Oportun Financial Corp 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For more information about terms and abbreviations used in this report see the “ Glossary ” at the end of Part II of this report. An index to our management's discussion and analysis follows: Topic Overview 39 Key Financial and Operating Metrics 40 Seasonality 44 Historical Credit Performance 42 Results of Operations 44 Fair Value Estimate Methodology for Loans Receivable at Fair Value 50 Non-GAAP Financial Measures 51 Liquidity and Capital Resources 54 Critical Accounting Policies and Significant Judgments and Estimates 57 Recently Issued Accounting Pronouncements 58 The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read together with, our audited consolidated financial statements and the related notes thereto and other disclosures included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this MD&A, 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 information contained in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K 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 this MD&A. Overview We are a mission-driven fintech that puts our members’ financial goals within reach. With intelligent borrowing, savings, and budgeting capabilities, we empower members with the confidence to build a better financial future . By intentionally designing our products to help solve the financial health challenges facing a majority of people in the U.S., we believe our business is well positioned for significant growth in the future. 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 17-year lending history, we have extended more than $17.8 billion in responsible credit through more than 6.9 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. We offer access to a comprehensive suite of financial products, offered either directly or through partners, including lending, and savings powered by A.I. 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 unsecured and secured personal loans. We also offer automated savings through our Set & Save platform. Consumers are able to become members and access our products through the Oportun Mobile app and the Oportun.com website, which are our primary channels for onboarding and serving members. As of December 31, 2023, our personal loan products are also available over the phone or through over 560 retail locations, which includes 393 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 December 31, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 41 months and 32.9%, respectively. The average loan size for loans we originated in 2023 was $4,007. Our loans do not have prepayment penalties or balloon payments, and range in size from $300 to $10,000 with terms of 12 to 54 months. Generally, loan payments are structured on a bi-weekly or semi-monthly basis to coincide with our members' receipt of 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 December 31, 2023, we originated unsecured personal loans in 4 states through state licenses and in 38 states through our partnership with Pathward, 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 $18,500 with terms ranging from 24 to 64 months. The average loan size for secured personal loans we originated in 2023 was $7,156. As of December 31, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 52 months and 28.9%, 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 and we are in the process of expanding 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 36 states as of December 31, 2023 . Credit lines on our credit cards range in size from $300 to $3,000 with an APR between 24.9% to 29.9%. The 39 average APR of the outstanding credit card receivables was 29.8% as of December 31, 2023 . The average credit line for credit cards activated in 2023 was $979. On November 6, 2023, the Company announced that it was exploring strategic options for our credit card portfolio. Oportun Savings Savings – Our savings product, Set & Save, is designed to understand a member’s cash flows and save the right amount on a regular basis to effortlessly achieve savings goals. Our 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 the Set & Save product 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 our savings product has helped members save more than $10.2 billion . The funds in these savings accounts are owned by members of our products and are not the assets of the Company. Therefore, these funds are not included in the Consolidated Balance Sheets. Lending as a Service Beyond our core direct-to-consumer lending business, we leverage our proprietary credit scoring and underwriting model to partner with other consumer brands and expand our member base. 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. We recently re-launched our Lending as a Service program with a new streamlined Lead Generation program through which we are able to offer loans through our existing channels by phone, online, or in our retail locations. Oportun originates, underwrites, and services the loan. Through this new program, we believe we will be able to offer our Lending as a Service Lead Generation program to additional partners with a much faster lead-to-market time while expanding our membership base with a true Oportun service experience. In order to strategically realign our resources to focus on other products, on November 6, 2023, we announced the sunsetting of our embedded finance partnership with Sezzle, a provider of Buy Now Pay Later financing options, which launched in the first quarter of 2023. 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 ten years, we have executed 20 bond offerings in the asset-backed securities market, the last 17 of which include tranches that have been rated investment grade. We have generally 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. In higher interest rate environments we may consider issuing amortizing bonds. Workforce Optimization and Streamlining Operations During 2023, we announced a series of personnel and other cost savings measures to reduce expenses and streamline efficiency, including reducing our corporate staff by approximately 40%. In relation to these and other personnel related activities, the income statement impact of $21.3 million was recorded through General, administrative and other on the Consolidated Statements of Operations for the twelve months ended December 31, 2023. We routinely evaluate the balance of investment and productivity of our retail locations. During 2023, we made the decision to close 32 retail locations and reduce a portion of the workforce who manage and operate these retail locations. The income statement impact of $1.1 million was recorded through General, administrative and other on the Consolidated Statements of Operations for the twelve months ended December 31, 2023. These amounts included expenses related to the retail location closures and all severance and benefits-related costs. While we do not expect any significant additional expenses to be incurred related to these closures, we are continually evaluating the performance of retail and partner locations. During 2022, we closed 27 retail locations and we reduced a portion of the workforce who manage and operate these retail locations. The income statement impact for the twelve months ended December 31, 2022 was $1.9 million, and was recorded through General, administrative and other on the Consolidated Statements of Operations . This amount included expenses related to the retail location closures and all severance and benefits-related costs. While we do not expect any significant additional expenses to be incurred related to these closures, we are continually evaluating the performance of retail and partner locations. 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. The following table and related discussion set forth key financial and operating metrics for our operations as of and for the years ended December 31, 2023 and 2022. For similar financial and operating metrics and discussion of our 2022 results compared to our 2021 results, refer to Part II. Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 14, 2023. 