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 December 31, 2017

☐  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

metalogoa05.jpg
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 and Zip Code)

(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, smaller reporting company or an emerging growth company See the definitions of "large accelerated filer." "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (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 standards 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

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 February 5, 2018:
Common Stock, $.01 par value
9,683,841 shares
Nonvoting Common Stock, $.01 par value
0 Nonvoting shares
 
 
 
 
 


META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.  
 
 
 
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
(Dollars in Thousands, Except Share and Per Share Data)
 
(Unaudited)
 
 
ASSETS
December 31, 2017
 
September 30, 2017
Cash and cash equivalents
$
1,300,409

 
$
1,267,586

Investment securities available for sale
1,392,240

 
1,106,977

Mortgage-backed securities available for sale
600,112

 
586,454

Investment securities held to maturity
235,024

 
449,840

Mortgage-backed securities held to maturity
8,468

 
113,689

Loans receivable
1,509,140

 
1,325,371

Allowance for loan losses
(8,862
)
 
(7,534
)
Federal Home Loan Bank Stock, at cost
57,443

 
61,123

Accrued interest receivable
21,089

 
19,380

Premises, furniture, and equipment, net
20,571

 
19,320

Bank-owned life insurance
85,371

 
84,702

Foreclosed real estate and repossessed assets
128

 
292

Goodwill
98,723

 
98,723

Intangible assets
50,521

 
52,178

Prepaid assets
29,758

 
28,392

Deferred taxes
5,379

 
9,101

Other assets
12,449

 
12,738

 


 
 
        Total assets
$
5,417,963

 
$
5,228,332

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
 
 
 
 
LIABILITIES
 

 
 
Non-interest-bearing checking
$
2,779,645

 
$
2,454,057

Interest-bearing checking
84,390

 
67,294

Savings deposits
53,535

 
53,505

Money market deposits
47,451

 
48,758

Time certificates of deposit
128,220

 
123,637

Wholesale deposits
420,404

 
476,173

        Total deposits
3,513,645

 
3,223,424

Short-term debt
1,313,401

 
1,404,534

Long-term debt
85,552

 
85,533

Accrued interest payable
4,065

 
2,280

Accrued expenses and other liabilities
63,595

 
78,065

          Total liabilities
4,980,258

 
4,793,836

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2017 and September 30, 2017, respectively
—

 
—

Common stock, $.01 par value; 15,000,000 shares authorized, 9,685,398 and 9,626,431 shares issued, 9,664,846 and 9,622,595 shares outstanding at December 31, 2017 and September 30, 2017, respectively
96

 
96

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2017 and September 30, 2017, respectively
—

 
—

Additional paid-in capital
262,872

 
258,336

Retained earnings
170,578

 
167,164

Accumulated other comprehensive income
5,782

 
9,166

Treasury stock, at cost, 20,552 and 3,836 common shares at December 31, 2017 and September 30, 2017, respectively
(1,623
)
 
(266
)
         Total stockholders’ equity
437,705

 
434,496

 
 
 
 
         Total liabilities and stockholders’ equity
$
5,417,963

 
$
5,228,332

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 December 31,
 
2017
 
2016
Interest and dividend income:
 
 
 
Loans receivable, including fees
$
16,443

 
$
10,678

Mortgage-backed securities
3,758

 
3,320

Other investments
10,656

 
8,577

 
30,857

 
22,575

Interest expense:
 

 
 

Deposits
1,885

 
938

FHLB advances and other borrowings
2,776

 
1,804

 
4,661

 
2,742

 
 
 
 
Net interest income
26,196

 
19,833

 
 
 
 
Provision for loan losses
1,068

 
843

 
 
 
 
Net interest income after provision for loan losses
25,128

 
18,990

 
 
 
 
Non-interest income:
 

 
 

Refund transfer product fees
192

 
176

Tax advance product fees
1,947

 
449

Card fees
25,247

 
18,414

Loan fees
1,292

 
870

Bank-owned life insurance
669

 
448

Deposit fees
848

 
150

Loss on sale of securities available-for-sale, net (Includes ($1,010) and ($1,234) reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended December 31, 2017 and 2016, respectively)
(1,010
)
 
