Meta Financial Group, Inc. Stock

Thank you. Ladies and gentlemen, thank you for standing by and welcome to Pathward Financial's Third Quarter 2026 Investor Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff, and Investor Relations. Please go ahead.

Thank you, operator, and welcome. With me today are Pathward Financial's CEO, Brett Pharr, and CFO, Greg Sigrist, who will discuss our operating and financial results for the third quarter of fiscal '26, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies remarks, and supplemental slides may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements. 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 presentation, and in the company's filings with the Securities and Exchange Commission, including our most recent filing, 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 call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis.

In order to make our adjusted net interest margin as comparable as possible, we have excluded the impact of the gross-up accounting methodology on our consumer finance loans and included contractual rate-related processing expenses associated with deposits on the company's balance sheet. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all time periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior-year period, unless noted otherwise. Now, let me turn the call over to Brett Pharr, our CEO.

Thanks, Darby, and welcome everyone to our Third Quarter 2026 Earnings Conference Call. This evening, before I go through the quarter's highlights, I want to address the outlier of the quarter, credit. We had an increase in provision during the quarter, largely driven by specific reserves on two loans and a CECL reserve build. One loan we mentioned during the June quarter earnings call last year, which at that time was shifting to non-performing with a path to workout, and another loan we believe is associated with a sophisticated fraud. You may have also noticed that our non-performing loan ratio increased. This was primarily related to certain renewable energy construction projects tied to a common developer. We continue to work with the other parties involved in these projects to bring them to completion.

However, while this work is ongoing, we have moved the loans to non-accrual status. We are currently not aware of any other loans in our portfolio that have a similar unique fact pattern. While this is certainly a disappointing outcome, credit events can and do occur in the world of lending. It's unfortunate that we had these items happen within an otherwise solid performing quarter and year thus far. We remain committed to providing transparency in connection with these credit items and continue our monitoring and oversight of the portfolio. At this time, we believe these events are not indicative of a broader systemic issue within the portfolio. With that context, we're pleased with the rest of the results achieved in the quarter.

Across the organization, our team continues to deliver meaningful progress on our strategy, and over the past nine months, I am proud of what we have accomplished. During the quarter, we generated $29 million of net income and diluted earnings per share of $1.37. At a very high level, we achieved growth in interest income from commercial finance loans as well as non-interest income and continue to manage expenses well. Year-to-date return metrics remain strong, with return on average assets of 2.37% and return on average tangible equity of 34.29%. While our business model remains straightforward, we take deposits, lend money, and move money, we concurrently provide a breadth of product offerings across all three verticals that are aimed at meeting our partners' needs.

We also continue to expand our product suite and capabilities in order to provide multi-threaded solutions that enable our partners to thrive and continue to innovate new and exciting products for the end consumers. It is through this lens that our long-term strategy was curated. Our strategy encompasses five focal areas: maintain an optimized balance sheet, leverage technology to facilitate evolution and scalability, people and culture are important assets, consultative risk and compliance infrastructure, and client experience. We continue to make progress on all of these areas, but one I'd like to highlight is people and culture. We recently received a number of recognitions that reflect our diligent focus, which I'd like to acknowledge this evening.

First, we were once again named as one of the best companies to work for by U.S. News & World Report for 2026-2027, rated among the top companies on the finance and insurance list as well as the Midwest list. Second, Pathward has been named to TIME's inaugural list of America's Best Companies 2026. These accolades serve as a testament to our employees' hard work and the cultures that they live and build every day. Congratulations to our employees on representing Pathward's values across the country. The second area I'd like to highlight is the client experience. As we continue to grow our business and expand our product set, this remains an area that calls for intentionality, discipline, and firm execution.

In our commercial finance business line, this means we strive to set clear expectations and maintain consistent, high-quality communication throughout each engagement. From initial contact to receiving funds, our goal is to make the client experience as seamless as possible. We believe this level of execution will strengthen our reputation, support high-quality referrals, and allow us to continue helping businesses reach their goals. In partner solutions, we aim to empower multi-threaded opportunities that help fintechs, payments companies, and brands to launch, scale, and grow with confidence. With a robust pipeline of opportunities to execute on, we view this as an imperative and we are working diligently to make sure that we deliver what our partners expect.

Our pipeline consists of both new partners and expansion opportunities, and we are excited to announce that after the quarter ended, we signed a contract extension with Clair. As part of enhancing the client experience, we continue to invest in people, processes, and technology. This includes building technology and risk and compliance capabilities to ensure we have a scalable platform well into the future. This has never been more important as partners are searching for banks that can not only deliver across multiple products at scale, but also help them navigate an evolving regulatory environment. Before I turn it over to Greg, I want to reiterate that while the credit events of the quarter are certainly unfortunate and we are working hard to resolve these loans, the growth of the business was solid.

Thank you, Brett. With the exception of the credit metrics Brett mentioned, we are pleased with the financial performance in the quarter, which is marked by solid growth, delivering higher commercial finance interest income and non-interest income combined with disciplined expense management. Starting with revenue, the sale of the consumer finance portfolio back in October impacted net interest income as expected, given the elimination of the gross-up accounting for that portfolio. Having said that, our strategy of balance sheet optimization continues to deliver solid revenues with growth in our core commercial finance business. With the aim of favoring assets where we believe we have a competitive advantage, holding to our pricing discipline remains an imperative for us and not chasing volume for volume's sake.

This is where we believe being governed by the Treasury-led model serves us well at Pathward and continues to generate higher risk-adjusted returns. Non-interest income increased 4% versus the same period last year. After a delay in secondary market revenues over the last few quarters, we are pleased to say that those sales volumes are catching up from earlier in the year. I want to take a moment to highlight the tax team's continued successes. They closed out their tax season during the quarter and had a phenomenal one at that. Their significant efforts produced third quarter year-over-year growth of nearly $2 million in total tax product revenue. From start to finish, the momentum from sales and marketing efforts led us to solid operational and financial performance as the team onboarded new tax offices and helped our existing partners provide additional products.

We are very proud of all the team was able to accomplish. Non-interest expense improved in the quarter as a result of disciplined expense management, with lower card processing expense and lower legal and consulting expenses. These items are partially offset by expenses that directly correlate to the execution of our strategy, with an emphasis on people and culture, as well as technology to facilitate evolution and scalability. Deposits held on the company's balance sheet at June 30th were relatively flat versus a year ago. Lower yielding assets, such as securities, declined, and average partner deposits were strong in the quarter. This allowed us to have nearly $100 million more in average custodial deposits than in the prior year's quarter. Loans and leases at June 30th grew 8%.

Our focus on ensuring we have the right loans on the balance sheet was the primary driver of the increase. While net interest margin declined to 6.59% in the quarter, the adjusted net interest margin was stable at 5.27%. Originations during the quarter grew $760 million, driven primarily by growth in our credit solutions business from both a new contract signed last year and expansion with current partners. Regarding credit, over the last year we have been discussing a few larger loans that we are monitoring. As Brett mentioned, a specific reserve was established on one of the loans we referenced in prior quarters. We no longer believe we have a path to favorable resolution and have now prepared for liquidation.

With that, the larger loans that we have discussed during the last year have specific reserves, as appropriate, established to reflect expected proceeds. Additionally, we have also identified a working capital loan that we believe involves a sophisticated fraud within what we understand to be a viable operating company. Due to the fraud, it is possible there is a portion of the loan that we estimate may be uncollectible, also resulting in a specific reserve. The majority of the provision related to commercial finance in the quarter can be attributed to the specific reserves on these two loans and adjustments to the CECL reserve. Additionally, while past dues have increased, there were roughly $100 million in loans that came current since quarter end.

Brett mentioned that the increase in non-performing loans was primarily based on a set of loans with a common developer. Add in the loans that we have been discussing on this call, and that total constitutes the majority of the non-performing loans in the quarter. The strength of our balance sheet, along with our earnings and capital accretion power, allow for return of capital to shareholders. As of June 30th, our liquidity was $2.7 billion, and during the quarter, we were able to repurchase approximately 304,000 shares at an average price of $92.18. This leaves 3.1 million shares still available for repurchase under the current stock repurchase program. Now to update our fiscal year 2026 and initial fiscal year 2027 guidance.

We are updating our fiscal 2026 guidance to an EPS range of $7.80 to $8.20, which includes the following assumptions: no additional rate changes during the year, an effective tax rate of 16% to 18%, and expected share repurchases. We are also introducing a fiscal year 2027 guidance range of $9.50 to $10.00, which includes the following assumptions: no rate changes during the year, an effective tax rate of 18% to 22%, expected secondary market revenues between $5 million to $7 million per quarter, and expected share repurchases of around 70% to 80% of net income. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Your line is open, please go ahead.

Hey, Tim. By the way, ask as many questions as you want, you and all the guys. So ask away.

So, we might as well just start on the credit here, looking for some clarity at first. For the two commercial loans that drove the provision, you said one of them was already moved to NPL in the June quarter of last year. Can you discuss what changed over the last year to either the borrower or collateral that resulted in the reserve? And what's the outstanding balance now versus the reserve?

So this is Brett. So this particular transaction was in the assembly phase of being constructed. There were a number of problems with the participants in it. We were able to, we thought we would be able to identify new additional buyers that would participate in it and lead it to completion. And we've had these kinds of circumstances before, and that's kind of where we got it to. This one did not get to that. And during the quarter, the facts changed. And we came to the conclusion that this was not going to reach its terminal value as a permanent ongoing enterprise, and it moved into liquidation.

