Pathward Financial, Inc. (“Pathward Financial” or the “Company”) (Nasdaq: CASH) reported net income of $35.9 million, or $1.36 per share, for the three months ended September 30, 2023, compared to net income of $23.4 million, or $0.81 per share, for the three months ended September 30, 2022.

The Company reported net income of $163.6 million, $5.99 per share, for the fiscal year ended September 30, 2023, compared to net income of $156.4 million, or $5.26 per share, for the fiscal year ended September 30, 2022. For the fiscal year ended September 30, 2023, the Company recognized return on average assets of 2.33% compared to 2.20% for the prior year period.

For the fiscal year ended September 30, 2023, the Company recognized adjusted net income of $166.5 million, or $6.09 per share, compared to adjusted net income of $133.6 million, or $4.49 per share, for the fiscal year ended September 30, 2022. See non-GAAP reconciliation table below.

CEO Brett Pharr said, “During fiscal year 2023, we focused on operations across the enterprise, growing the commercial finance loan book, and working with new and existing partners to expand their product offerings. As a result, we increased net income by 5%, earnings per diluted share by 14% and expanded our return on average assets to over 2.3%. I am very pleased by everything we accomplished and look forward to furthering our progress on our three strategic initiatives this year. We are raising our guidance to a range of $6.20 - $6.70 to reflect our updated view on fiscal year 2024.”

Company Highlights

• On October 5, 2023, the Company announced Greg Sigrist has been appointed Executive Vice President (“EVP”), Chief Financial Officer (“CFO”) - Designee, beginning November 1, 2023. Immediately after the filing of the Company’s Form 10-K for fiscal year 2023, Mr. Sigrist will transition to EVP, CFO, when he will succeed Glen Herrick, who will remain with the Company as EVP, Executive Advisor to the Chief Executive Officer to aid in the transition and other projects until his retirement on December 31, 2023.

• On August 25, 2023, the Company announced a new share repurchase program to repurchase up to 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028.

Financial Highlights for the 2023 Fiscal Fourth Quarter

• Total revenue for the fourth quarter was $161.0 million, an increase of $37.8 million, or 31%, compared to the same quarter in fiscal 2022, driven by an increase in both net interest income and noninterest income.

• Net interest margin ("NIM") increased 98 basis points to 6.19% for the fourth quarter from 5.21% during the same period of last year, primarily driven by increased yields and an improved earnings asset mix from the continued optimization of the portfolio. When including contractual, rate-related processing expense, NIM would have been 4.87% in the fiscal 2023 fourth quarter compared to 4.73% during the fiscal 2022 fourth quarter. See non-GAAP reconciliation table below.

• Total gross loans and leases at September 30, 2023 increased $829.8 million to $4.37 billion compared to September 30, 2022 and increased $293.2 million, or 7%, when compared to June 30, 2023. The increase compared to the prior year quarter was primarily due to growth in the commercial and consumer finance portfolios. The primary driver for the sequential increase was growth in commercial finance loans.

• During the 2023 fiscal fourth quarter, the Company repurchased 311,727 shares of common stock at an average share price of $51.29. An additional 232,588 shares of common stock were repurchased at an average price of $47.25 in October 2023 through October 16, 2023. As of October 16, 2023, there were 8,433,848 shares available for repurchase under the current common stock share repurchase programs.

• The Company is raising fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.20 to $6.70. See Outlook section below.

Net Interest Income

Net interest income for the fourth quarter of fiscal 2023 was $104.9 million, an increase of 32% from the same quarter in fiscal 2022. The increase was mainly attributable to increased yields, higher interest-earning asset balances and an improved earning asset mix.

The Company’s average interest-earning assets for the fourth fiscal quarter increased by $650.4 million to $6.72 billion compared with the same quarter in fiscal 2022, primarily due to growth in loans and leases and an increase in total investment balances, partially offset by a decrease in cash balances. The fourth quarter average outstanding balance of loans and leases increased $669.4 million compared to the same quarter of the prior fiscal year, primarily due to an increase in commercial finance loans and consumer finance loans.

Fiscal 2023 fourth quarter NIM increased to 6.19% from 5.21% in the fourth fiscal quarter of last year. When including contractual, rate-related processing expense, NIM would have been 4.87% in the fiscal 2023 fourth quarter compared to 4.73% during the fiscal 2022 fourth quarter. See non-GAAP reconciliation table below. The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increased 122 basis points to 6.48% compared to the prior year quarter, driven by an increase in loan and lease, investment securities and cash yields. The yield on the loan and lease portfolio was 8.33% compared to 7.12% for the comparable period last year and the TEY on the securities portfolio was 3.13% compared to 2.56% over that same period.

