Upstart Holdings, Inc. Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Upstart Q1 Fiscal Year 2022 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Jason Schmidt, Vice President, Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us on today's conference call to discuss Upstart's first quarter 2022 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'd like to remind you that shortly after the market closed today, Upstart issued a press release announcing its first quarter 2022 financial results and published an Investor Relations presentation. Both are available on our Investor Relations website, ir.upstart.com. During the call, we will make forward-looking statements, such as guidance for the second quarter and full year 2022 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. Later this quarter, Upstart will be participating in several upcoming conferences. We will also be holding our Annual Stockholders Meeting on May 17. Now I'd like to turn it over to Dave Girouard, CEO of Upstart.

Good afternoon, everyone. Thank you for joining us on our earnings call, covering our first quarter 2022 results. I'm Dave Girouard, Co-Founder and CEO of Upstart. I'm pleased to say we're off to a great start in 2022. The Upstart team just delivered our seventh consecutive profitable quarter and our fourth straight quarter with triple-digit year-on-year revenue growth. As the recognized innovator in AI lending, we continue to expand our leadership position in personal lending and are now off and running in our auto lending product as well. Despite the macro headwinds that appeared over the first quarter, we saw loan transactions of more than $4.5 billion, a record for the Upstart platform and perhaps for the industry as a whole. At the same time, we added a huge number of lenders and car dealerships during Q1. Today, we have more than 500 dealerships on Upstart as well as 57 banks and credit unions, which is up from 42 when I last updated you in February. At this point, we're adding about a lender per week. This is real progress, considering we had just 10 lenders on the platform when Upstart IPO-ed in December 2020. Additionally, we now have 11 lenders with no minimum FICO score in their credit policies, up from 7 the last time we spoke. I'm confident that our momentum and pipeline for both dealerships and lenders has never been stronger. We continue to make rapid progress with our auto refinance product as well. In the first quarter, we transacted more than 11,000 auto refi loans on our platform, almost twice as many as we did in all of 2021. We also launched our first AI model for auto refi that is partially trained by our own auto lending performance data. This kicks off the process of building and deploying increasingly accurate versions of our model, which is our primary source of competitive advantage in the market. In Q1, we also more than doubled the rate of instant approvals for auto refi applicants, another major step toward increasing funnel throughput and delivering a differentiated product experience. Of course, in the recent weeks and months, it's become apparent that 2022 is shaping up to be a challenging one for the economy and for the financial services industry in particular. In my remarks in our February earnings call, I mentioned that the Omicron variant, clear signs of inflation, and the Fed's plans to counter it, and the market rotation out of high-growth technology have posed challenges. Since then, it's become clearer just how aggressive the Fed will be with interest rates in order to combat a level of inflation that we haven't seen in decades. The two-year treasury note, which is the most relevant industry benchmark for our business, has risen more than 200 basis points since October. The war in Ukraine and the zero-COVID policy in China have only increased the risks and uncertainties facing the global economy. As I said in February, lending is a cyclical industry and always will be, so we expect volume and pricing on our platform to vary accordingly. The average loan pricing on our platform has increased more than 300 basis points since October. In addition to increasing rates for approved borrowers, this also has the effect of lowering approval rates for applicants on the margins. Given the hawkish signals from the Fed, we anticipate prices will move even higher later this year, which will have the effect of reducing our transaction volume. However, if you've been following Upstart for a while, you know we've been through several disruptions in our industry over the years, and each time, Upstart gained market share and emerged a stronger company. In turbulent economies, the advantages of a founder-led company with a closely-knit and tenured leadership team become apparent. I'm proud of how Upstart performed in the last two years, particularly during an economic cycle with no precedent. In 