Happen, Inc. (HAPN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Happen Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference will be recorded. I will now hand the conference over to your first speaker today, Artem Nalivayko, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to Happen Inc.'s Second 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 on 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 via 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 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 to 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 included a new Meet Happen presentation with our materials. This provides a way for our investors and media to learn who we are, why we're different and the opportunity that lies ahead of us. We will make this presentation available on our website going forward. And now I'd like to turn the call over to Scott.

All right. Thanks, Artem. Welcome, everyone. We delivered another standout quarter, growing loan originations 29% year-over-year to $3.1 billion, delivering record pretax income of $76 million and increasing return on tangible common equity to nearly 16%. We're growing and growing profitably despite the adverse rate environment. Our core business is firing on all cylinders, and we're making great progress against the strategy and initiatives we shared at Investor Day last fall. We officially launched the Happen Bank brand to properly reflect the role we play in consumers' financial lives. We're continuing to expand and optimize our marketing channels and improve our product experience, allowing us to deliver efficient growth. We're maintaining our leading credit performance, which is supporting strong growth in net interest income and marketplace loan sales. We're delivering valuable, high engagement products like our award-winning level of checking and savings accounts that our members love. We're successfully ramping our entry into the compelling home improvement financing market, and we're finding new ways to deploy AI to accelerate productivity, identify cost savings and enhance the customer experience. We launched the Happen Bank brand to better reflect the business we have become and why we exist to clear the way for people going places. Our brand is centered around our customer, the motivated middle who are high FICO, high income, digitally savvy consumers actively managing their financial lives. They are active users of credit, who are looking for products that deliver reliable value, are easy to understand and effortless to use, products that clear the way for what's next and help them make it happen. We deliver on that promise by making it easy for our members to access low-cost credit, saving them an average of 700 basis points in interest compared to their credit cards and by rewarding them for their savings by paying a rate that's more than 10x the national average. That's the kind of value that creates lifetime loyalty. Feedback on the new brand from members, prospects, partners and employees is enthusiastic because it speaks both to our broad ambitions and to our promise while also forging a distinct identity in the market. We look forward to sustaining this momentum and building deeper brand awareness and affinity among the motivated middles. Turning now to credit where we continue to outperform our competitive set by over 40%, thanks to our proprietary models informed by 2 decades on unsecured lending, a technology platform that allows for rapid testing and deployment and a seasoned team of experts who understand how to anticipate, interpret and react to changes in this dynamic macro environment. Our focus on underwriting discipline as we grow is a meaningful contributor to our strong financial performance. Sustained credit outperformance has furthered our reputation as a counterparty of choice and has translated to durable loan investor demand. Marketplace volume grew 20% year-over-year with strong participation across all programs. Existing investors buying in scale, new investors coming on board and average loan sales prices holding firm when adjusted for benchmark rates. In Q2, we began underwriting and issuing our first home improvement levels. With high mortgage rates and aging housing stock pushing more consumers towards renovation over relocation, this represents another compelling opportunity to leverage our lending expertise to win in a category where consumers are spending over $500 billion annually. The loans are to homeowners with high FICO scores and high income. Given this customer profile, combined with our leading credit expertise, we expect to generate returns similar to our personal loan portfolio. Market response has been positive and originations are ramping in line with our expectations. We've launched a second distribution partnership, and we have a strong pipeline of interest from additional partners. While most consumers come to us for seamless access to low-cost credit, they are increasingly adopting our banking products as well. We designed LevelUp Checking specifically for our borrowers, offering 2% cash back for on-time loan payments from their account. In Q2, we quadrupled the number of accounts we opened year-over-year with borrowers making up over half of all new accounts. What's more, borrowers who have a level of LevelUp Checking account are more engaged, logging in over 5x more often per month than those without a deposit account, giving us more opportunities to deepen the relationship. Borrowers also represent 20% of new LevelUp Savings accounts opened year-to-date. While initial balances are small, once they have paid off their loan, they are growing their accounts to an average of $16,000 to $18,000. Think about that. They came to us with roughly $20,000 in credit card debt and now have nearly that same amount in savings. You can imagine the kind of affinity these customers have for the bank that help them make that happen. As we build new solutions for our members, I've been pleased with the progress we're making on using AI to work more efficiently and effectively. We have put the infrastructure, training, controls and governance in place to enable safe model agnostic connectivity to our internal tools and data. Approximately 90% of our employees are regularly leveraging this infrastructure to accelerate productivity, improve problem solving and find efficiencies. It's fundamentally changing the way our teams accomplish everything from the mundane like drafting e-mails or creating presentations to more complex tasks like building and evaluating financial models, conducting compliance reviews, developing marketing campaigns and dramatically reducing the time it takes to onboard new partners. In some cases, the results have been profound. In engineering, the team is using AI to both develop code and assess its quality, leading to an acceleration in the velocity of our code releases. Within our call center, we delivered another record quarter of cost efficiency with 10% fewer staff year-on-year despite growing loan volumes by nearly 30%. Our new AI member service agent, Penny, is successfully resolving 30% more calls than our legacy system leading to faster response times, higher customer satisfaction and reduce costs. AI servicing tools have contributed to a 65% reduction in after-call work and a 10% reduction in average call time, allowing associates more time to spend delivering meaningful experiences and reducing the rate of staffing growth. And thanks to the use of AI to monitor 100% of our call volume, we have greater visibility into areas of member friction, allowing us to address and eliminate the drivers of calls. We are still in the early innings, and we expect to unlock even greater benefits as both the models and our applications evolve. In closing, we feel great about the momentum in our business. Our new brand is taking hold. We're executing well and we're continuing to innovate, all of which is translating to compelling financial results. Before I turn it over to Drew, I want to thank the Happen Bank team for successfully launching our new brand while continuing to deliver for our members and shareholders. Our talented team has made it happen yet again, and I'm proud to say that we've been recognized as a USA TODAY Top Workplace for the fourth year in a row. With that, I'll turn it over to you, Drew.

