Q3 2022 Oportun Financial Corp Earnings Call
Good evening and welcome to the opposite problem Nashville third quarter 2022 for you.
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Thanks, and Hello, everyone with me to discuss opportunities third quarter 2022 result, a role Vazquez, Chief Executive Officer, and Jonathan Cohen, Chief Financial Officer, and administrative officer.
I'll remind everyone on the call or webcast at some of the remarks made today will include forward looking statements related to our business future results of operations and financial position planned products and services business strategy and plans and objectives of management for our future operations.
Actual results may differ materially from those contemplated or implied by these forward looking statements and we question 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 at our upcoming Form 10-Q filing for the quarter ended September 32022.
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 material available at the Investor Relations section of our website.
non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our third quarter 2022 financial supplement and the appendix section of the third quarter 2022 earnings presentation.
All of which are available at the Investor Relations section of our website at investor that opportune Dot com.
In addition, this call is being webcast and an archived version will be available after the call along with a script of our prepared remarks with that I will now turn the call over to roll.
Thanks, Dorian and good afternoon, everyone. Thank you for joining us today I'd like to discuss our third quarter financial performance, followed by an update on how the macroeconomic environment is impacting opportunity and its members and close with an update on our strategic initiatives.
Opportune delivered a strong profitable third quarter on an adjusted basis, Let me start with the following summary.
We delivered revenue of $250 million up 57% along with adjusted net income of $8 4 million.
For adjusted EPS of <unk> 25.
Our annualized net charge off rate of nine 8% was in line with our prior guidance.
And we're upwardly revising our full year 2022 revenue and adjusted EPS guidance.
Let me now update you in more detail regarding what we saw in Q3, starting with credit.
Credit is the most important metric in our business on our prior earnings call. We shared that starting in July we had initiated a set of actions, including significantly tightened our underwriting standards to address the impact of inflation on our members.
I am pleased to inform you that these actions are having their intended effect.
We're continuing to reduce our exposure to new borrowers and increase our proportionate exposure to more profitable returning borrowers who have already successfully repaid at least one loan to opportunity.
In the third quarter, 28% of our loans, where do new borrowers as compared to 44% in the second quarter and 51% in the first quarter.
Early stage delinquencies are trending downward for instance from July to September are 15% to 29 day delinquencies declined from two 1% to one 8% and our 30 to 59 day delinquencies declined from two 2% to two 1%.
These trends defied the usual seasonal patterns and delinquencies, which typically rise in the back half of the year.
And our first payment defaults are now below 2019, pre pandemic levels, having come down from the 2% range to below 1%.
So in summary, we're very pleased with the credit results from Q3 originations and we are setting ourselves up well for good credit performance in 2023.
Now I'd like to update you on the other actions we've been taking starting with underwriting we're introducing and leveraging new underwriting models that have and will continue to significantly improve our credit performance for instance, we launched an updated version of our models specifically focused on underwriting are returning portfolio.
We are also expanding the use of the bank transaction model, we launched earlier this year by giving more applicants the opportunity to share their data, providing a more complete snapshot of their current financial situation.
We also launched a new direct marketing platform. This quarter that we expect will be fully implemented by the end of the year we.
We expect this new platform to improve the risk levels of the direct mail program and enable additional digital channels, where we will be able to target customers based on their credit profile.
Our funding and liquidity remained strong and in September we bolstered them by raising additional capital with a new four year $150 million senior secured term loan.
The investment community's confidence in opportune was also just further validated by our closing last week of our fourth securitization of 2022.
Our ability to complete these financings increases our capacity to fund future originations.
Finally, we've made progress and continue to focus on a significant reduction of operating expense growth.
Reiterating our mandate for flat second half adjusted operating expenses versus the first half of the year by reducing sales and marketing costs and limiting head count growth.
As a proof point of achieving this objective third quarter adjusted operating expense declined 3% sequentially to find our typical seasonal patterns.
And adjusted operating efficiency improved by approximately 1300 basis points year over year to 54% our lowest level since our 2019 IPO.
As you can see we continue to take the necessary steps towards putting the company on the strongest possible footing and are committed to limiting expense growth in order to operate more efficiently in 2023.
Shifting now to our long term strategic priorities, let me update you on our progress on enhancing our platform capabilities growing our members and increasing our multi product relationships.
We're continuing to enhance our platform capabilities to meet the everyday financial needs of hard working people.
We are on track to start testing our unified App. This quarter that brings together all of the savings banking investing products and opportune credit products into a single mobile application.
<unk> financial performance is exceeding our expectations and our overall integration continues to progress nicely.
