Happen, Inc. (HAPN) 2026 Q3 法說會逐字稿

Ladies and gentlemen, thank you for joining us, and welcome to Happen, Inc's third-quarter 2026 earnings conference call. (Operator Instructions)

I will now hand the conference over to Sam Hudson, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to Happen, Inc.'s third-quarter 2026 earnings conference call. Joining me today to talk about our results are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release in the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration through e-mail or through the Say Technologies platform.

Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation.

Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including risk-adjusted revenue, tangible book value per common share and return on tangible common equity.

You can find more information on our use of non-GAAP measures and a reconciliation of the most directly comparable GAAP measures in today's earnings release and presentation. Please note all financial comparisons in today's prepared remarks are to the prior-year period, unless otherwise noted. Finally, this quarter, we've updated our Meet Happen presentation.

This provides a way for our shareholders and the media to learn who we are, why we're different and the opportunity that lies ahead of us. This presentation is available in the Investor Relations section of our website.

And now I'd like to turn the call over to Scott.

Thank you, Sam. Welcome, everyone. I'm pleased to share that this was another outstanding quarter for Happen Bank. Let me start with the headline numbers. Pre-tax income grew 34% year-over-year to a record $76.8 million. Diluted EPS grew 35% to $0.50. Originations grew 26% to $3.3 billion, and we delivered a 15.8% return on tangible common equity.

These are fantastic results by any measure, but even more so given the dramatic change in interest rates during the quarter. Four things are working together right now, and they're what sets us apart: innovation in the member experience, disciplined execution, continued credit outperformance and a growing bank balance sheet. Our total assets are now at $13.3 billion, up 20% from a year ago.

Deposits are $11.5 billion, up 22%. And we ended the quarter with total risk-based capital ratio of 17%. That's a bank balance sheet built to perform and built to grow. Our business is performing exceptionally well, and the investments we're making in our new brand and in-product expansion set us up for continued growth. This was our first full quarter operating as Happen Bank, and the early response has been terrific.

Our name reflects the business we have become and why we exist: to clear the way for people going places. Our members are the motivated middle, digitally savvy consumers with an average FICO of roughly 720 and an annual income of over $120,000 who are actively managing their financial lives. We're building Happen Bank for them.

We make it easy to access lower-cost credit, saving members an average of 700 basis points in interest compared to their credit cards, and we reward them for saving with a rate that is more than 10 times the national average. This is real value. It earns lifetime loyalty, and it helps our members make their goals happen. We're four months into the rebrand.

Searches for Happen Bank are already more than two times those for LendingClub. Existing members have made the switch, and prospects are responding to the new brand creative at higher rates. The brand is taking root, and we're just getting started. Now let me turn to credit, which is the foundation of everything we do. We have outperformed our competitive set for more than six years, and the most recent data shows us once again with roughly 40% lower delinquencies.

Our underwriting isn't static. It is a dynamic, technology-driven recursive system that continuously adapts to consumer behavior and the macroenvironment and is overseen by some of the smartest people in the industry. We have always-on data sources, hundreds of proprietary variables and thousands of custom-engineered bureau features.

And we have a technology foundation that enables deployment of hundreds of policy changes every year. Combine that with our AI-enhanced fraud and collections capabilities, and it adds up to a meaningful underwriting advantage, one that is delivering attractive returns even as rates rise. Marketplace investors continue to take notice.

Our thriving marketplace delivers attractive fee-based revenue, allows us to serve a broader range of members and gives us a capital-light way to drive meaningful growth. Our credit track record paired with innovative loan investment structures is sustaining strong marketplace demand. That, in turn, is allowing us to sell loans without credit protection and is supporting loan sales pricing, helping to partially offset the impact of higher rates.

We developed our structured certificates program, which provides built-in financing for institutional loan buyers, in the last rising rate cycle. As evidence of their appeal, I'm excited to share that we have now crossed $10 billion in loans sold through these programs. This past quarter, we added a top 10 insurance company to our client list through our Fitch-rated structure, which we introduced last year specifically to attract insurance capital.

As funding costs increase, these structures give loan investors an attractive way to own high-yield, short-duration assets from a counterparty of choice. On the consumer side, home improvement is our next big growth opportunity. It's a $500 billion market where we have distinct advantages over the incumbents, and we're executing our entry at pace.

