Pathward Financial, Inc. — Form 10-Q Summary
Business context and period. This filing covers the fiscal third quarter and nine months ended June 30, 2022; it was filed August 9, 2022. Pathward is a bank holding company with Consumer, Commercial, and Corporate Services/Other segments. The company announced its rebranding from Meta Financial Group to Pathward on July 13, 2022.
Financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $126.1 million, down 4% year over year | $477.9 million, up 11% year over year |
| Net interest income | $72.2 million, up 5% | $227.6 million, up 9% |
| Net interest margin | 4.76%, versus 3.75% | 4.72%, versus 3.68% |
| Provision for credit losses | $1.3 million reversal, versus $4.6 million provision | $31.2 million provision, versus $41.0 million |
| Net income attributable to parent | $22.4 million, versus $38.7 million | $133.0 million, versus $125.8 million |
| Diluted EPS | $0.76, versus $1.21 | $4.44, versus $3.87 |
| Noninterest expense | $96.7 million, up 19% | $282.2 million, up 13% |
Third-quarter revenue combined $72.2 million of net interest income and $54.0 million of noninterest income. Quarterly earnings fell mainly because of higher expenses, lower noninterest income, and higher income tax expense, partly offset by higher net interest income. Nine-month revenue and earnings benefited from a $50 million gain on the sale of the Meta names and trademarks.
Financial position, cash flow, and liquidity
- At June 30, total assets were $6.73 billion; gross loans and leases were $3.69 billion; deposits were $5.71 billion; and long-term borrowings were $16.6 million.
- Cash and cash equivalents were $157.3 million, down from $314.0 million at September 30, 2021. Nine-month operating cash flow was $287.0 million, investing cash outflow was $410.9 million, and financing cash outflow was $32.5 million.
- Allowance for credit losses was $75.2 million, or 2.04% of loans and leases. Nonperforming loans and leases were $26.6 million, 0.71% of loans and leases, compared with $55.9 million and 1.16% at September 30, 2021.
- Stockholders’ equity declined to $724.8 million from $871.9 million, primarily reflecting a $139.0 million decline in accumulated other comprehensive income and share repurchases. The AOCI decline principally reflected unrealized losses on securities amid rising rates.
- The company retired $75 million of subordinated debt in May; total borrowings fell $76.2 million from September 30. Management said the retirement is expected to save more than $4 million in annual interest expense.
- Company and Bank capital ratios exceeded the regulatory thresholds for “well-capitalized” status. At June 30, Company ratios included 8.23% Tier 1 leverage, 11.87% common equity Tier 1, 12.19% Tier 1, and 13.44% total capital.
- Unfunded loan and lease commitments were $1.28 billion. Management believed available funding sources would meet foreseeable liquidity needs.
Material changes and management commentary
- Quarterly noninterest income fell to $54.0 million from $62.5 million, reflecting lower loan-sale gains, payments fees, and tax-services fees. Prior-year payments benefited from stimulus-related activity and tax-season timing; current-year SBA/USDA loan sales were affected by solar-construction supply constraints.
- Quarterly noninterest expense rose to $96.7 million. It included $3.1 million of separation-related expense, $3.4 million for rebranding, and $1.2 million related to ending two tax-partner relationships.
- The company will not renew agreements with Liberty Tax and Jackson Hewitt. Management expects taxpayer-advance volumes to decline about 30% next year, does not anticipate a significant impact on refund-transfer volumes, and expects improved operational efficiency over time.
- Total rebranding costs were estimated at $15–$20 million. The company sold its Meta tradenames for $60 million: $50 million was recognized in the first fiscal quarter, while the remaining $10 million is held in escrow pending completion of phase-out activities and had not been recognized at June 30.
- At quarter-end, the company had $176.3 million of gross unrealized losses on available-for-sale debt securities. Management attributed substantially all losses to interest rates and credit spreads, and said it neither intended nor expected to be required to sell securities before recovery of amortized cost.
- After quarter-end, a majority of the $83.3 million student-loan portfolio became held for sale under an agreement expected to close in August. The company did not expect a material net-income impact.
- Management cited inflation, rising interest rates, geopolitical conflict, supply-chain disruption, COVID-19-related uncertainty, credit performance, deposit and customer behavior, and cyber and third-party risks as factors that could affect results. No specific earnings guidance was provided in the supplied filing text.
Controls, contingencies, and unusual items
- Management concluded disclosure controls were not effective as of June 30. It identified a material weakness in internal control over financial reporting involving user access and segregation of duties in two loan systems. Access was removed, disbursements were tested without identified exceptions, and a preventive IT control and broader application review were underway.
- The company reported no material pending legal proceedings and no material changes to previously disclosed contractual obligations or off-balance-sheet arrangements.
- Quarterly net charge-offs were $12.2 million, including $8.0 million in tax services, $2.3 million in consumer finance, and $1.9 million in commercial finance. Management cautioned that future losses could exceed estimates and require additional provisions.
Important facts for investors to verify
- Progress and independent validation of remediation for the material weakness, and whether disclosure controls become effective.
- Actual costs and completion of the Pathward rebranding, including release of the escrowed $10 million and customer response to the new brand.
- Effects of ending the Liberty Tax and Jackson Hewitt agreements on next-season taxpayer advances, refund transfers, and expenses.
- Credit trends and allowance adequacy, particularly seasonal tax-services exposures and commercial-finance performance.
- Deposit stability, sensitivity of net interest income to changing rates, and the valuation or liquidity implications of unrealized securities losses.
- Completion and financial effect of the student-loan portfolio sale, and realization of expected savings from the subordinated-debt retirement.