Pathward Financial Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Meta Financial Group Fiscal Year 2020 Second Quarter 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, this conference call is being recorded.
I would now like to turn the conference call over to Brittany Kelley Elsasser, Director of Investor Relations. Please go ahead.
Thank you, and welcome to the Meta Financial Group conference call and webcast to discuss our financial results for the second fiscal quarter ended March 31, 2020, released earlier this afternoon. 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 will 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.
Participating in today's call are President and CEO, Brad Hanson; Executive Vice President and CFO Glen Herrick; and Executive Vice President and Head of Governance Risk and Compliance, Brett Pharr.
Before I turn the call over, we want to apologize in advance for any potential technical difficulties that we may encounter as we are working remotely in different locations during this time.
Now, I would like to turn the call over to President and CEO, Brad Hanson.
Thank you, Brittany. I'd like to welcome everyone to our fiscal 2020 second quarter earnings call.
Before we address our quarterly results, I want to take this opportunity to provide an update on how we are addressing COVID-19. Our priorities are the health and safety of our employees and ensuring customers have access to the financial services they need to make it through these difficult times.
In early March, we implemented our Pandemic Plan led by Brett Pharr, which is part of our business continuity program. We acted swiftly with minimal disruption to our business and put preventative health measures in place to protect employees and customers by among other things, banning nonessential business travel, mandating remote work options for certain employees and implementing social distancing and enhanced cleaning measures at all office locations.
We believe those early actions have had a positive impact. The effect of our planning is evident as employee engagement and productivity remains high and we continue to serve our customers and effectively manage our business while dealing with the fallout from this crisis.
We expect to see declines in our various business lines as our customers and partners feel the trickle-down effect from this economic disruption. However, I believe we are well-positioned to weather this storm and we'll capture new opportunities during the recovery.
As an essential business, we are striving to do our part to protect the integrity of our nation's financial system, support financial stimulus programs and keep the money moving. We are proactively reaching out to small business customers to assess their credit situations, offer flexible repayment options where appropriate and make them aware of financial assistance options like the Paycheck Protection Program established by the Cares Act. Through April 20th, we authorized 502 applications, totaling $190 million for this emergency small business lending program administered by the SBA. We are proud to be accepting applications from all small businesses not just our clients.
In addition, we have taken appropriate steps to protect the safety and soundness of the bank by reinforcing underwriting standards and limiting lending to certain high-risk industries. Credit quality is always a high priority for our company and we remain disciplined in our approach to underwriting and servicing our loan portfolios. Glen will discuss our asset quality in his prepared remarks.
Maintaining strong capital levels also remains a key strategic focus for the company. As of March 31st, 2020, the bank's capital leverage ratio was 8.52%. However, it's important to understand the ratio was temporarily dampened by the seasonality of the high assets related to the tax business services. Our quarter end bank capital leverage ratio based on asset levels as of March 31st was 9.71% which we believe better reflects our anticipated balance sheet going forward.
During the quarter, we repurchased approximately 2.6 million shares at a weighted average price of $31.78 per share under our share repurchase authorization. To further ensure that we maintain a strong capital position while facing these current economic uncertainties, we suspended our stock repurchase program in March until we have better visibility into the duration and economic impact associated with the pandemic. Along with these actions and a strong flexible balance sheet, we have many levers we can use to effectively manage our capital position.
While we plan to continue to take actions to preserve liquidity, manage credit risks, and reduce costs, we anticipate an adverse effect on earnings due to the COVID-19 pandemic.
However, we expect reaccelerating demand in each of our businesses once the pandemic subsides, consumers get back to work, and businesses seek financing to rebuild their operations.
In spite of the pandemic, we reported strong fiscal 2020 second quarter results including earnings of $52.3 million or $1.45 per diluted share, representing growth of 79% over the prior year's second quarter earnings per share.
Now, let me turn the call over to Glen Herrick our CFO to provide more detail on our fiscal 2020 second quarter financial results.
Thank you, Brad and good afternoon everyone. For the second quarter of fiscal 2020, we reported GAAP net income of $52.3 million or $1.45 per diluted share compared to $32.1 million and $0.81 per diluted share for the same quarter of the prior year.
We did see the early signs of growing uncertainty and volatility during the second fiscal quarter. As a result, loan growth slowed with total gross loans and leases increasing 1% on a linked-quarter basis to $3.61 billion at March 31. That said, year-over-year loan growth increased 5% from March 31, 2019.
