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 March 31, 2018

☐  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

metalogoa07.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 May 4, 2018:
Common Stock, $.01 par value
9,699,591 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 Data)
 
(Unaudited)
 
 
ASSETS
March 31, 2018
 
September 30, 2017
Cash and cash equivalents
$
107,563

 
$
1,267,586

Investment securities available for sale
1,418,862

 
1,106,977

Mortgage-backed securities available for sale
654,890

 
586,454

Investment securities held to maturity
226,618

 
449,840

Mortgage-backed securities held to maturity
8,393

 
113,689

Loans receivable
1,517,616

 
1,325,371

Allowance for loan losses
(27,078
)
 
(7,534
)
Federal Home Loan Bank Stock, at cost
17,846

 
61,123

Accrued interest receivable
17,604

 
19,380

Premises, furniture, and equipment, net
20,278

 
19,320

Bank-owned life insurance
86,021

 
84,702

Foreclosed real estate and repossessed assets
30,050

 
292

Goodwill
98,723

 
98,723

Intangible assets
47,724

 
52,178

Prepaid assets
26,342

 
28,392

Deferred taxes
20,939

 
9,101

Other assets
29,302

 
12,738

 


 
 
        Total assets
$
4,301,693

 
$
5,228,332

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
 
 
 
 
LIABILITIES
 

 
 
Non-interest-bearing checking
$
2,850,886

 
$
2,454,057

Interest-bearing checking
123,397

 
67,294

Savings deposits
65,345

 
53,505

Money market deposits
48,070

 
48,758

Time certificates of deposit
71,712

 
123,637

Wholesale deposits
181,087

 
476,173

        Total deposits
3,340,497

 
3,223,424

Short-term debt
315,777

 
1,404,534

Long-term debt
85,572

 
85,533

Accrued interest payable
1,315

 
2,280

Accrued expenses and other liabilities
114,829

 
78,065

          Total liabilities
3,857,990

 
4,793,836

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2018 and September 30, 2017, respectively
—

 
—

Common stock, $.01 par value; 30,000,000 and 15,000,000 shares authorized, 9,720,536 and 9,626,431 shares issued, 9,699,591 and 9,622,595 shares outstanding at March 31, 2018 and September 30, 2017, respectively
97

 
96

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2018 and September 30, 2017, respectively
—

 
—

Additional paid-in capital
265,685

 
258,336

Retained earnings
200,753

 
167,164

Accumulated other comprehensive (loss) income
(21,166
)
 
9,166

Treasury stock, at cost, 20,945 and 3,836 common shares at March 31, 2018 and September 30, 2017, respectively
(1,666
)
 
(266
)
         Total stockholders’ equity
443,703

 
434,496

 
 
 
 
         Total liabilities and stockholders’ equity
$
4,301,693

 
$
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 March 31,
 
Six Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 
 
 
 
 
 
 
Loans receivable, including fees
$
17,844

 
$
12,773

 
$
34,287

 
$
23,451

Mortgage-backed securities
4,047

 
4,481

 
7,805

 
7,801

Other investments
11,480

 
10,464

 
22,136

 
19,041

 
33,371

 
27,718

 
64,228

 
50,293

Interest expense:
 

 
 

 
 

 
 

Deposits
2,957

 
2,184

 
4,842

 
3,122

FHLB advances and other borrowings
3,009

 
1,568

 
5,785

 
3,372

 
5,966

 
3,752

 
10,627

 
6,494

 
 
 
 
 
 
 
 
Net interest income
27,405

 
23,966

 
53,601

 
43,799

 
 
 
 
 
 
 
 
Provision for loan losses
18,343

 
8,649

 
19,411

 
9,492

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
9,062

 
15,317

 
34,190

 
34,307

 
 
 
 
 
 
 
 
Non-interest income:
 

 
 

 
 

 
 

