Q1 2024 Upstart Holdings Inc Earnings Call

Participants

Jason Schmidt; Head of IR; Upstart Holdings Inc

Dave Girouard; Chairman of the Board, Chief Executive Officer, Co-Founder; Upstart Holdings Inc

Sanjay Datta; Chief Financial Officer; Upstart Holdings Inc

John Coffey; Analyst; Barclays Bank Plc

Kyle Peterson; Senior Analyst; Needham & Company LLC

Peter Christiansen; Analyst; Citigroup Inc.

Dan Dolev; Analyst; Mizuho Financial Group, Inc.

David Scharf; Analyst; Citizens JMP

Rob Wildhack; Analyst; Autonomous Research

John Hecht; Analyst; Jefferies Financial Group Inc.

Nate Richam; Analyst; Bank of America Corporation

Giuliano Bologna; Analyst; Compass Point

Simon Clinch; Analyst; Redburn

Reggie Smith; Analyst; JPMorgan Chase & Co.

James Faucette; Analyst; Morgan Stanley & Co LLC.

Presentation

Operator

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 Smith.

Jason Schmidt

Good afternoon, and thank you for joining us on today's conference call to discuss upstart First Quarter 2024 financial results. With us on today's call are Dave Gerard, upstart, Chief Executive Officer, and Sanjay data, 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 dot upstart.com.
During the call, we will make forward looking statements such as guidance for the second quarter of 2020 for 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 on May 14th, Barclays iMergent Payments and Fintech Forum May 15th B. Riley Securities Institutional Investor Conference on May 22nd, and the Missoula 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 Gerard, Chief Executive Officer of Upstart.

Dave Girouard

Good afternoon, everyone. I'm Dave Gerard, Cofounder and CEO of upstart. Thanks for joining us on our earnings call covering our first quarter 2024. And I can start by saying I'm quite proud of the work of starters around the country continue to do to build the world's leader in AI enabled lending with credit availability as constrained hasn't spent 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.
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 flatten org structures. We reallocated resources to our highest priorities since the beginning of 2024, we 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, vastly 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 start to return to profitability sooner and to rebound more quickly through 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.
And fortunately, consumer risks and interest remain at or near all-time highs, conspiring to constrain the volume of transactions on our plan given this combination in 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 R&D permits. This will allow us to make better use of those funds elsewhere, but we will continue to be flexible and responsive and using our balance sheet to do the right thing. We continue our work to make upstart a platform that can thrive in any macro environment where it 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. And thus far as ASPL rates are an average 20% less than the rate on an unsecured loan. The ASPL also helps many applicants qualified for loans that would otherwise be declined last quarter. I also shared that we were developing tools to help our lending partners strengthen relationships with their existing customer, which is often their priority in periods of reduced liquidity and two weeks ago, we announced recognized customer personalization or RCP. This new feature lenders can identify when an existing customer is actively shopping for a loan, an 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 fully automated, an all-time high for us. For the borrower. And this means no document upload, no phone call required in a final approval in just seconds for upstart in 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 and continue to make progress in our auto business was 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, which means doubling down on credit quality, making improvements to our in-store platform and focusing on overall dealership success.
Following 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 would be an attractive product and 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 catalog in 19 states plus Washington DC, covering 33% of the US 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 US borrowers. This includes instant verification of identity and income. So any tedious dockings to upload in another sign of progress. We offer applicants a key lock as an alternative to a personal loan. We're seeing a lift in the percentage of applicants taking one of our options. This validates our approach to integrating our personal loan in key lock applications, creating a single unified funding form for multiple products.
Lastly, but perhaps most importantly, we signed our first funding deal for the upstart Cielo 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 from 2024 and beyond. Our small-dollar loan product continues to expand rapidly with Q1 originations up 80% quarter to quarter. Consumers love the small relief loans because they're fast simple. And so much more affordable than more expensive flavors of credit normally available fr them. Today, about 60% of applicants can come to us for small-dollar loan and initially qualify actually get the loan, which is a super strong conversion rate at this stage.
From what's next for upstart perspective, I'll say first that this product is core to our mission. We're meaningfully expanding the percentage 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 personnel. So instead of declining them entirely, we give them the opportunity to perform on a small loan and start them on a better financial plan and 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 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 returning to financial health for example, we made it simpler and easier and borrowers to adopt auto pay a key leading determinant of credit performance.
These efforts have led to an increasing number of borrowers enrolled in auto pay for 24 straight weeks. In another example, we launched a new channel for contacting delinquent borrowers just in its initial deployment channel is projected to reduce gross losses more than 3%. This is just the beginning.
We see a wealth of opportunities to reduce run rates, improves 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 funds 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 staff. This new challenge is compounded by the fact that the cost of funding for many regional and community banks has risen. So 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 got eight new lenders join our platform due to one and a number of existing lenders increased their funding number of new vendors in the total available funding on upstart from lending partners, our book 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 upstarts home equity products.
As a result of this progress, we expect to be borrowed constrained as long as rates on upstart platform remain as elevated as they are currently And together, 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 leaner 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 May.
I'm sorry, 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 from the quarters reflecting the broad demand to upscale in this area. Some of you on today's call also may find the course can be of any. I want to thank our starters for their resilience and perseverance through a clearly challenging period. We find strength and durability and our focus on the mission and satisfaction we find and pursuing it together 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 guidance. Sanjay?

