Good day, and thank you for standing by. Welcome to the Happen Incorporated Second Quarter 2026 Earnings Conference Call. At this time, all participants are listening to the most. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message devising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference will be recorded. All night, Dan. Conference, over to your first speaker today, Artem Nellico, Head of Investor Relations. Please go ahead.

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 LeBend, 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 email or through the state 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 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 our future events our remarks also include non-GAAP measures relating to our performance including tangible book value for 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 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 pre-tax 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 HappnBank 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 lead in 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 10 times 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 middle. Turning now to credit, where we continue to outperform our competitive set by over 40% thanks to our proprietary models informed by two decades in 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 percent 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 loans 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 originating 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're increasingly adopting our banking products as well. We designed level-up 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-up checking account are more engaged, logging in over five times more often per month than those without a deposit account, giving us more opportunities to deepen the relationship. Borrowers also represent 20 percent of new level-up 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 helped 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 emails 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 iMember service agent, Penny, is successfully resolving 30% more calls than our legacy system, leading to faster response times, higher customer satisfaction, and reduced 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 the 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 four 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, for we have continued our outperformance across five 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. Non-interest 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, non-interest 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 dollars 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 in fair value as a reminder the larger balances require addition 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 one fair value adjustments. The higher benchmark rates were partially offset by spreads tightening 10 basis points at the end of the quarter. Combined impacts increased the discount rate for our for sale portfolio 23 basis points to 7.5 percent and her health care investment portfolio discount rate increased by 13 basis points to 7.1 percent the increase of the health care investment discount rate was lower due to the mix of newly retained loans in the portfolio in total revenue grew six percent to 263 million dollars 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%, flagged 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 percent compared to 3.8 percent in the prior year, driven by continued strength and 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-off and delinquency metrics include all health 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, and 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 and 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 headcount 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 pre-tax 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. Pre-tax 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 50 cents above the high end of our guidance range and up 52 percent from the prior year our return on tangible common equity was 15.9 percent and our tangible book value per share increased to 12.89 turning to the balance sheet total assets grew to 12.5 billion dollars up 16 percent year over year we ended the quarter with 10.8 billion dollars 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 spots, 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 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 in 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 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 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 lives. Sam Hudson 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.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To retire your question, please press star 11 again. Please stand by or we compile the Q&A roster. And our first question comes from the line of Bill Ryan of Seaport Research Partners. Your line is now open.

Good afternoon, Scott and Drew, and thanks for taking my questions. 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.

Hey, Bill. It's Scott. So as Drew mentioned on the call, in 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's 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 business are all growing quite nicely.

Okay, and just one follow-up, a little bit more technical, But on the day one fair value adjustment, it was 2.1% of originations in Q1. It was about 2.55 in Q2. I know we're only kind of three weeks, four 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 true. Yeah, if you look at where benchmarks are quarter to date, benchmarks are up another, depending on what they look at, like 15 to 20 basis points. And so that does have some impact on the day one 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, you know, I'm the caller. The other thing I'd just note on prices, we don't give the prices, but if you hold, if you 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. Thanks for taking my questions.

Thank you. One moment for our next question. Our next question comes from the line of Juliano Bologna of Compass Point. Your line is now open.

Congratulations on you. 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 step down in the HFI yields for the HFI book at fair value.

I'm curious of how we should think about kind of the betas of that going forward um from here and you know just think about the trajectory of that or if there's been a change in you know new loan yields and then along with that you know is there any should we expect any changes as you scale major purchase finance and home improvement yeah so thanks for the question juliano a couple things on the on the um on the yield on the hfi and fair value portfolio so one if you remember last quarter we had a 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, you know, 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 you know, I guess, down draft 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 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, you know, how hedged do you want the balance sheet to be from, like, you know, a coverage perspective?

