Q2 2024 Pathward Financial Inc Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by, and welcome to Pathward Financial's second quarter fiscal year 2024 investor conference call. During the presentation, all participants will be in a listen-only mode.
Ladies and gentlemen, thank you for standing by and welcome to password Financial's second quarter fiscal year 2024, Investor Conference call. During the presentation, all participants will be in a listen only mode.
Operator: 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.
Following the prepared remarks, we will conduct a question and answer session.
As a reminder, this conference call is being recorded.
I'd now like to turn the conference call over to Darby Schoenfeld Senior Vice President of Investor Relations. Please go ahead.
Darby Schoenfeld: Thank you, operator, and welcome. With me today are Pathwork Financial CEO Brett Pharr and CFO Greg Sigrist, who will discuss our operating and financial results for the second quarter of fiscal 2024, after which we will take your questions. Additional information, including a press release, the investor presentation that accompanies our prepared remarks, and supplemental slides, may be found on our website at pathworkfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods.
Darby Schoenfeld: Thank you operator and welcome.
Darby Schoenfeld: With me today are password financial CEO, Brett bar, and CFO, Greg cigarette, who will discuss our operating and financial results for the second quarter of fiscal 2024, after which we will take your questions additional information, including the press release, the investor presentation that accompanies our prepared remarks and supplemental slides maybe.
Darby Schoenfeld: Found on our website at password financial Dot com.
Darby Schoenfeld: 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.
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, 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.
Darby Schoenfeld: The company undertakes no obligation to update any forward looking statement.
Darby Schoenfeld: 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.
Darby Schoenfeld: 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 in the appendix of the Investor presentation.
Darby Schoenfeld: References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends. Reconciliations for such non-GAAP measures are included in the appendix of the investor presentation. Finally, all periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior year period, unless otherwise noted. Now, I will turn the call over to Brett Pharr, our CEO.
Darby Schoenfeld: Finally, all periods referenced are fiscal quarters and fiscal years and all comparisons are to the prior year period, unless otherwise noted.
Darby Schoenfeld: Now, let me turn the call over to Brett <unk> our CEO.
Brett Pharr: Thanks Darby and welcome everyone to our second quarter 2024 conference call. We continue to produce strong results in the quarter by focusing on risk-adjusted returns and enhancing our banking as a service offering. Additionally, tax season is shaping up nicely, especially since the steps we took in the offseason to enhance data analytics, underwriting, and monitoring for refund advances are generating positive returns for us. We are very pleased with our performance thus far in the fiscal year.
Brett Pharr: Thank you Darby and welcome everyone to our second quarter 2024 conference call.
Brett: We continue to produce strong results in the quarter by focusing on risk adjusted returns and enhancing our banking as a service offerings.
Brett: Additionally, tax season shaping up nicely, especially since the steps we took in the off season to enhance data analytics underwriting and monitoring for refund advances are generating positive returns for us.
Brett: We are very pleased with our performance thus far in the fiscal year.
Brett Pharr: This focus helped us to drive $65.3 million in net income, a 19% increase, and $2.56 per diluted share, a 29% increase compared to the prior year's quarter. Earnings growth was driven by an increase in net interest income of 17 percent and 26 percent growth in pre-tax income in our tax business during the quarter. We also expanded net interest margin to 6.23% when compared to last year's quarter, and our adjusted net interest margin, including rate-related processing expenses, was 4.65%.
Brett: This focus helped us to drive $65 3 million and net income by 19% increase and $2 56 per diluted share a 29% increase compared to the prior year's quarter.
Earnings growth was driven through an increase in net interest income of 17% and 26% growth in pre tax income in our tax business during the quarter.
We also expanded net interest margin to 623% when compared to last year's quarter and our adjusted net interest margin, including rate related processing expenses was $4 six 5%.
Brett Pharr: Performance metrics remain strong, with return on average assets for the first six months of the year of 2.35 percent and return on average tangible equity of 51.09 percent. For reference, these metrics were 2.39% and 50.81%, respectively, for the same time period last year. Finally, we are narrowing our guidance range to $6.30 to $6.60 in EPS for the full year. Greg will give you more color on this in his remarks.
Brett: Performance metrics remained strong with return on average assets for the first six months of the year of 235% and return on average tangible equity of 51, 9%.
Brett: For reference these metrics were $2, three 9% and 58, 1% respectively for the same time period last year.
Brett: Finally, we are narrowing our guidance range to $6 30 to $6 60.
Brett: And EPS for the full year.
Brett: Greg will give you more color on this in his remarks.
Brett Pharr: We are very pleased with our tax season results for the six months ending in March. The IRS opened a week later than last year, and because of the delay, we had more applications for our refund advance product, which gives customers access to a portion of their refund immediately. We originated almost $100 million more in tax services loans than we did last year. This helped us to increase refund advance fee income by 12% over the same six months in the prior year. As we often say, no two tax seasons are the same, and this was true again this year.
Speaker Change: We are very pleased with our tax season results for the six months ending in March.
Speaker Change: IRS opened a week later than last year and because of the delay we had more applications in our refund advance product, which gives customers access to a portion of their refund immediately.
Speaker Change: We originated almost $100 million more in tax services loans than we did last year.
Speaker Change: This helped us to increase refund advance fee income by 12% over the same six months in the prior year.
As we often say, though two tax seasons are the same and this was true again. This year, however, our long tenured and talented team adjusted well and once again drove good results.
Brett Pharr: However, our long-tenured and talented team adjusted well and once again drove good results. Total tax services revenues for the six months ended March 31st increased slightly. However, we were able to decrease both tax product expenses and the provision for credit losses resulting from some of the work I mentioned previously. And pre-tax net income for tax services grew 24% to $36.9 million.
Speaker Change: Total tax services revenues for the six months ended March 31 increased slightly.
