Q2 2022 Meta Financial Group Inc Earnings 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 a reminder, this conference call is being recorded I would now like to turn the conference over to Justin Kim Vice President of Investor Relations and financial reporting. Please go ahead.
Thank you and welcome to the meta financial group second fiscal quarter of 2022 conference call and webcast.
Our CEO , Brett Farr, President, Anthony Charrette, and CFO Glen Herrick will discuss our operating and financial results after which we will take your questions additional information, including the earnings release and Investor presentation may be found on our website at meta 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.
Company undertakes no obligation to update any forward looking statements.
Please refer to the cautionary language in the earnings release Investor presentation, and in <unk> 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 may be discussing certain non-GAAP financial measures on this conference call references to non-GAAP measures are only provided to assist you in understanding meadows results and performance trends.
Reconciliations for such non-GAAP measures are included within the appendix of the Investor presentation.
Now, let me turn the call over to Brett Farr, our CEO .
Thank you everyone for joining met our financial group's second fiscal quarter 2022 earnings call.
Wanted to begin by referencing the exciting news of our new name password financial which we announced last month.
Password is borne out of our company's purpose to power financial inclusion for all and our commitment to providing a path forward to people and businesses. So they can reach the next stage of their financial journey. The name reflects our dedication to removing barriers that prevent millions of Americans from achieving access to the financial system.
And will serve as a constant reminder of our mission to create a path forward for the Unbanked underbanked and underserved to help them achieve economic mobility.
We will make some changes immediately to integrate the password name and work with our partners in the coming months to ensure a successful transition for each of them.
We will complete the transition to password by calendar year end, including the launch of a new brand identity and website.
Until then we will continue to serve our customers under existing brand names during the second quarter, we recognized $2 $8 million of pre tax expenses related to these rebranding efforts and we continue to estimate our total rebranding expenses will range between $15 million to $20 million.
Turning now to our financial results for the second quarter net income was $49 $3 million down $9 8 million compared to $59 1 million in the prior year earnings per share for the quarter was $1 66, as compared to $1 84 in the prior year.
Our income taxes and tax rate were up significantly compared to last year as uncertainty around government infrastructure funding and supply chain constraints delayed the development of renewable energy projects in our pipeline.
While this is beginning to return to normal our fiscal 2022 tax rate will be higher than expected.
In addition, the 2022 tax season deals with mixed results.
Year over year total tax product revenue was up slightly while total tax services product expense was approximately flat. However, we believe child tax credits and excess liquidity from various stimulus programs reduced our expected year over year increase for our taxpayer advance product.
Otherwise the balance of our businesses posted good results, our commercial finance portfolio. So continued healthy loan growth from satisfying the robust demand of small and medium sized businesses for credit. We believe our collateralized commercial finance portfolios are especially well positioned for any potential down economic cycles.
As they have demonstrated during prior cycles.
Our core banking as a service business continues to grow with increased activity from both new and existing partners and our pipeline of opportunities remains strong.
Looking ahead, we are optimistic about the prospects of a rising rate environment.
Our low cost of funds deposit base combined with the mix of our earning assets position meta for meaningful interest income growth under a rising rate scenario.
Now, let me turn the call over to our President Anthony <unk> to provide updates on our lines of business.
Thank you Brett.
During the quarter, we have further refined how we innovate and co create with our partners and clients across our businesses to foster and deepen our relationships.
We remain focused on executing on our strong pipeline of banking as a service opportunities building out new and enhanced products and capabilities to serve a broad variety of fintech Neo banks challenger banks and others wishing to offer banking services through their distribution channels.
Turning to commercial finance, we were pleased with how well the division performed during the quarter.
Our commercial finance loan portfolio totaled $2 9 billion at March 31, an increase of 4% on a linked quarter basis, and a 16% increase year over year, reflecting growth across our product lines.
We continue to see strong demand for our commercial credit with a healthy pipeline of loans and leases total nonperforming loans and leases as a percentage of total loans and leases improved 21 basis points from the prior quarter to <unk>, 95% the allowance as a percentage of loans and leases increased from 184% in the prior quarter.
So 238.
