Meta Financial Group, Inc.® Reports Net Income of $31.4 million for Second Quarter of Fiscal 2018

Apr 30 2018

Continued expansion of direct-to-consumer lending relationships

SIOUX FALLS, S.D., April 30, 2018 (GLOBE NEWSWIRE) -- Meta Financial Group, Inc.® (Nasdaq:CASH) (“Meta” or the “Company”)

Highlights for the 2018 Fiscal Second Quarter Ended March 31, 2018

  • The Company recorded net income of $31.4 million, or $3.23 per diluted share, for the three months ended March 31, 2018, compared to net income of $32.1 million, or $3.42 per diluted share, for the three months ended March 31, 2017, a decrease of 2%.  The 2018 fiscal second quarter pre-tax results included $2.2 million of merger and acquisition related expenses, $0.5 million payout of severance costs related to synergy efforts in the Company's tax divisions, and a $0.2 million loss on sale of investments. The 2018 fiscal second quarter pre-tax results also included $2.7 million in amortization of intangible assets and $1.3 million in non-cash stock-related compensation associated with executive officer employment agreements (see Select Quarterly Expenses table).

  • Net interest income was $27.4 million in the 2018 fiscal second quarter, an increase of $3.4 million, or 14%, compared to $24.0 million in the second quarter of fiscal 2017.  This increase was largely driven by increased loan balances, primarily in the portfolios of community banking, purchased student loans, and commercial insurance premium finance loans. A rise in interest expense, largely due to an increase in short-term funding rates and an increase in wholesale funding balances due to retaining more tax services loans on the Company's balance sheet, partially offset the increase in interest income.

  • Card fee income increased $0.3 million, or 1%, to $26.9 million for the 2018 fiscal second quarter when compared to the same quarter in 2017. Card fee growth with respect to the 2018 fiscal second quarter compared to the same period of the prior year was negatively affected by a promotional campaign during the second quarter of fiscal 2017 that has since expired as expected. Excluding the year over year change for the promotional campaign's partner, card fee income would have been up $1.3 million, or 5%, when comparing the 2018 fiscal second quarter to the same period of the prior year. The Company expects fiscal year 2018 total card fee income to be between $95.0 million and $101.0 million and expects total card processing expense to be between $23.0 million and $27.0 million.

  • For the three months ended March 31, 2018, compared to the same period of the prior year, tax product fee income increased $4.0 million, or 6%, from $63.6 million to $67.6 million, tax product expense decreased $2.0 million, or 15%, from $13.3 million to $11.3 million and provision for loan losses related to tax services loans increased $10.2 million, or 130%, from $7.9 million to $18.1 million. The increase in tax product fee income and provision for loan losses was primarily due to retaining all tax advance loans originated during the 2018 tax season, as opposed to the previous year when a majority of these loans were sold. When comparing pre-tax income for the tax services business, the 2018 fiscal first quarter was higher than the same period of the prior year, while the 2018 fiscal second quarter was lower than the same period of the prior year.  The Company expects 2018 fiscal third quarter pre-tax income to be higher than the same period of the prior year and now expects total fiscal 2018 pre-tax income for our tax services business to be approximately $1 million to $3 million lower than for total fiscal 2017.

  • The Company's 2018 fiscal second quarter average assets grew to $4.70 billion, compared to $4.41 billion in the 2017 fiscal second quarter, an increase of 7%, primarily driven by growth in loan balances.

  • Total loans receivable, net of allowance for loan losses, increased $353.9 million, or 31%, at March 31, 2018, compared to March 31, 2017. This increase was primarily related to growth in commercial real estate loans, consumer loans, due to the purchased student loan portfolios and tax advance loans, and commercial insurance premium finance loans.

  • Payments division average deposits increased $190.9 million, or 8%, for the 2018 fiscal second quarter when compared to the same quarter of 2017.

  • Non-performing assets (“NPAs”) were 0.84% of total assets at March 31, 2018, compared to 0.12% at March 31, 2017. See Credit Quality section below for further detail.

Business Updates

  • On April 30, 2018, Meta announced an expanded, four-year agreement with AAA. Together, Meta and AAA anticipate bringing robust payments solutions to US-based AAA Clubs. Under this new agreement, MetaBank and AAA will expand distribution of the payments products, as well as enhancing them based on member feedback and consumer preference, adding features like mobile applications for card management and additional load capabilities.

  • On April 30, 2018, Meta announced an agreement with CURO Group Holdings Corp ("CURO"), a leader in providing short-term credit to underbanked consumers. Together, the organizations will launch a new line of credit product that the parties believe will be more flexible and transparent than others in the market, and well-suited for US-based underbanked consumers. CURO and Meta expect to unveil the new, joint brand and a timeline for the pilot launch later this year. In the first three years of the agreement with CURO, Meta expects to hold up to $350 million in product receivables on its balance sheet.

  • On April 3, 2018, Meta announced it entered into a three-year agreement with Health Credit Services ("HCS"), a technology-driven, patient financing company. MetaBank will approve and originate loans for elective procedures for select HCS provider offices throughout the country. During the three-year agreement, MetaBank expects to originate at least several hundred million dollars in personal loans.

  • On March 12, 2018, Meta announced a 10-year renewal of a relationship with Money Network Financial, LLC ("Money Network"), a wholly-owned subsidiary of First Data (NYSE:FDC). MetaBank supports a range of Money Network payments programs, most notably the Money Network® Electronic Payment Delivery Service, which large organizations use to provide employees the option of receiving wages electronically.