However, we were able to decrease both tax project expenses and the provision for credit losses, resulting from some of the work I mentioned previously and pre tax net income for tax services grew 24% to $36 9 million.
Brett Pharr: On the asset side of the house, Pathward's commercial finance division is comprised of four primary asset classes: Working Capital, Structured Finance, Equipment Finance, and Insurance Premium Finance. Each asset class is built to perform through economic cycles with a strong foundation of specialized and unique risk mitigation techniques. Because of this, we are better positioned to help businesses that many traditional banks are uncomfortable or unwilling to serve. For example, working capital products consist of asset-based lending and accounts receivable factoring that provide businesses with the ability to obtain financing by leveraging assets as collateral, regardless of profitability or cash flow.
Speaker Change: On the asset side of the house passwords commercial Finance Division is comprised of four primary asset classes working capital structured finance equipment finance and insurance premium finance.
Speaker Change: Each asset class is built to perform through economic cycles with a strong foundation of specialized and unique risk mitigation techniques.
Cause of this we are better positioned to help businesses that many traditional banks are uncomfortable or unwilling to serve for.
Speaker Change: For example, working capital products consist of asset based lending and accounts receivable factoring that provide businesses with the ability to obtain financing by leveraging assets as collateral regardless of profitability or cash flow.
Brett Pharr: These products are supported by formulaic advances primarily related to accounts receivable and inventory. We analyze the collateral's performance to determine the ongoing viability of converting these assets into cash. This helps to establish appropriate collateral advance rates, which are monitored on a daily or weekly basis. It also helps us to understand our overall risk, regardless of whether the borrowing company is profitably growing or experiencing financial strain. Additionally, unlike traditional banks, we generally use stronger controls, including dominion of funds, demand notes, and frequent field exams.
Speaker Change: These products are supported by formulaic advances primarily related to accounts receivable and inventory.
Speaker Change: We analyze the collateral performance to determine the ongoing viability of converting these assets into cash.
Speaker Change: This helps to establish appropriate collateral advance rates, which are monitored on a daily or weekly basis.
Speaker Change: It also helps us to understand our overall risk regardless of whether the barring company is profitably growing or experiencing financial strength.
Speaker Change: Additionally, unlike traditional banks, we generally use stronger controls, including Dominion funds demand notes and frequent field exams.
Brett Pharr: Our equipment finance team offers commercial lease and term loans for equipment needs. We typically focus on mission critical items where the equipment is required to operate the business on an ongoing basis, even in the event of a company restructuring. Each contract has ongoing financial reporting requirements and ongoing collateral reviews, which sometimes include physical inspection.
Our equipment finance team offers commercial lease and term loans for equipment needs.
Speaker Change: We typically focus on mission critical items, where the equipment is required to operate the business on an ongoing basis, even in the event of a company restructuring.
Speaker Change: Each contract has ongoing financial reporting requirements and ongoing collateral reviews, which sometimes include physical inspection.
Brett Pharr: At the portfolio level, we monitor industry and collateral concentrations to manage our exposure. These examples help illustrate the work that goes into managing our portfolio and allows it to perform very well historically, regardless of the macroeconomic environment. We believe it is the workload that is the primary driver of our higher yield. When reviewing our portfolio and potential loan opportunities, it is with this lens that we underwrite. We take into account the FTE costs, the traditional net charge-off rates of our portfolio, not the traditional net charge-off rates for these types of loans in the industry, and then arrive at a risk-adjusted return.
At the portfolio level, we monitor industry and collateral concentrations to manage our exposure.
Speaker Change: These examples help illustrate the work that goes into managing our portfolio and allows us to perform very well historically, regardless of the macroeconomic environment.
Speaker Change: We believe it is the workload that is the primary driver of our higher yields.
Speaker Change: When reviewing our portfolio and potential loan opportunities. It is with this lens that we underwrite.
Speaker Change: We take into account the FTE cost the traditional net charge off rates of our portfolio not the traditional net charge off rates for these types of loans in the industry and then arrive at a risk adjusted return.
Brett Pharr: When you compare the end of this quarter to the same time last year, we are holding over a half billion dollars more in commercial finance loans and 160 million more in consumer tax services and warehouse finance loans, and this is helping to drive our performance and growth in earnings. Our goal on the asset side is to continue to optimize the balance sheet. We intend to focus on adding loans and leases with the highest risk-adjusted returns and redeploying cash from our securities portfolio into higher-yielding loan verticals. While we believe there is still runway to continue expanding that interest income, we believe non-interest income will be the source of sustained earnings growth well into the future. This growth can come from two avenues.
Speaker Change: When you compare the end of this quarter to the same time last year, we are holding over a half a billion dollars more in commercial finance loans and $160 million more in consumer tax services and warehouse finance loans and this is helping to drive our performance and growth in earnings.
Speaker Change: Our goal on the asset side is to continue to optimize the balance sheet.
Speaker Change: We intend to focus on adding loans and leases with the highest risk adjusted returns and redeploying cash from our securities portfolio into higher yielding loan verticals.
Speaker Change: While we believe there is still runway to continue expanding net interest income we believe non interest income will be the source of sustained earnings growth well into the future.
Speaker Change: This growth can come from two avenues first you may see us increasingly utilized balance sheet velocity strategies, which come in a few forums to generate fee income, including increased originations and sale of consumer loans, which we provide to support some of our banking as a service clients.
Brett Pharr: First, you may see us increasingly utilize balance sheet velocity strategies, which come in a few forms, to generate fee income, including increased originations and sales of consumer loans, which we provide to support some of our banking-as-a-service clients. And second, we are extremely focused on growing fee income and banking as a service. We continue to be a beneficiary of a strong risk and compliance capability as our processes, procedures, and programs are especially designed for the space.
We are extremely focused on growing fee income and banking as a service.
