Open Lending Corp Q1 FY2021 Earnings Call

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 Jehl, 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 views 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. 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 the 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 the refinance channel partners. We noticed 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 third volume from approximately 700 loans in February to over 1,000 in March. In March, we cohosted a webinar with KPMG and we published a white paper on CECL relief that can be found on our website. The webinar had over one hundred attendees and has generated positive feedback in 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 on 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 No. 1 and 2. OEM No. 1, we experienced certification growth of approximately 164% in the first quarter of 2021 as compared to the first quarter 2020. We are very happy with this progress and growth. OEM No. 1 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 No. 1 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 No. 2. As you may recall, OEM No. 2 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 No. 2. Production continues to ramp up, and we're making good progress moving forward towards a full ramp of 8,000 to 10,000 certs per month by the end of 2021. We launched subvention in January in one market, and we 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're excited about the opportunities to continue to broaden our services with them as our relationship grows. OEM No. 3. As we previously disclosed, we completed a data study for OEM No. 3, and it included a 51% increase in approvals demonstrating a strong value proposition to their business. We are both encouraged by the results, and we'll update you as our relationship moves forward. Moving onto OEM No. 4. As previously disclosed, we completed our data study, which included a 57% increase in approvals from applications they're denying. We're also encouraged by these results and the progression of our discussions. And we'll update you as well on the relationships as they move forward. Let's move on to the 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. 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 in claims than expected. We removed the 5% vehicle discount in mid-April and we're 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. And now, I'll 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 the first quarter of 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 in 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 for certified loan as compared to $15.8 million or $564 per certified loan in the first quarter of 2020. Program fees were $14.9 million in the 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 the 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 the 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 the first quarter of 2021 compared to 86% in the first quarter of 2020. Selling, general and 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 cost 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 the first quarter of 2021 compared to $8.9 million in the first quarter of 2020. The increase was primarily driven by the 19% increase in certified loans as compared to the first quarter of 2020, and the recognition of the $5.1 million in profit share related to historical advantages 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 the first quarter of 2020. Adjusted EBITDA for the first quarter of 2021 was $30.3 million as compared to $9.6 million in the 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. Now moving 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 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 31st, 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 offering. 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 $0.40 on the dollar. This settled the TRA holders' 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're happy to take some questions from the group. Thank you.

At this time, we will be conducting a question-and-answer session. The first question is from Peter Heckmann from D.A. 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, or as well as any other thoughts for modeling purposes?

Yeah. Peter, this is Ross. The change will not affect the average revenue per loan, but it should improve our capture rate, meaning we will have many more closed loans in relation to the number that are approved. The potential change on the revenue side is a reduction in the amount of premium coming in. However, considering our ongoing reduction of claims and prepayments compared to our estimates, I believe there's a balance there. Therefore, we don't expect our overall revenue per certificate to change significantly. Mainly, we will just be able to capture many more loans.

Yeah. It is Chuck, Peter. I would just say on that profit share, I think in that range, let's call it, $650 per cert, which is what we've kind of been discussing longer term for the average there and about $1,150 per certified loan in total.

Okay. That's helpful. Regarding the loans by OEM, did you say you still expect OEM No. 2 to ramp up to 8,000 to 10,000 loans per month? If so, what timeframe are you considering for that?

I still believe we're on track to reach that by the end of the year, aiming for the range of eight to ten.

Okay. Great. Thank you.

And 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, as we approach the end of a reporting season where consumer lenders across various asset classes experienced credit performance that exceeded initial expectations, your situation is no different and is reflected in the profit share. Considering the factors that affect the demand for your services from lending partners, does the current favorable credit environment, along with indications that other lenders, including OEM captives or credit unions, may be easing some of their underwriting standards, pose any challenges in terms of their internal approvals? I'm trying to understand the dynamics involved, particularly whether there is any indication that some of your lending partners might become more lenient and as a result, not require as much additional support from you and your prime borrowers.

