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Oportun Financial (NASDAQ:OPRT)
Q1 2020 Earnings Call
May 14, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the Oportun Financial Corporation's first-quarter 2020 earnings conference call. [Operator instructions] Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Nils Erdmann, vice president of investor relations. Mr.

Erdmann, you may begin.

Nils Erdmann -- Vice President of Investor Relations

Thanks and good afternoon, everyone. Joining me today to discuss Oportun's first-quarter 2020 results are Raul Vazquez, chief executive officer; and Jonathan Coblentz, chief financial officer and chief administrative officer. Before we get started, let me remind you that some of the remarks made today will include forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements.

A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in today's earnings press release. 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. Also on today's call, we will present both GAAP and non-GAAP financial measures, which we believe will provide useful information. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our first-quarter 2020 financial supplement, as well as the Appendix section of the first-quarter 2020 earnings presentation.

All of which are available on the Investor Relations website at investor.oportun.com. In addition, this call is being webcast and an archived version will be available after the call on the Investor Relations portion of our website. With that, I will now turn the call over to Raul.

Raul Vazquez -- President and Chief Executive Officer

Thank you, Nils, and good afternoon, everyone. We appreciate your taking the time to join us, and we hope that you, your families, and friends are all healthy and safe. I will start with a brief review of our response to the pandemic crisis. I'll discuss some of the decisive actions we have taken in recent weeks, as well as our three areas of near-term focus to successfully operate throughout this period.

Jonathan will then present our first-quarter financial results, followed by an update on our preliminary credit and financial performance for April, as well as a few early reads for May. Now let me take you through our three near-term areas of focus: one, serving our customers; two, credit; and three, capital and liquidity. I'll start with what we are doing to serve our customers. The health and safety of our employees and customers is our top priority, and we are taking all necessary precautions in accordance with the guidelines from the Centers for Disease Control and state and local authorities.

As a financial services provider, Oportun is deemed part of an essential critical infrastructure sector by the Department of Homeland Security. So we are continuing to serve our customers through our omnichannel network, in person at our retail locations, over the phone through our contact centers and online through our end-to-end mobile solution. As of April 30, 337 of the company's 342 retail locations remain open to serve customers. And with the exception of our stores in New Mexico that were closed by state order, everyone who wants and is able to work at full schedule can do so.

Our contact centers also remain in operation, which enables our customers to apply for a loan over the phone by speaking directly to one of our contact center representatives. Thanks to our omnichannel technology, our contact centers have continued to meet all service levels with an average time to answer a call of less than 10 seconds despite significantly increased call volumes. We proactively increased our customer service and collections capacities through new hires and cross-training of existing personnel. We have also made investments in technology that allow a significant portion of our contact center staff to work remotely if they have to.

I am incredibly proud of how all of Oportun's employees have come together as a team during the last eight weeks and how much we have accomplished as a business. I am especially grateful to our retail and contact center employees who have been working tirelessly to help our customers throughout this pandemic. Moving on to credit. Because of our technology investments, we were able to move quickly to tighten our underwriting criteria and rapidly deploy changes into production.

For example, we previously used industry and regional factors in our underwriting scorecard and have now increased the weighting of these factors to reflect the changing employment dynamics in those industries and regions. The adaptability of our scoring and decisioning platform and the speed at which we can make adjustments enabled us to reduce loan sizes by credit tier and better manage credit outcomes. We continue to make such adjustments based on new data. In anticipation of the economic impact of the pandemic and the increasing unemployment rate, we also implemented more stringent employment verification and increased recency requirements for proof of income.

Additionally, we have implemented incremental changes to our pricing, servicing, and collections capabilities. The net effect of those actions is that we continue to lend to income and employment verified customers who meet our more stringent credit criteria, and we've implemented tighter underwriting as part of our strategy to navigate this dynamic situation. Our credit tightening, along with an overall lessening in demand in applications in recent weeks has contributed to reduced originations. In terms of payments, we continue to see strong customer payment activity and customers are availing themselves of our omnichannel capabilities.

For the month ended April 30, over 68% of our customers were making payments outside of Oportun's retail locations, and over 66% of all customers were paying via ACH or debit card. Now let me talk about how we've managed credit performance during this difficult time. In addition to the verification and underwriting changes we've implemented, we have been offering our customers emergency hardship deferrals, which allow them to skip payments for 30 days to give them time to get back on their feet. We saw emergency hardship deferrals peak at 14.6% the last week of April, as the unemployment rate continues to rise.

And since that time, we have seen this rate decrease significantly to 8.6% as of May 12. We expect this trend to continue to improve as more of the economy reopens, and our customers are able to get back to work. In fact, we are starting to see the first set of customers come to the end of their 30-day emergency hardship deferral period, and over 60% of those deferrals with a payment due in April have made a payment. To track the impact of the pandemic, we also closely monitor early stage delinquencies, which we disclosed on Page 11 of the earnings deck.

As you can see from that slide, eight- to 14-day delinquencies decreased from March to April and have subsequently increased as of mid-May. However, keep in mind that we offer customers grace periods of up to 14 days before a late fee is assessed, and we know that Mother's Day leads to temporarily lower payment rates. For 15- to 29-day delinquencies, we've seen a steadily decreasing and encouraging trend. Our 30-plus day delinquency rates for the periods ending March 31, April 30 and May 12 were 3.8%, 4%, and 4.1%, respectively.

