OppFi Inc.

Good afternoon and welcome to OPFI's third quarter 2023 earnings conference 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. Participants can submit questions at any time, either by emailing investors at opfi.com, or for those listening by dial-in, you will be prompted to enter the queue after the prepared remarks. It is now my pleasure to introduce your host, Sean Smolarz, Head of Investor Relations. You may now begin.

Thank you, Operator. Good afternoon. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our third quarter 2023 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 OPFI's 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 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 United States 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 the 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. I'm very excited to discuss our third quarter results, which demonstrate that we are achieving the goals that we set out to accomplish. For the second consecutive quarter, our earnings significantly rebounded year over year, while we generated solid revenue growth. Throughout this year, we have continued to make impactful adjustments to credit models with our bank partners that have resulted in improved credit performance and accelerated earnings growth. We believe the portfolio is as strong as it has ever been from a credit profile perspective, which gives me confidence in continued credit performance and earnings growth prospectively. I strongly believe our results indicate, yet again, our ability to balance growth and risk while maintaining expense discipline. Pam will review our third quarter results in detail, as well as discuss our full-year guidance updates. which includes raising our earnings outlook for the third time this year. Before she does, I will cover two topics. The key highlights from our third quarter financial performance and our progress on strategic business priorities for 2023. The third quarter was highlighted by substantial improvement in credit performance year over year, including net charge off rate as a percentage of revenue, yield and recoveries. The key highlights for the third quarter this year compared to last year are a strong 7.2% total revenue growth to $133.2 million, solid 7.6% growth in originations to $195.7 million, and significant rebounds in net income to $15.5 million from an approximate $1 million loss and adjusted net income to $13.8 million from an approximate $1 million profit. We achieved these results while maintaining discipline in the approach to underwriting, considering the macro environment and our continued emphasis on profitability over portfolio growth. Now, I'd like to provide updates on our core strategic initiatives. For the third quarter, credit performance continued to improve as expected. The annualized net charge-off rate as a percentage of total revenue decreased 23%, or 12 percentage points, falling to 42.4 percent from 54.8 percent in Q3 last year. In addition, the annualized net charge-off rate as a percentage of average receivables decreased 17 percent, or 11 percentage points, falling to 54.5 percent from 65.9 percent in the year-ago period. Credit modeling enhancements and adjustments have created dynamic credit models that continue to improve early-stage delinquency metrics as the portfolio shifts to the lowest risk segments. At the end of the third quarter year over year, the total first payment default decreased 9% and total delinquency rate declined 14%. As has been the trend this year, our recovery strategy performed well with a 58% increase compared to the third quarter last year. We also realized solid growth in yield, expanding to 129% compared to 120% in the year-ago period, and thereby strengthening our unit-level economics. This was achieved with a decrease in delinquent loans in the portfolio, lower enrollment in hardship and assistance programs, and a relative shift away from states with lower interest rates. Our product and marketing team are focused on cost-effective initiatives to attract greater lower-risk origination volume, including SEO and direct mail, while also strengthening our relationships and fine-tuning our competitive strategy in the partner channel. For the third quarter, this resulted in our marketing cost per funded loan being steady year over year. We also continued to be vigilant on expenses, total expenses excluding interest expense as a percentage of total revenue increased less than 1% to 36.1% from 35.8% in Q3 last year. We have previously discussed our corporate development initiatives. While we are evaluating acquisition opportunities in adjacent customer or product categories, we will be patient to find the right fit. Concurrently, we are exploring other initiatives to create shareholder value, given our strong balance sheet and the inherent options that it provides us. At its core, OpFi is a tech-enabled, mission-driven specialty finance platform that broadens the reach of community banks to extend credit access to everyday Americans. Through transparency, responsible lending, financial inclusion, and an excellent customer service experience, The company supports consumers who are turned away by mainstream options to build better financial health. In summary, we expect to continue to grow profitably with Originations growth, improved credit performance, and prudent expense management. These dynamics combined with our strong balance sheet and excess funding capacity provide us with options next year to create additional shareholder value. We will remain disciplined with underwriting and expenses. we plan to share our detailed view of 2024 when we report Q4 results. Now, I'll turn the call over to Pam to review our Q3 financial performance and updated full-year outlook.

