Oportun Financial Corp Stock

Greetings, and welcome to the Oportun Financial Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

And now it is my pleasure to introduce Dorian Hare of Investor Relations. Please go ahead.

Thanks, and hello, everyone. With me to discuss Oportun's second quarter 2026 results are Doug Bland, our Chief Executive Officer; and Paul Appleton, our Interim Chief Financial Officer, Treasurer and Head of Capital Markets.

I 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 our 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 June 30, 2026. Any forward-looking statement 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 than 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 second quarter 2026 financial supplement and the appendix section of the second 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 turn the call over to Doug.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Q2 was a strong quarter and an important step forward for Oportun. We exceeded the high end of each of the second quarter guidance ranges provided last quarter.

Total revenue was $233 million, $1 million above the high end of our guidance range, supported by modest year-over-year originations growth. We generated $49 million in adjusted EBITDA. This was well above our guidance range and represented 56% year-over-year growth. And our annualized net charge-off rate improved 65 basis points sequentially to 12%, outperforming our guidance range of 12.2%, plus or minus 15 basis points. I want to thank the team for the focus and execution behind these results.

Our bottom line performance was also strong. We delivered our seventh consecutive quarter of GAAP profitability with our GAAP EPS of $0.17, growing 21% year-over-year and adjusted EPS of $0.42, growing 35%. The quarter demonstrates the company is executing. Revenue was better than expected, profitability improved, credit performance improved sequentially relative to our expectations and the balance sheet continued to strengthen.

Our revised full year guidance that Paul will share reflects an improved annualized net charge-off rate and increased adjusted EBITDA at the respective midpoints. The improved charge-off rate reflects continuing operational improvement, and Paul will explain how our EBITDA guidance includes a favorable noncash change in interest expense recognition.

On our first quarter call, I said I would return with a more defined path forward. My conclusion is that Oportun has a differentiated franchise and a materially stronger financial foundation, but our next phase depends on making growth broader, more precise and more repeatable. Near term, we are focused on 3 priorities: responsibly rebuilding new member growth, deepening our member relationships in lower-risk segments and preserving the funding expense and capital discipline that has restored profitability.

I am now just over 100 days into my tenure as CEO. During this period, I completed a broad assessment of the business. I spent time with our teams, reviewed our products, risk management framework, funding position, operations, technology and member experience. I also met with key external stakeholders, including investors and capital providers. I have begun working with the Board and leadership team on a long-range planning process. While we are not ready to share the full details of that work today, I do want to share the conclusions that are already shaping how we operate.

First, Oportun has built something genuinely differentiated over the past 20 years. We serve a large and underserved market that continues to need responsible access to credit and tools to manage everyday financial needs. We do this seamlessly through a bilingual omnichannel model designed to serve consumers whom traditional providers often overlook. Our mission to empower members to build a better future remains highly relevant. Our members also demonstrate strong trust in Oportun. Across our app stores, Google and Trustpilot, we have earned more than 365,000 5-star reviews and 9 out of 10 members tell us they would recommend Oportun to a friend. We believe that trust is a real asset, and we intend to protect and build upon it.

Second, the team has done meaningful work to stabilize the business. Over the past year, Oportun has improved its balance sheet, reduced funding costs, managed expenses with discipline and increased liquidity. That progress continued in Q2. Unrestricted cash increased to $140 million at quarter end. Operating expenses remained stable and the balance sheet optimization actions we have taken provide greater flexibility to further diversify funding and evaluate opportunities to refinance or retire our higher cost debt over time.

Third, our next phase requires disciplined growth. Originations returned to modest year-over-year growth in Q2, driven by returning members and secured lending. The resulting mix delivered strong credit performance demonstrating the value of our existing member relationships and the attractive risk-adjusted economics of secured lending. To sustain growth over time, we also need to expand responsible access for new members, strengthening our new member engine through more precise selection and the right product fit is one of our highest priorities.

Delinquencies are performing better than anticipated, and we strengthened the leadership team with the appointment of Sean Rowles as Chief Risk Officer. Sean brings deep experience in consumer credit, fraud, collections and financial services operations. Our goal is not to loosen credit, it is to become more precise. We are focused on optimizing the balance between risk and reward using data and analytics to make the best decisions about approval, pricing, amount and term.

One important step to balance risk and reward was the launch of risk-based pricing in July. It gives us greater flexibility to differentiate terms more precisely across risk tiers. This can help us retain attractive lower-risk and returning members while responsibly serving additional qualified applicants. We are still early in the rollout and will scale based on observed cohort economics. We also continue to execute on our payment protection offering launched in April. This is designed to support members during qualifying disruptions to their loan payments and to improve portfolio resilience over time.

Overall, we will scale deliberately, 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. Oportun 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 full year outlook. Over to you, Paul.

Thank you, Doug, and good afternoon, everyone. Turning to Q2 highlights on Slide 6. As Doug mentioned, we recorded our seventh consecutive quarter of GAAP 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 0.5% year-over-year. Total revenue exceeded our expectations and the high end of our guidance range, driven by higher 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 (sic) [ $5.6 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-market adjustment on loans.

Second quarter interest expense was $42 million, down $18 million year-over-year. This improvement reflects ongoing balance sheet optimization actions, which I will discuss in more detail shortly and a favorable noncash change in interest expense recognition associated with asset-backed borrowings.

Regarding the noncash change, revisions to forecasted cash flows used to recognize interest expense associated with $140 million of asset-backed borrowings contributed approximately $7 million of lower interest expense in the second quarter. Our revised guidance reflects an estimated $3 million of additional noncash 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 pretax 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 million 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%, down 65 basis points sequentially from Q1 and outperforming our guidance range. We remained in a tight credit posture and continue 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 contributed to our improved credit performance in the quarter 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 continued 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 9. 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 6.5x debt-to-equity ratio. This is down from 7.3x a year ago and materially lower than the peak leverage of 8.7x reported in 3Q '24. The improvements achieved since then and through the end of the second quarter include consistent GAAP 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 noncash change in interest expense recognition 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 nonrecurring 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 delevering the business, and we continue to expect to approach 6x 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 million to $240 million, annualized net charge-off rate of 11% plus or minus 15 basis points and adjusted EBITDA of $43 million 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 4 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 million to $955 million, annualized net charge-off rate of 11.7%, plus or minus 30 basis points, adjusted EBITDA of $160 million to $175 million, adjusted net income of $74 million 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 that meets 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 Oportun's 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 Oportun 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.

[Operator Instructions] And the first question comes from the line of John Hecht with Jefferies.

Congratulations on what looks to be a very strong quarter and I appreciate the, call it, strategic update as well, Doug. So Doug, 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?

Yes. 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.

Yes, 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 in 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 are branch or non-branch partnerships have you -- that you might be able to kind of guide us through what your strategic thoughts might be about those elements?

Yes. We are -- 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.

Okay. And then a 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 more tools in place to evaluate that. Maybe looking at it from a different angle, like where are approval rates now? Where can they go or where kind of -- if you can look back the history, where have they been in normal periods?

Yes. 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 Rowles 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 5-year low for the business. So we expect that to continue as well while being tight within our overall posture just given the continued uncertainty within the economy.

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

Congratulations on a strong quarter and good dynamics coming out of the quarter. I 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.

