Oportun Financial Corp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations An index to our management's discussion and analysis follows: Topic Forward-Looking Statements 21 Overview 22 Key Financial and Operating Metrics 24 Historical Credit Performance 26 Results of Operations 28 Fair Value Estimate Methodology for Loans Receivable at Fair Value 35 Non-GAAP Financial Measures 36 Liquidity and Capital Resources 39 Critical Accounting Policies and Significant Judgments and Estimates 42 Recently Issued Accounting Pronouncements 42 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 ended December 31, 2021 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, on March 1, 2022 . 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 meani ng of the Private Securities Litigation Reform Act of 1995, Sec tion 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts are 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; • the successful integration of Hello Digit, Inc. ("Digit") with our business; • our expectations and management of future growth, including expanding our markets served, member base and product and service offerings, including our digital banking services; • our ability to successfully adjust our proprietary credit risk models and products in response to changing macroeconomic conditions and fluctuations in the credit market; • 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 for 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 grow market share in existing markets or any new markets we may enter; • our ability to continue to expand our demographic focus; • our ability to maintain or expand our relationships with our current partners, including bank partners, and our plans to acquire additional partners using our Lending as a Service model; • our ability to successfully manage our interest rate spread against our cost of capital; • our ability to maintain the terms on which we lend to our borrowers; • our plans for and our ability to successfully maintain our diversified funding strategy, including warehouse facilities, loan sales and securitization transactions; 21 • our ability to manage fraud risk; • 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 loans receivable held for investment and our asset-backed 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 markets in which we operate; • our ability to attract, integrate and retain qualified employees; • the effect of macroeconomic conditions on our business, including the impact of the COVID-19 pandemic, rising interest rates and recession or slowing growth; • 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. 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 are a financial technology company and digital banking platform driven by our mission to provide inclusive, affordable financial services that empower our members to build a better future. By intentionally designing our products with our members in mind, we are focused on realizing our vision to deliver a complete set of financial solutions that meet the needs of hardworking people, from borrowing and banking to savings, investing and more. We take a holistic approach to serving our members and view it as our purpose to responsibly meet their current capital needs, help grow our members’ financial profiles, increase their financial awareness and put them on a path to a financially healthy life. In our 16-year lending history, we have extended more than $14.7 billion in responsible credit through more than 6.0 million loans and credit cards . We have been certified as a Community Development Financial Institution ("CDFI") by the U.S. Department of the Treasury since 2009. With our recent acquisition of Digit, we believe we now have a strong competitive advantage over other fintechs and neobanks. As a combined company, we can now offer access to a comprehensive suite of digital banking products, offered either directly or through partners, including lending, savings and investing powered by A.I. and tailored to each member's goals. Our financial products allow us to meet our members where they are and assist them with their overall financial health, resulting in opportunities to present multiple relevant products to our members. Our credit products include personal loans, secured personal loans and credit cards. Our digital banking products include digital banking, automated savings, long-term investing and retirement savings. Consumers are able to become members and access our products through our digital banking app — the Digit app — and the Oportun.com website, which are our primary channels for onboarding and serving members. Our personal loan products are also available over the phone or through over 550 retail locations, which includes 348 of our Lending as a Service partner locations. Credit Products Personal Loans - Our personal loan is a simple-to-understand, affordable, unsecured, fully amortizing installment loan with fixed payments throughout the life of the loan. We charge fixed interest rates on our loans, which vary based on the amount disbursed and applicable state law, with a cap of 36% annual percentage rate (“APR”) in all cases. As of September 30, 2022, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 37 months and 32.1%, respectively. The average loan size for loans we originated during the three months ended September 30, 2022 was $4,414. Our loans do not have prepayment penalties or balloon payments, and typically range in size 22 from $300 to $12,000 with terms of 12 to 60 months. Generally, loan payments are structured on a bi-weekly or semi-monthly basis to coincide with our members' receipt of their income. As part of our underwriting process, we verify income for all applicants and only approve loans that meet our ability-to-pay criteria. As of September 30, 2022, we originate unsecured personal loans in 12 states through state licenses and in 30 through our partnership with Pathward, N.A. (formerly known as MetaBank, N.A.). Secured Personal Loans - In April 2020, we launched a personal installment loan product secured by an automobile, which we refer to as secured personal loans. Our secured personal loans range in size from $2,525 to $20,000 with terms ranging from 24 to 63 months. The average loan size for secured personal loans we originated during the three months ended September 30, 2022 was $8,107. As of September 30, 2022, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 48 months and 28.5%, respectively. As part of our underwriting process, we evaluate the collateral value of the vehicle, verify income for all applicants and only approve loans that meet our ability-to-pay criteria. Our secured personal loans are currently offered in California, Texas, Florida, Arizona and New Jersey and we are in the process of considering expansion into other states. Credit Cards - We lau nched Oportun® Visa® Credit Card, issued by WebBank, Member FDIC, in December 2019, and offer credit cards in 45 states as of September 30, 2022 . Credit lines on our credit cards range in size from $300 to $3,000 with an APR between 24.9% to 29.9%. The average APR of the outstanding credit card receivables was 29.8% as of September 30, 2022 . The average credit line for credit cards activated during the three months ended September 30, 2022 was $793. Digital Banking Products Digit Savings – Our Digit Savings product is designed to understand a member’s cash flows and save a calculated amount on a regular basis to effortlessly achieve savings goals. Digit's savings product utilizes mac hine learning to analyze a member’s transaction activity and build forecasts of the member’s future cash flows to make small, frequent savings decisions according to the member’s financial goals in a personalized manner. Members integrate their existing bank accounts into the platform or they can make Digit their primary banking relationship through a bank partner. After one year using the automated savings product, members have been able to increase their liquid savings by approximately 50%. Since 2015 Digit has helped members save more than $8.5 billion and pay down more than $330.0 million in debt. Digit Direct – Our Digit Direct product offers a full checking account, through a bank partner, that intelligently organizes and budgets a member’s money across bills, savings, and spending. The bank account with a brain™, Digit Direct leverages the same A.I. engine used for our savings product to automatically identify and organize recurring bills and guides spending to ensure members' savings goals are met, and that members know exactly what they can safely spend. This is on top of what members can expect from a traditional checking account, including a physical and virtual debit card to use for purchases and ATM withdrawals and checks. Digit Investing and Digit Retirement – Our Digit investment and retirement products are a longer-term savings solution via an A.I.