And, you know, 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 we're roughly where we want to be based on the current balance sheet size so as as the um as we grow the balance sheet we're going to grow the notional on the hedges and as i as i just said you know 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 marks going through the balance But it does provide that additional benefit. um in any given quarter that's very helpful i appreciate it and uh i'll jump back with you thank you one moment for our next question and our next question comes from line of david scar

from citizen capital markets the line is now open great hi uh good afternoon thanks for uh taking my questions as well um hey you know maybe um just circling back to originations maybe a follow-up to bill's question but a little higher level um you know you you laid out some pretty formidable you know annual origination growth targets back at the investor day you know for the medium term and it looks like every quarter since then you you've been exceeding your forecast and you know can you provide any additional color on just what you're seeing out there you know, demand-wise. If it's a case of just conservative, you know, guidance, that's fine, but I'm wondering if, is part of it just, you know, 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.

Yeah, maybe I'll start. So, you know, 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, you know, so far since that date. A couple of the drivers, 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 you know repopulating our models rebuilding the creative library getting all the targeting models back that little we were very certain that the channels work but exact time to effectiveness and you know at scale is it 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. As you all know, we're 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 attracting.

No, 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. You know, 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 major driver. And we, just to maintain that flywheel, we really target that X. Okay, very helpful.

Thanks so much.

Thank you. One moment for our next question.

Our next question comes from the line of Vincent Kainzig from PTIG. your line is now open.

Hey, good afternoon. Thanks for taking my questions. 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 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 on the marketplace?

Yeah, great. Well, I'd say, first of all, investor demand is as healthy as it's been over the last, you know, 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, you know, that's just how the market works, basically, especially on the, you know, private credit and asset manager side and the structured certificates. There hasn't been a, 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 quality paper on balance sheet versus the full spectrum that we sell through the marketplace.

Okay, great. That's super helpful. Thank you. And then wanting to switch gears, focusing on expenses and kind of the marketing you're expecting. So you 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? Is there kind of more going forward as you're making investments in marketing? This is 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. Thank you.

Yeah, sure. I think there will still be some increase in marketing spend as we go through the year. We will have a little bit more brand spread in Q3 as well, which all that is factored into the guidance, obviously. And then we have the normal seasonality that you would expect where 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, you know, 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.

Okay, great. That's very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Crispin Love of Piper Sandler. Your loan is now open.

Thank you. Good afternoon, everyone.

Just first on credit, net charge-offs improved again. Credit commentary seems pretty positive, has been for some time. but can you just talk a little bit about expectations here? Have recent years 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 as you look out over the long-term.

Yeah. Well, I'd say, first of all, we always expect our credit's 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, you know, 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 mixed factor as those businesses get larger as well.

Great. I appreciate that.

And then can you discuss what the guidance implies for 2026 for the net interest margin outlook? And then does the guide imply any rate hikes, or is it more kind of stable rates for the back half of the year?

Yeah, let me take the rates first. So think of the two components of rates that are important to us. One is, you know, we call it benchmarks, but it's sort of around the two-year point of the Treasury curve, which is really setting our fair value marks and our loan sale pricing. And then you have the Fed funds rate, which is more influential in the deposit pricing. So benchmarks at the two-year point have been moving around pretty rapidly. We think, you know, in anticipation that the Fed may hike as we go through the year. We're assuming today's benchmark rates going forward. There's enough volatility in there that we don't know, obviously, where they're going to come. The Fed fund rate, especially for 26, is less impactful. If we get a hike at the end of the year, that's not going to have a very large impact on our guidance just because of the lag in deposit pricing. The fact that we've actually held our rates pretty competitively, I think, gives us some room to maneuver in the back half of the year with whatever the Fed may throw at us within reason. As far as net interest margin, we will have some, as I think I was answering in an earlier question, the asset yields will be moving down still as we go through the year, partially because of that transition from CECL to fair value and some of the legacy purchase portfolios running off as well. So that number will probably move down towards six as we go into Q3 and somewhere around there in Q4.

Great. Thank you, Drew. I appreciate all the details. Helpful.

