Since I cover the specialty finance and fintech spaces here at Stevens, pleased to have with me the CFO of OppFi, Pam Johnson, and then Mike's in the audience as well from the company. OppFi is a tech-enabled, mission-driven Digital Finance Platform that partners with lenders to enable small-dollar, short-term, unsecured installment loans—that was a mouthful—to underserved U.S. consumers through the company's OppLoans platform. The company also has an investment in an SMB, a Small Business Lender called Bitty. With that, I'd like to turn it over to Pam to introduce herself and give us a little bit of the history of the company and how it's evolved since going public in 2021.
Sure. Thanks, Kyle, and I appreciate the invitation to talk with everyone. I'm Pam Johnson. I am the CFO of OppFi. I've been with the company since February of 2021. I came in as their Chief Accounting Officer to help them go public. We went public in July of 2021 through a SPAC with FG New America. The company was founded in 2012 by Todd Schwartz, who is our CEO and executive chairman. He has an amazing story, and I love to tell it. He was visiting a friend who owned a chain of pawn shops in Chicago, and a woman came in dressed in scrubs, and she was pawning her wedding ring. Todd was really taken aback by that. He could not imagine why anybody pawns such a family heirloom. He talked to his friend. His friend says, "She has no other option. She needs funds.
The banks won't lend her. The credit unions won't lend to her. She needed funds, and this is what she does. He was—that just really struck him as being a sad situation. He went right back home and started researching the lending laws in Illinois and decided he can do this. Took $50,000 of his own money, opened a storefront, made 2,000 of the first 2,000 loans himself, as I call it, kneecap to kneecap, right across the table from the customer. A lot of them referred from the pawn shop that he had had the incident in. He then started opening other storefronts, ended up with about five storefronts in the Chicago area, and soon realized that he could not scale the company to the level he wanted to by having storefronts.
He went back and decided to develop a digital platform, which is now OppLoans. We have a loan that is very transparent to the customer. It is a fully amortizing, Simple Interest Loan with no Origination Fees, no Prepayment Penalty, no Late Fee, and no NSF fees. The customer knows exactly what their payment's going to be, what the term's going to be. We have a customer operations center, customer service center, that allows them to reach a customer service person should they ever need to do so. Generally, about 76% of our loans are made without human intervention through our platform. Like I mentioned, we did go public in 2021. Todd had stepped back as CEO of the company about five years earlier, but still was chair of the board.
He came back into the company in February 2022 when the previous CEO left, and then actually promoted me to CFO the next month in March of 2022. He has put together a really solid management team that has been, I think, very successful in growing the company, turning the company around from what was a tough year of 2022. I think most people in our space had a rough year that year. We were still a profitable company, but not to where we wanted to be. In the meantime, now we have had record quarters, record revenues, record growth, and record net income. Just a very good company that has solid fundamentals and a good management team. That is my spiel there on that, Kyle, as far as what this company is.
Great intro. Thank you, Pam. Yeah, I think we'll just dive right into it and start it off with the topic to sure is obviously consumer credit, following some developments in not even really your space, but consumer finance broadly in terms of auto. There is a lot of macro uncertainty, and people are very concerned about the consumer, particularly the low-end consumer. Just walk us through how your portfolios perform through macro volatility, and then talk about how quickly you're able to identify and address if there are any credit issues.
Sure. Sure. That's a beautiful thing about this business is you can identify issues relatively quickly. You can react relatively quickly. When you do have a problem, it works its way through the system quickly. I said in some instances, I've been in companies that it was a two or three year problem if you had a credit challenge. In ours, it's more like a four or five month challenge because you can see the issue coming through the buckets, the delinquency buckets, and adjust accordingly. We saw some concerns from our second quarter vintages. We were just talking about how some of our competitors saw it earlier than that. Some of our competitors saw it later than that, but we've all seen a bit of softness with our consumer.
We saw that in our second quarter vintages, and we'll see some higher charge-offs in fourth quarter, but those are all baked into our guidance. I can share that with you. We feel what I call a general unease, but nothing that is specifically sticking out as a specific driver. Our customers are very impacted by sudden increases in inflation, things that they can't react to quickly, and unemployment. Neither of those things are really happening. We've got a general increase in inflation, I think. It is in some segments that do probably impact our customers more than they will some in groceries, gas. Things like that are really impactful to them. We're still seeing our customers employed and not a lot of issues with the employment. We think that there's still a general drawback, I think, of people or just a general unease.