Our annualized net charge-off rate was 8.9% for the first quarter, which was better than our previously stated projection, demonstrating our strong credit performance prior to the impact of the pandemic. Our annualized net charge-off rate for April increased to 9.4%. The final near-term area of focus for us is capital and liquidity. In terms of our liquidity position, based on stress test scenarios, we continue to have more than 12 months of liquidity runway without accessing the securitization market due to our well-established and diversified funding program.

We intend to prudently manage our liquidity position over the coming months, conserving our cash position to ensure our continued service to as many of our customers as possible. As of the end of March, we had $206 million of cash, which decreased to $185 million as of April 30 due to the timing of the repayment of our warehouse line as our loan portfolio is paid down. Additionally, our business generated $52 million of cash from operations in the first quarter, which bolstered our liquidity. We have a strong balance sheet with $469 million in adjusted tangible book value and low leverage.

Given the strength of our revenue, balance sheet and liquidity position, as well as the importance of our retail locations and taking payments and originating loans, we have not laid off any employees, and it is our desire to avoid layoffs. Now that I've updated you on our three near-term focus areas, let me address how we have adapted our strategic drivers to the current environment. I would characterize our current strategy is optimizing for smart, sustainable growth. The current backdrop of the pandemic has created opportunities for us to accelerate our strategic plans in certain areas.

So let me provide a brief update. Since the start of the pandemic, the focus of our efforts has shifted from growth toward conservation of capital and liquidity. We also have seen a reduction in applications, which is impacting our loan originations. While some of this reduced application volume is a reflection of the redirection and pullback of our marketing efforts, we believe that customer demand has lessened as well given the sudden increase in unemployment and decline in consumer spending due to the stay-at-home orders.

In light of the reduction in demand, we put the expansion of our retail footprint temporarily on hold. We are optimistic that we will see demand to return as the economy begins to reopen. While our customers have the option of visiting one of our retail locations, even while stay-at-home orders are in effect around the country, our end-to-end mobile solution is an even more accessible option, and it enables customers to complete the entire lending process online via their mobile device. We believe our mobile solution is particularly valuable in helping our customers navigate the current environment.

As the crisis began to unfold, we demonstrated the ability to use our omnichannel network for servicing. We enhanced our mobile end-to-end solution to provide additional features to simplify and expedite the origination and payment processes. We also leveraged our technology infrastructure to enable our retail agents to help with customer outreach. Each of our retail locations was enhanced to become a mini contact center, able to respond to two-way SMS chats with our customers, make outbound calls, and provide service to customer inquiries.

To maintain our contact center service levels and abide by social distancing requirements, we deployed secure technology to enable our contact center agents to work remotely. Currently, we have over 800 agents working from home on a daily basis. We also are in the process of phasing in an updated version of our risk scorecard for returning customers. Similar to V10, which was designed specifically for our new customer population, the latest version of our risk model represents an improvement in our ability to manage credit risk for our returning customers, especially in our fast-growing mobile channel.

This phase-in is planned to start in the next few weeks. Now let me provide you with an update on auto and credit card. For auto, we began piloting our personal loans secured by a vehicle last week. Even before the impact of the pandemic, we saw secured personal loans as an opportunity to serve more customers and offer larger loans as an alternative to an unsecured loan to the customers that we serve today.

With our tighter underwriting posture, we believe this capability will be even more valuable today. In order to devote sufficient resources to making secured personal loans a success, we have stopped marketing our direct and auto refi offerings, but we'll revisit our strategies for these products in the future. For credit cards, we are very pleased with the initial results of the Oportun Visa Credit Card, which was launched in December. In response to market conditions, however, we are slowing down growth for the time being until we have gathered more credit performance data.

We remain optimistic that as the economy starts to open, our opportunity for growth will return. We are already seeing some initial positive trends in the first two weeks of May. To be well prepared to capitalize on this, we continue to explore ways to enter new geographic markets via state licensing or through other means, including a potential bank sponsorship to offer our personal loan products on a nationwide basis. Although there are very real challenges for us to overcome, Oportun has been lending for 14 years, and we are applying many of the valuable lessons that we learned while managing through the Great Recession.

By leaning on this past experience and leveraging all of the technology we have built since then, Oportun is again proving resilient, and I firmly believe that our company will be even stronger when this crisis finally recedes. We will continue to manage through the current environment thoughtfully by prioritizing serving and supporting our customers while protecting and delivering long-term value for shareholders. I'll now turn the call over to Jonathan, who will walk you through a more in-depth discussion of our first-quarter financial results, and then we'll open the line for your questions. Jonathan?

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Thanks, Raul, and hello, everyone. Let me start by echoing Raul's appreciation to those of you joining us today on this call, and I hope you and your loved ones are healthy and safe. As you may recall, in addition to GAAP, we also evaluate our performance based on fair value pro forma results, which we believe present a more consistent view of the underlying trends of the business. Unless I state otherwise, all the metrics that I will now share with you will be on a fair value pro forma basis for the purposes of comparison to prior-year periods.

A full list of definitions and reconciliations can be found in our earnings materials. We continue to operate in a very fluid environment. So while I'll provide you with a summary of our first-quarter results, I'll also devote some time to discussing our insights from the month of April and a few early reads for May. Through mid-March, we were on track to deliver double-digit origination growth but then shifted our focus to capital and liquidity preservation.