Hey, everyone. This is John. I'll start with that. Ross or Chuck, feel free to jump in. We regularly communicate with all our clients, and we've discovered that many of them, especially credit unions, have excess cash they're looking to invest. They are receiving very little yield on their assets and are eager to enhance their returns on auto loans. However, when you look at the actual yields from auto loans, they are minimal. Operating with razor-thin margins on a 1.9 percent interest rate for new car loans compared to generating around 300 basis points net on a near-prime loan is quite challenging. I spoke yesterday with the head of a $900 million credit union, and they're struggling to find a place for $100 million; it’s just circulating within the credit union. Can we onboard your refinance program or engage with those customers stuck at higher rates to help them refinance? Personally, I don't see the traditional banks becoming significantly more competitive. They won't be able to match the credit unions due to differences in cost of funds and the fact that credit unions do not pay income taxes. I believe we have a strong opportunity with these credit unions. I don't expect them to fill their lending needs quickly, but they are still issuing loans. Ross or Chuck, do you have anything to add?

I'll just add that a lot of the data studies we're conducting are from the past five or six months. We're still observing that these lenders are declining applications where we can provide improvement and assistance. Our capture rates are also showing an upward trend. Therefore, I don't consider this a current threat, but we are definitely monitoring the situation closely to manage it effectively.

Got it. That's helpful. It seems like the credit universe is not using the current credit environment to expand and reach more near-prime customers. Just one quick follow-up. Any update on the conversions with bank core processors and that channel? I believe you were in the process of potentially integrating with one or more soon.

We recently had several productive discussions with Sagent, which we've mentioned before as the Loan Origination System for at least three of the captives we're aware of. They are also the system for the captive Ross referred to during the earnings call, which is moving quickly to implement something. That captive indicated they believe something significant has occurred, prompting everyone to reach out to finalize requirements and get everything set up, aiming for a fourth-quarter launch. Additionally, we spoke the other day with a large company known as Atap, which uses an older Loan Origination System but is familiar with our operations. We are actively exploring partnerships with several entities. Another development is our partnership with the FIS platform, originating within iBank, and we now have one or two more banks nearing the end of their due diligence, indicating they are also on that platform. Many positive developments are occurring in this area.

Got it. Terrific. Congratulations. Thank you.

Thanks, guys.

The next question is from Joseph Vafi from Canaccord. Please go ahead.

Good afternoon, everyone. We have seen some impressive results with plenty of positive developments. To start, I believe you mentioned that the March certification number was 14,500. If that's accurate, it represents a significant increase for the month when looking at the full run rate for Q1. Could you provide more details about what contributed to this increase in March and whether it's something we can expect to continue? I may have a follow-up question afterward. Thank you.

Yes, it's Chuck. In our prepared comments, we mentioned that Q1 set a record for the company with 33,300 certifications in March, making it a standout month. We're pleased to say that this momentum has carried into the second quarter, which is encouraging as we continue to expand the business. Application volume has significantly increased across all channels, driven by various factors including the current stimulus and the economy's performance despite emerging from a worldwide pandemic. Our business is thriving, and we demonstrated its resilience throughout 2020 and into 2021. This business tends to perform well through different economic cycles, including recessions. The surge in application volume is clearly a major factor in our progress and direction.

Okay. Maybe just a quick follow-up. Can you provide any additional details? That's a significant increase relative to the quarter. Was it driven by OEMs or was it more widespread? Can you share more about where those certifications came from in March?

You bet. It came from all channels. On our website, we have an updated Q1 supplemental on the KPIs. If you consider the credit unions and banks from quarter to quarter, our credit union banks are up 16% and the OEMs are up 24% compared to Q1 of 2020. On a blended basis, that's 19% growth in certs in Q1 of 2021 compared to 2020. In Ross's prepared comments, you heard about OEM 1 and 2; they are also seeing significant growth, with OEM 1 up 164% compared to Q1 of 2020 and OEM 2, which came back online in the fourth quarter, up 60% in cert growth compared to Q1 of 2021 against Q4 of 2020. It's widespread, the credit unions, banks, and OEMs are all growing, which aligns with our expectations for the business.

