Q2 2020 Oportun Financial Corp Earnings Call
[music].
Good afternoon, and welcome to be Opportune Financial Corporation second quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question answer session.
Today's call is being recorded.
For opening remarks introductions I'd like to trickle over to Neil's Erdman, Vice President Investor Relations Mr. Urban you may begin.
Thanks, and good afternoon, everyone. Joining me today to discuss opportune second quarter 2020 results, our role Vasquez, Chief Executive Officer, and Jonathan Cobot, Chief Financial Officer, and Chief administrative officer.
Before we get started let me remind you that some of the remarks made today will include forward looking statements actual results may differ materially from those contemplated or implied by these forward looking statements, particularly given the uncertainties caused by the cold and 19 pandemic. Let me caution you not to place undue reliance on these forward looking statements a more detailed discussion at the risk factors that could cause these results.
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 most recent quarterly report on form 10-Q, and our annual report on form 10, K. any forward looking statements that we make on this call. It based on assumptions as of today and we undertake no obligation to update. These statements is result of new information or future.
Thats.
Also on today's call, we will present, both GAAP and non-GAAP financial measures, which we believe will provide useful information to investors regarding our financial condition and results of operation a reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our second quarter 2020 financial supplement and the appendix section of the second quarter 2020 earnings presentation, all of which are there.
A little on the Investor Relations Web site at Investor Day Opportune Dotcom. In addition, this call is being webcast and an archived version will be available after the call on the Investor Relations portion of our website with that I will now turn the call over durable.
Thank you Neil and thanks to everyone on the webcast and phone line for joining us this afternoon.
Thank you your loved ones your friends and colleagues continue to be well.
On a previous earning Paul I highlighted be proactive measures. We were taking in response to the pandemic to navigate this challenging environment.
Im pleased to say that because of these proactive measures we have been successfully managing through this critical period under a second quarter's performance demonstrates the benefits of our significant investment in technology risk analytics and data science as well is the strength of our omni channel network.
Despite the impact of the pandemic, we generated 143 million of total revenue and 4.8 million of adjusted EBITDA for the second quarter.
And while improvements in the prices of our bonds for beneficial for our ability to access funding at an attractive cost of funds. The short term impact on our fair value marks broke down or net change in fair value, which weighed on our net revenue and EPS.
Jonathan will share the details of our second quarter financials, but before that I'd like to talk about how we plan to return to growth, while maintaining a thoughtful approach to underwriting.
As I outlined in may or three near term focus areas are.
First managing for good credit outcome.
Second continuing to serve our customers.
And finally, maintaining or capital and liquidity.
I will now go through each of these in a bit more detail.
Starting with credit by creating new payment and collections tools as well is focusing on helping our customers manage hardships. They may be facing many of our customers have emerged from deferral and delinquency status and return to repayment.
Among others. The tools. We've developed include one click SMS deferral.
Reduced payment plan process here that can take place entirely online and enhanced use of social media outreach to customers.
The goal of our collections process each has always been to contact our customers understand their situation and try to help them repaid or debts, if they can or getting to the right hardship program. If we need more time to get back on their feet.
Our efforts in processes have been working as evidenced by the percentage of our portfolio in deferral and the rate of delinquencies both of which have been improving month over month.
At July 31st our deferral percentage had declined to 3.9% as compared to 5% at June Thirtyth in 30, plus day delinquencies rate declined to 3.4% as compared to 3.7% at June Thirtyth.
At the same time, we're pleased with the loans we have originated since mid March because the credit performance of these new originations had been trending better than 2019 levels in our portfolio performance prior to the onset of the pandemic.
These results are a testament to the competitive advantage, we have built through our proprietary underwriting models in technology platform and Jonathan will walk through more details during his portion of our presentation.
Shifting to serving our customers one of the ways. We measure the success of our mission is the amount of capital we have deployed in the low to moderate income communities we serve.
Because of the positive credit performance on post pandemic loans, we gradually began increasing our approval rates in mid June with a particular focus on increasing approval rates for our returning customers.
In addition, we further refined our marketing efforts through the increase of our digital initiatives and optimization of direct mail.
