OPORTUN FINANCIAL CORPORATION An index to our management's discussion and analysis follows:
Topic
Forward-Looking Statements 22 Overview 23 Key Financial and Operating Metrics 24 Historical Credit Performance 26 Results of Operations 28 Fair Value Estimate Methodology for Loans Receivable at Fair Value 34 Non-GAAP Financial Measures 35 Liquidity and Capital Resources 40 Off-Balance Sheet Arrangements 43 Critical Accounting Policies and Significant Judgments and Estimates 43 Recently Issued Accounting Pronouncements 43 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, 2020 included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , onFebruary 23, 2021 . 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 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 may be deemed to be 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 make;
•our ability to manage our net charge-off rates;
•our ability to successfully manage the potential adverse impact of the COVID-19
pandemic on our business, results and operations;
•our plans to consolidate a number of our retail locations and estimated future
expenses associated with our retail network optimization plan;
•our plans and timing for new product launches;
•our ability to successfully adjust our proprietary credit risk models and
products in response to changing macroeconomic conditions and fluctuations in
the credit market, including as a result of the COVID-19 pandemic;
•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 capabilities origination and increase the
volume of loans originated through our digital channels;
•our ability to increase the effectiveness of our marketing efforts;
•our ability to expand our presence in states in which we operate, as well as
expand into new states, including through the successful development and
execution of strategic partnerships, bank partnerships or by obtaining a
national bank charter;
•our plans and ability to enter into new markets and introduce new products and
services;
•our ability to continue to expand our demographic focus;
•our ability to maintain the terms on which we lend to our customers;
•our plans for and our ability to successfully maintain our diversified funding
strategy, including loan warehouse facilities, whole loan sales and
securitization transactions;
22
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•our ability to successfully manage our interest rate spread against our cost of
capital;
•our ability to manage fraud risk;
•our ability to efficiently manage our Customer Acquisition Cost;
•our expectations regarding the sufficiency of our cash to meet our operating
and cash expenditures;
•our ability to effectively estimate the fair value of our Fair Value Loans and
Fair Value Notes;
•our ability to effectively secure and maintain the confidentiality of the
information provided and utilized across our systems;
•our ability to successfully compete with companies that are currently in, or
may in the future enter, the business of providing consumer loans to low- and
moderate-income customers underserved by traditional, mainstream financial
institutions;
•our ability to attract, integrate and retain qualified employees;
•our ability to effectively manage and expand the capabilities of our contact
centers, outsourcing relationships and other business operations abroad; 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 be materially different from what we expect, particularly given the uncertainties caused by the COVID-19 pandemic.
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.
Overview
We offer responsible consumer credit through our A.I.-driven digital platform. Our products provide a lower cost alternative to individuals that are not well served by the financial mainstream. In our 15-year lending history, we have originated more than 4.5 million loans, representing over$11.1 billion of credit extended, to more than 2.0 million customers. We have developed a deep data-driven understanding of our customers' needs through a combination of the rigorous application of machine learning, the use of alternative data sets and continuous customer engagement. We have been certified as aCommunity Development Financial Institution ("CDFI") by theU.S. Department of the Treasury since 2009. Our core offering is a simple-to-understand, affordable, unsecured, fully amortizing personal installment loan with fixed payments and fixed interest rates throughout the life of the loan with APRs capped at 36%. Our unsecured personal loans do not have prepayment penalties or balloon payments and range in size from$300 to$11,000 with terms ranging from 8 to 51 months. We have begun expanding beyond our core offering of unsecured installment loans into other financial services that a significant portion of our customers already use and have asked us to provide, such as auto loans and credit cards. We launched the Oportun Visa Credit Card, issued byWebBank , Member FDIC, in 2019 and offered credit cards in 45 states as ofSeptember 30, 2021 . InApril 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 19 to 64 months. Beyond our core direct-to-consumer lending business, we believe that our proprietary credit scoring and underwriting model can be offered as a service to other companies. Our first strategic partner for this Lending as a Service model is DolEx. In this partnership, DolEx will market loans and enter customer applications intoOportun's system, andOportun will underwrite, originate and service the loans. In July, we signed our second Lending as a Service partner,Barri Financial Group , which we launched in several locations inOctober 2021 . If these partnerships are successful, we believe we will be able to offer Lending as a Service to additional partners and thereby expand our reach into new consumer markets. As part of our commitment to be a responsible lender, we verify income for our personal loan customers and only make loans to customers that our ability-to-pay model indicates should be able to afford a loan after meeting their other debts and regular living expenses. We execute our sales and marketing strategy through a variety of acquisition channels including our digital platform, retail locations, direct mail and digital marketing, and partnerships. We also benefit from customers learning aboutOportun from friends, family members and through social media. Our omni-channel network enables us to serve our customers in the way they prefer and when it is convenient for them, online, over-the-phone, and in person. We have 23 -------------------------------------------------------------------------------- seen our customers' usage and preference for our digital channels accelerate during 2020 and 2021 and we are continuing to invest in our digital origination and servicing platform, as well as building out customer self-service capabilities. Our product offerings serve as an alternative to high-cost installment, auto title, payday and pawn lenders. According to theFinancial Health Network study that we commissioned, we estimate that, as ofSeptember 30, 2021 , our customers have saved more than$2.0 billion in aggregate interest and fees compared to alternative products available to them. With the rollout of our partnership with MetaBank, N.A, a national bank ("MetaBank"), inAugust 2021 , MetaBank originates unsecured personal loans in 21 states outside of our state-licensed footprint as ofSeptember 30, 2021 , allowing us to offer a uniform product across the nation, while minimizing operational complexity and generating cost savings that can be passed on to our customers. Through MetaBank, we plan to offer loan products that are the same as our unsecured personal loans with APRs capped at 36%. 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 16 bond offerings in the asset-backed securities market, the last 13 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. We are also party to a whole loan sale program whereby we sell a percentage of our loans to a third-party financial institution. In addition to our whole loan sale program, we also have a$600.0 million Personal Loan Warehouse facility, committed throughSeptember 2024 , which also helps to fund our loan portfolio growth. Further, we have entered into a separate agreement with another institution which provides us with additional funding to expand our credit card product. InNovember 2020 , we filed our application to obtain a national bank charter. OnOctober 8, 2021 , we announced that we were voluntarily withdrawing our previously filed application and plan to amend elements of our application to reflect changes in our business. If established,Oportun Bank, N.A. will seek to serve customers in all 50 states with consumer lending and deposit services.
Retail Network Optimization
Consistent with our retail network optimization plan, during the first quarter of 2021, 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 and nine months endedSeptember 30, 2021 , we incurred$0.1 million and$11.2 million , respectively, in expenses related to the retail location closures. In the first quarter of 2021, we recognized$1.6 million related to severance and benefits related to the store closures which represents all severance and benefits related costs to be incurred related to the retail network optimization plan. The income statement impact for the three and nine months endedSeptember 30, 2021 was$0.1 million and$12.8 million , respectively, and was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited). The retail network optimization plan was substantially completed in the third quarter, and we do not expect any significant additional expenses to be incurred.
Key Financial and Operating Metrics
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.
See the next section, "Non-GAAP Financial Measures", included in this Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for a presentation of the actual impact of the election of the
fair value option for the periods presented in the financial statements included
elsewhere in this report.
As of or for the Three Months As of or for the Nine Months
Ended September 30, Ended September 30,
(in thousands of dollars, except CAC) 2021 2020 2021 2020
Key Financial and Operating Metrics
Aggregate Originations $ 662,105 $ 302,397 $ 1,430,383 $ 892,798
Active Customers 772,361 624,205 772,361 624,205
Customer Acquisition Cost $ 152 $ 207 $ 166 $ 223
Managed Principal Balance at End of
Period $ 2,147,856 $ 1,835,764 $ 2,147,856 $ 1,835,764
30+ Day Delinquency Rate 2.8 % 3.5 % 2.8 % 3.5 %
Annualized Net Charge-Off Rate 5.5 % 10.4 % 6.8 % 10.0 %
Operating Efficiency 70.0 % 74.3 % 75.8 % 66.2 %
Adjusted Operating Efficiency 67.1 % 63.3 % 68.7 % 60.1 %
Return on Equity 18.3 % (5.3) % 9.1 % (15.2) %
Adjusted Return on Equity 19.0 % 3.7 % 14.4 % (9.0) %
Other Useful Metrics
Number of Loans Originated 210,731 97,826 479,183 289,169
Average Daily Principal Balance $ 1,741,358 $ 1,598,141 $ 1,654,582 $ 1,731,748
Owned Principal Balance at End of Period $ 1,862,143 $ 1,571,980 $ 1,862,143 $ 1,571,980
24
--------------------------------------------------------------------------------See "Glossary" at the beginning of this report for formulas and definitions of our key performance metrics.
