Investors Pressure MetaBank Share Price

June 27th, 2011

A large shareholder has decided to take its concerns about the share price of MetaBank to the public.

The SEC published a June 21st letter from Philadelphia Financial Management, a private equity firm from San Francisco, written to MetaBank’s Board of Directors. The letter seems to have no basis and little in the way of authority, but it still presents a fairly persuasive case for gaunging the underlying value of MetaBank shares.

The letter argues that MetaBank’s shares are extremely undervalued. Philadelphia, which owns 6.7 percent of MetaBank’s issued common stock, wants the board to put the thrift up for sale. Philadelphia’s basis is in the growth in Meta’s book value and its strong regulatory capital position. Here are the basic facts:

MetaBank’s share price is now $19 per share. It was $14 when Philadelphia’s letter was released by the SEC.
At the end of the last quarter, MetaBank had a book value of $23.40 per share.
Approximately two-third’s off MetaBank’s balance sheet is made up of cash. This would seem to constitute a safe regulatory capital situation. Indeed, only one-fourth of its balance sheet is made up of loans.
MetaBank has established a beachhead in the payments business. By virtue of their first-to-market status, Meta arguably enjoys a “moat” against other competitors.
MetaBank’s position in the upper Midwest gives it an opportunity to make loans in a robust regional economy.

Philadelphia says that MetaBank shares should trade for at least $34 and possibly as much as $60. Their letter has created a “make-it-so” effect – the shares have jumped by almost one-third in just a few days.

The unknown in the otherwise stirring case for a higher valuation is the future of MetaBank’s Meta Payment Systems division.

MetaBank is the largest issuer of prepaid debit cards in the United States as measured by total purchase volume. They are the tenth largest issuer of debit cards. MetaBank issues cards that are later marketed and distributed by NetSpend and AccountNow. Those relationships can change, of course. NetSpend has embarked on a new strategy to diversify its partner base. This has mostly meant more work with Bancorp Bank. This is the prime driver of MPS revenue and if it is in play, then the share price makes sense.

The Durbin amendment does not touch MetaBank’s cards. Whereas big banks competing in this space will see their fees slashed, MetaBank will remain protected by virtue of its size.

The demise of the i-advance program is harder to quantify. Certainly i-advance created profits. It gave MPS a product that other cards could not offer. Philadelphia seems to think that a return of the i-advance would be another positive development.

Philadelphia offers an interesting bit of speculation about the i-advance. The SC 13d includes this opinion:

“We recognize the uncertainty surrounding the potential for a cash settlement / civil penalty for the Supervisory Directive from the OTS measured against the iAdvance / tax business that was shut down. However, we do not believe the potential outlay of such civil penalty to be more than 10-20% dilutive to its $23.01 book value.”

Philadelphia is doing two things – creating more expectation of a civil penalty, and putting a specific price to the fine.