Q3 2020 Oportun Financial Corp Earnings Call
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I would now like to turn the conference over to Nails, Erdman, Vice President of Investor Relations. Please go ahead.
Thanks, and good afternoon, everyone. Joining me today to discuss opportunities third quarter 2020 results or roll baskets, Chief Executive Officer, and Jonathan Cohen, Chief Financial Officer, and Chief administrative officer.
Before we get started let me remind you that some of the remarks made today will include forward looking statements.
Actual results may differ materially from those contemplated or implied by these forward looking statements.
Given the uncertainties caused by the COVID-19 pandemic, let me caution you not to place undue reliance on these forward looking statements more detailed discussion of the risks factors that could cause these results to differ materially are set forth in our earnings press release.
<unk> filings with the Securities and Exchange Commission under the caption risk factors, including our most recent quarterly report on form 10-Q.
Report on form 10, K. any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
On today's call, we will present, both GAAP and non-GAAP financial measures, which we believe can be useful measures for period to period comparisons in our core business, which will provide useful information to investors regarding our financial condition and results of operation.
Conciliation of non-GAAP to GAAP measures is included in our earnings press release, our third quarter 2020 financial supplement and the appendix section of the third quarter 2020, <unk> earnings presentation, all of which are available on the Investor Relations website at Investor <unk> Dot opportune Dot com.
In addition, this call is being webcast and an archived version will be available after the call on the Investor relations portion of our website.
With that I will now turn the call over to <unk>.
Thank you Neil and thank you to everyone on the webcast and phone line for joining us this afternoon.
I would like to start by highlighting our solid third quarter results as evidenced by our quarter over quarter originations growth or credit performance, our ability to access the capital markets to fund our growth and positive adjusted EPS.
While the environment continues to be dynamic we believe we have adapted and identified a path to study and sensible growth.
During the third quarter, we grew aggregate originations, 92% quarter over quarter.
We generated $137 million of total revenue and $4.2 million of adjusted net income or 15 cents of adjusted EPS.
Our managed principal balance at end of period was $1.84 billion I'm very pleased to share with you that at the end of October or managed principal balance was $1.83 billion largely in line with September. So we believe we have reached an inflection point, where we will resume growing or receivables and revenue.
Our credit performance continues to demonstrate the superior capabilities about risk engine, particularly through this period of economic uncertainty.
Our annualized net charge off rate for the third quarter was 10.4%, which was lower than our second quarter rate of 10.6%.
We saw our net charge off rate further improve at the end of October 8.9%, a 10 basis point improvement month over month.
Our favorable charge off trend was driven by decreasing 30, plus day delinquencies and fewer customers in default status.
At the end of October delinquencies were at 3.6% about 30 basis points below last year's level.
Jonathan will share additional credit details as well as our third quarter financials, but before that I'd like to talk about our deliberate progress towards returning to growth.
You may recall, there prior to the pandemic I outlined our five strategic drivers that create our company's growth flywheel, which you can see on slide four our earnings deck.
These were number one customer growth number two data and technology three new products for our omni channel network and five geographic expansion.
I'd now like to provide an update on three of these namely geographic expansion new products and our omni channel network.
Today, we announced a partnership with Meadowbank National Association that sets us on a course to broaden our distribution by expanding across the nation.
We currently offer personal loan products in 12 states credit cards, when issuing bank in 24 states and auto loans in won.
To accomplish this we devote significant technology resources to build and maintain product terms that vary in each state.
Partnering with the National Bank will allow us to offer a uniform personal loan product across the nation, creating access to our responsible unsecured installment loans in over 30 additional states.
This greatly reduces operational complexity and gives customers access to affordable loans in the new geography is that we will enter.
Our nation wide product will be the same as our court state license products that are designed to help our customers succeed with a PR is capped at 36%.
I am enthusiastic about our growth prospects in light of this announcement it.
It sets the foundation for opportunity to reach all of the estimated 100 million financially underserved low and moderate income U.S. consumers, we seek to serve.
We are currently working on the technology that will enable the rollout of our Meadowbank partnership by mid 2021.
