CASH - Meta Financial

[samwise]

I couldn’t find a thread for this or for TBBK, which is similar. I have seen these mentioned on the forum. Wondering if anyone has thoughts on the moat, growth prospects, credit or valuation? I’m wondering why a growth business should sell under 10 PE, now that the market has looked past Covid. Am I missing something. Do you have a preference between these two banks?

 

Both of these banks are growing their cheap deposits, riding prepaid cards/fintech partners like venmo etc. Seems like they really have some sort of moat, because the growth has been going on for a decade, and other banks haven’t muscled in. Every single card probably has a short life, but their deposits do seem sticky in total, probably because the important relationship is with the marketing entity. So it sells to businesses and not really consumers. Normally this should mean tougher negotiations, lower spreads, but perhaps not if their are few competitors.

 

They get growth in low cost deposits as well as fee income.

 

CASH pairs this with a higher interest lending operation. TBBK hasn’t done that yet, but seems to like lower risk and rate lending.

 

CASH

forward PE is 9 (on yahoo finance)

P/B 1.5

Roe 13%, but I think they are targeting higher.

 

TBBK

forward PE 8

P/B 1.4

Roe 11.4%, they are definitely targeting higher.

 

So both are currently available at earnings yields above 10% with growth which seems at least in the teens. Both grew through Covid, and credit seems to be ok so far.

 

[wabuffo]

I watch both of these banks but am a big fan of CASH and have owned it since 2008.  The CEO (Brad Hanson) who started CASH's payments biz (and the originator of the TBBK business - which TBBK acquired) took over the CEO position a few years ago.  I think he is sensational.

 

Both of these banks are growing their cheap deposits, riding prepaid cards/fintech partners like venmo etc.

 

One the keys to fintech using these two banks is regulatory arbitrage.  Banks with greater than $10B in assets have their debit interchange fees capped at very low amounts due to the Durbin Amendment.  CASH and TBBK are under that limit and are thus not capped. 

 

I like to think of CASH as a payments engine with a bank strapped to it.  It focuses on generating payment income over NIM income. The payments business generates incredible amounts of non-interest bearing deposits that actually cost less than zero when the fee income is also added in and the S&GA associated with the payment business is subtracted out.  Its kinda like the way Buffett likes to think of what makes a good insurance business (generate lots of float that costs less than zero). 

 

Here's a chart of its history at CASH from day 1 of the MPS business (the old community bank was around a lot longer before Hanson came aboard to CASH).

 

I think the biggest issue for CASH is matching the interest-earning asset side of its balance sheet with this high-powered liability side of its balance sheet.  It has already traded out its old community bank for a larger national lender (Crestmark).  But its payment business is generating so much in deposits, that it may have already outgrown Crestmark lending business.  But there's no doubt Hanson gets it.  Since he took over, he is aggressively restructuring the balance sheet.  He sold off the community bank, put the unsold community bank loans in run-off and is quickly shedding Crestmark's high cost wholesale deposit funding and debt since the business can be funded with the payments business's less-than-zero cost deposits.  I think that CASH is one of the few banks out there that could (one day) earn more than 2% return on assets (which is unheard of in this zero rate environment).  The US Treasury stimulus program will depress ROA this year - but its still a good business for CASH as it builds goodwill with the Fed, US Treasury and the bank regulators.

 

Another thing to note - since the new CEO took over, MetaBank are very aggressive repurchasers of their shares.  Since mid-2019 when they started buying back shares for the first time, they have since reduced share count by over 15% despite pausing it this summer (they've since restarted it).

 

I should also note that this can be a very volatile stock that has had numerous 50% drawdowns in the many years that I've owned it.  Its a favorite of mine over the long-term and it has done well - but it has had quite a few whipsawing drops during that time.

 

wabuffo

[samwise]

wabuffo, thanks for the detailed reply. There is a lot to unpack, so let me go point wise below.

