Greetings, and welcome to Oportun Financial Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Dorian Hare, Investor Relations. Thank you. You may begin.

Thanks, and hello, everyone. With me to discuss Oportun's second quarter 2023 results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I'll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results, 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-Q filing for the quarter ended June 30, 2023. 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 future condition and results of operations. A full list of definitions can be found in our earnings materials available in the Investor Relations section of 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 substantial measures is included in our earnings press release, our second quarter 2023 financial supplement and the append exception of the second quarter 2023 earnings presentation, all of which are available at the Investor Relations section of our website at investor.oportun.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. Thanks for joining us. Today, I'll discuss our second quarter financial performance and update you on Oportun areas of focus. Let me begin with five highlights from our Q2 performance. First, we returned to profitability in Q2 with $2 million in adjusted net income, driven by strong top line performance and the steps that we took earlier this year to streamline our operating expenses. We've now reported positive adjusted net income in 11 of the last 12 quarters. Our adjusted EBITDA, which also turned positive at $4 million was within our guidance range and more importantly, we expect to deliver $35 million to $40 million in adjusted EBITDA in Q3. Second, our credit outlook is improving as a result of our tightened credit posture. Our annualized net charge-off rate of 12.5% outperformed our guidance due to effective collection and recovery efforts as well as our tighter credit standards. We expect Q2 to have been the peak level, and we project that our loss rate will decline by approximately 80 basis points in Q3 based upon our midpoint guidance. As a reminder, we initiated our credit tightening in July of 2022 due to heightened inflation present at that time and are continuing to see improvements within our portfolio. Third, we're seeing the tangible benefits and results of our cost savings initiatives. You'll recall that we enacted a combined set of initiatives in February and May to produce $126 million to $136 million in annualized expense savings. Those actions are taking hold and resulted in total operating expenses of $136 million for Q2, at 7% sequential and at 14% year-over-year decline. Fourth, we increased revenue by 18% and set a new quarterly record of $267 million, while expenses were down 14% year-over-year. This demonstrates the resilience…

Thanks, Rahul, and good afternoon, everyone. As Raul mentioned, Oportun delivered strong performance in the second quarter. We achieved these results by continuing to take a conservative stance focused on the things we can control. As shown on Slide 7, Oportun delivered record total revenue of $267 million and returned to profitability, delivering $2 million of adjusted net income. For originations, we continue to be focused on quality rather than quantity. That was evident in our Q2 aggregate originations of $485 million, which were down 45% year-over-year, yet up 19% from the first quarter as we were able to make more high-quality loans. In particular, we drove the sequential growth by successfully marketing to our best customers. Total revenue of $267 million for year-over-year growth of 18%, outperformed our guidance range due to higher-than-anticipated originations and higher portfolio yield as our pricing increases have started to take effect. Our 32.2% portfolio yield increased by 83 basis points from Q1 to Q2. We remain on track for year-end portfolio yield to be approximately 200 basis points higher than the level at the end of 2022. We had increased yield while remaining committed to our 36% APR cap without burdening our members with significant changes to their payment amounts. Net revenue was $119 million, down 18% year-over-year, primarily due to higher net charge-offs and higher interest expense compared to 2022. Interest expense of $41 million was up $24 million year-over-year, primarily driven by increased debt issuance and an increase in our cost of debt to 6% versus 3% in the year ago period. The fair value price of our loans increased to 100.7% as of June 30 and resulted in a $14 million mark-to-market increase. This was essentially offset by a $13 million mark-to-market increase in our asset-backed notes, which contributed negatively…

