PATHWARD FINANCIAL, INC. quarterly report, Q1 FY2019

Business context and reporting period

This is Meta Financial Group, Inc.’s Form 10-Q for the fiscal quarter ended December 31, 2018 (fiscal 2019 Q1), not a filing under the “Pathward Financial, Inc.” name in the request metadata. Meta reported through Payments, Banking, and Corporate Services/Other segments. Comparisons below are with the three months ended December 31, 2017, unless noted.

Financial results and position

At December 31, 2018, total assets were $6.18 billion, up 6% from September 30, 2018. Gross loans and leases were $3.33 billion, up 13%; deposits were $4.94 billion, up 11%. Cash and cash equivalents were $164.2 million. Total borrowings were $320.3 million, down from $514.7 million at September 30; this comprised $231.3 million short-term and $89.0 million long-term debt. Stockholders’ equity was $770.7 million.

Investing cash outflow was $299.3 million and financing cash inflow was $311.6 million; cash increased $64.2 million during the quarter. The allowance for loan and lease losses rose to $21.3 million from $13.0 million. Nonperforming loans and leases were $13.9 million, or 0.42% of loans and leases, versus $10.2 million, or 0.35%, at September 30. Nonperforming assets totaled $45.4 million, 0.73% of assets.

Material changes and drivers

• Results benefited primarily from the Crestmark acquisition, completed August 1, 2018, and the resulting larger commercial finance portfolio and improved earning-asset mix. Crestmark contributed to higher loan balances and yields; purchase-accounting accretion added 18 basis points to tax-equivalent NIM.
• National Lending loans and leases increased $303.0 million from September 30, including $111.1 million in warehouse finance, $108.0 million in commercial finance, and $75.5 million in tax services. Community Banking loans grew $80.4 million.
• Noninterest income rose $8.5 million year over year, including $10.9 million of rental income, partly offset by a $5.9 million decline in card fees as two non-strategic payments relationships wound down. Noninterest expense rose $30.3 million, principally from Crestmark-related staffing and costs, operating-lease equipment depreciation, and amortization.
• Deposit growth included higher noninterest-bearing and wholesale deposits; certificates of deposit fell $105.6 million. Wholesale deposits were $1.79 billion at quarter-end. Management identified increasing core-deposit funding as a near-term priority.

Outlook, risks, contingencies and unusual items

• Management expects NIM, tax-equivalent, to continue increasing as loans and leases and noninterest-bearing checking deposits grow. It announced near-term priorities to increase core-deposit funding, optimize the earning-asset mix, and improve operating efficiency; it gave no quantified earnings or revenue guidance.
• Management said expected cumulative net losses on current prime and non-prime consumer credit programs were under 8% and 10%, respectively, and described contractual loss triggers that can suspend or terminate originations. It said losses of 15%–20% for prime or 25%–30% for non-prime would be needed for the current 1% program allowance to be inadequate; actual outcomes depend on loss timing and curve shape.
• The quarter included a $1.7 million income-tax benefit and an effective tax rate of negative 11.56%, primarily reflecting expected investment tax credits. The filing states that future tax-credit amounts and timing depend on solar-project originations and actual credits earned.
• Following the CEO transition, former CEO J. Tyler Haahr’s employment ended January 30, 2019. A transition agreement is expected to produce $6.1 million of compensation expense in fiscal Q2 2019.
• Material risks include interest-rate and funding-cost changes, reliance on wholesale and brokered deposits, credit quality and loan-loss estimates, Crestmark integration and expected synergies, tax-season and government-shutdown effects, regulatory matters, and litigation. Disclosed claims include a $4.0 million claim by Card Limited and a claim alleging more than $3.0 million in damages by Ohio Valley Bank; the company said it could not estimate reasonably possible loss ranges for these matters. It is also pursuing recovery of just over $1.6 million in unearned insurance premiums. The filing says there were no material changes to the risk factors in its latest annual report.
• The Bank and company exceeded regulatory well-capitalized thresholds. At December 31, the Bank’s total qualifying capital ratio was 12.41% versus a 10.00% well-capitalized threshold; its Tier 1 leverage ratio was 9.01% versus 5.00%. A $25 million no-fee credit line was undrawn.

Important facts for investors to verify

• Confirm the filing identity: the supplied filing is Meta Financial Group’s, despite the Pathward metadata, and covers fiscal Q1 2019.
• Assess how much of the earnings and margin improvement is sustainable versus attributable to the Crestmark acquisition, purchase-accounting accretion, and the unusual tax benefit.
• Track credit quality and reserve coverage as the loan book grows, especially in commercial finance, consumer finance, and tax services; review the rise in nonperforming loans and allowance.
• Monitor the mix and cost of funding, including wholesale deposits, short-term borrowing needs, and management’s stated shift toward core deposits.
• Review subsequent-period results for the $6.1 million transition expense, legal developments, and realization of solar investment tax credits.