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#Thank you, <UNK>, and thank you to everyone joining us on today's earnings call.
We're pleased with Meta's performance during our fiscal second quarter with strong financial results, numerous positive developments with respect to our consumer credit and prepaid relationships and the proposed Crestmark acquisition and a successful tax season largely complete, it's clear that Meta is well positioned for a strong second half of fiscal 2018.
Meta's highly differentiated financial services model, including our annuity-like and high-fee generation businesses and tax services and payments, combined with our national lending platform and community banking operations, continue to deliver very strong organic growth and profitability in the second quarter.
We are actively making investments in people and systems to build out our platforms for our new consumer credit business line initiatives and to prepare for additional growth with Crestmark and our existing business lines.
And we plan to make significant investments in the next 12 months to lay the groundwork for what we believe will be meaningful drivers for enhancements to earnings, particularly in 2020 and beyond.
However, we do hope and expect to gain some operating efficiencies in our existing business lines over the next year and beyond.
As you know, our fiscal second quarter is by many measures defined by tax season, and we're pleased with the contributions of that business to Meta's overall results.
In October's tax season preview, we anticipated the origination of more than $1 billion of interest-free refund advance loans across our multiple partners during the 2018 tax season.
In fact, we originated a total of $1.26 billion.
Although refund advance and refund transfer volumes came in slightly better than expected, we did experience timing differences with respect to pretax income for the Tax Services business when comparing to prior year periods.
The 2018 fiscal first quarter was higher than the same period of the prior year, while the 2018 fiscal second quarter was lower than the prior year, and we expect 2018 fiscal third quarter pretax income to be higher than the same period of the prior year.
Although we expect positive performance in the third quarter, the overall contribution to pretax earnings in fiscal 2018 is now expected to be approximately $1 million to $3 million below our performance in fiscal 2017.
Brad will provide further information in his prepared remarks.
In the payments space, we announced in March, a long-term renewal through our strategic relationship with Money Network, and today announced an extended relationship with AAA.
We're proud to have this kind of consistency and longevity in our payments programs.
Expanding on the agreement we entered into in January with Liberty Lending, we plan to further capitalize on our SCS leadership team and consumer lending platform, with newly announced agreements with Health Credit Services Corporation and CURO Group Holdings Corp.
or CURO, which Brad will elaborate on his comments.
These consumer credit programs are expected to allow us to leverage the SCS team and our balance sheet to generate significantly higher margins and on a much larger scale than we were able to achieve historically.
We expect to see the positive earnings effect from this in 2019, and expect to see further income growth in 2020 as programs scale and even greater efficiencies take hold.
We believe consumer lending has the potential to be one of our most profitable divisions within a few years.
I also wanted to take this opportunity to update you on the Crestmark Bancorp acquisition we announced in January.
We continue to expect to close the transaction by June 30, subject to customary regulatory and shareholder approvals.
On April 27, we filed our joint proxy statement and final prospectus related to the deal and related proposals.
Our special meeting is scheduled to take place on Tuesday, May 29.
This strategic can transformational merger will provide Meta with access to Crestmark's National Commercial Lending platform, while providing complementary cross-selling opportunities for Meta's commercial insurance premium finance division.
By combining Meta's low-cost deposits, higher capital and legal lending limits with Crestmark's loan platform, we believe there is the potential for significant financial upside in addition to the deal's high strategic value.
Likewise, we will consider opportunities to grow Crestmark's existing business lines and add new business lines, both with existing staff and through external opportunities over time.
We also continue to believe that the acquisition of Crestmark, which historically has been fully funded by wholesale deposits, will enhance Meta's already considerable flexibility for manage our balance sheet.
We expect to able to accommodate continued growth in origination volumes and revenue across our business lines.
While we have no intention of selling loans or assets for the foreseeable future, many of Crestmark's assets are very saleable should we need to manage the growth of our balance sheet at some time in the future.
Our integration efforts are progressing nicely.
I'm very pleased with both the Meta and Crestmark teams work on this front as they continue to meet expectations and work well together to prepare for a successful merger, closing and seamless integration.
