Business context and reporting period
This is Meta Financial Group, Inc.’s Form 10-K for the fiscal year ended September 30, 2018—not a filing identifying Pathward Financial, Inc. The filing reports full-year results and comparative fiscal 2017 and 2016 figures; fiscal Q4 ended September 30, 2018. Meta operated Payments, Banking, and Corporate Services/Other segments. The August 1, 2018 Crestmark acquisition expanded its commercial-finance business.
Financial performance and condition
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net interest income | $130.5 million | $93.2 million | Up 40%; tax-equivalent net interest margin rose to 3.41% from 3.05%. |
| Provision for loan and lease losses | $29.4 million | $10.6 million | Higher seasonal tax balances, portfolio growth, student-loan risk and acquired Crestmark loans contributed. |
| Non-interest income | $184.5 million | $172.2 million | Up 7%; includes $7.3 million rental income from Crestmark leases and an $8.2 million net securities-sale loss. |
| Non-interest expense | $228.2 million | $199.7 million | Up 14%, including higher compensation, acquisition-related legal/consulting, occupancy and card-processing costs. |
| Net income attributable to parent | $51.6 million | $44.9 million | Up 15%; diluted EPS was $1.67 versus $1.61 (share figures adjusted for the subsequent 3-for-1 split). |
| Assets / net loans and leases | $5.84 billion / $2.93 billion | $5.23 billion / $1.32 billion | Assets rose 12%; net loans more than doubled, largely due to Crestmark. |
| Deposits / borrowings | $4.43 billion / $514.7 million | $3.22 billion / $1.49 billion | Deposits rose 37%; borrowings fell 65%, mainly as short-term FHLB advances declined. |
| Cash flows | Operating +$137.8 million; investing -$389.8 million; financing -$915.6 million | — | Cash and cash equivalents fell $1.17 billion to $100.0 million, primarily following the unusually high September 2017 balance. |
At year-end, stockholders’ equity was $747.7 million. The Bank remained well-capitalized: CET1 12.50%, Tier 1 12.56%, total capital 12.89%, and leverage 9.75%. Regulatory capital ratios were lower than in 2017 on several measures, amid balance-sheet growth and acquisition-related changes.
Credit indicators were mixed. Non-performing assets were $41.8 million, or 0.72% of assets, unchanged as a percentage year over year. The allowance was $13.0 million, 0.44% of gross loans and leases, versus $7.5 million and 0.57% a year earlier. FY2018 net charge-offs were $23.9 million; tax-advance net charge-offs were $21.3 million. Foreclosed and repossessed assets rose to $31.6 million, primarily reflecting agricultural property.
Material changes versus the prior comparable period
- Crestmark added $1.05 billion of loans and leases at acquisition-date fair value and $1.12 billion of deposits; its results were consolidated from August 1. Meta issued shares valued at $295.8 million as consideration and recorded $204.5 million of goodwill.
- Excluding Crestmark, net loans and leases still grew 34%, reflecting commercial insurance premium finance, consumer credit, warehouse lending and community-bank lending.
- Net interest income benefited from asset growth and a higher-yielding loan mix. Funding costs rose: average cost of total deposits and interest-bearing liabilities increased to 0.70% from 0.43%.
- Net income growth was partly offset by higher credit provisions and operating expenses. The 2017 comparison included a $10.2 million H&R Block relationship impairment; the Bank did not provide H&R Block refund advances for the 2018 tax season.
- Tangible book value per share fell 3% to $9.54, while reported book value per share increased to $19.09, reflecting acquisition-related share issuance and goodwill/intangible growth.
Outlook, commentary, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management said it expected loan growth and acquisition benefits, but cautioned that Crestmark synergies and efficiencies might not be fully achieved or could take longer, with integration, customer-retention and liability risks.
- Key funding exposure: Payments generated $2.41 billion of deposits, and 49.9% of total deposits were classified as brokered. About $1.32 billion of wholesale time deposits were due within one year. Management described liquidity as adequate and the Payments deposit base as historically stable, while acknowledging concentration and outflow risks.
- Student-loan insurer ReliaMax entered liquidation in June 2018. Coverage was cancelled; the company recorded a $2.8 million allowance on the purchased student-loan portfolios and expected additional provision expense pending any recovery of unearned premiums.
- FY2018 effective tax rate was 9.0%, versus 18.6%, reflecting the Tax Act, $4.0 million of investment tax credits and a $4.6 million benefit from amending a Crestmark tax return. These items may not recur at the same level.
- The company recorded an $8.2 million net loss on available-for-sale securities, including a fourth-quarter sale of about $260 million of lower-yielding securities in a balance-sheet restructuring. It transferred securities from held-to-maturity to available-for-sale under accounting guidance and the Crestmark business-combination exception.
- Management reported a change after year-end: Brad Hanson became CEO on October 30, 2018, replacing J. Tyler Haahr, who stepped down and was expected to remain chairman through the January 2019 annual meeting. The filing also describes regulatory, interest-rate, cybersecurity, third-party, consumer-lending, tax-partner and commercial-credit risks.
- Two material litigation matters have uncertain potential losses: a prepaid-program dispute with Card Limited, which claimed about $4.0 million, and Inter National Bank litigation for which a loss range could not be estimated. The company said it intended to defend both. A separate AFS/IBEX suit seeks just over $1.6 million in unearned insurance premiums.
Most important facts for investors to verify
- Confirm the issuer and period: the source is Meta Financial Group’s FY2018 10-K, not a Pathward-named filing or a standalone Q4 report.
- Assess Crestmark’s post-acquisition performance, integration costs, credit quality, goodwill and ability to deliver anticipated benefits.
- Review tax-advance loss experience and subsequent student-loan allowance/provision developments, including recoveries tied to ReliaMax liquidation.
- Evaluate deposit concentration, brokered-deposit classification, near-term wholesale certificate maturities, and the Bank’s capital and liquidity under stress.
- Separate recurring earnings from the low effective tax rate, securities-sale loss, acquisition expenses and other unusual items; inspect quarterly results, particularly the unusually strong second-quarter reported income.
- Check subsequent developments in the disclosed litigation, CEO transition, consumer-lending regulation and any material changes in partner relationships.