Open Lending Corporation

Good afternoon and welcome to Open Lending's first quarter 2021 earnings conference call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman and CEO, and Ross Jessup, President and COO, and Chuck Yale, CFO. Earlier today, the company posted its first quarter 2021 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 view as of today, May 11, 2021. 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 more information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. And now I'll pass the call over to you, John, for your opening remarks.

Thank you, operator, and good afternoon, everyone. Thanks again for joining us for our first quarter 2021 earnings conference call. I'd like to start today by reviewing our first quarter highlights, as well as the progress we've made on our growth objectives. Then Ross is going to provide an update on our OEM opportunity, along with some recent changes to our underwriting. And finally, Chuck is going to review our Q1 financials and our outlook for full year 2021. During the first quarter, we certified 33,318 loans which was an increase of 19% as compared to the first quarter of 2020. We reported revenue of 44 million, which was an increase of 152% and adjusted EBITDA of 30.3 million, which was an increase of 217% as compared to the first quarter of 2020 as well. The first quarter was a record quarter for the company and March was especially notable. as it was a record month in our company's history from a certified loan perspective. We certified over 14,500 loans in March, and the momentum has continued into the second quarter. We also continue to make solid progress on our growth opportunities. During the quarter, 14 contracts were executed with new customers, and we currently have over 360 active customers on our platform that have generated certified loans in the past 12 months. We announced a new partnership with Noble Credit Union, which is a $1 billion institution based in Fresno, California, and we've also recently signed six other large institutions, which we will announce once they go live on our platform. We continue to show progress on the credit union front, and we believe we still have a huge runway for growth ahead of us. We continue to have productive conversations with multiple regional bank prospects. And we are currently working on two data studies for these types of institutions. We've begun making traction with companies in the online lending channel who funnel applications to funding sources. We are currently working on a data study with one of these institutions to look at their applications that were not funded in the last quarter, which represents approximately 270,000 applications at various credit scores. Also during the quarter, we added seven new credit unions and banks to the refinance program and have 28 credit unions that are acting as funding sources behind these refinance channel partners. We noted an uptick in volume and it was a greater than 75% increase in applications in March of 2021 as compared to March of last year. PenFed Credit Union has grown its CERT volume from approximately 700 loans in February to over 1,000 in March. In March, we co-hosted a webinar with KPMG and we published a white paper on CECL relief that can be found on our website. The webinar had over 100 attendees and has generated positive feedback and inbound calls from current and prospective OEM, bank, and credit union partners inquiring as to how we can help. We plan to do more of these webinars in an ongoing basis to educate potential partners on our offerings. As the CECL deadline approaches for credit unions, we believe this is a great growth opportunity for us to expand our wallet share. And then lastly, we continue to make very good progress on adding additional insurance carrier partners to our platform. We are in active discussions with various top insurance carriers as we feel there is enough volume to support a third or fourth insurance carrier without jeopardizing our relationship with the other two carriers. This is an important initiative for us and we will continue to provide a more meaningful update on our progress as we execute this initiative. So with that, I'm going to turn it over to Ross to review our OEM business and our progress on that front, as well as talk about some of the underwriting changes that we're currently making.

