Q1 2025 Pathward Financial Inc Earnings Call
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Thank you.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to Pathwork Financial's first quarter fiscal year 2025 investor conference call.
During the presentation, all participants will be in a listen-only mode.
Speaker Change: Following the prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff, and Investor Relations. Please go ahead. Thank you, Operator, and welcome.
Speaker Change: With me today are Pathward Financial CEO Brett Pharr and CFO Greg Sigrist, who will discuss our operating and financial results for the first quarter of fiscal year 2025, after which we will take your questions.
Speaker Change: Additional information, including the earnings release, the presentation that accompanies our prepared remarks, and supplemental slides may be found on our website at PaffordFinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods.
Speaker Change: 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 statement.
Speaker Change: Additionally, today we will be discussing certain non-GAAP financial measures on this call. References to non-GAAP measures are provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis.
Speaker Change: Reconciliation for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation.
Speaker Change: Included in the non-GAAP measures, this quarter we will begin reporting an adjusted net interest margin, including contractual rate-related card processing expenses associated with deposits that are on the company's balance sheet.
Speaker Change: All mentions of adjusted net interest margin on this call will refer to the updated metric. This will replace our previously reported adjusted net interest margin, which included contractual rate-related car processing expenses associated with all deposits, including custodial deposits.
Speaker Change: You will find this adjusted net interest margin measure included in our non-GAAP reconciliations in the earnings release and the supplemental slides that were filed today in conjunction with the earnings release.
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 Pharr: Thanks Darby and welcome everyone to our earnings conference call. Fiscal 2025 has started out well. During the quarter we made good progress against the strategy we laid out last year.
Brett Pharr: The biggest step we took was closing the sale of our insurance premium finance business in October, along with the subsequent sale of securities.
Brett Pharr: This move started the process of optimizing close to $800 million on our balance sheet by putting us in a position to reallocate those funds into higher-yielding assets or those with optionality.
Brett Pharr: Keeping our focus has helped us deliver strong results. We reported earnings of $1.29 per share for the first quarter, which represents year-over-year growth of 22% and net income of $31.4 million.
Brett Pharr: Our results were driven in part by an increase in net interest income of 6% when compared to the same quarter last year.
Brett Pharr: We also expanded our quarterly net interest margin and adjusted net interest margin, which includes contractual rate-related processing expense associated with deposits on the company's balance sheet, to 6.84% and 5.41% respectively.
Brett Pharr: Performance metrics were strong for the quarter, with return on average assets for the quarter of 1.69% and return on average tangible equity of 25.65%.
Brett Pharr: We are also reiterating our fiscal 2025 guidance of $7.25 to $7.75 earnings per diluted share.
Brett Pharr: Our focus on the loan side of the balance sheet has not changed.
Brett Pharr: Given our competitive position in the payment space, we are limited to an asset size of $10 billion in order to remain under the Durbin Amendment threshold, which leads us to focus on optimizing the assets that we keep on balance sheet.
Brett Pharr: This focus means our assets either have high risk-adjusted returns or optionality for balance sheet velocity.
Brett Pharr: As a part of this focus, we executed the sale of our insurance premium finance business as I mentioned before.
Brett Pharr: We also announced a strategic partnership to support renewable energy loan growth.
Brett Pharr: Renewable energy continues to be a focus for Pafford, where we are underwriting conventional construction loans and USDA-guaranteed loans with proper risk-adjusted returns and providing us optionality on the balance sheet.
Brett Pharr: Our partner brings strong industry experience to the table, and we expect that co-innovation in this partnership will accelerate efficient, scalable, and predictable growth within PAPR's Renewable Energy Initiative.
Brett Pharr: Our fiscal first quarter originations were strong, particularly in renewable energy, equipment finance, and working capital. And we believe that this origination momentum will continue.
Brett Pharr: Another aspect of the lending side that we're focused on is credit sponsorships where we act as a lender of record.
Brett Pharr: We continue to expand our reach through growth with our existing partners and nurturing a strong pipeline of prospective partners who are mission aligned and share our risk and compliance posture.
Brett Pharr: During the first quarter, we originated more of these loans than any other first quarter in the company's history.