2020, Upstart grew revenue 42% and generated a modest profit in the worst year of the pandemic. Our growth rate and our profits since then have been extraordinary by any measure. Even in this challenging environment in 2022, our guidance for full-year revenue implies a growth rate of 47% over 2021, and we expect to be cash flow-positive. With respect to credit performance, we are pleased with how our models performed on behalf of our lenders during this tumultuous period. While not perfect, our model significantly outperformed traditional FICO-based risk models and learned quickly while doing so. For Upstart loans originated and funded by our banks and credit union partners, we saw significant overperformance since the beginning of COVID, which has normalized to on-target performance in recent months. There has been no meaningful underperformance of returns with any of our more than 50 lending partners since the program's inception in 2018 despite significant periods of economic disruption. For loans funded by institutions in capital markets, we have observed more volatility, which is natural given the broader risk aperture. The unprecedented level of government stimulus caused the majority of these post-COVID vintages to overperform significantly. The abrupt termination of these stimulus programs has caused some of the more recent vintages to underperform. We are confident that our models are currently well-calibrated to the latest consumer credit conditions, performing in line with expectations and are more accurate than at any time in our history. Let's turn now to our new product efforts. One of our most important initiatives for 2022 is the accelerated rollout of our auto retail product. Since acquiring Prodigy in April of 2021, we expanded our dealership footprint from about 100 rooftops at the time of the acquisition to more than 500 today, making Upstart one of the fastest-growing auto retail software platforms in the industry. Upstart's active dealership footprint over the last 90 days spans 35 different OEMs, including Toyota, Subaru, and VW. We are well into Phase 2, which is the introduction of Upstart-powered loans into our auto retail software. This represents the next critical step in modernizing the car buying experience. Our early progress in delivering loans through our retail software has exceeded our most optimistic expectations. While lending has enabled only a handful of dealerships in California, the uptake and win rate for the loan product, technically termed a retail installment contract, has been far better than anticipated. Our auto teams are working quickly to smooth some product edges, fill in a few missing features and complete integrations with various legacy dealer systems, all in the interest of moving toward a broad-based rollout. Our goal has enabled lending in a few dozen dealerships in four states this quarter, representing about 25% of the U.S. population, followed by a full nationwide rollout in Q3. Based on what we now know, we expect the auto retail lending business to contribute meaningfully to Upstart's monthly transaction volumes by the end of the year, setting us up for a significant ramp in 2023. As I've said before, auto retail is perhaps the largest of all buy now, pay later markets. So this is one of the most exciting developments in Upstart's history. You should feel confident that we have a lot of executive attention on getting it right. I'm also pleased to share that we began publicly testing our small dollar loan product in the past few weeks. I first mentioned this to you in our earnings call last November. It's designed to help consumers with unexpected and immediate cash needs, think a few hundred dollars repaid in just a few months. It's also important to remember that we're building a bank-ready product at bank-friendly APRs, always operating within the 36% rate cap prescribed to nationally chartered banks and to those who serve U.S. military service members. This is a strategic initiative to our mission to improve access to credit, and we believe it will accelerate the pace at which we can bring more marginalized Americans into the mainstream banking system. What I told you in November, we aim to launch the small dollar loan before the end of 2022. Our small dollar team set an aggressive goal to launch the product by the end of Q1, and I'm pleased to report that they achieved this ambitious goal. Of course, we still have lots of work to do to realize the opportunity in small dollar lending, but the team's ambition is inspiring. Additionally, I'm happy to share that our small business lending team is likewise making impressive progress and is aiming to have their product in the market within a few months. The first version of our SMB pricing model will include more than 500 variables about both the applicant and the business. It will also feature