PATHWARD FINANCIAL, INC. — FY2019 Form 10-K Summary
Reporting-period note: The filing is for Meta Financial Group, Inc. (ticker CASH), for the fiscal year ended September 30, 2019—not a standalone fourth-quarter report. The company was later known as Pathward Financial; that name does not appear as the registrant in this filing.
Business context and reporting period
The company operated through Payments, Banking, and Corporate Services/Other. Its businesses included prepaid and other payment products, tax-related services, commercial and consumer lending, equipment leasing, and community banking. Fiscal 2019 included a full year of Crestmark operations following its August 2018 acquisition.
Financial performance and condition
| Metric | FY2019 / September 30, 2019 | FY2018 / September 30, 2018 |
|---|---|---|
| Total revenue | $486.8 million | $315.1 million |
| Net income attributable to parent | $97.0 million; diluted EPS $2.49 | $51.6 million; diluted EPS $1.67 |
| Net interest income | $264.2 million | $130.5 million |
| Net interest margin | 4.91%; tax-equivalent 5.02% | 3.14%; tax-equivalent 3.41% |
| Provision for loan and lease losses | $55.7 million | $29.4 million |
| Noninterest income / expense | $222.5 million / $333.2 million | $184.5 million / $228.2 million |
| Total assets | $6.18 billion | $5.84 billion |
| Loans and leases, net | $3.63 billion | $2.93 billion |
| Deposits / total borrowings | $4.34 billion / $861.9 million | $4.43 billion / $514.7 million |
| Stockholders’ equity | $844.0 million | $747.7 million |
Operating cash flow was $191.0 million, investing cash flow was negative $339.2 million, and financing cash flow was positive $174.9 million. Cash and cash equivalents ended the year at $126.5 million, up from $100.0 million. The Bank was classified as well capitalized; its September 30, 2019 capital ratios included a 9.65% Tier 1 leverage ratio and a 13.02% total capital ratio.
Material changes versus the prior comparable period
- Net income rose 88% and revenue rose 54%, primarily reflecting loan growth, a shift toward higher-yielding lending assets, and a full year of Crestmark operations.
- Gross loans and leases grew 24% to $3.66 billion. Commercial finance and warehouse finance were major sources of growth; the investment portfolio declined 30% to $1.41 billion as securities were used to support lending growth.
- Funding costs rose: the average cost of deposits and interest-bearing liabilities was 1.16%, versus 0.70% in FY2018. Period-end deposits fell 2%, while borrowings increased 67%.
- Nonperforming assets increased to $56.5 million, or 0.91% of assets, from $41.8 million, or 0.72%. Net charge-offs were $39.5 million, including $24.9 million in tax services; those tax-service charge-offs were fully reserved.
- The allowance for loan and lease losses rose to $29.1 million from $13.0 million, and its ratio to loans and leases increased to 0.80% from 0.44%.
Outlook, risks, contingencies, and unusual items
- Management’s near-term priorities were to increase core-deposit funding, optimize the earning-asset mix, and improve operating efficiency. Management expected net interest margin to expand over time through loan growth and low-cost Payments deposits; this is commentary, not formal numerical guidance.
- FY2019 included a $27.1 million reduction in income tax expense from renewable-energy investment tax credits, contributing to a $3.4 million income tax benefit and a negative 3.4% effective tax rate. The company disclosed potential recapture risk for tax credits tied to projects and compliance requirements.
- DC Solar bankruptcy proceedings and federal investigations led to a $9.5 million impairment expense and a $6.6 million after-tax net charge. The company had repossessed 173 of 176 related mobile solar generators; additional losses remained uncertain and were not accrued at year-end.
- A previously disclosed agricultural relationship remained significant to foreclosed assets. The company reported a subsequent November 2019 disposal expected to result in an approximately $4.3 million pretax loss in the quarter ending December 31, 2019.
- On November 20, 2019, the company agreed to sell its community bank division to Central Bank. The transaction included approximately $270 million of deposits and $265 million of loans; about $935 million of related loans were to remain on Meta’s balance sheet and be serviced by Central. Closing was subject to conditions and approvals.
- Liquidity and funding risks include reliance on brokered deposits, classified as 58.9% of deposit liabilities, and concentration in Payments-related deposits. About $1.21 billion of wholesale time deposits were scheduled to mature within one year. The company reported $978.1 million of unfunded loan commitments.
- Management and the auditor identified a material weakness in Crestmark internal controls over financial reporting, involving IT access, program-change controls, and loan-account and client-record review procedures. Management’s remediation was not yet validated as effective at year-end; the auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- Other risks include credit losses exceeding reserves, interest-rate and repricing exposure, third-party and payments-program concentration, consumer-lending legal or regulatory challenges, cybersecurity, and uncertainty over ReliaMax-related student-loan insurance recoveries. The company also expected CECL adoption on October 1, 2020, but could not yet estimate its impact.
Important facts for investors to verify
- Whether Crestmark’s material weakness was remediated and independently tested after year-end, and whether any related financial reporting adjustments occurred.
- Subsequent developments in DC Solar investigations and bankruptcy, equipment recovery and re-leasing, tax-credit realization, and any additional impairment or loss exposure.
- Completion and final economics of the Central Bank community-bank sale, including the retained loan portfolio, servicing arrangements, and resulting funding and earnings effects.
- Credit quality trends, especially commercial finance delinquencies, nonperforming assets, agricultural foreclosed assets, and adequacy of reserves following elevated charge-offs.
- Deposit stability and cost, including brokered and wholesale funding dependence, large program-manager concentrations, and near-term certificate maturities.
- Actual CECL impact on the allowance, retained earnings, and regulatory capital when adopted; the filing does not provide a clear estimate.