Okay. Hello, everybody, and welcome to Sidoti Small Cap Conference. My name is Brendan McCarthy. I'm an analyst here at Sidoti, and I'm pleased to welcome Oportun Financial. They'll be presenting with us this afternoon. Leading the discussion from Oportun will be CEO Raul Vazquez, CFO Jonathan Coblentz, and Senior Vice President Dorian Hare. Before I hand it over, a quick reminder that the Q&A tab is located right at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. But with that said, I'm happy to hand it over to Raul.
Thank you, Brendan, and my thanks to each of you in the audience for joining us today. I'm Raul Vazquez, CEO of Oportun Financial. With me today are Jonathan Coblentz, our CFO, and Dorian Hare, our SVP of Investor Relations. What I'll be presenting today is our current investor presentation, dated August twenty twenty-four, which is on our investor relations website at investor.oportun.com. For those of you who may not be familiar, Oportun provides loans, along with a savings product, to hardworking individuals. We do so through our three core products that I'll provide more details on shortly. Those products are our unsecured personal loans, our secured personal loans, and our award-winning Set & Save savings product. Our target market is comprised of thin-file and no-file, low- to moderate-income individuals who are traditionally underserved.
Our customer base is both English and Spanish-speaking, and we seamlessly engage with them across all channels via our retail locations, bilingual contact center team, and our mobile app. Our market opportunity is quite vast. We're addressing the biggest challenges that face U.S. consumers. It starts with the fact that, according to the Financial Health Network, 85% of U.S. consumers lack financial resilience. As examples, you'll see on this page that 55% of U.S. consumers are discouraged about their personal finances, and 57% would struggle to come up with $1,000 in an emergency. To provide more details on our products and how we address those challenges, I want to start with our responsibly structured credit products. Unsecured personal loans are our primary focus as the largest and most profitable business within Oportun.
They allow our members a fast and convenient way to address pressing financial needs, such as car repair or a security deposit on an apartment they are renting. Our competitive differentiation in personal loans comes from our segment focus on underserved communities, our technology and data, our AI-driven approach to underwriting, and the way we tailor our product to meet and exceed the expectations of our members. You can see on this page that the average loan size for our unsecured personal loans is just over $3,000. The average term is 41 months, and the average APR is 33.5%, which, as I'll discuss soon, provides a strong value proposition for our members.
Shifting to secured personal loans, we're continuing to roll out our plans to expand our secured personal loan product, which is secured by a member's auto, by the end of twenty twenty-five through our partnership with Pathward. Available only in California as of the end of last year, we reintroduced secured personal loans in our next two biggest states, which are Texas and Florida, at the end of the first quarter this year. We then relaunched SPL in Arizona and New Jersey in the second quarter and completed the rollout of the product in Illinois for the first time. We are excited about the expansion of SPL because of its superior unit economics.
Not only did losses last year run approximately 350 basis points lower for our secured personal loans last year as compared to the unsecured loans, but revenue per loan was over 50% higher, since, on average, SPL loans are over $3,000 larger. The average loan size for unsecured personal loans is just—for our secured personal loans, I'm sorry, is just under $7,000, while the average term is 51 months, and the average APR is 29.9%. As I alluded to earlier, our value proposition is supported by the fact that we deliver significant savings to our members as compared to alternatives that are generally available to them. With our APRs capped at 36%, competitor products and payday loans are, on average, seven times more expensive.
We're proud of the fact that we've also helped 1.2 million members establish a credit history, and we've saved our members $2.4 billion in estimated interest and fees in the aggregate. It's not surprising that since 2009, we've been certified by the U.S. Treasury Department as a Community Development Financial Institution, which we consider validation of our mission-driven approach and goal to provide access to capital to underserved communities. Aside from the pricing elements of our value proposition, another way we've been able to keep our members satisfied is through our diverse set of loan fulfillment and payment channels, which enable our members to interact with us by any means that is most convenient to them.
For example, during 2023, 49% of loan applicants used more than one of our loan fulfillment channels as part of the application process, and again, that includes our retail stores, our contact centers, and our mobile and digital capabilities. All of those were used to complete their applications. It's also notable that 74% of applicants used our mobile and digital channel for at least part of their applications. For payments, in addition to our direct Oportun locations, we offer tens of thousands of partner locations to our members at various PayNearMe, MoneyGram, and CheckFreePay affiliated facilities. Our savings product, which we recently rebranded as Set Save, was rated the number one app in the space by Bankrate and the best app for automated savings, according to Forbes. Members can integrate their existing bank accounts into the platform and set goals for savings.
