Pathward Financial, Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Apr 2021

[Operator:]

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

[Brittany 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 second fiscal quarter ended March 31st, 2021. Also participating in this call is Brett Pharr, Co-President and COO of MetaBank.

[Bradley Hanson:]

Thank you for joining Meta Financial Group's second fiscal quarter 2021 earnings call. MetaBank once again had good results in the second quarter with net income up 13% to $59 million and earnings per share up 27% to $1.84 per share compared to the same quarter last year. During the quarter, we were able to further our mission of financial inclusion by serving as a financial agent for the U.S. Department of the Treasury's Bureau of the fiscal service as the issuer of prepaid debit cards to consumers for economic impact payments, or EIP. In total, we have distributed $24.2 billion in stimulus funds since this program was initiated in April of 2020. This work is core to our mission, and we are honored to be able to serve as an efficient means of distributing these funds to millions of our fellow citizens. We are also pleased for the opportunity to act as an originator for Paycheck Protection Program, or PPP, loans, where we helped save over 18,000 jobs and assisted nearly 700 businesses. Our PPP loans through rounds one and two totaled over $300 million on behalf of businesses in 38 states. The connection to our mission is clear, and more than 31% of the businesses held were in Community Development Financial Institution, or CDFI, zones. Tax product revenue was up 17% in the quarter over last year but came in below our expectations. Refund advance originations were $1.8 billion this year compared to $1.3 billion in the 2020 tax season. We believe overall demand for refund advance loans was tempered by the excess consumer liquidity created by federal stimulus payments that coincided with this tax season.

[Brett Pharr:]

Thanks, Brad. As of March 31, gross loans and leases were $3.65 billion. Commercial finance loans made up 69% of the company's gross loan and lease portfolio and totaled $2.51 billion, a 3% increase from the linked quarter and a 24% increase year-over-year. The increase in commercial finance loans from the linked quarter was primarily due to increases in SBA/USDA loans and lease financing of $31.2 million and $24.4 million, respectively. As part of our lending strategy, we provide permanent debt financing via United States Department of Agriculture guaranteed loan programs. A majority are back by our purchase agreements with highly rated large public utility providers and low loan to values. We also benefit from the tax advantages in renewable energy, which flow through the income tax expense line item, contributing to higher overall returns. We originated $20 million in solar leases during the fiscal 2021 second quarter compared to $17.6 million during the same quarter last year.

[Glen Herrick:]

Thank you, Brett. For the quarter, we produced revenue of $187 million, down 1% compared to the same quarter of the prior year. However, revenue in fiscal 2020 and benefited from the $19.3 million gain on divestiture of the Community Bank division. Excluding that onetime event, we generated promising year-over-year revenue growth from our payments and tax businesses. Revenue was supported by tax advanced product fees and payments fee income, which grew 51% and 29%, respectively, compared to the same quarter of the prior year, offset slightly by a decrease in refund transfer product fees. As Brad mentioned, we expect to see some refund transfer-related income shift in the third quarter as a result of the delay in extension in the 2021 tax season. Net interest margin decreased to 3.07% for the second fiscal quarter from 4.78% last year, largely driven by excess cash associated with the company's participation in the EIP program. Absent the inflated cash balances, which better reflect the impact from the stimulus programs, we believe NIM would have been 5.29%, which we consider to be more reflective of a normalized net. We saw improvement in loan mix that we believe will continue to drive strong margins, absence continuing stimulus programs. Fee income represented 47% of revenue for the trailing 12 months, while payments fee income benefited from the inflow of deposits related to stimulus programs. We believe it temporarily reduced demand for certain tax services products. As Brad mentioned, tax product revenue was up 17%. While the results are promising, this was below our expectations as we believe the demand for the refund advance product was negatively impacted by the excess liquidity associated with the stimulus payments. We expect demand to return to normalized levels for the 2022 tax season, absent further stimulus.

[Operator:]

Thank you. Our first question comes from Frank Schiraldi with Piper Sandler.

[Frank Schiraldi:]

Yes. How are you doing?

[Bradley Hanson:]

Hi, Frank.

[Frank Schiraldi:]

Just wanted to start with, Glen, the big increase in the payments card and deposit fee line. Can you give any color on what the impact was from either the H&R Block relationship or maybe seasonality there? And kind of any color on where that could trend in the near term on a year-over-year or linked-quarter basis?

[Glen Herrick:]

Yes. So a couple of things going on with the payments fee income line. One is, clearly, we had H&R Block that we didn't have a year ago. And the other contributing factor, as we called out, was additional fee income from our participation in the stimulus programs. And so some of that is temporary and is offsetting what we think is a lower demand for certain refund advance loan. And so likely, some of that will go away a year from now, absent continuing stimulus.

[Frank Schiraldi:]

Okay. And is it also quite seasonal because of the H&R Block, so that we should continue to look at it year-over-year and apply some changes…

[Glen Herrick:]

Yes, there will - yes, you should expect payments income - payments fee income now with our card relationship with Block to have - to be higher in our March quarter because of that seasonality.

