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spk01: Good day and welcome to the Opportune Financial first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Dorian Hare, SVP of Investor Relations. Please go ahead.
spk02: Thanks, and hello, everyone. Some of you are aware that I started in this role a few weeks ago, and I am very excited to be joining you today for my first earnings call while leading Opportunity Investor Relations efforts. With me to discuss opportunity first quarter, 2022 results are Raul Vasquez, chief executive officer and Jonathan Copeland, 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 positions, 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, and we question 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 at our earnings press release and in our filings with the Securities and Exchange Commission, Under the caption, risk factors, including our upcoming Form 10Q filing for the quarter ended March 31, 2022. 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 of our core business and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions and reconciliations 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 non-GAAP to GAAP measures is included in our earnings press release, our first quarter 2022 financial supplement, and the appendix section of the first quarter 2022 earnings presentation, all of which are available at the investor relations section of our website at investor.opportune.com. In addition, this call is being webcast. An archived version will be available after the call, along with a script of our prepared remarks. With that, I will now turn the call over to Raul.
spk06: Thanks, Dorian. Jonathan and I are glad to have you here, and I know you are keen to get to know our investment community. Good afternoon, everyone, and thank you for joining us. I'm incredibly proud of our record results for the first quarter. which reflected the power of our product offerings and exceeded all of our expectations. As you know, we have very ambitious goals for 2022, so we are pleased that the year is off to a great start. Let me start by sharing the headlines. We achieved record first quarter originations of $800 million, up 139% from the first quarter of 2021. Originations continued to be driven by our expansion into new states where we are taking share. New borrowers represented over 51% of our total loans, up from 40% a year ago. We delivered record revenue of $215 million and adjusted net income of $53 million for adjusted EPS of $1.58 and adjusted ROE of 34%. We are continuing to deliver strong credit performance as evidenced by our annualized net charge off rate of 8.6%, which was on par with the prior year quarter and with 17 basis points better than the midpoint of our expectations. Given the favorable trends in our business, we are raising our full year 2022 guidance. Now, let me tell you about our progress on our three strategic priorities for the year. that support our outlook for strong, profitable, and sustainable growth. Our first priority is to grow our members. We ended the first quarter with 1.7 million members, up from 1.5 million at the start of the year, a 48% annualized growth rate for the quarter. So we are very pleased with the pace of member growth. Our second strategic priority is to increase multi-product relationships with our members. As a proof point of our ability to do so, In the first quarter, products grew at an annualized rate of 58%, faster than our member growth of 48%. Additionally, at the end of the first quarter, 12% of our members with an Opportune credit card also had a personal loan with Opportune, which is up from 7% at the start of the year. We also began developing multi-product relationships across our credit and digital banking products during the first quarter, and are enthusiastic about expanding this aspect of our business as a growth lever. Our third strategic priority is enhancing our platform capabilities to meet the everyday financial needs of hardworking people. In our last earnings call, we talked about creating a seamless integrated acquisition funnel across all our products to increase member conversion and decrease the cost of member acquisition. In Q1, we made important progress toward that vision as we began offering Digit products to our applicants whom we were not yet able to approve for a loan, as well as to current and previous loan customers. I'm also happy to announce that the Digit integration into our credit card funnel went live a couple of weeks ago. While there is more work required this year to create a fully integrated funnel, we are beginning to gather valuable learnings from members we have started serving with multiple products. Now, let me share with you more detail regarding our progress across our different products. The growth of our unsecured personal loan product continues to benefit from our expansion across the nation. As of the end of the first quarter, our personal loans were available in 39 states, and we plan further geographic expansion this year. I want to emphasize how differentiated this geographic expansion is for us compared to other FinTechs that have already had nationwide operations. By introducing our superior customer value proposition in new geographies, we are taking share from other lenders who have never had to compete with OPPORTUNE. In addition, having access to new members