OPORTUN FINANCIAL CORPORATION An index to our management's discussion and analysis follows:
Topic
Forward-Looking Statements 20 Overview 21 Key Financial and Operating Metrics 23 Historical Credit Performance 25 Results of Operations 26 Fair Value Estimate Methodology for Loans Receivable at Fair Value 31 Non-GAAP Financial Measures 32 Liquidity and Capital Resources 36 Off-Balance Sheet Arrangements 39 Critical Accounting Policies and Significant Judgments and Estimates 39 Recently Issued Accounting Pronouncements 39 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, 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;
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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 at a lower cost compared to market alternatives available to individuals that are not well served by the financial mainstream. In our 15-year lending history, we have originated more than 4.2 million loans, representing over$10.2 billion of credit extended, to more than 1.9 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. Our personal loans do not have prepayment penalties or balloon payments and range in size from$300 to$10,000 with terms ranging from six to 51 months. As part of our commitment to be a responsible lender, we verify income for 100% of 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 or family members and other word-of-mouth referrals. 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 seen our customers' usage and preference for our digital channels accelerate during 2020 and we are continuing to invest in our digital origination and servicing platform, as well as building out customer self-service capabilities. Our personal loan serves 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 ofMarch 31, 2021 , our customers have saved more than$1.9 billion in aggregate interest and fees compared to alternative products available to them. 21 -------------------------------------------------------------------------------- Through our recently announced partnership with MetaBank, N.A, a national bank ("MetaBank"), pursuant to which MetaBank will originate unsecured personal loans in certain states outside of our current state-licensed footprint, we will be able 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%. We are anticipating the rollout of our MetaBank. partnership in mid-2021. InNovember 2020 , we filed our application to obtain a national bank charter. If approved,Oportun Bank, N.A. will seek to serve customers in all 50 states with consumer lending and deposit services. 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. This Lending as a Service model is currently being piloted with our strategic partner, DolEx. In this partnership, DolEx will market loans and enter customer applications intoOportun's system, andOportun will underwrite, originate and service the loans. If 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. 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 42 states as ofMarch 31, 2021 . InApril 2020 , we launched a personal installment loan secured by an automobile, which we refer to as secured personal loans. Our secured personal loans range in size from$2,500 to$20,000 with terms ranging from 21 to 66 months.
The map below shows the states in which we offer our products as of
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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 seven years, we have
executed 15 bond offerings in the asset-backed securities market, the last 12 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 $400.0 million Secured Financing committed through October 2021 , 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.
We closely manage our operating expenses, which consist of technology and facilities, sales and marketing, personnel, outsourcing and
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professional fees and general, administrative and other expenses, with the goal
of increasing investments in our data analytics, technology and mobile-first
experiences, and our digital marketing capabilities.
Retail Network Optimization
Consistent with our retail network optimization plan, as ofMarch 31, 2021 , we have closed 136 retail locations and reduced a portion of the employee workforce who managed and operated these retail locations. In the first quarter of 2021, we have incurred$6.2 million in expenses related to the retail location closures and estimate remaining expenses of$4.7 million . to be recognized in the second quarter of 2021. In addition, we have also recognized$1.6 million related to severance and benefits related to the store closures in the first quarter of 2021 which represents all severance and benefits related costs to be incurred related to the retail network optimization plan. The income statement impact of$7.8 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations and Comprehensive Income for the three months endedMarch 31, 2021 .
Key Financial and Operating Metrics
We monitor and evaluate the following key metrics in order to measure our current performance, develop and refine our growth strategies, and make strategic decisions.
See the next section, "Non-GAAP Financial Measures", included in this Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for a presentation of the actual impact of the election of the
fair value option for the periods presented in the financial statements included
elsewhere in this report.
As of or for the Three Months
Ended March 31 ,
(in thousands of dollars, except CAC) 2021 2020
Key Financial and Operating Metrics Aggregate Originations$ 335,239 $ 432,759 Active Customers 643,967 777,194 Customer Acquisition Cost $ 208$ 170
Managed Principal Balance at End of Period
30+ Day Delinquency Rate 3.0 % 3.8 % Annualized Net Charge-Off Rate 8.6 % 8.9 % Operating Efficiency 78.5 % 60.3 % Adjusted Operating Efficiency 69.0 % 57.8 % Return on Equity 2.6 % (11.0) % Adjusted Return on Equity 10.6 % (1.0) % Other Useful Metrics Number of Loans Originated 114,670 143,150 Average Daily Principal Balance$ 1,624,753 $
1,862,130
Owned Principal Balance at End of Period
See "Glossary" at the beginning of this report for formulas and definitions of our key performance metrics.