The ensuing steps we took to adapt to the changing environment led to reducing our credit risk exposure and making the appropriate modifications to our servicing strategy. In late March, we saw a reduction in loan applications, potentially attributable to a redirection of our marketing efforts, as well as reduced demand by our customers. This impacted our aggregate originations, which were $432.8 million for the first quarter, up 4% from the prior-year period. Despite this impact to our originations in the last two weeks of March, on a GAAP basis, total revenue for the first quarter was $163.4 million and grew 18% year over year.

Fair value pro forma total revenue, which is now the same as GAAP total revenue for the first quarter, was also $163.4 million, up 19% over the prior-year quarter, driven by strong growth in interest income and noninterest income. Our interest income increased to $150.7 million, up 20% year over year as we grew our receivables portfolio. Our managed principal balance at end of period grew 20% over the prior-year quarter to reach $2.2 billion. We also saw a slight decline in our portfolio yield from 33% in the first quarter a year ago to 32.5% for the most recent quarter.

Noninterest income, which includes cash gain on sale from our whole loan sale program, increased 10% to $12.7 million. The growth in the volume of loans sold was slightly offset by the lower gain on sale premium of 10% versus 10.7% in the prior-year period. With the reduction in our originations, we reduced the amount of our core loans that we sell from 15% to 10% of originations in order to ensure we have sufficient collateral to replenish our revolving asset-backed bonds. We continue to sell all of our access loans that we originate.

For the first quarter, net revenue, which is our total revenue after interest expense and net change in fair value, was $92.7 million, up 3% year over year. The growth in net revenue was impacted by the decrease in the value of our loans offset by a decrease in the value of our debt. Interest expense of $15.9 million was up 11% year over year. The higher interest expense was driven by an increase in our average daily debt balance of 18% year over year.

Our cost of debt decreased slightly to 4.2% in Q1 2020 relative to 4.4% in the same period a year ago. Net increase or decrease in fair value or net change in fair value includes our current-period principal net charge-offs and mark-to-market on our loans and debt. We provide a summary of the net change in fair value in our Q1 2020 earnings presentation that is available through our investor relations website. As you'll see on Page 18 of the presentation, the first quarter $54.8 million net decrease in fair value consisted of a $155.1 million mark-to-market decrease in our loans receivable, a $141.7 million mark-to-market increase related to our asset-backed notes and current-period charge-offs of $41.4 million.

Let me take you through the drivers of our fair value marks in greater detail, starting with our asset-backed notes. We set the fair value of our asset-backed notes based upon March from a third-party marketing service used by institutional investors and compared the prices to March from dealers and available trading data to validate them. As of March 31, 2020, the weighted average price of our asset-backed notes was 90.5%, down from 101.1% at December 31, 2019, reflecting the significant dislocation in illiquidity in the asset-backed market as a result of the economic impact of the pandemic. This significant reduction in the fair value of our bonds resulted in a $141.7 million increase in net change in fair value and net revenue.

As of April 30, 2020, the prices of our bonds have declined to 89.1%, reflecting continued dislocation in the asset-backed securities market. The $155.1 million decrease in fair value of our loans receivable was driven by a quarter-over-quarter decrease in the fair value price for our loans from 104.5% to 96% as of March 31, 2020. The decrease in fair value was mainly driven by two factors: first, the increase in the discount rate from 7.77% as of December 31, 2019 to 12.78% as of March 31, 2020; and second, the increase in our remaining life of loan charge-offs from 9.51% at December 31, 2019 to 14.56% at March 31, 2020. I will now provide more details on those two main drivers.

First, I'll start with the discount rate. We adjust the discount rate we used to fair value our loans based upon changes in the yields of our asset-backed notes. The 501-basis point increase quarter over quarter is consistent with the weighted average increase in yield on our bonds. The second driver of reduction in the fair value of our loans is the 505-basis point increase in our remaining life of loan charge-off assumptions.

Our charge-off assumptions are based upon our experience in the last recession, where we had a statistically significant pool of loans outstanding, as well as our experience providing hardship deferrals to our customers in Houston impacted by Hurricane Harvey in 2017, adjusted for projected unemployment of 15%, which is higher than the previous recession. However, our assumptions did not include any benefit connected to government stimulus efforts because we chose to wait to see the actual impact on borrower repayment behavior. We've provided some supplemental disclosures regarding our fair value assumptions on Page 42 of the earnings deck. As of April 30, 2020, the fair value of our loans declined to 95.1% due to an increase in the discount rate, offset by a decrease in remaining life of loan charge-offs.

The discount rate increased to 14.09%, consistent with the increase in yields on our asset backlogs. Remaining life of loan charge-offs decreased to 13.85% due to plateauing of deferrals and previously deferred loans returning to repayment. We believe that the delivery of stimulus checks and increased unemployment benefits are helping our borrowers. Our operating expenses for the first quarter were $98.6 million, up 25% over the prior year.

Operating costs associated with our auto and credit card products are included in our overall opex. And Page 19 of the earnings deck provides some additional detail regarding these costs. For Q1 2020, we recognized $4.2 million of operating expense related to these investments. These investments contributed to our year-over-year opex increase.

