Hello. Hi, welcome everyone today. Thank you for joining the Financials Conference here for BMO Capital Markets. My name is Conan Leon. I cover the fintech and payments space, along with we recently just launched on the consumer finance sector. It has been really exciting looking at a new set of names. I am very excited today to have Jonathan Dobres here, CFO of Pagaya Technologies. Welcome.
Thank you. Thanks for having me. It has been a great conference so far.
Great. Thank you. Maybe if we start with a little bit of education, right? For those that do not know Pagaya Technologies, right? Those that still think of Pagaya Technologies as a second look company, much more just going, approving loans that banks would otherwise decline. If you can just give kind of the lay of the land and talk about the business model.
Yeah, sure. First, just to answer the question, we are not a second look originator. About 50% of our flow today comes from applications that may have been first declined by our partner bank or lender. That number a year or two ago looked more like 80%. So we are moving very much kind of up the funnel through different products with our bank partners, with our lending partners to access a far greater percentage of the total application flow.
But let us take a step back. So what is Pagaya Technologies? We are a credit decisioning solution that helps lenders convert more of their borrowers. Over time, what we have formed is a network. On one side of that network is over 35 banks, fintechs, other lenders in the personal loan space, auto, and to a lesser extent, point of sale. On the other side of the network are more than 190 unique investors.
These are the largest asset managers, insurance companies in the world who want access to the diversified flow of consumer credit assets that our network originates. What is it that all translated to? We are run rate right now about $14 billion of funded loan volume a year. We went net income positive about seven quarters ago, the first quarter of 2025. We have grown net income every quarter since, and we are now at a run rate of GAAP net income of about $200 million, which has strengthened the business considerably. What is the value prop? How do we work with people on more than just the decline business?
I think of our value proposition at sort of a pretty high level. On personal loans, we are essentially a deposit retention tool for banks. What does that mean? Citizens, who is our newest bank partner who came on just over the last couple of months, they view Pagaya Technologies as enabling their ability to provide a personal loan product, which is a vital product for them to attract new deposit customers, a nd keep existing deposits, as there might be more competitive products in that set at faster moving fintechs.
On the auto side, our solution dramatically improves the lender's relationship with its dealer network. If we can make an Ally Financial, a Westlake, or whoever else on the auto side of our network provide a more fulsome, more dealer-friendly solution, then that lender's relationship with its dealer network will be dramatically improved, which apart from the economics that our lending partners are getting, just that positioning has been so vital.
Makes sense. I mean, you guys have put up some really good numbers, and particularly, your partners have been ramping, right? Maybe if you can talk about has something changed structurally in terms of you are signing up larger and larger banks as partners. What has changed in banks looking at what the model was to now deciding to partner up with Pagaya Technologies?
Yeah, I think it's a couple of things. One, the first one's always kind of the hardest to get. As we ramped up U.S. Bank, Ally Financial, and others, our ability to walk into other banks, can be banks that are larger than those or smaller, and allow those banks to really have the confidence that we know what we're doing and we know how to work with banks and we know how to integrate, I think is very powerful. The other piece is increasingly, and this is something our partnerships team has noticed and we've noticed in higher level conversations with banks, in a way, the balance sheet strategy and the product strategy are now sort of seen as not independent of each other, but both having validity on their own.
It may be that personal loans in the space where we're providing personal loans, so this is a 670, 680 FICO borrower, $125,000 of annual income, so a very good borrower--
Yep
--And most likely a very good deposit customer. It may be that from a balance sheet standpoint, that may not be sort of the targeted borrower for the bank. However, there is a recognition that from a product standpoint, it's something that they have to have to really compete in a much more fintech-centric landscape. I think it's really that. It's realizing that you can't just think so monolithically about your balance sheet in the bank context. It needs to be, how are we going to best service our customers so we retain that long-term value and we can work with them in so many other ways?
Got it. Maybe we pivot to the just pipeline conversion. You've talked about your relationships take 12 months, I think, to kind of stabilize, and you've also talked to the $30 million of contribution margin that, once scaled, that could add onto the platform. Can you walk us through the milestones, I think, from when you sign a partner to getting to that scaled economics? What should investors be looking for?
Yeah. There is pre-announcement and post-announcement, kind of how I think of it. When we announced that Citizens joined the network a month or so ago, there was obviously a ton of work that led up to that for us to begin scaling them on the network. The lead-up to a partner announcement includes a number of things, right? There is a tech integration, which has become more and more seamless as we have onboarded more partners. From a bank standpoint, though, there is also a more sort of analog manual process of getting the different parts of the banks comfortable with our offering and that it is not going to subject them to any sort of additional risk, right?
