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 June 30, 2006
[ ] 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 August 10, 2006:
Common Stock, $.01 par value 2,516,655 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
at June 30, 2006 and September 30, 2005 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2006 and 2005 4
Condensed Consolidated Statements of Comprehensive (Loss) for the
Three and Nine Months Ended June 30, 2006 and 2005 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2006 6
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2006 and 2005 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 27
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 28
Item 1.A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Financial Condition (Unaudited)
ASSETS June 30, 2006 September 30, 2005
-----------------------------------------------------------------------------------------------------------
Cash and due from banks $ 13,466,120 $ 5,390,455
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 78,532,767 8,979,299
--------------------------------
Total cash and cash equivalents 91,998,887 14,369,754
Securities purchased under agreements to resell 8,648,161 37,513,348
Securities available for sale 195,302,200 230,892,565
Loans receivable - net of allowance for loan losses of
of $6,111,484 at June 30, 2006 and $7,222,404
at September 30, 2005 399,087,976 440,190,245
Loans held for sale 1,261,009 306,000
Federal Home Loan Bank stock, at cost 6,197,700 8,161,000
Accrued interest receivable 3,924,692 4,240,694
Premises and equipment, net 16,085,939 15,126,069
Foreclosed real estate and repossessed assets 49,500 4,706,414
Bank owned life insurance 12,919,721 12,332,337
Goodwill 3,403,019 3,403,019
Other assets 7,930,983 5,107,497
--------------------------------
Total assets $ 746,809,787 $ 776,348,942
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing demand deposits $ 187,327,972 $ 102,164,156
Interest-bearing checking 25,471,425 33,481,270
Money market deposits 79,191,919 74,632,300
Savings deposits 42,303,092 62,370,483
Time certificates of deposit 218,772,087 268,122,096
------------- -------------
Total deposits 553,066,495 540,770,305
Advances from Federal Home Loan Bank 114,565,000 159,705,000
Securities sold under agreements to repurchase 18,048,563 20,507,051
Subordinated debentures 10,310,000 10,310,000
Advances from borrowers for taxes and insurance 258,777 271,273
Accrued interest payable 580,119 941,935
Accrued expenses and other liabilities 6,488,391 884,688
--------------------------------
Total liabilities 703,317,345 733,390,252
--------------------------------
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, 2,516,655 and 2,503,655 shares outstanding
at June 30, 2006 and September 30, 2005, respectively 29,580 29,580
Additional paid-in capital 20,621,534 20,646,513
Retained earnings - substantially restricted 36,842,776 34,557,258
Accumulated other comprehensive (loss) (5,545,211) (3,180,607)
Unearned Employee Stock Ownership Plan shares (483,301) (825,057)
Treasury stock, 441,344 and 454,344 common shares, at cost,
at June 30, 2006 and September 30, 2005, respectively (7,972,936) (8,268,997)
--------------------------------
Total shareholders' equity 43,492,442 42,958,690
--------------------------------
Total liabilities and shareholders' equity $ 746,809,787 $ 776,348,942
================================
See Notes to Condensed Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 7,525,676 $ 7,931,647 $ 22,577,658 $ 22,031,011
Securities available for sale 2,710,090 2,754,168 7,905,803 8,652,487
Dividends on Federal Home Loan Bank stock 78,940 126,860 202,825 286,476
--------------------------- ----------------------------
10,314,706 10,812,675 30,686,286 30,969,974
--------------------------- ----------------------------
Interest expense:
Deposits 3,413,981 3,106,402 10,096,827 8,694,306
FHLB advances and other borrowings 1,776,272 2,590,639 5,755,568 7,483,862
