Pathward Financial, Inc.
Q1 2021 Earnings Call Transcript

Published: 27 Jan 2021

[Brittany Elsasser:]

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, Glen Herrick will discuss the results of our first fiscal quarter ended December 31, 2020. Also participating in the call is Brett Pharr, Co-President and COO of MetaBank. Additional information, including the earnings release and investor presentation maybe 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.

[Brad Hanson:]

Thank you all for joining Meta Financial’s first fiscal quarter year 2021 earnings call. It’s my pleasure to discuss our strong results achieved in the first fiscal quarter. I want to start by acknowledging our excellent team and thank our employees for generating these results while dealing with the challenges of the pandemic and serving our customers remotely. Compared to the same quarter last year, revenue was up 9% to $111 million, net income was up 33% to $28 million, and earnings per share was up 50% to $0.84 per share. Our focus on improving our efficiency ratio resulted in improvement of 6 percentage points to 62.2% over last year, which was achieved without any COVID related layoffs or salary reductions. Our loan portfolios continue to perform well. Non-performing loans and leases as a percentage of loans and leases for commercial finance were 86 basis points, the lowest level in over a year and a half. As Brett will discuss, we remain focused on the hospitality and movie theater loans in our legacy Community Bank portfolio as well as our small ticket leasing and finance relationships in our commercial finance division and we stay in regular contact with those borrowers. Due to our conservative approach to wrapping up provision during the early days of the pandemic, we believe that current reserves are adequate to withstand projected losses in the existing portfolio. The effects of government stimulus programs have had a significant impact on our balance sheet. These programs included the Paycheck Protection Program loans, economic impact payments, or EIP, and enhanced unemployment benefits that flow through to existing card programs. Total average payments divisions deposits, including stimulus funds associated with EIP programs, were up 83% year-over-year. While it’s not possible to determine the exact amount of the deposit growth associated with government stimulus programs, our analysis of our deposit base, including several large programs that we moved over from other banks during the year lead us to believe a more realistic run-rate would be somewhere in the mid-teens excluding any stimulus related impact.

[Brett Pharr:]

Thank you, Brad. Today, I will share some updates on a few of our business lines not yet covered, starting with commercial finance. At December 31, commercial finance loans made up 70% of the company’s gross loan and lease portfolio and totaled $2.42 billion, a 5% increase from the linked quarter. We saw solid growth in term lending primarily related to our solar lending business and strong asset based lending originations. During the quarter, our solar credits balance increased 29% from last quarter to $323.9 million. While we have a strong pipeline, we expect that we could see a slowdown in asset-based lending and factoring as a result of the second round of PPP loans reducing temporary demand for funding. From a credit perspective, we continue to closely monitor each of our lending portfolios, paying significant attention to our legacy Community Bank hospitality and movie theater loans as well as our small ticket equipment finance relationships in the Crestmark division. Our credit management team has remained in regular contact with these borrowers and we feel comfortable with the level of reserves and collateral in place on these credits. Our legacy Community Bank portfolio balances continued to decline as the portfolio winds down. The portfolio is performing well and we have not experienced any further deterioration as such. We believe our credit metrics demonstrate the company’s ability to weather the worst of the pandemic.

[Glen Herrick:]

Thank you, Brad and good afternoon everyone. Total revenue for the fiscal 2021 first quarter was $111 million, an increase of 9% compared to the same quarter last year. The increase in revenue benefited from the previously disclosed $5 million loss from the sale of foreclosed property during the last year’s first fiscal quarter related to a legacy Community Bank agricultural relationship. Revenue also benefited from the receipt of $3.5 million from a portion of the company’s liquidation insurance claims of unearned premiums on the ReliaMax estate related to our student loan portfolio. In June 2018, we announced that we have received written notification of the ReliaMax’s solvency and that we expect it to recover a portion of the unearned premiums.

[Operator:]

Our first question comes from Steve Moss with B. Riley Securities.

[Steve Moss:]

Good afternoon. Just was stopping on the low yields here, pretty stable yields for your commercial finance business kind of curious how the pricing environment is there and just the activity you are seeing?

[Brad Hanson:]

Yes, this is Brad. I will jump in here. Obviously, rates are moving down and our assets have a fairly short duration. So we are feeling some price pressure, but remember the kind of assets that we go after tend to have a higher yield. So yes, there is some price pressure, there is lot of liquidity in the market. We are not chasing a down market, but we are still holding our own pretty well.

