Pathward (CASH) Q1 2026 Earnings Call Transcript

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DATE

Jan. 22, 2026, 5 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Brett Pharr
• Chief Financial Officer — Gregory Sigrist

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TAKEAWAYS

• Net income -- $35.2 million, a 17% increase compared to the prior-year period.
• Earnings per diluted share -- $1.57, marking a 28% increase compared to the same quarter last year.
• Return on average assets -- 1.87%, up from 1.61% in the prior-year quarter.
• Return on average tangible equity -- 26.7%, compared to 25.5% in the same quarter the prior year.
• Net interest margin (adjusted for the impact of consumer loans sale) -- Increased to 5.49% this quarter, up sequentially from 5.31% and 5.11% in comparable prior periods.
• Total deposits (December 31) -- $6.4 billion, reflecting a $170 million decrease year over year, driven by $200 million higher custodial deposits.
• Average deposits -- $90 million higher than last year for the quarter; average custodial deposits decreased slightly.
• Total loans and leases (December 31) -- $5 billion, up from $4.6 billion last year, led by a $531 million increase in commercial finance loans, offset by a $148 million decline in consumer finance loans.
• Loan originations -- $1.9 billion during the quarter; $678 million in commercial finance and $1.2 billion in consumer finance.
• Net charge-offs (excluding tax services loans) -- Annualized rate of 2 basis points; in commercial finance, net charge-offs were a net recovery, with a 12-month trailing figure at 39 basis points.
• Allowance for credit losses ratio (commercial finance) -- 116 basis points, a slight improvement from 118 basis points in the same quarter last year.
• Liquidity -- $3.7 billion available at quarter-end.
• Share repurchases -- 652,000 shares bought back during the quarter at an average price of $72.07, with 4.3 million shares remaining on the program.
• Fiscal year 2026 EPS guidance raised -- New projected range of $8.55 to $9.05, with assumptions of no rate cuts, an 18% to 22% effective tax rate, and continued share repurchases.
• Noninterest income -- Core card and deposit fee income showed growth, excluding a $1 million expected decline in custodial deposit servicing fees.
• Partner/contract pipeline -- Management indicated it is "as big as it's ever been," and multiple partner contracts announced in 2025 have started contributing to revenue.
• Tax services update -- Over 11% growth in enrolled tax offices compared to the same point last year, attributed to renewed agreements and technology improvements.
• Balance sheet velocity strategy -- Management reiterated the ability to originate and sell loans, keeping asset size steady while driving both interest and noninterest income.

SUMMARY

Pathward Financial (NASDAQ:CASH) reported substantial increases in profitability metrics, including a notable rise in adjusted net interest margin and a boost in year-over-year lending activity. Management emphasized that recently added partner relationships are now impacting revenues and are expected to contribute more meaningfully as they scale, with mid- to high-single-digit percentage annualized contribution indicated for card fee lines by the full ramp. The guidance for fiscal 2026 earnings per share was increased, reflecting confidence in partner onboarding momentum and improved tax season positioning with more enrolled tax offices than previously. Executives cited secondary market revenue timing, partner ramp, and tax season volume as key swing factors for achieving the high or low end of the revised guidance range. Commercial finance and consumer loan originations reached new highs, with velocity initiatives and balance sheet optimization designed to maintain asset size while generating incremental income.

• CEO Pharr highlighted that competitive market dynamics in the partner segment have recently "normalized," supporting Pathward Financial's selective growth approach.
• Pathward Financial does not hold digital assets but is exploring opportunities in payment rails and onboarding/offboarding of fiat as part of broader B2B partnerships.
• Management noted that nonperforming loans increased slightly quarter over quarter but reiterated confidence in collateralization strategies, stating, "there's nothing in there systematic."
• Liquidity position remained strong, and the repurchase of shares under the existing program continued to reduce share count, supporting EPS outlook.

INDUSTRY GLOSSARY

• Issuing sponsorship: Banking service where a bank enables third parties to issue payment cards or similar financial products using its charter and regulatory platform.
• Balance sheet velocity: Strategy of actively originating and selling loans to generate fee and interest income without materially expanding total asset base.
• Net charge-offs (NCOs): Actual loans charged off as uncollectible, minus recoveries, expressed as a percentage of outstanding loans.
• Allowance for credit losses (ACL): Reserve set aside to cover expected loan and lease losses based on management's credit risk assessment.

