Pathward Financial Inc (CASH) 2022 Q1 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 first fiscal quarter of 2022. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you. I would like to welcome everyone to the Meta Financial Group Conference Call and Webcast. Our CEO, Brett Pharr; President, Anthony Sharett; and CFO, Glen Herrick, will discuss the results of our first fiscal quarter of 2022, 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. These 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 statements. 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 I will turn the call over to Brett Pharr.

Thank you, everyone, for joining Meta Financial Group's first fiscal quarter 2022 earnings call. We are pleased to have achieved solid results again this quarter. Net income for the quarter was $61.3 million. Earnings per share of $2 was well above the prior year's $0.84, reflecting the benefits of 2 substantial nonoperating events. First, as I mentioned last quarter, we plan to fully wind down our Community Bank balances to 0 by year-end. I'm pleased to say that during the quarter, we sold the remainder of the legacy Community Bank loans in December wrapping up a significant phase in our multiyear shift towards higher return earning assets.

Second, we announced in December an agreement to sell the Meta names and trademarks for $60 million, of which we receive $50 million in the fiscal first quarter. This agreement aligned well with the brand strategy review that we began during the 2021 fiscal year. We plan to develop a new corporate name and brand that represents the company's significant evolution during the last few years, which has enabled us to better fulfill our vision of financial inclusion for all. We expect to announce a new company name in the coming months and to be wrapped up with all the rebranding activity by the end of the calendar year.

Returning to operating results, we made continued progress during the quarter in the 3 strategic initiatives that drive our business and financial results. First, we increased our base of lower cost, stable core deposits with the average deposits growing 9% compared to the first quarter of last year. We were also able to drive our cost of funds lower as we further reduce our overall funding cost to 8 basis points. This contributed to a net interest margin that was again over 450 basis points.

Next, we continued to optimize our interest-earning asset mix by emphasizing higher return assets demonstrated by the $375 million or 15% year-over-year growth in our commercial finance loans and the successful completion of the sale of our Community Bank loans.

And lastly, we made progress towards improving operating efficiency to expand our core earnings from our operations. We remain focused on driving simplification and optimization of existing business platforms as well as investing in and improving our technology to help drive efficiencies and operating leverage.

Now let me turn the call over to our President, Anthony Sharett, to discuss Meta's efforts to improve operating efficiencies and provide updates on our lines of business.

Thank you, Brett.

With our vision of financial inclusion for all and focus on business simplification, we paid attention this quarter to opportunities that have the promise to increase revenue as we become an even larger banking-as-a-service provider. This focus refines how we will use innovation to enable new products and solutions with partners and develop enhanced internal capabilities using a customer-centric approach that more closely aligns with our partners and customers' needs. This will help us accelerate our focus on driving cross-sell across our company, leveraging our existing partnerships and strengths of our businesses.

During the quarter, we were pleased to have completed a 3-year extension of our existing agreement with H&R Block. This agreement adds valuable new financial product offerings and capabilities for customers. Of note, earlier this month, H&R Block introduced Spruce, a mobile banking platform that features a spending account with an attached debit card. This innovative product is designed to help consumers better manage their financial resources and meet spending goals as powered by MetaBank. Spruce is another great example of MetaBank's ability to provide successful and reliable banking-as-a-service capabilities to partners and their customers. Banking-as-a-service has always been a core feature of our business model. We continue to see a robust pipeline of fee income-generating opportunities within our Payments division as well as opportunities to drive incremental revenue through cross-selling banking-as-a-service solutions across our businesses.

Our Commercial Finance division performed well during the quarter. The commercial finance loan portfolio totaled $2.8 billion at December 31, an increase of 3% on a linked-quarter basis and a 15% increase year-over-year. We continue to see strong demand for our commercial finance loans and leases with a healthy pipeline across portfolios.

