Q4 2023 Pathward Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to pathway Financial's fourth quarter and fiscal year 2023 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 now like to turn the conference call over to Darby Schoenfeld Senior Vice President of Investor Relations. Please go ahead.
Thank you operator and welcome with me today are proper financial CEO, Brett Farr, and CFO, Glen Herrick, who will discuss our operating and financial results for the fourth fiscal quarter and full fiscal quarter of 2023, after which we will take your question additional information, including the earnings release, the Investor presentation that accompanies our prepared remarks.
And supplemental slides may be found on our website at Hartford financial Dot 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 statements.
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 conference call references to non-GAAP measures are provided only to assist you in understanding the company's results and performance trends and reconciliations for such non-GAAP measures are included in the appendix of the Investor presentation now, let me turn the call over to Brett Farr, our CEO.
Thanks, Dorothy and thanks, everyone for joining us today and for your continued support.
We've just completed.
Year of solid results, both financially and operationally.
I remind you that we operate at the intersection of traditional banking and alternative delivery channels.
And therefore this year, we've had in expanding net interest margin increased return on assets and increase return on equity.
Great results are in spite of a tougher economy, and especially what has been a tough banking environment.
When you combine these great results with the return of capital through share repurchases and dividends.
Delivered value to our shareholders in multiple ways.
Specific numbers for the year.
Ported net income of $163 6 million, an increase of 5% and $5 99 per diluted share an increase of 14%.
In the fourth quarter net income was $35 $9 million or $1 36 in diluted earnings per share.
Our earnings growth was driven through expansion of our full year net interest margin to six 4% an increase of 120 basis points over fiscal year 2022.
Our full year adjusted net interest margin, including rate related processing fees grew 15 basis points to 483% from $4, 6% to 8% in fiscal year 2022.
Those metrics in the fourth quarter were 487% and 473% respectively.
Besides the financials operationally, we have a lot to be proud of.
Cross the enterprise it.
Team delivered a reduction in <unk> costs.
Utilizing these funds to help us to continue to focus on growth.
We're also from a people standpoint certified by as a great place to work for the first time and Newsweek ranked us among America's Greenest workplaces, along with some special distinctions for women diversity and parents and families.
Turning to commercial finance, specifically, we grew total loans and leases by 23%.
This was driven by growth in our insurance premium finance business of 67% over the prior year.
This was a direct result of us positioning the team to take advantage of opportunities and some market disruption in that particular vertical.
We've also built several new relationships and our government guaranteed sectors talking about SBA and USDA that we believe will prepare us well for 2024.
Also in commercial finance, we undertook a process to align teams that were operating vertically within their loan product into horizontally capable groups across the team.
Darby Schoenfeld: Ladies and gentlemen, thank you for standing by and welcome to PATHWARD Financial's fourth quarter in fiscal year 2023 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 now like to turn the conference call over to Darby Schoenfeld, Senior Vice President of Investor Relations. Please go ahead.
We believe this will drive a reduction in operating costs and will create a more efficient and streamlined organization going forward.
Collateral manage loans provide us with tremendous safety, but it is people intensive and we are constantly seeking efficiency in that space.
And banking as a service we continue to expand and create new agreements with our existing partners. We extended four agreements, we launched a new acquiring sponsorship program and we expanded product offerings and three cases.
Darby Schoenfeld: Thank you operator and welcome. With me today, our PATHWARD Financial's CEO, Brett Pharr and CFO Glen Herrick, who will discuss our operating and financial results for the fourth fiscal quarter in full fiscal quarter of 2023, after which we will take your question. Additional information, including the earnings release, the investor 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.
We also work with a new partner in their launch as a payment processor and most recently, we signed a new agreement to launch a new demand deposit account program.
We continue to evolve our bass organization to position us as the go to partner with a broad payment capability set and flexible solutions that deliver safe and sound infrastructure simplicity and speed to market for our partners.
Darby Schoenfeld: 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, investors' presentation, and in the company's filing with the Security and Exchange Commission, including our most recent filing 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-gap financial measures on this conference call. References to non-gap measures are provided only to assist you in understanding the company's results and performance trends. Reconciliation for such non-gap measures are included in the appendix of the investor presentation.
Finally, regulatory news and the vast marketplace compels me to discuss compliance.
I believe the strength of our regulatory risk and compliance infrastructure needs to be emphasized as a key differentiator for us.
Recently, all the regulatory agencies have announced novel banking or a similar type of approach to address banking as a service business models like ours.
Frankly, it is about time.
We hope it will reduce the current environment of regulatory arbitrage.
If it is similar to the third party risk management that the agencies collectively leased in the last year and I expect it will be we already meet those heightened standards and have for some time.
Brett Pharr: Now, let me turn the call over to Brett Pharr, our CEO. Thanks, Darby, and thanks, everyone, for joining us today and for your continued support. We've just completed a year of solid results both financially and operationally. Remind you that we operated the intersection of traditional banking and alternative delivery channels, and therefore this year we've had an expanding that interest margin, increased return on assets, and increased return on equity. These great results are in spite of a tough economy and especially what has been a tough banking environment.
To exist in todays banking as a service regulatory world you must have a culture of compliance and the human capital to power it.
And we've worked very long and hard to create that.
The password is job one in banking as a service.
Going forward heightened standards for banks that operate in this space will be the requirement.
And we believe we have the culture and the commitment to maintain that level of risk framework.