As a result, adjusted operating efficiency was 57.8%, 200 basis points higher than the comparable quarter last year and consistent with our adjusted operating efficiency in the fourth quarter of 2019. While actively identifying and reducing discretionary spend across the company, we have increased spending to protect the health and safety of our customers and employees. And we continue to invest in those areas that will enhance our company over the long term, such as completing the development of our secured personal loan product. Our customer acquisition cost for the first quarter of 2020 was $170, up from $141 in the prior-year quarter.

The increase in CAC was driven by the decline in number of loans originated we started to see in the second half of March. Our overall market investments have also been reduced by approximately 35% to 40% for the second quarter as we look to redirect our efforts to manage credit risk. In April, we saw a CAC of $574 due to reduced customer demand and tighter credit approval criteria. While we have reduced our marketing budget, we continue to employ all of our sales team in retail locations and contact centers, which has also contributed to elevated CAC.

We believe it is important for us to maintain current staffing levels in order to ensure we can meet customer demand as the economy reopens. Our effective tax rate was 26% for Q1 2020 as compared to 27% in Q1 2019. The reduction in our effective tax rate reflects our net loss from operations, which on a GAAP basis, was $13.3 million versus net income of $14.6 million in the prior-year quarter. This equated to a net loss per share of $0.49 versus diluted earnings per share of $0.51 in the prior-year quarter.

Our adjusted net loss per share was $0.04 based on adjusted net loss of $1.2 million versus adjusted EPS of $0.43 and adjusted net income of $9.6 million in the prior-year quarter. Adjusted net income or loss is the numerator of our adjusted return on equity, which was minus 1% for Q1 2020 versus 10.6% in the prior-year quarter. Over time, we believe this metric should improve, and post crisis, our longer-term goal remains to achieve high-teens ROEs on a consolidated basis. Given the impact of the fair value marks on our bottom line, we believe it continues to be very valuable to use adjusted EBITDA as a proxy for our pre-tax cash profitability.

In addition to adding back taxes, depreciation, amortization, stock-based compensation, and onetime events, adjusted EBITDA also excludes the noncash impact of fair value accounting. For the first quarter, our adjusted EBITDA was $17.9 million, compared to $18.9 million in the prior-year quarter. Raul already shared with you the highlights of our credit performance, but I'd like to share more with you regarding the deferrals and repayment options we are providing to our customers who have told us they've been economically impacted by the pandemic. An emergency hardship deferral allows a customer to skip payments for 30 days.

Interest continues to accrue on along during the deferral period and the skip payments are added on to the end of the customer's loan repayment schedule, extending the term of the loan. We begin reaching out to customers in deferral a week prior to their next scheduled payment to ask if they are capable of making a payment or whether they remain economically impacted by the pandemic and need another emergency hardship deferral. We have seen the rate of new emergency hardship deferral significantly diminish, our own curve flattening, if you will, and we believe we have already reached our peak in late April. As of April 30, 2020, 14.6% of owned receivables principal balance was in emergency hardship deferral.

As of May 12, emergency hardship deferrals have declined to 8.6% of owned receivables principal balance. These trends are encouraging, and we hope to see them accelerate as the economy reopens. It's also important to note that over 92% of balances that are in deferral were seven days delinquent or less prior to March 16. In addition, over 79% of balances that are in deferral are returning borrowers who are our best customers, with 58% of balances belonging to customers who've had two or more prior loans with us.

Turning now to capital and liquidity. We continue to manage our funding program to maintain a liquidity runway of at least 12 months, meaning that we do not need to access incremental funding or capital during this time period. As of March 31, 2020, total cash was $206.1 million comprised of cash and cash equivalents of $144.8 million and restricted cash of $61.3 million. To evaluate our liquidity is also valuable to look at our cash flow statement.

Adjusted EBITDA includes the impact of charge-offs, but charge-offs are noncash events. For the first quarter of 2020, our cash flow from operations was $52.1 million as compared to $47.2 million for the prior-year period. With respect to funding, we have $1.3 billion in term securitization bonds outstanding that allow us to fund new loan originations for the remainder of each securitization's revolving period which range from September 2020 to July 2022. As of March 31, 2020, we had $120 million of undrawn capacity on our $400 million warehouse line that is committed through October 2021.

Because of the decline in loan originations, as of April 30, 2020, we had $188 million of undrawn capacity on our warehouse line as we have transferred certain loans from our warehouse line to pledge to our securitizations. Until we see a return to receivables growth, we will not need to increase our warehouse line capacity or issue a new securitization. I also want to reiterate the point Raul touched on about our strong capital base. As of March 31, 2020, we had adjusted tangible book value of $468.8 million or $17.27 per share.

In addition to having a strong equity capital base, we run our business at low leverage. Our debt-to-equity ratio was 3.0 times, a reduction from 3.6 times the prior year, as the $60.5 million net proceeds we raised in our IPO in September reduced our need to issue debt to fund the strong growth of our portfolio in Q4 2019. Turning to our outlook for the second quarter and remainder of 2020. Given the ongoing uncertainty surrounding the duration, severity of the pandemic, we anticipate that our future financial performance will continue to be impacted, but the timing of this impact is too dependent on external factors to reliably set guidance parameters at this time.

