Good afternoon, and welcome to Oportun Financial Corporation's First Quarter 2020 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 Nils Erdmann, Vice President of Investor Relations. Mr. Erdmann, you may begin.

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun's first quarter 2020 results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer.Before we get started, let me remind you that some of the remarks made today will include forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements.A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in today's earnings press release. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.Also on today's call, we may present both GAAP and non-GAAP financial measures, which we believe will provide useful information. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our first quarter 2020 financial supplement, as well as the appendix section of the first quarter 2020 earnings presentation, all of which are available on the Investor Relations website at investor.oportun.com.In addition, this call is being webcast and an archived version will be available after the call on the Investor Relations portion of our website.With that, I will now turn the call over to Raul.

Thank you, Nils. And good afternoon, everyone. We appreciate your taking the time to join us and we hope that you, your families and friends are all healthy and safe. I will start with a brief review of our response to the pandemic crisis. I'll discuss some of the decisive actions we've taken in recent weeks, as well as our three areas of near-term focus to successfully operate throughout this period. Jonathan will then present our first quarter financial results, followed by an update on our preliminary credit and financial performance for April, as well as a few early reads for May.Now let me take you through our three near-term areas of focus. One, serving our customers, two credit and three, capital and liquidity. I'll start with what we are doing to serve our customers.The health and safety of our employees and customers is our top priority and we are taking all necessary precautions in accordance with the guidelines from the Centers for Disease Control and state and local authorities. As a financial services provider, Oportun is deemed part of an essential critical infrastructure sector by the Department of Homeland Security. So we are continuing to serve our customers through our omni-channel network, in person at our retail locations, over the phone through our contact centers and online through our end-to-end mobile solution.As of April 30th, 337 of the company's 342 retail locations remain open to serve customers and with the exception of our stores in New Mexico that were closed by state order, everyone who wants and is able to work a full schedule can do so.Our contact centers also remain in operation which enables our customers to apply for a loan over the phone by speaking directly to one of our contacts center representatives. Thanks to our omni-channel…

Thanks, Raul and hello everyone. Let me start by echoing Raul’s appreciation to those of you joining us today on this call and I hope you and your loved ones are healthy and safe.As you may recall in addition to GAAP, we also evaluate our performance based on fair value pro forma results, which we believe present a more consistent view of the underlying trends of the business. Unless I state otherwise, all the metrics that I will now share with you will be on a fair value pro forma basis for the purposes of comparison to prior year periods. A full list of definitions and reconciliations can be found in our earnings materials.We continue to operate in a very fluid environment. So while I'll provide you with a summary of our first quarter results, I'll also devote some time to discussing our insights from the month of April and a few early reads from May.Through mid-March, we were on track to deliver double-digit origination growth, but then shifted our focus to capital and liquidity preservation. The ensuing steps we took to adapt to the changing environment led to reducing our credit risk exposure and making the appropriate modifications to our servicing strategy.In late March, we saw a reduction in loan applications, potentially attributable to a redirection of our marketing efforts, as well as reduce demand by our customers. This impacted our aggregate originations which were $432.8 million for the first quarter, up 4% from the prior year period.Despite this impact to our originations in the last two weeks of March, on a GAAP basis total revenue for the first quarter was $163.4 million and grew 18% year-over-year. Fair value pro forma total revenue which is now the same as GAAP total revenue for the first quarter was also $163.4…

Thank you, Jonathan. In closing, I want to reiterate that we have built a strong business characterized by low leverage, strong liquidity and a diversified funding program. Our significant investment in technology is allowing us to rapidly evolve our underwriting and collections approach in order to continue to serve our customers during these unprecedented times.As Jonathan and I have both mentioned, we are cautiously optimistic at this time, given recent trends we've shared with you in customer payments and credit, as well as indications that loan applications are beginning to increase. I began my remarks by expressing thanks to our teams who are working hard during these very difficult circumstances to help our customers.I have never been more proud of our employees than I am now and I am confident that Oportun will come out of this crisis even stronger than it was at the start of the year.Thank you all for your time. And now we welcome your questions and comments. Operator?

Thank you. [Operator Instructions] The first question is from the line of John Hecht with Jefferies. Please proceed with your question.

John?

John, your line is live.

Sorry, guys. Can you hear me?

