Pathward Financial, Inc.
Q3 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Meta Financial Group Third Quarter Fiscal Year 2021 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, the conference call is being recorded. I would now like to turn the call over to Brittany Kelley Elsasser, Director of Investor Relations. Please go ahead.

[Brittany Kelley Elsasser:]

Thank you. I would like to welcome everyone to the Meta Financial Group conference call and webcast, where President and CEO, Brad Hanson; and Executive Vice President and CFO, Glen Herrick, will discuss the results of our third fiscal quarter ended June 30, 2021. Also participating in the call is Brett Pharr, Co-President and COO of MetaBank.

[Brad Hanson:]

Good afternoon, and thank you for joining our call today. Net income for the quarter was $38.7 million or $1.21 per diluted share, compared to $18.2 million or $0.53 per diluted share generated in the third quarter last year. Various timing items including tax season delays, additional card fee income from government stimulus programs and reduced provision drove the enhanced performance year-over-year. Year-to-date, net income was $125.8 million, a 37% increase compared to the prior year, driven primarily by the additional card fee income and net interest income from government stimulus programs, along with lower provisioning. Our results demonstrate how Meta’s mission of financial inclusion for all is creating value for all stakeholders, our customers, our employees and our shareholders. This mission is embedded in our vision to increase the availability of financial products that offer social benefit and produce economic opportunity for people. We empower individuals and organizations by expanding financial availability, choice and opportunity. We use our national bank charter to offer banking as-a-service or what we call sponsorship to fintechs and third-party providers, helping them access financial networks, navigate risk and compliance, and we monitor their activities to ensure quality, security and fairness across a number of relationships and a variety of products. One example of how we empower consumers is our sponsorship of Coinbase, a fintech company working to build the crypto economy. The Coinbase card issued by MetaBank in partnership with Marqeta is a visa debit card that allows customers to instantly convert any asset in their Coinbase point -- portfolio to spend at visa accepted locations earning rewards for each purchase. Partnering with Coinbase Meta helps to empower consumer with ways to manage and spend these emerging assets.

[Brett Pharr:]

Thanks Brad. Today I would like to provide an overview of our banking-as-a-service business lines, which encompasses our payments, tax services and consumer finance activities, along with our other mission supporting business Meta Ventures. Meta has been at the forefront of providing banking-as-a-service offering financial solutions to third-parties and fintechs, including regulatory and compliance services since 2004 when we signed our first prepaid sponsorship agreement. Years of experience along with substantial investment in compliance, infrastructure and people that positioned Meta well to partner with numerous third-party providers. Over that time, we have achieved significant scale and developed the user-friendly infrastructure that allows third parties to choose the solutions that work best for their business needs. We also expanded our solutions to include all facets of the payments ecosystem from issuing to acquiring in ACH and Faster Payments enablement. We have relationships with more than 30 processors and 21 credit and debit card networks, and we have launched over 9,000 prepaid and debit programs with over 50 program managers and payment service providers. Our tax services division works with the largest tax preparation companies in the country, along with thousands of small independent tax preparers to bring necessary financial products and services to the millions of hardworking people they serve.

[Glen Herrick:]

Thank you, Brett. And as Brett noted, GAAP net income for the quarter was $38.7 million or $1.21 per share, representing a year-over-year increase of 113% and 128%, respectively. Our strong revenue generation included growth in card fee income and refund transfer fees compared to the same quarter last year. Card fees benefited from increased activity related to government stimulus programs. Refund transfer fee income in this quarter was higher compared to last year, due in part to a volume shift from the second fiscal quarter because of delays in the 2021 tax filing season. As we wrap up tax season, we are pleased with the results, especially given that government stimulus programs reduced demand for the refund advance product. Year-to-date, pre-tax net income contribution from the tax business was up 19% compared to last year. This was largely generated by our new relationship with H&R Block and we expect overall earnings from our tax business to be up even further next year. A detailed breakout of net tax product income can be found on slide 13 of our quarterly investor deck.

[Operator:]

Sure, sir. Your first question comes from the line of Steve Moss with B. Riley Securities. Your line is now open.

[Steve Moss:]

Hi. Good afternoon guys.

[Brad Hanson:]

Hi, Steve.

[Steve Moss:]

Maybe just starting here with loan demand in the pipeline, you have seen improvements in commercial finance loan growth. I am kind of curious as to how the pipeline shaking out and what your thoughts are going forward there?

