Q3 2020 Meta Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the financial group fiscal year, 2023rd quarter Investor Conference call. During the presentation. All participants will be in listen only mode. Following their prepared remarks, we'll conduct a question and answer session. As a reminder, this conference call is being recorded.
Now, let's turn the conference call over to Britney Kelly, All SASSA <unk> director of Investor Relations. Please go ahead.
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You and welcome to the Medicine Intragroup conference calls and webcast, our president and CEO, Brad Hansen, and executive Vice President and CFO Glenn here. It will discuss the result over third fiscal quarter ended June Thirtyth 2020 also participate.
In the call it <unk> SAR co president and COO of Mccabe before I turn the call over we want to apologize in advance for any potential technical difficulties that we may encounter as they are in different locations and continue to work remotely during that time.
Additional information, including the earnings release and Investor presentation may be found on our website at <unk> financial group Dotcom. As a reminder are kind of may include forward looking statement.
Those statements are subject to risks and uncertainties that could cause actual in it but he did result to differ the company undertakes no obligation to update any forward looking statement.
Please refer to the cautionary language in the earnings release Investor presentation, and in metal filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual results to differ materially from the forward looking statements.
Additionally, it today, we will be discussing certain non-GAAP financial measures on this conference call references to non-GAAP measures are only provided to assist you in understanding that as a result and performance trends.
Reconciliations for such non-GAAP measures are included within the appendix I think investors.
Now I'll turn the call over to Brad Hansen.
Thank you Brittany.
It goes without saying that cobot 19 in various social awareness activities continue to impact the economy and psyche of our country.
Through these times I've watched with pride as my team successfully implemented our pandemic plan as part of our business continuity program protecting staff and enabling them to effectively serve our partners and customers, while adapting to working from home.
Engagement and productivity remains high as we continue our remote remote work schedules and contemplate various scenarios for safely, allowing staff back into the office.
This will likely include more flexible scheduling on an ongoing basis to allow for dispensing and reduce the need for additional office space as we continue to grow.
But disciplined hard work of our people will help us to earn $18.2 million or 53 cents per diluted share during the quarter compared to 75 cents in the prior year third quarter.
The decline in a P.S., mostly reflected lower revenue as a result of last quarter sale of our community Bank Division.
Lower loan and lease balances decline the net interest margin given recent rate cuts a higher provision for loan losses, and reduced tax product and card fee income, partially offset by lower interest expense tax rate and compensation costs.
Well credit trends have outperformed our initial expectations. We believe it is prudent to remain conservative as a matter as macroeconomic conditions continue to evolve.
We have taken additional provisions related to the uncertainty of the co that pandemic, allowing us to build our allowance.
Stock repurchase program remains on hold as we remain focused on strengthening our capital position.
I believe that our allowance and strong balance sheet position us well should any unforeseen events unfold.
I want to recognize the outstanding effort of our team members during this time.
Our commercial lending team immediately took steps to contact every borrower ensuring they have access to appropriate loan deferral programs modifications or government assistance programs such as this small business administration Paycheck protection program or P. P. P.
They worked tirelessly, providing P.P.P. loans to existing customers and many new customers desperately looking for help when their existing financial institution was unable to assessed.
We heard numerous moving stories of appreciation from these businesses and hope that many of them will become long term relationship for us going forward.
I also want to thank central bank for their efforts in servicing our legacy community Bank loan portfolio. We appreciate their efforts as we couldn't coordinate closely with them to manage our portfolio alongside their own providing the same high quality of service our customers have come to expect.
Our payments team successfully worked to wind down too small program managers, who were forced to discontinue operations due to the pandemic.
They also coordinated with various partners to help ensure customer support issues were adequately address as call centers around the world struggled to adapt and handle increased coal volumes.
During the height of the pandemic our teams work to secure the previously announced letter of intent with HR block, which is expected to be significant contributor to earnings beginning in fiscal year 21.
At the same time Meadowbank was selected as the issue where a prepaid cards for economic impact payments as part of the government stimulus package.
We work closely with visa Pfizer, the IRS and the U.S. Treasury to execute this important program in a timely manner.
Finally, I'd like to highlight some of the enhancements made in several areas of management.
In addition to our current bench of strong business leaders Weve been fortunate to bring on Kathy Winter as Chief people Officer, and Charles Ingram as Chief Information Officer, We promoted Anthony Charette to Chief legal and compliance officer, and corporate Secretary as well as Brett Farr.
Our two co president and CFO and COO of met a bank.
