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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________to ________
Commission File Number: 001-39797
Upstart Holdings, Inc.
(Exact name of registrant as specified in its charter)
_________________________

Delaware
(State or other jurisdiction of
incorporation or organization)
46-4332431
(I.R.S. Employer
Identification No.)
Upstart Holdings, Inc.
2950 S. Delaware Street, Suite 300
San Mateo, California 94403
(650) 204-1000
(Address of principal executive offices, including zip code)
_________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading SymbolName of each exchange on which registered:
Common Stock, par value $0.0001 per shareUPSTNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒
As of May 7, 2021 there were 76,904,178 shares of the registrant’s common stock outstanding.
1


Upstart Holdings, Inc.
FORM 10-Q
TABLE OF CONTENTS
Page
Item 1. 5
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
118
2

Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws about us and our industry, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “seek,” “could,” “intend,” “target,” “aim,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:
our future financial performance, including our expectations regarding our revenue, our operating expenses, our ability to determine reserves and our ability to remain profitable;
our ability to improve the effectiveness and predictiveness of our AI models and our expectations that improvements in our AI models can lead to higher approval rates and lower interest rates;
our ability to increase the volume of loans facilitated by our AI lending platform;
our ability to successfully maintain a diversified loan funding strategy, including bank partnerships and whole loan sales and securitization transactions;
our ability to maintain competitive interest rates offered to borrowers on our platform, while enabling our bank partners to achieve an adequate return over their cost of funding;
our ability to successfully build our brand and protect our reputation from negative publicity;
our ability to increase the effectiveness of our marketing strategies, including our direct consumer marketing initiatives;
the impact of the COVID-19 pandemic and any associated economic downturn on our business and results of operations;
our expectations and management of future growth, including expanding the number of potential borrowers;
our ability to successfully adjust our proprietary AI models, products and services in a timely manner in response to changing macroeconomic conditions and fluctuations in the credit market;
our compliance with applicable local, state and federal laws;
our ability to comply with and successfully adapt to complex and evolving regulatory environments, including regulation of artificial intelligence and machine learning technology;
our expectations regarding regulatory support of our approach to AI-based lending, including our ongoing discussions with the Consumer Financial Protection Bureau, or CFPB;
our ability to protect against increasingly sophisticated fraudulent borrowing and online theft;
our ability to service loans and the ability of third-party collection agents, to pursue collection of delinquent and defaulted loans;
our ability to successfully compete with companies that are currently in, or may in the future enter, the markets in which we operate;
our expectations regarding new and evolving markets and our ability enter into new markets and introduce new products and services, such as our recent introduction of auto loans;
our ability to effectively secure and maintain the confidentiality of the information received, accessed, stored, provided and used across our systems;
3

Table of Contents
our ability to successfully obtain and maintain funding and liquidity to support continued growth and general corporate purposes;
our ability to attract, integrate and retain qualified employees;
our ability to effectively manage and expand the capabilities of our operations teams, outsourcing relationships and other business operations;
our ability to maintain, protect and enhance our intellectual property;
our expectations regarding outstanding litigation and regulatory investigations; and
the increased expenses associated with being a public company;

We caution you that the foregoing list may not contain all of the forward-looking statements made in this report.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Upstart Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.

4

Table of Contents
Part 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Upstart Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

December 31,March 31,
20202021
Assets
Cash$250,819 $257,017 
Restricted cash60,514 79,049 
Loans (at fair value)78,460 57,189 
Notes receivable and residual certificates (at fair value)19,074 16,033 
Property, equipment, and software, net10,032 10,098 
Operating lease right of use assets18,310 17,265 
Other assets (includes $6,831 and $8,734 at fair value as of December 31, 2020 and March 31, 2021, respectively)
40,046 51,937 
Total assets(a)
$477,255 $488,588 
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable$13,775 $8,127 
Payable to investors45,501 56,490 
Borrowings62,626 41,891 
Accrued expenses and other liabilities (includes $9,530 and $12,628 at fair value as of December 31, 2020 and March 31, 2021, respectively)
35,669 42,869 
Operating lease liabilities19,432 18,621 
Total liabilities(a)
177,003 167,998 
Stockholders’ equity:
Common stock, $0.0001 par value; 700,000,000 shares authorized; 73,314,026 and 73,908,252, shares issued and outstanding as of December 31, 2020 and March 31, 2021, respectively
7 7 
Additional paid-in capital369,467 379,703 
Accumulated deficit(69,222)(59,120)
Total stockholders’ equity300,252 320,590 
Total liabilities and stockholders’ equity$477,255 $488,588 

(a)The following table presents information on assets and liabilities related to variable interest entities (“VIEs”) that are consolidated by Upstart Holdings, Inc. at December 31, 2020 and March 31, 2021. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The holders of the beneficial interests do not have recourse to the general credit of Upstart Holdings, Inc. The assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs and exclude intercompany balances that eliminate in consolidation.