This was our first full quarter in the new business, and we generated over $100 million in volume. Happen Connect, our new embedded financing platform, is reducing partner onboarding time by 60%, and we expect to add several additional partners in Q4. We're also launching a new merchant portal and introducing multidraw capability that gives borrowers added flexibility to draw funds in increments and pay multiple parties.

These capabilities have application across our other business lines and will support continued growth throughout 2027. We furthermore remain on track to launch home equity in the second half of next year. Consumers are tapping roughly $21 trillion in home equity to consolidate debt and make home improvements, two areas where we already have deep experience.

We can't wait to bring our strength in innovation, underwriting and customer experience to a high-ticket secured product that will add value to our members and further strengthen and diversify our balance sheet. Our strategy is simple and powerful: acquire customers through lending and then engage them with intention to deepen the relationship and grow lifetime value.

The introduction of the mobile app itself has already changed behavior. Members interact with us more, call us less and use more of our products. A majority of our customer interactions now come through the app, and loan issuance through the app has doubled year-over-year. Deposits and DebtIQ, our debt monitoring and management tool, support deeper engagement while also providing meaningful insights into our members' expenses, debt, cash flow and behavior, which give us a roadmap for delivering even more value in their financial life. The flywheel is already generating business results.

Among borrowers who've paid off their loans, those with either a deposit account or DebtIQ are two to three times more likely to return to us than those who only had a loan. The number of active borrowers with a deposit account tripled in the past year, thanks in no small part to our 2% cash back for on-time loan payments made through LevelUp Checking.

And one in five LevelUp Savings accounts are being opened by borrowers who, after paying off their loan, build savings of $18,000 to $20,000, about equal to the credit card debt they originally came to us to consolidate. These results are a win for our members and for our shareholders. As we realize the benefits of lower acquisition costs and proven credit performance, this flywheel will keep improving member outcomes and driving member lifetime value over time.

Now an update on AI, which is developing at an incredible speed and changing both how we work and how we interact with our customers. We've put the infrastructure, training, controls and governance in place to enable safe, model-agnostic and cost-controlled connectivity to our internal tools and data. With our employees now using AI regularly, real results are becoming visible.

Penny, our AI member service agent, is resolving 30% more calls than our legacy system, which means faster response times and higher member satisfaction. We've automated QA for our member support calls with 100% coverage, which means we're learning how to improve our experience faster. Together with our other AI tools, we supported 26% higher loan volume this quarter with 20% lower operations head count and delivered another quarter of record efficiency.

We launched our first data analytics agent in operations, giving the team natural language real-time insight into 90% of the measures they review regularly and freeing our analysts to focus on higher-value work. We are expanding this tool to data sources across the organization in pursuit of a centralized company intelligence that unlocks insight and speeds decision-making.

Coding agents have driven a 21% increase in pull requests per technology employee, and we're testing autonomous coding agents with a human in the loop. We're also testing agents in fraud, building on layered defenses in which identity checks and fraud checks reinforce each other while substantially reducing manhours and turnaround times.

I'd like to point out, we're getting these results while managing our costs. AI usage roughly doubled between July and September, yet by ensuring employees are using the right tool for the job, we were actually able to lower our total AI spend. Looking externally, AI agents are coming to banking, and we believe that we stand to benefit, and we plan to be ready.

Our entire business is based on convincing people to break their complacency and take action to improve their financial situation. When consumer trust, permission and liability issues are sufficiently resolved, that value proposition will remain, and we're making the investments now to be both highly visible and responsibly accessible to agents when the time comes.

In closing, I'd like to take a moment to take stock of where we stand. We delivered another strong quarter amid a difficult rate environment. We executed against our strategy. We leveraged a proprietary set of solutions to support marketplace demand. We drove further operating efficiencies, and we delivered meaningful value to our members.

Our new brand is in place. We are deepening member engagement. We're building new products and experiences. Our partner network is expanding. Our credit outperformance continues to support our reputation as a counterparty of choice, and we're finding new ways to use AI to seize the opportunities ahead.

I've never been more excited about the road before us. I want to thank our employees for another great quarter of making it happen and for helping us earn yet more recognition and awards for our innovation, experience, products and workplace culture.

With that, I'll turn it over to you, Drew.