"We are excited to announce that we have delivered strong quarterly earnings of $31.4 million," said Chairman and CEO J. Tyler Haahr. “The production and results of the 2018 tax season and the effectiveness of our processing standards and partner relationships aided in our outstanding performance. Our tax season infrastructure has once again performed very well and we believe we are well positioned to continue to deliver positive results into the future.

"Adding to a very active quarter, we renewed multi-year agreements with two of our largest prepaid partners, Money Network Financial and AAA, and added relationships in our national consumer lending business. Meta will originate and provide consumer lending opportunities to the customers of Liberty Lending, LLC, Health Credit Services, and CURO. We expect that these renewed and new relationships will provide us continued momentum and allow us to further diversify our financing products.

"Work towards the integration of the anticipated Crestmark acquisition is continuing behind the scenes, and we expect the acquisition to be completed by June 30. While we are earnestly engaged with acquisition details, we are actively making investments in people and systems to build out our platforms for our consumer credit business and to enhance growth for Crestmark and our other current business initiatives.  We anticipate making significant investments in the next twelve months to lay the groundwork for what we believe will be good growth in fiscal 2019 and significantly more meaningful drivers for earnings performance in 2020 and beyond."

Financial Summary

Revenue

Total revenue for the fiscal 2018 second quarter was $124.8 million, compared to $116.1 million for the same quarter in 2017, an increase of $8.7 million, or 7%. This increase was primarily due to growth in interest income from community banking loans, as well as the purchased student loans and income from tax-exempt securities (included in other investment securities), and growth in tax product fee income.

Net Income          

The Company recorded net income of $31.4 million, or $3.23 per diluted share, for the three months ended March 31, 2018, compared to net income of $32.1 million, or $3.42 per diluted share, for the three months ended March 31, 2017. The decrease in net income was due to an increase of $9.7 million in provision for loan losses, primarily related to the Company holding all tax services loans on the balance sheet, and a $1.6 million increase in non-interest expense, partially offset by increases of $5.2 million in non-interest income and $3.4 million in net interest income along with a decrease in income tax expense of $1.9 million, primarily due to the adoption of the Tax Cuts and Jobs Act (the "Tax Act").

The 2018 fiscal second quarter pre-tax results included $2.7 million of amortization of intangible assets, $2.2 million of acquisition expenses, $0.5 million payout of severance costs related to ongoing synergy efforts in the Company's tax divisions, and a $0.2 million loss on sale of investments. In addition, pre-tax results included $1.3 million in non-cash stock-related compensation in connection with three executive officers signing long-term employment agreements in the first and second quarters of fiscal 2017. These stock awards vest over eight years but the associated expense is heavily front loaded (see Select Quarterly Expenses table).

Net Interest Income

Net interest income for the fiscal 2018 second quarter was $27.4 million, up $3.4 million, or 14%, from the same quarter in 2017, due to an enhanced interest-earning asset mix primarily due to increases in the community banking loan portfolio, the purchased student loan portfolios, and commercial insurance premium finance loans. Excluding the additional borrowing costs related to retaining all tax services loans, net interest income for the fiscal 2018 second quarter would have been approximately $28.4 million, or an increase of 18% compared to the fiscal 2017 second quarter. The quarterly average outstanding balance of loans from all sources as a percentage of interest-earning assets increased from 33% as of the end of the second fiscal quarter of 2017 to 44% as of the end of the second fiscal quarter of 2018. In addition, lower-yielding agency Mortgage-Backed Securities ("MBS") decreased from 19% of interest-earning assets in the fiscal second quarter of 2017 to 15% of interest-earning assets for the same quarter in 2018. Net interest income for the fiscal 2018 second quarter was up $1.2 million from the Company's fiscal 2018 first quarter, primarily due to a combination of increased loan balances and yields and higher investment yields on mortgage and asset backed securities, offset in part by higher short-term funding costs.

Net Interest Margin

Net interest margin, tax equivalent ("NIM") was 2.89% in the fiscal 2018 second quarter, a decrease of two basis points from 2.91% in the fiscal 2017 second quarter. The decrease was primarily related to the increase in non-interest bearing tax-related loans retained on the Company's balance sheet in the current year's tax quarter when compared to the previous year, as well as the change in the corporate tax rate. Had corporate tax rates remained at previous rates, excluding changes resulting from the adoption of the Tax Act, the reported NIM of 2.89% would have been 3.08%. If the average balance of tax services loans for the second quarter of fiscal 2018 had been at similar levels to the same period of fiscal 2017, NIM would have been another seven basis points higher.

The Company estimates, when adjusting for certain seasonal tax program related items as discussed below, a normalized NIM for the 2018 fiscal second quarter would have been between 3.30% and 3.33%, which also reflects the adjusted tax rate due to the adoption of the Tax Act. These adjustments include removing the impact of tax related lending, normalizing cash balances, and making borrowing adjustments by removing borrowing expense if cash balances were available. This Company estimate of normalized NIM would compare favorably to a similarly adjusted fiscal first quarter of 2018 NIM of 3.14%. The quarter to quarter estimated improvement primarily relates to improving earning asset yields and an increase in average non-interest bearing deposits in the current quarter.

The overall reported tax equivalent yield (“TEY”) on average earning asset yields increased by 16 basis points to 3.46% when comparing the fiscal 2018 second quarter to the 2017 second quarter, which was driven primarily by the Company's improved earning asset mix, with increased exposure to its high-quality commercial insurance premium finance, student, and community banking loan portfolios. The reported 3.46% TEY on earning assets reflects the lowered corporate prorated tax rate of the Company's tax-exempt securities portfolio. Had corporate tax rates remained at previous rates, excluding changes resulting from the adoption of the Tax Act, reported TEY on earning assets would have been 3.65%.

