Pathward Financial Inc (CASH) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group's Fiscal Year 2019 First Quarter 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 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 first fiscal quarter ended December 31, 2018, released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.com. 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.

At this time, I would like to turn the call over to President and CEO, Brad Hanson.

Thank you, Brittany. I want to welcome everyone to our fiscal 2019 first quarter earnings call. Today, I'm going to provide an overview of the quarter before highlighting our increasingly differentiated business model and outlining our top priorities. Afterwards, Glen will provide an update on our financial performance and earnings guidance for fiscal year 2019.

We are very pleased to report strong fiscal 2019 first quarter results including earnings of $15.4 million, representing growth in earnings per share of 144% over the prior year's first quarter. The successful addition of Crestmark, a national commercial bank, which the company acquired in the previous quarter, is enhancing our net interest income growth as we more fully leverage our low-cost funding base to fund higher yielding commercial finance loans and leases. To the point, our net interest margin on a tax-equivalent basis expanded by 170 basis points over the prior year quarter and 49 basis points on a linked-quarter basis. We expect that this expansion will have a meaningful impact as we continue to generate growth across our multiple lending activities, which Glen will discuss further in his remarks.

Over the past few months, I've had the opportunity to engage with our management team and board and collectively, we have formulated a plan to address our top priorities for the company. Today, I'm excited to share what we feel are the most important points of emphasis.

Starting on Slide 4 of the investor presentation, let's focus on 3 key elements to Meta's near-term plan and related initiatives that we believe will bring a differentiated approach to value for our shareholders. First, as shown on Slide 5, we intend to increase the percentage of balance sheet funding from core deposits. Our payments division remains focused on client and partner engagement and we have been pleased to see continued growth in our low-cost deposits as shown on the chart on the bottom left. In addition to pursuing a greater share of partner relationship deposits, we are continuing to evaluate additional products and flexible services to deepen relationships and grow our customer base. We expect this to include expansion of banking as a service deposit products.

Second, turning to Slide 6. We intend to optimize the earnings asset mix of the balance sheet. We've taken a meaningful stride forward with the company's acquisition of Crestmark and over time, we intend to grow the commercial finance segment of our earnings assets from approximately 30% as of the end of the first fiscal quarter to above 55% of the total earning asset mix. Importantly, we are also targeting the investment securities portfolio to trend below 20% of the mix over time. We expect this shift will enable us to replace lower yielding securities with higher yielding loans and leases while maintaining our high credit quality.

I also want to be clear that we intend to limit consumer finance activities, which includes the consumer credit products we have introduced over the last year to less than 15% of on-balance sheet earning assets. We will focus our consumer lending partnerships to those relationships that exhibit a high potential for strategic cross-selling opportunities, particularly with our payments business. As this component of our lending activities grows, we plan on utilizing the secondary market as needed, including the use of participations or sales to limit our on-balance sheet exposure.

And third, as noted on Slide 7, we intend to improve operating efficiencies. This will likely be increasingly impactful as we integrate and optimize recent acquisitions. We have a deep and experienced team in place to lead this company forward, and we will focus on expense management and generating positive operating leverage through technology as we further automate and utilize productivity enhancements to drive sustainable revenue and earnings growth.

Turning to M&A. We have built or acquired the operating business platforms, which we believe offer high returns for our clients and shareholders. As such, we intend to take a pause on material merger and acquisition activity and will concentrate our efforts on maximizing value from the existing platforms. We believe that these 3 priorities from the Meta playbook will increasingly differentiate our business model, and in turn enhance our long-term value for shareholders.

As shown on Slide 9, we expect to generate excess capital as our earnings power builds reflecting a more potent earnings asset mix. And in the longer term, we are targeting an ROA that exceeds 2% and an efficiency ratio less than 65% as the initiatives we highlighted today increasingly take hold.

Given our strong platform and talented team, I believe Meta remains poised to deliver significant value for our shareholders in the years ahead.

Now I'll turn it over to Glen Herrick, our CFO, to provide an overview of our fiscal 2019 first quarter financials.

Thank you, Brad, and good afternoon, everyone. Starting on Slide 11. For the first quarter of fiscal 2019, we reported net income of $15.4 million as earnings per share more than doubled to $0.39 per diluted share over the same quarter in the prior year. Earnings growth from the prior year quarter was largely driven by an increase in net interest income related to the expansion of the commercial finance portfolio.

