Pathward Financial Inc

SWB:FM7

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Meta Financial Group Fourth Quarter and Fiscal Year 2018 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 Ms. Brittany Elsasser, Director of Investor Relations. Please go ahead.

[Brittany Elsasser, Director, IR]

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, 2018, released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.com.

Company Chairman Tyler Haahr; 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, objectives or goals. 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 reports 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.

As a note, all share and per share data reported in our earnings release and during this conference call has been adjusted to reflect three-for-one forward stock split that the company recently affected.

At this time, I would like to turn the call over to Chairman, Tyler Haahr.

[Tyler Haahr, Chairman]

Thank you, Brittany, and thank you to everyone for joining today's call.

Before I turn it over to Brad to get into our record results for the fourth quarter and for fiscal 2018, I would like to touch briefly on the leadership announcement we made this afternoon.

As you saw in our press release, the board has appointed Brad Hanson, our current President of Meta Financial Group, MetaBank and Meta Payment Systems, the additional role of Chief Executive Officer effective immediately. I will remain Chairman of the Board through our annual meeting of shareholders expect to take place in January 2019.

It’s been a privilege to lead this great company for 13 years and to be part of its growth story for more than 20 years. I'm extremely proud of the work that we have done to strengthen and diversify our platform, take good care of our employees and customers, advance our vision of financial inclusion for everyone and deliver value for our shareholders.

Following the conclusion of the fiscal year and completion of the transformative Crestmark acquisition, I, along with the board, determined that now is the right time to transition to new leadership. I'm delighted that the board has elected Brad to succeed me as CEO. He's a proven leader in the financial services industry and has been instrumental in executing our strategic initiatives. I look forward to continuing to work with Brad in my role as Chairman to ensure a smooth transition and I'm confident under Brad’s leadership Meta will continue to drive for decades to come.

With that, I will turn the call over to Brad.

[Brad Hanson, President & CEO]

Thank you, Tyler.

On behalf of the entire Meta team, I would like to express our gratitude for your service and many contributions to the company. Thanks again. It’s an honor to have been given this opportunity to lead Meta in a new role. As CEO and President, I will focus on continuing to build on our recent accomplishments and growth momentum.

Given our strong platform and talented team, I believe Meta is poised to deliver significant value for our shareholders in the years and years ahead. The strength of our platform is evident in the fourth quarter and fiscal 2018 results we announced today. We are very pleased to report very strong fiscal 2018 results which generated record earnings of $51.6 million, up 15% over the prior fiscal year even with significant non-recurring expenses such as the Crestmark acquisition expenses.

For the fiscal 2018 fourth quarter, we're also pleased to report earnings of $8.7 million or 24% per diluted share and Glen will touch on meaningful items that impacted our results in his remarks. Our results for the fourth quarter and fiscal year reflect the acquisition of Crestmark Bancorp and other strategic efforts to drive profitable growth.

Due to the diligent work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver enhanced profitability and revenue growth. Our core performance remains solid and continues to reflect the success of our strategies around client acquisition and discipline around risk management and underwriting which resulted in strong core revenues and record earnings for 2018 fiscal year.

We are now benefiting from the successful integration of our recent acquisition of Crestmark which has a dramatic impact on expanding the scale and reach of the company in to national commercial lending activities, in asset base lending, factoring, equipment financing and leasing as well as SBA and USDA lending. These initiatives are providing a great opportunity for growth as we look to further optimize the balance sheet and more fully utilize our low cost funding base.

Reflecting on fiscal 2018, gross loans and leases grew $2.9 billion at September 30, 2018 growing more than two-fold during the fiscal quarter through organic growth and the addition of over $1.1 billion of Crestmark loans and leases.

Our payments division fiscal year average deposits grew $2.45 billion, up 9% over the prior fiscal average.

Net interest income grew to $130.5 million, an increase of $37.3 million or 40% over the prior fiscal year, and non-interest income grew to $184.5 million or up over 7% over the prior fiscal year. Excluding losses on the sale of securities for the current and prior fiscal quarters, non-interest income grew $20 million or nearly 12% year-over-year.

Our payments division remains focused on client and partner engagement and we are pleased to see continued growth in our low cost deposits over the prior year. In coordination with the Crestmark acquisition and other lending opportunities looking ahead, we are continuing to evaluate strategies that will support increasing the long-term growth of our advantageous low cost deposit base.