Thank you, Scott, and good afternoon, everyone. Q3 was another quarter of excellent execution. We delivered record net interest income and pretax income with earnings per share above our guidance range. These results reflect disciplined execution, exceptional credit performance and continued growth, and we're pleased we were able to deliver during this unexpected rising rate environment.

Since the last upward rate cycle, we have strengthened our hedging program, improved operating efficiency, significantly grown our balance sheet and broadened marketplace funding options. These capabilities support our ability to navigate the current environment. Let's review the third-quarter's results in more detail and then discuss our fourth-quarter outlook.

Loan originations were $3.34 billion, up 26% and toward the upper end of our quarterly guidance range. Personal loans, major purchase finance and auto refinance each delivered sequential and year-over-year originations growth, and we're excited that home improvement is now contributing to our results. For the third-quarter, risk-adjusted revenue was a record $279 million, up 27%.

We utilize this metric, which is net revenue less provision, to compare performance given our change to fair value accounting for all new loan originations. Total net revenue was $263 million. The first component of revenue, net interest income, grew 16% to reach a record $183 million, supported by growth in our interest-earning assets.

Net interest margin was 6.05%, and we continue to expect net interest margin of approximately 6% in the fourth-quarter. The other component of revenue, noninterest income, was $80 million. As a reminder of why this number was down year-over-year despite an increase in originations, we began accounting for newly originated held-for-investment loans at fair value in 2026.

The result is that origination fees are recognized upfront, which is a positive, while initial fair value marks and subsequent valuation changes flow through noninterest income, which is a reduction. Credit impacts on these loans are therefore reflected in fair value adjustments rather than provision expense. With this in mind, let's break down the key components of noninterest income.

Origination fees were up 64% to $173 million, reflecting the 26% higher volume as well as the benefit of no longer deferring the origination fee for loans held for investment. Fair value net markdowns were $131 million compared to $121 million in the second-quarter. This was a fantastic result given the significant move in benchmark rates, which were up approximately 60 basis points.

Portfolio discount rates increased by 40 basis points on held-for-investment loans and 50 basis points on held-for-sale loans, with portfolio mix and relative pricing improvements partially offsetting higher benchmarks. For new loan origination volume, higher benchmark rates would initially result in lower marketplace loan sales prices and higher day-one marks until we raise coupons.

However, we were able to offset approximately half of the impact of higher benchmark rates with strong loan economics supporting marketplace sales prices while we work to pass higher coupons through to borrowers. For fair value loans on our balance sheet, higher benchmark rates did result in approximately $20 million of markdowns in the third-quarter.

This was substantially offset by a $15 million gain due to our hedges, where we increased notional balances to $2.45 billion and extended duration over the course of the third-quarter. We plan to expand our hedging program as we grow to manage our interest rate risk profile. Our goal is to protect revenue generated by the balance sheet through interest rate cycles within prescribed limits.

It is important to note that the markdowns on loans due to higher discount rates is a timing impact, the reversal of which will accrete through fair value as the loans move to maturity. In addition, growth in the size of the fair value portfolio increased ongoing fair value rolldown by approximately $5 million on a sequential basis.

Pages 15 and 16 of the earnings presentation provide additional details on these mechanics. Finally, onetime items generated approximately $12 million of fair value benefits. The primary driver was that we repurchased a $300 million loan portfolio at a discounted price from a legacy bank loan buyer that was recently acquired.

Our credit continues to perform very well, supported by both our underwriting and servicing advantages as well as consumer resilience within our portfolio. Provision for credit losses was a benefit of approximately $16 million, reflecting continued solid observed and projected credit performance on the portfolio still under CECL. Provision benefits have exceeded our expectations over the past few quarters.

We expect credit performance to remain solid in the fourth-quarter, and we anticipate a further provision benefit of $5 million to $10 million. Our net charge-off ratio for the held-for-investment portfolio improved materially to 3.1% compared to 3.4% in the prior period. This is well below our underwriting assumption, further demonstrating our industry-leading credit performance.

We maintained our expense discipline with total expenses of $202 million. Total expenses, excluding marketing, were down quarter-over-quarter. Marketing expense was 2.2% of originations, up from 2% in the second-quarter, reflecting an increase associated with our successful rebrand. We expect that ratio to modestly improve in the fourth-quarter as the rebrand impact normalizes, offset by the effects of seasonality.