Thanks, John. As we have spoken previously, the OEM captive market is substantial and a major growth opportunity for us. As of today, we currently serve two OEM captives, which we expect to continue to ramp, and we continue our ongoing discussions building out our pipeline of other OEMs for the future. Now let me provide an update on our progress growing OEM number one and two. OEM number one We experienced certification growth of approximately 164% in the first quarter 2021 as compared to the first quarter 2020. We are very happy with this progress and growth. OEM number one is currently utilizing our platform for an expanded credit score offering, which is 560 to 679 in all four regions that they service. They launched one region in January and the remaining three regions last week for the credit score ranges 620 to 679. We anticipate this could add an additional 300 certs per month, taking OEM number one to approximately 1,300 certs per month once fully ramped. In addition, this week we are launching expanded loan terms from 72 to 75 months in one of their four regions initially as a pilot. Moving on to OEM number two. As you may recall, OEM number two launched originally in October 2019 with their captive finance arm and paused doing business in April 2020 due to the COVID-19 pandemic. They came back online in October 2020 and production has ramped to near pre-COVID levels. Certified loan growth was approximately 60% in Q1 2021 as compared to Q4 2020. We are now active for both new and used across the nation for OEM number two. Production continues to ramp up and we're making good progress moving forward towards a full ramp of eight to 10,000 certs per month by the end of 2021. We launched Subvention in January in one market and were delayed for the February launch due to the Texas storms. As of early March, we are live across the nation with Subvention. We expanded terms to 75 months in early April, and the initial feedback is very positive. So for both new and used, they're ramping in line with expectations, and we are excited about the opportunities to continue to broaden our services with them as the relationship grows. Volume number three, as we previously disclosed, we completed a data study for volume number three, and it included a 51% increase in approvals demonstrating a strong value proposition to their business. We both are encouraged by the results and will update you as the relationship moves forward. Moving on to item number four, as previously disclosed, we completed our data study which included a 57% increase in approvals from applications they are denying. We are also encouraged by these results and the progression of our discussions and will update you as well on the relationships as they move forward. Let's move on to an update on the underwriting initiatives. When COVID-19 hit last year, we tightened our underwriting standards by incorporating a 5% vehicle valuation discount, which resulted in higher loan-to-values, LTVs, that increased premiums and improved the quality of the credit of our book during that pandemic. And we changed our income verification thresholds With the macroeconomic environment improving, we felt it was the appropriate time to change these standards back to where they were pre-pandemic, as we have had fewer defaults and claims than expected. We removed the 5% vehicle discount in mid-April and are removing the proof of income for 620 to 680 credit scores for direct and the refinance channels in May. We expect both of these changes will increase our certified loan volume through more attractive rate offerings. I now turn it over to Chuck to discuss our Q1 financials in more detail.

Great. Thanks, Ross. During the first quarter of 2021, we facilitated 33,318 certified loans and 14 contracts were executed with new customers. In addition, we have nearly a dozen active implementations with go-live dates in the next 60 days. Total revenue for first quarter 2021 increased 152%, to $44 million as compared to first quarter 2020, with profit share making up $27.7 million of total revenue, including $5.1 million from performance obligations that were satisfied in previous periods as a result of improved macroeconomic conditions and the continued overall portfolio performing better than expected due to fewer defaults and claims as compared to a $12 million reduction in performance obligations satisfied in previous periods in the first quarter of 2020. Profit share associated with new originations in the first quarter of 2021 was $22.6 million or $680 per certified loan as compared to $15.8 million or $564 per certified loan in first quarter of 2020. Program fees were $14.9 million in first quarter of 2021 as compared to $12.7 million in the previous year quarter. and claims administration fees were 1.4 million in the first quarter of 2021 as compared to 0.9 million in first quarter of 2020. Gross profit was 40.6 million in first quarter 2021, an increase of 172% due to higher levels of loans certified as compared to first quarter 2020 and the ASC 606 change in estimate discussed earlier. The positive adjustment in the first quarter of 2021 related to ASC 606 resulted in a 17.1 million change quarter over quarter and represents the continued improvement of our portfolio performance from a risk perspective related to frequency and severity of defaults and prepayments over what we anticipated last year when the pandemic began. Gross margin was 92% in first quarter of 2021 compared to 86% in first quarter of 2020. Selling general administrative expenses were $11.2 million in the first quarter of 2021 compared to $6 million in the previous year quarter. The increase in SG&A costs reflects an increase in employee compensation and benefits as we build out our organization, in addition to professional and consulting fees as we continue to implement the internal control, compliance, and reporting requirements of public companies. Now moving to operating income, it was $29.4 million in first quarter of 2021 compared to $8.9 million in first quarter of 2020. The increase was primarily driven by the 19% increase in certified loans as compared to first quarter of 2020 and the recognition of the $5.1 million in profit share related to historical vintages as a result of better than expected performance of the portfolio as a result of lower than anticipated defaults and claims. Net income for first quarter of 2021 was $12.9 million compared to $8.2 million net income in first quarter of 2020. Adjusted EBITDA for the first quarter of 2021 was $30.3 million as compared to $9.6 million in first quarter of 2020. There's a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our press release. I'll move to the balance sheet. We exited the quarter with $326.8 million in total assets of which $127 million was unrestricted cash, $97.2 million was contract assets, both current and non-current, and $83.9 million in net deferred tax assets. We had $286.6 million in total liabilities, of which $173.3 million was an outstanding debt and $92.4 million related to our tax receivable agreement liability. On April 6, 2021, we completed an underwritten public offering of 10,350,000 shares of our common stock at a public offering price of $34 per share. All shares were sold by existing stockholders and certain executive officers of Open Lending. Upon closing of the offering, we entered into an agreement to repurchase from the selling stockholders an aggregate number of shares of Open Lending's common stock equal to $20 million or 612,745 shares at the same per share price paid by the underwriters to the selling stockholders in the offering. Also, I wanted to briefly give you an update on our share count. We had approximately 126.8 million shares outstanding at March 31, 2021. We posted an updated investor presentation and first quarter 2021 earnings supplemental to our investor relations website, which includes a slide that lays out our current share count post the April secondary offerings. Before reviewing our guidance for 2021, there are a few items I wanted to point out. In March, we entered into a new credit agreement, which included a senior secured term loan facility of $125 million, along with a revolving loan facility of up to $50 million. The new facilities were used to refinance the company's existing term loan agreement and will result in approximately $9 million in annual interest expense savings. In April, We paid $36.9 million to settle our long-term obligation related to the tax receivable agreement to terminate a $92.4 million liability at 40 cents on the dollar. This settles the TRA holder's present and future right to the tax receivable agreement. Now moving to our guidance for 2021. Based on our first quarter results and trends into the second quarter of 2021, we are reaffirming our previously announced guidance ranges as follows. total certified loans to be between $161,000 and $206,000, total revenue to be between $184 million and $234 million, adjusted EBITDA to be between $125 million and $168 million, and adjusted operating cash flow to be between $81 million and $111 million. Now with that, we will turn it back over to the operator, and we are happy to take some questions from the group. Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate 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. One moment, please, while we poll for questions. The first question is from Peter Heckman from DA Davidson. Please go ahead.

