Pathward Financial, Inc. (CASH) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Meta Financial Group Fourth Quarter and Fiscal Year 2019 Investor Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the 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 fourth quarter and fiscal year ended September 30, 2019, 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, goals or objectives. 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 report 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. For fiscal 2019, Meta reported GAAP net income of $97 million or $2.49 per diluted share one of several key accomplishments made during the year. This includes the previously announced executive transition expense of $0.12 per diluted share after tax incurred in the fiscal second quarter and severance expenses of $0.07 per diluted share after tax incurred in the fourth fiscal quarter as part of our initiative to optimize organizational resources and improve efficiency ratios. These results reflect the earnings power of the company and the impact our key initiatives are having on the business. Before I turn it over to Glen for detailed account of the financial results, I'd like to take a bit more time to talk about the progress we are making on our key initiatives, increasing core deposits, improving our earning asset mix and improving our efficiency ratio. First, we work to accelerate the positive growth within our payments division by increasing business development efforts and streamlining processes making it easier for our strategic partners to do business with us. We were rewarded by the renewal and extension of existing relationships while also developing several new relationships. During fiscal 2019, average deposits from our payments division grew 11% over the average for the fiscal year 2018. At the same time, we are positioning ourselves to take advantage of fee income opportunities in areas such as merchant acquiring, ACH origination and our faster payments initiatives. Second, we are improving our interest earning asset mix by replacing lower yielding loans and investment securities, with higher yielding commercial loans while maintaining a strong credit profile. As shown on Slide 4 of our investor presentation, quarterly average commercial finance loans accounted for 36% of our total earning assets as of September 30, 2019, up from 23% at September 30, 2018, while investments as of September 30, 2019 made up just 28% of our earning assets compared to 46% at the end of September of last year. As a result, we generated growth in net interest income and expanded our net interest margin 90 basis points to 4.95% for the fourth quarter of fiscal 2019, compared to 4.05% in the comparable prior year quarter. Finally, we made meaningful strides in improving operating efficiencies across our organization. As part of these efforts, our strategic plan included a comprehensive analysis of our organizational structure and infrastructure. Following our review, we recently made the decision to outsource part of our IT infrastructure. As our business continues to grow, so do the IT needs of our customers, partners and employees. We determined that we need to meet those needs in a quicker and more efficient manner and better align our resources with our strategic growth priorities for transitioning certain non-proprietary commoditized functions to an external IT focused firm. More proprietary strategic functions, including IT development will remain in house. We also made significant organizational changes in the fourth quarter to begin aligning positions and resources with our strategic objectives while continuing to improve operating efficiencies. As we head into fiscal 2020, we remain focused on optimizing our organization and developing a strong foundation for further growth. We will continue to focus on allocating the appropriate resources to areas that maximize value for the company and our shareholders over time. Turning to capital management, during the fiscal fourth quarter we opportunistically bought back approximately 106,000 shares under our existing share repurchase authorization, bringing total repurchases to approximately 1.7 million shares for the fiscal year. We remain opportunistic and will consider repurchase activity within the context of a balanced capital management approach designed to support the company's growth prospects and maximize shareholder value. While fiscal 2019 mark the year of significant change in progress, we believe there is much more to come in furtherance of our key strategic initiatives as we continue to execute on the key pillars of our plan, while providing tailored services for our customers, opportunities for employees and driving more value for shareholders. And we believe our execution will allow us to deliver significant earnings growth in the year ahead. Now, let me turn it over to Glen Herrick, our CFO to provide a review of our fourth fiscal quarter and fiscal 2019 financial results.

