Upstart (UPST) Q3 2023 Earnings Call Transcript

Upstart (UPST 2.76%)
Q3 2023 Earnings Call
Nov 07, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Upstart third quarter 2023 earnings. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Schmidt, head of investor relations. Please go ahead, sir.

Jason Schmidt -- Head of Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss Upstart's third quarter 2023 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 third quarter 2023 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 fourth quarter of 2023, relating to our business and 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 the 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 a non-GAAP financial measure and are reconciled to our GAAP results, which can be found in the earnings release and supplemental tables. [Operator instructions] Later this quarter, Upstart will be participating in the JMP Securities AI forum, November 29; and Wedbush's disruptive finance virtual conference, December 1. Now I'd like to turn it over to Dave Girouard, CEO of Upstart.

Dave Girouard -- Chief Executive Officer

Good afternoon, everyone. Thank you for joining us on our earnings call covering our third quarter 2023 results. I'm Dave Girouard, co-founder and CEO of Upstart. While 2023 continues to be a difficult environment for consumer lending, I can state with confidence that we're making rapid progress in building the world's first and best AI lending platform.

We do this with a focus on our mission and with an optimistic eye toward the transformation of an industry that is inevitable over the next decade and beyond. In the third quarter, rates were at an all-time high in our marketplace, higher than we expected them to be, reflecting both decades high interest rates and significantly elevated risk in the consumer economy. This is not a path we would have chosen and is obviously not constructive to our growth, but it reflects the reality of operating responsibly in this environment. That said, we believe the economic trends continue in the right direction.

Inflation is waning. Interest rates, presumably, are peaking or have peaked. The jobs market remain strong, and many retailers are suggesting that consumer spending is softening. We continue to look for a return to normal for personal savings rates, which are highly correlated with risk and therefore with pricing on our platform.

From a financial perspective, we'd, of course, prefer to be growing quickly, but this is a time when it's wise to be operating in a conservative mode. In that light, we were EBITDA positive for the second straight quarter. Our contribution margins are still near record highs. And finally, we remain confident that our personal loan models are calibrated, and Upstart-powered credit is performing as expected right now.

Not only are we financially superior, we also continue to invest in our AI platform. Last quarter, we launched Model 15.0, the latest version of our core personal loan underwriting model. This new version increased our model accuracy by about 15%, the largest improvement we have seen since we began tracking improvements in 2018 by about a factor of 1.5. Our previous most impactful model launch added personalized timing curves, what we have come to call our loan-month model, for a giant accuracy improvement.

This version improves the accuracy and precision of these personalized timing curves and also adds personalized macro effects for the first time. Last week, we also launched an upgraded version of the Upstart Macro Index to account for seasonal patterns and repayment behaviors. Over the last decade, we've measured a distinct seasonal pattern with respect to loan repayments. The time from January to April represents the best seasonal loan performance in our experience, likely due to borrowers receiving extra cash in the form of state and federal tax refunds.

Performance then generally degrades marginally each month until the early fall and then flattens or modestly improve through the end of the year. With a seasonally adjusted UMI, we'll offer a more accurate lens into changes in the financial health of consumers, and that should result in less volatility in loan pricing and approvals from month to month. Our auto retail platform saw a huge boost recently as we partnered with a major OEM to implement our software in support of the launch of a new vehicle. Our technology powered their consumer reservation, deposit, and customization system for this amazing new vehicle and was implemented quickly at more than 99% of all their dealerships in the U.S.

We see this as a harbinger to a future where consumers can choose exactly the car they want online and have it delivered directly to them with none of the friction and inconvenience many associate with the car-buying experience. We're partnering with leaders in the industry to unlock this future. Separately, we also expanded our roster of car dealerships that have gone live with Upstart Lending from 61 to 69, and we've added support for rooftops in Arkansas, Maryland, and Virginia, expanding our reach to 70% of the U.S. population.

We also signed agreements with two of the largest national nonprime auto lenders to help fund our auto lending solutions. I'm also excited about the progress with our home equity product. As of today, the Upstart HELOC is available to homeowners in Colorado, Michigan, Washington, and Utah, and we expect to be live in Alabama, Kentucky, Tennessee, and Washington, D.C. in the coming weeks.

We have received encouraging feedback from applicants about how fast and easy the process is, even at this nascent stage. Our home equity product helps diversify our business in two critical ways. First, it's a very prime product with annual loss rates expected to be 1% or less. And second, it's a countercyclical to a refinance product because it's an effective way to tap equity in a home during a higher-rate environment, such as we have today.

More than 90% of HELOCs are offered by banks and credit unions today, so it's a good fit with the Upstart platform and our partners. We'll bring some pricing advantage to the HELOC market over time, but there are two predominant advantages we expect to see sooner. The first is speed and ease of access because the banks and credit unions that originate most HELOCs today take more than a month, on average, for the applicant to receive funds. We're aiming for less than five days.

Second, our existing platform unlocks customer acquisition advantages that others can't match. Each month, more than 80,000 homeowners apply for a personal loan on Upstart. Some large fraction of them can and will be better served with a home equity product that offers a lower rate. After all, personal loans and HELOCs are just two different ways to solve the same customer need.