Brett Pharr: These loans are protected by certain layers of credit support and offer us additional balance sheet flexibility.
Brett Pharr: In the first quarter of fiscal year 2025, our partner solutions team extended contracts with two of our top issuing partners, one for an additional two years and one for an additional five years.
Brett Pharr: After the quarter ended, we also signed a contract with a new partner.
Brett Pharr: We remain dedicated to growing and nurturing our partnerships while addressing new opportunities in our pipeline.
Brett Pharr: The pipeline remains strong, and we continue to work tirelessly with potential new clients to show them the breadth of products we offer, our ability to scale and expand with them, and an expertise that comes with being in the industry for 20 years.
Brett Pharr: Tax season has begun. We're off to a good start with 12% more enrolled tax offices than last year. We look forward to updating you more on the next call.
Brett Pharr: For a couple of quarters now, we have talked about our strategy to be the trusted platform that enables our partners to thrive. We believe this strategy will help us deliver our goal to drive growth and revenue and net income in the next few years.
This growth will come in two forms.
Brett Pharr: In the short term, our focus on optimizing the balance sheet should drive an expanded net interest margin with additional net interest income. This is due to rotating assets out to higher yielding assets.
Brett Pharr: In addition to the changes we have already made, we also have a portion of loans on the balance sheet that were underwritten prior to the increase in interest rates.
Brett Pharr: Longer term, having the right people, process, and systems will allow us to continue to grow partner solutions.
This team produces primarily non-interest income, diversifying our revenue stream.
Brett Pharr: With the increased desire for embedded finance, combined with the innovation from Frentex and other payments-focused companies, the opportunity for growth in this aspect of our business is significant.
Brett Pharr: We offer an array of products, issuing, acquiring, digital payments, including direct-to-debit and ACH, financial institution solutions, credit solutions, and professional tax solutions, allowing Pathware to provide an array of products to partners.
Brett Pharr: We can provide multiple solutions while offering expertise, operational excellence, true partnership, and a mature risk and compliance infrastructure that is led by our consultative governance approach.
Brett Pharr: Now I'd like to turn it over to Greg, who will take you through the financials and guidance in more detail.
Thank you, Brad.
Brett Pharr: The first quarter results included growth in net interest income and non-interest income. Net interest income grew 6% despite the sale of the insurance premium finance business, which closed on October 31st.
Brett Pharr: The net interest margin of 6.84% and adjusted net interest margin of 5.41% expanded when compared to the prior year's quarter.
Brett Pharr: This is primarily due to a mix shift to higher yielding assets as well as an increase in yields across our lending businesses.
Brett Pharr: Sequentially, both measures also expanded due to a mix shift to higher yielding assets.
Brett Pharr: Our continued efforts to increase new production yields produced a 9.45% average yield.
Brett Pharr: on commercial finance loans and leases originated during the quarter, compared to the last quarter's yield on the same portfolio of 8.49%.
Brett Pharr: Provision for credit losses was $12 million, which includes provisioning for our strong loan production in the quarter.
Brett Pharr: We continue to see the benefit from our strong credit and collateral management.
Non-interest income increased 9%.
Brett Pharr: when compared to the prior year's quarter, primarily due to an increase in gain on loan sales.
Brett Pharr: This was in line with our focus on having optionality on the balance sheet, including the sale of eligible loans.
Brett Pharr: Total non-interest expense increased 4% versus the same quarter last year, primarily due to an increase in compensation and benefits.
Thank you.
Brett Pharr: The increase in compensation and benefits is largely due to hiring additional talent on our technology team.
Brett Pharr: This is a direct reflection of our comments last quarter, where we detailed for you some of the work we've been doing in technology and the investments in people and talent aligned to that work.
Brett Pharr: Finally, we did recognize the gain on the sale of our insurance premium finance business, but during the quarter, we also sold approximately $175 million in par value securities at a loss that largely offset the gain, thereby largely neutralizing the impact on the income statement.
Brett Pharr: We use some of the proceeds of both of these sales to repay outstanding short-term borrowings and the remainder was used to fund loans or shifted to custodial deposits.
