Business context and reporting period
This Form 10-Q is for Meta Financial Group, Inc. (ticker CASH), for the quarter and nine months ended June 30, 2020. The filing identifies the company as Meta Financial Group, not Pathward Financial. The company is a bank holding company whose operations include consumer payments and tax services, commercial lending and leasing, and corporate services. On April 1, 2020, the bank converted to a national bank charter and the holding company to a bank holding company that elected financial holding company status.
Financial results and position
Amounts below are in millions of dollars except per-share amounts and ratios.
| Metric | Three months ended June 30, 2020 | Prior-year quarter | Nine months ended June 30, 2020 | Prior-year period |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $103.2 | $110.8 | $393.6 | $385.2 |
| Net interest income | $62.1 | $67.0 | $194.5 | $198.6 |
| Provision for loan and lease losses | $15.1 | $9.1 | $55.8 | $51.5 |
| Net income attributable to parent | $18.2 | $29.3 | $91.6 | $76.8 |
| Diluted earnings per share | $0.53 | $0.75 | $2.54 | $1.95 |
| Net interest margin | 3.28% | 5.07% | 4.21% | 4.90% |
Quarterly net income declined 38% year over year, principally reflecting lower interest income and higher credit-loss provision. Nine-month earnings increased 19%, aided by higher noninterest income and lower operating expenses, including a $19.3 million pretax gain on the Community Bank division sale. Quarterly noninterest income was $41.0 million versus $43.8 million; nine-month noninterest income was $199.0 million versus $186.6 million. Noninterest expense was $71.2 million for the quarter versus $72.5 million and $238.8 million for nine months versus $257.0 million.
Quarterly NIM fell 179 basis points year over year. The company attributed approximately 140 basis points of pressure to temporary, low-yielding cash balances from Economic Impact Payment (EIP) deposits, with the lower-rate environment also weighing on asset yields. Cost of funds fell to 0.28% from 1.14% in the quarter, partly offsetting lower asset income.
At June 30, total assets were $8.78 billion, up from $6.18 billion at September 30, 2019, largely because of EIP-related cash. Cash and cash equivalents were $3.11 billion, compared with $126.5 million; deposits were $7.59 billion, compared with $4.34 billion. Gross loans and leases were $3.50 billion, down 4% from $3.65 billion, while the allowance rose to $65.7 million from $29.1 million. Total borrowings declined to $209.8 million from $861.9 million; short-term borrowings were zero at quarter-end. Stockholders’ equity was $829.9 million versus $844.0 million.
Nine-month operating cash flow was $281.7 million, investing cash outflow $70.9 million, and financing cash inflow $2.77 billion; ending cash was $3.11 billion. The filing reported a 6.89% bank leverage ratio, 13.82% common equity Tier 1 ratio, 13.86% Tier 1 ratio, and 15.12% total capital ratio. The bank exceeded regulatory well-capitalized thresholds.
Material changes versus comparable periods
- Quarterly revenue declined 7% and parent net income fell from $29.3 million to $18.2 million; nine-month revenue rose 2% and parent net income increased from $76.8 million to $91.6 million.
- Credit provisioning increased: the allowance-to-loans ratio was 1.88% at June 30, versus 0.80% at September 30, 2019. Nonperforming loans and leases rose to $39.3 million (1.10% of loans) from $26.5 million (0.70%).
- The February 29 sale of the Community Bank division included $290.5 million of deposits and $268.6 million of loans. Remaining community banking loans were serviced by Central Bank; an additional $58.6 million was sold on August 4, after quarter-end.
- The company repurchased 3.50 million shares during the nine months for an average $34.34 per share, but suspended repurchases in March 2020. The quarterly dividend was $0.05 per share.
Outlook, risks, contingencies and unusual items
- COVID-19 and credit exposure: At June 30, deferrals covered $352.1 million of loan, lease and rental-equipment balances, of which $292.2 million remained in deferral; other active modifications totaled $34.6 million. Hospitality and small-ticket equipment finance were areas of particular concern. Management said future credit costs were uncertain and provisions may be revised as conditions and borrower information change.
- EIP deposit sensitivity: The program delivered 3.6 million cards loaded with $6.42 billion. Remaining card balances were $2.68 billion at June 30 and $1.72 billion at July 31. Management described the deposit influx as temporary and noted pressure on NIM and leverage ratios; the company’s leverage ratio was reduced by approximately 278 basis points by the asset increase.
- Business developments: On August 5, the bank entered a three-year program management agreement with an H&R Block subsidiary for financial products. The agreement includes termination provisions, including in relation to the bank’s Durbin Amendment exemption. On August 4, it sold an additional $58.6 million of retained community-bank loans without material gain.
- Capital and accounting: CECL adoption was scheduled for October 1, 2020. The company expected an allowance-related retained-earnings and capital impact but could not yet estimate it precisely; it expected to elect the regulatory transition relief. The filing reports an EVE sensitivity of -10.8% under a -100-basis-point scenario, exceeding the company’s -10.0% policy limit; management attributed this to rapid growth in noninterest-bearing deposits. Other modeled interest-rate scenarios were within policy limits.
- Controls: Management concluded disclosure controls were not effective at June 30 because of an unremediated material weakness in Crestmark IT access, program-change controls and review procedures. Remediation was ongoing.
- Commitments and legal matters: Unfunded loan commitments were approximately $1.12 billion. A lawsuit by Card Limited seeks $4.0 million; the court ruled for the bank on summary judgment, with appeal rights remaining. The filing says the possible loss range cannot be estimated. The bank is also pursuing recovery of just over $1.6 million of unearned insurance premiums in litigation.
- Outlook: No quantified earnings or revenue guidance was provided. Management said the pandemic’s ultimate effects on demand, credit losses, interest income and asset values could not be projected clearly. It stated liquidity sources were expected to meet foreseeable needs.
Key facts investors should verify
- Whether EIP card balances continued to run off as expected, and the resulting effects on deposits, cash yields, NIM and regulatory leverage.
- Subsequent trends in deferrals, borrower performance, nonperforming assets, charge-offs and allowance adequacy, especially in hospitality and equipment finance.
- The initial CECL allowance adjustment, its capital effects and the timing and treatment of any regulatory transition relief.
- Progress in remediating Crestmark’s material weakness and whether disclosure controls become effective.
- Execution and economics of the Community Bank loan sales and H&R Block agreement, including Durbin Amendment-related termination risk.
- Regulatory capital headroom, given the temporary EIP asset surge and the reported EVE policy-limit breach under the down-rate scenario.