Q3 2024 Pathward Financial Inc Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Passport Financial's third quarter fiscal year 2024 investor conference call.

Operator: Financial's Third Quarter Fiscal Year 2024 Investor Conference Call. During the presentation, all participants will be in 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. And I will now like to turn the conference over to Darby Schoenfeld, Senior Vice President, Chief of Staff, and Investor Relations. Please go ahead.

Speaker Change: During the presentation, all participants will be in listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session.

As a reminder, this conference call is being recorded.

Darby Schoenfeld: And I would now like to turn the conference over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead.

Darby Schoenfeld: Thank you, operator, and welcome. With me today are Pathward Financial CEO Brett Pharr and CFO Greg Sigrist, who will discuss our operating and financial results for the third quarter of fiscal 2024, after which we will take your questions. 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. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement.

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. 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, particularly in competitive analysis.

Darby Schoenfeld: Thank you, operator, and welcome. With me today are Pathway Financial CEO Brett Pharr and CFO Greg Sigrist, who will discuss our operating and financial results for the third quarter of fiscal 2024, after which we will take your questions.

Darby Schoenfeld: Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all time 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.

Brett L. Pharr: Thanks, Darby, and welcome, everyone, to our third quarter 2024 conference call. We're very pleased with our results in the first nine months and continue to execute on what we set out to accomplish this year. Our focus on balance sheet management, led by risk-adjusted returns and continued evolution of our product offerings, has helped us deliver solid financial results. We plan to continue this focus into next year, but before I talk about strategy, I want to give some results from the quarter. Net income was $41.8 million, and earnings per diluted share were $1.66.

Brett L. Pharr: Results were driven by an increase in net interest income of 14% when compared to the same quarter last year. We also expanded NIM and adjusted NIM, which includes contractual rig related processing expense, to 6.56% and 4.92%, respectively. These were both increases when compared to last year's quarter and the second quarter of this year. However, performance metrics remain strong, with return on average assets for the first nine months of the year of 2.33% and return on average tangible equity of 47.3%. For reference, these metrics were 2.46% and 50.8%, respectively, for the same time period last year. Finally, we are narrowing our guidance range to $6.40 to $6.60 in EPS for the full fiscal year.

Speaker Change: Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks, and supplemental slides, may be found on our website at passwordfinancial.com.

Speaker Change: As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement.

Speaker Change: 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.

Speaker Change: Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call.

Speaker Change: References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation.

Speaker Change: Finally, all time periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior year period, unless otherwise noted. Now let me turn the call over to Brett Pharr, our CEO .

Brett L. Pharr: On the asset side of the balance sheet, our focus has been to optimize assets, and the team has been very disciplined in sourcing and underwriting loans that have the highest risk-adjusted return. We also continue to see a robust pipeline of working capital and government-guaranteed loans, both SBA and USDA. We put in a new technology system that should create efficiencies in the underwriting process and enhanced asset management capabilities to help us maximize our efforts while reducing costs.

Brett L. Pharr: Thanks, Darby, and welcome, everyone, to our third quarter 2024 conference call. We're very pleased with our results in the first 9 months and continue to execute on what we set out to accomplish this year.

Brett L. Pharr: Our focus on balance sheet management, led by risk-adjusted returns and continued evolution of our product offerings, has helped us deliver solid financial results. We plan to continue this focus into next year, but before I talk about strategy, I want to give some results from the quarter.

Brett L. Pharr: Net income was $41.8 million and earnings per diluted share were $1.66.

Brett L. Pharr: Results were driven through an increase in net interest income of 14% when compared to the same quarter last year.

Brett L. Pharr: We also expanded NIM and adjusted NIM, which includes contractual regulated processing expense, to 6.56% and 4.92% respectively.

Brett L. Pharr: These were both increases when compared to last year's quarter and the second quarter of this year.

Brett L. Pharr: Performance metrics remain strong, with return on average assets for the first nine months of the year of 2.33%, and return on average tangible equity of 47.3%.

Brett L. Pharr: For reference, these metrics were 2.46% and 50.8% respectively for the same time period last year.

Brett L. Pharr: Finally, we are narrowing our guidance range to $6.40 to $6.60 in EPS for the full fiscal year.

Brett L. Pharr: On the assets side of the balance sheet, our focus has been to optimize assets, and the team has been proven very disciplined in sourcing and underwriting loans that have the highest risk-adjusted returns.

Brett L. Pharr: We also continue to see a robust pipeline in working capital and government guaranteed loans, both SBA and USDA.

Brett L. Pharr: We put in a new technology system that should create efficiencies through the underwriting process and enhanced asset management capabilities to help us maximize our efforts while reducing costs.

Brett L. Pharr: In consumer lending, we have seen solid originations and continue to co-innovate. We expect to launch additional products as well as add partners in the future, generating growth for us and enabling our partners to thrive. In BAS or Partner Banking, being a trusted partner to our clients means we can deliver on a number of value propositions. First, we offer experience. We were pioneers in this space, starting our issuing business back in 2004.

Brett L. Pharr: In consumer lending, we have seen solid originations and continue to co-innovate. We expect to launch additional products as well as add partners in the future, generating growth for us and enabling our partners to thrive.

Brett L. Pharr: In BAS or Partner Banking, being a trusted partner to our clients means we can deliver on a number of value propositions.

Brett L. Pharr: First, we offer experience. We were pioneers in this space.

Brett L. Pharr: We believe our deep expertise in payments positions us as a forward-thinking partner with decades of leadership and the capability to expand across multiple solutions, including payments, issuing, credit, tax, and now solutions for financial institutions, which I will expand on in a moment. Second, we provide operational excellence. We believe we have the right people and the right tools. This creates an operating structure that ensures reliable and sustainable programs.

Brett L. Pharr: starting our issuing business back in 2004.

Brett L. Pharr: We believe our deep expertise in payments positions us as a forward-thinking partner with decades of leadership.

