Pagaya's 1Q24 Letter to Shareholders

This morning, we presented our record 1Q24 results. Here is our letter to shareholders.

We delivered our fifth consecutive quarter of growth across our key metrics, with another record-setting quarter of network volume, total revenue and adjusted EBITDA. These results reflect consistent execution of our strategy as we continue to build the infrastructure to enable more financial opportunity for borrowers on our network.

We’re continuously proving the strength of our core value proposition. This is reflected in the expansion of our network with the country’s top banks, the increasing fees we’re earning from our lending partners, and an expanding funding network composed of the world’s top asset managers.

• Unmatched value proposition to banks: Adding Elavon to our network in just one quarter after announcing U.S. Bank is proof of the growing demand for our product and the speed at which we can add value across a lender’s business.

• Accelerating fee generation: We delivered our highest FRLPC margin in eight quarters at 3.8% and we continue to drive further monetization across our lending network. FRLPC growth is translating to our bottom line with operating leverage - our adjusted EBITDA hit a record high of $40 million this quarter.

• Extensive funding network and access to capital: We added another 18 large asset managers and insurance companies to our network this quarter, and raised a record $1.9 billion in funding even in a tough market environment.

In our very first quarter reporting as a public company in 2022, we spoke about our strategy to partner with large enterprise lenders. That strategy has succeeded well beyond my initial expectations. Simply said, we provide a completely unique offering to banks that creates real value immediately. I can now state with conviction, with three of the largest banks in the country utilizing our product and many of the top 25 banks in the U.S. in our sales pipeline, that our strategy is working and there’s a lot more to come as we expand our product ecosystem.

Executing on our 2024 Growth Plan

Expanding our product to more enterprise lenders

We have a robust pipeline of enterprise-grade lenders, reflecting strong demand for the one-ofa-kind product we offer. Our focus is to continue to expand our network to position our business for long-term future growth, prioritizing lending partners that deliver the right level of scale and returns for our funding investors.

In our deep funnel - lenders in the later stages of our sales cycle- we have 6 large prospective lending partners across our major verticals (personal loan, auto and POS). We continue to advance discussions with top banks across verticals, while advancing early-stage discussions with payments companies and banks in our POS vertical.

Each of these partners would represent connections to millions of new customers and the opportunity to expand across multiple products, while driving significant upside to our bottom line.

Deepening existing partnerships & enhancing network monetization

We continue to improve unit economics as we scale our lending product. In the first quarter, FRLPC was up 84% year-over-year to deliver an FRLPC margin of 3.8%, the highest level since the beginning of the rate hike cycle in early 2022.

Our average FRLPC margin for our personal loan business, our largest product, more than doubled year-over-year. This growth reflects our ability to extract improved unit economics as we scale our lending partnerships.

The onboarding and ramping of our 2023 cohorts remains on track. We are also in advanced discussions to expand our personal loan business with one of our current bank partners, which we expect to share more about before the end of the year.

Driving capital efficiency to optimize profitability and liquidity

A key enabler to fueling our fee-generating business is an efficient capital strategy that balances profitability, growth and liquidity.

We secured a record $1.9 billion in funding in the quarter, reflecting ongoing strong demand from both existing and new funding partners. We added 18 new investors year-to-date, for a total of 116 funding investors connected to our platform. We continue to see expanded interest from private credit investors in supporting our growth.

We remain laser-focused on optimizing our balance sheet as we fund new network volume. We are committed to reducing our net risk retention while exploring diversified sources of funding. We recently raised a $100 million secured borrowing facility and completed a whole loan sale program, both of which lowered our upfront capital needs. We expect to scale these programs to drive further capital efficiency.

Our connectivity across the U.S. lending ecosystem continues to provide a distinct data advantage in managing asset performance on behalf of our funding partners. Our 2023 personal loan vintages continue to show strong performance, with 30-day+ delinquencies for 6-month, 9-month and 12-month seasoned loans at their lowest levels since April 2021. Our late 2023 personal loan vintages, the most recent vintages for which we have 3-month performance data, are also showing positive early-stage indicators, with 30-day+ DQs at their lowest levels since February 2021. We continue to monitor borrower behavior trends closely and are continuously enhancing our credit models as we see real-time data from our network of 30 lending partners.

Expanding our product ecosystem

As we strive to become the trusted lending technology partner in the consumer finance ecosystem, we are focused on product innovation to meet the complex and evolving needs of banks and other large lenders.

During the quarter, we launched the test phase of a new pre-screen product with select lending partners. With this program, Pagaya evaluates a lender’s existing customers to offer pre-approved offers for a new loan. Lenders get to reward their customers with expanded credit access, increasing customer lifetime value with little to no incremental marketing costs. This highlights our product progression from helping our partners increase their market share to now enabling them to increase their customer wallet share. We expect this product to generate higher FRLPC margins than our flagship credit product.

While our product roadmap is still in early stages, we’re pleased with the progress we’ve made and expect new products like this one to become accretive to growth beginning in 2025.