In the current quarter.
Due to the increase in seasonal reserves for the tax service loan portfolio.
Excluding the reserves for tax loans reserves dropped from $1 eight 4% to 159%.
Primarily driven by a reduction in commercial finance specific reserves as the portfolio remains healthy overall.
Net charge offs for the quarter were $11 $2 million.
Primarily attributable to the charge offs on two commercial finance relationships.
Let me briefly touch on today's macroeconomic environment.
Historically, our commercial finance portfolio has performed well during recessionary cycles and periods of economic stress.
As it relates to demand as well as credit losses and in fact, we found such periods have opened up further opportunities for us in particular for our working capital lines, such as asset based lending and factoring.
Lastly, I want to highlight the continued progress in our environmental social and governance efforts.
Earlier this week meta published its second annual ESG report in addition to detailing our community impact program.
And our diversity equity and inclusion initiatives.
It contains an enhanced quantitative reporting, which we will use to measure our ESG progress.
Now, let me turn the call over to Glen Herrick, our CFO to provide an overview of our financials. Thank you Anthony and good afternoon, everyone net income for the quarter ended March 31st totaled $49 3 million.
Our $1 66 per share.
Decrease of $9 $8 million from the second quarter of fiscal year 2021.
Excluding $2 $8 million of rebranding expenses and $900000 of severance expenses, our adjusted net income for the second quarter net of taxes was $52 $1 million.
The second quarter's net interest income of $83 $8 million represents a 13% increase from the prior year's $73 9 million.
Net interest income benefited from strong loan and lease growth.
Favorable shifts in our earning asset mix and additional tax loan interest quarterly average loans and leases grew $124 million.
Or 3% compared to the prior year driven by growth across our operating units, which was partially offset by the sale of the remaining community bank portfolio lower average tax services loans and payment protection program loan Paydowns.
Continued balance sheet optimization combined with the reduction in excess cash from stimulus payments.
<unk> improved the second quarter net interest margin of four 8%.
Third to $4 five 9% in the linked quarter and 3.07% in the prior year.
Noninterest income of $109 8 million down slightly from the $113 $5 million.
Recorded in the prior year payments fee income was $26 $3 million declined from $29 9 million in the second quarter of fiscal year, 2021, which was inflated due to several rounds of stimulus payments.
Core payments and deposit fee income remains strong.
In addition, our quarter's noninterest income included a $1 $3 million loss on the moneyline investment during the second fiscal quarter.
Matt has sold the entirety of its equity investment and Moneyline in total we recognized a cumulative loss of approximately $400000 on the investment dating back to the fourth quarter of fiscal 2021.
This sale is in no way a view on <unk> future and we continue to serve as <unk> banking as a service partner and anticipate growth in this relationship in the years ahead.
Net total tax services product income net of losses and direct product expenses was approximately flat for the quarter.
Fiscal year to date, it was up 6% over the prior year refund advance originations for the 2022 tax season were $183 billion as compared to $179 billion last year we.
We expect to refund transfer volumes and product income for the overall tax season.
And the season similar to last year. We also expect taxpayer advance volumes to return to a more normalized levels in the 2023 tax season absent further stimulus.
Or additional changes to tax credit payments.
Non interest expenses increased 7% year over year, excluding the $2 $8 million of rebranding expenses and $900000.
Separation costs core expenses of $99 $5 million increased 4% from the prior year the year over year increase in expenses reflects additional spending supporting the company's growth as well as overall compensation and other inflationary pressures.
Income tax expense increased to $8 million for the quarter, representing an effective tax rate of 13, 8%.
As compared to $1 $1 million with an effective tax rate of one 9% for the prior year.
As previously noted the increase was due to a reduction in renewable energy investment tax credits when comparing to the prior year period.
We repurchased 736000 shares during the quarter at an average price of $57 seven one.
As of March 31, we have $4 9 million shares remaining under the current repurchase program.
At the end of March we submitted the necessary notifications of our intention to retire.
Our floating rate subordinated debt of $75 million at par in order to reduce interest expense, which is now set for redemption on May 15 2022.