(1,234
)
Loss on foreclosed real estate
(19
)
 
—

Other income
102

 
76

Total non-interest income
29,268

 
19,349

 
 
 
 
Non-interest expense:
 

 
 

Compensation and benefits
22,340

 
17,850

Refund transfer product expense
101

 
51

Tax advance product expense
280

 
27

Card processing
6,540

 
5,579

Occupancy and equipment
4,890

 
3,977

Legal and consulting
2,416

 
2,723

Marketing
553

 
470

Data processing
414

 
363

Intangible amortization expense
1,681

 
1,525

Other expense
4,827

 
4,188

Total non-interest expense
44,042

 
36,753

 
 
 
 
 
 
 
 
Income before income tax expense
10,354

 
1,586

 
 
 
 
Income tax expense (Includes ($380), and ($463) reclassified from accumulated other comprehensive income (loss) for the three months ended December 31, 2017 and 2016, respectively)
5,684

 
342

 
 
 
 
Net income
$
4,670

 
$
1,244

 
 
 
 
Earnings per common share
 

 
 

Basic
$
0.48

 
$
0.14

Diluted
$
0.48

 
$
0.14

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
December 31,
 
2017
 
2016
Net income
$
4,670

 
$
1,244

 
 
 
 
Other comprehensive income (loss):
 

 
 

Change in net unrealized loss on securities
(7,480
)
 
(45,268
)
Losses realized in net income
1,010

 
1,234

 
(6,470
)
 
(44,034
)
LESS: Deferred income tax effect
(3,086
)
 
(16,092
)
Total other comprehensive loss
(3,384
)
 
(27,942
)
Total comprehensive income (loss)
$
1,286

 
$
(26,698
)
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 Three Months Ended December 31, 2017 and 2016
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
 
 
Treasury
Stock
 
 
Total
Stockholders’
Equity
Balance, September 30, 2016
$
85

 
$
184,780

 
$
127,190

 
$
22,920

 
$
—

 
$
334,975

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.13 per share)
—

 
—

 
(1,195
)
 
—

 
—

 
(1,195
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP
3

 
3,245

 
—

 
—

 
—

 
3,248

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to acquisition
5

 
37,291

 
—

 
—

 
—

 
37,296

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration equity earnout due to SCS acquisition
—

 
24,091

 
—

 
—

 
—

 
24,091

 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation
—

 
69

 
—

 
—

 
—

 
69

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

 
—

 
—

 
(27,942
)
 
—

 
(27,942
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
1,244

 
—

 
—

 
1,244

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
93

 
$
249,476

 
$
127,239

 
$
(5,022
)
 
$
—

 
$
371,786

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
$
96

 
$
258,336

 
$
167,164

 
$
9,166

 
$
(266
)
 
$
434,496

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.13 per share)
—

 
—

 
(1,256
)
 
—

 
—

 
(1,256
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to ESOP
—

 
1,606

 
—

 
—

 
—

 
1,606

 
 
 
 
 
 
 
 
 
 
 
 
Shares repurchased for tax withholdings on stock compensation
—

 
(314
)
 
—

 
—

 
(1,357
)
 
(1,671
)
 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation
—

 
3,244

 
—

 
—

 
—

 
3,244

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

 
—

 
—

 
(3,384
)
 
—

 
(3,384
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
4,670

 
—

 
—

 
4,670

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
96

 
$
262,872

 
$
170,578

 
$
5,782

 
$
(1,623
)
 
$
437,705

See Notes to Condensed Consolidated Financial Statements.


