Open Lending Corp (LPRO) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to Open Lending's Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman; Keith Jezek, CEO; and Chuck Jehl, CFO. Early today, the company posted its third quarter 2022 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 estimated and other forward-looking statements that represent the company's view as of today, November 3, 2022. 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 from those expressed or implied with such statements.

And now I'll pass the call over to Mr. John Flynn. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks again for joining us today for Open Lending's third quarter 2022 earnings conference Call.

For the third quarter, the company's results were in line with our expectations despite continued challenging economic and industry dynamics impacting our business. During the third quarter of '22, we certified 42,186 loans.

Total revenue was $50.7 million, gross profit was $45.5 million, and adjusted EBITDA was $29.4 million. I'm going to turn the remainder of the prepared remarks over to Keith and Chuck, but before I do that, I want to again emphasize how confident and excited I am in the appointment of Keith Jezek as our CEO.

Through a robust national research process, there was no one that possessed such a deep knowledge and experience in the retail, automotive and technology industry and a proven track record of success than Keith. He's an exceptional leader and the right executive at the right time to lead the company into the next stage of growth.

Keith's expertise within the auto, retail technology industry is going to serve shareholders well over time as we prepare for an improvement of the challenging economic and industry dynamics currently impacting our business. Specifically; Keith's experience at Cox Automotive building and managing software products for the retail automotive ecosystem, including consumers, OEMs, auto lenders and the largest and most prominent dealer networks in the nation.

These service offerings totaling multibillions in revenue were provided through companies, including Dealer Track, AutoTrader, Kelley Blue Book, vAuto and Dealer.com, among others. His Executive Relationships and knowledge will be complementary to our existing and prospective credit union and OEM partnerships.

I'm very confident that our collective continued underwriting vigilance along with Keith's focus on our go-to-market sales strategy and technology road map will provide Open Lending the right balance of downside protection in the immediate term and allow us to capture significant upside as industry fundamentals recover.

It's been an incredible honor to lead Open Lending. And I'm extremely excited to continue working with Keith, the leadership team and the Board as we embark on the next chapter of growth and continuing to execute our mission of serving the underserved. So with that, Keith, I'll turn the call over to you.

Well, thank you for the kind words, John. I look forward to collaborating with you and Ross closely and continuing to execute Open Lending's business plan with U.S. Chairman and Ross as a Trusted Adviser. Since it's my first earnings call as CEO, I thought I would start off with my relevant experience and the reason why I joined Open Lending.

As many of you are aware, I've been involved with Open Lending for over a decade. Initially, I served on the board from 2012 to 2020, while the company was private. I transitioned to an advisory role as the company entered the public markets and have served in that role for the last 2 years.

During my 10-year affiliation with the company, I've witnessed firsthand the company's strong product adoption and market-leading profitable growth. Many of the secular trends that affected Cox Automotive have also impacted Open Lending. Both companies develop technologies that provide insights and innovative decision-making tools for the respective clientele.

In the case of Cox Automotive, we help dealers, OEMs and financial institutions decide how best to deploy capital, manage inventory and optimize pricing and sales functions. At Open Lending, I will continue to draw from my market knowledge and grow our client base; that use our technology to analyze risk while connecting borrowers and lenders.

Now let me turn to why I found the CEO opportunity extremely compelling. To begin with, I believe all great companies have the following characteristics: one, a large and growing total addressable market, or TAM; two, a profound competitive advantage and significant barriers to entry; and three, a business model that leverages both 1 and 2.

Open Lending exhibits all of these attributes. That is what attracted me to the company over 10 years ago and what led me to the decision to take on the CEO role a few weeks ago. So, first on TAM. As we shared during our last earnings call, our TAM is large and growing and now totals approximately $270 billion for auto loan originations.

In addition, there was approximately $40 billion in total addressable market related to the auto refinancing opportunity. We have captured less than 2% market share this year, leaving significant room for growth. Second, as it relates to the competitive advantage and significant barriers to entry, Open Lending has 20-plus years of proprietary data, sophisticated technology, including 5 second underwriting decisions, exclusive relationships with 4 A-rated insurance partners, deep lender relationships and regulatory know-how.

We believe we have the strongest balance sheet and unit economics of any pure-play participant in the marketplace and we do not take balance sheet credit risk.

