CASH - Earnings call transcript Q3 2022 | Pathward Financial, Inc.

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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Pathward Financial Investor Conference Call for the Third Fiscal Quarter of 2022.

During the presentation, all participants will be in a listen-only mode.

Following the prepared remarks, we will conduct a question-and-answer session.

As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Justin Schempp, Vice President of Investor Relations and Financial Reporting. ahead. go Please

Justin Schempp

will welcome conference And company third quarter and fiscal changed throughout as Thank call. today's and Pathward webcast. XXXX we Financial, Pathward call name the to On of ourselves its such you. to Financial's refer July legally XX,

CEO, President, your take and questions. Anthony Our CFO, discuss will will Herrick Brett which and operating we Pharr; our financial Sharett; Glen results, after

investor presentation, site Additional may found information, release including Web the on at and pathwardfinancial.com. earnings our be

comments our to language future Those investor risks reminder, from As differ our to including forward-looking factors information respect no the earnings filings company that the statements actual cause company's include to the differ. a could to including additional presentation, with to could statements. undertakes in statement. recent the results obligation refer Securities may materially anticipated Exchange release, with statements, cause covering the filings subject and that forward-looking results periods. for anticipated to and The Please cautionary forward-looking and actual and update for uncertainties most Commission, are in results any

assist non-GAAP Additionally, are on this investor non-GAAP measures to may the of financial only within non-GAAP appendix measures and today, call. the the References presentation. provided Reconciliations be we conference company's understanding for such discussing certain you to results trends. in measures performance are included

turn me let the Now, CEO. Brett call to our over Pharr,

Brett Pharr

so their continued stage reach first, journey. fiscal our commitment our joining can path third host I Pathward next quarter for name, call pleased everyone, financial the and of to Financial's corporate people a providing which company's this using earnings you, our businesses forward XXXX to they Thank by am new today, reflects call.

changed As our month. company earlier legally this its name Justin Pathward to mentioned,

full year complete identity and our by the is calendar launch our the of Web to brand, corporate end. and it underway, we new transition changed will brand, new including has site name Our still

results. period. Net $XX.X That's financial down year. our year million the to compared $XX.X in in to per compared million, prior quarter $X.XX. Earnings the $XX.X for income Turning prior was million share same $X.XX to the were

As have lending tax a than certain energy lower year advanced renewable this by we separation our previously been the one-time in credit market, assumed slowdown agreement demand tax and disclosed, branding expenses. earnings and impacted

portion our We that This return loan from our market the higher the to begin substantial our to lending continue variable variety higher model to finance benefit reflect lending business commercial using portfolio. into banking-as-a-service generate our originations our mix the to environment. rate them from with coupled deposits increases to model shift of interest rates once capital returns low-cost of higher business, overall classes, rates of our shareholders. asset as assets, to higher will a continue on allowing We will business new anticipate earning ongoing the existing and net margin result interest expand of of

never macroeconomic we Our steadily others landscape. share a confidence challenging per industry, Like growing our in geopolitical has been are and in higher. earnings facing

as we year expectations productivity higher our to drive industry-wide respond spending response headwinds, to as our and as technology-related and In get were concentrate Third well will incurred these to higher previous to market enhance quarter enhance efforts inflationary of compensation compared higher capabilities expenses ahead employee the pressures. to costs we to efficiency.

delays was energy rate renewable development due quarter to the projects to tax up in Our the in pipeline. our of income second compared

result, reflected Commercial short expected in Finance market The previously our that and we've as solar current largely income construction the As environment, to fluctuates healthy has to allowance supply the leading in pleased constraints, than tax higher expectations term. volumes be to due our To anticipate these we growing past, level noted we rates. chain as impacted projects. are credit by rate a tax reduced in our in our been the portfolio the reserve address primarily lower remains

be to continue it confident difficult this diversified done historically. has of a ability the environment We perform, well economic in as even portfolio during to

and downturns. collateral Our has to lending. losses the mitigate manage experience has management, traditional this exceed which ability deep of collateral previous during Because losses our far helped downturn hands-on team management, in hands-on cyclical C&I

be Given guidance year. the the we it and helpful current environment, believe economic next dynamic provide for fiscal will to

