Pathward Financial - Earnings Call - Q3 2025

Executive Summary

• Q3 FY25 preliminary results were resilient amid restatement work: diluted EPS $1.81 vs $1.78 YoY (+2%), total revenue $195.8M (+4% YoY), and NIM expanded to 7.43% (adjusted NIM 5.98%) driven by balance sheet optimization.
• The quarter beat S&P Global consensus on EPS ($1.81 vs $1.67) and revenue ($195.8M vs $185.1M); Q2 and Q1 also posted EPS beats. Management reaffirmed strategic execution despite elevated compliance/tech spend and rising NPLs from episodic items, with net charge-offs contained.
• Guidance: FY25 GAAP EPS raised at the low end to $7.50–$7.80 (from $7.40–$7.80), FY26 introduced at $8.25–$8.75; assumptions include one rate cut in FY25 Q4, none in FY26, and effective tax rates of 16–20% (FY25) and 18–22% (FY26), with buybacks included (preliminary pending restatement).
• Near-term stock catalysts: restatement filing timeline, credit normalization of the three idiosyncratic NPLs, durability of adjusted NIM, and execution on growing Partner Solutions (including acquiring sponsorship with Checkout.com) and credit sponsorship opportunities.

What Went Well and What Went Wrong

• What Went Well

  • Margin resilience and mix: NIM rose to 7.43% and adjusted NIM to 5.98% (both up QoQ and YoY) on improved earning asset mix and optimization.
  • Fee growth and pipeline: Noninterest income +11% YoY, with secondary market revenue and card/deposit fees higher; “acquiring” posted triple-digit YTD growth and a multi-year Checkout.com acquiring sponsorship deal was signed post-quarter, supporting sustainable fee income.
  • Capital return and liquidity: Repurchased ~604K shares at $74.49; YTD ~1.9M. Liquidity “almost $2.7B” and well-capitalized status maintained.

• What Went Wrong

  • Asset quality optic: NPL ratio rose to 1.49% (from 0.88% in Q2), driven by three episodic loans; management emphasized collateral coverage and focus on net charge-offs (which remained modest).
  • Elevated expenses: Noninterest expense +11% YoY on legal/consulting, occupancy/equipment (tech investment), and card processing, with higher legal/consulting expected in Q4 before tapering in FY26.
  • Restatement overhang: Preliminary results pending restatement; accounting change reduces 2022–23 income, boosts 2024, with a more muted impact thereafter; completion remains a gating factor for full normalization.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to Pathward Financial's third quarter preliminary earnings conference call. 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 Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead.

Darby Schoenfeld (Senior VP, Chief of Staff, and Investor Relations)

Thank you, operator, and welcome. With me today are Pathward Financial CEO Brett Pharr and CFO Greg Sigrist, who will discuss our preliminary operating and financial results for the third quarter of fiscal 2025, after which we will take your questions. Additional information, including the earnings release and the investor presentation that accompanies our prepared remarks, may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements. 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. Finally, the financial information we will discuss is preliminary pending our previously disclosed restatement. These results incorporate our current view of the new accounting methodology, under which we recognize certain relationships in the credit solutions business within held-for-investment loan balances on a growth basis. The company's actual results may differ materially from these preliminary financial results. 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 preliminary earnings conference call. The strategy that we set out to accomplish at the start of our fiscal year 2025, being the trusted platform that enables our partners to thrive, remains our main focus. We've made progress on many fronts, and I'm incredibly proud of what our team has been able to accomplish over the past nine months. This strategy starts with balance sheet optimization, where the assets that we choose to originate must have either a high risk-adjusted return or optionality that can also generate fee income growth and higher return on assets. The success of our commercial business lies in our ability to operate in niche markets or be creative with our loans due to our collateral management capabilities.

Because of this approach, we operate in a unique position where we can offer structures to our clients that traditional banks may not have the ability to. This differentiation matters as our customers are able to receive the financing that meets their needs. Because of our stable deposit base, we are able to provide our clients, typically small to medium-sized businesses, loans at attractive rates. These loans are originated across the country through a combination of an in-house business development team, referrals from other institutions, or through partners. In the third quarter, we continue to see strong originations within commercial finance at solid yields. The team has done a tremendous job redeploying the additional capital that was generated earlier in the fiscal year with the sale of some of our loans and securities.

