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CASH > SEC Filings for CASH > Form 10-Q on 2-May-2013All Recent SEC Filings

Show all filings for META FINANCIAL GROUP INC



Quarterly Report

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



Meta Financial Group, Inc.®, ("Meta Financial" or the "Company") and its wholly-owned subsidiary, MetaBank™ (the "Bank" or "MetaBank"), may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission ("SEC"), in its reports to stockholders, 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.

You can identify forward-looking statements by words such as "may," "hope," "will," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "continue," "could," "future" or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other "forward-looking" information. These forward-looking statements include statements with respect to the Company's beliefs, expectations, estimates, and intentions that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such statements address, among others, the following subjects: future operating results; customer retention; loan and other product demand; important components of the Company's balance sheet and income statements; growth and expansion; new products and services, such as those offered by the Bank or Meta Payment Systems® ("MPS"), a division of the Bank; 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 Board of Governors of the Federal Reserve System (the "Federal Reserve"), as well as efforts of the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely development, acceptance and, as appropriate, approval of new products and services offered by the Company as well as risks (including reputational and litigation) attendant thereto and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third-parties; the scope of restrictions and compliance requirements imposed by the supervisory directives and/or the Consent Orders entered into by the Company and the Bank with the Office of Thrift Supervision (the functions of which were transferred to the Office of the Comptroller of the Currency ("OCC") and the Federal Reserve) and any other such actions which may be initiated; the impact of changes in financial services' laws and regulations, including but not limited to laws and regulations promulgated or administered by the OCC, the Federal Reserve, and the Bureau of Consumer Financial Protection; technological changes, including but not limited to the protection of electronic files or databases; acquisitions; litigation risk in general, including but not limited to those risks involving the MPS division; the growth of the Company's business as well as expenses related thereto; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default.

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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 or its subsidiaries.


The Company, a registered unitary savings and loan holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank. Unless the context otherwise requires, references herein to the Company include Meta Financial and the Bank, and all subsidiaries of Meta Financial, direct or indirect, on a consolidated basis.

The Company's stock trades on the NASDAQ Global Market under the symbol "CASH."

The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at March 31, 2013, compared to September 30, 2012, and the consolidated results of operations for the three and six months ended March 31, 2013 and 2012. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2012.


MPS 2013 fiscal second quarter net income was $2.4 million compared to net income of $2.5 million in the 2012 second quarter. This decrease was primarily the result of a decrease in non-interest income of $1.7 million, primarily from a decrease in card fees, offset in part by a decrease in income tax expense of $0.9 million and an increase in net interest income of $0.6 million. MPS 2013 fiscal second quarter revenue of $17.7 million decreased $1.1 million compared to the 2012 second quarter due to a temporary interruption at one MPS business partner and discontinuance of certain credit sponsorship programs. The average internal net interest yield MPS received for its deposits was 1.16% in the 2013 fiscal second quarter and 1.10% in the comparable 2012 period.

Retail Bank fiscal 2013 second quarter net income was $1.0 million compared to net income of $7.6 million in the 2012 second quarter. The decrease was primarily attributable to a decrease in gain on sale of securities available for sale of $11.1 million. Retail Bank checking balances continued to grow from $62.5 million at March 31, 2012 to $65.9 million, or 5%, at March 31, 2013.

The Company's tangible book value per common share decreased by $0.75, or 3%, from $26.42 at September 30, 2012 to $25.67 per share at March 31, 2013 primarily due to a decline in unrealized gains in securities caused by market conditions.

At March 31, 2013, Non-Performing Assets decreased by $0.8 million to $1.8 million compared to $2.6 million at September 30, 2012.

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At March 31, 2013, the Company's assets grew by $91.4 million, or 5.5%, to $1.7 billion compared to $1.6 billion at September 30, 2012. The increase in assets was reflected primarily in increases in the Company's mortgage-backed and investment securities available for sale and, to a lesser extent, in increases in the Company's bank-owned life insurance ("BOLI") and net loans receivable, offset in part by a decrease in cash and cash equivalents.