[Frank Schiraldi:]

Okay. And then just lastly, I wondered if you could talk a little bit about the EIP deposits and then moving them off-balance sheet. And what those agreements look like? How that benefits Meta and - other than just moving them and reducing balances? And is that maybe sort of a helpful template for the future as you continue to think about optimizing the balance sheet?

[Glen Herrick:]

Yes. I think that's a good observation. Demonstrates some of our capabilities that we had or have now put in place to manage our balance sheet and also to develop strategic partnerships not only with distribution channels, but also with other larger financial institutions.

[Bradley Hanson:]

And Frank, we work closely with outside counsel and our regulators in order to develop a solution in order to achieve this.

[Frank Schiraldi:]

Okay. I mean, does it provide some fee income? Or is it - do we get something through the margin related to these agreements?

[Bradley Hanson:]

At this point in time, it's just a balance sheet management tool.

[Frank Schiraldi:]

Got you. Okay. Okay. Thanks, guys.

[Bradley Hanson:]

Thanks, Frank.

[Operator:]

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

[Steve Moss:]

Good afternoon.

[Bradley Hanson:]

Hi, Steve.

[Steve Moss:]

I guess maybe just starting on - with regard to loans here. Good quarter for loan growth. Just kind of wondering how you guys are seeing things on the commercial financing side in terms of pipeline, pricing, and where things can go?

[Brett Pharr:]

Yes. This is Brett. I'll jump in there. The pipeline is improving, I think. While it's not been as dramatic, we've seen some movement in asset based lending and factoring, whereas you go through a difficult time, and people get their end of year financial statements and they look at loan covenants, they have to look for alternative types of financing. So we're seeing some of those transactions, probably not as much as I might have anticipated, but we're seeing them and that's allowing for some growth. The pricing, depending on where you are on the product type, can be under tremendous pressure. And so certainly, in our equipment leasing to the Fortune 1000 type companies, heavy, heavy pricing pressure there, whereas in the asset based lending and factoring, not nearly as much pricing pressure that we're experiencing.

[Steve Moss:]

Okay. That's helpful. And then just in terms of maybe going back to card fees here. You guys announced a couple of partnerships in the quarter and a good pipeline. Just kind of any color as to how we should think about fee income growth. And I don't - I'm not sure about depository, just given the IP noise that we have there. But maybe just how to think about fee income growth and where that could trend over the next 12 months?

[Glen Herrick:]

Yes. So those larger programs take some time to ramp up. And so as we work with those - our partners, you will see it ramping up over the next year.

[Steve Moss:]

Okay. All right. And then in terms of - one last one for me, just in terms of the reserve and credit, still pretty healthy reserve even when I back out tax. Kind of curious as to what the potential is for reserve releases or r any thoughts around that.

[Glen Herrick:]

Yes. We feel very comfortable with our current allowance given what we see in the portfolio across all our various loan portfolios. And we'll continue to monitor that for the appropriate reserve levels going forward. But we feel we're well reserved at this time.

[Steve Moss:]

All right. Thank you very much.

[Glen Herrick:]

Thanks, Steve.

[Operator:]

Our next question comes from Michael Perito with KBW.

[Michael Perito:]

Hey. Good afternoon, guys. Thanks for taking my questions.

[Glen Herrick:]

Hi, Mike.

[Michael Perito:]

Glen, I was wondering, just really a few of my questions have been asked and answered, just a couple of clarification things. The 5.29% margin adjusted. Can you just go through again what exactly you're backing out? Was that just the kind of excess cash? Or was there any other adjustments you were making on that…

[Glen Herrick:]

Yes. Correct. Just as a directional placeholder, we backed out the cash that is sitting on our balance sheet. And so that's probably a few basis points high because we'd likely - from quarter-to-quarter, we do carry some cash. But that's something that we can reconcile to these deposits, especially at the indirect EIP deposits at our partners. It's - you can see the inflow, but it's hard to tell what's remaining. Is it still $600 from their stimulus program or is it still from their weekly paycheck as those funds are fungible.

[Michael Perito:]

Right. And I guess that's kind of the next question here. I mean, the whole industry, right, is kind of wrestling with this excess liquidity in the system. And obviously, I don't expect you guys run with $4.2 billion of average cash going forward. But any sense of what that number might look like as we think about the near term forecast here? I mean, can it be kind of like $1 billion plus or minus? Or any kind of context or additional thoughts you want to provide on that?

[Glen Herrick:]

Yes. In the remainder of fiscal year - our fiscal year '21, it could certainly be $1 billion. We think it will - there will be a nice ramp down by the end of June from where we're at today. We'll deploy a little bit of that cash, certainly. But we do expect it to run off.

[Michael Perito:]

Okay. Just a couple more quick ones for me. One, just on the tax rate. I mean any additional thoughts you can provide on the pipeline of other kind of solar investments and that can impact the tax rate? Or any sense of where that might move over the rest of the fiscal year here?

[Glen Herrick:]

Yes. No, we have a strong pipeline. Brad, anything you want to highlight there?

