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spk06: Ladies and gentlemen, thank you for standing by and welcome to PathWords Financial's first quarter fiscal year 2023 investor conference call. During the presentation, all participants will be in listening 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 Justin Schimpf, Vice President of Investor Relations and Financial reporting. Please go ahead.
spk07: Thank you, Operator, and welcome. Password Financial's CEO, Brett Farr, CFO, Glenn Herrick, and Deputy CFO, Sonya Tyson, will discuss our operating and financial results for the first fiscal quarter of 2023, after which we will take your questions. Additional information, including the earnings release and a supplemental investor presentation, may be found on our website at PasswordFinancial.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 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 within the appendix of the investor presentation. Now, let me turn the call over to Brett Farr, our CEO.
spk02: Thank you, everyone, for joining Pathwork Financial's first quarter 2023 earnings call. The company performed well during the quarter. Core net income, excluding the impacts of rebranding, was $23.2 million compared to $24 million in the prior year, and core earnings per share of 81 cents was up 4% compared to 78 cents per share in the prior year quarter. Our continued focus on our key strategic pillars of asset optimization, deposit optimization, and operational simplification helped drive further expansion of our net interest margin, which rose over 100 basis points to 5.62% for the first fiscal quarter compared to 4.59% in the prior year quarter. Our strategy also enabled us to achieve return on average assets and return on average tangible equity that are amongst the top in the industry. Our commercial finance portfolio grew 7% year over year and totaled $3 billion a quarter in. Total loans and leases on December 31st were $3.5 billion, a decrease of 5% from $3.7 billion in the prior year. The year-over-year decline in total loans and leases reflects the sale of the student loan portfolio, timing of tax season loans, and a few relationship paydowns in our warehouse lending portfolio. Credit quality across the portfolio remains strong, as non-performing loans of 1.16% were the same as a year ago. As we head into a potential recessionary environment, we remain confident in our active collateral management and the quality of our loan portfolio. On the liability side of the balance sheet, the company continues to demonstrate its proficiency in managing excess deposits by storing them at our program banks. In the first quarter, off-balance sheet deposits averaged $1.4 billion, earning revenue roughly equivalent to the federal fund's effective rate. In addition to generating revenue, these excess deposits also serve as a readily available source of liquidity. As of December 31st, we had $2.2 billion of customer deposits stored off balance sheet with program banks, a level that is seasonably elevated due to holiday-related gift cards and other products. As we have indicated during the two previous quarters, the landscape of the banking as a service market is changing. While we continue to see fewer startups receive funding, our legacy partners are launching new programs and using our services to attract new customers. With our diversified clientele and our long history and experience in banking as a service, we steer clear of the current turmoil experienced by others in the industry. We believe our strong risk and compliance capabilities continue to serve us well during this time of industry transition. Regarding our rebrand, I'm happy to announce the company completed the remaining efforts during the quarter. Consequently, we received the final $10 million of the original $60 million sale associated with our meta trademarks. We are pleased to be serving our customers under our new password name, which has been well received by our customers and partners. We look forward to building upon the brand value it provides. Looking ahead to the remainder of fiscal year 2023, We believe our unique business model allows us to benefit from rising rates, positioning us well to continue delivering solid financial results. Consequently, we've increased our fiscal year 2023 GAAP earnings guidance range, which we now expect to be between $5.55 and $5.95 per share. Finally, we are well prepared for tax season, which is kicking off in the second fiscal quarter. We have a long history of operational success, are a leader in supporting the independent tax industry, and serve a major franchise in the business. Our historical experience and operational excellence position us to succeed in the unique economic environment of this year's season. We look forward to sharing more on our next earnings call. Now, let me turn the call over to our Chief Financial Officer, Glenn Herrick, who will provide additional detail on the quarter's financials.
