Oportun Financial Corporation ($OPRT)

Welcome to Oportun Financial Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Dorian Hare, Senior Vice President of Investor Relations. Mr. Hare, you may begin.

Thanks, and hello, everyone. With me to discuss Oportun's first quarter 2026 results are Doug Bland, our Chief Executive Officer; and Paul Appleton, our Interim Chief Financial Officer, Treasurer and Head of Capital Markets. Kate Layton, Oportun's Chief Legal Officer; and Gaurav Rana, our Senior Vice President and General Manager of Lending, will also join for the question-and-answer session. I'll remind everyone on the call or webcast that some of the remarks made today will include forward-looking statements related to our business, future results of operations and financial position, including projected adjusted ROE attainment and expected originations growth, planned products and services, business strategy, expense savings measures and plans and objectives of management for future operations. Actual results may differ materially from those contemplated or implied by these forward-looking statements, and we caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption Risk Factors, including our upcoming Form 10-Q filing for the quarter ended March 31, 2026. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events other as required by law. Also on today's call, we will present both GAAP and non-GAAP financial measures, which we believe can be useful measures for the period-to-period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section of our website. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A reconciliation of non-GAAP to GAAP financial measures is included in our earnings press release, our first quarter 2026 supplement and the appendix section of the first quarter 2026 earnings presentation, all of which will be available at the Investor Relations section of our website at investor.oportun.com. In addition, this call is being webcast, and an archived version will be available after the call, along with a copy of our prepared remarks. With that, I will now turn the call over to Doug.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. I'm honored to be speaking with you for the first time as CEO of Oportun. I was drawn to Oportun because it stands out, a technology-driven platform with a critical mission and proven ability to responsibly improve the financial lives of people who are too often overlooked by traditional lenders. I also saw a business known for high-quality customer service, uniquely positioned to seamlessly engage with both English and Spanish-speaking members across its retail, contact center and mobile app. My initial meetings with team members across the company and with key stakeholders have only reinforced this view. I look forward to working with our team and Board to strengthen the business, build deeper relationships with our members and deliver long-term value for shareholders. I'm optimistic about what we can achieve together. I joined Oportun on April 20, so I've been in the role for less than three weeks. I'm not going to use my first earnings call to declare a new strategy before I've completed a deeper review. What I can say from my early assessment is that the team has made real progress strengthening the foundation of the business, particularly profitability, liquidity and funding costs, while important work remains to improve through-cycle credit performance and rebuild a durable growth engine. The 2026 plan was already in motion before I arrived, yet based on my review so far, I support reiterating the full year guidance. I'll now hand it over to Paul for a review of how we are executing against our current strategy and our first quarter financial results. He will also provide our Q2 guidance while updating you on our full year outlook.

