Happen, Inc. Common Stock (HAPN) Q3 2026 Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for joining us and welcome to Happen Inc's third quarter 26 earnings conference call. After today's prepared remarks, If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand, and *6 to unmute. I will now hand the conference over to Sam Hudson, Head of Investor Relations. Please go ahead.

Artem Nalivayko: Thank you, and good afternoon. Welcome to Happen Incorporated's third quarter 26 earnings conference call. Joining me today to talk about our results are Scott C. Sanborn, CEO and Andrew 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 email or through the SAVE 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 have updated our Meet Happen presentation. This provides a way for our shareholders and the media to learn who we are why we are different, and the opportunity that lies ahead of us. This presentation is available in the investor relations section of our website. And now, I would like to turn the call over to Scott.

Scott C. Sanborn: Thank you, Sam. Welcome, everyone. I am pleased to share that this was another outstanding quarter for Happen. Let me start with the headline numbers. Pretax 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. 4 things are working together right now. And they are what sets us apart. Innovation in the member experience disciplined execution, continued credit outperformance, 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% we ended the quarter with total risk based capital ratio of 17%. that is a bank balance sheet built to perform and built to grow. Our business is performing exceptionally well and the investments we are making in our new brand 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 thousand. Who are actively managing their financial lives. We are 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, we reward them for saving. With a rate that is more than 10x the national average. This is real value. It earns lifetime loyalty, it helps our members make their goals happen. We are 4 months into the rebrand, Searches for Happen Bank are already more than 2x 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 are 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 6 years. And the most recent data shows us once again with roughly 40% lower delinquencies. Our underwriting is not static. It is a dynamic technology driven recursive system that continuously adapts to consumer behavior and the macro environment 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 engineer bureau features. 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. 1 that is delivering attractive returns even as rates rise. Mark investors continue to take notice. Our thriving marketplace delivers attractive fee based revenue allows us to serve a broader range of members, 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 am 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 is a $500 billion market where we have distinct advantages over the incumbents, and we are executing our entry at pace. This was our first full quarter in the new business and we generated over $100 million in volume. HappenConnect, our new embedded financing platform, is reducing partner onboarding time by 60%, and we expect to add several additional partners in Q4. We are also launching a new merchant portal and introducing multidraw capability that gives borrowers added flexibility to draw funds in increments and paying 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 the second half of next year. Consumers are tapping roughly $21 trillion in home equity to consolidate debt and make home improvements, 2 areas where we already have experience. We cannot wait to bring our strengths 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 the 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 Debt IQ, 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 have paid off their loans, those with either a deposit account or debt IQ are 2 to 3x 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 2% cash back for on time loan payments made through LevelUp checking and 1 in 5 LevelUp savings accounts are being opened by borrowers who after paying off their loan, build savings of $18 thousand to $20 thousand 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 have 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. Have automated QA for our member support calls, with 100% coverage, which means we are 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 headcount 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 are testing autonomous coding agents with a human in the loop. We are also testing agents in fraud. Building on layered defenses in which identity checks and fraud checks reinforce each other while substantially reducing man hours and turnaround times. I would like to point out we are getting these results while managing our cost. 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. 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 are making the investments now to be both highly visible and responsibly accessible to agents when the time comes. In closing, I would 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 are 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 are finding new ways to use AI to seize the opportunities ahead. I have 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 will turn it over to you, Drew.

Andrew LaBenne: 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 are 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 originating growth. And we are 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 to 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 adjust 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 1 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 rate 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 roll down by approximately $5 million on a sequential basis. Pages 15 and 16 of the earnings presentation provide additional detail on these mechanics. Finally, 1 time items generated $12 million of fair value benefits. The primary driver was that we repurchased $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 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 health 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. Maintained our expense discipline with total expenses of $202 million. Total expenses excluding marketing were down quarter over quarter. Mark 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 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 road map 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 50¢, above our guidance range of 43¢ to 48¢ Return on tangible common equity was 15.8%, Intangible 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 2022% 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. 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 the 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 43¢ to 48¢ Key assumptions for this outlook include stable rates on the 1- to 2-year Treasurys 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 will open it up for Q and A.

Operator: We will now begin the question and answer session. If you have dialed into today's call, please press 9 to raise your hand and *6 to unmute. Your first question comes from the line of Bill Ryan with Seaport Research Partners. Your line is open. Please go ahead.

