Good morning, and welcome to OpFi's third quarter 2025 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 dial-in, you will be prompted to enter the queue after the prepared remarks. I am pleased to introduce your host, Mike Galentine, Head of Investor Relations. You may begin.

Thank you, Operator. Good morning, and welcome to OpFi's third quarter 2025 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-looking statements. Please refer to slide 2 of the earnings presentation and press release 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. Reconciliations of those measures to gap measures can be found in the appendix to our earnings presentation and press release. With that, I'd like to turn the call over to Todd.

Thanks, Mike, and good morning, everyone. Thank you for joining us today. OPFI achieved another record quarter of revenue, profitability, originations, and ending receivables. In addition, we are happy to report that we have renewed our credit agreement with Castle Lake, improving operating leverage, pricing, and capacity. Given our continued outperformance in Q3, we are raising earnings guidance for the third time this year. I will discuss growth, credit, our loan origination lending application, Lola, migration, and BIDI, our SMB investment, on the call. In the quarter, we achieved a 12.5% growth in net originations and a 13.5% increase in revenue year-over-year, with almost 50% of originations coming from new customers. Auto approval rates increased to 79% year-over-year, and customers continue to be approved at a higher rate than in prior quarters, with no human interaction. We continue to see increased scale in our partnerships and direct response programs. We started testing connected TV in Q4 and believed that this could contribute to growth in 2026 and beyond. This strong top-line growth, combined with prudent expense management, led OpFi to generate a record $41 million of adjusted net income for the quarter, representing 41% year-over-year growth. Regarding credit, Model 6 continues to perform well and better segment customers across risk segments. Throughout the quarter, we saw higher charge-offs in new loan vintages. However, by tightening higher risk segments and applying a risk-based pricing approach, we maintained strong unit economics while sustaining growth. The team leveraged AI tools, customer attributes, and repayment data to refit Model 6 into what we believe is the most reliable model to date, Model 6.1. This Model 6.1 refit is designed to identify riskier borrower populations better while incrementally improving volume. The model is also designed to enhance risk pricing across segments, accounting for behavioral and seasonal volatility. In conjunction with our lending partners, we plan to roll out Model 6.1 refit in Q4 and fully implement it in Q1 2026. With Lola, OpFi is building the origination system of the future. This will give us a clean architecture that is designed to take advantage of rapidly developing AI tools in originations, servicing, and corporate operations. The product and tech teams have been working hard and have officially begun the testing phase of our migration. We plan to continue testing Lola throughout the fourth quarter and migrate in Q1 2026. Early indicators give us confidence that Lolo will help continue to improve funnel metrics, increase automated approvals, enhance efficiency in servicing and recoveries, better integrate major systems, and deliver reduced cycle times and greater throughput for our product, tech, and risk teams. Our investment in Biddy continues to perform well. In the third quarter of 2025, Biddy generated $1.4 million in equity income for OpFi. Biddy is a great partner that we have enjoyed working with and learning from in the SMB space. The company shares OpFi's business principles and corporate values and consistently uses technology to enhance operations and the customer experience. Biddy has identified significant additional growth opportunities and continues to capitalize on the ongoing supply-demand imbalance in the small business revenue-based finance space. overall opfi delivered another strong quarter both financially and operationally outperforming expectations and allowing us to raise guidance for the third time this year looking ahead we anticipate continued double-digit revenue and adjusted net income growth throughout the remainder of 2025 and into 2026 we believe opfi is well on its way to executing its vision of becoming the leading tech-enabled digital finance platform that partners with banks to offer essential financial products and services to everyday Americans. With that, I'll turn the call over to Pam.

