OppFi Inc.

Good morning and welcome to OPFEE's Third Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. After management's presentation, there will be a question and answer session. 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, John Kakos, SVP Controller. You may begin.

Thank you, Operator. Good morning and welcome to OPFEE's Third Quarter 2024 Earnings Call. Today we have Executive Chairman and CEO Todd Schwartz and CFO Pam Johnson presenting our financial results before taking questions. You can access the earnings presentation on our website at .opfee.com. During this call, OPFEE may discuss certain forward-looking information. 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. Please refer to slide 2 of the earnings presentation for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliation of those measures to GAAP measures can be found in the appendix to our earnings presentation. With that, I'd like to turn it over to Todd.

Thanks John and good morning everyone. This quarter we achieved record quarterly net income and revenue, which has enabled us to raise full-year earnings guidance for the third time this year. The record quarterly net income was a result of credit initiatives that continue to drive strong loss, payment, and recovery performance, marketing cost efficiency, and prudent expense discipline across the organization. We're also proud that we have successfully executed on some of the strategic initiatives that we've previously outlined during the past several quarters. We've also realized additional operational efficiencies that have continued to strengthen the core business and increase profitability. Pam will review our third quarter results in detail and our earnings guidance increase for full year 2024. Before she does, I will cover the highlights. Total revenue increased to 136.6 million, a company record for any quarter. GAAP net income grew .4% to 32.1 million. Another OPFI record for any quarter. An adjusted net income increased .2% year over year to 28.8 million, also a company record for any quarter. Our key highlights for the quarter compared to the prior year are a 5.4 percentage point increase in annualized average yield to 133.9%, an 8.1 percentage point improvement in the annualized net charge off rate as a percentage of total revenue to 34.3%, a 400 basis point improvement in total expenses as a percentage of total revenue to 41.1%, a net income margin increase by 1180 basis points to 23.5%, while adjusted net income margin expanded by 1110 basis points to 21.1%. Throughout 2024, we have successfully executed on a number of operational initiatives designed to ensure continued future profitability growth. We also see additional opportunities to optimize our product structure with a goal of gaining volume while maximizing portfolio profitability. Operationally, our continued focus on process automation resulted in consistent year over in OPEX as a percentage of revenue, which led to 400 basis point decrease mentioned above. Going into 2025, we plan to continue these efforts as well as integrate future AI-based enhancements in our operating model. OPFI has made tremendous progress the past two and a half years, and we look forward to building upon the foundation that we have set. In closing, we believe OPFI is well positioned to build a leading credit access and financial services platform with a suite of digital financial service products for everyday Americans, serving large addressable markets that exist due to the supply demand imbalance and credit access. Our first step in executing on this vision was taken with our equity investment, NVIDI, to enter the small business financing market. We are encouraged by the early results and potential opportunity of this platform and the strength of our relationship with NVIDI. We continue to explore similar opportunities that would be accretive and aligned with OPFI's strategic vision. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. For the third quarter, total revenue increased .6% to 136.6 million year over year, with a 540 basis point improvement in average yield annualized to 133.9%. Total net originations increased .8% to 218.8 million, while total retained net originations increased .0% to 198.4 million as a result of our originations' growth outpacing the growth in the percentage of loans retained by our bank partners. From a mixed perspective, .2% of originations were to existing customers and .8% were to new customers. During the quarter, we and our bank partners continue to emphasize loans to existing customers since those loans have historically performed better than those to new customers. Credit performance during the third quarter supported this strategy, as refinanced loans to existing customers had lower delinquencies than loans to new customers. On an absolute basis, new customer originations for the quarter increased by .8% year over year, while existing customer originations increased by 6.3%. The year over year increase in new customer originations was the result of strategic credit and marketing initiatives designed to increase originations in lower risk segments. The annualized net charge-up rate as a percentage of average receivables decreased by 860 basis points to .9% for the third quarter, compared to .5% for the prior year quarter. And the annualized net charge-up rate as a percentage of total revenue decreased by 810 basis points to 34.3%, compared to .4% last year. Turning to expenses, total expenses were 56.1 million or .1% of total revenue, compared to 60.1 million or .1% of total revenue in the third quarter last year. Interest expense totaled 11.3 million or .3% of total revenue, compared to 12.1 million or .1% of total revenue in the same period a year ago, impacted by lower borrowings and a reduction in rates. Adjusted net income was 28.8 million compared to 13.3 million for the period last year. Adjusted earnings were 33 cents per share, compared to 16 cents in the third quarter last year. For the three months ended September 30, 2024, OPFI had 86.7 million weighted average diluted shares outstanding for the calculation of adjusted earnings per share. We believe our balance sheet remains healthy with cash, cash equivalents and restricted cash of 74.2 million, total debt of 325.6 million, and total stockholders' equity of 21.3 million as of the end of the third quarter. We ended the period with 599.2 million in funding capacity, including 199.4 million of unused debt capacity under financing facilities. Now turning to our outlook. For the full year 2024, we are increasing our adjusted net income guidance to 74 million to 76 million, which represents a 17% increase from our prior range of 63 million to 65 million. This results in anticipated adjusted earnings per share of 85 cents to 87 cents, compared to the previous range of 73 cents to 75 cents. We are reiterating guidance for total revenue of 510 million to 530 million and are currently pacing towards the midpoint of this range. Looking forward to 2025, we expect our positive momentum to continue, with first quarter adjusted net income growth in excess of 15% year over year. As a reminder, we typically experience significant seasonality in the demand for loans on our platform, which is generally lower in the first quarter. Therefore our potential Q1 earnings growth shouldn't be extrapolated out to the full year. We plan to introduce full year 2025 guidance when we report our 2024 full year results in March. With that, I would now like to turn the call over to the operator for Q&A. Operator?