Total cash and cash equivalents were $89.0 million at March 31, 2013, a decrease of $56.1 million from $145.1 million at September 30, 2012. The decline primarily was the result of the Company's investing its excess liquidity in mortgage-backed and investment securities available for sale. The Company maintains its cash equivalent investments in interest-bearing overnight deposits with the FHLB and the Federal Reserve Bank of Chicago ("FRBank"). Federal funds sold deposits may be maintained with the FHLB. At March 31, 2013, the Company did not have any federal funds sold.

The total of mortgage-backed securities and investment securities available for sale increased $120.7 million, or 10.8%, to $1.2 billion at March 31, 2013 as compared to September 30, 2012, as purchases exceeded investment maturities, sales, and principal paydowns. The Company's portfolio of securities available for sale consists primarily of mortgage-backed securities, which have relatively short expected lives. During the six month period ended March 31, 2013, the Company purchased $183.6 million of mortgage-backed securities with estimated future maturities of five years or less (primarily due to anticipated prepayments) and stated maturities of 30 years or less and $222.9 million of investment securities available for sale.

The Bank's portfolio of net loans receivable increased $3.9 million, or 1.2%, to $330.9 million at March 31, 2013 from $327.0 million at September 30, 2012. This increase primarily relates to a $16.6 million increase in residential mortgage loans, an $8.0 million increase in agricultural real estate loans and a $2.1 million increase in agricultural operating loans, partially offset by a decrease of $17.7 million in commercial and multi-family real estate loans, $3.4 million in consumer loans, and $1.8 million in commercial operating loans.

The Company's BOLI increased $18.4 million to $33.2 million at March 31, 2013 from $14.8 million at September 30, 2012. This increase was due to the Company's purchases of additional life insurance to take advantage of additional BOLI capacity allowed under regulatory guidelines along with generating additional tax-advantaged income. The BOLI also provides death benefits to the Bank against the loss of key executives and death benefits to the employee's family equal to one times salary at the time of death.

Foreclosed real estate and repossessed assets decreased to $9,000 as compared to $0.8 million at September 30, 2012, primarily due to a sale of two properties in the commercial and multi-family real estate loan category. These sales, after expenses, resulted in a loss of $0.4 million during the quarter ended December 31, 2012.

Assets held for sale increased $1.3 million at March 31, 2013 due to an expected sale of a branch in the Central Iowa market.

Total deposits increased $177.4 million, or 12.9%, to $1.6 billion at March 31, 2013 from $1.4 billion at September 30, 2012. Deposits attributable to MPS increased by $186.2 million, or 16.0%, at March 31, 2013, compared to September 30, 2012. Additionally, certificates of deposits decreased by $18.8 million to $81.9 million primarily related to maturities exceeding new volume. The average balance of total deposits and interest-bearing liabilities was $1.5 billion for the six month period ended March 31, 2013 compared to $1.2 billion for the same period in the prior fiscal year.

Total borrowings decreased $22.7 million from $47.7 million at September 30, 2012 to $25.0 million at March 31, 2013, primarily due to the decrease of securities sold under agreements to repurchase.

At March 31, 2013, the Company's stockholders' equity totaled $143.4 million, a decrease of $2.5 million from $145.9 million at September 30, 2012 due primarily to a decrease in accumulated other comprehensive income. At March 31, 2013, the Bank continues to exceed all regulatory requirements for classification as a well-capitalized institution. See "Liquidity and Capital Resources" for further information.

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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 a non-accrual status and, as a result of this action, previously accrued interest income on the loan is reversed against interest 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.

The Company believes that the level of allowance for loan losses at March 31, 2013 is appropriate and reflects probable losses related to these loans; however, there can be no assurance that all loans will be fully collectible or that the present level of the allowance will be adequate in the future. See "Allowance for Loan Losses" below.

The table below sets forth the amounts and categories of non-performing assets in the Company's portfolio. Foreclosed assets include assets acquired in settlement of loans.

