Pathward Financial, Inc. (then Meta Financial Group, Inc.) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; filed February 8, 2022. The filing is under Meta Financial Group, Inc., which planned to rebrand and cease using the Meta names by December 7, 2022.
Financial performance
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $158.2 million | $111.5 million | Up 42% |
| Net interest income | $71.6 million | $66.0 million | Up 9% |
| Net income attributable to parent | $61.3 million | $28.0 million | Up 119% |
| Diluted earnings per share | $2.00 | $0.84 | Up $1.16 |
| Provision for credit losses | $0.2 million | $6.1 million | Lower by $5.9 million |
| Net interest margin | 4.59% | 4.65% | Down 6 basis points |
| Operating cash flow | $157.1 million | $170.1 million | Down $13.0 million |
Revenue and earnings benefited substantially from a $50.0 million gain on sale of the Meta names and trademarks. Excluding that transaction, reported revenue growth was materially lower; the filing does not present an adjusted revenue or earnings measure excluding the gain. Noninterest expense rose 14% to $82.4 million. Net charge-offs were $1.1 million, compared with $2.8 million a year earlier.
Financial position and liquidity
- Total assets were $7.61 billion at quarter-end, up $919.0 million from September 30, 2021, mainly due to higher cash.
- Cash and cash equivalents were $1.23 billion, versus $314.0 million at fiscal year-end. The increase was primarily funded by deposit inflows and proceeds from the legacy community-bank loan sales.
- Deposits rose 18% to $6.53 billion; long-term borrowings were $92.3 million, down slightly from $92.8 million. Stockholders’ equity was $826.2 million, down from $871.9 million.
- Gross loans and leases were $3.68 billion, up 2% from September 30, 2021. The allowance for credit losses was $67.6 million, or 1.84% of loans and leases, versus $68.3 million, or 1.89%, at fiscal year-end.
- Operating, investing and financing cash flows were $157.1 million, negative $147.5 million, and positive $906.4 million, respectively. Financing cash flow largely reflected the $1.01 billion increase in deposits and was reduced by $104.5 million of share repurchases.
- The Company and Bank exceeded regulatory capital requirements and were classified as well-capitalized. Company ratios included a 10.88% common equity Tier 1 ratio and a 13.80% total capital ratio.
Material changes, outlook and risks
- Rebranding and trademark sale: The Company sold its Meta-related names, marks and associated rights for $60 million. It recognized $50 million in the quarter; the remaining $10 million was held in escrow pending completion of phase-out activities and was not yet recognized. Management expected $15 million to $20 million in rebranding costs over the next fiscal year.
- Portfolio disposition: The Company sold its remaining $192.5 million of community banking loans, eliminating that portfolio. Management reported an approximately $3.9 million favorable pretax impact after the allowance recovery and loss on sale.
- Deposits and seasonality: Deposit growth was driven partly by stimulus-related funds loaded onto partner cards. EIP program card balances totaled $1.38 billion, but only $28.1 million was on the Company’s balance sheet. Tax-services lending also increased seasonally.
- Credit and macroeconomic risks: Management said COVID-19’s ultimate effects on borrowers remained difficult to predict. Nonperforming loans and leases were $43.2 million, or 1.2% of total loans and leases, versus $55.9 million, or 1.52%, at September 30, 2021. The Company cautioned that future losses could exceed estimates and additional provisions may be required.
- Interest-rate exposure: Management noted that a large base of low-cost payments deposits can pressure margins if rates fall. Its one-year earnings-at-risk model showed net interest-sensitive income 12.2% above base under a 100-basis-point rate increase and 5.6% below base under a 100-basis-point decrease; the filing cautions that modeled outcomes depend on assumptions and may differ from actual results.
- Controls: Management concluded disclosure controls were effective at quarter-end, but described a previously identified material weakness in controls over lease disbursements at Crestmark Leasing. Automated segregation-of-duties controls and access reviews were implemented by October 15, 2021; management continued evaluating further enhancements.
- Guidance: The filing provides no quantified earnings or revenue guidance. Management said it expected to meet the capital conservation buffer, subject to continued profitability and capital-market access, and believed available funding sources would meet foreseeable liquidity needs.
Important facts for investors to verify
- How much of the quarter’s reported earnings growth reflects the one-time $50 million trademark gain, and what are the associated tax and rebranding effects?
- Whether the escrowed $10 million trademark payment is released after phase-out milestones and whether rebranding costs remain within the estimated $15 million–$20 million range.
- Whether the exceptional deposit increase persists after stimulus-related card balances run off, and the resulting effects on liquidity, funding costs and margins.
- Whether credit performance and allowance coverage remain adequate as commercial finance reserves rose and the Company completed the community-bank loan exit.
- Whether remediation of the lease-disbursement control weakness is sustained and independently validated.