Q4 2021 Meta Financial Group Inc Earnings Call
It expanded the range of financial services, we offer to our partners and the company's significantly outperformed the S&P 500, and Russell 2000 indices.
Brad surrounded himself with talented executives and created a strong leadership team.
We benefit from the deep bench of experienced and highly qualified senior level executives. The attracted who are executing our strategy and taking the company forward.
At the same time I also want to recognize brad's commitments and that is mission of financial inclusion for all which has powered our business and inspired our ESG and <unk> efforts.
To facilitate a smooth transition Brad will serve as a strategic advisor to meta and the board until the end of 2022.
Ed will remain on the metal financial group Board until the next annual stockholders meeting, which we expect will take place in February 2022.
Having completed the leadership transition to Anthony and myself, our board of firms that med as corporate strategy and mission remain the same.
Our strategy will continue to center around optimizing three key metrics.
Our mix of earning assets with an ongoing emphasis on growing our portfolio of higher return assets.
Maintaining a high percentage of lower cost stable core deposits and continuing to improve operating efficiencies and simplify the way we run our business.
Turning to our results during fiscal year 2021, meta generated revenue of $550 million and net income of $141 $7 million or $4 38 per share.
The fiscal year 2021 earnings per share represent an increase of 49% over fiscal year 2020.
We are pleased to achieve a return on average assets of 174%. Despite the large cash balances held due to our participation in the U S government's economic impact payment program.
In our recorded return on average equity of $16, 84%.
Our banking as a service pipeline has never been stronger and we serve as the backbone for financial technology companies and others, who offer innovative financial services, while supporting our established partners with their programs.
We believe <unk> is well positioned to continue generating value for all stakeholders as we execute our strategy and build upon our ESG and <unk> efforts.
I'd now like to provide an update on our process to better align our credit administration policies with OCC guidance for National banks, which we discussed last quarter.
During the fourth quarter, we completed a review of our loan portfolio and establish a new baseline for our portfolio metrics going forward.
This resulted in the downgrade of certain credits in several categories, but these ground downgrades do not indicate a deterioration in these credits expected performance.
Further these changes do not reflect an increase in overall credit risk for past or future periods, and we do not expect any increase in losses. As a result of these one time administrative adjustments to risk ratings.
I want to reiterate our loan and collateral management practices have proven effective in managing losses through economic cycles over the last 20 years.
Excluding approximately $1 $5 million of professional expenses to assist with the comprehensive review of our portfolio and set this new baseline the impact to our financial position is minimal.
Following the end of the fourth quarter, we had a couple of positive developments I'd like to brief you on.
In October we sold $30 million of legacy community banking loans to central bank and have agreements in place to sell approximately $161 million more.
Following the sales the legacy community bank portfolio will be less than $8 million. As these sales will wind down nearly all of our legacy community bank loan portfolio.
Included in the loan sales or approximately $108 million of substandard and doubtful loans of which $15 million, our nonaccrual loans as of September 32021, representing 39% of substandard and doubtful loan and lease balances and 44% of non accrual balances.
We expect community bank balances to be zero at the end of the first fiscal quarter of 2022, and this will mark the successful conclusion of the first phase of our ongoing effort to deploy our capital in higher return assets.
The net pretax impact of the sales will be recognized in the first fiscal quarter of 2022 and is expected to be roughly breakeven.
In summary.
<unk> performed well in fiscal 2021, as we recorded record earnings and executed efficiently on our strategy and made progress against our three key initiatives.
We are well positioned as we head into the next fiscal year, Let me now turn the call over to our new President Anthony Shred.
Thank you Brett and it's a pleasure to meet all of you on today's call.
Look forward to talking with you in person in the quarters ahead.
If I may.
Let me give you a brief introduction to my prior P&L in leadership roles.
Prior to joining <unk> in 2019.
<unk> President of our acting president of business units at nationwide mutual insurance company.