In the fiscal 2018 fourth quarter, we benefited from a large and improved earning asset mix. And as a result, our net interest margin and our tax equivalent basis increased to 4.27%, an increase of 114 basis points over the prior year fourth quarter, and increased 104 basis points on a linked quarter basis. Since the Crestmark acquisition closed on August 1st, the company's fourth quarter results only reflect the benefit of the Crestmark acquisition for two months of the fourth fiscal quarter. So we expect further increases in net interest margin into our current first fiscal quarter of 2019.

Regarding our national consumer lending initiatives, we were pleased to see $59 million in new loan origination activity from the Liberty Lending and SCS programs in the fourth quarter. We have also been actively preparing for a program launch with our CURO product and the process is moving along prudently for its pilot activity in the fiscal 2019 first quarter.

We feel confident that we have the capacity to scale our platform, sophisticated underwriting, and decision science capabilities, and the experience needed to create programs that address the needs of partners and consumers. At the same time, we are unwavering in our commitment to mitigating credit risks and other risks, managing compliance, and maintaining appropriate balance of consumer credit in our overall loan portfolio, while generating earnings as we continue building Meta's national consumer lending business.

We're diligently working with our tax partners to prepare for what we expect to be a solid fiscal 2019 tax season. The effects of our platform consolidation efforts and operational improvements are expected to help drive better customer service and value to our tax partners and we believe we're prepared to anticipate and address the needs of our partners and clients in the months to come.

Overall, our earnings provided a return on average assets of 1.12% for 2018 fiscal year, while return on average equity was 10.44%. Adjusting for merger and acquisition expenses in fiscal year 2018, ROA was 1.27%, and ROE was 11.75%.

Now I'll turn over the call to Glen Herrick, our CFO, to provide a brief review of our financials.

[Glen Herrick, EVP & CFO]

Thank you, Brad and good afternoon everyone.

On a GAAP basis, for the fiscal 2018 fourth quarter, we reported net income of $8.7 million or $0.24 per diluted share. You will notice in our earnings release and on Slide 6 of our fourth quarter Investor Presentation, we have details on selected items of note that are included in GAAP earnings.

In the fourth quarter, we took a $7 million loss on the sale of securities to take advantage of the opportunity to fund loan growth primarily from the Crestmark acquisition and reposition our securities portfolio for the current rate environment. We will continue to optimize shareholder returns by considering methods to utilize our balance sheet where we feel prospects are best suited for Meta over the long-term, while staying nimble to take advantage of market opportunities.

Earnings in the fourth quarter also included the favorable tax benefit of $4.6 million from an amended prior-year Crestmark tax return. In addition, direct merger and acquisition-related expenses totaled $3.2 million, while expense charges related to the aforementioned operational synergies in the tax division and support areas totaled $3.1 million in the fourth fiscal quarter.

In addition, GAAP net income includes the benefit of investment tax credits which contributed approximately $4 million to net earnings in the fourth quarter. Through the Crestmark acquisition, Meta acquired an experienced team and sophisticated processes for evaluating, underwriting, and managing alternative energy tax credit opportunities which we intend to utilize to manage income tax expense and to maximize shareholder return. The timing and impact of alternative energy tax credits are expected to vary from period to period, but are expected to be an ongoing source of income for the company and Meta intends to undertake only those opportunities that meet the company's underwriting and return criteria.

For the 2018 fiscal year, our effective tax rate was 9% compared to 18.6% for the 2017 fiscal year. Looking ahead to the 2019 fiscal year, we anticipate the company's effective tax rates to range in the high-single-digits to lower teens including the favorable impact of investment tax credits. This expectation is reflected in our recent earnings outlook for fiscal years 2019 and 2020.

When excluding Crestmark loans and leases, total net loans and lease receivable increased $454 million or 34% during fiscal 2018. Community banking loans grew $168 million or 18% during fiscal 2018. Within the national lending portfolios, commercial finance loans increased $95 million primarily driven by commercial insurance premium finance loan growth. The consumer finance portfolio increased $195 million largely driven by the launch of consumer credit products and consumer loan-based warehouse line of credit and the student loan portfolio. As we look longer-term, we expect our national commercial finance portfolios and lines of business to garner the majority of Meta's total loan and lease portfolio.

