Open Lending Corporation

Thank you.

Good afternoon and welcome to Open Lending's third quarter 2020 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman and CEO, Ross Jessup, President and COO, and Chuck Yeo, CFO. Earlier today, the company posted its third quarter 2020 earnings release to its investor relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent the company's views as of today, November 10, 2020. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filings with the SEC for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. And now, John, I'll pass the call over to you for your opening remarks.

Thank you, operator, and good afternoon, everyone. Thanks again for joining us for our third quarter 2020 earnings conference call. Before we dive in, I do want to congratulate both Ross and Chuck on their respective appointments. I'm very much looking forward to continuing to work with them on growing our business. Today, though, I'd like to start by reviewing our third quarter highlights and our progress on our growth objectives. Then Ross will provide an update on our OEM opportunity. And finally, Chuck will review our Q3 financials in greater detail. During the third quarter, we certified 20,696 loans, which was an increase of 8% quarter over quarter. We also reported revenue of $29.8 million, which was an increase of 35%, and adjusted EBITDA of $19.7 million, which was an increase of 29% quarter over quarter. Chuck is going to go over our third quarter results in more detail in a few minutes, but we're very encouraged by these results. As we previously discussed, the vast majority of our growth is attributable to our existing lenders that are already on the platform. Our lending partners, especially credit unions, have been very resilient and continue to utilize our platform throughout the COVID-19 pandemic. We believe that the low interest rate environment, the increased demand and value of used cars, and consumers moving out of the cities that are reluctant to use public modes of transportation are driving these positive trends. We've also seen an influx of cash into these credit unions and banks, which is creating the need for them to lend more money into shorter-duration loans, typically like a two- to three-year auto loan. We also continue to add customers and sign new partnerships driven by our strong value proposition. During the quarter, we added 11 new customers, and we currently have approximately 340 active customers on our platform that are generating certs this year. We continue to bring in additional resellers as well. We recently launched our first bank on the FIS Originate platform, which we also believe is going to open doors for us to market to other banks that use the FIS platform. We announced some new larger partnerships in the third quarter as well, including A-plus Federal Credit Union, which is a $1.9 billion institution based here in Austin, Texas, Sound Credit Union, a $2.1 billion institution based in Tacoma, Washington, and First Investors Financial Services, which is a $1 billion institution based in Houston, Texas. One of our key competitive advantages is our exclusive insurance carriers relationships. As you already know, we currently have two insurance partners, and we've identified a third carrier that we're working to finalize terms on which will be similar to the terms we have with our existing carriers. I also want to note that adding a third carrier will not negatively impact the volume of our existing carriers. While our core business of helping credit unions and banks make more auto loans continues to grow strongly, we are making progress with some of our other growth objectives. Our largest opportunity in front of us right now is the $1 billion OEM captive market. which I'm going to turn it over to Ross in a few minutes to provide an update here. But first, I wanted to touch base on a few other initiatives that we're working on. Our enhanced focus on the refinance program to drive additional certified loan volume is working out very well. This opportunity with near prime consumers allows them to lock in a lower rate, saving them as much as $150 to $200 per month. This is a huge savings to a family which is trying to make ends meet in this time of economic uncertainty. During the quarter, we grew our business with existing channel partners and signed four new credit unions and banks to the refi program. We've also been working on other funding sources with third parties to expand our funding sources outside the banks, credit unions, and the OEMs that we currently partner with. We're also looking to broaden our offering into adjacent asset classes such as leases and establish a broader auto lending platform and to make our risk decisioning available to our clients beyond the near prime space. And with that, I'm going to go ahead and turn it over to Ross so he can jump into the OEM opportunity that we have in front of us.