As a result, our originations in July grew 24% month over month and relative to last year. Our July originations were down 54%, which is an improvement over June when originations were down 60% year over year.
We continue to monitor the external environment and intend to adjust approval rates verification procedures and loan sizes as needed.
Some of our borrowers may have benefited from government stimulus, an incremental unemployment benefits and while the decrease or elimination of ongoing stimulus may impact borrower repayment behavior I'd like to point out the following.
First we know our customers are very resilient and are able to take the types of jobs that are still available in today's economy.
Second we demonstrated our ability to adapt our servicing processes to manage credit performance.
And finally, because our customers have had limited access to credit we know that they generally have few outstanding debts and de prioritized opportune highly in their payment hierarchy.
Moving on to capital and liquidity our position remains robust during this protracted downturn.
We continue to have more than 12 months of liquidity runway without accessing the securitization market due to our well established and diversified funding program and we intend to continue the prudent management of our liquidity position over the coming months.
While it is crucial for us to continue to be judicious in our underwriting and conservative and maintaining our liquidity runway. Our current strategy also optimizes for a return to smart sustainable growth.
We believe there are opportunities for us to accelerate our strategic plans, including geographic expansion optimization of our Omnichannel network investments in our personal loans in new products.
Further refinement in application of our data and technology tool set and responsible growth.
Consistent with our growth objective today, we announced that we have signed a letter of intent to form a strategic partnership with deluxe dollar Express.
The purpose of the partnership is to make the origination disbursement and servicing of opportune loans available to consumers at deluxe is more than 500 locations throughout the us.
Subject to appropriate regulatory approvals, we expect the partnership to be finalized in the next few weeks with an initial rollout anticipated in the fourth quarter.
We believe this partnership with all ex will significantly broaden our reach and critical markets across the US and is a testament to our leadership position in lending to low to moderate income consumers.
Look forward to providing more details about this exciting initiative as we continue to develop our launch plans.
Another key area of growth for us has been the opportunities or credit card issued by what bank over the past several months, we've continued to expand or geographic presence through the marketing of the credit card in multiple states that are outside of our personal loan footprint.
As you'll see on page four of our earnings presentation deck. Since may we've expanded our footprint to include 10 additional states, bringing our total credit card footprint to 19 state and across all opportune products. We now serve customers in 29 States. We plan to continue our expansion of the opportunities for credit card.
On a methodical basis.
For auto we soft launched our secured personal loans in mid May we are still in the very early stages of testing the product in our gathering valuable data and feedback based on preliminary results for the time being however, we have pushed back or timetable for auto expansion to allow our technology and operations teams to focus on pending.
I think related enhancements to our customer service and collections tools as well as the new partnerships that we've announced today.
We continue to be very committed to auto and our roadmap for the year includes enhancements based on our preliminary results. We believe that secured personal loans will be an excellent complement to our unsecured product and will provide us with the opportunity to serve more customers and offer larger loans.
By executing on partnerships and new products, we are setting the stage for our business to generate additional long term and sustainable growth opportunities.
Before turning the call over to Jonathan I'd like to take a moment to discuss the announcement, we made last week regarding two changes to our operations.
The two changes will improve the way in which we function is a business and I believe they will also have a meaningful impact on our customers and the communities we serve.
Last week, we announced that we announced that we will be implementing an all in a PR cap of 36% for all newly originated loans nationwide in other words, a straightforward and transparent 36% Aer cap.
No ancillary products.
This decision is consistent with our mission it represents an even better way to serve our customers in the current environment and it is an accretive business decision.
Additionally, capping graveyards at 36% will increase conversion rate for previously higher price to customers and it will expand the marketing channels and partnerships available to us such as the don't fix announcement I mentioned earlier.
Our decision to cap our rates has long been an aspiration and it dispelled the notion that small dollar lending to low and moderate income consumers requires a PR is about 36% or ancillary products.
In addition to the business benefits that we anticipate an all in 36% HCR rate cap further enhances our regulatory friendly business model.
Our engineering marketing and product teams worked extremely hard to quickly rollout the pricing change and I am pleased to say this change went into effect on newly originated loans. This morning.
While our growth and created the opportunity to reduce our Nprs. It is also brought about a challenge related to our small claims collections practices, which was the second part of the announcement, we made last week.