5
Table of Contents


META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended December 31,
(Dollars in Thousands)
2017
 
2016 (1)
Cash flows from operating activities:
 
 
 
Net income
$
4,670

 
$
1,244

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

 
 

Depreciation, amortization and accretion, net
9,561

 
9,479

Stock-based compensation expense
3,244

 
69

Provision for loan losses
1,068

 
843

Provision (recovery) for deferred taxes
6,807

 
(927
)
(Gain) on other assets
(8
)
 
(6
)
Loss on sale of foreclosed real estate
19

 
—

Loss on sale of securities available for sale, net
1,010

 
1,234

Net change in accrued interest receivable
(1,709
)
 
(4,176
)
Fair value adjustment of foreclosed real estate
23

 
—

Originations of loans held for sale
—

 
(27,191
)
Proceeds from sales of loans held for sale
—

 
25,968

Change in bank-owned life insurance value
(669
)
 
(448
)
Net change in other assets
(1,102
)
 
(27,164
)
Net change in accrued interest payable
1,785

 
1,379

Net change in accrued expenses and other liabilities
(14,462
)
 
14,255

Net cash provided by (used in) operating activities
10,237

 
(5,441
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(105,327
)
 
(144,024
)
Proceeds from sales of securities available-for-sale
65,941

 
60,623

Proceeds from maturities and principal repayments of securities available for sale
35,065

 
30,849

Proceeds from maturities and principal repayments of securities held to maturity
12,021

 
13,301

Loans purchased
(75,163
)
 
(136,172
)
Loans sold
5,916

 
6,525

Net change in loans receivable
(114,827
)
 
(59,008
)
Proceeds from sales of foreclosed real estate or other assets
122

 
—

Net cash paid for acquisitions
—

 
(29,425
)
Federal Home Loan Bank stock purchases
(249,920
)
 
(140,680
)
Federal Home Loan Bank stock redemptions
253,600

 
184,360

Proceeds from the sale of premises and equipment
—

 
58

Purchase of premises and equipment
(2,593
)
 
(2,899
)
Net cash used in investing activities
(175,165
)
 
(216,492
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in checking, savings, and money market deposits
341,407

 
309,726

Net change in time deposits
4,583

 
(3,658
)
Net change in wholesale deposits
(55,769
)
 
926,987

Net change in FHLB and other borrowings
(205,000
)
 
(100,000
)
Net change in federal funds
113,000

 
(992,000
)
Net change in securities sold under agreements to repurchase
867

 
744

Principal payments on capital lease obligations
(16
)
 
(18
)
Cash dividends paid
(1,256
)
 
(1,195
)
Purchase of shares by ESOP
1,606

 
—

Proceeds from exercise of stock options and issuance of common stock
—

 
3,248

Shares repurchased for tax withholdings on stock compensation
(1,671
)
 
—

Net cash provided by financing activities
197,751

 
143,834

 
 
 
 
Net change in cash and cash equivalents
32,823

 
(78,099
)
 
 
 
 
Cash and cash equivalents at beginning of period
1,267,586

 
773,830

Cash and cash equivalents at end of period
$
1,300,409

 
$
695,731

 
 
 
 







6
Table of Contents




Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
6,446

 
$
1,362

Income taxes
218

 
2,110

Franchise taxes
31

 
20

Other taxes
1

 
1

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Securities transferred from held to maturity to available for sale
$
(306,000
)
 
$
—

Contingent consideration - cash
 
 
$
(17,259
)
Contingent consideration - equity
—

 
(24,091
)
Stock issued for acquisition
—

 
(37,296
)
See Notes to Condensed Consolidated Financial Statements.
(1) See Note 1. Basis of Presentation for further discussion on the current presentation.

7
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, 2017 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 November 29, 2017.  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 three month period ended December 31, 2017 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2018.

In fiscal 2017, the Company early adopted Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The requirement to report the excess tax benefit related to settlements of share-based payment awards in earnings as an increase or (decrease) to income tax expense has been applied utilizing the prospective method. While the adoption of ASU 2016-09 requires retrospective application to all fiscal year periods presented, the Company elected to not recast previously reported financial statements as the impact was considered insignificant. However, the Company reclassified stock compensation from financing to operating activities on the Consolidated Statement of Cash Flows as of December 31, 2017 and December 31, 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.