Hey, good afternoon, everyone. Nice results. Wanted to ask, with the underwriting standard change that's going to take place here in May, can you talk about what that might represent in terms of a change in the average revenue per loan, as well as any other thoughts for modeling purposes?

Yeah, Peter, this is Ross. The change actually will not affect the average revenue per loan, but should change our capture rate, meaning that many more closed loans compared to the number that are approved. So the change that would happen potentially on the revenue side was we do have a reduced amount of premium coming in, but I think whenever you factor that in as well as our continual reduction of claims and prepayments compared to where we estimated, I think there's a balance in there. So we don't actually think our overall per cert revenue is going to change that materially. Mainly we're just going to be able to capture that many more.

Yeah, it is Chuck. Pete, I would just say on that profit share, I think in that range of that call it 650 per cert, which is what we've kind of been discussing kind of longer term for the average there and about 11, you know, 50 per certified loan in total.

Okay. That's helpful. And then, um, what was my other, um, just as regards the, um, the loans by OEM, did you say you continue to expect OEM number two should be able to ramp to, uh, Did you say 8 to 10,000 loans per month? And if so, what kind of timeframe are you thinking about there?

Yeah, I still think we're tracking right along with that towards the end of the year. And so it is 8 to 10 number. Okay.

Great. Thank you.

Thanks, Pete.

The next question is from David Scharf from JMP Securities. Please go ahead.

Great. Good afternoon. Thanks for taking my question. I was just wondering, we're at the tail end of a reporting season in which obviously consumer lenders pretty much across every asset class experienced much better credit performance than maybe initially anticipated. Obviously, you're no exception, and it's reflected in the profit share. As we think about just some of the puts and takes, that impact the demand for your service from your lending partners? Does sort of this benign credit environment and perhaps evidence of other lenders, even OEM captives or credit unions potentially loosening some of their underwriting requirements, does that represent any sort of headwind in which maybe their approvals internally could be supported or Does it just sort of – trying to really understand sort of the puts and takes, if you will, whether or not there's any, you know, evidence that some of your lending partners might relax and therefore not require as much incremental help from you on your prime borrowers.

Hey, guys, this is John. I'll take the first stab at that. And, Ross or Chuck, if you want to jump in, but We talk to all of our clients on a regular basis, and what we're finding is every one of them, particularly credit unions, have an influx of cash that they're trying to find a home for. They have virtually no yield on investments, and they're all trying to reach and find out how they can get more yield on these autologs. And when you get into what they actually get on a pro loan, it's next to nothing. I mean, and you've got to be so, you know, razor thin margins when they're doing a 1.9, you know, interest rate on a new car loan versus being able to generate up to 300 basis points net on a near prime loan. Um, yeah, I had a call yesterday with a gentleman that runs about a $900 million credit union. And he said, I need to find a home for a hundred million dollars. It just flows through the credit union. You know, can we sign up for your refinance, your channel partner or capturing those people that got stuck with a higher rate and, you know, refinance them into something here. So, you know, I personally don't see, you know, rate again, some of the banks might get a little bit more competitive. I don't think they can ever compete with the credit unions, a cost of funds, the fact that they don't pay income taxes. I think we have such an opportunity ahead of us with all of these credit unions that I don't see them filling up those buckets with their prime loans. But that's my two cents. Ross or Chuck, do you want to add anything?

