All right. We are going to keep continuing here at the 46th Annual Canaccord Growth Conference. Once again, I am Joe Vafi, Equity Research Analyst here, with a focus on fintech. We are pleased to have up again with us this year, the management team from Pagaya and Pagaya CFO, Jonathan Dobres. Any good fintech should have at its core a disruptive element to its business model, and potentially a great fintech should have multiple disruptive elements. I think Pagaya falls into this latter category, leveraging what we believe may be one of the more powerful and holistic next-generation consumer credit algorithms in the market today, combined with investment vehicles raised to fund loan portfolios generated with that algo. The company has made great progress in its corporate evolution, and the momentum is reflected in Q2 results posted, I think maybe last week, was it?
Yep.
Or the week before. An increased outlook for the year. With that quick intro, thanks for being with us, Jon.
Thank you.
Great.
Great to be here.
I think some people here do know the Pagaya story. It has been in the public market here for a couple of years now. But just in case you are not familiar with it, maybe you could just introduce Pagaya to us in two minutes or less, and then we will get into it.
Sure. And thanks again for having us again this year. It has been a great conference. We have had a great set of meetings—
Great.
—today so far. Pagaya, at its core, is a technology solution that enables our bank, fintech, and just broader lending partners to convert a greater portion of their potential borrower flow. So what does that mean? We have created a network that connects, on the one side today, about 35 lending partners with very large pools of institutional capital. In the middle of that network is our well-honed, over time, AI decisioning engine. So we are obviously deciding on the loans originating from these lending partners and funding off balance sheet with these very large pools of capital. Currently, Pagaya is about $14 billion of run rate of consumer loans in personal loans, auto, and point-of-sale. Our net income last quarter was $45 million, which has scaled each of the last six quarters since we went net income positive.
We will exit this year with a $200 million GAAP net income run rate, which we are very excited about. But taking a step back, I think more about what Pagaya should be and will grow into. There is no reason why every lender, every bank in the U.S. shouldn't be a part of our network. And it is not because we are good at selling them, it is because the economics of it are undeniable.
All we are doing for all of these banks, financial institutions, generally speaking, are bringing in more customers, improving their relationships with the customers, and monetizing those customers for our partners. If Ally or U.S. Bank, for example, originates a loan that we help facilitate, even though we're taking, and when I say we, again, this is mostly off balance sheet, even though we're taking the credit risk away from them, they're still getting the customer relationship. They're still monetizing the customer in some way. It may be an origination fee at first, a servicing revenue stream that hits their ROE directly because there's no capital set aside against it. In the auto situation, they're improving their relationship with their dealer networks.
For point of sale, they're bringing a more holistic solution to their merchant networks. When I think about Pagaya on the whole, our opportunity is truly massive. We have 35 partners today. There's no reason why that shouldn't be double over time. When we think about our pipeline and just who we've onboarded this year, we see a trajectory to that level. What do each of those partners mean to us? A scaled partner, for us, is $30 million- plus of essentially contribution margin on an annual basis. It takes a year or so for a partner to scale, so that's not day one.
When you think about the types of companies out there that have such deep, entrenched relationships as a service provider to financial institutions and can bring that much in terms of revenue and bottom line from each new relationship, when you extrapolate out our growth, it's really quite powerful.
That's great. It's been a great story so far and the partner growth, and the same store growth in those partners has been great. Coming off just a really good Q2 result with a lot of good stuff going on, maybe we kind of frame this opportunity in the light of what you posted in Q2.
Yeah. So Q2 to us, and it's been 2026 in general, but really started to click in Q2, is proof positive, I think, of what we've been saying really about our product-led growth strategy and how we grow, frankly, for most of the past two years. If you think about what we said at the beginning of the year, we looked at the macro, we looked at the consumer, and we saw a strong consumer. However, what we also thought is if macro conditions deteriorate, if inflation remains persistent, where would we see stress in what we're originating? And we identified in our riskiest two credit tiers, which tend to have a lower-income borrower, if stress leaks into the market, again, we weren't seeing it at the time, but if stress leaked in, those would be the credit tiers most affected.
