OppFi Inc.

Good afternoon. On today's call are Todd Schwartz, OPFI's Executive Chairman, Chief Executive Officer, and Shivan Shah, Chief Financial Officer. The company's fourth quarter and full year 2021 earnings press release and supplemental presentation can be found at investors.opfi.com. During the call, the company will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OPFI's management in light of their experience and assessment of historical trends, current conditions, expected future development, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and OPFI undertakes no duty to update or revise any such statement, whether as a result of new information, future events, or otherwise. Important factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the sections entitled Risk Factors. In today's Remarks by Management, the company will discuss non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this afternoon's earnings press release. This call is being webcast live and will be available for replay for one month on our website. I would now like to turn the call over to Todd.

Thank you and good afternoon, everyone. First, I want to say how proud and excited I am to return as CEO of OpFi and lead this dynamic company in its next phase of growth. As some of you know, 10 years ago, I founded OpFi with a compelling mission. to help millions of consumers who are locked out of mainstream options to gain access to credit. The goal was clear, provide simple credit to help people with unforeseen expenses and help millions build a better financial path. Today, I remain as passionate about this mission for financial inclusion as I did in 2012, and I'm extremely confident in our future. As I will detail in the next few minutes, this year, we are focusing on our core business, which we believe will position us to continue to achieve consistent profitable growth. Therefore, we are pursuing initiatives we believe that represent the best allocation of capital and yield the highest return on investment to unlock the potential to further expand our market share and continue to lead our industry. As OPFI's Executive Chairman, CEO, and the largest shareholder, I want to underscore that OpFi's Board of Directors is committed to maximizing long-term stockholder value. To this end, we recently announced our $20 million corporate share repurchase authorization that we intend to utilize when we believe OpFi's share price is disconnected from the long-term value and potential of the company. In addition, my family and I are and have been strong believers in the long-term potential of OpFi and are prepared to further invest and support the stock when we see such a disconnect in the market. Now, I would like to go over three topics before I turn over the call to our CFO, Shivan. Number one, offer some reflections on our record for 2021. Number two, speak about the macro outlook for 2022. Three, discuss our key product enhancements. specific to the installment loans business for 2022. We are very pleased with our record results and strong profitability in 2021. We continue to have a strong, profitable core business with robust demand on the heels of the economic recovery and increased consumer spending. For the year, we generated $351 million of revenue in line with guidance and $66 million of adjusted net income, consistent with the higher end of our expectations. We ended the year with a strong balance sheet with $62 million of cash, $158 million of unused debt capacity, and $473 million of total funding capacity to fund future growth. As we anticipated, we are seeing a shift in the macro environment with consumer spending, financing trends normalizing to the pre-pandemic levels. The end of federal stimulus programs, including child tax credits, decades-high inflation, and increased consumer spending are accelerating demand for credit from our customers. In addition, the strong labor market is creating more employee qualified borrowers. This normalization of demand drove the second consecutive quarter of record originations in the fourth quarter, resulting in record volumes for the year. We also ended the year with record receivables, which establishes a strong baseline for which we grow in 2022 and beyond. While it's early, We have seen this acceleration of demand continue thus far in 2022. In January and February combined, we generated a 51% year-over-year increase in originations. This trend is better than expected from historical seasonality trends. At the same time, demand is returning to pre-pandemic levels. As a result, we are proactively managing our expected credit performance to ensure that all customers to which we facilitate credit meet our risk return criteria. Recently, we re-rolled out our new next generation credit model that we will believe will enable us to target more prospective customers while achieving our target return hurdles. In the second half of 2021, we also made several product and operational enhancements that we believe will have a meaningful impact on growth and profitability in 2022. First, our market-based offers. We are introducing market-based offers to profitably grow our core loans business that incorporates different rate, term, and loan amounts, following promising testing in the fourth quarter of 2021. We saw certain channels and price points generate 2.5 times volume increases with lower credit risk versus our traditional product. We believe this initiative will enable us to expand our market share and reach customers we have not historically served, all while reducing credit risk. Second, tech enabled efficiencies and automation. We continue to leverage our proprietary technology platform and artificial intelligence systems to automate the loan approval process. This not only enhances the customer experience with speed, but also improves operational efficiency. Percentage of automated loans more than doubled in 2021. These loans are funded with zero human interaction. We expect to continue this upward trend in 2022, which should drive increased operational scale and efficiency. Third, credit enhancements. As mentioned earlier, we recently introduced our next generation credit model, which will allow us to target qualified customers more effectively. When credit began to normalize in Q4, we implemented optimized underwriting parameters in our new model that have resulted in a decline in early stage delinquency. Of course, in addition to these initiatives, we continue to work on improving the user experience, increasing conversion rates, and acquiring customers more efficiently. To this end, we are excited to further leverage our industry-leading customer service, as exemplified by our Net Promoter Score of 85. In 2022, we are highly focused on maximizing our core off-loans product, as we believe we can gain market share with the enhancements that I outlined, unlocking profitable, sustained growth. In summary, we are excited by our key initiatives and the resurgence of consumer demand and are confident about our future, as well as our ability to serve more customers by facilitating safe, reliable credit options. With that, I'll turn the call over to Shivan to review our fourth quarter and full year 2021 results, as well as provide commentary on our outlook for 2022.