So, obviously, when you are part of the network, we are handling the capital side of things. If we facilitate a loan for a U.S. Bank, U.S. Bank doesn't have any of the credit risk. They are, however, still technically the lender, right? They are adopting our model, and you become a U.S. Bank customer, you become a SoFi customer. So they have to feel like, and they have to have the confidence that we are not going to subject them through our decisioning--
Mm-hmm.
--any additional regulatory scrutiny or anything else. That takes some time.
Yeah.
It is also what we are built to do. This has always been in our DNA, but it was accelerated dramatically when Sanjiv Das, our President, came on board about three and a half years ago. We have a risk function, a compliance function, that is all sort of bank-grade quality.
Which is important when you are sitting across from your counterparts at these financial institutions. While it makes it more difficult to bring someone on because you have to do all these things to build into onboarding, once the bank is on the other side of that, it becomes a very powerful barrier to entry. Once you are on the network, sort of post-announcement,
it does take time to scale the volume, and a big part of that is intentional, right? We do a ton of testing in sort of the ramping stage on historical application flow that the relevant financial institution had, what we expect performance to look at. You can have the best AI in the world, you need a period of time to scale and test that application funnel to make sure the performance is consistent with where you thought that performance would be. That is why it does take upwards of six, 12 months to begin getting a scaled amount of volume from one of these new partners, and then beyond 12 months, it kind of continues to grow. The way our economics work are, and this is like a little counterintuitive, but our margin goes up as volume goes up.
That is just sort of like the lineage of our offering. We want to sort of prove out success and then begin to get it to kind of a stable margin profile.
Yeah. Makes sense. Maybe we just talk about the impressive performance, right? Talk about the pipeline is up over 50% on the bank side. Your application volume is up 42% this last quarter to over $377 billion, right? But the conversion, right, from applications to volume sits at around 1%. How should investors think about or interpret that 1%? Is it just a lot of being selective around it, or is it just that application flow is not economically viable?
It's always interesting talking about our application flow because it's a massive number, right? Last year, we hit sort of a trillion dollars of run rate applications annually. Q2 of this year, we hit $300 billion in a quarter for the first time, and Q3, we're at $377 billion. First and foremost, we see application flow as sort of a leading indicator of where funded volume is going to go over time. We see, even though we're not We put on seven new partners this year. Even though we're not originating a massive amount with them in year one, right? Because as we talked about, it takes time to scale. We are still seeing those applications. That ramp in application is attributable to the fact that we've added so many partners.
Over time, as we get more comfortable with the relevant lenders' funnel of applications, more of that will turn into funded volume. We're also highly selective inside that universe of applications, because we want to be able to grow volume, and we do grow volume, without having to really increase our credit box in any way. In fact, and the market didn't love this, but at the beginning of 2026, we actually said that we were reducing our origination in our riskiest tiers. Pagaya Technologies, because we have so many different lending partners, we have an internal standard called Pagaya Risk Tier, PRT, one through seven, that we sort of normalize among the different lenders so we can compare them all, right? Because you're going to get different types of borrowers from different funnels.
We said at the beginning of the year that we were going to reduce or almost eliminate our origination in PRT six and seven. The market read that as you're not going to grow. We then grew faster than we ever did afterwards. We made that decision because if you're in a market where you have really persistent inflation, the borrowers in those tiers who are kind of on the lower end of our income range are going to feel that first. We weren't seeing it in the numbers, but we felt confident that we could grow the volume even with that sort of prophylactic step of cutting those tiers. That's the benefit of having that sort of very, very large top of the funnel. You still see the PRTs five, sixes, and sevens in the funnel.
Right.
We're not converting any of those intentionally. It's really just being able to be selective.
Yeah.
That being said, and we can get into products in a little while, but as we do more on pre-screen, some of our counteroffer products in the auto side, you will see over time that conversion tick up.
Yeah.
Just because some of those are higher conversion products.
Because you're starting with a base of information that's a lot more rich.
Maybe if we talk about the auto space, right? Strong growth there has become the biggest asset class from Pagaya's perspective. You've introduced some new capabilities and products. We've also noticed there's a ton of other lenders leaning into the auto space. Can you talk about what you're seeing from a demand perspective that, why auto's growing so well, and should we think about the growth that we're seeing now and what does 2027 look like? Is this just a one-time acceleration or is it repeatable going forward?