Refund transfer product fees
33,803

 
32,487

 
33,995

 
32,663

Tax advance product fees
33,838

 
31,119

 
35,785

 
31,568

Card fees
26,856

 
26,547

 
52,103

 
44,961

Loan fees
1,042

 
1,182

 
2,334

 
2,052

Bank-owned life insurance
650

 
444

 
1,319

 
892

Deposit fees
982

 
168

 
1,830

 
318

Loss on sale of securities available-for-sale, net (Includes ($166) and ($144) reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended March 31, 2018 and 2017, respectively and ($1,176) and ($1,378) for the six months ended March 31, 2018 and 2017, respectively)
(166
)
 
(144
)
 
(1,176
)
 
(1,378
)
Gain (loss) on foreclosed real estate
—

 
7

 
(19
)
 
7

Other income
414

 
360

 
516

 
436

Total non-interest income
97,419

 
92,170

 
126,687

 
111,519

 
 
 
 
 
 
 
 
Non-interest expense:
 

 
 

 
 

 
 

Compensation and benefits
32,172

 
26,766

 
54,512

 
44,616

Refund transfer product expense
9,871

 
10,178

 
9,972

 
9,969

Tax advance product expense
1,474

 
3,140

 
1,754

 
3,427

Card processing
7,190

 
7,043

 
13,730

 
12,622

Occupancy and equipment
4,477

 
4,191

 
9,367

 
8,168

Legal and consulting
3,239

 
1,505

 
5,655

 
4,228

Marketing
668

 
610

 
1,221

 
1,080

Data processing
243

 
392

 
657

 
755

Intangible amortization expense
2,731

 
7,082

 
4,412

 
8,607

Other expense
6,432

 
6,039

 
11,259

 
10,227

Total non-interest expense
68,497

 
66,946

 
112,539

 
103,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
37,984

 
40,541

 
48,338

 
42,127

 
 
 
 
 
 
 
 
Income tax expense (Includes ($46) and ($54) reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2018 and 2017, respectively and ($329) and ($517) for the six months ended March 31, 2018 and 2017, respectively)
6,548

 
8,399

 
12,232

 
8,741

 
 
 
 
 
 
 
 
Net income
$
31,436

 
$
32,142

 
$
36,106

 
$
33,386

 
 
 
 
 
 
 
 
Earnings per common share
 

 
 

 
 

 
 

Basic
$
3.25

 
$
3.44

 
$
3.73

 
$
3.65

Diluted
$
3.23

 
$
3.42

 
$
3.72

 
$
3.63

See Notes to Condensed Consolidated Financial Statements.


3
Table of Contents

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2018
 
2017
 
2018
 
2017
Net income
$
31,436

 
$
32,142

 
$
36,106

 
$
33,386

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in net unrealized gain (loss) on securities
(35,993
)
 
7,969

 
(43,472
)
 
(37,300
)
Losses realized in net income
166

 
144

 
1,176

 
1,378

 
(35,827
)
 
8,113

 
(42,296
)
 
(35,922
)
LESS: Deferred income tax effect
(8,879
)
 
3,076

 
(11,964
)
 
(13,016
)
Total other comprehensive income (loss)
(26,948
)
 
5,037

 
(30,332
)
 
(22,906
)
Total comprehensive income
$
4,488

 
$
37,179

 
$
5,774

 
$
10,480

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 Six Months Ended March 31, 2018 and 2017
(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 ($0.26 per share)
—

 
—

 
(2,409
)
 
—

 
—

 
(2,409
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP
4

 
6,767

 
—

 
—

 
—

 
6,771

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to acquisition
5

 
37,291

 
—

 
—

 
—

 
37,296

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration equity earnout due to SCS acquisition
—

 
24,142

 
—

 
—

 
—

 
24,142

 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation
—

 
493

 
—

 
—

 
—

 
493

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

 
—

 
—

 
(22,906
)
 
