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00:02 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. 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, this conference call is being recorded.
00:25 I would now like to turn the conference call over to Justin Schempp, Vice President of Investor Relations and Financial Reporting. Please go ahead.
00:37 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 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.
01:05 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 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.
01:37 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.
01:57 Now I’d turn the call over to Brett Pharr.
02:00 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 two substantial non-operating events.
02:27 First, as I mentioned last quarter, we plan to fully wind down our community bank balances to zero 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 multi-year shift towards higher return earning assets.
02:48 Second, we announced in December, an agreement to sell the Meta names and trademarks for $60 million of which we received $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 represent the company's significant evolution during the last few years, which has enabled us to better fulfil our vision of financial inclusion for all. We expect to announce a new company name in the coming months and we wrapped up with all the rebranding activity by the end of the calendar year.
03:29 Returning to operating results, we made continued progress during the quarter, in the three 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 reduced our overall funding cost or 8 basis points. This contributed to a net interest margin that was again over 450 basis points.
04:02 Next, we continue 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 a 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 improving our technology to help drive efficiencies and operating leverage.
04:41 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.
04:53 Thank you, Brett. With our vision of financial inclusion for all and focus on business simplification, we pay 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 strength of our businesses.
05:36 During the quarter, we're pleased to have completed a three year extension of our existing agreements with H&R Block. This agreement adds valuable new financial product offerings and capabilities for customers. Of note, earlier this month, H&R Block to introduce Spruce, a mobile banking platform that features a spending account with an attached debit card. This innovative product design to help consumers better manage their financial resources and meet spending goals is powered by Meta bank.
06:10 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 and 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.
06:37 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 50% increase year-over-year. We continue to see strong demand for our commercial finance loans and leases with a healthy pipeline across portfolios.
07:01 Turning to credit quality. Total non-performing 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 lease have declined $81 million for the prior quarter, primarily driven by the sale of the Community Banking loans.
07:35 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, helps in part by 2.6 million recoveries from our tax services portfolio.
07:56 Now let me turn the call over to Glen Herrick, our CFO, to provide an overview of our financials.
08:04 Thank you, Anthony and good afternoon, everyone. For the quarter ended December 31, net income totaled $61.3 million or $2 per 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.
08:33 As Brett noted, we had two 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.
08:59 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 earning asset mix, we sold the remaining legacy Community Bank loans completing the wind down of that portfolio.
09:30 These transactions generated a net favorable pre-tax 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.
09:58 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 the 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.
10:30 Cost to 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.
10:49 Non-interest 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've recognized a net unrealized gain of approximately $4 million on our MoneyLion investment after they completed their de-SPAC process and became publicly traded.
11:25 Non-interest 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.
11:57 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.
12:30 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.
12:58 That concludes our prepared remarks. Operator, please open up the line for questions.
13:04 Certainly. [Operator Instructions] The first question is from the line of Frank Schiraldi with Piper Sandler. You may proceed.
13:41 Good afternoon.
13:44 Hey, Frank.
13:46 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 too and sort of what is the incremental consumer product that went on the balance sheet in the quarter?
14:20 Yeah. We -- this is Anthony. And your question was about the consumer book. Correct?
14:27 Correct.
14:29 Yeah. We -- again, we are -- as we've talked about it 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 consist of our consumer loans and also through the consolidation of our Consumer Solutions Group, for us now that'll also includes our tax division as well. Tax season is coming up, and so we're still in the wait and see approach to that, but I've 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 will continue to grow.
15:16 Okay. So...
15:18 Yeah. Frank, it's still coming off as 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, and you're going to see a big allowance build for consumer finance either this quarter.
15:46 Right. Does these balances represent partnerships with partners that you do business with on the other side of the balance sheet, on the depository side or different set of partners for the most parts?
16:04 So, this is Anthony.
16:06 Go ahead, Anthony.
16:08 So today again we [Multiple Speakers]
16:10 That are market place 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.
16:30 Okay. Great. And then on the balance sheet, there was a significant growth into the end of 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 during the remainder of the year?
17:02 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 deposit -- 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.
17:30 Okay. Got you. And then just lastly from me on, Glenn, 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?
17:59 Glenn, go ahead.
18:03 Yeah. I'm sorry, Brett. Our line dropped momentarily. So what was the question?
18:10 Just on expenses. I think you mentioned on your prepared remarks, maybe some higher expense for something going forward. Just wondering if you could quantify that at all?
18:22 Yeah. We got back to the kind of core run rate we had guided last quarter, and we will have higher expenses obviously during the March quarter for taxes with the seasonality, where 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 revenues, so we can generate positive operating leverage. 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.
19:22 Okay. And then you might have mentioned on the call, but the $10 million left the game, you've got that when, in a year's time, is that how it works?
19:38 Yeah. We said prior to year-end once we fulfil 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.
20:00 Got you. All right. Thanks.
20:05 Thank you.
20:07 Thank you, Mr. Schiraldi. The next question is from the line of Steve Moss with B. Riley Securities. You may proceed.
