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 June 30, 2005
[ ] 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 Street, 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 August 15, 2005:
Common Stock, $.01 par value 2,503,655 Common Shares
META FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
- -------------------------------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at June 30, 2005 and September 30, 2004 3
Consolidated Statements of Operations for the Three Months
And Nine Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Comprehensive Income (Loss) for the
Three Months and Nine Months Ended June 30, 2005 and 2004 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2005 6
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2005 and 2004 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 25
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
ASSETS June 30, 2005 September 30, 2004
- -----------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 2,947,175 $ 1,591,982
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 4,965,726 7,344,587
-------------------------------------
Total cash and cash equivalents 7,912,901 8,936,569
Securities available for sale, amortized cost
of $255,208,924 at June 30, 2005 and
$324,500,510 at September 30, 2004 250,802,241 322,523,577
Loans receivable - net of allowance for loan losses of
of $9,568,620 at June 30, 2005 and $5,370,994
at September 30, 2004 459,689,897 404,051,379
Loans held for sale 2,478,292 270,000
Federal Home Loan Bank stock, at cost 10,413,500 11,052,700
Accrued interest receivable 3,896,671 3,849,215
Premises and equipment, net 13,861,581 11,690,437
Foreclosed real estate, net 19,528 --
Bank owned life insurance 12,186,176 11,847,420
Other assets 7,416,282 6,577,227
-------------------------------------
Total assets $ 768,677,069 $ 780,798,524
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits $ 41,178,750 $ 19,537,370
Savings, NOW and money market demand deposits 158,365,383 177,287,972
Time certificates of deposit 294,325,455 264,755,535
-------------------------------------
Total deposits 493,869,588 461,580,877
Advances from Federal Home Loan Bank 195,430,000 226,250,000
Securities sold under agreements to repurchase 23,538,909 32,549,377
Subordinated debentures 10,310,000 10,310,000
Advances from borrowers for taxes and insurance 266,161 216,331
Accrued interest payable 1,018,554 473,426
Accrued expenses and other liabilities 1,192,908 2,144,248
-------------------------------------
Total liabilities 725,626,120 733,524,259
-------------------------------------
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, 2,503,655 and 2,491,025 shares outstanding
at June 30, 2005 and September 30, 2004, respectively 29,580 29,580
Additional paid-in capital 20,636,272 20,678,644
Retained earnings - substantially restricted 34,313,180 36,758,258
Accumulated other comprehensive loss (2,765,977) (1,240,338)
Unearned Employee Stock Ownership Plan shares (893,109) (394,766)
Treasury stock, 454,344 and 466,974 common shares, at cost,
at June 30, 2005 and September 30, 2004 respectively (8,268,997) (8,557,113)
-------------------------------------
Total shareholders' equity 43,050,949 47,274,265
-------------------------------------
Total liabilities and shareholders' equity $ 768,677,069 $ 780,798,524
=====================================
See Notes to Consolidated Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2005 2004 2005 2004
------------ ----------- ------------ ------------
Interest and Dividend Income:
Loans receivable, including fees $ 7,931,647 $ 6,465,018 $ 22,031,011 $ 17,992,328
Securities available for sale 2,754,168 2,535,342 8,652,487 8,834,059
Dividends on Federal Home Loan Bank stock 126,860 42,852 286,476 161,173
------------ ----------- ------------ ------------
Total interest and dividend income 10,812,675 9,043,212 30,969,974 26,987,560
Interest Expense:
Deposits 3,106,402 2,428,676 8,694,306 7,182,561
FHLB advances and other borrowings 2,590,639 2,094,690 7,483,862 6,402,540
------------ ----------- ------------ ------------
Total interest expense 5,697,041 4,523,366 16,178,168 13,585,101
------------ ----------- ------------ ------------
Net interest income 5,115,634 4,519,846 14,791,806 13,402,459
Provision for loan losses 4,956,000 167,500 5,390,500 324,500
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 159,634 4,352,346 9,401,306 13,077,959
Noninterest income:
Deposit service charges and other fees 340,767 304,257 950,505 933,726
Gain on sales of loans, net 55,811 107,648 137,119 227,748
Bank owned life insurance 126,645 151,532 379,936 469,373
Loss on sales of securities available for sale, net (20,413) -- (19,334) --
Gain on sale of branch office -- -- -- 1,113,230
Loss on sales of foreclosed real estate, net -- (2,560) -- (3,052)
Other income 445,885 78,810 786,223 264,041
------------ ----------- ------------ ------------
Total noninterest income 948,695 639,687 2,234,449 3,005,066
Noninterest expense:
Employee compensation and benefits 2,923,900 2,422,886 8,615,950 6,848,008
Occupancy and equipment expense 931,871 597,056 2,693,974 1,720,735
Deposit insurance premium 17,111 17,378 53,185 48,824
Data processing expense 188,320 175,176 556,446 537,106
