Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the met a financial group fourth quarter fiscal year 2019, Investor Conference call. During the presentation. All participants will be in listen only mode. Following their prepared remarks, we'll conduct a question and answer session. As a reminder, this conference call is being.

Thank you and welcome to minutes Conference call My past he discusses our financial results for the fourth quarter and go. Your ended September Thirtyth 2018, released earlier. This afternoon additional information, including the earnings release and Investor presentation may be found on our website at <unk> financial group Dot com.

President and CEO , Brad Hansen, and executive Vice President CFO , Glenn hearing, we'll 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 metal and an operating subsidiaries, which me generally be identified as describing the company's future plan goal or just give me.

We caution you not to place undue reliance on these forward looking statement, 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 provision of the private Securities Litigation Reform Act of 1995 for further information about the factors that could affect the minutes bigger result, we see the company's most recent annual and quarterly report filed on Form 10-K , and 10-Q and other.

Our filings with the Securities and Exchange Commission.

Well, we're looking statements speak only as of today on which they are I mean mehta expressly disclaims any intention or obligation to update any forward looking statement on behalf of the company or subsidiary whether as a result of new information changed circumstances future events or for any other reason.

At the time I would now like to turn the call over to President and CEO Brad Hansen.

Thank you Britney.

For fiscal 2019 met a 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 12 cents per diluted share after tax incurred in the fiscal second quarter and severance expenses of seven cents per diluted share after tax incurred in the fourth fiscal quarter as part of our initiative to us.

Demise, 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 deposit growth within our payments division by increasing business development efforts and streamlining processes, making it easier for our 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.

That's the same time, we're positioning ourselves to take advantage of fee income opportunities in areas, such as merchant acquiring a C H origination and our faster payments initiatives.

Second.

We are improving our interest, earning asset mix by replacing lower yielding loans and investments 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 Thirtyth 2019 up from 23% at September 32018, well investments as of September .

32019 made up just 28% of our earning assets compared to 46% at the end of September of last year.

The 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 4.5% in the comparable prior year quarter.

Finally, we made meaningful strides in an 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 IP infrastructure.

As our business continues to grow so do the I.T. 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 non.

Terry Commoditize functions.

To an external IP focus from.

More proprietary strategic functions, including I.T. 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 overtime.

Turning to capital management during the fiscal fourth quarter, we Opportunistically bought back approximately 106000 shares under our existing share repurchase authorization, bringing total repurchases to approximately 1.7 million shares for the fiscal year.

We remain opportunistic and we'll 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.

I 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 exit.

Fusion will allow us to deliver significant earnings growth and the year ahead now let me turn it over to Glenn Herrick, our CFO to provide a review of our fourth fiscal quarter and fiscal 2019 financial results.

Thank you Brad and good afternoon, everyone. Today, we're 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 53 cents 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 their krestmark 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 towards.

The improving our funding mix.

Furthermore, we originated $104 million in solar leases during the year with related investment tax credits driving higher after tax income.

So 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 earning 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 replace them with higher yielding loans, primarily within our commercial finance portfolio.

Total gross loans and leases were 3.65 billion at September Thirtyth.

Again relatively flat on a linked quarter basis, despite the seasonal runoff of tax related loans and the transfer of certain consumer loan products to held for sale.

And up 24% from September 32018.

Our commercial finance portfolio was $1.92 billion at September Thirtyth, 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 $775000 an average yield was 9.67% for the quarter and the approximate net charge off rate well.

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.

Net income in the fiscal 2019 fourth quarter up 35% compared to the fourth quarter 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 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 Krestmark.

There 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 the loan yields in the fourth quarter.

Versus 37 basis points in the third quarter.

Metals 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 remained within our risk tolerance levels as depicted on slide eight of the investor deck nonperforming assets represented 91 basis points of the company's total assets at September Thirtyth.

Of note foreclosed real estate and repossessed assets represented 48 basis points of the company's nonperforming assets balance at September Thirtyth, 2019, which is primarily related to a nonperforming agricultural relationship that we have previously discussed.

We continue to evaluate liquidation options for the nonperforming AG relationship as it is actively being marketed for sale the increase in nonperforming assets compared to the linked quarter was primarily attributable to a couple of relationships in the commercial finance portfolio, where occasional fluctuations.

Our comments.

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 during fiscal 2018 and represented 46% of total revenues.

The year over year increase was largely driven by increases in rental income gain on sale as securities gain on sale of loans and leases and other income.

Turning to non interest 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 krestmark merger.

From a cost efficiency perspective, we're committed to allocating capital in 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're 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 tighter range reflects better visibility into revenue and expense trajectory, particularly in light of a meaningful 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.