 

1. Agree with he regulatory arbitrage argument. But that also sets a limit to growth. both are at 6B, so they can only grow to 10B. TBBK has said they want to reach 8B, probably to stay comfortable below the cap. Does this mean growth will end soon? Will they have to urn deposits away?

 

2. I think there is more to the moat than regulatory arbitrage. Any small bank would get hte deposits, but only two seem to dominate. They must have worked out the software systems , compliance and regulations. And adding new providers o the front end seems easy. Perhaps this is the moat, but I haven't followed long enough or know enough about the industry to be sure. Do you think they can retain their growth and fees, or do both/either get competed away?

 

3.Agree with the Buffett-like view of negative cost deposits/float. Its not usual where fees and NIM are separated, but here it makes sense as the advantage these banks have is purely in the deposit side.

 

4. TBBK has also announced a share buyback recently. I think they were restricted by regulators before. It seems to have had a worse history with lending issues, but current management has turned the asset side around. That brings me to my next concern.

 

5. I'm not quite sure about the lending side.  banks blow up if they get it wrong. So I almost like TBBK's lower risk approach of lending at 2.5% with SBLOC/IBLOC. But they have also said they are targeting 2% ROA and evaluating their asset side. So perhaps they are going to imitate CASH as well. Lots of banks get it right, so its definitely possible. But asking banks to grow assets fast is almost always a bad signal. However so far, credit hasn't blown up in either bank.

 

6. Yes, volatility is high. This is up 11% today.

 

Edit: Sorry I tend to write out a lot, as it helps me think through the issues. Adding a summary below.

Basically my worries are

1. Will growth stop due to regulation/Durbin or competition ?

2. Will the growth happen at reasonable ROE without undue risk on the lending side as assets expand?

 

FD: I do have a position in TBBK right now. Would have bought into CASH today if the market was down 11% instead of up.

[wabuffo]

1. Agree with he regulatory arbitrage argument. But that also sets a limit to growth. both are at 6B, so they can only grow to 10B. TBBK has said they want to reach 8B, probably to stay comfortable below the cap. Does this mean growth will end soon? Will they have to urn deposits away?

 

This is true - but in Meta's cash there are two reasons why their balance sheet is inflated right at the moment. First, they are still running down the reserves assets gained because of the US Treasury's EIP program.  Unfortunately now there is round 2 and it is slightly larger - but, it too, will be run-off by summer time.  Meta also has lots of assets it wants to run-off (MBS, community bank loans, etc).  I think they have around $3.5b-ish only of core assets they like and want to keep/grow.  So I think there's still room to run here.

 

2. I think there is more to the moat than regulatory arbitrage. Any small bank would get hte deposits, but only two seem to dominate. They must have worked out the software systems , compliance and regulations. And adding new providers o the front end seems easy. Perhaps this is the moat, but I haven't followed long enough or know enough about the industry to be sure. Do you think they can retain their growth and fees, or do both/either get competed away?

 

Of course - there is lots of technology, regulatory and micro-credit know-how involved that is tough for other banks to mimic.  For one, the CEO (Brad Hanson) basically invented this industry (pre-paid open loop debit).  Second, CASH has a track record of winning back business.  A good example is the H&R Block tax refund business.  Meta entered the H&R tax refund business through its acquisition of SCS.  But H&R Block sold its captive bank sub to BOFI.  This brought BOFI into H&R Block's tax refund business sharing it with Meta.  BOFI "learned the business' and underbid and forced Meta out in 2017.  This business is very difficult from a micro-loan credit perspective as well as from a regulatory and technological perspective (one needs the refund transfer and electronic refund originator platforms which Meta has vast experience with).

 

Sure enough, BOFI threw in the towel after a couple of years of trying and H&R Block is back with Meta for the 2020 tax year preparation season.  I think this speak's to the "moat-i-ness" of CASH's payment biz.

