Pathward Financial Inc (CASH) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Fourth Quarter and Fiscal Year 2018 Investor Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to Ms. Brittany Elsasser, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Meta's Conference Call and Webcast to discuss our financial results for the fourth quarter and fiscal year ended September 30, 2018, released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.com.

Company Chairman, Tyler Haahr; President and CEO, Brad Hanson; and Executive Vice President and CFO, Glen Herrick will be sharing some prepared remarks today before we open up the call for questions.

Today's call may contain forward-looking statements, including statements related to Meta and its operating subsidiaries, which may generally be identified as describing the company's future plans, objectives or goals. We caution you not to place undue reliance on these forward-looking statements, which are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated or that we otherwise discuss today. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

For further information about the factors that could affect Meta's future results, please see the company's most recent annual and quarterly reports filed on forms 10-K and 10-Q and its other filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. Meta expressly disclaims any intent or obligation to update any forward-looking statements on behalf of the company or its subsidiaries, whether as a result of new information, changed circumstances, future events or for any other reason.

As a note, all share and per share data reported in our earnings release and during this conference call have been adjusted to reflect the 3 for 1 forward stock split that the company recently affected.

At this time, I would like to turn the call over to Chairman, Tyler Haahr.

Thank you, Brittany, and thank you to everyone joining us on today's earnings call. Before I turn it over to Brad to get into our record results for the fourth quarter and for fiscal 2018, I would like to touch briefly on the leadership announcement we made this afternoon.

As you saw in our press release, the board has appointed Brad Hanson, our current President of Meta Financial Group, Meta Bank and Meta Payment Systems to the additional role of Chief Executive Officer, effective immediately.

I will remain Chairman of the Board through our annual meeting of shareholders expected to take place in January 2019. It's been a privilege to lead this great company for 13 years and to be part of its growth story for more than 20 years. I'm extremely proud of the work that we have done to strengthen and diversify our platform, take good care of our employees and customers, advance our vision of financial inclusion for everyone and deliver value for our shareholders.

Following the conclusion of the fiscal year and completion of the transformative Crestmark acquisition, I, along with the board, determined that now is the right time to transition to new leadership.

I'm delighted that the board has elected Brad to succeed me as CEO. He's a proven leader in the financial services industry and has been instrumental in executing our strategic initiatives. I look forward to continuing to work with Brad in my role as chairman to ensure a smooth transition and I am confident under Brad's leadership Meta will continue to thrive for decades to come.

With that, I'll turn the call over to Brad.

Thank you, Tyler. On behalf of the entire Meta team, I would like to express our gratitude for your service and many contributions to the company. Thanks again.

It's an honor to have been given this opportunity to lead Meta in a new role. As CEO and President, I will focus on continuing to build on our recent accomplishments and growth momentum. Given our strong platform and talented team, I believe Meta is poised to deliver significant value for our shareholders in the years ahead.

The strength of our platform is evident in the fourth quarter and fiscal 2018 results we announced today. We are very pleased to report very strong fiscal 2018 results, which generated record earnings of $51.6 million, up 15% over the prior fiscal year, even with significant nonrecurring expenses, such as the Crestmark acquisition expenses.

For the fiscal 2018 fourth quarter, we are also pleased to report earnings of $8.7 million or 24% per diluted share, and Glen will touch on meaningful items that impacted our results in his remarks.

Our results for the fourth quarter and fiscal year reflect the acquisition Crestmark Bancorp and other strategic efforts to drive profitable growth. Due to the diligent work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver enhanced profitability and revenue growth. Our core performance remains solid and continues to reflect the success of our strategies around client acquisition and discipline around risk management and underwriting, which resulted in strong core revenues and record earnings for 2018 fiscal year.

We are now benefiting from the successful integration of our recent acquisition of Crestmark, which has a dramatic impact on expanding the scale and reach of the company into national commercial lending activities in asset base lending, factoring, equipment financing and leasing as well as SBA and USDA lending. These initiatives are providing a great opportunity for growth as we look to further optimize the balance sheet and more fully utilize our low cost funding base.