our loan month modeling framework, which is one of the most impactful innovations added to our personal loan product a few years back. Our initial testing suggests that version 1 of our SMB model will deliver higher accuracy as measured by Area Under the Curve, or AUC, than peer models that have been in the market for years. We'll begin to cautiously test this new product in the second half of the year. I'm excited about our SMB product for two reasons. First, business lending is central to far more banks than is consumer lending. Second, despite the interest banks have in business lending, the FDIC data suggest that 77% of large banks and almost 90% of small banks have no online application process whatsoever. We're also hard at work on some fundamental upgrades to the infrastructure that underpins our AI models and how we develop them. The surface area over which we're implementing AI has expanded dramatically. First, we're now working on seven or eight unique models that target different aspects of credit targeting and origination. Second, the amount and types of data used to train our models has grown exponentially and will continue to do so. As such, the time and processing power required to retrain our models has similarly increased. Naturally, the opportunity to improve the infrastructure we use to build, train and deploy AI models is enormous. In an effort broadly referred to internally as Machine Learning to Heaven, or ML2H, we're working to dramatically upgrade this infrastructure. Our goals with ML2H are to allow hundreds of research scientists to seamlessly and securely build new models, add data to existing models, train and test them in an automated fashion, and deploy them across the entire model ecosystem simultaneously. Another important area we're investigating is the means by which our AI models include assumptions about the macro economy. While our models have long considered the current macro context, we've consistently said that we aren't and don't aim to be macro forecasters, yet macro events will always have some degree of impact on the performance of Upstart-powered loans. Given our product is designed to target a particular return to lending partners, that implies there's always some view of the macro future embedded in our models. Given this reality, we intend for our product to explicitly share the macro adjustments that are embedded in the models, and furthermore, to allow our partners to input their own macro assumptions. This will provide significantly more transparency to our lending partners and will also put our focus squarely on risk ranking, which is the heart of what makes Upstart's models unique. A few weeks back, we celebrated Upstart's 10th anniversary. It was a wonderful opportunity to remember all we've been through, to stop for a moment to reflect on how we got where we are today, and to show gratitude that I feel for all those who have been part of that journey: our employees, past and present; our investors and partners; and of course, our friends and families that made this all possible. Some of the old-timers, the original Upstarters, if you will, shared some of their favorite moments in Upstart history. We talked about the street curb we sat on for lunch each day in our Palo Alto office because we had no better place to gather. When I had the chance to speak to the team, I told them that I'm not particularly adept at celebrating the past. It's just not me. I'm far too excited and paranoid about the future to spend too much time toasting to our success in the past. As we shifted towards talking about the future, I told our team we need to act with urgency today with a healthy dose of paranoia. We're a company grounded in reality with our eyes wide open as to the evolving risks we see in the industry and in the world. At the same time, we have to pair this urgency about the present with optimism and absolute determination about the future. Fortunately, most of our leadership team has been here. So we know the drill and are confident that we can navigate whatever 2022 and beyond might hold. We're confident that we can blend that urgency for today with an optimistic eye on the horizon because although we serve a cyclical industry, we represent a secular change that the financial services industry desperately needs. Artificial intelligence will reshape the economics of lending in ways that will reverberate for decades. We're today pursuing opportunities that represent more than $6 trillion in annual origination. So there's little question about the scale of the addressable market. We see a clear path to building a company with more than $10 billion in revenue in the coming years and are maniacally focused on achieving that goal. Thank you. And now I'd like to turn it over to Sanjay, our Chief Financial Officer, to walk through our Q1 financial results and guidance.

