UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction 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 (IRS Employer Identification No.)
incorporation or organization)
121 East Fifth, Storm Lake, Iowa 50588
--------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
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 7, 2005:
Common Stock, $.01 par value 2,492,860 Common Shares
Transitional Small Business Disclosure Format: Yes |_|; No |X|
META FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page
No.
----
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at December 31, 2004 and September 30, 2004 3
Consolidated Statements of Income for the
Three Months Ended December 31, 2004 and 2003 4
Consolidated Statements of Comprehensive Income
for the Three Months Ended December 31, 2004 and 2003 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended December 31, 2004 6
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2004 and 2003 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 21
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 22
Item 3. Defaults on Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
ASSETS December 31, 2004 September 30, 2004
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 2,003,264 $ 1,591,982
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 7,117,716 7,344,587
----------------------------------
Total cash and cash equivalents 9,120,980 8,936,569
Securities available for sale, amortized cost
of $317,851,514 at December 31, 2004 and
$324,500,510 at September 30, 2004 314,709,190 322,523,577
Loans receivable - net of allowance for loan losses of
of $5,540,473 at December 31, 2004 and $5,370,994
at September 30, 2004 438,698,886 404,051,379
Loans held for sale 50,000 270,000
Federal Home Loan Bank stock, at cost 11,177,300 11,052,700
Accrued interest receivable 3,861,721 3,849,215
Premises and equipment, net 11,806,891 11,690,437
Foreclosed real estate, net -- --
Bank owned life insurance 11,960,339 11,847,420
Other assets 7,034,793 6,577,227
----------------------------------
Total assets $ 808,420,100 $ 780,798,524
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits $ 27,796,678 $ 19,537,370
Savings, NOW and money market demand deposits 174,678,808 177,287,972
Time certificates of deposit 287,059,369 264,755,535
----------------------------------
Total deposits 489,534,856 461,580,877
Advances from Federal Home Loan Bank 229,300,000 226,250,000
Securities sold under agreements to repurchase 29,772,698 32,549,377
Subordinated Debentures 10,310,000 10,310,000
Advances from borrowers for taxes and insurance 257,994 216,331
Accrued interest payable 528,463 473,426
Accrued expenses and other liabilities 2,394,205 2,144,248
----------------------------------
Total liabilities 762,098,216 733,524,259
----------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value; 5,200,000 shares authorized,
2,957,999 shares issued, 2,492,860 and 2,491,025 shares outstanding
at December 31, 2004 and September 30, 2004, respectively 29,580 29,580
Additional paid-in capital 20,662,110 20,678,644
Retained earnings - substantially restricted 36,876,128 36,758,258
Accumulated other comprehensive income (1,977,911) (1,240,338)
Unearned Employee Stock Ownership Plan shares (750,318) (394,766)
Treasury stock, 465,139 and 466,974 common shares, at cost,
at December 31, 2004 and September 30, 2004 respectively (8,517,705) (8,557,113)
----------------------------------
Total shareholders' equity 46,321,884 47,274,265
----------------------------------
Total liabilities and shareholders' equity $ 808,420,100 $ 780,798,524
==================================
See Notes to Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
2004 2003
- --------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $6,760,835 $5,818,757
Securities available for sale 2,941,112 3,151,741
Dividends on Federal Home Loan Bank stock 82,744 83,209
-------------------------
9,784,691 9,053,707
-------------------------
Interest Expense:
Deposits 2,685,172 2,414,297
FHLB advances and other borrowings 2,412,502 2,171,612
-------------------------
5,097,674 4,585,909
-------------------------
Net interest income 4,687,017 4,467,798
Provision for loan losses 177,000 101,000
-------------------------
Net interest income after provision for loan losses 4,510,017 4,366,798
-------------------------
Noninterest income:
Deposit service charges and other fees 329,034 334,574
Gain on sales of loans, net 35,742 88,720
Bank owned life insurance 126,645 160,398
Brokerage commissions -- 39,576
Other income 120,163 51,530
-------------------------
Total noninterest income 611,584 674,798
-------------------------
Noninterest expense:
Employee compensation and benefits 2,910,389 2,262,737
Occupancy and equipment expense 731,610 534,851
Deposit insurance premium 19,621 16,226
Data processing expense 183,676 179,923
Other expense 640,467 566,191
-------------------------
Total noninterest expense 4,485,763 3,559,928
-------------------------
Net income before income tax expense 635,838 1,481,668
Income tax expense 193,896 504,726
-------------------------
Net income $ 441,942 $ 976,942
=========================
Earnings per common share:
Basic $ 0.18 $ 0.39
=========================
Diluted 0.18 0.39
=========================
4
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended
December 31,
2004 2003
----------- -----------
Net income $ 441,942 $ 976,942
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (1,174,667) 2,262,061
Deferred income tax expense (benefit) (437,094) 841,712
