Welcome to the Oportun Financial First Quarter 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode, and following the presentation, there will be a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, May 8, 2025. I would now like to turn the conference call over to Mr. Dorian Hare. Please go ahead.

Thanks, and hello, everyone. With me to discuss Oportun's first quarter 2025 results are Raul Vazquez, Chief Executive Officer; and Paul Appleton, our Treasurer, Head of Capital Markets and Interim Chief Financial 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, including projected adjusted ROE attainment and expected origination growth, planned products and services, business strategy, expense savings measures 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 March 31, 2025. 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 comparison 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 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 first quarter 2025 financial supplement and the appendix section of the first quarter 2025 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. Thank you for joining us. I'd also like to welcome Paul to the call for the first time. We started 2025 with a strong first quarter, building on our momentum from last year. We've now met or exceeded guidance for six consecutive quarters while consistently driving financial and operational improvements across the business. The four key headlines from Q1 are: continuing GAAP profitability, improving credit performance, responsible originations growth and ongoing expense discipline. First, we were GAAP profitable again in Q1, continuing the momentum we regained in Q4. Our Q1 net income of $9.8 million was a $36 million improvement year-over-year and drove an ROE of 11%. Adjusted net income of $19 million represented a $15 million year-over-year increase. Moreover, we generated $34 million of adjusted EBITDA, a $32 million increase. We achieved these results primarily through a combination of originations growth, ongoing expense discipline and improved credit performance. I want to reiterate that we expect to be profitable on a GAAP basis for full year 2025. Regarding improved credit performance, our annualized net charge-off rate was 12.2%, which was at the low end of our guidance range. Importantly, our underlying trends remained positive with dollar net charge-offs down year-over-year for the sixth consecutive quarter. Our 30-plus day delinquency rate was 4.7% marking the fifth consecutive year-over-year decline in this instance by 56 basis points. I'm pleased to inform you that following the first quarter, our 30-plus day delinquency rate declined further to 4.5% at the end of April. The guidance Paul will share reflects lower net charge-off rates in the quarters ahead. Third, originations were $469 million during Q1, up 39% year over year. It's important to note that this growth reflects the unusually low baseline from 1Q '24. Secured personal loans accounted…

Thanks, Raul, and good afternoon, everyone. As you can see on Slide 5, we had a strong first quarter exceeding the high end of our total revenue and adjusted EBITDA guidance while coming in at the favorable end of our annualized net charge-off rate guidance. As shown on Slide 6, we delivered total revenue of $236 million in the first quarter. We were GAAP profitable for the second consecutive quarter with $9.8 million of net income and diluted EPS of $0.21. We were also profitable on an adjusted basis for the fifth consecutive quarter with adjusted Net Income of $18.6 million and an adjusted EPS of $0.40. While maintaining credit discipline, originations of $469 million were up 39% year-over-year which, as Raul mentioned, reflected an unusually low baseline in Q4 '24. Sequentially, originations were down 10% from Q4's $522 million, consistent with the typical seasonality we've observed in prior years. Total revenue of $236 million declined by $15 million or 6% year-over-year. This decline was primarily due to the absence of $11 million of credit card revenue in the prior year quarter. As a reminder, we completed the sale of our credit card portfolio in November of last year, which was accretive to our bottom line. Our total net decrease in fair value of $73 million was primarily driven by current period net charge-offs of $81 million. Furthermore, higher yielding assets drove a favorable $12 million mark-to-market adjustment on our loan portfolio. First quarter interest expense of $57 million was up $3 million year-over-year as sub-3% pandemic era ABS issuances continued to pay down. Net revenue was $106 million, up 34% year-over-year, as lower fair value marks and lower net charge-offs more than offset lower total revenue and higher interest expense. As a reminder, we elected to stop accounting for…

Thanks, Paul. To close, I'd like to emphasize three key points: First, we're pleased to have carried 2024's momentum into 2025 by being GAAP profitable for the second consecutive quarter with a GAAP ROE of 11% and an adjusted ROE of 21%. Second, we are closely monitoring the macroeconomic environment, have factored it into our outlook and are adjusting our underwriting and expenses as needed. And finally, we're reiterating our full year 2025 guidance expectations for revenue, adjusted earnings and adjusted EBITDA. Our adjusted EPS guidance range of $1.10 to $1.30 reflects strong growth of 53% to 81% and we continue to expect to be GAAP profitable on a full year basis. Our strategic focus on improving credit performance, strengthening business economics and prioritizing high-quality originations is delivering consistent improvements in our performance. I'm deeply grateful to our employees and shareholders for their unwavering commitment as we continue advancing on this journey. With that, operator, let's open up the line for questions.

