Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

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

For the quarterly period ended June 30, 2016

☐  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 incorporation or organization)
(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices)

(605) 782-1767
(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 ☒  NO☐

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 ☒  NO .☐

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☐
Accelerated filer☒
Non-accelerated filer☐
Smaller Reporting Company☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ YES  ☒ 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 July 27, 2016:
Common Stock, $.01 par value
8,524,142 Common Shares
Nonvoting Common Stock, $.01 par value
0 Common Shares
 
 
 
 
 


META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.  
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

i

Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
ASSETS
June 30, 2016
 
September 30, 2015
Cash and cash equivalents
$
36,830

 
$
27,658

Investment securities available for sale
863,468

 
679,504

Mortgage-backed securities available for sale
579,330

 
576,583

Investment securities held to maturity
465,451

 
279,167

Mortgage-backed securities held to maturity
139,138

 
66,577

Loans receivable - net of allowance for loan losses of $6,120 at June 30, 2016 and $6,255 at September 30, 2015
854,506

 
706,255

Federal Home Loan Bank Stock, at cost
25,311

 
24,410

Accrued interest receivable
17,911

 
13,352

Premises, furniture, and equipment, net
18,695

 
17,393

Bank-owned life insurance
57,038

 
45,830

Goodwill
36,928

 
36,928

Intangible assets
30,088

 
33,577

Prepaid assets
10,434

 
9,360

Deferred taxes
407

 
6,997

Meta Payment Systems accounts receivable
6,694

 
5,337

Other assets
1,937

 
777

 


 
 
        Total assets
$
3,144,166

 
$
2,529,705

 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
LIABILITIES
 

 
 

Non-interest-bearing checking
$
1,922,802

 
$
1,449,101

Interest-bearing checking
39,946

 
33,320

Savings deposits
78,547

 
41,720

Money market deposits
45,325

 
42,222

Time certificates of deposit
100,336

 
91,171

        Total deposits
2,186,956

 
1,657,534

Advances from Federal Home Loan Bank
107,000

 
7,000

Federal funds purchased
437,000

 
540,000

Securities sold under agreements to repurchase
2,234

 
4,007

Subordinated debentures
10,310

 
10,310

Capital lease
2,048

 
2,143

Accrued interest payable
337

 
272

Contingent liability
—

 
331

Accrued expenses and other liabilities
65,612

 
36,773

          Total liabilities
2,811,497

 
2,258,370

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2016 and September 30, 2015, respectively
—

 
—

Common stock, $.01 par value; 15,000,000 shares authorized, 8,523,641 shares issued and outstanding at June 30, 2016 and 8,183,272 shares issued and 8,163,022 shares outstanding at September 30, 2015
85

 
82

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized,no shares issued or outstanding at June 30, 2016 and September 30, 2015, respectively
—

 
—

Additional paid-in capital
184,700

 
170,749

Retained earnings
122,292

 
98,359

Accumulated other comprehensive income (loss)
25,592

 
2,455

Treasury stock, at cost, no common shares at June 30, 2016 and 20,250 common shares at September 30, 2015
—

 
(310
)
         Total stockholders’ equity
332,669

 
271,335

 
 
 
 
         Total liabilities and stockholders’ equity
$
3,144,166

 
$
2,529,705


See Notes to Condensed Consolidated Financial Statements.

2
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 June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest and dividend income:
 
 
 
 
 
 
 
Loans receivable, including fees
$
9,280

 
$
7,528

 
$
26,147

 
$
21,561

Mortgage-backed securities
3,777

 
3,055

 
12,258

 
10,798

Other investments
7,706

 
4,671

 
21,262

 
12,885

 
20,763

 
15,254

 
59,667

 
45,244

Interest expense:
 

 
 

 
 

 
 

Deposits
136

 
159

 
434

 
563

FHLB advances and other borrowings
708

 
434

 
1,821

 
1,164

 
844

 
593

 
2,255

 
1,727

 
 
 
 
 
 
 
 
Net interest income
19,919

 
14,661

 
57,412

 
43,517

 
 
 
 
