Open Lending Corporation (LPRO) Q1 2021 Earnings Call Transcript

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Open Lending Corporation (NASDAQ:LPRO)
Q1 2021 Earnings Call
May 11, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 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.

John FlynnChairman and Chief Executive Officer

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. Now we’ve begun making traction with companies in OakParkFinancial.com identifies payday loans bad credit direct lender 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 third 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 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.

Ross JessupPresident and Chief Operating Officer

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 ’21 as compared to in Q4 ’20, we are now active for both new and used across the nation for OEM No.

2. Production continues to ramp up, and we are making good progress moving forward toward 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 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 are ramping in line with expectations, and we are excited about the opportunities to continue to broaden our services with them as the 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 both are encouraged by the results, and we’ll update you as the 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 are denying. We are 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 onto 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’ll now turn it over to Chuck to discuss our Q1 financials in more detail.

Chuck JehlChief Financial Officer

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 loan 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 the first quarter of 2021 compared to 86% in 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 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 in 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. 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 concurrent, 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 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 settles 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.

Questions & Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator instructions] The first question is from Peter Heckmann from D.A. Davidson. Please go ahead.

Peter HeckmannD.A. Davidson — Analyst

Hey. Good afternoon, everyone. Nice results. Wanted to ask about 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?

Ross JessupPresident and Chief Operating Officer

Yeah. Peter, this is Ross. The change actually will not affect the average revenue per loan but should change our capture rate, meaning, you know, that many more closed loans compared to the number that are approved. So there is — the change that would happen on — potentially on the revenue side was we do have a reduced amount of premium coming in.

But I think, you know, whenever you factor that in as well as, you know, 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.

Chuck JehlChief Financial Officer

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

Peter HeckmannD.A. Davidson — Analyst

OK. That’s helpful. And then what was my other — just as regards the loans by OEM, did you say you continue to expect OEM No. 2 should be able to ramp to 8,000 to 10,000 loans per month? And if so, what kind of time frame are you thinking about there?

Ross JessupPresident and Chief Operating Officer

Yeah. I still think we’re right — we’re tracking right in line with that toward the end of the year. And so it is 8,000 to 10,000 number.

Peter HeckmannD.A. Davidson — Analyst

OK. Great. Thank you.

Chuck JehlChief Financial Officer

And thanks, Pete.

Operator

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

David ScharfJMP Securities — Analyst

Great. Good afternoon. Thanks for taking my question. Hey, you know, I was just wondering, you know, we’re at the tail end of a reporting season in which, you know, obviously, consumer lenders pretty much across every asset class experienced much better credit performance than maybe initially anticipated.

And obviously, you’re no exception, and it’s reflected in the profit share. You know, 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 evidence that some of your lending partners might relax and, therefore, not require as much incremental help from you on near-prime borrowers.

John FlynnChairman and Chief Executive Officer

Hey, guys. This is John. So I’ll take the first stab at that. And Ross or Chuck, if you want to jump in, then that’s fine.

we talk to all of our clients on a regular basis. And what we’re finding is every one of these, particularly credit unions have an influx of cash that they’re trying to find a home for it. They have virtually no yield on investments. They’re all trying to reach and find out how they can get more yield on these auto loans and when you’ve been to what they actually get on a perm loan, it’s next to nothing.

I mean you’ve got to be so razor-thin margins when they’re doing a 1.9 interest rate on a new car loan versus being able to generate up to 300 basis points net on a near-prime loan. I had a call yesterday with the gentleman that runs about a $900 million credit union. And he says, “Well, I need to find a home for $100 million that just float in the credit union. Can we sign up for your refinance — your channel partner or capturing those people that got stuck with a higher rate and refinance them into something here?” So I personally don’t see, you know, rate — again, some of the banks might get a little bit more competitive, but 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 sense. Ross or Chuck, do you want to add anything?

Ross JessupPresident and Chief Operating Officer

Yeah. I’ll just — I’ll add one thing to pile on that, John, is, you know, a lot of the data studies we’re doing are from time periods, you know, just over the past five, six months. So we’re still seeing that these lenders are declining applications that we can improve 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 that — but we certainly have our eye on it to manage.