Thank you, John. OEM captive certification originations were strong in the third quarters, which demonstrates tremendous growth despite the COVID-19 pandemic. We have good news for both OEMs. Let's start with OEM number two. I'm sure you saw the very exciting news about OEM number two being back online in October. This is a very good sign for our business, and they have begun to ramp production back up throughout October. We are encouraged on the number of applications being submitted and the opportunity ahead with OEM number two. Based on the October trends, it seems like OEM number two will get back to its pre-COVID levels very soon. Moving on to OEM number one. The nationwide expansion of the OEM number one has manifested itself in certification growth of over 150% from April to September, and we are currently seeing applications from over 90% of their nationwide dealerships. As stated previously, OM number one decided to expand their credit spectrum to customers with credit scores up to 679 from their previous cap of 619. Initially, they are sending us denied applications and will be adding countered applications soon. This expansion launched as a pilot for three months in one of their four geographic areas with the goal to be expanded nationwide by January 2021. So starting in late September, they are now utilizing our platform for 560 to 679 credit scores. This is a great example of how a customer has expanded their usage with us and saw tremendous benefit from our product. We are excited to use this when talking to other OEMs and banks that we're targeting. We continue to make progress on our subvention efforts for the OEMs. The work our technology and finance teams are doing with OEM number two on the subvention enhancement will allow us to help them finance new vehicles throughout our Lenders Protection Program, which increases the potential opportunity with the OEM. This rollout is on schedule and should be ramping over the next few weeks. As soon as it's rolled out, OEM number one wants to explore this as well. In terms of CECL relief, We are very excited that OEM number two received CECL relief from the SEC as well as their independent auditors. We look forward to providing more insight on this next quarter. We are also working to add multiple OEM opportunities that are in our pipeline, and some could possibly launch in 2021. I do want to point out, however, that the addition of a third OEM is not in our financial projections for 2021. One way of proving our value to prospective OEMs is by completing data studies. These studies show captives the lift opportunity by looking at how many loans they are saying no to today that they can say yes to through our platform. We are working closely with a third OEM captive to complete a data study, as well as numerous other OEM captives that are in the discussion and valuation stage. These studies were very beneficial in the signing up of OEM number one and two, so we are hopeful this will be the case for other OEMs and banks. I'll turn it over to Chuck to discuss our financials in greater detail. Chuck?

Now, moving to our third quarter results, we facilitated 20,696 certified loans and 11 new contracts were executed with lenders during the three months ended September 30th. In addition, we have six active implementations with go-live dates in the next 60 days. Total revenue for the quarter was $29.8 million, with profit share making up $18.5 million, including $3.8 million from performance obligations that were satisfied in previous periods as a result of improved macroeconomic conditions and our overall portfolio performing better than we expected in the second and third quarter of 2020. Program fees were $10.1 million and claims administration fees were $1.1 million. Gross profit was $27.3 million in the third quarter 2020, an increase of 35 percent due to higher levels of loans certified as compared to third quarter 2019 and the ASC 606 change in estimate discussed previously. Selling general administrative expenses were $7.7 million in the third quarter 2020 compared to $5.4 million in the previous year quarter. The increase in SG&A cost is a result of incremental costs related to becoming a public company. In the short term, we do expect to experience an increase in our SG&A expenses as we continue implementing the internal control and compliance procedures required of public companies. Operating income was $19.5 million in third quarter 2020 compared to $14.8 million in the previous year quarter. The increase is primarily driven by an 8% increase in certified loans quarter over quarter and the recognition of 3.8 million in profit share related to historical advantages as a result in better than expected performance of the portfolio. As a result, operating margin increased slightly to 92% in the third quarter 2020 from 91% in third quarter 2019. Net loss for the third quarter of 2020 was 71.1 million compared to 14.7 million net income in third quarter 2019. We had 83.1 million in expenses in the quarter that were associated with the business combination, specifically a non-cash charge as a result of the change in fair value of the contingent consideration earn-out shares, which were accounted for as liability awards. All contingent earn-out share milestones were met in the third quarter 2020. So beginning in fourth quarter 2020, net income will not be burdened by any changes in the value of contingent consideration earn-out awards as these shares were issued in the third quarter 2020. So let me now turn to adjusted EBITDA, which excludes the significant charges associated with the business combination. The reconciliation from GAAP to non-GAAP financial measures can be found at the back of our press release. Adjusted EBITDA for the third quarter of 2020 was $19.7 million, as compared to $15.3 million in third quarter 2019. We exited the quarter with $294.9 million in total assets, of which $115.1 million was unrestricted cash. On October 13, 2020, our warrant redemption period expired. As a result of all warrant-related transactions, the company received approximately $105.3 million in cash and issued approximately 9.2 million shares. We are working very closely with our board evaluating the best use of proceeds, and we'll provide an update when we know more about the use of proceeds. I also wanted to briefly give you an update on our share count. We have approximately 128 million diluted shares outstanding as of November 9th. We posted an updated investor presentation, third quarter 2020 earnings supplemental, to our investor relations site, which has a slide that lays out our fully diluted share count. Now moving on to our guidance for 2020. Based on our third quarter 2020 results and the performance into October, we are reaffirming our previously issued fiscal 2020 guidance ranges of the following. Total search to be between 85,000 and 101,000. Total revenue to be between 89 and 108 million. Adjusted EBITDA to be between 54 and 70 million. and adjusted operating cash flow to be between 34 and 41 million. Our team is continuously evaluating the macroeconomic climate, and we still feel confident in our previously provided fiscal 21 guidance. As the business continues to rebound from April lows, we look forward to sharing a more meaningful guidance update early next year. With that, I'll turn the call back over to the operator for Q&A. Operator?