The best time to plant a tree is 20 years ago.
And that is exactly what we did when we entered into the payment space back in 2004.
Brett Pharr: When you combine these great results with the return of capital through share repurchase and dividends, we have delivered value to our shareholders in multiple ways. Specific numbers for the year, we reported net income of $163.6 million, an increase of 5% and $5.99 per diluted share, an increase of 14%. In the fourth quarter, net income was $35.9 million or $1.36 in diluted earnings per share. Our earnings growth was driven through expansion of our full year net interest margin to 6.04%, an increase of 120 basis points over fiscal year 2022.
As a result, we will not have to make significant investments to bring our bass program up to speed.
Rather we can focus on helping our partners adapt to today's ever changing financial services environment.
So some key points.
We believe we are entering a regulatory cycle that could fundamentally change the banking as a service banking space, drawing a regulatory moat around those who can operate within the heightened requirements.
We believe others will decide to get out of the banking as a service space.
And we believe we're extremely well positioned to thrive in this type of environment as a financial institution that generate sustainable recurring revenue and champions a strong culture of compliance built to endure any cycle, including credit economic or regulatory to name a few.
Brett Pharr: Our full year adjusted net interest margin, including rate-related processing fees, grew 15 basis points to 4.83% from 4.68% in fiscal year 2022. Those metrics in the fourth quarter were 4.87% and 4.73% Inc. The size of the financials operationally, we have a lot to be proud of. Across the enterprise, our IT team delivered a reduction in run costs and we're utilizing these funds to help us to continue to focus on growth. We're also, from a people standpoint, certified by, as a great place to work for the first time, and Newsweek ranked us among America's greatest workplaces, along with some special distinctions for women, diversity, and parents and families.
Through the cycle matters.
We are built to thrive in all cycles.
For fiscal 2024, you can expect us to continue on enhancing our company.
We all of our teams continue to innovate and to improve efficiencies.
In commercial finance, we want to drive smart balance sheet growth, ensuring appropriate yields for the current financial landscape.
The Vas team is going to continue to emphasize being the one stop shop when partners are looking for a banking partner to work with them.
We will continue to win with our risk and compliance framework and culture.
And we will become and maintain our status as a banking as a service powerhouse bank with a long track record of success through the cycle.
Brett Pharr: To the commercial finance specifically, we grew total loans and leases by 23%. This was driven by growth in our insurance premium finance business of 67% over the prior year. This was the direct result of us positioning the team to take advantage of opportunities and some market disruption in that particular vertical. We've also built several new relationships and our government guaranteeing sectors, talking about SBA and USDA, that we believe will prepare us well for 2024.
All of these items have contributed to our ability to raise our fiscal year 2024 guidance to a range of $6 20 to $6 70.
Per diluted share.
Finally, we are very excited to announce the appointment of Greg Siegrist as our next CFO.
Greg comes to us with a strong background make him. An excellent addition, he has over 20 years of banking experience with impressive leadership and financial and business acumen that we believe will keep password and the way the continued success.
Brett Pharr: Also in commercial finance, we undertook a process to align teams that were operating vertically within their loan product into horizontally capable groups across the team. We believe this will drive a reduction in operating costs and will create a more efficient and streamlined organization going forward. Collateral managed loans provide us with tremendous safety, but it is people intensive and we are constantly seeking efficiency in that space. In banking of the service, we continue to expand and create new agreements with our existing partners.
We look forward to welcoming Greg in few weeks.
I also want to once again, thank Glenn for all of his contributions over the last 10 years.
There is not enough time on this call the detail everything Glenn has done for this organization in his time here.
He was instrumental in the diversification and evolution into who we are today and built accounting finance and treasury teams that I believe rival those of much larger institutions and any other banking as a service bank.
Glenn on behalf of the board and our employees. Thank you we wish you well and hope you enjoy retired.
Brett Pharr: We extended four agreements. We launched a new acquiring sponsorship program, and we expanded product offerings in three cases. We also worked with a new partner in their launch as a payment processor, and most recently we signed a new agreement to launch a new demand deposit account program. We continue to evolve our bass organization to position us as the go-to partner with a broad payment capability set and flexible solutions that deliver safe and sound infrastructure, simplicity, and speed to market for our partners.
Thank you, Brad and welcome aboard Greg.
I look forward to working with you on the transition.
Before I sign off on my last <unk> 40 to earnings it has been an honor and a privilege to serve as CFO of this company for the last 10 plus years.
It has been a joy to watch the company and the team transform into an innovative.
<unk> entrepreneurial driven bank.
Our annual net income has grown from $13 million in fiscal year 2013.
So over $160 million this year.
From my start date through mid October our total shareholder return has exceeded.
Brett Pharr: Finally, regulatory news in the bass marketplace compels me to discuss compliance. I believe the strength of a regulatory risk and compliance infrastructure needs to be emphasized as a key differentiator for us. Recently all the regulatory agencies have announced novel banking or a similar type of approach to address banking as a service business models like ours. Frankly, it is about time. We hope it will reduce the current environment of regulatory arbitrage. If it is similar to the third-party risk management that the agencies collectively released in the last year, and I expect it will be, we already meet those heightened standards and have for some time.
450% versus the NASDAQ community Bank index increase of about 80%.
And the Russell 2000 index increase of just over 110%.
We've achieved a great deal and I look forward to cheering on the team to even greater accomplishments.
Now onto the financial results.
