Oportun Financial Corporation (OPRT) Earnings Call Transcript & Summary

Okay. Good afternoon, and thank you for joining us. I'm Barclays' consumer finance analyst, Mark DeVries, and I'm pleased to be joined by Oportun's CEO, Raul Vasquez. We'll be conducting a fireside chat, but we'll break it up with some polling with the audience and we'll also leave time for questions that come in from the audience during the session. [Operator Instructions]

Before my first question for Raul, I'd like to lead off with a question for the audience. [Operator Instructions] First question for the audience, what factor do you view as most likely to determine whether Oportun outperforms over the next year: reaccelerating reoriginations, less volatile fair value marks, stable to only modestly worsening credit, successful expansion in the card and auto products or other? So as the audience responds to that, let's move on to the first question for Raul. I wanted to start with how Oportun has been managing through this crisis. Can you talk about the type of proactive measures you took at the start of this pandemic to tighten underwriting and the results from those efforts?

Sure, Mark. So I believe we've managed through this crisis quite well due to our strong team and the technology platform we built, which allows us to make changes quickly. In terms of proactive measures, we really moved quickly with 2 goals in mind: the first was to tighten our underwriting [ and reflect ] the economic unemployment shocks that were taking place, while still allowing us to lend to customers who needed our helping and who we had confidence would be able to pay us back; and the second goal was ensuring that we could deliver good credit outcomes. To achieve those goals, we implemented changes to our underwriting criteria within 1 day of the shelter-in-place orders here in California. And we did that really quickly to reduce our exposure to the segments of the population that we believed would be most impacted by the pandemic. So specifically, we increased the weighting of industry and regional factors within our underwriting to reflect the employment dynamics; number two, we reduced the loan size by credit tier; and then we also took a third and fourth step, which were implementing more stringent employment verification procedures and also increasing the recency requirements for proof of income. And those things are factors and our considerations that we continue to adjust based on new data, now that we're 6 months into this pandemic. We certainly knew the tightening was going to reduce our originations. But first and foremost, we wanted to solve for credit quality. So as a result of the credit tightening as well as reduced demand that we were seeing, just as people were staying home more, originations fell 67% in the second quarter on a year-over-year basis, but our credit tightening was successful in driving first payment defaults for newly originated post-pandemic loans below the levels that we've seen before the pandemics and even before the levels that we saw last year. That strong credit performance has now given us confidence to increase approval rates, and we started with returning customers in the June time frame. We've now actually expanded that to new customers. And what we've seen, if you looked at the data that we released today, is loan originations in August are 140% higher than they were in April, that first month that really felt the impact of the pandemic. So those are examples of some of the actions that we took and that we took quickly and the results of those actions.

Okay. Well, those results may explain the response to the first question, let's say, people are looking more for reaccelerating originations than credit stability. So moving to the next question for the audience. What do you view as the biggest risk to the shares: low or flat originations, more volatile term value marks, materially worsening credit, regulatory risk or other? Next question for you, Raul. For context, can you give us some color on how Oportun loans performs during the 2008-2009 global financial crisis? And what sort of measures were implemented back then? And are there any learnings that can be applied to this crisis?

Yes. We've been lending for 14 years, and we're really one of the few fintechs that was around back then in that crisis. And we performed well in that crisis, too. In the 2008 and 2009 recession, what we saw was our static pool net charge-offs increased by 37% from kind of the first 3 quarters of 2008 compared to the first 3 quarters in 2007. And really, what we did was we ran a very similar playbook. In fact, the playbook we have today is a playbook that was developed back then. So what we did was we tightened our lending criteria, we adjusted our loan amounts rapidly and then we implemented adjustments to both our servicing and our marketing efforts. And we're very fortunate, in fact, that the Chief Credit Officer that we have today is the person that drew up that playbook and executed it way back then. So what we saw was, in fact, not only were we able to bend the curve in terms of the 2008 results, but our 2009 vintage was one of our best-performing vintages despite the continued high unemployment rates that we saw as a country in 2009 and 2010. So we really think that, that experience helps shape the actions that we've taken today and has proven very useful. And the other thing that's helped us a lot is the technology platform that we have then allowed us to make those changes. But obviously, it's a lot more advanced now after 10 years of investment.