[Bradley Hanson:]

Yes. I think we can do all we want to do. There's plenty in the pipeline, in the niche we try to serve and even longer term, considering the current administration, we expect that to continue to be a good business for some time.

[Michael Perito:]

So fair to think the tax burden should be pretty modest going forward near term based on the pipeline you see today?

[Glen Herrick:]

Yes.

[Michael Perito:]

Okay. And then just lastly, maybe Brad or Glenn, any thoughts, you mentioned the trailing five quarters, I think, 63.6% on the efficiency. Obviously, a decent amount of time here now below the prior target. With H&R Block on now and some of the other growth avenues you guys have, I mean, are you at a point where you're willing to provide some updated thoughts around the efficiency ratio moving forward or anything else you're willing to share there?

[Glen Herrick:]

Yes. What I would say is, it depends, as we've talked before, on the mix of business lines, our non-credit business lines as is typical across the payments industry, tend to have a higher efficiency ratio because you don't have provisioning or credit risk. But that said, we continue to work on positive operating leverage, improving efficiency levels at every business. And I would also note that these last six months with all the stimulus money, we've had some very high efficiency earning asset revenue. If you think of a lot of cash sitting and earning 10 basis points at the Fed, that's a really high efficiency ratio for that - those earnings as well.

[Michael Perito:]

Helpful. I guess just - it's fair to think, though, I mean, obviously, the 65%, I mean, in the current rate environment, I mean, if there were to be some positive change on the short term rate environment, I mean, there would be no offset or nothing you could think of. I mean there would seem to be a little - certainly, some upside to that range. I mean is that directionally consistent? Or is there anything else we should be thinking about?

[Glen Herrick:]

Yes. Yes, higher rates will be positive.

[Michael Perito:]

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

[Glen Herrick:]

Thanks, Mike.

[Operator:]

Our next question comes from William Wallace with Raymond James.

[William Wallace:]

Hi. Thanks for taking my question. I wanted to ask about the tax business. Your commentary was that, I believe you expect to see some revenue shift into the fiscal third quarter from the second quarter, we're talking specifically about the transfer product fee line, right?

[Bradley Hanson:]

Correct. That’s true.

[William Wallace:]

Okay. And that - if I combine your fiscal second and third quarter, so you anticipate that would be near where you were last fiscal second and third quarters on an all-in…

[Glen Herrick:]

Yes, correct.

[William Wallace:]

Okay. And then if I look at the tax advanced product fees, those were up 50% year-over-year. Was there anything that was going on that was - you think might be impacting behavior as it relates to stimulus that would have that be so meaningfully higher? Or do you think that - is it possible that you were anticipating that maybe the transfer product fees could have been that much higher as well?

[Bradley Hanson:]

Wally, that is all the addition of our Block relationship. We actually expected advance fees to be higher this year with the Block relationship, but the liquidity that came from stimulus payments to consumers at the same time that they would normally get refunds, we believe, tempered the demand for those products. So we actually think it was lower than we expect on a normalized year. Absent additional stimulus, as we mentioned, we would expect that to normalize again next year.

[William Wallace:]

Okay. And that's so - so the advantage product fees, the transfer product fees didn't benefit as much from H&R Block?

[Glen Herrick:]

Yes, that's correct. Different structure and economics in that business.

[William Wallace:]

Okay. Okay, thanks. And then if I could circle back to previous line of questioning about the transfer of cash that some of these relationships. Am I interpreting, what you said, correctly when I think that you said you worked with regulators in an outside council, basically, you found financial institutions who were willing to help you out? This isn't indicative of the ability to manage the balance sheet by sweeping that much cash in a short period of time in future periods. Is that fair?

[Bradley Hanson:]

I'm not sure I understood your question. Did you say - can you ask it again?

[William Wallace:]

Yes. So are you setting up relationships now that could be beneficial as you're looking to manage the balance sheet in future periods?

[Bradley Hanson:]

Yes.

[William Wallace:]

Sweeping cash off the balance sheet? Or was this just temporary arrangements to help you out for all of the cash that you took in a short period?

[Bradley Hanson:]

There is a little bit of both. We developed the process and structure in order to accomplish that. We also identified short term relationships that would help us with the specific EIP program issues we were having, as well as some - hopefully, some longer term relationships that we think will help us into the future.

[William Wallace:]

Okay. Thank you very much. And then one other circle back on the questions regarding the model and the reserve levels. I think it might be an understate to say you're adequately reserved right now as the economic forecasts likely continue to improve, it's probably going to be hard to keep the CECL model from wanting to put a greater amount of reserves back. Is that true? Or do you have a lot of room on the key factors?

[Glen Herrick:]

No. No. I think that's fair. Obviously, some of it will depend on new loan growth as well if you're trying to figure out whether it will be reserve releases or not. But yes, otherwise, I think, you're spot on, Wally.

[William Wallace:]

Okay. Okay, thank you, guys, for taking my call. I appreciate it.

[Glen Herrick:]

Thank you.

[Operator:]

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