Speaker Change: We continue to be a beneficiary of a strong risk and compliance capability as our processes procedures and program are especially designed for the space.
Brett Pharr: Recent industry focus by regulators, specifically on Bass Banks, has, in our opinion, only reduced regulatory arbitrage and enforced rules that have been a part of the requirements for more than a decade. We expect that focus to continue. We are receiving more inquiries as other banks may be exiting or restricting their past business. As a result, the pipeline in BASC continues to be very healthy and includes expansion of products and services with existing partners, as well as inquiries from new partners.
Speaker Change: Recent industry focus by regulators, specifically on bass banks in our opinion is only reduced regulatory arbitrage and enforces rules that have been a part of the requirements for more than a decade.
Speaker Change: We expect that focus to continue.
Speaker Change: We're receiving more inquiries as other banks may be exiting or restricting their bass business.
Speaker Change: As a result, the pipeline in Vas continues to be very healthy and includes expansion of products and services with existing partners as well as inquiries from new partners.
Brett Pharr: We continue to build on and invest in our people, risk culture, strong processes, and technology to adapt and grow with the demands of the business. We believe that the innovation that is occurring around the Bass Marketplace is incredible, and we intend to continue to be a trusted partner for the companies moving this industry forward. Now, I'd like to turn it over to Greg, who will take you through the financials.
Speaker Change: We continue to build on and invest in our people risk culture strong processes and technology to adapt and grow with demands of the business. We believe that the innovation that is occurring around the vast marketplace is incredible and we intend to continue to be a trusted partner for the company is moving this industry.
Speaker Change: Forward.
Now I'd like to turn it over to Greg who will take you through the financials.
Gregory A. Sigrist: Thank you, Brett, and good afternoon, everyone. Net interest income continues to be a significant driver of our results at a higher percentage of revenues than last year. This is primarily due to increased yields and thus an improved earning asset mix, as well as the significant growth in loans and leases that we have seen over the last 12 months. In addition, we have seen sequential increases in overall yield on the portfolio due to increased rates on new production as we remain disciplined in adding higher risk-adjusted return assets onto the balance sheet. Our new production yield on commercial finance loans and leases in the quarter was 9.27% compared to the quarterly yield on the same portfolio from the last quarter of 7.97%.
Gregory A. Sigrist: Thank you Brett and good afternoon, everyone.
Gregory A. Sigrist: Net interest income continues to be a significant driver of our results at a higher percentage of revenues than last year.
This was primarily due to increased yields and thus an improved earning asset mix.
Gregory A. Sigrist: As well as a significant growth in loans and leases that we have seen over the last 12 months and.
Gregory A. Sigrist: In addition, we have seen sequential increase and overall yield on the portfolio due to increased rates on new production as we remained disciplined and adding higher risk adjusted return assets onto the balance sheet.
Gregory A. Sigrist: Our new production yield on commercial finance loans and leases in the quarter was nine 7% compared to the quarterly yield on the same portfolio from the last quarter of 797%.
Gregory A. Sigrist: Our adjusted net interest margin was 4.65%, and while this is slightly behind last year's quarter, we made the operating decision to hold deposits off the balance sheet at certain points in the quarter, as we have in the past, and instead utilize borrowing. This had the artificial impact of lowering both net interest margin and adjusted net interest margin since servicing fee income from off-balance sheet deposits is not included in either measure. However, the impact is relatively neutral to earnings.
Gregory A. Sigrist: Our adjusted net interest margin was 465%.
Gregory A. Sigrist: And while this is slightly behind last year's quarter, we made the operating decision to hold deposits off balance sheet at certain points in the quarter as we have in the past and instead utilize borrowings.
Gregory A. Sigrist: This had the artificial impact of lowering both net interest margin and adjusted net interest margin since servicing fee income from off balance sheet deposits is not included in either measure. However, the impact is relatively neutral to earnings it simply shifts revenue from interest income and to noninterest income.
Gregory A. Sigrist: It simply shifts revenue from interest income into non-interest income. Non-interest income grew 2%, primarily driven by increases in refund advance fee income. This was partially offset by lower card and deposit fees due to lower servicing fee income from reduced levels of off-balance sheet deposits when compared to the prior year quarter. Provision in the quarter declined almost 30%, primarily due to decreases in provision for refund advances and commercial finance.
Gregory A. Sigrist: Noninterest income grew 2%, primarily driven by increases in refund advance fee income this.
Gregory A. Sigrist: This was partially offset by lower card and deposit fees due to lower servicing fee income from reduced levels of off balance sheet deposits when compared to the prior year quarter.
Gregory A. Sigrist: Provision in the quarter declined almost 30% primarily due to decreases in provision for refund advances and commercial finance.
Gregory A. Sigrist: Brett mentioned the work we did in tax, which led to improved credit performance, including recoveries in the quarter. The provision also reflects a mix shift in the loan portfolio and a benign credit environment. Total non-interest expenses increased versus the same quarter last year, primarily driven by higher rate-related card processing expenses due to the rate environment. However, non-interest expenses apart from rate-related card processing costs continue to be well-managed with an increase of just over 3% from the prior year quarter.
Gregory A. Sigrist: Brett mentioned the work we did in tax, which led to improved credit performance, including recoveries in the quarter the.
The provision also reflects a mix shift in our loan portfolio and a benign credit environment.
Gregory A. Sigrist: Total noninterest expenses increased versus the same quarter last year, primarily driven by higher rate related card processing expenses due to the rate environment non.
Gregory A. Sigrist: Noninterest expenses apart from rate related card processing costs continue to be well managed with an increase of just over 3% from the prior year quarter.