Of course, when you're liquidating equipment and those kinds of things in these circumstances, there's a different kind of economic result. So that's what happened in this particular case. We thought that we were going to be able to get it to where we could get to completion without the participants, and we did not get there.

Okay. Any color you can provide on the current outstanding balance and what the reserve level is right now?

I don't think we're going to get into specific dollars on this. Yes, I don't think we're going to get into any more detail on the loans. I mean, we've written it down to what we believe the net proceeds to be, which is common with all the loans that have been out there for the past year, called legacy loans. But again, the net balance of that's in the NPLs, and that's what we can tell you on the call.

Okay, fair enough. And then also in the same quarter last year, you guys mentioned that one of those loans that moved to NPL was a fraud. Is that related to the one related to fraud this quarter? Is that another separate loan? What's your confidence on the ability to recover the potential loss either through the collateral or maybe legal means?

Yes, so this is a new thing that happened within this quarter. When you're in asset-based lending, from time to time, you run into these frauds, and then you go through a full liquidation process to the extent that you can. We go through the process and evaluate the collateral. This involves everything from field exams to having independent verifications, et cetera. And then we calculate what we believe the value will be as we liquidate and go through the process. And then we apply an appropriate reserve as we have in this case with that. So generally when these frauds happen, they happen very quickly.

And then we have a team that comes in and assesses where we are and apply these appropriate reserves. So this is not something that's been there for a while.

Okay, helpful. And then last one on the credit this quarter for the renewable energy loan. Was any of that kind of related to struggles with some of the changes made by the administration over the last year or is this more kind of idiosyncratic and the rest of the portfolio you still feel confident in?

So, let's go back to the big picture here. The reason we're in these various different asset classes, the power needs of the U.S. are just expected to continue to grow and frankly are exploding. And I think everybody understands that. We're in different asset classes. We're in solar or in battery storage. We're in renewable natural gas. Each of those have different kinds of risks, and each of them have a different kind of view from the administration, current administration, et cetera. And so there are shifts that occur.

In this particular case, particularly solar, there was some speeding up to get some things done because of the expiring of tax credits. But these are different asset classes that have different characteristics and we manage those appropriately based on the individual projects that are there. To answer your question, but the big thing we need to remember is we need more electricity and generally these projects are very viable.

Okay. Is this a portfolio that you plan to continue growing and maybe any color on the pace you plan to grow that over the next year or two?

We continue to be involved in alternative energy, yes, because there are a number of elements of that that are very advantageous. But we're constantly evaluating sub-asset classes within it and where we might want to be and might not want to be, and we've made some adjustments with that over time.

Okay. All right. That's helpful. I'll move on to another topic here on the banking-as-a-service pipeline. Any update you guys have on that? It looks like really good origination volume and consumer loans, but any color you can provide would be really helpful.

Yes, I mean we continue to say, you know, the pipeline is full. Sales calls, lots of opportunities. We're being selective in the partners that we work with. We've had some press releases over time that you have seen announcing these things. Some of them are quick revenues. Some of them are longer-term revenue in the '27 and '28. What we have now is in our guidance that we're providing for fiscal year '27. So the story is largely the same there.

You know, after several years back when things kind of lagged because of different players, that's sort of been cleaned up and now we've got lots of opportunities to go get business.

Okay, that's good to hear. And then one last one from me and I'll jump back into queue. For the secondary market revenue, big jump up this quarter. I believe your commentary last quarter was that the government shutdown had an impact on your ability to sell those loans. Was that kind of a catch-up? And we'll get back to that $5 million to $7 million range in the next quarter?

Tim, that's exactly right. I mean, we were able to start moving some loans through the pipeline. We were probably one of the first to do so. And there's a lot of demand out there for the USDA loans, particularly the higher rate loans that we have. We kind of did what we were able to do in the June quarter, was catch up, and going forward. Yes, we do expect $5 million to $7 million a quarter. I mean, and I will tell you, though, for the fourth quarter, the demand is still out there, so we're probably going to trend to the higher end of that guidance for the fourth quarter of '26.

Your next question comes from the line of Joseph Yanchunis with Raymond James. Your line is open. Please go ahead.

I was hoping to ask just a couple more questions on credit. Although I think Tim covered most of them. So while I understand these credit issues seem largely one-off in nature, has this caused you to change any of your underwriting or monitoring methodology?

You know, we're always monitoring how we look at these loans, whether you're talking about ones in asset-based lending or our approach to the alternative energy. And so I would say it's always evolving. And you know, as you know, fraudsters get more sophisticated. We have to adjust things over time. So this is not an episode. This is not a one and done. This is an ongoing process that we're engaged in and will continue to be engaged in.

As we watch this business, this is a particular niche expertise that we have and we're constantly monitoring and evolving as we need to for market conditions.

All right. I appreciate that. And then, if I heard you correctly, it sounded like the non-performing renewable energy credit was related to solar. So is that true? And, if so, how much solar exposure remains on the balance sheet?

Well, let me answer the first part. Yes, the non-performing loan addition is associated with solar projects that are single developer, et cetera, and it's multiple projects that are in the process of assembly. And so we're having to step in and help with the assembly of those projects.

Well, I think the exact dollar amount, Joe, as we said on the call, it's the majority of the increase from the prior quarter. And I would say the majority is probably closer to, it's at least 75% or 80% of the increase over the prior quarter.

Okay, let's move on from credit, huh? So with the new fiscal '27 guide, what are the main factors that would push results towards the top or bottom of the range?

Well, obviously getting to the higher end of the range, part of it's going to be the pace with which we pull through some of the new partners we've announced. Brett's already touched on it, whether it's announced or what's in the guide right now. Faster pace on our partners ramping those projects is going to help push us to the higher end of the guide, so I think that one's an obvious. We've also obviously had some good success with credit solutions, the volumes there. And if those volumes continue to trend higher, we hope they do, but hope is not a strategy, then I think that can push us a little higher on the guide as well, which is helpful. And on the bottom end, I think that's part of your question, too. I mean, I think the biggest one on the bottom end is if there are unforeseen credit issues that we don't foresee today, which is why they're unforeseen, that would trend us to the bottom end.

All right, and then, within this outlook, what drove the decision to lower your buyback ratio to that 70% to 80% of net income? I guess was part of this decision based on holding more capital for potential credit normalization?

No, I'll answer the last part first. I mean, I think we're comfortable with the level of capital we're holding and where we're trending to. We're always trying to create just a bit of additional capital every quarter, and I think we feel very comfortable, particularly as we're going to exit our fiscal year. I mean, we're hitting our targets where we want to be for next year. I mean, I think the guide 70% to 80%. We might go in and bump it above the 80%. But there's, again, I don't think there's a need to build an additional layer related to credit if that's really where your question's coming from.

All right, that's helpful. And then you said growth with current partners contributed to really strong origination numbers. What products are you seeing the most traction with and are you still under-penetrated within your existing partner base?

Are you talking, Joe, on the commercial finance side or are you talking about on the payments side? Yes, I mean, you know, for example, we just did the announcement on Clair, which is an earned wage access partner as a renewal of that and that business continues to grow. And so we're seeing a lot of traction in that. In commercial finance, we're continuing to do a lot of the same things. Some of the emphasis we want to have is around government-guaranteed things. An example would be potential SBA types of opportunities that are there.

And then I think on the money movement side, it's really also just scaling some of the new partners we've announced on the acquiring side. So I'd say that's really the pull-through on that probably happened a little at a faster pace than we could have hoped. And that's a positive too.

Your next question comes from the line of Manuel Navas with Piper Sandler. Your line is now open. Please go ahead.

I appreciate the new EPS guide. Is there a portion of the decline this year that assumes some lower EPS of these current issues creeping into next quarter?

No, I mean, I think the guide for this year is really just acknowledging, I mean, I'll just take you through the numbers. Let's let you know. I mean, we've said that the majority of the credit provision in the quarter related to specific reserves and the CECL build, that all occurred in this quarter. And if you put numbers to it, you see in the press release that our credit provision in the quarter related to commercial finance was roughly $34 million. Of that, that's probably elevated by $28 million to $30 million related to the things we've talked about here, and that's about $1 per share. That's what weighed on reducing the guide.

But obviously when you do the math, you realize there's some upside that probably wasn't in the guide before. So again, I think that goes back to the success we've had with the acquiring volumes increasing, some of the other things too. So hopefully that answers the question.

And then with next year's guide, it's kind of where conditions are, consensus almost was. So it's almost like next year's guide assumes that most of this is much more normalized credit performance from here. What gives you the confidence that there aren't more of these loans out there?

Well, we're always looking at the portfolio to see what's there. And of course, the loans that are in the non-performing loans, we have a current view of the outcomes that are there. And we continue to have our monitoring of our loans and making sure they're properly rated and we'll go through all that process. So if we knew that there were things that were coming, they would be reserved for, et cetera. So, yes, we're in the lending business. And so you have to understand in the lending business, things happen.

But we don't see anything right now. Yes, and I think the answer to the first part of your question, if it was a part of the question though, I mean, I do think that there's going to be a normalization, more of a reversion to the mean, and that's really what's baked into the assumptions here. And if you kind of go back in time, being focused specifically on the commercial finance portfolio, I think that normalized ACL ratio has been in that 120 to 130 basis point range and that's what we've included in our guide.