Thank you Glenn to recap we are pleased with our results for the fourth quarter and fiscal year of 2019. The progress we've made thus far toward our three key initiatives and the opportunities in 2020 that completes our prepared remarks, so I'll ask Glenn to join.

Joining me for Q any operator.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Your question pressed upon key please standby we've compiled the Monday roster.

Our first question comes from functionality with Sandler O'neill. Your line is now open.

Good afternoon.

Just I wanted to ask about well first on the severance.

Can you just talk a little bit about as this you mentioned, Brad you mentioned a.

Outsourcing.

Infrastructure.

Is that where this sort of severance is coming from or is this just sort of across.

Positions.

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 IP transition goes that will happen.

Little bit later.

Yeah.

The people that were in our IP department will be absorbed by the outsourcing company. So they.

We'll continue to be working here with us but.

For the most part.

They were not impacted by the severance.

And is there any detail you can give on as you make that transition impact to the income statement.

Well, we are looking for a positive impact over time.

There is a transition period that will occur and his primary primarily in the commodity based parts of the IP infrastructure business.

Okay, and then just to on the consumer.

Loan balances.

You are transferred some to for sale you mentioned, obviously the held for investment.

Balances fell linked quarter.

Just wondering it didn't look like from your slide that Youre further deemphasizing that business, but.

Are you are you looking too.

Shrink that portfolio or.

Or keep stable at these levels.

Now as we've mentioned we plan to manage the consumer lending business to be within 15% of earning assets.

That's still our plan going forward, but we're taking a very measured approach as we develop those.

Programs on 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.

Okay, and then just one more and I'll go back to the Q, but.

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 that's not the plan for Krestmark 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 unexpected or.

Or anticipated growth rate and the Krestmark business from here.

We've been consistent in saying as we looked at the Krestmark 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 too.

Compromise on structure on pricing, we try to remain very disciplined in that and then overtime. We believe that it will create opportunities for us.

I mean do you expect that business to continue to grow in the in the double digits.

Or you know, what's what's a decent growth rate I guess.

Yes, Hi, Frank this is Glenn so certainly as the denominator becomes.

Larger what we would.

Expect to see.

Some slowing of growth, but but we are expecting double digit growth.

Year over year and it could come from different levers there we have abroad 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 in an asset based lending our are created equal and while the.

The portfolios that we have are certainly higher return.

Portfolios than our traditional community bank portfolios. There also not the high cost.

The higher cost factory in or a b L type products.

There are a little lower in the and the credit quality.

Range.

Okay.

I'm sorry, so they are lower in terms of.

The factoring.

Yes, so let's say we're.

We've got yields of 9.7%.

For a portfolio and as you go down and credit quality there may be other players in those that do factoring or Avi all that are charge in 18 to 20% to 36%.

And that's usually a reflection of the credit quality or the credit risk inherent in the customers, they're serving so there's a lot of different flavors of.

Of.

The commercial finance business.

Okay, all right I appreciate it thanks.

Thank you and our next question comes from Michael Perito with KBW. Your line is now open.

Hey, good afternoon everybody.

Hi, Mike.

I wanted to ask up kind of a big picture question on capital here, obviously, you after the stronger level in the third quarter the repurchases slowed a bit in the fourth quarter and the shares of obviously done quite well with.

And your multiple up but.

You, obviously no rush around this because your capital levels are healthy today, but I wouldn't say anything major.

A couple points if I look forward I mean, obviously you guys are motivated to keep your balance sheet under 10 billion, which.

Somewhat limit the capital you need for balance sheet growth anyway, and I'm just wondering how do you guys think about as you.

This matures and and becomes more profitable with maybe a slower percentage growth rate.

Yes, it's the capital your return to shareholders.

What seemed like the level of buybacks you've done recently isn't sustainable longer term just curious how you guys you're thinking about that dynamic as you evolve here.

Well, we've as we've stated we expect to generate excess capital and in 2020 and and beyond and we'll certainly consider repurchase activity within the context of overall capital management as the board and management reviews.

He is our options.

At any point is that the dividend come come into play or is that really it certainly is certainly one of the levers. Yeah. Again is certainly one of the levers that the company will consider.

Okay.

As we think out.

The card fee line on the fee side.

It was a bit lower than it's been for for quite some time now, but I know that scenario focus just any initial thoughts or expectations about that online and as we move forward and what you guys. Big is realistic is there any other volatility expected near term or or is there something or is there a pipeline for for growth. Just curious if you price more thoughts there.

Yes, yes, yes, so we're kind of coming off this this tough comparison because of the one times.

From comparing.

Jeff why 19 to fiscal year 18 that.

Clear 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.

You.

Well a number of our large programs are.

Customized.

Price so.

Depending where the economics may or May fall and the.

