Q1 2022 Oportun Financial Corp Earnings Call
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The opportune financial call will begin shortly.
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Good day and welcome to the Opex, you're in financial first quarter 2022 earnings conference call.
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I would now like to turn the conference over to Dorian here.
VP of Investor Relations. Please go ahead.
Thanks, and Hello, everyone.
Youre aware that I started in this role a few weeks ago and I am very excited to be joining you today for my first earnings call, while leading opportunity Investor relations effort with me to discuss opportunities first quarter 2020 results are removed Vazquez, Chief Executive Officer, and Jonathan Copeland.
Financial Officer, and Chief administrative officer.
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 operation.
NATO position land product 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 March 31 2022.
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 operation.
A full list of definitions and reconciliations can be found in our earnings materials are 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 measures is included in our earnings press release.
First quarter 2022 financial supplement and the appendix section of the first quarter 2020 earnings presentation, all of which are available at the Investor Relations section of our website at investor that opportune desktop.
In addition, this call is being webcast and are in an archived version will be available after the call along with the script of our prepared remarks with that I will now turn the call over to Raul.
Thanks, Dorian Jonathan and I are glad to have you here and I know you were keen to get to know our investor community.
Afternoon, everyone and thank you for joining us.
Incredibly proud of our record results for the first quarter, which reflected the power of our product offerings and exceeded all of our expectations.
As you know we have very ambitious goals for 2022. So we are pleased that the year is off to a great start.
Let me start by sharing the headlines.
We achieved record first quarter originations of $800 million up 139% from the first quarter of 2021.
Originations continued to be driven by our expansion into new states, we are taking share.
New borrowers represented over 51% of our total loans.
40% a year ago.
We delivered record revenue of $215 million and adjusted net income of $53 million for adjusted EPS of $1 58.
An adjusted ROE of 34%.
We are continuing to deliver strong credit performance as evidenced by our annualized net charge off rate of eight 6%, which was on par with the prior year quarter and was 17 basis points better than the midpoint of our expectations.
Given the favorable trends in our business, we are raising our full year 2022 guidance.
Now let me tell you about our progress on our three strategic priorities for the year.
Our outlook for strong profitable and sustainable growth.
Our first priority is to grow our members.
We ended the first quarter with $1 7 million members up from $1 5 million at the start of the year, a 48% annualized growth rate for the quarter. So we are very pleased with the pace of member growth.
Our second strategic priority is to increase multi product relationships with our members.
It's a proof point of our ability to do so in the first quarter products grew at an annualized rate of 58%.
Faster than our member growth of 48%.
Additionally, at the end of the first quarter, 12% of our members with an opportune credit card also had a personal loan with opportunity, which is up from 70% that will start up the year.
We also began developing multi product relationships across our credit and digital banking products. During the first quarter and are enthusiastic about expanding this aspect of our business as a growth lever.
Our third strategic priority is enhancing our platform capabilities to meet the everyday financial needs of hard working people.
In our last earnings call, we talked about creating a seamless integrated acquisition funnel across all our products to increase member conversion and decreased cost of member acquisition.
In Q1, we made important progress toward that vision as we began offering <unk> products to our applicant, whom we were not yet able to approved for a loan.
Well as to current and previous loan customers.
I'm also happy to announce that the digital integration into our credit card funnel went live a couple of weeks ago.
While there is more work required this year to create a fully integrated funnel. We are beginning to gather valuable learnings for members. We have started serving with multiple products.
Now, let me share with you more details regarding our progress across our different products.
The growth of our unsecured personal loan product continues to benefit from our expansion across the nation.
As of the end of the first quarter, our personal loans were available in 39 eight when we plan further geographic expansion this year.
I want to emphasize how differentiated is geographic expansion is for us compared to other fin techs that have already had nationwide operation.
By introducing our superior customer value proposition in new geographies, we are taking share from other lenders who have never had to compete with opportune.
In addition, having access to new members allows us to grow selectively without having to expand the credit box.
