Upstart Holdings, Inc.

Please stand by. Good afternoon and welcome to the Upstart second quarter 2026 earnings call. At this time, all participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sonya Banerjee, Head of Investor Relations. Sonya, please go ahead.

Thank you. Welcome to the Upstart Earnings Call for the second quarter of 2026. Joining me today are Paul Gu, our co-founder and CEO, and Andrea Blankmeyer, our CFO. During today's call, we will make forward-looking statements, which include statements about our outlook and business strategy. These statements are based on our expectations and beliefs as of today, which are subject to a variety of risks, uncertainties, and assumptions, and should not be viewed as a guarantee of future performance. Actual results may differ materially as a result of various risk factors that have been described in our SEC filings. We assume no obligation to update any forward-looking statements as the result of new information or future events, except as required by law. Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results. Reconciliations of our historical GAAP to non-GAAP results can be found in our earnings materials. which are available on our IR website. For the first time this quarter, we'll discuss contribution margins separately for our unsecured and secured businesses. As a reminder, Upstart has one reportable segment, unsecured lending, formerly called personal lending. The name change is administrative only and does not affect the underlying disclosures. Our auto and home businesses are not separate reportable segments. But in certain earnings materials, we refer to them collectively as secured products, which is derived by subtracting unsecured lending from total company results. With that, Paul, over to you.