Full Conference Call Transcript

Brett Pharr: Thanks, Darby, and welcome, everyone, to our earnings conference call. We kicked off the year in a position of strength. And overall, we are pleased with the financial results the team achieved in the quarter. I want to take a moment to talk about what we do, how we do it and why we believe Pathward is uniquely positioned as a leader in this space. Whether you are an investor, analyst or another member of the financial community, you likely have an understanding of how a traditional bank works. Banks take deposits from individuals or corporations, lend those deposits and move money. In this, Pathward is no different. Where we differ is how we do those things.

First of all, we move money. Where we differ is we work with partners and facilitate payments through issuing sponsorship, merchant acquiring sponsorship, independent ATM sponsorship, consumer credit sponsorship and digital payments, assisting them with the moving of significant amounts of money relative to our size across the nation. In issuing sponsorship, we move money and facilitate payments via products such as prepaid cards, gift cards, loyalty cards, payroll cards and general purpose reloadable cards.

With over 20 years of experience in payment facilitation, Pathward's value proposition is anchored in 4 principal pillars: Our leadership is seasoned and has deep expertise in payments and sponsorship; second, our combination of people, processes and operating structure delivers a streamline approach to banking and provides reliable and sustainable partner programs; third, we deliver partnership with a commitment that enables our partner success; and lastly, a consultative governance approach rooted in our stable risk and compliance infrastructure that helps partners manage a regulatory framework that is also complex and difficult to manage. Second, we hold deposits. Where we differ is that generally, our issuing partnerships provide Pathward with stable deposits.

As one of the most mature and experienced sponsored banks, we work with our partners to help them grow scale and co-create solutions that facilitate innovation. Because of our differences, we are able to generate significant fee income, this leads us to lending. Like other banks, we lend our deposits. However, we specialize in working with businesses that for a multitude of reasons, may not be able to work with or borrow from a traditional bank. We provide lending products that help these businesses access funds they need to launch, operate and grow. In some cases, we are also working through partners to originate commercial finance loans. Pathward strengths help us deliver on our purpose of financial inclusion.

Our partnerships offer financial solutions that help individuals and businesses who are underserved, underrepresented or even unbanked. Additionally, as our world grows increasingly dependent and relied upon digital-first or digital-only solutions, Pathward's role in fulfilling the needs of these individuals and companies, both expand and increases. While at a high level, we operate the same as the traditional bank. We believe it is our unique value propositions, partnerships and position in the marketplace that allows us to help a greater variety of consumers and businesses as well as generate results that we believe exceed those of a traditional bank. This is characterized by a disciplined balance sheet optimization and fee income working together to generate positive performance.

Last year, our return on average assets was over 2%. Our return on average tangible equity was over 38% and roughly 40% of our revenue came from noninterest income. Our business model optimizes our long-term strategy, being the trusted platform that enables our partners to thrive. Our 2026 goals are off to a great start. As part of our commitment to the client experience, we announced the rollout of an evolved operating model last month. We firmly believe this model better aligns with our partners by supporting their growth and scalability and creating a more seamless experience. Each of the respective leaders have strong, relevant industry background and a solid commitment to Pathward's culture.

We believe this decision ultimately positions our clients for greater success and revenue enablement and the company for increased innovation and growth. Building upon the progress we've made over the last few years, we believe revenue growth will come from 3 main areas during the fiscal year. It's important to note that we have prioritized areas that are not dependent on growing our balance sheet in order to grow revenue. First, we have additional capacity to optimize the balance sheet through the continued rotation from securities to loans, increasing net interest income without growing the overall asset size.

As we continue to optimize, we are also looking at the yields of each asset, and we intend to continue to favor areas where we believe we have a competitive advantage to deliver a higher risk-adjusted return or optionality. This leads to the second area of revenue growth, fee income from balance sheet velocity. Our business model supports the ability to originate and sell loans, thereby generating additional revenue. By utilizing velocity for both commercial and consumer loans, our balance sheet can remain steady, while generating both interest income and noninterest income for the business.

