Greetings, and welcome to the Oportun Financial Corporation Fourth Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Nils Erdmann, Vice President, Investor Relations. Please go ahead, sir.

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun’s fourth quarter and full year 2020 results 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, 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, particularly given the uncertainties caused by the COVID-19 pandemic, and we caution you not to place undue reliance on these forward-looking statements.

Good afternoon, everyone, and thank you for joining us. We concluded 2020 well situated to grow our business and expand our mission, and I’d like to start by highlighting 5 things that became clear about our company as a result of successfully navigating the challenges of the pandemic. First, our business is resilient and showing additional signs of recovery. In the fourth quarter, we grew aggregate originations 48% sequentially, generated $141 million of total revenue and $17.5 million of adjusted net income or $0.60 of adjusted EPS. We also grew our managed principal balance to $1.9 billion, up sequentially from $1.8 billion. In summary, our fourth quarter results were strong and give us confidence that we exited the year on a trajectory for continued growth.

Thanks, Raul, and hello, everyone. In the fourth quarter, our business exhibited growth in originations and revenue, normalization of our credit performance and improved profitability. Aggregate originations were $448.6 million, up 48% sequentially. Total revenue was $140.8 million, up 3% sequentially due to higher interest income and higher noninterest income but down 15% year-over-year. Interest income was $129.9 million, up 1% sequentially but down 12% year-over-year. Noninterest income, which includes cash gain on sale from our whole loan sale program, was $10.9 million, 36% lower than the prior year period but up 36% sequentially due to higher originations, reflecting the volume of loans sold, offset by a higher gain on sale premium of 12.8% versus 10.2% in the prior year period.

In closing, I want to thank all of Oportun employees for their ongoing commitment. Their efforts made it possible for Oportun to navigate through the pandemic successfully. What’s more, we’ve accomplished this while ensuring that we stayed committed to our mission of helping hard-working people in the U.S. build a better life for themselves and their families. Entering 2021, we are well positioned for growth, and I’m very excited about all the things we’ve set out to accomplish this year. Thank you all for your time, and now we welcome your questions and comments. Operator?

The first question is from Sanjay Sakhrani, KBW.

So first question -- it’s sort of a 3-part question on the branch closures. Just want to clarify, like the branches that you closed, it was more that they were in the general vicinity of each other and that’s why you could get efficiencies. I guess the second part of that, are there more branches like that, that you could consider taking out over the future? Second question related is are there any discernible behaviors of consumers that you originate online versus off-line or you feel pretty comfortable that you’re not getting any adverse selection related to that? And then final one, on the savings, the $19 million. Does that come back in 2022 then? Like, we’re reinvesting this year, but we’ll get it in 2022?

Sure. Sanjay, this is Raul. So on the branch closures, you’re absolutely right. The branches were close to each other. On average, the next closest branch to one that we’re closing is about 3 miles away. And in our dense markets like L.A., the average distance is 1.2 miles. So as we executed our strategy and saw customers go ahead and shift to the digital capabilities, we did have an opportunity to optimize the network given the fact that we have branches nearby. So you’re absolutely right. The second part to your first question was whether there are more branches like this. We’re always monitoring our footprint, and we’re always taking a look at whether or not there are opportunities to optimize our omnichannel approach. So that will be something that we continue to do and continue to monitor. So that’s the first part. Let me pause there and see if you have any follow-up questions on that.

No, that’s good.

Okay. Your second one was whether or not we see any differences by channel and do we believe there’s any sort of adverse selection. We do not. We’re really pleased with the progress that we made with this strategy, and what we’ve seen is just the performance continue to improve across really just about every metric in mobile. So we are making this decision with a lot of confidence given the numbers that we’ve seen, given the performance in our mobile channel. And then your third question is the $19 million. So yes, we believe that there is kind of the recurring savings, if you will, relative to what our run rate was. How much we drop to the bottom line versus how much we invest, we’ll make that decision as we go into the next year. As you heard me describe in the beginning of this call, there are a lot of growth opportunities that we’re very excited about going into 2021. So this year, we decided to reinvest that capital, but that will be the sort of thing that we’ll take a look at as we go into ‘22.

Okay, great. Just one last one on the deferrals. I see on Slide 11, you guys talked about how that picked up a little bit on the shutdowns, but since the start of 2021, they’ve decreased. As far as that pickup is concerned, is that because your customers are sort of indexed to professions that are leveraged to the shutdowns or what? I’m just trying to make sure I understand that part.