David ScharfJMP Securities — Analyst

Got it. No, no, that’s helpful. And 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. Just one quick follow-up.

Any update on just I believe conversions with Bancorp 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?

John FlynnChairman and Chief Executive Officer

Yeah. We — as recently as last week, we’ve had a number of really productive calls with Sagent, which I think you’ve heard us talk about is 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, you know, moving pretty quickly down the path of wanting to do something. So what they heard from that captive that they believe it was [Inaudible] and if something would happen, all of a sudden, they’re all reaching out. They want to get the specs in place to get this thing laid out, but they hope to be fourth quarter ones.

So we’ve got that one going. We’ve talked the other day with a very large shop, kind of a platform known as [Inaudible], which is more of an antiquated LOS, but it’s an experienced and large shop that funds $1 billion of term 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 — is coming to fruition we launched, so I think I mentioned to you the FIS platform originate within iBank.

Well, now we have one or two more banks that have come pretty close to finishing, you know, their due diligence that have mentioned that they’d be on that same platform. So a lot of good things going down in that realm.

David ScharfJMP Securities — Analyst

Got it. Terrific. Congratulations. Thank you.

John FlynnChairman and Chief Executive Officer

Thanks, guys.

Operator

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

Joseph VafiCanaccord Genuity — Analyst

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. So I was wondering if you could maybe discuss a little bit any more breakout on what happened in March to bring that run rate up so much and if it’s sustainable? And then maybe I’ll have a follow-up after that. Thanks.

Chuck JehlChief Financial Officer

Yeah. Hey, Joe, it’s Chuck. Yeah. Yeah, 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 has gone into the second quarter. So we’re very encouraged by that as we continue to ramp and grow the business. App volume is up significantly in all channels, and that’s driving the increase. Obviously with the stimulus that’s out there and the economy is performing, even though we’re coming out of a worldwide pandemic, our business is doing well.

And I think we proved it in 2020 as well as heading into ’21, this business performs through cycles and is resilient through recessions and downturns. So — but the app volume is driving, obviously, a lot of the volume and where we’re heading.

Joseph VafiCanaccord Genuity — Analyst

OK. Maybe just — maybe a little quick follow-up there, though. Any other color, like — I mean, that’s kind of a — that’s a big bump relative to the quarter. And so just was it OEM driven? Or is it more broad-based? Kind of some more color on what was the — where did those certs come from in March?

Chuck JehlChief Financial Officer

You bet. I mean it came from all channels. And 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 our credit union, banks are up 16%, and then the OEMs are up 24% over Q1 of ’20.

And that’s what — on a blended basis, that’s 19% cert growth, Q1 of ’21 over ’20. I think you heard in 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, as they came back online in the fourth quarter, is up 60% in cert growth just compared to Q1 of ’21 back to Q4 of ’20.

So it’s across the board. The credit union, banks, and OEMs are growing, and that’s what we’ve expected from the business.

John FlynnChairman and Chief Executive Officer

Hey, Chuck, the one thing I’d add — it’s 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 [Inaudible] itself. So I think you’re starting to see what we had talked about last year, that a lot of shops that had done had a little bit of a [Technical difficulty]. I think it brings back to the fact that Chuck has alluded to — of it across the board.

How much did launch, Chuck, 14, or somewhere around that number?

Chuck JehlChief Financial Officer

Yeah. That’s right. John, it’s a great point. Of the 55 new contracts signed in 2020 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, 52 of them are live in writing certs and contributing to the growth in Q1.

Ross JessupPresident and Chief Operating Officer

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.

Joseph VafiCanaccord Genuity — Analyst

That’s great. So it sounds like pretty broad-based. Maybe just one more quick one. This online lending channel that I think you mentioned.

That seems pretty intriguing to a lot of cert potential, and I know it’s early there. But 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? Great results, guys.

Ross JessupPresident and Chief Operating Officer

John, do you want to handle the online lending?