Finally, in 2025, we announced multiple contracts for products such as merchant acquiring sponsorship, which has little impact to the balance sheet that generates noninterest income. Money movement, specifically issuing sponsorship was how Pathward entered into sponsored banking and is still the core of our business. But with our partner searching for a bank that can provide multiple products outside of issuing, offering multi-thread solutions across a breadth of banking needs is an important differentiator. Finally, tax season has begun, and we are 1 step ahead with over 11% more enrolled tax offices than at this point last year. We do look forward to a number of possible benefits.

First has to do with the change in tax code for 2025. We believe this change has the potential to drive more consumers into the tax preparation offices that we serve. Second, we exited last year's season with renewed agreements across all of our tax software partners. And finally, we continue to make technology improvements throughout the year for greater efficiencies when compared to years past and look forward to reaping those benefits in 2026. As an industry leader in tax-related financial products, we pride ourselves in offering one of the most comprehensive product mixes in the tax industry including products and services like refund transfers, refund advances, ERO loans and facilitating refunds on prepaid cards.

We feel confident that we will be able to deliver on our goals and look forward to providing a more robust tax update next quarter. Now I'd like to turn it over to Greg, who will take you through the financials.

Gregory Sigrist: Thank you, Brett. We were pleased with our results in the quarter, which were marked by solid growth in our core business, growing interest income and commercial finance with a lower provision, increasing core card and deposit fee income and flat expenses. Let me start with the sale of the consumer finance portfolio we mentioned on last quarter's call, which had an impact on several income statement line items, including an $11.9 million reduction to net interest income. This amount is largely offset by reduced provision and lower other expenses. So while optically, it appears that these income statement line items are lower year over year, the net impact is quite muted.

Similarly, net interest margin has been reduced by this gross-up amount, while the offsetting line items were in areas that do not impact NIM. Within net interest income, Contribution from commercial finance increased $9.2 million in the quarter due to higher balances and slightly higher yields given our continued focus on optimization. Provision for credit losses was lower than last year, in part due to a recovery from a commercial finance loan that moved into nonperforming during the first quarter of last year. Given our approach to collateral management and monitoring, we are often able to work out or resolved loans that have moved into nonperforming status, recovering most, if not all, of the funds.

It may take us a few quarters but this is why we focus more on annualized net charge-offs than nonperforming loan volumes. I'll highlight this because, as we have mentioned previously, this is the nature of our business and an example of why we are comfortable with our credit trends. We reported solid results and noninterest income, particularly in core card and deposit fees. If you remove the impact of servicing fees on custodial deposits, which decreased as expected by about $1 million, we saw good growth in that line. This reflects some of the new partners we announced in fiscal 2025 beginning to show up in our revenue numbers.

Due to the government shutdown, we fell just shy of our goal range for secondary market revenues but we believe this is just a timing impact, and we expect to make that up in subsequent quarters. Finally, we saw a decrease in rental income due to lower balances and operating leases. However, this is largely offset in noninterest expenses in the form of lower operating lease equipment depreciation. Noninterest expenses were well managed during the quarter, coming in slightly better when compared to last year. We saw lower rate-related card processing fees, primarily due to a lower rate environment.

This led to net income of $35.2 million and earnings per diluted share of $1.57, showing significant increases of 17% and 28%, respectively, when compared to last year. In addition, annualized performance metrics were also strong for the first quarter. Keeping in mind our normal seasonality with return on average assets of 1.87% and a return on average tangible equity of 26.7%, compared to 1.61% and 25.5%, respectively, during the same quarter last year. Deposits held on the company's balance sheet at December 31 totaled $6.4 billion, which is a $170 million decrease versus a year ago.

This was primarily driven by having $200 million more in custodial deposits at the end of the first quarter when compared to last year. Average deposits on the company's balance sheet during the quarter were around $90 million higher than last year's quarter. Average custodial deposits during the quarter decreased slightly when compared to last year. During the quarter, we saw favorable deposit balances at multiple partners due to a strong holiday season and continued partner growth. Loans and leases at December 31 were $5 billion, compared to $4.6 billion last year. The primary driver of the increase was $531 million increase in commercial finance loans, partially offset by a $148 million decrease in consumer finance loans.