Thank you, Dave, and thanks to everyone for being with us today. Just to quickly call out the key financial trends before diving into the more detailed numbers. On the top line, origination volumes and revenue from fees were both slightly up from last quarter, which was encouraging given the seasonal drop we typically see in Q1. Profitability was ahead of guidance but as anticipated, down sequentially from last quarter, partly due to the ramp of auto lending. We've continued to deploy our balance sheet assertively in the service of R&D in both auto lending and new segments of personal lending as well as using it to smooth fluctuations in funding for corporate loans. As Dave outlined, the macro environment has become an increasing headwind to growth this past quarter with both rising interest rates and rising consumer delinquencies putting downward pressure on conversion. With these dynamics in mind, here now is a summary of our numbers. Net revenues in Q1 came in at $310 million, up 156% year-over-year. Revenue from fees constituted $314 million of that amount, representing 101% of overall revenue and up 9% sequentially from last quarter. Net interest income was a negative component of net revenue this quarter as the loan assets on our balance sheet, which we mark-to-market each quarter, sustained declines in valuation due to the rising interest rate environment. The volume of loan transactions across our platform in Q1 was approximately 465,000 loans, up 174% year-over-year and representing over 350,000 new borrowers. The average loan size was up 18% over last quarter, indicating that fundamental loan demand from borrowers is back on the rise after being suppressed for more than a year due to government stimulus. Our contribution margin, a non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition, verification, and servicing, declined from 52% in Q4 to 47% in Q1, a level which was nonetheless 100 basis points above guidance. Our declining contribution margin was almost entirely a function of the expected ramp in auto lending, which remains contribution-negative at this early stage. Without the effect of auto loans, our contribution margin for personal lending would have clocked in at a robust 51%. Operating expenses were $275 million in Q1, growing 13% sequentially over Q4. Sales and marketing and customer operations spend, typically viewed as variable costs, each outgrew revenue this quarter at 16% and 18% quarter-on-quarter, respectively, due to the additional onus of acquiring and onboarding auto loans. Engineering and product development grew 8% sequentially due to slower hiring than targeted and remains our priority area of investment. Growth in general and administrative spend grew 3% sequentially. Taken together, these components resulted in Q1 GAAP net income of $32.7 million, up 224% year-on-year and above our guidance but down 44% sequentially from Q4. Similarly, adjusted EBITDA exceeded guidance at $62.6 million and grew 198% year-on-year but slid 31% quarter-over-quarter. Adjusted earnings per share for Q1 was $0.61 based on a diluted weighted average share count of 95.5 million. We ended the quarter with $1 billion in restricted and unrestricted cash, down from $1.2 billion at the end of last year as more of our capital base flowed into loan assets to support R&D programs, primarily in auto refinancing and some newer segments of personal loans. Additionally, we have started to selectively use our capital as a funding buffer for core personal loans in periods of interest fluctuation where the market-clearing price is in flux. Our balance of loans, notes, and residuals at the end of the quarter was consequently up to $604 million from $261 million in Q4. Since our prior earnings release, the level of uncertainty in the macro environment has continued to grow. After remaining at historically low levels for the past 18 months, loan default rates rose quite abruptly toward the end of last year and are now back to, or in some cases above, pre-pandemic levels. This dynamic we've observed consistently across the full breadth of our portfolio, although one which appears to be disproportionately impacting higher-risk tiers, which are generally composed of borrowers who might have a greater exposure to loss of government stimulus. To keep investors abreast of such credit trends, we have introduced new information in our investor materials, which shows in aggregate for all historical vintages the in-period loan defaults compared to the aggregate defaults predicted across those vintages at the time of their origination. The drop and subsequent reversal in developed trends depicted in the chart are in our view a function of the injection and subsequent waning of government stimulus. Consequently, virtually all of our pre-2021 vintages will substantially outperform their return targets, while the two or three vintages most adjacent to the reversal in trend at the end of 2021 are set to underperform. Separately, interest rates have continued to climb in response to inflation signals and Fed tightening. The combination of inflation and monetary tightening implies the nontrivial risk of a recession potentially later this year. Given the general macro uncertainties and the emerging prospects of a recession later this year, we have deemed it prudent to reflect a higher degree of conservatism in our forward expectations. With this context, for Q2 of 2022, we are expecting revenues of $295 million to $305 million, representing a year-over-year growth rate of 55% at the midpoint; a contribution margin of approximately 45%; net income of negative $4 million to $0 million; adjusted net income of $28 million to $30 million; adjusted EBITDA of $32 million to $34 million; and a diluted weighted average share count of approximately 96.2 million shares. For the full year 2022, we now expect revenue of approximately $1.25 billion, representing a growth rate of approximately 47% from the prior year, down from $1.4 billion guided last quarter; a contribution margin of approximately 48%; adjusted EBITDA of approximately 15%. Thanks once again to everyone at Upstart who is working hard to move our mission forward. With that, Dave and I are now happy to open the call to any questions. Operator, back to you.