--------------------------- ----------------------------
5,190,253 5,697,041 15,852,395 16,178,168
--------------------------- ----------------------------
Net interest income 5,124,453 5,115,634 14,833,891 14,791,806
Provision for loan losses -- 4,956,000 (309,500) 5,390,500
--------------------------- ----------------------------
Net interest income after provision for loan losses 5,124,453 159,634 15,143,391 9,401,306
--------------------------- ----------------------------
Non-interest income:
Deposit service charges and other fees 336,663 340,767 1,043,096 950,505
Gain on sales of loans, net 56,933 55,811 163,145 137,119
Bank owned life insurance 166,992 126,645 496,510 379,936
Gain on sales of foreclosed real estate, net 3,382 -- 6,963 --
(Loss) on sales of securities available for sale, net -- (20,413) -- (19,334)
Card fees 5,058,641 373,992 7,729,890 554,971
Other income 113,298 71,893 339,261 231,252
--------------------------- ----------------------------
Total non-interest income 5,735,909 948,695 9,778,865 2,234,449
--------------------------- ----------------------------
Non-interest expense:
Employee compensation and benefits 3,676,323 2,923,900 10,302,039 8,615,950
Occupancy and equipment expense 1,081,793 931,871 3,044,739 2,693,974
Deposit insurance premium 14,411 17,111 44,457 53,185
Data processing expense 178,684 188,320 563,304 556,446
Legal and consulting expense 850,607 87,725 2,395,689 247,728
Card processing expense 469,262 59,300 1,754,691 185,030
Other expense 654,172 457,301 1,810,863 1,662,465
--------------------------- ----------------------------
Total non-interest expense 6,925,252 4,665,528 19,915,782 14,014,778
--------------------------- ----------------------------
Net income (loss) before income tax expense (benefit) 3,935,110 (3,557,199) 5,006,474 (2,379,023)
Income tax expense (benefit) 1,452,247 (1,245,205) 1,746,810 (908,345)
--------------------------- ----------------------------
Net income (loss) 2,482,863 (2,311,994) 3,259,664 (1,470,678)
=========================== ============================
Earnings (loss) per common share:
Basic $ 1.00 $ (0.94) $ 1.32 $ (0.60)
=========================== ============================
Diluted 0.98 (0.94) 1.30 (0.60)
=========================== ============================
Dividends declared per common share: $ 0.13 $ 0.13 $ 0.39 $ 0.39
=========================== ============================
See Notes to Condensed Consolidated Financial Statements.
4
META FINANCIAL GROUP INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income (loss) $ 2,482,863 $(2,311,994) $ 3,259,664 $(1,470,678)
Other comprehensive income (loss):
Net change in net unrealized income (loss)
on securities available for sale (1,249,585) 1,343,396 (3,565,069) (2,429,750)
Deferred income tax benefit (338,875) 499,879 (1,200,465) (904,111)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) (910,710) 843,517 (2,364,604) (1,525,639)
Total comprehensive income (loss) $ 1,572,153 $(1,468,477) $ 895,060 $(2,996,317)
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2006
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 $ 29,580 $20,646,513 $34,557,258 $(3,180,607) $ (825,057) $(8,268,997) $42,958,690
Cash dividends declared on
common stock ($.39 per share) -- -- (974,146) -- -- -- (974,146)
Issuance of 13,000 common shares
from treasury stock due to
exercise of stock options -- (117,889) -- -- -- 296,061 178,172
Stock compensation -- 116,005 -- -- -- -- 116,005
15,300 common shares committed to
be released under the ESOP -- (23,095) -- -- 341,756 -- 318,661
Net change in net unrealized
gains and losses on securities
available for sale, net of income
taxes -- -- -- (2,364,604) -- -- (2,364,604)
Net income for nine months ended
June 30, 2006 -- -- 3,259,664 -- -- -- 3,259,664
Balance, June 30, 2006 $ 29,580 $20,621,534 $36,842,776 $(5,545,211) $ (483,301) $(7,972,936) $43,492,442
See Notes to Condensed Consolidated Financial Statements.