The fiscal 2018 second quarter TEY on the securities portfolio decreased by six basis points to 3.18% compared to the same period of the prior year TEY of 3.24%, primarily due to the adoption of the Tax Act, which lowered the TEY on tax-exempt securities. Had corporate tax rates not changed due to the Tax Act, reported securities portfolio TEY yield would have been increased to 3.52% due to new investments being made in higher-yielding investment securities and MBS.

The Company’s average interest-earning assets for the fiscal 2018 second quarter grew by $289.0 million, or 7%, to $4.25 billion, from the comparable quarter in 2017, primarily from growth in the loan portfolio of $552.4 million, of which $239.4 million was attributable to an increase in volume of tax services loans. This increase was partially offset by decreases in cash and fed funds sold and total investment securities of $170.5 million and $92.8 million, respectively. The Company's management believes it has the flexibility to reasonably manage total balance sheet growth moving forward, if needed.

Overall, the Company's cost of funds for all deposits and borrowings averaged 0.58% during the fiscal 2018 second quarter, compared to 0.39% for the 2017 second quarter. This increase was primarily due to an increase in short-term funding rates and higher average overall funding balances due to the Company's utilization of more of its capital during non-tax season with higher investment balances and funding, and in preparation to hold more tax loans on the Company's balance sheet. The Company's overall cost of deposits was 0.33% in the fiscal second quarter of 2018, compared to 0.24% in the same quarter of 2017. When excluding wholesale deposits, the Company's cost of deposits for the second quarter of fiscal 2018 would have been 0.06%.

Non-Interest Income

Fiscal 2018 second quarter non-interest income of $97.4 million increased $5.2 million, or 6%, from $92.2 million in the same quarter of 2017, largely due to an increase in tax product fee income of $4.0 million, or a 6% increase, when comparing the current quarter to the same period of the prior year. The increase in tax product fee income was primarily due to retaining all tax advance loans originated during the 2018 tax season, as opposed to the previous year when most of those loans were sold.

Non-Interest Expense

Non-interest expense increased $1.6 million, or 2%, to $68.5 million for the 2018 fiscal second quarter, compared to the same quarter in 2017. This increase was primarily caused by increases of $5.4 million in compensation expense and $1.7 million in legal and consulting expense, offset in part by decreases of $4.4 million in amortization expense and $2.0 million in total tax product expense. The increase in compensation expense was primarily due to increased staffing to support the Company's growing business initiatives in consumer credit, the business to be conducted following the proposed acquisition of Crestmark, and other business units, along with the aforementioned payout of severance costs. The integration of EPS Financial and Specialty Consumer Services allowed the Company to gain some scale and cost savings in the tax services divisions this year, and the Company expects to gain further efficiencies during fiscal 2018. During the fiscal 2018 second quarter, the Company had $2.2 million of merger and acquisition related expenses. The Company expects additional intangible amortization expense of between $6 million and $10 million for fiscal year 2019, attributable to the proposed Crestmark acquisition, which is subject to regulatory and shareholder approval. The Company will provide an update after further analysis and valuation is completed. See Select Quarterly Expenses table for a breakdown of current anticipated select expenses for future quarters.

Income tax expense for the fiscal 2018 second quarter was $6.5 million, resulting in an effective tax rate of 17.2%, compared to $8.4 million, or an effective tax rate of 20.7%, for the 2017 fiscal second quarter. Although net income before tax was $2.6 million lower in the second quarter of fiscal year 2018 than the second quarter of fiscal year 2017, the income tax expense and effective tax rate decreased primarily due to the provisions of the Tax Act, which lowered Meta’s statutory federal corporate tax rate from 35% in fiscal year 2017 to 24.53% in fiscal year 2018.

Loans

Total loans receivable, net of allowance for loan losses, increased $353.9 million, or 31%, from $1.14 billion at March 31, 2017, to $1.49 billion at March 31, 2018.  Among lending categories, this included a $212.4 million, or 45%, increase in commercial real estate loans from $473.1 million at March 31, 2017, to $685.5 million at March 31, 2018. Also contributing to the loan growth was a $99.2 million, or 54%, increase in consumer loans, $53.1 million of which was attributable to the purchased student loan portfolios and $43.9 million of which was attributable to refund advance loans, an increase in commercial insurance premium finance loans of $53.6 million, or 29%, from $187.0 million at March 31, 2017, to $240.6 million at March 31, 2018, and an increase in residential mortgage loans of $27.7 million, or 16%, from $178.3 million at March 31, 2017, to $206.0 million at March 31, 2018. The growth in net loans receivable from March 31, 2017, to March 31, 2018, was partially offset by a decrease of $39.1 million, or 40%, from $97.9 million to $58.8 million in total agricultural loans, which made up only 1.37% of total assets at March 31, 2018. Excluding the purchased student loan portfolios and refund advance loans, total loans receivable, net of allowance for loan losses, at March 31, 2018, would have increased $267.3 million, or 27%, compared to March 31, 2017.  Community banking loans increased $208.2 million, or 26%, from $802.0 million at March 31, 2017, to $1.01 billion at March 31, 2018, even with the reduction in total agricultural loans of $39.1 million.

The Company recorded a provision for loan losses of $18.3 million during the three months ended March 31, 2018, compared to a provision for loan losses of $8.6 million for the three months ended March 31, 2017. The provision was predominantly driven by an $18.1 million reserve related to tax services loans, which is higher than the previous year because the Company retained all tax advance loans originated during the 2018 tax season, as opposed to the previous year when most of those loans were sold.