[Steve Moss:]

Okay. And then with regard to expenses for your coming quarter, obviously, big quarter for tax just kind of curious as to how we think about total expenses in the upcoming quarter?

[Glen Herrick:]

Hey, Steve, this is Glen. Yes, as always, our fiscal second quarter, the March quarter is our highest expenses. A lot of those expenses are above our run-rate are variable in nature. So it depends on the volume of tax season as well. But so they could go to $95 million, $100 million, but where it settles in that, will also correlate with revenues.

[Steve Moss:]

Okay. That’s helpful. And just one last question for me here on fee income, you guys talked about it becoming a greater percentage of revenue as the year goes on. Just wondering if you could expand on that and how you are thinking about that percentage growing throughout the year?

[Glen Herrick:]

Well, we have announced several times about our faster payments initiatives and our acquiring business that we entered into during the last year, which is starting to ramp up as well. So, we have a number of those kinds of transaction related businesses that we have gotten into that will be ramping up over the next couple of years and that will be increasing our fee income. Now, if interest rates go up again and interest income goes up along with it, those ratios could be more or less depending on those factors, but if interest rates stay the same and our portfolio kind of hangs in where it is, then I think you will see an ever increasing percentage of fee income over time.

[Steve Moss:]

Alright. Well, thank you very much for that good quarter.

[Glen Herrick:]

You bet.

[Brad Hanson:]

Thanks, Steve.

[Operator:]

Thank you. Our next question comes from Michael Perito with KBW.

[Michael Perito:]

Hi, good afternoon, guys. Thanks for taking my questions.

[Brad Hanson:]

Hey, Mike.

[Michael Perito:]

I had kind of a conceptual question, Brad you mentioned some of the ESG and financial inclusion themes that are kind of driving the Meta strategy and frankly happened for years. So I performed a lot in those processes and whatnot. But I guess as we think about the prepaid card business, it’s hard to not look at some of the other, if you put on the slide deck, the neobanks or digital challenger banks or things of that nature kind of going after the same part of the pie here. And I am curious if you have any kind of longer term views about the growth play and viability of the prepaid businesses, there is no digital disruption from banking alternative software. And I guess as we think about specifically to Meta, I mean, is it fair to think that with your representation on both sides that you don’t really expect much of an overall impact to kind of how your business grows or do you think there is room for growth rates to kind of shift as you know time evolves?

[Brad Hanson:]

Well, the neobanks generally don’t have a banking charter and they partner with other banks in order to implement those programs. That’s really what we do is support those guys. Brett highlighted MoneyLion and the RoarMoney product, which is a checking account product. So, that’s an example of us facilitating those kinds of opportunities in addition to prepaid, so I don’t think we are just pigeonholed in prepaid first of all. Secondly, I think prepaid is a broad category. There are a lot of niche applications of prepaid. And if you think about the rebate cards, the loyalty and promotion cards, the gift cards, how it’s used for certain other categories, like FSA products and benefits and things like that there are lot of niche categories that will continue to grow in prepaid. And then finally, even at – within some of the prepaid reloadable categories, they are still very – operating very strong and we are seeing growth in a number of those programs, but also the payroll card programs, which are beneficial to employers. So, there are lots of opportunities within prepaid. There is lots of opportunity for us with the neobanks and the fin-techs that are out there for us to support their programs and partner with them. And I think the industry and the category is very broad, so have no concerns about competitive pressures at this time.

[Michael Perito:]

That’s very helpful. And I think last I checked, there is maybe a couple dozen of banks that one way or another are kind of in this embedded finance or banking as a service arena. I mean, have you noticed any change in the competitive landscape as far as kind of the amount of other banks looking at deals you are looking at or has it been relatively steady for you guys and I know you have been doing it for a long time, but just curious if that competition has really noticeably changed at all over the last 12 to 24 months?

[Brad Hanson:]

I am not seeing any competition noticeably change in the last 12 to 24 months. In fact, I have seen opportunities increasing in all categories.

[Michael Perito:]

Great. I also wanted to talk about the capital I saw in the release that you guys are getting some temporary relief because of the EIP and the impact on capital. I was just curious if you could comment, if at all, if any, there is an impact on kind of your appetite near term for share repurchases? And is it fair to think that either way coming into tax season here, when the balance sheet is typically a bit more levered that buybacks are likely not going to be quite as robust near term, but longer term, we should still view them as a piece of your capital deployment strategy.