Aggregate Originations Aggregate Originations increased to$662.1 million for the three months endedSeptember 30, 2021 from$302.4 million for the three months endedSeptember 30, 2020 , representing a 119.0% increase. The increase is primarily driven by growth in application volume due to higher demand and an increase in average loan size. We originated 210,731 and 97,826 loans for the three months endedSeptember 30, 2021 and 2020, respectively, representing an increase of 115.4%. Aggregate Originations increased to$1,430.4 million for the nine months endedSeptember 30, 2021 from$892.8 million for the nine months endedSeptember 30, 2020 , representing a 60.2% increase. The increase is primarily driven by an increased number of applications due to higher demand. We originated 479,183 and 289,169 loans for the nine months endedSeptember 30, 2021 and 2020, respectively, representing a 65.7% increase. The increase in Aggregate Originations was partially offset by a decrease in average loan size for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decrease in average loan size is primarily due to growth in the proportion of new customers compared to returning customers.
Active Customers
Active Customers increased by 23.7% fromSeptember 30, 2020 toSeptember 30, 2021 due to higher originations as a result of an increase in application volume and the growth of our credit card and unsecured personal loan products.
Customer Acquisition Cost
For the three months endedSeptember 30, 2021 and 2020, our Customer Acquisition Cost was$152 and$207 , respectively, a decrease of 26.6%. For the nine months endedSeptember 30, 2021 and 2020, our Customer Acquisition Cost was$166 and$223 , respectively, a decrease of 25.6%. The decrease is primarily due to the increase in number of loans originated period over period as a result of an increase in application volume due to higher demand. The decrease is partially offset by the higher sales and marketing expenses due to growth in direct mail volume, digital marketing and our customer referral programs.
Managed Principal Balance at End of Period
Managed Principal Balance at End of Period as ofSeptember 30, 2021 increased by 17.0% fromSeptember 30, 2020 , driven by growth in originations over the last 12 months. 30+ Day Delinquency Rate Our 30+ Day Delinquency Rate was 2.8% and 3.5% as ofSeptember 30, 2021 and 2020, respectively. The decrease is due to the overall improvement in the economy, COVID-19 stimulus measures that our customers have used to stay current on their payments, as well as the effectiveness of our A.I.-driven underwriting models, collections tools and payment options that have helped our customers manage through the pandemic.
Annualized Net Charge-Off Rate
Annualized Net Charge-Off Rate for the three months endedSeptember 30, 2021 and 2020 was 5.5% and 10.4%, respectively. Annualized Net Charge-Off Rate for the nine months endedSeptember 30, 2021 and 2020 was 6.8% and 10.0%, respectively. Net charge-offs decreased 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 customers manage through the pandemic.
Operating Efficiency and Adjusted Operating Efficiency
For the three months endedSeptember 30, 2021 and 2020, Operating Efficiency was 70.0% and 74.3% respectively, and Adjusted Operating Efficiency for the same period was 67.1% and 63.3%, respectively. For the nine months endedSeptember 30, 2021 and 2020, Operating Efficiency was 75.8%, and 66.2%, respectively, and Adjusted Operating Efficiency was 68.7% and 60.1%, respectively. The change in Operating Efficiency for the three and nine months endedSeptember 30, 2021 is primarily due to year-over-year increases in operating expenses driven by$14.6 million and$31.7 million in investments in new products and channels for the three and nine months endedSeptember 30, 2021 , respectively. The change in Operating Efficiency was also driven by our increased investment in marketing initiatives of$11.5 million and$14.2 million for the three and nine months endedSeptember 30, 2021 , respectively, as well as additional investments in technology, data and digital capabilities. The increase in operating expenses year-over-year also included$12.8 million of expenses related to our retail network optimization plan and a$3.3 million impairment charge related to our right-of-use asset recognized due to management's decision to move toward a remote-first work environment in the nine months endedSeptember 30, 2021 . Adjusted Operating Efficiency excludes COVID-19 expenses prior toJanuary 1, 2021 , stock-based compensation expense, and litigation reserves, expenses associated with our retail network optimization plan and impairment charges. For a reconciliation of Operating Efficiency to Adjusted Operating Efficiency, see "Non-GAAP Financial Measures-Fair Value Pro Forma." 25 --------------------------------------------------------------------------------
Return on Equity and Adjusted Return on Equity
For the three months endedSeptember 30, 2021 and 2020, Return on Equity was 18.3% and (5.3)%, respectively, and Adjusted Return on Equity was 19.0% and 3.7%, respectively, For the nine months endedSeptember 30, 2021 and 2020, Return on Equity was 9.1% and (15.2)%, respectively, and Adjusted Return on Equity was 14.4% and (9.0)%, 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 lower credit losses and increased fair value of our loan portfolio due to improved credit outlook. For a reconciliation of Return on Equity to Adjusted Return on Equity, see "Non-GAAP Financial Measures-Fair Value Pro Forma."
Average Daily Principal Balance
Average Daily Principal Balance increased by 9.0% from
Average Daily Principal Balance decreased by 4.5% from$1.73 billion for the nine months endedSeptember 30, 2020 to$1.65 billion for the nine months endedSeptember 30, 2021 . The decrease is primarily driven by shrinkage in our portfolio as a result of lower originations due to economic uncertainty following the onset of the COVID-19 pandemic inMarch 2020 and a decrease in average loan size. We have seen an increase in Aggregate Originations for the nine months endedSeptember 30, 2021 due to higher application volume.
Owned Principal Balance at End of Period
Owned Principal Balance at End of Period as of
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. 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-20210930_g1.jpg]]
*Numbers shown reflect year-to-date amounts for the nine 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 throughSeptember 30, 2021 divided by the total origination loan volume for that year. 26 -------------------------------------------------------------------------------- The below table shows our net lifetime loan loss rate for each annual vintage since we began lending in 2006. 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. The chart below includes all personal loan originations by vintage, excluding loans originated fromJuly 2017 toAugust 2020 under a loan program for customers who did not meet the qualifications for our core loan origination program. 100% of those loans were sold pursuant to a whole loan sale arrangement. [[Image Removed: oprt-20210930_g2.jpg]] Year of Origination 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Net lifetime loan losses as of September 30, 2021 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%* 9.4%* 2.8%* Outstanding principal balance as ofSeptember 30, 2021 as a percentage of original amount disbursed -% -% -% -% -% -% -% -% -% -% 0.1% 2.9% 21.2% 63.6% 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
* Vintage is not yet fully mature from a loss perspective.
