Okay, hello everybody, and thank you for joining us today. My name is Brendan McCarthy. I'm an Analyst here at Sidoti, and I'm pleased to welcome Oportun Financial, who will present with us today. Leading the discussions from the firm will be CEO Raul Vazquez and Senior Vice President Dorian Hare. Before I hand it over, just a quick reminder: 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, I'm pleased to hand it over to Raul.
Thank you, Brendan. I want to say that we're pleased with how well you and the Sidoti team have come to know our business since 2022, when we first started attending your conferences. I also want to thank you for covering Oportun as part of your research as of last week. I also want to thank all of you in the audience for joining us today. As Brendan mentioned, I am Raul Vazquez, CEO of Oportun Financial. With me today is Dorian Hare, our SVP of Investor Relations. Jonathan Coblentz, our CFO, regrets that he can't join us today, as anticipated, due to a family situation. What I will be presenting today is our current investor presentation dated November 2024, 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 savings products to hardworking individuals.
We do so through our three core products that I'll provide more details on shortly. They are the unsecured personal loan product, the secured personal loans, and our award-winning Set & Save savings products. Our target market is comprised of thin file and no-file low to moderate-income individuals who are traditionally underserved by the financial services industry. Our customer base is both English and Spanish-speaking, and we seamlessly engage with them via our bilingual retail and contact center teams, as well as through our mobile app. To provide more details on our product set, let me start with the responsibly structured credit card products and specifically our unsecured personal loans, which are the primary focus since they are the largest and most profitable business within Oportun.
Our unsecured personal loans allow our members a fast and convenient way to address pressing financial needs, such as a need for car repair or a security deposit on an apartment that one of our members wants to rent. Our competitive differentiation in personal loans comes from our segment focus on underserved communities, our technology, our data, our AI-driven approach to underwriting, and the way we tailor our product to meet and exceed the expectations of our members. As you can see on this page, the average loan size over unsecured personal loans is just over $3,000. The average term is 41 months, and the average APR is 33.9%, which, as I'll discuss soon, provides a strong value proposition for our members. We're also continuing to roll out the plans to expand our secured personal loan product, which is secured by members' autos.
We are excited about the expansion of SPL because of its superior unit economics. Not only have losses run over 500 basis points lower for our secured personal loans through the first three quarters of this year, that's when we compare it to the unsecured personal loan product, but as you can see on this page, revenue is considerably higher because secured personal loans are over twice as large as the loans we make on an unsecured basis. The average loan size for our secured personal loans is just over $7,000, while the average term is 51 months and the average APR is 30.7%. 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 than our loans. We're also very proud of the fact that we've helped 1.2 million members establish a credit history and have saved our members $2.4 billion in interest and fees in the aggregate. So 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 value proposition driven by pricing, 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 the means most convenient to them.
For example, during 2023, 49% of loan applicants used more than one of our loan fulfillment channels. That includes our retail stores, our contact centers, and our mobile and digital channel as part of the process to complete their applications. It's also notable that 74% of applicants used our mobile or digital channel for at least part of their application, and for payments, in addition to our direct locations, Oportun offers tens of thousands of partner locations to our members for making a payment, and that includes various PayNearMe, MoneyGram, and CheckFreePay affiliated locations. Our savings product branded 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, and I'm proud that our savings product has helped members set aside, on average, $1,800 a year, which now means a total of over $11 billion in aggregate have been saved since the inception of the product. There's also a strong synergy between our credit and savings products. Savings allows us to maintain daily engagement with our members, even after they may have repaid their most recent credit product, while credit allows our members to meet unexpected needs that are greater than their savings.
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 the slide, have been: number one, improving credit outcomes, number two, fortifying our business economics, and number three, identifying high-quality originations, so first, on improving credit outcomes, we tightened credit in July of 2022 and executed multiple tightenings since then, including significant additional actions in December 2022 and further actions throughout 2023. This discipline has allowed us to make good progress on key credit outcomes. For example, our Q3 annualized net charge-off rate was 11.9%, which was 26 basis points better than the lower end of our guidance range. When measured in dollars, our quarterly net charge-offs have declined year over year for four consecutive quarters, in this instance by 6%.
