Ladies and gentlemen thank you for standing by and welcome to Pathward Financial’s Fourth Quarter and Fiscal Year 2024 Investor Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Thank you, operator and welcome. With me today are Pathward Financial’s CEO, Brett Pharr; and CFO, Greg Sigrist, who will discuss our operating and financial results for the fourth quarter and full fiscal year of 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, maybe 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 statements.

Please refer to the cautionary language in the earnings release, investor presentation and in the company’s filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statements.

Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are 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. 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..

Next. Finally, our experience in the industry has allowed us to build our risk and compliance framework into what we believe is a competitive advantage.

In fact, the recently announced extension of our partnership with MoneyLion through 2029 was driven in part by their acknowledgment of our mature compliance culture and deep knowledge of the regulatory landscape. We’ve done a lot of work in fiscal 2024 to execute on our strategy, and we believe this has laid the groundwork for a successful future.

As a result, we are increasing our fiscal 2025 guidance for earnings per diluted share to $7.10 to $7.60, which does not include the impact of the sale of our commercial insurance premium finance business. Now I’d like to turn it over to Greg, who will take you through the financials and guidance in more detail..

Thank you, Brett. Net income for the quarter ended September 30 was $33.6 million, or $1.35 per diluted share. As has been the case all year, net interest income in the quarter was the driver of our results, growing 10% when compared to the prior year quarter. For the full year, net interest income grew 17%.

The fourth quarter net interest margin of 6.66% and adjusted net interest margin of 5.15%, both expanded sequentially from the third quarter of 2024. This was largely due to an increase in our loan and lease yields, combined with the continued rotation from the securities portfolio, which contributed to a mix shift into higher earning assets.

The new production yield on all commercial finance loans and leases in the quarter was 8.82%, compared to the quarterly yield on the same portfolio from last quarter of 8.39%. This performance is a direct result of our focus on risk-adjusted returns and ROAs.

We are very pleased with what the team has been able to accomplish and look forward to continuing to benefit from this focus moving into 2025.

Provision for credit losses was approximately $800,000 and compares to $9 million for the same quarter last year, with the decrease primarily stemming from reductions in the commercial finance portfolio and the tax services portfolio. A portion of the commercial finance reduction is related to the sale of our insurance premium finance business.

During the quarter, we moved these loans into a held-for-sale status from an accounting perspective, which reverses the provision for credit losses. In tax services, the provision benefited from work we did prior to last year’s tax season to enhance data analytics, underwriting and monitoring.

For the year, provision for credit loss was $42.6 million, a 26% decrease from the prior year, demonstrating our ongoing discipline and strength in our collateral managed credit process and enhancements made within our independent tax business.

Non-interest income declined when compared to the prior year’s quarter, primarily due to a decrease in card and deposit fee income. This was largely driven by lower servicing fee income due to lower average levels of off-balance sheet custodial deposits during the quarter, as we set EIP funds back to the U.S. Treasury throughout the year.

The decline in non-interest income in the fourth quarter was partially offset by an increase in gain on sale of other, which was driven by our decision to sell some of our structured finance loans, reflecting our balance sheet velocity strategy.

For the full year, non-interest income also declined, primarily due to lower servicing fee income from off-balance sheet custodial deposits. Total non-interest expense increased versus the same quarter last year, primarily due to increases in compensation and benefits and higher rate-related card processing expenses.

The year-over-year increase in comp and benefits was partially driven by adding nearly 50 FTEs. The sequential increase in compensation and benefits was primarily due to net new FTEs during the quarter and several onetime items, including true-ups.

On a go-forward basis, after adding in the impact of annual compensation adjustments for 2025, we expect the quarterly compensation and benefits expense run rate to settle in roughly $1 million lower than the fourth quarter. The second quarter will be elevated due to the seasonal impact of tax season.

The remaining non-interest expenses also include transaction costs associated with the sale of our commercial insurance premium finance business and some in-period technology expenses that we would not expect to recur. Deposits on balance sheet at September 30 totaled $5.9 billion, a decrease of over $700 million from a year ago.

However, if you look at average deposit balances over the quarter, the change was nearly flat versus last year’s quarter as ending spot balances were impacted by normal flows in some of our programs. Off-balance sheet custodial deposits held at partner banks at September 30 totaled $202 million compared to $268 million last year.