Aggregate Originations Aggregate Originations decreased to$335.2 million for the three months endedMarch 31, 2021 from$432.8 million for the three months endedMarch 31, 2020 . The 22.5% decrease is primarily driven by a decrease in the number of loans originated and a decrease in average loan size. We originated 114,670 and 143,150 loans for the three months endedMarch 31, 2021 and 2020, respectively, representing a 19.9% decrease. This decrease is primarily due to a reduction in application volume attributable to the COVID-19 stimulus measures.
Active Customers
As of
Customer Acquisition Cost
For the three months endedMarch 31, 2021 and 2020, our Customer Acquisition Cost was$208 and$170 , respectively, an increase of 22.4%. The increase was directly related to the decrease in number of loans originated period over period due to the COVID-19 stimulus measures. The increase was partially offset by the lower sales and marketing expenses due to a 41% reduction in full-time equivalents attributable to our retail network optimization plan. 23 --------------------------------------------------------------------------------
Managed Principal Balance at End of Period
Managed Principal Balance at End of Period as ofMarch 31, 2021 decreased by 16.0% fromMarch 31, 2020 , driven by fewer loans originated year-over-year. This decline was a result of a reduced number of applications attributable both to COVID-19 stimulus measures and the proactive measures we implemented to tighten our lending criteria and underwriting practices.
30+ Day Delinquency Rate
Our 30+ Day Delinquency Rate was 3.0% and 3.8% as ofMarch 31, 2021 and 2020, respectively. The decrease is due to the effectiveness of our collections tools and payment options that have helped our customers manage through the pandemic, COVID-19 stimulus measures that our customers have used to stay current on their payments, as well as our tightened lending criteria and underwriting practices for loans originated since the pandemic began. As ofMarch 31, 2021 , 0.6% of our Owned Principal Balance at End of Period was in active deferral status under our Emergency Hardship Deferral program.
Annualized Net Charge-Off Rate
Annualized Net Charge-Off Rate for the three months endedMarch 31, 2021 and 2020 was 8.6% and 8.9%, respectively. Net charge-offs for the year decreased due to our tighter underwriting criteria maintained from March of 2020 through July of 2020 and the impact of stimulus payments to consumers, partially offset by a decrease in our Average Daily Principal Balance.
Operating Efficiency and Adjusted Operating Efficiency
For the three months endedMarch 31, 2021 and 2020, Operating Efficiency was 78.5% and 60.3% respectively, and Adjusted Operating Efficiency for the same period was 69.0% and 57.8%, respectively. The increase in Operating Efficiency is due to year-over-year increase in operating expenses driven by$6.9 million in investments in new products and channels, technology, data and digital capabilities. We incurred$7.8 million of expenses related to our retail network optimization plan in the first quarter of 2021. Adjusted Operating Efficiency excludes stock-based compensation expense and expenses associated with our retail network optimization plan. For a reconciliation of Operating Efficiency to Adjusted Operating Efficiency, see "Non-GAAP Financial Measures-Fair Value Pro Forma."
Return on Equity and Adjusted Return on Equity
For the three months endedMarch 31, 2021 and 2020, Return on Equity was 2.6% and (11.0)%, respectively and Adjusted Return on Equity was 10.6% and (1.0)% 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 the increase in fair value of our loan portfolio. 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 decreased by 12.7% from$1.86 billion for the three months endedMarch 31, 2020 to$1.62 billion for the three months endedMarch 31, 2021 . The decrease is primarily driven by a decrease in the number of loans originated and a decrease in average loan size.
Owned Principal Balance at End of Period
Owned Principal Balance decreased by 13.1% from$1.83 billion for the three months endedMarch 31, 2020 to$1.59 billion for the three months endedMarch 31, 2021 , driven by fewer loans originated year-over-year. This decline is a result of a reduced number of applications attributable both to COVID-19 stimulus measures and the proactive measures we implemented to tighten our lending criteria and underwriting practices. 24 --------------------------------------------------------------------------------
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.
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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 through March 31, 2021 divided by the
total origination loan volume for that year. Loans are charged off no later than
after becoming 120 days contractually delinquent.
The below table shows our net lifetime loan loss rate for each annual vintage
since we began lending in 2006. We have managed to stabilize cumulative net
lifetime loan losses since 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 from July 2017 to August 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.
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Year of Origination
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Net lifetime loan
losses as of March 31,
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% 8.3% 9.8%* 7.4%* 0.0%*
Outstanding principal
balance as of March 31,
2021 as a percentage of
original amount
disbursed -% -% -% -% -% -% -% -% -% -% 0.3% 7.5% 39.4% 88.6%
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.