Thanks, Jonathan. Before I open up the call for questions, I want to highlight that we recently released our 2022 corporate responsibility and sustainability report and share some of the ways in which Oportun is focused on addressing the biggest challenges facing U.S. consumers. Oportun extended more than $15.5 billion of credit to hard-working individuals while helping to establish more than 1.1 million credit histories. Likewise, our savings product has helped our members effortlessly save more than $8.9 billion with the average member using our savings product setting aside over $1,800 annually. We've recently surpassed 2 million members, and our services are available in all 50 states, and our employees are passionate about giving back to the communities in which we operate and where we live. Having volunteered around 3,500 hours since 2020 and supported 572 nonprofits. As you can see on Slide 14, we received various recognitions during 2022, including for the high degree of trust with which we engage with our customers, the sustainability of how we operate and our use of AI for the betterment of our members. In closing, I want to share with you how proud I am of how the Company performed during the quarter and amidst our significant cost-cutting efforts. Our people have proven to be highly resilient and are continuing to deliver excellence for our members and shareholders. I also want to reiterate that I'm very pleased with our second quarter progress, which signifies the emergence of a leaner, more profitable Oportun. And we've laid the foundation to carry the strong momentum into 2024 and beyond. With that, operator, let's open up the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Hecht with Jefferies.

Congratulations on kind of a big raise relative to the expectations prior to this quarter so thanks. Just on the net charge-offs stuff. I mean, you guys started tightening over a year ago, things are starting to stabilize how much do you -- are you able to discern how much of this is a function of the tightening? Or is there some attribution to the stabilization of inflation? And given that, is there -- at what time would you be comfortable starting to think about loosen and lean back into the market a little bit more aggressively?

Yes. So John, thanks for the question. This is Raul. We really think it's a combination of things. So certainly, the tightening and the ongoing adjustments help the stabilization of the economy helps. You may have noticed in the comments we shared also that the percentage of loans going to individuals that advantage scores of 660 or higher was 33% a year ago, 40% at the end of 2022, and now it's up to 47%. So I think as kind of lenders upstream from us Titan that is giving us an opportunity to select better credit profiles, right? And we're certainly focused on doing that to improve the results. So that's something that we think is also helping us really deliver this step down in originations, I'm sorry, in losses, right, will be about 80 basis points better in this next quarter. And then in terms of opening up, we feel really good about the credit that we're originating right now, right? The whole loan sale agreements with Castle and Newberger indicate that the front book is high quality and people want to earn those -- I'm sorry, they want to go ahead and own those assets, right? They want to own those loans. And as a consequence, we are starting to grow the portfolio a bit. So you saw that originations were up 19% quarter-over-quarter, about $77 million. So that indicates on our side, an ability to acquire that credit that we're going to feel really good about and starting to grow originations kind of a modest and really smart level given what we're seeing in the economy.

Okay. And second question, and I know this is not the focus of your priorities right now, but you have invested in other categories of businesses. I think you slowed down some of that investing recently, just given the variability in the credit markets, maybe like specific to the credit card business, where do you see that? At what level would that be positive contribution? Is there still some sort of framework for us to think about the timing of that? And that and maybe any of the other growth segments as well.

Sure. So in Page 4 of the deck, what we presented was where is it that we're putting our corporate expenses, 85% of them are on the unsecured personal loan business, 10% in savings. And then to your point, John, we've got 5%. You could think of that as $16 million to $17 million a year in corporate expenses. And that's what's being allocated to credit cards, secured personal loans, lending as a service. So what we're really focused on right now is evaluating each of those products and initiatives to ensure they're the best use of resources and capital. We announced that after that review, we decided that we were closing our checking account. We just didn't think it made sense to keep that in maintenance mode when we thought about what's the highest and best use of resources. We're going to be taking a look at the rest of those products as well. Credit cards, secured personal loans, lending as a service as part of an ongoing effort, just to make sure that it's the highest and best use of capital management time and the resources, especially after the reduction in force.

That makes sense. And then final question, the full agreements is the -- that is a good signal kind of in the credit market, not only the credit performance, but the interest from the counterparties to the investors. Is the type of pricing you're getting on that consistent with where you were doing it, say, in 2019? Or how do we think about the shift to that market?

That's a great question. Obviously, since 2019, interest rates and credit spreads are much higher. We continue to have very strong risk-adjusted yield. We've got a slide in the deck that talks about our unlevered yield after losses and servicing being about over 15%. So clearly, that's an attractive cash flow to investors. We're not sharing the specific economics, John, but we are selling loans at a premium. And I think in this current market, that's a really strong sign.