Reflecting on fiscal 2018, gross loans and leases grew $2.9 billion at September 30, 2018, growing more than twofold during the fiscal quarter through organic growth and the addition of over $1.1 billion of Crestmark loans and leases.

Our payments division, fiscal year average deposits grew to $2.45 billion, up 9% over the prior fiscal average. Net interest income grew to $130.5 million, an increase of $37.3 million or 40% over the prior fiscal year. And noninterest income grew to $184.5 million or up over 7% over the prior fiscal year. Excluding losses on the sale of securities for the current and prior fiscal quarters, noninterest income grew $20 million or nearly 12% year over year.

Our payments division remains focused on client and partner engagement, and we are pleased to see continued growth in our low cost deposits over the prior year. In coordination with the Crestmark acquisition and other lending opportunities looking ahead, we are continuing to evaluate strategies that will support increasing the long-term growth of our advantageous low cost deposit base.

In the fiscal 2018 fourth quarter, we benefited from a large and improved earning asset mix. And as a result, our net interest margin and our tax equivalent basis increased to 4.27%, an increase of 114 basis points over the prior year fourth quarter and then increased 104 basis points on a linked quarter basis.

Since the Crestmark acquisition closed on August 1, the company's fourth quarter results only reflect the benefit of the Crestmark acquisition for 2 months of the fourth fiscal quarter. So we expect further increases in net interest margin into our current first fiscal quarter of 2019.

Regarding our national consumer lending initiatives, we were pleased to see $59 million in new loan origination activity from the Liberty Lending and HCS programs in the fourth quarter. We have also been actively preparing for a program launch with our Curo product and the process is moving along prudently towards pilot activity in the fiscal 2019 first quarter.

We feel confident that we have the capacity to scale our platform, sophisticated underwriting and decision science capabilities and the experience needed to create programs that address the needs of partners and consumers. At the same time, we are unwavering in our commitment to mitigating credit risk and other risks, managing compliance and maintaining appropriate balance of consumer credit in our overall loan portfolio, while generating earnings as we continue building Meta's national consumer lending business.

We are diligently working with our tax partners to prepare for what we expect to be a solid fiscal 2019 tax season. The effects of our platform consolidation efforts and operational improvements are expected to help drive better customer service and value to our tax partners and we believe we're prepared to anticipate and address the needs of our partners and clients in the months to come. Overall, our earnings provided a return on average assets of 1.12% for 2018 fiscal year, while return on average equity was 10.44%. Adjusting for merger and acquisition expenses in fiscal year 2018, ROA was 1.27% and ROE was 11.75%.

Now I'll turn over the call to Glen Herrick our CFO to provide a brief review of our financials.

Thank you, Brad, and good afternoon, everyone.

On a GAAP basis, for the fiscal 2018 fourth quarter, we reported net income of $8.7 million or $0.24 per diluted share. You will notice in our earnings release and on Slide 6 of our fourth quarter investor presentation, we have detailed some selected items of note that are included in GAAP earnings. In the fourth quarter we took a $7 million loss on the sale of securities to take advantage of the opportunity to fund loan growth primarily from the Crestmark acquisition and reposition our securities portfolio for the current rate environment. We will continue to look to optimize shareholder returns by considering methods to utilize our balance sheet where we feel prospects are best suited for Meta over the long term, while staying nimble to take advantage of market opportunities.

Earnings in the fourth quarter also included the favorable tax benefit of $4.6 million from an amended prior year Crestmark tax return. In addition, direct merger and acquisition related expenses totaled $3.2 million, while expense charges related to the aforementioned operational synergies in the tax division and support areas totaled $3.1 million in the fourth fiscal quarter.

In addition, GAAP net income includes the benefit of investment tax credits, which contributed approximately $4 million to net earnings in the fourth quarter. Through the Crestmark acquisition, Meta acquired an experienced team and sophisticated processes for evaluating, underwriting and managing alternative energy tax credit opportunities, which we intend to utilize to manage income tax expense and to maximize shareholder return. The timing and impact of alternative energy tax credits are expected to vary from period to period, but are expected to be an ongoing source of income for the company, and Meta intends to undertake only those opportunities that meet the company's underwriting and return criteria.

