OPORTUN FINANCIAL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
An index of our MD&A follows:
Topic
Forward-Looking Statements 18 Overview 19 Key Financial and Operating Metrics 21 Historical Credit Performance 23 Results of Operations 25 Fair Value Estimate Methodology for Loans Receivable at Fair Value 30 Non-GAAP Financial Measures 31 Liquidity and Capital Resources 34 Critical Accounting Policies and Significant Judgments and Estimates 36 Recently Issued Accounting Pronouncements 36 You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and the audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedDecember 31, 2021 included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , onMarch 1, 2022 . Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Forward-looking statements
This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "aim," "anticipate," "assume," "believe," "contemplate," "continue," "could," "due," "estimate," "expect," "goal," "intend," "may," "objective," "plan," "predict," "potential," "positioned," "seek," "should," "target," "will," "would," and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements about:
•our ability to increase the volume of loans we grant;
• our ability to manage our net charge rates;
•the successful integration of
•our expectations and management of future growth, including expanding our markets served, member base and product and service offerings, including our digital banking services; •our ability to successfully adjust our proprietary credit risk models and products in response to changing macroeconomic conditions and fluctuations in the credit market;
•our expectations regarding our costs and seasonality;
•our ability to successfully build our brand and protect our reputation from negative publicity;
• our ability to expand our digital origination capabilities and increase the volume of loans originated through our digital channels;
• our ability to increase the effectiveness of our marketing efforts;
• our ability to increase our market share in existing markets or in any new markets we may enter;
•our ability to continue to expand our demographic target;
•our ability to maintain or expand our relationships with our current partners, including bank partners, and our plans to acquire additional partners using our Lending as a Service model;
•our ability to successfully manage our interest rate differential relative to our cost of capital;
•our ability to maintain the terms on which we lend to our borrowers;
•our plans and our ability to successfully maintain our diversified financing strategy, including warehousing facilities, loan sales and securitization transactions;
18 --------------------------------------------------------------------------------
•our ability to manage the risk of fraud;
• our expectations regarding the adequacy of our cash to meet our operating and cash expenses;
• our ability to effectively estimate the fair value of our loans receivable held for investment and our asset-backed notes;
• our ability to effectively secure and maintain the confidentiality of information provided and used in our systems;
• our ability to compete successfully with companies that are currently present or may enter in the future in the markets in which we operate;
•our ability to attract, integrate and retain qualified employees;
•the impact of macroeconomic conditions on our business, including the impact of the COVID-19 pandemic;
• our ability to effectively manage and develop the capabilities of our contact centers, outsourcing relationships and other overseas business operations; and
• our ability to successfully adapt to complex and evolving regulatory environments
Forward-looking statements are based on our management's current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and on our management's beliefs and assumptions. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. We anticipate that subsequent events and developments may cause our views to change. Forward-looking statements do not guarantee future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading "Risk Factors" and elsewhere in this report. We also operate in a rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. As a result, any or all of our forward-looking statements in this report may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material.
You should read this report with the understanding that our actual future results, levels of activity, performance and achievements may differ materially from what we expect.
These forward-looking statements speak only as of the date of this report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.
Insight
We are a financial technology company and digital banking platform driven by our mission to provide inclusive, affordable financial services that empower our members to build a better future. By intentionally designing our products with our members in mind, we are focused on realizing our vision to deliver a complete set of financial solutions that meet the needs of hardworking people, from borrowing and banking to savings, investing and more. We take a holistic approach to serving our members and view it as our purpose to responsibly meet their current capital needs, help grow our members' financial profiles, increase their financial awareness and put them on a path to a financially healthy life. In our 16-year lending history, we have extended more than$13.0 billion in responsible credit through more than 5.2 million loans and credit cards. We have been certified as aCommunity Development Financial Institution ("CDFI") by theU.S. Department of the Treasury since 2009. With our recent acquisition ofHello Digit, Inc. ("Digit"), we believe we now have a strong competitive advantage over other fintechs and neobanks. As a combined company, we can now offer access to a comprehensive suite of digital banking products, offered either directly or through partners, including lending, savings and investing powered by A.I. and tailored to each member's goals. Our financial products allow us to meet our members where they are and assist them with their overall financial health, resulting in opportunities to present multiple relevant products to our members. Our credit products include personal loans, secured personal loans and credit cards. Our digital banking products include digital banking, automated savings, long-term investing and retirement savings. Consumers are able to become members and access our products through our digital banking app-the Digit app-and the Oportun.com website, which are our primary channels for onboarding and serving members. Our personal loan products are also available over the phone or through over 500 retail locations, which includes 284 of our Lending as a Service partner locations.
Credit products
Personal Loans - Our personal loan is a simple-to-understand, affordable,
unsecured, fully amortizing installment loan with fixed payments throughout the
life of the loan. We charge fixed interest rates on our loans, which vary based
on the amount disbursed and applicable state law, with a cap of 36% annual
percentage rate ("APR") in all cases. As of March 31, 2022 , for all active loans
in our portfolio and at time of disbursement, the weighted average term and APR
at origination was 35 months and 32.3%, respectively. The average loan size for
loans we originated during the three months ended March 31, 2022 was $3,893 . Our
loans do not have prepayment penalties or balloon payments, and typically range
in size from $300 to $11,000 with terms of 6 to 61 months. Generally, loan
payments are structured on a bi-weekly or semi-monthly basis to coincide with
our members'
19
--------------------------------------------------------------------------------
receipt of their income. As part of our underwriting process, we verify income
for all applicants and only approve loans that meet our ability-to-pay criteria.
As of March 31, 2022 , we originate unsecured personal loans in 12 states through
state licenses and in 27 through our partnership with MetaBank, N.A.
Secured Personal Loans - In April 2020 , we launched a personal installment loan
product secured by an automobile, which we refer to as secured personal loans.
Our secured personal loans range in size from $2,525 to $20,000 with terms
ranging from 21 to 64 months. The average loan size for secured personal loans
we originated during the three months ended March 31, 2022 was $8,394 . As of
March 31, 2022 , for all active loans in our portfolio and at time of
disbursement, the weighted average term and APR at origination was 47 months and
29.1%, respectively. As part of our underwriting process, we evaluate the
collateral value of the vehicle, verify income for all applicants and only
approve loans that meet our ability-to-pay criteria. Our secured personal loans
are currently offered in California , Texas and Florida . in April 2022 we
launched our secured personal loans in Arizona and we are in the process of
considering expansion into other states.
Credit Cards - We launched Oportun® Visa® Credit Card, issued by WebBank , Member
FDIC , in December 2019 , and offer credit cards in 45 states as of March 31,
2022 . Credit lines on our credit cards range in size from $300 to $3,000 with an
APR between 24.9% to 29.9%. The average APR of the outstanding credit card
receivables was 29.8% as of March 31, 2022 . The average credit line for credit
cards activated during the three months ended March 31, 2022 was $944 .