[Brad Hanson:]

Glen, you want to take that?

[Glen Herrick:]

Yes, again, we talked about keeping our balance sheet outside of the temporary EIP impact, keeping the balance sheet in that $6 billion, $6.5 billion range for quite some period of time. The returns we expect to generate, we are going to generate a lot of excess capital. And we will look at all those options certainly share repurchases will be a part of that.

[Michael Perito:]

Okay. Excellent. Thank you, guys. I appreciate it.

[Brad Hanson:]

Yes, thank you.

[Glen Herrick:]

Thanks Mike.

[Operator:]

Our next question comes from the line of Frank Schiraldi with Piper Sandler.

[Frank Schiraldi:]

Hi, guys. Good afternoon. I was wondering if you could give any color or thoughts on the tax season so far especially given just how unique the environment is and things like greater flexibility and earned income tax credit in terms of filers using either ‘19 or ‘20 income, I would imagine overall the increased payout and more potential for refund of that, any thoughts are there if you could also?

[Brad Hanson:]

Brett, do you want to start with that?

[Brett Pharr:]

Yes. So, we enter every tax season with a set of very experienced people. We are probably more prepared for this season than we ever have. And just as you go through it, it seems like every season has its unique attributes. So, I don’t know that we can predict in any way, but we are all prepared for it whatever it’s going to entail.

[Frank Schiraldi:]

Okay. So no change to thinking on our previous guidance on expectations on that front at this point?

[Brad Hanson:]

I think the industry overall actually thinks that there will be some delay just IRS, deferred, the start of the tax season and the processing. So I think we will see some delay, but I think the industry overall thinks it will be pretty consistent yet. Now, that’s to be seen, we won’t know until we get into the season and start to see how people are reacting to all these changes.

[Frank Schiraldi:]

Thanks. And then I am wondering if you could just talk about the continued reduction in the community banking block and I would imagine the stuff that’s moved off the book has been maybe more risk categories that also the opportunity to maybe sell some stuff out in the higher risk categories given significant reserves you have taken against that?

[Glen Herrick:]

Hey Frank, it’s Glen. I would necessarily classify it as lower risk. All the loans have been sold to central bank thus far or refied away. And so central banks were considered relationships that they want to prioritize long-term as they have capacity on their balance sheet. Now, clearly, they are being very cautious about the hospitality in the theater loans we have. But it’s not a – it will not necessarily be on that left with an adverse selection. And yes, that portfolio eventually gets to zero one way or the other, but right now, we feel good about the loans that we do have on our balance sheet and those that we are watching closely, we feel good about the reserve levels that we have against them.

[Frank Schiraldi:]

Yes. And as far as I know, you talked about the specific reserve against this – the movie theater relationship that went into non-accrual. And I know you give the reserves to total community banking, but can you give the reserves against the movie theater and hotel book in total, I don’t know if I missed that in really?

[Glen Herrick:]

Well, we, the theaters are reserved at approximately 50% and I don’t know, we haven’t provided the hospitality allowance.

[Frank Schiraldi:]

Got it. Okay. And if I could just sneak in one final one in terms of the strength, the solar business, any expectation or changed expectation on the tax rate for the year?

[Glen Herrick:]

Yes. If the solar pipeline is strong, we also worry about our taxable earnings pipeline is strong and so low double-digit tax rate is we are thinking today. As Brad mentioned, a lot of our annual results, including the amount of taxable income will depend on how well tax season goes.

[Frank Schiraldi:]

Alright. Okay, thank you.

[Glen Herrick:]

Thanks, Frank.

[Operator:]

Thank you. Our next question comes from William Wallace with Raymond James.

[William Wallace:]

Good evening. Thanks for taking my call. I was wondering if you could just kind of help us think about how you might think your reserve to loan ratio might move under CECL as the year progresses under the expectation that we start to get greater visibility into an economic recovery and not – we don’t start to turn the other way?

[Brad Hanson:]

Sure. Yes, so we are assuming the economy improves or doesn’t get worse from here, plateaus and/or starts improving later in the year, then we would expect our loans to come down.

[William Wallace:]

Okay.

[Brad Hanson:]

Now, as a percentage of the qualitative allowance, as we re-shift our balance sheet, our earning assets into more loans and hear our securities, the absolute allowance will depend on the mix of loans versus securities. But on a qualitative basis, we would expect a further improved economy and/or past the health crisis by the end of the year, we would expect lower allowance ratios?