Hey, Chuck, I want to mention that John Flynn. You might recall we signed several accounts in 2020 that we couldn't launch until the first quarter of 2021 due to COVID and other factors. I believe you're starting to see the developments we discussed last year, with the last few shops showing some progress. I want to emphasize, as Chuck mentioned, this growth is widespread. You might have heard about the 14 or so.

Yeah. That's right. John, I think that's a great point. Of the 55 new contracts signed in 2020, we had about 20 of those that came online in Q1 of 2021. So that's driving a lot of the inquiries. And of those 55, 52 of them are live and in writing searched and contributing to the growth in Q1.

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

That's great. It sounds like it's pretty broad-based. Just one more quick question about the online lending channel you mentioned, which seems quite intriguing. There appears to be a lot of potential there, and while it's still early, how do you compare that to your other core markets, which have some differences? This would help us understand the opportunity in relation to the overall backdrop. Thanks a lot, great results, everyone.

John, do you want to handle online lending?

I think what we're observing from the online lending perspective is that many of our refinance channel partners are receiving applications. A lot of these partners don't have a reliable funding source; they outsource it. It was reported that one funding source accounted for around 30% of their applications, and it appears another source decided not to proceed. This is a significant aspect of our model. Whether it’s Napster from an online lending source, COB lending, or channel partners conducting soft polls on individuals with high interest rates when they financed their cars, there are ample opportunities to reach out to those individuals and offer them refinancing options with several lending sources backing these applications. The potential for growth in this area is substantial. I mentioned earlier that a recent analysis revealed they have 270,000 applications per quarter that aren’t being processed, often due to high rates or down payment requirements. We're beginning to receive inquiries from entities interested in partnering with us to provide our funding options for their platforms. I believe this trend will continue to expand.

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 certs, the strength in March. Yeah. Thank you. Any comments on April. Specifically, I think your guide implies pretty healthy triple-digit growth from here on out, but 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 a higher capture rate, that could drive upsides to the cert, but just kind of curious there, if that was contemplated or if that was a new decision that was made recently?

Hey, John, this is Chuck. I'll start with the guidance we reaffirmed for the full year 2021. Although we came off a record quarter, I want to highlight that the range of 161,000 to 206,000 certifications is quite broad. Our business is operating well; we are executing our plan and feel optimistic as we head into the second quarter and beyond. The range reflects our growth potential and the benefit of the underwriting changes. On the low end of that range, we're looking at 70% year-over-year growth, while the high end is 120%. The midpoint you mentioned is 95%. We are committed to growing the business, and any point within that range signifies significant growth.

Okay. Great. Anything we should think about just from sequentially, that I was saying. So, the balance of the three quarters you need even to get to 70% pretty close to tripled digit growth. So just as we got to think about the cadence through 2Q through 4Q, do you expect the growth to just build? I mean, obviously Q2 you have I guess, easier COVID related comp, but just curious if there's any call-outs sequentially from here?

I believe Q3 and Q4 will show stronger growth, and we're seeing some growth in Q2 as well. Overall, we feel that the business is operating and executing very well.

Okay, great. As a follow-up, Ross, you provided an update on OEM No. 3 and No. 4. It seems that you've done everything possible for OEM No. 3 and are now waiting for them. Can you clarify the status of OEM No. 4? Have you completed the study, or is there more follow-up needed? Any additional details would be appreciated.

Yeah. We definitely have had numerous meetings with our teams, IT-wise as well as finance and I think they have a lot that they are looking at and figuring out where we need to be scheduled in. I think both of them is 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 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.

Thanks. Thanks, guys.

Thank you.

The next question is from Vincent Caintic from Stephens. Please go ahead.

Hey, thanks. Good afternoon. I appreciate you taking my questions. My first question is on the non-OEM side. You mentioned a few opportunities, including seven unique offerings, five partners, and 14 new customer contracts that are set to be implemented within 60 days. Regarding the OEMs, you’ve shared your thoughts about the potential upside and monthly certification volume. I’m curious if you can discuss the potential monthly certification volume for these non-OEM opportunities and any upside from here. Thank you.