[Operator Instructions] Your first question comes from John Jefferies.

It's John Hecht. My name is not John Jefferies, but I work at Jefferies. Anyway, congratulations on a lot of the progress here. I guess, Raul, maybe can you give us an update on online or digital loan application activity versus in-branch? And are you seeing any changes there in terms of mix and behavior on the front end of the loan originations?

John, let me start with thank you for the congratulations. We felt really good about the way that the team executed in Q1. You're going to see when we print our investor deck, we give a quick update on originations. You're going to see pretty stable. There's been a small shift I think on the order of two points from physical to online quarter-over-quarter. As you know, we manage the business at a portfolio level. We develop the channels so that they all work together. So we're not seeing any big changes, just very, very modest change.

Okay. And then I know you're targeting growing the secured business relative to the overall book. Is there a way to kind of execute that that involves kind of trying to steer customers to that product or is it finding all new customers? I guess maybe give us the update on that strategic objective.

Sure. So I'm really pleased with the performance of secured personal loans in Q1. The book grew about 59% year-over-year. So we were able to add about $66 million to the principal balance of that book. Average loan size came down, right? We think that in this environment, it makes sense for us to continue to be very discerning and very thoughtful. So average loan size came down about $2,200 year-over-year for secured personal loans. So, I like the growth, I like the fact that the growth was driven by units not by loan size. And from a strategy perspective, it's both the things that you talked about. So from a user experience perspective, we continue to focus on presenting both products to our members and giving them the option of picking whichever product is going to meet their needs. And at the same time, our marketing group is certainly trying to figure out how do we create some specific strategies to try to bring in more people that are going to be interested in that product. It's now about 7% of our book and our goal this year is to continue to drive growth faster in that part of the business and to continue to increase the penetration of that as a percentage of our book.

Okay. Makes sense. And then last question is maybe just any comments on competition just given, call it, the uncertainty in the macro backdrop and what opportunities or challenges that presents for you guys?

Yes. We've always felt that we compete very well with others. When you look at the all-in cost for our product, it is very favorable to some of the alternatives that are out there. Thankfully, we think that the competitors continue to behave in a very rational way, right? I think pricing still reflects elevated cost of funds across the board. So we think that the competitive environment right now continues to be very constructive for us and that's part of what's allowing us to perform in this manner.

And your next question comes from Chris Sakai from Singular Research.

Yes. I'm in for Gowshi. Just let's see how much is in-app features, such as payment reminders and dynamic pricing, reduce customer acquisition costs for secured loans versus unsecured? Is this replicable in newer markets?

Yes, it's a great question. So when we look at our cost to acquire, we look at it across the entire business. I'm really pleased with the fact that our cost to acquire was very stable on a year-over-year basis. So it was $139 this quarter, $138 a year-ago in Q1. In terms of whether it's the app, whether it is direct mail, our referral program was also something that grew a lot. We had 352% year-over-year growth in referrals. We really try to take a holistic approach to how we make people aware, number one, that Oportun exists and that we're a great value relative to other options. And then to your point, Chris, we also try to make them aware, as John was just asking about as well, we try to make them aware of the fact that we have both an unsecured product and then a secured product. The secured product gives us an opportunity to make loans that are about twice as large. We love the product also because it has losses that last year ran 500 basis points lower than the loss rate for unsecured loans. So we're really focused across all touch points, Chris. We're focused on driving awareness of secured personal loans.

Okay. Great. Have you noticed any unexpected shifts in repayment patterns or customer engagement since phasing out physical check and how does this trend influence your fraud prevention strategy?