Results of Operations
The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three months endedMarch 31, 2021 and 2020. Three Months Ended March 31, (in thousands of dollars) 2021 2020 Revenue Interest income$ 127,191 $ 150,700 Non-interest income 8,122 12,728 Total revenue 135,313 163,428 Less: Interest expense 13,504 16,361 Total decrease in fair value (11,568) (66,469) Net revenue 110,241 80,598 Operating expenses: Technology and facilities 32,924 30,774 Sales and marketing 23,893 24,827 Personnel 26,827 25,582 Outsourcing and professional fees 12,625
13,618
General, administrative and other 9,997 3,813 Total operating expenses 106,266 98,614 Income before taxes 3,975 (18,016) Income tax expense (benefit) 956 (4,715) Net income (loss) $ 3,019$ (13,301) Total revenue Three Months Ended March 31, Period-to-period Change (in thousands of dollars) 2021 2020 $ % Revenue Interest income$ 127,191 $ 150,700 $ (23,509) (15.6) % Non-interest income 8,122 12,728 (4,606) (36.2) % Total revenue$ 135,313 $ 163,428 $ (28,115) (17.2) % Percentage of total revenue: Interest income 94.0 % 92.2 % Non-interest income 6.0 % 7.8 % Total revenue 100.0 % 100.0 % 26
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Total Revenue. Total revenue decreased by
Interest income. Total interest income decreased by$23.5 million , or 15.6%, from$150.7 million for the three months endedMarch 31, 2020 to$127.2 million for the three months endedMarch 31, 2021 . The decrease is primarily attributable to a decline in our Average Daily Principal Balance from$1.9 billion for the three months endedMarch 31, 2020 to$1.6 billion for the three months endedMarch 31, 2021 , a decrease of 12.7%. The decrease was also attributable to a decrease in portfolio yield of 70 basis points due to returning customers receiving lower interest rates and our decision to cap our APR at 36% starting inAugust 2020 . Non-interest income. Total non-interest income decreased by$4.6 million , or 36.2%, from$12.7 million for the three months endedMarch 31, 2020 to$8.1 million for the three months endedMarch 31, 2021 . The decrease is primarily due to a$3.1 million decrease in the gain on sale of loans and a$1.4 million decrease in servicing revenue from loans sold as a result of a decline in volume under our whole loan sale program. 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 March 31, Period-to-period Change (in thousands of dollars) 2021 2020 $ % Interest expense$ 13,504 $ 16,361 $ (2,857) (17.5) % Percentage of total revenue 10.0 % 10.0 % Cost of Debt 3.9 % 4.2 % Leverage as a percentage of Average Daily Principal Balance 87.0 % 83.6 % Interest expense. Interest expense decreased by$2.9 million , or 17.5%, from$16.4 million for the three months endedMarch 31, 2020 to$13.5 million for the three months endedMarch 31, 2021 . We financed approximately 87.0% of our loans receivable through debt for the three months endedMarch 31, 2021 , as compared to 83.6% for the three months endedMarch 31, 2020 , and our Average Daily Debt Balance decreased from$1.6 billion to$1.4 billion for the three months endedMarch 31, 2021 , a decrease of 9.1%. We have continued to improve our Cost of Debt as we have been able to refinance and increase the size of our securitizations. See Note 7, Borrowings, in the Notes to the Condensed Consolidated Financial Statements (Unaudited) included in this report for further information on the Company's Secured Financing facility and asset-backed notes. 27 --------------------------------------------------------------------------------
Total net increase (decrease) in fair value
Net increase (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 a derivative instrument related to our credit card program and servicing agreement withWebBank . Changes in the fair value of the derivative asset are reflected in the total fair value mark-to-market adjustment below. Three Months Ended March 31, Period-to-period Change (in thousands of dollars) 2021 2020 $ % Fair value mark-to-market adjustment: Fair value mark-to-market adjustment on Loans Receivable$ 21,562 $ (155,125) $ 176,687 * at Fair Value Fair value mark-to-market adjustment on asset-backed 1,524 130,089 (128,565) *
notes
Fair value mark-to-market adjustment on credit card (46) - (46) *
derivative
Total fair value mark-to-market adjustment 23,040 (25,036) 48,076 * Charge-offs, net of recoveries on loans receivable at (34,608) (41,433) 6,825 * fair value Total decrease in fair value$ (11,568) $ (66,469) $ 54,901 * Percentage of total revenue: Fair value mark-to-market adjustment 17.0 % (15.3) % Charge-offs, net of recoveries on loans receivable at (25.6) % (25.4) % fair value Total net increase (decrease) in fair value (8.6) % (40.7) % Discount rate 6.65 % 12.78 % Remaining cumulative charge-offs 8.60 % 14.56 % Average life in years 0.78 0.90 * Not meaningful Net increase (decrease) in fair value. Net decrease in fair value for the three months endedMarch 31, 2021 was$11.6 million . This amount represents a total fair value mark-to-market increase of$23.0 million on Loans Receivable at Fair Value and Asset-Backed Notes at Fair Value, and$34.6 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a$21.6 million mark-to-market reduction on Fair Value Loans due to (a) a decrease in the discount rate from 6.85% as ofDecember 31, 2020 to 6.65% as ofMarch 31, 2021 caused by declining interest rates and credit spreads and (b) a decrease in remaining cumulative charge-offs from 10.03% as ofDecember 31, 2020 to 8.60% as ofMarch 31, 2021 due to improving credit trends, partially offset by (c) a decrease in average life from 0.80 years as ofDecember 31, 2020 to 0.78 years as ofMarch 31, 2021 . The$1.5 million mark-to-market adjustment on Fair Value Notes is due to the tendency for ABS prices to trend toward par as they approach their call date.