$X.XX be be to XXXX At this tax, we to certain in items We broad be $X.XX adjusting be not per various earnings for our the an range Glen only GAAP discuss year expect to expect on assumptions in the adjusted will per nonrecurring specifics for share net $X.XX. fiscal to range in of EPS share When of later. detail point, will items. guidance income we $X.XX. providing more of addressing and will earnings statement

President, turn provide me business. let call our Now, updates of to Sharett, Anthony the to over our lines on

Anthony Sharett

Thank you, Brett.

which and our capabilities. tech includes lending Let services, on you business, banking-as-a-service me payments, consumer first update our

that often more relationships with sustainable relationship this Hewitt. in Block, economics, means an Tax prioritizing with are H&R A multi-product that we of broader whom place have through these and longer-term Consistent have we June solutions Jackson provide. use we example not renewing capabilities great XXXX. which agreement are with that is priorities, partners Liberty with agreements of our with and We agreements suite favorable, a of

XX% limited exiting majority result, to of year, gain not and and volatility the solution. new our did the reduce Neobanks and transfer represent seasonal volumes, taxpayer these of our services expect solutions our material efficiencies resources roughly refund two banking-as-a-service opportunities to which volumes impact magnitude business. other strong in of our Recent as slowing expect will impacting at over and pipeline. and business, to pullbacks also will partners, extensive on our We us focus next funding will decline partnerships. business. we are it are and to year growing we advanced view payment legacy we remain tax partnerships, Block a any By our with markets core capital allow As H&R help in our our but revenue, time, the Changes 'XX firms impact expect which also investment banking-as-a-service banking-as-a-service which programs fintech ongoing. But fiscal

Moving to quality. credit

Our nonperforming in in quarter percentage from total to portfolio. of improved and reserves total basis a as leases services percentage The leases to quarter, loans and current X.XX% points X.XX% large in X.XX%. prior tax the loans to as allowance seasonal quarter the the the in decreased for loan loans XX prior decrease from a leases of part and due the

X.XX% the Excluding reserves the X.XX%. to for reserves dropped from loans, tax

Commercial The loans pleased Commercial year. ability portfolio. portfolio and team's are increase June we our grow in were fiscal from the to last an leases mentioned, Brett XX% As with the the quarter billion Finance third of at continue X.X to Finance XX,

potentially positioned. Financial believe a continue stagflation, portfolio enter As coupled well our characterized period low rates negative by is growth to or with higher Commercial we of inflation, we and interest

First, asset-based rising to existing as such will which lose rates as credit their on Further, traditional funding our companies favorably and lines the and higher customer during yields result base sources new working in tends our business lending portfolios. expand factoring. capital variable our loan impacts cycle,

expect we on yields loan these For forward. commercial continued higher going portfolio the reasons, growth and strong

to an our over call overview the Herrick, financials. to Glen of turn me let our Now, CFO, provide

Glen Herrick

from $X.XX afternoon, of XXXX. the million, of Net and per $XX.X June a year million third income Anthony, fiscal decrease the totaled everyone. you, good share, ended for quarter Thank quarter or XX $XX.X

than million separation and year. $XX.X Higher of the net of prior of was our Excluding million the X% the The net income Commercial represents the portfolio XX.X expenses, X.X tax interest offset greater remaining X.X expenses and portfolio yields adjusted bank income from more for rebrand-related increase million net interest quarter. income community a impact, million of year-over-year. the of securities quarter's sale on Finance

expense liquidity in total, likely or to some in the Concurrently, leases traditional this million, loans average rate growth the seeing the expense with has Commercial are by rate, and thus driven increases yields, slower was beyond debt. of by $XXX,XXX to beta expected interest of interest than in the we market. In due lending $XXX company quarter and associated far, the we X%, elevated Finance the portfolios. growth quarterly retirement factoring as grew While its been accelerated have run strong subordinated yield excess asset-based

combined optimization, year. helped drive excess X.XX% prior third interest Noninterest year. from the quarter margin of payments, $X.X in was net in a income reduction stimulus yields to sheet million cash the $XX higher balance Our prior down and the from compared with to X.XX% million

timing Brett impacted As greater as constraints, loan income gains the tax the solar to sales construction by benefited season. year's market as year, fiscal card leading been recorded chain the from terms. last associated mentioned, of stimulus extended fewer prior fee Furthermore, has current company with as construction the well on in supply year's activity quarter