Thanks, Todd, and good morning, everyone. As Todd noted, we achieved another record quarter, generating revenues of $155 million, an impressive 14% increase over third quarter 2024. Model 6 has been a significant contributor to this growth, empowering OpFi to expand its reach and grow its business effectively. Its enhanced predictive power has enabled us to better manage our loan economics through risk-based pricing and allow our bank partners to underwrite larger loan amounts for credit-worthy individuals, helping fuel robust growth in originations and receivables balances. As Todd noted, in the third quarter of 2025, we observed an increase in net charge-offs as a percentage of revenue at 35%, up from 34% in third quarter 24. It's important to note that we believe this risk is appropriately priced into these loans. This strategy also contributed to our net revenue growth, reaching a quarterly record of $105 million, a 15% increase over third quarter 24, though the yield decreased slightly to 133% from 134% in third quarter 24. Our scale and focus on cost discipline also played a pivotal role in our strong performance. Continued operational improvements contributed to notably lower total expenses before interest expense, which declined significantly to 30% of revenue in the third quarter, a substantial improvement compared to 33% in the same quarter last year. As we noted previously, earlier this year, we proactively paid down our corporate debt and successfully upsized one of our main credit facilities at more attractive interest rates. These strategic moves helped reduce interest expense to 6% of total revenue, down from 8% in the prior year. Additionally, in early October, we announced the signing of another $150 million credit facility with lower interest rates than the previous one, positioning us to realize even lower interest expenses as a percentage of revenue in the future. As a direct result of increased revenue and strategic reductions in expenses, adjusted net income surged 41% to a quarterly record of $41 million, marking a significant increase from $29 million last year. Concurrently, adjusted earnings per share grew to $0.46 from $0.33 last year. On a GAAP basis, net income increased by 137% to $76 million, reflecting our higher revenues, lower expenses, and a $32 million non-cash gain related to the change in the fair value of our outstanding warrants. Because our Class A common stock price decreased during the quarter, the estimated value of the warrants issued when we went public decreased, driving this non-cash income. However, as we have consistently stated, this is a non-cash item and does not impact the underlying profitability of the company. Looking at the balance sheet, we continue to maintain a robust financial position, ending the quarter with $75 million in cash, cash equivalents, and restricted cash, alongside $321 million in total debt and $277 million in total stockholders' equity. Our total funding capacity stood at a strong $600 million at quarter's end, including $204 million in unused debt capacity. During the third quarter, OpFi strategically repurchased 710,000 shares of Class A common stock for $7.4 million. Additionally, since the third quarter, OpFi has repurchased 317,000 shares of Class A common stock for $3.2 million, as management continues to believe the share price does not reflect our underlying cash generation or our return on capital opportunity. Given our strong operating performance driven by growth in net originations, revenues, and adjusted net income, we are pleased to provide the following updated full-year guidance. We are once again increasing our guidance. For total revenues, we are raising the bottom of the range to $590 million while leaving the top of the range at $605 million, up from the prior guidance of $578 million to $605 million. Adjusted net income is expected to be $137 million to $142 million, up from our prior guidance of $125 million to $130 million. Based on an anticipated diluted weighted average share count of 89 million shares, Adjusted earnings per share are expected to be $1.54 to $1.60, up from our prior guidance of $1.39 to $1.44 per share. 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 remove yourself from the queue at any time by pressing star 2. Once again, to ask a question, that is star one. We'll take our first question from David Scharf with Citizens Capital Markets. Your line is open.

Good morning, and thanks for taking my questions. Maybe I'll start off with credit since it's been so topical this reporting season. Just curious, obviously you spoke to a strong performance. Just curious, are there any early indicators or metrics such as first payment defaults or the like? I mean, anything that gives you a sense that households that you're catering to are becoming a little more stressed than three months ago or pretty much the loss rates you reported speak for themselves?