Turning to credit quality. Total nonperforming loans and leases as a percentage of total loans and leases improved 36 basis points from the prior quarter to 1.16%. This was largely due to the Community Bank loan sales and an improvement in our tax services portfolio. Likewise, our total outstanding substandard and doubtful loans and leases declined $81 million for the prior quarter, primarily driven by the sale of the Community Banking loans. The allowance as a percentage of loans and leases dropped from 1.89% in the prior quarter to 1.84% for the current quarter. Overall, our net charge-offs were minimal for the quarter, totaling just $1.1 million, helped in part by $2.6 million in recoveries from our tax services portfolio.

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.

For the quarter ended December 31, net income totaled $61.3 million or $2 a share, an increase of $33 million from the first quarter of fiscal 2021. When adjusting for the impact of the gain on sale of trademarks, core net income from the quarter totaled $23.9 million or $0.78 per share.

As Brett noted, we had 2 significant transactions during the quarter, including the agreement to sell the Meta names and trademarks for $60 million. We recognized $50 million of those proceeds as a gain in the first quarter and anticipate recognizing the remaining $10 million upon completion of the rebranding activities, which we expect will be completed by the end of this year. We estimate utilizing between $15 million and $20 million of the sale proceeds toward rebranding efforts and anticipate using the remainder of the funds for general corporate purposes, including tax-efficient capital allocation consistent with our previously discussed strategy.

As part of our efforts to optimize the earning asset mix, we sold the remaining legacy Community Bank loans completing the wind-down of that portfolio. These transactions generated a net favorable pretax impact of approximately $3.9 million for the first quarter when combining the loss on sale of loans of $8.4 million and a $12.3 million allowance release. In addition, we expect the elimination of the Community Bank portfolio will contribute towards improved efficiencies moving forward.

We generated net interest income of $72 million, an increase of 9% from the prior year. Net interest income benefited from strong loan and lease growth and continued improvement in earning assets and liability mix.

Quarterly average loans and leases grew $211 million or 6% compared to the prior year, driven by growth in our loan portfolios, partially offset by the wind down of the Community Banking portfolio.

Cost of funds for the first quarter improved to 8 basis points compared to 15 basis points from the prior year. As the financial markets prepare for a potential rise in interest rates, we believe our balance sheet is well positioned to benefit, given our stable low-cost funding base.

Noninterest income increased to $87 million for the quarter and included the $50 million gain on sale of trademarks, the $8.4 million loss on sale of the Community Bank loans and a $3.3 million negative mark-to-market adjustment of our equity investment in MoneyLion. As a reminder, last quarter, we recognized a net unrealized gain of approximately $4 million on our MoneyLion investment after they completed their de-SPAC process and became publicly traded.

Noninterest expense totaled $82 million for the first fiscal quarter of 2022, a decrease of $11 million from the prior quarter and in line with the range we noted last quarter. We are seeing an increase in compensation expenses due to FTE growth and the current employment environment. In addition, we do expect to see an uptick in expenses in the coming quarters as we utilize some of our gain on sale of trademark proceeds towards our rebranding efforts.

Turning to our share repurchase program. During the first quarter of fiscal 2022, we repurchased 1.7 million shares at an average price of $58.97, and in January, have purchased an additional 130,000 shares at an average price of $61.26 through January 20. As of January 20, we had approximately 5.5 million shares remaining under the repurchase program. The recent purchases continued to reflect the momentum of the business and confidence in the company's outlook and growth trajectory.

The company remains well capitalized with a regulatory leverage ratio for the bank of 8.5% as compared to 8.7% the prior quarter. Overall, we continue to make great progress against our key strategic initiatives, which are reflected in our financial results.

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

(Operator Instructions) The first question is from the line of Frank Schiraldi with Piper Sandler.

Just wanted to start with the consumer finance book, if I'm not mistaken grew pretty significantly off a smaller base on a percentage basis linked quarter. And I just wondered if you could remind us your thoughts on where you want to grow that to, and sort of what is the incremental consumer product that went on the balance sheet in the quarter.