We're seeing strong growth in states, such as Pennsylvania, North Carolina, Michigan, Virginia, and Ohio.
Overall, we have added more than $22 million potential members and the 27 States we've entered with medibank through the end of the first quarter.
Our secured personal loan product. We ended the first quarter was $79 million in receivables up one 375% year over year and on track to meet our year end target of $140 million.
In April we also expanded our secured personal loan product to Arizona.
Our secured personal loan growth continues to benefit from the fact that it is offered through the same acquisition funnel along with our unsecured personal loans providing.
Providing a proof point for the low number acquisition cost opportunity that a single unified acquisition funnel for all opportune products will offer in the future.
We also saw excellent progress this quarter from a credit card product.
Receivables grew 996% year over year to $90 million also on track to meet our year end goal of $150 million.
We now have more than 153000 members, who have an opportune branded credit card.
We have also continued to make great progress with our lending its a service product.
During the first quarter, we scaled our lending its a service network to include 284 partner locations up from 28, a year ago, and we still expect to complete 2022 with over 500 partner locations.
Additionally.
<unk> shipped with schedule a buy now pay later company and our first digital lending its a service relationship remains on track to launch in the second half of the year.
We are in discussions with multiple potential partners to expand our lending its a service channel, including both retail and fully digital businesses.
Finally.
Digital integration is progressing nicely.
We are now offering dessert products at multiple points in the opportune application and servicing experiences.
We've enabled opportune members to obtain our digit products at a discount.
All of these activities are being conducted while of course honoring our members privacy preferences.
Finally, I'd like to tell you about how well opportunities positioned to both meet the needs of our hard working members and create shareholder value in the current macro environment.
Our members are benefiting from a strong job market.
16 years of lending we have found that the robust employment environment is the leading driver of both the origination levels and the health of our loan portfolio.
I've never been more confident about our ability to grow the company and create long term shareholder value by.
By providing inclusive affordable financial services that empower our members to build a better future.
I will now turn the call over to Jonathan who will walk you through a more in depth discussion of our financial results and provide our outlook for the second quarter and full year.
Jonathan.
Thanks, and good afternoon, everyone as Rolla mentioned, we generated record results in the first quarter and 2022 is off to a great start in the first quarter, we generated $215 million.
Of total revenue and $53 million of adjusted net income or $1 58 of adjusted EPS.
Our aggregate originations were $800 million up 139% year over year, and well ahead of our expectation of $625 million loan.
<unk> volume and originations have remained strong since the end of the quarter and we expect continued strength in aggregate originations throughout 2022.
Total revenue of $215 million was up 59% year over year also well above our expectations and reflected higher receivables due to increased originations.
We expect continued strong origination volume across all our credit products to drive increased growth in total revenue throughout the year.
Net revenue was $205 million up 86% year over year net revenue improved from the prior year period due to higher total revenue consistent interest expense and greater increase in fair value.
Interest expense of $14 million was up 1% year over year, primarily driven by increased debt issuance to fund our growth partially offset by the decrease in our cost of debt to two 6% versus three 9% in the year ago period.
As a reminder, last year, we locked in one 4 billion of fixed rate term asset backed funding at a weighted average interest rate of two 2% and negotiated better terms on our $750 million warehouse lines of credit.
At the end of the first quarter, 73% of our debt was fixed rate, providing us with protection from rising interest rates.
For our net change in fair value, we had a $4 million net increase in fair value, which consisted mainly of a $41 million mark to market net increase on our loans in our debt.
A $16 million cumulative mark adjustment related to the sale of $228 million of loans through the structured loan sale at the end of the quarter and current period charge offs of $51 million for.
The mark to market the fair value price of our loans decreased to 104, 1% as of March 31, and resulted in a 17 million dollar mark to market decrease to 58 million dollar Mark to market increase in our asset backed notes resulted from a 353 basis points.
Greece, and the weighted average price to 96, 3% due to the increase in interest rates and credit spreads during the quarter.