The funds generated were almost $1 billion, and we originally believed it would take us 12-18+ months to redeploy the funds from just the insurance premium finance sale and corresponding security sale. I'm excited that we were able to accomplish it in a shorter time frame. In addition, credit sponsorship, which we have been providing since 2018, is another area where we are starting to see some additional opportunities. As we announced on our last earnings call during the June quarter, we signed a contract with a new credit solutions partner to originate loans through their lending marketplace. This business gives us an alternate way to leverage our balance sheet and generate sustainable fee income. With the second part of our strategy, we have been investing in technology to help us evolve and scale our product offerings.

This gives us the opportunity to focus on delivering sustainable fee income growth since our ongoing investment in technology is particularly impactful when we think about partner solutions. We are building and scaling products that allow us to co-innovate with some of the largest players in the business. This approach has helped to fill our pipeline in partner solutions, which remains strong. This year, Pathward contracted for 11 opportunities to expand products with existing or new partners. One area where our investment has paid dividends is acquiring. This product has experienced triple-digit revenue growth year to date. After the quarter closed, we signed a multi-year deal with Checkout.com for acquiring sponsorship and are excited about the upcoming partnership. The progress both our partner solutions and technology teams are making is very important and is allowing us to bring multi-threaded solutions to our partners.

We believe continued investments in technology will continue to drive growth with our existing partners and enable us to partner with new clients as well. Third, and something that I am incredibly proud of, are our people and culture. Recently, Pathward was named one of the best companies to work for by U.S. News & World Report for 2025 to 2026 on the finance and insurance lists and the Midwest lists. Our culture is driven organically by a sense of purpose, financial inclusion, a belief in giving back to our communities, and a desire to work for a talent anywhere company that can be a greater partner and solutions provider. This has also earned Pathward the Great Place to Work Certification for three years in a row.

This type of recognition is humbling and a true testament to the strength of our people who continue to execute against our objectives and purpose. The final component is risk and compliance. As we grow our product offerings across the enterprise, we are able to showcase our experience and mature risk and compliance infrastructure that is supported by our three lines of defense. We understand the complexities of the industry and aim to remain nimble through the ever-changing regulatory environment while making the necessary investments in this area. It is our belief that strong execution of this strategy will continue to position the company well in future years and generate strong growth and returns for our shareholders. As a final comment, while we were very pleased with the performance of our tax team this year, they are already gearing up for next season.

We have agreements with all of our tax software partners heading into the next tax season, including recently renewing our relationship with one of the largest tax software providers. The three-year agreement lays the foundation for an expanded partnership. Overall, we believe that we have one of the most comprehensive product mixes in the tax industry and feel confident that we will continue to expand our network as we strengthen our relationships and continue our strong sales and marketing efforts. Now, I'd like to turn it over to Greg, who will take you through the financials in more detail.

Greg Sigrist (CFO)

Thank you, Brett. As a reminder, all financial results shared today are preliminary, pending our previously disclosed restatement. All results, for comparison purposes, reflect the new accounting methodology for the held-for-investment consumer loan portfolio with impacted balances totaling $191 million at June 30, 2024. We're very pleased with our third quarter results that show the impact of our strategy. Our focus on balance sheet optimization has contributed to increasing net interest income over the past few years. We are encouraged by the stability of our net interest income and net interest margin when compared to the prior year. Net interest margin in the quarter was 7.43%, and adjusted net interest margin, which includes rate-related card expenses associated with deposits on the balance sheet, was 5.98%.

Both of these expanded from last year's quarter, which were 7.26% and 5.76% respectively, and when you compare them to the March quarter, which were 7.12% and 5.72% respectively. Non-interest income grew 11% from the prior year. Tax solutions continued to produce results that outperformed last year's quarter, and secondary market revenue and card and deposit fees were also higher. Secondary market revenue is benefiting from our balance sheet optimization strategy, part of which focuses on originating loans that have optionality and can generate fee income. As a reminder, we are generally targeting quarterly secondary market revenues in the range of $5 million-$7 million. Expenses in the quarter were elevated as we continue to invest in technology and compliance, which I indicated last quarter would occur in the back half of the year.

