Good afternoon, and welcome to the Oportun Financial Corporation's First Quarter 2021 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Nils Erdmann, VP of Investor Relations. Mr. Erdmann, you may begin.

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun's first quarter 2021 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 are off to a great start this year, and I'm proud of the many accomplishments we can point to in the first quarter. Our financial and operational performance was a continuation of several trends exiting 2020 as well as progress that was consistent with the growth initiatives I outlined during our last earnings call. Our first quarter financial results reflect the strength of our business as we generated $135 million of total revenue and $12 million of adjusted net income or $0.41 of adjusted EPS. Aggregate originations were $335 million, and we crossed the $10 billion mark in originations in February, representing over 4 million loans that we've made to hard-working people so far in our 15-year history. We experienced some impact to demand volume in early January and again in mid-March relating to stimulus payments. But by mid-April, disbursements and applications were realigning with historical trends. In terms of credit, we delivered favorable results that outperformed our pre-pandemic levels, demonstrating the efficacy of our AI-driven models as well as signaling the continued U.S. economic recovery and the benefits of the stimulus.

Thanks, Raul, and hello, everyone. For our first quarter of 2021, we delivered strong profitability driven by better than pre-pandemic credit performance and outlook. Our net income was $3 million versus a net loss of $13.3 million in the prior year quarter. This equated to earnings per diluted share of $0.10 versus a net loss per diluted share of $0.49 in the prior year quarter. On a non-GAAP basis, we delivered adjusted EPS of $0.41 based on adjusted net income of $12.2 million versus adjusted net loss per share of $0.04 and adjusted net loss of $1.2 million in the prior year quarter. Aggregate originations were $335.2 million, reflecting loan demand that is nearing pre-pandemic levels. Our typical first quarter seasonality, where originations are lower than the prior fourth quarter due to our customers receiving tax refunds, was amplified by the delivery of stimulus checks in early January and again in mid-March. The impact of the stimulus abated by mid-April as anticipated, and already loan application volume and originations have accelerated. Total revenue was $135.3 million, down 17% year-over-year, reflecting lower receivables due to reduced originations during 2020. This was comprised of $127.2 million of interest income and $8.1 million of noninterest income. As our originations continue to rebound, we expect to see growth in our portfolio, which will drive growth in total revenue. Net revenue was $110.2 million, up 19% year-over-year. Net revenue improved from the prior year due to lower charge-offs and our improved charge-off outlook, which increased the fair value of our loans. Interest expense of $13.5 million was down 15% year-over-year, driven by a decrease in our average daily debt balance of 9% year-over-year and also driven by the decrease in our cost of debt to 3.9% versus 4.2% in the year ago period, as we began to refinance over $950 million of our after tax notes that we can call this year and take advantage of favorable interest rates and market conditions. For our net change in fair value, as you'll see in our earnings deck, we had an $11.6 million net decrease in fair value. which consisted of a $23 million mark-to-market net increase in our loans and our debt and current period charge-offs of $34.6 million. For the mark-to-market, $21.6 million of the increase was driven by the reduction of our life of loan charge-offs from 10.0% at the end of the fourth quarter to 8.6% at the end of the first quarter, which was the primary driver of the 143 basis point increase in our fair value price of our loans, to 104.9% as of March 31.

In closing, I want to thank all of our employees, our customers and our partners for a great quarter. Oportun is off to a great start this year, and we remain confident in the goals we have outlined for 2021. We will continue operating in a disciplined manner and pushing technological innovation to accelerate growth, produce excellent credit outcomes and deliver shareholder value, all while maintaining our principled approach to furthering our mission. Thank you. And now we welcome your questions and comments. Operator?

Our first question is from Sanjay Sakhrani with KBW.

I had a question on the store closures and sort of the ongoing benefit to expenses -- or the ongoing run rate of expenses. Any color you could provide there?

Sanjay, it's Jonathan. Yes. What we had disclosed last quarter was we expected that we would have $19 million of annual savings, and we continue to expect that. And what we also said was that for this year, in 2021, we would use the portion of that $19 million that falls into this year. We'd reinvest that in our technology and AI initiatives.