Business activities at Crestmark continue to perform as expected, while credit quality remains strong.
Crestmark shows a solid pipeline of activity, and we remain enthused about the opportunities for expansion.
Before I turn the call over to Brad, I would like to touch on the Board's recent ---+ recently disclosed charter amendment proposal we made through our SEC Form S-4 filing related to our common stock.
After careful consideration, our Board proposed a charter amendment proposal to increase the number of authorized shares of Meta's common stock to accommodate a 3-for-1 stock split.
Meta's board believes the stock split would make the shares with Meta common stock more marketable and attractive to a broader group of potential investors, increasing liquidity and the trading of Meta's common stock and raising the awareness of our employees' equity awards.
The proposed stock split is another indication of the confidence we have in our business model.
I'll now turn the call over to our President, Brad <UNK>, who will provide additional detail on the 2018 tax season, our outlook for 2019, and an update on our national consumer lending platform and Payments businesses.
Thank you, <UNK>.
We're pleased with the ongoing support from our partners and the execution from our Meta team during the 2018 tax season.
Starting with our refund advance loan programs, we originated a total of $1.26 billion of these loans above the expectations we shared last October and in line with 2017 originations.
To be able to match last year's volume in 2018 without the participation of H&R Block, the largest U.S. tax preparation company in the country, is a testament to the dedication of our team and the quality of our exceptional partners we have been honored to do business with this past year.
If we include this one relationship ---+ if we exclude the one relationship from the fiscal 2017, originations would have increased approximately $700 million this tax season.
In addition to originating $1.26 billion in refund advance loans this year, we executed on our previously announced plan to retain all of these loans on our balance sheet, more than doubling what we retained in 2017 tax season.
Originations were also bolstered by higher-average refund advance loan sizes, which we saw a nearly 75% increase in average loan size over the prior tax season.
Turning to refund transfers.
We continue to expect the process approximately $2.5 million in transfers through the end of 2018.
This compares to a total of $2.4 million during last year's tax season.
Compared to fiscal 2017, we experienced margin compression in net tax service contributions, even with refund advance and refund transfer volumes coming in slightly better than expected.
This was caused mainly by margin compression and timing issues, specifically, a mix of refund transfer volume and associated pricing; the refund advance margin compressed slightly due to increase in average loan size and provider mix with some partners performing better and others expected to finish under our original expectations; and slower repayment on refund advances from the IRS.
This is more of a timing issue as we expect to see a slight shift of revenue to the third quarter, which would have been in the second quarter, comparing year-over-year statistics.
According ---+ accordingly, we expect the 2018 fiscal third quarter pretax income to be higher than the same period last year.
Although we expect positive performance in the third quarter, the overall contribution pretax earnings in fiscal 2018 is expected to be approximately $1 million to $3 million below our performance in 2017.
Looking ahead to fiscal 2019, we anticipate continued growth for the next year's tax season.
And as we noted in our March 5 tax season update, we continue to believe growth potential of up to 10% based on our existing relationships is reasonable.
Initiatives have already been kicked off related to incorporating additional synergies in our tax divisions between EPS and refund advantage, and we believe there are more efficiencies to gain.
We are privileged to enjoy collaborative multiyear relationships with great partners, and we believe the infrastructure is in place today to enable us to continue our momentum and achieve our organic growth objectives for tax season 2019.
We continue to secure multiyear agreements with outstanding partners in our Payments division.
As <UNK> mentioned, we announced a 10-year renewal of our relationship with Money Network.
MetaBank and Money Network have worked together for 13 years, and we're proud to be able to the extend this strong relationship in order to provide innovative payment products.
We're also happy to announce today an expanded 4-year relationship with AAA, where we will be partnering to expand distribution of the payments products as well as incorporating enhancements and additional product features.
Consumer lending had a strong quarter.
During the quarter, we announced 2 new agreements in diversified financial markets, which continue to support our vision of financial inclusion for everyone, such as Liberty Lending and healthcare services.
In addition, we're pleased to announce today that we have entered into an agreement with CURO.
