Greetings, and welcome to the OppFi Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jason Rosenthal, Vice President, Finance. Please go ahead.

Thank you, operator. On today's call are Jared Kaplan, OppFi’s Chief Executive Officer; and Shiven Shah, Chief Financial Officer. The company's second quarter 2021 earnings press release, supplemental presentation and associated Form 8-K can be found at investors.oppfi.com. During the call, the company will be discussing certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi’s management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believed to be appropriate. Any forward-looking statements made during this call are made as of today and OppFi undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, development and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the sections entitled Risk Factors. In today's remarks by management, the company will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures, the most comparable GAAP measures can be found in this afternoon's earnings press release. The results discussed on this call reflect Opportunity Financial, LLC for the second quarter ended June 30, 2021 achieve pride with completion of the business combination with FG New America Acquisition Corp. on July 20, 2021. This call is being webcast live, it will be available for replay for one-month on our website. I would now like to turn the call over to Jared.

Thank you, and good afternoon everyone. Since this is our first call as a public company, before discussing our second quarter results, I will take a few minutes to review the OppFi story. Our multi-year mission is to facilitate financial inclusion for the 150 million Everyday Consumers, who lack access to traditional financial options by providing the best available products in an unwavering commitment to our customers. We are working to create the digital financial services destination for the Everyday Consumer. This is the US median consumer. It's not a low income consumer. Our average customer makes about $50,000 and has a bank account, but their bank has failed them at their greatest moment of need. Banks won't provide these consumers with credit, due to a low traditional credit score. Perhaps their car broke down, and they need to get, it repaired to go to work, or maybe they must finance a healthcare deductible to receive urgent medical care. Filling the void left by larger banks, shrewd community banks have recognized the market opportunity for this vastly underserved consumer. But these smaller banks often lack the people, process and technology to enter the market directly. That's where OppFi comes in. We power community banks by providing best-in-class outsourced marketing, underwriting, servicing and technology to facilitate credit access for this Everyday Consumer. Instead of traditional credit scores, we develop proprietary scoring based on alternative data to determine an individual's ability and willingness to repay. This proprietary credit decisioning technology is about 30% more predictive than FICO. The result for the customer is a much better financing alternative than the markets of last resort. Products like payday loans, auto title loans, bank overdraft lines, tribal loans and unregulated markets. We are now expanding our credit access platform with a goal of becoming…

Thanks, Jared, and good afternoon, everyone. As Jared highlighted in his remarks, during the second quarter, we continue to see favorable trends in credit quality and originations, which drove strong profitability continuing the momentum from the first quarter. Prior to going into more details in our second quarter results and full year outlook, I would like to start by walking through a couple of key financial drivers of our business model, starting with the unit economics of our installment loan product. Our flagship product, the OppLoan is a fully amortizing 11 months $15 installment loan, after banks originate the product through a platform, we buyback the majority of economic interests. We earn interest on those receivables. There are no other fees. Our goal is full transparency and ensuring customers have the ability to repay, which underpins our proprietary credit model. Our customer takes about 2.5 loans out over the life, which on average is approximately 11 months. The average customer will have a net charge-off rate of about 38% as a percent of revenue, although we have seen significantly lower loss rates recently during by healthier customer balance sheets, as a result of the government stimulus program. Apart from cost of credit, the other main variable cost driver is our cost of customer acquisition, which has historically been in the $200 range, but 80% of our acquisition channels, which include our third party referral relationship, search engine optimization, customer referrals, and remarketing are based on a variable cost per funded loan, meaning we pay a fixed amount when we fund a loan. The other two variable cost drivers are our sales costs, and cost of financing. About half of our sales costs are from reporting data and tools to support our bank partners underwriting models, and the other half are…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from line of David Scharf with JMP Securities. Please proceed with your question.

Yes. Good afternoon. Thanks for taking my questions.

Hey, Dave.

Hey, Jared, I'm wondering, first off, just more of a high level macro question, you obviously provided a lot of background behind sort of the full year outlook and some of the exogenous factors. We're obviously wrapping up in a reporting season where a lot of non-prime, sub-prime lenders have talked about the initial signs of perhaps a lot of government stimulus and so forth finally starting to wane. It's still a depressive factor on demand, but there's seems sort of the initial green shoots if you will over a return to pre-COVID demand. Can you sort of talk about within the context of some of the qualifiers you put out there. I guess number one. If you in fact are seeing through August 10, any signs of delta or otherwise sort of impacting demand or perhaps how it ended in June? And secondly, 50% increases in receivables at December 31st is still a extremely impressive growth rate obviously versus just June 30. Are you willing to sort of comment on perhaps how much that impressive figure may be discounted in your mind or just by what sounds like being a little more cautious and some of these external factors? It just kind of kind of reconcile once again, I think some of the narratives out there that hey, maybe there's light at the end of the tunnel of all the government stimulus and all the depressive factors versus what sounds like maybe a little more cautious on your front?

