the current environment, and the adjustments we are currently making will position us well for continued profitable growth in 2023 and beyond.

With that, operator, let’s open the line for questions..

Thank you. The first question comes from John Hecht with Jefferies. Please go ahead..

Hey, guys. Thanks very much for all the detail and for taking my questions. You guys, I mean you have a lot of channels, growth opportunities and channels and new products.

So if we’re kind of looking at where you’re maybe surgically tightening in this kind of environment, can you kind of describe which products and/or channels it would affect the most?.

Sure, John. This is Raul. You’re absolutely right.

I think one of the benefits of the way that we’ve executed our strategy is when you look at the channels that we have available to growth opportunities, the lending-as-a-service partners, the new products, it really creates a top of the funnel that is large and gives us an opportunity to be very judicious in terms of where we want to tighten and where we want to focus.

So I would start by saying the core personal loan product is the profitable engine for this business. So that’s the area in which we are tightening the least relative to the products. You saw us talk about credit card receivables and secured personal loan receivable targets that have been reduced for the year.

We think since those are new products and they represent a relatively small percentage of the portfolio, it made sense to tighten there and just be a lot more prudent in terms of who we’re applying and the growth that we’re looking for.

In that personal loan product, as I mentioned, is the proven profitable portion of our business, what we’re doing there is we’re going to skew much more to the returning portfolio.

We’re going to tighten quite a bit on the new side, in particular, as I mentioned in the comments, with borrowers that have lower free cash flow in those kind of new shorter-term loans. So that’s really where we’re looking to tighten the most..

Okay. That’s very helpful. And then what are you – like, I mean, what are you kind of seeing in terms of the competitive dynamics of the industry? I mean, we’re hearing this type of narrative from a few operators who are surgically tightening just to do the right thing and protect the balance sheet and so forth.

So what – how would you define the – or describe the competitive environment and does that give you certain opportunities in this kind of environment as well?.

Well, I think to your point, when we listen to the earnings of some of the other companies in the space, we think that what we’re saying today that a portion of our member base is starting to feel the impact of inflation and high gas prices, that, that’s consistent with what we’ve heard others say.

Jonathan mentioned in his comments that if you look at the increase in losses on a gross adjusted basis, it’s about 60 basis points. Again, we think that’s consistent with what others have said. So when we think about competitive positioning, we see this as a momentary pause.

We see it as a way to really be judicious given the uncertain environment. And once we see things start to get a bit better and a bit clearer, we will start to lean back into growth. And our history of taking share, we think, is going to continue. So we think from a competitive positioning perspective, we remain quite strong..

Okay, great. Thank you guys very much..

Thank you, John..

The next question comes from Sanjay Sakhrani with KBW. Please go ahead..

Thanks. Good afternoon.

I guess first question is maybe, Raul, you could just walk through what exactly these cohorts where you’re experiencing the higher – if there is any similarities between the cohorts that are actually causing some of the stress on credit? Because you hear a lot about the macro backdrop while people are worried about the future generally today being okay in terms of low unemployment and strong income trends, could you just talk about sort of what’s causing this cohort to see some of the problems they are? Thanks..

Absolutely. So what we think happened is if you think about the individuals I described, Sanjay, those with lower free cash flow and new customers who are the ones that tend to get those smaller loans with the shorter terms, we think that, that borrower was absolutely making their payments benefiting from the strong labor environment.

And then when gas prices started to go up, when inflation starting to be seen in food and other areas, they just got squeezed. And then any small bump in the road made it hard for them to make their payments or hard to stay on track.

So when we’ve talked to our servicing team, when we’ve seen some of the comments and trends, we’re finding things like someone got laid off at work. They are getting a new job, but it’s going to be a while before they get their paycheck and they are behind on a couple of other bills.

They got COVID or they are taking care of someone else that got COVID. So it’s really that member that just doesn’t have enough of a cushion to really make it through a disruption and was really hanging in there well, but this last period of inflation in gas prices and a disruption are the ones that just ended up putting them off track.

And that’s why really the returning portion of the portfolio, we continue to be really, really pleased with that performance and why we’re skewing in that direction. And at least for now until things get a bit better, we’re just not going to originate many of those lower cash-free loans for a lot of new loans.

And you can tell that in what we described, in Q1, 51% of the loans were to new borrowers. In Q2, we started to bring it down. We’d already talked to you about the tightening we were doing. So Q2 was 44%. And given what we saw in July, we drove that down to 35% of loans going to new borrowers.

So that’s what we’re seeing, and those are the actions we’re taking, Sanjay..

