Pathward Financial - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

oTRANSACTION 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

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(Registrant's telephone number, including area code)

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):

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Notes to Consolidated Financial Statements (Unaudited)

The accounting policies followed 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, for interim reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. The accompanying financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances and should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2005.

 

The following table sets forth an analysis of the activity in the Company's allowance for loan losses for the three-month periods ended December 31, 2005 and December 31, 2004:

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.

As has been previously disclosed, the Company has established an allowance and taken charge offs in prior periods attributable to potential and actual losses from the Company’s loans to a group of automobile sales, service, and financing companies and their principal owner. The Company has estimated its range of potential losses from this transaction at between $1.90 million and $4.88 million.

 

Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options.

A reconciliation of the numerators and denominators used in the basic earnings per common share and the diluted earnings per common share computations for the three months ended December 31, 2005 and 2004 is presented below.

 

At December 31, 2005 and September 30, 2005, the Company had outstanding commitments to originate and purchase loans totaling $71.3 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.

 

 

 

 

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.

 

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 December 31, 2005, compared to September 30, 2005, and the consolidated results of operations for the three months ended December 31, 2005, compared to the same period in 2004. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2005.

The Meta Payment Systems (MPS) division generated net income of $494,000, or $0.20 per diluted share, for the quarter ended December 31, 2005--its second consecutive quarter of profitability. Since inception, the division has sustained a net loss of $804,000. While this cumulative net loss is higher than was originally projected, the division has reached profitability sooner than projected, and the Company continues to be pleased with revenue, earnings, and deposit growth in the division.

The Company continues to emphasize expansion in the growing metropolitan areas of Sioux Falls, South Dakota, and Des Moines, Iowa. The Company recently completed construction of its fourth branch office in Sioux Falls, and plans to add its fifth branch office in Des Moines in 2006.

As previously disclosed in an 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 most of the assets of these firms, with final liquidation scheduled to occur during the second fiscal quarter of 2006. The Company believes its range of potential loss in this transaction, previously disclosed in an 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 the August 15, 2005 8-K filing that it anticipated future cash expenditures of between $250,000 and $500,000 related to the impairment charge. In an 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.

Total assets decreased by $21.1 million, or 2.7%, to $755.3 million at December 31, 2005, from $776.3 million at September 30, 2005. The decrease in total assets was primarily attributable to both a decrease in securities available for sale as well as loans receivable, offset in part by increases in total cash and cash equivalents and, to a lesser extent, in securities purchased under agreements to resell. Net funds received from asset shrinkage were primarily used to pay down advances from the Federal Home Loan Bank of Des Moines, and to reduce higher costing certificates of deposit and public funds deposits.

Securities available for sale decreased $15.0 million, or 6.5%, during the quarter as part of the Company’s planned strategy of reducing lower yielding wholesale assets. Additionally, loans receivable decreased $19.4 million, or 4.4% as loan payoffs exceeded new originations and purchases. While seasonal influences likely played a role in the shrinkage of loans in the first fiscal quarter of 2006, the Company cannot quantify with certainty the impact of such influences.

Total deposits increased by $9.7 million, or 1.8%, from $540.8 million at September 30, 2005 to $550.5 million at December 31, 2005. Non-interest-bearing demand deposits increased $32.3 million, or 31.6% during the first fiscal quarter of 2006, as the Company continued to focus on attracting low- or no-cost funding sources. Most of the Company’s growth in non-interest-bearing demand deposits was the result of growth in Meta Payment Systems’ prepaid debit card product. The Company’s portfolio of certificates of deposit decreased by $27.0 million, or 10.1% during the first fiscal quarter of 2006. This shrinkage is also part of the Company’s planned strategy of reducing higher costing funding sources including public funds deposits.

More than offsetting the increase in total deposits were decreases in advances from the Federal Home Loan Bank of Des Moines (FHLB) and in securities sold under agreements to repurchase. FHLB advances decreased by $25.0 million, or 15.6% during the quarter ended December 31, 2005. During the same period, securities sold under agreement to repurchase declined $5.3 million, or 25.8%, from $20.5 million at September 30, 2005 to $15.2 million at December 31, 2005. This shrinkage was also part of the Company’s planned strategy of reducing higher costing wholesale funding sources.