Have any of your past credit events impacted partner growth before? How have you discussed these with partners in the past?

So there's really no relationship between sort of our credit book and our payment solutions partners. So there's no connection and we have no issues around that. And one of the things we have to remember is that while we had unfortunate credit losses, we had substantial earnings still, right? So if you compare us to other banks that might have credit losses, this is a reduction in net income, not an elimination of net income.

With our partners, they're very positive. We are working with our partners and expanding the breadth of products that we sell to them and work with them. They're very much going after a broad consumer share of wallet. The payments industry, as we understand, is in a great deal of innovation and change, and we're a part of those conversations. And we're excited to be engaged in that. And so we're, you know, in this particular sponsor banking, we're one of the premier players, and names small and great come to us and want to engage with us in those things. So those conversations are going well.

I mean, the point should be made here is we had a fantastic year so far with all the things that we have, it's just unfortunate we had this one credit issue that has come through, but otherwise, all elements of the business are running very well. And Greg even mentioned the tax business and the big success we had in the tax season.

We've been looking at the card and deposit fee line as evidence of kind of building partner programs. It took a little bit of a step down link quarter this quarter, but it's still elevated. Is that still kind of our target for like the mid to high single-digit growth on that line?

Yes, I believe it is. I mean in the quarter it was down really more because the quarter last year was a bit elevated. You know that we do have to occasionally get some that are a bit lumpy, tied to things like incentives, and that hit in the prior quarter and that usually hits at some point on the calendar year. You can't always predict what quarter you're going to hit the break point and have the confidence level on it, but that's really what caused the year-on-year optics. But prospectively, yes, we're still looking at that mid to high, probably I would say high growth on core card fee income. Still very positive on the business and the outlook there.

Switching back a little bit to the guide, is there any buyback limitation due to anything related to credit? It's just kind of your appetite and you can be as opportunistic as necessary if there's a share decline at any point?

Well, it really gets back fundamentally to our capital strategy and our capital plan. And, you know, we've consciously over the last three years slowed down the buybacks to put away additional capital. And in the process, pushed our Tier 1 leverage ratio upwards of 10% or above. And since we already made that decision and have done that, that gives us the headroom here to be opportunistic without any limitations, at least with the facts and the environment we have right now.

We've talked a little bit about kind of a NIM or a core NIM outlook in the past. There's a lot of moving parts with it. Is there a part that you can kind of guide near term here, which is the best way to look at it? Happy to consider any of the various ways to look at it going forward. I've thought of it as kind of flat. Look at the core adjusted, then it's down about 5 basis points. Just kind of thoughts on NIM and NII outlooks from here.

Yes, the down versus the sequential quarter of a couple of basis points, I mean, I view that as being pretty stable. I mean, and what really drove it down slightly were the non-accrual loans that went on in the quarter. So even with the non-accrual loans, we stayed pretty stable to the prior quarter. The other data point I would give you, though, is in the quarter, new loan production was pretty close to 9%. For the new originations, it was at 8.99%. You compare that to the portfolio yield right now for loans of, I think, it's 7.42%. I mean, that gives you a sense of some of the tailwinds we still have in the portfolio.

We also, over the next 12 months, have $150 million of principal coming off of the securities portfolio. It's obviously much lower book yield on that that will get recycled and repriced. So that gives us a bit more tailwind, too. And as we've talked about the last several quarters, regardless of whether the Fed raises rates or lowers rates. My crystal ball is broken on that one right now, but we're still incredibly close to neutral on the short end of the curve. So any changes on the short end of the curve would have a very muted impact going forward on the net interest margin. So, and more pointedly, the adjusted net interest margin. I hope that helps.

That is helpful. I'll step back into the queue. Thank you for the commentary.

Your next question comes from the line of Tim Switzer with KBW. Your line is now open. Please go ahead.

Hey, Tim. Tim, if you're there, we can't hear you. Yes, you might be on mute, but welcome back.

My follow-up was on the adjusted NIM trajectory. I think last quarter you guys mentioned that it should continue to maybe gradually move higher over time. Can you quantify that at all? And how would rate hikes impact, not necessarily just the adjusted NIM, but the whole income statement overall?

Yes, as I might have already laid out some of this, but sequentially down a couple of basis points to me is stable, and being down was driven principally by the non-accrual loans that arose in the quarter. And so to be stable with that, I think, is a pretty good thing. Going forward, though, again, a couple of data points for you. New loan production in commercial finance for the quarter was 8.99% and that's versus a book yield of 7.42%. So that'll give you some uplifting tailwind going forward, assuming again we always talk about that middle part of the Treasury curve, the 3- to 5-year part of the curve. Obviously it's been, you know, there's been slope to the curve, which is helpful.

And consistent as it relates to the short end of the curve, we are incredibly close to neutral. So whether you have a 25-basis-point cut or a 25-basis-point increase, it's pretty negligible on EPS. And the other one, again, I just reminder, it's the same storyline. There's roughly $150 million of principal balance expected to come off the securities portfolio over the next 12 months and that will get recycled back into higher yielding, likely loans. So there's going to be some tailwind there. Beyond that, I'm not really seeing any drivers one way or the other. I think those are the biggest drivers that are going to hit the P&L.

Okay, that's helpful. And then how should we think about core OpEx excluding the card processing expense going forward? It seems like there are a lot of moving pieces in FQ3.

Yes, we have spent a lot of time over the last couple of quarters managing expenses pretty tightly and we're very pleased with what we've been able to do and I think you've seen the OpEx expenses trending down. As we think about next year, you're obviously still going to see investments in people. We talked about it consistently. It's for scalability. It's for really driving the platform that we need to succeed with our partners, so it's people, process, technology. I do think some of the drivers from a year ago, in terms of consulting and things like that, have kind of dropped off, and that's a good thing.

If I think about next year in terms of OpEx as a total, you're probably mid to high single digits as a total. We're going to continue to work the non-interest expense down to the extent we can to fund the things that we know we want to do from a strategic perspective, like people and the platform.

Okay, great. And then the last question I have is in terms of M&A, are there any areas you guys are interested in, something you've kind of talked about a little bit before? And I assume a lot of this is out of the bank space, but any updates you have there?

So, I mean, we always have our eyes open, as we've said before. Things that we might have been interested in have had such high prices. And so we really haven't engaged and we're in a very sort of unique and innovative business and we tend to have to do things more on a proprietary basis internally. It's not the kind of thing that somebody has built for us on the outside. So always willing, always interested, would always be looking for something that's accretive, but not anything that we've seen that we could talk about at all.

Okay, great. Thank you for taking all my questions.

[Operator Instructions] Your next question comes from the line of Joseph Yanchunis with Raymond James. Your line is now open. Please go ahead.

I wanted to kind of piggyback off that last answer there. Has the evolution of AI changed your decision at all about owning the technology stack instead of using third parties at all?

Well, it's interesting. You know, we already were in a situation where there were things that we had to do internally rather than purchasing them from suppliers. We have a very robust engineering department for that reason. AI has the potential to actually even accelerate that. So where we do more of that. So you're going to be in a situation where you're going to be evaluating the economics of buying it, building it, and then as very common in the news, the related token costs that are associated with that, what's the right tool that goes with it. So I think we were already on the side of building more than buying, and this may lean us more to that over time.

All right, well, thanks for my follow-up.

We have reached the end of the Q&A session. I will now turn the call back to Brett Pharr, CEO, for closing remarks.

Thank you everyone for joining today. Appreciate the questions. Have a great evening.

This concludes today's conference. Thank you for participating. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to Pathword Financial's Second Quarter Fiscal Year 2026 Investor Conference Call. [Operator Instructions]. 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, Chief of Staff and Investor Relations. Please go ahead.

Thank you, operator, and welcome. With me today are Paper Financial's CEO, Brett Pharr; and CFO, Greg Sigrist, who will discuss our operating and financial results for the second quarter of fiscal year 2026, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pashwordfinancial.com. As a reminder, our comments may include forward-looking statements. 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 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 only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis.

In order to make our adjusted net interest margin as comparable as possible we have excluded the impact of the gross accounting methodology on our consumer loans included contractual rate-related processing expenses associated with deposits on the company's balance sheet. The historical numbers in the earnings presentation has also been updated to reflect this. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of investor presentation. Finally, all time periods referenced our fiscal quarters and fiscal years, and all comparisons are to the prior year period unless otherwise noted.

Now let me turn the call over to Brett Pharr, our CEO.

Thanks, Darby, and welcome, everyone, to our earnings conference call. At the midpoint of our fiscal year, we continue to make good progress on our goals and execute on our long-term strategy being the trusted platform that enables our partners to thrive. Our tax season is going very well with tax-related products leading the way in revenue growth for the quarter. Additionally, new and existing partnerships announced last year are developing nicely and the Partner Solutions pipeline remains robust. Net interest income from our commercial finance loans also increased significantly as well. All in all, our core businesses remain healthy, and we are pleased with the results achieved in the quarter.

Continuing with some highlights. We reported net income of $72.9 million and earnings per diluted share of $3.35. Noninterest income in the quarter grew 9% and represented 55% of our total revenue. This was primarily accomplished through numerous successes within tax services and further supported by growth in our core card and deposit fees. Return metrics were also strong for the first 6 months of the year with return on average assets of 2.75% and return on average tangible equity of 40.69%.