The Company's cost of funds for all deposits and borrowings averaged 0.29% during the fiscal 2023 fourth quarter, as compared to 0.03% during the prior year quarter. The Company's overall cost of deposits was 0.12% in the fiscal fourth quarter of 2023, as compared to 0.01% during the prior year quarter. When including contractual, rate-related processing expense, the Company's overall cost of deposits was 1.56% in the fiscal 2023 fourth quarter, as compared to 0.52% during the prior year quarter. See non-GAAP reconciliation table below.

Noninterest Income

Fiscal 2023 fourth quarter noninterest income increased 29% to $56.1 million, compared to $43.5 million for the same period of the prior year. The increase was primarily attributable to increases within gain on sale of other, card and deposit fees, rental income, gain (loss) on sale of securities, and other income. The period-over-period increase was partially offset by a reduction in tax services fee income.

The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $7.8 million during the 2023 fiscal fourth quarter, as compared to $5.9 million for the same period of the prior year. Servicing fee income on off-balance deposits totaled $14.6 million for the fiscal quarter ended June 30, 2023. The sequential quarter decrease was due to a reduction in off-balance deposits that the Company manages at other banks.

Noninterest Expense

Noninterest expense increased 15% to $118.2 million for the fiscal 2023 fourth quarter, from $103.0 million for the same quarter last year. The increase was primarily attributable to increases in card processing expense, compensation expense, other expense, and operating lease equipment depreciation. The period-over-period increase was partially offset by a decrease in legal and consulting expense.

The card processing expense increase was due to rate-related agreements with Banking as a Service ("BaaS") partners. The amount of expense paid under those agreements is based on an agreed upon rate index that varies depending on the deposit levels, floor rates, market conditions, and other performance conditions. Generally, this rate index averages between 50% to 85% of the Effective Federal Funds Rate ("EFFR") and reprices immediately upon a change in the EFFR. Approximately 49% of the deposit portfolio was subject to these higher rate-related processing expenses during the 2023 fiscal fourth quarter. For the fiscal quarter ended September 30, 2023, contractual, rate-related processing expenses were $22.5 million, as compared to $20.5 million for the fiscal quarter ended June 30, 2023, and $7.4 million for the fiscal quarter ended September 30, 2022.

Income Tax Expense

The Company recorded an income tax benefit of $2.7 million, representing an effective tax rate of (7.9%), for the fiscal 2023 fourth quarter, compared to income tax benefit of $1.3 million, representing an effective tax rate of (5.6%), for the fourth quarter last fiscal year. The current quarter increase in income tax benefit was primarily due to an increase in investment tax credits recognized ratably when compared to the prior year quarter.

The Company originated $42.6 million in renewable energy leases during the fiscal 2023 fourth quarter, resulting in $13.7 million in total net investment tax credits. During the fourth quarter of fiscal 2022, the Company originated $35.9 million in renewable energy leases resulting in $9.6 million in total net investment tax credits. Investment tax credits related to renewable energy leases are recognized ratably based on income throughout each fiscal year. For the fiscal year ended September 30, 2023, the Company originated $93.6 million in renewable energy leases, compared to $62.8 million for the prior fiscal year. The timing and impact of future renewable energy tax credits are expected to vary from period to period, and the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

Outlook

The following forward-looking statements reflect the Company’s expectations as of the date of this release and are subject to substantial uncertainty. The Company's results may be materially affected by many factors, such as changes in economic conditions and customer demand, changes in interest rates, adverse developments in the financial services industry generally, inflation, competition, and other factors detailed below under “Forward-looking Statements.”

The Company is raising fiscal year 2024 GAAP earnings per diluted share guidance to a range of $6.20 to $6.70. As part of this guidance, the Company expects that its annual effective tax rate in fiscal year 2024 will range between 16% and 20%.

Investments, Loans and Leases

The Company's investment security balances at September 30, 2023 totaled $1.84 billion, as compared to $1.95 billion at June 30, 2023 and $1.92 billion at September 30, 2022.

Total gross loans and leases totaled $4.37 billion at September 30, 2023, as compared to $4.07 billion at June 30, 2023 and $3.54 billion at September 30, 2022. The primary driver for the sequential increase was an increase in commercial finance and consumer finance loans, partially offset by a decrease in seasonal tax services loans and warehouse finance loans. The year-over-year increase was primarily due to an increase in commercial finance, consumer finance, and warehouse finance loans, partially offset by a slight reduction in seasonal tax services loans.