The company remains well capitalized with a regulatory leverage ratio for the bank of seven 8%.
As a reminder, our march quarter leverage ratios are seasonally lower as a result of the higher average assets during the tax season, when using end of period assets. The bank's leverage ratio was eight 9%.
That concludes our prepared remarks.
Operator, please open up the line for questions.
Yes. Thank you if you would like to submit a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove a question. Please press star followed by two again to ask a question Thats Star one.
Turkey during a speaker phone please remember to pick up your handset before asking your question, we'll pause here briefly ask questions are registered.
Our first question comes from.
Frank Schiraldi with Piper Sandler.
Frank Your line is now open.
Hey, guys.
Hey, Brian how are you doing.
Good how are you going to.
Oh.
Just a quick.
Well just starting with the.
The card fee income.
I'm wondering if it would be.
Possible just given the pipeline you guys are currently.
And then considering the stimulus of last year.
Year over year limitations from.
Any color you can provide.
In terms of where you expect that to trend for the remainder of the fiscal year.
Hey, Anthony why don't you talk about our business pipeline and then Glenn you might just give them any information on the on the fee income specifically.
Sure. Thanks Frank.
You noted fiscal year 'twenty, one was elevated due to the numerous rounds of stimulus. So we certainly recognize that.
Going forward, we expect continued growth from both existing and new partnerships with a focus on fee income generating opportunities. So are our pipeline remains strong Glenn.
Hi, Frank we would expect as you know the March quarter is.
Seasonally our highest quarter of card fee income.
Not only for our activities.
Directly in the tax space, but many of our partners.
Have customers that load their tax refunds on their cards.
We would expect.
Card fee income to be a little lower.
The coming quarters compared to tax season, but then reset that base for growth from there.
Okay.
And then in terms of expenses, sorry, if I've missed.
Something in the release I saw the rebranding efforts.
Was there anything else other than the tax business that kind of bumped expenses.
On a.
On a temporary basis, just wondering again same sort of question on the expense base any sort of color on where that could flush out.
In a more normal quarter.
Yes, Frank of course, we reported the the amount that was associated with the rebrand I'll tell you, we're experiencing inflationary pressures like everybody else and some of these categories.
Particularly around compensation and some of our particular disciplines are hot right now and so some of that has to do with the inflationary pressures there.
And frankly also noted we had $900000 of separation expense this quarter.
Okay. So you've got the separation expense you got the rebranding and then there is.
In terms of the comp line.
A significant amount that just flows through this quarter from the tax season right.
All right, great and should that.
Copies.
Comp expense will be lower in the next three quarters.
Okay. So I guess as I'm thinking about comp from the December quarter is that a better run rate or.
Then.
And in the March.
It's a good starting point.
We will see how things shake out as it's.
As Brent mentioned Theres, a lot of pressure on compensation.
Given <unk>.
Given us given our history and banking as a service.
You might imagine there's a lot of pressure on our staff.
Especially as as folks entering this market they are looking for talent.
Sure.
Okay, and then just on the.
One thing from the model that caught my attention.
You might have mentioned that Glenn but the.
The tax services of course, we can't find right now with the tax services yield.
In the quarter was much higher than the year ago period.
And just wondering if you could talk a little bit about I know thats really only.
An issue that we see in the March quarter.
The tax business loans, but.
And why was that so much higher just year over year those are those yields.
One of our tax partners there is a.
A new product or sub product.
That had an interest component to it.
But have not been there.
So I mean I got it.
Thinking about next year as we do our modeling for next year, it's not unreasonable to assume that that product will be back again.
Not a temporary blip.
No not temporary.
Okay.
And just if I can sneak in one last one just on the you talked about in the release.
At the end I think it was in the period, we had 185.
Billion in customer deposits at other banks.
I assume that's still the direct stimulus stuff, but I'm just wondering if you have expanded that at all to two additional.
Partnerships.
Yes, Frank one of the things that.
We learned through the stimulus program.
Really how to better exercise our deposit transference capability, which is what you are talking about.
And we continue to expect to maintain a flat balance sheet.
And the way, we will do that and still generate meaningful growth in card fee income.