Turning to expenses, our first quarter total operating expense was $147 million, an increase of 39% as compared to the prior year quarter.
Adjusted operating expense, which excludes stock based compensation expense and certain nonrecurring charges increased 42% year over year to $133 million growing more slowly than total revenue and net revenue, which grew 59% and 86% respectively year.
Per year, thus, increasing our profit margins the.
The increase in expense was primarily related to the addition of $15 million.
A digit operating expenses post merger, which were not present in the prior year quarter. We also increased our investment in technology to enhance our platform and increased marketing spend to drive growth in new markets, where we are taking share.
Our customer acquisition cost was $151 down 27% from a year ago period.
This decrease was partially driven by our investment in AI, which has increased the efficiency of our marketing programs and the reduction of our cost base achieved through last year's rationalization of our retail network.
Furthermore, as our business continues to become more digital first we have decided to close 27 retail locations. This year, which will save almost $20 million of operating expenses over the next five years.
In the first quarter, we took a $600000 charge relating to these closures and expect an additional $1 5 million charge in the second quarter.
Our net income was $46 million well above the $3 billion of net income generated in the prior year quarter. This equated to earnings per diluted share of $1 37.
A significant increase from 10 in the first quarter of 2021.
On a non-GAAP basis, we delivered adjusted net income of $53 million more than quadrupling $12 million in the prior year quarter and adjusted EPS of $1 58.
Versus <unk> 41.
Respectively.
Adjusted EBITDA was $34 million.
A $36 million increased compared to a loss of $2 million in the prior year quarter.
Adjusted return on equity was 34% versus 11% in the prior year quarter for the last 12 months adjusted ROE was 21%.
Turning now to credit our first quarter results for further evidence of our portfolio's continued strength and our ability to manage credit and deliver specific outcomes.
Our annualized net charge off rate was eight 6%.
Similar to the prior year period, and 17 basis points better than our midpoint guidance as of March 31, Our 30, plus day delinquency rate would have been four 1% had we not sold $228 million of loans or approximately 9% of our own portfolio at.
At the end of the quarter.
The loan sale reduced the denominator of the delinquency calculation, increasing our reported 30 plus day delinquency rate from four 1% to four 5% in comparison, our 30 plus day delinquency rate was 24 basis points higher than the three 9% level as of December 31.
2021.
As a reminder, our sophisticated AI driven underwriting algorithms allow us to manage our credit exposure on a highly granular basis are fully centralized and fully automated credit model consists of over 1000 different end nodes each of which represents a different gradation of credit risk, enabling us to make adjustments.
On a node by node basis to target desired outcomes, we have further enhanced our underwriting capability by incorporating cash flow information from banking data, a new and highly predictive alternative data source that we have not previously leveraged. Additionally, we are in the process of implementing machine learning models.
To enhance the efficiency of our collections, which will allow us to further optimize borrower outcomes and achieve better credit results.
We continue to be very pleased with the credit quality of the loans, we are booking while simultaneously adding to our membership.
As Ron mentioned, our growth through geographic expansion is a key differentiator and will allow us to be more selective and underwriting because of access to new markets. For example, we've actually been tightening our underwriting standards since the third quarter of last year and continued to make some adjustments through the first quarter of this year.
We've also been allocating our marketing spend across channels to optimize for credit outcomes.
While taking these prudent measures our strong growth in new loans continues to drive our performance.
In the first quarter, new loans represented 51% of total loans originated as compared to 40% in the prior year quarter as we continued to expand in new geographic markets and take share.
Most of the new borrowers we are adding today will become future returning borrowers who will be less expensive to acquire we will safely qualify for larger loans on average and are expected to have lower charge off rates.
To give you a sense of this in the first quarter, our average loan size to a new borrower was $3100 as compared to $5100 for returning borrower and net charge off rates for returning borrowers had been running at approximately two thirds the rate for new borrowers in short new member growth.
2022 sets us up for continued success in 2023 and beyond.
Regarding our capital and liquidity as of March 31, total cash was $171 million. Additionally.
