Upstart - Q1 2024
May 7, 2024
Transcript
Operator (participant)
Good day, and welcome to the Upstart First Quarter 2024 Earnings. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jason Schmidt. Please go ahead.
Jason Schmidt (Head of Investor Relations)
Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's first quarter 2024 financial results. With us on today's call are Dave Girouard, Upstart's Chief Executive Officer, and Sanjay Datta, our Chief Financial Officer. Before we begin, I want to remind you that shortly after the market closed today, Upstart issued a press release announcing its first quarter 2024 financial results and published an investor relations presentation. Both are available on our investor relations website, ir.upstart.com. During the call, we will make forward-looking statements, such as guidance for the second quarter of 2024 and the second half of 2024, related to our business and our plans to expand our platform in the future. These statements are based on our current expectations and information available as of today and are subject to a variety of risks, uncertainties, and assumptions.
Actual results may differ materially as a result of various risk factors that have been described in our filings with the SEC. As a result, we caution you against placing undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information or future events, except as required by law. In addition, during today's call, unless otherwise stated, references to our results are provided as non-GAAP financial measures and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables. To ensure that we can address as many analyst questions as possible during the call, we request that you please limit yourself to one initial question and one follow-up.
Later this quarter, Upstart will be participating in the Needham Technology, Media, and Consumer Conference, May 14th, Barclays Emerging Payments and Fintech Forum, May 15th, B. Riley Securities Institutional Investor Conference, May 22nd, and the Mizuho Technology Conference, June 12th. As well, we will host our annual shareholder meeting on May 29th. Now I'd like to turn it over to Dave Girouard, CEO of Upstart.
Dave Girouard (Co-founder and CEO)
Good afternoon, everyone. I'm Dave Girouard, Co-founder and CEO of Upstart. Thanks for joining us on our earnings call covering our first quarter 2024 results. I'd like to start by saying I'm quite proud of the work Upstarters around the country continue to do to build the world's leader in AI-enabled lending. With credit availability as constrained as it's been in more than a decade, we've never felt the urgency of our mission more than we do today. We're off to a solid start this year and have made significant progress with our products and with funding. There are many reasons to believe our business will return to growth soon, but we're also prepared for the current macroeconomic conditions to persist. So we continue to focus on improving our efficiency and financial performance while investing responsibly for the long term.
In pursuit of efficiency, we minimized hiring, reduced the size of some teams, flattened org structures, and reallocated resources to our highest priorities. Since the beginning of 2024, we've cut fixed expenses from headcount by approximately $20 million on an annual basis. Our headcount today is as low as it's been since Q3 of 2021. We've also improved the efficiency of our cloud infrastructure and reduced our model training and development costs. Year-over-year, our compute and storage costs have been reduced by 23%, and we expect to generate additional savings in this area. We believe these actions set up Upstart to return to profitability sooner and to rebound more quickly to the company we know we can be.
I'm happy to report that the funding situation on our platform is beginning to improve for banks and credit unions, as well as for credit investors. We're hopeful this trend will continue through 2024. Unfortunately, consumer risk and interest remain at or near all-time highs, conspiring to constrain the volume of transactions on our platform. Given this combination, and assuming rates on Upstart remain at or near their current high levels, we expect to reduce the use of our balance sheet to fund loans that are not for R&D purposes. This will allow us to make better use of those funds elsewhere, but we will continue to be flexible and responsive in using our balance sheet to do the right thing for the business. We continue our work to make Upstart a platform that can thrive in any macro environment.
This work comes in the form of improvements to our core personal loan product, as well as progress in the newer products in our portfolio. Last quarter, I mentioned an initiative to allow applicants to provide collateral to support their personal loan application, with the goal of helping borrowers access credit at lower rates than would otherwise be possible. Today, I'm happy to report that we've successfully launched our auto-secured personal loan as a pilot in seven states. Our approach allows qualified applicants to make an informed choice between an unsecured or an auto-secured personal loan, which commonly offers a lower APR. Thus far, ASPL rates are on average 20% less than the rate on an unsecured loan. The ASPL also helps many applicants qualify for a loan who would otherwise be declined.
Last quarter, I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customers, which is often their priority in periods of reduced liquidity. To that end, two weeks ago, we announced Recognized Customer Personalization, or RCP. With this new feature, lenders can identify when an existing customer is actively shopping for a loan on upstart.com and strengthen their relationship by making a compelling offer of credit. This is a capability many banks and credit unions have long requested, and we're pleased with the initial response. 30 of our bank and credit union partners have signed up for RCP already. In Q1, 90% of unsecured loans on the Upstart platform were fully automated, an all-time high for us. For the borrower, this means no documents to upload, no phone call required, and a final approval in just seconds.
For Upstart and our lending partners, it means there's no human in the loop whatsoever to process and complete the loan application. Automation is a hallmark of AI-enabled lending, and Upstart aims to be the best at it. We continue to make progress in our auto business, with 103 dealer rooftops now live with Upstart-powered lending versus 39 a year ago. In keeping with the times, we've tasked our auto team to move more quickly toward profitability. This means doubling down on credit quality, making improvements to our in-store platform, and focusing on overall dealership success, along with the goal of improving the unit economics of each dealership. We've somewhat reduced our go-to-market investment in auto retail for now and believe a more focused effort today will allow us to scale more quickly in the future.