Finally, Open Lending has a business model that takes advantage of both this large and growing underpenetrated market and our differentiated business offerings.

With that, I'd like to share my view on the current state of the retail automotive lending marketplace. Although the characteristics of each economic contraction are different, there are some common responses by the major participants in the automotive sector.

To that end, we are watching a cross-section of economic, industry data and company metrics. It's been over 40 years since inflation rates exceeded 8%. However, the automotive sector data related to the dot.com recession in early 2000, the great financial crisis of 2008 and economic contraction and subsequent expansion from 2020 to 2021 do offer some parallels and insights.

In the prior recessions that I just referenced, the new vehicle SAAR fell as much as 40% and risk fee rates for 5-year treasuries declined in a range of 200 to 400 basis points. At the same time, after OEMs pulled back on production, it took anywhere from 12 to 18 months to ramp back up.

I would like to point out that in these recessions, auto pricing moderated but did not fall precipitously or below prerecession levels. On the topic of auto, supply and inventory, the new light vehicle SAAR was 13.7 million units as of October or approximately 3 million units below the historical trend line.

Inventory is improving as production continues to ramp and supply chain challenges ease. However, the rate of recovery has still been slower than expected due to the ongoing semiconductor chip shortages.

At 42.6 weeks, up 8% from a year ago, affordability is at a record 15-year high level; although the Manheim Price Index was down 15% from the recent peak. What's most meaningful is the 20% average increase in the rate of a 5-year automotive loan since the beginning of the year as the Fed's fund has increased 6x and 375 basis points, the fastest rate of increase in 35 years.

For all these reasons, we are expecting a continued moderation in auto pricing as inventory grows. If patterns of prior recessions serve as a barometer, that pace of the moderation will be correlated most closely to the production efforts of the OEMs and a resolution of supply chain conditions.

So now turning somewhat closer to home. I had the benefit of spending a few days last week with over 200 of our clients at our Annual Executive Leadership roundtable. The key takeaways where many of our credit union customers are managing their liquidity and deposits in a more conservative fashion versus a year ago, as they work through this challenge, they continue to embrace the value proposition we offer them to go deeper in the credit spectrum, serving their members.

Additionally, they recognized that there is a large yield opportunity in the near and non-prime space versus the super prime space due to the higher rate environment. All that said, we're even more passionate about our ability to help those that are hoping to purchase a car or are already paying too high of a rate.

And we will continue to target company growth rates in excess of industry auto loan origination growth rates, but not at the expense of our commitment to managing risk. We will continue to maintain our rigorous underwriting standards as John and Ross have taken extreme care to maintain through the pandemic as well as the current economic slowdown.

Now before I turn it over to Chuck, I want to provide a brief operations update. We have increased our sales, account management and marketing teams by approximately 20% this year and plan to continue investing through the current economic and industry challenges.

The individuals we've hired have deep experience in the auto retail loan origination sector, in particular, with credit unions, banks and OEMs. As an adviser, I was actively involved in the hiring of these individuals and laying out the structure of these teams and our sales disciplines going forward.

While early on, we have seen good progress from these investments. In the third quarter, our non-OEM business, primarily credit unions, was essentially flat year-over-year in certified loans. This demonstrates the strength of our core credit union business, while the large universal banks reported auto loan originations down 30% to 40% year-on-year.

We are pleased to have announced we partnered with America First Credit Union, the seventh largest credit union in the country at $17 billion in assets and 1.2 million members. In addition to those investments, we have added R&D team members and have continued to invest in our technology and in the enhancement of lenders protection.

Importantly, to insist our customers during this period of elevated affordability, we have modified our product with program underwriting changes to expand loan limits and extend the term of qualifying equals to 84 months.

Now with that, I would like to turn the call over to Chuck to review Q3 in further detail as well as to provide updated thoughts on the full year 2022 outlook. Chuck?

Thanks, Keith. During the third quarter of 2022, we facilitated 42,186 certified loans compared to 49,332 certified loans in Q3 of '21 and 44,531 certified loans in Q2 of '22.

Total revenue for the third quarter of 2022 was $50.7 million as compared to $58.9 million in the third quarter of 2021. Total revenue was down 14% year-over-year.

However, excluding ASC 606 change in estimate associated with our profit share, revenue was down only 5% year-over-year. To break down total revenues in the third quarter of 2022, profit share revenue represented $26.5 million, program fees were $21.8 million, and claims administration fees and other were approximately $2.3 million.