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of David Sharf with JMP Securities. Please proceed with your question.

Hi. Good afternoon. Thanks for taking my questions. I wanted to just follow up a little on what was a tremendous kind of profit share figure. And should we largely be thinking about this along the same lines as we've thought about so many other lenders during this reporting season who effectively probably over-reserved in the early days of COVID and reset their allowance levels. Should we view this as sort of a one-time kind of event related to potentially overly cautious underwriting of some of those early vintages as we think about kind of that level of shear per cert going forward?

You bet. Hey, David, it's Chuck. Good to talk to you. Yeah, you know, as we've talked about previously, you know, we have a very disciplined process, a quarterly process that we follow. It includes our risk team, our chief risk officer, you know, Ross, John, and myself, and various people. And really, if you think about what we recorded in Q3, the 3.8 million in change in estimate, it's really just a better performance of the book in the second and third quarter. You know, when we did this and made the estimate back in first quarter, it was a $12 million adjustment. And that was based on the facts and circumstances we had at the time. Nobody really knew about COVID and how bad it was going to be. So we really just looked at this in the third quarter and and realized the favorability of the period through the third quarter through 9-30. So we continue to have stress levels into the fourth quarter, into next year, because none of us really know if there's going to be another wave of corona or what will have you. So that's our process. It's very disciplined, and we continue to follow it on a quarterly basis.

Got it, got it. That's helpful. And maybe as one follow-up question, You know, on the credit union side, on the demand front, is there the equivalent of almost, well, a same-store kind of growth figure?

I mean, for kind of your active credit unions during the quarter, like, you know, the percentage increase in their contracts and... Well, you know, I think what you're going to find is we have a lot of credit unions that, you know, will continue to grow their line of business with us, whether it's opening... other avenues like the refinance channel, or they might go from just doing indirect to direct. But I think what you'll find is every credit union has churn in their auto portfolio, where they typically try to keep a fixed percentage of their total loans in auto. And with about a three-year average life, what we see is a lot of credit unions, once they get their feet wet with our program and see that the yield is higher than their prime, they'll continue to increase their volume in our Lempro portfolio versus filling that churn with prime loans. So that's a matter of their appetite for certain asset classes versus scores within that asset class. So, yeah, we get a lot of same-store sales.

I think it continues to grow. I think one thing to add, David, too, is the fact that if you look at our active customers here at Forty, that incremental amount of customers compared to last quarter is not just all new customers that were signed up. We have some customers that, you know, were affected by COVID and now they're back again. And so it's really, you know, I think what's happened is, you know, our product has withstand a lot of the uncertainty and folks are seeing the value prop and stepping up and coming back.

And I guess one other thing I'd add to that comment too, David, is So we have a credit union right here locally in Austin that I just had lunch with their EVP last week, and probably only a $700 million shop, but they ended up attracting $70 million worth of cash in the last two to three months just because they were scared of the market. They're bringing money into safe places. So, you know, these guys are calling us and we're getting what could be, you know, hot money is what we're looking for. your assets to put it back out in. I think you've seen a lot of growth. That's where I was going with earlier. What drives it is if they're getting a bunch of cash in, they're going to do a lot more auto loans with our program.

Right.

And I think every time the markets get a little scared, people consider credit unions to be a safe place to put their money.

Got it. Are you finding that influx of deposits is actually leading them to look even further down the FICO spectrum?

Exactly. Yeah, there's only so many prime auto loans, and the beauty of what we do is it's incremental flow. They're all looking at these applications. They're just denying them. So our clients now that are utilizing our program are capable of buying down into those lower tiers because they've already got the processes set up.