By integrating our personal loan and HELOC application processes, which we expect to do before year end, will take a giant step toward becoming customer-centric rather than product-centric. The trade-offs between price, time, and effort will change over time and will help applicants choose the best product for them. Now let's talk about the funding side. Despite the difficult lending environment, we have seen some great success with credit unions in the last couple of years.

We attribute this to the fact that credit unions are extremely focused on delivering the products that their members want with an intense focus on the quality of experience. They also map well into current and future Upstart products with approximately $29 billion in personal loans, $266 billion in auto loans, and $82 billion in HELOCs funded by credit unions each year. So we're doubling down on credit unions by building features and capabilities that will strengthen our partnerships. In recent weeks and months, we upgraded the Upstart Performance Console to enhance visibility into originations and loan performance trends, improved connectivity to the core systems that power credit unions' financials and operations, deliver features that make it easier for new members to join the credit union, and enhanced our partners' ability to cross-sell other products to existing members.

We're also unlocking loan participation where a loan originated by one credit union can be fractionalized and sold to a network of other credit unions. This significantly improves liquidity in the system and allows us to reach the long tail of small credit unions in an economic and constructive way. On the capital market side, we continue to pursue a large number of committed funding partnerships in order to strengthen the reliability of loan funding on Upstart. With banks retrenching, paying more for deposits and likely facing even more imposing capital requirements, we believe it's important to find alternative sources of funding, even for the primest of loans.

We're in discussions about partnerships and structures that can enable at-scale funding across the entire credit spectrum and are excited to innovate in the space. Lastly, we're investing significantly in servicing and collections, a vital part of our business where improvements can go directly to the bottom line. We recently launched a new version of our funded borrower dashboard, which is the experience borrowers see while in the process of repaying a loan. We also recently launched our first mobile application, which is initially focused on loan repayment.

Servicing and collections is clearly an area where AI can lead to better results, and we believe the surface area upon which we can apply our AI expertise is broad. We've brought some incredible new talent to this aspect of our business and are excited about its potential. To wrap up my remarks today, there are plenty of reasons to remain optimistic about Upstart. First, even with our rates at all-time highs, we continue to grow fee revenue and invest in our teams and core AI.

Second, our models are learning and improving at an unprecedented pace, creating more separation from traditional approaches to lending. Third, the competition to serve mainstream American consumers with responsible lending products has waned considerably, given the challenges in the markets in recent years. And fourth, we believe there's an inevitable period of normalization on both rates and risk levels' return to long-term averages. That will provide Upstart with a tailwind over a multiyear period in the future.

We aren't waiting around for that period, but we'll certainly be ready when it arrives. Speaking of the future, last week, I had the privilege of participating in the U.S. Senate's AI insight forum. It was a very productive bipartisan discussion on how to maximize the benefits of AI while mitigating risks.

I focus my remarks on the lessons we've learned on our journey to use AI responsibly to help establish America as a global leader in AI-enabled lending. Hearing about the challenges other industries are facing deploying AI reinforced to me that lending is one of the most compelling examples of how AI can clearly improve the lives of all Americans. I left more excited than ever about the opportunities ahead of us. Thank you.

And I'd like now to turn it over to Sanjay, our chief financial officer, to walk through our Q3 2023 financial results and guidance. Sanjay?

Sanjay Datta -- Chief Financial Officer

Thanks, Dave, and thanks to all of you for joining us today. We're coming off a quarter of mixed results in Q3 with narrow misses on revenue and margins against success nonetheless in maintaining a positive adjusted EBITDA and sequential growth in fee revenue. We continue to operate in a challenging and fluid macro environment. Real consumption continues to hover at levels which we believe to be unsustainable.

Incomes continue to lag consumption growth despite the positive trend in labor participation as the ongoing decline in government transfers still receding from stimulus era highs offsets any wage gains from the return to work. The residual savings rates in the economy have consequently continued to languish at historically low levels. This consumer reality continues to be reflected in elevated borrower default trends in our Upstart Macro Index, now adjusted for seasonality, which indicates a stable level of loan defaults throughout most of this past year, albeit one which remains remarkably high. Our ability to approve borrowers in this environment has remained the constraint on platform growth for most of the past quarter.

On the funding side of our business, the banks continue to manage balance sheets conservatively and seek to unwind existing asset positions in secondary markets. The decline in aggregate deposit base, which started in mid-2022, has now thankfully eased, but anemic savings rates are so far hindering a rebound in liquidity. Correspondingly, the institutional funding markets remain distracted with a bounty of trading opportunities coming from the banking sector. On the other hand, significant amounts of institutional capital has been recently raised for upcoming deployment into credit, and the volume of discussion and negotiation aimed at setting up for 2024 remains encouraging.

With these items as context, here are some financial highlights from the third quarter of 2023. Revenue from fees was $147 million in Q3, slightly below our guidance of $150 million and marginally up from $144 million last quarter. Our underwriting of primer higher-income borrowers has become more conservative over this past quarter as their loss rates accelerate and converge with the broader default trends across the borrower spectrum. This has been a headwind for our volumes and fee revenues over this past quarter versus our contemplated guidance.