Net income for the quarter ended September 30 was $35 9 million.
Or $1 36 per diluted share an increase of $12 5 million compared to the prior year.
For fiscal year 2023, net income totaled $163.6 million, an increase of $7 $2 million.
Brett Pharr: To exist in today's banking of the service regulatory world, you must have a culture of compliance and the human capital to power it, and we have worked very long and hard to create that. The password is job one in banking as a service. Partners. Going forward, heightened standards for banks that operate in the space will be the requirement. And we believe we have the culture and the commitment to maintain that level of risk framework.
Relative to fiscal year 2022.
Adjusting for various one time items, including the impacts of our rebrand the.
The increase would have been $32 $9 million or 25%.
GAAP earnings per share of $5.99 increased 14% compared to last year.
When adjusting for the same items core EPS increased to $6 nine in fiscal year 2023.
Brett Pharr: The best time to plan a tree is 20 years ago. That is exactly what we did when we entered the payment space back in 2004. As a result, we will not have to make significant investments to bring our batch program up to speed. Rather, we can focus on helping our partners adapt to today's ever-changing financial services environment.
Compared to $4 49 in fiscal year 2022.
In the fourth quarter net interest income totaled $104 9 million, an increase of 32% relative to the prior year.
Brett Pharr: So some key points. We believe we are entering a regulatory cycle that could fundamentally change the banking as a service banking space, drawing a regulatory mode around those who can operate within the heightened requirements. We believe others will decide to get out of the banking as a service space. And we believe we are extremely well positioned to thrive in this type of environment as a financial institution that generates sustainable recurring revenue and champions of strong culture of compliance built to endure any cycle, including credit, economic or regulatory to name a few.
This year over year increase was driven by additional earning asset balances as well as greater yields across the loan and securities portfolios.
Our NIM expanded to $6 one 9% in the fourth quarter when accounting for the increase in rate related processing expenses, the company's adjusted NIM of 487% in the fourth quarter increased from 473% in the prior year quarter and was in line with four.
88% last quarter.
As a reminder, our adjusted NIM does not include the servicing fees.
Brett Pharr: Through the cycle matters, we are built to thrive in all cycles. For fiscal 2024, you can expect us to continue on enhancing our company. We will have our teams continue to innovate and improve efficiencies in commercial finance. We want to drive smart balance sheet growth, ensuring appropriate yields for the current financial landscape. The vast team is going to continue to emphasize being the one-stop shop when partners are looking for a banking partner to work with them.
We also earn on or off balance sheet deposits.
Also impacting the NIM was a mix shift in our loan base as we saw growth in our USDA loans.
Insurance premium finance and large ticket equipment finance loans, which are typically higher rated credits and thus lower yielding.
In fiscal 2024, we expect our NIM, both GAAP and adjusted to expand as we continue to optimize the earning asset mix.
Provision for the quarter was $9 million the provision increased when compared to the same period last year largely due to the fact that the fourth quarter of fiscal 2022 included a $4 $3 million reversal of provision following the sale of the company's student loan portfolio.
Brett Pharr: We will continue to win with our risk and compliance framework and culture, and we will become and maintain our status as a bank as a service powerhouse bank with a long track record of success through the cycle. All of these items have contributed to our ability to raise our fiscal year 2024 guidance to a range of $6.20 to $6.70 per diluted share.
As of September 30, the company had an ACL coverage ratio of 114% deep.
A decrease from one 3% at the same time last year, our commercial finance group.
Our coverage ratio of 126% compared to $1 three 5% in the last quarter and $1 four 6% in the fourth quarter last year.
Brett Pharr: Finally, we are very excited to announce the appointment of Greg Segrist as our next CFO. Greg comes to us with a strong background making him an excellent addition. He has over 20 years of banking experience with impressive leadership and financial and business acumen that we believe will keep passing on the way to continue success.
The successive declines are generally a result of the mix shift towards more insurance premium finance.
<unk> and large ticket equipment finance loans, which have a relatively lower allowance rate.
Brett Pharr: We look forward to welcoming Greg in a few weeks. I also want to once again thank Glenn for all of his contributions over the last 10 years. There is not enough time on this call. The detail everything Glenn has done for this organization is time here. He was instrumental in the diversification and evolution into who we are today and built accounting, finance, and treasury teams that I believe rival those of much larger institutions and any other banking of the service bank. Glenn, on behalf of the board and employees, thank you.
Non interest income of $56 1 million in the fourth quarter grew $12 $6 million year over year. This increase was partially driven by $2 million of additional card fee income related to the company's servicing of off balance sheet deposits.
Additionally, the fourth quarter of fiscal year 2022 was hindered by a $4 8 million dollar pre.
Pre tax loss on the sale of the student loan portfolio as well as the $1 $9 million pre tax loss on the sale of the venture capital investments.
Glen Herrick: We wish you well and hope you enjoy a great day. Thank you, Brett and welcome aboard, Greg. I look forward to working with you on the transition.
Noninterest expenses increased 15% year over year to $118 2 million.
Glen Herrick: Before I sign off on my last 42 earnings, it has been an honor and a privilege to serve as CFO of this company for the last 10 plus years. It has been a joy to watch the company and the team transform into an innovative entrepreneurial driven bank. Our annual net income has grown from $13 million in fiscal year 2013, to over $160 million this year. From my start date through mid-October, our total shareholder return has exceeded 450%, versus the NASDAQ community bank index increase of about 80%, and the Russell 2000 index increase of just over 110%. We've achieved a great deal and I look forward to cheering on the team to even greater accomplishments.