Thanks, Todd, and good afternoon, everyone. Q3 was a strong quarter as credit metrics continued to improve, resulting in back-to-back quarters of solid performance. Total revenue increased 7.2% to $133.2 million. Net originations increased 7.6% year-over-year to $195.7 million due to greater customer demand in the lowest credit risk segments of our adjustable market. New customer originations for the quarter decreased by 5% year-over-year while existing customer originations increased by 20.2%. The annualized net charge-off rate as percentage of average receivables improved to 54.5% compared to 65.9% for the prior quarter. As a percentage of total revenue, the annualized net charge-off rate decreased to 42.4% from 54.8% in the comparable period last year. Turning to expenses, total expenses, including interest expense, were $60.1 million, or 45.1% of total revenue, compared to 53.6 million, or 43.1% of total revenue for the third quarter of 2022. The year-over-year increase was primarily the result of higher interest expense. Interest expense totaled $12.1 million or 9.1% of total revenue, compared to $9.1 million or 7.3% of total revenue for the same period last year. The increase was due to higher interest rates on our credit facilities utilized to fund originations over the past year. Adjusted EBITDA totaled $33 million for the quarter, 149.8% increase from $13.2 million for the comparable period last year. Adjusted net income was $13.8 million compared to $0.8 million for Q3 last year. Adjusted earnings per share was $0.16 compared to $0.01 for the same period last year. For the three months ended September 30, 2023, OpFi had 85.3 million weighted average diluted shares outstanding on an adjusted basis. Our balance sheet remains strong with cash, cash equivalents, and restricted cash of $66 million, total debt of $344.3 million, ending receivables of $415.9 million, and equity of $189.8 million as of quarter end. We believe we have ample liquidity available to support our current growth plans with $591 million in total capacity to fund receivables at the end of the third quarter. Turning now to our outlook. For full year 2023, we are reaffirming guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year over year. In addition, we are increasing guidance for adjusted net income to between $40 million and $42 million from the $29 million to $35 million prior range. As a result, we are also raising our outlook for adjusted earnings per share to between $0.47 and $0.49 from the $0.34 to $0.41 previous range. Before concluding our prepared remarks, I will provide a brief update on our proactive investor relations strategy for the remainder of the year. We are very excited by our substantial earnings turnaround this year and are confident in our long-term growth strategy. We plan to amplify our message and communicate the story to a broader audience, both institutional and retail investors, through investor conferences, non-deal roadshows, and other opportunities. In addition to further our engagement with retail investors, we recently launched our participation on the Webull Corporate Connect platform, where we can directly communicate with investors to highlight corporate news and answer questions. With that, I would now like to turn the call over to the operator for Q&A. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roster. Our first question comes from David Scharf from JMP Securities.

Please go ahead.

Great, thanks. Good afternoon. Thanks for taking my questions. Todd, we're obviously seeing the benefits of kind of the credit tightening you implemented last year in more disciplined underwriting, certainly translating into improved unit economics. You know, just big picture, I mean, we're kind of at the tail end of a reporting season where a lot of, you know, non-prime lenders have, you know, been communicating, you know, little, you know, easing of the pace of credit normalization, but, you know, still highlighting a lot of economic uncertainty. You know, What are you seeing, if anything, that signals potentially leaning into marketing and customer acquisition a little more? Just want to make sure I kind of accurately interpret sort of what your view heading into next year is in terms of the health of the consumer or whether you're still maintaining a pretty cautious outlook.

Yeah, thanks for the question, David. It's a good question. And it becomes a little more challenging when you look back to the three prior years, like last year being a tough one with inflation, 21 being the stimulus of COVID and 2020 being COVID. So we kind of look back to 2019. That's how we've been. And we look at the loss curves compared to how we're performing today. There's a lot of growth out there, but obviously we've got to be very disciplined, and I think we would need a sustained period where we're confident in loss curves, looking like 2019, and some macro factors as well to be able to lean into growth again. We're also still able to grow, though. I want to point out that we're still going to grow at 10% to 15% this year. We just have a much higher quality book of business right now. and we've been able to maintain acquisition costs. So really happy to do that as well. But as you look in the economy, there's a bunch of mixed signals. Unemployment is still really low, but then you have these things like wars going on. So we're not prognosticators of the economy, but we look at some key factors, but we also base it upon our past experience. One of the the great things is that we've been around since 2011, 12, and we pull on that information and our team's experience, frankly, to make those decisions.

Got it. No, no, completely understood. Hey, switching to the funding side, you highlighted the capacity you have right now, but can you just remind us about the fixed versus variable component of your facilities and how we ought to be thinking about sort of the near-term average borrowing rate in the next few quarters?

