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Edited Transcript of CASH earnings conference call or presentation 30-Jan-18 10:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Meta Financial Group Inc Earnings Call

STORM LAKE Feb 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Meta Financial Group Inc earnings conference call or presentation Tuesday, January 30, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Hanson

Meta Financial Group, Inc. - President, MFG, MetaBank, and MPS

* Brittany Elsasser

Meta Financial Group, Inc. - Director, IR

* Glen William Herrick

Meta Financial Group, Inc. - Executive VP, Secretary & CFO

* J. Tyler Haahr

Meta Financial Group, Inc. - Chairman of the Board & CEO

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Conference Call Participants

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* Frank Schiraldi

Sandler O'Neill & Partners - Analyst

* Joshua James Elving

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Michael Anthony Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group First Fiscal 2018 Investor Conference Call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brittany Elsasser, Director of Investor Relations. Please go ahead.

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Brittany Elsasser, Meta Financial Group, Inc. - Director, IR [2]

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Thank you and welcome to Meta Financial's conference call and webcast to discuss our financial results for the fiscal 2018 first quarter ended December 31, 2017, which were released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at www.metafinancialgroup.com.

Company Chairman and CEO, J. Tyler Haahr; President, 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 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 view 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 statement on behalf of the company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.

With those formalities out of the way, I would like to now turn the conference over to CEO, Tyler Haahr.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [3]

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Thanks, Brittany. I'd like to welcome everyone to our first ever quarterly investor call and webcast. Over the last few months we'd informally asked investors and analysts about initiating a call and received very positive feedback. As Meta continues to grow, we believe introducing a quarterly call is another enhancement to our corporate communications, consistent with our desire to be highly accessible and transparent with the company's owners.

With this call, we aim to provide shareholders with an opportunity to hear from us on key items from our results which warrant particular attention. Even more importantly, we want to provide the investment community with a chance to ask questions in this public forum and for us to give you timely information and insights on our performance and prospects. Before we open up the call to Q&A, I do want to share a few thoughts with you on the business, and I'll ask Brad and Glen to do the same.

I know many of you saw our January 9 announcement of our all-stock transaction to acquire the national commercial lender, Crestmark Bank. This acquisition will further diversify Meta's national lending platform, immediately adding new pipeline for AFS/IBEX, Meta's commercial insurance premium finance division and provide opportunities for other synergies.

Crestmark has been a very profitable operator, posting impressive loan growth rates of nearly 19% on a compound basis over the last five years, despite the reliance on wholesale funding and capital limitations that constrain growth. By combining Meta's low-cost deposits, higher capital and legal lending limits with Crestmark's loan platform, we believe there exists significant financial upside in addition to the deal's high strategic value.

The transaction also delivers on Meta's goal of growth and innovation through diversification. In addition, the deal supports our strategy to pursue higher-margin, risk-appropriate opportunities while deemphasizing certain lower-margin deposit relationships. We also expect this acquisition to moderate Meta's inherent earnings seasonality, which we believe shareholders will value.

We believe this will be a transformational transaction with relatively low execution risk. It's expected to be immediately accretive to 2018 earnings, excluding merger-related expenses, and we expect it to be approximately 10% earnings per share accretive in the fiscal 2019 year. Even with only 6% cost savings and a 15% loan growth rate for Crestmark assumed.

We believe the deal was priced reasonably at 7.2 times projected 2019 earnings, with an earnback of tangible book value dilution of about 2.2 years. We've had the opportunity to spend extensive time with Crestmark's management team and we continue to be very impressed with founder and CEO, Dave Tull; President, Mick Goik; and their entire team of talented executives who have an average tenure of 13 years with the company. We'll continue to benefit from their leadership after the transaction closes.

When the transaction is complete, Dave will be joining our board, along with a second mutually agreed upon director. In addition, Mick will add leadership strength to our company as President of the Crestmark division and an EVP of MetaBank. More broadly, Meta and Crestmark's joint integration teams have been working well together and we continue to expect to close the transaction during the second calendar quarter of 2018. We look forward to progressing towards a successful close and seamless integration in the coming months.

Even as we work to bring our latest acquisition together, we maintained our focus on operational excellence and other profitable growth opportunities at Meta. As you can see in the quarterly results reported this afternoon, our highly differentiated business model continued to see very strong performance across all of our divisions. Meta's fee-generation business, prepaid and tax services are typically characterized by 1 or more of 4 key elements.