As I outlined on our blog up until now we have used the small claims legal process as a mechanism of last resort to reengage with a small minority of our customers who have fallen behind in their payments and non answered or call letters tax board emails for several months.
In the current environment. However, we recognize that any legal action represents a stressful escalation even for the small minority of impacted customers.
We made the decision to substantially reduce our legal collections, including dismissing all pending small claims cases, suspending all new filings and committing to reduce our future filings by more than 60% from current levels.
We believe that we are now well positioned to be able to significantly reduce this method of collections and generate minimal impact on net charge offs moving forward.
As we continue to provide affordable unsecured loans court collections remain a necessary tool of last resort, but under the present difficult circumstances. We believe this approach better reflects what we are and is more consistent with the relationships we have built with our customers.
We remain cautiously optimistic that as the economy recovers, our unrelenting and proactive efforts in navigating through this period will place us in the best possible position to grow our business extend our products to more customers across the us and generates significant value for our shareholders.
I'll now turn the call over to Jonathan who will walk you through a more in depth discussion of our second quarter financial results and then we'll open the line for your questions. Jonathan Thanks travel and Hello, everyone. In addition to GAAP. We also evaluate our performance based on fair value pro forma results, which we believe presenter more consistent.
Few of the underlying trends of the business.
Unless I state otherwise all of the metrics that I will now share with you will be on a fair value pro forma basis for the purposes of comparison to prior year periods, a full list of definitions and reconciliations can be found in our earnings materials as Raul mentioned, a moment ago, we experienced steady improvement throughout fiscal.
Peter and that has continued into the current quarter. So I'll start by providing a summary of our second quarter results and I'll also discuss some recent trends and insights from the month in July.
We experienced a reduction in loan applications in the second quarter and as part of our disciplined response to the pandemic, we tightened our underwriting criteria, both of which led to lower originations our aggregate originations of $157.6 million for the second quarter down 67 per se.
Sent from the prior year period showed steady improvement month over month.
As we experienced a gradual improvement in the overall economic environment, we increased our credit decisioning. Accordingly, so that by the end of June loan originations had increased 46% as compared to May for July our aggregate originations were $85.3 million an increase of 24 per se.
And over the month of June now during the year over year declined to 54%.
On both a GAAP and a fair value pro forma basis total revenue for the second quarter was $142.7 million up slightly relative to prior year quarter.
The increase was primarily due to higher interest income during the period.
Our interest income for the second quarter increase to $136.1 million up 5% year over year, while our managed principal balance at the end of the period grew 3% over the prior year quarter to $1.9 billion.
We achieved this level of growth despite a decline in our portfolio yield from 33.4% in the second quarter year ago to 31.5% for the most recent quarter.
Noninterest income, which includes cash gain on sale from our whole loan sale program decreased 48% to $6.6 million. The decrease reflects the lower volume of loans sold primarily attributable to the reduced level of originations as well as a lower gain on sale premium of 10%.
Versus 10.2% in the prior year period.
For the second quarter net revenue, which is our total revenue after interest expense in that change in fair value was $36.9 million down 62% year over year.
Net revenue was impacted due to changes in the fair value of our loan portfolio and asset backed notes.
Interest expense of $14.9 million was up 4% year over year. The higher interest expense was driven by an increase in our average daily debt balance of 14% year over year, our cost of debt decreased to 4.2% in Q2 relative to 4.3% in the same period a year ago.
Go.
Net increase or decrease in fair value or net change in fair value includes our current period principal net charge offs and mark to market on our loans and debt. We provide a summary of the net change in fair value in our earnings presentation deck.
As you'll see on page 11 of the presentation. The second quarter $90.9 million net decrease in fair value consisted of a 45.2 million dollar mark to market decreased on our loans in our debt and current period charge offs of $45.7 million there.
Mark to market adjustments consisted of a $108.2 million mark to market decrease related to our asset backed notes and a 63.1 million dollar mark to market increase in our loans receivable.
Let me take you through the drivers of our fair value marks in greater detail, starting with our asset backed notes.
As of June Thirtyth, the weighted average price of our asset back notes was 98.7% up from 90.5% at March 30, Onest, reflecting a significant improvement in the prices of our bonds, while the increase in the fair value of our bonds resulted in a 108 point.