Just a reminder that these metrics generally hit their high point during this quarter due to the seasonality tax business. Finally, we are maintaining our guidance range of $8.55 to $9.05 earnings per diluted share. Our investments within tax services are paying off, and we are very proud of all that the team was able to accomplish not only this quarter, but also in the planning and preparation that was undertaken to achieve the results that you see today. This year, we operated with over 48,000 tax offices, which is another record for us and nearly double the number of offices from just 5 years ago.

We are thanks to have cultivated such strong relationships with our existing tax partners and independent tax offices as well as new ones that have come on board. It is incredibly important to us especially given the competitive nature of the space that they trust our people and the level of service they receive. We hope to inspire financial confidence and empower more people to navigate the tax system with clarity. Tax season can be the most significant financial event of the year for many families. And through our products, we aim to help individuals make informed decisions about their finances. This focus on empowering taxpayers and delivering transparent solutions drove increased engagement and improved financial performance within tax services.

For the 6 months ending March 31, 2026, we increased total tax product revenue by 13%, led by a 13% increase in noninterest income related to refund transfer products and Refund Advance products. Additionally, Refund Advance originations increased by over $200 million this year. This brought total tax services revenue to $96 million. Loss rates on refund advances were also favorable when compared to last year due to our continued work on our underwriting models and data analytics capabilities. This led us to preincome of $62 million for tax services, an increase of 30%. We believe these outcomes reflect our commitment to empowering people and partners through innovative solutions unlocking potential and fueling success for those we serve.

We remain diligently focused on delivering on our strategy of being the trusted platform that enables our partners to thrive. As a reminder, this consists of 5 key focus areas in our fiscal 2026. First, we continue to favor asset rotation in areas where we believe we have a competitive advantage to deliver higher return on assets. With an asset limit of $10 billion to remain below the Durbin amendment exemption, we remain focused on creating balance sheet optionality. This should deliver increasing net interest income without growing the overall asset size and generate sustainable fee income in the form of secondary market revenue.

Second, we invest regularly in technology and our run rate to help ensure that our platform undergoes the evolution and scalability needed to support our partners' growth as they expand their reach with new products and markets. Third, we believe people and culture are Pathword's most important assets, which is why I'm very proud to share with you that we once again earned the -- great Place to Work certification in 2026 for the fourth year in a row. Our culture is just as important as the outcome of our efforts. At Pather, we are guided by our core values, lead by example, find a better way, help others succeed and dare to be great. These core elements along with our talent anywhere approach is what we believe sets us apart.

Fourth, the consultative governance approach we take when it comes to our risk and compliance framework helps our partners manage an area that is often complex and difficult to navigate. We also continue to invest in this area to not only evolve with the regulatory environment, but also allow for scalability with our partners. Finally, our focus on the client experience is about supporting our partners for greater successes and revenue enablement.

Our pipeline remains full, and we are diligently working to bring more partners into the Pathward family and help those that we are already working with the door. We are also happy to announce that in April after the quarter closed, Path word executed a 3-year extension pay, a leading money movement platform. Now I'd like to turn it over to Greg, who will take you through the financials.

Thank you, Brett. Overall, we are pleased with the financial performance in the quarter. As Brett mentioned, our tax season is off to a great start. This is the product of thoughtful planning and teamwork, and we're proud of what the team is accomplishing again this year. We're equally pleased to see growth in Partner Solutions, which I'll dive into a little deeper in a moment. First, let me start with revenue. As expected, the sale of the consumer finance portfolio back in October did impact net interest income given the elimination of the gross-up accounting for that portfolio.

Having said that, our strategy of balance sheet optimization continues to deliver solid results with growth in our core commercial finance business. Other parts of our strategy have enabled to report solid results in noninterest income, particularly in our tax products as well as in core card and deposit fees. In our consolidated tax services which consist of both our independent tax offices and tax partnerships. We saw an 18% increase in noninterest income from Refund Advance and tax fees and a 7% growth in revenue from refund transfers during the quarter. This is the direct result of significant work to grow this business, increase market share and evolve the underwriting model.

CoreCard and deposit fee income, which excludes the servicing fees we earn on custodial deposits grew 22%. We're seeing a lot of growth through existing partners as well as increasing contributions from new contracts signed last year. Due to the continued backlog from the first government shutdown, we fell short of our goal range for secondary market revenues but we believe this is primarily a timing impact, and we expect to make up the difference in subsequent quarters.

Noninterest expense improved in the quarter, Outside of the impact from the sale of the consumer portfolio, the primary driver was lower card processing expense due to lower rates, partially offset by an increase in compensation and benefits. Given the value we place on our people, we remain committed to investing in them as well as processes and technology, and we were still able to manage expenses well when compared to the prior year quarter. This led to a net income of $72.9 million and earnings per diluted share of $3.35. Deposits sales on the company's balance sheet at March 31 were relatively flat versus a year ago. This is consistent with our balance sheet optimization strategy, lower-yielding assets such as securities declined and partner deposits were strong in the quarter.

This allowed us to have over $250 million more in average custodial deposits than in the prior year quarter and also generated higher servicing fee income in the quarter. Loans and leases at March 31 grew 9%. Our focus on ensuring we have the right loans on the balance sheet was the primary driver of the increase with a $588 million increase in our core commercial finance business, particularly in renewable energy and structured finance.

Additionally, Origination volumes were strong during the quarter with $367 million in commercial finance at yields higher than the March 31 portfolio yield and $945 million in consumer finance. This represents significant growth versus the same quarter last year, and we were pleased by the growth in consumer finance originations, which was driven by the new contract we announced last year. In Commercial Finance, our loan pipeline remains strong despite timing delays in certain cases stemming from the October 2025 government shutdown. Net interest margin was 6.3% in the quarter.

Our adjusted net interest margin was 5.32%, a 23 basis point improvement over the same quarter last year. This was primarily driven by lower rate-related card expenses. Our nonperforming loans saw a modest increase to 2.39%, and our allowance for credit loss ratio on commercial finance increased versus last year. This was driven by a mix of specific reserves and our CECL model which takes into account a number of factors, including the macroeconomic environment as well as portfolio history over time.

Our commercial finance portfolio metrics are being driven by a relatively small number of loans in comparison to our portfolio size and in different verticals. As we've mentioned before, we look at our credit metrics to a full year look back. And on March 31, our going 12-month net charge-off rate was at or below the same metric at the end of every quarter in fiscal 2025, and store remains at the low end of our historic range. Lastly, we continue to believe that we are still in a relatively stable credit environment, consistent with the past few quarters. Our liquidity remains strong with $2.7 billion available, and we are extremely pleased with our position at this point in the year.

During the quarter, we repurchased approximately 855,000 shares at an average price of $84.15. This leaves 3.4 million shares still available for repurchase under the current stock repurchase program. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Tim Switzer with KBW.

So the first one I had, you guys took Ceska, but you upped to buy back quite a bit this quarter. Relative to what you've been doing recently. You still have a good amount of capital, obviously, a high ROE. Is what you did this quarter, is that kind of repeatable for the rest of the year? And what are your other priorities outside of organic growth and repurchases? Are there any other kind of M&A type businesses you're in discussions with? .

Yes, Tim, let me start and Brett may jump in at the end. But I think what you typically see throughout the years, you're going to see seasonality in that buyback number of shares in the dollar amount. It typically is correlated to our higher earnings quarter. So second quarter is always our highest buyback quarter on a relative basis. I would say, though, that the algorithm for the number of shares we buy early in the quarter does get updated periodically.

And I think this quarter in part of it was we took advantage of lower share prices as well. So if it optically looks like we got a little bit ahead, it probably had something to do with that. Obviously, very pleased with where we landed in the quarter on the buybacks, but I think more broadly on the question of capital and capital allocation, I mean I still continue to believe and we continue to believe that the share buybacks are still the highest use of capital at this point in time. We obviously continue to look at a lot of things, but -- and if that changes, we'll at some point, let you know, but I think it's still buybacks.

Yes. And Tim, it's Brett. So just sort of on the strategic elements of M&A I mean we're always looking to see what's out there. But with our results, we've got a pretty high hurdle rate and obvious reasons, we wouldn't be involved in much of a bank kind of situation. We look for things that you might buy versus build. But we've just not seen anything over time to make any sense. So the kind of capital utilization we're doing is the highest and best use in our mind at this moment. .

And then the other -- another question I had, you guys -- I remember last quarter, 2 quarters ago, the new programs you guys announced in '25 would contribute mid- to high single digits to card fees year-over-year, not including some of the new living partnerships you guys have now that we're a few quarters then, are you guys still on track for that? What have been kind of the puts and takes over the last few months? And where do you think that can go as you head into '27.

Yes. And Greg can talk about specifics as he wants to. But you look at our card fee income year-to-date, that's part of the increase in the noninterest income. And that's -- we had those deals. We've always talked about some of them take time to come on. We're now seeing the benefit of that come through the noninterest income line. .

Yes. But as I said in my prepared remarks, year-over-year, the significant increase versus a year ago is largely organic. But as you would expect and as we talked about, we started to see some of the benefit of the new deals -- but it's all about the speed to revenue. It still takes some time after you've signed the deals to -- depending upon the product to get those programs live, and get the programs ramped and get them fully loaded. But the guide we gave previously about what that looked like on a fully loaded basis still applies. We still think it's going to be a measurable increase into next year as those programs fully ramp. .

