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spk02: 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.
spk01: 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.
spk05: 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.
spk03: Thank you, Brett, and welcome aboard, Greg. I look forward to working with you on the transition. Before I sign off on my last 42 earnings, it has been an honor and a privilege to serve as CFO of this company for the last 10 plus years. It has been a joy to watch the company and the team transform into an innovative, entrepreneurial-driven bank. Our annual net income has grown from $13 million in fiscal year 2013 to over $160 million this year. From my start date through mid-October, our total shareholder return has exceeded 450% versus the NASDAQ Community Bank Index increase of about 80% and the Russell 2000 Index increase of just over 110%. We've achieved a great deal, and I look forward to cheering on the team to even greater accomplishments. Now, on to the financial results. Net income for the quarter ended September 30th with $35.9 million or $1.36 per diluted share, an increase of $12.5 million compared to the prior year. For fiscal year 2023, net income totaled $163.6 million, an increase of $7.2 million relative to fiscal year 2022. Adjusting for various one-time items, including the impacts of our rebrand, the increase would have been $32.9 million, or 25%. Gap earnings per share of $5.99 increased 14% compared to last year. And when adjusting for the same items, core EPS increased to $6.09 in fiscal year 2023, compared to $4.49 in fiscal year 2022. In the fourth quarter, net interest income totaled $104.9 million, an increase of 32% relative to the prior year. This year-over-year increase was driven by additional earning asset balances as well as greater yields across the loan and securities portfolios. Our NIM expanded to 6.19% in the fourth quarter, When accounting for the increase in rate-related processing expenses, the company's adjusted NIM of 4.87% in the fourth quarter increased from 4.73% in the prior year quarter and was in line with 4.88% last quarter. As a reminder, our adjusted NIM does not include the servicing fees we also earn on our off-balance sheet deposits. Also impacting the NIM was a mix shift in the loan base as we saw growth in our USDA loans, insurance premium finance, and large ticket equipment finance loans, which are typically higher rated credits and thus lower yielding. In fiscal 2024, we expect our NIM, both GAAP and adjusted, to expand as we continue to optimize the earning asset mix. Provision for the quarter was $9 million. The provision increased when compared to the same period last year, largely due to the fact that the fourth quarter of fiscal 2022 included a $4.3 million reversal of provision following the sale of the company's student loan portfolio. As of September 30th, the company had an ACL coverage ratio of 1.14%, a decrease from 1.3% at the same time last year. Our commercial finance group has an ACL coverage ratio of 1.26% compared to 1.35% in the last quarter and 1.46% in the fourth quarter last year. The successive declines are generally a result of the mixed shift towards more insurance premium finance, USDA, and large ticket equipment finance loans, which have a relatively lower allowance rate. Non-interest income of $56.1 million in the fourth quarter grew 12.6 million dollars year over year this increase was partially driven by two million dollars of additional card fee income related to the company's servicing of off-balance sheet deposits additionally the fourth quarter of fiscal year 2022 was hindered by a 4.8 million dollar pre-tax loss on the sale of the student loan portfolio as well as a 1.9 million dollar pre-tax loss on the sale of a venture capital investment. Non-interest expenses increased 15% year-over-year to $118.2 million. This increase was primarily driven by rate-related processing expenses as well as compensation expenses, partially offset by a decrease in legal and consulting expenses, primarily due to the impact of rebranding activity in the prior year. During the fourth quarter, we were able to capitalize on several renewable energy lending opportunities. These credits pushed our effective tax rates significantly lower. Total deposits, including on and off balance sheet, decreased $322 million, or 4%, from the prior year quarter to $6.9 billion. Total deposits decreased sequentially, primarily due to a reduction in the runoff EIP deposits, as well as the continued decline in seasonal tax deposits. During the fourth quarter, we maintained an average of $588 million of deposits off balance sheet, earning fee income roughly equal to the effective funds rate. At September 30th, there were $268 million of deposits off balance sheet at partner banks. And to keep you up to date, As of September 30th, we are holding roughly $900 million in deposits related to government stimulus programs. These deposits are being spent down while unclaimed balances are being returned to the U.S. Treasury. During fiscal year 2024, we expect to return approximately $380 million of unclaimed deposits. As of September 30th, the company held $4.4 billion of loans an increase of $830 million, or 24%, compared to the end of fiscal year 2022. The growth in our loan portfolio stemmed primarily from our commercial finance division, particularly insurance premium finance, term lending, and USDA and SBA. We also saw growth in consumer credit and warehouse lending. Credit quality across the portfolio remains strong. Non-performing loans of 1.26% increased from 0.93% in the previous quarter. The largest increase was in commercial finance, and this was partially driven by the same relationship we mentioned last quarter, which is in the process of a workout. As we have said in the past, we do experience lumping up in our non-performing loans, particularly when we are in the process of a workout, but typically we recover at least a portion of a loan if not all, due to our collateral management. We remain confident in our collateral and the quality of our portfolio. As Brett said, we have built a company to be resilient through different cycles. From a liquidity perspective, Pathwork continues to be in a good position. Our balance sheet is strong, and when you factor in all of the sources, we have over $2.6 billion in available liquidity. These results continue to give us the ability to return value to shareholders. In the fourth quarter, we repurchased approximately 312,000 shares at an average share price of $51.29. In October, through October 16, we have repurchased an additional 233,000 shares at an average price of $47.25. In August, we announced that our Board of Directors authorized a new share repurchase program of up to 7 million shares through September 30, 2028. As of October 16, we have 8.4 million shares available for repurchase under the two current programs. As Brett stated, we are raising our fiscal year 2024 GAAP earnings per share guidance to a range from $6.20 to $6.75. While the fourth quarter saw a healthy amount of renewable energy funding opportunities, we do not anticipate this to reoccur at the same pace in fiscal year 2024. As a result, we are reaffirming our effective tax rate to be in the 16% to 20% range. This concludes our prepared remarks. Operator, please open the line for questions.