Digital banking products
Digit Savings - Our Digit Savings product is designed to understand a member's cash flows and save a calculated amount on a regular basis to effortlessly achieve savings goals. Digit's savings product utilizes machine learning to analyze a member's transaction activity and build forecasts of the member's future cash flows to make small, frequent savings decisions according to the member's financial goals in a personalized manner. Members integrate their existing bank accounts into the platform or they can make Digit their primary banking relationship through a bank partner. After one year using the automated savings product, members have been able to increase their liquid savings by approximately 50%. Since 2015 Digit has helped members save more than$7.6 billion and pay down more than$330.0 million in debt. The funds in these saving accounts are owned by Digit members and are not the assets of the Company. Therefore, these funds are not included in the Condensed Consolidated Balance Sheets (Unaudited). Digit Direct - Our Digit Direct product offers a full checking account, through a bank partner, that intelligently organizes and budgets a member's money across bills, savings, and spending. The bank account with a brain™, Digit Direct leverages the same A.I. engine used for our savings product to automatically identify and organize recurring bills and guides spending to ensure members' savings goals are met, and that members know exactly what they can safely spend. This is on top of what members can expect from a traditional checking account, including a physical and virtual debit card to use for purchases and ATM withdrawals and checks. Digit Investing and Digit Retirement - Our Digit investment and retirement products are a longer-term savings solution via an A.I.-driven portfolio allocation into low-cost investments based upon risk-tolerance. Our long-term investment solutions automatically allocates our members' savings into low-cost risk-adjusted portfolios held in brokerage accounts or tax-advantaged IRAs. Since 2020, our members have invested$45 million into long-term goals through low-cost ETF portfolios. The investment products include a general investing account and a retirement account for our members' longer term goals, utilizing smart recommendations to invest savings in risk-adjusted portfolios.
Ready as a service
Beyond our core direct-to-consumer lending business, we believe that we can leverage our proprietary credit scoring and underwriting model to partner with other consumer brands and expand our member base. With our Lending as a Service model, our partner markets loans and enters borrower applications into our system andOportun underwrites, originates, and services the loans. Our first Lending as a Service strategic partner wasDolEx Dollar Express, Inc. ("DolEx") with an initial launch inDecember 2020 . In October of 2021, we launched another Lending as a Service partnership withBarri Financial Group in select locations. InJanuary 2022 , we announced our first all-digital Lending as a Service partnership with Sezzle, a leading provider of Buy Now Pay Later ("BNPL") financing options. When deployed,Oportun will be available as a checkout option, through Sezzle, for larger purchases of goods and services on a BNPL basis, which we believe will allow us to reach more new members.
Capital market financing
To fund our growth at a low and efficient cost, we have built a diversified and well-established capital markets funding program, which allows us to partially hedge our exposure to rising interest rates or credit spreads by locking in our interest expense for up to three years. Over the past eight years, we have executed 17 bond offerings in the asset-backed securities market, the last 14 of which include tranches that have been rated investment grade. We issued two- and three-year fixed rate bonds which have provided us committed capital to fund future loan originations at a fixed Cost of Debt. ThroughMarch 4, 2022 , we were also party to a whole loan sale program whereby we sold a percentage of our loans to a third-party financial institution. We allowed the whole loan sale program agreement to expire on its own terms. InMarch 2022 , we participated in a securitization and sold loans through the issuance of amortizing asset-backed notes secured by a pool of our unsecured and secured personal installment loans. We also sold our share of the residual interest in the pool. The sold loans had an aggregate unpaid principal balance of approximately$227.6 million . In addition to possible future whole loan or structured loan sales, we also have a$600.0 million Personal Loan Warehouse facility with a term throughSeptember 2024 and a$150.0 million Credit Card Warehouse facility with a term through December, 2023 which also helps to fund our receivables growth. 20 --------------------------------------------------------------------------------
Acquiring digits
OnDecember 22, 2021 , we acquired Digit and it became our wholly-owned subsidiary. Digit is a digital banking platform that provides automated savings, banking and investing tools. With Digit, members can keep and integrate their existing bank accounts into the platform, or with Digit, they can makeOportun their primary banking relationship by opening new accounts via a bank partner. By acquiring Digit, we further expanded our A.I. and digital capabilities and added additional service offerings to provide members a comprehensive suite of digital banking products, either directly or through our partners. The total consideration we provided for Digit was approximately$205.3 million , comprised of$73.2 million in equity and$132.1 million in cash. The cash consideration was funded with a$116.0 million Acquisition Financing facility.
Retail Network Optimization
During the first quarter of 2021, pursuant to our retail network optimization plan we closed 136 retail locations and reduced a portion of the employee workforce who managed and operated these retail locations. In addition, for the three months endedMarch 31, 2021 , we incurred$6.2 million in expenses related to the retail location closures and$1.6 million related to severance and benefits related to the store closures which represented all severance and benefits related costs to be incurred in connection with the retail network optimization plan. The income statement impact for the three months endedMarch 31, 2021 was$7.8 million and was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited). During the first quarter of 2022, we made the decision to close an additional 27 retail locations inApril 2022 and reduce a portion of the workforce who manage and operate these retail locations. In the first quarter of 2022, we incurred$0.2 million in expenses related to these additional retail location closures and estimate remaining expenses of$1.5 million to be recognized in the second quarter of 2022. In addition we have also recognized$0.4 million related to severance and benefits related to the store closures in the first quarter of 2022 which represents all severance and benefit related costs to be incurred as a result of the additional store closures. The income statement impact of$0.6 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) for the three months endedMarch 31, 2022 .
Main financial and operational indicators
We monitor and evaluate the following key metrics in order to measure our
current performance, develop and refine our growth strategies, and make
strategic decisions.
As of or for the Three Months
Ended March 31,
(in thousands of dollars) 2022 2021
Key Financial and Operating Metrics
Members (1) 1,676,754 643,967
Products (1) 1,757,339 643,967
Aggregate Originations $ 800,115 $ 335,239
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 %
Other Useful Metrics
Managed Principal Balance at End of Period $ 2,842,943 $ 1,832,556
Owned Principal Balance at End of Period $ 2,353,981 $ 1,591,789
Average Daily Principal Balance $ 2,412,997 $
1,624,753
(1) The 643,967 Members and Products reported as ofMarch 31, 2021 reflect our previously defined and disclosed "Active Customer" metric. Products presented as ofMarch 31, 2021 represents one product per member as we did not have members with multiple products at that time. EffectiveJanuary 1, 2022 , Active Customers is no longer a Key Financial and Operating Metric. See the definition of Members and Products in the Glossary at the end of Part II.
See “Glossary” at the end of Part II of this report for formulas and definitions of our key performance measures.
