Business context and reporting period
Meta Financial Group, Inc. (now associated with the Pathward name) filed this unaudited Form 10-Q for the quarter ended December 31, 2017, the first quarter of fiscal 2018. The filing reports the company and MetaBank on a consolidated basis. Its businesses include Payments, Banking, and Corporate Services/Other. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter |
|---|---|---|
| Total revenue | $55.5 million | $39.2 million |
| Net interest income | $26.2 million | $19.8 million |
| Provision for loan losses | $1.1 million | $0.8 million |
| Non-interest income | $29.3 million | $19.3 million |
| Non-interest expense | $44.0 million | $36.8 million |
| Income before taxes | $10.4 million | $1.6 million |
| Income tax expense | $5.7 million | $0.3 million |
| Net income | $4.7 million | $1.2 million |
| Diluted earnings per share | $0.48 | $0.14 |
- Net interest margin on a tax-equivalent basis was 3.06%, versus 2.90%; reported net interest margin was 2.76%, versus 2.44%.
- Net cash provided by operating activities was $10.2 million, compared with cash used of $5.4 million. Investing activities used $175.2 million versus $216.5 million; financing activities provided $197.8 million versus $143.8 million. Cash and cash equivalents ended the quarter at $1.30 billion.
- At December 31, total assets were $5.42 billion, loans net of allowance were $1.50 billion, deposits were $3.51 billion, and stockholders’ equity was $437.7 million. Short- and long-term debt totaled about $1.40 billion.
- The allowance for loan losses was $8.9 million, up from $7.5 million at September 30. Nonperforming assets were 0.61% of total assets, down from 0.72% at September 30; nonperforming loans were $33.2 million, or 2.19% of loans.
- The company and Bank exceeded regulatory well-capitalized thresholds. At quarter-end, the Bank’s Tier 1 leverage ratio was 9.61%, Common Equity Tier 1 ratio 16.71%, and total qualifying capital ratio 17.11%.
Material changes versus the prior comparable period
- Revenue rose 42% and net income rose 275%. Net interest income increased 32%, primarily reflecting loan growth, purchased floating-rate student loans, higher-yielding securities, and a more favorable earning-asset mix.
- Non-interest income increased 51%, led by card fees, up $6.8 million, and tax-product fees, up $1.5 million. Management attributed the card-fee increase largely to residual fees from the wind-down of two non-strategic programs.
- Non-interest expense increased 20%, including higher compensation, card processing, and occupancy costs. Management cited a full quarter of expenses from the EPS and SCS acquisitions and added staffing to support growth.
- Loans net of allowance increased $182.4 million, or 14%, from September 30, 2017, with increases in consumer and commercial real estate lending. Deposits rose $290.2 million, or 9%; total borrowings declined $91.1 million, or 6%.
- The company transferred $306.0 million of securities from held-to-maturity to available-for-sale after early adoption of an accounting standard, citing improved balance-sheet flexibility and liquidity. Unrealized losses reduced other comprehensive income by $3.4 million in the quarter.
Outlook, commentary, risks, and unusual items
- The Tax Cuts and Jobs Act led to a provisional, non-recurring $3.6 million tax expense from remeasurement of deferred tax assets. The reported effective tax rate was 54.9%; management said the fiscal 2018 statutory rate would be prorated to 24.53% and that the tax estimate could change as guidance and data become available.
- Management forecast fiscal 2018 card-fee income of $95 million to $101 million and card-processing expense of $23 million to $27 million. It gave no overall earnings guidance. Tax-related revenue is seasonal and is expected to be concentrated in the fiscal second quarter, with some additional revenue in the third quarter.
- After quarter-end, the company agreed to acquire Crestmark Bancorp in an all-stock transaction valued at approximately $320.6 million based on the January 8 share price. Completion remained subject to shareholder, regulatory, and other conditions; integration, cost, customer-retention, and realization-of-synergies risks were identified.
- Also after quarter-end, MetaBank entered a three-year agreement with Liberty Lending to originate personal loans. The Bank expected $500 million to $1 billion of originations over the agreement and anticipated starting as early as fiscal Q3 2018. The company cautioned that unsecured lending and third-party marketing/servicing may increase credit, fraud, legal, and regulatory risks.
- Management reported a large agricultural relationship more than 90 days past due at quarter-end; it was still accruing. A deed in lieu of foreclosure was executed January 2, 2018, and the company took the collateral properties. Management expected recovery of principal, interest, and costs through sale or, if unsold by the end of the receivership period, the properties’ fair value.
- Credit risks include stressed agricultural markets from lower commodity prices and adverse weather, and potential loan losses exceeding reserves. Unfunded loan commitments were approximately $349.5 million. Two disclosed lawsuits remained unresolved, including a claim for approximately $4.0 million; the filing said a reasonably possible loss range could not be estimated for these matters.
- Interest-rate sensitivity depends on deposit behavior, repricing, and market conditions. Management’s alternative model estimated net interest income changes of -5.5% in a 100-basis-point decline and +0.9%, +0.6%, 0%, and -0.5% under parallel increases of 100, 200, 300, and 400 basis points, respectively; management emphasized that these are model estimates, not forecasts.
Important facts for investors to verify
- Whether quarter-to-quarter earnings growth is sustainable after isolating the $3.6 million tax charge, the $1.0 million securities-sale loss, acquisition costs, and stock-based compensation.
- Whether growth in card and tax-related fees persists, particularly given seasonality and the non-strategic program wind-downs.
- Credit performance and reserve adequacy as consumer, student, commercial real estate, tax-advance, and unsecured personal-loan balances grow; also track the agricultural collateral recovery.
- Progress, approvals, dilution, integration costs, and realized benefits from the proposed Crestmark acquisition, and actual loan volumes and performance under the Liberty agreement.
- Liquidity and funding sensitivity, including the sizable Payments-related deposit base, wholesale funding, borrowings, and the effect of interest-rate changes.
- Final accounting for the Tax Act, outcomes of the disclosed legal proceedings, and developments in unfunded commitments and regulatory requirements.