Sanjay Datta

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 macroenvironment and the trends I highlighted last quarter have remained constant. Real personal consumption in our economy continues to surge more recently powered by the gathering momentum of the services economy 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, segment 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 disposal 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 core problem statements.
Regarding credit performance, we spoke last quarter about the trend of deterioration at the primary 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 just 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 amongst 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 fuel 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 negative $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 the 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 per borrower acquisition verification and servicing as a percentage of revenue from fees came in at 59% in Q1, down 4 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 the 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 negative $20 million, both ahead of guidance.
Adjusted earnings per share was negative $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.
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 the stimulus 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 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 negative $10 million. Contribution margin of approximately 56%, net income of approximately negative $75 million, adjusted net income of approximately negative $36 million, adjusted EBITDA of approximately negative $25 million and a diluted weighted average share count of approximately 88.4 million shares. For the second half of 2024, we expect to revenue from fees of approximately $300 million and positive EBITDA in Q4.
Thanks once again to all for joining us today. And with that, Dave and I are happy to open up the call to any questions.

Question and Answer Session

Operator

(Operator Instructions) Ramsey El-Assal, Barclays.

John Coffey

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 the you'll be able to make more attractive loans to consumers?
Is it -- I'm just trying to think of what the different factors are that makes you a little bit more optimistic here?

Sanjay Datta

Great question, banks on some context on the second half of 2024. I would say, first of all, our assumptions on the macro are neutral on and in that environment, really a lot of this growth is down to how we have historically grown, which is a roadmap of product execution resulting in model improvements in accuracy gains. And so maybe one of the really important contextual points is the the the though 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 stimulus and the stimulus to the economy. And as we said in our remarks, we really think that's now in the process of fully running its course. And so we're really back to our old model of improving technology and accuracy and driving conversion gains from that. And we think that that's the that's going to be the story in the back half of this year, barring.

Operator

Kyle Peterson, Needham.

Kyle Peterson

Good afternoon, and thanks for taking the questions, guys. I wanted to start off on expenses, assuming that we're kind of in a but 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 are more action to potentially take if volumes don't stand?

Sanjay Datta

Yeah. As we said in our remarks, we have been doing a lot of that work. And since the end of the quarter and 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 for the plan we have for the rest of this year. I mean, obviously, if there's another downturn in the macro that affects the credit environment, lock to react further. That's all there's a possibility. But as of where we are, we think we've taken the appropriate actions.

Kyle Peterson

And then 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 kind of still in the same, I guess like our loss assumptions still the same? And if so, like, are you guys comfortable with some of the pricing and origination for underwriting changes? He has made that you guys that the newer vintages in that cohort can be profitable and attractive for investors?