Okay. You may have already answered this question by indicating how strong your '09 vintage was, but any color for how your loans performed relative to peers during that period in other asset classes?

Yes. Well, as I mentioned, the increase was about 37%. If you were to look at it as basis points, there was about 120 basis point increase year-over-year. And when we look back now and we know that, that compared very favorably even to some prime and super prime portfolios. And we really attribute that good performance to 2 things: number one is the technology that I've already talked about that let us make changes very quickly and in a very granular and precise manner, the second thing is the segment of the market that we serve. And I'll spend a little more time talking about the customer we serve. Our risk engine allows us to underwrite individuals who have little or no credit history, which means that they have not had a lot of access to capital. And as a consequence, they weren't over-levered then, and that's been true now, right? And that means that our customer really values the capital access that we provide. And as a consequence, they make it a priority to pay us back. We also know that our customers are very hard working, very responsible and very resilient so even if they do lose their jobs, they're very quick to look for and secure another job even in a recession. So that was true then. That was what we saw then, and that's what's given us so much confidence to continue to focus on this segment of the market. And we've been proven right again because the customers again demonstrated their resilience during the pandemic and this recession.

Okay. Turning back to this crisis, as you've alluded to, credit performance so far has been more benign than we expected. For sure, most of you all expected at the beginning of this crisis. What do you attribute that to? Is it the stimulus measures that were put in place? Your customer assistance programs? Or anything else you'd like to call out?

Well, we definitely believe that the stimulus efforts have been helpful. They've helped our customers either maintain a certain level of income or potentially put a little bit of extra money in their pockets. But we attribute the bulk of our credit results or good credit results to the emergency hardship programs that we offer to our customers and that resilience that I mentioned earlier. So let me talk a little bit about the emergency hardship programs that we put in place. When the crisis began, we started offering our customers Emergency Hardship Deferrals, and we did it 1 month at a time. So that gave them a month to not make payments and be able to get on to their feet or a stronger financial footing. And what we did was really, we give them that month and then we get in contact with them before the month was over to ascertain their current circumstances. Our collections efforts, whether it was before the pandemic or during the pandemic, have always been focused on getting in contact with the customer, understanding their situation and then figuring out the best approach for them and for us, since our performance is really driven by good customer performance on their loans. So we get in touch with them and we try to figure out what's happening and what's going to maximize their chances of being successful with their loan. So when we talk to our customers, most of our customers return to making their regular payments after their deferral. Some of them wanted to return to payments, but they couldn't do it maybe because they lost some hours. So what we would do is offer them a reduced payment plan. And then we had other customers that were -- it was the minority of customers, but they were still being impacted by the pandemic, and they needed another month of deferral. So we think the strategy of doing it a month at a time, getting in contact with our customers understanding what was happening, and then if necessary, giving them another month has been very effective because it's allowed them to get back on their feet and to get back making payments. And if you look at the numbers that we reported from a delinquency perspective and the percentage of customers in deferrals, which has come down quite a bit, that really demonstrates the success that we've had.

Okay. What sort of industries are represented by your customer base? Can you talk about a little bit more about the resiliency of your customers to the crisis as a result of where they may they seek employment?