Our agreement with Liberty Lending helps consumers through debt settlement, while healthcare services will help medical patients throughout the country gain access to the medical procedures they need, while providing them with opportunity to easily and responsibly manage those healthcare expenses.
Likewise, our agreement with CURO will provide consumers with access to the credit they need with the ability to control their cost of borrowing, with an innovative and flexible line of credit product.
This product is expected to have a pilot launch later this year.
As has always been the case, Meta's new programs require start-up costs, primarily in compensation and legal expense and loan loss provisioning during the ramp-up periods.
Accordingly, the new agreements announced in fiscal 2018 are expect to require upfront investment to generate future higher returns, of which management estimates initial start-up cost of $800,000 to $1 million for each of the first 3 programs.
With durations between 1 and 5 years, we expect pretax net yield of approximately 6% to 9% net of credit losses.
We also expect significant volume of consumer credit products over time, and we plan to grow our originations in a controlled and profitable manner.
However, we don't currently have good visibility into how fast these volumes will ramp up.
Given the economic cycles of these loan products, we anticipate more material benefits of these programs to earnings to be exhibited in 2020 and beyond.
Though there are more consumer lending opportunities in the pipeline, we continue to practice disciplined growth as we grow our national consumer lending business.
By leveraging the leadership and talent of our Specialty Consumer Services group, as well as its origination and decision science platform, we are able to develop channels of consumer loan originations with prudent risk management and credit structuring.
Now I'd like to like to turn the call over to <UNK> <UNK>, our CFO, to provide a brief review of our consolidated financials.
Thank you, Brad, and good afternoon, everyone.
We delivered another good quarter, and I'll briefly touch on a few highlights and other items we'd ask you to note as you review our financial results.
Net income for the quarter was $31.4 million compared to the prior year period of $32.1 million.
Earnings per share of $3.23 reflects a $0.19 decrease from the fiscal second quarter of 2017.
Importantly, this quarter's results included $2.2 million of acquisition-related expenses in the quarter; $0.5 million payout of severance costs related to synergy efforts in our tax division; and $200,000 loss on the sale of investments.
Net interest income was $27.4 million in the second quarter of 2018, a 14% increase over the same period last year.
The previously disclosed student loan portfolio purchases and our high credit quality organic loan growth supported by our investment portfolio contributed to our net interest income growth, while holding more tax loans funded with wholesale deposits offset some of that growth in net interest income.
Total net loans of $1.5 billion at March 31, 2018, reflected growth of 31% from one year prior.
Excluding purchased student loan portfolios and refund advance loans, we delivered net loan growth of 27% year-over-year, which was driven in large part by our expanded commercial insurance premium finance portfolio, up 29% year-over-year.
And our community bank portfolio, which grew 26% year-over-year, driven by growth in commercial real estate, even with the reduction of $39 million in agricultural loans.
Importantly, we have maintained our underwriting and risk management discipline even as we continue to grow loans at a high double-digit pace and our asset quality metrics remain strong.
Nonperforming assets represented just 84 basis points of Meta's $4.3 billion in total assets at the end of the second quarter of fiscal 2018.
Outstanding NPAs are primarily related to our previously disclosed nonperforming ag loan relationship for which a deed in lieu of foreclosure was executed on the collateral in January 2018, and the collateral has been transferred to foreclosed real estate and repossessed assets.
We expect to receive all principal, note interest and related expenses from this relationship.
At March 31, 2018, agricultural loans totaled $58.8 million, representing just 1.4% of total assets.
Provision expense totaled $18.3 million in the second quarter.
The provision expense was primarily driven by an $18.1 million reserve related to tax service loans, which is an outcome of retaining all-tax loan volume on our balance sheet this tax season.
Turning to funding.
Our average cost of funds increased to 58 basis points in Meta's second quarter.
This increase was largely due to the use of wholesale deposits and increased overnight borrowing rates, as well as higher average overall funding balances to support the 2018 tax season.
At the same time, our cost of funds remains well below average for comparably sized financial institutions.
We continue to view our growing low-cost core deposit base as a differentiator in the banking space, particularly in a rising rate environment.
Our cost of deposits during the quarter was 33 basis points and just 6 basis points when excluding wholesale deposits, which was improved by 1 basis point from the previous quarter.