We ended the third quarter with $1 9 million members up from $1 8 million at the end of last quarter at 9% annualized growth rate.
We are pleased with this pace of adding high quality new members the opportunity given our lower marketing spend and decreased focus on acquiring new borrowers.
Furthermore, in the third quarter products grew at an annualized rate of 11% faster than our member growth of 9% as members continue to increase their engagement with opportunity.
Now, let me update you on new product activities. As a reminder, we indicated on our prior earnings call that we have deliberately moderate growth in our secured personal loan and credit card products in the second half of this year as part of our credit tightening actions.
For unsecured personal loan products, we ended the third quarter with $116 million in receivables up from $100 million sequentially.
Our credit card receivables grew at a similarly moderate pace to $131 million up from $119 million sequentially.
Now have more than 200000 members, who have an opportune branded credit card.
Finally, we have also continued to make great progress with our lending as a service partner channel.
Which we can efficiently increase our applicant pool and selectively add high quality new members, even while we tightened our credit standards.
During the third quarter, we scaled our partner network to include 348 locations up from 229, a year ago, and we still expect to complete 2022 with over 500 locations. Additionally, our partnership with settle a buy now pay later company in our first digital lending as a service relationship remains on track to launch.
This quarter.
With that I'd like to turn it over to Jonathan for additional details on our financial performance and our revised guidance.
He will also take you through a technical accounting requirement that caused a noncash $108 million write off of goodwill that impacted our Q3 GAAP results.
Thanks, and good afternoon, everyone as Rob mentioned, we're pleased with our third quarter results, which exemplify the resilience of opportunities business model under the current macroeconomic environment.
In the third quarter, we generated $250 million of total revenue and $8 4 million of adjusted net income or <unk> 25.
Adjusted EPS revenue upside and expense discipline enabled us to be profitable while our prior guidance had indicated the expectation for a slight loss.
Our aggregate originations were $634 million down 4% year over year and modestly below the prior guidance of between $650 million and $675 million for the quarter. This reflects the credit tightening actions, we initiated in July and our focus on high quality originations.
Total revenue of $250 million was above the guidance range and up 57% year over year with upside reflecting lower than anticipated prepayments.
We expect continued revenue growth into 2023, even as we keep the tighter underwriting standards.
Net revenue was $147 million up 5% year over year net revenue improved from the prior year period due to higher total revenue, partially offset by higher interest expense and net charge offs as compared to last year.
Interest expense of $27 million was up 152% year over year, primarily driven by increased debt issuance to fund our growth and the increase in our cost of debt to three 9% versus two 8% in the year ago period.
At the end of the third quarter, 79% of our debt was fixed rate, providing us with protection from rising interest rates.
For our net change in fair value, we had a $76 million net decrease which consisted mainly of current period charge offs of $72 million for the mark to market. The fair value price of our loans decreased to 107% as of September 30, and resulted in a $41 million mark to.
Market decrease the $61 million Mark to market increase in our asset backed notes resulted from a 181 basis point decrease in the weighted average price to 92, 9% due to the increase in interest rates and credit spreads during the quarter turning to expenses, we maintained strong expense discipline.
And as we said we would on our prior call with adjusted operating expenses decreasing sequentially, 3% as.
As Rolla mentioned, we will continue to reduce our adjusted operating expense growth rate going forward and are on track to be flat in the second half versus the first half of this year.
Our customer acquisition cost was $142 down 7% from the prior year period due to lower direct mail and online marketing expenditures, partially offset by lower aggregate originations. We delivered adjusted net income of $8 4 million compared to $24 million.
In the prior year quarter, and adjusted EPS of <unk> 25 versus 78.
Respectively.
For the first three quarters of the year combined adjusted net income was $65 million representing.
Representing 23% year over year growth and adjusted EPS was $1 95.
Representing 11% year over year growth.
As Rolla mentioned, our GAAP results were impacted by a technical accounting requirement because of our market capitalization remain below our tangible book value. We were required by GAAP to write off $108 million of goodwill.
Our GAAP net income and EPS were impacted by this noncash charge.
While the goodwill related to our acquisition of digit the write down is not a reflection on digits financial performance, which as you heard Rob will mentioned earlier is exceeding our expectations. We have not impaired any of the other intangibles, we acquired with Detroit for this reason because this was a noncash charge it in no way affect.
The operations for future prospects of the company.
Adjusted EBITDA was a $6 $2 million loss in the third quarter at $24 million decrease compared to a gain of $18 million in the prior year quarter.
For the nine months of the year adjusted EBITDA was $23 million flat to the prior year period.
