Edgar Filing: META FINANCIAL GROUP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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

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 August 7, 2018:
Common Stock, $.01 par value	13,059,722 shares
Nonvoting Common Stock, $.01 par value	0 Nonvoting shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents



PART I - FINANCIAL INFORMATION		2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Statements of Financial Condition as of June 30, 2018 and September 30, 2017	2

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2018 and 2017	3

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2018 and 2017	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2018 and 2017	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 4.	Controls and Procedures	63

PART II - OTHER INFORMATION		65

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	65

Item 6.	Exhibits	67

SIGNATURES		68

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	June 30, 2018			September 30, 2017
Cash and cash equivalents	$	71,276		$	1,267,586
Investment securities available for sale	1,351,538			1,106,977
Mortgage-backed securities available for sale	575,999			586,454
Investment securities held to maturity	216,160			449,840
Mortgage-backed securities held to maturity	8,218			113,689
Loans receivable	1,597,294			1,325,371
Allowance for loan losses	(21,950		)	(7,534		)
Federal Home Loan Bank Stock, at cost	7,446			61,123
Accrued interest receivable	17,825			19,380
Premises, furniture, and equipment, net	20,374			19,320
Bank-owned life insurance	86,655			84,702
Foreclosed real estate and repossessed assets	29,922			292
Goodwill	98,723			98,723
Intangible assets	46,098			52,178
Prepaid assets	23,211			28,392
Deferred taxes	23,025			9,101
Other assets	17,345			12,738

Total assets	$	4,169,159		$	5,228,332

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	2,637,987		$	2,454,057
Interest-bearing checking	103,065			67,294
Savings deposits	57,356			53,505
Money market deposits	45,115			48,758
Time certificates of deposit	57,151			123,637
Wholesale deposits	620,959			476,173
Total deposits	3,521,633			3,223,424
Short-term debt	27,290			1,404,534
Long-term debt	85,580			85,533
Accrued interest payable	3,705			2,280
Accrued expenses and other liabilities	87,038			78,065
Total liabilities	3,725,246			4,793,836

STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2018 and September 30, 2017, respectively	—			—
Common stock, $.01 par value; 90,000,000 and 15,000,000 shares authorized, 9,721,526 and 9,626,431 shares issued, 9,700,535 and 9,622,595 shares outstanding at June 30, 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 June 30, 2018 and September 30, 2017, respectively	—			—
Additional paid-in capital	267,804			258,336
Retained earnings	206,284			167,164
Accumulated other comprehensive (loss) income	(28,601		)	9,166
Treasury stock, at cost, 20,991 and 3,836 common shares at June 30, 2018 and September 30, 2017, respectively	(1,671		)	(266		)
Total stockholders’ equity	443,913			434,496

Total liabilities and stockholders’ equity	$	4,169,159		$	5,228,332

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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



	Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2018			2017
Interest and dividend income:
Loans receivable, including fees	$	19,056		$	14,089		$	53,344		$	37,540
Mortgage-backed securities	3,950			4,544			11,755			12,345
Other investments	11,098			10,228			33,234			29,269
	34,104			28,861			98,333			79,154
Interest expense:
Deposits	2,264			1,039			7,106			4,161
FHLB advances and other borrowings	3,429			2,879			9,215			6,251
	5,693			3,918			16,321			10,412

Net interest income	28,411			24,943			82,012			68,742

Provision for loan losses	5,315			1,240			24,726			10,732

Net interest income after provision for loan losses	23,096			23,703			57,286			58,010

Non-interest income:
Refund transfer product fees	7,358			5,785			41,353			38,448
Tax advance product fees	(46		)	(108		)	35,739			31,460
Card fees	22,807			23,052			74,910			68,013
Loan fees	1,111			982			3,445			3,034
Bank-owned life insurance	633			656			1,952			1,548
Deposit fees	1,134			190			2,964			508
(Loss) gain on sale of securities available-for-sale, net (Includes ($22) and $47 reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended June 30, 2018 and 2017, respectively and ($1,198) and ($1,331) for the nine months ended June 30, 2018 and 2017, respectively)	(22		)	47			(1,198		)	(1,331		)
Gain (loss) on foreclosed real estate	—			—			(19		)	7
Other income	250			216			766			652
Total non-interest income	33,225			30,820			159,912			142,339

