Ladies and gentlemen thank you for standing by and welcome to Pathward Financial’s Fourth Quarter and Fiscal Year 2024 Investor Conference Call. [Operator Instructions] 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, Chief of Staff and Investor Relations. Please go ahead, Darby.

Thank you, operator and welcome. With me today are Pathward Financial’s CEO, Brett Pharr; and CFO, Greg Sigrist, who will discuss our operating and financial results for the fourth quarter and full fiscal year of 2024, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental slides, maybe 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 statements. 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, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all time periods referenced are fiscal quarters and fiscal years and all comparisons are to the prior year period, unless otherwise noted. Now, let me turn the call over to Brett Pharr, our CEO.

Thanks, Darby and welcome everyone to our earnings conference call. 2024 was a great year for Pathward. We welcomed Greg to the company, recertified as a great place to work, remain committed to our remote-first approach, announced new partnerships and extended others, celebrated employees who won multiple awards and most recently, announced that our newly rebranded Partner Solutions team won Finovate’s Best Banking as a Service provider. In addition, we continue to deliver on our purpose as we help consumers and small to medium-sized businesses with access to the financial markets. These successes translated into solid financial results as well. We reported earnings per diluted share of $6.62 for the fiscal year, which was just above the high end of the guidance range we provided last quarter and represents year-over-year growth of 11%. Net income for the year was $168.4 million. Our results were driven in part by an increase in net interest income of 17% when compared to last year. We also expanded our full year net interest margin and adjusted net interest margin, which includes contractual rate-related processing expense to 6.41% and 4.85%, respectively. Performance metrics remained strong, with return on average assets for the year of 2.2% and return on average tangible equity of 41.7%. We continue to focus on optimizing the asset mix on the balance sheet. With an asset limit of $10 billion in order to remain below the Durbin Amendment exemption, we want to ensure that the assets we are holding are giving us the opportunity to maximize our ROA. We have seen the results of these efforts as our loan and lease portfolio yield moved from 8.33% for the fourth quarter of 2023 to 8.67% for the fourth quarter of this year. As part of this strategy, during the fourth quarter, we announced…

Thank you, Brett. Net income for the quarter ended September 30 was $33.6 million, or $1.35 per diluted share. As has been the case all year, net interest income in the quarter was the driver of our results, growing 10% when compared to the prior year quarter. For the full year, net interest income grew 17%. The fourth quarter net interest margin of 6.66% and adjusted net interest margin of 5.15%, both expanded sequentially from the third quarter of 2024. This was largely due to an increase in our loan and lease yields, combined with the continued rotation from the securities portfolio, which contributed to a mix shift into higher earning assets. The new production yield on all commercial finance loans and leases in the quarter was 8.82%, compared to the quarterly yield on the same portfolio from last quarter of 8.39%. This performance is a direct result of our focus on risk-adjusted returns and ROAs. We are very pleased with what the team has been able to accomplish and look forward to continuing to benefit from this focus moving into 2025. Provision for credit losses was approximately $800,000 and compares to $9 million for the same quarter last year, with the decrease primarily stemming from reductions in the commercial finance portfolio and the tax services portfolio. A portion of the commercial finance reduction is related to the sale of our insurance premium finance business. During the quarter, we moved these loans into a held-for-sale status from an accounting perspective, which reverses the provision for credit losses. In tax services, the provision benefited from work we did prior to last year’s tax season to enhance data analytics, underwriting and monitoring. For the year, provision for credit loss was $42.6 million, a 26% decrease from the prior year, demonstrating our ongoing…

[Operator Instructions] Our first question comes from the line of David Feaster with Raymond James.

Hi. Good afternoon everybody.

Hi David.

Doing great. Let’s start on kind of your last commentary on the updated guidance. I am curious maybe, what are some of the key factors from your standpoint to get you to the top end of the bottom? And then assuming additional cuts, how do you think that would impact guidance? And does the guidance include that securities restructuring like you were talking about, or is that part of the premium finance sale that’s excluded?

Well, I will try to take all 14 of those questions.

Sorry, I have a lot in there.

