Business context and reporting period
The supplied filing is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal quarter ended June 30, 2021, and the nine months then ended. This differs from the request metadata identifying Pathward Financial, Inc.; the filing itself names Meta Financial Group and MetaBank. Fiscal third-quarter results are compared with the three months ended June 30, 2020. Balance-sheet comparisons are principally with September 30, 2020.
The company operates Consumer, Commercial, and Corporate Services/Other businesses, including payment cards and tax services, commercial finance, and banking. Management attributed several period-to-period changes to seasonal tax activity and government stimulus-related payment-card balances.
Financial performance and condition
| Metric | Three months ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $130.9 million | $103.2 million | $429.7 million | $393.6 million |
| Net interest income | $68.5 million | $62.1 million | $208.3 million | $194.5 million |
| Provision for credit losses | $4.6 million | $15.1 million | $41.0 million | $55.8 million |
| Net income attributable to parent | $38.7 million | $18.2 million | $125.8 million | $91.6 million |
| Diluted EPS | $1.21 | $0.53 | $3.87 | $2.54 |
- Margins and costs: Third-quarter net interest margin (NIM) was 3.75%, up from 3.28%; nine-month NIM was 3.68%, down from 4.21%. Third-quarter noninterest expense rose 14% to $81.5 million, driven principally by compensation and benefits and tax-product expense.
- Cash flow: For the nine months, operating cash flow was $450.7 million, investing cash flow was negative $971.8 million, and financing cash flow was $813.3 million. Cash and cash equivalents increased $292.9 million to $720.2 million.
- Balance sheet and funding: Total assets were $7.05 billion, up $959.7 million from September 30, 2020. Deposits rose $909.7 million to $5.89 billion; noninterest-bearing checking deposits were $5.39 billion. Loans and leases totaled $3.50 billion gross, up about 5% from September 2020, while loans held for sale fell to $87.9 million. Long-term borrowings were $93.6 million; there were no short-term borrowings. A $25 million no-fee credit line was undrawn.
- Credit and capital: The allowance for credit losses (ACL) was $91.2 million, or 2.61% of loans and leases, versus $56.2 million at September 2020; adoption of CECL and seasonal tax-loan reserves contributed to the increase. Nonperforming loans and leases were $41.9 million (1.17% of loans and leases), versus $34.0 million at September 2020. Total stockholders’ equity was $876.6 million. The company and bank reported well-capitalized status; company total risk-based capital was 16.18% and bank total risk-based capital was 16.22%.
Material changes versus comparable periods
- Quarterly revenue increased $27.7 million, primarily from higher payment-card fees associated with stimulus programs and a timing shift in refund-transfer fees following the IRS tax-filing deadline extension.
- Quarterly net income more than doubled, reflecting higher noninterest income and lower credit-loss provision. Net interest income improved as deposit interest expense declined; management also cited a higher quarterly NIM.
- For the nine-month period, revenue increased 9% and net income increased to $125.8 million. Net interest margin nevertheless fell year over year, as yields on earning assets declined and the average asset and funding mix changed.
- National Lending balances grew $362.7 million from September 2020, while Community Banking loans declined $181.6 million, reflecting portfolio sales and repayments. The company reported $233.0 million of Community Banking loan sales during the nine months.
- Deposits and cash were significantly affected by Economic Impact Payment (EIP) program activity. Of approximately $2.81 billion of EIP card balances still outstanding at June 30, only $98.1 million remained on Meta’s balance sheet.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said liquidity should be adequate for foreseeable needs and expected to continue monitoring and adjusting the ACL as appropriate. It expected to sell $18.1 million of remaining Community Banking loans held for sale in the next fiscal quarter.
- Credit and COVID-19: Management said the pandemic’s ultimate effect on borrowers remained difficult to predict. Active COVID-related loan modifications fell to $41.5 million at June 30, from $66.5 million at March 31. The company cautioned that future losses could exceed estimates and that regulators could require additional reserves.
- Credit policy review: The company began revising credit administration policies to better align with OCC guidance, with completion expected by September 30, 2021. Management expected some risk-rating downgrades but said the review was not, in its view, an indication of deterioration in expected portfolio performance. Classified substandard assets rose to $135.1 million from $61.6 million at September 2020.
- Regulatory threshold: Management warned that year-end assets at or above $10 billion could trigger additional regulatory requirements and loss of the small-issuer Durbin Amendment interchange-fee exemption. EIP and Child Tax Credit-related deposits could affect asset levels; the company said it intended to remain below the threshold.
- Tax and seasonal items: The nine-month effective tax rate was 6.92%, primarily reflecting anticipated investment tax credits, compared with 3.91% a year earlier. Actual credits depend in part on solar-energy investment activity. Tax-service results and related credit reserves are seasonal; the filing also notes that tax-season timing affected quarterly revenue comparisons.
- Accounting and other items: CECL adoption on October 1, 2020 increased the allowance relative to legacy accounting and reduced retained earnings by $8.4 million, with a further $2.5 million attributable to noncontrolling interests. The filing reported no material subsequent events and no material changes to previously disclosed risk factors other than the new $10 billion threshold risks.
- Market and operational risks: Key exposures include interest-rate changes, economic and COVID-related conditions, credit quality, dependence on third-party payment and tax partners, fraud and cybersecurity, regulatory changes, and litigation. The filing’s modeled one-year net interest income sensitivity ranged from a 5.0% decline under a 100-basis-point rate decrease to a 38.7% increase under a 400-basis-point increase; these are scenario estimates, not guidance.
Important facts for investors to verify
- Confirm the issuer and reporting period: the source document identifies Meta Financial Group, Inc., not Pathward Financial, Inc., and covers the fiscal quarter ended June 30, 2021.
- Track EIP and other program-related deposits, including the potential effect of year-end assets crossing $10 billion and the resulting regulatory and interchange-fee consequences.
- Review the ACL and credit trends, particularly seasonal tax-service reserves, nonperforming loans, classified assets, and the results of the OCC-alignment policy review.
- Separate recurring operating performance from tax-season timing, stimulus-driven card activity, loan-sale gains, CECL adoption effects, and investment tax credits.
- Monitor NIM and funding costs as deposit balances and interest rates change; management’s sensitivity scenarios depend on assumptions and may differ from actual results.