—

 
(22,906
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
33,386

 
—

 
—

 
33,386

 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
$
94

 
$
253,473

 
$
158,167

 
$
14

 
$
—

 
$
411,748

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
$
96

 
$
258,336

 
$
167,164

 
$
9,166

 
$
(266
)
 
$
434,496

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.26 per share)
—

 
—

 
(2,517
)
 
—

 
—

 
(2,517
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to exercise of stock options
—

 
147

 
—

 
—

 
—

 
147

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to restricted stock
1

 
—

 
—

 
—

 
—

 
1

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to ESOP
—

 
1,606

 
—

 
—

 
—

 
1,606

 
 
 
 
 
 
 
 
 
 
 
 
Shares repurchased for tax withholdings on stock compensation
—

 
(726
)
 
—

 
—

 
(1,400
)
 
(2,126
)
 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation
—

 
6,322

 
—

 
—

 
—

 
6,322

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

 
—

 
—

 
(30,332
)
 
—

 
(30,332
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
36,106

 
—

 
—

 
36,106

 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2018
$
97

 
$
265,685

 
$
200,753

 
$
(21,166
)
 
$
(1,666
)
 
$
443,703

See Notes to Condensed Consolidated Financial Statements.


5
Table of Contents


META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended March 31,
(Dollars in Thousands)
2018
 
2017 (1)
Cash flows from operating activities:
 
 
 
Net income
$
36,106

 
$
33,386

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

 
 

Depreciation, amortization and accretion, net
19,183

 
24,843

Stock-based compensation expense
6,322

 
493

Provision for loan losses
19,411

 
9,492

Provision (recovery) for deferred taxes
126

 
(2,172
)
(Gain) on other assets
(15
)
 
(14
)
(Gain) loss on sale of foreclosed real estate
19

 
(7
)
Loss on sale of securities available for sale, net
1,176

 
1,378

Net change in accrued interest receivable
1,776

 
(3,703
)
Fair value adjustment of foreclosed real estate
23

 
—

Originations of loans held for sale
—

 
(685,934
)
Proceeds from sales of loans held for sale
—

 
685,934

Change in bank-owned life insurance value
(1,319
)
 
(892
)
Net change in other assets
(14,472
)
 
(40,079
)
Net change in accrued interest payable
(965
)
 
(153
)
Net change in accrued expenses and other liabilities
36,779

 
47,933

Net cash provided by operating activities
104,150

 
70,505

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(323,995
)
 
(577,967
)
Proceeds from sales of securities available-for-sale
126,373

 
113,647

Proceeds from maturities and principal repayments of securities available for sale
71,652

 
59,383

Purchase of securities held to maturity
—

 
(931
)
Proceeds from maturities and principal repayments of securities held to maturity
19,863

 
21,112

Loans purchased
(88,986
)
 
(136,172
)
Loans sold
9,582

 
11,205

Net change in loans receivable
(143,766
)
 
(102,576
)
Proceeds from sales of foreclosed real estate or other assets
122

 
83

Net cash paid for acquisitions
—

 
(29,425
)
Federal Home Loan Bank stock purchases
(477,604
)
 
(243,971
)
Federal Home Loan Bank stock redemptions
520,880

 
266,440

Proceeds from the sale of premises and equipment
—

 
58

Purchase of premises and equipment
(3,689
)
 
(4,210
)
Net cash used in investing activities
(289,568
)
 
(623,324
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in checking, savings, and money market deposits
464,084

 
485,048

Net change in time deposits
(51,925
)
 
(64,822
)
Net change in wholesale deposits
(295,086
)
 
21,923

Net change in FHLB and other borrowings
(385,000
)
 
(100,000
)
Net change in federal funds
(703,000
)
 
(499,000
)
Net change in securities sold under agreements to repurchase
(758
)
 
(1,191
)
Principal payments on capital lease obligations
(31
)
 
(38
)
Cash dividends paid
(2,517
)
 
(2,409
)
Purchase of shares by ESOP
1,606

 
—

Issuance of restricted stock
1

 
—

Proceeds from exercise of stock options and issuance of common stock
147

 
6,771

Shares repurchased for tax withholdings on stock compensation
(2,126
)
 
—

Net cash used in financing activities
(974,605
)
 
(153,718
)
 
 
 
 
Net change in cash and cash equivalents
(1,160,023
)
 
(706,537
)
 
 
 
 
Cash and cash equivalents at beginning of period
1,267,586

 
773,830

Cash and cash equivalents at end of period
$
107,563

 
$
67,293

 
 
 
 





6
Table of Contents





META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Con't.)
 