Yes, we can.

Hi, John.

Okay. Thanks very much. Good to hear your voice. Appreciate all the color from the quarter and then the update to April is very helpful as well. First question, Jonathan, just thinking about, if the trends you're seeing in delinquencies and deferrals and so forth. And I'm not asking for guidance, it's more of just kind of conceptual, if those kind of persisted through the quarter like you seen, how do we think about what that fair value - the effects on fair value this quarter in terms of any assumptions you might change?

Sure. That's a great question John. So first of all, what I'd guide you to is what you've already seen in the transition from our March mark to our April mark, right. So you talked about credit performance in terms of delinquencies, as we said in our remarks based upon some favorable trends such as the deferral percentage coming down from a peak of 14.6% to 8.6%, also the percentage of customers in deferrals 60% making payments. That is one of the factors we considered in lowering our remaining cumulative life charge-off assumption from 14.6% to 13.9%. If we continue to see favorable trends, then it could be that we would take that loss assumption down further.The other part of fair value, as you know is the discount rate, as well as the marks on the bonds. We saw the yields on our bonds increase right to the price traded down during April. That's a function of markets. And you know, that that will be sort of an independent variable.We are seeing the asset-backed market in general continue to have increased firmness. Companies are coming to market with deals. So we haven't seen it yet, but it may be that over time our spreads, along with the rest of the market improve and that would actually be beneficial on the asset side. But then it wouldn't be not beneficial on the debt side, right. If the price of our debt were to increase then that moves against fair value because it's an increase in the value of liability. But overall, you know, we expect to see the credit trends based on what we're seeing today improve.

Okay. That's very helpful. And then an unrelated follow up questions and we've always appreciated the value of the omni-channel platform and the technology. I'm wondering you know, over the course of the past several weeks, can talk about your applications online versus in stores and how that mix is changing and how that you know, how that impacts the business as well/

Sure. John, this is Raul. To your point given the fact that a lot of the country put in place shelter in place kind of measures and consumers in general start moving around as much. We did start to see diminished traffic to our retail locations. Thankfully for years we believed in having an end-to-end mobile capability and that has served us very, very well during this time.And from a road map perspective, we've asked our engineers to prioritize mobile enhancements even higher. It's really our second priority now, second only to managing credit outcomes. So we're really pleased with the performance we're seeing from mobile and we've decided to continue to enhance the capability even faster, given the environment that we're in.

Great, appreciate it and good to hear everybody - that everybody's healthy.

Likewise.

Thank you, John.

Our next question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Thanks. Nice to hear that you guys are well. I wanted to dig in a little bit more on the credit quality discussion. I guess, do you guys have a whole lot of insight into your customers employment situation. For example how many have been laid off versus furloughed, maybe how many are essential workers. Because I guess what I'm trying to get at is as we look forward and let's just assume the stimulus sort of wears off you know, what is the sort of structural impact to the loss rate going forward? Thanks.

Yeah. So that level of detail we don't really have in terms of the population of customers that we have Sanjay. What I would tell you is that our belief was that our customers were among the first ones that lost their jobs. So as shelter in place took effect, as different businesses started to cut back on labor, we believe that our customers were among the first that saw that impact.As a consequence you know, already that there were a lot of tightening measures that we put in place to strengthen our verification practices, including verifying our applicants that were coming in now had a job and we asked them for even more recent proof of income.So we took a lot of measures, because again we felt like our customers were among that first wave. I saw some data in just the last day and a half or so that looked at unemployment or job losses, I'm sorry, that looked the job losses by income ban. So there were three lines, that were people that earn less than 50,000, 50 to 100 and 100,000 plus and for people that earn less than 50,000, the amount of job losses basically plateaued.So our view right now is that our customers have felt the pain and as the economy starts to open back up, our customers will be able to go back to work. And until then, that they are benefiting from the stimulus and unemployment benefits. And I think by the way it’s helping our delinquency numbers.

Right. And I guess when we look at the loss assumption you guys have made inside of that fair value mark. Are you guys assuming some kind of recovery? I know you mentioned Jonathan that you're assuming that deferrals will help like a natural disaster sort of situation. But how have things historically progressed for a given loss rate in your book and how different is the cycle?And then just one quick other follow-up to David's last question. How many of your customers are actually making payments electronically versus at the branch? Thanks.