Adjusted return on equity was 6% versus 9% in the prior year quarter for the last 12 months adjusted ROE averaged 17%.
Turning now to credit our third quarter results showed we managed our credit well to deliver outcomes in line with our prior guidance our annualized net charge off rate was nine 8% compared to five 5% in the prior year period.
As a reminder, last year's charge off rate was abnormally low due to strong consumer balance sheets, including the impact of government stimulus amidst the pandemic.
As of September 30, our 30, plus day delinquency rate was five 4%, which was consistent with the increased charge off trends, we previously guided to.
Regarding our capital and liquidity as of September 30, total cash was $272 million.
Additionally, net cash flow from operations for the third quarter was $68 million.
Up 44% year over year.
Our debt to equity ratio was five two times and absent the impact of the noncash goodwill impairment charge I just discussed our debt to equity ratio would've been four three times.
As of September 3300, $82 million of our combined $750 million in warehouse lines was undrawn and available to fund our growth we are well positioned to maintain our strong liquidity, while we selectively underwrite high quality loans and our tightened credit posture.
We have maintained our track record of consistent access to the capital markets. Robert mentioned that we closed a four year $150 million senior secured term loan in September .
It's important to emphasize that this new facility provides non dilutive capital that supports the continued investment and growth in our business that we expect in 2023 and beyond even under the tighter credit underwriting criteria, we've adopted in the current environment.
We also disclosed our fourth securitization of 2022, a $300 million asset backed note issuance reaffirming our access to funding and investor support for our business model.
Turning to our expectations for the rest of 2022, we remain focused on prudent profitable growth by tightening credit and continuing the cost discipline that rolla mentioned.
In terms of guidance our outlook for the fourth quarter is aggregate originations of $650 million to $700 million.
Total revenue of $255 million to $260 million.
Adjusted net income of $8 million to $10 million and adjusted EPS of <unk> 24 to 30.
Our updated guidance for the full year is aggregate originations of $2 96, two to three point or one 2 billion.
Total revenue of $946 million to $951 million adjusted net income of $73 million to $75 million and adjusted EPS of $2 19 to $2 25.
Going forward, our credit performance will be driven by two different portfolio dynamics. The loans, we've been originating since July under significantly tighter credit standards and the loans originated prior to that let.
Let me start with the loans we've originated since July .
The credit tightening is already having the desired effect of driving down our early stage delinquencies in first payment defaults with performance trending better than 2019, you can see these trends and the additional slides. We've included in our earnings presentation. This quarter.
With regard to the loans originated prior to July the charge offs, we expect it to have in the fourth quarter will be almost entirely from these loans we originated prior to tightening.
For the fourth quarter, we are guiding to 11, 9% annualized net charge offs, plus or minus 25 basis points for the full year, we are increasing our guidance by 30 basis points to nine 9% net charge offs, plus or minus 20 basis points.
Approximately 12 basis points of the increase in rate for the full year is reflective of the denominator effect of credit tightening leading to reduced origination announce and lower average daily receivables from our prior expectation.
It's worth keeping in mind that this upward revision of full year guidance only represents $8 million more in charge offs than previously expected and even after these expected incremental charge offs, we are forecasting 8% to $10 million and adjusted income for the fourth quarter. Additionally.
Additionally, because the average life of our portfolio is only nine two years the portfolio will turnover more than once per year. This means that the loans, we started originating under tighter credit standards in July will make up the vast majority of the portfolio by the second half of 2023.
While we expect to have elevated loss rates into the fourth quarter of this year, our projection remains that losses will start decreasing in the first quarter of 2023 and return to our target 7% to 9% range by the third quarter of 2023 in summary, I am pleased that we delivered another strong quarter opportunities ninth consecutive.
<unk> profitable quarter and that we are in a position today to upwardly revise our 2022 profit outlook with that I will now turn it back over to Raul for some final comments before we open the line for questions.
Thanks, Jonathan this quarter exceeded our expectations and I am confident that we will emerge from this challenging economic environment, a stronger company than ever before justice opportunity following the pandemic and the financial crisis the.
The resilience of the company has and will continue to exhibit reflects the determination of our talented employees.
Opportunity will continue to deliver responsible profitable growth on behalf of our shareholders.
I look forward to reviewing our fourth quarter results and providing our outlook on 2023. When we next report in February with that operator, let's open up the line for questions.
Excuse me.
We will now begin the question and answer session.
A question you May Press Star then one on your telephone keypad.
He has a nice speaker phone please pick up your handset before pressing the key.
