OppFi Inc.

Good afternoon and welcome to OPFI's fourth quarter and full year 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 by either emailing investors at opfi.com or selecting the ask a question feature on this live webcast. 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 Smallers, Head of Investor Relations. You may 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 fourth quarter and full year 2023 is earnings, press release, and supplemental presentation can be found at investors.opci.com. During this call, Opci will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by Opci'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 Opsite 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 and 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. We're excited to begin 2024 and leverage our strong 2023 to continue achieving profitable growth. 2023 marked our ninth consecutive year of net income with annual records for total revenue and ending receivables. We achieved what we said we would do and credit improvements and operating efficiencies led us to raise full year earnings guidance three times. In addition, our solid fourth quarter enabled us to exceed our final full year earnings guidance for 2023. In 2024, we plan to maintain our strategy to be disciplined with underwriting, emphasizing profitability over portfolio growth, while simultaneously aiming for further operating efficiency throughout the company. Pam will review our fourth quarter results in detail, as well as introduce guidance for Q1 and full year 2024. Before she does, I will cover four primary topics. One, the highlights from our Q4 and full year 2023 financial performance. Two, progress in our strategic business areas during Q4 2023. Three, commentary on our macroeconomic outlook for 2024. for our discussion of our 2024 priorities. Fourth quarter results were driven by revenue growth, credit performance improvements, and expense leverage. Specifically, the key highlights for fourth quarter 2023 compared to the prior year are strong 10.7% total revenue growth to 132.9 million, disciplined 3.3% net originations growth to 191.9 million, the annualized net charge-off rate as a percentage of total revenue improved by 12.9 percentage points to 46.4%. And prudent expense management, with total expenses excluding interest expense as a percentage of total revenue, down 5.6 percentage points to 33.8%. This led to solid rebounds in profitability net income of $1.9 million up from a loss of $5.2 million and adjusted net income of $8.9 million up from a loss of $2.8 million. Our financial highlights for full year 2023 compared to the prior year are record total revenue of $508.9 million, a 12.4% increase, record ending receivables of $416.5 million, a 3.6% increase, the net charge-off rate as a percentage of total revenue declined to 43.5%, an 8.1% point improvement, and discipline expense management with total expenses excluding interest expense as a percentage of total revenue by 6.2 percentage points to 35.4%. As a result, profitability improved sharply with net income of $39.5 million compared to $3.3 million and adjusted net income of $43.3 million from $5 million. Adjusted net income margin was 8.5%, 50 basis points higher than implied by the midpoint of our guidance. We achieved these results despite interest expense increasing by $11.6 million for 33% year over year. and a macroeconomic environment marked by sticky inflation that hurt the financial health of our customers. Our strategy to balance growth and risk while maintaining expense discipline contributed meaningfully to this transformational year for OP5. Now I'll discuss our progress during the fourth quarter with our strategic business areas. Credit performance continuing to improve year over year as expected. In addition to improvement in the annualized net charge off rate as a percentage of total revenue already mentioned, earlier stage delinquency trends also improved compared to the same period last year. The total first payment default rate decreased by 40 basis points and the total delinquency rate declined by 90 basis points. We also realized solid expansion in yield of 8.4 percentage points to 126.8% compared to 118.4% in the year-ago period. We are pleased that credit modeling enhancements and adjustments made throughout the 2023 appear to have had the intended effect, and our portfolio mix continued to shift to the lowest risk segments. Our values-based recovery strategy also ended 2023 strongly, with a 40.8% increase year-over-year in the fourth quarter for recoveries of previously charged-off loan balances. Our marketing team remained focused on cost effective initiatives to generate higher quality origination volume. As a result, the marketing cost per funded loan was down 6.3% year over year in the fourth quarter. In addition, the platform also expanded geographically with bank partners entering new states. We also realized operating cost leverage year over year with a focus on making each department more efficient. Further, we continued our work on corporate development opportunities by evaluating potential partnerships and acquisitions as a means to create further shareholder value. As a result of this work, we've refined our criteria for what we would view as an attractive opportunity. Now, I'll briefly discuss how we're thinking about the macroeconomic environment. We expect the economy in 2024 to be similar to how it was in 2023, with sticky inflation and interest rates higher than historic norms. As we have communicated during the past couple of years, persistent above-normal inflation hurts customers more than recessions do because they have more difficulty budgeting for everyday expenses, especially when living paycheck to paycheck with limited to no savings. To further illustrate this point, a recent Wall Street Journal article said it's been 30 years since food comprised this much of Americans' incomes. Nonetheless, we note that employment trends appear relatively strong for customers, In summary, we think current macroeconomic conditions both help and hurt customers, and therefore, the net effect for OPFI is uncertain. While we are cautious due to these macroeconomic headwinds and our elevated interest expense, we believe that we're well-positioned to operate in this type of environment. We intend to pursue the same strategy and discipline in 2024. We expect to continue focusing on profitability over growth. and we plan to achieve this by maintaining prudent risk tolerances, emphasizing disciplined growth, and scaling operating expenses efficiently. In conjunction with the banks that partner with us, a new credit model is expected to be launched in Q2 that will incorporate an updated dynamic risk model intended to drive lower risk origination volume and reduce credit losses. We also anticipate further geographic expansion as bank partners enter new states. In addition, we're planning for marketing to focus on top-of-funnel optimization with new analytic insights. Similar to last year, we are also focused on reviewing every function to manage expenses and achieve operating efficiencies, including vendor spending and process improvements. Moreover, we will be patient with corporate development to find the right fit for accretive partnerships or acquisitions. In summary, before turning the call over to Pam, I will reiterate my confidence in our long-term strategy. We ended 2023 with a strong balance sheet, including unrestricted cash of $31.8 million, which nearly doubled year over year. This provides us the optionality to deploy cash to create additional shareholder value. Our confidence in the business will be demonstrated by our participation in investor events during 2024 to communicate our story with a more targeted approach.