Pathward Financial, Inc. (NASDAQ:CASH) Q1 2025 Earnings Call Transcript

Pathward Financial, Inc. (NASDAQ:CASH) Q1 2025 Earnings Call Transcript January 21, 2025

Pathward Financial, Inc. beats earnings expectations. Reported EPS is $1.29, expectations were $1.24.

Operator: Ladies and gentlemen, thank you for standing by and welcome to Pathward Financial’s First Quarter Fiscal Year 2025 Investor Conference Call. During the presentation, all participants will be in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead.

Darby Schoenfeld: Thank you, operator, and welcome. With me today are Pathward Financial CEO, Brett Pharr, and CFO, Greg Sigrist, who will discuss our operating and financial results for the first quarter of fiscal year 2025, after which we will take your questions. Additional information including the earnings release, the presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to, anticipated results for future periods. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement.

Please refer to the cautionary language in the earnings release, investor presentation and in the company’s filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statements. Additionally, today we will be discussing certain non-GAAP financial measures on this call. References to non-GAAP measures are provided to assist you in understanding the company’s results and performance trends, particularly in competitive analysis. Reconciliation for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Included in the non-GAAP measures, this quarter we will begin reporting an adjusted net interest margin including contractual rate-related card processing expenses associated with deposits that are on the company’s balance sheet.

All mentions of adjusted net interest margin on this call will refer to the updated metric. This will replace our previously reported adjusted net interest margin, which included contractual rate-related card processing expenses associated with all deposits, including custodial deposits. You will find this adjusted net interest margin measure included in our non-GAAP reconciliations in the earnings release and the supplemental slides that were filed today in conjunction with the earnings release. Finally, all time periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior year period, unless otherwise noted. Now, let me turn the call over to Brett Pharr, our CEO.

Brett Pharr: Thanks, Darby, and welcome everyone to our earnings conference call. Fiscal 2025 has started out well, and during the quarter we made good progress against the strategy we laid out last year. The biggest step we took was closing the sale of our insurance premium finance business in October, along with the subsequent sale of securities. This move started the process of optimizing close to $800 million on our balance sheet by putting us in a position to reallocate those funds into higher yielding assets or those with optionality. Keeping our focus has helped us deliver strong results. We reported earnings of $1.29 per share for the first quarter, which represents year-over-year growth of 22% and net income of $31.4 million.

Our results were driven in part by an increase in net interest income of 6% when compared to the same quarter last year. We also expanded our quarterly net interest margin and adjusted net interest margin, which includes contractual rate-related processing expense associated with deposits on the company’s balance sheet to 6.84% and 5.41% respectively. Performance metrics were strong for the quarter with return on average assets for the quarter of 1.69% and return on average tangible equity of 25.65%. We are also reiterating our fiscal 2025 guidance of $7.25 to $7.75 earnings per diluted share. Our focus on the loan side of the balance sheet has not changed. Given our competitive position in the payment space, we are limited to an asset size of $10 billion in order to remain under the Durbin Amendment threshold, which leads us to focus on optimizing the assets that we keep on balance sheet.

This focus means our assets either have high risk adjusted returns or optionality for balance sheet velocity. As a part of this focus, we executed the sale of our insurance premium finance business as I mentioned before. We also announced a strategic partnership to support renewable energy loan growth. Renewable energy continues to be a focus for Pathward where we are underwriting conventional construction loans and USDA guaranteed loans with proper risk-adjusted returns and providing us optionality on the balance sheet. Our partner brings strong industry experience to the table, and we expect that co-innovation in this partnership will accelerate efficient, scalable, and predictable growth within Pathward’s renewable energy initiative. Our fiscal first quarter originations were strong, particularly in renewable energy, equipment finance, and working capital.

And we believe that this origination momentum will continue. Another aspect of the lending side that we’re focused on is credit sponsorships, where we act as a lender of record. We continue to expand our reach through growth with our existing partners and nurturing a strong pipeline of prospective partners who are mission aligned and share our risk and compliance posture. During the first quarter, we originated more of these loans than any other first quarter in the company’s history. These loans are protected by certain layers of credit support and offer us additional balance sheet flexibility. In the first quarter of fiscal year 2025, our partner solutions team extended contracts with two of our top issuing partners, one for an additional two years and one for an additional five years.

After the quarter ended, we also signed a contract with a new partner. We remain dedicated to growing and nurturing our partnerships while addressing new opportunities in our pipeline. The pipeline remains strong, and we continue to work tirelessly with potential new clients to show them the breadth of products we offer, our ability to scale and expand with them, and an expertise that comes with being in the industry for 20 years. Tax season has begun. We’re off to a good start with 12% more enrolled tax offices than last year. We look forward to updating you more on the next call. For a couple of quarters now we have talked about our strategy to be the trusted platform that enables our partners to thrive. We believe this strategy will help us deliver on our goal to drive growth in revenue and net income in the next few years.

