Pathward Financial - Earnings Call - Q2 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Meta Financial Group Fiscal Year twenty nineteen Second Quarter Investor Conference Call. During the presentation, all participant lines will be in listen only mode. Following the prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Brittany Elsasser, Director of Investor Relations.

Please go ahead.

Speaker 1

Thank you, and welcome to Meta's conference call and webcast to discuss our financial results for the second fiscal quarter ended March 3139 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, Glenn 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, 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 ks 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 like to turn the call over to President and CEO, Brad Hanson.

Speaker 2

Thank you, Britney. We are pleased to report our results for 2019 including GAAP earnings of $32,100,000 or $0.81 per diluted share. As Glenn will discuss further, adjusting for the previously disclosed executive transition agreements costs and impact of the DC Solar leaseback, core EPS came in at $1.1 per diluted share for the fiscal second quarter. Last quarter, we announced a plan to address our top priorities for the company. As a reminder, we identified three initiatives to build upon for our profitable growth and drive additional shareholder value including increasing the percentage of balance sheet funding from core deposits, optimizing the earnings asset mix of the balance sheet and improving operating efficiencies.

In the fiscal second quarter, average non interest bearing deposits grew by 11 over the prior year's quarter average, reflecting targeted efforts to enhance deposit opportunities with our existing payment partners. Next, lower investment portfolio balances resulting from ongoing cash flow from amortizing securities and strategic sales combined with commercial loan growth continue to drive a more potent earning asset mix. Net interest margin expansion this quarter was 46 basis points over the previous quarter to 5.06%. Focusing on our Tax Service division, this year we offered a new refund advance product featuring larger individual loan amounts available with a fixed interest rate in addition to our traditional no fee refund advance product. The new interest bearing refund advance product was well received by consumers and further expanded our tax product solutions while generating incremental interest income.

Turning to refund transfers, while the number of RTs processed trended lower relative to last year, we were able to realize higher margins, primarily due to the mix of business. Overall, our net income contribution from the tax business was up 5% compared to the March. I'd like to take this opportunity to thank our entire team for their efforts in producing another successful tax season for Meta. Now I'd like to spend a few minutes discussing our leadership team. In my first few months as CEO, I have focused on better aligning our existing management structure while also building a broader executive team.

We've been fortunate to strengthen and extend our leadership team by adding seasoned senior leaders in consumer lending, risk management and our governance areas. I expect these new leaders to work alongside an already talented management team leveraging the breadth of our franchise to drive profitable growth and bring great value to our customers and shareholders alike. Now I'd like to turn it over to Glenn Herrick, our CFO, to provide a review of our fiscal twenty nineteen second quarter financial results.

Speaker 3

Thank you, Brad, and good afternoon, everyone. As Brad mentioned, for the second quarter of fiscal twenty nineteen, we reported GAAP net income of $32,100,000 an increase of 2% over the same period in the prior year as earnings per share reached $0.81 per diluted share. Notably, results for the quarter included the previously disclosed executive transition agreement cost of $6,100,000 on a pretax basis and $0.12 per share after tax as well as the $0.17 per share after tax earnings impact related to DC Solar, which I'll discuss in greater detail later. Excluding these charges, adjusted core EPS came in at $1.1 for the quarter. Earnings growth from the prior year quarter was largely driven by an increase in net interest income related to progress in optimizing the asset mix of our balance sheet led by the ongoing growth of the commercial finance loan portfolio.

Gross loans and leases increased $107,000,000 to $3,400,000,000 at March 31, up 3% from December 31. Our national lending portfolios more than quadrupled year over year, led by our acquisition of Crestmark. On a sequential quarter basis, the commercial finance portfolio grew $48,000,000 or 3 percent. Our consumer loan portfolio grew by $32,000,000 driven by $80,000,000 of new originations during the quarter from our two consumer credit programs. There were $42,000,000 of consumer loans held for sale as of March 31.

