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Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter and Fiscal Year 2021 Investor Conference Call. During the presentation, all participants will be in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded.
I would now like to turn the conference call over to your host Brittany Kelley Elsasser, Director of Investor Relations. Please go ahead.
Thank you. I would like to welcome everyone to the Meta Financial Group conference call and webcast, where CEO, Brett Pharr; President, Anthony Sharett and CFO, Glen Herrick, will discuss the results of our fourth fiscal quarter and year ended September 30, 2021.
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 filing for additional information covering factors that could cause actual results to differ materially from the forward-looking statements.
Additionally, today, we may be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding Meta’s results and performance trends. Reconciliations for such non-GAAP measures are included within the appendix of the investor presentation.
Now, I will turn the call over to Brett Pharr.
Thank you everyone for joining us this afternoon.
Before we discuss the results for the fourth quarter and fiscal 2021, I want to thank Brad Hanson for his contributions to Meta for nearly 20 years. His efforts together with those of our team built the leadership position that Meta enjoys today. Under Brad's direction, Meta was an early entrant in the payments industry, and pioneered banking as a service. During the period he was CEO, Meta expanded the range of financial services we offer to our partners, and the company significantly outperformed the S&P 500 and Russell 2000 Indices.
Brad surrounded himself with talented executives created a strong leadership team. We benefit from the deep bench of experienced and highly qualified senior level executives he attracted who are executing our strategy and taking the company forward. At the same time, I also want to recognize Brad's commitment to Meta’s mission of financial inclusion for all, which is powered our business and inspired our ESG and DE&I efforts.
To facilitate a smooth transition, Brad will serve as a strategic adviser to Meta and the Board until the end of 2022. Brad will remain on the Meta Financial Group Board until the next Annual stockholders meeting, which we expect will take place in February 2022.
Having completed the leadership transition to Anthony and myself, our Board affirms that Meta’s corporate strategy and mission remained the same. Our strategy will continue to center around optimizing three key metrics; our mix of earning assets with an ongoing emphasis on growing our portfolio of higher return assets, maintaining a high percentage of lower cost stable core deposits, and continuing to improve operating efficiencies and simplify the way we run our business.
Turning to our results, during fiscal year 2021, Meta generated revenue of $550 million, and net income of $141.7 million, or $4.38 per share. The fiscal year 2021 earnings per share represent an increase of 49% over fiscal year 2020. We are pleased to achieve a return on average assets of 1.74% despite the large cash balances held due to our participation in the U.S. government's economic impact payment program and a recorded return on average equity of 16.84%.
Our banking as a service pipeline has never been stronger. And we serve as the backbone for financial technology companies and others who offer innovative financial services while supporting our established partners with their programs. We believe Meta is well positioned to continue generating value for all stakeholders as we execute our strategy and build upon our ESG and DE&I efforts.
I’d now like to provide an update on our process to better align our credit administration policies with OCC guidance for national banks, which we discussed last quarter. During the fourth quarter, we completed our review of our loan portfolio and established a new baseline for portfolio metrics going forward. This resulted in the downgrade of certain credits in several categories. But these downgrades do not indicate a deterioration in these credits expected performance. Further, these changes do not reflect an increase in overall credit risk for past or future periods and we do not expect any increase in losses as a result of these one-time administrative adjustments to risk ratings.
I want to reiterate; our loan and collateral management practices have proven effective in managing losses through economic cycles over the last 20 years. Excluding approximately $1.5 million of professional expenses to assist with the comprehensive review of our portfolio and set this new baseline, the impact to our financial position is minimal.
Following the end of the fourth quarter, we had a couple positive developments, I’d like to brief you on. In October, we sold $30 million of legacy community banking loans to central bank and have agreements in place to sell approximately $161 million more. Following the sales, the legacy Community Bank portfolio will be less than $8 million, as these sales will wind down nearly all of our legacy community bank loan portfolio. Included in the loan sales are approximately $108 million of substandard and doubtful loans, of which $15 million or non-accrual loans as of September 30, 2021.