Over the course of the next few quarters, we'll provide periodic updates on our progress.
Turning to new products, we are seeing steady progress with both the opportunity visa credit card issued by what bank and our secured personal loan product.
For credit card or geographic presence continues to expand through marketing in multiple states, including those that are outside of our personal loan footprint.
In the third quarter, we added five additional states, bringing our total credit card footprint to 24 states.
For auto we've been doing a lot of work on product market fit by using the data we've collected from our soft launch based on our learnings. We're now in the process of increasing the number of customers were offered secured personal loans.
Starting in a couple of weeks or underwriting platform will begin offering all eligible customers a choice between our traditional personal loan or a personal loan secured by an auto with a higher loan amount and more favorable terms.
This functionality is currently being rolled out everywhere, we offer auto loans and overtime, we expect to make this available across additional states.
Turning to our partner channel, we announced our strategic partnership with Dole like in August.
We are currently developing the underlying technological capabilities required to enable our partnership and expect a soft launch in selectone looks locations in several weeks.
These partnerships and new products combined with our technology focused and mission driven culture represent sustainable and compelling opportunities for us as a company.
Track record of delivering bottom line results, while growing our business enables us to continue to empower low and moderate income consumers across the U.S., while generating significant value for our shareholders.
I couldn't be more proud of what opportune stands for as an organization, we're more optimistic about where we are headed.
With that I'll now turn the call over to Jonathan who will walk you through a more in depth discussion of our third quarter financial results and then well open the line for your questions.
Uh huh.
That's ratable and Hello, everyone. In addition to GAAP. We also evaluate our performance based on fair value pro forma results, which we believe present, a more consistent view of the underlying trends of the business unless I state otherwise all the metrics that I will now share. If you will be on a fair value pro forma basis for the purposes of comparing.
Since the prior year periods, a full list of definitions and reconciliations can be found in our earnings materials as Raul mentioned, a moment ago, we experienced steady improvement throughout the third quarter that continues into the current quarter aggregate originations in the third quarter were $302.4 million.
Nearly twice the level of our second quarter originations. We're also tracking our progress in returning to our 2019 level of originations and our third quarter originations were up 56% of last years in September our originations improved to 67% of last years and in October.
Over this improvement continued as we saw aggregate originations for the margin increase to $133.6 million, 69% of last years.
The overall economic environment has gradually improved we are cautiously increased our credit decisioning we.
We remain thoughtful and deliberate in our execution of such changes.
Given the encouraging indications we experienced throughout the third quarter and into October. We believe we are well positioned for further improvements assuming the economy continues to improve.
Total revenue for the third quarter was $136.8 million down 11% relative to the prior year period. The decrease was primarily due to lower interest income during the period, which was $128.7 million down 7% year over year. This was due to a 3% decrease.
So an average daily principal balance and a decrease in portfolio yield to 32%.
Non interest income, which includes cash gain on sale from a whole loan sale program was $8 million. This was down over the prior year period, reflecting the lower volume of loans sold as well as lower gain on sale premium of 9.9% versus 10.1% in the prior year period.
For the third quarter net revenue, which is our total revenue after interest expense and that change in fair value was $92.4 million down 17% year over year net revenue was lower due to higher charge offs offset by lower interest expense and $10.7 million net improvement in the fair value of our loan portfolio.
In asset backed notes.
Interest expense of $13.2 million was down 13% year over year. The decline in interest expense was driven by a decrease in our average daily balance of 8% year over year. That's we have reduced our leverage as our portfolio was paid down and also the decrease in our cost of debt to 3.9% in Q.
Tree relative to 4.2% in the same period a year ago.
That increase or decrease in fair value, we're not changing fair value includes our current period principal net charge offs and mark to market of our bonds and that.
We provide a summary of the net change in fair value in our third quarter 2020 earnings stock.
As you'll see on slide 15 in the third quarter $31.2 million net decrease in fair value consisted of $8.7 million Mark to market net increase on our loans entered that and current period charge offs or $41.9 million.
