Oportun Financial Corporation

pursuing growth only where it expands responsible access and meets our standards for attractive risk-adjusted returns and durable credit performance. To execute against these priorities, we are also increasing operating cadence and accountability across the business. We are establishing defined routines and performance monitoring, using technology and data to improve decision making, and focusing the organization on the critical few priorities that can move the company forward. My conclusion is clear. OPPORTUNE has a strong mission, a differentiated member franchise and a much stronger financial foundation than it had a year ago. We are now focused on translating these advantages into durable growth and more predictable returns. Q2 was an encouraging early proof point. We exceeded guidance, improved profitability, reduced charge-offs faster than expected, and continued strengthening the balance sheet. We are moving from stabilization toward disciplined growth and we intend to scale only where member outcomes and risk-adjusted returns meet our standards. With that, I will turn the call over to Paul for a more detailed review of our second quarter financial results. He will also provide our third quarter guidance and discuss our updated four-year outlook. Over to you, Paul.

Thank you, Doug, and good afternoon, everyone. Turning to Q2 highlights on slide six. As Doug mentioned, we recorded our seventh consecutive quarter of gap profitability. with net income of $8.5 million and diluted EPS of $0.17 a share. We also generated adjusted net income of $21 million and adjusted EPS of $0.42 a share. Total revenue was $233 million, down $1.1 million, or less than half of 1% year over year. Total revenue exceeded our expectations and the high end of our guidance range, driven by high originations. We returned to originations growth in Q2 with originations up 1% year-over-year. Net decrease in fair value was $86 million. The majority of this amount was $79 million of net charge-offs. The remaining impact included a $6 million unfavorable mark on the loan portfolio, primarily driven by a slight decline in weighted average life. Compared with the prior year period, net decrease in fair value was $15 million higher as the prior year period benefited from a favorable $9 million mark-to-mark adjustment on loans. Second quarter interest expense was $42 million This improvement reflects ongoing balance sheet optimization actions, which I will discuss in more detail shortly, and a favorable non-cash change in interest expense recognition associated with asset-backed borrowing. Regarding the non-cash change, revisions to forecasted cash flows used to recognize interest expense associated with $140 million of asset bank borrowings contributed approximately $7 million of lower interest expense in the second quarter. Our revised guidance reflects an estimated $3 million of additional non-cash interest expense benefits in the second half of this year. Net revenue was $106 million, up $1 million year-over-year, as lower interest expense more than offset the unfavorable impact of net decrease in fair value. Operating expenses were $90 million, down $4.4 million, or 5% year-over-year, reflecting continued cost discipline. Together, net revenue growth and expense discipline supported pre-tax income of $16 million, up $5.5 million, or 55% year-over-year. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes, was $49 million in the second quarter, up $17 million, or 56% year-over-year, driven primarily by lower interest expense and adjusted operating expense. Those same drivers, along with higher total revenue and lower net charge-offs, drove the outperformance of our $34 to $39 million guidance range. Adjusted net income was $21 million, up $5.9 million, or 40% year-over-year, due to lower interest expense and adjusted operating expense, partially offset by the unfavorable net change in fair value in the loan portfolio. adjusted EPS increased 35% year-over-year from $0.31 to $0.42 per share. GAAP net income was $8.5 million, up $1.7 million, or 24% year-over-year, due to similar drivers, partially offset by higher taxes driven by the settlement of a state tax audit. Turning to credit performance on slide 7, Q2's annualized net charge-off rate was 12%, and many more. In the Q2, we continued to benefit from disciplined portfolio mix and the strong performance of returning members. Returning members accounted for 82% of origination volume in Q2, and that was up 64% from the prior year quarter. This higher returning mix can and reflects the strength of our existing member relationships. Over time, our goal is to add new member growth responsibly using improved pricing, decisioning, secured lending and disciplined channel management. The loan portfolio continues to benefit from deliberate growth in our secured personal loan portfolio, which features average loan sizes approximately twice those of unsecured loans and materially lower losses. SPL originations grew 15% during Q2 and secured personal loans accounted for 9% of our total portfolio, up from 7% at the end of the prior year period. We are guiding to further improvement in annualized net charge-off rate to 11% plus or minus 15 basis points in Q3. Reinforcing our confidence in our outlook, Q2's 30-plus day delinquency rate was 4%. below the 4.1 to 4.2% expectation we set and the lowest level since the fourth quarter of 2021. We also launched our V13 credit model for new members in June. The model is designed to improve risk differentiation by incorporating more recent performance trends and additional data signals. We expect this to support better selection and more disciplined new member growth over time. Turning to capital and liquidity on slide nine, we continue to strengthen our debt capital structure through balance sheet optimization, further reducing higher cost corporate debt, lowering our overall cost of capital, and enhancing liquidity. We continue to make meaningful progress deleveraging the balance sheet, ending the quarter with 6.5 times debt to equity ratio. This is down from 7.3 times a year ago and materially lower than the peak leverage of 8.7 times reported in 3Q24. The improvements achieved since then and through the end of the second quarter include consistent gap profitability, an $80 million or 21% increase in shareholder equity, and a $187 million or 7% reduction in total debt outstanding. Q2 interest expense was $42 million, down $18 