Dave Girouard

Yeah, we are comfortable that our models are caught up in the current product is performing and is calibrated, as we said, the we see signs of recovery in the less prime, less affluent parts of the world. And the more affluent primary part is what has deteriorated more recently, but we're hopeful also that we are on and you're kind of reaching toward the end of that.
So, you know, it has been a cycle that we've been at we've been observing for a while. We did, I think, accurately state that it was going to affect less affluent people first and then probably more affluent primer 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 it for us, it's just kind of back to business of improving model accuracy of funnel throughput, et cetera. And that's what gives us some confidence in the rest of this year.

Operator

Peter Christiansen, Citigroup

Peter Christiansen

Thank you. Good afternoon and thanks for the question. So I'm Dave, Sanjay, I wonder if you do a little bit into the small the growth in the smaller dollar loan product there, what impact that's had on the conversion rate, perhaps maybe how should we think about the conversion rate and standard personal loan levels? And then a second question. I'm just curious on the auto side, it looks like you kind of run rating around five loans per rooftop per quarter. Just curious on 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

On the small dollar loan product, um, there's definitely a heavy focus on automation there. I don't know if we have the numbers to separate rate of automation for the small-dollar loan from the personal loan, but they've certainly come they contribute to that 90% that we have. We put up some 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 as the model is getting smarter, better separation, which means we compete better and also just the process of originating those loans in the dealership. And so those those are, as I kind of highlighted earlier, very central to our focus. And there were a little less worried about exactly how many dealers are blending. We want to make sure the volume going through a dealer and the unit economics of a dealer, our where we want them to be, and that's been a lot of focus for us in recent months.

Peter Christiansen

Okay. Thanks. But I guess the question on the small-dollar loans is really more on how that impacts the conversion ratio, which went to 14% this quarter. Just curious how in a typical the typical personal loan product is doing from a conversion ratio factor of if you can piece it out? Thank you.

Sanjay Datta

Yes, maybe I think the answer to that is I don't think it's a huge impact, but it's probably marginally positive as 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 market and marketing sort of centralized, we will have additional approvals due to that product but I don't think it's really big enough to move the data in a significant way at this point.

Operator

Dan Dolev, Mizuho.

Dan Dolev

Hey, guys. Come actually really So pretty good results. I mean, and 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 when you look at if you look at 2Q versus what people were expecting, is something kind of changed? Was do you think there's been a bit of a miss modeling that just kind of little bit of a misunderstanding in terms of 2Q? Because if I look at 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

Yes. Then on basically the Q2 guidance is as it is because 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 primary segment, so that that's fully felt in the second quarter. We do hope that these rates are as high as they'll be in, they'll come off these rates. But in any case, we feel like this sort of a and pandemic and post pandemic stimulus effect is really running its course. So that gives us some comfort that we're kind of back to the world work that we know, which is we can make improvements to the funnel into the models and grow on a month-to-month basis, really just based on advancements of the technology that you're not seeing that really in the Q2 guidance because we're just fully getting to the place where we think the models are reflecting the risk out there. But we think there's we feel pretty comfortable with the second half of the year.

Dan Dolev

Got it. Yes, because if I look at the UMI, it seems to be going down, which is a positive signal, correct?

Dave Girouard

Yes, UMI just very recently took it 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 you have my number on a week-to-week basis, fingers crossed.

Operator

David Scharf, Citizens JMP.

David Scharf

Sanjay, kind of wondering, you had mentioned, I think, in the update about about $2.7 billion of committed capital in flow deals over the next 12 months. As you think notwithstanding, obviously consumer demand and some of the macro uncertainties, you still can't predict. But as you think about your overall volume expectations and should we think about that as pretty much funding entirely new origination activity or is your I guess, 12 months from now we're going to see less balance sheet exposure to the core personal loan product. Meaning, is some of that $2.7 billion going to be I'm focused on perhaps whole loan sales of the existing retention.

Sanjay Datta

Hey, David, I'm sure yes, 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 a forward funding, I would say that as the platform scales and certainly as the credit environment and markets become more constructive. And we said that and 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 on. So there continued 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. And if we're doing our job right on the capital market side, we should be reducing our balance sheet exposure to whole loans.