Now, we see a higher demand, though, because of that. With our type of company, when people need money, they'll come to us, and we're seeing some greater demand. That may be within our current customer base, but we're also seeing growth in new customers, which makes me think that we're seeing some of the what I'd call more the near-prime folks kind of dropping into that deeper sub-prime area where they're needing our type of loan more than they might need a OneMain Loan or a Regional Management Loan, things like that.
Great. Very helpful. If you could talk about the competitive environment, who are the other players in your space, has capital been flowing in or out, and supply and demand dynamics to the low-end consumer?
Sure. Sure. We kind of look at Propel Holdings as one of our comps. Enova has some products that are very comparable to ours. We always do then follow some opportune. We follow some of what I call the higher credit profile ones, like OneMain, like Regional Management, just to kind of see specifically what's happening to the overall specialty finance world in general and their stock prices. We know that OneMain has some turndown programs, but they do not like to play in the triple-digit APR range like we are in. We do not see a flow of customers specifically from them. We are not seeing what I call a real shift in the competitive market at this time.
Okay. And then let's talk about LOLA. Can you give us a sense for how it's been performing ahead of the 2026 launch and how you see it changing OppFi?
Sure. This is a new platform that we are building in-house. The customer experience is being built in-house. The very front end, the origination, that's what LOLA stands for. There is a Loan Management System that we're putting on the back of that system. Again, it's a full revamp of our customer end-to-end loan from the beginning to the end servicing. It's going well. As many of these things do, it takes a bit longer than what you think it's going to. That's not because of anything majorly happening. It's just a little bit longer time frame. While we'd hope to launch that more like third quarter or fourth quarter, we are looking more like first quarter. So far, things are going well. We are very conservative in how we launch anything like that.
We do a lot of testing, a lot of champion challenger types of things that say, "Is this the right way to do it?" We are in what I call a friends and family test right now. It's going well, and they're learning a tremendous amount through the experience. I think it's going to be transformative. Where I think we're going to really see the benefit, the customer's going to have a great experience. That's very, very important to us. The customer has a great experience. Where we're going to see internally the efficiencies is our time to market.
As we introduce new products or as we make tweaks even to our current products, risk-based pricing, different loan amounts, things like that that we can offer, different attributes that we're going to roll out in our underwriting, all of that will be so much more easily deployed. The efficiencies we'll gain there are going to be huge.
That's great. As we think about positioning into 2026, in terms of what we've been reading, healthcare costs are likely going up, but we're expecting larger tax refunds. How is the business position going in the next year?
Sure. Sure. As in every Q1, you'll see the portfolio shrink a bit as people take their tax refunds and apply them to their loans and things like that. I think the real key will be, let's see what Q2 brings. In that a Q2 vintage is usually your worst-performing ones because our customer, with their challenges, will have taken their tax refund, paid down a loan, and then may need another loan fairly quickly. That means they may have a little bit bigger challenges than what the average consumer would have coming to us. That second quarter is really a harbinger of what we're going to see. We are looking ahead to that. We have tightened some credit in a few areas. We have broadened our risk-based pricing. When we are loaning to a riskier customer, we are getting a higher yield from that customer.
Our yields are staying steady. We anticipate those staying steady into the next year. We do not anticipate any increases in overhead. In fact, we are hoping we will see some come down after the new system gets launched. Again, we think if we keep those yields where they currently are, we will still see great profitability and hopefully then grow the portfolio later in the year as we get through Q2.
That's great. Thanks. Let's pivot to the SMB segment. Tell us a little bit about Bitty, kind of compare and contrast it to the consumer segment. I know it's a different model. Remind us of the structure and how you can increase your investment there and how it's impacting the P&L currently.
Sure. Sure. We purchased a 35% interest in Bitty, which is a Revenue-based Financing Company that serves small businesses. We like that segment because we feel like those small business owners have similar challenges to our consumers. They need working capital, but if they go to a bank, that bank needs a personal guarantee. In some situations, their credit has been challenged through different reasons, and they can't give that personal guarantee or that personal guarantee is not worth anything to the bank. They have no access to capital either. We found Bitty, and just we looked at a lot of these. We thought this was a good adjacency for us. We found Bitty and think we have really purchased one of the best operators in that space. We paid a little over $18 million for that acquisition, $3 million in stock and $15 million in cash.
It's been so successful that we've received over $4 million back of that cash in distributions. I'd love to do about five more of those acquisitions if we could when you get that return within just a little over a year. They have doubled their originations since we purchased them. It's been a great partnership in that Todd, our CEO, meets with their CEO every week. We share best practices. They share best practices. We look really forward to our ability to continue to partner with them. We have another call option in July of 2027 for another 30% piece, and then a final piece in 2030 to get the remaining 35% to get full ownership. Both of those have a price set at six times trailing 12 months.
