Oportun Financial Corporation (OPRT) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Oportun Financial Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Nils Erdmann, Vice President, Investor Relations. Mr. Erdmann, you may begin.

Thanks, and good afternoon, everyone. Joining me today to discuss Oportun's second quarter 2020 results are Raul Vazquez, Chief Executive Officer; and Jonathan Coblentz, 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 COVID-19 pandemic. Let me caution you not to place undue reliance on these forward-looking statements. A more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption Risk factors, including our 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 are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 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 available on the Investor Relations website at investor.oportun.com. In addition, this call is being webcast, and an archived version will be available after the call on the Investor Relations portion of our website.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 to Raul.

Thank you, Nils. And thanks to everyone on the webcast and phone line for joining us this afternoon. I hope you, your loved ones, your friends and colleagues continue to be well. On our previous earnings call, I highlighted the proactive measures we were taking in response to the pandemic to navigate this challenging environment. I'm pleased to say that because of these proactive measures, we have been successfully managing through this critical period, and our second quarter's performance demonstrates the benefit of our significant investment in technology, risk analytics and data science as well as the strength of our omnichannel 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 improvement in the prices of our bonds are beneficial for our ability to access funding at an attractive cost of funds, the short-term impact on our fair value marks grow down our 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 would like to talk about how we plan to return to growth while maintaining a thoughtful approach to underwriting. As I outlined in May, our 3 near-term focus areas are: first, managing for good credit outcomes; second, continuing to serve our customers; and finally, maintaining our 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 as focusing on helping our customers manage hardships they may be facing, many of our customers have emerged from deferral and delinquency status and returned to repayment. Among others, the tools we've developed include: one-click SMS deferrals; reduced payment plan processes that can take place entirely online; and enhanced use of social media outreach to customers. The goal of our collections processes has always been to contact our customers, understand their situation and try to help them repay their debts if they can, or get into the right hardship program if they need more time to get back on their feet. Our efforts and 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 31, our deferral percentage had declined to 3.9% as compared to 5% at June 30 and 30-plus-day delinquencies rate declined to 3.4% as compared to 3.7% at June 30. At the same time, we're pleased with the loans we have originated since mid-March because the credit performance of these new originations has been trending better than 2019 levels and 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 and 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 and incremental unemployment benefits, and while the decrease or elimination of ongoing stimulus may impact borrower repayment behavior, I would 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 they prioritize Oportun 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 in maintaining our liquidity runway, our current strategy also optimizes for our 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 and new products; further refinement in application of our data and technology tool set; and responsible growth. Consistent with our growth objectives, today, we announced that we have signed a letter of intent to form a strategic partnership with DolEx Dollar Express. The purpose of the partnership is to make the origination disbursement and servicing of Oportun loans available to consumers at DolEx' more than 500 locations throughout the U.S. 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 DolEx will significantly broaden our reach in critical markets across the U.S. and is a testament to our leadership position in lending to low- to moderate-income consumers. I 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 Oportun Visa Credit Card issued by WebBank. Over the past several months, we have continued to expand our 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 4 of our earnings presentation deck, since May, we have expanded our footprint to include 10 additional states, bringing our total credit card footprint to 19 states and across all Oportun products, we now serve customers in 29 states. We plan to continue our expansion of the Oportun Visa 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 and are gathering valuable data and feedback based on preliminary results. For the time being, however, we have pushed back our timetable for auto expansion to allow our technology and operations teams to focus on pandemic-related enhancements to our customer service and collections tools as well as the new partnership that we have announced today. We continue to be very committed to auto, and our road map 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 would 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 as 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 will be implementing an all-in APR cap of 36% for all newly originated loans nationwide, in other words, a straightforward and transparent 36% APR cap, with 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 our APRs at 36% will increase conversion rate for previously higher-priced customers, and it will expand the marketing channels and partnerships available to us, such as the DolEx announcement I mentioned earlier. Our decision to cap our rates has long been an aspiration, and it dispels the notion that small dollar lending to low- and moderate-income consumers requires APRs above 36% or ancillary products. In addition to the business benefits that we anticipate, an all-in 36% APR rate cap further enhances our regulatory-friendly business model. Our engineering, marketing and product teams worked extremely hard to quickly roll out the pricing change, and I am pleased to say this change went into effect on newly