We do expect impacts in many of our business lines during the fiscal third quarter resulting from COVID-19 which could be partially offset by programs recently enacted by the government to assist small businesses through the pandemic including the CARES Act.
As Brad mentioned, we authorized 502 applications totaling $190 million in loan requests for the Paycheck Protection Program and funded 224 loans totaling $79 million as of April 20th. We expect to fund the majority of the remaining authorized applications in the coming week.
The current interest rate environment impacted yields as well. Loan yields were 6.76% for the quarter compared to 7.32% for the previous quarter and 8.05% for the second quarter of the prior fiscal year.
Purchase accounting accretion added four basis points to loan yields in the second fiscal 2020 quarter versus eight basis points in the prior quarter and 29 basis points in the second fiscal 2019 quarter.
Turning to the liability side of the balance sheet, average payments deposits were $3.31 billion for the quarter, rising 11% compared to the same quarter in the prior fiscal year and now represents 65% of total average deposits. Cost of funds improved by 34 basis points, mostly as a result of the current rate environment compared to the same quarter in the prior fiscal year.
Net interest margin decreased to 4.78% for the fiscal 2020 second quarter, down 16 basis points from the fiscal 2020 first quarter. Adjusting for the impact from our seasonal tax refund advance loans and related funding, net interest margin was 5.01%.
As Brad mentioned, credit performance remains a priority for the company. During the quarter, we took a provision for loan and lease losses of $37.3 million. $15.8 million was related to additional allowance for potential losses associated with the COVID-19 pandemic and $19.6 million, which related to our 2020 tax season loans.
At this time, it is too early to gauge what the ultimate impact of COVID-19 will have on credit and we have not recognized significant asset deterioration to date. However, the company is being prudent in taking steps to mitigate potential losses related to certain higher-risk industries, including transportation, hotels, retail and entertainment and small ticket leasing equipment, as you can see on slides 11 and 12 of our investor deck.
At March 31, our total allowance for loan and lease losses was $65.4 million or 1.81% of total loans and leases, an increase from 0.84% at December 31, 2019 and 1.42% at March 31, 2019. The company's commercial finance allowance coverage ratio increased from 80 basis points to 128 basis points on a linked-quarter basis and the Community Bank coverage ratio increased from 68 basis points to 149 basis points. While we are anticipating an upward trend in past dues and non-performing assets in subsequent periods, we do not expect to see a corresponding 1:1 increase in charge-offs as we are able to recover on certain collateral-based relationships.
Management believes the structure of the credit protections across our consumer and warehouse finance lending lines was adequate as of March 31, 2020. We are working closely with our partners and customers impacted by the COVID-19 pandemic and we'll continue to closely monitor the allowance and we'll adjust accordingly in future periods as appropriate.
Non-performing loans at March 31, 2020, represented 0.87% of total loans and leases, an increase of 25 basis points compared to December 31, 2019. The increase during the quarter was primarily related to two agricultural relationships in the legacy Community Bank portfolio and an increase from our term lending portfolio.
As we previously mentioned, we saw pressure on net interest margin and as a result net interest income decreased 5% year-over-year. While it is still too early to fully understand the scope of potential financial impacts from COVID-19, we do expect the slower loan demand and lower yields will pressure net interest income in the near term.
Non-interest income was $120.5 million for the fiscal second quarter, an increase of 15% from the same quarter of fiscal 2019, driven primarily by the gain on divestiture of the Community Bank division. Excluding the gain on sale, non-interest income represented 60% of total revenue and benefited from higher rental income and other income, which were partially offset by lower payments and tax product fee income.
For the 2020 tax season through March 31, we originated $1.33 billion in refund advance loans, which represented a 10% decline compared to the 2019 tax season, largely due to a partner reduction, which represented $252 million of originations in 2019. Slide 17 of our investor deck contains a further breakout of net tax product income.
Going forward, we don't expect any material impact to the tax services business line as a result of the COVID-19 pandemic, as we are mostly past the peak of tax season. Non-interest expense decreased by 17% to $91.7 million for the fiscal second quarter compared to the same quarter of fiscal 2019.
As Brad mentioned, in response to the COVID-19 pandemic, we put in place health and safety measures including temporarily banning non-essential travel, which resulted in reduced costs. We also implemented expense reduction initiatives to include limiting non-essential hires for the foreseeable future.