Yeah. Personal loans is still our largest asset class. Auto's growing faster. A year from now, you could see those two asset classes being the same size. What's really driven the growth in auto is that product-led growth. So, taking Ally Financial as an example, although it's pervasive across our auto partners, 18 months, two years ago, we were really, and this kind of goes back to your first question, but we were only working with Ally Financial, or we would only see Ally Financial applications that were first literally turned down.
What we've worked to over time with a lot of these auto lenders is identifying cohorts of borrowers where we believe we can convert at a much higher level than the lending partner can. So it's technically an approval, but maybe it's a $23,000 approval on a $30,000 loan that not only would a borrower reject that, but a borrower probably won't even see it because the dealer's not going to pass that along.
We then present an offer that sort of behind the scenes goes to the dealer instead of the original lender offer through like real-time decisioning that we have agreed upon with the lender. And the dealer then shows that offer. That offer has a much higher chance of converting, and it improves dramatically the lender-dealer relationship. So that and other similar products is what has really driven the volume growth on the auto side. We still see very strong demand in auto. I think next year we feel very good about one or two very substantial auto partners coming on board, which is, again, as we talked about, takes time to scale, but provides a lot of long-term growth there. We see substantial partner-led growth there. Like, auto is massive, right?
Yeah.
Like, it dwarfs obviously the personal loan opportunity. If you are able to add one or two more people who look like, who sort of rhyme with Ally Financial, then you have a lot of potential for growth there.
Yeah.
The product story there is also, I mean, it is really taken hold the last two quarters, but it is still sort of nascent. There is an ability to sort of exploit that opportunity with some other partners also.
Yeah. I think you have talked about going up funnel, right? The end borrower, that composition is changing, right? I think you gave some stats around personal, like, income levels reaching to $120,000 from a borrower's perspective, and even on the auto side, to $88,000 versus what used to be $60,000. Does that composition change anything that we should think about in terms of spreads or loss rates, how we should think about fundamentally?
Yeah. The story is a little different. It is the same trend, but it is a little different story on the PL and the auto side. On personal loans, as we have originated more and more from banks, we have, one, the funnel continues to increase, so we can be more selective, and we have been able to kind of grow that volume while selecting borrowers who we think are just stronger. That has translated to very consistent credit. I mean, especially on the auto side, but in both businesses, there are a ton of components that go into that credit performance, and in the end, it is just thinking about the ROA on the assets we are producing.
But we have been, over the last three years really, have been very, very consistent and in line with our expectations on credit. The going up market on the auto side, that has various components to it. We have gone up quite a bit on income. Like we, a couple years ago, were in sort of a $60,000 income consumer. We are now at almost $90,000. There are so many other components, though, that go into the ROA on those auto loans, and a lot of it is around servicing. So our servicing partner's ability to get delinquent borrowers current, which Ally Financial, Westlake, Exeter are the best at in the country, in our view.
Concentrating on sort of two to three-year-old cars that, from our view, are easier to underwrite from a recovery standpoint, so our recoveries are up significantly. I mean, that is partially just better servicers, but it is also the just inherent quality of the collateral. The reason I say it is a bit different from PL is we made a conscious decision in auto a few years ago to move from sort of smaller, more fintech-like auto originators to sticking with these very large, high-quality servicers, and that is, as well as our sort of monitoring of that servicing, that has really been a huge driver in our growth there and the improving quality over time.
Great. Great to hear. Maybe we can talk about the change also in the funding mix, and the economics along. I think you have recently, you just had $2 billion of committed capital, which included $3 billion of ABS issuance. Can you talk about, like, what, as an investor, what should we be looking for in terms of trade-off from, like, visibility, cost, capital efficiency, or any retained economics?
Yeah. Our priority with funding in general is diversified, long-term, and committed. I mean, if you looked at us 18 months, two years ago, about 80% of our funding was our core pre-funded ABS program, so our PAID shelf and our RPM shelf. That is still a substantial amount of our funding. It is like a little bit over 50% today. It gives us three to five months of visibility, right? It is pre-funded, but we generally commit those funds in a sort of two, three to five month period. It is pretty efficient and executing very well in this market. Probably most importantly, we have done about 100 of them at this point for over $40 billion. So the investor community looks at it as almost like an allocation to consumer credit through our platform. So it is a very powerful tool we have.
It will continue to be a major part of what we are doing. But there is a counterbalance, right? We also like the forward flow product.