Additionally, during the quarter, we originated $1.9 billion in loans with $678 million in commercial finance and $1.2 billion in consumer finance. We are quite pleased by the growth in consumer originations, which was driven in part by the new contract we announced last year. This loan production is the engine behind our balance sheet optimization strategy, which includes balance sheet velocity. Our nonperforming loans ticked up slightly when compared to last quarter. We continue to monitor loans we discussed on the prior quarter earnings call. As we indicated then, these loans are in different verticals, and we do not believe represent a systemic portfolio issue.

We continue to believe that there is a path forward to resolving these loans in due course over the next several quarters. To reiterate an additional point we made last quarter, when you compare our historic NPLs to NCOs, we do not believe there's a correlation between them. As I mentioned earlier, because we take a collateralized approach to underwriting and credit management, we generally focus on our annualized net charge-offs since we have risk mitigation techniques designed to address past due and nonperforming loans built into our lending process. This quarter is a good example of what we are describing.

Our total NCOs as a percentage of average loans when excluding tax services loans was 2 bps on an annualized basis. In commercial finance, our net charge-offs were actually a net recovery for the quarter, and our trailing 12-month net charge-offs are at 39 basis points. Our allowance for credit loss ratio in commercial finance was 116 basis points in the quarter, a slight improvement when compared to 118 basis points for the same quarter last year. Our liquidity remains strong with $3.7 billion available, and we're extremely pleased with our position at this point in the year. During the quarter, we repurchased approximately 652,000 shares at an average price of $72.07.

This leaves 4.3 million shares still available for repurchase under the current stock repurchase program. We are increasing our fiscal year 2026 guidance to an EPS range of $8.55 to $9.05, which includes the following assumptions: no additional rate cuts during the year; an effective tax rate of 18% to 22% and expected share repurchases. This concludes our prepared remarks. Operator, please open the line for questions.

Operator: [Operator Instructions] The first question comes from Tim Switzer with KBW.

Timothy Switzer: The first 1 I have is on the NIM trajectory. A lot of moving parts this quarter, which makes sense. And I think you guys did a good job of laying it out. But if we think about the adjusted NIM, what is the right way to think about the jumping off point for Q2? And then how do we think about the trajectory over the course of the year within your guide, assuming no rate cuts?

Gregory Sigrist: Yes. Let me give you a couple of data points first, Tim, that might help frame the conversation. I think what's given it a bit harder to look at this quarter is obviously, the gross uptick we've had on the consumer loans, which are part of that calc, even though they offset someplace else. So if you strip out all of the impact of the net income -- net interest income related to the gross HFI consumer loans, you would have had an adjusted NIM of 5.11% a year ago. Last quarter would have been 5.31%, and this quarter would have been 5.49%. So you can tell, both linked quarter and prior year where the trajectory has been up.

As it relates to just interest rate sensitivity in the portfolio, though, the story remains the same, candidly. Every incremental 25 basis point overnight rate cut continues to have a very de minimis impact on us. We are still very sensitive to the middle part of the curve, which means that with the steepening we've seen over the last 4 to 6 weeks and just where the outlook is, the forward curve is on the middle part of the curve. I think that 5.31% is the launch point for the second quarter. And again, as long as the macroeconomic environment stays muted and middle part of the curve is elevated. We still have some tailwinds.

So I think we're flat to up from that point.

Timothy Switzer: Okay. Got it. Very helpful. And I appreciate all the color you provided on the credit outlook and the charge-offs. Are you able to quantify what that recovery was that you recorded this quarter within net charge-offs?

Gregory Sigrist: No, I think you'll see the chart in the earnings release. It just has more of the aggregate number. So it's within that roll forward on the ACL, Tim.

Timothy Switzer: Got you. Okay. And then another question I had, maybe a little more philosophical, but there's been a lot of discussion lately about fintechs wanting to obtain their own bank charters. I think there is a few more -- or not fintech, there are ILCs announced earlier today. And most of the discussions about in the [ BaaS ] world has been, how it could be a threat with partners no longer needing a bank sponsor. So could you respond to that? And could you also maybe outline how there might be some opportunities here, if any?

