Pathward Financial - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Fourth Quarter and Fiscal Year twenty twenty Investor Conference Call. During the presentation, all participants will be in a listen only mode. Following prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Brittany Kelly Elsasser, Director of Investor Relations.

Please go ahead.

Speaker 1

Thank you, and welcome to the Meta Financial Group conference call and webcast, where President and CEO, Brad Hanson and Executive Vice President and CFO, Glenn Herrick, will discuss the results of our fourth quarter and fiscal year ended 09/30/2020. Also participating in the call is Brett Farr, Co President and COO of MetaBase. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.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 Meta's filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual 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 Meta's results and performance trends. Reconciliations for such non GAAP measures are included within the appendix of the investor presentation.

Now I will turn the call over to Brad Hanson.

Speaker 2

Thank you, Brittany. Everyone I know is talking about what a crazy year 2020 has been. So I recognizing the exemplary performance of my team during this difficult time and express my appreciation to our dedicated staff for continuing to serve our customers and shareholders from a remote working environment. Despite some of the challenges, including substantial rate cuts and sizable loan loss provision, we reported net income of $104,700,000 for fiscal year twenty twenty, an increase of 8% compared to fiscal twenty nineteen. And earnings per share increased 18% to 2.94 over the same period.

While the share price is down considerably from pre COVID-nineteen levels, our strong operating performance has afforded us the opportunity to start buying back shares at what we believe are favorable prices. In September, we reinstated our previously announced share repurchase program and bought back approximately 898,000 shares through October 23 at a weighted average of $21.8 per share. During the past year, we were able to close on the sale of our retail community bank just before implementing our pandemic plan in response to COVID-nineteen. We funded $219,000,000 of PPP loans to six eighty nine borrowers and partnered with the U. S.

Department of the Treasury's Bureau of the Fiscal Service and Fiserv to further support the government stimulus package by distributing $6,400,000,000 of economic impact payments on $3,600,000 prepaid cards. At the same time, we closed several new relationships and extended existing relationships while maintaining focus on our three strategic initiatives: increasing the percentage of funding from low cost core deposits in exchange for higher cost deposits optimizing our interest earning asset mix by replacing lower return assets with higher return loans and improving our efficiency ratio by managing expenses and improving operating leverage. In addition to this, we have been working hard solidify the foundations of our company by further enhancing operating procedures, governance programs, organizational structure, our talent pool and pay for performance programs. We are getting faster, safer and more efficient. We are also focused on developing our aspirational culture, corporate and social responsibility programs and diversity and inclusion initiatives.

In the year ahead, we expect to see progress in our messaging and communications, our websites and our technical capabilities as we strive to upgrade and enhance the competitive advantages that our platform gives us in enabling fintech providers at scale, entering new product segments and looking for ways to leverage the vast amounts of data accumulated over the years. Now let me turn the call over to Brett Farr.

Speaker 3

Thank you, Brad. In the fiscal fourth quarter of twenty twenty, we took a provision for loan and lease losses of $9,000,000 Our allowance for loan and lease losses was $56,200,000 as of September 30, a 15% reduction compared to 06/30/2020, due in large part to anticipated seasonal charge off activity within our tax services business. Credit quality remains good with no material deterioration in past dues. Non performing loans and leases were 0.97% of total loans and leases at quarter end, '13 basis points lower than the previous quarter. We are closely monitoring our small ticket equipment finance portfolio.

However, modifications in that portfolio are now just $21,800,000 and we believe reserves are adequate to cover any associated risk. We have seen no measurable change of performance in our consumer lending portfolios due to COVID-nineteen. Our student loan portfolio has continued to pay down to $115,000,000 at quarter end and now accounts for just 3% of total loans and losses. Movie theater and hospitality loans in our legacy community bank portfolio are still a concern, accounting for roughly 50% of our total deferred balances. Movie theaters have been heavily impacted by the COVID-nineteen pandemic, and we have approximately $18,000,000 of exposure in this category.

While these credits are currently on three month deferral of principal and interest, we have taken additional reserves against them to reflect the elevated level of risk. Hotel loans are trending positive, but far from fully recovered. Most are in the third round of deferrals, generally making interest only payments. Excluding PPP loans, total deferments across all portfolios decreased to $193,300,000 in the quarter, down from $326,900,000 and now account for just 6% of total gross loans. As of 09/30/2020, we had six eighty nine loans outstanding, totaling $219,000,000 in loans under the Paycheck Protection Program and have recognized approximately $1,800,000 in total fees from the SBA.