Gregory A. Sigrist: Deposits on the balance sheet as of March 31st totaled $6.4 billion, an increase of almost half a billion dollars from a year ago. We intend to hold higher relative levels of deposits on the balance sheet to support the growth in loans and leases. Off-balance sheet deposits on March 31st totaled $1.2 billion. As a reminder, while these values are elevated at the end of the quarter due to seasonal deposits related to tax season, they will gradually draw down toward a low point, which we usually see in the September quarter. As of March 31st, Password is still holding approximately $741 million in deposits related to government stimulus programs.
Gregory A. Sigrist: Deposits on balance sheet at March 31 totaled $6 4 billion, an increase of almost half a billion dollars from a year ago.
Gregory A. Sigrist: We intend to hold higher relative levels of deposits on balance sheet to support the growth in loans and leases.
Gregory A. Sigrist: Off balance sheet deposits on March 31 totaled $1 2 billion.
As a reminder, while these values are elevated at the end of the quarter due to seasonal deposits related to tax season, they will gradually drawdown toward a low point, which we usually see in the September quarter.
Gregory A. Sigrist: As of March 31.
Gregory A. Sigrist: Password is still holding approximately $741 million of deposits related to government stimulus programs.
Gregory A. Sigrist: Through the rest of fiscal year 2024, we expect to return approximately $219 million of unclaimed deposits to the Treasury Department. We now expect the full-year average off-balance sheet deposits to be around $440 million. Total loans and leases at March 31st totaled $4.4 billion, an increase of 18% from a year ago. The company has experienced strong growth in the commercial and consumer portfolios, and we believe there are ample opportunities ahead, particularly in working capital and government-guaranteed loan products, where we see healthy pipelines with strong risk-adjusted returns. Compared to December 31st, total loan balances declined slightly. We saw increases in asset-based lending, term lending, and SBA and USDA loans, offset by a decrease in insurance premium finance and consumer finance.
Gregory A. Sigrist: Through the rest of fiscal year 2024, we expect to return approximately $219 million of unclaimed deposits to the Treasury Department.
Gregory A. Sigrist: We now expect for the full year average off balance sheet deposits to be around $440 million.
Gregory A. Sigrist: Total loans and leases at March 31 totaled $4 4 billion, an increase of 18% from a year ago.
The company has experienced strong growth in the commercial and consumer portfolios and we believe there are ample opportunities ahead, particularly in working capital and government guaranteed loan products, where we see healthy pipelines with strong risk adjusted returns.
Gregory A. Sigrist: Compared to December 31.
Gregory A. Sigrist: Total loan balances declined slightly we.
Gregory A. Sigrist: We saw increases in asset based lending term lending and SBA and USDA loans.
Gregory A. Sigrist: Offset by a decrease in insurance premium finance and consumer finance.
Gregory A. Sigrist: From a liquidity perspective, we remain in a strong position with approximately $3.6 billion in available liquidity. As Brett mentioned, our goal is to optimize the balance sheet and rotate out of securities and into higher-earning assets. We still expect the securities portfolio to continue drawing down with close to $300 million of cash flows available for reinvestment over the next 12 months. Finally, during the quarter, we repurchased approximately 764,000 shares at an average share price of $51.20.
Gregory A. Sigrist: From a liquidity perspective, we remain in a strong position with approximately $3 $6 billion in available liquidity.
Gregory A. Sigrist: As Brad mentioned, our goal is to optimize the balance sheet and rotate out of securities and into higher earning assets.
We still expect the securities portfolio to continue drawing down with close to $300 million of cash flows available for reinvestment over the next 12 months.
Gregory A. Sigrist: Finally during the quarter, we repurchased approximately 764000 shares at an average share price of $51 20.
Gregory A. Sigrist: From April 1st through April 15th, we repurchased approximately 101,000 shares at an average price of $49.47. We are narrowing our fiscal year 2024 EPS guidance to a range of $6.30 to $6.60. This includes a number of assumptions in addition to those that I've already touched on. We expect earnings asset yields to continue to increase given our focus on risk-adjusted returns, continued pricing discipline, and securities portfolio cash flows, which will be reinvested into higher-yielding loans.
Gregory A. Sigrist: From April one through April 15th we have repurchased approximately 101000 shares at an average price of $49 47.
Gregory A. Sigrist: We are narrowing our fiscal year 2024, EPS guidance to a range of $6 30 to $6 60.
Gregory A. Sigrist: This includes a number of assumptions in addition to those that I have already touched on.
Gregory A. Sigrist: We expect earning asset yields to continue to increase given our focus on risk adjusted returns continued pricing discipline and securities portfolio cash flows, which will be reinvested into higher yielding loans.
Gregory A. Sigrist: We expect core currency income to follow normal historical seasonal patterns. We estimate our effective tax rate to be in the range of 16 to 20 percent for the year. Operator, please open the line for questions.
Gregory A. Sigrist: We expect core card fee income to follow normal historical seasonal patterns.
Gregory A. Sigrist: We estimate our effective tax rate to be in the range of 16% to 20% for the year.
Speaker Change: This concludes our prepared remarks, operator, please open the line for questions.
Operator: Absolutely. We will now begin the Q&A session. If you'd like to queue for a question on today's call, please dial star 1 on your telephone keypad. If, for any reason, you would like to remove that question, please dial star 2. Again, to ask a question, it is star 1. As a reminder, if you're using a speakerphone on today's call, please be sure to pick up your handset before asking your question. We'll pause here briefly to allow questions to generate in the queue. The first question is from the line of Frank Schiraldi with Piper Sandler. Your line is now open.
Speaker Change: Absolutely we will now begin the Q&A session, if you'd like to queue for a question on today's call. Please dial star one on your telephone keypad. If for any reason you would like to remove that question. Please dial star two.
Speaker Change: To ask a question it is star one.
Speaker Change: As a reminder, if youre using a speakerphone on todays call. Please be sure to pick up your handset before asking your question.
