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 | |||||
| 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
(Exact name of registrant as specified in its charter)
_________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| Upstart Holdings, Inc. | ||||||||||||||
| (Address of principal executive offices, including zip code) | ||||||||||||||
( | ||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||||||||
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||
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.
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| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller 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 November 1, 2023 there were 85,057,317 shares of the registrant’s common stock outstanding.
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Upstart Holdings, Inc.
FORM 10-Q
TABLE OF CONTENTS
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| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
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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 achieve and maintain profitability;
•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 through our AI lending marketplace;
•our ability to successfully maintain a diversified and resilient loan funding strategy, including lending partnerships, whole loan sales, committed capital arrangements and securitization transactions;
•our capital allocation plans, including expectations regarding funding loans through our balance sheet and allocations of cash and timing for any share repurchases and other investments;
•our ability to maintain competitive interest rates offered to borrowers on our platform, while enabling our lending partners and institutional investors 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;
•our expectations regarding macroeconomic events, including rising interest and inflation rates and monetary policy changes;
•our expectations regarding the credit performance of Upstart-powered loans;
•the impact of recent bank failures, including disruption in the banking industry, and any associated effects on our business and industry;
•our expectations and management of future growth, including expanding the number of potential borrowers;
•our reductions in workforce announced in November 2022 and January 2023, including our ability to successfully implement such reductions in workforce or achieve the anticipated cost reductions;
•our ability to successfully adjust our proprietary AI models, products and services, and provide up-to-date information to our lending partners, 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;
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•our expectations regarding the success of our strategic investments and acquisitions, including the integration of acquired operations, products, technology, internal controls and personnel;
•our expectations regarding new and evolving markets and our ability to enter into new markets and introduce new products and services;
•our expectations concerning relationships with third parties;
•our ability to protect against increasingly sophisticated fraudulent borrowing and online theft;
•our ability to service our loans and 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 ability to effectively secure and maintain the confidentiality of the information received, accessed, stored, provided and used across our systems;
•our ability to successfully obtain and maintain corporate funding and liquidity to support continued growth and for general corporate purposes;
•our ability to attract, integrate and retain qualified employees;
•our ability to maintain an effective system of disclosure controls and internal control over financial reporting and operations;
•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
•our ability to manage 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.
Forward-looking statements should not be relied upon 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. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. 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. Undue reliance should not be placed on our forward-looking statements as we may not actually achieve the plans, intentions, or expectations disclosed in our forward-
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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.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Upstart Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
Loans (at fair value)(1) | |||||||||||
| Property, equipment, and software, net | |||||||||||
| Operating lease right of use assets | |||||||||||
| Beneficial interests (at fair value) | |||||||||||
| Non-marketable equity securities | |||||||||||
| Goodwill | |||||||||||
Other assets (includes $ | |||||||||||
Total assets(2) | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Payable to investors | |||||||||||
| Borrowings | |||||||||||
| Payable to securitization note holders (at fair value) | |||||||||||
Accrued expenses and other liabilities (includes $ | |||||||||||
| Operating lease liabilities | |||||||||||
Total liabilities(2) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
____________
(1)Includes $196.5 million as of September 30, 2023 of loans, at fair value, contributed as collateral for the consolidated securitization. Refer to “Note 6. Fair Value Measurement” for details.
(2)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, 2022 and September 30, 2023. 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, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Loans (at fair value) | |||||||||||
Other assets (includes $ | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Payable to investors | $ | $ | |||||||||
| Borrowings | |||||||||||
| Payable to securitization note holders (at fair value) | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Total net assets | $ | $ | |||||||||
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 Loss
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Revenue from fees, net | $ | $ | $ | $ | |||||||||||||||||||
| Interest income and fair value adjustments, net: | |||||||||||||||||||||||
Interest income(1) | |||||||||||||||||||||||
Interest expense(1) | ( | ( | ( | ( | |||||||||||||||||||
Fair value and other adjustments(1) | ( | ( | ( | ( | |||||||||||||||||||
| Total interest income and fair value adjustments, net | ( | ( | ( | ( | |||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Customer operations | |||||||||||||||||||||||
| Engineering and product development | |||||||||||||||||||||||
| General, administrative, and other | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Net loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average number of shares outstanding used in computing net loss per share, basic | |||||||||||||||||||||||
| Weighted-average number of shares outstanding used in computing net loss per share, diluted | |||||||||||||||||||||||
(1)Balances for three and nine months ended September 30, 2023 include amounts related to the consolidated securitization. Refer to “Note 2. Revenue” for details.