Representing 39% of substandard and doubtful loan and lease balances and 44% of non-accrual balances. We expect community bank balances to be zero at the end of the first fiscal quarter of 2022. And this will mark the successful conclusion of the first phase of our ongoing effort to deploy our capital in higher return assets. The net pre-tax impact of the sales will be recognized in the first fiscal quarter of 2022 and is expected to be roughly breakeven.
In summary, Meta performed well in fiscal 2021 as we recorded record earnings and executed efficiently on our strategy and made progress against our three key initiatives. We are well positioned as we head into the next fiscal year. Let me now turn the call over to our new President, Anthony Sharett.
Thank you, Brett. And it's a pleasure to meet all of you in today's call. I look forward to talking with you in person in the quarters ahead. If I may, let me give you a brief introduction to my prior P&L and leadership roles.
Prior to joining Meta in 2019, I served as President or acting President of business units at Nationwide Mutual Insurance Company. I lead the transition of Nationwide Bank, which at the time was a $7 billion in assets institution, from a full service direct to consumer bank to a trust only charter. I was responsible for all the activities and business lines, including credit, risk management, operations, marketing, compliance, legal and human resources and develop a strategic roadmap and action plan for the transition, working closely with its Board of Directors. I then served as President of Nationwide Pet, the largest pet health insurer in the United States before transitioning to Meta. Previously, I was in private practice, most recently with the law firm of Bakerand Hostetler, where I co-chaired its financial institutions practices group.
Meta is a mission driven organization. As we look forward to fiscal year 2022, we want to ensure that all decisions we make about new capabilities fit within our mission of financial inclusion for all, which continues to be our north star. We will continue to work at increasing our efficiency, making our processes as straightforward as possible, so we can better serve our partners and customers. And we will focus on optimizing our interest earning asset mix in our core deposits, which results in a better financial performance. Our board and management team believe Meta's strategy as much further to run and we are excited about these prospects.
Glen over to you to review our financial results.
Thank you, Anthony and good afternoon everyone. Let me briefly summarize our results.
We achieved another quarter and a year of solid earnings. For the quarter ended September 30, net income totaled $15.9 million, or $0.50 per share an increase of $2.7 million from the fourth quarter of fiscal 2020. For the fiscal year net income totaled $141.7 million, or $4.38 per share an increase of $37 million from fiscal 2020.
Net interest income grew $20 million during the year to $279 million, an increase of 8% year-over-year, mainly attributable to the continued optimization of our balance sheet and higher loan balances. Non-interest income increased to $50 million for the quarter aided by strong payments fee income and an approximately $4 million gain on an equity investment.
For the fiscal year, non-interest income grew 13% to $271 million, driven by strong payments fee income growth of 23%, which was aided from an increase in payments activity related to government stimulus programs. Non-interest income represented 49% of total revenue in fiscal year 2021.
During the quarter one of our banking as a service partners MoneyLion completed its de-SPAC process and became publicly traded on September 22. Meta through our venture capital arm Meta Ventures made a $3 million investment in MoneyLion in May 2019. As of September 30, we are recognizing a net unrealized gain of approximately $4 million on the investment. We hold approximately 950,000 shares of this public equity, which we will measure it at fair value and recognize the mark-to-market adjustments in non-interest income, while we hold the position.
Non-interest expense grew $25 million to $344 million in fiscal 2021, while producing an improved efficiency ratio of 62.5%, as revenue growth exceeded expense growth. A large portion of the expense increase occurred in the fourth quarter, where total non-interest expense of $93.6 million increased $13.3 million year-over-year. During the quarter Meta incurred, one-time spend of $9 million related to investments in our technology and product stack to support future growth. Furthermore, the company recognized $1.3 million of expense associated with the CEO transition. Outside of these items, traditional expenses remained within historical levels, and we expect total expenses to be in the low $80 million range for the first quarter of fiscal year 2022.