We're making fast progress with our home equity product, which continues to exceed our expectations. We knew it would be an attractive product in a high interest rate environment, and the team's progress thus far has been impressive. Less than a year after launch, we're offering an Upstart HELOC in 19 states plus Washington, D.C., covering 33% of the U.S. population. This is up from 11 states last quarter and now includes Florida, our largest state to date. I mentioned last time that we were beginning to automate verification of borrower information, and I'm happy to report that we're now able to instantly verify 36% of HELOC borrowers. This includes instant verification of identity and income, without any tedious documents to upload.
In another sign of progress, when we offer applicants a HELOC as an alternative to a personal loan, we're seeing a lift in the percentage of applicants taking one of our offers. This validates our approach to integrating our personal loan and HELOC applications, creating a single unified funding form for multiple products. Lastly, but perhaps most importantly, we signed our first funding deal for the Upstart HELOC and expect to begin selling loans on a forward flow basis to this partner in the next few weeks. I'm excited to see this product scale through 2024 and beyond. Our small dollar loan product continues to expand rapidly, with Q1 originations up 80% quarter-over-quarter. Consumers love these small relief loans because they're fast and simple and so much more affordable than the more expensive flavors of credit normally available to them.
Today, about 60% of applicants who come to us for a small dollar loan and initially qualify, actually get the loan, which is a super strong conversion rate at this stage. From a what's-in-this-for-Upstart perspective, I'll say first that this product is core to our mission. We're meaningfully expanding the percent of Americans we invite into the world of bank-quality credit with a small but important first step. The beauty of this relief loan is that it's primarily offered to those who don't today qualify for our personal loan. So instead of declining them entirely, we give them the opportunity to perform on a small loan and start them on a better financial path. Of course, our risk models are learning rapidly by extending credit to someone who would otherwise be turned away.
These small loans are rapidly expanding the frontier of understanding of our models and represent a long-term opportunity to serve Americans with fairly priced credit. We continue to invest in our ability to service Upstart loans and help those borrowers who become delinquent return to financial health. For example, we made it simpler and easier for borrowers to adopt autopay, a key leading determinant of credit performance. These efforts have led to an increasing number of borrowers enrolled in autopay for 24 straight weeks. In another example, we launched a new channel for contacting delinquent borrowers. Just in its initial deployment, this channel is projected to reduce gross losses of more than 3%. This is just the beginning. We see a wealth of opportunities to reduce roll rates, improve recoveries, all while helping borrowers get themselves on a better financial footing.
As I mentioned earlier, we're seeing improvements in the funding side of our business. These improvements are both in the bank and credit union segments, as well as on the institutional and credit fund side. The liquidity challenges many banks and credit unions experienced in 2023 seem to be waning. Many lenders now once again facing a shortage of assets. This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen. They're now paying more for deposits. While still cautious about the direction of the economy, many lenders are now looking for ways to generate healthy and appropriately risk-adjusted yield from their balance sheet. We saw eight new lenders join our platform in Q1, and a number of existing lenders increase their funding.
The number of new lenders and the total available funding on Upstart from lending partners are both at their highest since prior to the 2023 bank failures a year ago. We also continued to make progress with institutional capital, working to renew and extend existing partnerships and to bring investor partners who paused in the past back to the platform. And as mentioned previously, we signed the first partnership to fund Upstart's home equity product. As a result of this progress, we expect to be borrower-constrained as long as the rates on Upstart platform remain as elevated as they are currently. Altogether, we're hopeful that we're headed into a period of stable funding in excess of our needs. We expect this will allow us to reduce the use of our own balance sheet and redeploying that capital to other important goals.
To wrap things up, our lean organization is making rapid progress on building a product portfolio and a platform that will accelerate the financial industry's migration to AI-enabled lending. With the interest in AI soaring, just last week, we launched a first-of-its-kind AI certification program to help bank executives prepare for this brave new world. Just in the first couple of days, several hundred individuals registered for the course, reflecting the broad demand to upskill in this area. Some of you on today's call also may find the course to be of interest. I want to thank Upstarters for their resilience and perseverance through a clearly challenging period. We find strength and durability in our focus on the mission and the satisfaction we find in pursuing it together.
I approach every day confident that the Upstart team is unmatched in both its capacity to execute as well as its unity of purpose. Thanks. I'd like now to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 2024 financial results and guide. Sanjay?
Sanjay Datta (CFO)
Thanks, Dave, and thanks to all of you for joining us today. As was the case in 2023, the dominant influence on our business so far this year remains the macro environment, and the trends we highlighted last quarter have remained consistent. Real personal consumption in our economy continues to surge, more recently powered by the gathering momentum of the services economy and now increasingly compounded by the rapidly growing outflow of interest payments. Despite healthy growth in wages, overall disposable income has in fact languished over the past year due to the combined headwinds of falling government transfer payments, sagging asset income, and as of the new year, a significantly higher personal tax burden compared to 2023.
The consequence of continuing consumption growth against flat disposable income has been a downward trend in the personal savings rates, which have fallen back towards the 3% level after peaking almost one year ago, and matched by a continuously falling balance of real savings deposits. In an economy with strong headline growth numbers and low unemployment, the anemic savings rates and declining real savings balances are the clear problem statement. Regarding credit performance, we spoke last quarter about the trend of deterioration at the prime end of the borrower base, which has continued. Our models have reacted to this trend over the past quarter with higher loss estimates and correspondingly higher APRs for more affluent borrowers in order to maintain the returns investors expect, which has further reduced loan volume on our platform.
