This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Ladies and gentlemen, thank you for standing by, and welcome to the Metal Financial Group Third Quarter Fiscal Year 2021 Investor Conference Call. During the presentation, all participants will be in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, the conference call is being recorded. I would now like to turn the call over to Brittany Kelly Elsasser, Director of Investor Relations. Please go ahead.
spk01: Thank you. I would like to welcome everyone to the Meta Financial Group conference call and webcast, where President and CEO Brad Hanson and Executive Vice President and CFO Glenn Herrick will discuss the results of our third fiscal quarter ended June 30, 2021. Also participating in the call is Brett Farr, Co-President and COO of MetaBank. 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 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 Brad Hanson.
spk06: Good afternoon, and thank you for joining our call today. Net income for the quarter was $38.7 million, or $1.21 per diluted share, compared to $18.2 million, or 53 cents per diluted share generated in the third quarter last year. Various timing items, including tax season delays, additional card fee income from government stimulus programs, and reduced provision drove the enhanced performance year over year. Year to date, net income was $125.8 million, a 37% increase compared to the prior year, driven primarily by the additional card fee income and net interest income from government stimulus programs, along with lower provisioning. Our results demonstrate how META's mission of financial inclusion for all is creating value for all stakeholders, our customers, our employees, and our shareholders. This mission is embedded in our vision to increase the availability of financial products that offer social benefit and produce economic opportunity for people. We empower individuals and organizations by expanding financial availability, choice, and opportunity. We use our national bank charter to offer banking as a service, or what we call sponsorship, to FinTechs and third-party providers, helping them access financial networks, navigate risk and compliance, and we monitor their activities to ensure quality, security, and fairness across a number of relationships and a variety of products. One example of how we empower consumers is our sponsorship of Coinbase, a fintech company working to build the crypto economy. The Coinbase card, issued by MetaBank in partnership with Marketa, is a Visa debit card that allows customers to instantly convert any asset in their Coinbase portfolio to spend at Visa-accepted locations, earning rewards for each purchase. Partnering with Coinbase, Meta helps to empower consumers with ways to manage and spend these emerging assets. Our mission also drives our environmental, social, and governance efforts. ESG is embedded in our strategy, aligning our business activities with our purpose and culture. We advanced our ESG efforts during the quarter by publishing our inaugural ESG report, highlighting the efforts we've undertaken and outlining our future ambitions across five critical pillars, governance, customers, employees, the community, and the environment. As part of our ESG reporting process, we also completed a materiality assessment to determine the topics that are most important to our stakeholders. This assessment will help further develop our ESG strategy, including the establishment of quantitative goals that we publish in future reports and use to guide our efforts. Also during the quarter, we launched our Community Impact Program to support the ways in which our employees and our companies show up in the communities we serve. This program includes matching gifts, paid time off for volunteering, and exploring partnerships with nonprofits in which our employees can engage. With that, I'm turning the call over to Brett to share some additional thoughts.
spk02: Thanks, Brad. Today I would like to provide an overview of our banking as a service business lines, which encompasses our payments, tax services, and consumer finance activities, along with our other mission-supporting business, Meta Ventures. Meta has been at the forefront of providing banking as a service, offering financial solutions to third parties and fintechs, including regulatory and compliance services since 2004 when we signed our first prepaid sponsorship agreement. Years of experience, along with substantial investments in compliance, infrastructure, and people, have positioned MetaWell to partner with numerous third-party providers. Over that time, we have achieved significant scale and developed a user-friendly infrastructure that allows third parties to choose the solutions that work best for their business needs. We also expanded our solutions to include all facets of the payments ecosystem, from issuing to acquiring, and ACH and faster payments enablement. We have relationships with more than 30 processors and 21 credit and debit card networks, and we have launched over 9,000 prepaid and debit programs with over 50 program managers and payment service providers. Our tax services division works with the largest tax preparation companies in the country, along with thousands of small independent tax preparers, to bring necessary financial products and services to the millions of hardworking people they serve. We enable these companies to provide consumers with refund advanced loans and the ability for unbanked filers to receive refunds by direct deposit instead of by check. These services provide consumers with significant benefits, including speed, safety, and cost savings. Our consumer finance division works with third parties to help consumers better control their finances with empowered spending options and reliable access to funds. We are currently piling in a new direct line of credit, which we hope will enhance the products offered to many of our existing banking as a service partners. We believe that responsible credit options are core to our mission, creating pathways towards upward mobility by establishing credit histories and building credit scores. MetaVentures complements our banking as a service activities, allowing us to make direct investments and select fintechs and funds that share our social commitment, add key capabilities to the payments ecosystem, or serve key consumer segments. During the quarter, we made a minority investment in Greenwood, a mobile banking platform aimed at serving the Black and Latinx communities. MetaVentures has committed more than $25 million to 18 businesses, and we believe our investing activities make us a more attractive partner to FinTechs, seeking a financial services partner that can also provide regulatory and compliance oversight. The outlook for banking of a service is robust, and we are fortunate to have been able to select partners that complement our mission and create opportunities and value for consumers. Glenn, over to you to review our third quarter's financial results.