It is important to note that while our certified loan volume was down year-over-year, our program fee revenue increased slightly due to the mix of business certified resulting in higher unit economics related to our program fees year-over-year.

Now to further break down the $26.5 million in profit share revenue in Q3, profit share associated with new originations in the third quarter of 2022 was $24.9 million or $589 per certified loan as compared to $27.9 million or $566 per certified loan in the third quarter of 2021. Also included in profit share revenue in Q3 of '22 was $1.7 million in positive change in estimate of future revenues from certified loans originated in previous periods, primarily as a result of positive realized portfolio performance due to lower severity of losses.

Change in estimated future revenues were $7.5 million in the third quarter of 2021. Gross profit was $45.5 million and gross margin was approximately 90% in the third quarter of 2022 as compared to $52.5 million and gross margin of approximately 90% in the third quarter of 2021.

Selling, general and administrative expenses were $17.7 million in the third quarter of 2022 compared to $11.8 million in the previous year quarter. There were approximately $3.5 million in onetime expenses during the current quarter. The increase year-over-year, excluding onetime expenses is primarily due to additional employees to support our growth with a focus on our go-to-market sales strategy and investment in our R&D technology.

Operating income was $27.8 million in the third quarter of 2022 compared to $40.7 million in the third quarter of 2021. Net income for the third quarter of 2022 was $24.5 million compared to $29.4 million in the third quarter of 2021. Basic and diluted earnings per share were $0.19 in the third quarter of 2022 as compared to $0.23 in the previous year quarter.

Adjusted EBITDA for the third quarter of 2022 was $29.4 million as compared to $42.1 million in the third quarter of 2021. There's a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release.

Adjusted operating cash flow for the quarter was $35.9 million as compared to $38.8 million in the third quarter of 2021. We exited the quarter with $399 million in total assets, of which $201.8 million was unrestricted cash; $99.9 million was in contract assets and $73.4 million in net deferred tax assets.

We had $165.7 million in total liabilities, of which $148.3 million was an outstanding debt. As Keith mentioned, we believe the most significant factor weighing on unit growth and originations for the auto retail sector in the near term is affordability for the end consumer.

As the year began, industry forecast called for a slow and steady improvement of inventory and pricing moderation as represented in the Manheim Price Index. However, the new vehicle SAAR has now been revised downward in each of the last 2 quarters and is currently at a run rate of 13.7 million units in contrast to 15 million units as we began the year.

In addition, with the FOMC press conference this week, we have now seen the fastest rise in federal funds rate in over 35 years and a communication by the Federal Reserve Chairman that rates could potentially stay high for longer than previously anticipated. For those reasons, we are tightening our guidance for full year 2022 accordingly.

Based on year-to-date 2022 results and trends into the fourth quarter, we are tightening our previous guidance range for total certified loans to be between 160,000 and 170,000. Total revenue to be between $180 million and $190 million, adjusted EBITDA to be between $112 million and $122 million and adjusted operating cash flow to be between $130 million and $145 million.

In our guidance, we continue to take the following factors into consideration: continued disruption in transportation networks and raw material shortages, including global semiconductor chip shortages, dealer inventory that remains below historic levels, the rate of contraction for an index of the largest public auto lender financial institutions, some of which originated 30% to 40% less volume on a year-over-year comparison in the third quarter of 2022.

The affordability index of our target credit score due to continued inflated used car values and finally, inflation and rising interest rates and overall consumer sentiment. Specifically, for the overall auto industry, the affordability is now at 42.6 weeks, the highest levels in a decade.

We want to thank everyone for joining us today and we will now take your questions.

(Operator Instructions) And our first question comes from David Scharf with JMP.

And congrats on the new role, the formal first earnings call for you. Keith, 2 things. One is more maybe just some context around the Q4 guidance, a little more granular question. There's typically some pretty steep seasonality in the auto industry with a slowdown sequentially from Q3 and Q4.

Just trying to gauge as we think about what's implied by the full year guidance, what's implied for the fourth quarter. Sort of how much of that sequential decline in the top line is normal seasonality and how much of it is maybe some incremental caution versus 3 months ago in your macro outlook?