Okay. So let me - I'll take your payments. Yeah. Let's start with the first part. So let me tell you I think the easiest way to address your question Sanjay is to tell you what things we looked at in order to come up with our loss assumption. And it's a triangulation between a couple a couple three things.One, you know, we've been lending for 14 years, so we have statistically significant experience from 2008, 2009 great recession where our loss experience actually was relatively quite good in comparison. And obviously in the current environment you know, we're seeing higher levels of unemployment than we did back then. So we've clearly extrapolated for that.The other thing that we looked at very closely is that you know, we have experience with deferrals and helping customers get back on track, even though this is bigger than a natural disaster. I think it's a very helpful comparison.So in 2017 you know, we had 12% of our portfolio in Houston when Hurricane Harvey hit and we were able to help customers there. And so we have a wealth of data from that experience of what happens when you defer customers, give them time to get back on their feet and then work with them potentially to get reduced repayment plans for those who aren't able to get back to a full income, but can make some payment.So we've taken that experience and then we've magnified the fact that we're seeing much higher levels of unemployment than in either of those scenarios in the past. What we didn't factor in as we discussed in our remarks was the $4 billion - $4 trillion of government stimulus. And that's because we'd like to take a data driven approach and we hadn't seen data on that before. So we decided to wait and see how that would impact customer behavior before we factor that in.And as we've talked about before, I think the fact that we are seeing so many customers paying, the fact that we're seeing the deferrals go down, the fact that we're seeing good delinquency numbers, potentially that is an impact from the stimulus that's factored in.

So just to add one thought to that and then I'll answer your payment question Sanjay. The way that we're thinking about that number going forward and updating it, is we updated based on actuals. So we look at what percentage of the cohorts of deferrals are actually coming off deferrals, what percent are making payments, do they continue making payments, do they go into delinquencies. And then obviously as you can imagine, we manage all the delinquencies carefully.So we would tell you that the change that you saw from Q1 to April is based on actuals and then obviously as we continue to see Mac season, we'll update that again and when we tell you Q2 that will again be based on actuals.So we're you know, we're not foolish enough to try to project when things are going to fully recover or what it's going to look like region by region. What we're trying to do is just manage the actuals of the business very carefully. Look let me pause there and see if you have any follow up questions, before we move to payment numbers you asked for.

No, great. Thanks.

Okay. So on the payment side for a month, the month that ended in April what we saw was over 68% of customers were making payments outside of our locations. So going back to the question that John asked, we have seen people start to use either payment mechanisms or certainly our mobile solution more and over two thirds of all customers Sanjay are paying either via ACH or debit card.

Right. Thank you.

Our next question comes from the line of Mark DeVries with Barclays. Please proceed with your question.

Thanks and good afternoon. I was hoping you could provide some color on what you think is driving that that drop, I believe you said on the deferrals some 14.6%, I thought at the end of April to 8.6% and just a couple of weeks I mean, it seems like a very big drop, do you kind of have a feel for what caused that to move so quickly?

This is Raul, Mark. It's a couple of things. If you think about this number one of the ways we manage is, we think about what are new deferrals coming in and then what are the number of people that are coming off of deferrals. So on terms of new deferrals we've seen that number declined significantly and that goes back to the comment I made earlier that our view is that our customers got hit with the first wave of layoffs. So kind of end of March beginning of April that was really when we think our customers started to be impacted. And as a consequence when we started to make these emergency hardship deferrals available, we saw quite a few of them at the beginning, but we're seeing very few being added now.The number of people coming off is what's driving that percentage down. And you did have those numbers correct, it was 14.6% at the end of April and as of May 12th it was 8.6% and that's a combination of people making payments and coming off deferral or the people for whom the deferrals have expired and those are really the things that are driving it. The people coming in and then the two reasons I described for people coming out.

Okay. That's helpful. One of things that you've talked about in the past, about you know, the resiliency of your customers and you know, under stress is the ability to substitute in final term sources of income, if they lose their job. Do you have a sense for how many people who are returning to repayment are you know, returning to their old jobs versus maybe being able to find new jobs? Some of the need for the economy or shift?

Yeah. We don't know. Mark, that that's not something that we ask our customers, if they're going to make a payment, we don't ask them if it's from a new job or their current job. So I'm afraid, I don't have any insight to provide there.

