Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission File Number:  0-22140

 

META FINANCIAL GROUP, INC. ®

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1406262

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

121 East Fifth Street, Storm Lake, Iowa 50588

(Address of principal executive offices)

 

(712) 732-4117

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o  NO o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company x

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class:

 

Outstanding at August 6, 2010:

Common Stock, $.01 par value

 

3,085,672 Common Shares

 

 

 



Table of Contents

 

META FINANCIAL GROUP, INC.

FORM 10-Q

 

Table of Contents

 

 

 

Page No.

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition as of June 30, 2010 and September 30, 2009

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2010 and 2009

 

3

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended June 30, 2010 and 2009

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

36

 

 

 

 

Item 4T.

Controls and Procedures

 

38

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

 

 

 

 

Item 1A.

Risk Factors

 

39

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

39

 

 

 

 

Item 4.

Reserved

 

39

 

 

 

 

Item 5.

Other Information

 

39

 

 

 

 

Item 6.

Exhibits

 

39

 

 

 

 

Signatures

 

40

 

i



Table of Contents

 

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

June 30, 2010

 

September 30, 2009

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

17,424

 

$

6,168

 

Federal funds sold

 

 

9

 

Investment securities available for sale

 

19,434

 

17,566

 

Mortgage-backed securities available for sale

 

477,770

 

347,272

 

Loans receivable - net of allowance for loan losses of $5,140 at June 30, 2010 and $6,993 at September 30, 2009

 

373,627

 

391,609

 

Federal Home Loan Bank Stock, at cost

 

8,086

 

7,050

 

Accrued interest receivable

 

4,609

 

4,344

 

Bond insurance receivable

 

3,920

 

4,118

 

Premises, furniture, and equipment, net

 

20,882

 

21,989

 

Bank-owned life insurance

 

13,664

 

13,270

 

Foreclosed real estate and repossessed assets

 

1,071

 

2,053

 

Goodwill and intangible assets

 

2,749

 

2,215

 

MPS accounts receivable

 

8,093

 

5,381

 

Other assets

 

9,972

 

11,733

 

 

 

 

 

 

 

Total assets

 

$

961,301

 

$

834,777

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Non-interest-bearing checking

 

$

529,459

 

$

442,158

 

Interest-bearing checking

 

25,179

 

15,602

 

Savings deposits

 

10,772

 

10,001

 

Money market deposits

 

34,443

 

39,823

 

Time certificates of deposit

 

141,652

 

146,163

 

Total deposits

 

741,505

 

653,747

 

Advances from Federal Home Loan Bank

 

109,000

 

74,800

 

Other borrowings from Federal Reserve Bank

 

 

25,000

 

Securities sold under agreements to repurchase

 

8,302

 

6,686

 

Subordinated debentures

 

10,310

 

10,310

 

Accrued interest payable

 

318

 

447

 

Contingent liability

 

4,045

 

4,268

 

Accrued expenses and other liabilities

 

18,024

 

12,174

 

Total liabilities

 

891,504

 

787,432

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, 800,000 shares authorized, no shares issued or outstanding

 

 

 

Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,082,612 and 2,634,215 shares outstanding at June 30, 2010 and September 30, 2009, respectively

 

34

 

30

 

Additional paid-in capital

 

31,773

 

23,551

 

Retained earnings - substantially restricted

 

40,388

 

31,626

 

Accumulated other comprehensive income (loss)

 

2,732

 

(1,838

)

Treasury stock, 290,387 and 323,784 common shares, at cost, at June 30, 2010 and September 30, 2009, respectively

 

(5,130

)

(6,024

)

Total shareholders’ equity

 

69,797

 

47,345

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

961,301

 

$

834,777

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1



Table of Contents

 

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

5,523

 

$

5,625

 

$

19,624

 

$

19,533

 

Mortgage-backed securities

 

4,393

 

2,652

 

9,375

 

7,457

 

Other investments

 

198

 

188

 

562

 

735

 

 

 

10,114

 

8,465

 

29,561

 

27,725

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

939

 

1,211

 

2,976

 

4,184

 

FHLB advances and other borrowings

 

517

 

910

 

1,607

 

2,792

 

 

 

1,456

 

2,121

 

4,583

 

6,976

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

8,658

 

6,344

 

24,978

 

20,749

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

609

 

6,277

 

14,778

 

18,676

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

8,049

 

67

 

10,200

 

2,073

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Card fees

 

18,206

 

15,677

 

74,866

 

63,763

 

Gain on sale of securities available for sale, net

 

239

 

204

 

2,093

 

213

 

Deposit fees

 

191

 

189

 

585

 

567

 

Bank-owned life insurance income

 

132

 

124

 

394

 

382

 

Loan fees

 

68

 

212

 

246

 

542

 

Loss on sale of REO

 

(105

)

(208

)

(105

)

(208

)

Gain on sale of membership equity interests, net

 

 

515

 

 

515

 

Other income

 

62

 

162

 

388

 

247

 

Total non-interest income

 

18,793

 

16,875

 

78,467

 

66,021

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Card processing expense

 

8,060

 

7,307

 

29,897

 

28,166

 

Compensation and benefits

 

7,500

 

8,218

 

25,032

 

23,999

 

Occupancy and equipment expense

 

1,995

 

1,996

 

6,229

 

5,849

 

Data processing expense

 

756

 

293

 

1,306

 

817

 

Legal and consulting expense

 

521

 

690

 

2,405

 

2,735

 

Marketing

 

384

 

349

 

1,593

 

1,161

 

Other expense

 

1,943

 

2,102

 

6,366

 

6,430

 

Total non-interest expense

 

21,159

 

20,955

 

72,828

 

69,157

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense (benefit)

 

5,683

 

(4,013

)

15,839

 

(1,063

)

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

2,145

 

(1,431

)

5,935

 

(329

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,538

 

$

(2,582

)

$

9,904

 

$

(734

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.15

 

$

(0.99

)

$

3.44

 

$

(0.28

)

Diluted

 

$

1.11

 

$

(0.99

)

$

3.37

 

$

(0.28

)

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share:

 

$

0.13

 

$

0.13

 

$

0.39

 

$

0.39

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in Thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,538

 

$

(2,582

)

$

9,904

 

$

(734

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on securities available for sale

 

8,498

 

(435

)

5,196

 

(631

)

Gains realized in net income

 

239

 

204

 

2,093

 

213

 

 

 

8,737

 

(231

)

7,289

 

(418

)

Deferred income tax effect

 

3,259

 

(86

)

2,719

 

(156

)

Total other comprehensive income (loss)

 

5,478

 

(145

)

4,570

 

(262

)

Total comprehensive income (loss)

 

$

9,016

 

$

(2,727

)

$

14,474

 

$

(996

)

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Nine Months Ended June 30, 2010 and 2009

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
(Loss),
Net of Tax

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2008

 

$

30

 

$

23,058

 

$

34,442

 

$

(5,022

)

$

(6,775

)

$

45,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared on common stock ($.39 per share)

 

 

 

(1,014

)

 

 

(1,014

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 5,200 common shares from treasury stock due to issuance of restricted stock

 

 

(101

)

 

 

101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

 

385

 

 

 

 

385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized losses on securities available for sale

 

 

 

 

(262

)

 

(262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for nine months ended June 30, 2009

 

 

 

(734

)

 

 

(734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2009

 

$

30

 

$

23,342

 

$

32,694

 

$

(5,284

)

$

(6,674

)

$

44,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2009

 

$

30

 

$

23,551

 

$

31,626

 

$

(1,838

)

$

(6,024

)

$

47,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared on common stock ($.39 per share)

 

 

 

(1,142

)

 

 

(1,142

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 415,000 common shares from the sales of equity securities

 

4

 

8,563

 

 

 

 

8,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options

 

 

(272

)

 

 

894

 

622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

 

(69

)

 

 

 

(69

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized losses on securities available for sale

 

 

 

 

4,570

 

 

4,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for nine months ended June 30, 2010

 

 

 

9,904

 

 

 

9,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2010

 

$

34

 

$

31,773

 

$

40,388

 

$

2,732

 

$

(5,130

)

$

69,797

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

 

 

Nine Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

9,904

 

$

(734

)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, amortization and accretion, net

 

8,716

 

3,875

 

Provision for loan losses

 

14,778

 

18,676

 

Loss on sale of other

 

106

 

143

 

(Gain) on sale of available for sale securities, net

 

(2,093

)

(213

)

(Gain) on sale of membership equity interests, net

 

 

(515

)

Net change in accrued interest receivable

 

(265

)

1,032

 

Net change in other assets

 

(1,681

)

2,904

 

Net change in accrued interest payable

 

(129

)

29

 

Net change in accrued expenses and other liabilities

 

5,627

 

406

 

Net cash provided by operating activities

 

34,963

 

25,603

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Purchase of securities available for sale

 

(378,557

)

(156,114

)

Net change in federal funds sold

 

9

 

(4,844

)

Proceeds from sales of securities available for sale

 

93,359

 

10,848

 

Proceeds from maturities and principal repayments of securities available for sale

 

156,327

 

60,727

 

Loans purchased

 

(1,287

)

(52,070

)

Net other change in loans receivable

 

4,678

 

56,263

 

Proceeds from sales of foreclosed real estate

 

733

 

 

Net change in Federal Home Loan Bank stock

 

(1,036

)

1,305

 

Proceeds from the sale of premises and equipment

 

 

2

 

Purchase of premises and equipment

 

(1,766

)

(3,076

)

Other, net

 

(2,719

)

(52

)

Net cash (used in) investing activities

 

(130,259

)

(87,011

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in checking, savings, and money market deposits

 

92,269

 

99,129

 

Net change in time deposits

 

(4,511

)

17,439

 

Net change in advances from Federal Home Loan Bank and other borrowings

 

9,200

 

(55,275

)

Net change in securities sold under agreements to repurchase

 

1,616

 

3,008

 

Cash dividends paid

 

(1,142

)

(1,014

)

Proceeds from issuance of equity securities

 

8,567

 

 

Stock compensation

 

(69

)

385

 

Proceeds from exercise of stock options

 

622

 

 

Net cash provided by financing activities

 

106,552

 

63,672

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

11,256

 

2,264

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

6,168

 

2,963

 

Cash and cash equivalents at end of period

 

$

17,424

 

$

5,227

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

4,711

 

$

6,947

 

Income taxes

 

1,664

 

2,607

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Loans transferred to foreclosed real estate

 

$

244

 

$

3,775

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

META FINANCIAL GROUP, INC. ®

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1.  BASIS OF PRESENTATION

 

The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2009 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 10, 2009.  Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.

 

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended June 30, 2010, are not necessarily indicative of the results expected for the year ending September 30, 2010.

