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 March 31, 2006
[ ] 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) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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 May 12, 2006:
Common Stock, $.01 par value 2,512,655 Common Shares
META FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial Condition
at March 31, 2006 and September 30, 2005 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended March 31, 2006 and 2005 4
Condensed Consolidated Statements of Comprehensive (Loss) for the
Three and Six Months Ended March 31, 2006 and 2005 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended March 31, 2006 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2006 and 2005 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 1.A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 30
Signatures 31
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Financial Condition (Unaudited)
ASSETS March 31, 2006 September 30, 2005
- ------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 12,666,049 $ 5,390,455
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 24,663,593 8,979,299
-----------------------------------
Total cash and cash equivalents 37,329,642 14,369,754
Securities purchased under agreements to resell 25,161,603 37,513,348
Securities available for sale 206,494,462 230,892,565
Loans receivable - net of allowance for loan losses of
of $5,998,089 at March 31, 2006 and $7,222,404
at September 30, 2005 425,744,615 440,190,245
Loans held for sale 285,825 306,000
Federal Home Loan Bank stock, at cost 6,851,600 8,161,000
Accrued interest receivable 3,945,497 4,240,694
Premises and equipment, net 15,790,036 15,126,069
Foreclosed real estate and repossessed assets 61,366 4,706,414
Bank owned life insurance 12,626,890 12,332,337
Goodwill 3,403,019 3,403,019
Other assets 7,745,403 5,107,497
-----------------------------------
Total assets $ 745,439,958 $ 776,348,942
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing demand deposits $ 145,334,196 $ 102,164,156
Interest-bearing checking 23,468,544 33,481,270
Money market deposits 86,532,419 74,632,300
Savings deposits 51,081,919 62,370,483
Time certificates of deposit 234,007,998 268,122,096
-----------------------------------
Total deposits 540,425,076 540,770,305
Advances from Federal Home Loan Bank 129,755,000 159,705,000
Securities sold under agreements to repurchase 16,103,046 20,507,051
Subordinated debentures 10,310,000 10,310,000
Advances from borrowers for taxes and insurance 287,545 271,273
Accrued interest payable 832,766 941,935
Accrued expenses and other liabilities 5,688,049 884,688
-----------------------------------
Total liabilities 703,401,482 733,390,252
-----------------------------------
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, 2,512,655 and 2,503,655 shares outstanding
at March 31, 2006 and September 30, 2005, respectively 29,580 29,580
Additional paid-in capital 20,624,327 20,646,513
Retained earnings - substantially restricted 34,681,939 34,557,258
Accumulated other comprehensive (loss) (4,634,501) (3,180,607)
Unearned Employee Stock Ownership Plan shares (596,733) (825,057)
Treasury stock, 445,344 and 454,344 common shares, at cost,
at March 31, 2006 and September 30, 2006, respectively (8,066,136) (8,268,997)
-----------------------------------
Total shareholders' equity 42,038,476 42,958,690
-----------------------------------
Total liabilities and shareholders' equity $ 745,439,958 $ 776,348,942
===================================
See Notes to Condensed Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
- -----------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 7,465,410 $ 7,338,529 $ 15,051,982 $ 14,099,364
Securities available for sale 2,674,376 2,957,207 5,195,713 5,898,319
Dividends on Federal Home Loan Bank stock 54,921 76,872 123,885 159,616
-----------------------------------------------------------
10,194,707 10,372,608 20,371,580 20,157,299
-----------------------------------------------------------
Interest expense:
Deposits 3,336,118 2,902,732 6,682,846 5,587,904
FHLB advances and other borrowings 1,869,404 2,480,721 3,979,296 4,893,223
-----------------------------------------------------------
5,205,522 5,383,453 10,662,142 10,481,127
-----------------------------------------------------------
Net interest income 4,989,185 4,989,155 9,709,438 9,676,172
Provision for loan losses (350,000) 257,500 (309,500) 434,500
-----------------------------------------------------------
Net interest income after provision for loan losses 5,339,185 4,731,655 10,018,938 9,241,672
-----------------------------------------------------------
Non-interest income:
Deposit service charges and other fees 362,666 280,704 706,433 609,738
Gain on sales of loans, net 51,234 45,566 106,212 81,308
Bank owned life insurance 165,876 126,646 329,518 253,291
Gain on sales of foreclosed real estate, net 846 -- 3,581 --
Card fees 1,453,117 136,604 2,671,248 165,046
Other income 163,624 84,650 225,964 176,371
-----------------------------------------------------------
Total non-interest income 2,197,363 674,170 4,042,956 1,285,754
-----------------------------------------------------------
Non-interest expense:
Employee compensation and benefits 3,357,806 2,781,661 6,625,716 5,692,050
Occupancy and equipment expense 1,123,551 1,030,493 1,962,946 1,762,103
Deposit insurance premium 14,412 16,453 30,046 36,074
Data processing expense 191,275 184,450 384,620 368,126
Legal and consulting expense 954,149 163,285 1,545,082 224,172
Card processing expense 942,174 68,035 1,285,429 119,846
Other expense 616,596 619,110 1,156,691 1,146,879
-----------------------------------------------------------
Total non-interest expense 7,199,963 4,863,487 12,990,530 9,349,250
-----------------------------------------------------------
Net income before income tax expense 336,585 542,339 1,071,364 1,178,177
Income tax expense 75,204 142,964 294,563 336,860
-----------------------------------------------------------
Net income $ 261,381 $ 399,375 $ 776,801 $ 841,317
===========================================================
Earnings per common share:
Basic $ 0.10 $ 0.16 $ 0.31 $ 0.34
===========================================================
Diluted 0.10 0.16 0.31 0.33
===========================================================
Dividends declared per common share: $ 0.13 $ 0.13 $ 0.26 $ 0.26
===========================================================
See Notes to Condensed Consolidated Financial Statements.
4
META FINANCIAL GROUP INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
------------------------- --------------------------
Net income $ 261,381 $ 399,375 $ 776,801 $ 841,317
Other comprehensive (loss):
Net change in net unrealized (losses)
on securities available for sale (596,859) (2,598,479) (2,315,484) (3,773,146)
Deferred income tax benefit (222,094) (966,896) (861,590) (1,403,990)
------------------------- --------------------------
Total other comprehensive loss (374,765) (1,631,583) (1,453,894) (2,369,156)
Total comprehensive (loss) $ (113,384) $(1,232,208) $ (677,093) $(1,527,839)
========================== ===========================
See Notes to Condensed Consolidated Financial Statements.