Hi, David. Good question. You know, we constantly are surveying, looking at different data points, not only from the data that we receive from customers' bank accounts and the macroeconomic data. I mean, the backdrop from a macroeconomic standpoint still remains largely unchanged. We are hearing about, you know, different products like auto loan delinquencies and all this. But, you know, we really focus on how it affects our customers. In our bank data, we're not seeing anything that would cause alarm. However, we did see some higher early payment stats in the quarter that caused us to tighten slightly. I will remind you, though, that back in 22, without risk-based pricing, not being able to price risk properly in these environments is something that we were not able to do. Also, our recovery lines, you know, we feel really good about keeping unit economics strong with pricing and strong recoveries in this environment. I feel like we can operate in any environment with Model 6, you know, and it's kind of a dynamic modeling environment. It's not, you know, it's not set it, forget it anymore. We're really of the mindset that, you know, we're going to meet the customer where they are and we're going to price it properly and, you know, have a product for them. So, yeah, we may incur some higher charge-offs coming through in the fourth, but let's not lose sight of as a percentage of revenue year over year, we expect our charge-offs as a percentage of revenue to go down year over year. So, you know, that's just kind of how the environment is now. You can't set it, forget it. You have to be constantly watching it and constantly updating your pricing per segments and your pricing for risk.

Got it. No, that's helpful. You kind of delved into maybe my follow-up, which was maybe to get a little better context for risk-based pricing that Model 6 is going to enable more of. You know, I guess at a high level, should we think about more risk-based pricing as you're currently leaving yield on the table, or is it you're leaving volume on the table that there are maybe consumers that are applying, not accepting the loan? You know, maybe give us a little context.

It's both. I think in times of volatility in economic environments, it allows us to properly price risk, so that gives us that lever, but it also allows us to target with potentially lower prices for our lowest risk customers. It allows us to better target them, and so we use it for both. We use it for credit and losses. We also are using it for targeting and growth, and it's a switch that you can toggle depending on the environment, And that's kind of why I spoke a little bit before about the dynamic nature of it. It's something that we're reading, you know, in real time on a weekly basis and kind of assessing, especially in an environment like this where, you know, there's a lot of news and a lot going on. You know, we do, you know, the Fed's meeting soon. You know, we're waiting and seeing on that, you know, from a union economics standpoint, if we do get some relief on interest rate. But, you know, right now we're just in an environment like that where we're just going to continue to watch credit. But we still think we can grow in this environment with strong unit economics. Got it. Got it.

Great. Hey, I apologize. Maybe just one quick follow up on credit, because, you know, obviously you had mentioned auto. It's been sort of dominating the headlines, a lot of company specific events out there. But but but auto subprime delinquencies have gone up. I'm curious, since you're capturing bank data, do you monitor what percentage of household budgets are being attributed to auto payments since affordability is still sort of playing the auto sector for both new and used?

Yeah, I mean, ability to repay is very prevalent in our modeling. not specifically necessarily, you know, auto, but it is factored into the equation of ability to repay. You know, customers have to have the discretionary income to make the monthly payments. And so it's something that is top of mind in our model. We have not seen in our bank data, you know, significant reductions in income or balances or anything that would cause alarm here. And so that's why we can, you know, we tightened where it made a lot of sense. And then also, you know, use the model to better target lower risk customers in this environment. But, you know, we're watching it just like everybody else right now. I'm not going to not say that, you know, credit isn't worse. It is worse than it was last year in the new segments, especially the new. But, you know, something that we can operate in now with our current pricing structure and how we operate. Great.

Thank you very much, Dad.

Yep.

Our next question comes from Mike Grondahl with Northland Securities. Your line is open.

Congratulations. On the origination side, could you talk a little bit about direct mail and then some of your thoughts on connected TV that you mentioned?

Yeah. Thanks, Mike.

How are you doing? You know, listen, I think I think direct mail is a highly scalable lever for us that we're just starting. You know, we're just in the in the early innings of it. You know, it was it was four point two percent of our originations that can easily be in the double digits if we wanted. We're going slow and being pretty methodical and strategic. We're making sure we have the creative right, excuse me, and making sure that the modeling is right. It's something that, you know, it's a powerful funnel, top of funnel, you know, if you can get a lot of apps that's consistent. It's something that, you know, we're prioritizing and focusing on.

Got it. And then connected TV, I think.

The connected TV, yeah, so we're in the early, really early innings of that. But, you know, it's something that we think it's controllable, scalable, and it's also reaching a lot of our customers in a targeted fashion. So we're excited about it. It also allows us to get our brand out there and our creative. So, you know, our marketing team has been working hard on that. And, you know, we're going to be testing that throughout the quarter. But, you know, we'll have more to report on that in our Q4 earnings. But, you know, we think it's promising and it's something that can help us scale and continue to grow next year.

