UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2017
OR
☐ | 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. |
(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, SD | 57108 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number: (605) 782‑1767
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | NASDAQ Global Market | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 and Section 15(d) of the Act. YES ☐ NO ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company, or an emerging growth company. (Check one):
Large accelerated filer ☒ | Accelerated filer ☐ | Non‑accelerated filer ☐ | Smaller Reporting Company ☐ |
Emerging growth company ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ YES ☒ NO
As of March 31, 2017, the aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and asked prices of such stock on the NASDAQ Global Market as of such date, was $762.6 million.
As of November 24, 2017, there were 9,666,462 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 22, 2018 are incorporated by reference into Part III of this report.
META FINANCIAL GROUP, INC.
FORM 10-K
Table of Contents
Page No. | ||
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
Item 16. | ||
i
Forward-Looking Statements
Meta Financial Group, Inc.® (“Meta Financial” or “the Company” or “us”) and its wholly-owned subsidiary, MetaBank® (the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements contained in this Annual Report on Form 10-K, in its other filings with the Securities and Exchange Commission (“SEC”), in its reports to stockholders, and in other communications by the Company and the Bank, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which 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 risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results; customer retention; loan and other product demand; important components of the Company's statements of financial condition and operations; growth and expansion; new products and services, such as those offered by the Bank or the Company's Payments divisions (which includes Meta Payments Systems (“MPS”), Refund Advantage, EPS Financial (“EPS”) and Specialty Consumer Services (“SCS”)); credit quality and adequacy of reserves; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the risk that we are unable to recoup a significant portion of the lost earnings associated with the non-renewal of the agreement with H&R Block through agreements with new tax partners and expanded relationships with existing tax partners; the risk that loan production levels and other anticipated benefits related to the agreement with Jackson Hewitt Tax Service®, as extended, may not be as much as anticipated; maintaining our executive management team; 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 “Federal Reserve”), as well as efforts of the U.S. Congress, 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 and economical 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 parties, including, in connection with the Company’s refund advance business, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or acceptance of usage of Meta’s strategic partners’ refund advance products, including as a result of pending tax legislation in the U.S. Congress; any actions which may be initiated by our regulators in the future; the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry, our relationship with our primary regulators, the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve, as well as the Federal Deposit Insurance Corporation (“FDIC”), which insures the Bank’s deposit accounts up to applicable limits; 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 Bank's divisions; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by the Bank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion of which has been characterized as “brokered”; changes in consumer spending and saving habits; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.
These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed herein under the caption “Risk Factors” that could cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements.
The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are contained herein, including under the caption “Risk Factors,” and in the Company’s periodic filings with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries.
2
PART I
Item 1. Business
General
Meta Financial, a registered unitary savings and loan holding company, was incorporated in Delaware on June 14, 1993, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank, the accounts of which are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. 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.
The Bank, a wholly-owned full-service banking subsidiary of Meta Financial, is both a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves and a payments company providing services on a nationwide basis, as further described below. The business of the Bank consists of attracting retail deposits from the general public and investing those funds primarily in one-to-four family residential mortgage loans, commercial and multi-family real estate, agricultural operations and real estate, construction, consumer loans (including tax refund advance loans), commercial operating loans, and premium finance loans. In addition to originating loans, the Bank also has contracted to sell loans, in this case principally tax refund advance loans, to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities and other investments permissible under applicable regulations.
In addition to its lending and deposit gathering activities, the Bank’s various divisions issue prepaid cards, design innovative consumer credit products, sponsor Automatic Teller Machines (“ATMs”) into various debit networks, and offer tax refund-transfer services and other payment industry products and services. Through its activities, the Meta Payment Systems (“MPS”) division of the Bank generates both fee income and low- and no cost deposits for the Bank. On September 8, 2015, the Bank purchased substantially all of the assets and related liabilities of Fort Knox Financial Services Corporation and its subsidiary, Tax Product Services, LLC (together “Refund Advantage”). The assets acquired by MetaBank in the acquisition include the Fort Knox operating platform and trade name, Refund Advantage®, and other assets. On November 1, 2016, the Bank purchased substantially all of the assets and certain liabilities of EPS Financial, LLC ("EPS") from privately held Drake Enterprises, Ltd. ("Drake"). The assets acquired by MetaBank in the EPS acquisition include the EPS trade name, operating platform, and other assets. Also, on December 14, 2016, the Bank purchased substantially all of the assets and specified liabilities of privately-held Specialty Consumer Services LP ("SCS") relating to its consumer lending and tax advance business. All of these transactions expanded the Company’s business into providing tax refund-transfer and lending services for its customers.
First Midwest Financial Capital Trust, also a wholly-owned subsidiary of Meta Financial, was established in July 2001 for the purpose of issuing trust preferred securities.
In April 2017, the Company formed a new entity, Meta Capital, LLC, that is a wholly-owned service corporation subsidiary of MetaBank. Meta Capital was formed for the purposes of investing in financial technology companies.
Meta Financial and the Bank are subject to comprehensive regulation and supervision. See “Regulation” herein.
The principal executive office of the Company is located at 5501 South Broadband Lane, Sioux Falls, South Dakota 57108. Its telephone number at that address is (605) 782-1767.
Market Areas
The Bank’s home office is located at 5501 South Broadband Lane, Sioux Falls, South Dakota. The Banking segment consists of the retail bank, the AFS/IBEX division, as well as other specialty finance loans. The retail bank’s locations include offices in Storm Lake, Iowa, Brookings, South Dakota, Sioux Falls, South Dakota and the Des Moines, Iowa area. AFS/IBEX operates an office in both Dallas, Texas and Newport Beach, California. The Payments segment offers prepaid cards, tax refund-transfer services, and other payment industry products and services nationwide and includes the MPS, Refund Advantage, EPS Financial and SCS divisions. It operates out of Sioux Falls, South Dakota, with offices in Louisville, Kentucky, Easton, Pennsylvania and Hurst, Texas.
3
Lending Activities
General. The Company originates both fixed-rate and adjustable-rate (“ARM”) loans in response to consumer demand. At September 30, 2017, the Company had $1.12 billion in fixed-rate loans and $205.6 million in ARM loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Annual Report on Form 10-K for further information on Asset/Liability Management.