We do expect our 2Q operating expenses to be in line with 1Q. For the full-year 2020, we expect our originations and revenue will reflect the overall economic environment. As we discussed, we remain committed to working with our customers during this uncertain time. And just as our technology enabled our rapid response to the impact of COVID-19, it is just as capable of rapidly implementing incremental changes to pricing, servicing, and collections as we emerge from this period.

Based on what we know today, we will continue to monitor and adjust as conditions unfold. That concludes my remarks, and I will now turn the call back over to Raul.

Raul Vazquez -- President and Chief Executive Officer

Thank you, Jonathan. In closing, I want to reiterate that we have built a strong business characterized by low leverage, strong liquidity, and a diversified funding program. Our significant investment in technology is allowing us to rapidly evolve our underwriting and collections approach in order to continue to serve our customers during these unprecedented times. As Jonathan and I have both mentioned, we are cautiously optimistic at this time given recent trends we've shared with you in customer payments and credit, as well as indications that loan applications are beginning to increase.

I began my remarks by expressing thanks to our teams who are working hard during these very difficult circumstances to help our customers. I have never been more proud of our employees than I am now, and I'm confident that Oportun will come out of this crisis even stronger than it was at the start of the year. Thank you all for your time, and now we welcome your questions and comments. Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question is from the line of John Hecht with Jefferies. Please proceed with your question.

Raul Vazquez -- President and Chief Executive Officer

John?

Operator

John, your line is live.

John Hecht -- Jefferies -- Analyst

Sorry, guys. Can you hear me?

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Yes, we can.

Raul Vazquez -- President and Chief Executive Officer

Hi, John.

John Hecht -- Jefferies -- Analyst

OK. Thanks very much. Good to hear your voice. I appreciate all the color from the quarter, and then the update through April is very helpful as well.

First question, Jonathan, just thinking about, if the trends you're seeing in delinquencies and deferrals and so forth, kind of -- and I'm not asking for guidance. It's more just kind of conceptual. If those kind of persisted through the quarter like you've seen, how do we think about what the fair value -- like what the effects on fair value this quarter in terms of any assumptions you might change?

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Sure. That's a great question, John. So first of all, what I'd guide you to is what you've already seen in the transition from our March mark to our April mark, right? So you talked about credit performance in terms of delinquencies. As we said in our remarks, based upon some favorable trends, such as the deferral percentage coming down from a peak of 14.6% to 8.6%, also the percentage of customers in deferral, 60% making payments, that is one of the factors we considered in lowering our remaining cumulative life charge-off assumption from 14.6% to 13.9%.

If we continue to see favorable trends, then it could be that we would take that loss assumption down further. The other part of fair value, as you know, is the discount rate, as well as the marks on the bonds. We saw the yields on our bonds increase, right? So the price traded down during April. That's a function of markets, and that will be sort of an independent variable.

We are seeing the asset-backed market, in general, continue to have increased firmness. Companies are coming to market with deals. So we haven't seen it yet, but it may be that, over time, our spreads, along with the rest of the market, improve. And that would actually be beneficial on the asset side, but then it would be not beneficial on the debt side, right? If the price of our debt were to increase, then that moves against fair value because it's an increase in the value of a liability.

But overall, we expect to see the credit trends based on what we're seeing today improve.

John Hecht -- Jefferies -- Analyst

OK. That's very helpful. And then maybe an unrelated follow-up questions, and we've always appreciated the value of the omnichannel platform and the technology. I'm wondering, over the course of the past several weeks, can you talk about your applications online versus in stores and how that mix is changing and how that impacts the business as well?

Raul Vazquez -- President and Chief Executive Officer

Sure. John, this is Raul. To your point, given the fact that a lot of the country put in place shelter-in-place kind of measures and consumers in general, stop moving around as much, we did start to see diminished traffic to our retail locations. Thankfully, for years, we believed in adding an end-to-end mobile capability, and that has served us very, very well during this time.

And from a road map perspective, we've asked our engineers to prioritize mobile enhancements even higher. It's really our second priority now, second only to managing credit outcomes. So we're really pleased with the performance we're seeing from mobile, and we've decided to continue to enhance the capability even faster given the environment that we're in.

John Hecht -- Jefferies -- Analyst

Great, appreciate it. And good to hear that everybody's healthy.

Raul Vazquez -- President and Chief Executive Officer

Likewise.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Thank you, John.

Operator

Our next question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Sanjay Sakhrani -- KBW -- Analyst

Thanks. Nice to hear that you guys are well. I wanted to dig in a little bit more on the credit quality discussion. I guess, do you guys have a whole lot of insight into your customers' employment situation? For example, how many have been laid off versus furloughed? Maybe how many are essential workers? Because I guess what I'm trying to get at is as we look forward, and let's just assume the stimulus sort of wears off, what is the sort of structural impact to the loss rate going forward.

Thanks.

Raul Vazquez -- President and Chief Executive Officer

Yeah. So that level of detail, we don't really have in terms of the population of customers that we have, Sanjay. What I would tell you is that our belief was that our customers were among the first ones that lost their jobs. So as shelter-in-place took effect as different businesses started to cut back on labor, we believe that our customers were among the first that felt that impact.

As a consequence, you know already that there were a lot of tightening measures that we put in place. We strengthened our verification practices, including verifying that our applicants that were coming in now had a job, and we asked them for even more recent proof of income. So we took a lot of measures because, again, we felt like our customers were among that first wave. I saw some data in just the last day and a half or so that looked at unemployment or job losses -- I'm sorry, with the job losses by income ban.