<unk>. Your question. Please press the Star then queue.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Mark Levine.
Barclay.
Yes. Thanks.
You could clarify kind of what what's changed.
What gave you confidence for the new EPS guidance for the year is it primarily just what youre seeing on the credit side or are there other drivers there we should be aware of.
Yes, Mark it's Jonathan.
I think it's a number of things so first of all when you take a look at the beat we delivered for <unk> that was really driven by two things one we beat revenue by $5 million and that was largely driven by slower prepayment rates in the portfolio.
She is not unexpected given the inflation.
And then second we had very strong expense discipline. So as you heard both for Alan I comment, we actually reduced adjusted operating expenses by 3% quarter.
Quarter over quarter, which is about $4 6 million.
So we feel good about those trends.
The other thing as yields have gone up.
In the short term is going to be beneficial.
Relative to the mark to market.
Okay, Great and then could you just comment on Europe .
Youre observing in the funding markets, how your execution maybe.
Impacted like your latest ABS deal how does how does that compare to the past execution and any impact on on your ability to kind of hit your target returns.
Sure. So we successfully closed our fourth securitization of the year on last Thursday, It was a $300 million amortizing offering and we were able to sell all the tranches from double a down to double b.
And a little over a week. So it was a very successful offering in the context of the current market. It certainly reflected current market interest rates and credit spreads, but that's one of the reasons, we chose to do it on an amortizing basis. So it's not a long term piece of funding when you look overall at our cost of funds.
It was about three 9% for the.
For the quarter and so we see that rising into the fours next quarter.
But overall on a blended basis, that's very manageable, we continue to have our warehouse lines that are committed through.
Sure.
Personal loan one through 2024.
Theres a lot of interest from investors in purchasing our whole loans, which could be another source of funding. So we feel very good about our ability to access the capital we need to fund and grow our business.
Okay, Great and just wanted to make sure you don't have any debt covenants that are impacted at all by the by the goodwill impairment.
No no we do not.
Okay great.
Alright, thank you.
Our next question comes from Hawaii for kidney week K B W.
Thanks.
Two questions on the higher charge offs I appreciate there's pluses and minuses from a financial impact that net each other out but I guess when we think about.
The first half of next year, and the charge off rate being higher than that 7% to 9% as a result of the back book that you mentioned, Jonathan could you just give us some sort of cadence as to how that migration should look because the fourth quarter was a little bit higher than what you thought it would be.
Secondly, maybe Robert if you could just talk anecdotally about what your customers are dealing with now with what the macro environment with inflation higher rates et cetera also less liquidity from some of the fintech players like the buy now pay later providers. Maybe you can just give us some more color on that as a two part question on loss rates.
Yes, so sanjay to take the first part.
I think our expectation continues to be the same as before.
On our prior earnings call that we expect Q1 losses to be lower than where they are in Q4 and to continue to trend downward over the course of the year.
And I'll add a little bit to that Sanjay I'd say from a credit perspective, we're right, where I expected us to be and right, where I wanted us to be and that has two components to it.
As you put it right we were very transparent in the last call that the back book, we're seeing the impact of inflation and that we did expect delinquencies to go up we expected losses to go up and hit their peak in Q4 as Jonathan just mentioned and we will start going down and we'll get back to the 7% to 9% range in the 2023 time frame.
But I would also like to point out we have started to provide some of the same transparency that we provided during the pandemic. So I'm really pleased with how effective our credit tightening actions are proving to be if you look at page six of our earnings deck Youre going to see the early stage delinquencies are declining.
And thats consistent with our focus on quality of originations as opposed to quantity and then first payment defaults are now below pre pandemic levels. So we think we're setting ourselves up very well for a good 2023 from a credit perspective.
Revenue was up $90 million year over year total revenue and we know that that's going to be a run rate going into 2023, so that higher revenue run rate the lower losses that we would expect in 2023 combined with the expense discipline. We think is setting us up really really well for 2023, let.
Let me pause there and if you'd give any other questions on credit before I answer. The second question that you posed Sanjay.
No I think you can continue to grow.
Okay. So in terms of what we're seeing both from a competition perspective and.
From a consumer perspective.
In terms of competition, we continue to be a very attractive provider of credit in particular to our returning customer base. So I am pleased with the demand that we're seeing there I am pleased with the credit performance that we're seeing.
So I'd say from a competition perspective, we still know that by capping our rates at 36% and below we're going to be one of the most attractive providers of credit our net promoter scores of those 79.
I really like where we're at from a consumer perspective, it's really the things that we've talked about in the past. They are just feeling the impact of inflation higher ranch gas has started to move up again, a tiny bit.