Net income growth also reflected $35.6 million in solar leasing initiative originations in the quarter and the related income tax benefit from those. The impact of the tax benefits will vary from period to period as they are recognized ratably based on the pretax net income throughout the fiscal year.

For the remainder of fiscal 2019, we anticipate further tax credits, which are built into our EPS outlook and the tax rate used in determining our EPS outlook. More specifically, we continue to anticipate the company's effective tax rate for the fiscal year to settle into single digits.

Turning to Slide 12. Gross loans and leases increased $383 million to $3.3 billion at December 31, an increase of 13% during the first quarter. Our national lending portfolios generated 314% growth year-over-year, led by our acquisition of Crestmark. Asset-based lending portfolio grew $76 million, an increase of 16% from the previous quarter.

In the quarter ended in December, factoring and, to a lesser extent, asset-based lending, typically experiences a seasonal slowdown as there is a buildup prior to the Christmas season. In addition, the automotive industry essentially shuts down in December and into early January. We expect activity in those areas to regain momentum in the fiscal second quarter.

We also saw solid opportunities in our warehouse lending portfolio, and we're able to grow the portfolio by $111 million from the preceding quarter. During the quarter, Meta participated as a first out participant in 2 highly secured asset-based warehouse lines of credit. Our senior position is supported with significant subordination. The warehouse finance portfolio is made up of commercial and consumer asset-based lines of credit. There were $65 million of new originations during the quarter from our 2 consumer credit programs in which we hold a senior position, and we designated $24 million of loans as held for sale at December 31.

On Slide 13, we are providing an example of what a cash flow waterfall looks like as well as the expected cumulative loss rates that would be required to render our allowance for consumer loan losses reserve insufficient. It is important to note that each of our consumer programs is different. However, we provided the key attributes we look for when structuring our programs in the example. The example consumer credit waterfall shows that once a consumer payment is put into a collection account, we then receive the principal portion of the payment and protection from loan losses. Once our losses and principal are covered, we then receive our agreed-upon interest target, and the program partner company receives its servicing and marketing fees. The remaining fees and interest flow to a Meta-owned escrow account and build to an agreed-upon level or a time period lapses before additional funds are released to the program partner company.

After extensive stress testing, we have concluded that cumulative net loss rates would have to raise between 15% and 20% for the prime program and between 25% and 30% for the nonprime program for the 1% reserve at December 31 to be insufficient.

During the quarter, community banking loans grew $80 million or 7%, but the majority of the growth occurring in commercial real estate. Our renewed focus for Meta is to grow our noninterest-bearing deposit base, which currently represents 55% of total deposits. For the fiscal 2019 first quarter, we grew average noninterest-bearing deposits by 7% compared to the average for the same quarter in the prior fiscal year. Overall, our cost of deposits during the quarter was 91 basis points, an increase of 67 basis points compared to the prior year quarter and when excluding wholesale deposits, our cost of deposits was just 14 basis points, an increase of 7 basis points over the prior year quarter.

Meta's net interest margin on a tax-equivalent basis was 4.76% for the fiscal 2019 first quarter, improving by 49 basis points from the fourth quarter of fiscal 2018. As expected, we benefited from a full quarter's contribution from Crestmark's higher net loan and lease yields. Net purchase accounting accretion contributed 18 basis points to the net interest margin in the first quarter of fiscal 2019. Meta's provision for loan and lease losses was $9.1 million for the fiscal 2019 first quarter. The increase in provision was primarily driven by growth in our commercial finance and tax advance portfolios as well as provision expense to maintain allowance levels. Net charge-offs were just $849,000 for the quarter. We expect to see a higher provision in the second fiscal quarter related to the seasonality of our tax refund advance business.

Turning to Slide 14. We remain pleased with our strong credit metrics, which remain well within our risk tolerance levels. Nonperforming assets represented just 73 basis points of total assets at December 31, 2018. Of note, the company's outstanding foreclosed real estate and repossessed assets balance is primarily related to a nonperforming agricultural loan relationship that we've discussed previously and the land is actively being marketed for sale.

In regard to commercial finance credit, I wanted to note that the recent overall 3-year historical net charge-off rate was 63 basis points for the Crestmark loan and lease portfolio. And over the past 10 years, net charge-offs average 41 basis points, and we're just 166 basis points during the Great Recession, a time when Crestmark loans consisted of primarily asset-based lending and discount factoring. The Crestmark team consists of an experienced management team that consistently follows a conservative credit culture, as evidenced by their strong performance across cycles.