spk04: Thank you, Brett. Total gap net income for the first quarter was $27.8 million, or $0.98 per share, down from the $61.3 million, or $2 per share, recorded in the prior year quarter. As a reminder, the last fiscal year's quarter included an initial $50 million gain on sale of the Meta Treadmarks, And this fiscal year's first quarter included the remaining $10 million gain associated with the sale. Excluding the one-time gains and expenses associated with rebrand related activity and severance expenses, core net income of $23.2 million decreased slightly compared to the $24 million in the prior year. Adjusted earnings per share of 81 cents for the quarter represents a year-over-year increase of four percent the business does not expect to report any additional rebrand related financial impacts moving forward net interest income grew 17 year-over-year driven by expansion and passwords net interest margin total net interest margin for the first quarter of 5.62 percent increased substantially relative to the 4.59 percent recorded in the first quarter of fiscal year 2022. We expect our net interest margin to continue to expand given the current rate environment and ongoing optimization of our balance sheet. Provision expense in the first quarter of $9.8 million is a $9.6 million increase from the prior year. However, the prior year benefited from a $12.7 million provision reversal associated with the disposal of the bank's remaining community bank portfolio. GAAP non-interest income declined from $86.6 million in the prior year quarter to $65.8 million in fiscal year 2023, excluding the $50 million and $10 million trademark sale gain in the first quarters of fiscal years 2022 and 2023, respectively, non-interest income increased 52% year-over-year. The large increase was attributed to fiscal year 2022's losses on the community bank portfolio sale and Money Lion investment write-down. Meanwhile, the current year benefited from revenues associated with off-balance sheet deposit servicing. On the expense side, total GAAP non-interest expense of $105.1 million represents an increase of 27% from the prior year quarter. When adjusting for $3.7 million of rebrand related items in 2023, expenses of $101.3 million grew 23% year over year. This increase resulted primarily from $15.5 million of additional card processing expenses, mostly attributable to the higher rate environment. Other expenses including rebrand related items, grew at a 4% pace year over year. The company remains well capitalized while continuing to return value to shareholders. During the fiscal 2023 first quarter, the company repurchased 654,000 shares at an average price of $38.10. Through January 20th, the company repurchased an additional 478,000 shares at an average price of $45.45. As Brett mentioned, we are increasing our guidance for fiscal year 2023. For the year, we expect gap earnings per share between $5.55 and $5.95. This guidance assumes the federal funds target rate rises to 5% in the second half of fiscal year 2023 and remains flat thereafter. That concludes our prepared remarks. Operator, please open the line for questions.
spk06: Thank you. Our first question comes from the line of Frank of Piper Sandler. Please proceed.
spk03: Hi, guys. Hey, Frank. Just wanted to ask about the prior guide. Can you talk a little bit about what is driving that? Is it just, you know, early thoughts on tax season are shaping up pretty good? Or, you know, what's kind of driving the changeling quarter?
spk02: I think the big thing is there's a slight increase in Fed funds beyond what our original basis was. And so we expect that to show up and are experiencing that starting to show up in higher yields. We think we're well prepared for the tax season, as we always are. This is one of our core competencies. And the macro environment for the tax season is positive, but we haven't made any bets on that yet. So it's too early. I mean, the IRS just opened up for returns this week, so it's too early for us to make any perspective views of what's going to happen in the tax season.
spk03: Okay. And then can you talk a little bit about what the guide might imply for loan growth here? Just given, you know, overall commercial finance was kind of flattish, sling quarter, and I know the ABL and factoring balances have declined. Not sure what you're thinking, you know, is a good kind of run rate for commercial finance growth from here.
spk02: Again, it's a mix of asset classes that are going to behave differently. Working capital is where we're hoping for the growth as we get into a more recessionary style environment. There likely will be some slowdown in various kinds of term lending. Conversely, there seems to be a bit of uptick in the in our solar financing and other alternative energy financing opportunities. So I think we're going to be continually plodding forward as we have been and making that rotation from one asset class, i.e. securities, to another. I don't expect it to take off, and I don't expect it to dive or anything like that either. OK.
spk03: I think in the past you might have talked about sort of double-digit growth overall in commercial finance. I know that's still kind of a reasonable bogey going forward.
spk02: Yeah, I mean, I think low double digits over time through economic cycles is quite reasonable for us. We want to make sure that we have the yield in it, and that's been some of the challenge, and we've talked about that from a liquidity perspective that's gradually getting washed out. But I mean, I think long term, that is a reasonable assumption.
spk03: And then in terms of the depository side, unless I heard wrong, it sounded like the off balance sheet deposits maybe were boosted a bit in quarter given some seasonality. So if that's the case, Maybe those come down from whatever this is, $2 billion plus at the end of the quarter. Just wondering how to think about the rest of that, I guess. Do you continue to think that remains off balance sheet and you pick up Fed funds on it? Is there opportunity or thoughts to bring it back on balance sheet and given some of the opportunities you can get in terms of yields on the asset side? What's sort of the strategy there overall?
spk02: Well, a couple things. You're correct. There was some seasonality in the fourth quarter, and I think in my comments, I highlighted a level that's probably more like core. We do think that, and this is one of our advantages, that the liquidity is gradually wiping out in the general economy, and there may be some minor shrinkage, even at that core, just because of what's going on in the economy. I don't, because we have plenty of money in the securities portfolio, I don't need to pull those deposits back onto the balance sheet to fund the next asset rotation. We've got plenty on the balance sheet to do that. And there's no sense in inflating the size of my balance sheet until we kind of keep working through that asset rotation.
spk03: Justin Fields- Okay, that makes sense, and then just lastly on on credit. Justin Fields- You know you talked in the release about. Justin Fields- The increase in provisioning and increase in npa soon was part and parcel the same I think you talked about one relationship on the commercial finance side any any additional color. you can give on that relationship and, you know, hopefully your comfort in limiting losses there.
