Business context and reporting period
The supplied filing is Meta Financial Group, Inc.’s Form 10-Q for the quarter ended June 30, 2017, not a filing identified as Pathward Financial, Inc. It covers fiscal Q3 and the first nine months of fiscal 2017. MetaBank’s businesses include payments and tax-related products, consumer and specialty finance, and retail banking.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $55.8 | $43.7 | $211.1 | $139.0 |
| Net interest income | $24.9 | $19.9 | $68.7 | $57.4 |
| Provision for loan losses | $1.2 | $2.1 | $10.7 | $4.1 |
| Net income | $9.8 | $8.9 | $43.2 | $27.2 |
| Diluted EPS | $1.04 | $1.04 | $4.66 | $3.21 |
- Q3 net interest margin was 3.25%, down from 3.27% a year earlier; nine-month margin was 3.02%, versus 3.23%. Q3 cost of funds rose to 0.45% from 0.13%.
- Nine-month operating cash flow was $82.8 million, compared with $50.1 million. Investing activities used $676.6 million and financing activities used $114.4 million. Cash and cash equivalents ended at $65.6 million, down from $773.8 million at September 30, 2016; management attributed much of the decline to temporary tax-season balance-sheet positioning at the prior year-end.
- Total assets were $4.02 billion, broadly unchanged from September 2016. Net loans were $1.21 billion, up 32%; securities were $2.39 billion, up 14%. Deposits rose 30% to $3.15 billion, while borrowings fell 69% to $369.7 million. Stockholders’ equity was $430.2 million.
- At June 30, the Company’s total qualifying capital ratio was 19.08% and the Bank’s was 19.34%; both exceeded the stated well-capitalized thresholds.
Material changes versus comparable periods
- Nine-month revenue increased 52% and net income increased 59% year over year, driven by tax advance, card and refund-transfer fees, higher loan interest income, and investment growth. Q3 revenue rose 28%, while net income increased about 10%; diluted EPS was unchanged at $1.04.
- Non-interest income for the first nine months rose to $142.3 million from $81.5 million, while non-interest expense increased to $145.9 million from $103.4 million. Q3 expense included higher compensation, acquisition-related amortization, severance, and executive stock compensation.
- The EPS Financial and Specialty Consumer Services acquisitions, completed in November and December 2016, added businesses, loans, goodwill and intangible assets. Goodwill reached $98.7 million and intangible assets $64.8 million.
- The allowance for loan losses increased to $15.0 million from $5.6 million at September 30, 2016, principally reflecting an $8.6 million reserve for tax-season loans and agricultural credit downgrades.
Outlook, risks, contingencies and unusual items
- Customer relationship change: After quarter-end, H&R Block advised that it would not offer the Company’s interest-free refund advances for the 2018 tax season. The relationship contributed approximately $12 million of fiscal 2017 net earnings. Management preliminarily estimated a $10.7 million pretax intangible-asset impairment in fiscal Q4 and said it was pursuing replacement and expanded partner business.
- Offsetting partner extension: MetaBank extended its Jackson Hewitt agreement through the 2020 tax season, with annual capacity of up to $750 million in interest-free refund advances, $300 million more than the prior year. Management said it expected to recoup a significant portion of the H&R Block-related earnings loss; this is an expectation, not a guarantee.
- Credit quality: Non-performing assets were $47.0 million, or 1.17% of assets, versus $1.2 million at September 2016. Past-due loans totaled $52.8 million; the increase primarily reflected two agricultural relationships more than 90 days past due and tax advances not repaid on schedule. Management described the agricultural loans as well collateralized and tax advances as more than 94% reserved, but collection and loss outcomes remain uncertain. Management also cited lower commodity prices and dry or drought conditions as risks to agricultural borrowers.
- Legal and regulatory matters: Disclosed litigation includes a prepaid-program-related claim for which the Bank said a loss range could not be estimated, and a separate claim seeking approximately $1.6 million. The filing also describes the CFPB’s class-action-waiver rule and possible implementation requirements; the rule could be blocked by legislative or other action.
- Other exposures: Unfunded loan commitments were approximately $263.5 million. The Company identified interest-rate, third-party/vendor, tax-partner, regulatory, technology, acquisition and litigation risks. It said liquidity sources should meet foreseeable needs and that the Bank remained well capitalized.
- The business is seasonal, with tax-related revenue concentrated in the first half of the fiscal year. Management stated the interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document is Meta Financial Group, Inc., although the request metadata names Pathward Financial, Inc.
- Track the actual earnings impact and impairment from the H&R Block non-renewal, and whether replacement partners offset the lost business.
- Monitor Jackson Hewitt loan volumes and performance, tax-advance collections and reserve adequacy, and the two delinquent agricultural relationships.
- Assess sustainability of fee growth and the rising expense base, including acquisition-related amortization and compensation.
- Review funding mix, seasonal cash and borrowing fluctuations, deposit concentrations, and interest-rate sensitivity; reported interest-rate models are snapshots and management notes their limitations.
- Follow the legal proceedings and regulatory developments, including any change in potential loss estimates or required product-contract changes.