First, Meta provides unique solutions designed to address unmet market needs. Second, these businesses have high barriers to entry due to start-up costs, including compliance and technology infrastructure buildouts among other things, and Meta has multiyear agreements and very long relationships with many big partners in these businesses.

Third, these businesses contribute to Meta's success in pushing non-interest income to levels among industry leaders, representing 65% of revenue in fiscal 2017. And fourth, these businesses are the driver behind Meta's overall low cost of deposits, which in the first quarter averaged 24 basis points or just 7 basis points excluding wholesale deposits. We believe that is a key competitive advantage and will become an even bigger advantage as rates continue to rise.

Prepaid solutions and tax services exemplify our proven ability to integrate, pilot, scale and then to continue profitably grow these outsized fee-generation businesses. As most of you know, one of the pioneers of the prepaid and tax payments industry is MetaBank's President, Brad Hanson. He joined our company in 2004 and has over 25 years of experience in financial services, including numerous positions in banking, card industry and technology. He has played a significant role in the development of the prepaid card industry and has led Meta to an industry-leading position.

Brad not only has a firm grasp of Meta's entire operation and opportunities, but he also has an exceptional perspective on payments and tax service industries and is among the industry's most recognized leaders and innovators. With that in mind, I'd asked him to share some of his thoughts with you today. And it's my pleasure to introduce you now to Brad Hanson.

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Brad Hanson, Meta Financial Group, Inc. - President, MFG, MetaBank, and MPS [4]

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Thank you, Tyler. We could spend a lot of time reviewing MetaBank's prepaid solutions and tax service businesses in detail, but I'd like to focus my remarks on some timely topics. Let's start with a brief update of our 2018 tax filing season.

We believe that we have the right infrastructure in place and are well-positioned. Things are going well in the early days of the filing season, as expected. We also believe we're well prepared to deliver best-in-class execution thanks to the hard work of our multiple tax partners in collaboration with the MetaBank team. Accordingly, we remain comfortable with the tax season guidance we shared in October.

During the 2018 tax season compared to 2017, we continue to expect modest growth in contribution from refund transfer income, as well as nearly the same contribution from refund advance loans. While we also expect to originate over $1 billion in refund advance loans during the 2018 tax season, we expect to hold all of these loans on our balance sheet.

We're also very excited about some innovative programs created through collaboration with our tax partners. For example, earlier this month our partner, Credit Karma Tax, launched an early-bird advance program, the first entirely online refund advance program of its kind. I want to note that Credit Karma's program was included in our assumptions when we provided our tax season guidance last fall.

We also wanted to take this opportunity to share our thinking on how December's Tax Cuts and Jobs Act might impact our tax service business.

In short, we believe the changes in federal tax law will be neutral to slightly positive for Meta's refund advance loan and refund transfer programs. Demand for these products is largely driven by individual tax payers who qualify for the earned income tax credit.

Under the new tax law, the earned income tax credit remains largely unchanged. In fact, it's expected that some of these tax payers should see an increase in their expected tax refund during the 2019 tax season. Again, this should be neutral to slightly positive related to our previously anticipated volumes this year and going forward.

We believe that our collaboration with multiple tax partners, the buildout of our infrastructure, and our plans for execution in 2018 are setting the table for an accelerated tax service growth in 2019. As consumers become increasingly aware of the availability and benefits of these programs, we continue to believe that this space has significant upside for MetaBank.

Turning to our consumer credit, Meta expects to announce exciting new products with strategic partners in 2018. While our resources have been prioritized to focus on execution and delivery of our interest-free tax advance product for the current tax season, we have been laying the groundwork through our SCS acquisition to deliver several new consumer loan programs during fiscal 2018 and expect them to be significant contributors to earnings in 2019 and beyond.

As in our prepaid business, we are developing strategic partnerships to accelerate delivery and adoption of these new products with national companies such as Liberty Lending. These partners will provide marketing and servicing support, while Meta will provide underwriting and maintain loan balances. We are pleased with the development of these programs and continue to strive to deliver product offerings to consumers that provide financial inclusion for everyone.

Let me stop there, and I'd like to turn the call over to Glen Herrick, our CFO, to provide a brief review of our consolidated financials for the most recently completed quarter.