up XX, the direct product June expenses losses ended recorded $XX from product total in million $XX.X months was the For net period. year of nine million, income and tax prior

expectations, in our year-over-year. transfer came volume advances below overall grew taxpayer While refund X%

to strong of ahead expenses noninterest we efficiency the next exit increased tax volumes as Looking and XX% year-over-year. year, line greater partnerships. business Total transfer our two refund the for in aforementioned expect we quarter

million expenses, higher in Finance expenses spend support two related separation inflationary pressures expenses in Commercial and to of greater Excluding agreements, from industry-wide rebrand-related and caused tax costs future increase increased year-over-year. the core of the and The generally partner expenses X% nonrenewal the X.X million to X.X by X.X growth. compensation in million stemmed technology current

expenses under rate Additionally, the company to the card environment. rising incur higher started

As agreements. expenses interest rates with rise, elevated we contractual card some with associated experience will certain partners

XX%, higher variable of sheet year. be off less tax as correspond compared third interest deposits. balance the from corresponding the million expect to prior through These income revenue Income we and rate respectively. rates income fee increased expenses from card in higher tax the $X additional benefits effective environment and $X.X XX.X% to However, expense expenses to in gains to the million quarter do than the

$X.XX call, adjusted energy previously, guidance the is earnings year. for expand compared the provided earlier be the When XXXX XXXX trademarks, renewable credits to mentioned further year to per on EPS the fiscal of and rebrand-related investment sale expenses and on prior reductions year gain in to of range in a GAAP adjusting To $X.XX funds our range GAAP As company tax EPS level. be driven of earnings we the increase $X.XX XXXX Brett estimate in fiscal to share the to separation to estimates $X.XX. increases by range in while by These impacted assume to adjusted fiscal in $X.XX. could impact XXXX year of XXXX. level year and not expected expects to fiscal above of in share our the this rates of negatively that range of rate to expenses, $X.XX X.X% do positively Any the earnings reach be may be earnings, $X.XX Fed be $X.XX September per the if

XXXX. XX, As debt the outstanding rate The May the its retired million we mentioned a of company moved debt in last to subordinated fixed quarter's phase variable call, had recently rate. $XX on out

a As save company interest result the of million retirement, over approximately $X year. the will the expense next of

remains company bank price average remarks. we of capital capitalized through the the leverage Operator, to X.X% ratio for the returning up our prepared at repurchased XXX,XXX and with committed a regulatory That line shares to questions. well XX. open we an Finally, for In July, concludes $XX.XX July remain shareholders. please of

Operator

Thank you. [Operator Instructions].

Sandler. Schiraldi your Our is open. Piper from first question is with Frank line Frank,

Brett Pharr

Hi, Frank.

Frank Schiraldi

that wonder EPS a in you macro? could state of with sort -- XXXX or it line of steady macro some you're guide, guide? about terms give I in the do on if detail reflect economic how terms the the little the think outlook, environment deterioration of giving in does assume Does a when just that you

Brett Pharr

thought. think thing of is as in extreme will we in this portfolio reprice big other And the are it's Glen some everybody his the picture as there's the comments, mentioned yield as what's liquidity I not And the quickly question. our market. going have and on, understand, Well, piece might first helping it

even in they've so ones. intermediate have practice. And about talking up in rates theory, I'm moved And though duration moved kind up not

we'll get as perhaps we might So then aggressive a the thought some been yield, perspective, and go we're even rate we're to longer not do through might And of we have benefit environment. net margin believe thought. going have higher benefit period obviously the down going as a from lower this yield we of get that period come that interest sustain to time for as a as

the will up. about which environment it's at So about not as as really the yield macroeconomic pick much speed

Frank Schiraldi

Okay.

just it So It's the necessarily things? all. side more at of slowdown reflect NIM guess on subtle doesn't I economic an

Brett Pharr

That's right.

Frank Schiraldi

main if reason the have Is date? really -- to it have And little the then, talk is I Brett, just to the guess rates could some you a -- maybe in rates why the lending you What liquidity? you moved as that noted thought. haven't much maybe could increase the higher as bit reflected may yields market

Brett Pharr

deposits what are with of kind flushed continue that's banks and deposits. about talking is Again, to with flushed they were be we Yes.