 

Certain reclassifications have been made to prior periods’ consolidated financial statements to present them on a basis comparable within the current period’s consolidated financial statements.

 

NOTE 2.  ALLOWANCE FOR LOAN LOSSES

 

At June 30, 2010 the Company’s allowance for loan losses was $5.1 million, a decrease of $1.9 million from $7.0 million at September 30, 2009.  During the nine months ended June 30, 2010 the Company recorded a provision for loan losses of $14.8 million.  $11.0 million related to the Company’s Meta Payment Systems® (“MPS”) division, of which $10.0 million related to loan originations offered in collaboration with a nationally known tax preparation firm.  This level of losses is consistent with expectations for this program.  In addition to the Company’s loss provision, the contractual arrangement with this firm provides for substantial, but not full, reimbursement of financial losses, if any.  During the nine months ended June 30, 2010, the Company recorded a retail bank provision in the amount of $3.8 million due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans.  Three loans with commercial borrowers were partially charged off in the amount of $5.7 million during the second and third quarters of fiscal 2010 and a fourth loan with a commercial borrower was fully charged-off in the amount of $0.4 million.  These three loans were previously reserved for and classified as doubtful.

 

During the three months ended June 30, 2010, the Company recorded a provision for loan losses in the amount of $0.6 million, consisting of a $0.7 million provision primarily related to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans partially offset by a negative provision of $0.1 million related to the MPS loan portfolio.  The current quarter decrease in the MPS provision for loan losses relates to the MPS tax-related loans and resulted from actual loss rates trending slightly better than anticipated.

 

The Company’s total net charge-offs for the three and nine months ended June 30, 2010 were $13.0 million and $16.6 million, respectively.  The net charge-offs related to the MPS tax loan portfolio were $10.8 million and $10.0 million, respectively.  Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Loss” in Management’s Discussion and Analysis.

 

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Table of Contents

 

NOTE 3.  EARNINGS (LOSS) PER COMMON SHARE (“EPS”)

 

Basic EPS is computed by dividing income (loss) available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.

 

A reconciliation of the income (loss) and common stock share amounts used in the computation of basic and diluted EPS for the three and nine months ended June 30, 2010 and 2009 is presented below.

 

Three Months Ended June 30,

 

2010

 

2009

 

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss)

 

 

 

 

 

Net Income (Loss)

 

$

3,538

 

$

(2,582

)

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Weighted average common shares outstanding

 

3,080,242

 

2,602,655

 

Less weighted average unallocated ESOP and nonvested shares

 

(3,334

)

(5,000

)

Weighted average common shares outstanding

 

3,076,908

 

2,597,655

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share

 

 

 

 

 

Basic

 

$

1.15

 

$

(0.99

)

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Weighted average common shares outstanding for basic earnings per common share

 

3,076,908

 

2,597,655

 

Add dilutive effect of assumed exercises of stock options, net of tax benefits

 

101,740

 

 

Weighted average common and dilutive potential common shares outstanding

 

3,178,648

 

2,597,655

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share

 

 

 

 

 

Diluted

 

$

1.11

 

$

(0.99

)

 

7



Table of Contents

 

Nine Months Ended June 30,

 

2010

 

2009

 

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss)

 

 

 

 

 

Net Income (Loss)

 

$

9,904

 

$

(734

)

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Weighted average common shares outstanding

 

2,885,665

 

2,602,655

 

Less weighted average unallocated ESOP and nonvested shares

 

(3,334

)

(5,000

)

Weighted average common shares outstanding

 

2,882,331

 

2,597,655

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share

 

 

 

 

 

Basic

 

$

3.44

 

$

(0.28

)

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Weighted average common shares outstanding for basic earnings per common share

 

2,882,331

 

2,597,655

 

Add dilutive effect of assumed exercises of stock options, net of tax benefits

 

58,315

 

 

Weighted average common and dilutive potential common shares outstanding

 

2,940,646

 

2,597,655

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share

 

 

 

 

 

Diluted

 

$

3.37

 

$

(0.28

)

 

Stock options totaling 75,433 and 174,827 were not considered in computing diluted EPS for the three and nine months ended June 30, 2010, respectively, because they were not dilutive.  Stock options totaling 473,955 and 511,274 were not considered in computing diluted EPS for the three and nine months ended June 30, 2009, respectively, because they were not dilutive.  The calculation of the diluted EPS for the three and nine months ended June 30, 2009 does not reflect the assumed exercise of 10,200 and 28,567 stock options, respectively, because the effect would have been anti-dilutive for the period.

 

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Table of Contents

 

NOTE 4.  SECURITIES

 

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale securities as of June 30, 2010 and September 30, 2009 are presented below.

 

 

 

AMORTIZED
COST

 

GROSS
UNREALIZED
GAINS

 

GROSS
UNREALIZED
(LOSSES)

 

FAIR
VALUE

 

 

 

(Dollars in Thousands)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

Trust preferred and corporate securities

 

$

25,813

 

$

25

 

$

(8,764

)

$

17,074

 

Obligations of states and political subdivisions

 

2,253

 

107

 

 

2,360

 

Mortgage-backed securities

 

464,780

 

12,990

 

 

477,770

 

Total debt securities

 

$

492,846

 

$

13,122

 

$

(8,764

)

$

497,204

 

 

 

 

AMORTIZED
COST

 

GROSS
UNREALIZED
GAINS

 

GROSS
UNREALIZED
(LOSSES)

 

FAIR
VALUE

 

 

 

(Dollars in Thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

Trust preferred and corporate securities

 

$

25,805

 

$

 

$

(10,604

)

$

15,201

 

Obligations of states and political subdivisions

 

2,258

 

107

 

 

2,365

 

Mortgage-backed securities

 

339,706

 

7,662

 

(96

)

347,272

 

Total debt securities

 

$

367,769

 

$

7,769

 

$

(10,700

)

$

364,838

 

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at June 30, 2010 and September 30, 2009 are as follows:

 

 

 

LESS THAN 12 MONTHS

 

OVER 12 MONTHS

 

TOTAL

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

(Losses)

 

Value

 

(Losses)

 

Value

 

(Losses)

 

 

 

(Dollars in Thousands)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred and corporate securities

 

$

 

$

 

$

16,549

 

$

(8,764

)

$

16,549

 

$

(8,764

)

Mortgage-backed securities

 

 

 

 

 

 

 

Total debt securities

 

$

 

$

 

$

16,549

 

$

(8,764

)

$

16,549

 

$

(8,764

)

 

 

 

LESS THAN 12 MONTHS

 

OVER 12 MONTHS

 

TOTAL

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

(Losses)

 

Value

 

(Losses)

 

Value

 

(Losses)

 

 

 

(Dollars in Thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred and corporate securities

 

$

 

$

 

$

15,201

 

$

(10,604

)

$

15,201

 

$

(10,604

)

Mortgage-backed securities

 

17,780

 

(37

)

10,782

 

(59

)

28,562

 

(96

)

Total debt securities

 

$

17,780

 

$

(37

)

$

28,348

 

$

(10,663

)

$

46,128

 

$

(10,700

)

 

9



Table of Contents

 

The amortized cost and fair value of debt securities by contractual maturity are shown below.  Certain securities have call features which allow the issuer to call the security prior to maturity.  Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

 

 

 

AMORTIZED

 

FAIR

 

 

 

COST

 

VALUE

 

 

 

(Dollars in Thousands)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

100

 

$

102

 

Due after one year through five years

 

1,720

 

1,801

 

Due after five years through ten years

 

433

 

457

 

Due after ten years

 

25,813

 

17,074

 

 

 

28,066

 

19,434

 

Mortgage-backed securities

 

464,780

 

477,770

 

Total debt securities

 

$

492,846

 

$

497,204

 

 

NOTE 5.  COMMITMENTS AND CONTINGENCIES

 

At June 30, 2010 and September 30, 2009, the Company had outstanding commitments to originate and purchase loans totaling $37.3 million and $51.8 million, respectively.  It is expected that outstanding loan commitments will be funded with existing liquid assets.  At June 30, 2010, the Company had commitments to purchase securities available for sale totaling $0.4 million.  There were no commitments to sell securities available for sale.

 

Legal Proceedings

 

Lawsuits against MetaBank involving the sale of purported MetaBank certificates of deposit continue to be addressed.  Since its filing of Form 10-K for the year ended September 30, 2009, the matter of Methodist Hospitals of Dallas v. MetaBank and Meta Financial Group, Inc., filed in the 95th Judicial District Court of Dallas County, TX, Cause No. 08-06994, has been settled for a payment (see below) and the matter dismissed with prejudice.  In all, nine cases have been filed to date, and of those nine, two have been dismissed, and three have been settled for payments that the Company deemed reasonable under the circumstances, including the costs of litigation.  Of the four remaining cases, two are class action cases.  On May 5, 2010, in one of these two cases, Guardian Angel Credit Union v. MetaBank et al., Case No. 08-cv-261-PB (USDC, District of NH), the court granted the plaintiff’s motion to certify the class.  The other two cases, not styled as class actions, are cases in which each plaintiff seeks recovery of $99,000 and other specified damages, in connection with a fraudulent CD.  Additionally, a lawsuit relating to this matter has been filed by Airline Pilots Assoc Federal Credit Union in the Iowa District court for Polk County, Case number CL-118792.  This overall matter was first disclosed in the Company’s quarterly report for the period ended December 31, 2007, which stated that an employee of the Bank had sold fraudulent CDs for her own benefit.  The unauthorized and illegal actions of the employee have since prompted a number of demands and lawsuits seeking recovery on the bogus CDs to be filed against the Bank, which have been disclosed in subsequent filings.  The employee was prosecuted, convicted and, on June 2, 2010, was sentenced to more than seven years in federal prison and ordered to pay more than $4 million in restitution.  Notwithstanding the nature of her crimes, which were secreted from the Bank and its management, plaintiffs in the four remaining cases seek to impose liability on the Bank under a number of legal theories with respect to the remaining $3.8 million of bogus CDs that were issued by the former employee.  The Bank and its insurer, which has assumed defense of the action and which is advancing defense costs subject to a reservation of rights, continue to vigorously contest liability in the remaining actions.

 

10



Table of Contents

 

Cedar Rapids Bank & Trust Company v MetaBank, Case No. LACV007196.  In a separate matter, on November 3, 2009, Cedar Rapids Bank & Trust Company (“CRBT”) filed a Petition against MetaBank in the Iowa District Court in and for Linn County claiming an unspecified amount of money damages against MetaBank arising from CRBT’s participation in loans originated by MetaBank to companies owned or controlled by Dan Nelson.  The complaint states that the Nelson companies eventually filed for bankruptcy and the loans, including CRBT’s portion, were not fully repaid.  Under a variety of theories, CRBT claims that MetaBank had material negative information about Dan Nelson, his companies and the loans that it did not share with CRBT prior to CRBT taking a participation interestMetaBank believes that CRBT’s loss of principal was limited to approximately $200,000, and in any event intends to vigorously defend the case.