Perfect. Thank you.

Thank you. Our next question comes from the line of Ashish Savardhra with Deutsche Bank. Please proceed with your question.

Thanks for taking my question. Good momentum in the business. I wanted to drill down on the OEM. So on OEM number two, good to see that they are back. I was wondering if you can talk about the monthly run rate, how it's ramping up, and once the subvention functionality is implemented, how should we think about the run rate going forward? And when do we get to the normalized run rate of 10 to 12,000 certs per month? Thanks.

You bet. Good to talk to you. Yeah, so we're excited. Early in October, the division that was doing business with us outside of their dealerships relaunched. It's going great. The number of applications are coming in. And even our very first month back, They exceeded all previous months except for one month. So it's definitely trending in the right area. I think that we should see in the next couple of months them hit kind of the levels that they were back in Q1. Also, in moving over to their division that does business inside, as you know, we've been in one of their 14 markets. In the used side, we are launching this month the used side throughout the other areas. There'll be a ramp to that, but I would think going into 2021, we'll be fully ramped in the used side. Later this month, we should be in one of the markets from launching the subvention side, which will help us on the new side. There will be a ramp to that, which I assume will be, you know, a few months. So I think when we start looking at sometime in the second quarter of 2021, third quarter, we should be hitting on all cylinders nationwide. you know, inside their dealerships as well as, you know, new used and the division outside. So, it's going very well with them. Everybody's, you know, lined up and the training and implementation plan is underway.

That's great. That's great. And maybe just on OEM number three, I was wondering if you could just provide an update on the data study. Have you already completed the data study, and what are the next steps for OEM number three?

Yeah, so we actually have completed. We've delivered. They have taken it in. We actually delivered it in summary form as well as the individual detail application form. They are doing their own analysis now, looking at the results, looking at the pockets that they think that we could be utilized in, and we should be hearing back from them very soon. I had a conference call with the CEO a couple of three weeks ago and that went really well so you know the next steps would be hearing back from them discussing the areas that are of interest that provide the most lift and then going from there so a great opportunity here and that's great and then maybe if I can sneak in a third one just on the Cecil relief I understand you're planning to provide more information next quarter but I just wanted to better understand quickly

the CECL relief that OEM 2 received, that would be applicable for any OEMs or any banks. Would that be a fair statement? That's a pretty... I'm just wondering if you could give any brief color on this call. Thanks.

You bet. And so basically... The way our policy, insurance policy is styled is to provide them a level of certainty as to what percentage of the deficiency balance we will cover. And from that, they'll get CECL relief that mirrors that. The SEC's agreed with that. There are auditors. And basically what it does is takes the future claims payment that we'll be making, and you can actually offset the allowance account right there at that line item on the financials. So you show a net number as opposed to recognizing the future claims payment as other income. And so this is something that we're pleased to have and behind us now. We definitely look to replicate that to other lenders, not just OEMs, but, you know, right around the corner is going to be credit unions that are going to have to adhere to CECL. And so I think all the things we're doing today will be, we'll have, you know, two or three years of benefit on some of the new, you know, lenders that are having to adhere to that.

Yeah. I mean, you've got the larger banks need to comply today. and then credit unions in the beginning of 2023. So we're gearing up to make that a big selling point.

That's great. Congrats once again on such a solid quarter. Thank you.

Thank you. Thank you for your time.

Thank you. Our next question comes from Mike Rondle with Northland Securities. Please proceed with your question.

Hey, congrats guys on OEM number two and it sounds like the progress on OEM number three. That's great for the business. The six credit unions that you're implementing and the 11 new ones in the quarter, does anything stick out size-wise compared to the 340 you have or would you describe all of them as average or anything to call out?

No, I think that's a great question and We tried to highlight that in the fact that we think we're signing up to larger shops now. We're getting a lot of interest from, you know, you heard us talk about the A-plus and the sound. They're all up in the billion-plus size. I think we're starting to attract some of the larger shops that can produce some significantly higher numbers in our program today. So we're really excited about the size of the shops that are hearing about us.

Great, great. And then the four new refinance partners, roughly refi, what percent of your business was that in the third quarter? And how should we think about that going forward?

I think it was about 11% of our cert volume in the third quarter, up from seven in the second quarter, and it's continuing to grow.