Thanks, Scott, and good afternoon, everyone. We're very pleased with our execution throughout the first half of 2026 where strong originations growth and pristine credit performance have more than offset the unexpected change in interest rates. Now let's get into the details. Turning to Page 4 of our earnings presentation. Loan originations grew by 29% to over $3.1 billion, above the high end of our guidance range. Our business lines delivered strong growth supported by the compelling experience and value we deliver for our members. Our industry-leading credit performance remains a key differentiator where we have continued our outperformance across 5 years of quarterly vintages. As a result, we continue to sell loans without credit enhancements or loss protection. Now let's turn to revenue on Page 5. Net interest income increased 16% to $179 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. Noninterest income was $84 million, up 10% sequentially and down 11% year-over-year. The year-over-year comparison is affected by our switch to fair value in 2026. As a reminder, noninterest income now immediately recognizes the loan origination fees, which were previously deferred under CECL and now have a positive benefit to in-period revenue. However, the more significant impact with the move to fair value option is the deduction of credit performance through fair value adjustments, which would have previously been captured as provision expense under CECL. Diving into the results. Origination fees in the quarter were $164 million, up 87% year-over-year, driven by higher volumes and the immediate recognition of origination fees under fair value accounting. Total fair value markdowns were $121 million compared to $89 million in the first quarter due to three factors: first, higher origination volumes in the quarter mean higher fair value markdowns. Second, continued growth in the average balance of loans carried at fair value. As a reminder, the larger balances require an additional fair value markdowns to achieve a constant revenue yield equal to the discount rate. Third, benchmark rates moved 35 basis points higher during the quarter, which lowered sales prices and caused larger day 1 fair value adjustments. The higher benchmark rates were partially offset by spreads tightening 10 basis points at the end of the quarter. The combined impacts increased the discount rate for our held-for-sale portfolio 23 basis points to 7.5%, and our held-for-investment portfolio discount rate increased by 13 basis points to 7.1%. The increase of the held-for-investment discount rate was lower due to the mix of newly retained loans in the portfolio. In total, revenue grew 6% to $263 million. Another useful way to evaluate performance under the accounting transition is risk-adjusted revenue or revenue less provision for credit losses, which grew 31% year-over-year to $274 million due to the revenue growth we just discussed and the net provision benefit this quarter. Now turning to net interest margin on Page 7. The net interest margin was 6.1%, flat year-over-year as lower asset yields were offset by lower funding costs. Now let's move on to credit, where performance remains excellent. Provision for credit losses was a benefit of approximately $11 million, reflecting strong observed and projected credit performance on the portfolio under CECL. We expect this credit performance to continue in the second half and currently are forecasting another provision benefit in Q3, but at lower levels in Q2. Our net charge-off ratio for the total held for investment portfolio improved to 3.2% compared to 3.8% in the prior year, driven by continued strength in credit performance as well as portfolio growth dynamics. As our portfolio matures, these charge-off ratios will increase to target levels. It is important to note that these charge-offs and delinquency metrics include all held for investment loans on the balance sheet, inclusive of both fair value and CECL portfolios for all reported periods. We're continuing to improve profitability while investing in critical initiatives to drive future growth. These include developing new marketing channels, further supporting our rebrand efforts in building out our new home improvement vertical. Turning to Page 8. Total expenses were $198 million, up 28% year-over-year. The majority of the increase was due to higher marketing spend, reflecting our continued investment in paid acquisition channels to drive originations growth. Marketing spend increased approximately $7 million sequentially, consistent with our higher origination volumes. While marketing as a percentage of originations improved sequentially to 2% due to better performance in our more efficient marketing channels. Compensation and benefits expense was up 10% year-over-year, reflecting head count growth to support new business verticals and continued expansion in our core businesses. We have remained thoughtful about hiring as we continue on our growth trajectory. As a point of reference, the last time we achieved these origination levels, our employee base was 27% larger than it is today. Putting it all together, our pretax profit margin reached a new high of 28.8%, reflecting a strong pull-through of revenue growth to the bottom line. We're encouraged by the step-up in profitability and our investment in future growth initiatives while growing profit margins. Pretax income was $76 million, up 40% compared to a year ago and reflects a new high watermark for the company. Diluted earnings per share was $0.50, above the high end of our guidance range and up 52% from the prior year. Our return on tangible common equity was 15.9% and our tangible book value per share increased to $12.89. Turning to the balance sheet. Total assets grew to $12.5 billion, up 16% year-over-year. We ended the quarter with $10.8 billion in deposits, which was an increase of 18% compared to the prior year, and we continue to see healthy deposit trends across our product offerings. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining flexibility to scale marketplace volumes as an additional growth lever. We have also evolved our hedging program over the last few years. The program is meant to protect revenue and earnings across interest rate cycles, while minimizing short-term volatility. At the end of the quarter, we had $2.1 billion of notional balances using a combination of caps and interest rate swaps. And we expect to continue scaling the program in line with the size and composition of our balance sheet. We ended the quarter well capitalized with strong liquidity and positioned to fund future growth. I'd also like to provide a brief update on the share repurchase and acquisition program. Since inception and through the second quarter, we have utilized $50 million to purchase approximately 3 million shares and held our diluted share count flat compared to the previous quarter and share count is down since the end of 2025. Now let's turn to our outlook. We finished the first half of 2026 with significant momentum. We are tracking to the high end of our annual return on tangible common equity guidance that we laid out at Investor Day despite absorbing approximately 75 basis points of rate pressure year-to-date from increasing benchmark rates. Our outperformance to date gives us confidence to update our full year targets. For the full year, we are increasing the lower end of our originations guidance and the updated range is $12.2 billion to $12.6 billion, and we are raising our diluted earnings per share target range to $1.80 to $1.90. For the third quarter, we expect to deliver loan originations of $3.2 billion to $3.35 billion, although we have slightly widened the range to account for the brand transition and operational complexity that goes with the change of this magnitude. On earnings for Q3, we expect to deliver diluted earnings per share of $0.43 to $0.48. We're pleased with our execution, our strategy is working, and we remain encouraged by the underlying fundamentals of the business. One final call out before we move to Q&A. This will be Artem's last earnings call as our Head of Investor Relations. We can't thank him enough for all the incredible work he has done over the last several years. He is ready for a new challenge and is moving into an internally facing finance role as the CFO of our business lines. Sam Houston will be taking over as our Head of Investor Relations. Sam has been playing a critical leadership role within the finance organization at Happen Bank for more than a decade. We are excited to have him take on this new role. With that, we'll open it up for Q&A.