5
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended March 31, 2006
Accumulated Unearned
Other Employee
Additional Comprehensive Stock Total
Common Paid-in Retained (Loss), Ownership Treasury Shareholders'
Stock Capital Earnings Net of Tax Plan Shares Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 $29,580 $ 20,646,513 $ 34,557,258 $(3,180,607) $(825,057) $(8,268,997) $ 42,958,690
Cash dividends declared on common
stock ($.26 per share) -- -- (652,120) -- -- -- (652,120)
Issuance of 9,000 common shares
from treasury stock due to exercise
of stock options -- (63,189) -- -- -- 202,861 139,672
Stock compensation -- 56,989 -- -- -- -- 56,989
10,200 common shares committed to be
released under the ESOP -- (15,986) -- -- 228,324 -- 212,338
Net change in net unrealized gains
and losses on securities
available for sale, net of -- -- -- (1,453,894) -- -- (1,453,894)
Net income for six months ended
March 31, 2006 -- -- 776,801 -- -- -- 776,801
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2006 $29,580 $ 20,624,327 $ 34,681,939 $(4,634,501) $(596,733) $(8,066,136) $ 42,038,476
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31,
2006 2005
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from operating activities:
Net income $ 776,801 $ 841,316
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net 1,469,678 1,863,437
Provision for loan losses (309,500) 434,500
Stock compensation 56,989 --
Proceeds from sales of loans held for sale 4,344,032 4,327,480
Originations of loans held for sale (4,323,857) (4,263,680)
Gain on sales of foreclosed real estate, net (3,581) --
Net change in accured interest receivable 295,197 214,707
Net change in other assets (2,070,904) (121,465)
Net change in accrued interest payable (109,169) 451,860
Net change in accrued expenses and other liabilities 4,803,361 (501,741)
----------------------------
Net cash provided by operating activities 4,929,047 3,246,414
Cash flow from investing activities:
Purchase of securities available for sale (108,522) (15,459,228)
Net change in securities purchased under agreement to resell 12,351,745 --
Proceeds from maturities and principal repayments of
securities available for sale 21,506,955 37,803,043
Net change in loans receivable 41,467,922 (29,784,282)
Loans purchased (26,687,356) (12,870,084)
Proceeds from sales of foreclosed real estate 4,675,974 2,500
Change in FHLB stock 1,309,400 659,800
Purchase of premises and equipment (1,289,867) (817,752)
----------------------------
Net cash provided by (used in) investing activities 53,226,251 (20,466,003)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits $ 33,768,869 $ 2,535,991
Net change in time deposits (34,114,098) 37,026,386
Net repayments of advances from Federal Home Loan Bank (29,950,000) (18,500,000)
Net change in securities sold under agreements to repurchase (4,404,005) (3,743,424)
Net change in advances from borrowers for taxes and insurance 16,272 30,196
Cash dividends paid (652,120) (648,923)
Purchase of shares by ESOP -- (437,080)
Proceeds from exercise of stock options 139,672 146,763
Purchase of treasury stock -- (25,655)
----------------------------
Net cash provided by (used in) financing activities (35,195,410) 16,384,254
----------------------------
Net change in cash and cash equivalents 22,959,888 (835,335)
Cash and cash equivalents at beginning of period 14,369,754 8,936,569
----------------------------
Cash and cash equivalents at end of period $ 37,329,642 $ 8,101,234
============================
Supplemental disclosure of cash flow information Cash paid during the period for:
Interest $ 10,771,311 $ 10,029,267
Income taxes 334,500 265,011
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 27,345 $ 22,028
See Notes to Condensed Consolidated Financial Statements.
7
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by Meta
Financial Group, 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 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 condensed consolidated financial
statements, and all such adjustments are of a normal recurring nature.
The accompanying condensed consolidated statement of financial
condition as of September 30, 2005, which has been derived from audited
financial statements, and the unaudited interim condensed financial
statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and note
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest shareholders' annual report (Form 10-K).
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 pursuant to stock options agreements.
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 and six months ended March 31, 2006 and 2005
is presented below.
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2006 2005 2006 2005
---- ---- ---- ----
Basic earnings per common share:
Numerator:
Net income $ 261,381 $ 399,374 $ 776,801 $ 841,316
=========== =========== =========== ===========
Denominator:
Weighted average common shares outstanding $ 2,510,677 $ 2,494,060 $ 2,507,147 $ 2,492,788
Less: Weighted average unallocated ESOP
shares (29,975) (35,129) (32,558) (33,484)
----------- ----------- ----------- -----------
Weighted average common shares outstanding
for basic earnings per share $ 2,480,702 $ 2,458,931 $ 2.474.589 $ 2,459,304
=========== =========== =========== ===========
Basic earnings per common share $ 0.10 $ 0.16 $ 0.31 $ 0.34
=========== =========== =========== ===========
8
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2006 2005 2006 2005
---- ---- ---- ----
Diluted earnings per common share:
Numerator:
Net income $ 261,381 $ 399,374 $ 776,801 $ 841,316
========== ========== ========== ==========
Denominator:
Weighted average common shares outstanding
for basic earnings per common share $2,480,702 $2,458,931 $2,474,589 $2,459,304
Add: Dilutive effect of assumed exercise
of stock options, net of tax benefits 32,225 57,160 30,504 59,939
---------- ---------- ---------- ----------
Weighted average common shares outstanding
for diluted earnings per share $2,512,927 $2,516,091 $2,505,093 $2,519,243
========== ========== ========== ==========
Diluted earnings per common share $ 0.10 $ 0.16 $ 0.31 $ 0.33
========== ========== ========== ==========
3. LOANS RECEIVABLE
Loans receivable before allowance for loan losses totaled $431.7
million as of March 31, 2006, a decrease of $15.7 million from $447.4
million at September 30, 2005. Most of this decrease is the result of
pay downs or pay offs of commercial real estate participation loans in
the first fiscal quarter of 2006. Loans receivable before allowance for
loan losses increased $3.7 million during the second fiscal quarter,
from $428.0 million as of December 31, 2005.
4. INTANGIBLE ASSETS
As of March 31, 2006 and September 30, 2005 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- and six-month periods ended March 31, 2006
or 2005.
5. DEPOSITS
Overall deposits decreased $345,000 from $540.8 million as of September
30, 2005 to $540.4 million as of March 31, 2006; however low- or
no-cost demand deposits have risen $33.8 million over this same time
period, and higher-costing certificates of deposit and public funds
deposits have declined by approximately the same amount.
6. COMMITMENTS
At March 31, 2006 and September 30, 2005, the Company had outstanding
commitments to originate and purchase loans totaling $62.4 million and
$69.6 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be
funded with existing liquid assets.
