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.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1, telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And the first question comes from the line of John Hecht with Jefferies. Please proceed.

Good afternoon, guys. Thanks for taking my questions and congratulations on what looks to be a very strong quarter and appreciate the I know you're 100 days into your tenure there and there's a lot to continue to be learned, but maybe you guys did do the column deal a couple of weeks or a few weeks back. Maybe give your sense on your distribution system and where you might emphasize any kind of growth objectives or optimization objectives in that portion of your business.

Yeah, hey, John, thank you so much for the question and appreciate the comment around this being a strong quarter. I'm super proud of the team for the results and the focus. So thank you for that. Yeah, we were able to execute the column agreement in July, the first part of July, just as we had communicated on the last earnings call. And this is going to enable us along with our other bank partner program to start testing into risk-based pricing across our business. So the second half of this year, we do have a robust test and learn agenda that we are executing against, which is going to help inform us how do we position risk-based pricing as we go into 2027 and beyond. So this was a real fundamental step change for us to create this capability that I think is going to drive real benefits for our business going forward.

And then maybe just do you have any other perspectives on other channels, whether they're branch or non-branch partnerships that you might be able to kind of guide us through what your strategic thoughts might be about those elements?

Yeah, I continue to go through a review of our channel strategies. We're thinking about, as I mentioned in my comments before, we're doing a long-range planning exercise with the board and the leadership team. Part of that is rationalizing our channel and distribution strategies and thinking through are there areas where we should invest further into as well as optimize? I would say it's too early to provide that information at this point, but it is work that is underway right now.

Thanks very much. And then follow-up question is that you mentioned you don't intend at this point to loosen the credit aperture, but to become more precise. which to me seems like you may be able to pick up more volume by just getting some you know more tools in place to evaluate that maybe looking at it from a different angle like where are approval rates now where you know where can they go or where kind of if you look back in history where have they been in normal periods?

Yeah It's a really good question. And when we talk about precision, when it comes to approval, it's really around how do we further refine the models that we have, the data that we are ingesting, and how do we increase the predictability of those models. So that's a strong area of focus. As I mentioned in my earnings We just hired Sean Rolls, brought him in as our new chief risk officer. He has a tremendous amount of experience with managing through sophisticated data modeling that will help us improve in this area. So that's an example of what we're doing. I would say the other thing when we're saying we're maintaining a tight credit posture, we are looking at over indexing on our lowest risk segments within the portfolio from a growth standpoint as well. So you're clearly seeing that happen this quarter as we're looking at delinquencies and losses starting to both converge on a five year low. for the business. So we expect that to continue as well while being, you know, tight within our overall posture just given the continued uncertainty within the economy.

Great. Thanks very much.

Thank you.

The next question comes from the line of Zachary Oster with Citizens Capital Markets. Please proceed.

Hey, good afternoon. Thank you for taking my questions and congratulations on a strong quarter and good dynamics coming out of the quarter. Wanted to dig in a little bit more on the macro side, see if we can get a little bit more color, including just more insights on potentially any kind of changes in consumer behavior, which includes anything on payment rates. Thank you.

Yeah, thanks, Zachary. I'll start, and Paul, if you have anything you want to add on this, but At this point in time, we are not seeing anything come through our metrics in terms of changes in consumer behavior. In fact, we continue to see better than expected trends from a delinquency and as it flows through from a loss perspective, which is reflected in our updated guidance. We are closely monitoring things like first pay defaults, the vintage early month on book delinquencies and making sure that we're not seeing that come through. And at this time, it's just not coming. So our customer base is very resilient through some of these challenging times that we're experiencing. Paul, anything you would add?

I think you said it well, Doug. Just to add, I think on payment rates, nothing material there, Zach. As we pointed out on the credit side, with the 4.0% 30-day pass due, that's a multi-year low. And when you look at the guidance, 11% for third quarter, and what that implies for the fourth quarter, given our full-year guidance, these are four- and five-year lows. So we feel very good about how the consumer is navigating and a lot of that is reflected again by the mix that Doug pointed out a moment ago leaning into these lower risk segments. The growth is there in secure personal loans and returning members and so we were very pleased with the credit outcomes we're driving.

Yeah, understood. And then I guess one kind of follow-up related to that. I want to see if you're seeing anything specifically in consumer purchasing behavior or spending behavior as much as you can see especially around energy prices. Yeah, so if you guys are kind of seeing any kind of movement in how people are spending their money or anything like that.