27
--------------------------------------------------------------------------------Results of Operations
The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three and nine months endedSeptember 30, 2021 and 2020. Three Months Ended September 30, Nine Months Ended September 30, (in thousands of dollars) 2021 2020 2021 2020 Revenue Interest income$ 145,444 $ 128,739 $ 401,224 $ 415,525 Non-interest income 13,640 8,028 31,427 27,377 Total revenue 159,084 136,767 432,651 442,902 Less: Interest expense 10,574 13,408 36,241 44,879 Total net decrease in fair value (8,987) (29,633) (26,457) (177,584) Net revenue 139,523 93,726 369,953 220,439 Operating expenses: Technology and facilities 34,226 31,641 100,274 93,927 Sales and marketing 32,102 20,634 79,743 65,521 Personnel 29,039 26,662 84,412 79,925 Outsourcing and professional fees 13,348 11,491 40,762 36,232 General, administrative and other 2,686 11,138 22,862 17,591 Total operating expenses 111,401 101,566 328,053 293,196 Income before taxes 28,122 (7,840) 41,900 (72,757) Income tax expense (benefit) 5,143 (1,794) 8,652 (19,162) Net income (loss)$ 22,979 $ (6,046) $ 33,248 $ (53,595) Total revenue Three Months Ended Nine Months Ended September 30, Period-to-period Change September 30, Period-to-period Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Revenue Interest income$ 145,444 $ 128,739 $ 16,705 13.0 %$ 401,224 $ 415,525 $ (14,301) (3.4) % Non-interest income 13,640 8,028 5,612 69.9 % 31,427 27,377 4,050 14.8 % Total revenue$ 159,084 $ 136,767 $ 22,317 16.3 %$ 432,651 $ 442,902 $ (10,251) (2.3) %
Percentage of total revenue: Interest income 91.4 % 94.1 % 92.7 % 93.8 % Non-interest income 8.6 % 5.9 % 7.3 % 6.2 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Interest Income. Total interest income increased by$16.7 million , or 13.0%, from$128.7 million for the three months endedSeptember 30, 2020 to$145.4 million for the three months endedSeptember 30, 2021 . This increase was primarily attributable to higher Average Daily Principal Balance, which increased from$1.60 billion for the three months endedSeptember 30, 2020 to$1.74 billion for the three months endedSeptember 30, 2021 . The increase is due to growth in our portfolio as a result of higher application volume due to increased demand. Interest income was also favorably impacted by an increase in portfolio yield of 116 basis points in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to growth in originations to new customers who generally receive higher APRs than returning customers. Total interest income decreased by$14.3 million , or 3.4%, from$415.5 million for the nine months endedSeptember 30, 2020 to$401.2 million for the nine months endedSeptember 30, 2021 . This decrease was primarily attributable to lower Average Daily Principal Balance, which declined from$1.73 billion for the nine months endedSeptember 30, 2020 to$1.65 billion for the nine months endedSeptember 30, 2021 . The decrease is due to shrinkage in our portfolio as a result of lower originations due to economic uncertainty following the onset of the COVID-19 pandemic. Non-interest income. Total non-interest income increased by$5.6 million , or 69.9%, from$8.0 million for the three months endedSeptember 30, 2020 to$13.6 million for the three months endedSeptember 30, 2021 . This increase is primarily due to increased gain on loans sold of$3.4 million , or 88.8% under our whole loan sale programs due to an increase in loans sold resulting from higher origination volume. The increase in non-interest income is also due to increased credit card fees of$1.5 million , which have increased with the growth of our credit card customer base. 28 -------------------------------------------------------------------------------- Total non-interest income increased by$4.1 million , or 14.8%, from$27.4 million for the nine months endedSeptember 30, 2020 to$31.4 million for the nine months endedSeptember 30, 2021 . This increase is primarily due to increased gain on loans sold of$3.7 million , or 27.4% under our whole loan sale programs due to an increase in loans sold resulting from higher origination volume. The increase in non-interest income is also due to increased credit card fees partially offset by decreased servicing fees of$2.7 million for the nine months endedSeptember 30, 2021 , or 22.6%, related to the shrinkage in our serviced portfolio of sold loans due to lower loan sale volume since the onset of the COVID-19 pandemic and our decision to sell 10% versus 15% of originated loans. See Note 2, Summary of Significant Accounting Policies, and Note 11, Revenue, of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our interest income, non-interest income and revenue.
Interest expense
Three Months Ended Nine Months Ended
September 30, Period-to-period Change September 30, Period-to-period Change(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Interest expense$ 10,574 $ 13,408 $ (2,834) (21.1) %$ 36,241 $ 44,879 $ (8,638) (19.2) % Percentage of total revenue 6.6 % 9.8 % 8.4 % 10.1 % Cost of Debt 2.8 % 4.0 % 3.3 % 4.1 % Leverage as a percentage of Average Daily Principal Balance 86.4 % 82.6 % 88.8 % 84.1 % Interest Expense. Interest expense decreased by$2.8 million , or 21.1%, from$13.4 million for the three months endedSeptember 30, 2020 to$10.6 million for the three months endedSeptember 30, 2021 . We financed approximately 86.4% of our loans receivable through debt for the three months endedSeptember 30, 2021 , as compared to 82.6% for the three months endedSeptember 30, 2020 , and our Average Daily Debt Balance increased from$1.32 billion for the three months endedSeptember 30, 2020 to$1.50 billion for the three months endedSeptember 30, 2021 , an increase of 13.9%. Our leverage as a percentage of Average Daily Principal Balance was elevated due to the prefunding account on our 2021-B securitization. Adjusting for this restricted cash amount, our leverage ratio would have been 85.5% for the three months endedSeptember 30, 2021 . We have continued to improve our Cost of Debt as we have been able to refinance and increase the size of our securitizations. Interest expense decreased by$8.6 million , or 19.2%, from$44.9 million for the nine months endedSeptember 30, 2020 to$36.2 million for the nine months endedSeptember 30, 2021 . We financed approximately 88.8% of our loans receivable through debt for the nine months endedSeptember 30, 2021 , as compared to 84.1% for the nine months endedSeptember 30, 2020 , and our Average Daily Debt Balance increased slightly from$1.46 billion for the nine months endedSeptember 30, 2020 to$1.47 billion for the nine months endedSeptember 30, 2021 , an increase of 0.9%. Our leverage as a percentage of Average Daily Principal Balance was elevated due to the prefunding account on our 2021-B securitization. Adjusting for this restricted cash amount, our leverage ratio would have been 86.0% for the nine months endedSeptember 30, 2021 . We have continued to improve our Cost of Debt as we have been able to refinance and increase the size of our securitizations. 29 --------------------------------------------------------------------------------
Total net decrease in fair value
Net decrease in fair value reflects changes in fair value of Fair Value Loans and Fair Value Notes on an aggregate basis and is based on a number of factors, including benchmark interest rates, credit spreads, remaining cumulative charge-offs and customer 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 credit card funding facility and servicing agreement withWebBank and our bank partnership program withMetaBank, N.A. Changes in the fair value of the derivative asset are reflected in the total fair value mark-to-market adjustment below. Three Months Ended Nine Months Ended September 30, Period-to-period Change September 30, Period-to-period Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Fair value mark-to-market adjustment: Fair value mark-to-market adjustment on Loans Receivable at$ 12,962 $ 39,828 $ (26,866) *$ 52,333 $ (52,242) $ 104,575 * Fair Value Fair value mark-to-market 700 (27,515) 28,215 * 4,237 3,758 479 * adjustment on asset-backed notes Fair value mark-to-market 935 - 935 * 639 - 639 * adjustment on derivatives Total fair value mark-to-market 14,597 12,313 2,284 * 57,209 (48,484) 105,693 *
adjustment
Charge-offs, net of recoveries on (23,924) (41,946) 18,022 * (84,183) (129,100) 44,917 * loans receivable at fair value Excess interest - credit card 340 - 340 * 517 - 517 * performance fee Total net decrease in fair value$ (8,987) $ (29,633) $ 20,646 *$ (26,457) $ (177,584) $ 151,127 * Percentage of total revenue: Fair value mark-to-market 9.2 % 9.0 % 13.2 % (10.9) % adjustment Charge-offs, net of recoveries on (15.0) % (30.7) % (19.5) % (29.1) % loans receivable at fair value Total net decrease in fair value (5.9) % (21.7) % (6.2) % (40.1) % Discount rate 6.52 % 7.84 % 6.52 % 7.84 % Remaining cumulative charge-offs 7.53 % 10.61 % 7.53 % 10.61 % Average life in years 0.76 0.78 0.76 0.78 * Not meaningful Net increase (decrease) in fair value. Net decrease in fair value for the three months endedSeptember 30, 2021 was$9.0 million . This amount represents a total fair value mark-to-market increase of$14.6 million , and$23.9 million of charge-offs, net of recoveries on Fair Value Loans. The total fair value mark-to-market adjustment consists of a$13.0 million mark-to-market adjustment on Fair Value Loans due to (a) a decrease in the discount rate from 6.54% as ofJune 30, 2021 to 6.52% as ofSeptember 30, 2021 caused by declining interest rates and credit spreads, and (b) a decrease in remaining cumulative charge-offs from 7.59% as ofJune 30, 2021 to 7.53% as ofSeptember 30, 2021 due to improving credit trends, partially offset by (c) a slight decrease in average life from 0.77 years as ofJune 30, 2021 to 0.76 years as ofSeptember 30, 2021 . The$0.7 million mark-to-market adjustment on Fair Value Notes is due to the tendency for asset-backed security prices to trend toward par as they approach their call date, partially offset by tightening in longer-dated asset-backed notes. Net decrease in fair value for the nine months endedSeptember 30, 2021 was$26.5 million . This amount represents a total fair value mark-to-market increase of$57.2 million , and$84.2 million of charge-offs, net of recoveries on Fair Value Loans. The total fair value mark-to-market adjustment consists of a$52.3 million mark-to-market adjustment on Fair Value Loans due to (a) a decrease in the discount rate from 6.85% as ofDecember 31, 2020 to 6.52% as ofSeptember 30, 2021 caused by declining interest rates and credit spreads, and (b) an decrease in remaining cumulative charge-offs from 10.03% as ofDecember 31, 2020 to 7.53% as ofSeptember 30, 2021 due to improving credit trends, partially offset by (c) a slight decrease in average life from 0.80 years as ofDecember 31, 2020 to 0.76 years as ofSeptember 30, 2021 . The$4.2 million mark-to-market adjustment on Fair Value Notes is due to the tendency for asset-backed security prices to trend toward par as they approach their call date, partially offset by tightening in longer-dated asset-backed notes.
