Q1 2023 Pathward Financial Inc Earnings Call
Okay.
Ladies and gentlemen.
Thank you for standing by and welcome to a path where its financials first just first quarter fiscal year 2023 Investor Conference call.
During the presentation, all participants will be in 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 now like to turn the conference call over to suggest and ship.
Vice President of Investor Relations and financial reporting.
Please go ahead.
Thank you operator, and welcome Patrick Financial CEO , Brett Pharr, CFO , Glen Herrick, and Deputy CFO , starting to tighten will discuss our operating and financial results for the first fiscal quarter of 2023, after which we will take your questions.
Additional information, including the earnings release, and a supplemental investor presentation may be found on our website at Patrick financial Dotcom.
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 statements. Please refer to the cautionary language in the earnings release Investor presence.
Patient 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 results to differ materially from the forward looking statements.
Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call references to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends and reconciliations for such non-GAAP measures are included within the appendix of the Investor presentation now, let me turn the call over to Brett Farr, Our C E.
Ill.
Thank you everyone for joining password Financial's first quarter 2023 earnings call.
The company performed well during the quarter core net income excluding the impacts of rebranding was $23 $2 million compared to $24 million in the prior year and core earnings per share of 81 cents was up 4% compared to 78 cents per share in the prior year quarter.
Our continued focus on our key strategic pillars of asset optimization deposit optimization and operational simplification helped drive further expansion of our net interest margin, which rose over 100 basis points to 562% for the first fiscal quarter compared to 4.59.
In the prior year quarter.
Our strategy also enabled us to achieve return on average assets and return on average tangible equity that are amongst the top in the industry. Our commercial finance portfolio grew 7% year over year and totaled $3 billion at quarter end.
Total loans and leases on December 31 were $3 5 billion, a decrease of 5% from $3 7 billion in the prior year the year over year decline in total loans and leases reflects the sale of the student loan portfolio timing of tax season loans and a few relationship paydowns in our warehouse lending.
Leo.
Credit quality across the portfolio remains strong as nonperforming loans of 1.16% for the same as a year ago.
As we head into a potential recessionary environment, we remain confident in our active collateral management and the quality of our loan portfolio.
On the liability side of the balance sheet. The company continues to demonstrate its proficiency in managing excess deposits by storing them at our program banks.
In the first quarter off balance sheet deposits averaged $1 $4 billion, earning revenue roughly equivalent to the federal funds effective rate.
In addition to generating revenue these excess deposits also serve as a readily available sources of liquidity.
As of December 31, we had $2 $2 billion of customer deposit stored off balance sheet with program banks a level that is seasonally elevated due to holiday related gift cards and other products.
As we have indicated during the two previous quarters the landscape of the banking as a service market is changing.
While we continue to see fewer startups receive funding our legacy partners or launching new programs and using our services to attract new customers.
With our diversified clientele, and our long history and experience in banking as a service we steer clear of the current turmoil experienced by others in the industry.
We believe our strong risk and compliance capabilities continued to serve us well during this time of industry transition.
Regarding our rebrand I'm happy to announce the company completed the remaining efforts during the quarter Con.
Consequently, we received the final $10 million in the original $60 million sale associated with our meta trademarks.
We are pleased to be serving our customers under our new password name, which has been well received by our customers and partners. We look forward to building upon the brand value. It provides.
Looking ahead to the remainder of fiscal year 2023, we believe our unique business model allows us to benefit from rising rates positioning us well to continue delivering solid financial results.
Consequently, we've increased our fiscal year 2023, GAAP earnings guidance range, which we now expect to be between $5 and 55 and $5 95 per share.
Finally, we are well prepared for tax season, which is kicking off in the second fiscal quarter.
We have a long history of operational success are a leader in supporting the independent tax industry and serve a major franchise in the business.
Our historical experience and operational excellence position us to succeed in the unique economic environment of this year's season.
We look forward to sharing more on our next earnings call.
Now, let me turn the call over to our Chief Financial Officer, Glen Herrick, who will provide additional detail on the quarter's financials.
Thank you Brett total GAAP net income for the first quarter was $27.8 million or <unk> 98 per share.
<unk> from the $61 $3 million or $2 per share recorded in the prior year quarter.
As a reminder, last fiscal year's quarter included an initial $50 million gain on sale of the Meda trademarks and this fiscal year's first quarter included the remaining $10 million gain associated with the sale excluding.
Excluding the one time gains and expenses associated with rebrand related activity and severance expenses.
Core net income of $23 $2 million decreased slightly compared to the $24 million in the prior year.
Adjusted earnings per share of 81 cents for the quarter represents a year over year increase of 4%.
The business does not expect to report any additional rebrand related financial impacts moving forward <unk>.
Net interest income grew 17% year over year, driven by expansion in passwords net interest margin totaled.
Total net interest margin for the first quarter of $5, 62% increase substantially relative to the 4.59% recorded in the first quarter of fiscal year 2022.
We expect our net interest margin to continue to expand given the current rate environment and ongoing optimization of our balance sheet provision.
