OPPFI 3Q26 EARNINGS CONFERENCE CALL - OPPFI INC

Good morning and welcome to the OPFI third quarter, 2026 earnings conference call. All participants are in a listen only mode. As a reminder, this conference call is being recorded. Following management's presentation, a question and answer session will be held. For those listening by You will be prompted to enter the queue after the prepared remarks. I am pleased to introduce your host, Jared Pollack. You may begin. Thank you, Operator. Good morning, and welcome to OPFI's third quarter 2026 earnings call. Today, our Executive Chairman and CEO, Todd Schwartz, and CFO, Pam Johnson, will present our financial results, followed by a question and answer session. You can access the earnings presentation on our website at investors.opfi.com. During this call, OpFi may discuss certain forward-looking information. The company's filings with the SEC describe essential factors that could cause actual results, developments, and business decisions to differ materially from forward-thinking statements. Please refer to slide 2 of the earnings presentation and press release for our disclaimer statement covering forward-looking statements and references to information about non-GAAP financial measures, which will be discussed throughout today's call. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation in press release. In addition, certain important information related to the BNCC transaction will be included in the registration statement on Form S-4, Files by OPFI, in conjunction with the transaction. Investors are encouraged to read the Form S4 and other documents filed with the SEC in conjunction the transaction Please refer to the disclaimer information included in our earnings release. With that, I would like to turn the call over to Todd. Thanks Jared, and good morning everyone. Thank you for joining us today. I'll begin with a business update, and then Pam will walk through our strategic investments and third quarter financial results in detail. Q3 was one of the most productive quarters in our company's history in executing across key strategic initiatives. At the same time, we believe our current share price does not reflect the long-term intrinsic value of the business. Our stock trades well below pure multiples on both a trailing and forward basis. When the market is not getting us credit for our investment long-term earnings potential we intend to utilize our board authorized 40 million repurchase program when we believe our purchases represent an attractive use of capital first an update on our pending acquisition of bnc on september 17th bncc corp stockholders overwhelmingly approved the transaction leaving regulatory approval as the final step we continue to work constructively with regulators on our bank merger applications and we remain confident the combination will benefit our customers through a broader product set and lower costs and bnc's customers through enhanced digital banking capabilities next i'm pleased to share that we launched our new line of credit product with our bank partners in q3 loc expands credit access while responding to consumers growing preference for more flexible products we are beginning to scale it in new geographies and will test it in existing markets to give customers more flexible options we believe the product will also open new marketing funnel opportunities which we plan to test in q4 we see considerable growth potential for loc in 2027. we built and launched the technology behind LOC in less than six months thanks to our new Lola platform. Its clean, modular architecture lets our product and technology teams move faster, shortening development cycle times for new products and other initiatives across originations, servicing, and risk. The increased agility allows us to deliver more roadmap priorities and innovations at a faster pace. In our core installment business, we continue to focus on affordability and supporting our program's reach. Our latest pricing initiative, Pricing Test 5, represents our most significant rate and payment reduction opportunity to date. Alongside flexibility, customers want more affordable payments and lower APRs, and we are responding by lowering monthly payments and rates for a large portion of customers. This initiative reflects a combination of macro conditions and competitive dynamics, as well as insights from our customer data, which suggests that offering more affordable monthly payments over longer durations can lead to improvement across key loss indicators. Early indicators are positive, and we expect this to support origination growth in Q4 and into 2027. The Lola migration for our installment business is progressing well. Substantially all new customers now run on the new system. The next step is migrating existing customers and data, which we expect to be substantially complete heading into 2027. Lola has meaningfully strengthened our ability to launch and service multiple products, shorten cycle times for product enhancements, compliance, and other workflows, and the Lola platform now enables us to embed AI agents across originations and servicing workflows over time. We expect development of these capabilities to begin in 2027 and look forward to sharing updates as we progress. In Q4, we expect to launch Model 7, our most powerful underwriting and targeting model yet. Early results show a 20% improvement in aligning marketing pre-screening scores with our bank partners' established underwriting criteria, enabling us to make more accurate and better targeted offers to potential customers, particularly on partner sites. When customers receive offers that more closely match the loan amount they ultimately qualify for, application to funded rates are significantly higher. By improving our accuracy, we expect to drive higher conversion and application tofunded rates. The model is currently in validation, and we look