Thank you, Brad and good afternoon everyone. Today we are pleased to report our results for the fourth fiscal quarter and full fiscal year 2019. On a GAAP basis, we generated net income of $20.2 million for the quarter or $0.53 per diluted share and $97 million or $2.49 per diluted share for the year. Full year earnings per share growth of 49% over the prior year primarily reflected higher net interest income as a result of the Crestmark acquisition and efforts to optimize the mix of our balance sheet. Over the past year, we continued to build out our commercial finance portfolio and work toward improving our funding mix. Furthermore, we originated $104 million in solar leases during the year with related investment tax credits driving higher after tax income. Though the timing and impact of future investment tax credits are expected to vary from period to period, we expect the tax rate for fiscal year 2020 to settle in the low teens. Turning to the balance sheet, average interest earning assets remain relatively flat on a linked-quarter basis, reflecting efforts to focus on enhancing our earning asset mix instead of balance sheet growth. During the fourth quarter, we selectively sold lower yielding investment securities, reducing our average holdings by 10% on a linked-quarter basis and replace them with higher yielding loans, primarily within our commercial finance portfolio. Total gross loans and leases were 3.65 billion at September 30, again, relatively flat on a linked-quarter basis, despite the seasonal run off of tax related loans and a transfer of certain consumer loan products to help our sale and up 24% from September 30, 2018. Our commercial finance portfolio was $1.92 billion at September 30, an increase of 4% on a linked-quarter basis and 27% year-over-year, meaningfully outperforming our initial 15% forecast for loan growth at the time of the merger. On Slide 7, we provide more color on the components of our commercial finance portfolio. For example, our asset based lending portfolio average loan size was approximately $775,000 and average yield was 9.67% for the quarter and the approximate net charge off rate was 60 basis points over the past three years. Turning to the liability side of the balance sheet, average payments deposits grew by 11% compared to the same quarter in the prior fiscal year and represented 57% of total average deposits. As a result of the balance sheet remix, we generated $65.6 million of net interest income in the fiscal 2019 fourth quarter, up 35% compared to the fourth quarter of fiscal 2018, while our net interest margin expanded by 90 basis points year-over-year to 4.95% for the fiscal 2019 fourth quarter. Purchase accounting to accretion contributed 14 basis points to the net interest margin in the fourth quarter of fiscal 2019, a decrease of 11 basis points from the third quarter and we expect minimal contribution in fiscal 2020 as adjustments related to the purchase loan and lease portfolio from Crestmark are expected to wind down. Loan yields were 7.51% for the quarter, compared to 7.77% for the previous quarter and 7.21% for the fourth quarter of the prior fiscal year. Purchase accounting accretion added 20 basis points to loan yields in the fourth quarter versus 37 basis points in the third quarter. Meta's provision for loan and lease losses was $4.1 million for the fiscal 2019 fourth quarter, compared to 4.7 million for the fourth quarter of the prior fiscal year. The decline in provision was primarily driven by a decrease in loan balances within the consumer loan portfolio, as well as the lower provision in the tax services and community bank portfolios. Net charge offs were $18.5 million for the quarter, which included $15.4 million related to charging off the majority of the remaining balances of tax service loans. Our credit metrics remain within our risk tolerance levels, as depicted on Slide 8 of the investor deck. Nonperforming assets represented 91 basis points of the company's total assets at September 30. Of note foreclosed real estate and repossessed assets represented 48 basis points of the company's nonperforming assets balance at September 30, 2019, which is primarily related to a nonperforming agricultural relationship that we have previously discussed. We continue to evaluate liquidation options for the nonperforming Ag relationship as it is actively being marketed for sale. The increase in nonperforming assets compared to the linked-quarter was primarily attributable to a couple of relationships in the commercial finance portfolio, where occasional fluctuations are common. Noninterest income was $36 million for the fiscal fourth quarter, up 11.4 million from the same quarter of fiscal 2018. For the year, noninterest income totaled $222 million, up $38 million from fiscal 2018 and represented 46% of total revenues. The year-over-year increase was largely driven by increases in rental income, gain on sale of securities, gain on sale of loans and leases and other income. Turning to noninterest expense, as Brad previously mentioned, we remain focused on positioning the company to maximize profitable growth going forward. As a result, we incurred $3.5 million of expense during the quarter related to organizational changes, primarily severance to better support growth and drive enhanced operating leverage. Other fiscal year-over-year drivers of noninterest expense included step ups in compensation, operating lease equipment depreciation, occupancy and equipment and loan and lease expenses primarily related to the Crestmark merger. From a cost and efficiency perspective, we are committed to allocating capital and resources to businesses with the most attractive growth and profitability profiles. Finally, let me discuss an update to our previously disclosed earnings per share outlook. For fiscal year 2020, we are tightening our GAAP earnings per share guidance range to be between $3.30 and $3.50 per share. This represents a range of annual earnings per share growth from 33% to 41%. The tighter range reflects better visibility into revenue and expense trajectories, particularly in light of a meaningfully different interest rate backdrop, since we initially provided an outlet for fiscal 2020, back in September 2018. With that, I'll turn the conversation back to Brad for closing comments.

Thank you, Glen. To recap, we are pleased with our results for the fourth quarter and fiscal year of 2019. The progress we've made thus far toward our three key initiatives and the opportunities in 2020. That completes our prepared remarks. So I'll ask Glen to join me for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from Frank Schiraldi with Sandler O'Neill. Your line is now open.

Good afternoon. Just I wanted to ask about, well, first on the severance. Can you just talk a little bit about is this – you mentioned Brad, you mentioned outsourcing your IT infrastructure. Is that where this sort of severance is coming from or is this just sort of across positions.

We had an initiative to look at all the positions in the company and make sure that positions were aligned with the needs of our strategic plan going forward. And where we found gaps or positions that were not necessary or aligned, we eliminated certain positions and there were several people that were impacted by that process. As far as the IT transition goes, that will happen a little bit later. The people that were in our IT department will be absorbed by the outsourcing company. So they will continue to be working here with us, but for the most part, they were not impacted by the severance.