40 As of or for the Year Ended December 31, (in thousands of dollars) 2023 2022 Key Financial and Operating Metrics Members 2,224,302 1,877,260 Products 2,387,745 2,006,245 Aggregate Originations $ 1,813,058 $ 2,922,871 Portfolio Yield 32.2 % 32.0 % 30+ Day Delinquency Rate 5.9 % 5.6 % Annualized Net Charge-Off Rate 12.2 % 10.1 % Return on Equity (37.8) % (13.5) % Adjusted Return on Equity (26.1) % 12.1 % Other Metrics Managed Principal Balance at End of Period $ 3,182,148 $ 3,406,981 Owned Principal Balance at End of Period $ 2,904,683 $ 3,098,609 Average Daily Principal Balance $ 2,992,592 $ 2,740,318 See “ Glossary ” at the end of Part II of this report for formulas and definitions of our key performance metrics. Members 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 had signed-up to use or are using our Set & Save product or historically our checking, investing and/or 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 as of December 31, 2023 grew to 2.2 million, as compared to 1.9 million as of December 31, 2022. This increase was primarily due to our marketing efforts. New members seeking our personal loan products are discovering and also activating the Set & Save product via the Oportun Mobile App. 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 Set & Save, checking, investing and/or retirement products that our Members use or have signed-up to use. Products as of December 31, 2023, grew to 2.4 million, compared to the 2.0 million Products we had as of December 31, 2022. Aggregate Originations Aggregate Originations decreased to $1.81 billion for the year ended December 31, 2023, from $2.92 billion for the year ended December 31, 2022, representing a 38.0% decrease. We originated 467,188 and 764,516 loans for the years ended December 31, 2023 and 2022, respectively. The decrease in the number of loans originated is primarily due to actions taken to focus lending efforts towards existing members to improve credit outcomes and lower marketing spend. Further, given macroeconomic factors, such as inflation, our borrowers are facing higher costs for food, fuel and rent. In July 2022, we took numerous actions to improve the credit performance on newly originated loans, including significantly tightening our underwriting standards for all borrowers. We further tightened underwriting standards for returning members in December 2022. During the second half of 2023 we continued to tighten underwriting standards for returning members. The decrease in number of loans originated was partially offset by growth in average loan size due to a focus on returning members. Portfolio Yield Portfolio yield increased to 32.2% for the year ended December 31, 2023, from 32.0% for the year ended December 31, 2022 primarily attributable to higher pricing on our personal loan products. 30+ Day Delinquency Rate Our 30+ Day Delinquency Rate increased to 5.9% as of December 31, 2023, from 5.6% as of December 31, 2022. The increase was partially 41 caused by decreasing originations which caused receivables to decrease throughout 2023 as we continued to tighten credit standards throughout the second half of 2023 after significantly tightening underwriting standards in 2022. Macroeconomic factors, such as inflation, our borrowers are facing higher costs for food, fuel and rent are also putting pressure on our members. Another driver of the increase in the 30+ Day Delinquency rate was that the back book, defined as loans originated prior to July 2022, continued to season. As the average life of our loans is only one year, we expect the back book to become less impactful on our losses throughout 2024. We further tightened underwriting standards for returning members in December 2022. During the second half of 2023 we continued to tighten underwriting standards for returning members. Annualized Net Charge-Off Rate Annualized Net Charge-Off Rate for the years ended December 31, 2023 and 2022 was 12.2% and 10.1%, respectively. The increase is primarily driven by a deterioration in our back book and deterioration of the vintages originated in the second half of 2022 prior to further tightening underwriting standards for returning members in December 2022. The back book continued to season and made-up 68% of charge-offs while only making up 41% of average receivables. In addition, the increase was partially caused by decreasing originations which caused receivables to decrease throughout 2023 as we continued to tighten credit standards throughout the second half of 2023. We further tightened underwriting standards for returning members in December 2022 and the second half of 2023. Following these credit tightening actions, we expect to see improvement in the credit performance of the portfolio in 2024. Return on Equity and Adjusted Return on Equity For the year ended December 31, 2023 and 2022, Return on Equity was (37.8)% and (13.5)%, respectively. For the year ended December 31, 2023 and 2022, Adjusted Return on Equity was (26.1)% and 12.1%, respectively. The decrease in Return on Equity during the period is primarily due to lower net income as a result of higher credit losses. The decrease in Adjusted Return on Equity is primarily due to lower Adjusted Net Income as a result of higher credit losses during the period. For a reconciliation of Return on Equity to Adjusted Return on Equity, see “Non–GAAP Financial Measures.” Historical Credit Performance 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 COVID-19 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. Our Annualized Net Charge-off Rate increased to 10.1% in 2022 primarily due to an increasing interest rate environment, inflation and the cessation of COVID-19 stimulus payments and a higher mix of first-time borrowers in 2021 and the first half of 2022. In response to this increase, we tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes. The increase is primarily driven by a deterioration in our back book and deterioration of the vintages originated in the second half of 2022 prior to further tightening underwriting standards for returning members in December 2022. The back book continued to season and made-up 68% of charge-offs while only making up 41% of average receivables. In addition, the increase was partially caused by decreasing originations which caused receivables to decrease throughout 2023 as we continued to tighten credit standards throughout the second half of 2023. Consistent with our charge-off policy, we evaluate our loan portfolio and charge a loan off at the earlier of when the loan is determined to be uncollectible or when loans are 120 days contractually past due and charge-off a credit card account at the earlier of when the account is determined to be uncollectible or when it is 180 days contractually past due. 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 42 vintage as a percentage of original principal balance. Net lifetime loan loss rates equal the net lifetime loan losses for a given year through December 31, 2023, 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 experiencing higher charge-offs than prior vintages primarily due to a higher percentage of loan disbursements to new members. We have tightened credit, reduced loan size and loan term, and began reducing loan volumes to new and returning members in the third quarter of 2022 and reduced significantly in the second half of 2022. We refer to the post-July 2022 underwriting vintages as our front book and we refer to the originations made prior to our significant credit-tightening in July 2022 as the back book. Net Lifetime Loan Loss Rates on vintages originated since significant July 2022 credit tightening are performing near comparable vintages originated in 2019 for the first 7 to 9 months on books but start to diverge due to underperformance of larger loans relative to 2019 and due to longer average term length. Macroeconomic factors, such as inflation, our borrowers are facing higher costs for food, fuel and rent are also putting pressure on our members. First Payment Defaults on newly-originated loans continue to come in at near pre-pandemic 2019 levels. We regard First Payment Defaults to be an early indicator of credit performance as the outstanding principal balance of loans that have their first payment past due are regarded as more likely to default and result in a charge-off. First Payment Defaults are calculated as the principal balance of any loan whose first payment becomes 30 days past due, divided by the aggregate principal balance of all loans originated during that same week. We employ collection strategies and tools to help customers make ongoing payments against their loans, with new efforts launched that: expanded the frequency and content of our digital and telephony communications; broadened eligibility for collection tools that help customers address payment difficulties; and eased customer access to those collection tools via new online and mobile app self-enrollment capability, supported by a new Collections strategy system that enables centralized, faster, and more-targeted application of strategies. 