Non-interest expense:
Compensation and benefits	24,439			22,193			78,951			66,809
Refund transfer product expense	1,694			1,623			11,665			11,852
Tax advance product expense	(19		)	72			1,736			3,239
Card processing	7,068			5,755			20,798			18,377
Occupancy and equipment	4,720			4,034			14,087			12,202
Legal and consulting	2,781			1,375			8,436			5,603
Marketing	416			381			1,637			1,461
Data processing	301			344			958			1,099
Intangible amortization expense	1,664			1,887			6,077			10,494
Other expense	5,988			4,555			17,247			14,782
Total non-interest expense	49,053			42,219			161,592			145,918


Income before income tax expense	7,268			12,304			55,606			54,431

Income tax expense (Includes ($6) and $18 reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2018 and 2017, respectively and ($335) and ($499) for the nine months ended June 30, 2018 and 2017, respectively)	476			2,517			12,708			11,258

Net income	$	6,792		$	9,787		$	42,898		$	43,173

Earnings per common share
Basic	$	0.70		$	1.05		$	4.43		$	4.69
Diluted	$	0.70		$	1.04		$	4.41		$	4.66

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)



	Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2018			2017
Net income	$	6,792		$	9,787		$	42,898		$	43,173

Other comprehensive (loss) income:
Change in net unrealized (loss) gain on securities	(9,905		)	11,902			(53,377		)	(25,398		)
Losses (gains) realized in net income	22			(47		)	1,198			1,331
	(9,883		)	11,855			(52,179		)	(24,067		)
LESS: Deferred income tax effect	(2,447		)	4,472			(14,412		)	(8,544		)
Total other comprehensive (loss) income	(7,436		)	7,383			(37,767		)	(15,523		)
Total comprehensive (loss) income	$	(644	)	$	17,170		$	5,131		$	27,650

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the Nine Months Ended June 30, 2018 and 2017

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



	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance, September 30, 2016	$	85	$	184,780		$	127,190		$	22,920		$	—		$	334,975

Adoption of Accounting Standards Update 2016-09	—		104			(104		)	—			—			—

Cash dividends declared on common stock ($0.39 per share)	—		—			(3,625		)	—			—			(3,625		)

Issuance of common shares due to exercise of stock options	—		529			—			—			—			529

Issuance of common shares due to restricted stock	4		—			—			—			—			4

Issuance of common shares due to ESOP	—		1,174			—			—			—			1,174

Issuance of common shares due to acquisition	5		37,291			—			—			—			37,296

Contingent consideration equity earnout due to acquisition	—		24,142			—			—			—			24,142

Shares repurchased for tax withholdings on stock compensation	—		(337		)	—			—			—			(337		)

Stock compensation	—		8,405			—			—			—			8,405

Net change in unrealized losses on securities, net of income taxes	—		—			—			(15,523		)	—			(15,523		)

Net income	—		—			43,173			—			—			43,173

Balance, June 30, 2017	$	94	$	256,088		$	166,634		$	7,397		$	—		$	430,213

Balance, September 30, 2017	$	96	$	258,336		$	167,164		$	9,166		$	(266	)	$	434,496

Cash dividends declared on common stock ($0.39 per share)	—		—			(3,778		)	—			—			(3,778		)

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		)	—			—			(1,405		)	(2,131		)

Stock compensation	—		8,441			—			—			—			8,441

Net change in unrealized losses on securities, net of income taxes	—		—			—			(37,767		)	—			(37,767		)

Net income	—		—			42,898			—			—			42,898

Balance, June 30, 2018	$	97	$	267,804		$	206,284		$	(28,601	)	$	(1,671	)	$	443,913

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended June 30,
(Dollars in Thousands)	2018			2017
Cash flows from operating activities:
Net income	$	42,898		$	43,173
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net	27,995			35,002
Stock-based compensation expense	8,441			8,405
Provision for loan losses	24,726			10,732
(Recovery) provision for deferred taxes	488			(2,914		)
Gain on other assets	(1		)	(21		)
Loss (gain) on sale of foreclosed real estate	19			(7		)
Loss on sale of securities available for sale, net	1,198			1,331
Net change in accrued interest receivable	1,555			(4,632		)
Fair value adjustment of foreclosed real estate	29			—
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	(1,952		)	(1,549		)
Net change in other assets	577			(24,179		)
Net change in accrued interest payable	1,425			1,588
Excess contingent consideration paid	—			(248		)
Net change in accrued expenses and other liabilities	4,879			16,080
Net cash provided by operating activities	112,277			82,761

