Oportun Financial (OPRT) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Oportun's Q2 2022 unaudited financials show asset and liability growth, a net loss for the quarter due to fair value adjustments, but increased net income for the six-month period Condensed Consolidated Balance Sheets Total assets grew to $3.35 billion by June 30, 2022, funded by increased liabilities, while stockholders' equity also rose Consolidated Balance Sheet Data | Account | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $3,350,022 | $2,946,625 | | Loans receivable at fair value | $2,854,594 | $2,386,807 | | Total Liabilities | $2,701,824 | $2,342,744 | | Secured financing | $505,727 | $393,889 | | Asset-backed notes at fair value | $1,935,842 | $1,651,706 | | Total Stockholders' Equity | $648,198 | $603,881 | Condensed Consolidated Statements of Operations Q2 2022 saw a net loss of $9.2 million due to fair value adjustments, contrasting with a net income of $36.5 million for the six-month period Consolidated Statements of Operations Data | Metric ($ thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $225,802 | $138,254 | $440,522 | $273,567 | | Net decrease in fair value | ($63,484) | ($5,902) | ($59,513) | ($17,470) | | Total operating expenses | $157,886 | $110,386 | $305,230 | $216,652 | | Net income (loss) | ($9,157) | $7,250 | $36,506 | $10,269 | | Diluted EPS | ($0.28) | $0.24 | $1.10 | $0.34 | Condensed Consolidated Statements of Cash Flow Operating cash flow was $91.6 million, but significant investing outflows led to a $59.1 million net cash decrease for the six months Consolidated Statements of Cash Flow Data | Cash Flow Activity ($ thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $91,642 | $53,838 | | Net cash used in investing activities | ($638,024) | ($57,151) | | Net cash provided by financing activities | $487,278 | $192,692 | | Net (decrease) increase in cash | ($59,104) | $189,379 | Notes to the Condensed Consolidated Financial Statements Notes detail business, accounting policies, Digit acquisition, VIE funding, loan sales, and ongoing CFPB regulatory matters - The company acquired Hello Digit, Inc. on December 22, 2021, to expand its A.I. and digital banking capabilities, offering a suite of products including lending, savings, and investing[22][40] - Oportun uses wholly-owned special-purpose subsidiaries (VIEs) to collateralize asset-backed financing. As of June 30, 2022, these consolidated VIEs held $2.86 billion in assets and $2.56 billion in liabilities[32][34] - In March 2022, the company sold loans with an unpaid principal balance of $227.6 million in a securitization transaction. In April 2022, it sold another population of loans with a principal balance of $14.7 million[35][36] - The company received a Civil Investigative Demand (CID) from the CFPB in March 2021 regarding its collection practices. Additionally, a separate CFPB matter related to Digit has reached an agreement in principle, for which a reserve of approximately $2.8 million has been established[85][87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong origination growth, Q2 net loss due to fair value adjustments, and strategic Digit acquisition for diversified digital banking Overview Oportun is a digital banking platform offering diverse financial services, leveraging the Digit acquisition and a diversified funding strategy - Oportun's credit products include personal loans (unsecured and secured) and credit cards, while its digital banking products (via Digit) include automated savings, checking, and investing[98] - The company leverages a 'Lending as a Service' model, partnering with brands like DolEx, Barri Financial, and Sezzle to expand its member base[107] - In Q1 2022, the company decided to close an additional 27 retail locations as part of its network optimization plan, incurring $2.1 million in related expenses for the first six months of the year[113] Key Financial and Operating Metrics Q2 2022 metrics show strong origination growth but increased delinquency and charge-off rates due to credit normalization Key Financial and Operating Metrics Summary | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Members | 1,818,588 | 684,843 | | Aggregate Originations | $878,177 thousand | $433,039 thousand | | 30+ Day Delinquency Rate | 4.3% | 2.5% | | Annualized Net Charge-Off Rate | 8.6% | 6.4% | | Return on Equity | (5.7)% | 6.1% | | Adjusted Return on Equity | 2.3% | 14.2% | - The increase in delinquency and charge-off rates is attributed to a higher mix of first-time borrowers and the return to pre-pandemic underwriting criteria in late 2021[122][123] Results of Operations Q2 2022 revenue grew 63.3% YoY, but a $63.5 million net decrease in fair value led to a net loss, alongside rising operating expenses - Q2 2022 total revenue grew 63.3% YoY, primarily due to a 61.5% increase in interest income driven by growth in the Average Daily Principal Balance from $1.60 billion to $2.58 billion[135] - The net decrease in fair value for Q2 2022 was $63.5 million, a significant change from a $5.9 million decrease in Q2 2021. This was driven by a mark-to-market reduction on loans due to increased charge-off assumptions (11.25% vs. 7.59% in Q2 2021) and a higher discount rate (8.97% vs. 6.54%), partially offset by a positive mark-to-market adjustment on asset-backed notes[145] - Total operating expenses in Q2 2022 increased by $47.5 million YoY to $157.9 million, with notable increases in Technology and facilities (+$19.7 million), Personnel (+$10.1 million), and Sales and marketing (+$8.6 million)[134] Non-GAAP Financial Measures Non-GAAP measures for Q2 2022 show declines in Adjusted EBITDA, Net Income, and EPS, reflecting core business performance Non-GAAP Financial Measures Summary | Non-GAAP Metric ($ thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | ($4,488) | $4,510 | | Adjusted Net Income | $3,751 | $16,964 | | Adjusted EPS | $0.11 | $0.56 | | Adjusted Return on Equity | 2.3% | 14.2% | Liquidity and Capital Resources Oportun funds operations via securitizations and secured borrowings, maintaining liquidity to cover twelve months of expected outflows - Primary funding sources include asset-backed securitizations, secured financing facilities, and loan sales[195] - As of June 30, 2022, the company had $1.94 billion in outstanding asset-backed notes and $241.0 million in undrawn capacity from its $750.0 million secured financing facilities[201][203] - In May 2022, the company issued $400.0 million of two-year asset-backed notes, and issued another $400.0 million in July 2022[54][55] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk from 2021 Form 10-K, but rising interest rates and macro conditions pose ongoing impact - There have been no material changes to market risk from the 2021 Form 10-K, but the company notes that rising interest rates and macroeconomic conditions could impact financial results[215] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2022, with no material changes to internal controls - The CEO and CFO concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective at the reasonable assurance level[216] - 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[218] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company refers to Note 16 for legal proceedings, stating no other material adverse legal matters are pending - For details on legal proceedings, the company refers to Note 16 of the financial statements[220] Item 1A. Risk Factors Significant risks include reliance on credit models, fair value accounting volatility, funding dependence, and regulatory oversight - Business Risks: The company faces risks related to managing its rapid growth, retaining customers, competing effectively, and successfully integrating the Digit acquisition[223] - Financial & Market Risks: The business is exposed to disruptions in credit markets, rising interest rates, and the effectiveness of its risk management models. The use of fair value estimates for loans and notes can lead to earnings volatility[223][242] - Regulatory & Legal Risks: The financial services industry is highly regulated, with the CFPB having broad authority. The company faces risks from litigation, changes in regulation, and compliance issues, particularly concerning its bank partnership model[224][338] - Indebtedness Risks: The company has substantial debt and relies on securitizations and other facilities for funding. A breach of covenants or an inability to access capital markets could negatively impact liquidity and operations[225][354] Items 2-6 This section reports 'None' for unregistered sales, defaults, mine safety, and other information, concluding with an exhibit index - No unregistered sales of equity securities, defaults upon senior securities, mine safety disclosures, or other information were reported for the period[382][384][385][386]