Oportun Financial Corp

Results of Operations

The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three and six months ended June 30, 2024 and 2023.

Total revenue

Interest Income. Total interest income decreased by $9.1 million, or 3.8%, from $240.5 million for the three months ended June 30, 2023 to $231.4 million for the three months ended June 30, 2024. This decrease was primarily attributable to a decline in our Average Daily Principal Balance, which decreased from $2.99 billion for the three months ended June 30, 2023 to $2.75 billion for the three months ended June 30, 2024, a decrease of 8.3%. The decrease was partially offset by an increase in portfolio yield of 167 basis points in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Total interest income decreased by $16.1 million, or 3.4%, from $478.1 million for the six months ended June 30, 2023 to $462.0 million for the six months ended June 30, 2024. This decrease was primarily attributable to a decline in our Average Daily Principal Balance, which decreased from $3.03 billion for the six months ended June 30, 2023 to $2.80 billion for the six months ended June 30, 2024, a decrease of 7.7%. The decrease was partially offset by an increase in portfolio yield of 139 basis points in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Non-interest income. Total non-interest income decreased by $7.1 million, or 27.1%, from $26.1 million for the three months ended June 30, 2023 to $19.0 million for the three months ended June 30, 2024. This decrease is primarily due to a $8.2 million decrease in fees related to our Pathward program, and a $1.4 million decrease in subscription revenue related to our Set & Save product. These decreases were partially offset by a $2.8 million increase in interest earned on Set & Save member accounts.

Total non-interest income decreased by $9.1 million, or 18.9%, from $48.0 million for the six months ended June 30, 2023 to $38.9 million for the six months ended June 30, 2024. This decrease is primarily due to a $7.8 million decrease in fees related to our Pathward program, and $3.0 million decrease in subscription revenue related to our Set & Save product. These decreases were partially offset by a $2.2 million increase in interest earned on Set & Save member accounts.

See Note 2, Summary of Significant Accounting Policies, and Note 12, 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

Interest expense. Interest expense increased by $12.8 million, or 30.9%, from $41.4 million for the three months ended June 30, 2023 to $54.2 million for the three months ended June 30, 2024. The increase was driven by a 215 basis point increase in our Cost of Debt partially offset by a decrease to our Average Daily Debt Balance. Our Average Daily Debt Balance decreased from $2.98 billion for the three months ended June 30, 2023 to $2.82 billion for the three months ended June 30, 2024, adecrease of 5.3%. Our Cost of Debt has increased due to increases in interest rates and wider credit spreads on our new asset-backed securitization issuances.

Interest expense increased by $28.3 million, or 35.1%, from $80.4 million for the six months ended June 30, 2023 to $108.7 million for the six months ended June 30, 2024. The increase was driven by a 222 basis point increase in our Cost of Debt partially offset by a decline in our Average Daily Debt Balance. Our Average Daily Debt Balance decreased from $2.99 billion for the six months ended June 30, 2023 to $2.86 billion for the six months ended June 30, 2024, a decrease of 4.5%. Our Cost of Debthas increaseddue to increases in interest rates and wider credit spreads on our new asset-backed securitization issuances.

We expect our interest expense to increase as our asset-backed notes issued at lower interest rates amortize and are replaced with more expensive current funding.

See Note 8, Borrowings, in the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further information on our Interest expense and our borrowings.

Total net increase (decrease) in fair value

Net increase (decrease) in fair value reflects changes in fair value of loans receivable held for investment and asset-backed notes at fair value 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.

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(1) The fair value mark-to-market adjustment on Loans Receivable at Fair Value includes the fair value mark-to-market adjustment of $(36.2) million related to the credit card portfolio reclassified to held for sale. See Note 5, Loans Held for Sale and Loans Sold in the Notes to the Condensed Financial Statements (Unaudited) included elsewhere in this report for further information on Credit cards receivable held for sale.

(2)The fair value mark on loans sold shown for the three and six months ended June 30, 2024 includes $(18.4) million related to the cumulative fair value mark on the loans sold in other loan sales in Q 2 2024. The fair value mark on loans sold shown for the three and six months ended June 30, 2023 includes $(18.9) million related to the cumulative fair value mark on loans sold in other loan sales in Q 2 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.

Net increase (decrease) in fair value. Net decrease in fair value for the three months ended June 30, 2024 was $136.1 million. This amount represents a total fair value mark-to-market decrease of $37.7 million, and $83.9 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a$(36.7) million mark-to-market adjustment on Loans Receivable at Fair Value due to (a) $(36.2) million mark-to-market adjustment in the fair value of our credit cards receivable related to management's decision to sell the portfolio and (b) $(0.5) million mark-to-market adjustment on loans receivable at fair value. The $(0.5) million mark-to-market on loans receivable at fair value was driven by a 0.9% decrease in weighted average life of the portfolio offset by a 44 basis point decrease in the discount rate and a 4 basis point decrease in the remaining cumulative charge offs. The$(1.9) million mark-to-market adjustment on asset-backed notes is due to tighter credit spreads. The total net decrease in fair value for the three months ended June 30, 2024 also includes a$(18.4) million adjustment related to the fair value mark on the loans sold as part of the other loan sales for the three months ended June 30, 2024.