8
Table of Contents

Homogeneous loan populations are collectively evaluated for impairment.  These loan populations may include commercial insurance premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, home equity and second mortgage loans, and tax product loans.  Commercial and agricultural loans as well as mortgage loans secured by other properties are monitored regularly by the Bank given the larger balances. When analysis of the borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business is not adequate to meet its debt service requirements, the individual loan or loan relationship is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 210 days or more for commercial insurance premium finance, 180 days or more for tax and other national lending loans and 90 days or more for other loans. Non-accrual loans and all troubled debt restructurings are considered impaired.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans receivable at December 31, 2017 and September 30, 2017 were as follows:
 
December 31, 2017
 
September 30, 2017
 
(Dollars in Thousands)
1-4 Family Real Estate
$
203,967

 
$
196,706

Commercial and Multi-Family Real Estate
654,029

 
585,510

Agricultural Real Estate
61,303

 
61,800

Consumer
274,981

 
163,004

Commercial Operating
56,516

 
35,759

Agricultural Operating
24,696

 
33,594

Commercial Insurance Premium Finance
235,671

 
250,459

Total Loans Receivable
1,511,163

 
1,326,832

 
 
 
 
Allowance for Loan Losses
(8,862
)
 
(7,534
)
Net Deferred Loan Origination Fees
(2,023
)
 
(1,461
)
Total Loans Receivable, Net
$
1,500,278

 
$
1,317,837





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Table of Contents

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three months ended December 31, 2017 and 2016 was as follows:

 
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
CML Insurance
Premium
Finance
 
Unallocated
 
Total
 
(Dollars in Thousands)
Three Months Ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
803

 
$
2,670

 
$
1,390

 
$
6

 
$
158

 
$
1,184

 
$
796

 
$
527

 
$
7,534

Provision (recovery) for loan losses
(118
)
 
364

 
(210
)
 
297

 
690

 
(380
)
 
51

 
374

 
1,068

Charge offs
(31
)
 
—

 
—

 
—

 
—

 
—

 
(129
)
 
—

 
(160
)
Recoveries
—

 
—

 
—

 
367

 
46

 
—

 
7

 
—

 
420

Ending balance
$
654

 
$
3,034

 
$
1,180

 
$
670

 
$
894

 
$
804

 
$
725

 
$
901

 
$
8,862

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ending balance: collectively evaluated for impairment
654

 
3,034

 
1,180

 
670

 
894

 
804

 
725

 
901

 
8,862

Total
$
654

 
$
3,034

 
$
1,180

 
$
670

 
$
894

 
$
804

 
$
725

 
$
901

 
$
8,862

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
95

 
707

 
—

 
61

 
—

 
1,052

 
—

 
—

 
1,915

Ending balance: collectively
evaluated for impairment
203,872

 
653,322

 
61,303

 
274,920

 
56,516

 
23,644

 
235,671

 
—

 
1,509,248

Total
$
203,967

 
$
654,029

 
$
61,303

 
$
274,981

 
$
56,516

 
$
24,696

 
$
235,671

 
$
—

 
$
1,511,163


10
Table of Contents

 
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
CML Insurance
Premium
Finance
 
Unallocated
 
Total
 
(Dollars in Thousands)
Three Months Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
654

 
$
2,198

 
$
142

 
$
51

 
$
117

 
$
1,332

 
$
588

 
$
553

 
$
5,635

Provision (recovery) for loan losses
—

 
(286
)
 
334

 
(28
)
 
691

 
(3
)
 
110

 
25

 
843

Charge offs
—

 
—

 
—

 
—

 
—

 
—

 
(118
)
 
—

 
(118
)
Recoveries
—

 
—

 
—

 
24

 
5

 
12

 
14

 
—

 
55

Ending balance
$
654

 
$
1,912

 
$
476

 
$
47

 
$
813

 
$
1,341

 
$
594

 
$
578

 
$
6,415

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually
evaluated for impairment
11

