Ladies and gentlemen, thank you for standing by, and welcome to the Pathward Financial Fourth Quarter Fiscal Year 2023 Investor 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 of Investor Relations. Please go ahead.

Thank you, operator and welcome. With me today are Pathward Financial’s CEO, Brett Pharr and CFO, Glen Herrick who will discuss our operating and financial results for the fourth fiscal quarter and full fiscal quarter 2023, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental file may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods. 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. Reconciliations for such non-GAAP measures are included in the appendix of the investor presentation. Now, let me turn the call over to Brett Pharr, our CEO.

Thanks, Darby, and thanks everyone for joining us today and for your continued support. We've just completed a year of solid results both financially and operationally. Remind you that we operated the intersection of traditional banking and alternative delivery channels and therefore this year we've had an expanding net interest margin, increased return on assets and increased return on equity. These great results are in spite of a tough economy and especially what has been a tough banking environment. When you combine these great results with the return of capital through share repurchase and dividends we have delivered value to our shareholders in multiple ways. Specific numbers for the year we were reported net income of $163.6 million, an increase of 5% and $5.99 per diluted share, an increase of 14%. In the fourth quarter, net income was $35.9 million or a $1.36 in diluted earnings per share. Our earnings growth was driven through expansion of our full year net interest margin to 6.04%, an increase of 120 basis points over fiscal year 2022. Our full year adjusted net interest margin including rate related processing fees grew 15 basis points to 4.83% from 4.68% in fiscal year 2022. Those metrics in the fourth quarter were 4.87% and 4.73% respectively. Besides the financials operationally we have a lot to be proud of. Across the enterprise our IT team delivered a reduction in rent costs and we're utilizing these funds to help us to continue to focus on growth. We're also from a people standpoint certified by as a Great Place to Work for the first time and Newsweek ranked us among America's greatest workplaces along with some special distinctions for women diversity and parents and families. To commercial finance specifically we grew total loans and leases by 23%. This was driven…

Thank you, Brett, and welcome on board, Greg. I look forward to working with you on the transition. Before I sign off on my last 42 earnings, it has been an honor and a privilege to serve as CFO of this company for the last 10 plus years. It has been a joy to watch the company and the team transform into an innovative entrepreneurial-driven bank. Our annual net income has grown from $13 million in fiscal year 2013 to over $160 million this year. From my start date through mid-October, our total shareholder return has exceeded 450% versus the NASDAQ community bank index increase of about 80% and the Russell 2000 index increase of just over 110%. We've achieved a great deal and I look forward to cheering on the team to even greater accomplishments. Now, on to the financial results. Net income for the quarter ended September 30th was $35.9 million or $1.36 per diluted share, an increase of $12.5 million compared to the prior year. For fiscal year 2023, net income totaled $163.6 million, an increase of $7.2 million relative to fiscal year 2022. Adjusting for various one-time items, including the impacts of our rebrand, the increase would have been $32.9 million or 25%. GAAP earnings per share of $5.99 increased 14% compared to last year, and when adjusting for the same items, core EPS increased to $6.09 in fiscal year 2023 compared to $4.49 in fiscal year 2022. In the fourth quarter, net interest income totaled $104.9 million, an increase of 32% relative to the prior year. This year-over-year increase was driven by additional earning asset balances as well as greater yields across the loan and securities portfolios. Our NIM expanded to 6.19% in the fourth quarter when accounting for the increase in rate-related processing expenses,…

Absolutely. [Operator Instructions] Our first question comes from the line of Michael Perito with KBW. You may proceed.

Hi, this is Mike's associate, Andrew filling in. Thank you for taking my questions.

Hey. How are you doing?

First off here, I was wondering -- good. How are you guys doing? Just first off here, I was wondering if we could get some updated credit outlook commentary, given some of the negative data points we've seen from other lenders, particularly in like the credit card and small business segments?

Yes. So, of course we don't have credit cards in the small business arena, commercial finance. As we've said, we're a heavily collateral managed loan lender and therefore we tend to do very well through these kinds of times. And so, we're not, while we're having -- some companies that are having some difficulties, we're not having any kind of losses associated with that out of any ordinary pattern. So we're feeling very confident about it, don't expect to have any trouble, and we believe our collateral managed approach will put us in a better place going through this cycle than other lenders may have.