2 million dollar decrease in net change in fair value and net revenue the prices are positive indication of the conditions and accessibility of the capital markets.
The 63.1 million dollar increase in fair value on our loans receivable was driven by a quarter over quarter increase in the fair value price of our learns from 96% as of March 30, Onest to 99.4% as of June Thirtyth.
The increase in fair value was mainly driven by three factors.
First consistent with the weighted average decreasing yield of our bonds the discount rate on our loans decreased from 12.78% as of March 31% to 8.84% as of June Thirtyth second due to more customers returning to repayment our remaining life of loan charge offs do.
Decreased from 14.56% at March 31% to 12.73% at June 30, and third fewer than expected emergency hardship deferrals resulted in a decrease in average life from 0.9 years as of March 31 to 0.8 years as of June Thirtyth.
We provided some additional supplemental information regarding our fair value assumptions at the end of earning stack.
As part of our response to the pandemic, we have taken deliberate actions to reduce our expenses among others. These actions included limiting hiring to critical roles, reducing marketing expenditures and optimizing our retail network, which resulted in the closure of several retail locations as of July 30, Onest, We had 334.
Retail locations across the us, although we are actively reducing discretionary spend across the company. We have continued to protect the health and safety of our customers and employees and as incurred $2.4 million and covered 19 related expenses in the second quarter.
Our operating expenses for the second quarter were $93 million up 12% over the prior year, but down 6% sequentially from the first quarter in comparison from the first quarter to the second quarter in 2019, our operating expenses increased 6% on.
Operating costs associated with the our auto and credit card products, which are included in our overall opex were $4 million for the second quarter.
These investments contributed to our year over year Opex increase while we were able to decrease opex sequentially lower revenue in the second quarter led to adjusted operating efficiency of 60%, which was 290 basis points higher than the comparable quarter last year and 260 basis points.
Higher than the first quarter 2020.
Our customer acquisition costs for the second quarter was $413 up from $136 in the prior year quarter.
The increase impact was driven by the decline in loans originated during the quarter.
Our overall marketing investments were reduced in order to redirect our efforts to manage credit risk as growth in originations increased in June tax decreased to $298 for the month.
Our effective tax rate was 27% for Q2, which was consistent with our tax rate in the prior year period.
Our effective tax rate held constant despite our net loss from operations, which on a GAAP basis was $34.2 million versus net income of $13.8 million in the prior year quarter.
This equated to a GAAP net loss per share of one dollar and 26 cents versus diluted earnings per share of 52 cents in the prior year quarter. Our adjusted net loss per share was one dollar and 29 cents based on an adjusted net loss of $35.1 million versus.
Adjusted EPS of 50 cents and adjusted net income of 10.9 million in the prior year quarter.
Adjusted net income or loss is the numerator of our adjusted return on equity, which was negative 29.9% for Q2 versus 11.7% in the prior year quarter overtime. We believe this metric should improve and post pandemic. Our long term goal remains to achieve a high teens are we on a consolidated basis.
Given the impact of the fair value marks on our bottom line. We believe it continues to be very valuable to use adjusted EBITDA as a proxy for our pre tax cash profitability.
In addition to adding back taxes depreciation amortization stock based compensation in onetime events. Adjusted EBITDA also excludes the noncash impact of fair value accounting.
For the second quarter, our adjusted EBITDA was $4.8 million compared to $19.9 million in the prior year quarter.
As Raul mentioned earlier, our credit performance has shown notable improvements month over month, we've seen a significant decline in deferral requests over the quarter relative to the peak levels. We saw toward the end of April at the end of June 5% of opportunities portfolio was in emergency hardship deferral status.
Down from 14.6% at the end of April this trend continued into July and our deferral levels as at the end of the month were 3.9%.
Coupled with this positive trend is a reduction in our 30 plus day delinquency rate as of June 30. This rate had decreased to 3.7% down from 4% at the end of both April and May at July 31, 30, plus day delinquencies improved further to 3.4% early stage drilling.
Quincy's has similarly declined with eight to 14 day delinquencies in 15 to 29 day delinquencies of 1.8% and 1.9% respectively. At June 30, as compared to 1.9% and 2.8% respectively at May 31.
