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spk02: Good afternoon and welcome to Opportunity Financial Corporation's first quarter 2021 earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker's 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, VP of Investor Relations. Mr. Erdmann, you may begin.
spk01: Thanks and good afternoon, everyone. Joining me today to discuss OPPORTUNE's first quarter 2021 results are Raul Vasquez, Chief Executive Officer, and Jonathan Koblenz, 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. 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 most recent quarterly report on Form 10-Q and and our annual report on Form 10-K for the year ended December 31, 2020. 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 will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for period-to-period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operations. Unless stated otherwise, all of the metrics shared on this call will be on a fair value pro forma basis. Also, starting this quarter, there is no difference between our GAAP-reported metrics and fair value pro forma. A full list of definitions and reconciliations can be found in our earnings materials. 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 non-GAAP to GAAP measures is included in our earnings press release, our first quarter 2021 financial supplement, and the appendix section of the first quarter 2021 earnings presentation, all of which are available in the Investor Relations website at investor.opportune.com. In addition, this call is being webcast, and an archived version will be available after the call in the Investor Relations portion of our website. And with that, I will now turn the call over to Raul.
spk05: 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 41 cents 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 hardworking 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 US economic recovery and the benefits of the stimulus. For the first quarter, our annualized net charge off rate was 8.6%, an improvement of 72 basis points relative to last quarter and 31 basis points better than last year. Now, let me tell you about how we are innovating to grow our business and address market needs. Specifically, I will share the progress we are making on our digital first strategy, new products, and our strategic partnerships. Let me start with our digital first strategy, which I emphasized on our last earnings call because our investment in digital capabilities gives us a path for continued growth in a more capital efficient manner. Growth trends in the first quarter continue to show our customers increasing utilization of our online services. For Q1, 68% of new applicants chose to apply online, up from 51% one year ago. Additionally, 76% of all payments were made outside of our stores, whereas this figure was 62% one year ago. We successfully completed our retail network consolidation prior to the end of the first quarter, and I'm pleased to report that we accomplished this with minimal impact to our loan production. As I already have mentioned, we will utilize a portion of the cost savings from this effort to further enhance our AI-driven digital platform and accelerate our digital growth. This reinvestment will focus on providing our customers with even more choices, flexibility, and new digital experiences. Regarding our new product initiatives, we set two consecutive disbursement milestones with our secured personal loan product in February and March, and volume continues to accelerate. We ended the first quarter with $5.4 million in secured personal loan receivables, representing 170% quarter-over-quarter growth. We are seeing dramatic increases in demand for SPL, as well as overall engagement levels that show the product is gaining traction with our customers. This is encouraging on several levels, both in terms of the product market fit as well as the economics for SPL. Compared to our unsecured personal loans, the average SPL loan is roughly twice the size and 30-plus day delinquencies are lower. We are preparing to roll out our SPL offering to customers in Florida in the next few weeks, with the Texas market following in the third quarter. As momentum continues to build for our SPL product, I'm confident that our portfolio is on track to reach our goal of $40 million by year-end. Credit card is also executing according to plan, and we continued our geographic expansion across the U.S. and are now in 43 states as of today. In the first quarter, credit card receivables grew 276% year-over-year to $8.2 million, and we brought our active customer accounts to over 25,000. In summary, our credit card portfolio is tracking well to meet our objective of growing to $50 million by the end of the year. Third and finally, we expect to significantly expand our services and our geographic footprint with partners like Dolex and MetaBank. Our partnership with Dolex is the initial application of our lending as a service offering and in Q1, we launched in 28 of the 150 Dolex locations that are planned for 2021. During the month of April, we brought this count up to 71. We are already in all of the Dolex locations in Florida and we expect to open in all remaining locations in Texas, bringing our DOLEX store count to over 100 by the end of the second quarter. Our partnership with MetaBank will enable us to connect with potential personal loan customers in over 30 additional states. Our soft launch across digital channels will begin in a dozen states in the second half of the year, and our aim is to be fully deployed across all the remaining states by year end. With MetaBank, We will unlock incremental growth by bringing our best-in-class AI-driven marketing and underwriting capabilities to more customers across the U.S., nearly doubling the size of our addressable market. We are currently building operational integrations with MetaBank and designing the customer experiences into our mobile and online channels as we get closer to launch. These partnerships enable new experiences for our customers and help to expand the opportune mission and brand across new channels and marketplaces. We are building platform integrations with Dolex and operational integrations with MetaBank, and we expect to add new lending as a service partners throughout 2021. Our aspiration is to be the digital first lending platform of choice for retail partners and consumers, bringing financial inclusion to millions more hardworking people. We remain steadfast in our mission, and as a testament to that, We recently released our 2020 Corporate and Social Responsibility Report, highlighting the progress we've made in driving social impact, supporting the communities we serve, and managing our environmental footprint. The report outlines our priorities on these important issues and illustrates that we live our mission inside the company as well as outside. This includes our diverse workforce where the majority of our employees, along with every level of management, from frontline supervisors to the board of directors identify as women or people of color. I am proud of the report, the positive impact we have had on the communities we serve and the company we have built. I'll now turn the call over to Jonathan, who will walk you through a more in-depth discussion of our first quarter financial results and provide our financial outlook for the second quarter and full year. We will then open the line for your questions. Jonathan.