This growth will come in two forms. In the short term, our focus on optimizing the balance sheet should drive an expanded net interest margin with additional net interest income. This is due to rotating assets out to higher yielding assets. In addition to the changes we have already made, we also have a portion of loans on the balance sheet that were underwritten prior to the increase in interest rates. Longer term, having the right people, process, and systems will allow us to continue to grow partner solutions. This team produces primarily noninterest income diversifying our revenue stream. With the increased desire for embedded finance combined with the innovation from Fintechs and other payments focused companies, the opportunity for growth in this aspect of our business is significant.

We offer an array of products, issuing, acquiring, digital payments including direct to debit and ACH, financial institution solutions, credit solutions and professional tax solutions, allowing Pathward to provide an array of products to partners. We can provide multiple solutions while offering expertise, operational excellence, true partnership, and a mature risk and compliance infrastructure that is led by our consultative governance approach. Now, I’d like to turn it over to Greg who will take you through the financials and guidance in more detail.

Greg Sigrist: Thank you, Brett. The First quarter results included growth in net interest income and noninterest income. Net interest income grew 6% despite the sale of the insurance premium finance business which closed on October 31st. The net interest margin of 6.84% and adjusted net interest margin of 5.41% expanded when compared to the prior year’s quarter. This is primarily due to a mix shift to higher yielding assets as well as an increase in yields across our lending businesses. Sequentially, both measures also expanded due to a mix shift to higher yielding assets. Our continued efforts to increase new production yields produced a 9.45% average yield on commercial finance loans and leases originated during the quarter compared to the last quarter’s yield on the same portfolio of 8.49%.

Provision for credit losses was $12 million, which includes provisioning for our strong loan production in the quarter. We continue to see the benefit from our strong credit and collateral management. Non-interest income increased 9% when compared to the prior year’s quarter, primarily due to an increase in gain on loan sales. This was in line with our focus on having optionality on the balance sheet, including the sale of eligible loans. Total noninterest expense increased 4% versus the same quarter last year, primarily due to an increase in compensation and benefits partially offset by decreases in contractual rate-related card processing expenses. The increase in compensation and benefits is largely due to hiring additional talent on our technology team.

This is a direct reflection of our comments last quarter, where we detailed to you some of the work we’ve been doing in technology and the investments in people and talent aligned to that work. Finally, we did recognize a gain on the sale of our insurance premium finance business, but during the quarter, we also sold approximately $175 million in par value securities at a loss that largely offset the gain, thereby largely neutralizing the impact on the income statement. We used some of the proceeds of both of these sales to repay outstanding short-term borrowings, and the remainder was used to fund loans or shifted to custodial deposits. Deposits held on the company’s balance sheet at December 31st totaled $6.5 billion, a decrease of around $400 million from the prior year.

This primarily reflects the repayment of wholesale deposits and our return of inactive EIP deposits to the Treasury. Sequentially, deposits grew $644 million following our normal seasonal patterns. Custodial deposits held at partner banks at December 31st totaled $840 million compared to $1.1 billion last year. However, average balances for the quarter were $388 million compared to $379 million last year. Total loans and leases at December 31st were $4.6 billion, slightly above the balance of $4.4 billion from a year ago. If you take into account the fact that we completed the sale of our insurance premium finance business, which reduced the balance by approximately $600 million, we saw some pretty incredible growth. This is primarily due to higher term lending balances, particularly renewable energy construction loans that convert to USDA, as well as asset-based lending and warehouse.

Origination in these loan verticals has been deliberate as they provide us with either higher risk-adjusted returns or optionality on the balance sheet. Our liquidity remains strong, with approximately $4 billion available. This is slightly higher than where we were last year at this time, and we are extremely pleased with our position. The securities portfolio will continue to draw down by approximately $250 million over the next 12 months, giving us additional capacity to optimize the balance sheet. Finally, during the quarter, we repurchased approximately 702,000 shares at an average share price of $74.05. With the sale of the insurance premium finance business, we had more flexibility in executing share repurchases this quarter, and we made the decision to accelerate them.

We are reiterating our fiscal year 2025 GAAP earnings per diluted share guidance range of $7.25 to $7.75. This includes a number of assumptions, no rate cuts for the remainder of the year. We expect net interest margins to exceed those of fiscal 2024 as a result of our strategy to optimize the balance sheet. We still expect an effective tax rate of 18% to 22%. Guidance also includes expected share repurchases. This concludes our prepared remarks. Operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] First question is from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi: Hey, good afternoon.

Brett Pharr: Hey, Frank.