Turning to net interest margin, net interest margin continues to benefit from our approach to optimizing our balance sheet. During the quarter we have strong loan growth, while we continue to optimize our loan mix away from lower yielding assets evidenced by growth in the commercial finance portfolio. We are seeing momentum in our asset based lending and factoring portfolios as the economy ramps up and there is renewed customer demand for working capital. These factors contribute to a robust commercial finance pipeline and we expect to see continued loan growth in fiscal 2022. The community bank loan sales are also a direct effort to optimize earning assets and as Brett noted, we expect community bank balances to be at zero at the end of the first fiscal quarter of 2022.
Turning to capital, in September, we announced that our Board authorized a new share repurchase program of up to 6 million shares of the company's outstanding common stock expiring on September 30, 2024. During the fiscal fourth quarter we repurchased nearly 235,000 shares and have purchased an additional 636,000 shares in October through October '22. The Board share repurchase authorization and recent purchases reflect the momentum of the business and confidence in the company's outlook and growth trajectory. The company remains well-capitalized with the regulatory leverage ratio for the bank increasing to 8.7% from 7.8%, the prior quarter.
This concludes our prepared remarks. Thank you all for joining us today. Operator, please open up the line for Q&A.
Certainly, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Frank Schiraldi with Piper Sandler.
I wanted to start with the expenses, Glen, you mentioned in the release, you mentioned on the call the 9 million in one-time expense, could you dive into that a little further in terms of what's in that one-time expense? And then, just any color on why it was taken all up front, as opposed to maybe being amortized over time?
Hi, Frank. Sure that, there are certainly ongoing investments that we make and development efforts that we do, that are capitalized and are amortized over time or ongoing projects. We saw some opportunities, really related to the strong pipeline and business opportunities that we saw, and felt it was worth making a larger investment in a shorter period of time. So we can be prepared for to serve the customers that we want to serve. So you'll see a lot of it in the legal and consulting line, and then some other expense. So, think of contractors, consultants, staff augmentation, type of expenses to pass through on a number of items.
So this is partially reflects a larger, FTE count or is it generally?
No, in fact, yes, , if you look our compensation cost is down on a linked quarter. This is really, external expenses that our one time that we know, well, we've guided to where we think expenses will be next year, or next quarter in the low $80 million range back into our normal run rate. But we had an opportunity to prepare for the growth we see coming down the pipeline, and we wanted to push through that bubble and be able to serve more baking as a service customers in particular.
Okay. And then, in terms of the timing of it, with Brett taking over the CEO spot, this in some ways reflect a change in thinking about consulting fees versus FTEs or, is this timing, just coincidental?
Yes, Frank. This is Brett. I think it's purely coincidental. As it relates to our sort of our strategy and our approach and even some of the deeper tactics around banking as a service. There's no change and we are completely aligned. What we're seeing is just a continual ramp up of revenue opportunities. And we felt like we needed to do some things quickly to be prepared to handle the additional volume that's coming our way. So that's purely what it was, had nothing to do with the CEO switch. In fact, a lot of this was already in place before the CEO switch was being announced. So we've been talking about these things for a time and that's the reason we decided to invest in the quarter.
Okay. And then, just thinking about, you mentioned Glenn, you guys gave your expectations for first quarter expenses. Wondering if you can give any color, I think I would expect in terms of bottom-line growth year-over-year kind of 2021 creates some tough comps, just given what a strong year it was. But any color you can provide either in 2022 expectations, or maybe even beyond that just thinking about the payments niche, you guys have created in banking as a service, and the moat, as far as other banks taking advantage of it. So maybe, either some guide for 2022, or even just your expectation of what the core growth rate could be in this business, bottom-line coming over the next couple of years.