----------- -----------
Total other comprehensive income (loss) (737,573) 1,420,349
----------- -----------
Total comprehensive income (loss) $ (295,631) $ 2,397,291
=========== ===========
5
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 2004
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income (Loss),
Stock Capital Earnings Net of Tax
- -----------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 $ 29,580 $ 20,678,644 $ 36,758,258 $ (1,240,338)
Cash dividends declared on common
stock ($.13 per share) -- -- (324,072) --
Purchase of 1,000 common shares of treasury
stock -- -- -- --
Issuance of 2,835 common shares from
treasury stock due to exercise of stock
options -- (27,219) -- --
Purchase 18,500 common shares for ESOP -- -- -- --
3,300 common shares committed to be
released under the ESOP -- 10,685 -- --
Change in net unrealized gains and losses on
securities available for sale, net of
effect of income taxes of ($437,094) -- -- -- (737,573)
Net income for three months ended
December 31, 2004 -- -- 441,942 --
-----------------------------------------------------------
Balance, December 31, 2004 $ 29,580 $ 20,662,110 $ 36,876,128 $ (1,977,911)
===========================================================
Unearned
Employee
Stock Total
Ownership Treasury Shareholders'
Plan Shares Stock Equity
- -----------------------------------------------------------------------------------------------
Balance, September 30, 2004 $ (394,766) $ (8,557,113) $ 47,274,265
Cash dividends declared on common
stock ($.13 per share) -- -- (324,072)
Purchase of 1,000 common shares of treasury
stock -- (25,655) (25,655)
Issuance of 2,835 common shares from
treasury stock due to exercise of stock
options -- 65,063 37,844
Purchase 18,500 common shares for ESOP (423,400) -- (423,400)
3,300 common shares committed to be
released under the ESOP 67,848 -- 78,533
Change in net unrealized gains and losses on
securities available for sale, net of
effect of income taxes of ($437,094) -- -- (737,573)
Net income for three months ended
December 31, 2004 -- -- 441,942
----------------------------------------------
Balance, December 31, 2004 $ (750,318) $ (8,517,705) $ 46,321,884
==============================================
6
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from operating activities:
Net income $ 441,942 $ 976,942
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net 1,005,284 1,271,537
Provision for loan losses 177,000 101,000
Gain on sales of foreclosed real estate, net -- (2,013)
Proceeds from sales of loans held for sale 2,332,355 6,025,078
Originations of loans held for sale (2,112,355) (5,643,368)
Net change in accrued interest receivable (12,506) 356,638
Net change in other assets (133,389) 2,340
Net change in accrued interest payable 55,037 (79,096)
Net change in accrued expenses and other liabilities 249,957 334,705
--------------------------------
Net cash provided by operating activities 2,003,325 3,343,763
Cash flow from investing activities:
Purchase of securities available for sale (15,459,228) (15,262,500)
Proceeds from maturities and principal repayments of
securities available for sale 21,452,368 26,998,771
Net change in loans receivable (27,430,666) (771,310)
Loans purchased (7,442,015) (16,571,299)
Proceeds from sales of foreclosed real estate 2,500 27,647
Purchase of shares by ESOP (423,400) --
Purchase of FHLB stock (124,600) (79,700)
Purchase of premises and equipment (350,953) (134,252)
--------------------------------
Net cash used in investing activities (29,775,994) (5,792,643)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 5,650,145 19,464,977
Net change in other time deposits 22,303,834 4,093,282
Proceeds from advances from Federal Home Loan Bank 854,200,000 590,515,000
Repayments of advances from Federal Home Loan Bank (851,150,000) (595,126,450)
Net change in securities sold under agreements to repurchase (2,776,679) (11,622,708)
Net change in advances from borrowers for taxes and insurance 41,663 4,430
Cash dividends paid (324,072) (325,860)
Proceeds from exercise of stock options 37,844 582,555
Purchase of treasury stock (25,655) (522,572)
--------------------------------
Net cash from financing activities 27,957,080 7,062,654
--------------------------------
Net change in cash and cash equivalents 184,411 4,613,774
Cash and cash equivalents at beginning of period 8,936,569 9,756,815
--------------------------------
Cash and cash equivalents at end of period $ 9,120,980 $ 14,370,589
================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 5,042,637 $ 4,665,005
Income taxes 40,076 10,500
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 2,500 $ 8,389
7
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Meta Financial Group, Inc., formerly
First Midwest Financial, Inc., ("Meta Group" or the "Company") and its
consolidated subsidiaries, MetaBank, MetaBank West Central ("MetaBank
WC"), Meta Trust Company ("Meta Trust"), First Services Financial Limited
and Brookings Service Corporation, for interim reporting are consistent
with the accounting policies followed for annual financial reporting. All
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the periods reported have been included in
the accompanying unaudited consolidated financial statements, and all such
adjustments are of a normal recurring nature. The accompanying financial
statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances and should be read in
conjunction with the Company's consolidated financial statements, and
notes thereto, for the year ended September 30, 2004.
2. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
under stock options.
A reconciliation of the numerators and denominators used in the basic
earnings per common share and the diluted earnings per common share
computations for the three months ended December 31, 2004 and 2003 is
presented below.
Three Months Ended
December 31,
------------
2004 2003
----------- -----------
Basic Earnings Per Common Share:
Numerator:
Net Income $ 441,942 $ 976,942
=========== ===========
Denominator:
Weighted average common shares
Outstanding 2,491,544 2,501,845
Less: Weighted average unallocated
ESOP shares (31,875) (22,263)
----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,459,669 2,479,582
=========== ===========
Basic earnings per common share $ 0.18 $ 0.39
=========== ===========
8
Three Months Ended
December 31,
------------
2004 2003
----------- -----------
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 441,942 $ 976,942
=========== ===========
Denominator:
Weighted average common shares
outstanding for basic earnings per
common share 2,459,669 2,479,582
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 62,595 54,778
----------- -----------
Weighted average common and
dilutive potential common shares
Outstanding 2,522,264 2,534,360
=========== ===========
Diluted earnings per common share $ 0.18 $ 0.39
=========== ===========
3. COMMITMENTS
At December 31, 2004 and September 30, 2004, the Company had outstanding
commitments to originate and purchase loans totaling $71.0 million and
$60.2 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be funded
with existing liquid assets.
4. INTANGIBLE ASSETS
As of December 31, 2004 and September 30, 2004 the Company had intangible
assets of $3,403,019, all of which has been determined to be goodwill.
There was no goodwill impairment loss or amortization related to goodwill
during the three-month periods ended December 31, 2004 and 2003.
5. CURRENT ACCOUNTING DEVELOPMENTS
The Accounting Standards Executive Committee has issued Statement of
Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer. This Statement applies to all loans acquired in a transfer,
including those acquired in the acquisition of a bank or a branch, and
provides that such loans be accounted for at fair value with no allowance
for loan losses, or other valuation allowance, permitted at the time of
acquisition. The difference between cash flows expected at the acquisition
date and the investment in the loan should be recognized as interest
income over the life of the loan. If contractually required payments for
principal and interest are less than expected cash flows, this amount
should not be recognized as a yield adjustment, a loss accrual, or a
valuation allowance. For the Company, this Statement is effective for
fiscal year 2006 and, early adoption, although permitted, is not planned.
No significant impact is expected on the Company's consolidated financial
statements at the time of adoption.
SEC Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting
Principles to Loan Commitments, was released in March 2004. This release
summarizes the SEC staff position
9
regarding the application of GAAP to loan commitments accounted for as
derivative instruments. The Company accounts for interest rate lock
commitments issued on mortgage loans that will be held for sale as
derivative instruments. Consistent with SAB No. 105, the Company considers
the fair value of these commitments to be zero at the commitment date,
with subsequent changes in fair value determined solely on changes in
market interest rates. The Company's adoption of this bulletin had no
impact on the consolidated financial statements.
