Good morning, and welcome to OppFi's First Quarter 2022 Earnings 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. It is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. You may begin.

Thank you, operator. Good morning. On today's call are Todd Schwartz, Chief Executive Officer and Executive Chairman; and Pam Johnson, Chief Financial Officer. Our first quarter 2022 earnings press release and supplemental presentation can be found at investors.oppfi.com. During this call, OppFi will discuss 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 believe 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, developments and business decisions to differ materially from forward-looking statements are described in the Company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors. In today's remarks by management, the Company will discuss non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the earnings press release issued earlier this morning. 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, Shaun, and good morning, everyone. The past two months since I returned to OppFi as CEO have been very exciting. We have refined our company mission and growth strategy, refocused our efforts on the installment loan business and continued to build our leadership team to take us to the next level as a publicly traded company. Now I would like to cover three topics before I turn the call over to Pam; one, offer some reflections on the first quarter in macro trends; two, discuss more detail about our long-term growth strategy; and three, elaborate on our proactive regulatory initiatives. While Pam will discuss our financial results in more detail, I want to start by discussing a few key highlights from the first quarter. The robust demand environment we experienced in Q4 continued to accelerate through Q1, resulting in a 63% growth in origination volume year-over-year, a first quarter record for originations for us. With a more normalized credit demand environment in the absence of federal stimulus dollars, in addition, our receivables ended the quarter at $338 million, up 38% year-over-year and remaining flat since the beginning of the year. Moreover, we rolled out an updated underwriting model, which tightened our scoring parameters and shifted our mix to higher quality customers. As a result, we believe the quality of our originations was very strong, as measured by future expected net charge-off rates. The Q1 vintages are experiencing early delinquency rates for new loans that are 20% lower than for loans originated in the second half of 2021. As a result, we are cautiously optimistic about this improved trend. We are also very pleased with our improved operational efficiency in the quarter. Our auto approval rate reached 61%, up from just 41% in the prior period. In addition, our cost…

Thanks, Todd, and good morning, everyone. Turning now to our first quarter results. Total revenue increased 20% to $101 million. As Todd mentioned, we achieved a 63% year-over-year increase in originations while lowering our marketing cost per new funded loan by 17% or $45 to $221 compared to the prior year period. These results reflect stronger strategic marketing partnerships and more efficient utilization of other non-direct mail channels, such as search engine optimization, e-mail and customer referrals. We have seen a year-over-year increase in key operational metrics, such as qualified rate, defined as qualified apps over applications and funded rate, defined as funded loans over qualified apps. In addition, our investments in automation resulted in our auto approval rate increasing 49% year-over-year to 61%. Our origination mix continues to shift towards a servicing or facilitation model for bank partners from a direct origination model. Total net originations by our bank partners increased to 95% in the first quarter, up more than 24 percentage points from the first quarter of 2021. In addition, our net originations saw an increase in the percentage of originations of new loans compared to refinanced loans as we continue to drive growth through increased marketing spend with cost-efficient marketing partners driving more new loans. Total net originations of new loans as a percentage of total loans increased to 53%, up nearly 20 percentage points from the first quarter last year. Our annualized net charge-off ratio was 56% for the first quarter of 2022 versus 53% for the fourth quarter of 2021 and 30% for the prior year quarter. The increase reflects a normalization of credit towards pre-pandemic levels and includes losses from new loan segments that are no longer being approved in 2022. However, to reiterate what Todd said earlier, the higher quality level of originations…

[Operator Instructions] First phone question is from the line of David Scharf with JMP Securities.

Todd, wondering if you can expand a little bit on sort of the broad comments about how you've refined your sort of target marketing and underwriting. And I guess specifically, as you talk about sort of higher credit quality borrower, can you be a little more specific? I mean, obviously, these are higher cost loans, triple-digit APRs. But is it primarily a reflection of the channels through which they come from? Are there any particular characteristics, whether it's debt-to-income levels? Just trying to get a little better sense for how the business has either been repositioned or reset to pre-2021 levels?