Other expense 604,326 518,359 2,095,223 1,600,393
------------ ----------- ------------ ------------
Total noninterest expense 4,665,528 3,730,855 14,014,778 10,755,066
------------ ----------- ------------ ------------
Income (loss) before income taxes (3,557,199) 1,261,178 (2,379,023) 5,327,959
Income tax expense (benefit) (1,245,205) 424,569 (908,345) 1,839,011
------------ ----------- ------------ ------------
Net income (loss) $ (2,311,994) $ 836,609 $ (1,470,678) $ 3,488,948
============ =========== ============ ============
Earnings (loss) per common share:
Basic $ (0.94) $ 0.34 $ (0.60) $ 1.41
============ =========== ============ ============
Diluted $ (0.94) $ 0.33 $ (0.60) $ 1.38
============ =========== ============ ============
Dividends declared per common share $ 0.13 $ 0.13 $ 0.39 $ 0.39
============ =========== ============ ============
See Notes to Consolidated Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2005 2004 2005 2004
----------- ---------- ----------- -----------
Net income (loss) $(2,311,994) 836,609 $(1,470,678) $ 3,488,948
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale 1,343,396 (6,439,564) (2,429,750) (1,339,005)
Deferred income tax expense (benefit) 499,879 (2,396,139) (904,111) (498,221)
----------- ---------- ----------- -----------
Total other comprehensive income (loss) 843,517 (4,043,425) (1,525,639) (840,784)
----------- ---------- ----------- -----------
Total comprehensive income (loss) $(1,468,477) (3,206,816) $(2,996,317) $ 2,648,164
=========== ========== =========== ===========
See Notes to Consolidated Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2005
Accumulated Unearned
Other Employee
Additional Comprehensive Stock
Common Paid-in Retained Income (Loss), Ownership
Stock Capital Earnings Net of Tax Plan Shares
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 $ 29,580 $ 20,678,644 $ 36,758,258 $ (1,240,338) $(394,766)
Cash dividends declared on common
stock ($.39 per share) -- -- (974,400) -- --
Purchase of 1,000 common shares of
treasury stock -- -- -- -- --
Issuance of 13,630 common shares from
treasury stock due to exercise of stock
options -- (95,597) -- -- --
Tax benefit from exercise of stock options -- 12,240 -- -- --
Purchase 30,000 common shares for ESOP -- -- -- -- (684,133)
9,900 common shares committed to be
released under the ESOP -- 40,985 -- -- 185,790
Change in net unrealized gains and losses on
securities available for sale, net of
effect of income taxes of ($901,111) -- -- -- (1,525,639) --
Net loss for nine months ended June 30, 2005 -- -- (1,470,678) -- --
-----------------------------------------------------------------------
Balance, June 30, 2005 $ 29,580 $ 20,636,272 $ 34,313,180 $ (2,765,977) $(893,109)
=======================================================================
Total
Treasury Shareholders'
Stock Equity
- ------------------------------------------------------------------------------
Balance, September 30, 2004 $ (8,557,113) $ 47,274,265
Cash dividends declared on common
stock ($.39 per share) -- (974,400)
Purchase of 1,000 common shares of
treasury stock (25,655) (25,655)
Issuance of 13,630 common shares from
treasury stock due to exercise of stock
options 313,771 218,174
Tax benefit from exercise of stock options -- 12,240
Purchase 30,000 common shares for ESOP -- (684,133)
9,900 common shares committed to be
released under the ESOP -- 226,775
Change in net unrealized gains and losses on
securities available for sale, net of
effect of income taxes of ($901,111) -- (1,525,639)
Net loss for nine months ended June 30, 2005 -- (1,470,678)
-----------------------------
Balance, June 30, 2005 $ (8,268,997) $ 43,050,949
=============================
See Notes to Consolidated Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
2005 2004
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,470,678) $ 3,488,948
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation, amortization and accretion, net 2,736,379 3,733,747
Provision for loan losses 5,390,500 324,500
Loss on the sale of securities available for sale, net 19,334 --
Loss on sales of foreclosed real estate, net -- 3,052
Gain on the sale of branch office -- (1,113,230)
Proceeds from sales of loans held for sale 6,850,685 13,695,203
Originations of loans held for sale (9,058,977) (12,568,893)
Net change in accrued interest receivable (47,456) 418,452
Net change in other assets (273,701) (586,085)
Net change in accrued interest payable 545,128 (32,752)
Net change in accrued expenses and other liabilities (951,339) 725,871
----------------------------
Net cash provided by operating activities 3,739,875 8,088,813
Cash flow from investing activities:
Purchase of securities available for sale (15,459,228) (15,463,098)
Proceeds from sales of securities available for sale 25,842,709 --
Proceeds from maturities and principal repayments of
securities available for sale 57,174,746 67,024,122
Net change in loans receivable (27,475,818) (9,955,846)
Loans purchased (33,637,751) (34,325,665)
Proceeds from sales of foreclosed real estate 2,500 1,123,934
Cash transferred to buyer on sale of branch -- (14,154,359)
Change in FHLB stock 639,200 908,400
Purchase of premises and equipment (2,904,200) (1,197,562)
----------------------------
