Q2 2025 Pathward Financial Inc Earnings Call
Thank you. Sorry for the delay.
Speaker Change: Ladies and gentlemen, for standing by and welcome to Path Word Financial's second quarter 2025 earnings conference call. During the presentation, all participants will be in listen only mode. Following the prepared remarks, we will conduct a question and answer session. As Reminder, this conference call is being recorded.
Speaker Change: How now I turn the conference over to our host, Darby Schoenfeld, Senior Vice President of Investor Relations. Please go ahead.
Speaker Change: Thank you, operator, and welcome. With me today are password financial CEO , Brett Pharr and CFO , Brett Sigrist, who will be discussing our operating and financial results for the second quarter of fiscal year 2025, after which we will take your question.
Speaker Change: Additional information including the earnings release, the investor presentation that a company's are prepared remarks, and supplemental slides may be found on our website at passwordfinancial.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 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. Reconciliation 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 .
Thanks Darby and welcome everyone to our Earnings call.
Speaker Change: At the halfway point of the fifth year, we have just completed a fantastic quarter. Our businesses are healthy and we are optimistic about the future.
Speaker Change: We've made some significant progress on our goals, especially on our successful execution
Speaker Change: This is allowing us to generate revenue above our asset size and means we do not need to grow our balance sheet to grow revenues.
This is clear in our financial performance during this quarter.
Speaker Change: We are also having a great tax season which led the way to non-interest income growth during the quarter.
Speaker Change: We reported earnings of $3.11 per share for the March quarter, which represents year-over-year growth of 21% and net income of $74.3 million.
Speaker Change: Our results were driven in part by an increase in on-interest income of 7%, and that interest income of 5% when compared to the same quarter last year.
Speaker Change: We also expanded our quarterly net interest margin and adjusted net interest margin.
Speaker Change: Year-to-date non-interest income now represents 45% of our total revenue, and it is our goal to continue to grow this over time.
Speaker Change: Performance metrics were strong for the first six months of the year with return on average assets of 2.69% and return on average tangible equity of 43.79%. Remember that due to tax season, these metrics generally reached our high water point during this quarter.
Speaker Change: We are also pleased to revise our fiscal 2025 guidance to $7.40 to $7.80 earnings per diluted share. Greg will discuss this in more detail.
Speaker Change: Tax season has been really strong with the team doing a fantastic job of expanding our reach.
Speaker Change: We operated with over 42,000 independent tax offices, which is a new record for us.
Speaker Change: As a reminder, our results include not only the independent tax offices but also tax partnerships.
Speaker Change: For the six months ended March 31st, 2025, we increased non-interest income related to refund transfer products and refund advanced products by 13% each.
Speaker Change: Refund Advanced Origination increased over $100 million this year, representing 7% growth. This brought total tax services revenues to $85 million, growth of 17% when compared to the prior year period.
Speaker Change: Laws rates are also favorable when compared to last year due to our continued work on our underwriting models and data usage to originate refund advances, so the slight dollar increase and provision you see in our results is by and driven.
Speaker Change: Free Tax Income for Tax Services grew 29% to $47.6 million, and we are very pleased that this team has been able to produce stable growth and solid results
Speaker Change: We continue to make significant progress on our strategy of optimizing the balance sheet.
Speaker Change: Last quarter, we entered into a strategic partnership to support renewable energy loan growth and that is going very well.
Speaker Change: This could be seen in our results with strong originations and structured finance during the quarter and a pipeline that continues to be robust.
Speaker Change: Our partner, Bridge Peak, brings strong industry experience to the table, and we expect that co-innovation in this partnership will accelerate efficient, scalable, and predictable growth within Pathor's Renewable Energy Initiative.
Speaker Change: During the quarter, we also took advantage of a premium in the marketplace and sold a portion of our working capital loan portfolio.
Speaker Change: Greg will go into more detail in a moment on how this further accelerates our optimization strategy.
Opportunities in the partner solutions pipeline remain strong.
Speaker Change: These deals can have protracted timelines and we are tracking each of them with precision and care.
Speaker Change: Our team is working hard to further the opportunities in front of us by tirelessly working with both new and existing clients to ensure we are providing them with the best solutions and capabilities to fit their needs.
Speaker Change: Our Credit Solutions team continues to explore growth and new opportunities.