Speaker Change: We will pause briefly to allow questions to generate in the queue.
Speaker Change: The first question is from the line of Frank <unk> with Piper Sandler Your line is now open.
Speaker Change: Okay.
Frank Joseph Schiraldi: Hey, good afternoon. I just wanted to start with the expense side of things. If you could provide maybe a little color and, hopefully, a little bit of outlook in terms of how you see the comp line. I know, you know, this quarter is obviously impacted by the seasonality of the tax business. So, is it more reasonable to kind of return to nearer to fiscal, you know, 1Q levels in terms of thinking out through the rest of the year in terms of comp?
Frank: Hey, good afternoon.
Frank: Just wanted to start with.
Frank: The expense side of things if you could provide maybe a little color.
Frank: Hopefully a little bit of outlook in terms of how you see the comp line.
Frank: No.
Frank: This quarter, obviously impacted by the.
Frank: Seasonality in the tax business so.
Frank: Is it more reasonable to kind of return to nearer to physical.
Frank: <unk> levels.
Frank: In terms of thinking through the rest of the year in terms of comp.
Yeah, Hi, Frank I appreciate the question, yes in the quarter I mean, just to be clear I think there was roughly.
Frank: $2 million of what I would consider to be nonrecurring expenses in there. The rest really was related to your point to just the seasonality higher levels of revenue et cetera, but you're spot on I think my starting point is going to be reverting back to that December quarter run rate. The one thing I would touch on that for comp and benefits over the balance of the year, we are going to continue to invest in human capital.
Gregory A. Sigrist: Yeah, hi, Frank. Appreciate the question. Yeah, in the core, I mean, just to be clear, I think there was roughly [inaudible]. I think we'll exit September a little bit higher than the December quarter.
Frank: So.
Frank: I am expecting to perhaps $2 5 million of additional run rate kind of building in over the balance of the year and that will take some time to get there, but I think we will exit September a little bit higher than the December quarter.
Frank Joseph Schiraldi: Okay, great. And then just on the, sorry if I missed it earlier, but in terms of the, what you would just consider non-recurring, the $2 million, any sort of additional color you can provide there? Is that just, you know, one off in the quarter? And what was the driver there?
Speaker Change: Okay, Great and then just on the sorry, if I missed this earlier, but in terms of the what you would just consider nonrecurring the $2 million in any sort of additional color you can provide.
Speaker Change: Provide there or is that just.
Speaker Change: One off in the quarter and what was the driver there.
Gregory A. Sigrist: Yeah, it was just some one-offs in the quarter. I mean, you periodically have some things that'll run through comp and benefits that are just bespoke, and they, again, they're just not going to recur, so.
Speaker Change: Yes. It was just some one offs in the quarter I mean, you periodically have some things that will run through comp and benefits that are just the spoke and they again they are just not going to recur.
Speaker Change: Okay.
Speaker Change: Okay.
Frank Joseph Schiraldi: Okay, um, and then just on loan growth. You know, the insurance premium finance business, obviously, you had an opportunity there, and you saw a significant pickup, maybe it was six months ago or so, and obviously, they are short-term loans, and we've seen that come back down. And any sort of thoughts around where that stabilizes, you know, normalizes, because otherwise, you'd look like you have pretty good growth on the commercial finance side of things outside of that category.
Speaker Change: And then just on the.
Speaker Change: Loan growth.
Speaker Change: The insurance premium finance business, obviously, you had an opportunity there.
Speaker Change: And you saw a significant pick up.
Maybe it was six months ago, or so and obviously they are short term loans and we've seen that come back down.
Speaker Change: And any sort of.
Speaker Change: Thoughts around where that stabilizes.
Speaker Change: Normalizes.
Speaker Change: Because otherwise you looked like you had pretty good growth on the <unk>.
Speaker Change: Marshall finance side of things outside of that category.
Gregory A. Sigrist: Yeah, I would expect the insurance premium finance to normalize back up in April and May back to the levels we saw at the end of the year, you know, the December quarter end. So I think that should be roughly back up to 680 million francs. But part of the reason for that should be that April and May are pretty heavy premium months, you know, renewal months for the underlying corporate.
Speaker Change: Yes, I would expect the insurance premium finance to normalize back up in April and May back up to the levels. We saw at the end of the year.
Speaker Change: Remember quarter, and so I think that was roughly back up to $680 million Frank.
That should build part of the reason for that is April and May are pretty heavy premium months renewal months for the underlying corporate so that we do expect that portfolio to build again.
Frank Joseph Schiraldi: Okay. And then outside of that book, you know, thinking about the rest of commercial finance, I think it was up close to double digits annualized. Is that kind of the rate of growth you're seeing in those other businesses?
Speaker Change: Okay, and then outside of that book thinking about the rest of the commercial finance I think was up close to.
Speaker Change: Close to double digit annualized is that onto the the rate of growth.
Speaker Change: You are seeing in those other businesses.
Brett Pharr: You know, this is Brett. In working capital, I think we're seeing that in the pipeline is really big. We're being a little bit more selective on the equipment finance side and structure finance. There are a number of things that have various puts and takes. So I do think we'll have to continue to have pretty good growth, but maybe not quite at the rate that we've had over the past year.
Brett: This is Brett.
Brett: And the working capital I think we're seeing that in the pipeline is really big.
Brett: We're being a little bit more selective on the equipment finance side in structured finance, it's a number of things that have various puts and takes so so I do think we'll have continue to have pretty good growth, but maybe not quite at the rate that we've had over the past year.
Frank Joseph Schiraldi: Okay, and then I could just sneak in one last one just on the deposits that are subject to the contractual indexing. This quarter, you talked about 56% of the deposits being subject to that indexing, up from 53% last quarter, and just curious, is that going to be, you know, a continued trend, if you can kind of talk us through that a little bit?