The forward flow will never be as large as that first piece, but it is more efficient from a capital standpoint. It is a little more expensive. Obviously, the counterparty is taking the risk of the whole loan, so they have to get paid for that. And we have had big wins there recently as well, Neuberger Berman on the auto side. Then there are things that we sort of consider in between. So, we have revolving, often like bilateral ABS with different large investors. So this will be a two-year structure. If it is an initial commitment of $500 million or $600 million, that is actually like $900 million of purchasing power, right? Because it revolves in and out over a two-year period and gives us more of a view.
On day one, it has the same capital intensity as our core ABS does, but because the money is revolving in and out over time, it sort of works that capital, the amount of capital they are down. Over the course of November, we talked about this on the call, we will have our first bank-led off-balance sheet warehouse. So we are not going to have an on-balance sheet warehouse like a more conventional securitization program, but we will have a non-recourse bank-led auto warehouse that is off-balance sheet that just enhances flexibility on when we go into the securitization market, and structurally how we approach it. So, in my six years at the company, we have never been more diversified with the types of funding instruments we are using and the types of structures, and we think that is a very good place to be.
The investor interest right now is as high as it's ever been.
That's great to hear.
Yep.
Maybe we talk about, it's a mouthful, FRLPC, that bridge, right? You have a target of 4%-5%. Fell to, I think, the low end of that range this past quarter. You've recently taken up APRs, right, to APRs to buy like 100 basis points or more--
Yeah
--on both sides of the personal loan and auto. Can you help us bridge how you get back towards the higher end of it and, like, what we're thinking about going into 2027?
I'm sorry, a higher end of what?
Of the 4%- 5%.
No, no. I was going to make you say FRLPC again. The hardest part of transitioning from, like, a strategy guy at the company to CFO was just getting those letters in the right order.
Right.
Okay. But, sorry, our FRLPC, Fee Revenue Less Production Costs, it's essentially the closest thing we have to, like, a gross profit metric. It's basically the revenue we bring in less the fees that go back to our lending partners. On day one on a loan, there's an origination fee or similar fee of, just to pick a number, say 8%. We retain a portion of that. A portion of it goes back to the lending partner, goes back to the bank, goes back to the fintech. About 80% of our FRLPC is our portion of that origination fee. The other 20% of it are fees that are attributable to the investor side of the network.
Some of them are highly regular and dependable, an admin fee or a management fee that we get in connection with the underlying financing vehicle, which is just 50 basis points times the outstanding balance every month. The other portion of that is related to how we're pricing securitizations, and that's what drove us, and we set the expectation to this, to the bottom of that 4%-5% range in both Q2 and Q3. The range is, again, FRLPC as a percentage of network volume. We're still getting the 80% of the FRLPC that comes from the lending partner side that grows with volume, that is unaffected by rates.
However, when the cost of capital on our securitization goes up, and right, we're kind of tied to the two-year, the two-year went up, our spreads, the amount we're paying over the two-year, has actually stayed the same or has gone down, so our investor demand is very strong. But the overall cost of capital is a bit higher because of the higher two-year, and it takes some time to pass on that APR to the market.
For a couple month period of time, our margin compresses a bit. We then price securitizations because of those margins with more of a discount, and that shows up as a negative capital markets revenue line, and that lowers our FRLPC. That's why we're at the lower end of the range right now. As we talked about on the call and as you highlighted, we've increased APRs. As that stages its way into the market, which is happening now, that restores that lost margin. As you look at us in 2027, we'll be much closer to the middle of that 4%-5% range.
You'll already kind of start to see a tick up as you get kind of to the end of this quarter, but it's really an early-mid 2027 type thing.
Got it. Maybe moving a little bit further down the P&L, operating leverage. You've had consistent, I think it was six to seven quarters of your operating expense base staying relatively flat. As you continue to grow, you're scaling partners, a ton of more volume, maybe even more complex partners, how much does that operating base have to stay at current levels as opposed to needing a new investment cycle?
Yeah. We had our largest onboarding year this year, ever, and we I mean, I call them stable, but they were actually slightly reduced this year, our core operating expense. We have one variable cost, it's the production cost, right? It's, again, the portion of the fee that the lender retains. That's obviously success-based, right? The fee's not generated if the loan's not made. The rest of our cost structure is pretty fixed. We made a significant investment in 2022, 2023 to have the right tech structure in place to onboard, importantly, to have the right bank-like infrastructure on board to give banks that confidence that we talked about before, right? That we understand regulatory issues and everything else. But all of that is in place. We don't view OpEx as something that will increase, I mean, think of it as like inflationary level increase.
We don't see it as something that's going to increase next year.