Thank you, Doug, and good afternoon, everyone. I'd like to start by updating you on our strategic priorities, which include improving credit outcomes, strengthening business economics and identifying high-quality originations. Starting with improving credit outcomes. We have remained in a tight credit posture, maintaining an emphasis on returning members amid an uncertain macroeconomic outlook for low and moderate income households. Our annualized net charge-off rate was 12.65% in Q1 at the midpoint of our guidance range. In Q1, the proportion of originations to returning members was 79%, 16 percentage points higher than the 63% recorded in the prior year quarter. Importantly, our Q1 30-plus delinquency rate of 4.5% met the expectations we set on our February earnings call, down 38 basis points sequentially and 18 basis points year-over-year. We expect the second quarter 30-plus delinquency rate to improve further to a range between 4.1% and 4.2%, which is 22 to 32 basis points lower than 2Q '25 and 30 to 40 basis points lower sequentially than the first quarter. These proof points support our continued confidence that Q1's 12.65% annualized net charge-off rate should be the highest of 2026. We also mentioned on our February earnings call that a key focus this year is continuing to invest in our credit decisioning capabilities to accelerate model training, deployment and effectiveness. In Q2, we are introducing the latest iteration of our primary underwriting model, V13, which features an enhanced model architecture designed to better capture both long-term and more recent emerging trends. The model also incorporates new alternative data sources to improve predictive power and reduce adverse selection risk. Turning to business economics. We remain committed to improving on full year 2025 17.5% adjusted ROE and 6.8% GAAP ROE, making progress towards our objective of 20% to 28% GAAP ROE on an annual basis. A key component of this is continuing our expense discipline. During Q1, total OpEx declined 1% year-over-year to $91 million, in line with a substantially flat expectation we set for the full year. Another important part of our efforts to attain our ROE goal is exploring the launch of risk-based pricing. As discussed on our last earnings call, this effort would reintroduce pricing above 36% for shorter-term loans and higher-risk segments, including some customers we're not able to approve today. We have made good progress with this initiative, including signing a letter of intent with a new bank partner. And as a result, we continue to expect to roll this initiative out in the second half of the year. Last month, we launched another initiative, a payment protection offering that we expect will provide more certainty for our members and a positive financial contribution to Oportun in future years. Payment protection is an opt-in offering that members can elect during the loan application progress, which provides protection against unforeseen events like involuntary unemployment, death or disability by completely or partially paying off the loan. The offering is currently available to loan applicants in several states and in coordination with our bank partner, we expect to introduce the offering across most of our footprint in the coming months. Due to the phased rollout, we are currently assuming only a modest financial benefit from the payment protection initiative in our 2026 guidance. However, at scale, we see a potential for profit enhancement in future years due to lower credit losses on enrolled loans and fees earned. Lastly, regarding identifying high-quality originations, in Q1, originations declined by 11%. Now this was in line with our expectations, reflecting typical seasonality and the higher mix of returning borrowers I referenced a moment ago. We continue to expect to grow originations in the mid-single-digit percentage range this year. Expanding our secured personal loan portfolio secured by members autos remains a key pillar of our responsible growth strategy. Partially offsetting the unsecured personal loan originations decline in Q1, secured personal loan originations grew 12% year-over-year and the secured portfolio grew 30% year-over-year to $233 million. As a result, secured personal loans now represent 9% of our own portfolio, up from 7% last year. Importantly, average losses on secured personal loans continued to run substantially lower than unsecured personal loans in the first quarter. Turning now to Q1 highlights on Slide 6. We recorded our sixth consecutive quarter of GAAP profitability with net income of $2.3 million and diluted EPS of $0.05 per share. We also generated adjusted net income of $10 million and adjusted EPS of $0.21 per share. Total revenue of $229 million declined by $7.1 million or 3% year-over-year, which again was in line with our expectations and driven by the 11% year-over-year decline in originations I mentioned a moment ago. Net decrease in fair value was $86 million this quarter due to $85 million in net charge-offs. The net decrease in fair value was $13 million higher than the prior period, which benefited from a favorable $12 million mark-to-market adjustment on loans. First quarter interest expense was $48 million, down $9 million year-over-year. This improvement reflects recent balance sheet optimization initiatives that I'll share shortly. Net revenue was $95 million, down $11 million year-over-year as the impact of lower total revenue and fair value offset the benefit from lower interest expense. Operating expenses were $91 million, down $1.3 million or 1% year-over-year, reflecting continued cost discipline. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes was $29 million in the first quarter. This reflects a year-over-year decrease of $4.2 million as lower total revenue and higher net charge-offs more than offset lower interest expense and adjusted operating expense. Adjusted net income was $10 million, down $8.4 million year-over-year due to lower net revenue, partially offset by lower adjusted operating expense. Adjusted EPS declined year-over-year from $0.40 a share to $0.21 a share. Finally, GAAP net income of $2.3 million was similarly down $7.4 million year-over-year. Turning now to capital and liquidity, as shown on Slide 9, we continue to strengthen our debt capital structure through continued balance sheet optimization by further reducing higher cost corporate debt, lowering our overall cost of capital and enhancing liquidity. I'm pleased with the progress we made deleveraging, ending the quarter with a 6.8x debt-to-equity ratio. That's down from 7.6x a year ago and materially lower than the peak leverage of 8.7x we reported in 3Q '24. The improvements achieved since then and through the end of the first quarter include consistent GAAP profitability, a $69 million or 21% increase in shareholders' equity and a $70 million or 30% reduction in our high-cost corporate debt. Q1 interest expense was $48 million, and that was $9 million or 16% lower than the prior year quarter, supporting our sustained profitability. This was driven by corporate debt repayments as well as actions taken related to our ABS notes and warehouse facilities. Also supporting our strong liquidity position, our cash flow has enabled us to continue to grow our unrestricted cash balance to $130 million as of the end of 1Q '26, up $25 million from year-end 2025 and up $52 million year-over-year. With this strong cash position, we paid down another $30 million of high-cost corporate debt following the end of the first quarter, lowering our remaining corporate debt principal balance to $135 million. Corporate debt repayments since the facility's October 2024 inception now total $100 million, reducing outstandings from the initial $235 million balance to $135 million, resulting in $15 million in annual run rate expense savings. On the capital markets side, we completed a $485 million ABS transaction at a 5.32% yield in February. Over the last 12 months, we have issued $1.9 billion in ABS bonds at sub-6% yields, demonstrating our sustained access to capital on favorable terms. Next, I'd like to turn to our updated guidance as shown on Slide 10. While our member base remains resilient, inflation above Federal Reserve targets, uneven job creation, policy uncertainty and higher gas prices continue to create a cautious environment for low to moderate income consumers. We are particularly monitoring the impact of high fuel prices on our members. And while we have not seen any deterioration in our metrics as a result, we understand the pressure this can place on our customers 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 second quarter is total revenue of $227 million to $232 million, annualized net charge-off rate of 12.2%, plus or minus 15 basis points and adjusted EBITDA of $34 million to $39 million. At the midpoint, our Q2 revenue guidance implies a modest sequential increase from Q1 and a lesser year-over-year decline driven by higher originations from first quarter levels. Our Q2 annualized net charge-off rate midpoint guidance of 12.2% implies 45 basis points of sequential improvement from the first quarter, supported by the favorable 30-plus delinquency trends I discussed earlier. At the midpoint of $37 million, our Q2 adjusted EBITDA guidance implies strong sequential and a return to year-over-year growth of $5 million or 17%, driven primarily by lower interest expense along with ongoing operating expense discipline. We are fully reiterating our full year 2026 guidance, including total revenue of $935 million to $955 million, annualized net charge-off rate of 11.9%, plus or minus 50 basis points, adjusted EBITDA of $150 million to $165 million, adjusted net income of $74 million to $82 million and adjusted EPS of $1.50 to $1.65. 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, a reduction in interest expense of at least 10% and substantially flat operating expenses. Also, our full year annualized net charge-off rate midpoint guidance of 11.9% continues to indicate slight year-over-year improvement. Midpoint growth of 16% in adjusted EPS and 6% in adjusted EBITDA, even amid macro uncertainty for low to moderate income consumers reflects the resilience of both our members and our business model. Before I turn it back to Doug, let me conclude with a brief summary of our unit economics progress. Although our long-term targets are GAAP targets, I'll reference adjusted metrics because they remove nonrecurring items and better reflect our future run rate. As shown on Slide 11, we generated 10.5% adjusted ROE during the first quarter. With ramping originations and lower credit losses embedded in our full year guidance, we expect to improve on our first quarter adjusted ROE performance in the balance of the year and outpaced last year's 17.5% adjusted ROE. I'm encouraged by the positive fundamentals we exhibited in Q1, particularly on a year-over-year improvement in cost of funds and operating expense efficiency. Our balance sheet optimization initiatives drove improvement in our cost of funds from 8.2% to -- 7.0%, a level well below our 8.0% target. And expense discipline enabled improvement in our adjusted OpEx ratio from 13.3% to 12.7%, nearing our 12.5% target. Our North Star remains delivering GAAP ROEs of 20% to 28% annually. We plan to achieve this by driving positive credit outcomes, growing the owned loan portfolio and effectively managing operating expenses. We also intend to continue to drive our debt-to-equity leverage ratio this year towards our 6x target by reducing our debt outstanding and continuing to grow GAAP profitability. With that, Doug, back over to you.