Compensation expense was up 6%, which is remarkable when compared to 26% loan originations growth and demonstrates the impact of our automation, efficiency and AI initiatives. These efficiencies give us room to reinvest in our new product roadmap and brand while maintaining expense discipline. In total, pretax income reached a record $76.8 million with a strong pretax profit margin of 29%.

Diluted earnings per share were $0.50, above our guidance range of $0.43 to $0.48. Return on tangible common equity was 15.8%, and tangible book value per share was $13.11. We ended the quarter with total assets of $13.3 billion and deposits of $11.5 billion, up 20% and 22%, respectively. Scaling our balance sheet continues to be a meaningful driver of our financial performance by delivering resilient, recurring revenue. As Scott mentioned, our structured certificate program continues to grow and evolve.

Beginning in the fourth-quarter, we expect to exercise our first cleanup calls, which become available when less than 10% of the initial certificate balance remains. These cleanup calls will improve investor returns, and we expect this efficiency to support improved pricing over time. Finally, we ended the quarter well-capitalized with a consolidated total risk-based capital ratio of 17% and strong liquidity to support further balance sheet growth.

Now let's turn to our fourth-quarter outlook and updated full year guidance. Our full year guidance achieves the high end of the near-term targets we provided at Investor Day 1 year ago. Our full year originations growth is expected to be 26% to 27%, reflecting a narrowed range of $12.3 billion to $12.4 billion. Our fourth-quarter volume outlook is $3.1 billion to $3.2 billion due to typical fourth-quarter seasonality and the transition to higher interest rates as we increase borrower pricing.

We are raising our full year earnings per share outlook to between $1.87 and $1.92, reflecting the power of our profitable business. The implied return on tangible common equity from this range is 15%. For the fourth-quarter, we expect diluted earnings per share of $0.43 to $0.48. Key assumptions for this outlook include stable rates on the one- to two-year Treasuries and a 25 basis point increase in the federal funds rate in December.

We expect continued net interest income growth as we scale the balance sheet with net interest margin of approximately 6%. We also expect a continuation of strong consumer credit performance and a $5 million to $10 million provision benefit. Total expenses should be flat to down compared to the third-quarter. Regarding our stock repurchase and acquisition program, through September 30, we had deployed $59 million and acquired 3.5 million shares.

We entered the quarter with $41 million remaining in our authorization. Given the change in our valuation, we plan to increase purchases through the remainder of the year. Looking ahead, we remain energized by the opportunities in front of Happen Bank as we focus on accelerating and launching new business lines, maintaining strong credit performance and continuing to invest with discipline. Our experience, technology and execution give us ongoing confidence as we close out 2026.

With that, we'll open it up for Q&A.

(Operator Instructions) Bill Ryan, Seaport Research Partners.

First question, mathematically, you spent a lot of time on credit during the presentation, noting that your credit performance is about 40% better at equivalent FICO bands than your peers. And in an August conversation we had, you noted that your credit underwriting was still about 20%, 25% tighter in the prime part of the business and about 60% tighter in the nonprime.

Given the credit performance -- and I don't believe you really relaxed underwriting standards at all -- all things being equal, is it possible that your credit performance doesn't really normalize from current levels to expectations? And following with that, could you maybe talk about what your default rate assumptions roughly are and any adjustments that you made in the quarter? And I have one follow-up.

Yes. Great. Bill, this is Drew. So yes, that's about right in terms of the application of the credit box compared to where we've been historically and no dramatic change in that since we spoke last. And obviously, as you mentioned, and we mentioned a few times, we're very pleased with where we are at on credit right now. In terms of our loss assumptions, we're still in that 4.5% to 5% range in terms of lifetime annualized net credit losses.

So no real change there. I would note, I'd say the performance we're seeing right now is outperforming that, and that's why you're seeing some of the benefits coming through in the back book and some of the benefits we're getting through pricing as well. But we're still keeping that base assumption in terms of where credit will go over time.

And just a follow-up, a little bit more number-specific question. Your day-one fair value mark on originations looked to be fairly equivalent with where it was last quarter. There's a lot of moving parts that you've highlighted during the presentation. As we sit here towards the end of October, how should we be thinking about modeling that for Q4?