 

Other than the matters set forth above, there are no other new material pending legal proceedings or updates to which the Company or its subsidiaries is a party other than ordinary litigation routine to their respective businesses.

 

NOTE 6.  STOCK OPTION PLAN

 

The Company maintains the 2002 Omnibus Incentive Plan, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company.  Awards are granted by the Stock Option Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

 

In accordance with ASC 718, compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant.  The exercise price of options or fair value of nonvested shares granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date.  The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock based incentive awards has been negligible.  Forfeitures for the nine months ended June 30, 2010 are primarily the result of the Company’s second quarter reduction in staff and are not indicative of future forfeitures.

 

A summary of option activity for the nine months ended June 30, 2010 is presented below:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Number

 

Average

 

Remaining

 

Aggregate

 

 

 

of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term (Yrs)

 

Value

 

 

 

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2009

 

577,921

 

$

23.74

 

7.12

 

$

1,836

 

Granted

 

2,500

 

23.65

 

 

 

 

 

Exercised

 

(30,544

)

17.71

 

 

 

 

 

Forfeited or expired

 

(100,537

)

32.30

 

 

 

 

 

Options outstanding, June 30, 2010

 

449,340

 

$

22.20

 

6.20

 

$

3,952

 

 

 

 

 

 

 

 

 

 

 

Options exercisable, June 30, 2010

 

409,815

 

$

22.16

 

6.19

 

$

3,630

 

 

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Table of Contents

 

A summary of nonvested share activity for the nine months ended June 30, 2010 is presented below:

 

 

 

Number of

 

Weighted Average

 

 

 

Shares

 

Fair Value at Grant

 

 

 

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

 

 

 

 

Nonvested shares outstanding, September 30, 2009

 

3,334

 

$

24.43

 

Granted

 

3,600

 

23.01

 

Vested

 

(3,600

)

23.01

 

Forfeited or expired

 

 

 

Nonvested shares outstanding, June 30, 2010

 

3,334

 

$

24.43

 

 

As of June 30, 2010, stock based compensation expense not yet recognized in income totaled $97,000 which is expected to be recognized over a weighted average remaining period of 0.79 years.

 

NOTE 7.  SEGMENT INFORMATION

 

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.  The Company has determined that it has two reportable segments.  The first reportable segment, Traditional Banking, along with the second reportable segment, MPS, comprise the entirety of its banking subsidiary, MetaBank (the “Bank”).  The Bank operates as a traditional community bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located.  MPS provides a number of products and services to financial institutions and other businesses.  These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, credit programs, ACH origination services, gift card programs, rebate programs, travel programs and tax related programs.  The remaining grouping under the caption “All Others” consists of the operations of Meta Financial Group, Inc. and Meta Trust Company® and inter-segment eliminations.  Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices, meaning prices that would be paid if the companies were not affiliates.  The following tables present segment data for the Company for the three and nine months ended June 30, 2010 and 2009, respectively.

 

 

 

Traditional

 

Meta Payment

 

 

 

 

 

 

 

Banking

 

Systems®

 

All Others

 

Total

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

Interest income

 

$

7,261

 

$

2,837

 

$

16

 

$

10,114

 

Interest expense

 

1,251

 

91

 

114

 

1,456

 

Net interest income (loss)

 

6,010

 

2,746

 

(98

)

8,658

 

Provision for loan losses

 

675

 

(66

)

 

609

 

Non-interest income

 

550

 

18,215

 

28

 

18,793

 

Non-interest expense

 

4,720

 

16,244

 

195

 

21,159

 

Income (loss) before tax

 

1,165

 

4,783

 

(265

)

5,683

 

Income tax expense (benefit)

 

450

 

1,821

 

(126

)

2,145

 

Net income (loss)

 

$

715

 

$

2,962

 

$

(139

)

$

3,538

 

 

 

 

 

 

 

 

 

 

 

Inter-segment revenue (expense)

 

$

2,093

 

$

(2,093

)

$

 

$

 

Total assets

 

417,035

 

542,169

 

2,097

 

961,301

 

Total deposits

 

231,974

 

510,875

 

(1,344

)

741,505

 

 

12



Table of Contents

 

 

 

Traditional

 

Meta Payment

 

 

 

 

 

 

 

Banking

 

Systems®

 

All Others

 

Total

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

Interest income

 

$

6,776

 

$

1,661

 

$

28

 

$

8,465

 

Interest expense

 

1,828

 

148

 

145

 

2,121

 

Net interest income (loss)

 

4,948

 

1,513

 

(117

)

6,344

 

Provision for loan losses

 

5,504

 

773

 

 

6,277

 

Non-interest income

 

1,141

 

15,700

 

34

 

16,875

 

Non-interest expense

 

4,358

 

16,319

 

278

 

20,955

 

Income (loss) before tax

 

(3,773

)

121

 

(361

)

(4,013

)

Income tax expense (benefit)

 

(1,350

)

34

 

(115

)

(1,431

)

Net income (loss)

 

$

(2,423

)

$

87

 

$

(246

)

$

(2,582

)

 

 

 

 

 

 

 

 

 

 

Inter-segment revenue (expense)

 

$

2,177

 

$

(2,177

)

$

 

$

 

Total assets

 

352,931

 

465,124

 

1,460

 

819,515

 

Total deposits

 

220,670

 

442,187

 

(317

)

662,540

 

 

 

 

Traditional

 

Meta Payment

 

 

 

 

 

 

 

Banking

 

Systems®

 

All Others

 

Total

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

Interest income

 

$

18,869

 

$

10,662

 

$

30

 

$

29,561

 

Interest expense

 

3,919

 

307

 

357

 

4,583

 

Net interest income (loss)

 

14,950

 

10,355

 

(327

)

24,978

 

Provision for loan losses

 

3,775

 

11,003

 

 

14,778

 

Non-interest income

 

3,525

 

74,859

 

83

 

78,467

 

Non-interest expense

 

14,545

 

57,687

 

596

 

72,828

 

Income (loss) before tax

 

155

 

16,524

 

(840

)

15,839

 

Income tax expense (benefit)

 

61

 

6,198

 

(324

)

5,935

 

Net income (loss)

 

$

94

 

$

10,326

 

$

(516

)

$

9,904

 

 

 

 

 

 

 

 

 

 

 

Inter-segment revenue (expense)

 

$

7,045

 

$

(7,045

)

$

 

$

 

Total assets

 

417,035

 

542,169

 

2,097

 

961,301

 

Total deposits

 

231,974

 

510,875

 

(1,344

)

741,505

 

 

13


 


Table of Contents

 

 

 

Traditional

 

Meta Payment

 

 

 

 

 

 

 

Banking

 

Systems®

 

All Others

 

Total

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

Interest income

 

$

19,773

 

$

7,866

 

$

86

 

$

27,725

 

Interest expense

 

5,715

 

778

 

483

 

6,976

 

Net interest income (loss)

 

14,058

 

7,088

 

(397

)

20,749

 

Provision for loan losses

 

10,527

 

8,149

 

 

18,676

 

Non-interest income

 

2,113

 

63,833

 

75

 

66,021

 

Non-interest expense

 

14,007

 

54,185

 

965

 

69,157

 

Income (loss) before tax

 

(8,363

)

8,587

 

(1,287

)

(1,063

)

Income tax expense (benefit)

 

(3,046

)

3,156

 

(439

)

(329

)

Net income (loss)

 

$

(5,317

)

$

5,431

 

$

(848

)

$

(734

)

 

 

 

 

 

 

 

 

 

 

Inter-segment revenue (expense)

 

$

6,253

 

$

(6,253

)

$

 

$

 

Total assets

 

352,931

 

465,124

 

1,460

 

819,515

 

Total deposits

 

220,670

 

442,187

 

(317

)

662,540

 

 

NOTE 8.                 NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the FASB issued an accounting standard which amends current GAAP related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP.  This new accounting standard also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset.  This accounting standard was subsequently codified into ASC Topic 860, “Accounting for Transfers of Financial Assets”.  This accounting standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  The adoption of ASC Topic 860 is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued an accounting standard which will require a qualitative rather than quantitative analysis to determine the primary beneficiary of a variable interest entity for consolidation purposes.  This accounting standard requires an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity.  It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  This accounting standard was subsequently codified into ASC Topic 810, “Improvements for Financial Reporting by Enterprises Involved with Variable Interest Entities”.  This accounting standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for all interim reporting periods after that.  The adoption of ASC Topic 810 is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

In January 2010, the FASB issued an accounting standard which requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than a major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances and settlements in the Level 3 recurring measurement reconciliation.  Additionally, the standard clarifies that a description of the valuation technique(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements.  Also, if a valuation technique has changed, entities should disclose that change and the reason for the changes.

 

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This accounting standard was subsequently codified into ASC Topic 820, “Improving Disclosures about Fair Value Measurements”.  Disclosures other than the gross presentation changes in the Level 3 reconciliation are effective for the first reported period beginning after December 31, 2009.  The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis will be effective for fiscal years beginning after December 15, 2010 and is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

In July 2010, the FASB issued ASC Topic 310, “Receivables” which amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the allowance for loan and lease losses (the “allowance”).  The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  The provisions of the new authoritative guidance under ASC Topic 310 will be effective in the reporting period ending December 31, 2010.  The new authoritative guidance amends only the disclosure requirements for loans and leases and the allowance.   The adoption is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

NOTE 9.                 FAIR VALUE MEASUREMENTS

 

Effective October 1, 2008, the Company adopted the provisions of ASC 820, Fair Value Measurements.  ASC 820 defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and expands disclosures about fair value measurement.  It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.

 

The fair value hierarchy is as follows:

 

Level 1 Inputs — Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at the measurement date.

 

Level 2 Inputs — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in active markets that are not active and model-based valuation techniques for which significant assumptions are observable in the market.

 

Level 3 Inputs — Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Securities Available for Sale.  Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using an independent pricing service.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government and agency securities that are traded by dealers or brokers in active over-the-counter markets.  The Company had no Level 1 securities at June 30, 2010.  Level 2 securities include agency mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities.

 

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The following table summarizes the assets of the Company for which fair values are determined on a recurring basis as of June 30, 2010.