And then the last one I had, and it might be a little too early to ask the question, and I don't know if we have enough details, but there's been a proposed executive order about banks being required to obtain citizenship inflow. And it seems like a tricky situation, I guess, with some of the [indiscernible] banks and like what's the risk needing to perform that for all the bank accounts you guys have and that comes out that cost? And then I know there's a lot on your like on the other side of it, is there an opportunity at all for like your prepaid card products, like do we know if those would be required to attain to obtain citizenship into as well?

All right, Tim. So let's get in the weeds just a little bit. Obviously, we don't what the rules are, right? So that's part of it. You probably know that for any known owner of account, you have to collect something called CIP. So we already have documentary and nondocument pieces of information about our customers that we're required to get An exception to that is if it's unregistered like an unregistered gift card that would not apply, and I would suspect, in this case, it would not apply.

But -- so we already have the processes in place with our partners to collect the necessary information like that. there's something else that has to be collected, then we, like everybody else would have to go and do that. But to we know what the rules are, we don't know what the implications are, but the highways already exist to get that kind of information.

Are you able to tell us maybe like what percent of your deposits or accounts would be part of that funded registered prepaid card business?

Yes. So I'm getting the heads that say we don't disclose that here, right? But you can think about our business, right, in general, the kinds of things we have. And if you're in the gift card, it doesn't apply unless they specifically register it. payroll card, obviously, you know who it is. There's various kinds of things. So we would have it on some and we would not have it on others. .

Yes. And I think as we say broadly on just the topic of deposits, it's a well-diversified deposit base -- so it's going to be different -- it's over time, it evolves and over time as we continue to bring on new partners, it continues to diversify. So hopefully, that helps you.

Your next question comes from the line of Joe Yanchunis from Raymond James.

So I'd like to start with credit here. And I know you touched on in your prepared remarks, but NPAs ticked higher again this quarter. Can you provide some color on the underlying credits that drove this increase? And I know you often count your workout process, which can take time. So do you have a sense for how much of this bucket was resolved in the quarter?

So let me go through a big picture. So you recall, we've got different asset classes. We always do collateral managed transactions. So there's no uncured and we stay out of certain kinds of verticals that we do not think have good collateral attributes over time. We measure these things through cycle, and Greg in his comments even talked about that. You always have some one-offs, right? So you have to go through a workout. Workouts can be short workouts can be long, and they're uneven as you go through them.

So, I don't know that we could answer the question if there are any been resolved. They're all consistent with the way that we approach our collateral management program, and we've had consistent results with that literally for years that you can trace through -- so again, the great comments, I think in his remarks, we're not seeing anything changing in the credit environment. It's just one-off stories that happen in various asset classes.

Yes. And Joe, just to walk you through a few of the is there just broadly on the credit side. You probably saw when you get into it that on the past due side, the 30- to 59-day bucket increase, it went up by about $40 million. That was due to a limited number of loans that frankly came after quarter end. So that kind of factors into this equation, too. So you kind of get back to a more normalized level of past dues in that bucket. And then when you take that into account, overall past dues are pretty moderate. And then when you get -- you mentioned the NPL ratio ticked up it did, but then you need to disaggregate that a little bit.

When you look at the nonaccrual balances in the earnings release, those nonaccrual balances actually came down about $5 million. that's the bucket that had some of the larger loans in it that we've been talking about in terms of resolution over the last couple of quarters. What drove the NPL ratio in the quarter though is that greater than 90 days past due and still accruing bucket, which that's really the broad stuff in a normal course, collateral management and collection piece that Brett is talking about. So it's a number of just our normal process, a number of smaller loans kind of drove that. So in the quarter, what drove it up was that bucket. Not anything that's larger in part of the resolution.

And then just kind of moving over to the provision, and then we'll move on to a different topic. So the provision increased pretty materially in this quarter. How much of that increase was due to seasonal tax changes, organic growth versus underlying crises?

I think the line I focus on the most. I mean I think we isolate the tax services provisioning in the document. I keep coming back to the commercial finance, which I addressed in my prepared remarks, right? Yes, it was a mix of -- there's certainly some specific reserving related to everything we talked about on the NPL side, but it's also just driven by our normal CECL process. many quarters is driven by increase in the loan book, but this quarter, it was more driven just by looking through and just taking a pragmatic view of where we're going to land on some of these credits. But with the benefit of looking forward, we still believe this is a very -- my word is benign, very stable credit environment. So we're not seeing anything special in that. .

I think the other thing I pointed to in my prepared remarks, though, was -- you've heard us say this for quite a few quarters now. We always look at the trailing 12-month NPLs or net charge-offs because that's a better barometer for this business given how lumpy some of our workouts are and some of our recoveries are -- so when you kind of apply that backward-looking 12-quarter view to the net charges this quarter, and frankly, the things driving some of the credit metrics, it's benign. It's well within our historic averages.

One of the things that's very important about our asset classes, Joe, is while in some industries, nonperforming loans are a leading indicator and the net charge-offs are a lagging indicator. If you look at the correlation in our book for the past literally decade, that's not what happens. And so while you have nonperforming loans, they generally tend to be more tightly secured. And even if you get a charge off, you get a recovery. So look at that history through the cycle, and you'll see our net charge-offs are disconnected from our nonperforming loans.

I appreciate that. And I'll ask one more before hopping back in the queue. So the -- you had mentioned, subsequent to quarter end, you reached a contract extension with a partner. And then sorry, I didn't catch the name during it. Speaking, how the economics change during the recontracting process. I understand that if the partner grows during the contract, you'll get more volume. But does the recontracting generally result in lower margins?

Every contract is different. And there's a lot of contracts where you trade 1 thing for the other because that's what the partner wants to do. So the classic example is if there's deposits involved and somebody wants a higher percentage of what we call contractual card service payments on it, but then we just charge more transaction fees. So the net economics for us are the same. And a lot of it depends on whether they want to take interest rate risk or not. -- and we can manage interest rate risk or they can manage it.

So there's always trade-offs. There's also trade-offs. So if you want a longer, that will probably be better economically if you want it shorter, probably not as good economically. So -- that's a general comment on them. So every contract negotiation is different, and there's not a standard sort of book approach to it. And no, we're not seeing things generally go south on the margin side because that's and we did this a few years ago. That's the reason we didn't do a lot of transactions at 1 point was as the pricing was silly. Now we're seeing the kind of pricing we want to have.

And part of that, too, is we feather in the discipline to do risk-adjusted returns every time we do either a new partner or 1 of these renewals. So there's a pricing team that looks at it to make sure it makes sense, and it's sensical for us from an overall enterprise perspective.

Your next question comes from the line of Manuel Novas from Piper Sandler.

Is there any more color you could add -- is there any more color you could add about the partner pipeline -- you said it robust? Just anything you could add there?

Yes. Well, we've been through these last several years where there was a period of time I alluded to it a minute ago, where there were some things that were going on in the industry that we really didn't want to participate in A lot of that's gotten washed out. And we've started talking in the last year, 1.5 years that is really picking up and it's actually coming through with contracts. .

And yes, our pipeline is very strong. Part of that has to do with our breadth of product approach with our partners, where we'll do multiple kinds of products with the same partner. And that's an advantage, I think, we have in the marketplace. We're continuing to have lots of new opportunities and new partners as well as existing partners bringing on new products and new programs. So pipeline is very strong and part of it is because we think the dynamics and economics have returned back in our favor.

22% increase in core card fee income from last year. That in part is new products with existing organic partners. No, I don't have the numbers to split it out for you. But again, that's just 1 outward sign that we're having success with our existing partners doing the multi-threaded approach on the product side, as Brett mentioned, in addition to, as he also mentioned, new partners, new products. So we're really pleased with where we are right now. .

That's helpful. Can you speak to there was some loan decline this quarter? I understand some of the seasonality there. How should we think about loan growth going forward? You talk about healthy pipelines in different of your loan lines -- can you speak to perhaps the mix of that growth as well going forward as you kind of reset the loan book to how you want it to end up? .

Let me work backwards on that. I mean I think we like the verticals we're in. We've done some resetting over the last couple of years. We've exited a couple of verticals. But when we think about the asset classes that we're in, we've been very purposeful with them. We've obviously used a risk-adjusted return approach with looking at credit through the cycle. I think the variance you saw in the quarter, though, was more of a timing issue. On the USDA side, there's probably a bit of a slowdown in the quarter just related to the government shutdown, the first shutdown with the government, led to some slowdown on the USDA side, but I continue to believe that's just a timing issue. .

When I think about the rest of the asset classes more broadly, I think it's just more of a timing issue. I would say our pipelines are very full across the verticals. So when I think about the balance of the year, I tend to focus more on the origination than I do the relative point estimate or average on the loan side. Why? And this goes back to our -- the treasury led model and the fact that we're focused on the balance sheet velocity, which really means we can be down quarter-on-quarter to just because old a lot of stuff purposefully as part of that process.

This quarter, I didn't have anything to do with that, again, because the SDA was -- they're still a little bit groggy, -- they're still a little bit gummed up. But when I think about going forward, I would expect to see some modest continued uptick in the quarters going forward in the products we're in with an eye toward, again, risk-adjusted returns across the verticals we're in at this point in time.

I appreciate that. Any near-term guidance on the direction of the NIM, it stepped down on both the full version and then the adjusted level -- just kind of how should we think of it going forward on either metric?

