Pagaya Technologies Stock

Greetings. Welcome to the Pagaya Second Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Craig Smith, Investor Relations at Pagaya Technologies. Thank you, Craig. You may begin.

Thank you, and welcome to Pagaya's Second Quarter 2026 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; and Jon Dobres, Chief Financial Officer.

You can find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the third quarter and the full year of 2026. Our actual results may differ materially from those contemplated by these forward-looking statements.

Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in our press release today and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC, including our 10-Ks, 10-Qs and other reports for a more detailed discussion of these factors. Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC as a percentage of network volume, core operating expenses and core operating expenses as a percentage of FRLPC will be discussed on the call and included in the accompanying materials.

We also provide an outlook for the third quarter and full year '26 on a non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials, which are posted on our Investor Relations website. We encourage you to review the shareholder letter, which was furnished to the SEC on Form 8-K today for more detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release.

With that, let me turn the call over to Gal.

Hi, everyone, and thank you very much for joining. I'm really proud of our Q2 performance. The business had very strong growth. This growth was not by a chance. It was the outcome of a partner-focused strategy that we have. From an EPS perspective, Q2 reached $0.49, which is a record for us. And as a result, we are raising our net income guidance by almost 25%. Today, I want to drive home a few key messages. First, our unique profit engine. Second is that growth is accelerating, driven by repeatable product and partner expansion. Third, the Pagaya embedded B2B integration powers a unique consumer data mode at scale.

Let me start with reminding ourselves of our business model. Our model is simple. Partners sell us volume, which our proprietary technology turned a portion of that volume into loans and our capital markets funds these loans with over 170 of the largest asset managers, insurance companies and pension funds in the world. With each transaction, we earn high-margin cash fees. And this quarter, every part of that engine set a record, network volume, FRLPC, adjusted EBITDA and EPS. Personal loan reached an all-time high and also set a record by a wide margin. All of this while keeping costs flat, which means all of it went to the bottom line. Auto was the standout this quarter and showed a step function growth. The driver behind it is that our network calibrates now every aspect of the offer, the amount, the rate, the duration and the document requested.

Why this is so important? Because it pushes our lenders to win more deals with their crucial dealer networks. In turn, every offer strength our value proposition. This data drives the perpetual learning that improves our proprietary technology. This is the auto flywheel running, and we are still in the early days. The bigger picture, though, that keeps me excited is that the total addressable market in consumer credit is almost $1 trillion of origination per year. Today, we are only at a run rate of $14 billion of origination per year.

To take advantage of this opportunity, Pagaya continued to develop 2 distinct capabilities. The first, a B2B embedded platform where our products enable our partners to be a full spectrum lender; and the second, a data mode engine for consumer lending, where every application sharpens the next decision. This combination, the data mode plus the embedded distribution sets Pagaya on track for years of profitable growth. To summarize, costs are largely flat. Volume is growing. Operational leverage is high. That combines to compound EPS and it is just getting started.

With that, I will turn it over to Sanjiv.

Thanks, Gal. Big picture, this was another strong quarter of disciplined execution. We stayed focused on profitable volume growth and on diversifying across asset classes, partners and channels. What's driving this is our product-led growth playbook, which we keep rolling out partner by partner to unlock growth.

So let's start with the headline. This quarter, we achieved the highest network volume in Pagaya's history at $3.5 billion, which is a 33% increase year-over-year. We did it with no change to our credit posture with a steady conversion at roughly 1% and almost no incremental OpEx. Auto alone was more than 3/4 of our year-on-year growth in network volume. In fact, this quarter, application volume grew 29% year-on-year. Our auto approach remained focused on the indirect auto industry and the relationship between the dealer and the lender as we believe that the dealer will continue to be where most of the auto transactions will eventually take place. About 83% of auto loans close at the dealer's desk. So the dealer is the gateway to the loan with Pagaya connected to more than 40% of the U.S. market.

Let me break down what we are actually optimizing in auto to solve critical dealer needs and thereby enabling our partners to become full spectrum lenders. First, we optimize our lenders' capabilities. So when a partner can't make an offer or their terms just aren't going to convert, we set them with an approval or a counter, so they stay relevant right there at the dealer's desk. This means that our lenders stay in deals they'd otherwise lose. Second, we optimize for the borrower. We adjust the down payment, the APR, the loan-to-value, the term, all in real time to find the structure that the borrower can actually close on, and that's the key. The goal isn't the offer that looks best and safer. It's the one that the borrower actually says yes.

And third, last but certainly not the least, we optimize for the market because the dealer is seeing multiple offers at the same time. So we look at what the other lenders are putting in front of them, and we make sure ours is the most compelling one in that lineup, not just approvable but win worthy. So you put those together and you get a self-reinforcing flywheel. We deliver a seamless dealer experience. We let our lenders make competitive offers and that earns us more application referrals. As we expand full spectrum approvals and capture more flow, approval rates and application volumes both rise, which makes our partners the preferred lending provider for the dealers, pulls even more flow into the top of the funnel for them and feeds the next turn of the cycle.

And here's our real structural advantage. Our embeddedness in our partners' business is driving our unique customer data moat. That combination, the B2B integration on one side and the data on the other side is what makes it so hard to replicate.

Now on to PL or personal loans. This quarter alone, the affiliate Optimizer engine, our flagship personal loans product contributed more than $1 billion in network volume. Last quarter, we onboarded one of our leading personal loans partners into Experian Activate, and we are on track to add a few more personal loans partners to that platform this year with a line of sight to 2 more next year. In the second half of this year, we expect to go live with a few more new partners, including regional banks. The important part, every new partner comes on through our prebuilt product integration, which makes scaling additional products far more seamless and capital efficient.

Finally, our point-of-sale business has the same story, a robust, diversified pipeline across verticals and ticket sizes. It runs from retail solutions like Sezzle to upgrade travel-focused BNPL product, FlexPay, up to large ticket POS providers in onboarding right now. Part of the play here is enabling our existing personal loan partners to grow their POS business. FlexPay is a great example, and we have another large ticket partner in the pipeline. And beyond what's live today, we are building new solutions like PreQual to keep pushing the POS offering forward. On the funding side, the institutional demand for Pagaya's assets stays strong, and we keep optimizing our cost of capital and our access to liquidity. This was our largest funding quarter ever with $3.7 billion, and we closed 6 ABS transactions, including our largest auto securitization ever at $600 million.

Demand was strong enough that we grew our investor network by 11 to a total of 174 investors, and we upsized our last 3 securitizations this quarter. Jon will talk more about it. So to step back, this quarter reflects the repeatability and scalability of the model. By staying disciplined in underwriting, deepening our partner relationships and executing methodically against the playbook, we are building a more diversified multiproduct platform. And with every turn, the flywheel gets stronger. Each new partner and each new product compounds the value of the last, which is exactly what makes this mix, prudent risk management plus relentless execution so powerful. It sets us up to deliver profitable, sustainable growth and to keep creating value for our partners, our funding network and you and our shareholders.

With that, I'll hand this over to Jon.

Thank you, Sanjiv. I met Pagaya initially as an investor in 2020 before joining in 2021. I was drawn to its unique value proposition for lenders and data-driven competitive moat as well as a highly scalable operating model. Our results since then, including our current net income run rate of over $180 million substantiates that initial confidence.

Now let's get to the specifics on a highly successful quarter. Network volume grew 33% year-over-year to a record of $3.5 billion, driven by strength in auto and personal loans. Application to volume conversion remained at roughly 1%. Total revenue grew 19% year-over-year to a record $387 million. Interest and investment income doubled to $22 million as we continue to orient our investment portfolio toward cash interest bonds. This now comprises approximately 50% of our overall investments versus less than 30% in 2025. FRLPC grew 16% to $147 million, a record. FRLPC as a percent of network volume contracted about 60 basis points sequentially to 4.2%.

Two drivers affected the FRLPC percentage this quarter. The first is product and partner mix. By design, new products and partners initially enter the portfolio at lower margins, consistent with our existing legacy products as volume grows, margin follows. The second is the rate environment. Benchmark rates remain elevated, which compresses the margin we earn from the funding side of our network, even with interest in our funding vehicles at an all-time high. Importantly, over the course of 2026, we priced ABS transactions with more conservative loss assumptions. That trades lower day 1 revenue for more stable vintage performance with a larger loss buffer.

Turning to GAAP profitability. This is where our business model really shows its strength. Operating income reached $106 million, up 87% year-over-year. Adjusted EBITDA increased 43% to $124 million with a margin of 32%, up 5 points over last year. Core operating expenses were actually lower sequentially and declined 6% year-over-year. As a percentage of FRLPC, core OpEx hit a record low of 31%, an 8-point improvement versus last year. This deserves a second mention. We increased volume 33% and increased profits nearly 200%, but core OpEx has not increased in 1.5 years. That is unique and can only be accomplished by a software-like business model that requires virtually no marketing spend to generate volume.

Quarterly GAAP EPS was a record $0.49 with overall GAAP net income increasing $29 million to $45 million. That was driven primarily by 19% growth in total revenue alongside lower operating expenses and interest expense from our more efficient balance sheet. Net income margin reached 12% compared to 5% last year. On credit performance, all asset classes are performing in line with underwriting expectations. 2025 and 2026 vintages continue to reflect consistent performance with cost of capital down approximately 200 to 400 basis points versus 2024 and earlier despite higher benchmark rates. Our funding diversification strategy, including more forms of longer-term committed capital has received strong receptivity by our investor network. We combine prefunded ABS, seasoned ABS with committed long-term revolving structures and forward flow.

Turning to the balance sheet. As of June 30, we held $249 million in unrestricted cash and cash equivalents and $1.04 billion of investments in loans and securities. Our investments have consistently improved in quality and mix over the past 15 months with now approximately 50% in bond tranches with highly attractive yields. As we have discussed in the past, there is widely available funding against these bonds and our ability to sell them as they season provides additional optionality. On fair value, the investment portfolio was adjusted downward by $42 million in the quarter, in line with expectations. We added $118 million of new investments net of paydowns from prior deals.

Now turning to guidance. Based on a strong quarter and visibility on the remainder of 2026, we are raising our full year net income guidance by about 25% at the midpoint. We expect network volume growth to be driven by deeper engagement with existing partners, primarily in auto, contributions from new partners and new product initiatives. This will be partially offset by lower point-of-sale volume. FRLPC percent is expected to be between 4% and 5% for the remainder of the year, and we assume that benchmark rates remain elevated for the rest of the year. For the third quarter 2026, we expect network volume between $3.425 billion and $3.625 billion, total revenue and other income in the range of $370 million to $390 million and adjusted EBITDA between $120 million and $130 million. We expect GAAP net income for the quarter of $42 million to $52 million.

For the full year 2026, we're expecting network volume between $12.5 billion and $13.25 billion, total revenue in the range of $1.425 billion to $1.525 billion, adjusted EBITDA between $460 million and $490 million and GAAP net income between $155 million to $180 million. With that, let me turn it over to the operator for Q&A.

[Operator Instructions] Our first question is from John Hecht with Jefferies LLC.

Congrats on a good quarter and good guide. It seems like there's a lot of strength in auto. You mentioned lower point-of-sale volumes. Maybe talk about your pipeline and the competitive situation and what's causing the auto to grow so fast relative to the other segments?

This is Sanjiv. I'll take the call. I'll take the question rather. Thank you for the compliment on the performance. I would say that a large part of our auto growth came in with -- as a result of a lot of the hard work that had been going on for the last 6 to 9 months on the auto product. We had spent a lot of time essentially working on what we call dynamic offer optimization, which was essentially improving the conversion rate at the dealer level in order to make our offers more winworthy. So when a customer applies for a loan, we not -- we didn't give just one offer. We gave multiple offers and multiple choices. It was dynamically optimized at that -- at the point of sale for the dealer.

This led to a significantly higher flow that came into our lenders because they were able to approve more loans. The other thing was a very strong effort that we had made in terms of product market alignment over the last few months. If you recall, in the last quarter, we had talked about updated terms and updated ticket sizes to meet market levels. So there was a much greater product market alignment. And last and certainly not the least, in fact, it's something that I would like to double-click on was that we got access to substantially new flow from our partners, which was essentially driven by this new construct of what we call counters, where our underwriting models provide sometimes more optimized volumes of offers or loan approvals for the customer.

And so the lenders often prefer to provide Pagaya's approval as opposed to their own because it's sort of more fuller in terms of the loan amount and the approvals. And this is really important because our partners are now giving us new flow that they used to keep for themselves. So there are 3 things. There's the product as a result of the optimization of the offer, there's greater alignment with the market in terms of the ticket size and the market levels and, of course, access to new flow. All of this effectively led to the growth in the auto business. Perhaps Gal can give some more color on that.

Yes, John, good to hear from you. I think the one sentence I will add on top of all what Sanjiv said, which was exactly the point, is the unique power that we have because we have many lenders and what we perceive to be our partner product growth is really that when we are unlocking some product, in this case, was understanding in one of our partners that actually the decline flow is less where it's interesting, but much more than what if we sell all the applications that are actually being sent back to the dealers with cutbacks and recognizing that the probability for them to convert is much lower and changing the full product of how Pagaya works to be able actually to receive it in an output and instead of that, sending our offer instead.

And that has drive a very major growth with that partner. But more interesting than that, we took that concept of kind of like meeting more what are the needs of the customer in the dealership moment through activating the best offer that could show to the customer, in this case, through reducing the amount of counter. And we took it to another few lenders. So what you see is really the product partner growth in actions, specifically in auto, where one product solution is happening to one is actually pushing to be deployed and sold across the platform. And therefore, you see that meaningful change in rather short term or short period of time to be able to drive meaningful growth, and it should remain the same in the future.

And then if you think about the momentum of the different products and then the pipeline, how should we think about product mix on a volume perspective in 2027?

Yes. So basically, we are experiencing a very, very strong pipeline. In fact, in the last quarter, we had announced that there are about 7 -- in the last 6 months, actually, there are about 7 new partners that we are in the process of onboarding. Some of them are in the personal loan side, some of them are in auto and a couple in POS. We expect that the mix will roughly remain the same because we sort of PL continues to be our flagship product. Auto is showing significant growth. And POS will continue to grow and diversify. In terms of our pipeline, we are now seeing a shift in the mix, which is very interesting. In personal loans, we are seeing much more traction with the regional banks. In fact, there are a couple of banks that we are -- we've signed term sheets with and in the final contract stages with them.

It's interesting to see that in the U.S., banks are into personal loans and are looking at fee income as a major source of growth. In auto, we are also seeing a lot of interest from the banks, although we have started moving interest in the direction of OEMs and some of the enterprise-grade dealers. We will announce some of these in the forthcoming quarters. And in POS, we continue to have a very important discussions with our existing partners who are now starting to branch into different forms of POS like purchase finance. And so yes, so we expect the mix to remain pretty similar. But I will remind you that we had exponential growth in our partner onboarding in the last couple of quarters, and we expect the momentum to continue over the next few quarters without a very substantial mix in the 3 asset classes that we operate in today.

Our next question is from Sanjay Sakhrani with KBW.

Is that negative $23 million this quarter run rate now? Or can that become more severe as you bring on incrementally more volume in the back half of the year? And are you guys seeing any changes in demand from asset managers? Or is there still some repricing there?

I apologize. I think the first part of your question got cut off.

Yes. So you guys were expecting some of that pressure on the capital markets line item. That negative $23 million that we saw this quarter, I guess, is that run rate now? Or can that potentially increase as you guys kind of lean into volume growth in the back half of the year?

Thanks for the question. This is Jon. So we don't view that as a run rate. However, we still see, as we said, benchmark rates remaining elevated. So you should think about our FRLPC margin as 4% to 5%. It reflects our self-funded business model, and it's a range we remain very confident in. As benchmark rates remain elevated, as we expect, you will continue to see some pressure on the funding -- from the funding side of the FRLPC contribution. But I wouldn't think of it as something that's going to necessarily increase much from where it is today.

Our next question is from Kyle Joseph with Stephens Inc.

Let me echo John's congratulations on a good quarter. I just want to get your posture on underwriting. I know you guys tightened coming into the year. And obviously, it looks like the growth is reaccelerating there. And I just want to kind of see if anything has changed on the underwriting front? Or is that really just a function of new products and new partners?

It's Gal. So as you can tell, there are -- actually, we spoke about it many times, but we'll share it. There are 2 sides to it, but let me start with the bottom line. The bottom line is the posture in underwriting is not changed. The way we think about how do we bring together growth and in the same time, the concept of being more prudent in risk measures as we have been, we are and we will be, is really looking on the growth engine that is coming from new partners and from new products. So a lot of the growth that we have seen in this specific quarter has came from new products that has been deployed in our major partners in the auto.

And you should continue to expect that as we bring new auto partners to see much more growth from that front through the embeddness of this product into them. So the concept of growing through embedding more product into more partners, which is the B2B concept of Pagaya, which we're taking the unique capabilities that we have on the consumer credit side and kind of like allowing different vendors to become full spectrum through this is really what drives more applications to come to our way what is driving the ability at the end of the day to present a very impressive growth numbers that we saw this quarter.

On the other side of it, you have the disciplined B2C side because we are talking about credit and we are taking credit risk. We are constantly looking for the areas and pockets that are actually slightly softer or areas that we feel that we are not pricing well and constantly on a biweekly basis are changing and adapting to the different population into the different places. And as I said in the beginning, for now, we don't see any shift. And therefore, the posture for us is unchanged as the U.S. economy is in a very good spot. There is a lot of investment coming in. Unemployment is low. And these are really the major driver for specifically our borrower, which is rather a healthy borrower and Sanjiv will give a few comments on that in a second, but allowing us to stay very much on course without any major changes to the credit posture. I don't know, Sanjiv, if you want to add anything to that?

Sure. Actually, I do want to double down on what Gal just said. In the last quarter, when we said we were anticipating that there were shifts going on in the market because of inflationary pressures and all the kinds of stuff that people were talking about the economy at the time, we -- and I will repeat what we said last quarter, we took a prudent credit posture by cutting out the highest risk because we were anticipating that some consumers will be under pressure. I must stress that -- when you show growth, you say, okay, I'm going to grow by basically shifting the mix that we have in the business flow that comes in through to Pagaya. Now there's one major misconception in the market, which is that we are a decline-only lender, which is not true.

We have used decline as a mechanism to get into the loan origination system of about 36-odd partners, which is a very big deal. And once you do that, then you start moving upstream, up the funnel with our partners, which is what we have demonstrated we have done with prescreen, with affiliate marketing, with counter flows. And that is now starting to become a very large part of our flow. In fact, about, I would say, greater than 45% of our flow comes from non-decline types of flow. And I think that's a very important point for everybody to understand. So product-led growth, which is what we've been calling this, has been really important in shifting the positioning of Pagaya from a decline-only partner to using decline to leverage the embeddedness within our partner and grow up the funnel. That's really, really an important point.

The second point is, as a consequence of this, we have -- and this is another misconception that we would like to straighten out is that we are a -- I don't think people understand that as a result of moving up the funnel, we've actually significantly shifted the profile of the borrower that comes into Pagaya. So the average borrower income is now about $120,000. The average FICO is about $680. 37% of them are homeowners, and they have an average DTI of about 28%. To me, that looks like Middle America or Mass America. And as you know, Middle America is not the bottom of the spectrum. Middle America manages its finances quite responsibly, and we've seen that across credit cards and other unsecured products through some of the other lenders.

And so that's kind of how we are growing right now. We are growing through product. We are growing through top of the funnel, and that is starting to be evidenced both in our auto business as well as in our personal loans business and so in our POS.

And then just one follow-up for me. In terms of point of sale, obviously, some moving parts there in terms of your partners adding some losing one. But just kind of talk about your expectations for volumes from point-of-sale specifically given what's going on there.

Thanks. Yes. So when you think about point of sale through the rest of the year, you'll see some volume decrease there from the roll-off of one of our POS partners. That being said, that partner represents very, very little in terms of FRLPC margin. So while it might have an effect on late Q3, Q4, volume has really no effect on FR LTC. And obviously, as we get into next year, toward the end of this year and next year, as we scale new POS partners, you'll begin to see that volume ramp again.

Can I just add one little thing to what Jon just said. Jon rightly pointed out the rolling off of one of our partners, but we continue -- and we continue to grow in partners like Several, partners like FlexPay with existing partners like Upgrade. And we are in pretty intense discussions with our existing partners. We want to grow into areas like home improvement loans, purchase finance and so on. Loans that have structures very similar to our personal loans business, which we understand quite well. And I know that in some of the earnings calls that you've had with some of our lending partners in the last few days, they're all talking about growth in other areas of the NPL. We are right alongside them in our growth across that particular asset class.

Our next question is from David Scharf with Citizens Capital Markets.

I wanted to ask about a couple of drivers of further operating leverage. And one is on just the OpEx side. As you noted, remarkably, it's been flat for about 18 months despite the amount of growth you've seen. Just based on the portfolio of products that you've introduced now, should we pretty much for the next 18 months, expect that core OpEx figure to be in a pretty tight range? I mean, is most of the heavy lifting of investment spending behind you? Or is there another step function somewhere down the line that you foresee?

Thanks for the question. Obviously, we don't guide into 2027. But as we've said many times, our core OpEx, we believe, is rightsized today for significant growth in our 3 major asset classes. So I don't think you should model much growth there at all.

Good clarification.

And then -- and I think another point I think there is another clarification. As you think about the core business and the things we have right now, which is the POS, the auto, the PL, the platform that we are operating and building that is repeatable, scalable and actually at this point, even predictable about adding new partners. And just to put things in perspective of how much we think about ourselves as an enterprise-grade type of organization, the average contribution margin of the customer to us is $8 million. So to that core business and the platform that we have built and just now rolling out more of the products to more of our partners and to be able to bring more partners from the 35 that we have now, hopefully, to the 80 or 100, there is very minimal investment that is needed.

It might be that in the future, because of the very heavy operational leverage that we have and the earning power and the profits that we are starting to gain and to get, we will look for more avenues to accelerate even growth further to invest in new initiatives of where the world work goes, maybe in other areas. But like the core business as it stands right now needs very limited, if any, investment to be able to handle twice the volume, 3x the volume, twice or 3x the partner and rolling out all of our amazing products to the partners that we enjoy so much support.

No, that's great feedback, Gal. I mean notwithstanding all the margin expansion at the bottom line you've experienced so far, it sounds like there's even more operating leverage to come.

And that's how we think about the earning power of the business that like the margins are going to continue to go up and the scale is going to continue to go up. And that's how you should think, again, while we're not giving guidance for the next 3 years, but you can just illustrate the next 3 years with that trajectory and ability to drive all of that value through a rather stable OpEx to get to a very interesting number without the enterprise capability.

Just a quick follow-up more on the consumer and credit side. Notwithstanding all of the kind of quarter-to-quarter commentary, the conversion rate has been holding around 1% for really several years now. Is there anything whether it's kind of inflation, unemployment? I mean, just trying to get a sense for if there's anything out there that you keep an eye on or looking for that would notably change that? Or maybe what might also be helpful is to understand not so much the conversion rate, but your loan -- your approval rate. Has that actually been holding steady as well?

I mean, David, let me take this. Look, I think you're absolutely right. Environment keeps shifting. As I said before, we feel pretty good about the shift that we have made in the consumer to essentially -- and the shift in our business model sort of more top of the funnel, and we think that we understand this consumer quite well. Having said that, for those of us that have gone through several cycles in the market, we are extremely humble about what it is that we don't know, which is why in the last quarter, in anticipation of a potentially shifting market, we took out our highest risk tiers, and we have the ability to do that. When you get $1 trillion worth of flow coming in and we're only issuing 1% of that, you, in some ways, have a lot of the ability to be fairly discerning, which is what we constantly watch.

Now one other thing is that across 36-odd partners, you constantly watch credit performance of the flow that's coming in, and you can fine-tune your performance to optimize for best performance that comes in into the system. So that's kind of how we think about it. Obviously, we are very tuned into things like inflation and unemployment and what it does to the discretionary spending part of our consumers. And we work very closely with our primary lenders to make sure that we are seeing what they are seeing. We work very closely with them. But the good news in all of this is that the credit box of our primary lenders has stayed stable. We expect it to continue to remain stable.

As you know, in situations like this, the flow accretive because they spend more in marketing and they keep their credit stable. So our outlook for ourselves in terms of the stability of the flow and the discretionary ability to manage underwriting carefully continues to remain pretty good. So we feel pretty good about where we are at right now. Jon, you want to add something here.

Just keep in mind one interesting stat from this quarter. For the first time, we had over $300 billion of applications coming in. So we have the ability to be selective and to keep that conversion rate that Sanjiv described while still growing the business quite nicely.

Our next question is from Joseph Vafi with Canaccord.

Great results, great operating leverage, really nice to see. So maybe we start, can we get an update on the forward flow market? I know that there were some moving parts there a couple of quarters ago. Wondering how you're viewing that market? And then a quick follow-up.

Thanks, Joe. Let me -- this is Jon. I'll take that one. And the way I'll answer it is how we think about funding generally and I think how you should think about it when it comes to Pagaya. So our funding channels are more committed and diversified than ever. Today, about 40% of our flow comes from the non-prefunded ABS products. Funding diversification remains a core strategy and focus. This doesn't just mean ABS and forward flow, right? We think of it as different forms of long-term committed capital. So the market demand for our securitizations, as you can see just from the last couple of weeks in the last quarter is extremely high even with elevated benchmark rates. So just throwing out some numbers last quarter, Q2 rather, we have $3.7 billion raised with 12 new investors. So our full investor base right now is around $175. The last 3 deals were upsized in both paid and RPM.