Yes. 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 past due. That's a multiyear low. And when you look at the guidance, 11% for the third quarter and what that implies for the fourth quarter, given our full year guidance, these are 4- and 5-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, leading into these lower-risk segments, the growth is there in secured personal loans and returning members. And so we're very pleased with the credit outcomes we're driving.

Got it. 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 could see, especially around energy prices? 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 share a gallon 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 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.

The next question comes from the line of Kyle Joseph with Stephens Inc.

Sorry, I hopped on a little bit late. But yes, 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.

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

Yes. On the financing side, obviously, we continue to look at opportunities to improve the capital structure. We've -- as we pointed out, right, 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 OpEx 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 sort of run rate, but also investments in the growth of the business on the marketing side. And we continue to look for opportunities, right? 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.

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

Congratulations on a strong quarter. Just wanted to start off on the balance sheet, really nice job bringing down leverage. It seems like you're going to hit that 6:1 leverage target very shortly. And you cited an improved outlook for interest expense. I think you're looking for a 15% reduction. And is that mostly just from that noncash benefit we saw in the quarter? Or is there -- are you just experiencing a benefit from more rapid debt paydown?

Yes. We do -- it's both, Brendan. Thanks for the question. Clearly, we are continuing to delever. We do expect, as we've said on prior calls, to be at or around that 6:1 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 noncash 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 $3 million for the rest of the year. So clearly, that is providing a benefit as well. My expectation is, we won't -- 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. And on the credit front, how have early credit indicators looks for Q3? Do you expect a sequential improvement in that 30-day delinquency rate?

That's a good question. 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 past due trend has been, and it has been positive. And you can see here in the quarter that 4.0% 30-day past due trend is at multiyear lows.

This quarter, I decided not to kind of 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 I'd point you to the net charge-off trends that continue to be very favorable, 100 basis points lower in third quarter than second quarter and rather than kind of put a precise number out there on the DQs for the third quarter.

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 in Oportun 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.

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.

Greetings, and welcome to the Oportun Financial Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Dorian Hare of Investor Relations. Please go ahead.

Thanks, and hello, everyone. With me to discuss Oportun's fourth quarter 2025 results are Raul Vazquez, Chief Executive Officer; and Paul Appleton, our Interim Chief Financial Officer, Treasurer and Head of Capital Markets.

I'll remind everyone on this 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-K filing for the year ended December 31, 2025. 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 than 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 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 in 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 fourth quarter 2025 financial supplement and the appendix section of the fourth quarter 2025 earnings presentation, all of which are 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 Raul.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Our fourth quarter results were strong. We met or exceeded all of our guidance metrics, reflecting continued operational discipline and strong execution across the business. The 4 key headlines from the quarter are sustained GAAP profitability, solid credit performance, ongoing expense discipline and a reduced cost of capital. Let's start with profitability.

We generated $25 million of GAAP net income in 2025, including $3.4 million in the fourth quarter. This capped a year of significantly enhanced profitability for Oportun with full year GAAP net income improving by $104 million and adjusted EPS growing 89%. These results were driven by growth in originations, improved credit performance, balance sheet optimization and disciplined expense management. Turning to credit performance. Our annualized net charge-off rate was 12.3% in Q4 at the better end of the guidance range we provided.

On the expense side, Q4 operating expenses of $84 million came in below the $92 million expectation set last quarter and marked our lowest quarterly spend as a public company. Driven by disciplined expense management, full year 2025 GAAP operating expenses totaled $362 million, a $49 million or 12% reduction from 2024. Finally, our balance sheet optimization initiatives are lowering our cost of capital and positioning us for stronger long-term returns.

Driven by corporate debt repayments as well as actions related to our ABS notes and warehouse facilities, Q4 interest expense, excluding $5.5 million of debt extinguishment costs was $52 million. That was $4.1 million lower than Q3. We also completed a $485 million ABS transaction earlier this month, marking our fourth consecutive issuance with a sub-6% funding cost and a AAA rating on the senior notes. Paul will further detail our balance sheet optimization initiatives and how they factor into our 2026 expectations. With our Q4 and full year 2025 highlights covered, I'll now review how we're executing against our 3 strategic priorities: improving credit outcomes, strengthening business economics and identifying high-quality originations.

Starting with credit outcomes. As we discussed in our second quarter call, the first half of the year included a higher mix of new members than expected, so we shifted originations towards returning members. That adjustment was effective. 74% of second half originations came from returning members, up from 64% in the first half. To further strengthen our risk management approach, we also introduced new early default models focused on new and returning members and added 5 new data sources into our underwriting process. In 2026, a key focus will be upgrading our decisioning infrastructure capabilities to accelerate model training and deployment, thereby enabling us to respond even faster to evolving credit conditions.

Turning to business economics. We continue to make strong progress on efficiency and operating leverage. During full year 2025, our risk-adjusted net interest margin ratio improved 55 basis points year-over-year to 15.8%. As a reminder, that metric includes portfolio yield, net charge-offs, cost of capital and loan-related fair value impacts. Our full year 2025 adjusted OpEx ratio improved 109 basis points year-over-year to 12.7% of our owned portfolio. Together, these improvements drove strong operating leverage, lifting adjusted ROE by almost 1,000 basis points to 17.5%.

I'm also pleased to share that we are advancing a new initiative designed to enhance our unit economics and progress towards 20% to 28% annual GAAP ROEs while expanding access to responsible credit. In partnership with potential new bank sponsors and warehouse providers, we are exploring the reintroduction of risk-based pricing above 36% APRs for select higher-risk segments on shorter-term loans. This creates a meaningful opportunity to extend our mission of financial inclusion by responsibly serving customers that we would otherwise not serve while better aligning pricing and term length with risk in order to improve portfolio returns.

At the same time, we are selectively testing modestly lower APRs for certain higher-quality returning members to maximize lifetime value where competitive dynamics warranted. We are assuming only modest incremental profitability in the second half of 2026 as we roll this initiative out in a disciplined and measured manner. However, if executed successfully, we believe this initiative can drive higher earnings power in 2027 and beyond.

Finally, on identifying high-quality originations, we grew originations by 10% during full year 2025 while maintaining a conservative credit posture. We exceeded our prior expectation for high single-digit percent growth by focusing on members with higher free cash flow and on channels that deliver the strongest results. In full year 2025, loan application growth more than doubled the rate of originations growth, while customer acquisition costs declined 6% to an average of $117, a testament to our strong loan demand, disciplined underwriting and improved cost efficiency.

And expanding our secured personal loans portfolio secured by members' autos remains a key pillar of our responsible growth strategy. SPL originations increased 51% in full year 2025. As a result, our secured portfolio grew 39% year-over-year to $226 million and secured loans now represent 8% of our owned portfolio, up from 6% at year-end 2024. Importantly, secured personal loan losses were more than 600 basis points lower than unsecured personal loans during the year. To continue our strong SPL growth momentum into 2026, we've recently initiated new direct mail campaigns targeted specifically at potential SPL customers who own their vehicles.

By executing against our 3 strategic imperatives: improving credit outcomes, strengthening business economics and identifying high-quality originations, we've driven meaningful operational and profit improvement in 2024 and 2025. We're confident this disciplined framework will continue to support our momentum in 2026. With that, I'd like to now preview our initial 2026 outlook. While our member base remains resilient, inflation above Federal Reserve targets, declining wage growth, uneven job creation and policy uncertainty continue to create a cautious environment for low to moderate income consumers.