Yes. I think the day-one mark should be roughly equivalent as we go forward. We obviously took some rate impacts in the quarter, as we talked about. What we are having success with is offsetting some of those rate impacts with the performance that is happening through our marketplace. So we expect we'll be able to keep those sales prices in Q4 roughly equivalent. And if there's no change in the interest rate environment from here, we should be able to keep those day-one marks roughly consistent.

And then I guess just adding on that, Bill, over time, the plan is, of course, and starting now, would be to increase coupons to borrowers. So that should help over time also bring prices back up.

Tim Switzer, KBW.

I got a few more questions on the moving parts around the fair value here. Could you maybe provide or quantify what the hedging portfolio gains were the last two quarters? And then where exactly that flows through in the income statement? Is that within the fair value adjustments line?

That's within the fair value adjustments line, and we had about a $3 million gain last quarter, $3 million to $4 million last quarter, and $15 million this quarter. So it was obviously higher. And a few reasons for that. First, obviously, the movement in rates was higher, and so that created a larger gain. But over the course of the quarter, we increased the notional hedge amount that we were doing just as we've been growing the balance sheet, but also increasing the duration, which is about 1.5 years now on the portfolio.

We were getting to the point of some of our earlier hedges where they were rolling off, and so renewing them gave us the benefit of additional duration from the hedging portfolio.

And if I'm looking at the breakdown on the fair value adjustments on that Slide 16, a very helpful slide, is the hedging gain within both of those buckets that make up the $131 million?

It's going to be in the $85 million.

And then, Scott, you just mentioned about repricing coupons higher over time. How should we think about the NIM trajectory? It sounds like margin can stay around 6% for Q4. But as we look into '27, assuming we get one or two more Fed rate hikes, we don't have just this one, what does that look like over the course of '27?

Yes, I'll take that one, Tim. So over the course of '27, it depends, obviously, on how the world evolves. But if we're getting one to two hikes, I'll take you back to what happened last rate cycle and then talk about some of the differences. So last rate cycle, we were able to price on loan coupons at about a 60% beta. I think we passed on 290 basis points on a risk-constant basis.

So we were changing our mix over that time, so it doesn't all show up in coupon, but it shows up in asset yields. So we were fairly effective in pricing on coupon on a lag, and I think we should be able to do that again. In terms of the funding side, the deposit side, we had about an 80% beta in the rising rate environment with only one real deposit portfolio and CDs.

We now have multiple deposit products, with more that we'll probably be launching over the course of '27. So I think our ability to manage that beta more effectively this time around, we should be able to lower that below 80% in this next cycle.

And when you say the 60% beta on the loan yields, that's on new loan originations?

Correct New loan originations. So we pass that through to borrowers on a lag. It takes some time to get it to new borrowers. And then obviously, the back book needs to reprice as well before we get all that benefit through or it needs to recycle.

Kyle Joseph, Stephens.

I'll try and pivot a little bit from fair value here. Scott, in your prepared remarks, you talked about the motivated middle, but I can't go a day without talking to someone about the K-shaped economy. Just to get your assessment of how the motivated middle compares versus the K-shaped economy we're seeing and what that does essentially to your customer base.

Yes. So coming back to credit, Kyle, I'd say, in the last cycle, we really adapted our uprate with -- that corresponded with inflation, we really adapted the underwriting to be focused on ability to pay and understanding people's overall obligations. As we just mentioned, we remain, by historical standards, fairly restrictive on that. That hasn't changed. And I think that's why you're seeing across our whole portfolio that the performance has been so stable for so long.

I'd note it's not stable because we've been static. I mentioned that as well. It's been stable because we are constantly -- we're releasing hundreds of changes throughout the course of the year: tweaks on pricing, tweaks to underwriting criteria. And that's allowed us to stay in this comfort zone where we're seeing a really, really resilient performance from our consumer. The motivated middle, we're saying middle -- on the income side, these people are on the higher side, right?

So while wages for the most part until recently have generally been outstripping the increase in costs, these people do have -- they're not struggling to make their bills. They're coming to us because they're looking to lower the cost and optimize them. And if you think about things like leading indicators across that we've seen in past periods when consumers are under pressure, we're not seeing that now.