Frank Schiraldi: Just to start with the commercial finance business. You saw really strong growth in the quarter. I think, Brett, you mentioned a new renewable energy partnership. Just curious, your thoughts, you know you expect the momentum to continue. Just wondering your thoughts on expectations of growth rates going forward in this business over the near term.

Brett Pharr: Yeah, I mean, I think we’ll continue to emphasize that product set. Part of it is, it is a product set that gives us a lot of optionality. And you’re seeing that even in our returns this quarter, where you can enter in transactions and they ultimately result in a saleable loan. And so we really like that business model. Part of your question may be around shifts in the political environment. And I think there’s some potential of some slowdown, but there still needs to be a lot of investment in energy infrastructure in the country. I think about battery storage is an area that no matter what happens we’re going to need. There’s going to be a demand for AI power. And so I think it’s still going to be good and strong. It may not jump as much in future quarters as it did this time, but I still expect growth there.

Frank Schiraldi: Okay. And then, correct me if I’m wrong, but I feel like the higher for longer in terms of the rate outlook is, I think, the best scenario for your balance sheet and earnings pickup. And so, we definitely seem like we’ve gotten more, a little better clarity maybe into that versus where we were three months ago? So just curious, the guide was reiterated full year, bottom line EPS guide. But shouldn’t you benefit from this higher for longer rate picture, which should otherwise boost expectations a bit?

Brett Pharr: Yeah, I’d say a few things, and then maybe Greg can comment on it. You’re right, higher for longer, assuming curve — yield curve, which we’re getting right now, is good for us. And so that’s definitely a tailwind. As we kind of think about what’s coming, though, some of it depends on which assets you have to continue to grow that. So some assets are — get a better benefit from that than others. And so we’re looking at those pieces. The thing I would tell you is, we always look at our tax season. We want to see what happens to the tax season before we have any conversations. And so that’s certainly partly in our mind. We think it’s going to be a great year, but you wait to see that kind of coming through. The last thing I would say is we are contemplating various kinds of investments over time, we’ve been doing it for a while.

We’ll continue to be doing some things in the technology area, risk and compliance to match the volumes that we have added and those kinds of things. So we’ll have more to say about that later, but there’s good tailwinds, but more potentially to come.

Frank Schiraldi: Okay. And then just lastly, just on the partnerships, you mentioned the two large partnerships on the partner solution side that you re-upped. Just curious, as you re-upped these contracts, is there any broad-based readthrough in terms of any changes to the economics? Are you seeing any pressure on pricing, any improvement on pricing and any change in the economics broadly speaking? That’s number one. And then two, just wondering if you can give any further detail on the new partner you signed post quarter? Thanks.

Brett Pharr: Yeah, on the economics, obviously not to any specific deal, but because of the rate environment, there is continued pressure and discussion on what do we call it, [instead of] (ph) commission deposits, contractual fee…

Greg Sigrist: Contractual rate related processing fees.

Brett Pharr: Yeah, right, processing fees. So, I think some of that, there’s pressure there, we try to offset that with other kinds of transaction fees et cetera and that’s not necessarily about those two but that’s generally what we’re seeing as we go through this and people just more attuned to the rate environment. I don’t really want to comment on the one that was announced after the fact. Just know that pipelines are full, all these things are constantly being looked at and particularly both in the partners interest and in our interest long before contracts expire, looking for extensions of those because nobody wants to go through a switching process.

Frank Schiraldi: Sure, I know that makes sense. Okay, that’s all I have. Thank you.

Brett Pharr: Thanks, Brian.

Operator: Thank you for your question. Next question is from the line of Tim Switzer with KBW. Your line is now open.

Tim Switzer: Hey, good afternoon. Thank you for taking my questions.

Brett Pharr: Hey, Tim.

Tim Switzer: I have a follow-up on, I guess, the part of your pipeline here and it’s been about a year plus of some disruption in the banking-as-a-service industry. Has that created a lot of opportunities for you guys more recently and how do you see this evolving over the course of the new administration? Do you see any relief possibly on the regulatory side or do you think this will continue to create opportunities for you given the disruption?

Brett Pharr: Yeah, the headline would be yes, this is going to continue to give us opportunities. I think you’ve got to bifurcate the political regulatory environment into two groups. It is obviously true that there is going to be a change in tone at the top in general bank regulatory environments, which is going to provide some relief. And you’ve got things that you already assumed. You’ve got an FDIC statement that came out today, all of which are very good news for the banking industry in general. However, in those areas where there’s potential for customer harm, there’s going to be a bipartisan view that you can’t do that. And so I think in our specific narrow space, there will continue to be considerable pressure from a regulatory environment just to prevent that kind of customer harm.

Tim Switzer: Yeah, Okay. That makes a lot of sense. Switching topics here a little bit. It looks like commercial charge-offs ticked up just a little bit. Can you provide some color one what you guys are seeing there and kind of the outlook for the rest of your portfolio, excluding the tax business?

