Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net income for the quarter was $41.8 million, with earnings per diluted share at $1.66.
- Net interest income increased by 14% compared to the same quarter last year.
- Return on average assets for the first nine months was 2.33%, and return on average tangible equity was 47.3%.
- The company has a robust pipeline in working capital and government-guaranteed loans, including SBA and USDA.
- Pathward Financial Inc (CASH, Financial) has implemented a new technology system to create efficiencies in underwriting and asset management.
Negative Points
- Provision for credit losses increased to $5.9 million from $1.8 million in the same quarter last year, primarily due to the commercial finance division.
- Non-interest income declined slightly, driven by a decrease in card and deposit fee income.
- Total non-interest expense increased, mainly due to higher rate-related card processing expenses.
- Off-balance sheet custodial deposits decreased significantly, from $781 million last year to $353 million.
- There was a slight uptick in non-performing assets (NPA) and net charge-offs, particularly in the consumer finance side.
Q & A Highlights
Highlights of Pathward Financial Inc (CASH) Q3 2024 Earnings Call
Q: Could you talk a little bit about the expense outlook you have embedded in the 2025 EPS guidance?
A: Gregory Sigrist, CFO: We will continue to invest in human capital and technology, with a fairly muted FTE expansion expected next year. Normal cost of living adjustments will affect compensation and benefits. On the tech side, we anticipate consistent increases similar to this year. We aim to self-fund these increases through tight expense management. Rate-related card expenses will follow historical trends, and we expect a modest uptick in BAS deposits in the latter half of next year.
Q: Could you discuss the tick up in NPA and net charge-offs, excluding the tax business?
A: Gregory Sigrist, CFO: The increase in NPLs and NPAs is primarily on the consumer finance side due to a delayed contractual settlement with a program manager. We feel adequately reserved for any potential exposure and expect to resolve this by July without additional exposures.
Q: What should the average off-balance sheet deposits look like in Q4, and do you expect anything outside of normal seasonality in 2025?
A: Gregory Sigrist, CFO: We expect off-balance sheet deposits to follow historical trends, with a seasonal low in Q4. For 2025, we anticipate similar trends in the first half, with a modest uptick in BAS deposits in the latter half due to pipeline pull-through.
Q: Could you size the expected balance sheet growth into 2025?
A: Gregory Sigrist, CFO: We expect loan growth to continue at historical rates of 10-15% for the full year. BAS deposits are expected to tick up in the latter half of the year, leading to a scaling in deposits and total assets. We aim to self-fund third-quarter tax season through BAS deposit growth, reducing the need for wholesale borrowings.
Q: How does the disruption in the banking as a service (BAS) industry impact your partnership agreements and negotiations?
A: Brett Pharr, CEO: We are seeing more sophisticated program managers seeking backup partners. We are selective about these opportunities, focusing on those with significant volume potential. Each agreement is custom, with considerations for volumes and minimums.
Q: Could you elaborate on the new tech system and any opportunities to leverage AI?
A: Brett Pharr, CEO: We have implemented a new tech system in our commercial finance group to improve efficiencies in sales, underwriting, and credit management. While we see potential in AI for tasks like adverse action reports, we are cautious about data security and controls.
Q: Is there any increased appetite for securities sales given the move in rates and loan growth outlook?
A: Gregory Sigrist, CFO: Our appetite for securities sales hasn't changed. We might be opportunistic, but we prefer to rotate cash flows from the securities portfolio into higher-yielding loans. We expect about $300 million in annual cash flows from the securities book to fund loan growth.
Q: How do you view share buybacks given the recent run-up in stock price?
A: Gregory Sigrist, CFO: We remain committed to optimizing capital through share buybacks, though the payout ratio may moderate to 60-70% from the historical 70-80%. We see organic growth opportunities and prefer to have capital available for future needs.
Q: How does the disruption in the BAS industry impact your partnership agreements and negotiations?
A: Brett Pharr, CEO: We are seeing more sophisticated program managers seeking backup partners. We are selective about these opportunities, focusing on those with significant volume potential. Each agreement is custom, with considerations for volumes and minimums.
Q: Could you elaborate on the new tech system and any opportunities to leverage AI?
A: Brett Pharr, CEO: We have implemented a new tech system in our commercial finance group to improve efficiencies in sales, underwriting, and credit management. While we see potential in AI for tasks like adverse action reports, we are cautious about data security and controls.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
