Business context and reporting period
This is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal third quarter and nine months ended June 30, 2016. The filing identifies Meta Financial Group—not Pathward Financial, Inc.—as the registrant. Meta Financial is a bank holding company whose principal subsidiary is MetaBank; its businesses include Payments, Banking, and Corporate Services/Other.
Financial results and position
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Interest income | $20.8 million, up from $15.3 million | $59.7 million, up from $45.2 million |
| Net interest income | $19.9 million, up 36% | $57.4 million, up 32% |
| Net interest margin | 3.27%, versus 3.00% | 3.23%, versus 3.01% |
| Non-interest income | $23.8 million, versus $15.4 million | $81.5 million, versus $43.1 million |
| Provision for loan losses | $2.1 million, versus $0.7 million | $4.1 million, versus $1.3 million |
| Non-interest expense | $31.6 million, up 29% | $103.4 million, up 47% |
| Net income | $8.9 million; diluted EPS $1.04 | $27.2 million; diluted EPS $3.22 |
Assets were $3.14 billion at June 30, up 24% from September 30, 2015. Net loans were $854.5 million, up 21%; total securities were $2.05 billion, up 28%. Deposits grew 32% to $2.19 billion, primarily from non-interest-bearing Payments deposits. Stockholders’ equity was $332.7 million, versus $271.3 million.
Cash and cash equivalents were $36.8 million. For the nine-month period, operating cash flow was $49.4 million, investing cash outflow was $575.8 million, and financing cash inflow was $535.5 million. Borrowings totaled approximately $556.5 million, including $437.0 million of federal funds purchased and $107.0 million of FHLB advances; quarter-end overnight borrowings can fluctuate materially with program and payroll timing.
Credit measures included $2.2 million of non-performing loans (0.26% of loans), down from $7.8 million (1.09%) at September 30, 2015. The allowance for loan losses was $6.1 million, compared with $6.3 million. The Bank and Company exceeded regulatory minimums for well-capitalized status; the Bank’s total qualifying capital ratio was 18.52%.
Material changes versus the prior comparable periods
- Quarterly net income increased from $4.6 million to $8.9 million; nine-month net income rose from $13.4 million to $27.2 million. Management attributed growth primarily to higher net interest income and non-interest income, partly offset by higher expenses.
- Nine-month non-interest income included $23.1 million of tax product fees, with no comparable amount in the prior-year period. Card fees rose to $52.6 million for nine months from $40.6 million.
- Growth in earning assets, loans, and securities, funded largely by Payments-related deposits, supported net interest income and margin expansion.
- Expenses rose materially, including compensation, card processing, and $8.6 million of tax product expense for the nine-month period. The allowance provision also increased, and net charge-offs were $4.2 million versus $0.6 million a year earlier, primarily reflecting a large agricultural relationship.
- Other comprehensive income increased by $23.1 million for the nine months, mainly from unrealized securities gains; this contributed to higher reported equity and book value.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management said compensation expense growth should moderate in the fourth quarter of fiscal 2016 and fiscal 2017, excluding potential acquisitions.
- Payments and tax-refund processing are seasonal; tax product revenue is concentrated in the second and third fiscal quarters. Management noted that tax product fees contributed significantly to fiscal 2016 earnings to date.
- Management expects the growing low-cost, non-interest-bearing deposit base to support funding and returns, particularly in rising-rate environments. However, the required June 30 interest-rate sensitivity analysis showed net interest income down 6.6% under a 100-basis-point decline, outside the Board’s stated policy limit; management’s alternative analysis also showed downside under that scenario. The filing explains that quarter-end program funding temporarily elevated overnight borrowings.
- Management cited lower agricultural commodity prices and high land rents as potential pressures on agricultural borrowers, and cautioned that future agricultural loan losses could exceed recent history. Commercial real estate, agricultural, consumer, and business lending also carry borrower, collateral, and economic risks.
- Five class actions and one individual lawsuit relate to alleged RushCard prepaid-card access disruptions in October 2015. The company estimated a reasonably possible loss range of $0 to $0.1 million across these matters; several actions were settled or awaiting final approval. A separate NetSpend-related lawsuit has no estimable loss range at this stage. In agricultural lending litigation, the Bank obtained a $6.1 million judgment but described uncertainty in recovery; a separate dispute involves $481,000.
- Unfunded loan commitments were approximately $158.1 million. Management considered liquidity adequate for foreseeable needs. The Bank’s well-capitalized status supports brokered-deposit access, but a future loss of that status could adversely affect liquidity.
Key investor verification points
- Confirm the registrant identity and ticker for the requested company: this filing is for Meta Financial Group, Inc. and refers to NASDAQ symbol CASH.
- Assess the sustainability and seasonality of tax product and card fee growth, and the associated expense burden.
- Review deposit concentration, brokered-deposit exposure, and reliance on short-term federal funds funding.
- Evaluate agricultural credit quality, charge-offs, classified assets, and allowance adequacy against commodity-price and land-rent risks.
- Track interest-rate sensitivity, especially the modeled decline-rate scenario and its sensitivity to temporary quarter-end borrowing levels.
- Monitor RushCard and other litigation, regulatory examinations, and recovery prospects on the agricultural judgments.