And our 30-plus day delinquencies declined year over year for the third consecutive quarter, in this case to 5.2%. In order to continue this momentum, we've expanded the use of our V12 risk model, which was built on the largest data set we've ever used and included data from this inflationary period that we've all seen recently. So we've taken now the V12 risk model, and we're now applying it to applications from returning members. V12 was first implemented for new loans earlier in the year in January, and we're very pleased with the new loan growth that we've been able to drive and the improved loss rates compared to V11. Moving on to our second priority for 2024, we're also fortifying our business economics on both the revenue and the cost side.
Starting with the revenue side, I'm pleased that our Q3 risk-adjusted portfolio yield, which includes charge-offs, improved year over year by 56 basis points. We will continue to take actions to ensure that our new loans are appropriately priced for risk while remaining committed to our 36% APR cap. On the cost side, we reiterated during our earnings call that we will continue to reduce operating expenses by targeting $97.5 million for our Q4 GAAP operating expenses. That represents a 38% reduction from the OpEx levels in Q2 of 2022, which was when we started initiating significant cost reduction measures. We're pleased that our focus on improving business economics, which is part of our cost discipline, enabled our Adjusted ROE during Q3 to improve by over 1,000 basis points year- over- year.
Dorian will provide you with additional color on our progression toward our long-term 20%-28% ROE target, and finally, we remain intent on identifying high-quality originations, ensuring that we continue to lay the foundation for responsible growth. As you can see here, until Q3, we've had several consecutive quarters of origination levels that were markedly lower than the prior years. 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 momentarily, has given us confidence that we are making high-quality loans in this environment. I'm pleased that our 3Q originations of $480 million grew 10% sequentially, in line with seasonal patterns, and were virtually flat year over year while maintaining credit discipline.
We've also shared on our November 12th earnings call that we expect to return to growth with Q4 loan originations up approximately 10% year- over- year, and that we expect full year 2025 loan originations to exceed the levels of 2024. I'd like to spend more time speaking with you about our improving credit performance because our credit metrics are those most aligned with the overall performance of Oportun. The actions we've taken to improve credit are clearly paying off. The Back Book of loans on this slide 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. As you can see, the losses on our Front Book have been running approximately 400 basis points lower 12+ months after disbursement than losses on our Back Book.
Our Q3 vintage, which has now been on the books for 12 months, showed the lowest losses of any Front Book vintage as of our November 12th earnings call. Also, on our earnings call, we included a breakout of our annualized net charge-off rate for the third quarter by Front Book versus Back Book. In Q3, the Back Book had an annualized net charge-off rate of 23.7%, while the Front Book was at 10.4%, which is within the 9%-11% net charge-off range that we are targeting in our unit economics model, which Dorian will take you through. Before I turn it over to Dorian, I'd like to highlight that we've recently executed two key transactions that position us to finish this year strong and deliver an even better 2025. First, we closed the sale of our credit card portfolio on November 12th.
The transaction will be $2 million Adjusted EBITDA accretive during the fourth quarter and $11 million Adjusted EBITDA accretive for full year 2025. Second, on November 14th, we executed an agreement for a $235 million four-year senior term loan facility that replaced our prior corporate financing facility. This reflected a key milestone towards strengthening our balance sheet and enhancing our operational flexibility, thereby improving our financial results. I'd like to close by relaying to you our preliminary full year 2025 expectations, which we shared in October and reiterated on our November earnings call. They are diluted EPS between $0.25 and $0.50, Adjusted EPS between $1 and $1.25, and an annualized net charge-off rate between 11% and 12%.
I'm proud of how the team executed in Q3 and pleased that with the credit card sale and refinancing behind us, we can turn our focus towards a strong close to 2024, then significantly improve our profitability and credit performance in 2025. With that, I'll turn it over to Dorian for a financial review.