Then our AI engine analyzes their income and spending patterns to find the optimal amount that can be safely applied towards their goals and automatically transfers the necessary funds over time to achieve those goals. Savings is integral to our mission of empowering our members to build a better future. I'm proud that our savings product helps members set aside, on average, $1,800 a year, and that we've now had over $10.8 billion in aggregate savings since the product's inception. I now want to take a few moments to update you on our progress towards our top strategic priorities for 2024, which, as you can see on this slide, are, number one, improving credit outcomes, number two, fortifying our business economics, and number three, identifying high-quality originations. First, regarding improving credit outcomes.
We first tightened credit in July of twenty twenty-two and executed multiple tightenings since then, including significant additional actions in December of twenty twenty-two and further actions throughout twenty twenty-three and twenty twenty-four. This discipline has allowed us to make good progress on our credit metrics. For instance, our 30-plus day delinquencies declined year over year for the second consecutive quarter and now achieve the level of 5.0%. In order to continue this momentum, we've expanded the use of our V12 risk model, which was built on inflation data, to returning members. We first used V12 to underwrite first-time borrowers earlier in the year, and we're pleased with the fact that the early reads and the delinquencies from those V12 underwritten loans have already outperformed the V11 model.
Moving on to our second priority for 2024, we're also fortifying our business economics. Starting with the revenue side, I'm pleased that our Q2 risk-adjusted portfolio yield, which includes charge-offs, improved year over year by 191 basis points. We will continue to take actions to ensure that our new loans are appropriately priced for risk in 2024, while remaining committed to our 36% APR cap, and on the cost side, we reiterated during our earnings call that we will continue to reduce our operating expenses by targeting $97.5 million as our Q4 2024 GAAP operating expense level. That represents a 38% reduction from the level of $158 million in OpEx in Q2 2022, and that really is the point at which we started our significant cost reduction measures.
Also, on the cost side, our most recent $223 million securitization, which closed less than two weeks ago, was highly oversubscribed. At an 8.1% weighted average interest rate, its cost is 30 basis points less than the securitization we executed in February, and almost 200 basis points lower than our October 2023 securitization. In my view, this signifies the confidence investors have in the credit quality of our originations, as well as the improvement and strength of our business model. And finally, we remain intent on identifying high-quality originations, ensuring that we continue to lay the foundation for responsible growth. We've had several consecutive quarters of origination levels that were lower than the prior year's levels. These negative growth rates have been driven by our stated focus on quality, not quantity of originations.
We have been laser-focused on conservative underwriting and improving our loss rates. Our improved credit performance and outlook, which I'll cover more momentarily, have given us confidence that we are making high-quality loans. Accordingly, as I said on our August eighth earnings call, while Q2 originations were 10% lower year over year, we expect Q3 originations to be roughly flat to last year's levels. I'd now like to spend more time speaking with you about our improving credit performance. The actions we've taken to improve credit are clearly paying off. As you can see on this slide, the losses on our front book have been running approximately 400 basis points lower, 12-plus months after disbursement than the losses on our back book. As a reminder, the back book is comprised of loans originated prior to the first material tightening in July of 2022.
The front book of loans is comprised of originations since that time. Also, on our August 8 earnings call, we added a breakout of our annualized net charge-off rate for the second quarter by splitting it into front book versus back book. So in Q2, the back book had an annualized net charge-off rate of 21.2%, while the front book was at 10.6%, which was within the 9%-11% net charge-off range that we are targeting in our unit economics model, which Jonathan will take you through. I also want you to be aware that we've signed a non-binding letter of intent to sell our credit card portfolio to a leading credit card marketer and servicer for 70% of the receivables balance of current and less than 30-day delinquent receivables as of the closing date.
We set the expectation on our August 8 earnings call that 2025 Adjusted EBITDA favorability resulting from the credit card sale will be approximately $11 million. Before I turn it over to Jonathan, I'm excited to share the details of our new lending collaboration with Western Union, a leader in cross-border money transfers with 90% global brand recognition. Under the agreement, we have the potential to reach their millions of customers who are similar to our own. Structured like our other lending-as-a-service agreements, it only requires us to pay for leads when a loan that has met our underwriting criteria has been funded. This is an exciting opportunity to add new applicants to our originations funnel and generate incremental new loan volume under our current credit standards. With that, I'll turn it over to Jonathan for a financial review.