At the March 17-18, 2004 Emerging Issues Task Force ("EITF") meeting, the
Task Force reached a consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments. EITF 03-1 provides guidance for determining the meaning of
"other-than-temporarily impaired" and its application to certain debt and
equity securities within the scope of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115") and investments accounted for under the cost
method. The guidance set forth in the Statement was originally to be
effective for the Company in the September 30, 2004 consolidated financial
statements. However, in September 2004, the effective dates of certain
parts of the Statement were delayed. Management is currently assessing the
impact of Issue 03-1 on the consolidated financial statements.
The Financial Accounting Standards Board ("FASB") issued Statement 123
(Revised), Share-Base Payment. This Statement establishes standards for
accounting for transactions in which an entity engages its equity
instruments for goods and services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that
are based on the fair value of the entity's equity instruments, or that
may be settled by the issuance of those equity instruments. FAS 123(R)
covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. FAS 123(R) replaces
existing requirements under FAS 123, Accounting for Stock-Based
Compensation and eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock
Issued to Employees. For the Company, the Statement is effective for the
quarter beginning July 1, 2005. The Company is currently assessing the
impact that FAS 123(R) will have on its consolidated financial statements
at the time of adoption.
6. STOCK OPTION PLAN
FASB Statement No. 123, Accounting for Stock-Based Compensation,
establishes a fair value based method for financial accounting and
reporting for stock-based employee compensation plans and for transactions
in which an entity issues its equity instruments to acquire goods and
services from nonemployees. However, the standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by APB No. 25, Accounting for Stock Issued to
Employees, but requires expanded disclosures. The Company has elected to
apply the intrinsic value based method of accounting for stock options
issued to employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company
stock at the date of grant over the amount an employee must pay to acquire
the stock.
Had compensation cost for the Plan been determined based on the grant date
fair values of awards (the method described in FASB Statement No. 123),
the approximate reported income and earnings per common share would have
been decreased to the pro forma amounts shown below:
10
Three Months Ended
December 31,
------------
2004 2003
-------- --------
Net income, as reported $441,942 $976,942
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (23,810) (5,814)
-------- --------
Pro forma net income $418,132 $971,128
======== ========
Earnings per common share - basic:
As reported $ .18 $ .39
Pro forma $ .17 $ .39
Earnings per common share - diluted:
As reported $ .18 $ .39
Pro forma $ .17 $ .38
11
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
GENERAL
Meta Financial Group, Inc. ("Meta Financial" or the "Company") is a bank holding
company whose primary assets are MetaBank, formerly First Federal Savings Bank
of the Midwest ("First Federal"), and MetaBank West Central ("MetaBank WC"),
formerly Security State Bank ("Security"). The Company was incorporated in 1993
as First Midwest Financial, Inc., a unitary non-diversified savings and loan
holding company and, on September 20, 1993, acquired all of the capital stock of
First Federal in connection with First Federal's conversion from mutual to stock
form of ownership. On September 30, 1996, the Company became a bank holding
company in conjunction with the acquisition of Security. Pursuant to requisite
shareholder approvals, the Company and its banking subsidiaries changed their
names as of the close of business on January 28, 2005.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at December 31, 2004, compared to September 30,
2004, and the consolidated results of operations for the three months ended
December 31, 2004, compared to the same period in 2003. This discussion should
be read in conjunction with the Company's consolidated financial statements, and
notes thereto, for the year ended September 30, 2004.
FINANCIAL CONDITION
Total assets increased by $27.6 million, or 3.5%, to $808.4 million at December
31, 2004, from $780.8 million at September 30, 2004. The increase in total
assets was the result of an increase in loans receivable which was funded by an
increase in deposit balances and a reduction in securities available for sale.
The portfolio of securities available for sale decreased $7.8 million, or 2.4%,
to $314.7 million at December 31, 2004, from $322.5 million at September 30,
2004. The decrease reflects $21.5 million of maturities and principal repayments
and the change in market value, which were partially offset by $15.5 million of
purchases of securities available for sale.
The portfolio of net loans receivable increased by $34.7 million, or 8.6%, to
$438.7 million at December 31, 2004, from $404.1 million at September 30, 2004.
The increase reflects increased origination of commercial and multi-family real
estate loans on existing and newly constructed properties and by increased
origination of commercial business loans. The increase was partially offset by
small reductions in purchased commercial real estate and commercial business
loans, and by reductions in consumer and agricultural business loans, as
existing loans in these categories were repaid in amounts greater than new
originations retained in portfolio during the period.