originated loans this morning. While our growth has created the opportunity to reduce our APRs, it has 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 not answered our calls, letters, texts or e-mails 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 to 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 who 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 U.S. and generate 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, Raul, and hello, everyone. In addition to GAAP, we also evaluate our performance based on fair value pro forma results, which we believe present a more consistent view 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 the second quarter, 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 of 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% 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% over the month of June, narrowing the year-over-year decline 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 increased 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 a 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 and net 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. Net increase or decrease in fair value or net change in fair value includes our current period principle 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 mark-to-market decrease on our loans and our debt and current period charge-offs of $45.7 million. The 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 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 30, the weighted average price of our asset-backed notes was 98.7%, up from 90.5% at March 31, reflecting a significant improvement in the prices of our bonds. While the increase in the fair value of our bonds resulted in a $108.2 million decrease in net change in fair value and net revenue, the prices are a positive indication of the conditions and accessibility of the capital markets. The $63.1 million increase in fair value on our loans receivable was driven by a quarter-over-quarter increase in the fair value price of our loans, from 96% as of March 31, to 99.4% as of June 30. The increase in fair value was mainly driven by 3 factors: first, consistent with the weighted average decrease in yield of our bonds, the discount rate on our loans decreased from 12.78% as of March 31, to 8.84% as of June 30; second, due to more customers returning to repayment, our remaining life of loan charge-offs decreased from 14.56% at March 31, to 12.73% at June 30; and third, fewer-than-expected Emergency Hardship Deferrrals resulted in a decrease in average life from 0.9 years as of March 31, to 0.8 years as of June 30. We've provided some additional supplemental information regarding our fair value assumptions at the end of our earnings deck. 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 31, we had 334 retail locations across the U.S. 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 have incurred $2.4 million in COVID-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%. 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 of 2020. Our customer acquisition cost for the second quarter was $413, up from $136 in the prior year quarter. The increase in CAC 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, CAC 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 $1.26 versus diluted earnings per share of $0.52 in the prior year quarter. Our adjusted net loss per share was $1.29 based on an adjusted net loss of $35.1 million versus adjusted EPS of $0.50 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. Over time, we believe this metric should improve, and post pandemic, our long-term goal remains to achieve a high-teens ROE 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 pretax cash profitability. In addition to adding back taxes, depreciation, amortization, stock-based compensation and 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 Oportun's 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 of 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 delinquencies have similarly declined, with 8- to 14-day delinquencies and 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 31, these 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 repayment 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, we evaluate our loan portfolio and charge-off a loan when we determine it 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 were determined to be uncollectible prior to reaching 120 days past due. 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 a 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 million. As of our -- as of July 31, our total cash decreased to $165.8 million, largely reflecting the call of our 2017-B securitization, which was partially funded with $51 million of 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. The charge-offs are a noncash event. For the second quarter, our cash flow from operations was 49 -- $41.9 million as compared to $51.5 million for the prior year period. As of July 31, we had $176 million of undrawn capacity on our $400 million 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 issue a 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 originate in the future and will continue to service the portfolio of existing access loans. We expect this change to have an immaterial impact on our business. As of the end of the second quarter, we had adjusted tangible book value of $429.8 million or $15.73 per share, reflecting a 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 3.1x, a reduction of -- from 3.6x 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 Raul, I am very excited about the announcements we made regarding the implementation of a 36% APR cap and the changes to our legal collections process. Although we currently expect the 36% APR capital ultimately reduce the portfolio yield by 70 basis points over time as the old portfolio runs off, we believe that capping our rates will be accretive to earnings. We anticipate that we will be able to attract more customers with lower pricing, and our 36% APR cap will be compelling to potential partners and organizations that seek to serve our customers. Separately, we believe that the changes we announced to our court collections process, combined with enhanced customer outreach tools, will result in approximately 15 basis points of impact to our annualized 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 are confident that our high-quality team and technology platform will enable us to advance our strategies and identify new growth opportunities, like the DolEx 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?

