Small Cap Values

Management at Meta Financial has been busy recently with two recent large announcements.  One of which involved laying off 40 people from the Meta Payments division.  At first glance this appeared quite worrisome as MPS is the growth engine at the company, so cutting people would imply that growth is slowing.  However, I do not believe that to be the case.  Here’s a quote from the CEO in a news article:

“There were new product initiatives that we decided not to continue to pursue,” Haahr said. “We decided that it made more sense to stick to our core in payment systems rather than spending more money to expand into some new areas. We expect our payment systems to continue to grow with this re-emphasis on our core business and the new emphasis on the cost reductions.”

via Layoffs at Meta Financial | argusleader.com | Argus Leader.

So, if we believe him, it appears that they are refocusing the company on the core business, instead of expanding into new lines of business.  There could be many reasons for this, from not wanting to compete with customers to not having enough resources to do it successfully.  One of my nits with Meta has been the bloated overhead at MPS, it has been growing just as fast as the business.  Now it appears they are focusing a little more on profitable growth and not just growth, so this could be a positive, for all except those that are laid off.

So what is a little troubling is that this announcement coincided with a capital raise.  What is most worrisome is that they may have been forced to do this by regulators after they saw the 12/31 numbers.  They raised $5.65m by selling 265,000 shares to Cash America.  They managed to do this at $21.33 per share, which was approximately where it closed the day before and above the book value of $17.97, and didn’t pay any commissions to do so.  However, it still dilutes the future earnings for current holders, despite book value increasing to my estimate of about $18.25 before any write-downs from Q1.

As I mentioned before, a capital raise would not surprise me and I reduced exposure to the stock in September.  If I get another meaningful discount to book, I may buy back the shares that I sold, as this puts the bank in a stronger position to weather any commercial real estate storm. I’m not sure why they didn’t cut the dividend as that costs about $1.5m per year, but that’s a story for a different day.

We should get a look at the 12/31 numbers in a few weeks, hopefully I’ll be back with an update then.  In the meantime, please switch your TV to Direct TV or AT&T U-Verse and get some rebate cards.  Or buy Symantec products with a rebate.  Or choose rebate cards instead of a check if your Staples Easy Rebate will allow it!

Disclosure: Long CASH.

Meta Financial reported earnings last month that were full of a lot of good things and a few not so good things.  First the positives:

• MPS Fee Income up 109% yoy
• MPS average deposits up 38% yoy
• MPS earned a profit in the seasonally weakest quarter
• Cost of deposits continues to decline

And then the negatives:

• Non Performing assets increased to 2.41% of total assets from 0.99% last year
• $6.3m loan loss provision causing a large loss for the bank

Continue…

Meta Financial reported earnings last night and results out of Meta Payment Systems were outstanding.  Fee revenue was up 187% to $33m, Net Income was up 61% to $3.5m, and average deposits were up 54% to over $530m.  Look at what’s happened to Fee Revenue recently:

The market cap of the entire bank is only $40m, and the MPS division earned $3.5m in the quarter.  That’s incredible.  It’s trading at less than 3x earnings (if I annualize that) which are growing at over 60%.  Does this make any sense? I didn’t think so.

So what’s the problem? well it’s attached to a not so good bank as evidenced by another $2m in write offs for 2 bad commercial real estate loans in the quarter.  MPS Giveth, the Bank Taketh away.  There are two pieces of good news out of the bank, however.  First, outside of these two relationships, the rest of their portfolio is quite healthy.  And secondly, despite the massive growth in assets at MPS, the bank is not in a hurry to do more lending in the current environment, even though their markets have not been as economically sensitive.  So I’m glad to see some discipline.

As for MPS, Trailing 12 month NOPLAT has not reached $7.8m as reported (taxed at 40%, assuming current market rates for interest earned on deposits).  This is up from $3.5m at the end of the March 2008 quarter, or more than 100% growth.  If you want to capitalize the non processing, non loan loss provision expenses over a longer period (as they could be considered an investment), TTM NOPLAT could be as high as $20m for a 5 year capitalization period:

Tangible Book Value is $17.56 per share, the stock is at $14.50.  Book value increased during the quarter, despite the $2m write off.  I think the bank is probably worth about $14.50 per share by itself, and the MPS division is worth about $30 per share (and growing every quarter), and options outstanding reduce the value of the company by about $5.  So even though the stock is up almost 150% in the past 2 months since adding it to the portfolio, I think it’s got another 200% to go from here.

Disclosure: Long CASH.

Western Union Expands Prepaid Card Platform With New Overnight Home Delivery Service.

In the fine print of the above press release it says, “The Western Union(R) MoneyWise(TM) Visa Prepaid Card is issued by MetaBank pursuant to a license from Visa U.S.A. Inc. MetaBank, Member FDIC”

I find that interesting as their current prepaid card is issued by The Bancorp Bank.  I’ll ask the company why they changed…

Disclosure: Long CASH.

MasterCard Readies TV Push for Prepaid – 04.15.2009 – Bank Technology News Article.

Since education and awareness is the top challenge for the prepaid industry, it’s nice to see a behemoth like MasterCard take the initiative and start spending to spread the word.  This can only be positive for Meta Financial… and everyone else in the prepaid industry.  Hopefully the commercials will be “priceless”.

Disclosure: Long CASH.

Prepaid Expo: The 2009 Paybefore Awards Ceremony.

Congratulations to Meta Payment System’s Brad Hanson who received one of the lifetime achievement awards at the Prepaid Card Expo yesterday.

Disclosure: Long CASH.

I’m adding Meta Financial to the portfolio today.  It closed at $6.59 but I actually picked up some shares last week at $6.50.  Meta Financial is a very unique bank, with a highly profitable, hyper growth prepaid card division that is still undiscovered. At this price, it pays a 7.9% dividend yield (going ex dividend on Thursday).

I’ll have more details later, but the basic thesis is that Meta is more than just a bank in Iowa/South Dakota.  The stock price has been hit, along with all other financial companies, despite the bank not having any sub-prime exposure (read the 10-k: The Company has not engaged in sub-prime residential mortgage originations and the Company has no direct exposure to sub-prime loans.) Now this doesn’t mean that they have a perfect underwriting history, because they don’t.  They’ve managed to write bad loans, been the subject of some fraud, etc., so they’re not perfect, but they are currently trading at a market cap of $21m vs book value of $48m, which I think more than compensates for all the potential issues with their loans.  The company has had very little in the way of write offs, in part due to their customers, many of whom are farmers with record incomes the past few years.

So, what about the prepaid card division?  It’s called Meta Payment Systems (MPS), the website is www.metapay.com.  It was founded in 2004 by Brad Hanson, who joined Meta Financial from BANKFIRST.  He’s a pioneer in the prepaid card industry, serving on the Board of Directors for the Network Branded Prepaid Card Association, the industry’s trade group.  The company partners with other marketers who want to create their own prepaid card.  Meta provides access to the networks, the processing, etc.  In return, they get a cut of the fees as well as access to all the cash that is stored on the cards. The bank is able to use this as a zero cost deposit, which should make their underwriting very profitable.  Here’s a graph of how the deposits on the company’s prepaid cards have grown since 2005:

Continue…