Deposit balances increased by $28.0 million, or 6.1%, to $489.5 million at
December 31, 2004, from $461.6 million at September 30, 2004. The increase in
deposit balances resulted from increases in saving accounts, checking accounts
and certificates of deposit in the amounts of $13.8 million, $14.8 million and
$22.3 million, respectively. These increases were partially offset by a $22.9
million decrease in money market demand accounts.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
increased by $3.1 million, or 1.4%, to $229.3 million at December 31, 2004 from
$226.3 million at September 30, 2004.
12
The balance in securities sold under agreements to repurchase decreased by $2.8
million, or 8.5%, to $29.8 million at December 31, 2004 from $32.5 million at
September 30, 2004. The increase in advances from the FHLB and the decrease in
securities sold under agreements to repurchase resulted in a net increase in
borrowed funds of less than $300,000 during the quarter.
Total shareholders' equity decreased $952,000, or 2.0%, to $46.3 million at
December 31, 2004 from $47.3 million at September 30, 2004. The decrease in
shareholders' equity reflects an increase, in accordance with SFAS 115, of
$738,000 in unrealized loss, net of income tax, on securities available for
sale, the purchase by the Employee Stock Ownership Plan of 18,500 shares of
Company stock and the payment of a cash dividend to shareholders. These
decreases were partially offset by earnings of $442,000 during the period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current, or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At December 31, 2004, the Company had loans delinquent 30 days and over totaling
$2.2 million, or 0.5% of total loans compared to $1.9 million, or 0.5%, of total
loans at September 30, 2004. The Company's increase in delinquent loans relates
an increase of $303,000 in 30-day delinquent commercial loans during the
quarter.
At December 31, 2004, commercial and multi-family real estate loans delinquent
30 days and over totaled $1.6 million, or 0.4% of the total loan portfolio as
compared to $1.4 million, or 0.3% of total loans at September 30, 2004.
Multi-family and commercial 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. These loans are being closely monitored by
management, however, there can be no assurance that all loans will be fully
collectible.
At December 31, 2004, agricultural operating loans delinquent 30 days and over
totaled $253,000, or 0.1% of the total loan portfolio as compared to $254,000,
or 0.1% of total loans at September 30, 2004. Agricultural lending involves a
greater degree of risk than one-to-four family residential mortgage loans
because of the typically larger loan amounts. 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 factors outside the control of the agricultural
borrower, such as the weather and grain and livestock prices. Although
management believes the Company's portfolio of agricultural real estate and
operating loans is well structured and adequately secured, there can be no
assurance that all loans will be fully collectible.
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. The Company's restructured loans (which
involved forgiving a portion of the interest or principal on the loan or making
loans at a rate materially less than market rates) are included in the table and
were performing as agreed at the date shown. Foreclosed assets include assets
acquired in settlement of loans.
13
December 31, 2004 September 30, 2004
----------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ -- $ --
Commercial and multi-family 390 399
Agricultural real estate -- --
Consumer 77 59
Agricultural operating 253 254
Commercial business -- --
---- ----
Total non-accruing loans 720 712
Accruing loans delinquent 90 days or more -- --
---- ----
Total non-performing loans 720 712
---- ----
Restructured loans:
Consumer -- --
Agricultural operating 5 9
Commercial business 7 8
---- ----
Total restructured loans 12 17
---- ----
Foreclosed assets:
One-to four family -- --
Commercial real estate -- --
Consumer -- --
Agricultural operating -- --
Commercial business -- --
---- ----
Total foreclosed assets -- --
Less: Allowance for losses -- --
---- ----
Total foreclosed assets, net -- --
---- ----
Total non-performing assets $732 $729
==== ====
Total as a percentage of total assets 0.09% 0.09%
==== ====
Classified Assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general allowances for loan losses in an amount deemed
prudent by management. 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 loans. When assets are classified as loss, the Company is
required either to establish a specific allowance for loan losses equal to 100%
of that portion of the loan so classified, or to charge-off such amount. The
Company's determination as to the classification of its loans and the amount of
its allowances for loan losses are subject to review by its regulatory
authorities, whom may require the establishment of additional general or
specific allowances for loan losses.