Thanks, Raul. As Raul mentioned, we're pleased with the progress demonstrated by our third quarter results, and we're looking to carry that positive momentum into the fourth quarter and into 2025. Total revenue of $250 million declined by 7%, driven principally by a 7% decline in our average daily principal balance under our conservative credit posture. Interest expense of $56 million was up $9 million year- over- year, primarily driven by an increase in our cost of debt to 7.8% versus a 6.3% in the year-ago period, reflecting the higher rate environment.
Net revenue was $63 million, down 26% year- over- year, primarily due to total revenue, the total revenue decline, non-cash mark-to-market on our ABS notes, and higher interest expense. Turning now to operating expenses and efficiency, we continue to see the benefits of our expense reduction initiatives. Our $102 million in total operating expenses in Q3 reflected a 17% decrease from the prior year period. We recorded an Adjusted Net Income of $1 million, a $13 million improvement compared to the prior year quarter, and Adjusted EPS of $0.02, up 33% versus last year. The improvement was principally driven by our sharply reduced cost structure. Adjusted EBITDA, which excludes the impact of fair value mark-to-market adjustments on our loan portfolio and notes, was $31 million in the third quarter.
This reflected a year-over-year increase of $17 million, or 117%, driven also by our sharply reduced cost structure along with lower net charge-offs on a dollar basis, partially offset by higher interest expense. Our third quarter Adjusted EBITDA performance exceeded the high end of our guidance range by $5 million, primarily on lower than anticipated charge-offs. I want to take a moment to emphasize that our Adjusted Net Income provides a future run rate of our GAAP net income by removing non-recurring items in the mark-to-market on our ABS notes, which will almost be entirely gone after 2025. As you can see on this slide, we would have been GAAP profitable on a year-to-date basis, excluding non-recurring and non-cash impacts relating to the fair value marks on our ABS notes, the write-down of our credit card portfolio triggered by our agreement to sell it, and other non-recurring charges.
Similarly, for the third quarter, our GAAP net loss was $30 million, driven by the $35 million non-cash mark on our ABS notes. Regarding our capital and liquidity, net cash flows from operating activities for the second quarter were a record $108 million. As of September 30th, total cash was $229 million, of which $72 million was unrestricted and $157 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 $483 million in available funding under our warehouse lines and remaining whole loan sale agreement capacity of $24 million. During the third quarter, we closed two new committed personal loan warehouse facilities totaling $552 million.
We also executed a new $223 million ABS transaction that was seven times oversubscribed and priced at an 8.0% weighted average interest rate, consistent with our unit economics targets, and in October, we facilitated a securitization of our whole loans purchased by Castlelake, which priced at 7.27% weighted average interest rate. While the only economic opportunity we'll receive from the latter ABS transaction is a servicing fee, the further tightening of credit spreads for ABS backed by our loans should benefit us in the future. We expect the corporate debt refinancing that closed last month will improve Oportun's operational and balance sheet flexibility. We're also committed to deleveraging, which we believe is in the best interest of shareholders.
At closing, we repaid our residual financing facility, which had a $22 million outstanding balance at the end of the third quarter, and we agreed to our requirement to pay down without prepayment penalty at least $40 million under the new term loan facility by January 31st, 2026. We also have the option to repay without prepayment penalty an additional $10 million under the new term loan facility at any time, and another $10 million after the first anniversary of its closing. The required amortization, combined with the voluntary penalty-free prepayments, will allow us to reduce our corporate debt balance to $175 million prior to the two new term loans' maturity. Given that we consistently repaid $5.7 million of corporate debt every month this year leading up to the refinancing, we are confident in our ability to continue to delever over the next two years.
Before handing the call back to Raul, I'd like to update you on the progress towards our long-term unit economics targets. While the long-term targets are GAAP targets, I'll be using adjusted metric actuals for comparison since they remove non-recurring items and provide a better sense of the future run rate. We made solid progress in Q3, as evidenced by our 11 percentage point year-over-year improvement in Adjusted ROE, driven principally by cost reductions. And here you can see how we will continue to focus on improving our credit performance, reducing expenses as a percentage of own principal balance, and reducing leverage on our journey to reach our 20% to 28% ROE target. Raul, back over to you.
Thank you, Dorian. To close, I'd like to emphasize four key points.