As of July 30, Onest fees early stage delinquency measures improved further to 1.5% and 1.8% respectively. We regard this positive trend as an indication that our customers are currently managing through the crisis and returning to repayments status.
Our annualized net charge off rate was 10.6% for the second quarter up from 8.9% for the first quarter ended March 31, consistent with our charge off policy reevaluate our loan portfolio in charge off alone when redetermined at to be uncollectible or when it is 120.
Days contractually past due.
Based on our analysis of historical loan performance following natural disasters and other emergencies more of our pre pandemic loans originated we're determined to be uncollectible prior to reaching 120 days past.
This led to a $4.1 million of additional charge offs in June increasing our annualized net charge off rate by 96 basis points for the second quarter, we expect elevated levels of charge offs to continue in 2020, but to be manageable.
In July our annualized net charge off rate increased to 11.9% with $4 million of additional charge offs, a 290 basis point impact.
Turning now to capital and liquidity, we continue to manage our funding program to maintain liquidity runway of at least 12 months as of June 30, total cash was $198 million comprised of cash and cash equivalents of $139.2 million and restricted cash of 58.7.
$1 million.
As of our as of July 30, Onest, our total cash decreased to $165.8 million largely reflecting the call of our 2017 be securitization, which was partially funded with $51 million our unrestricted cash.
To evaluate our liquidity. It is also valuable to look at our cash flow statement. Adjusted EBITDA includes the impact of charge offs, but charge offs are a noncash event for the second quarter, our cash flow from operations was 49 $41.9 million as compared to 51 point.
$5 million for the prior year period.
As of July 31, we had $176 million of Undrawn capacity on our 400 million dollar warehouse line that is committed through October 2021, we have continued to transfer certain loans from our warehouse line to pledge to our Securitizations until we see a return to receivables growth we will not.
Need to increase our warehouse line capacity or issuing new securitization.
This week, we elected not to renew our agreement to sell the access loans that we originate we previously had sold these loans at a slight discount to par instead, we will retain any access loans, we originated in the future and we'll continue to service the portfolio of existing access loans, we expect this choice.
Range to have an immaterial impact on our business.
As of the ended the second quarter, we had adjusted tangible book value of $429.8 million or $15.73 per share, reflecting our loss of $40.9 million for the quarter.
In addition to having a strong equity capital base, we run our business at low leverage our debt to equity ratio was 3.1 times a reduction of from 3.6 times the prior year.
Turning now to our financial outlook.
We anticipate that our future performance will continue to be impacted by the pandemic.
The timing and magnitude of this impact remains uncertain. So we will not be providing specific guidance at this time for either 2020 or 2021.
Like growl I'm very excited about the announcements we made regarding the implementation of a 36% PR cap and the changes to our legal collections process.
Although we currently expect to 36% a PR capital ultimately reduce the portfolio yield by 70 basis points over time as the old portfolio runs off we believe that tapping our rates will be accretive to earnings we anticipate that we will be able to attract more customers with lower pricing.
And our 36% PR cap will be compelling to potential partners and organizations that seek to serve our customers separately. We believe that the changes we announced two our court collections process combined with enhanced customer outreach tools will result in approximately 15 basis points of impact to our annual.
Net charge offs.
Taken together however, we believe these initiatives create an increased opportunity for growth.
That concludes my remarks, and I will now turn the call back over to Raul. Thank you Jonathan the external environment continues to be challenging, but we're confident that our high quality team and technology platform will enable us to advance our strategies and identifying new growth opportunities like the doley partnership we announced today.
We are grateful for the support of our shareholders and we remain committed to the creation of sustainable long term value and competitive advantage.
Thank you all for your time and now we welcome your questions and comments operator.
Thank you enough came ducking. Your question answer session. If you like facing the question Q. Please press star one under telephone keypad, a confirmation told would indicate your line is in the question Q you may Prostar, two or three lecture will that question for the Q for participants using speaker equipment, it may be necessary to pick comprehensive.
Before proceeds star one one moment, please what we pull for questions.
His question today is coming from Merck degrees from Barclays. Your line is allies.