 

 

 

 

Fair Value at June 30, 2010

 

(Dollars in Thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

497,204

 

$

 

$

497,204

 

$

 

 

Included in securities available for sale are trust preferred securities as follows:

 

At June 30, 2010

 

 

 

 

 

 

 

Unrealized

 

S&P

 

Moody

 

Issuer(1)

 

Book Value

 

Fair Value

 

(Loss)

 

Credit Rating

 

Credit Rating

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Corp. Capital I

 

$

4,981

 

$

3,216

 

$

(1,765

)

BB

 

Baa3

 

Huntington Capital Trust II SE

 

4,970

 

2,845

 

(2,125

)

B

 

Ba1

 

Bank Boston Capital Trust IV (2)

 

4,962

 

3,213

 

(1,749

)

BB

 

Baa3

 

Bank America Capital III

 

4,950

 

3,315

 

(1,635

)

BB

 

Baa3

 

PNC Capital Trust

 

4,950

 

3,835

 

(1,115

)

BBB

 

Baa2

 

Cascade Capital Trust I 144A (3)

 

500

 

125

 

(375

)

 

 

 

 

CNB Invt Tr II Exchangeable Pfd Ser B (3)

 

500

 

525

 

25

 

 

 

 

 

Total

 

$

25,813

 

$

17,074

 

$

(8,739

)

 

 

 

 

 


(1)

Trust preferred securities are single-issuance. There are no known deferrals, defaults or excess subordination except for Cascade Capital Trust I 144A which has deferred payment of its interest, and which is on non-accrual.

(2)

Bank Boston was acquired by Bank of America.

(3)

Securities not rated.

 

The Company’s management reviews the status and potential impairment of the trust preferred securities on a monthly basis.  In its review, management discusses duration of unrealized losses and reviews credit rating changes.  Some, but not necessarily all, of the other factors considered are:  that the risk of loss is minimized and easier to determine due to the single-issuer, rather than pooled, the nature of the securities, the condition of the banks listed, and whether there have been any payment deferrals or defaults to-date.  Such factors are subject to change over time.

 

Federal Home Loan Bank (“FHLB”) Stock.  FHLB stock is recorded at cost which is assumed to represent fair value since the Company is generally able to redeem this stock at par value.

 

Foreclosed Real Estate and Repossessed Assets.  Real estate properties and repossessed assets are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure, establishing a new cost basis.

 

Loans.  The Company does not record loans at fair value on a recurring basis.  However, if a loan is considered impaired, an allowance for loan losses is established.  Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, Accounting for Creditors for Impairment of a Loan.  When the fair value of the collateral is based on an observable market price or current appraised value, the Company records the impaired loan as non-recurring level 2.

 

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The following table summarizes the assets of the Company for which fair values are determined on a non-recurring basis as of June 30, 2010.

 

 

 

Fair Value at June 30, 2010

 

(Dollars in Thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

FHLB Stock

 

$

8,086

 

$

 

$

8,086

 

$

 

Foreclosed Assets, net

 

1,071

 

 

1,071

 

 

Loans

 

7,826

 

 

7,826

 

 

Total

 

$

16,983

 

$

 

$

16,983

 

$

 

 

The following table discloses the Company’s estimated fair value amounts of its financial instruments.  It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of June 30, 2010 and September 30, 2009, as more fully described below.  The operations of the Company are managed from a going concern basis and not a liquidation basis.  As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations.  Additionally, a substantial portion of the Company’s inherent value is the Banks’ capitalization and franchise value.  Neither of these components have been given consideration in the presentation of fair values below.

 

The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at June 30, 2010 and September 30, 2009.  The fair value for ASC 825 purposes is estimated using a historical replacement cost basis concept (i.e. entity price concept).  The information presented is subject to change over time based on a variety of factors, such as interest rates and market conditions.

 

 

 

June 30, 2010

 

September 30, 2009

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,424

 

$

17,424

 

$

6,168

 

$

6,168

 

Federal funds sold

 

 

 

9

 

9

 

Securities available for sale

 

497,204

 

497,204

 

364,838

 

364,838

 

Loans receivable, net

 

373,627

 

377,829

 

391,609

 

396,640

 

FHLB stock

 

8,086

 

8,086

 

7,050

 

7,050

 

Accrued interest receivable

 

4,609

 

4,609

 

4,344

 

4,344

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

529,459

 

529,459

 

442,158

 

442,158

 

Interest bearing demand deposits, savings, and money markets

 

70,394

 

70,394

 

65,426

 

65,426

 

Certificates of deposit

 

141,652

 

143,867

 

146,163

 

148,673

 

Total deposits

 

741,505

 

743,720

 

653,747

 

656,257

 

 

 

 

 

 

 

 

 

 

 

Advances from FHLB

 

109,000

 

112,214

 

74,800

 

76,034

 

FRB TAF Borrowings

 

 

 

25,000

 

25,000

 

Securities sold under agreements to repurchase

 

8,302

 

8,302

 

6,686

 

6,686

 

Subordinated debentures

 

10,310

 

10,311

 

10,310

 

10,656

 

Accrued interest payable

 

318

 

318

 

447

 

447

 

 

 

 

 

 

 

 

 

 

 

Off-balance-sheet instruments, loan commitments

 

 

 

 

 

 

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The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at June 30, 2010 and September 30, 2009.

 

CASH AND CASH EQUIVALENTS

The carrying amount of cash and short-term investments is assumed to approximate the fair value.

 

FEDERAL FUNDS SOLD

The carrying amount of federal funds sold is assumed to approximate the fair value.

 

SECURITIES AVAILABLE FOR SALE

To the extent available, quoted market prices or dealer quotes were used to determine the fair value of securities available for sale.  For those securities which are thinly traded, or for which market data was not available, management estimated fair value using other available data.  The basis on which the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings is determined using the specific identification method.

 

LOANS RECEIVABLE, NET

The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities.  When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers as of June 30, 2010 and September 30, 2009.  In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit quality.

 

FHLB STOCK

The fair value of such stock is assumed to approximate book value since the Company is generally able to redeem this stock at par value.

 

ACCRUED INTEREST RECEIVABLE

The carrying amount of accrued interest receivable is assumed to approximate the fair value.

 

DEPOSITS

The carrying values of non-interest bearing checking deposits, interest bearing checking deposits, savings, and money markets is assumed to approximate fair value, since such deposits are immediately withdrawable without penalty.  The fair value of time certificates of deposit was estimated by discounting expected future cash flows by the current rates offered on certificates of deposit with similar remaining maturities.

 

In accordance with ASC 825, no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under ASC 825.

 

ADVANCES FROM FHLB

The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates as of June 30, 2010 and September 30, 2009 for advances with similar terms and remaining maturities.

 

FEDERAL RESERVE BANK (“FRB”) TERM AUCTION FACILITY (“TAF”) BORROWINGS

The carrying amount of FRB TAF borrowings is assumed to approximate the fair value due to short-term maturities of 30 days or less.

 

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Table of Contents

 

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES

The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 2010 and September 30, 2009 over the contractual maturity of such borrowings.

 

ACCRUED INTEREST PAYABLE

The carrying amount of accrued interest payable is assumed to approximate the fair value.

 

LOAN COMMITMENTS

The commitments to originate and purchase loans have terms that are consistent with current market terms.  Accordingly, the Company estimates that the fair values of these commitments are not significant.

 

LIMITATIONS

It must be noted that fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.  Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time.  Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision.  Changes in assumptions as well as tax considerations could significantly affect the estimates.  Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.

 

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Table of Contents

 

NOTE 10. GOODWILL AND INTANGIBLE ASSETS

 

The changes in the carrying amount of the Company’s goodwill and intangible assets for the nine months ended June 30, 2010 and 2009 are as follows:

 

 

 

 

Traditional

 

Meta Payment

 

Meta Payment

 

Meta Payment

 

 

 

 

 

Banking

 

Systems®

 

Systems®

 

Systems®

 

 

 

 

 

Goodwill

 

Goodwill

 

Patents

 

Other

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2009

 

$

1,508

 

$

 

$

707

 

$

 

$

2,215

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions during the period

 

 

 

399

 

231

 

630

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

(96

)

(96

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2010

 

$

1,508

 

$

 

$

1,106

 

$

135

 

$

2,749

 

 

 

 

Traditional

 

Meta Payment

 

Meta Payment

 

 

 

 

 

Banking

 

Systems®

 

Systems®

 

 

 

 

 

Goodwill

 

Goodwill

 

Patents

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2008

 

$

1,508

 

$

425

 

$

273

 

$

2,206

 

 

 

 

 

 

 

 

 

 

 

Acquisitions during the period

 

 

 

302

 

302

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2009

 

$

1,508

 

$

425

 

$

575

 

$

2,508

 

 

The Company tests goodwill and intangible assets for impairment at least annually or more often if conditions indicate a possible impairment.  There was no impairment to goodwill during the nine months ended June 30, 2010 and 2009.

 

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Table of Contents

 

Part I.      Financial Information

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

META FINANCIAL GROUP, INC®.

AND SUBSIDIARIES

 

FORWARD-LOOKING STATEMENTS

 

Meta Financial Group, Inc.®, (“Meta Financial” or “the Company”) and its wholly-owned subsidiaries, MetaBank (the “Bank”), and Meta Trust Company® (“Meta Trust” or the “Trust Company”), may from time to time make written or oral “forward-looking statements,” including statements contained in this and other filings with the Securities and Exchange Commission (“SEC”), in its reports to shareholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements include statements with respect to the Company’s beliefs, expectations, estimates, and intentions that 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 statements address, among others, the following subjects:  future operating results; customer retention; loan and other product demand; important components of the Company’s balance sheet and income statements; growth and expansion; new products and services, such as those offered by the Bank or Meta Payment Systems® (“MPS”), a division of the Bank; credit quality and adequacy of reserves; technology; and our employees.  The following factors, among others, could cause the Company’s financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements:  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 “FRB” or the “Board”), 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 of and acceptance of new products and services offered by the Company 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-party vendors; the significant portion of the Company’s revenues that are derived from income tax-related programs, the impact of changes in financial services’ laws and regulations; 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 the MPS division; the growth of the Company’s business as well as expenses related thereto; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default.

 

The foregoing list of factors is not exclusive.  Additional discussions of factors affecting the Company’s business and prospects are contained in the Company’s periodic filings with the SEC.  The Company expressly disclaims any intent or obligation to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries.

 

GENERAL

 

The Company, a registered unitary savings and loan holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank.  The Company also owns all the issued and outstanding shares of Meta Trust.  Unless the context otherwise requires, references herein to the Company include Meta Financial and the Bank, and all subsidiaries of Meta Financial, direct or indirect, on a consolidated basis.

 

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Table of Contents

 

The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at June 30, 2010, compared to September 30, 2009, and the consolidated results of operations for the three and nine months ended June 30, 2010 and 2009. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2009.