Yeah, I'll just add one thing to pile on that, John, is a lot of the data studies we're doing are from time periods just over the past five, six months. So we're still seeing that these lenders are declining applications that we can approve and help with. We also are seeing that from our capture rates that are ticking up. So I don't see that as a current threat, but we certainly have our eye on it to manage.

Got it. No, that's helpful. I mean, it sounds like the credit union universe is not using the – kind of current credit environment to sort of open their funnel and dip down into more near-prime themselves. Hey, just one quick follow-up. Any update on just some, I believe, conversions with Bancor processors in sort of that channel? Because I believe you were in the process of potentially integrating with one or more in the near term.

Yeah, as recently as last week, we've had a number of really productive calls with Sajent, which I think you've heard us talk about as the LOS for at least three of the captives that we're aware of. And they are the LOS for the one captive that Ross alluded to in the earnings call that is moving pretty quickly down the path of wanting to do something. So what they heard from that captive that, They believe it was in it that something would happen. All of a sudden, they're all reaching out and want to get the specs in place, get this thing laid out, what they hope to get fourth quarter at once. So, you know, we've got that one going. We've talked the other day with a very large shop on a platform known as ATAPS, which is more of an antiquated LOS, but it's an extremely large shop. It funds a billion dollars of loans every month. We are going to reach out and figure out how to work with a number of these. But the other one that I think is coming to fruition, we launched, which I think I mentioned to you, DFIS platform, Originate within iBank. Well, now we have one or two more banks that have come pretty close to finishing their diligence that have mentioned that they're on that same platform. So a lot of good things going on in that realm.

That is terrific. Congratulations. Thank you.

Thanks, Dave. The next question is from Joseph Bassey from Canaccord. Please go ahead.

Hey, guys. Good afternoon. Really good results. A lot of good stuff here. Maybe we'll start. I think you said that the March CERT number was 14,500. And if that's right, then, you know, relative to a run rate off of the full Q1, that's a big bump for the month. I was wondering if you could, um, maybe discuss a little bit, any more breakout on what happened in March to bring that run rate up so much. Um, and if it's sustainable and then maybe I'll have a follow up after that. Thanks.

Yeah. Hey Joe, it's Chuck. Yeah. Yeah. We, as we stated in our prepared comments, you know, March, you know, Q1 was a record quarter for the company at 33,300 certs. And March notable is a record month. And as we said in the prepared comments, you know, that momentum, you know, has gone into the second quarter. So, you know, we're very encouraged by that as we continue to ramp and grow the business. You know, app volume is up significantly in all channels. And, you know, that's driving the increase, you know, obviously with the you know, the stimulus that's out there and the economy's, you know, performing, even though we're coming out of a worldwide pandemic, you know, our business is, you know, is doing well. And I think we proved it in 2020, as well as heading into 21, you know, this business performs through cycles and is resilient, you know, through recessions and downturns. So, but the app volume is driving, obviously, you know, a lot of the volume and where we're heading.

Okay, maybe just a little quick follow-up there, though. You know, any other color? Like, I mean, that's kind of a big bump relative to the quarter. And so just, you know, was it OEM-driven? Was it more broad-based? You know, kind of some more color on what was the – where did those shirts come from in March?

You bet. I mean, it came from all channels. And, you know, on our website, we've got an updated Q1 supplemental on the KPIs, Joe. So if you think about the credit union and banks, just quarter over quarter, and I can also talk to Q4 to Q1, but, you know, our credit union banks are up 16%, and then the OEMs are up 24% over Q1 of 20. And that's what, you know, on a blended basis, that's 19% CERT growth, you know, Q1 of 21 over 20. You know, I think, you know, you heard Ross's prepared comments about OEM 1 and 2. They're performing and ramping as well over, you know, OEM 1 is up 164% over Q1 of 20. And OEM 2, you know, as they came back online in the fourth quarter, is up 60% in CERT growth just compared to, you know, Q1 of 21 back to Q4 of 20. So, you know, it's across the board. The credit union banks and OEMs are growing and That's what we've expected from the business.