7. STOCK OPTION PLAN
Prior to October 1, 2005, the Company accounted for its stock option
plans under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees and related
9
Interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation. No stock-based employee compensation cost was
recognized for stock options in the Statement of Operations for the
year ended September 30, 2005 or prior years, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. Effective October 1,
2005, the Company adopted the fair value recognition provisions of SFAS
No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three- and six-month periods ended
March 31, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of October 1, 2005,
based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to October 1, 2005, based on
the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on October 1, 2005, the
Company's net income for the three- and six-month periods ended March
31, 2006 are $39,000 and $57,000 lower, respectively, than if it had
continued to account for share-based compensation under Opinion 25.
Prior to the adoption of Statement 123(R), the Company presented all
tax benefits of deductions resulting from the exercise of stock options
as operating cash flows in the Statement of Cash Flows. Statement
123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as
financing cash flows.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Company's
stock option plans in all periods presented. For purposes of this pro
forma disclosure, the value of the options is estimated using a
Black-Scholes option-pricing formula and amortized to expense over the
option's vesting periods.
Three Months Six Months
Ended Ended
March 31, March 31,
--------- ---------
2005 2005
---- ----
Net income, as reported $ 399,374 $ 841,316
Deduct: Total employee stock-based
compensation expense determined
under fair value based method for
all awards, net of tax effects (23,810) (47,620)
----------- -----------
Pro forma net income $ 375,564 $ 793,706
=========== ===========
Earnings per common share - basic:
As reported $ 0.16 $ 0.34
Pro forma $ 0.15 $ 0.32
Earnings per common share - diluted:
As reported $ 0.16 $ 0.33
Pro forma $ 0.15 $ 0.32
10
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
Meta Financial Group, Inc. and Meta Trust Company. Revenues and
expenses are allocated to business segments using a funds transfer
pricing methodology through which excess funds or funding shortfalls at
individual segments are sold to or bought from, respectively, the
remaining segments. As the Company's funding mix changes between
segments, net interest income at individual segments may rise or fall
based on the relative size of the excess funding or funding shortfall
position at any particular segment. The following tables present
segment data for the Company for the three- and six-month periods ended
March 31, 2006 and March 31, 2005, respectively.
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Three months ended March 31, 2006:
Net interest income $ 3,914,472 $ 1,234,542 ($ 159,829) $ 4,989,185
Provision for loan losses (350,000) -- -- (350,000)
Non-interest income 668,369 1,500,766 28,228 2,197,363
Non-interest expense 4,760,778 2,190,736 248,449 7,199,963
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense 172,063 544,572 (380,050) 336,585
Income tax expense 53,316 188,000 (166,112) 75,204
------------- ------------- ------------- -------------
Net income $ 118,747 $ 356,572 ($ 213,938) $ 261,381
============= ============= ============= =============
Inter-segment revenue (expense) ($ 775,651) $ 933,415 ($ 157,764) --
Total assets $ 625,800,789 $ 117,535,743 $ 2,103,427 $ 745,439,958
11
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Three months ended March 31, 2005:
Net interest income $ 5,071,554 $ 25,103 ($ 107,502) $ 4,989,155
Provision for loan losses 257,500 -- -- 257,500
Non-interest income 451,749 196,460 25,961 674,170
Non-interest expense 4,047,732 747,737 68,018 4,863,487
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense 1,218,071 (526,174) (149,559) 542,338
Income tax expense 403,140 (181,000) (79,176) 142,965
------------- ------------- ------------- -------------
Net income $ 814,931 ($ 345,174) ($ 70,383) $ 399,374
============= ============= ============= =============
Inter-segment revenue (expense) $ 98,243 $ 25,351 ($ 123,594) --
Total assets $ 789,899,748 $ 3,817,268 $ 2,043,701 $ 795,760,717
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Six months ended March 31, 2006:
Net interest income $ 8,039,388 $ 1,991,406 ($ 321,356) $ 9,709,438
Provision for loan losses (309,500) -- -- (309,500)
Non-interest income 1,249,575 2,738,910 54,471 4,042,956
Non-interest expense 9,047,644 3,431,708 511,178 12,990,530
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense 550,819 1,298,608 (778,063) 1,071,364
Income tax expense 185,276 448,000 (338,713) 294,563
------------- ------------- ------------- -------------
Net income $ 365,543 $ 850,608 ($ 439,350) $ 776,801
============= ============= ============= =============
Inter-segment revenue (expense) ($ 1,099,857) $ 1,419,321 ($ 319,464) --
Total assets $ 625,800,788 $ 117,535,743 $ 2,103,426 $ 745,439,957
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Six months ended March 31, 2005:
Net interest income $ 9,840,066 $ 37,246 ($ 201,140) $ 9,676,172
Provision for loan losses 434,500 -- -- 434,500
Non-interest income 978,400 248,082 59,272 1,285,754
Non-interest expense 7,814,645 1,389,528 145,077 9,349,250
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense 2,569,321 (1,104,200) (286,945) 1,178,176
Income tax expense 887,489 (389,000) (161,629) 336,860
------------- ------------- ------------- -------------
Net income $ 1,594,656 ($ 715,200) ($ 38,140) $ 841,316
============= ============= ============= =============
Inter-segment revenue (expense) $ 195,917 $ 38,363 ($ 234,280) --
Total assets $ 789,899,748 $ 3,817,268 $ 2,043,701 $ 795,760,717
12
9. LEGAL PROCEEDINGS
On June 11, 2004, the Sioux Falls School District filed suit in the
Second Judicial Circuit Court alleging that MetaBank, a wholly-owned
subsidiary of the Company, 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 or about March 10, 2006, plaintiffs filed five class-action suits on
behalf of themselves and all other purchasers of vehicles from Prairie
Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s Rapid City, South
Dakota location, and other not-yet-identified auto sales entities owned
or operated by defendants. The complaints are styled as follows: Ronald
Archulleta, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Oglala Sioux Tribe, Pine Ridge Indian Reservation; Cedar
Around Him, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Rosebud Sioux Tribe, Rosebud Indian Reservation; Chris
Dengler, et al. v. Prairie Auto Group, Inc. - Circuit Court of the
Second Judicial Circuit, Minnehaha County, South Dakota; Lucinda Janis,
et al. v. Prairie Auto Group, Inc., et al. - File No. C-157-04; In the
Tribal Court for the Cheyenne River Sioux Indian Reservation, Eagle
Butte, South Dakota; and Kali Treetop, et al. v. Prairie Auto Group,
Inc., et al. - File No. 01-970; Circuit Court for the Seventh Judicial
Circuit, Pennington County, South Dakota. Except for the named
plaintiffs, each of the complaints is essentially identical to the
others. The nature of the allegations are the same, and the same
fourteen legal claims are sought to be pled in each.