[Operator Instructions] And our first question comes from the line of Bill Ryan of Seaport Research Partners.

First question is on the origination mix. Obviously, you've had some new product launches here in the past couple of quarters. Home improvement, major purchase. And if you could maybe give us some idea what they're contributing to your year-over-year growth in volume and maybe how the personal loan core product is doing?

Bill, it's Scott. So as Drew mentioned on the call, I mean, all of our consumer businesses are growing and contributing to that year-on-year growth, home improvement is really, at this point, so nascent. As we mentioned on the call, we're pleased with the trajectory. It's in line with what we expected. But given that we just got live with the first partnership, as you can imagine, we don't just sort of open the fire hose out of the gate until we're sure everything is working properly. We're getting the profile we expect and all that and just added a second partner as we exited the quarter and expect to add more. So there, it's really next year that we'd expect to see the step up in growth as this year, we put all the infrastructure in place and get all the partnerships signed in time for next year's seasonal pickup. And then as I mentioned, all the other consumer businesses are all growing quite nicely.

Okay. And just one follow-up, a little bit more technical. But on the day 1 fair value adjustment, it was 2.1% of originations in Q1. It was about 2.5% in Q2. And I know we're only kind of 3 weeks, 4 weeks into the current quarter, but kind of where things stand today, do the fair value marks going forward on originations look fairly stable? Or do you think it's going to move a little bit from where it is right now?