Net cash provided by (used in) investing activities 4,182,158 (6,040,074)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 2,718,791 (9,132,202)
Net change in other time deposits 29,569,920 50,931,974
Proceeds from advances from Federal Home Loan Bank 2,566,400,000 1,655,190,000
Repayments of advances from Federal Home Loan Bank (2,597,220,000) (1,675,511,784)
Net change in securities sold under agreements to repurchase (9,010,468) (22,596,875)
Net change in advances from borrowers for taxes and insurance 49,830 (6,146)
Cash dividends paid (974,400) (975,896)
Proceeds from exercise of stock options 230,414 582,555
Purchase of shares by ESOP (684,133) --
Purchase of treasury stock (25,655) (764,865)
----------------------------
Net cash used in financing activities (8,945,701) (2,283,239)
----------------------------
Net change in cash and cash equivalents (1,023,668) (234,500)
Cash and cash equivalents at beginning of period 8,936,569 9,756,815
----------------------------
Cash and cash equivalents at end of period $ 7,912,901 $ 9,522,315
============================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 15,633,040 $ 13,617,853
Income taxes 563,911 1,692,500
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 22,028 $ 58,349
Sale of branch
Assets disposed:
Loans $ (730,704)
Accrued interest receivable (5,518)
Premises and equipment (110,818)
Liabilities assumed by buyer:
Non-interest bearing demand, savings, NOW 6,314,066
and money market demand accounts
Time deposits 9,788,688
Advances from borrowers for taxes and insurance 5,749
Other liabilities 6,126
Gain on sale of office property, net (1,113,230)
------------
Cash paid $ 14,154,359
============
See Notes to Consolidated Financial Statements.
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. ALLOWANCE FOR LOAN LOSSES
At June 30, 2005, the Company has established an allowance for loan losses
totaling $9.6 million. The allowance represented approximately 117.1% of
the total non-performing loans at June 30, 2005, while the allowance at
September 30, 2004 represented approximately 754.4% of the total
non-performing loans at that date. The increase in the allowance for loan
losses was due primarily to additional reserves recorded in the quarter
ended June 30, 2005 relating to $9.8 million of assets determined to be
impaired, and to the increase in the loan portfolio. Approximately $7.6
million of the impaired assets were placed on non-accrual status, and are
included in non-performing loans, and $1.3 million of the impaired assets
were written off as of June 30, 2005,
The following table sets forth an analysis of the activity in the
Company's allowance for loan losses for the nine-month periods ended June
30, 2005 and June 30, 2004:
2005 2004
----- ----
(In Thousands)
Balance, September 30, $ 5,371 $ 4,962
Charge-offs (1,313) (25)
Recoveries 120 13
Additions charged to operations 5,391 324
-------- --------
Balance, June 30, $ 9,569 $ 5,274
======== ========
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.
8
3. 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 (loss) per common share and the diluted earnings per common share
computations for the three months and nine months ended June 30, 2005 and
2004 is presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Basic Earnings (Loss) Per Common Share:
Numerator:
Net Income (Loss) $(2,311,994) $ 836,609 $(1,470,678) $ 3,488,948
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding 2,502,521 2,497,197 2,496,033 2,500,437
Less: Weighted average unallocated
ESOP shares (41,473) (13,263) (36,147) (17,779)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,461,048 2,483,934 2,459,886 2,482,658
=========== =========== =========== ===========
Basic earnings (loss) per common share $ (0.94) $ 0.34 $ (0.60) $ 1.41
=========== =========== =========== ===========
The calculations for the diluted loss per share for the three and nine
month periods ended June 30, 2005 do not reflect the effect of the assumed
exercise of stock options of 42,798 and 54,042 shares, respectively,
because the effect would have been anti-dilutive due to the net loss in
those periods.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Diluted Earnings (Loss) Per Common Share:
Numerator:
Net Income (loss) $(2,311,994) $ 836,609 $(1,470,678) $ 3,488,948
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding for basic earnings per
common share 2,461,048 2,483,934 2,459,886 2,482,658
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits -- 54,599 -- 54,205
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common shares
outstanding 2,461,048 2,538,533 2,459,886 2,536,863
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ (0.94) $ 0.33 $ (0.60) $ 1.38
=========== =========== =========== ===========
9
4. COMMITMENTS
At June 30, 2005 and September 30, 2004, the Company had outstanding
commitments to originate and purchase loans totaling $65.7 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.
5. INTANGIBLE ASSETS
As of June 30, 2005 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 or nine-month periods ended June 30, 2005 and 2004.
6. CURRENT ACCOUNTING DEVELOPMENTS
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 October 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.