David, this is Chuck. As we thought about the guide, obviously, there are a lot of factors that went into it, the inputs. Obviously, the Fed monetary policy that came out that's been ongoing, but the Fed Chairman Powell talked yesterday.

And definitely seasonality for Q4 that's out there, historically lower volume. But really, this affordability issue to the nonprime consumer is really what's driving a lot of what -- we've taken into consideration with the rising rates. I mean we've had 375 basis points increase in the past 5 months in the Fed funds rate.

And even since our last call in August, 150 basis points since then. Your point about the 3 months that have transpired since we last talked. So -- and really no -- this really aggressive manner on the Fed. And it's difficult to anticipate the lag effect of the federal policy. So we think it's prudent to be conservative.

Got it. And maybe following up on the affordability challenges. To the extent that you're extending some loan terms to 84 months and loan limits for qualified borrowers. I would imagine that the premiums, the cost of default insurance would go up as well, coincident with those types of revisions.

Are the carriers in this dynamic sort of insistent on maintaining their own return requirements? And does that, therefore, potentially impact the average profit share we should expect from assert?

David, I've some words, I'll let Chuck speak to the profit here. But from a carrier standpoint, you're right. We've tried to maintain and this is John answering the question.

Every sell that we write to a sell being a loan-to-value on a FICO score driven matrix, if you will, is written to about a 60% loss ratio. So to your point, is the risk -- if a greater risk 84 month higher loan amount, the premium is going to be a little bit higher.

But because you're extending that out, it gets the payment to income into a much better situation for the consumer, meaning fewer defaults. But you hit the nail on the head from the standpoint of the premiums are going to be a little bit more and hopefully would be reflected in the profit share.

But Chuck, do you want to expand on the profit share part of that?

You bet, David. Yes, I can, John. And you can see it in our Q3 results, we -- on new originations, we booked $589 per certified loan over last year it was $566. And you may recall in our underwriting changes and some of the things we did earlier this year, we had -- in addition to the higher premium on the loan amounts as well as the extended term, the vehicle valuation discount, which also is an increase to the premium.

So we feel like it's the right decisions on the underwriting where we are in this challenging backdrop. But I think more importantly, your comment about the underwriters. They're part of the decision. It's a partnership. And we're all working together with the premium increases or any of the changes.

The next question comes from Peter Heckmann with D.A. Davidson.

It looks like, if I'm reading my model right, 9 quarters in a row where you've had a positive adjustment to profit share, this is the smallest of those 9. And certainly looking into the tealeaves here, I guess, what would you -- what would be driving that more?

Is it the increasing severity of loss per claim due to the drop in used car values? Or are you actually seeing a little bit of an uptick in potential defaults?

Yes. Pete, its Chuck. Yes, I mean, you're absolutely right. I mean if you think back last year, I think 2021, we had like -- almost $31 million of positive changes and that was primarily driven by, obviously, the liquidity in the consumers' hands and lower defaults, claims and severity.

And what we've continued to model in this challenging time going forward into '22, in the last couple of quarters and also into the future, is increased severity because we've modeled the Manheim index, price index coming down moderately.

In our prepared comments, I think, 15% year-to-date in that and as well as defaults normalizing to normal levels. And even past that, we've stressed the future portfolio as it relates to defaults in severity. So -- and with a little benefit to prepay speeds due to the rising rate environment and the loans being in our portfolio longer. So it's kind of a combination of all of that.

Okay. That's helpful. And then just from a housekeeping perspective, how many lending customers did you end the quarter with? And were there any -- I know you had the one notable add. But if I remember correctly, there's a couple of relatively larger FIs that were onboarding.

Right. Yes. America First, obviously, it was largely Keith talked about. But we had about 400 active institutions at Q3 end.

Okay. I'll follow up offline on that one. And I'll get back in the queue.

The next question comes from Faiza Alwy with Deutsche Bank.

I wanted to ask about refinancing volumes because I think historically, that's something that you've disclosed. And unless I missed it, I haven't found some that yet. So just give us some color on how that has trended and what your expectation is for that going forward.

Sure. The -- a little bit of the slowdown with Pentagon has caused the refinance channel to slow down a little bit. It's still a significant piece of our volume for sure. And we think it will continue to be going forward.

But as we talked about in our comments, with Credit Union kind of retooling, trying to figure out where to find some cash, some of our larger ones it had slowed down a bit. I think we have found too and I think Keith alluded to this.