Thank you. One moment for our next question. And our next question comes from the line of Kyle Joseph of Stevens. You line that open.

Hey, good afternoon, guys. Thanks for taking my questions.

Just a quick one, Drew, talking about your 26 guidance, if you can give us a little help just in terms of how you're thinking about the provision and the fair value marks impacting that just, you know, as we adjust our models for the new accounting. yeah yeah sure on the provision um for for q3 i think i said it in the in the earlier comments there we we are expecting a positive provision or a release again in q3 not as large as what we just saw in q2 but but i would note it you know there's a fair amount of variance uh in in terms of that estimate even even at this point as we're talking about q3 so you know i might be a little off on that estimate as we get the actual results. And then Q4, we would expect to be pretty benign on the provision line as well. And then fair value marks, you know, right now we're staring at 15 to 20 basis points of benchmark increases thus far for Q3. So as we get further into the quarter, we'd have a little more certainty. We'll watch the benchmarks in terms of how they're affecting price, but the guidance we've given you right now is assuming those benchmarks are are relatively stable for the rest of the year.

Really helpful. That's it for me. Thanks for taking my question.

Thank you. One moment for our next question. Our next question comes from the line of Yuna Sun of Jeffries. Your line is now open.

Hello, this is Yuna under John Hex's line. Maybe one more question on the how to think about provisions line going forward. How much of the third quarter would be a function of the CECL book shrinking versus credit improving? And with that, does the growth and the new customer's profile change that and how we should think about that in medium term?

Sure. Well, the easy answer on the last part is we are not originating any more loans under CECL. So the provision line is – the new originations have zero impact on the provision line going forward. Everything we're dealing with now is really just MacBook. And so if the CECL portfolio ran off exactly as we expected and the economic factors went exactly as we expected, you'd have a very small number in the provision line of a build, not a release because of the discounting. What we're seeing happening right now is obviously credit is outperforming our expectations, and the economic factors are not needed at this point. So both of those things are causing this release. For Q3, we're already almost a month in. We think those factors will continue through Q3. For Q4, we expect it to be, as I said, pretty benign. So that number, you know, it should be another release in Q3 and probably close to zero in Q4, but subject to change based on how the world evolves.

Got it. And just a follow-up on profile of the new customers that you're acquiring. Is there anything to note when it comes to the customer behavior, credit profile, or anything that you would like to note? Thank you.

No, no. Stable credit box. Obviously, the different programs we mentioned, home improvement coming in with a higher FICO than our average personal loan and higher income, but that's so small, it doesn't really skew the overall portfolio. Small for now. Small for now. Yes.

Thank you so much.

Thank you. One moment for our next question. And our next question comes from the line of Timothy Switzer of KBW. The line is now open.

Hey, good afternoon. Thank you for taking my questions. I have a follow-up on Juliano asking about the hedging program. Can you remind us, do you have a hedging program in place for all the loans that are marked at fair value? And then do you have any on the amortized cost portfolio?

Thank you.

We don't separate the hedging program into any one particular asset. We look at the duration of the total assets and liabilities on the balance sheet and look at our exposure of the net of that, and we hedge that exposure over time. Now, what we also have done at the beginning of this year with the move to fair value is we used to have our hedges under hedge accounting treatment, which means you would not mark them to market every quarter. Since it moved to fair value, we have moved our hedges away from that, including the existing ones, so that now they will be marked to fair value every quarter. And what that does is that provides some offset to the loan marks that are happening through the fair value portfolio. But I'll restate it. The goal is not to perfectly hedge the fair value marks on the assets. It's an added benefit of the hedging program.

Okay. Okay. And then if we look at your origination guide, it looks like some modest growth in Q3, which I think is in line with normal seasonality. But then a further pickup in Q4, at least flat.

