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 about the store closures and the ongoing impact on expenses. Could you provide any details on that?

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 fully committed to pursuing growth. We believe our prudent approach, as demonstrated over the last year, has been a key factor. We have shared insights in prior earnings calls regarding our initial payment defaults, which confirmed that we made the right choices. Additionally, we discussed the significant innovations we implemented last year, particularly in how we connect with customers who have fallen behind. Our primary goal when a customer becomes delinquent is to reach out, understand their situation, and develop the best plan to assist them in getting back on their feet. Our current right party contact rates are notably high, thanks to our innovative outreach methods that make it easier for customers to reach us. Considering our delinquency metrics alongside the improving economy, we are genuinely focused on fostering growth.

Our next question is from John Hecht with Jefferies.

In the second quarter, you've provided some detailed guidance. I understand you might not be able to answer this, but could you give us an idea of your thoughts on fair value marks and new product expenses for that time? Or could you at least suggest that it might resemble the first quarter? Any context you can provide would be helpful.

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 compare to the prior year with 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-wise and 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 roadmap for the next quarter or so. And then credit card is already in over 40 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 are some adjusting items that are 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, Rick, I think you're generally thinking about that in the right direction. We do plan to increase the level of investment in the second half to support all the things Raul was describing just a moment ago in response to John Hecht's question about the growth opportunities in the new products as well as other areas.

Perfect. When considering this, how should we view the allocation between technology investment and marketing? I understand that technology investment is expensed rather than capitalized, and the strategy involves reinvesting a portion of the $19 million in savings into technology. However, it seems there will also be a significant increase in marketing spending.

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 two things.

This is Raul. I appreciate your question, and it allows us to provide some clarity. We are experiencing increased expenses related to higher applications and marketing efforts. Consequently, we will see elevated AWS costs and increased expenses for application processing and credit reports. As our staff gets vaccinated, we are eager to have our retail leaders visit our locations and to unite our leadership team. This means there will be greater property and equipment expenses than what was observed at the start of the year. Additionally, Jonathan mentioned that we have completed a securitization, which we are excited about. It amounts to $500 million with an interest rate of 2.05%, which is a significant achievement for Jonathan and his team. There will also be deal fees affecting this quarter. Some of these expenses are one-time items, like the ABS piece, while others, although not immediately obvious, are connected to our focus on returning to growth.

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 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.