Charge-offs, net of recoveries
Three Months Ended Nine Months Ended
September 30 , Period-to-period Change September 30 , Period-to-period Change
(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ %
Total charge-offs, net of
recoveries $ 23,924 $ 41,946 $ (18,022) (43.0) % $ 84,183 $ 129,100 $ (44,917) (34.8) %
Average Daily Principal Balance
$ 143,217 9.0 %$ 1,654,582 $ 1,731,748 $ (77,166) (4.5) % Annualized Net Charge-Off Rate 5.5 % 10.4 % 6.8 % 10.0 % 30
-------------------------------------------------------------------------------- Charge-offs, net of recoveries. Our Annualized Net Charge-Off Rate decreased to 5.5% and 6.8% for the three months and nine months endedSeptember 30, 2021 , respectively, from 10.4% and 10.0% for the three and nine months endedSeptember 30, 2020 , respectively. Net charge-offs for the three months and nine months endedSeptember 30, 2021 decreased primarily due to the overall improvement in the economy and the impact of stimulus payments to consumers. 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. As a result of the pandemic and based upon our analysis of loan performance following natural disasters or other emergencies, more loans have been determined to be uncollectible prior to reaching 120 days contractually past due, resulting in higher charge-offs. This led to$1.0 million and$6.4 million of additional charge-offs for the three and nine months endedSeptember 30, 2021 , respectively, compared to$11.2 million and$15.3 million of additional charge-offs for the three and nine months endedSeptember 30, 2020 , respectively. Operating expenses Operating expenses consist of technology and facilities, sales and marketing, personnel, outsourcing and professional fees and general, administrative and other expenses. Operating expenses include$14.6 million and$31.7 million related to new products for the three and nine months endedSeptember 30, 2021 , respectively. Operating expenses include$4.2 million and$12.4 million related to new products for the three and nine months endedSeptember 30, 2020 , respectively.
Technology and facilities
Technology and facilities expense is the largest component of our operating
expenses, representing the costs required to build our omni-channel network and
technology platform, and consists of three components. The first component is
comprised of 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, this
category also includes all software licenses, subscriptions, and technology
service costs to support our corporate operations, excluding sales and
marketing.
Three Months Ended Nine Months Ended
September 30, Period-to-period Change September 30, Period-to-period Change
(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ %
Technology and facilities $ 34,226 $ 31,641 $ 2,585 8.2 % $ 100,274 $ 93,927 $ 6,347 6.8 %
Percentage of total revenue 21.5 % 23.1 % 23.2 % 21.2 %
Technology and facilities. Technology and facilities expense increased by $2.6
million , or 8.2%, from $31.6 million for the three months ended September 30,
2020 to $34.2 million for the three months ended September 30, 2021 . The
increase is primarily due to a $1.0 million increase in service costs related to
higher usage of software and cloud services, $0.6 million of increased
depreciation commensurate with growth in internally developed software and $0.5
million increase in usage of temporary contractors to supplement staffing
related to new product investment.
Technology and facilities expense increased by $6.3 million , or 6.8%, from $93.9
million for the nine months ended September 30, 2020 to $100.3 million for the
nine months ended September 30, 2021 . The increase is primarily due to a $3.1
million increase in service costs related to higher usage of software and cloud
services, $2.1 million of increased depreciation commensurate with growth in
internally developed software and a $1.1 million increase in usage of India
off-shoring services and other temporary contractors to supplement staffing
related to new product investment.
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 Nine Months Ended
September 30, Period-to-period Change September 30, Period-to-period Change(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Sales and marketing$ 32,102 $ 20,634 $ 11,468 55.6 %$ 79,743 $ 65,521 $ 14,222 21.7 % Percentage of total revenue 20.2 % 15.1 % 18.4 % 14.8 %
Customer Acquisition Cost (CAC)
(55) (26.6) % $ 166 $ 223 $ (57) (25.6) %
Sales and marketing. Sales and marketing expenses to acquire our customers
increased by $11.5 million , or 55.6%, from $20.6 million for the three months
ended September 30, 2020 to $32.1 million for the three months ended September
30, 2021 . To grow our loan originations, we increased our investment in
marketing initiatives by $13.2 million across various marketing channels,
including direct mail, digital advertising and our customer referral programs.
This increase was partially offset by $2.4 million lower personnel-related costs
as a result of the implementation of our retail network optimization plan that
began in the first quarter of 2021. As a result of our increased number of loans
originated during the three months ended September 30, 2021 , our CAC decreased
by 26.6% as compared to the three months ended September 30, 2020 .
31
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Sales and marketing expenses to acquire our customers increased by $14.2
million , or 22%, from $65.5 million for the nine months ended September 30, 2020
to $79.7 million for the nine months ended September 30, 2021 . To grow our loan
originations, we increased our investment in marketing initiatives by $20.7
million across various marketing channels, including direct mail, digital
advertising, lead aggregators and our customer referral programs. This increase
was partially offset by $6.6 million lower personnel-related costs as a result
of the implementation of our retail network optimization plan that began in the
first quarter of 2021. As a result of our increased number of loans originated
during the nine months ended September 30, 2021 , our CAC decreased by 25.6% as
compared to the nine months ended September 30, 2020 .
Personnel
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 technology and facilities.