We take our first question from Ramsey El-Assal with Barclays. Your line is open. Please go ahead.

My first question is on the conversion rate. It came in a little lower than our model. And Sanjay, I know you mentioned that some higher delinquency rates might be putting some pressure there. So I guess, first in quarter, maybe talk about the sort of puts and takes with the conversion rate. And then also, what should we be expecting as we move forward throughout the year?

Thank you for your question, Ramsey. I believe it relates to what we've discussed, which involves two main points: first, as interest rates in the economy increase, referrals for banks and institutional buyers also rise. Secondly, we've observed that delinquencies in the economy, which were unusually low for about 18 months, began to revert between November and February. With the reduction in government stimulus, we anticipate that these trends have now reversed. These two factors are leading to higher rates quoted to consumers, resulting in lower conversion rates. The impact on the rest of the year will depend on these dynamics. We see the reversal in delinquency trends as stable now, consistent for around 60 days. There is a possibility of interest rate hikes later in the year, which could pose risks to conversion rates, but it will depend on how you perceive the macro environment's evolution for the rest of the year.

Fair enough. I also wanted to ask you about the ABS side of your business. You mentioned that you'd seen some dislocation that sort of worked its way back to something more normal. I guess, talk about the demand environment for your loans as we stand today. And then also maybe clarify whether you foresee needing to incur any kind of residual liabilities or any other kind of hand-holding measures in order to get those transactions consummated or whether you think the environment is not really going to demand that.

Yes. Sure. The broader picture on loan demand is diverse; there are various channels by which the loans get funded. The loans funded through bank balance sheets or credit union balance sheets are among the more resilient since they have a cost of funds from their deposits that tends to be insulated from the yield curve movements. The buyers in the institutional world that buy and hold on their balance sheets are a bit more exposed to interest rate movements but still somewhat resilient. The amount of loans being sold to the ABS markets has dramatically decreased in 2022 compared to 2021. That said, we do not retain any residual risk in those transactions, and it is not part of our plan to do so in the future.

We take our next question from Pete Christiansen with Citi.

Dave, Sanjay, I was just hoping you could elaborate a little bit on that last comment Sanjay made about, I guess, credit trends seem to be stable over the last 60 days. If you look at some of the rollovers on delinquencies, there are some concerns that you could trigger some of the ABS C&L thresholds. Just wondering if there's a concern there, and could this impact your ability to attract funding? Then just to my second question, Sanjay, you mentioned you've increased the balance sheet risk here a little bit. How far are you willing to go in terms of supporting new loans and putting warehouse liabilities on the balance sheet?

Yes. Pete, thanks for the question. This is Sanjay. Your first question is about the pattern of delinquencies and ABS triggers. The absolute level of delinquency rates, as I said, reverted to pre-pandemic levels fairly abruptly starting in October and November. However, March and April were very stable months. Regarding your concern about triggers on ABS deals, the triggers are based not on the in-period delinquencies but on charge-offs from delinquencies in prior months. We've done some modeling on that. I think, with respect to our large ABS deals, I don't think there's much concern of breaching triggers. We do some smaller monthly pass-through issuances. There may be a possibility of breaching triggers there, but it won't affect our ability to quantify those deals. Your second question is how we plan to use our balance sheet. Historically, our balance sheet has mostly been for R&D. However, we've used it recently as a funding mechanism to smooth out fluctuations caused by quick changes in interest rates. This is not a long-term strategy but rather a necessary step. We're looking to build more automated mechanisms for responding to funding rates without relying heavily on our balance sheet.

Next question from Simon Clinch with Atlantic Equities.

