Oportun Financial Corporation

Greetings and welcome to the opportune financial third quarter 2024 earnings call and webcast. At this time all participants are in listen only mode. If anyone should require operator assistance please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder this conference is being recorded. It's now my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead, Dorian.

Thanks, and hello, everyone. With me to discuss Opportunity's third quarter 2024 results are Raul Vasquez, Chief Executive Officer, and Jonathan Koblentz, 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, expense-saving measures, statements regarding our senior secured term loan and plans and objectives of management for our future operations. Actual results may differ materially from those contemplated or implied by those forward-looking statements, and we 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 is 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 10Q filing for the quarter ending September 30, 2024. 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 record 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 provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to GAAP financial measures is included in our earnings press release, our third quarter 2024 financial supplement, and the appendix section on the third quarter 2024 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 copy of our prepared remarks. With that, I will now turn the call over to Raul.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Overall, I'm pleased with the progress demonstrated by our third quarter results. The four headlines from the quarter, in my view, were lower charge-offs, return to growth, continued cost reduction, and higher profitability. First, we had lower charge-offs. Our annualized net charge-off rate was 11.9%, which was 26 basis points better than the lower end of our guidance range. When measured in dollars, our quarterly net charge-offs declined year over year for the fourth consecutive quarter, in this instance, by 6%. I'm also pleased with the progress we continue to make with our 30-plus day delinquencies, which were down 34 basis points year over year to 5.2%. That's the third consecutive quarter of year-over-year declines. Improvement in our credit performance is being driven in part by our implementation of our V12 credit model, which leverages the performance data of our portfolio over the last two years under higher inflation. We started using V12 to underwrite new borrower applications in January and recently implemented V12 to underwrite applications from returning borrowers, So we expect to see further improvements in credit performance in 2025. Second, we're ready to return to originations growth. After several consecutive quarters of origination levels that were lower than the prior year's levels, originations at $480 million during Q3 were virtually flat year over year. This is despite continuing to de-risk the business by decreasing average loan sizes, which were down 18% year-over-year from $3,975 to $3,244. Third, we continued progress on expense reduction actions Our 3Q gap operating expenses were $102 million, down 17% year over year, and we are reiterating our expectation to reduce gap operating expenses to $97.5 million or less by the fourth quarter. And fourth, each of these factors led to higher profitability. We generated $31 million of adjusted EBITDA, more than doubling last year's level and exceeding the top end of our guidance range by 21%. Q3 was also our third consecutive quarter of adjusted net income profitability. I mentioned at the start of the year that we would see our business recover significantly, which we have delivered with improving trends in profitability, credit performance, originations, and expense reductions. Additionally, the macro backdrop has also improved this year, with economists' expectations for a recession significantly diminishing, with resilient growth and ongoing low unemployment and with the Fed now having initiated a rate cut cycle that's expected to continue into next year. As we near the end of 2024, we are well positioned to deliver an even better 2025. We've recently executed two transactions that were critical towards that end. First, we closed the sale of our credit card portfolio today. As we shared previously, the transaction will be $2 million adjusted EBITDA accretive this quarter, and $11 million adjusted EBITDA accretive for full year 2025. Second, as we announced on October 29th, we executed an agreement to fund a $235 million four-year senior term loan facility that will replace our existing corporate financing facility. This reflects a key milestone towards strengthening our balance sheet and enhancing our operational flexibility, thereby improving our financial results. As we said in March, we had been evaluating refinancing options for the existing facility given scheduled increases in the asset coverage ratio covenant requirements. We weren't going to be in compliance with the existing facility's ACR covenant, which limited operational flexibility to enhance shareholder value and didn't reflect operational improvements in the business. The new facility replaces the ACR covenant with an adjusted EBITDA-based leverage covenant that rewards accretive decisions and recognizes cash flow generation. With the closing of our credit card sale, which was a necessary condition, we expect a new term loan to fund this week. In connection with providing the term loans, the lenders will receive approximately 4.86 million penny warrants, which equals 9.8% of the fully diluted shares outstanding of the company, excluding out-of-the-money options on a pro forma basis. Even with the dilution impact from the newly issued warrants, we expect to drive increased profitability on a per share basis through focusing on our core products, maintaining expense discipline, and improving credit performance. I'd like to reiterate our preliminary full year 2025 expectations that we released at the end of last month. They are diluted EPS between 25 cents and 50 cents, adjusted EPS between $1 and $1.25 and an annualized net charge off rate between 11% and 12%. In addition to our positive view of 2025, our full year 2024 outlook continues to show that after a strong start to this year, our second half performance will be even better than the first half. In summary, I'm proud of how the team executed in Q3, and pleased that with the credit card sale behind us and the refinancing transaction expected to close this week, we can now turn our focus towards a strong close to 2024 and significantly improving our profitability and credit performance in 2025. With that, I will turn it over to Jonathan for additional details on our financial performance, credit performance, and guidance. Jonathan will also update you on how this translates to progress towards our longer term unit economic objectives.