PATHWARD FINANCIAL, INC. annual report, FY2021

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SEC Filing Summary: Meta Financial Group, Inc. (now identified in request as Pathward Financial, Inc.)

Reporting period: Form 10-K for the fiscal year ended September 30, 2021; fourth-quarter figures refer to the quarter ended September 30, 2021. The filing’s registrant name is Meta Financial Group, Inc.

Business context

The company is a bank holding company whose principal subsidiary, MetaBank, provides nationwide payments and banking-as-a-service products, commercial and consumer lending, and tax-related services. Results are reported in Consumer, Commercial, and Corporate Services/Other segments. The former Community Bank division was sold in February 2020; the company continued selling retained loans.

Key financial results and position

  • Fiscal 2021 revenue: $549.9 million, up 10% from $498.8 million. Net income attributable to the parent was $141.7 million, or $4.38 diluted EPS, versus $104.7 million, or $2.94, in fiscal 2020.
  • Fourth quarter: Revenue was $120.2 million, up $14.9 million year over year; net interest income was $70.7 million versus $64.5 million. Net income attributable to the parent was $15.9 million, or $0.50 per share, versus $13.2 million, or $0.38.
  • Net interest: Full-year net interest income rose 8% to $279.0 million, while annual net interest margin declined to 3.83% from 4.09%. Fourth-quarter NIM improved to 4.35% from 3.77% a year earlier.
  • Credit costs: Fiscal 2021 provision for credit losses was $49.8 million, down from $64.8 million. Net charge-offs were $50.6 million, including $33.3 million in tax-services loans. The allowance for credit losses was $68.3 million, or 1.89% of loans and leases, versus $56.2 million, or 1.70%, a year earlier.
  • Expenses and taxes: Noninterest expense increased 8% to $343.7 million. Income tax expense was $10.7 million, with a 6.8% effective tax rate; $26.5 million of investment tax credits reduced tax expense.
  • Cash flow: Operating cash flow was $581.6 million; investing cash outflow was $1.12 billion and financing cash inflow was $422.9 million. Cash and cash equivalents ended the year at $314.0 million, down from $427.4 million.
  • Balance sheet and funding: Assets were $6.69 billion, up $598.6 million. Gross loans and leases were $3.61 billion, up 9%; deposits were $5.51 billion, up 11%. Total borrowings were $92.8 million, down from $98.2 million; there were no short-term borrowings or FHLB advances at year-end.
  • Capital: Stockholders’ equity was $871.9 million. The Bank’s CET1, Tier 1, total capital, and leverage ratios were 14.11%, 14.13%, 15.38%, and 8.69%, respectively; the Bank was classified as well capitalized.

Changes versus the prior period

  • Net income rose by $37.0 million, mainly reflecting higher noninterest income and a lower credit-loss provision, partly offset by higher expenses. Noninterest income increased 13% to $270.9 million, supported by tax-advance and payments fees, including stimulus-related activity.
  • Net interest income increased, but the full-year margin declined as stimulus-related noninterest-bearing deposits produced excess low-yield cash balances. Lower funding costs helped offset reduced asset yields.
  • Loans grew in commercial finance, consumer finance, tax services, and warehouse finance; community banking loans fell 59% to $199.1 million following portfolio sales and repayments. Investment securities increased substantially, with available-for-sale mortgage-backed securities rising to $1.02 billion.
  • Nonperforming assets increased to $61.8 million, or 0.92% of assets, from $48.0 million, or 0.79%. Management attributed much of the increase in nonaccrual loans to one $14.9 million community banking relationship.

Outlook, risks, and unusual items

  • The filing provides no specific numeric earnings or revenue guidance. Management cited continued monitoring of credit quality, liquidity, capital, and COVID-19 effects, and said it expects to maintain regulatory capital buffers subject to continued profitability and capital-market access.
  • CECL was adopted October 1, 2020. The adoption increased the allowance by $12.8 million and reduced retained earnings by $8.4 million after tax, excluding the noncontrolling-interest impact. The accounting change also affects comparability with prior periods.
  • Management revised credit administration policies to align with OCC guidance; resulting risk-rating downgrades raised potential problem loans and leases to $276.7 million from $67.9 million. Management said the revisions establish a new baseline and do not, in its view, indicate worse expected portfolio performance.
  • Government stimulus payments drove unusually high payment activity and deposits. The company noted potential asset growth above $10 billion could trigger additional regulatory requirements and loss of the debit interchange-fee exemption; it did not expect this threshold to be exceeded at calendar year-end but identified stimulus and Child Tax Credit balances as uncertainties.
  • Other key risks include reliance on a small number of significant payments-program relationships and third parties, fraud and settlement exposures, cyber and operational disruptions, credit losses, interest-rate sensitivity, and regulatory scrutiny of consumer and third-party lending. Assets subject to settlement risk totaled $474.4 million.
  • Leadership changed after year-end: the CEO and COO transition was completed October 1, 2021. The company also reported a material weakness in internal control over financial reporting involving segregation of duties for Crestmark Leasing disbursements. Management reported implementing initial remediation steps by October 15, 2021, but the auditor issued an adverse opinion on internal controls. The financial statement audit opinion was unqualified.
  • Subsequent to year-end, the company agreed to sell about $170 million of retained community banking loans; the transaction’s overall income-statement effect was not known at filing. A further $30.2 million loan sale to Central Bank was completed without a material gain.

Important facts for investors to verify

  • Whether the Crestmark Leasing material weakness has been fully remediated and independently validated, and whether related disbursements or reporting require further review.
  • How the $276.7 million of potential problem loans, the $14.9 million community banking relationship, and subsequent community-loan sales affect future credit costs and results.
  • How normalized payments fees, deposits, and liquidity will be after temporary stimulus-related activity runs off, including any movement toward the $10 billion regulatory threshold.
  • Whether the $68.3 million allowance remains adequate as CECL forecasts and portfolio conditions change, particularly for tax-services and commercial-finance lending.
  • The final terms, closing, and gain or loss from the planned approximately $170 million community banking loan sale, and the pace and price of subsequent share repurchases.