John FlynnChairman and Chief Executive Officer

I don’t know. So 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 fund source behind it. They farm it out.

I think when we even put it up, was it Ross who gave the analysis from a competitor that had two fund sources behind them that represented like one funding source was like, I don’t know, 2% of their bots and 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, whether [Inaudible] are coming from an online funding source, whether it’s Lending Club, LendingTree, channel partners that go out and look for — through the use of soft pulls, people that got too high of an interest rate when they did the [Inaudible] and then market to those people to refinance into us, I expect it was done over 300-plus lending sources sitting behind these applications has a huge runway ahead of it. And I alluded to the fact that — in my comments about the one online lending platform that we just did a data speed before they pointed out that they have 270,000 apps a core that fall 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 inbound calls from the likes of people like that are looking for us to bring our funding source to their platform.

I think it will continue to grow.

Joseph VafiCanaccord Genuity — Analyst

Great. Thanks very much, John.

Operator

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

John DavisRaymond James — Analyst

Hey. Good afternoon, guys. Just wanted to follow up a little bit on the certs and the strength in March. Yes.

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 higher capture rates that could drive upside to the cert guide. But just kind of curious there if that was contemplated or that was a new decision that was made recently.

Chuck JehlChief Financial Officer

Hey, John. How are you doing? This is Chuck. Yeah, I mean, if you think about — I’ll start with the guidance and what we reaffirmed today for full-year ’21. We did come off the record quarter, the record month, but I’d also tell you, 161,000 certs to 206,000 certs is a wide range.

However, 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 in what our business can generate. From adding the underwriting changes and the impact being that the range is that broad, we’d like to think that that’s built-in, and that’s the upside and the opportunity between the low and the high. I would point to 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 its tremendous growth at any point in that range.

John DavisRaymond James — Analyst

OK. Great. Anything we should think about just from sequentially? I think I was saying, the balance of the three quarters you need even to get to 70% 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, easier COVID-related comp, but just curious if there’s any call out sequentially from here.

Chuck JehlChief Financial Officer

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.

John DavisRaymond James — Analyst

OK. Great. And then just as a follow-up, Ross, I think you gave an update on OEM No. 3 and No.

4. Are we in a situation now where you’re just — you’ve kind of done everything you can do for OEM No. 3 and you’re waiting on them? And then where are we with OEM No. 4 as far as you’re done with the study? Or is there more follow-up? Just any more color you could give would be helpful.

Ross JessupPresident and Chief Operating Officer

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, we’ll 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 yes, 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.

John DavisRaymond James — Analyst

Thanks. Thanks, guys.

Chuck JehlChief Financial Officer

Thank you.

Operator

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

Vincent CainticStephens Inc. — Analyst

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 refi partners, seven — 14 new customer contracts, and guys are getting implemented within 60 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.

Chuck JehlChief Financial Officer

Yeah, yeah —

John FlynnChairman and Chief Executive Officer

Chuck, I don’t know if you gave a number.

Chuck JehlChief Financial Officer

Yeah, go ahead, John.

John FlynnChairman and Chief Executive Officer

I would just say, Vince, one of the things we found over the past year and even more prevalent in this last quarter and this quarter is signing some of the larger shops versus multiple little shops. So I think the upside is obviously there. I don’t know, Chuck, did — 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 speak to any of specifics or no?

Chuck JehlChief Financial Officer

No, I don’t — I mean, Vincent, it’s Chuck. From — obviously, the credit union — to get to the range of the guide that we’ve talked about, not only do OEM 1 and 2 execute sort of the core credit union and bank business, so — but we’re not giving guidance out on individual customers at the credit union and bank level. But we feel like that business year over year with the pent-up demand 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%.

Vincent CainticStephens Inc. — Analyst

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 of hundred a month versus a bank would be a couple of thousand a month? Or 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.

John FlynnChairman and Chief Executive Officer

I think the thing I’d add, yes, we’re looking at 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 once fully ramped, could do up to 1,000 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. And you heard me speak to the fact that once we have Pentagon hopefully 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 think the months were.