Mark to market adjustments consisted of a $29.1 million mark to market decrease related to our asset backed notes and $39.8 million mark to market increase and our loans receivable.
Now I'll walk you through the drivers of our fair value Mark starting with our asset backed notes as of September 30, the weighted average price of our asset backed notes was 101.1% up from 98.7% at June Thirtyth, reflecting a significant improvement in the prices of our bonds yeah.
Decrease in the fair value of our bonds resulted in a $29.1 million decrease net change in fair value and that revenue improvement in prices is a positive indication of capital markets conditions and accessibility.
The 39.8 million dollar increase in fair value of current loans receivable was driven by an increase in the fair value price for loans to 101.9% as of September 30 from 99.4% as of June 30, the increase in fair value was mainly driven by three factors first due to more.
Customers returning to repayment, our remaining life of loan charge offs decreased 10.61%.
Remember 30 from 12.73% action 30, sorry.
Second consistent with the weighted average decrease in yield on our bonds the discount rate on our loans decreased to 7.84% as of September 38.4% as of June 30.
Third fewer than expected emergency hardship deferrals resulted in a decrease in average life to 0.78 years as of September 30.8 years as of June 30, additional supplemental information regarding our fair value assumptions is provided in the appendix section of our third quarter 2020, earning stock Kearney.
To expenses, we have actively reduce discretionary spend across the company for the third quarter. Our total operating expense was $101.6 million up 9% sequentially from the second quarter. However, excluding the impact of the net liability of $8.8 million in relationship to a legal settlement.
Our operating expenses were down 8.2% sequentially by comparison, our operating expenses increased 20% from the second quarter to the third quarter and 2019.
Operating costs associated with our auto and credit card products, which are included in our overall opex were $4.2 million for the third quarter.
These investments contributed to our year over year Opex increase lower revenue in the third quarter led to adjusted operating efficiency, 63.3%, which was 540 basis points higher than the comparable quarter last year, and 330 basis points higher than the second quarter 2020.
Our customer acquisition cost for the third quarter was $207 down from $413 in the second quarter, while our CAC was still elevated relative to the $128 in the prior year period is returning to normal levels as origination volumes normalized EPS originations increased concern.
Tempur CAC further decreased to $180. Furthermore, we are optimizing our marketing investments for the current environment, but we expect an increase in marketing in the fourth quarter as we return to growth and take advantage of the expected seasonal increase in demand.
Our loss from operations on a GAAP basis was $6 million versus net income of $10 million in the prior year quarter.
This equated to GAAP net loss per share of 22 cents versus a net loss per share of $6.39 in the prior year quarter on a non-GAAP basis. Our adjusted EPS was 15 cents based on adjusted net income of $4.2 million versus adjusted EPS of 65.
Four cents and adjusted net income of $15.3 million in the <unk>.
Prior year quarter, adjusted net income as the numerator of our adjusted return on equity, which was 3.7% for Q3 versus 14.6% in the prior year quarter, our third quarter adjusted EBITDA, which is a proxy for pre tax cash profitability does not factor in the 212 basis point reduction.
Our remaining cumulative loss estimate since the noncash impact of fair value accounting is back out for the third quarter, our adjusted EBITDA was negative $1.2 million compared to $18.6 million in the prior year quarter.
Turning now to credit our performance in the third quarter and October showed notable improvements we continue to see a significant decline in loans in deferral and at the end of September only 1.5% of our portfolio wasn't emergency hardship deferral status by the end of October deferrals had further decrease to 1%.
Since the start of the pandemic, we have been able to help over 112000 customers through our emergency hardship program and most of that emerge from deferral and returned to retain it.
Coupled with this positive trend is a reduction in our 30 plus day delinquency rate.
September 30, this rate has decreased to 3.5% down 20 basis points quarter over quarter, and down 30 basis points year over year and as Robert mentioned earlier. The October 30, plus day delinquency rate was 3.6% also 30 basis points better than last year's level, we regard.
This positive trend as an indication that our customers are currently managing through the crisis and returning to repayment status.