By increasing our use of deposit transference.
So I don't know that we have disclosed any numbers on it but not all of those deposits that are off the balance sheet our stimulus related.
Okay.
Great well I'll, let someone else jump in and ask the question. Thanks guys.
Thank you.
Thank you Frank.
Our next question comes from.
Michael Perito with K B W.
Michael Your line is now open.
Hey, good afternoon guys.
Hey, Michael.
On the.
The tax the total tax season, I think you guys said and wrote in the release that you expect the kind of.
Total season revenues I think if I heard you correct to be similar year on year I guess the specific question is last year, you guys had quite a bit more refund transfer volume.
In the fiscal third quarter than the normal I think there might have been some delays it feels like 10 years ago now so who can remember, but I guess it said another way is that it seems like that could be expected to occur to some degree again and I just want to clarify that I'm hearing that correctly.
Hey, Glenn once you take that.
Sure Hi, Mike.
Yes, so we're.
You're talking about net.
Net tax.
Earnings tax business earnings.
Our 6% ahead of last year year over year, but to your specific question, we think that will contract a little bit.
<unk> last year, while we will still have some carryover.
Carryover into the third quarter, there was a higher percentage of carryover last year in the third quarter because of <unk>.
More delays last year on a relative basis.
The delays this year by the IRS got it okay alright so.
Youre talking something more like fiscal <unk> 'twenty than fiscal 2021 liquids unusually elevated now not to say that that's what it'll be but directionally yeah. Okay.
Great and then on the margin.
I saw on the presentation, you guys kind of have the updated parallel and ramp sharply.
Obviously, it's a pretty dynamic rate environment here, Glenn and I was curious if you could maybe spend a minute and just give us your thoughts about where we go from the $4 78 here today.
41, I should say today too.
If we do get some type of scenario, where you get a 50 basis point hike in may or because I correct me if I'm wrong I guess the reason for the question as you guys with your funding.
There should be less of kind of a law of diminishing returns here as we get deeper into the tightening cycle correct. I mean, you guys would expect to be able to maintain your benefit per hike, probably at a better rate than other banks, whose deposit betas would theoretically rises as the rates go higher does that make sense and are you able to give us any indication of where the NIM.
In the current kind of consensus outlook on forward curve on the forward curve.
Hey, Mike.
So I think you described it very well what I would say is that we.
We have to go through a little bit of a period of repricing. So even though when you have variable rate transactions, where you have very short duration items. It takes a little bit of time, so but your description. This is our best time right because rates are going up we unlike others, we have the greatest benefit.
At of rates going up.
And we're going to receive a great deal of benefit from it.
But most of it's going to show up in fiscal year, 'twenty, three and onward, just because of the repricing time that it takes even for short duration instruments.
And then Mike I would add.
Specifically, so we've talked about.
4%.
And the ramp model.
We're comfortable with.
At 100 basis points as Brent alluded to it it all depends where is the demand.
And for US, it's less around the deposit beta and more about the loan pricing data.
And where competition.
How fast the liquidity washes out at other banks or finance companies.
But certainly.
Certainly it should be a net positive for us.
Okay, and then just lastly for me on the.
The charge off the non tax related charge offs in the quarter I think I saw somewhere in the presentation that there were a couple of factoring relationships that that you guys charge.
Chuck charged off.
Wondered if you could give us a little bit more color there.
Any other credit commentary as you look forward. Obviously, there is some increasing concerns about some consumer small business health deterioration.
Later, this year and into 2023 I'm curious what you guys are seeing as well just more broadly as it stands today.
Yes, so it's a good question so we have.
Very robust collateral management process that.
The last part of your question as we go into a recession benefits from two things. One is we will have much more.
More control of collateral and therefore any potential losses, secondly, particularly our working capital lines.
Are going to get the opportunity to grow quite a bit because others will be fleeing traditional banks and don't need our collateral managed process, which throughout multiple cycles has done extremely well with very little loss rates.
What happens in some of these as everyone saw you get a one off and we got a couple of one offs through this but there's the portfolio was very strong it's performing well all of our collateral management controls are executing as they have been for a decade in that business.