forward to launching it this quarter. Lastly, BIDI, our small business funding investment, recently surpassed $1 billion in total funding since 2021, marking a significant milestone in its growth. During the quarter, Biddy launched a new premier funding product as part of its strategy to become a full-spectrum small business funder. The offering expands Biddi competitive reach into near-prime segment, providing larger funding amounts, more attractive pricing, and longer repayment terms, allowing Biddie to compete more effectively across a broader range of small business customers. Citi is also advancing its AI and automation strategy across the entire funding cycle, from underwriting and credit decisioning to funding and servicing. These initiatives are designed to streamline the customer experience, accelerate decision-making, enhance portfolio performance, and create a more efficient, scalable operating platform. Early results are encouraging, and we believe the combination of expanded market reach, AI-driven innovation, and a scalable operating platform creates a compelling opportunity for Biddy to accelerate growth in 2027 and beyond. Taken together, this was an important quarter of progress in building the foundation of OpFi's next phase of growth. We are well underway in strategically transforming the business, investing more than $150 million this year to support continued growth on our path to our objective of 500 million in adjusted net income within five years we remain focused on our vision of becoming a leading technology-enabled bank platform that provides essential credit access and community banking services to everyday americans and businesses with that i'll turn the call over to pam thanks todd and good morning everyone i want to build on todd's comments regarding the quarter. Higher for longer inflation and subdued consumer sentiment continue to affect our customer base, which tends to be disproportionately impacted relative to the broader population. Against this backdrop, we remain focused on maintaining a strong balance sheet of healthy profit margins over shorter-term volume growth. OPFI has repeatedly demonstrated throughout its history that disciplined underwriting, strong credit performance, superior unit economics, and sustainable profitability create more long-term value than pursuing growth at any cost in the near term. Turning to our financial performance for the third quarter, we generated revenue of $149 million, a 3.8% decrease from Q3 2025. Originations for the quarter decreased by approximately 7% to $229 million compared to the prior year quarter, primarily driven by tightened marketing partner screening criteria. We expect the introduction of Model 7 to help improve future performance. While credit losses are elevated compared with the prior-year period, net charge as a percentage of average receivables remain broadly in line with historical averages, driven in part by our strong recoveries. Net charge-offs as a percent of revenue during the quarter increased to approximately 40 percent from 35 percent in the prior year period. And net charge-offs as a percentage of receivables increased to approximately 53 percent from 47 percent in the prior-year period. Given the denominator effect, these charge-off metrics appear inflated in times of slower growth. Moreover, we saw a reversion to the mean and credit, but note we believe it is overall stable. Importantly, these charge-offs are partially offset by a meaningful improvement in recoveries, an area where we believe we maintain a distinct competitive advantage. Recoveries increased to approximately $15 million from $11 million in the prior year period. We continue to closely monitor consumer payment behavior and adjust our underwriting posture with agility as conditions evolve, and we remain confident that the actions we have taken position the portfolio for stronger performance over time. Operating expenses remained well controlled as we continue to balance investment and strategic initiatives with disciplined expense management. Total adjusted operating expenses were approximately $52 million, or 35% of revenue, compared with 34% in the prior year period. On an unadjusted basis, including one-time expenses related to the BNC transaction, expenses were 37% of revenue compared with 36% of revenue in the prior period. While we continue investing in strategic initiatives, particularly those related to the BNC transaction and platform development, we maintained disciplined expense management across the rest of the organization. Taken together, adjusted net income decreased by 23% in the third quarter to approximately $32 million compared to the prior year period, and adjusted earnings per share decreased to 37 cents from $0.46 in the prior year period. Looking at the balance sheet, we continue to maintain a robust financial position, ending the quarter with approximately $141 million in cash, cash equivalents and restricted cash, alongside $350 million in total debt and $443 million in total stockholders' equity. Our total funding capacity was $691 million at quarter end, including $199 million of unused debt capacity. This strong liquidity position and balance sheet flexibility continues to provide a solid foundation for our capital allocation strategy and long-term growth objectives. On capital allocation, our balance sheet remains a significant source of strength. Our business continues to generate meaningful free cash flow, allowing us to invest in growth initiatives while simultaneously returning capital to shareholders. During the quarter, we began repurchasing shares under the board-authorized $40 million repurchase program, reflecting our belief that the current valuation does not appropriately reflect the long-term earnings potential of the company. As Todd mentioned, we intend to remain active in repurchassing our shares when we believe they are undervalued. With