Yes. We -- this is Anthony. And your question was about the consumer book, correct?

Correct.

Yes. We -- again, we are -- as we talked about in our prepared remarks, we are certainly focused on our banking-as-a-service offerings, and we'll continue to do so. Our consumer book consists of our consumer loans and also through the consolidation of our Consumer Solutions group. For us, now that it also includes our tax division as well.

Tax season is coming up, and so we're still in a wait-and-see approach to that. But in talking to our teams within the tax division, we're off to a good start. But as it relates to our consumer loans, again, utilizing our banking-as-a-service model here, we believe that, that will continue to grow.

And Frank, it's -- yes. It's still -- it's coming off of a small base. The amount of consumer loans you'll see on balance sheet are going to be pretty small for the foreseeable future on a relative basis. We will use those strategically, as Anthony said, without taking on a lot of risk, hence you didn't see a big allowance build for consumer finance either this quarter.

Right. Does this -- do these balances represent partnerships with partners that you do business with on the other side of the balance sheet, on the depository side? Or is it a different set of partners for the most points?

So this is Brett. Go ahead, Anthony.

Go ahead, Brett.

Today, I believe a number of these marketplace lenders that are not currently in the payments business, but there is at least one that has now crossed over and is doing both. And the pipeline is filled with people that want to do both.

Okay. Great. And then on the balance sheet, there was significant growth into the end of the period, which I believe is just seasonality. Just wondered if you could remind us as you look out over 2022, your thoughts on balance sheet size on an average basis through the remainder of the year.

So -- this is Brett. So I mean we're going to continue to manage the balance sheet and we're not interested in rapid balance sheet growth. Obviously, as deposits come to us, we will. Our deposits -- our balance sheet has been swollen a bit still because of some of the government stimulus. So I think some of those things will continue to run down. But I wouldn't expect much growth from where we are right now.

Okay. Got you. And then just lastly for me on, Glen, I think you mentioned in the prepared remarks some higher expense going forward. Just wondered if maybe you could give any color on your expectations for the normal expense base outside of, I guess, the tax season stuff.

Yes. I'm sorry, Brett, our line dropped momentarily there. So what was the question?

Just on expenses. I think you mentioned during your prepared remarks, maybe some higher expense for some things going forward. Just wondering if you could quantify that at all.

Yes, we got back to the kind of core run rate we had guided last quarter. And from -- we will have higher expenses, obviously, during the March quarter for taxes with the seasonality there. A lot of that is variable. So it will go up as much as -- tied to our revenue from tax season.

Outside of that, I would expect core expenses to probably grind a little bit higher here, but that will be because of higher revenues and expense growth at a lower rate than revenue, so we can generate positive operating leverage. The -- outside of core expenses, we will be incurring expenses for our rebranding efforts and in absolute expenses, that's where you'll see the bulk of that $15 million to $20 million being spent over the rest of the fiscal year.

Okay. And then, you might have mentioned it on the call, but the $10 million left, the gain, you got that, Glen, in 1 year's time. Is that how it works?

Yes, we said prior to year-end, once we fulfill the rest of our commitments about the current use, the transition period for the Meta name, then we'll be able to recognize or realize that last $10 million. It's sitting in an escrow account right now.

The next question is from the line of Steve Moss with B. Riley Securities.

Maybe just on the other part of the loan portfolio here with commercial finance business, kind of curious how you guys are feeling about growth and the pipeline there.

Yes, this is Anthony. We feel good about our pipeline in commercial finance. We continue to see strong growth. We've got a full pipeline. That growth is within our underwriting criteria. And again, our commercial finance loans are up 15% year-over-year. So we feel good about our pipeline this year.

Okay. And then in terms of the -- just thinking about credit costs here, I mean, obviously, some moving pieces with the Community Bank sale, but charge-offs are pretty low here for the quarter. And just kind of curious as to how you guys are thinking about credit costs normalizing or just any time line or sense around that?

