PATHWARD FINANCIAL, INC. Q2 FY2025 earnings call

• Strong second quarter with healthy businesses and optimism for the future. - Successful execution on balance sheet strategy, generating revenue above asset size without growing balance sheet. - Strong tax season with over 42,000 independent tax offices (new record), non-interest income from tax products up, and pre-tax income for tax services grew 29% to $47.6 million. - Strategic partnership for renewable energy loan growth going well, with strong originations and robust pipeline. - Sold portion of working capital loan portfolio to optimize balance sheet. - Credit solutions team signed contract with new partner to originate loans through their lending marketplace. - Net interest income grew 5% due to improved earning asset mix and higher profitability. - Expenses well managed with a 1% increase, partially offset by lower compensation and benefits. - Liquidity strong with almost $3.9 billion available, higher than last year.

For the second quarter of 2025, Pathward Financials saw strong performance. In tax services, non-interest income related to refund transfer products and refund advance products increased by 13% each, with refund advanced origination up over $100 million (7% growth). Total tax services revenues reached $85 million, a 17% growth compared to the prior year period. Net interest income grew 5%, and the net interest margin was 6.5% in the quarter, up from 6.23% in the prior year period. Adjusted net interest margin expanded 33 basis points. Non-interest income grew 7% driven by higher secondary market revenues from loan sales and higher tax product fee income. Year-to-date, non-interest income represents 45% of total revenue.

• Revised fiscal 2025 EPS guidance to $7.40 to $7.80. - Assumptions include no rate cuts for the remainder of the year, net interest margins exceeding those of fiscal year 2024 due to balance sheet optimization, effective tax rate 17% to 21%, expected share repurchases, and continued well-management of businesses with investments in technology and risk compliance.

• Forward-looking statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. - Market dynamics, economic slowdown impacts on portfolio performance, and regulatory changes could affect results.

Q: When you think about the tax business, how would you characterize its scalability going forward and confidence in continuing to grow independent tax offices?

A: The tax business has seen improved operational effectiveness and market share gain. While year-over-year growth may not be as fast as this year, it will continue to do well with ongoing improvements in operations and underwriting models.

Q: Given the amount of payment volume through the company, have you seen any change in activity or behavior since Liberation Day?

A: No, not at all. A large percentage of the book of business is for essential items like groceries and gas, which aren't significantly affected by economic circumstances as people still need to buy these even without jobs.

Q: Can you provide more color on the new partnership to originate loans through a marketplace?

A: The partnership involves online consumer term loans ranging from six months to five years, near prime to subprime. There's a waterfall approach to credit losses and close monitoring of underwriting models to ensure adequate reserves.

Q: Walk us through the margin outlook and impact of rate cuts?

A: Each 25 basis point rate cut has a pretax annual impact of maybe $500,000. The balance sheet is managed to rotate liquidity and assets, with $190 million freed up from selling part of the working capital line and $200 million in securities principal paydowns over 12 months, allowing redeployment into duration assets to maintain margin stability.

Q: Has disruption in the past created opportunities for acquiring new programs or portfolios?

A: The phone is ringing and the pipeline is full, with opportunities to pick and choose what makes sense as market dynamics create opportunities.