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Meta Financial Group Inc (CASH 0.67%)
Q4Â 2019 Earnings Call
Oct 24, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Fourth Quarter and Fiscal Year 2019 Investor Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Brittany Elsasser, Director of Investor Relations. Please go ahead.
Brittany Elsasser -- Director of Investor Relations
Thank you, and welcome to Meta's conference call and webcast to discuss our financial results for the fourth quarter and fiscal year ended September 30, 2019, released earlier this afternoon. Additional information, including the earnings release and investor presentation, may be found on our website at metafinancialgroup.com. President and CEO, Brad Hanson; and Executive Vice President and CFO, Glen Herrick, will be sharing some prepared remarks today before we open up the call for questions. Today's call may contain forward-looking statements, including statements related to Meta and its operating subsidiaries, which may generally be identified as describing the company's future plans, goals or objectives. 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 discussed 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 Form 10-K and 10-Q and its other filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. Meta expressly disclaims any intent or obligation to update any forward-looking statements on behalf of the company or its subsidiaries whether as a result of new information, changed circumstances, future events or for any other reason.
At this time, I would now like to turn the call over to President and CEO, Brad Hanson.
Brad Hanson -- President and Chief Executive Officer
Thank you, Brittany. For fiscal 2019, Meta reported GAAP net income of $97 million or $2.49 per diluted share, one of several key accomplishments made during the year. This includes the previously announced executive transition expense of $0.12 per diluted share after-tax incurred in the fiscal second quarter and severance expenses of $0.07 per diluted share after-tax incurred in the fourth fiscal quarter as part of our initiative to optimize organizational resources and improve efficiency ratios. These results reflect the earnings power of the company and the impact our key initiatives are having on the business. Before I turn it over to Glenn for detailed account of the financial results, I'd like to take a bit more time to talk about the progress we are making on our key initiatives, increasing core deposits, improving our earning asset mix, and improving our efficiency ratio.
First, we work to accelerate the positive growth within our payments division by increasing business development efforts and streamlining processes making it easier for us strategic partners to do business with us. We were rewarded by the renewal and extension of existing relationships while also developing several new relationships. During fiscal 2019, average deposits from our Payments division grew 11% over the average for the fiscal year 2018. At the same time, we are positioning ourselves to take advantage of fee income opportunities in areas such as merchant acquiring, ACH origination and our faster Payments initiatives. Second, we are improving our interest earnings asset mix by replacing lower yielding loans and investment securities with higher yielding commercial loans, while maintaining a strong credit profile.
As shown on Slide four of our investor presentation, quarterly average commercial finance loans accounted for 36% of our total earnings assets as of September 30, 2019, up from 23% at September 30, 2018, while investments as of September 30, 2019, made up just 28% of our earning assets compared to 46% at the end of September of last year. As a result, we generated growth in net interest income and expanded our net interest margin 90 basis points to 4.95% for the fourth quarter of fiscal 2019 compared to 4.05% in the comparable prior year quarter. Finally, we made meaningful strides in improving operating efficiencies across our organization as part of these efforts our strategic plan included a comprehensive analysis of our organizational structure and infrastructure. Following our review, we recently made the decision to outsource part of our IT infrastructure.
As our business continues to grow so do the IT needs of our customers, partners and employees. We determined that we need to meet those needs in a quicker and more efficient manner and better align our resources with our strategic growth priorities for transitioning certain nonproprietary commoditized functions to an external IT focused firm. More proprietary strategic functions including IT development will remain in house. We also made a significant organizational changes in the fourth quarter to begin aligning positions and resources with our strategic objectives, while continuing to improve operating efficiencies. As we head into fiscal 2020, we remain focused on optimizing our organization and developing a strong foundation for further growth.
We will continue to focus on allocating the appropriate resources to areas that maximize value for the company and our shareholders over time. Turning to capital management. During the fiscal fourth quarter, we opportunistically bought back approximately 106,000 shares under our existing share repurchase authorization, bringing total repurchases to approximately 1.7 million shares for the fiscal year. We remain opportunistic and will consider repurchase activity within the context of a balanced capital management approach designed to support the company's growth prospects and maximize shareholder value. While fiscal 2019 marked a year of significant change in progress, we believe there is much more to come in furtherance of our key strategic initiatives as we continue to execute on the key pillars of our plan, while providing tailored services for our customers, opportunities for our employees and driving more value for shareholders, and we believe our execution will allow us to deliver significant earnings growth in the year ahead.
Now let me turn it over to Glen Herrick, our CFO, to provide a review of our fourth fiscal quarter and fiscal 2019 financial results.