Brett Pharr: Deposits held on the company's balance sheet at December 31st totaled $6.5 billion.
a decrease of around $400 million from the prior year.
Brett Pharr: This primarily reflects the repayment of wholesale deposits and our return of inactive EIP deposits to the Treasury.
Sequentially, deposits grew $644 million following our normal seasonal patterns.
Brett Pharr: Custodial deposits held at partner banks at December 31st totaled $840 million, compared to $1.1 billion last year. However,
Brett Pharr: Average balances for the quarter were $388 million compared to $379 million last year.
Brett Pharr: Total loans and leases at December 31st were 4.6 billion dollars.
Brett Pharr: slightly above the balance of 4.4 billion dollars from a year ago.
Brett Pharr: If you take into account the fact that we completed the sale of our insurance premium finance business, which reduced the balance by approximately $600 million, we saw some pretty incredible growth.
Brett Pharr: This is primarily due to higher term lending balances, particularly renewable energy construction loans that convert to USDA, as well as asset-based lending and warehouse.
Brett Pharr: Origination of these loan verticals has been deliberate as they provide us with either higher risk-adjusted returns or optionality on the balance sheet.
Our liquidity remains strong, with approximately $4 billion available.
Brett Pharr: This is slightly higher than where we were last year at this time, and we are extremely pleased with our position.
Brett Pharr: The securities portfolio will continue to draw down by approximately $250 million over the next 12 months, giving us additional capacity to optimize the balance sheet.
Brett Pharr: Finally, during the quarter, we repurchased approximately 702,000 shares at an average share price of $74.05.
Brett Pharr: With the sale of the insurance premium finance business, we had more flexibility in executing share repurchases this quarter, and we made the decision to accelerate them.
Brett Pharr: We are reiterating our fiscal year 2025 GAAP earnings for diluted share guidance range of $7.25 to $7.75. This includes a number of assumptions.
No rate cuts for the remainder of the year.
Brett Pharr: We expect net interest margins to exceed those of fiscal 2024 as a result of our strategy to optimize the balance sheet.
Brett Pharr: We still expect an effective tax rate of 18 to 22 percent.
Guidance also includes expected share repurchases.
Brett Pharr: This concludes our prepared remarks. Operator, please open the line for questions.
Thank you.
Speaker Change: If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2.
Brett Pharr: Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
Speaker Change: First question is from the line of Frank Schiraldi with Piper Sandler. Your line is now open.
Good afternoon.
start with.
Speaker Change: The commercial finance business, you know, it's a really strong growth in the quarter. I think, Brett, you mentioned a new renewable energy partnership.
Speaker Change: Just curious, your thoughts, you know, you know you expect the momentum to continue. Just wondering your thoughts on, you know,
Speaker Change: expectations of growth rates going forward in this business over the near term.
Speaker Change: Yeah, I mean, I think we'll continue to emphasize that product set. Part of it is
Speaker Change: It is a product that gives us a lot of optionality, and you're seeing that even in our returns this quarter.
Speaker Change: where you can enter in transactions and they ultimately result in a saleable loan. And so we really like that business model.
Part of your question may be around...
Speaker Change: shifts in the political environment. And I think there's some potential of some slowdown, but there still needs to be a lot of investment in energy infrastructure in the country.
Speaker Change: I think about battery storage is an area that no matter what happens we're going to need. There's going to be a demand for AI power. And so I think it's still going to be good and strong. It may not jump as much in future quarters as it did this time, but I still expect growth there.
Thank you.
Speaker Change: And then, correct me if I'm wrong, but I feel like the higher for longer in terms of the rate outlook is...
is I think the best scenario for your balance sheet.
and earnings pickup. And so we definitely seem like.
Speaker Change: We've gotten a little better clarity maybe into that versus where we were three months ago. So just curious.
Speaker Change: You know, the guide was reiterated full year, bottom line EPS guide.
But shouldn't you benefit from this hire for longer?
Thank you. Bye.
Bye-bye.
Speaker Change: Yeah, I think a few things, and then maybe Greg can comment on it. You're right, higher for longer, assuming yield curve, which we're getting right now, is good for us. And so that's definitely a tailwind. As we kind of think about...