But you can see that kind of growth from some other shops that have the liquidity that they want to get there, especially since we launch them into a refinance channel partner.

Ross JessupPresident and Chief Operating Officer

And Vincent, we usually tier credit union opportunities. Tier 1 is 100 more. Tier 2’s 50 or more. Then we go to 10 or more, then below that.

So we do that. And so we kind of have those tiers that we assign based on our expectations, and then we kind of juggle those around. So I wish there were more, 500 a month, but we like the Tier 3s, 2s, and 1s equally, just more of them.

Vincent CainticStephens Inc. — Analyst

OK. Great. That’s helpful. Thank you.

Because I don’t think — I think it’s underappreciated about the non-OEM opportunities since we don’t talk about it too much. Second question, kind of on the profit share and the expectations. So your profit share was really good this quarter, and I saw the $5 million positive profit share adjustment. Just wondering, when you think about profit share going forward, credit has been great.

What’s built into your future credit expectations like when you think about the loss curve 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 it in future quarters in 2020, is there potential upside in the profit share that you have? Thank you.

Chuck JehlChief Financial Officer

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, that is attributable to the business performing better than expected, less defaults, and less claims. And as we’ve talked about on various other calls, we’ve got a very robust process that 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 we believe there’s unknowns 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 as it relates to loss curves and things like that out into the future, we look at it quarterly.

We have that robust process that we follow. We sit down with the risk team and we evaluate. And if the stress that we had in the model didn’t materialize, we’ll have a positive adjustment, which is what we had in the first quarter. So —

Ross JessupPresident and Chief Operating Officer

Yeah. I mean 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 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.

And so — but clearly, we know that there’s definitely a tailwind right now.

Vincent CainticStephens Inc. — Analyst

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

Chuck JehlChief Financial Officer

Thanks, Vincent.

Operator

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

James FaucetteMorgan Stanley — Analyst

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 estimate how much of a benefit you are getting from the — right now from the strength of the used car market and the value of used cars specifically. 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?

Ross JessupPresident and Chief Operating Officer

You bet. So I think, 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 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 claims severities could be out in the future when you have that depreciation of value and is built into our model. And that’s something, obviously, that we true-up quarterly. Chuck, you want to?

Chuck JehlChief Financial Officer

Yeah, James. Yes, I’ll jump back again. But yes, that’s something we — as I said to Vincent’s comment, that we look at on a quarterly basis. And we’ve got some stress on severity throughout ’21 and into ’22 in our model 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.

James FaucetteMorgan Stanley — Analyst

Got it. Got it. And from a — as you kind of play that out and think about like an eventual return to and availability of new cars, etc., do you think that overlaid with the people that you’re talking to and the OEMS, etc., is that we should see a change in that used versus new car mix in a meaningful way? And anything we should take into account that way?

Ross JessupPresident and Chief Operating Officer

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 No.

2, 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 end of Q3 and Q4 when we — when chip shortage, hopefully, can get back to the level that can meet the demand, and we certainly will benefit from that, from the new side.

James FaucetteMorgan Stanley — Analyst

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

Ross JessupPresident and Chief Operating Officer

Yeah. Thanks, James.

Chuck JehlChief Financial Officer

Thanks, James.

Operator

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

Sameer KaluchaDeutsche Bank — Analyst

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 insurer three and four. Any color you can provide on the time lines when you expect them to be live?

Ross JessupPresident and Chief Operating Officer

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

John FlynnChairman and Chief Executive Officer

Yeah. We’re, you know– we work closely with at least four different carriers throughout the year. Our hope would be to have at least one of them up and running by third quarter. So that’s our game plan.

We’re in the process of negotiating the final contracts. The other three that [Inaudible] on that one are all very strong or strong financially. That’s just [Inaudible] of, again, us seeing the right timing so that we can commit the [Inaudible] amount of premium on each of them. So the game plan is to hopefully have one of them up and running by the third quarter here.