Members
Reflecting our acquisition of Digit and its users, we define Members as borrowers with an outstanding or successfully paid off loan, originated by us or under a bank partnership program that we service, or individuals who have been approved for a credit card issued under a bank partnership program. Members also include individuals who have signed-up to use or are using any of our Digit Savings, Digit Direct, Digit Investing and/or Digit Retirement products. We view Members as an indication of growth of our business and our ability to establish long term relationships with the users of our products. Member growth is generally an indicator of future revenue, but is not directly correlated with revenues, since not all Members who sign up for one of our products fully utilize or continue to use our products. Members were 1.7 million as ofMarch 31, 2022 , and include members acquired in connection with the acquisition of Digit onDecember 22, 2021 . Active Customers were 0.6 million as ofMarch 31, 2021 . EffectiveJanuary 1, 2022 , Active Customers is no longer a Key Financial and Operating Metric and the year over year change is not directly comparable due to the difference in the metric. 21 --------------------------------------------------------------------------------
Some products
Products refers to the aggregate number of personal loans and/or credit card accounts that our Members have had or been approved for that have been originated by us or through one of our bank partners. Products also include the aggregate number of digital banking products we offer as a result of our acquisition of Digit, including Digit Savings, Digit Direct, Digit Investing and Digit Retirement, that our Members use or have signed-up to use. We view Products as an indicator of the effectiveness of our member acquisition efforts and multiproduct adoption.
Products from
Aggregated origins
Aggregate Originations increased to$800.1 million for the three months endedMarch 31, 2022 from$335.2 million for the three months endedMarch 31, 2021 , representing a 138.7% increase. The increase is primarily driven by an increase in the number of loans originated. We originated 228,728 and 114,670 loans for the three months endedMarch 31, 2022 and 2021, respectively. The increase is primarily driven by an increased number of applications due to higher demand. Aggregate Originations for the three months endedMarch 31, 2021 were lower due to tightened underwriting practices as a result of the pandemic.
Delinquency rate over 30 days
Our 30+ Day Delinquency Rate was 4.5% and 3.0% as ofMarch 31, 2022 and 2021, respectively. The increase reflects the higher mix of first-time borrowers and the return to pre-pandemic underwriting criteria later in 2021. However, had we not sold$227.6 million of loans, or approximately 8.8% of our owned portfolio, at the end of the quarter, the 30+ Day Delinquency Rate would be 4.1%, as compared to 3.9% as ofDecember 31, 2021 .
Annualized net imputation rate
Annualized Net Charge-Off Rate for the three months endedMarch 31, 2022 and 2021 remained relatively flat at 8.6%. Net charge-offs remained flat due to the overall improvement in the economy, as well as the effectiveness of our A.I.-driven underwriting models, collections tools and payment options that have helped our borrowers manage through the pandemic.
Return on equity and adjusted return on equity
For the three months endedMarch 31, 2022 and 2021, Return on Equity was 29.5% and 2.6%, respectively and Adjusted Return on Equity was 34.1% and 10.6% respectively. The increases in Return on Equity and Adjusted Return on Equity were primarily due to higher net income. Net income was higher due to increased interest rates reducing the prices of our asset-backed notes which led to a net increase in fair value. For a reconciliation of Return on Equity to Adjusted Return on Equity, see "Non-GAAP Financial Measures." 22 --------------------------------------------------------------------------------
Historical credit performance
Our A.I.-driven credit models enable us to originate loans with low and stable
loss rates. Our Annualized Net Charge-off Rate ranged between 7% and 9% from
2011 to 2019 and was 9.8% in 2020, a modest variance above this range during the
pandemic. Due to credit tightening in response to the COVID-19 pandemic and
government stimulus payments our Annualized Net Charge-Off Rate decreased to
6.8% in 2021. However, we anticipate this rate will return to levels consistent
with performance in pre-pandemic years. Consistent with our charge-off policy,
we evaluate our loan portfolio and charge a loan off at the earlier of when the
loan is determined to be uncollectible or when loans are 120 days contractually
past due or 180 days contractually past due in the case of credit cards.
[[Image Removed: oprt-20220331_g1.jpg]]
*Figures shown reflect cumulative amounts for the three months ended
In addition to monitoring our loss and delinquency performance on an owned portfolio basis, we also monitor the performance of our loans by the period in which the loan was disbursed, generally years or quarters, which we refer to as a vintage. We calculate net lifetime loan loss rate by vintage as a percentage of original principal balance. Net lifetime loan loss rates equal the net lifetime loan losses for a given year throughMarch 31, 2022 divided by the total origination loan volume for that year. The below chart and table shows our net lifetime loan loss rate for each annual vintage of our personal loan product since we began lending in 2006, excluding loans originated fromJuly 2017 toAugust 2020 under a loan program for borrowers who did not meet the qualifications for our core loan origination program. 100% of those loans were sold pursuant to a whole loan sale agreement. We were able to stabilize cumulative net loan losses after the financial crisis that started in 2008. We even achieved a net lifetime loan loss rate of 5.5% during the peak of the recession in 2009. The evolution of our credit models has allowed us to increase our average loan size and commensurately extend our average loan terms. Cumulative net lifetime loan losses for the 2015, 2016, 2017, and 2018 vintages increased partially due to the delay in tax refunds in 2017 and 2019, the impact of natural disasters such as Hurricane Harvey, and the longer duration of the loans. The 2018 and 2019 vintages are increasing due to the COVID-19 pandemic. 23
--------------------------------------------------------------------------------
[[Image Removed: oprt-20220331_g2.jpg]]
Year of Origination
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Dollar weighted
average original
term for vintage in
months 9.3 9.9 10.2 11.7 12.3 14.5 16.4 19.1 22.3 24.2 26.3 29.0 30.0 32.0 33.3
Net lifetime loan
losses as of March
31, 2022 as a
percentage of
original principal
balance 7.7% 8.9% 5.5% 6.4% 6.2% 5.6% 5.6% 6.1% 7.1% 8.0% 8.2% 10.0% 10.3%* 5.4%* 0.0%*
Outstanding
principal balance as
of March 31, 2022 as
a percentage of
original amount
disbursed -% -% -% -% -% -% -% -% -% -% 0.1% 0.9% 9.4% 40.6% 89.0%
* Vintage is not yet fully mature from a loss standpoint.
24 --------------------------------------------------------------------------------
Operating results
The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three months endedMarch 31, 2022 and 2021. Three Months Ended March 31, (in thousands of dollars) 2022 2021 Revenue Interest income$ 192,237 $ 127,191 Non-interest income 22,483 8,122 Total revenue 214,720 135,313 Less: Interest expense 13,677 13,504 Total net increase (decrease) in fair value 3,971 (11,568) Net revenue 205,014 110,241 Operating expenses: Technology and facilities 49,189 32,924 Sales and marketing 34,541 23,893 Personnel 35,926 26,827 Outsourcing and professional fees 14,327
12,625
General, administrative and other 13,361 9,997 Total operating expenses 147,344 106,266 Income before taxes 57,670 3,975 Income tax expense 12,007 956 Net income$ 45,663 $ 3,019 Total revenue Three Months Ended March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Revenue Interest income$ 192,237 $ 127,191 $ 65,046 51.1 % Non-interest income 22,483 8,122 14,361 176.8 % Total revenue$ 214,720 $ 135,313 $ 79,407 58.7 % Percentage of total revenue: Interest income 89.5 % 94.0 % Non-interest income 10.5 % 6.0 % Total revenue 100.0 % 100.0 % Interest income. Total interest income increased by$65.0 million , or 51.1%, from$127.2 million for the three months endedMarch 31, 2021 to$192.2 million for the three months endedMarch 31, 2022 . The increase is primarily attributable to growth in our Average Daily Principal Balance from$1.6 billion for the three months endedMarch 31, 2021 to$2.4 billion for the three months endedMarch 31, 2022 , an increase of 48.5%. The increase is due to growth in our portfolio as a result of higher application volume due to increased demand and due to first quarter 2021 originations being depressed as a result of the COVID-19 pandemic. Interest income was also favorably impacted by an increase in portfolio yield of 55 basis points in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 due to growth in originations to new members who generally receive higher APRs than returning members. Non-interest income. Total non-interest income increased by$14.4 million , or 176.8%, from$8.1 million for the three months endedMarch 31, 2021 to$22.5 million for the three months endedMarch 31, 2022 . This increase is primarily due to$9.3 million attributable to Digit subscription income,$1.6 million of increased fees related to our credit card portfolio,$1.2 million increase related toMetaBank, N.A. documentation fees,$0.9 million increase in servicing revenue and increased gain on loans sold of$0.8 million under our whole loan sale programs due to an increase in loans sold resulting from higher origination volume.
