Ladies and gentlemen, thank you for standing by and welcome to Pathward Financial's First Quarter Fiscal Year 2025 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 like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead.

Thank you, operator, and welcome. With me today are Pathward Financial CEO, Brett Pharr, and CFO, Greg Sigrist, who will discuss our operating and financial results for the first quarter of fiscal year 2025, after which we will take your questions. Additional information including the earnings release, the presentation that accompanies our prepared remarks and supplemental slides 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 call. References to non-GAAP measures are provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliation for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Included in the non-GAAP measures, this quarter we will begin reporting an adjusted net interest margin including contractual rate-related card processing expenses associated with deposits that are on the company's balance sheet. All mentions of adjusted net interest margin on this call will refer to the updated metric. This will replace our previously reported adjusted net interest margin, which included contractual rate-related card processing expenses associated with all deposits, including custodial deposits. You will find this adjusted net interest margin measure included in our non-GAAP reconciliations in the earnings release and the supplemental slides that were filed today in conjunction with the earnings release. 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. Fiscal 2025 has started out well, and during the quarter we made good progress against the strategy we laid out last year. The biggest step we took was closing the sale of our insurance premium finance business in October, along with the subsequent sale of securities. This move started the process of optimizing close to $800 million on our balance sheet by putting us in a position to reallocate those funds into higher yielding assets or those with optionality. Keeping our focus has helped us deliver strong results. We reported earnings of $1.29 per share for the first quarter, which represents year-over-year growth of 22% and net income of $31.4 million. Our results were driven in part by an increase in net interest income of 6% when compared to the same quarter last year. We also expanded our quarterly net interest margin and adjusted net interest margin, which includes contractual rate-related processing expense associated with deposits on the company's balance sheet to 6.84% and 5.41% respectively. Performance metrics were strong for the quarter with return on average assets for the quarter of 1.69% and return on average tangible equity of 25.65%. We are also reiterating our fiscal 2025 guidance of $7.25 to $7.75 earnings per diluted share. Our focus on the loan side of the balance sheet has not changed. Given our competitive position in the payment space, we are limited to an asset size of $10 billion in order to remain under the Durbin Amendment threshold, which leads us to focus on optimizing the assets that we keep on balance sheet. This focus means our assets either have high risk adjusted returns or optionality for balance sheet velocity. As a part of this focus, we executed the sale of…

Thank you, Brett. The First quarter results included growth in net interest income and noninterest income. Net interest income grew 6% despite the sale of the insurance premium finance business which closed on October 31st. The net interest margin of 6.84% and adjusted net interest margin of 5.41% expanded when compared to the prior year's quarter. This is primarily due to a mix shift to higher yielding assets as well as an increase in yields across our lending businesses. Sequentially, both measures also expanded due to a mix shift to higher yielding assets. Our continued efforts to increase new production yields produced a 9.45% average yield on commercial finance loans and leases originated during the quarter compared to the last quarter's yield on the same portfolio of 8.49%. Provision for credit losses was $12 million, which includes provisioning for our strong loan production in the quarter. We continue to see the benefit from our strong credit and collateral management. Non-interest income increased 9% when compared to the prior year's quarter, primarily due to an increase in gain on loan sales. This was in line with our focus on having optionality on the balance sheet, including the sale of eligible loans. Total noninterest expense increased 4% versus the same quarter last year, primarily due to an increase in compensation and benefits partially offset by decreases in contractual rate-related card processing expenses. The increase in compensation and benefits is largely due to hiring additional talent on our technology team. This is a direct reflection of our comments last quarter, where we detailed to you some of the work we've been doing in technology and the investments in people and talent aligned to that work. Finally, we did recognize a gain on the sale of our insurance premium finance business, but during the…

[Operator Instructions] First question is from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Hey, good afternoon.

Hey, Frank.

Just to start with the commercial finance business. You saw really strong growth in the quarter. I think, Brett, you mentioned a new renewable energy partnership. Just curious, your thoughts, you know you expect the momentum to continue. Just wondering your thoughts on expectations of growth rates going forward in this business over the near term.

