Oportun Financial Corporation (NASDAQ:OPRT) Q3 2023 Earnings Call Transcript

Oportun Financial Corporation (NASDAQ:OPRT) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Hello, and welcome to the Oportun Financial Third Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Dorian Hare, Investor Relations. Please go ahead.

Dorian Hare: Thanks, and hello everyone. With me to discuss Oportun’s third quarter 2023 results are Raul Vazquez, Chief Executive Officer, and Jonathan Coblentz, Chief Financial Officer and Chief Administrative Officer. I’ll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results of operations and financial position, planned products and services, business strategy, expense savings measures, and plans and objectives of management for 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 September 30, 2023. 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 comparisons of our core business, and which will provide useful information to investors regarding our financial condition and results of operations.

A full list of definitions can be found in our earnings materials, available at the Investor Relations section on our website. Non-GAAP financial measures are presented in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to GAAP financial measures is included in our earnings press release, our third quarter 2023 financial supplement and the appendix section of the third quarter 2023 earnings presentation, all of which are available on the — at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast, and an archived version will be available after the call, along with a copy of our prepared remarks. With that, I will now turn the call over to Raul.

Raul Vazquez: Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Today, I’ll discuss our third quarter financial performance and update you on Oportun’s areas of focus. Let me begin with the following summary of our Q3 performance. We increased revenue by 7% year-over-year and set a new quarterly record of $268 million. This top-line performance demonstrates the resilience of our business. We reached our quarterly GAAP operating expense target of $125 million ahead of schedule. At $123 million in Q3, GAAP operating expenses were our lowest in two years and a 10% reduction sequentially. Additionally, we achieved another post-IPO record for adjusted operating efficiency of 40.8%, attributable to our prudent cost management.

We’re also working to ensure that Oportun is well funded to grow in a responsible and sustainable fashion. We recently executed new personal loan financing agreements totaling up to $267 million with two of our primary funding partners. That brings our total executed funding agreements since June to $967 million, and exemplifies the confidence that fixed income investors have in the quality of our loans. While there were highlights to be proud of in Q3, we know we still have work to do to deliver the value that we, and our shareholders, expect. Our performance versus our prior guidance was mixed. We outperformed the top-end of the range for total revenue and fell within the range for annualized net charge-offs at 11.8%, which represented sequential improvement in our loss rate of more than 70 basis points.

I am, however, disappointed that at $16 million, our adjusted EBITDA fell well short of the $35 million to $40 million range we provided. This shortfall was driven by fair value adjustments to our adjusted EBITDA calculation and interest expense. Turning to credit, the dominant factor continues to be the performance of our back book of loans that was originated prior to the material tightening we made in July of 2022. We are seeing some of our members continue to struggle with the higher prices in our economy, and since our last earnings call, we have started to see some deterioration in our Q3 2022 vintage, which was the first quarterly vintage originated under our tighter criteria. As you can see on Slide 9, after 12 months of performance, we are now seeing cumulative net charge-offs for that vintage of 6.1%, or approximately 60 basis points higher than the comparable 2019 vintage.

As you can also see on that page, Q4 2022 and the 2023 vintages continue to be in-line with 2019 or slightly better. As I’ve mentioned in prior earning calls, we didn’t just tighten back in July 2022; we took more tightening actions with respect to our returning loans in December of 2022. And, we have continued to make adjustments throughout 2023 to fine tune our performance as the macro backdrop remains uncertain due to the return of higher gas prices and ongoing inflation that are impacting our hardworking members to varying degrees. Given these trends and some softening in our late stage roll rates starting at the end of September, which contributed to our delinquencies increasing by 10 basis point year-over-year, we are taking up our guidance for full-year 2023 net charge-off rate by 50 basis points above the midpoint of our prior range to reflect updated guidance of 12.2% plus or minus 10 basis points.

The increase in expected losses drove a reduction in the fair value of our loans and, along with unfavorable impact from our asset-backed notes at fair value and other fair value adjustments, contributed to our recording an adjusted net loss of $18 million for the quarter, or an adjusted loss per share of $0.46 per share. Let me now shift to the actions we are taking to offset our increase in losses and enhance profitability. Today, we are announcing $80 million in further annualized operating expense reductions that will get us down to $105 million in quarterly run rate expenses by the end of 2024. These operating expense reductions will be affected by an approximately 18% reduction in our corporate staff as well as other non-compensation expense savings.

