Q3 2021 Meta Financial Group Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the metal of financial group third quarter fiscal year 2021 Investor Conference call. During the presentation, all participants will be in a listen only mode. Following the prepared remarks, we will conduct a question and answer session as return.

The conference call is being.

The recorded I would now like to turn the call over to Brittany Kelley Elsasser director of Investor Relations. Please go ahead.

Thank you I would like to welcome everyone to them that of financial Group Conference call and webcast, our president and CEO, Brad Hanson and executive Vice President and CFO Glen Herrick.

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 statement. Please.

Please refer to the cautionary language in the earnings release Investor presentation.

And then to non-GAAP measures are only provided to assist you in understanding the meadows result, and performance trend reconciliations per such non-GAAP measures are included within the <unk> of the Investor presentation.

Now I will turn the call over to Brad Hansen.

Good afternoon, and thank you for joining our call today.

A day.

Net income for the quarter was $38.7 million or of $1.21 per diluted share compared to $18.2 million or <unk> <unk> per diluted share generated in the third quarter last year.

Various timing items, including tax season delays.

Additional vision to increase the availability of financial products that offer social benefit and produce economic opportunity for people.

We empower individuals and organizations by expanding financial availability choice and opportunity.

We use our national bank charter to offer banking.

Yes.

This assessment will help further develop our ESG strategy, including the establishment of quantitative goals that we publish in future reports and used to guide our efforts.

Also during the quarter, we launched our community impact program to support.

The way of Ards.

Thanks, Brad.

I would like to provide an overview of our banking as a service business lines, which encompasses our payments tax services and consumer finance activities, along with our other mission supporting business meta ventures met.

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<unk> of well to partner with numerous third party providers.

Over that time, we have achieved significant scale and developed the user friendly infrastructure that allows third parties to choose the solutions that work best for their business needs.

We also expanded our solutions to include all facets of the payments ecosystem.

On to.

The receive refunds by direct deposits instead of by check.

These services provide consumers with significant benefits, including speed safety and cost savings.

Our consumer Finance Division work from third parties to help consumers better control of their finances with empowered spending options and really.

Quarter last year card fees benefited from increased activity related to government stimulus programs.

Refund transfer fee income in this quarter was higher compared to last year.

Due in part 2 of volume shift from the second fiscal quarter because of delays in the 2021 tax filing season.

By our new relationship with H&R block and we expect overall earnings from our tax business to be up even further next year.

A detailed breakout of net tax product income can be found on slide 13 of our quarterly investor deck.

We are starting to see demand rebound within our working capital loan.

Portfolio, which includes asset based lending and factoring these grew 11% on a linked quarter basis, and 51% year over year.

On the insurance premium finance portfolio also experienced strong loan growth, increasing 21% during the quarter and 16% year over year.

The continued remix of the balance sheet supported net interest margin improvement year over year.

This highlights the momentum of our efforts to grow our commercial loan portfolio and continue to replace lower return on assets with higher return on assets.

Expenses increased.

Compared to the prior year driven by increases in compensation due to a return to more normalized incentive accrual levels in fiscal year 2021.

Along with additional employees to support growth.

We also saw higher refund transfer expenses this quarter compared to the prior year.

Due to the volume shift into the third fiscal quarter as a result of the delayed IRS filing date.

As we start to plan for the upcoming year and our strategic priorities, we are falkirk focusing on investments.

And further improving our technology stack to position us for future success.

We are starting to see total assets returning to expected levels, allowing us to reduce our stimulus related cash holdings as consumers spend their stimulus dollars and we utilized third party bank relationships to move deposits off balance sheet.

Going into the fourth quarter, we will likely see elevated deposits.

That's related to the 2021 advanced child tax credit payments being loaded onto the partner cards similar to what we saw within the indirect impact of the previous 3 rounds of economic impact payments.

You will see in our earnings release that meta is now revising.

<unk>, that's credit administration policies and completing the review of its loan portfolio to better align with the OCC guidance for National banks, a process. We expect will take place during the second half of fiscal 2021, we expect these credit policy revisions will have an impact on our loan and lease risk ratings.

The resulting in the downgrade of certain credits in several categories.

We expect this process will result in setting a new baseline for our portfolio metrics going forward, but it does not indicate a deterioration in expected portfolio performance. Further these changes do not reflect an increase in credit risk free.

The past or future periods, and we do not expect any increase in losses. As a result of these 1 time administrative adjustments to risk ratings are loan and collateral management practices have proven effective in managing losses through economic cycles over the last 20 years.

The expected.

Did impact to our financial position is minimal if any including the allowance and provision impact as you can see no adjustments to provision or allowance were made this quarter.

We have included 2 tables on our earnings release that show the changes from the March quarter based on these revised credit policies.

Overall.

We're all element our theater borrower received in July over $7 million and shuttered venue operators grant funds, which are used to bring all payments current since June they have reported theater attendance sufficient to support all operating expenses and debt service and our outlook is cautiously optimistic.

From the key accounts.

We will get past I guess, the moment to compile the Q&A losses.

Okay.

Your first question comes from the line speed loss be wildly securities Your line Standalone.

Good afternoon guys.

And Steve maybe just.

Of available lines, which is more of normal so seeing a lot of growth. There we've had a new deal pipeline coming in there as well some of the term deals we're still doing those.

The rates, obviously are lower and so the tie.

Really competitive.

But we're having good flows there.

I would say, it's strong in some areas and moderate and others.

Okay.

Origination yields these days.

Generally speaking.

Well I think the.

That's the questions answered differently by each asset class.

And factoring yields are.

And I'm curious if you guys could quantify how much of the card fees worse stimulus related and just how do we how to think about that growth going forward.

Okay.

Yeah, Hi, David.

Yes.

Difficult to quantify.

Cash is.

As fungible and.

So many of the stimulus funds were loaded on our partner cards.

Such as net spend or H&R block, it's really hard to differentiate.

On.

Was that driven by the stimulus or some other spending.

Especially the fact that we are seeing the balances go up so there's the.

Theyre holding deposits, which does not generate.

Fee income growth for us so.

We wish we knew the exact answer there.

But the.

Just.

Don't know where that's at.

Okay.

And then to be of squeeze 1 last 1 in just in terms of expenses here just kind of.

Pretty clean quarter, I think versus the expectations just kind of curious on how we think about expenses net of taxes fully behind us from the third quarter.

The biggest increase in compensation.

Was the change in incentive accruals for team members.

Where last year, we were taken haircuts due to the pandemic pretty significant ones and this year, we're accruing incentive accruals at the more normal levels.

Okay.

Yeah.

Alright. Thank you very much for all of that the next quarter I'll step back.

Thanks, Steve Thanks.

Your next question comes from the lineup of Michael The Korean led the <unk> the lines of things.

Thank you good afternoon guys.

Hey, How're you doing.

We've been doing in the past them.

We have of pipeline there as well so we may see consumer lending.

Still be see some growth but the.

And of the other channels you are talking about I think will still take a little bit of time to develop.

Okay.

Just 2 more from me quick 1 just to ask the card fees.

Apparel per se, if youre not willing to comment, but just yeah. It was it was quite a bit ahead of what I was looking for I mean.

Any indications.

The third of the way from the third quarter here I mean is it is it run rating at a lower rate than that I mean, I'm just trying to get a sense of that quarterly run rate I know, it's hard to kind of guide to where it could go on what the long term growth rate is but I mean.

Is it fair to assume that that should step down if we're trying to make a conservative kind of base case here in the fall of order yet.

Yeah.

I think that's fair Mike.

Steve still on listening to that and all of you.

Year ago, our card fee income was around $21 million.

Yes.

We don't think of it.

<unk> core increased to 29 here, but.

We would.

We don't have exact numbers, but we do believe our core.

The fee income business outside of the stimulus likely grew double digits.

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On the balance sheet kind of approach more normal levels again in capital.

Go back up I mean last quarter your leverage ratio of 4.5% by the end of the calendar year it could be north of 10, but it seems like we're approaching if not.

Pretty quickly approaching here of more normalized balance sheet and capital position.

It might be of a quarter.

The 2 out still but just wondering Brad if you could just update us on once that does happen how should we think about capital deployment I mean, the balance sheet shouldnt really be growing a ton and what the fee and ROE generation you guys have in the you'll be accumulating capital pretty quickly just was wondering if you'd be willing to kind of refresh us on on your thoughts there.

Yes.

We've already made the Piper Sandler your line scandalous.

Hey, guys.

Just wanted to ask it trying to get a sense.

I know its been asked already but in terms of the.

Fee income the.

The payments related to fee income and.

You noted that you guys are about 21 million.

Dollars.

A year ago.

I would assume.

And ex stimulus maybe you've got.

Double digit run rate of 10, you mentioned, 18%.

Tough to tell but.

Also in some pretty big deals.

That's the big partnerships over.

The build it on there.

The interfaces on their side as well so.

We have a really robust pipe pipeline really pleased with the quality and the distribution.

Some of these new partners bring us.

Sure.

Higher rates would would the very welcome.

Any updated expectations or thoughts on what you would expect to get.

And in a given rate move call. It 50 bps of 100 bps.

Any updated thoughts there.

Yeah.

Higher is better anywhere on the curve for us.

As what I would say.

Our our liability side is still virtually fixed at zero.

We.

Broke out the distribution of our of our price resets for our loans.

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The this is the same underwriting the.

Of structurally been doing.

Okay alright, thank you.

Yes, Brett.

Brent said.

There is the OCC guidance on.

On on how to manage these portfolios of manage this process for.

Our commercial of the last line of questioning on I'm just curious with.

With.

Some of the shifts in the risk rating.

I would have anticipated that just the function of the plugging in the new risk rating into the Fas 5 model you would have seen your reserve levels have to go up.

Well.

And we are more than comfortable with the allowance levels.

We have today.

Okay.

What was the Genesis of.

Of this.

Kind of.

Decision.

Well I think I mentioned it is just making sure we're aligned with the Occ's guidance for commercial.

<unk> lending practices and the portfolio.

Portfolio management practices and so we're just trying to make sure we're aligned with their guidance and in doing that.

Here's the thing their guidance.

Primarily focuses on things like cash.

Cash flow analysis in the.

The partner's cards and the spend is increasing which is driving the the fees higher I mean is it safe to assume that that the.

The decline to whatever the baseline is is going to be gradual or do you anticipate that that decline could could happen.

The lease.

Of these 6 months.

None of those were issued on our debit card. However.

Same issue or our partners that have <unk> card programs.

Consumers use them as the bank checking accounts.

They're getting the child tax credits and so we're going to consume.

So the question that you're probably not to be able to answer but there was some press recently about a letter written to the CFPB about looking into chimes closure of accounts on I'm curious if.

If you can talk about the the yeah. The decision matrix around you know looking at these of these accounts and the decisions to close them.

Does this have any impact or could this have any impact on meta.

Kind of we do not.

Chime and the don't have any specific information on what they're looking at or how they're managing that but we do monitor all of those kinds of activities against.

Against our portfolio and make sure that we're in compliance with all required regulations and we believe that we are.

Thank you very much.

And that concludes the net of financial group third quarter of fiscal year 2021 investor call. Thank you.