SBA. The remaining fees will be amortized over the remaining lives of the loans. The average fee rate of approximately 2.5% equates to approximately 5,400,000 of net fees on an average loan size of $318,000 We are closely following the development of the Small Business Administration PPP forgiveness rules. Now let me turn the call over to Glenn Herrick, our CFO.

Speaker 4

Thank you, Brett, and good afternoon, everyone. Today, we reported our results for the fourth fiscal quarter and full fiscal year 2020. On a GAAP basis, we generated net income of $13,200,000 for the quarter or $0.38 per diluted share and $104,700,000 or $2.94 per diluted share for the year. Full year earnings per share growth of 18% included the one time gain on sale of the Community Bank division, a key strategic accomplishment along our path to optimize our balance sheet. Despite the current rate and loan demand environment, we generated net interest income of $259,000,000 a decrease of only 2% compared to fiscal year twenty nineteen.

We believe this reinforces our focus on remixing our balance sheet. United States Treasury EIP stimulus card deposits continue to be a drag on net interest income in the quarter, albeit at a lower level than the prior quarter. Net interest margin was 3.77% for the fiscal twenty twenty fourth quarter, an improvement of 49 basis points over the linked quarter. Excluding the impact from EIP deposits, NIM was 4.87% compared to 4.95% in the fiscal twenty nineteen fourth quarter. While slower loan demand and lower yields will continue to pressure net interest income in the near term, the ongoing shift in our earning asset mix likely leads to higher net interest margins over time.

Our cost of funds improved by 94 basis points compared to the same quarter in the prior fiscal year, largely as a result of the EIP card deposits, which reduced wholesale funding needs and an overall lower rate environment. Meta continues to generate above industry levels of non interest income and total non interest income for the fiscal year was $240,000,000 an 8% increase compared to the prior year, influenced by the gain on sale of

Speaker 5

the Community Bank division. Non interest income now represents 48% of total revenue in fiscal year twenty twenty. For the fourth quarter, non interest income was $41,000,000 an increase of 13% compared to the same quarter in the prior year. The increase can be attributed to gain on sale of SBA loans, other income and an increase in payments fee income.

Speaker 4

For the fiscal year, non interest expense was down 4% to $319,000,000 as a result of our ongoing efficiency initiatives, including the sale of the Community Bank division. Non interest expense was $80,000,000 for the quarter, a 5% increase compared to the prior year. Fourth quarter expenses included a $1,700,000 prepayment penalty to extinguish long term debt and employee separation related expenses of $1,500,000 Turning to the balance sheet. Total assets at September 30 were $6,100,000,000 reflecting a more normalized level as EIP card balances spent down and the remaining cash balances were used to pay down borrowings and reduce wholesale funding. Total gross loans and leases held for investment decreased 5% on a linked quarter basis to $3,300,000,000 at fiscal year end.

The decrease was primarily related to legacy community bank loans that were sold or refinanced away and loans that were classified as held for sale, which we expect to sell this quarter. Commercial finance loans, which comprise 70% of the company's loan and lease portfolio, totaled $2,300,000,000 reflecting growth of $149,000,000 or 7% from 06/30/2020. Growth in the commercial finance portfolio is a result of some rebound of demand in the factoring and leasing business lines. Average payments deposits were $5,800,000,000 for the quarter, which were inflated by $1,600,000,000 on EIP stimulus cards issued by MetaBank. As of October 23, dollars $829,000,000 in EIP balances remained outstanding.

Excluding the impact from EIP cards, average payments deposits increased 60% compared to the same quarter in the prior fiscal year. A large component of the increase was driven by stimulus payments that ended up on various program partner cards and lower overall consumer spending levels. As Brad mentioned, during the quarter, we reinstated our share repurchase program. Since restarting our share repurchase program in September, we have repurchased 898,416 shares through October 23 at a weighted average price of $21.8 per share. The company has approximately 3,500,000.0 shares remaining under its authorized share repurchase program that is scheduled to expire on 12/31/2022.