 
—

 
—

 
—

 
339

 
—

 
—

 
—

 
350

Ending balance: collectively
evaluated for impairment
643

 
1,912

 
476

 
47

 
474

 
1,341

 
594

 
578

 
6,065

Total
$
654

 
$
1,912

 
$
476

 
$
47

 
$
813

 
$
1,341

 
$
594

 
$
578

 
$
6,415

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
190

 
429

 
—

 
—

 
505

 
—

 
—

 
—

 
1,124

Ending balance: collectively
evaluated for impairment
172,687

 
440,083

 
64,014

 
173,164

 
50,319

 
33,617

 
179,508

 
—

 
1,113,392

Total
$
172,877

 
$
440,512

 
$
64,014

 
$
173,164

 
$
50,824

 
$
33,617

 
$
179,508

 
$
—

 
$
1,114,516



11
Table of Contents

Federal regulations promulgated by the Bank's 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 for the Company and its wholly-owned subsidiary, MetaBank (the "Bank"), 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 Company'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 Company 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 Company'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, or a geographic location.  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 Company’s Tier 1 Capital plus the Allowance for Loan Losses.
 

12
Table of Contents

The asset classification of loans at December 31, 2017 and September 30, 2017 were as follows:

December 31, 2017
1-4 Family
Real Estate
 
Commercial and
Multi-Family
Real Estate
 
Agricultural
Real Estate
 
Consumer
 
Commercial
Operating
 
Agricultural
Operating
 
CML Insurance
Premium
Finance
 
Total
 
(Dollars in Thousands)
Pass
$
203,035

 
$
643,393

 
$
28,794

 
$
274,783

 
$
56,245

 
$
14,304

 
$
235,671

 
$
1,456,225

Watch
608

 
10,145

 
—

 
102

 
271

 
13

 
—

 
11,139

Special Mention
245

 
199

 
2,939

 
—

 
—

 
—

 
—

 
3,383

Substandard
79

 
292

 
29,570

 
96

 
—

 
10,379

 
—

 
40,416

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
203,967

 
$
654,029

 
$
61,303

 
$
274,981

 
$
56,516

 
$
24,696

 
$
235,671

 
$
1,511,163


September 30, 2017
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
$
195,838

 
$
574,730

 
$
27,376

 
$
163,004

 
$
35,759

 
$
18,394

 
$
250,459

 
$
1,265,560

Watch
525

 
10,200

 
2,006

 
—

 
—

 
4,541

 
—

 
17,272

Special Mention
247

 
201

 
2,939

 
—

 
—

 
—

 
—

 
3,387

Substandard
96

 
379

 
29,479

 
—

 
—

 
10,659

 
—

 
40,613

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
196,706

 
$
585,510

 
$
61,800

 
$
163,004

 
$
35,759

 
$
33,594

 
$
250,459

 
$
1,326,832


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. 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 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 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.




13
Table of Contents

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, 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.

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, 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 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.

14
Table of Contents

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.  The Bank originates a variety of secured consumer loans, including home equity, home improvement, automobile and boat loans and loans secured by savings deposits.  In addition, the Bank offers other secured and unsecured consumer loans and currently originates most of its community banking consumer loans in its primary market areas and surrounding areas. In addition, the Bank’s consumer lending portfolio includes two purchased student loan portfolios, the most recent purchased on October 11, 2017, along with consumer lending products offered through its payments segment.

The Bank's community banking consumer loan portfolio consists primarily of home equity loans and lines of credit.  Substantially all of the Bank'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 Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the 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 of 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.

On October 11, 2017, the Company completed the purchase of a $73.0 million, seasoned, floating rate, private student loan portfolio. All loans are indexed to one-month LIBOR. The portfolio is serviced by ReliaMax Lending Services LLC and insured by ReliaMax Surety Company. This portfolio purchase builds on the Company's existing student loan platform.

The Bank’s student loan portfolio that was purchased during the first quarter of fiscal year 2017 is a seasoned portfolio that is also serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company. All loans in this portfolio are floating rate and indexed to the three-month LIBOR plus various margins.
Through its Payments segment, the Bank strives to offer consumers innovative payment products, including credit products. Most credit products have fallen into the category of portfolio lending. The Payments segment, including Specialty Consumer Services ("SCS"), continues its development of new alternative portfolio lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.


15
Table of Contents

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.

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. 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 ("ERO") advance loans through its Payments segment as described in more detail below.

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 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.

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.

Commercial Insurance Premium Finance Lending.  Through its AFS/IBEX division, the Bank provides short-term and primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as commercial 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.

Commercial 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.