With the cost of funds, some of our larger funding sources there are still taking app, but the outflow is simply down. We're just not seeing the apps that we were seeing leading into this quarter. So I think the percentage of approval of the app is still way up there, particularly in that channel. But it's simply the applications aren't coming through as quick as they were. So it's still a significant piece of our business.

We think it will continue to grow as we talked about with the cost of funds rising all over. Some of our funding sources of razor yield targets by at high-end 300 points, where credit unions have only raised it by 60 basis points. So I think there's still some significant room for growth there.

Okay. Okay, understood. And then can you talk about sort of has there been some churn on the customer side. I think previously, like last quarter, you talked about 463 active lenders you lowered. It sounds like it's the same issue that you just -- you've been describing, John. But give us a bit more color and maybe on the new partners that you signed sort of how significant of a benefit could that be? And when will that start kicking in?

And even I think Peter had asked, not the total number of accounts. But what have we signed approximately 55 or 60 new clients this year?

That's right, John. 53, year-to-date.

Yes. I wouldn't say that there's been any significant churn. I mean we've not had people actually canceling. When we determined what is an active account versus a funding source sometimes you get some credit unions that will not be as active on the platform simply because of liquidity issues. But we continue to see a lot of inbound calls.

We've got a very active sales force. And we continue to see a lot of interest from some of the larger credit unions looking to get on the platform. So I'm not familiar with any major accounts that have fallen off from a standpoint of actually shutting down the program.

Yes, John, I'll jump in. Faiza, what you thinking of as last quarter, we actually put a new disclosure in the 10-Q. So the way we had previously defined an active account was one active cert within the trailing 12 months.

We still provide that. And we exited the quarter that was about 430, okay, active customers. Then what we did is added in the periods presented Q3 and then 9 months to date for 2022, we actually showed new lenders added and then anybody that might have been inactive in the quarter, it doesn't mean they've gone inactive and they left the business or the company. They just didn't have a cert in the quarter.

And one of the disclosures this quarter when we filed our Q tomorrow is we had 21 new lenders in Q3 actually their first certified loan with Open Lending.

The next question comes from Joseph Vafi with Canaccord.

Once again, welcome, Keith. Maybe just start with one for you, Keith. I know you're really focused on go-to-market.

And I mean the macro is to say the least dynamic. But do you see any -- without giving away any secret sauce, any kind of tweaks or opportunities on the go-to-market now that you're CEO? And then I have a follow-up.

Well, I appreciate the question. Certainly, the vision that I have for the company is to continue the great work that John and Ross have set in motion. But my idea is to kind of bring a series of refinements to the go-to-market model that I've kind of worked on and best practices that I've developed in my career, both in founding the auto and growing that to hundreds of millions of revenue and then a series of acquisitions that we did at Cox Automotive.

So developing best practices and now utilizing those at those acquisitions and then utilizing those here. The great news is, obviously, I've had 10 years to kind of study up on Open Lending as opposed to like 90 days due diligence on the acquisitions. To get a little bit more specific, it's developing new practices and refinements to marketing and lead gen, sales, account management, implementations and product development.

With the key ingredient being to test, new hypothesis and kind of new and a little bit different ways to go to market. And then once we find the right mix and then just to scale that as rapidly as we can.

Got it. That makes a lot of sense. And then just a question about kind of the medium to long term and I'm going to try to kind of phrase this as best I can. But we've got some longer-term loan products out, I think, to 84 months.

And we clearly have still an affordability issue with the price of cars and especially used cars. And the one thing that I think about from time to time is if prices on used cars come in, that's going to be good for your volumes, obviously, because affordability gets better, the consumer comes back and your certs go up.

But then when you think about residual value of the existing loan book and if prices come down on used cars materially, what does that mean maybe relative to loss provisions a couple of years ago? And how do you think about that and accounts for that in your underwriting model?

Thanks, Joe. It's Chuck. Yes, my comments earlier about the profit share. We have a robust quarterly process. We've got a really experienced risk team; they're auto finance experts, a lot of experience. And what we do on a quarterly basis, we subscribed to Moody's Economic Forecast quarterly.