Okay. Got it. And then just one last thing. I mean, I think you also cited some positive signs as people return to work. Do you have a feel here on the ground any difference in like originations, credit performance in some of the states that have opened up earlier like Texas and Florida versus states that have been Florida open like California?

So I won't go into the geographic piece right now because historically we haven't disclosed originations that way Mark. But I'll tell you though we recognize that things are very dynamic. We are cautiously optimistic based on the improvements we've seen in originations the last few weeks.So one of the ways that we've chosen to look at it now just given how different the times are is not necessarily on a year-over-year basis alone, but instead on a week-over-week basis to try to get a sense of have we hit bottom and are we starting to climb out of the bottom. And we have seen improvements now week-over-week over the last couple of weeks, so that that does make us cautiously optimistic right now.

Okay. Got it. Thank you.

Sure. Thank you.

Our next question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

Hey, afternoon and thanks for taking the questions. And I'll echo previous comments. Thanks for all of the April and May data. Everyone's trying to obviously get a handle on what kind of trajectory we're on and that's very helpful. Raul, this you may have addressed this in one of your answers, but I'm curious is there any color you can provide on who is applying in these last few weeks. You know, and specifically whether these are new applicants or if they're all repeat borrowers? I mean, it's clearly a positive trend that some other lenders aren't necessarily seeing?

So I would tell you David, we are getting both new applicants and repeat applicants. This is clearly a time where there are people that still need capital, either people who don't have a job and are trying to find someone who can help them out or people that do have a job, and maybe because their loved one has lost their job they want to help out or they've got some unforeseen expense. So we're seeing applications from both new and repay customers.What I can tell you is the profile of a successful borrower today after the tightening actions that we've taken in both March and April is someone who has proof of income, someone who is more likely to work in an industry that has not been as impacted by the current situation, in some cases the risk engine suggests that we verify employment. And in that case, we've been able to get a hold of their employer and verify that the applicant has a job right now.And to your point because I think this is one of the things that's behind your question David. The person is much more likely to have been a prior customer. In this environment we are absolutely skewing towards people who have proven success with our product and payment structure.

Got it. That's helpful. And maybe just following up on that discussion. You know, when you when you talked about tightening the underwriting criteria and specifically maybe beefing up income verification. I think you just gave one example which maybe now calling employers. But can you talk a little bit about in the past and what's changed in terms of the nuts and bolts of income verification and whether you believe that these will be sort of permanent changes to the business going forward.

So I think as Jonathan described earlier, one of the things that really helped us is we've been through this situation before in terms of the great recession. So we have a playbook that works well for us then and frankly we also have the benefit of having the same chief risk officer. So we not only have the playbook, but we have the person that wrote it still with us and we've been able to add to that playbook based on the hurricanes wildfires, other things like that.So just to summarize very quickly, I am going to answer more broadly first, David. We've tightened our lending criteria, we adjusted loan amounts overnight. We enhanced outreach efforts to customers, we skewed more to repeat customers and then getting back to your specific question, the things that we have done on income verification are we have asked for a much more recent proof of income. So if in the past we would have allowed you to say give us a pay stamp from three or four weeks ago. Now we're going to ask you for your most recent pay stamp just to verify that you are still employed and that you're not necessarily showing us something that is not reflecting your current employment.Whether or not these are going to continue to be permanent changes, I'm not going to speculate on that right now. I think we like everyone else are waiting to see how does the economy recover, how quickly do people get back to work and then once the recovery takes place is it going to be a stable recovery. But right now we think this is the best practice for us to have.

Got it. No, it makes sense. And then, I think lastly Jonathan just to make sure I wrote this down correctly, as we think about near-term marketing spend variable costs in the context of reduced demand. Did you say that total OpEx in the second quarter would likely be sequentially flat or should we be thinking about it being down?

No, I did say that, you heard that correctly. I did say that we would expect Q2 total OpEx to be sequentially flat around there.

Got it. Okay. Thank you very much.

Thank you, David.

[Operator Instructions] Our next question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

Hey, guys. Thanks for taking my questions and glad to hear everybody's doing well. I do appreciate all the detail on the fair value marks and the underlying analytics behind that. It's really helpful. Couple of detailed questions and then sort of a conceptual question. What were the actual repayments on the portfolio this quarter and what was the gain on sale margin?