Bill Ryan: Good afternoon and thanks for taking my questions. First question, mathematically, 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, when you 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 non prime. You know, given the credit performance, I believe you really relaxed underwriting standards at all. I mean, all things being equal, you know, is it possible that your credit performance does not really kind of 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 1 follow-up.

Andrew LaBenne: Yes, great. Hey, Bill, this is Drew. So, yeah, that is that is about right in terms of the application of the credit box compared to where we have been historically. And you know, no dramatic change in that since we spoke last. And, obviously, as you mentioned, and we have been a few times, we are very pleased with where we are at on credit right now. In terms of our loss assumptions, we are still in that 4.5 to 5% range in terms of kind of lifetime annualized net credit losses. So no real change there. I would note, you know, I would say performance we are seeing right now is outperforming that, and that is why you are seeing some of the benefits coming through in the back book and some of the benefits we are getting through pricing as well. But we are still keeping that base assumption in terms of where credit will go over time.

Bill Ryan: Okay. And just follow-up a little bit more of a numbers question. Your day 1 for EvaluMark on originations look to be fairly equivalent with where it was last quarter. There are a lot of moving parts that you highlighted during the presentation as we kind of sit here towards the end of October, how should we be thinking about modeling that for Q4?

Andrew LaBenne: Yes. I think the day 1 mark should be roughly equivalent as we go forward. So what we are. 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 know, the performance that is happening through our marketplace. So we expect we will be able to keep those sales prices in Q4 roughly equivalent if there is no change in the interest rate environment from here, we should be able to keep those day 1 marks roughly consistent. Okay. Thanks for taking my questions.

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

Operator: Your next question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead.

Tim Switzer: Hey, afternoon. Thanks for taking my questions. Hey, Tim. I got a few more questions on the on the on the moving parts around fair value here. Could you maybe provide your. Quantify, like, what the hedging portfolio gains were the last 2 quarters? And then where exactly that flows through in the income statement? Is that within the fair value adjustment? Adjustments line?

Andrew LaBenne: that is within the fair value adjustments line, and we had about a $3 million gain last quarter. $3.03 to $4 million last quarter. And $15 million this quarter. So it was obviously higher. And 2 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 have been growing the balance sheet. Also increasing the duration, which is about 1 point 5 years now on the portfolio. Were getting to the point on some of our earlier hedges where they were rolling off, so we were renewing them. Gave us the benefit of additional duration from the ports. From the hedge portfolio.

Tim Switzer: Gotcha. Okay. And if I am looking at the breakdown on the fair value adjustments in that slide 16, helpful.

Andrew LaBenne: Slide. Is the hedging gains, is that within both of those buckets that make up the 31? it is gonna be it is going to be in the $85 million. Gotcha. Okay.

Tim Switzer: And then, Scott, you just mentioned about you know, repricing coupons higher over time. How should we think about the NIM trajectory? Well, it sounds like margin can stay around 6% for Q4. But as we look into 2027, assuming we get, you know, 1 or 2 more Fed rate hikes we do not have just this 1. What does that look like over the course of 2027?

Andrew LaBenne: Yeah. I will take that 1, Tim. So over the course of 2027, you know, just. It depends obviously on how the world evolves. But if we are getting 1 to 2 hikes, I will take you back to where. What happened last rate cycle and then talk about some of the differences. So last rate cycle, we were able to price on coupons 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 does not all show up in coupon. But it shows up in asset yield. So we were fairly effective in pricing on coupon on a lag and, you know, 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 1 real loan portfolio. I am sorry, deposit portfolio and CDs. We now have a multiple deposit products with more that we will probably be launching over the course of 2027. 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. Got it.

Tim Switzer: Okay. And when you say the 60% beta on the loan yields, that is on new loan originations.

Andrew LaBenne: I mean, new loan originations. Okay. Correct. New loan originations so that we passed 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 needs to recycle. Okay. Under. Understood. Thank you.

Operator: Your next question comes from the line of Kyle Joseph with Stephens. Your line is open. Please go ahead.

Kyle Joseph: Hey, good afternoon, guys. Thanks for taking my questions. I will try and pivot a little bit from fair value here. Scott, in your prepared remarks, you kind of talked about the motivated middle but I cannot go a day without talking to someone about the. Kind of the k shaped economy. And just kind of get your assessment of, you know, how the motivated middle compares, you know, versus the k shaped economy where we are seeing and what that does essentially to your customer base? Thanks.