Charge-offs, net of recoveries
Three Months Ended
March 31, Period-to-period Change
(in thousands of dollars) 2021 2020 $ %
Total charge-offs, net of recoveries $ 34,608 $ 41,433 $ (6,825) (16.5) %
Average Daily Principal Balance $ 1,624,753 $ 1,862,130 $ (237,377) (12.7) %
Annualized Net Charge-Off Rate 8.6 % 8.9 %
* Not meaningful
Charge-offs, net of recoveries. Our Annualized Net Charge-Off Rate decreased to
8.6% for the three months ended March 31, 2021 , from 8.9% for the three months
ended March 31, 2020 . Net charge-offs for the year decreased due to our tighter
underwriting criteria maintained from March of 2020 through July of 2020 and the
impact of stimulus payments to consumers, partially offset by a decrease in our
Average Daily Principal Balance. 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. 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 $3.2 million of additional charge-offs for the three
months ended March 31, 2021 .
Operating expenses
Operating expenses consist of technology and facilities, sales and marketing, personnel, outsourcing and professional fees and general, administrative and other expense. Operating expenses include$6.9 million and$4.2 million related to new products for the three months endedMarch 31, 2021 and 2020, respectively. 28 --------------------------------------------------------------------------------
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 consist 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
March 31, Period-to-period Change
(in thousands of dollars) 2021 2020 $ %
Technology and facilities $ 32,924 $ 30,774 $ 2,150 7.0 %
Percentage of total revenue 24.3 % 18.8 %
Technology and facilities. Technology and facilities expense increased by $2.2
million , or 7.0%, from $30.8 million for the three months ended March 31, 2020
to $32.9 million for the three months ended March 31, 2021 . The increase was
primarily due to $1.3 million in depreciation commensurate with growth in
internally developed software, $1.1 million increase in service costs related to
higher usage of software and cloud services and a $0.2 million increase in rent
expense. These increases were partially offset by $0.7 million lower
depreciation on leasehold improvements due to the reduced number of retail
locations as we began to implement our retail network optimization plan in March
2021 . Our retail locations decreased from 341 at March 31, 2020 to 228 at March
31, 2021 , or 33.1%.
Sales and marketing
Sales and marketing expense consists of two components and represent the costs
to acquire our customers. The first component is comprised of the expense to
acquire a customer through various paid marketing channels including direct
mail, digital marketing and brand marketing. The second component is comprised
of the costs associated with our telesales, lead generation and retail
operations, including personnel expenses, but excluding costs associated with
retail locations.
Three Months Ended
March 31, Period-to-period Change
(in thousands of dollars) 2021 2020 $ %
Sales and marketing $ 23,893 $ 24,827 $ (934) (3.8) %
Percentage of total revenue 17.7 % 15.2 %
Customer Acquisition Cost (CAC) $ 208 $ 170 $ 38 22.3 %
Sales and marketing. Sales and marketing expense to acquire our customers
decreased by $0.9 million , or 3.8%, from $24.8 million for the three months
ended March 31, 2020 to $23.9 million for the three months ended March 31, 2021 .
This decrease was primarily attributable to $1.9 million lower personnel-related
costs as we implemented our retail network optimization plan in the first
quarter of 2021. The decrease was partially offset by increased investment in
marketing initiatives of $1.3 million across various marketing channels,
including direct mail, digital advertising channels, lead aggregators, and brand
marketing. As a result of our focus on developing new marketing capabilities and
our lower number of loans originated during the period due to the COVID-19
pandemic, our CAC increased by 22.3% from the three months ended March 31, 2020
to the three months ended March 31, 2021 .
Personnel
Personnel expense represents compensation and benefits that we provide to our
employees and include 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
March 31, Period-to-period Change
(in thousands of dollars) 2021 2020 $ %
Personnel $ 26,827 $ 25,582 $ 1,245 4.9 %
Percentage of total revenue 19.8 % 15.7 %
Personnel. Personnel expense increased by $1.2 million , or 4.9%, from $25.6
million for the three months ended March 31, 2020 to $26.8 million for the three
months ended March 31, 2021 , primarily driven by $0.7 million in increased stock
compensation expense related to equity incentive awards for our 2020 annual
review and $0.3 million in benefits related to 401k employer matching.