I think the rate, let me – let’s start with the rates, right. I mean as I have said, we had two front-end curve rate cuts this fiscal year, this calendar year still. And we pulled in the consensus curve from, I think it was effectively October 1st. And that, as you know most of our loans are going to re-price and a lot of the work we are doing on balance sheet strategy is going to re-price along the middle part of the curve, that 3-year to 5-year, which frankly, we are pretty substantially higher today than we were when we – versus the curve we used. And you have heard me say it many times, the bond market has been wrong pretty consistently for the last couple of years, so which is why we run a number of scenarios here. Now, the way I think about the short end of the curve is we are still pretty close to neutral, but each 25 basis point rate cut does have a modest negative impact to us. And it’s not completely linear. We do have some consumer finance programs that actually would hit break points after each like, for example, 100 basis points now. But the point though is, the pace of cuts will matter. If there are more cuts later in the year, obviously, muted impact on this year. But typically, though the overnight cuts, we can mitigate that just through ongoing balance sheet management, including some of the balance sheet velocity work we are doing, which includes gain on sales of the structured finance book. The middle part of the curve, again, as long as we stay above where the rates were when a lot of those loans were put on the remaining loans in 2021 and 2022, we have got a pretty long runway there from a rate perspective. So, part of this is going to depend upon the rate curve. For the things we can control, which are in part includes the pipelines, pipelines are strong. Commercial finance pipeline, we are very pleased with it, really across all the verticals we talk about. And I think Brett has already touched on the successes we have had so far this quarter, even once just in the last couple of days, the last week or so around pulling through on the Partner Solutions pipeline, David. So, again, I think it’s just – part of it is the timing on when the pipeline sit, particularly on the Partner Solutions side, and then where the rate environment goes. But again, we have – we feel like we have all the tools we need from a balance sheet strategy perspective to keep pushing it up.

And David, I think you had a question about securities portfolio as well. So, key to understand this guidance does not include the IPF sale nor the impact on the securities portfolio associated with that. That being said, and listen carefully to Greg’s comments, while we know there is going to be an EPS benefit over time, that’s not immediate because you are taking the assets off of the balance sheet, and then you will appropriately and with great stewardship add them back. And I think we are talking about a 12-month to 18-month cycle before we get the full benefit of that. But none of that is in our guidance. Our slight guidance increase is related to the pipeline and interest rates.

And just the general momentum that we are starting to see behind all businesses, which is great.

Yes.

Okay. That is terrific color. And then I guess to that point, I mean let’s touch on the pipeline of partners. And is the strength that you are seeing, is that from the existing partners that you have? And then just kind of what is the pipeline of new partners, the pace of inquiries? And it’s also great to see the extension of some of these. You talked about the tax business, and we saw MoneyLion. Kind of curious just how some of those negotiations are going upon renewal and just kind of the pipeline for partners.

Yes. So, I mean this is coming both from existing partners wanting to do more programs and new products with their same customers, which has been a migration that’s been going on the last several years and is really, really important. But it’s also come from new people coming to us who already have a book of business. And we have talked for a while about the dislocation that’s occurring in the third-party delivery banking services and that impact. We have been saying for several quarters, our pipeline is stronger than it’s ever been. We are adding to that not only is the pipeline stronger than it’s ever been, but we have closed some transactions. And that’s the difference this quarter you should recognize.

Okay. That’s great. And then we have – I just want to touch on the plans post the loan sale. We moved the timeline back a little bit, but has there been any change – talk to the 12 months to 18 months. What are some of the – I mean where do you see the most opportunity to deploy that liquidity and kind of the pace to do it? And then how does the change in rates impact that if we start seeing gain on sale margins starting to improve like in SBA? It does look like your SBA held for sale started to increase a little bit. I didn’t know if your thoughts on selling production versus retaining had shifted at all just kind of – given some of that, so kind of another big question, sorry.

Yes. I mean I think there is a lot of variety there. In a perfect world, our commercial finance pipeline, delivery and other asset deliveries will give us higher-yielding assets that we can put on the balance sheet over time with appropriate credit structures, etcetera, and we will do that. Now, we will look at the securities portfolio, and we will do things there that we need to or appropriate. But I am most excited about the opportunity to put on some of our higher-yielding assets with all the appropriate capabilities and controls that we have during this timeframe. So, that’s what I am talking about. But as you know, it takes time to build that and go through it. And that’s why we are not going to go run out and immediately try to put a bunch of assets on the balance sheet. And we are doing this as part of an active asset rotation. The other thing I would say about SBA, USDA, we are increasingly wanting to create a flow business. Now, sometimes that depends on rates and markets and all those things, and we will make those appropriate decisions. But being able to have a balance sheet that you can expand or contract based on opportunities to take things in the flow market, that’s a key part of our future.