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 Stockholders’ Equity
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Repurchases of stock | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | ( | — | ( | |||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Repurchases of stock | ( | ( | ( | — | ( | ||||||||||||||||||||||||
Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
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)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Change in fair value of financial instruments | |||||||||||
| Stock-based compensation | |||||||||||
| Gain on loan servicing arrangement, net | ( | ( | |||||||||
| Depreciation and amortization | |||||||||||
| Non-cash interest expense | |||||||||||
| Other | ( | ||||||||||
| Net changes in operating assets and liabilities: | |||||||||||
| Purchase of loans held-for-sale | ( | ( | |||||||||
| Proceeds from sale of loans held-for-sale | |||||||||||
| Principal payments received for loans held-for-sale | |||||||||||
| Principal payments received for loans held by consolidated securitization | |||||||||||
| Other assets | |||||||||||
| Operating lease liability and right-of-use asset | |||||||||||
| Accounts payable | ( | ||||||||||
| Payable to investors | ( | ( | |||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of loans held-for-investment | ( | ( | |||||||||
| Proceeds from sale of loans held-for-investment | |||||||||||
| Principal payments received for loans held-for-investment | |||||||||||
| Principal payments received for notes receivable and repayments of residual certificates | |||||||||||
| Acquisition of beneficial interests | ( | ||||||||||
| Purchase of non-marketable equity securities | ( | ||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Capitalized software costs | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Payments made on securitization notes | ( | ||||||||||
| Proceeds from issuance of securitization notes | |||||||||||
| Proceeds from borrowings | |||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | |||||||||
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2023 | ||||||||||
| Repurchases of common stock | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Change in cash and restricted cash | ( | ||||||||||
| Cash and restricted cash | |||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash (received) paid for income taxes, net | ( | ||||||||||
| Supplemental disclosures of non-cash investing and financing activities | |||||||||||
| Securities retained under consolidated securitization transaction | $ | $ | |||||||||
| Beneficial interests included in payable to investors | |||||||||||
| Capitalized stock-based compensation expense | |||||||||||
The following presents cash and restricted cash by category within the unaudited condensed consolidated balance sheets:
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash and restricted cash | $ | $ | |||||||||
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”, the “Company”, “we”, or “our”) apply artificial intelligence models and cloud applications to the process of originating consumer credit. The Company helps originate credit by providing lending partners with access to a proprietary, cloud-based, artificial intelligence lending marketplace. As the Company’s technology continues to improve and additional lending partners adopt the Upstart platform, consumers benefit from improved access to affordable and frictionless credit. 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. Certain prior period amounts have been reclassified or disaggregated where appropriate to conform to the current period presentation of such amounts. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss 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, 2022.
Use of Estimates
The preparation of the unaudited 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.
Derivative Financial Instruments
The Company evaluates its contracts and financial instruments to determine if these contracts and instruments or their parts meet the definition of derivatives in accordance with the requirements of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Derivatives are recorded on the condensed consolidated balance sheets at fair value with changes in the value recorded in earnings on the condensed consolidated statements of operations and comprehensive loss, and are reported within the net cash used in operating activities in the condensed consolidated statements of cash flows. 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)
Consolidated Securitization
The Company elected the measurement alternative under ASC 810, Consolidation, and maximizes the use of observable inputs to estimate the fair value of the financial assets and liabilities of a consolidated securitization entity. Under the measurement alternative, the Company determined that the fair value of the liabilities, which consists of securitization notes and residual certificates issued by the entity, is based on more observable inputs than inputs used to determine the fair value of the assets, which consists of held-for-sale loans. Thus, the fair value of these loans is determined by the sum of the fair value of the related securitization notes and residual certificates. Changes in the fair value of these assets and liabilities are included in the consolidated statements of operations and comprehensive loss. See “Note 3. Variable Interest Entities” and “Note 6. Fair Value Measurement” for additional information.