allows us to grow selectively without having to expand the credit box. We are seeing strong growth in states such as Pennsylvania, North Carolina, Michigan, Virginia, and Ohio. Overall, we have added more than 22 million potential members in the 27 states we have entered with Medibank through the end of the first quarter. For our secured personal loan product, we ended the first quarter with $79 million in receivables, up 1,375% year-over-year, and on track to meet our year-end target of $140 million. In April, we also expanded our secured personal loan product to Arizona. Our secured personal loan growth continues to benefit from the fact that it is offered through the same acquisition funnel along with our unsecured personal loans, providing a proof point for the low member acquisition cost opportunity that a single unified acquisition funnel for all opportune products will offer in the future. We also saw excellent progress this quarter from our credit card product. Receivables grew 996% year-over-year to $90 million, also on track to meet our year-end goal of $150 million. We now have more than 153,000 members who have an OPPORTUNE branded credit card. We have also continued to make great progress with our lending as a service product. During the first quarter, we scaled our lending as a service network to include 284 partner locations, up from 28 a year ago, and we still expect to complete 2022 with over 500 partner locations. Additionally, our partnership with Sezzle, a buy now, pay later company, and our first digital lending as a service relationship remains on track to launch in the second half of the year. We are in discussions with multiple potential partners to expand our lending as a service channel, including both retail and fully digital businesses. Finally, our digit integration is progressing nicely. We are now offering digit products at multiple points in the OPPORTUNE application and servicing experiences, and we've enabled OPPORTUNE members to obtain our digit products at a discount. All of these activities are being conducted while, of course, honoring our members' privacy preferences. Finally, I'd like to tell you about how well Opportunity is positioned to both meet the needs of our hardworking members and create shareholder value in the current macro environment. Our members are benefiting from a strong job market, and in our 16 years of lending, we have found that a robust employment environment is the leading driver of both origination levels and the health of our loan portfolio. I've never been more confident about our ability to grow the company and create long-term shareholder value by providing inclusive, affordable financial services that empower our members to build a better future. I'll now turn the call over to Jonathan, who will walk you through a more in-depth discussion of our financial results and provide our outlook for the second quarter and full year. Jonathan?
spk08: Thanks, and good afternoon, everyone. As Raul mentioned, we generated record results in the first quarter, and 2022 is off to a great start. In the first quarter, we generated $215 million of total revenue and $53 million of adjusted net income, or $1.58 of adjusted EPS. Our aggregate originations were $800 million, up 139% year over year, and well ahead of our expectation of $625 million. Loan application volume and originations have remained strong since the end of the quarter, and we expect continued strength in aggregate originations throughout 2022. Total revenue of $215 million was up 59% year over year, also well above our expectations, and reflected higher receivables due to increased originations. We expect continued strong origination volume across all our credit products to drive increased growth in total revenue throughout the year. Net revenue was $205 million, up 86% year over year. Net revenue improved from the prior year period due to higher total revenue, consistent interest expense, and greater increase in fair value. Interest expense of $14 million was up 1% year over year, primarily driven by increased debt issuance to fund our growth, partially offset by the decrease in our cost of debt to 2.6% versus 3.9% in the year-ago period. As a reminder, last year we locked in $1.4 billion of fixed-rate term asset-backed funding at a weighted average interest rate of 2.2% and negotiated better terms on our $750 million warehouse lines of credit. At the end of the first quarter, 73% of our debt was fixed rate, providing us with protection from rising interest rates. For our net change in fair value, we had a $4 million net increase in fair value, which consisted mainly of a $41 million mark-to-market net increase on our loans and our debt, a $16 million cumulative mark adjustment related to the sale, of $228 million of loans through the structured loan sale at the end of the quarter and current period charge-offs of $51 million. For the mark-to-market, the fair value price of our loans decreased to 104.1% as of March 31 and resulted in a $17 million mark-to-market decrease. The $58 million mark-to-market increase in our asset back notes resulted from a 353 basis point decrease in the weighted average price to 96.3% due to the increase in interest rates and credit spreads during the quarter. Turning to expenses, our first quarter total operating expense was $147 million, an increase of 39% as compared to the prior