And Andrew, I'd remind you that one thing that differentiates us, we no longer have a community bank, so we have a de minimis amount of commercial real estate on our books.

Great. Appreciate the color there. And then, just a quick follow-up on that. What are the provision assumptions that are going into the fiscal year 2024 guide?

Brett, assumptions.

Well, it's based on our originations and the outlook for the economy and where our growth is coming from. You’ve seen in the last couple quarters, our growth has come from higher quality, typically lower loss portfolios, SBA, USDA, and insurance premium finance. So that factors into both where the allowance levels are at, it also drives your CECL provision.

And then just lastly from me, and then I'll step back. Near term just a quick question on the margin. Do you believe the NIM will stabilize here if we're in a higher for longer environment, kind of as predicted, and there's no movement at the federal funds rate?

I mean, if we have stability here, higher for longer, our NIM will continue to widen. That's a key differentiator of our business model, is we still have a lot more upside on the yield side versus the cost, even if that one stays flat.

Appreciate all the color. Thanks for taking my questions.

Thank you.

Thank you for your question. The next question comes from the line of Eric Spector with Raymond James. You may proceed.

Hey, good afternoon. This is Eric on the line for David Feaster. Thanks for taking the question.

Hey Eric.

Kind of just, hey, how is it going? Staying on a similar page on the NIM, just curious how you think about operations in a higher for longer environment? Obviously, there's tailwind to the margin, but just curious if you could elaborate on the margin trajectory and then just any broader perspective how you think that would impact loan growth? And maybe any other impacts or impacts on any other business in a higher for longer environment?

Well, so the first thing kind of ties back to the previous question. As you offload longer duration loans that were at lower rates and replace them with duration loans at higher rates, we're going to continue to grow NIM even if Fed funds and primes stay flat. So that's kind of obvious. Now, the other element of your question is what's going on in the marketplace. And we're watching to see how much of a slowdown occurs in loan demand. Glen noted particularly that we're already migrated some in our growth to higher quality loans. Now, some of that is what's available in the marketplace. And so we see that leasing portfolios and others. And so that may well be what happens. But also if the economy gets into a little bit more of a difficult time, we may see some growth in our working capital and factoring assets. We've talked about that for I think nearly a year now. So it hasn't materialized. But that would be the next thing that would happen if the economy really slows down as people are starting to talk about.

Got it. That's helpful color. And then just kind of wanted to touch more on the capital side, so obviously regulatory capital remains strong. But TCE is then just curious if you're hearing any pushback from regulators on that. And that impacts your capital return opportunities at all. Looks like we've already started to repurchase some shares during the quarter, so maybe that's the answer. But just curious if TCE plays into the equation at all at this point?

We obviously watched that. And as you said, that's a factor. And we're comfortable. Our board's comfortable. You could assume regulators have a say in your capital levels and share repurchases as well. And I would say in a banking 30 plus years where as liquid a bank as I've seen.

Okay. And then just one last question. Just wanted to touch on what you're seeing on the SBA front. We're seeing growth opportunities. And do you remind us like how much of that book is government guaranteed? That’s my last question, I'll step back. Thanks for taking the questions.

Yes, we talked about. I’ve mentioned my comments that we've been identifying additional SBA partners where we can get volume coming through. And so, I would say the SBA business in general industry wide has slowed down. But we're able to get some more transactions because of new partners that we've brought on. So we're excited about that. The exact percentage of how much is government guaranteed or not varies depending on market conditions. Sometimes we sell off the government guaranteed portion. So I don't know, do we have those numbers?

It usually range about two-thirds, it moves up and down, as Brett said, but plus or minus two-thirds of it would be typically guaranteed.

Got it. All right, well, that's it for me. Thanks again.

Thank you.

Thank you.

Thank you for your question. [Operator Instructions] Our next question comes from the line of Frank Schiraldi with Piper Sandler. You may proceed.

Hey, guys, good afternoon.

