Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal quarter and nine months ended June 30, 2018. The filing identifies Meta Financial Group, Inc. as the registrant; it does not identify Pathward Financial, Inc. The company operates payments and tax-related businesses, community banking, and other lending businesses.
Key financial results
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Total revenue | $61.6 million, up 11% year over year | $241.9 million, up 15% |
| Net interest income | $28.4 million, up 14% | $82.0 million, up 19% |
| Provision for loan losses | $5.3 million, versus $1.2 million | $24.7 million, versus $10.7 million |
| Net income | $6.8 million, versus $9.8 million | $42.9 million, versus $43.2 million |
| Diluted earnings per share | $0.70, versus $1.04 | $4.41, versus $4.66 |
| Net interest margin | 2.94%, versus 2.76% | 2.77%, versus 2.55% |
At June 30, 2018, total assets were $4.17 billion, deposits were $3.52 billion, and stockholders’ equity was $443.9 million. Cash and cash equivalents were $71.3 million, down from $1.27 billion at September 30, 2017. Short-term and long-term debt were $27.3 million and $85.6 million, respectively. The allowance for loan losses was $22.0 million, compared with $7.5 million at fiscal year-end.
For the nine months, operating cash flow was $112.3 million, investing cash flow was negative $225.3 million, and financing cash flow was negative $1.08 billion. Cash declined by $1.20 billion. Management attributed the large balance-sheet movements in part to temporary cash positioning for tax-season activity and related repayment of short-term funding.
Material changes versus comparable periods
- Quarterly revenue and net interest income increased, supported by loan growth and a shift toward higher-yielding lending assets. Quarterly net income fell as loan-loss provision and non-interest expenses rose.
- Nine-month revenue increased by $30.8 million, but higher non-interest expense and credit provision largely offset revenue and net-interest-income growth; net income was slightly lower.
- Loans, net of allowance, increased 20% from September 30, 2017, to $1.58 billion. Deposits increased 9% to $3.52 billion, while total borrowings fell 92% to $112.9 million.
- Accumulated other comprehensive loss was $28.6 million, versus accumulated other comprehensive income of $9.2 million at September 30, 2017. Management reported that securities’ unrealized losses primarily reflected market interest-rate changes and recorded no other-than-temporary impairment.
- Non-performing loans were $5.7 million, down from $37.6 million at September 30, 2017. Foreclosed assets rose to $29.9 million, primarily after the company took possession of collateral for a large agricultural loan relationship.
Outlook, commentary, risks and unusual items
- Student loan insurance: ReliaMax Surety was declared insolvent and placed in liquidation in June 2018, leaving the purchased student loan portfolios uninsured. The company recorded a $3.0 million quarterly provision and expected further provision expense of $0.6 million to $0.8 million per quarter until recovery of unearned premiums, potentially a year or longer. Management estimated portfolio pre-tax yields, net of provisions and direct servicing costs, of 5.50% to 7.50%, but cautioned that recoveries are uncertain.
- Consumer lending: New programs originated $27.0 million in loans during the quarter. Management anticipated more than $45.0 million of consumer credit originations in fiscal Q4 and expected the new programs to contribute positively to earnings in fiscal 2019, with further growth as they scale in fiscal 2020. The filing highlights unsecured-loan credit, fraud, third-party conduct, and regulatory or “true lender” challenges as risks.
- Other outlook: Management expected fiscal 2018 card fee income of $95 million to $100 million and card fee expense of $24 million to $29 million. It expected the 2018 tax season’s pre-tax income to be close to, but below, the prior year. Card-fee growth could be moderated by declining residual income.
- Acquisition and unusual expenses: The August 1, 2018 Crestmark acquisition, completed after quarter-end, had an indicated aggregate value of $316.1 million in stock. Quarterly pre-tax results included $2.4 million of merger-related expenses, $0.8 million related to early termination of a vendor contract, and the $3.0 million student-loan provision. The acquisition creates integration, customer-retention, cost, and execution risks.
- Credit and legal exposures: A $1.6 million insurance premium finance receivable more than 210 days past due is subject to litigation seeking return of unearned premiums. Other disclosed proceedings include a prepaid-program dispute claiming $4.0 million and a separate NetSpend-related case for which the company said a loss range could not be estimated. The company also reported $282.8 million of unfunded loan commitments.
- Capital and interest rates: The company and bank exceeded regulatory well-capitalized thresholds; the bank’s reported capital ratios included a 10.16% Tier 1 leverage ratio and an 18.50% total qualifying capital ratio. Management’s rate-sensitivity scenarios remained within policy limits, though modeled economic value of equity declines as rates rise.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Meta Financial Group, Inc., not Pathward Financial, Inc.
- Track ReliaMax liquidation and actual recovery of student-loan insurance premiums, including subsequent credit provisions and realized portfolio yields.
- Assess loan-loss trends, particularly tax-service and consumer lending exposures, and whether the allowance remains adequate as loan balances grow.
- Review Crestmark integration progress, realized synergies, acquisition-related costs, and any dilution or customer attrition.
- Monitor consumer-loan program originations, credit performance, partner conduct, regulatory developments, and whether management’s earnings expectations are achieved.
- Evaluate liquidity and funding needs in light of low quarter-end cash, deposit seasonality, wholesale funding, and outstanding commitments.