year quarter. Adjusted operating expense which excludes stock-based compensation expense and certain non-recurring charges, increased 42% year-over-year to $133 million, growing more slowly than total revenue and net revenue, which grew 59% and 86% respectively year-over-year, thus increasing our profit margins. The increase in expense was primarily related to the addition of $15 million of digit operating expenses post-merger, which were not present in the prior year quarter. We also increased our investment in technology to enhance our platform and increased marketing spend to drive growth in new markets where we are taking share. Our customer acquisition cost was $151, down 27% from the year-ago period. This decrease was partially driven by our investment in AI, which has increased the efficiency of our marketing programs and the reduction of our cost base achieved through last year's rationalization of our retail network. Furthermore, as our business continues to become more digital first, we have decided to close 27 retail locations this year, which will save almost $20 million of operating expenses over the next five years. In the first quarter, we took a $600,000 charge relating to these closures and expect an additional $1.5 million charge in the second quarter. Our net income was $46 million, well above the $3 million in net income generated in the prior year quarter. This equated to earnings per diluted share of $1.37, a significant increase from 10 cents in the first quarter of 2021. On a non-GAAP basis, we delivered adjusted net income of $53 million, more than quadrupling $12 million in the prior year quarter, and adjusted EPS of $1.58 versus $0.41, respectively. Adjusted EBITDA was $34 million, a $36 million increase compared to a loss of $2 million in the prior year quarter. Adjusted return on equity was 34% versus 11% in the prior year quarter. For the last 12 months, adjusted ROE was 21%. Turning now to credit, our first quarter results were further evidence of our portfolio's continued strength and our ability to manage credit and deliver specific outcomes. Our annualized net charge-off rate was 8.6%, equivalent to the prior year period and 17 basis points better than our midpoint guidance. As of March 31, our 30-plus day delinquency rate would have been 4.1%, had we not sold $228 million of loans or approximately 9% of our own portfolio at the end of the quarter. The loan sale reduced the denominator of the delinquency calculation, increasing our reported 30 plus day delinquency rate from 4.1% to 4.5%. In comparison, our 30 plus day delinquency rate was 24 basis points higher than the 3.9% level as of December 31, 2021. As a reminder, our sophisticated AI-driven underwriting algorithms allow us to manage our credit exposure on a highly granular basis. Our fully centralized and fully automated credit model consists of over 1,000 different end nodes, each of which represents a different gradation of credit risk, enabling us to make adjustments on a node by node basis to target desired outcomes. We have further enhanced our underwriting capability by incorporating cash flow information from banking data, a new and highly predictive alternative data source that we have not previously leveraged. Additionally, we are in the process of implementing machine learning models to enhance the efficiency of our collections, which will allow us to further optimize borrower outcomes and achieve better credit results. We continue to be very pleased with the credit quality of the loans we are booking. while simultaneously adding to our membership. As Raul mentioned, our growth through geographic expansion is a key differentiator and will allow us to be more selective in underwriting because of access to new markets. For example, we've actually been tightening our underwriting standards since the third quarter of last year and continue to make some adjustments through the first quarter of this year. We've also been allocating our marketing spend across channels to optimize for credit outcomes. While taking these prudent measures, our strong growth in new loans continues to drive our performance. In the first quarter, new loans represented 51% of total loans originated as compared to 40% in the prior year quarter as we continue to expand in new geographic markets and take share. Most of the new borrowers we are adding today will become future returning borrowers who will be less expensive to acquire, will safely qualify for larger loans on average and are expected to have lower charge-off rates. To give you a sense of this, in the first quarter, our average loan size to a new borrower was $3,100 as compared to $5,100 for a returning borrower. And net charge-off rates for returning borrowers have been running at approximately two-thirds the rate for new borrowers. In short, new member growth in 2022 sets us up for continued success in 2023 and beyond. Regarding our capital and liquidity, as of March 31, total cash was $171 million. Additionally, net cash flow from operations for the first quarter was $39 million. Our debt to equity ratio was 3.3 times, and $273 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth. We have maintained our track record of consistent access to the capital markets. In March, during a choppy market, we successfully closed a structured loan sale, which was an amortizing asset-backed securitization that