spk03: 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 10 cents versus a net loss per diluted share of 49 cents in the prior year quarter. On a non-GAAP basis, we delivered adjusted EPS of 41 cents based on adjusted net income of $12.2 million versus the adjusted net loss per share of 4 cents 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 non-interest income. As our originations continue to rebound, we expect to see growth in our portfolio, which will drive growth in total revenues. 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 asset-backed 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. Based upon current trends in our loan portfolio, we are now projecting better credit performance than before the pandemic. The $1.5 million mark to market increase in our asset back notes resulted from a 26 basis point decrease in the weighted average price of our asset back notes during the quarter to 100.9% as our older deals approach their call dates. Turning to expenses, operating expense in our personal loan business, excluding certain non-recurring charges, declined 3% year over year to $91.5 million as we've better leveraged technology investments and been disciplined with other spending. Operating expenses associated with new products grew year over year by $2.7 million to $6.9 million. In the first quarter, we also incurred $7.8 million of costs associated with our retail network optimization. As of March 31, we had completed the closure of 136 retail locations and reduced our workforce who managed and operated those locations. Because the closures were a non-recurring event, we have excluded this charge from our non-GAAP metrics. We estimate remaining optimization expense of $4.7 million to be recognized in the second quarter as we vacate the closed retail locations. Our customer acquisition cost was $208, up from $170 in the year-ago period. This increase was due to the lower loan origination volume partially attributable to the stimulus impact. Also, as we mentioned during our previous earnings call, we are ramping up our marketing to fuel our product and partnership growth initiatives. Our net income on a GAAP basis was $3 million versus a net loss of $13.3 million in the prior year quarter. This equated to GAAP 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 an adjusted net loss per share of $0.04 and adjusted net loss of $1.2 million in the prior year quarter. Adjusted EBITDA was negative $2.3 million versus positive $17.9 million in the prior year quarter. Our investment in new products impacted our EBITDA by $5.9 million as illustrated in our first quarter earnings deck. And absent these investments, our EBITDA would have been a positive $3.6 million. Adjusted return on equity was 10.6% versus minus 1% in the prior year quarter. Turning now to credit, our first quarter results were better than our performance pre-pandemic. Our annualized net charge-off rate was 8.6%, a 31 basis point improvement versus the prior year period. And at March 31, our 30-plus day delinquency rate was 3.0%, 82 basis points lower than the prior year period. The strength of our credit performance gives us great confidence in our growth outlook for 2021 and beyond. Regarding our capital and liquidity, as of March 31, total cash was $183.2 million. Our debt to equity ratio was 3.0 times, and we had $335 million of undrawn capacity on our $400 million warehouse line. During the quarter, we took advantage of a favorable credit market, issuing $375 million of two-year fixed-rate asset-backed notes. The notes were priced at a weighted average interest rate of 1.79%, representing our lowest cost of funds to date. And just last week, we priced another securitization, which was our largest bond deal ever, with $500 million of three-year fixed rate notes. The deal is expected to close next week. It is our first ABS deal where secured personal loans are included as eligible collateral. The transaction also provides flexibility and funding for our other key growth initiatives. The transaction priced at a weighted average interest rate of 2.05%. Looking ahead to the second quarter and the remainder of 2021, our originations and credit trends are showing sequential improvement. We expect our normalized credit trends to carry forward into the second quarter as the stimulus impact abates and demand resumes following seasonal trends. We expect the continuing economic recovery will shape our 2021 performance. With that context, we are now in a position to reinstitute our forward-looking guidance. Our outlook for the second quarter is aggregate originations of approximately $425 million. Total revenue of approximately $135 million. Adjusted EBITDA between minus two and minus one million dollars. Adjusted net income between one and two million dollars and adjusted earnings per diluted share between three and seven cents. For the full year 2021, aggregate originations of at least $2.1 billion. total revenue between $600 and $605 million, adjusted EBITDA between $0 and $5 million, adjusted net income between $50 and $54 million, and adjusted earnings per diluted share between $1.69 and $1.82. We expect O2Q annualized net charge-off rate to be 6.8% plus or minus 10 basis points, And for the full year, our projected rate is 7.6% plus or minus 15 basis points. In summary, our first quarter results set us up well for a strong 2021 as we continue to execute on our strategic initiatives for sustainable growth, which will deliver attractive returns for our shareholders. With that, I will now turn it back over to Raul.