Sure. We're not providing overall guidance at this point. But we've talked consistently about a strong pipeline. And both in the payments and commercial finance sides of the business. As you know, Frank in payments a little harder to predict the timing of these especially larger partners, and program managers that require some upfront investment and ramp up -- see how fast customer acceptance and moving things over. So a lot of that is a little harder to predict. But if we look at a three or five year run rate, we will feel pretty good. We are very positive about the outlook of having double digit EPS growth over an extended period of time.
Thank you, Mr. Schiraldi. The next question comes from the line of Steve Moss with B. Riley Securities.
Maybe just following up on Frank's line of question in terms of growth here. Card fees. I understand you had obviously some extra juice in the prior quarters numbers but figure this probably a good baseline. How are you guys thinking about the growth in terms of revenue there in fiscal '22?
Yes. Hi, Steve. So this payments fee income will be -- growth rates will be depressed year-over-year, we would expect unless there's a whole bunch more around the stimulus. And but what was depressed in fiscal year '21, was a lot of our cash fee income, because it was cannibalized by all the government stimulus. A large part of that went to consumers that would have otherwise taken out in some of our tax products. So we expect to return to normal. And if that occurs, payments fee income will certainly not grow as much. But we would expect a nice leg up in our tax fee income in 2022.
Now, if the government comes out with a bunch of other stimulus programs, extends child tax credits and does other social programs then we would expect continued strength in payments and maybe not as much growth in tax. So there's somewhat of a natural hedge, we then put the company together to hedge for government stimulus, but it certainly worked out that way.
Okay, fair enough. And then, in terms of the -- I hear you before going on the robust loan pipeline, for commercial bank loans, just kind of curious, when you're thinking robust, double-digit growth rate for fiscal '22 is kind of what that sounds like to me. You guys have seen any supply chain issues or any disruptions with line of business, just trying to get a little bit of more flavor around the drivers there.
This is Brett. So I think your double-digit growth rate is a good place to look. And it's consistent across many of our asset classes, so feel pretty good about that. The interesting thing, particularly in our working capital areas, factoring an asset-based lending, we have pretty good insights into what's actually happening moment by moment and we're seeing good growth there. And it is a highly diversified set of customers. So we're not seeing any impact from the supply chain pieces that are slowing things down for us. Our customers seem to be going pretty well and are not experiencing that there may be one or two very specific pockets where that's happening, but we're not having supply chain issues at all.
Okay. So that's helpful. And then maybe just one last one for me, excluding tax on the provision line here, just kind of think about the provision more or less matching charge offs going forward. Just kind of curious as to how you guys are thinking about that dynamic?
I think that's fair depending on our loan growth rates, and then obviously, what the seasonal factors are for every bank we use some of the similar services. Seasonal factors are starting to come back down. So that will be a tailwind to provision. Our headwind would be just loan growth and having to provide upfront for larger amount of loans. But we would expect overall lower provisioning numbers than we've had in the past.
Thank you, Mr. Moss. The next question comes from the line of Michael Perito with KBW.
Sorry to beat a dead horse here on the $9 million, but I'm just -- I'm not fully clear kind of on what the dollars were spent on. So I guess, asking the question a little differently, I mean, it's called tech -- I think you guys flagged this kind of a one-time technology [Technical Difficulty] cost. But it sounds like it's more kind of consulting and legal
driven. So I guess, can you try and maybe break it down a little bit more? I mean, were there kind of platform upgrades? Was there kind of second sets of opinions you needed on certain kind of technology protocols or compliance protocols you guys were doing or just trying to get a better handle of where the dollars were spent?