So we limited, we pretty much eliminated origination in those two tiers.
Okay.
What the market said was, "Everyone else is leaning into credit. You're pulling back. You're not going to grow." But that's just not how we grow. We don't grow through increasing the credit aperture or increasing marketing dollars, right? We don't really have marketing spend.
Right. It's a B2B2C model.
Because we're adding partners and products, we add enough application flow to the top of the funnel that we can be very selective, and our conversion quarter to quarter is plus/minus 1%. We can be very selective quarter to quarter and hit our growth targets. Q2, to me, was that proof point. What the product-led growth, which is a lot of what led to our 140% year-over-year growth in auto, what that product-led growth meant is that with the same partners, we are seeing more applications. Very simply, if you looked at the way we worked with auto partner A two years ago, we were only seeing the applications that they first declined.
Naturally, that is a subset of applications. Today, with that same auto partner and with other auto partners, we work with them literally on a weekly basis to identify cohorts of borrowers that they may be technically approving, but we can make an offer that will have a much higher chance of converting. You really started to see that in Q2. In other words, where we were only seeing the declines at one point, now we're seeing the declines plus this other cohort. So many more applications. If you saw in Q2, our applications for the first time, our total dollar value of applications for the first time exceeded $300 billion.
Through identifying these types of borrowers, with the auto partner in particular, it might have been a borrower that requested a $30,000 loan and they came back and said, "We can give you $20,000." We look at the same borrower and say, "Maybe at a slightly higher interest rate, we can give you $28,000 or $30,000.
Yeah.
The auto partner knows, let's put out that loan instead of ours. That converts, that becomes part of our flow, really drives our growth, and still from the original example, still really benefits the partner, right? Because it's still a loan under that partner's name.
Right.
They're still getting servicing revenue for years. They're still having the direct contact with the borrower. And their relationship with the dealer is improved because they look more like a full-spectrum lender. It's really like a virtuous circle—
Sure.
—that benefits everyone in the ecosystem.
That's great. Then just to be clear, you tightened your credit box a little bit exiting 2025, but your application volume growth in Q2, a lot of it was a function of moving, I think your term on the conference call was, or maybe your president's, moving up the application funnel, right? Seeing more opportunities with your partners than you were seeing previously. Just because your partner approved a loan didn't mean that that customer chose that loan.
Right.
That's an important factor, too, right?
Right.
Now you're providing a more attractive offer to that end consumer, so you're converting theoretically a higher rate of offers or approved loans into closed loans.
Yeah.
Right.
Because we're moving up the funnel—
Yeah.
—we're seeing a greater number of applications.
We're able to choose, applying very similar conversion, we're able to turn more of those applications into Pagaya-funded loans, which is exactly what you're saying. It also leads, to your point, to a borrower profile that I think—
Is better.
—is strengthened.
Yeah.
In personal loans today, our average borrower is $120,000 of income, so top 20% of the U.S., 670, 680 FICO level. This is not what you think of as a deep subprime or even a subprime borrower by any extent. But it's our ability to see a very large number of applications, which allows us to select borrowers in certain profiles. From an auto point of view, that ability to see more applications to go higher up in the funnel, has also improved our collateral quality significantly.
Yeah.
That's such a key part of auto lending. If you look at our collateral today at the inception of the loan, an average car for us today is about three years old with 30,000 mi. If you would have looked at that two years ago, it was more like five or six years old at 60,000 mi.
Yeah.
Which is very important—
Very different, yeah.
—for a number of reasons, and also indicative, oftentimes, of a stronger borrower.
Sure. Starting to move up the funnel a little bit, is there more opportunity to keep moving up the funnel, especially in auto? Or maybe talk about this kind of phenomenon going on in some of your other loan categories.