Each complaint states that it is a "companion" to the other four and
names the same defendants (approximately twenty-five) including the
Registrant and affiliates thereof (the "MetaBank Defendants"). None of
these complaints has yet been served on any of the MetaBank Defendants.
The thrust of the complaints is that plaintiffs allegedly suffered
damages as a result of a scheme by defendants to use fraudulent
statements, misrepresentations and omissions to sell vehicles and
extended warranties to plaintiffs. Plaintiffs claim that they and other
similarly situated purchasers paid too much for their vehicles and were
induced to buy warranties that were not honored and otherwise proved
worthless. Plaintiffs allege that defendants reaped considerable
profits through fraudulent sales methods; by refusing to make
warrantied repairs; and by engaging in usurious repossession and resale
practices. Plaintiffs allege that these practices were part of a
business plan that originated with the franchisor-defendants and was
purchased and employed by the franchisee-defendants. It appears that
the principal basis for naming the MetaBank Defendants is that they
loaned money to finance some of the defendants' business operations,
purportedly with some degree of knowledge about the defendants'
allegedly abusive consumer practices.
The complaints allege that the described transactions are typical of
defendants' business and were part of a deliberate scheme directed
primarily at Native American customers. The complaints allege that the
franchisee-defendants engaged in coercive, fraudulent and other illegal
activities in connection with the automobile sales, and each seeks to
state claims for: (1) breach of express warranty; (2) breach of implied
warranty of merchantability; (3) deceit/fraud; (4) violation of
applicable deceptive trade laws; (5) breach of the implied covenant of
good faith and fair dealing; (6) conversion; (7) civil conspiracy under
tribal and state common law; (8) negligent hiring, training and
supervision of employees; (9) violation of the Federal Equal Credit
Opportunity Act; (10) invasion of privacy; (11) violation of the
Racketeer Influenced and Corrupt Organizations Act (RICO); (12)
violation of the Magnuson-Moss Act; (13) violation of the Federal Truth
and Lending Act's (TILA) Three Day Rescission Period; and (14)
violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary damages
including the initial purchase price warranty charges, finance costs
13
and related repossession and other charges; costs of allegedly
warrantied repairs that were not made by defendants; consequential
damages relating to the alleged wrongful repossession of vehicles and
deficiency judgments associated therewith; damages for emotional and
mental suffering; punitive and treble damages; and attorneys' fees. The
amount of the alleged damages is not specified in the complaints.
With respect to the first matter described under "Corporate Development
in Fiscal 2005" in the Company's Annual Report of Form 10-K for the
fiscal year ended September 30, 2005 in Part II, Item 7 thereof, each
participation agreement with the ten participant banks provides that
the participant bank shall own a specified percentage of the
outstanding loan balance at any give time. Each agreement also recites
the maximum amount that can be loaned by MetaBank on that particular
loan. MetaBank allocated to some participants an ownership in the
outstanding loan balance in excess of the percentage specified in the
participation agreement. MetaBank believes that in each instance this
was done with the full knowledge and consent of the participant.
Several participants have demanded that their participations be
adjusted to match the percentage specified in the participant
agreement. Based on the total loan recoveries projected as of March 31,
2006, MetaBank calculated that it would cost approximately $953,000 to
adjust these participations as the participants would have them
adjusted. A few participants have more recently asserted that MetaBank
owes them additional monies based on additional legal theories.
MetaBank denies any obligation to make the requested adjustments on
these or related claims. MetaBank cannot predict at this time whether
any participants will file litigation.
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.
14
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. is a bank holding company whose primary assets are
MetaBank, and MetaBank West Central. 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 Savings Bank of the Midwest 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 State Bank. Pursuant to requisite shareholder and regulatory approvals,
the Company and its banking subsidiaries consolidated their names under the
"Meta-" brand 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 March 31, 2006, compared to September 30, 2005,
and the consolidated results of operations for the three- and six-month periods
ended March 31, 2006, compared to the three- and six-month periods ended March
31, 2005. This discussion should be read in conjunction with the Company's
consolidated financial statements, and notes thereto, for the year ended
September 30, 2005.
CORPORATE DEVELOPMENTS AND OVERVIEW
The Company continues to emphasize expansion in the growing metropolitan areas
of Sioux Falls, South Dakota and Des Moines, Iowa. The Company completed
construction of its fourth branch office in the Sioux Falls market in late 2005,
and has now begun construction of a fifth branch in the Des Moines market in
2006.
As previously disclosed in its Form 8-K filing on June 24, 2005, the Company
determined that $9.8 million of its assets related to loans to three companies
involved in auto sales, service, and financing, and their principal owner were
impaired under generally accepted accounting principles. The Company has taken
possession of and liquidated nearly all of the assets of these firms. At this
time, the Company believes its range of potential loss in this transaction,
previously disclosed in its Form 8-K filing on August 15, 2005 at between $1.90
million to $4.88 million, is accurate, and that an adequate allowance has been
established for this potential loss.
The Company also disclosed in its August 15, 2005 Form 8-K filing that it
anticipated future cash expenditures of between $250,000 and $500,000 related to
the impairment charge. In its Form 8-K/A filing on January 24, 2006, the Company
disclosed that its original estimate of future cash expenditures was too low,
and revised its estimate to between $750,000 and $1.1 million. At this time, the
Company believes this estimated expenditure range remains accurate.
The Company disclosed in its Form 8-K filing on March 16, 2006 that its
wholly-owned subsidiary MetaBank entered into a settlement agreement with one of
the participants in the aforementioned auto lending relationship. MetaBank and
the participant agreed to resolve all disputes related to the participation loan
in exchange for MetaBank re-purchasing $461,000 of the outstanding loan amount.
See Footnote 9 and Part II, Item 1. Legal Proceedings, herein.
The Meta Payment Systems (MPS) division generated net income of $356,000, or
$0.14 per diluted share, for the quarter ended March 31, 2006, and $851,000, or
$0.34 per diluted share, for the six-month period ended March 31, 2006. Since
inception, the division has sustained a net loss of $447,000.
15
FINANCIAL CONDITION
As of March 31, 2006, Meta Financial Group had assets totaling $745.4 million,
compared to $776.3 million at September 30, 2005. The reduction in total assets
of $30.9 million, or 4.0%, reflects the Company's planned strategy to reduce the
level of lower yielding investment securities and pay off higher costing
wholesale borrowings. Investment and mortgage-backed securities totaled $231.6
million at March 31, 2006, compared to $268.4 million at September 30, 2005,
reflecting a decrease of $36.8 million, or 13.7%. Similarly, advances from the
Federal Home Loan Bank of Des Moines, and other wholesale borrowings, declined
$34.3 million, or 18.0%, from $190.5 million at September 30, 2005 to $156.2
million at March 31, 2006.