Our outlook prudently assumes these conditions persist throughout 2026 alongside our currently tight credit posture. We remain well positioned to adjust quickly as conditions evolve. The guidance for full year 2026 that Paul will soon detail for you is underpinned by mid-single digits originations growth, a 1% to 2% decline in average daily principal balance, revenue growth ranging from flat to a 2% decline, a net charge-off rate range with a midpoint reflecting slight year-over-year improvement, a reduction in interest expense of at least 10% and substantially flat operating expenses. We expect these drivers to result in full year 2026 adjusted EPS growth of 16% at the midpoint of our full year guidance. We also expect higher profitability in the second half than the first as originations ramp under our normal seasonal pattern and loss rates improve.

Now I will turn it over to Paul for additional details on our financial and credit performance as well as our guidance.

Thanks, Raul, and good afternoon, everyone. Turning to Slide 5. We delivered a strong fourth quarter relative to guidance. Identifying high-quality originations enabled us to exceed the top end of our quarterly total revenue guidance by $1.7 million or 1%. Combined with disciplined expense management, this drove strong adjusted EBITDA of $42 million, exceeding the top of our guidance range by $5.5 million or 15%. For full year 2025, we delivered adjusted EPS of $1.36 towards the high end of the $1.30 to $1.40 expectation and achieved GAAP profitability of $25 million, consistent with our full year GAAP profitability commitment.

Turning now to Slide 6. We recorded our fifth consecutive quarter of GAAP profitability with net income of $3.4 million and diluted EPS of $0.07. We also generated adjusted net income of $13 million and adjusted EPS of $0.27. While maintaining credit discipline, fourth quarter originations of $495 million were down 5% year-over-year, primarily due to credit tightening actions. This was modestly better than our prior expectation for a high single-digit decline.

Total revenue of $248 million declined by $3.2 million or 1% year-over-year. This decline was attributable to the absence of $3.8 million of credit card revenue in the prior year quarter. As a reminder, we completed the sale of our credit card portfolio in November of last year, a transaction that has been accretive on a cash basis. Net decrease in fair value was $99 million this quarter due primarily to $86 million in net charge-offs. Also included in the decrease in Q4 fair value was $17 million of derivative-related impacts in line with our expectations associated with the acquisition of an Oportun service loan portfolio and the wind-down of a related risk-sharing agreement. The majority, $13 million was noncash. As we discussed on our prior earnings call, these loans were previously held by our bank sponsor, Pathward.

We continue to expect a profitability benefit from the acquisition, driven by lower funding costs associated with owning the portfolio versus the prior arrangement with Pathward. We also expect derivative-related fair value impacts to be muted in the first quarter and following the wind down to no longer affect fair value in future quarters. Partially offsetting the impact of the wind down, sustained lower ABS funding costs drove a favorable $4.9 million mark-to-market adjustment on our loan portfolio. Reported fourth quarter interest expense was $58 million, down $16 million year-over-year. After adjusting for debt repayment-related charges of $17 million in the prior year quarter and $5.5 million in Q4 '25, interest expense declined $4.6 million or 8% year-over-year. This improvement reflects the balance sheet optimization initiatives Raul referenced earlier, which I'll detail momentarily. Net revenue was $90 million, down 3% year-over-year as the impact of lower total revenue and a higher net decrease in fair value offset lower interest expense.

Operating expenses were $84 million, down $5.6 million or 6% year-over-year, better than our $92 million expectation and reflecting continued cost discipline. Our adjusted OpEx ratio reached a record low of 11.6%, marking the first time we've outperformed our 12.5% unit economics target. Importantly, as we work toward meeting our unit economics targets on a GAAP basis, our GAAP OpEx ratio improved to 12%, down from 13.1% in the prior year quarter and also outperformed our target.

Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes was $42 million in the fourth quarter. This reflected a year-over-year increase of $1.5 million as lower operating expenses and interest expense more than offset higher net charge-offs and lower total revenue. Adjusted net income, which excludes the debt repayment-related charges discussed earlier, was $13 million, down $8.6 million year-over-year, primarily due to the wind down of the Pathward risk-sharing agreement I discussed earlier. Adjusted EPS similarly declined year-over-year from $0.49 to $0.27.

Importantly, GAAP net income before taxes was $6.6 million, up $2.7 million or 68% year-over-year as lower operating expenses more than offset lower net revenue. GAAP net income was $3.4 million and would have been higher absent repayment-related charges and the tax headwinds this quarter. The $5.3 million year-over-year decline in GAAP net income was largely attributable to the tax comparison as this quarter reflected $3.2 million of tax expense versus a $4.8 million benefit in Q4 '24 due to discrete items and R&D credit timing. Diluted EPS of $0.07 declined by $0.13 year-over-year.

Next, I'd like to provide some additional color on our credit performance in Q4. As shown on Slide 7, our Q4 net charge-off rate increased as anticipated, coming in at 12.3% and at the low end of the annualized guidance we provided. As expected, the higher loss pre-July 2022 back book continued to roll off, shrinking to less than 1% of our owned portfolio at year-end. Our 30-plus delinquency rate was 4.9%, up a modest 13 basis points year-over-year. As a forward-looking indicator, this supports our expectation that 1Q '26 will represent the peak quarterly net charge-off rate for the year with moderation beginning in the second quarter.

Turning now to capital and liquidity. As shown on Slide 9, we continue to strengthen our debt capital structure by reducing higher cost corporate debt, lowering our overall cost of capital and enhancing liquidity. First, I'm pleased with the progress we made with deleveraging, ending Q4 '25 at 7.2x debt to equity. That's down from 7.9x a year ago and from the 3Q '24 peak of 8.7x. During 2025, shareholders' equity increased by $36 million or 10% with consistent GAAP profitability supporting continued deleveraging.

Reducing our high-cost corporate debt, which carries a 15% interest rate remains our second highest capital priority after originating high-quality loans and reinvesting in the business. Since the $235 million corporate debt facility was put in place in November 2024, we've reduced the outstanding balance by $70 million or 30%, including $37.5 million or 16% in Q4. These repayments lowered our annualized run rate expense by $10.5 million, generating meaningful and sustainable savings.

During Q4, we increased total committed warehouse capacity from $954 million to $1.14 billion. We also extended the weighted average remaining term of our combined warehouse facilities from 17 months to 25 months and reduced the aggregate weighted average margin by 43 basis points. We achieved this by closing a new $247 million 3-year revolving term committed warehouse facility and improving the terms of our existing facilities.

Following the fourth quarter and earlier this month, as Raul mentioned, we completed a $485 million ABS transaction at a 5.32% weighted average yield. In the last 9 months, we have now raised $1.9 billion in the ABS market at sub -6% yields, demonstrating sustained access to capital on favorable terms. In addition to reducing high-cost corporate debt by $70 million during 2025, we increased our unrestricted cash balance by $46 million or 76%. As of December 31, total cash was $199 million, of which $106 million was unrestricted and $93 million was restricted.

Turning now to our guidance. As shown on Slide 12, our outlook for the first quarter is total revenue of $225 million to $230 million, annualized net charge-off rate of 12.65%, plus or minus 15 basis points and adjusted EBITDA of $25 million to $30 million. At the midpoint, our Q1 revenue guidance implies an $8 million year-over-year decline, reflecting seasonally lower demand during tax season and our continued tight credit posture. Our Q1 annualized net charge-off rate midpoint guidance of 12.65% reflects the impact of first half 2025 originations, which included a higher percentage of new members prior to the tightening actions we implemented in the second half.

