PATHWARD FINANCIAL, INC. quarterly report, Q3 FY2011

Business context and reporting period

The supplied filing is Meta Financial Group, Inc.’s unaudited Form 10-Q for the fiscal third quarter ended June 30, 2011, with nine-month results compared with the periods ended June 30, 2010. The request identifies Pathward Financial, Inc., but the filing itself names Meta Financial Group, Inc.; confirm the intended issuer. Dollar amounts below are in millions unless stated otherwise.

The company operated through Traditional Banking and Meta Payment Systems (MPS), including prepaid-card, ATM sponsorship, payment processing and credit programs.

Financial performance and condition

The quarter’s loss before tax was $1.616 million. Nine-month provision for loan losses was $0.025 million, compared with $14.778 million in the prior-year period; the quarter included a $0.161 million negative provision. The filing reports no separate consolidated operating-margin measure.

For the nine months, operating cash flow was $17.577 million, investing cash flow was $(69.741) million, and financing cash flow was $29.871 million. Cash and cash equivalents fell $22.293 million to $65.210 million, primarily as liquidity was invested in mortgage-backed securities.

At June 30, 2011, assets were $1,074.480 million, up 4.3% from September 30, 2010. Available-for-sale securities were $629.108 million, up $122.3 million; net loans were $312.328 million, down $53.7 million. Deposits were $928.589 million, up 3.5%. Borrowings totaled about $41.0 million, including $21.0 million of FHLB advances, $9.682 million in repurchase agreements and $10.310 million of subordinated debentures. Shareholders’ equity was $78.064 million.

Credit indicators worsened: non-performing loans rose to $13.943 million from $8.252 million at September 30, 2010, and non-performing assets rose to $16.403 million from $9.697 million. The allowance for loan losses was $4.882 million, down from $5.234 million. Management said the allowance was appropriate but cautioned that future losses could exceed estimates. The Bank reported capital ratios above well-capitalized thresholds, including a 20.02% total risk-based capital ratio.

Material changes versus prior comparable periods

• Quarterly net income swung to a $1.020 million loss from $3.538 million of income; nine-month income declined to $2.448 million from $9.904 million.
• Non-interest income fell sharply, principally because MPS discontinued iAdvance and certain tax-related programs in October 2010, and recorded customer reimbursements related to regulatory matters.
• MPS reported a quarterly net loss of $1.927 million, versus $2.962 million of income a year earlier. Traditional Banking reported quarterly net income of $1.003 million.
• Net interest income increased modestly, but net interest margin declined as asset yields fell and the asset mix shifted toward government-guaranteed mortgage-backed securities.
• Loans contracted while securities and deposits grew. Non-performing loans increased, including three commercial relationships totaling $9.6 million cited by management as driving the increase.
• The company recorded a $1.508 million goodwill impairment in the first fiscal quarter, attributed primarily to the company’s share-price decline.

Outlook, risks, contingencies and unusual items

The filing provides no quantified earnings or revenue guidance. Management said loan repayments and other funding sources should meet foreseeable liquidity needs, and expected to complete actions required under regulatory orders by applicable deadlines.

On July 15, 2011, after quarter-end, the company and Bank consented to OTS cease-and-desist orders. The related remediation plan requires $4.8 million of customer reimbursements; the Bank also agreed to a $0.4 million civil money penalty. The filing says related charges totaling $5.2 million were recorded in the quarter. Orders impose compliance and capital-planning requirements and require regulatory non-objection for specified dividends, distributions, repurchases and debt actions. Restrictions on certain MPS activities, including iAdvance and tax-related products, remain in effect. The Bank reported that it remained well-capitalized after the reimbursement and penalty.

Regulatory oversight transferred from the OTS to the OCC for the Bank and the Federal Reserve for the holding company on July 21, 2011. The filing identifies possible increased compliance costs and restrictions, and uncertainty around regulatory review. Other risks include interest-rate movements, economic conditions, credit quality, agricultural and commercial real-estate exposures, reliance on third-party processors, and litigation.

Material legal matters include remaining suits concerning fraudulent certificates of deposit, with an estimated possible loss range of $0–$0.4 million; a loan-participation dispute estimated at $0–$0.2 million; a receiver’s suit seeking approximately $1.5 million, with a stated estimated loss range of $0–$0.5 million; and a processor-related card-fraud matter with an estimated range of $0–$0.5 million. A securities class action had entered discovery, and the company said a loss estimate could not be made. ATM-notice suits and claims relating to prepaid reward cards also remained unresolved; the company disputed liability and stated that losses could not be estimated for certain matters.

Unrealized losses on trust-preferred securities totaled about $4.1 million, including securities with losses outstanding for more than a year. Management recorded no other-than-temporary impairment, citing its assessment of credit risk and intent and ability to hold for recovery. The filing also disclosed a $0.6 million loss from fraudulent wire transfers, partly offset by a $0.5 million bond-insurance receivable.

Most important facts for investors to verify

• Confirm the issuer and period: this source is a Meta Financial Group 10-Q for the quarter ended June 30, 2011, not a filing under the name Pathward Financial, Inc.
• Review the OTS orders, the $4.8 million customer remediation and $0.4 million penalty, related accounting, and ongoing restrictions on MPS and capital distributions.
• Assess whether lower MPS fee income can be offset after discontinuation of iAdvance and certain tax programs.
• Track non-performing loans, particularly commercial real-estate relationships, allowance adequacy, and foreclosed assets.
• Evaluate the concentration and valuation risks in the securities portfolio, including trust-preferred holdings and interest-rate sensitivity.
• Monitor the status and potential exposure of the disclosed litigation and third-party processor claims.