Speaker Change: What's coming though, some of it depends on which assets you have to continue growth at. So some assets get a better benefit from that than others. And so we're looking at those pieces.
Speaker Change: The thing I would tell you is, you know, we always look at our tax season and see what happens to the tax season before we have any conversations.
Speaker Change: And so that's certainly partly in our mind, we think it's going to be a great year, but you wait to see that kind of coming through.
Speaker Change: Well, I think I would say is is we are contemplating various kinds of investments over time. We've been doing it for a while
Speaker Change: We'll continue to be doing some things in the technology area, risk and compliance to match the volumes that we have added and those kinds of things. So we'll have more to say about that later, but there's, you know, good tailwinds, but more potentially to come.
And then.
Speaker Change: And then just lastly, just on the partnerships, you mentioned the two large partnerships.
on the partner solution side that you re-upped.
Speaker Change: Just curious, as you re-up these contracts, is there any broad-based read-through in terms of...
Speaker Change: Any changes to the economics? Are you seeing any pressure on pricing? Any improvement on pricing? Any change in the economics, broadly speaking? That's number one. And then two, just wondering if you can give any further detail on the new partner you signed post-quarter. Thanks.
Good evening, everyone.
Speaker Change: And that's not necessarily about those two, but that's generally what we're seeing as we go through this and people are just more attuned to the rate environment.
Speaker Change: I don't really want to comment on the one that was announced after the fact.
Speaker Change: Just know that, you know, pipelines are full, all these things are constantly being looked at, and particularly
Speaker Change: Both in the partner's interest and in our interest, long before contracts expire, looking for extensions of those because nobody wants to go through a switching process.
That makes sense. Okay, that's all I have. Thank you.
Speaker Change: Thanks, Brian. Thank you for your question. Next question is from the line of Tim Switzer with KBW. Your line is now open.
Good afternoon. Thank you for taking my questions.
again.
Speaker Change: I have a follow-up on, you know, I guess the partner pipeline here, and...
It's been about, you know, a year plus.
Speaker Change: of some disruption in the banking as a service industry. You know, has that created a lot of opportunities for you guys more recently? And, you know, how do you see this evolving?
Speaker Change: over the course of the new administration, you know, do you see any...
Speaker Change: you know, relief possibly on the regulatory side, or do you think this will continue to create opportunities for you given the disruption?
Speaker Change: Yeah, the headline would be yes, this is going to continue to give us, you know, opportunities. I think you've got to bifurcate the political regulatory environment into two groups.
Speaker Change: It is obviously true that there is going to be a change in tone at the top in general bank regulatory environments.
Speaker Change: which is going to provide some relief. And you know, you've got things that you already assumed, you've got an FDIC statement that came out today, all of which are very good news for the banking industry in general.
Speaker Change: However, in those areas where there's potential for customer harm, there's, you know, going to be a bipartisan view that you can't do that. And so I think in our specific narrow space, there will continue to be considerable pressure from regulatory environment just to prevent that kind of customer harm.
Thank you.
Yeah, okay. Okay, that makes a lot of sense.
Speaker Change: Switching topics here a little bit. It looks like commercial charge-offs ticked up just a little bit. Can you provide some color on what you guys are seeing there and kind of the outlook for the rest of your portfolio excluding the tax business?
Thank you.
You know, we always look at commercial.
charge off within a range
And there are one-offs.
Speaker Change: Every quarter, come and go. Sometimes it's a charge-off. Then the next quarter, it's a recovery. There's nothing happening in that portfolio that's unexpected. And it's, you know, it's very much within the range that we've been over time. So there's there's nothing happening there. It's just normal business that we have that usually has an individual story.
Speaker Change: Yeah, the only thing I would add, Tim, is when you look at the credit metrics for the quarter, you know, charge off, you know, past dues and the like, everything is either stable or improving, just is another couple of more data points you can go look at, but I agree with Brett's commentary on that.
Good to talk to you.
Speaker Change: Okay, and the last question I have is do you guys have any other plans for like securities restructuring or redeployment of...