I for gathering so having I'm out rates put sit why because it funds, it can And reflective Fed are deposits. of versus a in not having problem

believe never that's like you've take turn. the when pricing this there's on situation some going quickly little to to We've marketplace with system. is where of going we'll this more bit normal that's I this through increase. you the while a in Now, a a have had much It's in going liquidity rate flip. And a And kind market. rate got to a the that's have then going increase

Frank Schiraldi

talked know on efficiencies refund product tax Okay. announced side, And maybe then of any time. also the the reduction talked just you the but in on I of you two up expected those about over relationships sort picking year-over-year, some advance color you the give? about can exiting

we earnings, line to have us? math you about the guys think the XXXX if for that on So is impact what if bottom

Brett Pharr

Anthony, and talk maybe, of question? why? bit a Well, Then any little why there doing you address don't math about can kind Glen, what you you're a

Anthony Sharett

Sure.

base want As we noted on remarks, we for utilities us. that our have broad to banking-as-a-service partners in focus really

think of partner we economics, the efficiency our While necessarily it what our these the believe two, by the redeploying reduced about improve result reducing number our you of taxpayer able but we part. volumes [indiscernible]? disclose these optimize we'll be QX our over have call advanced do do to And impact impact by don't will but resources core, we in guidance, XX%, included to be exits we expect of enterprise to time

Glen Herrick

items overall fair provided detail all save Liberty or not reduction I of around type Yes. Jackson can of then have there -- And all that other of will tax for either margin growth, as businesses. our into internally advances. that it and higher And components we We We factored a Frank. guidance and advances. tax we assume, might out the it fiscal think to that our Anthony you revenue the And year the forward. covered Hewitt there, list resources 'XX is amount for that's are can we higher in going redeploy

Frank Schiraldi

there's baked offset that's ability more of that's guess things to of opposed down getting at. more idea the the road I the XXXX. I other because some I'm that's here, as into what into guess to some baked down that sort kind road some there's do

Glen Herrick

That's correct.

Frank Schiraldi

strength you I as growth Okay. but as here the And far then think, pipeline if Anthony, give on the and mentioned this, the partners, card could guys color maybe on the from side, any slowing existing you wondered partnerships into of banking-as-a-service new side? fee just

Brett Pharr

start that the it of take you, and me I Anthony. then Let pass to

and macroeconomic coming slowdown bit some But that think its of back there. play still well of capital some firms, lot Neobanks, with seeing lot we're partners sort of I the fintechs large new the what what's is actually Frank, existing from of a those of seeing our new venture in a new that's of seeing new strong. them there'll So, And that's of and kind ideas our programs, pretty on, in. were in understood environment a be a Because interest out. going and the way we're of partners, and survive little programs, out. bringing products, capabilities, come

add what So that? would Anthony, you to

Anthony Sharett

grow we enterprise to I partners, back well look going resources either put. and the last to or question, core those wider redeploying think deeper to even be saving as to that's and Again, partners. optimize go with we're really our

fintechs still have of do those pipeline And companies be robust is opportunities. the We declining. on because banking-as-a-service in ones Neobank of going we of investments our seen a are really in pullback But we're those have that the and a focused to pipeline.

Frank Schiraldi

color. the Okay. all Thanks for

Brett Pharr

Thanks, Frank.

Operator

Next B. Riley is question open. your is Steve with Securities. line from Moss Steve,

Steve Moss

afternoon. Good

Brett Pharr

Steve. Hi,

Steve Moss

there just any caused just made -- the Maybe here? starting attractive -- the the that -- from on starting partners business were less here here, the maybe side tax business in Brett plans change hi, pricing tax and demands on

Brett Pharr

three pricing to wasn't trying four products, to proposition. product away an a conversation. breadth that a to you wanting arrangements. from. can would say industry portion that threaded partner a same of if is where the go or the you're to that's And those single not gives going I have economies or products of were two, arrangements We're really we're of scale through sense, what it really both a partner. Having And capabilities product get a administrative offering pure of this partner you makes Well, single