[Brett Pharr:]

Well, this is Brett. First, as we noted, there’s been a dramatic increase in our asset base lending and factoring, which if you think about as the economy ramps up that makes a lot of sense, because that’s the need in the pull for working capital. We had situations back a year ago where balances were dropping to half of available lines. Now the balances are coming back up to 85%, 90% of available lines, which is more abnormal. So seeing a lot of growth there, we have had new deal pipelines coming in there as well. Some of the term deals, we are still doing those, the rates obviously are lower and so that it’s highly competitive, but we are having good close there. So I would say, it’s a strong in some areas and moderate in others.

[Steve Moss:]

Okay. And where are our origination yields these days generally speaking?

[Brett Pharr:]

Well, I think the -- that’s a questions answered differently by each asset class. In factoring yields are 8%, 9% all the way to 12% or 14%, so pretty high. Some of our larger five-year equipment lease deals can be in the 4.5%, 5% range.

[Steve Moss:]

Okay. And then in terms of just the -- just on to the card fees here, just kind of curious if you guys have quantify how much of the card fees were stimulus related and just how do we think about that growth going forward?

[Brad Hanson:]

Yeah. Hi, Steve. It’s -- that that’s difficult to quantify as a cash is fungible and so many of these stimulus funds were loaded on our partner cards such as net spend or H&R Block, it’s really hard to differentiate was it driven by the stimulus or some other spending, especially the fact that we are seeing the balances go up. So there’s -- there are holding deposits, which does not generate fee income growth for us. So we wish we knew the exact answer there. But just don’t know what -- where that’s at.

[Steve Moss:]

Okay. And then, if I could just squeeze one last one in just in terms of expenses here, just kind of first quarter I think versus expectations, just kind of curious how we think about expenses now that tax is fully behind us for the third quarter?

[Glen Herrick:]

Yeah. So, I think, this was a good run rate quarter for us, plus or minus $80 million outside of tax season. You will see our biggest increase year-over-year was in compensation. Yeah, we have added employees, which is variable to support our growth. But the biggest increase in compensation was the change in incentive accruals for team members, where last year, we were taking haircuts due to the pandemic’s pretty significant ones, and this year we are accruing incentive accruals at more normal levels.

[Steve Moss:]

Okay. All right. Thank you very much for all that. Nice quarter. I will step back.

[Brad Hanson:]

Thanks, Steve.

[Brett Pharr:]

Thanks.

[Operator:]

Your next question comes from the line of Michael Perito with KBW. Your line’s now open.

[Michael Perito:]

Thank you. Good afternoon, guys.

[Brad Hanson:]

Hey. How are you doing?

[Michael Perito:]

Good. I wanted to spend a minute on slide 12 here. You guys kind of pull out the payments growth in BaaS revenue, 82% prepaid, 8% checking, 10% banking services. I am curious if you could maybe expand on how that’s trended over the last couple years. I mean is it fair to think that the dispersion amongst that is improving or maybe not improving, but just accelerating as your type of partners diversifies? And is that a trend you expect to continue going forward putting less kind of concentration around some of the prepaid legacy relationships?

[Brett Pharr:]

Yeah. I think so…

[Brad Hanson:]

Brett?

[Brett Pharr:]

I think as things that are evolving here, we are seeing more opportunities arise with, in the checking and core banking kind of products and then also in our like faster money. We have talked about those. So when you are looking at revenues you are seeing banking services increased. I think that should continue as well. So I think you are calling it right.

[Brad Hanson:]

Yeah. I would say, that’s on an absolute level. We would expect all of them to grow over time, but we would expect the checking and the banking services segments to grow faster.

[Brett Pharr:]

And that’s a good call out. And from a revenue perspective also the banking services are and most of this is heavily fee oriented as well, right? So, especially the banking services, so we are concentrating there pretty heavily.

[Michael Perito:]

And then it sounds like is it, the consumer finance, which sounds like it’s kind of lending focused on financial inclusion. I mean that sounds like it’s something that’s not necessarily new, but maybe new in the way you are selling it to your fintech partner. So is that another area where maybe the growth rate going forward could look stronger than what it was historically where I think most your consumer lending was just kind of referral through partnership, correct me if I am wrong?

[Brad Hanson:]

I think that’s an opportunity but I think that’s going to ramp-up over a longer period of time as we continue to develop those products and fill them into those other channels. We do have our partnership lending or consumer lending that we have been doing in the past and we have a pipeline there as well. So we may see consumer lending still be see some growth. But into the other channels you are talking about I think we will still take a little bit of time to develop.