The Company’s allowance for loan losses was $27.1 million, or 1.8% of total loans, at March 31, 2018, compared to an allowance of $14.6 million, or 1.3% of total loans, at March 31, 2017. This increase was primarily due to the additional provision expense related to tax services loans.

Credit Quality

MetaBank’s NPAs at March 31, 2018, were $36.1 million, representing 0.84% of total assets, compared to $5.0 million and 0.12% of total assets at March 31, 2017, and $37.9 million and 0.72% at September 30, 2017.  The increase in NPAs from the comparable previous year period was primarily related to a large, well-collateralized agricultural loan relationship, with respect to which the Company took ownership of the properties serving as collateral upon execution of a deed in lieu of foreclosure and transferred the loans to foreclosed real estate and repossessed assets on January 2, 2018.  If the properties are sold prior to the end of the agreed-upon receivership period set forth in the settlement agreement, as expected, the Company will be entitled to all principal, note interest, legal and other fees and expenses.  After the receivership period ends, if the properties are not sold, the Company will be entitled to the fair value of the properties, which the Company believes to be significantly in excess of all principal, note interest, legal and other fees and expenses. The increase in NPAs as a percentage of total assets from September 30, 2017 to March 31, 2018 was primarily due to a decrease in total assets of $926.6 million, offset in part by the payment in full of a previously disclosed $7.0 million nonperforming agricultural loan relationship during the first quarter of fiscal 2018. The Payments segment had no NPAs at March 31, 2018, March 31, 2017, or September 30, 2017.

Investments

Investment securities and MBS decreased by $115.3 million, or 5%, to $2.31 billion at March 31, 2018, as compared to $2.42 billion at March 31, 2017. This included a decrease of $102.0 million in MBS and $13.3 million in investment securities.

Average TEY on the securities portfolio decreased six basis points to 3.18% in the second quarter of fiscal 2018 from 3.24% in the same quarter of 2017. Overall TEY of other investment securities decreased by 23 basis points from 3.65% to 3.42% in the second quarter of 2018 compared to the same period of 2017 primarily due to the effects of the Tax Act and a reduction of TEY due to the reduced overall tax rate. Average yields increased within MBS by 18 basis points to 2.56% in the second quarter of 2018 from 2.38% in the same quarter of 2017.

Average yields on asset backed securities increased to 4.41% in the second quarter of 2018 from 2.49% in the same quarter of 2017.

The TEY on the securities portfolio of 3.18% for the second fiscal quarter of 2018 reflects the lowered corporate prorated tax rate on the Company's tax-exempt municipal portfolio. Had corporate tax rates not changed due to the Tax Act, reported securities portfolio yield would have been 3.52%, and the TEY of investment securities would have been 3.90% at the previous corporate rate. The 3.42% overall TEY of other investment securities reflects the lowered corporate prorated tax rate.

When comparing the second quarter of fiscal 2018 to the first quarter of fiscal 2018, average TEY on the securities portfolio increased by 25 basis points to 3.18% from 2.93%, investment securities TEY increased 19 basis points to 3.42% from 3.23%, and MBS increased 35 basis points to 2.56% from 2.21%.

During the 2018 second fiscal quarter, the Company continued to execute its investment strategy of primarily purchasing U.S. Government-related securities and U.S. Government-related MBS, as well as AAA and AA rated non-bank qualified (NBQ) municipal bonds; however, the Company also continues to review opportunities to add other diverse, high-quality securities at attractive relative rates when opportunities arise. With the Company’s funding base being comprised of a large percentage of non-interest-bearing deposits, and even with the lower corporate tax rate, the TEY for these NBQ bonds is higher than a similar term investment in other investment categories of similar risk and higher than many other banks can realize on the same instruments due to the Company’s current cost of funds and its projected cost of funds if interest rates rise.

Deposits, Other Borrowings and Other Liabilities

Total end-of-period deposits increased $468.3 million, or 16%, to $3.34 billion at March 31, 2018, compared to $2.87 billion at March 31, 2017. The increase in end-of-period deposits was primarily a result of increases in non-interest-bearing deposits of $213.7 million, or 8%, wholesale deposits of $159.2 million, or 726%, interest-bearing checking of $79.1 million, or 179%, and certificates of deposits of $10.5 million, or 17%.

The increase in wholesale deposits at March 31, 2018 compared to the same period of the prior year was primarily due to the Company utilizing those funds at advantageous rates when compared to the overnight borrowing rates, thereby lowering funding costs. During the second quarter of fiscal 2017, wholesale deposits were primarily used to target strategic maturities related to our seasonal tax advance lending, and many of those deposits had matured by March 31, 2017.

Total average deposits for the fiscal 2018 second quarter decreased by $78.8 million, or 2%, compared to the same period in 2017. Average non-interest-bearing deposits for the 2018 fiscal second quarter were up $143.6 million, or 6%, compared to the same period in 2017.

The average balance of total deposits and interest-bearing liabilities was $4.17 billion for the three-month period ended March 31, 2018, compared to $3.92 billion for the same period in the prior year, representing an increase of 7%. This increase was primarily due to an increase in total borrowings of $335.9 million and an increase in non-interest-bearing deposits of $143.6 million, partially offset by a decrease in wholesale deposits of $301.9 million.

Capital Ratios

The Company and MetaBank remain above the federal regulatory minimum capital requirements to remain classified as well-capitalized institutions. Regulatory capital ratios at March 31, 2018 are stated in the table below.