David Scharf

Got it. And then just as a follow-up, maybe on that saying those whole loans and the credit side, I guess the roughly $51 million of net fair value adjustment in earnings, I guess it's fair value accounting, that's principally current period losses plus any mark to market. Is that our model -- 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

And so yes, certainly a large part of it are the ongoing sort of charge offs from the whole loans that are on our balance sheet. And I think if you look into some of the materials in the deck, you'll see that some amount of that was 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.

Operator

Rob Wildhack, Autonomous Research.

Rob Wildhack

I just wanted to clarify something you said earlier. Are you 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 and here up.

Sanjay Datta

I think our intention would certainly be to reduce exposure to the core personal loan business. And that, of course, is pending on 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 compared to the and the amount of R & D loans we have in the balance sheet today, which is principally comprised of auto, we could we could imagine in a in a perfect world that being reduced as well. But both of those, I think intentions are contingent on us, Certen external things.

Rob Wildhack

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 and then 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 so why the decision to hold fewer loans?

Dave Girouard

Now 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 have we are creating structures with long-term partners, two to be invested alongside them on holding whole loan 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 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, a capital provider as opposed to just holding loans until. So our goal would be is to have ultimately no personal loans other than those for some reason and an R & D structure or some kind of risk sharing agreement we have with a long term partner.

Sanjay Datta

I'll just I'll just add to that briefly, Rob's Dave spoke to sort of the more the long-term intention, our strategy for how we wanted to play our balance sheet in the shorter term to your question of why we are signaling or aspiring to a reduction on all lines in the balance sheet really have to do it what we expressed as a as some some positive signals from the institutional markets and the capital markets in their demand of loans. And of course, if that third party capital has healthy demand for loans, we would always prefer to deliver to them than to hold it on our own balance sheet just because that's in of itself, it's more central to how our business model works.

Operator

John Hecht, Jefferies.

John Hecht

Afternoon, guys. Thanks for taking my questions. First question is, I mean, it looks like about $70 million of incremental a little -- north of $70 million incremental capital co-invested in the quarter. How I know you guys did a deal with Aries in the quarter. I'm just wondering can you tell us how much of that co-investment was tied to that deal versus, I guess, upping some of the flow agreements that you've already that you announced prior to this quarter?

Sanjay Datta

Hey, John, we don't have an exact breakdown, but Aries was certainly a meaningful portion of some of the overall amount. I mean, if I had to ballpark it, I think something around the order of a half is probably in the ballpark, but we don't have a specific breakdown for you.

John Hecht

Okay. That's helpful. In any case. And then the second half well with the second half, the growth in the second half. You mentioned the HELOC. I think you mentioned HELOC on 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 enhanced growth in the second half versus the first half versus the more traditional products.

Sanjay Datta

Hey, John, I'm sorry. Yes, but you're very right. We've got our first sort of forward flow on capital partner and he lock and hoping to bring some more on shortly. I would say, look, we're very excited for some of the newer products, particularly I mean, if you like is a great product in this environment, we talked about how fast small-dollar loans 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 some good economics there. And 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.

Operator

[Nate Richam], Bank of America.

Nate Richam

Good afternoon, Jason. My question, I understand you're being conservative on the underwriting, but can you talk a little bit about the demand environment? Who are you producing like I know you like the partner banks are kind of like offset some of this deposit pressure due to the higher yields. I'm just curious if the demand is kind of increased with this higher rate for longer environment?

Dave Girouard

As demand, you're referring to the lending partners that we which we think the supply. But that having been said on, yes, I think the banking credit unions sector has changed from what we would have told you 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 I'm kind of going away. And exact bank executives generally feeling better about their balance sheet and their position, but they're suddenly the ratios aren't right in terms of having sufficient assets. So there seems to be an increasing appetite for loans on the right types of loans, et cetera, for banks and credit unions. And that's that's been something we're seeing. So we're now at a place where in that part of our on that part of our lending, we definitely have excess capital and because because rates still are super high and that constrains demand from borrowers But having said that, the demand from loans as a group from from banks and credit unions has definitely strengthened.

Nate Richam

Well, thank you. And then just curious if there's anything to call out from a tax refund season. I mean, we heard if you call it putting things about how seasonal trends played out in the quarter. And I'm just curious like for the loans that you are servicing, do you see anything like just different from a repayment or delinquency standpoint or maybe also loan demands have there? Is there anything different to call out.