Our prefunded ABS, which is sort of our core and historical product, provides committed clarity for kind of going forward looking at quarter. Forward flow where we remain active. We've announced new forward flows this year. You'll continue to hear from us. Provides additional clarity for a 6- to 12-month period. But importantly, beyond that, we've executed longer-term 1- to 2-year committed revolving structures and are in process with several other agreements with large asset managers as well as bank partners. So all in all, we see Pagaya as an evolving committed funded sort of suite of funding solutions, where forward flow remains an important one, but it's just one of several.

And then with all the operating leverage emerging, and I appreciate the kind of fixed transaction processing side of OpEx. Just wondering if there are areas of, say, marketing spend that you see at this point that could have attractive ROIs and put some of this emerging operating leverage back to work in the business.

So actually, I will take it. It's Gal here. So again, I want to just emphasize what I said before. The platform and the way it's been operating doesn't require any more investment from that perspective in the business models that we are. So to your -- directly to your question, no. There is no marketing dollar or other pieces that will need to be ramped up and therefore, it could erode the operational leverage in the future. We are looking in areas of ROI and places where you can bring specific knowledge that could help our ability to even sharpen further our product and value proposition and offering, but it's nothing in the magnitude that you will see as a major expense item.

And the last piece I would say, and we don't talk about it a lot because this is a little bit embedded in the way we operate. But the agentic world kind of like revolution and a company like ours that all of us are either computer science and data science engineers or on the other hand side, financial leaders, we are very much enjoying from that leap of growth of the ability to get access and do many of the tasks that once in the past that needed to be relied upon many analysts now to be much more driven by the agentic world, by our ability to have the data that we have in a such organized manner. So as we think about the future productivity for our business, we actually think about doing more with the same rather than the other way around.

Our next question is from Hal Goetsch with B. Riley Securities.

Congratulations on a great quarter and start to the first half of the year. Back to the auto. You mentioned that 83% of loans closed at the dealer desk and you're making more competitive offers at that point of sale essentially at the dealer channel. I think you mentioned, Sanjiv, you might have mentioned that you have -- you're using information to find out what the other offers might be. I'm just trying to figure out how you get access or how you triangulated the competition to make a better offer that's accepted by the car buyer. Can you elaborate on how you maybe formulated this information that gets a better offer to the car buyer?

Thank you again. Good to hear your voice. A couple of things. One is I'll take it back a little bit. In the past, what used to happen was there was an offer that came -- there's an app that comes in -- application that comes in through the lender to us, and we made essentially what I would call a static point in time, one-dimensional offer to the consumer. Now what happens is we have access through our lenders to essentially the interaction that they have with the dealer in terms of essentially what the dealer comments are, what the dealer is saying in terms of what will make the application work or not work and we leverage that information essentially to build in as inputs into our underwriting decisioning process.

Instead of giving one static approval, we are now able to give multiple choices, what if you reduce your down payment, what if the down payment, what if you've got a higher back-end approval, what -- so we have now -- we offer across various dimensions and across various options. And how do we do it, which is the core question that you're asking is we get it because we are now able to leverage the information between the dealer and the consumer through our lender much, much more than we ever did before.

[Operator Instructions] Our next question is from Rayna Kumar with Oppenheimer & Company Inc.

This is Guru on for Rayna. We were just wondering if you can comment on your current capital allocation priorities here. And if there are any updated thoughts on your appetite for acquisitions going forward?

Thanks for the question. So we're always calculating sort of the best use of the net incremental dollar that we spend. We find, for example, our bond purchases that we've added to our balance sheet. Our balance sheet is now, I think, as you know, 50% bonds, so extremely strong as an attractive use of capital. On the M&A topic, we have nothing significant planned right now, but we're always looking at opportunities and always considering things there. But in terms of our guidance and looking over the near-term, we have no anticipated M&A.

So since we don't have any more questions, we really want to thank everyone for joining us today. We delivered a record quarter and I'm very and extremely proud of the team and the execution behind these results. But importantly, I want to leave investors with a few clear messages. Pagaya is a materially different company today than it has been in the last few years. And there are 4 fundamental small misperceptions about our business that I want to address directly before we close the call. First is that our product portfolio is broadened than ever, and it is the effective growth engine that we are pushing towards and should expect in the future.

Secondly, the Pagaya borrower that has $120,000 on the PL product is materially stronger than market assumed and is rather resilient to any inflation pressure. The third one is that the earning power that you are seeing and that our network is actually building is very strong, mainly because of the operational power because our platform is already ready to use, and it's only the starting days of that earning power growth. And lastly, thanks to all of that, the acceleration of the strengthening of our balance sheet and funding engine is something that we are focusing on and did major changes in the last year. So with all these factors, it makes me much more confident in the business as we think about our growth trajectory -- and as we think about how Pagaya 10th next year looking for after having celebration the Pagaya 10th year this year. Thank you very much, everyone, for joining, and we are looking forward to discuss with you more in the future.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

All right. Good afternoon, everybody. For our last session from my end today, we are delighted to welcome Chief Financial Officer of Pagaya, Evangelos Perros. Welcome, EP.

Thank you for having me. Appreciate it.

No problem. Yes, happy to have you. And I guess maybe just to get started with our conversation here, for those of you tuning in who aren't as familiar with Pagaya, can you maybe give those investors the 60-second elevator pitch on what your business does exactly?

Sure. So think of Pagaya as a tech-enabled company that connects consumer lenders and originators on one side with investors on the other side across different types of consumer products like personal loans, auto and point of sale. And through that connection, we integrate basically our technology into the consumer lenders, banks, nonbanks, fintechs, BNPL providers. And through that, basically, we make fees, majority of which is coming from the consumer lending side as a result of using our technology and allowing them to approve more loans. We're not an originator ourselves. So we're basically providing a pure white-label solution to them to expand their capabilities and overall underwriting.

Great. I think you went over 60 seconds definitely, but you tried your best. Maybe just explain the problem, the value proposition you bring, the problem that Pagaya solves for your loan originator partners and how it differs across the asset classes you support?

Sure. So I think every lending partners, so today, we work with more than 30 lending partners across, as I said, banks and nonbanks and fintechs. Every partner is solving for something else. If you think about banks or within, let's say, the personal loan space, they're actually using our product to, call it, "protect" the relationship with their consumers and the deposits that come with them and expand effectively the lifetime value of that relationship.

If you think about banks that are offering auto loans, they ultimately are looking to expand their dealership network or offer higher satisfaction rates and different options to their consumers through the dealers at the point of lend. If you think about BNPL, which, as we all know, is becoming increasingly much more of a mainstream credit product, consumer lenders, our partners are looking to expand their merchant network, offer more solutions at that point of lend. So every partner is doing something else.

Fintechs, in many ways, they're basically trying to improve their economics because we can come in. We're a very -- the largest personal loan issuer in the country. We can come in, provide the funding alternative to them and share fees along the way. So every single lender is actually solving for something else. We see ourselves at the end of the day as a utility, and our goal is to be embedded in every single lending institution out there when it comes to the consumer lending. The business is highly scalable. The model is highly scalable. So that's how to think about it. And then we'll adjust our product offering with the needs of our lending partners.

Great. And maybe related to the different asset class question, the funding environment, I think, has come a little bit more in question more recently. Any color you can add on loan buyer demand that you're seeing? Hasn't there been a little bit of slowing or weakness in that, in particular, in the personal loan space? Or is that not accurate?

The funding markets have gone through a change over the last 12 months. But fundamentally, I think what people forget is like when you think about the source of capital that deploys into the type of asset classes, primarily comes from 2 or 3 sources. It's either like insurance capital or pension capital or sort of bank capital, and that has not changed even in the last 12 months. In fact, the demand continues to be robust.

And if you think about why that is, it's for 2 reasons. One is the consumer, the U.S. consumer, is still resilient. And the consumer credit performance is still stable and actually quite attractive, particularly relative to some of the corporate alternatives out there. Now having said that, how they deploy capital, channels like private credit providers, ABS and all of that, that has shifted quite a bit. So for example, when you look at ABS or public markets, broadly speaking, they are as robust as they have -- we have seen them over the last multiple years.

And as this capital is finding its way through, call it, private credit alternative asset managers, there we actually see a repricing. We came in -- came out from a very strong 2025 where you could argue there was a little bit of an exuberance and a lot of competition in deploying capital through these types of alternative asset managers, and now there is a repricing happening there. And obviously, that's driving a little bit of -- a lot of the headlines that you see there. But fundamentally, like when you think about the secular trends in funding, we continue to see very strong demand for these types of asset classes.

Okay. Great. And maybe just high level, how are you thinking about growth and the drivers, levers you can pull to either toggle this up and down? And are there any specific channels or asset classes or new areas that you're more interested in today?

Yes. So the way we go to market, when you think about our growth strategy, it comes through different ways. One is land and expand, right? We onboard new lending partners, new consumer lenders as our partners. We get access to their flow. We usually start with what we call the decline monetization program with a second-look program. And then over time, we try to ramp them up and also introduce new products to them. On top of that is, obviously, every time, add new partners to the mix. When you now pivot a little bit to the asset class, what I would say is you should expect to think about personal loans being at the point of level of maturity where you should see some growth, but not like very high double digits.

That you would expect to see much more so on the auto vertical, where the market size is obviously much bigger. Our evolution -- auto, in our evolution as a company, is still a few years behind personal loans. And while on the unit economics is very similar, there is a lot more partners out there that we're continuing to sort of tap into.

But, look, it's part of the evolution. Like if you look at Pagaya 3 years ago, 4 years ago, pretty much all of our volume was coming from what we call the second-look. Today, it's actually evenly split between traditional sort of second-look and all the other products that we have with the partners.

Over the cycle, what I would say is our goal is to continue to grow at that, call it, 20% annually. But obviously, based on credit changes, risk appetite and all of that, sometimes it will be 10%, 15% and sometimes it will be 30%. I think one key thing for us and for investors to appreciate is we do not have a lever to really grow 30% in a single quarter. We don't have marketing dollars. We don't go directly to the consumer. We actually have to partner with the lending partners. And therefore, it's a much -- it's like a more traditional B2B business. So you should generally see more stable growth through the cycle relative to some of the other players in the marketplace.

And just as we think about the forward look there, and you talked a little bit about the growth, you did recently raise the low end of your network volume guide and you increased the total net income guide as well. Can you talk about what drove that decision and how you're thinking about it?

Yes. If you step back a little bit, I have to take you back to Q4 of last year. We decided to -- as a result of the uncertainty in the marketplace, broadly speaking, we decided to cut our production of our higher-risk tiers. Overall, that translated to about 10%, 15% cut. And we kept that credit posture, and we're very happy, obviously, with the decision given what's happening in the marketplace. However, we are in position to offset that cut -- more than offset that cut by -- through new product -- through new partner growth as well as product-led growth, i.e., providing more product solutions to our partners and therefore, getting more application flow that's much more balanced in terms of risk.

That was the initial stance behind, call it, our guidance in the beginning of the year. What you saw after Q1 as raising on the low end is because we have very strong confidence in our product-led strategy. And I can tell you now, obviously being in this quarter that we have very strong confidence in continue to delivering that and grow that with primary focus on the auto side. There's obviously tailwinds, right, in the marketplace besides the uncertainty. You have higher spreads, higher interest rates, which could impact potentially a little bit the, call it -- what we call FRLPC or unit economics.

But overall, the continued strong growth and the products that we have out there should more than offset any pressure in the FRLPC, and we'll continue to see that translate into higher FRLPC revenue less production costs in dollar terms in terms of growth. And remember, the business has a significant operating leverage. So every dollar of growth that we see in FRLPC in dollar terms pretty much flows through straight to the bottom line in terms of GAAP net income profitability, operating income. So...

Okay. And just in terms of the funding model of the business, it's evolved quite a bit over the last few years from, I think, entirely prefunded ABS to now about half your funding. So how do we think about the funding diversification going forward? Are you going to continue down that path of continuing to lean away from that? Or how are you thinking about it?

We have traditionally looked at the funding more so as, obviously, access to capital and focusing less on the economics and much more so on the diversification. Ultimately, what we try to do is not rely on one single name or one single channel at any point in time, and obviously, tactically pivot between the different channels. So if you take the -- if you go back 2 years ago in early 2024, 100% of the funding was basically done through the traditional prefunding ABS. Today, that prefunding ABS represents approximately 50% of our total funding. There is forward flow structures, there is pass-through structures, there is vertical risk retention. There is different -- there is revolving ABS or different flavors between, call it, the full loan forward flow and the prefunding ABS.

And the goal, as I said, is much more continue to diversify and bring on more partners into the -- more funding partners into the mix. Specifically, what we saw going back a little bit to your other question, what we saw in Q1, the call it, forward flow private credit on the consumer side, while there's still a lot of capital to be deployed and is being deployed, they're going through a repricing. And that's why we tactically pivoted in Q1 a little bit more so into the ABS type of products because public markets, the demand is as robust as we have seen in the last multiple years.

Like if you actually look at our series of ABS issuance that we have done in the last 4 or 5 months, every other deal, we will upsize. We have increased the number of investors we work by 30 in the last, call it, 9 to 12 months. So there is now a little bit of a separation between private markets and public markets. That will probably converge back over the next few months, but like that's what we currently see. And that's where the mix of funding currently stands.

Okay. And I guess maybe as we think about the last 2 years as well, relatedly, your unit economics have evolved from primarily coming from your funding partners to now your lending partners. So can you talk about what drove that shift and how we should think about it going forward relative to this year in the past quarter?

Yes, that's something like we're obviously very proud of in terms of the accomplishment. It's probably the #1 driver of how we managed to get the business to be consistently sustainably GAAP net income profitable. If I take you back 3 years ago, we were -- our unit economics were close to 2%, 2.5%, i.e., for every dollar -- for every $1 billion of volume, we would earn $20 million to $25 million. Two years forward, today, we're closer to the 4.5%. So we managed to more than double the unit economics. And obviously, on a $10 billion volume business, high level, that's an incremental $200 million more coming through, real cash, real fees.

And because of the operating leverage, that's all going straight to the bottom line. To your question, I think we're now at the point where -- and for the last, call it, 12 months, that 4% to 5% represents what we think it's much more the mature state. And therefore, from here on, it's much more volume growth, product-led growth and ultimately, maintaining that sort of 4% to 5% range while we continue to grow volume is what will drive bottom line profitability.

And I guess maybe just to take it back to the ABS markets. Can we spend a moment talking about what you're seeing there? And I know you touched on this already a bit. So maybe just more specifically, what are you seeing there from like spreads or interest demand? You talked about how on earnings you're intentionally leaning back into that market. Just maybe elaborate on what's driving that decision.

Yes. So I think it's going back a little bit is in 2025, you saw significant competition and demand that didn't seem sustainable on the private credit side. A lot of different funds and investors competing and driving sort of the cost of capital lower. And it was actually much more competitive to do funding through these private credit sort of sources. That has normalized either as a result of some of the things that we saw in the marketplace with Tricolor and MFS and the overall dislocation in private credit, particularly on the corporate side.

But ABS markets are more economic right now. There is significant more demand. I think part of that is also because we also cut our credit late last year. So we're actually benefiting disproportionately from the demand from public markets because we have lowered the cost of capital and the expected sort of loss assumptions and pricing.

It goes back to my point that like these are just ways capital is finding its way to deploy. At the end of the day, the secular tailwind of like insurance capital and pension capital continues to increase their allocation into consumer credit, is still very strong. And the reason for that is because simply the consumer, the U.S. consumer is very resilient. And we saw consumer credit performance has been very stable.

Now to your point, pricing-wise, in 2025, we saw sort of the trough sometime around, call it, September or so, October when it was the last rate cut. And then you started seeing some movement against that in Q1. Today, what I would say is like spread across benchmark rates, which is for us about the 2-year and then spreads have widened by about somewhere between 100 and 125 basis points. So that's obviously having an impact across the board, right? Everybody is adjusting a little bit on their cost of capital.

But again, from our perspective, keep in mind, like most of our fees, most of our profitability come from the lending partner side. We can very easily adjust our production and our pricing and this type of movements doesn't really have a material impact on our ability. And we're very scaled as well, right? Like having 170 investors in our ABS and every deal we go out to market, we use 35 or 40 of those, and we rotate into that is a very strong place to be, and we feel very good about that scale and our ability to continue to execute seamlessly through the public markets.

And just as you think about the pivot back to ABS, how should we think about your ability to self-finance? And do you think you'll need to raise equity or debt to help fund that 5% risk retention? Or do you think you've reached the point where you're effectively recycling capital?

So it's definitely the latter. So if you actually think where we're trying to get to is on a marginal basis, think about it, we earn $4 to $5 upfront in terms of cash from the fees. And then we need to hold some of that as part of, call it, risk retention or risk participation more broadly. And today, we're closer to -- like in the last quarter, it was like literally just 50 basis points. That obviously, was a very strong quarter for us, and we managed to accelerate a lot of the cash from historical deals.

But ultimately, strategically, what we try to do is -- and it goes back to your question around unit economics and overall capital efficiency. We managed to get the unit economics to that 4% to 5%. And through the cycle, what we're trying to do in terms of risk participation is be somewhere between 2% and 3%. And therefore -- and that's on a marginal basis.

So therefore, you're at the point now where you're actually -- you can self-fund this type of growth. And we feel very good about that part, and it's a deliberate effort that we have tried to put in place over the last 2 years to really reposition the company to make sure we don't have to raise any more capital. We don't have to raise equity. Obviously, the balance sheet will change along the way. We'll tap into like debt capital markets and everything else, but like we're at a point where we can self-fund that type of growth.

And I think one big topic we haven't really touched on yet, EP, is consumer health, macro, very top of mind questions for many investors. You have a bit of an interesting perspective given where you sit in the ecosystem as more of a second-look provider. So can you talk about what you're seeing in your data, your underwriting? And is there anything from an early indicator standpoint that you see that's a bit more unique versus others?

So I think to your point, we feel we're uniquely positioned because we see the application flow and the performance across more than 30 consumer lenders across banks, like from top 5 banks all the way to fintechs and across 3 asset classes, some of them with a very short duration and like the BNPL all the way to the auto, which can go as far as 18-month type of term for us. And we can recalibrate, obviously, and assess this type of information. At the same time, we're monitoring outside of this asset class as well, like credit cards and trends like everybody else.

What I would tell you is the consumer is -- the U.S. consumer, despite everything that's happening in the macro environment and geopolitical environment and everything is very resilient. And the consumer credit is performing very much in line with expectations. And there is no better validation not just for us, but for other players in the marketplace by the fact that investors continue to deploy capital in these asset classes.

Now having said that, there is a lot of uncertainty in the marketplace. We took the stance that we're going to have to be more cautious in the beginning of this year, late last year to cut some of that production. And if some of that uncertainty materializes into a real risk, we're well positioned for it. If not, we would have left some money on the table, and we're happy with that type of decision.

I think overall, it seems like -- and even if you look like the 2026 vintages, again, very early on, you have like good -- very early indicators suggesting good performance. But the uncertainty is still there, like whether it's inflation, whether it's unemployment, whether it's interest rate path, whether it's the K economy.

One thing though that people just don't really appreciate about Pagaya is when you actually look at the consumer we're underwriting, people are surprised to hear that like the average consumer in our personal loans has $120,000 income and a 680 FICO score. And that consumer, if you think about it, given what's happening in the marketplace with AI and white collar jobs or with inflation risk and oil prices, it actually sits sort of at that sort of center of the K economy, if you think about it on the lower end of the upper part of the K. And it's quite immune to some of those risks.

Still, I think we feel very good about our overall credit positioning, something we're obviously monitoring day in, day out like everybody else. We'll have to continue to see how that progresses over the course of the year and how persistent some of those uncertainties are.

So it sounds like the performance from a credit perspective is still in line. I guess I'm curious, have you done any work to maybe try to pull out what the different various drivers are, whether it be higher tax refunds versus the impact of gas prices? Is there any observations from the more nuanced...

So what I would say is it's interesting that you have that together with a very strong tax season, let's call it. And what you saw, for example, is in auto, you saw significant demand for new loans and people sort of getting more cars. At the same time, on the personal loan, a lot of people use the tax refund to accelerate a little bit the payments. Again, those are sort of nuances, right, but just giving you a little bit of a flavor. Credit card delinquencies at the same time are a little bit on the rise, and that's something we're monitoring. And obviously, people are tapping into personal loans to refinance those at lower and more predictable costs.

So it's -- you can see things going in multiple different directions, and that's the type of uncertainty that we have to live with. And what we're trying to do from our perspective is to be well positioned for whenever that uncertainty translates into a certain risk because you can never really predict when that will happen. It's just a matter of how you're positioned to deal with it when it comes. And you know it's going to come. It's just a question of when and what form it will take.

I think what we have proven out relative to some of the other players, again, it doesn't mean they're doing something wrong, is that we are risk first particularly in the credit risk and then really focus on optimizing for growth and profitability more so than the other way around where we see a lot of the other players, again, nothing against that approach, but to push for that growth in light of the strong consumer and strong credit performance. And we're not looking to change that credit posture at all at this point.

You mentioned, I think if I had it right, you're more -- you think you're a little bit more at the lower half -- or the lower part of the upper half of the market, right? So where do you think that goes over the next few years? I mean, do you think you'll continue migrating a little higher? And is that coming from maybe just a purposeful partner acquisition mix? Or is it a little bit more you're going to underwrite a little tougher -- or a little tighter to get there? Like how are you thinking about that?

Yes. So look, on the credit side, I can't really predict like we'll always move. But I think what we are quite unique in is like if you think about Pagaya today, just from the 30-plus partners that we have, we look at -- we get $1 trillion of application coming our way. And from that, we approve approximately 1% of that to get to that $12 billion to $13 billion of volume. But if you actually double-click into this application flow, we're very uniquely positioned for that spectrum of consumer that's call it, very broadly, call it, from 550 FICO all the way to like the 750. That's our niche. Like our data advantage and production data that we have for that type of consumer is very difficult to match by any other lender out there. You can have banks who are focusing on the higher FICO score. You have subprime lenders who are focusing on lower than that.

The advantage, the data advantage and the moat that we have in that sort of spectrum, we feel is quite unique. But I cannot predict obviously, credit. What I can tell you is that when you think about partner mix, we are increasingly obviously focusing on adding more bank partners, which would arguably provide more access to more flow on the higher end of even the spectrum as I just described for us, call it that 650 to 750 FICO. But that's just a matter, as I said, of partner mix. That's how we see the strategy.

Now having said that, remember, to your point, that's as it relates to the existing asset class, which is personal auto and POS. Down the line, we could be -- go a little bit on the offense as well and potentially explore acquisition opportunities in other asset classes, maybe home improvement, maybe like purpose-driven POS, potentially even credit cards. Again, right now, the ROI on the existing asset class is very high for us. So we're focusing on executing on that. But that will also potentially drive a little bit of that mix into, call it, the type of consumer we're underwriting.

And thinking about your capital allocation strategy, you've been profitable for over a year now. You've been generating cash. How are you thinking about deploying capital here? And are you looking at M&A, more buybacks, dividend? Or what are you sort of prioritizing at this point? And obviously, I think we recognize every company is always looking at M&A. If you were to look at that, what are some of your, I guess, biggest needs at this point that you'd consider looking at?

So I think the uniqueness in the business model is also coming across on the capital allocation. What I mean by that is like we don't have any capital allocation alternative we have does not have to compete with organic CapEx. We don't have any of that. The model is already built out. The infrastructure is already built out. We can even double the volume that we do today without any really incremental investment. Obviously, on the margin, there will be a little bit more hiring, a little bit more support, but like we don't have that. And that's a great place to be. If you actually look at our P&L, it's much more of a pure tech P&L rather than a traditional consumer lender. We don't have to spend money to get more application flow or add more partners to it. So that's a great place to be in that regard.

So now when you think about capital alternatives at a high level, we could potentially buy back some of our high-yield notes that we issued last year, which are obviously trading at prices that, from our perspective, don't make sense. And we have been doing some of that. We could buy potentially back some stock given the relative valuation there or do some M&A. Given the uncertainty in the marketplace, our first choice now is to basically preserve some of that capital and continue to build the cash flow profile of the business.

And then if the right opportunity comes along, we can basically either go a little more aggressive or more on the offense side in the M&A side, which from our perspective, if you actually look at our partners where we actually see most of the opportunity, if I had to choose 1 or 2 sub-asset classes within consumer lending will be either on what we call purpose-driven point of sale, i.e., longer duration, larger ticket items within point of sale like home improvement or health care or things like that or potentially even credit cards.

What will drive that decision, though, it's where our -- like it will be our partners. Again, we see ourselves as a utility. We want to be embedded in every single lending institution in consumer lending out there. And if they expand into these types of asset class, we would want to expand with them. That's how we think about capital allocation. And obviously, it's going to be a very dynamic decision. But we feel very well sort of positioned for that and our ability to execute either organic or inorganic type of growth.

And maybe just to make this a little full circle back with the original question. What are the barriers to entry in your business? What's your moat? And how difficult do you think it is to replicate what you do? And maybe as a part of that question, one question we always get across all of our businesses that we cover today are what's the risk of AI? Do you view that as additive to you? Or how hard is it to replicate what Pagaya does today?

Yes. So obviously, we get that question particularly from you, investors. Starting a little bit with the first part, the real advantage is the data that we have, our own production data. Again, think about $1 trillion of application flow coming our way. We extend approvals back about 10% of that, so $100 billion of approvals that actually -- and only 10%, obviously, of that converts.

When you think about $100 billion of approvals and within a reasonably tight range of the consumer profile, that data advantage is honestly quite unique and very difficult for anyone to replicate. And it's basically, again, across 3 asset classes, banks, nonbanks, affiliates, to organic flow, and that's quite unique. And our ability for the model to continuously price those consumers increasingly over time more accurately, I think it's quite unique. And there is no other player in the marketplace that has this type of amount of data to do that specific consumer.

