Upstart Holdings, Inc.UPST
Upstart Holdings, Inc. Fair Value Disclosure
Fair Value Measurement
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The following table presents assets and liabilities measured at fair value and categorized in accordance with the fair value hierarchy:
| Level | December 31, 2024 | December 31, 2025 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Loans | 3 | $ | 806,304 | $ | 984,552 | |||||||||||||||
Beneficial interest assets | 3 | 176,848 | 396,216 | |||||||||||||||||
| Line of credit receivable | 3 | 56,269 | 112,742 | |||||||||||||||||
| Loan servicing assets | 3 | 27,439 | 40,941 | |||||||||||||||||
| Notes receivable and residual certificates | 3 | 22,055 | 97,416 | |||||||||||||||||
Interest rate cap(1) | 2 | 1,864 | 225 | |||||||||||||||||
| Total assets | $ | 1,090,779 | $ | 1,632,092 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Payable to securitization note holders | 3 | $ | 87,321 | $ | 46,542 | |||||||||||||||
| Beneficial interest liabilities | 3 | 10,089 | 5,075 | |||||||||||||||||
| Trailing fee liabilities | 3 | 4,614 | 5,761 | |||||||||||||||||
| Loan servicing liabilities | 3 | 1,180 | 4,383 | |||||||||||||||||
| Total liabilities | $ | 103,204 | $ | 61,761 | ||||||||||||||||
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(1) The fair value of the interest rate cap is determined based on the present value of the estimated future cash flows over the contract term using observable market-based inputs as of the valuation date, including implied interest rates.
Financial instruments are categorized in the fair value hierarchy based on the significance of unobservable inputs and assumptions in the overall fair value measurement. Financial instruments classified as Level 3 within the fair value hierarchy do not trade in an active market with readily observable prices. The Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years presented.
Loans
Loans included in the Company’s consolidated balance sheets are classified as either held-for-sale or held-for-investment based on the Company’s intent and ability to sell the loans prior to maturity. From time to time, the Company transfers loans between the classification categories based on changes in the Company’s intent and ability. Loans held in the consolidated securitization include loans contributed as collateral to and held in the consolidated securitization (UPST 2023-2) and are classified as held-for-sale.
The following table presents the fair value of classes of loans included in the Company’s consolidated balance sheets as of December 31, 2024 and 2025:
| December 31, 2024 | December 31, 2025 | |||||||||||||
| Loans held-for-sale | $ | 405,812 | $ | 393,159 | ||||||||||
| Loans held-for-investment | 297,543 | 537,631 | ||||||||||||
| Loans held in consolidated securitization | 102,949 | 53,762 | ||||||||||||
| Total | $ | 806,304 | $ | 984,552 | ||||||||||
Valuation Methodology
Loans held-for-sale and held-for-investment are measured at estimated fair value using a discounted cash flow model. The fair valuation methodology considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows on loans. Net cash flows are discounted using an estimate of market rates of return. The fair value of these loans also includes accrued interest.
The Company elected the measurement alternative under Topic 810, Consolidation, and maximizes the use of observable inputs to estimate the fair value of the financial assets and liabilities of UPST 2023-2. Under the measurement alternative, the Company determined that inputs and market data used to determine the value of UPST 2023-2 liabilities, which consist of securitization notes and residual certificates issued as part of this securitization, are more observable than those used to measure fair value of UPST 2023-2 financial assets, which consist of held-for-sale loans contributed as collateral. Thus, the loans are measured based on the sum of the fair value of the UPST 2023-2 securitization notes and residual certificates, with changes in fair value included in the consolidated statements of operations and comprehensive income (loss). The fair value is also corroborated with discounted cash flow that considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows on loans, discounted using an estimate of market rates of return as disclosed below in the “Significant Inputs and Assumptions” section. The fair value of loans in consolidated securitization also includes accrued interest.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans held-for-investment and held-for-sale, excluding loans held in consolidated securitization:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (1) | Minimum | Maximum | Weighted-Average (1) | |||||||||||||||||||||||||||||||||
| Discount rate | 9.75 | % | 22.37 | % | 11.91 | % | 5.00 | % | 14.78 | % | 9.51 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.01 | % | 93.12 | % | 17.87 | % | 0.01 | % | 91.50 | % | 15.52 | % | ||||||||||||||||||||||||||
Prepayment rate | 0.45 | % | 89.07 | % | 33.07 | % | 0.45 | % | 99.75 | % | 43.41 | % | ||||||||||||||||||||||||||
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(1) Unobservable inputs were weighted by relative fair value.