We will consider further share repurchase activity within the context of our overall capital deployment strategies, including funding growth initiatives and returning excess capital to shareholders. Finally, we have adopted CECL effective 10/01/2020, and expect our day one entry to increase the allowance for credit losses by approximately $13,500,000 As it relates to regulatory capital, the day one adjustment will not impact our regulatory capital ratios in the short term as we have elected the two year delay in the five year total transition period to minimize the impact. We intend to disclose further detail of CECL adoption in our 10 ks. With that, I will turn the conversation back to Brad for closing comments.

Speaker 2

Thanks, Glenn. I'd like to thank our employees, our partners and our shareholders for all their hard work and support during the past year. Despite missing a few pre COVID targets, we made significant progress on multiple fronts and delivered solid results for the year. We are looking forward to the New Year and all the opportunities that lie ahead. With that, I'll have the operator open up the line for any questions.

Speaker 6

Thank you.

Speaker 5

Session.

Speaker 6

Our first question comes from Michael Perito with KBW. I

Speaker 7

wanted to just spend a minute on kind of the earnings outlook for 2021. I guess it's kind of a long winded question here. But if we think about kind of the core earnings power of fiscal twenty twenty, I think plus or minus I had it in like the 93,000,000 to $96,000,000 range. And I guess as we think about how that transitions into 2021, I guess is there still is it still correct to assume that the 15,000,000 to $20,000,000 of annual, I believe it was income from the H and R Block partnership will be additive to that core fiscal twenty twenty run rate and then that there would be additional growth opportunities on the core business as well as you guys continue to move forward. Is that kind of a fair without putting too specific numbers around it, a fair way to think about how the earnings profile could look next year?

And is there any other kind of thoughts or items that you would point us to as we kind of think about where the trend is heading?

Speaker 4

Hi, Mike. This is Glenn. I'll take a shot at that. So yes, H and R Block will be additive in 2021. And as it relates to our other businesses, we would certainly expect organic growth in a number of them.

I would also point we have some runoff portfolios though, primarily in the community bank and also the student loan portfolio that year over year will be a drag on absolute dollar earnings. And what we've also talked about is remixing our balance sheet and we think that will drive earnings increase without increasing the overall size of our balance sheet.

Speaker 2

And remember that we'll have a full year coming in, in September. We had six months of earnings at a higher interest rate than in 2020 and we'll have a full year of the impact of the reduction in interest rates in 2021.

Speaker 7

Right. Okay. That's very helpful. Thanks. And then for my follow-up, Brad, I was curious if you could just maybe comment, I think the I'm sure someone else will ask about kind of Crestmark and pipelines, but there's obviously the balance sheet side of here.

But as we think about the fees and the payments side of the business here, what are the kind of one or two or biggest growth opportunities that you see on the horizon for 2021 that you think could be the most impactful for Meta at this point?

Speaker 2

Well, as we said, we signed some new deals. H and R Block will certainly have an impact on that side as well since we took over the breadth of their business, which includes their card programs in addition to their tax loans and business. So that will have an impact on that portfolio as well. We also have started to see the genesis of the faster payments business taking hold. I think that's a good fee income play for us and we have several programs launching.

It will be a ramp up period from the start. So we will start to probably the end of twenty twenty one, think, see an impact from that more so. And then in 2022 and beyond as that continues to grow. There's a lot of interest in that in the marketplace. So we have high hopes for the future of that business line as well.

We also answered some of the other business lines in acquiring and that should ramp up a little bit. Think also that starting from scratch, there'll be a longer ramp up period before that's truly material, but we'll see some more business from that. And if you start compounding those new opportunities, I think they start to have an impact in aggregate even earlier. Do you have any follow-up, Brett? I think that's it.

Speaker 7

Okay. And you guys think that that will be some of those broader initiatives that will be on display in the 2021 fiscal kind of financials to a certain extent?

Speaker 2

And there's also other business we've signed and are continuing to sign. So there's Moneyline launching, which was announced that we'll start to see that ramp up and we're excited about the prospects of that business. So there's a number of new initiatives I think that have come on recently as well that will start to have an impact as the year progresses.

Speaker 7

Great. Thank you guys for taking my questions. I appreciate it.

Speaker 2

Thanks Mike.