spk02: Yeah, one of the things I talk about all the time is we are a collateral managed credit facility. We don't do unsecured credit. And even though something might be in a non-performing Um, there is a collateral behind it. Um, we're kind of experts at liquidating that, uh, whether it's working capital or working with partners on, uh, you know, equipment and those kinds of things. Uh, and so, you know, just because you see a non-performing doesn't mean that that's a loss. What that means is we're working it down with the collateral that we have. Um, we're seeing, you know, continued good performance in the credit portfolio. uh we're not seeing you know any negative impacts as of yet uh you always have companies coming and going that's true but we're not seeing any trends uh to the negative side at all okay um but can you say where that can't you know is that in working capital or is that a term loan just trying to get you know a little bit more color hey uh Glenn, do you want to respond to that? I mean, we know, but I don't know what we can disclose on that.
spk04: Yeah, that's a term loan, Frank. And, you know, I would also note that for us, NPLs is a better metric than NPAs. As we continue to makeshift our earning assets into loans from securities, Our NPAs are going to go up just as we reduce the securities percentage. And, you know, our numbers are pretty low. And so if you get one $3 or $4 million loan, it can spike up short term. But we feel real confident about our outlook. Okay, great.
spk03: Thank you. Thanks, Rick.
spk06: Thank you. Our next question comes from Tim Switzer of KBW. Please proceed.
spk05: Hey, good afternoon. I'm on for Mike Pareto. Thanks for taking my question. How you doing? Good on the I guess it's on the. Credit conversation that we're having. Could you walk us through? some of the collateral you have in different pieces of your loan book, particularly some of the higher loss categories, such as like the term lending and factoring. And, uh, I guess kind of like run through the terms you have on those as well.
spk02: So, so in the working capital arena, um, you know, these are, uh, accounts receivable and inventory. Um, and, and those kinds of transactions, um, we either have a borrowing base of receivables where we've pre-approved the debtor, which is the one that owes our customer money. Um, in many cases, depending on the situation, we actually have dominion of funds where all the payments are coming straight to us. Uh, and, and obviously have a security interest in those things. Um, and, and we do some things that are kind of unique, at least for a bank in the way that we manage those. Um, uh, in, in the inventory cases, we have pre-planned buyers often for the inventory or at least appraisals on it. So we know what we would do in the event of liquidation. The equipment arena varies a little bit about what it is. Um, some of it's mission critical equipment, which means that even in the event of a reorganization bankruptcy, it's mission critical and they're going to reaffirm the debt and pay us. Uh, so we emphasize that a lot where other cases we have relationships with third parties. who are ready buyers of that, and we regularly work on and cultivate those relationships so that we can take advantage of them. So it's not like a traditional C&I lending. We go in assuming there's going to be a default, and then how would we get out if there was a default and not lose money? So generally, particularly in the working capital, where there's a problem, it's because of fraud, not because of an actual weakness in the collateral position.
spk07: Okay. Okay.
spk04: Tim, this is Glenn. I would also refer to page 16 of our investor presentation on the deck, some additional information around our different types of commercial finance. And then at the end of the deck, we have some industry concentration information.
spk05: Great. Yeah, that's helpful. Um, and when you guys stress the portfolio running your stress test, what are some of the scenarios you use? And like, which variables are you focusing on? We're just trying to get an idea of like, how different parts of the loan book would react to, you know, certain stress environments.
spk02: Yeah, so, Glenn, I'll let you answer that here in just a second. What I would tell you is that we're always looking at every transaction as if it is stressed. We certainly look at industry concentrations, what can happen in that industry, and adjust appropriately. A particularly strong thing that we do is we look at the debt or credit book. Again, that's the people that are paying our borrower. and make regular decisions about that. And so, you know, example of some fairly common high name bankruptcies that have occurred recently, 18 months ago, we were out and wouldn't accept receivables from them. So that's more the kind of thing we do. Each transaction is so unique in this space. It's really not conducive to a portfolio stress type arrangement that you might be used to in a traditional CNI.
spk05: Okay, I got you. Going back to the guidance a little bit, what is sort of the NIM expectations you have for Q1 and Q2? You're through all the interest rate floors, right? I mean, you've had 40 basis points of NIM expansion for the last two quarters in a row, basically. Is it reasonable to expect that again, or should it start slowing down?
spk04: Kevin, this is Glenn. Yeah, you know, like all things, it depends on the mix, where the growth comes from. That said, we will gain NIM just by continuing to remix our balance sheet if rates didn't move at all. But we are comfortable that NIM will pass through 6% in our fiscal year 2023. Okay.
spk05: All right, great. And could you provide a little bit of color on like the expense expectations you have within the guidance? You know, assuming like there isn't like a serious economic deterioration.
spk04: You know, we're not guiding by line item on our income statement. And so our expenses, we have... For a bank, we have a fair amount of variable expenses that are driven by activity, which relates to revenues. And so those are correlated with the revenue expenses that we have. And our goal is to grow our core expenses at less than half the rate of our revenue growth. And then that's what's factored into our guide.
spk05: Okay, that's helpful. Thank you, guys. I'll get back in the queue.
spk06: Thank you. And that concludes the PathWord financial first quarter fiscal year 2023 investor conference call.
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