In an effort to further optimize our earning asset mix, we sold lower yielding investment securities during the quarter, reducing our average holdings by 15% on a linked quarter basis and replaced them with higher yielding loans. On top of that, we grew average non interest bearing deposits by 11% compared to the same quarter in the prior fiscal year with average non interest bearing deposits representing 53% of total average deposits. Meta's net interest margin was 5.06% for the fiscal twenty nineteen second quarter, improving by two forty five basis points from the 2018 and increased 46 basis points on a linked quarter basis, reflecting the ongoing earning asset mix shift as well as the introduction of the interest bearing refund advance product this year. Net purchase accounting accretion contributed 18 basis points to the net interest margin in the second quarter of fiscal twenty nineteen. Loan yields were 8.05% for the quarter compared to 7.69% for the previous quarter and compared to 3.9% for the second quarter of the prior fiscal year.

The new interest bearing refund advance product contributed 10 basis points to the increase in loan yields for the current quarter and these tax loans will run off in the June. In prior years, we generally witnessed a drag on net interest margin in the fiscal second quarter given the influx of no interest refund advance balances. Meta's provision for loan and lease losses was $33,000,000 for the fiscal twenty nineteen second quarter compared to $18,000,000 for the second quarter of the prior fiscal year. The higher provision primarily reflected reserves for our 2019 tax season loans, growth in our commercial finance portfolio, as well as provision expense to maintain appropriate overall allowance levels. Total net charge offs were $5,900,000 for the quarter.

Our credit metrics remain strong and well within our risk tolerance levels as depicted on Slide 11 of the investor deck. Non performing assets represented just 68 basis points of total assets at March 3139. Non interest income was $105,000,000 for the fiscal second quarter, up $7,600,000 from the same quarter of fiscal twenty eighteen. The increase was largely driven by rental income from the Commercial Finance division, other income, deposit fees and gain on sale of loans and leases. For the 2019 tax season, we originated $1,500,000,000 in refund advance loans, which represent a growth of 18% compared to the 2018 tax season.

The growth was largely due to an increase in average loan sizes. Total tax product fees totaled $65,000,000 while tax advance interest income totaled $8,000,000 Slide five of our investor deck includes a breakout of net tax product income. Going forward, we believe that the ongoing growth and diversification of our overall franchise should continue to moderate the earnings volatility associated with tax season. Card fee income increased on a linked quarter basis by 19% to $23,000,000 while we saw a decrease of $3,800,000 compared to the prior fiscal year second quarter. The decrease compared to the prior year quarter is due to the previously mentioned wind down of two non strategic partners in prior years as well as the transition of certain card fees to deposit fees.

We expect the effects of the wind down to continue to be a modest headwind for year over year comparisons through the third quarter of fiscal twenty nineteen. Turning to expenses. The year over year increase in non interest expense primarily reflected higher compensation costs related to the Crestmark merger as well as new hires in the back half of fiscal twenty eighteen in support of Meta's lending and other business initiatives. In addition, compensation expense for the quarter included the previously disclosed executive transition expense of $6,100,000 Other year over year drivers of non interest expense included step ups in operating lease equipment depreciation, occupancy and loan and lease expenses related to the Crestmark acquisition. With much of the detail on DC Solar included in our earnings release, specifically under the heading Overview of the DC Solar Financial Impact, let me touch on just a few key points.

DC Solar is a manufacturer and distributor of mobile solar generators with whom we engaged on sale leaseback transactions. As we previously disclosed, DC Solar along with their principles are subjects of an ongoing federal investigation involving allegations of fraudulent conduct. We believe this was an isolated non credit related event involving a single third party seller and lessee of mobile solar generators. Based on what we know today, including having now physically identified 175 of 176 of the mobile solar generator units we purchased from DC Solar, we concluded that it was appropriate to record an after tax net non cash charge of $6,600,000 to earnings or $0.17 per share and a $2,000,000 increase to provisional goodwill. Finally, let me disclose discuss our previously disclosed earnings per share outlook.

For fiscal twenty nineteen, we are tightening our adjusted earnings per share guidance from between $2.3 and $2.7 per share to between $2.35 and $2.65 per share. Importantly, our adjusted EPS guidance range excludes this quarter's $0.12 of non recurring executive transition agreement costs and $0.17 related to

Speaker 2

the

Speaker 3

DC Solar after tax net non cash charge to earnings. As a result, GAAP earnings per share for the fiscal twenty nineteen is expected to be in the range of $2.6 to $2.36 per diluted share. This compares to earnings per diluted share of $1.67 for fiscal year twenty eighteen, an early demonstration of the potential earnings power of the combined franchise as a result of the Crestmark acquisition. With that, I'll turn the conversation back to Brad for closing comments before we open it up for questions.

