Oportun Financial Corp Q3 FY2024 earnings call

• Lower charge-offs: Annualized net charge-off rate was 11.9%, 26 basis points better than guidance range; 30+ day delinquencies down 34 basis points year-over-year to 5.2%.
• Return to growth: Originations at $480 million in Q3 were virtually flat year-over-year, despite decreasing average loan sizes by 18%.
• Cost reduction: 3Q GAAP operating expenses were $102 million, down 17% year-over-year; reiterating expectation to reduce GAAP operating expenses to $97.5 million or less by Q4.
• Higher profitability: Generated $31 million of adjusted EBITDA, more than doubling last year's level; third consecutive quarter of adjusted net income profitability.
• Key transactions: Closed sale of credit card portfolio (accretive to adjusted EBITDA); executed $235 million four-year senior term loan facility to strengthen balance sheet.

Total revenue for the third quarter was $250 million. Adjusted EBITDA was $31 million, which was more than doubling year-over-year. The annualized net charge-off rate was 11.9%, with quarterly net charge-offs declining 6% year-over-year. Originations were $480 million, virtually flat year-over-year despite a 18% decrease in average loan sizes. GAAP operating expenses were $102 million, down 17% year-over-year.

• Full year 2025: Diluted EPS between $0.25 and $0.50, adjusted EPS between $1 and $1.25, annualized net charge-off rate between 11% and 12%.
• 4Q 2024: Total revenue $246 million to $250 million, annualized net charge-off rate 11.8% plus or minus 15 basis points, adjusted EBITDA $28 million to $30 million.
• Full year 2024: Total revenue $997 million to $1.001 billion, annualized net charge-off rate 12% plus or minus 10 basis points, adjusted EBITDA $92 million to $94 million.

Q: Afternoon guys. Thanks very much for taking my questions. I think I have two for Jonathan and one for you, Raul. The two for Jonathan are, Jonathan, you mentioned the fair value marks on the ABS should be wrapped up by the end of next year. Do you have a sense of what's left to mark on that based on the current mark versus the fair -- versus I guess par?

A: Yes. And we actually have a slide for that, John. Thank you for the question. If you take a look at slide -- hold on. If you take -- it's at the back of the earnings deck and it's -- I'm just flipping there right now, sorry. It's Slide 34. If you look at Slide 34, in the middle, we have asset backed notes at fair value and it says cumulative fair value mark-to-market adjustment, and for the notes that is $30.8 million, so $31 million, right. So we're not making any more. We're not electing fair value for any new debt. So this existing fair value debt is just going to pay down. It will be mostly paid off by the end of next year and between then and now, I would expect to take most if not all of that mark.

Q: And then second question for you. You mentioned a priority of delevering the business. How do you got -- what do you guys look at in terms of leverage ratios or primary leverage ratios, I guess, and what would kind of the longer term target be for that?

A: Sure. So if you take a look at Slide 16 of our deck, it's where we have the unit economics model that we've been trying to -- that we're focused on and – yeah -- thank you, Raul. And there it indicates that our target leverage ratio which we're currently above is 6 to 1 and so the -- I mentioned in my remarks on the call, John, that this new facility, one of the things we really like about it is we can repay $60 million of the principal balance with without paying a prepaid penalty, so that would take the debt from $235 million to $175 million. We've talked about the fact that this year, every month we've paid down 5.7 million of corporate debt principal and our cash flow position is only going to be stronger -- cash generation is only going to be stronger next year given the increased profitability that we're projecting. So if we pay down that debt to $175 million over time, we expect that we'll get to our target 6 to 1 leverage ratio and we're comfortable with that as a target for us.

Q: Afternoon guys. Thanks for taking my questions. So actually follow up questions kind of related to the growth aspect of it. So it's nice to be able to see that we're now at the inflection point for year-over-year growth rates. I was wondering, you mentioned in the prepared remarks that you are seeing macro improvements to the economy and so if you could maybe talk about the drivers of that growth rate, specifically if you could talk about your underwriting posture and any changes to that? And I'll ask my related question now, as you're growing, what sort of, I guess, risk adjusted margins and loss rates should we be expecting with the growth you're achieving?

A: So I'll take the beginning of those. I'll have Jonathan talk about the risk adjusted margins. In terms of our return to growth throughout the year, we've been talking about the fact that there were a few things we were going to be looking for. Number one, we'd want to look at our own metrics and when we look at where credit is trending, we look at the performance that we've been able to drive in delinquencies. We shared that 30 plus delinquencies were down 34 basis points year-over-year. That gives us confidence that our underwriting adjustments are working. V12, we shared in our comments that we started using V12 for underwriting the new applicants. We started that at the beginning of the year and we've been very, very pleased with the improvement in V12 versus V11. We're now using that for the returning population, which is historically where we've had 75% to 80% of our portfolio has been in the hands of returning borrowers. So to be able to apply this much improved risk model V12 relative to V11 to the returning portfolio, that's one of the things that gives us confidence in being able to return back to growth. So our internal metrics are one of the things we were going to look at. Number two, we wanted to continue to see inflation come down and I think now there's broad recognition that the Fed has done a fantastic job trying to get that back to their target rate. So to see inflation start to come down, we know gives more breathing room in the budgets of our borrowers. And then finally we were going to look for other macro indicators that the economy would be constructive. So when we look at the unemployment rate and in particular how strong the job market is for blue collar workers and we look at fuel prices, fuel prices continue to be low, we know that's one of the things that also makes a big difference in our borrowers’ ability to make our payments and to be able to just make their paycheck stretch in all of the ways that they need, those are the things that really give us confidence returning to originations growth, our internal metrics and then what we see in the macro. I'll pass it over to Jonathan now.

Q: Thanks, Raul. So Vincent, if you want to take a look at Slide 17, which is our unit economics model, you asked about risk adjusted margin and loss rates, so we gave guidance for 2025 that we expect our annualized net charge-off rate to be between 11% and 12%. And then on the unit economics slide, right, as you've seen for several quarters now, we've had very resilient total revenue at around 36%. We've had stable cost of funds at 8% and that takes us to a net interest margin before charge-offs of 28%. So if we take that 28% and we're 11% to 12% charge-offs for next year that would imply 16% to 17% risk adjusted NIM.