Brett L. Pharr: and the capability to expand across multiple solutions including payments, issuing, credit, tax, and now solutions for financial institutions, which I will expand on in a moment.

Brett L. Pharr: Second, we provide operational excellence.

Brett L. Pharr: We believe we have the right people and the right tools.

Brett L. Pharr: This creates an operating structure that ensures reliable and sustainable programs.

Brett L. Pharr: Third, we build strong partnerships. We have a high level of commitment to enabling our partners' success and work closely with them every day to ensure they feel supported and valued. Finally, we believe we have a mature risk and compliance infrastructure. We offer partners a scalable platform led by a governance-focused approach. This has generated a pipeline that we continue to be optimistic about. As a reminder, these deals have a long sales cycle, so anything that we are working on now would be expected to benefit fiscal 2025 and beyond.

Brett L. Pharr: Third, we build strong partnerships. We have a high level of commitment to enabling our partners success and work closely with them every day to ensure they feel supported and valued.

Brett L. Pharr: Finally, we believe we have a mature risk and compliance infrastructure. We offer partners a scalable platform led by a governance focused approach.

Brett L. Pharr: This has generated a pipeline that we continue to be optimistic about. As a reminder, these deals have a long sales cycle, so anything that we are working on now would be expected to benefit fiscal 2025 and beyond.

Brett L. Pharr: During the quarter, we announced the expansion and transformation of our Solutions for Financial Institutions, which previously only provided prepaid cards to banks and credit unions. With this expansion, we can now also provide commercial finance solutions to their business clients that do not qualify for traditional financing or when a product is an offer. We also provide financial institutions with the ability to offer merchant services to their business clients.

Brett L. Pharr: During the quarter, we announced the expansion and transformation of our Solutions for Financial Institutions, which previously only provided prepaid cards to banks and credit unions.

Brett L. Pharr: With this expansion, we can now also provide commercial finance solutions to their business clients that do not qualify for traditional financing or when a product isn't offered.

Brett L. Pharr: We also provide financial institutions the ability to offer merchant services to their business clients.

Brett L. Pharr: Our strategy is to be the trusted platform that enables our partners to thrive. As we get close to the end of our fiscal year and look toward 2025, we will continue to execute on many of the initiatives across the enterprise that were started in 2024 and laid the foundation for growth. First, we need to have not only the right-sized balance sheet but also one with an optimized asset mix.

Brett L. Pharr: Our strategy is to be the trusted platform that enables our partners to thrive. As we get close to the end of our fiscal year and look toward 2025, we will continue to execute on many of the initiatives across the enterprise that were started in 2024 and laid the foundation for growth.

Brett L. Pharr: First, we need to have not only the right size balance sheet, but also one with an optimized asset mix.

Brett L. Pharr: Looking ahead, we intend to continue to favor asset rotation to areas where we believe we have a competitive advantage to deliver higher return on assets. Second, we are regularly investing in technology to ensure that our platform is capable of evolving and scaling as our partners remain at the forefront of innovation and expand their reach with new products and markets. This has been ongoing for years and will continue to be a focus as we grow with our partners.

Brett L. Pharr: Looking ahead, we intend to continue to favor asset rotation to areas where we believe we have a competitive advantage to deliver higher return on assets.

Brett L. Pharr: Second, we are regularly investing in technology to ensure that our platform is capable of evolving and scaling as our partners remain on the forefront of innovation and expand their reach with new products and markets. This has been ongoing for years and will continue to be a focus as we grow with our partners.

Brett L. Pharr: Third, we believe that people and culture are Pafford's most important assets. And as a testament to that, we once again earned the Great Places to Work certification in 2024 for the second year in a row. We intend to remain a talent anywhere organization with intentional inclusion efforts to support a workforce spread across the country. Our Talent Anywhere approach is so successful that four out of five of our top workplace strengths, according to our employees, were directly connected to PathWord's remote work policy.

Brett L. Pharr: Third, we believe that people and culture are Pafford's most important assets. And as a testament to that, we once again earned the Great Places to Work certification in 2024 for the second year in a row.

Brett L. Pharr: We intend to remain a Talent Anywhere organization with intentional inclusion efforts to support a workforce spread across the country.

Brett L. Pharr: Our Talent Anywhere approach is so successful that 4 out of 5 of our top workplace strengths, according to our employees, were directly connected to PathWords remote work policies.

Brett L. Pharr: Finally, we have built a risk and compliance framework and culture that provides us with what we believe is a competitive advantage in our space, and this starts with the tone at the top. This has been, and will continue to be, a priority for Pafford, especially since the industry is in a more difficult regulatory environment. It is this strategy that allows us to introduce fiscal year 2025 earnings per diluted share guidance in the range of $7 to $7.50. Now, I'd like to turn it over to Greg, who will take you through the financials and discuss our updated and new guidance in more detail. Thank you, Brett, and good afternoon, everyone.

Brett L. Pharr: Finally, we have built a risk and compliance framework and culture that provides us with what we believe is a competitive advantage in our space, and this starts with the tone at the top.

Pafford: This has been, and will continue to be, a priority for Pafford, especially since the industry is in a more difficult regulatory environment.

Speaker Change: And this strategy allows us to introduce fiscal year 2025 earnings per diluted share of guidance in the range of $7 to $7.50.

Speaker Change: Now, I'd like to turn it over to Greg, who will take you through the financials and discuss our updated and new guidance in more detail.

Gregory A. Sigrist: Net interest income continues to be a driver of our results, growing 14% when compared to the prior year quarter. We continue to focus on risk-adjusted returns, which is helping to drive our new production yields higher and increase the overall yield on our loan and lease portfolio. New production yield on commercial finance loans and leases in the quarter was 8.58%, compared to the quarterly yield on the same portfolio from the previous quarter of 8.19%. New production yield in the quarter was impacted by a seasonal renewal period in insurance premium finance, which tends to carry a lower yield due to the lower risk.

Greg: Thank you, Brett, and good afternoon, everyone.

