Business context and reporting period
The filing is Meta Financial Group, Inc.’s Form 10-K for the fiscal year ended September 30, 2020; it also reports fourth-quarter results. The filing names Meta Financial Group and MetaBank, not Pathward Financial, Inc., as the registrant, so investors should verify the entity match to the request metadata.
The company operated consumer payments and lending, commercial finance, and corporate services businesses. On February 29, 2020, it sold its Community Bank division to Central Bank and shifted toward national lending and payments activities. On April 1, the Bank converted to a national bank charter, and the holding company became a bank holding company that elected financial holding company status.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $498.8 million | $486.8 million |
| Net interest income | $259.0 million | $264.2 million |
| Provision for loan and lease losses | $64.8 million | $55.7 million |
| Net income attributable to parent | $104.7 million | $97.0 million |
| Diluted EPS | $2.94 | $2.49 |
| Net interest margin | 4.09% | 4.91% |
| Operating cash flow | $467.2 million | $191.0 million |
FY2020 investing cash flow was negative $206.3 million and financing cash flow was positive $40.0 million; cash and cash equivalents increased $300.8 million to $427.4 million. Total assets were $6.09 billion, down 1% year over year. Deposits rose 15% to $4.98 billion, while total borrowings fell 89% to $98.2 million. Stockholders’ equity was $847.3 million.
At September 30, 2020, loans and leases, net of allowance, were $3.27 billion, down from $3.63 billion. The allowance was $56.2 million, or 1.70% of loans and leases, versus $29.1 million and 0.80% a year earlier. Nonperforming assets were $48.0 million, or 0.79% of assets, compared with $56.5 million and 0.91%.
For Q4 FY2020, revenue was $105.3 million versus $101.6 million a year earlier; net interest income was $64.5 million versus $65.6 million, and net income attributable to the parent was $13.2 million versus $20.2 million. Q4 diluted EPS was $0.38 versus $0.53.
Material changes versus the prior comparable period
- Annual net income rose 8% and revenue rose 2%, supported by higher noninterest income and lower noninterest expense; net interest income declined 2%.
- Net interest margin contracted as pandemic-related Economic Impact Payment (EIP) deposits created unusually large balances of low-yielding cash. Management estimated the EIP program reduced Q4 margin by approximately 110 basis points.
- The company recorded a $19.3 million pretax gain on the Community Bank sale. Excluding that gain, reported earnings growth was less pronounced.
- Loan balances fell primarily because of the Community Bank sale, while national lending balances increased. Commercial finance loans and leases grew, but the consumer finance portfolio declined.
- Credit provisions increased, including $26.4 million of additional provision associated with management’s assessment of COVID-19 risks. Net charge-offs were $37.7 million, including $22.0 million in tax services, which were fully reserved.
- Noninterest expense declined 4%, partly reflecting lower compensation, impairment and intangible amortization expense. The company also incurred a $1.7 million pretax charge in Q4 to extinguish remaining FHLB advances.
Outlook, risks and unusual items
The filing provides no specific numeric earnings or revenue guidance. Management said it would continue monitoring credit quality and adjust the allowance as needed. It expected to sell the remaining $130.1 million of Community Bank loans held for sale in Q1 FY2021; a further $129.8 million sale was completed on November 18, 2020.
Management identified hospitality, movie theater and small-ticket equipment finance borrowers as areas of pandemic-related credit concern. At year-end, $170.0 million of loans and leases remained in payment deferral and $23.3 million had other active COVID-related modifications. Potential problem loans and leases increased to $67.9 million from $41.2 million.
EIP participation delivered 3.6 million cards with $6.42 billion in total loads; $942.2 million remained on the cards at September 30. These deposits boosted liquidity and lowered funding costs but were temporary and pressured margin and leverage capital measures. Consumer-segment deposits were highly concentrated in payment programs: five significant program managers accounted for $3.03 billion of deposits. The Bank also classified $2.13 billion, or 43% of deposits, as brokered.
The Bank exceeded regulatory minimums and was designated well capitalized. Its period-end leverage ratio was 9.66%; the Bank’s average-assets leverage ratio was 7.56%. Management said the period-end measure better reflected the anticipated balance sheet after the temporary EIP effect. The company estimated adoption of CECL on October 1, 2020 would increase its allowance by $12–$13 million and reduce retained earnings by $10–$11 million after tax; the estimate was still being finalized.
Other matters include a $5.0 million loss on sale of foreclosed agricultural property, $20.5 million of investment tax credits that reduced FY2020 tax expense, and an effective tax rate of 4.9%. The independent auditor issued an unqualified opinion on the financial statements and internal controls. A previously reported material weakness in Crestmark controls was reported as remediated in Q4. The filing describes ongoing litigation, including a former prepaid program manager’s $4.0 million claim for which a court ruled in the Bank’s favor, subject to possible appeal; management could not estimate a reasonably possible loss range.
Key risks include COVID-19’s uncertain impact on borrowers and collateral, interest-rate and margin sensitivity, dependence on third-party payment and program-manager relationships, deposit concentration and brokered-deposit access, fraud and cybersecurity exposure, regulatory change, and the possibility that actual credit losses exceed reserves. There is no assurance that deposits generated through payment programs will remain stable.
Important facts for investors to verify
- Confirm the registrant and ticker identity: this filing is for Meta Financial Group, Inc. (ticker CASH), not Pathward Financial, Inc. by name.
- Assess recurring earnings apart from the $19.3 million divestiture gain, tax-credit benefits, and the $1.7 million debt-extinguishment charge.
- Track EIP card runoff and the durability, concentration and cost of payment-related deposits, including brokered deposits and major program-manager relationships.
- Monitor post-deferral performance in hospitality, movie theater and small-ticket equipment finance exposures, and whether the $56.2 million allowance and planned CECL increase prove adequate.
- Review the completed and expected sales of retained Community Bank loans, including associated credit exposure, servicing costs and earnings effects.
- Check subsequent-period margin, credit costs, capital ratios and CECL adoption impact against the filing’s estimates; no forward earnings guidance was provided.