Net interest income was negative $12 million in Q3, owing to continued elevated charge-offs in our R&D portfolio, as well as a one-time change in our charge-off process for loans and bankruptcy, that had the effect of pulling some charges forward into Q3. Taken together, net revenue for Q3 came in at $135 million, slightly below guidance and representing a 14% contraction year over year. The volume of loan transactions across our platform in Q3 was approximately 114,000 loans, up roughly 5% sequentially and representing over 70,000 new borrowers. Average loan size of $11,000 was up 9% versus the same period last year and sequentially flat.

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 64% in Q3, up 11 percentage points from 54% last year, but 1 percentage point below our guidance for the quarter. We continue to benefit from high levels of loan processing automation and fraud modeling efficacy, achieving another new high in percentage of loans fully automated at 88%. Operating expenses were $178 million in Q3, down 17% year over year but up 5% sequentially, as increasing sales and marketing spend somewhat offset continued savings in engineering and product. Altogether, Q3 GAAP net loss was $40.3 million, and adjusted EBITDA was positive $2.3 million, both roughly in line with guidance.

Adjusted earnings per share was negative $0.05 based on a diluted weighted average share count of $84.4 million. We ended the quarter with loans on our balance sheet of $776 million before the consolidation of securitized loans, down sequentially from $838 million the prior quarter. Of that balance, loans made for the purposes of R&D, principally auto loans, sat at $447 million of the total. In addition to loans owned directly, we have consolidated an additional $196 million of loans that were sold from our balance sheet into an ABS transaction earlier this quarter from which we retained a total net equity exposure of $43 million.

As described in our prior earnings call, this transaction was somewhat unusual for us and designed to serve as a visible market reset, as well as a public vote of confidence, in our current degree of model calibration. Our corporate liquidity position at the end of Q3 remains strong with $517 million of unrestricted cash on the balance sheet and approximately $425 million in net loan equity at fair value. We continue to watch for signs of moderating consumption, improved savings rates, and reduced credit defaults in our economy as precursors to a broader normalization of consumer fiscal health. Until we see such signals, our operating assumption is that the macro environment will remain constant.

And in such a scenario, our business growth will predominantly come from model upgrades and from improved underwriting accuracy, both of which we consider to be squarely in our set of core technical competencies and ones in which we have demonstrated a strong historical record of delivering growth over the years. With this context in mind, for Q4 of 2023, we expect total revenues of approximately $135 million, consisting of revenue from fees of $150 million and net interest income of approximately negative $15 million, contribution margin of approximately 62%, net income of approximately negative $48 million, adjusted net income of approximately negative $14 million, adjusted EBITDA of approximately zero, and a diluted weighted average share count of approximately 85.6 million shares. That is all for our prepared remarks this afternoon. A shout-out to all of the Upstart teams who have kept their heads down and their results strong over the course of the past year spent in an expecting external environment.

Our business today is a much stronger one in a number of very tangible ways than it was before the onset of this post stimulus hangover. And when the winds eventually settle, your work will be manifest and brightly shine. With that, Dave and I are happy to open up the call to any questions. Operator?

Questions & Answers:

Operator

[Operator Instructions]. We will take our first question from Simon Clinch with Redburn Atlantic. Please go ahead.

Simon Clinch -- Redburn Partners -- Analyst

Hi, everyone. Thanks for taking my question. I was wondering if I could start with your comments around private credit and the encouraging pipeline for 2024 in terms of long-term funding commitments. Could you just expand on that a little bit more in terms of, I guess, the scale of long-term funding that you would hope to get and how that -- how we should think about that in terms of visibility into potential growth beyond this year?

Sanjay Datta -- Chief Financial Officer

Yeah. Hey, Simon. Sanjay here. Thanks for your question.

Yeah, I guess the comment was maybe an allusion to the fact that in the ongoing discussions that we're having with a number of counterparties, obviously in the vein of securing longer-term committed capital, I think the volume and the depth of those discussions has been on a good trend. And it feels like there's a lot of counterparties that are exploring this asset class that are newer to the asset class that have freshly raised capital. It's probably related to what we all read about in the press that the private credit space is becoming very big and very interested. What that means with respect to 2024 and future plans or maybe sort of visibility we have into the capital base, nothing concrete yet, unfortunately.

I think it's just an encouraging trend for us, and it sort of reinforces our view of the direction we're taking.

Simon Clinch -- Redburn Partners -- Analyst

OK. Thanks for that. And just as a follow-up, I'm just turning to the very high level of automation at 88%, coupled with the sort of very low conversion rates and the high contribution margins. So I'm just wondering, when we get to the stage where volumes start to recover, just for modeling purpose, should we effectively assume that as conversion rates rise, that level of automation is not sustainable, and so we would expect, I guess, the incremental cost to rise and push that contribution margin down? Is that the kind of math that we should be thinking about?

Dave Girouard -- Chief Executive Officer

Hi, Simon. This is Dave. I don't think so. There is an obvious relationship between the rest of the funnel and the sort of automation level.