So no, I wouldn't say we've noticed anything unexpected. When we think about both delinquencies and losses, you can see that we're where we expected to be from a guidance perspective. So the fact that delinquencies for example came in at 4.7%, down 56 basis points year-over-year for the quarter. We gave a sense of where April came in. April delinquencies were even lower. So we like that downward trend. So when we think about both payment behavior and the potential for fraud, there's nothing alarming and nothing unexpected. We're performing in line with guidance and obviously this is an area that our team is very, very focused on.

Okay. Great. And then last from me. So returning borrowers drove originations it looks like. Is this shift intentional to improve unit economics and if so, what's the long-term ceiling for new customer acquisition?

From an acquisition perspective, the things that we've been focused on have been: number one, to your point, our returning borrowers we know are among our best borrowers. They generally get access to more capital. They have a lower cost to acquire. The loss levels are lower. So we're very pleased with growth on the returning side of the business. From a cost to acquire perspective, I wouldn't say that it's going to drive any shift there. We want to continue to acquire high-quality new borrowers. We've mentioned in the past that we look -- in this environment in particular, we look for new borrowers that are going to do better in the different scores that we use from an underwriting perspective. I think as you know, we use a few proprietary scores. We're looking for new borrowers that have higher levels of free cash flow. We think that that helps position them well for any unexpected macroeconomic environment that may develop. So the new borrowers with those characteristics we know become attractive returning borrowers in the future. So we're going to continue to look for both, high-quality new borrowers and then focus on our great returning borrowers.

And your next question comes from Brendan McCarthy from Sidoti.

I just want to start off on the macro outlook. You mentioned you're tapering the outlook for originations for this year down to 10% at the lower level of that original 10% to 15% outlook. But I guess what are you -- just curious as to what you're seeing in the macroeconomic picture to drive this decision or is it more just of a cautious approach for the rest of the year?

It's the latter. I think Chair Powell stated it very well yesterday that there is uncertainty in the macro, right? It's not clear what level of tariffs are going to exist over what time period. And I think as he stated yesterday, there is the potential for higher unemployment and for higher inflation. We're not seeing it yet, right? We think the job market for a blue collar worker that earns $50,000, that's our core customer. We think the job market is really, really strong for our customer. But we think it makes sense right now to take a bit of a wait and see perspective from a macro perspective. Wait a little bit. Hopefully, there will be more deals like the ones announced this morning by the administration and if that happens and the macro gets clearer that it's going to be a strong environment, then we'll just move back up within the range of the 10% to 15%. But right now, Brendan, we just think it's prudent to be on the lower end of that range and just to wait and see.

Understood. And pivoting to the operating expense outlook. It looks like for the first quarter, the number of $93 million came in well below the outlook for the average of right around $98 million. I guess what factors could cause meaningful underperformance there or higher operating expenses there for the year-end or what factors could cause that number to stay fairly low on a quarterly basis going forward?

Well, we're clearly focused on continuing to be disciplined from an OpEx perspective, Brendan. I liked your question because one of the things we've done again within this kind of framework of really thinking about what's the prudent level of growth today and then being able to watch the environment and see how it develops. Within that framework, we decided that we were going to push some of the marketing dollars into the back half of the year. So that that way if there's more clarity on the macro environment, if inflation continues to stay low, the job market is as strong as it is today; then we've got some dry powder from a marketing perspective to drive growth at the back half of the year and position us for a great 2026. If the macro remains uncertain, right, then we won't spend those dollars and we'll have a lower OpEx than the $390 million we're projecting today.

Understood. I appreciate the color. One last question for me. I saw the announcement yesterday on the forward evolution of Oportun. I'm just curious if you could provide additional color I guess on the decision to ultimately shrink the size of the Board and how investors can really think about that.

Sure. So the Board determined that a smaller Board size would be both more conventional and more efficient. The Board also felt that this reflects feedback that we've heard from shareholders and it really underscores our commitment to thoughtful Board evolution. The Board regularly reviews its composition, ensures that it's got the right mix of skills and expertise to effectively oversee the business. So I'd say those were the drivers, Brendan.