spk05: In closing, I want to thank all of our employees, our customers, and our partners for a great quarter. Opportune 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?
spk02: Thank you. And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we poll for questions. Our first question is from Sanjay Sakrani with KBW. Please proceed with your question.
spk06: Sanjay Sakrani Thank you. 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?
spk03: Hey, Sanjay. It's Jonathan. Yes. You know, 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 projects. and AI initiatives.
spk06: 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?
spk05: Sanjay, this is Rahul. 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.
spk06: Absolutely. Just 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?
spk05: 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 number one 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.
spk06: Okay, wonderful. Thank you.
spk05: Thank you.
spk02: And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Our next question is from John Heck with Jefferies. Please proceed with your question.
spk00: Afternoon, guys. Thanks for taking my questions. First one is Q2, you've given some detailed guidance around that. You may or may not be able to answer this question, but can you give us a sense for where you're coming on fair value marks and or new product expenses in that period? Or can you at least give us, maybe say that it may look similar to Q1 or any framing there for us?
spk03: Yeah, that's a great question, John. You know, obviously we've given origination guidance. We've given revenue guidance. We've given the bottom line as well. You know, fair value, right? You know, the short end of the curve, the interest rate environment and the credit spread environment remains favorable. So, you know, 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, you know, with healthy growth opportunities in front of us, we'll certainly be increasing marketing commensurate with that.
spk00: Okay.
spk03: And that's all within the context of the guidance we provided. Sorry, go ahead, Raul.
spk05: Well, I was just going to add a little bit to that, John, if you'll permit me. On page seven 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 We shared that quarter-over-quarter growth in secured personal loans was 170% year-over-year growth, because credit card 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 growth. And that's what you should expect from us going forward. We'll keep being disciplined 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, pound-foolish. We think we're seeing really great traction in these products, and we want to drive that growth there as well.
spk00: Okay. That's good color. And then looking at the year guidance and then thinking about Q1 and Q2, what you've 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, you know, drive loan demand and how much of that is tied to the growth initiatives that are just distinct from an economic reopening.
spk05: It's definitely both. 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'll 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, how Florida and Texas are on a roadmap for the next quarter or so. And then credit card is already in 40 plus states. So as we continue to see good credit reads 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.
spk02: Okay, great. Thanks, guys. Thank you. And again, as another quick reminder, if you have any questions, you may press star 1 on your telephone keypad. Our next question comes from the line of Melissa Weddle with J.P. Morgan. Please proceed with your question.
spk04: Hey, guys. 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 right conclusion, is that in the second quarter, expenses will be elevated basically on a gap basis comparable to the first quarter. The difference is that it's really investment as opposed to closing branches.
spk03: 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.
spk02: Got it.
spk03: Right, and that's to support all the things Raul was describing just a moment ago in answer to John Huck's question about the growth opportunities in the new products as well as other things.
spk04: Perfect. And, and when we think about it, will that run you? Cause you guys have talked about both technology investment, which I know you expense as opposed to generally speaking, capitalize and marketing. How should we think about the allocation between the two? Cause I know the strategy or the, the plan is to reinvest a chunk of the 19 million in savings into technology and, but it sounds like there's going to be a pretty significant ramp in marketing as well.
spk03: 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 you know, the 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.
spk05: Got it. 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. So we're certainly going to see higher AWS expenses. We're going to see higher app processing and credit report expenses. 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 T&E than what you saw at the beginning of the year. There's also one of the comments that Jonathan showed 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.
spk04: 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 difference is 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.
spk03: Yeah, based on our origination guidance, you could certainly infer that.
spk04: Got it. Okay. Thank you guys very much.
spk03: Thank you, Rick.
spk02: And it looks like we have reached the end of the question and answer session. I'll now turn the call over to Raul Vasquez for closing remarks.
spk05: 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.
spk02: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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