So it could go up and down because of just changes in who's applying and things like fraud rings that could drive the automation level down when our systems are kind of blocking fraud rings, things like that. So there are some reasons it cannot always go up and to the right, and in fact, has over time. Having said that, I don't think it sort of has the relationship that you are suggesting.

Simon Clinch -- Redburn Partners -- Analyst

OK. That's very helpful. Thank you very much, guys.

Operator

We will take our next question from David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hi. Good afternoon, and thanks for taking my questions as well. Maybe following up the last round of questions, kind of similar vein, focusing on -- not so much funding, Sanjay, but I guess, balance sheet retention. We've been obviously seeing a lot of non-prime lenders announce more kind of private capital partnerships lately, forward flow arrangements.

The ABS market spreads are still wide, but they are tightening. Given all of that context, irrespective of the demand environment, is there a planned trajectory in mind that investors should think about in terms of effectively winding down the balance sheet exposure? I mean, we realize there are always going to be so-called testing loans. But when the residual from the securitization is factored in, it looked like it was kind of flattish quarter to quarter. I'm kind of wondering when you would imagine the loans held for investment or orders for sale to be substantially lower.

Sanjay Datta -- Chief Financial Officer

Yeah. Hey, David. Thank you for the question. I guess at a headline level, nothing explicit to really share with respect to how we would view the balance sheet evolving over the course of the next year.

As we said in our remarks, the explicit constraint on growth right now is on the demand. It's on the borrower side and the approvability of the borrowers. And as that relaxes presumably over the course of time and as our platform rescales, obviously, the goal is to use as much third-party capital as is available in that rescaling, and that will be our goal. But it's -- I don't think we have any explicit guidance or predictions on how that will evolve over the coming quarters.

David Scharf -- JMP Securities -- Analyst

No, Understood. And maybe just a follow-up on credit. It looks like the fair value adjustment, it was about another negative kind of $40 million this quarter. I would imagine that that's typically made up of current period losses, as well as any mark-to-market adjustment.

Can you kind of give us the breakdown of those? And also, as we think about sort of your guidance in Q4 for net interest income, I mean, embedded in that is another kind of fair value adjustment and loss figure. Is it possible to give us kind of the charge-off figures for the retained balances that was embedded in the Q3 number, as well as the Q4 guide?

Sanjay Datta -- Chief Financial Officer

Yeah. I mean, I think I will just say that -- well, first of all, the components of fair value are the actual charge-offs being incurred by the loans in the balance sheet. Any unrealized fair value adjustments we're taking to those loans when we mark them up and down as the assumptions valuation change and then any realized gains or losses we take on sales or securitizations. And I'll just say that, by far, the biggest component in Q3 are the charge-offs themselves.

And a lot of that, as we said, we've got about $0.5 billion of auto loans on our book that were made sort of in the vein of R&D almost a year and a half ago, now back when we were in a very different environment and that half of our loan book is unsurprisingly taking on excess defaults right now. And I think all of those stacks will remain true in Q4 as well. The largest component of fair value, in general, is the actual charge-offs being incurred by the loan book.

David Scharf -- JMP Securities -- Analyst

Got it. Thanks, Sanjay.

Sanjay Datta -- Chief Financial Officer

Thank you, too.

Operator

We will take our next question from Lance Jessurun with BTIG. Please go ahead.

Lance Jessurun -- BTIG -- Analyst

Thanks for taking my question, guys. A lot of the pressure on the top line has been -- the rates coming in above 36%. And as we come into an environment where it's more likely than not that we see rate cuts possibly next year, combined with the UMI, it looks like your UMI is starting to kind of level off a little bit. How should we think about the interplay kind of between the two and how that impacts your conversion rate and where the APRs are coming in below 36%? So is it just a linear like-for-like basis, whereas the rates start to come down and then the conversion rate starts to go up? Or what are the contribution between that and the UMI and where rates are?

Dave Girouard -- Chief Executive Officer

Hey, Lance. This is Dave. Great question. Generally speaking, both you and I and kind of underlying rates have both been, as we've said, moving up pretty much constantly for the last year and a half or even longer.

And those -- each time that happens to either of them, they are additive in effect to the price of a loan in the marketplace. And as you said, because we have a kind of a sharp line at 36% where we don't offer loans above that, that means people are being knocked out of the approval box and declined increasingly as that -- as those two go up. I would say, generally speaking, the UMI effect is maybe -- is larger than the interest effect -- the interest rate effect, but they both push in the same direction. They both work to make prices higher.

So to your point, not to project where things will go, but assuming rates do come down and assuming over time UMI comes down, those will both certainly become tailwinds to us and essentially lower rates and improve approvability and thus the funnel metrics that's driven by those. So it's very fair to say, as those things go down, it would be what we would consider a normalization of our funnel and our overall pricing and everything else, and we certainly look forward to that.

Lance Jessurun -- BTIG -- Analyst

Got it. Appreciate it. And then pivoting a little bit to the HELOC product, I'd be interested to kind of hear the first reactions. Essentially, what is the approval to funding time? What are the margins looking like for the product? How has consumer feedback been? Any color that you can give there would be great.

