KBRA Affirms Ratings for Pathward Financial, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Sioux Falls, South Dakota based Pathward Financial, Inc. (NASDAQ: CASH) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Pathward, National Association. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s unique business model that allows for robust capital generation with limited stress from asset growth. CASH has consistently reported above-average earnings (ROAA of 2.20% for FY24), which, coupled with its assumed asset cap (related to the Durbin amendment and its impact should the bank surpass $10 billion in assets), provides the company with a unique ability to rapidly build capital should the need arise. CASH employs a differentiated earnings profile that includes peer-leading fee revenues and an above-average NIM, despite an earning asset mix less concentrated in loans (average loans represented 68% of average earning assets in F4Q24). Through its partner solutions business line, CASH has four primary sources of fee income, with card and deposit fees its leading driver at roughly 40% of total noninterest income. Refund advance fees, refund transfer, and rental income are the remaining leading contributors. Overall, noninterest income has consistently tracked over 40% of annual revenues, with CASH reporting $300 million in FY24 (CASH's fiscal year ends September 30), or 3.9% of average assets.

CASH’s higher adjusted NIM (estimated 4.84% for FY24, includes $111 million in rate-related card processing expenses) is largely attributable to its lower average adjusted cost of deposits (1.89% for FY24) as well as elevated loan yields (8.50%). KBRA recognizes the higher risk nature of the loan portfolio which is concentrated in commercial finance loans, though considers the risk well managed with loss rates, while elevated, rather consistent (NCO ratio on commercial finance portfolio has tracked between 0.5% - 0.7% since 2019) allowing for comparatively strong risk-adjusted yields. Finally, KBRA recognizes the company as a leader within the fintech banking space. As a long-time operator in the space, CASH has strong knowledge of the regulatory risk associated with fintech banking and has a well-developed risk management infrastructure to ensure this risk is well managed.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a rating change is unlikely over the medium term. However, significant credit deterioration, with loss rates well above historical norms, or more aggressive management of capital with ratios tracking measurably below current levels, or the loss of a strategically important paycard partner, materially impacting its partner solutions business, could result in negative rating action.

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