Yes. David, thank you for that question. So coming back in as the Founder, some of the things that were core to OppFi in the early days were our robust referral program. We didn't really have marketing in the early days when I kind of founded the business, it was basically all referrals. And so I have a real granular understanding of how to propel our referral program, and we've made some operational changes that have significantly improved that channel, which is a low-cost channel, but also we do receive higher-quality borrowers from referrals. One thing that has really been revamped over the fourth -- is our search engine optimization program. These -- obviously, there's some overhead attributed to it. But as far as the actual acquisition cost is virtually zero, and we're driving a lot of new originations from that channel. The acquisition cost from last year had significantly improved due to those efforts, also direct mail, right? So direct mail on the acquisition cost on that channel was coming in higher than we'd like from an ROA perspective. If you look at the ROA, we've been able to make significant strides. We rebuilt the direct mail model that better targets customers in the market and [indiscernible] better response rates and conversion rates. So those are some of the things we're doing on the marketing channel side, I think. And then if you look at the partner channels the Credit Karmas, the LendingTree, the QuinStreets of the world, our market-based offers have been -- we're showing -- we're still testing. We're being -- we're cautiously optimistic. We -- obviously, if you remember from the last call, we had some issues in testing in the second half of last year that kind of came back to bite us a little…

Got it. No, that's very helpful. And obviously, the early stage delinquency reductions are certainly supporting it. Just one follow-up. As we think about the product mix and the profile going out 12, 24 months, you had referenced adjacencies, including sub-36%. Is that -- just curious, is that a business where, I guess, number one, if there's any overlap with your existing borrower base? I mean sometimes repeat borrowers demonstrate the ability to continually repay and get offered lower rates. And I'm curious whether or not any of your installed base, you actually think might be ultimately qualified for that? And from a return standpoint based on your existing cost of capital, obviously, that's a lot less APR starting with. There have to be a different funding strategy contemplated to meaningfully underwrite sub 36% loans.

Yes. So the way we're going to place sub-36% to be clear, is from as a servicer, right, as an originator and a servicer. We don't plan to play where we take the credit risk or the balance sheet risk. So one thing that OppFi has built is one of the strongest consumer-facing brands in the online lending world. We have an 85 NPS. Our tech infrastructure allows for installment-based products. And so for us to play sub-36, all the marketing channel partners and a lot of the marketing that we're already doing is consistent with the core business. And so it's essentially taking everything that we've built over the last 10 years and using it to earn service and fee income and acquisition fee income from customers. And it also provides for a natural graduation product for our current customers. Unfortunately, we have this product feature, David, where we screen our customers against a consortium of low-cost lenders before they take out our product. It's our commitment to our customers to make sure, "hey, if we can find these lower cost of capital, let's do that and hope you're successful". Out of the 7% that match, I think half of those end up getting approved. So unfortunately, the reality is it's a small percentage today, but it would be nice that if we were able to match, we could provide that product for the customer instead of kind of providing it through a third-party consortium of lenders. And then in addition, yes, it's a natural graduation product for our customers. So when our customers are successful, and do pay us over time and their credit profile improves, it's a natural graduation for a customer, which would be a lower rate, a little bit of a longer dated maturity and larger amounts of capital to help them consolidate bills and expenses.

Our next question is from the line of Mike Grondahl with Northland Securities.

Could you talk a little bit about demand and kind of the pacing of demand kind of January through April?

Specifically, the pace like has it picked up towards the second half?

Yes, with inflation and gas prices kind of rising a little bit later in the quarter, just trying to understand, did you see demand pick up at the same time? And maybe kind of what you saw with delinquencies and credit quality as those things have picked up?

Yes. I mean there was a muted tax refund season pretty much -- the whole first quarter, we saw [indiscernible]. But specifically, March, April, there's been a noticeable pickup. And I think with everything from prices rising 8% to 9% year-over-year to interest rates rising, housing costs, I mean, these are all hitting not just our borrowers, but kind of all consumers. And I think what's happened in March is we've anecdotally heard but also read that there's banks that may have been serving kind of the top tier of our customers for the last couple of years through COVID have now tightened their credit models. And we're getting a benefit of those customers now, once again interacting with OppFi and needing us to facilitate credit access for them. But yes, there's definitely an increase in demand and higher quality borrowers that we're seeing.