 
 
 
 
Provision (recovery) for loan losses
2,098

 
700

 
4,057

 
1,341

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
17,821

 
13,961

 
53,355

 
42,176

 
 
 
 
 
 
 
 
Non-interest income:
 

 
 

 
 

 
 

Tax product fees
3,424

 
—

 
23,062

 
—

Card fees
18,779

 
13,854

 
52,614

 
40,607

Loan fees
1,091

 
702

 
4,126

 
1,267

Bank-owned life insurance
454

 
632

 
1,208

 
1,759

Deposit fees
144

 
151

 
457

 
448

Gain (loss) on sale of securities available for sale, net (Includes ($102) and ($52) reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three and nine months ended June 30, 2016, respectively)
(102
)
 
51

 
(52
)
 
(1,191
)
Gain (loss) on foreclosed real estate
—

 
1

 
—

 
29

Other income (loss)
17

 
33

 
127

 
149

Total non-interest income
23,807

 
15,424

 
81,542

 
43,068

 
 
 
 
 
 
 
 
Non-interest expense:
 

 
 

 
 

 
 

Compensation and benefits
15,375

 
12,126

 
47,140

 
34,324

Tax product
359

 
—

 
8,615

 
—

Card processing
5,607

 
3,868

 
16,858

 
12,374

Occupancy and equipment
3,413

 
2,866

 
10,451

 
8,304

Legal and consulting
1,221

 
1,116

 
3,211

 
3,333

Marketing
490

 
323

 
1,531

 
1,002

Data processing
324

 
417

 
1,022

 
1,063

Other expense
4,838

 
3,757

 
14,597

 
9,905

Total non-interest expense
31,627

 
24,473

 
103,425

 
70,305

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
10,001

 
4,912

 
31,472

 
14,939

 
 
 
 
 
 
 
 
Income tax expense (Includes ($37) and ($19) income tax expense reclassified from accumulated other comprehensive income (loss) for the three and nine months ended June 30, 2016, respectively)
1,128

 
272

 
4,258

 
1,523

 
 
 
 
 
 
 
 
Net income
$
8,873

 
$
4,640

 
$
27,214

 
$
13,416

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
1.05

 
$
0.67

 
$
3.24

 
$
2.05

Diluted
$
1.04

 
$
0.66

 
$
3.22

 
$
2.03

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2016

 
2015

 
2016

 
2015

Net income
$
8,873

 
$
4,640

 
$
27,214

 
$
13,416

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in net unrealized gain (loss) on securities
17,561

 
(16,660
)
 
36,397

 
(4,208
)
Losses (gains) realized in net income
102

 
(51
)
 
52

 
1,191

 
17,663

 
(16,711
)
 
36,449

 
(3,017
)
Deferred income tax effect
6,399

 
(6,062
)
 
13,312

 
(1,038
)
Total other comprehensive income (loss)
11,264

 
(10,649
)
 
23,137

 
(1,979
)
Total comprehensive income (loss)
$
20,137

 
$
(6,009
)
 
$
50,351

 
$
11,437


See Notes to Condensed Consolidated Financial Statements.


4
Table of Contents

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2016 and 2015
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Treasury
Stock
 
 
Total
Stockholders’
Equity
Balance, September 30, 2014
$
62

 
$
95,079

 
$
83,797

 
$
(3,409
)
 
$
(727
)
 
$
174,802

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.39 per share)
—

 
—

 
(2,588
)
 
—

 
—

 
(2,588
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares from the sales of equity securities
8

 
24,987

 
—

 
—

 
—

 
24,995

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP
—

 
207

 
—

 
—

 
417

 
624

 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized losses on securities, net of income taxes
—

 
—

 
—

 
(1,979
)
 
—

 
(1,979
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
13,416

 
—

 
—

 
13,416

 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015
$
70

 
$
120,273

 
$
94,625

 
$
(5,388
)
 
$
(310
)
 
$
209,270

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
$
82

 
$
170,749

 
$
98,359

 
$
2,455

 
$
(310
)
 
$
271,335

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.39 per share)
—

 
—

 
(3,281
)
 