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Glen William Herrick, Meta Financial Group, Inc. - Executive VP, Secretary & CFO [5]

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Thank you, Brad, and good afternoon, everyone. For those of you who have followed Meta for some time, you know that many of our businesses are seasonal. But as Tyler mentioned, the Crestmark transaction is expected to significantly reduce our earnings seasonality.

Turning to fiscal 2018, we believe that all of our businesses are enjoying an outstanding start and that should be evident in our consolidated financial results. We reported record first quarter GAAP net income of $4.7 million, a nearly fourfold increase from the same period last year. On a per share basis, we grew earnings to $0.48 in the first quarter of 2018, a $0.34 year-over-year increase.

This earnings growth is even more impressive when considering that reported earnings included the impact of $3.6 million in additional income tax expense related to passage of the Tax Cuts and Jobs Act, as previously disclosed; $1.3 million of acquisition expenses in the quarter; and a $1 million loss on sale of investments, which were replaced with the $73 million of seasoned floating rate private student loans early in the first quarter of fiscal 2018 which carried an earnback at just 4 months.

The previously disclosed student loan portfolio purchase and our organic loan growth, supported by our investment portfolio, contributed to net interest income growth. Net interest income was $26.2 million in the first quarter of 2018, a 32% increase over the same period last year. Total loans of $1.5 billion at the end of the first quarter reflected growth of 36% from 1 year prior. Excluding purchase portfolios, loan growth of 30% was driven particularly by the commercial insurance premium finance portfolio at 31% year-over-year and community bank portfolio at 29% year-over year.

Average cost of funds increased to 51 basis points in Meta's first quarter. The increase was largely due to the addition of wholesale deposits and increased overnight borrowing rates and higher average overall funding balances to support the 2018 tax season, as we prepare to hold more tax loans this year. With that said, as expected, we have been able to more efficiently acquire the wholesale funding needed to fund our tax loans compared to last year.

Despite this year-over-year increase in cost of funds, we continue to believe our growing low cost deposit base is a differentiator in the banking space, particularly in a rising rate environment. Our overall cost of deposits was just 24 basis points in the first quarter and just 7 basis points when excluding wholesale deposits.

We reported a tax equivalent net interest margin or NIM of 3.06% in the recent quarter, up 16 basis points from the year-ago quarter. However, the growth in NIM was tempered by 20 basis points' impact due to December's Tax Act on our municipal securities portfolio and also by wholesale funding. As the 2018 tax season progresses and has a material effect on NIM in subsequent quarters, we plan to disclose margin with and without the impact of tax loans and wholesale funding, similar to what we provided last year.

Turning to non-interest income which grew by 51% to $29.3 million, our largest drivers continue to be card and tax product fees. Card fee income increased 37% to more than $25 million in the first quarter, compared to the same period last year. Similar to the previous quarter, a good portion of the $6.8 million increase was due to residual fees related to the wind-down of two non-strategic programs.

In 2018 we expect total card fee income to be the range of $95 million to $101 million, and total card processing expense to be in the range of $23 million to $27 million.

In tax services the 2018 filing season is off to a good start with $2.1 million in fees in the first quarter. The 242% increase over the first quarter of 2017 was primarily due to the volume of preseason tax advance loans originated during the first quarter of fiscal 2018. All of these loans are also being held as opposed to the previous year when many of these loans were sold, contributing to fee growth.

Combined with substantial growth in earning assets and interest income, the company grew total revenue to $55.5 million in the first quarter, up 42% compared to the same period the year prior.

A quick note on first quarter 2018 non-interest expense, we'd emphasize that most of the $7.3 million increase from the year-ago period is attributed to higher compensation expense. This reflects the cost of new team members with the EPS Financial and Specialty Consumer Services businesses we acquired partway through the first quarter of fiscal 2017, as well as costs to support continued growth. The integration of EPS and SCS permitted the company to gain scale in the tax services divisions, and we expect to gain further efficiencies during fiscal 2018.

Turning to credit, you saw that our asset quality metrics remain very strong and further improved in the first quarter of 2018 compared to the fourth quarter of 2017. Non-performing assets represented just 61 basis points of Meta's $5.4 billion in total assets at the end of first quarter fiscal 2018, declining 11 basis points from the end of fiscal 2017. This relates primarily to the payoff of a $7 million non-performing ag loan relationship during the quarter, in which we received all principal, interest, legal, and other expenses.