I recognize how difficult this is for those employees affected, and I want to thank them for all of their contributions to Oportun. Before handing off to Jonathan, I also want to spend a few minutes reiterating our strategic priorities and how we are adapting them to the current environment. Oportun holistically addresses two of the most fundamental challenges to financial health and resilience: access to responsible and affordable credit, and adequate savings. Accordingly, we have been allocating our spending to the two most proven and profitable parts of the business: unsecured personal loans and our savings product. Our primary focus remains the largest component of our business, our unsecured personal loan product. We will continue to grow at prudent levels and enhance this product’s profitability.

Our savings product continues to be profitable on a cash flow basis and was the primary driver of our 39% year-over-year growth in non-interest income this quarter. So, to enhance our focus in this challenging economic environment, we’re taking the following actions: First, we’re increasing our focus as a management team and reducing expenses by sunsetting our embedded finance partnership with Sezzle, and discontinuing our investing and retirement products. The elimination of these products and initiatives will contribute to the operating expense reduction I mentioned earlier, and will simplify our business. Second, we are reviewing strategic options for our credit card portfolio and will update the market when we have concluded that process.

Finally, I’m pleased to announce that we’re significantly expanding our secured personal loan product to approximately 40 states through our partnership with Pathward. Our secured personal loan product is highly synergistic with our unsecured personal loan product. Responsibly expanding secured lending, collateralized by members’ autos, will allow us to better serve those who need larger loans while reducing credit exposure for Oportun. Annualized net charge-offs for secured personal loans are currently over 300 basis points lower than for unsecured personal loans on a year-to-date basis. We expect to complete the expansion of our secured personal loans footprint by the end of 2025. With that, I will turn it over to Jonathan for additional details on our third quarter financial performance and our updated 2023 guidance.

Jonathan Coblentz: Thanks Raul, and good afternoon, everyone. As Raul mentioned, we made progress on a number of fronts in the third quarter, yet we have more to do to consistently drive strong results. I remain highly confident that our continued credit tightening actions, further cost initiatives and streamlining of our product offerings will enable us to enhance profitability in 2024 and beyond. As shown on Slide 6, Oportun delivered record total revenue of $268 million, although the impact of net change in fair value drove an adjusted net loss of $18 million. We continue to be focused on quality rather than quantity with originations of $483 million, which were down 24% year-over-year. Sequentially, we were virtually flat from the second quarter as we further tightened our credit posture.

Total revenue of $268 million, representing year-over-year growth of 7%, outperformed our guidance range due to slightly higher portfolio yield resulting from our pricing increases. Our 32.5% portfolio yield increased by 30 basis points from Q2 to Q3. We remain on track for our year-end portfolio yield to be approximately 200 basis points higher than the level at the end of 2022. We have increased yield while remaining committed to our 36% APR cap. Net revenue was $85 million, down 42% year-over-year, due to an unfavorable net change in fair value and higher interest expense compared to 2022. Current period charge-offs of $88 million were the primary driver of our total net decrease in fair value of $136 million. As Raul mentioned, we have seen an increase in our 30+ day delinquencies as well as some softening in late stage roll rates.

As a result, the fair value price of our loans decreased to 100.4% as of September 30, and resulted in a $9 million mark-to-market decrease. This was driven by our increasing of our remaining cumulative net charge-off assumption by 58 basis points to 11.9%. Also contributing negatively towards our earnings was a $15 million mark-to-market increase in our asset-backed notes, resulting from a 22 basis point increase in weighted average price to 94.3% and continued regular amortization of several of our ABS deals. Interest expense of $47 million was up $20 million year-over-year, primarily driven by increased debt outstanding, and the increase in our cost of debt to 6.8% versus 3.9% in the year-ago period. Turning now to operating expenses and efficiency, we are continuing to see the benefits of our previously announced cost structure optimization initiatives.