 

5. I'm not quite sure about the lending side.  banks blow up if they get it wrong. So I almost like TBBK's lower risk approach of lending at 2.5% with SBLOC/IBLOC. But they have also said they are targeting 2% ROA and evaluating their asset side. So perhaps they are going to imitate CASH as well. Lots of banks get it right, so its definitely possible. But asking banks to grow assets fast is almost always a bad signal. However so far, credit hasn't blown up in either bank.

 

No doubt.  But I thought CASH's approach here was novel and innovative.  They didn't just buy loans or extend loans to new customers/new geographies.  Instead they bought a book of business by buying Crestmark and thus gaining the customer relationships and institutional credit knowledge of that organization.  They then chucked the old community bank and its loan book.  I think they will probably have to do it again as they grow.  There's risk for sure - but I think there's probably more risk of overpaying than having a credit blow-up.  Bank mergers make sense to me in CASH's case.  Of course, I could be wrong here.

 

wabuffo

[samwise]

Thanks, makes perfect sense. And the history with H&R and BoFi is as good evidence of a moat that an outsider can get.

 

The only thing that doesn't make sense is why the market is pricing this so cheap, ~10 PE. Do you have a view on valuation and right time to buy?

 

I also like the idea of buying a loan book and platform with high cost deposits , and then marrying it with the low cost deposits. then you get rid of the worst part of both banks: high cost deposits, and your previous loans. End result should be performance from both asset and deposit side, great ROE along with growth.

 

Seems TBBK has the bigger "opportunity" here, but hat seems to be the result of previous challenges. So far management in CASH has been better, as they already did this. Lets see what comes out of TBBK's review. I have a feeling these two will be following each other closely, sort of like coke/pepsi or V/MA.

[wabuffo]

Seems TBBK has the bigger "opportunity" here, but hat seems to be the result of previous challenges. So far management in CASH has been better, as they already did this.

 

samwise - my own view is that it comes to down to mgmt.  I think CASH's mgmt is better.  For one, its a payments 'guy' running CASH whereas in TBBK's case (and CASH's case as well before Hanson became CEO) - the bankers run the business and payments is the lower priority.  This leads to sub-optimization of financial results, IMHO.

 

Also, have you researched the Cohen family that runs TBBK?  From what I can tell, some of their other financial companies (REXI, RSO, IFMI, RAS) in the past have run into issues though I haven't looked closely at all of these situations.

 

Second - as I indicated in my earlier post, Brad Hanson created both CASH's payments business as well as TBBK's from whole cloth.  Do you know the history here? 

 

Hanson started his first payments business from scratch at BankFirst in the early 2000s.  BankFirst ran into credit problems with some of its non-payments business lines and was purchased by another bank and became Marshall BankFirst.  That bank too ran into troubles prior to the GFC and was bought by TBBK.  This is how TBBK got into the payments biz - by buying the Stored Value Solutions business that came with its acquisition of Marshall BankFirst.

 

When Hanson left BankFirst around 2004, he walked across the street to Meta Financial - both small banks were headquartered in Sioux Falls, SD.  Once he arrived at CASH he started their payments business from scratch too.  So let's say CASH's CEO knows the industry very well. 

 

So my bet on CASH is partly the business, partly the "jockey".

[samwise]

Thanks, yes that makes sense.

 

The price history between TBBK and CASH is pretty different. TBBK has massively underperformed. Hence my observation about "challenge/opportunity". I don't mind having a banker in charge as long as they let payments run and manage the asset side appropriately.

 

Anyway, my plan was to buy both. I got TBBK yesterday and had planned to buy CASH today. But I don't like to buy things when they are up 11%. Might be a mistake. (I still remember not buying LULU at a split adjusted 2.5 on March 10th 2009, because it was up 12% that day. It never came back there, and I learnt a lesson. So I didn't try to time myself during Covid. Maybe I should buy CASH anyway soon. Hence my question on valuation, risks and if the market sees something I missed).