Recently Adopted Accounting Pronouncements
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which was issued by the FASB in October 2021. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the previous business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The ASU will be applied prospectively to business combinations occurring after the adoption date. The adoption of this new standard did not have an impact on the Company's condensed consolidated financial statements or related disclosures.
Recently Issued Accounting Pronouncements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (the “Update”). The amendments in this Update clarify or improve current disclosure and presentation requirements of a variety of topics, including ASC 230-10, Statement of Cash Flows, ASC 260-10, Earnings Per Share, ASC 470-10, Debt, and ASC 815-10, Derivatives, and are intended to align requirements under GAAP with those under Regulation S-X or Regulation S-K. The effective date for each amendment in the Update will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective. However, if by June 30, 2027, the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K, the amendments will not be effective for any entities. Early adoption is prohibited and the amendments should be applied prospectively. 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)
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Revenue from fees, net: | |||||||||||||||||||||||
| Platform and referral fees, net | $ | $ | $ | $ | |||||||||||||||||||
| Servicing and other fees, net | |||||||||||||||||||||||
| Total revenue from fees, net | $ | $ | $ | $ | |||||||||||||||||||
Platform and Referral Fees, Net
The Company enters into contracts with lending partners to provide access to a cloud-based artificial intelligence lending marketplace developed by the Company (the “Upstart platform”) to enable lending partners to originate unsecured personal and secured auto loans. The Upstart platform includes a cloud-based application (through Upstart.com or a lending partner-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, electronic loan documentation signed by the borrower. Lending partners can specify certain parameters of loans they are willing to originate. Under these contracts, lending partners can choose to use Upstart’s referral services, which allow them to access new borrowers through Upstart’s marketing channels.
After origination, Upstart-powered loans are either retained by lending 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 lending partners a one-time loan premium fee upon completion of the minimum contractual holding period. Upstart also pays lending partners monthly loan trailing fees 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, which are our lending partners, and are recorded as 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 loss. The Company recognized $6.1 million and $20.9 million of loan premium fees and loan trailing fees as contra-revenue within platform and referral fees, net during the three and nine months ended September 30, 2022, respectively, and $2.2 million and $5.6 million during the three and nine months ended September 30, 2023, respectively.
As of December 31, 2022 and September 30, 2023, the Company recognized $4.9 million and $4.2 million of loan trailing fee liability, respectively, which is recorded at fair value and included within accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets. Refer to “Note 6. 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, 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.
16
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)
Platform and referral services are typically provided under a fixed or variable price per unit based on a percentage of the value of loans originated each period with certain lending partners subject to minimum fees; however, pricing for these services may also be based on usage fees, calculated as a percentage of each loan originated. The nature of the Company’s promise is to stand-ready and provide continuous access to and process transactions through the platform. Platform and referral fees represent variable consideration as loan origination volume is not known at contract inception. These fees are determined each time a loan is originated. Fees for platform and referral services are typically billed and paid on either a daily or monthly basis. As such, the Company’s contracts with customers do not include a significant financing component.
The Company had $31.1 million and $19.8 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, 2022 and September 30, 2023, respectively. The standard payment terms on accounts receivable are 30 days. The Company’s allowance for bad debt and bad debt expense were immaterial for the periods presented.
The Company capitalizes incremental costs of obtaining a contract with a customer, which are certain sales commissions paid to employees in connection with the acquisition of lending partners. Capitalized costs are amortized over the expected period of benefit, which we have determined, based on an analysis, to be three 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 December 31, 2022 and September 30, 2023, the Company had a $2.6 million and $2.7 million amount of contract costs, respectively, capitalized within other assets on the condensed consolidated balance sheets. The Company amortized an immaterial amount of capitalized contracts costs to sales and marketing in the condensed consolidated statements of operations and comprehensive loss for the periods presented.
Customers accounting for greater than 10% of total revenue were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Customer A | |||||||||||||||||||||||
| Customer B | |||||||||||||||||||||||
| Customer C | * | * | |||||||||||||||||||||
* Less than 10%
Customers accounting for greater than 10% of accounts receivable were as follows:
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
| Customer C | |||||||||||
Servicing and Other Fees, Net
The Company also enters into contracts with lending partners and institutional investors to provide loan servicing for the life of Upstart-powered loans. These services commence upon origination of these loans by lending partners and include collection, processing and reconciliations of payments received, institutional 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
17
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)
are provided. Loan servicing fees are not within the scope of ASC 606 and are accounted for under ASC 860, Transfers and Servicing.