Provision expense in the first quarter of $9 $8 million is a $9 $6 million increase from the prior year. However, the prior year benefited from a $12 $7 million provision reversal associated with the disposal of the bank's remaining community bank portfolio.
GAAP noninterest income declined from $86 $6 million in the prior year quarter to $65 8 million in fiscal year 2023.
Excluding the $50 million and $10 million trademark sale gain in the first quarters of fiscal years, 2022, and 2023, respectively.
Non interest income increased 52% year over year.
The large increase was attributed to fiscal year 2020, twos losses on the community bank portfolio sale and Moneyline investment write down.
Meanwhile, the current year benefited from revenues associated with off balance sheet deposits servicing.
On the expense side total GAAP noninterest expense of $105 $1 million represents an increase of 27% from the prior year quarter.
When adjusting for $3 $7 million of rebrand related items in 2023 expenses of 101 $3 million grew 23% year over year.
This increase resulted primarily from $15 $5 million of additional card processing expenses, mostly attributable to the higher rate environment.
Other expenses, excluding rebrand related items grew at a 4% pace year over year.
The company remains well capitalized while continuing to return value to shareholders.
During the fiscal 2023 first quarter the company repurchased 654000 shares at an average price of $38 intense.
Through January 20th the company repurchased an additional 478000 shares at an average price of $45 45.
As Brett mentioned, we are increasing our guidance for fiscal year 2023 for.
For the year, we expect GAAP earnings per share between $5 55.
And $5 95.
This guidance assumes the federal funds target rate rises to 5% in the second half of fiscal year 2023 and remains flat thereafter.
That concludes our prepared remarks, operator, please open the line for questions.
Thank you.
First question comes from the line of Frank <unk>.
Sherry Sherry Aldi.
Piper Sandler. Please proceed.
Hi, guys.
Hmm.
Hey, Brian I wanted to ask I wanted to ask about the higher guide.
Can you talk a little bit about what is driving that is it just you know early thoughts on tax season is shaping up pretty good or or whats kind of driving the change linked quarter.
I think the big thing is there's a slight increase in fed funds beyond what our original basis was and so we expect that to show up in our experiencing that starting to show up in AR and higher yields.
We we think we're well prepared for the tax season as we always are this is one of our core competencies.
And the macro environment for the tax season is positive, but we havent.
Any.
Bets on that yet so it's.
It's too early I mean, the IRS just opened up for returns. This week. So it's too early for us to make any per.
Perspective views of what's going to happen tax season.
Okay, and then can you talk a little bit about what the guide might imply for loan growth here.
Just given you know overall commercial finance was kind of flattish linked quarter and I know the ABL and factoring balances have declined.
Declined.
Sure what you're thinking.
No. It was a good kind of run rate.
For commercial finance our growth from here.
You know again, it's a it's a mix of asset classes that.
They're going to behave differently.
You know working capital is where we're hoping for the growth as we get into a more recessionary style environment.
There likely will be some slowdown in various kinds of term lending.
Conversely, there are there seems to be a bit of uptick in the in our.
Solar financing and other.
Alternative energy financing opportunities. So I think we're just going to be continually plodding forward as we have been.
In making that rotation from one asset class I E securities to another I don't expect it to take off and I don't expect it to two.
Di or anything like that either.
Yeah.
I think in the past you might have talked about sort of double digit growth overall.
In commercial finance.
I know, that's still kind of a reasonable bogey I'm going forward.
Yeah, I mean, I think low double digits over time through economic cycles is quite reasonable for us.
We want to make sure that we have the yield in it and you know that.
It's been some of the challenge and we've talked about that from a liquidity perspective.
Gradually getting washed out but.
I think long term that is a reasonable assumption.
Okay.
And then in terms of the.
On the depository side, unless I heard wrong it sounded like the off balance sheet deposits, maybe were boosted a bit linked quarter given some seasonality. So that's the case.
Maybe those come down.
From whatever this is two 2 billion plus.
At the end of the quarter, just wondering how to think about the rest of that I guess do you do you continue to think you that remains off balance sheet and you pick up fed funds on it.
Is there opportunity or thoughts to bring it back on balance sheet and given some of the opportunities you can get.
In terms of yields on the asset side, what sort of strategy there overall.
Well a couple things.
You are correct there is some seasonality in the fourth quarter and.
I think in my comments I highlighted what level, that's probably more like core we do think that and this is one of our advantages that your liquidity is gradually wiping out in the general economy, and there may be some minor shrinkage even in that core.
Because of what's going on in the economy.
I don't because we have plenty of money in the securities portfolio.
Need to pull those deposits back onto the balance sheet to fund the next asset rotation. We've got plenty on the balance sheet to do that and there is no sense in inflating the size of my balance sheet until we kind of keep working through that asset rotation.
Okay that makes sense and then just lastly on credit.
You talked in the release about.
The increase in provisioning.
The increase in NPA I assume was kind of part and parcel of the same I think you've talked about one relationship on the commercial finance side.
Any any additional color you can give on that relationship and hopefully your comfort.
Limiting losses there.
Yeah, one of the things I talk about all the chain as we are a collateral managed credit facility.
We don't do unsecured credit.