Yes. Thanks.
Could you talk a little bit more about timing of the Deutsche partnership in the rollout.
Products and also just you know.
Philosophy around what is the right time to be kind of launching adjacent products.
Sure. So I'll start with the timing Mark so from a timing perspective, there's still some regulatory approvals that we need to figure out.
But we expect to be able to get those things nailed down in the next few weeks and then the rollout which started in Q4 in terms of additional products just to be clear. It is our unsecured consumer installment loan that we're going to be offering through their locations. So we did the exact same product that we use today with the exact same.
100% centralized 100% automated risk engine what makes it so exciting for US is we look at the footprint that don't like has.
Kind of coast to coast, and we think about the opportunity to get these additional distribution mechanisms and points of presence in a lot of communities.
And leveraging all of the investments that we've made in the risk engine. So we don't see this as an additional product we see it as an additional channel for our business.
Got it and then.
Next question and I appreciate it is kind of non operating noise, but as we think about kind of the fair value marks.
During the quarter Jonathan.
What are the the prices now all of your ABS compare to where they were kind of pre pandemic and how much more negative mark could you yet if those kind of revert to.
To where they were.
So everyone's bag.
Thats a great question Mark Thank you and on AD page 11 of our DAC, we actually laid out the fair value marks and if you take a look at.
To to 19, which was Anna in a good economy.
The overall price of our fair value bonds was 101.6%.
Settle out we announced that add June thirtyth, our fair value Mark on our bonds was 98.7%. So if we get back to a fully normalized market.
Obviously, we could see Oliver bonds collectively.
Being above par our senior bonds are already on trading above par right now.
Okay Thats helpful. Thank you.
Thank goodness question today's can you from John Hecht from Jefferies. Your line is allied.
Thank you guys I guess sticking along the liability discussion.
Just sort of as you move toward maturity, assuming you'll pay off the notes at par do you caught back that's fair value.
Right up overtime.
That's a that's a great question John so.
Yes, one would assume that as we approach the under the revolving period and potential call dates.
That regardless of market conditions that the bonds should converge to par that's certainly what we've seen in past markets.
And then.
Yes, let me just thinking about benchmark rates in this that I mean, it's is it.
Is it fair statement just to say the residual risk of a right up in their liabilities has very low at this point in time going forward.
I think there is some risks still but obviously I'm certainly not the amount that we saw this quarter right. We saw aramark improved from 90.5% to 98.7%.
As the markets at normalized after significant dislocation.
So I.
I can't speculate on where the markets will trade or be trading as of September thirtyth or December 30, Onest, but clearly the magnitude is very different remember also.
As.
Rates and yields improve.
Which drive prices and the bond market, we look to that as a reference for how we are mark our.
Asset backed loan or excuse me, our fair value loans as well right and as you saw.
The discount rate improved and so that'll be a factor as well overall.
Okay, and then and then you guys. Specifically you noted that in essentially pulled forward some higher risk late stage delinquencies and charge offs buckets. This quarter net yes, you'll be doing that for the near term, but as a way to interpret kind of the forward book of credit is generally healthier than.
You would have expected see three months ago, because of payment rates and lower delinquencies.
But that near term charge offs might have a little bit of elevation relative to where they would have been just because you're creating out those riskier accounts given like the typical poster emergency state of affairs.
I think thats, a very good way to think about it John I think thats accurate and actually let me point you to one of the metrics that I shared in my remarks.
So.
For July we had an annualized net charge off rate of 11.9%.
Right.
290 basis points or that was due to the pull forward of $4 million in charge offs. The ones you were referring to so if you back that out.
Would have had a 9% charge off rate right, which was within the 7% to 9% annualized target that we had before.
John This is where I will just to just add to that.
But part that I also agree with is your view in the way you characterized it on the post pandemic originations that we've made you may have seen on page 10 of the earnings deck. We presented an updated view of the first payment default and you see really that the first payment defaults of the originations we've made since the pandemic began.
There were below last years levels and below the levels of before that pandemic and thats part of what gave us confidence to start increasing or approval rates in mid June it's frankly, they're coming in even lower than we would've expected. So that gives us confidence, especially as the economy has started to stable.
It's a bit.