The following table presents quantitative information about the significant unobservable inputs implied for the Company’s Level 3 fair value measurements for loans held in consolidated securitization, which is determined by the sum of the fair value of the related securitization notes and residual certificates, and corroborated with a discounted cash flow model, similar to the one used for other loans held on the consolidated balance sheet:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (1) | Minimum | Maximum | Weighted-Average (1) | |||||||||||||||||||||||||||||||||
| Discount rate | 5.96 | % | 15.25 | % | 9.59 | % | 6.99 | % | 15.00 | % | 10.43 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.67 | % | 37.70 | % | 15.66 | % | 0.67 | % | 35.68 | % | 16.12 | % | ||||||||||||||||||||||||||
Prepayment rate | 6.73 | % | 89.84 | % | 41.51 | % | 6.73 | % | 89.84 | % | 40.50 | % | ||||||||||||||||||||||||||
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(1) Unobservable inputs were weighted by relative fair value.
Discount rates–The discount rates are rates of return used to discount future expected cash flows to arrive at a present value, which represents the fair value. The discount rates used for the projected net cash flows are the Company’s estimates of the rates of return that market participants would require when investing in these financial instruments with cash flows dependent on credit quality of the related loan. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.
Credit risk rates–The credit risk rates are an estimate of the net cumulative principal payments that will not be repaid over the entire life of a financial instrument. The credit risk rates are expressed as a percentage of the original principal amount of the instrument. The estimated net cumulative loss represents the sum of the net losses estimated to occur each month of the life of the instrument, net of the average recovery expected to be received.
Prepayment rates–Prepayment rates are an estimate of the cumulative principal prepayments that will occur over the entire life of a loan as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments impacts the projected balances and expected terms of the loans.
Significant Recurring Level 3 Fair Value Input Sensitivity
The following table presents the sensitivity of the fair value of loans held-for-sale and held-for-investment, excluding the loans in consolidated securitization, to adverse changes in key assumptions used in the valuation model as of December 31, 2024 and 2025:
| December 31, 2024 | December 31, 2025 | |||||||||||||
| Fair value of loans held-for-sale and held-for-investment | $ | 703,355 | $ | 930,790 | ||||||||||
| Discount rates | ||||||||||||||
| 100 basis point increase | (9,048) | (12,006) | ||||||||||||
| 200 basis point increase | (17,881) | (23,623) | ||||||||||||
| Expected credit loss rates on underlying loans | ||||||||||||||
| 10% adverse change | (9,135) | (10,465) | ||||||||||||
| 20% adverse change | (18,129) | (20,397) | ||||||||||||
| Expected prepayment rates | ||||||||||||||
| 10% adverse change | (1,899) | * | ||||||||||||
| 20% adverse change | (3,783) | * | ||||||||||||
* Immaterial
The table below presents the fair value sensitivity of loans in consolidated securitization to adverse changes in key assumptions. The fair value of loans in consolidated securitization is not sensitive to adverse changes in discount rates and prepayment rates as such changes do not result in a material impact on the fair value as of December 31, 2024 and 2025.