Three Months Ended Nine Months Ended
September 30, Period-to-period Change September 30, Period-to-period Change
(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ %
Personnel $ 29,039 $ 26,662 $ 2,377 8.9 % $ 84,412 $ 79,925 $ 4,487 5.6 %Percentage of total revenue 18.3 % 19.5 % 19.5 % 18.0 % Personnel. Personnel expense increased by$2.4 million , or 8.9%, from$26.7 million for the three months endedSeptember 30, 2020 to$29.0 million for the three months endedSeptember 30, 2021 , driven by increased compensation expense due to a 5.9% increase inU.S. headcount. Personnel expense increased by$4.5 million , or 5.6%, from$79.9 million for the nine months endedSeptember 30, 2020 to$84.4 million for the nine months endedSeptember 30, 2021 , primarily driven by a$4.1 million increase in compensation expense due to a 5.9% 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 andJamaica provide support for the business including application processing, verification, customer service and collections. We utilize third parties to operate the contact centers inColombia andJamaica and include the costs in outsourcing and other 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 Fair Value Notes. Three Months Ended Nine Months Ended September 30, Period-to-period Change September 30, Period-to-period Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ %
Outsourcing and professional fees
$ 1,857 16.2 %$ 40,762 $ 36,232 $ 4,530 12.5 % Percentage of total revenue 8.4 % 8.4 % 9.4 % 8.2 % Outsourcing and professional fees. Outsourcing and professional fees increased by$1.9 million , or 16%, from$11.5 million for the three months endedSeptember 30, 2020 to$13.3 million for the three months endedSeptember 30, 2021 . The increase is primarily attributable to a$2.7 million increase in credit report expense due to higher application volume and$1.0 million of higher professional service costs related to credit card and bank partnership programs. These increases were partially offset by a$1.2 million decrease related to ceasing legal collection on defaulted loans sinceAugust 2020 and$1.1 million lower outsourced service costs due to the reduced contact center outsourced headcount as compared to prior year as a result of the uncertainty around the COVID-19 pandemic. Outsourcing and professional fees increased by$4.5 million , or 13%, from$36.2 million for the nine months endedSeptember 30, 2020 to$40.8 million for the nine months endedSeptember 30, 2021 . The increase is primarily attributable to a$7.7 million in debt financing fees and expenses related to asset-backed securitizations,$4.0 million increase in credit report expense due to higher application volume and$2.7 million of higher professional service costs related to credit card and bank partnership programs and expenses associated with our prior bank charter application. These increases were partially offset by a$5.6 million decrease related to ceasing legal collection on defaulted loans beginning inAugust 2020 ,$2.9 million lower outsourced service costs due to the decline in contact center outsourced headcount that was needed in prior year as a result of the uncertainty around the COVID-19 pandemic and$1.2 million of lower legal fees. 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 organizations, 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 and expenses associated with our retail network optimization plan. 32 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Period-to-period Change September 30, Period-to-period Change
(in thousands, except percentages) 2021 2020 $ % 2021 2020 $ %
General, administrative and other
$ (8,452) (75.9) %$ 22,862 $ 17,591 $ 5,271 30.0 % Percentage of total revenue 1.7 % 8.1 % 5.3 % 4.0 % General, administrative and other. General, administrative and other expense decreased by$8.5 million , or 76%, from$11.1 million for the three months endedSeptember 30, 2020 to$2.7 million for the three months endedSeptember 30, 2021 , primarily due to a$8.8 million litigation reserve recorded for the three months endedSeptember 30, 2020 . General, administrative and other expense increased by$5.3 million , or 30%, from$17.6 million for the nine months endedSeptember 30, 2020 to$22.9 million for the nine months endedSeptember 30, 2021 , primarily due to our retail network optimization expenses of$11.1 million related to the retail location closures and$1.6 million related to severance and benefits related to the retail location closures. The increase was also attributable to a$3.3 million impairment charge recognized on a right-of use asset related to our leased office space inSan Carlos, California due to management's decision to move toward a remote-first work environment. These increases were partially offset by an$8.8 million decrease in litigation reserve related to prior year and decreases in travel expenses due to the travel restrictions and remote work arrangements resulting from the COVID-19 pandemic.
Income taxes
Income taxes consist ofU.S. federal, state and foreign income taxes, if any. For the periods endedSeptember 30, 2021 and 2020, we recognized tax expense (benefit) attributable toU.S. federal, state and foreign income taxes. Three Months Ended Nine Months Ended September 30, Period-to-period Change September 30, Period-to-period Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Income tax expense (benefit)$ 5,143 $ (1,794) $ 6,937 386.7 %$ 8,652 $ (19,162) $ 27,814 145.2 % Percentage of total revenue 3.2 % (1.3) % 2.0 % (4.3) % Effective tax rate 18.3 % 22.9 % 20.7 % 26.3 % Income tax expense (benefit). Income tax expense increased by$6.9 million or 387%, from a benefit of$1.8 million for the three months endedSeptember 30, 2020 to an expense of$5.1 million for the three months endedSeptember 30, 2021 , primarily as a result of having pretax income for the three months endedSeptember 30, 2021 compared to a pretax loss for the three months endedSeptember 30, 2020 as well as tax planning performed by the Company. Income tax expense increased by$27.8 million or 145%, from a benefit of$19.2 million for the nine months endedSeptember 30, 2020 to an expense of$8.7 million for the nine months endedSeptember 30, 2021 , primarily as a result of having pretax income for the nine months endedSeptember 30, 2021 compared to a pretax loss for the nine months endedSeptember 30, 2020 as well as tax planning performed by the Company.
See Note 2, Summary of Significant Accounting Policies, and Note 12, Income Taxes, of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our income taxes.
33
--------------------------------------------------------------------------------Fair Value Estimate 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 and Comprehensive Income (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 Fair Value Loans may be partially offset by changes in the fair value of the Fair Value Notes, depending upon the relative duration of the instruments.
Fair Value Estimate Methodology for Loans Receivable at Fair Value
We calculate the fair value of Fair Value Loans using a model that projects and discounts expected cash flows. The fair value is a function of:
•Portfolio yield; •Average life; •Prepayments; •Remaining cumulative charge-offs; 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.
Remaining cumulative charge-offs is the expected net principal charge-offs 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 whole loan purchase price at the time the flow sale
agreement was entered into, updated for observable changes in the fixed income
markets, which serve as a proxy for how a whole 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 seven
quarters:
•Subtracting the servicing fee from the weighted average portfolio yield over
the remaining life of the loans to calculate net portfolio yield;
•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 charge-offs from the net portfolio yield
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 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.
34
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The table below reflects the application of this methodology for the seven
quarters since January 1, 2020 , on loans held for investment. The data for the
three months ended September 30, 2021 in the table below represents our secured
and unsecured loan portfolio. For the 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
Sep 30, 2021 Jun 30, 2021 Mar 31, 2021 Dec 31, 2020 Sep 30, 2020 Jun 30, 2020 Mar 31, 2020
Weighted average portfolio yield 30.35 % 30.28 % 30.25 % 30.17 % 30.50 % 30.78 % 30.74 %
over the remaining life of the loans
Less: Servicing fee (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) %
Net portfolio yield 25.35 % 25.28 % 25.25 % 25.17 % 25.50 % 25.78 % 25.74 %
Multiplied by: Weighted average life 0.761 0.769 0.778 0.796 0.775 0.797 0.903
in years
Pre-loss cash flow 19.26 % 19.43 % 19.64 % 20.03 % 19.75 % 20.54 % 23.25 %
Less: Remaining cumulative (7.53) % (7.59) % (8.60) % (10.03) % (10.61) % (12.73) % (14.56) %
charge-offs
Net cash flow 11.73 % 11.84 % 11.04 % 10.00 % 9.14 % 7.81 % 8.69 %
Less: Discount rate multiplied by (4.96) % (5.03) % (5.17) % (5.45) % (6.07) % (7.04) % (11.54) %
average life
Gross fair value premium (discount)
as a percentage of loan principal 6.77 % 6.81 % 5.87 % 4.55 % 3.07 % 0.77 % (2.85) %
balance
Less: Accrued interest and fees as a (0.90) % (0.87) % (0.92) % (1.06) % (1.15) % (1.35) % (1.11) % percentage of loan principal balance Fair value premium (discount) as a 5.87 % 5.94 % 4.95 % 3.49 % 1.92 % (0.58) % (3.96) % percentage of loan principal balance Discount Rate 6.52 % 6.54 % 6.65 % 6.85 % 7.84 % 8.84 % 12.78 %
The illustrative table included above is designed to assist investors in understanding the impact of our election of the fair value option.
Non-GAAP Financial Measures
We believe that the provision of non-GAAP financial measures in this report, including Fair Value Pro Forma information, 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 consider 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 Fair Value Loans or our Fair Value Notes. ?Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us. Reconciliations of non-GAAP to GAAP measures can be found below.