This increase was primarily driven by rate related processing expenses as well as compensation expenses, partially offset by a decrease in legal and consulting expenses, primarily due to the impact of rebranding activity in the prior year.
During the fourth quarter, we were able to capitalize on several renewable energy lending opportunities. These credits pushed our effective tax rate significantly lower.
Total deposits, including on and off balance sheet decreased $322 million or 4% from the prior year quarter to $6 9 billion.
Total deposits decreased sequentially, primarily due to a reduction in the runoff in deposits as well as the continued decline in seasonal tax deposits. During the fourth quarter. We maintained an average of $588 million of deposits off balance sheet, earning fee income.
Glen Herrick: Now on to the financial results. Net income for the quarter ended September 30th with $35.9 million, or $1.36 per deluded share, an increase of $12.5 million compared to the prior year. For fiscal year 2023, net income total 163.6 million dollars, an increase of $7.2 million, relative to fiscal year 2022. Adjusting for various one-time items, including the impacts of our rebrand, the increase would have been $32.9 million or 25%. Gap earnings per share of $5.99, increased 14% compared to last year.
Roughly equal to the effective funds rates.
At September 30, there were $268 million of deposits off balance sheet and our partner base.
And to keep you up to date.
September 30, we are holding roughly $900 million in deposits related to government stimulus programs.
These deposits are being spent down while unclaimed balances are being returned to the U S Treasury.
During fiscal year 2024, we expect to return approximately $380 million of unclaimed deposits.
As of September 30, the company held $4 4 billion of loans, an increase of $830 million or 24% compared to the end of fiscal year 2022.
Glen Herrick: And when adjusting from the same items, $4.50 increased the $6.9 in fiscal year 2023, compared to $4.49 in fiscal year 2022. In the fourth quarter, net interest income totaled $104.9 million, an increase of 32% relative to the prior year. This year over year increase was driven by additional earning asset balances, as well as greater yields across the loan and securities portfolios. Our NIM expanded to 6.19% in the fourth quarter, when accounting for the increase in rate-related processing expenses, the company adjusted NIM of 4.87% in the fourth quarter, increased from 4.73% in the prior year quarter, and was in line with 4.88% last quarter.
The growth in our loan portfolio stemmed primarily from our commercial finance division, particularly insurance premium finance term lending and USDA and SBA. We also saw growth in consumer credit and warehouse lending.
Credit quality across the portfolio remains strong nonperforming loans of one 6% increase from <unk>, 93% in the previous quarter. The largest increase was in commercial finance and this was partially driven by the same relationship we mentioned last quarter, which is in the process of a workout.
As we have said in the past, we do experienced lumpiness in our nonperforming loans, particularly when we are in the process of a workout, but typically we recover at least a portion of a loan if not all due to our collateral management.
Glen Herrick: As a reminder, our adjusted NIM does not include the servicing fees, we also earn on our off balance sheet deposits. Also, impacting the NIM was a mixed shift in the loan base, as we saw growth in our USDA loans, insurance premium finance, and large ticket equipment finance loans, which are typically higher rated credits and thus lower yielding. In fiscal 2024, we expect our NIM both gap and adjusted to expand as we continue to optimize the earning asset next.
We remain confident in our collateral and the quality of our portfolio.
Brett said, we have built the company to be resilient through different cycles.
From a liquidity perspective copper.
<unk> continues to be at a good position our balance sheet is strong and when you factor in all of the sources, we have over $2 $6 billion that available liquidity. These.
These results continue to give us the ability to return value to shareholders.
In the fourth quarter, we repurchased approximately 312000 shares at an average share price of $51 in 2009.
Glen Herrick: Provisioned for the quarter was $9 million. The provision increased when compared to the same period last year, largely due to the fact that the fourth quarter of fiscal 2022 included a $4.3 million reversal of provision following the sale of the company's student loan portfolio. As of September 30, the company had an ACL coverage ratio of 1.14%, a decrease from 1.3% at the same time last year. Our commercial finance group has an ACL coverage ratio of 1.26% compared to 1.35% in the last quarter and 1.46% in the fourth quarter last year.
In October through October 16, we have repurchased an additional 233000 shares at an average price of $47 25.
In August we announced that our board of directors authorized a new share repurchase program of up to 7 million shares through September 32028 as of October 16, we.
<unk> eight 4 million shares available for repurchase under the two current programs.
As Brett stated, we are raising our fiscal year 2024, GAAP earnings per share guidance to a range from $6 20 to $6 70.
While the fourth quarter saw a healthy amount of renewable energy funding opportunities. We do not anticipate this to reoccur at the same pace in fiscal year 2024.
As a result, we are reaffirming our effective tax rate to be in the 16% to 20% range.
Glen Herrick: This increase was partially driven by 2 million dollars of additional card fee income related to the company's servicing of off-balance sheet deposits. Additionally, the fourth quarter of fiscal year 2022 was hindered by a $4.8 million pre-tax loss on the sale of the two loan portfolio, as well as a $1.9 million pre-tax loss on the sale of a venture capital investment. Now an interest expenses increased 15% year over year to $118.2 million.
This concludes our prepared remarks, operator, please open the line for questions.
Absolutely.
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Our first question comes from the line of Mike Perito with K B W.