Brett Pharr: Yes. So this is Brett. So I think the way you think about this is, yes, we're in a clearly a more relaxed regulatory environment as it relates to getting these charters on. It takes a lot of time to build the scale, to be able to do the kinds of things that we do, even if you've got a lot of dollars behind you. And so yes, there will be some of the happening. But I think sort of the history longer term has been people that have bought bank charters have often given them back because they realized what they had.

Now that's not going to happen under current administration, but it will happen under other administrations as we look forward. We have some partners that have gotten those and then came to us and did additional transactions with us and talked about more because there's very narrow things they can do within those charters, and we can do a whole lot more. Don't forget, we have a multi-threaded approach with our partners, and that is to offer many different kinds of products. And some of these charters are not really going to allow that to happen. So a, not seeing it; b, I think it's going to be a long time before it creates any competitive pressure.

And I also think these things go in cycles. And so just think about it through the cycle is the way we should think about this kind of competition.

Timothy Switzer: Got it. Yes, that all makes sense. And sort of related to this, some of the fintechs going to obtain more often the custody charter are stablecoin or other digital asset companies. And Brett, you gave a great overview of the business earlier and you talked about some of the opportunities. I don't think you mentioned digital assets at all. Is that an area you guys want to play in? And what kind of role do you think part Pathward can play?

Brett Pharr: Yes. So there's all kinds of things that we can do. We're already doing some things in the crypto space in terms of onboarding and offboarding the fiat currency, et cetera. To be clear, we don't hold any of those digital assets today. But we're looking at all those things. And my sort of personal view is that this is first a B2B use case and there's a lot of cool things there. And we're talking to partners and other material players about ways we can play in that space. My view right now is it will be an additional rail among many rails and we'll continue to work on that.

And as our partners pull forward and as use cases come forward, we'll engage in it because it's definitely part of the future.

Operator: Our next question comes from Joe Yanchunis with Raymond James.

Joseph Yanchunis: SO in your prepared remarks, you talked about a lot of the new partner announcements in 2025, and it looks like they're really just started to impact the P&L. And I was wondering if you could unpack the amount of kind of embedded growth from this cohort of partners that hasn't yet shown up in your financials.

Gregory Sigrist: Yes. I mean I'd be happy to. As you recall from last quarter, I mean, these kind of span the gamut from merchant acquiring, might have been an issuing [ deal or two ] in there, and one up in the credit solution space. And each of those has a different path to time to revenue. And we're obviously onboarding all the entire cohort as rapidly as we can. And then each of those programs need to build, right?

But once each of those programs is launched and live, I would expect contribution to a full 12-month run rate on the card fee line to be somewhere in the middle to high single digits, and that's just based on those programs. And I think as we talked about last quarter, we are still actively working on multi-threaded approaches with many of those that we've announced, too. So that cohort alone, again, mid- to high single digits and we're seeing what we -- how we can scale from there.

Brett Pharr: Yes. And Joe, this is Brett. I mean we're getting very enthusiastic about the pull-through on these partners and others were talking both existing and future. We went through a period of time where there was some crazy pricing and structures in this particular industry, and we chose to abstain. But that's long been washed out, and these things are picking up. And we've often said to you, it takes a little time for the programs to build. This quarter, you're seeing it. And we're -- there's a reason we're saying what we're saying about guidance. We're seeing it happen. And we'll continue to think about that through the rest of the year as we go on.

This is an upbeat time for us, and that's why we're thinking about these partners and others who are talking about.

Joseph Yanchunis: Perfect. And I'm going to get to your updated guidance in a moment. I just kind of wanted to pick up something you just said there. So you just talked about the washout of the irrational pricing and you're starting to see some normalization from partners. What does your current partner pipeline look like today? And should we expect a similar number of announcements in the calendar year or fiscal year ahead?

Brett Pharr: I mean, the part -- your first part of your question is easy to answer. The pipeline has never been more full. We're very excited about it, et cetera. You don't know until they're done, right? So as we can and we kind of publicly agree to talk about it publicly, we will let you know about those things. But this is -- I mean, these kinds of things are only increasing, not decreasing. And there's been a lot of sense that has been brought into this marketplace. So we're going to get lots of swings at it, and we're winning some of those swings and we're going to keep going. So pipeline is as big as it's ever been.