Chuck, I don't know …

Yeah. Go ahead, John.

I'd just say one of the things we found over the past year and even more prevalent than this last quarter, in this quarter is, signing some of the larger shops versus multiple little shops. So, I think now the upside is obviously there. I don't know. I don't know 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 use any specifics or no?

No. I mean, Vincent, hi. It’s Chuck. The credit union is on track to meet the guidance range we discussed, particularly with the execution of OEM 1 and 2 regarding the core credit union and bank business. However, we are not providing guidance on specific customers at the credit union and bank level. We are optimistic about this business, with year-over-year growth driven by pent-up demand and accounts that were added in Q1 from those signed last year. We expect strong growth in the credit union and bank business as well. In Q1, we saw a growth rate of 16%.

That's helpful. Can you provide a general understanding of the volume of transactions that a typical credit union handles compared to a bank? For instance, a credit union might manage a couple of hundred transactions a month, while a bank could handle a couple of thousand. I'm curious if you can offer any insights regarding the size differences.

I think the fact that we're looking at the credit unions that can certainly do a couple of hundred a month, for sure. We did just sign and they're getting ready to launch a bank. And we believe one fully ramped, they 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. Yeah. 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 unions 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 get Pentagon fully launched on just one of the refinance channel partners, their cert growth went from 700 in February to was over a thousand in March or March to April. I forget the months. But you can see that kind of from summit shops that have the liquidity that they want to get up there and especially since we launched them into a refinance channel partner.

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

Thank you for that insight. I believe the non-OEM opportunity is often overlooked since we don't discuss it frequently. Regarding your profit share, it performed exceptionally well this quarter, and I noted the $5 million positive profit share adjustment. As we look ahead, given the strong credit performance, what are your expectations for profit share moving forward? Considering the loss curves presented in your slide deck and the recoveries you've experienced, have conditions improved significantly? For the upcoming quarters in 2020, is there a possibility for an increase in profit share? Thank you.

I’ll start, and then Ross can add in. Regarding the $5.1 million change in estimate and profit share in Q1, this is due to the business performing better than anticipated, along with fewer defaults and claims. As we've mentioned in previous calls, we have a strong process involving John, Ross, and myself, supported by a talented risk team that assesses this monthly and quarterly. While there are still uncertainties about the future, we believe that using $650 per cert on average is a reasonable figure for your modeling needs. For loss curves and similar forecasts, we analyze them quarterly, following our established robust process. We collaborate with the risk team to review these metrics, and if the stress we anticipated in our model does not occur, we will see a positive adjustment, which is what we experienced in the first quarter.

We are benefiting from the used car index being at record levels, which is positively impacting our loan-to-value ratios and rates, as well as others in the market. However, there is a risk associated with this. Once the chip shortage is resolved and new car production resumes, it could affect the used car market. This uncertainty is why we emphasize the future and prepare for various potential outcomes. Nonetheless, we recognize that we are currently experiencing favorable conditions.

Okay. That's very helpful. Thank you so much.

Thanks, Vincent.

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

Thank you for the insightful comments. I would like to follow up on your last point. My main question is whether you can provide an estimate of the benefits you are currently experiencing from the strength of the used car market and the specific value of used cars. Additionally, could you provide some details on how you anticipate this will normalize over time, including the expected timeline and rate of change, and how we should consider the impact of this?

You bet. So, I think, first of all, on the used car side, one thing to know 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 we made up from the used 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 true up poorly. Chuck, do you want to …

Yes, James, I'll add to that. As I mentioned in response to Vincent's comment, we evaluate it on a quarterly basis. We have accounted for some stress severity in our model throughout 2021 and into 2022. From a planning perspective, that's our approach. However, we revise our assessments quarterly based on new information and circumstances.

Got it. As you consider the eventual return of new car availability, do you believe that, combined with your discussions with OEMs, we should expect a significant change in the mix of used versus new cars? Is there anything else we should keep in mind regarding this?

