Pathward Financial, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Password Financial's second 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, Head of Investor Relations. Please go ahead.

Thank you, Operator, and welcome. With me today are Password Financial's CEO, Brett Farr, and CFO, Glenn Herrick, who will discuss our operating and financial results for the second fiscal quarter of 2023, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks, and supplemental slides 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 statements. Please refer to the cautionary language in the earnings release, investor presentations, 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 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 Farr, our CEO.

Thanks, everyone, for joining us today. We're very happy to welcome Darby to Pathword. Please reach out to her to say hello, introduce yourself, and let her know what you might need. We thought this was a good opportunity and time to offer all of you a bit more context and detail than we have in the past about PathWord. We've taken advantage of the recent attention focused on our industry to assess our strengths, focus on the potential for new opportunities, and more about these in a few minutes, and better communicate to you and others why PathWord is uniquely positioned for a strong and stable future. We're going to start today with an in-depth look at how PathWord is different how our business is unique, and how we differentiate ourselves from traditional banks. And more importantly, why we think that differentiation matters and how it offers our investors and customers a better value proposition. Financial inclusion for all drives our actions and our strategy. We want to be a leader in providing access to underserved banking markets. Why? Three reasons. The underserved gap that's in the marketplace for both consumers and commercial small business customers is significant. We can help close that gap. Second, we believe our approach to inclusion generates unique value for our shareholders. And three, we believe it offers valuable and meaningful career opportunities for our employees. We continuously strive to provide financial inclusion by positioning ourselves at the hub of the financial ecosystem where financial technology and banking intersect. Sitting at this intersection gives Pathwork and you, our investors, multiple advantages and opportunities. First off, it provides us with strength, provides us with stability, And it provides us with the ability to produce stronger capital returns. It also gives us the ability to innovate and disrupt, creating more opportunities for growth. I want to share a bit about our business lines. We operate primarily through two businesses, banking as a service or BAS, and two, commercial finance. Our vast business focuses on underbanked and underserved consumers. It generates sticky, low-cost deposits and recurring fee income. Our commercial finance business lends these stable deposits to small and medium-sized businesses that may not have access to traditional forms of credit. These two business entities form a particularly strong combination. deliver a diversified revenue base that provides recurring stable fee income and a high net interest margin. In BAS we operate primarily through a diverse network of partners who approve and establish companies and long-standing clients of ours. We generally sign long-term agreements and excluding the economic impact program or EIP deposits No single partner constitutes more than 13% of our total deposits. Our Bass business has four solutions, issuing, tax, payment, and credit. In addition to creating a strong deposit base, these businesses have the added benefit of generating recurring non-interest or fee income. In issuing solutions, we are one of the leading debit and prepaid card issuers in the country. We are a network sponsor. and settle and hold funds and programs developed jointly with our partners. This allows the end consumer who may not have access to a traditional bank account to receive the protections and benefits of one. These partnerships, combined with our purpose, distinguish PathWords deposits from most traditional banks. Most of our deposits are held in millions of retail card accounts with an average balance of less than $1,000. We have very few institutional accounts and those that we do have are typically cash collateral tied to loans within our commercial finance group. Due to these factors, our non-interest-bearing deposits on the balance sheet have a weighted average life of over six years based on our decay study. To contrast this with our loan portfolio's weighted average life of about two and a half years and our securities portfolio duration of around five years, And you can really see the value of our unique deposit base, particularly in today's high rate environment. Glenn will give you a more detailed look at our deposits in a moment. Our second line of business within BAS is Tax Solutions, where we offer refund transfers, refund advances, and pre-season loan programs. Refund transfers allow consumers to have their tax return completed with no upfront cost, as any preparation fees are deducted from the refund. Additionally, refund transfers allow unbanked customers to take advantage of the speed and safety of direct deposit from the IRS. Refund advances enable consumers to receive an advance based on their expected refund proceeds, allowing access to funds immediately while they wait for the return to be processed by the IRS. The preseason loan program allows the consumer to borrow as early as November in anticipation of the refund. which may serve a more immediate end-of-year cash flow need. For many of our customers, their tax refund is one of the largest financial events of the year. Our programs assist them by providing access to funds immediately, or in some cases early, providing options for receiving their refund and helping to process the tax preparation payment. These tax services are utilized by millions of consumers annually through a network tens of thousands of tax preparation offices nationwide. This year's tax season has performed above our initial expectations through the end of March, and we're pleased with the results. Glenn will dive into the details in his remarks. Remaining two businesses are Payment Solutions and Credit Solutions. Payment Solutions, we offer merchant acquiring and money movement, acting as a sponsor bank for our clients and moving our $2.5 billion in ACH and wire services daily. We are also the sponsoring bank on approximately 270,000 or two of every three independent ATMs in the nation. In credit solutions, we give our partners the ability to offer lending solutions to a diverse credit pool. Importantly, our relationships are designed with a focus on credit protection, risk mitigation, as well as liquidity. We earn a reasonable risk-adjusted return protected by certain layers of