greater visibility into the remainder of the year, we are refining our full-year 2026 guidance by adjusting the top end of the range. We now expect total revenue of $600 million to $610 million, adjusted net income of $115 million to $120 million, and adjusted EPS of $134 to $140. Moreover, our confidence in the long-term earnings potential of the company remains unchanged. Our expectations for 2027 and 2028 remain intact, and we continue to believe OpFi is building a stronger, more diversified, and more valuable platform. We remain confident in our path toward achieving our long-term objective of approximately $3 of earnings per share by the end of 2028. With that, I will now turn the call over to the operator for Q&A. Operator? Thank you. If you'd like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star and one to ask a question. And we will take our first question from David Scherf with Citizens Capital Market. Please go ahead. Your line is now open. All right. Thanks. Good morning and thanks for taking my questions. Todd, maybe to start just kind of a high-level broad question. And, you know, it sounds like both the actual results of the quarter as well as the commentary was very similar to, you know, what we heard three months ago. And, I, you know, I'm just wondering, is there any, you know, as you've done more research into maybe just some of the headwinds and volumes, is Is there anything incremental from a quarter ago that you feel more comfortable getting your arms around as it relates either to the consumer, consumer preference, competitive products, just anything that you can potentially add? Yeah, I mean, I think the fact that we launched our line of credit product, we're very excited about it. You know, we are seeing, you know, in the competitive landscape, a lot of growth in line of credit product from you know we're going to it opens up new geographies but also some of the marketing capabilities of it customers you know there's a subset of customers that prefer the flexibility you know especially in this environment over the more stringent nature of the installment product provides customers the ability to draw more frequently and you know know, we're very encouraged by the early, you know, testing, and now it's fully launched, so that we're going to have that as a growth lever for next year. So, that's pretty considerable. We're also, you Know, we were on for the product roadmap for next week. I didn't really talk about it much on this, you now, earnings call, but, you Now, we we're encouraged by some of the product roadmap initiatives we have. We're looking at earned wage access as another complement to the line of credit product for next year and figuring out the best way for us to get that in market next year so you know we're encouraged by that we're also being cautious I just you know a little bit more cautious probably than most we're undergoing you know significant strategic transaction with banks we want to keep our balance sheet you know with about 140 million of cash we're sitting on so you and I think that the stock is trading at a really unfair multiple for the amount of strategic initiatives and growth potential that the company has. But we're positioned really well with a lot of optionality for growth in 2027. And think, you know, listen, I would credit for the quarter, although, you Know, slightly elevated on the growth side, if you look at our recoveries, it's a really strong story. So we're very encouraged by that. When looking at the unit P&L and looking at growth going ahead for the future, Our recovery stream has really been dependable and growing, and it gives us confidence to grow in 2027. Got it. Thank you. And maybe just as a follow-up, is there any, I guess, granularity you can provide on how we should be thinking about modeling yields, either in the fourth quarter or going forward, you know, in lieu of the pricing adjustments you discussed? You know, I think one thing that we're comfortable, we have a very high margin. We run at a higher margin than most of our peers and feel that, you know, obviously new product initiatives and marketing are part of getting back to some of the growth on units and originations. But it's also product marketing, right, offering customers, meeting them with a price and term that matches their risk profiles, right? And so I think, you know, we would be comfortable reducing yield for higher quality customers to be able to, you Know, recruit them and especially in some of these partnership sites. But it's not going to, you know, largely be impacted, you know, and Q4 was flat year over year. But it is something we're looking at. In addition to acquisition costs, we know that in our peer set, you're going to have a lot of competitors that are paying, in some cases, almost double as a percentage of principal that we pay. So we've been very disciplined on keeping yields strong and, you know. Our acquisition costs. But it isn't something we are looking at in addition to to, you know, like I said, new products and finding new ways to grow. Got it. Thank you very much. Thank you. We'll take our next question from Dave Storms with StoneGate. Please go ahead. Your line is now open. Morning, and thank you for taking my questions. Todd, I wanted to start with the line of credit product. Maybe just any more you could tell us about what you learned from the initial rollout, anything around customer demand and then also maybe more specifically the learnings as they might apply to that earned wage products any other products going forward just love to hear more about that yeah I mean the rollout has gone as expected we're starting to add additional marketing sources and we're also starting to plan for offering it in existing states as well as I mentioned so we're you know we're excited about you know starting to scale that in the next two months of the year and it will give us a lot of