Yeah, well, I mean, you know, it's really, you know, we wish we had the interest rates of last year. You know, we have voting rate in our facilities. It's based on SOFR, and SOFR, as you know, has increased about 400 basis points year over year. It's, you know, it's something that we're definitely feeling, but I think if you look at the business, even in probably the worst interest rate environment we've seen in 30 years, we're still able to generate strong returns, right? And that really is, if you look at our OPEX, the leverage on OPEX, if you look at our loss curves and you look at our acquisition discipline, you know, any reduction in rate we're going to get the benefit of. Now, I don't know when that's going to happen. You know, I think we're going to probably forecast it to stay probably at the certain – maintain at the certain levels that they are today for next year. But I do think that that would be a nice thing for next year if rates were able to come down a little because we would get that benefit.

Got it. And just for modeling purposes, is there a number – I apologize, I don't know what your spread is offhand. Is there a good weighted average cost of borrowing we ought to factor in their term?

Yeah, I mean, weighted average, like roughly 11% is what we're currently paying.

Got it, got it. Hey, and then one final question. You know, just on the marketing side, as you noted, the expense per funded loan, held pretty steady. I think last year there may have been a pretty big decline. There was something about the Q2 comp last year, but overall CAC levels, should we pretty much assume that that steady rate per funded loan going forward, or are there any other potential improvements near term?

Yeah, I mean, there's minor fluctuations, but no, no, our goal is to keep Keep it where it's at, and we think we can. We think we have the full capabilities and the service capabilities to be able to keep it there. So, you know, that is our goal. And think that, you know, you see some others in the industry kind of chasing a little bit on the cost per. We're not going to do that. We're going to be pretty disciplined on our cost. Understood.

Great. Thank you very much. Thank you.

Our next question comes from Mike Grondel from Northland Securities. Please go ahead.

Hey, guys. Congrats on the progress. Do you like your cost structure where it is today kind of going into 24? Any thoughts on that?

Well, I mean, I think if you look, we've made – we brought it down even further from last year. I think we were at 39% as a percentage of revenue in 22, and I think we're closer to 35. So we've made significant progress. And that's in an environment, Mike, that you're seeing inflation on all services, vendors, goods, and frankly, wages. And so we're really proud that we've been able to scale OPEX in a year where most haven't been able to. And, listen, we're always about continuous improvement here and always looking at things that we can be more efficient. And, you know, there are some, you know, potential, you know, optimizations and efficiencies that we can look to next year to offset some of increased costs. And, you know, we're something we're always going to be looking at. But we feel really good. I think if you remember when I came back as CEO, we were at 45%. As a percentage of revenue, we're now down in the, you know, 35% range as a percentage of revenue, 35, 36. And, you know, feel really good that we've done a lot there and, you know, continue to push on that.

Got it. And then secondly, you guys are generating nice capital again. It looks like you're going to be generating cash for a while here after you tighten credit. You know, you've mentioned you're looking at acquisitions a little bit. You've also mentioned you're really patient. I don't know. Could you just talk about what you're looking for in an acquisition? And, you know, you run the core business so well, and in the past you've tried to do, you know, a couple things new, credit card, maybe the payroll product that, you know, in a way didn't work. How are you just thinking about an acquisition versus returning capital to shareholders? What kind of hurdle does that acquisition need to get over?

Yeah, I mean, we could potentially even do both. So we're going to consider all the possibilities. It's good to have that optionality. I think when we're looking at inorganic opportunities, the market's coming to us. you know, there's definitely more rational sponsors out there and companies that, you know, I believe anything we do, we're going to kind of have the unit economics figured out, which is different than kind of when you do an in-house startup credit card and some of the salary tab stuff. That's kind of stuff that had to be proven out and had to build models, you know, off of data. So anything, you know, we look at, you know, whether it, It's in, you know, the kind of credit repair, small business space, some of the themes I've kind of mentioned before is going to be highly accretive to our business. It's going to have, you know, some proof of concept already in unit economics that we know, if you look at OPFI, can be scaled. But we'll be deliberative and patient for the right price and right fit and, you know, brand and values that align with our values is important as well. You know, we're, you know, a credit access business, and brand matters. You know, we have one of the strongest, you know, consumer-facing brands, so we have to find something that aligns with that and, you know, provides real value to the customers.

Okay, fair, fair. Thanks, guys.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Todd Schwartz for any closing remarks.

Thank you, everyone, for joining us today. We look forward to speaking with you again early next year when we report Q4 results.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.