| December 31, 2024 | December 31, 2025 | |||||||||||||
Fair value of loans held in consolidated securitization | $ | 102,949 | $ | 53,762 | ||||||||||
| Expected credit loss rates on underlying loans | ||||||||||||||
| 10% adverse change | (1,799) | * | ||||||||||||
| 20% adverse change | (3,577) | * | ||||||||||||
* Immaterial
Rollforward of Level 3 Fair Values
The following table presents a rollforward of loans classified within Level 3 of the fair value hierarchy:
| Loans Held-for- Sale | Loans Held-for-Investment | Loans Held in Consolidated Securitization | Total | |||||||||||||||||||||||
Fair value at December 31, 2023 | $ | 830,574 | $ | 146,768 | $ | 179,071 | $ | 1,156,413 | ||||||||||||||||||
Reclassification of loans(1) | (7,201) | 7,201 | — | — | ||||||||||||||||||||||
Purchases and originations of loans(1)(2) | 2,224,563 | 323,069 | — | 2,547,632 | ||||||||||||||||||||||
Sale of loans(1) | (2,342,018) | — | — | (2,342,018) | ||||||||||||||||||||||
Purchase of loans for immediate resale(1) | 2,087,810 | — | — | 2,087,810 | ||||||||||||||||||||||
Immediate resale of loans(1) | (2,087,810) | — | — | (2,087,810) | ||||||||||||||||||||||
Repayments received(1) | (201,106) | (137,050) | (47,997) | (386,153) | ||||||||||||||||||||||
| Charge-offs and changes in fair value recorded in earnings | (92,687) | (59,862) | (28,125) | (180,674) | ||||||||||||||||||||||
| Other changes | (6,313) | 17,417 | — | 11,104 | ||||||||||||||||||||||
| Fair value at December 31, 2024 | $ | 405,812 | $ | 297,543 | $ | 102,949 | $ | 806,304 | ||||||||||||||||||
Purchases and originations of loans(1) | 2,329,749 | 1,032,970 | — | 3,362,719 | ||||||||||||||||||||||
Sale of loans(1) | (2,105,962) | (418,624) | — | (2,524,586) | ||||||||||||||||||||||
Purchase of loans for immediate resale(1) | 6,765,933 | — | — | 6,765,933 | ||||||||||||||||||||||
Immediate resale of loans(1) | (6,765,933) | — | — | (6,765,933) | ||||||||||||||||||||||
Repayments received(1) | (193,197) | (314,827) | (37,885) | (545,909) | ||||||||||||||||||||||
| Charge-offs and changes in fair value recorded in earnings | (43,026) | (110,787) | (11,302) | (165,115) | ||||||||||||||||||||||
| Other changes | (217) | 51,356 | — | 51,139 | ||||||||||||||||||||||
Fair value at December 31, 2025 | $ | 393,159 | $ | 537,631 | $ | 53,762 | $ | 984,552 | ||||||||||||||||||
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(1) Represents the principal balance.
(2) Purchase activity includes an immaterial unpaid principal balance related to securitization clean-up calls during the year ended December 31, 2024.
The following table presents the aggregate fair value and aggregate principal outstanding of all loans and loans that were 90 days or more past due included in the consolidated balance sheets:
| Loans | Loans > 90 Days Past Due | |||||||||||||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||
| 2024 | 2025 | 2024 | 2025 | |||||||||||||||||||||||
| Outstanding principal balance | $ | 858,440 | $ | 1,038,521 | $ | 11,236 | $ | 17,685 | ||||||||||||||||||
| Net fair value and accrued interest adjustments | (52,136) | (53,969) | (9,638) | (13,094) | ||||||||||||||||||||||
Fair value(1)(2) | $ | 806,304 | $ | 984,552 | $ | 1,598 | $ | 4,591 | ||||||||||||||||||
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(1) Includes $285.5 million and $367.4 million of auto loans at fair value as of December 31, 2024 and 2025, respectively, of which an immaterial amount are 90 days or more past due as of December 31, 2024 and 2025. Also includes $54.3 million and $149.5 million of HELOCs at fair value as of December 31, 2024 and 2025, respectively, of which immaterial amounts are 90 days or more past due as of December 31, 2024 and 2025, respectively.
(2) The fair value of loans in nonaccrual status was immaterial as of December 31, 2024 and 2025.
Line of Credit Receivable
In connection with one of its committed capital and other co-investment arrangements, the Company issued a revolving line of credit receivable to a third-party, which is classified as held-for-investment. The fair value of the line of credit receivable as of December 31, 2024 and 2025 was $56.3 million and $112.7 million, respectively.