good data and learnings from going into 2027 as we start to put our forecasts together so encouraged and as you know team did a great job I think it was we announced it was slightly delayed but you know after that slight delay the team came together and got it launched in Q3, which was a big milestone for us. EWA is something that we think it's not only a product that has a lot of product market fit. We're seeing a lot customers using it in their daily lives to manage cash flows, but we think that it also just has a line of marketing capabilities that some of our installment product is not eligible for. so we're excited about that, more mainstream opportunities on the marketing side. Right now, you know, we're thinking that's probably going to be, you know enough for us next year getting line of credit scaled and adding an earned wage access product. There are other products out there that, you know we'll be looking at and considering, but nothing to report as of now. That's great, I really appreciate that. And then just looking into 2027, I know you're obviously not given guidance at this point, but with Model 7 hopefully being up in Q4, is there anything you can see either from a macro standpoint or from an offline specific standpoint that might throw a wrench in the typical seasonality that you tend to see? No, I mean, you know, like, you're one of the benefits of the Model 7, the ability to more accurately customers or you know for their what they fall in and and kind of target uh their the loan the loan or uh advance amount on the on the line of credit that they're looking for we found that uh the targeting customers more actually provides for higher conversion so we're excited to get that validated and rolled out uh that'll be included obviously in our forecast for 2027, but now there's, you know, we're continuing to believe that a lot of these strategic initiatives, including, you know, the Lola migration, which is, you know, originating 100% of our new volume, net new volume through this system now, and we'll soon, you know, will be finishing up the migration substantially this year, which will give us a lot of opportunities in our product roadmap initiatives going into next year so we feel confident we're going to get back to our you know growth trends on a unit and origination basis for 27 that's perfect appreciate the commentary and good luck in the next quarter thank you thank you we'll take our next question from Mike Rundell with Northland please go ahead your line is now open Hey, thank you. So I'm looking at slide six, and it's kind of titled Investment and Key Strategic Initiatives. Can you kind of talk through the dollar amount you're investing in those initiatives? And is there anything to call out that's sort of one-off, or is this sort of just part of running the business? I don't have slide six in front of me, but I can kind of talk about it at a high level. What's the dollar amount it's referencing? Yeah, the investments that you're making in strategic initiatives. Yeah, $150 million, yeah. Well, starting, the company has almost bought back almost $18 million this year. So far, we had a $42 million TRA, which collapsed the EPSI structure. You know, the contemplated, the system, the Lola system, is another $35 million of investment to rebuild our whole operating and servicing system. we have, you know, we made an investment into Biddy, which we have a call option coming in 2027, and then also the bank transaction. So, if you kind of add it all together, it probably even might be over $150 million when all said and done. Got it. And then on the bank transactions, I think last quarter and when you announced it, you kind of thought you'd, you know, have this sort of nailed down by year end. Any updates to that timing, or does that still feel good? Yeah, I mean, listen, we're continuing to, you know, respond to regulators promptly, qualitatively and quantitatively. And, you know, we are ready to continue to respond and work with them. We're hopeful that we can get this resolved by Q4. If it does leak or bleed into Q1 of 2027, we'll provide those updates when they come available. But we continue to work on the application and feel like our app, on a merit basis, remains strong and continue to feel like we're giving really solid qualitative and quantitative answers to our regulators got it um and then the the 75 million dollars drawn from that Catholic facility can you remind us the interest rate on that and kind of the flexibility if you end up not needing it can you pay it back right away how does that fit into your plans Yeah, I mean, that's more of just a financing to allow for more flexibility in our capital structure balance sheet. The interest rate is somewhere around 12%, but we were more focused on allowing for a lot of flexibility of payback to allow flexibility in capital structure for 2027 and beyond. So, you know, it's something that positions us in our balance sheet, you know, very well going into 2027 to provide that optionality. Got it. Okay. Thank you. And another thing, you know, to mention is we've been paying debt down over the years, and this was just kind of replenishing it. If you look at actually the last couple of years, you know, we've, we're, we, we been on a trend of de-levering the business, you from a debt-to-equity ratio. So this is really just kind of replenishing it. Okay, and maybe just one more. I think the purchase price of the bank is about $130 million. Would you use all cash for that, or is there some other financing you would take on? Can you talk about how you envision that? Yeah, I mean, currently the deal that was announced is 50% stock, 50% cash. You know, so there's no financing needed. We have ample amount of cash to fulfill the transaction. Sure. Okay. Hey, thanks for that. Yep. Thank you. There are no further questions. And this brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.