spk09: Thank you, Brad. And as Brad noted, GAAP net income for the quarter was $38.7 million, or $1.21 per share, representing a year-over-year increase of 113% and 128% respectively. Our strong revenue generation included growth in card fee income and refund transfer fees compared to the same quarter last year. Card fees benefited from increased activity related to government stimulus programs. Refund transfer fee income in this quarter was higher compared to last year, due in part to a volume shift from the second fiscal quarter because of delays in the 2021 tax filing season. As we wrap up tax season, we are pleased with the results, especially given that government stimulus programs reduced demand for the refund advance product. Year-to-date, Pre-tax net income contribution from the tax business was up 19% compared to last year. This was largely generated by our new relationship with H&R Block, and we expect overall earnings from our tax business to be up even further next year. A detailed breakout of net tax product income can be found on slide 13 of our quarterly investor deck. We are starting to see demand rebound within our working capital loan portfolio, which includes asset-based lending and factoring. These grew 11% on a linked quarter basis and 51% year-over-year. The insurance premium finance portfolio also experienced strong loan growth, increasing 21% during the quarter and 16% year-over-year. The continued remix of the balance sheet supported net interest margin improvement year-over-year. This highlights the momentum of our efforts to grow our commercial loan portfolio and continue to replace lower return assets with higher return assets. Expenses increased compared to the prior year, driven by increases in compensation due to a return to more normalized incentive accrual levels in fiscal year 2021, along with additional employees to support growth. We also saw higher refund transfer expenses this quarter compared to the prior year due to the volume shift into the third fiscal quarter as a result of the delayed IRS filing date. As we start to plan for the upcoming year and our strategic priorities, we are focusing investments in further improving our technology stack to position us for future success. We are starting to see total assets returning to expected levels. allowing us to reduce our stimulus-related cash holdings as consumers spend their stimulus dollars, and we utilize third-party bank relationships to move deposits off balance sheet. Going into the fourth quarter, we will likely see elevated deposits related to the 2021 advanced child tax credit payments being loaded onto partner cards, similar to what we saw within the indirect impact of the previous three rounds of economic impact payment. You will see in our earnings release that Meta is now revising its credit administration policies and completing a review of its loan portfolio to better align with OCC guidance for national banks, a process we expect will take place during the second half of fiscal 2021. We expect these credit policy revisions will have an impact on our loan and lease risk ratings, resulting in the downgrade of certain credits in several categories. We expect this process will result in setting a new baseline for portfolio metrics going forward, but it does not indicate a deterioration in expected portfolio performance. Further, these changes do not reflect an increase in credit risk for past or future periods, and we do not expect any increase in losses as a result of these one-time administrative adjustments to risk ratings. Our loan and collateral management practices have proven effective in managing losses through economic cycles over the last 20 years. The expected impact to our financial position is minimal, if any, including the allowance and provision impact. As you can see, no adjustments to provision or allowance were made this quarter. We have included two tables in our earnings release that show the changes from the March quarter based on these revised credit policies. Overall, our credit metrics remain stable. Allowance for credit losses totaled $91.2 million at June 30, 2021, a decrease from the linked quarter, however, up 39% compared to the prior year, driven by impacts from the pandemic, the adoption of CECL, and year-over-year loan growth. Provision expense was lower compared to the prior year, due in large part to the increase in allowance as part of the company's response to the emerging COVID-19 pandemic during the third quarter of fiscal 2020, along with strong credit performance. In a further positive development, our theater borrower received in July over $7 million in shuttered venue operators grant funds, which it used to bring all payments current. Since June, they have reported theater attendance sufficient to support all operating expenses and debt service, and our outlook is cautiously optimistic. Thank you all for joining. That concludes our prepared remarks. Operator, please open up the line for questions.
