Oportun Financial Corp

Results of Operations

The following tables and related discussion set forth our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022. For a discussion regarding our operating and financial data for the year ended December 31, 2022, as compared to the same period in 2021, refer to Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 14, 2023.

Total revenue

Interest income. Total interest income increased by $87.4 million, or 10.0%, from $876.1 million for 2022 to $963.5 million for 2023. The increase is primarily attributable to growth in our Average Daily Principal Balance, which grew from $2.74 billion for 2022 to $2.99 billion for 2023, an increase of 9.2% and anincrease in portfolio yield of 23 basis points in the year ended December 31, 2023, compared to the year ended December 31, 2022.

Non-interest income. Total non-interest income increased by $17.0 million, or 22.2%, from $76.4 million for 2022 to $93.4 million for 2023. This increase is primarily due to a $20.3 million increase in interest earned on Set & Save member accounts, $10.3 million increase in documentation fees and servicing fees on loans retained by Pathward, and $2.8 million increase related to the gain on loan sales. The increase was offset by $7.8 million decrease in servicing revenue due to the amortization of our serviced portfolio, a $6.5 million decrease related to subscription revenue, a $1.3 million decrease as a result of a decline in credit card income and a $0.8 million decrease in sublease income.

See Note 2, Summary of Significant Accounting Policies, and Note 12, Revenue, of the Notes to the Consolidated Financial Statements included elsewhere in this report for further discussion on our interest income, non-interest income and revenue.

Interest expense

Interest expense. Interest expense increased by $86.4 million, or 92.8%, from $93.0 million for 2022 to $179.4 million for 2023. We financed approximately 99.2% of our loans receivable through debt for 2023 as compared to 91.2% for 2022, and our Average Daily Debt Balance increased from $2.50 billion to $2.97 billion for 2023, an increase of 16.6%. Our Cost of Debt has increased due to higher benchmark interest rates and wider credit spreads on financings in 2023 relative to 2022 and higher interest rate on our floating rate debt. We expect our interest rates to increase as our asset-backed notes at fair value with lower interest rates are replaced with more expensive current funding.

See Note 2, Summary of Significant Accounting Policies, and Note 8, Borrowings, in the Notes to the Consolidated Financial Statements included elsewhere in this report for further information on our Interest expense and our borrowings.

Total net decrease in fair value

Net increase (decrease) in fair value reflects changes in fair value of loans receivable held for investment and asset-backed notes on an aggregate basis and is based on a number of factors, including benchmark interest rates, credit spreads, remaining cumulative charge-offs and borrower payment rates. Increases in the fair value of loans increase Net Revenue. Conversely, decreases in the fair value of loans decrease Net Revenue. Increases in the fair value of asset-backed notes decrease Net Revenue. Decreases in the fair value of asset-backed notes increase Net Revenue. We also have a derivative instrument related to our bank partnership program with Pathward, N.A. Changes in the fair value of the derivative instrument are reflected in the total fair value mark-to-market adjustment below.

• Not meaningful

(1)The fair value mark-to-market adjustment on loans receivable at fair value shown for the year ended December 31, 2023, includes $(118.2) million related to the cumulative fair value mark on loans sold in other sales in 2023. This fair value mark on loans sold represents the life-to-date mark-to-market adjustment for the loans sold and is presented separately for the loans sold to assist in reconciling to our non-GAAP measure, Adjusted EBITDA. For details regarding other loan sales, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Consolidated Financial Statements included elsewhere in this report.

Net decrease in fair value. Net decrease in fair value for 2023 was $596.8 million. This amount represents a total fair value mark-to-market decrease of $109.5 million on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $(18.2) million mark-to-market adjustment on Loans Receivable at Fair Value due toan increase in remaining cumulative charge-offs from 10.38% as of December 31, 2022 to 12.10% as of December 31, 2023, partially offset by a decrease in the discount rate from 11.48% as of December 31, 2022 to 10.10% as of December 31, 2023. The $(100.0) million mark-to-market adjustment on Asset-backed notes is due to rising rates and widening asset-backed securitization spreads. The net decrease in charge-offs, net of recoveries, for 2023 was $363.8 million. The total net decrease in fair value for the year ended December 31, 2023 includes a $(118.2) million adjustment related to the fair value mark on other loan sales in 2023. We expect to continue to see volatility in fair value primarily as a result of macroeconomic conditions.

Charge-offs, net of recoveries

Charge-offs, net of recoveries.

Our Annualized Net Charge-Off Rate increased to 12.2% for the year ended December 31, 2023, from 10.1% for the year ended December 31, 2022. Net charge-offs for the year ended December 31, 2023 increased primarily due to a higher mix of first-time borrowers in 2021 and the first half of 2022. In response to this increase, we tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes in the second half of 2022. 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 the loan is 120 days contractually past due and we charge-off a credit card account when it is 180 days contractually past due.

Operating expenses

Operating expenses consist of technology and facilities, sales and marketing, personnel, outsourcing and professional fees and general, administrative and other expenses.

Technology and facilities

Technology and facilities expense is the largest segment of our operating expenses, representing the costs required to build and maintain our A.I.-enabled digital platform, and consists of three components. The first component comprises costs associated with our technology, engineering, information security, cybersecurity, platform development, maintenance, and end user services, including fees for consulting, legal and other services as a result of our efforts to grow our business, as well as personnel expenses. The second component includes rent for retail and corporate locations, utilities, insurance, telephony costs, property taxes, equipment rental expenses, licenses and fees and depreciation and amortization. Lastly, the third component includes all software licenses, subscriptions, and technology service costs to support our corporate operations, excluding sales and marketing.