spk02: Absolutely. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from the line of Mike Perito with KBW. You may proceed.
spk06: Hi, this is Mike's associate Andrew filling in. Thank you for taking my questions. Um, first off here, I was wondering, God, how are you guys doing? Uh, just first off here, I was wondering if we could get some, uh, updated credit outlook commentary, you know, given some of the negative data points we've seen from other lenders, particularly in like the credit card and small business segments.
spk05: Yeah, so, of course, we don't have credit cards in the small business arena commercial finance. As we said, we're heavily collateral managed loan lender and therefore we tend to do very well through these kinds of times. And so we're not while we're having some companies that are having some difficulties. We're not having any kind of losses associated out of any ordinary pattern. So we're feeling very confident about it. Don't expect to have any trouble. And we believe our collateral managed approach will put us in a better place going through this cycle than other lenders may have.
spk03: And Andrew, I'd remind you that one thing that differentiates us, we no longer have a community bank. So we have a de minimis amount of commercial real estate on our books.
spk06: Great. I appreciate the color there. And then just a quick follow up on that. What are the provision assumptions that are going into the fiscal year 24 guide?
spk03: Provision assumptions. Well, it's based on our originations and the outlook for the economy and where our growth is coming from. You've seen in the last couple quarters, our growth has come from higher quality, typically lower loss portfolios, SBA, USDA, and insurance premium finance. So that factors into both You know, where the allowance levels are at, it also drives your CISO provision.
spk06: And then just lastly for me, and then I'll step back. Near term, just a quick question on the margin. Do you believe the NIM will stabilize here if we're in a higher for longer environment kind of as predicted and there's no movement in the federal funds rate?
spk05: I mean, if we have, you know, stability, Here, higher for longer, our NIM will continue to widen. That's a key differentiator of our business model. We still have a lot more upside on the yield side versus the cost, even if Fed Fund stays flat.
spk06: Appreciate all the color. Thanks for taking my questions.
spk05: Thank you.
spk02: Thank you for your questions. The next question comes from the line of Eric Spector with Raymond James. You may proceed.
spk07: Hey, good afternoon. This is Eric on the line for David Feaster. Thanks for taking the question.
spk02: Hey, Eric.
spk07: Just kind of just, hey, how's it going? Just staying on a similar page on the NIM. Just curious how you think about operations in a higher for longer environment. Obviously, there's a tailwind to the margin, but just curious if you could elaborate on the margin trajectory and then just any broader perspective how you think that would impact loan growth and maybe any other impacts or impacts on any other business in a hire for longer environment?
spk05: Well, so the first thing kind of ties back to the previous question. As you offload longer duration loans that were at lower rates and replace them with duration loans at higher rates, we're going to continue to grow NIM even if Fed funds and Prime stay flat. So that's kind of obvious. Now, the other element of your question is what's going on in the marketplace. And, you know, we're watching to see how much of a slowdown occurs in loan demand. Glenn noted particularly that we're already migrated some in our growth to higher quality loans. Some of that is what's available in the marketplace, and so we see that in leasing portfolios and others. And so that may well be what happens. But also, if the economy gets into a little bit more of a difficult time, we may see some growth in our working capital and factoring assets. We've talked about that for, I think, nearly a year now, so it hasn't materialized, but that would be the next thing that would happen if the economy really slows down, as people are starting to talk about.
spk07: Got it. That's helpful, Culler. I just kind of wanted to touch more on the capital side. So, obviously, regulatory capital remains strong, but TCEs, I'm just curious if you're hearing any pushback from regulators on that and that impacts your capital return opportunities at all. Looks like we've already started to repurchase some shares during the quarter, so maybe that's the answer, but just curious if TCE plays into the equation at all at this point.
spk03: We obviously watch that, and as you said, that's a factor, and we're comfortable, our board's comfortable. You know, you could assume regulators have a say in your capital levels and sharing purchases as well. And, you know, I would say in a banking 30 plus years, we're as liquid a bank as I've seen.
spk07: Okay. And then just one last question. Just wanted to touch on on what you're seeing on the SBA front. We're seeing growth opportunities. Can you remind us, like, how much of that book is government guaranteed? My last question. I'll step back. Thanks for taking the questions.
