Pathward Financial - Earnings Call - Q2 2025

Executive Summary

• EPS materially beat Wall Street: diluted EPS was $3.11 vs S&P Global consensus of $2.78; management raised FY25 EPS guidance to $7.40–$7.80, citing strong tax season and balance sheet optimization. S&P Global values marked with an asterisk are retrieved from S&P Global.*
• Total revenue grew 6% year over year to $262.9M, driven by 7% noninterest income growth and 5% net interest income growth; net interest margin expanded to 6.50% (adjusted 5.09%).
• Tax Services momentum: six‑month pre‑tax income rose 29% to $47.6M, with refund advance originations up to $1.66B and favorable loss rates; noninterest income rose on secondary market revenues and tax products.
• Capital returns and liquidity: repurchased 575,804 shares at $78.11 in Q2, maintained ~$3.9B liquidity; management targets Tier 1 leverage closer to ~10% while keeping buybacks at 80–90% of income in 2025.
• Watch items: end‑of‑period deposits fell 9% YoY; NPLs ticked to 0.88% of loans; card processing expense (rate‑linked) remained elevated; later in Q2, the company received a Nasdaq late‑filing deficiency notice (no immediate listing impact).

What Went Well and What Went Wrong

What Went Well

• EPS beat and margin expansion: diluted EPS $3.11 (+21% YoY), NIM 6.50% with adjusted NIM 5.09%, reflecting higher loan yields and improved asset mix from optimization.
• Tax Services strength: “We are also having a great tax season, which led the way to noninterest income growth for the quarter,” noted CEO Brett Pharr; six‑month tax product income rose to $47.6M (+29%).
• Strategic optimization and pipeline: CFO highlighted ~$190M freed via working capital loan sales and robust structured finance pipeline; management expects $4–6M secondary market revenue per quarter remainder of year.

What Went Wrong

• Deposit base contracted: end‑of‑period deposits declined to $5.82B (−9% YoY), driven by lower noninterest‑bearing and wholesale deposits, pressuring card/deposit fee income.
• Rate‑linked expenses elevated: contractual card processing expenses were $28.4M in Q2 (vs $30.1M prior‑year quarter) as ~62% of deposits remain subject to rate‑indexed agreements.
• Asset quality mixed: NPLs rose to 0.88% of total loans (from 0.76% in Q1); NPAs reached 0.59% of assets; provision increased to $29.9M, reflecting tax season and commercial finance volumes.

Transcript

Operator (participant)

Sorry for the delay. Thanks, ladies and gentlemen, for standing by, and welcome to Pathward Financial's second quarter 2025 earnings conference call. During the presentation, all participants will be in 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 over to our host, Darby Schoenfeld, Senior Vice President of Investor Relations. Please go ahead.

Darby Schoenfeld (VP of Investor Relations)

Thank you, Operator, and welcome. With me today are Pathward Financial's CEO, Brett Pharr, and CFO, Greg Sigrist, who will be discussing our operating and financial results for the second quarter of fiscal year 2025, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks, and supplemental slides, may be 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 statement.

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.

Brett Pharr (CEO)

Thanks, Darby, and welcome, everyone, to our earnings call. At the halfway point of the fiscal year, we have just completed a fantastic quarter. Our businesses are healthy, and we are optimistic about the future. We've made some significant progress on our goals, especially on our successful execution on our balance sheet strategy. This is allowing us to generate revenue above our asset size and means we do not need to grow our balance sheet to grow revenues. This is clear in our financial performance during this quarter. We are also having a great tax season, which led the way to non-interest income growth during the quarter. We reported earnings of $3.11 per share for the March quarter, which represents year-over-year growth of 21% and net income of $74.3 million.

Our results were driven in part by an increase in non-interest income of 7% and net interest income of 5% when compared to the same quarter last year. We also expanded our quarterly net interest margin and adjusted net interest margin. Year-to-date non-interest income now represents 45% of our total revenue, and it is our goal to continue to grow this over time. Performance metrics were strong for the first six months of the year, with return on average assets of 2.69% and return on average tangible equity of 43.79%. Remember that due to tax season, these metrics generally reached their high water point during this quarter. We are also pleased to revise our fiscal 2025 guidance to $7.40-$7.80 earnings per diluted share. Greg will discuss this in more detail. Tax season has been really strong, with the team doing a fantastic job of expanding our reach.