43 Year of Origination 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 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 37.8 Net lifetime loan losses as of December 31, 2023 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% 10.8% 8.7%* 15.4%* 9.5%* Outstanding principal balance as of December 31, 2023 as a percentage of original amount disbursed —% —% —% —% —% —% —% —% —% —% —% —% 0.4% 2.2% 17.0% 57.5% * Vintage is not yet fully mature from a loss perspective. Seasonality Our quarterly results of operations may not necessarily be indicative of the results for the full year or the results for any future periods. Our business is highly seasonal, and the fourth quarter is typically our strongest quarter in terms of loan originations. For the three months ended December 31, 2023, our business exhibited lower than typical originations due to our credit tightening. Prior to the pandemic, we historically experienced a seasonal decline in credit performance in the fourth quarter primarily attributable to competing demand of our borrowers’ available cash flow around the holidays. General increases in our borrowers’ available cash flow in the first quarter, including from cash received from tax refunds, temporarily reduces our borrowers’ borrowing needs. We experienced this seasonal trend in 2023, consistent with years prior to the COVID-19 pandemic. Results of Operations The following tables and related discussion set forth our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022. For a discussion regarding our operating and financial data for the year ended December 31, 2022, as compared to the same period in 2021, refer to Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 14, 2023. Years Ended December 31, (in thousands of dollars) 2023 2022 Revenue Interest income $ 963,496 $ 876,114 Non-interest income 93,423 76,431 Total revenue 1,056,919 952,545 Less: Interest expense 179,414 93,046 Total net decrease in fair value (596,839) (218,842) Net revenue 280,666 640,657 Operating expenses: Technology and facilities 219,406 216,120 Sales and marketing 75,284 110,033 Personnel 121,843 154,850 Outsourcing and professional fees 45,401 67,630 General, administrative and other 72,385 58,838 Goodwill impairment — 108,472 Total operating expenses 534,319 715,943 Income (loss) before taxes (253,653) (75,286) Income tax expense (benefit) (73,702) 2,458 Net income (loss) $ (179,951) $ (77,744) 44 Total revenue Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Revenue Interest income $ 963,496 $ 876,114 $ 87,382 10.0 % Non-interest income 93,423 76,431 16,992 22.2 % Total revenue $ 1,056,919 $ 952,545 $ 104,374 11.0 % Percentage of total revenue: Interest income 91.2 % 92.0 % Non-interest income 8.8 % 8.0 % Total revenue 100.0 % 100.0 % Interest income. Total interest income increased by $87.4 million, or 10.0%, from $876.1 million for 2022 to $963.5 million for 2023. The increase is primarily attributable to growth in our Average Daily Principal Balance, which grew from $2.74 billion for 2022 to $2.99 billion for 2023 , an increase of 9.2% and an increase in portfolio yield of 23 basis points in the year ended December 31, 2023, compared to the year ended December 31, 2022. Non-interest income. Total non-interest income increased by $17.0 million, or 22.2%, from $76.4 million for 2022 to $93.4 million for 2023. This increase is primarily due to a $20.3 million increase in interest earned on Set & Save member accounts, $10.3 million increase in documentation fees and servicing fees on loans retained by Pathward, and $2.8 million increase related to the gain on loan sales. The increase was offset by $7.8 million decrease in servicing revenue due to the amortization of our serviced portfolio, a $6.5 million decrease related to subscription revenue, a $1.3 million decrease as a result of a decline in credit card income and a $0.8 million decrease in sublease income. See Note 2, Summary of Significant Accounting Policies , and Note 12 , Revenue , of the Notes to the Consolidated Financial Statements included elsewhere in this report for further discussion on our interest income, non-interest income and revenue. Interest expense Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Interest expense $ 179,414 $ 93,046 $ 86,368 92.8 % Percentage of total revenue 17.0 % 9.8 % Cost of Debt 6.0 % 3.7 % Leverage as a percentage of Average Daily Principal Balance 99.2 % 91.2 % Interest expense. Interest expense increased by $86.4 million, or 92.8%, from $93.0 million for 2022 to $179.4 million for 2023. We financed approximately 99.2% of our loans receivable through debt for 2023 as compared to 91.2% for 2022, and our Average Daily Debt Balance increased from $2.50 billion to $2.97 billion for 2023, an increase of 16.6%. Our Cost of Debt has increased due to higher benchmark interest rates and wider credit spreads on financings in 2023 relative to 2022 and higher interest rate on our floating rate debt. We expect our interest rates to increase as our asset-backed notes at fair value with lower interest rates are replaced with more expensive current funding. See Note 2, Summary of Significant Accounting Policies , and Note 8 , Borrowings , in the Notes to the Consolidated Financial Statements included elsewhere in this report for further information on our Interest expense and our borrowings. 45 Total net decrease in fair value Net increase (decrease) in fair value reflects changes in fair value of loans receivable held for investment and asset-backed notes on an aggregate basis and is based on a number of factors, including benchmark interest rates, credit spreads, remaining cumulative charge-offs and borrower payment rates. Increases in the fair value of loans increase Net Revenue. Conversely, decreases in the fair value of loans decrease Net Revenue. Increases in the fair value of asset-backed notes decrease Net Revenue. Decreases in the fair value of asset-backed notes increase Net Revenue. We also have a derivative instrument related to our bank partnership program with Pathward, N.A. Changes in the fair value of the derivative instrument are reflected in the total fair value mark-to-market adjustment below. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Fair value mark-to-market adjustment: Fair value mark-to-market adjustment on Loans Receivable at Fair Value $ (18,180) $ (68,897) $ 50,717 * Fair value mark-to-market adjustment on asset-backed notes (99,951) 184,906 (284,857) * Fair value mark-to-market adjustment on derivatives 8,583 3,702 4,881 * Total fair value mark-to-market adjustment (109,548) 119,711 (229,259) * Charge-offs, net of recoveries on loans receivable at fair value (363,824) (276,796) (87,028) * Net settlements on derivative instruments (5,284) (15,688) 10,404 * Fair value mark on loans sold (1) (118,183) (46,069) (72,114) * Total net decrease in fair value $ (596,839) $ (218,842) $ (377,997) * Percentage of total revenue: Fair value mark-to-market adjustment (10.4) % 12.6 % Charge-offs, net of recoveries on loans receivable at fair value (34.4) % (29.1) Total net decrease in fair value (44.8) % (16.5) % Discount rate 10.10 % 11.48 % Remaining cumulative charge-offs 12.10 % 10.38 % Average life in years 1.01 1.00 * Not meaningful (1) The fair value mark-to-market adjustment on loans receivable at fair value shown for the year ended December 31, 2023, includes $(118.2) million related to the cumulative fair value mark on loans sold in other sales in 2023. This fair value mark on loans sold represents the life-to-date mark-to-market adjustment for the loans sold and is presented separately for the loans sold to assist in reconciling to our non-GAAP measure, Adjusted EBITDA. For details regarding other loan sales, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Consolidated Financial Statements included elsewhere in this report. Net decrease in fair value. Net decrease in fair value for 2023 was $596.8 million. This amount represents a total fair value mark-to-market decrease of $109.5 million on Loans Receivable at Fair Value. The total fair value mark-to-market adjustment consists of a $(18.2) million mark-to-market adjustment on Loans Receivable at Fair Value due to an increase in remaining cumulative charge-offs from 10.38% as of December 31, 2022 to 12.10% as of December 31, 2023, partially offset by a decrease in the discount rate from 11.48% as of December 31, 2022 to 10.10% as of December 31, 2023. The $(100.0) million mark-to-market adjustment on Asset-backed notes is due to rising rates and widening asset-backed securitization spreads. The net decrease in charge-offs, net of recoveries, for 2023 was $363.8 million. The total net decrease in fair value for the year ended December 31, 2023 includes a $(118.2) million adjustment related to the fair value mark on other loan sales in 2023. We expect to continue to see volatility in fair value primarily as a result of macroeconomic conditions. Charge-offs, net of recoveries Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Total charge-offs, net of recoveries $ 363,824 $ 276,796 $ 87,028 31.4 % Average Daily Principal Balance 2,992,592 2,740,318 252,274 9.2 % Annualized Net Charge-Off Rate 12.2 % 10.1 % Charge-offs, net of recoveries. Our Annualized Net Charge-Off Rate increased to 12.2% for the year ended December 31, 2023, from 10.1% for the year ended December 31, 2022. Net charge-offs for the year ended December 31, 2023 increased primarily due to a higher mix of first-time borrowers in 2021 and the first half of 2022. In response to this increase, we tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes in the second half of 2022. Consistent with our charge-off policy, we evaluate our loan portfolio and charge a loan off at the earlier of when the loan is determined to be uncollectible or when the loan is 120 days contractually past due and we charge-off a credit card account when it is 180 days contractually past due. Operating expenses Operating expenses consist of technology and facilities, sales and marketing, personnel, outsourcing and professional fees and general, administrative and other expenses. 46 Technology and facilities Technology and facilities expense is the largest segment of our operating expenses, representing the costs required to build and maintain our A.I.-enabled digital platform, and consists of three components. The first component comprises costs associated with our technology, engineering, information security, cybersecurity, platform development, maintenance, and end user services, including fees for consulting, legal and other services as a result of our efforts to grow our business, as well as personnel expenses. The second component includes rent for retail and corporate locations, utilities, insurance, telephony costs, property taxes, equipment rental expenses, licenses and fees and depreciation and amortization. Lastly, the third component includes all software licenses, subscriptions, and technology service costs to support our corporate operations, excluding sales and marketing. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Technology and facilities $ 219,406 $ 216,120 $ 3,286 1.5 % Percentage of total revenue 20.8 % 22.7 % Technology and facilities . Technology and facilities expense increased by $3.3 million, or 1.5%, from $216.1 million for 2022 to $219.4 million for 2023. The increase is primarily due to a $7.8 million increase in depreciation costs commensurate with growth in our internally developed software balance, $7.2 million increase due to a decrease in capitalization of internally developed software following the reductions in force in 2023, $5.7 million increase due to an impairment charge related to the write-off of embedded finance, investing, and retirement products, and a $3.1 million increase in service cost and software. The increase was offset by $8.9 million decrease in wages and salaries and benefits, $7.9 million decrease in outsourcing and professional fees, $1.9 million decrease in other expenses and $1.1 million decrease in utilities. Sales and marketing Sales and marketing expenses consist of two components and represent the costs to acquire our members. The first component is comprised of the expense to acquire a member through various paid marketing channels including direct mail, digital marketing, and brand marketing. The second component is comprised of the costs associated with our telesales, lead generation and retail operations, including personnel expenses, but excluding costs associated with retail locations. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars, except CAC) 2023 2022 $ % Sales and marketing $ 75,284 $ 110,033 $ (34,749) (31.6) % Percentage of total revenue 7.1 % 11.6 % Customer Acquisition Cost (CAC) $ 161 $ 144 $ 17 11.8 % Sales and marketing. Sales and marketing expenses to acquire our members decreased by $34.7 million, or 31.6%, from $110.0 million for 2022 to $75.3 million f or 2023. Our net decrease in marketing spend during the year ended December 31, 2023 was $21.6 million across various marketing channels, including pay per lead, digital advertising and direct mail. We decreased marketing spend as we shifted our strategy to focus lending towards existing and returning members to improve credit outcomes. The decrease was also attributable to a $8.1 million decrease related to outsourcing and professional fees and $6.9 million decrease in salaries and benefits due to the decrease in headcount following our efforts to streamline operations. As a result of our decrease in number of loans originated during the year ended December 31, 2023, our CAC increased by 11.8%, from $144 for the year ended December 31, 2022, to $161 for the year ended December 31, 2023. We expect our sales and marketing to decrease in 2024 compared to 2023 as we maintain focus on our strategy to improve credit outcomes by focusing on lending towards existing and returning members. Personnel Personnel expense represents compensation and benefits that we provide to our employees, and include salaries, wages, bonuses, commissions, related employer taxes, medical and other benefits provided and stock-based compensation expense for all of our staff with the exception of our telesales, lead generation, and retail operations which are included in sales and marketing expenses and technology which is included in technology and facilities. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Personnel $ 121,843 $ 154,850 $ (33,007) (21.3) % Percentage of total revenue 11.5 % 16.3 % Personnel . Personnel expense decreased by $33.0 million, or 21.3%, from $154.9 million for 2022, to $121.8 million for 2023. The decrease is attributable to a $19.2 million decrease in wages and salaries, a $7.2 million decrease in stock compensation, a $5.2 million decrease in bonus and a $1.9 million decrease in benefits. The decrease was primarily driven by the reductions in force announced during the annual period ended December 31, 2023. We expect our personnel expense to decrease in 2024 compared to 2023 as a result of transitioning certain roles to lower cost jurisdictions. 47 Outsourcing and professional fees Outsourcing and professional fees consist of costs for various third-party service providers and contact center operations, primarily for the sales, customer service, collections and store operation functions. The costs related to our third-party contact centers located in Colombia, Jamaica and the Philippines are included in outsourcing and professional fees. These third-party contact centers provide business support, including application processing, verification, customer service and collections. Professional fees also include the cost of legal and audit services, credit reports, recruiting, cash transportation, collection services and fees and consultant expenses. Direct loan origination expenses related to application processing are expensed when incurred. In addition, outsourcing and professional fees include any financing expenses, including legal and underwriting fees, related to our asset-backed notes. We expect our outsourcing and professional fees expense to decrease in 2024 compared to 2022 as a result of our focus to reduce our reliance on outsourced services. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Outsourcing and professional fees $ 45,401 $ 67,630 $ (22,229) (32.9) % Percentage of total revenue 4.3 % 7.1 % Outsourcing and professional fees . Outsourcing and professional fees decreased by $22.2 million, or 32.9%, from $67.6 million for 2022 to $45.4 million for 2023. The decrease is primarily attributable to a $7.1 million decrease in outsourcing services, a $6.9 million decrease in fees and expenses related to debt financing, a $5.7 million decrease in professional services, a $3.0 million decrease in credit reports, and a $1.5 million decrease in other expenses. The decrease was partially offset by a $2.0 million increase in debt recovery, court filing and legal fees. We expect our outsourcing and professional fees to decrease in 2024 compared to 2023 as a result of our continued focus on strong expense discipline and streamlining operations. General, administrative and other General, administrative and other expense includes non-compensation expenses for employees, who are not a part of the technology and sales and marketing organization, which include travel, lodging, meal expenses, political and charitable contributions, office supplies, printing and shipping. Also included are franchise taxes, bank fees, foreign currency gains and losses, transaction gains and losses, debit card expenses, litigation reserve, expenses related to workforce optimization and streamlining operations, and Digit-related acquisition and integration expenses. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % General, administrative and other $ 72,385 $ 58,838 $ 13,547 23.0 % Percentage of total revenue 6.8 % 6.2 % General, administrative and other . General, administrative and other expense increased by $13.5 million, or 23.0%, from $58.8 million for 2022, to $72.4 million for 2023, primarily due to an increase of $21.3 million driven by the reductions in force, offset by $2.6 million decrease in litigation expense, a $2.0 million decrease in travel and entertainment, and a $2.0 million decrease in acquisition and integration related expenses. Income taxes Income taxes consist of U.S. federal, state and foreign income taxes, if any. For the years ended December 31, 2023 and 2022 we recognized tax expense (benefit) attributable to U.S. federal, state and foreign income taxes. Year Ended December 31, 2023 vs. 2022 Change (in thousands of dollars) 2023 2022 $ % Income tax expense (benefit) $ (73,702) $ 2,458 $ (76,160) 3,098.5 % Percentage of total revenue (7.0) % 0.3 % Effective tax rate 29.1 % (3.3) % Income tax expense . Income tax expense decreased by $76.2 million or 3098.5%, from $2.5 million tax expense for 2022 to $73.7 million tax benefit for 2023, primarily resulting from larger pretax losses for the annual period ended December 31, 2023, the tax benefits of the return-to-provision adjustments and the generation of tax credits. Valuation Allowance . As of December 31, 2023, we have $45.9 million of U.S. net deferred tax assets, of which $69.5 million is related to the tax-effected net operating losses, tax credits, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some, or all, of these tax attributes could ultimately expire unused. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the period in which the valuation allowance is recorded. 48 See Note 2 , Summary of Significant Accounting Policies , and Note 13 , Income Taxes , of the Notes to the Consolidated Financial Statements included elsewhere in this report for further discussion on our income taxes. 49 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 Consolidated Statements of Operations 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 asset-backed notes where the fair value option has been elected, 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 and credit cards 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 for personal loans 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. For personal loans, 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 cards, 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 and credit cards, divided by the outstanding principal balance. For personal loans and credit card, the discount rate is determined by using the Weighted Average Capital Cost (WACC), which was calculated using the Capital Asset Pricing Model (CAPM) method, also considering several components of financing, debt and equity. 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 eight 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. The table below reflects the application of this methodology for the eight quarters since January 1, 2022, on loans held for investment. The data in the table below represents all of our credit products. 50 Three Months Ended Dec 31, 2023 Sep 30, 2023 Jun 30, 2023 Mar 31, 2023 Dec 31, 2022 Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Weighted average portfolio yield over the remaining life of the loans 29.10 % 29.58 % 29.85 % 29.61 % 29.34 % 29.73 % 30.14 % 30.01 % Less: Servicing fee (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % (5.00) % Net portfolio yield 24.10 % 24.58 % 24.85 % 24.61 % 24.34 % 24.73 % 25.14 % 25.01 % Multiplied by: Weighted average life in years 1.007 0.995 0.955 0.963 1.000 0.924 0.895 0.847 Pre-loss cash flow 24.26 % 24.45 % 23.74 % 23.69 % 24.34 % 22.85 % 22.50 % 21.19 % Less: Remaining cumulative charge-offs (12.10) % (11.93) % (11.35) % (11.72) % (10.38) % (11.67) % (11.25) % (10.37) % Net cash flow 12.16 % 12.52 % 12.39 % 11.97 % 13.96 % 11.18 % 11.26 % 10.82 % Less: Discount rate multiplied by average life (10.17) % (11.09) % (10.61) % (10.66) % (11.48) % (9.42) % (8.03) % (5.73) % Gross fair value premium (discount) as a percentage of loan principal balance 1.99 % 1.43 % 1.78 % 1.31 % 2.48 % 1.76 % 3.23 % 5.09 % Less: Accrued interest and fees as a percentage of loan principal balance (1.06) % (0.99) % (1.04) % (1.06) % (1.03) % (1.03) % (0.99) % (0.97) % Fair value premium (discount) as a percentage of loan principal balance 0.92 % 0.44 % 0.74 % 0.26 % 1.45 % 0.73 % 2.23 % 4.12 % Discount Rate 10.10 % 11.15 % 11.10 % 11.07 % 11.48 % 10.19 % 8.97 % 6.76 % 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 (Loss), 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. 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 (benefit), as reported, because historically it has included irregular income tax items that do not reflect ongoing business operations. • We believe it is useful to exclude the impact of depreciation and amortization and stock-based compensation expense because they are non-cash charges. • We believe it is useful to exclude the impact of interest expense associated with the Company’s Corporate Financing, as we view this expense as related to our capital structure rather than our funding. • We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with our workforce optimization, acquisition and integration related expenses, and other non-recurring charges because these items do not reflect ongoing business operations. Other non-recurring charges include litigation reserve, impairment charges, debt amendment and warrant amortization costs related to our Corporate Financing. 