Glen Herrick: This increase was primarily driven by rates related processing expenses, as well as compensation expenses, partially offset by a decrease in legal and consulting expenses, primarily due to the impacts of rebranding activity in the prior year. During the fourth quarter, we were able to capitalize on several renewable energy lending opportunities. These credits pushed our effective tax rate significantly lower. Total deposits, including on-and-off balance sheet, decreased $322 million or 4% from the prior year quarter to $6.9 billion.
Proceed.
Hi, This is mikes associate Andrew filling and thank you for taking my questions.
John first off here I was wondering.
Good how are you guys doing.
Just first off here I was wondering if we could get some updated credit outlook commentary given some of the negative data points, we've seen from other lenders, particularly.
The credit card and small business segments.
Yes. So of course, we don't have credit cards, and the small business arena commercial finance as.
As we've said we're heavily collateral manager.
Glen Herrick: Total deposits decreased sequentially from early due to a reduction in the runoff EIP deposits, as well as a continued decline in seasonal tax deposits. During the fourth quarter, we maintained an average of $588 million of deposits off-balance sheets, earning fee income roughly equal to the effective funds rate. At September 30th, there were $268 million of deposits off-balance sheets at partner banks. And to keep you up to date, at September 30th, we are holding roughly $900 million into deposits related to government stimulus programs.
Loan.
And therefore, we tend to do very well through these kinds of times.
And so we're not while we're having.
Some companies are having some difficulties.
We're not having any kind of losses associated to that.
Ordinary pattern. So we're feeling very confident about it don't expect to have any trouble in.
We believe our collateral managed approach will put us in a better place going through this cycle than other lenders may have yes.
Glen Herrick: These deposits are being spent down while unclean balances are being returned to the U.S. Treasury. During fiscal year 2024, we expected to return approximately $380 million of unclean deposits. As of September 30th, the company held $4.4 billion of loans, an increase of $830 million or 24% compared to the end of fiscal year 2022. The growth in our loan portfolio stem primarily from our commercial finance division, particularly insurance premium finance, term landing, and USDA and SBA.
And Andrew I'd remind you that.
One thing that differentiates us.
Longer has a community bank. So we have a de minimis amount of commercial real estate.
On our books.
Great I appreciate the color there.
And then just a quick follow up on that what are the provision assumptions are going into the fiscal year 'twenty for guy.
Vision assumptions.
Well, it's based on our originations and the outlook for the economy and where our growth is.
Coming from you've seen.
In the last couple of quarters, our growth has come from.
Glen Herrick: We also saw growth in consumer credit and warehouse money. Credit quality across the portfolio remains strong, non-performing loans of 1.26 percent increase from 0.93 percent in the previous quarter. The largest increase was in commercial finance and this was partially driven by the same relationship we mentioned last quarter, which is in the process of a workout. As we have said in the past, we do experience lumping up in our non-performing loans, particularly when we are in the process of a workout, but typically we recover at least a portion of the loan if not all due to our collateral management. We remain confident in our collateral in the quality of our portfolio.
Higher quality typically lower loss portfolios.
SBA USDA and.
In insurance premium.
So that factors into both where the allowance levels or add it also drives your seasonal provision.
And then just lastly for me and then I'll step back.
Near term just a quick question on the margin.
Do you believe the NIM will stabilize here for higher for longer environment kind of as predicted and there is no movement in the federal funds rate.
I mean, if we have.
Stability here higher for longer our NIM will continue to widen.
Glen Herrick: As Brett said, we have built a company to be resilient through different cycles. From a liquidity perspective, fabric continues to be at a good position. Our balance sheet is strong and when you factor in all of the sources, we have over $2.6 billion that available liquidity. These results continue to give us the ability to return value to shareholders. In the fourth quarter, we were purchased approximately 312,000 shares at an average share price of $51.29.
A key differentiator of our business model.
It is we still have a lot more upside on the yield side versus the cost even if fed funds stays flat.
I appreciate all the color thanks for taking my questions.
Thank you.
Thank you for your question.
The next question comes from the line of Eric Spector with Raymond James You May proceed.
Glen Herrick: In October through October 16, we have repurchased an additional 233,000 shares at an average price of $47.25. In August, we announced that our Board of Directors authorized a new share repurchased program of up to $7 million shares through September 30, 2028.
Hey, Good afternoon. This is Eric on the line for David Feaster.
Thanks for taking the question.
Yes.
Got it.
Hey, How's it going.
Staying on a similar page on the on the NIM just curious how you think about operations and are higher for longer environment. Obviously, there is a tailwind.
Margin, but just curious if you could elaborate on the margin trajectory and then just.
Glen Herrick: As of October 16, we have 8.4 million shares available for repurchase under the two current programs. As Brett stated, we are raising our fiscal year 2024 gap earnings per share guidance to arrange from $6.20 to $6.70. While the fourth quarter saw a healthy amount of renewable energy funding opportunities, we do not anticipate this to reoccur at the same pace in fiscal year 2024. As a result, we are reaffirming our effective tax rate to be in the 16% to 20% rate.
Any broader perspective, how do you think that would impact loan growth and maybe any other impacts are in fact on any other business center and are higher for longer environment.
Well so the first thing.
Back to the previous question.
As you all fluids longer duration loans that were at lower rates and replace them with duration loans at higher rates, we're going to continue to grow NIM, even if fed funds and prime stayed flat so thats kind of obvious.