NPAs at the end of the first quarter represented a 56 basis point increase from 1 year prior, as a percentage of total assets. This was primarily due to a large well-collateralized ag loan relationship moving to non-performing status in the third quarter of fiscal 2017. On January 2, 2018, a deed in lieu of foreclosure was executed and we assumed ownership of the properties, moving these particular ag loans into foreclosed real estate and repossessed assets.

Today we believe we have minimal loss exposure with respect to this relationship, given the underlying value of the land collateralized in the relationship which will now be marketed for sale. We expect to work with the borrower to sell these properties and to receive principal, note-rate interest, and related fees and expenses. We would note that ag loans represent only 1.59% of total assets. Overall we are comfortable with our asset quality metrics which remain well within our risk tolerance levels.

We are very pleased with the start we are getting off to in fiscal 2018. Meta's annuity-like fee-generation businesses combined with our national lending platform and community banking operations, continue to deliver very strong organic growth and profitability. Add to that the financial and strategic benefits to be presented by our accretive acquisition of Crestmark, and we are very excited about the growth potential of our highly differentiated financial services model in 2018 and beyond.

With that, I'll turn the conversation back to Tyler now for any closing comments before we open it up for questions.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [6]

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I'd like to thank Glen and Brad for their comments and participation today. These are just two of the outstanding leaders we have on our deep bench at Meta, and I look forward to giving our shareholders a better appreciation for the quality of our talented team through these calls in the quarters ahead.

That completes our prepared remarks. So I'll ask Brad and Glen to join me for Q&A. Operator, could you please open up the line for any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [2]

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Good quarter here, I guess I want to start with the strategic initiatives that you mentioned. Does the announcement last week regarding with Liberty, is that kind of the format we should look for in terms of additional commitments in the future, like a 3-year term, billion-dollar type commitment?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [3]

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Yes, so I guess what I would say is each of the individual deals will have different sizes and scope to them. But we have talked about material agreements with strategic partners. So we do think there's opportunities for significant growth in the credit area.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay, and will they be consumer secured or unsecured? Kind of, how should we think about the different offerings?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [5]

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Yes, I guess I don't want to get into too much specifics on any individual agreement that we haven't announced yet. But again, I think it will be consumer related in the customer demographic that frankly we've spent a lot of time and have a lot of knowledge with respect to that group.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [6]

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Okay, that's helpful. And then with regard to the residual wind-down of the two non-strategic programs, is that largely over at this point here with this quarter? Or is there a little bit more left?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [7]

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I would say that the majority of that is already included. I would add I guess a little bit. When you look at the wind-downs, we wind down programs all along. To some degree it's similar to what happens with loan portfolios. You have payoffs. You roll out of some deals, maybe get some prepayment penalties on deals. And that creates some lumpy income, a little bit.

With that said, we've continued to grow deposits and fee income even as we've rolled off or wound down some partners. And again, I would expect us to continue to grow. But there's always going to be a little bit of lumpiness for that reason, just like I said, just like you look at a normal bank's loan portfolio. You have some prepayment penalties that might kind of pop up.

Again, we'll have some income that comes in in a little lumpier manner as we're winding down some programs. We did call it out, because the dollar amounts involved were a little larger than normal when we wind some programs down.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [8]

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Right, and then my other question here, just as it relates to the margin a little bit, wondering what are your thoughts on the March quarter's margin excluding the impact of the tax refund.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [9]

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Yes, I think we continue to have upside to our margin opportunities, again between the student loans, frankly even more so when we get the Crestmark acquisition done. The majority of their loans are either variable rate or very short-term in nature. You add the growth with AFS, which again are roughly 5-month average life loans, some variable rate securities we've added as well.

So to me as long rates keep moving up, that's a good thing for us and gives us upside to margin. Again, excluding, as you said, the wholesale funding and the fee-based instead of interest-based income that we earn on the tax loans.

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Operator [10]

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And our next question will come from the line of Michael Perito with KBW.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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A few different areas I want to touch on, I guess first in the prepared remarks you guys mentioned about kind of driving efficiencies next year, I guess. Is that to be kind of construed as you guys think you could kind of keep driving down the efficiency ratio from here and generating positive operating leverage?

And I guess just a quick follow-up I'll throw on, I mean can you guys maybe give us kind of a core starting point as you look at your fiscal 2017 that you think you can improve upon?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [12]

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So again, the way I would answer the question is based on the existing businesses as we're doing it, we talked about with tax. Now that we've got EPS and Refund Advantage and SCS kind of all integrated, we do expect to see some improved efficiencies from our ongoing banking and payment systems as well.