So there were three lines, that were people that earned less than $50,000, $50,000 to $100,000 and $100,000-plus. And for people that earned less than $50,000, the amount of job losses basically plateaued. So our view right now is that our customers have felt the pain. And that as the economy starts to open back up, our customers will be able to go back to work.

And until then that they are benefiting from the stimulus and unemployment benefits. And that's what we think, by the way, is helping our delinquency numbers.

Sanjay Sakhrani -- KBW -- Analyst

Right. And I guess when we look at the loss assumption you guys have made inside of that fair value mark, are you guys assuming some kind of recovery? I know you mentioned, Jonathan, that you're assuming that deferrals will help like a natural disaster sort of situation. But how have things historically progressed for a given loss rate in your book? And how different is this cycle? And then just one quick other follow-up to David's last question. How many of your customers are actually making payments electronically versus at the branch? Thanks.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

OK. So let me just...

Raul Vazquez -- President and Chief Executive Officer

We'll take the payments first.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Yes, let me start with the first part. So let me tell you, I think, the easiest way to address your question, Sanjay, is to tell you what things we looked at in order to come up with our loss assumption. And it's a triangulation between a couple of three things. One, we've been lending for 14 years, so we have statistically significant experience from the 2008, 2009 Great Recession, where our loss experience actually was relatively quite good in comparison.

And obviously, in the current environment, we're seeing higher levels of unemployment than we did back then, so we've clearly extrapolated for that. The other thing that we looked at very closely is that we have experience with deferrals and helping customers get back on track. Even though this is bigger than a natural disaster, I think it's a very helpful comparison. So in 2017, we had 12% of our portfolio in Houston when Hurricane Harvey hit, and we were able to help customers there.

And so we have a wealth of data from that experience of what happens when you defer customers, give them time to get back on their feet and then work with them potentially to get reduced repayment plans for those who aren't able to get back to a full income but can make some payment. So we've seen that experience, and then we've magnified the fact that we're seeing much higher levels of unemployment than in either of those scenarios in the past. What we didn't factor in, as we discussed in our remarks, was the $4 trillion of government stimulus, and that's because we like to take a data-driven approach, and we haven't seen data on that before. So we decided to wait and see.

How that would impact customer behavior before we factor that in. And as we've talked about before, I think the fact that we are seeing so many customers pay the fact that we're seeing the deferrals go down, the fact that we're seeing good delinquency numbers, potentially, that is an impact from the stimulus that's factored in.

Raul Vazquez -- President and Chief Executive Officer

So just to add one thought to that, and then I'll answer your payment question, Sanjay, the way that we're thinking about that number going forward and updating it is we update it based on actuals. So we look at what percentage of the cohorts of deferrals are actually coming off deferrals, what percentage are making payments, do they continue making payments, do they go into delinquencies. And then obviously, as you can imagine, we manage all the delinquencies carefully. So we would tell you that the change that you saw from Q1 to April is based on actuals.

And then obviously, as we continue to see May season, we'll update that again. And when we tell you Q2, that will, again, be based on actuals. So we're not foolish enough to try to project when things are going to fully recover or what it's going to look like region by region. What we're trying to do is just manage the actuals of the business very carefully.

Let me pause there and see if you have any follow-up questions before we move to payment numbers you asked for.

Sanjay Sakhrani -- KBW -- Analyst

No, that was great. Thanks.

Raul Vazquez -- President and Chief Executive Officer

OK. So on the payment side for the month that ended in April, what we saw was over 68% of customers were making payments outside of our locations. So going back to the question that John asked, we have seen people start to use either payment mechanisms or certainly our mobile solution more. And over two-thirds of all customers, Sanjay, are paying either via ACH or debit card.

Sanjay Sakhrani -- KBW -- Analyst

Right. Thank you.

Operator

Our next question comes from the line of Mark DeVries with Barclays. Please proceed with your question.

Mark DeVries -- Barclays -- Analyst

Thanks and good afternoon. I was hoping you could provide some color on what you think is driving that drop. I believe you said on the deferrals from 14.6%. I thought it was the end of April to 8.6%.

And just a couple of weeks, I mean, it seems like a very big drop. Do you kind of a feel for what caused that to move so quickly?

Raul Vazquez -- President and Chief Executive Officer

Yes. This is Raul, Mark. It's a couple of things. If you think about this number, one of the ways we manage is we think about what are new deferrals coming in and then what are the number of people that are coming off of deferrals.

So in terms of new deferrals, we've seen that number decline significantly, and that goes back to the comment I made earlier that our view is that our customers got hit with the first wave of layoffs. So at the kind of end of March, beginning of April, that was really when we think our customers started to be impacted. And as a consequence, when we started to make these Emergency Hardship Deferrals available, we saw quite a few of them at the beginning, but we're seeing very few being added now. The number of people coming off is what's driving that percentage down.

And you did have those numbers correct. It was 14.6% at the end of April. And as of May 12, it was 8.6%. And that's a combination of people making payments and coming off deferral or the people for whom the deferrals have expired.

And those are really the things that are driving it: the people coming in and then the two reasons I described for people coming out.