Servicing and other fees, net also include gains and losses on assets and liabilities recognized under loan servicing arrangements for loans retained by lending partners or loans sold to institutional investors. Such gains or losses are recognized based on whether the benefits of servicing are expected to be more or less than adequate compensation for servicing obligations performed by the Company. Servicing fees also include changes in fair value of loan servicing assets and liabilities in the periods presented. Refer to “Note 6. Fair Value Measurement” for additional information on changes in fair value associated with servicing assets and liabilities.
The Company recognized a net gain related to loan servicing rights upon loan sales for the periods presented as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Net gain related to loan servicing rights | $ | $ | $ | $ | |||||||||||||||||||
The Company charges lending partners and institutional investors for collection agency fees related to their outstanding loan portfolio. The Company either performs borrower collection activities in-house, or outsources to third-party collection agencies particularly for loans that are more than 30 days past due or charged off. 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 borrower fees inclusive of late payment fees and ACH fail fees. Revenue from collection agency fees and borrower fees are included in servicing and other fees, net as part of revenue from fees, net in the Company’s condensed consolidated statements of operations and comprehensive loss. 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 and other fees, net for the periods presented as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Collection agency fees | $ | $ | $ | $ | |||||||||||||||||||
| Borrower fees | $ | $ | $ | $ | |||||||||||||||||||
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 derivatives, beneficial interests, loans and notes receivable and residual certificates.
18
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
Interest income (1) | $ | $ | $ | $ | |||||||||||||||||||
Interest expense (1) | ( | ( | ( | ( | |||||||||||||||||||
| Fair value and other adjustments | |||||||||||||||||||||||
| Unrealized loss, charge-offs, and other adjustments, net | ( | ( | ( | ( | |||||||||||||||||||
| Realized loss on sale of loans, net | ( | ( | ( | ( | |||||||||||||||||||
Total fair value and other adjustments, net (1) | ( | ( | ( | ( | |||||||||||||||||||
| Total interest income and fair value adjustments, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1)Includes interest income, interest expense and fair value adjustments, net related to the consolidated securitization as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
| Interest income and fair value adjustments, net related to consolidated securitization: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Fair value and other adjustments | |||||||||||||||||||||||
| Unrealized gain, charge-offs, and other adjustments, net | |||||||||||||||||||||||
| Realized loss on sale of loans, net | |||||||||||||||||||||||
| Total fair value and other adjustments, net | |||||||||||||||||||||||
| Total interest income and fair value adjustments, net | $ | $ | $ | $ | |||||||||||||||||||
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 loan.
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. The Company does not record an allowance for credit losses on accrued interest receivable. As of December 31, 2022 and September 30, 2023, the Company has recorded $12.8 million and $12.0 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 on warehouse credit facilities, and interest expense related to the consolidated securitization. Interest expense includes accrued interest incurred but not paid. Accrued interest expenses were immaterial as of December 31, 2022 and September 30, 2023.
19
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)
Interest expense also includes changes in fair value of the interest rate cap. Refer to “Note 4. Derivative Financial Instruments” for additional information.
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 and the interest rate cap. These adjustments are recorded in the Company’s condensed consolidated statements of operations and comprehensive loss and include both realized and unrealized changes to the value of related assets and liabilities. Refer to “Note 6. Fair Value Measurement” for additional information.