16
Table of Contents

Due to the nature of collateral for commercial insurance 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 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.

Past due loans at December 31, 2017 and September 30, 2017 were as follows:
 
Accruing and Non-accruing Loans
 
Nonperforming Loans
December 31, 2017
30-59 Days
Past Due
 
60-89 Days
Past Due
 
> 89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
 
(Dollars in Thousands)
1-4 Family Real Estate
$
106

 
$
—

 
$
234

 
$
340

 
$
203,627

 
203,967

 
234

 
$
—

 
$
234

Commercial and Multi-Family Real Estate
—

 
284

 
—

 
284

 
653,745

 
654,029

 
—

 
284

 
284

Agricultural Real Estate
—

 
—

 
27,818

 
27,818

 
33,485

 
61,303

 
27,818

 
—

 
27,818

Consumer
4,192

 
2,015

 
1,624

 
7,831

 
267,150

 
274,981

 
1,624

 
—

 
1,624

Commercial Operating
—

 
—

 
—

 
—

 
56,516

 
56,516

 
—

 
—

 
—

Agricultural Operating
—

 
—

 
—

 
—

 
24,696

 
24,696

 
—

 
—

 
—

CML Insurance Premium Finance
1,594

 
592

 
3,194

 
5,380

 
230,291

 
235,671

 
3,194

 
—

 
3,194

   Total
$
5,892

 
$
2,891

 
$
32,870

 
$
41,653

 
$
1,469,510

 
1,511,163

 
32,870

 
$
284

 
$
33,154

 
Accruing and Non-accruing Loans
 
Nonperforming Loans
September 30, 2017
30-59 Days
Past Due
 
60-89 Days
Past Due
 
> 89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
 
(Dollars in Thousands)
1-4 Family Real Estate
$
370

 
$
79

 
$
—

 
$
449

 
$
196,257

 
$
196,706

 
—

 
$
—

 
$
—

Commercial and Multi-Family Real Estate
295

 
—

 
390

 
685

 
584,825

 
585,510

 
—

 
685

 
685

Agricultural Real Estate
—

 
—

 
34,198

 
34,198

 
27,602

 
61,800

 
34,198

 
—

 
34,198

Consumer
2,512

 
558

 
1,406

 
4,476

 
158,528

 
163,004

 
1,406

 
—

 
1,406

Commercial Operating
—

 
—

 
—

 
—

 
35,759

 
35,759

 
—

 
—

 
—

Agricultural Operating
—

 
—

 
97

 
97

 
33,497

 
33,594

 
97

 
—

 
97

CML Insurance Premium Finance
1,509

 
2,442

 
1,205

 
5,156

 
245,303

 
250,459

 
1,205

 
—

 
1,205

Total
$
4,686

 
$
3,079

 
$
37,296

 
$
45,061

 
$
1,281,771

 
$
1,326,832

 
36,906

 
$
685

 
$
37,591


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 commercial insurance premium finance loans, 180 days or more for refund advance loans, 120 days or more for ERO advance loans and 90 days or more for other loan categories.  As of December 31, 2017, there were no commercial insurance premium finance loans greater than 210 days past due.

17
Table of Contents

Total loans past due decreased $3.4 million to $41.7 million at December 31, 2017 from $45.1 million at September 30, 2017. This decrease was due to a $4.4 million decrease in loans greater than 90 days past due. The primary driver of the decrease in loans greater than 90 days past due included the payoff of a large nonperforming agricultural loan relationship during the first quarter of fiscal 2018.

Impaired loans at December 31, 2017 and September 30, 2017 were as follows:
 
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
December 31, 2017
(Dollars in Thousands)
Loans without a specific valuation allowance
 
 
 
 
 
1-4 Family Real Estate
$
95

 
$
95

 
$
—

Commercial and Multi-Family Real Estate
707

 
707

 
—

   Consumer
61

 
61

 
—

   Agricultural Operating
1,052

 
1,052

 
—

Total
$
1,915

 
$
1,915

 
$
—

 
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
September 30, 2017
(Dollars in Thousands)
Loans without a specific valuation allowance
 
 
 
 
 
1-4 Family Real Estate
$
72

 
$
72

 
$
—

Commercial and Multi-Family Real Estate
1,109

 
1,109

 
—

Total
$
1,181

 
$
1,181

 
$
—


The following table provides the average recorded investment in impaired loans for the three month periods ended December 31, 2017 and 2016.
 