Mark DeVries -- Barclays -- Analyst

OK. That's helpful. One of the things I think you've talked about in the past about the resiliency of your customers under stress is the ability to substitute in final term sources of income if they lose their job. Do you have a sense for how many people who are returning to repayment are returning to their old jobs versus maybe being able to find new jobs as some of the needs in the economic shift?

Raul Vazquez -- President and Chief Executive Officer

Yes. We don't know, Mark. That's not something that we ask for our customers. If they're going to make a payment, we don't ask them if it's from a new job or their current job.

So I'm afraid I don't have any insight to provide there.

Mark DeVries -- Barclays -- Analyst

OK. Got it. And then just one last thing. I mean, I think you also cited some positive signs as people return to work.

Do you have a feel yet on the ground? Any difference in like originations, credit performance in some of the states that have opened up earlier, like Texas and Florida versus states that have been slower to open, like California?

Raul Vazquez -- President and Chief Executive Officer

So I won't go into the geographic piece right now because, historically, we haven't disclosed originations that way, Mark. But I'll tell you, though, we recognize that things are very dynamic. We are cautiously optimistic based on the improvements we've seen in originations the last few weeks. So one of the ways that we've chosen to look at it now, just given how different the times are, is not necessarily on a year-over-year basis alone but instead on a week-over-week basis to try to get a sense of have we hit bottom and are we starting to climb out of the bottom.

And we have seen improvements now week over week over the last couple of weeks. So that does make us cautiously optimistic right now.

Mark DeVries -- Barclays -- Analyst

OK. Got it. Thank you.

Raul Vazquez -- President and Chief Executive Officer

Sure. Thank you.

Operator

Our next question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

David Scharf -- JMP Securities -- Analyst

Hey, good afternoon and thanks for taking the questions. And I'll echo previous comments and thanks for all of the April and May data. Everyone's trying to obviously get a handle on what kind of trajectory we're on, and that's very helpful. Raul, you may have addressed this in one of your answers, but I'm curious, is there any color you can provide on who is applying in these last few weeks and, specifically, whether these are new applicants or if they're all repeat borrowers? I mean, it's clearly a positive trend that some other lenders aren't necessarily seeing.

Raul Vazquez -- President and Chief Executive Officer

So I would tell you, David, we are getting both new applicants and repeat applicants. This is clearly a time where there are people that still need capital, either people who don't have a job and are trying to find someone who can help them out or people that do have a job and, maybe because their loved one has lost their job, they want to help out or they've got some unforeseen expense. So we're seeing applications from both new and repeat customers. What I can tell you is the profile of a successful borrower today after the tightening actions that we've taken in both March and April is someone who has proof of income, someone who is more likely to work in an industry that has not been as impacted by the current situation.

In some cases, the risk engines suggest that we verify employment. And in that case, we've been able to get a hold of their employer and verify that the applicant has a job right now. And to your point, because I think this is one of the things that's behind your question, David, the person is much more likely to have been a prior customer. In this environment, we are absolutely skewing toward people who have proven success with our product and payment structure.

David Scharf -- JMP Securities -- Analyst

Got it. No, that's helpful. And maybe just following up on that discussion. When you talked about tightening the underwriting criteria and specifically maybe beefing up income verification.

I think you just gave one example, which maybe calling employers. But can you talk a little bit about in the past and what's changed in terms of the nuts and bolts of income verification and whether you believe that these will be sort of permanent changes to the business going forward?

Raul Vazquez -- President and Chief Executive Officer

So I think as Jonathan described earlier, one of the things that has really helped us is we've been through this situation before in terms of the Great Recession, so we have a playbook that works well for us then. And frankly, we also have the benefit of having the same chain for risk officers. So we not only have the playbook, but we have the person that wrote it still with us, and we've been able to add to that playbook based on the hurricanes, wildfires, other things like that. So just to summarize very quickly, I'm going to answer more broadly first, David.

We've tightened our lending criteria. We adjusted loan amounts overnight. We enhanced outreach efforts to customers. We skewed more to repeat customers.

And then getting back to your specific question, the things that we have done on income verification are we have asked for much more recent proof of income. So if in the past, we would have allowed you to say, give us a pay stamp from three or four weeks ago, now we're going to ask you for your most recent pay stamp just to verify that you are still employed and that you're not necessarily showing us something that is not reflecting your current employment. Whether or not these are going to continue to be permanent changes, I'm not going to speculate on that right now. I think we, like everyone else, are waiting to see how does the economy recover, how quickly do people get back to work and then, once the recovery takes place, is it going to be a stable recovery.

But right now, we think this is the best practice for us to have.

David Scharf -- JMP Securities -- Analyst

Got it. No, no, makes sense. And then I think lastly, Jonathan, just to make sure I wrote this down correctly. As we think about near-term marketing spend, variable costs in the context of reduced demand, did you say that total opex in the second quarter would likely be sequentially flat? Or should we be thinking about it being down?

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

No, I did say that. You heard that correctly. I did say that we would expect Q2 total opex to be sequentially flat around there.

David Scharf -- JMP Securities -- Analyst

Got it. OK. Thank you very much.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Thank you, David.

Operator

[Operator instructions] Our next question comes from the line of Rick Shane with J.P. Morgan. Please proceed with your question.

Rick Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my questions and glad to hear everybody is doing well. I do appreciate all the detail on the fair value marks and the underlying analytics behind that. It's really helpful.