Yes. Adjusted NIM is the 1 I would recommend. It's the 1 I look to because I believe it's the more accurate representation of the interest rate risk on our balance sheet. -- because it kind of neutralizes for things that are not sitting in net interest expense, the contractual rate related fees we paid to partners on deposits. That one was down in the quarter. But if you kind of go back, I think we have a time sequence some place, it will show you that metric kind of back in time. you tend to always see seasonality in the March quarter because of tax season.

The balance sheet grows. And as a result, we tend to do some borrowings, wholesale borrowings at the margin to fund that. We don't need to fund it 12 months of the year, but we do fund it for 45 to 60 days of the year. So that tends to cause a little bit of a downtick in the March quarter. Looking ahead though, I mean -- and I appreciate you weren't on last quarter's call and Emanuel say now, I really appreciate you joining the team here joining the party.

I still continue to believe we're stable to up slightly trending up on the net -- adjusted net interest margin. Why? I think we've proven even look at the ether metric over the last year, rates are down approaching 100 basis points on last year. The adjusted yield back to the adjusted NIM a year ago were up. And that kind of -- I think it's proof that we're not sensitive to the short end of the curve. And as we've said consistently, we are more sensitive to the middle part of the curve, 3- to 5-year because that's where we price the fixed rate loans that we do have a price there.

And as importantly, we still have roughly $200 million for the next 12 months in the securities portfolio that we will -- it will reprice and it will reprice likely into loans over the horizon. And there's still a bit of fixed rate loans that were put on before rates released went up in 2022 that are subject to repricing -- and that last 1 is becoming a smaller and smaller bucket, but it all leads down the path of, yes, I still believe there's a most tailwind there for us.

I don't see with the current rate environment, current rate outlook and the mix we've got anything that would suggest otherwise.

One last question on the tax season. What's kind of I know there's about a month left in terms of what you haven't reported yet. But like what are some of the learnings that you're going to apply to next year? Anything on new tax laws, where you can gain market share? -- kind of any of the priorities that you think you might set up for the next tax season?

Over the last several years, we have really done a good job of focusing on customer service with our -- and because of some disruption going on in the marketplace, it's given us a great opportunity to grab market share. And we would hope we would continue to do the same thing next year. Now this year got quite a boost from the new tax laws and interest in refunds and the size of it and a lot of those kinds of things, and that may not come next year, but we still continue to believe we're having a better experience for our EROs. And so therefore, we retain more and we'll be grabbing more in future years. .

[Technical Difficulty] Your next question comes from the line of Tim Switzer from KBW. Tim your line is open. Please go ahead.

A quick 1 here. There's obviously been a lot of pullback from some competitors in the banking as a service space due to the regulatory environment. Now that we're a few years through that, can you quantify -- maybe not quantify, but discuss if you're starting to see more competition coming in? And are there different types of players or more players in the space than they were previously in terms of like this is coming from beyond banks now as you guys also expand your offerings?

Yes. So let's talk about the elephant in the room, right? Which is everybody is going and getting a bank charter right now. I might as well just hit that head on. So generally, in our pipelines, we are not seeing the effect of that. There are those, including some of our partners that are getting charters, but in many cases, they're getting sort of limited purpose charters and acknowledging to us, they're going to continue to do things with us. So we think there will be certain cases where people get charters and do that.

Those that are going for full national charters, some of those things. there's a long way between here and then actually getting a bank opened and getting something up and running. So my view is we're a couple of years out and they'll probably arrive just in time from what might be the next administration, which will be an interesting experience. So I think we've got a period of time here with runway on pipelines, and we're not seeing any impact yet from some of those kinds of things.

I do believe there will be some that are successful in 2 or 3 years from now, we'll have some more competitors that are in this space. But we've been there before. And it's 1 of the reasons we're making sure we're serving partners well, giving them a wide breadth of product opportunities, which are not easy to duplicate, typically getting longer-term contracts where we can, switching costs are high. And we think that will help us even if we hit another competitive wave that may happen here in a few years.

Interesting. Yes, you did get ahead of my follow-up there on some of your partners going to get. So I got just 1 more here. And I think I asked this a couple of quarters ago, too, but there's so much movement happening in the space right now. And the current administration is very open to it. Any recent developments you guys can share or talk about your level of interest in partnering with a stable coin or some other digital asset company?

Mean we're in the payments business, so we have to pay attention, right? So we have our own views [indiscernible], how we're going to deal with that, think about that, et cetera. But we are a partner-led model, and we're watching our partners. And as our partners come to us, we're engaging in various things, and that's not just stable coin. That's many other different kinds of payment mechanisms that are happening -- and so we'll continue to do that. But we're watching it and participating in the dialogue, but it's not the kind of thing we're announcing, and we'll watch how our partners lead us. .

Your next question comes from the line of Joe Yanchunis from Raymond James.

So a few more questions for me here. So I understand your pipelines -- your partner pipeline is pretty full. Cross-selling remains a big opportunity. Over the next, call it, 12, 18 months, do you expect to have more success cross-selling products or signing up new partners.

It's hard to answer that question and a lot of it depends on -- I mean we're going to be doing both, right? New ideas come in, et cetera. When you do a new partner and a new program, ramp-up is slow. There's no doubt about that. Greg alluded to it earlier, organic growth has been an awful lot of our growth recently, but we've got new things coming in. So I don't know that I could put a 50-50 on or something like that, but it's -- both of them are key parts of our overall strategy. .

Yes. I'll answer just from a revenue growth perspective, not even numbers, what's signed up. And to Brett's point, I think you always get to even faster with existing partners in part because of just the third-party risk management you have to do once they're onboarded, it makes a little easier, there's less. But I think you also typically -- when I think about the next 18 months, I still think that you're going to have a fair amount of revenue growth that are going to come from existing partners, whether that's cross-selling to your words or multi-threaded to ours, I think when you get out past the 18 months is when you're still going to have the tailwind from new partners, new products. .

And so in that answer, you talked about onboarding partners and how it can be -- to take longer for new partners I guess how has the time to onboard a new partner changed over now versus, say, 3 years ago? And I understand you have different products, which might have different times. But just generally speaking, has that speed to market, has that changed at all?

We've had a focus on speed to market, and that's part of what we're doing. Some of that is process improvement. Some of that is -- we're investing in technology and those kinds of things that will help with it. And sometimes, we're waiting on partners, right? So you've got both of those things are going on and you sort of took the words of my mouth, and it depends on the product.

There's a few products you can turn on in a matter of weeks, right? and there's others that can take quite a while to do it. So it varies, but we have been focused on improving the speed of that. But we just got to remember, third-party delivery, in fact, third-party delivery, and there are frameworks that have to be put in place when you set that up, and that's an important part of our overall program.

Yes. And speed to launching is different from speed to revenue because, again, we're not lifting and shifting programs that exist. These have not been transfers, right? So then you're then you hold into the partner to actually ramp their programs. And that, again, varies by product. But that's the other dimension that we work with partners on, but that's their -- the way they manage the program.

That's fair. And on the technology front, I mean, you're one of the major players in the Bang as a service space -- can you talk about value of building your own technology receiving a third-party vendor?

Yes. We spend a lot of time talking about that. Part of the issue is that the requirements for this business are fairly unique. And the ability for, say, a service bureau to provide them, there's not sufficient scale for them to be interested in developing. So we have to do a lot of things ourselves. I have done a lot of things in the past and are rebuilding a lot of things now. The other thing is, and I'll just kind of go ahead and use the word everybody needs to use, which is AI is being used a lot in our engineering space to help speed up the time to develop various capabilities. .

And that makes it even easier for us to build things ourselves internally, and I think that will be a key part of the future. I'm not saying that software service providers are going away. I just think that there will be different kinds of use cases for different things. And the things that are unique to our business, we will likely build ourselves.

Okay. And then one more for me here. Just kind of taking a step back and looking at the broader bath space. I mean, what do you view the biggest potential risk to the industry? We have -- JPM seems to be focused on small businesses are kind of doubling down on that segment. But I mean, how do you indicate the risk of stay one of the G-SIB starting to target lower end consumers?

Yes. I mean one of the key things here for the big banks is there sufficient scale right? And I don't set that a and I worked for 1 of those at 1 point. So I kind of know the conversations that went on in that space. So I don't see that happening. I do think as we become less interchange product dependent oriented, which could happen over time, we'll face different kinds of competition. But again, being small, fast and nimble is something that I think is of great value and is particularly important in this third-party delivery environment. .

And so we will have to adapt to change as product desires are coming in from our partners, which we're doing. It's why we like that wide breadth of products. But I don't see 1 of the big banks coming in and trying to take over the low to moderate income or the digital first, very young folks, it's just not enough scale in it.

At this time, there are no further questions. I will now hand the call over to Brett Pharr, CEO, for closing remarks.

Thank you, everyone, for joining the call today. Have a good evening.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to Pathward Financial's First Quarter Fiscal Year 2026 Investor Conference Call. [Operator Instructions]

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, Chief of Staff and Investor Relations. Please go ahead.

Thank you, operator, and welcome. With me today are Pathward Financial's CEO, Brett Pharr; and CFO, Gregory Sigrist, who will discuss our operating and financial results for the first quarter of fiscal year 2026, after which, we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pathwardfinancial.com.

As a reminder, our comments may include forward-looking statements. 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 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 only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation.

Finally, all time periods referenced are fiscal quarters and fiscal years, and all comparisons are to the prior year period unless otherwise noted.

