Pathward Financial, Inc.

Thank you for standing by and welcome to PathWord Financial's fourth quarter and 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 Password Financial's CEO, Brett Farr, and CFO, Glenn Herrick, who will discuss our operating and financial results for the fourth fiscal quarter and full fiscal quarter of 2023, after which we will take your questions. Additional information, including the earnings relief, 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's 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 provided only 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, 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. I remind you that we operate at 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 repurchases and dividends, we have delivered value to our shareholders in multiple ways. Specific numbers for the year, we 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 $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 run 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 by growth in our insurance premium finance business of 67% over the prior year. This was a direct result of us positioning the team to take advantage of opportunities and some market disruption in that particular vertical. We've also built several new relationships in our government guaranteed sectors, talking about SBA and USDA, that we believe will prepare us well for 2024. Also in commercial finance, we undertook a process to align teams that were operating vertically within their loan product into horizontally capable groups across the team. We believe this will drive a reduction in operating costs and will create a more efficient and streamlined organization going forward. Collateral managed loans provide us with tremendous safety, but it is people intensive and we are constantly seeking efficiency in that space. In banking as a service, we continue to expand and create new agreements with our existing partners. We extended four agreements. We launched a new acquiring sponsorship program and we expanded product offerings in three cases. We also worked with a new partner in their launch as a payment processor. And most recently, we signed a new agreement to launch a new demand deposit account program. We continue to involve our BAS organization to position us as the go-to partner with a broad payment capability set and flexible solutions that deliver safe and sound infrastructure, simplicity, and speed to market for our partners. Finally, regulatory news in the BAS marketplace compels me to discuss compliance. I believe the strength of a regulatory risk and compliance infrastructure needs to be emphasized as a key differentiator for us. Recently, all the regulatory agencies have announced novel banking or a similar type of approach to address banking as a service business models like ours. Frankly, it is about time. We hope it will reduce the current environment of regulatory arbitrage. If it is similar to the third party risk management that the agencies collectively released in the last year, and I expect it will be, we already meet those heightened standards and have for some time. To exist in today's banking as a service regulatory world, you must have a culture of compliance and the human capital to power it. And we have worked very long and hard to create that. The password is job one in banking as a service. Going forward, heightened standards for banks that operate in this space will be the requirement. And we believe we have the culture and the commitment to maintain that level of risk framework. The best time to plant a tree is 20 years ago. And that is exactly what we did when we entered the payment space back in 2004. As a result, we will not have to make significant investments to bring our BASC program up to speed. Rather, we can focus on helping our partners adapt to today's ever-changing financial services environment. So some key points. We believe we are entering a regulatory cycle that could fundamentally change the banking as a service banking space, drawing a regulatory moat around those who can operate within the heightened requirements. We believe others will decide to get out of the banking as a service space, And we believe we're extremely well positioned to thrive in this type of environment as a financial institution that generates sustainable recurring revenue and champions a strong culture of compliance built to endure any cycle, including credit, economic, or regulatory, to name a few. Through the cycle matters. We are built to thrive in all cycles. For fiscal 2024, you can expect us to continue on enhancing our company. We will have our teams continue to innovate and to improve efficiencies. In commercial finance, we want to drive smart balance sheet growth, ensuring appropriate yields for the current financial landscape. The BAS team is going to continue to emphasize being the one-stop shop when partners are looking for a banking partner to work with them. We'll continue to win with our risk and compliance framework and culture. And we will become and maintain our status as a bank as a service powerhouse bank with a long track record of success through the cycle. All of these items have contributed to our ability to raise our fiscal year 2024 guidance to a range of $6.20 to $6.70 per diluted share. Finally, we are very excited to announce the appointment of Greg Segrist as our next CFO. Greg comes to us with a strong background, making him an excellent addition. He has over 20 years of banking experience with impressive leadership and financial and business acumen that we believe will keep Pathford on the way to continued success. We look forward to welcoming Greg in a few weeks. I also want to once again thank Glenn for all of his contributions over the last 10 years. There's not enough time on this call to detail everything Glenn has done for this organization in his time here. He was instrumental in the diversification and evolution into who we are today and built accounting, finance, and treasury teams that I believe rival those of much larger institutions and any other banking as a service bank. Glenn, on behalf of the board and our employees, thank you. We wish you well and hope you enjoy retirement.