There are potentially solutions out there where basically they are supplementing as a service some of the underwriting for some of our consumer lenders, but no one is actually offering an end-to-end solution from the actual AI integration, technology integration, full white-label solution all the way through the funding. And that's a very unique place to be. We paid the price. Like it's not an easy thing for us to get where we are today, as you know. Like to really build that infrastructure took us some time. And now that we have crossed the breakeven point, obviously, we're reaping the benefits for that.

On the AI side, I think people -- like for us, we are -- we don't believe we're sort of, call it, threatened by that part because first of all, we're fully AI enabled on the front end in terms of the underwriting, 100%. But again, it goes back to the production data. It's not just somebody can go out and buy like, let's say, the bureau data and really build a model. And by the way, just to be clear, maybe somebody will try that out, but that will require significant sort of money to be spent to really build the infrastructure over time, generate this type of data.

But we feel good about having, call it, a first-mover advantage because if that happens, and it may happen, like somebody will actually see the opportunity and they'll try to do it. I cannot really predict the future, but I can tell you is we could potentially along the way, price them out or maybe acquire them. So it's a good place to be from a competitive advantage perspective because of the data, again, moat and the relative scale that we have already achieved. That's how we think about our relative positioning. And I think that's generally recognized by investors. It's just like it's a quite unique animal. You don't really have another B2B business out there that's really providing this white-label solution. And we feel very good about the competitive positioning that we have.

All right. Great. With that, I think we're out of time. EP, pleasure.

All right. Thank you so much for having me.

Thank you.

Hello, and welcome, everyone, joining today's Pagaya First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this call is being recorded, and we are standing by.

It is now my pleasure to turn the meeting over to Craig Smyth, Investor Relations. Please go ahead.

Thank you, and welcome to Pagaya's First Quarter 2026 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; Evangelos Perros, Chief Financial Officer; and Jon Dobres, Chief Strategy Officer. You can find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com.

Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the second quarter and full year 2026. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC, including our 10-K, 10-Q and other reports for a more detailed discussion of these factors. Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs, or FRLPC, FRLPC as a percentage of network volume, core operating expenses and core operating expenses as a percentage of FRLPC will be discussed on the call. We also provide an outlook for the second quarter and the full year 2026 on a non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable effort in our earnings release and other materials, which are posted on our Investor Relations website. We encourage you to review the shareholder letter, which was furnished with the SEC on Form 8-K today for detailed commentary on our business and performance in conjunction with the company earnings supplement and press release.

With that, let me turn the call over to Gal.

Thank you, and welcome, everyone. Before turning to the quarter, this morning, we announced that EP is stepping down as CFO after nearly 5 years with Pagaya. He has been a great partner to Sanjiv and me and was instrumental in laying the foundation for positive GAAP net income and cash flow, one of the most important pillars for our long term success. The transition takes effect June 15, with EP remaining as a strategic adviser through year-end. We are grateful for his contribution and look forward to continuing to work with him in the future.

We are also excited to announce Jon Dobres as the CFO of Pagaya. Since joining Pagaya in 2021, he has worked closely with me, Sanjiv and EP on our corporate strategy and key financing initiatives, including our term loan and high-yield bond offering. I'm confident he is the right leader for this role. He knows our business inside out and has been a driving force behind our financial transformation. He will continue to strengthen our balance sheet, drive profitable growth and sharpen our engagement with the investor community that is here on the call. With that, let me turn to our quarterly results.

I'm pleased to report another strong quarter for Pagaya. Despite the macro environment full of volatility, we stayed focused on what we can control, our core business drivers, and delivered GAAP net income of $25 million. This is now 5 consecutive quarters of profitability. These results reflect a team that is executing a clear plan, drive sustained profitability by expanding our partner network, building a differentiated product and operating a platform that is designed to perform through cycles.

Now let's turn into the consumer. What we see is a resilient consumer, supported by stable labor markets and credit conditions. Our first quarter credit performance is in line with expectations with some benefit from seasonal tax trends. But I want to be clear, we are not relying on those tailwinds to extend risk. We continue to maintain our selective posture, and that strategic cushion is what allows us to execute our long-term plan regardless of short-term market dislocation.

As you will recall, in the fourth quarter last year, we intentionally pulled back origination volumes in selected segments. Throughout the first quarter, we maintained that same credit posture unchanged. We are data-dependent and flexible, and we believe that a measured approach today is what secures our ability to scale tomorrow.

On funding, we have raised $2.1 billion this quarter, attracted 5 new investors into our deals and expanded our investor base through our first-ever auto resecuritization. The consumer credit public market continued to demonstrate strength despite recent volatility. In fact, we are seeing an influx of new investors participating in this market. We also reached another important funding milestone. We welcomed Fitch into our capital market platform, marking the first time we have added a major rating agency alongside Kroll. This is meaningful because it provides enhanced stability to our capital market presence and reinforce confidence in our asset performance.

Now while private credit markets are going through a period of repricing, we have strategically leaned into the public ABS markets. While volatile markets may create some near-term earnings pressure, the diversified funding structure we have built allows us to lean on different sources depend on market conditions, giving us great flexibility.

Whole loan buyers remain an important pillar of our funding, and we will continue to have relationships there, evidenced by an additional term sheet that we have signed just a few weeks ago and an ongoing discussions with additional parties. However, we are not dependent on any single channel. This is the benefit of how we are built. It is the same focused execution that continues to drive our B2B2C business model forward. And what I would say is that our growth enterprise strategy is working well. Since the start of the year, we reached a new onboarding record with 4 partners joining our network this quarter and making progress with regional banks in the pipeline.

Allow me to provide a quick overview on our businesses. On the personal loan, we expanded our platform capabilities by adding Experian Activate and continue to operate across significant affiliate marketplaces in consumer lending, broadening the reach of our partners to be active in more marketplaces through our products. On our auto loans business, the auto business reached record performance this quarter with volume hitting all-time highs. Auto has become a true structural growth engine for Pagaya, enhanced by product improvements and network pricing efficiency.

Finally, to our POS business. Our POS business continued to evolve. Instead of just being an enabler of point-of-sale, we have embedded longer-term larger ticket lending capabilities inside POS platforms like Sezzle and Flex Pay -- Upgrade -- buy now, pay later solution. Sanjiv will give you more color on what we have accomplished and the momentum we are seeing across the business.

Before we close my section, I want to step back. We have built a business that operates through volatility with clarity and purpose. As we approach our 10-year anniversary, I am reminded that the companies that endure are the ones that build through cycle. We are capital disciplined, and by proving our model yet again, we are separating Pagaya as the preferred technology partner for every major consumer lender in the United States.

With that, let me turn the call over to Sanjiv.

Thank you, Gal. First, I want to thank Evangelos, who has been an excellent partner and collaborator over the last couple of years. He's clearly accomplished a great deal for Pagaya, and he has my sincere best on what's next for him.

Jon Dobres has been a key part of the management team, and I am looking forward to partnering with him. We've structured this as a deliberate transition with EP remaining actively involved over the coming months to ensure continuity.

Now to the quarter. Our focus this quarter has been clear, drive GAAP net income through disciplined execution. Simply put, we are diversifying the business as we expand to the top of the origination funnel. More partners, more products, more channels. And as we do that, we are becoming deeply embedded with our lending partners, and that is strengthening our foundation for durable bottom line growth. What's important is that these growth levers don't require us to expand our credit box. They are driven by the combination of existing and new partner growth. And our relevance to those partners remains very high. Banks are solving for noninterest income and customer lifetime value. Fintechs are solving for return on acquisition spend. And that's exactly what we enable, and that is why our pipeline remains so strong.

As Gal mentioned, we are very intentional about pulling back on marginal risk exposure since late last quarter. Consumer behavior right now is in line with our expectations, but we are watching it closely. Our product suite is robust, it's market tested, and it's what's driving our balanced growth this year. New partners, meanwhile, are setting the stage for growth in the back half of the year and beyond. So let me walk you through the details of what we have accomplished this quarter and what we are on track to execute over the remainder of the year.

Starting with new partners. We continue to work through the onboarding pipeline we announced at the end of last year, which is a healthy mix of banks, fintechs and auto players. Year-to-date, we completed the onboarding of 4 partners, Global Lending Services, or GLS, Upstart, Sezzle, and Flex Pay, which is a buy now, pay later solution from Upgrade. It's still early days, but all 4 are showing healthy progression in their ramps, which is very encouraging. On top of that, we are in the process of onboarding regional banks that we expect to announce soon.

As a reminder, our onboarding process is truly industrial grade at this point. Every new partner gets a prebuilt integration with our entire product suite from day 1, which accelerates scaling.

Turning to our existing partners, I'm really excited about the momentum we are seeing. Think about it this way. We are evolving from what was a single product, single channel company into a multiproduct, multichannel platform that touches the entire cycle of our lenders' underwriting processes. This is a meaningful shift, and we are now in execution mode, building a true multiproduct enterprise that is increasingly embedded in our partners' businesses and loan origination funnels through products like our Affiliate Optimizer Engine and Direct Marketing Engine.

Our largest lending partners continue to move through the Pagaya lifecycle by adopting more products, and that translates directly into more volume and revenue for both sides. As we've discussed before, partners who adopt our products see material growth in their partnership. To give you a concrete example, we increased volume with one of our partners by 37% this quarter versus the same period a year ago, simply by onboarding them onto a leading affiliate marketplace. So that really highlights the value add of our affiliate channels.

As we are expanding these strategic relationships with the affiliates, we have partnered with Experian, which enables our personal loan partners to join Experian Activate. This partnership allows our personal loan partners to tap directly into Experian's high-intent marketplace, fueling a mutual increase in volume and profitability. Following a successful launch of a top 5 partner this quarter, we have a robust pipeline of major lenders that are scheduled for onboarding throughout the remainder of the year.

On the Direct Marketing Engine, we continue to onboard more partners to our prescreen solutions across e-mail and direct mail. We have now completed 12 campaigns across 5 partners, and each campaign gives us additional insights that allow us to enhance our response models to drive higher efficiency for future campaigns.

Now turning to our asset classes. We are increasingly operating a diversified platform across personal loan, auto, and point-of-sale. We are rebalancing our products and channels towards more stable, scalable economic and are continuing to optimize flow through pricing and activation tests. Pagaya brings longer-term larger ticket lending capabilities to our POS partners. Together, we can pursue enterprise merchants with a full lending solution that further differentiates the partner within their verticals. Personal loans remains our flagship asset class and represents 63% of production this quarter.

Our Affiliate Optimizer Engine will continue to drive near-term growth, while our Direct Marketing Engine will support growth over the longer term. Auto remains a key focus for us. We are seeing significant growth and strong profitability driven by access to additional flow sources, improved ABS execution, optimized pricing and frankly, some tax season tailwinds as well. Our auto volumes now stand at a record annualized run rate of $2.3 billion. That is double where we were in the first quarter of last year. On the product side, we have been focused on transaction optimization at the dealership level, which has allowed us to better address what dealers actually need.

Now turning to funding. Funding remains robust across all asset classes. This quarter, we raised 4 ABS transactions totaling $2.1 billion in funding across our paid and RPM shelves, and we did that despite the increased market volatility. That is a testament to the quality of our assets and the strength of our investor relationships. So stepping back, our foundation is strong, and we continue to build a resilient B2B2C business. The diversification across partners and products is what drives the value of our platform. It gives us unique access to data and insights, an unparalleled vantage point and the ability to stay nimble. As we continue to grow net income and cash, we are strengthening the business fundamentals for the long term.

Before I hand the call over to EP for a detailed review of our financials and outlook, I just want to say we are executing with discipline and momentum across our business as we continue to build it across new and existing partners, across products and across asset classes. We remain focused on building an enduring platform.

Thank you, Sanjiv. Before I get into the quarterly results, I want to briefly note that this will be my final earnings call as Chief Financial Officer. It has truly been a privilege to serve as CFO of Pagaya, and I'm proud of what we've built, architecting a financial and business foundation to deliver and grow GAAP net income profitability and expand access to capital. After careful consideration, I have decided this is the right time for me to step down and pursue my next chapter.

I remain very confident in the company's strategy and the strength of the team. I'm also excited for Jon, as he steps into the role. Jon and I have worked closely together since joining the company, and I'm confident in both his leadership and the strength of the finance organization that we built over the last 2 years. We're focused on a seamless transition and continuity across, particularly in the areas of investor engagement and capital efficiency. I will remain heavily involved as a strategic executive adviser to Jon on Pagaya's long-term funding strategy for its next phase of growth. Jon is joining us here today also. So Jon, perhaps you can say a few words.

Thanks, EP. I'm honored to step into the CFO role and grateful for EP's partnership over the past several years. We've worked closely together across capital formation and balance sheet strategy, and I look forward to building on the strong foundation already in place. Our priorities and financial strategy remain unchanged, and I'm excited to continue working with the team as we execute through the next phase of evolution.

Thanks, Jon. Turning to results. We delivered our fifth consecutive quarter of GAAP net income, generating $25 million of profit while continuing to operate within a disciplined risk framework in a challenging macro environment. More broadly, what you're seeing is the strength of our model, optimizing for credit discipline, growth and operating efficiency while positioning the business for long-term success. At the same time, we remain cautious given the current geopolitical and macro backdrop. So let me take you through the numbers.

For the first quarter of 2026, we reported revenue of $318 million, fee revenue less production costs of $121 million and adjusted EBITDA of $94 million. FRLPC as a percent of network volume was 4.6%. Network volume was $2.6 billion, up 9% year-over-year and 23% excluding SFR from the same quarter last year. As it relates to SFR, Darwin Homes, our tech-enabled property manager, continues to be the main engine of our SFR business, managing over 15,000 homes, and we expect to continue to add more homes under management as the platform scales. Strategically, our focus remains on consumer credit and becoming the partner of choice for lending institutions in our industry. So we will continue to assess strategic alternatives for Darwin and our SFR business.

Application to volume conversion was below 1%, consistent with our deliberate shift towards higher-quality borrowers and tighter underwriting, reflecting the actions we took in the prior quarter. Total revenue and other income grew 10% year-over-year to $318 million. Revenue from fees grew 6% to $299 million, driven by higher volume and partially offset by lower take rate and FRLPC percent rate.

Interest and investment income almost doubled as a result of our continued growth in our investments. Fee revenue less production costs grew 5% year-over-year to $121 million. FRLPC as a percent of network volume contracted by 19 basis points year-over-year to 4.6%, driven by new partner contributions and tighter pricing on our ABS transactions, reflecting higher cost of capital. As I discussed last quarter, tighter pricing flows through FRLPC in the form of lower fee revenue from capital markets execution, reducing upfront fees but providing support against potential future earnings volatility. In practical terms, we are effectively pricing at higher loss assumptions relative to the rating agencies in the range of approximately 125 to 175 basis points, creating a more clear risk boundary for our investors.

Turning to profitability. Adjusted EBITDA was $94 million, up $15 million with a margin of 29.6%, an increase of 200 basis points year-over-year. Core operating expenses remained well controlled, flat sequentially and modestly higher year-over-year, and represented 39% as a percent of FRLPC. We continue to see strong operating leverage with substantially all of revenue growth translating into adjusted EBITDA growth in dollar terms.

Operating income was $80 million, up 68% year-over-year. GAAP net income was $25 million, up $17 million compared to 1Q '25, driven by total revenue growth, cost discipline and lower interest expense. This equated to an 8% margin compared to 3% in the year ago quarter. Gains and losses on investments in loans and securities amounted to a loss of $38 million.

Turning to credit performance. All asset classes are performing in line with underwriting expectations. 2025 vintages reflect normalized production levels and underwriting at a lower cost of capital by approximately 200 basis points versus 2024, and up to 400 basis points lower versus 2023. In personal loans, though still a few months of seasoning is needed, early-stage delinquencies are stabilizing and loss trends remain consistent with our expectations. In auto, recent vintages continue to perform well relative to prior periods with delinquencies and losses within expected ranges and recoveries improving. POS credit performance also remained stable.

Turning to funding. Despite volatility in private credit markets, demand for our production remains strong. This quarter, we issued $2.1 billion through our ABS program across 4 transactions marketed to our network of more than 160 institutional funding partners. Additionally, new investor participation accelerated quarter-over-quarter, highlighting the continued quality and demand of our paper. I would highlight 2 key milestones here. Firstly, we received our first AAA rating from Fitch on our personal loan resecuritization shelf. And secondly, we successfully executed our first auto securitization.

These are meaningful achievements that further validate the strength of our credit performance and our platform. In fact, the resecuritization is actually becoming a key part of our capital market strategy. It gives us 2 things, first, a repeatable mechanism to return capital from prior vintages on an accelerated basis, and second, lower funding costs by refinancing seasoned collateral with more predictable credit performance. This is a very powerful combination. Over the last 12 months, we have generated $44 million in net cash flows from this type of transaction while attracting new investors to our platform.

As we have discussed, we continue to diversify our funding channels to reduce reliance on any single source and to mitigate market volatility. In recent months, we have leaned more into our ABS execution. This week, we completed another $800 million ABS transaction that was upsized from $600 million. And within ABS, we have different flavors like public and private structures, giving us significant flexibility.

Turning to the balance sheet. Asset quality and mix continue to materially improve, increasing both liquidity and flexibility. Approximately 35% of our investment portfolio is in bonds from our sponsored ABS transactions, which provides both accretive returns and access to financing. Over the last 12 months, we have sold $30 million of these notes above cost and have received gross funding of approximately $180 million in secured borrowings, which we have raised and paid off during this period in line with our needs, highlighting the flexibility that these assets provide.

Towards the last 2 weeks of the quarter, we drew down on our revolver as a precautionary measure given geopolitical uncertainty and paid it back in April. We also continue to deploy capital opportunistically, repurchasing $7 million of our corporate notes in February and an additional $4 million in April. During the first quarter, the fair value of the overall investment portfolio and allowances prior to new additions was adjusted downwards by $21 million compared to $50 million in the prior quarter.

Now turning to guidance. We expect network volume growth to be driven by deeper engagement with existing partners, primarily in auto, contribution from new partners and new product initiatives. FRLPC margin is expected to be between 4% and 5% for the year, and we assume that the cost of capital remains elevated at current levels for the rest of the year.

For the second quarter of 2026, we expect network volume in the range of $2.875 billion to $3.075 billion, total revenue and other income in the range of $345 million to $365 million and adjusted EBITDA in the range of $100 million to $115 million. We expect GAAP net income for the quarter of $25 million to $45 million. For the full year 2026, we are expecting network volume in the range of $11.45 billion to $13 billion, increasing the lower end of the range by about $200 million versus prior guidance. Total revenue and other income remains in the range of $1.4 billion to $1.575 billion. We are increasing adjusted EBITDA guidance to a range of $420 million to $460 million. We are also increasing GAAP net income guidance for the year to a range of $110 million to $160 million.

With that, let me turn it over to the operator for Q&A.

[Operator Instructions] We will take our first question from John Hecht with Jefferies.

EP, I wish you the best. Great working with you. Jon, look forward to working with you.

So first question is the quarter showed relatively stable outcome. I mean, it was a good quarter, but it reflected a lot of stability despite a period of volatility in funding markets, ABS markets and then a lot of headline noise with the private credit markets. Gal, I'm wondering, maybe can you talk about how you're managing these markets and how the volatility in those -- in your funding markets, how you're able to strategically work with that volatility?

Thanks, John. This is Gal. I'll take that. Pleasure again working with you, and you're staying in great hands with Jon.

So first, broadly speaking, keep in mind that we were very well positioned in this environment given some of the actions that we took in the last year -- in the previous quarter. When you think about the funding environment, it's obviously very dynamic. And I would say we're very fortunate given the sort of access to capital that we have to some of the deepest pocket institutional capital out there.

Maybe I'll step back and give you a little bit of how we think about it and how we see things. Think about the funding markets across 2 dimensions, one being, call it, public versus private and then the other one being consumer versus, let's say, corporate, particularly in the context of what's happening in the marketplace right now. So what we see today, most of the, call it, stress is in the private corporate credit side, not on the consumer credit. Keep in mind that the consumer overall is resilient and overall consumer credit performance is attractive, particularly relative to the corporate side.

So on the public consumer side, very constructive, very robust. We continue to see very strong demand. In fact, I would go as far as saying that some of the capital is trying to find its way from, call it, the corporate side into the consumer because insurance capital, pension funds and everything have to continue to deploy their capital. And they're finding their way primarily through the consumer public side. And that's also evident in our execution. Look at -- we just announced a new deal this week on the personal loan side. We upsized that during the short marketing period, very similar to the one we did also in January. So all of that to say that we have continued to see very strong demand on the consumer side of things.

On the private side, it's obviously -- it's something that we have been focusing on, as you know, and have executed well over the last 12 to 24 months to continue to diversify and have access to different types of structures like forward flows, pass-throughs, revolving ABS, many flavors there. But we do see on the private credit market side, obviously, an industry that is going through a repricing. And obviously, we're monitoring very closely for a potential contagion. And therefore, we are leaning tactically more so a little bit into the public ABS side at this juncture.

Keep in mind, there is 2 things that we're able to do to allow us to do that. First, we have the access to capital. We can very easily pivot, and if anything, some of the things that we have been doing have accelerated the interest from new investors into ourselves. And second and most importantly, we remain very disciplined and laser-focused on continuing to deliver and grow GAAP net income profitability and not just execute at any price point. All of that to say is that, obviously, there is a recalibration in the marketplace. But the key point here for us is that we're not relying on a single funding channel. We have a very robust model, very well diversified, and that allows us to have that stability and pivot as market conditions evolve.

Second, a follow-up question. Your expense management was a good surprise this quarter. And I know you've been focused on that in the past. I'm wondering to what degree should we think about efficiencies in the business and cost management? I guess, how high is that on the priority list for you guys?

So obviously, I would say 2 things here. First, look, one of the key differentiators of the business is the operating leverage, right? This is a quite unique business. You can continue to grow the top line without having to really put a lot more capital to work to grow the business. The infrastructure is already built out. When you think about capital allocation, growth into the business, there is not much there. And that's a great place to be. And second, I would say a lot of the actions that we have taken in the last 3 years are really playing out and continue to play out.

There was obviously going to be investments in certain areas, but the operating scalability and efficiencies that we have will continue to play out to our favor over many, many years. As you continue to see us in the existing asset classes, everything that we do can be effectively achieved again with a minor investment, and the levels of growth and targets that we have without any incremental investment. And that's something you should take obviously into consideration when you think about modeling the business.

I think, John, maybe one thing to add. Think about it as a design, not a period. Now it's not to say that this number will be forever the number, but we are running in purpose a very laser-focused, slim, communicating type of company that is highly leveraged with technology. And now with the world of agents in the world of AI, we would even potentially see that acceleration of these pieces and our ability to be relevant and to do more things with even deeper and more sophisticated technology embedded, which is our bread and butter and place where we grew up.

Our next question comes from Rayna Kumar with Oppenheimer.

This is Gur on for Rayna. Maybe just one on AI, right? As AI underwriting becomes more commoditized, how do you ensure that Pagaya's data advantage remains differentiated and proprietary?

So definitely great question. And funny enough, I think you have the answer in your question. But the bottom line is that the things that are becoming a little bit more commoditized are actually the models and the ability to build them. A lot of the models that are implying Pagaya are not LLMs by nature, and actually LLMs are not very relevant for these areas. So for the underwriting itself, it's really all about the data that we have.

We have 30 different partners. We have now history of millions of customers with dozens of millions of historical performance and payments. All of them are actually in a very specific segment that we are operating in, the 670, 680 FICO, personal loan, auto loan, the same. So the unique data advantage is not something that is easily to be replicated, and we are living in a world of very strongly regulatory regime for the good because banks and other lenders are not that easily can work with start-ups or new ideas or to provide them that data because it's proprietary. And it's definitely a very strong ability to continue to have advantage.

I will point out that the agentic AI, and these are things that you can imagine, we're speaking today starting to be fine, but could provide a very leap growth for our business, but in many different avenues. So think about the connectivity to the different banks, and that's why we'll be able to be done with agents -- or at least some way with agents could accelerate our ability to get connected to these pieces. When we have our very unique data capabilities, then to be able to have even a deeper, more robust way of risk management, data science with enhanced capabilities for agents and LLM is definitely an additional pillar. So for us, it's definitely a progression.

We are not ready to talk about the holistic strategy of that right now, but we are definitely forming it, and it's something that we believe will drive a lot of quality outcomes in the future. And at the same time, will be a major driver to the growth of all of that. And as you can imagine, maybe the last sentence, a lot of the banks and the lenders around us are viewing us as a technology provider. So for us to have the conversation with them and potentially to help them go through the AI era is definitely something we are looking very deeply into and starting to actually have interesting conversations around.

We'll move next to Alex Howell with Stephens Inc.

Congrats on the quarter and the CFO announcement, and we'll miss working with EP. Just a quick question, and this was touched on in the prepared remarks a bit, but could you help us better understand the mechanics of these resecuritized ABS from a credit and risk transfer and collateral standpoint? And how we can think about the longer-term benefits of these transactions as market and credit conditions change?

Alex, thanks for the question. It was a pleasure working with you. Yes. So look, the resecuritization is increasingly becoming a key part of our capital market strategy. In simple terms, what it does is basically 2 things. One, it's a repeatable mechanism for us to get capital back from deals that we had done in previous times and do that from seasoned entities and do that on an accelerated basis. If you think about the life of the ABS, it's 3 or 4 or 5 years or so. We're managing to do that effectively in 2 years post the deal.