Yes, it was all that, Mike. It was some -- quite frankly, some extra consulting and services to help us analyze a few things that have been -- we have been meaning to get to. And it were part of our planning, but the opportunities were coming faster than we are ready or in many cases, the capacity that our existing team had to get to them, because there was so much on the plate. So it's a lot of attack, it's staff augmentation that we talked about, it's consultants, it's some of that is a little future looking of, if we're going to go from -- if we're going to 3x this product or area, how do we need to be thinking about that. And so a lot of those came together this quarter. As Brett talked about, they were in process and part of the plan that we as a team and a company wanted to work through under Brett's leadership and we continued through the transition to execute on that with really no disruption.
So is it a situation where -- because I feel like the pipeline has been fairly robust in that -- in the bank as a service business for quite some time. So is there a situation where the types of companies or the magnitude or the size of the companies is kind of changing and becoming more complex or was it just the quality of the companies in the pipeline was increasing and you felt like you were letting too much good business go away by not being able to have a higher close rate on the pipeline or something else?
It's all of that, Mike, anywhere from what's the onboarding time and experience like versus some of the things you said, how do you scale up, do we just keep adding FTE and compensation? Our compensation expenses have increased a lot over the last few years. Now our revenue has grown faster than that, but we thought there were opportunities to get even more scale and we wanted to break through it. Now it's -- we wouldn't be making these investments if we didn't think there is a return on them. And I would also point that we're managing this and you can see that in our guidance of expenses returning to the low $80 million in the December quarter.
Yes, okay. No, that's helpful. Thanks for spending extra minute on it.
Yes, we knew -- yes, we knew it was an outlier, and that's why this is one instant, we thought we just want to be very clear and put a stake in the ground of what our expenses are going to be here in the December quarter.
Got it. And then on the mix of the BaaS business, I mean, it's still on the payment revenue side, it's still pretty heavily towards prepaids at this point, I think you guys said, it was like 79% in the slide deck. I was curious, if you guys want to make any kind of bigger picture comments. I mean, it feels like that the prepaid -- and we've kind of just talked around this in the past. But it feels like some of the momentum on the growth on the prepaid side has got -- lost a little wind behind its sales and certainly some of these more kind of checking oriented debit card neobank type platforms are having pretty big member growth.
I mean, do you -- does your pipeline show that? I mean, are there more? And I guess -- that's -- is that probably a good thing, I mean, is there more kind of revenue opportunities around these more kind of debit-oriented clients, whether you get into like sponsor credit card or other things like that, which prepaid was pretty monoline in terms of where the revenues were coming from, I mean, any thoughts on any of that?
Yes, I think -- this is Brett. I think you're categorizing it correctly. The neobanks that are out there -- and they are wanting to offer a broader set of financial products to their consumers and so we're engaging in all of those things. So a lot of it's remittance, payments of various kinds of things, et cetera, and maybe even broader consumer products they're talking to us about, that is going to happen. And the good news for us in many cases, those are fee income types of things, not as much balance sheet things. And I think we're going to increasingly see a mix of that.
The problem is, is it's very hard to anticipate the speed in which that transition is going to occur. So for modeling purposes, it's hard to understand that, but that is clearly a trend or some of which just got back from a conference. That's what everybody is talking about, doing the banking as a service across many of these other products, which we're involved in. So you will see that mix shift. I guess, I can't tell you how fast it's going to happen.
Hence some of the reasoning behind the investment that we wanted to get moving on.
Investment, that's right. Yes.
Got it, okay. And then just lastly, I apologize if I missed this. But just would love an additional comment on kind of the buyback appetite from here. I mean, you have some room on the authorization, the stocks obviously had a nice move and the valuation has kind of moved up a bit. But just, if you don't mind just making a specific comment or just more broadly refreshing us on kind of how you think about buybacks as a form of capital deployment, that'd be great?
Yes, we continue to believe we're going to generate excess capital for the foreseeable future. And our best opportunities are still with the platforms we have, making those more efficient, making them more scalable. And, but our earnings, 175 [Phonetic] ROA, and we're only going to head up from there. We're holding the balance sheet flat. And so with that excess capital right now, management and the board believe the best use of that is to repurchase shares providing the best value for our shareholders. A lot of factors go into that as you can assume, including what we think our outlook is for not only '22's earnings, but '23 through '25 and beyond. And so we're very comfortable buying shares at today's price.