This had a partial adverse impact on our Q1 results, and its full impact is being felt in Q2. On the funding side of the platform, liquidity among banks and credit unions is beginning to improve. We are seeing encouraging signals of funding capacity increases from existing lenders, as well as new lenders joining the platform, including our first forward flow buyer of HELOCs. In the institutional markets, we are in the process of extending and rolling over all of the committed capital relationships that are coming up on their one-year mark, as well as, in some cases, working on meaningful upsizing, which we are pleased to interpret as a positive endorsement of our program. We currently expect that these efforts will result in approximately $2.7 billion of funding through committed capital and other co-investment arrangements over the next 12 months, with additional opportunities in the pipeline.
Separately, we are starting to see more signs of formerly active investors once again reengaging with the platform. With this environment as context, here are some financial highlights from the first quarter of 2024. Revenue from fees was $138 million in Q1, up 18% from the prior year, but down 10% sequentially, and in line with the decreased origination volumes resulting from the increased pricing of prime loans. Net interest income was -$10 million, reflecting the impact of prime loan performance on our risk-sharing positions, as well as some realized fair value impact taken as part of a secondary sale transaction. Taken together, net revenue for Q1 came in at $128 million, above our guidance and up 24% year-over-year.
The volume of loan transactions across our platform in Q1 was approximately 119,000 loans, up 42% from the prior year, but down 8% sequentially and representing over 68,000 new borrowers. Average loan size of $9,500 was down from $12,200 in the same period last year, driven by robust growth in small dollar loans. Our contribution margin, a non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition, verification, and servicing as a percentage of revenue from fees, came in at 59% in Q1, down four percentage points sequentially, primarily reflecting increased investments in servicing and collections capabilities. We continue to benefit from very high levels of loan processing automation, achieving another high in the percentage of loans fully automated at 90%, and our seventh sequential quarterly improvement.
Operating expenses were $195 million in Q1, down 17% year-over-year, but up 4% sequentially as our payroll coming into the new year gets reset with a new benefits cost basis and bonus accruals. As Dave mentioned, since the beginning of 2024, we've restructured some teams and reduced headcount in order to quicken our path back to profitability. Altogether, Q1 GAAP net loss was $65 million, and adjusted EBITDA was -$20 million, both ahead of guidance. Adjusted earnings per share was -$0.31, based on a diluted weighted average share count of 87 million. We ended the first quarter with loans on our balance sheet of $924 million before the consolidation of securitized loans, down from $982 million in the same quarter of the prior year.
Of that balance, loans made for the purposes of R&D, principally auto loans, was $316 million. In addition to loans held directly, we have consolidated $157 million of loans from an ABS transaction in Q3 of 2023, from which we retained a total net equity exposure of $28 million. We ended the quarter with $301 million of unrestricted cash on the balance sheet and approximately $572 million in net loan equity at fair value. With our models having largely adjusted to the increased delinquency rates of prime loans and the near prime universe of borrowers now toggling between stabilization and recovery, we believe that the wave of elevated defaults propagating from the abrupt stimulus and destimulus of the economy in 2021 is now at or very close to its peak.
Assuming no new credit shocks lurking on the horizon, we are anticipating a return to sequential growth in the second half of this year and a return to positive EBITDA by the end of this year. With that in mind, for Q2 of 2024, we expect total revenues of approximately $125 million, consisting of revenue from fees of $135 million and net interest income of approximately -$10 million. Contribution margin of approximately 56%. Net income of approximately -$75 million. Adjusted net income of approximately -$36 million. Adjusted EBITDA of approximately -$25 million, and a diluted weighted average share count of approximately 88.4 million shares. For the second half of 2024, we expect revenue from fees of approximately $300 million and positive EBITDA in Q4.
Thanks once again to all for joining us today. With that, Dave and I are happy to open up the call to any questions. Operator?
Operator (participant)
Thank you. If you would like to signal with questions, please press star one on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star one if you would like to signal, star one. And our first question will come from Ramsey El-Assal with Barclays.
John Coffey (VP)
Hi, thank you very much. This is John Coffey on for Ramsey. I just wanted to ask you, Sanjay, about your second half of 2024 outlook with the revenue from fees of approximately $300 million. Could you just give me a little bit of a better idea of what some of the underlying mechanics of this are that are going to drive it to that level? Is it just that you'll be able to make more attractive loans to consumers? You know, I'm just trying to think of what the different factors are that makes you a little bit more optimistic here.
Sanjay Datta (CFO)
Hey, John. Great question, thanks. Some context on the second half of 2024. I would say, first of all, our assumptions on the macro are neutral. And in that environment, really a lot of this growth is down to, you know, how we have historically grown, which is a roadmap of product execution resulting in, you know, model improvements and accuracy gains. And so maybe one of the important contextual points is the main macro effect that we've been sort of contending with over the last two years, really is a propagation of what came from the stimulus and the destimulus to the economy. And as we said in our remarks, we really think that's now in the process of fully running its course.
So we're really back to our old model of improving technology and accuracy and deriving conversion gains from that. We think that that's the story in the back half of this year.
John Coffey (VP)
All right. Thank you.
Sanjay Datta (CFO)
Thank you, John.
Operator (participant)
Our next question will come from Kyle Peterson with Needham.
Kyle Peterson (Senior Analyst)
Great. Good afternoon. Thanks for taking the questions, guys. You know, wanted to start off on, you know, expenses. Assuming, you know, that we're kind of in a little bit muted environment, macro-wise, at least for a little while, are you guys comfortable with the expense structure where it is now on a cash basis? Or do you think there's more wood to chop or more action to potentially take if volumes don't snap back?