Valuation Methodology
The line of credit receivable is measured at estimated fair value using a discounted cash flow model. The model is based on the expected monthly outstanding balance of the line of credit receivable over the life of the agreement and considers the present creditworthiness of the counterparty and the difference between the market rates of return and the stated interest rate. Cash flows are discounted using an estimate of market rates of return. The fair value of the line of credit receivable also includes accrued interest.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements related to the line of credit receivable:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average | Minimum | Maximum | Weighted-Average | |||||||||||||||||||||||||||||||||
| Discount rate | 6.75% | 6.75% | 6.75% | 6.50 | % | 6.50 | % | 6.50 | % | |||||||||||||||||||||||||||||
Discount rate–The discount rate is the rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value. The discount rate used for the projected net cash flows is the Company’s estimate of the rate of return that market participants would require when investing in this financial instrument with cash flows dependent on credit quality of the counterparty. A risk premium component is implicitly included in the discount rate to reflect the amount of compensation market participants require due to the uncertainty inherent in the instrument’s cash flows resulting from risks such as credit and liquidity of the counterparty.
Significant Recurring Level 3 Fair Value Input Sensitivity
The fair value sensitivity of the line of credit receivable to adverse changes in key assumptions do not result in a material impact to the fair value of the line of credit receivable as of December 31, 2024 and 2025.
Rollforward of Level 3 Fair Values
The following table presents a rollforward of the line of credit receivable classified by the Company within Level 3 of the fair value hierarchy:
| Line of Credit Receivable | ||||||||
| Fair value at December 31, 2023 | $ | — | ||||||
Issuances | 54,780 | |||||||
| Changes in fair value recorded in earnings | 1,173 | |||||||
| Changes in accrued interest | 316 | |||||||
| Fair value at December 31, 2024 | $ | 56,269 | ||||||
Issuances | 59,461 | |||||||
| Repayments | (5,276) | |||||||
| Changes in fair value recorded in earnings | 1,923 | |||||||
| Changes in accrued interest | 365 | |||||||
| Fair value at December 31, 2025 | $ | 112,742 | ||||||
Assets and Liabilities related to Securitization Transactions
As of December 31, 2024 and 2025, the Company held notes receivable and residual certificates with an aggregate fair value of $22.1 million and $97.4 million, respectively, within other assets on the Company’s consolidated balance sheets. The balances consist of securitization notes and residual certificates retained from unconsolidated securitization transactions.
As of December 31, 2024 and 2025, the Company recognized payables to securitization note holders of $87.3 million and $46.5 million at fair value, respectively. The balance represents the value of the securitization notes issued and owned by third-party investors in connection with UPST 2023-2. The value of the UPST 2023-2 securitization notes and residual certificates retained by the Company is eliminated in the consolidation process.
Valuation Methodology
The Company prioritizes the use of observable inputs in estimating the fair value of notes receivable and residual certificates and payable to securitization note holders when available. Fair value is corroborated using a discounted cash flow methodology. This approach uses assumptions of projected cash flows of the underlying collateral loan pools adjusted for features of these securities, which reflect the Company’s best estimates of the assumptions a market participant would use to determine fair value.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements related to notes receivable, residual certificates, and payable to securitization note holders:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (1) | Minimum | Maximum | Weighted-Average (1) | |||||||||||||||||||||||||||||||||
| Notes receivable and residual certificates | ||||||||||||||||||||||||||||||||||||||
| Discount rate | 9.60 | % | 22.37 | % | 12.59 | % | 5.75 | % | 12.78 | % | 10.72 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.54 | % | 50.28 | % | 19.00 | % | 0.38 | % | 50.28 | % | 21.10 | % | ||||||||||||||||||||||||||
Prepayment rate | 4.61 | % | 94.53 | % | 35.72 | % | 4.11 | % | 95.77 | % | 33.04 | % | ||||||||||||||||||||||||||
Payable to securitization note holders | ||||||||||||||||||||||||||||||||||||||
| Discount rate | 5.96 | % | 10.98 | % | 8.52 | % | 6.99 | % | 10.40 | % | 9.65 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.67 | % | 37.70 | % | 15.66 | % | 0.67 | % | 35.68 | % | 16.12 | % | ||||||||||||||||||||||||||
Prepayment rate | 6.73 | % | 89.84 | % | 41.51 | % | 6.73 | % | 89.84 | % | 40.50 | % | ||||||||||||||||||||||||||
(1)Unobservable inputs were weighted by relative fair value.
Significant Recurring Level 3 Fair Value Input Sensitivity
Notes Receivable and Residual Certificates
Adverse changes in discount rates, credit risk rates, or prepayment rates do not result in a material impact to the fair value of notes receivable and residual certificates as of December 31, 2024 and 2025.