Sure. Our customer base is quite large. At the end of Q2, we mentioned that we had 600 -- over 675,000 active customers, really spanning from the West Coast all the way to the East Coast. As such, we believe that our customers really are employed by a representative and diverse set of industries. So you could think of it as retail, as construction, hospitality, agriculture, janitorial and more, really, any industry that employs low to moderate-income individuals. So the good news is that because it was a diverse set, we weren't hit as hard as, say, if we had only been focused on hospitality or retail, but we recognize that the pandemic was having a disproportionate impact on some of those industries. And that's why, as I mentioned earlier, we increased the weighting of the factors of the industry and even region because we know some regions like Florida are more dependent on tourism. And by increasing that weighting, we were able to make very specific adjustments that we knew would produce good credit outcomes. Again, we also know that our customer is very resilient. And one thing that we've learned is our customer's willing to be very pragmatic and to put food on the table, they'll even shift from thinking of their employment as a career and thinking of it as more as a job, and they'll shift into a new industry if that's where jobs are available. And we do know that there are still jobs available in this economy. They just may be in a different industry. So we've seen our customers move into those industries. And again, finally, because they've not had a lot of access to credit and don't have many outstanding obligations, we know that that's also allowed them to be very resilient and to be able to pay their obligation, which, again, generally is to us.

Okay. You already spoke about some of the strategies around deferrals. Any color you can provide on just the level of activity and how that's trended?

One of the things, and I'll refer back to the question that you asked the audience, we are focused on a return to growth, and we think we're doing it now from a position of strength. And one of the reasons that we've got that confidence is when we look at our Emergency Hardship Deferrals, what we saw was a peak really at the last week of April, in which we hit about 14.6% from a deferrals percentage. And since that peak, we've seen our deferrals now decline to 2.8% of the portfolio, which was a number we just announced as of the end of August. So as our customers have come out of deferral, we're seeing them return to payment -- to repayment, which means that our delinquencies have also declined to the levels that are below the pre-pandemic levels, indicating again that our customers are getting back on their feet, and that's giving us confidence to really drive growth again. And as I mentioned earlier, when we look at our August relative to April, what we've seen is our originations now are 140% of the level that we saw in April, and that's giving us the confidence to keep increasing approval rates back to the levels that we were seeing pre pandemic.

Okay. And any updates you can provide us on what kind of behavior you're seeing from borrowers as they come out of deferral?

We're seeing them get back to payment, by and large. So we're really pleased with the level of payments that we've seen. And that's both payments online through our mobile capabilities and what we offer online but also in our retail locations. We spent a lot of time and effort working with our retail team to ensure that our facilities, our locations, we had over 330 at the end of Q2, could stay open, could be safe for our employees, could be safe for our customers. And we've always believed that for our customer, a physical presence is important, and we saw that even during the pandemic. Even during shelter-in-place orders, 30% of our payments were still coming from customers who were leaving their homes, putting on masks and coming into our location to make a payment. So we think that our strategy of having multiple channels has served us well in terms of getting our customers to be able to pay back.

Okay. Great. Turning back to the audience for a question, a view. Peak credit card or receivable charge-offs this cycle will be 9% to 10%, 10% to 11%, 11% to 12% or 12-plus percent? Next question for Raul. What's your appetite here to offer an additional round of deferrals for your customers if there is continued stress in the labor markets and they need additional assistance?

Well, I mean, given the performance we've seen so far, we feel that our strategy has been very effective in helping our customers return to repayment status. So both from a business perspective, it makes sense, and from a mission perspective, we always want to help our customers create good outcomes. So we're very comfortable giving additional rounds of deferrals, if needed, because of the good outcomes that we've seen, both from a business perspective and consistency with our mission.

Okay. There was a slide in your earnings presentation that shows first payment defaults on post-pandemic loans are actually lower than pre-pandemic loans. Can you help investors understand kind of what's driving that?

Yes. So as you just described, we know that the credit tightening that we did in March has been effective because the percentage of customers who don't make their first payment has come down, below the levels that we saw in the February cohorts and below the levels we saw last year. So those efforts that we undertook to tighten our underwriting criteria very quickly in mid-March really are what's driven that down. We don't need our levels nor do we want our levels to be that low. So that's really what's given our Chief Credit Officer a confidence, and we've approved it and our Board has approved it to really lean back into growth because we agree with the audience that given those levels, we demonstrated the ability to underwrite even in these conditions, and we can get back to driving growth.