Yes. This is Jonathan, Sanjay. That’s a good question. I don’t -- we don’t have specific data around that. Obviously, it was a very small increase. It correlates very closely with the timing of shutdowns and now reopenings in California. So as you noted correctly, we saw a peak in December and since then, it’s been coming down. But that peak was up very slightly from 0.9 at a low during the quarter to only 0.4, and it’s trending down again.

We have a question from Mark DeVries, Barclays.

Yes. So it looks like you had some pretty encouraging developments around the digital engagement that gave you confidence to make the decision to shut some of the branches. Just curious to hear how you’re thinking about the risk that you’re doing that, when maybe customers are engaging more out a necessity and at a time as we emerge from this pandemic where they may actually look to want to move back to more of that kind of in-store interaction.

That’s a great question, Mark. So I’d say there are 3 parts to how we think about that. Number one, it is the fastest-growing and top channel for our customers now. And that was true whether or not there were restrictions in place or if we ended up in a period or a state in which the restrictions were not as severe. So what we really saw is what I think we’ve heard across every industry is that the pandemic accelerated all of those efforts that were already taking place. So when we think about potential risk, the first thing that we look at is we think that the risks are not high given how many people are already transacting outside of the stores. The second thing that we think makes the risk a very manageable one is the proximity to other locations, and I talked already a little bit about that in terms of kind of the response to Sanjay. And there was a lot of analysis that was done. We took a look at the different customers that interact in the stores that we’re going to close, and we have a well-proven playbook already that we use to migrate customers to other stores either because of a winter event -- I’m sorry, a weather event or because of store optimization that we’ve done in the past, because I did mention in my response to Sanjay that this is something that we always do. We always monitor our footprint and optimize our channel. So the second reason would be that proximity to other locations, the analysis we’ve done in the well-established playbook that we have. And then finally, one of the adjustments that we have made as we think about our channel ecosystem is also to think about the partner locations as part of that channel ecosystem. So when we think about a physical footprint and the ability to interact with someone in person, we think of it as a combination of our locations and the locations of our partners. And I mentioned during the call, our goal for 2021 is to expand our partnership with DolEx to 150 locations. So if you think of adding 150 physical locations with DolEx and then the decline of 136 of our own, we’re still up 14 locations, right, over the span of the year. So we think that, that also helps mitigate the risk.

Okay. Got it. That’s helpful. And then I appreciate given the uncertainty you don’t want to provide any kind of guidance. But just given kind of where you were this quarter with both new originations and loan growth, where are you in terms of the impact from both tightening and demand? And what do you think the implications are for growth as we look forward into 2021?

Yes. As we look forward into 2021, we’re absolutely optimistic. So when we think about -- I’ll take both of the pieces that you just asked about, Mark. When you think about the tightening, we have a lot of faith in our models, right? We’ve now spent over 12 years investing in machine learning and AI to develop these models that we think were tested last year and performed incredibly well. We’ve been increasing approval rates since June. We started with the repeat customer because that’s someone who’s already proven their ability to be successful with our product structure. But we’ve also started to increase approval rates for new customers as we work our way through the back half of 2020. And as Jonathan mentioned, first payment defaults continue to look really good. Our credit performance is also really good. If you were to look at charge-offs on a dollar basis, we’re below last year. So we have a lot of confidence right now in our models, and that makes us optimistic that we can continue to grow as we go into ‘21. The second part is the demand piece, and that’s where -- the government right now is doing something that we think is really good for communities. They’re putting capital into the hands of families and individuals who may be suffering. And just this morning, right, we saw what the retail results look like, and customers are using that capital. That means that at least short term, just while they go ahead and use that capital, there may be a slight dampening in demand. We certainly saw that when the $600 checks went out at the end of last year and this customer spent it at the beginning of this year. So the only reason we’re not giving guidance right now, Mark, despite our optimism is the government is obviously talking about another large stimulus effort. We want to get a sense of what is that going to be, who’s going to get it, what are the time lines. That will then give us a sense of that short-term impact on demand. And once we get through that, right, we’re very optimistic for the rest of the year.

We have a question from David Scharf, JMP Securities.