If the inputs from that going to our model, we've got the Manheim coming down moderately through this year as well into next year and then beyond. So we feel like we've got stress on the portfolio that takes that into consideration. We've had a period of these inflated prices. We've had positive change in estimate under the accounting primarily due to the severity of losses being lower than historical averages.

But as you may recall, we've modeled historical averages and then stressed that higher. So we don't have a crystal ball. But I think we have a really great process that we follow quarterly that, obviously, I'm involved in, our executives and the risk team, John and Ross historically and now Keith with his experience. So we'll all be involved in that.

And I feel like we've got that modeled in. But it just depends on how fast it moderates. But we've got default severity as well as prepay speeds into our econometric model.

Next question comes from James Faucette with Morgan Stanley.

This is Sandy Beatty on for James. More of a question for Keith, but for all of you guys as well. How are you thinking about capital allocation priorities?

And I'm thinking, particularly as it pertains to M&A, just given obviously a transition in leadership, obviously, you're all still working together. But any updates in that thought process would be helpful.

How about I start, Sandy, and then Keith can jump in. Obviously, we feel we're very strongly still about our value proposition to our customers. Obviously, there's the challenges and the dynamic of the industry, maintained a financial -- a very flexible financial profile.

We've got a strong balance sheet, got $200 million in cash at quarter end. We refinanced and amended our credit facility. We've got great liquidity under that. So we feel really good about the strength of our balance sheet and the position of the company. And we're investing in our go-to-market, in our technology road map, et cetera, as Keith mentioned.

So that's first and foremost from capital allocation. And then, obviously, M&A is something we can look at over time. But we're very focused on the white space ahead in the TAM. And we're less than 2% penetrated today and that's still a great opportunity for us to get market share in our business, so other opportunities that are out there that we'll consider.

But Keith's been here. I think this is his third or fourth week, and it's been great. And these are things we're going to talk about and come back and talk further about it at the year-end call.

Yes. Thank you, Chuck, and this is Keith. It's a great question. I mean the only color that I would add is that certainly using the strength of the balance sheet, not to go too far afield at all, but to continue to provide additional services and products to our current installed base and future customers.

And one follow-up, just mindful of the trajectory on revenue into 4Q and then even into '23. How are you thinking about the reaction function and operating leverage just from an adjusted EBITDA margin perspective, just cognizant of the sequential trends here and obviously, the macro impacts as well.

Right. No, good question. And Sandy, I'll point out in Q3, we had some onetime costs that if you normalize that out, we were still in that, call it, 63%, 64% EBITDA margin in the business.

Longer term, and for full year '22 and the guide for full year, we still feel we have strong EBITDA margins and that, call it, 60% to 62% range. So that's if you look at the midpoint of the guide and kind of where that goes.

But strong margins and we plan to continue investing in the business and our go-to-market and our technology and while others are not. So this is -- that's how we're proceeding through these times.

The next question comes from John Hecht with Jefferies.

Welcome, Keith. I can't remember if it was Keith or Chuck. But one of you guys talked about the concept of affordability and the issue tied to affordability. And I think you even mentioned kind of a stat or an index tied to it.

So I'm wondering how do you define or evaluate affordability? And then like what factors come into play to kind of release this as a headwind, which I think would maybe allow for kind of quarter-to-quarter growth going forward?

I'm not asking for guidance in that regard, but you're sort of thinking -- trying to think about, given these issues, when do they -- when do these headwinds become tailwinds in order for growth to reoccur?

Yes, it's a good question. And I think the stat, John, that maybe you were thinking of in our prepared comments was what it takes to -- for a consumer to buy a car. And its 42.6 weeks, I think, is -- which is above, I think norm is more like 30 weeks in the past, so what didn't help.

We already had the inflated cars per paycheck on the 42.6 weeks. We've got the inflated values. I think early in January, the Manheim price was 2.36, whatever it got to in the peak. And then if you think about what's happened over the last 5 months with the rate increases and the 8% inflation, 50-year low employment, unemployment, tight labor market, all these things waned.

And affordability is going to come down, I think, obviously, when rates can normalize again. And right now, the near and non-prime consumer that we target, it's -- they're payment buyers and it's very hard to afford a vehicle right now.

And Chuck, the thing I'd add to that and the question, what are we doing to combat it? I think coming out with the 84-month term. Again, the big driver of that is to get the PTI in line so that the payment is affordable by the consumer to be able to stay in the loan long term.