Okay. And I guess when we think about the 136, I mean, are you guys seeing an opportunity to potentially rationalize even more? Or is this it for now?

Sanjay, this is Raul. I would say, that's it for now. I'm really proud of the way that the group executed the current store closures. We mentioned in our comments that we haven't really seen any impact at all from the closure of those stores. So right now, we're really focused on the growth elements of the business. You may have seen, if you look at our originations guidance on a year-over-year basis, it's 169% higher than last year. So we feel like we've done what we wanted to do with those store closures, and now we're going to focus really on getting the business back to the really healthy growth rates we've seen in the past.

Absolutely. Just a final question. You guys mentioned the better credit trends relative to pre-pandemic levels. Maybe you guys could speak to sort of what's driving that. Obviously, you guys have been very prudent from an underwriting standpoint. But would you consider leaning into growth as a result? Or is it too early to do that?

We are absolutely leaning into growth. So we think the drivers were certainly the prudence. As you pointed out, that we demonstrated in the last 12 months, and we shared in prior earnings calls what our first payment defaults look like. So we felt like we made the right decision. Number two, we've also talked about all the innovation that took place last year. And in particular, some of the ways that we innovated in terms of being able to contact customers that have become delinquent, because our #1 objective anytime someone becomes delinquent is to get in touch with the customer, understand what happened and then figure out the right approach to help that customer get back on track. So our right party contact rates, for example, right now are really high because of the innovation and all the different ways that we're reaching out to customers and making that easy for them to get in touch with us. So as we look at what our delinquency numbers look like and we think about the strength of the economy -- the strengthening economy, we're really, really leaning into growth, as you described.

Our next question is from John Hecht with Jefferies.

First one is Q2, you've given us some good -- some detailed guidance around that. And you may or may not be able to answer this question, but can you give us a sense for like what -- where you're coming around on fair value marks and/or new product expenses in that period? Or can you at least give us maybe say that they -- it may look similar to Q1? Or any framing there for us?

Yes. That's a great question, John. Obviously, we've given origination guidance, we've given revenue guidance, we've given the bottom line as well. Fair value, right, the short end of the curve, the interest rate environment and the credit spread environment remains favorable. So we're not necessarily expecting anything different. And then from an OpEx standpoint, we're continuing to invest and grow our business, right, as we called out, both Raul and I in our remarks, right, we're obviously growing our new initiatives, secured personal loan and credit card. And with healthy growth opportunities in front of us, we'll certainly be increasing marketing commensurate with that. And that's all within the context of the guidance we provided. Sorry, go ahead, Raul.

Well, I was just going to add a little bit to that, Jon, if you'll permit me. On Page 7 of the earnings presentation, one of the things we really did this time was to unpack what's happening with personal loan operating expense versus new product expenses. So one of the things we wanted to highlight there was just, we're being very disciplined on the personal loan side. You saw that, that was down 3% year-over-year. The new products, that's where we're super pleased with the growth. You may have seen, right, we shared that quarter-over-quarter growth in secured personal loans with 170% year-over-year growth, because credit cards now we can comp to prior year was 276% growth. So we're really pleased with product market fit, the way that the customer is responding to the offering, and that's part of what's driving the growth in overall expenses. Because you saw that new products are up 64% year-over-year, and that's what you should expect from us going forward while keeping discipline on the personal loan side. Obviously, as the economy strengthens, we're going to invest more in marketing, as Jonathan just described. But in new product expenses, we don't want to be penny rise, pound foolish, we think we're seeing really great traction in these products, and we want to drive that growth there as well.

Okay. That's good color. And then looking at the year guidance and then thinking about Q1 and Q2, what you provided and what we know, it really looks like you've got a big ramp acceleration of all the factors that drive revenues and growth and support in the second half of the year. I'm wondering, how much of that is predicated upon the reopening of the economy that a lot of people are just expecting to happen and drive loan demand. And how much of that is tied to the growth initiatives that are just distinct from an economic reopening?