We operated with over 42,000 independent tax offices, which is a new record for us. As a reminder, our results include not only the independent tax offices but also tax partnerships. For the six months ended March 31, 2025, we increased non-interest income related to Refund Transfer products and Refund Advance products by 13% each. Refund Advance origination increased over $100 million this year, representing 7% growth. This brought total Tax Services revenues to $85 million, growth of 17% when compared to the prior year period. Loss rates are also favorable when compared to last year due to our continued work on our underwriting models and data usage to originate Refund Advances, so the slight dollar increase in provision you see in our results is volume-driven.

Pre-tax income for Tax Services grew 29% to $47.6 million, and we are very pleased that this team has been able to produce stable growth and solid results. We continue to make significant progress on our strategy of optimizing the balance sheet. Last quarter, we entered into a strategic partnership to support renewable energy loan growth, and that is going very well. This can be seen in our results with strong originations and Structured Finance during the quarter and a pipeline that continues to be robust. Our partner, Bridgepeak, brings strong industry experience to the table, and we expect that co-innovation in this partnership will accelerate efficient, scalable, and predictable growth within Pathward's renewable energy initiative. During the quarter, we also took advantage of a premium in the marketplace and sold a portion of our Working Capital loan portfolio.

Greg will go into more detail in a moment on how this further accelerates our optimization strategy. Opportunities in the Partner Solutions pipeline remain strong. These deals can have protracted timelines, and we are tracking each of them with precision and care. Our team is working hard to further the opportunities in front of us by tirelessly working with both new and existing clients to ensure we are providing them with the best solutions and capabilities to fit their needs. Our Credit Solutions team continues to explore growth and new opportunities. After the quarter ended, we signed a contract with a new partner to originate loans through their lending marketplace. Recently, we've talked about our strategy to be the trusted platform that enables our partners to thrive and how we intend to accomplish it.

I've mentioned in a few places today how we are delivering on this, and in order to continue delivering shareholder value, we stay laser-focused on accomplishing these goals. Now, I'd like to turn it over to Greg, who will take you through the financials and guidance in more detail.

Greg Sigrist (EVP and CFO)

Thank you, Brett. We're very pleased with a record second quarter, which is characterized by solid revenue growth, particularly in net interest income and tax service revenues, while expenses continue to be well-managed. Our focus on balance sheet optimization has contributed to our ability to do more with less. This can be seen in our net interest income, which grew 5% and was primarily driven by an improved earning asset mix and higher profitability. As a result, the net interest margin of 6.50% in the quarter increased from 6.23% in the prior year period, and our adjusted net interest margin expanded 33 basis points. Provision in the quarter totaled roughly $30 million in line with volumes in tax Refund Advances and commercial finance.

Non-interest income grew 7% from the prior year, driven primarily by higher secondary market revenues from loan sales and higher tax product fee income, partially offset by a loss on sale of securities. Secondary market revenues were elevated as we had an opportunity to sell the transportation portfolio within Working Capital, which was in addition to sales from Structured Finance. This also gave us an opportunity to further optimize the securities portfolio. We expect secondary market revenues to run in the $4-$6 million range per quarter for the remainder of the year. These actions freed up close to $190 million in liquidity, which we would expect to redeploy by the end of the year into other asset classes with either higher risk-adjusted returns or those with optionality and improved return on assets. Expenses in the quarter grew $2.1 million in the prior year, reflecting a modest 1% increase.

As we have mentioned previously, we continue to invest in our technology infrastructure, and this can be seen in the occupancy and equipment expense line. This increase was partially offset by lower compensation and benefits, reflecting a modestly lower FTE count. Deposits held on the company's balance sheet at March 31 declined from a year ago, and custodial deposits held at partner banks on March 31 were $1.1 billion, a slight decrease from $1.2 billion a year ago. The year-over-year decline in total deposit balances primarily reflects a return of EIP deposits to the Treasury Department during last year, as well as over $100 million fewer wholesale deposits on the balance sheet. Over the second quarter, the company averaged approximately $606 million in deposits at partner banks, compared to $783 million last year that are earning a rate roughly equal to the effective Fed funds rate.

Loans and leases at March 31 were $4.5 billion, a slight increase from the $4.4 billion last year. This represents pretty significant growth since the prior year's total loan balance included insurance premium finance loans. If you exclude these balances in the prior year, loans and leases would have grown 15% year-over-year. We are not seeing signs of economic slowdown in our portfolio, and performance metrics remain within our historical ranges. Our allowance for credit losses, excluding our seasonal Tax Services lending, was 101 basis points in the quarter, with an annualized net charge-off rate in the quarter of 61 basis points. Our liquidity remained strong, with almost $3.9 billion available. This is higher than where we were last year at this time, and we're extremely pleased with our position. The strong performance during the quarter allowed us to be opportunistic with our share repurchases.