7. 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 non-employees. 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 Nine Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss), as reported $(2,311,994) $836,609 $(1,470,678) $3,488,948
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (20,098) (15,092) (67,718) (26,720)
----------- -------- ----------- ----------
Pro forma net income (loss) $(2,332,092) $821,517 $(1,538,396) $3,462,228
=========== ======== =========== ==========
Earnings per common share - basic:
As reported $(0.94) $0.34 $(0.60) $1.41
Pro forma $(0.95) $0.33 $(0.63) $1.38
Earnings per common share - diluted:
As reported $(0.94) $0.33 $(0.60) $1.38
Pro forma $(0.95) $0.32 $(0.63) $1.36
8. SEGMENT INFORMATION
An operating segment is generally defined as a component of a business for
which discrete financial information is available and whose results are
reviewed by the chief operating decision-maker. The Company has determined
that it has two reportable segments under Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information": a traditional banking segment consisting of its
two banking subsidiaries, MetaBank and MetaBank West Central, and Meta
Payment Systems, a division of MetaBank. MetaBank and MetaBank West
Central operate as traditional community banks providing deposit, loan and
other related products to individuals and small businesses, primarily in
the communities where their offices are located. Meta Payment Systems
provides a number of products and services, primarily to third parties,
including financial institutions and other businesses. These products and
services include issuance of prepaid cards, issuance of credit cards,
sponsorship of ATMs into the debit networks, ACH origination services and
a gift card program. Other related programs are in the process of
development. The remaining grouping under the caption "All Others"
consists of the operations of the Meta Financial Group, Inc. and Meta
Trust Company.
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Three months ended June 30, 2005:
Interest income $ 10,752,866 $ -- $ 59,809 $ 10,812,675
Provision for loan and lease losses 4,956,000 -- -- 4,956,000
Non-interest income 467,993 457,413 23,289 948,695
Inter-segment revenue (expense) 57,786 80,108 (137,894) --
Non-interest expense 3,742,628 770,654 152,246 4,665,528
Income (loss) before income taxes (2,945,812) (235,664) (375,723) (3,557,199)
11
Three months ended June 30, 2004:
Interest income $ 8,974,970 $ -- $ 68242 $ 9,043,212
Provision for loan and lease losses 167,500 -- -- 167,500
Non-interest income 614,222 -- 25,467 639,689
Inter-segment revenue (expense) 131,484 (627) (130,857) --
Non-interest expense 3,384,946 220,611 125,300 3,730,857
Income (loss) before income taxes 1,765,418 (221,238) (283,002) 1,261,178
Nine months ended June 30, 2005:
Interest income $ 30,773,619 $ -- $ 196,355 $ 30,969,974
Provision for loan and lease losses 5,390,500 -- -- 5,390,500
Non-interest income 1,448,776 705,495 80,178 2,234,449
Inter-segment revenue (expense) 281,564 117,602 (399,166) --
Non-interest expense 11,331,984 2,156,182 526,612 14,014,778
Income (loss) before income taxes 86,164 (1,335,864) (1,129,323) (2,379,023)
Nine months ended June 30, 2004:
Interest income $ 26,765,388 $ -- $ 222,172 $ 26,987,560
Provision for loan and lease losses 324,500 -- -- 324,500
Non-interest income 2,934,265 -- 70,801 3,005,066
Inter-segment revenue (expense) 398,440 (627) (397,813) --
Non-interest expense 10,143,790 220,611 390,665 10,755,066
Income (loss) before income taxes 6,413,161 (221,238) (863,964) 5,327,959
Substantially all of the Company's assets were in the traditional banking
segment for all periods presented.
12
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 and regulatory 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 June 30, 2005, compared to September 30, 2004,
and the consolidated results of operations for the three months and nine months
ended June 30, 2005, compared to the same periods in 2004. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 2004.
CORPORATE DEVELOPMENTS
On June 20, 2005, the Company determined that $9.8 million of its assets were
impaired under generally accepted accounting principles. The Company is the lead
lender and servicer of approximately $32.0 million in loans to three affiliated
companies and their owners. Approximately $22.2 million of the total had been
sold to ten participating financial institutions. The Company's portion of the
affected assets includes total operating loans secured by new and used cars and
contracts receivable of approximately $6.8 million to two of the companies,
which filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on
the evening of June 20, 2005. The Company also had real estate loans totaling
approximately $2.0 million to the third company, and $1.0 million to the
majority owner of the three companies. As of June 30, 2005, $7.6 million of the
loans related to these borrowers were deemed non-performing, and placed on
non-accrual status. On July 8, 2005 the Company took possession of the assets of
one of the companies that had filed for reorganization, while the other company
remains in Chapter 11 bankruptcy. The process of liquidation of assets of all
three companies is underway. Since July 8, 2005, the Company has been in the
process of organizing, reviewing and evaluating the assets to determine their
estimated net realizable value. The Company concluded that, as of June 30, 2005,
additional loan loss reserves were required in the amount of $4.8 million. Net
of the effect of income taxes these additional reserves resulted in a reduction
in net income of $3.1 million, or $1.25 per diluted share, for both the three
month and nine month periods ended June 30, 2005. One loan totaling $1.3 million
was charged to the loss reserves as of June 30, 2005. While the Company believes
that the $4.8 million in additional reserves related to the impaired assets is
reasonable based on the information currently available, it is possible that
other factors and circumstances could result in a different final realized loss
on these assets. We can make no prediction at this time as to any other losses
or recoveries that might occur related to the bankruptcy and related matters.
See "Non-performing Assets and Allowance For Loan Losses," herein.