Fair Value Pro Forma
We previously elected the fair value option to account for all Fair Value Loans held for investment and all Fair Value Notes issued on or afterJanuary 1, 2018 . In order to facilitate comparisons to prior periods, we provided unaudited financial information for the three and nine months endedSeptember 30, 2020 on a pro forma basis, or the Fair Value Pro Forma, as if we had elected the fair value option since our inception for all loans originated and held for investment and all asset-backed notes issued. Upon adoption of ASU 2019-05, effectiveJanuary 1, 2020 , we elected the fair value option on all remaining loans that had previously been measured at amortized cost. Accordingly, for the three and nine months endedSeptember 30, 2021 and 2020, we did not have any loans receivable measured at amortized cost. Therefore, there are no Fair Value Pro Forma adjustments related to assets or revenue as of and for the three and nine months endedSeptember 30, 2021 and 2020. As ofJanuary 1, 2021 , we no longer have any Fair Value Pro Forma adjustments as there are no longer any amortized cost balances. However, on a Fair Value Pro Forma basis, the three and nine months endedSeptember 30, 2020 include Fair Value Pro Forma adjustments related to our asset-backed notes at amortized cost. 35 --------------------------------------------------------------------------------
Fair Value Pro Forma Condensed Consolidated Statements of Operations Data:
Three Months
Ended September Three Months Ended September Period-to-period Change in
30, 2021 (1) 30, 2020 FVPF (1)
(in thousands) As Reported As Reported FV Adjustments FV Pro Forma $ %
Revenue:
Interest income $ 145,444 $ 128,739 $ - $ 128,739 $ 16,705 13.0 %
Non-interest income 13,640 8,028 - 8,028 5,612 69.9 %
Total revenue 159,084 136,767 - 136,767 22,317 16.3 %
Less:
Interest expense 10,574 13,408 (207) 13,201 (2,627) (19.9) %
Net decrease in fair value (8,987) (29,633) (1,579) (31,212) 22,225 (71.2) %
Net revenue 139,523 93,726 (1,372) 92,354 47,169 51.1 %
Operating expenses:
Technology and facilities 34,226 31,641 - 31,641 2,585 8.2 %
Sales and marketing 32,102 20,634 - 20,634 11,468 55.6 %
Personnel 29,039 26,662 - 26,662 2,377 8.9 %
Outsourcing and professional fees 13,348 11,491 - 11,491 1,857 16.2 %
General, administrative and other 2,686 11,138 - 11,138 (8,452) (75.9) %
Total operating expenses 111,401 101,566 - 101,566 9,835 9.7 %
Income (loss) before taxes 28,122 (7,840) (1,372) (9,212) 37,334 405.3 %
Income tax expense (benefit) 5,143 (1,794) (375) (2,169) 7,312 337.1 %
Net income (loss) $ 22,979 $ (6,046) $ (997) $ (7,043) $ 30,022 426.3 %
(1) Beginning in 2021 we are no longer including any Fair Value Pro Forma
adjustments because all loans originated and held for investment and
asset-backed notes issued are recorded at fair value. Therefore, the three
months ended
Nine Months
Ended September Nine Months Ended September Period-to-period Change in
30, 2021 (1) 30, 2020 FVPF (1)
(in thousands) As Reported As Reported FV Adjustments FV Pro Forma $ %
Revenue:
Interest income $ 401,224 $ 415,525 $ - $ 415,525 $ (14,301) (3.4) %
Non-interest income 31,427 27,377 - 27,377 4,050 14.8 %
Total revenue 432,651 442,902 - 442,902 (10,251) (2.3) %
Less:
Interest expense 36,241 44,879 (889) 43,990 (7,749) (17.6) %
Net decrease in fair value (26,457) (177,584) 667 (176,917) 150,460 85.0 % Net revenue 369,953 220,439 1,556 221,995 147,958 66.6 % Operating expenses: Technology and facilities 100,274 93,927 - 93,927 6,347 6.8 % Sales and marketing 79,743 65,521 - 65,521 14,222 21.7 % Personnel 84,412 79,925 - 79,925 4,487 5.6 % Outsourcing and professional fees 40,762 36,232 - 36,232 4,530 12.5 % General, administrative and other 22,862 17,591 - 17,591 5,271 30.0 % Total operating expenses 328,053 293,196 - 293,196 34,857 11.9 % Income (loss) before taxes 41,900 (72,757) 1,556 (71,201) 113,101 158.8 % Income tax expense (benefit) 8,652 (19,162) 682 (18,480) 27,132 146.8 % Net income (loss)$ 33,248 $ (53,595) $ 874$ (52,721) $ 85,969 163.1 % (1) Beginning in 2021 we are no longer including any Fair Value Pro Forma adjustments because all loans originated and held for investment and asset-backed notes issued are recorded at fair value. Therefore, the nine months endedSeptember 30, 2021 is presented on a GAAP basis and the nine months endedSeptember 30, 2020 includes Fair Value Pro Forma adjustments related to our asset-backed notes at amortized cost. 36 --------------------------------------------------------------------------------
Fair Value Pro Forma Condensed Consolidated Balance Sheet Data:
September 30, Period-to-period Change in
2021 (1) December 31, 2020 FVPF (1)
(in thousands) As Reported As Reported FV Adjustments FV Pro Forma $ %
Cash and cash equivalents $ 168,407 $ 136,187 $ - $ 136,187 $ 32,220 23.7 %
Restricted cash 55,348 32,403 - 32,403 22,945 70.8 %
Loans receivable (1) 1,971,375 1,696,526 - 1,696,526 274,849 16.2 %
Other assets 152,751 143,935 - 143,935 8,816 6.1 %
Total assets 2,347,881 2,009,051 - 2,009,051 338,830 16.9 %
Total debt (2) 1,688,419 1,413,694 - 1,413,694 274,725 19.4 %
Other liabilities 148,043 128,990 682 129,672 18,371 14.2 %
Total liabilities 1,836,462 1,542,684 682 1,543,366 293,096 19.0 %
Total stockholder's equity 511,419 466,367 (682) 465,685 45,734 9.8 %
Total liabilities and $ 2,347,881 $ 2,009,051 $ - $ 2,009,051 $ 338,830 16.9 %
stockholders' equity
(1) Beginning in 2021 we are no longer including any Fair Value Pro Forma
adjustments because all loans originated and held for investment and
asset-backed notes issued are recorded at fair value. Therefore, the balances as
of
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined as our net income (loss), adjusted for the impact of our election of the fair value option and further 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 (benefit), as reported, because historically it has included irregular income tax items that do not reflect ongoing business operations. •We believe it is useful to exclude the impact of depreciation and amortization and stock-based compensation expense because they are non-cash charges. •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 impairment charges because these items do not reflect ongoing business operations. During the last three quarters of 2020 we excluded COVID-19 related expenses in our adjustments to derive Adjusted EBITDA. As ofJanuary 1, 2021 , COVID-19 expenses are no longer being excluded from Adjusted EBITDA because our business practices have been updated to operate in the current environment. •We also reverse origination fees for Fair Value Loans, 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 also reverse the fair value mark-to-market adjustment because it is a non-cash adjustment as shown in the table below.
Components of Fair Value Mark-to-Market Three Months Ended
2021 2020 2021 2020
Fair value mark-to-market adjustment on
Fair Value Loans $ 12,962 $
39,828
700 (29,094) 4,237 4,425
Fair value mark-to-market adjustment on
derivatives 935 - $ 639 -
Total fair value mark-to-market adjustment
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 and 2020 as if the fair value option had been in place since inception for all loans held for investment and all asset-backed notes: 37 -------------------------------------------------------------------------------- Three Months Ended
2021 2020 2021 2020
Net income (loss) $ 22,979 $ (6,046) $ 33,248 $ (53,595)
Adjustments:
Fair Value Pro Forma net income
adjustment (1) - (997) - 874
Income tax expense (benefit) 5,143 (2,169) 8,652 (18,480)
COVID-19 expenses (2) - 1,011 - 4,052
Depreciation and amortization 5,690 5,117 16,992 14,878
Stock-based compensation expense 4,598 5,194 14,542 14,317
Litigation reserve - 8,750 - 8,750
Retail network optimization expenses 114 - 12,787 -
Impairment (3) - - 3,324 -
Origination fees for Fair Value Loans,
net (5,863) (1,296) (9,070) 3,520
Fair value mark-to-market adjustment (14,597) (10,734) (57,209) 47,817
Adjusted EBITDA (4) $ 18,064 $ (1,170) $ 23,266 $ 22,133
(1) Beginning in 2021 we are no longer including any Fair Value Pro Forma
adjustments because all loans originated and held for investment and
asset-backed notes issued are recorded at fair value.
(2) As of January 1, 2021 , COVID-19 expenses are no longer being excluded from
Adjusted EBITDA because our business practices have been updated to operate in
the current environment.
(3) Impairment charge recognized on a right-of-use asset related to our leased
office space in San Carlos, California due to management's decision to move
toward a remote-first work environment.
(4) For the three and nine months ended September 30, 2021 , Adjusted EBITDA
included a pre-tax impact of $8.1 million and $21.8 million , respectively,
related to the launch of new products and services (such as secured personal
loans, credit card, bank partnership and expenses associated with our prior bank
charter application). For the three and nine months ended September 30, 2020 ,
Adjusted EBITDA included a pre-tax impact of $3.2 million and $9.7 million ,
respectively, related to the launch of new products and services (such as auto
and credit card).
