Filing summary
Registrant and period: The supplied filing is Meta Financial Group, Inc.’s Form 10-Q for the quarter ended March 31, 2018 (fiscal second quarter), not a filing under the name Pathward Financial, Inc. The company operated through Payments, Banking, and Corporate Services/Other segments.
Financial performance and condition
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Total revenue | $124.8 million, up 7% year over year | $180.3 million, up 16% |
| Net interest income | $27.4 million, up 14% | $53.6 million, up 22% |
| Net income | $31.4 million vs. $32.1 million | $36.1 million vs. $33.4 million |
| Diluted EPS | $3.23 vs. $3.42 | $3.72 vs. $3.63 |
| Provision for loan losses | $18.3 million vs. $8.6 million | $19.4 million vs. $9.5 million |
| Net interest margin | 2.61% vs. 2.45%; tax-equivalent margin 2.89% vs. 2.91% | 2.68% vs. 2.45%; tax-equivalent margin 2.97% vs. 2.91% |
At March 31, 2018, total assets were $4.30 billion, down 17% from September 30, 2017; loans, net of allowance, were $1.49 billion, up 13%; deposits were $3.34 billion, up 4%; and stockholders’ equity was $443.7 million. Cash and cash equivalents fell to $107.6 million from $1.27 billion, largely reflecting the unwind of temporary seasonal balance-sheet positioning. Short- and long-term debt totaled $401.3 million, down from $1.49 billion in total borrowings at September 30, 2017.
For the six months, operating cash flow was $104.2 million, investing cash outflow was $289.6 million, and financing cash outflow was $974.6 million; cash decreased by $1.16 billion. The Bank and holding company exceeded regulatory well-capitalized thresholds; the Bank’s Tier 1 leverage ratio was 8.93% and total qualifying capital ratio was 18.59%.
Material changes and notable items
- Tax product fee income rose, but the company retained all tax-advance loans originated in the 2018 tax season rather than selling most of them as in the prior year. This contributed to higher loan balances and a $18.1 million second-quarter tax-services loan provision, substantially reducing the tax business’s second-quarter pre-tax contribution.
- The allowance for loan losses increased to $27.1 million from $7.5 million at September 30, 2017, primarily due to the retained tax loans. Net loan recoveries for the six-month period were approximately $0.1 million.
- Non-performing loans fell to $6.0 million from $37.6 million at September 30, 2017, mainly after a large agricultural relationship was transferred to foreclosed property and another agricultural loan was paid off. Foreclosed assets increased to $30.1 million, including $29.9 million of agricultural property.
- Unrealized investment-security losses contributed to a $30.3 million six-month other comprehensive loss. Accumulated other comprehensive loss was $21.2 million at March 31, 2018. The company attributed the securities declines mainly to market interest rates and reported no other-than-temporary impairment.
- The Tax Act reduced the federal corporate rate; remeasurement of deferred tax balances generated $3.6 million of additional tax expense in the first quarter. The six-month effective tax rate was 25.3%, versus 20.7% a year earlier.
Outlook, risks, and contingencies
- Management forecast fiscal 2018 card-fee income of $95–$101 million and card-processing expense of $23–$27 million. It expected fiscal 2018 tax-services pre-tax income to be approximately $1–$3 million below fiscal 2017, while expecting the fiscal third-quarter comparison to improve year over year. Results are seasonal, with most tax-business revenue generally in the fiscal second quarter.
- The proposed all-stock Crestmark acquisition remained subject to shareholder, regulatory, and other closing approvals. Risks include delay or failure to close, integration costs, disruption, litigation, and unrealized synergies.
- New consumer-lending arrangements with CURO and Health Credit Services were expected to require upfront investment, with positive earnings effects anticipated in fiscal 2019 and additional growth as programs scale in fiscal 2020. Meta expected to hold up to $350 million of CURO product receivables during the agreement’s first three years.
- Credit risks include unsecured consumer and tax-advance lending, commercial real estate concentrations, and agricultural exposure to low commodity prices and adverse weather. Management cautioned that future losses could exceed reserves and regulators could require additional provisions.
- Interest-rate sensitivity was a key market risk. The company’s modeled one-year net interest income increased 3.4% under a 100-basis-point rise and 11.2% under a 400-basis-point rise in its March 31 snapshot; management cautioned that modeled results are sensitive to seasonal funding balances and assumptions.
- Two disclosed lawsuits had no estimable range of reasonably possible loss: an Inter National Bank dispute involving alleged prepaid-program settlement shortfalls, and a former program manager’s claim for $4.0 million in account balances. The company stated it would vigorously defend both matters.
- Unfunded loan commitments were approximately $289.0 million. Management believed available funding sources would meet foreseeable liquidity needs. The Bank’s well-capitalized status supports brokered-deposit access, but a loss of that status could materially affect liquidity.
Investor verification priorities
- Confirm the registrant’s identity and filing period: this document identifies Meta Financial Group, Inc., for the quarter ended March 31, 2018.
- Assess the performance and loss experience of retained tax-advance loans, including the adequacy of the $27.1 million allowance.
- Review the valuation, sale prospects, and recovery terms for the $29.9 million agricultural foreclosed-property balance.
- Track Crestmark transaction approvals, consideration, integration costs, and expected synergies.
- Monitor execution, credit quality, legal/regulatory treatment, and funding requirements of the new consumer-lending programs.
- Evaluate the impact of securities valuation changes, rising funding costs, seasonal cash and borrowing swings, and the pending legal claims.