We could go ahead and start growing again in increasing approval rates.
Yes, and then I guess aside comment would be also Jonathan there had to be sensitive denominator impact on your charge offs as well given where you would have been on loan portfolio size relative to where we ended up.
And then the final question.
Is related to I guess Dole ex.
You mentioned 500 locations I Didnt hear did you mentioned the geographies.
That will bring you too.
And.
I guess, what what type of addressable market does it bring you into that you're not already at and what should we thinking about the cadence of that ramped considering the environment any opportunity.
Sure so.
We did not in both the specifics yet because.
Those are part of the regulatory approvals that I mentioned that we still need to work through what's exciting for all supplement opportunity perspective in the recently some overlap. So if you were to look at the map that we present on page number four and you look at the state that or marked green for our personal loans.
There is overlap there in states like California, Florida, and Texas, but we're also in some states that were model and we would look forward to being able to offer our personal loans in most states once we figure out the regulatory elements.
But it's a little early to start to give a sense of what the cadence is going to be aside from the fact that our team and their team are excited about this partnership we're very committed to it.
And Thats why we expect to be able to start originating in Q4.
Okay.
Thank you guys very much thank you John.
Thank you next question spacing from Sanjay Sakhrani from KBW. Your line is allied.
Hi, This is actually Steven Fox filling in for Sanjay. Thank you for taking my questions I guess on the first one I had was just trying to dive a little bit deeper at fair value marks and if we want to use the end of July as a proxy.
Where with the Moxi.
So we havent publicly disclose that number.
As you know Stephen and hopefully other folks know as well all asset backed trades have to be recorded on trace and.
And you can find the information on Bloomberg, what I can say is that obviously market sentiment and and.
Performance has continued to improve through the month of July.
We've seen that.
From the volume of new issuance in asset backs, and where new issues have priced and.
Our bonds along with other issuers certainly hasn't have benefited.
Got it and then second question I had was just around the charge off rate trajectory given that you've seen the delinquency rate come down, but yet charge off is going higher.
Should we expect like July to tap into peak, if you can help us think through.
At the sequencing of it that sure.
Sure.
So first of all.
We're not providing guidance on charge offs right now.
And so I can't Unfortunately point you to a specific number I think we have two things going on in the portfolio as as you know.
When we calculate annualized net charge offs were dividing by our portfolio balance our average daily principal balance.
And so depending upon our origination trends.
We certainly saw during the month of during the quarter that the portfolio came down and serve your denominator gets smaller your number gets higher we're definitely also going to it we would assume we continue to see on some of the earlier charge offs that we've been taking.
For the quarter.
And that has an impact.
Just to remind you of the statistics that we shared earlier in July we saw 11.9%.
Annualized net charge offs by 290 basis points of that was the early charge offs.
And so if you backed that out we would have had a 9% annualized net charge off rate.
Got it okay, great. Thanks for taking my questions.
My pleasure before we take the next one I just want to circle back to a question that Mark and John had on on deluxe.
I just have to frame this.
In a better way that than it seems we may have in the script.
Part of what's exciting to us about deluxe and even the 36% opportunity is that in the current economic environment, starting all the way back when shelter in place took effect.
We've seen just less applications than we saw last year, we think that both reflects the fact that people are seeking to not leave home as often as they used to.
And just the uncertainty that exists in the economy I think we've demonstrated now when you look at the first payment defaults to end as we've shown the improvement in losses that the risk engine is doing a great job, making adjustments in light of the challenging environment and one of the best things. We can do right now for the business is just opened up the top of the funnel right.
So how do we just get more applications coming into our funnel that then patter chief credit officer into team can make sure that were decisioning appropriately. So whats exciting to us about the 36% opportunity for example, if it's going to give us a chance to market our loans in places like Nerdwallet in other places where because of the small percentage of loans that.
We had over 36%, we didnt get adequate visibility. The same thing is true in deluxe Endoleaks now we're going to have an opportunity to interact with consumers that we may not have otherwise seen even in the states, where we do ever present and both of those efforts in essence open up that very top of funnel. So that we can just go ahead and see more.
Applications. So I just want to provide that clarity that we don't think of this as.