I, let the transition of nationwide bank, which at the time was a $7 billion assets institution.
From a full service direct to consumer bank to a trust only charterer.
He was responsible for all of its activities and business lines, including credit risk management operations marketing compliance.
Legal and human resources.
<unk> developed a strategic road map and action plan for the transition working closely with its board of directors.
I then served as president of a nationwide pet.
The largest health insurer in the United States before transitioning to meta.
Previously I was in private practice, most recently with the law firm of Baker and Hostettler Codeshare, that's financial Institutions' practices group.
<unk> is a mission driven organization.
As we look forward to fiscal year 2022, we want to ensure that all decisions, we make about new capabilities fit within our mission of financial inclusion for all which continues to be our north star.
We will continue to work at increasing our efficiency.
Making our processes as straightforward as possible. So we can better serve our partners and customers.
Which results in a better financial performance.
Our board and management team believes that our strategy is much further to run.
And we are excited about these prospects.
Glenn over to you to review our financial results.
Thank you Anthony and good afternoon, everyone. Let me briefly summarize our results.
We achieved another quarter and year of solid earnings for the quarter ended September 30, net income totaled $15 9 million or <unk> 50 per share an increase of $2 $7 million from the fourth quarter of fiscal 2020.
For the fiscal year net income totaled 141, 7 million or $4.38 per share an increase of $37 million from fiscal 2020.
Net interest income grew $20 million during the year to $279 million.
An increase of 8% year over year, mainly attributable to the continued optimization of our balance sheet and higher loan balances.
Noninterest income increased to $50 million for the quarter aided by strong payments fee income and an approximately $4 million gain on an equity investment for.
For the fiscal year non interest income grew 13% to $271 million driven by strong payments fee income growth of 23%.
Which was aided from an increase in payments activity related to government stimulus programs.
Noninterest income represented 49% of total revenue in fiscal year 2021.
During the quarter one of our banking as a service partners money Lion completed these back process and became publicly traded on September 20 <unk>.
<unk> through our venture capital arm meta ventures made a $3 million investment and money lie in May 2019.
As of September 30th we are recognizing a net unrealized gain of approximately $4 million on the investment.
We hold approximately 950000 shares of this public equity.
We will measure it at fair value and recognized the mark to market adjustments and noninterest income, while we hold the position.
Non interest expense grew $25 million to $344 million in fiscal 2021, while producing an improved efficiency ratio of 62, 5% as revenue growth exceeded expense growth.
A large portion of the expense increase occurred in the fourth quarter, where total noninterest expense of $93 $6 million increased $13 $3 million year over year.
During the quarter meta incurred one time spend.
$9 million related to investments in our technology and product stack to support future growth.
Furthermore, the company recognized $1 3 million of expense associated with the CEO transition.
Outside of these items traditional expenses remain within historical levels, and we expect total expenses to be in the low $80 million range.
For the first quarter of fiscal year 2022.
Turning to net interest margin.
Net interest margin continues to benefit from our approach to optimizing our balance sheet.
During the quarter, we had strong loan growth, while we continue to optimize our loan mix away from lower yielding assets evidenced by growth in the commercial finance portfolio.
We are seeing momentum in our asset based lending and factoring in portfolio as the economy ramps up and there is a renewed customer demand for working capital.
These factors contributed to our robust commercial finance pipeline and we expect to see continued loan growth in fiscal 2022.
The community Bank loan sales are also a direct effort to optimize the earning assets and as Brent noted, we expect community bank balances to be at zero at the end of the first fiscal quarter of 2022.
Turning to capital in September we announced that our board authorized a new share repurchase program of up to 6 million shares of the company's outstanding common stock expiring in September 32024 during the fiscal fourth quarter, we repurchased nearly 235000 shares.
And have purchased an additional 636000 shares in October through October 20 <unk>.
The board share repurchase authorization and recent purchases reflect the momentum of the business and confidence in the company's outlook and growth trajectory.