At the same time, we continue to be extremely pleased with the credit performance of our newly originated loans. The loans. We have originated since our credit tightening in mid March have continued to trend better than 2019 levels. These results are a testament to the competitive advantage. We have built through our proprietary underwriting models and technology platform, we do not.
Any credit to be better than last year. However, an Irish team continues to analyze opportunities to open up and well performing nodes as evidenced by the quarter over quarter growth we delivered in Q3.
Our annualized net charge off rate was 10.4% for the third quarter down from 10.6% for the second quarter consistent with our policy and charge off actions. We took in the second quarter, we deemed certain loans impacted by the pandemic to be uncollectable prior to reaching 120 days past due.
This led to 11.2 million of additional charge offs in the third quarter. We continue to expect elevated levels of charge offs. However, future accelerated charge offs are expected to be lower going into third quarter.
Turning now to capital and liquidity, we continue to manage our funding program to maintain liquidity runway of at least 12 months out.
As of October 31st total cash was $196.2 million comprised of cash and cash equivalents of $140.2 million unrestricted cash of $56 million.
Last week, we completed the sale to an institutional asset manager of class C and class B bonds that we had retained as part of our 28, TB and 2019, a asset backed securitizations the.
The transaction provided us with growth capital of $39.8 million net of fees and expenses and reflected investor confidence in our collateral performance in our business model.
We also co sponsored a $188 million securitization by our whole loan buyer backed by loans. They previously purchased from us while the whole loan buyer receives the economic benefit of the securitization funding the strong investor reception deal received pricing at 2.8% cost of funds also reflects I suppose.
Investor confidence in opportune moms.
I also want to update you on our plans for a whole lot sales we've extended our current whole loan agreement through December time, and we'll continue to sell 10% of our lines at the same price as before.
During this extension period, we will evaluate our future options for selling whole loans, given we are coming up on your end, we may decide to part selling whole loans, if we decide to stop selling whole loans in the future. We are comfortable holding these loans on our balance sheet and we expect the near term reduction in the gain on sale to be more than offset by additional interest.
Net income over time.
<unk> Valuate, our liquidity is also valuable to look at our cash flow statement for the third quarter, our cash flow from operations was $45.4 million as compared to $68.6 million for the prior year period.
We also continued to maintain a strong capital base and run our business at a low level of leverage as of the end of the third quarter, we had adjusted tangible book value of $425.1 million or $15.41 per share like.
Our debt to equity ratio was 2.9 times a reduction from 3.3 times the prior year.
As of October 31st 2020, we had $208 million undrawn capacity on our $400 million warehouse line is committed through October 2021, we believe our warehouse line combined with our demonstrated ability to successfully placed both senior and subordinate bonds will support.
Our return to growth.
In closing like role I am very excited about them at a bank announcement and I'm extremely encouraged by the progress we're showing our credit outcomes the growth prospects of our products and the health and stability of our balance sheet.
Will not be providing financial guidance at this time due to the ongoing pandemic, our long term outlook for opportune remains optimistic and we see a great opportunity for growth in the months ahead with that I will now turn the call back over to Raul.
I want to thank all of opportunities employees for their efforts throughout the past year their actions and responses have been nothing short of fantastic and I continue to be grateful for their commitment and dedication.
Thank you all for your time and now we welcome your questions and comments operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And the first question comes from Sanjay Sakhrani of KBW. Please go ahead.
Thank you.
Just two questions on future originations as far as the rollout of auto to personal loan customers can you maybe frame the opportunity here because I know some of your competitors did this in the past.
It became a meaningful part of their portfolio, maybe you could speak to the economic impacts and the trade offs between credit and higher loan average sizes et cetera.
Sort of the economic returns and then secondly on the met a bank deal how quickly can you roll out personal loans to other geographies and it doesn't matter keep any of the loan. Thanks.
Hi, Sanjay it's Raul so I'll start with your question about auto and personal loans.
So what we're going to do in the next few weeks is for customers who are eligible they will in essence get a side by side to offer they'll be offered an unsecured personal loan and then they'll be also offered a secured loan or personal loan to secure buying in auto so it's a little early.
