Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2019 (its fiscal third quarter), with nine-month results compared with the periods ended June 30, 2018. The supplied filing is for Meta Financial Group, not a registrant named Pathward Financial, Inc.
Meta operates Payments, Banking, and Corporate Services/Other businesses. Crestmark, acquired in August 2018, materially expanded lending and lease operations; the year-ago quarter did not include Crestmark’s operations.
Financial performance and condition
| Metric | Three months ended June 30, 2019 | Comparable period / change |
|---|---|---|
| Total revenue | $110.8 million | $61.6 million; up 80% |
| Net interest income | $67.0 million | $28.4 million; up 136% |
| Net income attributable to parent | $29.3 million; diluted EPS $0.75 | $6.8 million; diluted EPS $0.23 |
| Net interest margin | 5.07%; tax-equivalent 5.15% | 2.94%; tax-equivalent 3.23% |
| Provision for loan and lease losses | $9.1 million | $5.3 million |
| Noninterest income / expense | $43.8 million / $72.5 million | $33.2 million / $49.1 million |
For the nine months, revenue was $385.2 million, net income attributable to the parent was $76.8 million, diluted EPS was $1.95, and net interest income was $198.6 million. The comparable figures were $241.9 million, $42.9 million, $1.47, and $82.0 million, respectively. Nine-month provision expense increased to $51.5 million from $24.7 million. The company recorded a $3.2 million income tax benefit for the nine months, primarily reflecting anticipated solar investment tax credits.
At June 30, 2019, total assets were $6.10 billion, up 5% from September 30, 2018. Gross loans and leases were $3.63 billion, up 23%; deposits were $4.78 billion, up 8%; and stockholders’ equity was $822.9 million, versus $747.7 million. The investment portfolio declined 26% to $1.50 billion. Total borrowings fell 31% to $356.4 million, though the company replaced some short-term funding with $110.0 million of new long-term borrowings during the quarter. Cash and cash equivalents were $100.7 million.
For the nine months, operating cash flow was $171.3 million, investing cash outflow was $284.8 million, and financing cash inflow was $114.3 million; cash increased $0.8 million to $100.7 million. The allowance for loan and lease losses rose to $43.5 million from $13.0 million. Nonperforming assets were $51.0 million, or 0.84% of assets, versus $41.8 million, or 0.72%, at September 30, 2018. The Bank and company exceeded regulatory well-capitalized requirements; the Bank’s total capital ratio was 13.26% and the company’s was 13.22%.
Material changes versus the prior comparable period
- Results benefited substantially from Crestmark and a higher proportion of loans and leases in earning assets. Average loans and leases in the quarter were up $2.04 billion year over year; management attributed the higher margin chiefly to Crestmark’s lending yields and portfolio mix.
- Quarterly noninterest income increased 32%, supported by rental income, loan and lease sale gains, other income, and deposit fees. Noninterest expense increased 48%, including higher compensation, equipment depreciation, amortization, and other costs.
- Card fee income and tax product fees were lower in the quarter. Funding costs also rose: quarterly cost of funds averaged 1.14%, versus 0.62% a year earlier.
- Loans classified as substandard increased to $35.0 million from $24.6 million at September 30, 2018; the filing reported no assets classified as doubtful or loss.
Outlook, risks, contingencies, and unusual items
- Management’s near-term priorities are to increase core-deposit funding, optimize the earning-asset mix, and improve operating efficiency. Management expects net interest margin to expand over time as lending grows and the Payments division’s low-cost deposits are leveraged; no specific earnings or revenue guidance is provided.
- DC Solar entities entered bankruptcy and became subjects of federal investigations involving alleged fraud. Meta reported a $6.6 million after-tax earnings reduction and an $8.5 million regulatory-capital reduction in the March 2019 quarter; no further DC Solar adjustment was recorded in the June quarter. Meta had repossessed 173 of 176 related units, but timing and ability to re-lease them remained uncertain. The company also disclosed potential recapture risk for $7.9 million of previously recognized solar investment tax credits.
- A material weakness in Crestmark’s IT access controls and related review procedures made disclosure controls ineffective at June 30. No resulting material misstatement was identified. Management was implementing remediation and expected to complete it in fiscal Q4 2019, but did not assure successful or timely remediation.
- Other exposures include $1.01 billion of unfunded loan commitments; a $4.0 million claim by Card Limited for which a reasonably possible loss range could not be estimated; and an accrued claim by Ohio Valley Bank alleging more than $3.0 million in damages. A separate NetSpend-related case was settled and dismissed in June 2019.
- Interest-rate sensitivity analysis was within Board policy limits. Management noted that falling rates could compress margins because costs on low-cost prepaid-related deposits may not decline as much as asset yields. The company also expected to adopt the new lease-accounting standard on October 1, 2019 and did not expect a material effect on capital ratios.
Important facts for investors to verify
- Confirm the intended issuer: this filing identifies Meta Financial Group, Inc., while the request metadata names Pathward Financial, Inc.
- Review the sustainability of earnings growth and margins excluding Crestmark-related growth, loan-sale gains, and solar tax-credit benefits.
- Track allowance adequacy, nonperforming assets, substandard credits, and the concentration and performance of National Lending portfolios.
- Monitor DC Solar asset recovery, re-leasing, potential tax-credit recapture, and any additional impairment or goodwill adjustments.
- Confirm remediation and independent testing of the Crestmark material weakness, and follow the disclosed legal claims and off-balance-sheet commitments.