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Upstart uses Variable Interest Entities (VIE) for some of its loans.
VIEs came about in reaction to Enron's creative use of off balance
sheet arrangements to hide debt and boost profits.

VIEs come in two flavors: consolidated and unconsolidated. The consolidated
VIEs are included in the balance sheet numbers. The unconsolidated VIEs are
reported in a note. Upstart has a section in its 10-K that reports on both
its consolidated and unconsolidated VIEs (in Note 3 on the 10-K).

I'm not the sharpest saw in the shed. VIEs give me a headache. I found that
ChatGPT was surprisingly quite helpful in understanding VIEs.

Bottom line: the balance sheet for Upstart is less transparent than most.

Ears <long UPST>

Very good to know, thanks for reporting this, Ears!!!

Guess I've got some digging to do in the 10-K.

VIEs come in two flavors: consolidated and unconsolidated. The consolidated
VIEs are included in the balance sheet numbers. The unconsolidated VIEs are
reported in a note. Upstart has a section in its 10-K that reports on both
its consolidated and unconsolidated VIEs (in Note 3 on the 10-K).


I got around to reading Note 3 in the 10-K.

Consolidated VIEs:
"
The Company established Upstart Loan Trust and Upstart Auto Warehouse Trust to enter into warehouse credit facilities for the purpose of purchasing Upstart-powered loans. (See 'Note 8. Borrowings' for additional information.) The entities are Delaware statutory trusts that are structured to be bankruptcy-remote, with third-party banks operating as trustees.

Upstart Loan Trust 2, a Delaware statutory trust, holds loans facilitated through the Upstart platform that are not pledged or eligible to be pledged to the Company's warehouse credit facilities.

Total consolidated VIEs Dec 31, 2022: Assets: $984,481, Liabilities: $337,830, Net Assets: $646,651
"

Those figures are quite a bit higher than the Dec 2021 figures, reflecting the use of the balance sheet to keep loans flowing, IINM.

Unconsolidated VIEs:
"
The Company's transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. While the Company continues to be involved with the unconsolidated VIEs in its role as the sponsor and the servicer of these transactions, the Company does not hold a significant economic interest in these entities and has determined that it is not the primary beneficiary of these entities. The Company's unconsolidated VIEs include entities established as the issuers and grantor trusts for various securitization transactions.

In cases where the VIEs are not consolidated and the transfer of the loans from the Company to the securitization trust meets sale accounting criteria, the Company recognizes a gain or loss on sales of loans. The net proceeds of the sale represent the fair value of any assets obtained or liabilities incurred as part of the transaction. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying securitization trusts.
"

They claim the maximum exposure to loss from the unconsolidated VIEs, a remote chance they say, is ~$13.3m, down from ~$15.5m last year.

"
The carrying value of assets that relate to variable interests in unconsolidated VIEs consists of $8.3 million and $6.2 million of securitization notes and residual certificates which are included in other assets on the consolidated balance sheets as of December 31, 2021 and 2022, respectively. The Company also had $7.2 million and $7.1 million of cash deposits made to reserve accounts for related securitizations, included in other assets on the consolidated balance sheets as of December 31, 2021 and 2022, respectively.
"

Doesn't look too scary, though I suppose they could be misrepresenting their exposure. The main risk seems to be, as before, that the economy deteriorates causing more defaults, and/or inflation picks back up causing the value of loans on the balance sheet to shrivel as the interest being earned is lower than would be required by the new higher rates.

Recent economic news has showed ongoing strength in the economy (good) and inflation not dropping as fast as some hoped (bad). Short term interest rates have been relatively flat the last several months, so I guess we can deduce that the value of the loans has been fairly stable.

Here's how I understand it works, but I could be dead wrong.

For a run-of-the-mill loan, Upstart buys the loan from its banking or credit
union partner and then immediately resells it to the VIE. Because Upstart has
controlling interest on the loan, it goes to the consolidated VIE. It is now
on the VIE's balance sheet. But because of SEC rules formulated after Enron,
Upstart has to report the loan on its own balance sheet as if it were its own.

Also, if Upstart had to use some of its credit limit using one of the warehouse
agreements when it bought this loan, the debt would show up on the VIE balance sheet,
but Upstart would also have to report the debt on its own balance sheet as well.

For the unconsolidated VIEs, Upstart has a minority interest which is included in
"Other Assets" on their balance sheet.

I understand the reasons for these VIEs. But it just makes things more complicated
and less transparent from my standpoint.

The takeaway for me from Q4 is they used cash and debt to goose loan volume in
order to goose fees so Q4 and the year would look better. Now they've maxed out
the cash they can use to buy loans and they've maxed out their credit line, so
there's nothing left for them to use to goose Q1.

Meanwhile, I've been working on the guidance numbers for Q1 and they don't make
sense unless one factors in a huge write-off and a surprise on SBC. I'll post on
this shortly.

Ears

I've been working on the guidance numbers for Q1 and they don't make
sense unless one factors in a huge write-off and a surprise on SBC. I'll post on
this shortly.

I'm not sure what you mean by SBC? I expect you're right about a big write-down. Common tactic for a corporation to throw every write-down, restructuring expense, etc ... into the same quarter so that they can say 'one time charge' and other quarters look much better by comparison.

Here's that forward guidance from the press release.
"
Financial Outlook
For the first quarter of 2023, Upstart expects:
● Revenue of approximately $100 million
o Revenue From Fees of approximately $110 million
o Net Interest Income (Loss) of approximately ($10) million
● Contribution Margin of approximately 55%
● Net Income (Loss) of approximately ($145) million
● Adjusted Net Income (Loss) of approximately ($70) million
"

They have the layoffs and associated charges in Q1, announced Jan 31st, as discussed in this Fool article: https://www.fool.com/investing/2023/01/31/upstart-...

The new reorganization will result in $15 million of charges and a one-time $3 million noncash charge due to forfeited stock awards.

They were already hemorrhaging funds prior to this action: the already existing loss rate (~$60m loss from operations in Q4), with further decline in loan volume, for the reasons you mention. With the reduced loan volume it's not hard to see them getting to the guided figure of a ~$70m loss in adjusted net income.

But, they also guided for a GAAP net income loss of more than twice that ($145m), of which they've only previewed ~$18m in charges for the restructuring, leaving ~$57m in other losses coming in the unadjusted figures.

I wouldn't be at all surprised to see most of that figure coming as a big write-down in the value of their loans on the book, due to realized and projected higher default and interest rates, calculated with a pessimistic eye to the future so that if things don't get as bad as their pessimistic forecast, they can later re-adjust value for a positive earnings surprise in a later quarter.

One thing in the guidance that didn't really register for me before I wrote this post is that they are guiding for a net interest income figure of a $10m loss. This for a corp with ~$530m in cash, ~$1,000m in loans vs ~$1m in borrowings. Shouldn't they have net positive interest, considering they are carrying ~$1,000m in personal and auto loans on their books to go with all that cash?!?

By SBC I meant Stock-Based Compensation.

We are thinking along the same lines...in my experience CEOs try to stuff all
bad news into one quarter if they can get away with it.

Shouldn't they have net positive interest...

Interest Income net includes Interest Income, Interest Expense, and Fair Value
Adjustments. In 2022 the fair value adjustments have been overpowering any interest
income. For example, in Q4.2022 Interest Income was 39,292, Interest Expense was
-4,521, and Fair Value Adjustments were -43,455 for a total Interest Income net
of -8,684. It appears they expect this to continue in Q1.

Ears

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