Pathward Financial, Inc. Announces Results for 2024 Fiscal Second Quarter

Pathward Financial, Inc. ("Pathward Financial" or the "Company") (NASDAQ:CASH) reported net income of $65.3 million, or $2.56 per share, for the three months ended March 31, 2024, compared to net income of $54.8 million, or $1.99 per share, for the three months ended March 31, 2023. For the fiscal quarter ended March 31, 2023, the Company recognized adjusted net income of $60.3 million, or $2.18 per share, when adjusting for the adverse financial impacts related to legacy mobile solar transactions and a venture capital investment impairment expense. See non-GAAP reconciliation table below.

CEO Brett Pharr said, "We continue to produce strong results by focusing on risk adjusted returns, enhancing our Banking as a Service offerings, and spending the off-season in tax services improving our data analytics, underwriting and monitoring processes. We delivered significant growth in net income and earnings per share through solid performance across the enterprise. The Pathward team continues to perform by maintaining our culture, focusing on risk and compliance, working closely with our partners, and embodying our purpose of financial inclusion. I am excited to be a part of this company and for what we can create in the future."

Company Highlights

• On February 27, 2024, the Board of Directors (the "Board") of Pathward Financial appointed Neeraj Mehta as a member of the Board.
• On April 3, 2024, Pathward^®, N.A. announced it became Certified™ by Great Place to Work^® for the second year in a row. Great Place to Work describes itself as the global authority on workplace culture, employee experience, and the leadership behaviors proven to deliver market-leading revenue, employee retention and increased innovation.

Financial Highlights for the 2024 Fiscal Second Quarter

• Total revenue for the second quarter was $247.2 million, an increase of $18.8 million, or 8%, compared to the same quarter in fiscal 2023, driven by an increase in both net interest income and noninterest income.
• Net interest margin ("NIM") increased 11 basis points to 6.23% for the second quarter from 6.12% during the same period last year, primarily driven by increased yields on earning assets and an improved earning asset mix from the continued optimization of the portfolio. When including contractual, rate-related processing expense, NIM would have been 4.65% in the fiscal 2024 second quarter compared to 4.89% during the fiscal 2023 second quarter due to increases in rate-related card processing expenses from a higher rate environment. Servicing fee income on off-balance sheet deposits is not included in this calculation. See non-GAAP reconciliation table below.
• Total gross loans and leases at March 31, 2024 increased $683.8 million to $4.41 billion compared to March 31, 2023 and decreased $16.9 million when compared to December 31, 2023. The increase compared to the prior year quarter was due to growth across all loan portfolios. The primary driver for the sequential decrease was a reduction in the commercial and consumer finance loan portfolios, partially offset by growth in the warehouse finance and seasonal tax services loan portfolios.
• During the 2024 fiscal second quarter, the Company repurchased 764,185 shares of common stock at an average share price of $51.20. An additional 100,990 shares of common stock were repurchased at an average price of $49.47 in April 2024 through April 15, 2024. As of April 15, 2024, there were 7,568,673 shares available for repurchase under the current common stock share repurchase programs.
• The Company is narrowing its fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.30 to $6.60. See Outlook section below.

Tax Season

For the six months ended March 31, 2024, total tax services product revenue was $72.9 million, an increase of 1% compared to the same period of the prior year. Total tax services product fee income increased marginally compared to the prior year, while total tax services product expense and net interest income on tax services loans decreased.

Provision for credit losses for tax services portfolio decreased $6.5 million for the six months ended March 31, 2024 when compared to the same period of the prior year, due to improvements in data analytics, underwriting and monitoring.

Total tax services product income, net of losses and direct product expenses, increased 24% to $36.9 million from $29.7 million, when comparing the first six months of fiscal 2024 to the same period of the prior fiscal year.

For the 2024 tax season through March 31, 2024, Pathward originated $1.56 billion in refund advance loans compared to $1.46 billion during the 2023 tax season.

Net Interest Income

Net interest income for the second quarter of fiscal 2024 was $118.3 million, an increase of 17% from the same quarter in fiscal 2023. The increase was mainly attributable to increased yields, higher average interest-earning asset balances and an improved earning asset mix.

The Company's average interest-earning assets for the second quarter of fiscal 2024 increased by $917.9 million to $7.64 billion compared to the same quarter in fiscal 2023, primarily due to growth in loans and leases and an increase in cash balances, partially offset by a decrease in total investment security balances. The second quarter average outstanding balance of loans and leases increased $889.1 million compared to the same quarter of the prior fiscal year, primarily due to an increase across all loan portfolios.