Earnings. Okay. Great. Let's see. You alluded to this earlier, but since you guys just reported 3Q, I think it'd be worth talking about some of the highlights. I think it was probably the third time you guys had to increase your guidance. It's a good problem to have.
At least right now.
Yeah, some of the highlights in terms of what you're seeing on originations, growth, and.
Yeah. Record originations, record revenue, record Adjusted Net Income, record ending receivables at the end of a quarter, and good performance through all those segments. The other thing that's exciting is we've been able to keep our OpEx very under control during all these things, such as new system integration and rolling out some new types of pricing and things like that, some new marketing channels that we're still keeping all of this very, very efficient. I think that's really a highlight as well. Excited about coming out of Q3 and finishing up the year strong.
That's great. I think it'd be helpful if we can you walk us through the bank model for those that aren't familiar and how the economics can vary depending on the bank partner.
Sure. Sure. Absolutely. We have three bank partners that we partner with. They are all Utah-based banks. We are responsible for finding the customer, originating the loan, and then servicing the loan through its life. After the origination happens, the bank will keep anywhere from they will keep the loan on their books for two to five days. They will then sell an Economic Interest to us. Sometimes they sell 95% to us. Sometimes they sell 49% to us. That is all dependent upon where the loan was originated or where the customer lives. Some states require that the bank have a Predominant Economic Interest in the loan. That means they must be getting 51% of all the economics of the loan. That depends on the state. We do business in 40 states.
I think PEI is in something like seven, maybe six, something like that. There are some of the bank partners that will participate in that and some that will not. There are some that we have some limits on how much they will do in those types of arrangements. There are just certain states where the bank will say, "We will not go any higher than this in this state." That is how some of the economics change between the bank partners. We get great relations with all of them. One of the things they always compliment us on is our level of compliance. We have got a really strong compliance team. We have to be as compliant as the bank does because we are responsible for all of those steps throughout the life of the loan. If the FDIC is regulating them, the FDIC is regulating us as well.
We're very comfortable in that compliance world.
Great. Thanks. You guys have recently made some enhancements to the right side of your balance sheet. If you could walk us through your funding mix and how you see that evolving as OppFi grows.
Sure. We have two warehouses at least currently. We were able to pay off all of our corporate term debt early this year. We made two large payments, one toward the end of last year and one at the beginning of this year. It was a total of $50 million we paid back within those six months or so period. We have now two warehouse facilities. One is with Blue Owl Atalaya. It is now $250 million. We upsized that earlier this year with marginally improved pricing. The other one was Castle Lake, which we just refied in September. Was it September? Okay. It was the same balance of $150 million, but we did get substantially improved pricing, improved it by about 150 basis points. We are now borrowing at SOFR plus 6% on that facility. Both of these were four-year terms.
We've got good solid financing in place that we think is sufficient. Again, great relationships with these partners. There seems to be a lot of money out there that if we did need more, I think we can probably go to market and get that. I had to laugh when I was at Structured Finance two years ago in February. I had two meetings in my two days out there. Last year, I had 14. It really helps when you make money and they get to know you and then everybody comes out of the way. Plus, there's just a lot of money in the market.
Got it. Yeah, maybe Credit Markets are being a little bit more rational than Equity Markets at this point.
I think you're right. I think it's a good way to put it.
Okay. With that and the liquidity you guys have, I think it'd be helpful if you could walk us through your capital allocation priorities, whether it's growing the business or M&A.
The one thing to remember is we are a big cash generator. We have a lot of cash and a lot of optionality for what to do with that cash. We did a Special Dividend early this year. It was the second one we've ever done. We really have no plans in place right now to do any kind of Recurring Dividend, but we like the optionality of a Special Dividend. We are actively in the M&A market, looking at several opportunities. We probably get close to one opportunity provided to us on a weekly basis. There seems to be quite a bit of activity out there. We, again, like the small business space. If we had an opportunity to do some more in there, that would be a space that we'd be interested in allocating some capital to.
We like the Early Wage, Earned Wage access, EWA space. I think some good cross-selling opportunities there, a lot of good type of adjacencies and some value add we think we can add to a lot of those companies. There's other lease-to-own, point-of-sale types of things. One of the things that I like to say about our customers, we finance wants, not needs. Needs, not wants. Needs, not wants. They're not purchasing the big screen TV with the $1,500 they're borrowing from us. That's the type of point of sale we'd want to because we think that's the types of things that people are committed to. Those are things like veterinary dentistry, auto repairs, those important things to our customers.
Great. Sorry.
One other thing, Stock Repurchases is something that we have done in the past couple of quarters and continue to be in the market.