million, or 30%, from the prior year quarter, driven by our ongoing balance sheet optimization efforts and the favorable non-cash change in interest expense risk condition I mentioned earlier. Balance sheet optimization actions reducing our Q2 interest expense included corporate debt repayments, as well as actions related to our ABS notes and warehouse facilities. During the quarter, we paid down $30 million of high-cost corporate debt, reducing our remaining corporate debt principal balance to $135 million. Corporate debt repayments now total $100 million since the facility's inception in October 2024, resulting in $15 million in annualized run rate interest expense savings. Strong cash flow generation in the underlying business enabled us to strengthen our liquidity position. As shown on the slide, compared to the prior year quarter, unrestricted cash increased by $43 million to $140 million while corporate debt was down $88 million to $135 million. The progress made in increasing liquidity, reducing leverage, and reducing interest expense gives us greater strategic and financial flexibility to fund responsible growth and evaluate opportunities to further optimize the debt structure over time. Before I review our Q3 and revised full-year guidance, let me provide a brief review of our ROE performance. Although our long-term targets are GAAP targets, I'll reference adjusted metrics because they remove non-recurring items and better reflect our future run rate. As shown on slide 10, we generated an adjusted ROE of 20.5% in the second quarter, which is within our 20 to 28% target range and reflects a 463 basis point improvement from the prior year period. Adjusted ROA of 2.6% also improved year-over-year and approached our 3% to 4% target range. Drivers of the year-over-year improvement in Q2 adjusted ROE included reducing our cost of debt from 8.6% to 6.3% through lower interest expense, as well as ongoing expense discipline, which improved our adjusted OPEX ratio from 13.3% to 12.8% of owned principal balance. We drove Q2's ROE improvement while de-levering the business and we continue to expect to approach six times leverage by the end of the year. With originations continuing to ramp and lower credit losses embedded in our full-year guidance, we expect to improve on our first half adjusted ROE performance of 15.6% in the balance of the year and to outpace full-year 2025's 17.5% adjusted ROE. I'll share our updated guidance as shown on slide 11. While our member base remains resilient, inflation above the Federal Reserve's target, uneven job creation, policy uncertainty, and higher gas prices continue to create a cautious environment for low to moderate income consumers. While we have not seen any deterioration in our credit metrics as a result, we understand the pressure this can place on our customers, particularly if higher prices persist. Consequently, our outlook prudently assumes we maintain a tight credit posture through the balance of the year. We remain well positioned to adjust quickly as conditions evolve. Our outlook for the third quarter is total revenue of $235 to $240 million, annualized net charge-off rate of 11% plus or minus 15 basis points, and adjusted EBITDA of $43 to $48 million. At the midpoint, our Q3 total revenue guidance implies a sequential increase from Q2 as originations ramp up in line with our seasonal pattern. Our Q3 annualized net charge-off rate midpoint guidance of 11%, which would be our lowest in the last four years, implies another sharp sequential improvement of 100 basis points, along with year-over-year improvement of 80 basis points. As a reminder, our improving credit outlook is supported by the favorable 30 plus delinquency trends I discussed earlier. And our Q3 adjusted EBITDA guidance at the midpoint of $46 million approaches Q2's level while including additional marketing investment and year-over-year growth of 10%, driven primarily by lower interest expense and net charge-offs. Our full-year 2026 guidance continues to be underpinned by our expectations for mid-single-digit originations growth, a 1% to 2% decline in average daily principal balance, and substantially flat operating expenses compared with the prior year. Our guidance also includes the expectation that interest expense will decline by at least 15% in 2026, which is higher than the 10% guidance we shared on our last earnings call. Our revised full-year 2026 guidance includes total revenue of $935 to $955 million, annualized net charge-off rate of 11.7% plus or minus 30 basis points, adjusted EBITDA of $160 to $175 million, adjusted net income of $74 to $82 million, and adjusted EPS of $1.50 to $1.65. Our full year annualized net charge off rate midpoint guidance of 11.7% reflects 20 basis points of improvement from our prior guidance and would reflect our lowest annual level since 2022. We're also increasing our full year adjusted EBITDA outlook at the midpoint by $10 million or 6% to $168 million, now reflecting 13% growth. and we are maintaining our prior adjusted net income and adjusted EPS guidance as higher fair value headwinds from the current rate outlook offset the benefits of lower interest expense. Importantly, the outlook I've shared today is not dependent on credit expansion. We will continue to scale deliberately and focus on growth and meet our standards for responsible access, adjusted risk returns and durable credit performance. With that, Doug, back over to you.

Thanks, Paul. To close, in my first 100 days as CEO, I have confirmed opportune strong foundation and aligned the team around the actions needed for our next phase. Q2 provides an encouraging early proof point. We exceeded guidance, improved credit performance and profitability, and continued to strengthen the balance sheet. We are continuing to work with our board and leadership team to refine our long-term strategy, and we look forward to sharing more once that work is complete. In the meantime, our priorities are clear. Responsibly broaden growth, sustain credit discipline, and continue improving funding and operating efficiency. As I look to the future, I see a larger scale, more financially resilient version of the opportunity that exists today. serving significantly more members, delivering more predictable financial outcomes, and creating substantially greater long-term shareholder value. That's the company we are building, and I'm excited about the journey ahead. With that, operator, let's open the line for questions.