29
--------------------------------------------------------------------------------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 March 31, Period-to-period Change (in thousands of dollars) 2021 2020 $ % Outsourcing and professional fees$ 12,625 $ 13,618 $ (993) (7.3) % Percentage of total revenue 9.3 % 8.3 % Outsourcing and professional fees. Outsourcing and professional fees decreased by$1.0 million , or 7.3%, from$13.6 million for the three months endedMarch 31, 2020 to$12.6 million for the three months endedMarch 31, 2021 . This decrease resulted primarily from a$2.6 million decrease related to ceasing legal collection on default loans beginning inAugust 2020 ,$1.1 million of lower legal fees, and$0.5 million decrease in credit report expense due to lower application volume attributed to the COVID-19 pandemic. These decreases were partially offset by a$3.3 million increase in debt financing fees and expenses inMarch 2021 related to an asset-backed securitization. General, administrative and other General, administrative and other expense includes non-compensation expenses for employees, who are not a part of the technology and sales and marketing organization, which include travel, lodging, meal expenses, political and charitable contributions, office supplies, printing and shipping. Also included are franchise taxes, bank fees, foreign currency gains and losses, transaction gains and losses, debit card expenses, litigation reserve and expenses associated with our retail network optimization plan. Three Months Ended March 31, Period-to-period Change (in thousands of dollars) 2021 2020 $ % General, administrative and other$ 9,997 $ 3,813 $ 6,184 162.2 % Percentage of total revenue 7.4 % 2.3 % General, administrative and other. General, administrative and other expense increased by$6.2 million , or 162.2%, from$3.8 million for the three months endedMarch 31, 2020 to$10.0 million for the three months endedMarch 31, 2021 , primarily due to our retail network optimization expenses of$6.2 million related to the retail location closures and$1.6 million related to severance and benefits related to the retail location closures. These increases were partially offset by decreases in travel expenses and postage and printing costs due to travel restrictions and remote working arrangements resulting from the COVID-19 pandemic. Income taxes
Income taxes consist of
Three Months Ended
March 31, Period-to-period Change
(in thousands of dollars) 2021 2020 $ %
Income tax expense (benefit) $ 956 $ (4,715) $ 5,671 120.3 %
Percentage of total revenue 0.7 % (2.9) %
Effective tax rate 24.1 % 26.2 %
Income tax expense (benefit). Income tax expense increased by $5.7 million or
120.3%, from a benefit of $4.7 million for the three months ended March 31, 2020
to an expense of $1.0 million for the three months ended March 31, 2021 ,
primarily as a result of higher pretax income for the three months ended March
31, 2021 .
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.
30
--------------------------------------------------------------------------------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 five
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 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.
31
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The table below reflects the application of this methodology for the five
quarters since
Three Months Ended
Mar 31,
2021 Dec 31, 2020 Sep 30, 2020 Jun 30, 2020 Mar 31, 2020
Weighted average portfolio yield over the 30.25 % 30.17 % 30.50 % 30.78 % 30.74 %
remaining life of the loans
Less: Servicing fee (5.00) % (5.00) % (5.00) % (5.00) % (5.00) %
Net portfolio yield 25.25 % 25.17 % 25.50 % 25.78 % 25.74 %
Multiplied by: Weighted average life in years 0.778 0.796 0.775 0.797 0.903
Pre-loss cash flow 19.64 % 20.03 % 19.75 % 20.54 % 23.25 %
Less: Remaining cumulative charge-offs (8.60) % (10.03) % (10.61) % (12.73) % (14.56) %
Net cash flow 11.04 % 10.00 % 9.14 % 7.81 % 8.69 %
Less: Discount rate multiplied by average life (5.17) % (5.45) % (6.07) % (7.04) % (11.54) %
Gross fair value premium (discount) as a 5.87 % 4.55 % 3.07 % 0.77 % (2.85) %
percentage of loan principal balance
Less: Accrued interest and fees as a percentage (0.92) % (1.06) % (1.15) % (1.35) % (1.11) %
of loan principal balance
Fair value premium (discount) as a percentage of 4.95 % 3.49 % 1.92 % (0.58) % (3.96) %
loan principal balance
Discount Rate 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 months endedMarch 31, 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 the Fair Value Loans which were previously measured at amortized cost. Accordingly, for the three months endedMarch 31, 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 months endedMarch 31, 2021 and 2020. Starting onJanuary 1, 2021 , we no longer have any Fair Value Pro Forma adjustments as there are no longer any amortized cost balances. However, there were Fair Value Pro Forma adjustments related to our asset-backed notes at amortized cost for the three months endedMarch 31, 2020 . 32 --------------------------------------------------------------------------------
Fair Value Pro Forma Condensed Consolidated Statements of Operations Data:
Three Months
Ended March 31, Three Months Ended March 31, Period-to-period Change in