Payable to Securitization Note Holders
Adverse changes in discount rates, credit risk rates, and expected prepayment rates do not result in a material impact to the fair value of payable to securitization note holders as of December 31, 2024 and 2025.
Rollforward of Level 3 Fair Values
The following table presents a rollforward of the notes receivable and residual certificates and payables to securitization note holders related to securitization transactions classified by the Company within Level 3 of the fair value hierarchy:
| Notes Receivable and Residual Certificates | Payable to Securitization Note Holders | |||||||||||||
| Fair value at December 31, 2023 | $ | 14,847 | $ | 141,416 | ||||||||||
| Additions | 13,001 | — | ||||||||||||
| Repayments and settlements | (5,917) | (55,368) | ||||||||||||
| Changes in fair value recorded in earnings | 124 | 1,273 | ||||||||||||
| Fair value at December 31, 2024 | $ | 22,055 | $ | 87,321 | ||||||||||
| Additions | 95,880 | — | ||||||||||||
| Repayments and settlements | (23,051) | (40,592) | ||||||||||||
| Changes in fair value recorded in earnings | 2,532 | (187) | ||||||||||||
| Fair value at December 31, 2025 | $ | 97,416 | $ | 46,542 | ||||||||||
Loan Servicing Assets and Liabilities
As of December 31, 2024 and 2025, the Company’s loan servicing assets had a fair value of $27.4 million and $40.9 million, respectively, recorded within other assets on the consolidated balance sheets. As of December 31, 2024 and 2025, the Company’s loan servicing liabilities had a fair value of $1.2 million and $4.4 million, respectively, recorded within accrued expenses and other liabilities on the consolidated balance sheets.
Valuation Methodology
Loan servicing assets and liabilities are measured at estimated fair value using a discounted cash flow model. The cash flows in the valuation model represent the difference between the contractual servicing fees charged to institutional investors and an estimated market servicing fee. Since contractual servicing fees are generally based on the monthly outstanding principal balance of the underlying loans, the expected cash flows in the model incorporate estimates of net losses and prepayments.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loan servicing assets and liabilities:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (1) | Minimum | Maximum | Weighted-Average (1) | |||||||||||||||||||||||||||||||||
| Discount rate | 13.00 | % | 20.00 | % | 17.14 | % | 13.00 | % | 20.00 | % | 17.32 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.08 | % | 61.96 | % | 16.05 | % | 0.01 | % | 61.96 | % | 17.01 | % | ||||||||||||||||||||||||||
Market-servicing rate (2)(3) | 0.62 | % | 3.70 | % | 0.62 | % | 0.62 | % | 2.69 | % | 0.65 | % | ||||||||||||||||||||||||||
Prepayment rate | 2.17 | % | 96.90 | % | 36.43 | % | 1.96 | % | 96.90 | % | 36.50 | % | ||||||||||||||||||||||||||
(1)Unobservable inputs were weighted by relative fair value.
(2)Excludes ancillary fees that would be passed on to a third-party servicer.
(3)Expressed as a percentage of the outstanding principal balance of 1.19% - 3.70% for auto loans and 0.62% for personal loans as of December 31, 2024. Expressed as a percentage of the outstanding principal balance of 1.16% - 2.69% for auto loans and 0.62% - 2.00% for personal loans as of December 31, 2025.
Discount rates–The discount rates are the Company’s estimate of the rates of return that market participants in servicing rights would require when investing in similar servicing rights. Discount rates for servicing rights on existing loans are adjusted to reflect the time value of money and a risk premium intended to reflect the amount of compensation market participants would require due to the uncertainty associated with these instruments’ cash flows.
Credit risk rates–The credit risk rates are the Company’s estimate of the net cumulative principal payments that will not be repaid over the entire life of a loan expressed as a percentage of the original principal amount of the loan. The assumption regarding net cumulative losses impacts the projected balances and expected terms of the loans, which are used to project future servicing revenues.
Market-servicing rates–Market-servicing rate is an estimated measure of adequate compensation for a market participant, if one was required. The rate is expressed as a fixed percentage of outstanding principal balance per annum. The estimate considers the profit that would be demanded in the marketplace to service the portfolio of outstanding loans subject to the Company’s servicing agreements.