We expect first quarter '26 delinquencies to decrease to 4.4% to 4.5%, which would be 20 to 30 basis points lower than 1Q '25 and 40 to 50 basis points lower sequentially than 4Q '25. That anticipated improvement in delinquencies gives us confidence that charge-offs will decrease beginning in the second quarter. Importantly, our implied net charge-off guidance for the remaining 3 quarters of 2026 is approximately 11.65%, which is 100 basis points lower than the first quarter guidance midpoint, reflecting the impact of our tightened underwriting and improved mix.

At the midpoint, our Q1 adjusted EBITDA guidance implies a year-over-year decline of approximately $6 million, less than the expected revenue decline of $8 million, driven by lower operating and interest expense. Our initial full year 2026 guidance includes 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 and adjusted EPS of $1.50 to $1.65.

We expect to lower interest expense by more than 10% in 2026, which supports our adjusted EPS guidance. We are confident in this expectation because the benefits of the balance sheet optimization initiatives completed in 2025 will flow through to our 2026 financials. 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 Raul, let me briefly review our unit economics progress for full year 2025. 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 made meaningful progress during the year. Full year 2025 adjusted ROE was 17.5%, nearly a 10% point increase year-over-year, driven primarily by cost reductions and improved credit performance. We expect to build on this progress in 2026.

Our North Star remains delivering GAAP ROE of 20% to 28% annually. We plan to achieve this by reducing annualized net charge-offs to 9% to 11%, lowering operating expenses to 12.5% of our owned portfolio and attaining 10% to 15% annual growth in our owned loan portfolio. We also intend to make substantial progress towards returning to our target 6:1 debt-to-equity leverage ratio this year by reducing our debt outstanding and continuing to grow profitability.

With that, Raul, back over to you.

To close, I'd like to emphasize 3 key points. First, we're pleased with our 2025 results. On a full year basis, we improved GAAP net income by $104 million and grew adjusted EPS by 89%. Second, we expect full year profitability to improve across all metrics in 2026. Although the additional credit tightening implemented in the second half of last year is expected to temper revenue growth in 2026, we still project 10% to 21% adjusted EPS growth per our guidance, improved ROE and higher GAAP profitability year-over-year. And third, we see a compelling long-term opportunity ahead for Oportun.

The progress we've made over the past year in reducing leverage, lowering our cost of capital and strengthening our liquidity enables us to focus squarely on operational execution and profitable, sustainable growth. For 2026, we are assuming only modest incremental profit from the risk-based pricing initiatives discussed earlier as we roll them out prudently. However, if executed successfully, a return to risk-based pricing could enhance earnings growth beginning in 2027 and drive additional progress towards our 20% to 28% GAAP ROE objective over time.

This will be my final earnings call as CEO of Oportun. I will step down as Chief Executive Officer and from the Board by April 3 or earlier if the Board appoints a successor. Following that, will serve as an advisor through July 3 to support a smooth transition. I will continue meeting with investors this quarter and I'm working closely with the Board and management team to ensure an orderly and seamless leadership transition. It has been a privilege to lead Oportun for nearly 14 years and to work alongside such a talented, committed and mission-driven team. I am deeply grateful to our employees, members, partners and shareholders for the trust and support they have shown me throughout this journey. I am confident that Oportun is well positioned for its next chapter with a strong foundation, a clear strategy and a team fully capable of continuing to deliver for our members and shareholders.

With that, operator, let's open up the line for questions.

[Operator Instructions] And the first question comes from the line of Kyle Joseph with Stephens.

Kyle, you may have us on mute. We can't hear you.

The next question will come from the line of David Scharf with Citizens.

This is Zach on for David. Congrats on the strong fourth quarter performance. I wanted to dig in a little bit on the macro side and see if we can get any more color. And also just kind of if you can kind of talk about any of the signs that we might see that might lead to some loosening.

Sure. Sure, Zach. So when we think about the macro, right, we think that the consumer, first of all, is showing a tremendous amount of resilience. So that has us optimistic as we go into the year. From a macro perspective, we certainly know that tax refunds are expected to be bigger this year. So far, our delinquency performance at the beginning of the year makes us feel good about what the path for loss is going to continue to be. So we think that, that's constructive.

On the flip side, right, Q4 GDP growth was a bit lower than expected. Wage growth for the lowest quartile in the country is the lowest, right? They do have the lowest wage growth right now. And then when we think about fuel, because we know fuel prices are something that our customer base is pretty sensitive to, although they are lower year-over-year, in the last month alone, we've seen fuel prices on average in the state of California go up $0.40 a gallon. So that is one of the things that we're going to continue to watch carefully. So I think on the macro side, Zach, there are some puts and takes. And as a consequence, right, we continue to have a conservative credit box until we see things improve.

To your point, in terms of improvement, we'd like to see stronger job growth across the economy. We'd like to see continued GDP growth. We'd like to see a strong finish to the tax season. And then obviously, we want to see the trajectory that we expect for losses to develop. Those are the sorts of things that would require us to -- I'm sorry, that we would be required to see to open up.

The next question comes from the line of Brendan McCarthy with Sidoti.

Just wanted to start off on the net charge-off rate. Obviously, it looks like a temporary step-up in the first quarter, and then you mentioned it will step down in the second quarter and thereafter. Just curious as to what data points you're seeing regarding first payment defaults or the new origination vintages that really give you that confidence that it will step down like that.

Yes. The biggest signal in terms of the losses going down is really what we're seeing in delinquencies. So right now, based on what we're seeing in delinquencies and 30-plus delinquencies specifically, but early delinquencies also look good, Brendan. But on the 30-plus side, we think we're going to end up at 4.4% to 4.5% for Q1. That would be 20 to 30 basis points lower than last year and 40 to 50 basis points lower quarter-over-quarter. So we think that this elevated loss rate for Q1 is really just a product of the higher mix of new customers that we had at the beginning of the year, right?

We've been signaling this bubble. We talked about it in our last 2 earnings calls. So the trajectory of losses is what we expect. If anything, Q4 was on the low end of the guidance that we provided. So we got a lot of confidence when we look at delinquencies going back to your question, looking at the path for delinquencies for Q1 that we will see losses start to come down in Q2 and then certainly in Q3 and Q4. You did see that the implied loss rate for Q2 to Q4 is 11.65%. And again, the confidence really comes from what we're seeing in delinquencies so far this year.

Great. I appreciate the detail there, Raul. And another question here on operating expenses. I think you guided to flat OpEx for 2026 relative to 2025. I'm curious if you can differentiate the Q4 run rate, which would be a little bit lower if you took that and annualized it for 2026. Just wondering what increases are kind of baked into that from the Q4 run rate?

Yes. So I would say from an OpEx perspective, when we look at 2026, there's really 2 things going on. Number one, I'm really proud of the discipline that the team showed throughout all of 2025 and certainly in Q4. And that discipline continues this year. We're going to continue to look for opportunities to reduce OpEx. We're going to continue to stay pretty lean from a headcount perspective. So that part is going to continue, and that's the first part of the OpEx story.

