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CASH > SEC Filings for CASH > Form 10-K on 16-Dec-2013All Recent SEC Filings

Show all filings for META FINANCIAL GROUP INC

Form 10-K for META FINANCIAL GROUP INC


16-Dec-2013

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 "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.

Overview of Corporate Developments

In fiscal 2013, the Company's net interest income after provision for loan losses was $36.0 million, the highest in its history, compared to $32.7 million in fiscal 2012 and $34.0 million in fiscal 2011. The Company had net income of $13.4 million in fiscal 2013 compared to $17.1 million in fiscal 2012. The primary reason for the decline in net income was due to a gain on sale of securities of $13.8 million in fiscal 2012 compared to a gain on sale of securities of $2.6 million in fiscal 2013.

MPS 2013 fiscal year net income was $8.4 million compared to net income of $6.5 million in the 2012 fiscal year. This increase was primarily the result of an increase in interest income of $2.4 million and, to a lesser extent, a decrease in non-interest expense and a decrease in income tax expense, offset in part by a decrease in non-interest income. The average internal net interest yield MPS received for its deposits was 1.26% for the 2013 fiscal year-end and 1.17% in the comparable 2012 period.

MPS is developing a number of new credit products for fiscal year 2014, subject to OCC approval.


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Retail Bank 2013 fiscal year net income was $5.9 million compared to net income of $11.0 million in the 2012 fiscal year. The decrease was primarily attributable to a decrease in non-interest income of $11.4 million, partially offset by a decrease in income tax expense. Retail Bank checking balances continued to grow from $62.9 million at September 30, 2012 to $72.8 million, or 15.8%, at September 30, 2013. Retail bank total loans increased $53.4 million during the fiscal year, or 16.3% to $380.4 million from strong growth in the residential real estate and agricultural lending segments.

The Company's tangible book value per common share decreased by $3.25, or 12.3%, from $26.42 at September 30, 2012 to $23.17 per share at September 30, 2013 primarily due to unrealized losses in securities as a result of market conditions.

Assets held for sale increased $1.1 million at September 30, 2013 due to an expected sale of a branch in the Central Iowa market.

At September 30, 2013, non-performing assets decreased by $1.8 million to $0.8 million compared to $2.6 million at September 30, 2012.

We filed a shelf registration statement on Form S-3 (the "Shelf Registration") which became effective with the Securities and Exchange Commission in June 2013. We commenced sales of common stock under the ATM Offering in June 2013 and we issued an aggregate of 507,354 shares of common stock through our ATM Offering during the year ended September 30, 2013. We utilized Sandler O'Neill + Partners, L.P., as our agent for the program. Shares were issued at an average price of $27.58 per share, and we raised proceeds, net of direct selling costs, of $13.6 million. The proceeds of the ATM Offering, all of which qualifies as Tier 1 capital for regulatory purposes (and also qualifies as common equity Tier 1 capital under the recently finalized Dodd-Frank and Basel III capital regulation), has been added to our general corporate funds and bolsters our regulatory capital ratios.

On September 24, 2013, the Board of Directors of the Company appointed Bradley C. Hanson, 49, to serve as President of the Company, Glen W. Herrick, 51, to serve as Executive Vice President, Chief Financial Officer, Treasurer and Secretary, Ira D. Frericks, 53, to serve as Executive Vice President and Chief Operating Officer, and Ronald W. Butterfield, 64, to serve as Executive Vice President and Chief Administrative Officer, with each of the appointments to be effective as of October 1, 2013. Mr. Herrick replaced Dave Leedom in the roles of Chief Financial Officer, Treasurer and Secretary. Mr. Leedom transitioned to a part-time role with the Company effective as of the appointment of Mr. Herrick.

On November 13, 2013, the Board of Directors of the Company appointed Douglas J. Hajek to the Company's Board for a term expiring at the 2014 Annual Meeting of stockholders, or until his respective successor is elected or qualified or until his earlier resignation or removal.

Financial Condition

As of September 30, 2013, the Company's assets grew by $43.1 million, or 2.6%, 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 investment securities and to a lesser extent in the Company's loans receivable and bank-owned life insurance, offset in part by a decrease in the Company's cash and cash equivalents.

Total cash and cash equivalents and federal funds sold were $40.1 million at September 30, 2013, a decrease of $105.0 million from $145.1 million at September 30, 2012. 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 FHLB of Des Moines and the FRB of Minneapolis. At September 30, 2013, the Company had no federal funds sold.