Though no longer "well-capitalized" under Federal banking guidelines due to the
additional loan loss reserves taken this quarter, MetaBank had a capital ratio
well in excess of minimum regulatory
13
requirements at June 30, 2005, with Tier I and Tier II capital ratios of 6.37
percent and 9.98 percent, respectively. The Company itself and MetaBank West
Central remain well-capitalized.
In May of 2004, the Company announced that MetaBank was in the process of
forming of a new operating division to position the Company to take advantage of
opportunities in the growing area of prepaid debit cards and related systems and
services. The division, Meta Payment Systems, is based in Sioux Falls, South
Dakota. During the first year of operations, through June 30, 2005, the division
has generated a net loss of almost $1.4 million, $490,000 in fiscal 2004 and
$867,000 to date in fiscal 2005. The cumulative net loss for the division is
higher than was originally projected. Management anticipates that the operations
of Meta Payment Systems will become profitable sooner than expected and that the
third year of operations will result in net income sufficient for the cumulative
operations of the division to become positive. The net loss of Meta Payment
Systems for 2005 resulted in a reduction in diluted earning per share of $.06
for the quarter and $.34 per share for the nine months ended June 30, 2005.
During both the comparable periods of 2004, Meta Payment Systems had a net loss
of $141,000, or $.06 per diluted share. Effective this quarter, the Company
presents Meta Payment Systems as a separate business segment. See "Note 8 of
Notes to Consolidated Financial Statements (Unaudited)," herein.
As indicated above, effective January 28, 2005, the Company and its
subsidiaries, having obtained the necessary approvals, changed their names from
First Midwest Financial, Inc., First Federal Savings Bank of the Midwest,
Security State Bank, and First Services Trust Company, to Meta Financial Group,
Inc., MetaBank, MetaBank West Central and Meta Trust Company, respectively. As a
result of marketing and other costs associated with the name changes, the
Company incurred expenses totaling $679,000, or $428,000, net of income taxes.
The expenses, net of income taxes, related to the name change resulted in a
reduction in diluted earnings per share of $.02 for the quarter and $.17 per
share for the nine months ended June 30, 2005.
The Company is in the process of expanding its presence in the Sioux Falls,
South Dakota market. A building, which will house a full-service banking office
and the Meta Payment Systems operations, is under construction in Sioux Falls.
Occupancy is anticipated to be either late in the third or early in the fourth
calendar quarter of 2005. In addition, a small branch office, formerly occupied
by another financial institution, became available for lease in Sioux Falls.
This office, which is a good strategic fit for operations in Sioux Falls, will
open in August.
FINANCIAL CONDITION
Total assets decreased by $12.1 million, or 1.6%, to $768.7 million at June 30,
2005, from $780.8 million at September 30, 2004. The decrease in total assets
was primarily attributable to a decrease in securities available for sale which
was substantially offset by growth in loans during the nine month period. The
excess funds from the decrease in securities available for sale, along with
growth in deposits, were used to reduce advances from the FHLB and other
borrowed money.
The portfolio of net loans receivable increased by $55.6 million, or 13.8%, to
$459.7 million at June 30, 2005, 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. There were also small increases in
conventional one-to-four family residential mortgage loans and in agricultural
business loans. These increases were slightly offset by a small reduction in
consumer loans, as existing consumer loans were repaid in amounts greater than
new originations during the period. The additional reserves of $4.8 million also
reduced the June 30, 2005 balances of net loans.
Deposit balances increased by $32.3 million, or 7.0%, to $493.9 million at June
30, 2005, from $461.6 million at September 30, 2004. The increase in deposit
balances resulted from increases in checking
14
accounts, savings accounts and certificates of deposit in the amounts of $26.4
million, $11.4 million and $29.6 million, respectively. These increases were
partially offset by a decrease in money market accounts of $35.1 million during
the period. The increase in deposit balances is attributable to the activities
of Meta Payment Systems and an increase in public funds deposits.
The portfolio of securities available for sale decreased $71.7 million, or
22.2%, to $250.8 million at June 30, 2005, from $322.5 million at September 30,
2004. The decrease reflects $57.2 million of maturities and principal
repayments, the sale of $25.8 million of such securities and by the change in
market value of securities available for sale, which were partially offset by
$15.5 million of purchases.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $30.8 million, or 13.6%, to $195.4 million at June 30, 2005 from
$226.2 million at September 30, 2004. The balance in securities sold under
agreements to repurchase decreased by $9.0 million, or 27.7%, to $23.5 million
at June 30, 2005 from $32.5 million at September 30, 2004. The decrease in
advances from the FHLB and in securities sold under agreements to repurchase
reflects the replacement of borrowed funds through deposit growth during the
period.
Total shareholders' equity decreased $4.2 million, or 8.9%, to $43.1 million at
June 30, 2005 from $47.3 million at September 30, 2004. The decrease in
shareholders' equity was primarily due to the net loss of $1.5 million for the
nine month period, a $1.5 million change, in accordance with SFAS 115, from a
$1.2 million unrealized loss to a $2.7 million unrealized loss, net of income
tax, on securities available for sale, the purchase of stock for the ESOP
totaling $684,000 and the payment of dividends to shareholders of $974,000,
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 June 30, 2005, the Company had loans delinquent 30 days and over totaling
$6.6 million, or 1.42% of total loans compared to $1.9 million, or 0.47%, of
total loans at September 30, 2004.