 

CORPORATE DEVELOPMENTS AND OVERVIEW

 

The Company recorded net income of $3.5 million for the 2010 fiscal third quarter which was primarily due to increases in card fee revenue of $2.5 million, mortgage-backed securities interest income of $1.7 million and lower provision for loan losses of $5.7 million. Additionally, the Company recorded a $0.5 million net gain on the sale of membership equity interests in the 2009 third quarter as compared to none in the current fiscal quarter. The MPS division’s credit business lines was a major contributor to the increase in revenue in the first nine months of fiscal 2010 with income tax-related revenue accounting for approximately one-third of the increase.  Offsetting the above was an increase of $3.6 million in the Company’s provision for income tax expense. 

 

The traditional bank segment is continuing to build its customer base in the growing metropolitan areas of Sioux Falls, South Dakota and Des Moines, Iowa and smaller towns in Brookings, SD and Storm Lake, IA.  The Bank focuses primarily on establishing lending and deposit relationships with commercial businesses and commercial real estate owners in these communities.  The Bank currently operates 12 retail banking branches: in Brookings (1) and Sioux Falls (3), South Dakota, in Des Moines (6) and Storm Lake (2), Iowa and a non-retail service branch in Memphis, Tennessee.  The traditional bank implemented new checking products early in the first quarter of fiscal 2010.  Retail bank checking balances grew 22%  from $36.0 million at September 30, 2009 to $44.0 million at June 30, 2010.  In addition, retail provision for loan losses was $4.8 million lower than the previous year’s quarter.  The bank segment continues its emphasis on cost control as 10 positions have been eliminated over the last 12 months.

 

The Company’s stock trades on the NASDAQ Global Market under the symbol “CASH.”

 

FINANCIAL CONDITION

 

As of June 30, 2010, the Company’s assets grew by $126.5 million, or 15.2%, to $961.3 million compared to $834.8 million at September 30, 2009.  The increase in assets was caused primarily by growth in the Company’s mortgage-backed securities available for sale and cash and cash equivalents offset in part by a decrease in the Company’s net loans receivable.

 

Total cash and cash equivalents and federal funds sold were $17.4 million at June 30, 2010, an increase of $11.2 million from $6.2 million at September 30, 2009.  The increase primarily was the result of the Company’s additional liquidity due to an increase in deposits, primarily due to deposits generated by MPS.  In general, the Company maintains its cash investments in interest-bearing overnight deposits with the FHLB and FRB.  Federal funds sold deposits are maintained at the FHLB.  At June 30, 2010, the Company had no federal funds sold.

 

The total of mortgage-backed securities and investment securities available for sale increased $132.4 million, or 36.3%, to $497.2 million at June 30, 2010, as investment purchases exceeded related investment maturities, sales, and principal paydowns.  The Company’s portfolio of securities available for sale consists primarily of mortgage-backed securities, which have an anticipated average duration of 3.4 years.  Approximately 2% of the mortgage-backed securities have balloon maturities which further limit extension risk.  During the nine month period ended June 30, 2010, the Company purchased $378.6 million of mortgage-backed securities with average lives of five years or less and stated final lives of 30 years or less.

 

The Company’s portfolio of net loans receivable decreased $18.0 million, or 4.6%, to $373.6 million at June 30, 2010.  Commercial operating, commercial real estate, and one- to four-family residential real estate loans decreased $5.4 million, $21.0 million, and $6.0 million, respectively.  These decreases were primarily offset by an

 

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Table of Contents

 

increase of $16.7 million in MPS consumer loans.  In addition, the allowance for loan losses decreased $1.9 million due to improvement in asset quality and the charge off of problem loans.

 

Foreclosed real estate and repossessed assets decreased to $1.1 million as compared to $2.1 million at September 30, 2009 due to the Company’s write-down and sale of foreclosed real estate and repossessed assets.

 

Other assets decreased by $1.8 million, or 15.0%, to $10.0 million at June 30, 2010.  This decrease primarily relates to a $4.0 million change in the Company’s deferred federal and state taxes from a $3.4 million deferred tax asset to a $0.6 million deferred tax liability which was offset in part by a one-time prepayment in December 2009 of $3.9 million with respect to the Company’s prepaid FDIC assessment.  The change in the Company’s deferred federal and state tax from an asset to a liability was primarily due to a positive change in the unrealized gain on its securities available for sale portfolio.  See Note 4 to the Notes to Condensed Consolidated Financial Statements.

 

Total deposits increased $87.8 million, or 13.4%, to $741.5 million at June 30, 2010.  The Company continues to grow its low- and no-cost deposit portfolio.  Total MPS-generated deposits were up $88.8 million, or 21.0%, at June 30, 2010, as compared to September 30, 2009.  This increase results from growth in prepaid card programs.  Retail bank checking balances were up $8.1 million, or 22.4%,  at June 30, 2010, as compared to September 30, 2009.  Offsetting the above increases was a $4.5 million decrease in certificates of deposits primarily related to a decrease in public funds and a $5.4 million reduction in money market account balances.

 

Total borrowings increased $10.8 million, or 9.3%, from $116.8 million at September 30, 2009 to $127.6 million at June 30, 2010.  The Company reduced its FRB TAF borrowings by $25.0 million due to maturity and discontinuation of the TAF program.  More than offsetting this decrease was an increase of $34.2 million of borrowings with the FHLB.

 

Accrued expenses and other liabilities increased $5.8 million, or 48.0%, to $18.0 million at June 30, 2010.  This increase was primarily related to a change of $3.0 million in liability for federal and state income taxes.  At September 30, 2009, the Company recorded a receivable of $2.1 million as compared to a liability of $0.9 million at June 30, 2010, due to an increase in the Company’s taxable income as compared to the prior fiscal year’s taxable loss.

 

At June 30, 2010, the Company’s shareholders’ equity totaled $69.8 million, up $22.5 million from $47.3 million at September 30, 2009.  The increase was related to the previously disclosed net sales of equity securities in the amount of $8.6 million and 2010 year-to-date net income (see “Results of Operations” below), and a favorable change in the accumulated other comprehensive loss on the Company’s available for sale portfolio partially offset by the payment of dividends on the Company’s common stock.  At June 30, 2010, the Bank continues to exceed all regulatory requirements for classification as well-capitalized institution.  See “Liquidity and Capital Resources” for further information.

 

Non-performing Assets and Allowance for Loan Losses

 

Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result of this action, previously accrued interest income on the loan is taken out of current income.  The loan will remain on non-accrual status until the loan has been brought current or until other circumstances occur that provide adequate assurance of full repayment of interest and principal.

 

The Company believes that the level of allowance for loan losses at June 30, 2010 adequately reflects potential risks related to these loans; however, there can be no assurance that all loans will be fully collectible or that the present level of the allowance will be adequate in the future.  See “Allowance for Loan Losses.”

 

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The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio.  Foreclosed assets include assets acquired in settlement of loans.

 

 

 

Non-Performing Assets As Of

 

 

 

June 30, 2010

 

September 30, 2009

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Non-Performing Loans

 

 

 

 

 

 

 

 

 

 

 

Non-Accruing Loans :

 

 

 

 

 

1-4 Family

 

$

99

 

$

266

 

Commercial & Multi Family

 

5,212

 

11,512

 

Commercial Business

 

271

 

871

 

Total

 

5,582

 

12,649

 

 

 

 

 

 

 

Accruing Loans Delinquent 90 Days or More:

 

 

 

Total

 

 

 

 

 

 

 

 

 

Total Non-Performing Loans

 

5,582

 

12,649

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

 

 

 

 

Non-Accruing Investments :

 

 

 

 

 

Trust Preferred Securities

 

500

 

 

Total

 

500

 

 

 

 

 

 

 

 

Foreclosed Assets:

 

 

 

 

 

Commercial & Multi Family

 

443

 

957

 

Commercial Business

 

628

 

1,096

 

Total

 

1,071

 

2,053

 

 

 

 

 

 

 

Total Other Assets

 

1,571

 

2,053

 

 

 

 

 

 

 

Total Non-Performing Assets

 

$

7,153

 

$

14,702

 

Total as a Percentage of Total Assets

 

0.74

%

1.76

%

 

The 2010 year-to-date decrease in non-performing loans primarily relates to charge-offs for four commercial borrowers and improving quality of the loan portfolio.  See Note 2 to the Notes to Condensed Consolidated Financial Statements.

 

In addition, the Company was informed in March 2010 that one of its available for sale trust preferred securities, Cascade Capital Trust I 144A (“Cascade”), was deferring all interest payments in order to conserve capital while they address items contained in a memorandum of understanding entered into with the FDIC.  Cascade is accruing the expense and expects to pay the deferred interest balances on the trust preferred bonds upon approval from the FDIC.  In the meantime, the Company has placed the investment on nonaccrual status, classified it as substandard, and included it in total substandard assets below.

 

Classified Assets.  Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Office of Thrift Supervision (the “OTS”) to be of lessor quality as “substandard”, “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the savings association will sustain “some loss” if the

 

24



Table of Contents

 

deficiencies are not corrected.  Assets classified as “doubtful” have all the weaknesses inherent in those classified as “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific reserve is not warranted.  When assets are classified as either substandard or doubtful, the Bank may establish general or specific allowances for loan losses in an amount deemed prudent by management.  General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for loan losses equal to 100% of that portion of the asset so classified or to charge-off such amount. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, who may overrule the Bank’s classifications and require the establishment of additional general or specific loss allowances.  The discovery of additional information in the future may also affect both the level of classification and the amount of loss allowances.

 

In connection with the Bank’s 2009 examination by the OTS, the Bank was informed that four of its trust preferred securities should be classified as “substandard” assets as of March 31, 2009.   The four securities are: Huntington Capital Trust II SE, Bank Boston Capital Trust IV, Bank America Capital III, and Key Corp. Capital I.  The criterion for the determination was the OTS’ policy that the assignment of a sub-investment grade rating by one nationally recognized rating agencynotwithstanding the fact that other nationally recognized rating agencies have assigned an investment grade rating to the securities in question, mandates the categorization of the asset as substandard.   Despite the classification, and since the classification, the actual performance of the four securities continues to be satisfactory; interest payments are being made on a timely basis and there have been no requests for payment deferrals.

 

On the basis of management’s review of its loans and other assets, at June 30, 2010, the Company had classified a total of $24.9 million of its assets as substandard, $4.6 million as doubtful and none as loss.  This compares to classifications at September 30, 2009 of $30.8 million as substandard, $10.4 million as doubtful and none as loss.  As of June 30, 2010, $20.4 million out of a total of $24.9 million of substandard assets is attributable to the trust preferred securities identified above.  See Note 9 to the Notes to Condensed Consolidated Financial Statements.