Looking at the credit opportunities, there are start-up expenses associated with that. In addition, when you start booking loans, there's some cost of acquisition. And then you've got to take the provision expense all up front. So again, there will be some start-up costs related to some new things we're doing. We've talked about Liberty Lending as one. But again, there's other initiatives, both in the credit space and other places.

Again, as is clear with our other businesses as well, we do have some start-up expenses and some ramp-up before we really start to scale and see the efficiencies. So I would rather break it out and say, the businesses that we have that are ongoing, yes, I expect to see increasing improvement in the efficiencies.

With respect to the other things, we will have some other new businesses that are starting and have some associated start-up costs. So with that said, I'm really not prepared to give you a core starting point for the efficiency numbers.

As we get further into some of these new initiatives, we'll try to provide some additional guidance on how quickly things will ramp. But again, especially with the credit initiatives, we're really looking at that as being a significant opportunity for increased earnings in '19 more so than in '18 between the start-up costs and the up-front provisioning.

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Glen William Herrick, Meta Financial Group, Inc. - Executive VP, Secretary & CFO [13]

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And Mike, this is Glen. I would just add, we are focused very heavily on creating positive operating leverage at each of our businesses. I would say all of them though have different operating efficiencies inherent in their business.

Payments is different from tax, different from consumer lending, which would be different from our community bank or Crestmark's commercial lending business. So at those business levels, we're certainly looking to generate positive operating leverage and improve efficiencies.

Also all the businesses are at different maturity points in their cycles from -- we kind of have a layering in of more mature businesses like our community bank, even though it's grown very quickly, still growing well; to those that are starting up, as in our consumer lending initiative.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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And then maybe switching over, as you guys kind of think about incremental investment portfolio purchases, how does tax reform-- because clearly the tax equivalent yield on some of this municipal stuff you guys have been doing would theoretically go down.

But I'm just curious how it still kind of looks internally from a profitability standpoint and how you guys kind of foresee incremental securities purchases trending now that tax reform has been passed.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [15]

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Yes, that's a great question. The municipal portfolio still provides us significantly better yields than what we could get in other investments, not as good as what it was before the tax act. On top of that, that's part of why we're doing the things we're doing on the lending side.

By replacing securities, especially securities growth with what we think will be a great loan generator with Crestmark in addition to what's been strong loan growth, both in the retail community bank and at AFS. And now you add in the consumer credit products that we're having, over time I would look for a de-emphasis of the securities portfolio (inaudible).

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [16]

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And then I had a couple questions on the Liberty Lending announcement. I guess first off, were they doing this relationship with a different bank previously? And was there any type of loss history that you could maybe share with us with their consumer book?

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Brad Hanson, Meta Financial Group, Inc. - President, MFG, MetaBank, and MPS [17]

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I can take that. Yes, there was another bank that has -- so there is some experience out there. We are not in a position to divulge the numbers right now of what that was. But we do have some insight into the performance and expectations within our modeling.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [18]

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Okay, so maybe I'll ask the question a bit more broadly. I mean I think over the last few years where the emphasis was more on fee income, the credit performance was pretty stable and the loan portfolio as a percentage of the balance sheet was much smaller.

I mean it seems like pro forma for the Crestmark deal and this new relationship, obviously that percentage is rising, while definitely off of low numbers. I think the overall credit risk of the franchise is certainly going to be a little higher.

Can you talk about maybe kind of your credit outlook and comfort with the rise in credit risk in that and the nature of some of these newer relationships and the expanding loan book related to the whole balance sheet?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [19]

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Yes, I'm going to start with Crestmark. Because I think your assumption is not necessarily true. The yields are higher on the Crestmark loans. They do a lot of small business related lending with the average ticket size of about $180-some thousand.

So if you look at the types of lending they do with receivables, leasing, asset-based lending; there's a lot more administrative cost associated with those loans. So part of the rate is not because they're dramatically higher in credit risk. But there is significantly higher administrative costs. And that's why if you look at their overall performance, their average loss rate has been barely over 50 basis points over the last 5 years.

So again, I think one of the things that we were most impressed with, with Crestmark is their -- I mean these are credit people. They know credit. They know underwriting. They know administration. They know how to properly securitize their collateral to make sure that they don't have those kind of losses.