Sanjay Datta (CFO)
Yeah. Hey, Kyle. As we said in our remarks, we have been doing a lot of that work. And since the end of the quarter, we've announced some more cost reductions. And I think as of where we are at the end of that series of cost reductions, we feel like we're in a good place for our current scale and, and for the, the plan we have for the rest of this year. I mean, obviously, if there is another downturn in the macro that affects the credit environment, we'll have to react further. That's always sort of a possibility, but, as of where we are, we think we've taken the appropriate actions.
Kyle Peterson (Senior Analyst)
That, that's helpful. And then, you know, just a follow-up on credit. I know you guys kind of mentioned, seems like some of the credit concerns with the affluent borrowers you guys mentioned last quarter is, you know, kind of still in the same. I guess, like, are the loss assumptions still the same? And, if so, like, are you guys comfortable with some of the pricing and origination or underwriting changes you guys have made that, you know, you guys, that the newer vintages in that cohort can, you know, be profitable and attractive for investors?
Dave Girouard (Co-founder and CEO)
Hey, Kyle, this is Dave. Yeah, we are comfortable that our models are caught up and the current product is performing and is calibrated. As we said, we see signs of recovery in the less prime, less affluent parts of the world. And then, the more affluent prime part is what has deteriorated more recently. But we're hopeful also that we are, you know, kind of reaching toward the end of that. So, you know, it has been a cycle that we've been observing for a while. We did, I think, accurately state that it was gonna affect less affluent people first, and then probably more affluent prime people later, which is exactly what's happened.
And now, as Sanjay kind of alluded to, we're hopeful we're nearing the end of this, and then, for us, it's just kind of back to business of improving, you know, model accuracy, funnel throughput, et cetera, and that's what gives us some confidence in the rest of this year.
Kyle Peterson (Senior Analyst)
All right. That's helpful. Thank you.
Operator (participant)
Our next question will come from Peter Christiansen with Citigroup.
Peter Christiansen (Director)
Thank you. Good afternoon, thanks for the question. So, Dave, Sanjay, I wonder if we could dig a little bit into the small dollar loan product there. What impact that's had on the conversion rate, perhaps, maybe how should we think about the conversion rate in standard personal loan levels? And then on a second question, I'm just curious, on the auto side, it looks like you kind of run rate around five loans per rooftop per quarter. Just curious on, like, what's the opportunity to increase that share within each rooftop and maybe some of the steps that you're taking there to improve that? Thank you.
Dave Girouard (Co-founder and CEO)
Pete, this is Dave. On the small dollar loan product, there's definitely a heavy focus on automation there. I don't know if we have the numbers to separate rates of automation for the small dollar loan from the personal loan, but they've certainly, they contribute to that 90% that we, we put up. In auto, I think we definitely believe there is a lot of room for increasing market share on loans per dealership. That's actually, one of a very central focus of ours, is how we do that. And part of that is the model's getting smarter, better separation, which means we compete better, and also just the process, you know, of originating those loans in the dealership.
And so those, those are, as I kind of highlighted earlier, very central to our focus in there. We're a little less worried about exactly how many dealers are lending. We wanna make sure the volume going through a dealer and the unit economics of a dealer are where we want them to be, and that's been a lot of focus of ours for the recent months.
Peter Christiansen (Director)
Thanks, thanks. But, I guess the question on, on the small dollar loan is really more on how that impacts the conversion ratio, which went to 14% this quarter. Just curious how, you know the typical personal loan product is doing from a conversion ratio factor, if you can piece that out. Thank you.
Sanjay Datta (CFO)
Yeah. Hey, Pete, I think the answer to that is, I don't think it's a huge impact, but it's probably marginally positive. You could think of like, with just the personal loan product, there's a certain approval rate, and then, people who are outside of that approval box can usually get approved for, a smaller loan, like a small dollar loan. So for a given marketing sort of sense size, we will have additional approvals due to that product. But I don't think it's really big enough to move the dial in a significant way at this point.
Peter Christiansen (Director)
Well, okay, that's helpful. Thanks, Sanjay. I appreciate it.
Operator (participant)
Our next question will come from Dan Dolev with Mizuho.
Dan Dolev (Senior Analyst)
Hey, guys. Actually, really, you know, pretty good results. I mean, I'm a little surprised by the initial kind of knee-jerk stock reaction. Do you think, is this. I mean, if you had to guess, is this, if you look at 2Q versus, you know, what people were expecting, is something kind of changed? Do you think there's been a bit of a mismodeling that just kind of a little bit of a misunderstanding in terms of 2Q? Because if I look at the trends overall, they seem to be more optimistic than pessimistic, especially if I look at the UMI, which is continuing to trend down, and your loan performance, which is in line with the expectation. I'm trying to sort of connect the dots here.
Dave Girouard (Co-founder and CEO)
Yeah. Hey, Dan. You know, basically, the Q2 guidance is as it is because rates have moved up during the first quarter, and that's a tightening due to observation of deterioration, and as we've mentioned previously in the primer segment, so that's fully felt in the second quarter. We do have hope that these rates are as high as they'll be and, you know, they'll come off these rates. But in any case, know, we feel like this, this sort of, pandemic and post-pandemic stimulus effect is really running its course.
So that gives us some comfort that we're, we're kind of back to the world work that we know, which is we can make improvements to the funnel and to the models and grow on a month-to-month basis, really just based on advancements of the technology. You’re not seeing that really in the Q2 guidance because we're just fully getting to this, this place where we think the models are reflecting, the risk out there. But we think there's, we, we feel, you know, pretty comfortable with the second half of the year.