Speaker Change: After the quarter ended, we signed a contract with a new partner to originate loans through their lending marketplace.
Speaker Change: Recently, we've talked about our strategy to be the trusted platform that enables our partners to thrive and how we intend to accomplish it.
Speaker Change: I've mentioned in a few places today how we are delivering on this and in order to continue delivering shareholder value, we stay laser focused on accomplishing these goals.
Greg Sigrist: Now, I'd like to turn it over to Greg who will take you through the financials and guidance in more detail.
Greg Sigrist: Thank you, Brett. We're very pleased with a record second quarter, which is characterized by solid revenue growth, particularly in net interest income and tax service revenues, while expenses continue to be well managed.
Greg Sigrist: Our focus on balance sheet optimization has contributed to our ability to do more with less.
Greg Sigrist: This can be seen in our net interest income, which grew 5% and was primarily driven by an improved earning asset mix and higher profitability.
Greg Sigrist: As a result, the net interest margin of 6.50% in the quarter increased from 6.23% in the prior year period and are adjusted net interest margin expanded 33 basis points.
Greg Sigrist: Provision in the quarter totaled roughly $30 million in line with volumes in tax refund advances and commercial finance.
Greg Sigrist: Non-interest income grew 7% from the prior year, driven primarily by higher secondary market revenues from loan sales and higher tax product fee income.
Parsley Offset by a Laws on Sale of Securities
Greg Sigrist: Secondary market revenues were elevated as we had an opportunity to sell the transportation portfolio within working capital, which was an addition to sales and structured finance.
Greg Sigrist: This also gave us an opportunity to further optimize the security's portfolio.
Greg Sigrist: We expect secondary market revenues to run in the $4 to $6 million range per quarter for the remainder of the year.
Greg Sigrist: These actions freed up close to $190 million in liquidity, which we would expect to redeploy by the end of the year into other asset classes with either higher risk adjusted returns or those with optionality and improved return on assets.
Greg Sigrist: It expenses in the quarter to grow $2.1 million in the prior year, reflecting a modest 1% increase.
Greg Sigrist: As we have mentioned previously, we continue to invest in our technology infrastructure and this can be seen in the occupancy and equipment expense line.
Greg Sigrist: This increase was partially offset by lower compensation and benefits, reflecting a modestly lower
Greg Sigrist: Deposits held on the company's balance sheet at March 31 declined from a year ago, and custodial deposits held at partner banks on March 31 were $1.1 billion, a slight decrease from $1.2 billion a year ago.
Greg Sigrist: The European Year decline in total deposit balances primarily reflects a return of EIP deposits to the Treasury Department during last year, as well as over $100 million fewer wholesale deposits on the balance sheet.
Greg Sigrist: Over the second quarter, the company averaged approximately $606 million in deposits at partner banks, compared to $780 million last year that are earning a rate roughly equal to the Fed funds rate.
Greg Sigrist: Loans and leases at March 31st were $4.5 billion, a slight increase from the $4.4 billion last year. This represents pretty significant growth since the prior year's total loan balance included insurance premium financial loans.
Greg Sigrist: If you exclude these balances in the prior year, loans and leases would have grown 15% year over year.
Greg Sigrist: We are not seeing signs of economic slowdown in our portfolio and performance methods remain within our historical ranges.
Greg Sigrist: Our allowance for credit losses, excluding our seasonal tax service lending, was 101 basis points in the quarter, with an annualized net charge operate in the quarter of 61 basis points.
Greg Sigrist: Our liquidity remains strong, with almost $3.9 billion available. This is higher than where we were last year at this time, and we're extremely pleased with our position.
Greg Sigrist: The strong performance during the quarter allowed us to be opportunistic with our share of As a result, we repurchased roughly 576,000 shares at an average price of $78.11
This brings year-to-date repurchases to almost 1.3 million shares.
Greg Sigrist: As Brett mentioned, we are revising our fiscal year 2025 EPS guidance range to $7.40 to $7.80.
Let's include the following assumptions.
No rate cuts for the remainder of the year.
Greg Sigrist: We expect net interest margins to exceed those at fiscal year 2024 as a result of our Boundary Optimization.
Greg Sigrist: We now expect an effective tax rate of 17 to 21 percent.