6
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
2006 2005
-----------------------------------------------------------------------------------------------------------
Cash Flows from operating activities:
Net income $ 3,259,664 $ (1,470,678)
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net 2,681,604 2,736,379
Provision for loan losses (309,500) 5,390,500
Loss on the sale of securities available for sale, net -- 19,334
Stock compensation 116,005 --
Net change in loans held for sale (955,009) (2,208,292)
Gain on sales of foreclosed real estate, net (6,963) --
Net change in accrued interest receivable 316,002 (47,456)
Net change in other assets (4,516,284) (273,701)
Net change in accrued interest payable (361,816) 545,128
Net change in accrued expenses and other liabilities 5,603,703 (951,339)
------------------------------
Net cash provided by operating activities 5,827,406 3,739,875
Cash flow from investing activities:
Purchase of securities available for sale (108,522) (15,459,228)
Proceeds from sales of securities available for sale -- 25,842,709
Net change in securities purchased under agreement to resell 28,865,188 --
Proceeds from maturities and principal repayments of
securities available for sale 29,458,124 57,174,746
Net change in loans receivable 44,947,494 (61,113,569)
Proceeds from sales of foreclosed real estate 4,656,914 2,500
Change in FHLB stock 1,963,300 639,200
Purchase of premises and equipment (1,894,995) (2,904,200)
------------------------------
Net cash provided by investing activities 107,887,503 4,182,158
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, interest-bearing
checking, and money market demand deposits $ 61,646,199 $ 2,718,791
Net change in time deposits (49,350,009) 29,569,920
Net repayments of advances from Federal Home Loan Bank (45,140,000) (30,820,000)
Net change in securities sold under agreements to repurchase (2,458,488) (9,010,468)
Net change in advances from borrowers for taxes and insurance 12,496 49,830
Cash dividends paid (974,146) (974,400)
Purchase of shares by ESOP -- (684,133)
Proceeds from exercise of stock options 178,172 230,414
Purchase of treasury stock -- (25,655)
------------------------------
Net cash (used in) financing activities (36,085,776) (8,945,701)
------------------------------
Net change in cash and cash equivalents 77,629,133 (1,023,668)
Cash and cash equivalents at beginning of period 14,369,754 8,936,569
------------------------------
Cash and cash equivalents at end of period $ 91,998,887 $ 7,912,901
==============================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 16,214,211 $ 15,633,040
Income taxes 587,224 563,911
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 49,500 $ 22,028
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, 2005, 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. CURRENT ACCOUNTING DEVELOPMENTS
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109, to clarify certain aspects of accounting and
disclosure for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions. This interpretation
is effective for fiscal years beginning after December 15, 2006. The
Company is in the process of evaluating the impact of this
interpretation and believes that implementation of this standard will
not have a material effect on the Company's consolidated financial
position or results of operations.
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 nine months ended June 30, 2006 and 2005
is presented below.
8
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Basic earnings (loss) per common share:
Numerator:
Net income (loss) $ 2,482,863 $(2,311,994) $ 3,259,664 $(1,470,678)
=========== =========== =========== ===========
Denominator:
Weighted average common shares outstanding $ 2,514,525 $ 2,502,521 $ 2,509,664 $ 2,496,033
Less: Weighted average unallocated ESOP
shares (24,875) (41,473) (30,060) (36,147)
----------- ----------- ----------- -----------
Weighted average common shares outstanding
for basic earnings per share $ 2,489,650 $ 2,461,048 $ 2.479.604 $ 2,459,886
=========== =========== =========== ===========
Basic earnings (loss) per common share $ 1.00 $ (0.94) $ 1.32 $ (0.60)
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Diluted earnings (loss) per common share:
Numerator:
Net income (loss) $ 2,482,863 $(2,311,994) $ 3,259,664 $(1,470,678)
=========== =========== =========== ===========
Denominator:
Weighted average common shares outstanding
for basic earnings per common share $ 2,489,650 $ 2,461,048 $ 2,479,604 $ 2,459,886
Add: Dilutive effect of assumed exercise
of stock options, net of tax benefits 39,886 -- 34,077 --
----------- ----------- ----------- -----------
Weighted average common shares outstanding
for diluted earnings per share $ 2,529,536 $ 2,461,048 $ 2,513,681 $ 2,459,886
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ 0.98 $ (0.94) $ 1.30 $ (0.60)
=========== =========== =========== ===========
4. LOANS RECEIVABLE
Loans receivable before allowance for loan losses totaled $405.2
million as of June 30, 2006, a decrease of $42.2 million from $447.4
million at September 30, 2005. Most of this decrease is the result of
pay downs or pay offs of participation loans during this nine month
period.
5. INTANGIBLE ASSETS
As of June 30, 2006 and September 30, 2005 the Company had intangible
assets of $3,403,019, all of which has been determined to be goodwill.
There was no goodwill impairment loss or amortization related to
goodwill during the three- and nine-month periods ended June 30, 2006
or 2005.
6. DEPOSITS
Overall deposits grew $12.3 million from $540.8 million as of September
30, 2005 to $553.1 million as of June 30, 2006. Most of this increase
arose from growth in low-or no-cost demand deposits, which grew $77.2
million over this same time period. This growth has been offset by
run-off of higher-cost certificates of deposit and public funds.