Meaning things like bank balances declining or people signaling stress for reasons other than the typical big ones like medical emergency, temporary job loss, divorce, all those things are stable. So we're continuing to feel quite good about their behavior. And as I mentioned on the call, we're also seeing really good adoption from them of our other products in our ecosystem. So it gives us quite a bit of confidence there.

John Hecht, Jefferies.

You noted higher marketing expenses in the quarter, some of which was related to taking advantage of the volume environment, some of it's also related to the rebrand. How do we think about those trajectories into Q4 and into '27? How do we think about marketing in '27 given product development? Is there a framework of marketing as a percentage of revenues or volumes that you might point us to?

Yes, John. So the big driver of the step-up last quarter was really the rebrand, both just the cost of making that transition, covering thousands of emails and the website and all the rest, but also the friction associated with it, things like you lose authority in your domain in areas like organic search, which is a low-cost channel. You have some friction with consumers who had password saves connected to the old domain in their browsers that don't all render when they visit a new domain, so things like that.

So when I said on the call, hey, existing customers have made the switch, that was not out of the gate when we first made the rebrand. So we had to work through that. Our repeat customers, which are obviously lower-cost, borderline-free customer acquisition, had some friction early in the quarter, and we made that up with paid advertising.

As we look ahead, we would expect to begin to come back down towards our historical run rate, which is roughly in the 2% of issued volume. It's obviously more efficient in Q2 and Q3 than it is in Q4 and Q1, but call it 2% to 2.1% as a range you can count on. I'd also note we are expanding the marketing channels. We started that this year, have been seeing good success and traction.

But with the new brand in place, we are leaning into broader-based, less direct-response channels, things like paid social, where, for example, we're now advertising our LevelUp Savings product and seeing positive initial results there. So those new channels are a little less efficient until we get them tuned.

And then you mentioned 1.5-year duration on the portfolio, Drew. Should we generally look at that part of the curve in terms of trying to assess where discount rates might be going? Or do different products come with different discount rates?

So yes, yes and yes. So 1.5 years for our core PL product is the duration at origination. If you look at our actual balance sheet, the duration is shorter than that. But different products are going to have different durations, and they're also going to have different discount rates as well. So for example, something like home improvement will probably have a bit longer duration, but it will also have lower loss content, which may mean a lower discount rate at the same duration point, but higher at a longer duration point. So we do this by product, both by duration and by product type as well.

And then just with respect to -- going into HELOC and so forth next year, anything to think about how -- and I know this is going to be early on and how that might either affect duration and/or, call it, net interest margin and so forth as you guys develop that product?

I'll just start with it, John, next year will really be, just like this year was largely a build year for home improvement, and as we stated on the call, pleased with the early results and the traction there. Next year is going to mostly be a build year for home equity. So it's not going to have a material impact to their financials. But if you wanted to --

I would just say home improvement, as we're adding more on next year, may extend the duration a little bit of our balance sheet, but personal loans will still be the largest component of that. And so I think it will roughly stay the same. Home equity, as Scott said, will probably be more of a '28 story before it's really impacting our balance sheet mechanics in any material way.

Giuliano Bologna, Compass Point.

Congrats on another great quarter. When I go back to the commentary, what you mentioned is that you're seeing good progress in major purchase finance and home improvement. I'd be curious, when you think about it from a mix perspective or at least from a run rate perspective, where those products are now as a portion of your originations and then where you see them going as you start moving into '27?

Yes. So home improvement, we gave you the number for Q3, it was $100 million. So not real impactful to the overall mix. I would just note that for our first -- as Scott already said, for our first full quarter operating, we're very pleased with that, and we'll expect to see that accelerating as we go into next year. And the major purchase finance, we don't break it out, but we said we were at about $1 billion run rate in that on an annual basis. And so you can think about that as the relative contribution for now and hopefully gaining more share of the overall portfolio as we go forward.

Yes. I'd say broadly, I touched on it on the call, we're still in build mode there, but we have a lot of enhancements to our platform. What we've launched first was what we called Happen Connect, which is basically a headless API that allows us to offer embedded finance. That is what's launching the partners that we've launched today.

We have several more coming before the end of the year, and this one is also applicable for purchase finance. The merchant portal is going to give us an easier way to both onboard merchants but also monitor them. And then some product features like promotional products, the multidraw product I mentioned, all of that is really upping the value proposition we have for some of the verticals we serve.