Our $123 million in total operating expenses during Q3 was the lowest quarterly figure we’ve reported since the same quarter in 2021. And, in comparison, our Q3 total revenue was 69% higher. As Raul described, we are enacting further cost reduction measures aimed at lowering our GAAP operating expenses to a quarterly run rate of $105 million by the fourth quarter of 2024, resulting in $80 million in annualized savings. We expect the headcount reductions announced today to result in a one-time charge in the fourth quarter of approximately $7 million. Excluding this charge, we still expect operating expense to be at or below $125 million in the fourth quarter of 2023. I’d like to highlight for you on Slide 7 how our expense reductions indicate that Oportun is now significantly more efficient.

Our OpEx ratio, or annualized operating expenses to average managed principal balance, was 15% as of 3Q ’23, 539 basis points better than the quarter in which we went public four years ago. Our adjusted OpEx ratio, which excludes stock-based compensation expense and certain non-recurring charges, was even lower at 13.4% for 3Q ’23, as we reduced adjusted operating expenses by 19% while we grew total revenue by 7%. In the third quarter, our sales and marketing expenses were just under $19 million, down 2% sequentially and down 13% year-over-year as part of our expense discipline and continued credit tightening. For the quarter, we recorded adjusted net loss of $18 million, compared to an $8 million net profit in the prior-year quarter, and an adjusted net loss per share of $0.46 versus prior-year net earnings per share of $0.25.

Adjusted EBITDA was $16 million in the quarter, a sequential improvement of $11 million compared to last quarter’s $4 million. On a year-over-year basis, it reflected a $22 million increase compared to the negative $6 million in adjusted EBITDA we reported in the prior-year quarter. Nevertheless our adjusted EBITDA fell short of our $35 million to $40 million guidance. As Raul mentioned, this was principally due to fair value adjustments to our adjusted EBITDA calculation and interest expense. Now, on Slide 8, let me discuss Q3 credit performance. Our annualized net charge-off rate of 11.8% was within our guidance range. This compared to 9.8% in the prior-year period and 12.5% in the second quarter. We were pleased that our risk-adjusted yield, which deducts charge-offs from portfolio yield, increased by 107 basis points sequentially to 20.8%.

Due to our 30+ day delinquency rate increasing by 25 basis points sequentially to 5.5% and higher late stage roll rates, we do anticipate our fourth quarter annualized net charge-off rate to increase by 50 basis points at the midpoint of our guidance, which I’ll detail for you shortly, as compared to our Q3 charge-off rate. Although inflation has generally abated, prices have not come down on an absolute basis and gas prices were about 10% higher on average during the third quarter from the first quarter trough, causing further economic stress on our member base. In prior earnings calls, we discussed the fact that the credit performance of our portfolio has two distinct drivers: first, the post-July 2022 origination vintages, made over the last 15 months after our significant credit-tightening, which we refer to as our front book; and second, the originations made prior, which we refer to as our back book.

The back book continues to represent the bulk of our delinquencies and charge-offs, but also continues to shrink. The back book declined by $0.4 billion in the third quarter to $0.9 billion, and is anticipated to further decline to $0.6 billion as of year-end. While it continues to be true that our elevated losses are being driven by back book vintages, as Raul explained earlier, we saw some deterioration in the vintages from the third quarter of 2022. Slide 9 shows the loss rates for recent loan vintages compared to their respective pre-pandemic vintages. To be clear, this Q3 ’22 front book vintage is still performing much better than the back book. We believe the reason recent vintages are performing in-line with 2019 performance is that we took further actions in December 2022 that are benefiting 2023 vintages.

As we discussed with you last quarter, we’ve continued to improve the credit quality of our originations. The percentage of underwritten loans with Vantage scores of 660 or greater was 33% for 2Q ’22 prior to our significant credit tightening, and increased to 49% during 3Q23. Higher Vantage scores of recent originations also help explain why we continue to see 2019 level performance from the 2023 vintages. Regarding our capital and liquidity, net cash flow from operations in the third quarter set a new record of $107 million, up 58% year-over-year, which supported net debt repayment of $24 million along with loan originations. We’ve repaid debt on a net basis during each quarter this year for a total reduction of $99 million. This debt repayment also includes $7 million of principal amortization on our residual facility which bears interest at SOFR + 11%, so we are beginning to reduce the balance of our expensive corporate debt.