Dave Girouard

Yeah. Seasonality in our businesses, some fairly consistent with exactly what we would have expected this year where the sort of loan demand trough and also credit performance improves a lot during the season when people are receiving tax refunds from the government. And that has played out every year and we saw it again this year so that that sub we were sort of planning on that. We've begun to model that into our credit, et cetera, and the expected and dumb. So it seems to have gone the usual path.

Operator

Giuliano Bologna, Compass Point.

Giuliano Bologna

One thing I'd be curious about kind of picking random. I mean, I realize you had some commentary about 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 what portion of the funnel you think you could push below 36% over the next few months and quarters and your hub and how that could flow into incremental origination volumes?

Dave Girouard

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 fundamental challenges of having that that eliminate 36%.
Having said that, it also works the opposite way. So as rates come down and our risk comes down, which we measure as you am, I 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 to actually bring more people into the approval bucket, things like on the auto secured personal loan things like the small-dollar loan. So we are tackling it on many fronts because we would like to stay in that sort of 36% envelope because it sort of reflects where nationally chartered banks can go. And so it feels like a good a good place for us to be.

Giuliano Bologna

Yes, that's helpful. And then, Earl, as you provide some commentary about the co-investments. It looks like the fair value is down $10 million linked quarter. When I when we think about the kind of bucket of loans that that's the answer to it because I'm sorry, multiple vintages there. I'm curious what vintages are driving that are driving kind of the deterioration in the pool? Is it coming from four quarter old vintages, three-quarter old because it just kind of curious what vintages are driving that and if you're seeing any changes in the but trends across the vintages that are covered by co-investment?

Sanjay Datta

Hey, Julien, this is Sanjay? Yes, I would say this is the dynamic here really is more about them and move or maybe call it deterioration at the prime end of the borrower base. And it has happened pretty consistently across vintages. I mean, the more seasoned vintages, the less loss it has left and a slice of 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. And 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 changes that have really been reflected in our risk-sharing positions. So I wouldn't call it a vintage specific thing.

Operator

Simon Clinch, Redburn.

Simon Clinch

I want to thanks for taking my question. I wanted to follow up on the questions around the second half is the first time for a while we've 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 or constraints, ease of what you are assuming in that guidance? And then to that last point about the pipeline for new markets, are you assuming a continued deterioration full income trends are within that?

Sanjay Datta

I'll take the first part of your question, which is rather the second half and this year. And again, let me just kind of reiterate some points because as you mentioned, we are going back to longer term some perspective somewhat here. And it's important to remember that 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 being said is that when I when the economy received a large influx of cash in the form of stimulus that then abruptly stopped it, created it propagated a massive wave of elevated defaults and nothing worked its way through the borrower base starting with the subprime, most folks and working its way to the more and more affluent folks, the Polk, the folks who it was, who were impacted earliest, the borrowers that were at the subprime or end of the spectrum are now well on their way to recovery.
And the promised end of that spectrum, I think we said is sort of like more recently crested in terms of their in terms of their default patterns. And because we've now seen that essentially play itself out, we are now back in the environment where there's just sort of, in our view, regular matching 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 before the 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 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 a long explanation, I've forgotten what the second part of your question was, would you mind repeating it?

Simon Clinch

Now the second part of that question was just around the Prima and if you're actually assuming that to deteriorate, but you've said your question sounds like you're assuming just double back into normal levels like this as well.

Sanjay Datta

To be very clear. We're not at the box now are very high and we're not expecting them or assuming that they'll go back down and we will just assume that they won't further deteriorate. I think we're sort of roughly assuming a constant macro to today, not an improving one and improving one would we believe be a tailwind to what we're working against.

Simon Clinch

Okay, great. And just as a follow-up, on the $2.7 billion of capital that you have, you have visibility into the next 12 months, could you give us a sense of what level of upscaling you've seen to it that gives you that number? And I think you said as well that most of that is actually for flow rather than that kind of long-term committed capital. And so you just clarify some of this trend.

Sanjay Datta

Yes, that is correct. I would say the $2.7 billion number really is an expression or a result of the that these sort of continuation or elongation of existing relationships as well as some new ones. It doesn't really contemplate any significant upsizing in 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.