So to me, I can't give you the exact time frame, but I'd say this should be getting out of the single digits into the low double digits as a percent of our origination over a near-term time frame. And by near-term, throughout the course of next year. So we're pretty excited about that and about the response we're getting from potential partners there.

And then just somewhat of a modeling question. But when I think about the take rate, should we assume the take rate stays roughly similar as that mix changes? And is there any ability to push take rates higher within your core personal loan product as well?

Yes. I think take rate should be roughly the same. There may be some changes. I would just note that some of the other products we just discussed, like home improvement, can have some very different take rate dynamics associated with it as we're managing different partners. The overall economics still work out to be very much like PL, but you might get more in the origination fee upfront versus the coupon later on depending on the agreement, MDRs, things of that nature.

So I wouldn't overweight it too much in your modeling thus far. It's probably steady as she goes for now. But as we get into '27, if there's any major changes, we'll let you know.

Crispin Love, Piper Sandler.

On the '26 originations guide, you narrowed that in the release. You did call out prioritizing unit margins in the elevated rate environment. Can you just dig into that a bit and also how that could impact growth in 2027 if rates do stay elevated?

Yes. So I wouldn't connect it to '27. I'll come back around on that. But just near term, given the magnitude of the move in the quarter, we are responding. So easy example: auto refinance. We've been getting some pretty good traction on that business in Q2 and Q3. That business, obviously, in a rising rate environment is going to come under some pressure.

And it was already a thinner-margin business -- lower losses, but thinner-margin business for us. So that's something we'll pull back on. Second is we'll be raising prices where we can to consumers. We're going to be very thoughtful to do that in a way that preserves the quality coming through the door, but that will have some impact on take rate as we do that.

So I'd call that more of a transition phase way to think about it, Crispin, especially as we deliver and close out the year. But as we look ahead to next year, we've got a number of initiatives on both sides of the balance sheet. And I think our ability to drive continued origination volume, we feel good about.

And then just another one on expenses, but on the compensation side, as you called out, comp expense was down sequentially and I think up 6% or so year-on-year, and also the lowest quarterly amount this year. You did call out, Drew, efficiency, automation, AI. But when you think about comp going forward, are there additional efficiencies to be realized there? Just curious on how you think about that dollar value trajectory or an annual growth rate on comp as you look forward in this environment over the next few quarters?

Yes. We still have some investments to make in growth businesses going forward. So we've mostly built out the staff for the home improvement space, but not 100%. We're now staffing up the HELOC team and the support groups around that. So there will be some increase in head count or compensation expense related to that, along with normal inflationary pressures.

I would say with the way we've used AI throughout the organization, we've already found a lot of efficiencies. And I think we'll continue to find more. I don't want to commit that it's going to offset that growth yet at this point. I think we'll come back around more in '27. But I think we're being very thoughtful and judicious where we are adding head count, so it's really there to drive revenue growth in the new businesses.

And just as an order of magnitude, I gave the stat of the lower head count versus the higher originations. If we were at last year's efficiency, we would have had over 200 additional heads in operations to process the volume that we have. So it gives you a sense of the magnitude of ground that we've covered over the time period.

Yes. Crispin, the other thing I'd just add, when you're doing the year-over-year comparison, keep in mind we did defer some compensation expense when we were under CECL for originations that we're no longer deferring. So that's part of the year-over-year step-up that you're seeing there as well.

David Scharf, Citizens JMP.

Most have been answered, but I did want to follow up on a couple of themes. First, in terms of just consumer behavior, setting aside the attractive credit metrics thus far, I know that home improvement, it was just $100 million. It was your first full quarter. But I'm curious, I would imagine in contrast to higher-earning borrowers who are just looking to reduce borrowing costs that more discretionary borrowers -- home improvement, large purchases, next year home equity -- should be more sensitive to rate increases.

Did the conversion rates and the marketing responses for this initial quarter of home improvement pretty much match what you were forecasting? Or are you already seeing a little more hesitancy from that cohort?

Yes. I don't think we should try to compare quarter-on-quarter just because we're so new in the space, and that was primarily driven by the first one or two partners. So even that is a smallish slice into the market. I think as we add more partners and get a broader view, we'll have a better sense of the overall landscape. But in terms of the overall industry trends and what we're hearing and certainly seeing is, one, these customers are even further up the spectrum.

