Q4 2020 Meta Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the metal financial fourth quarter and fiscal year 2020 Investor Conference call.
During the presentation, all participants will be in a listen only mode.
Following 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 call over to Britain, Kelly, Oh, Sasha director of Investor Relations. Please go away.
Thank you and welcome to the Medicine, Each group conference call and webcast are president and CEO, Brad Hansen, and executive Vice President and CFO Glenn here. It will discuss the results of our fourth quarter and fiscal year ended September Thirtyth 2020 also participating in the call and Brett Farr co President and COO.
Debate.
Additional information, including the earnings release and Investor presentation, maybe found on our website at medical financial Group Dotcom. 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.
Any forward looking statement.
Please refer to the cautionary language in the earnings release Investor presentation, and it met its 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, 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 met as a result and performance it trends.
Reconciliations for such non-GAAP measures are included within the appendix of the Investor presentation, now I will turn the call over to Brad Hansen.
Thank you Britney.
Every one I know is talking about what a crazy year 2020 has been so I want to start by recognizing the exemplary performance of my team. During this difficult time and express my appreciation to our dedicated staff for continuing to serve our customers and shareholders from a remote working.
Environment.
Despite some of the challenges, including substantial rate cuts and sizable loan loss provision, we reported net income of $104.7 million for fiscal year 2020, an increase of 8% compared to fiscal 2019.
And the earnings per share increased 18% to $2 or 94 cents over the same period.
Well the share price is down considerably from pre COVID-19 levels a strong operating performance has afforded us the opportunity to start buying back shares at what we believe are favorable prices.
In September we reinstated our previously announced share repurchase program.
Bought back approximately 898000 shares through October 23rd at a weighted average of $21.80 per share.
During the past year, we were able to close on the sale of our retail community Bank just before implementing our pandemic plan in response to COVID-19.
We funded $219 million of PPP loans to 689 borrowers and partnered with the U.S. Department of the Treasuries Bureau of the fiscal service and Pfizer to further support the government stimulus package.
Distributing $6.4 billion of economic impact payments on 3.6 million prepaid cards.
At the same time, we closed several new relationships and extended existing relationships, while maintaining focus on our three strategic initiatives.
Increasing the percentage of funding from low cost core deposits in exchange for higher cost deposits.
Optimizing our interest, earning asset mix by replacing lower return assets with higher higher return loans.
And improving our efficiency ratio by managing expenses and improving operating leverage.
In addition to this we have been working hard to solidify the foundations of our company by further enhancing operating procedures governance programs organizational structure, our talent pool and pay for performance programs.
We are getting faster safer and more efficient.
We're also focused on developing our aspiration all culture.
Corporate and social responsibility programs and diversity and inclusion initiatives.
In the year ahead, we expect to see progress in our messaging and communications our.
Our web sites.
And our technical capabilities as we strive to upgrade and enhance the competitive advantages of our plant that our platform gives us and enabling fintech providers at scale entering new product segments and looking for ways to leverage the vast amounts of data accumulated over the years.
Now, let me turn the call over to Brett Farr.
Thank you Brad.
In the fiscal fourth quarter of 2020, we took a provision for loan and lease losses of $9 million.
Our allowance for loan and lease losses was $56.2 million as of September Thirtyth.
15% reduction compared to June Thirtyth 2020 due in large part to anticipated seasonal charge off activity within our tax services business.
Credit quality remains good with no material deterioration in past dues non.
Nonperforming loans and leases were 0.97% of total loans and leases at quarter end 13 basis points lower than the previous quarter.
We are closely monitoring our small ticket equipment finance portfolio. However, modifications that portfolio are now just $21.8 million and we believe reserves are adequate to cover any associated risk.
We have seen no measurable change of performance in our consumer lending portfolios due to cope with ita.
Our student loan portfolio has continued to pay down to $115 million at quarter end and now accounts for just 3% of total loans and loss.
Movie Theater, and hospitality loans on our legacy community Bank portfolio are still concerned accounting for roughly 50% of our total deferred balances.
Movie theaters had been heavily impacted by the COVID-19 pandemic and we have approximately $18 million of exposure in this category.
While these credits are currently on three month deferral of principal and interest we have taken additional reserves against them to reflect the elevated level of risk.
Hotel loans are trending positive part far from fully recovered most.
Most are in the third round deferrals generally making interest only payments.
Excluding PPP loans total deferments across all portfolios decreased to $193.3 million in the quarter down from $326.9 million and now account for just 6% of total gross loans.
As of September Thirtyth 2020, we had 689 loans outstanding totaling $219 million in loans under the Paycheck protection program and have recognized approximately $1.8 million in total fees from the Sps.
The remaining piece will be amortized over the remaining lives of the loans.
The average fee rate of approximately 2.5% equates to approximately $5.4 million a net fees on an average loan size of $318000.
We are closely following the development of the small business administration VPP forgiveness rules.
Now, let me turn the call over to Glenn Eric Our CFO.
Thank you Brad and good afternoon, everyone. Today, we reported our results for the fourth fiscal quarter and full fiscal year 2020.
On a GAAP basis, we generated net income of $13.2 million for the quarter or 38 cents per diluted share and $104.7 million or $2.94 per diluted share for the year.
Full year earnings per share growth of 18% included the one time gain on sale of the community Bank Division.
A key strategic accomplishment, along our path to optimize our balance sheet.
Despite the current rate and loan demand environment, we generated net interest income of $259 million, a decrease of only 2% compared to fiscal year 2019.
We believe this reinforces our focus on Remixing our balance sheet.
United States Treasury E P stimulus card deposits.
Continue to be a drag on net interest income in the quarter, albeit at a lower level than the prior quarter net interest margin was 3.77% for the fiscal 2024th quarter, an improvement of 49 basis points over the linked quarter.
Excluding the impact from E. P deposits NIM was 4.87% compared to 4.95% in the fiscal 2019 fourth quarter.
While slower loan demand and lower yields will continue to pressure net interest income in the near term the ongoing shift in our earning asset mix likely lead to higher net interest margins overtime.
Our cost to funds improved by 94 basis points compared to the same quarter in the prior fiscal year largely as a result of the IP card deposits, which reduced wholesale funding needs and an overall lower rate environment.
Metre continues to generate above industry levels of non interest income and total non interest income for the fiscal year was $240 million and 8% increase compared to the prior year influenced by the gain on sale of the community Bank Division non interest income now represents.
48% of total revenue in fiscal year 2020.
For the fourth quarter noninterest income was $41 million, an increase of 13% compared to the same quarter in the prior year. The increase can be attributed to gain on sale of SP a loans other income and an increase in payments fee income.
For the fiscal year non interest expense was down 4% to $319 million as a result of our ongoing efficiency initiatives, including the sale of the community Bank Division non interest expense was $80 million for the quarter, a 5% increase compared to the prior year.
Year fourth quarter expenses included a $1.7 million prepayment penalties to extinguish long term debt.
And employee separation related expenses of $1.5 million.
Turning to the balance sheet total assets at September 30 were $6.1 billion, reflecting a more normalized level as VIP card balances spent down and the remaining cash balances were used to pay down borrowings.
And reduce wholesale funding.
Total gross loans and leases held for investment decreased 5% on a linked quarter basis to $3.3 billion at fiscal year end. The decrease was primarily related to legacy community bank loans that were sold or refinanced away.
And loans that were classified as held for sale, which we expect to sell this quarter.
Commercial finance loans, which comprise 70% of the Companys loan and lease portfolio totaled.
Total $2.3 billion, reflecting growth of $149 million or 7% from June 32020.
Growth in the commercial finance portfolio is the result of some rebound of demand in the factoring and leasing business lines.
Average payments deposits were $5.8 billion for the quarter, which were inflated by 1.6 billion on E. P stimulus cards issued by Meadowbank.
As of October 23rd $829 million in the IP balances remained outstanding.
Excluding the impact from the IP cards average payments deposits increased 660% compared to the same quarter in the prior fiscal year.
A large component of the increase was driven by stimulus payments that ended up on various program partner card and lower overall consumer spending levels.
As Brad mentioned during the quarter, we reinstated our share repurchase program since restarting our share repurchase program in September we have repurchased 898416 shares through October 20, Threerd at a weighted average price of $21.80 per.
Our share account.
The company has approximately 3.5 million shares remaining under its authorized share repurchase program that is scheduled to expire on December 31 2022.
We will consider further share repurchase activity within the context of our overall capital deployment strategies.
Including funding growth initiatives, and returning excess capital to shareholders.
Finally, we have adopted seasonally effective October one 2020, and expect our day one entry to increase the allowance for credit losses by approximately $13.5 million.
As it relates to regulatory capital the day, one adjustment will not impact our regulatory capital ratios in the short term as we have elected the two year delay in the five year total transition period to minimize the impact.
We intend to disclose further detail of seasonal adoption in our 10-K.
With that I will turn the conversation back to Brad for closing comments.
Thanks Glenn.
I'd like to thank our employees, our partners and our shareholders for all their hard work and support during the past year.
Despite missing a few pre co that targets, we made significant progress on multiple fronts and delivered solid results for the year.
We are looking forward to the new year and all the opportunities that lie ahead.
With that I'll have the operator open up the line for any questions.
Thank you as a reminder to ask the question you'll need to press Star then one on your Touchtone telephone to withdraw your question from the queue. Please press the pound key please.
Please limit yourself to one question and one follow up question before rejoining the queue.
And by what we compile the culinary roster.
Our first question comes from Michael Perito with KBW. Your line is now open.
Hey, good afternoon, guys. Thanks for taking my questions.
Hi, My name.
I wanted to just spend a minute on kind of the debt to earnings outlook for 2021.
I just kind of a long winded question here, but if we think about kind of the core earnings power of fiscal 2020 I think.
Plus or minus I had it in like that 93 to 96 million dollar range and.
And I guess as we think about how that transitions into 2021 is I guess is there still is it still correct to assume that the 15 to 20 million of annual I believe it was income from the HR block partnership will be additive to that that core fiscal 2020 run rate.
And then that there would be no additional growth opportunities on the core business as well as you guys continue to move forward is that kind of a fair without points to specific numbers around in a fair way to think about how the earnings profile could look next year and is there any other kind of thoughts or items that you would point us to as we kind of think about where the trend is heading.
Hi, Mike This is Glenn I'll take a shot at that so yes, HR block will be additive and 21.
And as it relates to our other businesses, we would expect we expect organic growth in a number of them.
I would also point, we have some runoff portfolios, though primarily in the community Bank and also the student loan portfolio that year over year.
We'll we'll be a drag on absolute dollar earnings and.
What we've also talked about as Remixing our balance sheet.
And we think that will drive earnings increase without increasing the overall size of our balance sheet.
Remember that excuse me that the.
We'll have a full year coming in September we had six months of our earnings.
The higher interest rate than.
In 2020, and we'll have a full year of the impact of the reduction in interest rates and 21.
Right Okay.
That's very helpful. Thanks, and then and then for my follow up Brad I was curious if you could just maybe comment.
You know I think the I.
I'm sure someone else will ask about kind of krestmark and pipelines, but theres, obviously, the balance sheet side here, but as we think about the fees and the payments side of the business here what are the kind of one or two or or yelp biggest growth opportunities that you see on the horizon for 2021 that you think could be the most impactful for Mehta.
At this point.
Well as we said, we we signed some new deals HR block will certainly have an impact on that side as well since we took over the breadth of their business, which includes their current programs. In addition to their attacks loans and business.
So that will have an impact on that portfolio as well.
Have started to see.
And the.
Genesis of the faster payments business, taking hold I think thats a good fee income play for us and.
Several programs launching.
It will be a ramp up period from the.
The stars. So we will start just by the end of 21, I think you see an impact from that more so and then in 22 and beyond as that continues to grow there's a lot of interest in that in the marketplace. So we have a.
Hi, hopes for the future of that business line as well. We also entered some other business lines in acquiring and.
Yeah that that should ramp up a little bit.
I think also that starting from scratch.
Lauren longer ramp up period before that's truly material but.
See some more business from that and if you start compounding those new opportunities I think that they started to have an impact.
In aggregate even earlier.
Do you have any follow up revenue because it.
Okay, and you guys think that that will be some of those broader initiatives that will be on display and the 2021 fiscal kind of financials.
Good morning, and as those in there and there is also you know other business, we've signed and are continuing to sign so there's money lying in launching which we will announce that.
Well start to see that ramp up and were excited about the prospects for that business. So there's a number of new initiatives I think that have come on recently as well that will start to have an impact as the year progresses.
Great. Thank you guys for taking my questions I appreciate it.
Thanks, Mike.
Thank you. Our next question comes from Steve Moss with B. Riley Securities. Your line is now open.
Good afternoon guys.
Starting with.
Starting with just kind of like loan yields they were up nicely over quarter over quarter and definitely seen a.
Re mixing within the portfolio here this quarter, especially on it.
This is just kind of curious.
How you're thinking about loan yields going forward here, just just into the fourth quarter seems like it's kind of a decent leg up.
Yes, sorry, Steve your last part cut out on either.
Just seems like for a loan yields I'm sorry into the into the December quarter seems.
Seems like it could be another.
Another us another step up in loan yields here for the upcoming quarter given the ERP remix.
Yes, we would agree with that yes.
Yes.
And.
Certain portfolios or you know are going to come in higher than others or lower given the rate environment, but as we continue to shift that mix.
Community Bank has lower yields those run off we do more commercial finance.
So we run off securities portfolio and community Bank.
Just swaps that will help the overall yields.
Okay.
And then just.
On the business front, just kind of curious as to what you're seeing for non interest bearing deposit growth.
From your card business I know that you eat deposits kind of obscure.
What's going on there.
Yes, Brad.
Take out.
PPS, we still have some growth that has occurred year over year or last couple of years and would expect that to continue to go.
We're in that business, we are seeking that business and we'll be picking more up.
He IP bubble just tied to it a little bit yeah, what's hard though Steve is.
So.
We have the very discreet card the stimulus card. So we're loaded on our cards that were issued from treasury. So those are the numbers, we've been calling out.
We've also called out we've seen.
Above normal growth in overall deposits twofold little bit slower consumer spending we believe but also folks that are getting stimulus money and then taking it and putting it on one of our partner GPR cards and and so it's hard to.
Tell exactly it's a money is fungible, where that came from but thats pretty consistent with what you know talking to our peers across the industry that everyone is at.
Elevated levels of deposits. So in absolute terms, probably card deposits will come down year over year.
If you try to back out our core business, we would still continue to expect some growth there and then on the new programs I discussed stage in our block moneyline another so.
Some of those leakage in our block is converting portfolio. So we'll see.
Impact from that business among others.
We'll be rolling over this year as well so.
Should we still expect to see strength and opportunity and growth in our payments business.
Some years.
Okay.
And then.
I'm not sure that this was answered just on the commercial finance portfolio you had good quarter over quarter growth I know you guys alluded to more.
More normalization in certain portfolios, but how is the pipeline looking and.
How are you thinking about loan growth you tend to see pretty good growth.
In the December quarter.
Yes, I mean, I think we're seeing more transactions to take a look at and.
In the pure commercial finance, so you're talking about your asset based lending.
And your factoring.
Some of the other things because of yield.
Markets are coming down and there are some cases, where we're choosing not to play because the yield is too low. So I think you're going to have some mix in that but if you think naturally through the economic cycle. This is the time that commercial finance starts to build in China.
Okay. Thank you very much I appreciate that.
Yes, Thanks, Steve.
Thank you and our next question comes from Frank Schiraldi with Piper Sandler Your line is now open.
Hi, guys.
Just on the on the deferrals or.
Where they were at the end of the quarter. So is there any expectation or any color you can give you know based on your conversations.
With borrowers and what percentage.
No what piece of that 6%.
May need further attention at the end of the deferral period.
Well, so obviously the biggest piece of that.
Does the hotel motel portfolio that we have in the residual community bank.
And we are seeing improvement, particularly with the type of properties that we have.
But certainly they're going to need continued assistance through the winter months and then we will come out in the spring kind of see what happens and are they getting closer to normal levels, where they can resume traditional fee payments. So that's the big thing.
We mentioned in there the seat or.
Relationship relatively small, but you have that.
And then there's some things that are in the small tickets finance again, not very large at all in all this depends on what's going on in particular marketplace geography, there's a lot of variability around the country on who's open and who's not and where there's.
Those are still shut down to a bad they're gonna struggled for a period of time yet so.
We'll see what happens with those and I think it's a board.
I understand that a lot of the hotels as well our interest payments yet not just it's not full principal.
Principal and interest so.
Making some.
Contribution.
Okay.
And then you also talked about if we look at where krestmark sort of be a net charge of cumulative net charge offs in the last downturn in the great recession.
Yes, I think.
You could you put a 2.5%.
Is there any you know as we sit here today and as you look out and.
So a lot of uncertainty still on the on the credit side, but.
Do you know do you expect that that.
Is likely to be lower this time around higher it's just too early to say or any any thoughts on on that front.
Well one of the things that's a good indicator of how that's going to go is the pure commercial finance I am talking about asset based lending and factoring you'll notice the balances have gone down considerably which means that those products are working exactly as design, which as the volume comes down.
You collect the receivables you pay down the debt and that's why you have even in a downturn environment such.
Such a low loss rate. So if the balances help you that gives you some indicator of where we think that's headed.
We're continuing to watch delinquencies in that space.
Other than the areas that I called out there is no specific thing that's happening you're not seeing much of a change at all so we feel pretty good about where that portfolio is today.
However, our crystal ball isn't any better than yours is Frank. So you know we continue to monitor the the portfolios very closely and.
We'll react to two.
Performances as is required.
Okay.
Then just finally I wondered if you could provide any.
Any help with run rate.
Spend side.
You know, particularly I don't know if there's any breakout of other expense.
And where that might trend going forward.
Yeah, we.
Yes.
We called out a couple of one time items, we will.
We prepaid $110 million of long term debt that we don't need anymore, and our borrowings and.
And then there was some of the employee severance costs.
And some other year end type type of expenses as we prepare to to invest.
Yes for 2021.
I would expect outside of the March quarter.
That are.
<unk> expenses and the other three quarters was.
21 would be less than they were in this quarter, so certainly under $80 million.
Side the tax quarter.
Okay.
And I am sorry did I might have missed what you broke out of the other expense line, but is that more.
$9 million to $10 million as opposed to 15 16 million going forward or.
Did you break out a one time item out of that.
Not well, what we called out for it again in the earnings release.
And then the script was.
It was 1.7 prepayment penalties for paying down long term debt at the flub.
And then one and a half a million dollars.
Severance costs.
Okay all right. Thank you.
Thank you and our next question comes from William Wallace with Raymond James Your line is now open.
Hey, Thanks, Good evening guys.
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Maybe just trying to think about some of the moving parts on net interest margin first could you one just break out what the purchase accounting accretion was in the quarter what the EPS.
Expense savings will be from the FHLB pre pay and then it looks like.
Of the 110 basis points of pressure from the IP deposits. It looks like as it stands at October 23rd you, probably going to get about half of that.
Back what's the balance is sitting at about 829 right now do you think that that those deposits do they go to zero or do you did they did they level out somewhere and then you start to deploy that liquidity elsewhere on the balance sheet.
Hey, Wally this is Glenn the latter.
We think the final tail.
Pay down another lag this quarter, but the final tailed peers people are using them for savings account or certain folks are and so we expect to have some level of those deposits throughout fiscal.
Fiscal year, 21, and we'll deploy them as we have opportunities with earning assets.
Purchase purchase accretion is.
Yes.
You know Thats run itself off so we're not getting any more benefit from that.
Think of that.
You know the Krestmark portfolios, primarily short term in nature. So.
Maybe a basis point left.
And that's about it from there.
What was the third part of your question to ask HLB. The FHLB expense, yes. So so it's it's about a 10 month payback so.
Will benefit all things being equal.
Save about $2 million of interest expense next year.
Okay.
And then my follow up question.
On the buyback you said I believe that your appetite would be great.
Governed by your Cat your internal capital constraints any any.
Commentary you could provide around what capital levels.
What would make the buyback.
Unlikely or however, you can frame that the capital conversation and then also are there any constraints at the holding company as it relates to just cash on hand to to continue to buy back or you have plenty of plenty of EPS needed dividend up et cetera.
Yes, no no constraints.
At this time and.
We've we've signal.
On a.
Our capital ratios will move around a little bit during the year I tax season, but.
On an average we're going to be looking in the 9% leverage or north of that in.
You know 12, and a half 13% on risk weighted.
Okay.
Okay all right. Thank you.
Thanks Wally.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to the speakers for any closing remarks.
Alright, thank everybody for joining the call today and I Hope you have a great evening. Thank you so much.
Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program you may now disconnect.
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