Oportun Financial Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Oportun provides technology-enabled consumer lending, principally unsecured installment loans to customers with limited or no traditional credit history. The quarter was materially affected by the COVID-19 pandemic and a change in loan accounting.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $163.4 million | $138.3 million |
| Net revenue | $80.6 million | $98.7 million |
| Operating expenses | $98.6 million | $78.7 million |
| Net income (loss) | $(13.3) million | $14.6 million |
| Diluted EPS | $(0.49) | $0.51 |
| Operating cash flow | $52.1 million | $47.2 million |
- Revenue increased 18.1%, mainly reflecting a 22.0% increase in average daily principal balance to $1.86 billion. Interest income rose 18.9%; non-interest income rose 9.9%.
- Net revenue declined as the decrease in fair value was $66.5 million, versus $25.4 million in Q1 2019. The 2020 amount included $41.4 million of net charge-offs and a $25.0 million net fair-value mark-to-market decrease. Operating expenses rose 25.3%.
- Adjusted EBITDA, a non-GAAP measure, was $17.9 million versus $18.9 million. Adjusted net loss was $1.2 million versus adjusted net income of $9.6 million. Operating efficiency increased to 60.3% from 56.9%; adjusted operating efficiency increased to 57.8% from 55.8%.
- Aggregate originations rose 4.1% to $432.8 million, although the number of loans originated fell 5.1% to 143,150. Active customers grew 11.1% to 777,194. Customer acquisition cost rose 20.6% to $170.
- Annualized net charge-off rate was 8.9%, compared with 8.3%; 30+ day delinquency was 3.8%, compared with 3.6%. Net charge-offs were $41.4 million versus $31.3 million.
Balance sheet, debt and liquidity
- At March 31, total assets were $2.12 billion, total liabilities $1.63 billion and stockholders’ equity $483.5 million. Loans at fair value were $1.76 billion; their unpaid principal balance was $1.83 billion.
- Cash and cash equivalents were $144.8 million and restricted cash was $61.3 million, for combined cash of $206.1 million. Q1 investing cash use was $39.3 million and financing cash provided was $57.2 million.
- Balance-sheet borrowings comprised $279.1 million of secured financing, $999.1 million of asset-backed notes at fair value and $199.6 million of notes at amortized cost. The $400 million warehouse facility had $120 million undrawn at quarter-end. The company reported compliance with debt covenants.
- Management stated it had more than 12 months of liquidity runway without accessing the securitization market, assuming continued operations and payment of debt obligations. This is a management estimate, not a guarantee.
Material changes, outlook and risks
- Accounting change: Effective January 1, 2020, Oportun adopted ASU 2019-05 and elected fair value accounting for loans previously measured at amortized cost. This eliminated the amortized-cost loan portfolio and separate loan-loss provision for 2020; estimated lifetime losses are reflected in fair value. Adoption increased opening retained earnings by approximately $4.8 million. Comparisons with 2019 are therefore affected by accounting presentation and are not fully like-for-like.
- Fair-value sensitivity: The loan portfolio’s fair-value price fell from 104.5% of principal at December 31 to 96.0% at March 31, reflecting higher discount rates and expected cumulative charge-offs. Fair-value notes also declined in price amid market illiquidity. These estimates rely on assumptions and can make reported earnings volatile.
- COVID-19 response and outlook: Management tightened underwriting, reduced loan sizes by credit tier, strengthened employment verification, cut marketing, and expanded payment deferrals and reduced-payment options. It expected charge-offs to increase and new-product growth to be slower in the near term. As of March 31, 6.1% of owned principal balance was in active emergency deferral; this reached 14.6% by April 30. April figures were preliminary: originations were $41.8 million, revenue $48.6 million, and 30+ day delinquency and annualized net charge-off rates were 4.0% and 9.4%, respectively. The filing provides no formal full-year earnings guidance.
- Management cited uncertainty around pandemic duration, customer repayment capacity, loan demand, funding-market access, credit spreads and securitization liquidity. Other risks include debt covenant or early-amortization triggers, valuation-model uncertainty, regulatory changes, cybersecurity and operational disruption.
- Two notable legal matters remain unresolved: a shareholder fiduciary-duty suit and a trademark dispute; the latter’s summary-judgment motion was denied, with no trial date set. The possible loss or range of loss was not estimable. A prior-period $1.9 million liability and $1.0 million insurance receivable were disclosed for the trademark matter.
Important facts for investors to verify
- How subsequent delinquency, deferral, payment and charge-off trends developed, including the effect of hardship deferrals on reported credit metrics.
- Whether fair-value assumptions and loan/note marks proved reasonable as pandemic conditions and credit spreads changed; distinguish cash performance from non-cash valuation effects.
- Actual liquidity runway, warehouse availability, securitization capacity and compliance with collateral and performance triggers.
- Whether originations, acquisition costs, operating expenses and new-product plans evolved in line with management’s stated response.
- Updates on the two lawsuits, including potential financial, operational or trademark consequences.