Loans receivable before allowance for loan losses totaled $431.7 million as of
March 31, 2006, a decrease of $15.7 million from $447.4 million at September 30,
2005. Most of this decrease is the result of pay downs or pay offs of commercial
real estate participation loans in the first fiscal quarter of 2006. Loans
receivable before allowance for loan losses increased $3.7 million during the
second fiscal quarter, from $428.0 million as of December 31, 2005. Management
believes some of the increase in the most recent quarter results from the
abatement of normal seasonal effects which tend to depress calendar year end
portfolios.
The Company's deposit mix has also changed favorably. Overall deposits have
remained relatively flat, decreasing by $345,000 from $540.8 million as of
September 30, 2005 to $540.4 million as of March 31, 2006; however low- or
no-cost demand deposits have risen $33.8 million over this same time period, and
higher-costing certificates of deposit and public funds deposits have declined
by approximately the same amount. The increase in demand deposits stems mainly
from growth at Meta Payment Systems, while the decrease in certificates of
deposit and public funds reflects management's planned strategy of reducing
reliance on higher-costing funding sources.
As of March 31, 2006 the Company's shareholders' equity totaled $42.04 million,
compared to $42.96 million as of September 30, 2005. The decrease of $920,000
stems largely from the increase in accumulated other comprehensive loss related
to the Company's mark to market adjustment of its securities available for sale
portfolio pursuant to SFAS No. 115. This loss increased $1.45 million from $3.18
million at September 30, 2005 to $4.63 million at March 31, 2006. Common stock
dividends totaling $652,000 also contributed to the decrease, offset by net
income of $777,000. Both of the company's banking subsidiaries, MetaBank and
MetaBank West Central, meet regulatory requirements for classification as
well-capitalized institutions.
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 March 31, 2006, the Company had loans delinquent 30 days and over totaling
$15.8 million, or 3.66% of total loans, compared to $1.9 million, or 0.42% of
total loans, at September 30, 2005, and $9.8 million, or 2.23% of total loans at
December 31, 2005. Subsequent to the end of the quarter, one of the Company's
commercial loans, which had been delinquent over 90 days, paid off in full
including all principal and interest amounts due. The total loan balance was
just under $4.0 million. Adjusting the Company's delinquent loan amounts for
this payoff would show total loans delinquent 30 days and over totaling $11.9
million, or 2.77% of total loans. The increase in delinquent loans is primarily
the result of four large commercial loans totaling $10.9 million. The Company
believes it is well secured on these assets, and that the level of allowance for
loan losses adequately reflects potential risks related to these loans. The
Company has monitored the increase in delinquent loans since the beginning of
the fiscal year, and does not believe the increase in loan delinquencies is
indicative of a downward
16
trend in credit quality, namely because the increase is concentrated in a few
large loans. Nevertheless, the Company continues to monitor closely all
developments in its loan portfolio.
At March 31, 2006, there were three commercial and multi-family real estate
loans totaling $7.0 million, or 1.63% of total loans, delinquent 30 days and
over. This compares to no delinquent loans in this category as of September 30,
2005. 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 higher level of 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 March 31, 2006, commercial business loans delinquent 30 days and over totaled
$6.7 million, or 1.55% of total loans. This compares to $1.5 million, or 0.32%
of total loans, at September 30, 2005. 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 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 March 31, 2006, agricultural operating loans delinquent 30 days and over
totaled $1.2 million, or 0.29% of the total loan portfolio as compared to
$234,000, or 0.05% of total loans at September 30, 2005. 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 the Company's
non-performing assets. 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 pursuant to their terms at the date shown. Foreclosed assets include
assets acquired in settlement of loans.
17
March 31, 2006 September 30, 2005
-------------- ------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family $ 125 $ 54
Construction 450 --
Commercial and multi-family 1,214 --
Agricultural real estate -- --
Consumer 18 1
Agricultural operating 185 218
Commercial business (1) 4,667 404
---------- ----------
Total non-accruing loans 6,659 677
Accruing loans delinquent 90 days or more -- --
---------- ----------
Total non-performing loans 6,659 677
Restructured loans:
Consumer -- --
Agricultural operating -- 7
Commercial business -- --
---------- ----------
Total restructured loans -- 7
Foreclosed assets:
One-to four family 23 --
Commercial and multi-family 35 1,841
Consumer 3 --
Agricultural operating -- --
Commercial business -- 2,865
---------- ----------
Total foreclosed assets 61 4,706
---------- ----------
Total non-performing assets $ 6,720 $ 5,390
========== ==========
Total as a percentage of total assets 0.90% 0.69%
========== ==========
(1) March includes a $3,964 commercial business loan which paid off
subsequent to quarter end.
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, 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 March 31,
2006, the Company had classified a total of $6.2 million of its assets as
substandard, $468,000 as doubtful and none as loss. This compares to
classifications at September 30, 2005 of $10.5 million substandard, $248,000
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.
18
At March 31, 2006, the Company has established an allowance for loan losses
totaling $6.0 million compared to $7.2 million at September 30, 2005. The
allowance represented approximately 90% of the total non-performing loans at
March 31, 2006. Adjusting for the aforementioned delinquent loan which paid off
subsequent to quarter end, the allowance to would represent approximately 218%
of total non-performing loans. The allowance at September 30, 2005 represented
approximately 1,067% 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-and six-month periods ended March 31,
2006 and March 31, 2005:
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
(Dollars in thousands) 2006 2005 2006 2005
- ---------------------- ---- ---- ---- ----
Beginning balance $ 7,257 $ 5,540 $ 7,222 $ 5,371
Provision charged (credited) to operations (350) 257 (309) 434
Loans charged-off (1,108) (1) (1,116) (12)
Recoveries 199 1 201 4
------- ------- ------- -------
Ending balance $ 5,998 $ 5,797 $ 5,998 $ 5,797
======= ======= ======= =======
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 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 non-performing
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 have reported 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 "Non-performing Assets and
Allowance for Loan Losses." Although management believes the levels of the
allowance as of both March 31, 2006 and September 30, 2005 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.
19
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 March 31, 2006, the Company recorded net
income of $261,000, or $0.10 per diluted share, compared to net income of
$399,000, or $0.16 per diluted share, for the same period in 2005. Earnings in
the current period were positively impacted by a negative provision for loan
loss and higher non-interest income, due primarily to large increases in card
fees, offset by higher compensation, legal and consulting, and other expenses.