As of September 30, total cash was $200 million, of which $82 million was unrestricted and [$18 million] (ph) was restricted. Turning now to funding. As Raul mentioned, we recently entered into two new personal loan financing agreements totaling $267 million, in addition to the June and August transactions we discussed on our last earnings call totaling $700 million. The recent $197 million private structured financing with Castlelake, its affiliates and other investors will fund existing and newly originated loans for a two-year revolving period at a fixed rate of interest and marks our second funding transaction of the year with Castlelake. The new debt financing will be accounted for on an amortized cost basis. The $70 million whole loan flow sale agreement with long-time partner Ellington will fund loans to new members.

These whole loan sales will be accounted for as off-balance sheet with servicing fee income being recorded on our income statement. This will be a re-initiation of our Access Loan program to support borrowers that we currently aren’t lending to. When we offered the Access Loan program in past years, it was successful in increasing the number of returning members that Oportun could serve, and we expect to start seeing this benefit again in the latter half of 2024. Turning now to our guidance as shown on Slide 11, our outlook for the fourth quarter is: total revenue of $260 million to $265 million; annualized net charge-off rate of 12.3% plus or minus 15 basis points; adjusted EBITDA of $5 million to $10 million. I’ll note that this fourth quarter adjusted EBITDA guidance range is well below that implied by our prior guidance.

This reduction of our adjusted EBITDA outlook is due to the same issues that drove our miss for the third quarter. Our fourth quarter adjusted EBITDA expectations are also impacted by higher charge-offs due to the trends we’ve been speaking with you about today and higher-than-previously-forecast interest expense. We expect fourth quarter interest expense to be in the $51 million to $53 million vicinity. Our guidance for the full year is: total revenue of $1.054 billion to $1.059 billion; annualized net charge-off rate of 12.2% plus or minus 10 basis points; adjusted EBITDA of $0.5 million to $5.5 million. I want to be frank by acknowledging that this is not how we anticipated or wanted to close 2023. Nevertheless my conviction remains, fortified by the decisive actions we announced today and our increasingly tight underwriting posture, that we are on track to markedly improve our profitability into 2024 and beyond.

Raul, back over to you.

Raul Vazquez: Thanks, Jonathan. Before my final remarks, I want to inform you that as disclosed in our filing today, Carl Pascarella has decided to retire from his position on Oportun’s Board of Directors to pursue other opportunities. With Carl’s departure, the Board has selected Neil Williams to assume the role of Lead Independent Director. On behalf of the rest of the Board and the company, I would like to sincerely thank Carl for almost 14 years of service as a director and for his significant contributions to Oportun. I look forward to working closely with Neil in his new capacity as Lead Independent Director. In closing, I want to first emphasize the progress that we have made to position Oportun for profitable, sustainable growth.

We remain highly focused on improving the profitability of our business by reducing costs further, enhancing our unit economics and streamlining our product suite. Our capital partners have demonstrated their confidence in the underlying strength of our business model with the $967 million in new funding agreements we’ve executed since June. In summary, I am highly confident that the initiatives we spoke about today will result in the emergence of a leaner, more profitable Oportun. We look forward to updating you on the progress of this evolution when we report on our fourth quarter results and provide our 2024 guidance early next year. With that, operator, let’s open up the line for questions.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Rick Shane from JPMorgan. Your line is now live.

Rick Shane: Thanks, guys. A couple of questions. If we can take a look at Slide 9 from this quarter and compare it to Slide 11 from last quarter, I think it’s pretty instructive of what’s gone on, and I know that everybody is going to be scrambling to try to match this up. But the 2019 vintage seasoned between nine and 12 months up 130 basis points. The ’22 vintage seasoned up 220 basis points in that three-month period. It seems fairly dramatic. The ’22 vintage was outperforming the 2019 vintage three months ago, and now it’s underperforming it by 60 basis points. Can you really help us understand what’s going on there?