Dan Dolev (Senior Analyst)
Got it. Yeah, 'cause if I look at the UMI, seems to be going down, which is a positive signal, correct?
Dave Girouard (Co-founder and CEO)
Yeah, UMI just very recently took a dip, which, of course, is something we like to see, but it's really important to say that it moves a lot, week-to-week. We do update the site every week, and you'll see it jump around a bit. It has taken a nice turn, and we would love to see that become a trend, but we don't bank on that by any stretch. There's certainly a lot of noise in that, UMI number on a week-to-week basis.
Dan Dolev (Senior Analyst)
All right. Well, fingers crossed.
Dave Girouard (Co-founder and CEO)
Thanks, Dan.
Operator (participant)
We'll take a question from David Scharf with Citizens JMP.
David Scharf (Managing Director)
Hey, good afternoon, and thanks for taking my question as well. Hey, Sanjay, kind of wondering, you had mentioned, I think, I think in the update about $2.7 billion of committed capital in flow deals over the next 12 months. You know, as you think of, you know, notwithstanding, obviously, consumer demand and some of the macro uncertainties you still can't predict, but as you think about your overall volume expectations, should we think about that as pretty much funding entirely new origination activity? Or is your guess 12 months from now, we're gonna see less balance sheet exposure to the core personal loan product? Meaning is some of that two point seven gonna be focused on perhaps whole loan sales of the existing retention?
Sanjay Datta (CFO)
Hey, David. Sure, yeah, that figure, I would say, is the number that we believe we have pretty direct line of sight to as of right now, and the majority of it is forward funding. I would say that as the platform scales, and certainly as, you know, the credit environment and markets become more constructive, and we said that, you know, we have some signals or some reasons to believe that that's currently happening, we would hope to increase that number along with the scaling of the platform. So, you know, there continue to be more opportunities beyond that $2.7 billion in the pipeline, and I think we said before, we want to keep it at some reasonable ratio of the overall platform size.
So I guess the implication of all of that is that as the platform grows, if we're doing our job right on the capital market side, we should be reducing, you know, balance sheet exposure to whole loans.
David Scharf (Managing Director)
Got it. Got it. And then just as a follow-up, maybe, maybe on the thing on, on those whole loans, on, on the credit side. I guess the roughly $51 million of net fair value adjustment in earnings, I guess, a fair value accounting, that's principally current period losses, plus any mark to market. Is that $51 million comprised entirely of charge-offs, or did you take any kind of net write-ups or write-downs on the fair value of the loans you've retained?
Sanjay Datta (CFO)
So yeah, certainly, a large part of it are the ongoing sort of charge-offs from the whole loans that are on our balance sheet. But I think if you look into some of the materials in the deck, you'll see that some amount of that was, you know, some writing down of our risk positions in some of these co-investment structures, largely flowing from what we've been talking about, which is this sort of degradation at the prime end of the borrower spectrum now. You're starting to see that reflected in some of the markdowns.
David Scharf (Managing Director)
Got it. Understood. Thanks so much.
Sanjay Datta (CFO)
Thanks, David.
Operator (participant)
Our next question is from Rob Wildhack with Autonomous Research.
Rob Wildhack (Director)
Hi, guys. Just wanted to clarify something you've said earlier. Do you intend to reduce the absolute number of loans on the balance sheet, or just the core personal loans on the balance sheet, or just the R&D loans on the balance sheet?
Sanjay Datta (CFO)
Hey, Rob. I mean, I think our intention would certainly be to reduce exposure to the core personal loan business. That, of course, is, you know, pending both the scaling of the platform, but also the level of engagement that we're getting from the capital markets. I think it's probably fair to say that, you know, compared to the amount of R&D loans we have on the balance sheet today, which is principally comprised of auto, we could imagine in a perfect world, that being reduced as well. But, you know, both of those, I think, intentions are contingent on certain external things.
Rob Wildhack (Director)
Okay, got it. Can you give some color on just how low you'd like to go from the $530 million in core personal or the $1 billion cap that you've discussed in the past? I'm curious, why make this change right now? You've spoken in the past about the attractive return profile of the loans, and I think today you sound pretty positive on the macro outlook or the return profile going forward. So why the decision to hold fewer loans now?
Dave Girouard (Co-founder and CEO)
This is Dave. Let me just maybe take a first crack at that. I mean, basically, holding whole loans on our balance sheet isn't super efficient. So while we do, we are creating structures with long-term partners to be invested alongside them, holding whole loans on the balance sheet, even if they're warehoused or leveraged, isn't particularly efficient. So that's not something we necessarily want to do more than necessary. For some of the R&D processes, as we've told, that's exactly what we have to do. In the personal loan product, we would certainly rather have anything on our balance sheet be in some form of risk-sharing or partnership with a long-term capital provider, as opposed to just holding loans on.
So our goal would be is to have ultimately you know no personal loans other than those for some reason in an R&D structure or some kind of risk-sharing agreement we have with a long-term partner.
Sanjay Datta (CFO)
I'll just add to that briefly, Rob. So Dave spoke to sort of the more, the long-term intention or strategy for how we wanted to play our balance sheet. In the shorter term, to your question of, you know, why we are signaling, you know, or aspiring to a reduction on whole loans in the balance sheet, really has to do with, you know, what we expressed as some positive signals from the institutional markets and the capital markets in their demand of loans. And of course, you know, if that third-party capital has healthy demand for loans, we would always prefer to deliver it to them than to hold it on our own balance sheet, just because that's, you know, that's, it's more central to how our business model works.