51 • 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) Year Ended December 31, 2023 2022 Fair value mark-to-market adjustment on loans receivable at fair value (1) $ (18,180) $ (68,897) Fair value mark-to-market adjustment on asset-backed notes (99,951) 184,906 Fair value mark-to-market adjustment on derivatives 8,583 3,702 Total fair value mark-to-market adjustment $ (109,548) $ 119,711 (1) The fair value mark-to-market adjustment on loans receivable at fair value excludes mark-to-market adjustments associated with loans sold. See the section titled " Total net increase (decrease) in fair valu e" in the Results of Operations section for additional information regarding the fair value mark on loans sold. The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the years ended December 31, 2023 and 2022 : Year Ended December 31, Adjusted EBITDA (in thousands) 2023 2022 Net income (loss) $ (179,951) $ (77,744) Adjustments: Income tax expense (benefit) (73,702) 2,458 Interest on corporate financing 37,684 5,987 Depreciation and amortization 42,978 35,182 Stock-based compensation expense 17,997 27,620 Workforce optimization expenses 22,485 1,882 Acquisition and integration related expenses 27,640 29,682 Origination fees for loans receivable at fair value, net (18,536) (26,845) Other non-recurring charges (1) 15,524 111,222 Fair value mark-to-market adjustment 109,548 (119,711) Adjusted EBITDA $ 1,667 $ (10,267) (1) Certain prior-period financial information has been reclassified to conform to current period presentation. Adjusted Net Income (Loss) We define Adjusted Net Income (Loss) 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 (Loss) is an important measure of operating performance because it allows management, investors, and our Board to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period to period. • We believe it is useful to exclude the impact of income tax expense (benefit), as reported, because historically it has included irregular tax items that do not reflect our ongoing business operations. • We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with our workforce optimization, acquisition and integration related expenses and other non-recurring charges because these items do not reflect ongoing business operations. Other non-recurring charges include litigation reserve, impairment charges, debt amendment and warrant amortization costs related to our Corporate Financing. • 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. 52 The following table presents a reconciliation of net income (loss) to Adjusted Net Income for the years ended December 31, 2023 and 2022 : Year Ended December 31, Adjusted Net Income (in thousands) 2023 2022 Net income (loss) $ (179,951) $ (77,744) Adjustments: Income tax expense (benefit) (73,702) 2,458 Stock-based compensation expense 17,997 27,620 Workforce optimization expenses 22,485 1,882 Acquisition and integration related expenses 27,640 29,682 Other non-recurring charges (1) 15,524 111,222 Adjusted income before taxes (170,007) 95,120 Normalized income tax expense (45,902) 25,682 Adjusted Net Income $ (124,105) $ 69,438 Income tax rate (2) 27.0 % 27.0 % (1) Certain prior-period financial information has been reclassified to conform to current period presentation. (2) Income tax rates for the years ended December 31, 2023 and December 31, 2022, are based on a normalized statutory rate. Adjusted EPS Adjusted Earnings (Loss) 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 years ended December 31, 2023 and 2022. For the reconciliation of net income to Adjusted Net Income (Loss), see the immediately preceding table “Adjusted Net Income (Loss).” Year Ended December 31, (in thousands, except share and per share data) 2023 2022 Diluted earnings (loss) per share $ (4.88) $ (2.37) Adjusted EPS Adjusted Net Income $ (124,105) $ 69,438 Basic weighted-average common shares outstanding 36,875,950 32,825,772 Weighted average effect of dilutive securities: Stock options — 252,357 Restricted stock units — 173,092 Diluted adjusted weighted-average common shares outstanding 36,875,950 33,251,221 Adjusted Earnings Per Share $ (3.37) $ 2.09 Adjusted Return on Equity We define Adjusted Return on Equity as annualized Adjusted Net Income (Loss) 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 for the years ended December 31, 2023 and 2022. For the reconciliation of net income to Adjusted Net Income (Loss), see the immediately preceding table “Adjusted Net Income (Loss).” As of or for the Year Ended December 31, (in thousands) 2023 2022 Return on Equity (37.8) % (13.5) % Adjusted Return on Equity Adjusted Net Income $ (124,105) $ 69,438 Average stockholders ’ equity $ 476,002 $ 575,740 Adjusted Return on Equity (26.1) % 12.1 % 53 Adjusted Operating Efficiency We define Adjusted Operating Efficiency as total operating expenses adjusted to exclude stock-based compensation expense and certain non-recurring charges such as expenses associated with our workforce optimization, acquisition and integration related expenses, and other non-recurring charges divided by total revenue. Other non-recurring charges include litigation reserve, impairment charges, and debt amendment costs related to our Corporate Financing. 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 years ended December 31, 2023 and 2022 : As of or for the Year Ended December 31, (in thousands) 2023 2022 Operating Efficiency 50.6 % 75.2 % Adjusted Operating Efficiency Total revenue $ 1,056,919 $ 952,545 Fair Value Pro Forma Total Revenue adjustments — — Fair Value Pro Forma Total Revenue 1,056,919 952,545 Total operating expense 534,319 715,943 Stock-based compensation expense (17,997) (27,620) Workforce optimization expenses (22,485) (1,882) Acquisition and integration related expenses (27,640) (29,682) Other non-recurring charges (1) (14,409) (111,222) Total adjusted operating expenses $ 451,788 $ 545,537 Adjusted Operating Efficiency 42.7 % 57.3 % (1) Certain prior-period financial information has been reclassified to conform to current period presentation. 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 financings, structured loan sales, 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 2023, available liquidity increased primarily due to draws under our PLW facility, the amendment and upsizing of our Corporate Financing and our Asset-backed borrowings at amortized cost and our whole loan sales. We generally target liquidity levels to support at least twelve months of our expected net cash outflows, including new originations, without access to our Corporate Financing or equity markets. Volatility in the interest rate environment, 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: Year Ended December 31, (in thousands) 2023 2022 Cash, cash equivalents and restricted cash $ 206,016 $ 203,817 Cash provided by (used in) Operating activities 392,765 247,875 Investing activities (286,181) (1,171,548) Financing activities (104,385) 934,530 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 $392.8 million and $247.9 million for the years ended December 31, 2023 and 2022, 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 54 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. The change in our net cash provided by operating activities is primarily driven by the $378M increase in our fair value adjustment, net offset by the $108M impairment charge in 2022 not present in the current year, and the $102M additional net loss in 2023 compared to prior year. Investing Activities Our net cash used in investing activities was $286.2 million and $1,171.5 million for the years ended December 31, 2023 and 2022, respectively. Our investing activities consist primarily of loan originations and loan repayments. 