The second piece is as the collateral has seasoned, we can achieve that first at a lower cost of capital and therefore, allows us to extract effectively more economic value through higher cash. So putting a little bit in perspective, we did 2 resecuritizations year-to-date, 1 in personal loans and 1 in auto. We refinanced $800 million or so of seasoned collateral. And through that, we managed to get cash back that would otherwise come back to us in a few years out. And effectively, this is becoming now from a pure corporate balance sheet perspective a very powerful tool to recycle the capital that we have put into these deals. And you can see how that plays out. I encourage you to look at our shareholder letter and see how these dynamics have played out over the last 12 months. So I think it's a very powerful tool.

The other thing I would say is it's actually helping the business in a different way as well. These are different types of structures, somewhat different from the marquee, call it, prefunding ABS, and it actually allows us to attract more institutional investors into ourselves that over time get more access to Pagaya and therefore, could become partners of ours for some of the other structures. So I think it's a very powerful tool, and you should continue seeing us do more of that in the future.

We'll move next to Pete Christiansen with Citi.

I want to tap into 2 areas. First, risk posturing and then also a little bit more detail on the pipeline and how momentum is going there. But first on the risk side, given the posture change last quarter, and you called it out in your shareholder letter that you're not extending current credit performance at this time, more data dependent. Gal, can you walk us through what areas are you worried about? And then on the data dependency side, like what's your perceived green light, red light in terms of any future changes in risk posturing just generally?

This is Sanjiv Das. Let me address your pipeline question first, and then Gal will come back on the consumer risk issues and what we are seeing ahead of us.

In terms of the pipeline, very specifically, we had mentioned -- we had given kind of guidance last quarter that we had about 5 partners that we were onboarding, and we are very much on track with that. We have, in fact, announced partners like Achieve, GLS, Sezzle, Upstart and are now in the process of onboarding Flex Pay, which is an existing partner, Upgrade that is getting into the POS business. But essentially, the pipeline of new partners has been very robust. 5 partners in a couple of quarters is like way higher than what our target was. And we have about 3 or 4 more that are in the process of being onboarded. And I might just add that those are principally regional banks, and our appeal there has been very strong.

I also want to articulate the fact that our pipeline constitutes all 3 asset classes that we're in, so personal loans, auto loans and point-of-sale. And the pipeline beyond that also continues to be very strong with several banks that are positioned where we are in late stage, some in economic and term sheet discussions and several in sort of business case discussions.

I would say that there are 2 major banks and about 5 or 6 regional banks that we are in those stages of discussions with. And the appeal has been primarily around 3 or 4 major attributes. One is we are actually helping some of the regional banks now stand up a stand-alone personal loans business, which completes the consumer product repertoire for them, which is extremely important to them for their depositors as a product offering. So we are standing up an entire PL, personal loans business for them, not just a decline monetization partner, but more than that in terms of the entire product offering.

For others, the appeal with the new pipeline is helping them grow beyond their organic personal loans businesses into the marketplace with what we call the affiliate channels, such as Credit Karma and Experian. And that appeal, including with some of our existing banks, has been very powerful for them. And so our pivot to what we call product in the last few quarters has actually proven to be a very, very good acquisition tool for our new partners. In auto, the fact that we are now talking about massively improving our dealer satisfaction through our product range extension in terms of longer-term products, higher APR products, has had an incredible appeal with some of the new auto partners we are talking to.

So long story short, 5 partners onboarded, check the boxes on that, 3 more partners in the process of being onboarded and about, I would say, 8 to 10 partners that are in the pipeline, which constitute banks and fintechs. Over to you, Gal.

Peter, regarding your consumer health question. So obviously, this is our business. So the risk management nature and the way we think about risk is instrumental to the way we think about growth. And what we're trying to do is to continue to grow our business model without touching at all the ability to need to extend or to increase the credit risk. So under that kind of belief system and philosophy, which is a philosophy, the short answer is that the consumer is behaving in line with our expectations this quarter. So we did not have any change to our credit posture. However, as I said before, this is our business model, we continue to monitor it closely and try to see signs beyond the first quarter, which was a very strong tax season, and to see what's going to play out in the rest of the year. So we didn't taken off our very observatory eyes and to see what's happening. But we do believe that we are in a better situation, but at the same time, happy that we took the decision that we did.

Just 2 things on a more softer piece, when we are thinking about what could potentially go wrong. This is a lot around the negative headlines regarding inflation that could come from geopolitical conflicts or others. And we continue to position our portfolio very strongly around strong high-income earners. So while our FICO is 670, 680, which is definitely in the middle, on the personal loan side, our average annual income of these borrowers lately has reached as high as $115,000. The same on the auto loan that we are going slightly to a lower FICO ranges, we are still talking about $80,000, $85,000 of annual income, which is above and beyond the average American numbers as we know them.

So all in all, just to summarize that up, we have built a very disciplined growth strategy that is really the core and heart of our business model, that we are not growing through opening the credit box or marketing spend by adding more products, as Sanjiv mentioned, and adding more partners, as Sanjiv mentioned. So growth and credit posture could go hand-in-hand for us. And we feel good on where we are today, and we are on the watch of what needs to come in the future.

It's good to hear that growth is primarily driven by pipeline expansion. Sanjiv, I just want to expand on your comments a little bit. I guess if we think about the cadence over the next, I don't know, 3 to 4 quarters, would it be fair to say that the current pipeline is more constrained by lender onboarding or integration timing and less so by available capital or risk appetite?

100%. Yes, I would totally agree with that, Pete. Not at all constrained by capital, totally a function of execution, as Gal said. And I would just add that even that whole process has been highly systematized and the lender onboarding process has been significantly reduced, which is how we were able to get -- we told you guys there are about 8 partners that we would onboard in about 2 to 3 quarters. Remember, our typical guidance is to be 2 to 4 a year. Now we are talking 8 in about 2 to 3 quarters. So the speed of being able to do that.

I just wanted to add one more thing. EP mentioned operating leverage in the past. I will say that we added all this without one single headcount being added to the system. So that's the power of the platform that we've built. But yes, short answer to your question, not at all constrained by anything else other than just execution.

We'll move next to Lemar Clarke with Freedom Capital Markets.

I wanted to ask a question on your multiproduct growth strategy and the continued momentum you're seeing in Q1. Maybe if you could provide some color around the interest you're seeing from various lending partners across the newer products? And are there any specific insights you're able to share around how certain products resonate with your lending partners across the different asset classes?

This is Sanjiv. I'll take it. So yes, great question. As we mentioned earlier, our growth is being driven -- the way we think about our growth is in terms of growing the network, which is new partners, and growing our products within the existing network. So our volume growth will come from those 2 vectors as opposed to credit box expansion. So let me talk a little bit about product expansion.

On the personal loan side, we said before that our partners grow either organically or they grow through their extension into marketplaces. Those marketplaces, we call affiliates. And we have a product called the Affiliate Optimizer Engine, which in the personal loans business is, as a category that is not as well developed as it is in credit cards. I think it's fair to say that Pagaya now kind of owns that category in the personal loans business and is building out the Affiliate Optimizer Engine as a very successful distribution expansion engine for our lending partners, and we've had tremendous success on it.

Just to give you real evidence of that, one of our top 5 partners, just by virtue of getting on another affiliate marketplace, grew their business by 37% with Pagaya by virtue of just getting on another affiliate platform. The 2 principal affiliate platforms, as you know, are Credit Karma and Experian. And now on Experian Activate, we have about 5 lending partners that are in the pipeline to grow. And we have our top 5 partners in there. So think about where the personal loans business could grow for Pagaya, by helping our partners extend into these new distribution channels. So that's on the personal loan side.

I should also add that on the personal loan side, we have run about 12 prescreen campaigns, which we talked about earlier, and have now built out our direct marketing campaigns for these top 5 partners. We have built the credit models for them. We have built the response models for them, and they have been built for each lending partner. The economic terms have now been agreed to with these partners, and you can see the trial period extending into a rollout by the end of the year with our top 5 partners. So in our personal loans business, that's how we are going to expand horizontally.

On the auto side, as Gal and EP mentioned, we've had obviously outstanding growth in our auto business, even if I should say so. And a lot of it has been through product expansion on the dealer side. We expanded -- we sort of modified the loan terms in keeping with where consumer loans are right now. We started extending the loan amount and higher APR caps. These 3 things led to a massive growth in our auto business and continue to be very, very powerful in terms of improving or reducing friction at the dealer with the consumer and significantly growing our auto business. Again, none of these are credit box expansion. These are all what we call product feature or product expansion.

What are we seeing in terms of interest from lending partners, I would say that on the PL side, the ability to get into marketplaces, which Pagaya now is the principal interface between our lenders and these marketplaces, is really where the focus has been. And we do about $2.8 billion to $2.9 billion in these affiliate platforms already. We think our ability to grow these businesses, these marketplaces, is very high. So that is of great interest. And I would say that on the auto side, the continued focus with dealers and improving the dealer interface has been of great interest to our lending partners.

We'll move next to David Scharf with Citizens Capital Markets.

I'll echo the congrats on the CFO transition for both Jon and EP. One quick question on funding. Obviously, 12, 18 months ago, funding mix was a very large topic and funding diversification. And as you noted this morning, an awful lot of very positive developments in your ABS funding has taken place recently, adding Fitch, adding revolving securitizations, auto. Can you just remind us, to the extent that the ABS markets continue to become increasingly attractive, do you still have sort of a ceiling placed on what percentage of your total funding you'll allow to come from securitizations and the accompanying risk retention? Or are you kind of thinking things are a little more fluid just based on recent developments?

David, I'm going to take it. So no, we don't think about these things in terms of ceilings. I think the better word to use is infrastructure. So as you know, to develop a funding strategy is not something that takes a quarter or 2 to build. Sometimes it takes 18 months or even 3 years to get to the level of efficiency you will need. We definitely started from the capital market side, that was our bread and butter, and over the years have pushed ourselves more to the private side and whole loan and all of the things that EP mentioned, but the key word is diversification. And as the company execution, you should continue to expect from us to build the pipes, the capabilities, the partnerships, et cetera, on both sides, almost equally. So as much as we are working on the Fitch rating, we are working on the next forward flow or the next whole loan buyer to make sure it's going to be on top of our platform.

Now there is a different question of like how do you utilize these assets and these relationships and the infrastructure that you have built in order to fund in a specific quarter, in a specific year, in a specific time. And there, the discipline of pricing, the discipline of the earnings combined with the capability to have diversification is really the equation that we are solving for.

So I would say that regardless of this or that last quarter, we are not trying to solve for a specific percentage in a specific time frame. We do solve strongly for a very robust fundamental infrastructure across the board. So if you will see some dislocation in one market or the other, our ability to move away and to rely on the other is going to be seamless and at the same scale. And that goes really to the world of diversification.

A quick follow-up on the product diversification expansion and specifically products like the Direct Marketing Engine. As we look a couple of years down the road, are more of the products going to be tied to sort of maybe less predictable one-off events like a marketing campaign by your partners? Or is the kind of visibility and predictability of volumes going to remain unchanged in your mind?

I think we are seeing a lot of moving parts right now in the whole direct marketing piece with our lenders. We are seeing, as I mentioned before, a significant shift towards marketplaces. We are seeing a significant shift within those marketplaces to folks using -- consumers using AI platforms for shopping. So there's a lot of consumer trends that are going on simultaneously.

From our perspective, we can see that even the marketplaces themselves are trying to adapt to these consumer shifting trends. We are not sure where this is going to land in terms of how consumers finally shop through using AI, for example, but we know for a fact that the banks and fintechs right now are extremely focused on going through the affiliate channels and also leveraging really good consumer selection and credit box and credit spectrum expansion using our products. So for us, that's turned out to be a really valuable product catalyst for our growth in the PL business.

Gal, I'm not sure if you want to add anything there.

No, I think that's definitely right. And as we scale and as we become more valuable, we become a much organic and more organized way of not just going after campaigns, but many more other ways. So fully aligned here.

At this time, we've reached our allotted time for questions. I'll now turn the call back over to Gal Krubiner, CEO and Co-Founder, for any final or closing remarks.

So I just want to say thank you to everyone today. This was obviously a very strong quarter that demonstrates our B2B2C model in action and the discipline in the way we think about underwriting and growth. Looking forward to see you in the future, and thank you to everyone for listening. Have a great day.

Thank you. This concludes today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, everyone. Thank you for joining us here today to kick off the fourth day of the Morgan Stanley TMT Conference. Very pleased to have Pagaya, Evangelos Perros, the CFO, is here. He'll be speaking to us about Pagaya. Before we get started, a quick introduction of myself. I'm James Faucette, Senior Fintech analyst at Morgan Stanley. And before we start our conversation, I do have an important disclosure to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures.

If you have any questions, please reach out to your Morgan Stanley sales representative. So great to have Pagaya at the TMT Conference. For those who don't know, Pagaya, I think it would be great if you gave a brief introduction about the company and where you sit in the broader financial ecosystem?

Yes, happy to. And thanks for having me. So think of Pagaya as a tech-enabled network, that connects lending partners on one side and investors on the other side of that network. And we integrate our technology into the lending originating systems for those lending partners, partners like SoFi, Ally, Klarna, U.S. Bank, other Fintechs. And then working today on 3 asset classes, personal loans, auto and POS.

Our underwriting technology underwrites these loans on behalf of our partners and then places them in the pockets of institutional vessels on the other side. So it's a B2B2C business model. We don't have a direct exposure to the consumer or interface with the consumer. And along those lines, we basically earn fees for the use of our technology in the network.

Most of that, almost 80% of those fees come actually for the use of our technology from the lending partner side. That's how they're [indiscernible] about Pagaya. We work now with almost 30-plus partners across the universe with a very good mix of banks and nonbanks and Fintechs across the 3 asset classes. And we have probably one of the largest independent sort of funding networks on the other side, one of the largest ABS issuers on personal loan, 155 plus unique investors that we work with, and that's how the network comes together.

Got it. So let's talk about some of the hurdles that we're seeing across all of Fintech, at least from an investor perspective, especially, there are a lot of fears right now, I would say, in the market around agentic AI. I think it's worthwhile to spend maybe a minute talking about whether you see that as a risk an opportunity, something in between? Just love to get your thoughts on that.

Yes. So as you think about Pagaya and what we do, we have like an end-to-end solution that we offer to our lending partners going from the integration and underwriting all the way to their funding. And it's an already AI-enabled platform on the front end, which primarily relies on our own production data, which is unique. We look at $1 trillion of application a year across all these multiple partners, across multiple channels asset classes, and that's the production data that's quite unique, which is very difficult for a generic otherwise AI model to really replicate those capabilities and find this data. We're not relying so much on our AI model.

It's actually the production data that fits into that model. And now as I said, on the front end, we're fully automated. I think what I would say is, I mean there's a lot more things that come in our end-to-end solution from a compliance perspective, regulatory, legal, capital markets analytics. Because in this structure that I laid out, Pagaya is not the originator on record. We still underwrite on behalf of our partners.

So when the regulatory call it, as an example, authorities come and ask questions with originators, we need to be able to answer those questions. So we have to meet the same requirements on their behalf. So it's a little bit different and insulated from this type of sort of risk on the front end. On the back end there is obviously a significant opportunity. We pride ourselves that we have a very unique operating leverage in the business. The infrastructure is built out. There is no real incremental cost to run the business or marketing costs or other customer acquisition costs.

So we can see a lot of opportunity of using some of those technologies and solutions to further decrease that type of operating expense and therefore, further fuel profitability for the business.

Got it. Got it. So let's expand a little bit and talk about the broader competitive landscape. Who do you think about as your competitors? I know some of the partners you talked about even have their own underwriting technologies, et cetera. So talk a little bit about how you fit within that and then the broader competitive landscape and I guess maybe the big question is what builds or constructs the moat competitively? Is it the AI, data, something else?

Yes. So to answer that second part of the question, it's the data. So if you think about what we do, we integrate with our partners into loan originating system and all our production data, the $1 trillion of application that we see across multiple partners is quite unique to Pagaya. Because every partner will obviously see their own data. But we are able to see across multiple partners and obviously, for a more well-defined type of consumer profile.

We don't go deep sort of on the subprime. We obviously will not underwrite necessarily 850. So it's actually a well-defined broad, but well-defined consumer profile where we can come in and enable more conversion, more activation rate from half of our partners and all of that with all the benefits that we get, the fee generation, no use of capital, servicing fees along the line.

So it's a little bit of a unique business proposition -- value proposition for them. And when you look at the competitive landscape, there is no other entity like -- or a company that does what we do being a pure B2B on the consumer lending space. And in fact, I would say it took a lot of pain and effort and infrastructure and investment to get to this point, to get the company to be cash flow positive and GAAP net income positive. Because of all the investments that you have to do. So we feel good about, call it, the barriers to entry for somebody else to come in and replicate it. But what really sort of protects that sort of competitive mode is actually the data for somebody to come in and get integrated again to the same partner they will have to have the data to do better underwriting than us. And even in that case, the acceleration that we see exponential acceleration, we see from more data that we get with new partners. It's something that, again, you can never say never, but it will be very difficult for somebody to replicate that. So the first-mover advantage is actually quite important here.

Got it. Got it. So let's talk about kind of current environment for a few minutes. So during our earnings call earlier this month, you communicated to investors that you had pulled back a little bit on how aggressive or tighten the box a little bit, if you will, during the December quarter.

Help us understand exactly what you were reacting to I mean, was it your capital partners, loan origination partners, some combination of both? Or is it something completely exogenous to those?

Sure, sure. And I think that created some confusion in the marketplace. What I would say is there is effectively call it, 2 sources of signal that we relied on. But I think what's more important is our ability to actually react to things like that as a result of the unique business model that we have.

So let me explain that, the signals were on one side, obviously, a little bit more macro uncertainty. It was not necessarily seeing something on the consumer. The consumer is still healthy and resilient performance, credit performance, everything is in line with expectations. On the funding side, continued deployment of capital. But we were sitting in December, if you go back on an environment that had a few months of sort of uncertainty, whether it's the path of interest rates after the last cut, whether it's unemployment, whether it's the K economy, the upper end of the K , the bottom part of the K. Back then, geopolitical sort of uncertainty at that point in Latin America, policy things around credit cards and the cap on credit cards and is that going to be instituted? And is that going to apply for personal loan.

So there was a bit more of an uncertainty, but more importantly, it was somewhat protracted. It wasn't just a single moment of this location, let's say, similar to Liberation Day where there was a week of dislocation, and it went off. So that was point number one.

The other one is we have the benefit of access to multiple different lending partners. And what we saw is a little bit of a step back or more sort of balanced view on their plans to grow in 2026 relative to what we were all delivering in 2025. It was not them tightening the credit box. It was not something necessarily that they saw that was a real risk. But when you're sitting in 2020 -- we're looking at the 2026 plan, on the back of, call it, 40%, 50% growth year-over-year in 2025, and now that growth coming down to 30 or so percent across multiple partners. That's, for us, a signal that it's not a bit disregarded.

So these are a little the sources. But I think what people are appropriately missed is where we sit to your point in the ecosystem and our ability to react. What do I mean by that? When I'm sitting in December, the CFO and looking at the plan for 2026 and debating about the decision to cut call it, riskier part of the production, which is purely a risk management decision. And I see a plan that I can see deliver $100 million to $150 million of GAAP net income profitability in 2026 after that cut. That's a 50% growth in bottom line profitability. I feel pretty good about that decision. And I think it's very few sort of companies, if any, that can actually do that because of the operating leverage and on top of that, the very strong visibility that we had from new flow that we expected to come from new partners and new products and actually allow us to replace this sort of higher risk production with much more balanced risk product-led and partner growth.

I think those are the pieces that allows us to actually go through that decision with a very strong sense of confidence. And I think that was probably a little bit that was -- but the market didn't really focus as much.

And so -- let me ask a couple of things there. So I mean, I think, particularly when it makes sense, incorporating the signal that you're getting from some of your lending partners and kind of their targeted growth rates. What -- from their perspective, were they seeing the same things and also taking a little bit more conservative view? Or was there really more just, hey, as we get bigger growth rates come down? I just love to kind of get a sense from you how you are interpreting your partner signals beyond the other things?

So it's a good question. And the answer is we don't really need to know at that point. It could be a consumer sort of view, it could be on the funding side, it could be on the competition side that they have with other like originating platforms that we may not be integrated with.

But we don't really have to have a full understanding at that point, our ability to react almost instantaneously on that and take a risk decision while still delivering the profitable growth.

It's something that will generally obviously do, I think, obviously, the magnitude that which we did it was that exactly so that it was a risk management decision. But it's something you should expect us to do over time as we continue to grow and deliver product-led growth, new partners coming in over time, you should see us get more of that riskier production. And by riskier production, I just want to be clear. It's a profitable production for us. It's priced for that risk, but it's the one that has -- it's more, let's say, prone to adversarial credit outcomes in the future if some of that uncertainty starts impacting the consumer and therefore leading to -- and why take that risk.

Right. So -- and just with your lending partners, how much board visibility on their intentionality do they give you? And how is that communicated? Just trying to, again, get a bit of an assessment of how you may incorporate their commentary into your own forecast.

So I think it's a very sort of -- we're talking about sort of deep relationships that we have delivered.

I imagine.

It's not just the technology and sort of the flow that we simply get, which obviously, we have a very good understanding, but it's more so like more of an ongoing relationship, regular business review that we have with them, sharing of the plans. And remember, from their end, they're still sitting at that point in time and seeing us still delivering growth on their volume, all else being equal because of the new products and everything that we're doing.

So but it's a relationship that we have like from regular discussions. So we have a pretty good understanding of how they're planning and what they're seeing and how we see it. But obviously, as a sort of second in the sequence, right, they have the direct access to the consumer. They have a direct assets to their consumer profile and every partner has a unique sort of niche that they're looking at. And then we can all put that together and that's how we get to that decision.

Got it. So let's stay there a little bit with current environment. This week, and I'm sure in your conversations, in my conversations, the topic of credit, credit performance right now is certainly top of mind and it seems to be maybe even more important than AI, which could be viewed down the road, but worried about the near term. What are you seeing right now, especially in the last few weeks, anything of note in your asset classes, whether it be personal loans, auto or point-of-sale?

Yes. So the short answer is we don't see anything like materializing in any real cracks. You look at the consumer, and as I said before, healthy and resilient. You look at the credit performance and you look at actual realized losses and they're pretty all in line with expectations.

We do highlight, and I think you've seen that, to some extent, like some of the delinquencies coming up, which is obviously something that we're monitoring all the time, and everybody doesn't shoot. But again, you need to put it in perspective and say you're looking at the delinquencies relative to, call it, a year ago, but in 2025, let's say, obviously, everybody is in a much more normalized production environment.

Cost of capital has come down by, call it, 150 to 200 basis across interest rate cuts as well as spreads and then specifically in auto, you have other components like very favorable rollover rates and actually much higher recovery rates, that when you put it all together, it's actually pointing to very like well within expectation type of cumulative net losses.

Now again, if things continue to become worse I mean, it will be -- obviously, we will react. But like right now, when you look at the consumer, you look at the deployment of capital and the demand for this type of assets. And you look at the actual product performance, nothing really pointing to something to deteriorate.

And that change in DQs, is that across all of the borrower spectrum? Or are you seeing it concentrated in a particular area?

Yes. So obviously, for us, it's -- as I was saying before, in the first question, is some of the well-defined sort of consumer profile. I think if you think about the average consumer that we're underwriting, let's say, on the personal 680 type of FICO score $115,000. So if you think about where that consumer sits, it's not in the bottom part of the K and it's sort of the top quartile or top 30% of the consumer.

So you see that a little bit of growth, but I think you see much more pressure on the bottom part, like people that are potentially still struggling -- not struggling but having a little more challenge meeting some of their means like $50,000, $60,000 of income. We see it in our parts, but again, it's like you need to keep in mind that we're solving for a certain return.

So the cost of capital is lower, you would expect a little bit of a different data performance to capture that, but not something that gives us sort of a pause in our current underwriting.

Got it. And so then the other question is there's headlines this week on newspaper around private credit funds I think there's been a couple of issues even outside of the U.S. with some other credit funds that makes everybody nervous. What are you seeing in the private credit space? Are you seeing slowdown in interest, any change in pricing or spreads that are being asked for kind of give us a lay of the land in that environment right now or that part of the business?

So specifically, just to jump in on the Pagaya side, we actually see very strong demand for the type of assets that we generate and I'll just focus on some of key things that we did over the last few months on the back of sort of what happened, call it, September, we sort of saw a little bit of that breaking momentum.

Like in this environment, we announced 2 new forward flows on auto and POS. We saw significant demand in our ABS structure. The last one we did in early 2026, that was upsized and still over subscribed. We did -- we had the new structure in a revolving ABS with 26 North. We managed to sell a lot of the -- one of the certificates back in RBS. So when you look at what Pagaya is delivering to our partners, we don't see a step back into their appetite to deploy capital through our platform.

Now having said that, if you go back and you look a little bit more at the macro level, you basically saw a very frothy environment on the private credit, particularly on the first half call it of 2025 into, call it Q3, which, in some ways, was where people are very looking to see some sort of correction in that. And then what happened in September onward, it's not that the demand for these types of asset cooled off, but people are generally much more disciplined. And it comes either in the form of pricing or diligence and things like that. And even in that environment in the last 6 months, you see like the spreads haven't really increased or anything.

So the macro trend and the secular trend of private credit continue to deploy capital, particularly in the consumer assets like consumer assets, less on the SaaS software type of thing. It's still strong. Obviously, something to be cautious about could potentially lead to contingent and things like that. but we haven't seen really a step back in that.

Got it. So let's go back to your kind of relationships with partners, et cetera. And I guess, historically, you started out as a second look lender, maybe about 10 years ago. Talk about the evolution of the product suite and how that has translated into your typical customer profile and margin or profitability.