And that seems a little bit in contrast to the seasonal headwind you typically see so could you maybe discuss you know what's driving that well i i'd say i'd say one for q3 you know there's there's a little bit of the the rebrand effect that we're going through right now and so the q3 number is giving us some range to uh navigate what was a very you know very large brand transition for us very successful brand transition and then q4 is you know the the normalization of that, but also some of the other businesses beginning to kick in more contribution as we go.

Meaning like the home improvement, major purchase finance?

Yeah, and small business.

And then if I can get one more, just looking a little bit further out, is there a target at all for balance sheet size or loans outstanding over the next year?

Well, what I would do is point you to investor day, right, where we put a target out there for balance sheet size over the medium term. And so, you know, we haven't been completely specific on what medium term is. But I think if you look at our balance sheet growth that we've achieved thus far, and you extrapolate that, you know, compound that out over a few years, you know, you'll get to kind of the target balance sheet that we put out there. So I think, you know, the levels you're seeing today in balance sheet growth, they're probably very similar in the future.

All right. Very helpful. Thank you, Drew.

Thank you. Now we'll turn over to Artem Nelaveco for additional questions.

All right. Thank you, Marvin. So, Scott and Drew, as always, we've got a few questions here that were submitted by our retail investors via same technologies and email.

First question, many fintech peers have built brands through things like podcasts, YouTube, social media. does the new happen bank brand plan to invest in a similar organic content strategy and what role do you expect organic marketing to play in long-term customer acquisition yeah so one of the key drivers of of the rebrand was to really you know properly reflect all the products we have available what we stand for for customers and it does provide the opportunity for us to move beyond the, let's call it the direct response blocking and tackling channels that have been a core driver of the business to date. So absolutely is the plan for us to move, as they say, kind of up funnel into broader awareness driving tactics and preference driving tactics. Once we get through the blocking and tackling of the transition, as Drew mentioned, you know, there's a major, major change, you know, thousands of touch points, emails, mobile app pages partner integrations you know retiring a brand that's been in market for for 20 years so we got to get through that which will be that you know really we expect to get through the majority of that this quarter and that then opens up the opportunity for us to start experimenting with other channels which we would hope to do you know could be as early as end of this year or beginning of next year we'll start leaning it into that opportunity all All right.

Perfect. Thanks, Scott. Second question is around capital. So with the company now demonstrating sustained profitability, solid balance sheet, how does the board and the management team prioritize the deployment of any excess capital? And should shareholders expect any shareholder-friendly initiatives such as a dividend in the future?

Yeah, great. Well, we have a continuous dialogue with management, Scott, myself, and the rest of the management team and the board the directors on the appropriate use of capital and excess capital going forward, and our goal continues to be to invest in growing the balance sheet and putting the originations, which have very high marginal ROEs, onto the balance sheet and grow the company. When we have excess capital available, as we determined we did at the end of last year, we initiated a stock acquisition share repurchase program, if you will, of $100 million in November of last year. We've executed $50 million of that, so we are redeploying excess capital back to shareholders.

Thanks, Drew. Last question is around product. So, does Happen Bank have plans to introduce any new lending solutions, such as buy now, pay later, for example, or any other innovative new services in the future.

Yeah, so we're very pleased with the velocity of product releases we've had over the last couple of years. If you think we launched Level Up Savings, Level Up Checking, Debt IQ, Home Improvement, and I continue to emphasize we're not done with the Home Improvement build. There's multiple products we need to make available in that market as well as capabilities to really, really tap the market and fit the needs of both the contractors and partners as well as the end users. But, you know, we're clearly not stopping there. Our goal over time is to lean into all the places we can help provide value, drive down the cost of credit for our customers. So next on the agenda will be home equity lending. It's just a natural fit because the number one and two uses of home equity loans are home improvement and debt consolidation. And those are two businesses we're already in today. So that will be kind of next up. Think about really more next year. We'll be thinking about that.

All right, perfect. That's all the questions we had. So with that, we'll wrap up our second quarter 2026 earnings conference call. Thank you all for joining us today. and if you have any questions, please reach out to irathappen.com.