Additionally, net cash flow from operations for the first quarter was $39 million our debt to equity ratio was three three times and $273 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth.
We have maintained our track record of consistent access to the capital markets in March during a choppy market. We successfully closed a structured loan sale, which was an amortizing asset backed securitization that included the sale of the residual cash flows through this transaction, we sold loans at an attractive price, while reducing our balance sheet.
And credit exposure.
And we are currently in the market with a $400 million securitization, which we expect to price this week, which will free up significant warehouse capacity to fund the strong growth in originations we are projecting for the remainder of the year.
Given the rising rate environment, we are enacting select pricing actions with respect to new loan originations, while remaining committed to growing our membership base, taking share and maintaining a 36% APR cap.
On average these pricing actions will increased portfolio yield by 65 basis points this year, helping to offset higher cost of funds.
Turning to our expectations for the rest of 2022, we will continue to leverage multiple vectors for growth, including the expansion of our addressable market products channels and digital banking capabilities. We expect this growth to accelerate over time as our annualized member growth is combined in the future with.
Expanded multi product relationships.
In terms of guidance our outlook for the second quarter is <unk>.
Aggregate originations of between 825 and $850 million total revenue of between 214 and $218 million.
Adjusted net income between two and $4 million and adjusted EPS between six and 12.
I want to point out that the reason our second quarter adjusted net income and adjusted EPS guidance is below our first quarter results is due to timing differences with respect to the net change in fair value caused by the increase in interest rates. However, the trends in our business remains strong.
As demonstrated by the fact that we are taking up each of our full year guidance metrics, including adjusted net income and adjusted EPS.
Our updated guidance for the full year is aggregate originations between 345 and $3 $5 billion.
Total revenue between 910 and $930 million.
Adjusted net income between 83, and $87 million and adjusted EPS between $2 and 45 and.
And $2 56.
We are maintaining our forecast for $140 million of yearend receivables for our secured personal loans and maintaining $150 million for credit cards.
We expect our second quarter annualized net charge off rate to be eight 6% plus or minus 10 basis points and we are reaffirming our expectation for the full year net charge off rate to be eight 8% plus or minus 15 basis points in.
In summary, I am pleased that we delivered a terrific quarter and our outlook for the remainder of 2022 remains strong.
And I believe that the exceptional growth in members originations and total revenue that we're seeing so far this year will set us up for a great 2023 with that I will now turn it back over to Raul for some final comments before we open the line for questions.
Thanks, Jonathan before.
I open up the call for questions I want to share with you that our 2021 corporate responsibility and sustainability report will be released soon.
With that in mind I wanted to share with you some of the ways in which opportunity enables a better financial future for our members.
Opportunities extended more than $12 billion of credits are hardworking individuals saving them over $2 billion in interest and fees.
Likewise, our digital banking platform has helped members effortlessly saved more than $7 $2 billion through the application of its AI driven algorithms.
Did your members have annually on average set aside more than $3000 as a rainy day funds.
We were pleased to share with you in our prepared remarks, how opportunities off to a strong start this year, which combined with our ongoing ability to execute on our strategic initiatives has allowed us to raise our full year 2022 guidance.
With that operator, let's open up the line for questions.
We will now begin the question and answer session.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press star. Thank you.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question today comes from John Hecht with Jefferies. Please go ahead.
Hey, guys congratulations on a great quarter I appreciate the guidance and thanks for taking my questions.
Just because you've got a lot of different growth opportunities here, but one of them. That's a little newer to US is the lending is a service component of the business and I'm wondering what are the characteristics of your partners in that category and how are the revenue arrangements.
Yes, John this is Robert Thanks for the question, we're really pleased with the way that that program is progressing if you heard us announce we've got 284 locations now so about 10 times the number that we had at the end of last quarter.
The revenue arrangement is really one that is accretive to the business and that we're very happy with as we've disclosed before we like the fact that we only compensate the partner went alone actually takes place and we don't have any of the costs related to trying to draw any client the customer we don't have any of the labor associated.