Glen Herrick -- Chief Financial Officer
Thank you, Brad, and good afternoon, everyone. Today we are pleased to report our results for the fourth fiscal quarter and full fiscal year 2019. On a GAAP basis, we generated net income of $20.2 million for the quarter or $0.53 per diluted share and $97 million or $2.49 per diluted share for the year. Full-year earnings-per-share growth of 49% over the prior year primarily reflected higher net interest income as a result of the Crestmark acquisition and efforts to optimize the mix of our balance sheet. Over the past year, we continued to build out our commercial finance portfolio and work toward improving our funding mix. Furthermore, we originated $104 million in solar leases during the year which related investment tax credits driving higher after-tax income. Though the timing and impact of future investment tax credits are expected to vary from period to period, we expect the tax rate for fiscal year 2020 to settle in the low teens.
Turning to the balance sheet, average interest-earning assets remained relatively flat on a linked quarter basis reflecting efforts to focus on enhancing our earnings asset mix instead of balance sheet growth. During the fourth quarter, we selectively sold lower yielding investment securities reducing our average holdings by 10% on a linked quarter basis and replaced them with higher-yielding loans primarily within our commercial finance portfolio. Total gross loans and leases were $3.65 billion at September 30, again, relatively flat on a linked quarter basis despite the seasonal runoff of tax related loans and the transfer of certain consumer loan products held for sale and up 24% from September 30, 2018. Our commercial finance portfolio was $1.92 billion at September 30, an increase of 4% on a linked quarter basis and 27% year-over-year meaningfully outperforming our initial 15% forecast for loan growth at the time of the merger.
On Slide seven, we provide more color on the components of our commercial finance portfolio, for example, our asset-based lending portfolio average loan size was approximately $775,000 and average yield was 9.67% for the quarter and the approximate net charge-off rate was 60 basis points over the past three years. Turning to the liabilities side of the balance sheet, average payments deposits grew by 11% compared to the same quarter in the prior fiscal year and represented 57% of total average deposits. As a result of the balance sheet remix, we generated $65.6 million of net interest income in the fiscal 2019 fourth quarter, up 35% compared to the fourth quarter of fiscal 2018, while our net interest margin expanded by 90 basis points year-over-year to 4.95% for the fiscal 2019 fourth quarter. Purchase accounting accretion contributed 14 basis points to the net interest margin in the fourth quarter of fiscal 2019, a decrease of 11 basis points from the third quarter, and we expect minimal contribution in fiscal 2020 as adjustments related to the purchase loan and lease portfolio from Crestmark are expected to wind down. Loan yields were 7.51% for the quarter compared to 7.77% for the previous quarter and 7.21% for the fourth quarter of the prior fiscal year.
Purchase accounting accretion added 20 basis points to loan yields in the fourth quarter versus 37 basis points in the third quarter. Meta's provision for loan and lease losses was $4.1 million for the fiscal 2019 fourth quarter compared to $4.7 million for the fourth quarter of the prior fiscal year. The decline in provision was primarily driven by a decrease in loan balances within the consumer loan portfolio as well as the lower provision in the tax services and Community Bank portfolios. Net charge-offs were $18.5 million for the quarter, which included $15.4 million related to charging off the majority of the remaining balances of tax service loans. Our credit metrics remain within our risk tolerance level as depicted on Slide eight of the investor deck. Nonperforming assets represented 91 basis points of the company's total assets at September 30. Of note, foreclosed real estate and repossessed assets represented 48 basis points of the company's nonperforming assets balance at September 30, 2019, which is primarily related to a nonperforming agricultural relationship that we have previously discussed.
We continue to evaluate liquidation options the nonperforming ag relationship as it is actively being marketed for sale. The entries in nonperforming assets compared to the linked quarter was primarily attributable to a couple of relationships in the commercial finance portfolio where occasional fluctuations are common. Noninterest income was $36 million for the fiscal fourth quarter, up $11.4 million from the same quarter of fiscal 2018. For the year, noninterest income totaled $222 million, up $38 million from fiscal 2018 and represented 46% of total revenues. The year-over-year increase was largely driven by increases in rental income, gain on sale of securities, gain on sale of loans and leases, and other income. Turning to noninterest expense, as Brad previously mentioned, we remain focused on positioning the company to maximize profitable growth going forward.
