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CASH > SEC Filings for CASH > Form 10-K on 21-Dec-2012All Recent SEC Filings

Show all filings for META FINANCIAL GROUP INC

Form 10-K for META FINANCIAL GROUP INC


21-Dec-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8 "Consolidated Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part I, Item 1 "Business."

General

The Company is a unitary savings and loan holding company whose primary subsidiary is the Bank. The Company focuses on two core businesses, its regional Retail Banking business and a national payments business, conducted through its MPS division. The Company's Retail Bank business is focused on establishing and maintaining long-term relationships with customers, and is committed to serving the financial service needs of the communities in its market area. The Retail Bank's primary market area includes the following counties: Buena Vista, Dallas and Polk located in central and northwestern Iowa, and Brookings, Lincoln, and Minnehaha located in east central South Dakota. The Retail Bank segment attracts retail deposits from the general public and uses those deposits, together with other borrowed funds, to originate and purchase residential and commercial mortgage loans, and to originate consumer, agricultural and other commercial loans and to purchase various investment and mortgage-backed securities.

MPS, a division of the Bank, is an industry leader in the issuance of prepaid debit cards and is also a provider of a wide range of payment related products and services, including prepaid debit cards such as those related to gift, tax refunds, rebate, travel and payroll, ATMs, and consumer credit products. MPS pursues a strategy of working with industry-leading companies in a variety of businesses to help them introduce new payment products to their customers. In addition, MPS partners with emerging companies to develop and introduce new payment products. MPS earns revenues from fees and is responsible for the bulk of the Bank's low- and no-cost demand deposits related to its prepaid card business. Certain of MPS' activities have been significantly curtailed as a result of Consent Orders issued by the OTS, our former regulator. For a description of the Consent Orders, see Item 1 "Business - Regulation - Bank Supervision and Regulation." The Consent Orders, and the related directives that preceded them, have had a significant impact on revenues, profitability, and growth of the MPS division, the Bank, and the Company as a whole.


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Overview of Corporate Developments

On October 1, 2012, the Company issued a press release announcing the closing of previously announced private placement transactions pursuant to which the Company sold, on September 28, 2012 to accredited investors an aggregate of 1,563,100 shares of the Company's common stock, par value $0.01 per share ("Common Stock"), for total consideration of approximately $34.2 million, or $21.91 per share, pursuant to nine separate securities purchase agreements (the "Purchase Agreements") entered into on August 16, 2012. The price per share was determined based upon the arithmetic average of the daily volume weighted average price of the Common Stock for a trading period preceding the date the Purchase Agreements were entered into. The Company invested 90% of the net proceeds, all of which qualifies as tangible common equity and Tier 1 capital at September 30, 2012, to further capitalize the Bank in order to support expected significant growth in its existing MPS programs. The remainder of the proceeds will be used by the Company for general corporate purposes.

The private placement transactions were consummated following stockholder approval of (a) an amendment to the Company's Certificate of Incorporation to, among other things, increase the number of authorized shares of Common Stock, and (b) the private placement transactions as required under Rule 5635 of the NASDAQ Stock Market Rules, which approvals were obtained at a Special Meeting of Stockholders of the Company held on September 27, 2012 (the "Special Meeting"). The sales of the shares of Common Stock described herein were undertaken by the Company without registration in private placements in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of Regulation D as promulgated by the SEC under the 1933 Act ("Regulation D"). Each of the Buyers is an "accredited investor" within the meaning of Regulation D.

At the closing of the private placement transactions, the Company and each of the Buyers entered into a separate registration rights agreement (each, a "Registration Rights Agreement"), the form of which was attached as Exhibit A to each Purchase Agreement, pursuant to which the Company prepared and filed with the SEC a registration statement covering the resale of shares of Common Stock purchased by the Buyers. The registration statement was declared effective on October 12, 2012.The foregoing description of the Registration Rights Agreements does not purport to be complete and is qualified in its entirety by reference to the full agreements, copies of which were filed as exhibits to a Form 8-K filed by the Company on October 1, 2012.

Financial Condition

The following discussion of the Company's consolidated financial condition should be read in conjunction with the Selected Consolidated Financial Information and Consolidated Financial Statements and the related notes included in this Annual Report on Form 10-K.

As of September 30, 2012, the Company's assets grew by $373.4 million, or 29.3%, to $1.6 billion compared to $1.3 billion at September 30, 2011. The increase in assets was reflected primarily in increases in the Company's investment securities available for sale and to a lesser extent the Company's mortgage-backed securities, offset in part by a decrease in the Company's cash and cash equivalents.