Speaker Change: Okay, and then if I could just sneak in one last one just on the.
Speaker Change: The deposits that are subject are subject to the contractual.
Speaker Change: The indexing.
Speaker Change: This quarter, you talked about 50%, 56% of the deposits are subject to the index thing up from 53% last quarter.
Speaker Change: Just curious is that going to be a continued trend. If you can kind of talk us through that a little bit.
Gregory A. Sigrist: Yeah, I mean, as you can imagine, with the rate environment, as contracts come up, this is considerably more a part of the conversation than it was before, so it is a negotiation, and sometimes it's, oh, you're trying to get more fees and then give it on commissional deposits or whatever it might be, so as long as rates are higher, there's going to be pressure to do some of that, and it's just If rates stay higher for longer, you'll probably have more of those conversations, but you will also get more on the asset side. Great OK.
Speaker Change: Yes, I mean as you can imagine with the rate environment as contracts come up this is considerably more a part of the conversation that it was before so it isn't negotiation and sometimes it's are you trying to get more fees and then given on commission on deposits or whatever it might be so.
Speaker Change: As long as rates are higher there is going to be pressure to do some of that.
Speaker Change: And it's just it's a negotiation that we will engage in and make sure. We're getting good margin as we go through it.
Speaker Change: Rates stayed higher for longer you probably have more of those conversations but youre also we'll get more on the on the asset side.
Speaker Change: Great. Okay. Thanks for the color.
Frank Joseph Schiraldi: Great, OK. Thanks for the call.
Speaker Change: Thanks, Brian.
Operator: Thank you. The next question is from the line of Tim Switzer with KBW. Your line is now open.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Tim Switzer with <unk>. Your line is now open.
Timothy Jeffrey Switzer: Hey, good afternoon. Thank you for taking my questions. I wanted to follow up on your comments about the banking as a service landscape and some of the regulatory pressures that are limiting the arbitrage that was previously occurring. Can you give us a description of the partner pipeline you have, like the, you know, the size of the partners, the industries they're in? you know, the composition between if you'll be doing deposit or credit sponsorship, everything like that.
Tim Switzer: Hey, good afternoon. Thank you for taking my questions I wanted to follow up on your comments about the banking as a service landscape then.
Tim Switzer: Some of the regulatory pressures are.
Tim Switzer: Limiting the arbitrage that was previously occurring can you give us a description of the partner pipeline you have.
Tim Switzer: Like the size of the partners to industry they're in.
Tim Switzer: The composition between if youll be doing deposit or credit sponsorship everything like that.
Brett Pharr: Yeah, I don't know that we've got to highlight all the specifics of it, but sort of the macro piece of this, right? So we've been pretty clear in the last three years that we were turning away business. In many cases, it was a business that did not fit our risk profile. Some were doing those kinds of businesses, and that's what's going on in the industry. And you've kind of heard pretty clearly from my comments my view of that, of where we stand versus others that are in the industry.
Speaker Change: Yes, I don't know that we kind of highlight.
Speaker Change: All of the specifics of it but sort of the macro piece of this right. So.
Speaker Change: We've been pretty clear in the last three years that we returning away business and in many cases it was business that did not fit our risk profile.
Speaker Change: Some were doing those kinds of businesses and that's what's going on in the industry.
Speaker Change: And you've kind of heard pretty clearly from my my comments my view of that of where we stand versus others that are in the industry.
Brett Pharr: So the result of that is everybody's fleeing quality, and that is true in the issuing space, that's true in the payment space, and that's true as well in the marketplace lending space. And there are very public events in all those categories, and people that already have a meaningful amount of business, so these are not startups, are coming our way, and it might be in the form of end-of-year flips, it might be in the form of, you know, going from scratch with new programs. But they find themselves in a situation where they can't do the next new program with their existing bank because of circumstances.
Speaker Change: So the result of that is everybody splitting the quality and that is true in the issuing space that's true in the payment space.
Speaker Change: That's true as well in the marketplace lending space and there are very public events and all of those categories.
Speaker Change: People that already have a meaningful amount of business. So these are not startups are coming our way and it might be in the form of been flips it might be in the form of build from scratch with new programs.
Speaker Change: But they are they find themselves in a situation where they can't do the next new program with their existing bank because of circumstances. So.
Timothy Jeffrey Switzer: So we say this a lot, but I exponentially mean this, our pipeline has never been bigger, and it's actually real stuff that we can do. And now people are beginning to listen to our requirements, and realize that our requirements are there for their benefit and safety as well as ours. So I actually welcome the elimination of regulatory arbitrage that was going on and focusing on what the rules actually say, and we believe we're in a good place for that.
Speaker Change: We say this a lot but I.
Speaker Change: Actually mean to us our pipeline has never been bigger.
Speaker Change: And it's actually real stuff that we can do and now people are beginning to listen to our requirements and our requirements are there for their benefit and safety as well as ours. So.
Speaker Change: I actually welcome the.
Speaker Change: The elimination of the regulatory arbitrage that was going on and focusing on what the rules actually say.
Speaker Change: We believe we are in a good place for that.
Brett Pharr: Okay, yeah, you kind of mentioned this, but are you able to qualitatively describe, maybe in your partner pipeline, how many are coming from competitors versus people new to the industry?
Speaker Change: Okay, Yeah, and you've kind of mentioned this but are you able to qualitatively describe maybe.
Speaker Change: And your partner pipeline, how many are coming from competitors versus people new to the industry.
Timothy Jeffrey Switzer: I could talk about that in general terms. There's almost nobody new coming into this right now. They're all scared to death. So this is somebody that has been three to five years in the industry, and they were connecting with a different bank partner. They've got a workable business model that has enough scale to meet our minimums, and they're coming. The days of, you know, fintechs coming with venture capital and knocking on the door and saying, hey, I want to start and do this new cool idea. We're not seeing any of that. That's pretty much gone.