[Michael Perito:]

Okay. Just two more for me quick one, just to ask the card fee question if you are not willing that to comment. But just -- it was quite a bit ahead of what I was looking for. I mean any indications, a third of the way through the third quarter here. I mean is it run rating at a lower rate than that? I mean just trying to get a sense of that quarterly run rate. I know it’s hard to kind of guide to where it could go and what the long-term growth rate is. But I mean, is it fair to assume that that should step down if we are trying to make conservative kind of base case here in the fourth quarter?

[Glen Herrick:]

Yeah. Yeah. Yeah. I think that’s fair, Mike, and Steve still on listening to that. A year ago our card fee income was around $21 million. We don’t think it was a core increase to $29 million here, but we would -- we don’t have exact numbers, but we do believe our core fee income business outside of stimulus likely grew double digits. I don’t know if that’s 10% or 18%, but perhaps, somewhere in that range.

[Michael Perito:]

Got it. No. That’s excellent. That’s very helpful. And then just lastly for me, I mean, obviously, it was a tremendous opportunity to partner with the treasury, but I am sure you guys are relieved to see the balance sheet kind of approach more normal levels again and capital go back off. I mean, last quarter your leverage ratio is 4.5%, by the end of the calendar year could be north of 10%. But it seems like we are approaching, if not -- pretty quickly approaching here a more normalized balance sheet and capital position, maybe you are a quarter or two out still. But just wondering, Brad, if you can just update us on, once that does happen, how should we think about capital deployment? I mean, the balance sheet shouldn’t really be growing a ton and what the fee and ROE generation you guys have, I mean you will be accumulating capital pretty quickly. Just was wondering if you would be willing to kind of refresh us on your thoughts there?

[Brad Hanson:]

Yeah. I mean, you are looking at the same things we are and capital is returning to more normal levels and we do set off a lot of excess capital over time. So, we are definitely looking at how to deploy those and we will probably use similar methods we have in the past.

[Michael Perito:]

So, I mean, definitely some buybacks would be a part of that equation?

[Brad Hanson:]

That’s a good possibility.

[Michael Perito:]

Okay. Excellent. Thank you, guys, very much for taking my questions. I appreciate it.

[Glen Herrick:]

Thanks, Mike.

[Brad Hanson:]

You bet.

[Operator:]

Your next question comes from the line of Frank Schiraldi with Piper Sandler. Your line’s now open.

[Frank Schiraldi:]

Hey, guys. Just wanted to ask...

[Brad Hanson:]

Hi, Frank.

[Frank Schiraldi:]

…trying to get a sense, I know it’s been asked already, but in terms of the fee income that the payments-related fee income and you noted that you guys were at $21 million a year ago. And I’d assume and ex-stimulus maybe you have got a double-digit run rate and you mentioned 18%. It’s tough to tell. But you have also inked some pretty big deals, some big partnerships over the last 12 months or so. And so I wanted, your guys thoughts on whatever that is 10%, 15%, should we expect that sort of core run rate to accelerate just given what the partnerships you guys have signed into the back half of the calendar year?

[Glen Herrick:]

Calendar year 2021. I am not so sure yet. These larger partnerships take a little time to ramp up to get the distribution out there. We have been very efficient at building the pipes to the partners, but it’s also how fast they build it on their interfaces on their side as well. So we have a really robust pipe pipeline, really pleased with the quality and the distribution that some of these new partners bring us and that’s how fast do they get market acceptance and start making headway in the market.

[Brad Hanson:]

And I think you still have a good upside potential on the ramp going into next fiscal year and throughout next fiscal year, some of the deals we have announced recently are going through the final stages of implementation and this coincide will start to ramp up. But as you can imagine once those things start to -- once they do ramp up, they start compounding on each other and continue to increase that growth rate.

[Frank Schiraldi:]

Okay. And then, I just wondered, I know you guys are, higher rates would be very welcome. Any updated expectations or thoughts on what you would expect to get in a given rate move, call it 50 bps or 100 bps, any updated thoughts there?

[Glen Herrick:]

Higher is better anywhere on the curve for us.

[Frank Schiraldi:]

Yeah.

[Glen Herrick:]

Is what I would say. Our liability side is still virtually fixed at zero. We broke out the distribution of our price resets for our loans and as we add new ones. And so anywhere across the curve is helpful, but no, we haven’t guided on a specific rate scenario.

[Frank Schiraldi:]

Okay. And then just lastly in terms of the, I guess, re-risk weighting of some of the loans, any -- does that, obviously, I recognize and you point out that it doesn’t reflect any deterioration in the portfolio. But just wondering if there is any other impact to operations, such as any change in risk appetites for certain loan categories and any changes to things like FDIC assessments?