Yes. The only other thing I would add is the outcome around what Brett had mentioned on in terms of the opportunities. We would be swapping out what is effectively a short-duration asset, the loan book for IPF. Those loans were priced inside of 12 months and over time, to a large degree, taking duration in the loan book. So, from an IRR perspective, David, I think there is part of how we intend to manage rates on a longer term basis here, which gives us a bit more comfort that particularly if the short end of the curve is going to come down and the middle part of the curve stays within a relative range, it’s going to give us a bit more tailwind in terms of managing NIM than otherwise, we otherwise would have.

Okay. That’s helpful. Thank you.

Our next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Great. Good afternoon. Just wanted to follow-up on a couple of, in terms of the – I just want to make sure I understand. In terms of the Partner Solutions growth, so the pipeline is really strong, but you have added some new business. And so I guess the idea would be that the bottom line impact or bottom line growth in this business should accelerate a bit in the back half of 2025 as those partnerships start driving revenue?

Yes, that’s right. And as we said, it takes a little time for it to come on, and our guidance assumes a good chunk of that comes in the back half of the year as these revenue-producing programs come online.

Okay. And then just in terms of – obviously, you have got the premium finance sale and looking to grow the book in and around that over a 12-month to 18-month period. And I guess I am just trying to – want to make sure I understand, the pipeline in the commercial finance book, would you say that – is that still sort of high-single digits, low-double digits? Is that sort of the range of growth you anticipate in that commercial book?

Yes. I mean where we are today, I think we are low-single digits. I think we are probably at least 10%, but potentially 10% to 15% is the range I am looking at right now. I think we have a lot of opportunities there. But even if we don’t close or if the transaction wasn’t on the table, I think that the pipelines are pretty full. So, that’s part of the reason why the transaction itself is going to take 12 months to 18 months. And it goes back to Brett’s point, you can’t push the pipelines, particularly over the next couple of months to be any bigger than they already are. You need to be prudent with it. But just to tie the two concepts together, it’s going to be, I think low-double digits, but it’s going to take some time just to have that consistent trajectory of building that pipeline out later into the year after the IPF transaction closes.

Okay. And I guess that it looked like structured finance was a big driver this quarter. I guess that should be a blend going forward of the working capital and structured finance as those are two biggest drivers?

Yes. That and SBA is in there, too.

Yes.

Okay. And then just Brett, I think you mentioned a secured credit product. So, I know the consumer side of things is a lot smaller piece of the pie. What do you think that looks like in a year’s time in terms of sort of similar piece of the pie and that secured credit product and maybe some other growth kind of helps that keep pace, that sub-10% of the total book I think it is. Where should we expect to see maybe consumer finance footings in a year or 2 years time?

Yes. I mean the consumer loan marketplace lending kinds of products, we have had some pretty good growth in that arena. Now again, remind you about all the waterfall credit protections and all those elements that are in there. And there is – in our third-party delivery, there is very careful compliance kinds of controls in that space that are important. But yes, I would – I could see it going up some from where it is, but not becoming a materially larger part of our total balance sheet.

Okay. Great. And then if I could just sneak in one last one. Just on the updated guide, $7.10 to $7.60. In terms of thinking about levers to get you to the bottom or the top end of that, is the biggest lever just that middle part of the curve? And Greg, it sounds like you have baked in essentially 50 basis points of reduction in the middle part of that curve. I guess that’s sort of midyear. And so if it’s less, you kind of get to the – all else equal, towards the higher end, if it’s more contraction towards the lower end, is that the best way to think about drivers – in terms of drivers of that range?

Yes, particularly the drivers we can’t control. I think we are going to be a taker one that one, but the slopes are our friend, right. To the extent we have – there is an increasing slope in the curve and that’s sustained and the short end comes down, that’s really the key here. And if that trend continues, you look at the rates today versus a month ago or four months ago, that continued trend towards slope is what’s going to drive us higher in the range versus lower relative to the rate environment. Then I think the pace of pulling through the pipelines on really, frankly, both commercial finance as well as in Partner Solutions is the other lever that we, again just to a large degree, have some control over. But those are the ones that come to my mind.

Okay. Alright. Great. Thank you.

Thank you.

Thanks Frank.

Thank you for your questions. That concludes the Pathward Financial’s fourth quarter and full fiscal year 2024 investor conference call. Thank you. You may now disconnect.