Thanks, Todd, and good afternoon, everyone. To start, I would like to note that our 2020 income statement is presented on a pro forma fair value adjusted view to present like-for-like comparisons. You will recall that on January 1, 2021, the company transitioned to the fair value accounting method for its core installment receivables. Turning now to our results, despite a challenging macroeconomic backdrop, 2021 adjusted net income increased 19% year-over-year to $66 million. in line with our original outlook at the time of our business combination announcement in February of last year. This is a testament to the resiliency of our business model through varying economic cycles. Adjusted revenue increased 9% to $351 million, while adjusted EBITDA grew 16% to $117 million. In addition, originations were up 23% year-over-year to $595 million, driving a 22% increase in ending receivables to $338 million. Strong financial performance during the fourth quarter led to record full-year earnings and the high end of our guidance ranges for adjusted net income and ending receivables. More specifically, revenues of $96 million were up 11% compared to the fourth quarter of 2020 and increased 4% from the prior quarter. Our ending receivables balance on an amortized cost basis was $338 million at the end of the year, up 15% from September 30th, and up 22% compared to the end of 2020. Much of that growth was tied to accelerating origination volume, which totaled $187 million for the fourth quarter, up 25% year over year, and up 14% sequentially. From a mixed perspective, More than half of the quarter's originations were extended to new customers versus 43% in the fourth quarter of 2020. On an absolute basis, new customer loan originations for the quarter increased by 51% compared to the prior year quarter and were up 14% sequentially. Our annualized net charge-off ratio was 53% for the fourth quarter of 2021 versus 36% for the third quarter and 31% for the prior year quarter. Charge-offs continue to normalize as expected in the fourth quarter, with our 2021 net charge-off ratio coming in at the midpoint of our previous guidance range of 35% to 40%. While the Child Tax Credit Program initially muted the upward trajectory of delinquencies, the impact faded later in the year. Moreover, on behalf of our bank partners, in the second half of 2021, We tested new channel partners as well as extended testing and credit facilitation to newer customer segments. We are no longer facilitating the origination of loans to these segments. And we believe this charge-off trend will likely dissipate by the second quarter. We project first quarter losses will trend similar to fourth quarter 2021. Looking ahead, we expect improvement in our net charge-off ratio beginning in the second quarter and therefore trend towards pre-pandemic level as the year progresses. We have seen improvement in delinquency trends from January and February origination that we believe bodes well for future loss rates. Turning to expenses. Operating expenses for the fourth quarter, excluding interest expense as well as add-backs and one-time items, totaled $44 million, or 46% of revenue compared to $44 million, or 48% of revenue for the prior quarter, and $38 million, or 44% of revenue for the fourth quarter of 2020. The year-over-year increase was primarily driven by more than 50% year-over-year growth in new loan origination and the corresponding impact on direct marketing and acquisition expenses. Following a detailed review of our cost structure, we are implementing operating cost efficiency initiatives that will result in a reduction in our cost base of approximately $15 million on an annualized after-tax basis, of which only a portion we expect to realize this year. More broadly, We expect to continue to reduce overhead and unit-level costs with a goal of driving higher incremental margins over time as we more fully leverage our technology platform. We expect first quarter 2022 operating expenses, excluding interest expenses as well as add-backs and one-time items as a percent of revenues to remain in line with the fourth quarter of 2022 before improving in the second half of the year as we realize savings from our efficiency initiatives. For 2022, we are projecting operating expenses, excluding interest expenses, as well as add-backs and one-time items, to be 43% to 47% of revenue. Adjusted EBITDA totaled $20 million for the quarter, down $11 million sequentially and $14 million versus the prior year quarter, as higher revenues and relatively flat expenses were more than offset by increased charge-offs. As expected, our adjusted EBITDA margin continued to normalize through the fourth quarter, reflecting rising net charge-offs and higher volume-related expenses. For the quarter, our adjusted EBITDA margin came in at 21% compared to 35% in the third quarter and 40% for the fourth quarter of 2020. Looking ahead, we expect margins to remain