The tables below also include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies.  Management reviews these measures along with other measures of capital as part of its financial analysis.

Regulatory Capital Data (1)

              Minimum
              Requirement to Be
          Minimum   Well Capitalized
          Requirement For   Under Prompt
          Capital Adequacy   Corrective Action
At March 31, 2018 Company   MetaBank   Purposes   Provisions
               
Tier 1 leverage ratio 7.26 %   8.93 %   4.00 %   5.00 %
Common equity Tier 1 capital ratio 13.74     17.43     4.50     6.50  
Tier 1 capital ratio 14.18     17.43     6.00     8.00  
Total qualifying capital ratio 18.48     18.59     8.00     10.00  
                       

(1) Regulatory ratios are estimated.

The following table provides certain non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP:

  Standardized Approach (1) 
  March 31, 2018 
  (Dollars in Thousands)
Total equity  
Adjustments: $ 443,703  
LESS: Goodwill, net of associated deferred tax liabilities 95,262  
LESS: Certain other intangible assets 47,724  
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards  
LESS: Net unrealized gains (losses) on available-for-sale securities (21,166 )
Common Equity Tier 1 (1) 321,882  
Long-term debt and other instruments qualifying as Tier 1 10,310  
LESS: Additional Tier 1 capital deductions  
Total Tier 1 capital 332,192  
Allowance for loan losses 27,285  
Subordinated debentures (net of issuance costs) 73,418  
Total qualifying capital 432,896  
     

(1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum CET1 ratio; those changes are being fully phased in through the end of 2021.

The following table provides a reconciliation of tangible common equity used in calculating tangible book value data.

  March 31, 2018 
  (Dollars in Thousands)
Total Stockholders' Equity $ 443,703  
Less: Goodwill 98,723  
Less: Intangible assets 47,724  
Tangible common equity 297,256  
Less: AOCI (21,166 )
Tangible common equity excluding AOCI 318,422  
   

Due to the predictable, quarterly cyclicality of non-interest bearing deposits in connection with tax season business activity, management believes that a six-month capital calculation is a useful metric to monitor the Company’s overall capital management process. As such, MetaBank’s six-month average Tier 1 leverage ratio, Common equity Tier 1 capital ratio, Tier 1 capital ratio, and Total qualifying capital ratio as of March 31, 2018, were 9.58%, 16.72%, 16.72%, and 17.84%, respectively. 

Forward-Looking Statements

The Company and MetaBank may from time to time make written or oral “forward-looking statements,” including statements contained in this press release, the Company’s filings with the Securities and Exchange Commission (“SEC”), the Company’s reports to stockholders, and in other communications by the Company and MetaBank, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: statements regarding the potential benefits of, and other expectations for the combined company giving effect to, the proposed merger transaction with Crestmark; the anticipated timing for closing the proposed merger transaction with Crestmark; future operating results; customer retention; loan and other product demand; important components of the Company’s statements of financial condition and operations; growth and expansion; new products and services, such as those offered by MetaBank or MPS, a division of MetaBank; credit quality and adequacy of reserves; technology; and the Company’s employees. The following factors, among others, could cause the Company’s financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the risk that the transaction with Crestmark may not occur on a timely basis or at all; the parties’ ability to obtain regulatory approvals and approval of their respective shareholders, and otherwise satisfy the other conditions to closing, on a timely basis or at all; the risk that the businesses of Meta and MetaBank, on the one hand, and Crestmark and Crestmark Bank, on the other hand, may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; the expected growth opportunities, beneficial synergies and/or operating efficiencies from the proposed transaction may not be fully realized or may take longer to realize than expected; customer losses and business disruption following the announcement or consummation of the proposed transaction; potential litigation or regulatory actions relating to the proposed merger transaction; the risk that the Company may incur unanticipated or unknown losses or liabilities if it completes the proposed transaction with Crestmark and Crestmark Bank; additional changes in tax laws; maintaining our executive management team; the strength of the United States’ economy, in general, and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), as well as efforts of the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely development and acceptance of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third parties; any actions which may be initiated by our regulators in the future; the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry; our relationship with our primary regulators, the Office of the Comptroller of the Currency and the Federal Reserve, as well as the Federal Deposit Insurance Corporation, which insures MetaBank’s deposit accounts up to applicable limits; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk, in general, including, but not limited to, those risks involving MetaBank’s divisions; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by MetaBank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion of which has been characterized as “brokered”; changes in consumer spending and saving habits; and the success of the Company at maintaining its high-quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this press release speak only as of the date hereof. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2017, and in other filings made with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances or future events or for any other reason.

Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)

ASSETS March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017   March 31, 2017
Cash and cash equivalents $ 107,563     $ 1,300,409     $ 1,267,586     $ 65,630     $ 67,293  
Investment securities available for sale 1,418,862     1,392,240     1,106,977     1,141,684     1,184,440  
Mortgage-backed securities available for sale 654,890     600,112     586,454     666,424     642,833  
Investment securities held to maturity 226,618     235,024     449,840     464,729     474,306  
Mortgage-backed securities held to maturity 8,393     8,468     113,689     117,399     122,497  
Loans receivable 1,517,616     1,509,140     1,325,371     1,224,359     1,151,192  
Allowance for loan loss (27,078 )   (8,862 )   (7,534 )   (14,968 )   (14,602 )
Federal Home Loan Bank Stock, at cost 17,846     57,443     61,123     16,323     25,043  
Accrued interest receivable 17,604     21,089     19,380     21,831     20,902  
Premises, furniture, and equipment, net 20,278     20,571     19,320     20,107     20,019  
Bank-owned life insurance 86,021     85,371     84,702     84,035     58,378  
Foreclosed real estate and repossessed assets 30,050     128     292     364        
Goodwill 98,723     98,723     98,723     98,723     98,723  
Intangible assets 47,724     50,521     52,178     64,798     66,633  
Prepaid assets 26,342     29,758     28,392     31,265     34,596  
Deferred taxes 20,939     5,379     9,101     6,858     10,589  
Other assets 29,302     12,449     12,738     10,132     22,754  
                   