Greg Sigrist: Guidance also includes expected share repurchases, and lastly, we would expect expenses to be well managed in the back half of the year, so we will continue to invest in technology as well as risk-reliant compliance.
Greg Sigrist: If you would like to ask a question, please press star followed by one on your telephone keypad. If you're any reason you'd like to remove that question, please press star followed by two. Again, to ask a question at a star one.
Speaker Change: Our first question is from Frank Schiraldi with Piper Sandler. Your line is now open.
Hey, good afternoon.
If you guys, uh, will you think about...
Speaker Change: It seems like the tax business, you know, was obviously or is highly scalable here. I just wondered at that
Speaker Change: You know, how are you would characterize that going forward? Does that continue to be the case and as you look?
Speaker Change: out at the competitive landscape out there, any confidence around continuing to grow those independent tax offices at a continued good clip here as we think about next tax season.
Speaker Change: Yeah, thanks, Frank. You know that the tax business is the last four or five seasons. We've kind of continued to improve our operational effectiveness, our penetration in market share, etc.
Speaker Change: So, I mean, I think we will continue to do well in that business. I don't know that year over year we're going to continue this.
to show the increases that we did this year.
Speaker Change: but we had a good year and we continue to improve our operations in our underwriting models. And so positive on a continuing maybe just not growth as fast as it is this year.
We're good.
Appreciate that, and then just...
Just general thoughts on the commercial finance business here.
The macro environment, obviously some significant uncertainty there.
Speaker Change: As you can just talk about how you get comfortable, if there's areas that you're shying away from, you know, obviously, so I contract the contraction in the factoring and as a based category, it's just trying to get a sense for your thoughts around growth.
Speaker Change: from here, just given all the uncertainty out there.
Speaker Change: You know, it's interesting. Of course, we see the same uncertainty and that that impacts the way we think about for looking guidance, et cetera. We're not seeing, you know, any deterioration at all in the credit quality that we have.
Even the same client funding is still staying pretty good.
Speaker Change: One of the things that is starting to happen that is an indicator of perhaps some tightening is we're getting more and more looks at transactions in our pipeline that previously would have been done by traditional C&I.
and so we are seeing some of that.
Speaker Change: Remember, in a downturn, that is actually when our working capital group will do the best.
because...
Speaker Change: He'll be more higher quality companies coming in the door to us because they've been turned away from a traditional CNI, so...
Speaker Change: I'm pretty optimistic about that going forward, now we'll see how...
Speaker Change: For example, equipment lending, the cash flows, which are a higher rated credit, but we'll see kind of how that impacts over time, but again, very secured portfolio and not seeing any cracks whatsoever.
Okay. Great. And then just lastly on...
Speaker Change: A couple of return obviously continued to be aggressive on buybacks here, just given, you know, the focus is more on balance sheet optimization than growth, I would say, and just given that equity is overall pulled back and maybe...
Speaker Change: There's more value there. Any thoughts about further accelerations by-back program? You know, I guess could you could you talk about what you target or what you expect to target from here in terms of?
Capital Return in terms of percentages of total income.
Speaker Change: Yeah, Frank's fake, thanks Frank, appreciate the question. We had originally earlier this year thought we were going to slow down a little bit and take that payout ratio down to, you know, it's called a 70%, but...
Speaker Change: You know, the one metric we are looking at, we're consciously trying to just grow a bit more capital on the balance sheet but your point, we're not looking to grow the total assets. It's really just that additional layer of operational capital. And as a result, we're really targeting it to your one leverage ratio, probably closer to 10%.
Speaker Change: And just with the profitability we've had, we felt that we could keep our buybacks at the current level they were running and get us to that level by the end of the year. So it's a good story for us because we can get to that capital target without really having to slow down the buybacks.
Speaker Change: As a result, I think you're going to see buybacks stay in that range of 80-90% for the balance of the year and obviously we'll have to see beyond that but I feel really confident we can continue to do that this year.
Great. Okay. Appreciate the color. Thanks.
You got a quick thing? Hi, you.
Speaker Change: Our next question is from Joe Yalkinus with Raymond James, the line is not open.
Good afternoon.
Hey Joe, welcome.
Thank you.