Hey, Chuck, the one thing I'd add to John Flynn, you remember we had signed a bunch of accounts in 2020 that we couldn't get launched until the first quarter of 21 just because of COVID and the holiday. So I think you're starting to see what we had talked about last year, that a lot of the shops that had signed had a little bit of a, I think it's, brings back to the fact that Chuck just alluded to, you know, it's across the board. How many did we launch, Chuck, 14 or somewhere?

Yeah, that's right. Yeah, John, you know, I think that's a great point. You know, of the 55 new contracts signed in 2020, you know, we had about 20 of those that came online in Q1 of 21. So that's driving a lot of the increase. And of those 55, you know, 52 of them are live and in writing search and contributing to the growth in Q1.

I think you add to it, Joe, the fact that, you know, tax refunds were a little delayed this year. So we certainly are seeing that momentum continue in to Q2, which is great.

That's great. So it sounds like pretty broad-based. Maybe just one more quick one. You know, this online lending channel that I think you mentioned, you know, that seems pretty intriguing. It's a lot of potential and I know it's early there, but, you know, kind of how do you look at that versus kind of your other core markets, which are different in some respects, just to help us understand, to frame the opportunity relative to kind of the overall backdrop. Thanks a lot. Great results, guys.

John, do you want to handle online lending?

You know, I think what we're seeing from the online lending standpoint is, You know, a lot of our refinance channel partners get applications from them. You know, a lot of these guys, they don't have a real funding source behind it. They farm it out. I think when we even put it up with the Ross University analysis for a competitor that had two funding sources behind them that represented like one funding source was like, I don't know, 50% of their volume. The other 30-some percent, and one of them just said they weren't going to go forward with that. What I think is beautiful about our model is the fact that whether the NEPs are coming from an online lending source, whether it's a lending hub, lending channel partners that go out and, you know, look for, through the use of soft poles, people that got too high of an interest rate when they did the cart and then, you know, market to those people to reflect into us. I think the fact that we've got over 300 plus lending sources sitting behind these applications has a huge runway ahead of us. I alluded to the fact in my comments about the online lending platform that we just did a data study for. They pointed out that they have 270,000 apps a quarter that fell through the cracks, whether it's because the rate was too high that they were coming back or they were requiring too much of a down payment. So we're starting to get inbounds from the likes of people like that that are looking for us to bring our funding source to their platform. So I think it will continue to grow.

Great. Thanks very much, John.

The next question is from John Davis from Raymond James. Please go ahead.

Hey, good afternoon, guys. Just wanted to follow up a little bit on the strength in March. Yeah, I think any comments on April specifically? I think your guide implies pretty healthy triple-digit growth from here on out, if I just use the midpoint. And I'm curious, I think the underwriting changes are new, so I assume those weren't contemplated in the original guide. And so I guess theoretically, if that does drive growth, higher capture rates that could drive upside to the certain guy. But just kind of curious there if that was contemplated or if that was a new decision that was made recently.

Hey, John. How you doing? It's Chuck. Yeah, I mean, if you think about, you know, I'll start with the guidance and, you know, what we reaffirmed today, you know, for full year 21. You know, we did come off the record quarter or the record month, but I'd also tell you, you know, 161,000 certs to 206,000 certs. you know, is a wide range. However, you know, our business is running well. We're executing against our plan. And we feel good going into the second quarter and beyond with the growth and what, you know, what our business can generate. You know, from adding the underwriting changes and the impact, being that the range is, you know, that broad, you know, we'd like to think that, you know, that's built in and, you know, that's the upside and the opportunity between the low and the high. I would point you on the low end of the range of that guide, it's 70% year-over-year growth, and on the high end, it's 120% growth. The midpoint you referenced is 95%. So we're very focused on continuing to grow the business, and it's tremendous growth at any point in that range.

Okay, great. Anything we should think about just from sequentially? I think I would say the balance of the three quarters you need even to get to 77% pretty close to triple digit growth. So just as we kind of think about the cadence through 2Q through 4Q, do you expect the growth to just build? I mean, obviously 2Q you have, I guess, an easier COVID-related comp, but just curious if there's any call-outs sequentially from here.

Yeah, I think Q3 and Q4, a little heavier growth there, and we're modestly into Q2. But the business is, again, we feel operating and executing very well.

