OppFi Inc.

Good afternoon, and welcome to OpFi's third quarter 2022 earnings call. All participants are in listen-only mode. As a reminder, this conference call is being recorded. After management's presentation, there will be a question and answer session. It is now my pleasure to introduce your host, Sean Smolars, Head of Investor Relations. You may begin.

Thank you, Operator. Good afternoon. Good afternoon. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our third quarter 2022 earnings press release and supplemental presentation can be found at investors.opfi.com. During this call, OpFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OPCIS management in light of their experience and assessment of historical trends, current conditions, expected future developments, 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 could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors. In today's remarks by management, the company will discuss certain non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to most comparable GAAP measures can be found in the earnings press release issued earlier this afternoon. This call is being webcast live and will be available for replay on our website. I would now like to turn the call over to Todd.

Thanks, Sean, and good afternoon, everyone. Pam will review our third quarter results and provide additional details about our financial performance and balance sheet. Before she does so, I will cover four topics. One, the key highlights of our third quarter performance. Two, an update on the key initiatives discussed on our second quarter call. Three, our macroeconomic outlook, as well as quarter-to-date business trends. And four, our early view of 2023. Our third quarter performance was in line with our expectations, and we're pleased by these results, given the challenging overall economic environment. The key highlights year over year are Net originations increased by 11% to 183 million. Ending receivables grew by 39% to 408 million. Total revenue expanded by 35% to 124 million. Marketing costs per new funded loan decreased by 26% to $188. Operating expenses, excluding interest expense, as well as add-back and one-time items decreased to $43.1 million or 34.7% of total revenue from $44.2 million or 48.1% of total revenue in the prior year period. I'm pleased to report some positive progress on the key initiatives we discussed last quarter. In mid-July, the most significant adjustments to credit models were made in the company's history. We're happy to report that these changes achieve the intended results based on early trends. To be more specific, the first payment default rate for new customers ended the third quarter 26% lower than at the end of the second quarter. Also, the first payment default rate for refinance loans to existing customers ended the third quarter 9% lower than at the end of the second quarter. Looking at the overall portfolio, The percentage of the total active portfolio that is up to 29 days delinquent ended the third quarter 2% lower than at the end of the second quarter, effectively stabilizing. Based on these metrics, we feel confident that the quality of the loans in the portfolio will continue to strengthen as better performing new vintage loans become an increasingly larger percentage of the portfolio and non-performing loans continue to cycle out. This dynamic gives us strong confidence in 2023. While we were happy with the portfolio quality becoming stronger, we want to remind investors that the net charge-off rate is likely to worsen sequentially in the fourth quarter, consistent with our forecast as non-performing loans continue to cycle through our platform. The net charge-off rate lags new vintage performance, since it is a function of the performance of loan vintages from prior quarters and the volume of current quarter originations. The credit models continue to evolve with the addition of new attributes and data sources to further strengthen the accuracy of the underwriting platform. We anticipate these initiatives will serve as continued tailwinds in 2023. Our second quarter conference call, we also discussed key marketing initiatives within our partner and direct mail channels to source higher quality originations while lowering the average cost per newly funded loan. I'm happy to report these initiatives have been successful. Specifically, our marketing costs per new funded loan declined by 8% sequentially, while the weighted average risk score, a risk-based assessment of ability to repay, improved by 17% sequentially. While originations for new customers decreased by 28% in Q3 year over year, due in part to planned adjustments implemented in July, we're excited that new originations for the lowest credit tier increased by 43%. We accomplished this by strategic upmarket targeting initiatives in our highest volume marketing channels, including partners and direct mail. Furthermore, in Q3, same-day funding was added to the platform. We also implemented our renewed values-based recovery strategy that enhanced customer experience and significantly increased recoveries. As part of this program, we launched a redesigned, easy-to-navigate self-service portal with expanded capabilities and payment options for customers. This has proven to be very successful and well received. Turning to our macroeconomic outlook, and current business trends, we are closely monitoring the broader economy and the effects that persistent high inflation and unemployment rates can have on our customers. However, we are confident in our ability to navigate the environment, and we are increasingly optimistic given the positive trends from our recent strategic adjustments. Speaking on business trends, I'll now briefly discuss our quarter-to-date performance. The business continues to perform in line with our expectations. which provides us confidence to reiterate our full year guidance. We continue to experience robust demand, including within the lowest risk credit tiers in the addressable market. We're likely benefiting from peers and upmarket lenders tightening credit in this uncertain environment, which is providing us a more opportunity to help customers that are being turned down by mainstream credit options, thereby growing our market share. For example, you may recall that OPFI offers a turn-up program for applicants who opt-in will check the market of near prime lenders before presenting options through our platform. The match rate, the percentage of opted-in consumers who are accepted by turn-up provider and moved on in their application reached an all-time low and is 60% lower than it was at the start of 2022. We believe this will result in strong demand for lower risk originations. I will now provide an initial overview of our current outlook for 2023. We are confident that profitability will rebound in 2023 with the quarterly cadence accelerating throughout the year. The first half of the year is likely to be impacted by elevated yet improving net charge off rates as the loan vintages from Q1 and Q2 of 2022 won't fully cycle through our platform until early Q2 of 2023. We anticipate providing full year 2023 guidance when we report the fourth quarter results. For 2023, we are focused on these core areas to optimize the business and maximize shareholder value. One, continuing to enhance the credit model with data and technology. Two, pursuing growth efficiency initiatives to further scale expenses. three, expanding initiatives to increase collections and recoveries, and four, strengthening our platform differentiation in the marketplace, including optimizing the customer experience. As stated previously, my family and I plan to continue to support OPFI shares when we believe there is a disconnect between its market price and what we believe is the true long-term fair value. During the third quarter open trading window, my family and I purchased approximately 273,000 shares for $717,000 with an average price of $262 per share. With these purchases, my family has purchased approximately 882,000 shares for $2.6 million at an average price of $297 year-to-date. Before turning the call over to Pam, I want to reiterate our key message that despite macroeconomic pressures, the business has stabilized with higher quality loans to new and existing customers, lower early delinquency rates, and a portfolio that is becoming stronger as older vintage non-performing loans cycle out due to adjustments to the credit model. These dynamics provide us with confidence and optimism. With that, I'll turn the call over to Pam.