 

Allowance for Loan Losses.  The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Company and its borrowers operate.

 

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses.  The economic slowdown continues to strain the financial condition of some borrowers.  Management therefore believes that future losses in the residential portfolio may be somewhat higher than historical experience.  Over the past three years, loss rates in the commercial and multi-family real estate market have increased.  Management concludes that future losses in this portfolio may be slightly higher than recent historical experience, excluding loan losses related to fraud by borrowers.  Current trends in agricultural markets continue to be mostly positive.  Reasonable commodity prices as well as higher expected yields have created strong economic conditions for most farmers.  Nonetheless, management still expects that future losses in this portfolio could be higher than the very positive recent historical experience.  Management believes that the subdued economic growth may also negatively impact consumers’ repayment capacities.  Additionally, a sizable portion of the Traditional Bank’s consumer loan portfolio is secured by residential real estate, as discussed above, and is an area to be closely monitored by management in view of its stated concerns.  The Company’s MPS division, in connection with its relationship to a nationally known tax preparation firm (“tax firm”), issued income tax-related loans to some of the tax firm’s

 

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Table of Contents

 

customers during the first and second quarters of fiscal 2010.  These loans are typically repaid at approximately the same time the customer receives their tax refund and are now substantially repaid or charged off.  The Company engaged in this program in the prior year as well.

 

Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, the current level of the allowance for loan losses at June 30, 2010 reflects an adequate allowance against probable losses from the loan portfolio.  Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods.  In addition, the Company’s determination of the allowance for loan losses is subject to review by its regulatory agencies, which can require the establishment of additional general or specific allowances.

 

At June 30, 2010, the Company has established an allowance for loan losses totaling $5.1 million, or 92.1% of non-performing loans, compared to $7.0 million, or 55.3% of non-performing loans, at September 30, 2009.  Excluding the $0.6 million allowance related to MPS loans, for purposes of analyzing the Traditional Bank segment, the ratio of allowance to non-performing loans would have been 81.0% at June 30, 2010.  The increase in the coverage ratio is due to management taking a more conservative approach to valuing its assets and related collateral to reflect the recent and ongoing decline in values and an increase in the historical loss rate for commercial real estate and multi-family loans.

 

The following table sets forth an analysis of the activity in the Company’s allowance for loan losses for the three and nine months ended June 30, 2010 and 2009.

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in Thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

17,521

 

$

11,224

 

$

6,993

 

$

5,732

 

Provision for loan losses

 

609

 

6,277

 

14,778

 

18,676

 

Charge-offs

 

(13,268

)

(8,436

)

(18,349

)

(15,850

)

Recoveries

 

278

 

60

 

1,718

 

567

 

Ending balance

 

$

5,140

 

$

9,125

 

$

5,140

 

$

9,125

 

 

The allowance for loan losses reflects management’s best estimate of probable losses inherent in the portfolio based on currently available information.  In addition to the factors mentioned above, future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s financial statements are prepared in accordance with GAAP.  The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.  Based on its consideration of accounting policies that: (i) involve the most complex and subjective decisions and assessments which may be uncertain at the time the estimate was made, and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements, management has identified the policies described below as Critical Accounting Policies.  This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented in Part II, Item 8 “Consolidated Financial Statements

 

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Table of Contents

 

and Supplementary Data” of its Annual Report on Form 10-K for the year ended September 30, 2009 and information contained herein.

 

Allowance for Loan Losses.  The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date.  Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors.  Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements.  Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries.  Size and complexity of individual credits in relation to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the methodology.  As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly.  Management may have reported a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different.  Although management believes the levels of the allowance as of both June 30, 2010 and September 30, 2009 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions or other factors could result in increasing losses.  In addition, our federal banking regulator has the ability to direct us to establish an allowance that may differ from management’s assessment.

 

Goodwill and Intangible Assets.  Goodwill represents the excess of acquisition costs over the fair value of the net assets acquired in a purchase acquisition.  Intangible assets include patents filed by the MPS Division.  Goodwill and intangible assets are tested annually for impairment or more often if conditions indicate a possible impairment.  Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.  These estimates and assumptions include revenue growth rates and operating margins used to calculate future cash flows, risk-adjusted discount rates, future economic and market conditions, comparison of the Company’s market value to book value and determination of appropriate market comparables.  Actual future results may differ from those estimates.

 

Each quarter the Company evaluates the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.  In accordance with ASC 350, Accounting for the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

 

Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.

 

Self-Insurance.  The Company has a self-insured healthcare plan for its employees up to certain limits.  To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $50,000 per individual occurrence with a maximum aggregate limit for each employee of $2.0 million.  The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported (“IBNR”) claims.  IBNR claims are estimated using historical claims lag information received by a third party claims administrator.  Although management believes it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual.

 

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Table of Contents

 

Deferred Tax Assets.  The Company accounts for income taxes according to the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are recognized subject to management’s judgment that realization is more-likely-than-not.  An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance.

 

Other-Than-Temporary Impairment.  Management evaluates the Company’s available for sale securities for other-than-temporary impairment at least on a quarterly basis, and more often if economic or market concerns warrant such evaluation.  Such factors management uses to determine impairment are:  (i) the length of time and extent to which the market value has been less than cost, (ii) the financial condition and near-term prospects of the issuer including specific events, (iii) the Company’s intent and ability to hold the investment to the earlier of maturity or recovery in fair value, (iv) the implied and historical volatility of the security, and (v) any downgrades by rating agencies.

 

RESULTS OF OPERATIONS

 

General.  The Company recorded net income of $3.5 million, or $1.11 per diluted share, for the three months ended June 30, 2010 compared to a net loss of $2.6 million, or $0.99 per diluted share, for the same period in fiscal year 2009.  The change in net income in the current period compared to the third quarter in fiscal 2009, was primarily driven by a $4.8 million decrease in Traditional Bank loan loss provision expense, a $3.8 million increase in MPS gross profit (net revenue less direct expenses), lower general and administrative expenses of $0.5 million and an increase in Traditional Bank net interest income of $1.1 million.  Partially offsetting these improvements was an increase of $3.6 million in the Company’s income tax expense due to the improved earnings and a $0.5 million gain on an equity related sale in the 2009 third quarter that did no reoccur in the 2010 third quarter.

 

The Company recorded net income of $9.9 million, or $3.37 per diluted share, for the nine months ended June 30, 2010 compared to a net loss of $0.7 million, or $0.28 per diluted share, for the same period in fiscal year 2009.  Total revenue for the current nine months ended June 30, 2010 was $108.0 million compared to $93.7 million in 2009, an increase of $14.3 million or 15%.  Interest income increased by $1.8 million, or 7%, and non-interest income increased by $12.4 million, or 19%.

 

Net Interest Income.  Net interest income for the 2010 fiscal third quarter increased by $2.3 million, or 36.5%, to $8.7 million from $6.3 million for the same period in the prior fiscal year.  Net interest margin increased to 3.45% for the third quarter of 2010 as compared to 3.19% for the same period in 2009.  Overall, asset yields declined by 23 basis points primarily due to lower average yields in the mortgage-backed securities portfolios and a change in asset mix to more mortgage-backed securities.  Mortgage-backed securities comprise 49% of average interest-earning assets compared to 37% one year ago.  Overall, rates on all deposits and interest-bearing liabilities decreased by 47 basis points from 1.07% in the 2009 quarter to 0.60% in 2010.  As of June 30, 2010, low- and no-cost checking deposits represented 79% of total deposits compared to 77% one year earlier.  The increase was driven by growth of $68.7 million, or 16%, in deposits generated by MPS as of the end of the quarter; as compared to one year earlier.  The decrease in the average balance of interest-bearing liabilities of $26.8 million and the rate paid on those liabilities had a $0.7 million impact on the increase in net interest income for the 2010 fiscal third quarter as compared to the same quarter in 2010.

 

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For the nine month period ended June 30, 2010 net interest income was $25.0 million compared to $20.7 million for the same period in the prior fiscal year.  Contributing to this increase was a 93 basis point decrease in rates paid on interest-bearing liabilities, a $13.6 million reduction in the average balances of interest-bearing liabilities, and a 21% increase in the average balance of earning assets.  These were partially offset by asset yields that decreased 55 basis points, in part, due to faster amortization of premiums due to prepayment speeds in the Company’s mortgage-backed securities portfolio as compared to the prior year.  Overall, the net interest margin remained relatively flat at 3.48% compared to 3.49% for the nine month period in 2009.

 

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Table of Contents

 

The following tables present, for the periods indicated, the Company’s 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.  No tax equivalent adjustments have been made.  Non-accruing loans have been included in the table as loans carrying a zero yield.

 

 

 

2010

 

2009

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

Three Months Ended June 30,

 

Outstanding

 

Earned /

 

Yield /

 

Outstanding

 

Earned /

 

Yield /

 

(Dollars in Thousands)

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

396,515

 

$

5,523

 

5.59

%

$

423,155

 

$

5,625

 

5.33

%

Mortgage-backed securities

 

495,635

 

4,393

 

3.56

%

297,492

 

2,652

 

3.58

%

Other investments and fed funds sold

 

114,229

 

198

 

0.70

%

76,252

 

188

 

0.99

%

Total interest-earning assets

 

1,006,379

 

$

10,114

 

4.03

%

796,899

 

$

8,465

 

4.26

%

Non-interest-earning assets

 

48,968

 

 

 

 

 

64,332

 

 

 

 

 

Total assets

 

$

1,055,347

 

 

 

 

 

$

861,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

636,055

 

$

 

0.00

%

$

492,238

 

$

 

0.00

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

22,177

 

79

 

1.43

%

16,406

 

10

 

0.24

%

Savings

 

10,710

 

9

 

0.34

%

10,085

 

9

 

0.36

%

Money markets

 

33,619

 

70

 

0.84

%

35,248

 

85

 

0.97

%

Time deposits

 

133,163

 

781

 

2.35

%

132,720

 

1,107

 

3.35

%

FHLB advances

 

112,853

 

395

 

1.40

%

85,217

 

646

 

3.04

%

Other borrowings

 

17,703

 

122

 

2.76

%

23,737

 

264

 

4.46

%

Total interest-bearing liabilities

 

330,225

 

1,456

 

1.77

%

303,413

 

2,121

 

2.80

%

Total deposits and interest-bearing liabilities

 

966,280

 

$

1,456

 

0.60

%

795,651

 

$

2,121

 

1.07

%

Other non-interest bearing liabilities

 

24,994

 

 

 

 

 

17,743

 

 

 

 

 

Total liabilities

 

991,274

 

 

 