Okay, great. And then just as a follow-up, Ross, I think you gave an update on OEM number three and number four. Are we in a situation now where you've kind of done everything you can do for OEM number three and you're waiting on them? And then, you know, where are we with OM number four as far as, you know, you're done with the study? Is there more follow-up? Just any more code you can give would be helpful.

Yeah. You know, we definitely have had numerous meetings with our teams IT-wise as well as, you know, finance. And I think, you know, they have a lot that they are looking at and figuring out where we – need to be scheduled in. I think both of them. It's really not a matter of if but when. And certainly the meetings that John alluded to earlier with the SAGENT folks will certainly benefit one of those that are looking to try to measure out what the IT endeavors are and to get those on the table to discuss, you know, moving forward. So, yeah, we're very excited about it, for sure, and as well as, you know, some of the status of other conversations. So, looking forward to being able to report more here next quarter.

Okay. Thanks, guys.

Thank you.

The next question is from Vincent Kintick from Stevens. Please go ahead.

Hey, thanks. Good afternoon. Thanks for taking my questions. First question, actually, on the non-OEM side. So you highlighted a couple of opportunities. So the seven new V5 partners, 14 new customer contracts, and guys are getting implemented within six days. With the OEMs, you've kind of given what you think is the upside and the monthly certification volume. I'm wondering, for these non-OEM opportunities, if you can talk about the potential monthly certification volume and what's the upside from here. Thank you.

Hey, Chuck, I don't know.

Yeah, go ahead, Chuck. I was just going to say, Vincent, one of the things we found over the past year and is even more prevalent in this last quarter and this quarter is finding some of the larger shops versus multiple little shops. So I think the upside is obviously there. I don't know if you put a number to it. I know you've done some graphs that show where our growth is coming from. Did you want to take any specifics or no?

No, I mean, you know, Vincent, you know, hi, it's Chuck. You know, obviously the credit union, to get to the range of the guide that we've talked about, you know, not only do OEM 1 and 2, you know, execute sort of the core, you know, credit union and bank business. But, you know, we're not giving, you know, guidance out on individual customers at the credit union and bank level. But, you know, we feel like that business year over year with the pent-up demand, you know, with the accounts that came on in Q1 that were signed last year, we're going to have really nice growth in the credit union and bank business as well. I mean, you can see in Q1 it was 16%.

That's helpful. Are you able, maybe without talking about a specific customer, just kind of broadly, and I know there's different sizes of credit unions, but does, say, a typical credit union do a couple hundred a month versus a bank would be a couple thousand a month? I'm just kind of wondering if maybe there's a sense of size that you could help with us if there's anything you could offer. Sure.

I think the thing I'd add to that, we're looking at credit unions that can certainly do a couple hundred a month for sure. We did just sign and are getting ready to launch a bank. We believe one fully ramped to do up to a thousand a month because it's launching through a finance channel partner. And that's the goal they've given us. But it's not going to happen in the first 90 days. They're launching it in certain states to get it started, and then they'll roll it out as they get comfortable with it. But I think some of the credit union sizes that we're talking about can certainly do $300 a month, some $400 a month. You heard me speak to the fact that once we got Pentagon, we launched on just one of our refinance channel partners. Their CERT growth went from $700 in February to over 1,000 in March or March to April, I forget what the months were. But you can see that kind of group from some of the shops that have the liquidity that want to get it there, especially since we launched them into a refinance channel partner.

And, Vincent, we usually tier credit union opportunities. Tier 1 is 100 or more. Tier 2 is 50. or more, then we go to 10 or more, and then below that. So we do that, and so we kind of have those tiers that we assign based off of our expectations, and then we kind of juggle those around. So I wish there were more 500, you know, a month, but we like the tier, you know, threes, twos, and ones, you know, equally, just more of them.

Okay, great. That's helpful. Thank you, because I don't think it's underappreciated about the non-OEM opportunities since we don't talk about it too much, so thank you for that. Second question, kind of on the profit share and the expectations. Your profit share was really good this quarter, and I saw the 5 million positive profit share adjustment. I'm just wondering, when you think about profit share going forward, you know, credit has been great. What's built into your future credit expectations, like when you think about the loss curves that you had put on your slide deck in the past and the recoveries? you've had, has it gotten appreciably better? And I'm thinking about in future quarters in 2020, is there a potential upside to the profit share that you have? Thank you.