As a result, we incurred $3.5 million of expense during the quarter related to organizational changes, primarily severance to better support growth and drive enhanced operating leverage. Other fiscal year-over-year drivers of noninterest expense included step-ups in compensation, operating lease equipment depreciation, occupancy and equipment and loan and lease expenses primarily related to the Crestmark merger. From a cost efficiency perspective, we are committed to allocating capital and resources to businesses with the most attractive growth and profitability profiles. Finally, let me discuss an update to our previously disclosed earnings per share outlook. For fiscal year 2020, we are tightening our GAAP earnings per share guidance range to be between $3.30 and $3.50 per share. This represents a range of annual earnings-per-share growth from 33% to 41%. The title range reflects better visibility into revenue and expense trajectories, particularly, in light of a meaningfully different interest rate backdrop, since we initially provided an outlook for fiscal 2020 back in September 2018.
With that, I'll turn the conversation back to Brad for closing comments.
Brad Hanson -- President and Chief Executive Officer
Thank you, Glen. To recap, we are pleased with our results for the fourth quarter and fiscal year of 2019. The progress we have made thus far toward our 3 key initiatives and the opportunities in 2020. That completes our prepared remarks. So I'll ask Glen to join me for Q&A. Operator?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Frank Schiraldi with Sandler O'Neill. Your line is open.
Frank Schiraldi -- Sandler O'Neill -- Analyst
To start Just -- I wanted to ask about, well, first on the severance. Can you just talk a little bit about, is this -- you mentioned -- Brad, you mentioned the outsourcing your IT infrastructure, is that where this sort of severance is coming from? Or is this just sort of across positions?
Brad Hanson -- President and Chief Executive Officer
We had an initiative to look at all the positions in the company and make sure that positions were aligned with the needs of our strategic plan going forward and where we found gaps or positions that were not necessary or aligned, we eliminated certain positions and there were several people that were impacted by that process. As far as the IT transition goes, that will happen a little bit later. We -- The people that were in our IT department will be absorbed by the outsourcing company. So they will continue to be working here with us, but for the most part, they were not impacted by the severance.
Frank Schiraldi -- Sandler O'Neill -- Analyst
And is there any detail you can give on as you make that transition, impact to the income statement?
Brad Hanson -- President and Chief Executive Officer
Well, we are looking for a positive impact over time. There is a transition period that will occur and it's primarily in the commodity base parts of the IT infrastructure business.
Frank Schiraldi -- Sandler O'Neill -- Analyst
Okay, and then just on the consumer loan balances, you transferred some to for sale, you mentioned obviously, the held for investment balances sell linked quarter. Just wondering, it didn't look like from your slide that you're further deemphasizing that business, but are you looking to shrink that portfolio? Or keep it stable at these levels?
Brad Hanson -- President and Chief Executive Officer
No, as we have mentioned, we plan to manage the consumer lending business to be within 15% of our earning assets. That's still our plan going forward, but we are taking a very measured approach as we develop those programs and portfolios to make sure that our infrastructure and capacity to manage them appropriately, especially, going into this part of the credit cycle is very sound.
Frank Schiraldi -- Sandler O'Neill -- Analyst
Okay, and then just one more and I'll go back into the queue. Just in terms of, obviously, people talk about we're getting later in the economic cycle here, some players tend to pull back from things like factoring and asset-backed lending at those times. I assume or believe it's not the plan for Crestmark. I'm just wondering if that maybe has created or is creating more opportunity for you and you could maybe just, any sort of color you can give on expected or anticipated growth rate in the Crestmark business from here.
Brad Hanson -- President and Chief Executive Officer
We have been consistent in saying, as we looked at the Crestmark performance over the prior years that their performance is sound during times of downturns as well as up cycles. As we see competition and people stretching in areas to compromise on structure and pricing, we try to remain very disciplined in that and then over time we believe that it will create opportunities for us.
Frank Schiraldi -- Sandler O'Neill -- Analyst
I mean, do you expect that business to continue to grow in the double digits? Or what's a decent growth rate, I guess?
Glen Herrick -- Chief Financial Officer
Frank, this is Glen. Certainly as the denominator becomes larger, we would expect to see some slowing of growth, but we are expecting double-digit growth year-over-year and it could come from different levers there. We have a broad set of products to serve our customers and I would also just -- to add on some color to Brad's comments about the credit cycle, also point you to the -- not all factory and an asset based lending are created equal and while the portfolios that we have are certainly higher return portfolios than our traditional community bank portfolios, they are also not the high cost -- the higher cost factoring or ABL type products, they are a little lower in the credit quality range.
Frank Schiraldi -- Sandler O'Neill -- Analyst
Okay, I'm sorry, you said they are lower in terms of the factoring as well?