2021 (1) 2020 FVPF (1)
(in thousands) As Reported As Reported FV Adjustments FV Pro Forma $ %
Revenue:
Interest income $ 127,191 $ 150,700 $ - $ 150,700 $ (23,509) (15.6) %
Non-interest income 8,122 12,728 - 12,728 (4,606) (36.2) %
Total revenue 135,313 163,428 - 163,428 (28,115) (17.2) %
Less:
Interest expense 13,504 16,361 (492) 15,869 (2,365) (14.9) %
Net decrease in fair value (11,568) (66,469) 11,655 (54,814) 43,246 (78.9) %
Net revenue 110,241 80,598 12,147 92,745 17,496 18.9 %
Operating expenses:
Technology and facilities 32,924 30,774 - 30,774 2,150 7.0 %
Sales and marketing 23,893 24,827 - 24,827 (934) (3.8) %
Personnel 26,827 25,582 - 25,582 1,245 4.9 %
Outsourcing and professional fees 12,625 13,618 - 13,618 (993) (7.3) %
General, administrative and other 9,997 3,813 - 3,813 6,184 162.2 %
Total operating expenses 106,266 98,614 - 98,614 7,652 7.8 %
Income (loss) before taxes 3,975 (18,016) 12,147 (5,869) 9,844 (167.7) %
Income tax expense (benefit) 956 (4,715) 3,627 (1,088) 2,044 (187.9) %
Net income (loss) $ 3,019 $ (13,301) $ 8,520 $ (4,781) $ 7,800 (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 three
months ended March 31, 2021 is presented on a GAAP basis and the three months
ended March 31, 2020 includes Fair Value Pro Forma adjustments related to our
asset-backed notes at amortized cost.
Fair Value Pro Forma Condensed Consolidated Balance Sheet Data:
March 31, 2021 Period-to-period Change in
(1) December 31, 2020 FVPF (1)
(in thousands) As Reported As Reported FV Adjustments FV Pro Forma $ %
Cash and cash equivalents $ 140,416 $ 136,187 $ - $ 136,187 $ 4,229 3.1 %
Restricted cash 42,765 32,403 - 32,403 10,362 32.0 %
Loans receivable (1) 1,670,251 1,696,526 - 1,696,526 (26,275) (1.5) %
Other assets 138,629 143,935 - 143,935 (5,306) (3.7) %
Total assets 1,992,061 2,009,051 - 2,009,051 (16,990) (0.8) %
Total debt (2) 1,405,588 1,413,694 - 1,413,694 (8,106) (0.6) %
Other liabilities 114,480 128,990 682 129,672 (15,192) (11.7) %
Total liabilities 1,520,068 1,542,684 682 1,543,366 (23,298) (1.5) %
Total stockholder's equity 471,993 466,367 (682) 465,685 6,308 1.4 %
Total liabilities and $ 1,992,061 $ 2,009,051 $ - $ 2,009,051 $ (16,990) (0.8) %
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 March 31, 2021 are presented on a GAAP basis and the balances as of December
31, 2020 include Fair Value Pro Forma adjustments related to our asset-backed
notes at amortized cost.
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.
33
--------------------------------------------------------------------------------
•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 noncash charges.
•We believe it is useful to exclude the impact of certain non-recurring charges,
such as expenses associated with our retail network optimization plan, 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 of January 1, 2021 , COVID-19 expenses are no longer
being adjusted for to derive 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. As a result of our
election of the fair value option for our Fair Value Loans, 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 Adjustment (in Three Months Ended March 31,
thousands) 2021 2020
Fair value mark-to-market adjustment on Fair Value Loans $ 21,562 $ (155,124)
Fair value mark-to-market adjustment on asset-backed notes 1,524 141,745
Fair value mark-to-market adjustment on credit card derivative (46) -
Total fair value mark-to-market adjustment $
23,040
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three months endedMarch 31, 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: Three Months Ended March 31, Adjusted EBITDA (in thousands) 2021 2020 Net income (loss)$ 3,019 $ (13,301) Adjustments: Fair Value Pro Forma net income adjustment (1) - 8,520 Income tax expense (benefit) 956 (1,088) Depreciation and amortization 5,332 4,658 Stock-based compensation expense 5,088 4,151 Retail network optimization expenses 7,799 - Origination fees for Fair Value Loans, net (1,422) 1,542 Fair value mark-to-market adjustment (23,040) 13,379 Adjusted EBITDA (2)$ (2,268) $ 17,861 (1) As ofJanuary 1, 2021 there are no further Fair Value Pro Forma adjustments because all loans originated and held for investment and all asset-backed notes issued are recorded at fair value. (2) For the three months endedMarch 31, 2021 and 2020, Adjusted EBITDA included a pre-tax impact of$5.9 million and$3.4 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 our retail network optimization plan, 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 ofJanuary 1, 2021 , COVID-19 expenses are no longer being adjusted for to derive 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. 34 -------------------------------------------------------------------------------- The following table presents a reconciliation of net income (loss) to Adjusted Net Income (Loss) for the three months endedMarch 31, 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: Three Months Ended March 31, Adjusted Net Income (Loss) (in thousands) 2021 2020 Net income (loss)$ 3,019 $ (13,301)
Adjustments:
Fair Value Pro Forma net income adjustment (1) - 8,520 Income tax expense (benefit) 956 (1,088) Stock-based compensation expense 5,088 4,151 Retail network optimization expenses 7,799 - Adjusted income (loss) before taxes 16,862 (1,718) Normalized income tax expense (benefit) 4,620 (513) Adjusted Net Income (Loss) (2)$ 12,242 $ (1,205) Income tax rate (3) 27.4 % 29.9 % (1) As ofJanuary 1, 2021 there are no further Fair Value Pro Forma adjustments because all loans originated and held for investment and all asset-backed notes issued are recorded at fair value. (2) For the three months endedMarch 31, 2021 and 2020, Adjusted Net Income includes an after-tax impact of$4.4 million and$2.9 million , respectively, related to the launch of new products and services (such as auto and credit card). (3) Income tax rate for the three months endedMarch 31, 2021 is based on a normalized statutory rate and the three months endedMarch 31, 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 Adjusted EPS for the three months endedMarch 31, 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 March 31, (in thousands, except share and per share data) 2021 2020 Diluted earnings (loss) per share $ 0.10$ (0.49) Adjusted EPS Adjusted Net Income (Loss) $
12,242
Basic weighted-average common shares outstanding 27,770,063 27,015,730 Weighted average effect of dilutive securities: Stock options 1,274,818 - Restricted stock units 575,153 - Diluted adjusted weighted-average common shares outstanding 29,620,034 27,015,730 Adjusted Earnings (Loss) Per Share $
0.41
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. The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three months endedMarch 31, 2021 and 2020. For the reconciliation of net income (loss) to Adjusted Net Income (Loss), see the immediately preceding table "Adjusted Net Income (Loss)." 35 --------------------------------------------------------------------------------
As of or for the Three Months Ended
March 31,
(in thousands) 2021 2020
Return on Equity 2.6 % (11.0) %
Adjusted Return on Equity
Adjusted Net Income (Loss) $ 12,242 $ (1,205)
Fair Value Pro Forma average stockholders' equity (1) $ 469,180 $ 488,884
Adjusted Return on Equity 10.6 % (1.0) %
(1) As of January 1, 2021 , there are no further Fair Value Pro Forma adjustments
because all loans originated and held for investment and all asset-backed notes
issued are recorded at fair value. Therefore, the average stockholders' equity
amount as of March 31, 2021 reflects the average of the GAAP stockholders'
equity account as of December 31, 2020 and the GAAP stockholders' equity account
as March 31, 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 our retail network optimization plan 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 adjusted for to derive 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 months ended
As of or for the Three Months Ended
March 31,
(in thousands) 2021 2020
Operating Efficiency 78.5 % 60.3 %
Adjusted Operating Efficiency
Total revenue 135,313 163,428
Total operating expense 106,266 98,614
Stock-based compensation expense (5,088) (4,151)
Retail network optimization expenses (7,799) -
Total adjusted operating expenses $ 93,379 $ 94,463
Adjusted Operating Efficiency 69.0 % 57.8 %
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.
Current debt facilities
The following table summarizes our current debt facilities available for funding
our lending activities and our operating expenditures as of
Scheduled
Amortization Period Principal
Debt Facility Commencement Date Interest Rate (in thousands)
LIBOR (minimum of
Secured Financing
3/1/2023 1.79% 375,000
Asset-Backed Securitization-Series 2019-A Notes 8/1/2022 3.46% 279,412
Asset-Backed Securitization-Series 2018-D Notes 12/1/2021 4.50% 175,002
Asset-Backed Securitization-Series 2018-C Notes 10/1/2021 4.39% 275,000
Asset-Backed Securitization-Series 2018-B Notes 7/1/2021 4.18% 225,001
$ 1,394,629
36-------------------------------------------------------------------------------- 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. OnFebruary 18, 2021 , our wholly-owned subsidiary,Oportun Funding VIII, LLC , the issuer under the 2018-A asset-backed securitization transaction, provided notice to the trustee that we had elected to redeem all$200.0 million of outstanding 2018-A Notes onMarch 8, 2021 and satisfy and dischargeOportun Funding VIII, LLC's obligations under the 2018-A Notes and the indenture. OnMarch 8, 2021 , we announced the issuance of$375.0 million two-year fixed-rate asset-backed notes byOportun Funding XIV, LLC , a wholly-owned subsidiary of ours and secured by a pool of our unsecured personal installment loans (the "2021-A Securitization"). The 2021-A 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 interest rate of 1.79% per annum. The proceeds from this securitization were used to fund the redemption of 2018-A and paid down our Secured Financing facility. OnMarch 24, 2021 , our wholly-owned subsidiary,Oportun Funding IX, LLC , the issuer under the Series 2018-B asset-backed securitization transaction, provided notice to the trustee that we elected to redeem all$225.0 million of outstanding 2018-B Notes, plus the accrued and unpaid interest, onApril 8, 2021 and satisfy and dischargeOportun Funding IX, LLC's obligations under the 2018-B Notes and the indenture. The redemption price was funded by drawing upon our Secured Financing facility and using unrestricted cash.