At June 30, 2005, there were two commercial and multi-family real estate loans
totaling $1,239,000, or 0.27% of total loans, delinquent 30 days and over. This
compares to $1,350,000, or 0.33% 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 June 30, 2005, commercial business loans delinquent 30 days and over totaled
$4,831,000, or 1.05% of the total loan portfolio. Included in the commercial
business loans delinquent 30 days and over at June 30, 2005 are $4.5 million of
the impaired loans discussed earlier. There were no commercial business loans
delinquent 30 days and over at September 30, 2004. Commercial business 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 typically dependent on the cash flows derived from the operation or
management of the business to which the loan is made. The success of the loan
may also be affected by factors outside the control of the business, such as
15
unforeseen changes in economic conditions for the business, the industry in
which the business operates or the general environment. Although management
believes the Company's portfolio of commercial business loans is well structured
and adequately secured, there can be no assurance that all loans will be fully
collectible.
At June 30, 2005, agricultural operating loans delinquent 30 days and over
totaled $220,000, or 0.05% of the total loan portfolio as compared to $254,000,
or 0.06% 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.
June 30, 2005 September 30, 2004
------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 23 $ --
Commercial and multi-family 2,281 399
Agricultural real estate -- --
Consumer 50 59
Agricultural operating 220 254
Commercial business 5,570 --
------ ----
Total non-accruing loans 8,144 712
Accruing loans delinquent 90 days or more -- --
------ ----
Total non-performing loans 8,144 712
------ ----
Restructured loans:
Consumer -- --
Agricultural operating 7 9
Commercial business -- 8
------ ----
Total restructured loans 7 17
------ ----
Foreclosed assets:
One-to four family -- --
Commercial real estate -- --
Consumer 20 --
Agricultural operating -- --
Commercial business -- --
------ ----
Total foreclosed assets 20 --
------ ----
Total non-performing assets $8,171 $729
====== ====
Total as a percentage of total assets 1.06% 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
16
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,
which 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 June 30,
2005, the Company had classified a total of $15.2 million of its assets as
substandard, $1,000 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 number of factors including, among
others, historic loss experience, the overall level of classified assets and
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 due to generally stable or higher commodity prices and a history
of government subsidies. Price levels for grain crops and livestock are
currently at levels that present minimal concern. The agricultural economy is
accustomed to commodity price fluctuations and is generally able to handle such
fluctuations without significant problem. 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. (See "CRITICAL ACCOUNTING POLICIES")
At June 30, 2005, the Company has established an allowance for loan losses
totaling $9.6 million. The allowance represented approximately 117.1% of the
total non-performing loans at June 30, 2005, while the allowance at September
30, 2004 represented approximately 754.4% of the total non-performing loans at
that date. The increase in the allowance for loan losses was due primarily to
the additional reserves recorded in the quarter ended June 30, 2005 relating to
the impairment of assets discussed earlier, and to the increase in the loan
portfolio.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the nine-month periods ended June 30, 2005 and
June 30, 2004:
2005 2004
---- ----
(In Thousands)
Balance, September 30, $ 5,371 $ 4,962
Charge-offs (1,313) (25)
Recoveries 120 13
Additions charged to operations 5,391 324
------- -------
Balance, June 30, $ 9,569 $ 5,274
======= =======
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.
17
CRITICAL ACCOUNTING POLICIES
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 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 June 30, 2005 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 June 30, 2005, the Company recorded a net
loss of $2,312,000 compared to net income of $837,000 for the same period in
2004. For the nine months ended June 30, 2005, the net loss was $1,471,000
compared to net income of $3,489,000 for the same period in 2004. The net losses
for the three and nine month periods of 2005 were primarily the result of $4.8
million in additional loan loss reserves recorded during the three month period.
Both periods reflect increases in net interest income and in the provision for
loan losses. The three month period reflects an increase in non-interest income
while the nine month period reflects a decrease. Non-operating expense increased
during both the three month and nine month periods, and there was an income tax
benefit in both periods of 2005 compared to income tax expense during the 2004
periods. The decrease in non-interest income for the nine month period reflects
primarily a gain of $1,113,000, on the sale of the Manson, Iowa branch office
during the 2004 period. The increases in non-interest expense were the result of
increases in compensation and benefits, and to expenses related to the name
changes, which totaled $64,000 and $679,000 for the three and nine month
periods, respectively. The decrease in net income was also attributable to the
net loss of Meta Payment Systems, which totaled $156,000 and $867,000 for the
three and nine month periods, respectively.