included the sale of the residual cash flows. Through this transaction, we sold loans at an attractive price while reducing our balance sheet and credit exposure. We are currently in the market with a $400 million securitization, which we expect to price this week, which will free up significant warehouse capacity to fund the strong growth and originations we are projecting for the remainder of the year. Given the rising rate environment, we are enacting select pricing actions with respect to new loan originations, while remaining committed to growing our membership base, taking share, and maintaining a 36% APR cap. On average, these pricing actions will increase portfolio yield by 65 basis points this year, helping to offset higher cost of funds. Turning to our expectations for the rest of 2022, we will continue to leverage multiple vectors for growth, including the expansion of our addressable market, products, channels, and digital banking capabilities. We expect this growth to accelerate over time as our annualized member growth is combined in the future with expanded multi-product relationships. In terms of guidance, our outlook for the second quarter is aggregate originations of between 825 and 850 million dollars, total revenue of between 214 and 218 million dollars, adjusted net income between two and four million dollars and adjusted EPS between six and twelve cents. I want to point out that the reason our second quarter adjusted net income and adjusted EPS guidance is below our first quarter results is due to timing differences with respect to the net change in fair value caused by the increase in interest rates. However, The trends in our business remain strong as demonstrated by the fact that we are taking up each of our full year guidance metrics, including adjusted net income and adjusted EPS. Our updated guidance for the full year is aggregate originations between 3.45 and $3.5 billion, total revenue between 910 and $930 million, adjusted net income between $83 and $87 million, and adjusted EPS between $2.45 and $2.56. We are maintaining our forecast for $140 million of year-end receivables for our secured personal loans and maintaining $150 million for credit cards. We expect our second quarter annualized net charge-off rate to be 8.6%, plus or minus 10 basis points. And we are reaffirming our expectation for the full year net charge off rate to be 8.8% plus or minus 15 basis points. In summary, I'm pleased that we delivered a terrific quarter and that our outlook for the remainder of 2022 remains strong. And I believe that the exceptional growth in members, originations, and total revenue that we are seeing so far this year will set us up for a great 2023. With that, I will now turn it back over to Raul for some final comments before we open the line for questions.
spk06: Thanks, Jonathan. Before I open up the call for questions, I want to share with you that our 2021 Corporate Responsibility and Sustainability Report will be released soon. With that in mind, I wanted to share with you some of the ways in which OPPORTUNE enables a better financial future for our members. Opportunity has extended more than $12 billion of credit to hardworking individuals, saving them over $2 billion in interest and fees. Likewise, our digital banking platform has helped members effortlessly save more than $7.2 billion through the application of its AI-driven algorithms. Digit members have annually, on average, set aside more than $3,000 as rainy day funds. We were pleased to share with you in our prepared remarks how OPPORTUNE is off to a strong start this year, which combined with our ongoing ability to execute on our strategic initiatives has allowed us to raise our full year 2022 guidance. With that, operator, let's open up the line for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then the one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, send to. At this time, we will pause momentarily to assemble our Raptor. The first question today comes from John Hex with Jeffrey. Please go ahead.
spk03: Hey, guys. Congratulations on a great quarter. I appreciate the guidance, and thanks for taking my questions. You've got a lot of different growth opportunities here, but one of them that's a little new to us is the lending as a service component of the business. I'm wondering, what are the characteristics of your partners in that category, and how are the revenue arrangements?
spk06: John, this is Raul. Thanks for the question. We're really pleased with the way that that program is progressing As you heard us announce, we've got 284 locations now, so about 10 times the number that we had at the end of last quarter. The revenue arrangement is really one that is accretive to the business and that we're very happy with. As we've disclosed before, we like the fact that we only compensate the partner when a loan actually takes place, and we don't have any of the costs related to trying to draw in the customer. We don't have any of the labor associated when we think about partners like Dolex and Bari, who are the two partners that have driven that growth to 284 locations. And we're excited about Sezzle later this year that will have a similar structure where we compensate them or helping to bring the member to us. So we continue to be really pleased with how the program is progressing, and we like the pipeline that we have in place.