Net decrease in fair value for the three months ended June 30, 2023 was $106.5 million. This amount represents a total fair value mark-to-market increase of $7.8 million, and $93.5 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $14.2 million mark-to-market adjustment on Loans Receivable at Fair Value due to (a) a decrease in remaining cumulative charge-offs from 11.72% as of March 31, 2023 to 11.35% as of June 30, 2023, partially offset by (b) a decrease in the weighted average life from 0.963 years as of March 31, 2023 to 0.955 years as of June 30, 2023 and (c)an increase in the discount rate from 11.07% as of March 31, 2023 to 11.10% as of June 30, 2023. The $(12.6) million mark-to-market adjustment on asset-backed notes is due to lower medium-term interest rates and tighter credit spreads. The total net decrease in fair value for the three months ended June 30, 2023 also includes a $(18.9) million adjustment related to the fair value mark on the loans sold as part of the other loans sales for the three months ended June 30, 2023.

Net decrease in fair value for the six months ended June 30, 2024 was $253.0 million. This amount represents a total fair value mark-to-market decrease of $34.7 million, and $169.2 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $(7.8) million mark-to-market adjustment on Loans Receivable at Fair Value due to (a) $(36.2) million mark-to-market adjustment in the fair value of our credit cards receivable related to management's decision to sell the portfolio, and (b) $28.4 million mark-to-market adjustment on loans receivable at fair value. The $28.4 million mark-to-market on loans receivable at fair value was driven by (a) a decrease in discount rate from 10.10% as of December 31, 2023 to 8.66% as of June 30, 2024, (b) a decrease in remaining cumulative charge-offs from 11.80% as of December 31, 2023 to 11.57% as of June 30, 2024, and (c) an increase in average life from 1.006 as of December 31, 2023 to 1.015 years as of June 30, 2024. The $(29.0) million mark-to-market adjustment on asset-backed notes isdue to lower medium-term interest rates and tighter credit spreads. The total net increase (decrease) in fair value for thesix months ended June 30, 2024 includes $(51.8) million in adjustments related to the fair value mark on loans sold as part of the other loan sales for the six months ended June 30, 2024.

Net decrease in fair value for the six months ended June 30, 2023 was $322.2 million. This amount represents a total fair value mark-to-market decrease of $76.7 million, and $185.1 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $(23.1) million mark-to-market adjustment on Loans Receivable at Fair Value due to (a) a decrease in average life from 0.998 as of December 31, 2022 to 0.955 years as of June 30, 2023 and (b) an increase in remaining cumulative charge-offs from 10.38% as of December 31, 2022 to 11.35% as of June 30, 2023, partially offset by (c) a decrease in discount rate from 11.48% as of December 31, 2022 to 11.10% as of June 30, 2023. The $(61.5) million mark-to-market adjustment on asset-backed notes isdue to lower medium-term interest rates and tighter credit spreads. The total net increase (decrease) in fair value for thesix months ended June 30, 2023 includes $(56.1) in adjustments related to the fair value mark on loans sold as part of the other loan sales for the six months ended June 30, 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 decreased to 12.3% and 12.2% for the three and six months ended June 30, 2024, respectively, from 12.5% and 12.3% for the three and six months ended June 30, 2023, respectively. Net charge-offs for the three and six months ended June 30, 2024 decreased primarily due to our efforts to tighten our credit underwriting standards and focus lending towards existing and returning members to improve credit outcomes. As the average life of our loans is approximately one year, we expect the back book to become less impactful on our losses by the end of 2024. 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 decreased by $14.5 million, or 26.3%, from $55.1 million for the three months ended June 30, 2023 to $40.6 million for the three months ended June 30, 2024. The decrease is primarily due to a $6.5 million decrease in wages, salaries and benefits as a result of our workforce optimization efforts that occurred in 2023 and 2024, $3.1 million decrease in service costs, $2.4 million decrease in software and office rent, $2.1 million decrease in outsourcing and professional fees, and $1.2 million decrease in depreciation and other expenses. These decreases were offset by $1.2 million lower capitalization of internally developed software.

Technology and facilities expense decreased by $24.3 million, or 21.7%, from $112.0 million for the six months ended June 30, 2023 to $87.7 million for the six months ended June 30, 2024. The decrease is primarily due to $15.0 million decrease in wages, salaries and benefits as a result of our workforce optimization efforts that occurred in 2023 and 2024, $4.5 million decrease in outsourcing and professional fees, $3.7 million decrease in service costs and $3.6 million decrease in software and office rent. These decreases were offset by $4.5 million lower capitalization of internally developed software.