3. Variable Interest Entities
Consolidated VIEs
The Company consolidates variable interest entities (“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 following tables present a summary of financial assets and liabilities from the Company’s involvement with consolidated VIEs:
| Assets | Liabilities | Net Assets | |||||||||||||||
| December 31, 2022 | |||||||||||||||||
| Consolidated securitization | $ | $ | $ | ||||||||||||||
| Consolidated warehouse entities | |||||||||||||||||
| Other consolidated VIEs | |||||||||||||||||
| Total consolidated VIEs | $ | $ | $ | ||||||||||||||
20
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)
| Assets | Liabilities | Net Assets | |||||||||||||||
| September 30, 2023 | |||||||||||||||||
| Consolidated securitization | $ | $ | $ | ||||||||||||||
| Consolidated warehouse entities | |||||||||||||||||
| Other consolidated VIEs | |||||||||||||||||
| Total consolidated VIEs | $ | $ | $ | ||||||||||||||
Consolidated Securitization
On July 6, 2023, the Company completed a private securitization securities offering (“UPST 2023-2”). As a retaining sponsor of the transaction, under risk retention requirements in Title 17 U.S. Code of Federal Regulations Part 246, Credit Risk Retention, promulgated by the Securities and Exchange Commission, the Company is required to retain at least 5% of the economic risk in UPST 2023-2. The Company elected to satisfy the risk retention requirements by holding eligible vertical retained interests in the form of a combination of securitization notes and residual certificates. The Company has also retained the remainder of the residual certificates issued as part of the transaction. The Company was the sole contributor of the collateral, which included $204.7 million unpaid principal balance of Upstart-powered loans held by the Company. The weighted-average coupon of the securitization notes issued was approximately 9.2 %, and their sale generated approximately $165.3 million in gross cash proceeds. These proceeds and payments made on securitization notes are classified as financing activities in the statement of cash flows.
Upon closing of UPST 2023-2, the Company determined that servicing fees represent a variable interest due to the retained interests held by the Company. The retained interests held by the Company were deemed to potentially absorb more than an insignificant amount of expected losses or expected returns at the inception of the securitization transaction. The Company, as servicer, also has the power to direct the activities that most significantly impact the economics of the entities associated with the UPST 2023-2 securitization, and as such, the Company determined it was the primary beneficiary and consolidated the entities associated with UPST 2023-2.
The loans held in the consolidated securitization trust are classified as held-for-sale and included in loans, at fair value, and the notes sold to third-party investors are recorded at fair value as payable to securitization note holders on the condensed consolidated balance sheets. Refer to “Note 6. Fair Value Measurement” for additional information on determination of fair value of these assets and liabilities. The value of the residual certificates issued as part of the securitization and retained by the Company was eliminated as part of the consolidation.
Warehouse Entities
The Company established Upstart Loan Trust (“ULT”) and Upstart Auto Warehouse Trust (“UAWT”) to enter into warehouse credit facilities for the purpose of purchasing Upstart-powered loans. Refer to “Note 9. Borrowings” for additional information. The entities are Delaware statutory trusts that are structured to be bankruptcy-remote, with third-party banks operating as trustees.
Other Consolidated VIE
The Company has formed a number of VIEs for the purpose of holding Upstart-powered loans that are not pledged or eligible to be pledged to the Company’s warehouse credit facilities.
Unconsolidated VIEs
The Company’s transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. While the Company continues to be involved with the unconsolidated VIEs
21
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)
in its role as the sponsor and the servicer of securitization transactions, the Company does not hold a significant economic interest in these entities and has determined that it is not the primary beneficiary of these entities. The Company’s unconsolidated VIEs include entities established as the issuers and grantor trusts for various securitization transactions.
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.
During the three months ended September 30, 2023, the Company exercised a clean up call related to two unconsolidated VIEs and subsequently liquidated the associated entities. A clean up call option allows the Company, as servicer, to repurchase the remaining transferred financial asset once the collateral falls below a predefined level, which represents the point where servicing becomes administratively burdensome. The clean up calls had no material impact on the condensed consolidated financial statements of the Company.
The following tables summarize the aggregate value of assets and liabilities of unconsolidated VIEs in which the Company holds a variable interest but is not the primary beneficiary:
| Assets | Liabilities | Net Assets | Maximum Exposure to Losses | ||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Securitizations and other | $ | $ | $ | $ | |||||||||||||||||||
| Assets | Liabilities | Net Assets | Maximum Exposure to Losses | ||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||
| Securitizations and other | $ | $ | $ | $ | |||||||||||||||||||
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. The carrying value of assets that relate to variable interests in unconsolidated VIEs consists of $6.2 million and $2.8 million of securitization notes and residual certificates which are included in other assets on the condensed consolidated balance sheets as of December 31, 2022 and September 30, 2023, respectively. The Company also had $7.1 million and $6.0 million of cash deposits held as reserve accounts for related securitizations, included in other assets on the condensed consolidated balance sheets as of December 31, 2022 and September 30, 2023.