Yes. So I think, obviously, we're very pleased with the evolution of the business. To your point, you go back, the company was 100% effectively focusing on the second look program i-e, we integrate with our partners, and we call it the client monetization. And generally speaking, a type of loan that they would not otherwise underwrite. Because it doesn't fit into their credit books and so on and so forth, would come to us and then we'll be obviously highly selective in how many of those loans we actually approve.

We have transitioned that in the last 2 years to new products that we're quite excited about. And the whole product strategy is around one thing, which is to monetize increasingly more the application flow that the partners, the lending partners have and also, in some cases, expanded application flow with some of the products that we do.

So I'll give you a couple of examples. There is examples like our prescreen product, for example, which is us trying to utilize the marketing engine of our lending partners. We're already integrated right in the loan origination. We're using the marketing engine to actually get access and identify consumers that they may not be looking at, and they may have the ability obviously for a certain risk profile to have a higher propensity to activate an offer. And we have that understanding. And that's like a very sort of product that we're early days, but like promising results. We have the affiliate sensing, which is -- when you look at the amount of data that we have across all the partners across the different affiliates, we're looking to increasingly access this type of channels for -- on their behalf and actually expand to different channels outside of call it the traditional credit [ Klarna ].

We have dual look programs. We have first look type of programs. Dual look it's a very exciting program when you basically offer 2 different offers on the same consumer, one backed by Pagaya, one backed by the lending partner from a funding perspective, and that gives more optionality to the consumer, and therefore, increase the probability of them activating that type of [indiscernible]

So multiple different products. And where we are today is, if you look at the pure decline monetization, it's about 50% of the volume in the fees that we generate and the other 50% is across all these other products, which may have, again, a sort of second look feature to it, but like different products with a little bit of a different business strategy.

Got it. And help us understand then when you're working with your partners, how like the lines are drawn or how they can move between like what they may want to do versus view and then how like -- I mean, obviously, if I were you in some ways, be looking for ways to expand within their opportunity set or help them grow faster. Just talk about like how that relationship can ebb and flow.

And it's -- obviously, it's a well-defined sort of process, but it's quite dynamic, i.e., like constantly looking because the application flow is obviously constantly changing. And for example, as they're expanding. If you take, for example, let's take BNPL, like it's an industry and a product that's become increasingly more mainstream and call it, merchant acquisition strategy is very robust for those partners.

So we come in and sort of work side by side with them whether it's a more interest-bearing type of loans or like longer duration type of products. But that's like a well-defined sort of an understanding of what we have where we come in. As long as we're integrated, like it's very easy for us to launch this it's a very dynamic process.

Got it. So let's dig into an example here of a partner. And I recognize that the relationship is still fairly new, but how would you describe the way you work with Klarna and the borrower pool that you're each serving respectively.

I know that Pagaya was somebody that they highlighted very heavily as they were going through the IPO process and continue to talk about.

Yes. And look, it's not just for Klarna, but like -- all we're trying to do is enable effectively the partner to achieve sort of their goals. And in the case of, let's say, the BNPL, just part Klara is like ultimately, what they want to do is they want to do is they want to come in and continue to acquire more merchants. And if you think about that, how to do that as they're compete with other originating platforms like that is can we offer more solutions to their consumers at the point of lending.

They may, for example, focus with certain merchants, as an example, in, call it, shorter-duration products. We can come in and do a little bit of longer duration products, which is much more tangential to the personal loan that we do from a duration and risk perspective.

It could be interest-bearing, noninterest-bearing. And ultimately, their strategy is obviously to continue to grow and expand their merchant network. And that's how to think about it. In the case of an auto partner, again, not a specific group of partners, it's all about the dealership satisfaction. We're integrated with some of our partners to all thousands of dealerships. And what the dealers -- what the lending partner is looking for, is less interested in making fees of the loans and sharing those fees with us. It's much more so being at the point of call it, lend.

The consumer comments, the dealer has now to offer certain options to that consumer. How do we increase the ability for -- first, how do we increase the profitability that they will show more of the, call it, Ally offer as an [indiscernible]. And not only that, but increase the conversion, the probability of that consumer activating their offer. So that's a very good example. Maybe just to dig into it, take 2 different offers that we have. Consumer comes in and says, "I want to under I want a $30,000 loan for a car, right? Our partner will say I will give $20,000 at 18% rate. We may come in side by side, at the same time, still an Ally offer backed by Pagaya in the eyes of the consumer and the dealer and will give $27,000, but a 22% rate.

Now the consumer has like the same type of loan, different terms, and now they have more options to choose from. If you think about it, what does that for the dealer. The dealer is satisfied on the fact that they can offer multiple solutions to their customers. And over time, they will channel more of those types of opportunities to the sort of Ally of all sort of flow. So that's how a little bit to think about how we enable that.

Got it. So you mentioned a moment ago kind of your own product evolution, et cetera. I've got to imagine that will drive more interest among loan originators. Talk about your pipeline, how it has evolved over the years and really what we should be expecting for developments here in 2026?

Yes. So obviously, very excited where we stand. What we mentioned a quarter ago or so, we were at the point where we have the highest number of partners in the onboarding phase. We announced 3 partners that went live at our earnings. Very pleased to announce that we're actually turned on a fourth partner yesterday to not to be named yet, but like that momentum is actually very strong and very excited about our strategy of how to add more partners, and we have another sort of 4 or 5 coming with a good sort of balance between banks and nonbanks.

And those 4 or 5 incremental would be through the course of 2026?

Yes, the expectation is over the coming quarters, again, like based on the timing, but it will be based on 2026. But what's most exciting about that because there is a slower ramp-up, like once you open up a partner, you don't suddenly just have all the flow coming in and suddenly approving all the loans. But what's the exciting about -- a part about this is it's actually planting already the seed in a very visible manner for 2027 and beyond. That's the thing that we're most excited about.

And obviously, a lot more to come on that. And the great thing about it is we can actually start with day 1 with our multiproduct strategy. At the same time, when you think about what that does in our economics, we have said like the fees that we earn on our partners is a range of 4% to 5%. And it's always a sort of, call it, a combination of this growth, new partners, new products, existing partners, existing partners are at slightly higher, just more mature, more volume than higher fee rates.

New partners come in at the start with lower volumes and therefore, lower rates. So very excited about the trajectory. Obviously, it will impact as we think about that sort of 4% to 5% range, which we mentioned on our call to gravitate towards the midpoint of that. But over time, as we have more volume times this type of fee rate, we continue to grow the top line.

And remember, given the operating leverage, there is a significant very high flow-through of those incremental fees going straight to the bottom line, which is driving [indiscernible] and profitability.

Got it. So let's talk about funding. And I love to hear your kind of ideas on how you think about your funding evolution. And where do you see it going in the future?

Yes. Obviously, very pleased with the evolution there as well. If I take you back into 2024 for those who have followed the story, it was 100% reliant on ABS. In fact, I would say even a few years before that, not only reliant on ABS, but to select few key investors that were backing that. If you look at our ABS infrastructure now in our platform, we work with 150 or so plus investors that we rotate into our regular ABS cadence.

So we have really diversified, the players that we work with, let's say, on the ABS side. On top of that, in 2024, we said that we're going to diversify the funding away from ABS, and we delivered that with certain forward flows that we did with select investors and what we have said is that we'll continue to do so and now targeting more partners like that, but on smaller sites as we continue to diversify on those -- in the same sort of strategy.

We're also very excited about some of the deals that we did, which deliver a different structure, the evolving ABS, which is effectively ABS that continue to recycle the capital within the structure. We did 3 of those across personal loan and point-of-sale. Just to put that in perspective, those were call it combined, call it, $1 billion of ABS structures. But because of the revolving nature, it actually allowed us to give us up to $3 billion of capacity over the next 2 years, and we want to do more of that and ultimately continue to diversify away and get increasingly more closely to more permanent capital type of structures. So that you have full visibility on one end, which is usually a little bit more costly. But combine it with access to capital markets, which is obviously the frictionless to get access to capital but exposed to that capital market. And that diversification for us is the winning strategy for our funding business.

Got it. Last couple of minutes here, capital allocation. You're at the point where now you're generating cash, how are you thinking about uses of that cash, whether it's reinvestment buybacks? Are there opportunities for M&A? Like what's the priority for you right now?

So it's a good question. And I think one of the great things about Pagaya, which I mentioned a little bit before is as you think at any company, number 1 priority is to continue to grow the business. Well, we don't have that. We don't have growth CapEx. We have already built out the infrastructure to support even double the amount of volume without any incremental investment.

So that's a great place to be.

Yes, for sure.

And now you think about capital allocation, there is other ways to support the business with new structures, things that we do on the funding side to lower the cost of debt. And then obviously, other things like buybacks across stock or even some of the high yield bonds that are now mispriced in the marketplace. And we obviously look at that and we'll always assess the math real time what makes sense for the next marginal dollar or how we're going to get the most benefit. We actually did purchase back some of the bonds in the last month, 2 months, a little bit in December as well as in January. We'll continue to reassess it. What I would say is, look, especially in the environment where you have some of the depressed prices, the other piece that we're looking at is and not necessarily for 2026, but like maintaining some M&A dry powder.

Because ultimately, if our partners move into a new asset class as an example, we want to be there with them. And we can grow these types of new asset class organically or inorganically. So that obviously comes into the equation. And we always want to maintain a good balance of liquidity, dry powder for these type of things as part of their capital allocation strategy.

That's great. Evangelos, thank you very much for joining us today, chatting about Pagaya. It's been great to have you at the Morgan Stanley conference.

Thank you very much. Pleasure to be here.

Greetings. Welcome to Pagaya Fourth Quarter Full Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Josh Fagen, Head of Investor Relations and COO of [indiscernible]. Thank you. You may begin.

Thank you, and welcome to Pagaya's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; and Evangelos Perros, Chief Financial Officer.

You could find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance including our financial outlook for the first quarter and full year of 2026. Our actual results may differ materially from those contemplated by those forward-looking statements.

Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC, including our 10-K, 10-Q and other reports for a more detailed discussion of these factors.

Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs or FRLPC, FRLPC percentage of network volume and core operating expenses will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials, which are posted on our Investor Relations website.

We encourage you to review the shareholder letter which was furnished with the SEC on Form 8-K today for a detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Thank you, and welcome, everyone. 2025 was a [ hallmark ] of a year. In Q4, we achieved $34 million of GAAP net income and $80 million in operating cash flow. In the beginning of 2024, we set the goal to become GAAP net income and cash flow positive, which we continue to accelerate in the fourth quarter this year.

For the full year, we achieved revenues of $1.3 billion, up 26% year-over-year, adjusted EBITDA of $371 million, up 76% year-over-year and GAAP net income of $81 million, up $483 million versus 2024 with an EPS of $0.93. More importantly, these results and achievements were the outcome of growing and diversifying our business across verticals, further expansion into first look and second-look loans and optimizing our unit economics and balance sheet.

Before discussing our results and outlook, it is important to recall that 2025 was a year of discipline for Pagaya. We fine-tuned the foundations of our business and approach towards risk management and underwriting. In turn, this drives further consistency for our investors as we continue to serve our lending partner needs. All of that while building an enterprise focused on sustainable through-the-cycle growth.

Discipline drove us to proactively take action later in the fourth quarter in face of persistent consumer uncertainty and trends. While our data does not indicate consumer deterioration, we have the privilege of being able to pivot our production to focus on prudent and discipline. As such, credit performance across asset classes remain in line with our expectations.

However, we pulled back our exposure to higher risk [ as we ] profitable credit deals, which have potential for higher relative losses in a downside scenario. As we mature as a company, we are shifting more and more of our focus to achieve the best long-term outcomes for our stakeholders and to avoid any downside that could arise from potential tail risks.

We have been the business that is highly scalable with key inflection points in our operating and capital structure that results in stand-alone operating efficiencies. We had a robust list of onboarding partners and a healthy funding position. As important, with our data mode, technological leadership and commercial momentum, we are positioned to continue to take share in this vast market, a market that Pagaya creates and one that Pagaya leads and is increasingly profitable manner.

Let me now talk about the long-term fundamentals of our business. It is clear that we have momentum and are executing on all aspects of our business. As we have talked about throughout 2025, future growth will continue to come from the combination of recently onboarded partners and deepening our existing relationships. Our pipeline remains robust, a testament to our product suite becoming industry standards.

In the latest quarter and the months that followed, we onboarded achieved GLS and a leading fast-growing buy-now-pay-later provider in North America, and we expect to announce additional partner launches in the coming quarters. GLS or [ Global Lending Services ] is a leading auto finance provider that offer financial solutions to almost 20,000 franchisees and independent dealerships national-wide.

As I look ahead, I'm excited about more consumer lenders joining the Pagaya network, further highlighting the potential and value added of our enterprise platform. For our existing partners, we continue to innovate, meeting our partners where they are to drive higher partner usage, certification and engagement.

For instance, LendingClub recently adopted our marketing affiliate offering and became a multiproduct partner for us. We expect to end the third quarter with multiple large personal loan partners fully onboarded into our risk screen offering. Our earning power and cash flow generation will become more robust as partners continue maturing into multiproduct relationships. At the same time, we continue to institutionalize and diversifying our business through long-term agreements with fee and application flow commitments creating additional partner alignment and business stabilization.

This quarter, we entered into long-term agreements with 2 of our largest partners in auto and personal loans. While we were to continue growing our application volume from you and existing partners, our decision to reduce our exposure is firmly grounded in portfolio [indiscernible] rather than growing just for the sake of growth. In fact, we are comfortable having a lower conversion rate when it is appropriate to reduce the likelihood of adverse outcomes.

As a maturing business, a core pillar of our culture is to deliberately balance long-term growth and profitability against short-term metrics. Our focus on top of funnel growth and expansion is designed for the future as we prioritize building an enterprise platform for the long term. As a B2B2C enabler, our partner depends on Pagaya to manage the business for long-term strength and stability. And I appreciate our ability and willingness to make such proactive risk-based decisions.

Turning to funding. We continue to leverage favorable market dynamics to create longer-term committed capital that enhance our capacity while reducing exposure to funding volatility. This year and in the months that followed, we made strides in diversifying our funding sources with forward flow arrangements across all 3 core asset classes personal loan, auto loans and point of sale.

Building on this momentum, we further enhanced our funding stability with expansion into revolving ABS across point-of-sale and personal loan creating almost $3 billion of revolving capacity. As we enter 2026, our guidance and business plan are driven first and foremost, by this disciplined risk framework that we have developed over the years.

Our accomplishments in 2024 and 2025, set us up for efficient and durable growth. We stabilized the business as we scale, we optimize our operating costs and balance sheet and diversified our sources of revenues and funding. Going forward, we are in the right place for balanced efficient growth.

In 2026, investors should expect more measured volume [ that ] revenue growth. As we prioritize reducing credit exposure over market share gains at the moment. Our strategy reflects a business that is in control of its long-term growth trajectory while deploying measured risks. With our 10-year anniversary approaching, we believe this strategy reflects a company that is building an enduring platform that maximize value creation over time.

We are building a B2B2C platform. There will be cornerstone of the U.S. financial ecosystem that should be embedded within every U.S. consumer lender, leveraging intelligent AI [indiscernible] decisioning as its core, our platform we operate wherever our partners are through the cycle while powering products that meet the needs of our customers. The first decade proved our model and secured our place in the market. The next decade is about scaling that foundation with greater ambition, durability and impact.

Thank you, Gal. As we wrap up the year with our fourth consecutive quarter of GAAP net income profitability and look ahead, our growth strategy is clear, continue to build a sustainable and profitable business that is increasingly embedded in the U.S. financial ecosystem. Pagaya's growth continues to be driven by institutional grade scaling of existing partner relationships as well as new partner additions.

In fact, we just added 3 new partners to our platform, achieve GLS or global lending services and a leading fast growth buy-now-pay-later provider in North America. Our onboarding process is becoming industrial grade, minimizing partner resource requirements. All new partners have a prebuilt API integration for the entire Pagaya product suite. Prebuilt product APIs, along with an 18-month joint road map will enable accelerated scaling.

We also established long-term agreements with all of them that encompass volumes, fees and all other protections. Our onboarding pipeline remains the busiest in Pagaya's history, with demand and traction from leading lenders in the country across banks, fintechs and other lenders. In fact, a lot of these leading lenders are proactively engaging with us on all products which is a testament to Pagaya's relevance and strong product-driven value proposition. We are planning to announce some new names in the coming quarters.

With our existing partners, we've been consistently delivering and diversifying across products, including the direct marketing engine, the affiliate optimizer engine and dual look. This diversification provides Pagaya with new volume beyond decline monetization, increased value and stickiness with existing lending partners and most importantly, provides future growth with Pagaya without expanding our own risk appetite.

Existing partners continue to actively adopt our products. In fact, our largest existing partners signed definitive term sheets and adopted the direct marketing engine after a series of tests and are now scaling with us across direct mail and e-mail prescreen campaigns. Within our affiliate optimizer engine, we recently onboarded LendingClub on to Credit Karma, where they will be presenting personal loan offers to consumers in partnership with Pagaya. Additionally, we are currently expanding our affiliate optimizer engine to include Experian Activate platform with the launch of our first partner and several more in the onboarding queue.

Lastly, we signed several long-term agreements with leading partners to establish commitments across application flow sides, quality and controls to provide further visibility through the cycle.

Turning to funding. We continue to diversify from prefunded ABS funding structure to include more committed capital structures that reduces our exposure to funding volatility. In the last few months, we have expanded our forward flow agreements into all 3 core asset classes, including inaugural agreements with Castlelake and [ Sandpoint ] in auto and point of sale, respectively. This broadens our Castlelake agreement into both personal loans and auto.

We continue to innovate across our various ABS shelves. We introduced revolving structures, first in POS and then in personal loans, we inked our [ Posch ] ABS deal and our inaugural paid revolving ABS with [ 26 ] North, which gives us a more diverse set of financing options and more visibility hence, greater consistency in our funding construct in the face of potential capital market cyclicality.

I'd like to reflect broadly on the capital markets environment, which remains very supportive for Pagaya. We see continued strong demand from across insurance funds along with traditional asset managers, while we are witnessing a higher level of rationality than we saw in 2025 from private credit. Overall, we would view the current environment as more of a steady state with healthy demand and execution, particularly for quality assets.

Turning to credit performance. We remain disciplined in our underwriting with our core focus centered around gaining access to more high-quality flow from existing and new partners. We continue to leverage our unique ability to assess risk in real time based on the data from over 30 lenders across 3 asset classes with agile decision-making.

We continue to prioritize prudent risk management. While credit risk performance of our portfolio remains in line with expectations, we took proactive steps late in the year to reduce exposure to select higher volatility segments. These actions had a direct impact on our network volumes, revenues and profit in the fourth quarter. Our decision was primarily driven by the changes in risk appetite that we observed across multiple lending partners of ours in light of market uncertainty.

As we discussed in our outlook, the impact of these actions will restrain growth to a measured degree in the first quarter. We expect a ramp in growth through the year due to several factors that we will discuss including the onboarding of new partners and continued penetration into existing relationships.

Before I hand the call to EP for a detailed review of our financial performance and outlook, I'd like to reflect on the successes we've had across the business this past year. In summary, 2025 was a year of innovation optimization and profitability across all aspects of the business, laying the groundwork for growth in 2026 and the years beyond.

Thanks, Sanjiv. I will start with the big picture. In 2025, we achieved several important milestones that position Pagaya up for sustainable profitable growth. Over the last few years, we have been deliberately reshaping this company, strengthening the foundation, tightening the operating model, improving the capital structure and most importantly, building a much more resilient, scalable and differentiated technology platform in consumer lending.

In this past year, we made sustained investment in our data and risk infrastructure, combined with intentional decisions around risk management, balance sheet optimization and how we grow. The cumulative result of all that work became evident in the financials as we are exiting 2025 with 4 consecutive quarters of GAAP profitability.

As it relates to our 2026 growth outlook, it reflects our long-term objective to grow the platform while remaining disciplined and adaptive in how we manage risk and even more so in an uncertain environment. We actively manage the business as a portfolio of products, partners and risk bands, adjusting exposure as conditions evolve. When uncertainty increases, the appropriate response is to reduce exposure to higher-risk segments. When conditions improve, we will reassess and reallocate accordingly. We remain focused on growth from increased product usage penetration and new partners.

Let me walk through the numbers. For the full year 2025, we delivered $1.3 billion of revenue, up 26% year-over-year, $512 million of FRLPC, also up 26%, $371 million of adjusted EBITDA, up 76% and $81 million of GAAP net income, representing a $483 million improvement versus last year. This reflects meaningful progress in profitability and operating leverage showing up at scale.

For the fourth quarter specifically, revenue was $335 million, FRLPC was $131 million and adjusted EBITDA was $98 million, representing a 29% margin. We reported GAAP net income of $34 million compared to a loss of $238 million a year ago. FRLPC as a percentage of network volume was 4.9%, demonstrating strong monetization while remaining disciplined on risk.

Turning to network volume. We reported $2.7 billion for the fourth quarter, up 3% year-over-year. Personal loan auto and POS volume combined grew at a double-digit rate and was partially offset by 0 [ SFR ] volume in the quarter. Personal loans remain our largest vertical at approximately 65% of total volume and grew 10% year-over-year. Auto and POS represented 19% and 16% of quarterly network volume, respectively.

For the full year, network volume was $10.5 billion, up 9%. Excluding SFR, volume growth was substantially higher. Late in the quarter, we proactively tightened production in certain areas that remain profitable but could exhibit higher variability of credit outcomes and may be the first to show deterioration in a downside scenario. This was a dynamic reallocation within the portfolio away from higher-risk segments with a plan to be redeployed in volume from new application flow and new products and, therefore, more balanced risk.

Given our visibility into new partner onboarding, new partner and product monetization and the operating leverage in the business, we are well positioned to make these adjustments. The decision reduced fourth quarter volume by approximately $100 million to $150 million without impacting the quarter's profitability targets. When risk moves and persist, we will adjust. We will not stretch. We are dynamic, we recalibrate and continue compounding returns.

Fourth quarter total revenue and other income was $335 million, up 20% year-over-year. Fee revenue grew 16% to $321 million and made up 96% of total revenue. Interest and investment income grew to $14 million. Importantly, revenue growth continued to outpace volume growth underscoring 2 key trends: improved monetization and higher revenue and profit per unit of volume and risk.

Full year revenue grew 26% and interest and investment income reached approximately $40 million. FRLPC in the fourth quarter was $131 million, up 12% year-over-year, again, meaningfully outpacing volume growth. FRLPC margin expanded to 4.9%, driven primarily by partner and funding mix. For the full year, FRLPC totaled $512 million, also 4.9% of network volume, up 70 [ base ] points from 2024.

I want to say a moment on a subset of fee revenue fees from capital markets execution. This is an area where we have progressed in a very intentional way. These fees were a negative $6 million for the quarter and a negative $21 million for the year, reflecting the pricing agreements with our [indiscernible] flow partners and the risk-adjusted pricing of our ABS transactions.

Specifically on ABS, negative fees reflect additional cash contribution report in our securitization structures in addition to our purchase of securities reflected in our investments in loans and securities. This cash contribution is accounted for as an upfront reduction in fee revenues and provide additional support against potential future credit losses.

While this does not change the underlying credit performance of the asset, it reduces downside exposure and earnings volatility associated with the certificate investments we hold on our balance sheet. Most importantly though, it also creates a clearer and a tighter risk bond for our investors.

To put this into context, for every $1 billion of ABS funding tied to contribute a minimum of approximately $50 million of capital, i.e., 5%, in line with risk retention rules. Illustratively, a 100 basis point discount in ABS pricing translates into roughly $10 million of lower upfront fees but also implies $10 million less in future impairments or up to $10 million more in all else being equal. Now let's talk about what we view as another differentiated feature of the business.

Our operating leverage -- adjusted EBITDA in the fourth quarter was $98 million, up 53% year-over-year with a 29% margin. Core operating expenses declined to 36% of FRLPC, a 13-point improvement year-over-year. Incremental EBITDA margin exceeded 100%, meaning nearly every incremental dollar of FRLPC flowed through to EBITDA. The modest mix versus guidance was driven by the late quarter production adjustment. For the full year, adjusted EBITDA was $371 million, up 76% and margin expanded to 28.5%, up 800 basis points.

Turning to GAAP net income. We reported a record $34 million, our fourth consecutive quarter of profitability compared to a net loss of $238 million a year ago. Fourth quarter GAAP net income included the positive impact of approximately $9 million from extinguishment of corporate notes and a nonrecurring tax-related benefit. For the full year, GAAP net income was $81 million compared to $401 million loss in 2024.

This largely reflects higher fee revenue alongside lower operating expenses, interest expense and impairments, resulting in a 10% margin in the fourth quarter compared to 6% last quarter and a negative 85% a year ago. Credit related fair value adjustments were $107 million for the year. Adjusted net income was $275 million.

Diving into credit performance. The results across personal loan, auto and point of sale remain in line with expectations and within our risk tolerance. Demand for our assets remain strong as evidenced by new forward flow agreements, our first auto certificate sales since 2021 and the demand that we're seeing in the first few weeks of the year. 2025 [indiscernible] represent a more normalized production compared to 2024, particularly given the lower cost of funding from investors relative to prior years. As it relates to new production, rating agencies also validated that cumulative net losses are expected to be lower relative to prior production after reflecting our recent risk actions.

Let's go to the specifics. Personal loan CMLs for the second half of 2024 through the first half of 2025 vintages are running 30% to 40% better than 2021 peak levels. Auto C&Ls are running 50% to 70% better than 2022 vintages. While Auto 60-plus delinquencies are higher than 24, following the [indiscernible] and broadly in line with 2023 levels, recoveries and roll rates are better than both 2023 and 2024, pointing to a normalized level of expected losses.