We reported a tax equivalent net interest margin of 2.89% for the recent quarter, down 2 basis points from the year-ago quarter.
It's important to remember, particularly for fiscal second quarter, that refund advance loans drive fee income, while having a negative impact on net interest margin.
These assets do not generate interest income, instead, we collect fees for these noninterest loans from our tax services partners, who offer them as a value-add to their clients.
We estimate that when adjusting for certain seasonal tax services loan programs and associated wholesale funding items, a normalized net interest margin for the 2018 fiscal second quarter would have been between 3.3% and 3.33%, which also reflects the adjusted tax rate due to the adoption of the Tax Cuts and Jobs Act.
On Slide 10 of our quarterly investor presentation, available at metafinancialgroup.com, we show the benefit to noninterest income in the fiscal second quarter and the corresponding impact to loan yields and NIM as a result of the refund advance loans.
Tax product income was the primary contributor to our noninterest income growth, which grew by 6% year-over-year to $97.4 million.
Meta's business is cyclical given the contributions of our tax refund advance and refund transfer programs, with the highest revenue levels in the second quarter of each fiscal year.
However, this seasonality is significantly less than in prior years and is expected to decrease further with Crestmark and our consumer lending agreements.
This year, the company grew total revenue to $124.8 million in the 3 months ended March 31, up 7% (sic) [7.5%] compared to the same period the prior year.
Beyond these results is an exceptional team of producers.
We're proud to attract top talent to Meta, individuals who share our commitment to providing diverse financial solutions and products with a customer-centric focus.
And our team is partially compensated based on performance-driven incentives.
As a result, the seasonality of our business holds true for our compensation expenses as well.
And the second quarter is marked by higher bonus accruals.
These factors, combined with the previously discussed expense related to a separation agreement and the overall increase in total FTE count, resulted in a 20% increase in our compensation and benefits cost for the recent quarter compared to the same period the prior year.
To provide deeper insight to the investment in our employees, we saw total FTEs increase to 916 at March 31, 2018, an increase of 38 from the linked quarter and an increase of 134 employees or 17% year-over-year.
The increase in headcount is primarily to support the rollout of our national consumer lending initiatives and the Crestmark merger, as well as overall growth in our existing business lines.
Despite this, total noninterest expense net of merger cost, remain relatively flat compared to the second quarter of last year, reflecting our expense management discipline overall.
However, we do expect to incur future intangible amortization expense, currently estimated at between $6 million and $10 million in 2019, attributable to the proposed Crestmark acquisition, which is subject to regulatory and shareholder approval.
And we will provide an update after further analysis and evaluation is completed.
We believe that our flat, total noninterest expense also illustrates the operating leverage potential for our model, excluding new product program or acquisition initiatives.
We remain focused on creating positive operating leverage at all of our businesses, each of which has inherently different efficiencies.
Each of these businesses is also a different maturity points in their life cycles.
Putting them together, we see significant opportunities for accelerating positive operating leverage, particularly in fiscal 2019 and even more so in 2020.
Overall, we are very pleased with our quarterly results and are well positioned to continue delivering strong financial performance going forward.
With that, I'll turn the conversation back to <UNK>, for any closing comments, before we open it up for questions.
I'd like to thank <UNK> and Brad for their comments and participation today.
As you'll see in our financial results for the second quarter, we're getting strong and growing contributions from all business lines and at the same time making significant investments for future growth initiatives.
While we spent most of our time this afternoon on tax payments and our pending Crestmark deal, our other businesses are firing on all cylinders and continue to have strong futures and opportunities ahead as well.
We're happy to address questions you may have on those operations.
That completes our prepared remarks.
Operator, please open up the line for any questions.
Yes.
Brad talked about a little bit as well.
We try to get the guidance out as soon as we could after tax season between different mix and higher loan volumes has led to the expectation that it will be a little lower than what we expected to be at the start.
Mike, this is <UNK>.
We tried to call some of that with the $800,000 to $1 million, and those are hard start-up costs for the loan programs.
And so we announced 3 of those in the quarter.
