Oportun Financial Corporation

Ladies and gentlemen, thank you for standing by. Our conference will be getting started momentarily. Once again, our conference will be getting started momentarily. Please continue to hold. Thank you. Hello, and welcome to the Opportunity Financial fourth quarter 2022 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dorian Hare, Vice President, Investor Relations. Please go ahead, Dorian.

Thanks, and hello, everyone. With me to discuss OPPORTUNE's fourth quarter 2022 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, 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 filing for the current quarter ended December 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 conditions 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 non-GAAP to GAAP measures is included in our earnings press release, our fourth quarter 2022 financial supplement, and the appendix section of the fourth 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, and 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 our Raoul.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Today, I'd like to discuss our fourth quarter financial performance, share how we are managing through the macroeconomic environment, and provide an update on our strategic initiatives. Jonathan will then provide more details on our financial performance and our guidance, and I'll provide some closing remarks. OPPORTUNE delivered strong top line growth in the fourth quarter and was profitable on an adjusted basis. Let me start with the following summary on slide three of our earnings deck. We delivered fourth quarter record revenue of $262 million, up 35% year over year. We exhibited diligent expense management with a 52% adjusted operating efficiency ratio. That's a new record for us as a public company and a key driver of our profitable quarter with adjusted net income of $4.6 million for adjusted EPS of 14 cents. While our post-July vintages are performing better or near 2019 pre-pandemic levels and continue to grow as a proportion of our loan portfolio, Our annualized net charge-off rate of 12.8% was higher than our prior expectations due to underperformance of our back book of loans originated before our July credit tightening. The positive trends in our post-July vintages provide us with the expectation that Opportune will continue to see its loss rates trend toward our target range during 2023. On a full year basis, 2022 was a resilient year in the face of a challenging macroeconomic backdrop. We grew total revenue by 52% to a record $953 million, while total originations grew by 27% despite significant credit tightening actions in the second half of the year. And OPPORTUNE was profitable on an adjusted basis. generating $69 million in adjusted net income and $2.09 in adjusted EPS. The initial 2023 guidance that Jonathan will detail with you reflects that although we still face headwinds in the first quarter, we anticipate strong performance starting in Q2, driven by prudent originations, lower losses, and expense reductions. Now, Let me update you in more detail about what we saw in Q4, starting with credit. Credit is the most important metric in our business. As a reminder, starting in July, we initiated a set of actions, including significantly tightening our underwriting standards to address the impact of inflation on our members. At the time, We observed an uptick in delinquencies, particularly among borrowers with lower free cash flows and those with smaller loans with shorter maturities whom we had underwritten prior to or in the first half of 2022. This subset of borrowers, including new and some returning, struggled with the expiration of pandemic-era stimulus payments amidst rising inflation. As you can see from slide four, our post-July underwriting vintages continue to perform quite nicely. We've maintained our posture of reducing our exposure to new borrowers and increasing our proportionate exposure to more profitable returning borrowers who have already successfully repaid at least one loan to Opportune. In the fourth quarter, 27% of our loans were to new borrowers as compared to 28% in the third quarter and 51% in the first quarter. This shift in underwriting has been integral towards our driving first payment defaults towards or below 2019 pre-pandemic levels. As of the end of 2022, our first payment default rate was markedly lower than where we started the year and stood at 0.6% in comparison to 1% in 2019. We initiated further credit tightening actions in November and December following the July actions. On an overall basis, as you can see on slide five, the 30-plus day delinquency rates for our August through November 2022 vintages were each lower than the comparative monthly vintages initiated in 2019. Moreover, as the average life of our loans is only one year, the proportion of post-July underwritten personal loans on our balance sheet was already up to 39% as of the end of the fourth quarter, 2022, and we anticipate it will be 81% by the end of 2023. So we're very pleased with the results from our originations following our July credit tightening and our subsequent actions, which position us to improve our credit performance throughout 2023. We remain highly focused on other key pillars of preparedness in this macro environment. including pricing, funding, liquidity, and cost controls. We continue to pursue loan portfolio pricing actions to mitigate the increased cost of funds we're experiencing in this rising rate environment, while remaining committed to our 36% APR cap. We now expect that by the end of 2023, our portfolio yield will be