Got it. And then Pam, that $75 million, I'll call it, financing you talked about, how will that show up? Or will that show up kind of in your financial statements? How should we think about you guys accessing that? And how will we see that?

Right now, we're still researching that with our technical accounting advisers, Mike. We are anticipating having that as an off-balance sheet item. So you won't see that on our balance sheet. However, we will be the servicer, you'll see fees and acquisition costs -- or acquisition fees related to that product. Plus then you'll see a derivative on the balance sheet for the total return swap.

[Operator Instructions] We do have another question from the line of Chris Brendler with D.A. Davidson.

I wanted to ask on the credit side. Just to confirm that the issues in the first quarter and some of the improvements you've seen subsequently, that was [indiscernible] the same issues you called out last quarter with some of those marketing partners you had, just want to make sure that there wasn't an additional step down in some of that second half vintages that have been underperforming.

So I mean we have not been originating. We've made subsequent enhancements to the model in early in the first quarter. We also made one at the end of last -- but that volume is no longer being originated or facilitated. We are not -- we deemed it to not be a customer that can be successful in our system. I mean, ultimately, our goal is to give our customers the capital that they need to stabilize their situation and then help them rebuild their financial health. So that takes people paying you back, right, and being successful in our system, whether they pay in full, whether they decide that they want to refinance into higher amounts or they graduate. We do need people to pay us back. So we have no interest kind of in a customer that's kind of a onetime user and that they're really just going to kind of be -- go to the delinquency buckets. So we've definitely enhanced our credit model significantly at the end of last year in the first quarter.

Okay. So my understanding was it was like a partner issue, sort of some of these newer fintechs were trying to be adversely selecting OppFi and that -- but it wasn't really like a credit box. Is there also like a certain borrower type, either from a FICO or other credit standard perspective that you also have tightened up on as a result of the second half performance?

Yes. So specifically, like if you remember from the last call, it was the Neobank population, what we have seen is there's been a large number of customers that apply with us roughly almost 10% that are using these Neobank programs, like Chime as an example. We ran a significant test in the fourth quarter to try to find borrowers in that set that could be successful and pay back. And unfortunately, we determined that they are -- they were a higher-risk customer, and we were not able to make them successful. One of the real technical things there is in these neobanks, people get paid two days early, three days early sometimes, that's one of the benefit of those. And I think that is something that is difficult to time and figure out when funds will be available to kind of pay back the installment loans. So we no longer are originating that, that has stopped in the fourth quarter. In addition to that, though, we took the opportunity with increased demand to also just look holistically at our underwriting model and find some higher risk borrowers that we thought that with inflation coming and with the macroeconomic environment, would be -- would not be a good fit for us and have -- that was early in the first quarter, like in January, so first thing in January. So I feel really good. What's great now is like we've been able to make those tightening. We've tightened the model, but we've also been able to lower acquisition costs and continue to grow and exceed our expectations. Like as I said before, that's like the trifecta.

Yes. No, this is actually the first quarter that originations came in above my estimate. So it's nice to see. On those lines, actually, the demand environment improving. I guess my question would be, how much are we back to normal? I mean I think we're still not quite back to where we would have been in 2019 from a consumer demand perspective?

I think we're there. From what I'm seeing, I'm seeing significant demand. But like I said, once again, we look at things from an ROA perspective and people have to pay you back. So like we're happy to see a normalization of demand and exceeding expectations. But I think we're also very cognizant. We've been around for a while. We know that you still need to collect and you still have to be -- have people to be successful in our system to have it flow through to the P&L. So we were actively enhancing our model as we go, as we find new volume and higher quality volume to make sure that we're not going to make the same mistake kind of that we did in the second half of last year.

Got it. Okay. Great. It's great to hear about demand that should make things a lot easier in the bigger top end of the funnel coming in. On the yield, it came in lower. I wanted to ask how much of that is the personalized pricing versus the increased delinquencies so the yield potentially could stabilize or go back up a little bit as delinquency improves? And then also, how much -- what does the higher interest rate environment mean for OppFi?

Yes. Pam, can take the interest rate question. I'll talk about the yield. Most of that the delinquency, right? And the net yield is being taken from the delinquency. We're still on the market-based offer approach, like being very thoughtful about it and keep holding it to a percentage that we feel really comfortable with, learning from kind of last year and that -- it's more definitely driven by kind of the stuff that flowed through in the first quarter.

