Oportun Financial Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless otherwise stated, financial amounts are in U.S. dollars. Oportun is a technology-enabled consumer lender focused on unsecured installment loans for customers with limited or no credit history; it is also developing auto and credit-card products.
Financial performance and position
- Q2 revenue: $142.7 million, essentially unchanged from $142.6 million in Q2 2019. Interest income rose 4.9% to $136.1 million, while non-interest income fell 48.4% to $6.6 million, mainly because fewer loans were sold and the company sold a smaller share of originations.
- Q2 net revenue and earnings: Net revenue was $46.1 million versus $102.1 million a year earlier. The reported $81.5 million decrease in fair value was a major factor. Operating expenses increased 11.8% to $93.0 million; net loss was $34.2 million, or $1.26 per diluted share, compared with net income of $13.8 million, or $0.52 per diluted share.
- First half: Revenue increased 9.0% to $306.1 million, but net revenue declined to $126.7 million from $200.8 million. Net loss was $47.5 million versus net income of $28.4 million in the first half of 2019.
- Margins and operating measures: Q2 operating efficiency was 65.2% versus 58.4%; adjusted operating efficiency was 60.0% versus 57.1%. Adjusted EBITDA, a non-GAAP measure, was $4.8 million versus $19.9 million. The company attributed weaker profitability principally to COVID-related credit effects and higher operating costs.
- Cash flow: For the first half, operating activities generated $94.0 million, investing activities generated $93.6 million, and financing activities used $125.8 million. Cash and cash equivalents were $139.2 million and restricted cash was $58.7 million at June 30; combined cash and restricted cash totaled $198.0 million.
- Debt and equity: Secured financing was $96.2 million, fair-value asset-backed notes were $1.098 billion, and amortized-cost asset-backed notes were $199.8 million. Total stockholders’ equity was $454.3 million. The company reported compliance with debt covenants at June 30.
- Portfolio: Owned principal balance was $1.643 billion and managed principal balance was $1.938 billion. Q2 originations were $157.6 million, down 66.7% year over year; active customers were 676,830, down 4.8% year over year.
Material changes versus comparable periods
- Q2 interest income grew with a larger average portfolio, but portfolio yield declined 208 basis points year over year. For the first half, interest income rose 11.8%, while non-interest income fell 20.8%.
- Q2 annualized net charge-off rate increased to 10.6% from 7.7%; first-half rate rose to 9.8% from 8.0%. The 30+ day delinquency rate was 3.7% at quarter-end versus 3.4% a year earlier.
- Customer acquisition cost rose to $413 in Q2 from $136, largely because originations fell faster than sales and marketing costs. The company said June originations increased 46% from May, though remained 60% below June 2019.
- Technology and facilities expense increased 29% in Q2 and personnel expense increased 46.5%, reflecting technology and product investment, higher staffing and stock-based compensation. Sales and marketing expense decreased 13.2%.
- Effective January 1, 2020, Oportun elected fair-value accounting for loans previously carried at amortized cost. This eliminated the separate loan-loss provision for the loan portfolio and added approximately $4.8 million to opening retained earnings. It also affects comparisons with earlier periods.
Outlook, risks and unusual items
- COVID-19 and credit: Emergency hardship deferrals covered 5.0% of owned principal at June 30, down from 14.6% at April-end; the rate was 3.9% at July 31. Management reported improving credit trends but expected elevated charge-offs. Q2 included $2.4 million of COVID-19 expenses; first-half expenses were $3.0 million.
- Liquidity outlook: Management stated that cash, anticipated operating cash flows and available borrowing capacity were expected to cover operating and capital needs for at least 12 months. It reported $302.8 million of undrawn warehouse capacity at June 30, falling to $153.8 million after the July 8 redemption of $200 million in Series 2017-B notes. The redemption was funded with $149 million drawn on the warehouse facility and $51 million of unrestricted cash.
- Pricing and collections changes: On July 28, Oportun announced an all-in 36% APR cap for newly originated loans, expected to be fully implemented by mid-August. Management said this may reduce yield but could support volume through additional marketing opportunities. The company also announced changes to legal collections, including dismissal of pending small-claims filings, suspension of new filings and a commitment to reduce future filings by 60%.
- Funding and operating risks: The company relies on securitizations, a $400 million warehouse facility and whole-loan sales. Its main whole-loan sale agreement was due to expire November 10, 2020; the Access Loan sale arrangement expired August 5 and was not renewed. COVID-19, credit deterioration, funding-market disruption, covenant triggers and fair-value model estimates could adversely affect results and liquidity.
- Fair-value sensitivity: Fair-value loans use Level 3 estimates, including expected charge-offs and discount rates. The reported Q2 improvement in loan fair value reflected lower discount rates and lower estimated remaining charge-offs; management cautioned that pandemic conditions remained fluid and actual outcomes could differ.
- Products and legal matters: The company had $4.6 million in auto loans and $2.7 million in credit-card receivables at quarter-end, and had piloted vehicle-secured personal loans. It deferred auto expansion work to focus on service and collections capabilities. Litigation includes the Atinar shareholder case and Opportune trademark dispute; outcomes and potential losses were not clear or estimable in the filing.
- No formal financial guidance: The filing does not provide a clear numerical earnings or revenue forecast. Management noted that lower portfolio balances could weigh on revenue and that pandemic impacts and seasonal trends remained uncertain.
Important facts for investors to verify
- How subsequent delinquency, deferral and charge-off trends compare with management’s expectations, particularly after government support measures change.
- Whether the 36% APR cap affects portfolio yield, originations, customer acquisition costs and profitability, and whether it produces the volume benefits management anticipates.
- Availability and cost of funding after the Series 2017-B redemption, the non-renewal of the Access Loan sale arrangement and the upcoming expiration of the main whole-loan sale agreement.
- How sensitive reported earnings and equity remain to fair-value assumptions, and how the fair-value accounting adoption affects comparisons with prior periods.
- Whether the company maintains covenant compliance and the stated liquidity runway, and how the pending litigation and collections-policy changes develop.