So if you look at their earnings over the last few years, I mean basically you're talking about a 2% ROA and a 20% ROE bank. So again, they understand credit and we're very comfortable. Frankly, we've looked at a lot of whether it be bank or finance company opportunities. And this one, the team, we were definitely impressed with.

And that's why, again, the team was a big part of the deal. It's not just buying that portfolio or the set-up that they have. But we want the people, because of the expertise they bring.

With respect to the consumer credit, again, there is history associated with that. We will be implementing our own underwriting as well. But there is history and background, as Brad said. And this is also a demographic that we've spent a lot of time and have a lot of background.

And as a reminder, when we bought SCS, we talked about they had the best-in-class underwriting model for tax. But we also talked a lot about their underwriting model and their platform for consumer credit, relationships they had throughout the country and our ability to really grow that business.

So while with a number of the tax partnerships and the acquisitions we've done over the last couple of years, frankly it took us a little longer to roll out those credit relationships and products than what we would have planned a year or two ago when we started talking about it. We think we're well-positioned with very seasoned teams leading those initiatives with very solid underwriting models, and we're comfortable with the credit.

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Operator [20]

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(Operator Instructions) Our next question will come from the line Frank Schiraldi with Sandler O'Neill.

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Frank Schiraldi, Sandler O'Neill & Partners - Analyst [21]

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Just a couple of questions I had left, first on the -- it looked like a pretty strong start to tax season. I know you guys reiterated the numbers you put out in October.

Just wondering as we think about that guidance, obviously there was a greater drag in the first quarter this year from EPS and SCS because you had a full quarter of those. So is that greater drag taken into account when you talk about what pretax earnings should look like in [2018] from Refund Advance and refund transfer?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [22]

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I'm not sure I'm clear on your question. Could you repeat it or rephrase it?

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Frank Schiraldi, Sandler O'Neill & Partners - Analyst [23]

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Yes, so you're going to have more expenses this year because you got a full quarter of 1Q expenses related to SCS and EPS. So all else equal that would reduce pretax earnings year-over-year. And just wondering if we should -- if that greater drag is taken into account in your guidance.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [24]

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Yes, it's taken in. So yes, I mean when we talked about making the same -- at least the same on the refund advances and a little more on the refund transfers that was all inclusive.

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Frank Schiraldi, Sandler O'Neill & Partners - Analyst [25]

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And then just wondered if you could, just back to the prepaid or the card fee income. Obviously it was tremendous again this quarter and you talked about why. And you gave full year guidance.

It seems that to get to that full year guidance after the first quarter that you had, we should expect to see the growth rate year-over-year fall from levels we saw last year. So just wondering if that's more of a pull-forward in terms of what we got with 1Q earnings. Or maybe you could just talk about what a good normalized expectation is of the prepaid business and fee income.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [26]

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Yes, again, we had a couple of those lumpy things in last year, which affects then the year-over-year growth. So that would be one comment. Another comment, again, we've made a couple of different times is we're trying to take advantage of the best opportunities with higher margin business.

So there could be some opportunities out there for lower-margin business in the prepaid space that we would rather pass on, so we can do more things in the credit which will add more income overall. Again, that doesn't mean we won't be growing deposits or we won't be growing fee income. But again, we're trying to make sure that we prioritize the opportunities that come to us.

So with the Crestmark acquisition, even though again we're assuming low cost saves and still have an accretive deal; we want to make sure that we have the right discipline and proper approach to make sure that integration goes well and Crestmark's ready to hit the ground running. Again, we've talked about other potential strategic credit announcement that would be coming.

So again, we don't want to bite off more than we can chew. So if there are better opportunities, again for the same reason last year, frankly we were working on some credit opportunities last year. And we looked at EPS and SCS acquisitions and some other partnerships as things we just had to do at that time.

So again, it really becomes a prioritization thing. So again, I don't view it as a negative. I just view it as us taking advantage of what we think the best opportunities are.

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Frank Schiraldi, Sandler O'Neill & Partners - Analyst [27]

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Okay, and then as you think about deposit growth, I think it was 15% year-over-year; is that something that was also impacted by the residual in the card fees line item? Or is there any sort of level you can share that you think is a decent run rate on that front?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [28]

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Yes, I would say the deposit growth was not materially affected by those called-out programs. So it was the fee income that got the bump, not the deposits.