spk03: Great. That's helpful. And then just thinking about you guys talked during the call about interest rates and modifying certain loans. I'm wondering, number one, which loans or is it across the board that you'll be raising rates or is there some loans that you can and some that you're less willing to? And then second, on the rate stuff, are you seeing behavioral change for causation loans? of a loan or use of a loan proceeds given the inflation outlook?
spk06: So I'll go ahead and take those. So from a pricing perspective, we took a look at where in the portfolio did we think it made sense to go ahead and raise prices. And we always want to do it in a way that is going to have a very small impact on the payment that is made by our borrower. We've done this in the past at various moments in our history, and we always do it trying to keep that payment at about the same rate that it is today. And we have found success in the past in terms of ensuring that we continue to get good outcomes and ensuring that we don't get any kind of negative selection. So we're really happy with the pricing. And again, it was done in a very precise manner because one of the things we want to continue to do, John, is we want to continue to show a superior value proposition and we want to keep taking share. Because when we look at the 139% year-over-year growth and originations, we feel like we're really taking share. So we took that into account as well as keeping our pricing under 36% APR. So that's how we thought about the pricing piece. In terms of what's creating demand for our loans and if we've seen anything different, not really. What we've seen over our 16 years of lending is Anytime that dollars get a little bit tight, it means that someone's going to need a little bit of credit when they've got a loved one that needs medical attention or a car that doesn't start or a planned purchase. So we're still seeing the same kinds of use cases driving demand for our month.
spk03: Okay. And then my last question before I get back in the queue would be, it sounds like you did a big loan sale at the end of the first quarter. Kind of, I mean, you guys have been a seller of a portion of your originations for a long time. Anything we should think about going forward in terms of your willingness to sell and the amount that you might sell at any time?
spk08: Yeah, John, great question. Given that we sold about 9% of the loan portfolio at the end of the quarter, and we were selling whole loans up until the beginning of March through a flow arrangement, which has now expired. We've actually sold a large portion of the loans we originally targeted for this year. So we're continuing to evaluate what's optimal between keeping loans on balance sheet and the option to sell them either directly to counterparties or through the securitization markets.
spk03: Okay. Very helpful. Thanks a lot. Thank you, John.
spk01: The next question comes from Sanjay Satrani with KBW. Please go ahead.
spk00: Thanks. I guess my first question is on the guidance. Obviously, revenue is coming in stronger than expected, but the expenses are a little bit higher as well for the rest of the year, as well as some of the impacts, I assume, from mark to market. But maybe, Jonathan, can you walk us through the breakdown of each of those factors as we think about the rest of the year and then sort of what the variables might be on those
spk08: specific lines if things don't pan out as expected on revenues sure well first of all we feel really good about our guidance and we've taken up originations and that is going to drive the increase in revenues that we forecast as we increase our revenues we would expect to have the opportunity to invest more in the business both on the marketing side and on the technology side So when we think about a contour for the operating expenses, I think looking at our pre-pandemic timing is probably a good thing to take a look at. We'd expect that each subsequent quarter, as demand increases, we're probably going to be spending more on sales and marketing. And similarly, we're making investments in the business, and that will lead to increased other OPEX other than sales and marketing. Is that helpful, Sandra?
spk00: Yeah, and as we think about the mark-to-market, just on a go-forward basis, maybe you could just give us some sense of dimensionality. Like, does it go higher, lower, anything, any color there?
spk08: Sure. No, that's a great question. So, you know, first of all, we guided to the second quarter, and that factors in our view of mark-to-market. The first quarter, as I mentioned in my remarks, benefited from a timing difference, given that interest rates went up a lot. it basically pulled a lot of net revenue through net change and fair value into that quarter. But when you look at the year overall, we're actually increasing our overall adjusted, we're increasing our overall adjusted net income and adjusted EPS guide. And so when you think about why the adjusted net income is, we're guiding lower for 2Q and also what's implied for the remainder of the year, Some of that is the timing of the mark-to-market as well as the timing of our expenses.