And is there any detail you can give on as you make that transition impact to the income statement?

Well, we are looking for a positive impact over time. There is a transition period that will occur and is primarily in the commodity based parts of the IT infrastructure business.

Okay, and then just on the consumer loan balances, you transferred some for sale, you mentioned obviously the help for investment balances fell linked-quarter. Just wondering it didn't look like from your slide that you're further deemphasizing that business, but are you looking to shrink that portfolio or keep it stable at these levels?

No, as we've mentioned, we plan to manage the consumer lending business to be within 15% of our earning assets. That's still our plan going forward, but we're taking a very measured approach as we develop those programs and portfolios to make sure that our infrastructure and capacity to manage them appropriately, especially going into this part of the credit cycle is very sound.

Okay, and then just one more, and I'll go back to the queue. But just in terms of – obviously, people talk about we're getting later in the economic cycle here. Some players tend to pull back from things like factoring and asset-backed lending at those times. I assume or believe that's not the plan for Crestmark, I'm just wondering if that maybe has created or is creating more opportunity for you and you could – maybe just any sort of color you can give on expected or anticipated growth rate in the Crestmark business from here.

We've been consistent in saying – as we looked at the Crestmark performance over the prior years that their performances sound during times of downturns as well as up cycles as we see competition and people stretching in areas to compromise on structure and pricing, we try to remain very disciplined in that and then over time we believe that it will create opportunities for us.

I mean, do you expect that business to continue to grow in the double digits or what's a decent growth rate, I guess?

Yeah. Hi, Frank. This is Glen. Certainly as the denominator becomes larger, we would expect to see some slowing of growth, but we are expecting double digit growth year-over-year and it could come from different levers there. We have a broad set of products to serve our customers. And I would also just – to add on some color to Brad's comments about the credit cycle. Also point you to the not all factory in an asset-based lending are created equal and while the portfolios that we have are certainly higher return portfolios than our traditional community bank portfolios, they're also not the high cost, the higher cost factoring or ABL type products that are a little lower in the credit quality range.

Okay. I'm sorry. So they're lower in terms of factoring.

Yeah, so if they were – we have yields of 9.7% for a portfolio and as you go down and credit quality, there may be other players in those that do factoring or ABL that are charging 18% to 20% to 36%. And that's usually a reflection of the credit quality or the credit risk inherent in the customers they're serving. So there's a lot of different flavors of the commercial finance business.

Okay, alright. I appreciate it. Thanks.

Thank you. And our next question comes from Michael Perito with KBW. Your line is now open.

Hey, good afternoon, everybody.

Hi, Mike.

I wanted to ask kind of a big picture question on capital here. Obviously, after the stronger level in the third quarter the repurchases slowed a bit in the fourth quarter and the shares have obviously done quite well with putting in your multiple up, but you obviously no rush around this because your capital levels are healthy today. Well, I wouldn't say anything major, but in the confines of I look forward. I mean, obviously, you guys are motivated to keep your balance sheet under 10 billion, which can somewhat limit the capital you need for balance sheet growth anyway. And I'm just wondering how do you guys think about as your business matures and becomes more profitable with maybe a slower percentage growth rate, the capital your return to shareholders, would seem like the level of buybacks you've done recently isn't sustainable longer term, just curious how you guys are thinking about that dynamic as you evolve here.

Well, we as we stated, we expect to generate access capital in 2020 and beyond. And we will certainly consider repurchase activity within the context of overall capital management as the board and management reviews our options.

At any point does the dividend come into play or is that really –

It's certainly one of the levers. Yeah, again, it's certainly one of the levers that the company will consider.

As we think out the card fee line on the fee side was a bit lower than it's been for quite some time now, but I know that scenario of focus, just any additional thoughts or expectations about that line item as we move forward and what you guys think is realistic, is there any other volatility expected near term or is there something or is there a pipeline for growth, just curious if you can price more thoughts there.

Yeah. So we're kind of coming off this tough comparison because of the one time's that from comparing FY '19 to fiscal year '18, that fiscal year '20 will be clean comparisons going forward. So we would expect this last quarter to be a low point in card fee income and that we will leg up from here. A number of our large programs are customized priced. So depending on where the economics may fall and the characteristics of the deposits, how stable they are, how they may be more seasonal and so that all drives your card fee income. There's some tiered pricing for some of our larger customers as they cross threshold. So card fee income is important driver of revenue for us. But overall, I would expect it to grow at a slightly – I expect it to grow from here. I expect it to grow at a slightly slower pace than overall deposit growth from the payments business.