-driven portfolio allocation into low-cost investments based upon risk-tolerance. Our long-term investment solutions automatically allocates our members' savings into low-cost risk-adjusted portfolios held in brokerage accounts or tax-advantaged IRAs. Since 2020, our members have invested $60.8 million into long-term goals through low-cost ETF portfolios. The investment products include a general investing account and a retirement account for our members’ longer term goals, utilizing smart recommendations to invest savings in risk-adjusted portfolios. The funds in these savings, checking, investing and retirement accounts are owned by Digit members and are not the assets of the Company. Therefore, these funds are not included in the Condensed Consolidated Balance Sheets (Unaudited) . Lending as a Service Beyond our core direct-to-consumer lending business, we believe that we can leverage our proprietary credit scoring and underwriting model to partner with other consumer brands and expand our member base. With our Lending as a Service model, our partner markets loans and enters borrower applications into our system and Oportun underwrites, originates, and services the loans. Our first Lending as a Service strategic partner was DolEx Dollar Express, Inc. with an initial launch in December 2020. In October of 2021, we launched another Lending as a Service partnership with Barri Financial Group in select locations. In January 2022, we announced our first all-digital Lending as a Service partnership with Sezzle, a leading provider of Buy Now Pay Later (“BNPL”) financing options. When deployed, Oportun will be available as a checkout option, through Sezzle, for larger purchases of goods and services on a BNPL basis, which we believe will allow us to reach more new members. We anticipate launching as a Sezzle checkout option before the end of 2022. Capital Markets Funding To fund our growth at a low and efficient cost, we have built a diversified and well-established capital markets funding program, which allows us to partially hedge our exposure to rising interest rates or credit spreads by locking in our interest expense for up to three years. Over the past eight years, we have executed 19 bond offerings in the asset-backed securities market, the last 16 of which include tranches that have been rated investment grade. We have 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. On July 22, 2022, we issued $400.0 million of amortizing asset-backed notes. On September 14, 2022, the Company entered into a credit agreement for a $150 million senior secured term loan. The term loan bears interest, payable in cash, at an amount equal to 1-month term SOFR plus 9.00%. The term loan is scheduled to mature on September 14, 2026, and is not subject to amortization. On November 3, 2022, we issued $300 million of amortizing asset-backed notes. For additional information, see Note 9 , Borrowings of the Notes to the Condensed Consolidated 23 Financial Statements (Unaudited) included elsewhere in this report. Through March 4, 2022, we were also party to a whole loan sale program whereby we sold a percentage of our loans to a third-party financial institution. We allowed the whole loan sale program agreement to expire on its own terms. In March 2022, we participated in a securitization and sold loans through the issuance of amortizing asset-backed notes secured by a pool of our unsecured and secured personal installment loans. We also sold our share of the residual interest in the pool. The sold loans had an aggregate unpaid principal balance of approximately $227.6 million ("2022-1 transaction"). In April 2022, we sold a population of loans that had an aggregate unpaid principal balance, including unpaid interest and fees, of approximately $16.3 million ("Q2 2022 Loan Sale"). During the third quarter of 2022, we sold populations of loans that had an aggregate unpaid principal balance, including unpaid interest and fees, of approximately $22.2 million ("Q3 2022 Loan Sales"). In addition to possible future whole loan, structured or other loan sales, we also have a $600.0 million Personal Loan Warehouse facility with a term through September 2024 and a $150.0 million Credit Card Warehouse facility with a term through December 2023 which also helps to fund our receivables growth. Digit Acquisition On December 22, 2021, we acquired Digit and it became our wholly-owned subsidiary. Digit is a digital banking platform that provides automated savings, banking and investing tools. With Digit, members can keep and integrate their existing bank accounts into the platform, or with Digit, they can make Oportun their primary banking relationship by opening new accounts via a bank partner. By acquiring Digit, we further expanded our A.I. and digital capabilities and added additional service offerings to provide members a comprehensive suite of digital banking products, either directly or through our partners. Retail Network Optimization During the first quarter of 2021, pursuant to our retail network optimization plan we closed 136 retail locations and reduced a portion of the employee workforce who managed and operated these retail locations. The income statement impact for the three and nine months ended September 30, 2021 was $0.1 million and $12.8 million, respectively, and was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited). These amounts included expenses related to the retail location closures and all severance and benefits-related costs. During the first quarter of 2022, we made the decision to close an additional 27 retail locations in April 2022 and reduce a portion of the workforce who manage and operate these retail locations. The income statement impact for the three and nine months ended September 30, 2022 was $0.2 million and $1.9 million, respectively, and was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) . These amounts included expenses related to the retail location closures and all severance and benefits-related costs and we do not expect any significant additional expenses to be incurred. Key Financial and Operating Metrics We monitor and evaluate the following key metrics in order to measure our current performance, develop and refine our growth strategies, and make strategic decisions. As of or for the Three Months Ended September 30, As of or for the Nine Months Ended September 30, (in thousands of dollars) 2022 2021 2022 2021 Key Financial and Operating Metrics Members (1) 1,858,335 772,361 1,858,335 772,361 Products (1) 1,981,310 772,361 1,981,310 772,361 Aggregate Originations $ 634,193 $ 662,105 $ 2,312,485 $ 1,430,383 30+ Day Delinquency Rate 5.4 % 2.8 % 5.4 % 2.8 % Annualized Net Charge-Off Rate 9.8 % 5.5 % 9.0 % 6.8 % Return on Equity (70.1) % 18.3 % (16.1) % 9.1 % Adjusted Return on Equity 5.6 % 19.0 % 15.0 % 14.4 % Other Useful Metrics Managed Principal Balance at End of Period $ 3,351,450 $ 2,147,856 $ 3,351,450 $ 2,147,856 Owned Principal Balance at End of Period $ 2,969,656 $ 1,862,143 $ 2,969,656 $ 1,862,143 Average Daily Principal Balance $ 2,903,928 $ 1,741,358 $ 2,633,169 $ 1,654,582 (1) The 772,361 Members and Products reported as of September 30, 2021 reflect our previously defined and disclosed "Active Customer" metric. Products presented as of September 30, 2021 represents one product per member as we did not have members with multiple products at that time. Effective January 1, 2022, Active Customers is no longer a Key Financial and Operating Metric. See the definitions of Members and Products in the Glossary at the end of Part II. See “ Glossary ” at the end of Part II of this report for formulas and definitions of our key performance metrics. 24 Members Reflecting our acquisition of Digit and its users, we define Members as borrowers with an outstanding or successfully paid off loan, originated by us or under a bank partnership program that we service, or individuals who have been approved for a credit card issued under a bank partnership program. Members also include individuals who have signed-up to use or are using any of our Digit Savings, Digit Direct, Digit Investing and/or Digit Retirement products. We view Members as an indication of growth of our business and our ability to establish long term relationships with the users of our products. Member growth is generally an indicator of future revenue, but is not directly correlated with revenue, since not all Members who sign up for one of our products fully utilize or continue to use our products. Members were 1.9 million as of September 30, 2022, and include members acquired in connection with the acquisition of Digit on December 22, 2021. Products Products refers to the aggregate number of personal loans and/or credit card accounts that our Members have had or been approved for that have been originated by us or through one of our bank partners. Products also include the aggregate number of digital banking products we offer as a result of our acquisition of Digit, including Digit Savings, Digit Direct, Digit Investing and Digit Retirement, that our Members use or have signed-up to use. We view Products as an indicator of the effectiveness of our member acquisition efforts and multiproduct adoption. Products as of September 30, 2022 were 2.0 million. Aggregate Originations Aggregate Originations decreased to $634.2 million for the three months ended September 30, 2022 from $662.1 million for the three months ended September 30, 2021, representing a 4.2% decrease. The decrease is primarily driven by fewer loans originated; partially offset by growth in average loan size. We originated 153,680 and 210,731 loans for the three months ended September 30, 2022 and 2021, respectively. The decrease is primarily driven by our tightening of credit underwriting standards and focusing lending towards existing and returning members to improve credit outcomes. Aggregate Originations increased to $2,312.5 million for the nine months ended September 30, 2022 from $1,430.4 million for the nine months ended September 30, 2021, representing a 61.7% increase. The increase is primarily driven by a larger number of loans originated and growth in average loan size. We originated 623,664 and 479,183 loans for the nine months ended September 30, 2022 and 2021, respectively. The increase is primarily driven by an increased number of applications due to higher demand, partially offset by a reduction in our approval rate as we tightened credit. 