Got it. That’s very helpful.

And then, Jonathan, I guess when we think about how that sort of flows into the credit spread element of the liability mark, that’s all sort of inside your mark for this quarter? I mean we shouldn’t expect any sort of residual impact as we move into the second half or how should we think about that as a better question?.

Yes. No, that’s a great question. So I think in terms of fair value, for our loan portfolio, we expect that as the year progresses, the prices may come down. Interest rates on the short end are still going up. So that will have an impact. And then for our bonds, they are actually becoming shorter just as they approach their payouts over time.

And some of the favorable benefit that we saw in the last two quarters may start to reverse itself just as bonds tend to revert back to power that maturity.

Is that helpful for your question, Sanjay?.

Yes.

I guess like, I mean – and does that trump anything else? Like I’m just trying to think about the direction we should think about the – look, dimensionalizing those how significant those marks could be?.

Look, I think from a debt holders’ perspective, I don’t think these slight shifts in our credit expectations will be viewed as material given that they have – I went through, at the end of my comments, are very significant unlevered yield.

And so from that perspective, I think that provides ample protection from a debt investor’s perspective..

Sanjay, this is Raul. The one thing I would add is I think we and other lenders have certainly talked about this kind of dynamic and uncertain macro environment. When you are able to go through the whole earnings deck, as you know, we pride quite a bit of detail on the fair value estimate methodology.

On Page 42, you will see that one of the really, really big impacts on the mark on just the fair value was the significant increase in the discount rate. You look at the trend really over the last seven quarters is what we provide there.

And you can see that this last quarter, it really moved up, and that’s again an indication of the tricky macro environment.

So, although to Jonathan’s point, on both kind of the debt side and in terms of our loan performance, we feel like we have got a good line of sight, it’s these other elements that are out of our control that can really impact the mark..

Very helpful. Great. Thank you very much..

Next question comes from Mark DeVries with Barclays. Please go ahead..

Yes. Thanks. So, how are you thinking about the risk that if we have kind of persistent high inflation, that you – some of these bars are hanging on now with slightly better cash flow start to get pressure and you have got kind of rolling delinquency challenges.

And am I right, based on your guidance, before expecting charge-offs to come back down at the beginning of next year that you are not really expecting any kind of increased – significant deterioration in the job market here?.

Yes. Mark, I guess a couple of things. Number one, right, we are watching the macro environment closely, and that’s things like unemployment rate, increase in wages, gas prices, inflation overall, and we will consider to make adjustments.

We will continue to make adjustments based on what we see there because we really want to make sure that we are booking high-quality profitable loans and that we are being prudent as we think about growth.

You see that in our originations guidance because the guidance for Q3 from an originations perspective is basically flat to last year which we think is the right approach in this environment. As we think about the potential for continued deterioration, that’s why we are going to swing much more to the returning portfolio.

Those are individuals that have prioritizing on our loans. They are individuals that have more free cash flow available. But if we were to see a continued change in the environment that is negative, then we will just keep tightening, and we will track first payment default rates and roll rates to guide the actions that we take..

Okay. That’s helpful.

And could you also just talk about how kind of the need to raise pricing for higher funding costs, the 36% rate cap you are trying to stay under and the need to tighten are going to impact the addressable market and any kind of potential impact to your expected returns?.

So, a couple of thoughts there. From a price count perspective, we think that having the price cap at 36% is still absolutely the right thing to do from a regulatory perspective in terms of the states that we can go ahead and serve, so we continue to be committed to the 36% price cap.

From a pricing perspective, we mentioned in the last earnings call that we have taken some pricing action. We have done more right now. So, what we expect is an overall benefit of about 130 basis points as all of those elements start to go into play. So, that will be seen over time. It’s not going to be by the end of the year.

And then in terms of just who we can serve, it’s not a question just of, say, cost of debt.

We really think about it in terms of credit performance so those adjustments in terms of the profitability of that member and the profitability of that loan, we are already taking into consideration, and that drove quite a bit of that tightening that we described today..

Okay, great. Thank you..

Thank you..

Next question comes from Rick Shane with JPMorgan. Please go ahead..

Thanks guys for taking my questions. So look, it’s interesting. If we look at the cumulative loss expectations on the portfolio, they are approaching where you were in mid-2020. And the difference mid-2020 versus where we are now is that mid-2020 had a huge expectation from a macro perspective in terms of peak – or a spike in unemployment.

And that’s not really in most forecast right now. So, as you pointed out, this is really an inflationary factor.

