Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015 (fiscal second quarter) and the six months ended on that date. The filing identifies Meta Financial Group, Inc., not Pathward Financial, Inc.; verify the company and filing match the intended request. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
The company operates Retail Banking and Meta Payment Systems (MPS). In December 2014, it acquired substantially all of AFS/IBEX’s commercial loan portfolio and related assets, adding insurance premium finance lending.
Financial performance and position
| Metric | Quarter ended March 31, 2015 | Comparable period / balance change |
|---|---|---|
| Net interest income | $15.3 | Up 32.7% from $11.5 |
| Net interest margin | 3.06% | 2.76% a year earlier |
| Non-interest income | $15.0 | Up 14.6% from $13.1; card fees were $13.7 |
| Non-interest expense | $23.4 | Up 18.6% from $19.7 |
| Provision for loan losses | $0.6 | $0.3 a year earlier |
| Net income | $5.2 | Up from $4.1 |
| Diluted earnings per share | $0.78 | $0.67 a year earlier |
For the six months, net interest income was $28.9 versus $22.0; non-interest income was $27.6 versus $26.7; non-interest expense was $45.8 versus $38.8; and net income was $8.8 versus $8.1. Diluted EPS was $1.37 versus $1.32. Six-month results included a $1.2 million loss on securities sales, compared with a $0.1 million gain in the prior-year period.
Balance sheet at March 31, 2015: Assets were $2.275 billion, up 10.8% from September 30, 2014; net loans were $618.7 million, up 26%; and total deposits were $1.731 billion, up 26.7%. Stockholders’ equity was $216.4 million, up from $174.8 million. Cash and cash equivalents were $24.9 million, down from $29.8 million. Securities totaled approximately $1.514 billion at carrying value.
Funding, debt, and liquidity: Total borrowings were approximately $289.9 million, down from $497.7 million, mainly reflecting lower federal funds purchased ($261.0 million versus $470.0 million). Deposits included $1.558 billion in non-interest-bearing checking. The company classified $1.2 billion, or 69% of deposits, as brokered under FDIC guidance. Management said it expected available funding sources to cover foreseeable liquidity needs; unfunded loan commitments were $81.6 million, and commitments to purchase securities were $10.9 million.
Cash flow for six months: Operating activities provided $38.9 million versus $8.3 million. Investing activities used $224.3 million versus $200.4 million, including $92.3 million net cash paid for the acquisition. Financing activities provided $180.5 million versus $191.0 million. Cash declined by $4.9 million to $24.9 million.
Capital and credit: The company and bank exceeded applicable well-capitalized requirements. At March 31, the company’s total risk-based capital ratio was 21.61% and the bank’s was 20.80%; their leverage ratios were 8.67% and 8.34%, respectively. The allowance for loan losses was $5.7 million. Non-performing assets were $1.7 million, or 0.07% of assets, compared with $1.0 million, or 0.05%, at September 30, 2014.
Material changes versus prior comparable periods
- Quarterly net income and diluted EPS improved, principally as net interest income rose $3.8 million and card fee income rose $1.6 million. Higher non-interest expense ($3.7 million) and income tax expense partly offset the gains.
- Net interest margin expanded to 3.06% from 2.76%, supported by loan growth and yields, securities income, and lower funding costs.
- Loan growth reflected the AFS/IBEX acquisition and expansion in commercial and multi-family real estate lending. Premium finance loans totaled $83.2 million at quarter-end.
- Deposit growth, especially in MPS-related non-interest-bearing balances, supported a reduction in borrowings. The ATM share offering raised $25.4 million net; 740,654 shares were sold at an average price of $35.03.
- Non-interest expense rose with staffing and growth initiatives; compensation and benefits increased 16.5% for the quarter. Management also cited $0.4 million of additional FDIC insurance expense related to brokered-deposit classification.
- Non-performing assets increased, including $0.6 million of accruing premium finance loans at least 90 days past due. The filing explains that insurer processing delays can make premium finance receivables delinquent while collateral is being returned.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management described its markets as stable or improving but warned that future credit losses could exceed recent low historical levels, including in agricultural lending given low commodity prices and high land rents.
- Management anticipated—but could not guarantee—that the company’s remaining Federal Reserve Consent Order would be terminated in fiscal third quarter 2015. The bank’s Consent Order had been terminated in August 2014.
- Management said brokered-deposit classification was not expected to materially affect operations while the bank remained well-capitalized. If the bank lost that status, restrictions on brokered deposits could pressure liquidity; FDIC surcharges or possible amended call reports and assessments were also risks.
- Interest-rate exposure is material. The company reported an economic-value-of-equity decline of 15.9% under a 100-basis-point rate decrease, outside its stated 10% policy limit; it attributed part of the sensitivity to the AFS/IBEX-related portfolio changes and quarter-end funding timing. The earnings-at-risk scenarios were reported within policy limits.
- Two notable legal matters remain: a Texas lawsuit related to prepaid-card settlement allegations, for which a reasonably possible loss range could not be estimated; and Springbok-related claims of approximately $1.5 million, with the company estimating a possible loss range of $0 to $0.3 million.
- Available-for-sale securities had $6.6 million of gross unrealized losses at quarter-end. Management attributed declines to market interest rates, stated it did not intend or expect to be required to sell affected securities before recovery, and recorded no other-than-temporary impairment.
Important facts for investors to verify
- Confirm that this Meta Financial Group filing—not a filing under the Pathward Financial name—is the intended company and period.
- Review the sustainability and composition of deposit growth, particularly the $1.2 billion classified as brokered deposits and MPS-related balances.
- Assess AFS/IBEX integration, acquired-loan performance, acquisition-related goodwill and intangibles, and the quality of premium finance receivables.
- Track agricultural credit exposure, the downgraded relationship, allowance adequacy, and the rise in non-performing assets.
- Monitor interest-rate sensitivity, securities valuation losses, capital ratios, and the Consent Order’s status.
- Follow developments in the disclosed litigation and any potential FDIC assessments or call-report revisions.