Cash flows from investing activities:
Purchase of securities available-for-sale	(418,699		)	(782,169		)
Proceeds from sales of securities available-for-sale	312,863			317,099
Proceeds from maturities and principal repayments of securities available for sale	115,878			86,516
Purchase of securities held to maturity	—			(932		)
Proceeds from maturities and principal repayments of securities held to maturity	29,752			34,242
Purchase of bank owned life insurance	—			(25,000		)
Loans purchased	(95,169		)	(136,172		)
Loans sold	19,961			2,141
Net change in loans receivable	(238,679		)	(168,537		)
Proceeds from sales of foreclosed real estate or other assets	244			97
Net cash paid for acquisitions	—			(29,425		)
Federal Home Loan Bank stock purchases	(713,444		)	(468,291		)
Federal Home Loan Bank stock redemptions	767,120			499,480
Proceeds from the sale of premises and equipment	—			57
Purchase of premises and equipment	(5,176		)	(5,699		)
Net cash used in investing activities	(225,349		)	(676,593		)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits	219,909			320,512
Net change in time deposits	(66,486		)	(42,232		)
Net change in wholesale deposits	144,786			444,857
Net change in FHLB and other borrowings	(415,000		)	(100,000		)
Net change in federal funds	(963,000		)	(717,000		)
Net change in securities sold under agreements to repurchase	754			(938		)
Principal payments on capital lease obligations	(46		)	(59		)
Cash dividends paid	(3,778		)	(3,625		)
Purchase of shares by ESOP	1,606			1,174
Issuance of restricted stock	1			4
Proceeds from exercise of stock options and issuance of common stock	147			529
Shares repurchased for tax withholdings on stock compensation	(2,131		)	(337		)
Contingent consideration - cash paid	—			(17,253		)
Net cash used in financing activities	(1,083,238		)	(114,368		)

Net change in cash and cash equivalents	(1,196,310		)	(708,200		)

Cash and cash equivalents at beginning of period	1,267,586			773,830
Cash and cash equivalents at end of period	$	71,276		$	65,630

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Con't.)



	Nine Months Ended June 30,
	2018			2017
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	17,746		$	8,824
Income taxes	8,211			19,947
Franchise taxes	199			156
Other taxes	129			289

Supplemental schedule of non-cash investing activities:
Loans transferred to foreclosed real estate and repossessed assets	$	(29,922	)	$	(378	)
Securities transferred from held to maturity to available for sale	(306,000		)	—
Contingent consideration - equity	—			(24,142		)
Stock issued for acquisition	—			(37,296		)
Purchase of available-for-sale securities accrued, not paid	(4,117		)	—

See Notes to Condensed Consolidated Financial Statements.

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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” 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 nine month periods ended June 30, 2018 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2018.

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 generally 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.

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.

Loans, or portions thereof, are charged off when collection of principal becomes doubtful. Generally, 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 the purchased student loan portfolios, 120 days or more for consumer credit products, and 90 days or more for community banking loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired.

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Loans receivable at June 30, 2018 and September 30, 2017 were as follows:



	June 30, 2018			September 30, 2017
	(Dollars in Thousands)
1-4 Family Real Estate	$	214,754		$	196,706
Commercial and Multi-Family Real Estate	716,495			585,510
Agricultural Real Estate	35,475			61,800
Consumer	258,158			163,004
Commercial Operating	46,069			35,759
Agricultural Operating	24,621			33,594
Commercial Insurance Premium Finance	303,603			250,459
Total Loans Receivable	1,599,175			1,326,832

Allowance for Loan Losses	(21,950		)	(7,534		)
Net Deferred Loan Origination Fees	(1,881		)	(1,461		)
Total Loans Receivable, Net	$	1,575,344		$	1,317,837