So even as we enter into what could be a recessionary environment, we're very confident about the control environment, we have there.
Yeah, and I would add are in our nonperforming loans are.
At a low point of the last 18 months.
Great. Thank you guys for taking my questions I appreciate it.
Thank you.
Thank you Michael.
There are no further questions in queue. So as a reminder to submit a question Thats star followed by one.
Our next question comes from.
Steve Moss with B Riley Securities Steve Your line is now open.
Good afternoon, guys not sure what happened there.
In terms of just.
One just touch on your expectations for <unk>.
Taxes next season, I guess, a little surprised by the weakness here, we saw a lot of inflation over the last nine to 12 months.
I know, we had stimulus, but kind of what gives you guys. The comfort that you will get a rebound next year I just want the higher inflation, we saw here would have.
Perhaps impact of consumer, but more to driven demand at a better level.
Hey, Glenn do you want to take that.
Alright.
Yes.
Are you talking to specific like on.
The tax rate and the investment tax credits or are you talking about the card activity.
The refund.
Vance product.
The refund advances, okay Im sorry.
Well, a large component of the.
The.
The customers that our partners serve in the tax business.
Those with earned income tax credits.
Where we.
They received sizable refunds every year.
And those refunds were.
Lower this year on average because of the child tax credits that were received throughout.
Calendar year 2021.
And that's where do you see our refund transfer our payment.
Tax payment processing product did well.
And we will grow that a little bit year over year, the refund advances, which are tied closer to the refund amounts.
Those are.
Theyre basically the same year over year, what we thought they would be higher this year.
Okay.
Helpful. I appreciate that clarity there.
And then maybe just on.
Sure.
The changing environment here.
With rates moving kind of curious I mean, obviously you guys benefit from rate hikes, just kind of curious are you seeing any changes in <unk>.
Loan pricing already here, just given move in the curve and and if theres any.
Any dislocation.
Already creating some maybe some extra activity for you guys.
Yes, so a couple of things.
One obviously variable rate items that did not have floors. Now some of them are do have floors, but very bright onto that have floors. Obviously, we're getting more on it right now so I think thats going on.
There still is excess liquidity out there.
So, particularly on some of the fixed rate stuff.
We're seeing some pricing that we're not willing to chase.
So you might see that more in like the leasing portfolio et cetera.
Last thing I would say is the migration out of banks traditional lenders is already starting.
We're looking at more ABL deals.
Why is that we have.
In a long time.
And so we're going into those and picking and choosing which ones that we want to do that meet our credit profile and our pricing profile. We think thats just the beginning as rates have their impact and goes to the economy. I think we will get a lot more opportunities to grow the working capital. If you look at our asset based lending and factoring line.
Over the last 12 months linked quarter, it's already had significant growth, but most of that was through same clients additional sales.
Post Covid now, we're getting new lines, but on the books as well so I expect to see that line to be growing quite a bit.
Over the next few quarters.
Okay.
That's really helpful.
And then maybe just in terms of.
Obviously with the stress is coming on the system I'm, just kind of curious as to.
How we think about.
Reserve modeling going forward.
With FIFA and all that stuff just kind of curious.
Is this kind of like the bottom and the reserve X X.
Tax.
And just what you guys thought processes there.
Glenn I'll, let you take that one.
Yes.
To predict Steve.
If this recession actually occurs or not certainly that's where that's going.
If you're a bank investors seems like everyone's assuming there's going to be a recession.
<unk>.
Yes.
And even if there is some pullback in the economy.
We still haven't unwound all are.
Covid pandemic.
Seasonal factors.
I wouldn't say if this would be a bottom necessarily.
For us at all.
In fact.
Again, depending on how bad it gets there could still be some room for us to bring down allowance levels, but.
I wouldn't expect them to.
<unk> had.
Had higher from here unless things get really bad.
Okay.
And then maybe I'm, sorry, I'm sorry.
I was just going to emphasize in that.
Yes.
Based on the asset classes that we.
We have been in.
Really being focused on collateralized commercial finance.
Right.
Okay.