Bill, it's Drew. Yes, if you look at where benchmarks are quarter-to-date, benchmarks are up another depending on what day you look at, like 15 to 20 basis points. And so that does have some impact on the day 1 marks that come through. We've accounted for that in our guidance using today's rates to set the guidance going forward. So if rates don't move, we'd expect a little pricing pressure and therefore, come through the marks, but we've accounted for that. And I'd say the other thing -- the other thing I'd just note on price is, we don't give the prices, but if you hold -- if you would account for benchmark change over the course of Q2, adjusting for that, our prices were stable throughout the quarter. So I think the underlying fundamentals of investor demand is very strong. I don't think it is -- I know it is it's very strong. What you're seeing is just the adjustment for the benchmark rates.

Our next question comes from the line of Giuliano Bologna of Compass Point.

Congrats on another impressive and successful quarter. When I look at the asset side of the balance sheet for a second, I'm curious, there's a bit of step down in the HFI yields for the HFI book at fair value. I'm curious if how we should think about kind of the betas of that going forward from here? And just thinking about the trajectory of that or if there's been a change in new loan yields. And then along with that, is there any -- should we expect any changes as you scale major purchase finance and home improvement?

Yes. So thanks for the question, Giuliano. A couple of things on the yield on the HFI fair value portfolio. So one, if you remember last quarter, we had an upward adjustment, which was due to the purchase portfolios and aligning how we did fair value through that. That portfolio, higher yielding, but is continuing to run off. So that means that we are going to see yields come down a little bit more as we go through the next quarters. And then for the overall asset yield as well, the move from CECL to fair value does mean we're giving up a little bit of yield on top line asset yield as we make that transition as well. So we'll have a little bit of, I guess, downdraft from both of those factors. As far as home improvement, you can think about home improvement, the economics are very similar to PL. It's higher FICO and higher income in terms of the customer that we're serving there. And so the yields are a little bit lower, but the loss -- expected loss content is also lower. So that means when you're looking at the NIM table, you'll probably see a little bit lower yield as those come on, but should make up for that in the overall economics when considering the loss rates.

That's very helpful. And then thinking on the hedging side, is there a rough sense of how hedged you want the balance sheet to be from like a coverage perspective? And are you roughly where you want to be from a coverage perspective going forward? Or should we expect that to dial higher over time?

We are roughly where we want to be based on the current balance sheet size. So as we grow the balance sheet, we're going to grow the notional on the hedges -- and as I just said, we use swaps and caps to do that. And we're also considering sort of where the market pricing is at any given time when it's time for us to add notional in terms of which product which type of hedge that we put into place. And the other thing I'd say is the goal of the hedging program is really to protect ongoing revenue. It's not necessarily there to entirely offset the fair value marks in any given quarter, given that's really timing as far as the fair value mark is going through the balance sheet. But it does provide that additional benefit in any given quarter.

And our next question comes from the line of David Scharf from Citizens Capital Markets.

Maybe just circling back to originations, maybe a follow-up to Bill's question. But a little higher level. You laid out some pretty formidable annual origination growth targets back at the Investor Day for the medium term. And it looks like every quarter since then, you've been exceeding your forecast. And can you provide any additional color on just what you're seeing out there demand-wise? Is it a case of just conservative guidance that's fine, but I'm wondering if -- is part of it just leaning into the additional marketing channels? Or is there something in terms of a particular consumer cohort that might be ramping up application volumes. Just any color on ultimately what's driving this kind of upside?

Yes, maybe I'll start. So the guide we gave at Investor Day was to maintain 20% to 30% growth in originations sort of over the medium term. So to your point, we're coming in at just at the high end of that so far since that date. The -- a couple of the drivers that Drew mentioned a little bit in his script. So one was during that high rate inflationary environment, we had pulled back on a lot of marketing channels and spinning those back up, repopulating our models, rebuilding the creative library, getting all the targeting models back a little. We were very certain that the channels work but exact time to effectiveness and at scale was a bit more of a question. And as you saw in these results, we actually delivered at the high end of the range while also actually improving modestly on marketing efficiency quarter-over-quarter. So that was certainly a real driver. And it's not just marketing. There's -- as you all know, we were constantly iterating on the product experience as well, how we present the offers, what offers we present, how we guide people through the process, how we pull them through with our marketing and our other efforts. And we saw a nice boost in our ability, especially to get our repeat customers back through the process in the second quarter. What it's not coming from and just emphasizing is any real change in our credit posture. So as strong as the performance has continued to be and stable as it's continued to be, we feel great about that, but we are maintaining real discipline there and are not looking to use that as a lever to drive growth.

