Ladies and gentlemen, thank you for standing by and welcome to the Meta Financial Group fiscal year 2019 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.
Thank you, welcome to Meta's conference call and webcast to discuss our financial results for the second fiscal quarter ended March 31st, 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, 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, future events, or for any other reason. At this time, I would like to turn the call over to President and CEO, Brad Hanson.
Thank you, Brittany. We are pleased to report our results for second quarter of fiscal year 2019, including GAAP earnings of $32.1 million, or $0.81 per diluted share. As Glen will discuss further, adjusting for the previously disclosed executive transition agreements cost and impact of the DC Solar leaseback, core EPS came in at $1.10 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.
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.
Our net income contribution from the tax business was up 5% compared to the March quarter of 2018. I'd like to take this opportunity to thank our entire team for their efforts in producing another successful tax season for Meta. 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 expand 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.
I'd like to turn it over to Glen Herrick, our CFO, to provide a review of our fiscal 2019 second-quarter financial results.
Thank you, Brad, and good afternoon, everyone.
As Brad mentioned, for the second quarter of fiscal 2019, we reported GAAP net income of $32.1 million, 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 $6.1 million on a pre-tax 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 $1.10 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 million to $3.4 billion at March 31st, up 3% from December 31st. 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 million, or 3%. Our consumer loan portfolio grew by $32 million, driven by $80 million of new originations during the quarter from our two consumer credit programs. There were $42 million of consumer loans held for sale as of March 31st. 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 2019 second quarter, improving by 245 basis points from the second quarter of fiscal 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 2019. 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 quarter. 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 million for the fiscal 2019 second quarter, compared to $18 million 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 $5.9 million 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 31st, 2019. Non-interest income was $105 million for the fiscal second quarter, up $7.6 million from the same quarter of fiscal 2018. 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 $1.5 billion in refund advance loans, which represented 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 million, while tax advance interest income totaled $8 million. 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 million, while we saw a decrease of $3.8 million 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 2019. 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 2018 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 $6.1 million.
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 principals, 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 $6.6 million to earnings or $0.17 per share and a $2 million increase to provisional goodwill. Finally, let me discuss our previously disclosed earnings per share outlook. For fiscal 2019, we are tightening our adjusted earnings per share guidance from between $2.30 and $2.70 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 the DC Solar after-tax net non-cash charge to earnings. As a result, GAAP earnings per share for the fiscal 2019 is expected to be in the range of $2.06 to $2.36 per diluted share.
This compares to earnings per diluted share of $1.67 for fiscal year 2018, 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.
Thanks, Glen. 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, I'll ask Glen to join me for Q&A. Operator, please open the line for any questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again, that's star then one if you'd like to ask a question at this time. Thank you. Our first question comes from Michael Perito with KBW.
Hey, good afternoon, guys.
Good afternoon.
I do apologize. I got on a little late. We'll head over here. I missed some of the prepared remarks, I apologize if you answered this already. The card fee line, I wanted to start there. The little over $23 million, 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?
Hi, Mike, this is Glen. It's hard to pinpoint exactly what comes from tax. Before we had a tax payment processing business, there was seasonality in the March quarter as
Right.
Of our customers have GPR cards, would use them for their tax refunds and get those loaded on there and spend. We do see the seasonality during the March season.
That's continued on a year-over-year basis.
Okay. On the expense side, Brad, you mentioned trying to curtail some of the growth a little bit, somewhat semi-hiring freeze maybe. I guess when we try to think about how that translates to the financials, my guess is there'll be maybe more of an impact to that in fiscal 2020. Is that something that we should think about as being able to drive the efficiency ratio down year-over-year 2020 and 2019? Is that going to help kind of enable that type of profitability improvement?
Yeah, we believe that will be the case. It's more being disciplined and planning better around our resource needs, than it is saying a pure 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 in the face of growth without any kind of proven process. We think that kind of discipline will help to enhance our efficiency ratios going forward.
Our next question comes from Steve Moss with B. Riley FBR.
Good afternoon, guys.
Hi, Steve.
I guess on the provision expense here for the quarter, ignoring the tax piece, it was around $10 million-$11 million. Just kind of wondering, 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?
No, I think overall, it's a 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 at a smaller level, the consumer loan portfolios, new originations we're building from scratch. It's not a bad run rate for the near future.
Okay, that's helpful. Just thinking about the margin here going forward. Still getting adjusted to 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.
Sure. We're obviously very pleased with where our margin's at, and really part of the main thesis of putting these two companies together, Meta and Crestmark. 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. 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. 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. Kind of back into a range that way.
As a reminder, ladies and gentlemen, that is star, then one if you'd like to ask a question at this time. Our next question comes from Frank Schiraldi with Sandler O'Neill.
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.
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 consumer lending program going forward. We'll be ramping up to that through the rest of this year and into next year and beyond.
In terms of the tax business, it was a good result, I thought, this year, right in the middle of what you guys were looking for. I don't know what your thoughts are for the 2020 season. You have a range out there for earnings. I figured I'd ask, is it going to be sort of a similar expectation now that those businesses maybe have matured a bit do you think for the 2020 season? What do you think about how we should think about modeling that?
Based on what we know today, Frank, things could change between now and next tax season. 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 based 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. Again, too early to tell. 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 2020 guidance.
Okay. Then just finally on the card fees, just to follow up there, in terms of seasonality, is March still the strongest quarter for the card-
Yeah
fee revenue line? Okay. Thank you.
Our next question comes from Daniel Cardenas, Raymond James.
Good afternoon, guys.
Hi, Dan.
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?
Our statutory rate is 21%. We have a small and winding down municipal portfolio, muni bond portfolio. 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.
All right, great. Kind of given a building capital base this quarter, you announced a stock repurchase plan, which I believe becomes active next week. What's your appetite for stock repurchases given current valuation levels and growth expectations?
Sure. We continue to manage capital in a shareholder-friendly way. We intend to have a strong balance sheet and strong capital positions. With a focus on maximizing shareholder value, we announced a stock buyback authorization as a tool to do that. Where we see value and where we're comfortable with capital levels, we would expect to have those discussions with the board about the timing and at what levels we would consider buying back shares.
Nothing predetermined at this time, nor has there been a decision to actually buy back stock or not at this time.
Okay, fair enough. Maybe just in terms of streamlining the tax business, have you finished that process? Is there still some work that needs to be done?
There is a little bit of work that needs to be done. You have a finite time to complete a project like that. You can't move back the launch date for tax season. 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. Most of the work was done, but there still is ongoing work that needs to be completed.
All right. Great. Thank you. I'll step back for now.
That concludes the question and answer session. I will now turn the call back to CEO, Brad Hanson.
Well, thank you. I'd like to close by thanking everyone for participating in Meta's quarterly investor call. We truly appreciate your support. Thank you for the time you took to listen to us today. Have a great evening.
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