Rob Wildhack (Director)
Okay, that's helpful. Thank you.
Sanjay Datta (CFO)
Thank you, Rob.
Operator (participant)
And we'll take a question from John Hecht with Jefferies.
John Hecht (Managing Director)
Afternoon, guys. Thanks for taking my questions. First question is, I mean, it looks like about $70 million. Little more, north of $70 million incremental capital co-invested in the quarter. You know, I know you guys did a deal with Ares in the quarter. I'm just wondering, can you tell us, you know, how much of that co-investment was tied to that deal versus, I guess, upping some of the flow agreements that you've already you announced prior to this quarter?
Sanjay Datta (CFO)
Hey, John. We don't have an exact breakdown, but Ares was certainly a meaningful portion of the overall amount. I mean, if I had to ballpark it, I think something around the order of half is probably in the ballpark, but we don't have a specific breakdown for you.
John Hecht (Managing Director)
Okay. That's, that's helpful in any case. And then the second half, well, the second half, the growth in the second half, you know, you mentioned the HELOC, and I think you mentioned HELOC a flow agreement on HELOC. Maybe I misheard that. But how do we think about the contribution of some of the newer products to the, the, you know, the enhanced growth in the second half versus the first half versus the more traditional products?
Sanjay Datta (CFO)
Hey, John. So yeah, but you heard it right. We've got our first sort of forward flow, capital partner in HELOC and, you know, hoping to bring some more on, shortly. I would say, look, we're very excited for some of the newer products, particularly, I mean, a HELOC is a great product in this environment. We talked about how fast small dollar loan were growing, and I think they're showing the kind of conversion strength where we believe we might be able to start to extract some good economics there. But I think in the relatively near term, i.e., for the rest of this year, I think that our economics and our guide really do depend on the core business.
I don't think the new products are quite yet going to move the dial in a meaningful way. But we're very excited for them, for 2025.
John Hecht (Managing Director)
Thank you.
Operator (participant)
Our next question will come from Nat Schindler with Bank of America.
Nat Schindler (Director)
Good afternoon. Thanks for taking my question. I understand you're being conservative on the underwriting, but can you talk a little bit about the demand environment for the loans you're producing? I know you said, like, the partner banks are trying to, like, offset some of this deposit pressure with the higher yields. I'm just curious if the demand has kind of increased with this higher rate for a longer environment?
Dave Girouard (Co-founder and CEO)
By demand, you're referring to the lending partners, which we think of as supply. But that having been said, yeah, I think the bank and credit union sector has changed from what we would have told you, you know, three or six months ago. There was definitely liquidity challenges. Nobody was really wanting to do all that much lending, and focused only on their own customers, et cetera. That situation has definitely begun to move the other direction. So liquidity seems to be a problem that's kind of going away, and bank executives generally feeling better about their balance sheet and their position, but they're suddenly their ratios aren't right in terms of having sufficient assets.
So there seems to be an increasing appetite for loans, the right types of loans, et cetera, for banks and credit unions. And that's been something we're seeing. So we're now at a place where in that part of our, that part of our lending, we definitely have excess capital, and because rates still are super high, and that constrains demand from borrowers. But having said that, the demand from loans, as a group from, you know, banks and credit unions, has definitely strengthened.
Nat Schindler (Director)
Awesome. Thank you. And then, just curious if there's anything to call out from a tax refund season. I mean, we heard a few conflicting things about, you know, how seasonal trends played out in the quarter. I'm just curious, like, for the loans that you were servicing, do you see anything like just different from a repayment or delinquency standpoint, or maybe also on demand side, is there anything different to call out?
Dave Girouard (Co-founder and CEO)
Yeah, seasonality in our business is fairly consistent, and it did exactly what we would have expected this year, where you know, the sort of loan demand troughs, and also credit performance improves a lot during the season when people are receiving tax refunds from the government. And that has played out, you know, every year, and we saw it again this year. So, you know, that that's you know we were sort of planning on that. We've begun to model that into our credit, et cetera, and expect it, and so it seems to have gone the usual path.
Nat Schindler (Director)
Got it. Thank you.
Operator (participant)
Our next question will come from Giuliano Bologna with Compass Point.
Guiliano Bologna (Managing Director)
Well, good afternoon. One thing I'd be curious about, you know, kind of picking your brain about, and, you know, I realize you made some commentary about, you know, some model improvements, but it seems like a lot of your loans were being priced about 36%. I'm curious if there's any incremental sense of, you know, what portion of the funnel you think you could, you know, push below 36%, you know, over the next few months and quarters, and, you know, how, and how that could flow into, you know, incremental origination volumes?
Dave Girouard (Co-founder and CEO)
Yeah, Giuliano, it's a good question. Yeah, because we have a limit, there's no loans above 36% on our platform. That means when underlying rates or return demands go up, as well as when loss assumptions go up, a lot of people will no longer be approved, and that's one of the, you know, fundamental challenges of having that limit at 36%. Having said that, it also works the opposite way. So as rates come down and/or risk comes down, which we measure as UMI, a lot of those people will come back into the approval fold. So, it's one of the things we deal with.