Great. Well, guys, I guess Look forward to hearing more about OEM 2 next time you report, and congrats there. Take care.

Thank you, Mike. Thank you. Our next question comes from the line of Joseph Zafi with Canaccord. Please proceed with your question.

Hey, guys. Great progress, and welcome on board, Chuck. Thank you. It's good to see the team expanding. So just a few questions here. Number one, John, I was interested in some of your earlier comments on business model expansion here, including expanding funding sources, moving into adjacent asset classes, and maybe moving beyond near prime. If you wanted to kind of provide a little more color on any or all of those about what when we might see some of that happen, and then any other comments you might have on that.

Yeah, as far as expanding beyond the near prime space, we've actually already started that data study. Our chief risk officer, Ken, has gone out and started to gather a ton of data from all three bureaus. We've been given a lot of data from some of our larger shops as it relates to the performance they have up in their prime portfolios. So they're all willing to give us data that you would typically have to go out and pay to get as it relates to how these super prime and prime loans are performing with a long history of performance data. So we're just now starting to model that. I can't give you a definitive date as to when that study will be done, but I know we're actively working on that right behind. Obviously, subvention for our IT team has been first and foremost because that's going to be a big bang moving forward with the OEMs.

And I think the expansion is clearly going north on the credit side, not south.

This was all aimed at more of the prime loans as more of a SAS model for something that's already built. That's just building the data into it. And then as far as funding sources, even prior to taking us public back in June, we were working on working with a number of different equity firms that were looking to put some capital together to be a funding source for this segment of the loans, knowing that they can generate some significant yield. And we put that on the back burner just to get through, you know, the SPAC process and going public back in June. We've got a lot of interest now from people that are looking to put some decent sized pools of money together to sit behind you know, what we currently have flowing through the pipeline of applications that we just can't find homes for until we get more lenders on. But I think we've got some significant volume that we can fill a funding source with that could be backed by our insurance. It's really just really creating another funding source, like a credit union or a bank. It's just a new customer.

Great. Thanks for that. And then just on OEM number one, I mean, it sounds like the relationship continues to expand, the FICO score range is expanding, other things. How penetrated do you think you are in OEM number one versus where you might get?

I think we're just now being noticed inside of them by the C-levels. Our portfolio continues to grow. And from everything we hear, it is performing very well, which is exactly why they decided to move north on the credit side. I think that, you know, it's hard for me to estimate, but it's still in the 2-3% kind of range from the overall opportunity, you know, in the non-prime. But we definitely... What they're telling us is our automated decisioning is really saving them a lot on the cost of underwriting and providing them the ability not to have to find a partner to refer these loans to and keep that person in the ecosystem. So it's exactly what we promised during our sales process, and we're living up to it. And we're excited. I think just the expansion we received from the additional credit tiers hasn't really even hit now. You know, it's in one of their four markets and it started late in the month. And so really, I think our progress will really be shown here in Q4 and certainly Q1 of next year when we continue to expand.

Okay. And then maybe I just had one more follow-up that may be related to what you just said, Ross, is that the guidance on the CERT range is still pretty wide, given that we're in Q4. And I'm guessing that perhaps that has to do with OEM ramps from here and what may or may not happen in Q4. Is that kind of directionally correct, at least?

Yeah, I think it is. And, you know, really, you know, what we're focused on is, you know, executing the plan and running the business. And when COVID first hit and we reassessed our guidance that was out there before we were even a public company, you know, we went and prepared a sensitivity analysis, you know, the high-low ranges and reaffirmed that guidance and came out. And that's what we did today is reaffirm that. And, you know, a lot of work went into it and we were focused on execution and Q3, we're all very excited about the results. We performed well. But we take a prudent view of the economic backdrop in the country. But we feel like through the performance through Q3, those trends will continue into Q4.

I think, Joe, looking at 2019 coming out of 78,000 certs to where we're going to end up the year and going through what we've gone through, I think we're very pleased that we're in the position we are right now. And certainly November, December are going to be growth months as well from that. So we're excited about 2021 as well with everything we have going on.

Great. Congrats, guys. Thanks very much. Thank you.

Thank you.

Thank you. Our next question comes from the line of Vincent Ciantic with Stevens. Please proceed with your question.