I am sorry, you asked, what were the actual repayments on the portfolio?

Yes.

Yeah. So you can actually see that in the slide that we included in the deck, we had some view on the portfolio. Let me get to the right page here, because I think this would be helpful, page 17 of the earnings deck, where we illustrate our operating cash flow and you can see cash flow from investments of minus $39 million.Now there are a few other things in there, but that's the main driver. And then also you can find more detail in the supplemental earnings spreadsheet, that's posted on our Investor website, that will have the portfolio roll forward. Then in terms of your second question, the gain on sale margin was 10.05 for Q1.

Great. Sorry for the dog in the background. The new reality, I apologize.

That's quite, all right.

No worries.

And then the last question is you know, look stocks trading at a substantial discount to tangible book, your secured notes are trading at significant discounts to par. I realize in particular on the fair value notes that may not be attractive to repurchase those because they do offer an attractive hedge against fair value marks, but you also have some notes that are held at amortized cost.I'm wondering when you're thinking about opportunities and investments and I realize and maintain liquidity is critical right now, but the opportunities either to buy back some stock or to extinguish some of the debt?

So Rick, this Raul. First, as I mentioned in my remarks, I'm really proud of how our team is executing right now. These are challenging times. There is a lot of dynamic elements in the business. We didn't spend a lot of time talking about this, but I think as you know one of the metrics that we provide to adjusted EBITDA, so that way our investors can see the underlying strength of the business, since it excludes the impact of the fair value. And that number for Q1 was $17.9 million, it exceeded the guidance that we had provided. So we continue to believe that the company is performing well, even during these difficult times.On your question of say buybacks, that's certainly something we've talked to the Board about, is thinking about how do we want to use our capital and what is the highest return for our shareholders. As you've pointed out, right now we think that the preservation of capital makes the most sense, given how dynamic the environment is. But that is kind of an ongoing conversation with our Board.

Great. Look, I realize that it's an easy question for my perspective and that if everything gets better from here, buying back stock or redeeming debts is a great call. But if things deteriorate, you're going to certainly wish you had the liquidity.But I just - you know, as a growth company, as the markets start to normalize, I am curious just how – and again, how you think about that because there is a trade off in terms of the growth opportunity.

How we think about growth in general or how we think about the buyback just to be clear?

How you would - you know, if you sort of reached the point of feeling all clear about the world, which again I think we're all ways away from that point. But how important is growth versus the opportunity generate really substantial returns by either redeeming notes or buying back stock at such a huge discount?

So the last time we spoke to you it was a very forward looking comment on your part. You mentioned that there are times when the team has to understand the need to slow down or even hit the brakes a bit and being very thoughtful about that.And we certainly believe that in this environment it made sense for us to shift from a growth mentality to one of managing capital carefully and making sure that we are producing great credit outcomes. That's our number one priority.But I'll tell you as a team, we remain optimistic that our opportunity for growth will return as the economy starts to reopen. So there was a question earlier David made about OpEx, and one of the reasons that we're keeping OpEx flat sequentially is we believe and we are working on things that are going to make us stronger on the other side of this event, that we're all living through than we were a few months ago.We mentioned in the comments, we have introduced now secure personal loan. It is in 20 locations, so we're testing our way into it and we're excited about the ability to have a secured loan product as the economy starts to reopen, credit cards was something we were very pleased with at the beginning and we just put it on hold out of an abundance of caution. But that's something that we think could continue to be a growth driver and we continue to look at things like bank sponsorships, so that we can offer our product in more states and the investments we're making mobile and other parts of the business.So you're right. What we have done is we've made sure that we've taken the right actions from our view today to make sure that we are well positioned to start to grow again as the economy starts to reopen.

Got it. That's very helpful. It's it feels like a lot longer than three months ago since we've had those conversations. So thank you and I appreciate all the hard work that's gone in to getting where you guys are today.

Thank you, Rick.

Thank you, Rick.

There are no further questions in the queue. I'd like to hand the call back to Raul Vazquez for closing remarks.

Thank you very much. Well, again I do want to thank everyone for joining us on today's call and we absolutely look forward to speaking with you again soon. Take care, everyone.

Stay well.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.