We've also mentioned several initiatives, you know, to actually bring more people into the approval bucket, things like the auto-secured personal loan, things like the small dollar loan. So we're tackling it on many fronts because we like to stay in that sort of 36% envelope because it sort of reflects, you know, where nationally chartered banks can go, and so it feels like a good place for us to be.
Guiliano Bologna (Managing Director)
That's helpful. And then, you know, I realize you provided some commentary about the co-investments. It looks like the fair value is down, you know, $10 million linked quarter. When we think about the kind of bucket of loans that that's associated with, there's obviously multiple vintages there, and I'm curious, you know, what vintages are driving, you know, that, you know, or driving kind of the deterioration in the pool? Is it coming from, you know, you know, you know, four-quarter-old vintages, three-quarter-old? You know, kind of just curious, what vintages are driving that, and if you're seeing any changes in the trends across the vintages that are covered by co-investment.
Sanjay Datta (CFO)
Yeah. Hey, Giuliano, this is Sanjay. Yeah, I would say, the dynamic here really is more about, a move, or maybe you would call it a deterioration at the prime end of the borrower base, and it has happened pretty consistently across vintages. I mean, the more seasoned the vintage is, the less loss it has left in its life, so the less impactful it is. But I would say, all else equal, prime borrowers, whether they took out their loan a year ago or a month ago, have all performed a little bit worse this year than they were performing six months ago.
That's the thing that's being reflected in the lower volume guide that we have for Q2, as well as some of the fair value, you know, changes that have really been reflected in our risk-sharing positions. So I wouldn't call it a vintage-specific thing.
Guiliano Bologna (Managing Director)
Got it. That's very helpful. I appreciate it, and I will jump back in the queue.
Sanjay Datta (CFO)
Thanks.
Operator (participant)
We'll take a question from Simon Clinch with Redburn Atlantic.
Simon Clinch (Managing Director)
Hi, everyone. Thanks for taking my question. Wanted to follow up on the questions around the second half. I mean, it's the first time for a while we've had you give that kind of visibility, and I was wondering if you could perhaps give a little bit more color around what you're actually anticipating in terms of the conversion rate as borrower constraints ease, you know, what you're currently assuming in that guidance? And then to that last point about the prime end of the market, are you assuming continued deterioration in that market, following the current trends within that outlook as well for the second half?
Sanjay Datta (CFO)
Hey, Simon. Well, I'll let's take back the first part of your question, which is really the second half of this year. And, yeah, let me just kind of reiterate some points, because as you mentioned, we are going back to longer term perspective somewhat here. And it's important to remember the, the reason we went away from that over the recent past is because we were grappling with a very specific thing in the macro. And that thing, as we said, is that, you know, the economy received a large influx of cash in the form of stimulus, that then abruptly stopped, it propagated a, a massive wave of elevated defaults, and that thing worked its way through the borrower base.
Starting with the subprimest folks and working its way to the more and more affluent folks. The folks who were impacted earliest, the borrowers that were at the subprime end of the spectrum, are now well on their way to recovery. The primest end of that spectrum, I think we've said, is sort of like more recently crested in terms of their default patterns. And because we've now seen that essentially play itself out, we're now back in the environment where, you know, there's just sort of, in our view, regular macro risk and execution against the product roadmap in order to create model gains.
So I believe we are, in some sense, back in the environment we were in, you know, before the stimulus and frankly the pandemic. And in that world, most of our growth was directly reflected in conversion gain, and most of that conversion gain came directly from improved model accuracy. So I think you can roughly intuit that a sequential growth that we're telegraphing for the back half of this year, we expect most of that, if not all of it, to show up directly in the form of conversion. Now, in that long explanation, I've forgotten what the second part of your question was. Would you mind repeating it?
Simon Clinch (Managing Director)
No, the second part of that question was just around the prime, and then if you're actually assuming that to deteriorate, but you've said you're - it's crested and sounds like you're assuming just you're back at a normal level. Is that, is that fair?
Sanjay Datta (CFO)
Well, to be clear, defaults now are very high. We're not expecting them or assuming that they'll go back down. We will just assume that they won't further deteriorate, right? I think we're sort of assuming a constant macro to today, not an improving one. An improving one would, we believe, be a tailwind to what we're working against.
Simon Clinch (Managing Director)
Okay, great. And just as a follow-up, on the $2.7 billion of capital that you have, you have visibility in for the next 12 months, could you give us a sense of what level of upscaling you've seen to that, you know, that gives you that number? And, and I think you said as well that most of that is actually forward flow rather than that kind of long-term committed capital. So just clarify some of those trends, if you so want.
Sanjay Datta (CFO)
Yeah, that is correct. I would say that the $2.7 billion number really is an expression or a result of the sort of continuation or elongation of existing relationships as well as some new ones. It doesn't really contemplate any significant upsizing in the existing relationships. Although, as we mentioned, I do think some of that is in play, and we're working on it, but we're not including that in the numbers that we currently have line of sight to.
Simon Clinch (Managing Director)
Okay, great. Thanks so much.
Operator (participant)
We'll take a question from Reggie Smith with JPMorgan. And again, Reggie Smith, your line is open. Please go ahead with your questions. Again, your line is open.
Sanjay Datta (CFO)
Yeah, we can thank you.
Reggie Smith (Executive Director)
I'm sorry. I must have been on mute. I wanted to follow up on the, the last question, or it might have been two questions ago, where you were talking about, I guess, your prime exposure. And in the last quarter, you talked about prime kind of deteriorating, and it sounds like, and I just want to make sure I'm hearing you right, when you speak of prime, you're not talking about prime in the traditional sense, but you, you're talking about more like primer, but still not quite prime. Maybe could you frame who is the prime customer you're talking about? And I know you don't use FICO scores, but, like, how would that customer translate to FICO? Just so that we're all speaking the same language, and then I have a few follow-ups. Thank you.