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Total cash and cash equivalents and federal funds sold were $145.1 million at September 30, 2012, a decrease of $131.8 million from $276.9 million at September 30, 2011. The decline was primarily the result of the Company executing a strategy designed to diversify the Bank's investment security portfolio. In general, the Company maintains its cash investments in interest-bearing overnight deposits with the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank ("FRB"). At September 30, 2012 the Company had no federal funds sold.

The total of mortgage-backed securities and investment securities available for sale increased $497.4 million, or 80.3%, to $1.1 billion at September 30, 2012, as investment purchases exceeded related maturities, sales, and principal paydowns. During fiscal 2012, the Company purchased $971.3 million of mortgage-backed securities with average lives of five years or less or stated final maturities of approximately 30 years or less and sold mortgage-backed securities in the amount of $657.4 million. In addition, the Company purchased $422.6 million of investment securities which are comprised of corporate and tax exempt bonds. See Note 3 to the "Notes to Consolidated Financial Statements," which are included in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company's portfolio of net loans receivable increased by $12.6 million, or 4.0%, to $327.0 million at September 30, 2012 from $314.4 million at September 30, 2011. This increase primarily relates to an increase of $15.4 million in residential mortgage loans and $1.5 million in commercial operating loans, partially offset by a decrease in commercial real estate and multi-family loans of $2.5 million and a decrease in MPS consumer loans of $2.0 million. See Note 4 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company owns stock in the FHLB due to its membership and participation in this banking system. The FHLB requires a calculated level of stock investment based on a pre-determined formula. The Company's investment in such stock decreased $2.6 million, or 55.2%, to $2.1 million at September 30, 2012 from $4.7 million at September 30, 2011. The decrease was due to a modification in the FHLB stock buyback where it changed from a monthly buyback to a daily buyback.

The Company has insurance receivables established for estimated recoveries from various lawsuits due from the Company's insurance company. This amount decreased $1.7 million to $0.6 million at September 30, 2012 from $2.3 million at September 30, 2011. The decrease was primarily the result of the settlement of the Meta Financial Group, Inc., Securities Litigation lawsuit for $2.1 million and subsequent payment of the settlement by the insurance company.

Foreclosed real estate and repossessed assets decreased to $0.8 million as compared to $2.7 million at September 30, 2011 due to sales and write offs exceeding the foreclosure of assets and loan collateral related to previously reported non-performing loans.

Goodwill and intangible assets increased $0.7 million, or 54.8%, to $2.0 million at September 30, 2012, due to an increase in capitalized expense related to patents.

Total deposits increased by $238.2 million, or 20.9%, to $1.4 billion at September 30, 2012 from $1.1 billion at September 30, 2011. During fiscal 2012, the Company continued to grow its low- and no-cost deposit portfolio. Deposits attributable to MPS were up $242.1 million, or 26.2%, at September 30, 2012, as compared to September 30, 2011. This increase results from growth in existing prepaid card programs.


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The Company's total borrowings increased $18.3 million, or 62.5%, from $29.4 million at September 30, 2011 to $47.7 million at September 30, 2012, primarily due to the increase of securities sold under agreements to repurchase. See Notes 8, 9, and 10 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

At September 30, 2012, the Company's stockholders' equity totaled $145.9 million, an increase of $65.3 million from $80.6 million at September 30, 2011. The increase was related primarily to the private offerings of common stock during fiscal 2012, and to net income, offset in part by the payment of cash dividends on the Company's common stock. At September 30, 2012, the Bank continues to meet regulatory requirements for classification as a well-capitalized institution. See Note 14 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Results of Operations

The following discussion of the Company's Results of Operations should be read in conjunction with the Selected Consolidated Financial Information and Consolidated Financial Statements and the related notes included in this Annual Report on Form 10-K.

The Company's Results of Operations are dependent on net interest income, provision for loan losses, non-interest income, non-interest expense, and income tax expense. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. Notwithstanding that a significant amount of the Company's deposits pay low rates of interest, the Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The Company's non-interest income increased in fiscal 2012 as compared to fiscal 2011 following a decrease in fiscal 2011 as compared to fiscal 2010. Non-interest expense, related primarily to compensation and benefits and card processing expense, decreased in proportion to non-interest income as compared to the prior fiscal year. A more detailed explanation of the factors responsible for results of operations of the Company is presented below.

The Company's non-interest income is derived primarily from prepaid card, credit products, and ATM fees attributable to MPS and fees charged on bank loans and transaction accounts. Non-interest income is derived from net gains on the sale of securities available for sale as well as the Company's holdings of bank owned life insurance. This income is offset by expenses, such as compensation and occupancy expenses associated with additional personnel and office locations as well as card processing expenses attributable to MPS. Non-interest expense is also impacted by occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses.