Commercial finance loans, which comprised 85% of the Company's loan and lease portfolio, totaled $3.72 billion at September 30, 2023, reflecting an increase of $282.4 million, or 8%, from June 30, 2023 and an increase of $699.5 million, or 23%, from September 30, 2022. The sequential increase in commercial finance loans was primarily driven by a $133.8 million increase in the insurance premium finance portfolio and a $102.4 million increase in the SBA/USDA portfolio. The increase in commercial finance loans when comparing the current period to the same period of the prior year was primarily driven by increases in the insurance premium finance, SBA/USDA, term lending, and asset-based lending portfolios, partially offset by reductions in the factoring and lease financing portfolios.

Asset Quality

The Company’s allowance for credit losses ("ACL") totaled $49.7 million at September 30, 2023, a decrease compared to $81.9 million at June 30, 2023 and an increase compared to $45.9 million at September 30, 2022. The decrease in the ACL at September 30, 2023, when compared to June 30, 2023, was primarily due to a $33.1 million decrease in the allowance related to the seasonal tax services portfolio, partially offset by slight increases in the allowance related to the commercial and consumer finance portfolios.

The $3.8 million year-over-year increase in the ACL was primarily driven by a $2.8 million increase in the allowance related to the commercial finance portfolio and a $0.9 million increase in the allowance related to the consumer finance portfolio. The year-over-year increase in the allowance related to both the commercial finance and consumer finance portfolios was primarily attributable to loan growth in each respective portfolio.

The following table presents the Company's ACL as a percentage of its total loans and leases.

The Company's ACL as a percentage of total loans and leases decreased to 1.14% at September 30, 2023 from 2.01% at June 30, 2023. The decrease in the total loans and leases coverage ratio was primarily driven by a decrease in the seasonal tax services portfolio. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.

Activity in the allowance for credit losses for the periods presented was as follows.

The Company recognized a provision for credit losses of $9.0 million for the quarter ended September 30, 2023, compared to a reversal of provision for credit losses of $2.6 million for the comparable period in the prior fiscal year. The increase in provision for credit losses during the current quarter compared to the prior year period was primarily driven by growth in the commercial finance portfolio. The reversal of provision for credit losses during the prior year quarter was primarily driven by the student loan portfolio sale and commercial finance recoveries. Net charge-offs were $41.3 million for the quarter ended September 30, 2023, compared to $26.6 million for the quarter ended September 30, 2022. Net charge-offs attributable to the tax services, commercial finance and consumer finance portfolios for the current quarter were $32.1 million, $5.1 million, and $0.1 million, respectively. Net charge-offs attributable to the tax services, commercial finance and consumer finance portfolios for the same quarter of the prior year were $22.6 million, $3.4 million, and $0.6 million, respectively.

The Company's past due loans and leases were as follows for the periods presented.

The Company's nonperforming assets at September 30, 2023 were $58.0 million, representing 0.77% of total assets, compared to $40.8 million, or 0.55% of total assets at June 30, 2023 and $30.9 million, or 0.46% of total assets at September 30, 2022.

The Company's nonperforming loans and leases at September 30, 2023, were $56.2 million, representing 1.26% of total gross loans and leases, compared to $38.8 million, or 0.93% of total gross loans and leases at June 30, 2023 and $29.2 million, or 0.82% of total gross loans and leases at September 30, 2022.

The increase in the nonperforming assets as a percentage of total assets at September 30, 2023 compared to June 30, 2023, was driven by an increase in nonperforming loans in the commercial finance portfolio and in the seasonal tax services portfolio. When comparing the current period to the same period of the prior year, the increase in nonperforming assets was primarily due to one sizable relationship moving to nonaccrual within the commercial finance portfolio, partially offset by a decrease in nonperforming loans in the seasonal tax services portfolio and the consumer finance portfolio.

The Company has various portfolios of consumer lending and tax services loans that present unique risks that are statistically managed. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The Company's loans and leases held for investment by asset classification were as follows for the periods presented.

Deposits, Borrowings and Other Liabilities

Total average deposits for the fiscal 2023 fourth quarter increased by $439.9 million to $6.20 billion compared to the same period in fiscal 2022. The increase in average deposits was primarily due to increases in noninterest bearing deposits, money market deposits, and wholesale deposits, partially offset by a decrease in savings deposits and time deposits.