spk00: Got it.
spk08: And then, Raul.
spk06: Yeah, this is Raul. I just wanted to add two quick things. Number one, just emphasizing what Jonathan said. I mean, clearly we are investing in the business, right? We've got the digit expenses, which we didn't have a year ago. But as you know, when we started the year, we guided to profit levels that were better than prior year. And as Jonathan just said, we've raised our guidance in profits. So we absolutely are being thoughtful and very disciplined on the expense side while continuing to build for long-term success for the business. So that would be number one. Just the second point I wanted to add to Jonathan's response is you've known us now for some time. You know that at moments, such as now, when interest rates are moving around, it can introduce a little bit of noise in the adjusted net income. And in the past, one of the things that we've also done is really try to point to adjusted EBITDA because adjusted EBITDA does not have that variability that's driven by, you know, kind of macro events like what's happening right now. And adjusted EBITDA was $34 million compared to a negative $2 million in Q1 of last year. So the growth that we're focused on delivering is flowing down through the PNL, even as we continue to invest in long-term success. So just wanted to go ahead and point out the EBITDA number, because I think that can be helpful at times like these.
spk00: No, I appreciate that. Um, and maybe a question for you, Raul, um, you know, obviously intense scrutiny on the part of investors on the low end consumer in your prepared remarks, you talked about how employment sort of the guiding light for you, um, I'm just curious because there's a lot of discussion about the Fed sort of having an impact on employment, right, like forcing employment to get weaker. And I'm just curious what you're looking at to inform yourself of the direction you want to go in terms of handling the growth. I understand you have a green light right now, but maybe you could just talk about some of the metrics you're looking at. And just one question for Jonathan on the delinquency rate, right? and I just want to make sure I'm mechanically thinking about this correct, if we think about the delinquency rate year over year, excluding the noise related to this loan sale, it's still higher year over year, yet you're expecting the charge-off rate to be kind of stable on a go-forward basis. Maybe you could just help us think through that dynamic as well. I mean, should we expect a rise in the charge-off rate or there's some offsetting dynamics? Thank you.
spk06: Sure. So I'll start. I think one of the benefits of opportune for investors is we're not a company that started two years ago or even three years ago. We've been around for 16 years. So to your point, Sanjay, we mentioned this in our comments, a robust employment environment is the leading driver of both origination levels and the health of our loan portfolio. So the things that we look at, we certainly look at the unemployment rate, we look at wages, and in particular, if wages are moving. even if there was a softening in the market over the next few months as a result of fed actions the market is so strong right now that relative softening would still look like a good market relative to the history and the models that we have so we feel that our models are well calibrated after these 16 years of lending and we can make adjustments as the macroeconomic picture changes but We look at the results even that have been shared of late. Unemployment rate is still incredibly low. Our particular customer continues to see year-over-year increases in wages, and we still know that there are companies paying bonuses to employees either to stay or to start a new job. So today we continue to be very, very confident both in terms of the quality of the loan portfolio and in terms of our ability to keep driving origination. Jonathan, you want to take the next part? Sure.
spk08: So Sanjay, with regard to the delinquency trend, we think it's going to be consistent with our guide for net charge-offs. So for 2Q, we guided to 8.6% plus or minus 10 basis points, which is right in the range that we delivered for the first quarter. And then obviously for the full year, we reaffirmed our 8.8% plus or minus 15 basis points guidance. I think one of the things that's causing delinquencies to be even after that adjustment that you noted to be slightly above last year is that we believe that for many of our borrowers, the tax refunds they typically receive in Q1 came to them later. And because of the earned income tax credit actually were a little smaller than they were typically. So that may be on the margin. one of the impact factors. But overall, we feel very good about credit, and I think the guidance we're giving on loss is consistent with that.