Dave Girouard -- Chief Executive Officer

I would say, generally -- again, this is Dave. I would say it's probably too early to quote conversion rates, things of that nature. It's still in its early stage. We are still kind of -- this is kind of the part of the product where we're very quickly making funnel improvements that can be leaps and bounds, but they're off of a very modest start.

So -- but I will say, generally, the world expects HELOCs to take a long time and to be a very difficult process. That's just the backdrop of us coming into the market. So it's not -- we can look really good, and people can be very pleasantly surprised, and we're still kind of saying, wow, we're just a shadow of where we're going to be in six months or a year with that product. And that's kind of where we are.

I think we have a process that's probably still better than you can get elsewhere in the market, not -- maybe not everywhere, but what most people are experiencing when they go out looking for HELOC. But at the same time, we're not even a shadow of the way where we're going to be down the road. So -- but it's working. It's good.

We're launching more states, and each week or two of development is typically a big step forward for us because there's just so many obvious things that we're improving as we get started.

Lance Jessurun -- BTIG -- Analyst

Got it. Thanks so much.

Operator

We will take our next question from Peter Christiansen with Citi. Please go ahead.

Peter Christiansen -- Citi -- Analyst

Thank you. Good evening, and thanks for taking my question. I was just curious, with loan size being kind of flattish sequentially, just curious if we should think of average loan size as a function of available capital or capital supply or I guess more or less an issue of what's going on in consumer credit right now? And I guess as a follow-up, just curious if we should think of loan size impacting the contribution profit margin. Thank you.

Sanjay Datta -- Chief Financial Officer

Hey, Pete. It's Sanjay. Thanks for your question. So I think your question was about loan size, not loan volume, correct?

Peter Christiansen -- Citi -- Analyst

Correct, correct. Yes.

Sanjay Datta -- Chief Financial Officer

OK. Yeah, loan size, let's see. I mean, there's a couple of different impacts. I would say the biggest one is borrower mix.

So all else equal, the sort of more low-risk borrowers you could think of maybe in a traditional sense, the primary borrowers that you have will tend to be able to be approved for larger loan sizes; and riskier borrowers, in contrast, lower loan sizes. So if you have, for example, a macro event such as we've had where there's a lot of people being nudged outside of the approval box at the riskier side and then consequently, you have a prime borrower mix than before, you would expect to have a larger loan size and vice versa. So borrower mix is one. Overall, sort of risk and approvability is another.

All else equal, as loss rates get higher in the macro, UMI gets higher. We would generally sort of on the margin be approving folks for smaller loans than in a very constructive environment. So I would say it's really down to mix. I wouldn't necessarily view loan size as a sort of inherent or a fundamental metric for our business in any sort of significant way.

Although it is true -- just answering your last question, it is true that, all else equal, a larger loan size will lead to a healthier contribution margin.

Peter Christiansen -- Citi -- Analyst

That's helpful. Thank you. And sorry, just as a quick follow-up. I guess how should we think about what borrowers are requesting versus what they're being approved for? Is there a meaningful difference there in this environment?

Sanjay Datta -- Chief Financial Officer

Yeah. I would say that, in relative terms, they've gone in very much in the opposite directions. I think the request for credit, the underlying fundamental demand for credit is as high as we've seen it in quite a while, and there's a lot of underlying demand from borrowers. Conversely, our ability to approve them is as limited as it's been in our company's history as a reflection of the UMI.

And so you sort of have them at cross-purposes right now.

Peter Christiansen -- Citi -- Analyst

Thank you, Sanjay. Helpful.

Sanjay Datta -- Chief Financial Officer

Thank you, Pete.

Operator

We will take our next question from James Faucette with Morgan Stanley. Please go ahead.

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks. I want to follow up on that last question. Clearly, you guys had to tighten things up, and given the low savings rates is that demand for credit seems understandable.

But what are you seeing in terms of actual conversion that is offers for loans that are actually converted into loans and what that origination looks like? Are you seeing any movement in that metric?

Sanjay Datta -- Chief Financial Officer

James, so you're asking about the conversion rates?

James Faucette -- Morgan Stanley -- Analyst

Yeah.

Sanjay Datta -- Chief Financial Officer

Yeah. I think our metric for this quarter was around 8.5%. So meaning, of all applicants to fill in an application and submit, about 8.5% of them become funded loans. I think at our peak, that number was closer to 24%.

James Faucette -- Morgan Stanley -- Analyst

Got it. And can I just ask for a clarification? What about -- that's of all applicants, what about the approved loans that actually ultimately convert, any sense what that looks like?

Sanjay Datta -- Chief Financial Officer

From loans that are approved and offered to funded loans, I believe, is on the order of about a third.

James Faucette -- Morgan Stanley -- Analyst

About a third. OK. That's helpful. And then I wanted to go back to the committed capital partners, just any additional color that you can provide in terms of the things that they are looking for, whether it be specific metrics or catalysts to get them moving forward? And do you feel like for them -- maybe it's done the same thing as we're talking about for borrowers that we kind of would like to -- people would like to see underlying rates come down, and then for your own metrics, UMI come down.