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                                                                      Non-Performing Assets As Of
                                                                March 31, 2013        September 30, 2012
Non-Performing Loans                                                     (Dollars in Thousands)

Non-Accruing Loans:
1-4 Family (2)                                                 $            307       $               307
Commercial & Multi Family (1) (2)                                         1,544                     1,423
Commercial Operating (1) (2)                                                 14                        18
Total                                                                     1,865                     1,748

Accruing Loans Delinquent 90 Days or More
Consumer                                                                     14                        63
Total                                                                        14                        63

Total Non-Performing Loans                                                1,879                     1,811

Other Assets

Foreclosed Assets:
1-4 Family                                                                    9                         9
Commercial & Multi Family                                                     -                       827
Commercial Business                                                           -                         2
Total                                                                         9                       838

Total Other Assets                                                            9                       838

Total Non-Performing Assets                                    $          1,888       $             2,649
Total as a Percentage of Total Assets                                      0.11 %                    0.16 %

(1) At March 31, 2013, the Company had $323,000 of TDRs in Commercial & Multi Family and $14,000 of TDRs in Commercial Operating.

(2) At September 30, 2012, the Company had $328,000 of TDRs in Commercial & Multi Family and $18,000 of TDRs in Commercial Operating. In addition to the non-performing TDRs in (1) and (2), the Company had an additional $6.4 million TDRs performing in accordance with their terms at March 31, 2013 and September 30, 2012.

At March 31, 2013, non-performing loans totaled $1.9 million, representing 0.6% of total loans, compared to $1.8 million, or 0.6% of total loans at September 30, 2012.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OCC to be of lesser quality, as "substandard", "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all the weaknesses inherent in those classified as "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific reserve is not warranted.

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General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for loan losses equal to 100% of that portion of the asset so classified or to charge-off such amount. The Bank's determination as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may direct the establishment of additional general or specific loss allowances. The discovery of additional information in the future may also affect both the level of classification and the amount of loss allowances.

On the basis of management's review of its loans and other assets, at March 31, 2013, the Company had classified a total of $8.9 million of its assets as substandard, $30,000 as doubtful and none as loss. This compares to classifications at September 30, 2012 of $8.7 million as substandard, $30,000 as doubtful and none as loss. See Note 2 to the Condensed Consolidated Financial Statements.

Allowance for Loan Losses. The Company establishes its provision for loan losses, and evaluates 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 Company and its borrowers operate.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness 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 believes 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 have 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.

At March 31, 2013, the Company had established an allowance for loan losses totaling $3.7 million compared to $4.0 million at September 30, 2012. 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 March 31, 2013 reflects an appropriate 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.

The allowance for loan losses reflects management's best estimate of probable losses inherent in the portfolio based on currently available information. In addition to the factors mentioned above, 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. In addition, our regulators have the ability to order us to increase our allowance.

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The Company's financial statements are prepared in accordance with U.S. GAAP. 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: (i) involve the most complex and subjective decisions and assessments which may be uncertain at the time the estimate was made, and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements, management has identified the policies described below as Critical Accounting Policies. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the year ended September 30, 2012 and information contained herein.

Allowance for Loan Losses. 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 consolidated statement of operations to change the allowance for loan losses if its assessment of the above factors were different. Although management believes the levels of the allowance at both March 31, 2013 and September 30, 2012 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.

Intangible Assets. Intangible assets include patents filed by the MPS division. Intangible assets are tested annually for impairment or more often if conditions indicate a possible impairment.

Each quarter the Company evaluates the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In accordance with ASC 350, Accounting for the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Assumptions and estimates about future values and remaining useful lives of the Company's intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.

Self-Insurance. The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $60,000 per individual occurrence with an unlimited lifetime maximum. The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process which may differ significantly from other methodologies and still produce an estimate in accordance with U.S. GAAP. Although management believes it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual.

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Deferred Tax Assets. The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized subject to management's judgment that realization is more-likely-than-not. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance.

Investment Security Impairment. Management continually monitors the investment security portfolio for impairment on a security by security basis. Management has a process in place to identify investment securities that could potentially have a credit impairment that is other than temporary. This process involves the consideration of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the investment security, cash flow projections, and the Company's intent to sell an investment security or whether it is more likely than not the Company will be required to sell the investment security before the recovery of its amortized cost which, in . . .

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