I am curious given how quickly things change, if you were seeing consumers’ behavior change at all to catch up in this environment where the labor markets are so strong, do you think that there is an opportunity for your consumers to cure and sort of work their way out of their difficulties?.

That’s a great question, Rick. So, I will start by saying I continue to be incredibly optimistic about our business. So, we have seen a part of the portfolio gets squeezed by these inflationary pressures, but when we look at the overall performance of the portfolio, that’s really what drives my optimism.

I really like the way that you are asking about kind of how does the business look today relative to, say, mid-2020, and you are right, the labor market is completely different. I think one of the big differences between now and then is as we expanded into new states, we really changed the mix of the portfolio. That was absolutely intentional.

It was meant to drive long-term profitable dynamics of the business, but then the world changed, right. Inflation that we are now seeing, gas prices, all of those things led to the squeezing of some of the customer base. But to your point, we think it’s a very, very different dynamic than what we saw in the middle of 2020.

So, we are going to continue to look at the performance of our borrowers. I am cautiously optimistic by trends like as of the end of last week, gas prices have gone down 51 days in a row. We think that gives a bit more breathing room to all of our members.

And if some of the articles we are reading are correct and we may have seen peak inflation, we know that, that’s going to create a bit more breathing room and may provide that opportunity for some of the borrowers who are delinquent to catch up.

We don’t know if that will happen for sure, which is why we felt that the prudent thing to do was to go ahead and tighten..

Got it. And thank you. It’s helpful. And you mentioned sort of anecdotally, the feedback that you are getting from the branches.

I am curious given how data-driven your business is, is there any effort to more systemically gather information about what’s going on with your borrowers, whether it’s polling or surveys or so that you can get that forward look?.

I think that’s also just a really good point you bring up. What I shared actually was not from the branches. We have actually created a channel now to try to get a lot more feedback from our servicing department across all products to try to understand what are they hearing, what is it that’s taking place.

And to your point, that’s helped us, I think understand the situation a bit better. I will give you another example I heard of recently that indicates how there can be a portion of the member base to get squeezed. What this particular member shared is that filling up the car used to cost $40, and it was now over $60.

And if you think about someone that due to their job maybe driving or maybe having to fill up their tank every week, right, that’s $80 out of their budget on just gas. And then you take into account the higher cost of food, and you can see again some of the borrowers with that lower free cash flow would get squeezed.

But you are absolutely right, we have had a new addition to our servicing team and one of the things that we were able to put in place was that continuous feedback and the ability to hear what the servicing department hears every day, and that’s been really beneficial to us already..

Got it. Okay. Great. Very interesting and very helpful. Thank you..

Thank you, Rick..

Next question comes from Hal Goetsch with Loop Capital. Please go ahead..

Hey. Thanks for taking my question. Just wanted to gauge your thoughts on what it would take you kind of to really reopen your funnel again as you are going into many new states, many new products, want to grow your membership base, but with this origination, target reduction, it seems like you are really taking a lot out of this funnel.

So, what do you need to see for this funnel to come back on the way you have it maybe at the start of the year? Thank you..

Yes. So, you are absolutely right. Certainly, we are skewing the portfolio much more to the returning side, and we are going to slow the growth among the new customer.

When I think about ending the year, when we look at the originations guidance we provided, we would still end the year with 37% year-over-year originations growth, total revenue of 49%, higher than a year ago. So, even if we were to maintain this trajectory, I still feel great about the year overall and how it positions us for 2023.

When I think about what it would take to go ahead and open up a bit more on the new side, I think we would have to see the reversal of some of the trends that I have been talking about. So, we would like to see gas prices to continue to go down. Thankfully, that trend is promising.

We would like to see some of the theories about having hit peak inflation really prove out in the remainder of the year. That’s how that would create that additional breathing room even among those that may have lower free cash flow.

So, that’s really what we would have to see to start to open back up among the new and the less – I am sorry, and those borrowers that have less free cash flow. That’s what we would have to see. And then this temporary slowing down, we would go ahead and reverse it and start growing again with that new part of the portfolio..

Thank you..

Thank you, Hal..

Next question comes from David Scharf with JMP. Please go ahead..

Hi, David. David, you may be on mute. We can’t hear you right now. Operator, we may have lost David..

Mr. David Scharf, you are on the line..

Operator, any other questions?.

This concludes the question-and-answer session. Thank you for your participation. I would like to turn the conference over back to Mr. Vazquez for any closing remarks. Please go ahead..

Well, thanks again to all of you for joining us on today’s call, and we look forward to speaking with you again soon..

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