The characteristics of the deposits house stable. They are how you know.

They may be more seasonal and so that all drives your card fee income, there's some tiered pricing for some of our larger customers as they crash threshold. So card fee income is important driver of revenue for us.

But overall I would expect it to grow at a slightly I expect it to grow from here I expect it to grow at a slightly slower pace than overall deposit growth from the payments business.

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 mentioned in my remarks, we are.

Starting.

Starting to evolve several new line areas of business and merchant acquiring our message origination, which we have been involved in the past in our faster payments initiatives, which will all be more fee income based products. So those over the course of the next year in the year. After we'll start to have.

A more meaningful impact.

Helpful and just lastly, as we.

As we think about.

Obviously the card issuing you guys have done in the prepaid space has done really well.

Start to see some your competitor branch out to non like prepaid card program managers like things like like one that they're not really bank partner companies like chime in 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 or card issue Your bank and service.

And what we can kind of expected, which 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.

And Thats why you seen some of the fee income card fee income move into the deposit fee line because several of our partners and a new relationships are involved with those exact type of products here discussing so we are in support of those kinds of products.

So I guess more to comment and stay tuned.

Yep.

Yeah, well, we're we're certainly involved in.

As as payments evolves and then we'll partners was strong relationships, where we find that Mike I would note Mike.

Overall, our our total fee income represented or roughly 40, 546% of overall revenues and we would hope.

It would.

Stay at that level or be a higher percentage actually in 2020.

Great well all helpful. Thank you guys for the color I appreciate it.

Thank you as a reminder to ask a question that you wanted to press star one on your telephone.

Next question comes from Steve Moss with B. Riley FBR. Your line is now open.

Good afternoon guys.

Hi, good afternoon C.

What does start on the commercial finance yields they are down about 65 basis points are so quarter over quarter, just wondering what the underlying dynamics, where there for the quarter and how we should think about that going forward.

Well, we had we had a leg down in the purchase accretion, which which contributed to that.

There are fair amount of variable rate loan products.

In that portfolio and then it's.

And then it's just.

A mix of.

Somewhat of a mix shift some portfolios in commercial finance are growing faster than others.

In in terms of the variable rate roughly an idea of what percentage is variable within the portfolio I know the premium finances for example.

It is.

But for 40%.

Roughly plus or minus.

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, it's kind of thinking about the different drivers you do have obviously lower lower rates, but you should probably be getting some funding benefits.

Just.

Any color on the margin would be great.

Yes.

Yeah, we had a step down this quarter in accretion next quarter will be our final big step down and 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 lagging up.

Through the rest of 2020.

Okay. That's helpful.

Then on expenses.

Just wanted to circle back to that wondering what is the a cleaner run rate going forward with the.

With the cost saves that were.

Disclosure.

Yes.

Well.

I'll get to your question, specifically, but as you know we have a fair amount of seasonality in our run rates primarily tax season that.

Kicks up here in December and then runs through through March 1st part of April . So certainly the March quarter is always a higher expense quarter 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 onetime 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 a business grows there are some variable ones that will grow with it so.

So.

I think starting with with September at the September quarter, and then building your growth from there.

Okay.

And lastly, just on on credit here.

The reserve.

Underlying reserve ratio I think it looks like continues to build X tax.

I would assume you probably have one last leg up with accretion run off here in this quarter just.

Just kind of.

Your thoughts around credit costs.

For the upcoming quarters, that's the allowance normalizes.

Yes.

Yeah, we feel as Brad mentioned, we feel good about our position in our allowance today I think.

Yes, it will depend on the mix of our assets, but you can.

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.

And we'll build provision to to maintain that level.

Alright, Thank you very much.

Thanks, Steve.

And our next question comes from Daniel Cardenas with Raymond James Your line is now open.

Hey, good afternoon guys.

Good afternoon.

Just a couple of follow up questions on on the credit side.

Any color.

You can provide in terms of the performance of your classified assets.

Versus the quarter before the previous quarter.

Yes, well, we have the one Oreo thats 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 our nonperforming assets.

The remainder we've we feel on.

Pretty good about their collateral position.

Yes.

Gets a little lumpy just depending on when certain certain loans might.

Age and especially in the commercial finance portfolio, but overall, we feel very good about our credit position today.

And how about watchlist trends had a ton of those look in the quarter.

All of our trends in the commercial credit are we feel very positive and strong we don't have any concerns there right now.

Okay and then.

I think all my other questions were asked so I'll step back thanks, guys.

Thank you.

Thank you and that concludes today's question and answer session I will now turn the call back to CEO Brad Hansen.

Thanks.

I'd like to close by thanking everybody for participating in metals quarterly Investor call. We truly appreciate your support and thank you for taking time to listen to US today have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.