Listen, you know what, Raul, I’ll probably stay on topic in terms of focusing on the store rationalization and the channel strategy. I guess can you -- actually, can you just remind me, put it into context, after the 136, what will be the branch count of locations left?

Yes. So we have 361 locations now, David, and we -- as I mentioned during the call, we’re going to close 136 of them. So that leaves 225 locations.

Got it. Okay. And I guess following up on the kind of the drivers of the shift in focus. I’m wondering, in terms of the proximity issue, I mean, obviously that’s existed for a while. And I’m wondering, is the overwhelming rationalization less maybe the proximity and redundancy of some branch locations as opposed to just how the pandemic has been playing out with respect to close to about 2/3 of your applications moving online? I mean just trying to get a better sense for, ultimately, what’s an operational decision versus what’s a strategic decision and which is really the one we should be focusing on more.

I would say, and to give you insight into how we thought about this, this is a strategic decision. So what the pandemic did was it accelerated the outcomes of our strategy. Ever since 2014, we started our mobile journey, and every year, we’ve invested a bit more. And every year, the customer shows us that they like the capability, they like the convenience, which then creates this cycle, right, where the more positive feedback we get, the more that we invest there. And what happened this year during the pandemic, David, because I really like your question, is all of those trends just got accelerated. I mentioned that last year, about 46% of new customers were applying online. So it was certainly high, but it really crossed over the 50% and got to be that 2/3 level that you talked about. We saw the same dynamic in terms of activity outside of our stores when it came to payments. And it was very consistent in different states. It was very consistent in different periods of the year. So we think that in many ways, what has happened is for consumers, the genie is out of the bottle and now they’ve interacted via mobile with their favorite retailers, with their restaurants, with financial services, right, with each other. I’m even struck by the number of QR codes that we see because China has had them for some time and they never really took off here in the U.S., and now we see them in a lot of restaurants. So we think the pandemic simply accelerated the strategic outcomes that we were driving. The benefits to us as a company are that there was an element of our expense base that you could think of as being fixed. And now by moving more to a mobile element, we think it’s a lot more variable. It’s a lot more capital efficient, and it’s consistent with a direction in which we want to go, which is there absolutely be digital first. And we’ve had that view before, but it got accelerated during the pandemic.

Right. And it is -- I guess, Raul, as we think about where that 65% figure can go, the percentage of applications that are online or mobile, just trying to get a sense for -- I mean, if that number goes to 80%, 85%, I mean, are there certain triggers you have in mind at which point we see even further rationalization of branches even if there’s not redundancy of stores within a few miles?

Well, David, we absolutely believe that a physical location can be a differentiator for us. We have a portion of customers that like those physical interactions, and we’re always going to be led by serving the customer in the way that the customer wants to be sorted. We’ve said for years now that we think the physical locations allow us to add to our addressable market because there may be some people that don’t want to deal with us digitally. I agree with your point, David. I do think that this number, this 65%, is only going to continue to go up. So as that continues to happen, we’ll do exactly what I mentioned earlier. We’ll monitor our footprint, and we’ll continue to optimize our omnichannel approach, in particular, with an eye to putting our capital against the efforts that are going to drive the most growth and the most value. And then per the question that was asked earlier, also trying to figure out how much of that capital then, after we feed our growth investments, can we go ahead and drop to the bottom-line so that we can get back to the ROE trajectory that we’ve committed to investors.

Got it. And just one last follow-up along the same lines on the channel strategy. Can you remind us sort of what percentage of the marketing has traditionally been direct mail? And does this more balance shift to digital origination also mean you’re going to redirect more of your marketing spend to online lead gen partners?

That’s a great question. So although we have not disclosed historically where we spend our marketing dollars, your intuition is correct. What has happened over the last few years, and again, it was accelerated last year during the pandemic, is we’ve invested a lot in a data infrastructure and set of capabilities for marketing that are very similar to what we have done for 12-plus years in our risk. We’ve increased our hiring. We’ve got a great team there. They did a fantastic job last year. So the mix of our marketing that went to digital did absolutely go up last year, David, and we expect that to continue to go up. Because one of the nice things between digital marketing and the digital capabilities that we’ve developed is there’s a very nice handoff there, right? You can put someone straight into the application, and you can present information in a more compelling way. So we’ve got a lot of faith in our team. They’ve done a great job, and we expect that mix to go up. On the DM side, one of the other things that has happened over the years as the customers were responding positively to our digital capabilities is the DM started to emphasize our mobile capabilities a lot more. So if you were to look at our direct mail from a few years ago, right, there would have been more prominence for location. And then what has happened over time is digital and the store started to get equal rate, and now there are some creatives that we test in which the call to action really feels like much more of a mobile one. So that shift has already taken place as we have monitored how customers are using our omnichannel network.