—

 
—

 
(3,281
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares from the sales of equity securities
2

 
11,499

 
—

 
—

 
—

 
11,501

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP
1

 
1,774

 
—

 
—

 
310

 
2,085

 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation
—

 
678

 
—

 
—

 
—

 
678

 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains on securities, net of income taxes
—

 
—

 
—

 
23,137

 
—

 
23,136

 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
27,214

 
—

 
—

 
27,214

 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2016
$
85

 
$
184,700

 
$
122,292

 
$
25,592

 
$
—

 
$
332,669


See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents


META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Nine Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
27,214

 
$
13,416

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation, amortization and accretion, net
26,646

 
19,674

Provision (recovery) for loan losses
4,057

 
1,341

Provision (recovery) for deferred taxes
348

 
(2,424
)
(Gain) loss on other assets
23

 
(647
)
(Gain) loss on sale of securities available for sale, net
52

 
1,191

Capital lease obligations interest expense
(95
)
 
(99
)
Net change in accrued interest receivable
(4,559
)
 
(3,013
)
Change in bank-owned life insurance value
(1,208
)
 
(1,267
)
Net change in other assets
(3,745
)
 
2,658

Net change in accrued interest payable
65

 
(39
)
Net change in accrued expenses and other liabilities
627

 
11,714

Net cash provided by (used in) operating activities
49,425

 
42,505

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(474,281
)
 
(591,786
)
Proceeds from sales of securities available-for-sale
224,564

 
463,108

Proceeds from maturities and principal repayments of securities available-for-sale
83,487

 
90,786

Purchase of securities held to maturity
(252,108
)
 
(57,949
)
Proceeds from maturities and principal repayments of securities held to maturity
11,242

 
7,240

Purchase of bank owned life insurance
(10,000
)
 
(10,000
)
Proceeds from loan sales
88

 
5,496

Net change in loans receivable
(152,396
)
 
(91,294
)
Proceeds from sales of foreclosed real estate
—

 
34

Net cash paid for acquisition
—

 
(92,308
)
Federal Home Loan Bank stock purchases
(615,701
)
 
(371,364
)
Federal Home Loan Bank stock redemptions
614,800

 
368,760

Proceeds from the sale of premises and equipment
51

 
2,100

Purchase of premises and equipment
(5,536
)
 
(3,231
)
Net cash provided by (used in) investing activities
(575,790
)
 
(280,408
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in checking, savings, and money market deposits
520,257

 
202,256

Net change in time deposits
9,165

 
(55,590
)
Net change in FHLB and other borrowings
100,000

 
—

Net change in federal funds
(103,000
)
 
56,000

Net change in securities sold under agreements to repurchase
(1,773
)
 
2,867

Principal payments on capital lease obligations
(95
)
 
(88
)
Cash dividends paid
(3,281
)
 
(2,588
)
Stock compensation
678

 
—

Proceeds from issuance of common stock
13,586

 
25,619

Net cash provided by (used in) financing activities
535,537

 
228,476

 
 
 
 
Net change in cash and cash equivalents
9,172

 
(9,427
)
 
 
 
 
Cash and cash equivalents at beginning of period
27,658

 
29,832

Cash and cash equivalents at end of period
$
36,830

 
$
20,405

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
2,190

 
$
1,767

Income taxes
5,204

 
4,002

Franchise taxes
74

 
78

Other taxes
78

 
47

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Purchase of held-to-maturity securities accrued, not paid
$
20,884

 
$
—

Capital lease obligation
—

 
2,259

Securities transferred from available for sale to held to maturity
—

 
310

See Notes to Condensed Consolidated Financial Statements.

6
Table of Contents


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, 2015 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 14, 2015.  Accordingly, footnote disclosures which would substantially duplicate the disclosures 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 nine month period ended June 30, 2016, are not necessarily indicative of the results expected for the year ending September 30, 2016.

NOTE 2.    CREDIT DISCLOSURES

The allowance for loan losses represents management’s estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements.  The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries).  Estimating the risk of loss and the amount of loss on any loan is necessarily subjective.  Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.  While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.