Yeah, I mean, I think we'll continue to emphasize that product set. Part of it is, it is a product set that gives us a lot of optionality. And you're seeing that even in our returns this quarter, where you can enter in transactions and they ultimately result in a saleable loan. And so we really like that business model. Part of your question may be around shifts in the political environment. And I think there's some potential of some slowdown, but there still needs to be a lot of investment in energy infrastructure in the country. I think about battery storage is an area that no matter what happens we're going to need. There's going to be a demand for AI power. And so I think it's still going to be good and strong. It may not jump as much in future quarters as it did this time, but I still expect growth there.

Okay. And then, correct me if I'm wrong, but I feel like the higher for longer in terms of the rate outlook is, I think, the best scenario for your balance sheet and earnings pickup. And so, we definitely seem like we've gotten more, a little better clarity maybe into that versus where we were three months ago? So just curious, the guide was reiterated full year, bottom line EPS guide. But shouldn't you benefit from this higher for longer rate picture, which should otherwise boost expectations a bit?

Yeah, I’d say a few things, and then maybe Greg can comment on it. You're right, higher for longer, assuming curve -- yield curve, which we're getting right now, is good for us. And so that's definitely a tailwind. As we kind of think about what's coming, though, some of it depends on which assets you have to continue to grow that. So some assets are -- get a better benefit from that than others. And so we're looking at those pieces. The thing I would tell you is, we always look at our tax season. We want to see what happens to the tax season before we have any conversations. And so that's certainly partly in our mind. We think it's going to be a great year, but you wait to see that kind of coming through. The last thing I would say is we are contemplating various kinds of investments over time, we've been doing it for a while. We'll continue to be doing some things in the technology area, risk and compliance to match the volumes that we have added and those kinds of things. So we'll have more to say about that later, but there's good tailwinds, but more potentially to come.

Okay. And then just lastly, just on the partnerships, you mentioned the two large partnerships on the partner solution side that you re-upped. Just curious, as you re-upped these contracts, is there any broad-based readthrough in terms of any changes to the economics? Are you seeing any pressure on pricing, any improvement on pricing and any change in the economics broadly speaking? That's number one. And then two, just wondering if you can give any further detail on the new partner you signed post quarter? Thanks.

Yeah, on the economics, obviously not to any specific deal, but because of the rate environment, there is continued pressure and discussion on what do we call it, [instead of] (ph) commission deposits, contractual fee…

Contractual rate related processing fees.

Yeah, right, processing fees. So, I think some of that, there's pressure there, we try to offset that with other kinds of transaction fees et cetera and that's not necessarily about those two but that's generally what we're seeing as we go through this and people just more attuned to the rate environment. I don't really want to comment on the one that was announced after the fact. Just know that pipelines are full, all these things are constantly being looked at and particularly both in the partners interest and in our interest long before contracts expire, looking for extensions of those because nobody wants to go through a switching process.

Sure, I know that makes sense. Okay, that's all I have. Thank you.

Thanks, Brian.

Thank you for your question. Next question is from the line of Tim Switzer with KBW. Your line is now open.

Hey, good afternoon. Thank you for taking my questions.

Hey, Tim.

I have a follow-up on, I guess, the part of your pipeline here and it's been about a year plus of some disruption in the banking-as-a-service industry. Has that created a lot of opportunities for you guys more recently and how do you see this evolving over the course of the new administration? Do you see any relief possibly on the regulatory side or do you think this will continue to create opportunities for you given the disruption?

Yeah, the headline would be yes, this is going to continue to give us opportunities. I think you've got to bifurcate the political regulatory environment into two groups. It is obviously true that there is going to be a change in tone at the top in general bank regulatory environments, which is going to provide some relief. And you've got things that you already assumed. You've got an FDIC statement that came out today, all of which are very good news for the banking industry in general. However, in those areas where there's potential for customer harm, there's going to be a bipartisan view that you can't do that. And so I think in our specific narrow space, there will continue to be considerable pressure from a regulatory environment just to prevent that kind of customer harm.

Yeah, Okay. That makes a lot of sense. Switching topics here a little bit. It looks like commercial charge-offs ticked up just a little bit. Can you provide some color one what you guys are seeing there and kind of the outlook for the rest of your portfolio, excluding the tax business?