Thanks, Raul. We had a strong second quarter, and our August eighth guidance indicates that we are positioned to improve upon our performance in the second half of the year. Total revenue of $250 million declined by 6%, driven principally by an 8% decline in our average daily principal balance under our conservative credit posture, partially offset by price increases as portfolio yield increased 167 basis points year over year, improving to 33.9%. Net revenue was $60 million, down 49% year over year, primarily due to a one-time $360 million unfavorable fair value mark to our credit card portfolio relating to the LOI we signed, along with the total revenue decline and higher interest expense.
To elaborate on the impact of selling the credit card portfolio, the agreed-upon price at 70% of the receivables being sold reflects the highest offer that we received as part of our strategic review process, thus setting the new fair value mark. Interest expense of $54 million was up $13 million year over year. This was primarily driven by increased debt outstanding and an increase in our cost of debt to 7.7% versus 5.6% in the year-ago period, reflecting the higher rate environment. Turning now to operating expenses and efficiency, we continue to see the benefits of our cost reduction initiatives.
Our $109 million in total operating expenses in Q2 reflected a 20% decrease from the prior year period, while including a $6 million impairment of the right-of-use asset for our Bay Area headquarters and $2 million in workforce optimization expenses relating to reductions in force we enacted in the second half of May. We reiterated on our August eighth call that we will continue to drive our cost structure lower in the second half of 2024, and remain on track to achieve $97.5 million in Q4 GAAP operating expenses.
Our sales and marketing expenses were just over $16 million, down 15% year over year, and I'm pleased to share that our CAC of $122 was a new low for us as a public company, down 25% year over year, driven by our cost discipline. Adjusted net income of $3 million compared to $6 million for the prior year quarter, and we had recorded adjusted EPS of $0.08 versus $0.17. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes, was $30 million in the second quarter. This reflected a year-over-year increase of $16 million or 109%, driven by our sharply reduced cost structure and lower net charge-offs on a dollar basis.
Our adjusted EBITDA performance exceeded the high end of our prior guidance range by $13 million, primarily on lower-than-anticipated operating expenses, along with lower charge-offs. Regarding our capital and liquidity, net cash flows from operating activities for the second quarter were a record $108 million, up 5% year over year. As of June thirtieth, total cash was $237 million, of which $73 million was unrestricted and $164 million was restricted. I'd note that these liquidity levels are after having paid down $17 million of corporate debt during the quarter. Further bolstering our liquidity was $523 million in available funding capacity under our warehouse lines and remaining whole loan sale agreement capacity of $181 million.
I'm pleased to share that since the end of the second quarter, we closed two new funding transactions: a new whole loan agreement for $245 million to fund our unsecured and secured personal loan activity into 2027, and the $223 million asset-backed securitization that Raul mentioned. Since June of last year, Oportun has raised over $1.8 billion in diversified financings, including whole loan sales, securitizations, and warehouse agreements from fixed income investors and banks, based upon the strong performance of recent vintages and their confidence in our business model. Before handing the call back to Raul to close, I'd like to update you on our progress towards what we believe long-term investor returns for Oportun could look like.
While our long-term targets are GAAP targets, I'll be using adjusted metrics for comparison, since they remove non-recurring items and provide a better sense of our future run rate. As a reminder, our personal loan business has a 32% average APR, even while we deliver value to our borrowing members that we believe is better than alternatives available to them. When non-interest income is added, primarily from our savings product, we see a 36% total revenue yield as a percentage of own principal balance to be sustainable. As of Q2, we are already at our total revenue yield target. In our unit economics model, we are targeting an 8% cost of funds and a 9%-11% annualized net charge-off rate to generate a 17%-19% risk-adjusted yield.
For Q2, we did report 8% cost of funds, but our charge-off rate of 12% was above the target rate, impacted by our average daily principal balance declining 8% year over year under our conservative credit posture. However, I wanna remind you again that if you remove the back book from our Q2 performance, the annualized net charge-off rate for the front book was 10.5%, already within our long-term target range. Our 14% risk-adjusted yield for 2Q '24 also included 2% of unfavorable non-cash fair value marks. Finally, assuming target operating expenses over the long term of 12.5% of own principal balance, we see a 3%-4% return on assets as attainable.