For the 2018 fiscal year, our effective tax rate was 9% compared to 18.6% for the 2017 fiscal year. Looking ahead to the 2019 fiscal year, we anticipate the company's effective tax rate to range in the high single digits to lower teens, including the favorable impact of investment tax credits. This expectation is reflected in our recent earnings outlook for fiscal years 2019 and 2020.

When excluding Crestmark loans and leases, total net loans and leases receivable increased $454 million or 34% during fiscal 2018. Community banking loans grew $168 million or 18% during fiscal 2018. Within the national lending portfolios, commercial finance loans increased $95 million, primarily driven by commercial insurance premium finance loan growth. The consumer finance portfolio increased $195 million, largely driven by the launch of consumer credit products, a consumer loan based warehouse line of credit, and the student loan portfolio.

As we look longer term, we expect our national commercial finance portfolios and lines of business to garner the majority of Meta's total loan and lease portfolio.

Turning to funding. The balance sheet obviously reflects the recent acquisition of Crestmark, which historically supported its very profitable loan growth with certificates of deposit and other wholesale funding sources. Over time, we expect to allow these CDs to roll off to more fully take advantage of Meta's growing low-cost funding base. In the meantime, Meta's average cost of funds increased to 101 basis points in the fiscal fourth quarter, reflecting the higher cost certificates of deposits, which will run off over time. Our cost of deposits during the quarter was 78 basis points, and was just 15 basis points when excluding wholesale deposits.

As Brad mentioned, Meta's net interest margin on a tax equivalent basis was 4.27% in the fiscal 2018 fourth quarter, improving by 104 basis points from the third quarter. We saw higher net loan and lease yields due to the Crestmark acquisition and expect to see a further uptick next quarter, which will include 3 full months of loans and leases from the Crestmark division.

Net purchase accounting accretion contributed 12 basis points to the net interest margin in the fourth quarter.

Meta's provision for loan and lease losses was $4.7 million in the fiscal 2018 fourth quarter, of which $1 million was related to additional Crestmark loan growth from the first 2 months of activity.

Charge off activity in the fiscal 2018 fourth quarter was primarily related to charging off $11.3 million of 2018 tax services loans. Currently, we have less than $1 million of tax advances left on our books.

In total, Meta's current metrics remain strong. Nonperforming assets represented just 72 basis points of total assets at September 30, 2018. In addition, the outstanding foreclosed real estate and repossessed assets balance are primarily related to a nonperforming agricultural loan relationship that we've discussed with you previously and which we expect to favorably resolve.

I'll note that noninterest income in the fourth quarter includes $7.3 million from 2 months of rental fees from Crestmark's equipment finance business. Crestmark's quarterly equipment finance rental income run rate was just over $11 million in calendar 2017 and is another example of how the Crestmark acquisition further enhances revenue diversity for Meta. This line item will be somewhat offset by operating lease equipment depreciation expense, which totaled $5.4 million for the fourth quarter.

Fourth quarter 2018 card fee income declined by $7.2 million year over year, reflecting the deposit fee transition and a reduction in residual fee income related to a wind down from the company's relationship with 2 of our nonstrategic payments partners, which we've discussed before. Total fiscal 2018 card fee income totaled $94.4 million, which was in line with the lower end of our 2018 full year expectations.

Noninterest expense excluding merger related costs was $63.4 million in the fourth quarter of this year compared to $53.5 million in the same period last year. The year-over-year increase primarily reflects the addition of 2 months of compensation of benefits cost for Crestmark division employees as well as fiscal 2018 hires in support of Meta's national lending initiatives and other business line expansions.

Meta has continued to make important progress toward driving operational efficiency. During the fourth quarter, we continued to evaluate the consolidation of systems and operations in our tax business. And as a result, the company incurred some expense charges related to synergies in the tax division and other support areas. We do expect an earn back of those costs within approximately 1 year, and of note, those efficiency gains were captured in the earnings guidance provided recently.