The reason that OpEx looks flat is really the second dimension, which is there are going to be some incremental investments relative to 2025. And we think these are investments that investors are going to be excited about. Number one, we're going to be investing in this return to risk-based pricing, right, specifically pricing over 36%. As a reminder, for people that may be newer to the Oportun story, the bulk of our history, we have pricing over 36%, right? The bulk of my time even as CEO, these last 14 years, we were pricing a part of the portfolio over 36%. So this is not new to us.

This is something we know how to do. It's the same Chief Credit Officer. So in many ways, this is returning to the pricing that we had before. But this is going to require engaging a new bank partner. It's going to require some new development and just some new investment. But again, we're excited about the impact that, that's going to have. Though modest this year, we think it will lead to a bigger impact in 2027 and the years beyond that. So that's one investment.

Number two, secured personal lending continues to be our major focus from a growth perspective. We shared that originations this last year were 51% year-over-year growth in originations for SPL, right? This year, we've said we're going to have kind of mid-single-digit growth in the business. That means growth both in UPL, but more importantly, disproportionate growth rates in SPL. So we continue to invest in that part of the business, Brendan.

And then number three, I just answered Zach's question in terms of what we would need to see to open up the credit box. We are going to see growth in the portfolio this year, in particular -- I'm sorry, growth in originations, in particular, Q2 through Q4, that will not be through opening the credit box. It will be through investing in marketing. So that's another investment that you're seeing. So the net-net of the savings we expect to find plus those 3 investments means relatively flat OpEx for the year.

Understood. I appreciate the color there. And I think that's a key takeaway, your plan to go above that 36% cap. Can you give us a sense of how this might increase your addressable market? And is that plan included in your expectation for mid-single-digit growth in originations for the year?

It is not included in our view for this year. For this year, we're going to take a very methodical, very prudent approach to rolling this out. Again, we know how to do this. This is not new to us. But certainly, right, this is a different environment than a few years ago when we stopped doing this. So we think it is prudent to roll this out in a thoughtful way. Certainly, as we get into '27 and future years, we think there's 2 big benefits here, Brendan.

One is certainly over time, to your point, it should open up some additional market for us. And our ability to price appropriately for that slightly higher risk, right, is going to improve our unit economics and is going to improve the overall profitability of the business. So we're excited about that. What we also used to do, and this is contemplated in our plans is we would price the best part of our portfolio slightly below 36%.

And if someone came back as a returning borrower, they would get the benefit of good performance by having lower pricing. We think not only does that maximize lifetime value because it allows us to go ahead and retain those individuals, but by marketing price points below 36%, it also changes the through-the-door population and the applicant quality that we see so that, that way you see an overall benefit from a credit quality perspective. So we think that part of the business, the pricing below the 36% is also accretive to the business. And that's why we're so excited, although the benefits would be muted this year, we're very excited about this initiative, and I've got a ton of confidence in this leadership team's ability to execute the plan well both this year and in future years.

The next question comes from the line of Hal Goetsch with B. Riley Securities.

Raul, I just want to thank you for your service to the company and to investors. Thank you very much. I think you had a tremendous run there from start-up to a public company. Congratulations. You're going to be missed. And my question is, can you go into a little more detail on the expense reduction? It seems like it was particularly good. And what did you see there that allowed you to do that this quarter? And the follow-up question is, what are the goals for maybe debt -- corporate debt reduction in 2026?

Yes. So let me start, Hal, by saying thank you for the very kind words. Shareholders are in great hands with this leadership team. Like I said, I've got a ton of confidence in them, but I appreciate your kind words. On the OpEx side, I'm going to focus on the full year, right, because the story from a full year perspective was very compelling, right? OpEx was down $49 million or 12% on a year-over-year basis. And really, what we saw were contributions almost across all areas, Hal.

So from a tech and facilities perspective, that's the largest part of our OpEx, that was down $24 million year-over-year or 14%. That's really efficiencies in our technology spend. It's really cutting, right, the size of that group so that way, also some of the charges that come over time with that also decreased, but a lot of good work there. I know the tech team is going to continue to look for opportunities, right, both to get leaner as we continue to use AI and that would be leaner through attrition, just to be clear, but also opportunities to try to figure out if we can lessen the number of contracts or just reduce the expense associated with some of the multiyear contracts that are coming up next year.

On the personnel side, right, we've certainly gotten much leaner as people know, over the years and reduced the size of headcount. So personnel for the year was down about $7 million or 8%. G&A was down $19 million or 36% and then outservicing was also down about $2 million. So really a ton of discipline and focus across all parts of the business. As I was answering the question in terms of OpEx earlier, right, those reductions still gave us an opportunity to self-fund some improvement or some increase in sales and marketing.

So sales and marketing for the year was up $4 million or 5%, right? The bulk of that investment was in the areas that we've talked about throughout the year, both direct mail and a really, really healthy customer referral program that we're very pleased with. So that's really what the picture look like for '25, and we'll seek to do something similar in '26, right? Obviously harder to continue to reduce some of those numbers at the same magnitude, but we'll continue to look for reductions across the areas I just mentioned and then some modest investment in marketing. And then remind me -- I'm sorry, the second part of your question.

What would you have a goal for debt reduction this year after a tremendous last 1.5 years or so?

Yes. So on the debt reduction side, from a capital allocation strategy perspective, our priorities are still, number one, fund profitable growth; number two, pay down the debt, in particular, the 15% interest rate corporate facility. We made a lot of progress last year. We did $70 million in payments last year, including $37.5 million. That does impact GAAP profitability because there are some repayment charges. So our GAAP net income would have been even higher if not for the $5.5 million or so of debt repayment charges in the quarter.

We do have additional payments contemplated in the plan by quarter. We'll certainly talk more about those every time that we have an earnings call, Hal, give you an update on how much did we pay down. But the plan does include that. And in fact, GAAP net income would be even higher this year, if not for some of those debt repayment charges that we have to recognize. So yes, you'll continue to see us pay down that debt as aggressively as possible.

[Operator Instructions]

Okay. There appear to be no further questions. So we want to thank you once again for joining today's call. We appreciate your continued interest in Oportun, and the team looks forward to speaking with you again soon. Thank you, everyone.

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

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" Sidoti & Company, LLC

" Jefferies LLC, Research Division

" JPMorgan Chase & Co, Research Division

Greetings, and welcome to the Oportun Financial Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dorian Hair of Investor Relations. Thank you. You may begin.

Thanks, and hello, everyone. With me to discuss Oportun's third quarter 2025 results are Raul Vazquez, Chief Executive Officer; and Paul Appleton, our Treasurer, Head of Capital Markets and Interim Chief Financial Officer.

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, included projections, 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 ending September 30, 2025. 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 than 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 future financial condition and results of operations. A full list of definitions can be found in our earnings materials available at the Investor Relations section on 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 third quarter 2025 financial supplement and the appendix section of the third quarter 2025 earnings presentation, all of which are 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 Raul.

Thanks, Dorian, and good afternoon, everyone. Thank you for joining us. Our third quarter results were strong, marking our fourth consecutive quarter of GAAP profitability. We met or exceeded all of our guidance metrics, reflecting continued operational discipline and strong execution across the business. The 4 key headlines from the quarter are: continued GAAP profitability, improved credit performance, ongoing expense discipline and an enhanced capital structure.