Got it. That's helpful. And maybe just as a follow-up, and you may have just partially answered it, but is part of the credit outperformance coming from an increase in the repeat borrower mix? It sounded like you are starting to see more success in attract...

I'd call that you are correct that repeat customers come at a dramatically lower cost and they do perform better. That is a true statement. That said, I'd say the range. On average, we shoot for roughly a 50-50 on a monthly basis of new versus repeat. And so when I say outperformance, you can think of just a couple of points versus maybe a prior quarter, it's not a massive swing. We're always going to be, I'd call it, in that 47 to 53, one way or the other, depending on what's happening in a given quarter. So it's not a not a major driver, and we -- just to maintain that flywheel, we really target that mix.

Our next question comes from the line of Vincent Caintic from BTIG.

First one, back to the marketplace and investor appetite. So I was just wondering if you could maybe talk about the conversations you're having with investors, particularly given market expectations that Fed rates are going to be climbing. How is demand has -- and has the mix of the loans that they're interested in changed maybe in terms of higher quality or anything like that? And then relatedly, how should we think about the mix going forward of what stays on the balance sheet held for investment versus what goes in the marketplace?

Yes. Great. Well, I'd say, first of all, investor demand is as healthy as it's been over the last extended period of time. So investors are very interested in the asset class. We are holding up our promise here and delivering the returns that we tell them they're going to deliver. And there is more appetite -- more investor appetite than we're able to fill at this point while also hitting our balance sheet goals. So very encouraged with the marketplace side. Obviously, as benchmarks are going up, as I mentioned on the call, we adjust price -- sales price for the benchmarks. And that's just how the market works, basically, especially on the private credit and asset manager side and the structured certificates. There hasn't been -- I don't think there's been a large change in kind of mix that people are looking for, it's across the spectrum from prime to near prime, and all cohorts are performing well. As far as what we put on our balance sheet, we are only selling personal loans through the marketplace. So home improvement is going entirely to our balance sheet. Auto is going entirely to our balance sheet, major purchase finance. And we tend to -- as a bank, we tend to hold higher quality paper on balance sheet versus the full spectrum that we sell through the marketplace.

Okay. Great. That's super helpful. And then wanting to switch gears, focusing on expenses and kind of the marketing you're expecting. So we've saw the nice improvement in terms of the originations on the different products launching home improvement and so forth. What should we sort of expect in the second half of the year? Or is there kind of more going forward as you're making investments in marketing? Does it kind of seasonally I think in the past like kind of tailing off in the fourth quarter and first quarter? Just if you can give us help on how to think about expenses and investments for the rest of the year and into next year.

Yes, sure. I think there will still be some increase in marketing spend as we go through the year. We -- we'll have a little bit more brand spend in Q3 as well, which all that is factored into the guidance, obviously. And then we have the normal seasonality that you would expect for Q3 -- Q2 and Q3 are strongest from a seasonal perspective, Q4 and Q1 have more headwind due to seasonality. We also, though, have other initiatives that are launching at the same time, Home improvement is the one, obviously, we've been talking about the most. And so growth there as we go through the back half of the year should help to offset some of the seasonality we would normally experience in other parts of the business.

Our next question from the line of Crispin Love of Piper Sandler.

Just first on credit. Net charge-offs improved again. Credit commentary seems pretty positive, it has been for some time. But can you just talk a little bit about expectations here? Have recent quarters been outperforming your expectations? And I believe in the past, you've discussed net charge-offs normalizing to 5% or so long term. So just curious in the current outlook, if that's changed at all on what you might expect for normalized levels that you see look out over the long term?

Yes. Well, I'd say, first of all, we're -- we always expect our credit is going to perform well. I think it's even exceeding our expectations and that's evidenced, obviously, by the charge-off rates going down and the provision release that we had in the quarter. So that was great and that helps, obviously, future performance as well as we go forward. As far as -- we are benefiting from the portfolio growing, which has a denominator effect that helps keep the charge-off rate probably lower than the longer-term targets that would be 4.5% to 5% in the personal loan space. I think some of where that entire portfolio ends up will depend on our longer-term mix as well. How much does home improvement contribute, how much does auto contribute those have lower charge-off rates than the personal loan business. So there probably will be some mix factor as those businesses get larger as well.

Great. I appreciate that. And then can you just discuss what the guidance implies for 2026 for the net interest margin outlook? And then -- and does the guide imply any rate hikes? Or is it more kind of stable rates for the back half of the year?