9
7. COMMITMENTS
At June 30, 2006 and September 30, 2005, the Company had outstanding
commitments to originate and purchase loans totaling $50.4 million and
$69.6 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be
funded with existing liquid assets.
8. STOCK OPTION PLAN
Prior to October 1, 2005, the Company accounted for its stock option
plans under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees and related
Interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation. No stock-based employee compensation cost was
recognized for stock options in the Statement of Operations for the
year ended September 30, 2005 or prior years, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. Effective October 1,
2005, the Company adopted the fair value recognition provisions of SFAS
No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three- and nine-month periods ended
June 30, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of October 1, 2005,
based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to October 1, 2005, based on
the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on October 1, 2005, the
Company's pre-tax net income for the three- and nine-month periods
ended June 30, 2006 are $36,000 and $92,000 lower, respectively, than
if it had continued to account for share-based compensation under
Opinion 25.
Prior to the adoption of Statement 123(R), the Company presented all
tax benefits of deductions resulting from the exercise of stock options
as operating cash flows in the Statement of Cash Flows. Statement
123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as
financing cash flows.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Company's
stock option plans in all periods presented. For purposes of this pro
forma disclosure, the value of the options is estimated using a
Black-Scholes option-pricing formula and amortized to expense over the
option's vesting periods.
10
Three Months Nine Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
Net (loss), as reported $ (2,311,994) $ (1,470,678)
Deduct: Total employee stock-based
compensation expense determined
under fair value based method for
all awards, net of tax effects (20,098) (67,718)
------------- -------------
Pro forma net (loss) $ (2,332,092) $ (1,538,396)
============= =============
(Loss) per common share - basic:
As reported $ (0.94) $ (0.60)
Pro forma $ (0.95) $ (0.63)
(Loss) per common share - diluted:
As reported $ (0.94) $ (0.60)
Pro forma $ (0.95) $ (0.63)
9. 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 Others" 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 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
nine-month periods ended June 30, 2006 and June 30, 2005, respectively.
11
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Three months ended June 30, 2006:
Net interest income (loss) $ 4,333,972 $ 984,624 $ (194,143) $ 5,124,453
Provision for loan losses -- -- -- --
Non-interest income 566,578 5,152,183 17,148 5,735,909
Non-interest expense 4,824,478 1,983,542 117,232 6,925,252
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense 76,072 4,153,265 (294,227) 3,935,110
Income tax expense (benefit) 27,680 1,581,000 (156,433) 1,452,247
------------- ------------- ------------- -------------
Net income (loss) $ 48,392 $ 2,572,265 $ (137,794) $ 2,482,863
============= ============= ============= =============
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Inter-segment revenue (expense) $ (633,233) $ 761,663 $ (128,430) --
Total assets $ 579,722,556 $ 164,973,427 $ 2,113,804 $ 746,809,787
Total deposits $ 393,000,079 $ 160,066,416 $ -- $ 553,066,495
Three months ended June 30, 2005:
Net interest income (loss) $ 5,182,175 $ 77,577 $ (144,118) $ 5,115,634
Provision for loan losses 4,956,000 -- -- 4,956,000
Non-interest income 439,772 457,413 51,510 948,695
Non-interest expense 3,868,295 766,654 30,579 4,665,528
------------- ------------- ------------- -------------
Net (loss) before income tax (benefit) (3,202,348) (231,664) (123,187) (3,557,199)
Income tax (benefit) (1,092,271) (80,000) (72,934) (1,245,205)
------------- ------------- ------------- -------------
Net (loss) $ (2,110,077) $ (51,664) $ (50,253) $ (2,311,994)
Inter-segment revenue (expense) $ 45,595 $ 80,111 $ (125,706) --
Total assets $ 750,184,896 $ 16,376,892 $ 2,115,281 $ 768,677,069
Total deposits $ 475,920,606 $ 17,948,982 $ -- $ 493,869,588
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Nine months ended June 30, 2006:
Net interest income (loss) $ 12,373,360 $ 2,976,030 $ (515,499) $ 14,833,891
Provision for loan losses (309,500) -- -- (309,500)
Non-interest income 1,816,153 7,891,093 71,619 9,778,865
Non-interest expense 13,872,122 5,415,250 628,410 19,915,782
------------- ------------- ------------- -------------
Net income (loss) before income tax
expense (benefit) 626,891 5,451,873 (1,072,290) 5,006,474
Income tax expense (benefit) 212,956 2,029,000 (495,146) 1,746,810
------------- ------------- ------------- -------------
Net income (loss) $ 413,935 $ 3,422,873 $ (577,144) $ 3,259,664
============= ============= ============= =============
Inter-segment revenue (expense) $ (1,733,090) $ 2,180,984 $ (447,894) --
Total assets $ 579,722,556 $ 164,973,427 $ 2,113,804 $ 746,809,787
Total deposits $ 393,000,079 $ 160,066,416 $ -- $ 553,066,495
12
(Unaudited)
Traditional Payment
Banking Systems All Others Total
------- ------- ---------- -----
Nine months ended June 30, 2005:
Net interest income (loss) $ 15,022,241 $ 114,823 $ (345,258) $ 14,791,806
Provision for loan losses 5,390,500 -- -- 5,390,500
Non-interest income 1,418,172 705,495 110,782 2,234,449
Non-interest expense 11,682,940 2,156,182 175,656 14,014,778
------------- ------------- ------------- -------------
Net (loss) before income tax (benefit) (633,027) (1,335,864) (410,132) (2,379,023)
Income tax (benefit) (204,782) (469,000) (234,563) (908,345)
------------- ------------- ------------- -------------
Net (loss) $ (428,245) $ (866,864) $ (75,569) $ (1,470,678)
============= ============= ============= =============
Inter-segment revenue (expense) $ 241,512 $ 118,474 $ (359,986) --
Total assets $ 750,184,896 $ 16,376,892 $ 2,115,281 $ 768,677,069
Total deposits $ 475,920,606 $ 17,948,982 $ -- $ 493,869,588
10. LEGAL PROCEEDINGS
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 March 10, 2006, plaintiffs filed five class-action suits on
behalf of themselves and all other purchasers of vehicles from Prairie
Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s Rapid City, South
Dakota location, and other not-yet-identified auto sales entities owned
or operated by defendants. The complaints are styled as follows: Ronald
Archulleta, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Oglala Sioux Tribe, Pine Ridge Indian Reservation; Cedar
Around Him, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Rosebud Sioux Tribe, Rosebud Indian Reservation; Chris
Dengler, et al. v. Prairie Auto Group, Inc. - Circuit Court of the
Second Judicial Circuit, Minnehaha County, South Dakota; Lucinda Janis,
et al. v. Prairie Auto Group, Inc., et al. - File No. C-157-04; In the
Tribal Court for the Cheyenne River Sioux Indian Reservation, Eagle
Butte, South Dakota; and Kali Treetop, et al. v. Prairie Auto Group,
Inc., et al. - File No. 01-970; Circuit Court for the Seventh Judicial
Circuit, Pennington County, South Dakota. Except for the named
plaintiffs, each of the complaints is essentially identical to the
others. The nature of the allegations are the same, and the same
fourteen legal claims are sought to be pled in each.
Each complaint states that it is a "companion" to the other four and
names the same defendants (approximately twenty-five) including the
Registrant and affiliates thereof (the "MetaBank Defendants"). None of
these complaints has yet been served on any of the MetaBank Defendants.
The thrust of the complaints is that plaintiffs allegedly suffered
damages as a result of a scheme by defendants to use fraudulent
statements, misrepresentations and omissions to sell vehicles and
extended warranties to plaintiffs. Plaintiffs claim that they and other
similarly situated purchasers paid too much for their vehicles and were
induced to buy warranties that were not honored and otherwise proved
worthless. Plaintiffs allege that defendants reaped considerable
profits through fraudulent sales methods; by refusing to make
warrantied repairs; and by engaging in usurious repossession and resale
practices. Plaintiffs allege that these practices were part of a
business plan that originated with the franchisor-defendants and was
purchased and employed by the franchisee-defendants. It appears that
the principal basis for naming the MetaBank Defendants is that they
loaned money to finance some of the defendants' business
13
operations, purportedly with some degree of knowledge about the
defendants' allegedly abusive consumer practices.