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 used in investing activities is primarily due to a reduction in disbursements on originations of loans of $1,182.7 million driven by a renewed focus on returning and existing members and more conservative underwriting, $245.2 million reduction in proceeds from structured loans sales, and a decrease of $74.3 million in repayments of loan principal for the year ended December 31, 2023, compared to the year ended December 31, 2022. Financing Activities Our net cash (used in) provided by financing activities was $(104.4) million and $934.5 million for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, net cash used in financing activities was primarily driven by principal payments on our Acquisition Financing facility, our Series 2019-A, Series 2021-A, Series 2022-2 and Series 2022-3 asset-backed notes, and repayments on our PLW facility, partially offset by borrowings under our PLW facility, Corporate Financing, and our asset-backed borrowings at amortized cost. For the year ended December 31, 2022, net cash provided by financing activities was primarily driven the issuance of our Series 2022-A, Series 2022-2 and Series 2022-3 asset-backed notes and the borrowings under our Secured Financing and Acquisition and Corporate Financing, 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, Series 2022-2 and Series 2022-3 asset-backed notes. Sources of Funds Debt and Available Credit Asset-Backed Securitizations As of December 31, 2023, we had $1.78 billion of outstanding asset-backed notes at fair value. Our securitizations utilize special purpose entities which are also variable interest entities (VIEs) that meet the requirements to be consolidated in our financial statements. For more information regarding our VIEs and asset-backed securitizations, see Note 4 , Variable Interest Entities and Note 8 , Borrowings of the Notes to the Consolidated Financial Statements 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 December 31, 2023, we were in compliance with all covenants and requirements of all our asset-backed notes. Secured Financings As of December 31, 2023 , we had Secured Financing facilities with warehouse lines of $700.0 million in the aggregate with undrawn capacity of $409.1 million. On March 8, 2023, the Credit Card Warehouse facility was amended, reducing its commitment from $150.0 million to $120.0 million. On December 22, 2023, the Credit Card Warehouse facility was further amended, reducing its commitment from $120.0 million to $100.0 million, thereby reducing the combined commitment to $700.0 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. Asset-Backed Borrowings at Amortized Cost On June 16, 2023, we entered into a forward flow whole loan sale agreement with an institutional investor. Pursuant to this agreement, we have a commitment to sell up to $300.0 million of our personal loan originations over the next twelve months. We will continue to service these loans upon transfer of the receivables. While the economics of this transaction are structured as a whole loan sale, the transfer of these loans receivable does not qualify as a sale for accounting purposes. Accordingly, the related assets remain on our balance sheet and cash proceeds received are reported as a secured borrowing under the caption of asset-backed borrowings at amortized cost with related interest expense recognized over the life of the related borrowing. As part of this agreement, during the twelve months ended December 31, 2023 , we transferred loans receivable totaling $220.5 million. 55 On August 3, 2023, we entered into a forward flow whole loan sale agreement with an institutional investor. Pursuant to this agreement, we have a commitment to sell up to $400.0 million of our personal loan originations over the next twelve months. We will continue to service these loans upon transfer of the receivables. While the economics of this transaction are structured as a whole loan sale, the transfer of these loans receivable does not qualify as a sale for accounting purposes. Accordingly, the related assets remain on our balance sheet and cash proceeds received are reported as a secured borrowing under the caption of asset-backed borrowings at amortized cost with related interest expense recognized over the life of the related borrowing. As part of this agreement, during the twelve months ended December 31, 2023 , we transferred loans receivable totaling $195.8 million. On October 20, 2023, the Company entered into a Receivables Loan and Security Agreement (the “Receivables Loan and Security Agreement”), pursuant to which the Company borrowed $197 million. Borrowings under the Receivables Loan and Security Agreement accrue interest at a weighted average interest rate equal to 10.05%. Acquisition Financing On December 20, 2021, Oportun RF, LLC, our wholly-owned subsidiary, 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 our 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, and subsequently on July 28, 2022, pursuant to amended indentures, Oportun RF, LLC issued an additional $20.9 million and $9.1 million asset-backed floating rate variable funding notes, and asset-backed residual certificates, both of which are also secured by certain cash flows from our securitizations and guaranteed by Oportun, Inc., increasing the size of the facility to $119.5 million. The amendments also replaced the interest rate based on LIBOR with an interest rate based on SOFR plus 8.00%. The Acquisition Financing facility was scheduled to pay down based on an amortization schedule with a final payment in May 2024. Subsequently, on February 10, 2023, the Acquisition Financing facility was further amended, including among other things, revising the interest rate to SOFR plus 11.00% and adjusting the amortization schedule to defer $42.0 million in principal payments through July 2023, with final payment in October 2024. Corporate Financing On September 14, 2022, we entered into an agreement to borrow $150.0 million of a 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. Certain prepayments of the term loan are subject to a prepayment premium. The obligations under the Credit Agreement are secured by our assets and certain of our subsidiaries guaranteeing the term loan, including pledges of the equity interests of certain subsidiaries that are directly or indirectly owned by us, subject to customary exceptions. On March 10, 2023, we upsized and amended our Corporate Financing facility to be able to borrow up to an additional $75.0 million. At closing, we borrowed $20.8 million of incremental term loans (the “Incremental Tranche A-1 Loans”) and borrowed an additional $4.2 million of incremental term loans (the “Incremental Tranche A-2 Loans”) on March 27, 2023. Under the Amended Credit Agreement, we borrowed an additional $25.0 million of incremental term loans (the “Incremental Tranche B Loans”) on May 5, 2023, and an additional $25.0 million of incremental term loans (the “Incremental Tranche C Loans”) on June 30, 2023. The term loan now bears interest at (a) an amount payable in cash equal to 1-month term SOFR plus 9.00% plus (b) an amount payable in cash or in kind, at our option, equal to 3.00%. As of December 31, 2023, 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 Financing and Corporate Financing, see Note 8, Borrowings of the Notes to the Consolidated Financial Statements included elsewhere in this report. Amendments to Acquisition and Corporate Financing In order to execute our plans for 2024 and beyond, we recently completed two amendments, one to our residual facility and the other to our senior secured term loan. The amendment to our residual facility provides us with a three month principal payment holiday and extends the term to January 2025. We will make principal payments on the senior secured term loan in the amount equal to the payments that would have been made on the residual facility. The senior secured term loan amendment reduces the minimum asset coverage ratio, which is the ratio of our unrestricted cash and equity in some of our financing facilities to the outstanding debt. We needed to lower the escalating levels of this covenant for 2024, which were set before 2023's higher than expected losses and lower originations caused by credit tightening. Given the scheduled increases in the asset coverage ratio covenant levels for the remainder of 2024 and into 2025, we are currently evaluating refinancing options. For more information regarding our Secured Financing facilities and Acquisition Financing and Corporate Financing, see Note 8, Borrowings of the Notes to the Consolidated Financial Statements 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 Consolidated Financial Statements included elsewhere in this report. Other Loan Sales During 2023 , we entered into agreements to sell certain populations