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The total of mortgage-backed securities and investment securities increased $52.5 million, or 4.7%, to $1.2 billion at September 30, 2013, as investment purchases exceeded related maturities, sales, and principal pay downs. The Company's portfolio of securities consists primarily of mortgage-backed securities (MBS), which have relatively short expected lives and non-bank qualified obligations of states and political subdivisions (NBQ) which mature in approximately 15 years or less. Of the total of $658.3 million of mortgage-backed securities, $581.4 million are classified as available for sale, and $76.9 million are classified as held to maturity. Of the total of $510.9 million of investment securities, $299.8 million are classified as available for sale and $211.1 million are classified as held to maturity. During fiscal 2013, the Company purchased $250.7 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 $79.6 million. In addition, the Company purchased $264.1 million of investment securities which are primarily comprised of corporate and tax exempt bonds. On May 6, 2013, the Company reclassified approximately $284.3 million from the AFS to the HTM category. The reclassification resulted in the recording of an unrealized gain of $2.1 million which has been segregated within accumulated other comprehensive income and is being amortized through maturity. See Note 3 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's portfolio of net loans receivable increased by $53.4 million, or 16.3%, to $380.4 million at September 30, 2013 from $327.0 million at September 30, 2012. This increase primarily relates to an increase of $33.2 million in residential mortgage loans, a $12.8 million increase in agricultural operating loans and a $9.7 million increase in agricultural real estate loans, partially offset by a decrease in MPS consumer loans of $2.9 million. See Note 4 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item
8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Through the Bank, the Company owns stock in the FHLB due to the Bank's membership and participation in this banking system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company's investment in such stock increased $7.9 million, or 371.4%, to $10.0 million at September 30, 2013 from $2.1 million at September 30, 2012. The increase was due to a modification in the FHLB stock buyback method which changed from a monthly 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 $0.2 million to $0.4 million at September 30, 2013 from $0.6 million at September 30, 2012 as management revised the expected receipt of insurance proceeds related to a settled claim. Foreclosed real estate and repossessed assets decreased to $0.1 million as compared to $0.8 million at September 30, 2012 due to sales and write offs exceeding the foreclosure of assets and loan collateral related to previously reported non-performing loans.

Intangible assets increased $0.3 million, or 14.9%, to $2.3 million at September 30, 2013, due to an increase in capitalized expense related to patents.

Assets held for sale increased $1.1 million at September 30, 2013 due to an expected sale of a branch in the Central Iowa market.


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Total deposits decreased by $64.5 million, or 4.7%, to $1.3 billion at September 30, 2013 from $1.4 billion at September 30, 2012. Deposits attributable to MPS were down $103.6 million, or 8.9%, at September 30, 2013, as compared to September 30, 2012. This decrease results from timing of the settlement of funds due to the last day of the fiscal year falling on a Monday, versus a Friday, in the prior year.

The Company's total borrowings increased $168.8 million, or 353.7%, from $47.7 million at September 30, 2012 to $216.5 million at September 30, 2013, primarily due to the increase in federal funds purchased. See Notes 8, 9, and 10 to the "Notes to Consolidated Financial Statements," which are included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

At September 30, 2013, the Company's stockholders' equity totaled $143.0 million, a decrease of $2.9 million from $145.9 million at September 30, 2012. Components of stockholders' equity changed due to issuances of common stock, an increase in retained earnings, and unrealized losses on investment securities due to market conditions. At September 30, 2013, 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 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Results of Operations

The Company's results of operations are dependent on net interest income, provision for loan losses, non-interest income, non-interest expense, income tax expense, and other comprehensive loss or income. 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 or none at all, 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 decreased in fiscal 2013 as compared to fiscal 2012 following an increase from fiscal 2011 to fiscal 2012. Non-interest expense, related primarily to compensation and benefits and card processing expense, decreased in fiscal 2013 as compared to the prior two fiscal years. 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 also 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.

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.


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Year Ended September
30,                                       2013                                         2012                                         2011
(Dollars in              Average        Interest                      Average        Interest                      Average        Interest
Thousands)             Outstanding      Earned /       Yield /      Outstanding      Earned /       Yield /      Outstanding      Earned /       Yield /
                         Balance          Paid          Rate          Balance          Paid          Rate          Balance          Paid          Rate
Interest-earning
assets:
Loans receivable       $    340,702     $  16,151          4.74 %   $    327,634     $  18,058          5.51 %   $    338,114     $  19,654          5.81 %
Mortgage-backed
securities                  700,709        11,900          1.70 %        756,465        16,133          2.13 %        549,374        18,362          3.34 %
Other investments
and fed funds sold          598,003        10,925          2.61 %        254,029         3,106          1.40 %        181,514         1,043          0.57 %
Total
interest-earning
assets                    1,639,414     $  38,976          2.66 %      1,338,128     $  37,297          2.82 %      1,069,002     $  39,059          3.65 %
Non-interest-earning
assets                       72,600                                       61,978                                       67,114
Total assets           $  1,712,014                                 $  1,400,106                                 $  1,136,116