Okay. Can you talk more about the sort of metrics or variables you look at when you're underwriting loans to a thin file or a no file? And how those measures change post the start of the pandemic?

So our risk engine is really sophisticated. Every time that we rebuild a version of our risk model, we evaluate over 10,000 data signals. So there really aren't 1 or 2 dominant variables that we rely on either in good times or in challenging times. Our risk engine is 100% centralized and 100% automated, and it uses 3 independent frameworks to make a decision. The first one is what we refer to as our alternative data score or ADS score. And that's based solely on information that is not in the credit bureaus. This is what allows us to be able to underwrite the invisible, the credit-invisible customer. And that's part of the reason why, again, we can give credit to someone who's not had a lot of access, and therefore, why we're a priority when they want to make a payment. So that ADS score is really, really valuable. The second is a proprietary bureau score, and that's more predictive than the commercially available bureau scores for our thin file customers. And then the last framework that we use is an ability to pay framework that's based upon verified framework. It's focused on a verified income from our customers. So we take these 3 frameworks, and you can think of them as created a very granular set of nodes in which we can make a risk decision of saying, "Do we want to lend to this customer at this node? And if so, how much do we want to lend?" So when the shelter-in-place orders went into effect in March, we quickly tightened our credit by increasing the minimum score cutoffs. So in some cases, we turned off some of these nodes, and even in the nodes where we continue to lend, what we did was on a node-by-node basis, with great precision, we decreased the amount of lending that we were willing to do at that node, so we could drive those first payment defaults down and give ourselves confidence that the underwriting engine would work during the pandemic. Additionally, because we knew that the pandemic, as I mentioned earlier, was having a disproportionate impact on certain industries and therefore, certain regions, we also made adjustments based on that industry and regional weighting in our scorecards to, again, have even more precise lending decisions taking place. So that's what we did initially, Mark. You asked what have we done since the start of the pandemic. What we've done is we've really looked at those first payment defaults, and we've looked at delinquencies in that post-pandemic portfolio to now figure out in what cases could we modify some of that employment verification, in what cases could we ease back a little bit on some of those recency requirements for income. And we did that in a test and a challenger methodology so that, that way we'd be able to have test and control. And based on that, we've been able to make adjustments and again, drive those approval rates up. So that's really kind of the focus at the beginning of the pandemic and adjustments we've made since the beginning.

Okay. Great. With expanded unemployment benefits ending over a month ago, have you noticed any change yet in payment behavior or credit?

We haven't so far, our credit trends so far continue to trend very positively over the last month. As I mentioned earlier, the -- at the end of August, our deferrals had fallen to 2.8% of the portfolio, and our 30-plus day delinquencies were 3.5%. So we really feel that even with the incremental unemployment benefits ending at the end of July, most of our customers have emerged from deferral and delinquency status and return to repayment.

Okay. What's your outlook on credit? If we don't get another round of stimulus that extends some of those benefits, would you eventually expect to see that sort of to weigh on credit here?

Well, for us, it looks like we're such an adaptable species, and people are just getting used to kind of the new normal, if you will, now that we're 6 months in. So across the country, it appears that the economy continues to reopen, unemployment is showing, although slow, it's showing improvement. So both of those facts, we think, are encouraging. So from where we sit, the customer behavior of our borrowers shows increasing demand. We're starting to see now a higher level of applications relative to what we saw in April and in May. And the improvement in payment metrics is also giving us that confidence to increase approval rates. So when we think about our credit performance, which, again, is a product of our agile technology, it's a product of how responsive we were to the environment, it reflects the resilience of our customers. When we look at all of these things, plus the economic trends improving overall, we expect normalization of our credit performance. So even with a nonrenewal of government stimulus, we don't see really a significant impact on our portfolio in the next 12 to 18 months.