Total assets $ 4,301,693     $ 5,417,963     $ 5,228,332     $ 4,019,693     $ 3,985,596  
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
                   
LIABILITIES                  
Non-interest-bearing checking $ 2,850,886     $ 2,779,645     $ 2,454,057     $ 2,481,673     $ 2,637,167  
Interest-bearing checking 123,397     84,390     67,294     40,928     44,264  
Savings deposits 65,345     53,535     53,505     55,292     65,367  
Money market deposits 48,070     47,451     48,758     46,709     42,340  
Time certificates of deposit 71,712     128,220     123,637     83,760     61,170  
Wholesale deposits 181,087     420,404     476,173     444,857     21,923  
Total deposits 3,340,497     3,513,645     3,223,424     3,153,219     2,872,231  
Short-term debt 315,777     1,313,401     1,404,534     277,166     494,919  
Long-term debt 85,572     85,552     85,533     92,514     92,497  
Accrued interest payable 1,315     4,065     2,280     2,463     722  
Accrued expenses and other liabilities 114,829     63,595     78,065     64,118     113,479  
Total liabilities 3,857,990     4,980,258     4,793,836     3,589,480     3,573,848  
                   
STOCKHOLDERS’ EQUITY                  
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2018, December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017.              
Common stock, $.01 par value; 15,000,000 shares authorized, 9,699,591, 9,664,846, and 9,622,595 shares outstanding and 9,720,536, 9,685,398, and 9,626,431 shares issued at March 31, 2018, December 31, 2017, and September 30, 2017. 9,349,989, and 9,349,989 shares issued and outstanding at June 30, 2017 and March 31, 2017, respectively. 97     96     96     94     94  
Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2018, December 31, 2017, September 30, 2016, June 30, 2017, and March 31, 2017.              
Additional paid-in capital 265,685     262,872     258,336     256,088     253,473  
Retained earnings 200,753     170,578     167,164     166,634     158,167  
Accumulated other comprehensive (loss) income (21,166 )   5,782     9,166     7,397     14  
Treasury stock, at cost, 20,945, 20,552, and 3,836 common shares at March 31, 2018, December 31, 2017, and September 30, 2017, none at June 30, 2017 and March 31, 2017. (1,666 )   (1,623 )   (266 )    
Total stockholders’ equity 443,703     437,705     434,496     430,213     411,748  
                   
Total liabilities and stockholders’ equity $ 4,301,693     $ 5,417,963     $ 5,228,332     $ 4,019,693     $ 3,985,596  
                                       

 Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)

  Three Months Ended   Six Months Ended
  3/31/2018   12/31/2017   3/31/2017   3/31/2018   3/31/2017
Interest and dividend income:                  
Loans receivable, including fees $ 17,844     $ 16,443     $ 12,773     $ 34,287     $ 23,451  
Mortgage-backed securities 4,047     3,758     4,481     7,805     7,801  
Other investments 11,480     10,656     10,464     22,136     19,041  
  33,371     30,857     27,718     64,228     50,293  
Interest expense:                  
Deposits 2,957     1,885     2,184     4,842     3,122  
FHLB advances and other borrowings 3,009     2,776     1,568     5,785     3,372  
  5,966     4,661     3,752     10,627     6,494  
                   
Net interest income 27,405     26,196     23,966     53,601     43,799  
                   
Provision for loan losses 18,343     1,068     8,649     19,411     9,492  
                   
Net interest income after provision for loan losses 9,062     25,128     15,317     34,190     34,307  
                   
Non-interest income:                  
Refund transfer product fees 33,803     192     32,487     33,995     32,663  
Tax advance product fees 33,838     1,947     31,119     35,785     31,568  
Card fees 26,856     25,247     26,547     52,103     44,961  
Loan fees 1,042     1,292     1,182     2,334     2,052  
Bank-owned life insurance 650     669     444     1,319     892  
Deposit fees 982     848     168     1,830     318  
Loss on sale of securities (166 )   (1,010 )   (144 )   (1,176 )   (1,378 )
Gain (loss) on foreclosed real estate     (19 )   7     (19 )   7  
Other income 414     102     360     516     436  
Total non-interest income 97,419     29,268     92,170     126,687     111,519  
                   
Non-interest expense:                  
Compensation and benefits 32,172     22,340     26,766     54,512     44,616  
Refund transfer product expense 9,871     101     10,178     9,972     9,969  
Tax advance product expense 1,474     280     3,140     1,754     3,427  
Card processing 7,190     6,540     7,043     13,730     12,622  
Occupancy and equipment 4,477     4,890     4,191     9,367     8,168  
Legal and consulting 3,239     2,416     1,505     5,655     4,228  
Marketing 668     553     610     1,221     1,080  
Data processing 243     414     392     657     755  
Intangible amortization expense 2,731     1,681     7,082     4,412     8,607  
Other expense 6,432     4,827     6,039     11,259     10,227  
Total non-interest expense 68,497     44,042     66,946     112,539     103,699  
                   
Income before income tax expense 37,984     10,354     40,541     48,338     42,127  
                   
Income tax expense 6,548     5,684     8,399     12,232     8,741  
                   
Net income $ 31,436     4,670     $ 32,142     $ 36,106     $ 33,386  
                   
Earnings per common share                  
Basic $ 3.25     0.48     $ 3.44     $ 3.73     $ 3.65  
Diluted $ 3.23     0.48     $ 3.42     $ 3.72     $ 3.63  
                   
Shares used in computing earnings per share                  
Basic 9,687,060     9,656,778     9,345,277     9,671,792     9,138,692  
Diluted 9,726,712     9,712,841     9,399,951     9,710,138     9,192,482  
   

Average Balances, Interest Rates and Yields

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Only the yield/rate has tax-equivalent adjustments. Non-accruing loans have been included in the table as loans carrying a zero yield.