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Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and nine months ended June 30, 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 June 30, 2018
Allowance for loan losses:
Beginning balance	$	883		$	3,904	$	146		$	18,074		$	1,716		$	619		$	746		$	990	$	27,078
Provision (recovery) for loan losses	(231		)	711		51			4,476			(26		)	(102		)	304			132		5,315
Charge offs	—			—		—			(9,000		)	(1,507		)	—			(243		)	—		(10,750		)
Recoveries	—			—		—			—			1			207			99			—		307
Ending balance	$	652		$	4,615	$	197		$	13,550		$	184		$	724		$	906		$	1,122	$	21,950

Nine Months Ended June 30, 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	(123		)	1,945		(1,193		)	22,174			1,480			(721		)	569			595		24,726
Charge offs	(31		)	—		—			(9,000		)	(1,507		)	—			(711		)	—		(11,249		)
Recoveries	3			—		—			370			53			261			252			—		939
Ending balance	$	652		$	4,615	$	197		$	13,550		$	184		$	724		$	906		$	1,122	$	21,950

Ending balance: individually evaluated for impairment	25			—		—			—			—			—			—			—		25
Ending balance: collectively evaluated for impairment	627			4,615		197			13,550			184			724			906			1,122		21,925
Total	$	652		$	4,615	$	197		$	13,550		$	184		$	724		$	906		$	1,122	$	21,950

Loans:
Ending balance: individually evaluated for impairment	229			409		—			47			—			2,135			—			—		2,820
Ending balance: collectively evaluated for impairment	214,525			716,086		35,475			258,111			46,069			22,486			303,603			—		1,596,355
Total	$	214,754		$	716,495	$	35,475		$	258,158		$	46,069		$	24,621		$	303,603		$	—	$	1,599,175

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 June 30, 2017
Allowance for loan losses:
Beginning balance	$	296	$	1,742		$	1,524		$	7,706		$	767		$	1,349		$	597		$	621		$	14,602
Provision (recovery) for loan losses	510		386			(80		)	142			249			(44		)	187			(110		)	1,240
Charge offs	—		—			—			(1		)	(799		)	—			(94		)	—			(894		)
Recoveries	—		—			—			—			5			—			15			—			20
Ending balance	$	806	$	2,128		$	1,444		$	7,847		$	222		$	1,305		$	705		$	511		$	14,968

Nine Months Ended June 30, 2017

Allowance for loan losses:
Beginning balance	$	654	$	2,198		$	142		$	51		$	117		$	1,332		$	588		$	553		$	5,635
Provision (recovery) for loan losses	152		(70		)	1,302			7,773			1,244			(39		)	412			(42		)	10,732
Charge offs	—		—			—			(1		)	(1,149		)	—			(352		)	—			(1,502		)
Recoveries	—		—			—			24			10			12			57			—			103
Ending balance	$	806	$	2,128		$	1,444		$	7,847		$	222		$	1,305		$	705		$	511		$	14,968

Ending balance: individually evaluated for impairment	—		—			—			—			—			—			—			—			—
Ending balance: collectively evaluated for impairment	806		2,128			1,444			7,847			222			1,305			705			511			14,968
Total	$	806	$	2,128		$	1,444		$	7,847		$	222		$	1,305		$	705		$	511		$	14,968

Loans:
Ending balance: individually evaluated for impairment	133		1,301			—			—			—			—			—			—			1,434
Ending balance: collectively evaluated for impairment	190,598		492,558			62,521			172,151			39,076			35,471			231,587			—			1,223,962
Total	$	190,731	$	493,859		$	62,521		$	172,151		$	39,076		$	35,471		$	231,587		$	—		$	1,225,396

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.

Table of Contents

The asset classification of loans at June 30, 2018 and September 30, 2017 were as follows:



June 30, 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	$	214,176	$	705,347	$	27,456	$	258,090	$	46,069	$	15,210	$	302,022	$	1,568,370
Watch	123		10,953		—		68		—		2,487		1,581		15,212
Special Mention	241		195		4,222		—		—		535		—		5,193
Substandard	214		—		3,797		—		—		6,389		—		10,400
Doubtful	—		—		—		—		—		—		—		—
	$	214,754	$	716,495	$	35,475	$	258,158	$	46,069	$	24,621	$	303,603	$	1,599,175



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