For point of sale, credit trends remained stable and in line with expectations. As I mentioned earlier, realized credit performance remains in line with expectations, and our late quarter actions reflect increased uncertainty rather than observed deterioration. When uncertainty increases, even if losses have not materialized, the platform is designed to reduce exposure to the tails of the distribution. When conditions improve, we will adjust again.

Parting remains robust. In the fourth quarter, we issued $2.9 billion in our ABS program across 7 transactions. Last week, we closed an $800 million ABS deal that was oversubscribed even after upsizing from an initial size of $600 million. With the recent announcement of our inaugural POS forward flow with sound on capital, we now have forward flow agreements across all 3 asset classes. We also closed our first $350 million revolving personal loan ABS with 26 North and combined with our two point-of-sale ABS revolvers, we now have about $3 billion of revolving capacity from those 3 transactions.

Turning to the balance sheet. Asset quality and mix have improved materially over the past 24 months, providing increased liquidity and flexibility. We ended the quarter with approximately $288 million in cash and cash equivalents, up $62 million from a year ago and $945 million in investments in loans and securities. As we have stated over the past year, we are leveraging our improved liquidity to make opportunistic investments to lower our cost of funding and increase profitability.

In the fourth quarter, new investments in loan and securities were about $271 million of which $47 million was opportunistic in the form of ABS bonds, and we received $17 million in return of capital from prior deals. In December, we also repurchased $7 million of our corporate notes at an approximate 12.5% discount to par, consistent with our stated objective of opportunistic capital deployment.

Last week, we repurchased an additional $7 million of our corporate notes. Throughout 2025, discretionary investments in ABS structures, all in the form operated loans totaled approximately $171 million, representing about 27% of the total investments in loans and securities. Combined with cash, we now hold a healthy liquidity position under a wide range of scenarios. Our objective is no longer just liquidity. We are maturing and increasingly pursuing optionality.

Optionality allows us to be conservative on credit, opportunistic on capital deployment and patient on growth. In the fourth quarter, the fair value of the investment portfolio was adjusted down by approximately $50 million, and we added $97 million of new investments, net of pay downs, our guidance continues to reflect $100 million to $150 million of rolling 12 months forward credit-related impairments.

I want to remind everyone that this is not a forecast of losses. It's a governance on risk embedded in our guidance. It reflects uncertainty and remains consistent with prior guidance. Let me close with our 2026 outlook. We remain cautious in the near term given persistent macro and credit uncertainty. We expect volume growth throughout the year, driven by new application flow, new partners and increased penetration of our products.

PC margin is expected to be between 4% and 5% for the year and to revert lower within that range from current levels as a result of continued expansion in POS contribution from new partners and our funding mix. As just mentioned, guidance reflects the credit-related impairments, if any, of $100 million, $150 million. Both first quarter and full year guidance reflect the full impact of last quarter's exit rate volume reduction of approximately $100 million to $150 million per month.

Illustratively, the midpoint of that range represents approximately $375 million of first quarter impact and $1.5 billion on a full year baseline essentially assuming current uncertainty persisted and to consumer and performance deterioration. If uncertainty receives, we will adjust accordingly and swiftly. This is an important point. So let me explain.

We are exiting the year with $10.8 billion of fourth quarter annualized volume deliberately shrinking higher risk volume by $1.5 billion on an annualized basis while still delivering year-over-year volume growth. The reduction in certain credit years and new volume growth are not contradictory, there are 2 sides of the same optimization process.

For the first quarter of 2026, we expect network volume in the range of $2.5 billion to $2.7 billion. Total revenue and other income in the range of $315 million to $335 million and adjusted EBITDA in the range of $80 million to $95 million. We expect GAAP net income for the quarter of $15 million to $35 million.

For the full year 2026, we are expecting network volume in the range of $11.25 billion to $13 billion. Total revenue and other income in the range of $1.4 billion to $1.575 billion and adjusted EBITDA in the range of $410 million to $460 million. We expect GAAP net income for the year to range from $100 million to $150 million. With that, let me turn it back to the operator for questions.

[Operator Instructions] Our first question is from John Hecht with Jefferies.

Gal, maybe just go away deeper in this concept of moving away from variable outcomes -- is it pricing in the market? Are you seeing something change with respect to payment trends? Or is this -- is it related to certain channel partners or certain types of products? Maybe just another layer of details on this.

Definitely, John. I appreciate the question. So before going into the market dynamics, I want just to start with reiterating that, that message that we gave from Pagaya perspective has been the same for the last year that we will always prioritize prudent risk management on the short-term group. And that principle that we have in rules call it a year, 1.5 years back is now fully embedded in the way we run the company.

Now the main reason for that is that we are a different type of animal. I mean we are not like many consumer finance platform rely on marketing spend to generate volumes. We don't need to grow at any cost to justify our expense. And this structural advantage is obviously giving us more flexibility to be disciplined, especially when we see early signs of different market softness.

Now when you think about that and the data we collect, it really comes to the core strength of our platform, which is the ability to remove what we describe as [indiscernible] liability outcomes that you pointed out in real time through the fact that we see signals across 30-plus different lend bills, 3 asset classes that are a lot of data that allows us to be proactive rather than being reactive.

Now the first point I would point out to your question is the market dynamics. So from a market perspective, there is just a lot, you don't need to look very hard to see that in the last period, mainly in Q4. The amount of volatility and declining rationality that we have seen has just reached level. Financial markets are demonstrating much volatility driven by geopolitical private credit, you see notable shifts in sentiment and despite the fact that the consumer performance in our production remains strong, and the ABS market are functioning well, it's definitely giving you a pause as a risk manager to ask the question of like, what's your risk appetite and where you want to be?

Now as I mentioned, the consumer behavior data front, we don't see a specific deterioration, so nothing on the [ CNN ] or the CPR. And therefore, our 2026 outlook of the impact of credit-related impairments, if any, is in line with our 2025 guide, which is the $100 million to $150 million, we did see a clear shift in our partner behavior. Several partners are moving away from expansion to cautious as they have progressed and the early signal is exactly what our operating model is designed to capture.

If you will talk with our lenders call it, Q1, Q2 last year [ Revlon ] will tell you that, yes, this is a year of going very strongly, aggressively growing 40%, 50%. When you spoke with the same folks, -- the end of the year, the posture and the understanding of the situation was much more balanced. And as we saw that, we decided take even one step further and to be what we call ahead of the curve.

Now the way we operate and what we were doing, we do it very quickly and swiftly because of the technology agile advantage that we have, and the fact that we can do these things real time. So literally, a decision in the middle to late of Q4 can be related to all of that, and that's becoming our basis as we think about 2026. And if you will talk a little bit more about how we think about the guidance in that respect.

I think before we close the question, I just want to emphasize that from an enterprise progression and execution perspective, what the team has done and is planning for 2026 is really exceptional. And we are becoming a better Pagaya and not just a bigger one. So think about it only in Q4. We added forward flow in 2 new asset classes. We included the revolver capacity in person alone and unbolded 2 more pains.

So when I think about it from a CEO perspective and frankly, I think you should think about it, too, is that I'm very pleased with the [ team ] outcome despite the short-term reduction in risk decision that is trying very hard to avoid with any potential of downside because of retail risk. And when I'm looking ahead on 2026, we remain very focused about executing on the thing we send in and our long-term strategy which is expanding our power network, deepening our existing relationships and proactively cutting all scale risks rather than chasing short and volume.

So to end that part, I just want to leave you with 2 small names that the first one, the fact that we have been more conservative is obviously retain our ability to scale quickly which is why our guide range is intentionally wide. And the second is that even in what we describe as volatile environment that we don't want to be over risk on we expect to deliver a meaningful GAAP net income profitability of over $100 million in 2026.

So in other words, our entire 2026 guidance range, especially assume current uncertainty persists and into consumer and performance deterioration that we are kind of like taking as part of our plan. So if uncertainty received, we will definitely adjust accordingly and swiftly.

Yes. Maybe I'll jump in. So as we noted, this action translates to somewhere between $100 million and $150 million volume cut in the fourth quarter. So effectively, that's a $1.5 billion of volume into 2026. And remember, we're more than offsetting that with new volume from new partners and new products.

So effectively, what we're doing is we replace higher credit risk volume with volume from new products and new partners that come in at a much more balanced. And if you think about -- I'm sure you're wondering like, okay, to jump ahead, what's next for 2026, what does that mean for the guidance? What needs to happen for that change. I would say the -- we are assuming this decision does not for purpose of our guidance in 2026.

And if we are right, we will not be chasing our tail for the year. And if we're wrong, we will reverse and in that case, we would have left some money on the table for a few quarters. So something has to really dramatically change really in 2026 to go below the guidance that we have provided.

The other thing I want to point out though and to close the question is, just think about -- in the long term, there is no real impact in the long-term part of the business. We're still looking at the 15%, 20% growth of this business, especially if you start thinking about the annualization of the new volume that comes in 2021 into 2028. And the last thing is obviously to keep in mind and let that sink in, is this is still a business that's generating $100 million plus of net income even in that scenario.

Okay. And then your follow-up question, which I think is somewhat similar to the last question in terms of where your focus is. It seems like there is more commentary about being focused on volume outside of decline monetization. Maybe talk about what products might have like increased momentum there -- and do the economics of those transactions differ from the decline monetization?

Sure, John. I'll take it. This is Sanjiv. Absolutely. I think you got it -- you hit the nail on its head with your question. So essentially, what we are diversifying our products into the direct marketing engine that we've talked about before, we talked about affiliate optimize their engine before and of course, dual or concurrent look, in [ Autoware ] we look at launch at the same time that our partners to essentially first look.

The dynamic of the direct marketing engine where we essentially help our partners grow their originations is very, very strong and very positive. And the performance is also substantially better. Same with the affiliate optimizer engine. We're essentially a business that has about of its dependency on Credit Karma and experience continues to grow very, very strongly. Similar to what credit card businesses do. We are doing the same thing in personal loans, and we are substantially improving our partner presence with our existing partners in both of those platforms. And so that is something that has done extremely well for us.

This is where the shift in the business is happening, and this is exactly where we are we're emphasizing that because of the performance of these products at the economic needs are substantially better than what we have traditionally provided because of better risk performance and better ability to charge better economics. So that's something that we definitely want to talk about.

We have, as you know, 31 existing partners. Our top 5 partners are already on these new products. We have signed agreements on [indiscernible] product, which is our direct marketing product, as well as agreements on Credit Karma and the affiliate channels, and we are starting to increase our dual look performance very substantially.

I do want to emphasize one other thing that is extremely important, which is that we have also onboarded a record number of new partners, Gal talked about that up onboarding right now. There's a third depth in process. And I fully expect that by the end of the second quarter, we will have onboarded maybe 7 potentially 8 new partners, which will be like a record for Pagaya.

Gal and I are trying to do is to emphasize is that we are focusing more on the shift in the business with our existing 31 lenders to more profitable partners. We're also focusing substantially more on getting new partners, essentially demonstrating that we are becoming part of the financial ecosystem in U.S. consumer lending. And we are managing the risk in a very thoughtful, responsible way as we grow our franchise in the long term.

Our next question is from Kyle Joseph with Stephens.

Been a lot of headlines on private credit and the alts recently. Just wanted to get -- you guys gave an update on the funding side business, but how you're thinking about funding into your '26 outlook given all the headlines we've seen in that world recently?

Yes. Thanks, Kyle. Thanks for the question. I'll take it. I mean, look, the demand for our product and production is very robust. Look at Q4, a couple of the things that we announced a new deal with [ 26 North], which combined with the post deal generates more than $3 billion of capacity across these 2 products from the revolver structure of these. The sale of the certificate to new forward flows in auto and POS, the sale of the set on OWS. So generally, very strong demand and validated by the execution that we're delivering for our investors.

What I would say is if you step back, 2025 was a year where you have a very frothy sort of private credit market deploying capital. And now it's becoming a little bit more normal and much more disciplined. And we're actually benefiting from that. I will take it a step further and say that some of the actions that we took is actually fueling more demand for our product and production.

If you look at the last ABS deal that we did a few days ago, going to market with $600 million of size, and it got upsized by 30% still oversubscribed. So I think what you see is the platform have a very robust and very diversified set of investors they work with like Pagaya. We are benefiting from all of this. We'll continue to obviously continue to try and diversify our funding further and on our pipeline.

So I think we feel very good about the funding environment relative to our positioning in the marketplace. Maybe 1 one to add is that a lot of the colleagues have been going around, which obviously [indiscernible] the full funding world, but like it's much more around the corporate side of the world and specifically around fast, et cetera, and companies that has been in the spear of trying to grab market share there. I think on the consumer side, which is a byproduct of that, but like you don't see that level of volatility or changes in the next quarter.

Great. And then just a quick follow-up, a modeling question for you. On the impairment side of things, given the underwriting changes you guys have made, what sort of level should we expect to get to your GAAP EPS guidance for '26 -- thank -- no change on that. We're still guiding to the, call it, under scenario in our guidance of $100 million to $150 million range for the year, same as it was in 2025. So no changes there given the ongoing credit performance.

Our next question is from Hal Goetsch with B. Riley Securities.

Got a question -- it's a big power intuitive given the macro trends we've seen over the year with falling inflation, rates coming down, job market generally good. And I think mentioned your action in the last quarter was based on increased uncertainty, not an increase in credit losses. So just wanted to -- can you give us any more qualitative or quantitative color on what you saw your partners doing in your response. The [ 50 million ] to it seems like things are going in the consumers' direction to be better credits. -- is it's a little bit -- a little more flushing out.

I think it's a great observation. In fact, those were some of the countervailing forces that we had in our mind as well at the end of Q4. On one hand, the macro was what it was in terms of inflation and rates coming down, as you pointed out, on the other hand, what we are observing very specifically from our 31 lending partner platform, some of the partners that have been talking about credit expansion in the middle of the year, we're feeling less certain about credit expansion by the third, fourth quarter.

So the sheer uncertainty in the market. And by that, as Gal outlined in his opening comments, have clearly geopolitical uncertainty, which was causing some uncertainty in the financial markets. There was some stuff going on at the tail end of certain businesses. There are certain markets and so we felt that the most responsible thing for us to do, and that's the beauty of being a B2B2C market is that in some ways, we are shielded from this because the B that between the CNS response or gives us signals that based on which we were able to take actions at what we thought would be the marginal risk tier in the business.

And it is this theme of uncertainties in the potential uncertainty in the credit markets that drives us to think that we should be responsible and prudent rather than aggressive. And -- but having said that, our ability to scale and be nimble is extremely high. So things change in the market, which could change. I mean rates could change the market could change by the second half of the year, what we -- all we need to do is basically prudently turn that back on. And that is the reason why our guidance range is wide. But having said that, we, as a management team, have a very, very high conviction that we will deliver profitable volumes, which is why our GAAP net income number is what has -- so do you want to add anything to that or ...

One point to take in mind, like when you see losses, it's a little bit too late. And when you are taking a frosty before, that's the way to be disciplined. So like you don't need always to look on deterioration of your outcomes on the CNL to say. Now I need to take action, and I think, again, given where we stand and what we see, it's enough to actually say, "You know what, I'm going to be more conservative on that part of the spectrum, and that's it."

Okay. And unlike maybe 2023, where you're still building the platform relationships with the lending partners your pullback from those riskier tiers that your lending partners were okay with that as well. There was not a relationship issue. Because I think it was key in 2023, 2024, if you build the platform, build those relationships. In this case, it was this kind of pullback is okay with the partner.

So it's a good question. It's exactly what we told it's a different situation. And see, the answer is no. They appreciate that. From them, 15% growth in the midpoint and the Pagaya, stronger today is much better than 25% growth. But then in 3 months, 6 months, 9 months, we take it down on that. So stability is key for the actual customer.

Our next question is from Rayna Kumar with Oppenheimer.

Can you just talk about like where you actually started to pull back? Like was it a particular asset class? Or was the action taken across the board?

Rayna, it's primarily across like the entire portfolio with a little bit more focus on the personal and auto side just because of the secular growth that we see in POS. That was obviously the later part of the quarter and effective, that's why you see that sort of as an exit rate change in 2026.

Understood. That's helpful. And then just on your target 4% to 5% RPC margin for '26. Obviously, it's a very wide range that you highlighted earlier. Can you just talk about like how much conservatism is baked in at the low end? And like what are the puts and takes to get from the bottom to the top. And then if I can sneak in one modeling question, if you can just tell us your assumption for GAAP tax rate.

Yes. So as we have said before, as it relates to the FPC rate, I appreciate, obviously, that is a wide range, and we look to narrow that down going forward at some point. But ultimately, the way to think about it, focus on the [indiscernible] in dollar terms. So volume we get from your partners and newer products that come in at the lower rate. You may see a sort of dilutive impact on the action rate, but still coming in at higher volumes and therefore, higher dollars at the top line.

And then vice verse potentially, let's call it slower. And when you think about the mix of the portfolio, if you see a slow new product, new partners, you may end up with, call it, the lower end of the rate of the guidance on volume, but obviously achieving a relatively higher RPC. That's how a little bit how to think about that across the board. So sort of the key dollar amount. On the tax rate question, generally speaking, I would point to, call it, a 20% type of tax rate. But obviously, there's a lot of moving parts there because the business is coming out from a period where it was 3 years ago, losing money now to get into capital profitability, but that's what I would assume for going forward.

Our next question is from David Scharf with Citizens Capital Markets.

Maybe just to sort of dive in a little more to Hal's question and perhaps what your kind of behavior you're seeing from lending partners. This was so far, an earnings season where a lot of lenders pretty much said things are stable. There are no -- certainly no rush to widen their credit boxes, but there certainly weren't indications that things were tightening either.

Just so we understand -- did you start to see by the end of the quarter, more evidence of turndowns of loan application rejections by your partners that may have been approved by your partners 6 months earlier? Or is that how we should sort of interpret the behavioral changes you're seeing?

I think the best way to look on it is many more expansions that were in place or in [ plant ] became not in play. So it's not to say that people are now saying, hey, we are going to continue to grow, but it has been shifted much more towards how do we do more asset classes, how do we get more to our customers rather than the pricing are high, and we're just going to make it more aggressive for the losses low too low and therefore, we're going to approve more type of population.

So you definitely see a difference -- and by the way, I think you will see on the gross numbers of all of the reporting companies we talked about the growth going forward. So shopping growth is not what it used to be last year, especially on the personal loan and other business.

Got it. No, that's helpful. I mean, obviously, you -- as you noted, your business is in a unique position to kind of see the activities of multiple lenders as opposed to just observing your own portfolio. So that's helpful. And then just as a follow-up, should we think about maybe the recalibration on credit extending and reducing tail risk. Does that extend to how you approach your discretionary investing in securities in addition to originations or loan approvals?

Dave, it's EP. I think these are 2 different aspects right 2 sides of the network, one that is necessarily tied to the other.

Got it. Understood. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Gal for closing remarks.

So I want to thank everyone for joining us today. As you can say, our results demonstrate power of the B2B2C model we have worked so hard to build that for Pagaya, increasingly diversified growth with an under-landing focus on disciplined underwriting, along with a growing list of [indiscernible] and funding mechanism that keeps evolving and improving. I look forward for 2026 and to share the journey with you as we broke Pagaya into a key partners for all U.S. consumers and institutions, continuing optimizing our product suite and value proposition, to maximize the value we provide to our partners.

We remain laser focused on the long-term potential of Pagaya as we penetrate this enormous market opportunity, a market that we created and that we need. Thank you very much for your time today.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Good afternoon. My name is Peter Christiansen here with a Gal Krubiner, CEO and Cofounder of Pagaya, which has been a fascinating story in 2025 and has been our top pick in our lending, [indiscernible] coverage of [indiscernible].

I think at one point, means before we -- this market hit some of this more recent turmoil Pagaya was the performing out of all [ fintech ] we said in our screening. So it's just been an amazing year for the company. Obviously, not just from the stock price moving in the right direction. But just what has gone on, and we're going to dig into that right now.

I think we want to start off with first is last quarter, how I think you and EP and [ Sanjiv ] talked about building sustainable growth -- sustainable network growth and focusing on sustainable expansion there. Not something you hear from a [indiscernible] company that often would be great that you could elaborate on how you're creating sustainability for Pagaya [indiscernible]. So definitely, we'll go into that.

Thank you so much for having me and thank you for your support. I think we had very few [indiscernible] many of the conferences that people are digging in, wants to learn more [indiscernible] long only looking for that. What is [indiscernible] over [indiscernible] market, not market what you're trying to build and when the company is doing. So I appreciate the [indiscernible] here, and the interest from everyone.

And what we try to do today is to get a little bit more regular [indiscernible] in the big process and how we are performing [indiscernible] your point how we take the in fundamental. And to your question, which is what your sales [indiscernible] or take on sustainable growth. And why this is sometimes different than the lending peers? I would say, putting very simply, our B2B strategy [indiscernible] it is by design. So when we are thinking about how we grow, we are thinking about how we are lending more [indiscernible]. We are thinking about how do we perfect our products, to be more value driven to these customers and the lenders that we already have, and how we are focusing our efforts to be in areas where once we get that growth, [indiscernible] growth and not something that is moving before the market has [indiscernible]. And there are many different [indiscernible] on the [ VC ] side of the houses that they are very much driven by marketing spend, opening the credit box and then when market goes against you, type of marketing spend. Type of playing the cycle. It's over the cycle, right?

And when we went into this, and I think this is the most -- the thing that I'm most excited about, like actually 2026 because I think we managed to bring the products [indiscernible] to a place where -- when we talk about a decent markets and asset classes. But like we started the year and we were going to listen to our [indiscernible] we're like, okay, what are you think the [indiscernible] very obvious product that you have is a big line monetization products, but then we heard, actually, we are looking on the [ PM ] side [indiscernible] We are looking to be more with the [indiscernible], the credit [ pharma ] and the [indiscernible] activate and the [indiscernible] because we're trying to bring more customers to outdoor. And at the same time, we're trying to open a lot credit to our approach. So we did that when we mutually created the marketing affiliate products that is helping these type of [indiscernible] to be very effective in [indiscernible] very effective in these places and the combination of being able to take a partner and move it from the deeply monetization product to [indiscernible] and to add that as additional [indiscernible] you in the credit [ pharma ] and in these different premier channels have been driving a lot of the [ proliferation ] that we see.

And in the same vein, just [indiscernible] one of the biggest questions that we have in [indiscernible] and especially on the dealerships, or people that are coming to the dealership, they have 2 types of nonprime lending or approval. You can have your [indiscernible] for the loan but you need to show me your income, and therefore, you need a verification. Or you have the ability to say you are fully approved, and that's what's mainly happening on the high FICO [indiscernible]

When you're asking the question of what is the biggest motivation and ability to start from a balance perspective, the product that suits for the dealership, it's the highest ability to say you are approved [indiscernible]. So subject to [indiscernible] not subject to the manual [indiscernible]. And what's happening is the dealership when I see that in his topline, he would say, okay, no, I'm going to give you a different [indiscernible] So we took that capability [indiscernible] pass, we develop [indiscernible] that technology of the ability to predict what's going to be your income that's going to be our predictability and accuracy of the order income.

And for this population that we see that we have a very strong handle, or we're giving them a bypass of this [indiscernible] line and actually being able to give them the fast part and increase massively the verification and performance and all the other side, not just working the same, but sometimes don't work in better because we get better [indiscernible]

So all of that to say that the product suite and trying to solve [indiscernible] for them, and I'm trying to deliver the message that the way we want to [indiscernible] have for the progress [indiscernible] clients. We have an 18-month road map of each client each product. And what we should expect to see for us more in 2026 is how they [indiscernible] for products are driving more value with existing [indiscernible]. But more interestingly, how they're pushing the queue and the [indiscernible] to be more robust and more relevant because there is no [indiscernible] today.

We have [indiscernible] in our lowest ever view of going onboarding is because it is [indiscernible]. So now we are sitting with a PL partner, and we're telling them, hey, we're not just going to do [indiscernible] volume with you for a deep line, but we can have been picking the [indiscernible], and we can actually direct [indiscernible] another [ 300 ] [indiscernible] $1 billion volume [indiscernible]. And therefore, you see these organizations of [indiscernible]

Well, because you're becoming a mission-critical value proposition. And you're ranking your partners up higher from the marketplaces and things like [indiscernible] is enhanced. And you also will be a diverse selection of those sorts of entire quality. So it's almost like you're becoming a mission-critical component for your [indiscernible]

And another way to think about it is a lot of the knowledge and capabilities and things that we're developing on [indiscernible], and we're not delivering that more today encumbered [indiscernible] high is really taking a bigger [indiscernible] and a bigger performance and actually funny enough, the government becoming more [indiscernible] for business is allow this [indiscernible] to actually say, we're going to do the extra mile. We're going to invest in the technology. We're going to partner with Pagaya or others and becoming an easier thing to do, and that has been fascinating to see how the [indiscernible] of mine when the SIs like [indiscernible] is like point of sale, right, we are going to [ land ].

So we are helping people to improve their lending in the point where people are coming to us for that spending, and it's been fascinating to see how the FIs are focusing on the same type of [indiscernible], which is how do we grow more, how we become more [indiscernible] dealership to next year, and we are passing on these challenges, creating products and increasing our growth.

You see [indiscernible] partners [indiscernible] That sounds great. I mean you still do have -- any one that [indiscernible] been credit cycle and now I'm getting through them. But -- and there's been a lot of noise, I think, on the credit picture this year and how things are kind of evolving on the last call.

I think you illustrated well on how your structures are performing versus [indiscernible] materially better there. And delinquency still looks like they're fine. They are at healthy levels. Just curious on your sentiment read on the capital markets side, also from your partners on where conditions are right now?