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Upstart Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

December 31,March 31,
20202021
Assets
Restricted cash$12,371 $19,440 
Loans (at fair value)75,373 52,558 
Notes receivable and residual certificates (at fair value)17,219 14,678 
Other assets29 47 
Total assets$104,992 $86,723 
Liabilities
Accounts payable$83 $71 
Borrowings42,181 21,428 
Other liabilities 32  
Total liabilities$42,296 $21,499 



































The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per share data)
(Unaudited)

Three Months Ended March 31,
20202021
Revenue:
Revenue from fees, net$68,013 $116,170 
Interest income and fair value adjustments, net (includes $608 from related parties expense and $4,335 of related parties fair value adjustments for the three months ended March 31, 2020)
(4,019)5,175 
Total revenue63,994 121,345 
Operating expenses:
Sales and marketing35,952 49,376 
Customer operations8,811 17,388 
Engineering and product development7,018 18,988 
General, administrative, and other11,660 20,019 
Total operating expenses63,441 105,771 
Income from operations553 15,574 
Other income (expense)150 (5,233)
Income (expense) on warrants and other non-operating expenses, net289 (18)
Net income before income taxes992 10,323 
Provision for income taxes 221 
Net income before attribution to noncontrolling interests992 10,102 
Net loss attributable to noncontrolling interests(488) 
Net income attributable to Upstart Holdings, Inc. common stockholders$1,480 $10,102 
Net income per share attributable to Upstart Holdings, Inc. common stockholders, basic$ $0.14 
Net income per share attributable to Upstart Holdings, Inc. common stockholders, diluted$ $0.11 
Weighted-average number of shares outstanding used in computing net income per share attributable to Upstart Holdings, Inc. common stockholders, basic14,625,267 73,629,122 
Weighted-average number of shares outstanding used in computing net income per share attributable to Upstart Holdings, Inc. common stockholders, diluted14,625,267 91,449,571 















The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share data)
(Unaudited)


Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total Upstart Holdings, Inc.
Stockholders’
Deficit
Noncontrolling
Interest
Total Stockholders’ Deficit
SharesAmountSharesAmount
Balance as of December 31, 201947,349,577 $162,546 14,561,398 $2 $12,489 $(75,205)$(62,714)$1,026 $(61,688)
Issuance of common stock upon exercise of stock options— — 92,634 — 185 — 185 — 185 
Stock-based compensation expense— — — — 2,055 — 2,055 — 2,055 
Return of capital to interests in consolidated VIEs— — — — — — — (381)(381)
Net income (loss)— — — — — 1,480 1,480 (488)992 
Balance as of March 31, 202047,349,577 $162,546 14,654,032 $2 $14,729 $(73,725)$(58,994)$157 $(58,837)


Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total Upstart Holdings, Inc.
Stockholders’ Equity
Noncontrolling
Interest
Total Stockholders’
Equity
SharesAmountSharesAmount
Balance as of December 31, 2020 $ 73,314,026 $7 $369,467 $(69,222)$300,252 $ $300,252 
Issuance of common stock upon exercise of stock options— — 521,511 — 1,492 — 1,492 — 1,492 
Issuance of common stock upon settlement of restricted stock units— — 308 — — — — — — 
Exercise of common stock warrants— — 72,407 — — — — — — 
Stock-based compensation expense— — — — 8,744 — 8,744 — 8,744 
Net income— — — — — 10,102 10,102 — 10,102 
Balance as of March 31, 2021 $ 73,908,252 $7 $379,703 $(59,120)$320,590 $ $320,590 




















The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,
20202021
Cash flows from operating activities
Net income before attribution to noncontrolling interests$992 $10,102 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Change in fair value of financial instruments (includes $(4,335) to related parties for the three months ended March 31, 2020)
11,995 901 
Stock-based compensation1,965 8,622 
Gain (loss) on loan servicing arrangements and sale of noncontrolling interests, net(1,459)67 
Depreciation and amortization515 816 
Noncash interest expense18 18 
Net changes in operating assets and liabilities:
Purchase of loans for immediate resale to investors(848,540)(1,294,634)
Proceeds from immediate resale of loans to investors848,540 1,294,634 
Purchase of loans held-for-sale(97,924)(18,240)
Principal payments received for loans held-for-sale2,328 2,637 
Net proceeds from sale of loans held-for-sale6,813 38,140 
Other assets(202)(9,988)
Operating lease liability and right-of-use asset37 234 
Accounts payable(3,003)(5,807)
Payable to investors570 10,989 
Accrued expenses and other liabilities(9,167)4,601 
Net cash (used in) provided by operating activities(86,522)43,092 
Cash flows from investing activities
Principal payments received for loans held by consolidated securitizations15,273  
Net proceeds from sale of loans held-for-investment88,136 8,329 
Principal payments received for loans held-for-investment5,429 3,002 
Principal payments received for notes receivable and repayments of residual certificates4,028 3,119 
Purchase of loans held-for-investment(2,755)(12,947)
Purchase of notes receivable and residual certificates(4) 
Purchase of property and equipment(508)(267)
Capitalized software costs(858)(334)
Net cash provided by investing activities108,741 902 
Cash flows from financing activities
Payments made on securitization notes and certificates (includes $633 paid to related parties for the three months ended March 31, 2020)
(16,740) 
Repayments of borrowings(78,011)(26,584)
Distributions made to noncontrolling interests(381) 
Proceeds from borrowings64,839 5,831 
Proceeds from exercise of stock options185 1,492 
Net cash used in financing activities(30,108)(19,261)
Net increase (decrease) in cash and restricted cash(7,889)24,733 
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
Three Months Ended March 31,
20202021
Cash and restricted cash
Beginning of period80,067 311,333 
End of period$72,178 $336,066 
Supplemental disclosures of cash flow information
Cash paid for interest$3,256 $1,030 
Supplemental disclosures of non-cash investing and financing activities
Capitalized stock-based compensation expense$90 $122 












































The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

1.Description of Business and Significant Accounting Policies
Description of Business

Upstart Holdings, Inc. and its subsidiaries (together “Upstart,” or the “Company”) apply modern data science and technology to the process of originating consumer credit. The Company helps bank partners originate credit by providing them with a proprietary, cloud-based, artificial intelligence lending platform. As the Company’s technology continues to improve and additional banks adopt the Upstart platform, consumers benefit from improved access to affordable and frictionless credit.