Adjusted Net Income (Loss)
We define Adjusted Net Income (Loss) as our net income (loss), adjusted for the
impact of our election of the fair value option, and further adjusted to exclude
income tax expense (benefit), stock-based compensation expenses and certain
non-recurring charges. We believe that Adjusted Net Income (Loss) 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 (benefit),
as reported, because historically it has included irregular tax items that do
not reflect our ongoing business operations.
•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 impairment charges, because these items do not reflect
ongoing business operations. During the last three quarters of 2020 we excluded
COVID-19 related expenses in our adjustments to derive Adjusted Net Income. As
of January 1, 2021 , COVID-19 expenses are no longer being excluded from Adjusted
Net Income because our business practices have been updated to operate in the
current environment.
•We believe it is useful to exclude stock-based compensation expense because it
is a non-cash charge.
•We include the impact of normalized statutory income tax expense by applying
the income tax rate noted in the table.
The following table presents a reconciliation of net income (loss) to Adjusted
Net Income (Loss) for the three and nine months ended September 30, 2021 and
2020 as if the fair value option had been in place since inception for all loans
held for investment and all asset-backed notes:
38
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Three Months Ended September 30, Nine Months Ended September 30,
Adjusted Net Income (Loss) (in
thousands) 2021 2020 2021 2020
Net income (loss) $ 22,979 $ (6,046) $ 33,248 $ (53,595)
Adjustments:
Fair Value Pro Forma net income
adjustment (1) - (997) - 874
Income tax expense (benefit) 5,143 (2,169) 8,652 (18,480)
COVID-19 expenses (2) - 1,011 - 4,052
Stock-based compensation expense 4,598 5,194 14,542 14,317
Litigation reserve - 8,750 - 8,750
Retail network optimization expenses 114 - 12,787 -
Impairment (3) - - 3,324 -
Adjusted income (loss) before taxes 32,834 5,743 72,553 (44,082)
Normalized income tax expense (benefit) 8,997 1,570 19,880 (12,347)
Adjusted Net Income (Loss) (4) $ 23,837 $ 4,173 $ 52,673 $ (31,735)
Income tax rate (5) 27.4 % 27.4 % 27.4 % 28.0 %
(1) Beginning in 2021 we are no longer including any Fair Value Pro Forma
adjustments because all loans originated and held for investment and
asset-backed notes issued are recorded at fair value.
(2) As of January 1, 2021 , COVID-19 expenses are no longer being excluded from
Adjusted Net Income because our business practices have been updated to operate
in the current environment.
(3) Impairment charge recognized on a right-of-use asset related to our leased
office space in San Carlos, California due to management's decision to move
toward a remote-first work environment.
(4) For the three and nine months ended September 30, 2021 , Adjusted Net Income
includes an after-tax impact of $5.9 million and $16.2 million , respectively,
related to the launch of new products and services (such as secured personal
loans, credit card, bank partnership and expenses associated with our prior bank
charter application). For the three and nine months ended September 30, 2020 ,
Adjusted Net Income includes an after-tax impact of $2.6 million and $7.9
million , respectively, related to the launch of new products and services (such
as auto and credit card).
(5) Income tax rate for the three and nine months ended September 30, 2021 is
based on a normalized statutory rate and the three and nine months ended
September 30, 2020 is based on the effective tax rate.
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 Diluted Adjusted EPS for the three and nine months endedSeptember 30, 2021 and 2020. For the reconciliation of net income (loss) to Adjusted Net Income (Loss), see the immediately preceding table "Adjusted Net Income (Loss)." Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2021 2020 2021 2020 Diluted earnings (loss) per share $ 0.75
$ 23,837 Basic weighted-average common shares outstanding 28,167,686 27,459,192 27,982,273 27,237,246 Weighted average effect of dilutive securities: Stock options 1,451,687 1,188,396 1,351,288 - Restricted stock units 884,400 75,282 726,114 - Diluted adjusted weighted-average common shares outstanding 30,503,773 28,722,870 30,059,675 27,237,246 Adjusted Earnings (Loss) Per Share $ 0.78$ 0.15 $ 1.75$ (1.17) 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. BeforeJanuary 1, 2021 , we previously defined Adjusted Return on Equity as annualized Adjusted Net Income divided by average Fair Value Pro Forma total stockholders' equity. Average Fair Value Pro Forma stockholders' equity is an average of the beginning and ending Fair Value Pro Forma 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. 39 -------------------------------------------------------------------------------- The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three and nine months endedSeptember 30, 2021 and 2020. For the reconciliation of net income (loss) to Adjusted Net Income (Loss), see the immediately preceding table "Adjusted Net Income (Loss)." As of or for the Three Months Ended As of or for the Nine Months Ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Return on Equity 18.3 % (5.3) % 9.1 % (15.2) % Adjusted Return on Equity Adjusted Net Income (Loss)$ 23,837 $ 4,173 $ 52,673 $ (31,735) Fair Value Pro Forma average stockholders' equity (1)$ 497,876 $ 453,493 $ 488,893 $ 471,422 Adjusted Return on Equity 19.0 % 3.7 % 14.4 % (9.0) % (1) Beginning in 2021 we are no longer including any Fair Value Pro Forma adjustments because all loans originated and held for investment and asset-backed notes issued are recorded at fair value. Therefore, the average stockholders' equity amount as ofSeptember 30, 2021 reflects the average of the GAAP stockholders' equity account as ofDecember 31, 2020 and the GAAP stockholders' equity account asSeptember 30, 2021 .
Adjusted Operating 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 impairment charges divided by total revenue. During the last three quarters of 2020 we excluded COVID-19 related expenses in our adjustments to derive Adjusted Operating Efficiency. As ofJanuary 1, 2021 , COVID-19 expenses are no longer being excluded from Adjusted Operating Efficiency because our business practices have been updated to operate in the current environment. 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 presents a reconciliation of Operating Efficiency to Adjusted Operating Efficiency for the three and nine months endedSeptember 30, 2021 and 2020: As of or for the Three Months Ended As of or for the Nine Months Ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Operating Efficiency 70.0 % 74.3 % 75.8 % 66.2 % Adjusted Operating Efficiency Total revenue 159,084 136,767 432,651 442,902 Total operating expense 111,401 101,566 328,053 293,196 COVID-19 expenses (1) - (1,011) - (4,052) Stock-based compensation expense (4,598) (5,194) (14,542) (14,317) Litigation reserve - (8,750) - (8,750) Retail network optimization expenses (114) - (12,787) - Impairment (2) $ - $ -$ (3,324) $ - Total adjusted operating expenses$ 106,689 $ 86,611 $ 297,400 $ 266,077 Adjusted Operating Efficiency 67.1 % 63.3 % 68.7 % 60.1 % (1) As ofJanuary 1, 2021 , COVID-19 expenses are no longer being excluded from Adjusted Operating Efficiency because our business practices have been updated to operate in the current environment. (2) Impairment charge recognized on a right-of-use asset related to our leased office space inSan Carlos, California due to management's decision to move toward a remote-first work environment.
Liquidity and Capital Resources
Sources of liquidity
To date, we have funded our lending activities and operations primarily through
private issuances of debt, equity issuances, cash from operating activities, and
the sale of loans to a third-party institutional investor. We anticipate issuing
additional securitizations, entering into additional secured financings and
continuing whole loan sales.
40
--------------------------------------------------------------------------------Current debt facilities
The following table summarizes our current debt facilities available for funding our lending activities and our operating expenditures as ofSeptember 30, 2021 : Scheduled Amortization Period Principal Debt Facility Commencement Date Interest Rate (in thousands) LIBOR (minimum of Secured Financing - PLW
5/1/2024 2.05% 500,000
Asset-Backed Securitization-Series 2021-A Notes 3/1/2023 1.79% 375,000
Asset-Backed Securitization-Series 2019-A Notes 8/1/2022 3.46% 279,412
$ 1,683,414
The outstanding amounts set forth in the table above are consolidated on our
balance sheet whereas loans sold to a third-party institutional investor are not
on our balance sheet once sold.
On September 8, 2021 , we closed on a Personal Loan Warehouse facility ("PLW").
