Oportun Financial (OPRT) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2022 Condensed Consolidated Balance Sheets Total assets grew to $2.99 billion, driven by an increase in loans receivable Condensed Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $109,864 | $130,959 | | Loans receivable at fair value | $2,450,987 | $2,386,807 | | Goodwill | $104,162 | $104,014 | | Total assets | $2,992,551 | $2,946,625 | | Liabilities | | | | Secured financing | $473,311 | $393,889 | | Asset-backed notes at fair value | $1,593,435 | $1,651,706 | | Total liabilities | $2,342,615 | $2,342,744 | | Total stockholders' equity | $649,936 | $603,881 | Condensed Consolidated Statements of Operations Total revenue grew to $214.7 million, leading to a net income of $45.7 million for Q1 2022 Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Total revenue | $214,720 | $135,313 | | Net revenue | $205,014 | $110,241 | | Total operating expenses | $147,344 | $106,266 | | Income before taxes | $57,670 | $3,975 | | Net income | $45,663 | $3,019 | | Diluted EPS | $1.37 | $0.10 | Condensed Consolidated Statements of Cash Flow Net cash from operations was $38.6 million, while investing activities used $122.5 million in Q1 2022 Summary of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $38,565 | $18,156 | | Net cash provided by (used in) investing activities | $(122,496) | $8,987 | | Net cash provided by (used in) financing activities | $61,529 | $(12,552) | | Net increase (decrease) in cash | $(22,402) | $14,591 | Notes to the Condensed Consolidated Financial Statements Details significant events including the Digit acquisition, a structured loan sale, and CFPB investigations - On December 22, 2021, the company completed its acquisition of Hello Digit, Inc ("Digit"), a digital banking platform, for a total consideration of approximately $205.3 million[21][37] - On March 31, 2022, the company participated in a securitization, selling loans with an aggregate unpaid principal balance of approximately $227.6 million and receiving $245.0 million in net proceeds[34] - The company's whole loan sale agreement, which required selling at least 10% of unsecured loan originations, was not renewed and expired on March 4, 2022[35][71] - The company and its subsidiary Digit are cooperating with separate Civil Investigative Demands (CIDs) from the Consumer Financial Protection Bureau (CFPB) regarding lending/debt-collection practices and product representations, respectively[74][75][76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Q1 2022 financial performance, highlighting growth driven by the Digit acquisition Key Financial and Operating Metrics Aggregate Originations surged 138.7% to $800.1 million, while the 30+ Day Delinquency Rate rose to 4.5% Key Financial and Operating Metrics | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Members | 1,676,754 | 643,967 | | Aggregate Originations | $800,115 thousand | $335,239 thousand | | 30+ Day Delinquency Rate | 4.5% | 3.0% | | Annualized Net Charge-Off Rate | 8.6% | 8.6% | | Return on Equity | 29.5% | 2.6% | | Adjusted Return on Equity | 34.1% | 10.6% | - Aggregate Originations increased by 138.7% year-over-year, driven by a higher number of applications and increased demand as Q1 2021 was suppressed by tighter pandemic-related underwriting[105] Historical Credit Performance The Annualized Net Charge-off Rate has historically ranged between 7% and 9% Net Lifetime Loan Losses by Vintage (as of March 31, 2022) | Year of Origination | Net Lifetime Loan Losses (% of Original Principal) | | :--- | :--- | | 2015 | 7.1% | | 2016 | 8.0% | | 2017 | 8.2% | | 2018 | 10.0% | | 2019 | 10.3%* | | 2020 | 5.4%* | | 2021 | 0.0%* | *Vintage is not yet fully mature. - The Annualized Net Charge-off Rate historically ranged between 7% and 9% from 2011 to 2019, rising to 9.8% in 2020 during the pandemic before decreasing to 6.8% in 2021 due to credit tightening and government stimulus[110] Results of Operations Q1 2022 revenue grew 58.7% to $214.7 million, driven by higher interest and non-interest income - Total revenue grew 58.7% YoY, with interest income up 51.1% due to a 48.5% increase in Average Daily Principal Balance; Non-interest income surged 176.8%, mainly due to $9.3 million from Digit subscription income[120][121] - Sales and marketing expenses increased 44.6% to $34.5 million to support origination growth, but Customer Acquisition Cost (CAC) decreased by 27.4% to $151 from $208 in the prior year period[132] - General, administrative and other expenses increased by 33.7%, primarily due to $7.3 million in transaction and integration costs related to the Digit acquisition, partially offset by a $7.6 million decrease in retail network optimization expenses[138] Non-GAAP Financial Measures Adjusted Net Income for Q1 2022 was $52.7 million, with an Adjusted EPS of $1.58 Reconciliation of Net Income to Adjusted Net Income (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net income | $45,663 | $3,019 | | Adjustments (Tax, Stock Comp, etc.) | $26,577 | $13,843 | | Adjusted income before taxes | $72,240 | $16,862 | | Normalized income tax expense | $19,505 | $4,620 | | Adjusted Net Income | $52,735 | $12,242 | Adjusted Earnings Per Share (Adjusted EPS) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Adjusted Net Income | $52,735 thousand | $12,242 thousand | | Diluted adjusted weighted-average shares | 33,323,134 | 29,620,034 | | Adjusted EPS | $1.58 | $0.41 | Liquidity and Capital Resources The company maintains sufficient liquidity through securitizations and secured financing facilities - Primary sources of funds include asset-backed securitizations, secured financing, and loan sales[171] - As of March 31, 2022, the company had $1.59 billion of outstanding asset-backed notes[177] - The company maintains secured financing facilities with an aggregate of $750.0 million in warehouse lines, with $273.0 million of undrawn capacity as of March 31, 2022[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk were reported, though macroeconomic factors are noted - There have been no material changes to market risk since the 2021 Form 10-K, but the company notes that inflation, rising interest rates, and credit trends could impact financial results[192] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective with no material changes in internal controls - Management concluded that as of March 31, 2022, the company's disclosure controls and procedures were effective at a reasonable assurance level[193] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[195] PART II - OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 16 for details on legal proceedings, with no other material litigation reported - For a description of legal proceedings, the report refers to Note 16 in the financial statements; The company is not presently a party to any other legal proceedings expected to have a material adverse effect[197] Item 1A. Risk Factors Details significant risks including credit modeling, fair value accounting, and regulatory scrutiny - The business relies extensively on proprietary credit risk models using A.I. and third-party data; Errors in these models could lead to higher than forecasted loan losses[216] - The company has elected the fair value option for its loans and asset-backed notes; Estimates used in determining fair value are subject to judgment and could be incorrect, potentially requiring write-downs that would adversely affect results[222] - The company faces regulatory risk from ongoing CFPB investigations into both Oportun's collection practices and Digit's product representations, the outcomes of which are currently unpredictable[313][314][315] - There is a risk that the company may fail to realize all anticipated benefits of the Digit acquisition, or that realizing them may take longer than expected, which could adversely affect results of operations[244] Item 2, 3, 4, 5: Other Disclosures Confirms no unregistered equity sales, defaults, or other information to report for the period - The company reported no unregistered sales of equity securities, defaults upon senior securities, mine safety disclosures, or other information for the quarter[359][361][362][363] Item 6. Exhibit Index Provides an index of all exhibits filed as part of the quarterly report - Lists exhibits filed with the report, including CEO/CFO certifications (Exhibits 31.1, 31.2), Section 1350 certifications (Exhibit 32.1), and new indenture agreements (Exhibits 10.2.1, 10.2.2)[369]