Pathward Financial, Inc. (then Meta Financial Group, Inc.) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. The filing is under Meta Financial Group, Inc.; the company announced its transition to Pathward Financial, Inc. The filing’s financial statements are unaudited. Dollar figures below are in millions unless otherwise indicated.
Financial performance
| Metric | Three months ended March 31, 2022 | Prior-year quarter | Six months ended March 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $193.6 | $187.3 | $351.8 | $298.8 |
| Net interest income | $83.8 | $73.9 | $155.4 | $139.8 |
| Provision for credit losses | $32.3 | $30.3 | $32.5 | $36.4 |
| Net income attributable to parent | $49.3 | $59.1 | $110.6 | $87.1 |
| Diluted earnings per share | $1.66 | $1.84 | $3.66 | $2.65 |
| Net interest margin | 4.80% | 3.07% | 4.70% | 3.65% |
| Net cash provided by operating activities | Not presented for quarter | $291.3 | $385.9 |
Quarterly revenue rose about 3%, while parent-attributable net income declined about 17%, reflecting higher noninterest expense and income tax expense and lower noninterest income, partly offset by stronger net interest income. Six-month revenue and net income increased; the $50.0 million gain on sale of the Meta tradenames materially contributed to six-month noninterest income. The company recognized $50.0 million of the $60.0 million sale price; the remaining $10.0 million was held in escrow and not recognized pending completion of phase-out activities.
Financial position, liquidity and capital
- Total assets were $6.89 billion at March 31, up $196.6 million from September 30, 2021. Cash and cash equivalents were $237.7 million, down from $314.0 million.
- Gross loans and leases were $3.73 billion, up $120.6 million from September 30; deposits were $5.83 billion, up $314.9 million. Long-term borrowings were $91.4 million, down from $92.8 million.
- Stockholders’ equity was $763.4 million, down $108.5 million, mainly due to a $77.0 million six-month other comprehensive loss and share repurchases. The company repurchased $146.7 million of shares during the six months.
- Unfunded loan and lease commitments were $1.33 billion. Management said loan repayments and other funding sources should meet foreseeable liquidity needs.
- The company and Bank were classified as well-capitalized. Company ratios included a 6.80% Tier 1 leverage ratio, 11.26% common equity Tier 1 ratio, and 14.16% total capital ratio.
Material changes and notable items
- Quarterly NIM increased to 4.80% from 3.07%, in part because prior-year cash balances were elevated by government stimulus programs and the current earning-asset mix included more loans and investments.
- Noninterest expense rose 7% year over year to $103.2 million for the quarter. Costs included $2.8 million of rebranding expense and $0.9 million of separation-related expense; management reported a $20.7 million sequential increase from the first quarter.
- Quarterly net charge-offs were $11.2 million versus $3.7 million a year earlier, primarily from commercial finance. The allowance for credit losses was $88.6 million, or 2.38% of loans and leases; the higher coverage ratio was largely attributable to seasonal tax-services loans.
- Nonperforming loans and leases were $35.8 million, or 0.95% of loans and leases, versus $55.9 million, or 1.52%, at September 30, 2021. Classified substandard and doubtful loans were $167.9 million and $4.0 million, respectively.
- Available-for-sale securities had $96.8 million of gross unrealized losses at March 31, compared with $11.5 million at September 30. The resulting six-month other comprehensive loss was $77.0 million; management attributed substantially all security losses to credit spreads and interest rates, and stated it did not intend or expect to be required to sell securities before recovery.
- All remaining Community Banking loans were sold in the fiscal first quarter. The company also sold its entire MoneyLion equity investment in the second quarter, recording a $1.3 million net loss, while continuing as a strategic banking-as-a-service provider.
Outlook, risks and controls
- The filing gives no formal earnings or revenue guidance. Management expects taxpayer advance volumes to return to more normalized levels in the 2023 tax season, absent further stimulus or changes to tax-credit payments.
- The full Pathward rebrand was expected by year-end 2022. Management estimated total rebranding expenses of $15–$20 million; $2.8 million was recognized in the reported quarter. The filing identifies customer retention, brand recognition and rebranding costs as risks.
- Management cited uncertainty from COVID-19 effects, economic conditions, inflation, interest-rate changes, Russia-Ukraine-related market impacts, credit performance, fraud and cyber threats, third parties, regulation, and demand for tax-refund products. Interest-rate sensitivity analysis showed modeled one-year net interest-sensitive income increasing 8.1% under a +100-basis-point parallel shift and declining 5.3% under a -100-basis-point shift; actual outcomes may differ.
- A previously identified material weakness involved segregation of duties over lease disbursements in the Crestmark Leasing division. Management reported implementing automated controls and reviewing access rights, and said testing found no instances of duties not being segregated. Disclosure controls were concluded effective as of March 31, 2022, but investors should assess remediation progress and the distinction between disclosure controls and the reported weakness in internal control over financial reporting.
- No material pending legal proceedings or material subsequent events were reported. Management stated there were no material changes in contractual obligations or off-balance-sheet arrangements during the period.
Most important facts for investors to verify
- How much of reported six-month earnings and revenue growth is recurring, excluding the $50.0 million tradename gain and other unusual items.
- Whether higher quarterly charge-offs and seasonal tax-loan reserves signal sustained credit deterioration, and how the allowance performs as tax loans seasonally run off.
- Progress and total cost of the rebrand, including release of the $10.0 million escrowed sale proceeds and customer retention following the transition.
- Remediation and independent validation of the Crestmark Leasing internal-control weakness.
- Deposit stability, liquidity to fund $1.33 billion of commitments, capital after planned debt redemption and repurchases, and exposure to interest-rate movements and securities valuation losses.