So we continue to be very very focused on that repeat customer who has demonstrated success with our loans and once the economy starts to stabilize a bit more and we start to see inflation coming back down that's when we'll start to focus on originations again to the new borrowers.
And just to follow up on the second part of that second question is you don't feel like there is an impact from diminished liquidity from some of these providers because a lot of what we've been hearing from the fin techs in the buy now pay later providers as Theyre pulling back right you don't feel like that's had an impact on your customers.
I mean, I think when others pull back it makes us more attractive as a provider of credit.
In terms of the impact on the customer themselves.
It's really hard to know.
We're dealing with the customers that come to us for credit they don't necessarily talk about the experience that they're having with other providers of credit.
Okay.
Great and just last one on the efficient the expenses and the efficiency ratio improving so much I mean that was that was great. I mean, I'm just trying to think how sustainable that is in this backdrop, maybe you could just talk about.
The pluses and minuses that efficiency ratio remaining here and how we should think about it on a go forward basis. Thanks.
Sure.
Very committed to keeping expenses as flat as we can even as we go into 2023, we recognize that over the last few years, we made investments in head count as we were.
We were building out our credit card product as we were building out the secured personal loan product and then certainly when we made the digit acquisition, but we feel that the organization is right sized today.
So we really feel that we can go ahead and support this higher revenue base.
With the head count that we have today. So we actually think that our posture on expenses is very sustainable.
Okay, great. Thank you.
Youre welcome.
Our next question comes from Rick Shane with JP Morgan.
Thanks, everybody for taking my questions. This afternoon.
Really appreciate the clarity in terms of the delinquency trends.
Just a quick look at slide seven.
And I'd like to put this in context of a couple of things so.
Obviously, the first half of the year.
First payment defaults were pretty significantly elevated we can see.
The impact here of the tighter underwriting.
Given the.
Timeline of loans and when first payments are due is it a weekly or bi weekly I'm trying to understand how quickly the tighter underwriting comes through on this chart. Since you provided on a weekly basis or on a biweekly basis.
Sure So you're absolutely right. When you look at the beginning of 2022 that was really reflecting the stimulus to consumers had our ability to go ahead and lean into the new States and then as the economy started to change then we started to drive this down as we kept tightening.
I would say when you look at that page seven and you look at the page before Rick we're already starting to see some of those first payment defaults bleed into those early delinquency buckets, you can see that the current percentage of the portfolio has been going up right from the end of July to the end of August to the end of September at the same time, we're seeing one.
To seven day delinquencies come down in each of 2014 are pretty stable that's not usually what happens at this time of the year. So we're defined seasonal trends. So we already feel that we're starting to see the impact of that tighter underwriting and those improved first payment default in those early stage delinquencies.
You can see it in the 15 to 29 as well, which went from two 1% to one 8%.
Got it okay and Thats helpful.
Context, I'm really interested in is when we look at this first payment default chart.
Curious if there was a sort of static tightening of underwriting or that as you moved through the quarter month over month.
It became increasingly tighter and the reason I'm most interested in this is that if we look to the guidance for the fourth quarter.
On a seasonal basis, it looks like Youre tightening again.
And that's what I really want to understand how should we think of this as should we think of this as three portfolios the back book.
Third quarter book, and what's happening now in the fourth quarter in terms of even tighter underwriting.
I appreciate that question no I don't think of it as three portfolios I really think of it as two at a high level. It is that back book and then the portfolio that we're building with this tighter underwriting.
It's not really if you were to look at page seven again.
Not really one tightening action.
Thankfully, we've got a underwriting engine that allows us to make changes quickly and then allows us to continue to make adjustments based on what we're seeing so what will happen is that our our team internally, we'll look at opportunities say tightened within the returning portfolio and then they'll look at opportunities to tighten within the new portfolio.
And then they'll start to look at it within different loan sizes.
So it's not necessarily a reflection of we got a tightened more and more and more it's a question of just being able to sequence the work and being able to make the best decisions possible.
But we very much think of it as two books Theres not say additional tightening thats coming in Q4, that's reflected in that guidance.
Got it okay, and I apologize for my peers, who are waiting to ask.
<unk>, but I just want to clarify that.
Is it fair to say that what you. Just described is that perhaps by the end of September underwriting was tighter than it was perhaps at the end of July that there was that progression within the quarter.
Yes, I think that would be fair.
Okay. Thank you.
Sure just Rick because I really appreciate the question I think one way to look at the different say in Q4, the two ways to look at the difference in Q4 originations.
