Q2 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Mehta financial good fiscal year, 2022nd quarter Investor Conference call.

In the presentation, all participants will be another one on not only the prepared remarks, we'll conduct a question and answer session as on Monday. This conference call is being recorded.

Now I'd like to turn the conference call every chance that need Kelly S. S. <unk> director of Investor Relations. Please go ahead.

Thank you and welcome to the minute financial Group Conference call everybody can you discuss our financial results for the second fiscal quarter ended March 31st.

20 released earlier this afternoon additional information, including the earnings release and Investor presentation may be found on our website at <unk> financial group Dotcom as a reminder, our comments may include forward looking statement. 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 minutes filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual results could differ materially from the forward looking statements.

Additionally, today, we will be discussing certain non-GAAP financial measures on the conference call references to non-GAAP measures are only provided to assist you in understanding that does result in performance trends reconciliation for such non-GAAP measures are included within the appendix of the Investor presentation.

Participating in today's call, our president and CEO, Brad Hansen, Executive Vice President and CFO, Glenn hearing and executive Vice President and head of governance risk and compliance Brett Farr before I turn the call over we want to apologize in advance for any potential technical difficulties that we may encounter.

We're working remotely in different locations during this time.

No I would like to turn the call over the President and CEO Brad Hansen.

Thank you Britney.

I'd like to walk everyone to our fiscal 2022nd quarter earnings call.

Before we address our quarterly results I want to take this opportunity to provide an update on how we are addressing cobot 19.

Our priorities.

The health and safety of our employees and then shrink customers have access to the financial services they need to make it through these difficult times.

In early March we implemented our pandemic plan led by Brett Farr, which is part of our business continuity program.

We acted swiftly with minimal disruption to our business and put preventative health measures in place to protect employees and customers by among other things banning nonessential business travel mandating remote work options for certain employees and implementing social distancing and then.

Hands cleaning measures at all office locations.

We believe those early actions have had a positive impact the effect of our planning is evident as employee engagement and productivity remains high and we continue to serve our customers and effectively manage our business while dealing with the fallout from this crisis.

We expect to see declines in our various business lines as our customers and partners field, the trickle down effect from this economic disruption.

However, I believe we're well positioned to weather the storm and we'll capture new opportunities during the recovery.

I was wanting central business, we're striving to do our part to protect the integrity of our nation's financial system support financial stimulus programs and keep the money moving.

We are proactively reaching out to small business customers to assess their credit situations offer flexible repayment options, where appropriate and making them aware of financial assistance options like the pay check protection program established by the cares Act.

Through April 20, if we authorized 500 into applications totaling $190 million for this emergency small business lending program administered by the S.P.A., we're proud to be accepting applications from all small businesses not just our clients.

In addition, we have taken appropriate steps to protect the safety and soundness of the bank by reinforcing underwriting standards and limiting lending to certain high risk and industries.

Credit quality is always a high priority for our company and we remain disciplined in our approach to underwriting and servicing our loan portfolios.

Glenn will discuss our asset quality in his prepared remarks.

Maintaining strong capital levels also remains a key strategic focus for the company.

As of March 31st 2020 banks capital leverage ratio was 8.52%. However, it's important to understand the ratio was temporarily dampened by the seasonality of the high assets related to the tax business services.

Our quarter end Bain capital leverage ratio based on asset levels as of March 31st was 9.71%, which we believe better reflects our anticipated balance sheet going forward.

During the quarter, we repurchased approximately 2.6 million shares at a weighted average price of $31 in 78 cents per share under our share repurchase authorization.

To further ensure that we maintain a strong capital position while facing these current.

Economic uncertainties, we suspended our stock repurchase program in March until we have better visibility into the duration and economic impact associated with the pandemic.

Along with these actions and a strong flexible balance sheet, we have many levers we can use to effectively manage our capital position.

While we plan to continue to take actions to pervert preserve liquidity manage credit risks and reduce costs, we anticipate an adverse effect on earnings due to the covert 19 pandemic.

However, we expect reaccelerating demand in each of our businesses once the pandemic subsides consumers get back to work and businesses seek financing to rebuild their operations.

Despite of the pandemic, we reported strong fiscal 2022nd quarter results, including earnings of $52.3 million or a $1.45 per diluted share representing growth of 79% over the prior years second quarter earnings per share.

Now, let me turn the call over to Glenn Harris, our CFO to provide more detail on our fiscal 2022nd quarter financial results.

Thank you Brad and good afternoon, everyone for the second quarter fiscal 2020, we reported GAAP net income of $52.3 million or one dollar and 45 cents per diluted share compared to $32.1 million.