Fiscal 2024 second quarter NIM increased to 6.23% from 6.12% in the second fiscal quarter of last year. When including contractual, rate-related processing expense, NIM would have been 4.65% in the fiscal 2024 second quarter compared to 4.89% during the fiscal 2023 second quarter. See non-GAAP reconciliation table below. The overall reported tax-equivalent yield ("TEY") on average earning asset yields increased 35 basis points to 6.69% compared to the prior year quarter, driven by an improved earning asset mix. The yield on the loan and lease portfolio was 8.43% compared to 8.47% for the comparable period last year and the TEY on the securities portfolio was 3.20% compared to 2.89% over that same period.

The Company's cost of funds for all deposits and borrowings averaged 0.47% during the fiscal 2024 second quarter, as compared to 0.21% during the prior year quarter. The Company's overall cost of deposits was 0.38% in the fiscal second quarter of 2024, as compared to 0.13% during the prior year quarter. When including contractual, rate-related processing expense, the Company's overall cost of deposits was 2.06% in the fiscal 2024 second quarter, as compared to 1.43% during the prior year quarter. See non-GAAP reconciliation table below.

Noninterest Income

Fiscal 2024 second quarter noninterest income increased 2% to $128.9 million, compared to $127.0 million for the same period of the prior year. The increase was primarily driven by an increase in refund advance fee income. The period-over-period increase was partially offset by a decrease in card and deposits fees.

The period-over-period decrease in card and deposit fee income was primarily related to servicing fee income on off-balance sheet deposits, which totaled $10.4 million during the 2024 fiscal second quarter, compared to $18.2 million for the same period of the prior year. The decrease in servicing fee income when compared to the prior year period was due to a reduction in off-balance sheet deposits. For the fiscal quarter ended December 31, 2023, servicing fee income on off-balance sheet deposits totaled $5.1 million.

Noninterest Expense

Noninterest expense increased 10% to $140.4 million for the fiscal 2024 second quarter, from $127.1 million for the same quarter last year. The increase was primarily attributable to increases in card processing expense, compensation and benefits expense, impairment expense, legal and consulting expense, and occupancy and equipment expense. The period-over-period increase was partially offset by decreases in operating lease equipment depreciation, other expense, refund transfer product expense, and intangible amortization expense.

The card processing expense increase was due to rate-related agreements with BaaS partners. The amount of expense paid under those agreements is based on an agreed upon rate index that varies depending on the deposit levels, floor rates, market conditions, and other performance conditions. Generally, this rate index is based on a percentage of the Effective Federal Funds Rate ("EFFR") and reprices immediately upon a change in the EFFR. Approximately 56% of the deposit portfolio was subject to these rate-related processing expenses during the fiscal 2024 second quarter. For the fiscal quarter ended March 31, 2024, contractual, rate-related processing expenses were $30.1 million, as compared to $26.8 million for the fiscal quarter ended December 31, 2023, and $20.4 million for the fiscal quarter ended March 31, 2023.

Income Tax Expense

The Company recorded income tax expense of $15.2 million, representing an effective tax rate of 18.9%, for the fiscal 2024 second quarter, compared to $9.2 million, representing an effective tax rate of 14.2%, for the second quarter last fiscal year. The current quarter increase in income tax expense compared to the prior year quarter was primarily due to increased earnings and also a decrease in investment tax credits recognized ratably when compared to the prior year quarter.

The Company originated $25.9 million in renewable energy leases during the fiscal 2024 second quarter, resulting in $7.0 million in total net investment tax credits. During the second quarter of fiscal 2023, the Company originated $18.1 million in renewable energy leases resulting in $4.9 million in total net investment tax credits. For the six months ended March 31, 2024, the Company originated $38.1 million in renewable energy leases, compared to $29.5 million for the comparable prior year period. Investment tax credits related to renewable energy leases are recognized ratably based on income throughout each fiscal year.

Outlook

The following forward-looking statements reflect the Company's expectations as of the date of this release and are subject to substantial uncertainty. The Company's results may be materially affected by many factors, such as changes in economic conditions and customer demand, changes in interest rates, adverse developments in the financial services industry generally, inflation, competition, and other factors detailed below under "Forward-looking Statements."

The Company is narrowing its fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.30 to $6.60. As part of this guidance, the Company is reiterating its expectation that the annual effective tax rate in fiscal year 2024 will be in a range between 16% and 20%.

Investments, Loans and Leases

The Company's investment security balances at March 31, 2024 totaled $1.81 billion, as compared to $1.89 billion at December 31, 2023 and $1.86 billion at March 31, 2023.

Total gross loans and leases totaled $4.41 billion at March 31, 2024, as compared to $4.43 billion at December 31, 2023 and $3.73 billion at March 31, 2023. The primary driver for the sequential decrease was a decrease in commercial finance loans and consumer finance loans. This was partially offset by an increase in warehouse finance loans and seasonal tax service loans. The year-over-year increase was due to growth across all loan portfolios.