Operator

Reggie Smith, JPMorgan. And again, Reggie Smith, your line is open. Please go ahead with your call. Your line is open.

Reggie Smith

Thank you are for most of them are new. So I wanted to follow up on the last question, there might have been two questions ago you were talking about I guess we have prime exposure and the last call talked about prime kind of deteriorating. And it sounds like in some niche I'm hearing you right, when you speak of prime, you're not talking about Prime in the traditional sense, but you're talking about more product like primer, but still not quite frankly, because Ukraine, who is the prime customer you're talking about in and I know you don't use cycle scores, but like how would that customer translate the cycle, just sort of we're all speaking same language. I'm going to have a few follow-ups. Thank you.

Sanjay Datta

Yes, Reggie, thanks for the question. Yes, as you know, there's a lot of different dimensions or ways to define prime. But for the sake of being reductive, I think you 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 six, 60, you're probably currently on the path to improvement.

Reggie Smith

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 current life of loan life of loan loss rate used for that borrower? And maybe how that has changed in the last, call it, six months as you've seen that kind of deteriorate. I'm just kind of curious, like what are you talking about there? And then thinking about the 36% cap, I think last quarter you talked about being able to raise price. And so I'm assuming that they're not that high that there's room to kind of price and maybe talk about the dynamics there, like how much you've been able to raise APRs versus what the loss increases kind of been there?

Sanjay Datta

And let's see, I mean, if you I think you're asking a little bit about the sort of nature of loss rates in the primer and obviously, 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 to the tune of a 50% plus 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 conversions are down, volumes are down, et cetera.

Reggie Smith

And then I wanted to ask about. So I appreciate the guidance for the back half of the year. And I guess when you do a 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 '23. My guess is that there's probably some some patent there on 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 if there's anything you can provide in terms of how 3Q and 4Q should we assume kind of flat? Or is it more 4Q loaded?

Sanjay Datta

I mean, I would say it, I don't I think it's safe to assume they won't be flat. I mean, we're going to have to regrowth into that level by getting some conversion gains over time. So I think you could think of that as in hopefully a steady stream of conversion gain that will reap regrowth and add to that scale and consistently.

Operator

James Faucette, Morgan Stanley.

James Faucette

Just a few quick follow-ups from me. On the assumption of what macro does that assume then if we continue to see a bit the deterioration and primer borrowers that you've seen that that would be a headwind? Or are you expecting to be able to offset that with mix? I guess that's my first.

Sanjay Datta

Okay. Again, no, I think that I would maybe say you have sort of flat in aggregate. So if you see mild deterioration at the brand and mild recovery at the maybe the less prime end of that would sort of result in a relatively aggregate neutral macro and under which we could achieve. I think the numbers that we have described.

James Faucette

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 your terms there? And then I'll just tag and as you're adjusting your OpEx base, is there a level at which you're thinking that you should be very equivalently, you keep OpEx relatively flat from or can you or how do we think about how you're thinking how you're feeling about OpEx, if you if and as we get back to breakeven and profitability? Thank you.

Sanjay Datta

Sure. Let's see on the I'll 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 those will get factored in to the back half of the year. I think that's one component of our return to our EBITDA breakeven. It won't get us there alone. So we are expecting some some growth as well. And if that growth doesn't materialize and it leaves us short of our EBITDA target, then we will sort of reconsider it at that time.
And I think your first your initial question or your first part of your question was about the renewal of the committed agreements yet and to what extent that terms are changing like anytime you, these are sort of renewals of existing relationships?
I think that each time anytime you spend on something like a year and in an initial relationship, you have learnings on both sides of what works well and what doesn't. And so it's natural to come to sort of revisit some of that when you re-up. But I think that some in the large in the grand scheme of things, I don't think those are these are not major changes. I think that I think you can largely think of these as and so surviving sort of persistent relationships with some fine tuning around the edge. I don't think there's anything that will dramatically changed the economic picture for our business model.

Operator

And 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

Well, thanks to all you for joining us today. And to close. I just want to 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

That does conclude today's conference. We do thank you for your participation. Have an excellent day.