Glen Herrick -- Chief Financial Officer
Yes. So, let's say we are -- we've got yields of 9.7% for a portfolio and as you go down in credit quality there may be other players in those that do factoring or ABL that are charging 18% to 20% to 36%. And that's usually the reflection of the credit quality or the credit risk inherent in the customers they are serving. So there's a lot of different flavors of the commercial finance business.
Frank Schiraldi -- Sandler O'Neill -- Analyst
Okay. All right. I appreciate it. Thanks.
Operator
Thank you, and our next question comes from Michael Perito with KBW.
Michael Perito -- KBW -- Analyst
Hey, good afternoon, everybody. And, Mike, I wanted to ask a kind of a big picture question on capital here. Obviously, after the stronger level in the third quarter, the repurchase has slowed a bit in the fourth quarter and the shares have obviously done quite well with bringing your multiple up, but obviously no rush around this because your capital levels are healthy today, but I wouldn't say anything major, but in the comp plans as I look forward, obviously, you guys are motivated to keep your balance sheet under $10 billion, which can somewhat limit the capital you need for balance sheet growth anyway and I'm just wondering how do you guys think about -- as your business matures and becomes more profitable with maybe a lower percentage growth rate, the capital you return to shareholders would seem like the level of buybacks you've done recently isn't sustainable longer-term, just curious how you guys are thinking about that dynamic as you evolve here.
Glen Herrick -- Chief Financial Officer
Well, as we stated, we expect to generate excess capital in 2020 and beyond, and we will certainly consider repurchase activity within the context of overall capital management as the board and management reviews our options.
Michael Perito -- KBW -- Analyst
At any point does the dividend come into play or is that really...
Glen Herrick -- Chief Financial Officer
It's certainly one of the levers -- yes, again, it's certainly one of the levers that the company will consider.
Michael Perito -- KBW -- Analyst
Okay. As we pick out the card fee line on the P side, it was a bit lower than it's been for quite some time now but I know it's an area of focus, just any unusual followups or expectations about that line item as we move forward and what you guys think is realistic, is there any other volatility expected near-term or is there something -- or is there a pipeline for growth. Just curious if you could provide us some more thoughts there.
Brad Hanson -- President and Chief Executive Officer
Want to start?
Glen Herrick -- Chief Financial Officer
Yes, so we're kind of coming off this tough comparison because of the 1 times, that's from comparing FY '19 to fiscal year '18. That fiscal year '20 will be clean comparisons going forward. So we would expect this last quarter to be a low point in card fee income and that we will leg up from here. A number of our large programs are customized price. Depending on where the economics may fall and the characteristics of the deposits, how stable they are, they may be more seasonal. And so that all drives your card fee income. There are some tier pricings for some of our larger customers as they cross thresholds. So card fee income is an important driver of revenue for us, but overall, I would expect it to grow out at a slightly -- I expect it to grow from here, expected to grow at a slightly slower pace than overall deposit growth from the Payments business.
Brad Hanson -- President and Chief Executive Officer
And you might note that some of the card fee income has transferred into the deposit fee line. So you need to take that into account as well and then finally as I've mentioned in my remarks, we are starting to evolve several new lines areas of business in merchant acquiring, our ACH origination which we have been involved in the past and our faster payments initiatives, which will all be more fee income based products. So those over the course of the next year and the year after, will start to have a more meaningful impact.
Michael Perito -- KBW -- Analyst
Helpful. And then just lastly, as we think about obviously, the card issuing you guys have done in the prepaid space, you've done really well. You start to see some of your competitors branch out to non -- like prepaid card program managers like banks like, well, they are not really banks, but partner companies like Chime and things of that nature. I'm just curious if you could kind of flush out a little bit for us, where your heads are at in terms of kind of expanding the ability to white label our card issue, your banking services and what we can kind of expect because it seems like a big priority for the next couple of years what we can kind of expect to see on that front moving forward.
Glen Herrick -- Chief Financial Officer
And that's why you seen some of the fee income, card fee income move into the deposit fee line, because several of our partners and new relationships are involved with those exact type of products you're discussing. We are in support of those kinds of products.
Michael Perito -- KBW -- Analyst
Okay, so I guess more to come in and stay tuned?
Glen Herrick -- Chief Financial Officer
Yes.
Brad Hanson -- President and Chief Executive Officer
Yes. We are certainly involved and as payments evolves and we'll partner with strong relationships where we find them. I would note, Mike, overall our total fee income represented roughly 45%, 46% of overall revenues and we would hope it would stay at that level or be a higher percentage actually in 2020.
Michael Perito -- KBW -- Analyst
Great, well, all helpful. Thank you guys for the color. I appreciate it.
Operator
[Operator Instructions] Our next question comes from Steve Moss with B. Riley FBR. Your line is open.