Lenders do not have direct recourse to
Debt
Our ability to utilize our Secured Financing facility as described herein is subject to compliance with various requirements, including:
•Eligibility Criteria. In order for our loans to be eligible for purchase by Oportun Funding V, 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 Secured Financing 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 Secured Financing facility also requires us to get lender consent prior to making material changes to our credit and collection policies. As ofMarch 31, 2021 , we were in compliance with all covenants and requirements per the debt facility.
For more information regarding our Secured Financing facility, 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.
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.
37
--------------------------------------------------------------------------------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. Under these agreements,WebBank will originate, fund and retain credit card receivables up to$25.0 million . We will purchase any excess receivables originated above the$25.0 million amount, in addition to certain ineligible receivables and charged-off receivables. The agreements have a term of two years, commencing onFebruary 9, 2021 . We will provide certain marketing, processing and accounting processing services toWebBank in connection with our credit card program.WebBank will pay us a servicing fee of 5% to service the accounts and certain excess collections on a monthly basis.
Whole loan sales
InNovember 2014 , we entered into a whole loan sale agreement with an institutional investor. This agreement was amended inMarch 2021 to extend the term toMarch 4, 2022 . Pursuant to the agreement, we are obligated to sell at least 10% of our unsecured loan originations, with an option to sell an additional 5%, subject to certain eligibility criteria and minimum and maximum volumes. We retain all rights and obligations involving the servicing of the loans and earn servicing revenue of 5% of the daily average principal balance of loans sold each month. We will continue to evaluate additional loan sale opportunities in the future and have not made any determinations regarding the percentage of loans we may sell. The loans are randomly selected and sold at the pre-determined contractual purchase price above par and we recognize a gain on the loans. We sell loans twice per week. We have not repurchased any of the loans sold related to this agreement and do not anticipate repurchasing loans sold in the future. We therefore do not record a reserve related to our repurchase obligations from the whole loan sale agreement.
Cash, cash equivalents, restricted cash and cash flows
The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated:
Three Months Ended March 31 ,
(in thousands) 2021 2020
Cash, cash equivalents and restricted cash$ 183,181 $ 206,094 Cash provided by (used in) Operating activities 18,156 52,122 Investing activities 8,987 (39,348) Financing activities (12,552) 57,179
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$18.2 million and$52.1 million for the three months endedMarch 31, 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$9.0 million and$(39.3) million for the three months endedMarch 31, 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 the decrease in the number of loans originated for the three months endedMarch 31, 2021 . The decrease in number of loans originated is attributable to the reduced number of applications which we believe is due to COVID-19 stimulus measures combined with continued elevated unemployment. Further, the decrease is due to proactive measures we implemented to tighten our lending criteria and underwriting practices given the current COVID-19 pandemic. 38 --------------------------------------------------------------------------------
Financing Activities
Our net cash provided by (used in) financing activities was$(12.6) million and$57.2 million for the three months endedMarch 31, 2021 and 2020, respectively. For the three months endedMarch 31, 2021 , net cash used in financing activities was primarily driven by the redemption of our Series 2018-A asset-backed notes and repayments on our Secured Financing facility. The issuance of our Series 2021-A asset-backed notes securitization was the primary source of funds for the redemption and repayments. For the three months endedMarch 31, 2020 , net cash provided by financing activities was primarily driven by borrowings on our Secured Financing facility, partially offset by repayments on those borrowings and redemption of our Series 2017-A asset-backed notes.
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. We believe our liquidity position atMarch 31, 2021 remains strong as we continue to navigate through a period of uncertain economic conditions related to COVID-19, and we will continue to closely monitor our liquidity as economic conditions change. 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. Under these 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. The agreements have a term of two years, commencing onFebruary 9, 2021 . We will provide certain marketing, processing and accounting processing services toWebBank in connection with our credit card program. As ofMarch 31, 2021 ,$7.8 million of the$25.0 million has been utilized.
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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