We we think right now to talk about the economic impact, but I'll give you a sense of certainly what we expect we would expect to average loan size to be larger we would expect losses to be lower because of the fact that they are secured by the car and to your point. We've seen this play book run well by others. So we're bullish.
Really about what this can represent over the next few years for our business as we continue to roll that out and continue to optimize product market fit I'm. So let me pause there and see if you have any follow up questions on that.
So you are saying they are always the same when you net it all out.
[laughter] a little early for us to really give you a sense of what that's going to look like so far we have about $4 million of auto loans. So it's still a really small relative to the size of our portfolio and as a consequence, we don't really have a sense yet of what the steady state are always were always are going to look like for that.
Product, but as we make more progress, we'll give updates to you and others.
Okay, great and.
And then on the matter.
Sure. So on Meadowbank, we're really excited about the fact that we're now going to have a chance to offer our products across the nation. We.
We do think we'll be able to offer it to over 30 additional states relative to our footprint today. So our plan is going to be to get all of the new states up as quickly as possible starting in the middle of next year, and we would hope to finish that initial rollout by early 2022.
Okay.
Just a final question.
On credit quality, obviously, the trend seems quite positive.
Just trying to think through how you guys are planning for the lack of stimulus I don't roll you spoke last quarter, maybe to the fact that many of your customers were impacted very early in the pandemic and many might have actually been industry employed as the reopening has occurred.
Do you feel about the set up right here.
We actually feel really good about the set up so I think to your point Sanjay. If you were to look at page number 10 of our earnings deck. What you would see is the percentage of customers who are not filling quench right at that very top or zero days delinquent.
Now as of the end of October up to 91.3%. So it's the highest number.
All the numbers that we've listed there in terms of prior period early delinquencies look good to first payment defaults continue to look good. So that's giving us confidence to go ahead and increase approval rates, which is part of what's driving origination.
And the delinquency numbers themselves look good. So we think we're well positioned now to return to growth and you saw that not only in the 92% quarter over quarter growth in origination.
I think the October and September portfolio size is now stable. So we feel like we've turned the corner and we can get back to growth now.
Okay, great. Thank you thank.
Thank you.
The next question comes from John Hecht of Jefferies. Please go ahead.
Hi, good afternoon, guys. Thanks very much.
The first question Jonathan <unk>, just you mentioned, you actually get 2.8 million of incremental change.
Yes I.
I think if I recall, that's tied to kind of you just I guess late stage delinquency buckets that you originated on or around you. When the pandemic started and you just you've been you know you you get on with guidance and guidance on those and I think you're cleaning through that how much more of that is left and how much did that.
Fact, either October charge off levels or Threeq, you charge off levels.
Sure John Thanks, very much for the question. So first of all I just wanted to clarify one point.
For the quarter for the third quarter, we had $11.2 million as additional charge offs accelerated charge offs.
For the month of October we had 2.8 million of accelerated charge off so we had those those two different numbers.
But the the reason for that is that what happens it out where this comes into play as a customer comes out of a deferral and were not able to make contact with them and based on prior data. We have you know our models tell us that it's highly highly likely that they will not returned to repayment himself.
We we don't wait to 120 days to charge them off so given that we're down to only 1% of the outstanding portfolio being an emergency hardship to fall.
You know, we expect a future levels to be to be lower than they were before in terms of the impact on you know the outer loss rate. There is some puts and takes so we didnt give a specific number.
Because some of the accelerated charge offs that happened in the second quarter, you know whatever the charged off normally in the third quarter. So there's that give and take but clearly the overall level of charge offs is it's a higher number equalize. We're recognizing these charge offs the clear things out as you said.
Okay, and the remaining bucket is much lower than it was a few months ago. Okay.
Second question I mean, you is just thinking about your growth opportunities between the rollout of Dove axe now met.
And then and then it just seems the ability to cross sell to larger loan or really just take up your customers loan size because if you look it looks like you in the tightening phase maybe brought down the average loan size. So you have a lot of.
A lot of opportunities and angles for gross yeah, and then there is also some uncertainty out there in the world from a number of different factors write down.