A new and say risky product to take on in the current environment. We don't think that even adding this channel in this environment is it is a risky thing to do because we're still going to use the exact same decisioning the path into team to use to provide these really compelling first payment default. We're just opening up the funnel to more applicants so Jim just.
Want to provide that given the question for Mark and John.
Thank you as a reminder, ladies and gentleman that star one speed, placing the question Q.
Our next question is coming from Rick Shane from JP Morgan Your line is allies.
Rick Rapture photos on mute please pick up your handset.
Oh, sorry about that.
Thanks, guys for taking my questions. This afternoon.
First in terms of expenses.
Curious if you could look at this both in terms of marketing and more general GNS right.
What is the mix right now between fixed and variable expenses.
Recently, we saw the customer acquisition costs go up pretty substantially that makes sense its.
Really a function.
Of the of the slowdown on the portfolio growth.
But im curious if some of that was marketing that you guys had committed to and we'll see that shrink as we move through the year or was that a strategic decision to keep.
Going on the marketing plan.
Yes, Rick this is where I will so we don't disclose the breakdown between fixed and variable, but your intuition is correct. If we were to look on page seven of the earnings deck that we provided in you were to look at say the increase from March which was a CAGR of 215 to April being 570 for that.
Did reflect some investments say direct mail that werent quite where you pick the list weeks in advance you commit to that list you paid for that list and then you have to send mail to them. So even though the pandemic was already starting to take shape here. There was nothing we could do in terms of that particular list. You then starts.
To see it come down to 461 in May and to 90 in June because that was really when we had an opportunity in direct mail and that was part of the optimization that are referred to to make the adjustment even with the long lead times that exist in direct mail. So that is absolutely one of the adjustments that we've made to.
The variable elements is just ratcheting that down based on the response rates that were seeing independently.
To your point there are other elements say the retail our rent and the labor that we have there that also are relatively fixed elements, but what we've really tried to do is to figure out what role the variable pieces that we can pull down how can we shift to marketing vehicles that have.
Shorter lead time, so digital in particular, and then try to look at every other part of the organization to figure out how to reduce.
Operating expenses and I know you were focused on marketing so I won't list those but that has been a big effort that Jonathan as late as well is looking at how do we reduce.
Not just the marketing expenses, but other parts of the business as well.
Got it and by the way.
We really appreciate the monthly data, it's very helpful and understanding the trends.
So thank you for that.
I want to pivot to Daleks, as well or deluxe as well.
I assume that one of the regulatory issues.
Because they are from what I understand the money transfer business is getting lending licenses is that an approval that you need or is that an approval. They need. Some assuming these are going to be loans that are written and closed in your name and that there.
Or just an agent on that transaction essentially providing the front debt.
That's exactly right so you're touching on one of the other things that makes this exciting for us Rick.
He is.
The operating expenses for issuing these loans are going to be very different these are going to happen in dole ex locations. So there's going to be none of the build out that we even have with our co locations, which has historically been our partnership structure is that we build on location and we benefit in this case they are going to.
Serve as an agent of opportunity and so there's no build out on our part there is no incremental labor and then depending on the state we have to figure out those regulatory relationships.
I'm, sorry, the regulatory structure that needs to exist given that agent relationship.
Got it looks to me I'm, having a hard to figure it out we're all their locations are but.
Looks like your biggest footprint it might be 30 or 40% of their branches might be in Texas. So.
You are fully licensed there so I'm assuming that Thats a branch network that you can turn on pretty quickly. It's just it's basically just geographic expansion and the territory you're already yet.
Yes, yes.
One of the challenging but fascinating parts of this business is every state is a little different so Texas is different than California, which is different from Florida, which is different than new Jersey.
So I don't want to characterize any one state is being easier than another one at this point thats part of the work that is happening jointly right now between our compliance team and delicious compliance team to figure out where do we want to start in how do we how do we expand the size of the partnership as quickly as possible, which they want and we will.
Great. Thank you very much.
Correct.
Yeah.
Operator that was the end of my question.
Thank you Rick Thank you.
Operator.
Unless they have all at all.
I think that brings us to the conclusion of our call. So thank you again for joining us on todays call and we look forward to speaking with all of you again soon.
Take care Bye bye.