spk05: Yeah, we talked about it. I mentioned in my comments that we've been identifying additional SBA partners where we can get volume coming through. And so I would say the SBA business in general, industry-wide, has slowed down. but we're able to get some more transactions because of new partners that we've brought on. So we're excited about that. The exact percentage of how much is government guaranteed or not varies depending on market conditions. Sometimes we sell off the government guaranteed portion. So I don't know, do we have those numbers or do we want to get this?
spk03: It usually rains about two thirds. You know, it moves up and down as Brett said, but plus or minus two thirds of it would be typically guaranteed.
spk07: Got it. Got it. All right. Well, that's it for me. Thanks again.
spk02: Thank you.
spk05: Thank you.
spk02: Thank you for your question. Again, if you would like to ask a question, please press star followed by 1. Our next question comes from the line of Frank Sheralby with Piper Sandler. You may proceed.
spk04: Hey, guys. Good afternoon. Hi, Frank. On the guide, the increasing guide, anything you can point to specifically? Is it just as simple as a bit of a change in rate outlook that's driving that increase here?
spk05: Yeah, I mean, I think the higher for longer what's going on should help us with NAM, and so we're feeling very comfortable about that. Obviously, we're just a few days into the year, so we're not getting carried away, but we felt like with what we're seeing with the rate environment, we could bump it some, and then we'll see what happens as we get through the year.
spk04: Okay. And then in terms of the expense base, I get the card processing expense, that increase there. As far as if you look at the other expense line, Was a bit elevated, bounced around a bit, but it was a bit elevated link quarter and same with legal and consulting expense. So any sort of color or range, you know, you can give in terms of anything one time, sort of in the quarter and where you expect a better run rate maybe to be on the expense side?
spk03: I would say this quarter is a pretty good run rate, Frank, excluding the rate-related processing expenses. I'll remind you, as you're aware, we do have a number of variable expenses. where our expenses go partially driven by where our revenues go. But, again, we're, you know, we'll grow revenue at least two times expense growth.
spk04: Okay. And then just on credit, in terms of the MPA increase in the quarter, you mentioned the commercial finance side of it. also look like the tax business and i think you noted in the in the release the tax business drove some of that and it looks like it's mostly or all in 90 days past due and accruing at least for the tax stuff and i just kind of surprised would think that at this point you just write anything off that's still outstanding and uh so any color on that front yeah you know there we had a mixed shift in our in our tax lending this year from
spk03: our BAS providers to more of the independents and obviously revenues related to that, but also had higher loss rates, which we expected. So it's just somewhat of a mix shift there and then timing of IRS, you know, refunds when they do their drops and there's still some of them coming. But that's where we're at today. It just seems like the cycle has gotten pushed back later this year in a lot of the processing.
spk04: Okay. It just seems like based on where the reserves are on that business, it seems like you don't anticipate significant losses in this $5 million bucket that's in NPA now. Is that fair?
spk03: That's fair.
spk04: Yeah.
spk03: I would not expect anything material from that.
spk04: And then if I could just sneak in one last one, you know, as you, I know you tend to have longer term partnerships. So, you know, they, I guess you don't have a ton renewing every day, but in terms of the partnerships that have renewed, I'm just wondering, are you seeing better pricing? Are you seeing more narrow pricing given that, You know, we've seen some of these smaller banks entering the market and, you know, to Brett's point, maybe over time they get crowded out. But given that they're in now, is that kind of what you're seeing as partnerships renew? Tighter pricing?
spk05: Well, I mean, there's been pricing pressure, but it's probably been driven more by the rise in interest rates and the desire to focus on commission on deposits than anything else. And, you know, we don't, like you said, we don't have a whole lot of these going on at a time. So we'll see. We'll see how it grades out. But I would not say that we have experienced any benefit of what I think will be a washout yet. We've experienced pressure on pricing somewhat because of the interest rate rise.
spk03: We're just all factored into our guidance. Yeah.
spk04: Right. So you're basically seeing more of an ask on the depository side in terms of some sort of return there?
spk05: Yeah, that comes up. Now, what we tend to do is there's a trade-off of fees paid versus you know, commission on deposits, et cetera. And that's all part of the contract negotiations you go through. But again, you know, we're predicting and feel solid about our guidance around expanding them and the result of that. So we're not too concerned about it.
spk04: Okay, great. I appreciate all the color and enjoy retirement, Glenn. Thanks.
spk03: Yeah, thank you, Frank. I'll miss you. Thanks.
spk02: Thank you for your question. I will now pass the line back to our CEO, Brett Farr.
spk05: Thank you everybody for joining today. I did want to make one final comment. Today in Washington, the Federal Reserve held a hearing on the debit card interchange fee calculations. And I want to remind everybody that by legislation, the only authority they have for that calculation relates to banks that are over $10 billion in asset size. And so there may be some confusion out there. I want to be sure we clear that up, that it's a small issue where we are not impacted by that proposed change in rule by the Fed. So I just want to make that clear. We appreciate everybody joining today and look forward to having direct conversations with you. Thank you.
spk02: That concludes PathWord Financial Fourth Quarter Fiscal Year 2023 Investor Conference Call. Thank you for your participation. You may now disconnect your line.
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