In Q2, we made progress towards this target by delivering a 13.8% adjusted operating expense ratio, while guiding to further cost reductions in the second half of the year. In summary, our adjusted ROE for 2Q 2024 was 4% in comparison to our 20%-28% long-term target. Here you can see the three key drivers we've identified to grow adjusted ROE from 4% to our 20%-28% long-term target. First, we're seeking to reduce our annualized net charge-off rate from 12% to 9%-11%, and expect to do so by eliminating our back book, driving ongoing performance improvements through the rollout of our V12 credit model, and prudently growing our loan portfolio by 10%-15% per annum over time.
Second, we're seeking to reduce our adjusted operating expenses as an annualized percentage of own principal balance from 13.8% to 12.5%. We're on our way to attaining that, as we said on our August 8 call, by achieving our $97.5 million GAAP operating expense target for the fourth quarter, maintaining our cost discipline with our simplified product portfolio into 2025 and beyond, and also benefiting from the tailwind of conservative portfolio growth and resulting scale. Third, we're seeking to reduce our debt-to-equity leverage ratio from 7.9-to-1 to 6-to-1. We expect to do so by continuing to allocate our free cash flow towards debt repayment, as we have in recent quarters, including our expected repayment of $38 million remaining on our corporate financing facility, secured by our securitization residuals, before the end of January.
We also expect to increase our stockholders' equity by returning to and maintaining GAAP profitability. I'm confident in our ability to make progress towards our 20%-28% ROE target over the next several years by executing on these key drivers. Raul, back over to you.
Thank you, Jonathan. To close, I'd like to emphasize three points. First, we're pleased with our second quarter performance and our momentum going into the second half, where we said on our August eighth call that we expect to generate Adjusted EBITDA levels that are over 70% higher than the first half, and to be markedly more profitable on an adjusted net income basis. Second, we further focused our business on our core competencies by agreeing to an LOI to sell our credit card portfolio, which enables us to focus on our three core products, and by forming a new lending collaboration with Western Union.
Third, we've made strong progress toward our long-term profitability targets by improving our credit outcomes, as evidenced by our front book generating a loss rate of 10.6%, which is already within our target 9%-11% range, and by reducing operating expenses a percentage of our own principal balance. With that, Brendan, Jonathan and I would be happy to answer any questions from you and the audience.
Great. Thanks, Raul and Jonathan. We can now open the floor for Q&A, and I wanna start at the Western Union partnership. I'm just curious as to how that evolved, how that relationship developed, and what are the ultimate benefits of that partnership for Oportun?
Sure. So, you know, we feel great about being able to establish that relationship and collaboration with Western Union, because in many ways, we see it as validation of the underwriting strengths and capabilities that we've developed over the years in the business. We made our first loan in 2006, so we have eighteen years of experience, right? We've been able to lend through different parts of the cycle and different economic climates. The way that this came together is Western Union did an RFP, so we had to compete with others in the space to demonstrate that, you know, we would be the best partner for them, and we were really pleased to be able to win that RFP process and be selected by Western Union.
In terms of what it represents, what we like about it is we'll be able to leverage Western Union's mobile properties over time, as we continue to work on the partnership, right? We have a plan to try to also increase our presence in their physical location, so that that way, we expand the top of the funnel. More people would be aware of Oportun, more people would consider Oportun, and we would therefore be able to turn more of those interested parties at the top of the funnel into disbursed loans, over time, so very, very early, right? Very much still the first inning, if you will, in terms of this collaboration, but we think it's an exciting opportunity.
... Got it, got it. That's helpful. I wanted to talk about the V12 credit model you mentioned, and as it relates to net charge-offs. What ultimately differs that V12 credit model from past models, and what were some of the changes implemented there?
Yeah, so, one of the ways to think about our risk engine is a little bit like, you know, the operating system on our phones, right? So there's both minor and major upgrades. So V12 represents the latest major upgrade in our risk engine, and we're excited about it for two reasons. Number one, we used the largest data set we've ever used to train the model, right? So as you can imagine, in this AI-driven world today, the more data that you feed a model, right, the better it's gonna be able to find some predictors of future performance. So, the fact that our risk team, our data scientists, our engineers, right, were able to give it the largest data set we've ever used, we think is very encouraging. Second, and more importantly, we were able to take data from this recent inflationary environment, right?