spk04: Sure, sir. Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Moss with B Reilly Securities. Your line is now open. Good afternoon, guys.
spk08: Steve, maybe just starting here with loan demand and the pipeline. seeing the improvement in commercial finance loan growth. Kind of curious as to how the pipeline is shaking out and what your thoughts are going forward there.
spk02: This is Brett. First, as we noted, there's been a dramatic increase in our asset-based lending and factoring, which if you think about as the economy ramps up, that makes a lot of sense because that's the need and the pull for working capital. We had situations back a year ago where balances were dropping to half of available lines. Now the balances are coming back up to 85%, 90% of available lines, which is more of normal. So seeing a lot of growth there. We've had new deal pipelines coming in there as well. Some of the term deals, we're still doing those. The rates obviously are lower, and so it's highly competitive. But we're having good flows there. So I would say it's strong in some areas and moderate in others.
spk08: Okay. Where are origination yields these days, generally speaking?
spk02: Well, I think that's a question answered differently by each asset class. Factoring yields are 8%, 9% all the way to 12% or 14%, so pretty high. Some of our larger, you know, five-year equipment lease deals can be in the four and a half, five range.
spk08: Okay. And then in terms of just the, just onto the card fees here, just kind of curious if you guys could quantify, you know, how much of the card fees were stimulus related and just how do we, you know, how to think about that growth going forward?
spk09: Yeah. Hi, Steve. It's That's difficult to quantify. Cash is fungible, and so many of the stimulus funds were loaded on our partner cards, such as NetSpend or H&R Block. It's really hard to differentiate was it driven by the stimulus or some other spending, especially the fact that we're seeing the balances go up. So There's, you know, they're holding deposits, which does not generate fee income growth for us. So we wish we knew the exact answer there, but just don't know where that's at.
spk08: Okay. And then if you just squeeze one last one in, just in terms of expenses here, just kind of, you know, pretty clean corner, I think, versus expectations. Just kind of curious how we think about expenses now that taxes are fully behind us for the third quarter.
spk09: I think this was a good run rate quarter for us, plus or minus $80 million outside of tax season. You'll see our biggest increase year over year was in compensation. We've added employees, which is variable to support our growth, but the The biggest increase in compensation was the change in incentive accruals for team members, where last year we were taking haircuts due to the pandemic, pretty significant ones, and this year we're accruing incentive accruals at more normal levels.
spk08: Okay. All right. Thank you very much for all that. Vice Chair, I'll step back.
spk04: Thanks, Steve. Thanks. Your next question comes from the line of Michael Perreault with KBW. The line is now open. Thank you. Good afternoon, guys.
spk06: Hey, how are you doing?
spk07: Good. I wanted to spend a minute on slide 12 here. You guys kind of pull out the payments, growth, and vast revenue, 82% prepaid, 8% checking, 10% banking services. I'm curious if you can maybe – expand on how that's trended over the last couple years. I mean, is it fair to think that the dispersion amongst that is improving or maybe not improving, but just accelerating as your type of partners diversifies? And is that a trend you expect to continue going forward, putting less kind of concentration around some of the prepaid legacy relationships?
spk06: Yeah, I think so. I think as things are evolving, we're seeing more opportunities arise with, you know, in the checking and core banking kind of products. And then also in our, you know, like faster money, we talked about those. So when you're looking at revenues, you're seeing banking services increase. I think that should continue as well. So I think you're calling it right.
spk09: Yeah, I would say at an absolute level, we would expect all of them. to grow over time, but we would expect the checking and the banking services segments to grow faster.
spk06: And that's a good call-out. And from a revenue perspective, also, the banking services are, you know, and most of this is heavily fee-oriented as well, right? So, especially the banking services. So, we are concentrating there pretty heavily.
spk07: And then it sounds like, is it, you know, the consumer finance, which sounds like it's kind of lending focused on financial inclusion. I mean, that sounds like it's something that's not necessarily new, but maybe new in the way you're selling it to your FinTech partner. So is that another area where, you know, maybe the growth rate going forward could look stronger than what it was historically, where I think most of your consumer lending was just kind of referral through partnership, correct me if I'm wrong?
