Operator
Ladies and gentlemen, thank you for standing by and welcome to Pathwork Financials fourth quarter and fiscal year 2025 investor conference call. During the presentation, all participants will be in a listen-only mode. Following the prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I now have 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 Financials CEO, Brett Farr, 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 passwordfinancial.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. Reconciliation 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 Farr, 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 cultural officer, contracting with several new partners, and winning multiple awards, the PATHWORD 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 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've reported earnings per diluted share of seven dollars and 87 cents for the year which was above the high end of the guidance range we provided last quarter and represents year-over-year growth of nine percent Net income for the year was $185.9 million. Our results were driven primarily by an increase in non-interest 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 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 three new agreements first we entered into an agreement with trustly to support the expansion of their paid by bank product offering through this partnership password 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 multi-year 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 one 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, Claire, for the recent announcement regarding the availability of Claire On Demand Pay as part of Intuit Enterprise Suite and QuickBooks Payroll on the Intuit platform. These two 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 continued 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 continued 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 measured to gauge success. We increased origination dollars for FTE by 200 percent, and we decreased days to fund on average by 36 percent. 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 our 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 in so doing pathroot 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 echoed 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 in 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 and 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 Berdy at the helm as our chief people and culture officer, she 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 town at anywhere remote working environment. our commitment to remote working remains an opportunity to help us recruit the talent we need it's also allowed our employees to deliver better outcomes resulting in multiple areas of recognition there are two instances that come to mind one i mentioned last quarter when password 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 and the midwest list The second is that Password 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 two 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 ensure we continue to have a scalable platform well into the future. We believe that these two 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 heightening 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 pathways 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 of the quarter ended September 30th through 16%, with earnings per diluted share growing 26% to $1.69. these results were primarily driven by strong growth and non-interest income of 13 percent compared to the prior year period for the full year net interest income grew by three percent and non-interest income increased to ten percent the growth in non-interest 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 dollars per quarter on a run rate basis net interest margin in the quarter was 7.46 percent an adjusted net interest margin which includes rate related card expenses associated with deposits on the balance sheet with 6.04%. Despite the interest rate environment, we have improved these metrics year over year through a focus on risk-adjusted returns, which includes holding to our spread and discipline. During the quarter, we moved more than half of our health for investment consumer portfolio to health 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 six million dollars and will provide us with approximately 70 million dollars 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 health 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 have 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 30th totaled $5.9 billion, which is a modest increase of $12 million versus a year ago. As is typical this time of year, our deposit base is generally at the lowest point seasonally. Custodial deposits held at partner banks on September 30th were $210 million, dollars 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 non-interest income. Loans and leases at September 30th were 4.7 billion dollars 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 non-performing loans did increase in the quarter primarily driven by one working capital loan which we believe is well collateralized as we have communicated before our non-performing 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 non-performing 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 mixed 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 password as a whole whether it is in partner solutions or commercial finance we find niche places in the market 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 percent 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 health for investment consumer portfolio will put downward pressure on both pre-tax 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, cents which includes the following assumptions no rate cuts during the year an effective tax rate of 18 to 22 percent and expected share repurchases this concludes our prepared remarks operator please open the line for questions if you would like to ask a question please press star followed by one on your telephone keypad if for any reason you would like to remove that question please press star followed by two again to ask a question press star one as a reminder if you're using a speakerphone please remember to pick up your handset before asking your question we will
pause here briefly as questions are registered first question is from the line of tim switzer with kbw your line is now open hey good afternoon thanks for taking my questions okay um so first off congratulations on the new partnerships um 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 Claire in terms of like the financial statement impact on the balance sheet and like where revenue will be recognized on the income statement? And are you still fully indemnified for any credit losses in this program as well?
Yeah. 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 identifications it has the come on the balance sheet go off the balance sheet uh kind of approach to it so yes it's very similar to that now claire's a little bit unique because it's early wage access was a different thing but very much in aligned with all of our other consumer lending kinds of programs that have the credit protections gotcha 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 um how quickly you guys will um move them off the balance you get it back to upstart or do you plan to sell to a partner do they just mature very quickly yeah i mean to 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 gotcha and then my last question on that is this an exclusive partnership that was started are they still going to be leveraging you know their own balance sheet
and other partners they have out there I don't believe this is exclusive so there are multiple things this is a good size company so um but we you know a lot of our partners have multiple banks they work with gotcha um makes sense and then um sort of sort of related all this your secondary market revenue um was a bit above the i think you guys have said it should be like a five to seven million dollar quarterly range and i know that can fluctuate quite a bit such you guys are trying to optimize the balance sheet um so can you talk about i guess what drove the upside this quarter was the sba or usda and is that five to seven million still a good target
going forward yeah i think this quarter tim is really just being opportunistic um you know kind of as you get near year end too you're out there getting some bids and there are 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 five million to seven million dollar range um we're really excited about you know the opportunities with our partners there, particularly on the renewable with 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.
Gotcha. Makes sense. Thank you.
Operator
Thank you for your question. Next question is from the line of Joe Yantunis with Raymond James. Here, I'll have that open.
Hey, good afternoon. Hey, Joe. So, hi. So how has demand for early wage access loans changed? And are you seeing any incremental demand from the current government shutdown?
You know, 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, you know, 200 bucks for 10 days. So this is a different kind of market. So, but that being said, Claire's contract 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, you know, if any of your partners were leveraged to that kind of type of consumer. And then kind of as you mentioned to it, I know it's early, but, you know, if you think about the recent change of 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?
You know, every tax year is different. We say that every year, and we actually experience that. Your data point about changes in the tax law speaks well where the business is a very valid, you know, thing that happens. um we don't have huge growth expectations one reason is is we came off of a really good year and that so that's kind of looking at that going forward but we expect to have a solid tax year uh and i think some of the tax law changes are going to help with that yeah and incrementally i just say in terms of setting the the guide we obviously look at a range of outcomes across all this but our historic growth rate in that business is probably mid single digits and you ought to think about that calibrating all through the you know the range we're looking at i appreciate that
and just kind of continue to hop around here i know you addressed a little bit prepared remarks but you know npls took tire in the quarter and we saw past due loans declined you know suggesting that some of these credits are moving to the snake and i understand you pride yourselves on working out problem loans was wondering if you had an opinion on when you thought this portfolio concentration would peak well so a couple 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 we move very quickly uh in those situations so i don't think you can correlate those two things um and when you look at our business going back to you know when we bought Gressmark in 2018 you'll have a quarter where these things kind of 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 you know this is these are stories right there's three or four stories and you work through the stories and you some of them resolve 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 main line is looking at net charge-offs and you'll see that net charge-offs are not correlated with the whole discussion of NPLs.
Yeah, and the only thing I would add, Joe, is that balance out there of NPLs for the quarter end. There's three loans that make up roughly half of it. We talked about two 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 we're pretty feeling pretty good about that but you when you look at those three you know i do believe those are going to resolve themselves over the next quarter or two could take three quarters because they have to rehabilitate or otherwise work down but you know i just to give you some context on what's out there right now okay all right that's helpful um and then lastly from me you know as we just think about the pace of uh share repurchases in 26 you know how should we think about maybe the buyback ratio you know as we look out in the coming quarters yeah we we had obviously slowed down that buyback ratio just to get some additional capital um 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 i appreciate it thank you for taking my questions we appreciate you asking thanks yeah thank you for your question there are no additional questions waiting at this time so i'll pass the call back to the management team for any closing remarks uh this is brett far 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