Hey Frank.

I wanted to ask on the guide, the increase in guide. Anything you can point to specifically, is it just as simple as a bit of a change in rate outlook that's driving that increase here?

Yes, I mean, I think the higher for longer, what's going on should help us with NIM. And so we're feeling very comfortable about that. Obviously, we're just a few days into the year. So we're not getting carried away. But we felt like with the -- what we're seeing with the rate environment, we could bump it some and then we'll see what happens as we get through the year.

Okay. And then in terms of the expense base, I get the card processing expense that increase there. As far as, if you look at the other expense line was a bit elevated bounce around a bit, but it was a bit elevated link quarter and same with legal and consulting expense. So any sort of color or range you can give in terms of anything one time, sort of in the quarter and where you expect a better run rate, maybe to be on the expense side?

Yes. I would say this quarter is a pretty good run rate, Frank, excluding the rate related processing expenses.

Okay.

And I'll remind you, as you're aware, we do have a number of variable expenses. So where our expenses go partially driven by where our revenues go, but again, we're, we'll grow revenue at least two times expense grow.

Okay. And then just on credit, in terms of the NPA increase in the quarter, you mentioned the commercial finance side of it. Also, look like the tax business, and I think you noted in the release, the tax business drove some of that. And it looks like it's mostly or all in 90 days past doing accruing, at least for the tax stuff. And I just kind of surprised, would think that at this point, you just write anything off that's still outstanding. And so any color on that front?

Yes. We had a mixed shift in our tax lending this year from our BaaS providers to more of the independence. And obviously, revenues related to that, but also had higher loss rates, which we expected. So it's just somewhat of a mixed shift there. And then timing of IRS, refunds when they do their drops. And there's still some of them coming. But that's where we're at today. It just seems like the cycle has gotten pushed back later this year in a lot of the processes.

Okay. It just seems like based on where the reserves are on that business. It seems like you don't anticipate significant losses in this $5 million bucket that's in NPA now. Is that fair?

That's fair. Yes. That would not expect anything material from that.

Okay. And then if I could just sneak in one last one. As you -- I know you tend to have longer term partnerships. So, I guess you don't have a ton renewing every day, but in terms of the partnerships that have renewed, I'm just wondering, are you seeing better pricing? Are you seeing more narrow pricing given that we've seen some of these smaller banks entering the market and to Brett's point, maybe over time, they get crowded out. But that given that they're in now, is that kind of what you're seeing as partnerships renew tighter pricing?

Well, I mean, there's been pricing pressure, but it's probably been driven more by the rise in interest rates and the desire to focus on commission on deposits than anything else. And we don't, like you said, we don't have a whole lot of these going on at a time. So we'll see how it rises out. But I would not say that we have experienced any benefit of what I think will be a washout yet. We've experienced pressure on pricing somewhat because of the interest rate rise. We're just all factored in here.

Okay. Yes, it's in your guidance.

Yes.

Right. So you're basically seeing more of an ask on the depository side in terms of some sort of return there?

Yes, that comes out. Now, what we tend to do is there's a trade off of fees paid versus commission on deposits, et cetera. And that's all part of the contract negotiations you go through. But again, we're predicting and feel solid about our guidance around expanding them and the result of that. So we're not too concerned about it.

Okay. Great. I appreciate all the color and enjoy retirement Glen. Thanks.

Yes. Thank you, Frank. I'll miss you. Thanks.

Me too.

Thank you for your question. I will now pass the line back to our CEO, Brett Pharr.

Thanks, everybody, for joining today. I do want to make one final comment today in Washington. The Federal Reserve held a hearing on the debit card interchange fee calculations. And I want to remind everybody that by legislation, the only authority they have for that calculation relates to banks that are over 10 billion in asset size. And so there may be some confusion out there. I want to be sure we cleared that off that. It's a small issue where we are not impacted by that proposed change in rule by the Fed. So I just want to make that clear. We appreciate everybody joining today and look forward to having direct conversations with you. Thank you.

That concludes Pathward Financial Fourth Quarter fiscal year 2023 investor conference call. Thank you for your participation. You may now disconnect your line.