Prepayment rates–Prepayment rates are the Company’s estimate of the cumulative principal prepayments that will occur over the entire life of a loan as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments impacts the projected balances and expected terms of the loans, which are used to project future servicing revenues.
Significant Recurring Level 3 Fair Value Input Sensitivity
The table below presents the fair value sensitivity of loan servicing assets to adverse changes in market-servicing rates. The fair value of loan servicing assets and liabilities are not sensitive to adverse changes in discount rates, credit risk rates, and prepayment rates as such changes do not result in a material impact on the fair value as of December 31, 2024 and 2025. Adverse changes in market-servicing rates do not result in a material impact to the fair value of loan servicing liabilities as of December 31, 2024 and 2025.
| December 31, 2024 | December 31, 2025 | |||||||||||||
| Fair value of loan servicing assets | $ | 27,439 | $ | 40,941 | ||||||||||
| Expected market-servicing rates | ||||||||||||||
| 10% market-servicing rates increase | (6,931) | (8,402) | ||||||||||||
| 20% market-servicing rates increase | (14,098) | (16,746) | ||||||||||||
Rollforward of Level 3 Fair Values
The following table presents a rollforward of the loan servicing assets and liabilities classified by the Company within Level 3 of the fair value hierarchy:
| Loan Servicing Assets | Loan Servicing Liabilities | ||||||||||
Fair value at December 31, 2023 | $ | 28,092 | $ | 2,038 | |||||||
| Sale of loans | 15,837 | 388 | |||||||||
Changes in fair value recorded in earnings | (16,490) | (1,246) | |||||||||
| Fair value at December 31, 2024 | $ | 27,439 | $ | 1,180 | |||||||
| Sale of loans | 32,148 | 4,145 | |||||||||
| Changes in fair value recorded in earnings | (18,646) | (942) | |||||||||
| Fair value at December 31, 2025 | $ | 40,941 | $ | 4,383 | |||||||
Beneficial Interests
In connection with the committed capital and other co-investment arrangements that meet a definition of derivatives (derivative beneficial interests), the Company is obligated to make payments to the third-party or is entitled to receive payments from the third-party if credit performance on the underlying loans deviates from initial expectations set at the time of loan sale or origination, subject to a dollar cap. In the arrangements that are associated with debt-like securities with embedded derivative features, the Company makes an initial investment and is entitled to a portion of cash flows from repayments received over time on the underlying loan portfolios. These cash flows vary depending on the demonstrated credit performance relative to our expectations.
As of December 31, 2024 and 2025, the fair value of the beneficial interest assets related to these arrangements was $176.8 million and $396.2 million, respectively. As of the same dates, the fair value of the beneficial interest liabilities was $10.1 million and $5.1 million, respectively.
Valuation Methodology
Beneficial interests are measured at estimated fair value using a discounted cash flow model. The discounted cash flow model sets expectations for cash flows to be received by the Company under each arrangement based on contractually-defined terms, such as total return, portfolio composition, frequency of cash distribution, and others and calculates net cash flows to be received by the Company. These net cash flows are then discounted using an estimate of market rates of return that reflect the risk premium related to those cash flows. As credit performance is demonstrated by the underlying loan portfolios, each discounted cash flow model is periodically updated to determine future cash inflows and outflows based on the latest estimated performance for the duration of each arrangement. The discounted cash flow model uses inputs discussed below that are inherently judgmental and reflect the Company’s best estimates of the assumptions a market participant would use to determine fair value of our beneficial interests.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s fair value measurements of beneficial interests as of December 31, 2024 and 2025:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average(1) | Minimum | Maximum | Weighted-Average(1) | |||||||||||||||||||||||||||||||||
| Beneficial interest assets | ||||||||||||||||||||||||||||||||||||||
| Discount rate | 6.75 | % | 13.75 | % | 13.53 | % | 6.50 | % | 14.50 | % | 12.90 | % | ||||||||||||||||||||||||||
Credit risk rate spread(2) | (4.00) | % | 12.60 | % | 1.32 | % | (7.59) | % | 13.42 | % | 0.89 | % | ||||||||||||||||||||||||||
Prepayment rate spread(3) | * | * | * | (7.56) | % | 15.50 | % | 3.60 | % | |||||||||||||||||||||||||||||
| Beneficial interest liabilities | ||||||||||||||||||||||||||||||||||||||
| Discount rate | 13.75 | % | 13.75 | % | 13.75 | % | 13.25 | % | 13.25 | % | 13.25 | % | ||||||||||||||||||||||||||
Credit risk rate spread(2) | (0.24) | % | 18.68 | % | 9.78 | % | (5.45) | % | 9.18 | % | 1.90 | % | ||||||||||||||||||||||||||
_________
(1) Unobservable inputs were weighted by relative fair value.