Commercial finance loans, which comprised 83% of the Company's loan and lease portfolio, totaled $3.66 billion at March 31, 2024, reflecting a decrease of $78.4 million from December 31, 2023 and an increase of $523.4 million, or 17%, from March 31, 2023. The sequential decrease in commercial finance loans was primarily driven by a $148.1 million decrease in the insurance premium finance portfolio, a $20.3 million decrease in the lease financing portfolio, and a $11.6 million decrease in the other commercial finance portfolio, partially offset by increases in the asset-based lending, term lending, SBA/USDA, and factoring loan portfolios. The increase in commercial finance loans when comparing the current period to the same period of the prior year was primarily driven by increases in the term lending, SBA/USDA, insurance premium finance, and asset-based lending portfolios, partially offset by reductions in the factoring, lease financing, and other commercial finance portfolios.

Asset Quality

The Company's allowance for credit losses ("ACL") totaled $80.8 million at March 31, 2024, an increase compared to $53.8 million at December 31, 2023 and a decrease compared to $84.3 million at March 31, 2023. The increase in the ACL at March 31, 2024, when compared to December 31, 2023, was primarily due to a $31.0 million increase in the allowance related to the seasonal tax services portfolio, partially offset by a $4.3 million decrease in the allowance related to the commercial finance portfolio.

The $3.5 million year-over-year decrease in the ACL was primarily driven by a $3.6 million decrease in the allowance related to the commercial finance portfolio and a $1.5 million decrease in the allowance related to the seasonal tax services portfolio, partially offset by a $1.6 million increase in the allowance related to the consumer finance portfolio.

The following table presents the Company's ACL as a percentage of its total loans and leases.

The Company's ACL as a percentage of total loans and leases increased to 1.83% at March 31, 2024 from 1.22% at December 31, 2023. The increase in the total loans and leases coverage ratio was primarily driven by seasonality in both the tax services portfolio and consumer finance portfolio.

Activity in the allowance for credit losses for the periods presented was as follows.

The Company recognized a provision for credit losses of $26.1 million for the quarter ended March 31, 2024, compared to $36.8 million for the comparable period in the prior fiscal year. The period-over-period decrease in provision for credit losses was due to improvements in the Company's data analytics, underwriting and monitoring in the Independent Tax space along with a decrease in provision for credit losses in the commercial finance portfolio primarily due to a mix shift in the loan portfolio and a benign credit environment. The Company recognized net recoveries of $1.1 million for the quarter ended March 31, 2024, compared to net charge-offs of $5.0 million for the quarter ended March 31, 2023. Net charge-offs attributable to the commercial finance portfolio for the current quarter were $4.7 million, while recoveries of $5.8 million were recognized in the tax services portfolio. Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same quarter of the prior year were $5.9 million and $0.2 million, respectively, while a recovery of $1.1 million was recognized in the tax services portfolio.

The Company's past due loans and leases were as follows for the periods presented.

The Company's nonperforming assets at March 31, 2024 were $37.2 million, representing 0.50% of total assets, compared to $42.4 million, or 0.53% of total assets at December 31, 2023 and $30.1 million, or 0.44% of total assets at March 31, 2023.

The decrease in the nonperforming assets as a percentage of total assets at March 31, 2024 compared to December 31, 2023, was primarily driven by a decrease in nonperforming loans in the commercial finance portfolio, partially offset by an increase in nonperforming loans in the consumer finance portfolio. When comparing the current period to the same period of the prior year, the increase in nonperforming assets was primarily due to an increase in nonperforming loans in the commercial finance portfolio.

The Company's nonperforming loans and leases at March 31, 2024, were $34.4 million, representing 0.78% of total gross loans and leases, compared to $39.5 million, or 0.88% of total gross loans and leases at December 31, 2023 and $28.5 million, or 0.76% of total gross loans and leases at March 31, 2023.

The Company has various portfolios of consumer lending and tax services loans that present unique risks that are statistically managed. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The Company's loans and leases held for investment by asset classification were as follows for the periods presented.

Deposits, Borrowings and Other Liabilities

The average balance of total deposits and interest-bearing liabilities was $7.28 billion for the three-month period ended March 31, 2024, compared to $6.47 billion for the same period in the prior fiscal year, representing an increase of 13%. Total average deposits for the fiscal 2024 second quarter increased by $782.1 million to $7.17 billion compared to the same period in fiscal 2023. The increase in average deposits was due to increases in noninterest bearing deposits, wholesale deposits, and money market deposits, partially offset by decreases in savings and time deposits.