We have a question from Rick Shane, JP Morgan.

I’m sitting here and listening to my peers ask their questions, and I know they’ve all followed your company for a long time as well. When we think about what you’re going to be in 2 years, it’s a pretty radical departure from where you were 2 years ago, likely to be increasingly concentrated online versus branch based and be -- and have a national bank charter and potentially be a depository as opposed to being a nonbank. So it’s obviously a huge shift. I’m kind of, of all of those changes, most curious about the shift to having your own bank charter. I think at this point with your partnerships, you have many of the benefits from an asset-gathering perspective, but I’m curious whether the regulatory constraints of being a depository really create enough benefit.

We think they absolutely do. We’re very excited about the chapter that is going to start if we get to become a bank. So from a benefit perspective, Rick, the cost of funds, right, improves significantly for us. And that gives us an opportunity to continue to sharpen our pricing. It gives us an opportunity to invest more in the business, and it helps us on our trajectory to the ROE. So that’s going to be a big benefit. The second thing is there is a lot of benefit for us as a company in having a uniform set of products that we can offer across all 50 states. And if you think about -- we’ve talked a lot about the channel ecosystem so far. We’re also building a product ecosystem. So we have our personal loan product, which is obviously what we do best. But we really made a lot of traction last year and in particular in the fourth quarter with both our secured personal loan and our credit card offering. And as a bank, we would be able to offer those products as well as the personal loans in a uniform fashion across all 50 states in a way that we think not only would create operational efficiencies but again, help the bottom line and help us sharpen our pricing the customers. And then strategically, the thing that we are really, really clear on is we do 2 things better than anyone else in the industry, we think, in our segment. Number one is underwriting people with no file and thin file, and then number two is providing great service to them even as they create a credit score. And as we took a step back and really thought about what strategic opportunities does that open up…

Got it. And look, I think it’s a great answer. And I agree with you in terms of your assessment of your core strengths, and I am intrigued by your comment as product as a service. I just do consider that -- some of the constraints that the bank regulated companies that we follow, and everybody else on this line follows, have experienced over the last 12 months and the flexibility that the nonbanks have enjoyed and there are opportunity to, frankly, gain share because of it.

We still have so much share opportunity in front of us that I think even as we work through potentially some of those challenges, Rick, the positives greatly, greatly outweigh any potential negatives. I absolutely hear what you’re saying. We think we’re barely scratching the surface in our addressable market. One of the things I mentioned that we’re really excited about is MetaBank, right? We’re going to almost double our addressable market this year. That shows how much potential there still is in our business and how excited we are about unlocking it, whether it’s through partners like MetaBank or DolEx or our own bank charter.

Got it. Great answers. I appreciate the time. And look, obviously we’ve seen a lot of companies move towards bank and depository -- increasingly towards depository models over the years. It’s -- it will be interesting to see how it evolves.

We have a question from John Hecht, Jefferies.

Most have actually been asked, but I’ve got a couple more. Thinking about the Meta and the DolEx, Raul, you mentioned some service components of those relationships. Can you tell us, are you going to be housing all the credit? Or with those partnerships, will DolEx and Meta be housing some of the credit? And is there anything as those partnerships develop that we think in terms of mix of fee income versus net interest income and so forth on your income statement?

Yes. It’s a great question. And as you know, historically, we have sold 10% to 15% of our loans. So we’ve had a portion of our P&L that is already fee income. The specific partnerships that you asked about Meta, it is largely with us. There is an element that is theirs, and with DolEx, it is as well. So for now, it is ours.

Okay. And then a very broad question, but how do you guys think about credit this year? I mean you’re clearly coming into this year with good momentum in delinquencies and loss rates. And then you -- and you’ve tightened -- you’ve done a very good job developing your underwriting engine. But we’ve also got more stimulus come in that may affect demand for credit. And then we’ve got some expectations, at least if you look at like provisioning from some of the credit card issuers for some -- if you look at -- they have relatively large allowances suggesting they expect at least some sort of charge-off cycle to occur through the year. How do you guys perceive it given the kind of momentum you’re coming in with those factors along with kind of the macro factors? I know you’re not giving any guidance, but how do you just sort of see the year shaping up?