spk06: I think that's an opportunity, but I think that's going to ramp up over a longer period of time as we continue to develop those products and install them into those other channels. We do have our partnership lending or consumer lending that we've been doing in the past, and we have a pipeline there as well, so we may see consumer lending still see some growth, but into the other channels you're talking about, I think we'll still take a little bit of time to develop.
spk07: Okay. Just two more for me, quick. One, just to ask the card a few questions, if you're not willing to comment, but just, you know, it was quite a bit ahead of what I was looking for. I mean, any indications, you know, a third of the way through the third quarter here? I mean, is it run rating at a lower rate than that? I mean, just trying to get a sense of that quarterly run rate. I know it's hard to kind of guide to where it could go and what the long-term growth rate is. But, I mean, is it fair to assume that that should step down if we're trying to make a conservative kind of base case here in the fourth quarter?
spk09: Yeah, I think that's fair, Mike, and, you know, Steve's still on listening, too, that, you know, a year ago our card fee income was around $21 million. You know, we don't think it's a core increase to 29 here, but we don't have exact numbers, but we do believe our core fee income business outside of stimulus likely grew double digits. I don't know if that's 10% or 18%, but perhaps somewhere in that range.
spk07: No, that's very helpful. And then just lastly for me, I mean, Obviously, it was a tremendous opportunity to partner with the Treasury, but I'm sure you guys are relieved to see the balance sheet kind of approach more normal levels again and capital go back up. I mean, last quarter, your leverage ratio was 4.5%. By the end of the calendar year, it could be north of 10%. But it seems like we're approaching, if not pretty quickly approaching here, a more normalized balance sheet and capital position here. You know, maybe you have a quarter or two out still, but just wondering, Brad, if you can just update us on, you know, once that does happen, you know, how should we think about capital deployment? I mean, you know, the balance sheet shouldn't really be growing a ton, and with the fee and ROE generation you guys have, I mean, you'll be accumulating capital pretty quickly. Just was wondering if you'd be willing to kind of refresh us on your thoughts there.
spk06: Yeah, I mean, you're looking at the same things we are. and capital is returning to more normal levels, and we do shed off a lot of excess capital over time. So we are definitely looking at how to deploy those, and we'll probably use similar methods we have in the past.
spk07: So, I mean, definitely some buybacks would be a part of that equation.
spk06: It's a good possibility.
spk07: Okay. Excellent. Thank you guys very much for taking my questions. I appreciate it. Thanks, Mike.
spk04: You bet. Your next question comes from the line of Frank Chiraldi with Piper Sandler. Your line is now open.
spk10: Hey, guys. Just wanted to ask, trying to get a sense, you know, I know it's been asked already, but in terms of the fee income, the payments-related fee income, and you noted that, you know, you guys were at $21 million a year ago. And, you know, I'd assume, and you know, X stimulus, maybe you've got, you know, a double digit run rate 10, you mentioned 18%, you know, it's tough to tell. But you've also inked some pretty big deals, you know, some big partnerships over the last 12 months or so. And so I just wondered, you know, you guys thoughts on whatever that is 10, 15%, should we expect that sort of core run rate to accelerate, just given what, you know, the partnerships you guys have signed into the back half of the calendar year?
spk09: Calendar year 21, I'm not so sure yet. You know, these larger partnerships take a little time to ramp up to get the distribution out there. you know, getting pretty efficient at building the pipes to the partners, but it's also how fast they build it on their, the interfaces on their side as well. So we have a really robust pipeline, really pleased with the quality and the distribution that some of these new partners bring us. And, you know, that's how fast do they get market acceptance and start making headway in the market.
spk06: Yeah, I think you still have a good upside potential on the ramp going into next fiscal year and throughout next fiscal year. Some of the deals we've announced recently are going through the final stages of implementation, and as Glenn said, will start to ramp up. But as you can imagine, once those things start to – once they do ramp up, they start compounding on each other and continue to – uh, increase that, that growth rate.
spk10: Okay. And then, um, just wondered, I know you guys are, you know, higher rates would, would, uh, be very welcome. Um, any updated expectations or thoughts on what, you know, you would expect to get, um, in, in a given rate move, you know, call it 50 bits, a hundred bits, um, you know, any, any updated thoughts there?
spk09: Um, Higher is better anywhere on the curve for us is what I would say. Our liability side is still virtually fixed at zero. You know, we broke out the distribution of our price resets for our loans, and as we add new ones. So anywhere across the curve is helpful. but no, we haven't guided on a specific rate scenario.