Loans are considered impaired if full principal or interest payments are not probable in accordance with the contractual loan terms.  Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

The allowance consists of specific, general, and unallocated components.  The specific component relates to impaired loans.  For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers loans not considered impaired and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Smaller-balance homogenous loans are collectively evaluated for impairment.  Such loans include premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, manufactured homes, home equity and second mortgage loans, and tax product loans.  Commercial and agricultural loans and mortgage loans secured by other properties are evaluated individually for impairment.  When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment.  Often this is associated with a delay or shortfall in payments of 210 days or more for premium finance loans and 90 days or more for other loan categories.  Non-accrual loans and all troubled debt restructurings are considered impaired.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.


7
Table of Contents

Loans receivable at June 30, 2016 and September 30, 2015 are as follows:
 
June 30, 2016
 
September 30, 2015
 
(Dollars in Thousands)
1-4 Family Real Estate
$
150,461

 
$
125,021

Commercial and Multi-Family Real Estate
386,798

 
310,199

Agricultural Real Estate
64,130

 
64,316

Consumer
36,986

 
33,527

Commercial Operating
40,971

 
29,893

Agricultural Operating
40,435

 
43,626

Premium Finance
141,342

 
106,505

Total Loans Receivable
861,123

 
713,087

 
 
 
 
Less:
 

 
 

Allowance for Loan Losses
(6,120
)
 
(6,255
)
Net Deferred Loan Origination Fees
(497
)
 
(577
)
Total Loans Receivable, Net
$
854,506

 
$
706,255





8
Table of Contents

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and nine month periods ended June 30, 2016 and 2015 is as follows:

 
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
Premium
Finance
 
Unallocated
 
Total
 
(Dollars in Thousands)
Three Months Ended
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
327

 
$
1,694

 
$
154

 
$
1,059

 
$
45

 
$
3,327

 
$
477

 
$
348

 
$
7,431

Provision (recovery) for loan losses
66

 
428

 
49

 
(243
)
 
281

 
1,436

 
95

 
(14
)
 
2,098

Charge offs
—

 
(95
)
 
—

 
(1
)
 
—

 
(3,253
)
 
(104
)
 
—

 
(3,453
)
Recoveries
—

 
—

 
—

 
1

 
—

 
—

 
43

 
—

 
44

Ending balance
$
393

 
$
2,027

 
$
203

 
$
816

 
$
326

 
$
1,510

 
$
511

 
$
334

 
$
6,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
June 30, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
278

 
$
1,187

 
$
163

 
$
20

 
$
28

 
$
3,537

 
$
293

 
$
749

 
$
6,255

Provision (recovery) for loan
losses
115

 
1,225

 
40

 
796

 
298

 
1,226

 
772

 
(415
)
 
4,057

Charge offs
—

 
(385
)
 
—

 
(1
)
 
—

 
(3,253
)
 
(631
)
 
—

 
(4,270
)
Recoveries
—

 
—

 
—

 
1

 
—

 
—

 
77

 
—

 
78

Ending balance
$
393

 
$
2,027

 
$
203

 
$
816

 
$
326

 
$
1,510

 
$
511

 
$
334

 
$
6,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
31

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
31

Ending balance: collectively evaluated for impairment
362

 
2,027

 
203

 
816

 
326

 
1,510

 
511

 
334

 
6,089

Total
$
393

 
$
2,027

 
$
203

 
$
816

 
$
326

 
$
1,510

 
$
511

 
$
334

 
$
6,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
210

 
994

 
—

 
—

 
3

 
—

 
—

 
—

 
1,207

Ending balance: collectively
evaluated for impairment
150,251

 
385,804

 
64,130

 
36,986

 
40,968

 
40,435

 
141,342

 
—

 
859,916

Total
$
150,461

 
$
386,798

 
$
64,130

 
$
36,986

 
$
40,971

 
$
40,435

 
$
141,342

 
$
—

 
$
861,123


9
Table of Contents

 
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
Premium
Finance
 
Unallocated
 
Total
 
(Dollars in Thousands)
Three Months Ended
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
522

