Pathward Financial Inc (CASH) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Investor Conference Call for the second fiscal quarter of 2022. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Justin Schempp, Vice President of Investor Relations and Financial Reporting. Please go ahead.

Thank you, and welcome to the Meta Financial Group's Second Fiscal Quarter of 2022 Conference Call and Webcast. Our CEO, Brett Pharr; President, Anthony Sharett; 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 metafinancialgroup.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. The company undertakes no obligation to update any forward-looking statement. Please refer to the cautionary language in the earnings release, investor presentation and in Meta's 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.

Additionally, 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 Meta's 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 Pharr, our CEO.

Thank you, everyone, for joining Meta Financial Group's second fiscal quarter 2022 earnings call. I want to begin by referencing the exciting news of our new name, Pathward Financial, which we announced last month. Pathward is born 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 Pathward 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 Pathward 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 pretax 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 yielded mixed results. Year-over-year, total tax product revenue was up slightly, while total tax services product expense was approximately flat. However, we believe channel 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 business has posted good results.

Our commercial finance portfolio so continued healthy loan growth from satisfying the robust demand with 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 Sharett 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 fintechs, neobanks, 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 lease total nonperforming loans and leases as a percentage of total loans and leases improved 21 basis points from the prior quarter to 0.95%.

The allowance as a percentage of loans and leases increased from 1.84% in the prior quarter to 2.38% in the current quarter due to the increase in the seasonal reserves for the tax service loan portfolio. Excluding the reserves for tax loans, reserves dropped from 1.84% to 1.59%, 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 2 commercial finance relationships.

Let me briefly touch on today's macroeconomic environment. Historically, our commercial finance portfolio has performed well during the recessionary cycles and periods of economic stress, both as it relates to demand as well as credit losses. 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 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 31 totaled $49.3 million or $1.66 per share, a decrease of $9.8 million from the second quarter of fiscal year 2021. Excluding $2.8 million of rebranding expenses and $900,000 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 pay downs. Continued balance sheet optimization, combined with the reduction in excess cash from stimulus payments helped improve the second quarter net interest margin of 4.8% compared to 4.59% in the linked quarter and 3.07% in the prior year.

Noninterest income of $109.8 million is 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, the quarter's noninterest income included a $1.3 million loss on the money line investment during the second fiscal quarter, Meta sold the entirety of its equity investment in MoneyLion. In total, we recognized a cumulative loss of approximately $400,000 on the investment dating back to the fourth quarter of fiscal 2021. This sale is in no way a view on MoneyLion's future, and we continue to serve as MoneyLion's 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 $1.83 billion as compared to $1.79 billion last year. We expect to refund transfer volumes and product income for the overall tax season to end the season similar to last year. We also expect taxpayer advance volumes to return to a more normalized level in the 2023 tax season, absent further stimulus or additional changes to tax credit payments.

Noninterest expenses increased 7% year-over-year, excluding the $2.8 million of rebranding expenses and $900,000 in 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 1.9% 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 736,000 shares during the quarter at an average price of $57.01. 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 7.8%. 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 8.9%.

That concludes our prepared remarks. Operator, please open up the line for questions.

(Operator Instructions) Our first question comes from Frank Schiraldi with Piper Sandler.

Just a quick -- well, just starting with the card fee income. I wonder if it would be possible, just given the pipeline you guys have currently and then considering the stimulus of last year and year-over-year limitations from that. Any color you can provide in terms of where you expect that to trend for the remainder of the fiscal year?

Anthony, why don't you talk about our business pipeline and then Glen, you might just give them any information on the fee income specifically.

Sure. As you noted, fiscal year '21 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 our pipeline remains strong. Glen?

We would expect, as you know, the March quarter is seasonally our highest quarter of card fee income, not only for our activities in -- directly in the tax space, but many of our partners have customers that love their tax refunds on their card. So we would expect card fee income to be a little lower in the coming quarters compared to tax season, but then reset that base for growth from there.

And then in terms of expenses, sorry if I missed something in the release, I saw the rebranding efforts. Was there anything else other than the tax business that kind of bumped expenses higher on a temporary basis? Just wondering, again, same sort of personnel expense base. Any sort of color on where that could flush out in a more normal quarter?

Yes, Frank, of course, we reported the amount that was associated with the rebrand. I'll tell you, we're experiencing inflationary pressures like everybody else in 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 Frank, we also noted, we had $900,000 of separation expense this quarter.

So you got the separation expense, you got the rebranding. And then there's -- in terms of the comp line, there's a significant amount that just flows through this quarter for the tax season, right? Is that right? And should that…

Correct. Comp expense will be lower in the next 3 quarters.