Net Interest Income. Net interest income increased by $596,000, or 13.2%, to
$5,116,000 for the three months ended June 30, 2005 from $4,520,000 for the same
period in 2004. For the nine months ended
18
June 30, 2005, net interest income increased $1,390,000, or 10.4%, to
$14,792,000 from $13,402,000 for the same period in 2004. The increase in net
interest income for the three month period ended June 30, 2005 included an
increase in total interest income of $1,769,000, or 19.6%, which was partially
offset by an increase in total interest expense of $1,174,000 or 26.0%, compared
to the same period in 2004. The increase in total interest income reflects an
increase in the yield of interest-earning assets to 5.69% from 4.90%, and an
increase of $22.5 million in the average balance of interest-earning assets
during the period. The increase in total interest expense reflects an increase
in the cost on interest-bearing liabilities to 2.63% from 2.38%, and an increase
of $29.3 million in the average balance of interest bearing-liabilities during
the period. The increase in net interest income for the nine month period ended
June 30, 2005 included an increase in total interest income of $3,982,000, or
14.8%, which was partially offset by an increase in total interest expense of
$2,593,000 or 19.1%, compared to the same period in 2004. The increase in total
interest income reflects an increase in the yield of interest-earning assets to
5.40% from 4.85%, and an increase of $22.7 million in the average balance of
interest-earning assets during the period. The increase in total interest
expense reflects an increase in the cost on interest-bearing liabilities to
2.89% from 2.50%, and an increase of $23.6 million in the average balance of
interest bearing-liabilities during the period.
Provision for Loan Losses. For the three months ended June 30, 2005, the
provision for loan losses was $4,956,000 compared to $168,000 for the same
period in 2004. For the nine months ended June 30, 2005, the provision for loan
losses was $5,391,000 compared to $325,000 for the same period in 2004. The
increases in both the three-month and nine-month periods were due primarily to
the $4.8 million provision in June 2005 related to the impaired loans discussed
earlier and to loan growth. 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. See "Non-Performing Assets and
Allowance for Loan Losses."
Non-interest Income. Non-interest income increased $309,000, or 48.3%, to
$949,000 for the three months ended June 30, 2005 from $640,000 for the same
period in 2004. For the nine months ended June 30, 2005, non-interest income
decreased $771,000, or 25.6%, to $2,234,000 from $3,005,000 for the same period
in 2004. The decrease in non-interest income for the nine month period reflects
a non-recurring gain in January, 2004 of $1,113,000 on the sale of a branch
office, which net of income taxes added $.27 per diluted share to the nine month
period ended June 30, 2004. There was an increase in both periods in deposit
service charges and other income. These increases were partially offset by
decreases in income from Bank Owned Life Insurance (BOLI) and net gain on the
sale of loans. The increase in other income was primarily the result of Meta
Payment Systems programs and activities which began to generate revenue during
the period. The decrease in income from BOLI was the result of a reduction in
the in the guaranteed return rate, and the decrease in net sale on the sale of
loans was the result of a lower volume of loans originated for sale.
Non-interest Expense. Non-interest expense increased $935,000, or 25.1%, to
$4,666,000 for the three months ended June 30, 2005, from $3,731,000 for the
same period in 2004. For the nine months ended June 30, 2005, non-interest
expense increased $3,260,000, or 30.3%, to $14,015,000 from $10,755,000 for the
same period in 2004. The increase in non-interest expense was the result of
increases in compensation and benefit expense, occupancy and equipment expense
and other expense during both the three and nine month periods ended June 30,
2005. Salary and benefit costs for Meta Payment Systems increased from $194,000
for both the three and nine month periods ended June 30, 2004 to $573,000 and
$1,561,000, respectively, for the three and nine month periods ended June 30,
2005. The increases were also attributable to other factors, including other
costs associated with Meta Payment Systems, totaling, excluding compensation and
benefits, $198,000 and $595,000 for the three and nine month periods,
respectively, and the marketing and other costs related to the corporate name
changes, which totaled $64,000 and $679,000 for the three and nine month
periods,
19
respectively. Meta Payment Systems had non-operating expenses of $221,000 for
both the three and nine month periods of fiscal 2004. Additional factors
contributing to the increase in expenses were the opening of a second branch
office in Sioux Falls, South Dakota, in May 2004, and additional staffing and
other costs related to initiating and proceeding with the process aimed at
compliance, in fiscal 2006, with Section 404 of the Sarbanes-Oxley Act. Normal
increases in costs have also contributed to the increase.
Income Tax Expense. The income tax benefit was $1,245,000 for the three months
ended June 30, 2005 compared to income tax expense of $425,000 for the same
period in 2004. For the nine months ended June 30, 2005, the income tax benefit
was $908,000 compared to income tax expense of $1,839,000 for the same period in
2004. The change for both periods reflects the 2005 net loss compared to net
income in 2004, before income tax expense (benefit).