Scott C. Sanborn: Yeah. So, you know, kind of coming back to credit, Kyle, I would say we in the last cycle, we really adapted our up rate cycle with. You know, 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 has not changed. And I think that is why you are seeing throughout our or across our whole portfolio the performance has been so stable for so long. But note, it is not stable because we have been static. I mentioned that as well. it is been stable because we are constantly--I mean, we are releasing hundreds of changes throughout the course of the year, tweaks on pricing, tweaks to underwriting criteria, and that is allowed us to kind of stay in this comfort zone where we are seeing a really resilient performance from our consumer. The motivated middle we are saying middle. You know, the. On the income side, these people are on the higher side. Right? So while, you know, wages for the most part until recently have generally been outstripping the increase in cost. These people do have you know, they are not struggling to make their bills. They are coming to us because they are looking to lower the cost and optimize them. And if you think about things like leading indicators across that you know, that we have seen in past you know, periods when consumers are under pressure. We are not we are not seeing that now. So many 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 of those all those things are stable. So we are to feel quite good about their behavior and as I mentioned on the call, we are also you know, seeing really good adoption from them of our other products in our ecosystem. So it gives us quite a bit of confidence there.

Kyle Joseph: Got it. Thanks for reconciling that. that is it for me. Thank you.

Operator: Your next question comes from the line of John Hecht with Jefferies. Your line is open. Please go ahead.

John Hecht: Afternoon. Thanks for taking my questions. Yeah. Yeah. You know, you noted higher marketing expense in the quarter, some of which was related to the. You know, taking advantage of the volume environment. Some of it is, also related to, you know, the rebrand. How do we think about like, you know, those trajectories into Q4 and into 2027? How do we think about, marketing, in 2027 given product development? You know, is there a framework of marketing as a percentage of revenues or volumes that you might, point us to?

Scott C. Sanborn: Yeah. Hey, John. So the big driver of the step up last quarter was really the rebrand, both just the costs 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 know, 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 passwords saved connected to the old domain in their browsers that do not 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 lower well, obviously, cost borderline free customer acquisition. Had some friction early in the quarter, and we made that up with paid advertising. As we as we look ahead, I mean, we would expect to, you know, begin to come back down towards our historical run rate, which is roughly in the 2% of issued volume. it is obviously more efficient in Q2 and 3 than it is in Q4 and Q1, but call it 2% to 2.1% as a range you can count on. I would also note, you know, we are expanding the marketing channels We started that this year, have been having. Seen good success and traction. But, you know, with the new brand in place, we are leaning into broader-based kind of less direct response channel things like paid social where, for example, we are now advertising our LevelUp savings product and seeing positive initial results there. So there is new channels a little less efficient until we get them tuned. Okay.

John Hecht: Super helpful. And then you mentioned 1.5-year duration. On the portfolio, Drew. Is that should we generally look at that part of the curve in terms of trying to like, assess where discount rates might be going or do different products come with different discount rates?

Andrew LaBenne: 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 are 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 you know, a lower discount rate at different 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.

John Hecht: And then just with respect to the. You know, going into HELOC and so forth, next year, Anything to think about how. You know? And I know it is going to be early on and this and that, but how that might either affect duration and or call it net interest margin and so forth as you guys develop that product?

Scott C. Sanborn: Man, I will just start with John. You know, next year will really be. Just like this year, it was largely a build year for home improvement. And, you know, as we stated on the call, pleased with the early and the traction there. Next year is going to mostly be a build year for home equity. So I do not. it is not gonna have a material impact to the financials, but if you wanna just talk.

Andrew LaBenne: I would just say, you know, home improvement is where. As we are 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. Yeah.

Scott C. Sanborn: Home equity. And as Scott said, home equity will probably be more of a 2028 story before it is really impacting our balance sheet mechanics in any material way.

John Hecht: Very helpful. Thanks, guys.

Operator: Your next question comes from the line of Giuliano Bologna with Compass Point. Your line is open. Please go ahead.

Giuliano Bologna: I appreciate the time, and, you know, congrats on, you know, another great quarter. When I kind of, you know, go back to the commentary, you know, what you mentioned is that you are seeing good progress in major purchase finance and home improvement. I would be curious when you think about it from a mix perspective or at least from a run rate perspective, I am curious kind of where those products are now as a portion of your originations. And then you see them going as we start moving into 2027?