I just wanted to ask about your guidance for the year. You're explicitly building in a recession scenario later in the year. I was wondering if you could help us bridge the gap to what’s changed regarding the mix of your loans. You talked about previously having embedded $1.5 billion of auto loans for the year. What’s changed there on the personal loan side as well? I have a follow-up probably on the last points you were just making.

Sure. This is Dave. We expect less volume than we would have a few months ago based on pricing in the marketplace being higher, which is a function of both base rates being higher and the risk in the environment. With increased average costs to the consumer, some borrowers will no longer be approved. Hence, if rates go up, we will see less volume, and if rates go down, we will see more. We are not predicting a recession, merely reflecting prevailing rates and the loan transactions they typically translate to, and that’s what's driving our guidance for the rest of the year.

Just to follow on that point, I'm kind of surprised to hear that you're using your balance sheet to support loans, which isn't normal for a platform business like yours. I was wondering what kind of message that might send to your bank partners or others in the system.

It’s crucial to clarify that we view ourselves as a marketplace where price discovery happens, and loans are funded when they make sense by our bank partners. When rapid changes in interest rates occur, our platform's ability to react isn't as nimble as we would like, and we've sometimes needed to step in to bridge that gap. We don’t plan to make it a long-term strategy; it’s a temporary measure to ensure stability in the system as we work on enhancing our platform's automation.

Just to contextualize the loan balance on our books this quarter, it was still a single-digit percentage, with the majority being R&D-style spending on auto loans and new products. So while it’s a new approach, it remains a small part of our overall strategy.

We move to Mike Ng with Goldman Sachs.

I wanted to follow up on the revenue outlook. It sounds like it was mostly driven by a lower origination outlook due to lower demand from rising rates. I just wanted to see if you're seeing any change in the lending parameters or shrinkage of the credit box due to what's happening on the funding side.

Mike, this is Dave. No, I don’t think there's any significant change there. While some banks and credit unions may have raised target returns slightly, there's no substantial movement in that direction overall. The larger shifts are occurring on the investor side regarding return targets, but the credit box tends to remain stable.

And I just wanted to follow up on some discussion around loans on the balance sheet. What's your assumption for where that goes for the rest of the year? Are you planning to let those mature or sell them when opportunities arise?

Those are being held as held-for-sale loans. It will depend on the secondary market's conditions, but ideally, we prefer liquidity, so we would want to get cash back on our balance sheet rather than hold loans for interest income.

We take our next question from David Chiaverini with Wedbush Securities.

I wanted to ask about the recent change to your loan modification policy where you made it easier for Upstart borrowers to obtain forbearance, which allows delinquent borrowers to be considered current on their loans. Can you discuss why this change was made? Are delinquent borrowers automatically entered into the forbearance program, or do they have to opt into it?

This is Sanjay. The change to loan modifications was made to create more flexibility for borrowers during periods of macro stress. If you charge off a loan, your recovery is quite low, around $0.10 to $0.12 on the dollar. If you implement an effective forbearance program, you can recover around $0.30 to $0.40 on the dollar. While we intended to optimize how we manage modifications and forbearance regardless, the current macro environment accelerated those plans. However, it does require an application and review process; it's not automatic.

And my follow-up question relates to the fair value adjustment. In 2018, when interest rates were rising, the fair value adjustment was about a $40 million headwind to revenue. Could you discuss how we should consider this line item this year and how it impacts your EBITDA forecast due to the rising rate environment?

The fair value adjustment is indeed a small component of volatility on the P&L and depends on the scale of our balance sheet and the economy. Currently, our scale is larger compared to last year. If interest rates continue rising, we could see further fair value devaluations. It's important to note that the loan valuations are marked to market, so volatility will exist based on that. However, we don't view fair value adjustments as critical to our long-term business opportunity.

We move to Arvind Ramnani with Piper Sandler.

I just wanted to ask about the loans on your balance sheet. And I know, Sanjay, you clarified that most of it is for R&D, but can you quantify what portion is R&D versus sort of regular risk? Under what circumstances should we see that number grow from single digits to double digits? Is that a possibility for the rest of the year?

