May 11, 2011 - 12:25pm EST by
2011 2012
Price: 13.80 EPS $4.50 $2.85
Shares Out. (in M): 3 P/E 3.0x 5.0x
Market Cap (in $M): 42 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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CASH is a highly asymmetric investment with minimal downside at its current value (60% of tangible book with very good capital ratios and 5 times current earnings) and several catalysts over the next 3-24 months that could cause the stock to appreciate 80-200%.

I wrote up a Meta Financial (CASH) a year ago. It is an Iowa bank with a fast growing prepaid card operation. Things were going quite well until last September when the OTS (Office of Thrift Supervision) as part of its normal annual review of CASH, decided to ban its iadvance product (high interest credit advances on prepaid debit cards) and tax refund products (i.e. refund transfers and refund anticipation loans). The review is still on-going but the company has made “meaningful progress” with the OTS, and more importantly, the damage has already been done. As a result of the elimination of iadvance and these tax programs, revenue was hit hard, declining from $47M in Q1/10 to $28M in Q1/11. Ouch!

The other piece of bad news was credit quality. NPAs jumped from 11.8M in December to $18.2M, primarily because of 4 different credit relationships worth $10.5M. Management noted that 3 of the 4 have been placed on revised payment plans and expect to be current under the original terms (i.e. current on all interest and principal payments) sometime in the summer. There is no doubt that these guys are “f***ing morons when it comes to making loans. It is shocking how many screw-ups there have been over the past few years. Fortunately, management has made the good decision to continue winding down its loan/bank operations to focus on the prepaid card opportunity. As a result, loan balances continue to decline ($330M in March vs. $382M a year ago and now only represent a very low 28% of total assets. Incidentally, the 10Q reveals that the estimated fair value of its loans is $338M vs. a carrying value of $330M, another unrecognized source of value, representing almost 20% of the current $42M market cap.

That is the bad news. The good news is that CASH still has a viable and growing franchise and is still making good money despite this huge regulatory/revenue hit. It just reported March quarter-end (fiscal Q2) EPS of $0.88. Operating EPS was $0.75 if we excluding $0.6M in pre-tax securities gains. Operating EPS in the December quarter was $0.68. Annualized, that is about $2.85 of EPS, and this includes a certain amount of expense drag as many employees involved with the iadvance program have been retained to deal with the regulators and compliance instead of revenue generation. Additionally, CASH continued to grow its valuable low-cost deposit franchise. Non-interest bearing deposits were $847M to end the quarter, up from $591M a year ago and $810M at December. This funds an incredibly high 72% of the total $1.183B balance sheet, which could very well be the highest ratio of any bank in the country.

At $13.80, the stock trades at 60% of its $23.01 book value (up 21% from $19.01 a year ago) and 5 times its current earnings, which are understated because of low interest rates and extra employees who will likely shift soon from expense related activities to revenue generating programs. The stock also supports an attractive 3.7% dividend yield based on a 20% payout ratio. I also believe that the company will announce a stock buyback program at the conclusion of the OTS investigation.

The other wildcard is their regulator. Currently, Meta is regulated by the OTS. The OTS and the OCC will merge on July 21, and as a result, Meta’s  actual physical regulatory person is going to change from someone in the OTS’s Chicago district to someone in the OCC’s Denver district. Meta will tell you that Wells Fargo, Fifth Third, and other banks (using the Fiserv platform) offer similar products to iadvance, but they have been allowed to continue offering the products because they are regulated by the OCC, not the OTS. It is conceivable that Meta once again offers its iadvance product once it gets a new regulator. Meta is a leader in the prepaid space--if other banks are offering the product, there is no reason why they cannot and will not do the same.

It is quite possible for Meta to be a $25 stock in 1 year (+80%), putting it at a mere 100% of tangible book, and $40+ in 2 years (200%+) once the fast growth and value of its prepaid operations are recognized. At 60% of book, with very strong capital levels, the downside is marginal from here. The risk-reward is highly asymmetric with 0-10% downside and 100-200% upside.


Conclusion of the OTS review
Stock buybacks
Rising interest rates
Continued growth of low cost deposit franchise and prepaid card revenues
New regulator enables potential offering of previously banned iadvance product
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