Got it. And then you've been really disciplined on OPEX. You know, I would call OPEX sort of, you know, basically flattish to up a tad. How much can you grow Originations and the book without having a step function lift in OPEX? You've kind of done this now for two-plus years, if not longer, bolted on more revenue and more loans on your existing platform and been really efficient. The throughput's been great. But how long can you continue to do that?

Yeah, good question. You know, we feel really confident in our ability to scale. I mean, this is where, you know, things get, you know, highly incremental at this scale as far as, you know, originations and growth go. We don't anticipate, I mean, Lola is that. That's why I keep talking kind of about Lola on these calls and introduced it last quarter. You know, we've made significant, you know, R&D and software development initiatives in the company over the last year to allow us to continue to scale and then also allow us to, you know, essentially, as I said, building the lending origination system of the future. But it really allows us to install and integrate some of these new age AI tools that are coming. You know, some of them are more developed than others, and some of them are more ready to use today versus, you know, in a year from now. But it's all about having a clean architecture on your tech stack and not have a lot of technical debt built up so that we can take advantage of some of these tools. It also better, you know, integrates our corporate system. So we really don't anticipate having to add much fixed overhead. It's more going to just be variable cost for the growth and think that this can continue and definitely into next year.

Got it. And then one last question. I think in your prepared remarks you said double-digit revenue and adjusted net income growth for the rest of 2025, obviously implied by your guidance. But I think you also said, and into 2026, is there anything you want to say about 2026? Are you sort of, you know, striving for double digit top line?

Anything there would be helpful. yeah i mean i mean listen it's something that you know it is credit dependent i'll caveat that my but you know i will say that we have the levers i'm pretty confident um you know within our walls we have the levers to grow in double digits um and feel confident we can do that the only thing you know that would prevent us from doing that is we're not going to chase growth if credit is not there it's just not something we're going to do you know us now uh we're very disciplined. So we won't chase growth to take on higher losses, but we do have the levers if that's what you're asking for next year for double-digit growth. Absolutely.

Got it. Hey, thanks a lot.

Thank you. As a reminder, if you would like to ask a question that is star one to join the queue, you may remove yourself by pressing star two. We'll take our next question from Kyle Joseph with Stevens. Your line is open.

Hey, good morning. Thanks so much for taking my questions. Just given everything going on with the portfolio in terms of new customer mix, the risk-based pricing, just wanted to get kind of your thoughts in terms of yield trends we should expect going forward.

Yeah.

We feel good that our yield's stable. It came down a little bit in In Q3, that is typical this time of year. In Q3, you're going to see some of your lower yields as you start to see some losses kind of come into the past due as they drop out of accrual. We do hope that we'll see a nice rebound in Q4, and it's also been stable throughout the year. But we anticipate stability and elevated yield coming through the book. And that is part of the risk-based pricing. We're better pricing risk across the segments, so we feel good about where we are with that.

Got it. Helpful. And then moving to the balance sheet and capital, obviously you guys have done a lot of work on the balance sheet year to date, and it's in a really good place. And then you guys are still generating strong cash flows despite portfolio growth. But just, you know, give us a sense for kind of your capital allocation priorities now that you get the balance sheet in a really good position.

Yeah.

Well, Pam, I think Pam, you know, talked about it. We've been buying back stock in open windows and with, you know, predetermined programs. We'll continue to, you know, defend our share price when we think it's, you know, undervalued. It's something that, you know, we feel like we're not trading. Hopefully the third time is the charm here, Kyle, with us raising guidance again. But listen, that's top of mind right now is obviously defending our share price and making sure that we're properly valued in the marketplace. We're continually actively looking at M&A opportunities, looking at – we're using it for growth. You know, the menu of options is open. So we are, you know, we're actively looking at those different scenarios and best and highest use of our cash.

Got it. And just one last one for me. Apologies if I missed it. But just in terms of the marketing spend, we saw a return to growth this year.