in the 20% to 25% range for 2022, with the first quarter expected to come in at roughly half of those levels, due to the temporary elevated charge-off levels in the first quarter. We are confident that margins will expand as the year progresses, driven by our new underwriting model, as well as realization of expense efficiency. Furthermore, we anticipate additional step-ups in profitability in 2023 and beyond, as we realize the benefits of accelerating growth and higher-quality origination for 30% as our long-term margin target. Interest expenses, excluding debt amortizations, for the fourth quarter totaled $6 million, or 7% of total revenue, compared to $4 million, or 5% of total revenue last year. Interest expense increased versus the previous quarter as we funded receivables growth from cash flow from operations and debt. We expect interest expense as a percentage of revenue to remain at 7% for 2022. We generated adjusted net income of $11 million for the fourth quarter compared to $17 million for the prior quarter and $21 million for the fourth quarter of 2020. As of December 31, 2021, OPFI had 84.5 million total shares outstanding, excluding 25.5 million earn-out shifts. Adjusted basic and diluted earnings per share for the fourth quarter was $0.1378 for the year. Our balance sheet remains healthy with cash of $62 million, total debt of $274 million, balance sheet receivables of $338 million, and equity of $158 million. Our net debt-to-equity ratio remains well below two times. Coupled with $470 million in funding capacity, we have ample liquidity available to support our future growth plan. Turning now to our outlook. As Todd discussed, the credit cycle is normalizing after being temporarily supported by lowering demand, reflecting the influx of cash from government stimulus programs. These factors will impact revenue, net charge-offs, and earnings in 2022. That said, our more recent initiatives are designed to allow us to adjust to these changes and maximize returns and minimize credit risks in the long run. In summary, for 2022, we're introducing the following guidance ranges. Total revenue and ending receivables growth of 20% to 25%. Net revenue, defined as gross revenues less change in fair value, margin between 60% and 65%. Adjusted operating expenses, excluding interest expense, advance, and one-time items, as a percentage of revenue between 43% and 47%. Adjusted EBITDA margin between 20% to 25%. And adjusted net income margin between 8% and 12%. We are currently executing efficiency and process automation initiatives and anticipate realizing their full annualized benefits after 2022. In addition, we believe that in a 2022 steady state environment, with credit normalization and realization of all of our efficiency initiatives, we would achieve adjusted net income at least in line with our 2021 results, assuming conservative origination growth. Importantly, we expect adjusted net income to ramp up throughout the year. as we realize the benefits of tighter underwriting parameters, origination volumes reaccelerating following tax season refund seasonality in the first quarter, and operating efficiency initiatives that are underway and will continue through 2022. More tactically, net income will be impacted by elevated charge-offs in the first half of the year related to late 2021 vintages. As those loans run off, we expect lower net charge-offs beginning in the second quarter driven by higher growth in lower-risk customer segments with normalized credit performance. As a result, we believe the first quarter will be our weakest of the year with profitability muted. We anticipate adjusted net income margin for the quarter to be approximately break-even. Looking to 2023 and beyond, we remain confident in the trajectory and sustainability of our earnings growth in the light of several powerful tailwinds. First, we expect accelerating revenue realization related to strong growth and originations in 2022. Second, we anticipate our net income will benefit from a full year of $15 million after-tax operating cost efficiency savings. And third, credit trends are continuing to improve, reflecting a more normalized macroeconomic backdrop, which we believe we will benefit from as our underwriting and targeting initiatives increasingly take hold. In addition, we believe our balance sheet is well positioned to weather market disruptions with multi-year committed lines and ample capacity. We are increasingly focused on exploring off-balance sheet strategies that are more capital efficient and increase our borrowing and leverage capacity. We are very excited about this initiative since we would expect to generate the same financial returns with similar economic risk, while simultaneously lowering the amount of loans held on our balance sheet and increasing our capacity to borrow to generate higher growth. With that, we would now like to turn the call over to the operator for Q&A. Operator?