The company remains well capitalized with a regulatory leverage ratio for the bank increasing to eight 7% from seven 8% the prior quarter.
This concludes our prepared remarks.
You all for joining us today.
Certainly we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your Touchtone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question. Please press star.
One as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question, we will pause here briefly to allow questions to generate in Q.
The first question comes from the line of Frank Sure RB with Piper Sandler you May proceed.
Hi, guys.
Hey, Brian.
I wanted to start with the expenses Glenn you mentioned in the release you mentioned on the call the $9 million.
One time expense could you dive into that a little further in terms of.
What.
What's in that onetime expense and then just.
Any color on why it was taken all upfront as opposed to maybe being amortized over time.
Hi, Frank.
Sure. There are certainly ongoing investments that we make and development efforts that we do that are capitalized and amortized over time are ongoing projects.
We saw some opportunities really related to the strong pipeline and business opportunities that we saw and felt it was worth making a larger investment in a shorter period of time.
So we can be prepared for.
To serve the customers that we want to serve so youll see a lot of it in.
And the legal and consulting.
Line and then some some other expense so.
Think of contractors consultants staff augmentation.
Type of expenses to.
Pass through on our number one.
A number of items.
So this was partially reflects a larger.
FTE count.
Or is it generally no.
Yes, if you look our compensation cost is down on a linked quarter.
This is this is really.
External expenses that are one time that.
Well, we've guided to where we think expenses will be next year or next quarter and in the.
A low $80 million range back into our.
Normal run rate, but we had an opportunity to prepare for the growth, we see coming down the pipeline and we wanted to.
Plus through that bubble and be able to serve serve more banking as a service customers in particular.
Okay.
And then.
In terms of.
The timing of it.
With.
Bret taking over the CEO spot.
In some ways reflect a change in thinking about.
Consulting fees versus Ftes or.
This timing.
Just coincidental.
Yes, Brian this is Brad.
I think it's purely coincidental.
As it relates to our sort of our strategy and our approach and even some of the deeper tactics around banking as a service. There is no change and we are completely aligned what we're seeing is just a continual ramp up of revenue opportunities and we felt like we needed to do some things quickly to be prepared to handle.
The additional volume that's coming our way so that's purely what it was had nothing to do with the CEO switch in fact.
Lot of this was already in place before the CEO switch was.
Being announced so we've been talking about these things for a time and Thats. The reason, we decided to invest in the quarter.
Okay.
And then just.
Thinking about you mentioned Glen you guys gave for your expectations for the first quarter.
Benches.
Wondering if you can give any color I think.
We expect in terms of bottom line growth year over year kind of 2021 creates some tough comps.
Given what a strong year it was.
But any color you can provide either in 2022 expectation or maybe even beyond that just thinking about the.
The payments niche you guys have created in this banking as a service.
And the moat.
As far as other banks are taking advantage of it.
So maybe either some guide for 2022 or even just your expectation of what.
The core growth rate to be in this business.
Bottom line coming over the next couple of years.
Sure.
We're not providing.
Overall guidance at this point, but we've talked consistently about our strong pipeline.
And.
Both in the payments and the commercial finance.
So sides of the business as you know Frank and payments a little harder to predict the timing of these especially larger partners and program managers.
They require some upfront investments and ramp up.
See how fast.
Customer acceptance and moving things over so so a lot of that is a little harder to predict but.
We look at a three or five year.
Run rate.
Feel pretty good.
Very positive about the outlook of having double digit EPS growth over an extended period of time.
Got it okay, alright, thank you guys.
Yeah. Thanks, Frank.
Thank you Mr Shaw.
The next question comes from the line of Steve Moss with B Riley Securities You May proceed.
Good afternoon guys.
Hey, Steve maybe just following up on.
Maybe just following upon on Franks line of question in terms of growth here.
Card fees I understand you had obviously some extra.