Let's start with profitability. We were GAAP profitable once again in Q3 with net income of $5.2 million, reflecting $35 million of year-over-year improvement. Our ROE was 5%, up 40 percentage points year-over-year. We achieved these results through continued disciplined expense management, improved credit performance and growth in originations. Based on our performance through the first 3 quarters, we remain confident that we'll deliver on our promise of full year 2025 GAAP profitability as we committed to at the start of the year. This includes our expectation to be GAAP profitable in the fourth quarter.

Turning to credit performance. Our annualized net charge-off rate was 11.8%, a modest improvement from 11.9% in the prior year period. Our 30-plus day delinquency rate also improved year-over-year by 44 basis points to 4.7%. On the expense side, we reported $91 million in operating expenses, down 11% year-over-year. That represents our second lowest quarterly expense level since becoming a public company in 2019 and our lowest ever on an adjusted basis. Thanks to our planned reduction of second half 2025 marketing and other expenses, we now expect full year 2025 GAAP operating expenses of approximately $370 million, a $10 million improvement from our prior outlook and a $40 million improvement from 2024.

Finally, we took meaningful steps during and after the quarter to further strengthen our capital structure. We executed ABS financings at weighted average yields below 6% in August and October and proactively repaid higher cost corporate debt. Additionally, we expanded our warehouse financing capacity in October by adding a new facility and modifying an existing one, extending average maturity and reducing our average cost of capital. Our debt-to-equity ratio was 7.1x at the end of Q3, down significantly from the 8.7x peak level in the prior year quarter, and we remain on track toward our target of 6x. With our Q3 highlights covered, I'll now review how we're executing against our 3 strategic priorities. improving credit outcomes, strengthening business economics and identifying high-quality originations.

Starting with credit outcomes. On our last earnings call, we shared that the first half of the year saw a higher mix of new members than expected and that we were recalibrating originations more toward returning members. Our efforts were effective. 70% of Q3 originations went to returning members, up from 64% in the first half. Although our third quarter 30-plus day delinquency rate of 4.7% came down by 44 basis points year-over-year, it was at the higher end of our internal expectations.

Observing this trend, we took additional credit tightening actions during the quarter, which are ongoing. This included leveraging a new early default model to enhance predictiveness in using our bank transaction model to lower loan amounts and enact hard declines where needed. While these actions help protect portfolio quality, they led to slightly lower originations in Q3, and we expect continued impact in Q4 origination levels. Accordingly, we now expect full year 2025 originations growth in the high single-digits percentage range, slightly down from our prior expectation for growth of approximately 10%.

Turning to business economics. We continue to make strong progress on efficiency and operating leverage. Our risk-adjusted net interest margin ratio improved 231 basis points year-over-year to 16.4% -- as a reminder, that metric includes portfolio yield, net charge-offs, cost of capital and loan-related fair value impacts. Our adjusted OpEx ratio improved 133 basis points year-over-year to 12.6% of our own portfolio. That's a new record for cost efficiency and within 8 basis points of our 12.5% target. Together, these improvements drove strong operating leverage, lifting ROE by 40 percentage points year-over-year and sharply increasing adjusted EPS from $0.02 to $0.39.

Finally, on identifying high-quality originations, even as we maintain a conservative credit posture, we grew originations by focusing on members with higher free cash flow and on channels that deliver the strongest results. Q3 originations were $512 million, up 7% year-over-year, marking our fourth consecutive quarter of growth under a disciplined credit approach. Our referral program continues to perform well, driving 25% growth in referral-based originations to $31 million in the quarter. And expanding our secured personal loans portfolio remains a key pillar of our responsible growth strategy. SPL originations increased 22% year-over-year, and our secured portfolio grew 48% year-over-year to $209 million, now 8% of our own portfolio, up from 5% a year ago. Through the first three quarters of this year, secured personal loan losses have run over 500 basis points lower compared to unsecured personal loans. Altogether, these actions reflect our commitment to balancing growth, credit quality and efficiency, an approach that's driving consistent improvement in Oportun's profitability and overall momentum.

With that, I'd like to now preview our updated 2025 outlook. We continue to closely monitor key indicators such as inflation, unemployment, fuel prices and evolving government policies alongside our internal performance metrics. Our members have remained remarkably resilient despite ongoing macro uncertainty and our third quarter results reflect that resilience. With that being the case, our 30-plus day delinquency rate did come in at the high end of our internal expectations, as I mentioned earlier. While we tighten credit accordingly, we do anticipate these trends to result in a slight increase at the midpoint of our full year 2025 annualized net charge-off rate by 20 basis points to 12.1%, reflecting approximately $5 million in higher anticipated losses. This includes a 12.45% annualized net charge-off rate expectation at the midpoint of our guidance for the fourth quarter. We expect this elevated loss rate to be temporary, impacting early 2026 before easing by next year's second quarter as recent tightening actions take hold.

Finally, we've raised our full year adjusted EPS guidance to a range of $1.30 to $1.40 per share, up 4% at the midpoint, reflecting strong year-over-year growth of 81% to 94% -- this increase is driven by continued expense discipline and a lower cost of capital, which together strengthen our profitability outlook for 2025. Oportun itself has become far more resilient with sustained GAAP profitability, improved operating efficiency and a clear path toward our 20% to 28% target ROEs. Looking ahead to 2026, we plan to stay focused on our 3 strategic priorities, which gives us confidence that we'll continue to grow adjusted EPS next year. With that, I will turn it over to Paul for additional details on our financial and credit performance as well as our guidance.

Thanks, Raul, and good afternoon, everyone. Turning to Slide 5. We delivered a strong third quarter, coming in $2 million or 6% above the top end of our adjusted EBITDA guidance, driven by lower operating expense and lower interest expense. In addition, we met guidance for total revenue and net charge-offs and delivered another quarter of strong GAAP and adjusted EPS performance.

Turning now to Slide 6. We continued our momentum with our fourth consecutive quarter of GAAP profitability, generating $5.2 million in net income and diluted EPS of $0.11 per share. This marks our seventh straight quarter of adjusted profitability with adjusted net income of $19 million and adjusted EPS of $0.39 per share. While maintaining credit discipline, originations of $512 million were up 7% year-over-year, slightly below our prior expectations due to the credit tightening actions Raul mentioned a moment ago. Total revenue of $239 million declined by $11 million or 5% year-over-year. This decline was primarily due to the absence of $9 million of credit card revenue in the prior year quarter.

As a reminder, we completed the sale of our credit card portfolio in November of last year, a transaction that has been accretive to our bottom line. Net decrease in fair value was $77 million this quarter, primarily due to $80 million in net charge-offs, which declined 3% from the prior year quarter. In addition, sustained lower ABS funding costs drove a favorable $7 million mark-to-market adjustment on our portfolio. Third quarter interest expense was $57 million, up $1 million year-over-year as sub -3% pandemic era ABS issuances continue to pay down. However, cost of debt was lower sequentially, decreasing from 8.6% in the second quarter to 8.1% in the third quarter, closely aligning with our 8% unit economics target. This improvement reflects the positive impact of recent lower cost ABS issuance, the refinancing of higher cost ABS debt as well as the repayment of corporate debt, which I'll cover more in detail shortly.