As a result, we repurchased roughly 576,000 shares at an average price of $78.11. This brings year-to-date repurchases to almost 1.3 million shares. As Brett mentioned, we are revising our fiscal year 2025 EPS guidance range to $7.40-$7.80. This includes the following assumptions: no rate cuts for the remainder of the year, we expect net interest margins to exceed those of fiscal year 2024 as a result of our balance sheet optimization, we now expect an effective tax rate of 17%-21%. Guidance also includes expected share repurchases. Lastly, we would expect expenses to be well-managed in the back half of the year, though we will continue to invest in technology as well as risk and compliance. This concludes our prepared remarks, operator. Please open the line for questions.

Operator (participant)

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, it is star one. Our first question is from Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi (Managing Director)

Hey, good afternoon. You guys, when you think about, it seems like the tax business was obviously or is highly scalable here. I just wondered if that, how you would characterize that going forward. Does that continue to be the case? As you look out at the competitive landscape out there, any confidence around continuing to grow those independent tax offices at a continued good clip here as we think about next tax season?

Brett Pharr (CEO)

Yeah, thanks, Frank. You know the tax business the last four or five seasons, we've kind of continued to improve our operational effectiveness, our penetration in market share, etc. I think a couple of things happened this year. One was we've continued that, and so we are grabbing some percentage points of market share. Also, it's fairly well publicized by the IRS that the amount of refunds this year were higher than normal. I mean, I think we will continue to do well in that business. I don't know that year over year we're going to continue to show the increases that we did this year, but we had a good year and we continue to improve our operations and our underwriting models. And so positive on a continuing, maybe just not growth as fast as it did this year.

Frank Schiraldi (Managing Director)

Okay. Appreciate that. Just general thoughts on the commercial finance business here, the macro environment, obviously some significant uncertainty there. If you could just talk about how you get comfortable if there's areas that you're shying away from, obviously saw the contraction in the factoring and asset-based categories. Just trying to get a sense for your thoughts around growth from here, just given all the uncertainty out there.

Brett Pharr (CEO)

Yeah, it's interesting. Of course, we see the same uncertainty and that impacts the way we think about forward-looking guidance, etc. We're not seeing any deterioration at all in the credit quality that we have. Even the same client funding is still staying pretty good. One of the things that is starting to happen that is an indicator of perhaps some tightening is we're getting more and more looks at transactions in our pipeline that previously would have been done by traditional C&I. We are seeing some of that. Remember, in a downturn, that is actually when our Working Capital group will do the best because there will be more higher quality companies coming in the door to us because they've been turned away from traditional C&I. I'm pretty optimistic about that going forward.

Now, we'll see how, for example, equipment lending, the cash flows, which are a higher-rated credit, but we'll see kind of how that impacts over time. Again, very secure portfolio and not seeing any cracks whatsoever.

Frank Schiraldi (Managing Director)

Okay. Great. Lastly, on capital return, obviously continue to be aggressive on buybacks here. Just given the focus is more on balance sheet optimization than growth, I would say, and just given that equities overall have pulled back and maybe there is more value there. Any thoughts about further accelerating the buyback program? I guess, could you talk about what you target or what you expect to target from here in terms of capital return, in terms of percentages of total income?

Greg Sigrist (EVP and CFO)

Yeah, thanks, Frank. Appreciate the question. We had originally, earlier this year, thought we were going to slow down a little bit and take that payout ratio down to, call it, 70%. The one metric we are looking at, we're consciously trying to just grow a bit more capital on the balance sheet. To your point, we're not looking to grow the total assets. It's really just that additional layer of operational capital. As a result, we're really targeting a Tier 1 leverage ratio, probably closer to 10%. Just with the profitability we've had, we felt that we could keep our buybacks at the level they were running and get us to that level by the end of the year. It's a good story for us because we can get to that capital target without really having to slow down the buybacks.

As a result, I think you're going to see buybacks stay in that range of 80-90% for the balance of the year. Obviously, we'll have to see beyond that, but I feel really confident we can continue to do that this year.

Frank Schiraldi (Managing Director)

Great. Okay. Appreciate the color. Thanks.

Greg Sigrist (EVP and CFO)

You got it, Frank. Thank you.

Operator (participant)

Our next question is from Joseph Yanchunis with Raymond James. The line is now open.

Joseph Yanchunis (Senior Equity Research Associate)

Good afternoon.

Greg Sigrist (EVP and CFO)

Hey, Joseph. Welcome.

Joseph Yanchunis (Senior Equity Research Associate)

Thank you. I kind of wanted to ask one of Frank's questions a little bit different way. Given the amount of payment volume that runs through your company, have you seen any particular change in activity or behavior since Labor Day?