Speaker 2

Thanks, Glenn. To recap, we are pleased with our results for the fiscal second quarter and the progress we've made against our three key initiatives of growing our core deposit base, optimizing our earning asset mix and improving our operating efficiencies. Related to our continued commitment to maximize operating efficiencies, we recently implemented a plan to more effectively allocate resources and moderate hiring, which should curb non interest expense growth over time. Going forward, we will continue to evaluate our businesses and initiatives to ensure that we are devoting the appropriate resources to those that drive the most value to the company and shareholders over the long term. That completes our prepared remarks.

So I'll ask Glenn to join me for Q and A. Operator, please open the line for any questions.

Speaker 0

Thank you. And our first question comes from Michael Perito with KBW.

Speaker 4

Hey, good afternoon guys.

Speaker 2

Good afternoon.

Speaker 4

So I do apologize. I got on a little late. It's little hectic over here. I missed some

Speaker 2

of the prepared remarks.

Speaker 4

So I apologize if you answered this already. But the card fee line, I want to start there. The 23,000,000 a little over $23,000,000 how much benefit was in there from the tax business as we try to think about how that line item might map out over the back half of the fiscal year?

Speaker 3

Mike. This is Glenn. It's hard to pinpoint exactly what comes from tax. Before we had a tax payment processing business, there was seasonality in the March certain of our customers have GPR cards, would use them for their tax refunds and get those loaded on there and spend. But we do see the seasonality during the March season, and that's continued on a year over year basis.

Speaker 4

Okay. And then on the expense side, Brad, I mean, mentioned trying to curtail some of the growth a little bit, higher somewhat semi hiring freeze maybe. I guess when we try to think about how that translates to the financials, I mean, guess is there'll be maybe more of an impact to that in fiscal twenty twenty. But I mean, is that something that we should think about as being able to drive the efficiency ratio down year over year 2020 and 2019? I mean is that going to help kind of enable that type of profitability improvement?

Speaker 2

Yes. We believe that will be the case. It's more being disciplined and planning better around our resource needs than it is saying a peer hiring freeze or anything like that. We're just trying to be as thoughtful as we can and make sure that we're hiring what is necessary to manage the business appropriately and effectively, but not just hiring without in the face of growth without any kind of prudent process. And we think that kind of discipline will help to enhance our efficiency ratios going forward.

Speaker 0

Our next question comes from Steve Moss with B. Riley FBR.

Speaker 5

Good afternoon, guys.

Speaker 4

Hi, Steve.

Speaker 6

I guess on the provision expense here for the quarter, if you ignoring the tax piece, was around 10,000,011 million dollars Just kind of wondering, I mean, obviously, you have the purchase accounting running off. And just kind of wondering what that is in isolation. Is this a reasonably good run rate? Or was there anything in terms of just building for the reserve outside of purchase accounting?

Speaker 3

I think overall, it's pretty good run rate as we grow the loan portfolio. Again, with the purchase accounting, we're having to build from scratch for the majority of the commercial finance portfolios as well as albeit a smaller level, the consumer loan portfolios, new originations we're building from scratch. But it's not a bad run rate for the near future.

Speaker 6

Okay. That's helpful. And then just thinking about the margin here going forward, still getting adjusted to the new low the change in the presentation here with the margin going up. Just kind of excluding taxes, if you could help with what your expectations will be for the third quarter?

Speaker 3

Sure. We're obviously very pleased with where our margins at and really part of the thesis, the main thesis of putting these two companies together, Meta and Crestmark. And so we did call out there's 10 basis points from tax advance loans that we did not have a year ago that contributed to the margin, and we would not expect to have that in the non tax quarters going forward. So there's 10 basis points assistance there. Plus we called out the purchase accounting mark accretion of 18 basis points in this quarter.