And you might note that some of the card fee income has transferred into the deposit fee line. So you need to take that into account as well. And then finally, as I mentioned in my remarks, we are starting to evolve several new lines, areas of business and merchant acquiring our ACH origination which we have been involved in the past and our faster payments initiatives which will all be more fee income based products. So those over the course of the next year and the year after will start to have a more meaningful impact.

Helpful and then just lastly as we think about obviously the card issue and you guys have done in the prepaid space has done really well. You started to see some of your competitors' branch out to non like prepaid card program managers like thanks like one that they're not really bank but partner companies like Chime and things of that nature. I'm just curious if you could kind of flesh out a little bit for us where your head's are at in terms of kind of expanding the ability to white label our card issue, your banking services and what we can kind of expect in which because it seems like a big priority for the next couple years, what we can kind of expect to see on that front moving forward.

And that's why you seen some of the fee income card fee income move into the deposit fee line because several of our partners and new relationships are involved with those exact type of products you're discussing. So we are in support of those kinds of products.

Okay, so I guess more to comment and stay tuned.

Yeah, we're certainly involved in – as the payments evolve and partner with strong relationships where we find them, I would know Mike, overall, our total fee income represents roughly 45%, 46% of overall revenues and we would hope it would stay at that level or be a higher percentage actually in 2020.

Great, well, all helpful. Thank you, guys, for the color I appreciate it.

Thank you. [Operator Instructions] Our next question comes from Steve Moss with B. Riley FBR. Your line is now open.

Good afternoon, guys.

Good afternoon Steve.

I want to start on the commercial finance yields. They're down about 65 basis points or so quarter-over-quarter, just wondering what the underlying dynamics were there for the quarter and how we should think about that going forward.

We had we had a leg down in the purchase accretion which contributed to that. There are fair amount of variable rate loan products in that portfolio. And then it's just a mix of – somewhat of a mixture – some portfolios and commercial finance growing faster than others.

In terms of the variable rate, roughly an idea of what percentages is variable within that portfolio. I know the premium finances, for example, but?

It is 40%, roughly plus or minus, yeah.

And then as we think about the margin going forward, I would assume that you're going to pick up in commercial banks [ph] growth here in the upcoming quarter. Just kind of thinking about the different drivers, you do have obviously lower rates, but you should probably be getting some funding benefits. Any color on the margin will be great.

Yeah, we had a step down this quarter in accretion. Next quarter will be our final big step down in accretion. So I would expect margin to increase a little bit. The mix shift will help offset the accretion that will run off. And so we should be flat to up a few basis points next quarter and then start lagging up through the rest of 2020.

Okay, that's helpful. And then on expenses, just wanted to circle back to that, wondering what is the cleaner run rate going forward with the costage that were disclosed here?

Yeah. I get to your question specifically, but as you know, we have a fair amount of seasonality in our run rates, primarily tax season that kicks up here in December and then runs through March, first part of April. So certainly the March quarter is always a higher expense quarter a lot of variable expenses. Where we're at today, the September quarter is typically a lower expense quarter for us although we did have the onetime expenses. So that said, I would – I think it's good to build a base from perhaps the September quarter. Again there are a fair amount of variable expenses, so as the business grows, there are some variable ones that will grow with it. So I think starting with the September quarter and then building a growth from there.

Okay and lastly just on credit here, the underlying reserve ratio I think it looks like to build x tax. I would assume you probably have one last leg up with accretion run off here this quarter, just kind of your thoughts around credit costs for the upcoming quarters that the allowance normalizes?

Yeah, we feel – as Brad mentioned, we feel good about our position in our allowance today. I think it'll depend on the mix of our assets. But you can assume that we'll probably end up around 100 basis points or so or a little higher actually blended allowance, again, depending where the mix comes from and we'll build provision to maintain that level.

All right, thank you very much.

Thanks, Steve.

And our next question comes from Daniel Cardenas with Raymond James. Your line is now open.

Hey, good afternoon, guys.

Good afternoon Dan.

Just a couple follow up questions on the credit side, any color you can provide in terms of the performance of your classified assets, say versus the quarter before the previous quarter.

Yeah, well, we have the one Oreo that's still out there that we're actively marketing and hope to make a progress on that here in early fiscal year '20 that actually represents like half of our nonperforming assets. The remainder we feel pretty good about their collateral position, gets a little lumpy just depending on when certain loans might age, especially the commercial finance portfolio, but overall, we feel very good about our credit position today.

And how about watch list trends how does those look in the quarter?

All of our trends in the commercial credit are – we feel very positive and strong. We don't have any concerns there right now.

Okay, and then I think all my other questions were asked. So I'll step back. Thank you, guys.

Thank you.

Thank you. And that concludes today's question-and-answer session. I will now turn the call back to CEO, Brad Hanson.

Thanks. I'd like to close by thanking everybody for participating Meta's quarterly investor call. We truly appreciate your support. And thank you for taking time to listen to us today. Have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.