Yes. This is Brett. The business that we're in, we manage collateral very closely. So we have limited losses, and we're pretty good at it. You get the occasional events that's more of a fraud-related thing. So occasionally, you'll see something lumpy, but we've had a very good run rate, and we would expect that run rate to continue with the book we have.

(Operator Instructions) Our next question come from the line of Michael Perito with KBW.

I wanted to just spend a second on the deposit side. With rates moving higher, I know you and some of your competitors, every partnership is kind of built differently, right? And I just wanted to kind of rehash with rates potentially set to move higher here, what, if any, kind of pull-through to your partners there needs to be as rates move higher on the deposit cost side. I don't believe that there's much, but I'm sure you've had some new partners that have grown since 2015. I just wanted to kind of hash that out real quick.

Yes. I was going to say we have a little bit of it. But I mean, I think the perspective we have is going forward as we renew these contracts, we're doing less and less of that. There's a little bit of it in there, and you'll see it. It usually has to get to a certain level. But we're still going to have, as rates move up, one of the lowest cost of funds in the industry.

Got it. Okay. And then on the, just kind of on the fee side of the equation here. I mean you guys kind of alluded to some non-deposit-oriented kind of opportunities, I guess, if I heard you correctly, your banking-as-a-service arena. Wondering, one, if you maybe be a little bit more specific around that? Is that sponsored credit cards? Is that other kind of true lender arrangement things of that nature, number one?

And then number two, should we think of this primarily as a fee-oriented type opportunity for you guys, where if there were type of lending arrangements, you'd be interested at a certain point in kind of selling those and products where you could sell them to generate fees, not grow the balance sheet? Or how do you guys think about that dynamic?

Well, I'll take the high level on this. And then maybe, Glen, you can talk about just a little bit. But our focus, and this is a big differentiator for us, is to focus on that fee income, service income, noninterest income line, and that's a differentiator for us from other banks. And whatever we're doing and involved in and the banking-as-a-service is going to be about driving that out.

Now any of those specific ones, Glen, do you want to comment on any of those?

Yes. It's really both sides of the balance sheet, Mike. Quite frankly, our near-term opportunities to drive fee income is likely on the payment side, where we can use our technology, our infrastructure around money movement just to do that with more real-time payments, virtual payments, relationships that don't carry high deposits long flow with them. So we'll continue to have our deposit business, and we're full on that. But we can use those same skill sets to serve other applications in payment space.

And then you're right on the credit space, that's a little bit of the consumer credit where we will, over time, do more of that. Most of it, we will not hold -- retain the risk but drive that more towards fee business. But it's that banking-as-a-service that Brett and Anthony talked about where you think about those large partners with great distribution that brought us the deposit account, well, their customers also have more banking needs than just a deposit account and allowing them to compete against some of these neobanks and other fintechs that are starting up that we're also serving.

So that's where you see more than a one solution banking-as-a-service provider, we think, are those that will win in the future.

Helpful. And then just lastly for me on that, and I think Anthony alluded to the initial kind of read on the tax season. I know it's early, but I guess anything structurally or environmentally that you think could maybe impact the tax season similar to kind of like last year, some other years prior where there were various things that kind of can push stuff out or perhaps make a refund advance volume or demand or rather, a little softer. Just with the stimulus played out, my guess is on the refund advance side, that's probably you guys are budgeting a little bit higher. But just curious if you guys could spend a minute to comment on the upcoming tax season. Anything we should be mindful of that you guys are looking at that could potentially impact the recognition of global revenues of credit and et cetera.

Yes, this is Anthony. As you alluded to, it's early in our tax season. Last year, things got a late start. But this year, the tax season started on time for us. And so, so far, we believe that we are positioned for a good tax season. But again, it's early.

We don't see anything environmentally happening or through any other external factors that, at least today, that are going to impact the tax season as we may have had last year. But yes, we feel optimistic about the season this year.