Under their leadership.
We are a lot realigning the company for growth and achieving even greater levels of execution, leaving us well prepared as we look forward.
Now, let me turn the call over to breath for more detail on our credit portfolios and overall response to covert 19.
Thank you Brad I'd like to start by saying I am honored and excited for the opportunity to work with the team as we navigate these unprecedented times.
Over the last 18 months management is focused a significant amount of time and effort and optimizing the streamlining our infrastructure resources and we will continue to focus on improving efficiencies and collaboration across teams and businesses.
Asset quality remains a priority for the company and as Brad mentioned, we likely won't fully understand the pandemics impact until cobot related deferrals and modifications run their course.
For the credit perspective, we continue to monitor each of our lending portfolios through these unprecedented times.
A significant focus has been placed on our hospitality loans in the legacy community bank portfolio and on small ticket equipment finance relationships, which represent 3% total assets, we're taking prudent steps in order to monitor and work with those customers to reduce potential losses.
As of June Thirtyth 2020 met his legacy community Bank hospitality loan balances were $169 million were 2% of total assets with an average loan to value ratio on those loans of 60% compared to 61% at March 31st.
The credit management team remains focused on these relationships, including real time tracking of key metrics such as occupancy breakeven Revpar and has been in regular contact with these borrowers.
We are seeing occupancy rates start to rebound off of lows in April.
Giardia. These hotel relationships received BPP loans, and 51% received some form of short term payment deferral modifications.
Since the beginning of the Cobot 19 pandemic through June Thirtyth 2020, we granted short term payment deferral modifications on outstanding loan and lease balances of $352 million.
All of which $292 million were still in their deferment period as of June Thirtyth 2020.
In addition, we granted a total of $53 million and other cobot 19 related modifications of which 35 million are still active.
The majority of the other modifications were related to adjusting the tight male customers payments.
Oh, the total modifications ever granite $87 million were loans in the hospitality industry and $67 million were just small ticket equipment finance relationships.
As a result of the emerging cobot 19 pandemic, we also increased our allowance for loan and lease losses during the fiscal third quarter.
As of June Thirtyth, excluding reserves on our seasonal tax services loans, our allowance for loan and lease losses was $54.3 million or 1.56% of loans and leases an increase from 1.25% at March 31st 2020.
We will continue to diligently monitor the allowance for loan and lease losses and adjust as necessary in future periods to maintain an appropriate and supportable level.
During the quarter, we took a provision for loan and lease losses, a $15.1 million $9.4 million of which was related to additional allowances for potential losses associated with the cobot 19 pandemic.
On slide six of the Investor deck, we provided historical look back on cumulative net charge offs during the prior cycle.
From a management perspective, virtually all the Krestmark leadership team worked through the last credit cycle and are very experienced and credit management debt restructuring and workouts.
Nonperforming loans and leases at June Thirtyth, 2020 represented 1.1% of total loans and leases an increase of 23 basis points compared to March 31st.
The increased during the quarter was primarily related to deterioration in small ticket equipment finance relationships in our term lending and leasing portfolios.
Through June Thirtyth 2020, we had 686 loans outstanding totaling $215.5 million in loans under the Paycheck protection program.
The average fee rate of approximately 2.5% equates to approximately $5.3 million that net fees on an average loan size of $315000.
We will be deferring those fees until we receive them an amortizing them over the life long.
We're also be a yield adjustment assessment over life with those loans as we would expect most of those to be forget it.
As Brad mentioned, we were the issue where for the IP cards under the program, we issued 3.6 million cards, representing $6.42 billion in funding.
As of July 19th over 80% of the cards had been activated and 2.08 billion and balances remained outstanding.
As a result of the program we saw a quick influx of deposits come onto our balance sheet with limited visibility into the duration.
While this program had an immaterial impact earnings.
It's significantly increased our total assets, which artificially depressed our leverage ratio and our net interest margin.
We have provided a more in depth analysis of the effects of the I.P. cards in the appendix of our investor deck and in the earnings release.
Now, let me turn the call over to blend Eric our CFO to provide more detail in our fiscal 2023rd quarter financial results.
Thank you Brad and good afternoon, everyone for the third quarter of fiscal 2020, we reported GAAP net income of $18.2 million or 53 cents per diluted share.
Compared to $29.3 million or 75 cents per diluted share for the same quarter of the prior year.
The year over year decline was primarily related to.
Two one.
Lower net interest income as a result of lower loan balances related to the sale of the community Bank Division and a decrease in loan yields to higher provision in related to covert 19 in the current economic environment.