Yes, I would say, as we said on the call, the performance is in line with what [indiscernible] see the performance to our [indiscernible] because [indiscernible] are coming at the right level. And there are a lot of [indiscernible] of how you think about that and what does it mean. And I think the biggest driver that is happening across the U.S., and you would see that more forming [indiscernible], and we don't talk about that [indiscernible] the reduction in the corporate [indiscernible]

If you look on the management rates, '25 vs '24, you saw [ 150 ] basis points of [indiscernible] from the benchmarks, both steady spreads that 80% of your capital structure, which is tied to the IT, et cetera, is very, very, very efficient [indiscernible] and macro efficient. So the [indiscernible] are thinking about that, and I think that's the [indiscernible] is even stronger in [indiscernible] You are computing to another way at it. What's the asset return that they need to be?

When you're asking the question of what you're expecting the threshold to be the return of the asset that you are [indiscernible] is the part of the pieces of capital and the [indiscernible] and the recoveries, and the different [ pace ] Than I said in auto, you have given the recoveries, which is much bigger than more important, right. It's [indiscernible] the end of the car that you're projecting is 40% or 55% changing completely the [ service region ]. This cost of capital is 150 basis points lower. So you saw for something which is a 9.5 hour way, but now you're [indiscernible] to an 8.

And what do we see [indiscernible] this is coming into the [indiscernible] or the [indiscernible].You should not see on the 2024, 2023, which was the tightest credit days in the U.S. environment [indiscernible] to be exactly the same as what we expect in [indiscernible] So when we are speaking on the call and we are talking to investors and we are trying to [indiscernible] all of that to an actual our way on a portfolio management and risk management meeting that's happening on a weekly basis. And this is definitely consumer credit and [indiscernible] side of the house. We are asking the question, with all the different things that have changed since last quarter reception.

And I told them for the right away, and we are asking that from the question of what's the unit economy that is less for me? The unit economy has never been a strong because the cost of capital is [indiscernible] was still going down and [indiscernible] are not still going high, that actually, the percentage you are keeping to yourself from a property perspective, is very high. And that gives them sometimes those with a little bit higher delinquencies as you are entering to the [indiscernible]

Sure. You have more degrees of freedom, more [indiscernible] room to do different things, infrastructure things in certain ways. You don't have to be as creative [indiscernible] as in prior years, prior vintages. But is that unit economic bucket that you're talking about, is that a toggle that I want to manage so that it's still conducive to driving growth?

I think that when we are solving for the sustainability of growth and the point where we do not need to [indiscernible] or increase massively is keeping that margin very, very healthy. And that you can see in the [ FLLP ] and that we've seen the different part of lowering the [indiscernible]. And you see that in the cost of capital that you have into what we are pointed unit and what has been written on our balance sheet. And we are managing that very carefully. And that's why you didn't see us increasing and opening the [indiscernible] less support, like the growth of Pagaya was [ 22% ], and that's is, not looking for [indiscernible] because we don't like the volatility [indiscernible].

So we all come back to the fact that as of now, the consumer is in a very [indiscernible] It is when it's coming from. We are seeing some questions about the private credit side, or AI and on the corporate. And that's definitely a question that is happening around the discussions. The consumer hasn't been written yet. We are definitely on the watch. We are definitely watching if something will go the other side, when we tax and will reduce even the conversion will become more from [indiscernible], we have [indiscernible] that we started the year very conservative on that side.

So again open the [indiscernible] against investors of marketing dollars because it's not our business. So [indiscernible] following, healthy situation, ready [indiscernible] whatever.

And you don't need to open up the credit box to improve your partner [indiscernible]?

Yes, because the reality is that let's talk about what's going to drive the growth [indiscernible] is going on experience [indiscernible], which is another aggregator like credit pharma, and you do with [indiscernible] partners and here, you have another $500 million of growth, and not by opening the credit box because now you need the approval of the [indiscernible] system.

Because now you're at the top of [indiscernible]

Exactly. And now you're [indiscernible] against that at [indiscernible] that's powerful.

And you did talk about things that you're watching it seems like [indiscernible] growth, that kind of stuff. Those are like your -- where your eyes are focused in on [indiscernible]

And our two other bases, how competitive the area of personal [indiscernible] varies that [indiscernible] underused. So it's a very big [indiscernible] what we saw in '21, out of it was people became too aggressive, too quickly, and then it was hard to keep hopping getting the right population to the right places. So that's definitely something we're watching. For us, this [indiscernible] good.

The other piece is the actual delinquencies of how many people are [indiscernible] actual MOBs data that are coming, and they are very much more implant. The point is all in the right context and into the what we are [indiscernible], which is ROA, which is the margin and that business are moving as we go through the site, but you still keep the same spread to make sure you have enough [ market ].

The last point I want to make is another example on the [indiscernible] is very interesting. One of the pieces that as we think about going down the [indiscernible] if something will happen in people or not, we are moving to much younger [ cars ]. So you will see the average age of the [ cars ] that we are approving on a total loan for them [indiscernible] assets. So by definition, you would see higher recoveries of cars if people are going to different when they're [indiscernible] But requiring potentially a little bit higher [indiscernible] to produce service on the same order.

So there are a lot of different nuggets that you are trying to [indiscernible] for the different parts that all in all is getting us to be very comfortable in managing.

That's interesting. I do want to look at the capital market side, equally an important conversation that investors are talking about right now. And -- and it is interesting. It does seem like we're seeing more [indiscernible] demand in the ABS market, structure markets seem to be operating quite healthy.

I'm just curious on your views. Where are some areas that you're seeing strength? Where are some areas where you'd like to see a little bit more support? Maybe there's a little bit of weakness there, or there's just noise that you think equity investors on this [indiscernible]

So I think -- let's savor that to the [indiscernible] impact on the financial. And I think that's something we've been doing this morning and to other folks to get the right your point of the business. The capital market and a healthy of -- the health of the funding market is actually a very big focus the [indiscernible] of Pagaya in 2024. We did a lot of changes and progression into the unit economy and the cash and the cash flow when we were happy [indiscernible] that we are [indiscernible] positive and we [indiscernible] and hard to appreciate the power of that.

I think in a very small [indiscernible], the credit -- sorry, the cash profile of the business that we have seen is starting to be accretive. And I want to walk through the pieces of that which are very much correlated to the question you've asked about how the ABS has been functioning there, and what [indiscernible] when I look in the future. So think about the fact that we are today originating the [ $10 billion ] and is being done in 3 [indiscernible] and the [ POS ]. And the real big question that we ask ourself on a capital profile perspective is what is the required [indiscernible] retention that we need to do inside the different types of the market?

Let's say the [indiscernible] long-term discounts, big push to go to forward flow, it is only to supply as an [indiscernible] Today, 40%, 50% our production is through that talent. And then that is actually with a 5% of retention. But the reality is that the structure and ability to take value from the ABS words, we have designed it in a way that wins we put 5%, you are getting after 2, 3 months that deserve that you needed to hold to the [indiscernible] period and other places, that is selling that at [indiscernible]. So the actual net risk retention only 2, 3 months after we begin the next [indiscernible] All in all, it brings PL 50%, [ 0 ], 50% [indiscernible] to be at a 1.5% on a net basis.

And you take that 2% back to put into the next year?

So the next data we'll talk about this in a second [indiscernible] Then on the auto loan side, actually, you have a higher leverage, so you're getting to a 98% leverage. So you need to put up for 2 points of cash and other 3 points for the value dated from the value, the spreads [indiscernible] the bottom line effect.

And the other pieces, we announced with [indiscernible] recently another [indiscernible] $500 million. [indiscernible] collect 20% is already on the forward flow. We have 2% and 8%, 0% and the 20%, again, [ 1.5 ]

A little quick sidebar. For a sale though, you can, I think, be a little bit more aggressive, right? Because the different lending model. POS the most?

POS, we went out and that's the third one [indiscernible] with the structure that is evolved. You put [indiscernible] retention on a $300 million, that is $15 million. But the power capacity of that [indiscernible] to buy over the next 24 months is [indiscernible] So $50 million on $1 billion is $1.5 billion. So you've got to [indiscernible]

I got your point. 1.5 points [indiscernible] And then you go back and you look on Pagaya and you say, okay, that's not NPC for the half [indiscernible] is 1.5 that we just spoke about, which is a blended and what you need to put the investment, you left with [indiscernible], right? That [indiscernible] cost of the business in how much for that cost? Employees, [indiscernible] left with half point. That's the free [indiscernible]

[indiscernible] your question. But we are doing it, and we stay with this because this is a lot of the power of how we're [indiscernible] mortgages. And we use our cost of capital over the time. We are starting to be able to retain the business, which is the place where capital market has been [indiscernible] And you can sell a bit on that 15% or 17%.

And that's not top charges? That's not your residuals, it's [indiscernible] between?

How many [indiscernible] have ever lost [ fun ] into that? Never. Okay. And we are already on the risk because we are holding the [indiscernible]. So it's below already on the hook for the risk, right? And the point is -- so you're holding something that is 15%, 17%, the potentially season it 1 year and then sell it, to potentially [indiscernible]. But when it [indiscernible] and the risk to materialize, you sell it at 10%, the compression of the spread is actually taking an to [indiscernible] ROE. So it's very as exciting [indiscernible] as equal to 0.25% or 50% [indiscernible] Pagaya was a smaller company that didn't have the $1.5 billion to [ $3 billion ] on the balance sheet, wouldn't retain.

When you look on the one [indiscernible] or they're firm of the [ world ], all of them are selling [ EBITDA ]. The point being is -- and I will hand it over to you, [indiscernible]. On the investment grade, the word is [indiscernible] Every insurance company in the world is growing a lot of money on it, never been any issues you are talking about a spread of 150 basis points to 200 basis points over the [indiscernible], very, very efficient.

On the [indiscernible],but our [indiscernible] And we are [indiscernible] the process of funding of one main firm and many [indiscernible] It actually having a much more robust [indiscernible] to be able to propel [indiscernible] higher asset income, very [indiscernible] than people can. And number two, [indiscernible] of capital, allowing you to be more competitive and therefore to get the best of investments. That [indiscernible] utilizing this cash is actually going to invest in a special part of the capital stack that is not exactly [indiscernible],and you are creating a much more stable company for the long-term vision and the ability to compare them over time over and over and the high on the part [indiscernible]

And you're also improving the overall structure that's been strengthened in the [ ABS ] market, making that asset more liquid, more fungible and more than [indiscernible]

And the last [indiscernible], I would say the people, again, [indiscernible]. A lot of the positions that we have put on the balance sheet in [indiscernible] After 2 years, you can resecuritize it and spend the risk retention, or we securitize. It's not there to do that already in the market, and that's starting to get our cash. Next year, there is another source of [indiscernible], but [indiscernible] from good performance leading indicators that are coming and being moved from acquisition on the balance sheet.

That cash too is going to be invested into reducing the [indiscernible].

The things that were challenging from a fair value mark in previous -- once that starts coming to mature, there's got to be recoveries that [indiscernible] that's the [indiscernible] So you expect at some point in the future, maybe in the next 12 to 24 months?

3 months in Q1, we'll start seeing because the vintage of the '24 they're going to mature from the risk securitization time [indiscernible] So in '26, we're going to start seeing cash that we can take out of the residuals and part that are moving to cash are going to still keep on the balance sheet as they [indiscernible]

That doesn't go into the normal [indiscernible]

It's on that [indiscernible] accounting. It's not [indiscernible]

Right. So your cash flow will be just as important story going forward. I mean [indiscernible] cash more...

We are now already, if you look on all the required [indiscernible] said before, we are [indiscernible] We're generating cash. [indiscernible] taking this additional cash, we need to focus capital on the balance sheet by holding more of the base and things that never have been [indiscernible].

Let's talk a little bit. I know we talked about earlier in the year. Obviously, you guys got this great post screening solution, maybe [indiscernible] right? And now you have the opportunity to move it to be in front of the street for a lot of your partners. What's driving the motivation there? When do you think the opportunity?

So if you think about for every [ legacy ] business in lending, what are the biggest driver of value [indiscernible] someone an loans, performing well, and then you want to go to the either second [indiscernible] refinance of the [indiscernible] in a different set. The [indiscernible] engine for us is the way for us to help the members, to prevent more lifetime value from the customers, the ones that were being give customers in the past, or they went to their website and was almost economy customer. Which means the marketing cost is already done.

And now when you do a targeted approach to them -- and it's a different type of [indiscernible]. The fact is, how do I give you the right offer that you want to expedite and how I know pricing well that you're not going to go to somewhere else, and that may cost you money, or through the app or whatever, I need to do it as expected as [indiscernible]. So what we're starting to do, and rather effective, is the screen all the historical customers that [indiscernible] had on [indiscernible] whatever and say there is actually 100,000 customers when you want to name them and you make the loan. [indiscernible] it's powered on, and we do the split, it's good for them. More client interaction. More customer. More [indiscernible] time value and more good determined customers to us.

The end zone is that will become 25% of our production because the normal B2C 25% to 30% [indiscernible] we need to solve whether they're coming in to the partner and what's there and what's there. But the beauty is that the reason why we [indiscernible] opportunity because we saw many customers.

You have a referral base there.

You can't run [indiscernible]. So you're like, okay, they are looking to doing it, and they're looking to do it in [indiscernible] speaking about time. But now we have a group product. You come in and [indiscernible] you come in, you come in and then you have 5 [indiscernible] that product.

The vision of this in the future is, okay, now we have [indiscernible] Actually, the over [indiscernible] actively the [indiscernible] persoal loan. More likely than not, I'm not speaking on the [indiscernible] they have been dying to do a person along for a [indiscernible], but they say don't in the investment [indiscernible] models and stuff, but we can be a plug and play, not [indiscernible] that is happening today and unity to drive that value rather quickly, taking on the service only to take. [indiscernible] We're going to do it, increase the lifetime by increasing engagement with the customers. So -- and that is a little bit our strategy.

So we are developing these [indiscernible]. The [indiscernible] becomes a very [indiscernible] Think about the credit metrics for all the products. Auto, PL, creditors [indiscernible]. And then the credit spectrum, 800 to [indiscernible] A perfect organization in lending is the one that has all of this, all of the set calls or actually they're not getting more than all [indiscernible]

Thank you.

[indiscernible] you're asking the question of what the organization doesn't have and how you [indiscernible] to that and you help [indiscernible] And because it has [indiscernible], they don't [indiscernible], but [indiscernible] with. So pointing is super regional or different parts. And if you think [indiscernible], by the way, the [indiscernible] has been, right, the state with a [indiscernible] they do the steps. We are taking that capability. I think.

And you can drive that externally in a partnership kind of framework rather than having build be responsible for the whole [indiscernible]

[indiscernible] partner on [indiscernible]

Are the unit economics any different [indiscernible] stores

Good [indiscernible] but just giving you a valid proposition to the partner, if you just become a whole lot [indiscernible] That's the cost of the bigger business.

I got it. I got it. That is fascinating. Let's -- I think we have to address this. Obviously, you had a successful bond raise this year. Just curious if you could talk a little bit about the guys on funding needs, on capital allocation, how should investors think about the company's strategy in front of the mix going forward?

Yes. So I think you should expect for us to increase the [indiscernible], but not more than 50%. The market is not [indiscernible] that. We don't have that many [indiscernible] you have good, big names, but you don't want to be overly levered to one brand. So 40%, 50% is a good mix. So we have to do that in the POS. We need to move in [indiscernible] more to auto in the [indiscernible], and that's part of the planning session expect to yield more than that. Not more on that than us.

And then the two other [indiscernible] while it was in -- we were very successful in opening every [indiscernible] capital market [indiscernible] and from a funding perspective and equity and converts no need for free cash. So for a new [indiscernible], so we're not going to raise any need instruments later that's out of the picture [indiscernible] has been the days of building that, but it's not in the cards anymore, and we are trying to build the value. So that's part of the [indiscernible].

On the other pieces of creating much more efficient funding on the high [ end ], we will look to increase the rating over time. How did that net income explain into that and the to hold more on your balance sheet, it is part of the game. How you keep the cash profile to be as [indiscernible] that you're building that, point number one.

Point number two is on the [ ABS ] is how we continue to propel more and more partnerships, to be more efficient than on that because. We don't have a major rating agency yet, like the [indiscernible] and the S&P. That's the next step on the ABS side. It's now on the corporate side, which is a very big jump, very helpful, de-rated, strong [indiscernible] is understanding, but the next level of that will be how we take it to the asset side to continue to compress the spreads to continue to be more big [indiscernible]

And by the way, we [indiscernible] S&P's Analyst Day, and they're talking -- they're coming to [indiscernible]

All the way. Right. And it's an interesting conversion end as well [indiscernible] I think the bottom line is, like I said about the [ metric ] before on the lending side, the metrics of IG, non IG, private public is all corporate, noncorporate, on balance sheet of balance sheet is all open for us. And we are trying to optimize in between this business.

IG, the most optimal cases from the ABS side, the [indiscernible] corporate to the [indiscernible] flows on the other [indiscernible]

Where you can make a difference.

[indiscernible] control. Right.

We have 1 minute and 51 seconds left. What's Pagaya's [indiscernible]

[indiscernible] is the leading technology company [indiscernible] lenders for hard problems, labeling [indiscernible] the best version of the spend, their customers any [indiscernible] spectrum in market as a [indiscernible] and [indiscernible]

Can Pagaya be replicated?

[indiscernible] It helps [indiscernible] fill [indiscernible] going to be very tough and [indiscernible] them the one in there.

And at the same time, it sounds like you're more on mission [indiscernible]

[indiscernible] to the enterprise level, the going deep giving our customers, the active [indiscernible]. They're our lifeline, [indiscernible] them. We love them. We learn so much from the every way, and we are enjoying [indiscernible]

What the pipeline looks like over the next 12 months? Do you feel like you're getting more bandwidth from the biggest gain prospect, [indiscernible]

[indiscernible] market treatment [indiscernible] first, first focus we up and running, and then we have a [indiscernible] we do see [indiscernible].

Do you feel like you have the full suite right now. You can go full force into to [indiscernible] or the partner very [indiscernible] It is [indiscernible].

And you sell into for any [indiscernible]

Yes. Well, thank you so much, Gal. That was super insightful. Great summary of what's going on. Very exciting time for the [indiscernible]. Thank you so much. Thank you. Thanks, everyone.

Greetings. Welcome to Pagaya's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Josh Fagen, Head of Investor Relations. Thank you. You may begin.

Thank you, and welcome to Pagaya's Third Quarter 2025 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; and Evangelos Perros, Chief Financial Officer. You can find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pagaya.com.

Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the fourth quarter and full year of 2025. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC including our 10-K, 10-Q and other reports for a more detailed discussion of these factors.

Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income revenue less production costs or FRLPC, FRLPC percentage of network volume and core operating expenses will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials, which are posted on our Investor Relations website. We encourage you to review the shareholder letter which is furnished with the SEC on Form 8-K today for detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release.

With that, let me turn the call over to Gal.

Thank you, and welcome, everyone. Our third quarter results demonstrate continued execution against our long-term operational and financial goals. We are nearing the end of the year for Pagaya, where not only have we achieved consistent GAAP net income profitability, but raised it again to an exit rate of over $120 million on an annual basis. Most importantly, the results demonstrate the momentum and strength of our platform with diverse and high-quality revenue drivers and the stability of our unit economics and our very deliberate and responsible approach towards scaling in a complex environment. The outcome is a through the cycle business, consistently growing with minimal investments for years to come.

After laying the groundwork through disciplined optimization and capital efficiency earlier in the year, we have shifted our focus to product-led growth. In short, the next 18 months will be all about affecting our products and our solutions to ensure we solve the fundamental challenges facing lenders and consumers. Our value proposition remains the same: helping lenders serve more customers. As partners recognize the increasing value of our platform, existing partners deepen their engagement while new partners join the network.

Our ability to design these products is truly unique. It is rooted in our vast data network, a core advantage for Pagaya. We embed data and machine learning as a backbone of our offering across the entire lending funnel. From verification to underwriting, and is far up the funnel as affiliate channels optimizations. This creates unparalleled optimizations for lenders and investors. I'm very proud to announce that we have now the highest number of partners in our onboarding queue on the history of Pagaya. We are in the process of onboarding up to 8 partners across all of our asset classes, ranging from fintechs to banks.

Inclusive of the 2 partners that were added this quarter, we now have a robust queue that is set for the next 12 months. In addition to the progress we have made in lending new partners, we have continued to refine our product strategy by listening to our partners ensuring we meet their needs with our product suite. Just this quarter, in the course of our regular ongoing meetings, Sanjiv and I met with many of our partners and prospects to truly understand their growth and value drivers and to continue to progress our products towards these needs.

Starting for the needs of our partners, improves our product ecosystem and solving for product effectiveness and hence every partner relationship in return, further propelling our flywheel. In short, the more value we add for partners, the more deeply they engage with our products and solutions, which in turn provides more opportunity to add value. Sanjiv will discuss later how we are evolving into a best-in-class B2B enterprise, growing our key partners to $1 billion relationships and locking in our commercial terms through multiyear contracts.

This will continue to define Pagaya's next chapter and accelerated our journey to become a necessary utility for every lender in the U.S. As we continue to mature and diversify our funding network, demand for our assets remain consistent and robust. During the third quarter, we issued $1.8 billion in our ABS program across 4 transactions, which were marketed to our network of more than 150 institutional funding partners. Outside of our ongoing core funding mechanism, we announced our first out of forward flow and strategic funding on residual certificates. The momentum on the corporate funding side is just as notable. We were rated by all 3 major credit rating agencies and raised $500 million in corporate debt. In addition, we expanded our corporate revolver with 4 new major banks at a significant lower cost, boosting our capital efficiency. Together, we continue to diversify our source of capital while improving efficiency across our funding and corporate capital structures.

We reached consistent profitability and record quarterly network volume of $2.8 billion, with sequential application flow growth of 12%, showcasing the continued growth of our network. Our growth is strong and increasingly diversified with POS and auto representing 32% of total volume versus 9% in the same quarter just a year ago. We are expanding existing partner relationships across our growing set of products and growing excess from newer partners. This disciplined growth is demonstrated through our steady application to funding conversion, which has remained at 1%. At the same time, we continue to drive new high potential partnerships to the platform. And across all of these segments, we see our network effect compounds.

We have an opportunity to truly reimagine the way consumer credit works as we build a platform that connects lenders with better data, more automation and smarter decisions. This enhances and accelerates our ability to generate the assets that best means the need of our investors, in line with our balanced approach towards long-term profitability and resilience.

Our goal is to be the plug-and-play solution for lenders gap in credit, spanning risk deals and asset types all delivered in a seamless white label solution powering the next generation of lending. We are extremely proud of how far we have come and ask you to stay tuned on what is on the horizon. The journey is long, will be innovated for consumers, partners and investors.

With that, I would like to hand it off to Sanjiv for a review of our operating business and more on our product-led growth strategy.

Thank you, Gal. Pagaya's growth continues to be driven by disciplined expansion with existing partners as well as addition of new partners to the platform. We are continuing to strengthen our business by institutionalizing our relationships with lending partners using best practice B2B disciplines such as long-term agreements and product and fee agreements while ensuring responsible underwriting and risk management using consumer credit disciplines.

Let me first provide an update on existing partners. Just to remind you, Pagaya currently has 31 lending partners on its platform. Our relevance among our existing partners remains extremely high. Banks and fintechs are increasingly focused on consumer growth, customer retention and maximizing customer lifetime value. Pagaya continues to solve for what lenders care about most, while providing efficient capital markets execution and driving fee income growth for our partners.

We achieved our growth of growing 5 accounts to over $1 billion relationships driven by multiple product adoption by our partners as well as expanded access to their application flow. Our existing lending partners are at varying stages of maturity with Pagaya. We define the level of partner maturity with us based on the number of Pagaya products that partners adopt which eventually drives the volumes on our platform.

As one would expect, the partner life cycle with Pagaya includes onboarding, ramp-up, scaling with decline monetization and eventually expansion across our products. Our multiproduct partners are leveraging the full suite of our products from decline monetization to our direct marketing engine and affiliate optimizer engine in personal loans to fast pass and do a look in auto.

Multiproduct expansion enables our partners to significantly grow volume, fee revenue, incremental new customers and long-term value from existing customers. A number of our personal loan and auto partners are currently expanding into Pagaya's products.

Let me pivot for a second and give you a product view of our business in addition to the partner view you just heard. Products above and beyond decline monetization are already contributing significantly to Pagaya's volume and revenue. In personal loans, approximately half our current volumes already come from products other than decline monetization.

Let's take the affiliate optimizer engine as an example. Pagaya has been enabling our partners to originate loans in the affiliate channels such as Credit Karma, LendingTree, Experian and others for many years now. But last year, we productized affiliate channels separately and commercialized this offering as a standalone affiliate optimizer engine product. We are currently rolling it out across all our partners that are at scale with our decline monetization product.

And we are increasingly seeing that partners have successfully leveraged affiliates to scale their credit card businesses are now starting to use affiliates to grow in personal loans by adopting Pagaya's affiliate optimizer engine. Becoming multiproduct presents a significant growth opportunity for partners who are currently only leveraging a decline monetization program. In fact, while multiproduct partners represent only 30% of Pagaya's partners by number, their contribution to our volume is more than 2/3. So the more products that partners have with Pagaya, the more volume, the more revenue, new customers and lifetime value they get from the partnership. This underscores the notable organic same-store growth opportunity ahead for Pagaya for its 31 partners.

Similar to our affiliate optimizer engine, our direct marketing engine offers our partners the ability to grow their business by leveraging our response engine to book new personal loans while providing them with the same superior capital markets execution.

Now a very quick update on our new partners. We are currently seeing the highest number of partners in onboarding in Pagaya's history. Pagaya's new partner onboarding now includes prebuilt integration for all the products I just described. For example, pre-integration with Credit Karma, pre-integration with Experian and so on, along with decline monetization capabilities. This significantly accelerates scaling and unlocks more value for our partners sooner.