On the basis of management's review of its loans and other assets, at December
31, 2004, the Company had classified a total of $12.9 million of its assets as
substandard, $8,000 as doubtful and none as loss as compared to classifications
at September 30, 2004 of $12.9 million substandard, $11,000 doubtful and none as
loss.
Allowance for Loan Losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a
14
number of factors including, among others, historic loss experience, the overall
level of non-performing loans, the composition of its loan portfolio and the
general economic environment within which the Bank and its borrowers operate.
Current economic conditions in the agricultural sector of the Company's market
area are stable. Commodity prices, while at the lower end of recent ranges, are
at average levels and there is a history of government subsidies. Price levels
for grain crops and livestock generally have been stable after declining from
the levels reached in early 2004. The agricultural economy is accustomed to
commodity price fluctuations and is generally able to handle such fluctuations
without significant problem. Most areas served by the Company experienced
average to above average yields in 2004, after a disappointing 2003. The
increased yields were a contributing factor to the lower commodity prices.
Although the Company underwrites its agricultural loans based on normal
expectations for commodity prices and yields, an extended period of low
commodity prices or adverse growing conditions could result in weakness in the
agricultural loan portfolio and could create a need for the Company to increase
its allowance for loan losses through increased charges to the provision for
loan losses.
At December 31, 2004, the Company has established an allowance for loan losses
totaling $5.5 million. The allowance represented approximately 756.8% of the
total non-performing loans at December 31, 2004, while the allowance at
September 30, 2004 represented approximately 754.4% of the total non-performing
loans at that date.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the three-month periods ended December 31, 2004
and December 31, 2003:
2004 2003
------ ------
(In Thousands)
Balance, September 30, $5,371 $4,962
Charge-offs 11 --
Recoveries 3 4
Additions charged to operations 177 101
------ ------
Balance, December 31, $5,540 $5,067
====== ======
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policies to be those related to the allowance for loan
losses and asset impairment judgments including the recoverability of goodwill.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including
15
borrowers' sensitivity to interest rate movements. Qualitative factors include
the general economic environment in the Company's markets, including economic
conditions throughout the Midwest and in particular, the state of certain
industries. Size and complexity of individual credits in relation to loan
structure, existing loan policies and pace of portfolio growth are other
qualitative factors that are considered in the methodology. As the Company adds
new products and increases the complexity of its loan portfolio, it will enhance
its methodology accordingly. Management may report a materially different amount
for the provision for loan losses in the statement of operations to change the
allowance for loan losses if its assessment of the above factors were different.
This discussion and analysis should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management's Discussion and Analysis section
entitled "Nonperforming Assets and Allowance for Loan Losses." Although
management believes the levels of the allowance as of both December 31, 2004 and
September 30, 2004 were adequate to absorb probable losses inherent in the loan
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses.
Goodwill represents the excess of acquisition costs over the fair value of the
net assets acquired in a purchase acquisition. Goodwill is tested annually for
impairment.
RESULTS OF OPERATIONS
General. For the three months ended December 31, 2004, the Company recorded net
income of $442,000 compared to net income of $977,000 for the same period in
2003, a decrease of 54.8%. The decrease in net income reflects increases in
non-interest expense and, to a lesser extent, in the provision for loan losses,
and a decrease in non-interest income, which were partially offset by an
increase in net interest income and a decrease in income tax expense.
Net Interest Income. Net interest income increased by $219,000, or 4.9%, to $4.7
million for the three months ended December 31, 2004 from $4.5 million for the
same period in 2003. The increase in net interest income includes an increase in
total interest income of $731,000, or 8.1%, and an increase in total interest
expense of $512,000, or 11.2%, for the 2004 period compared to the 2003 period.
The increase in total interest income reflects a $12.2 million increase in the
average balance of interest earning assets and an increase in the net yield on
average earning assets between the comparable periods. The net yield on average
earning assets increased to 5.12% for the quarter ended December 31, 2004 from
4.82% for the same period in 2003. The increase in total interest expense
reflects a $7.2 million increase in the average balance of interest-bearing
liabilities and an increase in the net cost on average bearing liabilities
between the comparable periods. The net cost on average interest bearing
liabilities increased to 2.74% for the quarter ended December 31, 2004 from
2.49% for the same period in 2003.
