Pathward Financial, Inc. — Form 10-Q Summary
Business context and period: Pathward Financial is a bank holding company whose business includes Banking-as-a-Service and consumer products, commercial finance, and corporate/treasury activities. This report covers the first quarter of fiscal 2023, the three months ended December 31, 2022. Results are compared primarily with the three months ended December 31, 2021; balance-sheet changes are compared with September 30, 2022. Amounts below are in U.S. dollars.
Financial performance
- Revenue: Total revenue was $149.8 million, down 5% from $158.2 million. Net interest income rose 17% to $84.1 million; noninterest income fell to $65.8 million from $86.6 million.
- Profit: Net income attributable to Pathward was $27.8 million, versus $61.3 million; diluted EPS was $0.98, versus $2.00. Pretax income was $35.0 million, compared with $75.6 million.
- Drivers and margins: Net interest margin increased to 5.62% from 4.59%, reflecting higher asset yields and a lower balance of low-yielding cash. The prior-year period included a $50.0 million trademark-sale gain; the current quarter included the final $10.0 million payment from that sale. Card and deposit fees increased, including $12.9 million of servicing fees on custodial off-balance-sheet deposits. Noninterest expense rose 27% to $105.1 million, including higher card-processing, compensation, and legal and consulting costs.
- Credit costs: Provision for credit losses was $9.8 million, versus $0.2 million. Net charge-offs were $3.2 million, versus $1.1 million. The allowance for credit losses was $52.6 million, or 1.50% of loans and leases, up from $45.9 million and 1.30% at September 30.
- Cash flow: Operating cash flow was $42.4 million, compared with $157.1 million. Investing activities provided $45.4 million, versus $147.5 million used; financing activities used $107.1 million, versus $906.4 million provided. The prior-year financing inflow included a substantial increase in deposits. Cash and cash equivalents ended the quarter at $369.2 million, down from $388.0 million at September 30.
Financial position, liquidity, and capital
- Total assets were $6.66 billion, down from $6.75 billion at September 30. Gross loans and leases were $3.51 billion, down 1% sequentially; the decrease was mainly in warehouse and commercial finance, partly offset by consumer and seasonal tax-services growth. Commercial finance represented 86% of gross loans and leases.
- Deposits were $5.79 billion, down 1% sequentially, principally due to lower noninterest-bearing deposits. Long-term borrowings were $35.0 million, down from $36.0 million. Stockholders’ equity was $659.1 million, up from $645.1 million, primarily reflecting improvement in accumulated other comprehensive loss.
- Available-for-sale securities had a fair value of $1.85 billion and gross unrealized losses of $268.2 million. Management attributed substantially all losses to interest rates and credit spreads, and stated it did not intend or expect to be required to sell securities before recovery. Accumulated other comprehensive loss was $201.7 million.
- The Company and Bank exceeded regulatory minimum capital requirements and were classified as well-capitalized. Company ratios included an 8.37% Tier 1 leverage ratio, 12.31% common equity Tier 1 ratio, and 14.29% total capital ratio.
- Unfunded loan and lease commitments were $1.24 billion. Management said expected loan repayments and other funding sources should meet foreseeable liquidity needs.
Material changes, outlook, and risks
- The lower year-over-year earnings largely reflect the prior-year $50.0 million trademark-sale gain, while current-quarter results included the remaining $10.0 million payment. The Company recorded $3.7 million of current-quarter rebranding expenses and said it did not anticipate further material rebranding costs.
- Nonperforming loans and leases rose to $40.9 million, or 1.16% of gross loans and leases, from $29.2 million, or 0.82%, at September 30. The increase was primarily associated with one commercial-finance relationship. Nonperforming assets were 0.68% of total assets, versus 0.46%.
- Card-processing expense under certain partner agreements is linked to an interest-rate index and reprices immediately with changes in that index. About 43% of deposits were subject to these arrangements; related expense was $14.0 million, versus $0.1 million a year earlier. Custodial deposits at third-party banks were $2.23 billion, up seasonally from $1.31 billion at September 30.
- Management identifies interest-rate movements, inflation and economic conditions, credit quality, partner and third-party dependence, fraud and cybersecurity, regulation, and execution of the Pathward rebrand among its risks. The filing provides no specific earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of the full fiscal year.
- Controls: Management concluded disclosure controls were not designed effectively to ensure timely alerting of material information as of December 31, 2022. A previously reported material weakness involving user access and segregation of duties in two loan systems remained under remediation. Management reported remediation steps and testing, but the broader remediation work was ongoing.
- The filing reports no material pending legal proceedings and no material subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether credit deterioration, especially the identified commercial-finance relationship, leads to further nonperforming loans, charge-offs, or allowance increases.
- How rate changes affect net interest income and the card-processing costs tied to rate indices, including the net effect of custodial-deposit servicing fees.
- Whether the $268.2 million of unrealized available-for-sale securities losses remain recoverable without sales that would realize losses.
- Progress and independent validation of the loan-system control remediation, and whether disclosure controls are subsequently assessed as effective.
- Whether deposit levels, the $1.24 billion of unfunded commitments, and capital ratios remain supportive of liquidity and planned growth.