Net revenue was $105 million, up 68% year-over-year, driven by improved fair value marks and lower net charge-offs more than offsetting lower total revenue. Operating expenses were $91 million, down 11% from the prior year, reflecting our ongoing cost discipline. Year-to-date, we've reduced operating expenses by $43 million. As Raul mentioned, with additional cost-saving measures identified, we now expect full year 2025 operating expenses to be approximately $370 million, including approximately $92 million in the fourth quarter for a 10% full year reduction from 2024. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes was $41 million in the third quarter. This reflected a year-over-year increase of $10 million, driven by cost reductions and credit performance improvement.

Adjusted net income was $19 million, up $8 million year-over-year, driven by our reduced operating expenses along with improved credit performance. Adjusted EPS increased sharply year-over-year from $0.02 per share to $0.39 per share, while our adjusted ROE improved 19 percentage points to 20%, which I will discuss further when I review our unit economics progress. GAAP income before taxes of $14 million increased $54 million year-over-year. This was our highest level of pretax income since the first quarter of 2022. I'll note that while our GAAP net income of $5 million increased sharply by $35 million, it was approximately half of what it would have been due to a $5 million unfavorable revision to tax expense from an annual R&D tax credit study. The revision primarily drove our effective tax rate up to 64% compared with 24% in the prior year period. Despite the higher rate, diluted EPS of $0.11 per share also impacted by the tax revision still increased by $0.86 per share year-over-year.

Next, I'd like to provide some additional color on our credit performance in Q3. Our front book of loans originated since July 2022 continues to perform quite well, while our back book of pre-July 2022 loans continues to roll off. As you can see on Slide 7, our more recent credit vintages have generally outperformed their predecessors. And as a result, the losses on our front book 12 months after disbursement are now running approximately 700 basis points or more lower than our back book. Furthermore, you can see our annualized net charge-off rate for the quarter by front book versus back book on Slide 8.

In Q3, the front book had an annualized net charge-off rate of 11.7%, near the 9% to 11% net charge-off range that we target in our unit economics model. The back book continues to decline, representing just 2% of the loan portfolio at quarter end, but accounting for 7% of gross charge-offs. We still expect the back book to further diminish to just 1% of our portfolio by the end of 2025.

Finally, as you can see on Slide 9, our net charge-off rate was 11.8% in the third quarter, which was 7 basis points better than last year's rate. Our Q3 net charge-off dollars declined by 3% year-over-year. While we reduced our 30-plus day delinquency rate year-over-year for the seventh consecutive quarter, it was at the higher end of our internal expectations, as Raul talked about.

Turning now to capital and liquidity. As shown on Slide 11, we've taken significant recent steps to enhance our debt capital structure by reducing debt outstanding and lowering our cost of capital while bolstering our liquidity. We deleveraged during Q3 by reducing our debt-to-equity ratio from 7.3x to 7.1x quarter-over-quarter, supported by GAAP profitability and $99 million in operating cash flow, of which $31 million was used to pay down debt. Our leverage is down markedly from the 8.7x peak level a year ago.

Much of our focus on reducing debt outstanding has been on repaying higher cost corporate debt, which carries a 15% interest rate. We proactively repaid $20 million of corporate loan principal during the third quarter and another $17.5 million following the quarter end. We've now repaid a total of $50 million since the facility's inception in October 2024, reducing the original $235 million balance to $185 million, resulting in an annualized run rate reduction in interest expense of $7.5 million. Since the end of the second quarter, we have continued to demonstrate our ability to consistently access the capital markets at favorable terms.

In August, we issued $538 million in ABS notes at a 5.29% weighted average yield, which was our lowest cost ABS issuance since October 2021. Following the quarter end, we completed another ABS issuing $441 million in notes at a 5.77% weighted average yield. Both transactions achieved a sub -6% funding cost, a AAA rating on their senior notes and freed up warehouse capacity for future originations. Also, following the quarter, we increased our total committed warehouse capacity from $954 million to $1.14 billion, increased the weighted average remaining term of our combined warehouse facilities from 17 months to 25 months and reduced the aggregate weighted average margin across our warehouse facilities by 43 basis points. We did so by closing a new $247 million 3-year revolving term committed warehouse facility and improving the terms of existing facilities.

Following the end of the quarter, we purchased $115 million of the Opportune service loan portfolio held by our bank sponsorship partner, Pathward. We expect some profitability benefit from the acquisition, driven by the lower funding cost of owning the portfolio in comparison to the prior agreement with Pathward. Finally, as of September 30, total cash was $224 million, of which $105 million was unrestricted and $119 million was restricted.

Turning now to our guidance, as shown on Slide 12, our outlook for the fourth quarter is total revenue of $241 million to $246 million, annualized net charge-off rate of 12.45%, plus or minus 15 basis points and adjusted EBITDA of $31 million to $37 -- our Q4 total revenue guidance reflects a $7 million year-over-year decline at the midpoint, largely due to the absence of the prior year period $4 million in credit card revenue. Our Q4 adjusted EBITDA guidance of $34 million at the midpoint also reflects a $7 million year-over-year decline, driven by lower total revenue and higher net charge-offs, partially offset by lower interest expense. Our Q4 annualized net charge-off midpoint guidance at 12.45% reflects 3Q's 30-plus delinquency rate being at the higher end of our expectations. We tightened our credit standards during Q3 and expect this uptick in our net charge-off rate to be temporary. Our revised full year 2025 guidance includes total revenue of $950 million to $955 million, annualized net charge-off rate of 12.1%, plus or minus 10 basis points, adjusted EBITDA of $137 million to $143 million and adjusted EPS of $1.30 to $1.40.

I'll note that our recent credit tightening actions imply a high single-digit year-over-year decline in originations for the fourth quarter. For context, 4Q '24 originations of $522 million were our highest level since 2022. We've maintained the midpoint of our full year revenue guidance at $952.5 million while narrowing the range by $10 million. We've also maintained the midpoint of our adjusted EBITDA guidance at $140 million, reflecting 34% year-over-year growth while narrowing that range by $4 million. We've increased our adjusted EPS midpoint by $0.05 per share or 4%, supported by lower operating expenses and reduced cost of capital. Together, these actions more than offset the impact of slightly higher charge-offs and reinforce the continued strength of our profitability trajectory.

Before I turn it back to Raul, let me conclude with a brief summary of our unit economics progress. While our long-term targets are GAAP targets, I'll use adjusted metrics because they remove nonrecurring items and provide a better sense of our future run rate.

It's clear on Slide 14 that we continue to make significant progress in Q3. Adjusted ROE was 20%, which was a 19 percentage point year-over-year improvement, driven principally by cost reductions and improved credit performance. Our North Star continues to be delivering GAAP ROE of 20% to 28% annually, driven by reduced annualized net charge-offs to 9% to 11%, lowering operating expenses to 12.5% of our own portfolio and attaining annual growth of 10% to 15% in our own loan portfolio. We also intend to return to our 6:1 debt-to-equity leverage ratio by reducing our debt outstanding and continuing to grow GAAP profitability. With that, Raul, back over to you.

Thanks, Paul. To close, I'd like to emphasize 3 key points. First, we're pleased with our third quarter results, achieving GAAP profitability for the fourth consecutive quarter, a GAAP ROE of 5% and adjusted ROE of 20%, both significantly improved from a year ago. Second, we made important progress in strengthening our capital structure, lowering leverage and reducing our cost of capital, improvements that position us well for the years ahead. And third, we're raising our full year adjusted EPS guidance expectations again to a range of $1.30 to $1.40, reflecting strong year-over-year growth of 81% to 94%. We expect to grow our adjusted EPS further in 2026.

