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

Thanks. And hello, everyone. With me to discuss Oportun’s fourth quarter 2023 result are; Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I’ll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results of operations and financial position, plan, products and services, business strategy, expense savings measures, statements regarding our senior secured term loan and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by those forward-looking statements, and we caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption, Risk Factors, including our upcoming Form 10-K for the year ended December 31st, 2023. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events other than as required by law. Also on today’s call, we will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for the period-to-period comparisons for our core business and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. A reconciliation of all non-GAAP to GAAP financial measures is included in our earnings press release, our fourth quarter 2023 financial supplement, and the appendix section of the fourth quarter 2023 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast and an archived version will be available after the call along with a copy of our prepared remarks. With that, I will now turn the call over to Raul.

Thanks, Dorian. And good afternoon, everyone. Thank you for joining us. Today I’ll discuss our fourth quarter performance and update you on our progress in key areas of the business. Let me begin with four highlights of our Q4 performance. First, we generated revenue of $263 million to close full year 2023 with a record $1.1 billion, up 11%. Second, our Q4 annualized net charge-off rate was 12.3%, 50 basis points better than last year. In addition, for the first time since 2022, our quarterly net charge-offs, measured in dollars, were lower than the prior year. Third, our GAAP operating expenses were $129 million, down 15% year-over-year. We met our stated GAAP OpEx goal for the quarter of $125 million, when $7 million of non-recurring severance relating to cost actions announced on our Q3 earnings call are backed out. Finally, adjusted EBITDA was $6 million and represented a $40 million year-over-year increase. Overall, our team executed well in the quarter and Jonathan will provide more details on our Q4 performance shortly. Turning the Page to 2024, I’m pleased that we’re seeing early signs of a business recovery taking shape, driven by the strategic decisions and operational changes we made in 2023. I’ll now share the three areas of improvement that I find most promising. I’ll start with credit and four positive dynamics we are seeing related to our credit performance. First, as you can see on Slide 6 of our earnings presentation, loss rates are approximately 400 basis points lower for our front book of loans in comparison to our back book loans. As a reminder, the back book of loans are loans originated prior to the first material tightening in July of 2022. The front book of loans represents origination since then. You can also see on Slide 7…

Thanks, Raul. And good afternoon, everyone. As Raul mentioned, we executed solidly in the fourth quarter. We are on track to substantially enhance our profitability in 2024 and beyond by being laser-focused on our three differentiated core products alongside our ongoing cost reduction initiatives and our tight credit posture. As shown on Slide 10, Oportun delivered total revenue of $263 million, the impact of net change in fair value and a higher interest expense drove an adjusted net loss of $21 million or an adjusted loss per share of $0.54. We continue to be focused on credit quality rather than quantity with originations of $437 million which were down 28% year-over-year. Sequentially, originations were down 9% from the third quarter with further tightening of our credit posture dominating traditional seasonal patterns for originations growth. Despite lower originations, total revenue was virtually flat year-over-year due to 100 basis points higher portfolio yield resulting from our pricing increases along with higher non-interest income. Our credit tightening actions led to lower originations than previously anticipated, causing us to fall short of our 200 basis points year-over-year increased target. However, I am pleased that our Q4 risk adjusted portfolio yield, which includes charge-offs, increased year-over-year by a strong 155 basis points. We will continue to enhance yield while remaining committed to our 36% APR cap. Net revenue was $72 million, down 50% year-over-year due to unfavorable fair value mark-to-market adjustments and higher interest expense. Our total net decrease in fair value of $139 million was primarily driven by current period charge-offs of $91 million, marks on loans sold of $31 million, and a mark-to-market adjustment on our asset-backed notes of $24 million, partially offsetting these unfavorable fair value drivers, the mark-to-market adjustments on our loan portfolio increased by $14 million due to a 60…

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

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

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

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

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

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

Great. Thanks for taking my questions.

Yeah. Thank you, Steven.

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

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

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

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

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

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

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

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

That’s right.

[technical difficulty]

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

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

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

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

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

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

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

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

Yes.

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

That’s –

The mark-to-market mark.

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

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

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

Okay. Sure.

Sure, John.

Thanks, guys.

Sure.

Thanks, John.

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

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

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

I missed that, thank you.

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

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

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

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

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

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

Thank you.

Thank you, Hal.

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

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

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

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

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

Thank you.

Thank you.

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

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

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