And 81 cents per diluted share for the same quarter of the prior year.

We did see the early signs of growing uncertainty and volatility during the second fiscal quarter.

As a result loan growth slowed with total gross loans and leases increasing 1% on a linked quarter basis to $3.61 billion at March 31.

That said year over year loan growth increased 5% for March 31 2019.

We do expect impacts in many of our business lines during the fiscal third quarter, resulting from coal that 19, which could be partially offset by programs recently enacted by the government to assist small businesses.

Through the pandemic, including the cares Act.

As Brad mentioned, we authorized 502 applications totaling $190 million in loan requests for the payment protection program and funded 224 loans totaling $79 million as of April Twentyth.

We expect to fund a majority of the remaining authorized applications in the coming week.

The current interest rate environment impacted yields as well.

Loan yields were 6.76% for the quarter compared to 7.32% for the previous quarter and 8.05% for the second quarter of the prior fiscal year.

Purchase accounting accretion added four basis points to loan yields in the second fiscal 2020 quarter versus eight basis points in the prior quarter and 29 basis points in the second fiscal 2019 corridor.

Turning to the liability side of the balance sheet average payments deposits were $3.31 billion for the quarter rising 11% compared to the same quarter in the prior fiscal year and now represent 65% of total average deposits.

Cost of funds improved by 34 basis points.

Mostly as a result of the current rate environment compared to the same quarter in the prior fiscal year.

Net interest margin decreased to 4.78% for the fiscal 2022nd quarter down 16 basis points from the fiscal 2021st quarter.

Adjusting for the impact from our seasonal tax refund advance loans and related funding net interest margin was 5.01%.

As Brad mentioned credit performance remains a priority for the company.

During the quarter, we took a provision for loan and lease losses of $37.3 million.

15.8 million was related to additional allowance for potential losses associated with the cold at 19 pandemic.

And 19.6 million.

Which related to our 2020 tax season loans.

At this time it is too early to gauge what the ultimate impact of coal that 19 will have on credit and we have not recognize significant asset deterioration to date.

However, the company as being prudent and taking steps to mitigate potential losses related to certain higher risk industries, including transportation hotels retail and entertainment and small ticket leasing equipment as you can see on slides 11, and 12 of our investor deck.

At March 31, our total allowance for loan and lease losses was $65.4 million are 1.81% of total loans and leases and increase from 0.84% at December 31, 2019, and 1.42 per se.

At March 31 2019.

The company is commercial finance allowance coverage ratio increased from 80 basis points to 128 basis points on a linked quarter basis, and the community bank coverage ratio increased from 68 basis points to 149 basis points.

While we are anticipating an upward trend in past dues and nonperforming assets in subsequent periods, we do not expect to see a corresponding one for one increase in charge offs as we're able to recover on certain collateral based relationships.

Management believes the structure of the credit protections across our consumer and warehouse finance lending lines was adequate as of March 31 2020.

We're working closely with their partners and customers impacted by the cold at 19 pandemic and we'll continue their closely monitored the allowance and we'll adjust accordingly in future periods as appropriate.

Nonperforming loans at March 31, 2020 represented 0.87% of total loans and leases and increase of 25 basis points compared to December 31 2019.

The increase during the quarter was primarily related to two agricultural relationships in the legacy community Bank portfolio and an increase from our term lending portfolio.

As we previously mentioned.

We saw pressure on net interest margin and as a result, net interest income decreased 5% year over year.

While it is still too early to fully understand the scope of potential financial impacts recovered 19, we do expect the slower loan demand and lower yields will pressure net interest income in the near term.

Non interest income was $120.5 million for the fiscal second quarter, an increase of 15% from the same quarter of fiscal 2019.

Driven primarily by the gain on divestiture of the community Bank Division.

Excluding the gain on sale noninterest income represented 60% of total revenue and benefited from higher rental income and other income.

Which were partially offset by lower payments and tax product fee income.

For the 2020 tax season through March 30, Onest, we originated $1.33 billion in refund advance loans, which represented a 10% decline compared to the 2019 tax season, largely due to a partner reduction which represented 252 million.

Of originations in 2019.

Slide 17 of our Investor deck contains a further breakout of the net tax product income.

Going forward, we don't expect any material impact to the Tech services business line as a result of the cold 19 pandemic as we are mostly passed the peak of tax season.

Non interest expense decreased by 17% to 91.7 million for the fiscal second quarter compared to the same quarter of fiscal 2019.

As Brad mentioned in response to the Cold 19 pandemic, we've put in place health and safety measures, including temporarily banning non essential travel which resulted in reduced costs. We also implemented expense reduction initiatives to include limiting non essential hires for the foreseeable future. These.