The other element of your question is what's going on in the marketplace.
Unknown Executive: This concludes our prepared remarks. Operator, please open a line for questions. Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking a question.
We're watching to see how much of a slowdown occurs in loan demand.
Glenn noted, particularly.
Already migrated some in our growth to higher quality loans. Some of that is what's available in the marketplace and so we see that leasing portfolios and others.
And so that may well be what happens.
But also we if the economy gets into a little bit more of a difficult time, we may see some growth in our working capital and factoring.
Michael Perito: Our first question comes from the line of Mike Perrito with KBW. You may proceed. Hi, this is Mike's Associate Andrew Philing and thank you for taking my questions.
Assets, we've talked about that for I think nearly a year now so it hasnt materialized, but that would be the next thing that would happen if the economy really slows down as people are starting to talk about.
Michael Perito: First off here, I was wondering, good, how are you guys doing. Just first off here, I was wondering if we could get some updated credit outlook commentary, given some of the negative data points we've seen from other lenders, particularly in the credit card and small business segments. Yeah, so of course we don't have credit in the small business arena commercial finance. As we said, we're heavily collateral managed loan lender and therefore we tend to do very well through these kinds of times.
Got it that's helpful color and then just kind of wanted to touch more on the on the capital side. So obviously regulatory capital remains strong with TCE is then just curious if you're hearing any pushback from regulators on that and that impacts your capital return opportunities at all.
Looks like you've already started to repurchase some shares during the quarter. So maybe that's the answer but just curious if <unk> plays into the equation at all at this point.
Yes.
We obviously watch that and as you said that that's a factor and.
We're comfortable our board's comfortable.
Michael Perito: And so while we're having some companies that are having some difficulties, we're not having any kind of losses associated out of any ordinary pattern. So we're feeling trouble and we believe our collateral managed approach will put us in a better place going through this cycle than other lenders may have. And Andrew, I'd remind you that one thing that differentiates us, we no longer have a community bank. So we have a minimum amount of commercial real estate on our boat.
You can assume regulators have a say in your capital levels and share repurchases.
As well.
<unk>.
I would say.
And in banking.
30 plus years.
As liquid a bank is.
I see.
Okay and then just one last question just wanted to touch on what Youre seeing on the SBA front.
We're seeing growth opportunities in.
Can you remind us like how much of that book is government guaranteed.
My last question and I'll step back thanks for taking the questions.
Yes.
Michael Perito: Great. I appreciate the color there. And then just a quick follow up on that. What are the provisioned assumptions that are going into the fiscal year 24 guy? Well, it's based on our originations and the outlook for the economy and where our growth is coming from. You've seen in the last couple quarters, our growth has come from higher quality, typically lower-loss portfolios, SBA, USDA, and insurance premium Phineas, so that that factors in to both where the allowance levels are at. It also drives your fiscal provision.
We talked about I mentioned in my comments that we've been identifying additional SBA partners, where we can get volume coming through and so I would say the SBA business and general industry wide has slowed down, but we're able to get some more transactions because of new partners that we brought on so we're excited about that.
The exact percentage of how much is government guaranteed or not varies depending on market conditions, sometimes we sell off the government guaranteed portion. So I don't know that we have in those numbers if you want to get those.
Range is about two thirds.
It moves up and down as Brad said, but plus or minus two thirds of it would be typically guaranteed.
Got it got it.
Alright, well that's it for me thanks again.
Thank you. Thank you.
Michael Perito: And then just lastly from me, and then I'll step back. Near term, just a quick question on the margin. Do you believe the nimble stabilize here if we're in a higher for longer environment kind of as predicted? And there's no movement at the federal funds rate. I mean, if we have, you know, stability here higher for longer, our nimble continue to widen. That's a key differentiator of our business model. It is, we still have a lot more upside on the yield side versus the cost even the fed fund stays flat. I appreciate all the color. Thanks for taking my questions. Thank you. Thank you for your question.
Thank you for your question.
Again, if you would like to ask a question. Please press star followed by Brian.
Our next question comes from the line of Frank <unk> with Piper Sandler You May proceed.
Hey, guys good afternoon.
Hey, Craig I'm going to ask.
On the.
On the guide the increasing got it anything you can point to specifically.
Is it just as simple as a bit of a change in rate outlook, that's driving that that increase here.
Yes, I mean I think.
The higher for longer whats going on should help us with them and so we're feeling very comfortable about that obviously.
Just a few days into the year. So we're not getting carried away, but we felt like with the what we're seeing with the rate environment. We could we could bump it some and then we'll see what happens as we get through the year.
Eric Spector: The next question comes from the line of Eric Spector with Raymond James. You may proceed. Hey, good afternoon. This is Eric on the line for David Feaster. Thanks for taking the question. Just kind of just as a ground.
Okay.
And then in terms of the expense base.
Eric Spector: Staying on a similar page on the nim just curious how you think about operations in a higher for longer environment. Obviously, there's tailwind to the margin, but just curious if you could elaborate on the margin trajectory and then just any broader perspective, how you think that would impact low growth and maybe any of any other impacts or impact on any other business in a higher for longer environment. Well, so the first thing kind of ties back to the previous question.
I get the card processing expense that increase there.
As far as.
If you look at the other expense line.
It's a bit elevated it bounced around a bit but it has been elevated linked quarter and the same with legal and consulting expense, so any sort of color or.