Greg: Net interest income continues to be a driver of our results, growing 14% when compared to the prior year quarter.

Greg: We continue to focus on risk-adjusted returns, which is helping to drive our new production yields higher and increasing the overall yield on a loan and lease portfolio.

Greg: New production yield on commercial finance loans and leases in the quarter was 8.58%, compared to the quarterly yield on the same portfolio from last quarter of 8.19%.

Greg: New production yield in the quarter was impacted by a seasonal renewal period in insurance premium finance, which tends to carry a lower yield due to the lower risk.

Gregory A. Sigrist: The higher production yields and focus on risk-adjusted returns over the past few quarters have helped expand the net interest margin and adjusted net interest margin in the quarter to 6.56% and 4.92%, respectively, both showing healthy increases over the March quarter. Provision for credit losses was $5.9 million compared to $1.8 million for the same quarter last year, with the increase primarily stemming from our commercial finance division. We're still experiencing a benign credit environment, and the increase in provision largely reflects growth and mix in the commercial finance portfolio during the quarter. Non-interest income declined slightly, primarily driven by a decrease in card and deposit fee income due to lower servicing fee income from reduced levels of off-balance sheet custodial deposits when compared to the prior year.

Greg: The higher production yields and focus on risk-adjusted returns over the past few quarters have helped expand the net interest margin and adjusted net interest margin in the quarter to 6.56% and 4.92% respectively, both showing healthy increases over the March quarter.

Greg: Provision for credit losses was $5.9 million compared to $1.8 million for the same quarter last year, with the increase primarily stemming from our commercial finance division.

Speaker Change: We're still experiencing a benign credit environment, and the increase in provision largely reflects growth and mix in the commercial finance portfolio during the quarter.

Greg: Non-interest income declined slightly, primarily driven by a decrease in card and deposit fee income due to lower servicing fee income from reduced levels of off-balance sheet custodial deposits when compared to the prior year.

Gregory A. Sigrist: Total non-interest expense increased versus the same quarter last year, primarily driven by higher rate-related card processing expenses due to continued deposit growth with our banking partners. Non-interest expense apart from rate-related card costs increased approximately 2 percent from the same year as the company continues to diligently monitor expenses and responsibly add FTEs to support growth. Deposits on the balance sheet at June 30th totaled $6.4 billion, an increase of $125 million from a year ago.

Greg: Total non-interest expense increased versus the same quarter last year, primarily driven by higher rate-related card processing expenses due to continued deposit growth with our banking partners.

Greg: Non-interest expense, apart from rate-related card costs, increased approximately 2% from the last year as the company continues to diligently monitor expenses and responsibly add FTEs to support growth.

Greg: Deposits on balance sheet at June 30th totaled $6.4 billion, an increase of $125 million from a year ago.

Gregory A. Sigrist: We continue to hold higher levels of deposits on the balance sheet to support growth in loans and leases. Off-balance sheet custodial deposits held at partner banks as of June 30th totaled $353 million, compared to $781 million last year. This declined approximately $840 million sequentially given that these deposits were elevated due to tax season during the second quarter of 2024. We expect deposits to continue their seasonal trend downward, bottoming out around the end of our September quarter.

Greg: We continue to hold higher levels of deposits on balance sheet to support growth in loans and leases.

Greg: Off balance sheet custodial deposits held at partner banks as of June 30th totaled $353 million compared to $781 million last year.

Greg: This declined approximately $840 million sequentially, given that these deposits were elevated due to tax season during the second quarter of 2024.

Greg: We expect deposits to continue their seasonal trend downward, bottoming out around the end of our September quarter.

Gregory A. Sigrist: Total loans and leases at June 30th totaled $4.6 billion, an increase of 13% from a year ago. Growth stemmed primarily from working capital and structured finance, including SBA, USDA, and renewable energy. As Brett mentioned, we are seeing healthy pipelines in commercial finance as well as in consumer lending. Compared to March 31st, the total loans and leases balance increased approximately $200 million.

Greg: Total loans and leases at June 30th totaled $4.6 billion, an increase of 13% from a year ago.

Greg: Growth stems primarily from working capital and structured finance, including SBA, USDA, and renewable energy. As Brett mentioned, we are seeing healthy pipelines in commercial finance as well as in consumer lending.

Brett L. Pharr: Compared to March 31st, total loans and leases balance increased approximately $200 million. We saw increases in insurance premium finance, renewable energy, working capital, and warehouse finance.

Gregory A. Sigrist: We saw increases in insurance premium finance, renewable energy, working capital, and warehouse finance. From a liquidity perspective, we remain in a strong position with approximately $2.5 billion in available liquidity. And as part of our continued goal to optimize the balance sheet and rotate out of securities and into higher-earning assets, we 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 287,000 shares at an average share price of $52.24.

Speaker Change: From a liquidity perspective, we remain in a strong position with approximately $2.5 billion in available liquidity.

Speaker Change: And as part of our continued goal to optimize the balance sheet and rotate out of securities and into higher earning assets, we expect the securities portfolio to continue drawing down with close to $300 million of cash flows available for reinvestment over the next 12 months.

Speaker Change: Finally, during the quarter, we repurchased approximately 287,000 shares at an average share price of $52.24.

Gregory A. Sigrist: We are narrowing our fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.40 to $6.60. This includes a number of assumptions. First, we expect earning asset yields to exceed those of Fiscal 23, given our focus on risk-adjusted returns, continued pricing discipline, and securities portfolio cash flows, which continue to be reinvested into higher-yielding loans with our investment tax credit pipeline. We estimate our effective tax rate to be in the range of 14 to 18 percent for the full year.

Speaker Change: We are narrowing our fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.40 to $6.60.

Speaker Change: This includes a number of assumptions. First, we expect earning asset yields to exceed those of Fiscal 23 given our focus on risk adjusted returns, continued pricing discipline, and securities portfolio cash flows, which continue to be reinvested into higher-yielding loans.