There is additional expenses outside of that as we ramp up staff, and have been ramping up staff in underwriting, origination to service these loans, product development.
And so you should expect, if you're looking at legacy business, that we will have higher expenses for a while.
What that amount is, part of it will depend on how fast these loan programs ramp up.
There will be certainly be a fixed cost, some fixed cost staffing primarily, and in investments to support them, but then a lot of the cost will be more variable, once the loans get up and running ---+ once the loan programs get up and running.
Yes.
That's why we talked about the amount per program too.
So if you see us announce additional consumer credit relationships, you now know to say, okay, this is what we expect.
The cost probably is going to be in the quarter that it's announced.
And again, then you can relate that to, again, associated revenue going forward.
Yes.
That's a reasonable way with the caveat of the timing of how fast some of these programs ramp up or need to ramp up, and we need to make investments for those programs.
But you're thinking about it the right way.
Frank, this is <UNK>.
Those amounts have ---+ since those 3 have been announced, you can assume that most of that was spent in this quarter, this recent quarter.
And to the extent we're looking at ---+ and the others, we haven't announced anything yet.
We're not going to do [tenet 1], so we're trying to phase these in where it makes sense and where we find good partners.
I think another good way to look to where some run rate is when we really look at our compensation expense and the number of staff that have been hired either since the prior quarter or a year-ago period.
There were no acquisitions in the last 12 months that would have increased staffing, obviously, we'll add 330-some employees when we close Crestmark.
But that 134 is net adds over the last year to support both existing businesses that have been growing.
You saw what's happening in our Community Bank and our premium finance business, those loan growth rates and then as well as to staff up to do a national consumer lending business and to do it properly.
Right.
So as ---+ I mean, Crestmark, for example, has been under $1 billion, not publicly traded.
So while all of their procedures, controls, et cetera, were perfectly appropriate for the bank, they were, as a large ---+ much larger organization that's publicly traded, we have been spending money and also preparing for the future growth that we think we can come ---+ that we can generate out of there.
But obviously, at the same time, because the deal hasn't closed, we haven't been able to gain any of the efficiencies that we did talk about, and we think they'll be out there with respect to Crestmark as well.
So I hope that helps some too.
May I make one clarification, please.
The 2 previously announced consumer loan deals have been largely incurred in this quarter.
CURO was just announced and will be developed and launched later this year, so we'll still be experiencing some expense related to that one.
And any new ones that we might announce later.
We haven't disclosed that.
Certainly some of the elevated expenses this year over last year in comp will be permanent compensation adds.
One of the other things too as we're moving more and more of our compensation to incentive-based compensation with a higher percentage of our income coming in the second quarter, a higher percentage of that in incentive comp would be recognized ---+ incentive comp expense would be recognized in the second quarter as well.
Yes.
We would expect, excluding Crestmark, depending on the timing of when that closes, we would expect comp to come down next quarter from this quarter.
No.
Well, one reminder too.
As of December 31, that ag loan that was $29-ish million was still in as a loan.
So that's $29 million that in essence came out of the loan growth or benefactor of the retail bank.
So basically you're at 30% at the retail bank in round figures and then 29%.
So frankly, the number is about what it has been in the last, at least, the last quarter as well.
Again, excluding moving that one ag loan to REO.
We see a lot of opportunities in both those in the Community Bank lending and Premium Finance.
Now will it stay at the same rate, we don't know.
Obviously, the denominator becomes larger.
But we're very pleased with the pipeline that we see in both of those businesses.
Yes.
And again, it's probably been 5 years now for the community bank that it's been between 19% and 30%.
And we've more than tripled AFS, the premium finance business in the 3 ---+ little over 3 years that we've had it.
And so, again, we've talked about robust loan growth and the fact, and there's a little seasonality.
There's a little bit of ---+ one's a little higher, one's a little lower, but they've been consistently strong for a lot of years.
And Frank, one follow-up on the comp expenses, just to clarify for ---+ looking at our third quarter, to more specifically answer your question, we would expect them to come down from Q2, but not probably all the way to the 20% that you saw the drop last year.