A couple of detailed questions and then sort of a conceptual question. What were the actual repayments on the portfolio this quarter? And what was the gain on sale margin?

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

I'm sorry, you asked what were the actual repayments on the portfolio?

Rick Shane -- J.P. Morgan -- Analyst

Yes.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Yes. So you can actually see that in the slide that we included in the deck. We had some view on the portfolio. Let me get to the right page here because I think this will be helpful.

It's Page 17 of the earnings deck, where we illustrate our operating cash flow and you can see cash flow from investments of minus $39 million. Now there are a few other things in there, but that's the main driver. And then also, you can find more detail in the supplemental earnings spreadsheet that's posted on our investor website that will have the portfolio roll forward. Then in terms of your second question, the gain on sale margin was 10% for Q1.

Rick Shane -- J.P. Morgan -- Analyst

Great. Sorry for the dog in the background. The new reality, I apologize.

Raul Vazquez -- President and Chief Executive Officer

That's quite all right.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

No worries.

Rick Shane -- J.P. Morgan -- Analyst

And then the last question is, look, stock is trading at a substantial discount to tangible book. Your secured notes are trading at significant discounts to par. I realize, in particular, on the fair value notes that may not be attractive to repurchase those because they do offer an attractive hedge against fair value marks, but you also have some notes that are held at amortized cost. I'm wondering, when you're thinking about opportunities and investments, and I realize maintaining liquidity is critical right now, but the opportunities either to buy back some stock or to extinguish some of the debt.

Raul Vazquez -- President and Chief Executive Officer

So, Rick, this is Raul. First, as I mentioned in my remarks, I'm really proud of how our team is executing right now. These are challenging times. There's a lot of dynamic elements in the business.

We didn't spend a lot of time talking about this, but I think, as you know, one of the metrics that we provide is adjusted EBITDA. So that way, our investors can see the underlying strength of the business since it excludes the impact of the fair value, and that number for Q1 was $17.9 million. It exceeded the guidance that we had provided, so we continue to believe that the company is performing well even during these difficult times. On your question of, say, buybacks, that's certainly something we've talked to the board about is thinking about how do we want to use our capital and what is the highest return for our shareholders.

As you pointed out right now, we think that the preservation of capital makes the most sense given how dynamic the environment is, but that is kind of an ongoing conversation with our board.

Rick Shane -- J.P. Morgan -- Analyst

Great. Look, I realize that it's an easy question from my perspective and that if everything gets better from here, buying back stock or redeeming debt is a great call. But if things deteriorate, you're going to certainly wish you had the liquidity. But as a growth company as the market start to normalize, I am curious just how -- and again, how you think about that because there is a trade-off in terms of the growth opportunity.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

How we think about growth in general or how we think about the buyback, just to be clear?

Rick Shane -- J.P. Morgan -- Analyst

How you would -- if you sort of reach the point of feeling all clear about the world, which, again, I think we're all a ways away from that point. But how important is growth versus the opportunity to generate really substantial returns by either redeeming notes or buying back stock at such a huge discount?

Raul Vazquez -- President and Chief Executive Officer

Yes. So the last time we spoke to you, it was a very forward-looking comment on your part. You mentioned that there are times when a team has to understand the need to slow down or even hit the brakes a bit and being very thoughtful about that. And we certainly believe that in this environment, it made sense for us to shift from a growth mentality to one of managing capital carefully and making sure that we are producing great credit outcomes.

That's our No. 1 priority. But I'll tell you, as a team, we remain optimistic that our opportunity for growth will return as the economy starts to reopen. So there was a question earlier David made about opex.

And one of the reasons that we're keeping opex flat sequentially is we believe, and we are working on things that are going to make us stronger on the other side of this event that we're all living through than we were a few months ago. We mentioned in the comments we have introduced now secured personal loan. It is in 20 locations. So we're testing our way into it, and we're excited about the ability to have a secured loan product as the economy starts to reopen.

Credit cards is something we were very pleased with at the beginning, and we just put it on hold out of an abundance of caution. But that's something that we think could continue to be a growth driver, and we continue to look at things like bank sponsorships so that we can offer our product in more states. And the investments we're making mobile and other parts of the business. So you're right.

What we have done is we've made sure that we've taken the right actions from our view today to make sure that we are well-positioned to start to grow then as the economy starts to reopen.

Rick Shane -- J.P. Morgan -- Analyst

Got it. That's very helpful. And it feels like a lot longer than three months ago since we've had those conversations. So thank you, and I appreciate all the hard work that's gone into getting where you guys are today.

Raul Vazquez -- President and Chief Executive Officer

Thank you, Rick.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Thank you, Rick.

Operator

There are no further questions in the queue. I'd like to hand the call back to Raul Vazquez for closing remarks.

Raul Vazquez -- President and Chief Executive Officer

Thank you very much. Well, again, I do want to thank everyone for joining us on today's call, and we absolutely look forward to speaking with you again soon. Take care, everyone.

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

Stay well.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Nils Erdmann -- Vice President of Investor Relations

Raul Vazquez -- President and Chief Executive Officer

Jonathan Coblentz -- Chief Financial Officer and Chief Administrative Officer

John Hecht -- Jefferies -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Mark DeVries -- Barclays -- Analyst

David Scharf -- JMP Securities -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

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