Upstart Network, Inc. was incorporated in Delaware in 2012. Pursuant to a restructuring, Upstart Holdings, Inc. was incorporated in December 2013 and became the holding company of Upstart Network, Inc. The Company currently operates in the United States and is headquartered in San Mateo, California and Columbus, Ohio. The Company’s fiscal year ends on December 31.
Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements included in our Annual Report on Form 10-K and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive income and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated of any future annual or interim periods.

Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Significant estimates and assumptions made in the accompanying condensed consolidated financial statements, which management believes are critical in understanding and evaluating the Company’s reported financial results include: (i) fair value determinations; (ii) stock-based compensation; (iii) consolidation of VIEs; and (iv) provision for income taxes, net of valuation allowance for deferred tax assets. The Company bases its estimates on various factors it believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
Stock-Based Compensation

The Company issues stock options and restricted stock units (“RSUs”) to employees and nonemployees, including directors and third-party service providers, and employee stock purchase rights granted under the Company’s employee stock purchase plan (“ESPP”). Stock options and employee stock purchase rights granted under the ESPP are initially measured at fair value at the date of grant using the Black-Scholes option-pricing model. RSUs are measured at the fair market value of our common stock at the grant date. Stock-based
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

compensation expenses are recognized based on their respective grant-date fair values. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures, such that the expense is recorded only for those stock options that are expected to vest.
Other Income (Expense)

In the three months ended March 31, 2020, other income (expense) primarily consists of dividend income earned by the Company on its unrestricted cash balance which is recognized in the period earned.

In April 2020, the Company received a forgivable loan under the Paycheck Protection Program (“PPP”), totaling $5.3 million with a stated annual interest rate of 1%. All loan payments are deferred for six months if not forgiven under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan and accrued interest are forgivable for borrowers who use the loan proceeds for eligible expenses during a twenty-four week period following the borrower’s receipt of the loan and maintain payroll and employee headcount. The Company has used the full proceeds of the loan for eligible expenses within the required period. The Company determined that forgiveness of the loan under the CARES Act was reasonably assured and recorded the full amount of proceeds as other income in the condensed consolidated statement of operations comprehensive income in 2020. In March 2021, the Company voluntarily repaid proceeds received under the Paycheck Protection Program plus accrued interest totaling $5.3 million. The Company recognized the loan principal repayment as an other expense.
Recently Adopted Accounting Pronouncements
        
The Company adopted the following accounting standards during the three months ended March 31, 2021:

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The standard is effective January 1, 2021 for emerging growth companies that have adopted the private company relief. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs after the date of adoption. The guidance became effective on January 1, 2021 and the Company adopted the standard on a prospective basis. The adoption of the standard did not have a material impact on the Company’s financial statements or related disclosures.

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The standard removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and also simplifies the diluted earnings per share calculation in certain areas The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted. The Company early adopted ASU 2020-06 on January 1, 2021 with no material impact on the Company’s financial statements or related disclosures.
Recently Issued Accounting Pronouncements

In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2023 for emerging growth companies that have adopted the private company relief. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. The Company accounts for its loans at fair value through net income, which is outside the scope of Topic 326. For available for sale debt
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

securities, the guidance will require recognition of expected credit losses by recognizing an allowance for credit losses when the fair value of the security is below amortized cost and the recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. The Company is evaluating the impact this ASU will have on its condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income, condensed consolidated statements of cash flows and related disclosures. The Company plans to adopt Topic 326 effective as of January 1, 2023.

In March 2020 the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting followed by and ASU 2021-01, Reference Rate Reform, Scope issued in January 2021. ASU 2020-04 and ASU 2021-01 provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is currently evaluating the impact of the adoption of ASU 2020-04 and ASU 2021-01 on its condensed consolidated financial statements and related disclosures.

2.Revenue
Revenue from fees, net

The Company disaggregates revenue from fees by type of service for the periods presented as follows:
Three Months Ended March 31,
20202021
Revenue from fees, net:
Platform and referral fees, net$60,230 $106,953 
Servicing fees, net7,783 9,217 
Total revenue from fees, net$68,013 $116,170 
Platform and referral fees, net

The Company enters into contracts with bank partners to provide access to a cloud-based artificial intelligence lending platform developed by the Company (the “Upstart platform”) to enable banks to originate unsecured personal and auto refinance loans. The Upstart platform includes a cloud-based application (through Upstart.com or a bank-branded program) for submitting loan applications, verifying information provided within submitted applications, risk underwriting (through a series of proprietary technology solutions), delivery of electronic loan offers, and if the offer is accepted by the borrower, an electronic loan documentation signed by the borrower. Bank partners can specify certain parameters of loans they are willing to originate. Under these contracts, bank partners can choose to use Upstart’s referral services, which allow them to access new borrowers through Upstart’s marketing channels. The Company’s contracts with bank partners are non-cancelable and generally have 12-month terms that automatically renew.

After origination, Upstart-powered loans are either retained by bank partners, purchased by the Company for immediate resale to institutional investors under loan sale agreements, or purchased and held by the Company. For loans purchased by the Company, Upstart pays bank partners a one-time loan premium fee upon completion of the minimum holding periods. Upstart also pays bank partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. The monthly loan trailing fees are paid based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. Both the loan premium fees and loan trailing fees are consideration payable to customers and are recorded as
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

a reduction to platform and referral fees, net, which is part of revenue from fees, net, in the condensed consolidated statements of operations and comprehensive income for the periods presented. The Company recognized $2.4 million and $3.6 million of loan premium fees and loan trailing fees as contra-revenue within platform and referral fees, net for the three months ended March 31, 2020 and 2021, respectively.