We expect to provide a more stable platform to better serve our customers, effectively manage the tax business and support long-term growth opportunities. Even as we invest in future growth, we intend to balance these initiatives with increased discipline around noninterest expense management. We continue to expect opportunities for accelerating operating leverage in fiscal 2019 and to a greater degree in fiscal 2020.

Before turning the call back to Brad, I want to discuss our previously disclosed earnings per share outlook for fiscal 2019 and 2020. For fiscal year 2019, excluding the effects related to the company executive transition cost, we continue to anticipate an earnings per share range of $2.30 to $2.70 per share. We currently estimate executive transition agreement costs of up to $0.15 per share, which we expect to incur in the quarter ending March 31, 2019.

This is expected to reduce the 2019 full year GAAP earnings per share to a range of $2.15 per share to $2.55 per share. For fiscal 2020, we continue to anticipate an earnings per share range of $3.10 to $3.80. Our EPS outlook reflects our recent 3 for 1 forward stock split.

With that, I'll turn the call back over to Brad for any closing comments before we take your questions.

Thanks, Glen. As I hope you learned from our comments this afternoon, all of Meta's teams, including the talented professionals at Crestmark, remain focused on expanding their businesses, implementing innovative programs for our partners and maintaining rigorous discipline around risk management, underwriting and expense management.

Meta continues to deliver profitable growth as we take full advantage of our differentiated business model, balance sheet and suite of diversified and fee generating products and services.

That concludes our prepared remarks. Glen and I will be available for any questions. Operator, please open the line for any questions.

(Operator Instructions) Out first question comes from Steve Moss with B. Riley FBR.

I want to start off on the balance sheet and the funding of it. You guys mentioned your securities to fund loan growth. How should we think about the balance sheet by the end of fiscal 2019 in terms of just deposits versus borrowings and wholesale CDs?

This is Glen. We haven't set balance sheet targets per se at this point. But now that we have Crestmark with the ability to generate high return, low risk commercial finance loans and we want to grow that business, you might expect us to put more effort into growing deposits now that we have again higher return uses for those deposits. So we're using wholesale to balance the balance sheet today and hope to grow and accelerate low cost core deposit growth going forward.

In terms of a lot of moving pieces, with the expenses here, just wondering if you could give us a little more color as to what to expect for the fourth quarter on a run rate basis, given that Crestmark came in here 2 months -- or 1 month into the quarter.

Sure. We are not providing guidance on a line-by-line item. I would say revert back to our overall guidance for 2019 and 2020. That said, we had roughly 2 months of expenses for Crestmark in this fourth quarter and so we'll have 3 full months. Their run rate, if you look at their color reports is in that $25 million or so range. We would expect that to be a representative run rate in the near future. That said, it's a combined company. There's a fair amount of variable expense that -- so to the extent that business accelerates, there is certainly some variable expense or if this contrasts, we would expect lower variable expenses.

And our next question comes from Michael Perito with KBW.

Hi, this is actually Adela Dashian on for Mike Perito. Thanks for taking my question. Could you please give us some more color on (inaudible) thoughts on the margin now that Crestmark is onboard?

We're 427 in the quarter, and that included just 2 months of Crestmark. It also included a benefit from purchase accounting, which we expect to continue as the acquired portfolio accretes through and then becomes replaced by a higher yielding loan. So we would expect the margin to move up from where it's at in this fourth quarter.

And then your consumer growth was much higher than we were looking for a quarter. How are you thinking about that growth in that business going forward?

Consumer lending growth?

Yes.

Yes, we are continuing to look at the balance sheet and the growth and profitability of those programs and managing that growth accordingly.

The next question comes from Frank Schiraldi with Sandler O'Neill.

Just wondered if -- I mean, you guys reiterated guidance, so doesn't seem like there's much change. But in terms of, Brad, with you now CEO, is there any change to strategy at all?

Not in the near term. We have -- continue to work on our plan and execute on our existing strategies. We will be looking at strategy over time and communicating with you as that develops over time.

Just in terms of the consumer credit business, I feel like we've heard some players talk recently about some areas of that business getting a bit frothy. Is there any rethinking at all in the speed and/or scope of building that business?

