Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Second Quarter Fiscal 2018 Investor Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Brittany Elsasser, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Meta Financial's Conference Call and Webcast to discuss our financial results for the fiscal second quarter ended March 31, 2018, released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.com. Company Chairman and CEO, 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 see the company's most recent annual and quarterly reports filed on forms 10-K and 10-Q and its other filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. Meta expressly disclaims any intent or obligation to update any forward-looking statements on behalf of the company or its subsidiaries, whether as a result of new information, changed circumstances or future events or for any other reason. At this time, I would like to turn the call over to CEO, Tyler Haahr.

Thank you, Brittany, 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…

Thank you, Tyler. 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…

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…

I'd like to thank Glen 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.

[Operator Instructions]. And our first question comes from the line of Michael Perito with KBW.

Had, I guess, a couple of questions. One, curious to what -- I was looking back at the tax press release you guys put out. And I believe it said that you guys expected roughly flat pretax income year-on-year. But it seems like now the overall tax -- pretax income, if I'm reading it correctly, will be $1 million to $3 million lower year-on-year. I'm just curious, what kind of changed and what the main drivers of that change are relative to your initial expectations earlier in the season?

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.

Okay. And my follow-up just on the overall expense base. So if you back out the tax-related expenses, refund transfer tax advance which recur annually, but not quarterly of about $10 million or $11 million. I think, it gets you to like $57 million expense run rate. And I'm just curious, I mean, it's a little higher than at least what I was looking for personally. It sounds like a lot of that is future growth investments. And I guess, a lot of the color was helpful from a qualitative perspective. But if we're thinking numbers, how much investments have you guys done? Where does that kind of $57 million ex tax number trend over the back half of the fiscal year? And is there still significant dollars that you expect to flow through the expense line in the coming quarters?

Mike, this is Glen. 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.

Okay. Is it fair to say, I mean, are we at a point right now where, like the -- I know you don't really give guidance on this metric, but were the efficiency ratios probably north of 70% in the fiscal first, third and fourth quarter, and then obviously, much lower in the second, which nets you into kind of the low 60% range. I mean, is that -- I don't know if you guys are comfortable commenting, but is that a reasonable way to think about it in terms of where you guys are with the investments you're [indiscernible] or?

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.

And our next question comes from the line of Frank Schiraldi with Sandler O'Neill.

Just want to follow up on expenses, on Brad's comments of $800 million to $1 million per agreement. I guess, and you've done 3, right? So how much kind of is in run rate in the March quarter? And how much would be sort of additive to the June quarter versus the March quarter?

Frank, this is Glen. Those amounts have -- since those three 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. 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.

Right. Okay. But when you guys talk about $800,000 to $1 million in start-up costs, that's kind of just the immediate increase in what, quarterly expense? And that stays with you?

No. Yes. Okay. That we're trying to call out more the onetime direct cost. Lot of legal investment and platforms that we need or additional development, platforms for those particular program, validations, outside consulting health. So hard direct onetime cost. The ongoing cost will be really driven in large part by headcount and headcount-related costs, such as building an occupancy and equipment to support those staff.

Okay. I'm just trying to get a sense of, if I look at comp of last year in 2017 from the March to June quarter, obviously, you had a big decrease in the comp line of about $5 million or 20% down after tax season. I'm just trying to get a sense of where you think comp costs should migrate to, in the June quarter, kind of before Crestmark even closes.

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.

Right. Okay. So there's still probably an elevated amount of comp in the second quarter that -- seasonal comp in the second quarter?

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.

Okay. Okay. But you can't say whether you would see a similar stepdown that we saw last year in terms of percentage wise?

No.

Okay. And then just the follow-up is on the loan growth. Year-over-year loan growth was, obviously, quite strong and if I just look at the quarter-over-quarter, it was a bit thinner. And just wondering your thoughts on, obviously, we got some things like Crestmark that are coming in that are going to be significant drivers of growth. But where are the community bank and Insurance Premium Finance businesses, if there's been any sort of slow down there? Or where you think those should grow on a normalized basis here?

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 five 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 three -- little over three 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.

[Operator Instructions]. And our next question comes from the line of Steve Moss with B. Riley.

Just following up on loan growth here. As we look at fiscal year 2019 with the acquisition of Crestmark and all the initiatives, kind of where are your thoughts around where loan growth should be for 2019 factoring in Crestmark and so forth?

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 five 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.

Okay. And then just on new money yields here today. Give a little color as to where investment securities purchases are in today's rate environment.

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 two and continue to see opportunity for growth, both because of higher yields overall and because a number of the different -- with [indiscernible] 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.

And our next question comes from the line of Daniel Cardenas with Raymond James.

Could you provide a little bit of color in terms of the loss rates for the tax refund business? Was that pretty much in line with expectations? Or did it perform better than it did a year ago?

Yes. So far, it has been in line with expectations. We have not disclosed specific loss rate numbers. That said, 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 Glen 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.

Okay. Good. Good. And then as I'm thinking about your margin for your core margin in 3Q, excluding Crestmark, I mean, does that kind of return to that's kind of the 330-ish level?

Yes. That's a reasonable expectation. 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.

Okay. And then just one last question here regarding tax rate. How should I be thinking about that for the second half of the year?

It should be as we disclosed when the Tax Act came out, Dan, the 21% for the remaining quarters.

And our next question comes from the line of Frank Schiraldi with Sandler O'Neill.

I just had a follow-up on tax business. You guys talked about pretax income from next quarter being higher year-over-year. And I just wondered if you could -- where would that come in? Is that a reversal of the provisioning as you get some people, get some more refunds back but didn't get refunds yet?

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.

And if I just look at the revenues in the refund transfer business of $5.8 million last year, I guess, you would expect that revenues will be higher as well?

Correct, in the refund transfer fee income.

Okay. I mean, I'm just kind of backing into $1 million to $2 million higher than last year. Am I doing my math right? Or is there variance from that?

We haven't given guidance on that. It will be a little bit higher than last year.

Okay. I mean, you guys talk about you give guidance for income. I was just trying to break it into just revenues, but okay.

And that concludes the question-and-answer session. I will now turn the call back to CEO, Tyler Haahr.

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. Thank you.

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