Now let me turn the call over to Brett Pharr, our CEO.

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 as 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 1 of the most mature and experienced sponsored banks, we work with our partners in the growing 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 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.

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% and 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 MCOs, 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 Instructions] The first question comes from Tim Switzer with KBW.

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?

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 the 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% of 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 entity 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 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.

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?

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.

Got you. Okay. And then another question I had, maybe a little more philosophical, but there's been a lot of discussion lately how 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 in the [ Bathworld ] 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?

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 it's not going to happen under current administration, but it will happen under other administrations as we look forward. We have some [indiscernible] 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 multithreaded 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.

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 stable coin or other digital asset companies. And Brett, 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?

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 to for 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 say, 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.

Our next question comes from Joe Yahonas with Raymond James.

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.

Yes. I mean I'd be happy to. As you recall from last quarter, I mean, you just kind of span the gamut from merchant acquiring, might have been an issuing deal or 2 in there, and 1 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 CAR T 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.

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.

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?

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.

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?

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, someone gets 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 they actually going to happen is not just a hope. We'll continue to talk about where we are in the funnel.

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.

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.

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?

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.

That's fair. And then just kind of 1 last 1 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?

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 not optimistic that 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. 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 and numbers that are meaningful enough that we're going to start talking about.

I appreciate that. And then just actually 1 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?

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

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

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

Ladies and gentlemen, thank you for standing by, and welcome to the Pathward's Financial Fourth Quarter and Fiscal Year 2025 Investor Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead.

Thank you, operator, and welcome. With me today are Password Financial's CEO, Brett Pharr; and CFO, Greg Sigrist, who will discuss our operating and financial results for the fourth quarter and full fiscal year of 2025 after which, we will take your questions. Additional information, including the earnings release the investor presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pathwardfinancial.com.

As a reminder, our comments may include forward-looking statements. 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 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 call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of the investor presentation. Finally, all time periods referenced our fiscal quarters and fiscal years, and all comparisons are to the prior year period unless noted otherwise.

Now let me turn the call over to Brett Pharr, our CEO.

Thanks, Darby, and welcome, everyone, to our earnings conference call. We had quite the fiscal year from completing the sale of our insurance premium finance business and the transportation portfolio, hiring a new Chief People and Culture Officer, contracting with several new partners, and winning multiple awards. The Pathward team has done a phenomenal job sticking to the 2025 strategy we laid out at the end of last year, overcoming challenges and executing day in and day out.

I'm very proud of all that we were able to accomplish together this year, but it doesn't stop there. While we celebrate past accomplishments here with you today, we are also planning for the future. I'll dive deeper when it comes to our 2026 strategy in just a moment, but let me start by going over some of the full year highlights.

We reported earnings per diluted share of $7.87 for the year, which was above the high end of the guidance range we provided last quarter and represents year-over-year growth of 9%. Net income for the year was $185.9 million. Our results were driven primarily by an increase in noninterest income of 10% when compared to last year. We also expanded our full year net interest margin and adjusted net interest margin which includes rate-related card expenses associated with deposits on the balance sheet to 7.34% and 5.92%, respectively.

Performance metrics remain strong with return on average assets for the year of 2.46% and return on average tangible equity of 38.75%. There were some moving pieces to the fourth quarter, and Greg will be providing additional detail shortly. We did a lot of work in 2025 to execute on our strategy, and we believe our efforts have laid the groundwork for a successful future that will allow us to grow. We had fantastic results in our Consumer segment.

During our last earnings call, we announced the signing of an agreement with Checkout.com. This quarter, we are proud to announce 3 new agreements. First, we entered into an agreement with Trustly to support the expansion of their pay by bank product offering. Through this partnership, Pathward is enabling settlement to their merchants, starting with a pilot launch of a major national retailer.

Second, we are very pleased to announce that we have signed a multiyear agreement for merchant acquiring sponsorship with Stripe. After the quarter ended, we signed a new contract with Greenlight to support their family finance and team card issuing business. In Credit Solutions, we mentioned earlier in the year that we signed 1 new contract during 2025.

We have now gone live and are pleased to announce that we have partnered with Upstart to offer personal loans through Upstart's AI lending marketplace. Additionally, we would like to congratulate our partner Clair for the recent announcement regarding the availability of Clair on-demand pay as part of Intuit Enterprise Suite and QuickBooks payroll on the Intuit platform. These 2 partnerships allow us to facilitate products, personal loans and early wage access that align with our purpose of financial inclusion.

Finally, in Professional Tax Solutions, we had a great year, and we are not sitting still. After tax season ended, we continue to invest in technology improvements that we believe will set us up for greater efficiency in 2026. There was also a tax code change for the 2025 tax year, and that could yield a positive consumer reaction in the tax preparation market we serve.

Switching over to the Commercial segment and Commercial Finance. We continue to optimize the balance sheet through divestitures and a focus on risk-adjusted returns, grew total loans and leases 14% and improved many of the metrics we measure to gauge success. We increased origination dollars for FTE by 200%, and we decreased days to fund on average by 36%.

It is imperative that we leverage the foundation we laid in 2025 to build, adapt and move forward in order to grow our business, which includes growing with the partners. We believe that by virtue of our capabilities, we've developed strategic partnerships that enable and provide expanded financial access to customers and businesses alike. And so doing, Pathward continues to power financial inclusion.

Building on our success in 2025 and delivering on our long-term strategy, being the trusted platform that enables our partners to thrive, we are introducing our fiscal year 2026 goals. There are similar themes that go from last year, and most of these components are still top of mind for us when we think about the business with a few small tweaks compared to what you're used to seeing. I'd like to go into a bit more detail and share what each of these elements will look like for us in 2026.

Number one, maintain an optimized balance sheet. You have heard about our balance sheet optimization strategy over the recent past, and we are now at a juncture where the team has done a great job at closing the gap and getting us to where we believe our optimal asset mix might be. Maintaining this balance will also take work. However, getting here was a challenge that we delivered on, and we are confident we can continue on that path.

Number two, technology to facilitate evolution and scalability. We believe that in order to remain the partner bank of choice in the marketplace, we need to continue investing in technology. As in 2025, this investment will remain a part of our run rate in 2026. We believe that our ability to drive revenue growth is predicated on our ability to produce profitable outcomes with enhanced technological capability. We believe we can find synergies and opportunities to streamline platforms, create new products and further innovation.

Number three, people and culture are important assets. With Anjana Berde at the helm as our Chief People and Culture Officer, he has provided a fresh look at how we can reimagine the human capital function within the business. She and her team will be focused on continuing to build a talent pipeline as well as reinforcing our commitment to collaboration with the Talent Anywhere remote working environment. Our commitment to remote working remains an opportunity to help us recruit the talent we need. It also allowed our employees to deliver better outcomes, resulting in multiple areas of recognition.

There are 2 instances that come to mind. One, I mentioned last quarter, when Pathward was named one of the 2025-2026 Best Companies to Work for according to the U.S. News and World Report on the Finance and Insurance list in the Midwest list. The second is that Pathward achieved, Great Place to Work certification for the third year in a row. This recognition is something we are extremely proud of and is really a reflection of our amazing employees and the culture they exemplify. Sustaining this momentum is certainly something we aim to do this coming year as well.

Number four, mature risk and compliance framework. As you know, this part of our trusted platform helps our partners develop products and services for their customers while managing a regulatory framework that is often complex. In 2026, we are building on 2 things: First, we will continue to lean on past experiences and stay true to where our program is built on, knowledge, monitoring and relationships. Second, we will be investing further in our risk capabilities to help ensure we continue to have a scalable platform well into the future. We believe that these 2 components together will serve us well and are imperative to furthering partner success.

Number five. The last part of our 2026 strategy is the client experience and continuing to pull through the pipeline of opportunities. Through various successes and deepening of those relationships, we frequently evaluate potential new opportunities and add more partners to our universe.

The work underway in this area has already begun. We cannot rest on our laurels as we recognize the rewards for delivering in an expanding market. things like reducing time to onboard partners or launch new programs and hiking our ability to offer multi-threaded solutions across our suite of products are meaningful ways we aim to help our partners achieve their goals while driving Pathward's growth. Based on our 2025 successes and what we are looking to deliver in 2026, we are maintaining our 2026 guidance for earnings per diluted share of $8.25 to $8.75.

Now I'd like to turn it over to Greg, who will take you through the financials in more detail.

Thank you, Brett. Net income for the quarter ended September 30 grew 16%, with earnings per diluted share growing 26% to $1.69. These results were primarily driven by strong growth in noninterest income of 13% compared to the prior year period.

For the full year, net interest income grew by 3% and noninterest income increased 10%. The growth in noninterest income through the year was driven in part by our success in optimizing the balance sheet by ensuring our loans either had high risk-adjusted returns or optionality. Our strategy of third-party delivery with stable partners is helping to drive secondary market revenues. As a result, we expect to continue to have secondary market revenues of about $5 million to $7 million per quarter on a run rate basis.

Net interest margin in the quarter was 7.46%, and adjusted net interest margin, which includes rate-related card expenses associated with deposits on the balance sheet was 6.04%. Despite the interest rate environment, we have improved these metrics year-over-year through our focus on risk-adjusted returns, which includes holding to our spread and discipline.