Andrew LaBenne: Yeah. So home improvement, we just know we gave you the number for Q3. It was a 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 are very pleased with that. And we will expect to see that accelerating as we as we go into next year. And then major purchase finance, we do not break it out, but said we were at about a $1 billion run rate in that on a an annual basis. And so you can think about that as sort of the relative contribution for now. And hopefully gaining more share of the overall portfolio as we go forward.

Scott C. Sanborn: Yeah. I would say broadly, I touched on the call. We have we are still in build mode there, but we have a lot of enhancements to our platform. You know, what we have launched first was what called HappenConnect, which is basically a headless API that allows us to offer embedded finance That is what is launching the partners that we have launched today. We have several more coming before the end of the year, and this 1 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 really upping kind of the value proposition we have for some of the verticals we serve. You know? So to me, give you the exact time frame, but I. You know, I would say this should be getting out of the single digits into the low double digits as a percent of our origination. Over, you know, kind of a near term time frame. And by, you know, near term, I mean, throughout the course of next year. So we are pretty excited about that and about the response we are getting from potential partners there.

Giuliano Bologna: that is very helpful. And then just to, you know, somewhat of a modeling question, but when I think about the take rate you know, should we assume the take rate stays roughly similar? Is that mixed changes? And are. Is there any kind of, you know, ability to take, you know, push take rates higher within kind of your core personal and product? As well.

Andrew LaBenne: Yeah. I think take rate, you know, should be roughly the same. You know, 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 are managing different partners. The overall economics you know, 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 you know, that is that I would not I would not overweight it too much in your modeling thus far Probably steady as she goes for now, but we get into 2027, if there is any major changes, we will we will let you know.

Giuliano Bologna: that is very helpful. Congrats on the quarter, and I will jump back in the queue.

Operator: Your next question comes from the line of Crispin Love with Piper Sandler. Your line is open. Please go ahead.

Crispin Love: Thank you. Appreciate taking the questions. On the 2026 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?

Andrew LaBenne: Yeah. So I would not connect it to 2027. I will 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 have been getting some pretty good traction on that business in Q2 and Q3. That business, obviously, in a rising rate environment, is gonna come under some pressure. And it was already a thinner margin business, lower losses but thinner margin business for us. So that is something we will pull back on Second is we will be raising prices where we can to consumers that will have. And we are gonna be very, 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 call that more of a you know, transition phase kind of way to think about it, Crispin, especially as we deliver and close out the year. But as we look ahead to next year, we have got a number of initiatives on both sides of the balance sheet that I think you know, we feel good as we go through the year, our ability to drive continued origination volume.

Scott C. Sanborn: We feel good about Perfect.

Crispin Love: That was helpful. And then just another 1 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 as you look forward in this environment over the next few quarters?

Andrew LaBenne: Yeah. Yeah. We still have some investments to make in growth businesses going forward. So we have we have mostly built out the staff for the home improvement space, but not 100%. We are now staffing up the HELOC team and the support groups around that now. So there will be some increase in headcount or compensation expense related to that along with sort of normal inflationary pressures.

Scott C. Sanborn: I would say with the pro. With the way we have used AI throughout the we have already found a lot of efficiencies and I think we will continue to find more. I do not wanna commit that it is going to offset that growth yet at this point. I think we will come back around more in 2027, but think we are being very thoughtful and judicious where we are adding headcount. So it is really there to drive revenue growth in the new businesses. And just as, like, an order of magnitude, you know, I gave the stat of the lower headcount 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. Yeah. So it just gives you a sense of the magnitude of ground that we have covered over the time period.

Andrew LaBenne: Yeah. And, Chris, and the other thing I would just add, when you are doing the year over year comparison, keep in mind, we did defer some compensation expense when we were under CECL for originations that we are no longer deferring. So that is part of the year over year step up that you are seeing there as well.

Crispin Love: Okay. Okay. Perfect. Thank you. I appreciate taking the questions.

Operator: Your next question comes from the line of David Scharf with Citizens Capital Markets. Your line is open. Please go ahead.