Joseph Yanchunis: That's great to hear. And then kind of going back to your guide, so you raised the midpoint by a pretty substantial amount. Can you help us think of the puts and takes in relation to the updated outlook? And what would need to happen for you to reach the top end versus the bottom end of the new ranges?

Brett Pharr: I think part of it is we've talked about these new partners that have come on, and we're seeing the benefits. But as you begin working with a new partner, you kind of learn what's the trajectory. You have sort of a funnel of opportunity and some get to the higher end of it, some get to the lower. We are now confident on that funnel to do what we did. And so as we go through the course of the year, and we continue to monitor those new partners coming on and feel solid that it's actually going to happen is not just a hope. We'll continue to talk about where we are in that funnel.

Gregory Sigrist: Yes. And I think the other thing is tax season too, right? I mean as we think about our guide, we clearly think to a multitude of different scenarios across our businesses. And I think Brett kicked through some of the positives on the tax business heading into tax season here and we're really enthusiastic about it. But I agree with Brett. I mean the 2 factors that are going to push us to the higher end of that guide. One is the timing on just the pull-through on those partners we talked about, the ones we've already announced. The other is going to be the success of the tax season. We're really enthusiastic about it.

But until you get into tax season, you start to see the numbers, you've got to temper expectations a little bit, but we're really, really enthusiastic heading into it.

Brett Pharr: Yes. One other thing, don't miss the secondary market income topic this time, the government shutdown slowed us down a little bit. I think this was in Greg's comments, and we expect that to come right back through because that was a temporary thing. And so we have that to look forward to as well, and that's part of what we're seeing.

Gregory Sigrist: Yes.

Joseph Yanchunis: So it sounds like the 2 biggest swing factors are somewhat out of your control, depending on partner ramp and the volume that goes through the tax offices. Is that fair to say?

Brett Pharr: Yes. I mean I think out of our control would be more like there's a range of possibilities, and we'll continue to manage those and hope for the upper side of it. But you don't know until you know. And what we don't want to do is overcommit.

Joseph Yanchunis: That's fair. And then just kind of one last one for me here. So new loan originations increased pretty meaningfully in the quarter. I understand part of that was due to some of the new relationships on the consumer side? Do you have a sense for what new originations will look like in [ 2016 ]? And should we expect kind of held for sale balances to increase in tandem with that? Or with the velocity kind of coming through the balance sheet increase just to kind of mitigate that upward movement?

Gregory Sigrist: Let's unpack that a little bit. I mean, in the quarter, we certainly saw the uptick on the consumer side. And as you know, those are, by and large, largely held for sale at this point and turn pretty quick. I'm optimistic that as the existing partners ramp and scale that, that volume is going to continue to certainly on a year-over-year basis, scale versus where it was. And I think scale from what we're seeing in this quarter. So again, that's all balance sheet velocity and that will largely come through as a fee income.

There's -- some of those programs do have interest income as part of them, but the majority of the economics come through is on the fee side. We haven't touched it on the commercial finance side. They also had a really good quarter on the production side. And when I think about the balance of the year, that's also a pipeline that's really full, particularly when you think across USDA, SBA, working capital, and with the balance sheet optimization work that we've been doing, for those 3 verticals, in particular, particularly USDA, it's about optionality.

So I think we're really enthusiastic about that pipeline, too, and the optionality it provides us either to continue to hold on balance sheet or as we see fit kind of sell into the market and drive some secondary market revenues. But over the balance of the year, I would actually expect commercial finance to start generating numbers that are meaningful enough that we're going to start talking about them.

Joseph Yanchunis: I appreciate that. And then just actually one more for me on credit. I understand that you went over in your prepared remarks, NPAs, NPL ratios ticked up, NCOs are basically 0. Is there anything that you currently see in the portfolio that you find incrementally different versus 3 months ago?

Brett Pharr: No. I mean, again, these things that we have that are nonperforming loans are in various different sub-asset classes. There's no pattern system or anything like that. And we're serious about our conversation that our historical past and our belief is, there's not going to be a relationship between NCOs and nonperforming loans because we do a different kind of lending that is very much collateral managed. So I -- there's nothing in there systematic.

Operator: [Operator Instructions] There are no more questions remaining at this time. I'll pass it back over to the team for closing remarks.

Brett Pharr: All right. Well, thank you very much for joining today. Have a good evening.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

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