[Operator Instructions] Our first question today is coming from Mark DeVries from Barclays.

Could you just talk a little bit more about timing of the DolEx partnership and the rollout of products and also just philosophy around whether this 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 would start 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 DolEx 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 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, I mean, I appreciate this is kind of nonoperating noise. But as we think about kind of the fair value marks during the quarter, Jonathan, where do the prices now of your ABS compare to where they were kind of pre-pandemic? And how much more negative mark could you get if those kind of revert to where they were several months back?

That's a great question, Mark. Thank you. And on Page 11 of our deck, we actually laid out the fair value marks. And if you take a look at 2Q '19, which was in a good economy, the overall price of our fair value bonds was 101.6%. So we announced that at June 30, our fair value mark on our bonds was 98.7%. So if we get back to a fully normalized market, obviously, we could see all of the bonds collectively being above par. Our senior bonds are already trading above par right now.

The next question today is coming from John Hecht from Jefferies.

I guess sticking along the liability discussion. Just so as you move toward maturity, assuming you'll pay off the notes at par, do you claw back that fair value right up over time?

No, that's a great question, John. So yes, one would assume that as we approach the end of 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, I mean, just thinking about benchmark rates in this set, I mean, is it a fair statement just to say the residual risk of a write-up in the liabilities is very low at this point in time going forward?

I think there is some risk still, but obviously, certainly not the amount that we saw this quarter, right? We saw our mark improve from 90.5% to 98.7% as the markets had normalized after significant dislocation. So I can't speculate on where the markets will trade or be trading as of September 30 through December 31. 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 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 will be a factor as well overall.

Okay. And then you guys, specifically, you noted that, in a sense, you pulled forward some higher-risk, late-stage delinquencies into charge-off buckets this quarter and that you'll be doing that for the near term. But is the way that you interpret kind of the forward book of credit is generally healthier than you would have expected, say, 3 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 cleaning out those riskier accounts given like the typical post-emergency state of affairs

I think that's a very good way to think about it, John. I think that's 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%. But 290 basis points of 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, we would have had a 9% charge-off rate, right, which was within the 7% to 9% annualized target that we had before.

And John, this is Raul. Just to add to that, the part that I also agree with is your view and 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 defaults. And you see, really, that the first payment defaults of the originations we've made since the pandemic began, they're below last year's levels and below the levels before the pandemic. And that's part of what gave us confidence to start increasing our approval rates in mid-June, is, frankly, they're coming in even lower than we would have expected, so that gives us confidence, especially as the economy has started to stabilize a bit, that we could go ahead and start growing again and increasing approval rates.

Yes. And then, I guess, a side comment would be also, Jonathan, there had to be some sort of 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, DolEx. You mentioned 500 locations. I didn't hear -- did you mention the geographies that, that will bring you to? And I guess, what type of addressable market does it bring you into that you're not already at? And what should we think about the cadence of that ramp, considering the environment and the opportunity?

Sure. So we did not discuss the specifics yet because there was a part of the regulatory approvals that I mentioned that we still need to work through. What's exciting for us, from an opportunity perspective, is there is certainly some overlap. So if you were to look at the map that we present on Page number 4 and you look at the states that are marked green for our personal loans, there is overlap there in states like California, Florida and Texas. But they're also in some states that we're not in, and we would look forward to being able to offer our personal loans in those states once we figure out the regulatory elements. But it's a little early to start to give a sense of what that 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 that's why we expect to be able to start originating in Q4.

Our next question today is coming from Sanjay Sakhrani from KBW.

This is actually Steven Kwok filling in for Sanjay. I guess the first one I had was just trying to dive a little bit deeper at the fair value marks. And if we were to use the end of July as a proxy, like where would the marks be?