It’s a great question. So you and the others on this call have known us for quite some time, John. We’ve always wanted to be a company that pursues growth in a prudent fashion, right? In these lending businesses, I think you have to take that approach. If not, you can be surprised. And given all of the uncertainty in 2020, we were prudent, right? We pulled back at the beginning of the pandemic. We waited to see what was going to happen as -- all around the world. We were trying to understand it. There were the shutdowns. There was a recession. So there was a lot of uncertainty. When we look into 2021, though, there’s still more work to do. We’ve read that an estimated 1 in 10 people across the country now has gotten the vaccine. The number of doses given, I looked at it this morning, I think it’s twice now the number of people that have tested positive for the disease in the U.S. And the Biden administration is certainly committed to a central role for the government and really pushing out more of those vaccines and trying to give them to as many people as want to take them. So we think that, that trend is going to be really, really positive, and it’s going to help the economy just get back on its feet, right, and get people employed and just -- it’s going to help us from a demand perspective. To your point, the stimulus, as I mentioned earlier, is something that can dampen demand. But our customers, unfortunately, right, live paycheck to paycheck. So even when stimulus comes in, whether it’s $600 or $1,200, it helps for a period of time, but it’s not necessarily going to be there when the car doesn’t start or there’s some other need for capital. So we look in many ways past whatever that short-term impact is going to be of the next stimulus. We’ll absolutely make sure we take it into account when we get back to providing guidance. But we think it will be a short-term impact and that the yield will be one that will be characterized by growth in our personal loan business, in the auto business or secure personal loans and in credit cards.

If I could just add one thing, John, because you asked about provision, which we have remaining cumulative charge-off as part of our fair value calculation, and I’m looking at Page 15 of the deck that we shared online. At the end of this past year, December 31, 2020, that remaining cumulative charge-off number came down by about 60 basis points. It’s 10% now, 10.0%. In comparison, at the end of 2019, that forward-looking estimate was 9.5%. So consistent with all of the other credit trends that are normalizing, that forward-looking outlook is normalizing as well. So I just wanted to share that number.

Okay. And then I guess while we’re on this, just thinking -- I mean, you have the, I guess, the flexibility that you’re opening so many channels this year that even if there’s a dampening of maybe credit demand at the secular level, you’re able to grow through that because you’re expanding so many DolEx branches in the markets with Meta. Do you -- so given that, do you -- is there any mix shift with respect to the credit -- the kind of average credit performance you expect in those channels? Or are they pretty consistent with how you think your historical delinquencies and losses have come through?

So we expect that they’ll be -- I’m sorry. Go ahead, Raul.

I’ll just start, Jonathan. So the -- you’re absolutely right. Let me first confirm your intuition. One of the things that makes this year such an exciting one for us is we think we’re really opening up the top of the funnel. We’re adding 30 additional states. We’re leaning into the marketing of these new products. We’ve got the 150 additional DolEx locations, right? We’re seeing great response to digital, which is obviously something that we can continue to scale up. So your intuition is absolutely right, John. It’s part of what makes this such an exciting year for us is that top of the funnel is really, really going to open up. And that means, as you put it, right, that even if there’s a slight dampening in demand due to stimulus or if it takes a bit longer to get to herd immunity, right, we still think we’re going to be able to have quite a bit of growth this year. In terms of the mix shift, this is one of the things we know how to do really, really well. We’ve opened up new states. We’ve opened up new channels. We’ve been very deliberate in the growth of mobile. So certainly, when we go ahead and reintroduce guidance, we’ll give a view of what we think losses will look like. And as a reminder, one of the things that we talked about when we went public is we think we’re at a stage of our company where losses will seek to optimize certainly the responsible lending approach that we have, but also growth in profitability because the growth part means that we’re putting capital into low- and moderate-income communities. So we think it’s very manageable, John, and we’ll set expectations when we give guidance.

Ladies and gentlemen, this is the end of the question-and-answer session. And now I’d like to turn the call back over to Raul Vazquez for closing remarks.

Well, I 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.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you.