These initiatives have resulted in savings and compensation and other expenses, such as meals, travel and entertainment. As a result of our expense reduction initiative, we saw significant improvements in our efficiency ratio. Year-over-year on a rolling 12-month basis our efficiency ratio improved from 73.4% as of March 31, 2019 to 62.9% as of March 31, 2020.
Finally let me discuss our outlook. Given the deteriorating economic environment and the uncertainty around the business impacts following the emergence of COVID-19 pandemic, we are suspending fiscal 2020 earnings per share guidance. We will continue to monitor and evaluate the situation and provide updates as necessary.
With that I'll turn the conversation back to Brad for closing comments.
Thanks, Glen. We want to ensure all of our stakeholders that we are putting people first while still maintaining high-functioning business and support operations. From a financial and regulatory perspective, we have instilled even more diligent monitoring processes regarding credit quality, capital forecasting and financial stability.
While we had a strong second quarter, the macro backdrop remains uncertain. We intend to be as transparent as possible regarding our business and the effects resulting from the COVID-19 pandemic.
That completes our prepared remarks, so I'll ask Glen and Brett to join me for Q&A. Operator, please open the line for any questions.
Thank you. And our first question comes from Steve Moss with B. Riley FBR. Your line is now open.
Good afternoon.
Hi, Steve.
Just want -- starting off with the -- Glen, I think you mentioned that the increase in non-performance was related to ag. I was wondering if you could give any color around what drove the increase in 30-89 past due here this quarter?
Yes just a couple larger relationships just tripped past those dates. We continue to have both in the legacy community banking portfolio and commercial finance and collateralized ones that we typically see will move in and out of various buckets.
Okay. And then with regard to -- call it about 6% of loans were deferred here given the COVID-19, just kind of wondering, if you could tell us -- give us color on the borrowers and types of industries?
Brett, do you want to comment on that?
Yes. This is Brett. One of the things that we did was stratified the portfolio based on various economic scenarios and we identified areas that were of concern. We've got those listed in the investor package and you can see what those were. We focused on those primarily and looked at those to see, are they getting the assistance they need from the PPP program or are there other things that need to happen to assist them through that. So that's the process we went to kind of dividing up the portfolio. Some areas of the portfolio of course are of no concern.
Okay. And is there any -- so I guess in particular, it's the industries that are listed in the deck, I saw a couple of them like whether it's energy or retail I believe.
Yes, that's right. And of course, we have hotels in there as well. In the energy sector, half of it's self-liquidating, so you don't worry about those as much, but the term you pay close attention to.
Okay. That's helpful. And then just kind of wondering here pretty healthy reserve builds for the pandemic just kind of wondering just kind of how we think about the provisioning going forward, maybe any color that you gave with regard to inputs. Obviously, you're still on the card method. And just any color you can give around CECL perhaps would be helpful too?
Sure. You know what, we took it -- there is basically the $16 million for -- solely due to the pandemic as an allowance build based on what we knew at March 31, and tried to get out in front of that a strong earnings quarter for us. Certainly, would not be surprised, if we do take additional provision over our normal run rate in the next quarter or two. That said, a lot will depend on the success these government programs have. There's certainly some extraordinary efforts being made and we'll have to see how those roll out. But we're trying to stay on top of it, and certainly have built our allowance to the right levels
CECL we'll be an October 1, adopter given our fiscal year, and we're on path to be prepared for that. And we would expect to be providing additional color and guidance around impacts to CECL in the coming quarters.
Okay. Thank you very much. I appreciate all the color.
Yes. Thanks, Steve.
Thank you. And our next question comes from Michael Perito with KBW. Your line is now open.
Hey, good afternoon, guys. Hope everyone is doing well given everything going on. Thanks for taking my question.
Yes. Thanks, Mike.
I wanted to start and follow-up on the credit topics Steve brought up previously. The commercial real estate portfolio from the Community Bank that is being serviced by Central Bank, but it's on your balance sheet. Is it correct to assume that you guys are still kind of leading and controlling the underwriting nature of that? And any thoughts around the -- any more color you can provide around the hotel exposure specifically within the CRE portion of that portfolio?
Yes. Yes, we're controlling the underwriting. We're working very closely with Central. The folks that are servicing our legacy runoff portfolio were our employees a month ago. They're building their operations team really off of our team, and so we continue to manage that very closely. And I'll defer to Brett on the credit. He and his team have really been leading the efforts throughout the year, but certainly stepped up efforts here in the last six weeks.