The next question comes from the line of William Wallace with Raymond James.

Maybe just a follow-up on the expenses. Glen, you said we look at the kind of the core expense base outside of tax and outside of the spend for the rebranding debt, I believe you said that you expect there will be pressures. Could you help maybe quantify that? We're seeing wage pressures anywhere from 5%, 6%, 7% across the industry. There's tech investments going on, and I'm sure that you guys are trying to stay front-and-center on that. Just kind of help us quantify what you mean by pressures so that we can get a better sense of where the expenses might be going.

Yes. We're not immune to any of that. And certainly, the investments we made last quarter helped us on our jumping off point here for fiscal year 2022. We continue to make investments in technology that we're paying out of our current run rate. There's always demand for more of that, but we'll manage that within our current business, where we -- and that really hasn't changed for us. We've always been a company, at least there was supposed to be one in the payments 18 years ago, that needed to keep investing in technology.

Where we're seeing like everyone else is more pressure in compensation. And so it's a competitive market out there. And part of the reason where one of our 3 strategies is focused on efficiency and simplification is so we can gain that productivity elsewhere and be able to be competitive in the hiring environment.

Okay. Moving on, then this afternoon, I believe I saw a press release that Freedom Financial announced roughly $230 million securitization of loans originated on their platform by you and Cross River. Is that the type of credit sponsorship opportunity that you're referencing? And where do those loans sit? How long do they sit? Just kind of maybe give us a sense of that specific relationship and how that fits into maybe some of the commentary around the kind of sponsorship side of banking-as-a-service that you all have been discussing today?

Yes. That's one of the models that's very efficient. Freedom already had a securitization platform, which is well established. And so those loans sit in our consumer finance bucket. And the most recent loans are not very long. It's you're building up, in essence, using our balance sheet and Cross River's as a warehouse facility until it all gets to the efficient size for both size and market conditions for Freedom to execute a securitization. And as you can imagine, there's plenty of protections and guardrails around that. So that's a terrific example of some of the things we may do with consumer lending, may not always be that exact profile of who brings what to the table. But the different components of the consumer loan programs are within that example.

It seems like there's a bit of a shift going on with a lot of fintechs that are trying to figure out ways to provide credit in partnership with banks. How fast are you guys running to keep up with that and be on the forefront? And in your view, when might we see maybe some material benefits on the loan side of the equation?

Yes, this is Anthony. We're certainly aware of the evolution of that in the market. And as we think about our future strategy around this, like everything else, we're going to take a measured approach and ensure that we're doing it in a way that fits within our 3-pillared strategy. But we are certainly looking at those opportunities and are aware that those opportunities are growing in the marketplace.

Okay. And then on the Spruce account that H&R Block launched with you guys on the back end, is this like a wholly unique product set or product offering to their customer base that they'll be selling in during the tax season? Or is this kind of like a tack-on, it's similar to other products that they've offered in prior years?

Yes. I don't want to speak for H&R Block, but we do know that it's a mobile banking opportunity to help consumers reach their savings goals, which offers them some unique offerings through H&R Block. We're proud of that partnership because it fits within our mission of enabling financial inclusion. As it relates to their strategy, I think it's just the evolution that we've been talking about as it relates to banking-as-a-service and providing more offerings and opportunities for consumers.

Okay. Last question on the EIP program. Are there any deposits left on your balance sheet? And if so, can you quantify that?

Yes, this is Brett. I'd say there's very little left from EIP. The sound tax credit fees, there's still some of those with some of our partners. So those are not direct, but they're indirect.

Yes. Wally, we actually disclosed that number, there's only $28 million of those on our balance sheet and then some are off balance sheet. We're obviously a master servicer for those.

Sorry, I missed the disclosure, but thanks for pointing it out.

No, I understand. It -- release is just out, so wouldn't expect you to see all that.

And that concludes the Meta Financial Group First Quarter Fiscal Year 2022 Investor Call.