Speaker Change: with our investment tax credit pipeline.

Speaker Change: We estimate our effective tax rate to be in the range of 14 to 18 percent for the full year. And we expect core card fee income to follow normal historical seasonal patterns, as has been the case during the first three quarters of the fiscal year.

Gregory A. Sigrist: And we expect core card fee income to follow normal historical seasonal patterns, as has been the case during the first three quarters of the fiscal year. We are also introducing our fiscal year 2025 GAAP earnings per diluted share guidance in the range of $7 to $7.50 per diluted share. This guidance includes the following assumptions: one rate cut in September 2024 heading into our fiscal 25. Any additional cuts would have a muted impact on net income, given our relatively neutral stance.

Speaker Change: We are also introducing our fiscal year 2025 GAAP earnings per diluted share guidance in the range of $7 to $7.50 per diluted share.

Speaker Change: This guidance includes the following assumptions.

Speaker Change: One rate cut in September 2024 heading into our fiscal 25.

Speaker Change: Any additional cuts would have a muted impact on net income given our relatively neutral stance.

Speaker Change: An effective tax rate of 18 to 22 percent for the year based on expected investment tax credit volumes and includes expected share repurchases.

Speaker Change: Additionally, our 2025 guidance also takes into account the success we have had in asset rotation, which we believe will continue to scale net interest income.

Speaker Change: We also expect our quarterly results to follow our typical seasonality, but be slightly more weighted toward additional earnings in the back half of the year.

Gregory A. Sigrist: An effective tax rate of 18 to 22 percent for the year based on expected investment tax credit volumes and includes expected share repurchase. Additionally, our 2025 guidance also takes into account the success we have had in asset rotation, which we believe will continue to scale net interest income. We also expect our quarterly results to follow our typical seasonality but be slightly more weighted toward additional earnings in the back half of the year. This concludes our prepared remarks. Operator, please open the line for questions.

Speaker Change: This concludes our prepared remarks. Operator, please open the line for questions.

Operator: We will now begin our question and answer session. Our first question comes from Tim Switzer with the company KPW. Tim, your line is now open. Hey, good.

Speaker Change: We will now begin our question and answer session. Our first question comes from Tim Switzer with the company KPW. Tim, your line is now open.

Timothy Jeffrey Switzer: Hey, good afternoon. Thank you for taking my question. Good afternoon, Sam.

Timothy Jeffrey Switzer: Hey, good afternoon. Thank you for taking my question.

Operator: We appreciate the 2025 EPS guidance. It's very, very helpful. Could you talk a little bit about the expense outlook you have embedded in that? And, you know, I'm sure there are some puts and takes depending on, you know, how macro trends go on the revenue side. But could you maybe discuss what you guys are expecting there and then what levers would be available to you if revenue doesn't come in like you hoped?

Tam: Good afternoon, Tam.

Timothy Jeffrey Switzer: We appreciate the 2025 EPS guidance. Very, very helpful. Could you talk a little bit about the expense outlook you have embedded in that? And, you know, I'm sure there's some puts and takes depending on...

Timothy Jeffrey Switzer: You know how macro trends go on the revenue side, but could you maybe discuss what you guys are expecting there and then what levers would be available to you if revenue doesn't come in like you hope?

Gregory A. Sigrist: Yeah, Tim, sure. Happy to have you touch on the expense guidance for next year. I mean, as a starting point, as you know, we were always going to invest in human capital and technology. I'm actually expecting a fairly muted FT expansion next year, but we are definitely going to see some. And you're also going to see just normal cost of living adjustments there that will pull through comp and benefits. On the tech side, I mean, you're probably going to see a fairly consistent increase, as we saw this year on the tech side.

Speaker Change: Yeah, Tim, sure. Happy to have you touch on the expense guidance for next year. I mean, starting point, as you know, we're always going to invest in human capital and technology. I'm actually expecting a fairly muted FT expansion next year, but we are definitely going to see some.

Speaker Change: And you're also going to see just normal cost-of-living adjustments there that will pull through comp and benefits.

Speaker Change: On the tech side, I mean, you're going to see probably a fairly consistent increase as we saw this year on the tech side, but we're going to work really hard to self-fund as much as we can for all of that across the rest of the P&L, you know, things like consulting, spend, etc.

Gregory A. Sigrist: But we're going to work really hard to self-fund as much as we can for all of that across the rest of the P&L, you know, things like consulting, spend, etc. So we're going to keep a really tight eye on it. So in total, other than some modest increases on the FTE side and just cost of living and inflationary items, there's really nothing significant I'd pull forward for you on that. Rate-related card expenses, though, you're going to have to model that out just based upon the historic trends you've seen the last couple of years.

Speaker Change: So we're going to keep a real tight eye on it. So in total, other than some modest increases on the FTE side and just cost of living and inflationary items, there's really nothing significant I'd pull forward for you on it.

Speaker Change: Rate-related card expenses though, you're going to have to model that out just based upon the historic trends you've seen the last couple of years. You know, you're going to see seasonality in the deposit balances.

Gregory A. Sigrist: You know, you're going to see seasonality in the deposit balances, as you always do. But I would also say, as part of that, we're really excited about the pipelines on the VAS side and the consumer finance side or commercial finance side. But, you know, I would say that the excitement hasn't necessarily drawn us into putting a lot of growth into this yet. We really want to see how the pipeline evolves and starts to pull through. But we have put in place a modest uptick in VAS deposits for the latter half of next year that, you know, we'll keep you informed on as we go forward.

Speaker Change: As you always do, I...

Speaker Change: would also say as part of that, you know, we were really excited about the pipelines on the BAS side and the consumer finance side or commercial finance side, but

Speaker Change: You know, I would say that the excitement hasn't necessarily drawn into us putting a lot of deposits growth into this yet. We really want to see how the pipeline evolves and starts to pull through.

Speaker Change: But we have put a modest uptick in BAS deposits into the latter half of next year that, you know, we'll keep you informed on as we go forward.