 

About Cohen's I've seen a few mentions. The only involvement I see here is chairman of the board and he owns < 1%. Not sure if they sill have control, and I didn't see many issues in related party transactions. Year old VIC writeup has this "Betsy Cohen is no longer involved but Daniel Cohen remains Chairman.  Would prefer no more Cohen involvement but decent Board turnover and addition of John Eggemeyer (Founder and Managing Principal of Castle Creek Capital) who has extensive experience in running, investing in and monetizing assets in the banking sector is encouraging.  Castle Creek is the #4 shareholder with 5%+ position. The largest shareholder is Frontier Capital with a 7%+ position. They initially became a shareholder in 2Q2017 and have been building their position over time. Stock hasn’t done well for Frontier to this point, but they have added and stuck with the position."

[wabuffo]

CASH came out with its proxy documents this morning.  Pretty standard stuff - except for one small detail.

https://www.sec.gov/Archives/edgar/data/907471/000130817921000004/lcash2020_def14a.htm

 

They haven't released their financials or 10-Q yet for the quarter ending Dec. 31, 2020, but the proxy indicates that common shares o/s for Dec. 31st, 2020 was 32,620,251.    This is interesting because common shares o/s at the end of their latest quarter end (9/30/20) was 34,360,890. 

 

Thus, their net repurchases for the December Q were 1,740,369 or 5% of their entire share count in one quarter.

 

They have taken out 17.3% of their shares in basically seven quarters starting with the June, 2019 quarter.  And that's with taking a pause basically from April-August of 2020 (almost 2 entire Qs).

 

wabuffo

[hasilp89]

Impressive buyback. Started reading on this one on wabuffos rec.

 

Feel like I’m missing something here though. The bank seems to be a decent lender in SD and IA are there aspirations to grow there? I also don’t see the moat/vision for the payments side - do they have a digital offering that is better than the rest? Prepaid visas etc seem like something every big bank can/does do.

[wabuffo]

The bank seems to be a decent lender in SD and IA are there aspirations to grow there?

 

That was the old community bank.  They sold that, its 4-5 branches and their local deposits, plus part of its loan book to another SD/IA community bank. They still retained part of the loan book and put it into runoff.  CASH acquired Crestmark a MI bank that is a national lender.  It specializes in higher yielding asset-based lending, factoring, term lending, etc.  The acquisition was part of a strategy to better match the rapidly growing liability side of the balance sheet with the asset side and to go national in scope.  They were going to be limited in asset-gathering scope if they stayed in their community bank roots.  After a few years, I fear that the payments business may have already grown Crestmark's lending capacity and they may need to make another acquisition.

 

I also don’t see the moat/vision for the payments side - do they have a digital offering that is better than the rest?

 

Its hard to attach the concept of a moat to financial businesses of any kind (insurance, banking, etc).  You want to buy them when they are cheap vs their net tangible assets.  CASH isn't cheap anymore like it was this summer.  They do know the payments business - their CEO basically invented/perfected it in the early 2000s.  The one advantage CASH has perhaps is they can charge higher interchange fees than their large bank competitors by regulatory fiat.  Debit card interchange fees are governed by the Durbin Amendment which capped them at a very low rate for banks with more than $10b in assets.  This gives CASH, TBBK and a few others that dominate this industry a bigger spread that they can share with fintechs/marketing partners who aren't banks.  I would also say that each bank tends to find its specific area within open-loop prepaid (CASH = tax refunds, TBBK = HSAs, etc).  The fact that CASH is a leader is also recognized by the US government which has selected it twice now to handle the prepaid card portion of the stimulus "check" programs. (ie. - sending pre-loaded debit cards as "stimulus checks" to the unbanked).

 

Payments are a growing area and they generate low-cost deposits (in Meta's case, less-than-zero cost). Part of the reason is the explosion of fintechs.  A lot of fintechs are not really banks so they need to partner with a real bank like CASH in order to "ride the rails of the US payments network" as they play their regulatory arbitrage games. What is interesting about CASH is that the entirety (and then some) of its deposit base now costs it less than zero and its growing.  No other bank in the US can say that. 