(2) Expressed as a percentage of cumulative net loss expectations as of the valuation date compared to the initial expectations as of the origination date or date of loan sale.
(3) Expressed as a percentage of cumulative principal prepayment expectations as of the valuation date compared to the initial expectations as of the origination date or date of loan sale.
* Prepayment rate spread was not a significant input as of December 31, 2024.
Discount rates–The discount rates are rates of return used to discount future expected cash flows to arrive at a present value, which represents the fair value. The discount rates used for the projected net cash flows are the Company’s estimates of the rates of return that market participants would require when investing in these financial instruments with cash flows dependent on credit performance of the underlying loan portfolio. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity. The Company uses two different discount rates for expected cash flows associated with demonstrated to-date credit performance and those associated with future credit performance. The difference in these rates reflects the level of uncertainty and, as a result, risk premium that would be required by market participants when investing in these instruments.
Credit risk rate spreads–Credit risk rate spreads are the measurement of estimated credit performance of underlying loan portfolios as of the reporting date in comparison to the Company’s estimates at the time of origination or sale of loans under these arrangements (“initial expectation”). More specifically, credit risk rate spreads are the difference between the initial expectation of the cumulative principal of a loan portfolio, net of average recoveries, that is estimated to not be repaid over the life of a beneficial interest (“cumulative net loss”) and the same estimate as of the reporting date. A positive credit risk rate spread indicates that the estimated cumulative net loss as of the reporting period is higher than the initial expectation for a particular portfolio. A negative credit risk rate spread indicates the opposite – the estimated cumulative net loss as of the reporting period is lower than the initial expectation. Credit risk rate spreads are expressed as a percentage of the initial expectation of the cumulative total net losses. The difference between the initial and current expectation of estimated cumulative net losses impacts the amount and the timing of cash flows the Company expects to receive on beneficial interest assets or to pay for beneficial interest liabilities.
Prepayment rate spreads– Prepayment rate spreads are the measurement of estimated prepayments on the underlying loan portfolios as of the reporting date in comparison to the Company’s initial expectation. More specifically, prepayment rate spreads are the difference between the initial expectation of cumulative principal prepayments that will occur over the life of a beneficial interest (“cumulative prepayment”) and the same estimate as of the reporting date. A positive prepayment rate spread indicates that the estimated cumulative prepayments as of the reporting period is higher than the initial expectation for a particular portfolio. A negative prepayment rate spread indicates the opposite – the estimated cumulative prepayments as of the reporting period is lower than the initial expectation. Prepayment rate spreads are expressed as a percentage of the initial expectation of the cumulative total prepayments. The difference between the initial and current expectation of estimated cumulative prepayment impacts the amount and the timing of cash flows the Company expects to receive on beneficial interest assets or to pay for beneficial interest liabilities.
The following table presents the sensitivity of beneficial interest assets and liabilities to adverse changes in key assumptions used in the valuation model as of December 31, 2024 and 2025. Adverse changes in discount rates and prepayment rates do not result in a material impact to the fair value of beneficial interest liabilities as of December 31, 2024 and 2025.