Again, that Delta being the staffing that we've added to support the consumer lending initiatives as well as prepare for the growth at Crestmark.
Yes.
If you looked at the numbers that we provided on the earnback and the dilution and things like that, we talked about the 2.2-year payback was being based on 15% loan growth out of Crestmark.
They've grown faster than they had in the past.
But, again, that's a number that we were comfortable with putting out there and with the integration and everything else we'll see what the opportunities are.
And again, with respect to AFS and the community bank, we've seen consistent solid growth as they're going to be at exactly the, again, the 26% for the community bank.
Well, I don't know what's been between 19 and 30 every quarter for 5 years and round figures.
And the AFS, again, we continue to see opportunities there whether that stays that 29%, 30% where it's been or not.
Again, we do think there's upside ---+ we think there's positive growth opportunity just like we've seen in the past.
Yes.
Obviously, with rates going up, there are higher opportunities.
We're seeing tax equivalent yields above 4% in things we're buying.
If you go back roughly a year, we talked about the opportunity for growth and the margin and things like that.
If you look at the securities yields on the securities portfolio, it was up 19 basis points from the last quarter.
The mortgage-backed portfolio was up 35 basis points.
So again, one of the things we've talked about with the mortgaged-backed portfolio is even though it was fixed-rate because of the type of securities we're buying, it does have upside potential as rates move up subject to ---+ obviously, there's a ceiling on how low prepayment speeds can go.
But, again, even with the lower tax rates, we are seeing higher yields even over the last quarter or 2 and continue to see opportunity for growth, both because of higher yields overall and because a number of the different ---+ with (inaudible) different baskets that started about a year ago, including more variable rate securities.
So again, if you look on ---+ if you look at the chart you see on Page 10 that was referenced before, you see higher loan yields.
Some of that relates to what ---+ the quasi-variable loans that we're seeing in the AFS portfolio as, again, the student loans that we bought also were tied to 30-day LIBOR.
So you're starting to see the benefit also of all rates going up, but again, much more quickly on those quasi-variable rate loans, again, as well good increases last quarter on the Securities portfolio.
Yes.
It was ---+ so far, it has been in line with expectations.
There ---+ we have not disclosed specific loss rate numbers.
That said, you can ---+ we provisioned $18.1 million this quarter.
Our different partners have very different loss rates, depending on the demographics of their customer base, as well as what their goals are from those programs as it pertains to where they want loan sizes to be and what they want approval rates to be.
But mixing all that in together, our models continue to perform very well.
Really, the history that SCS has had in this market for a number of years, we really continue to see the benefit of that throughout this tax season.
I think it's important to stress what <UNK> just mentioned that some of the partners want to be a little bit more aggressive with the approval rates, and we build in to the pricing and the fees associated with those loans, different pricing to accommodate loss rates so that will be commensurate with the approval rates that are desired by the various businesses.
Yes.
That's a reasonable expectation.
That's ---+ again, if you exclude the advances ---+ the refund advances as well as the associated borrowing, we would have been at that 330 to 333 this quarter and again, I think there is some upside to our margin opportunities just like we saw this quarter.
And Crestmark, once that closes, we'll take that up higher as well as the consumer credit loans that we're making as well.
It should be as we disclosed when the Tax Act came out, Dan, the 21% for the remaining quarters.
The primary carryover that we would expect to see in the third quarter is refund transfer.
So payment processing, Frank, given some of the delays with the IRS that flowed over from March into April.
There will be true-ups of the allowance for tax products throughout the remainder of this season, and we're not expecting those to be material, but we don't know at this point.
But based on what we know today, our primary expectations, refund transfers in the third quarter income will be higher than it was in the same period a year ago.
Correct, in the refund transfer fee income.
We haven't given guidance on that.
It will be a little bit higher than last year.
Thank you.
I'd like to close by thanking all of you for participating in Meta Financial's quarterly investor call.
It's our pleasure to update you on our highly differentiated financial services model, including Meta's annuity-like and high fee-generation business and tax services and payments, combined with our national lending platform and community banking operations.
We appreciate your interest and attention, and hope you have a great evening.