 
$
1,218

 
$
265

 
$
78

 
$
101

 
$
667

 
$
168

 
$
2,697

 
$
5,716

Provision (recovery) for loan losses
8

 
34

 
164

 
5

 
9

 
1,940

 
100

 
(1,560
)
 
700

Charge offs
—

 
—

 
—

 
—

 
—

 
(150
)
 
(96
)
 
—

 
(246
)
Recoveries
—

 
—

 
—

 
—

 
—

 
—

 
62

 
—

 
62

Ending balance
$
530

 
$
1,252

 
$
429

 
$
83

 
$
110

 
$
2,457

 
$
234

 
$
1,137

 
$
6,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
552

 
$
1,575

 
$
263

 
$
78

 
$
93

 
$
719

 
$
—

 
$
2,117

 
$
5,397

Provision (recovery) for loan
losses
23

 
(115
)
 
166

 
5

 
14

 
1,888

 
340

 
(980
)
 
1,341

Charge offs
(45
)
 
(214
)
 
—

 
—

 
—

 
(150
)
 
(194
)
 
—

 
(603
)
Recoveries
—

 
6

 
—

 
—

 
3

 
—

 
88

 
—

 
97

Ending balance
$
530

 
$
1,252

 
$
429

 
$
83

 
$
110

 
$
2,457

 
$
234

 
$
1,137

 
$
6,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually
evaluated for impairment
—

 
265

 
—

 
—

 
—

 
2,161

 
—

 
—

 
2,426

Ending balance: collectively
evaluated for impairment
530

 
987

 
429

 
83

 
110

 
296

 
234

 
1,137

 
3,806

Total
$
530

 
$
1,252

 
$
429

 
$
83

 
$
110

 
$
2,457

 
$
234

 
$
1,137

 
$
6,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
124

 
1,397

 
—

 
—

 
13

 
5,869

 
—

 
—

 
7,403

Ending balance: collectively
evaluated for impairment
118,592

 
277,513

 
64,173

 
32,968

 
29,991

 
35,642

 
91,740

 
—

 
650,619

Total
$
118,716

 
$
278,910

 
$
64,173

 
$
32,968

 
$
30,004

 
$
41,511

 
$
91,740

 
$
—

 
$
658,022



10
Table of Contents

Federal regulations promulgated by our primary federal regulator, the Office of the Comptroller of the Currency (the "OCC"), provide for the classification of loans and other assets such as debt and equity securities. The loan classification and risk rating definitions are generally as follows:

Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

Watch- A watch asset is generally credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures.  Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention.  These assets are of better quality than special mention assets.

Special Mention- Special mention assets are credits with potential weaknesses deserving management’s close attention and if left uncorrected, may result in deterioration of the repayment prospects for the asset.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.

Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position.  Assets so classified have well-defined weaknesses creating a distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected.  Loss potential does not have to exist for an asset to be classified as substandard.

Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort.  Due to pending factors the asset’s classification as loss is not yet appropriate.

Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is no longer warranted.  This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

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 losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
 
The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location, or an occupation.  Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Bank’s Tier 1 Capital plus the Allowance for Loan Losses.
 
The asset classification of loans at June 30, 2016 and September 30, 2015 are as follows:

June 30, 2016
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
Premium
Finance
 
Total
 
(Dollars in Thousands)
Pass
$
149,303

 
$
385,631

 
$
34,803

 
$
36,986

 
$
40,194

 
$
21,182

 
$
141,342

 
$
809,441

Watch
1,029

 
609

 
2,934

 
—

 
705

 
5,007

 
—

 
10,284

Special Mention
21

 
—

 
25,765

 
—

 
—

 
5,204

 
—

 
30,990

Substandard
108

 
558

 
628

 
—

 
72

 
9,042

 
—

 
10,408

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
150,461

 
$
386,798

 
$
64,130

 
$
36,986

 
$
40,971

 
$
40,435

 
$
141,342

 
$
861,123



11
Table of Contents

September 30, 2015
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
Premium
Finance
 