For securitization transactions where the Company is not the risk retaining sponsor, and 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 and is not able to collect all repayments, refer to “Note 12. Commitments and Contingencies” for further information.
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
22
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)
4. Derivative Financial Instruments
In February 2023 and June 2023, UAWT and ULT entered into interest rate cap agreements with a strike rate of 3.0 % and 3.25 %, respectively. The agreements were entered into in relation to the warehouse credit facilities which bear floating interest rates, refer to “Note 9. Borrowings” for further information. The interest rate caps provide protection to the credit facilities against exposure to changes in cash flows to the extent the underlying interest rate on the facility exceeds the strike rate. The UAWT interest rate cap matures in April 2029 and the ULT interest rate cap matures June 2025. The interest rate cap agreements meet the definition of a derivative and are reported at fair value. Refer to “Note 6. Fair Value Measurement” for additional information.
The following table presents the notional amount as well as the fair value of interest rate caps, which is reported as part of other assets on the condensed consolidated balance sheets. There were no material derivative financial instruments held by the Company as of December 31, 2022.
| September 30, 2023 | |||||||||||
| Notional Amount | Fair Value | ||||||||||
| Interest rate caps | $ | $ | |||||||||
The Company recognizes changes in fair value of these instruments in earnings and reports them as part of the interest expense on the condensed consolidated statements of operations and comprehensive loss. The table below presents gains recognized on the interest rate caps during the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
Fair value gains, net on interest rate caps | $ | $ | $ | $ | |||||||||||||||||||
5. Beneficial Interests
In connection with certain committed capital agreements, the Company has risk sharing arrangements in which it is obligated to make payments to the loan buyer or is entitled to receive payments from the loan buyer if credit losses on the underlying loans subject to the arrangements deviate from initial expectations, subject to a dollar cap. The Company has beneficial interests in these arrangements which either meet the definition of a derivative or that meet the criteria of a debt security. As of September 30, 2023 the Company’s capital at risk, which represents the maximum exposure to losses, under these arrangements was $66.1 million.
23
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)
| September 30, 2023 | |||||||||||
| Unpaid Principal Balance | Fair Value | ||||||||||
Beneficial interests | $ | $ | |||||||||
The Company recognizes these beneficial interests at fair value with changes reported as part of the fair value and other adjustments on the condensed consolidated statements of operations and comprehensive loss. The table below presents losses recognized on beneficial interests during the following periods:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||
Fair value losses on beneficial interests | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Refer to “Note 6. Fair Value Measurement” for additional information.
6. Fair Value Measurement
The following table presents assets and liabilities measured at fair value and categorized in accordance with the fair value hierarchy:
| December 31, | September 30, | |||||||||||||
| Level | 2022 | 2023 | ||||||||||||
| Assets | ||||||||||||||
| Loans | 3 | $ | $ | |||||||||||
| Notes receivable and residual certificates | 3 | |||||||||||||
| Loan servicing assets | 3 | |||||||||||||
Interest rate caps(1) | 2 | |||||||||||||
| Beneficial interests | 3 | |||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||
| Loan servicing liabilities | 3 | $ | $ | |||||||||||
| Payable to securitization note holders | 3 | |||||||||||||
| Trailing fee liabilities | 3 | |||||||||||||
| Total liabilities | $ | $ | ||||||||||||
(1)The fair value of interest rate caps is determined based on the present value of the estimated future cash flows over the contract term using observable market-based inputs as of the valuation date, including implied interest rates.
Financial instruments are categorized in the fair value hierarchy based on the significance of unobservable inputs and assumptions in the overall fair value measurement. Since the Company’s loans, notes receivable and residual certificates, loan servicing assets and liabilities, beneficial interests, payables to securitization note holders, 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
24
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 included in the Company’s condensed consolidated balance sheets are classified as either held-for-sale or held-for-investment based on the Company’s intent and ability to sell the loans prior to maturity. Loans held-for-sale in consolidated securitization include loans contributed as collateral to and held in the consolidated securitization (UPST 2023-2). From time to time the Company transfers loans between classifications based on changes in the Company’s intent and ability.