Significant Recurring Level 3 Fair Value Input Sensitivity
| December 31, 2024 | December 31, 2025 | |||||||||||||
| Fair value of beneficial interest assets | $ | 176,848 | $ | 396,216 | ||||||||||
| Discount rate | ||||||||||||||
| 100 basis point increase | (3,247) | (4,912) | ||||||||||||
| 200 basis point increase | (6,384) | (9,676) | ||||||||||||
| Expected credit risk rate spreads on underlying loans | ||||||||||||||
| 10% adverse change | (44,356) | (80,110) | ||||||||||||
| 20% adverse change | (89,605) | (158,190) | ||||||||||||
| Expected prepayment rate spreads on underlying loans | ||||||||||||||
| 10% adverse change | * | (7,798) | ||||||||||||
| 20% adverse change | * | (15,244) | ||||||||||||
| Fair value of beneficial interest liabilities | $ | 10,089 | $ | 5,075 | ||||||||||
| Expected credit risk rate spreads on underlying loans | ||||||||||||||
| 10% adverse change | 4,720 | 22,409 | ||||||||||||
| 20% adverse change | 10,259 | 44,420 | ||||||||||||
* Immaterial
Rollforward of Level 3 Fair Values
The following table presents a rollforward of beneficial interest assets and liabilities:
Beneficial Interest Assets | Beneficial Interest Liabilities | |||||||||||||
| Fair value at December 31, 2023 | $ | 41,012 | $ | 4,221 | ||||||||||
Acquisition of beneficial interests | 148,448 | — | ||||||||||||
Settlement of beneficial interests | (7,461) | (6,700) | ||||||||||||
| Changes in fair value recorded in earnings | (5,151) | 12,568 | ||||||||||||
| Fair value at December 31, 2024 | $ | 176,848 | $ | 10,089 | ||||||||||
Acquisition of beneficial interests | 326,870 | 5 | ||||||||||||
Settlement of beneficial interests, net | (140,686) | (21,598) | ||||||||||||
| Changes in fair value recorded in earnings | 33,184 | 16,579 | ||||||||||||
| Fair value at December 31, 2025 | $ | 396,216 | $ | 5,075 | ||||||||||
Trailing Fee Liabilities
The Company pays certain lending partners monthly trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. The Company held trailing fee liabilities of $4.6 million and $5.8 million as of December 31, 2024 and 2025, respectively.
Valuation Methodology
The discounted cash flow methodology, which is used to estimate the fair value of trailing fee liabilities, uses the same projected net cash flows as the underlying loans. The fair valuation methodology considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows of the underlying loans. Net cash flows are discounted using an estimate of market rates of return.
Significant Inputs and Assumptions
The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for trailing fee liabilities:
| December 31, 2024 | December 31, 2025 | |||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (1) | Minimum | Maximum | Weighted-Average (1) | |||||||||||||||||||||||||||||||||
| Discount rate | 9.55 | % | 22.37 | % | 12.54 | % | 5.00 | % | 14.78 | % | 10.15 | % | ||||||||||||||||||||||||||
Credit risk rate | 0.02 | % | 88.53 | % | 18.97 | % | 0.04 | % | 67.59 | % | 19.48 | % | ||||||||||||||||||||||||||
Prepayment rate | 1.51 | % | 95.80 | % | 35.50 | % | 1.52 | % | 95.77 | % | 34.59 | % | ||||||||||||||||||||||||||
_________
(1) Unobservable inputs were weighted by relative fair value.
Significant Recurring Level 3 Fair Value Input Sensitivity
The fair value sensitivity of trailing fee liabilities to adverse changes in key assumptions do not result in a material impact to the fair value of trailing fee liabilities as of December 31, 2024 and 2025.
Rollforward of Level 3 Fair Values
The following table presents a rollforward of trailing fee liabilities classified by the Company within Level 3 of the fair value hierarchy:
| Trailing Fee Liabilities | ||||||||
| Fair value at December 31, 2023 | $ | 4,251 | ||||||
| Issuances | 3,194 | |||||||
| Repayments and settlements | (3,003) | |||||||
| Changes in fair value recorded in earnings | 172 | |||||||
| Fair value at December 31, 2024 | $ | 4,614 | ||||||
| Issuances | 4,043 | |||||||
| Repayments and settlements | (2,900) | |||||||
| Changes in fair value recorded in earnings | 4 | |||||||
| Fair value at December 31, 2025 | $ | 5,761 | ||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 10, 2026 | Showing above |
| 2024 | Feb 14, 2025 | |
| 2023 | Feb 15, 2024 | |
| 2022 | Feb 16, 2023 | |
| 2021 | Feb 18, 2022 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.