So the more we can accommodate that and make it that the payments work for them, keep them in the loan, they're less likely to default the payments not over their budget. So they think like that are what we're working on to continue to help combat that affordability issue.

I was going to say -- and this is Keith. I mean and I would just add that combating on the affordability issues, the Manheim Index has been drifting down over the last couple of months; so that would be something on the positive side of the equation for affordability that and lowering gas prices.

Yes. All that makes sense. And then anything to think about, call it, near intermediate-term trends in terms of the profit share per cert or the fee per cert?

Yes. John, one of the -- in the quarter, we had $589 in average profit share for the new originations. And our program fees were $518 which program fees were actually -- if you look at it year-over-year, we're up about 18% and the profit share was up about 4%.

A lot of that -- obviously, the higher loan amounts is continuing -- will increase the program fee as well as mix of business sold. So I think longer term, that profit share, it's hard to -- I hate to give an exact number there, but that $550 range and then the program fees longer term, call it, $475 to $500, I think, is just -- but it does depend on mix.

The next question comes from Vincent Caintic with Stephens.

Keith, welcome aboard. Look forward to working with you, especially with your decades of Auto-tech experience. First question on the guidance. Just looking at the sort of the updated certification guidance and what it implies for the fourth quarter. I think it's down from quarter-over-quarter.

But just wanted to understand if there's -- as we're thinking about 2023 and I understand it's probably a little early to provide 2023 guidance. But for the fourth quarter, is there -- is it a seasonally weaker quarter? Or is there something we should be thinking about? Or is that a good number when we think about jumping off into 2023 for certifications?

Vincent, it's Chuck. Yes, a little earlier, we got one question about the guide. And yes, I mean, Q4, as you know, is seasonally historically a lower volume quarter. But really, what's changed since the last time we've all talked is just really the aggressiveness of the Fed actions, the affordability issue on the consumer that we've talked about.

And also, all things being equal, our customers primarily credit unions are being more conservative managing their liquidity and deposits right now. So it's a combination that went into our tightening of that guide for the year and consequently the fourth quarter.

Okay, understood. And then a second question, I think, for Keith. Just curious, you've been here for a couple of weeks. I believe there was a big user group meeting where you were able to meet a couple of your clients.

And just kind of wondering what you've been hearing in terms of the opportunities and challenges and what your clients are looking for. When I -- I covered a couple of the other auto lenders and you've got Capital One at Ally, who were saying that the credit unions are able to take share and able to price things better.

And so I would just wondering if that's an opportunity for you and what the banks and credit unions and your customers are saying?

Yes, happy. It was a pretty wonderful time to begin with any new company and that is to have 200 customers fly in and be able to talk shop and learn from them. I would say, certainly, hats off and congratulations to our credit union customers because over the last quarter, they actually supplanted the captives as the #2 source of auto lending in the country. So they've been very, very busy at work.

That said, however, there was just a little bit of caution around how they're going to manage their deposits and the way they think about their lending portfolio going forward. But it was a wonderful time to learn from the customers. And then also, I just have to reiterate the incredible relationships that John, Ross and the entire team had developed with each and every one of those customers. It was very impressive to see.

And Keith, the one thing I would add to that. The one thing we don't want to lose sight of what got credit unions -- I wouldn't say out of whack. Their loan-to-share ratios grew significantly in the last 9 months, primarily because mortgage rates were low.

Everybody was trying to get into houses and they went out and put a bunch of money out in mortgage loans. Well, that's reversed itself. But mortgage rates at an all-time high. They're going to be looking for an asset class to lend to that is going to be a shorter term, better rate loan.

So all these shops that kind of went out on a limb and did a lot of mortgage loans are regrouping and looking for that 2.5 to 3 year average life piece of paper, which is auto, and it's priced appropriately.

So I think even though it was a short-term kind of right out of cash deal, if you will, and they're obviously not going to go paying off those shorter-term mortgages. But those balances are going to be paying down. And they need to find a home for that money, which will be on our loans.

The next question comes from Bob Napoli with William Blair.

This is Spencer James on for Bob Napoli. I was wondering if you could provide an update on close rates and maybe share if you back out the expanded loan terms you guys have made, have closed rates started to recover or are you not yet seeing that?