When you engage with the OEM, their priority is to discuss how you can assist them in increasing production. Meanwhile, those involved in captive finance focus on strategies to monetize trade-ins and used cars currently available. Therefore, it's mutually beneficial for both parties. With the launch of subvention across the country for OEM No. 2, and as they continue to adapt to this in various tiers, I believe this sets a positive outlook for the third and fourth quarters, especially as we anticipate the chip shortage will improve to meet demand. We expect to gain from this on the new vehicle front.

That's great. Thank you so much, guys.

Yeah. Thanks, James.

Thanks, James.

The next question is from Sameer 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 were working with. You mentioned you're working with the 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?

We are collaborating closely with at least four different carriers throughout the year. Our aim is to have at least one of them operational by the third quarter. That's our strategy. We are currently finalizing the details, and the other three prospects are financially robust. Therefore, we need to choose the right moment to commit to a significant amount of premium for each of them. The plan is to ideally have one up and running by the third quarter.

Got it. Regarding the online channel, you mentioned discussions with one and provided some details about the scale of applications. Do you have any insights on whether you are in talks with others who are at a similar scale, or are you engaging with individuals at much lower scales?

I believe that there are between 250,000 to 270,000 applications that were declined. However, since we are grouping these applications, there is a significant volume expected from this collection of online lenders. These aren't just individuals with websites like Lending Club; we are also engaging with seven different refinance channel partners who actively target consumers. As I mentioned earlier, they use soft polls based on zip code to identify consumers who purchased a car in the last six months. They then analyze these consumers along with their FICO scores to market specifically to them. These are not merely online lenders available for anyone to access; these are individuals being directly targeted who we believe can save $100 to $150 a month, which dramatically improves our closing rates.

Got it. 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. How far are you along with that? And any guess at sort of how long that sales cycle is?

I can inform you that one of the banks that contacted us earlier this week indicated that they have included our podcast in their initial due diligence process, and we are now beginning discussions with them regarding the interface and related matters. This bank, along with another one we mentioned from the Houston area, is expected to go live within the next 60 days through one of our refinance channel partners. We are gaining solid traction from this group of banks, which we believe can generate significant volume quickly.

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

Afternoon. Thanks for taking my questions. And many of have been asked and answered. But I'm wondering if 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?

In the past, when we discussed tightening loan-to-value ratios, the 5% decrease in value didn't directly tighten our LTVs but instead placed applications into a higher LTV category, which resulted in increased premiums. I believe our LTVs are still higher than those of most lenders initially. In addition to increasing purchases, enhancing that aspect of the LTV is another value proposition. I would expect that with vehicle values remaining at record highs, this situation will be managed effectively. Ultimately, the calculations lead to higher LTVs than what a typical lender would consider, assuming they rely on models like ADA, trader, or Kelley Blue Book wholesale.

I think the thing I'd add to that, Ross, just take all we're in essence may have going back to pre-COVID underwriting rules. We tighten those things up. As Ross mentioned, bumping them up in the LTV area, really just because we weren't sure where COVID was going. Our results pre-COVID were pretty stellar. And I think that's not going to hurt us the fact that the fair values have stayed up. They will put that into the fact that we're going back to the COVID underwriting rules, I think is really just going to help us, again, the point earlier, get our book ratio up significantly in area where our performance was always good.

Yeah. One other thing to add, John, if you recall from our comments earlier, we actually are offering a little 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.

That's all very helpful. You've mentioned that you are working with two OEMs. I'm curious if that allows you to handle more volume with them and also enables you to explore different products like leases, or if you are still primarily focused on lending products.

I think it allows us to capture more market share with each OEM. However, exploring the leasing side is not a priority for us this year. It is a significant market, and if we can learn to manage the credit risk without taking on the residual risk, we are currently evaluating how to proceed with that.

Great. Thank you guys very much.

Thank you.

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. And again, thanks to everybody that stayed on the line, ask 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.

Yeah. Thank you.

Thank you.

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