Great. Thank you, guys. Appreciate it.
Thank you, Mr. Perito. The next question comes from the line of Wally Wallace with Raymond James. You may proceed.
Maybe just kind of -- hi. Maybe just following on Mike's line of questioning in your comments about the level of growth that you see kind of coming down the pipe from the banking as a service side of the business. It's, I mean, the amount of press that we're seeing of new entrants, et cetera, is definitely increasing. I'm curious if the competitive environment is changing, are you seeing more smaller banks that are trying to use their charter to try to win that business from you and other larger competitors or do you feel like you and I guess really Bancorp kind of have it locked up just because of the regulatory requirements, et cetera?
I think, in many ways you partially answered your own question. I would say, the regulatory requirements and also the operational history, we've got a long history of doing these things, learning how to do them well and building a talent base, based on a clear pathing capabilities internally should allow us to constantly win in this marketplace. Are there going to be people who dip their toe in it, yes, they will and then most of them will get in trouble and they'll get back out. So very few competitors really at the end of the day, there is two of us, others that come in are going to be short lived or they're going to have to invest a whole lot to be able to do it. So not worried about it.
And I think now as sort of the neobanks are coming in and the market is expanding into other products, it just positions us in a better place to be able to not provide them just the prepaid sponsorship pieces, but all the other components that you bolt-on with it as they want to serve their consumers. So I think you've got it right, that it's just pretty tough for others to play.
I mean, did the regulators makes that clear to others or is it you have to find that out the hard way?
I mean, it's hard for us to answer what the regulators are saying to others. Sometimes you can read the news and see what they're saying, but that's hard to answer.
Yes. And what I would say, Wally is, we've never had more opportunities than we have today. So yes, so clearly there's some banks doing some good stuff and Bancorp is obviously very capable, but our pipelines never been stronger.
Okay. And I -- you might have given this in the release, I apologize if I missed it. But I'm wondering how much of the EIP deposits are left on balance sheet? I'm guessing based on the cash balances, maybe not that much. And just kind of as a follow on to that, do you feel like you're at close to the kind of optimal asset size range for now, given the opportunity to shift the earning asset mix?
Yes, we, I think in our investor deck we talked about some of the balances. I mean, we don't have many left from EIP. We have moved some balances off balance sheet in partnership with some other banks that we've developed this year, and that that seems very efficient and will help us going forward. Yes, $6.5 billion is a kind of a good number for us. It will move up and down between $6 billion and $7 billion just given the flows of some of our money movement business. Outside of tax season, February and March, will be larger than that. But we think we can run this plus or minus $6.5 billion for a couple of years when you look at how we want to remix the left hand side of our balance sheet.
Okay, great. That's helpful. And then just one last, just kind of stinky question. But what was the nature of the insurance recovery, I think you said student loan insurance recovery, and is that something that could recur?
You'll recall, may recall a number of years ago, so well, we have purchased student loan portfolios that were insured by a private insurer, so that went barely up for things totally unrelated to the student loan portfolio that they insured. They had -- they then gotten involved in some other matters and that's all public documents. So they went bankrupt or were liquidated, I guess by the state of South Dakota insurance regulator. And so we have those -- we carry those as unsecured loans. Over time, we received some claims back on that. The state is wrapping up. We did get another claim this quarter. And we may have one more left. I wouldn't expect it to be material, but we will probably get one final claim before the state closes down.
Okay. Yes, thanks for refreshing my memory, I do remember that now. That's all my questions. I appreciate your time.
Thanks you, Mr. Wallace. There are no additional questions waiting at this time. That concludes the Meta Financial Group fourth quarter and fiscal year 2021 investor call. I hope you all enjoy the rest of your day.