Pathward Financial, Inc. Q3 FY2025 earnings call

• Balance Sheet Optimization: Focus on assets with high risk-adjusted return or optionality to drive fee income growth. Commercial business operates in niche markets with collateral management capabilities, seeing strong originations in commercial finance.
• Technology Investment: Investing in technology to scale product offerings, with Partner Solutions pipeline strong (11 opportunities to expand products this year), and acquiring product achieving triple-digit revenue growth. A multiyear deal with Checkout.com was signed.
• People and Culture: Named best company to work for by U.S. News and World Report and Great Place to Work Certified 3 years in a row, driven by purpose, financial inclusion, and community giving.
• Risk and Compliance: Mature risk and compliance infrastructure with three lines of defense, navigating the regulatory environment.
• Tax Solutions: Strong performance, with agreements in place with tax software partners, including a renewed relationship with a large provider for an expanded partnership.

Net interest margin in the third quarter was 7.43%, with adjusted net interest margin at 5.98%, both expanding from the prior year. Noninterest income grew 11% year-over-year. Deposits on the company's balance sheet at June 30 declined from the prior year, while custodial deposits at partner banks increased to $431 million. Loans and leases at June 30 increased, with commercial finance loan yield at 9.55% in the quarter compared to 8.24% in the March quarter. Allowance for credit loss was 160 basis points, with an annualized net charge-off rate of 52 basis points. Liquidity remained strong with nearly $2.7 billion available.

• Preliminary EPS range for fiscal 2025 is $7.50 to $7.80, assuming one rate cut in fiscal Q4 2025 and an effective tax rate of 16%-20%.
• Preliminary EPS range for fiscal 2026 is $8.25 to $8.75, assuming no rate cuts during the year and an effective tax rate of 18%-22%, with expected share repurchases. Accounting change impacts show lower income in 2022-2023 due to provisions, higher income in 2024 as portfolios stabilize, and muted impact in Q4 2025 and fiscal year 2026.

• Accounting restatement process has been a distraction, requiring work back through 13 quarters and redrafting filings. Potential for lower income in prior years due to provisions and benefit of credit enhancements in future years being pulled forward.

Q: Discuss how much of a distraction the accounting change has been for management and when new filings could be expected.

A: The accounting methodology is mostly behind us, in the middle to later innings of the restatement process. We're comfortable with the methodologies and have put out preliminary numbers with an 8-quarter table showing new balance sheet and income statement with the new accounting.

Q: Quantify incremental expenses associated with the accounting change and earnings pull forward from prior periods to future periods.

A: Lower income in 2022-2023 due to provisions, with benefit of credit enhancements hitting inflection in 2024. Detailed impacts will be in the restated 10-K.

Q: Provide more color on credit quality degradation in the quarter.

A: NPL increase was due to three episodic events in different loan verticals, all well-collateralized, and we focus on the net charge-off rate rather than NPL ratio.

Q: Discuss AI strategy and P&L impact.

A: AI used for efficiency in office tools and software engineering, with no immediate P&L impact in the near term, but long-term cost efficiency potential.

Q: Talk about crypto-related partners and products.

A: Provide access devices for crypto wallets, evaluating crypto-related products, focusing on consumer transactions and B2B/B2C use cases.

Q: Update on partner pipeline in Banking-as-a-Service and embedded finance.

A: Pipeline strong with 11 contracts this year, consumer lending and marketplace sponsorship strong, embedded finance farther out in the pipeline.

Q: Discuss expectations for continuing share repurchases.

A: Continued share repurchases expected, with ~1.9 million shares repurchased year-to-date, expected to continue but in a muted range moving forward