See Note 2, Summary of Significant Accounting Policies, and Note 13,
Revenue, notes to the condensed consolidated financial statements (unaudited) included elsewhere in this report for further discussion of our interest revenue, non-interest revenue and revenue.
25 --------------------------------------------------------------------------------
Interest expense
Three Months Ended
March 31, Period-to-period Change
(in thousands, except percentages) 2022 2021 $ %
Interest expense $ 13,677 $ 13,504 $ 173 1.3 %
Percentage of total revenue 6.4 % 10.0 %
Cost of Debt 2.6 % 3.9 %
Leverage as a percentage of Average Daily Principal
Balance 89.5 % 87.0 %
Interest expense. Interest expense increased by $0.2 million , or 1.3%, from
$13.5 million for the three months ended March 31, 2021 to $13.7 million for the
three months ended March 31, 2022 . We financed approximately 89.5% of our loans
receivable through debt for the three months ended March 31, 2022 , as compared
to 87.0% for the three months ended March 31, 2021 , and our Average Daily Debt
Balance increased from $1.4 billion to $2.2 billion for the three months ended
March 31, 2022 , an increase of 52.7%. We have continued to improve our Cost of
Debt as we have been able to refinance at lower interest rates and increase the
size of our securitizations. In 2022, we expect our interest expense to increase
as we borrow to fund our portfolio growth and interest rates increase.
See Note 9, Borrowings , in the Notes to the Condensed Consolidated Financial
Statements (Unaudited) included elsewhere in this report for further information
on our Interest expense and our Secured Financing and asset-backed notes.
Total net increase (decrease) in fair value
Net increase (decrease) in fair value reflects changes in fair value of loans receivable held for investment and asset-backed notes on an aggregate basis and is based on a number of factors, including benchmark interest rates, credit spreads, remaining cumulative charge-offs and borrower payment rates. Increases in the fair value of loans increase Net Revenue. Conversely, decreases in the fair value of loans decrease Net Revenue. Increases in the fair value of asset-backed notes decrease Net Revenue. Decreases in the fair value of asset-backed notes increase Net Revenue. We also have derivative instruments related to our bank partnership program withMetaBank, N.A. Changes in the fair value of the derivative instrument are reflected in the total fair value mark-to-market adjustment below. Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Fair value mark-to-market adjustment: Fair value mark-to-market adjustment on Loans$ (16,937) $ 21,562 $ (38,499) * Receivable at Fair Value Fair value mark-to-market adjustment on asset-backed 58,271 1,524 56,747 *
Remarks
Fair value mark-to-market adjustment on derivatives (393) - (393) * Total fair value mark-to-market adjustment 40,941 23,086 17,855 * Charge-offs, net of recoveries on loans receivable at (51,350) (34,608) (16,742) * fair value Net settlements on derivative instruments (1,477) 69 (1,546) * Cumulative mark on loans sold in structured loan sale 15,857 - 15,857 * Total net increase (decrease) in fair value$ 3,971 $ (11,453) $ 15,424 * Percentage of total revenue: Fair value mark-to-market adjustment 19.1 % 17.0 % Charge-offs, net of recoveries on loans receivable at (23.9) % (25.6) % fair value Total net increase (decrease) in fair value (4.8) % (8.6) % Discount rate 6.76 % 6.65 % Remaining cumulative charge-offs 10.37 % 8.60 % Average life in years 0.85 0.78 * Not meaningful Net increase (decrease) in fair value. Net increase in fair value for the three months endedMarch 31, 2022 was$4.0 million . This amount represents a total fair value mark-to-market increase of$40.9 million on Loans Receivable at Fair Value and asset-backed notes, and$51.4 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a$16.9 million mark-to-market reduction on Loans Receivable at Fair Value due to (a) an increase in remaining cumulative charge-offs from 9.60% as ofDecember 31, 2021 to 10.37% as ofMarch 31, 2022 , (b) a decrease in average life from 0.86 years as ofDecember 31, 2021 to 0.85 years as ofMarch 31, 2022 , partially offset by (c) a decrease in the discount rate from 6.94% as ofDecember 31, 2021 to 6.76% as ofMarch 31, 2022 . The$58.3 million mark-to-market adjustment on asset-backed notes is due to rising rates and widening asset-backed securitization spreads. The total net increase (decrease) in fair value also includes a$15.9 million adjustment related to the cumulative mark on the loans sold as part of the structured loan sale completed in the first quarter of 2022. In 2022, we expect to continue to see volatility in the fair value as a result of macro economic conditions. 26 --------------------------------------------------------------------------------
Charges, net of recoveries
Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Total charge-offs, net of recoveries$ 51,350 $ 34,608 $ 16,742 48.4 % Average Daily Principal Balance$ 2,412,997 $ 1,624,753 $ 788,244 48.5 % Annualized Net Charge-Off Rate 8.6 % 8.6 % Charge-offs, net of recoveries. Our Annualized Net Charge-Off Rate remained flat at 8.6% for the three months endedMarch 31, 2022 and 2021, respectively, primarily due to the overall improvement in the economy, the impact of stimulus payments to consumers as well as the effectiveness of our A.I.-driven underwriting models, collections tools and payment options that have helped our borrowers manage through the pandemic; partially offset by growth in new loan originations leading to higher charge-offs. Consistent with our charge-off policy, we evaluate our loan portfolio and charge a loan off at the earlier of when the loan is determined to be uncollectible or when loans are 120 days contractually past due or 180 days contractually past due in the case of credit cards. Operating expenses Operating expenses consist of technology and facilities, sales and marketing, personnel, outsourcing and professional fees and general, administrative and other expense. Technology and facilities Technology and facilities expense is the largest segment of our operating expenses, representing the costs required to build our A.I.-enabled digital platform, and consisting of three components. The first component comprises costs associated with our technology, engineering, information security, cybersecurity, platform development, maintenance, and end user services, including fees for software licenses, consulting, legal and other services as a result of our efforts to grow our business, as well as personnel expenses. The second includes rent for retail and corporate locations, utilities, insurance, telephony costs, property taxes, equipment rental expenses, licenses and fees and depreciation and amortization. Lastly, the third category includes all software licenses, subscriptions, and technology service costs to support our corporate operations, excluding sales and marketing. Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Technology and facilities$ 49,189 $ 32,924 $ 16,265 49.4 % Percentage of total revenue 22.9 % 24.3 % Technology and facilities. Technology and facilities expense increased by$16.3 million , or 49.4%, from$32.9 million for the three months endedMarch 31, 2021 to$49.2 million for the three months endedMarch 31, 2022 . The increase is primarily due to$6.8 million of service costs related to higher usage of software and cloud services, a$6.4 million increase in salaries and benefits due to the increase in headcount,$3.0 million in usage ofIndia off-shoring services and other temporary contractors to supplement staffing related to new product investment and$2.0 million of increased depreciation commensurate with growth in internally developed software. These increases were partially offset by$1.5 million lower expense due to higher capitalization of internally developed software in 2022 compared to 2021 and$1.1 million lower office rent associated with retail locations that were closed in early 2021.