[William Wallace:]

Okay, alright. Thank you. If I looked at some of the niche commercial lending businesses, a couple of them have seen some nice bounce back in growth here in the last quarter or two. Wondering if you can talk a little bit about what you are seeing in the commercial lending business and what your expectations for growth might be at this point?

[Brett Pharr:]

Yes, right. So we kind of talked about this before during the time of economic stress. Some of the commercial borrowers are either run out of or have too much trouble with their traditional lenders and they moved to more of the working capital line arrangement. So we have been the beneficiary of some growth in some nice transactions in asset-based lending and factoring that has come back. Also, I mean, if you just kind of look at the pure numbers, when COVID hit and also with the PPP payments that occurred for our clients, many of the same client borrowings dropped earlier. So, some of that has come back quite a bit. So, that’s really where you are seeing some good growth in those arenas. And we would expect that as we as we look forward and as I mentioned in my comments, depending on how many of our clients get the second round of PPP loans, we may see some softness there for a short period of time. But as you know, the economy comes back and we have a pretty good pipeline, we should be able to build those asset classes more.

[William Wallace:]

Okay, alright. Thanks. And that’s actually a good segue to another question I had, which was regarding the second round of PPP with the portal now open. Just about a week, where are you in application so far and maybe what are your expectations for what the value might end up just go around?

[Brett Pharr:]

Yes. Team has to help me if we would actually disclose anything. But what I would tell you is that there are some tests to get into the second round the most material of which is a 25% drop in revenue over linked quarter. And many of our clients are not able to meet that test. So, that’s sort of good news, bad news. But I would say that at this point the volume would be off from what it was the first round.

[William Wallace:]

Okay. Not willing to maybe quantify that. It seems like from a lot of the banks that have been reporting some have suggested maybe as much as 50% but others have thought that it could come in closer to 20% 30%. Do you have a sense to maybe within that range or it’s not?

[Brett Pharr:]

I would say that 50% is a directionally correct number to kind of work with.

[William Wallace:]

Okay, okay. Thanks. And then just a housekeeping question as it relates to PPP, can you give us the net interest income impact or the net interest margin impact from the program in the first quarter?

[Glen Herrick:]

It’s just a couple of basis points from PPP. It’s really our impact on net interest margin is far outweighed by the impacts of these EIP deposits.

[William Wallace:]

Yes, yes. And so that’s actually that I’m looking at my model and thinking that trying to forecast that net interest margin might be a meaningless exercise with all of the noise. Maybe...

[Glen Herrick:]

It’s going. Yes, NIM is going to be noisy throughout the rest of 2021. And so a cleaner ways just probably to start with the loan balances and where those go and the securities balances and build from there we’re going to hold a big chunk of the EIP direct stimulus in cash. So that’s going to be sitting there just earning ten basis points.

[William Wallace:]

And I am wondering now the rate of decline in the first round of EIP has slowed pretty dramatically here in the last, it looks like 3 to 6 months. And what’s the decision matrix as to whether or not it makes sense to take some of that cash and move it into the bond portfolio maybe later it or keep it all short and pick up a few extra dollars in net interest income if you have to keep it how are you thinking about that?

[Glen Herrick:]

Yes, a number of factors in there, Wally. So, a lot of the lot of deposits that you see hanging around from the first stimulus last spring, are still cards that have been un-activated. And so we continue discussions with our partners on that program. And when the plan was rushed out I don’t think Congress ever anticipated that folks wouldn’t actually take the money and use it. So, those discussions continue and as well as some of our regulatory waivers on leverage ratios call for us to keep that in cash which is why our risk-based ratios aren’t moving. So, that said we do have excess liquidity. We are looking at options in securities and other ways to use that powder. That being said we also don’t want to lock in too much interest rate risk but we will deploy some of it.

[William Wallace:]

Okay.

[Brad Hanson:]

And I would just state that the un-activated cards are still activating from last May’s release of cards. So we are still seeing some activations on a daily basis albeit small and at some point if that slows down or stops altogether one of the considerations is that money if it never does get accepted we don’t get it. We have to give it back to the government. So, we don’t want to tie that up too long-term.

[William Wallace:]

Understood. Yes, thank you. That’s all I have. I appreciate your time. Thank you.

[Operator:]

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