over 200 basis points higher than the end of 2022. We closed a $300 million securitization our fourth of the year in November, and we believe our access to the securitization market remains strong. We're making progress in reducing our charge-off rate, but given the performance of our back book, expected higher cost of funds given Fed actions to combat persistent inflation and the uncertain future macro environment, we have recently taken two additional measures to bolster our liquidity position. We have delayed $42 million of amortization on our residual financing facility, and we have upsized and amended our senior secured term loan by up to $75 million. Jonathan will detail these changes with you later. Let me shift now to operating expenses. We are pleased to have met our target for flat second half adjusted operating expenses versus the first half of the year by reducing sales and marketing costs and limiting headcount growth. while continuing to grow our revenue. Accordingly, our fourth quarter adjusted operating efficiency improved by over 1,200 basis points year over year to 52%, which is the lowest level in our history since becoming a public company in 2019. As we entered 2023, we remained focused on reducing operating expenses. I recently made the decision to reduce our corporate staff by 10% and eliminated a number of contractor relationships as part of an overall plan to streamline operations. These actions will result in $48 to $53 million in total annualized expense savings. Shifting now to our long-term strategic priorities, I'd like to provide you with our key areas of focus for this year and into 2025 as we've laid out on slide seven. Our first priority is to fortify our core business economics. I've talked to you about how our underwriting focus has been on returning members rather than our new members, and we look forward to the second quarter and beyond when we anticipate lower charge-offs. We're also focused on substantially improving our profitability and our ROE. We expect the expense discipline and record low adjusted operating efficiency levels we exhibited in the second half of 2022 to carry into this year and beyond. Our second priority is to strengthen our core unsecured personal loan product with a focus on improving unit economics. As I mentioned earlier, we are increasing yield and are focused on reducing costs associated with our personal loan business. Our unsecured personal loan portfolio will continue to be the most profitable component of our business, and we will leverage data technology and AI to responsibly grow it. Our third priority is to build our member engagement platform. We're continuing to enhance our platform capabilities to meet the everyday financial needs of hardworking people, which will extend member life cycles and enable us to service them with more personal loans over time. At the center of this engagement initiative is our OPPORTUNE mobile app, which we previously referred to as the Unified app. Released in February, the OPPORTUNE mobile app combines our credit products with our digital saving, banking, and investing products. I'll talk more about the mobile app in a moment. Finally, our fourth strategic priority is to develop our product suite. This includes our focus on credit cards, secured personal loans, and our lending as a service partner channel. As a reminder, we indicated on our August earnings call that we would deliberately moderate growth in our secured personal loan and credit card products as part of our credit tightening actions. While in the near term, we will be focused on improving the credit performance of these portfolios and limiting originations, we continue to believe that secured personal loans and credit cards are complimentary to our overall product suite. And we continue to make great progress with our lending as a service partner channel. from which we can efficiently increase our applicant pool and selectively add high-quality new members, even while we tighten our credit standards. During the fourth quarter, we scaled our partner network to include 590 locations, up from 258 a year ago, and well in excess of the 500 locations we had targeted by year end. I'm also pleased to share with you that our partnership with Sezzle, the Buy Now, Pay Later company, and our first digital lending as a service relationship is active as of February. OPPORTUNE will be providing financing for Sezzle's customers who need a larger loan for whom a traditional buy now, pay later loan is not a fit. To elaborate further on the new OPPORTUNE mobile app that I mentioned earlier, we're very excited about its release because it is a major milestone towards building our member engagement platform to help hardworking individuals meet their borrowing, saving, budgeting, and spending needs. over 275,000 members have already used our app. Many of you will recall that in November of 2021, when we announced the acquisition of Digit, our digital banking platform, we began to refer to our customers as members. The implicit strategy shift was that the digital banking products would allow for ongoing engagement with existing and new borrowers with whom we could formulate multi-product relationships. With the opportune mobile apps launch and the seamless customer experience it provides, we are now well positioned to accelerate the synergies we contemplated when we acquired Digit through increased cross-selling, higher conversions, and lower customer acquisition costs. With that, I'd like to turn it over to Jonathan for additional details on our fourth quarter financial performance and our initial 2023 guidance.