Three Months Ended March 31, 2018   2017
(Dollars in Thousands) Average   Interest   Yield /   Average   Interest   Yield /
  Outstanding Earned / Rate(1) Outstanding Earned / Rate(2)
  Balance Paid   Balance Paid  
Interest-earning assets:                      
Cash & fed funds sold $ 132,355     $ 722     2.21 %   $ 302,890     $ 593     0.79 %
Mortgage-backed securities 642,164     4,047     2.56 %   764,742     4,480     2.38 %
Tax exempt investment securities 1,431,974     9,001     3.38 %   1,349,034     8,325     3.85 %
Asset-backed securities 112,301     1,220     4.41 %   117,940     723     2.49 %
Other investment securities 78,272     537     2.78 %   125,792     824     2.66 %
Total investments 2,264,711     14,805     3.18 %   2,357,508     14,352     3.24 %
Community banking loans(3) 998,336     10,747     4.37 %   798,125     8,287     4.21 %
Tax services loans 416,625     833     0.81 %   177,193     11     0.02 %
Commercial insurance premium finance loans 242,305     2,913     4.88 %   191,282     2,286     4.85 %
Student loans and other 196,902     3,351     6.90 %   135,213     2,189     6.57 %
National lending loans(4) 439,207     6,264     5.78 %   326,495     4,475     5.56 %
Total loans 1,854,168     17,844     3.90 %   1,301,813     12,773     3.98 %
Total interest-earning assets $ 4,251,234     $ 33,371     3.46 %   $ 3,962,211     $ 27,718     3.30 %
Non-interest-earning assets 451,568             451,508          
Total assets $ 4,702,802             $ 4,413,719          
                       
Interest-bearing liabilities:                      
Interest-bearing checking $ 100,804     $ 51     0.20 %   $ 42,515     $ 42     0.40 %
Savings 59,634     9     0.06 %   58,718     8     0.06 %
Money markets 48,812     27     0.22 %   45,913     20     0.17 %
Time deposits 118,933     344     1.17 %   101,546     172     0.69 %
Wholesale deposits 685,025     2,526     1.50 %   986,908     1,942     0.80 %
Total interest-bearing deposits 1,013,208     2,957     1.18 %   1,235,600     2,184     0.72 %
Overnight fed funds purchased 407,789     1,679     1.67 %   73,033     168     0.93 %
FHLB advances 2,333     9     1.56 %   7,000     122     7.08 %
Subordinated debentures 73,395     1,114     6.15 %   73,256     1,112     6.16 %
Other borrowings 19,602     207     4.29 %   13,930     166     4.84 %
Total borrowings 503,119     3,009     2.43 %   167,219     1,568     3.80 %
Total interest-bearing liabilities 1,516,327     5,966     1.60 %   1,402,819     3,752     1.08 %
Non-interest bearing deposits 2,656,516         0.00 %   2,512,934         0.00 %
Total deposits and interest-bearing liabilities $ 4,172,843     $ 5,966     0.58 %   $ 3,915,753     $ 3,752     0.39 %
Other non-interest-bearing liabilities 86,675             106,700          
Total liabilities 4,259,518             4,022,453          
Shareholders' equity 443,284             391,266          
Total liabilities and shareholders' equity $ 4,702,802             $ 4,413,719          
Net interest income and net interest rate spread including non-interest-bearing deposits     $ 27,405     2.88 %       $ 23,966     2.91 %
                       
Net interest margin         2.61 %           2.45 %
Tax equivalent effect         0.28 %           0.46 %
Net interest margin, tax equivalent(5)         2.89 %           2.91 %
 

(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2018 was 24.53%
(2) Tax rate used to arrive at the TEY for the three months ended March 31, 2017 was 35%
(3) Previously stated Retail Bank loans have been renamed as Community Banking Loans
(4) Previously stated Specialty Finance Loans have been renamed as National Lending Loans
(5) Net interest margin expressed on a fully taxable equivalent basis ("Net interest margin, tax equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.

The following table presents, for the periods indicated, allowance for loan loss activity.