Jousten the prior quarter's numbers, but I figured this is probably a good baseline how are you guys thinking about the growth in terms of revenue there in fiscal 'twenty two.
Yes.
Hi, Steve.
Payments fee income will be growth rates will be depressed year over year, we would expect unless there's a whole bunch more rounds of stimulus.
And.
But what was what was depressed in fiscal year 'twenty one.
Lot of our tax.
Fee income.
It was cannibalized by all the government stimulus.
That went a large part of that went to consumers that would have otherwise taken out in some of our tax.
Products, So we expect to return to normal.
And if that occurs payments fee income.
We will certainly not grow as much.
But we would expect a nice leg up in our tax fee income in 2022 now the government comes out with a bunch of other stimulus programs.
Extends child tax credits and other social programs and we would.
We expect continued strength in payments and and maybe not as much growth in tax so.
There is somewhat of a natural hedge we then put the company together to hedge.
<unk> four.
Government stimulus, but it certainly worked out that way.
Okay fair enough.
Then in terms of the.
I hear you before we went on the robust loan pipeline.
Of course banks loans, just kind of curious when youre thinking robust.
Double digit growth rates for fiscal 'twenty twos kind of what that sounds like to me.
And are you guys seen any supply chain issues or any any disruptions with line of business, just trying to get a little bit more flavor around.
The drivers there.
Hey, this is Brett so.
Your double digit growth rate is a good place to look.
And it's consistent across many of our asset classes, so feeling pretty good about that the interesting thing, particularly in our working capital areas factoring and asset based lending we have pretty good insights into what's actually happening moment by moment and we're seeing good growth there and it is a.
Highly diversified set of customers. So we're not seeing any impact from the supply chain pieces.
There is slowing things down for us our customers seem to be going pretty well and are not experiencing that there may be one or two very specific pockets, where that's happening, but we're not having supply chain issues at all.
Okay.
That's helpful. And then maybe just one last one for me.
Excluding tax on the provision line here just kind of do we think about the provision more or less matching charge offs going forward just kind of curious as to.
How you guys are thinking about that dynamic.
Yes.
Alright, I think Thats thats fair, depending on our loan growth rates.
And then obviously what the seasonal factors are.
For every bank.
We use some of the similar services.
Seasonal factors are starting to come back down.
That will be a tail.
O N.
Two two.
Two provision.
I had one would be just just loan growth.
And having to provide upfront for larger.
<unk> loans, but.
But we would expect overall lower provisioning numbers than we've had in the past.
Okay.
Alright, well. Thank you very much I appreciate all the color.
Thanks, Steve.
Yeah.
Thank you Mr Mas.
The next question comes from the line of Michael Perito with K B W. You May proceed.
Yeah.
Hey, good afternoon, thanks for taking my questions.
Hey.
Sorry to beat a dead horse here on the 9 million Bucks.
Fully clear kind of on what the dollars were spent on so I guess asking the question a little differently. I mean, it's it's called I think you guys flagged it as kind of a onetime technology.
Cost, but it sounds like it's more.
Consulting and legal driven so I guess can you try and maybe break it down a little bit more I mean will there kind of platform upgrades was there kind of a second set of opinions you needed on certain kind of technology protocols or compliance protocols. You guys were doing or just I'm, just trying to get a better handle of where the dollars were spent.
Yes. It was all of that Mike It was it was.
<unk>.
Some quite frankly, some extra consulting and services to help us.
Analyzed a few things that have been.
We've been meeting to get to.
And we are part of our planning, but the opportunities are coming faster than we are ready or or.
Or in many cases, the capacity that our existing team had to get to one because there was so much on the plate. So.
It's a lot of the attack its staff augmentation that we talked about its consultants.
Some of that is a little future looking.
If we're going to go from three acts this product or area, how do we need to be thinking about that and so a lot of those came together this quarter as Bret talked about they were.
They were in process.
And part of the plan that we as a team and a company wanted to work through under Brad's leadership and we continued.