It's definitely both, John. So In the first quarter and even part of the second quarter, we held back our marketing investment. We knew that the stimulus was going to dampen demand. And I think that's been a story that everyone has mentioned industry-wide. But as Jonathan and I both mentioned during our comments, what we saw was about the middle of April, we started to see a return to the normal trends from a demand perspective. And that means that we're really leaning into all of the marketing elements now that we think the customer is also in a better place as the economy gets stronger. So there's certainly an element of that. At the same time, in particular, if you look at originations because as a reminder, right, in our business in particular, since we keep the loans on our balance sheet, we earn interest income, the revenue lags the originations. When we think about the drivers of originations, it is also the growth initiatives that you asked about. So one of the things that we're very excited about is our partnership with MetaBank that we expect to have the soft launch of that in about the middle of the year. We'll start with 12 states. It will be digital-first, and then by the end of the year, we would expect to be in all 30 states. And then the new products are certainly going to ramp. We talked, in secured personal loans, South Florida and Texas are in our road map for the next quarter or so. And then credit card is already in 40-plus states. So as we continue to see good credit leads there, that's giving us more and more confidence to really drive growth again through marketing and be able to have that $50 million portfolio by the end of the year. So the growth initiatives are definitely a big part of our end of year guidance.

Our next question comes from the line of Melissa Wedel with JPMorgan.

It's actually Rick Shane. I got dropped off, and I'm dialed in on Melissa's line. And I may have missed this in response to John's questions because, again, I was off the line. But when we look at the guidance in context of first quarter results, top line is pretty similar, EBITDA guidance is pretty similar to where you were, which suggests that there is some adjusting item that is not recurring in the second quarter that did in the first explain the differential. The big adjusting items are stock comp and the adjustments for closing the branches. The implication, and please tell me if I'm drawing the wrong conclusion, is that in the second quarter, expenses will be elevated basically on a GAAP basis comparable to the first quarter. The difference is that it's really investment as opposed to closing branches.

No, that -- Rick, I think the way you're thinking about that is generally in the right direction, that we do plan to increase the level of investment in the second half. And that's to support all the things Raul was describing just a moment ago in answer to John Hecht's question about the growth opportunities in the new products as well as other things.

Perfect. And when we think about it, will that run -- because you guys have talked about both technology investment, which I know you expense as opposed to, generally speaking, capitalized and marketing. How should we think about the allocation between the 2? Because I know the strategy -- or the plan is to reinvest a chunk of the $19 million in savings into technology. But it sounds like there's going to be a pretty significant ramp in marketing as well.

Sure. So it's going to be both. What we're expecting to see, and this is implied from our originations guidance, which we've provided for the first time here, is a return to the seasonality and business trends, which will then be amplified by the economic recovery. And so in order to capture that opportunity and better serve customers, we'll certainly be expanding marketing, and that's also true, not just in personal loans now, but also with the new products. So it's the combination of those 2 things.

This is Raul. If I could just -- because I like the question you're asking, and I think it gives us an opportunity to provide the clarity. There are just expenses that are tied to higher applications that are tied to higher marketing, right? So we're certainly going to see higher AWS expenses, we're going to see higher app processing and credit report expenses. As we -- as our employee base is getting vaccinated, we're looking forward now to having some of our retail leaders visit our locations. We're looking forward to bringing our leadership team together. So there's going to be higher P&E than what you saw at the beginning of the year. There is also -- one of the comments that Jonathan shared was the fact that we've priced a securitization. We're really excited about it. It's $500 million. You see the interest was 2.05%, so a big win from Jonathan and his team. There are deal fees that are going to hit this quarter. So there are elements that are one-offs, like the ABS piece. And then there are some other things that may not seem obvious, but are also tied to this return to growth that we're really focused on.

That's helpful. And I was actually wondering if there were some deal expenses in there as well given the size of that transaction. And I guess, look, the other differences that whereas last quarter was a quarter where balances were declining, this is going to be a quarter where end-of-period balances are likely to be up substantially?

Yes, based on our origination guidance, you would -- you could certainly infer that.

And it looks like we have reached the end of the question-and-answer session. I'll now turn the call over to Raul Vazquez for closing remarks.

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

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.