Thanks, Sonya. And thank you, everyone, for joining us today. At the end of our last earnings call, I shared four key commitments and takeaways. I want to start back there today, right where I left off. First, I said that core personal loans are a superpower. Our technology lead there gives us unusually strong margins, and I told you we would reaccelerate its growth. Second, I said home and auto had found their fit with the market, and I told you we would turn their focus to improving profitability. Third, I told you that we'd stay capital efficient, even as we pursue the enormous opportunity in credit. And putting those together, I told you that we'd drive a rebound in profitability that would show we are on track for our full year guidance. Today, I'm pleased to report that we've executed exactly that plan. We grew core personal loan originations 27% quarter on quarter. That's a $526 million sequential increase, which is more than three and a half times the growth of the prior three quarters combined. It's also the lion's share of the growth in our unsecured lending segment. Because of our strength in this market, we achieved this reacceleration while also driving our unsecured contribution margin up six percentage points compared to last quarter. At the same time, our secured products, Home and Auto, advanced rapidly towards profitability. Combined, their contribution margin improved by 61 percentage points in a single quarter, closing a large part of the remaining gap to break even. And they did so while still managing origination growth of 45% quarter over quarter. Combined, originations across all products grew 23% sequentially for $782 million compared to last quarter. Our third-party funding strategy delivered at an almost equally rapid pace, allowing us to support that growth without additional equity capital. While loans on our balance sheet increased marginally, they declined to just 5.9% of total outstanding loans, our lowest level in almost two years. Our strategy drove a rebound in our overall margins and profitability, including all-time high contribution profit and a return to gap profits. To put that in perspective, our previous peak in contribution profit was in Q4 of 2021. Back then, the business benefited from a much easier macroeconomic backdrop and the financial profile of being concentrated almost entirely in a single mature product. UMI was below 1. Chargeoff rates were at historic lows across the industry, and the federal funds rate was near zero. The fact that we've reached a new profit peak in today's environment is a testament to the relentless power of compounding technology wins quarter after quarter, year after year. I always tell people that while our business is sensitive to macro conditions in the short term, its value in the long term will be determined only by the pace of our execution. Also, unlike 2021, we're now a multi-product company. Our business today has a significant and growing share of secured products. Auto and home made up about 14% of total originations in Q2 compared to just 1% back then. Building those businesses is showing up in our operating expenses now ahead of the contribution profit we expect them to generate in the future. These products expand our market opportunity by many multiples and combined with core personal loans can fuel profit growth for years to come. Next, I want to highlight our progress in three areas, our models, our customer relationships, and our secured products. As always, our most important business lever, especially in core personal loans, is improving our models. In Q2, we shipped three new personal loan underwriting models, cumulatively adding more than 300 new variables. We also moved personal loan underwriting to a new distributed inference platform that is roughly 65% faster at the median relative to the prior architecture. even as it supports much greater complexity. The end result? Our model's accuracy lead over a traditional credit scoring benchmark widened again this quarter. Our model is now 2.74 times as accurate as a traditional model, and we're still early. 87.38% of the inaccuracy gap is left for us to solve. That's our runway. Turning to our customers, Q2 was another step toward becoming the most trusted brand in consumer credit. Approximately one in every 13 American adults has an Upstart account, and that number continues to grow. Investing in these relationships is important to us. In Q2, we originated more than 558,000 loans, a record high. Historical experience shows that each of those borrowers will take out roughly one and a half loans over time. Recent cohorts are trending even stronger. as the addition of new products like Home, Auto, and Cashline bring us closer to our vision of having the best product for every American's credit needs. We're also making it easier for consumers to return. In Q2, we launched a new model that allows us to better manage when we pull underwriting data from vendors, allowing us to reengage existing accounts more frequently and at lower cost. Next, I'll talk about our secured products. In Home, we streamlined the borrower verification and closing processes. Our cost to originate a HELOC decreased 15% versus Q1, and we can close in six days while also offering borrowers rates that are on average more than 200 basis points lower than competitors. That combination, lower cost, speed to close, and better pricing is the basis for a durable competitive advantage that should support our continued growth in this market. In auto retail, we continue to add rooftops and win wallet share. At the same time, because of the great value proposition we offer both dealers and car buyers, we began optimizing our take rates, a clear sign this business has moved from proving demand to improving unit economics. In auto-secured personal loans, we improved the efficiency of the funnel and upgraded our ability to automatically identify consumers with eligible vehicles, which lowers acquisition costs and directly supports product margins. Each of these secured products has the potential to be as important to Upstart as personal loans over time. and we're excited to continue investing in them. At the same time, capital discipline means holding an extraordinarily high bar for investments. And because of that, we decided to sunset our auto refinance business this quarter. While we're proud of what the team built over the past few years, it did not have the same velocity or potential as the other bets in our portfolio. Turning to funding. Since our May earnings call, we've closed three major institutional deals, including our largest ever. which together provide up to $5 billion in new committed capacity. We've also kept our streak intact, renewing every institutional capital partner at a 100% rate since 2023. Separately, we completed an upsized $569 million asset-backed securitization, our largest issuance since 2021, at the tightest spreads we've seen in three years. This activity is another vote of confidence in our ability to deliver strong returns to our capital partners. The average return of our last 12 quarterly vintages of loans exceeds U.S. Treasuries by approximately 660 basis points, with every individual vintage exceeding Treasuries by at least 425 basis points. Finally, a quick update on our bank charter. In July, we received conditional approval from the OCC following a rigorous review of our credit compliance and business practices. This process, plus the work remaining to receive Regulatory Approvals, and Stand Up the Bank is one of the largest undertakings in Upstart's history. The bank does not change our strategy of funding loans primarily with third-party capital, but we expect it to unlock major operational and regulatory efficiencies which will contribute to our financial goals over the coming years. We aim to launch in early 2027. Before I turn the call over to Andrea, I'll close with a few final thoughts. Q2 was our first quarter executing as a new management team. We defined a strategy and we executed it. At AI Day last year, I told you that lending's oldest truism assumes the technology stays constant, that you can't have growth, credit performance, and profitability all at once. That's not the case for Upstart. This quarter, we delivered all three. We grew, our credit performed, and we expanded margins. We didn't have to trade one for another, and that combination, not any single metric in isolation, is the clearest evidence that our AI advantage is real and compounding. You should expect us to double down in the second half of this year. We expect to compound wins across technology and marketing as we drive growth in core personal loans and profitability in secured loans. That's where the real durable value in this business lies, independent of any macro headwinds or tailwinds. And we will continue to steward every dollar of investor capital, expanding and deepening our third-party capital relationships and holding a high bar for operational investment. I want to close by thanking everyone at Upstart for an exceptional quarter.