And even though something might be in a nonperforming.
There is a collateral behind it were kind of experts at liquidating that.
Whether it's working capital or working with partners on.
Equipment and those kinds of things.
So.
Just because you see a nonperforming doesn't mean that that's a loss what that means is we're working it down with the collateral that we have.
We're seeing continued good performance in the credit portfolio.
We're not seeing any negative impacts as of yet.
You always have companies coming and going that's true, but we're not seeing any trends to the negative side at all.
Okay.
Okay, but can you say where that can't you know that in working capital or is that a term.
Term loan just trying to get a little bit more color on that.
Glenn do you want to respond to that I mean, we know, but I don't know what we can disclose on that.
Yeah.
Yeah that that's a term loan.
Frank.
And you know I would also note that.
For us Npls is a better metric than M. P. As as we continue to mix shift our earning assets into loans from securities.
Our NPA his or her gotta go up.
Just as we reduce the securities percentage and our numbers are pretty low and so if you get one.
Three or $4 million alone.
It it can spike up short term, but we feel real confident about our outlook.
Okay, great. Thank you.
Thanks, guys. Thanks, Brian .
Yes.
Thank you. Our next question comes from Tim Switzer, K B W. Please proceed.
Hey, good afternoon I'm on for Mike Perito, Thanks for taking my question.
How're you doing.
Good.
I guess just on the.
Credit conversation that we're having can you walk us through some of the collateral you have in different pieces of your loan book, particularly some of the higher loss categories, such as like the term lending and factoring in I guess, it kind of like run through the terms you have on those as well.
So on the working capital Arena.
These are.
Accounts receivable and inventory.
And those kinds of transactions.
We either have a borrowing base of receivables, where we've preapproved the debtor, which is the one that shows our customer money.
In many cases, depending on the situation, we actually have dominion of funds, where all the payments are coming straight to us.
And obviously you have a security interest in those things.
And we do some themes that are kind of unique at least for our bank and the way that we manage those and.
And the inventory cases, we had preplanned buyers often for the inventory or at least appraisals on it. So we know what we would do in the event of liquidation.
Equipment arena it varies a little bit about what it is and some of its mission critical equipment, which means that even in the event of a reorganization bankruptcy, it's mission critical and Theyre going to reaffirm the dead and pay us.
So we emphasize that a lot or other cases, we have relationships with third parties, who are ready buyers of that and we regularly work on and cultivate those relationships. So that we can take advantage of it so it's not like a traditional C&I lending.
It's we go in assuming there's going to be a default and then how would we get out if there was a default.
And not lose money, so generally, particularly the working capital where there's a problem, it's because of fraud not because of an actual weakness in the collateral position.
Okay.
Distress Tim.
Oh, Yeah go ahead.
Tim This is Glenn I would also refer to.
Page 16 of our investor presentation on that.
On the deck some additional information.
Around our different types of.
Commercial finance and then at the end of the deck, we have some industry concentration information.
Great Yeah, that's helpful.
And when you guys stress.
Stress the portfolio run in your stress test what what are some of the scenarios you use and which variables are you focusing on we're just trying to get an idea of like a different parts of the loan book would react to certain stressed environments.
Yeah, So Glenn I'll, let you can say here just second you know.
What I would tell you is that we're always looking at every transaction as if a distressed.
We certainly look at industry concentrations, what can happen in that industry and adjust appropriately, particularly.
Particularly strong thing that we do is we look at the debtor credit book that again, that's the people that are paying our borrower and make regular decisions about that and so you know.
An example of some fairly common high named bankruptcies that have occurred recently 18 months ago, we were out and wouldn't accept receivables from them. So that's more of the kind of thing we do.
Each transaction is so unique in this space, it's really not conducive to a portfolio stress type.
Arrangement that you might be used to in a traditional C&I.
Okay I gotcha.
Going back to the guidance a little bit what what is sort of the <unk>.
NIM expectations, you have for like Q1, and Q2 like you're through all the interest rate floors, right and I mean, you've had like 40 basis points of NIM expansion for the last two quarters in a row basically.
Oh, Mike is it reasonable to expect that again or should it start slowing down.
Tim.
Yes.
Yeah.
No.
Like all things it depends on the mix where the growth comes from.
That said, we will gain them just by continuing to remix our balance sheet if rates didn't move at all but we are comfortable that our NIM will pass through 6%.
In our fiscal year 2023.
Okay, Alright, great and could you provide a little bit of color on like the expense expectations you have within the guidance, assuming like there isn't like a serious economic deterioration.
Yeah.
Okay.
We're not guiding by line item on our income statement and so are our expenses we have.
For our bank, we have a fair amount of variable expenses that are driven by <unk>.
By activity, which relates to two revenues and so.
Those are correlated with the revenue expenses that we have and our goal is to grow our core expenses at less than half the rate of our of our revenue growth and then that's what's factored into our guidance.
Okay. That's that's helpful. Thank you guys I'll get back in the queue.
Yeah.
Thank you.
That concludes the password financial first quarter fiscal year 2023, Investor Conference call.
You may now disconnect.
Thank you.
[music].