And three.
Lower non interest income mostly related to decrease card fee and tax product income.
The net interest margin was 3.28% for the fiscal 2023rd quarter.
He I P stimulus card balances that were held in cash pressured NIM by 140 basis points.
Excluding the impact from those deposits net interest margin was 4.68% compared to 5.07% in the fiscal 2019 third quarter.
As we previously mentioned we saw pressure on net interest margin in loan balances with net interest income decreasing by 7% year over year.
Well slower loan demand and lower yield likely continue to pressure net interest income in the near term.
The ongoing transition of our earning asset mix likely leads to improved net interest margin overtime.
Cost of funds improved by 86 basis points compared to the same quarter in the prior fiscal year largely as a result of the IP card deposits and the lower rate environment.
While non interest income of $41 million for the fiscal third quarter was down 6% from the same quarter of fiscal 2019.
Non interest income did represent 40% of total revenue.
Reinforcing our differentiated business model.
Non interest expense decreased by 2% to $71.2 million for the fiscal third quarter compared to the same quarter of fiscal 2019.
Expense reduction initiatives put in place.
In the fiscal second quarter continued to generate savings and compensation and other expenses such as meal travel and entertainment.
Which we expect to continue through the remainder of fiscal 2020.
As a result of our focus on improving efficiencies that expense reduction initiative are rolling 12 month efficiency ratio improved from 70.6% as of June 32019% to 63.6% as of June 32020.
Turning to our balance sheet total gross loans and leases decreased 3% on a linked quarter basis to $3.5 billion. At June 30. The decrease was primarily related to certain legacy community bank loans classified as held for sale, which we expect to sell this quarter commercial.
Finance loans, which comprised 62% of the company is gross loan and lease portfolio totaled $2.16 billion, reflecting growth of $133 million or 7% from March 31 2020.
Excluding the impact of the P.P.P. loans, our commercial finance portfolio decreased 4% on a linked quarter basis as a result of lower asset based lending and factory balances.
Offset by higher originations in our leasing business lines.
Average payments deposits were $6.32 billion for the quarter.
Average payments deposits were inflated by $2.32 billion related to the IP cards that were issued by Meadowbank, excluding the impact from the EAP cards average payments deposits rose, 46% compared to the same quarter in the prior fiscal year.
A large component of the increase in payments deposits.
Were driven by various stimulus payments that ended up on program partner cards.
As well as lower overall consumer spending levels.
Finally, as we prepare to adopt seasonal as of October one 2020, we had been running Ari Kurt allowance in seasonal methodology in parallel and continue to refine our process and impact estimates.
Pre covert 19 provisioning levels were expected to be marginally higher however, we certainly expect higher provisioning levels undersea. So in the near term as covert 19 factors are incorporated as it relates to regulatory capital, we expect to elect the two year delay and the five year total transition period.
To minimize the impact of the increase in our allowance for credit losses on our capital ratios.
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 continue to put our people first while still maintaining a high functioning business and operations.
From a financial and regulatory perspective, we have been still even more diligent monitoring processes regarding credit quality capital forecasting and financial stability from a social perspective, we strive to promote trend that promote financial equity by ensuring that everyone not just the fortunate.
You have adequate access to quality financial products and services.
That completes our prepared remarks, so I'll ask Brad and Glenn to join me for Q in a operator. Please open the line for any questions.
Thank you at this time, if you'd like to ask your question. Please press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key fleets and shirts in interest the time to keep your questions to one question and one follow up question before rejoining the queue.
Please stand by what we can power the Q and a roster.
Our first question comes from Michael Perito with KBW. Your line is now open.
Hey, good afternoon, everyone. Thanks for taking my questions.
Mike.
I wanted to just ask I appreciate all the extra color on the.
The Treasury program liquidity.
I just wanted to kind of get a sense of it if there was any.
Kind of cadence to the consumer deployment here I mean do you expect that.
Yes, there will be some kind of carryover of liquidity for for some duration of timing obviously it seems like right out of the gates. There was quite a big drop but has that slowed and is it realistic to assume that liquidity could be quite a bit elevated for for the remainder of the year at this point.
Hi, Mike This is Glenn.
That is correct.
The amount of funds that are still on their surprised us a little bit we we assumed that the ramp down might be closer.
To what we see and tax season with the spending that occurs on on those although we didn't expect a quite as fast.
But what's been interesting is a at least so far consumers have been hanging on to a fair amount of these funds and thus a little lower slowdown as well as there's still some cards that haven't been activated.