First, we're pleased with the progress demonstrated by our third quarter performance and the momentum we've built to have a strong finish in 2024. Our November 12th guidance implies that we will generate second-half Adjusted EBITDA levels at the midpoint that are almost 90% higher than the levels from the first half, and we will also be markedly more profitable on an Adjusted Net Income basis. Second, with the completion of the credit card sale and refinancing of our corporate debt, we see no impediments to the full recovery of our business. Third, our momentum is quite strong heading towards 2025, where the preliminary expectations we reiterated on our earnings call indicated that improved credit performance, ongoing cost discipline, and a return to originations growth will enable us to generate $1-$1.25 in Adjusted EPS and an Adjusted ROE in the teens.
And finally, I want you to be aware that our strong confidence in Oportun and the company's prospects is exemplified by the stock purchases that Jonathan and I both made in late November, which are reflected in Form 4 filings that are now visible to all of you. With that, Brendan, Dorian and I would be happy to answer questions from you and the audience.
Great. Thank you, Raul and Dorian. We appreciate the overview. We can open the floor for Q&A now. We have a couple of questions here from the attendees. Start off with a fairly common question here, but do you anticipate any business benefits or impacts from the incoming Trump administration?
You know, we don't. I think, if anything, the new administration is seen as being a positive for the financial services industry.
So we saw a lift in the stock, as did others, right, when the results of the election came in. So we see it as a net positive.
Got it. And then I have a couple of questions here on the company's marketing strategy. Can you just discuss your distribution strategy, general marketing, and branding efforts? And maybe you can tie in any comments on the partnership, the lending partnership with Western Union.
Yeah. So the partnership with Western Union is still in its very, very early phases, but it's something that we're very excited about. We won an RFP process that looked at other lenders in the space, and we see it really as validation for the strength, right, of our underwriting and the strength of just how we go to market. The way we go to market, you'll see in the presentation, is really a combination of channels.
We go to market through our retail locations. We've got 129 of those. We also have a contact center. Thank you, Dorian. So you see here both how we go to market and the percent of originations that are driven by each channel. So our 129 locations, as well as lending as a service partnerships like Western Union, generated about a third of our originations. The contact centers, think of those as low-cost contact centers in Mexico. We showed at the beginning we're able to serve our members in both Spanish and in English throughout the entire process. So having contact centers in Mexico makes a lot of sense, and that's about 40% of our originations, a bit higher than that at 43%. And then 23% of our originations are from our mobile and our digital channels.
We're happy to serve members in any of these channels or through a combination of the channels.
Got it. That's helpful. And looking at the profitability metrics for Oportun, how can investors think about the impacts of changes in the interest rate environment on the company's income statement, as well as is the company committed to their current APR limit, or is that under consideration to be changed?
Yeah. So in terms of the APR limit, we do think that that limit continues to make sense, right? 36% is a bright line. Above that is considered to be very, very high cost and can gain the attention of regulators, legislators, and consumer advocates that we don't think is beneficial to the business.
In addition to that, the partnership that we've got with Pathward comes with a 36% APR cap, and that's been a partnership that's been really good for the overall business. So we think that the cap actually is the right pricing limit for our business.
Great. And maybe you could discuss the capital allocation priorities for Oportun. I know you mentioned a strong cash flow from operations generated in the past couple of quarters. Where does debt pay down ultimately fit in there, and has the company ever considered repurchasing shares just given the low P/E ratio?
Yeah, that's a great question. So we mentioned in our comments that one of the things that we want to do is we want to continue to pay down debt. We think that that is in the best interest of the company, is to go ahead and lower the leverage.
As Dorian mentioned in the unit economics slide, one of the things that we are looking at is getting to a target of six to one in terms of debt to equity. Right now, that's about 8.7 to one. So we do want to pay down debt in the coming year. We've got planned paying down about $60 million in corporate debt that we can do without any penalty whatsoever. That'll get us to that six to one target rate. And at that point, I think we could look at what do we want to do with excess cash and potentially look at something like buying down equity, or I'm sorry, buying back stock.
That makes sense. That makes sense. Maybe we could take a step back and look at the addressable market.