Yeah, I'll start and then Ross can jump in. But as it relates to the $5.1 million and change in estimate and profit share, in Q1, you know, that is, you know, trivial to the business performing, you know, better than expected, you know, less defaults and less claims. And, you know, as we've talked about on various other calls, you know, we've got a very robust process that, you know, John Ross and I are involved in. We've got a very talented risk team that evaluates this on a monthly and quarterly basis. And, you know, we believe, you know, there's unknown still in the future, but we believe that 650 per cert on average we think is a good average to use in your modeling purposes. And, you know, as it relates to loss curves and things like that, you know, out into the future, you know, we look at it quarterly. We, you know, have that robust process that we follow. We sit down with the risk team and we evaluate. And if the If the stress that we had in the model didn't materialize, you know, we'll have a positive adjustment, which is what we had in the first quarter.

Yeah, we all know that we're benefiting certainly from the used car index being at record levels, which are certainly helping our LTVs and rates, but it's helping others as well. So, you know, there obviously is a risk out there. once the chip shortage is made up and new cars are back being produced and all that, what the effect of that is on used cars. And that's one of the reasons we continue to stress the future, not knowing when that's going to happen, but having these various probabilities in place to look at that. But clearly we know that there's definitely a tailwind right now.

Okay, that's very helpful. Thanks so much.

Yeah, thanks, Vincent.

The next question is from James Fawcett from Morgan Stanley. Please go ahead.

Yeah, thanks for all the great color and commentary. I want to follow up on that last comment, and that actually was my key question, was any way to at least guesstimate how much of a benefit you are getting right now from the strength of the used car market and the value of used cars And then can you outline for us a little bit how you're in your planning, how you're expecting that to normalize, over what period and at what rate, and kind of how we should think about that impact?

You bet. So I think, first of all, on the used car side, one thing to note that we still are close to 85% used versus new. So from an origination and a forecast standpoint, the effect of the decrease in new should not materially impact us because I think it will be made up from the use side of it. On the underwriting and our profit share, I'll let Chuck continue on this, but obviously we have stress on what claim severities could be out in the future when you have that depreciation of value, and it's built into our model, and that's something obviously that we drew up poorly.

Yeah, James, I'll jump back in. But, yeah, that's something we, as I said to Vincent's comment, that, you know, we look at on a quarterly basis. And, you know, we've got some stress on severity, you know, throughout 21 and into 22 in our model that, you know, that we have in there. So from a planning perspective, that's how we assess it. But we reassess it on a quarterly basis based on new facts and circumstances.

Got it, got it. And from a, as you kind of play that out and think about, like, eventual return and availability of new cars, et cetera. Do you think that overlaid with the people that you're talking to and the OEMs, et cetera, is that we should see a change in that use versus new car mix in a meaningful way and anything we should take into account that way?

Well, I'll just tell you, when you talk to the OEM, they want to talk to you about how much you can help them move metal When you talk to the captive finance side, they want to talk to you about how to monetize some of these trade-ins and used cars that are out there. And so really it's a win-win deal, and both sides of it benefit. Now that we have subvention launched throughout the country for OEM number two, and as they continue to get used to that in the various tiers that it's working in, I think that really bodes well for Q4. you know, end of Q3 and Q4 when we, with chip shortage, hopefully can get back to a level that's, that can meet the demand and we certainly will benefit from that, from the new side.

That's great. Thank you so much, guys. Yeah, thanks, James. Thanks, James.

The next question is from Samir Kalucha from Deutsche Bank. Please go ahead.

Hi, thanks for taking my question. What I wanted to get a sense on was the insurers you're working with. You mentioned you're working with insurance three and four. Any color you can provide on the timelines when you expect them to be live?

John, do you want to take the first part of that?

Yeah, we're working closely with at least four different carriers throughout the year. Our hope would be to have at least put them up and running by the third quarter. So that's our game plan. We're in the process of negotiating the final contracts. The other three, the SAPI and that one, are all very strong, very strong financial. That's just, again, us being the right timing so that we can commit the right amount of premium to each of them. So the game plan is to hopefully have one of them running by the third quarter here.

Got it. And a quick follow-up I had on the on the online channel, you've mentioned conversations with one and a little bit of color on the scale of applications. Any sense on any more you're talking to who are at similar scale or other people you're talking to are much lower?