And so we're working with.
Hi stays treasury and five serves to help.
Make sure we're communicating to those consumers properly.
That said, we yes, we do expect to have some increase liquidity from that program over the next couple of quarters.
Okay. Thanks, and then.
On the credit side.
It seems like based on the prepared remarks, there's been quite a bit outreach to a lot of the especially on the small ticket, but bucket, but to a lot of the commercial.
Finance customers and.
I'm just curious to.
To this point you know industrywide really we haven't really seen.
Much in terms of any specific reserve or anything of that nature and I have just curious what your viewpoint is today I mean, obviously, there's still a lot of government intervention stimulus. This given your customers I imagine quite a bit of liquidity, but I also have to imagine that cash flow might not be quite as strong as it was pre pandemic can.
Hi, guys, which as you guys track those things you're one just kind of the push come to shop I think is it just simply when the deferral comes up or is there is it more complex than that in terms of one we could maybe start to see some more movement either direction really on the credit clarity front.
[noise] there's brett.
I'll take that at least initially yeah, we have watched the credit trends and they have actually outperformed what we thought initially might happen.
We've taken a measured approach on the the reserves et cetera, a decrease our allowance.
Really the jury's out we're gonna have to watch as these modifications come all to see who are they getting completely back in business or not in some cases.
These modifications were taken in what I would call an abundance of caution by the borrower.
And then may not have even been needed in other cases, they clearly were needed.
We're just going up to watch and see.
We're not we don't have enough information to have any insights really into which way. This is going to go or how fast is going to go.
And Mike I would say, we've been trying to get out in front of this bye.
Taking a measured approach to how much provision we can.
How far we can extend our provision for loan losses in our allowance a ahead of the cycle here. So.
We feel like as Weve stated earlier that with our allowance where it is and what the strength of our balance sheet that we're well positioned for however that falls out.
Okay is it fair to say that you know at this point with the reserve build you've had in first.
In the last couple of quarters here.
Plus kind of that the opportunity you'll have with Cecil adoption.
You know that you feel like environmentally you have a pretty good handle on on what you know the reserve needs to be and going forward and probably more specific in terms of what the provision cost looks like with actual credit starting to migrate in either direction.
Hey.
Mike I think it's still too soon to tell we feel good about our our reserve levels today.
And and that's a very fluid environment, it's a dynamic portfolio and we're staying very close to our borrowers.
On this.
Now I think we're still waiting to see what the government does with respect to any further stimulus and.
You know that could impact things as much as anything else that we're looking at so until those things start to.
Evolving and we get more clarity or I think we're just trying to.
He is the.
As prudent as we can about how we proceed.
Great.
I will jump back into queue. Thank you guys I appreciate the time and stay well.
Yep.
Thank you at our next question comes from Steve Moss with B. Riley FBR. Your line is now open.
Good afternoon.
Good afternoon, let's start with the perhaps the high impact industries here kind of curious as to what you're seeing for.
It's activity for those borrowers can you give any color there on within the different buckets and for hotel seems like what's the occupancy rate.
What's the level of reopening you're seeking those portfolios.
Yeah, a few things on the hospitality I was particularly highlights. The fact that these are not full service hotels are limited service and you likely understand that there's been a disparate impact based on which one of those you're in and were and where in the right side of that have that trade.
So.
We're not disclose exactly occupancy rates, but they are climbing revenue per available room is climbing.
Seeing some encouraging things that also referenced some materials, we have on the geography zone, where we're sitting so.
An awful lot of our locations are in places that are shall we say less impacted.
The the retail obviously, that's been hit pretty hard.
We're watching that to see obviously see if there are still in business and we understand where they are where they are not working closely with our borrower and again at some of it depends on precisely which subset of retail there in many cases were in retail enterprises that have not been hit very hard.
The other get pretty small I mean, we do have one theater.
Thank you ship, which you can imagine that's a little bit challenging and we're working closely through that when so.
That's that's the bulk of it.
Okay. That's helpful and then.
Perhaps going the other way in terms of business activity.
Kind of curious as to what you're seeing for.
Commercial finance opportunities kind of how do how are you.
But that kind of pipeline looks like if you will.
Well. So if you think about a pure commercial fan Nancy, especially the ABL in factory in our existing client balances as you can see in the numbers or declining simply because of some declining sales and you understand that self liquidating, so our exposure and that is.
Is.
Much much more limited Oh, we are starting to see the very early signs of some deals that are popping up we're obviously being very very cautious and very selective in that.