Thanks, Paul. To close, I'd like to emphasize that while Oportun's foundation is stronger than it was, we need to establish predictable outcomes that result in durable growth. My focus now is on disciplined execution, deeper assessment and coming back to you on our second quarter earnings call with a clearer view of the path forward. I want to underscore that Oportun's mission to empower members to build a better future will continue. I see a tremendous opportunity to accelerate this mission. It's my focus to partner with our teams to determine ways to accomplish this. I'm energized by what's ahead. With that, operator, let's open it up for questions.

[Operator Instructions] The first question comes from the line of Brendan McCarthy with Sidoti.

Welcome, Doug. I just wanted to start off on the outlook here. Originations down 11% year-over-year. That makes sense considering your tighter underwriting position. How does the new risk-based pricing initiative fit into the 2026 guidance that calls for a mid-single digit increase for the year?

Thanks, Brendan. Appreciate the question. So when it comes to the risk-based pricing initiative, as I mentioned in my comments, we're making good progress rolling out that program. As you know, for most of Oportun's history, we did price above 36%. But as we reintroduce this pricing regime, we certainly want to be thoughtful about how the glide path and what it looks like. And so for guidance, we've embedded a little bit of benefit in there for 2026, but just a small amount given we do want to test into it and the program is not live yet.

Understood. I appreciate the color there. Looking at interest expense, it looks like you had a pretty steep year-over-year decline. And if you annualize the Q1, it looks like you're trending well under that target for a 10% reduction in interest expense for full year 2026. Do you see room there to boost margins over the course of the year?

Possibly, yes. I see what you're looking at when you look at the run rate there. We're obviously pleased with the progress in paying down the corporate debt. As I mentioned in my comments, right, we're down $100 million from the initial balance of the corporate loan, and that's driving a $15 million annualized interest expense run rate benefit. And as I mentioned in the comments as well, we paid down another $30 million, right, that's included in that $100 million after the end of the quarter. So yes, there may be a bit of opportunity there, especially given some of the ABS execution we've got recently.

That makes sense. And as a follow-up on leverage, Paul, I think you mentioned you're at about 6.8x leverage at this point. You're trending pretty quickly towards your 6.1x target. How can we think about your capital allocation maybe once you reach that target? How might capital allocation change going forward?

Yes. Great question, Brendan. Thank you. Look, the capital allocation priorities we have right now are continuing to invest in profitable growth and paying down the corporate debt, right? The corporate debt, when we pay that down that comes with a certain return, right? We know exactly the expense we're going to save. And the corporate debt does have a high price to it. We're at that 6.8x leverage you mentioned just now. As we said on our last earnings call, we do expect to trend towards that by the end of the year. So for now, I think those are going to be our two continued priorities, and then we can look beyond that once we reach the target.

Next question comes from the line of Alek Labosky with Jefferies.

Welcome, Doug. I was just wondering if you've seen any changes to the demand trends given the high fuel prices. Has this driven more borrowing kind of given cash constraints?

In the first quarter, Alek, we continue to see demand outpace our originations. So certainly continue to be robust demand in the market.

Great. And then just a second question. Just kind of thinking about the current mix of digital versus branch originations. Just wondering if you plan to evaluate any changes moving forward and how we should expect this to kind of trend in the future?

Alex, this is Gaurav here. The trends that we have today will -- you can expect that to continue through the course of the year. As Paul alluded, we're still guiding towards the mid-single-digit growth in originations, and we've lined up our marketing spend to go accordingly to drive that growth.

[Operator Instructions] Next question comes from the line of Brendan McCarthy with Sidoti.

Great. Just a quick follow-up here on the net charge-off guidance. I think hitting the 11.9% midpoint for the full year, it assumes a pretty nice step down in the net charge-off rate to an average of like 11.6% for the rest of the year. I guess how confident are you that you can really hit the midpoint there? What specific credit indicators are you looking for?

Thank you for the follow-up question, Brendan. As you know, the 12.65% net charge-off rate we reported in the first quarter was elevated, but we expected, right? It was the midpoint of our guidance, and we achieved that. And as we mentioned on prior earnings calls, the reason for that spike in the net charge-offs was due to the mix shift that we experienced in the first half of 2025, where new loan originations accounted for a greater share of the mix than they do now. And so we've shifted to move the mix back to returning borrowers. So that's a positive tailwind for credit. Then you look at the guidance we set for second quarter, right? We're doing that very informed based on what we're seeing in roll rates, late-stage roll rates going into -- that will contribute to the second quarter charge-offs. Then the last and the third item that we see as a positive trend is the 30-plus day delinquencies I mentioned in the comments, where those are trending lower than the first quarter. So I think all those signs point to a continued improvement. As you no doubt have factored in, right, when you put in the 12.65%, the 12.2% and the 11.9% target for the full year, that does imply we're at the 11% handle for the second half of the year, in line with our sort of 9% to 11% target.

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Doug Bland, Chief Executive Officer, for closing comments.

Thank you, everyone, for joining today's call. Before we close, I do want to say a special thanks to this team, in particular, Kate, Paul and Gaurav in terms of working through the transition that they've been through is even under best circumstances, never easy and simple. And I think the team has done an excellent job continuing to drive this business, focused on discipline, and you heard the results that they've been able to achieve during this quarter. So I want to thank this team and look forward to working with them as we move forward. We appreciate the continued interest and opportunity by everyone and look forward to speaking with you again soon. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.