Is number one we're very focused on quality of originations not quantity, we could certainly originate more than the $675 million that we guided to but.
But we think that in this environment. It makes the most sense for us to demonstrate again, the efficacy of our underwriting engine and to position ourselves for lower losses in 2023, so that that way. We can go ahead and keep improving the profitability of our business. So that would be the first in quality over quantity. The second is if you look at the new bar.
Lower percentage, where we talked about Q1, being 51% Q2 being 44% in Q3 being 28%. It means that that our origination volume that normally we would make to new borrowers were choosing not to make a lot of that volume today, we're choosing to pick the highest quality borrowers with.
When that new borrower population and that just means that we're going to have less originations coming from that group. So I would characterize it more as a deliberate choice on our part to focus on that high quality, returning portfolio and picking the best new borrowers as opposed to what I think it was a great question on your part so it is really that as opposed to.
Say incremental tightening that we expect to have in these last two months.
Got it and then look I agree the market is clearly going to judge you on the credit performance over at the loan growth at this point.
Thanks, Rick.
Our next question comes from David Scharf.
J M.
Actually everything has pretty much been asked already.
Was on my list, but.
Maybe.
A little more kind of thematic or strategic question for you Rob.
Okay, Rick Rick is 100% correct.
Nobody's paying a whole lot of attention to.
To your origination volumes at this point.
But as you think about.
Ultimately what the guideposts are some of the guideposts that you need to see.
For you restart that origination engine.
Is it more is it more meeting and certain internal metrics such as.
Bringing visit.
Visibility into losses to within that 7% to 9% range.
Or are you more attuned to macro and external conditions. Even if you are meeting those internal targets just given how much uncertainty is out there.
Thanks for the question, David David I'd say, it's both.
So we're absolutely looking at our internal metrics, we want to look at those first payment defaults.
Performance on the early delinquency buckets that we shared with you we want to see.
The 30, plus delinquency rate get back to our historical levels.
But at the same time from a macro environment. The two things, we're really looking at our inflation and unemployment.
So, let's say for the sake of argument that the internal numbers, we're getting to the ranges that we wanted to but there was still the uncertainty in dynamic elements in the macro environment, we really wouldn't start to open up at that point too much.
Because we'd be concerned about potentially starting to open up and having the environment deteriorate some more.
And then we'd be having to catch up and we regret that decision. So it's really a combination of the two and what we'd really like to see is we'd really like to see our internal numbers get better we'd like to see inflation start to come down and we'd like to continue to see stability from an unemployment perspective, if we get kind of.
Green lights across those three things that's when we'll be very comfortable starting to open back up and taking advantage of the growth opportunity that still is in front of us.
Got it got it.
You've just basically define the definition of the expression once bitten twice shy Theres no reason to.
Yeah.
Move on any false.
Julie.
Given given particularly unemployment, which.
We're still not seeing it move arguably we.
We still have more headwind ahead of us to the extent, it's a lagging indicator.
Hey.
May.
A follow up too on it.
Yeah.
Kind of questioning along sort of Q4 versus Q3 magnitude of tightening of what Youre seeing.
It sounded like the revenue guide in the fourth quarter that went up as well as the revenue beat in the third quarter was not entirely pricing related but it was.
Lower prepayment rates no Jonathan said that was to be expected, but in the same breath said.
It was a contributor to revenue coming in ahead of guidance.
So as a as the prepayment rate coming in even slower than you anticipated I mean is that one more kind of cautious indicator.
Okay.
As Keith Tamping down the origination outlook near term.
Well David its Jonathan.
I don't know that the prepayment rate relates to the origination outlook.
At least we don't see it that way what I meant to say was that.
The rates, we're seeing we saw for the rest of the quarter were lower than at the time that we guided right and so we factor that in now.
And that's why one of the reasons among others why we expect to see higher revenue for the fourth quarter.
Got it yes, no I just meant.
On a higher portion of payment rates for one more negative indicator on consumer.
Liquidity in payment patterns.
I wouldn't I wouldn't think of it say as a negative indicator David This is Ron.
There are times, where someone's got a $60 payment and $65 payment and they'll go ahead and make an $80 payment right.
And we're happy to take that payment because if that if that member pays off their loan early they may still have a need for capital and we're happy to then give them a repeat loan.
What we're just seeing right now is people are managing their money carefully.
So we don't necessarily think that that lower prepayment penalty indicate stress. We think it just indicates prudent management on our members' part.
And the prepayment just ended up being lower than we would've expected and that creates a benefit for us in Q3, and it's going to create a benefit in Q4.