And your next question comes from Harold Goetsch from B. Riley Securities.

Good continued performance here. Could you just go over some of the data you gave on the whole loan sales again? You grew originations quite nicely above your target. Can you just go over the whole loan sales and maybe how that impacted the quarter?

Sure. Harold, we feel really good about the quarter. So within the $469 million of originations that we had, there are a couple of ways to think about that. Number one, secured personal loans drove about 19% of that Q1 growth, right? So for all the reasons that we've talked about already, that's a big strategic priority. We think of those as very high-quality originations given the fact that it's twice the revenue, losses that are 500 basis points lower. To your point, when we're able to grow at these levels, one of the things that we also want to do is be able to sell loans to partners. So we had about $32 million of loans that were sold to our partners, right? Those are people that like the cash flows. We think of it as a signal that these are high-quality assets that partners want to own. So those are two of the ways to think about kind of the growth that took place in Q1.

[Operator Instructions] And your next question comes from Rick Shane from JPMorgan.

I actually am sitting here and wondering if Jonathan is ignoring this call or is off listening and having a beer. But either way, I think we all wish him well. I did have one question and I apologize if this was covered, we've had multiple calls this afternoon. You guys had talked last quarter about incorporating risk associated with inflation into your underwriting models. Can you talk a little bit about how you do that? It feels to me like given where we are, that's probably the most important consideration. Who knows what's going to happen, but it is the wildcard.

Yes. I really appreciate that question, Rick. So I'd say at a high level, there are two ways to think about this. So just for context for others that may not be quite as aware. One of the things that we do with our underwriting engine is, as much as happens with our phones, there are major upgrades and then minor upgrades. So the major ones we think of as going from V9 to V10 to V11. And what you're referring to, Rick, is V12, which we introduced for the first time last year. So V12, one of the benefits of V12 is it was trained using data from this inflationary period that we've had recently. So the underwriting model V12 is much more equipped to think about who are going to be the borrowers that we want to approve within this environment that still has the compounding effects of inflation that have taken place over the last few years. So V12 was built in that way and one of the things that's already planned is in the coming weeks, we're actually going to do one of the minor updates in V12. So we're going to look at the performance over the last year and we're going to go ahead and make some tweaks to V12 and then introduce that as part of our new underwriting approach. So that's one of the things that's going to help us in this uncertain environment. The other thing that we've talked about in the past is one of the things that we were able to do was to look for some signals of individuals who are applying today who are likely to take on additional debt either at the same time or after taking on debt from Oportun, right? This has been one of the challenges in our industry in the past. It's been loan stacking in particular when the economic times get a bit more challenging. So I think that that's another set of signals and data that our data scientists and engineers have been able to build into our underwriting approach and both of those things are going to help us in this environment.

Got it. And look, you guys had made the comment about sort of shifting to the lower end of your origination guidance. Is that a function of increasing the importance of the inflationary factor in your model? And can you really dial things up and down like that within the model on a real-time basis and say, hey, here are the 17 factors; inflation is assigned to 4%. We're more worried about it now so we're going to wait that 7%.

I mean there are a lot of factors that we take into consideration. So the short answer is yes, we can dial it up and down. That's the short answer. But we're not just looking at inflation. For example the team also looks at trends at a state level, at a metro level even within states, at an industry level. And then we do take into consideration -- to your point, Rick, we take into consideration things like things like inflation, fuel prices, unemployment again at a national and a state level. So all those things are taken into account when we decide what adjustments we want to make to the credit box. As a reminder, throughout the year when we have targeted this 10% to 15% growth, it wasn't going to be by opening up the credit box. It was going to be by funding more marketing investments to flow through the currently conservative credit parameters. So one of the things that we've done, as I mentioned earlier, is just dialed back on the marketing and push that into the back half of the year to be at the lower end of our 10% to 15% range.

Got it. Okay. That was a comment I missed. I appreciate the feedback and the answers. It's a fun part of this job. It really is interesting and appreciate the insight.

Thank you. And there are no further questions at this time. Mr. Vasquez, you may continue your conference.

I 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.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation and we ask that you please disconnect. Have a great day.