of its personal loans and credit card receivables from time to time, including non-performing loans and credit card receivables originated as held for investment, of approximately $122.3 million. For further information on these 56 sales, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Consolidated Financial Statements included elsewhere in this report. Whole Loan Sales Through March 4, 2022, we had a commitment to sell to a third-party institutional investor 10% of our unsecured loan originations that satisfy certain eligibility criteria, and an additional 5% subject to certain eligibility criteria and minimum and maximum volumes. We chose not to renew the arrangement and allowed the agreement to expire on its terms on March 4, 2022. In November 2022, we entered into a forward flow whole loan sale agreement with an institutional investor. Pursuant to this agreement, we have a commitment to sell a minimum of $2.0 million of our unsecured loan originations each month, with an option to sell an additional $4.0 million each month, over an approximately one-year period, subject to certain eligibility criteria. The agreement expired December 2, 2023. The Company extended the agreement 30 days while finalizing the amendment to extend the original agreement an additional year. During the extension period, the Company will continue to sell loans consistent with the terms of the original agreement. In November 2023, the Company entered into a forward flow whole loan sale agreement with an institutional investor to sell up to $70 million of its unsecured personal loans over a one-year period beginning December 2023. The originations of loans sold and held for sale during the year ended December 31, 2023 were $56.6 million. For further information on the whole loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Consolidated Financial Statements 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 8 , Borrowings and Note 15 , Leases, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included 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. On the Second Amendment Closing Date, we borrowed $20.8 million of Incremental Tranche A-1 Loans and borrowed an additional $4.2 million of Incremental Tranche A-2 Loans on March 27, 2023. Under the Amended Credit Agreement, we borrowed an additional $25.0 million of Incremental Tranche B Loans on May 5, 2023, and an additional amount of $25.0 million of Incremental Tranche C Loans on June 30, 2023. During June 2023 and August 2023, we entered into forward flow whole loan sale agreements with two institutional investors. Pursuant to these agreements, we have a commitment to sell up to $300 million and $400 million of our personal loan originations over the following twelve-month periods. During October 2023,we closed Oportun CL Trust 2023-A Asset-backed notes in the amount of $197 million. Lastly, during February 2024, we announced the issuance of $199.5 million two-year asset-backed notes by Oportun Issuance Trust 2024-1. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing and we may have to take additional actions to decrease expenses, curtail the origination of loans, and our ability to continue to support our growth and to respond to challenges could be impacted. 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. 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 consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these 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. While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies , in our Notes to the Consolidated Financial Statements included elsewhere in this report, we believe the following critical accounting policies affect the more significant estimates, assumptions and judgments we use to prepare our consolidated financial statements. Fair Value of Loans Held for Investment We elected the fair value option for our loans receivable held for investment. We primarily use a discounted cash flow model to estimate fair 57 value based on the present value of estimated future cash flows. This model uses inputs that are not observable but reflect our best estimates of the assumptions a market participant would use to calculate fair value. The following describes the primary inputs that require significant judgment: • Remaining Cumulative Charge-offs - Remaining cumulative charge-offs are estimates of the principal payments that will not be repaid over the life of a loan held for investment. Remaining cumulative loss expectations are adjusted to reflect the expected principal recoveries on charged-off loans. Remaining cumulative loss expectations are primarily based on the historical performance of our loans but also incorporate adjustments based on our expectations of future credit performance and are quantified by the remaining cumulative charge-off rate. • Remaining Cumulative Prepayments - Remaining cumulative prepayments are estimates of the principal payments that will be repaid earlier than contractually required over the life of a loan held for investment. Remaining cumulative prepayment rates are primarily based on the historical performance of our loans but also incorporate adjustments based on our expectations of future borrower behavior and refinancings through our Good Customer Program. For credit card receivables, we estimate the principal payment rate which is the amount of principal we expect to get repaid each month. • Average Life - Average life is the time weighted average of the estimated principal payments divided by the principal balance at the measurement date. The timing of estimated principal payments is impacted by scheduled amortization of loans, charge-offs, and prepayments. • Discount Rates - The discount rates applied to the expected cash flows of loans held for investment reflect our estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics. Discount rates are based on our estimate of the rate of return likely to be received on new loans. Discount rates for aged loans are adjusted to reflect the market relationship between interest rates and remaining time to maturity. We developed an internal model to estimate the fair value of loans receivable held for investment. To generate future expected cash flows, the model combines receivable characteristics with assumptions about borrower behavior based on our historical loan performance. These cash flows are then discounted using a required rate of return that management estimates would be used by a market participant. We test the fair value model by comparing modeled cash flows to historical loan performance to ensure that the model is complete, accurate and reasonable for our use. In addition, we engage a third party to create an independent fair value estimate for the Loans Receivable at Fair Value, which provides a set of fair value marks using the Company’s historical loan performance data and whole loan sale prices to develop independent forecasts of borrower behavior. As discussed above, our fair value model uses inputs that are not observable but reflect our best estimates of the assumptions a market participant would use to calculate fair value. For a summary of how these inputs have changed over the last eight quarters since January 1, 2021, refer to Fair Value Estimate Methodology for Loans Receivable at Fair Value in Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations ". Goodwill Impairment 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 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 our stock price. In response to a sustained decline in our share price primarily 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 year ended December 31, 2022. There were no triggering events or goodwill impairment charges during the year ended December 31, 2023. Recently Issued Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies , of the Notes to the Consolidated Financial Statements included elsewhere in this report for a discussion of recent accounting pronouncements and future application of accounting standards. Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a "Smaller Reporting Company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information. 58