Yeah. Happy to address it. I think at the beginning of the year through 2Q, without some of the more recent data points, specifically as it relates to the surge and some of the consumer behavior related to it and some of the decisions by the government to extend these stimulus programs, right, I mean just the other day, the government talked about extending the moratorium on student loan payments, moratorium on rental payments. And so, we're definitely not at a level that we would consider normalized consumer spending, normalized demand for credit, despite that the business is going to grow nicely. And we hope here in the near future, we get back to what we consider a normalized environment. But I think we're trying to be thoughtful as relates to guidance versus where we are today. Even a month ago, we probably would have would have talked about it a bit differently with some of these new facts, and we are evaluating it on a day-to-day basis, and trying to be thoughtful about how we think about the future numbers but to your point, like the growth is still going to be strong. I think we've certainly improved the platform from a conversion perspective quite a bit compared to pre-pandemic periods, so that helps a lot. And there's certainly upside if some of these factors end up reversing more quickly, than we have a perfect crystal ball into, right. There's just a lot of uncertainty as it relates to this surge, how quickly it ends. And what that means for people getting out and about. Shiven, any other additional color on that.

Yeah, I agree, I think in terms of the guidance we provided, we wanted to take a pragmatic and a cautious approach, we saw demand accelerate through the second quarter, obviously 44% sequential growth, July was also a positive year-over-year performance, our receivables were up over 20%. So the growth is there. But yeah, the demand is not at pre-COVID level, so we do see upsides what we provided. We wanted to be transparent and provide guidance that we think that is in a range even in the downside situation.

Got it. It's very helpful. Obviously, caution is warranted. It's incredible. Everything we're seeing is remarkably different than it was just two, three weeks ago in terms of obviously the latest surge. And maybe just want one follow-up. The impressive increase in auto approval rates, I don't know if this is a question that you're able to answer, if it's quantifiable, but is that -- would you characterize that increase as somewhat of a function of the benign credit environment we're in or is it completely sort of related to just the AI algorithms becoming more and more perfected, because trying to obviously ultimately get a sense for how high that number could go and what the implications are for margins?

Completely separate, we fully believe you're going to be back in normalized credit as soon as, you're back in normalized demand. So we wouldn't do anything short term to increase the approval rates in that type of return to normalcy. I mean, we just have been ultra focused over the last couple quarters to continue to use our data and our technology platform, and our data science team and our product team to approve automatically where we're confident, and ultimately the banks are confident that the credit is going to be there. It's a bunch of dials you can think about – a bunch of dials over time, it's incredibly complex. But over time with more data, we are able to get more confidence to do that. And ultimately, you got to do business, the way that the customer wants to do business in – and certainly, we have seen a greater desire in customers going straight through. And so it's a very important part of the business to continue to improve over time, you'll never get to 100%, but there's still upside from here through year-end to continue to improve that auto approval rate.

Got it. I apologize, if I can squeeze just one more in. Are you able to maybe quantify for us, whether or not the guidance for year end balances to just how much – how material the contribution might be from SalaryTap and Card?

Yeah. So SalaryTap and Credit Card they both have been launched. We think that the –the overall impact on receivables, this will be about less than 10% of the overall portfolio. We want to make sure we prove out the unit economics of those products, like we did with the installment product. And then we plan to scale those business pretty significantly in 2022 and beyond.

Got it. Great. Thanks very much guys.

Thanks, David.

Thank you.

The next question comes from the line of a Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, guys. Thanks a lot. Good evening. Can you repeat what you said again about July, and especially the second half of July? I just want to make sure I got that.

Yeah, absolutely. So, we saw July receivables up over 20% year-over-year, and we feel that and based on our projection that the growth of receivables will approach 50% versus the second quarter by the end of the year.

Got it. I thought you said something else, like you started to see something late July, a little bit of a slowdown or some change, maybe I misheard that?

Yeah. So we saw accelerating growth – sequentially through the second quarter and into the first half of July, with some of these stimulus programs and increases in extensions and moratoriums, we did see a little bit of deceleration in growth in the second half of July. But that's baked in and that's related to the COVID and the Delta variant, potentially. So we baked that into our – kind of taking into account that downside potential going into the second half of the year. But that's baked into that 50% that we that we've alluded to earlier.

Perfect. Okay. And Jared, clearly, you're working hard on SalaryTap and Credit Card, but I know you have a more expansive product journey. What sort of next on the horizon and sort of a rough timeline for that?

Sure. Yeah, we're going through a robust comprehensive process that is a customer focused and customer first to understand what the best order of next products look like, there's a laundry list of potential products there, everything from mobile banking to sub, a 36% installment lending to point-of-sale lending to overdraft fee protection products, there's the gamut of potential products out there. For each of those, we will evaluate, but not only the order but whether we build it, whether we partner for launching it, and whether we look at acquisitions. And I would hope that as we exit the year early in the next year, we've got a beacon on the order there. And then, depending on the way we get into those products will determine the speed, we do have our hands full now executing two new products from the ground up, both of which are super early, but we are positive on the early indications. And I think from the stories perspective, the quicker, we're able to build up this full product suite, the quicker we're able to quantifiably show that we can graduate customers from a higher cost product back to a mainstream product, and the quicker we can show that the member base stays with us for a longer period of time, because I view that as a destination rather than a one stop shop to solve a acute problem. I think we'll be rewarded for it in the market, so there's a lot more to come there, obviously, Neville just joined us. He's severely talented, tremendous background. He's helping me lead a bunch of those initiatives, and I think you'll be hearing a lot more on our future plans there in the quarters ahead.