Speaker 6

You. Our next question comes from Steve Moss with B. Riley Securities. Your line is now open.

Speaker 8

Good afternoon guys.

Speaker 5

Hello. Starting with just kind of like loan yields, were up nicely over quarter over quarter and definitely seen a remixing within the portfolio here this quarter, especially on an EOP basis. Just kind of curious how you're thinking about loan yields going forward here just into the fourth quarter? It seems like a potential for a decent leg up.

Speaker 4

Yes. Sorry, Steve, your last part cut out on you there.

Speaker 5

Just seems like for loan yields, I'm sorry, into the December, seems like there could be another step up in loan yields here the upcoming quarter given the EOP remix?

Speaker 4

Yes. We would agree with that. It's certain portfolios are going to come in higher than others or lower given the rate environment. But as we continue to shift that mix, the Community Bank has lower yields, those run off. We do more commercial finance.

So we run off securities portfolio and community bank, just that swap set will help the overall yields.

Speaker 5

Okay. And then just on the business front, just kind of curious as to what you're seeing for non interest bearing deposit growth from your card business. I know the EIP deposits kind of obscure what's going on there.

Speaker 3

Yes. This is Brad. When you take out the EIP piece, we still have some growth that has occurred year over year last couple of years and would expect that to continue to go. We're in that business, we're seeking that business and we'll be picking more up. The EIP bubble just ties it a little bit.

Speaker 4

Yes. What's hard though Steve is so we have the very discrete card, the stimulus cards that were loaded on our cards that were issued from treasury. So those are the numbers we've been calling out. We've also called out we've seen above normal growth in overall deposits, twofold, a little bit slower consumer spending we believe, but also folks that are getting stimulus money and then taking it and putting it on one of our partner GPR cards. And so it's hard to tell exactly, if the money is fungible, where that came from, but that's pretty consistent with what talking to our peers across the industry that everyone is at elevated levels of deposits.

So in absolute terms, probably card deposits will come down year over year. If you try to back out our core business, we would still continue to expect some growth there. And there are the new

Speaker 2

programs I discussed, H and R Block, MoneyLion and others. So some of those, like H and R Block, is converting a portfolio, so we'll see some immediate impact from that business. And then the others will be growing over the year as well. So still expect to see strength and opportunity and growth in our payments business over the coming years.

Speaker 5

Okay. Then I'm not sure that this was answered. Just on the commercial finance portfolio, you had good quarter over quarter growth. I know you guys alluded to more normalization in certain portfolios. But how is

Speaker 9

that pipeline looking? And how are

Speaker 5

you thinking about loan growth? You tend to see pretty good growth in the December.

Speaker 3

Yes. I mean, I think we're seeing more transactions to take a look at in the pure commercial finance. So you're talking about your asset based lending and your factoring. Some of the other things because of yield, markets are coming down and there are some cases where we're choosing not to play because the yield is too low. So I think you're going to have some mix in that.

But if you think naturally through the economic cycle, this is the time that commercial finance starts to build and shine.

Speaker 5

Thank you very much. I appreciate that.

Speaker 4

Yes. Thanks, Steve.

Speaker 6

And our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.

Speaker 8

Hi, guys. Just on the deferrals, where they were at the end of the quarter, Is there any expectation or any color you can give based on your conversations with borrowers of what percentage, what piece of that 6% may need further attention at the end of the deferral period?

Speaker 3

Well, so obviously, the biggest piece of that is the hotel motel portfolio that we have in the residual community bank. And we are seeing improvement, particularly with the type of properties that we have. But certainly, they're going to need continued assistance through the winter months. And then when we come out in the spring, we'll kind of see what happens and are they getting closer to normal levels where they can resume traditional P and I payments. So that's the big thing.

We've mentioned in there the theater relationship relatively small, but you have that. And then there's some things that are in the small ticket finance, again, not very large at all. And all that depends on what's going on in particular marketplace geography. There's a lot of variability around the country on who's open and who's not. And where there's those that are still shut down to a bit, they're going to struggle for a period of time yet.

So we'll see what happens with

Speaker 2

And I think it's important to understand that a lot of the hotels as well are paying some interest payments, just it's not principal and interest being deferred. So they are making some contribution.