And when do you think about partners like <unk> Bari core the two partners that have driven that growth to 284 locations and we're excited about Cecil later this year that will have a similar structure, where we compensate them or helping to bring the member to us.
So we continue to be really pleased with how the program is progressing and we like the pipeline that we have in place.
Great.
Helpful. And then just thinking about you guys talked during the call about interest rates and modifying certain loans I'm wondering number one.
Which which goes or is it across the board, but you'll be raising rates or is there. Some words that you can.
That youre that Youre right.
Willing to and then second.
On the right stuff or are.
Are you seeing like behavioral change for like causation.
Hello, and reduce use of the loan proceeds given the inflation outlook.
So I'll go ahead and take those so from a pricing perspective, we.
Took a look at where in the portfolio did we think it made sense to go ahead and raise prices and we always wanted to do it in a way that it's going to have a very small impact on the payment that is made by our borrower. We've done this in the past.
<unk> moments in our history, and we always do it trying to keep that payment at about the same rate that it is today.
We have found success in the past in terms of ensuring that we continue to get good outcomes and ensuring that we don't get any kind of negative selection. So we're really happy with the pricing and again it was done in a very.
Precise manner, because one of the things we want to continue to do John .
We want to continue to show a superior value proposition and we want to keep taking share because when we look at the 139% year over year growth in originations, we feel like we're really taking share. So we took that into account as well as keeping our pricing under 36% APR. So.
That's how we thought about the pricing piece.
Terms of what's creating demand for our loans and if we've seen anything different really what we've seen over our 16 years of lending is.
Anytime that dollars get a little bit tight it means that someone's going to need a little bit of credit when they've got a loved one that needs medical attention or a car that doesn't start or a planned purchase. So we're still seeing the same kind of use cases driving demand for our market.
Okay.
And then my last question before I get back in the queue.
It sounds like you did a big oil until at the end of the first quarter kind of I mean, you guys have been a net.
Seller of a portion of your originations for a long time anything we should think about going forward in terms of.
Your willingness to sell and the amount that you might sell at any time.
Yes, John Great question given.
Given that we sold about 9% of the loan portfolio portfolio at the end of the quarter.
And we were selling whole loans up until the beginning of March through a flow arrangement, which has now expired. We've actually sold a large portion of the loans. We originally targeted for this year. So we're continuing to evaluate what's optimal between keeping loans on balance sheet and.
And the option to sell them either directly to counterparties or through the securitization markets.
Okay very helpful. Thanks, a lot.
Thank you Jeff.
The next question comes from Sanjay <unk> with <unk>.
<unk>. Please go ahead.
Thanks.
I guess my first question is on the guidance, obviously revenues coming in stronger than expected, but the expenses are a little bit higher as well for the rest of the year.
As well as some of the impacts I assume from Mark to market, but maybe Jonathan can you walk us through the breakdown of each of those factors as we think about the rest of the year and then sort of what the variables might be on those specific lines if things do.
Don't Pan out as expected on revenues.
Sure well first of all we feel really good about our guidance.
We've taken up originations and that is going to drive the increase in revenues.
That we forecast.
As we increase our revenues, we would expect to have the opportunity to invest more in the business both on the marketing side and on the technology side.
So when we think about contour for the operating expenses I think looking at our pre pandemic.
Sure.
Timing is probably a good thing to take a look at we would expect that each subsequent quarter.
As demand increases, we're probably going to be spending more on sales and marketing and similarly, we're making investments in the business.
And that will.
Increased other opex other than sales and marketing is that helpful. Sanjay.
As we think about the mark to market on a go forward basis, maybe you could just give us some sense of dimensionality like does it go higher or lower.
Any color there sure.
That's a great question so.
First of all we guided to the second quarter.
And that factors in our view of Mark to market. The first quarter as I mentioned in my remarks benefited from a timing difference given that interest rates went up a lot. It basically pulled a lot of net revenue through net change in fair value into that quarter, but when you look at the year overall, we're actually increasing our overall.