Sameer KaluchaDeutsche Bank — Analyst

Got it. And the quick follow-up I had on the online channel, you’ve mentioned conversations with one and a little bit 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?

John FlynnChairman and Chief Executive Officer

I think it’s a matter of all the 250,000 to 270,000 turn-down order. But I think by the picture of the — that we’re aggregating a bunch of them, yes, that there’s a significant sort of applications that will be flowing through from that group, if you will, of online lenders. And these aren’t just people that have sites out there like, you know, Lending Clubs or LendingTrees. 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 over the last six months, and they come 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. People that are actually being directly marketed to that we know can save $100, $150 a month, which really increases the close rate significantly.

Sameer KaluchaDeutsche Bank — Analyst

Got it. Great. Thank you.

Operator

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

Mike GrondahlNorthland Securities — Analyst

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?

John FlynnChairman and Chief Executive Officer

I can tell you that one of the banks that reached to us earlier this week and said that we’ve made [Inaudible] first grouping of due diligence and that 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, would — probably within the next 60 days through 1 of our refinance channel partners. So we’re getting pretty good feed from these real-sized banks that I think that can generate some pretty good volume significantly quickly.

Mike GrondahlNorthland Securities — Analyst

Got it. Thank you.

Operator

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

John HechtJefferies — Analyst

Afternoon. Thanks for taking my questions. And many have been asked and answered. But I’m wondering, have you guys talked 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?

Ross JessupPresident and Chief Operating Officer

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 than most lenders in the first place. And that’s — besides just buying deeper, expanding on that right side on the LTV is the other side of the value prop in there.

So I would imagine that the vehicle values themselves remaining at highs, record highs kind of takes care of that. And just through the math, it works out to be higher LTVs than a lender typically would go, assuming they use an NADA trade or Kelley wholesale on that.

John FlynnChairman and Chief Executive Officer

I think the thing I’d add to that, Ross, is just all were, in essence, I mean of going back to COVID underwriting rules, we tightened those things up as it relates to what Ross mentioned, bump them up in the LTV area really just because we weren’t sure where it was going to go. Our results pre-COVID were pretty stellar. And I think that’s not going to hurt us [Technical difficulty] with the fact that these values have stayed up. They — the way they’ve gotten to — the fact that we’re going back to some of the pre-COVID underwriting rules, I think, is really just going to help us, again, to Ross’ point earlier, get our book-to-bill ratio up significantly and an area where our performance was always good to begin with.

Ross JessupPresident and Chief Operating Officer

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.

John HechtJefferies — Analyst

OK. That’s all very helpful. And you launched subvention now to 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?

Ross JessupPresident and Chief Operating Officer

Yeah. So just to be clear, subvention is only live in OEM No. 2. We have not launched it in OEM No.

1. 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 1,300 run rate that they have that we talked about earlier in that.

John HechtJefferies — Analyst

And so it really just increases the I guess, the opportunity set within the OEM? Or does it also bring you to different products?

Ross JessupPresident and Chief Operating Officer

Well, I think it just allows us more wallet share per OEM. But I think the leasing side is something that 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 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.

John HechtJefferies — Analyst

Great. Thank you, guys, very much.

Ross JessupPresident and Chief Operating Officer

Thank you.

Operator

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.

John FlynnChairman and Chief Executive Officer

Yes. Thank you very much, operator And 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 important questions.

Ross JessupPresident and Chief Operating Officer

Yes, thank you.

Chuck JehlChief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

John FlynnChairman and Chief Executive Officer

Ross JessupPresident and Chief Operating Officer

Chuck JehlChief Financial Officer

Peter HeckmannD.A. Davidson — Analyst

David ScharfJMP Securities — Analyst

Joseph VafiCanaccord Genuity — Analyst

John DavisRaymond James — Analyst

Vincent CainticStephens Inc. — Analyst

James FaucetteMorgan Stanley — Analyst

Sameer KaluchaDeutsche Bank — Analyst

Mike GrondahlNorthland Securities — Analyst

John HechtJefferies — Analyst

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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