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 other operating activities. 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 June 30, 2005, the Company had
commitments to originate and purchase loans totaling $65.7 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 the 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 June 30, 2005 which, at that date,
exceeded the minimum capital adequacy requirements:
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At June 30, 2005 Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
MetaBank $52,175 9.98% $41,827 8.00% $52,284 10.00%
MetaBank WC 4,129 12.08 2,733 8.00 3,417 10.00
Tier 1 (Core) Capital (to risk weighted assets):
MetaBank 45,543 8.71 20,914 4.00 31,370 6.00
MetaBank WC 3,695 10.81 1,367 4.00 2,050 6.00
Tier 1 (Core) Capital (to average assets):
MetaBank 45,543 6.23 29,236 4.00 36,546 5.00
MetaBank WC 3,695 6.14 2,406 4.00 3,008 5.00
Tier 1 (Core) Capital (to adjusted total assets):
MetaBank 45,543 6.37 28,598 4.00 35,748 5.00
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
20
with respect to institutions in an undercapitalized category. At June 30, 2005,
MetaBank WC and the Company exceeded minimum requirements for the
well-capitalized category, while MetaBank was considered adequately capitalized
due to its risk-based capital ratio having fallen below 10.0%.
As a result of its status as an adequately capitalized institution, MetaBank
will need to seek regulatory approval (or non-objection) from the Office of
Thrift Supervision (OTS) prior to the declaration of a dividend to the Company.
No prediction can be made as to whether or to what extent any request to declare
a dividend will be granted. Traditionally, the Company has utilized dividends
received from its subsidiary banks to pay dividends to its shareholders. Though
the Company has assets that could be liquidated at the holding company level in
order to pay dividends, no assurance can be given that such assets will be
sufficient to pay regular dividends over an extended period of time, or that
regulatory approval for the payment of such dividends will not be restricted by
the Federal Reserve. It is the position of the Federal Reserve that bank holding
companies should serve as a source of strength to their insured subsidiaries.
Furthermore, MetaBank's ability as an adequately capitalized institution
to accept brokered deposits will be subject to OTS permission and certain
restrictions on the amount of interest the bank may pay on such deposits. This
is not expected to have a material impact on MetaBank, since it has no brokered
deposits. In addition, MetaBank's ability to transfer small business loans
pursuant to certain preferable regulations will be contingent on OTS approval.
Finally, Metabank may not be eligible for expedited regulatory processing of
certain applications. Neither of these limitations is expected to have a
material impact on MetaBank or the Company.
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, such as those offered by the Meta Payment Systems Division; 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 and collecting assets of borrowers in default and
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
21
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.
22
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 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 June 30, 2005 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,
23
the Company's NPV at June 30, 2005 and at September 30, 2004 was slightly 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 over the past twelve months. 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.
Between June 2004 and August 2005, the FOMC increased the target rate ten times
for a total increase of 250 basis points. 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 June 30, 2005 At September 30, 2004
Change in Interest Rates Board Limit ---------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
------------------ -------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $(4,828) (10)% $(5,473) (12)%
+100 bp (25) (1,567) (3) (1,580) (3)
0 bp -- -- -- -- --
-100 bp (25) (1,625) (3) (3,130) (7)
-200 bp (40) (6,676) (13) (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.
24
Part I. Financial Information
Item 4. 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) of the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of June 30, 2005 our disclosure controls and
procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in this Report was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (ii) information required to be disclosed by us in
our reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
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
25
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.
On June 20, 2005, Dan Nelson Auto Group and South Dakota Acceptance
Corporation filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the District of South Dakota, Southern
Division. The case numbers, respectively, are 05-40865 and 05-40866.
MetaBank is a secured creditor with respect to such cases. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Corporate Developments", herein.
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. Unregistered Sale of Equity Securities and Use of Proceeds -
------------------------------------------------------------
(a) None
(c) The following table provides information about purchases by the
Company or its affiliates during the quarter ended June 30, 2005 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 Purchased as Part of Shares that May Yet
Period of Common Paid Per Share Publicly Announced Be Purchased Under
Shares Purchased Purchased Program(s) the Program(s)
---------------------------------------------------------------------------------------------------------------
4/1/05 - 4/30/05 10,900(1) $22.67 40,000(1) 100,000(2)
---------------------------------------------------------------------------------------------------------------
5/1/05 - 5/31/05 -- -- -- 100,000(2)
---------------------------------------------------------------------------------------------------------------
6/1/05 - 6/30/05 -- -- -- 100,000(2)
---------------------------------------------------------------------------------------------------------------
Total 10,900(1) $22.67 40,000(1) 100,000(2)
---------------------------------------------------------------------------------------------------------------
(1) The Company's Employee Stock Ownership Plan (ESOP) was
authorized in September 2004 to purchase 40,000 shares of the
Company's stock. Through March 31, 2005, it had purchased 29,100
shares. On April 18, 2005, the ESOP completed the authorized
purchase.
(2) On April 25, 2005, the Company's Board of Directors authorized
the purchase of up to 100,000 shares of the Company's stock in a
repurchase program that runs through April 30, 2006. (As of August
12, 2005, no shares had been purchased under this program.)
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
26
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.
27
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: August 15, 2005 By: /s/ J. Tyler Haahr
--------------- ------------------
J. Tyler Haahr, President,
and Chief Executive Officer
Date: August 15, 2005 By: /s/ Ronald J. Walters
--------------- ---------------------
Ronald J. Walters, Senior Vice President,
Secretary, Treasurer and Chief Financial Officer
28