That will trend down over time as the purchase portfolio amortizes. And so there's some headwinds there. That being said though, as we continue to run down securities portfolio and replace it primarily with commercial finance loans, we'll get some pickup. So kind of back into, you know, a range that way.

Speaker 0

Our next question comes from Frank Schiraldi with Sandler O'Neill.

Speaker 7

Good afternoon. Just on the consumer finance business, just wondering if you could give any updated thoughts on where you would anticipate balances could be by year end 2019?

Speaker 2

Well, we haven't given that specific of guidance, but we have said that we're going to manage that to a maximum of 15% of our balance sheet and we think there's plenty of headroom in those numbers to be able to effectively manage a program, a consumer lending program going forward. So we'll be ramping up to that over the next through the rest of this year and into next year and beyond.

Speaker 5

Okay.

Speaker 7

And then in terms of the tax business, you know, was a good result I thought this year right in the middle of what you guys were looking for. You know, I don't know what your thoughts are for the 2020 season. I mean, you have a range out there for earnings. So I figured I'd ask, is

Speaker 2

it going to be sort

Speaker 7

of a similar expectation now that those businesses maybe have matured a bit, do you think for the 2020 season? Or what do you think about how we should think about modeling that?

Speaker 3

Based on what we know today, Frank, things could change between now and next tax season. But the client the overall taxpayers, especially the primary clientele that we're providing services to, the IRS is reporting that those are flat to up low single digits year over year. We think we have the partners we want today in tax. We're not looking to that to be our high growth area in this company. We like some of the synergies it provides though in the payments and card business.

But again, too early to tell. But as we've said in Brad's strategic and what we've said previously, we're looking for it to be a nice contributor of earnings, but not a large growth area for us, all of which would be factored into our 'twenty guidance.

Speaker 7

Okay. And then just finally on the card fees, just a follow-up there. In terms of seasonality, is March still the strongest quarter for the card fee revenue line?

Speaker 5

Okay.

Speaker 7

Okay thank you.

Speaker 0

Our next question comes from Daniel Cardenas, Raymond James.

Speaker 5

Hey good afternoon guys.

Speaker 2

Hi, Dan.

Speaker 5

Maybe just if you could help a little bit with how I should be thinking about your tax rate on a go forward basis. Obviously, you had a benefit in the quarter. As we look forward, do we kind of return back to kind of a 17%, 18% tax rate?

Speaker 3

So our statutory rate is 21. We have a small and winding down municipal portfolio, muni bond portfolio. And then the tax rate will be impacted by how active alternative energy credits are going forward. What we've guided to based on the pipeline that we see today is we would expect to run-in the mid single digits for tax rate.

Speaker 5

All right, great. And then kind of given a building capital base this quarter, you announced stock repurchase plan which I believe becomes active next week. What's your appetite for stock repurchases given current valuation levels and growth expectations?

Speaker 3

Sure. We continue to manage capital in a shareholder friendly way. We intend to have a strong balance sheet and strong capital positions. And with a focus on maximizing shareholder value. We're certainly we announced the stock buyback authorization as a tool to do that.

And where we see value and where we're comfortable with capital levels, we would expect to have those discussions with

Speaker 2

the Board about the timing and at what levels we would consider buying back shares. And nothing predetermined at this time nor has there been a decision to actually buy back stock or not at this time.

Speaker 5

Okay, fair enough. And then maybe just in terms of streamlining the tax business, have you finished that process? Or is there still some work that needs to be done?

Speaker 2

There is a little bit of work that needs to be done. You you have a finite time to complete a project like that. You can't move back the launch date for tax season. So there were as we came to the end of the cycle last year, we did have to implement a few manual processes and things to work through the season that we plan to close the gap on going forward and continue to gain some more efficiencies through that going forward. But most of the work was done but there still is ongoing work that needs to be completed.

Speaker 5

All right, great. Thank you. I'll step back for now.

Speaker 0

And that concludes the question and answer session. I will now turn the call back to CEO, Brad Hanson.

Speaker 2

Well, you. I'd like to close by thanking everyone for participating in Meta's quarterly investor call. We truly appreciate your support and thank you for the time you took to listen to us today. Have a great evening.

Speaker 0

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.