Steve Moss -- B Riley, FBR -- Analyst
I want to start on the commercial finance yields, they are down about 65 basis points or so quarter-over-quarter. Just wondering what the underlying dynamics were there for the quarter and how we should think about that going forward?
Brad Hanson -- President and Chief Executive Officer
Well, we had a leg down in the purchase accretion, which contributed to that. There are a fair amount of variable rate loan products in that portfolio and then it's just a mix of somewhat of a mix shift, some portfolios in commercial finance are growing faster than others.
Steve Moss -- B Riley, FBR -- Analyst
In terms of the variable rate, roughly what idea percentage is variable within a portfolio. I know the Premium Finances, for example?
Brad Hanson -- President and Chief Executive Officer
It is about 40%, roughly plus or minus. Yes.
Steve Moss -- B Riley, FBR -- Analyst
And then as we think about the margin going forward, I would assume that you're going to pick up in commercial plans growth here in the upcoming quarter. Just kind of thinking about the different drivers you do have obviously, lower rates what you should probably be getting funding benefits. Just any color on the margin would be great.
Brad Hanson -- President and Chief Executive Officer
Yes, we had a step down this quarter in accretion. Next quarter will be our final big step down in accretion. So I would expect margin to increase a little bit. The mix shift will help offset the accretion that will run off and so we should be flat to up a few basis points next quarter and then start legging up through the rest of 2020.
Steve Moss -- B Riley, FBR -- Analyst
Okay, that's helpful. And then on expenses, just wanted to circle back to that. Wondering what is a cleaner run rate going forward with the cost saves that were disclosed here?
Glen Herrick -- Chief Financial Officer
Yes, so I'll get to your question specifically, but as you know, we have a fair amount of seasonality in our run rate's, primarily, taxes and it kicks up here in December and then runs through March, first part of April. So certainly the March quarter is always a higher expense quarter, a lot of variable expenses. Where we're at today? The September quarter is typically a lower expense quarter for us although we did have the one-time expenses. So that said, I would -- I think it's good to build a base from perhaps the September quarter. Again, there are a fair amount of variable expenses so as the business grows there are some variable ones that will grow with it. So I think starting with this September quarter and then building your growth from there.
Steve Moss -- B Riley, FBR -- Analyst
Okay. And lastly just on credit here, the reserve, underlying reservation I think looks like continues to build ex-tax, I would assume you would probably have one last leg up with accretion runoff here this quarter. Just kind of your thoughts around credit costs for the upcoming quarters as the allowance normalizes?
Glen Herrick -- Chief Financial Officer
Yes, we feel, as Brad mentioned, we feel good about our position in our allowance today. I think it'll depend on the mix of our assets, but you can assume that we'll probably end up around 100 basis points or so or a little higher actually, blended allowance, again, depending where the mix comes from and we'll build provision to maintain that level.
Operator
And our next question comes from Daniel Cardenas with Raymond James. Your line is open
Daniel Cardenas -- Raymond James -- Analyst
A Good afternoon, guys, just a couple of follow-up questions on the credit side. Any color you can provide in terms of the performance of your classified assets, say, versus the quarter before the previous quarter?
Brad Hanson -- President and Chief Executive Officer
Yes. Well, we have the one more year. That's still out there that we're actively marketing and hope to make good progress on that here in early fiscal year '20. That actually represents like half of our nonperforming assets. The remainder we feel pretty good about their collateral position, gets a little lumpy just depending on when certain loans might age, especially, in the commercial finance portfolio, but overall, we feel very good about our credit position today.
Daniel Cardenas -- Raymond James -- Analyst
All right. And how about watch list trends and how did those look in the quarter?
Glen Herrick -- Chief Financial Officer
All of our trends in the commercial credit are -- we feel very positive and strong. We don't have any concerns there right now.
Daniel Cardenas -- Raymond James -- Analyst
Okay
Operator
And that concludes today's question-and-answer session. I will now turn the call back to CEO, Brad Hanson.
Brad Hanson -- President and Chief Executive Officer
Thanks. I'd like to close by thanking everybody for participating in Meta's quarterly investor call. We truly appreciate your support, and thank you for taking time to listen to us today. Have a great evening.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Brittany Elsasser -- Director of Investor Relations
Brad Hanson -- President and Chief Executive Officer
Glen Herrick -- Chief Financial Officer
Frank Schiraldi -- Sandler O'Neill -- Analyst
Michael Perito -- KBW -- Analyst
Steve Moss -- B Riley, FBR -- Analyst
Daniel Cardenas -- Raymond James -- Analyst