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Average Balances, Interest Rates, and Yields

The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments have been
made. Non-Accruing loans have been included in the table as loans carrying a
zero yield.

Year Ended September 30,                             2012                                         2011                                         2010
(Dollars in Thousands)              Average        Interest                      Average        Interest                      Average        Interest
                                  Outstanding      Earned /       Yield /      Outstanding      Earned /       Yield /      Outstanding      Earned /       Yield /
                                    Balance          Paid          Rate          Balance          Paid          Rate          Balance          Paid          Rate

Interest-earning assets:
Loans receivable                  $    327,634     $  18,058          5.51 %   $    338,114     $  19,654          5.81 %   $    402,750     $  24,944          6.19 %
Mortgage-backed securities             756,465        16,133          2.13 %        549,374        18,362          3.34 %        422,904        13,370          3.16 %
Other investments                      254,029         3,106          1.40 %        181,514         1,043          0.57 %        138,915           769          0.55 %
Total interest-earning assets        1,338,128     $  37,297          2.82 %      1,069,002     $  39,059          3.65 %        964,569     $  39,083          4.05 %
Non-interest-earning assets             61,978                                       67,114                                       49,739
Total assets                      $  1,400,106                                 $  1,136,116                                 $  1,014,308

Non-interest bearing deposits     $  1,018,748     $       -          0.00 %   $    780,941     $       -          0.00 %   $    633,246     $       -          0.00 %
Interest-bearing liabilities:
Interest-bearing checking               33,555           252          0.75 %         32,717           409          1.25 %         21,169           258          1.22 %
Savings                                 17,773            39          0.22 %         11,248            37          0.33 %         10,431            34          0.33 %
Money markets                           38,552           133          0.34 %         34,975           234          0.67 %         34,713           292          0.84 %
Time deposits                          105,605         1,782          1.69 %        119,318         2,389          2.00 %        136,409         3,324          2.44 %
FHLB advances                           45,414           798          1.76 %         39,316         1,181          3.00 %         76,312         1,558          2.04 %
Other borrowings                        25,584           559          2.18 %         16,322           497          3.04 %         23,023           527          2.29 %
Total interest-bearing
liabilities                            266,483         3,563          1.34 %        253,896         4,747          1.87 %        302,057         5,993          1.98 %
Total deposits and
interest-bearing liabilities         1,285,231     $   3,563          0.28 %      1,034,837     $   4,747          0.46 %        935,303     $   5,993          0.64 %
Other non-interest bearing
liabilities                             22,198                                       19,956                                       18,815
Total liabilities                    1,307,429                                    1,054,793                                      954,118
Stockholders' equity                    92,677                                       81,323                                       60,190
Total liabilities and
stockholders' equity              $  1,400,106                                 $  1,136,116                                 $  1,014,308
Net interest income and net
interest rate spread including
non-interest bearing deposits                      $  33,734          2.54 %                    $  34,312          3.19 %                    $  33,090          3.41 %

Net interest margin                                                   2.56 %                                       3.21 %                                       3.43 %


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Rate / Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the change related to higher outstanding balances and the change due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

Rate / Volume

Year Ended September 30,                            2012 vs. 2011                                              2011 vs. 2010
(Dollars in Thousands)
                                    Increase /           Increase /             Total          Increase /          Increase /             Total
                                    (Decrease)           (Decrease)        Increase /          (Decrease)          (Decrease)        Increase /
                                 Due to Volume          Due to Rate        (Decrease)       Due to Volume         Due to Rate        (Decrease)

Interest-earning assets
Loans receivable               $          (599 )   $           (997 )   $      (1,596 )   $        (3,826 )   $        (1,464 )   $      (5,290 )
Mortgage-backed securities             (57,226 )             54,997            (2,229 )             4,193                 799             4,992
Other investments                          444                1,619             2,063                 245                  29               274
Total interest-earning
assets                         $       (57,381 )   $         55,619     $      (1,762 )   $           612     $          (636 )   $         (24 )

Interest-bearing liabilities
Interest-bearing checking      $            11     $           (168 )   $        (157 )   $           144     $             7     $         151
Savings                                      5                   (3 )               2                   3                   -                 3
Money markets                               26                 (127 )            (101 )                 2                 (60 )             (58 )
Time deposits                             (259 )               (348 )            (607 )              (383 )              (552 )            (935 )
FHLB advances                              230                 (613 )            (383 )           (12,861 )            12,484              (377 )
Other borrowings                           124                  (62 )              62                 240                (270 )             (30 )
Total interest-bearing
liabilities                    $           137     $         (1,321 )   $      (1,184 )   $       (12,855 )   $        11,609     $      (1,246 )

Net effect on net interest
income                         $       (57,518 )   $         56,940     $        (578 )   $        13,467     $       (12,245 )   $       1,222

Comparison of Operating Results for the Years Ended September 30, 2012 and September 30, 2011

General. The Company recorded net income of $17.1 million, or $4.92 per diluted share, for the year ended September 30, 2012 compared to $4.6 million, or $1.49 per diluted share, for the year ended September 30, 2011. The increase in net income in the current period was primarily caused by a $12.1 million increase in non-interest income and a $7.8 million reduction in non-interest expenses which were partially offset by a $6.1 million increase in income tax expense.

