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 differentiated earnings profile which includes peer-leading fee revenues and an above-average NIM, coupled with a balance sheet that is less concentrated in loans, resulting in RoRWA well-above rated peer averages (3.8% through 9M23 as compared to peer average of 1.4%). CASH has four primary sources of fee income including card and deposit fees (2.2% of average assets for FY2023), refund transfer fees (0.6% of average assets), refund advance fees (0.5% of average assets), and rental income (0.8% of average assets). Overall, fee income has generally ranged between 45% - 50% of total revenues.

Despite funding headwinds that have greatly impacted the banking industry, CASH reported NIM expansion of over 100 bps in FY2023, benefiting from its unique funding profile with over 90% of deposits in noninterest bearing accounts. Moreover, CASH has reported a rather stable NIM over the last three quarters when adjusted to include rate related card processing expenses (CASH reported an adjusted NIM of 4.87% for the period-ending September 30, 2023) with its adjusted cost of deposits remaining below peer averages at 1.56% for F4Q2023.

Somewhat offsetting rating strengths is the company’s considerably higher expense base, both its operating costs as well as its credit costs. CASH’s higher credit costs are primarily driven by its tax service loans which comprised 67% of net charge-offs reported for FY2023. However, with a core loan book concentrated in higher-risk commercial finance loans, CASH has reported an above-average NCO ratio (0.5% - 0.7% since FY2019) for loans excluding tax service loans, though we recognize the rather stable performance in recent years. CASH’s risk-based capital ratios have fallen below peer averages in recent periods, though remain suitable considering the company’s above-average earnings capacity and an operating strategy that includes limited long-term balance sheet growth targets. With that said, KBRA expects the company to maintain capital ratios near current levels going forward.

Rating Sensitivities

The Stable Outlook reflects KBRA’s view that a change in the long-term ratings for CASH is unlikely over the medium term. However, management of capital ratios below current levels (~11% CET1 ratio), or the loss of partnerships within the payments divisions that would cause CASH to utilize a materially greater amount of noncore funding could result in negative rating action. Additionally, significant credit deterioration, with loss rates measurably above historical norms (0.5% - 0.7% for the commercial loan portfolio) could negatively affect long-term ratings.

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