Farther in the future, if we decide to add a new asset class, like at some point, credit cards can be a very interesting place for us, for example, there could be an increase, but that is something that we will telegraph and you will know about beforehand. But in the near term, medium term, we do not really see any need to increase that core OpEx base. I mean, again, beyond just normal kind of inflationary increases.
Mm-hmm. Makes sense. We have about seven minutes left, so just wanted to open it up for Q&A for if anyone has questions out in the audience, but--
Yes, sir.
Thank you, and thanks for coming, Jonathan. You have obviously got a number of institutional partners on your platform. I think the number you said is over 150, or whatever the number is. I am probably wrong. But how do you think of that pipeline, capacity pipeline-wise, new partners coming on board? Kind of how do you think about that?
On the investor side?
Yeah. No, more on when you think loan origination, you have partners that pass on to immediately, those institutional partners.
On the lending partner side, like on originating new flow, we had our biggest year of onboarding ever. I mean, there might have been like 2017, 2018, we may have onboarded more tiny, but in terms of size of real partners, we had a very big year this year. Our pipeline, though, still remains extremely strong for 2027 and 2028. You may not hit the number, you may not hit seven partners again, but in 2027, you will see some major wins in the network that will help us build to be a 50+ partner, much, much bigger platform three years out. We feel very, very good about the pipeline and have the infrastructure in place, have the processes in place to get all of these groups onboarded once they are ready. We feel very good about that.
On the investor side, which I thought was maybe a little bit from the beginning of your question, but anyway, on the investor side, we have a lot of help from banks like BMO and all the other banks we work with. But the reason capital markets work at Pagaya Technologies is our internal team. We have both from like a, we do not call it institutional sales, but from an institutional sales standpoint, like actually being out there with the different insurance platforms, asset managers, everything else, structuring and everything else, it is really core to our DNA. Our ability to retain long-time partners on the investor side and build up new partners, it is pretty exciting for us. A lot of the announce, we announce a lot on the capital market side, on the investor side.
A lot of those announcements are with ATLAS, Neuberger, Blue Owl, Castlelake, like people that you see us working with a lot. I think what you'll see into next year are some very large new partners there as well, that we can really scale. On both sides, on both sort of the lending partner side, the lending partner pipeline, and on the investor side, I mean, we already have very high quality on both, but I think as you get into 2027, you'll see some really interesting wins there.
Any other questions? Maybe if we end it with your capital allocation approach, as you're starting to generate more profitable dollars come in, how do you think about the strategy, whether that's paying down debt, investing into new asset classes, or even product?
We see, from a capital allocation point of view, we've been investing more in discretionary investments in our securitizations, so some of these mezzanine bonds in our securitizations. You'll see the interest income on our P&L has increased substantially over the last couple quarters because we've decided to take more of our capital and invest in these essentially 11% cash-yielding mezzanine bond tranches of the securitizations. We also can get leverage on them, on structures that are tied to the specific tranches, so non-recourse to Pagaya Technologies at sort of 6%, 7%. It's been a very interesting use of capital for us. We have paid down some of our high-yield bonds over the last six months, as the trading has been pretty irrational there in our view. I could see that as something we take advantage of more over time as well.
In terms of actual share buybacks or dividends, I still see that as something that's probably farther off.
Is there anything you want to close out with in terms of what are investors maybe not understanding about the Pagaya story, or what is not understood?
Yeah. I think a couple things. We are a unique model. People do parts of what we do. Obviously, there are a million direct consumer lenders. We are not that. I think better understanding how we grow is something that is simple to me and Craig, but maybe it is because we sit in it all day long, but I do not think it is fully understood. Adding new partners, adding new products with existing partners, which all that does is open up the application flow, right? If we are just seeing declines on day one, but then we are seeing declines, anybody under 730 FICO, just first look, people who are getting inefficient offers, and we are just increasing that application flow, we can be super selective from this funnel and grow volume really materially, which insulates you from a lot of things.
It enables you to be tighter on credit when you want to be tighter on credit, even if it is before you are seeing things in credit, which is what we did a year ago. It enables you to continue to grow profit even when you are momentarily at a lower end on an FRLPC margin point of view, just because you have sufficient volume from it. So, the way we grow is really, really powerful, and I do not think that is perfectly understood. So, I could go into a litany of things, but I think that is--
Yeah
--I think that is the main one. And you should watch out for, again, to the earlier question, really interesting partners over 2027 on both the lender and investor side, so.
Yeah. Looking forward to it. Thanks again, Jonathan.
Oh, we should also stay tuned for BMO picking up coverage of Pagaya Technologies, right?
Who knows?
Yeah.
Thanks so much.