Adjusted.
Increasing our overall adjusted net income and adjusted EPS Guide and so when you think about.
Why.
The adjusted net income is.
We're guiding lower for <unk> and what that also what's implied for the remainder of the year. Some of that is the timing of the mark to market as well as the timing of our expenses.
Got it.
And then Sanjay. Thank you got it wrong. Yeah. This is Robert I just wanted to add two quick things number one just emphasizing what Jonathan said.
Clearly we are investing in the business right. We've got the digit expenses, which we didn't have a year ago, but as you know when we started the year, we guided to profit levels that were better than prior year and as Jonathan just said, we've raised our guidance in profit. So we absolutely are being thoughtful and very disciplined on the <unk>.
<unk> side, while continuing to build for long term success for the business. So that would be number one just the second point I wanted to add to Jonathan's response is.
Notice now for some time you know that at.
At moments.
Such as now when interest rates are moving around it can introduce a little bit of noise in the adjusted net income and in the past one of the things that we've also done is really tried to point to adjusted EBITDA because adjusted EBITDA does not have that variability that's driven by kind of macro events like what's happening right now in adjusted EBITDA.
It was $34 million compared to a negative $2 million in Q1 of last year. So the growth that we're focused on delivering is flowing down through the P&L, even as we continue to invest in long term success. So just wanted to go ahead and point out the EBITDA number because I think that can be helpful. At times like these.
Sure.
So maybe a question for you Rob.
Sure obviously intense scrutiny on the part of investors on the low end consumer in your prepared remarks, you talked about how employment sort of guiding light for you.
I'm just curious because there is a lot of discussion about the fed sort of having an impact on employment rate by forcing employment to get weaker and I'm just curious what you're looking at to inform yourself.
Direction, you want to go in terms of handling the growth I understand you have a green light right now, but maybe you could just talk about some of the metrics Youre looking at and then just one question for Jonathan on the delinquency rate right.
I want to make sure Im mechanically thinking about this correct. If we think about the delinquency rate year over year, excluding the noise related to this loan sale, it's still higher year over year youre expecting the charge off rate to be kind of stable on a go forward basis. Maybe you can just help us think through that dynamic as well I mean should we expect a rise in the charge off rate or are there some offsetting dynamics.
Thank you.
Sure So I'll start.
I think one of the benefits of opera.
Opportunity for investors is we're not a company that started two years ago three years ago, we've been around for 16 years. So to your point Sanjay We mentioned this in our comments a robust employment environment is the leading driver of both the origination levels and the health of our loan portfolio. So the things that we look at.
Certainly look at the unemployment rate, we look at wages and in particular, if wages are moving even if there was a softening in the market over the next few months as a result of fed actions. The market is so strong right now that relative softening would still look like a good market relative to the history and the models that we have.
So we feel that our models are well calibrated after the 16 years of lending and we can make adjustments as the macroeconomic picture changes, but we look at the results even that have been favorably unemployment rate is still incredibly low.
Our particular customer continues to see year over year increases in wages and we still know that there were companies paying bonuses to employees either to stay or to start a new job.
Today, we continue to be very very confident both in terms of the quality of our loan portfolio and in terms of our ability to keep driving origination Jonathan.
Jonathan do you want to take the next part.
Sure. So Sanjay with regard to the delinquency trend, we think it's going to be consistent with our guide for net charge offs.
So for <unk>, we guided to eight 6% plus or minus 10 basis points, which is right in the range that we delivered for the first quarter.
And then obviously for the full year, we reaffirmed our eight 8% plus or minus 15 basis points guidance I think one of the things, that's causing delinquencies to be even after that adjustment that you noted.
To be slightly above last year is that we believe that for many of our borrowers the tax refunds. They typically receive in Q1 came to them later and because of the earned income tax credit actually were a little smaller than they were typically so that may be on the margin.
One of the impact factors, but overall, we feel very good about credit and I think the guidance, we're giving on losses.
Is consistent with that.
Okay I want to add.