In addition, the Company has more recently focused its lending activities on the origination of commercial and multi-family real estate loans, one-to-four family mortgage loans, commercial operating loans, premium finance loans, and tax refund advance loans. The Company also continues to originate traditional consumer loans and agricultural-related loans. The Company originates most of its retail bank loans in the primary market areas in Storm Lake, IA, Brookings, SD, Sioux Falls, SD, and Des Moines, IA. At September 30, 2017, the Company’s net loan portfolio totaled $1.32 billion, or 25% of the Company’s total assets, as compared to $919.5 million, or 23%, at September 30, 2016. The Bank recently signed an agreement extension to originate tax refund advance loans to customers of Jackson Hewitt Tax Service through the 2020 tax season. The Bank also purchased two separate student loan portfolios, one in fiscal year 2017 and one in the beginning of fiscal year 2018. The loans included in each of these loan portfolios are serviced by ReliaMax Lending Services, LLC, and the loans are insured by ReliaMax Surety Company.
Loan applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan. The Company has a loan committee consisting of senior lenders and Market Presidents, and is led by the Chief Lending Officer. Loans in excess of certain amounts require approval by at least two members of the loan committee, a majority of the loan committee, or by the Company’s Board Loan Committee, which has responsibility for the overall supervision of the loan portfolio. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors. The Company also created a Specialty Lending committee to oversee its insurance premium finance division and other specialized lending activities in which the Company may become involved. The Committee consists of senior personnel with diverse backgrounds well suited for oversight of these types of activities. Insurance premium finance loans in excess of certain amounts require approval from one or more members of the Committee.
At September 30, 2017, the Company’s largest lending relationship to a single borrower or group of related borrowers totaled $50.8 million. The Company had 24 other lending relationships in excess of $9.1 million as of September 30, 2017. At September 30, 2017, one of these relationships, which had loans that totaled $27.8 million at September 30, 2017, was classified as substandard. See “Non-Performing Assets, Other Loans of Concern, and Classified Assets.”
Loan Portfolio Composition. The following table provides information about the composition of the Company’s loan portfolio in dollar amounts and in percentages as of the dates indicated. In general, for the fiscal year ended September 30, 2017, the aggregate principal amounts in all categories of loans discussed below, except agriculture real estate and agriculture operating loans, increased over levels from the prior fiscal year.
4
At September 30, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||
Real Estate Loans: | ||||||||||||||||||||||||||||||||||
1-4 Family | $ | 196,706 | 14.8 | % | $ | 162,298 | 17.5 | % | $ | 125,021 | 17.5 | % | $ | 116,395 | 23.3 | % | $ | 82,287 | 21.4 | % | ||||||||||||||
Commercial & Multi-Family | 585,510 | 44.1 | % | 422,932 | 45.7 | % | 310,199 | 43.5 | % | 224,302 | 44.9 | % | 192,786 | 50.1 | % | |||||||||||||||||||
Agricultural | 61,800 | 4.7 | % | 63,612 | 6.9 | % | 64,316 | 9.0 | % | 56,071 | 11.3 | % | 29,552 | 7.7 | % | |||||||||||||||||||
Total Real Estate Loans | 844,016 | 63.6 | % | 648,842 | 70.1 | % | 499,536 | 70.0 | % | 396,768 | 79.5 | % | 304,625 | 79.2 | % | |||||||||||||||||||
Other Loans: | ||||||||||||||||||||||||||||||||||
Consumer Loans: | ||||||||||||||||||||||||||||||||||
Home Equity | 21,228 | 1.6 | % | 20,883 | 2.2 | % | 18,463 | 2.6 | % | 15,116 | 3.0 | % | 13,799 | 3.6 | % | |||||||||||||||||||
Automobile | 769 | 0.1 | % | 730 | 0.1 | % | 573 | 0.1 | % | 671 | 0.1 | % | 658 | 0.1 | % | |||||||||||||||||||
Purchased Student Loans | 123,742 | 9.3 | % | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||||||
Other (1) | 17,265 | 1.3 | % | 15,481 | 1.7 | % | 14,491 | 2.0 | % | 13,542 | 2.7 | % | 15,857 | 4.1 | % | |||||||||||||||||||
Total Consumer Loans | 163,004 | 12.3 | % | 37,094 | 4.0 | % | 33,527 | 4.7 | % | 29,329 | 5.8 | % | 30,314 | 7.8 | % | |||||||||||||||||||
Agricultural Operating | 33,594 | 2.5 | % | 37,083 | 4.0 | % | 43,626 | 6.1 | % | 42,258 | 8.5 | % | 33,750 | 8.8 | % | |||||||||||||||||||
Commercial Operating | 35,759 | 2.7 | % | 31,271 | 3.4 | % | 29,893 | 4.2 | % | 30,846 | 6.2 | % | 16,264 | 4.2 | % | |||||||||||||||||||
Premium Finance | 250,459 | 18.9 | % | 171,604 | 18.5 | % | 106,505.0 | 15.0 | % | — | — | % | — | — | % | |||||||||||||||||||
Total Other Loans | 482,816 | 36.4 | % | 277,052 | 29.9 | % | 213,551 | 30.0 | % | 102,433 | 20.5 | % | 80,328 | 20.8 | % | |||||||||||||||||||
Total Loans | $ | 1,326,832 | 100.0 | % | $ | 925,894 | 100.0 | % | $ | 713,087 | 100.0 | % | $ | 499,201 | 100.0 | % | $ | 384,953 | 100.0 | % | ||||||||||||||
(1) | Consist generally of various types of secured and unsecured consumer loans. |
5
The following table shows the composition of the Company’s loan portfolio by fixed and adjustable rate at the dates indicated.
September 30, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||
Fixed Rate Loans: | ||||||||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||||||||
1-4 Family | $ | 185,596 | 14.0 | % | $ | 152,232 | 16.5 | % | $ | 116,171 | 16.3 | % | $ | 105,870 | 21.2 | % | $ | 75,477 | 19.6 | % | ||||||||||||||
Commercial & Multi-Family | 566,156 | 42.6 | % | 404,888 | 43.7 | % | 284,586 | 39.9 | % | 203,840 | 40.8 | % | 173,373 | 45.1 | % | |||||||||||||||||||
Agricultural | 57,863 | 4.4 | % | 59,455 | 6.4 | % | 59,219 | 8.3 | % | 49,643 | 10.0 | % | 22,433 | 5.8 | % | |||||||||||||||||||
Total Fixed-Rate Real Estate Loans | 809,615 | 61.0 | % | 616,575 | 66.6 | % | 459,976 | 64.5 | % | 359,353 | 72.0 | % | 271,283 | 70.5 | % | |||||||||||||||||||
Consumer | 24,656 | 1.9 | % | 23,024 | 2.5 | % | 20,842 | 2.9 | % | 19,279 | 3.9 | % | 20,129 | 5.2 | % | |||||||||||||||||||
Agricultural Operating | 22,556 | 1.7 | % | 27,196 | 2.9 | % | 35,802 | 5.0 | % | 24,991 | 5.0 | % | 23,137 | 6.0 | % | |||||||||||||||||||
Commercial Operating | 13,935 | 1.1 | % | 12,393 | 1.4 | % | 15,520 | 2.2 | % | 13,659 | 2.7 | % | 8,070 | 2.1 | % | |||||||||||||||||||
Premium Finance | 250,459 | 18.9 | % | 171,604 | 18.5 | % | 106,505 | 15.0 | % | — | — | % | — | — | % | |||||||||||||||||||
Total Fixed-Rate Loans | 1,121,221 | 84.6 | % | 850,792 | 91.9 | % | 638,645 | 89.6 | % | 417,282 | 83.6 | % | 322,619 | 83.8 | % | |||||||||||||||||||
Adjustable Rate Loans: | ||||||||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||||||||
1-4 Family | 11,110 | 0.8 | % | 10,066 | 1.1 | % | 8,850 | 1.2 | % | 10,525 | 2.1 | % | 6,810 | 1.8 | % | |||||||||||||||||||
Commercial & Multi-Family | 19,354 | 1.5 | % | 18,044 | 1.9 | % | 25,613 | 3.6 | % | 20,461 | 4.1 | % | 19,413 | 5.0 | % | |||||||||||||||||||
Agricultural | 3,937 | 0.3 | % | 4,157 | 0.5 | % | 5,097 | 0.7 | % | 6,429 | 1.3 | % | 7,119 | 1.9 | % | |||||||||||||||||||
Total Adjustable Real Estate Loans | 34,401 | 2.6 | % | 32,267 | 3.5 | % | 39,560 | 5.5 | % | 37,415 | 7.5 | % | 33,342 | 8.7 | % | |||||||||||||||||||
Consumer | 138,348 | 10.4 | % | 14,070 | 1.5 | % | 12,685 | 1.8 | % | 10,050 | 2.0 | % | 10,185 | 2.6 | % | |||||||||||||||||||
Agricultural Operating | 11,038 | 0.8 | % | 9,887 | 1.1 | % | 7,824 | 1.1 | % | 17,267 | 3.5 | % | 10,613 | 2.8 | % | |||||||||||||||||||
Commercial Operating | 21,824 | 1.6 | % | 18,878 | 2.0 | % | 14,373 | 2.0 | % | 17,187 | 3.4 | % | 8,194 | 2.1 | % | |||||||||||||||||||
Total Adjustable Loans | 205,611 | 15.4 | % | 75,102 | 8.1 | % | 74,442 | 10.4 | % | 81,919 | 16.4 | % | 62,334 | 16.2 | % | |||||||||||||||||||
Total Loans | 1,326,832 | 100.0 | % | 925,894 | 100.0 | % | 713,087 | 100.0 | % | 499,201 | 100.0 | % | 384,953 | 100.0 | % | |||||||||||||||||||
Deferred Fees and Discounts | (1,461 | ) | (789 | ) | (577 | ) | (797 | ) | (595 | ) | ||||||||||||||||||||||||
Allowance for Loan Losses | (7,534 | ) | (5,635 | ) | (6,255 | ) | (5,397 | ) | (3,930 | ) | ||||||||||||||||||||||||
Total Loans Receivable, Net | $ | 1,317,837 | $ | 919,470 | $ | 706,255 | $ | 493,007 | $ | 380,428 | ||||||||||||||||||||||||
6
The following table illustrates the maturity analysis of the Company’s loan portfolio at September 30, 2017. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract reprices. The table reflects management’s estimate of the effects of loan prepayments or curtailments based on data from the Company’s historical experiences and other third-party sources.
Real Estate (1) | Consumer | Commercial Operating | Agricultural Operating | Premium Finance | Total | ||||||||||||||||||||||||||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||||||||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||
Due in one year or less (2) | $ | 220,813 | 4.32 | % | $ | 22,252 | 3.97 | % | $ | 15,136 | 4.98 | % | $ | 31,141 | 4.39 | % | $ | 250,447 | 5.90 | % | $ | 539,789 | 5.00 | % | |||||||||||||||||
Due after one year through five years | 435,956 | 4.24 | % | 88,569 | 4.03 | % | 15,353 | 5.11 | % | 2,339 | 5.14 | % | 12 | 8.40 | % | 542,229 | 4.23 | % | |||||||||||||||||||||||
Due after five years | 187,247 | 4.17 | % | 52,183 | 4.50 | % | 5,270 | 5.18 | % | 114 | 4.74 | % | — | — | % | 244,814 | 4.26 | % | |||||||||||||||||||||||
Total | $ | 844,016 | $ | 163,004 | $ | 35,759 | $ | 33,594 | $ | 250,459 | $ | 1,326,832 | |||||||||||||||||||||||||||||
(1) | Includes one-to-four family, multi-family, commercial and agricultural real estate loans. |
(2) | Includes demand loans, loans having no stated maturity and overdraft loans. |
7
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 loans and 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.
At September 30, 2017, the Company’s one-to-four family residential mortgage loan portfolio totaled $196.7 million, or 14.8% of the Company’s total loans. During the year ended September 30, 2017, the Company originated $21.3 million of adjustable-rate loans and $74.3 million of fixed-rate loans secured by one-to-four family residential real estate. See “Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities.” As of the same date, the average outstanding principal balance of a one-to-four family residential mortgage loan was approximately $0.2 million.
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 property securing the loan or the contract price. However, the vast majority of these loans are originated with loan-to-value ratios below 80%. 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. Residential loans generally do not include prepayment penalties. Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market standards such as 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 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 of the Company. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as 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. At September 30, 2017, there were no one-to-four family residential mortgage loans that were non-performing.
Commercial and Multi-Family Real Estate Lending. The Company engages in commercial and multi-family real estate lending in its primary market areas 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 located in the Midwest. See “Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities.”
At September 30, 2017, the Company’s commercial and multi-family real estate loan portfolio totaled $585.5 million, or 44.1%, of the Company’s total loans. At September 30, 2017, the Company’s largest commercial and multi-family real estate lending relationship totaled $47.2 million and was secured by real estate. As of the same date, the average outstanding principal balance of a commercial or multi-family real estate loan held by the Company was approximately $1.8 million.
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 property securing the loan, 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.
8
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. At September 30, 2017, there were $0.7 million of commercial and multi‑family real estate loans that were non-performing. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Agricultural Lending. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer, and other farm-related products, primarily in its market areas. 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, are due 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.
At September 30, 2017, the Company had agricultural real estate loans secured by farmland of $61.8 million or 4.7% of the Company’s total loans. At the same date, $33.6 million, or 2.5%, of the Company’s total loans consisted of secured loans related to agricultural operations. Total agricultural-related lending constituted 7.2% of total loans at September 30, 2017. At September 30, 2017, the Company’s largest agricultural real estate and agricultural operating loan relationship was $27.8 million, which is currently non-performing (as it is more than 90 days past due) but still accruing. Given the underlying values of collateral (primarily land related to our agricultural loans), we believe that we have minimal loss exposure on this agricultural relationship . At the same date, the average outstanding principal balance of an agricultural real estate loan and agricultural operating loan held by the Company was approximately $0.6 million and $0.2 million, respectively.
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, after which the loan will balloon or the interest rate will adjust annually. These loans generally amortize over a period of 20 to 25 years. Fixed-rate agricultural real estate loans typically 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. The farmer can reduce this risk with a variety of insurance coverages which can help to ensure loan repayment. Both government support programs, as well as the Company, typically require farmers to 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. The uncertainty of government programs and other regulations is also a risk. 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. At September 30, 2017, $34.2 million of the Company’s agricultural real estate loans and $0.1 million of agricultural operating loans were non-performing. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Consumer Lending. The Company originates a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits. In addition, the Company offers other secured and unsecured consumer loans and currently originates most of its retail bank consumer loans in its primary market areas and surrounding areas. In addition, at September 30, 2017, the Company's consumer lending portfolio included a purchased student loan portfolio, along with consumer lending products offered through its Payments segment.
9
On December 20, 2016, the Bank purchased, net of purchase discount, a $134.0 million seasoned, floating rate, private student loan portfolio. This portfolio is serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company. All the loans in this portfolio are floating rate and indexed to the three-month LIBOR plus various margins. On October 11, 2017, the Bank purchased a second student loan portfolio. See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption “Overview of Corporate Developments Since Fiscal Year 2016.”
At September 30, 2017, the Company's consumer loan portfolio totaled $163.0 million, or 12.3% of its total loans including the student loan portfolio purchased in December 2016. Excluding the December 2016 purchased student loan portfolio of $123.7 million, the Bank's consumer loan portfolio at September 30, 2017 consisted of $24.7 million in short- and intermediate-term, fixed-rate loans and $14.6 million in adjustable-rate loans.
The Company's retail bank consumer loan portfolio consists primarily of home equity loans and lines of credit. Substantially all of the Company’s home equity loans and lines of credit are secured by second mortgages on principal residences. The 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.
The Company primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Company purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers. The Company'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.
At September 30, 2017, $1.4 million of the Bank’s consumer loans were non-performing. The Bank's non-performing consumer loans, at September 30, 2017, were primarily comprised of purchased student loans that are serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company; accordingly, the Company believes that its exposure to realizable losses with respect to these loans is low. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Through its Payments segment, the Bank strives to offer consumers innovative payment products, including credit products. The Payments segment continues its development of new alternative lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.
The Payments segment also provides short-term consumer refund advance loans. Taxpayers are underwritten to determine eligibility for the unsecured loans which are by design interest and fee-free to the consumer. Due to the nature of consumer advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. Generally, when the refund advance loan becomes delinquent for 180 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
No Payments segment credit products were non-performing as of September 30, 2017. There were no taxpayer advances outstanding as of September 30, 2017.
10
Commercial Operating Lending. The Company also originates its Banking segment's commercial operating loans primarily in its market areas. Most of these 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. Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The Company also extends short-term commercial Electronic Return Originator ("EROs") advance loans to their clients on a nationwide basis through its Payments segment. At September 30, 2017, $35.8 million, or 2.7% of the Company’s total loans, were comprised of commercial operating loans.
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. As described further below, 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. At September 30, 2017, the average outstanding principal balance of a commercial operating loan held by the Company's Banking segment was approximately $0.2 million.
Through its Payments segment, the Company also provides short-term ERO advance loans on a nation-wide basis. These loans are typically utilized to purchase tax preparation software and to prepare tax offices for the upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, when the ERO advance loan becomes delinquent for 120 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance. There were $0.2 million of ERO advances outstanding as of September 30, 2017.
At September 30, 2017, none of the Company’s commercial operating loans were non-performing.
Premium Finance Lending. Through its AFS/IBEX division, the Company provides short-term, 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. At September 30, 2017, the four largest market areas for the Company with respect to premium finance loans were California, Texas, Florida and New York.
At September 30, 2017, $250.5 million, or 18.9% of the Company’s total loans, were comprised of premium finance loans. The largest premium finance exposure outstanding at September 30, 2017, was a $4.6 million loan relationship secured by the related insurance policy of the borrower. At the same date, the average outstanding principal balance of a premium finance loan held by the Company was approximately $9,900. During fiscal year 2017, the average balance of a premium finance loan originated was approximately $20,500.
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 canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest.
11
Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-210 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 has typically been 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 charge off the loan balance and any remaining interest and fees after applying any collection from the insurance company. At September 30, 2017, $1.2 million of the Company’s premium finance loans were non-performing.
Originations, Sales and Servicing of Loans
At the retail bank, loans are generally originated by the Company’s staff of loan officers. Loan applications are taken and processed in the branches and the main office of the Company. While the Company originates both adjustable-rate and fixed-rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market. Demand is affected by the interest rate and economic environment.
The Company, from time to time, sells loan participations, generally without recourse. At September 30, 2017, there were no loans outstanding sold with recourse. When loans are sold, the Company may retain the responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. The Company services loans that it originated and sold totaling $21.8 million at September 30, 2017, of which $3.2 million were sold to Fannie Mae and $18.6 million were sold to others.
On October 26, 2016, MetaBank entered into an agreement with certain H&R Block entities to originate up to $1.45 billion and retain up to $750 million of interest-free tax advance loans for H&R Block tax preparation customers during the 2017 tax season. On July 27, 2017, MetaBank announced the H&R Block agreement would not be renewed for the 2018 tax season.
On August 2, 2017, MetaBank announced an extension through the 2020 tax season of its current agreement with Jackson Hewitt Tax Service to offer on an annual basis up to $750 million of interest-free tax advance loans, an increase of $300 million over the prior year.
In periods of economic uncertainty, the Company’s ability to originate large dollar volumes of loans may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company’s ability to sell loans may substantially decrease if potential buyers (principally government agencies) reduce their purchasing activities.
12
The following table shows the loan originations (including draws, loan renewals, and undisbursed portions of loans in process), purchases, and sales and repayment activities of the Company for the periods indicated.
Years Ended September 30, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Originations by Type: | (Dollars in Thousands) | ||||||||||
Adjustable Rate: | |||||||||||
1-4 Family Real Estate | $ | 21,324 | $ | 15,276 | $ | 15,360 | |||||
Commercial and Multi-Family Real Estate | 6,014 | 2,460 | 5,575 | ||||||||
Consumer | 9 | 13 | 13 | ||||||||
Commercial Operating | 168,136 | 35,433 | 20,219 | ||||||||
Agricultural Operating | 23,513 | 21,954 | 12,347 | ||||||||
Total Adjustable Rate | 218,996 | 75,136 | 53,514 | ||||||||
Fixed Rate: | |||||||||||
1-4 Family Real Estate | 74,294 | 81,218 | 48,576 | ||||||||
Commercial and Multi-Family Real Estate | 190,618 | 154,478 | 109,173 | ||||||||
Agricultural Real Estate | 5,033 | 4,216 | 12,877 | ||||||||
Consumer | 1,505,247 | 222,391 | 204,258 | ||||||||
Commercial Operating | 54,866 | 42,775 | 15,533 | ||||||||
Agricultural Operating | 16,340 | 30,889 | 20,646 | ||||||||
Premium Finance | 535,339 | 357,252 | 208,183 | ||||||||
Total Fixed-Rate | 2,381,737 | 893,219 | 619,246 | ||||||||
Total Loans Originated | 2,600,733 | 968,355 | 672,760 | ||||||||
Purchases: | |||||||||||
1-4 Family Real Estate | 540 | — | — | ||||||||
Commercial and Multi-Family Real Estate | 7,078 | — | — | ||||||||
Consumer | 133,785 | — | — | ||||||||
Premium Finance | — | — | 74,120 | ||||||||
Total Loans Purchased | 141,403 | — | 74,120 | ||||||||
Sales and Repayments: | |||||||||||
Sales: | |||||||||||
Commercial and Multi-Family Real Estate | 4,720 | — | 4,843 | ||||||||
Agricultural Real Estate | — | — | 520 | ||||||||
Consumer | 685,934 | 17,611 | 11,650 | ||||||||
Agricultural Operating | — | 83 | 99 | ||||||||
Total Loan Sales | 690,654 | 17,694 | 17,112 | ||||||||
Repayments: | |||||||||||
Loan Principal Repayments | 1,652,674 | 737,853 | 515,883 | ||||||||
Total Principal Repayments | 1,652,674 | 737,853 | 515,883 | ||||||||
Total Reductions | 2,343,328 | 755,547 | 532,995 | ||||||||
(Decrease) increase in Other Items, Net | (441 | ) | 408 | (637 | ) | ||||||
Net Increase | $ | 398,367 | $ | 213,216 | $ | 213,248 | |||||
13
At September 30, 2017, approximately $134.5 million, or 10%, of the Company’s loan portfolio consisted of purchased loans, including the purchased student loan portfolio balance of $123.7 million. The remainder of the Company's purchased loan portfolio is secured by properties located in Iowa, North Dakota and South Dakota. The Company believes that purchasing loans outside of its market areas assists the Company in diversifying its portfolio and may lessen the adverse effects on the Company’s business or operations which could result in the event of a downturn or weakening of the local economy in which the Company conducts its primary operations. However, additional risks are associated with purchasing loans outside of the Company’s market areas, including the lack of knowledge of the local market and difficulty in monitoring and inspecting the property securing the loans. During fiscal 2017, the Company purchased a $148.7 million student loan portfolio discounted to $133.8 million, $7.1 million of commercial real estate participation loans and $0.5 million of other loans.
Non-Performing Assets, Other Loans of Concern and Classified Assets
When a borrower fails to make a required payment on retail bank real estate secured loans and consumer loans within 16 days after the payment is due, the Company generally initiates collection procedures by mailing a delinquency notice. The customer is contacted again, by written notice or telephone, before the payment is 30 days past due and again before 60 days past due. Generally, delinquencies are cured promptly; however, if a loan has been delinquent for more than 90 days, satisfactory payment arrangements must be adhered to or the Company may initiate foreclosure or repossession. For premium finance loans, a notice of cancellation is sent 18 days after the missed payment. If the account is not brought current, the Company may cancel the underlying insurance policy.
The following table sets forth the Company’s loan delinquencies by type, by amount and by percentage of type at September 30, 2017.