Look, I mean, this consumer continues to be resilient, and I think the segment we serve is able to calibrate their behaviors in ways that some of us don't imagine, right? You think about when you go fill up the car with gas, and gas is at $6 a gallon on on Tuesday, and then on Thursday it might be $5.50. Well, the way this consumer calibrates is they put less gas in the car, right? They have a certain amount to spend, and, you know, so it's actions like that that they're taking to manage through the volatility we're seeing in prices, particularly at the gas pump, and they appear to be navigating that very well.

Understood. Thank you.

The next question comes from the line of Kyle Joseph with Stevens Inc. Please proceed.

Hey, good afternoon. Thanks for taking my question. Sorry, I hopped on a little bit late. But yeah, I just wanted to hop back on credit. Obviously, the DQs and NCOs are looking better. I think I heard you say that's a function of mix shift in terms of loans. and just kind of how you think about that positioning originations growth going forward. I know you guys talked about being conservative given everything going on macro.

Yeah, we expect Kyle through the rest of this year to have a similar mix that comes through and so focusing on continuing to expand and grow our secured lending business as well as leaning in on our returning customers. The new member growth we have pulled back on that and that's reflected in if you look at overall year over year originations that we discussed it will be somewhere single digit type growth and that's very deliberate on our part in terms of how we're thinking about mix and that's allowing us to control overall risk which is translating through these delinquencies and loss rates. So we expect that to continue through this year as we continue to work on thinking about new member originations and doing that in a very risk-disciplined way to ensure that's something we restart as we look into the future.

Got it. And then, yeah, in terms of your cost of debt, your leverage, and then even OpEx, you know, obviously really strong performance year over year, you know, is there more room for kind of growth or expansion there? Or, you know, how much more juice is there to squeeze, if you will?

Yeah, on the financing side, obviously, we continue to look and opportunities to improve the capital structure. As we pointed out, we've made good progress paying down the high cost corporate debt, 30 million this quarter and 100 million since the facility's inception. So that is clearly driving benefits that you can see. And then on the OPEC side, As we talked about, we expect OPEX to be substantially flat this year, but that includes increases in marketing, particularly in the back half of the year. So I think within the OPEX, you're seeing a decline in run rate, but also investments in the growth of the business on the marketing side. And we continue to look for opportunities when we look at replacing staff, we're looking at can we reassign work, can we hire at a lower level and so we're being very prudent so no firm guidance that we can give beyond what we've shared but I think clearly this is something we continue to be focused on is continue to get more efficient using more tools and watching the efficiency very closely.

Got it. Thanks very much for taking my questions.

The next question comes from the line of line of Brendan McCarthy with Sidoti & Company. Please proceed.

Very good afternoon and thanks for taking my questions and congratulations on a strong quarter. I just wanted to start off on the balance sheet, you know, really nice job bringing down leverage. It seems like you're going to hit that, you know, six to one leverage target very shortly. And you cited an improved outlook for interest expense. I think you're looking for a 15% reduction Is that mostly just from that non-cash benefit we saw in the quarter, or are you just experiencing benefit from more rapid debt paydowns?

Yeah, we do. It's both, Brandon. Thanks for the question. Clearly, we are continuing to deliver. We do expect, as we said on prior calls, to be at or around that six to one leverage target by the end of the year. So that continues to be a positive tailwind in terms of the interest expense. And then we did have this non-cash benefit this quarter. which importantly, the biggest part of that benefit will be this quarter. It's not something we'll see as much in the future, about another three million for the rest of the year. So clearly that is providing a benefit as well. My expectation is that won't continue beyond that 10 million benefit that we described, but that is also contributing as well. But I think 15% overall, at least 15 is the outlook for the year.

Got it. Thanks, Paul. And on the credit front, how have early credit indicators looked for Q3? Do you expect a sequential improvement in that 30-day delinquency rate?

That's a good question. You know what, Brendan, as you know, in the last couple of quarters, we have talked about the first month of the current quarter and how that 30-day path to trend has been positive and you can see here in the quarter that 4% 30-day past due trend is at multi-year lows. This quarter, I decided not to put that monthly number out there. I think it was helpful to explain the peak loss we had in that first quarter, which was driven by higher new loan mix in 2025. So I think, you know, I point you to the net charge of trends that continue to be very favorable, 100 basis points lower in third quarter than second quarter. And, you know, rather than kind of put a precise number out there on the DQs for the third quarter.

Understood. Understood there, Paul. That's all from me. Thank you. Thank you, Brendan.

Thank you. This does conclude the question and answer session and I'd like to turn the call back over to Doug Bland for closing remarks.

Thank you again for joining today's call. We appreciate your continued interest and opportune and look forward to speaking with you again soon. Thank you.

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.