Yes. I mean, we contacted every one of those to have direct conversations about the impact they're having some of which are certainly catastrophic at the moment. Others for a variety of reasons they might be medical personnel or national reserve people have some occupancy. So obviously, we did modifications to get them through this time period. They applied for and received PPP support from Central. And now, it's a wait game for those to see, if it comes back and how fast it comes back.
Okay. And then maybe on that topic, can you talk about what the customer outreach looked like on maybe some of the more granular portfolios? Obviously in terms of the Community Bank commercial real estate portfolio, I'm sure there are some bigger customers in there. But when you think about kind of the Crestmark portfolio on the consumer book there's obviously a lot more granular a lot more people to reach out to. How have you guys kind of gone about trying to get in touch with your customers and see kind of what kind of shape they're in what they need and stuff like that?
In the commercial finance portfolio, we have literally talked to every customer. Now in some cases that might be, I'm fine don't worry about me. Move on. Others, we found out, if they applied for PPP through us or through some other source and then where appropriate we obviously had conversations about modifications.
A - Glen Herrick9
And I would add Mike, if you think about Crestmark, the -- their leadership team almost in its entirety was all here in 2008, 2009 through the recession. So while different cause pulling out a lot of the same playbook and instead of business development you're really focused on working with existing clients on helping them servicing them through this period.
And on the consumer side?
The consumer side, we have significantly more protections. And so we are working with our partners and the servicers to provide modifications in forbearance where appropriate and stepped up support and earlier contacts on past dues, typical things you would start that you would expect consumer lenders to start rolling out. And if you recall whether it's our direct consumer or our warehouse lending, we have a senior position there. And…
Yes, I think you guys in the past have disclosed like, kind of, where the loss rates would need to get in that book for you guys really to not be made whole. Is that something you can maybe revisit or remind us what that looks like today?
Yes. I think if you look in the deck on pages 15 and 16, the waterfall in the warehouse would give you a rough feel for protections there and the over-collateralization that we have. And then again we've pointed out to consumer credit. If -- where we're with a partner if it's a stated interest rate of 36% and yet our yield is, say 9% that's where you see a lot of the protection is coming from.
Okay. And then just lastly, can you tell us a little bit more about the nonstrategic partners that you guys exited with in the tax business? And as a follow-up is this new kind of -- is the 2020 tax season now the better way to think about what the production will be with the exit of those partnerships going forward?
Yes, I'll take that. The -- I think this year is more indicative of future years and for us to build off of. It was a much more effective and efficient year for us as we shed some relationships that were not as strategic or as valuable to our operation. We were able to manage overhead much better and have much smoother operations. So, overall we were pleased with how the year -- the results from this year.
Got it. So going forward while the volume and revenue might be lower than 2019, the expenses and the credit and all those aspects will be more efficient as well and you guys feel good about that dynamic moving forward with the exit of those partnerships.
Yes. You'll notice we had about -- those represented about 20% of the volume and we had about 10% increase -- decrease. So you can see that our core business did pretty well overall even though our business as a whole was down a bit.
And was the majority of the business seasonally as normal? I know there were some extension of deadlines and I don't think that would typically impact the customer base that you guys are targeting there. But is there any reason to believe that there might be a little bit more drag in the other quarters -- not drag but revenues in the other quarters from tax than a typical year given the delays in filing dates?
I -- go ahead Glen.
Sorry Brad. No, no. Really where we saw the quarter flips this year is some of the activity was pulled forward actually into our first fiscal quarter that a year ago might have been in January. This year it got pulled forward to December. But through the six months now, our customers are materially done. They're getting refunds. So they're not going to wait for July 15 to file their taxes.
Yes. Excellent. Thank you guys for taking my questions. Appreciate all the added color. And that's helpful. Thank you. And do well.
Thanks, Mike.
Thank you.
Thank you. [Operator Instructions] Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.
Hi, guys. Good afternoon. Wanted to ask on the deferrals that came in through the -- after the end of the quarter. In terms of -- I think Brett you mentioned that you've talked to everybody in the portfolio at this point. Just wondering the trend in deferrals following the end of the quarter, is that would you say accelerating, decelerating? Do you expect that to continue to grow significantly here even with little change to the outlook?