Total
 
(Dollars in Thousands)
Pass
$
124,775

 
$
307,876

 
$
35,106

 
$
33,527

 
$
29,052

 
$
29,336

 
$
106,505

 
$
666,177

Watch
212

 
1,419

 
26,703

 
—

 
712

 
1,079

 
—

 
30,125

Special Mention
10

 
—

 
877

 
—

 
—

 
4,014

 
—

 
4,901

Substandard
24

 
904

 
1,630

 
—

 
129

 
9,197

 
—

 
11,884

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
125,021

 
$
310,199

 
$
64,316

 
$
33,527

 
$
29,893

 
$
43,626

 
$
106,505

 
$
713,087


One-to-Four Family Residential Mortgage Lending.  One-to-four family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate and adjustable rate mortgage (“ARM”) loans for both permanent structures and those under construction.  The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.

The Company originates one-to-four family residential mortgage loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan‑to‑value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.

Due to consumer demand, the Company offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.  The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.

The Company also currently offers five- and ten-year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, adjust annually.  These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as the Company’s cost of funds.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into fixed-rate loans.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed-rate residential loans.  The current low mortgage interest rate environment makes ARM loans relatively unattractive and very few are currently being originated.

In underwriting one-to-four family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.

Commercial and Multi-Family Real Estate Lending.  The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan and participation interests in loans from other financial institutions.  The purchased loans and loan participation interests are generally secured by properties primarily located in the Midwest and the West.

12
Table of Contents

The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by guarantees of the borrowers.  The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio.  Commercial and multi-family real estate loans provide for a margin over a number of different indices.  In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.  Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.

Agricultural Lending.  The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm-related products.  Agricultural operating loans are originated at either an adjustable or fixed-rate of interest for up to a one year term or, in the case of livestock, upon sale.  Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year.  Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.

Agricultural real estate loans are frequently originated with adjustable rates of interest.  Generally, such loans provide for a fixed rate of interest for the first five to ten years, which then balloon or adjust annually thereafter.  In addition, such loans generally amortize over a period of 20 to 25 years.  Fixed-rate agricultural real estate loans generally have terms up to ten years.  Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.

Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one-to-four family residential lending, but involves a greater degree of risk than one-to-four family residential mortgage loans because of the typically larger loan amount.  In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.  The success of the loan may also be affected by many factors outside the control of the borrower.

Weather presents one of the greatest risks as hail, drought, floods, or other conditions can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral.  This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment.  Government support programs and the Company generally require that farmers procure crop insurance coverage.  Grain and livestock prices also present a risk as prices may decline prior to sale, resulting in a failure to cover production costs.  These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk.  The Company frequently requires borrowers to use futures contracts or options to reduce price risk and help ensure loan repayment.  Another risk is the uncertainty of government programs and other regulations.  During periods of low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result.  Finally, many farms are dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.

Consumer Lending – Retail Bank.  The Company, through the auspices of its “Retail Bank”, originates a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Retail Bank offers other secured and unsecured consumer loans.  The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas.

The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail Bank will lend amounts which, together with all prior liens, may be up to 90% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.

13
Table of Contents



The Retail Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers.  The Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles.  Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison of the value of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Consumer Lending- Meta Payment Systems (“MPS”).  The Company believes that well-managed, nationwide credit programs can help meet legitimate credit needs for prime and sub-prime borrowers, and affords the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to economic downturns.  Therefore, MPS designs and administers certain credit programs that seek to accomplish these objectives.  The MPS Credit Committee, consisting of members of Executive Management of the Company, is charged with monitoring, evaluating and reporting portfolio performance and the overall credit risk posed by its credit products. All proposed credit programs must first be reviewed and approved by the committee before such programs are presented to the Bank’s Board of Directors for approval.  The Board of Directors of the Bank is ultimately responsible for final approval of any credit program.

MPS strives to offer consumers innovative payment products, including credit products.  Most credit products have fallen into the category of portfolio lending.  MPS continues developing new alternative portfolio lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.