Our disciplined execution across credit, efficiency and quality growth has delivered consistent progress over the past 2 years. Oportun is now a more resilient business even amidst ongoing macro uncertainty, supported by our dedicated team and loyal members. We look forward to speaking with you early next year to share our Q4 results and provide our full set of 2026 expectations. With that, operator, let's open up the line for questions.

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

Look, the delinquency trends and charge-off trends are apparent and the credit tightening is having the impact as intended. I am curious, you guys have a lot more insight into the behavior of your consumers, whether it's frequency of payment, size of payment, loans that they're taking. Can you share some insights that you're seeing behaviorally beyond just sort of delinquencies and net charge-offs to help us understand what is going on at the consumer level for pluses and minuses?

Yes, Rick, thanks for the question. As you can imagine, people's financial lives are quite complex. I've enjoyed the conversations we've had over the years about things that can go well. For example, there have been years where wage growth has been positive and then certainly the things that are challenging. I think right now, I'll start with kind of what we're doing to try to generate this improvement that we've seen in our trends, right?

One of the things that you've heard us talk about over the last few quarters is really focusing on average loan size. So for example, in Q3, average loan size for our owned portfolio, on the unsecured personal loans, we took average loan size down 5% year-over-year. Even for the secured personal loan portfolio, where we're very pleased with performance. You heard in our comments state that losses year-to-date for secured are 500 basis points better than for unsecured. We're still taking loan sizes down there as well. So loan size was down for the secured personal loans 7% year-over-year, right? So we think that right now in this economy, it's important to try to decrease loan size and really focus on making payments affordable. And that's because though we think that the consumer today continues to be very resilient, there are certainly pressure points, right? The latest inflation rate at 3% year-over-year was the highest year-over-year increase since January.

As you know, we recently found out that for the first time in over a decade, wage growth for the lowest quartile, right, is now below wage growth for the highest quartile of earners in the country. And fuel prices here in California are higher than they were -- modestly higher than they were a month ago, but they are higher than a year ago, right? So right now, we think there's still resilience in the consumer, but there are these points of pressure. There's also the potential impact of the government shutdown, if that continues. So right now, we continue to be focused on having a conservative credit box, decreasing average loan size and really trying to keep our loans as affordable as possible.

Got it. That makes a lot of sense and I think it's pretty consistent with our world view as well.

Our next question comes from the line of Brendan McCarthy with Sidoti.

I just wanted to circle back to the consumer behavior point. I know in Q2 this past quarter, repayments were elevated. Just curious as to how repayments trended in the third quarter.

We're still seeing similar trends of slight repayment rates. Again, we think that really has to do with the fact that we've made our loans smaller, so they're just easier to pay off, Brendan. It's not an area of concern for us right now. And in fact, as you know, right, we're always happy to have loans paid off.

Great. That makes sense. And pivoting to OpEx, I think it's solid to see another -- the expectation for $10 million in OpEx to come out for the rest of the year. Just curious as to what line items you're taking OpEx out of the business.

Yes, there have been several. I'm really pleased with the focus throughout the organization on staying lean and reducing OpEx. So for example, we saw sales and marketing go down about $1 million in the quarter relative to last year. Personnel expenses were down $2 million year-over-year. G&A was also down about $2 million year-over-year. The tech team continues to find efficiencies, continues to find ways to use technology and innovation to lower OpEx. So really across the board, nice efforts throughout the organization.

Understood there. And last question here from me on the net charge-off rate. I know you're looking for a temporary increase. I think you mentioned into the first quarter of 2026, but you're expecting it to kind of come back down perhaps in the second quarter of 2026. What's ultimately backing that expectation there?

Yes, that's a great question. So we talked about some of the tightening that we did in the quarter. And I would point to 2 things that really give us confidence when we think about the shape of the curve. Number one, when we think about the tightening we did in the quarter, the first payment default rates that we saw in Q3, right, those right now look quite good, and they make us feel that the tightening that we did was effective. Second thing was, as we shared during the call, in the first half of the year, we had about 64% of originations going to our returning members. That meant that we had that higher percent of originations in the first half going to new members. We were able to focus more on returning members. So we saw 70% of Q3 originations going to returning members, right? So that makes us feel like the originations are at a better balance. And then finally, to add one more, when we look at the early delinquency trends right now in the business, those also indicate that the impact that we're seeing right now should be in Q4 and Q1, and then we should start to see it come back down in Q2 through Q4 of 2026.

Our next question comes from the line of John Hecht with Jefferies.

Apologize if this -- there's some redundancy. I've been bouncing back and forth between different calls. I'm talking about the -- I'm interested in the characteristics of the secured personal loan customers. Maybe discuss the resell or maybe graduation of this from a different product versus where you're identifying these opportunities in new channels and how that mix looks going into 2026.

Yes. So secured is certainly one of the areas where we've been quite pleased with the growth that we've seen, John. So the secured portfolio now is $209 million. It's up 48% year-over-year. and it represents 8% of our portfolio, and that was 5% last year. One of the things that the team has been able to do is, number one, really focus on how do we present the product during the application flow, how do we make it just a much more efficient experience so that, that way we can increase conversion. So the product teams, the engineering teams and the risk teams have done really good work there.

The marketing team also for the first time this year, started to focus on campaigns that were specific to trying to attract people that would be interested in secured personal loans. Historically, it's been just kind of a side-by-side offer with unsecured. So we were focused on getting unsecured customers and then presenting the opportunity for a larger loan if they owned their car. But now we have dedicated marketing campaigns that really are focused on trying to acquire someone that does own their car -- and those are the types of campaigns that we're really focused on in 2026 as we think about secured personal lending as one of the pillars of growth that we really want to lean into next year and in coming years.

Second question is just the -- you've talked about the delinquencies in the quarter. I'm wondering if you're seeing any changes in roll rates. Is there anything, whether it's at the product level or income cohorts that you're seeing roll rates change in any direction that gives us a perspective on what we should expect going into 2026?

Well, I mean, throughout the year, there are certainly puts and takes in terms of roll rates among different parts of the portfolio, John. But when we think about a very modest increase in this case of just 20 basis points at the midyear for full year guidance, -- it's the sort of thing that we think we've absolutely made adjustments for in the business by looking for reductions in OpEx, right, looking for reductions in marketing spend. So nothing that's really concerning to me at this time.

Okay. And then you guys have done a good job in delevering the balance sheet. I think it was closer to 9. It's now almost back to 7. I know I think your goal is 6. Maybe can -- based on the trajectory of the business and your outlook, when do you hit 6? And when you hit 6, I'm sure you're going to be focused on maintaining a good balance sheet. I guess what -- does that increase any optionality for you at that point in time?

Yes, John, thanks for the question. Yes, we're really pleased with the trajectory in leverage coming down, as you pointed out, from a high of 8.7x third quarter last year to now 7.1x. And even quarter-over-quarter, right, we saw the decrease from 7.3x to 7.1x. And so we expect that trajectory to continue. We haven't guided anyone yet to a number time line as it were for the 6x. But clearly, we're on a good path towards that. So that's kind of the outlook.

And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, Raul Vazquez for closing remarks.

We want to thank everyone once again for joining today's call. We appreciate your continued interest in Oportun, and we look forward to speaking to you again at the beginning of next year. Thank you.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.