Loans Delinquent For: | |||||||||||||||||||||||||||||
30-59 Days (1) | 60-89 Days (2) | 90 Days and Over (3) | |||||||||||||||||||||||||||
Number | Amount | Percent of Category | Number | Amount | Percent of Category | Number | Amount | Percent of Category | |||||||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||||||||||||
Real Estate: | |||||||||||||||||||||||||||||
1-4 Family | 1 | $ | 370 | 8.4 | % | 1 | $ | 79 | 2.6 | % | — | $ | — | — | % | ||||||||||||||
Commercial & Multi-Family | — | — | — | % | — | — | — | % | 3 | 685 | 1.8 | % | |||||||||||||||||
Agricultural | — | — | — | % | — | — | — | % | 13 | 34,198 | 91.0 | % | |||||||||||||||||
Consumer | 82 | 2,512 | 57.2 | % | 21 | 558 | 18.1 | % | 51 | 1,406 | 3.7 | % | |||||||||||||||||
Agricultural Operating | — | — | — | % | — | — | — | % | 1 | 97 | 0.3 | % | |||||||||||||||||
Premium Finance | 327 | 1,509 | 34.4 | % | 241 | 2,442 | 79.3 | % | 1,010 | 1,205 | 3.2 | % | |||||||||||||||||
Total | 410 | $ | 4,391 | 100.0 | % | 263 | $ | 3,079 | 100.0 | % | 1,078 | $ | 37,591 | 100.0 | % | ||||||||||||||
(1) As of September 30, 2017, 80 of the consumer loans, which totaled $2.5 million, were student loans that are insured by ReliaMax Surety.
(2) As of September 30, 2017, 20 of the consumer loans, which totaled $0.1 million, were student loans that are insured by ReliaMax Surety.
(3) As of September 30, 2017, 50 of the consumer loans, which totaled $1.4 million were student loans that are insured by ReliaMax Surety.
Delinquencies 90 days and over constituted 2.8% of total loans and 0.72% of total assets. Excluding the insured student loans, delinquencies 90 days and over would have constituted 2.7% of total loans and 0.70% of total assets.
14
Generally, when a loan becomes delinquent 90 days or more for retail bank loans 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, previously accrued interest income on the loan is reversed against current income. The loan will generally remain on a non-accrual status until six months of good payment history has been established. Certain relationships in the table above are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Specialty finance loans and Payments segment loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful.
The table below sets forth the amounts and categories of the Company’s non-performing assets.
At September 30, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Non-Performing Loans | (Dollars in Thousands) | ||||||||||||||||||
Non-Accruing Loans: | |||||||||||||||||||
1-4 Family Real Estate | $ | — | $ | 83 | $ | 24 | $ | 281 | $ | 245 | |||||||||
Commercial & Multi-Family Real Estate | 685 | — | 904 | 312 | 427 | ||||||||||||||
Agricultural Operating | — | — | 5,132 | 340 | — | ||||||||||||||
Commercial Operating | — | — | — | — | 7 | ||||||||||||||
Total | 685 | 83 | 6,060 | 933 | 679 | ||||||||||||||
Accruing Loans Delinquent 90 Days or More: | |||||||||||||||||||
Agricultural Real Estate | 34,198 | — | — | — | — | ||||||||||||||
Consumer | 1,406 | 53 | 13 | 54 | 13 | ||||||||||||||
Agricultural Operating | 97 | — | — | — | — | ||||||||||||||
Premium Finance | 1,205 | 965 | 1,728 | — | — | ||||||||||||||
Total | 36,906 | 1,018 | 1,741 | 54 | 13 | ||||||||||||||
Total Non-Performing Loans | 37,591 | 1,101 | 7,801 | 987 | 692 | ||||||||||||||
Other Assets | |||||||||||||||||||
Foreclosed Assets: | |||||||||||||||||||
1-4 Family Real Estate | 62 | 76 | — | — | — | ||||||||||||||
Commercial & Multi-Family Real Estate | 230 | — | — | 15 | 116 | ||||||||||||||
Total | 292 | 76 | — | 15 | 116 | ||||||||||||||
Total Other Assets | 292 | 76 | — | 15 | 116 | ||||||||||||||
Total Non-Performing Assets | $ | 37,883 | $ | 1,177 | $ | 7,801 | $ | 1,002 | $ | 808 | |||||||||
Total as a Percentage of Total Assets | 0.72 | % | 0.03 | % | 0.31 | % | 0.05 | % | 0.05 | % | |||||||||
Total Non-Performing Assets as a Percentage of Total Assets - excluding insured loans (1) | 0.70 | % | 0.03 | % | 0.31 | % | 0.05 | % | 0.05 | % | |||||||||
(1) Excludes from non-performing assets the student loans that are insured by ReliaMax Surety Company.
15
For the year ended September 30, 2017, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $13,000, none of which was included in interest income.
Non-Accruing Loans. At September 30, 2017, the Company had $0.7 million in non-accruing loans, which constituted less than 0.1% of the Company's gross loan portfolio and total assets. At September 30, 2016, the Company had $0.1 million in non-accruing loans which also constituted less than 0.1% of its gross loans portfolio and total assets. The fiscal 2017 increase in non-accruing loans relates to an increase in non-accruing loans in the commercial real estate category of $0.7 million.
Accruing Loans Delinquent 90 Days or More. At September 30, 2017, the Company had $1.2 million in accruing premium finance loans delinquent 90 days or more. At the same date, the Company also had $36.9 million in agricultural loans related to two large relationships that were more than 90 days past due and still accruing. One of these agricultural relationships, which represented an outstanding loan balance of about $7 million at September 30, 2017, was paid in full on November 1, 2017. The Company received all principal, accrued interest, legal, and other expenses at the closing. The Company also believes that its strong collateral position on the other relationship (less than 75% loan-to-value ("LTV") secured by agricultural real estate) and active collection process with the borrower supports the decision to continue to accrue interest on such loan. Given the underlying values of collateral (primarily land related to our agricultural loans), we believe that we have minimal loss exposure on this agricultural relationship and expect to receive all principal, accrued interest, legal, and other expenses. It is possible the collateral will go through a deed-in-lieu of foreclosure process in the near future. In addition to the principal balance, this relationship also had accrued interest of $1.8 million as of September 30, 2017 that the Company, as noted above, expects to collect.
Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. 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 Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “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 loss reserve is not warranted.
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.
On the basis of management’s review of its classified assets, at September 30, 2017, the Company had classified loans of $40.6 million as substandard and none as doubtful or loss. Further, at September 30, 2017, the Bank owned real estate or other assets as a result of foreclosure of loans with a value of $292,000.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an appropriate loan loss allowance.
Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan losses. The current economic environment continues to show signs of stability and improvement in the Bank’s markets. The Bank’s average loss rates over the past three years were low relative to industry averages for such years, offset, in the case of fiscal 2016, with a higher agricultural loss rate driven by the charge off of one relationship. The Bank does not believe it is likely these low loss conditions will continue indefinitely. Each loan segment is evaluated using both historical loss factors as well as other qualitative factors in order to determine the amount of risk the Company believes exists within that segment.
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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 level of the allowance for loan losses at September 30, 2017 reflected an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level it considers to be appropriate, 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 the OCC, which can require the establishment of additional general or specific allowances.
Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management and, if the value declines, a specific provision for losses on such property is established by a charge to operations.
The following table sets forth an analysis of the Company’s allowance for loan losses.
September 30, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Balance at Beginning of Period | $ | 5,635 | $ | 6,255 | $ | 5,397 | $ | 3,930 | $ | 3,971 | |||||||||
Charge Offs: | |||||||||||||||||||
1-4 Family Real Estate | — | (32 | ) | (45 | ) | — | (25 | ) | |||||||||||
Commercial & Multi-Family Real Estate | (138 | ) | (385 | ) | (214 | ) | — | (194 | ) | ||||||||||
Consumer | (7,084 | ) | (728 | ) | — | — | (1 | ) | |||||||||||
Commercial Operating | (1,149 | ) | (249 | ) | — | — | — | ||||||||||||
Agricultural Operating | — | (3,252 | ) | (186 | ) | (50 | ) | — | |||||||||||
Premium Finance | (626 | ) | (726 | ) | (285 | ) | — | — | |||||||||||
Total Charge Offs | (8,997 | ) | (5,372 | ) | (730 | ) | (50 | ) | (220 | ) | |||||||||
Recoveries: | |||||||||||||||||||
1-4 Family Real Estate | — | — | — | 2 | 2 | ||||||||||||||
Commercial & Multi-Family Real Estate | — | 27 | 6 | 347 | 113 | ||||||||||||||
Consumer | 209 | 11 | — | — | 1 | ||||||||||||||
Commercial Operating | 25 | — | 3 | 18 | 63 | ||||||||||||||
Agricultural Operating | 12 | 2 | — | — | — | ||||||||||||||
Premium Finance | 61 | 107 | 114 | — | — | ||||||||||||||
Total Recoveries | 307 | 147 | 123 | 367 | 179 | ||||||||||||||
Net (Charge Offs) Recoveries | (8,690 | ) | (5,225 | ) | (607 | ) | 317 | (41 | ) | ||||||||||
Provision Charged to Expense | 10,589 | 4,605 | 1,465 | 1,150 | — | ||||||||||||||
Balance at End of Period | $ | 7,534 | $ | 5,635 | $ | 6,255 | $ | 5,397 | $ | 3,930 | |||||||||
Ratio of Net Charge Offs During the Period to Average Loans Outstanding During the Period | 0.73 | % | 0.06 | % | 0.10 | % | (0.07 | )% | 0.01 | % | |||||||||
Ratio of Net Charge Offs During the Period to Non-Performing Assets at Year End | 22.94 | % | 443.84 | % | 7.78 | % | (31.66 | )% | 5.07 | % | |||||||||
Allowance to Total Loans | 0.57 | % | 0.61 | % | 0.88 | % | 1.08 | % | 1.02 | % | |||||||||
Allowance to Total Loans - excluding insured loans (1) | 0.63 | % | 0.61 | % | 0.88 | % | 1.08 | % | 1.02 | % | |||||||||
(1) Excludes from the total loan balance student loans that are insured by ReliaMax Surety Company.
17
For more information on the Provision for Loan Losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Annual Report on Form 10-K.
The distribution of the Company’s allowance for losses on loans at the dates indicated is summarized as follows:
At September 30, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Amount | Percent of Loans in Each Category of Total Loans | Amount | Percent of Loans in Each Category of Total Loans | Amount | Percent of Loans in Each Category of Total Loans | Amount | Percent of Loans in Each Category of Total Loans | Amount | Percent of Loans in Each Category of Total Loans | |||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||
1-4 Family Real Estate | $ | 803 | 14.8 | % | $ | 654 | 17.5 | % | $ | 278 | 17.5 | % | $ | 552 | 23.3 | % | $ | 333 | 21.4 | % | ||||||||||||||
Commercial & Multi-Family Real Estate | 2,670 | 44.1 | 2,198 | 45.7 | 1,187 | 43.5 | 1,575 | 44.9 | 1,937 | 50.1 | ||||||||||||||||||||||||
Agricultural Real Estate | 1,390 | 4.7 | 142 | 6.9 | 163 | 9.0 | 263 | 11.2 | 112 | 7.6 | ||||||||||||||||||||||||
Consumer | 6 | 12.3 | 51 | 4.0 | 20 | 4.7 | 78 | 5.9 | 74 | 7.9 | ||||||||||||||||||||||||
Commercial Operating | 158 | 2.7 | 117 | 3.4 | 28 | 4.2 | 93 | 6.2 | 49 | 4.2 | ||||||||||||||||||||||||
Agricultural Operating | 1,184 | 2.5 | 1,332 | 4.0 | 3,537 | 6.1 | 719 | 8.5 | 267 | 8.8 | ||||||||||||||||||||||||
Premium Finance | 796 | 18.9 | 588 | 18.5 | 293 | 15.0 | — | — | — | — | ||||||||||||||||||||||||
Unallocated | 527 | — | 553 | — | 749 | — | 2,117 | — | 1,158 | — | ||||||||||||||||||||||||
Total | $ | 7,534 | 100.0 | % | $ | 5,635 | 100.0 | % | $ | 6,255 | 100.0 | % | $ | 5,397 | 100.0 | % | $ | 3,930 | 100.0 | % | ||||||||||||||
Investment Activities
General. The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company’s need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings and to fulfill the Company’s asset/liability management policies. The Company’s investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy adopted by the Board of Directors, which is implemented by members of the Company’s Investment Committee. The Company closely monitors balances in these accounts, and maintains a portfolio of highly liquid assets to fund potential deposit outflows or other liquidity needs. To date, the Company has not experienced any significant outflows related to the MPS division deposits, though no assurance can be given that this will continue to be the case.
