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© transcript Emily Beynon ¶¶ ¶¶ Bob Lee for this early in the morning. It's good you knew that.

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 xylene, you will be prompted to enter the queue after the prepared remarks. I am pleased to introduce your host, Jared Pawlik. 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 Thank you for joining us today. 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 S-4 and other documents filed with the SEC in conjunction with 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 and 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. Expand 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, shortened 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. particular 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 to funded rates. The model is currently in validation and we look forward to launching it this quarter. Lastly, Biddy, 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 Biddy competitive reach into near prime segment, providing larger funding amounts, more attractive pricing, and longer repayment terms, allowing Biddy to compete more effectively across a broader range of small business customers. Biddy 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-offs 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 percentage of revenue during the quarter increased to approximately 40% from 35% in the prior year period. And net charge-offs as a percentage of receivables increased to approximately 53% from 47% 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 remain 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 a 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 46 cents 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 repurchasing 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 $1.34 to $1.40. 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 1 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, 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. I'm just wondering, as you've done more research into maybe just some of the headwinds and volumes, 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're seeing, you know, in the competitive landscape, a lot of growth in the 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 we're very encouraged by the testing and now it's fully launched so that we're gonna have that as a growth lever for next year. So that's pretty considerable. We're also, we're on for the product roadmap for next year. I didn't really talk about it much on this earnings call, You know, we were 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, a significant strategic transaction with banks. We want to keep our balance sheet We have about $140 million of cash we're sitting on. 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 listen, I would credit for the quarter, although 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, you know, one thing that we're comfortable with, we have a very high margin. We run at a higher margin, you know, than most of our peers and feel that 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 we would be comfortable reducing yield for higher quality customers to be able to recruit them and win, 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 know, a lot of competitors 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 is something we're looking at. in addition to, like I said, new products and finding new ways to grow it. 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.

Good 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 encourage and the team did a great job. I think we announced it was slightly delayed, but 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 of customers using it in their daily lives to manage cash flows, but we think that It also just has a lot 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, we're thinking that's probably going to be enough for us next year, getting line of credit scaled and adding an earned wage access product. There are other products out there that 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 giving 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 an opt-by specific standpoint that might throw a wrench in the typical seasonality that you tend to see? No, I mean, you know, like, you know, one of the benefits of the model set, the ability to more accurately customers or, you know, for their, what they fall in and kind of target their, the loan, the loan or advance amount on the, on the line of credit that they're looking for. We found that the targeting customers more actually provides for higher conversions. So we're, we're excited to get that validated and rolled out. That'll be included obviously in our, 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, we're originating 100% of our net new volume through this system now. And we'll soon, you know, we'll 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 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 in 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'm not, 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 about it's referencing?

Yeah, the investments that you're making in strategic initiatives.

Yeah, the 150 million, yeah. Well, you know, starting, you know, the company, you know, has almost bought back almost 18 million dollars this year. So far, we had a 42 million dollar TRA, which have collapsed the EPSI structure. The contemplated, the system, the Lola system is another $35 million of investment to rebuild our whole operating and servicing system. We made an investment into BIDI, 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 transaction, I think last quarter and when you announced it, you kind of thought you would 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 respond to regulators promptly, qualitatively and quantitatively, and we're ready to continue to respond and work with them. We're hopeful that we can get this resolved. 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. And then the $75 million drawn from that Castle Lake 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 and 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 for flexibility in our capital structure for 2027 and beyond. So, you know, 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, we've been on a trend of de-levering the business from a debt-to-equity ratio, so this was 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, currently the deal that was announced is 50% stock, 50% cash. 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.