UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
META FINANCIAL GROUP, INC.(R)
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
121 East Fifth Street, Storm Lake, Iowa 50588
---------------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at May 15, 2007:
Common Stock, $.01 par value 2,565,025 Common Shares
META FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
-------------------------------
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial Condition
as of March 31, 2007 and September 30, 2006 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended March 31, 2007 and 2006 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the Three and Six Months Ended March 31, 2007 and 2006 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended March 31, 2007 and 2006 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2007 and 2006 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 28
Item 4. Controls and Procedures 30
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 31
Item 1.A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits 35
Signatures 36
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(Dollars in Thousands)
ASSETS March 31, 2007 September 30, 2006
--------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 1,565 $ 7,405
Interest-bearing deposits in other financial institutions 22,920 101,948
----------------------------------
Total cash and cash equivalents 24,485 109,353
Federal funds sold 105,000 --
Securities purchased under agreements to resell -- 5,891
Other investment securities available for sale 27,584 27,474
Mortgage-backed securities available for sale 147,604 158,702
Loans receivable - net of allowance for loan losses of
$5,282 at March 31, 2007 and $5,968 at September 30, 2006 374,869 389,270
Federal Home Loan and Federal Reserve Bank stock, at cost 4,999 5,768
Accrued interest receivable 3,769 4,379
Premises and equipment, net 18,492 17,623
Bank owned life insurance 13,158 12,953
Goodwill 3,403 3,403
Other assets 6,063 6,795
----------------------------------
Total assets $ 729,426 $ 741,611
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing checking $ 249,869 $ 189,506
Interest-bearing checking 28,178 26,828
Savings deposits 20,196 29,869
Money market deposits 72,118 103,291
Time certificates of deposit 209,218 216,217
----------------------------------
Total deposits 579,579 565,711
Advances from Federal Home Loan Bank 85,300 99,565
Securities sold under agreements to repurchase 5,532 15,179
Subordinated debentures 10,310 10,310
Accrued interest payable 1,184 972
Accrued expenses and other liabilities 2,798 4,542
----------------------------------
Total liabilities 684,703 696,279
----------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value; 5,200,000 shares authorized,
2,957,999 shares issued, 2,559,830 and 2,534,367 shares outstanding
at March 31, 2007 and September 30, 2006, respectively 30 30
Additional paid-in capital 20,958 20,969
Retained earnings - substantially restricted 33,872 37,186
Accumulated other comprehensive (loss) (2,356) (4,548)
Unearned Employee Stock Ownership Plan shares (324) (509)
Treasury stock, 398,169 and 423,632 common shares, at cost,
at March 31, 2007 and September 30, 2006, respectively (7,457) (7,796)
----------------------------------
Total shareholders' equity 44,723 45,332
----------------------------------
Total liabilities and shareholders' equity $ 729,426 $ 741,611
==================================
See Notes to Condensed Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
March 31, March 31,
2007 2006 2007 2006
------------------------------------------------------------------------------- ---------------------
Interest and dividend income:
Loans receivable, including fees $ 6,615 $ 7,466 $ 13,491 $ 15,052
Mortgage backed securities 1,519 1,823 3,125 3,656
Other investments 2,155 906 4,050 1,663
-------------------- --------------------
10,289 10,195 20,666 20,371
-------------------- --------------------
Interest expense:
Deposits 3,190 3,336 6,693 6,683
FHLB advances and other borrowings 1,425 1,870 3,040 3,979
-------------------- --------------------
4,615 5,206 9,733 10,662
-------------------- --------------------
Net interest income 5,674 4,989 10,933 9,709
Provision for loan losses (280) (350) 5,185 (309)
-------------------- --------------------
Net interest income after provision for loan losses 5,954 5,339 5,748 10,018
-------------------- --------------------
Non-interest income:
Deposit Fees 246 364 482 626
Loan Fees 161 54 220 196
Card fees 3,462 1,449 6,870 2,670
Bank owned life insurance income 131 151 206 297
Other income 232 179 415 254
-------------------- --------------------
Total non-interest income 4,232 2,197 8,193 4,043
-------------------- --------------------
Non-interest expense:
Compensation and benefits 4,532 3,006 8,566 6,074
Occupancy and equipment expense 1,072 788 2,039 1,552
Marketing 137 186 380 317
Data processing expense 292 297 469 490
Card processing expense 1,589 942 3,242 1,275
Legal and consulting expense 784 954 1,520 1,545
Other expense 786 1,027 1,806 1,737
-------------------- --------------------
Total non-interest expense 9,192 7,200 18,022 12,990
-------------------- --------------------
Net income (loss) before income tax expense (benefit) 994 336 (4,081) 1,071
Income tax expense (benefit) 391 75 (1,430) 294
-------------------- --------------------
Net income (loss) 603 261 (2,651) 777
==================== ====================
Earnings (loss) per common share:
Basic $ 0.24 $ 0.10 $ (1.05) $ 0.31
==================== ====================
Diluted 0.23 0.10 (1.05) 0.31
==================== ====================
Dividends declared per common share: $ 0.13 $ 0.13 $ 0.26 $ 0.26
==================== ====================
See Notes to Condensed Consolidated Financial Statements.
4
META FINANCIAL GROUP INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
2007 2006 2007 2006
------------------------------------------------------------------ -------------------
Net income (loss) $ 603 $ 261 $ (2,651) $ 777
Other comprehensive gain (loss):
Net unrealized gain (loss) on
securities available for sale 774 (597) 3,495 (2,315)
Deferred income tax expense (benefit) 289 (222) 1,303 (861)
------------------- -------------------
Total other comprehensive income (loss) 485 (375) 2,192 (1,454)
------------------- -------------------
Total comprehensive income (loss) $ 1,088 $ (114) $ (459) $ (677)
=================== ===================
See Notes to Condensed Consolidated Financial Statements.
5
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended March 31, 2007
(Dollars in Thousands)
Accumulated Unearned
Other Employee
Additional Comprehensive Stock Total
Common Paid-in Retained (Loss), Ownership Treasury Shareholders'
Stock Capital Earnings Net of Tax Plan Shares Stock Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 $ 30 $ 20,646 $ 34,557 $ (3,180) $ (825) $ (8,269) $ 42,959
Cash dividends declared on common
stock ($.26 per share) -- -- (652) -- -- -- (652)
Issuance of 9,000 common shares from
treasury stock due to exercise of
stock options -- (63) -- -- -- 203 140
Stock compensation -- 57 -- -- -- -- 57
10,200 common shares committed to be
released under the ESOP -- (16) -- -- 228 -- 212
Net change in unrealized losses on
securities available for sale,
net of income taxes -- -- -- (1,454) -- -- (1,454)
Net income for six months ended
March 31, 2006 -- -- 777 -- -- -- 777
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2006 $ 30 $ 20,624 $ 34,682 $ (4,634) $ (597) $ (8,066) $ 42,039
==================================================================================================================================
Balance, September 30, 2006 $ 30 $ 20,969 $ 37,186 $ (4,548) $ (509) $ (7,796) $ 45,332
Cash dividends declared on common
stock ($.26 per share) -- -- (663) -- -- -- (663)
Issuance of 25,463 common shares from
treasury stock due to exercise of
stock options -- (227) -- -- -- 339 112
Stock compensation -- 170 -- -- -- -- 170
7,998 common shares committed to be
released under the ESOP -- 46 -- -- 185 -- 231
Net change in unrealized losses on
securities available for sale,
net of income taxes -- -- -- 2,192 -- -- 2,192
Net (loss) for six months ended
March 31, 2007 -- -- (2,651) -- -- -- (2,651)
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2007 $ 30 $ 20,958 $ 33,872 $ (2,356) $ (324) $ (7,457) $ 44,723
==================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months Ended March 31,
2007 2006
--------------------------------------------------------------------------------------------------
Cash Flows from operating activities:
Net income (loss) $ (2,651) $ 777
Adjustments to reconcile net income to net cash from operating
activities:
Effect of contribution to employee stock ownership plan 231 212
Depreciation, amortization and accretion, net 1,274 1,258
Provision for loan losses 5,185 (309)
Stock compensation 170 57
(Gain) loss on sales of real estate owned and repossessed assets, net 3 (4)
(Gain) on sales of loans, net (17) (27)
(Gain) on sales of other, net (36)
Net change in accrued interest receivable 610 295
Net change in other assets (962) (2,071)
Net change in accrued interest payable 212 (109)
Net change in accrued expenses and other liabilities (1,744) 4,803
--------------------------
Net cash provided by operating activities 2,275 4,882
Cash flow from investing activities:
Purchase of securities available for sale -- (109)
Net change in federal funds sold (105,000) --
Net change in securities purchased under agreement to resell 5,891 12,352
Proceeds from maturities and principal repayments of
securities available for sale 13,931 21,507
Loans purchased (54,840) (26,687)
Net change in loans receivable 64,073 41,531
Proceeds from sales of foreclosed real estate 50 4,676
Net change in FHLB / FRB stock 769 1,309
Purchase of premises and equipment (1,402) (1,290)
--------------------------
Net cash provided by (used in) investing activities (76,528) 53,289
Cash flows from financing activities:
Net change in checking, savings, and money market deposits 20,867 33,769
Net change in time deposits (6,999) (34,114)
Repayments of advances from Federal Home Loan Bank (14,265) (29,950)
Net change in securities sold under agreements to repurchase (9,647) (4,404)
Cash dividends paid (663) (652)
Proceeds from exercise of stock options 92 140
--------------------------
Net cash provided by (used in) financing activities (10,615) (35,211)
--------------------------
Net change in cash and cash equivalents (84,868) 22,960
Cash and cash equivalents at beginning of period 109,353 14,370
--------------------------
Cash and cash equivalents at end of period $ 24,485 $ 37,330
==========================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 9,521 $ 10,771
Income taxes 582 334
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ -- $ 27
See Notes to Condensed Consolidated Financial Statements.
7
META FINANCIAL GROUP, INC.(R)
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by Meta Financial
Group, Inc. ("Meta Group" or the "Company") and its consolidated
subsidiaries, MetaBank, MetaBank West Central ("MetaBank WC"), Meta Trust
Company ("Meta Trust"), First Services Financial Limited, and Brookings
Service Corporation are consistent with the accounting policies followed
for annual financial reporting. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results for the
periods reported have been included in the accompanying unaudited
condensed consolidated financial statements, and all such adjustments are
of a normal recurring nature. The accompanying condensed consolidated
statement of financial condition as of September 30, 2006, which has been
derived from audited financial statements, and the unaudited interim
condensed financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading. It is suggested that
these condensed consolidated financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest shareholders' annual report (Form 10-K).
2. ALLOWANCE FOR LOAN LOSSES
At March 31, 2007 the Company's allowance for loan losses was $5.3
million, a decrease of $686,000 from $6.0 million at September 30, 2006.
During the six months ended March 31, 2007 the Company recorded a
provision for loan losses of $5.2 million, which was primarily related to
the impairment of two commercial lending relationships. During the three
months ended March 31, 2007 the Company recorded a negative provision for
loan losses of $280,000. The Company also incurred net loan charge-offs of
$5.9 million, of which $4.8 million was incurred in the second fiscal
quarter, primarily related to the recognition of losses on both of these
relationships. Further discussion of this change in the allowance is
included in "Corporate Developments and Overview" and "Nonperforming
Assets and Allowance for Loan Loss" in Management's Discussion and
Analysis.
The following table sets forth an analysis of the activity in the
Company's allowance for loan losses for the three and six month periods
ended March 31, 2007 and 2006.
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- --------------------
2007 2006 2007 2006
-------------------- --------------------
(Dollars in Thousands)
Beginning balance $ 10,349 $ 7,257 $ 5,968 $ 7,222
Provision charged to operations (280) (350) 5,185 (309)
Charge-offs (4,831) (1,108) (5,924) (1,116)
Recoveries 44 199 53 201
-------------------- --------------------
Ending balance $ 5,282 $ 5,998 $ 5,282 $ 5,998
==================== ====================
8
3. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
pursuant to stock options agreements.
A reconciliation of the numerators and denominators used in the basic
earnings per common share and the diluted earnings per common share
computations for the three and six months ended March 31, 2007 and 2006 is
presented below.
Three Months Ended March 31, 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Basic earnings per common share:
Numerator, net income $ 603 $ 261
=================================================================================================================================
Denominator, weighted average common shares outstanding 2,549,631 2,510,677
Less weighted average unallocated ESOP and nonvested shares (25,283) (29,975)
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,524,348 2,480,702
=================================================================================================================================
Basic earnings per common share $ 0.24 $ 0.10
=================================================================================================================================
Diluted earnings per common share:
Numerator, net income $ 603 $ 261
=================================================================================================================================
Denominator, weighted average common shares outstanding
for basic earnings per share 2,524,348 2,480,702
Add dilutive effect of assumed exercises of stock options, net of tax benefits 96,366 32,225
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential common shares outstanding 2,620,714 2,512,927
=================================================================================================================================
Diluted earnings per common share $ 0.23 $ 0.10
=================================================================================================================================
9
Six Months Ended March 31, 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Basic earnings (loss) per common share:
Numerator, net income (loss) $ (2,651) $ 777
=================================================================================================================================
Denominator, weighted average common shares outstanding 2,542,440 2,507,147
Less weighted average unallocated ESOP and nonvested shares (27,174) (32,558)
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,515,266 2,474,589
=================================================================================================================================
Basic earnings (loss) per common share $ (1.05) $ 0.31
=================================================================================================================================
Diluted earnings (loss) per common share:
Numerator, net income (loss) $ (2,651) $ 777
=================================================================================================================================
Denominator, weighted average common shares outstanding
for basic earnings per share 2,515,266 2,474,589
Add dilutive effect of assumed exercises of stock options, net of tax benefits -- 30,504
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential common shares outstanding 2,515,266 2,505,093
=================================================================================================================================
Diluted earnings (loss) per common share $ (1.05) $ 0.31
=================================================================================================================================
4. COMMITMENTS AND CONTINGENCIES
At March 31, 2007 and September 30, 2006, the Company had outstanding
commitments to originate and purchase loans totaling $50.9 million and
$52.9 million, respectively. It is expected that outstanding loan
commitments will be funded with existing liquid assets. At March 31, 2007,
the Company had no commitments to purchase or sell securities available
for sale.
Legal Proceedings
MetaBank has been named in several lawsuits whose eventual outcome could
have an adverse effect on the consolidated financial position or results
of operations of the Company. Because the likelihood or amount of an
adverse resolution to these matters cannot currently be assessed, the
Company has not recorded a contingent liability related to these potential
claims.
On June 11, 2004, the Sioux Falls School District filed suit in the Second
Judicial Circuit Court alleging that MetaBank, a wholly-owned subsidiary
of the Company, improperly allowed funds, which belonged to the school
district, to be deposited into, and subsequently withdrawn from, a
corporate account established by an employee of the school district. The
school district is seeking in excess of $600,000. MetaBank has submitted
the claim to its insurance carrier, and is working with counsel to
vigorously contest the suit.
On or about April 26, 2006, MetaBank, Meta Financial Group, Inc., Meta
Trust Company and J. Tyler Haahr were named as defendants in Dengler,
Flute, et al v. Prairie Auto Group, Inc., a class action lawsuit filed in
Circuit Court for the Second Judicial Circuit in Minnehaha County, South
Dakota. This lawsuit appears to be a successor suit to a series of two
state and three tribal court lawsuits that were filed in 2006, reported on
a previous 10-Q, but apparently subsequently abandoned by the plaintiffs.
In this action,
10
plaintiff class is comprised of individuals who purchased vehicles and/or
obtained financing from the J.D. Byrider franchise in Pennington County,
which was owned and operated by companies controlled by Dan Nelson.
Plaintiffs allege that the Dan Nelson companies, including the Dan Nelson
Auto Group ("DNAG") and the South Dakota Acceptance Corporation ("SDAC")
and other affiliates, operated under the J.D. Byrider franchise and
business model and engaged in abusive sales, lending and consumer
practices, The bulk of the complaint addresses the various alleged
fraudulent schemes perpetrated by the Nelson companies against their
customers, principally the "buy here, pay here" model in which individuals
with poor credit histories were allegedly sold poor quality vehicles at
high prices with worthless warranties on usurious loan terms.
MetaBank, in conjunction with a roster of participating banks, had
provided a series of loans and lines of credit to DNAG and SDAC.
Plaintiffs allege that the MetaBank entities "participated in the
fraudulent scheme" by virtue of providing these lines of credit and loans
despite being aware of the predatory consumer practices of the Nelson
companies, and that MetaBank profited by receiving undisclosed "special
benefits" for providing these loans. DNAG, SDAC and Nelson have since
filed for bankruptcy. Plaintiffs also allege that MetaBank did not
vigorously pursue claims against Nelson and fellow DNAG executive Chris
Tapken in their respective personal bankruptcies in order to allow these
individuals to emerge with control over assets of their former companies.
The claims against J. Tyler Haahr personally are not explained, other than
that Haahr had a "long-standing personal relationship" that allegedly led
to the decision by MetaBank to provide loans and lines of credit to the
various entities owned and controlled by Nelson. The MetaBank entities
have not yet filed an answer to this complaint, and there is no discrete
amount of damages claimed against the MetaBank entities, so it would be
premature to predict MetaBank's likelihood of success or amount of
exposure in this lawsuit. MetaBank intends to vigorously contest these
claims. MetaBank's liability insurer has already agreed to provide
coverage to the MetaBank entities and J. Tyler Haahr for this claim, and
has retained and is paying for counsel to defend this action.
As was described in the Company's previous filings, MetaBank was the lead
lender and servicer of approximately $32.0 million in loans to three auto
dealership related companies and their owners. Approximately $22.2 million
of the total had been sold to ten participating financial institutions.
Each participation agreement with the ten participant banks provides that
the participant bank shall own a specified percentage of the outstanding
loan balance at any give time. Each agreement also recites the maximum
amount that can be loaned by MetaBank on that particular loan. MetaBank
allocated to some participants an ownership in the outstanding loan
balance in excess of the percentage specified in the participation
agreement. MetaBank believes that in each instance this was done with the
full knowledge and consent of the participant. Several participants have
demanded that their participations be adjusted to match the percentage
specified in the participant agreement. Based on the total loan recoveries
projected as of March 31, 2007, MetaBank calculated that it would cost
approximately $953,000 to adjust these participations as the participants
would have them adjusted. A few participants have more recently asserted
that MetaBank owes them additional monies based on additional legal
theories. MetaBank denies any obligation to make the requested adjustments
on these or related claims. Other than as disclosed below, MetaBank cannot
predict at this time whether any of these claims will be the subject of
litigation.
During the three months ended June 30, 2006 or shortly thereafter four
lawsuits were filed against the Company's MetaBank subsidiary. Three of
the complaints are related to the Company's alleged actions in connection
with its activities as lead lender to three companies involved in auto
sales, service, and financing and their owner. An additional bank, North
American Bank, has filed to join the First Midwest Bank-Deerfield Branches
case, which action has not been granted and is being fought by MetaBank.
All four actions are in their infancy and amount cannot be determined at
this time. The Company intends, however, to vigorously defend its actions.
11
First Midwest Bank-Deerfield Branches and Mid-Country Bank v. MetaBank
(Civ. No. 06-2241). On June 28, 2006, First Midwest Bank-Deerfield
Branches and Mid-Country Bank filed suit against MetaBank in South
Dakota's Second Judicial Circuit Court, Minnehaha County, in the above
titled action. The complaint alleges that plaintiff banks, who were
participating lenders with MetaBank on a series of loans made to DNAG and
SDAC, suffered damages exceeding $1 million as a result of MetaBank's
placement and administration of the loans that were the subject of the
loan participation agreements. The complaint sounds in breach of contract,
negligence, gross negligence, negligent misrepresentation, fraud in the
inducement, unjust enrichment and breach of fiduciary duty. On July 17,
2006, MetaBank removed the case from state court to the United States
District Court for the District of South Dakota, where the action has been
assigned case no. Civ. 06-4114. Plaintiff(s) moved to remand the case back
to state court, but this motion was denied. A scheduling order was
recently submitted to the United States District Court and discovery is
just beginning.
First Premier Bank v. MetaBank (Civ. No. 06-2277). On July 5, 2006, First
Premier Bank filed suit against MetaBank in South Dakota's Second Judicial
Circuit Court, Minnehaha County in the above titled action. The complaint
alleges that First Premier, a participating lender with MetaBank on a
series of loans made to SDAC, has suffered damages in an as yet
undetermined amount as a result of MetaBank's actions in selling to First
Premier a participation in a loan made to SDAC and MetaBank's actions in
administering that loan. The complaint sounds in breach of contract,
breach of covenant of good faith and fair dealing, fraudulent inducement,
fraud, deceit, negligent misrepresentation, fraudulent misrepresentation,
conversion, negligence, gross negligence, breach of fiduciary duty and
unjust enrichment. On July 17, 2006, MetaBank removed the case from state
court to the United States District Court for the District of South
Dakota, where the action has been assigned case no. Civ. 06-4115.
Plaintiff(s) moved to remand the case back to state court, but this motion
was denied. A scheduling order was recently submitted to the United States
District Court and discovery is just beginning.
Home Federal Bank v. J. Tyler Haahr, Daniel A. Nelson and MetaBank (Civ.
No. 06-2230). On June 26, 2006, Home Federal Bank filed suit against
MetaBank and two individuals, J. Tyler Haahr and Daniel A. Nelson, in
South Dakota's Second Judicial Circuit Court, Minnehaha County in the
above titled action. The complaint alleges that Home Federal, a
participating lender with MetaBank on a series of loans made to DNAG and
SDAC, suffered damages exceeding $3.8 million as a result of failure to
make disclosures regarding an investigation of Nelson, DNAG and SDAC by
the Iowa Attorney General at the time Home Federal agreed to an extension
of the loan participation agreements. The complaint sounds in fraud,
negligent misrepresentation, breach of fiduciary duty, conspiracy and
breach of duty of good faith and fair dealing. Discovery in that matter is
proceeding.
Subject to a reservation of rights, the Company's insurance carrier has
agreed to cover the three claims described above.
Meridian Enterprises Corporation v. Bank of America Corporation et al.
(Case No. 4:06-cv-01117CDP). On July 21, 2006, Meridian Enterprises
Corporation ("Meridian") filed suit against Meta Financial Group, Inc.
(Meta Payment Systems division) ("Meta") and other banks and financial
institutions in the U.S. District Court for the Eastern District of
Missouri in the above-titled action. Meridian is the owner of U.S. Patent
No. 5,025,372 (the " '372 Patent"). The complaint alleges that Meta and
the co-defendants each sell, administer, process and/or sponsor an
incentive program where cards are provided to participants in the
incentive program that can be presented to retailers to make a purchase.
The complaint further alleges, inter alia, that Meta and the co-defendants
each use a computer to determine whether or not a participant's
performance under the incentive program entitles the participant to an
award, in which the computer also determines the amount of the award, and
the amount of the award is based upon the level of the participant's
performance in the incentive program. Accordingly, the complaint sounds in
infringement, inducement of infringement, and contributory infringement of
one or more claims of the '372 Patent. On April 9, 2007, Meridian's
complaint was dismissed without prejudice.
12
There are no other material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
5. STOCK OPTION PLAN
The Company maintains the 2002 Omnibus Incentive Plan, which, among other
things, provides for the awarding of stock options and nonvested
(restricted) shares to certain officers and directors of the Company.
Awards are granted by the Stock Option Committee of the Board of Directors
based on the performance of the award recipients, or other relevant
factors.
Effective October 1, 2005, the Company adopted SFAS No. 123(R),
Share-Based Payment, using a modified prospective application. Prior to
that date, the Company accounted for stock option awards under APB Opinion
No. 25, Accounting for Stock Issued to Employees. In accordance with SFAS
No. 123(R), compensation expense for share based awards is recorded over
the vesting period at the fair value of the award at the time of grant.
The recording of such compensation expense began on October 1, 2005 for
shares not yet vested as of that date and for all new grants subsequent to
that date. The exercise price of options or fair value of nonvested shares
granted under the Company's incentive plans is equal to the fair market
value of the underlying stock at the grant date. The Company assumes no
projected forfeitures on its stock based compensation, since actual
historical forfeiture rates on its stock based incentive awards has been
negligible.
On January 22, 2007, the Company's stockholders approved the First
Amendment to the 2002 Omnibus Incentive Plan (the "Plan"). A description
of the Plan was included in "Proposal II: Approval of Amendment to 2002
Omnibus Incentive Plan" of the Company's Definitive Proxy Statement for
its 2007 Annual Meeting, as filed with the Securities Exchange Commission
on December 29, 2006, and is incorporated herein by reference.
13
A summary of option activity at and for the six months ended March 31,
2007 is presented below:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
shares Price Term (Yrs) Value
--------------------------------------------------------------------------------------------
Options outstanding, September 30, 2006 386,425 $ 19.79 6.65 $ 1,792,717
Granted 14,000 29.50
Exercised (52,780) 16.99 667,250
Forfeited or expired (1,500) 23.81
--------------------------------------------------------------------------------------------
Options outstanding, March 31, 2007 346,145 $ 20.60 7.16 $ 3,568,807
Options exercisable at March 31, 2007 232,395 $ 19.24 6.46 $ 2,710,427
A summary of nonvested share activity at and for the six months ended
March 31, 2007 is presented below:
Weighted
Number Average
of Fair Mkt Val
shares At Grant
-----------------------------------------------------------------------------
Nonvested shares outstanding, September 30, 2006 8,333 $ 24.43
Granted -- --
Vested -- --
Forfeited or expired -- --
-----------------------------------------------------------------------------
Nonvested shares outstanding, March 31, 2007 8,333 $ 24.43
As of March 31, 2007, stock based compensation expense not yet recognized
in income totaled $578,000, which is expected to be recognized over a
weighted average remaining period of 1.39 years.
6. SEGMENT INFORMATION
An operating segment is generally defined as a component of a business for
which discrete financial information is available and whose results are
reviewed by the chief operating decision-maker. Operating segments are
aggregated into reportable segments if certain criteria are met. 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(R), 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 Other
Segments consists of the operations of Meta Financial Group, Inc. and Meta
Trust Company. Revenues and expenses are allocated to business segments
using a funds transfer pricing methodology through which excess funds or
funding shortfalls at individual segments are sold to or bought from,
respectively, the remaining segments. As the Company's funding mix changes
between segments, net interest income
14
at individual segments may rise or fall based on the relative size of the
excess funding or funding shortfall position at any particular segment.
The following tables present segment data for the Company for the three
and six month periods ended March 31, 2007 and 2006, respectively.
Traditional Meta Payment
Banking Systems All Others Total
--------------------------------- ------------ ------------ ----------- ------------
Three Months Ended March 31, 2007
Net interest income (expense) $ 4,215 $ 1,697 $ (238) $ 5,674
Provision for loan losses (280) -- -- (280)
Non-interest income 726 3,482 24 4,232
Non-interest expense 4,463 4,370 359 9,192
------------ ------------ ----------- ------------
Net income (loss) before tax 758 809 (573) 994
Income tax expense (benefit) 281 270 (160) 391
------------ ------------ ----------- ------------
Net income (loss) $ 477 $ 539 $ (413) $ 603
============ ============ =========== ============
Inter-segment revenue (expense) $ (1,699) $ 1,699 $ -- $ --
Total assets 501,772 229,466 (1,812) 729,426
Total deposits 355,363 224,216 -- 579,579
Three Months Ended March 31, 2006
Net interest income (expense) $ 3,915 $ 1,234 $ (160) $ 4,989
Provision for loan losses (350) -- -- (350)
Non-interest income 668 1,501 28 2,197
Non-interest expense 4,761 2,191 248 7,200
------------ ------------ ----------- ------------
Net income (loss) before tax 172 544 (380) 336
Income tax expense (benefit) 53 188 (166) 75
------------ ------------ ----------- ------------
Net income (loss) $ 119 $ 356 $ (214) $ 261
============ ============ =========== ============
Inter-segment revenue (expense) $ (775) $ 933 $ (158) $ --
Total assets 625,801 117,536 2,103 745,440
Total deposits 422,059 118,366 -- 540,425
15
Traditional Meta Payment
Banking Systems All Others Total
--------------------------------- ------------ ------------ ----------- ------------
Six Months Ended March 31, 2007
Net interest income (expense) $ 8,320 $ 3,084 $ (471) $ 10,933
Provision for loan losses 5,185 -- -- 5,185
Non-interest income 1,200 6,944 49 8,193
Non-interest expense 8,962 8,321 739 18,022
------------ ------------ ----------- ------------
Net income (loss) before tax (4,627) 1,707 (1,161) (4,081)
Income tax expense (benefit) (1,641) 562 (351) (1,430)
------------ ------------ ----------- ------------
Net income (loss) $ (2,986) $ 1,145 $ (810) $ (2,651)
============ ============ =========== ============
Inter-segment revenue (expense) $ (3,066) $ 3,066 $ -- $ --
Total assets 501,772 229,466 (1,812) 729,426
Total deposits 355,363 224,216 -- 579,579
Six Months Ended March 31, 2006
Net interest income (expense) $ 8,039 $ 1,991 $ (321) $ 9,709
Provision for loan losses (309) -- -- (309)
Non-interest income 1,250 2,739 54 4,043
Non-interest expense 9,047 3,432 511 12,990
------------ ------------ ----------- ------------
Net income (loss) before tax 551 1,298 (778) 1,071
Income tax expense (benefit) 185 448 (339) 294
------------ ------------ ----------- ------------
Net income (loss) $ 366 $ 850 $ (439) $ 777
============ ============ =========== ============
Inter-segment revenue (expense) $ (1,100) $ 1,419 $ (319) $ --
Total assets 625,801 117,536 2,103 745,440
Total deposits 422,059 118,366 -- 540,425
7. SUBSEQUENT EVENT
On January 31, 2007, MetaBank announced that it had entered into
agreements to sell four of its Northwest Iowa branches. On April 13, 2007
MetaBank consummated the sale of its Laurens office to Iowa Trust &
Savings Bank in Emmetsburg, Iowa. Iowa State Bank in Sac City, Iowa, will
purchase the MetaBank offices in Sac City, Lake View, and Odebolt, Iowa.
This transaction is anticipated to close on May 18, 2007. Together, the
transactions will involve the assumption by the acquiring banks of
approximately $40.4 million in deposits and the purchase of $1.2 million
in loans. Meta Financial Group expects the transactions will generate a
pre-tax gain on sale of approximately $3.4 million.
16
8. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement No. 157, ("SFAS No. 157"), Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. It clarifies
that fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. This
Statement does not require any new fair value measurements, but rather, it
provides enhanced guidance to other pronouncements that require or permit
assets or liabilities to be measured at fair value. This Statement is
effective for fiscal years beginning after November 15, 2007, with earlier
adoption permitted. The Company does not expect that the adoption of this
Statement will have a material impact on its financial position, results
of operation and cash flows.
In February 2007, the FASB issued Statement No. 159, ("SFAS No. 159"),
"The Fair Value Option for Financial Assets and Financial Liabilities."
This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. Most of the provisions of this Statement apply only
to entities that elect the fair value option. However, the amendment to
FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities, applies to all entities with available-for-sale and
trading securities. Unrealized gains and losses on items for which the
fair value option has been elected are required to be reported in earnings
at each reporting date. This Statement is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. The
Company does not expect that the adoption of this Statement will have a
material impact on its financial position, results of operation and cash
flows.
17
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
The Company, and its wholly-owned subsidiaries, MetaBank and MetaBank WC, may
from time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission,
in its reports to shareholders, and in other communications by the Company,
which are made in good faith by the Company pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions that are subject to
significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond the Company's control. Such statements may
address: future operating results; customer growth and retention; loan and other
product demand; earnings growth and expectations; new products and services,
such as those offered by the Meta Payment Systems division; credit quality and
adequacy of reserves; technology; and our employees. The following factors,
among others, could cause the Company's financial performance to differ
materially from the expectations, estimates, and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary, and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
inflation, interest rate, market, and monetary fluctuations; the timely
development of and acceptance of new products and services of the Company and
the perceived overall value of these products and services by users; the impact
of changes in financial services' laws and regulations; technological changes;
acquisitions; litigation; 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 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.
GENERAL
Meta Financial Group, Inc. is a bank holding company whose primary subsidiaries
are MetaBank and MetaBank West Central. The Company was incorporated in 1993 as
a unitary non-diversified savings and loan holding company that, on September 20
of that year, acquired all of the capital stock of MetaBank, a federal savings
bank, in connection with MetaBank'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 MetaBank WC, a state-chartered commercial
bank.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at March 31, 2007, compared to September 30, 2006,
and the consolidated results of operations for the three and six month periods
ended March 31, 2007 and 2006. This discussion should be read in conjunction
with the Company's consolidated financial statements, and notes thereto, for the
year ended September 30, 2006.
18
CORPORATE DEVELOPMENTS AND OVERVIEW
The Company continues to emphasize expansion in the growing metropolitan areas
of Sioux Falls, South Dakota and Des Moines, Iowa. The Company focuses primarily
on establishing lending and deposit relationships with commercial businesses and
commercial real estate developments in these communities. In March 2007, the
Company also opened an administrative support office in Omaha. On January 31,
2007, the Company announced a plan to divest four of its branches in rural
Northwest Iowa. See Note 7 of "Notes to Condensed Consolidated Financial
Statements.
The Company also continues to experience significant growth in its Meta Payments
Systems (MPS) division and is investing for further growth in this business
unit. MPS offers prepaid debit cards and other payment systems products and
services through a global distribution network. As a part of its normal course
of business, the division also attracts significant balances on low- and no-cost
demand deposits. Further discussion of the financial results of MPS is included
below.
For the three months ended December 31, 2006, the Company announced impairments
on two commercial lending relationships which together reduced pre-tax earnings
by $5.7 million. Further detail on these loans is included in "Financial
Condition" and "Results of Operations" below.
The Company's stock trades on the NASDAQ Global Market under the symbol "CASH."
FINANCIAL CONDITION
As of March 31, 2007, the Company had assets totaling $729.4 million, compared
to $741.6 million at September 30, 2006. The decrease in assets of $12.2 million
resulted primarily from decreases in the Company's loan and investment and
securities portfolios. The Company's loan portfolio, net of allowance for loan
losses, decreased $14.4 million from $389.3 million at September 30, 2006 to
$374.9 million at March 31, 2007. The Company continues to experience runoff in
its commercial loan participation and commercial real estate portfolios.
Management attributes this shrinkage to an overall decrease in the demand for
credit and increased competition from the secondary market.
Investment securities, including mortgage-backed securities, declined $16.9
million from $192.1 million at September 30, 2006 to $175.2 million at March 31,
2007. The Company did not purchase any securities during the six months ended
March 31, 2007.
The decrease in loans and securities was offset by an increase in cash and cash
equivalents and federal funds sold of $20.1 million. In general, the Company
maintains its cash investments in interest-bearing overnight deposits with
various correspondent banks. Federal funds sold deposits are maintained at
various large commercial banks.
Total deposits rose $13.9 million from $565.7 million at September 30, 2006 to
$579.6 million at March 31, 2007. Most of this increase was the result of an
increase in non-interest-bearing checking deposits of $60.4 million. Most of the
checking deposit increase arose from growth in deposits at Meta Payment Systems.
Higher costing money market, savings, and certificates of deposits, including
public funds, declined $47.8 million. Other deposit portfolios exhibited
moderate growth during this time period.
Total wholesale borrowings also declined $23.9 million from $125.0 million at
September 30, 2006 to $101.1 million at March 31, 2007. The Company continues to
de-emphasize these high cost funding sources in an effort to decrease overall
liability costs and to de-lever the Company's balance sheet.
At March 31, 2007, the Company's shareholders' equity totaled $44.7 million,
down $609,000 from $45.3 million at September 30, 2006. The decrease was
primarily the result of the reported fiscal 2007 year-to-date loss (see "Results
of Operations" below) and the payment of dividends on common stock, offset by a
favorable change in
19
the accumulated other comprehensive loss on the Company's available for sale
securities portfolio. At March 31, 2007, the Company and both of its banking
subsidiaries, MetaBank and MetaBank West Central, continue to meet regulatory
requirements for classification as well-capitalized institutions.
Nonperforming 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 nonaccrual 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 nonaccrual status until the loan has been brought current or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At March 31, 2007, the Company had loans delinquent 30- days and over totaling
$8.0 million, or 2.11% of total loans, compared to $5.5 million, or 1.39% of
total loans, at September 30, 2006. The increase in delinquent loans since
September is primarily the result of a delinquency on a $3.8 million commercial
business loan relationship.
At March 31, 2007, commercial and multi-family real estate loans delinquent 30
days and over totaled $689,000, or 0.18% of total loans. There were no
delinquent loans in this category as of September 30, 2006. 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, but not limited to, the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income producing properties and the higher level of difficulty of evaluating
and monitoring these types of loans. The Company believes that the level of
allowance for loan losses adequately reflects potential risks related to these
loans; however there can be no assurance that all loans will be fully
collectible.
At March 31, 2007, commercial business loans delinquent 30 days and over totaled
$6.9 million, or 1.82% of total loans. This compares to $5.1 million, or 1.28%
of total loans, at September 30, 2006. 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. The Company believes that the
level of allowance for loan losses adequately reflects potential risks related
to these loans; however there can be no assurance that all loans will be fully
collectible.
At March 31, 2007, agricultural loans delinquent 30 days and over totaled
$150,000, or 0.04% of total loans. This compares to $201,000, or 0.05% of total
loans, at September 30, 2006. Agricultural lending also 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.
20
The table below sets forth the amounts and categories of the Company's
nonperforming assets. Foreclosed assets include assets acquired in settlement of
loans.
Nonperforming Assets As Of
------------------------------------
March 31, 2007 September 30, 2006
------------------------------------
(Dollars in Thousands)
Nonaccruing loans:
One-to four-family $ 242 $ 31
Commercial and multi-family 689 --
Agricultural operating 150 182
Commercial business 2,900 3,887
-------------- ------------------
Total nonaccruing loans 3,981 4,100
-------------- ------------------
Accruing loans delinquent 90 days or more -- --
-------------- ------------------
Total nonperforming loans 3,981 4,100
-------------- ------------------
Foreclosed assets:
One-to four-family -- 15
Commercial and multi-family -- 35
-------------- ------------------
Total foreclosed assets -- 50
-------------- ------------------
Total nonperforming assets $ 3,981 $ 4,150
============== ==================
Total as a percentage of total assets 0.55% 0.56%
Classified assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. When assets are classified as loss, the Company is
required either to establish a specific allowance for loan losses equal to 100%
of that portion of the loan so classified, or to charge-off such amount. The
Company's determination as to the classification of its loans and the amount of
its allowances for loan losses are subject to review by its regulatory
authorities, which may require the establishment of additional general or
specific allowances for loan losses. The discovery of additional information in
the future may also affect both the level of classification and the amount of
allowances for loan losses.
On the basis of management's review of its loans and other assets, at March 31,
2007, the Company had classified a total of $8.2 million of its assets as
substandard, $566,000 as doubtful and none as loss. This compares to
classifications at September 30, 2006 of $5.0 million substandard, $447,000
doubtful and none as loss.
Allowance for loan losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a number of factors including, among
others, historic loss experience, the overall level of classified assets and
nonperforming loans, the composition of its loan portfolio and the general
economic environment within which the Company and its borrowers operate.
At March 31, 2007, the Company has established an allowance for loan losses
totaling $5.3 million, or 133% of nonperforming loans, compared to $6.0 million,
or 143% of nonperforming loans at September 30, 2006.
21
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the three and six month periods ended March 31,
2007 and 2006.
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2007 2006 2007 2006
------------------------ ------------------------
(Dollars in Thousands)
Beginning balance $ 10,349 $ 7,257 $ 5,968 $ 7,222
Provision charged to operations (280) (350) 5,185 (309)
Charge-offs (4,831) (1,108) (5,924) (1,116)
Recoveries 44 199 53 201
------------------------ ------------------------
Ending balance $ 5,282 $ 5,998 $ 5,282 $ 5,998
======================== ========================
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.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policies to be those related to the allowance for loan
losses and asset impairment judgments including the recoverability of goodwill.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative, in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
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 "Nonperforming Assets and
Allowance for Loan Losses." Although management believes the level of the
allowance as of March 31, 2007 was 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.
22
RESULTS OF OPERATIONS
General. For the three months ended March 31, 2007, the Company recorded net
income of $603,000, or $0.23 per diluted share, compared to net income of
$261,000, or $0.10 per diluted share, for the same period in 2006. Earnings in
the current period were impacted by non-recurring and recurring fee income,
partially offset by higher compensation and card processing expenses. A net loss
of $2.7 million, or $1.05 per diluted share, was reported for the six month
period ended March 31, 2007 compared to net income of $777,000, or $0.31 per
diluted share for the same period in the prior fiscal year. Earnings for the six
month period ended March 31, 2007 were impacted by the recognition of
impairments on two commercial loan relationships, which together reduced pre-tax
earnings by $5.74 million. Additionally, the Company incurred higher operating
expenses. Offsetting these factors, in part, were increased income from card
fees and higher net interest income.
Net interest income. Net interest income for the second quarter of fiscal year
2007 was $5.7 million, up 12.6% from $5.0 million in the second quarter of
fiscal year 2006. Both higher asset yields and lower liability costs contributed
to this increase. Net interest margin rose 49 basis points from 2.87% in the
second quarter of fiscal year 2006 to 3.36% in the current quarter. The rise in
short term interest rates during the past year contributed to both higher loan
and investment yields. Total asset yields for the second quarter of fiscal year
2007 were 6.10%, up 24 basis points from 5.86% for the same quarter last year. A
significant change in deposit mix, away from higher costing certificates and
public funds deposits and toward low- and no-cost demand deposits also
contributed to a meaningful decline in liability costs despite a higher interest
rate environment. Total liability costs fell 24 basis points from 2.98% in the
second quarter of fiscal year 2006 to 2.74% in the current quarter. For the six
month period ended March 31, 2007 net interest income was $10.9 million compared
to $9.7 million for the same period in the prior fiscal year. Net interest
margin was 3.21% for the six months ended March 31, 2007, up 45 basis points
from 2.76% for the same period in the prior fiscal year.
23
The following tables present the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the three and six month periods ended March 31, 2007 and 2006.
Three Months Ended March 31, 2007 2006
------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 370,055 $ 6,615 7.24% $ 424,645 $ 7,466 7.12%
Mortgage-backed securities 150,403 1,519 4.04% 190,108 1,822 3.83%
Other investments and fed funds sold 160,061 2,155 5.39% 86,963 907 4.17%
-------------------------------- ---------------------------------
Total interest-earning assets 680,519 $ 10,289 6.10% 701,716 $ 10,195 5.86%
================== ===================
Non-interest-earning assets 47,211 48,696
----------- -----------
Total assets $ 727,730 $ 750,412
=========== ===========
Non-interest bearing deposits $ 247,082 $ -- 0.00% $ 139,127 $ -- 0.00%
Interest-bearing liabilities:
Interest-bearing checking 28,901 163 2.28% 26,070 177 2.76%
Savings 20,846 122 2.38% 54,490 381 2.84%
Money markets 66,303 519 3.17% 91,659 623 2.76%
Time deposits 214,387 2,386 4.51% 235,908 2,155 3.70%
FHLB advances 85,584 1,123 5.25% 132,252 1,523 4.61%
Other borrowings 16,145 302 7.49% 25,657 347 5.41%
-------------------------------- ---------------------------------
Total interest-bearing liabilities 432,166 4,615 4.31% 566,036 5,206 3.71%
Total deposits and
interest-bearing liabilities 679,248 $ 4,615 2.74% 705,163 $ 5,206 2.98%
================== ===================
Other non-interest bearing liabilities 4,849 3,016
----------- -----------
Total liabilities 684,097 708,179
Shareholders' equity 43,633 42,233
Total liabilities and ----------- -----------
shareholders' equity $ 727,730 $ 750,412
=========== ===========
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 5,674 3.35% $ 4,989 2.88%
================== ===================
Net interest margin 3.36% 2.87%
======= =======
24
Six Months Ended March 31, 2007 2006
------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 375,614 $ 13,491 7.24% $ 428,387 $ 15,052 7.04%
Mortgage-backed securities 152,776 3,125 4.09% 195,796 3,655 3.73%
Other investments and fed funds sold 156,436 4,050 5.12% 83,706 1,664 3.98%
-------------------------------- ---------------------------------
Total interest-earning assets 684,827 $ 20,666 6.05% 707,889 $ 20,371 5.77%
================== ===================
Non-interest-earning assets 47,360 46,308
----------- -----------
Total assets $ 732,187 $ 754,197
=========== ===========
Non-interest bearing deposits $ 226,666 $ -- 0.00% $ 123,983 $ -- 0.00%
Interest-bearing liabilities:
Interest-bearing checking 28,260 410 2.91% 26,250 380 2.90%
Savings 23,772 311 2.62% 57,189 805 2.82%
Money markets 76,875 1,222 3.19% 88,317 1,095 2.49%
Time deposits 215,517 4,751 4.42% 245,085 4,403 3.60%
FHLB advances 90,750 2,361 5.15% 142,568 3,315 4.60%
Other borrowings 20,541 679 6.54% 25,320 664 5.19%
-------------------------------- ---------------------------------
Total interest-bearing liabilities 455,715 9,733 4.26% 584,729 10,662 3.64%
Total deposits and
interest-bearing liabilities 682,382 $ 9,733 2.85% 708,712 $ 10,662 3.00%
================== ===================
Other non-interest bearing liabilities 5,147 2,837
----------- -----------
Total liabilities 687,528 711,549
Shareholders' equity 44,658 42,648
Total liabilities and ----------- -----------
shareholders' equity $ 732,187 $ 754,197
=========== ===========
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 10,933 3.20% $ 9,709 2.77%
================== ===================
Net interest margin 3.21% 2.76%
======= =======
25
Provision for loan loss. The Company recorded a negative provision for loan
losses in the second quarter of fiscal year 2007 of $280,000 compared to a
negative provision of $350,000 for the same period in the prior fiscal year. The
Company recorded a provision for the six months ended March 31, 2007 in the
amount of $5.2 million compared to a negative provision of $309,000 for the same
period in the prior fiscal year. The provision this year is directly related to
two commercial loan relationships. The Company recorded a $690,000 provision on
a loan secured by the assets of a road paving company and recognized a $4.95
million provision on a purchased participation loan relationship. See
"Nonperforming Assets and Allowance for Loan Losses" herein. Offsetting these
specific provisions, the Company also recorded a $280,000 negative provision
during the three months ended March 31, 2007 as a result of shrinkage in the
loan portfolio.
Non-interest income. Non-interest income for the second quarter was $4.2
million, double the level from the same quarter a year ago. The increase is the
result of higher fee income generated by the Meta Payment Systems division. Fees
earned on prepaid debit cards and other payment systems products and services
were $3.5 million for the second quarter of fiscal year 2007, compared to $1.4
million for the same quarter in fiscal year 2006. For the six months ended March
31, 2007, non-interest income totaled $8.2 million, compared to $4.0 million for
the same period in the prior fiscal year. Fees earned on prepaid debit cards and
other payment systems products and services were $6.9 million for the six months
ended March 31, 2007, compared to $2.7 million for the same period in fiscal
year 2006.
Non-interest expense. The Company's non interest expense was $9.2 million for
the second quarter of fiscal year 2007, reflecting a $2.0 million increase from
$7.2 million in the same quarter in fiscal year 2006. For the six months ended
March 31, 2007, non-interest expense totaled $18.0 million, compared to $13.0
million for the same period in the prior fiscal year. The increase is broad
based and is generally the result of the Company's investment in the Meta
Payment Systems division.
Card processing expenses rose $647,000 from $942,000 in the second quarter of
fiscal year 2006 to $1.6 million in the current quarter. For the six months
ended March 31, 2007, card processing expense totaled $3.2 million, compared to
$1.3 million for the same period in the prior fiscal year. These expenses
reflect costs associated with processing and delivering debit card related
products and services. Compensation expense rose $1.5 million on a quarter over
quarter basis to $4.5 million. For the six months ended March 31, 2007,
compensation expense totaled $8.6 million, compared to $6.1 million for the same
period in the prior fiscal year. This increase reflects the staffing of two new
full service branches, one each in Sioux Falls, SD and West Des Moines, IA, an
increase in the sales force and operations support staff at Meta Payment
Systems, and the addition of IT staff and other administrative support within
the Company. Many of the new employees at MPS and in IT will be focused on
developing new product lines and increasing market penetration of our payments
systems products and services. Other expenses at the Company have also exhibited
growth as business volumes have increased. Increases in occupancy and equipment
expense reflect the aforementioned new branches and the addition of
administrative office space in Sioux Falls. Similarly, increases in marketing,
legal and consulting, and other expenses reflect the Company's continuing
efforts to support growth of business opportunities that management believes
will be profitable over time.
Income tax expense. For the second quarter of fiscal year 2007, the Company
recorded income tax expense of $391,000 compared to $75,000 for the second
quarter of the prior fiscal year. For the six months ended March 31, 2007, the
Company recorded a benefit in the amount of $1.4 million. The benefit compares
to a $294,000 income tax expense for the first six months of fiscal year 2006.
The change is due primarily to the change in net income (loss) before income tax
expense (benefit).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments, and mortgage-backed securities, and
funds provided by other operating activities. While scheduled payments on loans,
mortgage-backed securities, and short-term investments are relatively
predictable sources of
26
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions, and competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At March 31, 2007, the Company had
commitments to originate and purchase loans totaling $50.9 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
Regulations require MetaBank and MetaBank WC to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth MetaBank's and MetaBank WC's actual capital and
required capital amounts and ratios at March 31, 2007 which, at that date,
exceeded the minimum capital adequacy requirements.
Minimum
Requirement to Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Active
Actual Purposes Provisions
---------------------------------------------------------------
At March 31, 2007 Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
MetaBank
--------
Tangible capital (to tangible assets) $ 46,109 6.68 % $ 10,356 1.50 % n/a n/a
Tier 1 (core) capital (to adjusted total assets) 46,109 6.68 27,616 4.00 $ 34,519 5.00 %
Tier 1 (core) capital (to risk-weighted assets) 46,109 10.33 17,860 4.00 26,790 6.00
Total risk-based capital (to risk-weighted assets) 50,134 11.23 35,720 8.00 44,651 10.00
MetaBank West Central
---------------------
Tier 1 capital (to average assets) 3,758 8.79 1,709 4.00 2,136 5.00
Tier 1 risk-based capital (to risk-weighted assets) 3,758 15.88 946 4.00 1,420 6.00
Total risk-based capital (to risk-weighted assets) 3,935 16.63 1,893 8.00 2,366 10.00
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At March 31, 2007, MetaBank and MetaBank WC exceeded
minimum requirements for the well-capitalized category.
27
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company originates predominantly adjustable rate loans and fixed rate loans
with relatively short terms to maturity. Long term fixed rate residential
mortgages are generally sold into the secondary market. As a result of its
lending practices, the Company's loan portfolio is relatively short in duration
and yields respond quickly to the overall level of interest rates.
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 interest rate risk. As a result, funds may
be invested among various categories of security types and maturities based upon
the Company's need for liquidity and its desire to create an economic hedge
against the effects changes in interest rates may have on the overall market
value of the Company.
The Company offers a full range of deposit products which are generally short
term in nature. Interest-bearing checking, savings, and money market accounts
generally provide a stable source of funds for the bank and also respond
relatively quickly to changes in short term interest rates. The Company offers
certificates of deposit with maturities of three months through five years,
which serve to extend the duration of the overall deposit portfolio. A
significant portion of the Company's deposit portfolio is concentrated in
non-interest-bearing checking accounts. These accounts serve to decrease the
Company's overall cost of funds and reduce its sensitivity to changes in short
term interest rates.
The Company also maintains a portfolio of wholesale borrowings, predominantly
advances from the Federal Home Loan Bank which carry fixed terms and fixed rates
of interest. The Company utilizes this portfolio to manage liquidity demands and
also, when appropriate, in the ongoing management of interest rate risk.
The Board of Directors, as well as the Office of Thrift Supervision, have
established limits 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.
28
Net Portfolio Value. The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. The Company's Investment Committee, which
consists of members of senior management, is responsible for managing the
interest rate risk of the Company.
Presented below, as of March 31, 2007 and September 30, 2006, is an analysis of
the Company's interest rate risk profile as measured by changes in NPV for an
instantaneous and sustained parallel shift in the yield curve, in 100 basis
point increments, up and down 200 basis points. The Company's interest rate risk
profile has remained largely unchanged since September 30, 2006. In general, the
Company is more exposed to a decline in market value from a falling interest
rate environment than it is to a rising interest rate environment. This risk
profile is driven predominantly by the Company's large concentration in low- and
no-cost checking deposits. At both March 31, 2007 and September 30, 2006, the
Company's interest rate risk profile was within the limits set by the Board of
Directors. Additionally, MetaBank's interest rate risk profile was within the
limits set forth by the Office of Thrift Supervision.
At March 31, 2007 At September 30, 2006
Change in Interest Rates Board Limit ------------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
------------------------ ----------- -------- -------- -------- --------
(Dollars in thousands)
+200 bp (40)% $ (894) (1)% $ 548 1%
+100 bp (25) (250) -- 562 1
0 bp (Base Case) -- -- -- -- --
-100 bp (25) (876) (1) (907) (1)
-200 bp (40) (4,279) (6) (4,139) (6)
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.
29
Part I. Financial Information
Item 4. Controls and Procedures
CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures, as such term is defined in
Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2007 our disclosure controls and
procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in this Report was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (ii) information required to be disclosed by us in
our reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
With the participation of the Company's management, including its Chief
Executive Officer and Chief Financial Officer, the Company also conducted an
evaluation of the Company's internal control over financial reporting to
determine whether any changes occurred during the Company's fiscal quarter ended
March 31, 2007, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on such evaluation, management concluded that, as of the end of the period
covered by this report, 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.
30
META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings - MetaBank has been named in several lawsuits
whose eventual outcome could have an adverse effect on the
consolidated financial position or results of operations of the
Company. Because the likelihood or amount of an adverse resolution
to these matters cannot currently be assessed, the Company has not
recorded a contingent liability related to these potential claims.
On June 11, 2004, the Sioux Falls School District filed suit in the
Second Judicial Circuit Court alleging that MetaBank, a wholly-owned
subsidiary of the Company, improperly allowed funds, which belonged
to the school district, to be deposited into, and subsequently
withdrawn from, a corporate account established by an employee of
the school district. The school district is seeking in excess of
$600,000. MetaBank has submitted the claim to its insurance carrier,
and is working with counsel to vigorously contest the suit.
On or about April 26, 2006, MetaBank, Meta Financial Group, Inc.,
Meta Trust Company and J. Tyler Haahr were named as defendants in
Dengler, Flute, et al v. Prairie Auto Group, Inc., a class action
lawsuit filed in Circuit Court for the Second Judicial Circuit in
Minnehaha County, South Dakota. This lawsuit appears to be a
successor suit to a series of two state and three tribal court
lawsuits that were filed in 2006, reported on a previous 10-Q, but
apparently subsequently abandoned by the plaintiffs. In this action,
plaintiff class is comprised of individuals who purchased vehicles
and/or obtained financing from the J.D. Byrider franchise in
Pennington County, which was owned and operated by companies
controlled by Dan Nelson. Plaintiffs allege that the Dan Nelson
companies, including the Dan Nelson Auto Group ("DNAG") and the
South Dakota Acceptance Corporation ("SDAC") and other affiliates,
operated under the J.D. Byrider franchise and business model and
engaged in abusive sales, lending and consumer practices, The bulk
of the complaint addresses the various alleged fraudulent schemes
perpetrated by the Nelson companies against their customers,
principally the "buy here, pay here" model in which individuals with
poor credit histories were allegedly sold poor quality vehicles at
high prices with worthless warranties on usurious loan terms.
MetaBank, in conjunction with a roster of participating banks, had
provided a series of loans and lines of credit to DNAG and SDAC.
Plaintiffs allege that the MetaBank entities "participated in the
fraudulent scheme" by virtue of providing these lines of credit and
loans despite being aware of the predatory consumer practices of the
Nelson companies, and that MetaBank profited by receiving
undisclosed "special benefits" for providing these loans. DNAG, SDAC
and Nelson have since filed for bankruptcy. Plaintiffs also allege
that MetaBank did not vigorously pursue claims against Nelson and
fellow DNAG executive Chris Tapken in their respective personal
bankruptcies in order to allow these individuals to emerge with
control over assets of their former companies. The claims against J.
Tyler Haahr personally are not explained, other than that Haahr had
a "long-standing personal relationship" that allegedly led to the
decision by MetaBank to provide loans and lines of credit to the
various entities owned and controlled by Nelson. The MetaBank
entities have not yet filed an answer to this complaint, and there
is no discrete amount of damages claimed against the MetaBank
entities, so it would be premature to predict MetaBank's likelihood
of success or amount of exposure in this lawsuit. MetaBank intends
to vigorously contest these claims. MetaBank's liability insurer has
already agreed to provide coverage to the MetaBank entities and J.
Tyler Haahr for this claim, and has retained and is paying for
counsel to defend this action.
As was described in the Company's previous filings, MetaBank was the
lead lender and servicer of approximately $32.0 million in loans to
three auto dealership related companies and their owners.
Approximately $22.2 million of the total had been sold to ten
participating financial institutions. Each
31
participation agreement with the ten participant banks provides that
the participant bank shall own a specified percentage of the
outstanding loan balance at any give time. Each agreement also
recites the maximum amount that can be loaned by MetaBank on that
particular loan. MetaBank allocated to some participants an
ownership in the outstanding loan balance in excess of the
percentage specified in the participation agreement. MetaBank
believes that in each instance this was done with the full knowledge
and consent of the participant. Several participants have demanded
that their participations be adjusted to match the percentage
specified in the participant agreement. Based on the total loan
recoveries projected as of March 31, 2007, MetaBank calculated that
it would cost approximately $953,000 to adjust these participations
as the participants would have them adjusted. A few participants
have more recently asserted that MetaBank owes them additional
monies based on additional legal theories. MetaBank denies any
obligation to make the requested adjustments on these or related
claims. Other than as disclosed below, MetaBank cannot predict at
this time whether any of these claims will be the subject of
litigation.
During the three months ended June 30, 2006 or shortly thereafter
four lawsuits were filed against the Company's MetaBank subsidiary.
Three of the complaints are related to the Company's alleged actions
in connection with its activities as lead lender to three companies
involved in auto sales, service, and financing and their owner. An
additional bank, North American Bank, has filed to join the First
Midwest Bank-Deerfield Branches case, which action has not been
granted and is being fought by MetaBank. All four actions are in
their infancy and amount cannot be determined at this time. The
Company intends, however, to vigorously defend its actions.
First Midwest Bank-Deerfield Branches and Mid-Country Bank v.
MetaBank (Civ. No. 06-2241). On June 28, 2006, First Midwest
Bank-Deerfield Branches and Mid-Country Bank filed suit against
MetaBank in South Dakota's Second Judicial Circuit Court, Minnehaha
County, in the above titled action. The complaint alleges that
plaintiff banks, who were participating lenders with MetaBank on a
series of loans made to DNAG and SDAC, suffered damages exceeding $1
million as a result of MetaBank's placement and administration of
the loans that were the subject of the loan participation
agreements. The complaint sounds in breach of contract, negligence,
gross negligence, negligent misrepresentation, fraud in the
inducement, unjust enrichment and breach of fiduciary duty. On July
17, 2006, MetaBank removed the case from state court to the United
States District Court for the District of South Dakota, where the
action has been assigned case no. Civ. 06-4114. Plaintiff(s) moved
to remand the case back to state court, but this motion was denied.
A scheduling order was recently submitted to the United States
District Court and discovery is just beginning.
First Premier Bank v. MetaBank (Civ. No. 06-2277). On July 5, 2006,
First Premier Bank filed suit against MetaBank in South Dakota's
Second Judicial Circuit Court, Minnehaha County in the above titled
action. The complaint alleges that First Premier, a participating
lender with MetaBank on a series of loans made to SDAC, has suffered
damages in an as yet undetermined amount as a result of MetaBank's
actions in selling to First Premier a participation in a loan made
to SDAC and MetaBank's actions in administering that loan. The
complaint sounds in breach of contract, breach of covenant of good
faith and fair dealing, fraudulent inducement, fraud, deceit,
negligent misrepresentation, fraudulent misrepresentation,
conversion, negligence, gross negligence, breach of fiduciary duty
and unjust enrichment. On July 17, 2006, MetaBank removed the case
from state court to the United States District Court for the
District of South Dakota, where the action has been assigned case
no. Civ. 06-4115. Plaintiff(s) moved to remand the case back to
state court, but this motion was denied. A scheduling order was
recently submitted to the United States District Court and discovery
is just beginning.
Home Federal Bank v. J. Tyler Haahr, Daniel A. Nelson and MetaBank
(Civ. No. 06-2230). On June 26, 2006, Home Federal Bank filed suit
against MetaBank and two individuals, J. Tyler Haahr and Daniel A.
Nelson, in South Dakota's Second Judicial Circuit Court, Minnehaha
County in the above
32
titled action. The complaint alleges that Home Federal, a
participating lender with MetaBank on a series of loans made to DNAG
and SDAC, suffered damages exceeding $3.8 million as a result of
failure to make disclosures regarding an investigation of Nelson,
DNAG and SDAC by the Iowa Attorney General at the time Home Federal
agreed to an extension of the loan participation agreements. The
complaint sounds in fraud, negligent misrepresentation, breach of
fiduciary duty, conspiracy and breach of duty of good faith and fair
dealing. Discovery in that matter is proceeding.
Subject to a reservation of rights, the Company's insurance carrier
has agreed to cover the three claims described above.
Meridian Enterprises Corporation v. Bank of America Corporation et
al. (Case No. 4:06-cv-01117CDP). On July 21, 2006, Meridian
Enterprises Corporation ("Meridian") filed suit against Meta
Financial Group, Inc. (Meta Payment Systems division) ("Meta") and
other banks and financial institutions in the U.S. District Court
for the Eastern District of Missouri in the above-titled action.
Meridian is the owner of U.S. Patent No. 5,025,372 (the " '372
Patent"). The complaint alleges that Meta and the co-defendants each
sell, administer, process and/or sponsor an incentive program where
cards are provided to participants in the incentive program that can
be presented to retailers to make a purchase. The complaint further
alleges, inter alia, that Meta and the co-defendants each use a
computer to determine whether or not a participant's performance
under the incentive program entitles the participant to an award, in
which the computer also determines the amount of the award, and the
amount of the award is based upon the level of the participant's
performance in the incentive program. Accordingly, the complaint
sounds in infringement, inducement of infringement, and contributory
infringement of one or more claims of the '372 Patent. On April 9,
2007, Meridian's complaint was dismissed without prejudice.
There are no other material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
33
Item 1.A. Risk Factors - Other than the risk factors described below, there
have been no material changes from those described in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the
period ended September 30, 2006.
On March 15, 2006, the Federal Housing Finance Board ("Finance
Board"), the federal regulator of the 12 Federal Home Loan Banks
("FHLBs"), published for comment a proposal that would (i) establish
a minimum retained earnings requirement for each Federal Home Loan
Bank, (ii) limit the amount of excess stock that a Bank could have
outstanding, and (iii) impose new restrictions on the timing and
form of dividend payment. On December 22, 2006, the Finance Board
adopted a final rule prohibiting the FHLBs from issuing new excess
stock to members (such as MetaBank and MetaBank West Central) if the
amount of member excess stock exceeds one percent of the FHLB's
assets. These changes will not have a material impact on the
Company.
In connection with the previously disclosed bankruptcy of certain
borrowers of MetaBank, MetaBank has experienced loan losses, which
have, in part, been passed on to various entities that participated
with MetaBank, which was the lead lender at the time the loans were
made. Several of the participant banks have contended, over and
above the allocation issue raised by the participants and described
in previous filings of the Registrant, that MetaBank owes such
participants additional monies, and have threatened MetaBank with
legal action, or have already filed such legal action, to recover
said monies. In addition, five lawsuits, all containing virtually
identical allegations to each of the others, have been filed naming
several defendants, including MetaBank and affiliates, on behalf of
the purchasers of automobiles from the borrowers. It is contended by
the plaintiffs in these five lawsuits that MetaBank and its
affiliates conspired with the borrowers to defraud such purchasers.
See Footnote 4 to the Financial Statements and Part II - Other
Information, Item 1. Legal Proceedings herein. If the Company is
forced to defend itself against this pending and threatened
litigation, the Company would incur additional legal expenses, which
cannot be reasonably estimated at this time, but which would affect
overall profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
-----------------------------------------------------------
Item 3. Defaults Upon Senior Securities - None
-------------------------------
34
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Shareholders held on January 22,
2007 (the "Annual Meeting"), the shareholders elected the three
individuals nominated to serve as directors until 2010 or until
their respective successors are elected and qualified, as set forth
in Proposal I in the Company's Proxy Statement relating to the
Annual Meeting. The three individuals elected, and the number of
votes cast for, or withheld, with respect to each of them, is as
follows:
E. Wayne Cooley For: 1,605,953 Vote Withheld: 351,628
J. Tyler Haahr For: 1,646,225 Vote Withheld: 311,356
Bradley C. Hanson For: 1,672,134 Vote Withheld: 285,447
The following directors continue to serve on the Board of Directors
following the Annual Meeting: James S. Haahr, E. Thurman Gaskill,
Frederick V. Moore, Rodney G. Muilenburg and Jeanne Partlow.
Additionally, the shareholders ratified the amendment of the
Company's 2002 Omnibus Incentive Plan as set forth in Proposal II in
the Company's Proxy Statement relating to the Annual Meeting. The
number of votes cast for and against the amendment, together with
abstentions and non-votes, are as follows:
For: 1,151,815
Against: 205,592
Abstain: 3,498
Non-Votes: 596,676
Item 5. Other Information - None
-----------------
Item 6. Exhibits
--------
(a) Exhibits:
31.1 Section 302 certification of Chief Executive Officer.
31.2 Section 302 certification of Chief Financial Officer.
32.1 Section 906 certification of Chief Executive Officer.
32.2 Section 906 certification of Chief Financial Officer.
35
META FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
META FINANCIAL GROUP, INC.
Date: May 15, 2007 By: /s/ J. Tyler Haahr
--------------- -----------------------------
J. Tyler Haahr, President,
and Chief Executive Officer
Date: May 15, 2007 By: /s/ Jonathan M. Gaiser
-------------- -----------------------------
Jonathan M. Gaiser, Senior Vice
President, Secretary, Treasurer,
and Chief Financial Officer
36