The largest component of MPS’s consumer loan portfolio consists of taxpayer advances.  These advances are available to eligible customers of our Refund Advantage Electronic Return Originators (“EROs”) and Liberty Tax franchisees.  The product is offered with no incremental fees or interest charges to the borrower (with the tax preparer paying applicable fees) and repayments are contingent upon receipt of future tax refunds.  This solution provides our network of over 10,000 EROs and Liberty Tax franchisees with an opportunity to attract new clients to their current customer base.

A Portfolio Credit Policy, which has been approved by the Board of Directors, governs portfolio credit initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying source of repayment.  Several portfolio lending programs also have a contractual provision that requires the Bank to be indemnified for credit losses that meet or exceed predetermined levels.  Such a program carries additional risks not commonly found in sponsorship programs, specifically funding and credit risk.  Therefore, MPS has strived to employ policies, procedures and information systems that it believes commensurate with the added risk and exposure.

Commercial Operating Lending.  The Company also originates commercial operating loans.  Most of the Company’s commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable, and operating costs for the Company’s network of tax electronic return originators (“EROs”).  Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.

14
Table of Contents



The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan.  ERO loans are not collateralized.  The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than more traditional lending activities.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment).  The Company’s commercial operating loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Premium Finance Lending.  Through its AFS/IBEX division, MetaBank provides short-term and primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as insurance premium financing.  This includes, but is not limited to, policies for commercial property, casualty and liability risk.  The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation.

Insurance premium financing is the business of extending credit to a policyholder to pay for insurance premiums when the insurance carrier requires payment in full at inception of coverage.  Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term.  The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to ten months on average.  The down payment is set such that if the policy is cancelled, the unearned premium is typically sufficient to cover the loan balance and accrued interest.

Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-180 days to convert the collateral into cash.  In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy and establish a first position lien on the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should typically be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium.  Generally, when a premium finance loan becomes delinquent for 210 days or more, or when collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance.

Past due loans at June 30, 2016 and September 30, 2015 are as follows:

June 30, 2016
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days
 
Total Past
Due
 
Current
 
Non-Accrual
Loans
 
Total Loans
Receivable
 
(Dollars in Thousands)
1-4 Family Real Estate
$
419

 
$
83

 
$
—

 
$
502

 
$
149,831

 
$
128

 
$
150,461

Commercial and Multi-Family Real Estate
—

 
—

 
—

 
—

 
386,285

 
513

 
386,798

Agricultural Real Estate
2,385

 
—

 
—

 
2,385

 
61,745

 
—

 
64,130

Consumer
19

 
17

 
53

 
89

 
36,897

 
—

 
36,986

Commercial Operating
354

 
—

 
—

 
354

 
40,617

 
—

 
40,971

Agricultural Operating
—

 
106

 
—

 
106

 
40,329

 
—

 
40,435

Premium Finance
892

 
351

 
1,514

 
2,757

 
138,585

 
—

 
141,342

Total
$
4,069

 
$
557

 
$
1,567

 
$
6,193

 
$
854,289

 
$
641

 
$
861,123


15
Table of Contents



September 30, 2015
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days
 
Total Past
Due
 
Current
 
Non-Accrual
Loans
 
Total Loans
Receivable
 
(Dollars in Thousands)
1-4 Family Real Estate
$
142

 
$
—

 
$
—

 
$
142

 
$
124,855

 
$
24

 
$
125,021

Commercial and Multi-Family Real Estate
—

 
—

 
—

 
—

 
309,295

 
904

 
310,199

Agricultural Real Estate
—

 
—

 
—

 
—

 
64,316

 
—

 
64,316

Consumer
152

 
—

 
13

 
165

 
33,362

 
—

 
33,527

Commercial Operating
—

 
—

 
—

 
—

 
29,893

 
—

 
29,893

Agricultural Operating
—

 
—

 
—

 
—

 
38,494

 
5,132

 
43,626

Premium Finance
702

 
362

 
1,728

 
2,792

 
103,713

 
—

 
106,505

Total
$
996

 
$
362

 
$
1,741

 
$
3,099