Timothy Jeffrey Switzer: Okay, great. That's really helpful. And then could you guys also spend a minute discussing, there's a pickup in NPA, net charge-offs excluding the tax business, which is also a bit higher this quarter. I think you mentioned the commercial finance loan or something. Can you guys talk a little bit about what you're seeing there and what your expectations are going forward?

Speaker Change: Okay, great. That's really helpful. And then, could you guys also spend a minute discussing, there's a pick up in NPA net charge-offs excluding...

Speaker Change: The tax business is also a bit higher this quarter. I think you mentioned the commercial finance loan or something. Can you guys talk a little bit about what you're seeing there and what your expectations are going forward?

Gregory A. Sigrist: Yeah, on the NPL side, NPA is picking up a little bit just dollar-wise. But it's really, I think, more on the consumer finance side.

Speaker Change: Yeah, on the NPL, the NPA is ticking up a little bit just dollar-wise. It's really, I think, more on the consumer finance side.

Gregory A. Sigrist: You know, we have one program manager who we typically contractually settle up with our, you know, there's a waterfall that protects us from a credit perspective. We typically settle up with them annually by June 30th. And this year, we pushed that out to July 31st. So what you're going to see is both an increase in consumer loans and consumer NPLs related to that. We feel that we're adequately reserved for any potential pathway exposure as of June 30th, but we expect to wrap that up here in July without any additional exposures.

Speaker Change: You know, we have one program manager who we typically contractually settle up our, you know, there's a waterfall that protects us.

Speaker Change: From a credit perspective, we typically settle up with them annually by June 30th.

Speaker Change: and this year we pushed that out to July 31st. So what you're going to see is both an increase in the consumer loans.

Speaker Change: and consumer MPLs related to that. We feel that we're adequately reserved for any potential pathway exposure at June 30th, but we expect to wrap it up here in July without any additional exposures.

Timothy Jeffrey Switzer: Okay, okay. That makes sense. And if I could squeeze in one more, could you guys give us a little bit of guidance or help on what the average off-balance sheet deposits should look like in Q4 and then if you expect anything outside of normal seasonality in 2025?

Speaker Change: Okay, okay, that makes sense. And if I could squeeze in one more, could you guys...

Speaker Change: Give us a little bit of guidance or help on what the average off balance sheet deposits should look like in Q4, and then if you expect anything outside of normal seasonality in 25.

Gregory A. Sigrist: For the off-balance sheet accounts, again, I would point you back to last year as well. I don't think I would see anything untoward in the fourth quarter for the off-balance sheet accounts.

Speaker Change: For off-balance sheet, again, I would point you back to last year as well. I don't think I would see anything untoward in the fourth quarter for off-balance sheet. I mean, as you know,

Gregory A. Sigrist: I mean, as you know, as I commented in my prepared remarks, the fourth quarter is our low point for BAS deposits and overall, just seasonally speaking, and that's going to pull forward into the fourth quarter. So I think you're definitely going to see a decline from where we are on June 30th. And as I mentioned just a few minutes ago, I think for next year, I think I'm really expecting next year's BAS deposits for the first couple of quarters to trend very similar to the way we did a year ago.

Speaker Change: As I commented in my prepared remarks, fourth quarter is our low point for fast deposits and overall, just seasonally speaking, and that's going to pull forward into the fourth quarter. So I think you're definitely going to see down from where we are June 30th.

Speaker Change: And as I mentioned just a few minutes ago, I think for next year, I'm really expecting next year's BASC deposits for the first couple of quarters to trend.

Gregory A. Sigrist: But as we get into the back half of next year, you know, I think we're very hopeful that the pull through on the BAS pipeline will result in some modest uptick in those BAS deposits relative to either existing programs with current partners, new programs, et cetera, but it's really back-loaded, so we're not going to see as much impact as you would see if it happened early in the year.

Speaker Change: very similar to the way we did a year ago. But as we get into the back half of next year, you know, I think we're very hopeful that the pull through on the BATS pipeline will result in some modest uptick.

Speaker Change: and those BASC deposits relative to...

Speaker Change: either existing programs with, you know, current partners, new programs, etc. But it's really back half-loaded, so we're not going to see as much impact as you would see if it happened early in the year.

Timothy Jeffrey Switzer: Hey, great. That's very helpful. Thank you, guys.

Gregory A. Sigrist: You got it. And thanks for asking.

Speaker Change: Hey, great. That's very helpful. Thank you guys.

Operator: Our next question is from Frank Schiraldi with the company Piper Sandler. Frank, your line is now open.

Speaker Change: Our next question is from Frank Schiraldi with the company Piper Sandler. Frank, your line is now open.

Frank Joseph Schiraldi: Thanks, good afternoon. You guys talked about still favoring asset rotation and a mixed ship out of security into higher yielding loans. It would seem that they still would expect some balance sheet growth into 2025. Just curious if maybe you can size that a little bit, or is that the right way to think about it in terms of higher yielding loans growing faster than perhaps securities are rolling off the books?

Frank Joseph Schiraldi: Thanks. Good afternoon. Just on the, you know, you guys talked about favoring asset rotation still and a mixture of data security into higher yielding loans. It would seem that

Frank Joseph Schiraldi: you still would expect some balance sheet growth into 2025. Just curious if maybe you can size that a little bit, or is that the right way to think about it?

Speaker Change: in terms of, you know, higher yielding loans growing faster than maybe securities are rolling off the books.

Gregory A. Sigrist: Yeah, I mean, again, I would kind of bifurcate it a little bit. I mean, in the early part of the year, you know, the first half at least, I would say you're going to see historic trends continue, Frank. So if we're, you know, growing loans, just focus on the loans, historically 10 to 15%, I think that trend is going to continue for the full year. From a total asset perspective, I do think we're expecting to see BAS deposits tick up, you know, again, both current programs, but back half loaded, I think you're going to see, you know, a scaling in deposits and total assets that correspond to that.