Hey, good afternoon, and thanks for taking my questions. Actually, just first clarifying, the profit share, so that was really strong this quarter, but I wanted to follow up on David's question. So the $12 million in profit share that you reversed in the first quarter, it's not like you put that back in the third quarter, right? So it's sort of what we saw in the third quarter is something that's sustainable going forward in terms of profit share.

That's right. Vincent, this is Chuck. How are you doing? I think about it this way. We had about a $711 average profit share per cert before the change in estimate based on the prior advantages. So that was a little under $15 million of the $18.5 that's on the P&L. And then we had the $3.8 that was really part of net of the $12 million that was reversed back in March. So That's just realized better than the expected performance on the portfolio in the second and third quarter. So the profit share of 896 per cert, if you just take straight certs for the quarter and divide into the revenue number, that number is inflated by the 3.8 roughly that we recognized on prior vintages.

Okay, gotcha. So that 3.8, okay, perfect, makes sense.

To set it another way, we got $9.1 million of that $12 million, and we'll file the 10Q later this week, but that's not been reversed. So we're still obviously looking forward and don't have a crystal ball, and we run our process.

We have even more than that, right? Because during Q1 of 20, we also – we had about a million six that was affected by that as well, so yeah.

Okay, that makes sense. That's very helpful, thank you. Secondly, on the guidance, so it's been a great nine months so far, and I guess to the prior question about, you know, the guidance is kind of wide in all of the different areas. I mean, is there, when you think about the four different items, What would take you to the low end of the range in each of those, since it seems like your performance has been very strong?

You know, I think I said when I asked to answer Joe's question, you know, we feel good about the guidance. You know, we reaffirmed it, Vincent. So, you know, the trends going into October, we feel really good about into November even now. So, you know, we reaffirmed and feel good about, you know, hitting our guidance, obviously, and really, you know, meeting expectations there. So, you know, I don't want to really go any further into it than that. But we feel good about where we're heading. And October was, you know, the trends were really good and continue into November. And we had 67,400 certs, you know, year-to-date September. And, you know, the range is 85 to 101. So, if you just think about the math and what a projected Q4 would look like. And, you know, we'll be in the middle of GoPost or, you know, or we feel maybe better than that.

Yeah.

Right. Excellent. Okay. Perfect. Thank you. And then just the last one for me. It's great, all the details you provided on OEM 1 and 2 and potentially number 3. So, wanting to size what the opportunity set is. For example, when you say OEM number one is going to a FICO score of 679 versus 619 prior, is that more, I guess, sizing up maybe what the application set is for that? Because I'm assuming that's probably more than the 2% to 3% that you're capturing now, maybe even more than double that. And then when you say, separately, when you say about OEM number three and looking at the different data sets, I guess, broadly speaking, when you sign up an OEM, How many applications that were turned down previously could you say yes to? So like kind of how much incremental upside can that OEM generate?

Thank you. Yeah, business, Ross. So, first of all, OEM number one, when it relates to the 560 to 619, we actually are seeing pretty much all their applications, okay? And then when you look at how they upsize the credit going from 620 to 679, they're only sending us the denied apps that are coming through now. The goal is to add countered apps where they're asking for a down payment, and that's probably running that customer off. And then with our program, they can make that full extension of credit. That's the next phase is convincing them to add that. And then I believe the third piece of that is to try to get them to move up that 619 floor to something like a 639 and everything below that. So we basically increase the credit score for everything that we see from them. And so, you know, today from an application standpoint, you know, that increase will probably get just that additional lift that they're getting is probably about 30% of our overall what they were doing in the past. And I think that could be much higher, especially because they're in a pilot right now. So once they get added to those three markets, we should take their volume. We're already seeing it be double today what it was just three months ago. And so there's lots of opportunity there. That's even before we get to discuss how to help them on the new car side with their subvention. Great. Thanks very much.

Thank you. You bet.

Thanks.

Thank you. Our next question comes from Matthew O'Neill with Goldman Sachs. Please proceed with your question.

Yeah. Hi. Good evening, gentlemen. Thanks for taking my questions. A lot of the exciting stuff has been asked and answered thus far. That said, I was curious, is there any update on the – the sort of cadence of discussions with the potential third insurer that I know we've been chatting about prior?