The complaints allege that the described transactions are typical of
defendants' business and were part of a deliberate scheme directed
primarily at Native American customers. The complaints allege that the
franchisee-defendants engaged in coercive, fraudulent and other illegal
activities in connection with the automobile sales, and each seeks to
state claims for: (1) breach of express warranty; (2) breach of implied
warranty of merchantability; (3) deceit/fraud; (4) violation of
applicable deceptive trade laws; (5) breach of the implied covenant of
good faith and fair dealing; (6) conversion; (7) civil conspiracy under
tribal and state common law; (8) negligent hiring, training and
supervision of employees; (9) violation of the Federal Equal Credit
Opportunity Act; (10) invasion of privacy; (11) violation of the
Racketeer Influenced and Corrupt Organizations Act (RICO); (12)
violation of the Magnuson-Moss Act; (13) violation of the Federal Truth
and Lending Act's (TILA) Three Day Rescission Period; and (14)
violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary damages
including the initial purchase price warranty charges, finance costs
and related repossession and other charges; costs of allegedly
warrantied repairs that were not made by defendants; consequential
damages relating to the alleged wrongful repossession of vehicles and
deficiency judgments associated therewith; damages for emotional and
mental suffering; punitive and treble damages; and attorneys' fees. The
amount of the alleged damages is not specified in the complaints.
With respect to the first matter described under "Corporate Development
in Fiscal 2005" in the Company's Annual Report of Form 10-K for the
fiscal year ended September 30, 2005 in Part II, Item 7 thereof, 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 June 30,
2006, 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 described 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. The
fourth complaint alleges patent infringement. All four actions are in
their infancy and materiality cannot be determined at this time. The
Company intends, however, to vigorously defend its actions. The
lawsuits are described in more detail herein at Part II - Other
Information, Item 1. Legal Proceedings.
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 Dan
Nelson Automotive Group ("DNAG") and South Dakota Acceptance
14
Corporation ("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.
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.
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.
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.
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.
15
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
GENERAL
Meta Financial Group, Inc. is a bank holding company whose primary assets are
MetaBank, and MetaBank West Central. The Company was incorporated in 1993 as
First Midwest Financial, Inc., a unitary non-diversified savings and loan
holding company and, on September 20, 1993, acquired all of the capital stock of
First Federal Savings Bank of the Midwest in connection with First Federal's
conversion from mutual to stock form of ownership. On September 30, 1996, the
Company became a bank holding company in conjunction with the acquisition of
Security State Bank. Pursuant to requisite shareholder and regulatory approvals,
the Company and its banking subsidiaries consolidated their names under the
"Meta-" brand as of the close of business on January 28, 2005.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at June 30, 2006, compared to September 30, 2005,
and the consolidated results of operations for the three- and nine-month periods
ended June 30, 2006, compared to the three- and nine-month periods ended June
30, 2005. This discussion should be read in conjunction with the Company's
consolidated financial statements, and notes thereto, for the year ended
September 30, 2005.
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 completed
construction of its fourth branch office in the Sioux Falls market in late 2005,
and plans to open a fifth branch in the Des Moines market in the fall of 2006,
bringing the Company's total branch network to 19.
The Company continues to experience growth in its Meta Payment Systems (MPS)
division, a separate reporting segment. During the quarter ended June 30, 2006,
MPS reported a non-recurring fee income item totaling $2.57 million related fees
charged on a recently acquired portfolio of prepaid debit cards. Further
discussion of the financial results of MPS is included below.
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. The fourth complaint alleges patent infringement. All four
actions are in their infancy and materiality cannot be determined at this time.
The Company intends, however, to vigorously defend its actions. The lawsuits are
described in more detail herein at Part II - Other Information, Item 1. Legal
Proceedings.
FINANCIAL CONDITION
As of June 30, 2006, Meta Financial Group had assets totaling $746.8 million,
compared to $776.3 million at September 30, 2005. The reduction in total assets
of $29.5 million, or 3.8%, reflects the Company's planned strategy to reduce the
level of lower yielding investment securities and pay off higher costing
wholesale borrowings, public funds deposits, and certificates. Investment and
mortgage-backed securities totaled $204.0 million at June 30, 2006, compared to
$268.4 million at September 30, 2005, reflecting a decrease of $64.4 million, or
24.0%. Similarly, advances from the Federal Home Loan Bank of Des Moines, and
other wholesale borrowings, declined $47.6 million, or 25.0%, from $190.5
million at September 30, 2005 to $142.9 million at June 30, 2006.