So I guess, as I'm thinking about comp from the December quarter, is that a better run rate? Or then comp in the March…

It's a good starting point. We'll see how things shake out. As Brett mentioned, there's a lot of pressure on compensation. And given our history in banking-as-a-service, you might imagine there's a lot of pressure on our staff, especially as folks entering this market go looking for talent.

Sure. And then just on the One thing from the model that caught my attention. You might have mentioned it, Glen, but the tax services, of course, I can't find it right now, but 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 that's really only an issue that we see in the March quarter, the tax business loans. But why was it so much higher just year-over-year those yields?

One of our tax partners, there was a new product or a subproduct that had an interest component to it. That had not been there.

So I mean, I guess, thinking about next year as we do our modeling for next year, it's not unreasonable to assume that, that product would be back again. It's not a temporary blip, I guess?

No, that's not temporary.

All right. And just if I could sneak in one last one. Just on the -- you talked about in the release you had at the end -- I think it was end of period, you had $1.85 billion in customer deposits at other banks. And I assume that's still a direct stimulant stuff, but I'm just wondering if you have expanded that at all to additional partnerships?

Yes, Frank, one of the things that we learned through the stimulus program, is really how to better exercise our deposit transference capability, which is what you're talking about. And we continue to expect to maintain a flat balance sheet. And the way we'll do that and still generate meaningful growth in card fee income is 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 are stimulus related.

Our next question comes from Michael Perito with KBW.

On the tax -- the total tax season, I think you guys said and wrote in the release that you expect to 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 normal. I think there might have been some delays. It feels like 10 years ago now, so we could remember. But I just -- I guess, 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 Glen, why don't you take that?

Sure. The -- yes, so we're really talking about net tax earnings, tax business earnings. We are 6% ahead of last year year-over-year. But to your specific question, we think that will contract a little bit because last year, while we will still have some that will carry over into the third quarter, there was a higher percentage of carryover last year in the third quarter because of more delays last year on a relative basis than the delays this year by the IRS.

All right. So you're talking something more like fiscal 3Q '20 than fiscal 3Q '21, which was unusually elevated, not to say that, that's where it will be, but directionally. Yes. Okay. Great. And then on the margin, I saw in the presentation, you guys kind of have the updated parallel and ramp shock. But Obviously, it's a pretty dynamic rate environment here, Glen. And I was curious if you could maybe spend a minute and just give us your thoughts about where we go from the 478th year today or the 41, I should say, today to -- if we do get some type of scenario where you get a 50 basis point hike in May because correct me if I'm wrong, I guess the reason for the question is 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 rise as the rates go higher. Does that make sense? And are you able to give us any indication of where the NIM might go in the current kind of consensus outlook on forward curve on the forward curve?

So I think you described it very well -- what I would say is that we have to go through a little bit of a period of re-pricing. So even though when you have variable rate transactions or 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 of rates going up, and we're going to receive a great deal of benefit from it. But most of its going to show up in fiscal year '23 and onward just because of the re-pricing time that it takes even for short duration instruments.

And then, Mike, I would add specifically. So we talk about 4% in the ramp model, we're comfortable with that at 100 basis points. As Brett 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 beta and where competition goes how fast the liquidity washes out at other banks or finance companies. But certainly, it should be a net positive for us.

Okay. And then just lastly for me on the charge-off, the nontax related charge-offs in the quarter, I think I saw somewhere on the presentation that there were a couple factoring relationships that you guys charged off. Wondering if you could give us a little bit more color there. Any other credit commentary as you look forward? Obviously, there's some increasing concerns about some consumer and small business health deterioration later this year into 2023. 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 a very robust collateral management process that -- the last part of your question, as we go into a recession, benefits from 2 things. One is we will have much 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 they'll need our collateral managed process, which throughout multiple cycles, has done extremely well with very little loss rates. Where -- what happens in some of these is 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 controllers 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 are very confident about the control environment we have there.

Yes. And I would add our nonperforming loans are a low point over the last 18 months.

There are no further questions in the queue. (Operator Instructions) Our next question comes from Steve Moss with B. Riley Securities.

Not sure what happened there. In terms of just one, just touch on your expectations for taxes next season, I guess a little surprised by the weakness here, we saw a lot of inflation over the last 9 months to 12 months. And I know we had stimulus, but kind of what gives you guys the comfort that we get a rebound next year? I just thought the higher inflation we saw here would have perhaps impacted consumer a bit more to have driven demand at a better level?

Hey Glen, do you want to take that?

Yes, Steve, are you talking specific like on the tax rate and the investment tax credits? Are you talking about card activity?