spk06: Okay. Sanjay, I want to add just a tiny bit more color because we're trying to be very intentional in giving you and our investors a sense of the business and why we're so excited about it right now. One new statistic that we've started to disclose is the percent of loans that are going to new borrowers. You heard us mention in our comments that new borrowers are 51% of loans. If you would have looked at this quarter last year, it would have been 40%. So we know that new borrowers tend to have higher delinquencies. They've got slightly higher losses. And when we think about what do we compare this 4.1% to, I would go all the way back to 2019, and the rate then was 3.6%, but with a much, much lower percentage of new borrowers. So the guidance that we provide and how we think about the business at the beginning of the year is that we want to get from kind of where we end 2021 to where we want to end 2022. And if you look at our results relative to our guidance, we're exactly where we wanted to be at this point. And we're really excited about the number of new borrowers we have because they turn into more valuable repeat borrowers. But in the short term, it is going to create slightly higher delinquencies and slightly higher losses. though the losses continue to be in that 7% to 9% range that we've always targeted to optimize for growth and profitability. Thank you. Thank you.
spk01: As a reminder, if you would like to ask a question, please press star then 1 to enter the question queue. The next question comes from David Sharp with JMP Security. Please go ahead.
spk05: Hi, good afternoon, and thanks for taking my questions. Actually, I think John and Sanjay pretty much asked just about everything that was on my plate, but I guess, Jonathan, I did want to maybe just get a little more clarification to make sure I have kind of the cadence correct for the rest of the year. I mean, it sounds like clearly Q1 and Q2, there were some timing issues, issues impacting the fair value mark. But it looks like when you take the last nine months of the year in aggregate, you know, the guidance for those nine months looks to be cut in half from a couple months ago. When I look at the prior full-year guidance, less the Q1 guidance versus the updated full-year guidance, less the Q1 actual. And, you know, it looks like we're kind of exiting the year. It's sort of a 40-year per quarter run rate of earnings power. You know, I guess once again, is there a certain level of OPEX that you would either consider above trend or it's just front-end loading given the volume push? So, you know, once again, trying to get a better feel for, you know, beyond sort of the Q1, Q2 fair value timing issues, kind of what's led to, you know, this change in really you know, the remaining three quarters of the year. Yeah.
spk08: So David, it is mainly the timing difference. So let's, so first of all, we've increased our, just to remind you, we increased our guidance for the full year on the bottom line. So overall, we still expect to deliver more adjusted net income, more adjusted EPS, um, than we did, um, a quarter ago when we, we lasted earnings. Um, so, When you look at the top line growth, we've taken that up as well, both for originations and revenue. So that's all doing well. We would expect that, as has typically been our practice, that sales and marketing would increase each subsequent quarter for demand, that there would be some operating expense increases as we invest in the business. But the rest is just the timing of the mark. We basically just earned a lot of the money we were going to earn this year earlier And so I think that's what the main driver is. Is that helpful clarity?
spk05: Yeah, it sounds like a lot of pull forward. And maybe, you know, I haven't gone through the kind of Rube Goldberg slides of all the arrows and colors on the pure value mark, but maybe if you could just kind of help as it relates to kind of pulling forward. How much, I guess, how much of the incremental pull forward is associated with, you know, the mark on the debt and the ABS instruments. And, you know, I ask, maybe it's kind of leads into a broader, perhaps an investor education street management question that, you know, opportunity is the only fair value accounting company we follow that marks the debt as well as the assets. And I'm wondering, um, if there's any consideration to perhaps conforming to just kind of marking the assets quarterly and how the Q1 earnings would have looked if that was just the case.
spk08: Sure. Well, I think as we've stated before, we believe the way we manage our accounting is the best fit for our business, so we're not planning any changes. I think the slide you were referring to was slide 30 in the earnings deck. And what that shows is we break out the mark to market on the loans versus the mark to market on the notes. And 58 million of the mark to market that was beneficial was on the notes. And that's because interest rates went up and that took the prices down. So now, obviously, what interest rates do in the future could have an influence. But assuming the Fed keeps doing what the forward curve is saying, then we would anticipate that, you know, the prices of our bonds would start heading back up to par because eventually they'll mature and that will pull back some of that 58. So when we talk about a timing difference, that's why I refer to it as a timing difference.