 

What is interesting to me is that a few years ago, they promoted the man who started its payment business to CEO.  That was a game-changer and you can see that he just gets it - in terms of the implementation of a strategy that maximizes leveraging the payments business for the entire bank.  Previously, the family that ran the old community bank didn't really do that.  I would argue TBBK is also run by the bankers and so does not optimize either.  I like to say that CASH is now a payments business with a bank strapped to it (and not the other way around which was the traditional way to run things).

 

But as I said, its not cheap anymore.

 

wabuffo

[samwise]

Competition? If these guys succeed, do they breach the moat and allow every community bank into this game? Then this access to cheap growing deposits probably gets arbed away. Has anyone followed these startups and the risk they pose?

 

https://teampcn.com/synctera-brings-fintech-as-a-service/

 

“Our primary customer base includes banks that have started doing the FinTech thing, but want to do it better or FinTechs that already have integrated everything and just need a bank,” he said. Hazlehurst stated that the platform model levels the playing field for smaller banks that grapple with operational or cash constraints that make it otherwise difficult to “manage” FinTechs. These banks can collaborate with FinTechs to improve their innovation and UX profile while allowing them to do what they do well, which is to collect deposits that can help drive lending programs that put money back into the community. FinTechs then get access to invaluable compliance advice, counsel and best practices. They also benefit as the pool of banks with which they can work is broadened through Synctera’s online marketplace.

 

The company said in a release Tuesday (Dec. 8 ) that its first “match” comes between Coastal Community Bank and One, a digital banking platform focused on financial wellness.

[wabuffo]

I think this is a suboptimal setup compared to CASH because the banks and the fintechs objectives don't naturally align.  In fact, CASH wrestled with the conflicting regulatory goals itself for over a decade before aligning its entire strategy behind optimizing the payments business.  In general, though, there is very little "moat" in banking.  Its basically a regulated utility now.

 

wabuffo

 

 

[samwise]

Agree that banking has no moat, except perhaps sticky deposits, which is an advantage versus non-bank businesses like MREITS rather than over other banks.

 

But a few players have captured all the deposit growth coming from fin techs. Not every community bank has been able to participate. So here is some barrier there, perhaps of technology or regulatory compliance.

 

In fact, CASH wrestled with the conflicting regulatory goals itself for over a decade before aligning its entire strategy behind optimizing the payments business.

 

I don't understand the conflict here? Can you explain.

 

[Libs]

Q2 out. If I have this right....( Wabuffo?):

1) If you adjust Y/Y for loss reserve differential ( 7MM lower in 2021) and gain on divesture ( 19MM last year, a one-off), pre-tax income went from 47MM to 61MM. Up 30%.

2) CASH has already made $2.68 and will probably make $4.25-$4.50 this year. The stock is still cheap at $46.

3) Ironically, all those EIP payments ( Meta cards) made H & R Block taxpayers so flush, they didn't need Meta's tax advances! Next year will be better, assuming no more stimulus.

4) Interest expense is basically 0% now that they re-profiled those expensive wholesale deposits.

5) It appears they are playing the tax code like a fiddle with the solar loans. The tax rate was 2% this quarter. I guess that's irony # 2- the administration wants higher corporate taxes - and also more solar. We're getting the best of that one.

Question: Refund transfer fee income was down 21% Q/Q. Anyone know why? How does that relate to "tax advance product income" on page 14 of the presentation?

 

[wabuffo]

Hey Libs - its a really good earnings report.  I haven't looked at in detail.   I will post more when I've had a chance to read the 10-Q when it comes out.

BTW - you missed:

6)  The Company repurchased 734,984 shares during the second quarter at an average price of $40.78.  

That's 2.25% of the outstanding common shares in a single Q.   By my calculations, CASH has repurchased close to 20% of its common shares outstanding in basically a little less than 8 quarters (their repurchase program began in May 2019).  That period also includes a pause during the pandemic months of April-August 2020.

wabuffo

Edited April 27, 2021 by wabuffo