Initiatives have resulted in savings and compensation and other expenses such as meals travel and entertainment.

As a result of our expense reduction initiative, we saw significant improvements in our efficiency ratio.

Year over year on a rolling 12 month basis, our efficiency ratio improved from 73.4% as of March 31, 2019% to 62.9% as of March 31 2020.

Finally, let me discuss our outlook.

Given the to deteriorating economic environment and the uncertainty around the business impacts following the emergence of Kobin 19 pandemic, we are suspending fiscal 2020 earnings per share guidance.

We will continue to monitor and evaluate the situation and provide updates as necessary.

With that I'll turn the conversation back to Brad for closing comments.

Thanks, Glenn we want to ensure all of our stakeholders that we're putting people first while still maintaining high functioning business and support operations.

From a financial and regulatory perspective perspective, we have instilled even more diligent monitoring processes regarding credit quality capital forecasting and financial stability.

While we had a strong second quarter the macro backdrop remains uncertain.

We intend to be as transparent as possible regarding our business and the effects, resulting from the code at 19 pandemic.

That completes our prepared remarks, so I'll ask Glenn and Brett to join me for Q any operator, please open the line for any questions.

Thank you and our first question comes from.

And last with B. Riley FBR. Your line is now open.

Hi, good afternoon.

Hi, Steve.

I just want to starting off with the.

Glenn I think you mentioned that the increase in non performers related to AG. I was wondering if you give any color around what drove the increase in a 30 89 days past due here this quarter.

Yes, I just.

A couple.

A couple larger relationships just.

Trip pass that pass those dates.

No we continue to have.

You know both in the legacy community banking portfolio, and commercial finance and the collateralize ones that we typically see.

Well, we'll move move in and out of various buckets.

Okay.

And then with regard to call about 6% of loans were deferred here given covert 19, it's kind of wondering.

If you could tell us give us color on the borrowers and types of industries.

Yeah.

Brett you want to comment on that.

Yes. This is Brad.

One of the things that we did with stratified.

Portfolio based on various economic scenarios.

And we identified areas that were concerned we've got those listed in the.

The Investor package and you can see what those were we focused on those primarily and looked at those to see are they getting the assistance they need from the PPP program or there other things that need to happen to assist them through that so that's the process we went to.

Kind of dividing up the portfolio in some areas portfolio of course are no concern.

Okay is there any so I guess is in particular is the industries that are listed in the deck.

A couple of them like.

You know what its energy or.

Retail I believe.

Yes, that's right and of course, we have hotels in there as well.

The energy sector half of it self liquidating. So you don't worry about those as much but the term you pay close attention to.

Okay. That's helpful. And then just kind of wondering here.

We hope the reserve build for.

For the.

For the the pandemic just kind of wondering just kind of how we think about the provisioning going forward, maybe maybe any color.

You gave with regard to inputs, obviously, you're still on the herd method.

Just any color you could give around Cecil perhaps would be helpful.

Sure.

Okay.

We.

We took the effect there basically 16 million for solely due to the pandemic as an allowance build based on what we knew at March 31.

And tried to get out in front of that the strong earnings quarter for us.

Certainly would not be surprised if we do take additional provision over our normal run rate and then next quarter or two that said a lot will depend on the success.

These government programs have there certainly some extraordinary efforts being made and we'll have to two to see how those those roll out but.

We're trying to stay on top of it and certainly have.

And build our allowance to the right.

At levels, Cecil where it will be in October one.

Adopter, given our fiscal year and were on path to be prepared for that and.

We would expect to be providing additional color in guidance around impacts the cecil in the coming quarters.

Okay. Thank you very much I appreciate all the color.

Yes, Thanks, Steve.

Thank you.

And our next question comes from Michael Perito with KBW. Your line is now open.

Hey, good afternoon guys.

Hope everyone is doing well given everything going on thanks for taking my questions.

Yeah. Thanks, Mike.

I wanted to start and follow up on the credit topics the brought up previously.

The commercial real estate portfolio from the community Bank.

That is being serviced by.

Central Bank, but put it on your balance sheet as a correction you guys still.

Kind of leading and controlling the underwriting nature that and any thoughts around the whole any more color you can provide around the hotel exposure specifically within the theory portion of that portfolio.

Yes the.

Yes, we're controlling the underwriting we're working very closely with central the.

The folks that are servicing our legacy run off portfolio.

Where our employees a month ago.

They're building their operations team really off of our team.

And and so we continue to manage that.

Very closely.

Yeah, I'll I'll defer to Brett on the credit he is he and his team have really been leading the efforts.