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Q&A Session

Raul Vazquez: Sure. So, Rick, this is Raul. I think as we mentioned during the script comments, we are seeing borrowers that are just feeling stress in the current macro environment, right? Although inflation is slowing down, prices continue to be elevated, more and more surveys indicate that consumers are concerned about just kind of their own financial situation. And I think we’re starting to see that now in that Q3 vintage. The reason why we think Q4 and Q1 could look different is Q3 only benefited from the July 2022 tightening. The Q4 vintage included not just that tightening, but a significant tightening in December of 2022, including returning customers. And then Q1, that whole vintage, right, has the benefits of that December tightening.

So, we continue to really be focused on servicing, collections and underwriting, but we recognize that this is a different environment than that 2019 pre-pandemic environment in which there was an inflation, volatile fuel prices, obviously, no geopolitical issues. So, we’re pleased with where Q4 and ’23 are, but we continue to watch them closely and continue to focus on tightening to make sure that we get the outcomes that we want.

Rick Shane: Got it. Okay. Thank you. Second question, comparing those slides. The way I read this, it actually looks like the Q4 vintage, for example, the ’22’s three months ago were showing a 3.5% loss rate. It’s now 3.1%. Why is the Q4 vintage showing down when you compare the slides versus last quarter? I just don’t understand that.

Raul Vazquez: Yeah. It’s a good question, Rick. So, on that page, in the prior deck, we were looking at net charge-off rate and 30-day delinquency rates. We decided in this presentation only show net charge-off rates because we would also get questions about how this particular slide compared to static pool information, and to include the delinquency rates didn’t make it a good comparison to the static pool information. So that’s why you see it as kind of net charge-off rates in this deck, and that’s what it will be going forward.

Rick Shane: Got it. And I see the language difference. I appreciate that. Okay. Last question, and this is a bigger question. But one of the challenges that you face is that fair value accounting at this point is really exacerbating the volatility in quarterly earnings and people’s ability to understand them. And I realize that there are some pretty significant optical challenges associated with establishing CECL reserves for loans that have lives as short as yours do. But the trade-off is that it will create a much more linear story around earnings and probably a little bit more predictability. Is it worth reassessing that at this point? And what are the accounting requirements to change from fair value to reserve accounting at this point?

Jonathan Coblentz: Sure. Rick, thank you for your comment. And we do recognize the volatility that the fair value has created in this environment. To answer the second question first, it’s an election that any company can make. So, we could to choose to make that election in the future. However, we still believe that fair value accounting for our loans continues to highlight their value. You may recall from our prior earnings call that we indicated that we were going to stop accounting for new financings as fair value, and we would account for them as amortized costs. So for example, the Castlelake securitization that we just closed, that’s going to be on an amortized cost basis. So, the bonds that we previously had fair valued, we can’t switch them back, but that will run off. And so, I do think by removing the liability side of the equation, over time, we will simplify things.

Operator: Thank you. Our next question is coming from John Hecht from Jefferies. Your line is now live.

John Hecht: How are you guys? Thanks very much. First one, just on the — Raul, I think you kind of expressed this, but I just want to make sure, the cost saves, they’re kind of across the board? Or are they more focused on kind of pushing out maybe some of the new initiatives? Or how do we think about kind of the layering of cost saves across the business?

Raul Vazquez: They’re pretty much across the board. They touched every department in the organization. So, it’s a combination of both compensation savings through headcount reduction and the non-comp savings and certainly narrowing our focus by eliminating the embedded finance partnership, eliminating the investing and retirement product, those contribute to the savings as well, John.

John Hecht: Okay. Then — and I know you guys have talked about pushing some price increases out to enhance the risk-adjusted margin. Do you still have more room there? Is it — out of the 40 states that you’re moving into, is there just a subset of those that you have more room? Maybe can you give us a sense for where yields might go?

Raul Vazquez: Yeah. I think we have a bit more room. We did share that our 32.5% portfolio yield was up 30 basis points quarter-over-quarter. So, we think we’ve done a good job, John, throughout the year, increasing pricing. And at the end of the year, we’ve shared that will end up with our year-end portfolio yield being 200 basis points higher than it was at the end of 2022. So, we think we’ve taken a lot of the improvement already. From here on out, it’s going to be smaller improvement.

John Hecht: Okay. And then — so I think the share count jumped this quarter. Was that tied to some of the, I guess, the warrants for the prior debt deal? Anything we should think about with the share count in the next couple of quarters?