Yeah. We believe in the final stages of that. We've had a verbal meeting with those guys last week on the phone where they said that on November 20th, they hope to get senior management's complete sign-off on it. And then after that, they consider it to be a rubber stamp event at their February board meeting. And their terminology, they'd like to be writing their first cert by as early as April.

Oh, that's great to hear. I appreciate that detail. As a follow-up to one of the other comments made earlier, you were talking about essentially like new pools of capital or investors looking to take the loans that you guys are able to originate. I was just curious, you know, it sounds like you've had some good success adding incremental credit unions and other participants to the mix up to 340 with six more in trials. Is the rate limiting factor on certs at the moment the sort of capital slash lender side, or is it the insurance side?

When you say the rate?

I don't think it's the insurance side whatsoever. I think some of the capacity comes from a geographic situation. standpoint where there might be some applications in a certain area that we might not have as much coverage as other areas. And so we're just trying to fill in possible gaps from that standpoint. And also you have lenders that do have liquidity issues every now and then and have to kind of, you know, come and go throughout the loan side. And we're just trying to shore up that so we can keep that steady flow.

And the other thing that we're working on, you know, without bringing names into it, but You end up with a lot of auto buying services, if you will, that cater to the likes of Costco members or Walmart members or different places like that that are always reaching out to us for, you know, if we bring you into here, do you have enough funding sources for it? So what we're trying to do is position the company to be able to handle both sides of the coin, if you will. You've got apps coming in that we can inundate our existing funding sources with, but at the same time, if we can bring a large pool of capital to the mix that can stay in the game, if these others, to Ross's point, reach their loan-to-share balances or you know, just run out of liquidity, we want to be able to have that, you know, cash available.

Yeah, and I think, Matt, one thing you mentioned something about us originating. We actually don't originate, right? We insure the risk on it. So we're definitely not a lender.

Yeah, and this is not any funding sources that we would own any piece of. This is just pulling together through a business plan and a white paper to show folks the kinds of returns they could make using our platform and funding auto loans through that cash.

Yeah, absolutely. Absolutely understood on that front. I guess the last follow-up I would just ask, I guess, I think on the last call I asked around, you know, once the industry of OEMs kind of starts to catch wind of the successes at OEM 1, OEM 2, OEM 3, I think I referred to something of like a domino effect. Is it premature to think about an OEM process?

discussion you know starting to take place yet or or or maybe it is not not at all Matt we you know we've got lots of discussions going on just we only have one that we're active on a data study now but we have numerous that we are having lots of detailed discussions not only with the captive but with their OEM as well so we can, you know, actually sell the, you know, the value prop each way to help, you know, the OEMs to see about moving metal, making more, you know, sales on backend products after sales. And so a lot of great discussions are underway now.

And I think you hit the nail on the head, Matt, with your comment about the domino effect. That's exactly what happened in the credit union space. Once you bring on a real big one that everybody views as a leader in the industry, They figure if they did the due diligence, what's to prevent them from jumping on the bandwagon? And I think the first two OEMs that we talked to, one of the first questions we got was, what other OEMs do you do business with? What are we missing? And then the minute you get that one or two up and running, all of a sudden it's a great, you know, flagship account to go out and show people that it does work and it's working well for the others.

Yeah, that makes a lot of sense. Thanks so much for taking the questions. I appreciate it. I'll jump back in the queue. Thanks for your time, Matt.

Thank you. Our next question comes from the line of Lance Jesserun with Jefferies. Pleased to see with your question.

Hey, guys. Thanks for taking my question. Just in the interest of time, you know, sorry to beat a dead horse on the OEM thing, but, you know, realistically in a good upscale for you guys, how many OEMs could you look at launching definitively in FY21?

Definitively?

If all the stars were aligned? I mean, over the next three years, there's more than a handful. There's probably seven or eight great candidates, five of which they definitely know who we are. We've had discussions, and we're just kind of you know, going through the process with them, looking at value prop, trying to answer questions regarding, you know, potential social relief and all that.

And to Ross's point, too, when he talks about the OEMs versus the captive, you know, we're attacking all of these from multiple angles, not just, you know, the chief lending guy. You know, we've got relationships now with the IT people. And Ross and I spent an hour on the phone last week with the gentleman at Sageant that is responsible for selling the loan origination platform that does the LOS for three of the majors that we're talking to. And what he wants to do is come up with how do you approach them from the IT side to show them exactly how this is built, how the watch is made, and not only that, but that it is made and ready to go. So I think that the more time we spend on stuff like that, the easier these OEMs are to land.