Technology and facilities. Technology and facilities expense increased by $3.3 million, or 1.5%, from $216.1 million for 2022 to$219.4 million for 2023. The increase is primarily due to a $7.8 million increase in depreciation costs commensurate with growth in our internally developed software balance, $7.2 million increase due to a decrease in capitalization of internally developed software following the reductions in force in 2023, $5.7 million increase due to an impairment charge related to the write-off of embedded finance, investing, and retirement products, and a $3.1 million increase in service cost and software. The increase was offset by $8.9 million decrease in wages and salaries and benefits, $7.9 million decrease in outsourcing and professional fees, $1.9 million decrease in other expenses and $1.1 million decrease in utilities.

Sales and marketing

Sales and marketing expenses consist of two components and represent the costs to acquire our members. The first component is comprised of the expense to acquire a member 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.

Sales and marketing. Sales and marketing expenses to acquire our members decreased by $34.7 million, or 31.6%, from $110.0 million for 2022 to $75.3 million for 2023. Our net decrease in marketing spend during the year ended December 31, 2023 was $21.6 million across various marketing channels, including pay per lead, digital advertising and direct mail. We decreased marketing spend as we shifted our strategy tofocus lending towards existing and returning members to improve credit outcomes. The decrease was also attributable to a $8.1 million decrease related to outsourcing and professional fees and $6.9 million decrease in salaries and benefits due to the decrease in headcount following our efforts to streamline operations. As a result of our decrease in number of loans originated during the year ended December 31, 2023, our CAC increased by 11.8%, from $144 for the year ended December 31, 2022, to $161 for the year ended December 31, 2023. We expect our sales and marketing to decrease in 2024 compared to 2023 as we maintain focus on our strategy to improve credit outcomes by focusing on lending towards existing and returning members.

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, and retail operations which are included in sales and marketing expenses and technology which is included in technology and facilities.

Personnel. Personnel expense decreased by $33.0 million, or 21.3%, from $154.9 million for 2022, to $121.8 million for 2023. The decrease is attributable to a $19.2 million decrease in wages and salaries, a $7.2 million decrease in stock compensation, a $5.2 million decrease in bonus and a $1.9 million decrease in benefits. The decrease was primarily driven by the reductions in force announced during the annual period ended December 31, 2023. We expect our personnel expense to decrease in 2024 compared to 2023 as a result of transitioning certain roles to lower cost jurisdictions.

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. The costs related to our third-party contact centers located in Colombia, Jamaica and the Philippines are included in outsourcing and professional fees. These third-party contact centers provide business support, including application processing, verification, customer service and collections. Professional fees also include the cost of legal and audit services, credit reports, recruiting, cash transportation, collection services and fees and consultant expenses. Direct loan origination expenses related to application processing are expensed when incurred. In addition, outsourcing and professional fees include any financing expenses, including legal and underwriting fees, related to our asset-backed notes. We expect our outsourcing and professional fees expense to decrease in 2024 compared to 2022 as a result of our focus to reduce our reliance on outsourced services.

Outsourcing and professional fees. Outsourcing and professional fees decreased by $22.2 million, or 32.9%, from $67.6 million for 2022 to $45.4 million for 2023. The decrease is primarily attributable to a $7.1 million decrease in outsourcing services, a $6.9 million decrease in fees and expenses related to debt financing, a $5.7 million decrease in professional services, a $3.0 million decrease in credit reports, and a $1.5 million decrease in other expenses. The decrease was partially offset by a $2.0 million increase in debt recovery, court filing and legal fees. We expect our outsourcing and professional fees to decrease in 2024 compared to 2023 as a result of our continued focus on strong expense discipline and streamlining operations.

General, administrative and other

General, administrative and other expense includes non-compensation expenses for employees, who are not a part of the technology and sales and marketing organization, which include travel, lodging, meal expenses, political and charitable contributions, office supplies, printing and shipping. Also included are franchise taxes, bank fees, foreign currency gains and losses, transaction gains and losses, debit card expenses, litigation reserve, expenses related to workforce optimization and streamlining operations, and Digit-related acquisition and integration expenses.

General, administrative and other. General, administrative and other expense increased by $13.5 million, or 23.0%, from $58.8 million for 2022, to $72.4 million for 2023, primarily due to an increase of $21.3 million driven by the reductions in force, offset by $2.6 million decrease in litigation expense, a $2.0 million decrease in travel and entertainment, and a $2.0 million decrease in acquisition and integration related expenses.

Income taxes

Income taxes consist of U.S. federal, state and foreign income taxes, if any. For the years ended December 31, 2023 and 2022 we recognized tax expense (benefit) attributable to U.S. federal, state and foreign income taxes.

Income tax expense. Income tax expense decreased by $76.2 million or 3098.5%, from $2.5 million tax expense for 2022 to $73.7 million tax benefit for 2023, primarily resulting from larger pretax losses for the annual period ended December 31, 2023, the tax benefits of the return-to-provision adjustments and the generation of tax credits.

Valuation Allowance. As of December 31, 2023, we have $45.9 million of U.S. net deferred tax assets, of which $69.5 million is related to the tax-effected net operating losses, tax credits, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some, or all, of these tax attributes could ultimately expire unused. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the period in which the valuation allowance is recorded.

See Note 2, Summary of Significant Accounting Policies, and Note 13, Income Taxes, of the Notes to the Consolidated Financial Statements included elsewhere in this report for further discussion on our income taxes.