 

 

813,394

 

 

 

 

 

Shareholders’ equity

 

64,073

 

 

 

 

 

47,837

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,055,347

 

 

 

 

 

$

861,231

 

 

 

 

 

Net interest income and net interest rate spread including non-interest bearing deposits

 

 

 

$

8,658

 

3.43

%

 

 

$

6,344

 

3.19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.45

%

 

 

 

 

3.19

%

 

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Table of Contents

 

 

 

2010

 

2009

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

Nine Months Ended June 30,

 

Outstanding

 

Earned /

 

Yield /

 

Outstanding

 

Earned /

 

Yield /

 

(Dollars in Thousands)

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

411,641

 

$

19,624

 

6.37

%

$

429,863

 

$

19,533

 

6.08

%

Mortgage-backed securities

 

404,681

 

9,375

 

3.10

%

243,386

 

7,457

 

4.10

%

Other investments and fed funds sold

 

142,740

 

562

 

0.53

%

121,307

 

735

 

0.81

%

Total interest-earning assets

 

959,062

 

$

29,561

 

4.12

%

794,556

 

$

27,725

 

4.67

%

Non-interest-earning assets

 

47,062

 

 

 

 

 

68,931

 

 

 

 

 

Total assets

 

$

1,006,124

 

 

 

 

 

$

863,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

631,428

 

$

 

0.00

%

$

486,554

 

$

 

0.00

%

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

19,185

 

145

 

1.01

%

15,788

 

31

 

0.26

%

Savings

 

10,337

 

26

 

0.34

%

9,704

 

30

 

0.41

%

Money markets

 

34,651

 

218

 

0.84

%

38,128

 

321

 

1.13

%

Time deposits

 

133,895

 

2,587

 

2.58

%

147,462

 

3,802

 

3.45

%

FHLB advances

 

76,425

 

1,209

 

2.12

%

67,289

 

2,034

 

4.04

%

Other borrowings

 

25,001

 

398

 

2.13

%

34,680

 

758

 

2.92

%

Total interest-bearing liabilities

 

299,494

 

4,583

 

2.05

%

313,051

 

6,976

 

2.98

%

Total deposits and interest-bearing liabilities

 

930,922

 

$

4,583

 

0.66

%

799,605

 

$

6,976

 

1.17

%

Other non-interest bearing liabilities

 

18,520

 

 

 

 

 

16,674

 

 

 

 

 

Total liabilities

 

949,442

 

 

 

 

 

816,279

 

 

 

 

 

Shareholders’ equity

 

56,682

 

 

 

 

 

47,208

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,006,124

 

 

 

 

 

$

863,487

 

 

 

 

 

Net interest income and net interest rate spread including non-interest bearing deposits

 

 

 

$

24,978

 

3.46

%

 

 

$

20,749

 

3.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.48

%

 

 

 

 

3.49

%

 

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Table of Contents

 

Provision for Loan Loss.  The Company recorded a provision for loan losses in the third quarter of fiscal year 2010 of $0.6 million compared to a provision of $6.3 million for the same period in the prior fiscal year.  The improvement was comprised of a negative provision of $0.1 million related to MPS and a positive provision of $0.7 million related to the Company’s traditional bank segment due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans.  For the nine months ended June 30, 2010 the Company recorded a provision of $14.8 million compared to a provision of $18.7 million for the same period in the prior fiscal year due to the aforementioned factors.  Also see Note 2 to the Notes to Condensed Consolidated Financial Statements and “Financial Condition - Non-performing Assets and Allowance for Loan Losses” herein for further discussion.

 

Non-Interest Income.  Non-interest income increased by $1.9 million, or 11.4%, to $18.8 million from $16.9 million in the prior fiscal year third quarter.  The increase is primarily the result of higher fee income earned on MPS credit products and other products offered by MPS.  Fees earned on MPS-related programs were $18.2 million for the third quarter of fiscal year 2010, compared to $15.7 million for the same quarter in fiscal year 2009.  For the nine months ended June 30, 2010, non-interest income increased by $12.4 million, or 18.9%, to $78.5 million from $66.1 million for the same period in the prior fiscal year.  Fees earned on income tax-related programs, credit, and other payment systems products and services were higher and accounted for the increase to $74.9 million for the nine months ended June 30, 2010 from $63.8 million for the same period in fiscal year 2009.

 

In addition, the Bank sold mortgage-backed securities resulting in a fiscal 2010 year-to-date pre-tax gain on sale of available for sale securities in the amount of $2.1 million compared to $0.2 million for the same period in fiscal year 2009.  In the prior fiscal year, the Company recorded a $0.5 million net gain on the sale of membership equity interests in the 2009 third quarter as compared to none in the current fiscal quarter.

 

Non-Interest Expense.  Non-interest expense increased by $0.2 million, or 1.0%, to $21.1 million for the third quarter of fiscal year 2010 from $20.9 million for the same quarter in fiscal year 2009.  Non-interest expense increased by $3.6 million, or 5.3%, to $72.8 million for the nine months ended June 30, 2010 from $69.2 million for the same period in fiscal year 2009.

 

Card processing expenses increased $0.8 million from $7.3 million in the third quarter of fiscal year 2009 to $8.1 million in the current quarter primarily due to volume-related variable costs for prepaid and credit programs.  For the nine months ended June 30, 2010, card processing expense totaled $29.9 million, compared to $28.2 million for the same period in the prior fiscal year.

 

Compensation expense declined $0.7 million to $7.5 million for the three months ended June 30, 2010 as compared to $8.2 million for the same period in fiscal 2009.  For the nine months ended June 30, 2010, compensation expense totaled $25.0 million, compared to $24.0 million for the same period in the prior fiscal year.  In January 2010, the Company eliminated 47 positions in MPS.  The reduction in compensation expense is expected to amount to nearly $5.0 million, on an annualized basis, as a result of this action.

 

Income Tax Expense/Benefit.  Income tax expense for the third quarter of fiscal year 2010 was $2.1 million, or an effective tax rate of 37.7%, compared to an income tax benefit of $1.4 million, or an effective tax rate of 35.7%, for the same period in the prior fiscal year.  For the nine months ended June 30, 2010, the Company recorded an income tax expense in the amount of $5.9 million, or an effective tax rate of 37.5%, compared to an income tax benefit of $0.3 million, or an effective tax rate of 31.0% for the same period in the prior fiscal year.  The change in tax expense is primarily due to increased income.

 

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Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment activities. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions, and competition.

 

The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses.  At June 30, 2010, the Company had commitments to originate and purchase loans totaling $37.3 million and commitments to purchase securities available for sale totaling $0.4 million.  The Company believes that loan repayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.

 

Regulations require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and a leverage ratio consisting of Tier 1 capital to average assets.  The following table sets forth the Bank’s actual capital and required capital amounts and ratios at June 30, 2010 which, at that date, exceeded the minimum capital adequacy requirements.

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

Requirement to Be

 

 

 

 

 

 

 

Minimum

 

Well Capitalized

 

 

 

 

 

 

 

Requirement For

 

Under Prompt

 

 

 

 

 

 

 

Capital Adequacy

 

Corrective Active

 

 

 

Actual

 

Purposes

 

Provisions

 

At June 30, 2010

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MetaBank

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible capital (to tangible assets)

 

$

71,756

 

7.51

%

$

14,330

 

1.50

%

$

n/a

 

n/a

%

Tier 1 (core) capital (to adjusted total assets)

 

71,756

 

7.51

 

38,214

 

4.00

 

47,768

 

5.00

 

Tier 1 (core) capital (to risk-weighted assets)

 

71,756

 

16.41

 

17,489

 

4.00

 

26,234

 

6.00

 

Total risk-based capital (to risk-weighted assets)

 

76,896

 

17.59

 

34,978

 

8.00

 

43,723

 

10.00

 

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category.  At June 30, 2010, the Bank exceeded all requirements for the well capitalized category.

 

OTHER RECENT MATTERS

 

In response to the current national and international economic recession, the U.S. government has taken a variety of actions intended to stimulate the national economy, including the passage of legislation, such as the Emergency Economic Stabilization Act of 2008 (the “EESA”), and the implementation of certain programs by federal agencies.

 

The first program put forth by the U.S. Treasury pursuant to its authority under the EESA was the Troubled Asset Relief Program’s Capital Purchase Program (the “CPP”).  Pursuant to the CPP, the US Treasury, on behalf of the US government, was authorized to purchase up to $250 billion of preferred stock, along with warrants to purchase common stock, from certain financial institutions that applied to receive funds.  The CPP was intended to shore up bank capital and to stimulate lending.  The Company did not participate in the CPP Program and applications for funding will only be considered by the U.S. Treasury if they were submitted prior to June 25, 2010.

 

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Table of Contents

 

The FDIC promulgated a temporary liquidity guarantee program that had both a debt guarantee component, whereby the FDIC agreed to guarantee certain senior unsecured debt issued by eligible financial institutions, and a transaction account guarantee component, whereby the FDIC agreed to insure 100% of non-interest bearing deposit transaction accounts held at eligible financial institutions, such as lawyers’ trust accounts, payment processing accounts, payroll accounts and working capital accounts.  The Company opted out of participation in both of these programs.

 

On July 21, 2010, in response to the current national and international economic recession and to strengthen supervision of financial institutions and systemically important nonbank financial companies, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act represents the most comprehensive change to banking laws since the Great Depression of the 1930s, and mandates change in several key areas: regulation and compliance (both with respect to financial institutions and systemically important nonbank financial companies), securities regulation, executive compensation, regulation of derivatives, corporate governance, and consumer protection.  While these changes in the law will have a major impact on large institutions, even relatively smaller institutions such as ours will be affected.

 

In this respect, it is noteworthy that preemptive rights heretofore granted to national banking associations by the OCC under the National Bank Act, and to federal savings banks by the Office of Thrift Supervision (which will be merged into the OCC) under the Home Owners Loan Act, will be diminished with respect to consumer financial laws and regulations. Thus, Congress has authorized states to enact their own substantive protections and to allow state attorneys general to initiate civil actions to enforce federal consumer protections.  In this respect the Company will be subject to regulation by a new consumer protection bureau housed within the Federal Reserve, known as the Bureau of Consumer Financial Protection.  The Bureau will consolidate enforcement currently undertaken by myriad financial regulatory agencies, and will have substantial power to define the rights of consumers and responsibilities of providers, including the Company.  The Company anticipates higher compliance costs as substantive state consumer protection laws must be taken into consideration.  In addition, and among many other legislative changes that the Company will assess, the Company will (l) have two new regulators, the Office of the Comptroller of the Currency, which will regulate the Bank, and the Federal Reserve, which will regulate the Company (2) experience a new assessment model from the FDIC based on assets, not deposits, (3) be required to retain some credit risk for certain mortgages it sells into secondary markets via asset backed securities, (4) be subject to enhanced executive compensation and corporate governance requirements, (5) be able, for the first time (and perhaps competitively compelled) to offer interest on business transaction and other accounts.