David Scharf: Hey. Good afternoon. Thanks for taking mine as well. Most have been answered, but I did wanna on a couple themes. You know, first, you know, in terms of just consumer behavior sort of setting aside the attractive credit metrics thus far, You know, I know that home improvement it was just $100 million. It was your first full quarter. But I am I am curious, you know, I would imagine in contrast to higher earning borrowers who are just looking to reduce borrowing costs that, you know, more discretionary borrowers home improvement, large purchases, next year home equity. You know, we are. They would. Should be more sensitive to rate increases Did the conversion rates in 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?

Scott C. Sanborn: Yeah. I mean, I do not think we should try to compare quarter on quarter just because we are so new in the space, and that was primarily driven by first 1 or 2 partners. So even that is kind of a you know, a smallish slice into the market. I think as we add more partners and get a broader view, we will have kind of a better sense of the overall landscape. But in terms of overall industry trends and what we are hearing and, you know, certainly seeing is 1, these customers are even further up the spectrum. So you are talking an extra 20 or 30 or even 40 points of FICO versus core direct to consumer business. They are also higher income. So call it another $30 thousand-$40 thousand higher at this stage. And recall part of their costs are being covered by the MDF fee provided, you know, via the contractor or the partnership. And it is really it is really a play of breaking it up into manageable payments. And given that have so much equity in their homes, and they are sort of stuck in their homes given that the vast majority of mortgages are now below, you know, 6 when rates for new mortgages are in the sevens. People are decide. Okay. I am staying put. So I might as well make this place what I want it to be. And we can help with you know, affordable payments and financing. So you know, response right now has been really, really strong.

David Scharf: Got it. No. No. that is good to go. Hey. Can you just remind us, you know, that first $100 million of volume? What was the average size of those draws?

Scott C. Sanborn: Yeah. Roughly $10 thousand-$10 thousand. that is just the nature of the first few partners. We have added, and we expect that with the additional partners we are bringing on, those numbers are gonna come up.

David Scharf: Got it. Hey. And just as a quick follow-up, you know, very high level on you know, on the cost structure and the impact of AI. Kinda hear you loud and clear with the previous question about you know, not committing to kind of long term headcount forecasting and some of the savings that can be plowed into to 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 is--

Andrew LaBenne: No. Certainly never too early to think about it. Maybe too early talk about it. So maybe we will also come back around on that 1 when we when we are talking more about 27. Well said, Douche.

Scott C. Sanborn: Our current thinking, David, we are what we are seeing more and more across the business is you know, 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 are 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, you know, onesies, twosies when people leave there is an increasing sense of we can. We do not really need to backfill that role. Because we can cover the gap with AI. I do expect to continue to see that. Pause. As Drew mentioned, we--you know, 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 you know, it will be a balance of finding savings where it makes sense, but making sure we are investing for future growth.

David Scharf: Understood. Thank you.

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

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

Andrew LaBenne: Yeah. 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 have done $10 billion through our structured program since then. And, really, it is just been a win for us and for investors. And I think we are doing a little over $1 billion per quarter across these programs right now. Just to just to get into it a little bit more, for investors, it is a benefit because it is a very simple bilateral securitization, which allows them to get leverage on their loan purchases which gives. Which allows them to generate a higher return overall and that translates into a higher sales price for us. So that is that is why I say it is a win. In terms of putting these on our balance sheet, the other benefit is it is 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.

Artem Nalivayko: 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.

Scott C. Sanborn: Yeah. So, look, we see all of the fintechs pursuing bank charters as validating the idea that you know, we pursued 6 years ago now. Important to note that today, you know, when we became a bank, we had to be operationally ready out of the gate. The conditional approvals today most of these banks are not yet operating as banks. So you know, they will be. They should be hitting the market throughout the course of next year. What I would say is we feel really, really ready. We have got a 6 year head start to tune our product mix, value proposition, you know, onboarding funnels, operations, and we have, more initiatives in the pipeline for next year. And that is why we are pleased to have gotten the new brand out there because we are also investing behind this new brand where you know, for us, the halo of being a brand that whatever your need is, we are gonna be delivering value. You know, when you see that we are delivering a market leading rate on savings, we believe that reinforces the value we provide on funding as well. So we feel very ready to compete.

Artem Nalivayko: Okay. Great. Thank you. Those are all the questions we had.

Operator: With that, we will wrap up our third quarter 26 earnings conference call. Thank you for joining us today. If you have any other questions, please email us at happen dot com.