Sales and Marketing
Sales and marketing expense consists of two components and represents the costs
to acquire our customers. The first component is comprised of the expense to
acquire a customer through various paid marketing channels including direct
mail, digital marketing and brand marketing. The second component is comprised
of the costs associated with our telesales, lead generation and retail
operations, including personnel expenses, but excluding costs associated with
retail locations.
Three Months Ended
March 31, Period-to-period Change
(in thousands, except percentages and CAC) 2022 2021 $ %
Sales and marketing $ 34,541 $ 23,893 $ 10,648 44.6 %
Percentage of total revenue 16.1 % 17.7 %
Customer Acquisition Cost (CAC) $ 151 $ 208 $ (57) (27.4) %
Sales and marketing. Sales and marketing expense to acquire our customers
increased by $10.6 million , or 44.6%, from $23.9 million for the three months
ended March 31, 2021 to $34.5 million for the three months ended March 31, 2022 .
To grow our Aggregate Originations, we increased our investment in marketing
initiatives by $9.8 million across various marketing channels, including direct
mail, digital advertising, lead aggregators and our referral programs. As a
result of our increased number of loans originated during the three months ended
March 31, 2022 , our CAC decreased by 27.4%, from $208 the three months ended
March 31, 2021 to $151 for the three months ended March 31, 2022 .
27
--------------------------------------------------------------------------------
Staff
Personnel expense represents compensation and benefits that we provide to our
employees and includes salaries, wages, bonuses, commissions, related employer
taxes, medical and other benefits provided and stock-based compensation expense
for all of our staff with the exception of our telesales, lead generation,
retail operations which are included in sales and marketing expenses and
technology which is included in technology and facilities.
Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Personnel$ 35,926 $ 26,827 $ 9,099 33.9 % Percentage of total revenue 16.7 % 19.8 % Personnel. Personnel expense increased by$9.1 million , or 33.9%, from$26.8 million for the three months endedMarch 31, 2021 to$35.9 million for the three months endedMarch 31, 2022 , primarily driven by a$9.1 million increase in compensation expense due to a 41.5% increase inU.S. headcount.
Outsourcing and professional fees
Outsourcing and professional fees consist of costs for various third-party service providers and contact center operations, primarily for the sales, customer service, collections and store operation functions. Our contact centers located inMexico and our third-party contact centers located inColombia ,Jamaica andthe Philippines provide support for the business including application processing, verification, customer service and collections. We utilize third parties to operate the contact centers inColombia ,Jamaica andthe Philippines and include the costs in outsourcing and professional fees. Professional fees also include the cost of legal and audit services, credit reports, recruiting, cash transportation, collection services and fees and consultant expenses. Direct loan origination expenses related to application processing are expensed when incurred. In addition, outsourcing and professional fees include any financing expenses, including legal and underwriting fees, related to our asset-backed notes. Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Outsourcing and professional fees$ 14,327 $ 12,625 $ 1,702 13.5 % Percentage of total revenue 6.7 % 9.3 % Outsourcing and professional fees. Outsourcing and professional fees increased by$1.7 million , or 13.5%, from$12.6 million for the three months endedMarch 31, 2021 to$14.3 million for the three months endedMarch 31, 2022 . The increase is primarily attributable to$2.3 million of higher professional service costs related to credit card and bank partnership programs and$2.1 million increase in credit report expense due to higher application volume. These increases were partially offset by a$3.2 million decrease in debt financing fees and expenses incurred inMarch 2021 related to an asset-backed securitization that were not present in the three months endedMarch 31, 2022 . General, administrative and other General, administrative and other expense includes non-compensation expenses for employees, who are not a part of the technology and sales and marketing organization, which include travel, lodging, meal expenses, political and charitable contributions, office supplies, printing and shipping. Also included are franchise taxes, bank fees, foreign currency gains and losses, transaction gains and losses, debit card expenses, litigation reserve, expenses associated with our retail network optimization plan and acquisition and integration related expenses in connection with the Digit acquisition. Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % General, administrative and other$ 13,361 $ 9,997 $ 3,364 33.7 % Percentage of total revenue 6.2 % 7.4 % General, administrative and other. General, administrative and other expense increased by$3.4 million , or 33.7%, from$10.0 million for the three months endedMarch 31, 2021 to$13.4 million for the three months endedMarch 31, 2022 , primarily due to$7.3 million of transaction and integration related expenses as a result of the Digit acquisition and$4.0 million increase in postage and printing expenses, travel expenses and other general and administrative expenses due to new products and services and the continuing growth of the business. These increases were partially offset by a$7.6 million decrease in retail network optimization expenses incurred in the three months endedMarch 31, 2022 compared toMarch 31, 2021 . In the first quarter of 2022, we incurred$0.2 million in expenses related to the retail location closures and estimate remaining expenses of$1.5 million to be recognized in the second quarter of 2022. Income taxes Income taxes consist ofU.S. federal, state and foreign income taxes, if any. For the three months endedMarch 31, 2022 and 2021, we recognized tax expense attributable toU.S. federal, state and foreign income taxes. 28 -------------------------------------------------------------------------------- Three
Months ended
March 31, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % Income tax expense$ 12,007 $ 956 $ 11,051 1,156.0 % Percentage of total revenue 5.6 % 0.7 % Effective tax rate 20.8 % 24.1 % Income tax expense. Income tax expense increased by$11.1 million or 1,156.0%, from$1.0 million for the three months endedMarch 31, 2021 to$12.0 million for the three months endedMarch 31, 2022 , primarily as a result of higher pretax income for the three months endedMarch 31, 2022 .
See note 2, Summary of significant accounting policies and note 14,
Income Taxes, notes to the condensed (unaudited) consolidated financial statements included elsewhere in this report for further discussion of our income taxes.