Jonathan Coblentz: No, I think the share count should be relatively stable going forward.

John Hecht: And then, the last one is the flow arrangement, not the Castlelake deal, but the other one. I think you mentioned you’re going to be getting servicing income in this net. Do you expect to make any gain — will you be taking a gain on those asset sales as well?

Jonathan Coblentz: Great question, John. We expect that on a gain basis, it will be breakeven for us. So, we just economically wouldn’t expect to have a gain that we will have with servicing fee income. But the real win in this relationship is the Access Loan borrowers who are successful with the loan, they will become candidates for returning loans in — starting in the latter half of 2024. You may recall, we’ve had this program in the past, and it worked out really well for us. So, we’re looking forward to restarting it with Ellington.

John Hecht: Yeah. So almost like more of a customer acquisition type opportunity.

Jonathan Coblentz: Absolutely. No, that’s right. We’ll be able to serve more new customers without taking credit risk exposure and get the benefit of the customer life cycle.

John Hecht: Okay. Great, guys. Thank you very much.

Raul Vazquez: Thank you, John.

Operator: Thank you. [Operator Instructions] Our next question is coming from Lance Jessurun from BTIG. Your line is now live.

Lance Jessurun: Hey, guys. Thanks for taking my question today. In terms of interest expense, obviously, that contributed a little bit to the miss. But assuming we’re in a bit of a higher for longer scenario and rates are relatively stable, how are you thinking about the cadence of your interest expense over time? I know without giving guidance into ’24, but looking at where rates are versus where you expect your funding mix to be over ’24 and ’25, how should we kind of think about that cadence going forward?

Jonathan Coblentz: Yeah, that’s a great question, Lance. So, what I can point you to is interest expense for the third quarter was $47 million, and I said in my remarks that we expected interest expense for the fourth quarter to be $51 million to $53 million. So that gives you a quarter-over-quarter type cadence. We would expect that there’s going to be some continued upward pressure into 2024 just because the existing financings that we have that are at a lower cost of interest are going to start either going into amortization and coming up for renewal over the course of the year next year.

Raul Vazquez: And Lance, certainly, that view is part of what drove our thinking on the cost reductions and taking $80 million of expense out of the business on an annualized basis as we go into 2024 is just this certainly this view of higher for longer, with longer apparently getting longer and longer over time.

Lance Jessurun: Got it. Appreciate that. And then in terms of the fair value, I know we talked a little bit about what drove it this quarter. Obviously, it gets really lumpy, and a lot of it, you kind of attributed to lingering inflation plus gas prices. But if you could give us any color just on what you’re seeing from your customer base? I know, obviously, they’re always kind of in the state of a permanent recession, but we’re in a new scenario where basically everything costs a little more. Anything that you can give us in terms of color on how you see the broader market evolving over the next year or two that kind of gives us a little insight into how we should think about modeling the fair value marks, especially as we’re a little distance from that side of the borrower group?

Raul Vazquez: Sure. So, I’m certainly reluctant to try to give you a view over the next year or two, but I can certainly give you a sense of what we’re hearing from our members when we speak to them from a collections perspective. So, the top reason that people give for why they’re having trouble making their payments is just some sort of an income delay, right? So, their employers having trouble giving them the income that they’ve earned in that particular time. So that’s the number one reason. Number two is someone has lost their job or they’re unemployed for a period of time. We’ve stated in the past that our borrowers, right, when they lose their job, they quickly try to pivot to find another job. But that’s certainly the number two reason why people are unable to make their payments.

Number three is something that’s medical related. So, some sort of a disability or an illness. And then, the last one, I’ll just focus on the top four, is, again, kind of work related. So, they’ve had a pay cut or they’ve had reduced work hours. So, again, we’re just seeing this kind of softening environment is impacting them. And sorry, that the last one is relevant also in terms of the comments we provided, other bills and expenses, right? Just again, struggling with just the expenses in other areas. So, it tends to be something related to work, something related to other expenses, whether that is an illness or something that is non-medical related, Lance.

Lance Jessurun: Got it. Thanks so much.

Raul Vazquez: Sure.