The environment that we've been in the last few years, where unemployment was low, but inflation was high and rates were high, right? No one's models in the space were trained on that kind of an environment. So being able to use also data from this recent inflationary environment, we think is one of the reasons why V12 has already outperformed for first-time borrowers, and why we're excited about the rollout that we're executing right now to use V12 for our returning borrowers.
Got it. Got it. And I wanna talk about the... Well, actually, we have a question from the attendees here, a timely question. What does a, you know, decline in the interest rate environment mean for Oportun and the outlook there?
Sure. So, over 80% of our debt is fixed rate, so that debt won't be impacted by the lower interest rate, but the remaining part is floating, and we'll certainly see a benefit there. The offset, though, is that we do receive non-interest income on our savings balances, and that will be lower. So it'll be about neutral, but in the long term, lower rates will benefit us when we come to market again and again with new term ABS, and we price at lower benchmark rates.
Got it. That makes sense. And I wanna touch on some of the the financial targets that you put out there, being I think you mentioned Q4 GAAP OpEx, as well as some adjusted EBIT, EBITDA targets. What are some factors or you know catalysts that might lead to significant outperformance or even underperformance of those targets?
Certainly when we think about OpEx, I'll start, Jonathan, and then I'll hand it over to you. When I think about OpEx, specifically, GAAP OpEx in Q2 was about $109 million. We shared that we have a target of $97.5 million for Q4, right? So from just a GAAP net income perspective, right, that's a pretty significant improvement in terms of being able to take out another $12 million, $11.5 million of OpEx out of the business as we get to the last quarter of the year. So we're excited about that. In terms of the other elements, right, where we're really focused on creating performance that gets us closer to the unit economics that Jonathan talked about, certainly losses, right? Continuing to have a downward trajectory in losses, especially when you look at it on a yearly basis, right?
There's a little bit of noise quarter by quarter, just based on the seasonality in these businesses, but we're encouraged by the performance of the front book, by the fact that the back book is declining, so we do expect that we'll continue to get closer and closer to those target ranges of 9%-11% over time, so that'll be one element, then the other one that we've spent time talking about is getting back to originations growth, right? Looking for those pockets of high-quality originations. To be able, in Q3, to get to roughly flat, right, that would be fantastic after six to eight quarters of year-over-year declines in originations.
That growth in the portfolio certainly helps with revenue over time. It helps with the reported loss rate, and I think that we'll start to get more of the leverage, if you will, from an OpEx perspective that again starts to translate to improved profitability. That's really what we're focused on, improving profitability to get to the ROA and ROE targets that Jonathan mentioned.
Got it. Got it. I'll finish up with one more question. As it relates to the credit card sale, I believe the target there is for that to close in Q3. How does that ultimately impact the company's cost of capital?
You know, I would say the credit card sale was very... The credit card portfolio was very small, right? It was, you know, less than 4% of our total assets. It's not going to change our cost of funds, you know, materially from what we've reported. It's positive from an Adjusted EBITDA standpoint. As we shared earlier in this presentation, we expect that Adjusted EBITDA will be $11 million higher next year due to the fact that we've exited this business line.
The other thing I would add, Brendan, just very quickly, you know, one of the things that we mentioned is we've been, you know, focusing the business on our three most profitable, most proven products. We launched credit card in December of 2019. We were excited about the business. You know, the early years were obviously a very different rate environment. The cost of capital was almost zero, in terms of just what it would've taken to go ahead and scale the business. As the Fed raised rates, we realized that it was going to be very expensive to scale that business, and that the best use of capital...
I know you asked about cost of capital and the shift in uses of capital, that the best use of capital was to drive growth in our unsecured personal loan products, secured personal loan products, or invest in cash, right? All of those contribute cash, all of those contribute to our profitability, and then, right, aside from growth, to use cash to pay down debt, right? One of the elements that Jonathan talked about in the unit economics is leverage, right? We wanna get back to about a six-to-one leverage ratio, so that's how we also thought about credit card. Not the highest and best use of capital, instead, we'd like to use capital to drive growth in our portfolio that is profitable, and to be able to use cash to pay down debt.
Great. That's very helpful. Thanks, Raul. Jonathan, thanks for your time as well. We'll conclude the presentation there. If anybody has any follow-up questions, feel free to reach out to Sidoti, or you can reach out to Oportun directly. Thanks everybody for your time.