Throughout the year, but that's certainly a stepped up efforts here in the last six weeks.

Yes, I mean, we contacted every one of those to have direct conversations about the impact there, having some of which are.

Certainly a catastrophic at the moment.

For a variety of reasons that might be medical personnel or national reserve people have some occupancy so.

Obviously, we did modifications to get them through this time period, they applied for and received that PPP support from central and now it's a weight gain for those as CFO.

Comes back and how fast it comes back.

Okay, and then maybe on on that topic.

Can you talk about what the customer outreach looks like.

Some of the more granular portfolio, obviously in terms of the community Bank commercial real estate portfolio I'm sure. There's some bigger customers in there, but when you think about kind of the krestmark portfolio in the consumer book Theres, obviously, a lot more granular granular a lot more people to reach out to how are you guys kind of gone about trying to get in touch with with your customers and see what kind of shape, there and what.

They need and stuff like that.

And the commercial finance portfolio, we have literally talk to every customer.

Now in some cases that might be.

Turning to worry about may move on.

Others, we found out if they applied for BPP through us for through some other source.

And then where appropriate we obviously had conversations about modifications.

And I would I would add Mike.

If you think about krestmark the.

Their leadership team.

Almost in its entirety was was all here and all eight or nine.

Through the recession, so while different cause.

Pulling out a lot of the same playbook and Adam.

Steady business development, you're really focused on working with existing clients.

On on helping them servicing them through through this period.

And on the consumer side.

Oh, the consumer side, we have significantly more protections and so we're working with our partners and the Servicers to.

Provide modifications in forbearance where appropriate.

And you know stepped up.

Support and earlier contacts on past dues typical things you would start that you would expect.

Consumer lenders to to start rolling out.

And if you recall.

Well it whether it's our direct consumer or our warehouse lending we have a senior position there.

And.

Yes. Thank you guys in the past that this close like kind of where the loss rates. When you get in that book for you guys really to not be whole is that something maybe revisit or remind us what that looks like today.

Yes, I think if you look in the deck. We then pages 15 to 16.

The waterfall and though in the warehouse will give you give you a rough feel for the protections there and the Overcollateralization that we have and and then again, we've we've pointed out too.

Consumer credit.

Yes.

Where we are with a partner if.

If it's a stated interest rate of 36%.

And yet our yield is say 9%.

That's where you see a lot of the protections coming from.

Okay.

Our next lastly, can you tell us a little bit more about.

The non strategic partners that that.

You guys.

Business.

A follow up is it.

You kind of going into 2020 taxi from now on the better way to think about what the production will be with the exit of those partnerships going forward.

Yes, I'll take that the.

I think this year is more indicative of future years and for us to build off of it was a much more effective and efficient year for us.

As we shed some relationships that.

We're not a strategic or is valuable to our operation we were able to manage overhead much better and have much smoother operations.

So overall, we were pleased with.

How the year the results from this year.

Got it so going forward, while the volume and revenue.

Lower than.

The expenses in the credit and all those aspects will be more efficient as well and and you guys feel good about that dynamic moving forward with the exit of those those partnerships yeah. You'll notice we added about a those those represented about a 20% of the volume one and we had a bad 10% increase and deep.

Crease. So you can see that our four core business.

Did pretty well overall, even though our.

Business as a whole.

Was down a bit.

And what was the majority of business seasonally as normal I know there were some extension of deadlines and I don't think that would typically impact that the customer base that you guys you're targeting there but is there any reason to believe that there might be a little bit more drag in the other quarters not track, but revenues.

From tax than a typical year given no delays filing dates.

No I go ahead Glenn.

Oh, sorry, Brad no no really where we saw the kind of the quarter flips this year as some other.

Some of the activity was pulled forward actually into our first fiscal quarter.

A year ago might have been in January this year. It got pulled forward to December.

But through the six months now our customers are are materially Don there.

They are getting refunds, so they're not going away for July 15th to file our taxes.

Yes.

Excellent. Thank you guys, taking my questions appreciate all the added color.

Helpful. Thank you well.

It's Mike.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Next question comes from Thanks.

Yes.

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Hi, guys good afternoon.

Wanted to ask on.

The deferrals that came in through the after the end the quarter.

In terms of I think Brett you mentioned that you can you talk to everybody in the portfolio at this point I'm just wondering to trend in deferrals.

Following the end of the quarters that would you say accelerating decelerating do you expect.

To continue to grow significantly here even with.

Little change the outlook.

Yes, it's really too soon to tell Frank.

And now now that the PPP loans are going out.

And a lot of our customers are drawing on those and while our volume.