Operator: Thank you. [Operator Instructions] Our next question is coming from Sanjay Sakhrani from KBW. Your line is now live.

Sanjay Sakhrani: Thanks. Maybe you could just talk about the expense reductions. Could you just talk about what it does to sort of the muscles on revenue growth and maybe even on collections as your cutting costs? I’m just trying to think through the implications it might have to the fundamentals.

Raul Vazquez: Sure. So, on the collection side, there was very, very little done that would touch servicing and collections. In this environment, we thought it was critical to your point, Sanjay, to continue to have the muscle mass that we built up in those areas. On originations, we’ve been cutting the marketing budget. You’ve heard us say that throughout the year. So, there were cuts to the marketing team because we do expect approval rates to continue to be lower than they have been historically. And as a consequence, we’re not going to be spending as much in outbound marketing. So therefore, we felt we could cut some of the marketing team. So, there really were, I would say, deep muscle cuts relative to what we need in originations or in servicing.

Sanjay Sakhrani: Thanks. And maybe just a follow-up on all these credit-related questions. I’m just trying to think through what gives you the confidence that you’ve made the proper adjustments on the underwriting scorecards to continue to grow? I understand you’re not growing on a net basis, but just you’re still originating. I’m just curious sort of — I understand the vintages are definitely performing. But like what kind of adjustments have been made? And what makes this backdrop so much difficult than prior cycles? I’m just trying to think through all of that. Thanks.

Raul Vazquez: Yeah. I mean, I would say just having read the comments of some of the other businesses in our sector, right, there seems to be an indication of stress across borrowers across all of the companies whose transcripts on read. I think it is a very challenging environment because we have had these higher prices for longer. We’ve had the volatility in fuel. The job market is starting to soften a little bit. So, I think those are things that we’re all dealing with from an industry perspective. In terms of what we look at, Sanjay, to try to ascertain the right level of originations, it’s exactly what you said. We look at the vintages, so we look at first payment defaults, we look at what do the roll rates look like, what do early delinquency trends look like in each of the vintages, and that’s how we go ahead and continue to make adjustments.

To be clear, we’ve been tightening throughout 2023, and, to be more specific, because I know you’re asking for specificity, it’s not just looking at approval rates, it’s looking at what is the average loan size, what is the average term, what is the distribution in terms of who we’re lending to. We shared in comments that Vantage scores over 660 now or 49% of our originations in Q2 of 2022, that was one-third. So, we are looking for higher cash flows, higher credit scores, and we’re reducing our exposure from an average loan size and average term with some of the segments of our borrowers, Sanjay.

Sanjay Sakhrani: Okay. Thank you very much.

Raul Vazquez: Thank you.

Operator: Thank you. Next question is a follow-up from Rick Shane from JPMorgan. Your line is now live.

Rick Shane: Thanks for taking my follow-up this afternoon. Just one thing. You guys have talked about some of the things that you’re seeing in the labor markets. I’m curious when you delve into it, if you’re seeing anything either on a geographic basis or on an industry basis that’s noteworthy? Are you seeing weakness in particular regions or particular job sectors?

Raul Vazquez: We’re not seeing differences today in terms of the regions that we would call kind of dramatic or noteworthy. From an industry perspective, I know there have been some areas where we have been tightening a little bit relative to other industries, Rick. So, we have seen some differences from an industry perspective.

Rick Shane: You want to be — to steel Sanjay word, could we get a little more specificity on that, or do you want to be — do you want to maintain the discretion on that?

Raul Vazquez: Yeah. Let me just follow up on the most recent numbers that we have on that, Rick, is — so just give me — we weren’t prepared to share that at this moment. So, just give me a few minutes, and we’ll try to make sure that we provide an update on that.

Rick Shane: Terrific. Thanks. It didn’t strike me as a question you would normally not. It struck me as a question you would normally answer. I was about to phrase that question like a quadruple negative. So, I was just a little surprised. So thank you. Happy to wait and hear the answer after you take another caller.

Raul Vazquez: Yeah, sure.

Operator: We reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Raul Vazquez: Well, I want to say thank you once again for joining us on today’s call, and we look forward to speaking with you again at the next quarter. Thank you very much.

Operator: Thank you. That does conclude today’s teleconference webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.