spk05: Understood. Got it. Well, thank you very much.
spk08: Thank you for the question.
spk01: The next question comes from Rick Shane with J.P. Morgan. Please go ahead.
spk07: Thanks, everybody, for taking my questions this afternoon. First of all, I just want to make sure I understand the owned principal balance tab in the Excel file. Nominally, it looks like the principal payments went up significantly in the first quarter, but I'm assuming that that is a function of selling loans in bulk versus selling them on a flow basis because you held them on balance sheet. Is that the differential there?
spk08: That's correct, Rick. The $228 million loan sale basically closed close to the last day of the quarter.
spk07: Okay. So actual repayment activity, the payment rate on the portfolio was, generally speaking, consistent with what you would expect in first quarter, except for the comment you made earlier that perhaps a little bit of drag due to delay in tax refunds. That's correct. Okay, great. And then, again, I know there have been a lot of questions on this, but I just want to sort of go back, and I know both Sanjay and David have discussed this, but the way we should start to think about operating expenses for Q1 is see that as a new level and then see activity-related growth from there at a more modest rate of growth. I think that's a great way to describe it. I will, I'll take that. And then last question, Raul, you had mentioned pricing actions. And one thing I wonder is giving your historic focus on being below the 36% APR number, how much latitude do you feel that you have in a rising rate environment? Can you reprice to reflect the changes that you're experiencing in the bond market, or do you need to basically tighten credit at slightly higher rates in order to retain your risk-adjusted margins?
spk06: Well, we're definitely still committed to the 36%. We do know that there are still opportunities to take some more actions if we need to. We're not going to try to capture all of the increase, say, in our cost of debt because we think to do so would be short-sighted and wouldn't let us go ahead and take the kind of market share that's available. If you look at our Q2 guidance for the quarter relative to last year in originations, We're guiding to 93% growth in originations. We're guiding to 56% growth in total revenue for the quarter. And we think that to continue to stay sharp in pricing is going to give us an opportunity to keep gathering members that then we can create kind of long-term relationships with and be able to grow their value. So we will take more action if necessary, but we're not going to try to capture the full increase that we're seeing in the market right now. We think that would be too short-sighted for our business. Got it.
spk07: Okay. That's it for me, guys. Thank you so much.
spk06: Thank you, Rick.
spk01: The next question comes from Hal Ghost with Loop Capital. Please go ahead.
spk04: Nice quarter, guys. A couple questions for you. Can you refresh your memory on the states you kind of entered this quarter or really got moving and what states maybe you have left to enter leveraging these licenses with MetaBank? And then would you say to say on the cross-selling capabilities right now you're really just getting going with that with the digit acquisition? Thank you.
spk06: Sure. On the new states, we didn't disclose the exact states it was a handful of states. We're really focused right now on growing on the 27 states that we've added through the MetaBank partnership. And we did give a little bit more color, both regarding the increase in addressable market. We feel that there are 22 million potential new members in those 27 states. And then we listed those five states where we're really, really pleased with the results. And those are just indicative. We're actually really, really pleased with the way that the entire metabank partnership is playing out. So that would be that part. On the second part, in terms of cross selling, we did share another update on the percentage of credit card members that have an unsecured personal loan. That number was 7% at the state at the beginning of the year, it's now up to 12%. And we're focused on also learning a lot more and really implementing cross-selling between our credit members and our digital banking members. But I would agree with you. I think we're very much at the top of the first inning in these efforts, but it's a promising opportunity to keep growing the value and the revenue of our business. And I am really pleased with how things are going so far.
spk04: Thank you.
spk06: Thank you for the question.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Raul Vasquez, CEO, for any closing remarks.
spk06: I simply 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 very much.
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