So we haven't publicly disclosed that number. As you know, Steven, and hopefully, other folks know as well, all asset-backed trades have to be recorded on TRACE. And you can find the information on Bloomberg. What I can say is that, obviously, market sentiment 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 have benefited.

Got it. And then the second question I had was just around the charge-off rate trajectory, given that you've seen the delinquency rate come down, but yet the charge-off is going higher. Should we expect like July to have been the peak? If you can help us think through kind of the sequencing of that, that would be great.

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 2 things going on in the portfolio. As you know, when we calculate annualized net charge-offs, we're 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 so if your denominator gets smaller, your number gets higher. We're definitely also going to -- we would assume, we would continue to see 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, but 290 basis points of that was the early charge-offs. And so if you back that out, we would have had a 9% annualized net charge-off rate.

Before we take the next one, I just want to circle back to the question that Mark and John had on DolEx. Just to frame this in a better way than it seems we may have in the script, part of what's exciting to us about DolEx 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 and 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 open up the top of the funnel, right? So how do we just get more applications coming into our funnel that then, Pat, our Chief Credit Officer, and the team can make sure that we're decisioning appropriately. So what's exciting to us about the 36% opportunity, for example, is it's going to give us a chance to market our loans in places like NerdWallet and other places, where because of the small percentage of loans that we had over 36%, we didn't get adequate visibility. The same thing is true in DolEx. In DolEx 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 have a presence. And both of those efforts, in essence, open up that very top of the funnel so that we can just go ahead and see more applications. So I just want to provide that clarity there. 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 a risky thing to do because we're still going to use the exact same decisioning that Pat and the team have used to provide these really compelling first payment defaults. We're just opening up the funnel to more applicants. So I just want to provide that to you, given the questions from Mark and John.

[Operator Instructions] Our next question is coming from Rick Shane from JPMorgan.

First, in terms of expenses, I'm curious and if you could look at this both in terms of marketing and more general G&A. What is the mix right now between fixed and variable expenses? Obviously, we saw the customer acquisition costs go up pretty substantially. And that makes sense. It's really a function of the slowdown in the portfolio growth. But I'm 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 Raul. So we don't disclose the breakdown between fixed and variable, but your intuition is correct. If we were to look on Page 7 of the earnings deck that we provided and you were to look at, say, the increase for March, which was a CAC of $215 million, to April being at $574 million, that did reflect some investments, say, direct mail that were implied. Or you pick the list weeks in advance, you commit to that list, you pay 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 start to see it come down to $461 million in May and $298 million in June because that was really when we had an opportunity in direct mail, and that was part of the optimization that I referred to, to make the adjustments 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. It's just ratcheting that down based on the response rates that we're seeing in the pandemic. To your point, there are other elements, say, the retail 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 are all the variable pieces that we can pull down, how can we shift to marketing vehicles that have shorter lead times, 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 has led 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 in understanding the trends. I want to pivot to DolEx as well or DolEx 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 that they need? So I'm assuming these are going to be loans that are written and closed in your name and that they're just an agent on that transaction, essentially providing the front end.

That's exactly right. So you're touching on one of the other things that makes this exciting for us, Rick, is the operating expenses for issuing these loans are going to be very different. These are going to happen in DolEx 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 our own location and we staff it. In this case, they are going to serve as an agent of Oportun, so there's no build-out on our part, there's 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. And it looks to me -- I'm having a hard time figuring out where all their locations are, but it looks like their 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 that's a branch network that you can turn on pretty quickly. It's just it's basically just geographic expansion in the territory you're already in.

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 than Florida, which is different than New Jersey. So I don't want to characterize any one state as being easier than another one at this point. That's part of the work that is happening jointly right now between our compliance team and DolEx' compliance team, to figure out where do we want to start and how do we expand the size of the partnership as quickly as possible, which they want and we want. Operator?

He must be on another call.

I think that brings us to the conclusion of our call. So thank you again for joining us on today's call. And we look forward to speaking with all of you again soon. Take care.

Bye-bye.