I think it's a matter of not all the 250,000 to 270,000 turn down order, but I think by the nature that we're aggregating a bunch of them, that there's a significant number of applications that will be flowing through from that grouping, if you will, of online lenders. These aren't just people that have sites out there like lending clubs and lending trees. This is coming from the seven different refinance channel partners that we have that go out and target consumers, like I mentioned earlier, by pulling soft pulls on zip code people to be able to find out who within a specific area bought a car for the last six months, and they can back in what that interest rate is in their FICO score and target that consumer directly. So it's not necessarily just the online lenders that are out there that people can jump in and apply to it. people that are actually being directly marketed to that we know can save $100, $150 a month, which really increases the close rate significantly.

Got it. Oh, great. Thank you.

The next question is from Mike Grondahl from Northland Securities. Please go ahead.

Yeah. Hey, thanks, guys. I think you commented that you're doing a data study for two different regional banks. Um, how far are you along with that? And any guess at sort of how long that sales cycle is?

I can tell you that one of the banks reached out to us earlier this week and said that we've made a first grouping of due diligence and that, uh, We're now starting to talk with them about what the interface would look like and things like that. That one and the other one that we mentioned out of the Houston area, we believe should be live here probably within the next 60 days through one of our refinance channel partners. So we're getting pretty good from these real-size banks that I think can generate some pretty good volume. And that's pretty quickly.

Got it. Thank you.

The next question is from John Hecht from Jefferies. Please go ahead.

Afternoon. Thanks for taking my questions. And many have been asked and answered. But I'm wondering, you guys talk about tightening your LTVs in the quarter. But I'm wondering if you look out at the overall end markets. Is there anything you're seeing with respect to other banks either loosening or tightening or taking down or up their LTVs and anything that's going on with pricing that is worth noting?

Yeah, I think in the past when we talked about tightening LTVs, when we did that 5% decrease in value, that didn't necessarily tighten our LTVs, but it basically put an application in a higher LTV classification, which generated more premium. So, you know, our LTVs, you know, are still, I believe are higher, uh, than most lenders in the first place. And that's besides just buying deeper, you know, expanding on that right side on the LTV is, is the other side of the value prop in there. So, um, so I, I, I would imagine that the vehicle values themselves remaining at, at, at highs, record highs kind of takes care of that. And, and, You know, just through the math, it works out to be higher LTVs than a lender typically would go, assuming they use, you know, NADA, you know, trade or Kelly Wholesale on that.

I think the thing I'd add to that, Brock, which is just all we're in essence going back to pre-COVID underwriting rules, you know, we tighten those things up, as it relates to what Brock mentioned, you know, bump them up in the LTV area. really just because we weren't sure where COVID was going to go. Our results pre-COVID were pretty stellar. And I think that's not going to hurt us a little bit with the fact that these fair values have stayed up today. They will have gotten to the fact that we're going back to some COVID underwriting rules, I think is really just going to help us, again, as I pointed out earlier, get our book to ratio up significantly in an area where our performance was always good to begin with.

One other thing to add, John, if you recall from our comments earlier, we actually are offering a bit longer term than we have in the past, where 72 months was our cap before, and we're going to 75, and we're doing that not only with a couple of the OEMs, but initially with a handful of other customers before we spread it to all our clientele. Okay, that's all very helpful, and

You know, you've launched Subvention now with the two OEMs. I'm wondering, does that – obviously, that gives you more breadth to take more volume with them. Does it also allow you to go into different products like leases, or is it still mostly lending products?

Yeah, so just to be clear, Subvention is only live in OEM number two. We have not launched it in OEM number one. That's certainly on the table to discuss. They've asked us to circle back once we have some experience with that. And so we're just waiting for time and experience to circle back. But that clearly is an opportunity that can get them well ahead of that 1300 run rate that they have that we talked about earlier in that.

So it really just increases the I guess, the opportunity set within the OEM, or does it also bring you into different products?

Well, I think it just allows us more wallet share per OEM, but I think the leasing side is something that we will explore. It's not on the radar this year, but it's a gigantic market. If we can figure out how to to underwrite and provide that credit risk for the credit side, but not take on residual risk. That's what we're kind of trying to go through the process evaluating now. Thank you guys very much. Thank you.

This concludes today's conference call and the question and answer session. I'd like to turn the call back over to John Flynn for any closing remarks.

Yeah, thank you very much, Operator. Again, thanks to everybody that stayed on the line, asked questions. Again, we're very excited about where the company's come to and where it's going. As you know, we're kind of an open book, so any questions you have, feel free to reach out whenever, and we're happy to jump on the phone. So thanks again for all of your input and questions.

Thank you. Thank you.

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