So you're talking an extra 20 or 30 or even 40 points of FICO versus the core direct-to-consumer business. They're also higher income, so call it another $30,000, $40,000 higher at this stage. And recall, part of their costs are being covered by the MDF fee provided via the contractor or the partnership. And it's really a play of breaking it up into manageable payments.

And given that people have so much equity in their homes and they're stuck in their homes, given that the vast majority of mortgages are now below 6% when rates for new mortgages are in the 7s, people are just like, okay, I'm staying put, so I might as well make this place what I want it to be, and we can help with affordable payments and financing. So response right now has been really, really strong.

Can you just remind us, that first $100 million of volume, what was the average size of those draws?

Yes, roughly $10,000. That's just the nature of the first few partners we've added, and we expect that with the additional partners we're bringing on, those numbers are going to come up.

And just as a quick follow-up, very high level on the cost structure and the impact of AI. I hear you loud and clear with the previous question about not committing to long-term head count forecasting and some of the savings are going to be plowed into growth initiatives. But just based on what seems to be some pretty dramatic efficiencies in a very short period of time of deploying these agents, are you rethinking what a sustainable efficiency ratio could be for this business? Is it too early to think about that?

It's certainly never too early to think about it, maybe too early to talk about it. So maybe we'll also come back around on that one when we're talking more about '27.

Our current thinking, David, what we're seeing more and more across the business is we could either do the same amount of things with less people or we can keep the same amount of people and do more. We're erring on the side of that as a general rule and trying to get more leverage out of the team we have. We certainly are seeing, as onesie, twosies when people leave, there's an increasing sense of, we don't really need to backfill that role because we can cover the gap with AI.

I do think we'll expect to continue to see that pause. As Drew mentioned, to get into the mortgage space or the home equity space, we need people with that expertise on the ground here to understand the operations and the compliance and the controls and the go-to-market strategy that we need to have. So it will be a balance of finding savings where it makes sense, but also making sure we're investing for future growth.

There are no further questions at this time. I will now turn the call back to Sam Hudson for a few additional questions.

Scott and Drew, we have a few questions here that were submitted by our retail investors through Say Technologies and through e-mail. First question is, with retained senior securities growing on your balance sheet, do you intend to continue growing this program? And is there a limit to that growth?

Yes. Well, listen, we absolutely intend to continue growing the program. And we have a dual benefit from this program. It supports the marketplace and marketplace demand while also producing strong risk-adjusted returns for our balance sheet. We started the program in 2023, and we've done $10 billion through our structured program since then.

And really, it's just been a win-win for us and for investors. And I think we're doing a little over $1 billion per quarter across these programs right now. Just to get into it a little bit more. For investors, it's a benefit because it's a very simple bilateral securitization, which allows them to get leverage on their loan purchases, which allows them to generate a higher return overall. And that translates into a higher sales price for us.

So that's why I say it's a win-win. In terms of putting these on our balance sheet, the other benefit is it's a very attractive risk-return profile. The securities have a 20% risk weighting on our balance sheet, which allows us to grow our balance sheet more efficiently while issuing more loans at the same time. So all of those benefits really make it a priority for us to continue the program.

Great. So the second question is, as competitors pursue bank charters, how will Happen strengthen its competitive position and grow customers and deposits over the next few years?

Yes. So look, we see all of the fintechs pursuing bank charters as validating the idea that we pursued six years ago now. Important to note that today, when we became a bank, we had to be operationally ready out of the gate. With conditional approvals today, most of these banks are not yet operating as banks. So they'll be -- they should be hitting the market throughout the course of next year.

What I'd say is we feel really, really ready. We've got a six-year head start to tune our product mix, value proposition, onboarding funnels, operations, and we have more initiatives in the pipeline for next year. And that's why we're pleased to have gotten the new brand out there, because we're also investing behind this new brand where, for us, the halo of being a brand that whatever you need is we're going to be delivering value.

When you see that we're delivering a market-leading rate on savings, we believe that reinforces the value we provide on lending as well. So we feel very ready to compete.

Okay. Great. Thank you. Those are all the questions we had. With that, we will wrap up our third-quarter 2026 earnings conference call. Thank you for joining us today. And if you have any other questions, please e-mail us at ir@happen.com.