PATHWARD FINANCIAL, INC. annual report, FY2017

Business context and reporting period

This is Meta Financial Group, Inc.’s Form 10-K for the fiscal year ended September 30, 2017, not a standalone fourth-quarter filing. The company operated through MetaBank, combining community and specialty lending with nationwide payments, prepaid-card and tax-related services. The supplied filing identifies the registrant as Meta Financial Group, Inc. (ticker CASH), not Pathward Financial, Inc.

Financial performance and position

MetricFY2017 / September 30, 2017FY2016 / September 30, 2016
Total assets$5.23 billion$4.01 billion
Net interest income$93.2 million$77.3 million
Net interest margin, tax-equivalent3.05%3.19%
Non-interest income$172.2 million$100.8 million
Non-interest expense$199.7 million$134.6 million
Provision for loan losses$10.6 million$4.6 million
Net income / diluted EPS$44.9 million / $4.83$33.2 million / $3.91
Operating cash flow$120.0 million$78.5 million
Loans, net$1.32 billion$919.5 million
Deposits$3.22 billion$2.43 billion
Total borrowings$1.49 billion$1.19 billion
Stockholders’ equity$434.5 million$335.0 million

Net income rose about 35%. Revenue gains reflected higher tax-advance, card and refund-transfer fees, as well as loan and investment growth. Net interest income increased 21%, but margin narrowed 14 basis points as funding costs rose. Return on average assets was 1.13% and return on average equity was 11.20%. Investing cash flow was negative $700.4 million, while financing cash flow was positive $1.07 billion; cash and cash equivalents ended at $1.27 billion, up $493.8 million. Management said year-end cash partly reflected temporary balance-sheet repositioning ahead of seasonal tax lending, with excess cash expected to repay overnight borrowings in October.

Liquidity included $1.27 billion in cash and $2.26 billion in investment and mortgage-backed securities. Year-end borrowings included $987 million of overnight federal funds purchased and $415 million of short-term FHLB advances. The Bank was classified as well-capitalized: its Tier 1 leverage ratio was 9.64%, common equity Tier 1 ratio 18.22%, Tier 1 capital ratio 18.22%, and total capital ratio 18.59%.

Material changes versus the prior comparable period

  • Assets increased 30%, deposits 33%, and net loans 43%. Loan growth included commercial real estate, premium finance and a purchased student-loan portfolio.
  • Non-interest income increased 71%, while non-interest expense increased 48%, including acquisition-related costs, higher compensation and amortization, and a $10.2 million intangible impairment.
  • H&R Block did not renew its tax-advance agreement for the 2018 tax season. The relationship contributed approximately $12 million of FY2017 net earnings; the company recorded the impairment charge in the fourth quarter.
  • The company acquired EPS Financial and Specialty Consumer Services in FY2017, expanding tax-transfer and consumer-finance operations. Goodwill rose to $98.7 million and goodwill plus intangible assets totaled $150.9 million.
  • Asset quality weakened: non-performing assets rose to $37.9 million, or 0.72% of assets, from $1.2 million, or 0.03%. Net charge-offs were $8.7 million, versus $5.2 million in FY2016.
  • Non-interest-bearing deposits remained a major funding source, but brokered deposits represented approximately 45.7% of deposits. Payments-related deposits were concentrated among large program-manager relationships.

Outlook, commentary, risks and unusual items

  • No specific earnings or revenue guidance is provided. The Jackson Hewitt agreement was extended through the 2020 tax season and permits up to $750 million of interest-free refund-advance lending annually.
  • After year-end, the Bank purchased a $73 million seasoned, floating-rate student-loan portfolio; the filing says it is serviced by ReliaMax and insured by ReliaMax Surety.
  • Two agricultural relationships drove most of the rise in loans more than 90 days past due. One, with an approximately $7 million balance, was paid in full on November 1, 2017. The company expected recovery on the other, citing collateral and an active collection process; it had $1.8 million of accrued interest at year-end, and a deed-in-lieu process was possible.
  • The allowance for loan losses was $7.5 million, or 0.57% of total loans. Management considered it adequate, but cautioned that actual losses could exceed estimates. The 2017 provision increase reflected loan growth, seasonal tax lending and an agricultural relationship downgrade.
  • Key risks include losing or renegotiating major tax and payments partners; deposit outflows or higher funding costs; reliance on brokered and program-related deposits; credit losses in agricultural, commercial real estate, consumer and tax-advance lending; interest-rate and securities valuation risk; third-party, fraud, cybersecurity and operational risks; regulatory changes; and acquisition integration or impairment.
  • Two disclosed lawsuits remained unresolved, including a former program manager’s $4.0 million claim; management could not estimate a reasonably possible loss range for either matter. The filing reports an unqualified audit opinion and effective internal control over financial reporting.

Most important facts for investors to verify

  • Confirm the registrant and period: this is Meta Financial Group’s FY2017 annual report, not a Pathward-named or standalone Q4 filing.
  • Track the remaining agricultural borrower’s collections, collateral disposition and accrued-interest recovery, and verify the reported post-year-end repayment of the other relationship.
  • Assess earnings replacement after the H&R Block non-renewal, including Jackson Hewitt volumes and performance of the acquired EPS and SCS businesses.
  • Monitor credit quality, charge-offs and reserve adequacy as the loan book expands, particularly student, agricultural, commercial real estate and tax-related exposures.
  • Evaluate the stability and concentration of Payments deposits, the 45.7% brokered-deposit share, and the company’s reliance on short-term borrowings and seasonal funding.
  • Review the full financial statements and notes for investment-security duration and unrealized losses, acquisition earn-outs, contingent commitments, litigation developments and regulatory capital headroom.