Pathward Financial, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; quarterly comparisons below are for the fiscal fourth quarter ended that date. Pathward is a bank holding company whose principal subsidiary, Pathward, N.A., operates Banking-as-a-Service (BaaS) and Commercial Finance businesses.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $704.5 million | $601.1 million |
| Net interest income | $387.9 million | $307.3 million |
| Net interest margin | 6.04% | 4.84% |
| Provision for credit losses | $57.4 million | $28.5 million |
| Noninterest income | $316.6 million | $293.8 million |
| Noninterest expense | $465.0 million | $385.3 million |
| Net income attributable to parent | $163.6 million | $156.4 million |
| Diluted earnings per share | $5.99 | $5.26 |
| Operating cash flow | $303.1 million | $268.8 million |
Fourth-quarter revenue was $161.0 million, up 31% year over year, and net interest margin was 6.19%, versus 5.21%. Quarterly net income attributable to the parent was $35.9 million, or $1.36 per diluted share, compared with $23.4 million, or $0.81, in the prior-year quarter. Quarterly net interest income was $104.9 million; provision for credit losses was $9.0 million, versus a $2.6 million provision reversal in Q4 FY2022.
Balance sheet, liquidity and credit
- Total assets were $7.54 billion, up $788.1 million year over year. Gross loans and leases were $4.37 billion, up $829.8 million; commercial finance made up 85% of the gross portfolio.
- Deposits rose 12% to $6.59 billion. Cash and cash equivalents were $375.6 million. Total borrowings were $46.9 million, including $13.0 million of short-term borrowings. Stockholders’ equity was $650.6 million.
- Management reported more than $2.6 billion of available liquidity, including cash, custodial off-balance-sheet deposits and borrowing capacity. The company and Bank were classified as well-capitalized; the Bank’s CET1 ratio was 11.81% and total capital ratio was 12.76%.
- Nonperforming assets increased to $58.0 million, or 0.77% of assets, from $30.9 million, or 0.46%. Nonaccrual loans rose to $37.4 million, primarily due to one sizable commercial finance relationship.
- The allowance for credit losses was $49.7 million, or 1.14% of loans and leases, compared with $45.9 million, or 1.30%. Net charge-offs were $53.7 million; tax-services net charge-offs were $35.8 million.
- Available-for-sale securities had $339.3 million of gross unrealized losses at year-end. Management attributed the losses to interest rates rather than credit and stated it did not expect or intend to sell the securities before recovery of amortized cost.
Material changes and notable items
- Annual revenue increased 17% and net income increased 5%. Higher asset yields, loan growth and an improved earning-asset mix lifted net interest income; annual NIM rose 120 basis points.
- Noninterest income benefited from custodial deposit servicing fees, which increased to $53.4 million from $6.4 million. Higher card-processing expense partly offset the benefit: rate-related processing expense was $77.4 million, compared with $9.9 million, reflecting contractual terms linked largely to the Effective Federal Funds Rate.
- Credit-loss provision increased to $57.4 million, primarily reflecting commercial portfolio growth. Nonperforming assets also rose, with management identifying a single sizable commercial relationship as the main driver of the increase in nonaccrual loans.
- Income tax expense fell to $16.3 million from $28.0 million; the effective tax rate declined to 9.0% from 15.2%, primarily due to investment tax credits. The company originated $93.6 million of renewable-energy tax credits in FY2023.
- Cash provided by operating activities was $303.1 million; investing activities used $920.8 million and financing activities provided $604.9 million. The filing reports cash flow totals, but does not provide a company-defined free-cash-flow measure.
- The company repurchased 2.63 million shares during FY2023 and authorized an additional 7 million-share repurchase program through September 30, 2028. Quarterly dividends were $0.05 per share.
Outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects approximately $380 million of inactive government-stimulus card balances to be returned to the U.S. Treasury during FY2024; $556.8 million of such balances were inactive at year-end.
- Management said loan repayments and other funding sources should meet foreseeable liquidity needs, while noting that deposit flows, loan repayments and funding access are sensitive to interest rates, competition and economic conditions.
- Key risks include credit deterioration and allowance-estimation uncertainty; interest-rate exposure; dependence on BaaS partners and concentrated program relationships; deposit volatility; fraud, cybersecurity and operational disruptions; and heightened regulatory scrutiny of bank-fintech partnerships. Crossing $10 billion in assets could trigger additional requirements, including loss of the small-issuer Durbin Amendment exemption.
- The $10 million FY2023 gain on sale of trademarks was the final payment associated with the sale of the Meta tradenames; the sale also generated a $50 million gain in FY2022. The company completed its rebranding to Pathward in December 2022.
- Gregory A. Sigrist was appointed CFO effective after filing; CFO Glen Herrick planned to retire after assisting with the transition. The auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor reported effective internal control over financial reporting as of September 30, 2023.
Important facts for investors to verify
- Whether the rise in nonperforming commercial loans remains concentrated in one relationship or broadens, and how that affects charge-offs and provision expense.
- Whether net interest margin and earnings hold up as interest rates, partner processing costs and deposit-related servicing fees change.
- How quickly inactive stimulus-card balances run off, and the resulting effect on deposits, assets and liquidity.
- The severity and duration of unrealized securities losses, and the company’s ability to avoid sales that would realize losses while meeting liquidity needs.
- Progress on the new share repurchase authorization, capital levels and dividend capacity, including regulatory constraints.