If history is consistent as we've seen in this industry from the past.
For the next 24 to 36 months, we could see some meaningful business development in that but we're in the very early stages of that and as I said do you have to be very careful in selective upfront.
Just on the ABL and factoring with as quickly and here does that continue to liquidate to this point or have we come closer to a bottoming out on those balances.
If you if you think about the public economic trends that we're seeing and some things that are coming back and transaction volumes et cetera, I think it's safe to say that AR balances are seeing a similar kind of pattern.
Okay. Thank you very much.
Thanks, Steve.
Thank you at our next question comes from Frank Schiraldi with Piper Sandler Your line is now open.
Good afternoon guys.
Wanted to ask on.
On the significant growth just outside of the direct a treasury.
Stimulus.
It seems like I mean, I guess that's just.
Income that's been pushed down the road in terms of a you know to keeping you not making much money off it just sitting in cash balances, obviously, but at some point, you'll get a piece of those fees. As those are spent down so is that a fair way to think about it and just wondering what your expectations are and cards fee growth.
I'm here in the near term.
Yeah, that's correct Franco.
I guess, you're the first part of your questions. So yeah. Our some of our program partners are seen.
Saw some nice growth in deposits funds that were loaded outside of the direct ERP cards that we issued so.
If folks got a stimulus or unemployment and went and loaded it on a GPR card or or something or a gift card or something else.
That's where you're seeing that deposit growth as well as just normal card program seems folks are.
Spending a little lower rate are saving data at a higher rate.
We would expect those to pick up here at some point.
That should certainly help some fee income.
Again, our depending on the partner relationship where those.
These are split between us and up in a program partner, but.
Yes, that's that's an accurate observation however on the ERP payments yeah. Those are some fees are being.
We achieved and and we now really expect there as we've said in our prepared remarks, there to be much of a financial impact to us.
From that program.
Sure I understood and then on the IP is there a point.
Where if these cards are not activated or spend down. The you know is there a line in the San where the Treasury just takes us money, but I can try to find another way has that been decided and does the IP in anyway. Given the you know you have more balances than you anticipated anticipate.
At this point does does that limit flexibility at all just given where you know it it reduces.
Leverage ratios too.
They're our terms with the Oh government as you can imagine on on how those.
Deposits will be handled and I'll, let glenn respond to the leverage ratio yeah. So so it's really the treasuries call on one when they might pull back funds. So we we don't want to.
Speak for them or try to determine their theres still seeing how this progress is.
Yes, certainly the we have more liquidity then we then we can use right now.
We don't expect you know, it's a 2 billion.
Today, we don't expect it to stay at that number.
It's probably less than that at this hour now obviously.
And so we do expect it to get back into a more manageable thing, which will allow us to have lower wholesale funding.
So.
The short term our leverage ratios are certainly depressed artificially temporarily depressed.
But we're not concerned about longer term the impact of these deposits.
Okay, and then if I could just one last one on credit.
The.
The increase in NPK balances think.
Brad mentioned there was in the equipment lease remains bright and the equipment lease portfolio.
Just kind of curious wouldn't that I would think set for the most part.
And the deferral period of up to six months.
That those would just continue to take deferrals and and would remain.
Yes current on your books as opposed to a falling into.
Performing categories. So I just wonder if you could talk a little bit more about how you're dealing with.
The deferrals and you know if as you go along here. Some of these loans are falling into the criticized classified and Npis.
Yeah, so, particularly around the leasing portfolio.
Yes, Mark has a fairly lengthy history and carefully monitoring on a regular basis equipment values.
And of course, depending on the equipment and it could have a relatively short life or it could have a very long life.
Understanding that equipment value and whether you have a shortfall or not is helping to inform the modifications.
When you're dealing with equipment at some point, you've got to kind of call. The question now of frankly in the in the.
Commercial equipment Finance Division most of these are more liquid fortune 1000 companies and they're not having the stresses in many cases.
They took modifications in abundance of caution just to preserve liquidity because like everybody. They didn't know what was going to happen. So I would say the key driver in the equipment view is.
The monitoring of the equipment values to make decisions and we've got a team that are experts at that.
Okay.
Alright, great. Thank you.
Thanks Frank.
Thank you and this concludes the question and answer session I will now turn the call back to CEO Brad hands.
Well I'd like to close by thanking everybody for participating in metals quarterly investor call. Today, we truly appreciate your support and thank you for taking time to listen then.
Have a great evening.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program you may now disconnect.
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Yes.
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