I'm wondering your route how do you how do you balance that is you know you'd there's there's got to be budgeting capital outlays partner expectations and so forth. How are you budgeting. This this call a broad set of opportunities with the uncertainties in the world and how would you prioritize that.
Yes, I think that's a great question, John So what we've done over the last eight months just given the uncertainties that exist. It is we really tightened the belt.
So we decided basically to reduce hiring to the hiring for strategic projects, we stopped growing the store base, especially in Q2, we reduced the spend on professional services an outside vendors. So we really decided given the uncertainty to be very cautious and.
Most of our expenses and you heard us mention that in Q3 absent a legal settlements our expenses actually would have been down 0.2% quarter over quarter versus last year when going from Q2 to Q3, our expenses grew 20%. So that just shows how disciplined we tried to be on.
The expense side as you pointed out we're really excited right now about the fact that we do have some growth opportunities. So we think that don't lets one is the one that's closest Dan and does the Meadowbank one that will start to take shape in the middle of next year and then there's the progress that we're making a new product that is going to allow us to have additional growth.
Honda So.
So the expenses that we are taking on right now are the expenses for the teams that are focused on Dol EPS on Meadowbank, and then really funding the new products as they see that they hit our milestones that we start to see progress so really deliberate expense control in the business that we have today and then additional budgeting for this.
But you do projects that you talked about.
Okay.
Okay. Thanks that helps with the cadence of the rollout and then final question just came to my mind, Jonathan I mean, you just thinking about you know you've had to write up your liabilities quite a bit because of interest rate fluctuations I mean, given where you've written up to now.
And you know I guess that really call a lack of downside from benchmark interest rates.
It is it is it a fair comment said the rate risk in the liabilities has been now contained because of what youve had to price.
Pricing there is there anything else to think about there.
Yeah, that's a great question John.
Well I don't have a crystal ball with regard to markets. If you take a look at page 15.
Of our earnings deck, where we have the explanation of that change in fair value right at the end of this quarter.
The but the debt was worth one of the 1.1% and you go back a year ago and stuff.
Strong normalized market that was worth one or 1.4% right. So we're you know we're very close to where we were just before the pandemic. So I would think that you know the amount that the data get increase is certainly a lot less than it was from the prior quarter.
Okay, great. Thank you guys very much thanks.
Thanks, John.
Again, if you would like to ask a question. Please press Star then one.
And the next question will come from Rick Shane of JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question. This afternoon and I hope everybody is well just wanted to talk a little bit about expenses as we roll into the fourth quarter. There was an uptick in the third quarter in terms of operating expense I'm, assuming that that's a function of right.
The opening and Restacking branches I'm curious as we move into what is your busiest season, and that's coincident print, presumably with further reopenings and restaffing or how we should think about that and I do apologize. If you addressed this we're bouncing around on calls today.
No. That's that's quite a right. So in terms of expenses the increase from Q2 to Q3, which was largely driven by a 8.8 million dollar legal settlement. This was a case that yeah. We just decided with the board that we wanted to put behind that's when we looked at the expense related.
Two continuing to try to litigate that.
So we looked at the expense of management attention and decided that we were better off settling it absent those $8.8 million Rick expenses basically would have been flat compared to last year. When they went up 20% quarter over quarter. As we look forward to Q4, you're right. There there was some incremental locations that we've been able to open these.
Co locations and as you heard us describe in the past, we like co locations because someone else is generating the traffic and it's a small footprint. So there is going to be some incremental staffing costs related to that probably the biggest increase in expenses from Q3 to Q4 is going to be marketing because now that we're starting to see the economy.
Stabilize and given the great performance that we're seeing in first payment defaults in early delinquencies were really going to lean into the seasonal increase that we normally see as we go into Q4. So the marketing budget is going to go up in this quarter, that's probably going to be the biggest increase in expenses and then some incremental staffing related.
Into the strategic projects that we talked about earlier.
Got it okay, great. Thank you very much.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Raul Vazquez for any closing remarks.
I just want to thank everyone again for joining us on today's call and we look forward to speaking with you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.