Speaker Change: I can talk about that in general terms.
Speaker Change: There is almost nobody knew coming into this right now they are all scared to death.
Speaker Change: So this is somebody that might be three to five years in the industry and they were connecting with a different bank partner they've got them workable business model that has enough scale to meet our minimums and theyre coming.
Speaker Change: Days of.
Speaker Change: Fintech coming with venture capital and knocking on the door, and saying, Hey, I want to start and do this new cool idea, we're not seeing any of that.
Speaker Change: Pretty much gone and it's really the bigger ones that have already have some scale and volume that are trying to find a place to put it.
Brett Pharr: And it's really the bigger ones that already have some scale and volume that are trying to find a place to put them.
Timothy Jeffrey Switzer: Very interesting. Have you found that this has helped with your pricing within your contracts as well?
Speaker Change: Very interesting have you found that this has helped with your pricing within your contracts as well.
Brett Pharr: You know, yes, it's all hand-to-hand combat, right? Because what you're sitting here doing is you're saying, okay, here are additional risk and appliance requirements you have to do. So that has a cost with a partner. We're in an advantage position because you have safety here, and there's fewer people that will take on this business. So, yes, we can ask for margin. So it's not just a price gouging kind of environment we're in.
Speaker Change: Yes, as I'll hand to hand combat right, because what youre seeing youre doing is youre, saying, okay. Here are additional risk and compliance requirements you have to do so that has a cost with the partner.
Speaker Change: We're in an advantaged position of safety here Theres fewer people that will take on this business. So yes, we can ask for margin.
Speaker Change: So it's not us is not just price gouging kind of environment. We're in is still in negotiation, but theres business now that has margin in it thats reasonable for the risk and compliance processes, we have to carry out.
Brett Pharr: It's still a negotiation, but there is business now that has margin in it that's reasonable for the risk and compliance processes we have to carry out. And there have been times in the past when that was not the case, and we walked away. Okay, great. That's all.
Speaker Change: And there had been times in the past when that was not the case and we walked away.
Okay, Great. That's all for me. Thank you.
Timothy Jeffrey Switzer: Okay, great. That's all for me. Thank you.
Speaker Change: Thanks, Dan.
Speaker Change: Thank you.
Operator: Again, if you'd like to ask a question, please dial star 1. The next question is from David Feaster with Raymond James. Your line is now open.
Speaker Change: Again, if you'd like to ask a question. Please dial star one.
Speaker Change: The next question is from David Feaster with Raymond James Your line is now open.
David Pipkin Feaster: Hey, good afternoon everybody. How are you? I just wanted to touch on a few of the newer products that we've talked about, like early wage access and faster payments, for instance, more embedded finance. I'm curious maybe where we are in the product development rollout of those, and kind of where we are and when you expect to see some more tangible benefits from those initiatives.
David Pipkin Feaster: Hey, good afternoon everybody.
David Pipkin Feaster: Hey, how are you.
Doing great.
I just wanted to touch on.
David Pipkin Feaster: A few of the newer products that we've talked about like early wage access and faster payments for instance, more embedded finance I'm curious, maybe where we are in the product development and rollout of those and.
David Pipkin Feaster: Kind of where we are and when do you when would you expect to see some more tangible benefits from those.
Brett Pharr: Yeah, I mean, those are all, for the most part, startup things, particularly early wage access. And those programs have to grow. And the partners have to connect with payroll companies, etc.
David Pipkin Feaster: <unk>.
Yes, I mean, those are all for the most part.
David Pipkin Feaster: Startup things, particularly early wage access.
Speaker Change: And those programs up to grow and the partners have to connect with payroll companies et cetera, So they're not at a scale that would reach any level of materiality yet.
David Pipkin Feaster: So they're not at a scale that would reach any level of materiality yet, but they seem to have a lot of promise. They are growing, and we're confident in it. You know, faster payments and better finance. Those are, I mean, those are very broad terms for a whole bunch of little ideas and niches in each of them. The beauty of that is it's non-interest income, or fee income that we're talking about, which is something that we want to emphasize.
David Pipkin Feaster: But they seem to have a lot of promise they are growing.
David Pipkin Feaster: And we're confident in it.
David Pipkin Feaster: Faster payments embedded finance. So those are I mean, those are very broad terms for a whole bunch of little ideas of niche is and each of them.
David Pipkin Feaster: <unk> of that is as noninterest income fee income that we're talking about which is something that we want to emphasize.
David Pipkin Feaster: But they're coming. But there's nothing in there that I would say is going to show up on a significant scale individually, you know, in the next year or two. But collectively, I think they're going to continue to drive us more towards a non-interest income, which is what we need.
David Pipkin Feaster: But they're coming but there is nothing in there that I would say, it's going to show up with significant scale individually.
David Pipkin Feaster: And the next year or two but collectively I think youre going to continue to drive us more towards a noninterest income which is what we need.
Brett Pharr: Yeah, and maybe to that point, you know, one other thing that we've talked about in the past is maybe some more managed services, you know, especially just given the regulatory and compliance headwinds in the industry, like we just talked about, right? It could be a huge opportunity. I'm curious, is the investment in human capital, like you guys alluded to, to support that or just your own back office? And, you know, so again, what is the investment in human capital that you guys are doing? What is that for?
David Pipkin Feaster: Yes.
David Pipkin Feaster: Maybe to that 0.1 other thing that we've talked about in the past and maybe some more managed services.
David Pipkin Feaster: Especially just given the regulatory and compliance headwinds in the industry like we just talked about right and it could be a huge opportunity.
Speaker Change: I'm curious.
Speaker Change: The investment in human.
Speaker Change: Capital like you guys alluded to to support that or just your own back office.