The following table presents the fair value of classes of loans included in the Company’s consolidated balance sheets as of December 31, 2022 and September 30, 2023:
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
| Loans held-for-sale | $ | $ | |||||||||
| Loans held-for-investment | |||||||||||
| Loans held in consolidated securitization | |||||||||||
Total | $ | $ | |||||||||
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.
As described in Note 1. Description of Business and Significant Accounting Policies, 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 UPST 2023-2. Under the measurement alternative, the Company determined that inputs used to determine the value of UPST 2023-2 liabilities, which consist of securitization notes and residual certificates issued as part of this securitization, are more observable than those used to measure fair value of UPST 2023-2 financial assets, which consist of held-for-sale loans contributed as collateral. Thus, the loans are measured based on the sum of the fair value of the UPST 2023-2 securitization notes and residual certificates, with changes in fair value included in the consolidated statements of operations and comprehensive loss.
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-sale and held-for-investment:
| December 31, 2022 | September 30, 2023 | ||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (2) | Minimum | Maximum | Weighted-Average (2) | ||||||||||||||||||||||||||||||
| Discount rate | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Credit risk rate (1) | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Prepayment rate (1) | % | % | % | % | % | % | |||||||||||||||||||||||||||||
(1)Expressed as a percentage of the original principal balance of the loans
(2)Unobservable inputs were weighted by relative fair value
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans held in consolidated securitization:
25
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, 2022 | September 30, 2023 | ||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (2) | Minimum | Maximum | Weighted-Average (2) | ||||||||||||||||||||||||||||||
| Discount rate | * | * | * | % | % | % | |||||||||||||||||||||||||||||
Credit risk rate (1) | * | * | * | % | % | % | |||||||||||||||||||||||||||||
Prepayment rate (1) | * | * | * | % | % | % | |||||||||||||||||||||||||||||
(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 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 impacts 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 additional information.
Significant Recurring Level 3 Fair Value Input Sensitivity
The following table presents the sensitivity of the fair value of loans held-for-sale and held-for-investment to adverse changes in key assumptions used in the valuation model as of December 31, 2022 and September 30, 2023, respectively.
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
Fair value of loans held-for-sale and held-for-investment | $ | $ | |||||||||
| Discount rates | |||||||||||
| 100 basis point increase | ( | ( | |||||||||
| 200 basis point increase | ( | ( | |||||||||
| Expected credit loss rates on underlying loans | |||||||||||
| 10% adverse change | ( | ( | |||||||||
| 20% adverse change | ( | ( | |||||||||
| Expected prepayment rates | |||||||||||
| 10% adverse change | ( | ( | |||||||||
| 20% adverse change | ( | ( | |||||||||
26
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 table presents the sensitivity of the fair value of loans in consolidated securitization to adverse changes in key assumptions used in the valuation model as September 30, 2023. No loans were held in consolidated securitization as of December 31, 2022.
| December 31, | September 30, | ||||||||||
| 2022 | 2023 | ||||||||||
Fair value of loans held in consolidated securitization | $ | $ | |||||||||
| Discount rates | |||||||||||
| 100 basis point increase | ( | ||||||||||
| 200 basis point increase | ( | ||||||||||
| Expected credit loss rates on underlying loans | |||||||||||
| 10% adverse change | ( | ||||||||||
| 20% adverse change | ( | ||||||||||
| Expected prepayment rates | |||||||||||
| 10% adverse change | ( | ||||||||||
| 20% adverse change | ( | ||||||||||
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-Investment | Loans Held in Consolidated Securitization | Total | ||||||||||||||||||||
| Fair value at June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Purchases of loans | |||||||||||||||||||||||
| Sale of loans | ( | ( | |||||||||||||||||||||
| Purchase of loans for immediate resale | |||||||||||||||||||||||
| Immediate resale of loans | ( | ( | |||||||||||||||||||||
| Repayments received | ( | ( | ( | ||||||||||||||||||||
| Changes in fair value recorded in earnings | ( | ( | ( | ||||||||||||||||||||
| Other changes | |||||||||||||||||||||||