The Company started paying loan trailing fees on January 1, 2019. As of December 31, 2020 and March 31, 2021, the Company recorded $1.3 million and $1.8 million of loan trailing fee liability, respectively, which is recorded at fair value and included within accrued expenses other liabilities on the Company’s condensed consolidated balance sheets. Refer to “Note 4. Fair Value Measurement” for additional information on changes in fair value associated with trailing fee liabilities.

The Company’s arrangements for platform and referral services typically consist of an obligation to provide one or both of these services to customers, which are our bank partners, on a when and if needed basis (a stand-ready obligation), and revenue is recognized as such services are performed. Additionally, the services have the same pattern and period of transfer, and when provided individually or together, are accounted for as a single combined performance obligation representing a series of distinct services.

Platform and referral services are typically provided under a fixed or declining (tier-based) price per unit based on volume or as a percentage of the total value of loans originated each period; however, pricing for these services may also be based on minimum usage fees. The tier-based pricing, when offered, resets on a monthly basis and does not accumulate. Given that the nature of the Company’s promise is to stand ready and provide continuous access to and process transactions through the platform, tier-based pricing based on usage represents variable consideration. Since the variable fees relate directly to the day in which such services are provided, they generally meet the criteria for allocating variable consideration entirely to one or more, but not all, performance obligations in a contract. Accordingly, when the requisite criteria are met, variable fees are allocated to and recognized on the day the services are provided. Fees for platform and referrals services are typically billed and paid on a monthly basis. As such, the Company’s contracts with customers do not include a significant financing component.

The Company did not recognize revenue from performance obligations related to prior periods for the three months ended March 31, 2020 and 2021. The Company had no material contract assets, contract liabilities, or deferred contract costs recorded as of December 31, 2020 and March 31, 2021. The Company had $8.1 million and $11.7 million of accounts receivable that are included in other assets on the condensed consolidated balance sheets related to contracts with customers as of December 31, 2020 and March 31, 2021, respectively. The Company’s allowance for bad debt was immaterial as of December 31, 2020 and March 31, 2021, and the Company’s bad debt expense was immaterial for the periods presented.

The Company capitalizes incremental costs of obtaining a contract with a customer, which are certain sales commissions paid to acquire bank partners. Capitalized costs are amortized over the expected period of benefit, which we have determined, based on an analysis, to be 3 years. The Company applies the practical expedient to expense costs to obtain contracts with customers if the amortization period is one year or less. As of March 31, 2021, the Company had an immaterial amount of contract costs capitalized within other assets on the condensed consolidated balance sheets. For the three months ended March 31, 2021, the Company amortized an immaterial amount of capitalized contracts costs to sales and marketing in the condensed consolidated statements of operations and comprehensive income.

For the three months ended March 31, 2020, the Company had one customer which accounted for 79% of the Company’s total revenue and two customers which accounted for 60% and 25% for the three months ended March 31, 2021. Two customers accounted for 34% and 15% of accounts receivable as of December 31, 2020 and 39% and 21% as of March 31, 2021.
Servicing fees, net

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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

The Company also enters into contracts with bank partners and institutional investors to provide loan servicing for the life of Upstart-powered loans. These services commence upon origination of these loans by bank partners and include collection, processing and reconciliations of payments received, investor reporting and borrower customer support as well as distribution of funds to the holders of the loans. The Company charges the loan holder a monthly servicing fee calculated based on a predetermined percentage of the outstanding principal balance. Servicing fees also include certain ancillary fees charged on a per transaction basis for processing late payments and payments declined due to insufficient funds. Servicing fees are recognized in the period the services are provided. Loan servicing fees are not within the scope of Topic 606 and are accounted for under Topic 860, Transfers and servicing of financial assets.

Servicing fees, net also include gains and losses on assets and liabilities recognized under loan servicing arrangements for loans retained by bank partners or loans sold to institutional investors. Such gains or losses are recognized based on whether the benefits of servicing are expected to more than adequately compensate the Company for carrying out its servicing obligations. Servicing fees also include changes in fair value of loan servicing assets and liabilities in the periods presented. Refer to “Note 4. Fair Value Measurement” for additional information on changes in fair value associated with servicing assets and liabilities.

The Company recognized gains and losses related to loan servicing rights upon loan sales for the periods presented as follows:
Three Months Ended March 31,
20202021
Net gain (loss) related to loan servicing rights$1,459 $(67)

The Company generally outsources borrower payment collections for loans that are more than 30 days past due or charged off to third-party collection agencies. The Company charges bank partners and institutional investors for collection agency fees related to their outstanding loan portfolio. The Company has discretion in hiring the collection agencies and determining the scope of their work. As the principal in the arrangement, the Company recognizes gross revenue from collection agency fees in the period that the services are provided. Upstart also receives certain ancillary fees inclusive of late payment fees and ACH fail fees. Revenue from collection agency fees and borrower fees are included in servicing fees, net as part of revenue from fees, net in the Company’s condensed consolidated statements of operations and comprehensive income. The total fees charged by collection agencies are also recognized in the period incurred and reported as part of customer operations expenses.

The Company recognized collection agency fees and borrower fees, which are included in servicing fees, net for the periods presented as follows:
Three Months Ended March 31,
20202021
Collection agency fees$800 $863 
Borrower fees$517 $886 
Interest Income and Fair Value Adjustments, Net

Interest income and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments, held in the Company’s normal course of business at fair value, including loans, notes receivable and residual certificates, payable to securitization note holders and residual certificate holders.