Partners currently in onboarding represent a mix of all 3 Pagaya asset classes, as in personal loans, auto and point-of-sale and include leading banks and fintechs. For the banks, the focus continues to shift towards growth against the backdrop of a more favorable regulatory environment. As they do, they are increasingly focused on building and scaling personal loans, auto and POS franchises. It presents a growth opportunity for Pagaya's bank-ready platform that has been tested and scaled with U.S. Bank, Ally and others.

I'd like to take a moment to review each of our loan categories, their performance during the quarter and going forward. As discussed before, in personal loans, we continue penetrating deeper into our existing partner base as they adopt our products, while simultaneously ramping up volumes at partners we have already onboarded in the last 12 to 18 months. On the funding side of personal loans, we are still the largest ABS issuer, while also continuing to successfully diversify into forward flow agreements.

Point-of-sale continues to make notable progress on both sides of the network. While still a relatively newer business, we have been able to quickly grow annualized POS volumes to about $1.4 billion from -- up from $1.2 billion last quarter.

On the funding side, we closed our second AAA rated POSH ABS offering in November, underscoring the demand and performance of our POS ABS shelf. In auto, annualized auto volumes grew to $2.2 billion, up from $2 billion last quarter. This quarter's announcements underscore several examples of the strength and performance of our auto franchise, including the sale of the residual certificates to One William Street in our latest RPM deal and our inaugural auto forward flow agreement with Castlelake, which we announced last week.

Before closing, I will touch briefly on our response to the macro economy, credit and risk. As Gal mentioned, not much has changed for Pagaya with respect to the consumer credit performance and lending partner actions. Despite that, we continue to build a robust through-the-cycle business by staying disciplined on consumer credit and long-term commercial agreements with partners. We know that the institutional franchise that we are building can mitigate normal business cycle fluctuations. This management team has done this before in highly cyclical consumer credit businesses and is confident that can do it again. With disciplined growth, we remain fully committed to our mission to help bridge Wall Street to Main Street for the long term.

And now it's my pleasure to turn the call over to EP to cover the quarter's financial results and outlook.

Thank you, Sanjiv. The results of our third quarter earnings demonstrate steady and sustainable growth and most importantly, growing profitability. Network volume grew 19% year-over-year to a record $2.8 billion, led by 31% growth in personal loans. Application to funded conversion held firm at 1%, reflecting disciplined underwriting. We expect conversion rates to remain stable as we focus on prudent profitable growth through the cycle.

Total revenue and other income rose 36% to a record $350 million driven by fee revenue growth outpacing volume. The outperformance of revenue growth versus volume growth is a strong indicator of our ability to monetize our volume and reflects the value added to our partner network. FRLPC increased 39% to $139 million, reaching 5% of network volume up 70 basis points year-over-year, a clear signal of monetization efficiency and in line with the financial strategy we launched in early 2024 to focus on improving unit economics.

We expect FRLPC as a percent of volume to normalize within the 4% to 5% range as we scale into POS and diversify our funding. In this year, we have shifted our focus on driving consistent and sustainable total FRLPC growth in dollar terms. Adjusted EBITDA increased 91% to a record $107 million, with margins expanding 9 points to 30.6%, fueled by strong fee growth and disciplined expense management.

Core OpEx dropped to 34% of FRLPC, the lowest since going public. Incremental adjusted EBITDA margin represented more than 100% of FRLPC growth in the third quarter. Operating income climbed 257% to $80 million, and operating cash flow hit a record $67 million, exceeding outflows for investments.

GAAP net income of $23 million represented our third consecutive positive quarter and improved from a net loss of $67 million in third quarter '24, fueled by 36% revenue growth, lower operating expenses and lower impairments. This equated to a 6% margin as compared to 5% margin last quarter and negative 26% in the year ago quarter.

We are also enhancing transparency in our disclosure by introducing a new reporting line called gains and losses on investments in loans and securities. This new line includes gains and losses on investments which were previously included in other expense net.

In the third quarter, credit-related fair value adjustments reported in this new line totaled a $20 million loss versus $14 million in the prior quarter and $78 million in the prior year quarter.

Interest expense fell to $22 million, down $1 million sequentially and should decline further as the benefits of our unsecured loan refinancing fully phasing driving $12 million in annualized interest savings and $14 million in added cash flow.

Third quarter GAAP net income included the negative impact of several nonoperating and nonrecurring items. We incurred a onetime $25 million in costs associated with the issuance of our corporate bond and early retirement of existing debt. In addition, we recorded a noncash warrant expense of $5 million. Partially offsetting these 1 items, we recorded a onetime tax-related benefit of $20 million. Share-based compensation expense of $14 million was up $1 million year-over-year and down $5 million from last quarter and is expected to remain broadly at those levels.

Turning to credit. Performance is in line with expectations across personal loans, auto and POS and remains within our disciplined risk tolerance, also evident by the robust demand we see across all our asset classes from institutional investors willing to underwrite our production at increasingly higher levels. We appreciate the increased investor attention around credit across financials, so I will spend a bit more time covering this today.

Macro trends and overall consumer behavior remains healthy, and we continue to monitor closely through the data advantage we have of working with 31 different partners across multiple asset classes. We're always ready to shift if and when needed.

Let me give you some perspective on how our credit positioning has evolved. As you may recall, during 2024, our credit performance was driven by a sharp focus on achieving consistent through-the-cycle GAAP profitability. In addition, since the beginning of this year, we have been benefiting from our positioning to reflect protracted volatility and uncertainty. This is largely Pagaya can afford given our GAAP net income profitability and our commitment to deliver sustainable growth and not just growth at any cost. This positioning means that we have been underwriting with a cushion against the market and running the business in that way while benefiting from the lower cost of capital. And from investors' point of view, we have been assuming future losses in our guidance, as shown in our earnings supplement.

Turning to some performance metrics. Our personal loan cumulative net losses across 2024 quarterly vintages are trending approximately 35% to 40% lower than peak levels in the fourth quarter of 2021 and at month on book 8 to 17.

Auto production continues to deliver strong performance, evident by the investor demand for auto ABS, the first sale of our certificates since 2021 and our inaugural auto forward flow. Auto loan C&Ls across quarterly 2024 vintages are trending approximately 50% to 65% lower than levels during comparable 2022 period at month on book 9 to 18. 60 classics across 2025 vintages are higher when compared to 2024 levels and lower relative to 2023 levels and well within our expectation.

Offsetting this, 2025 net recoveries and roll rates are trending significantly better than 2023 and 2024 vintages, driving the strong performance. For POS, credit trends remained stable and in line with expectations, validated by the continued strong demand we see for this product from our funding partners. Overall funding continues to be robust with a focus on improved efficiency and diversification.

During the third quarter, we issued $1.8 billion in our ABS programs across 4 transactions. Last week, we announced our inaugural $500 million auto forward flow agreement with Castlelake, expanding our relationship into 2 asset classes. Additionally, in early October, after the quarter, we closed a $400 million RPM auto transaction, which includes the sale of the residual certificate to strategic funding partner, One William Street Capital Management. And last week, we closed our second POS ABS transaction, which was oversubscribed. This underscores the attractiveness of Pagaya's assets as we grow our auto and POS product offering.

Turning to our balance sheet. We ended the quarter with $265 million in cash and cash equivalents and $888 million of investments in loan and securities. We completed a $500 million senior unsecured notes offering that reduced our cost of capital by approximately 2 full percentage points to 9%. As part of the refinancing of higher cost facilities, we bolstered our corporate liquidity with a release of over $100 million in highly liquid collateral. After the quarter, we announced an expansion of our existing revolving credit facility with 4 new bank partners as well as expanded commitments from our prior 4 existing lenders. This lowered the facility interest rate by nearly 35% to SOFR plus 350. After this expansion, substantially all of Pagaya's corporate borrowings are now at or below the high-yield bond coupon of 8.875%.

In the third quarter, the fair value of the overall investment portfolio and allowances, net of noncontrolling interest and prior to any new additions, was adjusted downward by $32 million versus $20 million last quarter. We also added $38 million of new investments in loan and securities net of paydowns from prior investments majority of which is our required risk retention related to our ABS securitizations.

As provided in our supplemental filing this morning, we maintained our scenario A illustrative assumption of $100 million to $150 million in rolling 12 months forward credit-related impairments, which is reflected in our guidance.

Now let me turn to our updated outlook. Our full year 2025 outlook reflects the momentum and resilience in our business to date and our unique operating leverage while maintaining our cautious stance given the protracted volatility. Key drivers include consistent levels of personal loan production and continued growth in auto and POS products. We continue to expect FRLPC to grow steadily in dollar terms and rates between 4% to 5% as a percent of network volume for the year versus staying at the levels of this past quarter.

Profitability trends will reflect continued scale and operating leverage. Our guidance continues to reflect potential scenarios related to future credit-related impairments, if any, as laid out in our earnings supplement, which imply a range of $25 million to $37.5 million per quarter over a rolling 12-month period.

Core OpEx is expected to be slightly elevated in the fourth quarter as a result of higher funding issuance. Interest expense is projected to trend lower as a result of the recent refinancing notes transaction. For the full year, we're updating our expected network volume to a range of $10.5 billion to $10.75 billion, total revenue and other income in the range of $1.3 billion to $1,325 million and adjusted EBITDA in the range of $372 million to $382 million. We are increasing our GAAP net income for the year to a range of $72 million to $82 million.

With that, let me turn it back to the operator for Q&A.

[Operator Instructions] Our first question is from John Hecht with Jefferies.

Congratulations on a good quarter. You gave a lot of detail around credit, but I'm wondering if we could just some step back maybe Gal, if you look at the different products, you're different, maybe different income ranges within the programs and so forth. Can you maybe give us your perspective on credit quality now and the consumers and borrowers' ability to manage their credits?

Yes. Thanks, John. I'll start. So credit -- like Pagaya's credit is performing well and well within our expectations. And I think the important thing here is that this is not an accident. We appreciate, obviously, the focus on credit performance over the last few weeks or months. But I want to remind everyone that we have taken a very balanced and conservative approach on our underwriting, since the beginning of the year.

We're very pleased with the disciplined approach that we have been doing in our underwriting and what -- how that has reflected in our performance. Interestingly, like during the last few months, people have been asking us why we don't grow faster? Well, this is exactly the reason, right? We have been positioning well for anticipating more volatility, more uncertainty and how that could potentially have any impact on the consumer.

So we're benefiting from that sort of positioning. And I would highlight we're quite unique in our ability to do so. Why? We're a B2B company. We have the highest fee rates, fee margins. You see how FRLPC has been growing. We have the most diverse partners and more importantly, very excited about the partners that are coming in our own board in queue and all of that translating to profitability, which allows us to be positioning the way we have over the last multiple quarters.

And not -- to remind everyone, a lot of that we have already reflected in our guidance as potential impairments down the line. So we don't see any reason for us, obviously, based on anything to deviate from that approach and obviously, the provided guidance. I don't know, Gal, if you want to add anything?

Yes. So John, I think -- thank you for your question. And I think putting that question in perspective, that's what is important for us on this call. The way I want -- I want you to think about it or at least the way we think about it is that in the context of our business model, it's really relatively easier to manage the credit side of the business. So think about it from a very high level, and as you can imagine, this is more a philosophical question. This is built in a way and for a reason in how we like to run our business, which shows the B2B versus B2C in consumer credit approach.

Although as you can imagine, in the early days, it was the least straightforward decision. But the reason we chose it usually is B2C lenders have very strong correlation between marketing spend and approval rate increasing. And therefore, they are growing with the cycle. So they need to have good days to be able to approve more and therefore, spend more, and that's how they are growing. But the same phenomena as the other side of it, when the cycle show weakness, you expect a good B2C and most of our partners are like that to reduce approval rates, and therefore, you will see less firepower to spend on marketing power.

And the result, as you can imagine, is much lower growth rate. All of this to say that credit is a super crucial backbone in the B2C organization ability to grow, especially in an increasing competitive world. And while I know many of our investors still think of us as another B2C organization because we deal with consumer credit, the reality that this is far from the truth. So when we designed the company, which is expanding, as you know, through more partners and products, i.e., the B2B concept of consumer credit was purposely designed to reduce the level of fluctuation over the cycle because we do not have marketing spend that moves up and down with approval rates.

Now none of that to say that we are immune, we are not immune to the cycle. And therefore, we are very closely monitoring, but remember that we have entered this year with a very tight thinking around it. So the sector is rightfully focusing here in general, but we do want to highlight that the relative impact from changes in consumer credit behavior on Pagaya is much more muted. So we are trying to solve for a specific -- we're not trying to solve for a specific growth rate in a specific quarter. The long term is what matters for us, and that leads to a high ability and degree of discipline over quarters.

Our next question is from Peter Christiansen with Citi.

Nice performance here. Gal, EP did a good job, I think, talking about collateral performance, looking pretty good there. I'm just curious with a lot of successful ABS issuances this year so far, I think a lot of them oversubscribed. Can you talk to maybe how risk retention may have changed or your strategy there, how it could evolve over the coming months, given the environment that we're in today? And how do you foresee that potentially changing should the market start showing any signs of increased volatility, as you mentioned?

Great. Thanks, Pete. I mean, look, you can see when it comes to the demand for Pagaya origination continues to be very robust and actually improving. If I take you back, call it, a year ago or so, remember, we're 100% ABS funded since then, we have really diversified our funding currently across all our products, we're approximately at that 60%, 40% mark between, call it, ABS and the other structures like forward flows and pass-throughs and things like that. You saw a couple of announcement where we sold our certificate actually in our recent RPM deal, which was the first time since 2021.

And at the same time, since then, again, let's not lose sight of the fact that our ABS now has a true play across all our products. So always keep in mind how that has evolved over time to our benefit. And obviously, given the scale that we have, people were worried the same thing back in April when tariffs came along and then we managed to absorb and actually do most of our -- some of their highest issuance back then.

Still, we have very strong funding, as I said, diversified funding and funding sort of expertise across the different products. And given where we are as a business, more importantly, from a cash flow generation perspective, if things move for whatever reason against the risk retention, if we need to put in more of that, we're best positions in our history to actually do that. So we're not worried about managing that through the cycle.

And then finally, can you just talk about your forward full pipeline? I mean, obviously, you're adding a lot more partners here. That looks really encouraging. But from your flow partners, whether existing or potentially new, can you speak to that and whether or not you're seeing increased traction there?

Yes. I think the traction is evident by what we have delivered already. You see how we have moved from just personal loan forward flows now to auto forward flow. And we'll continue to see traction across all our products. The next level of diversification, I would say, is now actually bringing more partners with which we do forward flows, and we're on track to deliver that as well, while maintaining sort of that view that we should get to that, call it, 50%, 50% mix between, call it, ABS and other structures like the forward flows.

Our next question is from Hal Goetsch with B. Riley Securities.

My question is for all, Gal, seen a lot of other consumer lenders report, but they're mostly consumer-facing B2C channel have to spend a lot to get new customers. Could you just remind us how different your model is on the B2B2C level? .

Yes, definitely, Hal. Thank you very much for the question. So I will start with a little bit high level and then Sanjiv will take it further to speak about the onboarding stages and the different parts. So I'll with the statement, as we said, we do have the biggest number of partners in the queue ever. But I think the real question and interesting part is how we got there.

So step back, think about the fact that we have been really focusing in the last year is to perfect our value proposition and the product suits behind it. So that a new partner considering Pagaya should be very clear for them, for him, how the partnership with Pagaya is becoming a meaningful contributor for them over the 2, 3 years after going live.

While we have a very clear value proposition, we did, I think, a better job in defining the different parts of the product and to be able to show to the partners, what is the sequencing of ramping them as Sanjiv has explained in the call and the ability to take partners to the first decline monetization product and therefore, a few others that you have a very clear and precise 18 months plan of how we roll out the different products to get them access to all of their Pagaya products over time.

Now that is creating a very clear concise target of at least $1 billion of origination already in year 2 or 3 for many of these potential partners. And the combination, for example, in the personal loan space, between the decline amortization and the prescreen or in the auto, the decline monetization and the fast pass is really becoming something that is how to resist from a partner perspective, and therefore, they are investing the time, the engagement, the tech, and we see the growth in the onboarding queue.

Last sentence before I'm handing it over to Sanjiv to speak more specific. I will say that the point in the cycle where lenders are looking to ramp up their growth and looking to become more on the offense rather than on the defense, call it, 2 years ago, combined with likely more attractive regulatory regime is actually bringing many more conversations to fruition and to actually acting on rather than an explanatory type of situation that was before. Sanjiv, maybe you want to share a little bit about the specifics of the parts?

Sure. I did want to say that to have a question between B2B and B2C. I did want to say that essentially, at its core, Carlos, you and I have talked about squarely a B2B business model. And how -- I mean the way we think about this is we are in the business of essentially growing the business of our lending partners. That's the business we're in.

And so we provide them the ability to approve more customers across the entire value chain through the Pagaya system or the Pagaya platform. So in that respect, we are more like a first data, which is, of course, now Fiserv where I worked for many years to establish the same B2B discipline that we are now instituting at Pagaya.

What that means is, Gal and I are very focused on establishing the disciplines of long-term agreements with our partners. The certainty of locking in predictable long-term fee contracts with top partners, clear rules of engagement around the new products that Gal described, which shared economics of growth, better focused on our partners' needs and what we see sort of uniformly demanded by partners across our lending platform. So it's very institutionalized. And just to be clear, we have started the process of B2B long-term contracts with our mega sort of billion-dollar partners that I described in the earlier script.

And it's been very well received. So our partners now clearly consider these institutionalized B2B relationships very valuable. They want certainty in the long-term Pagaya partnership as well, and we have now 3 to 5 contracts that are at fairly late stages of contracts under finalization. Having said that, where our B2B business sort of fits a little bit into some of the B2C disciplines is in risk management and consumer behavior, where we manage our business with the strict discipline, which I'm sure you know, given sort of the world-class consumer experience of this team, we have turned around highly cyclical consumer businesses several times. And this is something we believe we do quite well.

So essentially, that's what we're building, a solid B2B business with B2C disciplines, building it for the long term. We do not consider ourselves beholden to being flame of volume with credit expansion, we believe the right way to grow our volumes is to partner expansion and product expansion, which is what we talk a lot about today and in future intervals, essentially in a market that has a TAM of over $500 billion, of which we represent about $10 billion.

If I could ask one follow-up. You mentioned the most amount of partners in the queue. But I think, Sanjiv, you mentioned you've got a lot of technology kind of prebuilt that allows a much faster onboarding scaling. Could you just basically go over that again, describe what you've built and what will allow maybe next year to be one of your bigger years of onboarding?

Yes. So you're right. So let me answer your tech question first. Again, I'll go back to what Gal said. So what's happened, Hal is that we've built out all these products. The decline monetization product. In addition to that, we now have the direct marketing engine product, the affiliate optimization product in personal loans. And in auto, we have, in addition to decline monetization, we have FastPass and the develop program. So we're going further up the ecosystem. These products are now prebuilt and integrated into the Pagaya platform.

So now when we go and onboard a platform, these products are already there. And the partner literally has to turn them on. And we have back to the number of partners, we now have several new partners that we are currently onboarding and several more that we will onboard in the next quarter. These include a mix of all 3 asset classes that Pagaya represents today. So we have onboarding partners that are in personal loans, onboarding partners in auto and onboarding partners in point-of-sale. They include a couple of banks, including a major regional bank point-of-sale fintech institutions and auto monolines.

As we said, and I said this very proudly because it took us some time to sort of build the product -- a robust product proposition on our platform, we now have partners that are in our onboarding queue for the next 6 months that are truly the highest we've had in our history as again, as Gal mentioned, in fact, we totally know that we will achieve our guidance of 2 to 4 partners a year, both for 2025 and 2026 in the next 6 months.

I should also mention, Hal, that we are seeing very, very strong demand of cross-selling to existing partners that want to expand into other asset classes. So for example, right now, we have one of our biggest personal loan partners that wants to expand into POS. And they intend to be a very significant POS player. And we're already in the ecosystem. So we have those discussions, and we'll just expand with that.

Another major personal loans partner wants to expand into auto. And most interestingly, I should mention that a very significant auto partner wants to expand into our prescreen personal loans program, which we talked about before. So cross-selling across asset classes with our existing partners is truly becoming a strong value proposition in addition to onboarding new partners.

Our next question is from Rayna Kumar with Oppenheimer & Company.

Good results here. Could you talk a little bit about what you're seeing in the macro -- in macro in general? Just are you seeing any pockets of weakness or where are you seeing strength? .

Thank you for your question. This is Sanjiv. So as I think both EP and Gal mentioned, consumer performance has been very stable. EP said, our credit performance is in line with our expectations and then be the change. I'm sure you're all hearing this across the board for most lenders, and it's what we hear from most all lending partners whom we check in to the factors that we have 31 lending partners. So we have the benefit of talking to all 31, we also have the benefit of looking at 3 asset classes. So there's 1 deterioration in 1 asset class. It's clearly a signal for the others so we can take actions proactively.

But having said that, we are closely monitoring early stage credit performance for any downstream impact that we keep hearing about from or the macro in terms of inflation or the impact of tariffs. But so far [indiscernible]

And maybe I will add to that on the investor side, which is another part that could from a macro perspective impact. I think that putting the Liberation Day a little bit of like volatility aside. This year, demand for the different parts of the capital structure is very robust. So when we look on the -- in your -- the spread of the senior capital stack, it's actually been fairly steady throughout the year.

And on the junior business actually came a little bit even tighter, something like 50 basis points call in January, February versus now. There were points in the market of a little bit of overheating where people just wanted to deploy for the sake of deployment that went out, too. So a steady, healthy environment, which actually that's what we love. We prefer that on overheating or over cooling. So definitely, the trajectory of travel is something that we are feeling very confident in.

Our next question is from Kyle Joseph with Stephens.

You guys talked a lot about product expansion and the ability to cross-sell. But just thinking about you guys are in 3 asset classes and this might be longer term, but are there any other asset classes you could see yourselves expanding into over the years?

Kyle, it's Gal here. Thanks for the question. So I will tell you that this question is actually a question we are dealing a lot with and it has more philosophy rather than the specifics. So let me share with you a little bit how we think about it and the process of what we are seeing in reality. So when you think about what's the next so-called asset class, we prefer to call it market that we are looking to expand into. There are a few must-haves that we need to make sure we are feeling comfortable with before we are going down.

So the first one is that the time is big enough, that when we are doing that, that's actually going to be something that is meaningful, meaningful for us is things that we believe we can produce $2 billion to $3 billion in relatively short period of time, which you can think about it as [ 2, 3 yields ] tariff.

The second piece is we need to see the adaptation or the interest of more than 1 partner, more than 2 partners are actually going through this way because do remember that a lot of the operational heavy piece is not sitting within Pagaya, and therefore, we want to see the best-in-class business that are coming to that particular market.

So if you have only one partner that is doing very well, something, it's less interest for Pagaya, but if you will see a phenomena of 3 to 4 partners that are going into one direction, that's starting to become very interesting for us.

And then the third piece, it needs to be less cyclical or not cyclical. So anything which we believe that is a little bit more cyclical because of relativity of high sensitivity to interest rate like home equity or refi, auto, things that we might do a little bit, but not something that will put all of the -- what we call the Pagaya machine behind because when it takes something to build a year or 2 or 3 and then you're over the cycle, what's the point, right? We are not a trading shop, we are a technology business.

And the reality is that to choose it, you need to have a very strong understanding of the financial piece, but in the same time, the understanding of the tech piece of what do they take to build and where is your -- where is your actually. So in general, I would say that these are the things that are driving our decisions. Specifically to what we see with the partners, and Sanjiv, I don't know if you want to add any more after that just given the very high level.

Home improvement is starting to be something that we feel is gaining some traction. We see a few partners that are going to adopt and to do that, and therefore, potentially a candidate in the future to think on that. Obviously, we need to see that partners are doing it and doing it properly and to a major scale. But I think the bigger picture is really that the opportunities that are front of us is really all the consumer credit per se. And as we see things that are sticking going and becoming meaningful, you should expect that Pagaya will participate in that capacity rather early on after that's becoming to be institutional.

Sanjiv, do you have anything to add?

No, just to reinforce what you just said, Gal, which is essentially being very, very disciplined around the criteria that our partners up or the market demands. And we are seeing some very consistent stable demand across some of the product that you talked about. And -- but we follow a very strict discipline of making sure the TAM is there, the through the cycle performance is there and there's robust investor demand for those kinds of assets, and they are consistent with what. Certainly, home improvement record stand up. But having said that, with the new regulatory environment as you mentioned Gal earlier, there's a lot of demand for our existing products from new players, banks, in general, are sort of leaning in to growth. So we are seeing a very strong demand to stand up brand-new personal loans programs for banks, standup brand new personal loan we so many of the online very successful monolines. So the focus on the existing business itself, I think it demands a lot of our attention.

We have reached our -- the end of our question-and-answer session. I would like to turn the conference back over to Gal Krubiner for closing remarks.

So thank you, everyone, for joining us today. As you can see, this quarter record results are truly starting to reflect the benefits of the B2B business model that we also out to build increasingly diversified growth drivers, responsible and disciplined underwriting, a highly diversified partner and funding mechanism, all with the increasing efficient capital and operating structure that we have. The result is through the cycle stable growth and increasing profitability. I'm even more excited about the long term as we enter our next stage of the long-term growth.

We have optimized and perfect our product suite and value proposition to maximize the value we provide to partners. We are defining and accelerating our tailored multiproduct road map for B2C financial institutions from day one. This underscores the organic opportunity for our B2B solutions and has driven a record number of partners in our onboarding pipeline. We remain laser focused on the long-term potential of Pagaya and look forward to sharing progress with you over the coming years. Thank you very much, everyone.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.