As we've announced, we have a number of programs that we signed. We are focusing on those programs right now and managing the rollout very diligently. I would say that some of those may come on a little bit more paced as we identify and look for how the quality of those programs are being rolled out. But in general, I think our plans are still intact.

Frank, this is Glen, and I would add you'll note that we noted that we expect the majority of our loan portfolio to be in commercial lending and commercial finance products, the majority of it. And while we have not publicly set balance sheet mix targets at this point, part of that is we do not want to be holding to trying to achieve certain loan balances that may not meet our risk and return thresholds. But we do plan to over the next couple of months is provide additional guidance of how we see our balance sheet mix moving forward long term and what our goals are there.

And I would say that we are very focused on structure and risk management, risk mitigation as we develop these programs and we are not compromising on any of that.

(Operator Instructions) We have a question from Daniel Cardenas with Raymond James.

So given that you've completed the Crestmark transaction, you're ramping up the consumer lending programs, I mean what are your thoughts about additional M&A and additional expansion efforts? Are you kind of looking for those or are you in a digestion phase right now?

Dan, this is Glen. I think what's reasonable in the near term is you should not expect a material M&A from us. Again, in the near term, not to say we couldn't do some fill-ins where it's an acqui-hire or a technology platform, but I wouldn't expect any material acquisitions from Meta in fiscal 2019.

It's been our goal to really focus on integration at this point. We've made a number of acquisitions over the last short period of time and we're really focused on ensuring those smooth integrations going forward and optimizing those acquisitions and really stabilizing at this point.

Yes. Dan, if you really look at what Crestmark brought us, they brought us -- they combined all the platforms that we were really looking for. So the major pieces that now we have in our combined product suite and portfolios and now it's about really fully leveraging and optimizing the power of the combined platforms.

And where would you guys peg kind of a core EPS number for this quarter?

I would peg it at $0.41.

Our next question comes from Frank Schiraldi with Sandler O'Neill.

Just a follow-up here on -- Glen, you mentioned -- you talked about expectations or opportunities with Crestmark and so the idea that you would be able to ramp up or try to ramp up deposit growth. Can you just talk a little bit about that with seems like prepaid is maturing to a certain degree, so do you have any sort of color you can give on opportunities to ramp that back up?

Yes, prepaid has been maturing, but we still see opportunities for growth in prepaid, in particular. We've analyzed the different value of deposits associated with various prepaid programs and are looking at how we can target those. We did shift our focus a little bit towards some of our consumer lending and asset side of our balance sheet in the past year. And I think there is an opportunity to refocus on deposit gathering and expand what we've been doing there. So we are going to go after more deposits in the prepaid categories that we've targeted.

And Frank, I would say the payments technologies that we have today, it could be additional deposits besides your traditional prepaid card type deposits. So certainly exploring other opportunities to leverage technology and systems that we have.

And then this was obviously -- the change in CEO was pretty sudden obviously. I'm not sure if you can talk at all about what went into the thinking to do this effective immediately versus a transition period. Or maybe just you can get the street comfortable that there's no other impending issue here.

This is Tyler. I'll go ahead and take that one. From my perspective, I've been on the road basically over half the time and have meetings most nights when I'm in Sioux Falls. I told our team there's a reason most public company CEOs don't last 30 years.

So we got Crestmark successfully closed. We've got the consumer credit kicked off really well. We've got Brad and Glen in particular leading the team that have been here a long time. We've added a number of other senior executives. Frankly I've been transitioning some things for a while now. The company's in a great place so now just seemed like the right time.

And again, I am staying in the chair role and as an employee through really the end of January when our annual meeting, and will be there to help with a smooth transition and frankly I've told them if there are things they need from me, they can call me anytime. And so I think we're well positioned for future success and that's part of why it made sense to do it now.

And I'm showing no further questions. I would like to turn the call back to Mr. Brad Hanson for any closing remarks.

Thank you, everybody who participated on Meta's quarterly investment call today. And thank you, Tyler, for your service. We've all really enjoyed working with you and appreciate it. We're excited by the early progress we're making as we begin our 2019 fiscal year and look forward to updating you all again in our January investor call. Thank you again and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.