Pathward Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. Comparisons are with the corresponding 2022 periods unless otherwise noted. Amounts are in U.S. dollars.
Business context and financial performance
Pathward is a bank holding company with Consumer (including Banking as a Service and tax-related products), Commercial Finance, and Corporate Services/Other segments.
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 |
|---|---|---|
| Total revenue | $228.4 million, up 18% | $378.3 million, versus $351.8 million in 2022 |
| Net interest income | $101.4 million, up 21% | $185.5 million, up 19% |
| Net interest margin | 6.12%, versus 4.80% | 5.88%, versus 4.70% |
| Provision for credit losses | $36.8 million, versus $32.3 million | $46.5 million, versus $32.5 million |
| Net income attributable to parent | $54.8 million, versus $49.3 million | $82.6 million, versus $110.6 million |
| Diluted earnings per share | $1.99, versus $1.66 | $2.95, versus $3.66 |
| Net cash provided by operating activities | Not stated for the quarter | $183.8 million, versus $291.3 million |
The filing’s MD&A describes six-month revenue as up 18%, but the reported totals of $378.3 million and $351.8 million imply growth of approximately 7.5%; investors should verify this inconsistency. The six-month comparison also includes a $10.0 million trademark-sale gain in 2023 versus $50.0 million in 2022.
Financial condition, liquidity, and capital
- At March 31, total assets were $6.87 billion; gross loans and leases were $3.73 billion and deposits were $5.90 billion.
- Cash and cash equivalents were $432.6 million. Total borrowings were approximately $77.5 million, including $43.0 million of short-term borrowings and $34.5 million of long-term borrowings.
- Management reported more than $4.0 billion in available liquidity options, including nearly $2.0 billion in custodial off-balance-sheet deposits, cash, and potential FHLB, Federal Reserve discount-window, and other funding. Unfunded loan and lease commitments were $1.61 billion.
- The company and bank exceeded regulatory minimum capital requirements and were classified as well-capitalized. Company ratios included a 12.05% common equity Tier 1 ratio and a 7.53% Tier 1 leverage ratio.
- Available-for-sale securities had $249.7 million of gross unrealized losses at March 31. Management attributed substantially all losses to interest rates and credit spreads, reported no allowance for credit losses on these securities, and said it did not intend or expect to be required to sell them before recovery.
Material changes and notable items
- Quarterly net income and EPS rose year over year, supported by higher net interest income and card and deposit fees. The higher net interest margin reflected increased asset yields and a changed earning-asset mix.
- Quarterly noninterest expense rose 23% to $127.1 million, including higher card-processing costs and equipment depreciation. Card-processing expense under indexed BaaS partner agreements was $20.4 million for the quarter, versus $0.2 million in the prior-year quarter.
- The allowance for credit losses rose to $84.3 million from $45.9 million at September 30, 2022. The increase was primarily driven by seasonal tax-services loans; the filing reports a $33.1 million increase in that portfolio’s allowance over the six-month period. Total allowance coverage was 2.27% of loans and leases.
- Nonperforming loans and leases were $28.5 million, or 0.76% of gross loans and leases, versus $29.2 million, or 0.82%, at September 30, 2022. Classified substandard loans increased to $230.0 million from $203.7 million.
- Tax-season refund-advance originations were $1.46 billion versus $1.83 billion in the prior year. Excluding two partners not renewed after the 2022 tax season, originations increased $116.2 million. Net tax-services product income after losses and direct expenses fell 14% to $29.7 million for the six months.
- A single legacy solar-generator relationship resulted in $6.8 million of pretax adverse impacts during the quarter, including $4.8 million of accelerated depreciation and a $2.0 million disposal loss. The filing says the event was isolated to this equipment type; $1.3 million of generator value remained on the balance sheet.
- The company repurchased approximately 1.17 million shares during the quarter at an average price of $46.60; $82.3 million of shares were repurchased during the six months. A $0.10 per-share dividend was declared for the six-month period.
Outlook, risks, and controls
- The filing provides no specific earnings or financial guidance. Management said liquidity should meet foreseeable needs and expected the roughly $1.0 billion of government-program deposits to run down by about $500 million over the next 18 months.
- Management highlighted uncertainty from inflation, rising rates, geopolitical events, recent bank failures, deposit behavior, and economic conditions. It also cited credit-quality, partner, prepaid-card demand, technology and cybersecurity, regulatory, and key-personnel risks.
- Interest-rate sensitivity modeling estimated one-year net interest income changes of -11.2% under a 200-basis-point rate decline and +10.5% under a 200-basis-point increase. These are model estimates, not guidance, and depend on assumptions about customer and deposit behavior.
- Management concluded disclosure controls and procedures were not designed effectively as of March 31, 2023. A previously reported material weakness involving access permissions and segregation of duties in two loan systems remained under remediation. Management reported remediation steps and ongoing broader review.
- No material pending legal proceedings or material subsequent events were reported. The filing says there were no material changes to previously disclosed risk factors, while adding or updating risks related to prepaid-card industry changes, key personnel, and banking-sector stress.
Important facts for investors to verify
- Reconcile the MD&A’s stated 18% six-month revenue growth with the reported revenue totals, which imply approximately 7.5% growth.
- Track the seasonal tax-services allowance and refund-advance originations, and assess whether credit costs normalize outside tax season.
- Monitor indexed card-processing costs, custodial-deposit servicing income, and deposit balances as interest rates and partner terms change.
- Assess the status and effectiveness of remediation for the material weakness and ineffective disclosure controls.
- Review the solar-generator exposure and the effect of continued share repurchases and deposit runoff on capital and liquidity.