Range you can give in terms of anything one time sort of in the quarter and where you expect a better run rate maybe to be on the expense side.
Eric Spector: As you offloaded longer duration loans that were at lower rates and replace them with duration loans at higher rates, we're going to continue to grow now even if fed funds and prime stay flat. So that's kind of obvious. Now the other element of your question is what's going on in the marketplace and you know, we're watching to see how much of a slowdown occurs in loan demand. Glenn noted particularly that we're already migrated some in our growth to higher quality loans.
Yes.
I would say this this quarter is a pretty good run rate.
Excluding.
The rate related processing expenses.
And.
Eric Spector: Some of that is what's available in the marketplace and so we see that at least in portfolios and others. And so that may well be what happens, but also if the economy gives them to a little bit more of a difficult time, we may see some growth in our working capital and factoring, you know, assets. We've talked about that for I think nearly a year now, so it hasn't materialized, but that would be the next thing that would happen if the economy really slows down as people are starting to talk. That's a helpful color.
Okay.
And I'll remind.
And yet.
You are aware, we do have a number of variable expenses. So.
Where our expenses go partially driven by where our revenues.
But again were.
Alright.
We will grow revenue at least two times expense growth.
Okay.
And then.
Just on credit in terms of the NPA increase in the quarter you mentioned the commercial finance side of it also it looked like the tax business and I think you'd noted in the release the tax business drove some of that and it looks like it's mostly or all in 90 days past due and accruing at least for the tax.
I was just kind of surprised would think that at this point you just write anything off that's still outstanding and so.
So any color on that front.
Eric Spector: And they just kind of wanted to touch more on the capital side. So obviously regulatory capital remains strong. But TCE is then just curious if you're hearing any pushback from regulators on that and that impacts your capital return opportunities at all. Looks like we already started to re-purchase some shares during the quarter. So maybe that's the answer, but just curious if TCE plays into the equation at all at this point. We obviously watched that.
Yes.
We had a mix shift in our in our tax lending this year from our vast providers to more of the independents.
Obviously revenues related to that but.
We also had higher loss rates, which.
Which we.
<unk>. So it is somewhat of a mix shift there and then timing of IRS refunds when they do their drops and theres still some of them common.
Eric Spector: And, you know, as you said, that's a factor. And we're comfortable. Our boards comfortable. You know, you can assume regulators have a say in your capital levels and sharing purchases as well. And, you know, I would say in a banking 30 plus years, where is liquid a bank as I've seen.
But that's where we're at today. It just seems like the cycle has gotten pushed back later this year.
And a lot of the processes.
Okay. It just seems like based on where the reserves are on that business. It seems like you don't anticipate.
Significant losses in this $5 million bucket. That's that's an NPA now is that fair.
Eric Spector: Okay, and then just one last question.
Eric Spector: Just just wanted to touch on what you're seeing on the SBA front. We're seeing growth opportunities.
That's fair yes.
Eric Spector: Can you remind us like how much of that book is government guaranteed my last question. I'll step back. Thanks for taking the questions. Yeah, we talked about I mentioned my comments that we've been identifying additional SBA partners where we can get volume coming through. And so I would say the SBA business in general industry wide is slowed down. But we're able to get some more transactions because of new partners that we brought on.
I would not expect anything material.
From that.
Okay.
And then if I could just sneak in one last one.
As you.
I know you tend to have longer term partnership so.
I guess, you don't have a ton renewing.
Every day, but in terms of the partnerships that have renewed I'm. Just wondering are you seeing better pricing are you seeing more narrow pricing given that we've seen some of these smaller banks entering the market and to bretts point may be over time.
Eric Spector: So we're excited about that. The exact percentage of how much is government guaranteed or not varies depending on market condition. Sometimes we sell off the government guarantee portion. So I don't know. Do we have those numbers? It usually rains about two thirds. You know, it moves up and down as Brett said, but plus or minus two thirds of it would be typically guaranteed. Got it.
Get crowded out but given.
Given that they are in now is that kind of what youre seeing is partnership to renew.
Tighter pricing.
Well I mean, there's been pricing pressure, but its probably been driven more by the rise in interest rates in the <unk>.
<unk> to focus on commission on deposits.
Eric Spector: All right. Well, that's that's it for me. Thanks again. Thank you. Thank you for your question. Again, if you would like to ask a question, please press star followed by one.
Than anything else.
And we don't like you said, we don't have a whole lot of these going on at a time.
So we'll see we'll see how it plays out but I would not say that we have.
Frank Schiraldi: Our next question comes from the line of Frank Soralby with Piper Fandler. You may proceed. Hi, guys.
<unk> any benefit of what I think will be a wash out yet.
Experienced pressure on pricing somewhat because of the interest rate rise.
Frank Schiraldi: Good afternoon. On the on the on the guys, the increasing guy, anything you can point to specifically, is it just as simple as a bit of a change and rate outlook that's driving that that increase here? Yeah, I mean, I think the higher for longer what's going on should help us with them. And so we're feeling very comfortable about that. Obviously, we're just a few days into the year. So we're not getting carried away. But we felt like with the what we're seeing with the rate environment, we could we could bump it some and then we'll see what happens as we get through the year.
Which is all factored into our.
Guidance, yes.
Alright. So you are basically seeing more of an ask on the depository side in terms of.
Some sort of return there.
Yes that comes out now what we tend to do is theres, a tradeoff of fees paid versus.