Speaker Change: And so again what is the what is the investment in human capital that you guys are doing what is that for and then at what point does maybe some managed services become more interesting to you.
David Pipkin Feaster: And then at what point does, maybe, some managed services become more?
Brett Pharr: Yeah, I mean, I think part of this is you need to have a mix of two things. You've got to have the right human capital that understands all the risk and compliance elements, which I would argue we have, and we have the best in the industry. The other side of that is having technology that's coupled with that so you can carry out these managed services. And we're investing a lot.
Speaker Change: Yes, I mean, I think part of this is is you need to have a mix of two things you've got to have a mix of the right human capital that understands all the risk and compliance elements, which I would argue we have and we have the best in the industry.
Speaker Change: The other side of that is having a technology that's coupled with that so you can carry out these managed services and we're investing a lot of the people investments. We're talking about are from a technology perspective et cetera, and we're going to continue to do that and get it to where it is.
Brett Pharr: A lot of the investments we're talking about are from a technology perspective, etc., and we're going to continue to do that and get it to where it's as automated and scalable as we can be. And then we will definitely be looking at what you're talking about, because there are some target opportunities on different topics where we could do managed services. So it's not immediately on the horizon, but it is definitely something we're thinking about.
Speaker Change: Is automated and scalable as we can be.
Speaker Change: Then we will definitely be looking at what you're talking about because there are some target opportunities on different topics, where we could do managed services. So it's not immediately on the horizon, but it is definitely something we're thinking about that.
David Pipkin Feaster: Okay, and then maybe last one for me, just touching on credit. You guys have done a great job managing credit. Non-accruals have come down. Past dues did increase, though, a little bit.
Speaker Change: Okay.
Speaker Change: And then maybe last one for me just touching on credit you guys. You guys have done a great job managing credit non accruals have come down.
Speaker Change: Past dues did increase still a little bit I just wanted to get your sense on credit more broadly expectations for.
David Pipkin Feaster: I just wanted to get your sense on credit more broadly, expectations for credit going forward, and the health of your clients from your perspective. You did touch on being a bit more selective in equipment finance and structure finance, so maybe those are two segments where you're slowing down a bit. But I'm just curious about your thoughts on credit more broadly.
Speaker Change: Sure.
Speaker Change: No.
Speaker Change: Credit going forward in the health of your clients from your perspective.
Speaker Change: You did touch on it being a bit more selective in equipment finance and structured finance. So maybe those are two segments where you're.
Speaker Change: Slowing down a bit but I'm just curious your thoughts on credit more broadly.
Brett Pharr: Yeah, I mean, the structured finance and equipment financers, for the most part, are cash flow lending. Now, they're all secured, but cash flow lending. So you want to, you know, you want to watch those and, you know, our larger equipment finance things tend to be with, you know, the top Fortune 100, 200 kind of companies.
Speaker Change: Yes, I mean.
Speaker Change: Structured finance and equipment finance or for the most part of our cash flow lending and now they are all secured but the cash flow lending. So you want to you want to watch those and our larger equipment finance things tend to be with top fortune 100 to 100 kind of companies and so.
Brett Pharr: And so we'll do those where the yield makes sense in a particular niche that we're interested in and it's mission critical, collateral, etc. And so where I'm really excited is working capital because it's coming in, and the transactions are happening now. Now, keep in mind there that that's not about the health of the client.
Speaker Change: We'll do those where the yield makes sense in a particular niche that we're interested in and its mission critical collateral et cetera.
Speaker Change: And so where I'm really excited.
Speaker Change: Working capital because it's coming in.
Speaker Change: The transactions are happening now now keep in mind there.
Speaker Change: It's not about the health of the client that's about the health of the collateral and we only get involved in those and stay involved with those that theres the health of the collateral and lots and lots of opportunities there and our pipeline there is bigger.
Brett Pharr: That's about the health of the collateral. And we only get involved in those and stay involved in those if there's the health of the collateral. And lots and lots of opportunities there, and our pipeline there is bigger. You know, what typically happens this time of year is companies get their financial statements come in, they've missed covenants, they go and talk to the traditional C&I, they get invited to find somebody else to finance them, and that's when we get opportunities, and that's what's going on right now.
Speaker Change: What typically happens is time of the year as companies get their financial statements come in they've missed covenants. They go and talk to the traditional C&I.
Speaker Change: Get invited to find somebody else to finance them and Thats, when we get opportunities and Thats going on right now so feeling pretty good about that.
Brett Pharr: So I feel pretty good about that. As I always say about our credit book, it's collateral managed, it's collateral covered. We may have workouts, and we know how to work them out, and we do a pretty good job, even if we have a loss of recovery going forward. So we believe we're in good shape on credit. Terrific
Speaker Change: As I always say about our credit book as collateral managed as collateral covered.
Speaker Change: May have workouts, and we know how to work them out and we do a pretty good job, but even if we have a loss of a recovery going forward. So we believe we're in good shape on credit.
Speaker Change: Terrific. Thanks, everybody.
David Pipkin Feaster: Terrific. Thanks, everybody. Thank you.
Speaker Change: Thank you.
Operator: Thank you. There are no further questions in queue. So, as a final reminder, if you'd like to ask a question, it is star number one. If there are no additional questions, I'd like to turn the call over to Brett Pharr for concluding remarks.
Speaker Change: Thank you.
Speaker Change: There are no further questions in queue. So as a final reminder, if you'd like to ask a question. It is star one.
Speaker Change: There are no additional questions I'd like to turn the call over to Brett Farr for concluding remarks.
Brett Pharr: Thank you everyone for joining our call today. Have a great evening.
Brett Pharr: Thanks, everyone for joining our call today have a great evening.
Operator: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
Brett Pharr: That concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Operator: Thanks everyone for joining our call today.
Brett Pharr: Thanks, everyone for joining our call today.