The average balance of total deposits and interest-bearing liabilities was $6.39 billion for the three-month period ended September 30, 2023, compared to $5.80 billion for the same period in the prior fiscal year, representing an increase of 10%.

Total end-of-period deposits increased 12% to $6.59 billion at September 30, 2023, compared to $5.87 billion at September 30, 2022. The increase in end-of-period deposits was primarily driven by increases in noninterest-bearing deposits of $685.8 million and money market deposits of $47.4 million, partially offset by decreases in savings deposits of $8.1 million and certificate of deposits of $2.1 million.

As of September 30, 2023, the Company had $897.5 million in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $340.7 million are on activated cards while $556.8 million are on inactivated cards. During fiscal year 2024, these card balances are expected to decrease by approximately $380 million as the Company actively returns unclaimed balances to the U.S. Treasury.

As of September 30, 2023, the Company managed $267.6 million of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn servicing fee income, typically reflective of the EFFR.

Approximately 49% of the deposit portfolio during the 2023 fiscal fourth quarter were subject to variable, rate-related processing expenses that are derived from the terms of contractual agreements with certain BaaS partners. These agreements are tied to a portion of a rate index, typically the EFFR.

Regulatory Capital

The Company and its subsidiary Pathward®, N.A. (the "Bank") remained above the federal regulatory minimum capital requirements at September 30, 2023, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies. Regulatory capital ratios of the Company and the Bank are stated in the table below. Regulatory capital is not affected by the unrealized loss on accumulated other comprehensive income (“AOCI”). The securities portfolio is primarily comprised of amortizing securities that should provide consistent cash flow. The Company does not intend to sell these securities, or recognize the unrealized losses on its income statement, to fund future loan growth.

The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis.

The following table provides the non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP:

The following table provides a reconciliation of tangible common equity and tangible common equity excluding AOCI, each of which is used in calculating tangible book value data, to Total Stockholders' Equity. Each of tangible common equity and tangible common equity excluding AOCI is a non-GAAP financial measure that is commonly used within the banking industry.

Conference Call

The Company will host a conference call and earnings webcast with a corresponding presentation at 4:00 p.m. Central Time (5:00 p.m. Eastern Time) on Wednesday, October 25, 2023. The live webcast of the call can be accessed from Pathward’s Investor Relations website at www.pathwardfinancial.com. Telephone participants may access the conference call by dialing 1-833-470-1428 approximately 10 minutes prior to start time and reference access code 644009. A webcast replay will also be archived at www.pathwardfinancial.com for one year.

Upcoming Investor Events

• Piper Sandler East Coast Financial Services Conference, November 16, 2023 | Miami, FL

About Pathward Financial, Inc.

Pathward Financial, Inc.(Nasdaq: CASH) is a U.S.-based financial holding company driven by its purpose to power financial inclusion for all. Through our subsidiary, Pathward®, N.A., we strive to increase financial availability, choice, and opportunity across our Banking as a Service and Commercial Finance business lines. These strategic business lines provide end-to-end support to individuals and businesses. Learn more at www.pathwardfinancial.com.

Forward-Looking Statements

The Company and the Bank may from time to time make written or oral “forward-looking statements,” including statements contained in this press release, the Company’s filings with the Securities and Exchange Commission ("SEC"), the Company’s reports to stockholders, and in other communications by the Company and the Bank, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” "target," or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results including our earnings per share guidance, future effective tax rate and related performance expectations; the performance of our securities portfolio; the impact of card balances related to government stimulus programs; customer retention; loan and other product demand; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; and technology. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflicts in Ukraine and the Middle East; weather-related disasters, or public health events, such as the COVID-19 pandemic and any governmental or societal responses thereto; our ability to achieve brand recognition for the Bank equal to or greater than we enjoyed for MetaBank; our ability to successfully implement measures designed to reduce expenses and increase efficiencies; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate, and their related impacts on macroeconomic conditions, customer behavior, or funding costs and or loan and securities portfolio; changes in tax laws; the strength of the United States' economy and the local economies in which the Company operates; adverse developments in the financial services industry generally such as recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; inflation, market, and monetary fluctuations; the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of the Bank's strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by, our regulators; changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by the Bank of its status as a well-capitalized institution; changes in consumer spending and saving habits; losses from fraudulent or illegal activity; technological risks and developments and cyber threats, attacks, or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this press release speak only as of the date hereof. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022, and in other filings made with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.