As of September 30, 2017, investment and mortgage-backed securities with fair values of approximately $1.07 billion, $325.4 million, and $9.5 million were pledged as collateral for the Bank’s Federal Home Loan Bank of Des Moines (“FHLB”) advances, Federal Reserve Bank (“FRB”) advances and collateral for securities sold under agreements to repurchase, respectively. For additional information regarding the Company’s collateralization of borrowings, see Notes 8 and 9 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Investment Securities. It is the Company’s general policy to purchase investment securities which are U.S. Government-related securities, U.S. Government-related agency and instrumentality securities, U.S. Government-related agency or instrumentality collateralized securities, state and local government obligations, commercial paper, corporate debt securities and overnight federal funds.
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The Company continues to execute its investment strategy of primarily purchasing U.S. Government-related securities and U.S. Government-related MBS, as well as AAA and AA rated NBQ municipal bonds; however, the Company also reviews opportunities to add other diverse, high-quality securities at attractive relative rates when opportunities arise. As of September 30, 2017, the Company had total investment securities, excluding mortgage-backed securities, with an amortized cost of $1.54 billion compared to $1.37 billion as of September 30, 2016. At September 30, 2017, $838.8 million, or 57%, of the Company’s investment securities were pledged to secure various obligations of the Company.
A large portion of this investment strategy involves the purchase of non-bank qualified municipal housing bonds backed by Fannie Mae, Freddie Mac, and or Ginnie Mae or convertible directly into Ginnie Mae securities that also provide monthly cash flow in the form of principal and interest payments. These bonds are issued in larger denominations than bank qualified obligations of political subdivisions, which allows for the purchase of larger blocks. These larger blocks of municipal bonds are typically issued in larger denominations by well-known issuers with reputable reporting and in turn, tend to be more liquid, which helps reduce price risk. These municipal bonds are tax-exempt and as such have a tax equivalent yield higher than their book yield. The tax equivalent yield calculation uses the Company’s cost of funds as one of its components. Given the Company’s relatively low cost of funds due to the volume of interest-free deposits generated by the MPS division, the tax equivalent yield for these bonds is higher than a similar term investment in other investment categories. Many of the Company’s municipal holdings are able to be pledged at both the Federal Reserve and the Federal Home Loan Bank.
As of September 30, 2017, the Company held obligations of states and political subdivisions of $1.40 billion, representing 90.0% of total investment securities, excluding mortgage‑backed securities. This amount is spread among 48 of the 50 states of the U.S. and the District of Columbia, with no individual state (excluding agency backed and/or convertible municipal securities) having a concentration higher than 10% of the total carrying value of the municipal portfolio. The Company has no direct municipal bond exposure in Detroit or Puerto Rico, which are municipalities that have had recent financial troubles and carry a higher than normal risk of the principal not being returned to the investor. Management believes this geographical diversification lessens the credit risk associated with these investments. The Company also monitors concentrations of the ultimate borrower and exposure to counties within each state to further enhance proper diversification.
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The following table sets forth the carrying value of the Company’s investment securities portfolio, excluding mortgage-backed securities and other Benefit Equalization Plan equity securities, at the dates indicated.
At September 30, | |||||||||||
2017 | 2016 | 2015 | |||||||||
(Dollars in Thousands) | |||||||||||
Investment Securities AFS | |||||||||||
Trust preferred and corporate securities | $ | — | $ | 12,978 | $ | 13,944 | |||||
Asset backed securities | 96,832 | 116,815 | — | ||||||||
Small business administration securities | 57,871 | 80,719 | 56,056 | ||||||||
Non-bank qualified obligations of states and political subdivisions | 950,829 | 698,672 | 608,590 | ||||||||
Common equities and mutual funds | 1,445 | 1,125 | 914 | ||||||||
Subtotal AFS | 1,106,977 | 910,309 | 679,504 | ||||||||
Investment Securities HTM | |||||||||||
Obligations of states and political subdivisions | 19,247 | 20,626 | 19,540 | ||||||||
Non-bank qualified obligations of states and political subdivisions (1) | 430,593 | 465,469 | 259,627 | ||||||||
Subtotal HTM | 449,840 | 486,095 | 279,167 | ||||||||
FHLB Stock | 61,123 | 47,512 | 24,410 | ||||||||
Total Investment Securities and FHLB Stock | $ | 1,617,940 | $ | 1,443,916 | $ | 983,081 | |||||
Other Interest-Earning Assets: | |||||||||||
Interest bearing deposits in other financial institutions and Federal Funds Sold (2) | $ | 1,227,308 | $ | 513,441 | $ | 10,051 | |||||
(1) Includes $3.1 million of taxable obligations of states and political subdivisions.
(2) From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including the FHLB, the FRB, and other private institutions. At September 30, 2017, the Company had $1.23 billion in interest bearing deposits held at the FRB and $0.5 million at other institutions. At September 30, 2017, the Company did not have interest bearing deposits held at the FHLB and had no federal funds sold at a private institution.
20
The composition and maturities of the Company’s available for sale and held to maturity investment securities portfolio, excluding equity securities, FHLB stock and mortgage-backed securities, are indicated in the following table. The actual maturity of certain municipal housing related securities are typically less than its stated contractual maturity due to scheduled principal payments and prepayments of the underlying mortgages.
September 30, 2017 | |||||||||||||||||||||||
1 Year or Less | After 1 Year Through 5 Years | After 5 Years Through 10 Years | After 10 Years | Total Investment Securities | |||||||||||||||||||
Carrying Value | Carrying Value | Carrying Value | Carrying Value | Amortized Cost | Fair Value | ||||||||||||||||||
Available for Sale | (Dollars in Thousands) | ||||||||||||||||||||||
Asset backed securities | — | — | — | 96,832 | 94,451 | 96,832 | |||||||||||||||||
Small business administration securities | — | — | 43,160 | 14,711 | 57,046 | 57,871 | |||||||||||||||||
Non-bank qualified obligations of states and political subdivisions | — | 37,674 | 315,038 | 598,117 | 938,883 | 950,829 | |||||||||||||||||
Total Investment Securities AFS | $ | — | $ | 37,674 | $ | 358,198 | $ | 709,660 | $ | 1,090,380 | $ | 1,105,532 | |||||||||||