This declined approximately $150 million from the end of the June quarter, primarily due to the normal seasonal trend downward with the end of the September quarter typically being the lowest point. Total loans and leases at September 30 were $4.1 billion, a decrease of $290 million from a year ago.

During the quarter, we moved approximately $600 million of loans associated with our insurance premium finance business to held for sale, decreasing this balance.

If you exclude the commercial insurance premium finance business, loan balances when comparing this quarter to the September quarter of fiscal ‘23, we grew loans and leases by over $500 million. This is primarily due to growth in structured finance and working capital.

Compared to the end of last quarter, total loans decreased approximately $500 million. Again, if you exclude the impact of the insurance premium finance sale, total loans and leases increased approximately $80 million. Our liquidity remains in a strong position with approximately $2.1 billion in available liquidity.

As this is typically our seasonal low point from a deposit perspective, we feel very good about where we sit today. As Brett mentioned, optimizing the balance sheet will continue as a result of our desire to stay below $10 billion in assets.

Finally, during the quarter, we repurchased approximately 236,000 shares at an average share price of $63.44, bringing us to just over 1.5 million shares repurchased during the fiscal year. We are increasing our fiscal year 2025 GAAP earnings per diluted share guidance to a range of $7.10 to $7.60. This includes a number of assumptions.

We have built in two 25 basis point rate cuts, one in November and the second in December. In addition, we have incorporated the September 30 consensus rates for the middle part of the interest rate curve, which is roughly 50 basis points below where rates are today. As you know, there’s been much volatility along the curve.

So our guidance anticipates a range of possible rate scenarios. We expect net interest margins to exceed those of fiscal ‘24 as a result of our strategy to optimize the balance sheet. We expect an effective tax rate of 18% to 22% for the year based on lower expected investment tax credit volumes.

We are seeing lower volumes in this area due to an evolving market and increased competition. As Brett mentioned, this guidance does not include the impact of the sale of our insurance premium finance business. We expect the transaction to be accretive to fiscal year 2025 and intend to update our guidance following the close of the transaction.

In addition, it is still our intent to utilize the gain to optimize our securities portfolio. The combination of these two actions could be as much as $0.40 accretive to earnings per diluted shares in years after fiscal 2025, as redeployment of the capital and liquidity should take between 12 to 18 months.

The impact to fiscal 2025 will obviously be less than the full year impact and depends on a number of factors. But again, we will update you on that after the close of the transaction. Guidance also includes expected share repurchases. We have started to see the pull-through of our Partner Solutions pipeline.

But remember, these contracts have an implementation time line, so any deal signed now would likely impact the latter part of this fiscal year and into 2026 and beyond. As a result, we expect our quarterly results to follow our typical seasonality, but growth in earnings will be more weighted toward the back half of the year.

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

[Operator Instructions] Our first question comes from the line of David Feaster with Raymond James..

Hi. Good afternoon everybody..

Hi David..

Doing great. Let’s start on kind of your last commentary on the updated guidance.

I am curious maybe, what are some of the key factors from your standpoint to get you to the top end of the bottom? And then assuming additional cuts, how do you think that would impact guidance? And does the guidance include that securities restructuring like you were talking about, or is that part of the premium finance sale that’s excluded?.

Well, I will try to take all 14 of those questions..

Sorry, I have a lot in there..

I think the rate, let me – let’s start with the rates, right. I mean as I have said, we had two front-end curve rate cuts this fiscal year, this calendar year still. And we pulled in the consensus curve from, I think it was effectively October 1st.

And that, as you know most of our loans are going to re-price and a lot of the work we are doing on balance sheet strategy is going to re-price along the middle part of the curve, that 3-year to 5-year, which frankly, we are pretty substantially higher today than we were when we – versus the curve we used.

And you have heard me say it many times, the bond market has been wrong pretty consistently for the last couple of years, so which is why we run a number of scenarios here. Now, the way I think about the short end of the curve is we are still pretty close to neutral, but each 25 basis point rate cut does have a modest negative impact to us.

And it’s not completely linear. We do have some consumer finance programs that actually would hit break points after each like, for example, 100 basis points now. But the point though is, the pace of cuts will matter. If there are more cuts later in the year, obviously, muted impact on this year.

