Oportun Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where noted.
Business context
Oportun is a technology-enabled consumer lender focused on unsecured installment loans for customers with limited or no credit history. It also offers pilot auto-loan products and a limited credit-card program. The company funds lending through securitizations, a warehouse facility and whole-loan sales.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $136.8m | $153.9m | $442.9m | $434.8m |
| Net revenue | $93.7m | $114.5m | $220.4m | $315.2m |
| Operating expenses | $101.6m | $100.1m | $293.2m | $262.0m |
| Net income (loss) | ($6.0m) | $10.0m | ($53.6m) | $38.4m |
| Operating efficiency | 74.3% | 65.0% | 66.2% | 60.2% |
| Adjusted operating efficiency (non-GAAP) | 63.3% | 57.9% | 60.1% | 57.0% |
| Adjusted EBITDA (non-GAAP) | ($1.2m) | $18.6m | $22.1m | $57.3m |
| Adjusted net income (loss) (non-GAAP) | $4.2m | $15.3m | ($31.7m) | $35.9m |
Q3 revenue fell 11.0% year over year, principally reflecting lower originations, a smaller average loan balance and lower portfolio yield; nine-month revenue rose 1.9%. Net revenue declined more sharply, with the nine-month fair-value decrease rising to $177.6m from $78.6m a year earlier. Q3 net loss included an $8.8m litigation reserve; excluding specified items, the company reported non-GAAP adjusted net income of $4.2m for the quarter. These non-GAAP measures are not substitutes for GAAP results.
Q3 aggregate originations were $302.4m, down 44.4% year over year; nine-month originations were $892.8m, down 37.7%. Active customers were 624,205, versus 745,089 a year earlier. Customer acquisition cost increased to $207 from $128 for Q3. Owned principal balance at quarter-end was $1.572bn, down from $1.692bn a year earlier.
Q3 annualized net charge-off rate increased to 10.4% from 8.1%; the nine-month rate was 10.0% versus 8.0%. The 30+ day delinquency rate improved to 3.5% from 3.8%. At September 30, 1.5% of owned principal was in emergency hardship deferral. Management reported preliminary October data: deferrals of 1.0%, 30+ day delinquencies of 3.6%, and a monthly net charge-off rate of 8.9%.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $139.4m, compared with $167.2m in 2019. Investing activities provided $119.4m, versus $300.0m used in 2019, as loan originations declined and repayments exceeded originations. Financing activities used $231.4m, primarily reflecting redemptions of 2017-A and 2017-B asset-backed notes and related secured-facility funding. Cash, cash equivalents and restricted cash totaled $163.5m at September 30.
Balance-sheet total assets were $1.918bn, liabilities $1.465bn and stockholders’ equity $453.0m. Reported secured financing and fair-value asset-backed notes totaled approximately $1.317bn. The $400m secured-financing facility had $208.0m of undrawn capacity and was committed through October 2021. Management reported more than 12 months of liquidity runway and stated that it expected cash, operating cash flow and available borrowing capacity to cover anticipated requirements for at least 12 months. The company reported compliance with financing covenants.
Material changes, outlook and risks
- Fair-value accounting: Effective January 1, 2020, Oportun elected the fair-value option for loans previously carried at amortized cost. This eliminated the separate loan-loss provision for those loans and makes earnings sensitive to estimated cash flows, credit losses, interest rates and market spreads. Adoption increased opening retained earnings by approximately $4.8m.
- COVID-19 and credit: Management cited pandemic-related uncertainty, tighter underwriting and reduced marketing as drivers of lower applications and originations. It expected elevated charge-offs to continue; additional pandemic-related charge-offs were $11.2m in Q3 and $15.3m for the nine months.
- Pricing and collections: A nationwide 36% APR cap applied to newly originated loans from August 6, 2020. Management acknowledged possible yield pressure, while expecting expanded marketing opportunities could support volume. The company also changed legal collection practices, including suspending new small-claims filings and committing to reduce future filings.
- Legal settlement: A settlement agreement in the Atinar lawsuit was executed in late October. The company recorded an $8.8m reserve in Q3 and nine-month general, administrative and other expense. A separate trademark lawsuit remained pending, with no trial date reported.
- Funding and strategic developments: The November 2014 whole-loan sale agreement was extended through December 10, 2020, with further month-to-month extensions possible; the Access Loan Program sale agreement expired in August 2020 and was not renewed. In October, Oportun raised $39.8m net from selling retained securitization bonds. It announced a MetaBank partnership intended to launch a personal-loan program in mid-2021, subject to execution and regulatory risks.
- Other outlook: Management noted typical fourth-quarter strength in originations and seasonality in credit performance, but said COVID-19 had disrupted usual seasonal patterns. No quantified earnings or revenue guidance was provided in the supplied filing text.
Important facts for investors to verify
- How portfolio credit quality, charge-offs and deferrals evolve as pandemic relief and government stimulus change, including whether preliminary October trends persist.
- The sensitivity and reliability of Level 3 loan fair values, particularly the assumptions for cumulative charge-offs, prepayments, average life and discount rates.
- Whether originations and loan yields can recover under tighter underwriting and the 36% APR cap, and whether higher customer acquisition costs remain elevated.
- Renewal or replacement of the whole-loan sale arrangement after December 10, 2020, and continued access to securitization and warehouse funding.
- The final cost and terms of the Atinar settlement, the status and potential exposure in the Opportune trademark matter, and any other material litigation or regulatory developments.
- Execution, timing and economics of new-product and partnership plans, including the proposed MetaBank launch, and the company’s ability to sustain liquidity beyond its stated runway.