Brett Pharr: We always look at commercial charge-offs within a range. And there are one-offs every quarter come and go. Sometimes it’s a charge off, then the next quarter it’s a recovery. There’s nothing happening in that portfolio that’s unexpected. And it’s very much within the range that we’ve been over time. So there’s nothing happening there. It’s just normal business that we have that usually has an individual story.

Greg Sigrist: Yeah, the only thing I would add, Tim, is when you look at the credit metrics for the quarter, charge-off — past dues and the like, everything is either stable or improving, just another couple of more data points you can look at, but I agree with Brett’s commentary on that.

Tim Switzer: Okay, and the last question I have is, do you guys have any other plans for like securities restructuring or redeployment of — remixing the balance sheet following the commercial finance business sale beyond just moving into the higher yielding loan categories you guys have talked about previously?

Greg Sigrist: Well, never say never on a securities remixing. I think we’d have to be opportunistic on it. We’re pretty comfortable with what’s there, and it’s rolling down [250] (ph) over the next 12 months, and it’s a fairly five-year duration, which is fairly short. So I’m not sure I see the impetus to go out and just kind of blindly do it, but opportunistically, yeah, perhaps. As it relates to broader just remixing though, I mean, we’ve got some really good verticals on the balance sheet right now with a lot of good momentum behind them. We’re always looking to evaluate, where are there opportunities, where there might be gaps, either in markets we’re in or adjacencies. So you might see some of that come up over the next 12 to 18 months.

But right now, we’re actually really comfortable with the risk adjusted returns we have on the portfolio we’ve got. I’d like to continue to take a bit of duration. I think we’re at that point in the rate cycle where more duration is helpful, which we definitely did this past quarter. But I think just remixing what we’ve got is actually a pretty good strategy that’s been working for us.

Tim Switzer: Perfect. Okay. Thank you, guys.

Greg Sigrist: Thanks, Tim.

Operator: Thank you for your question. Next question is from the line of David Feaster with Raymond James. Your line is now open.

David Feaster: Hi, good afternoon, everybody.

Brett Pharr: Hey, David.

Greg Sigrist: Hey, David.

David Feaster: I just wanted to touch on the credit sponsorship side. I mean, you touched on seeing stronger volumes. I know this is a focus for you all. Could you just touch on where you’re having the most success, where you’re having — where you’re seeing the most opportunities? What types of credit or industries are you primarily focused in, and when would you expect to see more partners added to this segment and maybe accelerate growth even further?

Brett Pharr: It’s interesting, David, that if there’s any place where the story of regulatory pressure has created opportunities for us, it’s in this space. Frankly, we have new partners and/or existing partners with new volume that have come to us because other partner banks misstep in some of the third party risk compliance elements. And so that’s why we’re getting that growth. And we suspect that’s going to continue for a period of time. And we like this because it’s waterfall credit protected. As we talked about, it comes on the balance sheet, it goes off the balance sheet, so it gives us a lot of optionality, make fees in that. So it’s a good space to be. And while we talk about sort of the traditional payment side of this, giving us opportunities because of the compliance environment, we’ve actually seen more actual closed opportunities in this space.

David Feaster: That’s great. That’s great. And then within the working capital finance side, you guys have touched on that this is — I mean, you’ve seen really nice growth there. Obviously, ABL’s seen really nice growth. You touched on this — we’ve talked about this business historically doing well during an economic downturn. I mean, is this any indication of that, or is this you all gaining share and adding new partners? Or are there other factors that are driving outsized growth there and maybe somewhat of a counter-cyclical business?

Brett Pharr: I don’t think this growth is a comment at all on the economy. Sometimes this area grows because of a shift in the economy. We’ve done a little bit more work on focusing on our distribution capabilities here and I think that’s what’s happened here. We really like this asset class. We’ve got a secret sauce around it. It has excellent risk-adjusted returns. We’re really good at it. It’s core in the heart of the lending business from the very beginning that makes up the old Crestmark too. We really like it, but this growth was largely because of some improvements we made in overall distribution.

David Feaster: Okay, that’s great. Glad to hear that. And then just last one for me. You touched on tax season. You’ve got 12% more enrolled offices. It sounds like things are starting out good. Could you just touch on what you’re — how to think about the tax business, what you’re seeing, and what’s driving the increase in offices that are enrolling?

Brett Pharr: We’ve been doing this a while. We’ve got a good management team, top professionals at it with many, many decades of experience. They’re doing a reasonable job of grabbing market share and we’ll see. We’ll report on the rest of that later on once it comes through.

David Feaster: All right. Thanks, everybody.

Brett Pharr: Thanks, David.

Operator: Thank you for your question. And that concludes Pathward Financial’s investor conference call. Thank you.

Brett Pharr: Thank you.