[Brett Pharr:]

Yeah. So this is Brett. So none of the above. And I think the key point here is, there’s no change in our underwriting approaches here. We already had solid underwriting. Administratively there’s some procedure changes on how we will monitor on an ongoing basis and no it doesn’t impact any kind of an FDIC charge. So I -- this is truly an administrative change to sort of get us more aligned with where our regulators want and looking at applying these standards to our loan portfolio.

[Frank Schiraldi:]

Okay.

[Glen Herrick:]

And Frank, this is Glen, I would add -- yeah, thanks, Brett. If you look and you will see in our earnings release our past dues are actually down on a linked-quarter basis. And so this doesn’t change our expectation for the portfolio. We didn’t increase the allowance. We didn’t take additional provisions. So it doesn’t change our outlook at all nor have we changed our underwriting. This is the same underwriting that we have structurally been doing.

[Frank Schiraldi:]

Okay. All right. Thank you.

[Glen Herrick:]

And as Brett says, there is OCC guidance on how to manage these portfolios and manage this process for commercial loan portfolios and we are just trying to make sure that our program is fully aligned with their guidance.

[Frank Schiraldi:]

Thanks.

[Operator:]

Your next question comes from the line of William Wallace with Raymond James. Your line is now open.

[William Wallace:]

Thanks. Most of my questions have been answered, but as a follow up to the last line of questioning. I am just curious with some of the shifts in the risk rating. I would have anticipated that just the function of the plugging in the new risk rating into the fast five models you would have seen your reserve levels had to go up?

[Brad Hanson:]

Well -- yeah. Hi, Will. It’s depends on what your expectations are at each risk rating level and there’s no one size fits all for that. And again that was all looked at, reviewed and we are more than comfortable with the allowance levels we have today.

[William Wallace:]

Okay. And what was the genesis of this kind of decision?

[Glen Herrick:]

Well, I think, I mentioned. It’s just making sure we are aligned with the OCC’s guidance for commercial lending practices and portfolio management practices. And so we are just trying to make sure we are aligned with their guidance and in doing that -- I mean, here’s the thing, their guidance, primarily focuses on things like cash flow analysis and financial performance of the borrower. We take an approach where we look at our cap -- our collateral and manage our collateral very closely. And so when you take that different analysis, for example, you could have a lease that was making payments on time for several years and because the underlying company -- even though they have never missed a payment, the underlying company is stressed financially a little bit, could fall into one of these other categories. That doesn’t mean we expect there to be an increase in loss on that, an increased chance of loss on that specific lease. But we are using those other more, I guess, typical commercial lending methodology going forward to do these. That’s why we say it’s going to set a new base line and then we will start measuring off of that. But I don’t -- that we don’t expect to fall out at the end to be any greater than it has been all along.

[William Wallace:]

Okay. All right. Great. Thank you for that. Okay. I hate to do this, but in the interest of really beating a dead horse, with the payments revenue, you mentioned that, the balances are increasing on a lot of the partner’s cards and the spend is increasing, which is driving the fees higher. I mean, is it safe to assume that the decline to whatever the base line is going to be gradual or do you anticipate that that decline could happen in, say, the September quarter or the next one or two quarters?

[Glen Herrick:]

I would expect it to be gradual. The child tax credits are out there now and we are -- those are not issued -- the child tax credits that had been authorized for calendar year 2021, these six months, none of those were issued on our debit cards. However, same issue, our partners that have GPR card programs and our consumers use them as their main checking account, they are getting the child tax credits. And so we are going to continue to see tailwinds through the rest of this calendar year then we will see what the feds do for -- what Congress does for 2022 from there.

[William Wallace:]

Okay. Okay. All right. This is kind of an esoteric question you probably not to be able to answer, but there was some press recently about a letter written to the CFPB about looking into Chime’s closure of accounts. I am curious if you can talk about the -- yeah, the decision matrix around, looking at these accounts and the decisions to close them. And does this have any impact or could this have any impact on Meta, the current kind of ?

[Brad Hanson:]

We did not issue Chime and don’t have any specific information into their -- what they are looking at or how they are managing that. But we do monitor all those kinds of activities against our portfolio and make sure that we are in compliance with all required regulations and we believe that we are.

[William Wallace:]

Thank you very much.

[Operator:]

And that concludes the Meta Financial Group third quarter fiscal year 2021 investor call. Thank you.