Speaker Change: Yeah, I mean, again, I would kind of bifurcate it a little bit.

Speaker Change: You're going to see historic trends continue, Frank. So if we're, if we're growing loans, just focus on the loans, you know, historically 10 to 15%, I think that trend is going to continue for the full year. From a total asset perspective, I do think we're expecting to see BAS deposits tick up, you know, again, both

Speaker Change: Current programs, but back half loaded, I think you're going to see.

Gregory A. Sigrist: But again, I think it's going to be fairly muted. And as you know, we haven't historically given you guidance on that deposit growth. So I'm probably not going to be any more helpful for you today. But we do expect to see some benefit and uplift from that, in part, because if you think about how we fund our third quarter tax season, you know, we typically have some wholesale borrowings to fund that. I'm very hopeful that for next year, we can eliminate some of that and self-fund it through BAS deposit growth.

Speaker Change: And as you know, we haven't historically given you guidance on that deposit growth, so I'm probably not going to be any more helpful for you today, but we do expect to see some benefit and uplift on that, in part because if you think about how we fund our third quarter tax season, you know, we typically have some wholesale borrowings to fund that. I'm very hopeful that for next year we can eliminate some of that and self-fund it through Bass Deposit Growth.

Frank Joseph Schiraldi: Gotcha. And I guess, you know, speaking about strong pipelines, obviously, seeing what's going on with some of the smaller banks in the banking as a service business, kind of surprised, Greg, by your commentary around a modest uptick in deposits in the back half of next year. Is that, you know, the pickup more on the fee side in 2025 for BAS, or is the pipeline just such that, you know, revenues, deposits, and revenues could be kind of pushed out even further from this strong pipeline into future periods, into 2026? Hey, Frank, Brett.

Speaker Change: And I guess, you know, speaking about strong pipelines, obviously, seeing what's going on.

Speaker Change: with some of the smaller banks in the banking as a service business. Kind of surprised, Greg, your commentary around modest uptick.

Speaker Change: in deposits in the back half of next year.

Speaker Change: Is that, you know, is the pickup more on the...

Bass: B-Side in 2025 for BAS or...

Speaker Change: Is the pipeline just such that, you know, revenues, deposits and revenues could be kind of pushed out even further from this strong pipeline into future periods, into 2026?

Brett L. Pharr: So I think one thing to think about this is what you're seeing in the marketplace, is in trouble with a lot of smaller fintechs that actually won't be in the business. And so there are a few that are big enough, that are profitable, that are fleeing quality. And that's the kind of thing that's in our pipeline that we're looking at. But as you can tell just reading the news, there's some unwinding that's gonna be going on.

Speaker Change: Hi Frank, Brett. So I think one thing to think about this is what you're seeing in the marketplace

Speaker Change: is some trouble with a lot of

Speaker Change: smaller fintechs that actually won't be in the business. And so there's

Speaker Change: There are a few.

Speaker Change: that are big enough, that are profitable.

Speaker Change: that are fleeing the quality, and that's the kind of thing that's in our pipeline that we're looking at.

Speaker Change: but as you can tell just reading the news there's some unwinding that's going to be going on and just because a business existed in one place

Brett L. Pharr: And just because a business exists in one place doesn't mean they're gonna be able to put it someplace else. And I think that's a little bit of what's happening here. I kind of remind you that early in this whole phase, we were highly selective about any we would bring in. And that was because we didn't like those businesses anyway. So I don't know if that answers your question, but there are some meaty things in the pipeline, but it's certainly not all the volume that has been out there. Yeah, and just that.

Speaker Change: doesn't mean they're going to be able to put it someplace else. And I think that's a little bit of what's happening in this. Kind of remind you that, you know, early in this whole phase,

Speaker Change: We were highly selective on any we would bring in.

Speaker Change: And that was because we didn't like those businesses anyway. So I don't know if that answered your question, but there are some meaty things in the pipeline, but it's certainly not all the volume that has been out there.

Gregory A. Sigrist: Yeah, and just to add to that too, I mean, Brett's already touched on it. We talk about it, I think, every quarter, but it's a long sales cycle. And I think until we're at the point where we're completing that cycle and announcing deals, you know, I think the reason I use the word modest is until we kind of get through that, and we can get some, let you guys know in the market, know that we're closing some of these deals.

Speaker Change: Yeah, and just to add to that too, I mean, Brett's already touched on it, we talk about it I think every quarter, but it's a long sales cycle, and I think until we're at the point where

Brett L. Pharr: We're completing that cycle and announcing deals.

Speaker Change: The reason I use the word modest is until we kind of get through that and we can get and we can You know get some let you guys know in the market know that we're closing some of these deals You know, I think it's appropriate to haircut some of the expectations. We're still very excited about the business though and you know to Brett's point

Gregory A. Sigrist: You know, I think it's appropriate to lower some of the expectations. We're still very excited about the business, though. And, you know, to Brett's point. We're being very selective on what we're letting through the pipeline as well. So again, we're very optimistic but just being a bit, call it conservative in terms of how much we pull into the guidance for next year.

Brett L. Pharr: You know, we're being very selective on what we're letting through the pipeline as well. So again, we're very optimistic, but just being a bit, call it conservative in terms of how much we pull into the guidance for next year.

Frank Joseph Schiraldi: Great. And then if I could just ask one more on the buybacks. Buyback levels were a bit down significantly, I guess, quarter over quarter. And so capital levels were up, certainly where they were year over year. I know there's seasonality there.

Speaker Change: Great. And then if I could just ask one more on the buybacks.

Speaker Change: The buyback levels were a bit down, significantly I guess, quarter over quarter.

Speaker Change: And so capital levels were up.

Frank Joseph Schiraldi: But just how do we think about repurchases here? Just given the recent run-up in stock, is there any change? You mentioned, Greg, that 2025 does include expectations on buyback, your guide. But just curious if, you know, obviously you've got a lot out there in the current authorization. Just wondering if you guys are maybe tempering that a little bit in terms of activity from what we've seen in previous quarters, given just where the stock is.