30+ Day Delinquency Rate Our 30+ Day Delinquency Rate was 5.4% and 2.8% as of September 30, 2022 and 2021, respectively. The increase reflects the higher mix of first-time borrowers and the return to pre-pandemic underwriting criteria later in 2021. In mid-2022, we focused lending towards existing and returning members to address rising delinquencies. Annualized Net Charge-Off Rate Annualized Net Charge-Off Rate for the three months ended September 30, 2022 and 2021 was 9.8% and 5.5%, respectively. Annualized Net Charge-Off Rate for the nine months ended September 30, 2022 and 2021 was 9.0% and 6.8%, respectively. The increase is primarily driven by a higher mix of first-time borrowers in 2022 compared to 2021. In response to this increase, we focused lending towards existing and returning members in mid-2022 to improve credit outcomes as existing and returning members generally have lower loss rates . Further, due to credit tightening in response to the COVID-19 pandemic and government stimulus payments our Annualized Net Charge-Off Rate was lower in 2021. We anticipate that this rate may increase further this year in the current environment due to the impact of inflation on members. Return on Equity and Adjusted Return on Equity For the three months ended September 30, 2022 and 2021, Return on Equity was (70.1)% and 18.3%, respectively, and Adjusted Return on Equity was 5.6% and 19.0%, respectively, For the nine months ended September 30, 2022 and 2021, Return on Equity was (16.1)% and 9.1%, respectively, and Adjusted Return on Equity was 15.0% and 14.4%, respectively. The decreases in Return on Equity for the three and nine months ended were primarily due to lower net income. The lower net income was primarily driven by the non-cash goodwill impairment charge, the decrease in the fair value of our loan portfolio as a result of higher loss and discount rate assumptions, an increase in operating expenses and an increase in interest expense, partially offset by increased revenue for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021. The decrease in Adjusted Return on Equity for the three months ended September 30, 2022 was primarily due to lower Adjusted Net Income for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The improvement in Adjusted Return on Equity for the nine months ended September 30, 2022 was primarily due to higher Adjusted Net Income for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. For a reconciliation of Return on Equity to Adjusted Return on Equity, see “Non–GAAP Financial Measures.” 25 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. Due to credit tightening in response to the COVID-19 pandemic and government stimulus payments our Annualized Net Charge-Off Rate decreased to 6.8% in 2021. While we anticipate that the Annualized Net Charge-Off Rate could increase further in the current environment due to the impact of inflation on members, we have seen a decrease in early-stage delinquencies, with 8 to 14 day delinquencies and 15 to 29 day delinquencies of 1.7% and 1.8%, respectively, as of September 30, 2022 as compared to 1.7% and 2.1%, respectively, as of July 31, 2022 when we further tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes. Consistent with our charge-off policy, we 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 charge-off a credit card account when it is 180 days contractually past due. *Numbers shown reflect year-to-date amounts for the nine months ended September 30, for the indicated fiscal year. 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 September 30, 2022 divided by the total origination loan volume for that year. The below chart and table shows our net lifetime loan loss rate for each annual vintage of our personal loan product since we began lending in 2006, excluding loans originated from July 2017 to August 2020 under a loan program for borrowers who did not meet the qualifications for our core loan origination program. 100% of those loans were sold pursuant to a whole loan sale agreement. We were able to stabilize cumulative net loan losses after the financial crisis that started in 2008. We even achieved a net lifetime loan loss rate of 5.5% during the peak of the recession in 2009. The evolution of our credit models has allowed us to increase our average loan size and commensurately extend our average loan terms. Cumulative net lifetime loan losses for the 2015, 2016, 2017, and 2018 vintages increased partially due to the delay in tax refunds in 2017 and 2019, the impact of natural disasters such as Hurricane Harvey, and the longer duration of the loans. The 2018 and 2019 vintages are increasing due to the COVID-19 pandemic. The 2021 vintage is running higher than prior vintages primarily due to a higher percentage of loan disbursements to new members. We have tightened credit and began reducing loan volumes to new members in the third quarter of 2021 and reduced further during 2022. 26 Year of Origination 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 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 33.3 Net lifetime loan losses as of September 30, 2022 as a percentage of original principal balance 7.7% 8.9% 5.5% 6.4% 6.2% 5.6% 5.6% 6.1% 7.1% 8.0% 8.2% 9.8% 10.5%* 6.8%* 6.0%* Outstanding principal balance as of September 30, 2022 as a percentage of original amount disbursed —% —% —% —% —% —% —% —% —% —% —% 0.6% 3.7% 22.0% 62.6% * Vintage is not yet fully mature from a loss perspective. 27 Results of Operations The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, (in thousands of dollars) 2022 2021 2022 2021 Revenue Interest income $ 232,115 $ 145,444 $ 632,007 $ 401,224 Non-interest income 17,961 13,640 58,591 31,427 Total revenue 250,076 159,084 690,598 432,651 Less: Interest expense 26,671 10,574 57,452 36,241 Total net decrease in fair value (76,422) (8,987) (135,935) (26,457) Net revenue 146,983 139,523 497,211 369,953 Operating expenses: Technology and facilities 56,113 34,226 158,090 100,274 Sales and marketing 21,781 32,102 88,690 79,743 Personnel 39,959 29,039 114,514 84,412 Outsourcing and professional fees 18,620 13,348 50,112 40,762 General, administrative and other 14,401 2,686 44,698 22,862 Goodwill impairment 108,472 — 108,472 — Total operating expenses 259,346 111,401 564,576 328,053 Income (loss) before taxes (112,363) 28,122 (67,365) 41,900 Income tax expense (benefit) (6,536) 5,143 1,956 8,652 Net income (loss) $ (105,827) $ 22,979 $ (69,321) $ 33,248 Total revenue Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Revenue Interest income $ 232,115 $ 145,444 $ 86,671 59.6 % $ 632,007 $ 401,224 $ 230,783 57.5 % Non-interest income 17,961 13,640 4,321 31.7 % 58,591 31,427 27,164 86.4 % Total revenue $ 250,076 $ 159,084 $ 90,992 57.2 % $ 690,598 $ 432,651 $ 257,947 59.6 % Percentage of total revenue: Interest income 92.8 % 91.4 % 91.5 % 92.7 % Non-interest income 7.2 % 8.6 % 8.5 % 7.3 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Interest Income. Total interest income increased by $86.7 million, or 59.6%, from $145.4 million for the three months ended September 30, 2021 to $232.1 million for the three months ended September 30, 2022. This increase was primarily attributable to higher Average Daily Principal Balance, which increased from $1.74 billion for the three months ended September 30, 2021 to $2.90 billion for the three months ended September 30, 2022. The increase was partially offset by a decrease in portfolio yield of 143 basis points in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 driven by our tightening of credit underwriting standards and focusing lending towards existing and returning members who generally receive lower APRs, but have lower loss rates compared to new members. Total interest income increased by $230.8 million, or 57.5%, from $401.2 million for the nine months ended September 30, 2021 to $632.0 million for the nine months ended September 30, 2022. This increase was primarily attributable to higher Average Daily Principal Balance, which increased from $1.65 billion for the nine months ended September 30, 2021 to $2.63 billion for the nine months ended September 30, 2022. The increase was partially offset by a decrease in portfolio yield of 33 basis points in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 driven by our tightening of credit underwriting standards and focusing lending towards existing and returning members who generally receive lower APRs, but have lower loss rates compared to new members. Non-interest income. Total non-interest income increased by $4.3 million, or 31.7%, from $13.6 million for the three months ended September 30, 2021 to $18.0 million for the three months ended September 30, 2022. This increase is primarily due to $9.7 million attributable to Digit subscription income and $2.0 million increase in servicing revenue. This was partially offset by decreased gain on loans sold of $7.3 million under our whole loan sale programs due to the expiration of our whole loan sale agreement on March 4, 2022. 