You know clearly isn't match, our entire portfolio, but a lot of our commercial finance customers may have their primary bank their operating lines with a community bank and so we know there also drawing down the PPP loans. So.

But again it will have to see how successful these government stimulus efforts are.

I guess in terms of provisioning I would assume that.

Basically what you know March 31st as sort of a drives the provision so that the significant deferrals that came in after the ended the quarter.

Would be more of.

Sort of a to Q.

Concern as far as additional provisioning would be concern would be a concern.

That may or may or may or may not I.

I mean, it well, yes, we're certainly track and I want to many.

Metrics and dimensions, we're looking at.

But our provision bill was the based on.

While it was done at March 31, it wasn't based solely on the amount of.

Deferrals or loan mods, we had at March 31, we fully expected we would we would be seeing significant volume of that in April.

So there's clearly some of that built in.

May or may not be all of it but the there was some built in.

Gotcha.

And.

Just wanted to just a a quick one on credit wondered if on the the hotel portfolio in the community Bank.

In the Cree book.

Do you guys have available and an average LTV.

Book.

[noise] iden, we have not not disclose that.

Brett do you have that Andy I.

I don't have at handy, we followed.

Standard underwriting criteria, but I don't have a number handy.

Yeah.

Okay.

And then on the Ali.

The nonperforming increase in the quarter, you mentioned the to AG loans, and then the term lending and look to me like the term lending increase reflected fell into the past due.

But still accruing a bucket and I just kind of curious.

I would think that.

Defer that that something like that might fall into a deferral as opposed to just following on to nonperforming status here just given the environment was this sort of non coal did related or can you speak to that at all.

Yes. This is this is Brad that transaction was not coded related.

And as you know.

These things are heavily collateralized as well.

Okay, sorry, I guess can you there's a fair to say at least on that term lending.

To sum up forming that you don't anticipate.

Significant loss there.

That's correct.

Okay.

And then just just shifting gears to to loan growth or just given the tighter underwriting standards.

Mentioned, the transportation, which is a decent sized piece of the commercial finance book.

One of what are your thoughts here and given the the short term nature of some of these loans should.

Should we anticipate contraction in the overall commercial finance book at this point in the near term at least the man is there any change in strategy.

To drive growth elsewhere, I mean, you mentioned, the consumer book holding up well and I saw you actually.

Reduced the reserve related consumer book, So just curious any change in strategy and then in the near term what are the thoughts on growth or lack thereof than the commercial finance book.

Yes.

So what we may see we would not be surprised to see some contraction just you know if.

Yes, if you're not selling stuff you don't have receivables the need to get be factored.

And.

And so now.

Very well could.

That said as as we come through this there is also we've talked in the past.

About and Krestmark experienced this in the past.

As as more traditional banks pull back they all Russian to commercial finance lines of business as they pulled back from it it actually creates opportunities to go upstream a little bit.

And.

And so it's not simultaneous type of change, but we would expect to see.

Some opportunities.

A few quarters down.

Coming out of this.

Okay, and the sorry, just one last one if I could just in terms of the.

Stimulus program and the direct.

Checks to.

To us citizens.

My.

Thought or.

Soft by bread and suggested that.

Some of that could come through from the IRS.

To prepaid card.

It would have been attached to these consumers a tax refund.

Can you talk at all about you know your expectation there in terms of additional deposit balances from the stimulus.

Well there are some additional deposit balances on some prepaid programs that are reloadable and received those benefits, but in other portfolios. There are as less volume. So it's offset by depending on the type of portfolio also there's.

Different forms of payments going on on some of those in the form of maybe more on insurance.

Benefits going on to cards as for people that had lost lost their jobs and more their direct deposit is no longer going onto the card. For example, so it's a little bit of a mixed bag some areas our increased slightly and others are depressed.

But overall so.

We're still monitoring the portfolios.

And looking at the duration of this and whether additional stimulus programs are announced.

Okay. So you haven't seen any clear I guess trend up or down in terms of just given some of these offsetting factors and card usage or in deposit flows versus what you might expect.

You know.

Otherwise.

No no significant trends at this point, some ups and some downs in.

And we have a very diverse portfolio of prepaid products and some offset other so.

I wouldn't say, we we've seen movement, but not dramatic and nothing I would necessarily call a trend at this point.

Okay all right. Thank you.

Thank you.

That concludes the question and answer session I will now turn the call back to CEO, Brad Brad Hansen.

All right well, thank you I'd like to thank everybody for participating in our quarterly investor call.

We truly appreciate your support and we thank you for taking time listened today.

Have a great evening and everybody please stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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