Non-interest bearing
deposits               $  1,192,969     $       -          0.00 %   $  1,018,748     $       -          0.00 %   $    780,941     $       -          0.00 %
Interest-bearing
liabilities:
Interest-bearing
checking                     32,030           125          0.39 %         33,555           252          0.75 %         32,717           409          1.25 %
Savings                      27,907            39          0.14 %         17,773            39          0.22 %         11,248            37          0.33 %
Money markets                40,694           100          0.25 %         38,552           133          0.34 %         34,975           234          0.67 %
Time deposits               101,552         1,016          1.00 %        105,605         1,782          1.69 %        119,318         2,389          2.00 %
FHLB advances                 8,087           727          8.99 %         11,000           670          6.09 %         21,230         1,124          5.29 %
Overnight fed funds
purchased                   129,016           423          0.33 %         34,414           128          0.37 %         18,086            57          0.32 %
Other borrowings             20,839           524          2.51 %         25,584           559          2.18 %         16,322           497          3.04 %
Total
interest-bearing
liabilities                 360,125         2,954          0.82 %        266,483         3,563          1.34 %        253,896         4,747          1.87 %
Total deposits and
interest-bearing
liabilities               1,553,094     $   2,954          0.19 %      1,285,231     $   3,563          0.28 %      1,034,837     $   4,747          0.46 %
Other non-interest
bearing liabilities          15,605                                       22,198                                       19,956
Total liabilities         1,568,699                                    1,307,429                                    1,054,793
Stockholders' equity        143,315                                       92,677                                       81,323
Total liabilities
and stockholders'
equity                 $  1,712,014                                 $  1,400,106                                 $  1,136,116
Net interest income
and netinterest rate
spread including
non-interest bearing
deposits                                $  36,022          2.47 %                    $  33,734          2.54 %                    $  34,312          3.19 %

Net interest margin                                        2.48 %                                       2.56 %                                       3.21 %

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,                       2013 vs. 2012                                          2012 vs. 2011

                                  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             $           697     $      (2,604 )   $     (1,907 )   $          (599 )   $        (997 )   $     (1,596 )
Mortgage-backed securities            (1,132 )          (3,101 )         (4,233 )             5,643            (7,872 )         (2,229 )
Other investments                      4,773             3,046            7,819                 444             1,619            2,063
Total interest-earning                                                                                                                 )
assets                       $         4,337     $      (2,658 )   $      1,679     $         5,488     $      (7,250 )   $     (1,762

Interest-bearing
liabilities
Interest-bearing checking    $           (11 )   $        (116 )   $       (127 )   $            10     $        (167 )   $       (157 )
Savings                                   17               (17 )              -                  17               (15 )              2
Money markets                              6               (39 )            (33 )                22              (123 )           (101 )
Time deposits                            (66 )            (700 )           (766 )              (258 )            (349 )           (607 )
FHLB advances                           (208 )             265               57                 162              (545 )           (383 )
Overnight fed funds
purchased                                310               (15 )            295                   -                 -                -
Other borrowings                        (112 )              77              (35 )               229              (167 )             62
Total interest-bearing                                                          )                                                      )
liabilities                  $           (63 )   $        (546 )   $       (609     $           182     $      (1,366 )   $     (1,184

Net effect on net interest                                                                                                             )
income                       $         4,400     $      (2,112 )   $      2,288     $         5,306     $      (5,884 )   $       (578


Table of Contents
Comparison of Operating Results for the Years Ended September 30, 2013 and September 30, 2012

General. The Company recorded net income of $13.4 million, or $2.38 per diluted share, for the year ended September 30, 2013 compared to $17.1 million, or $4.92 per diluted share, for the year ended September 30, 2012, a decrease of $3.7 million. The decrease in net income was primarily caused by a $14.0 million decrease in non-interest income which reflected an $11.2 million net decrease in gains on sale of securities available for sale from fiscal 2012 to fiscal 2013, offset in part by an increase in net interest income, and decreases in provision for loan loss, non-interest expense, and tax expense.

Net Interest Income. Net interest income for fiscal 2013 increased by $2.3 million, or 6.8%, to $36.0 million from $33.7 million for the prior fiscal year. Net interest margin decreased to 2.48% in fiscal 2013 as compared to 2.56% in fiscal 2012.

The Company's average earning assets increased $301.3 million, or 22.5%, to $1.6 billion during fiscal 2013 from $1.3 billion during fiscal 2012. The increase is primarily the result of the increase in the Company's investment securities and non-bank qualified municipal portfolios. Overall, asset yields declined by 16 basis points due to lower average rates. The increase in average earning assets was offset by a change in the mix of earning assets favoring investment securities and a decrease in yields on mortgage-backed securities.

The Company's average total deposits and interest-bearing liabilities increased $267.9 million, or 20.8%, to $1.6 billion during fiscal 2013 from $1.3 billion during fiscal 2012. The increase resulted mainly from an increase in the Company's non-interest-bearing deposits and federal funds purchased. The average outstanding balance of non-interest bearing deposits increased from $1.0 billion in fiscal 2012 to $1.2 billion in fiscal 2013. The Company's cost of total deposits and interest-bearing liabilities declined 9 basis points to 0.19% during fiscal 2013 from 0.28% during fiscal 2012 primarily due to continued migration to low and no-cost deposits provided by MPS.

Provision for Loan Losses. In fiscal 2013, the Company did not record a provision for loan loss, compared to $1.0 million for fiscal 2012.

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 slow economic environment may also negatively impact consumers' repayment capacities.


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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 . . .
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