28 Total non-interest income increased by $27.2 million, or 86.4%, from $31.4 million for the nine months ended September 30, 2021 to $58.6 million for the nine months ended September 30, 2022. This increase is primarily due to $28.1 million attributable to Digit subscription income, $6.3 million increase in servicing revenue, $2.3 million of increased fees related to our credit card portfolio and $1.8 million increase related to our Pathward, N.A. documentation fees. This was partially offset by decreased gain on loans sold of $11.4 million, or 66.6% under our whole loan sale programs due to the expiration of our whole loan sale agreement on March 4, 2022. See Note 2, Summary of Significant Accounting Policies , and Note 13, 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 September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Interest expense $ 26,671 $ 10,574 $ 16,097 152.2 % $ 57,452 $ 36,241 $ 21,211 58.5 % Percentage of total revenue 10.7 % 6.6 % 8.3 % 8.4 % Cost of Debt 3.9 % 2.8 % 3.2 % 3.3 % Leverage as a percentage of Average Daily Principal Balance 92.7 % 86.4 % 90.9 % 88.8 % Interest Expense. Interest expense increased by $16.1 million, or 152.2%, from $10.6 million for the three months ended September 30, 2021 to $26.7 million for the three months ended September 30, 2022. We financed approximately 92.7% of our loans receivable through debt for the three months ended September 30, 2022, as compared to 86.4% for the three months ended September 30, 2021, and our Average Daily Debt Balance increased from $1.50 billion for the three months ended September 30, 2021 to $2.69 billion for the three months ended September 30, 2022, an increase of 78.9%. Cost of Debt increased due to increases in interest rates and wider credit spreads on our most recent asset-backed securitization issuances. Interest expense increased by $21.2 million, or 58.5%, from $36.2 million for the nine months ended September 30, 2021 to $57.5 million for the nine months ended September 30, 2022. We financed approximately 90.9% of our loans receivable through debt for the nine months ended September 30, 2022, as compared to 88.8% for the nine months ended September 30, 2021, and our Average Daily Debt Balance increased slightly from $1.47 billion for the nine months ended September 30, 2021 to $2.39 billion for the nine months ended September 30, 2022, an increase of 62.8%. Cost of Debt decreased due to the refinancing of older securitizations in 2021 to lower interest rates. Our Cost of Debt has begun to increase due to increases in interest rates and wider credit spreads on our new asset-backed securitization issuances. Through the remainder of 2022, we expect our interest expense to increase as we borrow to fund our portfolio growth and benchmark rates increase . See Note 9, 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. 29 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 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 derivative instruments 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. Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Fair value mark-to-market adjustment: Fair value mark-to-market adjustment on Loans Receivable at Fair Value $ (40,723) $ 12,962 $ (53,685) * $ (92,265) $ 52,333 $ (144,598) * Fair value mark-to-market adjustment on asset-backed notes 61,204 700 60,504 * 163,952 4,237 159,715 * Fair value mark-to-market adjustment on derivatives 906 935 (29) * 2,390 639 1,751 * Total fair value mark-to-market adjustment 21,387 14,597 6,790 * 74,077 57,209 16,868 * Charge-offs, net of recoveries on loans receivable at fair value (71,676) (23,924) (47,752) * (178,123) (84,183) (93,940) * Net settlements on derivative instruments (5,059) 340 (5,399) * (12,539) 517 (13,056) * Fair value mark on loans sold (1) (21,074) — (21,074) * (19,350) — (19,350) Total net decrease in fair value $ (76,422) $ (8,987) $ (67,435) * $ (135,935) $ (26,457) $ (109,478) * Percentage of total revenue: Fair value mark-to-market adjustment 8.6 % 9.2 % 10.7 % 13.2 % Charge-offs, net of recoveries on loans receivable at fair value (28.7) % (15.0) % (25.8) % (19.5) % Total net increase (decrease) in fair value (20.1) % (5.9) % (15.1) % (6.2) % Discount rate 10.19 % 6.52 % 10.19 % 6.52 % Remaining cumulative charge-offs 11.67 % 7.53 % 11.67 % 7.53 % Average life in years 0.92 0.76 0.92 0.76 * Not meaningful (1) The fair value mark on loans sold shown for the three and nine months ended September 30, 2022 includes ($21.1) million related to the cumulative fair value mark on the loans sold in the Q3 2022 Loan Sales. The fair value mark on loans sold shown for the nine months ended September 30, 2022 also includes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction and $(14.1) million related to the cumulative fair value mark on the Q2 2022 Loan Sale. 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 the Q3 2022 Loan Sales, the Q2 2022 Loan Sale and the 2022-1 transaction, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Net increase (decrease) in fair value. Net decrease in fair value for the three months ended September 30, 2022 was $76.4 million. This amount represents a total fair value mark-to-market increase of $21.4 million, and $71.7 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $(40.7) million mark-to-market reduction on Loans Receivable at Fair Value due to (a) an increase in remaining cumulative charge-offs from 11.25% as of June 30, 2022 to 11.67% as of September 30, 2022, (b) an increase in the discount rate from 8.97% as of June 30, 2022 to 10.19% as of September 30, 2022, partially offset by (c) an increase in average life from 0.90 years as of June 30, 2022 to 0.92 years as of September 30, 2022, The $61.2 million mark-to-market adjustment on asset-backed notes is due to rising rates and widening asset-backed securitization spreads. The total net increase (decrease) in fair value for the three months ended September 30, 2022 also includes a $(21.1) million adjustment related to the fair value mark on the loans sold as part of the Q3 2022 Loan Sales. Net decrease in fair value for the nine months ended September 30, 2022 was $135.9 million. This amount represents a total fair value mark-to-market increase of $74.1 million, and $178.1 million of charge-offs, net of recoveries on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $92.3 million mark-to-market reduction on Loans Receivable at Fair Value due to (a) an increase in remaining cumulative charge-offs from 9.60% as of December 31, 2021 to 11.67% as of September 30, 2022, (b) an increase in the discount rate from 6.94% as of December 31, 2021 to 10.19% as of September 30, 2022, partially offset by (c) an increase in average life from 0.86 years as of December 31, 2021 to 0.92 years as of September 30, 2022, The $164.0 million mark-to-market adjustment on asset-backed notes is due to rising rates and widening asset-backed securitization spreads. The total net increase (decrease) in fair value for the nine months ended September 30, 2022 includes a $(21.1) million adjustment related to the fair value mark on loans sold as part of the Q3 2022 Loan Sales completed in the third quarter, $(14.1) million adjustment related to the fair value mark on the loans sold as part of the Q2 2022 Loan Sale completed in the second quarter of 2022 and also includes a $15.9 million adjustment related to the fair value mark on the loans sold as part of the structured sale completed in the first quarter of 2022. Through the remainder of 2022, we expect to continue to see volatility in fair value primarily as a result of macroeconomic conditions. 30 Charge-offs, net of recoveries Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Total charge-offs, net of recoveries $ 71,676 $ 23,924 $ 47,752 199.6 % $ 178,123 $ 84,183 $ 93,940 111.6 % Average Daily Principal Balance $ 2,903,928 $ 1,741,358 $ 1,162,570 66.8 % $ 2,633,169 $ 1,654,582 $ 978,587 59.1 % Annualized Net Charge-Off Rate 9.8 % 5.5 % 9.0 % 6.8 % Charge-offs, net of recoveries. Our Annualized Net Charge-Off Rate increased to 9.8% and 9.0% for the three and nine months ended September 30, 2022, respectively, from 5.5% and 6.8% for the three and nine months ended September 30, 2021, respectively. Net charge-offs for the three months and nine months ended September 30, 2022 increased primarily due to a higher mix of first-time borrowers in 2022 compared to 2021. In response to this increase, we tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes. Further, due to credit tightening in response to the COVID-19 pandemic and government stimulus payments, our charge-offs were lower in 2021. 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 expense. Technology and facilities Technology and facilities expense is the largest segment of our operating expenses, representing the costs required to build our A.I.-enabled digital platform, and consisting 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 software licenses, 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. Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Technology and facilities $ 56,113 $ 34,226 $ 21,887 63.9 % $ 158,090 $ 100,274 $ 57,816 57.7 % Percentage of total revenue 22.4 % 21.5 % 22.9 % 23.2 % Technology and facilities. Technology and facilities expense increased by $21.9 million, or 63.9%, from $34.2 million for the three months ended September 30, 2021 to $56.1 million for the three months ended September 30, 2022. The increase is primarily due to a $8.8 million increase in salaries and benefits due to the increase in headcount, a $7.1 million increase in service costs related to higher usage of software and cloud services, $3.7 million incurred for India off-shoring services and other temporary contractors to supplement staffing related to new product investment, $3.5 million of increased depreciation commensurate with growth in internally developed software and $0.5 million of increased insurance expense for cyber-security. These increases are partially offset by $1.6 million lower expense due to higher capitalization of internally developed software in 2022 compared to 2021 and $0.3 million lower office rent due to retail location closures in early 2021 and early 2022. Technology and facilities expense increased by $57.8 million, or 57.7%, from $100.3 million for the nine months ended September 30, 2021 to $158.1 million for the nine months ended September 30, 2022. The increase is primarily due to a $23.4 million increase in salaries and benefits due to the increase in headcount, a $21.5 million increase in service costs related to higher usage of software and cloud services, $10.0 million incurred for India off-shoring services and other temporary contractors to supplement staffing related to new product investment, $8.3 million of increased depreciation commensurate with growth in internally developed software and $1.4 million of increased insurance expense for cyber-security. These increases are partially offset by $6.0 million lower expense due to higher capitalization of internally developed software in 2022 compared to 2021 and $1.7 million lower office rent due to retail location closures in early 2021 and early 2022. Sales and marketing Sales and marketing expense consists of two components and represents the costs to acquire our customers. The first component is comprised of the expense to acquire a customer through various paid marketing channels including direct mail, digital marketing and brand marketing. The second component is comprised of the costs associated with our telesales, lead generation and retail operations, including personnel expenses, but excluding costs associated with retail locations. 31 Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages and CAC) 2022 2021 $ % 2022 2021 $ % Sales and marketing $ 21,781 $ 32,102 $ (10,321) (32.2) % $ 88,690 $ 79,743 $ 8,947 11.2 % Percentage of total revenue 8.7 % 20.2 % 12.8 % 18.4 % Customer Acquisition Cost (CAC) $ 142 $ 152 $ (10) (6.6) % $ 142 $ 166 $ (24) (14.5) % Sales and marketing. Sales and marketing expenses to acquire our customers decreased by $10.3 million, or 32.2%, from $32.1 million for the three months ended September 30, 2021 to $21.8 million for the three months ended September 30, 2022. In an effort to reduce our operating expense growth, we decreased our investment in marketing initiatives by $13.2 million across various marketing channels, including direct mail, digital advertising, lead aggregators and our referral programs. This decrease was partially offset by an increase of $1.3 million related to professional fees primarily related to outsourced telesales FTEs as a result of an increase in demand for new applications and $1.3 million higher salaries and benefit costs due to an increase in retail hours worked and salary raises. As a result of the decline in our sales and marketing expenses during the three months ended September 30, 2022, our CAC decreased by 6.6% as compared to the three months ended September 30, 2021. Sales and marketing expenses to acquire our customers increased by $8.9 million, or 11.2%, from $79.7 million for the nine months ended September 30, 2021 to $88.7 million for the nine months ended September 30, 2022. To grow our loan originations, we increased our investment in marketing initiatives early in 2022 before decreasing our spend in the third quarter. Our net increase during the nine months ended September 30, 2022 was $1.6 million across various marketing channels, including digital advertising, lead aggregators, our referral programs. We also incurred $4.0 million related to outsourcing and professional fees primarily due to outsourced telesales FTEs as a result of an increase in demand for new applications, $2.0 million higher salaries and benefit costs due to higher sales incentives driven by more retail locations reaching sales goals and $0.8 million higher services costs related to new data sources. As a result of our increased loan originations during the nine months ended September 30, 2022, our CAC decreased by 14.5% as compared to the nine months ended September 30, 2021. Personnel Personnel expense represents compensation and benefits that we provide to our employees and includes salaries, wages, bonuses, commissions, related employer taxes, medical and other benefits provided and stock-based compensation expense for all of our staff with the exception of our telesales, lead generation, retail operations which are included in sales and marketing expenses and technology which is included in technology and facilities. Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Personnel $ 39,959 $ 29,039 $ 10,920 37.6 % $ 114,514 $ 84,412 $ 30,102 35.7 % Percentage of total revenue 16.0 % 18.3 % 16.6 % 19.5 % Personnel. Personnel expense increased by $10.9 million, or 37.6%, from $29.0 million for the three months ended September 30, 2021 to $40.0 million for the three months ended September 30, 2022, driven by increased compensation expense due to a 36.7% increase in U.S. headcount. Personnel expense increased by $30.1 million, or 35.7%, from $84.4 million for the nine months ended September 30, 2021 to $114.5 million for the nine months ended September 30, 2022, primarily driven by increased compensation expense due to a 36.7% increase in U.S. headcount. Outsourcing and professional fees Outsourcing and professional fees consist of costs for various third-party service providers and contact center operations, primarily for the sales, customer service, collections and store operation functions. Our contact centers located in Mexico and our third-party contact centers located in Colombia, Jamaica and the Philippines provide support for the business including application processing, verification, customer service and collections. We utilize third parties to operate the contact centers in Colombia, Jamaica and the Philippines and include the costs in outsourcing and 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 asset-backed notes. Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Outsourcing and professional fees $ 18,620 $ 13,348 $ 5,272 39.5 % $ 50,112 $ 40,762 $ 9,350 22.9 % Percentage of total revenue 7.4 % 8.4 % 7.3 % 9.4 % Outsourcing and professional fees. Outsourcing and professional fees increased by $5.3 million, or 39%, from $13.3 million for the three months ended September 30, 2021 to $18.6 million for the three months ended September 30, 2022. The increase is primarily attributable to $2.8 million increase in debt financing fees and expenses related to 2022-2, not present in the three months ended September 30, 2021, $1.8 million of higher professional service costs related to credit card programs and data integrity and infrastructure, $1.0 million related to 77.0% growth in contact 32 center outsourced FTEs as a result of an increase in demand for new applications and the new Philippines contact center, partially offset by $0.6 million decrease in credit report expense due to lower application volume. Outsourcing and professional fees increased by $9.4 million, or 23%, from $40.8 million for the nine months ended September 30, 2021 to $50.1 million for the nine months ended September 30, 2022. The increase is primarily attributable to $5.9 million of higher professional service costs related to credit card programs and data integrity and infrastructure, $2.2 million increase in credit report expense due to higher application volume and $2.0 million related to 77.0% growth in contact center outsourced FTEs as a result of an increase in demand for new applications and the new Philippines contact center. These increases were partially offset by a $1.8 million decrease in debt financing fees and expenses incurred in the nine months ended September 30, 2022 related to 2022-A and 2022-2 compared to 2021-A and 2021-B in the nine months ended September 30, 2021. 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, retail network optimization expenses and Digit-related acquisition and integration expenses. Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % General, administrative and other $ 14,401 $ 2,686 $ 11,715 436.2 % $ 44,698 $ 22,862 $ 21,836 95.5 % Percentage of total revenue 5.8 % 1.7 % 6.5 % 5.3 % General, administrative and other. General, administrative and other expense increased by $11.7 million, or 436%, from $2.7 million for the three months ended September 30, 2021 to $14.4 million for the three months ended September 30, 2022, primarily due to $8.1 million of transaction and integration related expenses as a result of the Digit acquisition, $2.4 million of charge-offs related to fraud and $1.3 million increase in postage and printing expenses, travel expenses and other general and administrative expenses due to new products and services and continuing growth of the business. General, administrative and other expense increased by $21.8 million, or 96%, from $22.9 million for the nine months ended September 30, 2021 to $44.7 million for the nine months ended September 30, 2022, primarily due to $22.4 million of transaction and integration related expenses as a result of the Digit acquisition, $5.1 million of charge-offs related to fraud, $2.7 million increase in litigation expense and $5.9 million increase in postage and printing expenses, travel expenses and other general and administrative expenses due to new products and services and continuing growth of the business. These increases were partially offset by a $3.3 million decrease attributable to an impairment charge recognized in 2021 on a right-of-use asset related to our leased office space in San Carlos, California, not present in the current year and a $10.9 million decrease in retail network optimization expenses incurred in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. In the nine months ended September 30, 2022, we incurred $1.9 million in expenses related to the retail location closures. Goodwill impairment Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Goodwill impairment $ 108,472 $ — $ 108,472 100.0 % $ 108,472 $ — $ 108,472 100.0 % Percentage of total revenue 43.4 % — % 15.7 % — % Goodwill impairment. In response to a sustained decline in our share price primarily driven by macroeconomic conditions, we conducted a quantitative test of our goodwill as of September 30, 2022. As a result of this quantitative test, we identified an impairment to goodwill resulting in recognition of a $108.5 million non-cash goodwill impairment charge for the three and nine months ended September 30, 2022. There were no goodwill impairment charges during the three and nine months ended September 30, 2021 because we did not have a goodwill balance as of September 30, 2021. Income taxes Income taxes consist of U.S. federal, state and foreign income taxes, if any. For the periods ended September 30, 2022 and 2021, we recognized tax expense (benefit) attributable to U.S. federal, state and foreign income taxes. 33 Three Months Ended September 30, Period-to-period Change Nine Months Ended September 30, Period-to-period Change (in thousands, except percentages) 2022 2021 $ % 2022 2021 $ % Income tax expense (benefit) $ (6,536) $ 5,143 $ (11,679) (227.1) % $ 1,956 $ 8,652 $ (6,696) 77.4 % Percentage of total revenue (2.6) % 3.2 % 0.3 % 2.0 % Effective tax rate 5.8 % 18.3 % (2.9) % 20.7 % Income tax expense (benefit). Income tax expense decreased by $11.7 million or 227%, from $5.1 million for the three months ended September 30, 2021 to $6.5 million benefit for the three months ended September 30, 2022, primarily resulting from the discrete tax benefit of the return-to-provision adjustments and having lower pretax income for the three months ended September 30, 2022. Income tax expense decreased by $6.7 million or 77%, from $8.7 million for the nine months ended September 30, 2021 to $2.0 million for the nine months ended September 30, 2022, primarily resulting from the discrete tax benefit of the return-to-provision adjustments and having a lower pretax income for the nine months ended September 30, 2022. See Note 2, Summary of Significant Accounting Policies , and Note 14, Income Taxes , of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our income taxes. 34 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 (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 Loans Receivable at Fair Value may be partially offset by changes in the fair value of the asset-backed 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 Loans Receivable at Fair Value using a model that projects and discounts expected cash flows. The fair value is a function of: • Portfolio yield; • Average life; • Prepayments (or principal payment rate for our credit card receivables); • 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. For credit card receivables we estimate principal payment rates which are the expected amount and timing of principal payments over the life of the receivable. 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 treasury curve rate that corresponds to the average life. The credit spread is based upon the credit spread implied by the loan purchase price at the time loans are sold, updated for observable changes in the fixed income markets, which serve as a proxy for how a potential 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 six quarters: • Subtracting the servicing fee from the weighted average portfolio yield over the remaining life of the loans to calculate net portfolio yield; • Multiplying the net portfolio yield by the weighted average life in years of the loans receivable, which is based upon the contractual amortization of the loans and expected remaining prepayments and charge-offs, to calculate pre-loss net cash flow; • Subtracting the remaining cumulative charge-offs from the net portfolio yield to calculate the net cash flow; • Subtracting the product of the discount rate and the average life from the net cash flow to calculate the gross fair value premium as a percentage of loan principal balance; and • Subtracting the accrued interest and fees as a percentage of loan principal balance from the gross fair value premium as a percentage of loan principal balance to calculate the fair value premium as a percentage of loan principal balance. 35 The table below reflects the application of this methodology for the seven quarters since March 1, 2021, on loans held for investment. The data for the periods ending on or after December 31, 2021 in the table below represents all of our credit products. The data for the three months ended September 30, 2021 in the table below represents our secured and unsecured loan portfolio. For prior quarters, the data in the table below represents only our unsecured personal loan portfolio which was the primary driver of fair value during those periods. Three Months Ended Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2021 Mar 31, 2021 Weighted average portfolio yield over the remaining life of the loans 29.90 % 30.27 % 30.15 % 30.14 % 30.35 % 30.28 % 30.25 % Less: Servicing fee (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % Net portfolio yield 24.90 % 25.27 % 25.15 % 25.14 % 25.35 % 25.28 % 25.25 % Multiplied by: Weighted average life in years 0.924 0.895 0.847 0.859 0.761 0.769 0.778 Pre-loss cash flow 23.01 % 22.61 % 21.30 % 21.60 % 19.26 % 19.43 % 19.64 % Less: Remaining cumulative charge-offs (11.67) % (11.25) % (10.37) % (9.60) % (7.53) % (7.59) % (8.60) % Net cash flow 11.34 % 11.37 % 10.93 % 12.00 % 11.73 % 11.84 % 11.04 % Less: Discount rate multiplied by average life (9.42) % (8.03) % (5.73) % (5.96) % (4.96) % (5.03) % (5.17) % Gross fair value premium as a percentage of loan principal balance 1.92 % 3.34 % 5.21 % 6.04 % 6.77 % 6.81 % 5.87 % Less: Accrued interest and fees as a percentage of loan principal balance (1.19) % (1.10) % (1.09) % (1.03) % (0.90) % (0.87) % (0.92) % Fair value premium as a percentage of loan principal balance 0.73 % 2.24 % 4.12 % 5.01 % 5.87 % 5.94 % 4.95 % Discount Rate 10.19 % 8.97 % 6.76 % 6.94 % 6.52 % 6.54 % 6.65 % 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 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 with United 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 loans receivable held for investment or our asset-backed 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. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure defined as our net income, adjusted to eliminate the effect of certain items as described below. We believe that Adjusted EBITDA is an important measure because it allows management, investors and our Board to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making the adjustments described below. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of taxes, certain non-cash items, variable charges and timing differences. • We believe it is useful to exclude the impact of income tax expense, as reported, because historically it has included irregular income tax items that do not reflect ongoing business operations. • We believe it is useful to exclude the impact of depreciation and amortization and stock-based compensation expense because they are non-cash charges. 