Total shareholders' equity decreased $785,000 during the first fiscal quarter to $42.2 million. The decrease in shareholders’ equity was primarily due to a $1.1 million increase in accumulated other comprehensive loss related to the after tax impact of the Company’s mark to market of its securities available for sale portfolio in accordance with SFAS No. 115. Increases in retained earnings for the quarter, resulting from the Company’s net income, were offset in part by the Company’s declaration of a dividend on its common stock.

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 December 31, 2005, the Company had loans delinquent 30 days and over totaling $9.8 million, or 2.23% of total loans, compared to $1.9 million, or 0.42% of total loans, at September 30, 2005. The increase in delinquent loans is primarily the result of two large commercial credits totaling $6.0 million becoming non-current. 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 continues to monitor closely developments in its loan portfolio and the payment histories of its borrowers.

At December 31, 2005, there were six commercial and multi-family real estate loans totaling $4.3 million, or 0.99% 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 increased difficulty of evaluating and monitoring these types of loans. These loans are being closely monitored by management, however, there can be no assurance that all loans will be fully collectible.

At December 31, 2005, commercial business loans delinquent 30 days and over totaled $4.7 million, or 1.08% 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 December 31, 2005, agricultural operating loans delinquent 30 days and over totaled $216,000, or 0.05% 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.

 

On the basis of management's review of its loans and other assets, at December 31, 2005, the Company had classified a total of $9.3 million of its assets as substandard, $247,000 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.

At December 31, 2005, the Company has established an allowance for loan losses totaling $7.3 million compared to $7.2 million at September 30, 2005. The allowance represented approximately 118% of the total non-performing loans at December 31, 2005, while 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-month periods ended December 31, 2005 and December 31, 2004:

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.

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 December 31, 2005 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.

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.

Non-interest income improved by $1,233,000 from $612,000 to $1,845,000 during the same periods, primarily due to the increase in fee revenue at Meta Payment Systems. Non-interest expense also increased, rising $1,305,000 from $4,486,000 to $5,791,000 resulting primarily from higher legal and collection costs related to the aforementioned loans to automobile related entities.

The Company continues to incur higher than normal levels of operating expenses associated with the collection of loans to three entities involved in automobile sales, service, and financing, and to the owners thereof. The Company previously disclosed on June 24, 2005 that two of these firms had filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company has taken possession of and liquidated most of the assets of said firms, with final liquidation scheduled to occur during the second fiscal quarter of 2006.

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 December 31, 2005, the Company had commitments to originate and purchase loans totaling $71.3 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 December 31, 2005 which, at that date, exceeded the minimum capital adequacy requirements:

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 December 31, 2005, the Company, MetaBank, and MetaBank WC exceeded minimum requirements for the well-capitalized category.

The Company, and its wholly-owned subsidiaries, MetaBank and MetaBank WC, may from time to time make written or oral “forward-looking statements,” including statements contained in its filings with the Securities and Exchange Commission, in its reports to shareholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, expectations, estimates and intentions that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such statements address the following subjects: future operating results; customer growth and retention; loan and other product demand; earnings growth and expectations; new products and services, such as those offered by the Meta Payment Systems Division; credit quality and adequacy of reserves; technology; and our employees. The following factors, among others, could cause the Company’s financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services’ laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default and managing the risks involved in the foregoing.

The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company’s business and prospects is contained in the Company’s periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

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.

 

Presented below, as of December 31, 2005 and September 30, 2005, is an analysis of the Company's interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up and down 200 basis points. As illustrated in the table, the Company’s NPV at December 31, 2005 and at September 30, 2005 was slightly more sensitive to decreasing interest rates than to increasing interest rates. This reflects management’s efforts to maintain and manage the Company’s interest rate sensitivity in a rising interest rate environment as well as the Company’s concentration of low- or no-cost demand deposits. Management closely monitors the Company’s interest rate sensitivity.

 

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.

Item 4.  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.

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 December 31, 2005 our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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.

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.

 

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