Yeah. I think the product-led growth, as it moves from partner to partner, I think there's a lot of funnel expansion as you sort of move to partner to partner and you apply the products to more partners. In personal loans, it's very prevalent as well.
Okay.
We're today helping our customers through our Affiliate Optimizer with being much more effective with the Credit Karmas experience of the world, where a ton of these applications come from. We're working with personal loan partners on a direct marketing product where we actually pre-qualify borrowers in their ecosystems for loans, and they're reaching out and sending those pre-qualified offers out. There are a lot of ways that we're accessing different parts of their borrower ecosystem through these product innovations. A lot of, again to your point, a lot of the growth this year was product led in that sense. Because on the other side, the other leg of our growth is partner-led growth, so new partners.
Sure.
We've added five this year already, and we expect three more between now and the end of the year, two of which are regional banks. That's our highest level in a very long time in one year. What that does is provide a runway for growth over the next few years, right? It takes time for a new partner to scale. It can take 12 months to get to a point of maturity, and then there's plenty of growth from there as well. Part of that is just the amount of time it takes to integrate, but part of it's also intentional. We want to make sure that the models are ingesting and performing with these new partners in a way that's consistent with our expectations. To see early returns takes a few months, and we just want to be careful with how we scale people—
Sure.
—to make sure it's consistent with our overall performance.
Great. The other side of your network, the funding side of your network, today you're already AAA rated on some of your securitizations already. If you're moving up the funnel, is there enough volume there, and does that skew your customer credit profiles, your collateral and auto, other things to kind of boost the quality of your securitizations? Do you think that ripples through onto the funding side of your business over time as well?
I think it definitely does. If you think about Pagaya funding, our current run rate is about $14 billion of funded volume. We are a flagship bellwether issuer and producer of these assets to the market. In other words, our pre-funded securitization business, which is about 60% of our funding today, and I'll talk about diversity and longer committed versions of that in a second. If you think about it, we have over 175 investors, obviously not 175 in every deal.
Yeah.
But 175 that we're talking to on a regular basis. These are the largest asset managers, insurance companies, pension funds in the world, and they expect the programmatic delivery of these consumer assets into these vehicles that is now an allocation—
Yeah.
—of what they're putting out every month. It's a super strong business for us. In the last three weeks, we've done about $2 billion of oversubscribed securitizations. Very solid, working very well for us. When we take a step back and think about funding more broadly, what we care about is diversity and commitment, like long-term visibility—
Yeah.
—on the dollars coming in. If you think, to simplify it a bit, what I talked about, we're 60% today pre-funded securitization. That gives us about three to five months of visibility on future funding. Forward flow is something we added about a year and a half ago and continue to add partners. That's more six, 12, 18 months of visibility. In the current market, it's a little more expensive than the securitization side, but has other benefits, lower capital intensity,—
Yeah.
—things like that. Where we're moving, and again, not moving completely away, it's a diversified funding mix, is to 12- 24-month committed revolving structures where we're putting capital in alongside banks and asset managers. The capital is committed for two years and revolves. Even if we put 3%, 4%, or 5% of the capital in on day one, because that's rotating, two and a half times over the 2-and-a-half-year period, you're really optimizing that use of capital. Those three elements, and then there's a lot of flavors in between, give us that longer-term committed visibility on capital that we think will benefit the company tremendously going forward.
That's great.
As the mix of assets get—
Yeah.
—higher quality, you're able to price things at different levels to be responsive—
Sure.
—to all of that.
That's great. So funding sounds like that's evolving. Your relationship with your existing lenders is evolving. The pipeline and new logo adds is going pretty well. So that's all driving a good momentum in the business. Maybe we just switch gears and then talk about how all this manifests itself in your P&L.
Okay.
A little bit. Maybe we'll start with one of your key margin metrics. So for those that don't know, it's fee revenue, less production cost. It's kind of a—
Just rolls off the tongue.