(Dollars in thousands)                  
(Unaudited) Three Months Ended   Six Months Ended
Allowance for loan loss activity March 31,
2018
  December 31,
2017
  March 31,
2017
  March 31,
2018
  March 31,
2017
                   
Beginning balance $ 8,862     $ 7,534     $ 6,415     $ 7,534     $ 5,635  
Provision - tax services loans 18,129     1,017     7,883     19,146     8,214  
Provision - all other loans 214     51     765     265     1,278  
Charge-offs (339 )   (160 )   (490 )   (499 )   (609 )
Recoveries 212     420     29     632     84  
Ending balance $ 27,078     $ 8,862     $ 14,602     $ 27,078     $ 14,602  
                   


Selected Financial Information
                     
    March 31,   December 31,   September 30,   June 30,   March 31,
At Period Ended: 2018 2017 2017 2017 2017
                     
Equity to total assets   10.31 %   8.08 %   8.31 %   10.70 %   10.33 %
Book value per common share outstanding   $ 45.74     $ 45.29     $ 45.15     $ 46.01     $ 44.04  
Tangible book value per common share outstanding   $ 30.65     $ 29.85     $ 29.47     $ 28.52     $ 26.35  
Tangible book value per common share outstanding excluding AOCI   $ 32.83     $ 29.25     $ 28.52     $ 27.73     $ 26.35  
Common shares outstanding   9,699,591     9,664,846     9,622,595     9,349,989     9,349,989  
Non-performing assets to total assets   0.84 %   0.61 %   0.72 %   1.17 %   0.12 %
Full-time equivalent employees (FTEs)   916     878     827     808     782  
                     
                     
    March 31,   March 31,             
For the Six Months Ended:   2018   2017             
                     
Net interest margin, tax equivalent   2.97 %   2.91 %            
Return on average assets   1.64 %   1.69 %            
Return on average equity   16.46 %   17.98 %            
                     


Select Quarterly Expenses
(Dollars in Thousands) Actual Anticipated
  Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31,
For the Three Months Ended 2018 2018 2018 2018 2019 2019 2019 2019 2020
                   
Amortization of Intangibles (1) (2) $ 2,731   $ 1,664   $ 1,633   $ 1,488   $ 2,707   $ 1,488   $ 1,468   $ 1,283   $ 2,008
                   
Executive Officer Stock Compensation (3) $ 1,309   $ 1,324   $ 1,338   $ 941   $ 917   $ 927   $ 937   $ 679   $ 669
                   

(1) These amounts are based upon the current reporting period’s intangible assets only.  This table makes no assumption for expenses related to future acquired intangible assets.
(2) The Company expects additional intangible amortization expense of between $6 million and $10 million for fiscal year 2019, attributable to the proposed Crestmark acquisition, which is subject to regulatory and shareholder approval. The Company will provide an update after further analysis and valuation is completed.
(3) These amounts are based upon the long-term employment agreements signed in the first and second quarters of fiscal 2017 by the Company’s three highest paid executives. This table makes no assumption for expenses related to any additional future agreements.

Conference Call

The Company will host a conference call and earnings webcast at 4:00 p.m. CDT (5:00 p.m. EDT) on Monday, April 30, 2018. The live webcast of the call can be accessed from Meta’s Investor Relations website at www.metafinancialgroup.com.  Telephone participants may access the live conference call by dialing (844) 461-9934 approximately 10 minutes prior to start time. Please ask to join the Meta Financial conference call, and provide conference ID 9166897 upon request. International callers should dial (636) 812-6634. A webcast replay will also be archived at www.metafinancialgroup.com for one year.

Additional Information About the Proposed Crestmark Transaction

In connection with the proposed merger transaction, Meta has filed a registration statement on Form S-4 (file no. 333-223769) with the SEC, which includes a joint proxy statement of Meta and Crestmark, which also constitutes a prospectus of Meta, that Meta and Crestmark will send to their respective shareholders. Before making any voting or investment decision, investors and security holders of Meta and Crestmark are urged to carefully read the entire registration statement and proxy statement/prospectus as well as any amendments or supplements to these documents and any other relevant materials because they contain important information about the proposed transaction. Investors and security holders are able to obtain the registration statement and the proxy statement/prospectus free of charge from the SEC’s website at www.sec.gov or from Meta by sending a request to Meta Financial Group, Inc., 5501 S. Broadband Lane, Sioux Falls, SD 57108; Attention: Investor Relations. In addition, copies of the proxy statement/prospectus will be provided free of charge by Meta to its stockholders.

This communication and the information contained herein does not and shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities in connection with the proposed merger shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Participants in the Transaction

Meta, Crestmark and certain of their respective directors and executive officers may be deemed under the rules of the SEC to be participants in the solicitation of proxies from the respective shareholders of Meta and Crestmark in connection with the proposed merger transaction. Certain information regarding the interests of these participants and a description of their direct and indirect interests, by security holdings or otherwise, are included in the joint proxy statement/prospectus regarding the proposed transaction. Additional information about Meta and its directors and officers may be found in the definitive proxy statement of Meta relating to its 2018 Annual Meeting of Stockholders filed with the SEC on December 4, 2017 and Meta’s annual report on Form 10-K for the year ended September 30, 2017 filed with the SEC on November 29, 2017. The definitive proxy statement and annual report on Form 10-K can be obtained free of charge from the SEC’s website at www.sec.gov.

About Meta Financial Group®
Meta Financial Group, Inc. ("Meta") is the holding company for MetaBank®, a federally chartered savings bank. Meta shares of common stock are traded on the NASDAQ Global Select Market® under the symbol CASH. Headquartered in Sioux Falls, S.D., MetaBank operates in both the Banking and Payments industries through: MetaBank, its community banking operation; Meta Payment Systems, its electronic payments division; AFS/IBEX, its commercial insurance premium financing division; and Refund Advantage, EPS Financial and Specialty Consumer Services, its tax-related financial solutions divisions. More information is available at metafinancialgroup.com.

Media Contact:   Investor Relations Contact:  
Katie LeBrun   Brittany Kelley Elsasser  
Corporate Communications Director   Director of Investor Relations  
605-362-5140   605-362-2423  
klebrun@metabank.com   bkelley@metabank.com  

 

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Source: MetaBank