credit support. We may also choose to sell certain consumer loans to third parties. Total deposits both on and off balance sheet decreased $534 million or 6% from the prior year quarter to $7.9 billion The drivers of this are a continued decrease in EIP balances and the volume and timing of tax deposits at quarter end. From the end of last quarter, we saw a decrease in total deposits of $152 million, or 2%, primarily due to runoff of seasonal gift card balances partially offset by tax season deposits. Pathword continues to be in a strong liquidity position. The recent financial industry issues have actually produced some new potential for Pathwork. We, the leadership, took this new focus on the banking industry as an opportunity to take a closer look at our positions and strengths and how they might offer new value and potential. Because of how our bank is positioned, our experience and our leadership in the BAS industry, some of which I just described, Several new businesses have reached out to us and new partnership opportunities have developed. We and others see the benefit of our strength as a stable, established partner. We will continue to be selective in our deals, ensuring that new relationships fit with our company's purpose, risk profile, and return aspirations. Now, I want to have a few words about commercial finance. We primarily offer financing to small and medium sized businesses. We operate in a unique position between traditional banks. We can offer better structuring to our clients and finance companies. We can offer better pricing. We generate new loans across the country through a combination of our in-house business development officers and referrals from other institutions. This portfolio is diversified across different asset classes. and structured to provide opportunity regardless of where we are in the economic cycle. If we're in a thriving economy, we expect to see increased originations in the equipment and insurance lines of businesses as our customers grow and expand. In a downturn, we typically see an increase in the working capital segment as most businesses need our help bridging any gaps they may experience. Regardless of the economic cycle, our leases and loans performance remain steady. There are two reasons for this. First, during a downturn, some of the additional volumes we underwrite are good credit companies that have had a bad moment and therefore have lost access to their original funding source. These companies are working to rebuild their credit profile, so they're highly incentivized to work with us to fulfill their fiduciary responsibilities. Secondly, our loans are highly collateralized and underwritten to a discounted basis on that collateral. so that in the event of liquidation, our recoveries limit any losses we may experience. The higher yields we receive are primarily due to the human capital and due diligence performed in the collateral during the underwriting process and throughout the life of the loan, and not necessarily an increased risk premium. Let me give you an example. During the underwriting process in the equipment finance line, we often receive several quotes from buyers on the equipment at origination. These quotes are part of what we base the value of the loan on, so that in the event of the default, buyers are pre-approved and prepared to transact with us. In our working capital business, during underwriting, we research and pre-approve the end client who is responsible for making payments to the company we're financing. In addition, throughout the life of loan, we conduct on-site field examinations, test the collateral and books of our clients, And we have dominion of funds. Should the client default, the payment from their customer comes directly to us. The active management of our highly collateralized loan book puts us in a strong position to recover a significant portion, if not all, the value of the loan in the event of a customer default. This may cause peaks and valleys in our short-term net charge-off rates, since the default may occur in one quarter and recover in another. However, as you can see on the slide, our annual net charge-off rates, even throughout the global financial crisis, are not significantly higher than those of larger banks. Total loans and leases were $3.7 billion as of March 31st, an increase of 6% from the link quarter. Commercial finance volumes and warehouse lending were the primary drivers of this result. This was roughly flat compared to the prior year as growth in commercial finance was offset by our decision to sell the student loan portfolio, pay downs in warehouse facilities, and the timing of tax season loans. Our commercial finance portfolio totaled $3.1 billion, an increase of 7% from the year-ago period. During the second quarter, The company recognized a total of $6.8 million in pre-tax financial impacts. This was attributable to the disposal or change in depreciable life of mobile solar generators related to a single relationship. In fiscal year 2019, we incurred a large impairment expense associated with one company with which we had three legacy solar transactions that turned out to be fraudulent. The assets were written down to their market value and redeployed under an equipment lease agreement to new participants. When the leased assets were returned, we performed a due diligence assessment. This led us to dispose of certain generators based on their condition and to adjust the depreciable life for the remaining mobile generators. That better reflected the service period based on market conditions and advancements in current technology. This was an isolated event, limited to unique equipment, is not indicative of the remaining rental equipment or even the solar portfolio. Remaining value of the generators on the balance sheet is $1.3 million. Notwithstanding that unique situation, credit quality across the portfolio remains strong. Non-performing loans of 0.76% were down from 1.16% in the previous quarter, and our net charge-off rates remain stable. We remain confident in our collateral management and the quality of our portfolio. Finally, some news of which we are particularly proud. In the fiscal third quarter, we were awarded the Great Place to Work certification. We remain dedicated to PathWords culture and improving our employees' work experience. We are extremely pleased with PathWords recognition as a Great Place to Work. Now, I know that's a lot. Thank you for your patience and attention to this password news in these interesting times. I look forward to your questions. Before yielding the floor to Glenn Herrick, I'd like to express my gratitude to Glenn for postponing his retirement and agreeing to carry the mantle of CFO while we search for his successor. We have engaged an executive search firm for this position, and Glenn has graciously agreed to help in a transition once that person is on board. Now, Glenn, will you take us through our financial results?