Noninterest income was up $13 million from the fourth quarter to $37.8 million. The increase was primarily driven by recognizing a full quarter of rental income from the Crestmark division, higher tax product income, an increasing gain on sale of loans and higher deposit fees over the previous quarter. Card fee income was flat on a linked-quarter basis and declined by $5.9 million compared to the prior fiscal year first quarter, reflecting the continued year-over-year reduction in residual fee income related to a wind-down of the company's relationships with 2 of our nonstrategic payments' partners and the transition of certain card fees to deposit fee income, which we previously discussed. The effects of the wind-down, as compared to the prior fiscal year, are expected to continue through the second and third quarters of fiscal 2019.

Turning to expenses. The year-over-year increase in noninterest expense, primarily reflects the addition of compensation and benefits cost for Crestmark division employees as well as fiscal 2018 hires in support of Meta's national lending and other business initiatives. Other year-over-year and quarter-over-quarter drivers of noninterest expense included step-ups in operating lease equipment depreciation, occupancy and equipment, and loan and lease expenses related to the Crestmark acquisition. As Brad previously mentioned, one of the areas of focus is improving operating efficiencies to accelerate operating leverage in fiscal 2019 and, to a greater degree, in fiscal 2020. Related initiatives include integrating and optimizing our recent acquisitions, and incremental focus on more fully extracting value from our existing platforms and enhancing automation and productivity across the company.

Let me discuss our previously disclosed earnings per share outlook for fiscal 2019. For fiscal year 2019, excluding the effects related to company executive transition agreement costs in Q2, we continue to anticipate earnings per share to be in the range of $2.30 to $2.70. We currently estimate executive transition agreement costs to be $6.1 million pretax, 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 be in the range of $2.18 to $2.58 per share.

With that, I'll turn the conversation back to Brad now for closing comments before we open it up for questions.

Thanks, Glen. As we conclude our prepared remarks, I'd like to provide a brief update on the 2019 tax filing season currently upon us. This season is marked by a bit of uncertainty based on the unknown effects of the government shutdown and the potential impact to IRS processing times even though we have all seen the news that the IRS intends to process returns. It is difficult to predict the impact to Meta at this time. However, we've worked hard preparing and are closely monitoring any developments, which may affect our tax service business. Based on what we know today, we expect any impact to be immaterial overall and as Glen mentioned, we are reiterating our fiscal year earnings guidance.

Let me conclude by recapping what I believe are 4 sustainable competitive advantages that position Meta for future growth, as shown on Slide 16. First, our diversification across payments and banking businesses, platforms and fee structures remains a key differentiating factor that we intend to increasingly leverage. Second, our payments platform delivers low-cost funding, and we are focused on shifting the deposit mix more in favor of core deposits. Third, our scalable lending platforms are set for profitable growth given ample, low-cost funding. And fourth, accelerating cross-selling across business lines drives stepped-up client acquisition and retention with related financial benefits.

That completes our prepared remarks, so I'll ask Glen to join me for Q&A. Operator, please open the lines for any questions.

(Operator Instructions) Our first question comes from the line of Steve Moss of B. Riley FBR.

I was wondering if -- can you just talk about the -- give us a little more color around the expected earning asset mix shift that you mentioned, Brad, in your opening remarks. Just kind of how do we think about the rundown and securities over the next 12 months? And does that go to pay down broker deposits? Or is that just more to fund loan growth?

Steve, this is Glen. So in our deck, we put out some aspirational goals. We really look at -- it will be a replacement -- we'll replace securities with loans, primarily the growth in the commercial finance loans, and the pace of that will depend on how fast we grow our loan volumes and, in essence, we'll be swapping lower yielding securities loans for a higher yielding, primarily commercial and some consumer loans.

Okay. And so just as we think about total assets over the next 12 months, probably modestly increasing is a fair way to think about things?

That is correct.

Okay. And I guess, just with regard to expenses and the efficiency ratio target, I believe sub-65 was the number. Just kind of wondering -- I hear your -- it's aspirational. Is that probably like fiscal 2020-type target?

Yes. That is not a near-term target. Obviously, that will take some time. So over the next several years of our planning, we -- that's the goal we have.

What we would expect, Steve, is that from where we're at today, it continues to make progress against both that goal and improved ROA goal that we've set. And we will continue to provide updates on our progress against those longer-term goals we've set for the company.

Your next question comes from the line of Michael Perito of KBW.