The table below presents components of the interest income and fair value adjustments, net presented in the Company’s condensed consolidated statements of operations and comprehensive income:

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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

Three Months Ended March 31,
20202021
Interest income and fair value adjustments, net(1):
Interest income$9,183 $3,405 
Interest expense(3,255)(1,030)
Fair value and other adjustments, net(9,947)2,800 
Total interest income and fair value adjustments, net$(4,019)$5,175 

(1)     Includes interest income, interest expense and fair value adjustments, net related to consolidated securitization trusts for the three months ended March 31, 2020 is as follows:
Three Months Ended March 31,
2020
Interest income and fair value adjustments, net related to consolidated securitization trusts:
Interest income$3,379 
Interest expense(569)
Fair value and other adjustments, net(3,000)
Total interest income and fair value adjustments, net$(190)
Interest income

Interest income is recognized based on the terms of the underlying agreements with borrowers for loans held on the Company’s condensed consolidated balance sheets and is earned over the life of a lioan.

Interest income also includes accrued interest earned on outstanding loans but not collected. Loans that have reached a delinquency of over 120 days are classified as non-accrual status and any accrued interest recorded in relation to these loans is reversed in the respective period. As of December 31, 2020 and March 31, 2021, the Company has recorded $0.9 million and $0.7 million of accrued interest income in loans on the condensed consolidated balance sheets, respectively.
Interest expense

Interest expense is primarily related to interest recorded on the Company’s borrowings and the notes issued as part of the consolidated securitizations. Interest expense includes accrued interest incurred but not paid. Accrued interest expenses were immaterial as of December 31, 2020 and March 31, 2021.
Fair value and other adjustments, net

Fair value and other adjustments, net include changes in fair value of financial instruments, other than loan servicing assets and liabilities, common stock warrant liabilities, and convertible preferred stock warrant liabilities. These adjustments are recorded in the Company’s earnings and include both realized and unrealized changes to the value of related assets and liabilities. Refer to “Note 4. Fair Value Measurement” for additional information.

Fair value and other adjustments, net also include income attributable to third-party residual certificate holders for the consolidated securitization and amounts received from borrowers for previously charged-off loans held on the Company’s condensed consolidated balance sheets. These amounts are recognized in the period received.

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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

3.Securitizations and Variable Interest Entities
Consolidated VIEs

The Company consolidates VIEs in which the Company has a variable interest and is determined to be the primary beneficiary. This determination is based on whether the Company has a variable interest (or combination of variable interests) that provides the Company with (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. The Company continually reassesses whether it is the primary beneficiary of a VIE throughout the entire period the Company is involved with the VIE.

The Company also determines whether decision-maker or service-provider fees are variable interests. Decision-maker or service-provider fees are not considered variable interests when the arrangement does not expose the Company to risks of loss that a potential VIE was designed to pass on to its variable interest holders, the fees are commensurate, the arrangement is at market, and the Company does not have any other interests (including direct interests and certain indirect interests held through related parties) that absorb more than an insignificant amount of a VIE’s potential variability. This determination can have a significant impact on the Company’s consolidation analysis, as it could affect whether a legal entity is a VIE and whether the Company is the primary beneficiary of a VIE. When the Company’s decision-maker or service-provider fee is not a variable interest, the Company is viewed as acting as a fiduciary for the potential VIE.
Warehouse Entities

The Company established Upstart Loan Trust to enter into warehouse credit facilities for the purpose of purchasing Upstart-powered loans. See “Note 7. Borrowings” for additional information. The entity is a Delaware statutory trust that is structured to be bankruptcy-remote, with third-party banks operating as trustees.
Consolidated Securitizations and MOAs

The Company entered into a private offering securitization transactions in April 2018 (“2018-1”). As the sponsor of the securitization transaction, the Company created legal entities for the roles of depositors, issuers, grantor trusts, and MOAs.

Under the risk retention requirements in Title 17 U.S. Code of Federal Regulations Part 246, Credit Risk Retention, promulgated by Securities and Exchange Commission (“RR”), the Company is required to retain at least 5% of the economic risk in securitization transactions in which the Company is the retaining sponsor. The Company elected to satisfy the RR requirements by holding Eligible Horizontal Retained Interests (“EHRIs”) in the form of subordinated certificates within the established MOA.

Concurrently with the closing of the 2018-1 securitization transaction, while maintaining its status as the primary beneficiary of the related MOA, the Company sold 80% of its interests in the MOA to an institutional investor in exchange for cash of approximately $8.0 million based on the fair value of the residual certificates held in the MOA as determined on the pricing date. As a result of the sale, the Company maintained a 20% interest in the MOA and its status as the managing member, while the investor became a non-voting limited member. As of December 31, 2020, no noncontrolling interests were recognized due to deconsolidation of the 2018-1 securitization during 2020.

Upon closing of the securitization transaction, the Company determined that the servicing fees represented a variable interest in the securitization entities due to the EHRIs held by the Company’s MOA to satisfy the RR requirements. The EHRIs held by the MOA were deemed to potentially absorb more than an insignificant amount of the VIEs’ expected losses or expected returns at the inception of the securitization transaction. The Company also
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

determined that it was the primary beneficiary of the entities and consolidated the MOA and trusts associated with the 2018-1 securitization transaction.