Speaker Change: So I kind of wanted to ask what a phrase question a little bit different way so
Speaker Change: Given the amount of payment volume that runs through your company, have you seen any particular change in activity or behavior since liberation day?
Speaker Change: No, not at all. And I think, you know, one of the things you have to remember about our book of business with our partners
Speaker Change: is a large percentage of it is the bottom of the economy.
Speaker Change: and so this is groceries, this is gas, this is those kinds of things.
This is not-
Speaker Change: He changed his measurable in that and really wouldn't expect to regardless of the economic circumstances because even when people don't have jobs and they have benefit payments and they're still buying gas and they're still buying groceries.
Thank you.
Understood.
Speaker Change: Um, and then kind of pivoting over here. So in your prepared remarks, you discuss the signing of a new partnership to
Speaker Change: Can you provide a little more color on that partnership and what kind of loads will be the focus?
We have several of these barters that do...
Speaker Change: You know, online consumer term loans that can be anywhere from, you know, six months to five years.
Speaker Change: and so that's the nature of them. They tend to be near prime slash subprime but what you need to remember in that is that there is a very much of waterfall approach to any exposure to credit losses.
Speaker Change: but this is very similar to other partnerships we've been doing for a lot of years and so we've got a lot of confidence in it and we watch it very closely and not expecting any problems.
Alright, we'll finish rotating my questions.
Thank you.
Speaker Change: Our next question is from Tim Switzer with KVW. Your line is now open.
Hey, good afternoon. Thank you for taking my question.
Hey Tim.
Speaker Change: The first question I have is in regards to the margin outlook, particularly...
The adjusted margin and your slide indicates that...
Speaker Change: There really isn't much of an impact to the margin regardless of where rates move. Can you guys kind of walk us through the puts and takes there, though, if we do see maybe more cuts than expected, on how that would impact reported an I.I. and adjusted number.
Speaker Change: Yeah, sure Tim, happy to take that one. I think kind of walking through it. I think the story remains the same as what we talked about the last couple of quarters, right?
Speaker Change: The number I recall pre-tax is maybe $500,000 annual impact, so you'd have to have quite a few of those stacked on top of each other plus have a few other things, you know, change in our balance sheet composition to have any measurable impact. So the overnight rate, over time, just steepens the curve, which is a benefit to us.
Speaker Change: as we can and as we think it's appropriate. Obviously this quarter we took an opportunity to
Speaker Change: Sell a bit of our working capital line, which freed up 190 million. That's going to be in addition to roughly 200 million of securities, you know, principal paydowns this next 12 months.
Speaker Change: which gives us, you know, add it up a little under 400 million of additional powder that we can deploy.
Speaker Change: You're coming off of really low roll off yields on all of that and we're going to be able to redeploy that in part into duration assets, duration loans.
Speaker Change: which is going to continue to give us stability in the interest margin and the adjusted margin. So when I kind of add all that together, I mean I think we're pretty close to neutral.
Speaker Change: in terms of, you know, how we're in managing the balance sheet, but also how I think the rate environment, a realistic set of rate environment assumptions could play into that adjusted margin over the next couple of quarters. I hope that helps.
Speaker Change: Yeah, that was really helpful. Thank you. And there's been a lot of disruption in the past space.
Speaker Change: with some smaller competitors looking to exit or pull back at least.
Speaker Change: There's another competitor exploring strategic alternatives. Has this created any opportunities for you that you would be interested pursuing, maybe acquiring some new programs or portfolios, entire business lines, and it's kind of your approach to this right now?
Speaker Change: Yeah, I mean for the most part, our approach has been, you know, our phone is ringing and our pipeline is full.
Speaker Change: and the approach would be, you know, don't buy what will actually come to you anyway. So we're continuing to see that and a lot of things you're talking about are happening that's creating some opportunities for us.
Speaker Change: and we can kind of pick and choose what we want to take and what makes sense and what doesn't. So I expect that to continue for a while just because of where we are in the regulatory cycle and fast and the market dynamics that are happening that you just have.
Yeah, makes a lot of sense. Thank you.
Speaker Change: There are no more questions waiting at this time, so I'll pass call back over to the management team.
Speaker Change: Brett Pharr, thank you for joining today. Have a great day.
Speaker Change: That includes the conference call. Thank you for your participation. Enjoy the rest of your day.