20:18 Good afternoon. 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?
20:31 Yeah. 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 was 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.
20:53 Okay. And then in terms of the -- just think about credit costs here, I mean obviously some moving pieces with Community Bank sale, but charge-offs pretty low here for the quarter. Just kind of curious as to how you guys are thinking about credit costs normalizing or just any timeline or sense around that?
21:17 Yeah. 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 will 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.
21:44 Okay. All right. Thank you very much. I appreciate all the color.
21:50 Thanks Steve.
21:52 Thank you, Mr. Moss. [Operator Instructions] Our next question comes from the line of Michael Perito with KBW. You may proceed.
22:16 Hey. Good evening, guys.
22:18 Hey, Mike.
22:21 I wanted to 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 is much, but I'm sure you've had some new partners that have grown since 2015. I just wanted to kind of has that out real quick?
22:57 Yeah. 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 going to do less and less of that. There is a little bit of it in there and you'll see it, usually it has to get through a certain level, but we're still going to have as rates move up one of the lowest cost of funds in the industry.
23:21 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 in 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 kinds of true lender arrangement of things of that nature, number one?
23:48 And number two, should we think of it 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 end products where you could sell them to generate fees not grow the balance sheet or how do you guys think about that dynamic?
24:07 Well, I'll take the high level on this and then maybe Glenn 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, non-interest income line and that's a differentiator for us from other banks. And whatever we are doing and borrowed in the banking-as-a-service is going to be about driving that out. Now, any of those specific ones -- Glenn, do you want to comment only of those?
24:36 Yeah. 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 float 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.
25:29 And then you're right on that 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 when you think about those large partners with great distribution that brought us the deposit accounts, well, their customers also have more banking needs than just a deposit account and allowing them to compete against some of these neo banks and other fintechs that are starting up that we're also serving. So that's why you'll see a more than a one solution banking as a service provider, we think are those that we'll win in the future.
26:28 Helpful. Thank you. And then just lastly for me on that -- 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 or other years prior where there were various things that kind of can push up or perhaps make refund advance volume or demand or rather, I'm 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 that you guys are looking at that that could potentially impact the recognition flow of revenues of credit and et cetera?
27:18 Yeah. This is Anthony. As you alluded too, it's early and 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 yeah, we feel optimistic about the season this year.
28:01 Got it. Very good. Thank you, guys. Appreciate it.
28:06 Thank you, Mr. Perito. The next question comes from the line of William Wallace with Raymond James. You may proceed.
28:18 Hi. Thank you. Maybe just to follow up on the expenses. Glenn, you said, we look at the kind of the core expense base outside of tax and outside of spend for the rebranding that 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 the pressure that you guys are trying to stay front. So just trying to help us quantify what you mean by pressures so that we can get a better sense of where the expenses might be going?
29:00 Yeah. 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. We'll manage that within our current business, where we -- and that really haven't changed for us, we've always been a company that at least there is this one in the payments, 18 years ago, we 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 three strategies is focused on efficiency and simplification, so we can gain that productivity elsewhere and be able to be competitive in the hiring environment.
30:21 Okay. Moving on then, this afternoon I believe I saw a press release that Freedom Financial amounts to 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 closed sponsorship side of banking-as-a-service that you all have been discussing tonight?
30:55 Yeah. So that's one of the models that's very efficient. Freedom already had a securitization platform that's well established. And so those loans sit in our consumer finance bucket, and you know them, most recent loans are not very long and you're building up in essence using our balance sheet and Cross Rivers as a warehouse facility until it gets to the efficient size for -- both size and market conditions for Freedom to execute a securitization. And as you can imagine, there is 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.
32:00 It seems like there is a bit of a shift going along 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 in your view, when might we see maybe some material benefits on the loan side of the equation?
32:32 Well, 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 were doing it in a way that fits within our three-pillared strategy. But we are certainly looking at those opportunities and are aware that those opportunities are growing in the marketplace.
32:59 Okay. And then on the Spruce accounted 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 tackle on and it's similar to other products that they've offered in prior years?
33:25 Yeah. I don't want to speak for H&R Block, but we do know that it's a mobile banking opportunity that help consumers reach their savings goals, which offers 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.
34:02 Okay. Last question on the EIP program, are there any deposits left on your balance sheet and if so, can you quantify that?
34:13 Yeah. This is Brett. I'd say there is very little from EIP, the sell tax credit piece, there is still some of lows with some of our partners, so those are not direct, but they are indirect.
34:31 Okay. Thanks for the time. Appreciate it.
34:34 Yeah. Wally, we actually disclosed that number, there is only $28 million of those on our balance sheet and then some summer off balance sheet where we're obviously master servicer for those.
34:55 Sorry, I missed the disclosure, but thanks for pointing it out.
35:00 No. I understand that the release was just out. So we didn't expect you to see all that.
35:09 That's all I had. I appreciate the time guys.
35:12 Thanks, Wally.
35:14 Thank you, Mr. Wallace. And that concludes the Meta Financial Group first quarter fiscal year 2022 investor call.