Turning to funding. The balance sheet obviously reflects the recent acquisition of Crestmark which historically supported its very profitable loan growth with certificates of deposit and other wholesale funding sources. Over time, we expect to allow these CDs to roll-off to more fully take advantage of Meta's growing low cost funding base. In the meantime, Meta's average cost of funds increased 101 basis points in the fiscal fourth quarter reflecting the higher cost certificates of deposits which will runoff over time. Our cost of deposits during the quarter was 78 basis points and was just 15 basis points when excluding wholesale deposit.

As Brad mentioned, Meta's net interest margin on a tax equivalent basis was 4.27% in the fiscal 2018 fourth quarter improving by 104 basis points from the third quarter. We saw higher net loan and lease yields due to the Crestmark acquisition and expect to see a further uptick next quarter which will include three full months of loans and leases from the Crestmark division.

Net purchase accounting accretion contributed 12 basis points to the net interest margin in the fourth quarter.

Meta's provision for loan and lease losses was $4.7 million in the fiscal 2018 fourth quarter of which $1 million was related to additional Crestmark loan growth from the first two months of activity.

Charge-off activity in the fiscal 2018 fourth quarter was primarily related to charging off $11.3 million of 2018 tax services loans. Currently, we have less than $1 million of tax advances left on our books.

In total, Meta's current metrics remain strong. Non-performing assets represented just 72 basis points of total assets at September 30, 2018. In addition, the outstanding foreclosed real estate and repossessed assets balance are primarily related to a non-performing agricultural loan relationship that we discussed with you previously and which we expect to favorably resolve.

I’ll note that non-interest income in the fourth quarter includes $7.3 million from two months of rental fees from Crestmark equipment finance business. Crestmark's quarterly equipment finance rental income run rate was just over $11 million in calendar 2017 and is another example of how the Crestmark acquisition further enhances revenue diversity for Meta. This line item will be somewhat offset by operating lease equipment depreciation expense which totaled $5.4 million for the fourth quarter.

Fourth quarter 2018 card fee income declined by $7.2 million year-over-year reflecting the deposit fee transition and a reduction in residual fee income related to a wind-down of the company's relationship with two of our non-strategic payments partners which we've discussed before.

Total fiscal 2018 card fee income totaled $94.4 million which was in line with the lower end of our 2018 full-year expectations.

Non-interest expense excluding merger-related costs was $63.4 million in the fourth quarter of this year compared to $53.5 million in the same period last year. The year-over-year increase primarily reflects the addition of two months of compensation and benefits costs for Crestmark division employees, as well as fiscal 2018 hires in support of Meta's national lending initiatives and other business line expansions.

Meta has continued to make important progress for driving operational efficiency. During the fourth quarter, we continued to evaluate the consolidation of systems and operations in our tax business and as a result, the company incurred some expense charges related to synergies in the tax division and other support areas. We do expect to earn back of those costs within approximately one year, and of note, those efficiency gains were captured in the earnings guidance provided recently. We expect to provide a more stable platform to better serve our customers, effectively manage the tax business, and support long-term growth opportunities.

Even as we invest in future growth, we intend to balance these initiatives with increased discipline around non-interest expense management. We continue to expect opportunities for accelerating operating leverage in fiscal 2019 and to a greater degree in fiscal 2020.

Before turning the call back to Brad, I want to discuss our previously disclosed earnings per share outlook for fiscal 2019 and 2020. For fiscal year 2019, excluding the effects related to the company executive transition cost, we continue to anticipate an earnings per share range of $2.30 to $2.70 per share. We currently estimate executive transition agreement cost of up to $0.15 per share which we expect to incur in the quarter ending March 31, 2019. This is expected to reduce the 2019 full-year GAAP earnings per share to a range of $2.15 per share to $2.55 per share.

For fiscal 2020, we continue to anticipate an earnings per share range of $3.10 to $3.80. Our EPS outlook reflects our recent three for one forward stock split.

With that, I'll turn the call back over to Brad for any closing comments before we take your questions.

[Brad Hanson, President & CEO]

Thanks, Glen.

As I hope you learned from our comments this afternoon, all of Meta's teams including the talented professionals at Crestmark remain focused on expanding their businesses, implementing innovative programs for our partners, and maintaining rigorous discipline around risk management underwriting and expense management.