During the quarter, we moved more than half of our held-for-investment consumer portfolio to held for sale due to an agreement to sell those loans in early October, which generated a $14.3 million release of our credit provision. In conjunction with that, we took the opportunity to surrender some of our bank-owned life insurance policies, which comes through as an additional expense on the income tax line and further optimize the securities portfolio which together generated a loss of almost $6 million and will provide us with approximately $70 million of liquidity to redeploy within our balance sheet strategy.

On the expense side, legal and consulting was elevated in part due to restatement costs of approximately $2 million. This was partially offset by a decrease in compensation and benefit expense. For the year, the largest increase in expense was in the other expense line. The primary driver was better performance in our held-for-investment consumer portfolio, which generated higher payments to our partners based on the positive performance.

In the future, we believe the impact to the other expense line will be significantly less since we've already closed the sale I mentioned a moment ago. And we are now primarily originating held for sale in credit solutions.

Deposits held on the company's balance sheet at September 30 totaled $5.9 billion, which is a modest increase of $12 million versus a year ago. As is typical this time of the year, our deposit base is generally at the lowest point seasonally. Custodial deposits held at partner banks on September 30 were $210 million, which is in line with last year. Average custodial deposits during the quarter were also in line with last year.

Going forward, we would expect custodial deposit balances to run lower than in prior years due to the rundown in programs such as EIP. This will translate to lower servicing fees on the card and deposit fee income line and noninterest income. Loans and leases at September 30 were $4.7 billion compared to $4.1 billion last year. The majority of the growth came from our commercial finance verticals. Within term lending, we saw significant growth in structured finance with the expansion of renewable energy.

We also saw growth in asset-based lending and warehouse finance. Nonperforming loans did increase in the quarter, primarily driven by 1 working capital loan, which we believe is well collateralized. As we have communicated before, our nonperforming loans as a percentage of total loans can have movement from quarter-to-quarter. But that generally is not correlated to a change in our annual net charge-off rate given our collateral managed approach.

When we have loans that move into nonperforming status, we then work to bring the loan back to performing status or recover the collateral and resolve the outstanding balance. This quarter is no exception. We believe we have the path to working through many of the larger NPLs over the next few quarters since they are well collateralized for the amounts we have in NPL status.

This is where we excel and is a secret to the success of our commercial finance team. Our allowance for credit loss ratio on commercial finance was 118 basis points in the quarter as compared to 129 basis points for the same quarter last year primarily driven by a mix shift in the portfolio. Our annual net charge-off rate in commercial finance for 2025 was 64 basis points compared to 52 basis points in 2024, well within our historic range. If you look at Pathward as a whole, whether it is in Partner Solutions or commercial finance, we find niche places in the markets that are difficult to operate in and become good at it.

We believe this is part of the reason we can deliver a return on average assets for the year of 2.46% and a return on average tangible equity of 38.8%. Our liquidity remains strong with $2.3 billion available. This is higher than where we were last year at this time, and we're extremely pleased with our position.

During the quarter, we repurchased approximately 181,000 shares at an average price of $82.95. This brings full year repurchases to almost 2.1 million shares, with almost 5 million shares still available for repurchases under the current stock repurchase program. The sale of the majority of our held-for-investment consumer portfolio will put downward pressure on both pretax income and our net interest margin in 2026. However, despite that, we are still reiterating our fiscal year 2026 guidance with an EPS range of $8.25 to $8.75, which includes the following assumptions. No 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 Instructions] First question is from the line of Tim Switzer with KBW.

So first off, congratulations on the new partnerships. Great to hear that. Are you able to provide some details on the Upstart program in terms of -- like will that look similar to your other credit solutions products such as the one you mentioned with Clair in terms of like the financial statement impact on the balance sheet and like where revenue will be recognized in the income statement? And are you still fully indemnified for any credit losses on -- in this program as well?

Yes. Generally speaking, this is in the same category of all our marketplace lending, where we're doing it through the third party, in this case, Upstart. And yes, it has all the credit indemnifications. It had come on the balance sheet, go off the balance sheet kind of approach to it. So yes, it's very similar to that.

Now Clair is a little bit unique because it's early wage access, was a different thing. But very much aligned with all of our other consumer lending kinds of programs that have the credit protections.

Got you. That's great to hear. And how long should these loans remain on the balance sheet? And is there some kind of -- within the contract of Upstart something in terms of how quickly you guys will move them off the balance sheet, either back to Upstart or do you plan to sell to a partner? Do they just mature very quickly?

Yes. I mean Brett's point, these are very similar to the other marketplace programs we have. We shifted that entire program to the majority of the program to held for sale several years ago, Tim. So these are all held for sale out of the gate. And like the other marketplace lending we do, this is -- our whole period is 30 days or less.

Okay. Got you. And then my last question on that. Is this an exclusive partnership of Upstart? Are they still going to be leveraging their own balance sheet and other partners that have out there?

I don't believe this is exclusive. So there are multiple things. This is a good-sized company. So -- but a lot of our partners have multiple banks they work with.

Got you. Makes sense. And then sort of related to all this, your secondary market revenue was a bit above the -- I think you guys have said it should be like a $5 million to $7 million quarterly range.

And I know that can fluctuate quite a bit. So as you guys are trying to optimize the balance sheet. So can you talk about, I guess, what drove the upside this quarter? Was it SBA or USDA? And is that $5 million to $7 million still a good target going forward?

Yes. I think this quarter, Tim, is really just being opportunistic kind of as you get near year-end too, you're out there getting some bids. And there were probably a few things we thought were going to slip to October, but just the demand was out there. So we decided to hit the bids to be candid.

So -- but going forward, we do believe we're going to dial it back to that $5 million to $7 million range. We're really excited about the opportunities with our partners there, particularly on the renewable USDA side. I do think that's what drove the majority of it. But we do believe we're going to dial that back a little bit next year because, again, we really like that optionality and the ability to keep those yields on the balance sheet.

The next question is from the line of Joe Yanchunis with Raymond James.

So how has demand for early wage access loans changed? And are you seeing any incremental demand from the current government shutdown?

I don't think we would have seen the impact of that yet. And if you think about total employees, that represents across the entire nation, that's probably not that significant. And Frankly, I'm not sure federal government employees would be the people that are getting that -- those kinds of transactions.

So we're talking about people that are at the very bottom of the economy and are looking at $200 for 10 days. So this is a different kind of market. So -- but that being said, Clair contracts with Intuit is going to bring significant volume in there because of the scale and breadth that they have. And we're very excited about that and expect that to have a much larger volume in the weeks and months to come.

Got it. I just wasn't sure if any of your partners were leveraged to that kind of type of consumer. And then kind of as you mentioned, Intuit, I know it's early, but if we were just to think about the recent changes in the tax law, which I believe normally is beneficial to your tax business, how much growth in the tax business is implied in your fiscal year '26 EPS guidance?

Every tax year is different. We say that every year, and we actually experienced that. Your data point about changes in the tax law speaks well where the business is a very valid thing that happens. We don't have huge growth expectations.

One reason is, we came off of a really good year. And so that's kind of looking at that going forward. But we expect to have a solid tax year. I think some of the tax law changes are going to help with that.

Yes. And incrementally, I'd just say in terms of setting the guide, we obviously look at a range of outcomes across all of this. But our historic growth rate in that business is probably mid-single digits. And you ought to think about that just calibrating probably the range we're looking at.

I appreciate that. And just kind of continuing to hop around here. I know you addressed a little bit on the prepared remarks, but NPLs took higher in the quarter. We saw past due loans declined suggesting that some of these credits are moving into say I understood you pride yourselves on working out problem loans. I was wondering if you had an opinion on when you thought this portfolio concentration would peak?

Well, so a couple of things. One is there actually isn't a tie between the past due loans and the NPLs because a lot of times, these are episodes, an event happens and then you immediately go to NPL and often it's without warning, you have the collateral and you manage the collateral, but we move very quickly in those situations. So I don't think you can correlate those 2 things.

And when you look at our business going back to -- when we bought Crestmark in 2018, you'll have a quarter where these things got to spike and then you go along and then you work your way down. So some of them are resolved quickly, some of them are not. And these are stories, right? There's 3 or 4 stories and you work through the stories and some of them resolved very quickly because you liquidate the collateral, some of them are tied up in some legal thing, but you still have the collateral and it may take some time.

But mainline is looking at net charge-offs, and you'll see that net charge-offs are not correlated with the whole discussion of NPLs.

Yes. And the only thing I would add, Joe, is that balance out there at NPLs for the quarter end, there's 3 loans that make up roughly half of it. We talked about 2 of those last quarter. We had I think a positive outlook at the end of last quarter that hasn't changed. The one we mentioned this quarter, again, well collateralized. We're feeling pretty good about that. But when you look at those 3, I do believe those are going to resolve themselves over the next quarter or 2, could take 3 quarters because they have to rehabilitate or otherwise work down. But just to give you some context on what's out there right now.

Okay. All right. That's helpful. And then lastly for me, as we just think about the pace of share repurchases in '26, how should we think about maybe the buyback ratio as we look out in the coming quarters?

Yes. We had obviously slowed down that buyback ratio, just to get some additional capital out there. And I think we've kind of gotten pretty close to where we want to be to what our target was. So I think going forward, you're going to see that buyback ratio kind of get back to its historic norms, which is probably in that 80% to 90% payout ratio range.

There are no additional questions waiting at this time. So I'll pass the call back to the management team for any closing remarks.

This is Brett Pharr. Thanks for joining the call today, and have a great evening.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.