Sales and marketing

Sales and marketing expenses consist of two components and represents 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 $2.9 million, or 15.3%, from $19.2 million for the three months ended June 30, 2023 to $16.3 million for the three months ended June 30, 2024. The decrease is attributable to a $2.1 million decrease in wages, salaries, benefits, bonus and stock compensation expense due to our streamlining operations efforts. As a result of our increase in number of loans originated duringthe three months ended June 30, 2024, our CAC decreased by 25.2% from $163 for the three months ended June 30, 2023 to $122 for the three months ended June 30, 2024.

Sales and marketing expenses to acquire our members decreased by $6.1 million, or 15.9%, from $38.4 million for the six months ended June 30, 2023 to $32.3 million for the six months ended June 30, 2024. The decrease is attributable to a $4.7 million net decrease in wages, salaries and benefits related to our streamlining operation efforts, and a $1.4 million decrease in service costs. As a result of our increase in number of loans originated during the six months ended June 30, 2024, our CAC decreased by 21.0% from $176 for the six months ended June 30, 2023, to $139 for the six months ended June 30, 2024.

We expect sales and marketing expense to be consistent in 2024 compared to 2023, as we continue to optimize marketing investment allocation across channels.

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 $8.9 million, or 28.8%, from $30.8 million for the three months ended June 30, 2023 to $21.9 million for the three months ended June 30, 2024, primarily driven by our workforce optimization efforts which occurred in 2023 and 2024.

Personnel expense decreased by $21.7 million, or 31.8%, from $68.1 million for the six months ended June 30, 2023 to $46.4 million for the six months ended June 30, 2024, primarily driven by our workforce optimization efforts in 2023 and 2024.

Driven by our 2023 and 2024 workforce optimization efforts, we expect our personnel expense to decrease in 2024 compared to 2023.

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 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 at fair value.

Outsourcing and professional fees. Outsourcing and professional fees decreased by $1.5 million, or 15.4%, from $9.9 million for the three months ended June 30, 2023 to $8.4 million for the three months ended June 30, 2024. The decrease is primarily attributable to $1.7 million decrease in outsourcing services and a $0.7 million decrease in professional fees and other expenses. These decreases were partially offset by a $0.8 million increase in debt recovery and court filing fees, legal fees, and consulting services.

Outsourcing and professional fees decreased by $5.1 million, or 21.5%, from $23.7 million for the six months ended June 30, 2023 to $18.6 million for the six months ended June 30, 2024. The decrease is primarily attributable to $5.2 million decrease in outsourcing and consulting services.

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 $0.9 million, or 4.2%, from $21.1 million for the three months ended June 30, 2023 to $22.0 million for the three months ended June 30, 2024, due to $6.4 million increase related to the impairment of the San Carlos office right-of-use asset and disposal of related fixed assets and a $1.7 million increase due to partial debt extinguishment expense not present in the prior period. These increases were partially offset by a $5.4 million decrease due to lower reserve related to our workforce optimization efforts in 2024 compared to 2023, a $1.4 million decrease in acquisition and integration related expenses and a $0.8 million decrease related to our streamlining operations efforts.

General, administrative and other expense decreased by $6.5 million, or 16%, from $40.3 million for the six months ended June 30, 2023 to $33.8 million for the six months ended June 30, 2024, primarily due to a $12.1 million decrease due to a lower reserve related to our workforce optimization efforts in 2024 compared to 2023, $2.4 million decrease in acquisition and integration related expenses, and a $1.2 million decrease in postage and printing. These increases were partially offset by $6.4 million impairment of the San Carlos office right-of-use asset and disposal of related fixed assets and $3.7 million increase due to a partial debt extinguishment expense not present in the prior period and other expenses.

Income taxes

Income taxes consist of U.S. federal, state and foreign income taxes, if any. For the periods ended June 30, 2024 and 2023, we recognized tax expense (benefit) attributable to U.S. federal, state and foreign income taxes.

Income tax benefit. Income tax benefit increased by $15.6 million or 605%, from $2.6 million for the three months ended June 30, 2023 to $18.1 million benefit for the three months ended June 30, 2024, primarily as a result of having a larger pretax loss for the three months ended June 30, 2024.

Income tax benefit decreased by $19.9 million or 47%, from $42.0 million benefit for the six months ended June 30, 2023 to $22.2 million benefit for the six months ended June 30, 2024, primarily as a result of having a lower pretax loss for the six months ended June 30, 2024.

Valuation Allowance. As of June 30, 2024, we have $69.4 million of U.S. net deferred tax assets, which includes $91.5 million of 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 Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our income taxes.