29 --------------------------------------------------------------------------------
Fair value estimation methodology for loans receivable at fair value
Summary
Fair value is an electable option under GAAP to account for any financial instruments, including loans receivable and debt. It differs from amortized cost accounting in that loans receivable and debt are recorded on the balance sheet at fair value rather than on a cost basis. Under the fair value option credit losses are recognized through income as they are incurred rather than through the establishment of an allowance and provision for losses. The fair value of instruments under this election is updated at the end of each reporting period, with changes since the prior reporting period reflected in the Condensed Consolidated Statements of Operations (Unaudited) as net increase (decrease) in fair value which impacts Net Revenue. Changes in interest rates, credit spreads, realized and projected credit losses and cash flow timing will lead to changes in fair value and therefore impact earnings. These changes in the fair value of the Loans Receivable at Fair Value may be partially offset by changes in the fair value of the asset-backed notes, depending upon the relative duration of the instruments.
Fair value estimation methodology for loans receivable at fair value
We calculate the fair value of loans receivable at fair value using a model that projects and discounts expected cash flows. The fair value is a function of:
•Portfolio yield; •Average life;
•Prepayments (or principal repayment rate for our credit card receivables);
• Remaining cumulative charges; and
•Discount rate.
Portfolio yield is the expected interest and fees collected from the loans as an annualized percentage of outstanding principal balance. Portfolio yield is based upon (a) the contractual interest rate, reduced by expected delinquencies and interest charge-offs and (b) late fees, net of late fee charge-offs based upon expected delinquencies. Origination fees are not included in portfolio yield since they are generally capitalized as part of the loan's principal balance at origination. Average life is the time-weighted average of expected principal payments divided by outstanding principal balance. The timing of principal payments is based upon the contractual amortization of loans, adjusted for the impact of prepayments, Good Customer Program refinances, and charge-offs. Prepayments are the expected remaining cumulative principal payments that will be repaid earlier than contractually required over the life of the loan, divided by the outstanding principal balance. For credit card receivables we estimate principal payment rates which are the expected amount and timing of principal payments over the life of the receivable.
Remaining cumulative charges are the expected net principal charges over the remaining life of the loans, divided by the outstanding principal balance.
Discount rate is the sum of the interest rate and the credit spread. The interest rate is based upon the interpolated LIBOR/swap curve rate that corresponds to the average life. The credit spread is based upon the credit spread implied by the loan purchase price at the time loans are sold, updated for observable changes in the fixed income markets, which serve as a proxy for how a potential loan buyer would adjust their yield requirements relative to the originally agreed price. Our internal valuation committee includes members from our risk, legal, finance, capital markets and operations departments and provides governance and oversight over the fair value pricing and related financial statement disclosures. Additionally, this committee provides a challenge of the assumptions used and outputs of the model, including the appropriateness of such measures and periodically reviews the methodology and process to determine the fair value pricing. Any significant changes to the process must be approved by the committee. It is also possible to estimate the fair value of our loans using a simplified calculation. The table below illustrates a simplified calculation to aid investors in understanding how fair value may be estimated using the last five quarters:
• By subtracting the management fees from the weighted average yield of the portfolio over the remaining life of the loans to calculate the net yield of the portfolio;
•Multiplying the net portfolio yield by the weighted average life in years of the loans receivable, which is based upon the contractual amortization of the loans and expected remaining prepayments and charge-offs, to calculate pre-loss net cash flow;
• Subtracting the remaining cumulative charges from the net portfolio return to calculate the net cash flow;
• Subtracting the product of the discount rate and the average life from the net cash flow to calculate the gross fair value premium as a percentage of the loan principal balance; and
•Subtracting the accrued interest and fees as a percentage of loan principal
balance from the gross fair value premium as a percentage of loan principal
balance to calculate the fair value premium as a percentage of loan principal
balance.
30
--------------------------------------------------------------------------------
The table below reflects the application of this methodology for the five
quarters since January 1, 2021 , on loans held for investment. The data for the
three months ended March 31, 2022 and December 31, 2021 in the table below
represents all of our credit products. The data for the three months ended
September 30, 2021 in the table below represents our secured and unsecured loan
portfolio. For prior quarters, the data in the table below represents only our
unsecured personal loan portfolio which was the primary driver of fair value
during those periods.
Three Months Ended
Mar 31,
2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2021 Mar 31, 2021
Weighted average portfolio yield over the 30.15 % 30.14 % 30.35 % 30.28 % 30.25 %
remaining life of the loans
Less: Servicing fee (5.00) % (5.00) % (5.00) % (5.00) % (5.00) %
Net portfolio yield 25.15 % 25.14 % 25.35 % 25.28 % 25.25 %
Multiplied by: Weighted average life in years 0.847 0.859 0.761 0.769 0.778
Pre-loss cash flow 21.30 % 21.60 % 19.29 % 19.43 % 19.64 %
Less: Remaining cumulative charge-offs (10.37) % (9.60) % (7.53) % (7.59) % (8.60) %
Net cash flow 10.93 % 12.00 % 11.76 % 11.84 % 11.04 %
Less: Discount rate multiplied by average life (5.73) % (5.96) % (4.96) % (5.03) % (5.17) %
Gross fair value premium as a percentage of loan 5.21 % 6.04 % 6.80 % 6.81 % 5.87 %
principal balance
Less: Accrued interest and fees as a percentage (1.09) % (1.03) % (0.90) % (0.87) % (0.92) %
of loan principal balance
Fair value premium as a percentage of loan 4.12 % 5.01 % 5.90 % 5.94 % 4.95 %
principal balance
Discount Rate 6.76 % 6.94 % 6.52 % 6.54 % 6.65 %
The illustrative table included above is designed to help investors understand the impact of our choice of the fair value option.
Non-GAAP Financial Measures
We believe that the provision of non-GAAP financial measures in this report, including Adjusted EBITDA, Adjusted Net Income, Adjusted EPS, Adjusted Operating Efficiency and Adjusted Return on Equity, can provide useful measures for period-to-period comparisons of our core business and useful information to investors and others in understanding and evaluating our operating results. However, non-GAAP financial measures are not calculated in accordance withUnited States generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measures of financial performance calculated and presented in accordance with GAAP. There are limitations related to the use of these non-GAAP financial measures versus their most directly comparable GAAP measures, which include the following:
“Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure.
“These measures do not take into account the potentially dilutive impact of stock-based compensation.
?Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements. ?Although the fair value mark-to-market adjustment is a non-cash adjustment, it does reflect our estimate of the price a third party would pay for our loans receivable held for investment or our asset-backed notes.
“Adjusted EBITDA does not reflect tax payments which may represent a reduction in the cash available to us.
Reconciliations of non-GAAP measures to GAAP measures are provided below.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined as our net income, adjusted to eliminate the effect of certain items as described below. We believe that Adjusted EBITDA is an important measure because it allows management, investors and our Board to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making the adjustments described below. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of taxes, certain non-cash items, variable charges and timing differences.
•We believe it is useful to exclude the impact of income tax expense, as presented, as historically it has included irregular income tax items that do not reflect not ongoing business operations.
•We believe it is useful to exclude the impact of depreciation and amortization and stock-based compensation expense as these are non-cash expenses.