Total end-of-period deposits increased 8% to $6.37 billion at March 31, 2024, compared to $5.90 billion at March 31, 2023. The increase in end-of-period deposits was primarily driven by increases in noninterest-bearing deposits of $329.4 million, wholesale deposits of $96.1 million, and money market deposits of $53.7 million, partially offset by slight decreases in savings and time deposits.

As of March 31, 2024, the Company had $740.8 million in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $323.3 million are on activated cards while $417.5 million are on inactivated cards. During the remainder of fiscal year 2024, these deposit balances are expected to decline by approximately $219 million as the Company actively returns unclaimed balances to the U.S. Treasury.

As of March 31, 2024, the Company managed $1.2 billion of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn servicing fee income, typically reflective of the EFFR.

Regulatory Capital

The Company and its subsidiary Pathward^®, N.A. (the "Bank") remained above the federal regulatory minimum capital requirements at March 31, 2024, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies. Regulatory capital ratios of the Company and the Bank are stated in the table below. The decrease in Tier 1 leverage capital ratio for the period is the result of higher quarterly average assets related to the Company's seasonal tax business. The Bank's Tier 1 leverage capital ratio using end of period assets of 8.77% better reflects the expected capital position of the Company post tax season. See non-GAAP reconciliation table below. Regulatory capital is not affected by the unrealized loss on accumulated other comprehensive income ("AOCI"). The securities portfolio is primarily comprised of amortizing securities that should provide consistent cash flow. The Company does not intend to sell these securities, or recognize the unrealized losses on its income statement, to fund future loan growth.

The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis.

The following table provides the non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP:

Conference Call

The Company will host a conference call and earnings webcast with a corresponding presentation at 4:00 p.m. Central Time (5:00 p.m. Eastern Time) on Wednesday, April 24, 2024. The live webcast of the call can be accessed from Pathward's Investor Relations website at www.pathwardfinancial.com. Telephone participants may access the conference call by dialing 1-833-470-1428 approximately 10 minutes prior to start time and reference access code 082173.

The Quarterly Investor Update slide presentation prepared for use in connection with the Company's conference call and earnings webcast is available under the Presentations link in the Investor Relations - Events & Presentations section of the Company's website at www.pathwardfinancial.com. A webcast replay will also be archived at www.pathwardfinancial.com for one year.

Upcoming Investor Events

• Jefferies Global FinTech Conference, June 12, 2024 | New York, NY

About Pathward Financial, Inc.

Pathward Financial, Inc. (NASDAQ:CASH) is a U.S.-based financial holding company driven by its purpose to power financial inclusion for all. Through our subsidiary, Pathward^®, N.A., we strive to increase financial availability, choice, and opportunity across our Banking as a Service and Commercial Finance business lines. These strategic business lines provide end-to-end support to individuals and businesses. Learn more at www.pathwardfinancial.com.

Forward-Looking Statements

The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in this press release, the Company's filings with the Securities and Exchange Commission ("SEC"), the Company's reports to stockholders, and in other communications by the Company and the Bank, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

You can identify forward-looking statements by words such as "may," "hope," "will," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "continue," "could," "future," "target," or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other "forward-looking" information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company's beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results including our earnings per diluted share guidance, annual effective tax rate and related performance expectations; progress on key strategic initiatives; expected results of our partnerships; impacts of our improved data analytics, underwriting and monitoring processes; our goals regarding the addition of recurring revenue and related expected performance impacts; expected nonperforming loan resolutions and net charge off rates; the performance of our securities portfolio; the impact of card balances related to government stimulus programs; customer retention; loan and other product demand; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; and technology. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflicts in Ukraine and the Middle East, weather-related disasters, or public health events, such as pandemics, and any governmental or societal responses thereto; our ability to successfully implement measures designed to reduce expenses and increase efficiencies; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios; changes in tax laws; the strength of the United States' economy and the local economies in which the Company operates; adverse developments in the financial services industry generally such as bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; inflation, market, and monetary fluctuations; our liquidity and capital positions, including the sufficiency of our liquidity; the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value and acceptance of these products and services by users; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company's prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of the Bank's strategic partners' refund advance products; our relationship with, and any actions which may be initiated by, our regulators; changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company's business, as well as expenses related thereto; continued maintenance by the Bank of its status as a well-capitalized institution; changes in consumer borrowing, spending and saving habits; losses from fraudulent or illegal activity; technological risks and developments and cyber threats, attacks, or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this press release speak only as of the date hereof. Additional discussions of factors affecting the Company's business and prospects are reflected under the caption "Risk Factors" and in other sections of the Company's Annual Report on Form 10-K for the Company's fiscal year ended September 30, 2023, and in other filings made with the SEC. The Company expressly disclaims any intent or obligation to update, revise or clarify any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.

Average Balances, Interest Rates and Yields

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and in rates. Only the yield/rate reflects tax-equivalent adjustments. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.