Provision for Loan Losses. For the three-month period ended December 31, 2004,
the provision for loan losses was $177,000 compared to $101,000 for the same
period in 2003, an increase of 75.3%. The primary reason for the increase in
provision was the loan growth achieved during the 2004 quarter. Management
believes that, based on a detail review of the loan portfolio, historic loan
losses, current economic conditions, and other factors, the current level of
provision for loan losses, and the resulting level of the allowance for loan
losses, reflects an adequate allowance against probable losses from the loan
portfolio, though no assurance can be given that the allowance will not increase
in the future.
Non-interest Income. Non-interest income decreased $63,000, or 9.4%, to $612,000
for the three months ended December 31, 2004 from $675,000 for the same period
in 2003. The decrease in non-interest income reflects decreases in gain on sales
of loans and the return on the investment in Bank Owned Life Insurance between
the comparable periods, which were partially offset by an increase in other
income. The decrease in gain on the sale of loans was the result of a decrease
in the amount of loans originated for sale during the three months ended
December 31, 2004, compared to the same
16
period in 2003. The increase in other income was due to the Meta Payment Systems
division of MetaBank having started generating revenue during the quarter.
Non-interest Expense. Non-interest expense increased $925,000, or 26.0%, to $4.5
million for the three months ended December 31, 2004, from $3.6 million for the
same period in 2003. The increase in non-interest expense primarily reflects
increases in personnel, office occupancy and marketing costs in the 2004 period
compared to the 2003 period. These increases were the result of several factors,
including primarily the start-up costs associated with our Meta Payment Systems
division, the operating costs associated with the second Sioux Fall, South
Dakota office, which opened in May 2004, and expenditures incurred as a result
of the name changes of the Company and subsidiaries.
Income Tax Expense. Income tax expense decreased $311,000, or 61.6%, to $194,000
for the three months ended December 31, 2004, from $505,000 for the same period
in 2003. The decrease reflects the decrease in the level of taxable income
between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At December 31, 2004, the Company had
commitments to originate and purchase loans totaling $71.0 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
Regulations require MetaBank and MetaBank WC to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth MetaBank's and MetaBank WC's actual capital and
required capital amounts and ratios at December 31, 2004 which, at that date,
exceeded the capital adequacy requirements:
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At December 31, 2004 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
MetaBank $53,674 10.5% $40,709 8.0% $50,887 10.0%
MetaBank WC 4,326 12.9 2,673 8.0 3,342 10.0
Tier 1 (Core) Capital (to risk weighted assets):
MetaBank 48,283 9.5 20,355 4.0 30,532 6.0
MetaBank WC 4,080 12.2 1,337 4.0 2,005 6.0
Tier 1 (Core) Capital (to adjusted total assets):
MetaBank 48,283 6.1 31,786 4.0 39,733 5.0
MetaBank WC 4,080 6.9 2,368 4.0 2,960 5.0
Tier 1 (Core) Capital (to average assets):
MetaBank 48,283 6.5 29,832 4.0 37,290 5.0
17
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At December 31, 2004, MetaBank and MetaBank WC
exceeded minimum requirements for the well-capitalized category.
Forward-Looking Statements
The Company, and its wholly-owned subsidiaries, MetaBank and MetaBank WC, may
from time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission,
in its reports to shareholders, and in other communications by the Company,
which are made in good faith by the Company pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates, and intentions, that are subject to
significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond the Company's control. Such statements address
the following subjects: future operating results; customer growth and retention;
loan and other product demand; earnings growth and expectations; new products
and services; credit quality and adequacy of reserves; technology; and our
employees. The following factors, among others, could cause the Company's
financial performance to differ materially from the expectations, estimates, and
intentions expressed in such forward-looking statements: the strength of the
United States economy in general and the strength of the local economies in
which the Company conducts operations; the effects of, and changes in, trade,
monetary, and fiscal policies and laws, including interest rate policies of the
Federal Reserve Board; inflation, interest rate, market, and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; the impact of changes in financial services' laws and
regulations; technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The foregoing list of factors is not exclusive. Additional discussion of factors
affecting the Company's business and prospects is contained in the Company's
periodic filings with the SEC. The Company does not undertake, and expressly
disclaims any intent or obligation, to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
18
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of three months through five years, principally from its primary
market area. The savings and NOW accounts tend to be less susceptible to rapid
changes in interest rates.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
Presented below, as of December 31, 2004 and September 30, 2004, is an analysis
of the Company's interest rate risk as measured by changes in NPV for an
instantaneous and sustained parallel shift in the yield curve, in 100 basis
point increments, up and down 200 basis points. As illustrated in the table,
19
the Company's NPV at December 31, 2004 and September 30, 2004 was more sensitive
to decreasing interest rates than to increasing interest rates. This reflects
management's efforts to maintain and manage the Company's interest rate
sensitivity in light of the events of the last three quarters of calendar 2004.