For the second fiscal quarter of 2006, Meta Payment Systems, a separate
reportable segment, recorded net income of $356,000, or $0.14 per diluted share,
compared to a loss of $345,000, or $0.14 per diluted share for the second fiscal
quarter of 2005. For the six-month period ended March 31, 2006, Meta Payment
Systems recorded net income of $851,000, or $0.34 per diluted share, compared to
a loss of $715,000, or $0.28 per diluted share, for the six-month period ended
March 31, 2005.
Net interest income. For the second quarter of fiscal 2006, net interest income
totaled $4.989 million, which was the same as the second fiscal quarter of 2005.
Average earning assets for the three-month period ended March 31, 2006 were
$701.7 million, compared to $762.8 million for the same period one year earlier,
a reduction of $61.1 million. Flat net interest income, coupled with a smaller
balance sheet resulted in an increase in net interest margin improvement of
0.23% from 2.64% in the second fiscal quarter of 2005 to 2.87% in the second
fiscal quarter of 2006.
Net interest income for the first six months of fiscal year 2006 totaled $9.709
million, compared to $9.676 million over the same period in fiscal year 2005,
reflecting an increase of $33,000. Similarly, average earning assets for the
six-month period ended March 31, 2006 were $707.9 million, compared to $756.2
million for the same period one year earlier, a reduction of $48.3 million.
Again, the combination of relatively flat net interest income and a smaller
balance sheet resulted in net interest margin improvement of 0.18% from 2.58%
for the first six months of fiscal year 2005 to 2.76% for the first six months
of fiscal year 2006.
The primary driver of the Company's higher net interest margin has been the
improvement of the Company's funding mix toward low- or no-cost demand deposits
and away from higher costing time and public funds deposits. Similarly, the
decrease in wholesale borrowings and investments has improved the Company's
capital and risk profile, while reducing reliance on lower spread assets and
funding vehicles.
20
The following table presents the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the three-month periods ended March 31, 2006 and March 31, 2005, respectively.
2006 2005
Average Annualized Average Annualized
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
- ---------------------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable $ 424,645 $ 7,466 7.12% $ 427,186 $ 7,339 6.96%
Mortgage-backed securities 190,108 1,822 3.83 284,302 2,654 3.73
Other investment securities 79,965 852 4.26 40,580 303 2.99
FHLB stock 6,998 55 3.14 10,734 77 2.87
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 701,716 $ 10,195 5.86% $ 762,802 $ 10,373 5.49%
Non-interest-earning assets 48,696 34,539
---------- ----------
Total assets $ 750,412 $ 797,341
========== ==========
Non-interest bearing deposits $ 139,127 -- -- $ 26,412 -- --
Interest-bearing liabilities:
NOW and money markets $ 117,729 $ 800 2.76% $ 108,385 $ 359 1.34%
Savings deposits 54,490 381 2.84 55,749 335 2.44
Time deposits 235,908 2,155 3.70 278,487 2,209 3.22
FHLB advances 132,252 1,523 4.61 239,468 2,106 3.52
Other borrowings 25,657 347 5.41 40,039 375 3.75
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 566,036 $ 5,206 3.71% $ 722,128 $ 5,384 3.00%
Total deposits and
interest-bearing liabilities $ 705,163 $ 5,206 2.98% $ 748,540 $ 5,384 2.90%
Other non-interest bearing
liabilities 3,016 2,711
---------- ----------
Total liabilities $ 708,179 $ 751,251
Stockholders' equity 42,233 46,090
Total liabilities and
stockholders' equity $ 750,412 $ 797,341
========== ==========
Net interest income and net $ 4,989 2.89% $ 4,989 2.59%
interest rate spread including
non-interest bearing deposits
========== ========== ========== ==========
Net interest margin 2.87% 2.64%
========== ==========
21
The following table presents the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the six-month periods ended March 31, 2006 and March 31, 2005, respectively.
2006 2005
Average Annualized Average Annualized
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
- ---------------------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable $ 428,387 $ 15,052 7.04% $ 419,803 $ 14,099 6.73%
Mortgage-backed securities 195,796 3,655 3.73 288,920 5,329 3.69
Other investment securities 76,136 1,540 4.05 36,820 569 3.09
FHLB stock 7,570 124 3.28 10,628 160 3.01
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets $ 707,889 $ 20,371 5.77% $ 756,171 $ 20,157 5.34%
Non-interest-earning assets 46,308 34,345
------------ ------------
Total assets $ 754,197 $ 790,516
============ ============
Non-interest bearing deposits $ 123,983 -- -- $ 24,673 -- --
Interest-bearing liabilities:
NOW and money markets $ 114,567 $ 1,475 2.58% $ 118,403 $ 807 1.37%
Savings deposits 57,189 805 2.82 51,614 514 2.00
Time deposits 245,085 4,403 3.60 282,258 4,267 3.03
FHLB advances 142,568 3,315 4.60 223,894 4,169 3.68
Other borrowings 27,978 664 4.75 41,079 724 3.52
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 587,387 $ 10,662 3.62% $ 717,248 $ 10,481 2.91%
Total deposits and
interest-bearing liabilities $ 711,370 $ 10,662 2.99% $ 741,921 $ 10,481 2.82%
Other non-interest bearing
liabilities 179 2,007
------------ ------------
Total liabilities $ 711,549 $ 743,928
Stockholders' equity 42,648 46,588
Total liabilities and
stockholders' equity $ 754,197 $ 790,516
============ ============
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 9,709 2.77% $ 9,676 2.52%
============ ============ ============ ============
Net interest margin 2.76% 2.58%
============ ============
Provision for loan loss. During the second fiscal quarter of 2006 and the six
months ended March 31, 2006, the Company recorded negative provisions for loan
loss of $350,000 and $310,000, respectively, compared to positive loan loss
provisions of $257,000 and $434,000 for the prior comparable periods. The
negative provisions in the current periods resulted primarily from the Company's
settlement agreement with one of the participants in its lending relationship
with three entities involved in auto sales, service, and financing, and their
principal owner. See "Non-Performing Assets and Allowance for Loan Losses"
herein.
Non-interest income. For the three months ended March 31, 2006, non-interest
income rose $1.523 million from $674,000 to $2.197 million, compared to the same
period in 2005. For the six months ended March 31, 2006, non-interest income
rose $2.757 million from $1.286 million to $4.043 million, compared to the same
period in fiscal year 2005. The bulk of this increase resulted from increased
card fee revenue from Meta Payment Systems. The revenue increase at Meta
Payments stems mainly from growth in the number of outstanding prepaid debit
cards. As of March 2006, the Company had over 4.3 million active prepaid debit
cards, more than double the level outstanding at the beginning of the fiscal
year.