Sanjay Datta (CFO)
Yeah, Reggie, thanks for the question. As you know, there's a lot of different dimensions or ways to define prime, but, you know, for the sake of being reductive, I think you could think of the current stress as being somewhere north of 700 FICO score. And I think if you're well below sort of 660, you're probably currently on the path to improvement.
Reggie Smith (Executive Director)
Understood. And then I guess, so thinking about that Prime customer, is there a way to articulate, or how should we think about what the, I guess, current life of loan loss rate is for that borrower? Maybe how that has changed in the last, you know, call it six months as you've seen that kind of deteriorate. Just kind of curious, like, you know, what are you talking about there? And then thinking about, you know, the 36% cap. I think last quarter you talked about being able to raise pricing, so I'm assuming that they're not that high, that there's room to kind of price. So maybe talk about the dynamics there, like how much you've been able to raise APRs versus what the loss increase has kind of been there.
Sanjay Datta (CFO)
Let's see. I think you're asking a little bit about the sort of nature of loss rates in the prime end. Obviously, they're, they're much lower. I think that, you could probably think of them in the sort of low to mid-single digits, as an expected loss target, and they're probably coming in high, you know, to the tune of, I don't know, 50%+ or so. So that adds a couple of 100 basis points to the APR. It certainly does not push them out of or even anywhere near the 36% approval box, but when you get higher APRs, you get lower acceptance rates, just due to elasticity. And so, you know, conversions are down, volumes are down, et cetera.
Reggie Smith (Executive Director)
Understood. Okay. And then I wanted to ask about, so appreciate the guidance for the back half of the year. And I guess when you do the simple average, you get to about $150 million on average in fees, and that's about flat to what you did in the fourth quarter of 2023. My guess is that there's probably some cadence there, and that you probably won't be running it flat as you get to the fourth quarter, and there may be some growth there. Can you talk a little bit about it? If there's anything you can provide in terms of, you know, how 3Q and 4Q, should we assume kind of flat, or is it more 4Q loaded? Yeah.
Sanjay Datta (CFO)
Sure. Yeah. I mean, I would say I don't, I think it's safe to assume they won't be flat. I mean, we're gonna have to regrow into that level by getting some conversion gains over time. So I think you could think of that as, you know, hopefully, a steady-ish stream of conversion gain that will regrow us into to that scale consistently.
Reggie Smith (Executive Director)
Perfect. Thank you. I'll, I'll hop back in the queue. Appreciate it.
Operator (participant)
We'll take a question from James Faucette with Morgan Stanley.
James Faucette (Managing Director)
Thanks for just a few quick follow-ups for me. In the assumption of flat macro, does that assume then if we continue to see a bit the deterioration in primer borrowers that you've seen, that would be a headwind, or are you expecting to be able to offset that with mix? I guess that's my first question.
Sanjay Datta (CFO)
Hey, James. No, I think that, I would maybe say, you know, sort of flat in aggregate. So if you see mild deterioration at the prime end and mild recovery at the maybe less prime end, that would sort of result in a relatively aggregate neutral macro and under which we could sort of achieve, I think, the numbers that we have described.
James Faucette (Managing Director)
Yep, got it. And then just a quick couple of clarifications is that, as you're looking to renew some of your long-term capital agreements that were entered into about a year ago, how should we be anticipating change in terms there? And then I'll just tag, as you're adjusting your OpEx base, is there a level at which you're thinking that you should be breaking, even though you keep OpEx relatively flat somewhere, or can you? Or, how you're thinking, how you're feeling about OpEx if you, if and as you get back to breakeven and profitability? Thank you.
Sanjay Datta (CFO)
Sure. Let's see. I'll just take the second question first on OpEx. So as we, as we sort of said in our remarks, we've taken some cost actions since the end of the quarter. And you know, those will get you know, factored in to the back half of the year. I think that's one component of our return to EBITDA breakeven. It won't get us there alone, so we are expecting some growth as well. If that growth doesn't materialize and it leaves us short of our EBITDA target, then you know, we will sort of reconsider it at that time. And I think the first part of your question was about the renewal of the committed agreements and, you know, to what extent, you know, terms are changing.
Look, anytime you, these are sort of, you know, renewals of existing relationships. I think that each time, anytime you, you know, spend, you know, something like a year, in an initial relationship, you have learnings on both sides of what, you know, works well and what doesn't. And so it's natural to, to sort of revisit some of that, when you re-up. But I think that, you know, in the grand scheme of things, I don't think those are, they're not major changes. I think you can largely think of these as, surviving, sort of persistent relationships with some fine-tuning around the edge.
I don't think there's anything that will dramatically change the economic picture for our business model.
James Faucette (Managing Director)
Great. Thank you so much.
Sanjay Datta (CFO)
Thanks, James.
James Faucette (Managing Director)
Thanks.
Operator (participant)
Thank you. That does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closing remarks.
Dave Girouard (Co-founder and CEO)
All righty, well, thanks to all of you for joining us today. To close, I just wanna assure you that we are taking the necessary steps to return to growth and get back to EBITDA profitability, all while continuing to invest in our future with a very fast pace of innovation. We look forward to showing you our progress through 2024 and beyond. Thanks for joining today.
Operator (participant)
Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.