Six Months Ended March 31,
 
2018
 
2017
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
9,662

 
$
6,341

Income taxes
3,966

 
2,371

Franchise taxes
66

 
95

Other taxes
153

 
260

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Loans transferred to foreclosed real estate and repossessed assets
$
(29,922
)
 
$
—

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

Contingent consideration - cash
$
—

 
$
(17,252
)
Contingent consideration - equity
—

 
(24,142
)
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- and six-month periods ended March 31, 2018 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 March 31, 2018 and March 31, 2017.

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's 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 March 31, 2018 and September 30, 2017 were as follows:
 
March 31, 2018
 
September 30, 2017
 
(Dollars in Thousands)
1-4 Family Real Estate
$
205,994

 
$
196,706

Commercial and Multi-Family Real Estate
685,457

 
585,510

Agricultural Real Estate
36,460

 
61,800

Consumer
281,371

 
163,004

Commercial Operating
47,461

 
35,759

Agricultural Operating
22,313

 
33,594

Commercial Insurance Premium Finance
240,640

 
250,459

Total Loans Receivable
1,519,696

 
1,326,832

 
 
 
 
Allowance for Loan Losses
(27,078
)
 
(7,534
)
Net Deferred Loan Origination Fees
(2,080
)
 
(1,461
)
Total Loans Receivable, Net
$
1,490,538

 
$
1,317,837





9
Table of Contents

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and six months ended March 31, 2018 and 2017 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 March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
654

 
$
3,034

 
$
1,180

 
$
670

 
$
894

 
$
804

 
$
725

 
$
901

 
$
8,862

Provision (recovery) for loan losses
226

 
870

 
(1,034
)
 
17,401

 
816

 
(239
)
 
214

 
89

 
18,343

Charge offs
—

 
—

 
—

 
—

 
—

 
—

 
(339
)
 
—

 
(339
)
Recoveries
3

 
—

 
—

 
3

 
6

 
54

 
146

 
—

 
212

Ending balance
$
883

 
$
3,904

 
$
146

 
$
18,074

 
$
1,716

 
$
619

 
$
746

 
$
990

 
$
27,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
803

 
$
2,670

 
$
1,390

 
$
6

 
$
158

 
$
1,184

 
$
796

 
$
527

 
$
7,534

Provision (recovery) for loan
losses
108

 
1,234

 
(1,244
)
 
17,698

 
1,506

 
(619
)
 
265

 
463

 
19,411

Charge offs
(31
)
 
—

 
—

 
—

 
—

 
—

 
(468
)
 
—

 
(499
)
Recoveries
3

 
—

 
—

 
370

 
52

 
54

 
153

 
—

 
632

Ending balance
$
883

 
$
3,904

 
$
146

 
$
18,074

 
$
1,716

 
$
619

 
$
746

 
$
990

 
$
27,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
25

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
25

Ending balance: collectively evaluated for impairment
858

 
3,904

 
146

 
18,074

 
1,716

 
619

 
746

 
990

 
27,053

Total
$
883

 
$
3,904

 
$
146

 
$
18,074

 
$
1,716

 
$
619

 
$
746

 
$
990

 
$
27,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
230

 
702

 
—

 
144

 
—

 
2,937

 
—

 
—

 
4,013

Ending balance: collectively
evaluated for impairment
205,764

 
684,755

 
36,460

 
281,227

 
47,461

 
19,376

 
240,640

 
—

 
1,515,683

Total
$
205,994

 
$
685,457

 
$
36,460

 
$
281,371

 
$
47,461

 
$
22,313

 
$
240,640

 
$
—

 
$
1,519,696


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 March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
654