Got it. Thank you. And Shiven roughly, your free cash flow conversion from adjusted EBITDA, what percent should we think of that as 50% to 60%, what's a rough guide?

Yeah. So I think, rough guide from adjusted EBITDA is about 60 -- about two thirds would convert.

Got it. Okay. Thanks a lot.

Thanks Mike.

[Operator Instructions] Your next question comes from line of Chris Brendler with D.A. Davidson. Please proceed with your question.

Hi thanks, thanks for taking my question. Congrats on the results guys. So, on the subordination outlook and some of the tea leaves here today, it surely sounds like a lot of the things we're watching are the stimulus payments and the macro impact on demand. Just wanted to -- just because of the amount of capital raising is taking place in fintech, and the amount of innovation that we're seeing in lending space in particular, are you seeing any changes to the competitive landscape as you think about this quarter's results and the outlook, or is it still really wide open from an OppFi perspective, just given where you guys sit?

We've seen some interesting themes from the traditional banks, I mean, you've seen a number of banks go to no fee accounts or lower fee accounts, you've seen some of them take away overdraft. You see some of them, notionally launch small dollar products, we haven't seen any of that impact us competitively, we haven't seen any direct competitors come to the marketplace. The one thing we did see, which is interesting that TurnUp program. So, today we quoted the percentage of customers that actually close alone when they go through that process. We did see a bit higher appetite on the glass of actually showing customers an offer. We usually are about 10% of the applicants that go through turn offs we'll see a offer that's up to mid-teens, but the close rate stayed the same. It's still less than 2%, so it appeared to us like you had some of those a bit upper in the traditional credit score funnel, try to come down market a bit but they just can't get comfortable with this customer. So we know we're watching that closely. We're also – when we just mentioned to Mike, we're thinking a lot about moving upstream a bit with our installment products. We certainly have the data to do so and we'll be focused on that in the next couple quarters, so but nothing directly competitive that would change any of our thinking as a relates to future growth. All those comments are macro related, some of – actually, all of which are just a matter of potential timing.

Okay, great. And then those charge-offs rate ticked down a little bit. Obviously, the positive side of stimulus and fiscal support is that your balance sheets are quite liquid consumers are paying back their debts. Are there any forward looking indicator? Are you seeing any changes in the margin on credit quality as it continues to get better or to start stabilizing here?

Yes, I mean in our guidance where we expect – we expect charge-offs to renormalize as demand comes back, and consumer balance sheets approach historical levels and then so we were guiding the net charge-off rate as a percentage of receivables to be in the mid-30s, kind of a full-year and that's baked into our guidance that we provided.

Okay, great. And then lastly maybe just made comment on I know those earlier shipping but just maybe some additional color around the idea of a federal rate cap and why we don't think that it's highly likely at this point?

Yes, so likely to the federal rate cap. So I would say just stepping back for – to address regulatory in general. I think we look at the business, we acknowledge the regulatory risk. We are incredibly focused on becoming a regulatory agnostic business, a very focused on diversifying our product suite, mostly from an offensive perspective and from the ability to graduate but also from a defensive perspective as well. We think the probability of a national rate cap is low. I'd never tell you 0%, but we think it's low for a number of reasons including the current makeup of Congress, but now that we have this platform, I think it's really important that we use it to amplify the voice of the 150 million customers that would be locked out if such legislation was enacted. Rate caps don't do anything to quell demand. There are supply constraint, and there are really productive ways to think about future regulation and legislation in the form of guardrails, in the form of the CFPB small dollar rule. We have lots of ideas. We've got ideas for legislation, and so we be big proponents for additional small dollar legislation, but we think we think our rate cap would have a tremendous amount of unintended consequences and we've got the data to prove it and our customers tell the story all the time, so low probability, not zero, but we're focused on diversifying. At the same time we're very focused on using our data and using our voice to make sure we get to the right answer for this customer in the space.

Thanks, It’s great, great results.

Thanks.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Jared Kaplan, CEO for closing remarks.

So, thanks everyone for joining us on our first call. I really want to thank the FG team, led by Joe Moglia, they've been terrific partners through this process of the Schwartz family. Our majority owners have been terrific partners as we built this platform. We are on the very beginning stages of a multi-year journey to transform the way that people think about this consumer. There are many people on this call today, that may not understand these products, right they never use these products. And that's why our customers always tell the best story about what options are out there for them. Why these products are so necessary and if we do what we say we're going to do, I think we will be the players in this space that change the way you think about nonprime credit. How you help someone in a really difficult time, how you graduate them back to a mainstream product in the near term, allow them to build some savings and ultimately allow them to generate wealth, that's our mission. That's what we're going to do. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.