Three Months Ended December 31,
 
2017
 
2016
 
Average
Recorded
Investment
 
Average
Recorded
Investment
 
(Dollars in Thousands)
1-4 Family Real Estate
$
80

 
$
172

Commercial and Multi-Family Real Estate
975

 
432

Consumer
20

 
—

Commercial Operating
—

 
168

Agricultural Operating
351

 
—

Total
$
1,426

 
$
772


The Company’s troubled debt restructurings (“TDR”) typically involve forgiving a portion of interest or principal on existing loans or making loans at a rate materially less than current market rates. There were $1.1 million of loans modified in a TDR during the three month period ended December 31, 2017 and no loans modified in a TDR during the three month period ended December 31, 2016. Additionally, there were no TDR loans for which there was a payment default during the three month periods ended December 31, 2017 or 2016 that had been modified during the 12-month period prior to the default.



18
Table of Contents

NOTE 3.     ALLOWANCE FOR LOAN LOSSES

At December 31, 2017, the Company’s allowance for loan losses increased to $8.9 million from $7.5 million at September 30, 2017. This increase was primarily due to the additional provision expense related to tax advance loans. During the three months ended December 31, 2017, the Company recorded a provision for loan losses of $1.1 million compared to $0.8 million for the same period of the prior year. The Company had $0.3 million of net recoveries for the three months ended December 31, 2017, compared to $0.1 million of net charge-offs for the three months ended December 31, 2016.

The allowance for loan losses is established through the 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 improvement in the Bank’s markets.  The Bank’s average loss rates over the past three years for community banking loans were relatively low compared to peers, but was offset with a higher agricultural loss rate in fiscal year 2016 driven by the charge off of one relationship. Although the Bank’s four market areas have indirectly benefited from a stable agricultural market, the market has become slightly stressed as commodity prices have generally remained lower than a few years ago. Management believes the low commodity prices and adverse weather conditions have the potential to negatively impact the economies of our agricultural markets. The improving economic conditions have also kept the loss rates on the national lending loans as well as the tax service loans relatively low.

Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio and other factors, the current level of the allowance for loan losses at December 31, 2017, reflects 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 the lesser of fair value or the recorded investment.  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.

NOTE 4.     EARNINGS PER COMMON SHARE

Earnings per share is computed after deducting dividends. The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the earnings per share calculation. Basic earnings per share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and after the allocation of earnings to the participating securities. Antidilutive options are disregarded in the earnings per share calculations.


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Table of Contents

A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share for the three months ended December 31, 2017 and 2016 is presented below.
Three Months Ended December 31,
2017
 
2016
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Basic income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
4,670

 
$
1,244

Weighted average common shares outstanding
9,656,778

 
8,938,339

     Basic income per common share
0.48

 
0.14

 
 
 
 
Diluted income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
4,670

 
$
1,244

Weighted average common shares outstanding
9,656,778

 
8,938,339

     Outstanding options - based upon the two-class method
56,063

 
63,061

Weighted average diluted common shares outstanding
9,712,841

 
9,001,400

     Diluted income per common share
0.48

 
0.14

 
 
 
 

NOTE 5. SECURITIES

During the first quarter of fiscal 2018, the Company early adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Due to the early adoption of the ASU, the Company transferred $204.7 million of investment securities and $101.3 million of MBS from HTM to AFS during the first quarter of fiscal 2018. This change allows for enhanced balance sheet management and provides the opportunity for more liquidity, should it be needed.
The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale and held to maturity securities at December 31, 2017 and September 30, 2017 are presented below.
Available For Sale
 
 
 
 
 
 
 
At December 31, 2017
AMORTIZED
COST

 
GROSS
UNREALIZED
GAINS

 
GROSS
UNREALIZED
(LOSSES)

 
FAIR
VALUE

 
(Dollars in Thousands)
Debt securities
 
&