What do you say if we backed out the 84 -- because I can tell you that's had a significant impact on close rates. But yes. I'm not sure that I have the exact number right in front of me of what it was if we were to back that number out.

Yes, John, I'll jump in. So Spencer, maybe the way to think about it is the program underwriting changes that we made earlier in the year on the 84-month term as well as the loan amount increases that we made.

We're seeing the increases in the capture rate about 8% to 10% on both categories is what we're seeing. So obviously, that's in the direction we obviously were looking for and -- but that's kind of early indication.

Okay. And one follow-up. The increase in premium pricing, will that continue to mainly come from the expanded loan terms? Or are there other levers you could pull to raise that premium pricing? If you could talk about your willingness to do so and what might lead you to do so?

Yes, I was going to say we've not had any premium increases because we haven't needed them. I think to your point, the additional premium today is coming from 84 months. Some of the levers that could be pulled, we can change premiums with a 30-day notice to the insured if we need to because it's a surplus lines policy.

But some of the easier levers if we wanted to do them, it simply change the advance rate. I don't know if you remember us talking over the last year or 2 that we have occasionally gone out and instead of using, let's say, 100% of wholesale, we were pricing off 95% of wholesale.

So if the advance then bumped them up into a 110% or 115% advance, based on using a lower dollar figure that would have the impact of more premium coming in. But at this point, we don't see the need to do so. The profit share is working well for the carriers and us.

But there are certainly levers that can be pulled if we needed to.

The next question comes from John Davis with Raymond James.

Chuck, just a quick one for you, took operating cash flow up despite taking EBITDA and some of the stuff towards the lower end of the range. So just want to understand kind of what's driving that kind of up to the higher end of the prior range for operating cash flow?

Yes. John, yes, it was just more of taking the low end up a bit in the high. We're -- the adjusted operating cash flow through September, were right about $110 million back of the earnings release already. So we felt like, obviously, it's been a good cash collection, strong cash collection year and profit share program fees and all of the 3 legs of the stool generated a lot of cash. So that's why just kind of trending into the quarter.

Okay. And I know the -- on the profit share, I know the economic assumption has come down but was still positive this quarter, which I guess is good on one hand. But on the other hand, given where we're going from a macro perspective, why not just kind of keep that in your back pocket? I mean I just maybe want to understand a little bit about the methodology is it literally just whatever the model spits out is what you guys put in the numbers because at some point, it's likely that assumption is going to go the other way, so just thoughts on how you guys get to that? And is it literally just whatever the model spits out it is what it is? Or is there any subjectivity to it at all?

No. I mean if we've talked about, John, I mean we've got a really thorough robust process with our risk team. But if you think about the $1.7 million that we booked net in Q3, obviously, it was lower than in any other quarters in the past, probably 4, 5 or 6.

Obviously, that has slowed down as we continue to put stress on the portfolio. As it relates to severity, the Manheim coming down gradually, severity of loss going up, defaults normalizing, et cetera. So -- but what really drove the $1.7 million was realized portfolio performance, which means that the actual claims through that balance sheet date of 9/30 that we thought would happen -- didn't happen as high as we thought.

So that turns to cash. So we basically increased the contract asset accordingly for that. But prospectively, we had more stress out into the portfolio on severities going up and defaults going up. So it's a quarterly process that's very robust. And we monitor it very closely and change our facts and circumstances.

Okay. And then just last one for me. As we look out, I appreciate you're not -- it's too early for '23 guidance. But if we were to look at the surge in 4Q, any reason why that's not a reasonable run rate to start out at least the first part of next year as we think about kind of building our models in '23?

Yes, remember, John, seasonality in the business in Q1 is -- March is obviously seasonality-wise, a good month for us due to the tax returns and folks getting tax refunds. So I'd obviously take that into consideration in your modeling.

And Q4, as Keith and I both talked about, and John, obviously, the affordability of the Fed action as well as some of the conservatism at our credit union customers right now with their liquidity and deposits.

And as we kind of do the bottoms of work on '23, we'll come back and talk to everybody about full year on the February call. So we're doing that work now.

(Operator Instructions) I would like to turn the conference back over to Chuck Jehl for any closer remarks.

We'd like to thank everyone for joining us today and your interest in Open Lending. And I appreciate your support and I want to officially welcome Keith. We're excited he's here and leading our company to the next area of our growth. So we'll talk to you soon and thanks again. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.