But typically, though the overnight cuts, we can mitigate that just through ongoing balance sheet management, including some of the balance sheet velocity work we are doing, which includes gain on sales of the structured finance book.

The middle part of the curve, again, as long as we stay above where the rates were when a lot of those loans were put on the remaining loans in 2021 and 2022, we have got a pretty long runway there from a rate perspective. So, part of this is going to depend upon the rate curve.

For the things we can control, which are in part includes the pipelines, pipelines are strong. Commercial finance pipeline, we are very pleased with it, really across all the verticals we talk about.

And I think Brett has already touched on the successes we have had so far this quarter, even once just in the last couple of days, the last week or so around pulling through on the Partner Solutions pipeline, David.

So, again, I think it’s just – part of it is the timing on when the pipeline sit, particularly on the Partner Solutions side, and then where the rate environment goes. But again, we have – we feel like we have all the tools we need from a balance sheet strategy perspective to keep pushing it up..

And David, I think you had a question about securities portfolio as well. So, key to understand this guidance does not include the IPF sale nor the impact on the securities portfolio associated with that.

That being said, and listen carefully to Greg’s comments, while we know there is going to be an EPS benefit over time, that’s not immediate because you are taking the assets off of the balance sheet, and then you will appropriately and with great stewardship add them back.

And I think we are talking about a 12-month to 18-month cycle before we get the full benefit of that. But none of that is in our guidance. Our slight guidance increase is related to the pipeline and interest rates..

And just the general momentum that we are starting to see behind all businesses, which is great..

Yes..

Okay. That is terrific color. And then I guess to that point, I mean let’s touch on the pipeline of partners. And is the strength that you are seeing, is that from the existing partners that you have? And then just kind of what is the pipeline of new partners, the pace of inquiries? And it’s also great to see the extension of some of these.

You talked about the tax business, and we saw MoneyLion. Kind of curious just how some of those negotiations are going upon renewal and just kind of the pipeline for partners..

Yes. So, I mean this is coming both from existing partners wanting to do more programs and new products with their same customers, which has been a migration that’s been going on the last several years and is really, really important. But it’s also come from new people coming to us who already have a book of business.

And we have talked for a while about the dislocation that’s occurring in the third-party delivery banking services and that impact. We have been saying for several quarters, our pipeline is stronger than it’s ever been. We are adding to that not only is the pipeline stronger than it’s ever been, but we have closed some transactions.

And that’s the difference this quarter you should recognize..

Okay. That’s great. And then we have – I just want to touch on the plans post the loan sale. We moved the timeline back a little bit, but has there been any change – talk to the 12 months to 18 months.

What are some of the – I mean where do you see the most opportunity to deploy that liquidity and kind of the pace to do it? And then how does the change in rates impact that if we start seeing gain on sale margins starting to improve like in SBA? It does look like your SBA held for sale started to increase a little bit.

I didn’t know if your thoughts on selling production versus retaining had shifted at all just kind of – given some of that, so kind of another big question, sorry..

Yes. I mean I think there is a lot of variety there. In a perfect world, our commercial finance pipeline, delivery and other asset deliveries will give us higher-yielding assets that we can put on the balance sheet over time with appropriate credit structures, etcetera, and we will do that.

Now, we will look at the securities portfolio, and we will do things there that we need to or appropriate. But I am most excited about the opportunity to put on some of our higher-yielding assets with all the appropriate capabilities and controls that we have during this timeframe. So, that’s what I am talking about.

But as you know, it takes time to build that and go through it. And that’s why we are not going to go run out and immediately try to put a bunch of assets on the balance sheet. And we are doing this as part of an active asset rotation. The other thing I would say about SBA, USDA, we are increasingly wanting to create a flow business.

Now, sometimes that depends on rates and markets and all those things, and we will make those appropriate decisions. But being able to have a balance sheet that you can expand or contract based on opportunities to take things in the flow market, that’s a key part of our future..

Yes. The only other thing I would add is the outcome around what Brett had mentioned on in terms of the opportunities. We would be swapping out what is effectively a short-duration asset, the loan book for IPF. Those loans were priced inside of 12 months and over time, to a large degree, taking duration in the loan book.