We always look at commercial charge-offs within a range. And there are one-offs every quarter come and go. Sometimes it's a charge off, then the next quarter it's a recovery. There's nothing happening in that portfolio that's unexpected. And it's very much within the range that we've been over time. So there's nothing happening there. It's just normal business that we have that usually has an individual story.

Yeah, the only thing I would add, Tim, is when you look at the credit metrics for the quarter, charge-off -- past dues and the like, everything is either stable or improving, just another couple of more data points you can look at, but I agree with Brett’s commentary on that.

Okay, and the last question I have is, do you guys have any other plans for like securities restructuring or redeployment of -- remixing the balance sheet following the commercial finance business sale beyond just moving into the higher yielding loan categories you guys have talked about previously?

Well, never say never on a securities remixing. I think we'd have to be opportunistic on it. We're pretty comfortable with what's there, and it's rolling down [250] (ph) over the next 12 months, and it's a fairly five-year duration, which is fairly short. So I'm not sure I see the impetus to go out and just kind of blindly do it, but opportunistically, yeah, perhaps. As it relates to broader just remixing though, I mean, we've got some really good verticals on the balance sheet right now with a lot of good momentum behind them. We're always looking to evaluate, where are there opportunities, where there might be gaps, either in markets we're in or adjacencies. So you might see some of that come up over the next 12 to 18 months. But right now, we're actually really comfortable with the risk adjusted returns we have on the portfolio we've got. I'd like to continue to take a bit of duration. I think we're at that point in the rate cycle where more duration is helpful, which we definitely did this past quarter. But I think just remixing what we've got is actually a pretty good strategy that's been working for us.

Perfect. Okay. Thank you, guys.

Thanks, Tim.

Thank you for your question. Next question is from the line of David Feaster with Raymond James. Your line is now open.

Hi, good afternoon, everybody.

Hey, David.

Hey, David.

I just wanted to touch on the credit sponsorship side. I mean, you touched on seeing stronger volumes. I know this is a focus for you all. Could you just touch on where you're having the most success, where you’re having -- where you're seeing the most opportunities? What types of credit or industries are you primarily focused in, and when would you expect to see more partners added to this segment and maybe accelerate growth even further?

It's interesting, David, that if there's any place where the story of regulatory pressure has created opportunities for us, it's in this space. Frankly, we have new partners and/or existing partners with new volume that have come to us because other partner banks misstep in some of the third party risk compliance elements. And so that's why we're getting that growth. And we suspect that's going to continue for a period of time. And we like this because it's waterfall credit protected. As we talked about, it comes on the balance sheet, it goes off the balance sheet, so it gives us a lot of optionality, make fees in that. So it's a good space to be. And while we talk about sort of the traditional payment side of this, giving us opportunities because of the compliance environment, we've actually seen more actual closed opportunities in this space.

That's great. That's great. And then within the working capital finance side, you guys have touched on that this is -- I mean, you've seen really nice growth there. Obviously, ABL's seen really nice growth. You touched on this -- we've talked about this business historically doing well during an economic downturn. I mean, is this any indication of that, or is this you all gaining share and adding new partners? Or are there other factors that are driving outsized growth there and maybe somewhat of a counter-cyclical business?

I don't think this growth is a comment at all on the economy. Sometimes this area grows because of a shift in the economy. We've done a little bit more work on focusing on our distribution capabilities here and I think that's what's happened here. We really like this asset class. We've got a secret sauce around it. It has excellent risk-adjusted returns. We're really good at it. It's core in the heart of the lending business from the very beginning that makes up the old Crestmark too. We really like it, but this growth was largely because of some improvements we made in overall distribution.

Okay, that's great. Glad to hear that. And then just last one for me. You touched on tax season. You've got 12% more enrolled offices. It sounds like things are starting out good. Could you just touch on what you're -- how to think about the tax business, what you're seeing, and what's driving the increase in offices that are enrolling?

We've been doing this a while. We've got a good management team, top professionals at it with many, many decades of experience. They're doing a reasonable job of grabbing market share and we'll see. We'll report on the rest of that later on once it comes through.

All right. Thanks, everybody.

Thanks, David.

Thank you for your question. And that concludes Pathward Financial’s investor conference call. Thank you.

Thank you.