Just a tiny bit more color because we're trying to be very intentional and giving you and our investors a sense for the business and why we're so excited about it right now one new statistic that we've started to disclose is the percent of loans that are going to new borrowers.
Third as mentioned in her comments that new borrowers are 51% of loans. If you would've looked at this quarter last year would have been 40%.
So we know that new borrowers tend to have higher delinquencies, they've got slightly higher losses, and when we think about what do we compare this four 1% true I would go all go back to all the way back to 2019 and the rate then was three 6%, but with a much much lower percentage of new borrowers.
So the guidance that we provide and how we think about the business at the beginning of the year is that.
We want to get from kind of where we end 2021 to where we a lot of it in 2022 and if you look at our results relative to our guidance, we're exactly where we wanted to be at this point and we're really excited about the number of new borrowers we have because they turn into more valuable repeat borrowers, but in the short term it is going to create slightly.
Higher delinquencies and slightly higher losses losses continue to be in that 7% to 9% range that we've always targeted to optimize for growth and profitability.
Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press Star then one to enter the question queue.
Next question comes from David Scharf with JMP Securities. Please go ahead.
Hi, good afternoon, and thanks for taking my questions.
Actually I think Jonathan Sanjay pretty much asked just about everything that was on my plate.
Plate, but.
I guess, Jonathan I did want to.
Maybe just get a little more clarification to make sure I have kind of the.
Cadence.
Correct for the rest of the year.
I mean, it sounds like clearly Q1 and Q2 there were some timing.
Uh huh.
Issues impacting the fair value Mark.
But it looks like when you take the last nine months of the year in aggregate.
The guidance for those nine months was it looks to be cut in half from a couple of months ago.
When I look at the prior full year guidance less the Q1 guidance versus the updated full year guidance less the Q1 actual and.
And it looks like we're kind of exiting the year at sort of a 40 cent.
Per quarter run rate of earnings power.
I guess what.
Once again is there a certain level of opex that.
That you would either consider above trend or its just front end loading given the volume.
Push so once again trying to get a better feel for it.
Beyond sort of the Q1 Q2 fair value timing issues kind of what's led to.
This change in really.
The remaining three quarters of the year.
Yes, David It is mainly the timing difference so let's so first of all we've increased start just to remind you we increased our guidance for the full year on the bottom line. So overall, we still expect to deliver more adjusted net income more adjusted EPS than we did.
Order ago, when we last did earnings.
So.
When you look at the top line growth right, we've taken that up as well both originations and revenue so thats all doing well.
Would expect that as has <unk>.
Typically been our practice that marketing sales and marketing.
Increase each subsequent quarter for demand and that there would be some operating expense increases as we invest in the business, but the rest is just the timing of the Mark we basically just earned a lot of money youre going to earn this year earlier.
And so I think that's what the main drivers is that is that helpful clarity.
Yes, it sounds like a lot of pull forward and maybe.
I haven't gone through the.
Kind of root Goldberg slide of all the arrows and colors fair value Mark.
But maybe if you could just kind of help as it relates to kind of pulling forward.
How much I guess, how much of the.
Incremental pull forward is associated with.
The mark on the debt and the ABS instruments.
And.
I ask maybe it's kind of leads into a broader.
Perhaps.
Investor.
Education Street management question that.
Opportune as the only fair value accounting.
Our company, we followed that marks the death as well as the assets and I'm wondering.
If there is any consideration to perhaps conforming to just kind of marketing the assets.
Quarterly.
How the Q1 earnings would've looked.
That was just the case.
Sure well I think as we've stated before we believe the way we manage our accounting as the best fit for our business. So we're not planning any changes I think the slide you're referring to slide 30 in the earnings deck.
And what that shows is we break out the mark to market on the loans versus the mark to market on the notes.
And $58 million of Mark to market.
<unk>.
That was beneficial was on the notes and that's because interest rates went up.
That took the prices down so now obviously what interest rates do in the future could have an influence, but assuming the fed keeps doing what the forward curve is saying then.