Speaker Change: You know, remixing the balance sheet following the commercial finance business sale beyond just moving into the higher yielding loan categories you guys have talked about previously.
Speaker Change: Well, I'd never say never on a securities remixing. I think we'd have to be opportunistic on it. We're pretty comfortable with what's there, and it's rolling down $250,000 over the next 12 months. And it's a fairly five-year duration, which is fairly short. So I'm not sure I see the impetus to go out and just kind of blindly do it. But opportunistically, yeah, perhaps.
Speaker Change: As it relates to broader just remixing though, I mean, we've got some really good verticals on the balance sheet right now with a lot of good momentum behind them. We're always looking to evaluate, you know, where are there opportunities, where there might be gaps, either in markets we're in or adjacencies.
Speaker Change: So, you might see some of that come up over the next, you know, 12 to 18 months. But right now, we're actually really comfortable with the risk-adjusted returns we have on the portfolio. We've got – like to continue to take a bit of duration. I think we're at that –
Speaker Change: point in the rate cycle where more duration is helpful, which we definitely did this past quarter. But, you know, I think just remixing what we've got is actually a pretty good strategy.
Perfect. Okay. Thank you guys
Thanks, Tim.
Thank you.
Speaker Change: Thank you for your question. Next question is from the line of David Feaster with Raymond James. Your line is now open.
All right, good afternoon, everybody.
Hey, David. Hey, David. I just...
Speaker Change: I just wanted to touch on the credit sponsorship side. I mean, you touched on seeing stronger volumes. I know this is a focus for y'all. Could you just...
Speaker Change: touch on where you're having the most success, where you're having, where you're seeing the most opportunities, you know, what types of credit or industries are you primarily focused in and when would you expect to see more, you know, partners added to this segment and maybe accelerate growth even further?
Speaker Change: You know, it's interesting, David, that if there's any place where the story of regulatory pressure has created opportunities for us, it's in this space.
Speaker Change: Frankly, we have new partners and or existing partners with new volume that have come to us because other partner banks misstepped in some of the third-party risk compliance elements.
And so that's why we're getting that growth.
Speaker Change: We suspect that's going to continue for a period of time.
Speaker Change: So it's a good space to be, and while we talk about sort of the traditional payment side of this, giving us opportunities because of the compliance environment, we've actually seen more actual closed opportunities in this space.
Thank you. Bye.
Thank you, everyone.
Oh, that's great.
That's great.
Speaker Change: And then, you know, within the working capital finance side, you know, you guys have touched on that this is, I mean, you've seen really nice growth there.
Speaker Change: You know, obviously, ABL has seen really nice growth. You know, you touched on this, that we've talked about this, this business historically doing, you know, well during an economic downturn.
Speaker Change: I mean, is this any indication of that or is this y'all gaining share and adding new partners? Or are there other factors that are driving outsized growth there and maybe somewhat of a counter-cyclical business?
Speaker Change: I don't think this growth is a comment at all on the economy. Sometimes this area grows because of a shift in the economy. We've done a little bit more work on focusing on our distribution capabilities here. And I think that's what's happened here. We really like this asset class.
Speaker Change: We've got a secret sauce around it. It has excellent risk-adjusted returns.
Speaker Change: We're really good at it. It's core in the heart of the lending business from the very beginning that, you know, makes up the old Crestmark. So we really like it, but this growth was largely because of some improvements we made in overall distribution.
Thank you.
Speaker Change: Okay, that's great. I'm glad to hear that. And then just last one for me, you know, you touched on tax season, you've got 12% more enrolled offices.
Speaker Change: It sounds like things are starting out good. Could you just touch on how to think about the tax business, what you're seeing and what's driving the increase in offices that are enrolling?
Speaker Change: We've been doing this a while. We've got a good management team, top professionals at it with many, many decades of experience.
Speaker Change: they're doing a reasonable job of grabbing market share and we'll see we'll report on the rest of that later later on once it comes through
and Gregory Sigrist. Thank you.
All right, thanks everybody.
Thanks, David.
Thank you. Thank you.
Speaker Change: Thank you for your question. And that concludes Pathwork Financial's Investor Conference Call. Thank you.
Thank you.