It's really too soon to tell Frank now that the PPP loans are going out and a lot of our customers are drawing on those. And while our volume clearly doesn't match our entire portfolio, but a lot of our commercial finance customers may have their primary bank their operating lines with a community bank. And so we know they're also drawing down the PPP loans. So again, we'll have to see how successful these government stimulus efforts are.
I guess, in terms of provisioning, I would assume that basically what you know March 31 just sort of drives the provision so that the significant deferrals that came in after the end of the quarter would be more of sort of a 2Q concern as far as additional provisioning would be concerned.
May or may not, I mean, well, yes, we're certainly tracking that one of many metrics and dimensions we're looking at. But our provision build wasn't based on -- while it was done at March 31, it wasn't based solely on the amount of deferrals or loan mods we had at March 31. We fully expected we would be seeing a significant volume of that in April. So there's clearly some of that built in. May or may not be all of it, but there was some built in.
Got you. And just wanted -- just a quick one on credit. Wondered if on the hotel portfolio in the Community Bank in the CRE book, do you guys have available and average LTV of that book?
We have not disclosed that. Brett, do you have that handy?
I don't have it handy. We followed standard underwriting criteria, but I don't have a number handy.
Yes.
Okay. And then on the non-performing increase in the quarter, you mentioned the two ag loans and then the term lending. It looked to me like the term lending increase reflected sell-in to the past due, but still accruing bucket. And I'm just kind of curious I would think that that -- something like that might fall into a deferral as opposed to just falling on to a non-performing status here just given the environment. Was this sort of non-COVID-19-related? Or can you speak to that at all?
Yes. This is Brett. That transaction was not COVID-related. And as you know these things are heavily collateralized as well.
Okay. So I guess can you -- is it fair to say at least on that term lending increase in non-performing that you don't anticipate a significant loss there?
That's correct.
Okay. And then just shifting gears to loan growth or just given the tighter underwriting standards. Brad, you mentioned the transportation which is a decent-sized piece of the commercial finance book. What are your thoughts here? And then given the short-term nature of some of these loans, should we anticipate contraction in the overall commercial finance book at this point in the near term at least? And then, is there any change in strategy to drive growth elsewhere? I mean, you mentioned the consumer book holding up well and I saw you actually reduce the reserves related to consumer book. So just curious any change in strategy? And then in the near term, what are the thoughts on growth or lack thereof in the commercial finance book?
So what we may see, we would not be surprised to see some contraction. Just if you're not selling stuff, you don't have receivables that need to get -- be factored. And so that very well could. That said, as we come through this there's also we've talked in the past about -- and Crestmark's experiences in the past as more traditional banks pull back they all rush into commercial finance lines of business as they pull back from it, it actually creates opportunities to go upstream a little bit. And so it's not simultaneous type of change, but we would expect to see some opportunities a few quarters down coming out of this.
Great. And sorry just one last one if I could. Just in terms of the stimulus program and the direct checks to U.S. citizens. My thought or stuff I've read has suggested that some of that could come through from the IRS to prepaid cards that would be would have been attached to these consumers' tax refunds. Can you talk at all about your expectation there in terms of additional deposit balances from the stimulus?
Well there are some additional deposit balances on some prepaid programs that are reloadable and receive those benefits. But in other portfolios, there are -- is less volume so it's offset by -- depending on the type of portfolio. Also, there's different forms of payments going on some of those in the form of maybe more on insurance benefits going onto cards for people that had lost their jobs and where their direct deposit is no longer going onto the card for example. So it's a little bit of a mixed bag. Some areas are increased slightly and others are depressed. But over -- so we're still monitoring the portfolios and looking at the duration of this and whether additional stimulus programs are announced.
Okay. So you haven't seen any clear, I guess trend up or down in terms of -- just given some of these offsetting factors in card usage or in deposit flows versus what you might expect otherwise?
No significant trends at this point, some ups and some downs. And we have a very diverse portfolio of prepaid products and some offset others. So I wouldn't say we -- we've seen movement, but not dramatic and nothing I would necessarily call a trend at this point.
Okay. All right. Thank you.
Thank you. And that concludes the question-and-answer session. I will now turn the call back to CEO, Brad Hanson.
All right. Well thank you. I'd like to thank everybody for participating in our quarterly investor call. We truly appreciate your support and we thank you for taking time to listen today. Have a great evening, and everybody please stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.