Net Interest Income. Net interest income for fiscal 2012 decreased by $0.6 million, or 1.7%, to $33.7 million from $34.3 million for the prior fiscal year. Net interest margin decreased to 2.56% in fiscal 2012 as compared to 3.21% in fiscal 2011.

The Company's average earning assets increased $269.1 million, or 25.2%, to $1.3 billion during fiscal 2012 from $1.1 billion during fiscal 2011. The increase is primarily the result of the increase in the Company's mortgage-backed securities and non-bank qualified municipal portfolios. Overall, asset yields declined by 83 basis points due to lower average rates. The increase in average earning assets was offset by a change in the mix of earning assets, to more investment securities and fewer loans, and a decrease in yields on mortgage-backed securities.

The Company's average total deposits and interest-bearing liabilities increased $250.4 million, or 24.2%, to $1.3 billion during fiscal 2012 from $1.0 billion during fiscal 2011. The increase resulted mainly from an increase in the Company's non-interest-bearing deposits. The average outstanding balance of non-interest bearing deposits increased from $780.9 million in fiscal 2011 to $1.0 billion in fiscal 2012. The Company's cost of total deposits and interest-bearing liabilities declined 18 basis points to 0.28% during fiscal 2012 from 0.46% during fiscal 2011 primarily due to continued migration to low and no-cost deposits provided by MPS. Due to stabilizing interest rates and a remix of the investment portfolio largely accomplished during the fourth fiscal quarter of 2012, we expect interest income to rebound going forward in fiscal 2013.


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Provision for Loan Losses. In fiscal 2012, the Company recorded a provision for loan losses of $1.0 million, compared to $0.3 million for fiscal 2011.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses. The economic slowdown, which recently has shown some signs of abating, continues to strain the financial condition of some borrowers. Management therefore believes that future losses in the residential portfolio may be somewhat higher than historical experience. It should be noted that a sizeable portion of the Company's consumer loan portfolio is secured by residential real estate. Over the past three years, loss rates in the commercial and multi-family real estate market have remained moderate. Management expects that future losses in this portfolio may be somewhat higher than recent historical experience. Loss rates in the agricultural real estate and agricultural operating loan portfolios have been minimal in the past three years primarily due to higher commodity prices as well as above average yields which have created positive economic conditions for most farmers in our markets. Nonetheless, management still expects that future losses in this portfolio, which have been very low, could be higher than recent historical experience. Management believes that various levels of drought weather conditions within our markets has the potential to negatively impact potential yields which would have a negative economic effect on our agricultural markets. In addition, management believes the continuing recessionary economic environment may also negatively impact consumers' repayment capacities.

The allowance for loan losses established by MPS results from an estimation process that evaluates relevant characteristics of its credit portfolio(s). MPS also considers other internal and external environmental factors such as changes in operations or personnel and economic events that may affect the adequacy of the allowance for credit losses. Adjustments to the allowance for loan losses are recorded periodically based on the result of this estimation process. The exact methodology to determine the allowance for loan losses for each program will not be identical Each program may have differing attributes including such factors as levels of risk, definitions of delinquency and loss, inclusion/exclusion of credit bureau criteria, roll rate migration dynamics, and other factors. Similarly, the additional capital required to offset the increased risk in subprime lending activities may vary by credit program. Each program is evaluated separately. The increased charge-offs in fiscal 2010 for MPS credit resulted primarily from borrowers in a pre-season tax-related program that peaked in January 2010. Management pro-actively established a provision for loan losses for these loans during the tax pre-season offering period. The majority of the charge-offs for these pre-season tax loans were recorded in the third quarter of fiscal 2010. A reduction in charge-offs in the MPS loan portfolio during fiscal 2011 is due to discontinuance of iAdvance and tax-related loan programs in October 2010.

Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, the current level of the allowance for loan losses at September 30, 2012 reflects an adequate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination of the allowance for loan losses is subject to review by its regulatory agencies, the OCC and the Federal Reserve, which can require the establishment of additional general or specific allowances.


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Non-Interest Income. Non-interest income increased by $12.1 million, or 21.0%, to $69.6 million for fiscal 2012 from $57.5 million for fiscal 2011 due . . .

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