Meta continues to deliver profitable growth as we take full advantage of our differentiated business model; balance sheet; and suite of diversified and fee generating products and services.

That concludes our prepared remarks. Glen and I will be available for any questions. Operator, please open the line for any questions.

[Operator]

Thank you. [Operator Instructions].

Our first question comes from Steve Moss with B. Riley FBR. Your line is open.

[Steve Moss, B. Riley FBR]

Good afternoon. I want to start-off on the balance sheet and the funding of it, you guys mentioned your securities to fund loan growth how should we think about the balance sheet by the end of fiscal 2019 in terms of just deposits versus borrowings and wholesale CDs?

[Glen Herrick, EVP & CFO]

Hi Steve, this is Glen. We haven't set balance sheet targets per se at this point. But now that we have Crestmark with the ability to generate high return low risk commercial finance loans, and we want to grow that business, you might expect us to put more effort into growing deposits now that we have again higher return uses for those deposits. So we're using wholesale to balance the balance sheet today and hope to grow and accelerate low cost core deposit growth going forward.

[Steve Moss, B. Riley FBR]

Okay. And in terms of a lot of moving pieces with expenses here, just wondering if you could give us a little more color as to what to expect for the fourth quarter on a run rate basis given that Crestmark came in here two months or one month into the quarter?

[Glen Herrick, EVP & CFO]

Sure. We're not providing guidance on a line-by-line item. I would say revert back to our overall guidance for 2019 and 2020. That said, we had roughly two months of expenses for Crestmark in this fourth quarter and so we'll have three full months. Their run rate if you look at their call reports was in that $25 million so range. We would expect that to be a representative run rate in the near future. That said, as a combined company, there is a fair amount of variable expense. So to the extent that business accelerates, there is certainly some variable expenses or business contracts, we would expect lower variable expenses.

[Operator]

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

[Unidentified Analyst]

Hi, this is actually [indiscernible] on for Mike Perito. Thanks for taking my questions. Could you please give us some color on the near-term thoughts on the margin now that Crestmark is on board?

[Glen Herrick, EVP & CFO]

Sure. We're 427 in the quarter and that included just two months of Crestmark, it also included benefit from purchase accounting which we expect to continue as the acquired portfolio accretes through and then becomes replaced by higher yielding loans. So we would expect the margin to move up from where it’s at in this fourth quarter.

[Unidentified Analyst]

Okay. And then your consumer growth which was much higher than we were looking for fourth quarter, how you’re thinking about that growth and that business going forward?

[Glen Herrick, EVP & CFO]

Consumer lending growth?

[Unidentified Analyst]

Yes.

[Glen Herrick, EVP & CFO]

Yes, we are continuing to look at the balance sheet and the growth and profitability of those programs and managing that growth accordingly.

[Operator]

Thank you. The next question comes from Frank Schiraldi with Sandler O'Neill. Your line is open.

[Frank Schiraldi, Sandler O'Neill]

Hi, just wondered if I mean you guys reiterated guidance so it doesn't seem like there's much strain -- much change but in terms of Brad with you now CEO, is there any change to strategy at all?

[Brad Hanson, President & CEO]

Not in the near-term. We have continued to work on our plan and execute on our existing strategies. We will be looking at strategy over time and communicating with you as that develops over time.

[Frank Schiraldi, Sandler O'Neill]

Just in terms of the consumer credit business, I feel like we've heard some players talk recently about some areas of that business getting a bit frothy. Is there any rethinking at all in the speed and/or scope of building that business?

[Brad Hanson, President & CEO]

We have -- as we've announced we have a number of programs that we signed, we are focusing on those programs right now and managing the rollout very diligently. I would say that they may come, some of those may come on a little bit more paced as we identify and look for how the quality of those programs are being rolled out. But in general, I think our plans are still intact.

[Glen Herrick, EVP & CFO]

Frank, this is Glen. And I would add, you'll note that we noted that we expect the majority of our loan portfolio to be in commercial lending and commercial finance products, the majority of it. And while we have not publicly set balance sheet mix targets at this point, part of that is we do not want to be home to trying to achieve certain loan balances that may not meet our risk and return thresholds. But we do plan to over the next couple months just provide additional guidance of how we see our balance sheet mix moving forward long-term and what our goals are there.