Speaker Change: certainly where they were year over year. I know there's seasonality there. But just how do we think about repurchases here? Just given the recent run-up in stock, is there any change? You mentioned, Greg, that 2025 does include expectations on buyback, your guide. But just curious if, you know, obviously you've got a lot out there in the current authorization. Just wondering if you guys are maybe tempering that a little bit in terms of activity from what we've seen in previous quarters, given just where the stock is.

Gregory A. Sigrist: Yeah, I mean, as it relates to the current, to the June quarter, buybacks were down a little bit, but one quarter does not make a full year. So I just make that point.

Speaker Change: Yeah, I mean as it relates to the current to the to the June quarter buybacks were down a little bit But one quarter does not make

Speaker Change: We're still very committed to optimizing our capital and highest and best use of capital going forward, and I still continue to believe share buybacks falls in that category.

Speaker Change: You know, I think it's been the slight slowdown, let's give you some perspective on it. You know, historically, our buybacks have equated to roughly a 70 to 80 percent payout ratio in terms of how much of our earnings we've put back into the buybacks.

Gregory A. Sigrist: You know, we're still very committed to optimizing our capital and the highest and best use of capital going forward, and I still continue to believe share buybacks fall in that category. You know, I think it's been a slight slowdown. Let's give you some perspective on it. Historically, our buybacks have equated to roughly a 70 to 80% payout ratio in terms of how much of our earnings we put back into the buybacks.

Gregory A. Sigrist: For the 25, that's likely to come down modestly. And I think that's really to the 60 to 70% payout range versus 70 to 80. So when I think about four quarters, I think about it moderating slightly. And I think a big part of the driver behind that is that we do see organic growth opportunities. I'd rather have the capital here before we need it, but when I look out the next several years, whether it's building a deposit base, being able to deploy that into the loan book, et cetera, I mean, I'm looking at this out three to five years.

Speaker Change: For the 25, that's likely to come down modestly, and I think that's really to the 60 to 70 percent payout range versus 70 to 80. So when I think about four quarters, I think about it moderating slightly. And I think a big part of the driver behind that is we do see the organic growth opportunities. I'd rather have the capital here before we need it.

Speaker Change: But when I look out the next several years, whether it's, you know, building deposit base, being able to deploy that into the loan book, et cetera, I mean, I'm looking at this out three to five years. I'd rather build ahead and get ahead of that a little bit.

Gregory A. Sigrist: I'd rather build ahead and get ahead of that a little bit, but I think by the time we get into, you know, the middle to latter part of next year, you're likely to see us go back to more normalized levels of buybacks. Brett, I don't know if there's anything you'd add to that strategically. No, I think that's exactly right. You know, we've got some opportunities that are out there, and where we need capital for the balance sheet, we'll use it. But a 60 to 70% payout ratio is pretty healthy. Now, agreed, OK.

Speaker Change: But I think by the time we get into, you know, the middle to latter part of next year, you're likely to see us go back to more normalized levels of buybacks. Brett, I don't know if there's anything you'd add to that strategic plan. No, I think that's exactly right.

Brett L. Pharr: You know, we've got some opportunities that are out there and, you know, where we need capital for the balance sheet, we'll use it, but 60 to 70% payout ratio is pretty healthy.

Frank Joseph Schiraldi: Agreed. Okay. I appreciate all the color. Thank you.

Speaker Change: Agreed, okay. I appreciate all the color, thank you.

Speaker Change: You got it, Frank. Thanks.

Operator: Our next question is from David Feaster with the company Raymond James. David, your line is now open.

Speaker Change: Our next question is from David Feaster with the company Raymond James. David your line is now open.

David Pipkin Feaster: All right. Good afternoon, everybody.

David Pipkin Feaster: Hey, good afternoon, everybody.

David Pipkin Feaster: You know, just kind of following up on some of the disruption commentary that you talked about in yourpaired remarks, I'm curious maybe some of your thoughts on how this impacts partnership agreements. I've heard that some partners may be looking for backup partners just kind of as a downside protection. I'm kind of curious, how does that impact your negotiations? Do you think that's a positive for the industry? Is that something you're seeing? And how does that impact contracts and pricing and just, you know..., overall, you know, just negotiation?

Speaker Change: Hey, David.

David Pipkin Feaster: You know, just kind of following up on the partnership, some of the disruption commentary that you talked about in your paired remarks, I'm curious maybe some of your thoughts on how this impacts partnerships agreements.

Speaker Change: You know, I've heard that some partners may be looking for backup partners just kind of as a downside protection.

Speaker Change: I'm kind of curious, how does that impact your negotiations? Do you think that's a positive for the industry? Is that something you're seeing? And how does that impact contracts and pricing and just, you know, overall, you know, just negotiations?

David Pipkin Feaster: Yeah, that is happening. We're getting those phone calls. There are some HWLA partners that are, I wouldn't say they're looking for a backup; they're looking for their second one. And that's something we're clearly seeing. We're not terribly excited about being the secondary backup.

Speaker Change: Yeah, that is happening.

Speaker Change: We're not terribly excited about being the secondary backup.

Brett L. Pharr: It's just, you know, we've got some capacity to do things, and we want to use it for things. They're going to have a lot of juice coming through it. And as to, you know, agreements, every one of those is customary, and you can have conversations about how that's going to work. There are volumes, there are minimums, those kinds of things. And in some cases, we have agreements where we have a percentage of the majority that we expect to get in.

Speaker Change: It's just, you know, we've got some capacity to do things and we want to use it for things that are going to have a lot of juice coming through it. And as to, you know, agreements, every one of those is custom.

Speaker Change: And you can have conversations about how that's gonna work. There's volumes, there's minimums, those kinds of things. And in some cases we have agreements where we have a percentage of majority that we expect to get in it. So very much custom, but all those things are happening.