•We believe it is useful to exclude the impact of certain non-recurring charges,
such as expenses associated with a litigation reserve, our retail network
optimization plan and acquisition and integration related expenses because these
items do not reflect ongoing business
31
--------------------------------------------------------------------------------
operations.
•We also reverse origination fees for Loans Receivable at Fair Value, net. We recognize the full amount of any origination fees as revenue at the time of loan disbursement in advance of our collection of origination fees through principal payments. As a result, we believe it is beneficial to exclude the uncollected portion of such origination fees, because such amounts do not represent cash that we received.
•We are also reversing the fair value adjustment to market value as it is a non-cash adjustment as shown in the table below.
Components of Fair Value Mark-to-Market Adjustment (in Three Months Ended March 31, thousands) 2022 2021
Fair value adjustment to market value on loans receivable at fair value
$ (16,937) $ 21,562 Fair value mark-to-market adjustment on asset-backed notes 58,271 1,524 Fair value mark-to-market adjustment on derivatives (393) (46) Total fair value mark-to-market adjustment $
40,941
The following table presents a reconciliation of net income and adjusted EBITDA for the three months ended
Three Months Ended March 31,
Adjusted EBITDA (in thousands) 2022 2021
Net income $ 45,663 $ 3,019
Adjustments:
Income tax expense 12,007 956
Depreciation and amortization 7,312 5,332
Stock-based compensation expense 6,773 5,088
Litigation reserve 300 -
Retail network optimization expenses, net 210 7,799
Acquisition and integration related expenses 7,287 -
Origination fees for loans receivable at fair value, net (4,685) (1,422)
Fair value mark-to-market adjustment (40,941) (23,040)
Adjusted EBITDA $ 33,926 $ (2,268)
Adjusted net income
We define Adjusted Net Income as our net income, adjusted to exclude income tax expense, stock-based compensation expenses and certain non-recurring charges. We believe that Adjusted Net Income is an important measure of operating performance because it allows management, investors, and our Board to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period to period.
•We believe it is useful to exclude the impact of income tax expense, as presented, as historically it has included irregular tax items that do not reflect our current business activities. Classes.
•We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses related to a litigation provision, our distribution network optimization plan and expenses related to acquisitions and integration, as these elements do not reflect ongoing business operations.
•We believe it is useful to exclude stock-based compensation expense as it is a non-cash expense.
•We include the impact of normalized statutory income tax expense by applying the tax rate shown in the table.
The following table provides a reconciliation of net earnings to adjusted net earnings for the three months ended
32
--------------------------------------------------------------------------------
Three Months Ended March 31,
Adjusted Net Income (in thousands) 2022 2021
Net income $ 45,663 $ 3,019
Adjustments:
Income tax expense 12,007 956
Stock-based compensation expense 6,773
5,088
Litigation reserve 300 - Retail network optimization expenses, net 210
7,799
Acquisition and integration related expenses 7,287 - Adjusted income before taxes 72,240 16,862 Normalized income tax expense 19,505 4,620 Adjusted Net Income$ 52,735 $ 12,242 Income tax rate (1) 27.0 % 27.4 %
(1) Tax rate for the three months ended
Adjusted earnings per share (“Adjusted EPS”)
Adjusted Earnings Per Share is a non-GAAP financial measure that allows management, investors and our Board to evaluate the operating results, operating trends and profitability of the business in relation to diluted adjusted weighted-average shares outstanding post initial public offering. In addition, it provides a useful measure for period-to-period comparisons of our business, as it considers the effect of conversion of all convertible preferred shares as of the beginning of each annual period. The following table presents a reconciliation of diluted EPS to Adjusted EPS for the three months endedMarch 31, 2022 and 2021. For the reconciliation of net income to Adjusted Net Income, see the immediately preceding table "Adjusted Net Income." Three Months Ended March 31, (in thousands, except share and per share data) 2022 2021 Diluted earnings per share $ 1.37$ 0.10 Adjusted EPS Adjusted Net Income$ 52,735 $ 12,242 Basic weighted-average common shares outstanding 32,216,641 27,770,063 Weighted average effect of dilutive securities: Stock options 733,503 1,274,818 Restricted stock units 372,990 575,153 Diluted adjusted weighted-average common shares outstanding 33,323,134 29,620,034 Adjusted Earnings Per Share $
1.58
Adjusted return on equity
We define Adjusted Return on Equity as annualized Adjusted Net Income divided by average stockholders' equity. Average stockholders' equity is an average of the beginning and ending stockholders' equity balance for each period. We believe Adjusted Return on Equity is an important measure because it allows management, investors and our Board to evaluate the profitability of the business in relation to equity and how well we generate income from the equity available. The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three months endedMarch 31, 2022 and 2021. For the reconciliation of net income to Adjusted Net Income, see the immediately preceding table "Adjusted Net Income."
As of or for the three months ended
March 31, (in thousands) 2022 2021 Return on Equity 29.5 % 2.6 % Adjusted Return on Equity Adjusted Net Income$ 52,735 $ 12,242 Average stockholders' equity$ 626,909 $ 469,180 Adjusted Return on Equity 34.1 % 10.6 % 33
--------------------------------------------------------------------------------
Adjusted operational efficiency
We define Adjusted Operating Efficiency as total operating expenses adjusted to exclude stock-based compensation expense and certain non-recurring charges such as expenses associated with a litigation reserve, our retail network optimization plan and acquisition and integration related expenses divided by total revenue. We believe Adjusted Operating Efficiency is an important measure because it allows management, investors and our Board to evaluate how efficient we are at managing costs relative to revenue.
The following table provides a reconciliation between operating efficiency and adjusted operating efficiency for the three months ended
As of
or for the three months ended
March 31, (in thousands) 2022 2021 Operating Efficiency 68.6 % 78.5 % Adjusted Operating Efficiency Total revenue 214,720 135,313 Total operating expense 147,344 106,266 Stock-based compensation expense (6,773) (5,088) Litigation reserve (300) - Retail network optimization expenses, net (210) (7,799) Acquisition and integration related expenses (7,287) - Total adjusted operating expenses$ 132,774 $ 93,379 Adjusted Operating Efficiency 61.8 % 69.0 %
Cash and capital resources
To date, we fund the majority of our operating liquidity and operating needs through a combination of cash flows from operations, securitizations, secured borrowings and whole loan sales. We may utilize these or other sources in the future. Our material cash requirements relate to funding our lending activities, our debt service obligations, our operating expenses, and investments in the long-term growth of the company. During the three months endedMarch 31, 2022 , available liquidity increased primarily due to increased borrowing capacity under Secured Financings, partially offset by a decrease in cash and cash equivalents. We generally target liquidity levels to support at least twelve months of our expected net cash outflows, including new originations, without access to new debt financing transactions or other capital markets activity. Inflation, rising interest rates, credit trends and other macroeconomic conditions could continue to have an impact on market volatility which could adversely impact our business, liquidity, and capital resources. Future decreases in cash flows from operations resulting from delinquencies, defaults, losses, would decrease the cash available for the capital uses described above. We may incur additional indebtedness or issue equity in order to meet our capital spending and liquidity requirements, as well as to fund growth opportunities that we may pursue.