 

The extent to which the new legislation and existing and planned governmental initiatives hereunder will succeed in ameliorating tight credit conditions or otherwise result in an improvement in the national economy is uncertain.  In addition, because most of the component parts of the new legislation will be subject to intensive agency rulemaking and subsequent public comment over the next six to 18 months prior to eventual implementation, it is difficult to predict the ultimate effect of the Act on the Company at this time. It is not unlikely, however, that the Company’s expenses will increase as a result of new compliance requirements.

 

The Credit Card Accountability Responsibility and Disclosures Act of 2009 (the “Credit Card Act”) was signed into law on May 22, 2009.  It is comprehensive credit card reform legislations that includes a variety of requirements that affect the operations and profitability of credit card issuers.  These requirements generally include the following: (1) limitations on certain increases in annual percentage rates and fees; (2) advance written notice of increases in annual percentage rates and fees, as well as the consumer’s ability to cancel the account before such changes are effective; (3) required payment allocations that prevent issuers from allocating payments above the minimum payment to balances with the lowest annual percentage rate; and (4) a prohibition against overlimit fees unless the consumer has opted-in to such feature of the credit card account.  In addition, the Credit Card Act also contains provisions that affect general use prepaid cards (as discussed below).  While certain open-end credit programs of the Company will be impacted by the Credit Card Act, the operational and financial

 

34



Table of Contents

 

impact to the Company will be immaterial.  The Company does not anticipate that any of its open-end line of credit programs will be discontinued or extensively modified as a result of the Credit Card Act.  Two of the Company’s credit card programs will have significant changes to the terms and conditions as a result of the Credit Card Act.  However, the account portfolio for these programs is relatively small, so any financial impact to the Company due to any modifications to the programs will be minimal.

 

As of August 22, 2010, final regulations issued by the Federal Reserve implementing the third and final phase of the Credit Card Act will go into effect, affecting prepaid products, including gift certificates, store-gift cards and general use prepaid cards (such as network branded cards).  The rules restrict a company’s ability to impose dormancy, inactivity, or service fees for certain prepaid products, primarily gift cards, and requires that three conditions be satisfied before such fees are imposed.  It also generally prohibits the sale or issuance of such products if they have an expiration date of less than 5 years from the date the product was bought or funds were last loaded.  The rules also require that all fees related to a gift card are disclosed on the gift card or its packaging (notably, however, a bill is making its way through the U.S. Congress to delay the implementation of this provision until existing inventories of such non-compliant cards are sold).  The Company does not expect that the implementation of this third and final phase of regulations related to the Credit Card Act to be material.

 

In June 2010, the federal banking agencies (including the OTS, the FDIC and the Federal Reserve) released their final guidance on incentive compensation arrangements at financial institutions as such incentive packages prescribe compensation for certain financial institution employees.  Such guidance requires financial institutions to take into account risk as well as safety and soundness in their compensation practices.  The three key principles outlined by the banking agencies with respect to incentive compensation are as follows: (1) employees should be provided incentives that balance risk and reward so that employees are not encouraged to expose their organization to imprudent risk; (2) the incentive programs must be compatible with institutional controls and risk management; and (3) the incentive programs must be supplemented with strong corporate governance, including active board oversight.  The banking agencies have stated that they are going to incorporate oversight of incentive compensation into the regular examination process for banks such as MetaBank.  The Company is currently reviewing the guidance.

 

Aside from the law, regulations and proposals discussed above, additional legislative and regulatory proposals have been set forth by members of Congress, federal agencies and state legislatures related to tax refund anticipation products.  There is no way to determine at the present time whether such proposals will be enacted by Congress or state legislatures or adopted by regulatory agencies and the extent to which they will impact the operations of the Bank and MPS.

 

The Company utilizes various third parties for, among other things, its processing needs, both with respect to standard bank operations and with respect to its MPS division.  MPS was notified in April 2008 by one of the processors that the processor’s computer system had been breached, which led to the unauthorized load and spending of funds from Bank-issued cards.  The Bank believes the amount in question to be approximately $2.0 million.  The processor and program manager both have agreements with the Bank to indemnify it for any losses as a result of such unauthorized activity.  In addition, the Bank has given notice to its own insurer.  The Company has been notified by the processor that its insurer has denied the claim filed.  The Company made demand for payment and filed a demand for arbitration to recover the unauthorized loading and spending amounts and certain damages and, in January 2010, received an arbitration judgment of $2.4 million including reimbursement of interest and costs in the amount of $279,000.  The Company is continuing to pursue this matter with a claim against the processor’s insurance company, which action is currently pending.

 

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Table of Contents

 

Part I.      Financial Information

 

Item 3.     Quantitative and Qualitative Disclosure About Market Risk

 

MARKET RISK

 

The Company is exposed to the impact of interest rate changes and changes in the fair value of its investments.

 

The Company originates predominantly adjustable-rate loans and fixed-rate loans up to ten years.  Long-term fixed-rate residential mortgages are generally sold into the secondary market.  As a result of its lending practices, the Company’s loan portfolio is relatively short in duration and yields respond quickly to the overall level of interest rates.

 

The Company’s primary objective for its investment portfolio is to provide the liquidity necessary to meet the Company’s cash demands.  This portfolio may also be used in the ongoing management of interest rate risk.  As a result, funds may be invested among various categories of security types and maturities based upon the Company’s need for liquidity and its desire to create an economic hedge against the effects changes in interest rates may have on the overall market value of the Company.

 

The Company offers a full range of deposit products which are generally short term in nature.  Interest-bearing checking, savings, and money market accounts generally provide a stable source of funds for the bank and also respond relatively quickly to changes in short term interest rates.  The Company offers certificates of deposit with maturities of three months through five years, which serve to extend the duration of the overall deposit portfolio.  A significant and increasing portion of the Company’s deposit portfolio is concentrated in non-interest-bearing checking accounts.  These accounts serve to decrease the Company’s overall cost of funds and reduce its sensitivity to changes in short term interest rates.

 

The Company also maintains a portfolio of wholesale borrowings, predominantly advances from the FHLB and FRB, including both overnight advances and advances that carry fixed terms and fixed rates of interest.  The Company utilizes this portfolio to manage liquidity demands and also, when appropriate, in the ongoing management of interest rate risk.

 

The Board of Directors, as well as the OTS, has established limits on the level of acceptable interest rate risk.  There can be no assurance, however, that, in the event of an adverse change in interest rates, the Company’s efforts to limit interest rate risk will be successful.

 

Net Portfolio Value.  The Company uses a Net Portfolio Value (“NPV”) approach to the quantification of interest rate risk.  This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from any off-balance sheet contracts.  Management of the Company’s assets and liabilities is performed within the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV that is acceptable given certain interest rate changes.

 

Presented below, as of June 30, 2010 and September 30, 2009, is an analysis of the Company’s interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up 400 and down 100 basis points.  At June 30, 2010, the Company was more sensitive to an adjustment in market value in an increasing interest rate environment compared to September 30, 2009.  Rate decrease scenarios at September 30, 2009 are not presented due to the extremely low rate environment.  As of June 30, 2010, the Bank’s interest rate risk profile was within the limits set forth by the OTS.

 

36



Table of Contents

 

 

 

Estimated Increase

 

 

 

(Decrease) in NPV

 

Change in

 

At June 30, 2010

 

At September 30, 2009

 

Interest Rates

 

$ Change

 

% Change

 

$ Change

 

% Change

 

Basis Points

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

+300 bp

 

$

(25,322

)

(31

)%

$

(9,543

)

(14

)%

+200 bp

 

(9,408

)

(12

)

(505

)

(1

)

+100 bp

 

5,746

 

7

 

 

 

Zero

 

 

 

 

 

 

Certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Furthermore, although management has estimated changes in the levels of prepayments and early withdrawal in these rate environments, such levels would likely deviate from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.

 

In addition to the NPV approach, the Company also reviews gap reports, which measure the differences in assets and liabilities repricing in given time periods, and net income simulations to assess its interest rate risk profile. Management reviews its interest rate risk profile on a quarterly basis.

 

37



Table of Contents

 

Part I.     Financial Information

Item 4T.   Controls and Procedures

 

CONTROLS AND PROCEDURES

 

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met.  Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a — 15(e) and 15d — 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by the report.

 

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2010, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

META FINANCIAL GROUP, INC.

 

PART II - OTHER INFORMATION

 

FORM 10-Q

 

Item 1.            Legal Proceedings — See “Legal Proceedings” of Note 5 to the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.

 

Item 1A.         Risk Factors - In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2009 as well as in our Quarterly Report on Form 10-Q/A for the period ended December 31, 2009.  Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially and adversely affect us in the future.  In addition, the following factor is presented:

 

The recently enacted Dodd-Frank Act may have unpredictable effects on the Company and  adversely impact the Company’s results of operations, financial condition or liquidity.

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law.  The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and, among many other things, eliminates the Company’s bank  regulator (the Office of Thrift Supervision, the duties of which will be taken over by the Office of the Comptroller of the Currency and the Federal Reserve as the new regulators of the Bank and the Company, respectively), establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), requires the BCFP and other federal agencies to implement over the next six to eighteen months many new and significant rules and regulations.  At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Company’s and the Bank’s business. Compliance with the new law and regulations will, however, likely result in additional costs, which could be significant, and could adversely impact the Company’s results of operations, financial condition or liquidity.

 

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds — None

 

Item 3.             Defaults Upon Senior Securities — None

 

Item 4.             Reserved

 

Item 5.            Other Information  — None

 

Item 6.             Exhibits

 

See Index to Exhibits.

 

39



Table of Contents

 

META FINANCIAL GROUP, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

META FINANCIAL GROUP, INC.

 

 

 

 

 

 

 

 

 

 

Date:

August 10, 2010

 

By:

/s/ J. Tyler Haahr

 

 

 

 

J. Tyler Haahr, President,

 

 

 

 

and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

Date:

August 10, 2010

 

By:

/s/ David W. Leedom

 

 

 

 

David W. Leedom, Senior Vice President

 

 

 

 

and Chief Financial Officer

 

40



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

31.1

 

Section 302 certification of Chief Executive Officer.

 

 

 

31.2

 

Section 302 certification of Chief Financial Officer.

 

 

 

32.1

 

Section 906 certification of Chief Executive Officer.

 

 

 

32.2

 

Section 906 certification of Chief Financial Officer.

 

41