It's just a margin level off the loan volume instead of a margin level off revenue. So it's off loan volume. And where that is now, it's been in, I think, a mid 4.5% range. I think existing customers usually mature on an FRLPC basis, and it moves higher, but then you have new logos that come in lower, and then they mature, but you always have a blended rate. Is that right? Any thoughts there? I think it is pretty steady, right?
Yeah. FRLPC dollars, excuse me, were a record this past quarter. Importantly, those dollars dropped to the bottom line at an incredibly high rate.
Good operating leverage.
Because we've had—
Yeah.
—we've had essentially the same, what we refer to as core OpEx for the last six quarters. It was actually a little lower last quarter, but we think of it kind of the same level. And again, that's driven by the fact that we don't really have marketing spend.
Right.
We're able to very much control that. We have a very strong infrastructure in place to continue to add partners and products and keep that operating leverage intact. The FRLPC drops to the bottom line at 90%—
Yeah.
—type margins. The FRLPC is a percentage of network volume. We set a range a while ago, and we still feel very strongly about it, which is it will remain in this range of 4%-5% of network volume. We reiterate that range. Over the course last quarter, and we expect for the rest of this year, we are going to be at the lower end of that 4%-5% range, and that is driven by two things. One, as you pointed out, as you add new partners and products, they start out at a lower margin. By contract, as they are proven out and scale, they get to the steady state margin. We added a bunch of new partners and products this quarter. The other element is when benchmark rates are higher.
The two years really are primary benchmark rate. When benchmark rates are higher, the amount of FRLPC contribution we get from the funding side of the network is lower. That takes it—
Right.
—to the lower end of that range. But we feel very good about the range, and we feel excellent about the trajectory of those FRLPC dollars, certainly over the guidance period and going forward.
So revenue's growing nicely and—
It drops to the bottom line in a very nice—
—operating income, net income's growing even faster.
Yeah.
Yeah, great. What about the balance sheet side of the business? Maybe some comments on where the balance sheet sits today. Is it adequate for your growth needs relative to running the business, and then any capital requirements you need to put in the business?
Yeah. We don't really have CapEx requirements in the business. We feel very good about our cash position. Our investment line item, which is the portion of the securitization and other funding vehicles that we actually put on our balance sheet, is about $1 billion today. Like most more mature non-bank lenders, we put our risk retention, but then also some additional discretionary investment on our balance sheet to support the overall securitization. You see this within Affirm or OneMain or even the auto OEMs that they'll put a portion of bond tranches from the securitizations on their balance sheet. The result of that is today we have a $1 billion investment line item. Half of that are equity portions of securitizations.
The other half are low teens, low to mid-teens, cash-yielding B and BB tranches of securitizations. Importantly, those bond tranches have never missed a payment, have never—
Right.
—been impaired in the history of Pagaya. We think that is a very prudent use of capital.
Got it. What about those equity tranches?
The equity tranches are more volatile because they are at the bottom of the stack. However, if you look at our net investment—
Yeah.
—as a percentage of volume, we are about 2.4% over the last 12 months. In other words, the dollars we are putting out netted back by what we are getting—
Sure.
—from previous deals. Included in that are return of capital from—
Right.
—equity portions of previous deals.
Okay, good. Doing okay, maybe a bit of a cost to doing business, but it's just—
Yeah.
—it's stable.
Yeah.
It's very stable, and we frankly see it as a strength to our balance sheet.
Okay, great. Jon, we're out of time, but Pagaya, great story. Been in the public markets for a while, executing well, but I think in my view, just a little bit of a breakout to the upside here in Q2, moving up the funnel with some of their customers, new logos coming on board. A lot of operating leverage in the business, and broadly speaking, consumer fintech as a sector is acting a little bit better in the public markets today.
Yeah. I appreciate it. The opportunity for us, again, is massive.
Yeah.
We have entrenched relationships with the largest financial institutions in the world that will only expand. Looking forward for the company, I couldn't be happier with the seat I sit in right now.
Great. Jon.
This one too.
Relatively new to the CFO seat, so congrats on that too.
All right. Thank you, sir.
Thank you, Jon.