Through the transition.
To execute on that with really no disruption.
So is it a situation where.
I feel like the pipeline has been fairly robust.
Thank you as a service business for quite some time, so is it a situation where the the types of companies or the magnitude of the size of the companies.
He's kind of changing and becoming more complex or was it just the quality of the companies in the pipeline was increasing and you felt like you were letting too much good business go away by not being able to have a higher close rate on the pipeline or or something else.
It's all of that Mike anywhere from.
What's the Onboarding.
Time and experienced lag.
Versus.
Some of the things you set how do you scale up or do we just keep adding FTE in compensation our compensation expenses have increased a lot over the last few years now our revenue has grown faster than that but we thought there were opportunities to get even more scale.
And we wanted to break through it now.
Yeah.
We wouldn't be making these investments if we didnt think there is a return on them.
And I would also point that we're managing this in.
<unk>.
You can see that in our guidance.
Of expenses return into the low $80 million in the December quarter.
Yeah, Okay. No. That's helpful. Thanks for spending an extra extra manner.
Yes, we knew it was an outlier and Thats why this is one that we thought we just wanted to.
Be very clear and put a stake in the ground of what our expenses are going to be here in the December quarter.
Got it.
And then on the.
On the.
The mix of the bass business I mean, it's still on the <unk>.
Payment revenue side is still pretty heavily.
Toward prepaid at this point I think you guys said it was like 79% in the slide deck.
I was curious if you guys are willing to make any kind of bigger picture comments I mean, it feels like the <unk>.
Prepaid and we've kind of talked around this in the past, but it feels like some of the momentum on the growth on the prepaid side has has got.
Got lost a little wind behind our sails and certainly some of these more kind of checking oriented debit card Neil bank type platforms.
Are having pretty big member growth I mean do you.
Does your pipeline show that I mean are there are there more.
And I guess it is.
Probably a good thing where I mean are there more kind of revenue opportunities around these more kind of debit oriented clients, whether you're going to like sponsor credit card or other things like that which prepaid was pretty mile line in terms of where the revenues were coming from I mean any thoughts on any of that.
Yes, I think this is Brett I think you are categorizing it correctly.
The neo banks that are out there and they are wanting to offer a broader set of financial products to their consumers and so we're engaging in all of those things. So a lot of it's remittance payments of various kinds of things et cetera, and maybe even broader consumer products, they're talking to us about.
<unk>.
That is going to happen and the good news for us in many cases those are fee income types of things not as much balance sheet things and.
And I think we are going to increasingly see a mix of that the problem is it's very hard to anticipate the speed in which that transition is going to occur. So for modeling purposes, it's hard to understand that but that is clearly a trend some of US just got back from a conference as what everybody is talking about.
Doing the banking as a service across many of these other products, which were involved in so you will see that mix shift I just can't tell you how fast it's going to happen.
Hence some of the reasoning behind the investment in Vas lines I guess right.
Got it okay.
And then just lastly, I apologize if I missed this but just.
Would love an additional comment on kind of the buyback appetite from here I mean, you have some room on the authorization and the stock obviously had a nice move in the valuation has kind of moved up a bit if you don't mind, just making a specific comment or just more broadly refreshing us on kind of how you think about.
Buybacks as a form of capital deployment that would be great.
We continue to believe.
We're going to generate.
Excess capital.
For the foreseeable future.
And.
Our best opportunities are still with the platforms, we have making those more efficient making a more scalable.
And.
But our earnings.
175, ROA and we're only going to head up from there we're holding the balance sheet flat.
So with that excess capital right now.
Management and the board believe the best use of that as two to repurchase shares.
Providing the best value for our shareholders.
A lot of factors go into that as you can assume including what we think our outlook is.
For not only 20 two's earnings, but 23 through 25 and beyond and so we are very comfortable buying shares at today's price.
Great. Thank you guys I appreciate it yeah.