Commission on deposits et cetera, and that's all part of the contract negotiations you go through but.
Again.
We're predicting and feel solid about our guidance around expanding NIM.
The result of that so.
We're not too concerned about it.
Okay, Great I appreciate all the color.
Retirement, Glenn Thanks.
Frank Schiraldi: Okay. And then in terms of the expense base, you know, I get the card processing expense that increase there. As far as if you look at the, you know, the other expense line was a bit elevated, it bounced around a bit, but it was a bit elevated link quarter and same with legal and consulting expense. So any sort of color or range, you know, you can give in terms of anything one time, sort of in the quarter and where you expect a better run rate, maybe, to be on the expense side.
Thank you Frank I will Miss you.
Thanks.
Lisa.
Thank you for your question.
I will now pass the line back to our CEO.
Hi.
Thanks, everybody for joining today I did want to make one final comment today in Washington.
Federal Reserve held a hearing.
On the debit card interchange fee calculations, and I want to remind everybody that by legislation.
Frank Schiraldi: Yeah, I would say this this quarter is a pretty good run rate, Frank, excluding rate related processing expenses. And, you know, our, and I'll remind you, as you're aware, we, we do have a number of variable expenses, so where our expenses go partially driven by where our revenues go, but again, we're, you know, we'll grow revenue at least two times expense group.
The only thought as they have for that calculation relates to banks that are over 10 billion in asset size.
And so there may be some confusion out there and want to be sure we cleared that up debt.
It's a small issue where we are not impacted by that proposed change and move by the fed. So just wanted to make that clear. We appreciate everybody joining us today and look forward to having direct conversations with you. Thank you.
That concludes pathway financial fourth quarter fiscal year 2023, Investor Conference call. Thank you for your participation you may now disconnect your line.
Frank Schiraldi: Okay. And then, just on credit, in terms of the MPA increase in the quarter, you mentioned the commercial finance side of it. Also, it looked like the tax business, and I think you noted in the, in the, in the release, the tax business drove some of that, and it looks like it's mostly, or all in 90 days past doing a crewing, at least for the tax stuff. And I just kind of surprised, would think that at this point, you just write anything off that's still outstanding.
Password financial fourth quarter fiscal year, 2023, Investor Conference call.
Frank Schiraldi: And, uh, any color on that from? Yeah, you know, there, we had a mixed shift in our, in our tax lending this year from our vast providers to more of the independence. And obviously, revenue is related to that, but also had higher loss rates, which, which we expected. So it's just somewhat of a mixed shift there, and then timing of IRS, you know, refunds when they do their drops, and there's still some of them coming.
Frank Schiraldi: But that's, that's where we're at today. It just seems like the cycle has gotten pushed back later this year, um, in a lot of the processes. Okay, it just seems like based on where the reserves are on that business, it seems like you don't anticipate significant losses in this, you know, $5 million bucket, um, that's, that's in NPA now. Is that fair? That's fair. Yeah. That would not expect anything material from that.
Frank Schiraldi: And then if I could just sneak in one last one, you know, as you, I know you tend to have longer term partnerships. So, you know, they, um, I guess you don't have a ton renewing, um, every day, but in terms of the partnerships that have renewed, I'm just wondering, are you seeing better pricing, are you seeing more narrow pricing, given that, you know, we've seen some of these, um, smaller banks entering the market and, and, you know, to Brad's point, maybe over time, um, they get crowded out, but, uh, that given that they're in now, is that kind of what you're seeing as partnership to renew?
Frank Schiraldi: Tighter pricing? Well, I mean, there's been pricing pressure, but it's probably been driven more by the rise and interest rates and the desire to focus on commission on deposits, um, than anything else. Um, and, you know, we don't, like you said, we don't have a whole lot of these going on at a time. Uh, so we'll see, we'll see how it rides out, but I would not say that we have, uh, experience any benefit of what I think will be a washout yet. Uh, we've experienced pressure on pricing somewhat because of the interest rate rise. Yes. We're just all factored in here.
Frank Schiraldi: Okay. I did our guidance. Yeah. Right. So you're basically seeing more than asked on the deposit side in terms of some sort of return there. Yeah, that comes up. Now what we tend to do is there's a trade off of fees paid versus, you know, commission on deposits, et cetera. And that's all part of the contract negotiations you go through. But again, you know, we're predicting and feel solid about our guidance around expanding them and the result of that. So we're not too concerned about it.
Frank Schiraldi: Okay. Great. I appreciate all the comments. Thank you. Thank you, Frank. I'll miss you. Thanks. Me too.
Unknown Executive: Thank you for your question.
Brett Pharr: I will now pass the line that to our CEO, Brett Pharr.
Brett Pharr: Thank you, everybody, for joining today. I did want to make one final comment today in Washington, the Federal Reserve, held a hearing on the debit card interchange fee calculations. And I want to remind everybody that by legislation, the only authority they have with that calculation relates to banks that are over 10 billion in asset size. And so there may be some confusion out there. I want to be sure that we cleared that off, that it's a small issue where we are not impacted by that proposed change in rule by the Fed. So just want to make that clear.
Unknown Executive: We appreciate everybody joining today and look forward to having direct conversations with you. Thank you.
Unknown Executive: That concludes password financial fourth quarter fiscal year 2023 investor conference call. Thank you for your participation. Amen out. Disconnect your line. Password financial fourth quarter fiscal year 2023 investor conference call.