Market interest rates began to increase as the result of concern over the
prospect of an increase in the rate of inflation. As the Federal Open Market
Committee ("FOMC") began a measured process of bringing short-term interest
rates back to a more normal level through 25 basis point increases in the target
rate for overnight money, long-term rates moderated creating a flattening in the
yield curve. Through the end of calendar 2004, the FOMC increased the target
rate five times for a total increase of 125 basis points. An additional 25 basis
point increase took place in February 2005. While management does not anticipate
a significant shift in market interest rates in the near future, it does believe
that there is less risk from declining rates than from rising rates, and its
management of interest rate risk has reflected this belief. Management closely
monitors the Company's interest rate sensitivity.
At December 31, 2004 At September 30, 2004
Change in Interest Rates Board Limit ---------------------- ----------------------
(Basis Points) % Change $ Change % Change $ Change % Change
------------------------ -------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $(5,916) (12)% $(5,473) (12)%
+100 bp (25) (1,947) (4) (1,580) (3)
0 bp -- -- -- -- --
-100 bp (25) (3,429) (7) (3,130) (7)
-200 bp (40) (10,376) (22) (5,631) (12)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
20
Part I. Financial Information
Item 4. Disclosure Controls and Procedures
Controls and Procedures
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting
21
META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings - On June 11, 2004, the Sioux Falls School
District filed suit in the Second Judicial Circuit Court, against
First Federal Savings Bank of the Midwest, a wholly-owned subsidiary
of the Company, alleging that First Federal (now MetaBank)
improperly allowed funds, which belonged to the school district, to
be deposited into, and subsequently withdrawn from, a corporate
account established by an employee of the school district. The
school district is seeking in excess of $600,000. MetaBank has
submitted the claim to its insurance carrier, and is working with
counsel to vigorously contest the suit. There are no other material
pending legal proceedings to which the Company or its subsidiaries
is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
--------------------------------------------------------------------
Equity Securities -
-------------------
(e) The following table provides information about purchases by the
Company during the quarter ended December 31, 2004 of equity
securities that are registered by the Company pursuant to Section 12
of the Exchange Act.
---------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Total Number Average Price Paid Purchased as Part of Shares that May Yet
of Common Per Share Publicly Announced Be Purchased Under
Period Shares Purchased Purchased Program(s) the Program(s)
---------------------------------------------------------------------------------------------------------------
10/1/04 - 10/31/04 -- -- -- --
---------------------------------------------------------------------------------------------------------------
11/1/04 - 11/30/04 -- -- -- --
---------------------------------------------------------------------------------------------------------------
12/1/04 - 12/31/04 -- -- -- --
---------------------------------------------------------------------------------------------------------------
Total -- -- -- --
---------------------------------------------------------------------------------------------------------------
There is currently no repurchase plan in place. The most recent
repurchase plan ended on July 31, 2004. The Company's Employee Stock
Ownership Plan was authorized in September 2004 to purchase 40,000
shares of stock, and through December 31, 2004, it had purchased
28,500 shares.
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits
--------
(a) Exhibits:
31.1 Section 302 certification of Chief Executive Officer.
31.2 Section 302 certification of Chief Financial Officer.
32.1 Section 906 certification of Chief Executive Officer.
32.2 Section 906 certification of Chief Financial Officer.
22
META FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
META FINANCIAL GROUP, INC.
Date: February 14, 2005 By: /s/ James S. Haahr
----------------- ----------------------
James S. Haahr, Chairman of the
Board, and Chief Executive Officer
Date: February 14, 2005 By: /s/ Ronald J. Walters
----------------- ----------------------
Ronald J. Walters, Senior Vice
President, Secretary, Treasurer and
Chief Financial Officer
23