22
Non-interest expense. Total non-interest expense for the three months ended
March 31, 2006 was $7.200 million. This compares to $4.863 for the same period
in 2005. For the six-month period ended March 31, 2006, total non-interest
expense was $12.990 million, compared to $9.349 million for the same period in
fiscal year 2005. The majority of the increases in each time period resulted
from higher compensation and legal and consulting expenses.
Meta Financial Group's compensation expense for the second fiscal quarter of
2006 totaled $3.358 million, which reflected a $576,000 increase compared to the
same quarter in fiscal 2005. For the first six months of fiscal year 2006,
compensation expense totaled $6.626 million, which reflected an increase of
$934,000 compared to the same period in fiscal year 2005. The increase was
primarily the result of staff acquisition costs related to the growth at Meta
Payment Systems, and the full-staffing of two de novo branch facilities in the
Sioux Falls market. Other compensation costs included one time severance and
recruitment expenses.
The Company's legal and consulting expenses also increased in the second fiscal
quarter of 2006, rising $791,000 from $163,000 to $954,000. Approximately one
half of this increase stemmed from higher expenditures related to the Company's
work related to section 404 of the Sarbanes-Oxley Act, for which the Company has
engaged an outside consulting firm to assist with implementation. The Company's
increased legal expenses were primarily due to expenditures on matters involving
or related to the aforementioned automobile related loans. For the six-month
period ending March 31, 2006, legal and consulting expenses rose $1.321 million
from $224,000 to $1.545 million. Approximately one half of this increase
pertains to Sarbanes-Oxley section 404 implementation. Higher legal expenses
relating to the aforementioned loans also contributed to the increase in
expense. Through March 31, 2006, the Company has incurred over $700,000 in
additional collection expenses related to the aforementioned auto lending
relationships. The Company previously disclosed that its revised estimate for
total cash expenditures relating to its collection efforts with respect to these
loans would range between $750,000 and $1.1 million. The Company believes this
expenditure estimate remains accurate at this time.
Income tax expense. Income tax expense was $75,000 for the three months ended
March 31, 2006, compared to $143,000 for the same period in 2005. Income tax
expense was $294,000 for the six months ended March 31, 2006 compared to
$337,000 for the same period in fiscal year 2005. The decreases of $68,000 and
$43,000, respectively, relate to lower taxable income in the current 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 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 March 31, 2006, the Company had
commitments to originate and purchase loans totaling $62.4 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 March 31, 2006 which, at that date,
exceeded the minimum capital adequacy requirements.
23
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
At March 31, 2006 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands) Total Capital (to risk weighted assets):
MetaBank $52,294 10.66% $39,244 8.00% $49,056 10.00%
MetaBank WC 4,243 13.15 2,581 8.00 3,226 10.00
Tier 1 (Core) Capital (to risk weighted assets):
MetaBank 46,524 9.48 19,622 4.00 29,433 6.00
MetaBank WC 3,944 12.22 1,290 4.00 1,936 6.00
Tier 1 (Core) Capital (to average assets):
MetaBank 46,524 6.64 28,033 4.00 35,041 5.00
MetaBank WC 3,944 8.50 1,855 4.00 2,319 5.00
Tier 1 (Core) Capital (to adjusted total assets):
MetaBank 46,524 6.66 27,937 4.00 34,921 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 with respect to institutions in an
undercapitalized category. At March 31, 2006, the Company, 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 may
address: 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; and the risk of litigation.
The foregoing list of factors is not exclusive. Additional discussions of
factors affecting the Company's business and prospects are contained in the
Company's periodic filings with the SEC. The Company 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.
24
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 the Company's cash demands. This portfolio may also
be used in the ongoing management of changes to the Company's asset/liability
mix. 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 demand, savings, and NOW accounts tend to be less susceptible
to rapid changes in interest rates. As discussed previously, the bank continues
to emphasize such deposits due to their low cost as well as their relative
stability in volatile interest rate environments.
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 March 31, 2006 and September 30, 2005, is an analysis of
the Company's interest rate risk profile 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 interest rates have moved
higher during this fiscal year, the Company's interest rate risk profile has
shifted from one more exposed to downward rate movements as of September 30,
2005 to a more balanced position as of March 31, 2006. This shift is primarily
the result of the
25
Company's Base Case position moving along the market value curve as rates have
risen. Between September 30, 2005, and March 31, 2006, the Federal Funds rate
rose 100 bp from 3.75% to 4.75%. Similarly, the 10 year Treasury yield rose 52
bp from 4.33% on September 30, 2005 to 4.85% on March 31, 2006. As a
consequence, what was the Company's Base Case position at September 30, 2005 is
more similar to the Company's Down 100 position as of March 31, 2006.
Some changes in company's balance sheet since September 30, 2005 have also
created moderate shifts in the Company's interest rate risk profile. The
decrease in mortgage-backed securities and callable wholesale borrowings has
reduced the company's exposure to option risk. Additionally, the increase in
non-costing deposits has served to reduce the Company's exposure to rising
interest rates. As of March 31, 2006 and September 30, 2005, the Company and its
subsidiaries were within the interest rate risk limits set forth by the Board of
Directors and banking regulations.
At March 31, 2006 At September 30, 2005
Change in Interest Rates Board Limit ----------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
- ------------------------ -------- -------- -------- -------- --------
(Dollars in thousands)
+200 bp (40)% $(3,938) (6)% $(1,904) (3)%
+100 bp (25) (1,032) (2) ( 411) (1)
0 bp (Base Case) -- -- -- -- --
-100 bp (25) ( 454) (1) (2,773) (5)
-200 bp (40) (3,583) (5) (9,183) (16)
Certain shortcomings are inherent in the method of analysis presented in the
preceding 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.
26
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 March 31, 2006 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.
27
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 alleging
that MetaBank, a wholly-owned subsidiary of the Company,
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 or about March 10, 2006, plaintiffs filed five class-action
suits on behalf of themselves and all other purchasers of vehicles
from Prairie Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s
Rapid City, South Dakota location, and other not-yet-identified
auto sales entities owned or operated by defendants. The
complaints are styled as follows: Ronald Archulleta, et al. v.