Just wondering if your potential committed capital partners are kind of waiting for a similar relief across the market or if there are other issues that they're watching.

Sanjay Datta -- Chief Financial Officer

Sure. Yeah. Thanks, James. Let's see.

Well, certainly, for counterparties that are -- so we say newer to unsecured consumer credit. There's a lot of investigation of the asset class itself. With respect to Upstart, I don't think it's as much about whether rates are going to move or UMI is going to move. It's more about developing a confidence in their diligence that we are going to hit the targets that we claim.

Meaning, when we predict loss estimates, they are accurate. And so they care a lot about our accuracy rather than the absolute direction of rates in the economy right now. And then there's clearly a macro component as well. All of these counterparties have credit committees and macro committees that take point of view on broad asset allocation and what the right timing is for these investments.

And so many of them are actively engaged with us in asking what we're seeing in our data with respect to macro trends and loss rates in the different segments of the borrower base. So that's sort of, I think, at the highest level, how they would think about the framework of investing with us. And then with respect to specific deals, as we've said before, you could sort of broadly class counterparties into some that are interested in maybe earning a premium on the return right now, and they're trying to understand where that can come from, certainly in a high-rate environment like today is if they can lock something in, it can look very good down the road a year from now if the economy changes. And then there are others who are less interested in return premiums.

They're interested in predictability. And that's where, as we've said in the past, in some instance, because we have a very precise understanding of our model calibration, we can sort of co-invest with them, put some skin in the game, give them some level of comfort on that dimension.

James Faucette -- Morgan Stanley -- Analyst

That's great. Hey, thanks for all the details.

Operator

We will take our next question from Ramsey El-Assal with Barclays. Please go ahead.

John Coffey -- Barclays -- Analyst

Hi. Thank you. This is John Coffey on for Ramsey. My first question is on Slide 21, and you may have already answered this, and I missed it.

But when I look at the cadence of the auto secured loans, it looks like that halved from Q2 of -- well, last quarter to this quarter. I was wondering if you could just talk a little bit about the drivers there of what caused that.

Sanjay Datta -- Chief Financial Officer

Yeah, John, thank you for the question. Yeah, auto lending I would say is currently subject to all of the same sort of dynamics in force as our core business. Meaning, rates themselves have risen, and default trends look very similar to what they look like in the unsecured world. Maybe there's some slight timing differences.

But in terms of the sort of relative level of increase in default rates, they very much mirror what we've seen in our core business. And just as our core business has had to retrench, as we've had to recalibrate our models as a lot of people, as Dave described, have fallen above the 36% line and out of the approval box. A lot of those dynamics are very similar in auto as well. With the difference that auto being a more nascent -- it's a product for us.

We've been calibrating a newer model in real time in that. Whereas with personal lending, I think we've got a very sophisticated model that we're just kind of make sure that it stays calibrated to the macro environment. So I guess the short answer is a lot of the things that have happened to our core business have also conspired to restrain auto lending volumes a little bit as well.

John Coffey -- Barclays -- Analyst

All right. That's very helpful. And I just have one follow-up question. Last quarter, when you reported in August, you already had a month behind you, that being July.

So given that you had your Q3 guide, what was the biggest surprise given it's still two months to go? What was the factor that -- I know it wasn't a big miss of guidance, but there was a miss. What was the thing that you thought essentially was the thing you were wrong on? Or was the biggest surprise there versus what you originally thought of?

Sanjay Datta -- Chief Financial Officer

Yeah. Thanks, great question. I'll highlight two things that we sort of alluded to in our remarks. One of them is just with respect to the transaction volume, the transaction revenue, -- our -- one of our model launches this quarter allowed us to essentially measure the sort of macro impact along the lines of what we do for UMI but at a borrower and a segment level, which is a greater level of granularity in terms of macro sensitivity in the borrower base.

And what that model quickly understood is that what's happening in very recent months is that the -- what you might think of as the primary or the more affluent borrowers are sort of starting to accelerate in their default trends, whereas the less affluent borrowers who were earlier affected last year in the sort of -- in the environment that we've been through are now much more stable. And it led us to be, I would say, a little bit more conservative in our approval of more affluent primary borrowers. So that was one impact that I think versus what we had contemplated in our guidance was a bit of a delta. And the second one was just sort of a mechanical thing that showed up in net interest income, but it had to do with essentially a process change around the timing with which we're charging off bankruptcy loans.

We went from the resolution of the bankruptcy to essentially the announcement of the bankruptcy, and it had the effect of pulling some charges forward from future quarters up into Q3, and that's something that we weren't expecting when we announced guidance.

John Coffey -- Barclays -- Analyst

Great. Thank you very much.

Sanjay Datta -- Chief Financial Officer

Thank you.

Operator

We will take our next question from Rob Wildhack with Autonomous Research. Please go ahead.

Rob Wildhack -- Autonomous Research -- Analyst

Hi, guys. I wanted to ask about the co-investment summary on Slide 20. Last quarter, the $40 million co-investment was marked up $11 million, so up $30 million. And now the $66 million is up, but it's only up $7 million or like $11 million.