In Q1, about three-quarters of the loans on our balance sheet were for R&D purposes. The proportion could grow depending on the level of dislocation in the economy and our ability to respond to shifts in market-clearing rates. If we continue to experience sharp interest rate changes and our platform doesn't respond well, we might have to step in more often to bridge those gaps. However, our aim is to develop mechanisms that allow for better automation in the system.

Regarding the auto segment, we’re committed to bringing lenders onto the platform to support this product throughout the year. We don’t foresee major delays in our timeline for either the refi product or the retail operations.

So I was impressed by your 18% sequential growth in your average loan amount, hitting $9,700, but you were at $13,000 at the beginning of 2020. Do you think you can approach that number anytime soon?

We don't expect to return to $13,000 average loan amounts. As our systems improve, we will be able to approve more borrowers at the margins, which will lead to a trend toward smaller loan sizes. We are launching a small dollar product, which also aims for smaller amounts than before. Overall, loan sizes will likely not trend significantly upward based on these factors.

And my follow-up is that the loan amount on your balance sheet is about $600 million. Can you confirm that is a high watermark for the year, or do you think you can grow meaningfully over the next couple of quarters?

We can’t confirm that the $600 million is a high watermark. Our plans involve continued R&D spending, and as some programs gain traction, we'll shift funding as necessary to support those efforts. The economy remains fluid, affecting our strategy, and we're prepared to step in if needed while ensuring it doesn’t overextend our balance sheet.

We move to James Faucette with Morgan Stanley.

This is Sandy Beatty on behalf of James. Can you remind us how the user limits impact what your platform can do, particularly for lower-end consumers? Are there scenarios where you encounter issues as APR offers rise?

Our platform features around 50 lenders, each with its own terms based on their charter. We've decided not to support any lender originating loans above 36% APR since that is the legal limit for nationally chartered banks. As rates increase, more prospective borrowers may find themselves rejected. Ultimately, the model improves and may grant approval to some that were declined previously, but the credit box can't be excessively modified based on circumstances.

And just as a follow-up, within a tighter funding environment, could we see changes to unit economics?

Yes, if the macro environment becomes more challenging, we might adopt a more conservative approach that could lead to higher take rates or larger, improved unit economics due to lower marketing and operational costs.

We take our final question from Nat Schindler with Bank of America.

You mentioned that you outperformed during the pandemic due to stimulus. Now, it seems there are signs of underperformance, particularly in lower-quality loans. What does that mean for the performance of your entire portfolio that originated from late 2021 through 2022?

The impact of the decline from the government stimulus has been widespread across all loan types. While there are some slight differences between the performance of high-risk and low-risk loans, the primary driver of underperformance is the macroeconomic conditions, particularly the withdrawal of the stimulus. Our risk grading system is more predictive than relying on FICO scores alone. Despite recent fluctuations, our model performance has been stable over the long term.

Timing plays a key role here. Loans originated before the stimulus withdrawal are performing well while those near the end of 2021 have been underperforming. The fates of those loans have less to do with their risk characteristics than with the macroeconomic landscape surrounding them.

If student loan forbearance ends as expected, could that have a compounding effect?

Yes, if forbearance ends and repayment demands resume, it would be a continued form of reversing the stimulus. The overall level of savings and cash in the economy continues to decline, but thus far, loan performance has been stable. I would add that our portfolio is now broad across various demographics, indicating a diversified risk landscape. It will benefit us overall if we have a more stable performance throughout the economy.

It appears there are no further questions at this time. I'd like to turn the call back to Dave Girouard for any additional or closing remarks.

I just want to say thanks, everybody. We are quite pleased with the results. We appreciate that 2022 is a complicated year for the economy with many open questions, but we feel exceptionally confident in the strength of the business and are optimistic about our future as we have been. Thank you all for joining us today.

That concludes today's call. Thank you for your participation. You may now disconnect.