Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal first quarter ended December 31, 2020, compared primarily with the three months ended December 31, 2019. The filing identifies the company as Meta Financial Group, not Pathward Financial, Inc.; investors should verify the issuer and filing period against the intended filing.
The company operated through Consumer, Commercial, and Corporate Services/Other segments. Key activities included payments and prepaid cards, tax services, consumer finance, commercial lending and leasing, and banking. The quarter included significant deposits associated with the federal Economic Impact Payment (EIP) program.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2020 | Prior comparable period |
|---|---|---|
| Total revenue | $111.5 million | $102.1 million |
| Net interest income | $66.0 million | $64.7 million |
| Provision for credit losses | $6.1 million | $3.4 million |
| Noninterest income | $45.5 million | $37.5 million |
| Noninterest expense | $72.6 million | $75.8 million |
| Net income attributable to parent | $28.0 million | $21.1 million |
| Diluted EPS | $0.84 | $0.56 |
Net interest margin was 4.65%, down 29 basis points year over year; tax-equivalent net interest margin was 4.67%, down 32 basis points. The company attributed margin pressure mainly to excess, lower-yielding EIP-related cash balances. Average cost of funds was 0.15%, versus 1.01% a year earlier.
At December 31, 2020, total assets were $7.26 billion, up from $6.09 billion at September 30, 2020. Cash and cash equivalents were $1.59 billion, versus $427.4 million. Loans and leases were $3.45 billion before the $72.4 million allowance for credit losses. Deposits totaled $6.21 billion, up from $4.98 billion, primarily reflecting EIP balances. Long-term borrowings were $96.8 million; there were no short-term borrowings. Stockholders’ equity was $813.2 million.
Operating cash flow was $170.1 million; investing activities used $182.4 million; financing activities provided $1.17 billion. Cash increased by $1.16 billion to $1.59 billion, principally due to deposit inflows. The company reported regulatory capital ratios above well-capitalized thresholds: company Tier 1 leverage 7.39%, common equity Tier 1 10.72%, Tier 1 11.07%, and total capital 14.14%. The Bank’s corresponding ratios were 8.60%, 12.87%, 12.89%, and 14.14%.
Material changes versus the prior comparable period
- Revenue rose 9%; parent net income increased to $28.0 million from $21.1 million. Lower noninterest expense and higher noninterest income contributed to earnings growth.
- Net interest income increased modestly, but net interest margin declined because of lower asset yields and the high volume of low-yielding cash associated with EIP deposits.
- Noninterest income increased by $8.0 million, including a $3.5 million receipt of liquidation insurance claims tied to the ReliaMax estate, higher payment card and deposit fees, and a more favorable gain/(loss) on sale of other assets. Rental income declined.
- Credit-loss provision increased to $6.1 million. The allowance was $72.4 million at quarter-end, compared with $56.2 million at September 30, 2020; the comparison is affected by adoption of CECL.
- Nonperforming loans and leases rose to $42.3 million from $34.0 million at September 30, 2020. Active COVID-related modifications fell to $85.3 million from $193.3 million.
- The company repurchased approximately 1.86 million shares during the quarter at an average price of $29.46, in addition to shares acquired for employee tax withholding.
Outlook, commentary, risks, and unusual items
No specific earnings or financial guidance is provided. Management said it expected the second-round EIP program to have a slightly positive earnings effect, while temporarily increasing cash and deposits, reducing net interest margin, and affecting leverage capital ratios. The Bank received a temporary OCC exemption from minimum regulatory leverage-ratio requirements related to EIP deposits; management said risk-weighted capital ratios were not expected to be materially affected. The company was working with other banks to move some EIP-related deposits off balance sheet.
The Bank began distributing the second round of EIP payments on January 4, 2021 and disbursed approximately $7.10 billion. Remaining balances on those cards were $5.80 billion as of January 20, 2021. The first round distributed approximately $6.42 billion on 3.6 million cards; $605.1 million remained on those cards at December 31, 2020.
CECL was adopted October 1, 2020. It increased the allowance by $12.8 million and the unfunded-commitment liability by $0.8 million; the tax-effected cumulative adjustment reduced retained earnings by $8.4 million and noncontrolling interests by $2.5 million. Management cautioned that the pandemic’s effects on borrowers and the economy remain difficult to predict and that future credit losses may exceed estimates.
Other risks include interest-rate sensitivity, deposit concentration and volatility, changing consumer and lending conditions, regulatory and third-party risks, fraud and cybersecurity, and litigation. The company disclosed a pending appeal in a former program manager’s $4.0 million claim; management could not estimate a reasonably possible loss range. It also reported a lawsuit seeking recovery of just over $1.6 million in unearned insurance premiums. Management stated that an unfavorable legal resolution could have a material effect, although it did not expect the matters overall to materially affect financial position or results.
Subsequent events included a January 13, 2021 sale of an additional $103.2 million of retained Community Bank loans to Central Bank, without material gain, and the second-round EIP disbursements. The quarter’s tax rate was 10.77%, and management noted that investment tax credits from solar financing can cause tax expense to vary between periods.
Most important facts for investors to verify
- Confirm the filing identity: the supplied 10-Q is for Meta Financial Group, Inc. (NASDAQ: CASH), despite the request metadata naming Pathward Financial, Inc.
- Assess how much of the deposit, cash, and balance-sheet growth is temporary and tied to EIP programs, and the effect of deposit transfers on liquidity and capital ratios.
- Review credit quality and allowance assumptions under newly adopted CECL, including rising nonperforming loans and the remaining COVID-modified exposures.
- Evaluate whether earnings growth is repeatable given one-time or period-sensitive items, including the ReliaMax insurance claim receipt, asset-sale comparisons, and solar tax credits.
- Monitor net interest margin, sensitivity to interest rates, and the company’s ability to deploy excess cash profitably.
- Review subsequent loan sales, share repurchases, and the status and potential exposure of the disclosed legal proceedings.