What were the drivers behind that markdown versus the second quarter?

Sanjay Datta -- Chief Financial Officer

Yeah. Thanks, Rob. It's a great question. Yeah, what you're seeing there is maybe a bit of retrenching in how we're valuing that, so it's representative of what you might think of some headwinds over the past 90 days in how all of that system is performing.

Look, one of the things that's on our minds that I think is relevant here is we're not necessarily adjusting this valuation for current seasonality. And it occurs to us we're in the worst seasonal part of credit right now. So credit is -- it is at its best from a seasonal standpoint in the sort of February to April standpoint -- time frame, and it's sort of at its worst in the October, November time frame. And so I think some of what's happening here is that, like the seasonal headwinds, the credit performance are making this asset maybe look a little bit worse than it will in six months, and we haven't necessarily gone to the level of sophistication of adjusting for seasonality.

So I think that's part of the story there. But some of it also may be durable. And therefore, what it would indicate is that stuff is performing marginally worse than it looked 90 days ago.

Rob Wildhack -- Autonomous Research -- Analyst

OK. And then on the committed funding partners, those initial agreements, the ones in place now, I think they were described as $2 billion in funding for the next 12 months. So that was roughly spring '23 to spring '24. So of the existing agreements, could you remind us what's locked in for beyond spring '24? And for anything that's not, what's the process or arrangement for extending or renewing those agreements?

Sanjay Datta -- Chief Financial Officer

Sure. Yeah, thanks. I guess I would say we haven't necessarily given specific numbers beyond the spring. I do think there were some announcements out there in the public, which alluded to some longer time frames for some of those agreements.

And so some of those, we expect to continue. I think with the other ones, as we get toward the sort of one-year mark and depending on how happy the counterparties are and how happy we are and how well everything is performing, you might imagine that there will be discussions around renewal. So I think we'll be undertaking those probably in the new year.

Rob Wildhack -- Autonomous Research -- Analyst

OK. Thanks.

Operator

We will take our next question from John Hecht with Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Afternoon, guys. Thanks very much. So just I think you did about $1.2 billion of loan originations, and it looks like you cleared nearly a quarter of that through your on-balance sheet securitization. So for the remaining 75-ish percent, I'm wondering, could you just let us know what was the characteristic? Were they kind of bank buyers that have been around for a while? Are they more credit funds Were they more tied to the counterparties and the forward flow agreements that you just were talking about? How do we think about the mix of that disposition?

Sanjay Datta -- Chief Financial Officer

Sure. Yeah. Thanks for the question. And maybe just one clarification about the securitization.

It was executed in Q3, but a lot of the loans that were sold into the securitization were originated in Q2. So it wasn't necessarily a component of Q3 origination. I think at a higher level, yes, we sort of have these three channels, if you will, of funding. One is the bank and credit union channel where they are typically doing the origination themselves as a lender.

There is our sort of traditional forward flow channel. And now there's a newer channel of what you might think of as committed capital. I think in rough terms, the forward flow and the bank channel numbers are somewhat comparable. And the channel by which we are providing loans into committed partnerships where we co-invest is slightly larger than the other two, but there's a pretty good balance across the three.

John Hecht -- Jefferies -- Analyst

OK. Thanks very much.

Operator

We will take our next question from Giuliano Bologna with Compass Point. Please go ahead.

Giuliano Bologna -- Compass Point Research and Trading -- Analyst

Just going back to the committed capital investment disclosure that you have, I'm curious, it may have come up earlier in the call, roughly speaking, what the balances of loans that you have outstanding that you have co-investment structure attached to at this point.

Sanjay Datta -- Chief Financial Officer

Yeah. Thanks, Giuliano. I think that's disclosed in the Q. I don't know the exact number on my fingertips right now.

Last quarter, if you recall, the co-investment represented approximately 5% of the total, and I think that's probably still a relatively consistent ratio.

Giuliano Bologna -- Compass Point Research and Trading -- Analyst

That's very helpful. And this a similar brief question time related to the revenue from fees. Is there any -- do you have the numbers for the platform realties versus the servicing income for the quarter and how that breaks down for the period? and the genesis of that is to kind of back into what the take rate was on originations.

Sanjay Datta -- Chief Financial Officer

Yeah, Giuliano. I think those numbers are also disclosed in the Q in one of the notes, and I don't have them off of my fingertips again. But I think you will see something like transaction revenue is maybe three times to four times the servicing revenue. Transaction revenue is up about 7%.

Servicing revenue is declining slightly as the outstanding balance in the platform declines. But if you want the specific numbers, they'll be in one of the notes in the Q. We can point you to it off-line, if that's helpful.

Giuliano Bologna -- Compass Point Research and Trading -- Analyst

That's helpful. I appreciate it. And then thinking about the cadence of kind of where you are on the funding side, I realize this is a question that's been asked a few different ways at this point. But when you think about where you are from an operating perspective, you have seen a bit more volumes to get incremental margin can cover your fixed costs.

I'm curious how you're thinking about the cadence of how funding could come back or how you're preparing to kind of manage the business for the foreseeable future if this environment persists for a number of quarters beyond 4Q.