Subsequent to the expiration of the RR requirements for 2018-1 in June 2020, the residual certificates held by the MOA was distributed based on the proportional equity held by Upstart and the investor. This distribution required the Company to reassess whether its servicing fee is a variable interest. Although the Company maintains a reduced level of variable interests in the 2018-1 securitization transaction through the EHRIs, the Company’s other interests subsequent to these distributions are no longer expected to absorb more than an insignificant amount of the VIE’s expected losses or expected returns. Therefore, the Company concluded that the fees for servicing the securitization transaction are no longer considered variable interests, and as such the powers the Company possesses through the servicing arrangement is no longer considered in the primary beneficiary determination. As a result, the Company concluded it was no longer the primary beneficiary of the 2018-1 securitization transaction. The Company deconsolidated the legal entities associated with the 2018-1 securitization as of June 30, 2020. The Company recorded an immaterial net gain on the deconsolidation of the entities. The Company maintained its role as servicer of these securitization transactions.

The Company sponsored three additional securitization transactions in August 2018 (“2018-2”), February 2019 (“2019-1”) and August 2019 (“2019-2”), respectively. As the retaining sponsor of these transactions, the Company was subject to the RR requirements and satisfied them through Eligible Vertical Interests (“EVIs”) in the form of a combination of securitization notes and residual certificates through the established MOAs. The Company concluded that it has a variable interest and is the primary beneficiary of the MOAs associated with these securitization transactions. As a result, the Company consolidated these MOAs as of December 31, 2020 and 2019. The Company determined that it is not the primary beneficiary of the trusts which hold the loans associated with these securitization transactions, primarily because the Company’s servicing fees are not considered variable interests, and that the transfer of loans as collateral into these securitization transactions met the definition of a sale under Topic 860, Transferring and Servicing. As such, the Company derecognized these loans from the condensed consolidated balance sheets upon the closing of these securitization transactions. Refer to the Unconsolidated Securitizations section below for more information.
Other Consolidated VIEs

Upstart Loan Trust 2, a Delaware statutory trust, holds personal loans facilitated through the Upstart platform that do not meet the criteria for inclusion in the warehouse credit facilities, or that were the result of the Company’s repurchases of loans for breaches of representations and warranties made to institutional investors, as described above.

The following tables present a summary of financial assets and liabilities from the Company’s involvement with consolidated VIEs:

AssetsLiabilitiesNet Assets
December 31, 2020
Warehouse Entities$71,530 $35,109 $36,421 
Majority-owned Affiliates17,219 7,187 10,032 
Other Consolidated VIEs16,243  16,243 
Total Consolidated VIEs$104,992 $42,296 $62,696 
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

AssetsLiabilitiesNet Assets
March 31, 2021
Warehouse Entities$47,329 $16,394 $30,935 
Majority-owned Affiliates14,678 5,105 9,573 
Other Consolidated VIEs24,716  24,716 
Total Consolidated VIEs$86,723 $21,499 $65,224 

The Company’s continued involvement in all of its securitizations in which it is the sponsor includes loan servicing rights and obligations for which it receives servicing fees over the life of the underlying loans. The Company monitors its status as the primary beneficiary and in case of reconsideration events, updates the analysis accordingly.
Unconsolidated VIEs

The Company’s transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. The Company has various forms of involvement with VIEs, including servicing of loans and holding senior or residual interests in the VIEs. The Company’s transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. The Company has various forms of involvement with VIEs, including servicing of loans and holding senior or residual interests in the VIEs.
Unconsolidated Securitizations

As of March 31, 2021, the Company’s unconsolidated VIEs include entities established as the issuers and grantor trusts for the 2017-1, 2017-2, 2018-1, 2018-2, 2019-1, and 2019-2 securitization transactions (the “Unconsolidated Securitizations”). The Company’s continued involvement in the unconsolidated VIEs is in the form of its role as the sponsor and the servicer of these transactions. For each of the unconsolidated securitizations, the Company determined that it is not the primary beneficiary.

In cases where the VIEs are not consolidated and the transfer of the loans from the Company to the securitization trust meets sale accounting criteria, the Company recognizes a gain or loss on sales of loans. The net proceeds of the sale represent the fair value of any assets obtained or liabilities incurred as part of the transaction. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying securitization trusts.

Upstart Network Trust

Upstart Network Trust (“UNT”), also a Delaware statutory trust, was established in 2014 to facilitate Upstart’s fractional loan program. The Company is the servicer of UNT’s loan assets and previously concluded that the servicing fee represents a variable interest and that the Company is the primary beneficiary of UNT. The program was formally discontinued in 2019 and as a result of a reduction in the Company’s investment in UNT, the Company concluded that it was no longer the primary beneficiary and therefore deconsolidated UNT during 2019. The fair value of the Company’s investment in UNT is included in notes receivable and residual certificates in the condensed consolidated balance sheets as of December 31, 2020 and March 31, 2021. The Company’s continued involvement in UNT includes loan servicing rights and obligations for which it receives servicing fees over the life of the underlying loans

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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

The following tables summarize the aggregate carrying value of assets and liabilities of unconsolidated VIEs in which the Company holds a variable interest but is not the primary beneficiary:

AssetsLiabilitiesNet AssetsMaximum Exposure to Losses
December 31, 2020
Securitizations$484,604 $390,252 $94,352 $24,434 
Upstart Network Trust39,754 39,754  1,707 
Total Unconsolidated VIEs$524,358 $430,006 $94,352 $26,141 

AssetsLiabilitiesNet AssetsMaximum Exposure to Losses
March 31, 2021
Securitizations$407,667 $315,994 $91,673 $21,893 
Upstart Network Trust31,427 31,427  1,355 
Total Unconsolidated VIEs$439,094 $347,421 $91,673 $23,248 


The carrying value of assets that relate to variable interests in unconsolidated VIEs consists of $18.9 million and $16.0 million which are included in notes receivable and residual certificates on the condensed consolidated balance sheets as of December 31, 2020 and March 31, 2021, respectively. The Company also had $7.2 million of cash deposits made to reserve accounts for related securitizations, included in other assets on the condensed consolidated balance sheets as of December 31, 2020 and March 31, 2021.