36 • We believe it is useful to exclude the impact of interest expense associated with the Company's Corporate Financing, as this expense is a function of our capital structure. • We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with a litigation reserve, our retail network optimization plan, impairment charges and acquisition and integration related expenses because these items do not reflect ongoing business operations. • We also reverse origination fees for Loans Receivable at Fair Value, net. We recognize the full amount of any origination fees as revenue at the time of loan disbursement in advance of our collection of origination fees through principal payments. As a result, we believe it is beneficial to exclude the uncollected portion of such origination fees, because such amounts do not represent cash that we received. • We also reverse the fair value mark-to-market adjustment because it is a non-cash adjustment as shown in the table below. Components of Fair Value Mark-to-Market Adjustment (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Fair value mark-to-market adjustment on loans receivable at fair value (1) $ (40,723) $ 12,962 $ (92,265) $ 52,333 Fair value mark-to-market adjustment on asset-backed notes 61,204 700 163,952 4,237 Fair value mark-to-market adjustment on derivatives 906 935 $ 2,390 $ 639 Total fair value mark-to-market adjustment $ 21,387 $ 14,597 $ 74,077 $ 57,209 (1) The fair value mark-to-market adjustment on loans receivable at fair value shown for the three and nine months ended September 30, 2022 excludes ($21.1) million related to the cumulative fair value mark on the loans sold in the Q3 2022 Loan Sales. The fair value mark-to-market adjustment on loans receivable at fair value shown for the nine months ended September 30, 2022 also excludes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction and $(14.1) million related to the cumulative fair value mark on the loans sold in the Q2 2022 Loan Sale. For details regarding the Q3 2022 Loan Sales, the Q2 2022 Loan Sale and the 2022-1 transaction, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, Adjusted EBITDA (in thousands) 2022 2021 2022 2021 Net income $ (105,827) $ 22,979 $ (69,321) $ 33,248 Adjustments: Income tax expense (benefit) (6,536) 5,143 1,956 8,652 Interest on corporate financing 871 — 871 — Depreciation and amortization 9,229 5,690 25,329 16,992 Stock-based compensation expense 7,050 4,598 20,752 14,542 Litigation reserve — — 2,750 — Retail network optimization expenses, net 183 114 1,881 12,787 Impairment 108,472 — 108,472 3,324 Acquisition and integration related expenses 8,132 — 22,363 — Origination fees for loans receivable at fair value, net (6,348) (5,863) (17,699) (9,070) Fair value mark-to-market adjustment (21,387) (14,597) (74,077) (57,209) Adjusted EBITDA $ (6,161) $ 18,064 $ 23,277 $ 23,266 Adjusted Net Income We define Adjusted Net Income as our net income, adjusted to exclude income tax expense, stock-based compensation expenses and certain non-recurring charges. We believe that Adjusted Net Income 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, as reported, because historically it has included irregular tax items that do not reflect our ongoing business operations. • We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with a litigation reserve, our retail network optimization plan, impairment charges and acquisition and integration related expenses, because these items do not reflect ongoing business operations. • 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. 37 The following table presents a reconciliation of net income to Adjusted Net Income for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, Adjusted Net Income (in thousands) 2022 2021 2022 2021 Net income $ (105,827) $ 22,979 $ (69,321) $ 33,248 Adjustments: Income tax expense (benefit) (6,536) 5,143 1,956 8,652 Stock-based compensation expense 7,050 4,598 20,752 14,542 Litigation reserve — — 2,750 — Retail network optimization expenses, net 183 114 1,881 12,787 Impairment 108,472 — 108,472 3,324 Acquisition and integration related expenses 8,132 — 22,363 — Adjusted income before taxes 11,474 32,834 88,853 72,553 Normalized income tax expense 3,098 8,997 23,990 19,880 Adjusted Net Income $ 8,376 $ 23,837 $ 64,863 $ 52,673 Income tax rate (1) 27.0 % 27.4 % 27.0 % 27.4 % (1) Income tax rate for the three and nine months ended September 30, 2022 and 2021 is based on a normalized statutory 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. The following table presents a reconciliation of Diluted EPS to Diluted Adjusted EPS for the three and nine months ended September 30, 2022 and 2021. For the reconciliation of net income to Adjusted Net Income, see the immediately preceding table “Adjusted Net Income.” Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2022 2021 2022 2021 Diluted earnings (loss) per share $ (3.21) $ 0.75 $ (2.12) $ 1.11 Adjusted EPS Adjusted Net Income $ 8,376 $ 23,837 $ 64,863 $ 52,673 Basic weighted-average common shares outstanding 33,010,107 28,167,686 32,688,988 27,982,273 Weighted average effect of dilutive securities: Stock options 72,714 1,451,687 326,702 1,351,288 Restricted stock units 101,363 884,400 208,600 726,114 Diluted adjusted weighted-average common shares outstanding 33,184,184 30,503,773 33,224,290 30,059,675 Adjusted Earnings Per Share $ 0.25 $ 0.78 $ 1.95 $ 1.75 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. 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 stockholders' equity and how efficiently we generate income from stockholders' equity. The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three and nine months ended September 30, 2022 and 2021. For the reconciliation of net income to Adjusted Net Income, see the immediately preceding table “Adjusted Net Income.” 38 As of or for the Three Months Ended September 30, As of or for the Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Return on Equity (70.1) % 18.3 % (16.1) % 9.1 % Adjusted Return on Equity Adjusted Net Income $ 8,376 $ 23,837 $ 64,863 $ 52,673 Average stockholders' equity $ 598,656 $ 497,876 $ 576,497 $ 489,110 Adjusted Return on Equity 5.6 % 19.0 % 15.0 % 14.4 % Adjusted Operating Efficiency We define Adjusted Operating Efficiency as total operating expenses adjusted to exclude stock-based compensation expense and certain non-recurring charges such as expenses associated with a litigation reserve, our retail network optimization plan, impairment charges and acquisition and integration related expenses divided by total revenue. We believe Adjusted Operating Efficiency is an important measure because it allows management, investors and our Board to evaluate how efficiently we manage costs relative to revenue. The following table presents a reconciliation of Operating Efficiency to Adjusted Operating Efficiency for the three and nine months ended September 30, 2022 and 2021: As of or for the Three Months Ended September 30, As of or for the Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Operating Efficiency 103.7 % 70.0 % 81.8 % 75.8 % Adjusted Operating Efficiency Total revenue 250,076 159,084 690,598 432,651 Total operating expense 259,346 111,401 564,576 328,053 Stock-based compensation expense (7,050) (4,598) (20,752) (14,542) Litigation reserve — — (2,750) — Retail network optimization expenses, net (183) (114) (1,881) (12,787) Impairment (108,472) — $ (108,472) $ (3,324) Acquisition and integration related expenses (8,132) — $ (22,363) $ — Total adjusted operating expenses $ 135,509 $ 106,689 $ 408,358 $ 297,400 Adjusted Operating Efficiency 54.2 % 67.1 % 59.1 % 68.7 % Liquidity and Capital Resources To date, we fund the majority of our operating liquidity and operating needs through a combination of cash flows from operations, securitizations, secured borrowings, Corporate Financing and whole loan sales. We may utilize these or other sources in the future. Our material cash requirements relate to funding our lending activities, our debt service obligations, our operating expenses, and investments in the long-term growth of the company. During the three months ended September 30, 2022, available liquidity increased primarily due to the execution of our Corporate Financing facility and the issuance of another asset-backed securitization. We generally target liquidity levels to support at least twelve months of our expected net cash outflows, including new originations, without access to new debt financing transactions or other capital markets activity. R ising interest rates, credit trends and other macroeconomic conditions could continue to have an impact on market volatility which could adversely impact our business, liquidity, and capital resources. Future decreases in cash flows from operations resulting from delinquencies, defaults, losses, would decrease the cash available for the capital uses described above. We may incur additional indebtedness or issue equity in order to meet our capital spending and liquidity requirements, as well as to fund growth opportunities that we may pursue. Cash and cash flows The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated: Nine Months Ended September 30, (in thousands) 2022 2021 Cash, cash equivalents and restricted cash $ 272,207 $ 223,755 Cash provided by (used in) Operating activities 159,343 103,728 Investing activities (915,877) (316,741) Financing activities 835,781 268,178 39 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. Operating Activities Our net cash provided by operating activities was $159.3 million and $103.7 million for the nine months ended September 30, 2022 and 2021, 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, goodwill impairment charges, 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 $(915.9) million and $(316.7) million for the nine months ended September 30, 2022 and 2021, respectively. Our investing activities consist primarily of loan originations and loan repayments. Our net cash provided by (used in) investing activities for the nine months ended September 30, 2022, includes $247.9 million of proceeds related to a structured loan sale in the first quarter, the Q2 2022 Loan Sale in the second quarter and the Q3 2022 Loan Sales in the third quarter. We invest in purchases of property and equipment and incur system development costs. Purchases of property and equipment, and capitalization of system development costs may vary from period to period due to the timing of the expansion of our operations, the addition of employee headcount and the development cycles of our system development. The change in our net cash provided by (used in) investing activities is due to disbursements on originations of loans increasing by $1,065.2 million while repayments of loan principal increased by $237.