So, from an IRR perspective, David, I think there is part of how we intend to manage rates on a longer term basis here, which gives us a bit more comfort that particularly if the short end of the curve is going to come down and the middle part of the curve stays within a relative range, it’s going to give us a bit more tailwind in terms of managing NIM than otherwise, we otherwise would have..

Okay. That’s helpful. Thank you..

Our next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open..

Great. Good afternoon. Just wanted to follow-up on a couple of, in terms of the – I just want to make sure I understand. In terms of the Partner Solutions growth, so the pipeline is really strong, but you have added some new business.

And so I guess the idea would be that the bottom line impact or bottom line growth in this business should accelerate a bit in the back half of 2025 as those partnerships start driving revenue?.

Yes, that’s right. And as we said, it takes a little time for it to come on, and our guidance assumes a good chunk of that comes in the back half of the year as these revenue-producing programs come online..

Okay. And then just in terms of – obviously, you have got the premium finance sale and looking to grow the book in and around that over a 12-month to 18-month period.

And I guess I am just trying to – want to make sure I understand, the pipeline in the commercial finance book, would you say that – is that still sort of high-single digits, low-double digits? Is that sort of the range of growth you anticipate in that commercial book?.

Yes. I mean where we are today, I think we are low-single digits. I think we are probably at least 10%, but potentially 10% to 15% is the range I am looking at right now. I think we have a lot of opportunities there. But even if we don’t close or if the transaction wasn’t on the table, I think that the pipelines are pretty full.

So, that’s part of the reason why the transaction itself is going to take 12 months to 18 months. And it goes back to Brett’s point, you can’t push the pipelines, particularly over the next couple of months to be any bigger than they already are. You need to be prudent with it.

But just to tie the two concepts together, it’s going to be, I think low-double digits, but it’s going to take some time just to have that consistent trajectory of building that pipeline out later into the year after the IPF transaction closes..

Okay. And I guess that it looked like structured finance was a big driver this quarter.

I guess that should be a blend going forward of the working capital and structured finance as those are two biggest drivers?.

Yes. That and SBA is in there, too..

Yes..

Okay. And then just Brett, I think you mentioned a secured credit product. So, I know the consumer side of things is a lot smaller piece of the pie.

What do you think that looks like in a year’s time in terms of sort of similar piece of the pie and that secured credit product and maybe some other growth kind of helps that keep pace, that sub-10% of the total book I think it is.

Where should we expect to see maybe consumer finance footings in a year or 2 years time?.

Yes. I mean the consumer loan marketplace lending kinds of products, we have had some pretty good growth in that arena. Now again, remind you about all the waterfall credit protections and all those elements that are in there.

And there is – in our third-party delivery, there is very careful compliance kinds of controls in that space that are important. But yes, I would – I could see it going up some from where it is, but not becoming a materially larger part of our total balance sheet..

Okay. Great. And then if I could just sneak in one last one. Just on the updated guide, $7.10 to $7.60.

In terms of thinking about levers to get you to the bottom or the top end of that, is the biggest lever just that middle part of the curve? And Greg, it sounds like you have baked in essentially 50 basis points of reduction in the middle part of that curve. I guess that’s sort of midyear.

And so if it’s less, you kind of get to the – all else equal, towards the higher end, if it’s more contraction towards the lower end, is that the best way to think about drivers – in terms of drivers of that range?.

Yes, particularly the drivers we can’t control. I think we are going to be a taker one that one, but the slopes are our friend, right. To the extent we have – there is an increasing slope in the curve and that’s sustained and the short end comes down, that’s really the key here.

And if that trend continues, you look at the rates today versus a month ago or four months ago, that continued trend towards slope is what’s going to drive us higher in the range versus lower relative to the rate environment.

Then I think the pace of pulling through the pipelines on really, frankly, both commercial finance as well as in Partner Solutions is the other lever that we, again just to a large degree, have some control over. But those are the ones that come to my mind..

Okay. Alright. Great. Thank you..

Thank you..

Thanks Frank..

Thank you for your questions. That concludes the Pathward Financial’s fourth quarter and full fiscal year 2024 investor conference call. Thank you. You may now disconnect..