So we don't think of that as a negative and it doesn't necessarily impact how we think about originations.
The origination level for us is really about again that quality, how do we focus on the repeat borrower how do we make sure that the bulk of our marketing is for that repeat borrower.
So that as you put it in as Rick put it right.
We can deliver what we think investors are looking for right now, which is really having a strong degree of controlling command over credit outcomes.
Got it.
Maybe just one last one.
On capital, obviously, you've highlighted.
Both your success in recent.
Accessing the debt capital markets as well as kind of your overall to create liquidity.
Given your shares at a significant discount to book.
As well as a.
Putting on the breaks a little bit on the magnitude of origination activity any comments on that.
Further buybacks that you could discuss it seems like.
And that paradigm as well as still being free cash flow positive.
There are many other uses for the capital.
Well.
In this very unique environment, we think it makes sense to really be careful with our capital right.
<unk> clearly is indicating that they are going to continue to take action to try to.
Bring inflation back down so.
So we think the most prudent thing to do today is to hold onto our capital until we see things stabilize a bit more from a macroeconomic perspective.
To your point, David we absolutely believe the company is undervalued.
We've increased profit guidance. So we're hopeful that having now nine consecutive profitable quarters increase in guidance.
Certainly demonstrating these early credit results that we're showing are going to go ahead and strengthen the confidence that investors have in our ability to navigate this environment.
Not planning to do buybacks now, but we'll continue to monitor the macro environment and our stock price and figure out if there is a moment in which we and the board thinks that thats the best use of capital.
Got it great. Thanks very much.
Thank you.
Our next question comes from John Hecht with Jefferies.
Hi, John .
Yes.
But we can't hear you.
I apologize thanks, very much for taking my questions.
Yes, I apologize for that.
Okay.
Dovetailing on some of the other topics you have already addressed but just thinking about the tightening in the call. It the new book.
Yes.
Forward book as opposed to the back book, how do we think about the difference in characteristics.
You did tell us that there's going to be more recurring customers, but maybe maybe I'm asking what did you change in underwriting and then how will that affect the mix of secured versus unsecured versus card.
Over the next few quarters.
And anything that might do to yield overall as well.
Yes so.
The way that I would characterize as say the new book versus the back book is the number one difference is absolutely the mix of returning borrowers versus new borrowers.
We have soft over the last few calls to give you a sense of what that makes us look like when we expanded to 30, new states through the Meadowbank partnership. It just gave us a fantastic opportunity to acquire new borrowers.
It was obviously before the war before rates started moving up there we're still <unk>.
A bit of capital that people had just based on the stimulus measures. So it made sense for us to have new borrowers represent 51% of the loans we were making.
And then as we started to reduce that we went to 44% and now you see us at 28%. So I would say that is the number one difference John between the back book in this new book.
And because you know you've known US for years, you know that returning borrower is someone who has fantastic credit performance a lower tax you also saw US report lower tax this quarter.
It's the most profitable and most group and part of the portfolio. So we think it makes sense to really focus on that borrower today.
That would be the biggest difference in terms of the books.
Okay. That's helpful. And then you mentioned meta maybe talk you guys have you've always had lots of new products in and developing channels. Maybe can you talk about how <unk> is doing or any.
Any changes to different channels or kind.
Kind of what Youre doing in terms of tightening is across the board just marginally.
Anything to kind of highlight with respect to the channels that you're using to grow.
Sure so.
From a channel perspective, the part of the tightening the risk team also does is partnering with the marketing team and focusing on those channels that have the highest.
Highest risk outcomes associated with them. So one of them. For example is direct mail because you get to select who youre going to send the mail to its very easy to ship that channel to more of a returning portfolio. So we've.
Focus direct mail on the returning population some of the online channels, where you don't necessarily have that degree of pre selection, whether thats say keyword advertising or being on some of the some of the online locations.
Those are places, where we've cut back because historically, we've seen much more of new borrower.
Selection take place out of our acquisition is a better better way to put it.
So I would say that it hasnt been say a channel by channel focus it's been really again trying to focus on getting that mix that we were looking for thats really been what we've been focused on from a product perspective, we shared last quarter and it continues to be true that we're really focused on the unsecured personal loan product that is the profitable engine.
<unk> of this business, we continue to believe in our multi product strategy.
But right now we're not focused on growing credit cards, we're not focused on growing the secured personal loan book, we've got those groups really focused on servicing and collections and any elements of kind of the product infrastructure that can be improved in this environment.
Okay I really appreciate the color that's helpful.
Our next question comes from how.
With loop capital.
