Business context and reporting period
This summary covers Meta Financial Group, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter and six months ended March 31, 2017 (fiscal Q2 2017). The filing identifies Meta Financial Group, Inc. as the registrant—not Pathward Financial, Inc.; investors should verify the company and filing match their intended review. The company operates a bank and payments businesses, including tax-related financial products. Results are materially seasonal, with tax-related revenue concentrated in the fiscal second quarter.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
| Metric | Q2 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income), Q2 | $116.1 million | $60.8 million, Q2 2016 |
| Net income, Q2 | $32.1 million; diluted EPS $3.42 | $14.3 million; diluted EPS $1.67, Q2 2016 |
| Total revenue, six months | $155.3 million | $95.2 million, six months 2016 |
| Net income, six months | $33.4 million; diluted EPS $3.63 | $18.3 million; diluted EPS $2.17, six months 2016 |
| Net interest income, Q2 | $24.0 million | $19.9 million, Q2 2016 |
| Net interest margin, Q2 | 2.91% | 3.22%, Q2 2016 |
| Total assets / loans, net of allowance | $3.986 billion / $1.137 billion | $4.006 billion / $919.5 million, September 30, 2016 |
| Deposits / borrowings | $2.872 billion / $587.4 million | $2.430 billion / $1.187 billion, September 30, 2016 |
| Cash and cash equivalents | $67.3 million | $773.8 million, September 30, 2016 |
| Allowance for loan losses | $14.6 million | $5.6 million, September 30, 2016 |
For the six months, operating cash flow was $70.0 million, investing cash outflow was $623.3 million, and financing cash outflow was $153.2 million. Cash declined $706.5 million. Management attributes the sharp cash decrease in part to the unwinding of unusually high cash balances held at September 30, 2016 for tax-season funding. Deposits increased while borrowings fell, mainly due to lower federal funds purchased; quarter-end borrowings can fluctuate with payment-processing and funding cycles.
Q2 non-interest income was $92.2 million, including $63.6 million of tax product fees and $26.5 million of card fees. Q2 non-interest expense was $66.9 million. The reported effective tax rate was 20.7% for Q2 and the first six months. The company declared dividends of $0.26 per share during the six-month period.
Material changes versus the prior comparable period
- Q2 revenue rose 91% and net income more than doubled, driven principally by higher tax product and card fee income, increased loan interest income, and growth in investment income.
- Q2 tax product fees increased $42.5 million (202%) year over year, and card fees rose $8.0 million (43%). The company cited tax advances, refund transfers, tax-season card programs, partner activity, and the EPS acquisition as contributors.
- Q2 net interest income rose 20%, but reported net interest margin fell 31 basis points to 2.91%. Management estimated normalized Q2 NIM of 3.29%–3.32% after adjustments for seasonal tax advances, cash balances, and funding costs.
- Q2 provision for loan losses increased to $8.6 million from $1.2 million; six-month provision was $9.5 million versus $2.0 million. The increase mainly reflected a tax-season loan reserve and a downgrade of a significant agricultural relationship.
- During Q1, the company acquired EPS Financial and Specialty Consumer Services (SCS). These acquisitions added tax-related operations, goodwill, intangible assets, expenses, and contingent consideration. A student-loan portfolio purchase also contributed to consumer-loan growth.
- Q2 non-interest expense rose 60%, including higher compensation, tax-product expense, and intangible amortization. Q2 amortization was $7.1 million, including tax-business seasonality and acquisition-related amortization.
- Available-for-sale securities’ accumulated unrealized gains fell sharply; six-month other comprehensive loss was $22.9 million, largely reflecting changes in unrealized securities values.
Outlook, management commentary, risks, and unusual items
- No formal full-year earnings or revenue guidance is provided. Management expects tax-related revenue to remain concentrated in Q2, with some additional revenue in Q3, and notes that seasonality and tax-processing partners, technology, and the IRS affect results.
- Management expected quarterly intangible amortization to decline by about $5.2 million, to approximately $1.9 million in each of Q3 and Q4 of fiscal 2017. It also expected the effective tax rate to remain near 20.7% for the rest of fiscal 2017.
- Management sees potential for higher NIM if short-term rates rise, citing floating-rate assets and low-cost non-interest-bearing deposits. This is not assured: reported NIM was affected by zero-interest tax advances, cash balances, and seasonal funding costs. Interest-rate sensitivity models are estimates and depend on assumptions about repricing, deposit behavior, and prepayments.
- Credit indicators warrant attention. Past-due loans totaled $50.7 million at March 31, 2017, versus $3.2 million at September 30, 2016, largely reflecting a rise in loans 30–59 days past due, three agricultural relationships, and seasonal refund advances. Non-performing loans were $5.0 million, or 0.43% of loans; $48.7 million of assets were classified substandard. Management cited lower commodity prices and high land rents as agricultural risks and warned that future losses may exceed recent experience.
- Q2 included $2.3 million of non-cash executive stock compensation, $2.1 million of excess tax-season funding expense, $0.8 million of due-diligence expense for an acquisition opportunity no longer pursued, $0.1 million of acquisition-related expense, and $0.1 million of securities losses. The EPS and SCS acquisitions also carried contingent consideration; the SCS cash earn-out liability was $17.3 million and its equity earn-out was initially valued at $24.1 million.
- Unfunded loan commitments were approximately $236.3 million. The company said loan repayments and other funding sources should meet foreseeable liquidity needs, but actual commitment funding could affect liquidity and capital.
- Legal matters include a prepaid-program settlement lawsuit in which the bank cannot estimate a reasonably possible loss range, and a former program manager’s claim for approximately $1.58 million, also with no estimable loss range. The bank says it is vigorously defending both matters.
- The bank and company exceeded regulatory well-capitalized requirements. At March 31, 2017, the bank’s total qualifying capital ratio was 19.76% and the company’s was 19.46%. Management cautioned that a future loss of well-capitalized status could constrain brokered deposits and adversely affect liquidity.
Most important facts for investors to verify
- Confirm that this Meta Financial Group 10-Q is the intended filing, given the request’s Pathward Financial company label.
- Separate recurring performance from tax-season concentration, acquisition contributions, non-cash stock compensation, and other identified unusual expenses.
- Review tax-advance loan loss experience and the adequacy of the $14.6 million allowance, as well as subsequent performance of the downgraded agricultural relationship and past-due loans.
- Assess deposit stability and the effect of seasonal cash, wholesale funding, and overnight borrowings on liquidity and reported margins.
- Verify the assumptions and outcomes behind the SCS earn-outs, acquisition goodwill and intangible values, and expected amortization schedule.
- Monitor the pending legal claims, regulatory capital and deposit classifications, and sensitivity of earnings and economic value to interest-rate changes.