I think you mentioned that was, you know, maybe TV in direct mail.

But, yeah, if you could walk us through, you know, what you're seeing in terms of customer acquisition costs and how you expect marketing expenses to go going forward and how that versus portfolio growth. Obviously, they go hand in hand.

Yeah. You know, I think I stated back in Q2, you know, you should expect the acquisition costs to kind of creep up here as we go into growth mode here in the second half. And that's, you know, it's consistent with, you know, what's happened. you know, we're probably up $20 to $30 per. We feel very comfortable there. And I think there's even probably some more room, especially for lower-risk segment customers, to be able to pay those CPS and feel really strong about the unit economics and the incremental growth it provides.

Great. Thanks so much for taking all my questions. Thanks, Kyle.

Our last question comes from Robert Lynch with Stonegate Capital Partners. Your line is open.

Hey, good morning, Pam and Todd. Really appreciate you taking the questions today. Just have a few here. With net charge-offs as a percentage revenue, saw a slight increase in Q3. You know, is this typical seasonality or mix? And, you know, could you get this back up to the 45% in Q4 that we saw last year? Seasonality and early indications for the holiday season coming up?

Yeah, I mean, there is seasonality to the business. And, you know, you're going to see your lowest charge offs as a percentage of revenue kind of in Q2 and Q3. And then it, you know, elevates year over year. It is it is slightly elevated. You know, we do anticipate, though, for, you know, annualized reduction and percent as a percentage of revenue overall. all um you know we didn't we didn't uh tighten you know we were we were very conservative in 24 even even you know tightening probably a little too conservative maybe in q2 um which which caused you know really uh you know strong revenue as a percentage of charge-off numbers i mean we we didn't we don't need to be we're at a level now where we feel really comfortable that the unit economics are strong so it's you know it's gonna it's gonna flatten out here and you know incrementally every quarter could be a little bit less could be a little bit more but we feel really good at these numbers where we're at and think that you know we can we can generate really strong returns within this band.

Okay great really appreciate the color there. I got maybe two more here but you know you highlighted stronger recoveries from operational changes. Is the second half recovery run right now above plan and you know how confident are you that this level is sustainable into 2026?

Yeah I mean we we've now you know achieved you know a strong as a percentage of gross charge-offs a really strong recovery right now for for two years we think it's very sustainable it's it's performing at or above plan every quarter we have a we have a great you know process team and strategy behind it. So we feel it's sustainable. And, you know, at first, you know, the first year when we were achieving those results, it was something that was hard to bake into the unit economics because, you know, we weren't sure if the stability of it was going to last, but it has. And we feel really good that, you know, we're going to continue to achieve that percentage of recovery on charge-off. And it obviously helps our unit economic model, and how we price and how we target on the front end. And so it's been a great story for us.

Awesome. Thank you for the color there. And I've got just one more kind of unique question here. But on the recent shutdown, what impact did it have on any of the data you see coming in, as well as your models with customer behavior? More for them and yourself as well. And how are you monitoring the situation and mitigating any of the effects going forward? in real time?

Yeah, you know, I thought we were prepared for this question because I thought I thought I was going to get it sooner. But no, it's something that, you know, we're recommending we have a we have a very, very fair, you know, hardship program for for for customers that have been impacted by the federal government shutdown. We do we do have some exposure. It's something we're currently watching. It's it's it's it's pretty demandless at this point on the number of hardships uh this this time of year because of weather events it is our it is our you know largest you know hardship uh program offering for this quarter because of the q3 and the weather events that happen usually typically in this time of year but you know they're incrementally there are some more coming from the federal government shutdown nothing that uh we've caused alarm or caused us to you know really change you know you know how we operate at this point or credit from a credit perspective, but definitely something we're watching very closely as it unfolds and we'll continue to.

I really appreciate it, Todd, Pam, Mike.

Congratulations on the quarter, and I'll get back in the queue.

It appears we have no further questions at this time. This does conclude today's program. Thank you for your participation, and you may disconnect at any time.