We would anticipate that.
The prices of our bonds would start heading back up to par because of entry that are mature and that will pull back some of that 58. So when we talked about a timing difference that's why I referred to it as a timing difference.
Understood got it well thank you very much.
Thank you for the question.
The next question comes from Rick Shane with JP Morgan. Please go ahead.
Thanks, everybody for taking my questions. This afternoon.
First of all I, just want to make sure I understand the owned principal balance tab.
In the <unk>.
<unk> file.
Hey, <unk>.
Nominally it looks like the principal payments went up significantly in the first quarter, but I am assuming that that is a function of selling loans in bulk versus selling them on a flow basis, because you're out them on balance sheet that the differential there.
That's correct Rick that.
$228 million loan sale basically closed close to the last day of the quarter.
Okay. So.
Actual.
Repayment activity the payment rate on the portfolio was generally speaking consistent with what you would expect in first quarter, except for the comment you made earlier that perhaps a little bit of drag due to delay in tax refunds.
That's correct.
Okay great.
And then again I know there have been a lot of questions on this but I just wanted to sort of go back and I know, both Sanjay and David have discussed this but.
The way we should start to think about operating expenses for Q1 is C that is a new level and then see activity related growth.
From there at a more modest rate of growth.
I think that's a great way to describe it.
I will I'll I'll take that and then.
Last question you had mentioned.
Pricing actions and one thing.
I Wonder is giving your historic.
<unk> focus on being below.
The 36% APR number.
How much latitude do you feel that you have in a rising rate environment can you re price to <unk>.
Reflect the changes that you're experiencing on the bond market or do you need to basically tightened credit at.
At slightly higher rates in order to retain.
<unk> risk adjusted margin.
Well, we're definitely still committed to the 36% quickly.
We do know that there are still opportunities to take some more actions if we need to we're not going to try to capture.
All of the increase in our cost of debt because we think to do so would be shortsighted and wouldn't let US go ahead and take the kind of market share Thats available. If you look at our Q2 guidance for the quarter relative to last year in originations, we're guiding to 93% growth in originations regretting guiding a 50.
6% growth.
In total revenue for the quarter.
And we think that to continue to stay sharp and pricing is going to give us an opportunity to keep gathering members than.
Then we can create kind of long term relationships with <unk>.
And be able to.
Grow their value. So we will take more action if necessary, but we're not going to try to capture the full increase that we're seeing in the market right. Now we think that would be too shortsighted for our business.
Got it okay. That's it for me guys. Thank you so much.
Thank you Rick.
The next question comes from how Ghost with loop capital. Please go ahead.
Nice quarter guys a couple of questions for you.
Can you refresh our memory on the.
On the state you kind of entered this quarter or really got moving and what states. Maybe you have left to enter.
Leveraging these licensees medibank and then.
Would you.
Hey on the cross selling capabilities right. Now you are really just getting going with that with the digital acquisition. Thank you.
Sure.
On the new states, we didn't disclose the exact state.
A handful of states, we're really focused right now on growing on the 27 states that we've added to the Medibank partnership.
And we did give a little bit more color both regarding the increase in addressable market. We feel that there are 22 million potential new members in those 27 States and then we listed those five states, where we're really really pleased.
With the results and those are just indicative, we're actually really really pleased with the way that the entire medibank partnership is playing out.
So that would be that part.
The second part in terms of cross selling.
We did share another update on the percentage of credit card members that have an unsecured personal loan that number was 7% at the state at the beginning of the year, It's now up to 12% and we're focused on also.
Learning a lot more and really implementing cross selling between our credit customer credit members in our digital banking members, but I would agree with you I think we're very much at the top of the first inning and these efforts, but it is a promising opportunity to keep growing the value and the revenue of our business and I am really pleased with how things are going so far.
Sure.
Okay.
Thank you.
Thank you for the question.
This concludes our question and answer session I would like to turn the conference back over to Robert Workman CEO for any closing remarks.
I simply 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 very much.