In connection with the PLW facility, our wholly-owned subsidiary Oportun PLW
Trust entered into a Loan and Security Agreement to borrow up to $600.0 million
committed through September 2024 . Borrowings under the PLW facility accrue
interest at a rate equal to one-month LIBOR plus a spread of 2.17%. On September
8, 2021 , our wholly-owned subsidiary, Oportun Funding V, LLC , as issuer under
the Variable Funding Note Warehouse ("VFN") facility, terminated the VFN
facility. Final payment was made on the VFN facility in the amount of
$219.0 million , plus the accrued and unpaid interest, which is the amount
sufficient to satisfy and discharge Oportun Funding V, LLC's obligations under
the VFN facility notes and the indenture. The final payment was funded by
drawing upon our PLW facility.
On September 8, 2021 , our wholly-owned subsidiary Oportun Funding XII, LLC , the
issuer under the Series 2018-D asset-backed securitization transaction,
completed the redemption of all $175.0 million of outstanding Series 2018-D
Notes, plus the accrued and unpaid interest. In connection with the redemption,
all obligations of Oportun Funding XII, LLC under the 2018-D Notes and the
indenture were satisfied and discharged. The redemption was funded by drawing
upon our facility.
On October 28, 2021 , the Company announced the issuance of $500.0 million of 3
year fixed-rate asset-backed notes by Oportun Issuance Trust 2021-C, a
wholly-owned subsidiary of the Company, and secured by a pool of its unsecured
and secured personal installment loans (the "2021-C Securitization"). The 2021-C
Securitization included four classes of fixed-rate notes: Class A, Class B,
Class C and Class D notes, which were priced with a weighted average fixed
interest rate of 2.48% per annum.
Lenders do not have direct recourse to
Debt
Our ability to utilize our
•Eligibility Criteria. In order for our loans to be eligible for purchase byOportun PLW Trust , they must meet all applicable eligibility criteria; •Concentration Limits. The collateral pool is subject to certain concentration limits that, if exceeded, would reduce our borrowing base availability by the amount of such excess; and •Covenants and Other Requirements.The Personal Loan Warehouse facility contains several financial covenants, portfolio performance covenants and other covenants or requirements that, if not complied with, may result in an event of default and/or an early amortization event causing the accelerated repayment of amounts owed.The Personal Loan Warehouse facility also requires us to get lender consent prior to making material changes to our credit and collection policies. As ofSeptember 30, 2021 , we were in compliance with all covenants and requirements per thePersonal Loan Warehouse facility. As ofSeptember 8, 2021 , the termination date of the VFN facility, we were in compliance with all covenants and requirements of the VFN facility prior to its termination and replacement. For more information regarding our Secured Financing facilities, see Notes 4 and 7 of the Notes to the Condensed Consolidated Financial Statements (Unaudited) 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. In order for our loans to be eligible for purchase by our
wholly-owned special purpose subsidiaries they must meet all applicable
eligibility criteria; and
•Covenants and Other Requirements. Our securitization facilities contain pool
concentration limits, pool performance covenants and other covenants or
requirements that, if not complied with, may result in an event of default,
and/or an early amortization event causing the accelerated repayment of amounts
owed.
41
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As of
For more information regarding our asset-backed securitization facilities, see Notes 4 and 7 of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.
Credit card receivables retention facility and servicing
OnFebruary 5, 2021 , we entered into a Receivables Retention Facility Agreement, a Servicing Agreement and other related documents withWebBank , providing us with additional funding to expand our credit card product (the "Retention Facility"). Under the Retention Facility agreements,WebBank will originate, fund and retain credit card receivables up to$25.0 million . We will purchase any excess receivables originated above the$25.0 million amount, in addition to certain ineligible receivables and charged-off receivables. The Retention Facility commenced onFebruary 9, 2021 and has a two-year term. We will provide certain marketing, processing and accounting processing services toWebBank in connection with our credit card warehouse facility.WebBank will pay us a servicing fee of 5% to service the accounts and certain excess collections on a monthly basis. To provide additional funding for our credit card product, through agreements entered into in July, September andOctober 2021 ,WebBank and the Company agreed to temporarily increase the size of the Retention Facility to$38.5 million through, the earlier of, the closing of a new credit facility orNovember 30, 2021 . Whole loan sales InNovember 2014 , we entered into a whole loan sale agreement with an institutional investor. This agreement was amended inMarch 2021 to extend the term toMarch 4, 2022 . Pursuant to the agreement, we are obligated to sell at least 10% of our unsecured loan originations, with an option to sell an additional 5%, subject to certain eligibility criteria and minimum and maximum volumes. We retain all rights and obligations involving the servicing of the loans and earn servicing revenue of 5% of the daily average principal balance of loans sold each month. We will continue to evaluate additional loan sale opportunities in the future and have not made any determinations regarding the percentage of loans we may sell. The loans are randomly selected and sold at the pre-determined contractual purchase price above par and we recognize a gain on the loans. We sell loans twice per week. We have not repurchased any of the loans sold related to this agreement and do not anticipate repurchasing loans sold in the future. We therefore do not record a reserve related to our repurchase obligations from the whole loan sale agreement.
Cash, cash equivalents, restricted cash and cash flows
The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated:
Nine Months Ended September 30,
(in thousands) 2021 2020
Cash, cash equivalents and restricted cash $ 223,755 $ 163,480
Cash provided by (used in)
Operating activities 103,728 139,407
Investing activities (316,741) 119,369
Financing activities 268,178 (231,437)
Our cash is held for working capital purposes and originating loans. Our restricted cash represents collections held in our securitizations and is applied currently after month-end to pay interest expense and satisfy any amount due to whole loan buyer with any excess amounts returned to us.
Cash flows
Operating Activities
Our net cash provided by operating activities was$103.7 million and$139.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Cash flows from operating activities primarily include net income or losses adjusted for (i) non-cash items included in net income or loss, including depreciation and amortization expense, fair value adjustments, net, origination fees for loans at fair value, net, gain on loan sales, stock-based compensation expense and deferred tax provision, net, (ii) originations of loans sold and held for sale, and proceeds from sale of loans and (iii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of various payments.
Investing Activities
Our net cash provided by (used in) investing activities was$(316.7) million and$119.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our investing activities consist primarily of loan originations and loan repayments. We currently do not own any real estate. 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$448.4 million while repayments of loan principal only increased by$13.2 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . 42 --------------------------------------------------------------------------------
Financing Activities
Our net cash provided by (used in) financing activities was$268.2 million and$(231.4) million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was primarily driven by the issuance of our Series 2021-A and Series 2021-B asset-backed notes securitizations and the borrowings under our Secured Financing facilities, partially offset by redemptions of our Series 2018-A, 2018-B and 2018-C asset-backed notes and repayments of borrowings on our Secured Financing facilities. For the nine months endedSeptember 30, 2020 , net cash used in financing activities was primarily driven by repayments of borrowings on our Secured Financing facility and redemption of our Series 2017-A and 2017-B asset-backed notes, partially offset by borrowings on our Secured Financing facility.
Operating and capital expenditure requirements
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. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing. 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.
Off-Balance Sheet Arrangements
OnFebruary 5, 2021 , we entered into an off-balance sheet arrangement under the Receivables Retention Facility Agreement, an Amended and Restated Credit Card Program and Servicing Agreement and other related documents withWebBank , aUtah -chartered industrial bank, providing us with additional funding to expand our credit card product (the "Retention Facility"). Under the Retention Facility agreements,WebBank will originate, fund and retain credit card receivables up to$25.0 million . We will purchase any excess receivables originated above the$25.0 million amount, in addition to certain ineligible receivables. We will provide certain marketing, processing and accounting processing services toWebBank in connection with our credit card program. As ofSeptember 30, 2021 ,$36.2 million of the$38.5 million has been utilized. The Retention Facility commenced onFebruary 9, 2021 and has a two-year term. To provide additional funding for our credit card product, through agreements entered into in July, September andOctober 2021 ,WebBank and the Company agreed to temporarily increase the size of the facility to$38.5 million through, the earlier of, the closing of a new credit facility orNovember 30, 2021 .
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, 2020 , filed with theSecurities and Exchange Commission onFebruary 23, 2021 ("2020 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 2020 Form 10-K.
Recently Issued 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.
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