Gotcha. And then to ask kind of a follow up on the ease of landing them, how should we think about the rate of origination volume with the new OEMs? I know COVID put a big hamper on your OEM one, but with how fast OEM one has ramped up, how much faster could we expect, you know, your future OEM partners to ramp up?

Yeah, I think back to what John kind of started with. One of the keys is having an integration into their loan organization platform, and that call that we had with the gentleman who they actually are the LOS provider of three of our seven or eight targets that we have that we're in discussion with. So once we have that integration with their system, then it's very easy. It's just an API driven type integration to actually have us, our technology platforms talk to each other. And so I think that's the first hurdle is, is getting on, you know, proving the value prop, getting on the IT roadmap from a project standpoint and, But we are prepared here. Just us having to learn and integrate subvention into our technology has been a seven-month process. And the good thing is all of our discussions so far with the other OEMs is they utilize the same kind of marketing dollars. They're all time-based where this incentive is for this unit for this period of time. And so it really fits well with what we already have developed. So I believe, you know, the first OEM, we launched them exactly one year from the first day we ever presented. But I think once we get the nod from OEM, you know, four to six months could be the timeline to get them implemented. So if you look at that, you could have two a year for the next four or five years, you know, to get out there. And there's If I look at various tiers, you know, the first OEM that we launched has that, you know, capability of doing, you know, 1,000 to 2,000 loans a month. The second one is that, you know, 8,000 to 12,000 range. And then the other ones we're talking to are, you know, are of equal size as OEM number two. And then some are that same sweet spot that OEM number one is as well. So it's a big PAM.

Awesome. Thanks so much for taking my questions, guys. Well, thank you. Thank you.

Thank you. Our next question comes from Peter Heckman with Davidson. Please proceed with your question.

Most of my questions have been answered. Thanks for staying on long, though. Can you just maybe talk about some of the major variables that play into some of your estimates and how you see some of that macro data trending in terms of unemployment, used car values? total new used car sales, and then how does maybe additional unemployment stimulus or direct stimulus play into some of those estimates and how you think about 2021?

Yeah, I think when we look at the 606 calculation, the things we factored in, of course, is unemployment, vehicle values, default trends, whether you legally can go out and repossess a vehicle at this point in time. the fact that what's the supply demand of new cars, which impacts used cars, all these things are considered. So I think that, you know, before we started working with the OEMs, 85% of our business is used cars. And so it's a fantastic market, what we're seeing now, and a lot of our lenders are benefiting from it. Now that the OEMs are manufacturing cars, there's still a pent-up demand out there for new cars, which is forcing the values of used cars to increase. We also have not, you know, we were pretty conservative not knowing what the impact of the Hertz situation with their bankruptcy and the supply of the used cars coming off lease. And I think, you know, fortunately, the new car production was so low, it's offset a lot of that risk. So I don't know.

In Mannheim, you know, you're over years up 16%. You know, the used car value index, I think it's up 167.

It happened in April and it's amazing how the fast recovered very quickly.

I think just everything's gotten better than we had originally thought. So we're all excited about the future. And the other thing we kept hearing too, even during these times where there was extensions being granted, We reached out to most of our shops, and they were telling us that the consumers that had your car loans weren't even looking for extensions. They were continuing to make their car payments.

Yeah, I just received something from our chief risk officer today. We all received it looking at our expected claims over the last four or five months compared to what's actually come in. And we still, even as of last month, are 35%, 40% below where we thought they would be. We definitely, it's probably a culmination of, you know, it's not as bad as we would have expected on one hand. And, you know, you still probably have some that are out there. But our delinquencies are in check. And so we're real pleased with how things are going now.

That's great. And I assume you'll probably continue to review the data for another quarter or two. But I guess, would there be a consideration of potentially reversing the pricing increase from earlier in the year?

We'll go through the same process that we went through in the quarter, and what we do is we meet as a management team, and we take the same inputs, and we look at how that is, as Chuck explained, and we come to a conclusion. We also have our service providers like KPMG and EY opine on that as well. I appreciate it. Thanks much. Thanks for your question, Doug.

Thank you. It appears we have no additional questions at this time. So ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time. you Thank you. Thank you.

Thank you. Thank you. Amen.