This can be seen in the occupancy and equipment expense line, which includes our technology costs as well as legal and consulting fees. We expect legal and consulting fees to remain elevated in the fourth quarter and then to taper off into fiscal year 2026. Deposits held on the company's balance sheet at June 30, 2024 declined from a year ago, primarily due to the timing of when the quarter ended and the runoff of EIP deposits. Custodial deposits held at partner banks on June 30, 2024 were $431 million, an increase from $353 million a year ago. Loans and leases at June 30, 2024 increased when compared to last year. As Brett mentioned, this represents pretty significant growth since our prior year's total loan balance included insurance premium finance loans, which were sold earlier this year.

Additionally, the yield on new originations on commercial finance loans during the quarter was 9.55% as compared to the March quarter yield on average balances of 8.24%. Our allowance for credit loss, excluding our seasonal tax service lending, was 160 basis points in the quarter, with an annualized net charge-off rate in the quarter of 52 basis points. As we mentioned before, our NPL ratio can be a bit lumpy from time to time, but then recover in the next quarter or two as the loans either return to performing or we are able to recover the collateral. In the June quarter, the increase in non-performing loans was driven by three loans in different loan verticals. One was related to fraud, but is well collateralized relative to carrying value.

The other two we expect to either return to accrual status or to result in recovery that will cover the majority of, if not the full balance. This is what makes our commercial finance team so successful, how we remain comfortable with our credit book and why we focus on the net charge-off rate versus NPL ratio. Our liquidity remains strong with almost $2.7 billion available. This is higher than where we were last year at this time, and we're extremely pleased with our position. During the quarter, we were able to repurchase approximately 604,000 shares at an average price of $74.49. This brings year-to-date repurchases to almost 1.9 million shares.

Based on our preliminary analysis, this accounting change should have a negative impact on net income in fiscal 2022 and 2023, primarily due to the increase in provision that will be recognized early in the life of the contracts as the portfolios ramped up. The inflection point appears to be 2024 when the impact of the recognized credit enhancements began to flow through as the portfolios approached a steady state, thus producing higher net income. However, should these portfolios remain in this steady state, we would expect them to have a more muted impact on fiscal fourth quarter 2025 and full year 2026. Therefore, for fiscal year 2025, we are expecting a preliminary EPS range of $7.50-$7.80. This includes the following assumptions: one rate cut in fiscal Q4 of 2025, an effective tax rate of 16%-20%.

For fiscal year 2026, we're introducing a preliminary EPS range of $8.25-$8.75, which includes the following assumptions: no rate cuts during the year, an effective tax rate of 18%-22%, and guidance for fiscal year 2025 and fiscal year 2026 includes expected share repurchases. I'd like to reiterate again that these are preliminary numbers pending the outcome of our restatement. This concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. The first question comes from Joe Yanchunis with Raymond James. You may proceed.

Joe Yanchunis (Analyst)

Good afternoon.

Brett Pharr (CEO)

Hey, Joe.

Joe Yanchunis (Analyst)

It appears the accounting change is taking a little longer to remedy than expected. Can you discuss how much of a distraction this has been for management, and if you have a sense on when we can expect a new balance?

Greg Sigrist (CFO)

I think the accounting methodology itself, from a distraction perspective, we've got the lion's share of it behind us, Joe. There's a lot of process that goes into working back through 13 quarters, which is what it takes, and then redrafting a super Form 10-K and whatnot. I would say we're probably in the middle to later innings in terms of getting it completely done behind us. We're obviously comfortable enough with the methodologies and we're far enough along on all the quantifications that we felt comfortable putting out these preliminary numbers. You probably have noticed in the IR deck itself in the back, we actually put in eight quarters of the new balance sheet and income statement with the new accounting. That should give you a sense of where we are at the comfort level.