I assume it's been on the increase just given the impacts of inflation, but how do you estimate the addressable market, and maybe you can tie in a discussion on member growth and your outlook there.
Yeah, we think we still have a tremendous opportunity in front of us. One of the ways that we look at things is we think about what percentage of the U.S. population might we be able to underwrite. We don't share that number publicly, but we think that there's still a tremendous growth opportunity for us. As a reminder, I talked earlier about the Pathward partnership. That started in late 2021. We entered 30 states for the first time in late 2021, and then when macro changed, we stopped marketing in a lot of those states. We think there's still 30 states where we have a tremendous growth opportunity in front of us.
I don't really worry about demand. I think there's still a robust demand for our product and a robust market opportunity in front of us.
Great. And looking at origination growth, how can investors think about origination growth going forward? I know you mentioned bright outlook for the fourth quarter of this year, but maybe beyond that in 2025 and 2026.
Yeah. So originations, we'd like to see it grow at about 10%-15% a year so that that way we can be growing our own portfolio at 10%-15% a year. We think that growing at those rates allows us to have much more predictability in terms of the losses that we report as a business.
And going back to the demand question, Brendan, when years are good and we can grow beyond that, right, we'll just sell the excess. We know there's a very healthy market for the high-quality loans that we make, right? We've had buyers like Neuberger and Castlelake over the years, as well as other buyers that have bought our loans. So we think that we can go ahead and grow at 10%-15% sustainably for many years, and then really work with partners to own any growth opportunity beyond that. We think we're well on our way, right? Q3, as I described earlier, was flat year over year from an originations perspective. We shared that we think Q4 growth can be 10%, and then we'd like to kind of keep that growth momentum going into 2025 and 2026.
Got it. And we have a question here on the underwriting model and how the technology infrastructure plays a role at Oportun. Maybe you can discuss the underwriting model. And as a follow-up, do you anticipate any technology investment needs if origination growth were to meet your targets?
Well, we're very committed to staying lean from an OpEx perspective. So we've shared that the target for Q4 is $97.5 million, and then we'd like to use that exit rate as kind of the target for next year and even try to look for additional opportunity to lower cost and really use any of those additional savings to fund the marketing improvements, I'm sorry, the marketing increases that are going to drive our growth, right? But we're not looking to make additional investments in technology. Technology is a big part of the underwriting.
So we've been using machine learning models for our underwriting, for our marketing, for our collections, for retail locations. We've been using sophisticated models throughout the business. And just as a reminder from an underwriting perspective, anyone that comes to us gets what's called an Alternative Data Score. It doesn't matter if you've worked with us once or if this is a fourth or fifth time. The Alternative Data Score is built with data that is outside of the bureaus, and we bring all of that data in and we create a score. Number two, we look in the bureaus, and if you have a score, we'll use the score as well. So that's the second element that we use. Number three, when we look in the bureaus, we actually pull all of the raw data and we create our own proprietary score based on what's in the bureaus.
And then number four, we use a bank transaction model. That's a new score that we've been developing based on what we see in someone's bank account when they give us permission to connect to their bank account. So those four scores, right, as you can imagine, give us very different views of the applicant. They are complementary to each other. All of them is a slightly different lens. Each of them is a slightly different lens, and they help us make decisions about whether or not we're going to approve someone and how much we will lend. One of the things that's helped us improve performance this year that I alluded to briefly is V12. V12 was introduced for first-time applicants in January. We're thrilled with the results. So we've introduced it now for the returning applicants. In October is when we introduced it.
70%-80% of originations go to returning applicants. So the impact, if you will, on our business is going to be even more pronounced now that we're using it for returning applicants.
That's great. That's very helpful insight. We'll conclude the presentation there. I want to thank you for the overview and the information, and thank you, everybody, for attending. I know there may have been some questions we missed out there in the Qbank, but feel free to reach out to Sidoti. You can contact myself or you can reach out to Oportun directly. But Raul and Dorian, thank you very much again.
Thank you, Brendan. Thank you, everyone, for attending today.
Thanks, everybody. Take care.