Business context and reporting period
Entity discrepancy: The supplied filing is for Meta Financial Group, Inc. and subsidiaries, not Pathward Financial, Inc. The filing covers its fiscal first quarter, the three months ended December 31, 2011, with balance-sheet comparisons to September 30, 2011 and income comparisons to the quarter ended December 31, 2010. Amounts below are in U.S. dollars.
The company operated through Retail Banking and Meta Payment Systems (MPS), which provides prepaid-card, ATM sponsorship, credit and related services. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Quarter / date | Comparable period / date |
|---|---|---|
| Net interest income | $8.64 million | $8.28 million |
| Net interest margin | 3.02% | 3.31% |
| Non-interest income | $15.68 million | $15.31 million |
| Non-interest expense | $18.79 million | $21.62 million |
| Provision for loan losses | $0.70 million | Negative provision of $0.03 million |
| Net income | $3.09 million; diluted EPS $0.97 | $0.72 million; diluted EPS $0.23 |
| Operating cash flow | $3.29 million | $1.47 million |
| Total assets | $1.36 billion | $1.28 billion at September 30, 2011 |
| Total deposits | $1.22 billion | $1.14 billion at September 30, 2011 |
| Stockholders’ equity | $85.56 million | $80.58 million at September 30, 2011 |
Net interest income plus non-interest income was approximately $24.32 million, up from $23.58 million a year earlier. Net income rose substantially year over year. The expense decline was a major contributor: the prior-year quarter included a $1.57 million goodwill impairment and a $0.60 million reserve for fraudulently authorized wire transfers; neither was recorded in the current quarter. Compensation expense also fell by $0.62 million.
Cash and cash equivalents fell $120.01 million to $156.88 million, primarily as the company invested liquidity in securities. Investing activities used $206.25 million, while financing activities provided $82.95 million. Available-for-sale securities increased $193.56 million to $812.81 million. Net loans were $317.80 million. Total borrowings were approximately $28.76 million, comprising FHLB advances, repurchase agreements and subordinated debentures.
Deposits increased $83.18 million; MPS deposit growth was largely tied to existing prepaid-card programs, while certificates of deposit declined $9.89 million. Low- and no-cost checking represented 90% of deposits, versus 87% a year earlier. The bank exceeded regulatory well-capitalized thresholds: Tier 1 core capital was 6.21% of adjusted assets and total risk-based capital was 18.58% of risk-weighted assets.
Material changes versus comparable periods
- Net interest income increased 4.4%, but net interest margin fell 29 basis points to 3.02%. Management attributed lower asset yields partly to a greater share of government-guaranteed mortgage-backed securities.
- Interest expense declined to $0.98 million from $1.34 million as funding costs eased; the reported rate on deposits and interest-bearing liabilities fell to 0.35% from 0.55%.
- The loan-loss provision increased to $0.70 million, reflecting higher general reserves and historical loss rates for commercial real estate and multifamily loans.
- Non-performing loans declined to $10.46 million, or 3.3% of loans, from $13.21 million, or 4.1%, at September 30, 2011. The decrease included a commercial relationship partially charged off and transferred to foreclosed assets.
- The allowance for loan losses ended at $4.57 million, down from $4.93 million, after $1.07 million in charge-offs and $0.70 million of provision expense.
- MPS reported net income of $1.94 million versus $1.58 million; Retail Banking reported $1.26 million versus a $0.67 million loss.
Outlook, risks, contingencies and unusual items
No quantified earnings or revenue guidance is provided. Management said available liquidity sources should meet foreseeable short- and long-term needs, including $45.5 million of loan commitments and unused credit lines. The filing identifies sensitivity to interest rates, economic conditions, credit quality, commercial real estate, agriculture, consumer repayment capacity, third-party processors, technology, regulation and litigation as important risks.
Credit quality remains a key watch item. Commercial and multifamily real estate loans accounted for most of the allowance tied to specific impaired loans. Management considers the allowance appropriate but warns future losses or regulatory review could require additional provisions. Non-performing assets were $14.42 million, or 1.06% of assets. Foreclosed and repossessed assets rose to $3.95 million, including a $1.7 million commercial relationship transferred during the quarter.
The company and the Bank were operating under July 2011 OTS Consent Orders and cooperating with the successor regulator, the OCC. Management reported progress, but said it could not assure how the OCC would assess compliance following its examination.
Legal matters include a tentative settlement of a securities class action, subject to court and class approval; the company expected insurance to cover the settlement and did not expect additional material losses if approved as anticipated. Six ATM-notice lawsuits were disclosed, with indemnification obligations from ATM operators, although the extent of recovery was uncertain. Other claims included a loan-transfer dispute with an estimated reasonably possible loss range of $0–$0.5 million, a processor dispute with a $0–$0.5 million range, and Springbok prepaid-card claims with a $0–$0.3 million range. A derivative suit was at an early stage and its loss range could not be estimated.
Subsequent event: In fiscal Q2, the company completed a sale of $299 million of Ginnie Mae securities, generating an $11.5 million pretax gain and an expected $7.2 million after-tax gain. Management expected this to add approximately 50 basis points to MetaBank’s Tier 1 core capital ratio and approximately $2.26 per share to tangible book value at March 31, 2012.
Available-for-sale securities included $24.83 million of trust preferred securities with $6.43 million of unrealized losses. Management attributed the losses to market factors, reported no other-than-temporary impairment, and said it intended and was able to hold the securities for recovery. The filing also reported a $1.05 million securities-sale gain in the current quarter.
Most important facts for investors to verify
- Confirm the intended issuer: this filing names Meta Financial Group, Inc., not Pathward Financial, Inc.
- Assess whether recurring earnings support the quarter’s net income, given prior-year impairment and fraud-reserve items and current-quarter securities-sale gains.
- Track the falling net interest margin and the company’s growing concentration in mortgage-backed securities.
- Review commercial real estate credit exposure, charge-offs, foreclosed assets and the adequacy of the loan-loss allowance.
- Verify final court approval, insurance coverage and potential exposure across the disclosed litigation matters.
- Monitor OCC examination findings and completion of the Consent Order requirements.
- Confirm realization and capital effects of the subsequent $299 million securities sale in the next reported quarter.