Oportun Financial Corp. — Q3 2021 Form 10-Q
Business context and reporting period. Oportun provides consumer loans and related financial services, primarily to customers with limited or no credit history. Its main product is unsecured personal loans; it is also expanding secured personal loans, credit cards and bank-partner lending. This unaudited filing covers the quarter and nine months ended September 30, 2021, with comparisons to 2020.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $159.1 million | $136.8 million | $432.7 million | $442.9 million |
| Net revenue | $139.5 million | $93.7 million | $370.0 million | $220.4 million |
| Operating expenses | $111.4 million | $101.6 million | $328.1 million | $293.2 million |
| Net income (loss) | $23.0 million | ($6.0 million) | $33.2 million | ($53.6 million) |
| Diluted EPS | $0.75 | ($0.22) | $1.11 | ($1.97) |
| Adjusted EBITDA (non-GAAP) | $18.1 million | ($1.2 million) | $23.3 million | $22.1 million |
- Q3 revenue rose 16.3%, led by higher interest income and loan-sale gains. Nine-month revenue declined 2.3%, as lower interest income outweighed growth in non-interest income.
- Net revenue includes fair-value movements and charge-offs. The net decrease in fair value was $9.0 million in Q3 2021 versus $29.6 million in Q3 2020, and $26.5 million for the first nine months of 2021 versus $177.6 million in 2020. Q3 2021 included a $14.6 million fair-value mark-to-market increase offset by $23.9 million of net charge-offs; the nine-month figures were a $57.2 million mark-to-market increase and $84.2 million of net charge-offs.
- Operating efficiency was 70.0% in Q3 and 75.8% for the nine-month period, compared with 74.3% and 66.2% a year earlier. Adjusted operating efficiency, a non-GAAP measure, was 67.1% and 68.7%, respectively, versus 63.3% and 60.1%.
- At September 30, cash and cash equivalents were $168.4 million and restricted cash was $55.3 million. Total assets were $2.35 billion; total liabilities were $1.84 billion; stockholders’ equity was $511.4 million.
- Debt consisted of $525.5 million of secured financing and $1.163 billion of asset-backed notes, or $1.688 billion combined. The company reported compliance with debt covenants at quarter-end.
- For the first nine months, operating cash flow was $103.7 million, investing cash flow was a use of $316.7 million, and financing cash flow was a source of $268.2 million. Cash, cash equivalents and restricted cash increased by $55.2 million to $223.8 million.
- Q3 aggregate originations increased 119% to $662.1 million; nine-month originations increased 60% to $1.43 billion. Active customers rose 23.7% year over year to 772,361. Q3 and nine-month annualized net charge-off rates improved to 5.5% and 6.8%, from 10.4% and 10.0%.
Material changes and significant developments
- Interest expense fell 21.1% in Q3 and 19.2% for the nine-month period, while reported cost of debt declined to 2.8% and 3.3%, respectively. Leverage as a percentage of average daily principal balance was 86.4% in Q3 and 88.8% for the nine months.
- Sales and marketing expense increased 55.6% in Q3 and 21.7% year to date, reflecting increased marketing investment. Customer acquisition cost nevertheless declined to $152 in Q3 and $166 for the nine months, compared with $207 and $223.
- The company closed 136 retail locations as part of its optimization plan. It recorded $12.8 million of related expenses for the first nine months, including an office right-of-use asset impairment; the plan was substantially complete and management did not expect significant additional costs.
- In September, Oportun replaced its terminated $400 million VFN warehouse facility with a $600 million Personal Loan Warehouse facility committed through September 2024, bearing one-month LIBOR plus 2.17%. It also issued $375 million of 2021-A and $500 million of 2021-B asset-backed notes during 2021, and redeemed several older securitizations. After quarter-end, it announced a further $500 million securitization priced at a 2.48% weighted-average fixed rate.
- The WebBank credit-card retention facility was temporarily increased to $38.5 million; $36.2 million had been utilized at September 30. The MetaBank unsecured-loan partnership launched in August, extending the company’s reach into 21 states outside its licensed footprint.
- Oportun announced on October 8, 2021 that it was voluntarily withdrawing its national bank charter application and planned to amend elements before potentially reapplying.
Outlook, risks and contingencies
- Management said existing cash, expected operating cash flows and available borrowing capacity should be sufficient for operating and capital needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management attributed improved delinquencies and charge-offs partly to economic recovery and customer stimulus measures, and cautioned that the end or reduction of stimulus could affect repayment and credit performance. The company also identifies COVID-19 uncertainty, economic conditions, funding access and cost, interest-rate exposure, and the performance of newer products as material risks.
- Fair-value accounting is a significant source of earnings volatility: loans are valued using Level 3 inputs and management estimates, and changes in credit expectations, interest rates, spreads or payment behavior can affect reported net revenue. Fair Value Loans were 84% of assets at quarter-end.
- The CFPB issued an initial Civil Investigative Demand in March 2021 and additional demands in May and September, focused on legal collection practices from 2019–2021 and pandemic hardship treatments. The filing does not report a resolution.
- In an ongoing trademark and unfair-competition lawsuit, Oportun recorded a $5.9 million liability and a $5.0 million insurance recovery receivable at quarter-end; settlement discussions were ongoing and no trial date had been set.
- The company depends substantially on securitizations, warehouse financing and whole-loan sales. Facility availability is subject to collateral eligibility, performance triggers and covenants. Its new warehouse facility is LIBOR-linked, exposing it to benchmark-transition and floating-rate risk.
Important facts for investors to verify
- Whether lower delinquency and charge-off rates persist as stimulus effects fade; track portfolio performance and the still-maturing 2018–2020 loan vintages.
- How much reported earnings reflect recurring operations versus fair-value changes, charge-offs and non-GAAP adjustments; review the reconciliations before relying on Adjusted EBITDA or other adjusted measures.
- Debt capacity, borrowing-base availability, covenant headroom and refinancing access, including the terms and funding impact of the October 2021 securitization and LIBOR transition.
- Whether higher originations and customer growth generate sustainable profitability after marketing, technology, new-product and partnership costs.
- Developments in the CFPB inquiry and trademark litigation, including any change in estimated exposure or insurance recovery.
- Whether the WebBank and MetaBank partnerships, credit-card expansion and any revised bank-charter strategy meet regulatory, funding and profitability expectations.