Great. Bear with me. I'm jumping all over the place. Going back to Bitty, yeah, walk us through kind of the competitive dynamic. Obviously, we had Enova up here earlier today, and they're involved in that space. It does sound like they're seeing tremendous growth. You guys are seeing tremendous growth. I know there was kind of pre-COVID, there was a lot of capital in that space, but I think it's been somewhat disrupted.
Yeah. Yeah. Right now, it's a forward flow situation with Bitty. They have a partner that is still very active in that market. We have not made any big changes to their funding structure. I think there still seems to be quite a bit of capital out there. Again, it has to be the right thing at the right return. Bitty, again, is doing a really great job, and they've got a really strong platform. I believe my understanding is their structure of their business is different than OnDeck, which is more of a structured term loan, as they say.
Oh, yeah. On balance sheet, yeah.
On balance sheet. Bitty is a merchant cash advance and/or a Revenue-Based Financing, however term you want to use, that basically is repaid through cash flows of the underlying business. I would not say necessarily competitors, even though there is a demand from a similar customer, I think.
Okay. If we talk in five years, what does OppFi look like at that point?
Sure. You know.
Bitty will be.
Bitty will be.
Bitty will be home-owned.
Yes. And that'll be a good thing. We'll be excited about that. We will continue, I think, to grow our consumer business. It may be through different structures, different types of products, but I think that we will continue to be a consumer lender. Could we be a bank? Possibly. Could we be a point-of-sale originator? Absolutely. There are just a lot of opportunities down there. We want to continue to grow the business. We've got, again, like I mentioned, a very strong management team that's really hungry and got a fire in the belly that we can make this happen. Pretty excited about it.
That's great. Kind of moving to expenses, how do we think about your marketing strategy? I know you guys have announced some kind of recent new initiatives on that front.
Yeah. Let's talk about direct mail first. The channels we use right now, we use our lead providers, the Credit Karmas, the LendingTrees of the world. That provides a lot of sources of our leads for us. We have SEO in-house ourself that does a tremendous job of directing people to our website. We use referrals. Referrals have been very strong as well. That is something that Todd brought back when he came back to the company in 2022. It has been a strong source and a low-cost source, which is great. We had done direct mail in the past. In 2024, we suspended direct mail. We decided it is very expensive. It is your most expensive channel. We stepped back from it. You want to make sure you do it right, or it can be really expensive.
We have a good team in-house that has kind of revamped it all and decided to relaunch it in 2025 because it's unusual for a company like us not to be doing direct mail. I mean, we relaunched it in 2025. It's been a strong generator of especially new business, I think. While more expensive, it's been well worth doing what we do. You've seen a jump in marketing expenses there. The thing we just launched a couple of weeks ago, which again is very exciting, is Connected TV. Again, dipping a toe in, we're very conservative when we go into these things, and we want to make sure that it's worth the investment. We started with a small budget and excited to see what that turns out.
I mean, the numbers are pretty impressive when you think of the number of eyeballs that will see these commercials that are directed specifically to our customers or our type of a customer. It is really impressive. I am looking forward to seeing how that we got the cutest little commercial out there that I think will be great.
That's great. Thanks. If you could walk us through the operating leverage inherent in the model, just being online only.
Yeah. The scalability is something I'm incredibly excited about with this company. I've just watched it over the last couple of years as we've grown. I see how we manage our overhead and our head count. We've done some offshoring of some of our customer service area that's turned out to be a really efficiency gain for us. I think the scalability is very strong without adding a lot of head count. For instance, we brought Bitty on. It's only a 35% of it. There is extra work around that, especially when you're a public company and you're having to integrate them a little bit into your financial statements and stuff like that. We didn't add any head count related to that. I don't imagine we will add head count as they run very lean. I think there's 20 people at Bitty.
It is a very scalable business.
Great. Thank you so much, Pam. I guess we'll close with, is there anything else you think investors might be overlooking or underappreciating about OppFi?
Yeah. You know, I think we've been painted with a broad brush. We are not Subprime model lending. I think that has tainted us a little bit in the market. I think sometimes our consumer is being underestimated in the market. They are very resilient. Again, any issues that come up with credit can be easily resolved within a few months, right? It's a relatively short-term problem. In the meantime, we are generating a lot of cash. I think that the valuation, when you look at the balance sheet, does not take into account that amount of cash that sits on our balance sheet at any one time and our ability to deploy that in some pretty profitable ways. Those are the type of things I'd like to highlight.
Great. Thank you so much for your time and your perspective. I think we're good. Thank you.
Thank you, Kyle.