And then maybe on the securities portfolio here, just kind of curious as to what the duration of the portfolio is kind of curious how youre thinking about cash flow than what your reinvestment rate is these days or given that you are seeing more.
Customer demand and we should start thinking more about a bit of.
Continuing to see that Remixing.
Our loans.
Yes, we're going to we're going to remix hard.
We'll remix hard this year again and.
So we duration were four four and a half years, we're right in that range.
So hopefully we've taken the worst of the.
OCI impact.
Kind of measure that more towards the five year.
And.
But we also have a number so we're.
We will amortize off 30 plus million a month easily.
That will amortize off as well as we have a number of variable rate securities.
We could liquidate as we.
As is our commercial finance portfolio grows.
Okay.
And then.
Lastly, maybe just on.
Clearly you guys on.
The redemption of the sub debt just kind of curious on your level of your appetite to buyback here.
Going forward.
Yes, I mean.
Obviously, we talked about.
Sub debt.
We have to remember as I alluded to earlier, we are going to manage as best we can to a flat balance sheet, which means unlike other financial institutions, we don't have to grow capital to grow income and so as it is available we will distribute it to our shareholders in <unk>.
Patient way and right now the best way for that to happen is through stock buybacks when we can.
Alright.
Thank you very much I appreciate all that.
Thanks.
Our next question comes from William Wallace with Raymond James.
Your line is now open.
Thank you hi, guys.
Hi.
Question on the loan so your loan growth was a little bit lighter than I might have anticipated given what we've been seeing.
Across the industry.
I'm wondering one it looks like maybe maybe more of the consumer products are.
A little bit slower I'm wondering is any of this by design or is it just a function of it is what it is.
Maybe provide a little commentary around the loan growth and how that performed relative to your expectations.
Yes.
Few things it depends on which lines you are looking at it but if you look linked quarter to linked quarter remember, we're down to $150 million in PPP loans from.
A year ago.
We got rid of the entire community bank portfolio, which is documented in the presentation, which was pretty big.
And last year.
Tax refund paydowns came slower and.
So you had a little bit more of a hangover there so actually be cleaned all that up total loans, we had a pretty good growth rate.
Well I guess I'm looking at it on a sequential basis in the fourth quarter, excluding the community bank impact it looks like you were growing in.
In the 20% annualized and then in the fiscal first quarter. It looks like it was even in the 30% annualized.
And this looks pretty clean to me, it's low single digits.
That's where my questions questions being right. So I'm, just really more sequential and year over year.
Yes, Glenn anything you want to add to that.
No I mean, there is some seasonality in some of the commercial finance we are never targeting.
20% loan growth. So I think annualized will be in the mid teens as we talked about.
Off of a larger denominator.
Commercial finance.
And so that's what we expected.
Consumer we're not not in a rush of lot of those are forward flow commitments and so depending on the.
The timing of the sales.
Those those will move up and down we're never going to hold a lot of consumer loans on balance sheet.
And then you've got various timing in your and your government guaranteed your SBA loans as well so we're happy with with commercial finance loan growth.
And we're very optimistic.
About opportunities there over.
Over the next couple of quarters for sure.
Can you all.
Do you all look for other avenues to deploy liquidity into other higher yielding assets other than your commercial finance businesses that maybe quite as sponsorship or with some of your fintech or anything like that.
Go ahead Glen.
Yes.
What are kind of consumer credit products, primarily are there.
We will call it credit sponsorship anymore.
It's really banking as a service partnership lending is what we're doing or.
I want to be more than just running out of charter.
Think we've proven that and bringing some different capabilities as well as other products to that mix.
And that's where we will use that you can see our warehouse.
Warehouse finance portfolio is.
Way for us to.
To deploy liquidity into <unk>.
Very very good risk adjusted returns.
Then the securities portfolio so.
Some of that is.
The retained flex flexibility as our commercial finance loan portfolio growth. So.
So long way of saying, yes volume all of that.
Okay fair enough.
That's all I had I'll step out thank you.
Yeah. Thanks, Thanks Ross.
Thank you William.
And that concludes the meta financial group second quarter fiscal year Conference call. Thank you for your participation you may now disconnect your line.