Hey, congrats on the quarter guys good job.
Just the first derivative.
<unk> has been seen.
Okay.
In the fourth quarter.
Origination guidance I know we're not.
We're still dealing with a tightening it's already happened in implied originations to be down 20% or so.
The first derivative.
Improvement in early the early losses.
Delinquencies first pay defaults is already improving.
What would it take for you guys.
Early next year.
Turned back on some of that marketing spend.
Came down quite significantly just want to know what what normal really is it appears to me. This is not a normal level and kind of know where that might settle out next year.
Yes, thanks for the questions Hello, and thanks for the kind words about the quarter, we felt really good about the quarter. We thought we delivered a strong quarter given the environment.
When it comes down to what would we need to see.
We're really focused on inflation.
Would like to see inflation come back down wed like to see our borrowers have a little bit more money leftover right. After every paycheck and.
And we'd like to see the unemployment rate continued to be pretty low.
We know that if we have a strong job market for our borrower and they've got some money left over after.
Every paycheck that they are then going to be current because we know our borrowers one opinion spat when they don't it's because they are having challenges.
So just just seeing us get back to a more normal economy with kind of lower inflation and strong job prospects, that's really what we'd need to see before we'd start to lean back into marketing and starting to look for more new borrower volume.
Okay.
Thank you.
Sure. Thank you Heng.
Our next question comes from Jose <unk>.
<unk> K B W.
Hey, Thanks, just had a couple of follow up questions more numbers related.
I guess, Jonathan on the debt costs I know you did a couple of offerings.
Should we think about those costs going forward and I'm just trying to think about like maybe a net interest margin or something I think we calculated to be 26% should that go higher.
As you invest or is <unk>.
As you've sort of fine.
Some of those cost sorry, the debt to fund the loans.
Yeah.
You are asking is net interest margin will be higher in the future, yes, like how should we think about NIM going forward.
Yes so.
It's a balance of things obviously the cost of funding.
Cost of funds component is going to creep up right.
We're at three 9% for the third quarter, but it will be higher in the fours for next quarter.
And.
From a NIM perspective, we've taken pricing actions and we're looking at more opportunity there.
So I do think we'll see NIM declined somewhat.
But.
That it should come back later next year.
Yes.
The pricing actions flow through the portfolio.
Can you just add.
Got it sorry, just to add a little a little bit to that certainly name is something that we're focused on to jonathan's point, we continue to ask the team to look for opportunities to increase.
Our yield whether thats, an origination fee or if there are areas, where we can charge more from an interest rate perspective, we're looking for every opportunity that said right. We're also focused on reducing the expenses in the rest of the P&L.
One of the reasons that we're so focused on driving losses down as we know if we can go ahead and reduce charge offs, that's going to help us with the overall profitability of the business.
And then we spent a lot of time talking about opex because that is something that is absolutely in our control and where I am pleased with the discipline that the team has shown and just want to be really clear because we hinted at this a couple of times, but we expect to take this discipline into 2023. So this is not just a question of second half.
Spence is relative to first half, we're going to roll into 2023 with the same mentality from an opex perspective of.
Very little hiring making sure that the marketing expenses are earned by the credit performance and again looking for the environment. So youre absolutely right. We're focused on NIM, but we're also looking at those other big expense lines in the P&L and really focused on improving the overall adjusted net income performance of the company and just add one thing to that ROE.
Sure.
We talked about the <unk> hundred basis point year over year improvement in our operating efficiency. If you compare that relative to revenue yield it's about four points right. So when you think about the 26% number you mentioned for NIM, while Opex is obviously below that.
We got four points better on that yield equation, just by the Opex changes, we've made already and if we stay flat as Raul.
That said we would.
<unk> and revenue continues to grow then it's even more.
No I appreciate that and maybe we could just talk offline sort of the cadence of that but I just wanted to make sure I understood that and then just second question is on that impairment charge understanding sort of a technicality with the market cap and the book value. So should we think about that impairment charge.
Yes.
In the unfortunate event that market cap continues to decline for whatever reason right like does that impairment charge come back.
Sure.
Are we here.
Set at some point I'm, just trying to think about the forward impact.
Yes, it's one and done.
Okay.
It's a very strict GAAP rule and so if.
If in the future, we're trading well above tangible book value, we don't get to write up goodwill.
And we've written off all the goodwill we had so there's nothing more.
That would.
There will be no future write downs.
Got it perfect. Thank you.
Thank you Sanjay.
This concludes our question and answer session.
I would like to turn the conference back over to Hal basket for any closing remarks.
Okay.
Just 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
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