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star 2. And once more for your questions, that is star and 1 on your telephone keypad. We'll pause a moment to allow any questions to queue. And

once again, that is star and 1. We'll pause another moment. And just once more, that is star

and 1. And we do have a question. We'll move first to Mike Grandahl with Northland Securities. Your line is open.

This is Luke from Mike. Congrats on the night's quarter. I just wanted to dive a little deeper into the improvement in yields, improved 5% year over year. I'm just wondering how much of that was due to pricing versus mixed and any other color you guys can provide on that.

Yeah, thanks. Thanks for the question. You know, I think it's a combination of better credit, people paying us back at a higher rate, but also, you know, in last year we had retired some lower risk-based pricing initiatives that is causing the yield to increase year over year. We also are starting to test pricing into some other segments as well, which is added to that, but it's a combination of the three things.

Okay, I got it. And then just looking out ahead into 2025 here, what are the biggest goals for you guys here? What are you kind of most focused on, or maybe top two or three priorities?

Yeah, I mean, we got the business performing really, really well right now, you know, and if you look at our auto approvals continuing to increase that, you know, another five to seven percent for the quarter, quarter over quarter. So, you know, we're really excited the business is performing and our funnel is very efficient. I think we're focused on growth. You know, we have a lot of levers and growth initiatives that we've been testing and we're starting to feel our confidence level and the credit for our customers and our ability to find new volume in different segments, but also with different marketing and channel partners is growing. And so we're looking to grow the business and continue to push on operational efficiencies. You know, we, we've been on a call, we mentioned some of these AI tools that, you know, we're supplementing our ops with to help continue to expand while getting more efficient on the ops side.

Got it. And then just looking at the capital allocation going forward, I know you guys paid the special quarterly dividend, just wondering about if dividends is something that you're thinking about going forward. Share repurchases have continued in the fourth quarter. Just any other sort of color around capital allocation?

Yeah, good question. You know, we're always, we're always looking for, you know, the highest and best use for our cash. Obviously, our balance sheet is in good shape. And it's something that, you know, next year we will look, you know, that special dividend is definitely something we're going to be looking at. I think we're also, you know, holding capital back for some strategic M&A initiatives. You know, like in the second quarter, we had paid down some corporate debt. So, you know, we're using our cash as most efficiently as we possibly can and for the highest and best use where we see a return.

Got it. It makes sense. Well, thank you guys for taking the questions and congrats again on a very nice quarter. Thank you. Appreciate it.

We'll take our next question from David Storms with StoneGate. Your line is open.

Good morning.

Just wanted to kind of start. You just mentioned some strategic M&A initiatives as a potential use for cash. Would you be willing to kind of lay out what a target profile would look like? Would it be similar to, you know, equity stake like a BIDI transaction? Maybe any geographic targets? Anything of that nature would be very helpful.

Yeah, I mean, you know, we're looking at both. I mean, I think, you know, whatever it is, it's got to be something that's highly accretive. I mean, Opfy's vision is to be a platform for digital alternative financial service products where we see large supply and demand imbalances in large addressable markets. You know, there's definitely different profiles of business out there, different situations are pretty, it's pretty bespoke. But, you know, we're prepared to, you know, handle either or. So, you know, it has to make sense for us, though. You know, and obviously we're going to, you know, protect and mitigate risk with anything we do to make sure that it's successful and make sure that we're going to be getting a return on our capital. It's highly accretive to shareholders.

Understood. That's very helpful. And I was a tad late to the call, so apologies if this is redundant. But just any puts and takes on guidance. Great to see that, you know, revenue was held up and profitability, you know, raised the guidance there. Anything that you're seeing that's giving you confidence, you know, specifically to raise that guidance?

Yeah, we're seeing really strong credit performance, especially in our existing book, which, you know, feels confident that we can, you know, continue to test different marketing partner channels, expand that a little bit. We're also, you know, testing some pricing in the segments, you know, to find some new volume. And I think it also, you know, gives us confidence for next year that we have some levers for growth. You know, we've been very disciplined on our approach on what, you know, on cost per acquisition. Also on the new side, we've been pretty cautious, you know, coming out of 22. And it's bode well for us. We put ourselves in a really good position with optionality here for growth coming out into 2025. And we think that, you know, we have some we have some levers and we have some new channels and segments that we can definitely, you know, look to next year for some growth.

Understood. And then just one more maybe macro level question for me. In the last six months, you know, we've seen Fed break cut. We just finished up an election in the U.S. As you're looking out to the next maybe quarter or two, any macro catalyst you're keeping your eyes on? I know there's another maybe couple that rate cuts that may be on the docket. Anything else that you feel is important?

Yeah. Well, listen, I mean, it's nice to, you know, obviously get a little wind at the back there. You know, I think quarter over quarter, we saw about a 50, 50 basis point drop in, you know, interest costs, which is great. Great to see. We can't really predict what the Fed's going to do. You know, any cost savings there is not something we necessarily plan for, but would just be enhance, you know, our returns. But you know, we're looking forward to an environment where, you know, we've kind of had that headwind for the last two years. So it would be great to obviously, you know, lower that interest cost.

Understood.

Thank you for taking my questions and good luck in Q4.

Thank you. Appreciate it.

And once more for your questions, that is star and one. We'll pause just a moment. And it does appear that there are no further questions at this time. I would now like to turn it back to Todd for any additional or closing remarks.

Yeah, I just want to thank everyone for joining our Q3 earnings call. And I really look forward to seeing and hearing everybody on our Q4 earnings call coming up in March next year.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.