------------------------------
Prairie Auto Group, Inc., et al. - In the Tribal Court for the
-----------------------------------
Oglala Sioux Tribe, Pine Ridge Indian Reservation; Cedar Around
Him, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Rosebud Sioux Tribe, Rosebud Indian Reservation;
Chris Dengler, et al. v. Prairie Auto Group, Inc. - Circuit Court
-------------------------------------------------
of the Second Judicial Circuit, Minnehaha County, South Dakota;
Lucinda Janis, et al. v. Prairie Auto Group, Inc., et al. - File
-----------------------------------------------------------
No. C-157-04; In the Tribal Court for the Cheyenne River Sioux
Indian Reservation, Eagle Butte, South Dakota; and Kali Treetop,
-------------
et al. v. Prairie Auto Group, Inc., et al. - File No. 01-970;
---------------------------------------------
Circuit Court for the Seventh Judicial Circuit, Pennington County,
South Dakota. Except for the named plaintiffs, each of the
complaints is essentially identical to the others. The nature of
the allegations are the same, and the same fourteen legal claims
are sought to be pled in each.
Each complaint states that it is a "companion" to the other four
and names the same defendants (approximately twenty-five)
including the Registrant and affiliates thereof (the "MetaBank
Defendants"). None of these complaints has yet been served on any
of the MetaBank Defendants. The thrust of the complaints is that
plaintiffs allegedly suffered damages as a result of a scheme by
defendants to use fraudulent statements, misrepresentations and
omissions to sell vehicles and extended warranties to plaintiffs.
Plaintiffs claim that they and other similarly situated purchasers
paid too much for their vehicles and were induced to buy
warranties that were not honored and otherwise proved worthless.
Plaintiffs allege that defendants reaped considerable profits
through fraudulent sales methods; by refusing to make warrantied
repairs; and by engaging in usurious repossession and resale
practices. Plaintiffs allege that these practices were part of a
business plan that originated with the franchisor-defendants and
was purchased and employed by the franchisee-defendants. It
appears that the principal basis for naming the MetaBank
Defendants is that they loaned money to finance some of the
defendants' business operations, purportedly with some degree of
knowledge about the defendants' allegedly abusive consumer
practices.
The complaints allege that the described transactions are typical
of defendants' business and were part of a deliberate scheme
directed primarily at Native American customers. The complaints
allege that the franchisee-defendants engaged in coercive,
fraudulent and other illegal activities in connection with the
automobile sales, and each seeks to state claims for: (1) breach
of express warranty; (2) breach of implied warranty of
merchantability; (3) deceit/fraud; (4) violation of applicable
deceptive trade laws; (5) breach of the implied covenant of good
faith and fair dealing; (6) conversion; (7) civil conspiracy under
tribal and state common law; (8) negligent hiring, training and
supervision of employees; (9) violation of the Federal Equal
Credit Opportunity Act; (10) invasion of privacy; (11) violation
of the Racketeer Influenced and Corrupt Organizations Act (RICO);
(12)
28
violation of the Magnuson-Moss Act; (13) violation of the Federal
Truth and Lending Act's (TILA) Three Day Rescission Period; and
(14) violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary
damages including the initial purchase price warranty charges,
finance costs and related repossession and other charges; costs of
allegedly warrantied repairs that were not made by defendants;
consequential damages relating to the alleged wrongful
repossession of vehicles and deficiency judgments associated
therewith; damages for emotional and mental suffering; punitive
and treble damages; and attorneys' fees. The amount of the alleged
damages is not specified in the complaints.
With respect to the first matter described under "Corporate
Development in Fiscal 2005" in the Company's Annual Report of Form
10-K for the fiscal year ended September 30, 2005 in Part II, Item
7 thereof, each participation agreement with the ten participant
banks provides that the participant bank shall own a specified
percentage of the outstanding loan balance at any give time. Each
agreement also recites the maximum amount that can be loaned by
MetaBank on that particular loan. MetaBank allocated to some
participants an ownership in the outstanding loan balance in
excess of the percentage specified in the participation agreement.
MetaBank believes that in each instance this was done with the
full knowledge and consent of the participant. Several
participants have demanded that their participations be adjusted
to match the percentage specified in the participant agreement.
Based on the total loan recoveries projected as of March 31, 2006,
MetaBank calculated that it would cost approximately $953,000 to
adjust these participations as the participants would have them
adjusted. A few participants have more recently asserted that
MetaBank owes them additional monies based on additional legal
theories. MetaBank denies any obligation to make the requested
adjustments on these or related claims. MetaBank cannot predict at
this time whether any participants will file litigation.
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 1.A. Risk Factors - Other than the risk factors described below, there
------------
have been no material changes from those described in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for
the period ended September 30, 2005.
On March 15, 2006, the Federal Housing Finance Board, the federal
regulator of the 12 Federal Home Loan Banks, published for comment
a proposal that would (i) establish a minimum retained earnings
requirement for each Federal Home Loan Bank, (ii) limit the amount
of excess stock that a Bank could have outstanding, and (iii)
impose new restrictions on the timing and form of dividend
payment. If adopted, dividends paid to the Company by the FHLB of
Des Moines, of which the Company is a member, could be reduced,
thereby negatively impacting the Company's earnings.
In connection with the previously disclosed bankruptcy of certain
borrowers of MetaBank, MetaBank has experienced loan losses, which
have, in part, been passed on to various entities that
participated with MetaBank, which was the lead lender at the time
the loans were made. Several of the participant banks have
recently contended, over and above the allocation issue raised by
the participants and described in previous filings of the
Registrant, that MetaBank owes such participants additional
monies, and have threatened MetaBank with legal action if such
amounts are not paid. In addition, five lawsuits, all containing
virtually identical allegations to each of the others, have been
filed naming several defendants, including MetaBank and
affiliates, on behalf of the purchasers of automobiles from the
borrowers. It is contended by the plaintiffs in these five
lawsuits that MetaBank and its affiliates conspired with the
borrowers to defraud such purchasers. See Footnote 9 to the
29
Financial Statements and Part II - Other Information, Item 1.
Legal Proceedings herein. If the Company is forced to defend
itself against this pending and threatened litigation, the Company
would incur additional legal expenses, which cannot be reasonably
estimated, but would affect overall profitability.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds - None
----------------------------------------------------------
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:
10.12 Settlement Agreement By and Between First Indiana
Bank, N.A. and MetaBank dated March 13, 2006.
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.
30
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: May 12, 2006 By: /s/ J. Tyler Haahr
-------------- ----------------------------------------------
J. Tyler Haahr, President,
and Chief Executive Officer
Date: May 12, 2006 By: /s/ Jonathan M. Gaiser
------------- ----------------------------------------------
Jonathan M. Gaiser, Senior Vice President,
Secretary, Treasurer and Chief Financial Officer
31