Brett L. Pharr: So, very much custom. But all those things are happening because more sophisticated program managers have recognized, oh, I better have an exit or a couple of banks in mind if I need them so I can keep doing new programs.

Speaker Change: because more sophisticated program managers have recognized, oh, I better have an out or a couple of banks in mind if I need it so I can keep doing new programs.

Speaker Change: That's helpful. And then, you know, just looking at the slide deck, you talked about implementing a new tech system that's going to create efficiencies. I'm curious.

Speaker Change: I was hoping you could elaborate on that. What are you looking at? And then I guess with AI being all the rage these days, is there any opportunity for you guys to leverage AI across your platform? And how would you do it?

Brett L. Pharr: There's a lot in what you just said, but let me start with what we did in the commercial. There are readily available packaged solutions that help with the sales process through underwriting, credit management, collateral management, all the way to reporting. And we spent some time and money putting some efficiencies in place by installing that in our commercial finance group. I wouldn't say it's a particularly competitive advantage, but it's a basic tool that will help us there and will help us with FTE counts and those kinds of things. So we're happy it's in there, and we're starting to reap the benefits of some of that.

Speaker Change: There's a lot in what you just said, but let me start with what we did in commercial.

Speaker Change: There are readily available.

Speaker Change: packaged solutions that help with

Speaker Change: sales process through underwriting.

Speaker Change: credit management, collateral management, all the way to reporting.

Speaker Change: And we...

Speaker Change: spent some time and money putting some efficiencies in by installing that in our in our commercial finance group. I wouldn't say it's particularly, you know,

Speaker Change: competitive advantage, but it's the basic tools that will help us there and will help us with FTE counts and those kinds of things. So we're happy that's in there and we're starting to reap the benefits of some of that. I think your comment about AI is correct, but I think that there's...

Brett L. Pharr: I think your comment about AI is correct, but I think that there's a limited view of what we have at the moment. And as you know, everybody's got to be very focused on the data, the information security, the controllers that are in it. We can see some very basic ways where it could be used. I'll give you a simple bread example: adverse action reports that are due monthly. People hate writing those things.

Speaker Change: a limited view of what we have at the moment. And as you know, everybody's got to be very focused on the data, the info security, the controls that are in it. We can see some very basic ways where it could be used. I'll give you a simple bread example.

Brett L. Pharr: You can get an initial start with an AI process and then modify it later and make it according to standards. So, I mean, there's a whole bunch of things that are like that, but we haven't even started to scratch the surface on that. I just hope over time we figure out how to efficiently use it.

Speaker Change: You know, adverse action reports that are due monthly. People hate writing those things.

Speaker Change: you can get an initial start with an AI process and then modify it later and make it according to standards. So, I mean, there's a whole bunch of things that are like that, but we haven't even started to scratch the surface on that. I just hope over time we figure out how to efficiently use it.

David Pipkin Feaster: And then just

David Pipkin Feaster: And then, just last one for me, there's still a lot of earnings power that's locked up in the securities book. The good news is that you've got deposit growth; you don't have a liquidity challenge; you've got deposit growth to fund the loan growth that you've got coming. But I guess just given the moving rates and the loan growth outlook that you have, is there any increased appetite for securities sales at this point? I mean, you're not hurting for earnings growth, but maybe that could accelerate. I didn't know if your appetite for that had changed.

Speaker Change: That's helpful.

Speaker Change: And then just, last one from me, there's still a lot of earnings power that's locked up in the securities book. You know, the good news is that you've got the deposit growth, you don't have a liquidity challenge. You've got the deposit growth to fund the loan growth that you've got coming. But I guess just given the moving rates...

Speaker Change: and the loan growth outlook that you have, is there any increased appetite for securities sales at this point? I mean, you're not hurting for earnings growth, but maybe that could accelerate. I didn't know if your appetite for that had changed.

Gregory A. Sigrist: It hasn't changed, David, to be candid. I mean, we might be opportunistic down the road if we see an opportunity just here and there. But as a practical matter, I mean, when I think about the balance sheet as a whole, we're really just looking at the shape of the curve. And, you know, the one thing we haven't touched on yet on this call is, you know, when I think about the loan book combined with the securities book and the ability to rotate into loans, just even at that cash flow level, as long as the middle part of the curve stays fairly static, But, you know, as it relates specifically to loan sales and then recycling, no, our appetite really hasn't changed on that side.

Speaker Change: Boom!

Speaker Change: Not hasn't changed, David, to be candid. I mean, we might be opportunistic down the road if we saw an opportunity just here and there. But as a practical matter, I mean, when I think about the balance sheet as a whole, we're really just looking at the shape of the curve. And, you know, the one thing we haven't touched on yet this call is.

Speaker Change: You know, when I think about the loan book combined with the securities book and the ability to rotate into loans, just even at that cash flow level, as long as the middle part of the curve stays fairly static, and I think the market does believe that.

Speaker Change: You know, I think that's really going to be to our benefit and be a real tailwind for us, in addition to the pipelines. But, you know, as it relates specifically to loan sales and then recycling that, no, our appetite really hasn't changed on that side.

Gregory A. Sigrist: And just to remind you, I think you know this, but as to the cash flow, I think it's about $300 million a year, right, that we are coming out of the securities book and so then putting that into the loan portfolio. So, sort of self-funding, providing the liquidity to be able to grow the loan book, not counting any new deposits. Yeah, that makes sense.

Speaker Change: And just to remind you, I think you know this, but...

Speaker Change: As to the cash flow, I think it's about $300 million a year, right, that we are coming out of the securities book and so then putting that into the loan portfolio. So sort of self-funding, providing the liquidity to be able to grow the loan book, not counting any new deposits.

David Pipkin Feaster: Yep, that makes sense. All right, thanks everybody.

Speaker Change: Yep. That makes sense. All right. Thanks, everybody.

David Pipkin Feaster: Thanks, David.

Operator: That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.

Speaker Change: That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.