Joe Yanchunis (Analyst)

Okay, I appreciate that. Kind of sticking on this topic, perhaps I missed this, but can you quantify the incremental expenses associated with the accounting change? Do you have a sense for how much earnings will be pulled forward from prior periods to future periods?

Greg Sigrist (CFO)

That was, I think, the genesis of being able to put the eight-quarter table in for you. Unfortunately, you're going to have to wait until we file the restated Form 10-K to see 2022 and 2023, the full years. As I mentioned, directionally, you're going to see lower income in those years as we built the provisions. I think as we've disclosed in our Form 8-K filing, we won't get the benefit of the contractual waterfall payments for the credit enhancements until we actually receive them. Those really hit the inflection point in 2024.

When you go back and you see the quarterly numbers we're able to share with you in the IR deck and compare them to what was reported, what you're going to see is additional income in 2024, but then it kind of levels out and the impact since then really over the last three to four quarters has been fairly muted, pretty flat in the aggregate. I think your other question was on expenses. Again, as you do that math and you get at a line item level, that will pop out. It'll show you what those impacts were quarter on quarter for that time horizon.

Joe Yanchunis (Analyst)

Okay, I appreciate that. I haven't had a chance to dig through everything yet, just kind of given the restatements that were there. Kind of shifting over to credit quality, it looks like there's a little degradation in the quarter and you attributed the increases in NPLs to commercial and consumer finance portfolios. Can you provide a little more color on what occurred?

Brett Pharr (CEO)

Yeah, this is Brett. Commercial, and you know, this is not a portfolio question. These are three distinctive episodic events that happen sometimes in different verticals or sub-asset classes that we have. There is no portfolio or systematic kind of thing going on here. These are just stories. We have these all the time. As Greg mentioned in his comments up front, one of them was a fraud that has been appropriately written down to where we know we will get out with the collateral we have, which we know how to manage. The other two are actually trending quite positively, but they are very much covered by collateral value as well. There is no real credit story here. There are three different individual stories about some things that happened that are unrelated and very unique. We have had these before. We have talked about this in the past.

What we focus on is the net charge-off rate because an awful lot of times these things turn into recoveries as well because we are particularly good at managing collateral.

Joe Yanchunis (Analyst)

I appreciate that. Last one from me here, I just want to zoom out a little bit. AI has been a pretty big theme across the market over the past year or so. As a tech-forward bank, can you discuss your strategy around AI and if that's something you're pursuing and how you think that could benefit, say, the P&L over the near to intermediate term?

Brett Pharr (CEO)

Yeah, so first of all, like most forward-looking companies, we're thinking about AI in areas of efficiency. These are office tools. These are things that you do that are around software, engineering. Eventually, it will likely get to some development capabilities. That's a fairly common thought that you will get from most forward-thinking companies. Obviously, in a bank, we have to think very carefully about information security and models and being sure the models are tested, etc. We're doing that and we're working on that. Over time, that'll create some efficiencies for us. I think particularly exciting in our space is because of the third-party delivery of banking services. We are responsible for our partners' actions that are facing a consumer.

There are a lot of opportunities in AI to be able to do things that, instead of being sort of a sample of what's going on, maybe full file, and be able to do it much more efficiently and more quickly. I think that's going to help a lot with us ultimately in the cost structure. Now, you went, the tail end of your phrase was how it will impact the P&L. I think in the next couple of years, you're not going to see any impact in the P&L from this. What you're going to see over time is potential less increase in cost because we won't have to add more as we bring on more volumes. I don't think there's going to be any kind of a dramatic shift in that, in the intermediate term.

Joe Yanchunis (Analyst)

Understood. I appreciate it. Take my questions.

Brett Pharr (CEO)

Yeah, thanks, Joe.

Operator (participant)

Thank you. There are currently no other questions queued. As a quick reminder, it is star one on your telephone keypad if you'd like to ask a question. The next question comes from Tim Switzer with KBW. Your line is open.

