Business context and reporting period
Pathward Financial, Inc. (NASDAQ: CASH), a bank holding company whose principal subsidiary is Pathward, N.A., filed this Form 10-Q for the fiscal first quarter ended December 31, 2023. Comparisons of operating results are to the three months ended December 31, 2022; balance-sheet comparisons are generally to September 30, 2023. The company reports Consumer, Commercial, and Corporate Services/Other segments.
Financial and operating highlights
| Metric | Quarter ended Dec. 31, 2023 | Comparable / prior balance |
|---|---|---|
| Total revenue | $162.8 million | $149.8 million; up 9% |
| Net interest income | $110.0 million | $84.1 million; up 31% |
| Net interest margin | 6.23% | 5.62% |
| Provision for credit losses | $9.9 million | $9.8 million |
| Net income attributable to parent | $27.7 million | $27.8 million |
| Diluted EPS | $1.06 | $0.98 |
| Operating cash flow | $22.4 million | $42.4 million |
Net interest income benefited from higher asset yields, growth in interest-earning assets, and an improved asset mix. Average interest-earning assets rose to $7.03 billion from $5.93 billion; average loan and lease yield increased to 8.33% from 7.70%. Average cost of funds rose to 0.35% from 0.07%, while the reported overall cost of deposits was 0.21% versus 0.01%.
Noninterest income fell 20% to $52.8 million, chiefly because the prior-year quarter included a $10.0 million trademark-sale gain and because card and deposit fees declined. Noninterest expense increased 14% to $119.3 million, notably reflecting card processing costs, compensation, and other expenses. A $2.5 million gain on an investment in the Pathward Venture Capital business partly offset lower noninterest income.
Balance sheet, liquidity, and credit
- Total assets were $7.93 billion, up from $7.54 billion at September 30, 2023. Cash and cash equivalents were $671.6 million, compared with $375.6 million.
- Gross loans and leases were $4.43 billion, up $60.2 million sequentially and $916.6 million year over year. Sequential growth was led by seasonal consumer and tax-services lending and commercial lending, partly offset by lower warehouse finance and insurance premium finance balances.
- Deposits increased 5% sequentially to $6.94 billion. Borrowings declined to $33.6 million from $46.9 million; there were no short-term borrowings at quarter-end.
- Management reported more than $3.8 billion of total available liquidity, including $672 million of cash and $1.1 billion of custodial off-balance-sheet deposits, plus potential borrowing and wholesale funding sources. Unfunded loan and lease commitments were $1.51 billion.
- Stockholders’ equity was $729.3 million, up from $650.6 million, substantially reflecting improved accumulated other comprehensive income and retained earnings. The company and bank exceeded regulatory minimums and remained classified as well-capitalized.
- The allowance for credit losses was $53.8 million, or 1.22% of loans and leases, versus $49.7 million and 1.14% at September 30. Quarterly net charge-offs were $5.5 million, compared with $3.2 million a year earlier.
- Nonperforming loans and leases were $39.5 million, or 0.88% of gross loans and leases, down from $56.2 million and 1.26% at September 30. Total nonperforming assets were reported as 0.53% of assets, versus 0.77%.
Changes, outlook, risks, and unusual items
- Quarterly net income was broadly flat year over year despite higher net interest income: the prior-year trademark gain and lower current-period card and deposit fees, alongside higher expenses, offset much of the improvement.
- Unrealized gains on debt securities drove $67.0 million of other comprehensive income for the quarter. Available-for-sale securities still had $250.7 million of gross unrealized losses at December 31, down from $339.3 million at September 30. Management attributed losses to market conditions and interest rates, not credit deterioration, and stated it neither intends nor expects to be required to sell securities before recovery.
- The company announced a multi-year extension with a longstanding partner on January 16, 2024, supporting collaboration on product innovation and expanded offerings. It gave no quantified earnings or revenue guidance in the supplied filing text.
- Government stimulus-program deposits totaled $837.6 million, including $503.1 million on inactive cards. Management expects inactive balances to decline by approximately $310 million during the remainder of fiscal 2024 as unclaimed funds are returned to the U.S. Treasury.
- Management cited uncertainty from interest rates, inflation, economic conditions, bank-industry developments, customer behavior, credit performance, partner and third-party relationships, regulation, and cyber and technology risks. Its interest-rate model estimated one-year net interest income sensitivity of -6.2% for a 100-basis-point decline and +5.9% for a 100-basis-point increase; actual results may differ.
- There were no material changes to the risk factors from the prior annual report, no material pending legal proceedings disclosed, and no material subsequent events identified through the filing date. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved net interest margin and loan growth persist as funding costs and rate-sensitive card-processing expenses evolve.
- Trends in credit quality, charge-offs, delinquencies, and allowance adequacy, especially in consumer, tax-services, and commercial lending.
- The pace and financial effect of the expected reduction in inactive stimulus-program deposits, and the stability of BaaS and custodial deposit funding.
- How securities unrealized losses, liquidity availability, and capital ratios respond to changes in interest rates and market conditions.