So I guess, a couple of questions. Glen, can you give us a little bit more detail about how those 2 larger loans -- just kind of impacted everything this quarter ranging from provision to NII. And I guess, given the size and where the margin went to, I was kind of surprised that the net interest income didn't see a little bit more of a bump. So I was curious, I mean, were those loan booked later in the quarter? Any more additional kind of details around that would be helpful.

Yes, which 2 loans are you talking about? The warehouse finance facilities, Mike?

Yes. I'm sorry. Facilities, yes.

Yes. So they were booked late in the quarter. Those are not -- those will be net positive. Net positives to our yields going forward.

So I mean it's the right way to think about that the -- since they were booked late in the quarter, obviously, the provision all came in, in the first fiscal quarter, but a lot of the -- kind of yield or NII, so to speak, from it, will benefit in the future -- second quarter and beyond? Once it has a full 3-month impact?

Correct. To see a full quarter -- a full, clean quarter of that in the March quarter here. We incur the upfront origination and structuring costs as well in the December quarter.

Okay. Helpful. And then on the slide on the consumer kind of waterfalls is helpful. And I guess, Mike, the question I have is, if I look at this last bullet here, with the cumulative net loss rates, you guys kind of provide where they have to range for the reserve to be inadequate. I'm wondering if you could maybe give us a little bit more color. I mean, I'm sure you guys kind of launched this platform you had historical perspective on where credit losses on similar type of products have gone. And I guess the more relevant question is, where do you see those loss rates going into a more stressed scenario? I mean, is it 25%, 30%? Or is that just simply where they have to get for the reserve to be inadequate? I don't know if that makes sense. Let me clarify if I have to but...

Yes, those loss rates were actually stressed at multiple times, the expected loss rates. So we would not be planning on those reaching those levels.

Yes, we think a normal stress environment is just going to be from our expected rate, it could go 25% from the expected rate increase. So maybe 8% goes to 10% or 11%, but we don't see it getting into -- given the senior position and the -- and our position in the waterfall, we feel pretty comfortable about our position today.

(Operator Instructions) Our next question comes from the line of Frank Schiraldi of Sandler O'Neill.

Just on the commercial finance business. Just given the growth you saw in the quarter and the expectations of how big you expect that to get as a percentage of the whole pie. I'm just wondering what sort of growth expectations or opportunities you think you have there in terms of what could that commercial finance business grow by on a quarterly or annual basis here?

Frank, this is Glen. You recall from the merger announcement and the thesis behind the merger, we were estimating roughly 15% annualized growth. We felt very comfortable with the commercial finance lines of business. We have exceeded that in these first 2 quarters, and we feel very confident with that 15-plus percent level certainly for the next 3 or 4 quarters going forward.

Is there anything seasonal in the first -- in the December quarter here that would lead us to believe that growth is going to slow closer to what would be an annual rate of 15% plus?

No, it's a -- yes, it could slow to 15% plus, we wouldn't see that in the near quarter. There were some pent-up demand having the ability to have higher loan limits and slightly improved funding costs. What piece of the business could slow or it's harder to breakdown timing would be tax credits. Those -- we saw quite a few of those come through in the December quarter.

And then you talked about...

The mix will change between the various commercial lines of business.

And then you talked about for the consumer business, the 1% reserves. What sort of reserves are, if you could remind us, are you generally, on average, putting against the commercial finance loans?

Plus -- roughly 1%. That's our -- our book allowance is less than that because of the purchase mark. But that's -- we should expect it to build towards as the purchase mark portfolio trades up.

And just a follow-up quickly on the consumer credit product. I'm not sure I totally understand why you have that -- what is it, $24 million in held for sale.

Sure. So some of our programs, the relationships with our partners, they have the right to purchase some of the loans from us. And in essence, sharing some of those economics, and as we structure those, we factor that in. And so those are the loans that are marked held for sale. Knowing per our agreements, that there will be a takeout by our program partner.

And how is that decided, the level of -- is that sort of on a per quarter basis? Or how do you come up with that number, the $24 million?

Individually negotiated. This have been upfront in the contracts. So we know well ahead of time based on volume levels how much the partner intends to take out with committed -- other committed facilities that they have. And you will see more of that in the future. That's one of the ways we'll manage our on balance sheet exposure to consumer loans.

Thank you. That concludes the question-and-answer session. I would now turn the call back to CEO, Brad Hanson.

Thank you. I'd like to close by thanking all of you for participating in Meta's quarterly investor call. We truly appreciate your support, and thank you for taking time to listen in today. Have a great evening.

Ladies and gentlemen, that does conclude your program. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.