Tim Switzer (VP of Equity Research)

Hey, guys. Sorry, I just jumped over from another call. One of the questions I had, and apologies if you already talked about this, but I believe you guys maybe have one or two partners with some crypto-related partners. I'd love to know what products you're offering there, what your services are. Have you guys explored any opportunities internally to develop any kind of crypto-related products on your side, maybe a stable coin or anything like that, or how you could support the growth in this industry going forward?

Brett Pharr (CEO)

You're right on your first point, being that we have, for some time, provided what I'll call access devices in US dollar to partners that provide crypto-related digital wallets. That's mostly so they can onboard and offboard assets from their particular consumer's wallets or investor's wallets. That's been there for a while, and that's our bread and butter, and we know how to do that, and we like doing that. Obviously, being in the payments business, you could surmise we're looking at all these things. There are a whole lot of use cases that banks like ours could be considering. Being a tech-forward bank, we would like to be ahead on some of those things, and we are evaluating that. There's also just a whole lot of movement going on right now. It's going to be a little while before it's clear how things settle out.

One thing to remember about us is we tend to be much more around consumer-type transactions. We do some B2C. We do some very limited B2B. Likely, the early use cases for this are in the B2B space or in the international space, which may not be our first place to go look. We're thinking about various use cases and what makes sense and working with our partners and the networks to figure out the right answer in that. It's here to stay, and we'll likely have to be a player.

Tim Switzer (VP of Equity Research)

Okay. Yeah, makes sense. Can you provide an update on the credit trends you're seeing in the portfolio, particularly within the commercial finance? Is there any pressure at all from some of the macro uncertainty or anything like that, or higher rates, or are most of your borrowers still doing pretty well?

Brett Pharr (CEO)

They're doing very well. We noted in our comments that NPL bumped a little bit this time. You can go back and see that, but there are three credits that are what I would call episodic, and they're in different verticals that have their own story, and we're handling those correctly, and they're collateral managed, and they're covered one way or the other. We tend to manage that net charge-off line, because even when there is a write-down, oftentimes because of our collateral management approach, they go right back up. No trends, no story, no industry that's in it. We generally do not do commercial real estate, which is important to know. We're in good shape.

Tim Switzer (VP of Equity Research)

Okay. Thank you. Can you update us on the partner pipeline in your banking-as-a-service business? How is that trending? I assume still pretty robust. What are some of the more near-term opportunities you guys are seeing within embedded finance specifically?

Brett Pharr (CEO)

Yeah, so the pipeline continues to be strong. As we've gone through sort of an industry reshuffle, there's lots of people looking for a different primary or secondary bank partner. We sort through those and we evaluate those, and those are ongoing. We said in our comments, this time it contracted 11, is that right? Give me straight, 11. Either new contracts for existing partners or new partners this year, right? That's happened already, and then we've got things that we're looking at. Very much a full pipeline. Where are we seeing those? In order, I would rank them: consumer lending marketplace sponsorship has been really strong, then some of the more traditional issuing/payments things. The embedded finance thing is an emerging story, and those are all very, very unique use cases. You have to work through each one of those in the funds flow.

Those are coming, but I think those are farther out per se than the things that we're getting in the marketplace lending and issuing/payments.

Tim Switzer (VP of Equity Research)

Okay, got it. The last question I have for you is your expectations to continue to point capital through share repurchases.

Greg Sigrist (CFO)

Yeah, nothing's really changed there, Tim. I think, as I said in my prepared remarks, we've repurchased roughly 1.9 million shares this year, which is pretty phenomenal. Particularly given our ability to generate capital, we would expect to continue buying back shares. I would think that it's going to probably stay in that more muted range for next year. We still want to continue to accrete a bit more capital and be mindful of where our share price is trading. With the trends we've seen, where our multiple is, we still think it's a green light, though.

Tim Switzer (VP of Equity Research)

Awesome. Appreciate all the color. Thank you, guys.

Greg Sigrist (CFO)

Got it. Thank you, Tim.

Brett Pharr (CEO)

Thank you.

Operator (participant)

Thank you. I'll now turn it back over to the management team for closing remarks.

Brett Pharr (CEO)

Thank you, everyone, for joining our call today. Have a great evening.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.