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Financing Activities Our net cash provided by (used in) financing activities was $835.8 million and $268.2 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, net cash provided by financing activities was primarily driven the issuance of our Series 2022-A and Series 2022-2 asset-backed notes and the borrowings under our Secured Financing facilities and Acquisition and Corporate Financing facilities, partially offset by repayments of borrowings on our Secured Financing facilities and scheduled amortization payments on our Acquisition Financing facility and our Series 2019-A and Series 2022-2 asset-backed notes. For the nine months ended September 30, 2021, net cash provided by financing activities was primarily driven by the issuance of our Series 2021-A and Series 2021-B asset-backed notes and the borrowings under our Secured Financing facilities, partially offset by redemptions of our Series 2018-A, 2018-B and 2018-C asset-backed notes and repayments of borrowings on our Secured Financing facility. Sources of Funds Debt and Available Credit Asset-Backed Securitizations As of September 30, 2022, we had $2.24 billion of outstanding asset-backed notes. In addition, on November 3, 2022, we completed the issuance of $300 million amortizing asset-backed notes. For additional information, see Note 9 , Borrowings of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Our securitizations utilize special purpose entities (SPEs) which are also variable inter est entities (VIEs). For VIEs where we have determined we are the primary beneficiary, the financial results of the VIE are consolidated in our financial statements. For VIEs where we have determined we are not the primary beneficiary, the financial results of the VIE are not consolidated in our financial statements. For more information regarding our VIEs and asset-backed securitizations, see Note 4, Variable Interest Entities and Note 9, Borrowings , respectively, 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 for the loan collateral and covenants and other requirements. As of September 30, 2022, we were in compliance with all covenants and requirements of all our asset-backed notes. Secured Financings As of September 30, 2022 , we had Secured Financing facilities with warehouse lines of $750.0 million in the aggregate with undrawn capacity of $382.0 million. Our ability to utilize our Secured Financing facilities as described herein is subject to compliance with various requirements, including eligibility criteria for collateral, concentration limits for our collateral pool, and covenants and other requirements. Acquisition Financing On December 20, 2021, Oportun RF, LLC, a wholly-owned subsidiary of the Company issued a $116.0 million asset-backed floating rate variable funding note, and an asset-backed residual certificate, both of which are secured by certain residual cash flows from the Company's securitizations and guaranteed by Oportun, Inc. The note was used to fund the cash consideration paid for the acquisition of Digit. On May 24, 2022, pursuant to an amended indenture, Oportun RF, LLC issued an additional $20.9 million asset-backed floating rate variable funding note, and an asset- 40 backed residual certificate, both of which are secured by Class D Notes and residual cash flows from the Company's 2022-A Securitization and guaranteed by Oportun, Inc. The amendment also replaced the Acquisition Financing interest rate based on LIBOR with an interest rate based on SOFR. The notes bear interest at a rate of SOFR plus 8.00%. On July 28, 2022, pursuant to an amended indenture, the facility was upsized for an additional $9.1 million. The amendments did not modify the maturity date of the Acquisition Financing facility, it is still structured to pay down based on an amortization schedule with a final payment in October 2024. Corporate Financing On September 14, 2022, the Company entered into an agreement to borrow $150.0 million of a senior secured term loan (the “Corporate Financing”). The term loan bears interest, payable in cash, at an amount equal to 1-month term SOFR plus 9.00%. The term loan is scheduled to mature on September 14, 2026, and is not subject to amortization. Certain prepayments of the term loan is subject to a prepayment premium. The obligations under the Credit Agreement are secured by the assets of the Company and certain of its subsidiaries guaranteeing the term loan, including pledges of the equity interests of certain subsidiaries that are directly or indirectly owned by the Company, subject to customary exceptions. As of September 30, 2022, we were in compliance with all covenants and requirements on our outstanding debt and available credit. For more information regarding our Secured Financing facilities and Acquisition and Corporate Financing, see Note 9, Borrowings of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Structured loan sales In March 2022, we participated in a securitization and sold loans through the issuance of amortizing asset-backed notes secured by a pool of our unsecured and secured personal installment loans. We also sold our share of the residual interest in the pool. The sold loans had an aggregate unpaid principal balance of approximately $227.6 million. For further information on the structured loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Other loan sales In April 2022, the Company entered into an agreement to sell a population of loans. The sold loans had an aggregate unpaid principal balance of approximately $14.7 million (the "Q2 2022 Loan Sale"). During the third quarter of 2022, the Company entered into agreements to sell populations of loans. The sold loans had an aggregate unpaid principal balance of approximately $20.7 million (the "Q3 2022 Loan Sales"). For further information on these sales, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Whole loan sales Through March 4, 2022, the Company had a commitment to sell to a third-party institutional investor 10% of its unsecured loan originations that satisfy certain eligibility criteria, and an additional 5% subject to certain eligibility criteria and minimum and maximum volumes. The Company chose not to renew the arrangement and allowed the agreement to expire on its terms on March 4, 2022. The originations of loans sold and held for sale during the three months ended September 30, 2022 was insignificant. For further information on the whole loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report. Bank Partnership Program and Servicing Agreement We entered into a bank partnership program with Pathward, N.A. on August 11, 2020. In accordance with the agreements underlying the bank partnership program, Oportun has a commitment to purchase an increasing percentage of program loans originated by Pathward based on thresholds specified in the agreements. Lending under the partnership was launched in August of 2021. Contractual Obligations and Commitments The material cash requirements for our contractual and other obligations primarily include those related our outstanding borrowings under our asset-backed notes, Acquisition Financing and Secured Financing, corporate and retail leases, and purchase commitments for technology used in the business. See Note 9, Borrowings and Note 16, Leases, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for more information. Liquidity Risks 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 do not have any significant unused sources of liquid assets. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing. In a rising interest rate environment, our ability to issue additional equity or incur debt may be impaired and our borrowing costs may increase. 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. 41 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. Goodwill is tested for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. We have a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recognized for the amount that the our carrying value, including goodwill, exceeds the fair value, limited to the total amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in the our stock price. In response to a sustained decline in our share price driven by macroeconomic conditions, we conducted a quantitative test of its goodwill as of September 30, 2022. We recognized a $108.5 million non-cash impairment charge for the three and nine months ended September 30, 2022. There were no triggering events or goodwill impairment charges during the three and nine months ended September 30, 2021 because we did not have a goodwill balance as of September 30, 2021 (see Note 7 of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further details). There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K dated December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022 ("2021 Form 10-K"), under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations. For additional inf ormation about our critical accounting policies and estimates, see the disclosure included in our 2021 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. 42 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to our market risk as previously disclosed in our 2021 Form 10-K. Rising interest rates, credit trends and other macroeconomic conditions could continue to have an impact on market volatility which could impact our financial results .