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Frank Schiraldi, Sandler O'Neill & Partners - Analyst [29]

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Got you, and then finally just I might have missed this. I know you talked a bit about Liberty and credit sponsorship in general. But did you say whether -- I know there are start-up costs involved. Is that material that relationship in particular at Liberty, is that material in either direction for 2018 or is that more of a 2019 impact?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [30]

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Yes, so I'll start off with one thing. It's not sponsorship. So I need to repeat that. It is not credit sponsorship. We will be underwriting. We will be holding the loans. We are originating the loans. This is a Meta credit program. It is not a sponsorship or rent-a-BIN thing.

So with that said, yes, we don't expect any material impact to earnings in 2018 off the credit programs, give or take a little income or a little loss, but nothing that I would frankly change your numbers in '18. But we do expect to see some significant impact going into '19 once kind of that start-up phase is done.

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Operator [31]

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And our last question will come from the line of Josh Elving with Lake Street.

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Joshua James Elving, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [32]

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So I too had a couple of questions on Liberty. And I know you've kind of provided a little bit of color on the size or the amount of loans you might add to the balance sheet over the course of the next 3 years. Should we think about that as kind of a ratable ramp over the 3-year period?

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Glen William Herrick, Meta Financial Group, Inc. - Executive VP, Secretary & CFO [33]

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Well, there will certainly be some sort of curve to it. But yes, and again, those are origination volumes. It's obviously not going to equal 1-for-1 in outstandings by the end of the 3-year period for the Liberty Lending relationship.

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Joshua James Elving, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [34]

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And have you provided any color around the yield profile of those loans?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [35]

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No, we haven't. Like I said, we'll continue to provide more guidance as we roll things out.

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Joshua James Elving, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [36]

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Okay, and then I guess just in thinking about the Crestmark acquisition and this partnership and maybe from a high-level perspective, could you just talk a little bit about your outlook for what you want to do with the balance sheet over the next several years?

I know that there are advantages to remaining below $10 billion in assets. You obviously have the opportunity to grow fairly dramatically with the acquisition and with Liberty and with some of the other potential partnerships you've talked about.

Can you maybe talk a little bit about your outlook for growth over the next couple years of the balance sheet, as well as maybe the potential to replace some lower-yielding assets?

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [37]

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Yes, so actually we have even more flexibility after the Crestmark transaction. Again, basically 100% of their funding is wholesale deposits. So to the extent we wanted to, we could replace those wholesale deposits and either sell or let securities roll off. Securities roll-off can replace loans.

On top of that, virtually all of the loans that Crestmark would originate, if we wanted to, we could securitize them and sell them, frankly in addition to some of the other loans that we have on the books. So we have a lot of flexibility on the balance sheet side or on the asset side.

And again, with the wholesale funding that we do incrementally, again, there's a lot of flexibility. Again, we could shrink the balance sheet well over $1 billion overnight if we wanted to. So we are managing at this point to stay under the $10 billion. And we think we have a lot of flexibility to do that. So I think that answers the question.

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Joshua James Elving, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [38]

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Yes, I guess just maybe one last question; obviously I'm a little bit new to this story and I'm using a GAAP number. I've seen some numbers out there on an adjusted basis. I know you've offered up a couple of data points that would allow for an adjusted EPS build. Have you thought more about making that a formality? Just curious to hear your thoughts.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [39]

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Yes, we're continuing to add additional information into our earnings announcement. We'll continue to provide more guidance each time we do an earnings call.

Back to the discussion on the lumpiness of some of the card fee income. When we are doing big agreements and big partnerships, how quickly something ramps as we work with our partners and their budgeting and expectations. We're going to continue to provide as much guidance or direction, ranges, things like that as we can. But at this point, we don't have a plan to provide specific earnings guidance on a go-forward basis.

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Operator [40]

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Thank you. And that concludes the question-and-answer session. I will now turn the call back to our presenters.

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J. Tyler Haahr, Meta Financial Group, Inc. - Chairman of the Board & CEO [41]

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Thank you, everyone. I'd like to close by thanking all of you for participating in Meta Financial's inaugural quarterly investor call. We recognize this is a very busy time for all of you and hope you found this session to be of value. If you have any feedback or suggestions on today's call, don't hesitate to let Glen, Brittany or me know. Thanks again and have a great evening. Thanks, everyone.

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Operator [42]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.