The Company’s maximum exposure to loss from its involvement with unconsolidated VIEs represents the estimated loss that would be incurred under severe, hypothetical circumstances, for which the Company believes the possibility is remote, such as where the value of securitization notes and senior and residual certificates the Company holds as part of the RR requirement declines to zero.
Retained Interest in Unconsolidated VIEs

The investors and the securitization trusts have no direct recourse to the Company’s assets, and holders of the securities issued by the securitization trusts can look only to the assets of the securitization trusts that issued their securities for payment. The beneficial interests held by the Company and the Company’s MOAs are subject principally to the credit and prepayment risk stemming from the underlying unsecured personal whole loans.
Off-Balance Sheet Loans

Off-balance sheet loans relate to securitization transactions for which the Company has some form of continuing involvement, including as servicer. For a loan related to securitization transactions where servicing is the only form of continuing involvement, the Company would only experience a loss if it were required to repurchase such a loan due to a breach in representations and warranties associated with its loan sale or servicing contracts. Additionally, in the unlikely event principal payments on the loans backing a securitization are insufficient to pay senior note holders, any amounts the Company contributed to the securitization reserve accounts may be depleted.

In December 2019, February 2020, October 2020, and February 2021, the Company co-sponsored securitization transactions (“2019-3”, “2020-1”, “2020-3”, “2021-1”, respectively) with an investment bank. The
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

Company was not required to retain economic risk in these securitization transactions as the co-sponsor investment bank acted as the retaining sponsor. Similar to 2018-2, 2019-1, and 2019-2, the Company contributed certain loans to this securitization as collateral and recognized this transfer under Topic 860, Transferring and Servicing. The Company is also the servicer of these securitization transactions.

In September 2020, the Company co-sponsored an additional securitization transaction (“2020-2”) with an investment bank. The Company did not retain economic risk in this transaction and did not contribute any loans as collateral. The Company is the servicer of this securitization.

4.Fair Value Measurement

The following table presents assets and liabilities measured at fair value and categorized as Level 3 in the fair value hierarchy:
December 31,March 31,
20202021
Assets
Loans$78,460 $57,189 
Notes receivable and residual certificates19,074 16,033 
Loan servicing assets6,831 8,734 
Total assets$104,365 $81,956 
Liabilities
Loan servicing liabilities$8,254 $10,853 
Trailing fee liabilities1,276 1,775 
Total liabilities$9,530 $12,628 

Financial instruments are categorized in the fair value hierarchy based on the significance of unobservable factors in the overall fair value measurement. Since the Company’s loans, notes receivable and residual certificates, other assets, loan servicing assets and liabilities, and trailing fee liabilities do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.
Loans

Loans included in the Company’s condensed consolidated balance sheets are classified as either held-for-sale or held-for-investment. The Company reclassified loans held by the warehouse entities from held-for-investment to held-for-sale as of January 1, 2020, due to the Company’s intent to sell the loans prior to maturity and increasing evidence of their marketability. Other loans held on the Company’s condensed consolidated balance sheets retained their classification as held-for-investment. These loans include loans which do not satisfy the warehouse requirements and loans held in the consolidated securitizations.

The following table presents the fair value of classes of loans held by the Company:
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

December 31,March 31,
20202021
Loans held-for-sale$60,232 $28,794 
Loans held-for-investment18,228 28,395 
Total$78,460 $57,189 
Valuation Methodology

Loans held-for-sale and held-for-investment are measured at estimated fair value using a discounted cash flow model. The fair valuation methodology considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows on loans. Net cash flows are discounted using an estimate of market rates of return. The fair value of these loans also includes accrued interest, which was immaterial as of December 31, 2020 and March 31, 2021.

For the three months ended March 31, 2020 and 2021, the Company elected the measurement alternative under Topic 810, Consolidation, and maximizes the use of observable inputs to estimate the fair value of the financial assets and liabilities of consolidated securitization entities. Under the measurement alternative, the Company measures the financial assets, which consist of held-for-investment and held-for-sale loans in the condensed consolidated balance sheets, and financial liabilities, which consist of securitization notes and residual certificates issued to institutional investors, included in payable to securitization note holders and residual certificate holders in the condensed consolidated balance sheets, using the more observable of the fair value of the financial assets and liabilities. The Company determined the fair value of the amounts payable to securitization note holders and residual certificate holders is more observable than that of the loans. The securitization notes and residual certificates are measured at fair value, and the loans are measured based on the sum of the fair value of the securitization notes and residual certificates, with changes in fair value included in the condensed consolidated statements of operations and comprehensive income.
Significant Inputs and Assumptions

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans held-for-investment and held-for-sale:
December 31, 2020March 31, 2021
MinimumMaximum
Weighted-Average (2)
MinimumMaximum
Weighted-Average (2)
Discount rate6.80 %16.99 %7.44 %3.52 %16.60 %6.74 %
Credit risk rate (1)
0.36 %52.31 %19.82 %0.21 %52.31 %23.09 %
Prepayment rate (1)
11.64 %78.36 %31.03 %12.69 %78.53 %33.68 %
(1)Expressed as a percentage of the original principal balance of the loans
(2)Unobservable inputs were weighted by relative fair value

Discount rates–The discount rates are rates of return used to discount future expected cash flows to arrive at a present value, which represents the fair value. The discount rates used for the projected net cash flows are the Company’s estimates of the rates of return that market participants would require when investing in these financial instruments with cash flows dependent on credit quality of the related loan. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.