Brett Pharr (CEO)

No, not at all. I think one of the things you have to remember about our book of business with our partners is a large percentage of it is the bottom of the economy. This is groceries, this is gas, this is those kinds of things. This is not Nordstrom or Neiman Marcus or anything like that. We have not seen any change as measurable in that and really would not expect to, regardless of the economic circumstances, because even when people do not have jobs, they have benefit payments and they are still buying gas and they are still buying groceries.

Joseph Yanchunis (Senior Equity Research Associate)

Understood. Kind of pivoting over here. In your prepared remarks, you discussed the signing of a new partnership to originate loans through a marketplace. Can you provide a little more color on that partnership and what kind of loans will be the focus?

Brett Pharr (CEO)

We have several of these partners that do online consumer term loans that can be anywhere from six months to five years. That is the nature of them. They tend to be near prime slash subprime. What you need to remember in that is that there is very much a waterfall approach to any exposure to credit losses. There is a constant watching of the underwriting models to be sure that anything that is on the balance sheet is adequately covered by reserves. This is very similar to other partnerships we have been doing for a lot of years. We have a lot of confidence in it and we watch it very closely and are not expecting any problems.

Joseph Yanchunis (Senior Equity Research Associate)

All right. Thank you for taking my questions.

Greg Sigrist (EVP and CFO)

Thanks, Joe.

Operator (participant)

Our next question is from Tim Switzer with KBW. Your line is now open.

Tim Switzer (VP of Equity Research)

Hey, good afternoon. Thank you for taking my question.

Greg Sigrist (EVP and CFO)

Hey, Tim.

Frank Schiraldi (Managing Director)

Hey, Tim.

Tim Switzer (VP of Equity Research)

The first question I have is in regards to the margin outlook, particularly the adjusted margin. Your slide indicates that there really isn't much of an impact to the margin regardless of where rates move. Can you guys kind of walk us through the puts and takes there, though, if we do see maybe more cuts than expected on how that would impact reported NII and the adjusted number?

Greg Sigrist (EVP and CFO)

Yeah, sure, Tim. Happy to take that one. I think kind of walking through it, I think the story remains the same as what we've talked about the last couple of quarters, right? The curve has obviously been really dynamic lately, particularly just the volatility in the middle part of the curve. The starting point at overnight rate, and to your question, we are still very close to neutral as it relates to the overnight rate. Each 25 basis point rate cut is, the number I recall, pre-tax is maybe $500,000 annual impact. You'd have to have quite a few of those stacked on top of each other, plus have a few other things change in our balance sheet composition to have any measurable impact. The overnight rate over time just steepens the curve, which is a benefit to us.

The counter to that, though, we are still continuing to rotate liquidity and assets as we can and as we think is appropriate. Obviously, this quarter, we took an opportunity to sell a bit of our Working Capital line, which freed up $190 million. That's going to be in addition to roughly $200 million of securities, principal paydowns this next 12 months, which gives us added up a little under $400 million of additional powder that we can deploy. You're coming off of really low roll-off yields on all of that. And we're going to be able to redeploy that in part into duration assets, duration loans, which is going to continue to give us stability in the net interest margin and the adjusted margin.

When I kind of add all that together, I mean, I think we're pretty close to neutral in terms of how we're managing the balance sheet, but also how I think the rate environment, a realistic set of rate environment assumptions could play into that adjusted margin over the next couple of quarters. I hope that helps.

Tim Switzer (VP of Equity Research)

Yeah, that was really helpful. Thank you. There has been a lot of disruption in the BaaS space with some smaller competitors looking to exit or pull back at least. There is another competitor exploring strategic alternatives. Has this created any opportunities for you that you would be interested in pursuing, maybe acquiring some new programs or portfolios, entire business lines? What is kind of your approach to this right now?

Brett Pharr (CEO)

Yeah, I mean, for the most part, our approach has been our phone is ringing and our pipeline is full. The approach would be don't buy what will naturally come to you anyway. We are continuing to see that. A lot of things you're talking about are happening that's creating some opportunities for us. We can kind of pick and choose what we want to take and what makes sense and what doesn't. I expect that to continue for a while just because of where we are in the regulatory cycle and BaaS and the market dynamics that are happening that you described.

Tim Switzer (VP of Equity Research)

Yeah, makes a lot of sense. Thank you.

Brett Pharr (CEO)

Thank you.

Operator (participant)

There are no more questions waiting at this time, so I'll pass the call back over to the management team.

Greg Sigrist (EVP and CFO)

This is Brett Pharr, thank you for joining today. Have a great day.

Operator (participant)

That concludes the conference call. Thank you for your participation. Enjoy the rest of your day.