Cash and cash flow
The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated:
Three Months Ended March 31 ,
(in thousands) 2022
2021
Cash, cash equivalents and restricted cash$ 170,558 $ 183,181 Cash provided by (used in) Operating activities 38,565 18,156 Investing activities (122,496) 8,987 Financing activities 61,529 (12,552)
Our cash is held for working capital and lending purposes. Our restricted cash represents collections held in our securitizations and is currently applied after month end to pay interest expense and settle any amount due to the buyer of the entire loan together with any excess amount returned to us.
Operational activities
Our net cash provided by operating activities was$38.6 million and$18.2 million for the three months endedMarch 31, 2022 and 2021, respectively. Cash flows from operating activities primarily include net income or losses adjusted for (i) non-cash items included in net income or loss, including depreciation and amortization expense, fair value adjustments, net, origination fees for loans at fair value, net, gain on loan sales, stock-based compensation expense and deferred tax provision, net, (ii) originations of loans sold and held for sale, and proceeds from sale of loans and (iii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of various payments. 34 --------------------------------------------------------------------------------
Investing activities
Our net cash provided by (used in) investing activities was$(122.5) million and$9.0 million for the three months endedMarch 31, 2022 and 2021, respectively. Our investing activities consist primarily of loan originations and loan repayments. Our net cash provided by (used in) investing activities for the three months endedMarch 31, 2022 , includes$245.0 million of proceeds related to a structured loan sale. We invest in purchases of property and equipment and incur system development costs. Purchases of property and equipment, and capitalization of system development costs may vary from period to period due to the timing of the expansion of our operations, the addition of employee headcount and the development cycles of our system development. The change in our net cash provided by (used in) investing activities is due to disbursements on originations of loans increasing by$444.0 million while repayments of loan principal increased by$72.7 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 .
Fundraising activities
Our net cash provided by (used in) financing activities was$61.5 million and$(12.6) million for the three months endedMarch 31, 2022 and 2021, respectively. For the three months endedMarch 31, 2022 , net cash provided by financing activities was primarily driven by the borrowings under our Secured Financing facilities, partially offset by repayments of borrowings on our Secured Financing facilities and scheduled amortization payments on our Acquisition Financing facility. For the three months endedMarch 31, 2021 , net cash used in financing activities was primarily driven by the redemption of our Series 2018-A asset-backed notes and repayments on our Secured Financing facility. The issuance of our Series 2021-A asset-backed notes securitization was the primary source of funds for the redemption and repayments. Sources of Funds Debt and Available Credit Asset-Backed Securitizations As ofMarch 31, 2022 , we had$1.59 billion of outstanding asset-backed notes. Our securitizations utilize special purpose entities (SPEs) which are also variable interest entities (VIEs). For VIEs where we have determined we are the primary beneficiary, the financial results of the VIE are consolidated in our financial statements. For VIEs where we have determined we are not the primary beneficiary, the financial results of the VIE are not consolidated in our financial statements. For more information regarding our VIEs and asset-backed securitizations, see Note 4, Variable Interest Entities and Note 9,
Borrowing, respectively, from the notes to the condensed (unaudited) consolidated financial statements included elsewhere in this report.
Our ability to utilize our asset-backed securitization facilities as described herein is subject to compliance with various requirements including eligibility criteria for the loan collateral and covenants and other requirements. As ofMarch 31, 2022 , we were in compliance with all covenants and requirements of all our asset-backed notes. Secured Financings As ofMarch 31, 2022 , we had Secured Financing facilities with warehouse lines of$750.0 million in the aggregate with undrawn capacity of$273.0 million . Our ability to utilize our Secured Financing facilities as described herein is subject to compliance with various requirements, including eligibility criteria for collateral, concentration limits for our collateral pool, and covenants and other requirements. Acquisition Financing OnDecember 20, 2021 ,Oportun RF, LLC , a wholly-owned subsidiary of the Company issued a$116.0 million asset-backed floating rate variable funding note, and an asset-backed residual certificate, both of which are secured by certain residual cash flows from the Company's securitizations and guaranteed byOportun, Inc. The note was used to fund the cash consideration paid for the acquisition of Digit and bears interest at a rate of one-month LIBOR plus 8.00%. The Acquisition Financing is structured to pay down based on an amortization schedule, with a final payment inOctober 2024 . As ofMarch 31, 2022 , we were in compliance with all covenants and requirements per the Secured Financing facilities and Acquisition Financing. For more information regarding our Secured Financing facilities and Acquisition Financing, see Note 9, Borrowings of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.
Structured loan sales
InMarch 2022 , we participated in a securitization and sold loans through the issuance of amortizing asset-backed notes secured by a pool of our unsecured and secured personal installment loans. We also sold our share of the residual interest in the pool. The sold loans had an aggregate unpaid principal balance of approximately$227.6 million . For further information on the whole loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Whole loan sales
By
35 -------------------------------------------------------------------------------- chose not to renew the arrangement and allowed the agreement to expire on its terms onMarch 4, 2022 . The originations of loans sold and held for sale during the three months endedMarch 31, 2022 was$48.7 million . For further information on the whole loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.
Banking partnership program and service agreement
We entered into a bank partnership program withMetaBank, N.A. onAugust 11, 2020 . In accordance with the agreements underlying the bank partnership program,Oportun has a commitment to purchase an increasing percentage of program loans originated by MetaBank based on thresholds specified in the agreements. Lending under the partnership was launched in August of 2021.
Contractual obligations and commitments
The material cash requirements for our contractual and other obligations primarily include those related our outstanding borrowings under our asset-backed notes, Acquisition Financing and Secured Financing, corporate and retail leases, and purchase commitments for technology used in the business. See Note 9, Borrowings and Note 16, Leases, Commitments and Contingencies
of
the notes to the condensed (unaudited) consolidated financial statements included elsewhere in this report for more information.
Liquidity risks
We believe that our existing cash balance, anticipated positive cash flows from operations and available borrowing capacity under our credit facilities will be sufficient to meet our anticipated cash operating expense and capital expenditure requirements through at least the next 12 months. We do not have any significant unused sources of liquid assets. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing. In a rising interest rate environment, our ability to issue additional equity or incur debt may be impaired and our borrowing costs may increase. If we raise additional funds through the issuance of additional debt, the agreements governing such debt could contain covenants that would restrict our operations and such debt would rank senior to shares of our common stock. The sale of equity may result in dilution to our stockholders and those securities may have rights senior to those of our common stock. We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all.
Critical Accounting Policies and Significant Judgments and Estimates
Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K datedDecember 31, 2021 , filed with theSecurities and Exchange Commission onMarch 1, 2022 ("2021 Form 10-K"), under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations. For additional information about our critical accounting policies and estimates, see the disclosure included in our 2021 Form 10-K.
Recently published accounting pronouncements
See Note 2 of the Notes to the Condensed Consolidated Financial Statements (unaudited) included elsewhere in this report for a discussion of recent accounting pronouncements and future application of accounting standards.
36
————————————————– ——————————
© Edgar Online, source
Comments are closed.