 
$
1,912

 
$
476

 
$
47

 
$
813

 
$
1,341

 
$
594

 
$
578

 
$
6,415

Provision (recovery) for loan losses
(358
)
 
(170
)
 
1,048

 
7,658

 
304

 
8

 
115

 
43

 
8,648

Charge offs
—

 
—

 
—

 
—

 
(350
)
 
—

 
(140
)
 
—

 
(490
)
Recoveries
—

 
—

 
—

 
1

 
—

 
—

 
28

 
—

 
29

Ending balance
$
296

 
$
1,742

 
$
1,524

 
$
7,706

 
$
767

 
$
1,349

 
$
597

 
$
621

 
$
14,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
654

 
$
2,198

 
$
142

 
$
51

 
$
117

 
$
1,332

 
$
588

 
$
553

 
$
5,635

Provision (recovery) for loan
losses
(358
)
 
(456
)
 
1,382

 
7,631

 
995

 
4

 
226

 
68

 
9,492

Charge offs
—

 
—

 
—

 
—

 
(350
)
 
—

 
(259
)
 
—

 
(609
)
Recoveries
—

 
—

 
—

 
24

 
5

 
13

 
42

 
—

 
84

Ending balance
$
296

 
$
1,742

 
$
1,524

 
$
7,706

 
$
767

 
$
1,349

 
$
597

 
$
621

 
$
14,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually
evaluated for impairment
12

 
—

 
—

 
—

 
53

 
—

 
—

 
—

 
65

Ending balance: collectively
evaluated for impairment
284

 
1,742

 
1,524

 
7,706

 
714

 
1,349

 
597

 
621

 
14,537

Total
$
296

 
$
1,742

 
$
1,524

 
$
7,706

 
$
767

 
$
1,349

 
$
597

 
$
621

 
$
14,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
248

 
1,144

 
582

 
—

 
302

 
1,072

 
—

 
—

 
3,348

Ending balance: collectively
evaluated for impairment
178,062

 
471,914

 
61,840

 
182,156

 
33,592

 
34,421

 
187,049

 
—

 
1,149,034

Total
$
178,310

 
$
473,058

 
$
62,422

 
$
182,156

 
$
33,894

 
$
35,493

 
$
187,049

 
$
—

 
$
1,152,382



11
Table of Contents

Federal regulations promulgated by the Office of the Comptroller of the Currency (the "OCC"), which is the primary federal regulator of the Company's wholly-owned subsidiary, MetaBank (the "Bank"), 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 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 March 31, 2018 and September 30, 2017 were as follows:

March 31, 2018
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
$
204,610

 
$
674,925

 
$
30,386

 
$
281,175

 
$
47,190

 
$
14,319

 
$
239,054

 
$
1,491,659

Watch
927

 
10,044

 
—

 
100

 
271

 
2,389

 
1,586

 
15,317

Special Mention
243

 
197

 
2,879

 
—

 
—

 
—

 
—

 
3,319

Substandard
214

 
291

 
3,195

 
96

 
—

 
5,605

 
—

 
9,401

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
205,994

 
$
685,457

 
$
36,460

 
$
281,371

 
$
47,461

 
$
22,313

 
$
240,640

 
$
1,519,696


September 30, 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
$
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 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 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, 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.

The Bank's purchased student loan portfolios are seasoned, floating rate, private portfolios that are serviced by ReliaMax Lending Services LLC and insured by ReliaMax Surety Company. The portfolio purchased during the first quarter of fiscal year 2018 is indexed to the one-month LIBOR, while the portfolio purchased in the first quarter of fiscal year 2017 is 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.

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.

15
Table of Contents


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 nationwide 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 t