[Brad Hanson, President & CEO]

And I would say that we are very focused on structure and risk management, risk mitigation as we develop these programs and we are not compromising on any of that.

[Operator]

Thank you. [Operator Instructions].

We have a question from Daniel Cardenas with Raymond James. Your line is open.

[Daniel Cardenas, Raymond James]

Good afternoon guys. So given that you've completed the Crestmark transaction, you're ramping up the consumer lending programs. I mean what are your thoughts about additional M&A and additional expansion efforts. Are you kind of looking for those or are you in a digestion phase right now?

[Glen Herrick, EVP & CFO]

Yes, hi Dan, this is Glen. I think what's reasonable in the near-term is you should not expect a material M&A from us. Again in the near term not to say we can do some fill-ins where it's aqua higher or a technology platform. But I wouldn't expect any material acquisitions from that in fiscal 2019.

[Brad Hanson, President & CEO]

It's been our goal to really focus on integration at this point. We've made a number of acquisitions over the last short period of time and we're really focused on ensuring those smooth integrations going forward and optimizing those acquisitions and really stabilizing at this point.

[Glen Herrick, EVP & CFO]

Yes, Dan if you really look at what Crestmark brought us they brought us combined all the platforms that we were we're really looking for. So the major pieces that now we have in our combined product suite and portfolios. And now it's about really fully leveraging and optimizing the power of the combined platforms.

[Daniel Cardenas, Raymond James]

Good. And where would you guys pick kind of a core EPS number for this quarter?

[Glen Herrick, EVP & CFO]

I would pick it at $0.41.

[Daniel Cardenas, Raymond James]

Okay, great. I’ll step back for right now. Thank you.

[Operator]

Thank you. Our next question comes from Frank Schiraldi with Sandler O'Neill. Your line is open.

[Frank Schiraldi, Sandler O'Neill]

Yes, sorry it's just a follow-up here on. Glen, you mentioned you talked about expectations or up opportunities with Crestmark and so the idea that you would be able to ramp up or try to ramp up deposit growth. Can you just talk a little bit about that with seems like prepaid is maturing to a certain degree. So do you have any sort of color, you can give on opportunities to ramp that back up?

[Glen Herrick, EVP & CFO]

Yes, prepaid has been maturing but we still see opportunities for growth in prepaid in particular. We've analyzed the different value of deposits associated with various prepaid programs and are looking at how we can target those. We did shift our focus a little bit towards some of our consumer lending and that asset side of our balance sheet in the past year and I think there's an opportunity to refocus on deposit gathering and expand what we've been doing there. So we are going to go after more deposits in the prepaid categories that we've targeted.

[Brad Hanson, President & CEO]

And Frank, I would say, as you know, the payments technologies that we have today, it could be additional deposits besides your traditional prepaid card type deposits. So certainly exploring other opportunities to leverage technology and systems that we have.

[Frank Schiraldi, Sandler O'Neill]

And then this was obviously the change in CEO was pretty sudden obviously I'm not sure if you can talk at all about, what went into the thinking to do this effective immediately versus a transition period or maybe just how you can get the Street comfortable that there's no other impending issue here?

[Tyler Haahr, Chairman]

This is Tyler. I'll go ahead and take that one. From my perspective, I've been on the road basically over half the time and have meetings most nights when an industry falls. I told our team there is a reason most public company CEOs don’t last 30 years. So we got Crestmark successfully closed, we’ve got the consumer credit kicked-off really well, we got Brad and Glen in particular leading the team that has been here a long time, we’ve added a number of other senior executives, Frank, I'd been transitioning some things for a while now.

The company is in a great place, so now just seen like the right time, again I’m staying in the Chair role and as an employee through really the end of January when our Annual Meeting and be there to help with the smooth transition and frankly I told them that the things they need for me they can call me anytime. And so I think we’re well-positioned for future success and that’s part of why it makes sense to do it now.

[Operator]

Thank you. And I’m showing no further questions. I'd like to turn the call back to Mr. Brad Hanson for any closing remarks.

[Brad Hanson, President & CEO]

All right, well thank you everybody who participated on Meta's quarterly investment call today and thank you Tyler for your service. We all really enjoyed working with you and appreciate it. We’re excited by the early progress we’re making as we begin our 2019 fiscal year and look forward to updating you all again in our January Investor Call. Thank you again and have a great evening.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.