Credit risk rates–The credit risk rates are an estimate of the net cumulative principal payments that will not be repaid over the entire life of a financial instrument. The credit risk rates are expressed as a percentage of the
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

original principal amount of the instrument. The estimated net cumulative loss represents the sum of the net losses estimated to occur each month of the life of the instrument, net of the average recovery expected to be received.

Prepayment rates–Prepayment rates are an estimate of the cumulative principal prepayments that will occur over the entire life of a loan as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments impact the projected balances and expected terms of the loans.

The above inputs are similarly used in estimating fair value of related financial instruments. Refer to the Assets and Liabilities related to Securitization Transactions section below for more information.

Significant Recurring Level 3 Fair Value Input Sensitivity

The below table presents the sensitivity of the loans held-for-sale and held-for-investment to adverse changes in key assumptions used in the valuation model as of December 31, 2020 and March 31, 2021, respectively. The estimated fair value of these loans is not sensitive to adverse changes in expected prepayment rates as such changes would not result in a significant impact on the fair value in either periods.

December 31,March 31,
20202021
Fair value of loans$78,460 $57,189 
Discount rates
100 basis point increase(979)(714)
200 basis point increase(1,939)(1,415)
Expected credit loss rates on underlying loans
10% adverse change(1,303)(1,087)
20% adverse change(2,611)(2,126)
Rollforward of Level 3 Fair Values

The following tables include a rollforward of the loans classified within Level 3 of the fair value hierarchy:
Loans Held-for-
Sale
Loans Held-for-InvestmentLoans Held-for-
Investment (Securitized)
Total
Fair value at December 31, 2019$ $141,555 $90,750 $232,305 
Reclassification of loans from HFI to HFS125,297 (125,297)  
Purchases of loans97,924 2,755  100,679 
Sale of loans(94,949)  (94,949)
Purchase of loans for immediate resale to investors848,540   848,540 
Immediate resale to investors(848,540)  (848,540)
Repayments received(6,446)(1,311)(15,273)(23,030)
Changes in fair value recorded in earnings(5,281)(1,019)(8,143)(14,443)
Other changes(34)75 (2)39 
Fair value at March 31, 2020$116,511 $16,758 $67,332 $200,601 
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

Loans Held-for-
Sale
Loans Held-for-InvestmentLoans Held-for-
Investment (Securitized)
Total
Fair value at December 31, 2020$60,232 $18,228 $ $78,460 
Reclassification of loans from HFI to HFS(26)26   
Purchases of loans18,240 12,947  31,187 
Sale of loans(46,469)  (46,469)
Purchase of loans for immediate resale to investors1,294,634   1,294,634 
Immediate resale to investors(1,294,634)  (1,294,634)
Repayments received(3,310)(2,329) (5,639)
Changes in fair value recorded in earnings357 (558) (201)
Other changes(230)81  (149)
Fair value at March 31, 2021$28,794 $28,395 $ $57,189 

Assets related to Securitization Transactions

As of December 31, 2020 and March 31, 2021, the Company held notes receivable and residual certificates with an aggregate fair value of $19.1 million and $16.0 million, respectively. The balances consist of securitization notes and residual certificates corresponding to the 5% economic risk retention the Company is required to maintain as the retaining sponsor of the unconsolidated securitizations.
Valuation Methodology

The discounted cash flow methodology is used to estimate the fair value of notes receivable and residual certificates, using the same projected net cash flows as their related loans. This model uses inputs that are inherently judgmental and reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value.
Significant Inputs and Assumptions

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements of assets related to securitization transactions:
December 31, 2020March 31, 2021
MinimumMaximum
Weighted-Average (2)
MinimumMaximum
Weighted-Average (2)
Notes receivable and residual certificates
Discount rate3.01 %14.00 %5.84 %3.01 %14.00 %5.83 %
Credit risk rate (1)
0.04 %50.69 %17.12 %0.04 %50.69 %17.40 %
Prepayment rate (1)
15.60 %36.88 %27.63 %15.60 %36.88 %27.67 %
(1)Expressed as a percentage of the original principal balance of the loans underlying the financial instruments
(2)Unobservable inputs were weighted by relative fair value

Significant Recurring Level 3 Fair Value Input Sensitivity

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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)

The securities issued in the securitization transactions are senior or subordinated based on the waterfall criteria of loan payments to each security class, with the residual interest (the “residual certificates”) issued being the first to absorb credit losses in accordance with the waterfall criteria. Accordingly, the residual certificates are the most sensitive to adverse changes in credit risk rates. Depending on the specific securitization, a hypothetical increase in the credit risk rate of 10% to 20% would result in significant decreases in the fair value of the residual certificates. On average, a hypothetical increase in the credit risk rate of 20% would result in a 17% decrease in the fair value of the residual certificates. The remaining classes of securities, with the exception of those in 2018-2, are all overcollateralized such that changes in credit risk rates are not expected to have significant impacts on their fair values.

The fair value of the securities is also sensitive to adverse changes in discount rates, which represent estimates of the rates of return that institutional investors would require when investing in financial instruments with similar risk and return characteristics. On average, a hypothetical 100 basis point increase in discount rates results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 1.23% and 1.05% as of December 31, 2020 and March 31, 2021, respectively. On average, a hypothetical 200 basis point increase in discount rates results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 2.36% and