spk10: Okay, and then just lastly, in terms of the, I guess, re-risk weighting of some of the loans, does that, obviously I recognize and you point out that it doesn't reflect any deterioration in the portfolio, but just wondering if there's any other impact to operations such as you know, any change in risk appetites for certain loan categories and any changes to things like FDIC assessments?
spk02: Yeah, so this is Brett. So, none of the above. And I think the key point here is there's no change in our underwriting approaches here. We already had solid underwriting Administratively, there's some procedure changes on how we'll monitor on an ongoing basis. And no, it doesn't impact any kind of an FDIC charge. So this is truly an administrative change to sort of get us more aligned with what our regulators want and looking at applying these standards to our loan portfolio.
spk09: And, Frank, this is Glenn. I would add... Yeah, thanks, Brett. You know, if you look and you'll see in our earnings release, our past dues are actually down on a linked quarter basis. And so this doesn't change our expectation for the portfolio. We didn't increase the allowance. We didn't take additional provisions, so it doesn't change our outlook at all, nor have we changed our underwriting. This is the same underwriting that we've structurally been doing. Okay.
spk10: All right. Thank you.
spk06: Yeah, as Brett said, there is OCC guidance on how to manage these portfolios and manage this process for commercial loan portfolios, and we're just trying to make sure that our program is fully aligned with their guidance.
spk04: Okay. Thanks. Your next question concerned the line of William Wallace with Raymond James. Your line is now open.
spk05: Thanks. Most of my questions have been answered, but as a follow-up to the last line of questioning, I'm just curious with some of the shifts in the risk rating, I would have anticipated that just the function of the plugging in the new risk rating into the FAS-5 model, you would have seen your reserve levels have to go up.
spk09: Well, yeah, hi, Wally. It depends on what your expectations are at each risk rating level, and there's no one-size-fits-all for that. And again, that was all looked at, reviewed, and we are more than comfortable with the allowance levels we have today.
spk05: Okay, and... What was the genesis of this kind of decision?
spk06: Well, I think I mentioned it's just making sure we're aligned with the OCC's guidance for commercial lending practices and portfolio management practices. And so we're just trying to make sure we're aligned with their guidance. And in doing that, I mean, here's the thing. Their guidance primarily focuses on things like cash flow analysis and the financial performance of the borrower. We take an approach where we look at our collateral and manage our collateral very closely. And so when you take that different analysis, for example, you could have a lease that was making payments on time for several years, And because the underlying company, even though they've never missed a payment, the underlying company is stressed financially a little bit, could fall into one of these other categories. That doesn't mean we expect there to be an increase in loss on that, an increased chance of loss on that specific lease. But we are using those other more I guess, typical commercial lending methodology going forward to do these. That's why we say it's going to set a new baseline, and then we'll start measuring off of that. But we don't expect the fallout at the end to be any greater than it has been all along. Okay.
spk05: All right, great. Thank you for that. Okay, I hate to do this, but in the interest of really beating a dead horse, With the payments revenue, you mentioned that the balances are increasing on a lot of the partners' cards and the spend is increasing, which is driving the fees higher. I mean, is it safe to assume that the decline to whatever the baseline is is going to be gradual, or do you anticipate that that decline could happen in, say, this September quarter or the next, you know, one or two quarters?
spk09: I would expect it to be gradual. You know, the child tax credits are out there now, and those are not issued. The child tax credits that have been authorized for calendar year 21, these six months, none of those were issued on our debit cards. However, same issue, our partners that have GPR card programs and they're consumers use them as their main checking account, they're getting the child tax credits. And so we're going to continue to see tailwinds through the rest of this calendar year. Then we'll see what the feds do for, you know, what Congress does for 2022 from there. Okay. Okay. All right.
spk05: This is kind of an esoteric question that you're probably not going to be able to answer, but there was some press recently about a letter written to the CFPB about looking into CHIME's closure of accounts. I'm curious if you can talk about the decision matrix around looking at these accounts and the decisions to close them. Does this have any impact or could this have any impact on META?
spk06: We do not issue CHIME and don't have any specific information into what they're looking at or how they're managing that, but we do monitor all those kinds of activities against our portfolio and make sure that we're in compliance with all required regulations, and we believe that we are. Thank you very much.
spk04: And that concludes the Meta Financial Group third quarter fiscal year 2021 investor call. Thank you.
Disclaimer