Sanjay Datta -- Chief Financial Officer

Sure. Yeah. Let's see. Well, as I said in the remarks, I think there's a lot of good conversations happening on the funding side.

The platform constraint today on growth is on the borrower side and our inability to approve. But in anticipation of that eventually changing, and as we said to one of your earlier questions, that could change because rates dropped. It could change because sort of default trends normalize and UMI drops. In anticipation of that, we definitely want to have a few more agreements teed up and some partnerships ready to go at that time, but it isn't the gating item on platform growth currently.

Giuliano Bologna -- Compass Point Research and Trading -- Analyst

So I appreciate the questions, and I will jump back in the queue. Thank you.

Operator

We will take our next question from Reggie Smith with J.P. Morgan. Please go ahead.

Reggie Smith -- JPMorgan Chase and Company -- Analyst

Hey, good evening. Thanks for taking the question. Most of mine have been answered. But I was curious, you were talking earlier-- I think previous analysts had asked about approvals, and I think you suggested that roughly a third of the loans that are approved are ultimately funded.

Can you tell us kind of how that has trended as it changed over time? And then the second part of the question, do you ever approve borrowers for less than they're requesting? And do people tend to take those loans if you do?

Sanjay Datta -- Chief Financial Officer

Sure. Thank you, Reggie. Let's see. The answer to the first question -- well, the first question was what has happened to what we call acceptance rates, which is the instance where a loan is approved and an offer is made, and what percentage of those are accepted by the borrower.

And those are currently at the 30% level. They definitely trended down. I think they probably used to be in the 60s a couple of years ago before the environment sort of became very challenging. And the intuition is obvious, as rates have gotten very high, even though borrowers are getting approved under 36%, in some instances, the rates that they are being approved for are quite high, and their propensity to accept those rates is a lot lower than it was before.

And the second question had to do -- sorry, remind me of your second question, Reggie.

Reggie Smith -- JPMorgan Chase and Company -- Analyst

Yes. I was curious if -- so somebody comes in with a loan request, and it's totally out of whack with their income or debt levels. Do you ever approve them for less? Or can you do things like that to improve acceptance rates? And -- or is there a size below it just doesn't make economic sense to do a loan? Any color there will be helpful.

Sanjay Datta -- Chief Financial Officer

That's a great question, Reggie. And we absolutely do that. There are many applicants who are asking for loan levels that we are not able to approve them for. But what we can do is say, well, we can approve you for a lower amount.

And very often, those are accepted instead. And so that is a component of our acceptance rates and is a business practice we have.

Reggie Smith -- JPMorgan Chase and Company -- Analyst

And do you find that those loans tend to perform as well as you would expect? Or alternate, what insights are you gleaning from those types of transactions?

Sanjay Datta -- Chief Financial Officer

They perform as expected on a risk-adjusted basis. Meaning, there's -- they -- because we are approving them from -- for a lower amount, that adjustment to the risk is commensurate with the risk that we perceive. And so they -- at the end of the day for investors perform as expected, just as full offers do compared to what we call -- we call these counteroffers.

Reggie Smith -- JPMorgan Chase and Company -- Analyst

That makes sense. OK. And then last question for me. Marketing, I saw, was up sequentially.

It had been obviously down a lot from the previous year. Anything to call out there on the marketing side of competition? Is it advertising? What's driven that?

Sanjay Datta -- Chief Financial Officer

Reggie, the -- I think the thing to call out is that we're at the point now where -- as we -- we are, as we said, a borrower-constrained platform. And as we regrow into prior volumes, all of that growth will be paid growth. So obviously, we've -- as we've contracted over the past 18 months, we've prioritized organic and unpaid volume repeat volume, if you will. And we've got a great benefit from that.

But I think the incidents of repeat loans will start to subside, just given the recent volumes on the platform. And as we sort of regrow into higher volumes, such as where we've been previously, that you'll see higher incidents of paid growth versus unpaid growth, and that will have the effect of bringing up the overall average acquisition cost.

Reggie Smith -- JPMorgan Chase and Company -- Analyst

OK. That makes sense. OK. Thank you.

Operator

Thank you. There are no further questions at this time. Mr. Girouard, I will turn the conference back to you for any additional or closing remarks.

Dave Girouard -- Chief Executive Officer

All right. Well, thanks, all, for joining us today. We continue to make strides in building the first and best AI lending platform in the market. There is not a company better positioned than Upstart to lead this transformation of the financial services industry.

So thank you, and we'll see you next time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jason Schmidt -- Head of Investor Relations

Dave Girouard -- Chief Executive Officer

Sanjay Datta -- Chief Financial Officer

Simon Clinch -- Redburn Partners -- Analyst

David Scharf -- JMP Securities -- Analyst

Lance Jessurun -- BTIG -- Analyst

Peter Christiansen -- Citi -- Analyst

James Faucette -- Morgan Stanley -- Analyst

John Coffey -- Barclays -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

John Hecht -- Jefferies -- Analyst

Giuliano Bologna -- Compass Point Research and Trading -- Analyst

Reggie Smith -- JPMorgan Chase and Company -- Analyst

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