The refunded advanced product?

The refund advances, okay. I'm sorry. Well, a large component of the customers that our partners serve in the tax business are those with earned income tax credits where 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 you see our refund transfer, our payment -- tax payment processing product did well, and we'll drill that a little bit year-over-year. The refund advances which are tied closer to the refund amounts, those are -- they're basically the same year-over-year. We thought they would be higher this year.

And then maybe just on 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 loan pricing already here just given moves in the curve? And if there's any dislocation out there already creating maybe some extra activity for you guys?

Yes. So a couple of things. One, obviously, variable rate items that did not have floors. Some of them are doing high floors. But even at have floors, obviously, we're getting more on it right now. So I think that's 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. The last thing I would say is the migration out of banks, traditional lenders is already starting.

We are looking at more ABL deals dollars-wise and 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 that's just the beginning. As rates have their impact and it goes to the economy, I think we'll get a lot more opportunities to grow the working capital. If you look at our asset-based lending and factoring line growth 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.

And then maybe just in terms of -- obviously, with the stresses coming on the system, just kind of curious just to how we think about reserve modeling going forward with seasonal and all that stuff. Just kind of curious, is this kind of like the bottom in the reserve tax and just kind of what your guys' thought process is there?

Glen, I'll let you take that one.

Yes. Hard to predict, Steve, if this recession actually occurs or not, certainly, that's where bets are going. If you're a bank investor, it seems like everyone is assuming there's going to be a recession. And even if there is some pullback in the economy, given that we still have an unwound over COVID pandemic seasonal factor. I wouldn't think 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 had higher from here unless things get really bad.

And then maybe also..

I just can have the side, and that's primarily based on the asset classes that we have and really being focused on the collateralized commercial finance.

And then maybe on the securities portfolio here. I was just kind of curious as to what the duration of the portfolio is? Kind of curious how you're thinking about cash flows and what your reinvestment rate is these days? Or given that you're seeing more customer demand, that we should start thinking more about a bit of -- continuing to see that remixing to loans?

Yes. We're going to remix hard -- we'll remix hard this year again. And so we -- duration, were 4 years, 4.5 years. We're right in that range. And so hopefully, we've taken the worst of the OCI impact, kind of measure that more towards the 5-year and -- but we also have a numbers -- so we're -- we'll amortize off $30-plus million a month easily that we'll amortize off as well as we have a number of variable rate securities that we could liquidate as we -- as our commercial finance portfolio grows.

Okay. And then lastly, maybe just follow on -- I hear you guys on the redemption the sub debt. Just kind of curious on your level of your to buyback here going forward?

Yes. I mean -- obviously, we talked about the 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 a tax-efficient way. And right now, the best way for that to happen is through stock buybacks when we can.

Our next question comes from William Wallace with Raymond James.

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 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? Can you just maybe provide a little commentary around the loan growth and how that performed relative to your expectations?

Yes. I mean I'd hit a few things. It depends on which line you're looking at. But if you look linked quarter to linked quarter, remember, we're down $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, the tax refund pay downs came slower. And so you had a little bit more of a hangover there. So actually, if we clean 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 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. So that's where my question is being derived from is really more sequential than year-over-year.

Yes. Glen, anything you want to add to that?

No. I mean there's some seasonality in some of the commercial finance. We are never targeting 20-plus percent loan growth. So I think annualized will be in the mid-teens, as we talked about off of a larger denominator in our commercial finance. And so it's what we expected. Consumer, we're not in a rush. A lot of those are forward flow commitments. And so depending on the timing of the sales, -- 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 government guarantees, your SBA loans as well. So we're happy with commercial finance loan growth. And we're very optimistic about opportunities there over the next couple of quarters, for sure.

Do you all look for other avenues to deploy liquidity into other higher-yielding assets other than your commercial finance business? Is that maybe quite a sponsorship or with some of your fintechs or anything like that?

Go ahead, Glen.

Well, that's what our consumer credit products primarily are -- we don't call it credit sponsorship anymore. They -- it's really banking-as-a-service partnership lending is what we're doing. We want to be more than just running out of charter, and we think we've proven that and bring some different capabilities as well as other products to that mix. And that's where we'll use that. You see our warehouse finance portfolio is a way for us to deploy liquidity into very, very good risk-adjusted returns than the securities portfolio. So some of that is as to retain flexibility as our commercial finance loan portfolio grows. So long way of saying, yes, Wally, so all that.

And that concludes the Meta Financial Group Second Quarter Fiscal Year Conference Call. Thank you for your participation. You may now disconnect your lines.