Okay. Great. Go ahead, Pam.

As far as the interest rate environment, Chris, our credit agreements to incorporate rising interest rates. So it results in a minimal impact on our financial performance and spreads. So -- and we've already baked that into our guidance and our projections. So we have a resilient business model because of the way we've structured these credit agreements.

Right. And I guess when you're lending at [120 -- 150] basis points doesn't rely matter that much. So along those lines, though, just the overall tightening of market conditions, we've seen some other lenders have struggled to get financing whereas a year ago is super easy. Todd, your comments about being want to step up and support this company and the vision here. How do you sit from a funding perspective? And have you seen any of that tightness show up in some of your recent discussions with your lenders?

Just so I make sure I understand the question, when you're funding showing up, I just want to make sure I understand the question.

Just like warehouse lines and your other sources of funding beside...

Yes, I mean, listen, I mean, we've had long-dated relationships with our financing partners, and we have very strong ones. That has not been something that we've had issue with. I think if you haven't been around for 10 years and have the history we've had and the level of success, there may be some financing partners that pull back here [indiscernible] because they're worried about the inflationary environment. But I think there's going to be a flight to quality, right? And a bifurcation between lenders that are doing this profitably and have been around and continue to grow and ones that the newer entrants that might not be as stabilized.

Our next question is a follow-up question from the line of David Scharf with JMP Securities.

Just really some kind of housekeeping items for Pam. I guess, first, is there a charge-off dollar number you can provide us with for the quarter? We have the rate, but the actual dollar number?

Around $50 million for the quarter.

Got it. And just to provide, I guess, context for the comments about returning to sort of pre-pandemic loss rates. The -- I guess, the normalization, you're sort of working in the opposite direction from what we've been dealing with during the last few quarters with most lenders where they're seeing losses increased to pre-pandemic levels because of the nuance surrounding those 2021 vintages you're going in the other direction. But I guess, Todd, trying to just triangulate what kind of loss rate you're anticipating exiting the year at? And I would imagine these are short duration assets that's sort of embedded in your fair value calculation as well. I mean, are we -- should we be looking at sort of 2019 levels, in the mid-30s as an exit point? Or is that too aggressive?

I think maybe for this year, that's a little aggressive. I mean we're looking to get back down into the low 40s for the second half. And then eventually, we're going to continue to push on that, and we'd like to get back down into the high 30s for next year. But listen, I mean, you have a demand environment that's extremely strong because of the weakening of kind of some of the consumer health segments. So we're also -- we're being cautiously optimistic there, but we're also realizing the macro environment is one where the reason the demand is so strong is also because of weakening of the backdrop, right, the macroeconomic backdrop for our consumers, that things are more expensive, interest rates are going up, housings and used car market's expensive. So we're balancing that.

Got it. Got it. And then lastly, just a technical question. I'm looking once again at the fair value slide that was provided. It looks like it's Slide number 13. And obviously, a lot of inputs go into the mark-to-market once adopting fair value accounting. I'm trying to better understand how to put into context the default rate. Can you Pam maybe provide a little bit of a thumbnail education for me on how I equate that 18.5% to either the existing kind of loss rates, the future expectations. I'm trying to put that into context versus default rates that are considerably higher on an annualized basis?

Sure. We are able to refi customers. Now we do a full underwriting of that refi, but that -- when you think over the life of that customer, the default rate is different than just a charge-off rate. Is that helpful?

Yes. No, no. Clearly, the loss rates on repeat borrowers are going to be lower. But is this 18.5%, that's an annualized figure?

That is -- this is [indiscernible] with OppFi. That figure is respective view of an average individual loan. So when you start to blend those over a number of different repeat borrowers, that's when you start to see the deviation from what you're seeing observed on the financial statements.

And there are no further questions at this moment. I'll turn it back over to Todd Schwartz.

Well, thanks, everyone, for joining us today. Hopefully, you now have a better appreciation and understanding of our mission, strategic growth strategy and confidence. We look forward to speaking with you again during our second quarter earnings call in August.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines.