Q2 2021 Meta Financial Group Inc Earnings Call
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.
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.
Now I'd like to turn the conference over to Brittany Kelley Elsasser director of Investor Relations. Please go ahead.
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 line, Harry will discuss the results of our second fiscal quarter ended March 31st 2021 also participating in this call is Brent spar hull.
President and C O all of Medibank.
Additional information, including the earnings release and Investor presentation may be found on our website at net of financial group Dot Com as a reminder, our comments may include forward looking statements.
Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ the company undertakes no obligation to update any forward looking statements.
Please refer to the cautionary language in the earnings release Investor presentation, and in meta 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.
Italy 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 of the Investor presentation, now I will turn the call over to.
Brad Hansen.
Thank you for joining meta financial group second fiscal quarter 2021 earnings call.
Other bank once again had good results in the second quarter with net income up 13% to 15 9 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.
Serving as a financial Asia for the U S Department of the Treasury's Bureau of the physical service as the issuer prepaid debit cards to consumers for economic impact payments or AIP, Inc.
In total we have distributed $24 $2 billion in stimulus bonds. Since this program was initiated in April of 2020.
This work is core to our mission and we are honored to be able to see.
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 help save over 18000 jobs and assisted nearly 700 businesses. Our PPP loans through rounds wanted 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 business has helped where in community development development financial institution or <unk> 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 loans was tempered by the excess consumer liquidity created by federal stimulus payments that coincided with this tax season.
We are seeing higher than normal late season refund transfer demand this year, which should result in some volume moving to our fiscal third quarter. We believe this is a result of the delayed start to the 2021 tax season and the extension of the filing deadline to May 17, we expect overall Tac.
Season refund transfer volumes and associated fee income to be similar to last year.
We continue to develop our ESG diversity and inclusion efforts during the quarter.
And we are pleased to announce the hiring of key are paying as our chief people and inclusion officer.
A key part of key his role is to ensure that diversity and inclusion become more than just a sound bite.
Our goal is for DNI to become part of who we are as a company weaving it into the very fabric of our culture programs and solutions. The combination of key his skill set and the expanded role of chief people and inclusion officer marks an important point and meta bank's history and the execution.
Our mission to support financial inclusion for all.
On the ESG front, we have completed a materiality analysis that will inform our ESG metrics and goals and under the leadership of our board of Directors ESG Committee established in January we are well positioned to continue advancing ESG efforts have meta.
I am pleased with the significant progress we have made and excited to see us reach the milestone of publishing our first ESG report during the third fiscal quarter of 2021 now.
Now, let me turn the call over to Brett to provide some updates on our other lines of businesses and Glen will follow with some more specific information on our financial results.
Thanks, Brad.
As of March 31, gross loans and leases were $365 billion.
Commercial finance loans made up 69% of the company's gross loan and lease portfolio and totaled $2 five $1 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 a $24.4 million respectively.
As part of our lending strategy, we provide permanent debt financing via United States Department of agriculture guaranteed loan programs.
Gerrard ear backbone art purchase agreements with highly rated large public utility providers and low loan to values.
We also benefit from the tax advantages in renewable J, which flow through the income tax expense line item contributing to higher overall returns.
We originated $20 million in solar leases during fiscal 2021 second quarter compared to $17 $6 million during the same quarter last year.
From a credit perspective, we continue to closely monitor each of our lending portfolios paying significant attention to our legacy community banks hospitality and movie theater loans as well as our small ticket equipment financial relationships in the commercial Finance Division.
Our credit management team has remained in regular contact with these borrowers and we feel comfortable with the level of reserves and collateral in place on these credits.
The company's allowance for credit losses, as a percentage of total loans and leases increased to $2, 71% at March 31, 2021 from two 1% at December 31, 2020, primarily driven by the seasonal tax services loan portfolio.
Allowance for credit losses for non tax related loan categories remain similar to last quarter.
Net charge offs were $3 $7 million per the quarter ended March 31 2021.
The majority of the net charge offs for the quarter were in the small ticket equipment financing portfolio that we have been monitoring diligently and discussed previously.
Nonperforming loans and leases remained relatively flat quarter over quarter, and we have not seen further deterioration in the portfolio.
During the quarter eight hospitality loans were upgraded to pass from watch as of now all but one have resumed their contractual payment schedules and several are now operating above breakeven.
We continue to closely monitor our theater exposure in our legacy community Bank portfolio. However, the outlook is beginning to trend more favorably as vaccination rates improve and new releases from Hollywood continued to rise during the remainder of 2021.
There is also an opportunity for further relief under the shuttered venue operators Grant program and the economic age of hard hit small businesses nonprofits and venues Act signed into law on December 27th 2020.
And our consumer lending portfolios credit remains strong and we have seen no measurable change in performance due to COVID-19.
Flex the strength of our program structuring and guardrails in place.
We are pleased to report that during the quarter we.
<unk> launched the faster money line of credit product into the marketplace.
This is a direct to consumer product designed with the desire to increase financial availability choice and opportunity for consumers, who don't have easy access to credit.
This product will help break down barriers that make it challenging for people to access responsible credit and allow meta to extend our underwriting competencies, while gaining practical experience and insights to better guide our partners.
Our payments Division continues to have a strong pipeline of prospective banking as a service relationships.
Most recently, we expanded our roster of banking as a service partnerships.
The issuing bank for Walgreens newly launched bank account product and partnership with income payments and Mastercard.
Finally on slide 15, we provide additional insight on our venture capital arm meta ventures.
Throw me out adventures, we strategically investing in companies are funds that are aligned with our financial inclusion mission Bay.
The strategy driven investments are focused on verticals related to potential partners lead generation technology or ESG.
We've made 17 investments to date and as of March 31, 2021, we have $25 $9 million in committed capital.
With that I'd like to turn the call over to Glen Herrick to provide an overview of our financials.
Thank you Brett.
For the quarter, we produced revenue of $187 million down 1% compared to the same quarter of the prior year.
<unk> revenue in fiscal 2020 benefited from the $19 $3 million gain on divestiture of the community Bank Division.
Excluding that one time event, we generated promising year over year revenue growth from our payments and tax businesses.
Revenue was supported by tax advanced product.
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 our refund transfer product fee.
As Brad mentioned, we expect to see some refund transfer related income shift to the third quarter as a result of the delay in extension of the 2021 tax season.
Net interest margin decreased to 3.07% for the second fiscal quarter from $4 seven 8% last year.
Largely driven by excess cash associated with the Companys participation in the EAP program.
Absent the inflated cash balances.
Which better reflects the impact from the stimulus programs. We believe NIM would have been $5, two 9%, which we consider to be more reflective of a normalized yeah.
We saw improvement in loan mix that we believe will continue to drive strong margins absence continually 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 that temporarily reduced demand for certain tax services projects.
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.
Non interest expense increased 5% to $96 million per the quarter compared to the same quarter in the prior year.
Primary driver was compensation expenses, which increased due to a return to more normalized incentive accruals and additional employees to support growth.
Our efficiency ratio for the trailing 12 months was 63, 1% on March 31, 2021, and has now been below our target of less than 65% total.
Last five quarters.
I'd like to take some time to provide an update on our participation in the EAP stimulus program.
Through March 31, 2021, the bank has issued a total of $16 5 million prepaid cards totaling approximately $24 2 billion.
Of which $11 6 billion.
Still outstanding as of March 31.
We have partnered with other base to transfer these temporary deposits off balance sheet and in an effort to relieve the impact of the substantial influx of deposits associated with the EAP program.
As a result $869 million remained on <unk> balance sheet at quarter end.
We have also experienced a large increase in deposit balances from VIP on partner program costs.
The balance sheet impact of stimulus one significantly due to the large influx of cash related to stimulus deposits in the fiscal second quarter, resulting in a significant but temporary reduction of net interest margin return on assets and the company's leverage capital ratios.
We will continue to see these impacts in self funds are spent by customers.
However, we do not expect these conditions won't be sustained over the long term and our risk based capital ratios were unaffected and strong.
On slides 29, and 30 of our Investor presentation, we provide the impacts of the IP related balances on our key ratios.
Turning to capital during the quarter, we repurchased nearly 735000 shares at an average price of $40 78.
Under our previously announced share repurchase program.
To further ensure that we maintain a strong capital position, while taking on the deposits from the direct and indirect AIP stimulus funds.
We suspended our stock repurchase program until deposit balances normalized <unk>.
However, the board and management continues to evaluate capital deployment priorities. These priorities include or Gannett growth initiatives additional repurchases <unk> dividends, we will continue to evaluate future activity against our generation of excess capital and within the context of overall cash.
Capital management.
That concludes our prepared remarks, operator, please open up the line for questions.
Thank you.
I'd like to ask a question at this time. Please press the Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Again that is star then one can ask a question at this time.
Our first question comes from Frank Schiraldi from Piper Sandler.
How're you doing.
Hi, Frank.
Just wanted to start with Glen the big increase in the.
Payments card and on deposits 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 you are.
That could trend in the near term on a year over year or a linked quarter basis.
Sure.
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 is temporary and is offsetting what we think is a lower demand for certain refund advance.
Loans and.
So likely some of that will go away a year from now.
Absent continuing stimulus.
Okay.
Also quality.
Seasonal because of the H&R block so that we should continue to look at it year over year and implies.
Yes, you should.
<unk> payments income payments fee income now.
With our current relationship with block.
To have to be higher in our March quarter.
Because of that seasonality.
Okay.
And then just lastly, I wondered if you could talk a little bit about the.
Deposits and 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 as that may be sort of a helpful. Template for the future as you continue to think about optimizing the balance sheet.
Yes, yes, I think thats 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 with other larger financial institutions.
Okay.
Frankly, we've worked closely with outside counsel and our regulators in order to develop a solution in order to achieve this.
Okay, I mean does it provide some fee income or do.
Do we get something through the margin.
Related to these agreements.
At this point in time, it's just a balance sheet management tool.
Got you okay.
Hey, Thanks, guys.
Thanks Brent.
Our next question comes from Steve Moss from B Riley Securities.
Good afternoon.
Hey, Steve.
I guess, maybe just starting on with regard loans here.
Good quarter for loan growth.
Just kind of wondering how you guys are seeing things on the commercial finance side in terms of pipeline pricing and where things can go.
Yes. This is Brad I'll jump in there.
The pipeline is improving I think.
While it has not been as dramatic we've seen some.
Movement in asset based lending and factoring.
There are as you go through a difficult time.
And people get their end of year financial statements when 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 on the product type can be under tremendous pressure and so certainly in our.
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.
Okay. That's helpful. And then just in terms of maybe going back to two card fees here.
As announced called partnerships in the quarter.
And the good pipeline just kind of any color as to how we should think about fee.
Fee income growth and I.
I'm not sure about personal deposit growth 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 next 12 months.
Yes, so those larger deals.
Those larger programs takes some time to ramp up.
And so as we work with those.
Our partners.
Youll see it ramping up over the next year.
Okay.
Alright, and then in terms of.
One last one from me just in terms of the reserve and.
Credit is still pretty healthy reserve, even when I back out tax kind of curious as to what the potential is for.
Reserve releases or.
And any thoughts around that.
Yes.
We feel very comfortable with our current allowance.
Given given what we see in the portfolio.
Across all our various loan portfolios.
Well, we'll continue to monitor that for the appropriate reserve levels going forward, but we feel we're well reserved at this time.
Okay.
Alright, Thank you very much.
Thanks, Steve.
As a reminder to ask a question you will need to press Star then one on your telephone keypad.
Our next question comes from Michael Perito with J B W.
Hey, good afternoon, guys. Thanks for taking my questions.
Hi, Mike.
Glenn I was wondering just really kicking my question has been asked and answered just a couple of clarification things day, 5% to 9% margin adjusted can you just.
Go through again, what exactly Youre backing out was that just the kind of excess cash or was there any other adjustments you are making on that on that accounts yes.
Correct, just 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 strength from.
Some cash, but thats something that we can reconcile to these deposits, especially on the indirect AIP deposits at our partners.
You can see the inflow, but it's hard to tell what's remaining as it is it still.
600 Bucks from their stimulus program or is it still from their weekly paycheck as those funds are fungible.
Right and I guess, that's kind of the next question here I mean, the whole industry writers kind of wrestling with it.
Excess liquidity in the system and obviously I don't expect you guys to 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 a 1 billion plus or minus or any kind of context or additional thoughts you're willing to provide around that.
Yes.
In the remainder of fiscal year or fiscal year, 'twenty, one and could certainly be a $1 billion, we think it will.
It'll ramp there will be a nice ramp down by the end of June from from where we're at today.
We'll deploy a little bit of that cash.
Certainly, but we do expect.
To run off.
Just a couple more quick ones from me one of them just on the tax rate I mean any additional.
Thoughts you can provide on the pipeline of other kind of solar investment and debt that could impact the tax rate or any sense of where that might move over the rest of the fiscal year here.
Yes, no we have.
Strong pipeline, Brad anything you want to highlight there.
I think we can do all we want to do Theres a plenty in the pipeline.
In the niche we try to serve an.
Even longer term considering the current administration, we expect that to continue to be a good business for some time.
So fair to think that.
<unk> burden could be pretty modest going forward near term based on the pipeline you see today, yes.
Yes.
Okay.
And then just lastly.
<unk> line and any thoughts you mentioned the trailing five quarters I think 63, 6% on the efficiency, obviously become out of time here not below the prior target with H&R block on now and some of the other growth average as you guys have and 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.
Yeah, Yeah, what I would say is.
It depends as we've talked before on the mix of business.
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.
As said.
We continue to.
Work on positive operating leverage improving efficiency.
Levels at every business.
And I would also note debt.
These last six months with other stimulus money we've had some very.
High efficiency, earning asset.
If you think of.
<unk>.
Cash sitting in earning 10 basis points at the fed.
It's a really high efficiency ratio for that those earnings as well.
Helpful.
It's fair to think though I mean, obviously the 65.
In the current rate environment, I mean that there will be some positive change on the short term rate environment. I mean, there would be no offset or nothing you could think of probably never seem to be a little certainly some upside to that range. I mean is that directionally consistent or.
So we should be thinking about yes.
Higher rates will be positive.
Yes, okay.
Excellent. Thank you guys I appreciate it.
Thanks, Mike.
Our next question comes from William Wallace from Raymond James.
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.
The transfer product fee line right.
Correct that's correct.
Okay, and that and that if I combine your fiscal second and third quarters, you anticipate that would be.
Near where you were last fiscal second and third quarters on an all in.
Yes, correct, 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 debt was.
You think might be impacting behavior as it relates to stimulus it would have that.
B, so meaningfully higher or do you think that price.
Is it is it possible that you were anticipating that maybe the transfer product fees could have been that much higher as well.
The.
That is all the addition of our block relationship we actually expected the 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.
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.
Okay, and then so the advanced product fees to transfer product didn't benefit as much from H&R block.
Yes, that's correct.
Okay separate structure and economics in that business.
Okay. Okay. Thanks, and then if I could circle back to previous line of questioning about the debt.
Transfer of cash debt some of these relationships.
Am I interpreting what you said.
Correctly, when I think debt you said you worked with regulators and outside counsel basically you've found financial institutions, who are 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 is that fair.
I'm not sure I understood. Your question did you say can you ask it again.
Yeah. So.
Are you setting up relationships now that could be beneficial as you're as you're looking to manage the balance sheet in future periods.
Yes.
<unk> 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.
There is a little bit of both we developed a process and structure and.
In order to accomplish that.
Also identified short term relationships that would help us with the specific.
ERP program issues, we were having as well as some hopefully some longer term relationships that we think will help us into the future.
Okay. Thank you very much and then one other circle back on the questions regarding the model and the reserve levels.
It might be to understate to say youre adequately reserved right now as the as the economic gnomic forecasts likely continue to improve as it is probably going to be hard to keep the CSO model from wanting to put a greater amount of reserves back is that is that true.
Moving onto <unk> no no.
<unk>.
That's fair obviously some of it will depend on new loan growth as well.
If you are.
Trying to.
Figure out whether it'll be reserve releases or not but.
Yes.
Otherwise I think youre spot on Wally.
Okay.
Thank you guys for taking my call I appreciate it.
Thank you.
Sure.
Thank you.
And that concludes the meta financial group second quarter fiscal year 2021 investor call.
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