Yeah. Thanks, Mike Thank you.
Thank you Mr Cheng.
The next question comes from the line of Wally Wallace with Raymond James You May proceed.
Thanks, Good evening guys.
Okay.
Kind of.
Hi, maybe just following on on Mike's line of questioning.
And your comment about the level of gross growth, what you see kind of coming down the pike.
<unk> as a service side of the business.
The amount of <unk>.
First that we're seeing of new entrants et cetera is definitely increasing I'm curious if the competitive competitive environment is changing are you seeing more <unk>.
Smaller banks that are trying to use their charter.
To try to win that business from from you and other larger competitors or are.
Or do you feel like you and I guess really kind of have it havent locked up just because of the regulatory requirements et cetera.
I think in many ways you partially answered your own question I would say the regulatory requirements and also the operational history.
We've got a long history of doing these things learning how to do them well and building a talent base based on a clear path and capabilities internally that will allow us to constantly win in this marketplace are there going to be people, who dipped their toe in it yes. They will.
<unk>.
And then most of them will get in trouble and they will get back out so.
Very few competitors really at the end of the day, there's two of US others that come in are going to be short lived or they're going to have to invest a whole loss should be able to do it. So.
Not worried about it.
I think now as sort of the.
The neo banks are coming in and the market is expanding into other products. It just positions us in a better place to be able to not provide them just the prepaid sponsorship pieces, but all the other components that you bolt on with it as they want to serve their consumers. So.
I think you've got it right.
Tough for others to play.
Sure.
Did the regulators make that clear to two others.
Or is it you have to find it up.
It's hard for us to answer what the regulators are saying to others.
And as you can read the news and see what they are saying, but.
That's.
That's hard to answer, yes, and what I would say Wally is.
We've never had more opportunities than we have today. So yes. So clearly there is some banks doing some good stuff.
The bank or <unk>.
Obviously.
Very capable.
But.
Our pipeline has never been stronger.
Okay.
You might have given this in the release I apologize if I missed it but I am wondering how much of the IP deposits had left on balance sheet.
I'm guessing based on the cash balances maybe not that much.
And just kind of as a follow on to that do you feel like you are.
At close to the kind of optimal asset size range for now.
Given the opportunity to shift the earning asset mix.
Yes.
In our Investor deck, we talked about some of the balances we don't have many left from AIP.
We have moved some balances off balance sheet partnership with some some other banks. So we've developed this year.
That's been very efficient and will help us going forward.
$6 5 billion.
Kind of a good number for us it'll move up and down between six and seven just.
Given the flows of some of our money movement business.
Outside of tax season.
February March will be larger than that.
Well, we think we can run at this plus or minus $6 5 billion for a couple of years.
When you look at how we want to remix the left hand side of our balance sheets.
Okay, Great that's helpful and then.
Just one last just kind of.
<unk> question, but what was the nature of the insurance recovery at least some student loan insurance recovery and is that something that.
Could could recur.
Youll recall may recall, a number of years ago, So well we have purchased.
One portfolio.
We are insured by a private insurer.
So thats.
Went belly up four thing totally unrelated to the student loan portfolio that they assured.
Yes.
<unk> gotten involved in some some other matters that's all public documents.
So they went bankrupt.
Bankrupt.
Were liquidated I guess.
State of South Dakota insurance regulator, and so we have those we carry those as unsecured loans over time, we've received some claims back on that.
State is wrapping up we did get.
Another.
Claim this quarter and we may have one more left.
We expect it to be material.
We will probably get one final claim before these stay close down.
Okay. Thanks.
Normally as you remember that now.
That's all my questions I appreciate your time.
Thanks, Wally Thanks Rolla.
Thank you Mr. Huang.
There are no additional questions waiting at this time that concludes the meta financial group fourth quarter and fiscal year 2021, Investor call I Hope you all enjoy the rest of your day.
Yeah.
Yes.
Okay.