Speaker 8

Okay. And then you also talked about if we look at where Crestmark, sort of the net charge cumulative net charge offs in the last downturn in the Great Recession, I think you put it at 2.5%. Is there any as we sit here today and as you look out and obviously a lot of uncertainty still on the credit side. But do you expect that that is likely to be lower this time around higher? It's just too early to say or any thoughts on that front?

Speaker 3

Well, one of the things that's a good indicator of how that's going to go is the pure commercial finance. So I'm talking about asset based lending and factoring. You'll notice the balances have gone down considerably, which means that those products are working exactly as designed, which as the volume comes down, you collect the receivables, you pay down the debt. And that's why you have even in a downturn environment such a low loss rate. So if the balances help you, that gives you some indicator of where we think that's headed.

We're continuing to watch delinquencies in that space. Other than the areas that I called out, there's no specific thing that's happening. You're not seeing much of a change at all. So we feel pretty good about where that portfolio is today.

Speaker 2

However, our crystal ball isn't any better than yours is, Frank. So we continue to monitor the portfolios very closely and we'll react to their performance as is required.

Speaker 8

Okay. And then just finally, I wondered if you could provide any help with run rate on the expense side.

Speaker 2

Particularly, don't know if there's

Speaker 8

anything you can break out of other expense and where that might trend going forward?

Speaker 4

Yes. We called out a couple of one time items. We prepaid $110,000,000 of long term debt that we don't need anymore and our borrowings. And then there were some employee severance costs and some other year end type of expenses as we prepare to invest for 2021. I would expect outside of the March that our expenses in the other three quarters in 2021 would be less than they were in this quarter.

So certainly under $80,000,000 outside the tax quarter.

Speaker 8

Okay. And I'm sorry, might have missed what you broke out of the other expense line, but is that more $19,000,000 as opposed to $15,000,000 $16,000,000 going forward? Or did you break out a onetime item out of that?

Speaker 4

Not well, what we called out for, again, in the earnings release and in the script was 1.7 prepayment penalties for paying down long term debt at the flub and then $1,500,000 of severance costs.

Speaker 8

Okay. All right. Thank you.

Speaker 6

Thank you. And our next question comes from William Wallace with Raymond James. Your line is now open.

Speaker 9

Thanks. Good evening, guys. Maybe just trying to think about some of the moving parts on net interest margin first. Could you, one, just break out what the purchase accounting accretion was in the quarter? What the expense savings will be from the FHLB prepay.

And then it looks like of the 110 basis points of pressure from the EIP deposits, it looks like as it stands at October 23, you're probably going to get about half of that back with the balances sitting at about $8.29 right now. Do you think that those deposits, do they go to zero? Or do you do they level out somewhere and then you start to deploy that liquidity elsewhere on the balance sheet?

Speaker 4

Hey, Wally, this is Glenn. The latter, we think the final tail they'll pay down another leg this quarter, but the final tail appears people are using them for savings account or certain folks are. And so we expect to have some level of those deposits throughout fiscal year twenty twenty one and we'll deploy them as we have opportunities with earning assets. Purchase accretion has that's run itself off, so we're not getting any more benefit from that. Think of that the Crestmark portfolio is primarily short term in nature.

So it might be a basis point left and that's about it from there. What was the third part of your question?

Speaker 9

The FHLB expense. Yes.

Speaker 4

So it's about a ten month payback. So we'll benefit all things being equal, save about $2,000,000 of interest expense next year.

Speaker 9

Okay. And then my follow-up question on the buyback. You said, I believe, that your appetite would be governed by your internal capital constraints. Any commentary you could provide around what capital levels would make a buyback unlikely or however you can frame the capital conversation? And then also are there any constraints at the holding company as it relates to just cash on hand to continue to buyback or you have plenty of opportunity to dividend up etcetera?

Speaker 4

Yes. No constraints at this time. And we've signaled on a our capital ratios will move around a little bit during the year, I. E. Tax season.

But on an average, we're going to be looking in the 9% leverage or north of that and 12.5%, 13% on risk weighted.

Speaker 9

Okay. Okay. All right. Thank you.

Speaker 4

Thanks, Wally.

Speaker 6

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Speaker 2

I'd like to thank everybody for joining the call today and I hope you have a great evening. Thank you so much.

Speaker 6

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may now disconnect.