Glen Herrick

this Glen. Steve, is

renewal that strategic could hurdles. the contracts be -- return and the going I renewal not you assume single for economics up a But Brett the though what or came also contract didn't new think a these you're that economics that clear threaded assume as addressed might perhaps there. new and thinking product to would our

Steve Moss

And going maybe business Right. fundamental season? point, plans I of is kind in to business go year's on shift to just or this next, the unusual a after there here outlook was the tax is that

Brett Pharr

I except we're there's the a say this as that business fundamental don't banking-as-a-service. would I shift think thinking -- tax about

it's of to tax exactly and We broader to Block interactions our his the with remarks, a expect business is tax other play. to as mentioned relationship H&R things. Anthony broader with our begin in consumer than that address kinds nature And just where be

Steve Moss

business, tax credits. impact going on short-term Okay. side was Glen, of think tax the the to I the for who that get you And -- short-term the it credit then mentioned

if 'XX? you kind rate Just of are your for tax marginal kind of curious, does a what it in fiscal go guys so, assuming into And, guidance?

Brett Pharr

Glen. ahead, Go

Glen Herrick

Sure.

still and seen has whole this issues, delayed, perhaps there. go? projects does But Now getting permitting the between supply for predict, it's market chain, other So to a says long market slowdown. there's out either primarily hard projects how demand Steve, color

projecting type So double we're next for tax low year. roughly rate digit

Steve Moss

the the to just just Okay. here And initiative type to then on -- kind here, for of upcoming I of you of just And of guys expenses in efficiency how seeking? are thing What are terms want other the guess quarter? about ask cost kind think savings curious. the

Brett Pharr

Glen, go ahead.

Glen Herrick

we're Yes. two tax for to Well, moving of tied I'm our as we've also able to continuing scale. -- on with being from partners. talked some of expense efficiencies, these look about,

so improve over efficiency our And ratio to expect we time.

to we But and of Some some lumpiness have short-term in time. our hard could the business that downs. working are over ups improve

Steve Moss

right. the much very All color. Thank for Okay. all you

Brett Pharr

you. Thank

Operator

question from Perito open. Michael, KBW. is your next from line Michael is Our

Andrew Stimpson

Hi. Andrew taking my you him. This is Mike's associate for for in filling Thank questions.

off, First the give credit process move you uncertainty? trends, given whether starting inventory or anything, seeing Are Or flow to cash in consumer I to macro you wanted again. just be underwriting to Finance any the side changes some Commercial yet? to it loan portfolios or making you or any the are the concern

Brett Pharr

is Well, in which traditional if when to the managed. majority a not kind any what heavy Finance, And is that into you Commercial exposure of collateral downturn our entering have remember, precisely C&I, of want environment. is you're you

question, it want is This your to happen No. time. what answer you to particular So are anything? of we changing first in period this

not We real borrowers. are our in seeing deterioration any

et back starting may leave some to see of which traditional because way had covenant issues, commercial are banks to cetera, to We they've the all go COVID. trying some borrowers

we're up. so And picking

And due of to our ABL been growth that. some has precisely

a we're a consumer -- it's or of And remind in I'll again, meaning some lending one some approach other in much that that consumer credit way deterioration waterfall of there's maybe exception, side, seeing slight our majority is that you either. space the not On the kind portfolio lending with arrangement. enhanced,

Andrew Stimpson

color what do or then I next do just appreciate So shrink here me, term kind balance might sort bit think of for near a color of the quarter? there. lastly the size kind Thank of in assets you and you expect you. And Great. there? the any a sheet just more

Brett Pharr

that? Glen, you why handle don't

Glen Herrick

talked too. We've Yes. in the past about this

kind $X around future. $X.X billion the for We foreseeable expect move to to between billion of

Andrew Stimpson

the questions. I Great. appreciate taking for you. and Thank time thanks my

Brett Pharr

you. Thank

Operator

no there time, further are questions. At this

I'd for So to the conference management back closing the remarks. turn like any to team

Brett Pharr

questions. Appreciate today. We the appreciate attending everybody

Operator

call. Thank That you concludes for fiscal quarter participation. Pathward Financial's the your XXXX third year investor

your disconnect now lines. may You

Pathward Financial (CASH) 28 Jul 222022 Q3 Earnings call transcript