The next question comes from the line of Richard Shane with JPMorgan.

John really started to touch upon what I was largely interested in. Historically, you've sold about 10% of your production. It looks to me like implicitly depending upon how much we think volume is going to grow from here and some of the indications you just provided that you're going to be selling a substantially higher percentage. I'm guessing somewhere 25% to 35% of production. Does that seem like it's in the ballpark of $700 million a year?

I think that's fair, Rick. As you know, we're not guiding to originations, so we can't do the math precisely, but that sounds like a reasonable estimate.

Got it. And then in answer to John's question about the gain on sale margin, you said that there was a positive gain on sale but that --obviously starts at a very, very modest number, and they can go substantially higher. I think historically, you've been pretty close to 10 points. The difference between 10 points and profitable is the difference -- positive is the difference between substantially profitable and kind of breaking even. I am curious given what is the very favorable guide for the second half of the year, the best explanation of that would be the contribution from that volume. I just want to make sure that we are thinking about the channel markers right that it's probably not as high as 10%, but it's probably not as low as 10 basis points.

So Rick, I'm glad you asked this question. I mentioned in my remarks and maybe I should have emphasized it more. But we are -- for GAAP accounting purposes, treating these whole loan sales as asset-backed borrowings. So we're recording the proceeds we received as a debt balance. There will be interest expense equal to management's estimate of the investor yield, and then we'll continue to record revenue as if the loans were on balance sheet and they will continue to show up in our on-balance sheet loans. So we won't actually have a gain on sale or servicing fee income reported in noninterest income for this portfolio. But to your point, the economics work the same way, and we're definitely making money and nice money on these whole loan sales. And so it's a win-win. Our investors get a high-quality asset at what for them is an attractive yield. And we get to continue to originate high credit quality loans and make money off of those loans.

And Rick, just to add a little -- this is Raul -- just to add a little bit because I think you were also talking in essence, about our guidance for adjusted EBITDA for the remainder of the year, I'm really bullish right now about the positioning of the Company. We obviously had to make some difficult choices in the beginning of the year, but we were setting ourselves up for a really strong back half of the year. So certainly, the whole loan sales are going to contribute. The reduction in expenses are contributing. The improvement in yield is something that's contributing to a stronger back half of the year. Having losses come down as I talked about a bit when John asked his question, all those things are lining up really to create, as we mentioned in our remarks, right, a combined adjusted EBITDA at the end of the year that is higher than the last 16 quarters combined. So I'm really proud of the way that the team is executing, and I think we're set up really well for the back half of the year in 2024, where it just feels to us like we've really turned the corner through this good execution.

No. Look, that clearly comes through, and we are already sort of trying to solve into that $90 million to $95 million. And then Jonathan tanks for the clarification, I heard you say that, but I did not, in fact, process it the way that I should have -- I was so sort of tunnel vision on the gain on sale, I hadn't thought about really the implications of what you're describing. And Raul, I think you're right. It's not any one of those individual adjustments. It's the layering of them is the incremental revenue with the lower cost on the operations side, it's the lower cost. On the credit side, it's a little more operating leverage and it really does build. It will be interesting as we go through the model to see all of that. And then the other issue is I guess the one accounting issue I have is how do you make that sale but keep sales below sale treatment, do you have to continue to reserve as if you own those loans. And so out you fair value it. How is that going to work with the fair value accounting?

So those are a couple of great questions. So first of all, from a GAAP standpoint, we retain the option, Oportun retains the option to repurchase a small percentage of the loans that we've sold. And so because of that, from a GAAP accounting standpoint, the loans do not qualify for deconsolidation and they're on balance sheet. There -- it's a sale for tax, it's a sale for legally. But in terms of fair value will fair value those loans, just like we fair value the rest of our portfolio. It doesn't really change anything there.

And just a quick clarification on the option to repurchase that is at our discretion. That's at Oportun discretion.

Understood. Okay. more than extended my one question and a follow-up, I apologize. Thank you.

Okay. 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 very much. Thanks, everyone. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.