16
Loans receivable before allowance for loan losses totaled $405.2 million as of
June 30, 2006, a decrease of $42.2 million from $447.4 million at September 30,
2005. Most of this decrease is the result of pay downs or pay offs of
participation loans.
The Company's deposit mix has also changed favorably. Total deposits grew $12.3
million from $540.8 million as of September 30, 2005 to $553.1 million as of
June 30, 2006. Low or no-cost demand deposits grew $77.2 million during this
time period, which was partially offset by declines in higher-cost certificates
of deposit and public funds deposits. The increase in demand deposits stems
mainly from growth at Meta Payment Systems, while the decrease in certificates
of deposit and public funds reflects management's planned strategy of reducing
reliance on higher-costing funding sources.
As of June 30, 2006 the Company's shareholders' equity totaled $43.5 million,
compared to $43.0 million as of September 30, 2005. The increase of $0.5 million
pertains to increases in retained earnings from net income, offset by common
stock dividends and a negative change in the accumulated other comprehensive
loss on the Company's available for sale securities portfolio. Both of the
company's banking subsidiaries, MetaBank and MetaBank West Central, meet
regulatory requirements for classification as well-capitalized institutions.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At June 30, 2006, the Company had loans delinquent 30 days and over totaling
$9.4 million, or 2.35% of total loans, compared to $1.9 million, or 0.42% of
total loans, at September 30, 2005, and $15.8 million, or 3.66% of total loans
at March 31, 2006. The increase in delinquent loans since September is
concentrated in a few large commercial credits. The Company believes that the
level of allowance for loan losses adequately reflects potential risks related
to these loans. The Company has monitored the increase in delinquent loans since
the beginning of the fiscal year, and does not believe the increase in loan
delinquencies is indicative of a downward trend in credit quality because the
increase is concentrated in a few large loans. Additionally, several of the
loans which were delinquent at the end of the second fiscal quarter were paid
off or brought current during the third fiscal quarter. Nevertheless, the
Company continues to monitor closely all developments in its loan portfolio.
At June 30, 2006, commercial and multi-family real estate loans delinquent 30
days and over totaled $3.8 million, or 0.96% of total loans. This compares to no
delinquent loans in this category as of September 30, 2005 and $7.0 million, or
1.63% of total loans at March 31, 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 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 June 30, 2006, commercial business loans delinquent 30 days and over totaled
$5.2 million, or 1.29% of total loans. This compares to $1.5 million, or 0.32%
of total loans, at September 30, 2005, and $6.7 million, or 1.55% of total
loans, at March 31, 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
17
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 June 30, 2006, there were no agricultural operating loans delinquent 30 days
and over. This compares to $234,000, or 0.05% of total loans at September 30,
2005, and $1.2 million, or 0.29% of total loans at March 31, 2006. Agricultural
lending involves a greater degree of risk than one-to-four family residential
mortgage loans because of the typically larger loan amounts. In addition,
payments on loans are dependent on the successful operation or management of the
farm property securing the loan or for which an operating loan is utilized. The
success of the loan may also be affected by factors outside the control of the
agricultural borrower, such as the weather and grain and livestock prices.
The table below sets forth the amounts and categories of the Company's
non-performing assets. Foreclosed assets include assets acquired in settlement
of loans.
June 30, 2006 September 30, 2005
(Dollars in thousands)
Non-accruing loans:
One- to four-family $ 91 $ 54
Construction 243 --
Commercial and multi-family -- --
Agricultural real estate -- --
Consumer -- 1
Agricultural operating -- 218
Commercial business 3,862 404
------ ------
Total non-accruing loans 4,196 677
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 4,196 677
Restructured loans:
Consumer -- --
Agricultural operating -- 7
Commercial business -- --
------ ------
Total restructured loans -- 7
Foreclosed assets:
One-to four family 15 --
Commercial and multi-family 35 1,841
Consumer -- --
Agricultural operating -- --
Commercial business -- 2,865
------ ------
Total foreclosed assets 50 4,706
------ ------
Total non-performing assets $4,246 $5,390
====== ======
Total as a percentage of total assets 0.57% 0.69%
====== ======
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
18
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.
On the basis of management's review of its loans and other assets, at June 30,
2006, the Company had classified a total of $5.0 million of its assets as
substandard, $540,000 as doubtful and none as loss. This compares to
classifications at September 30, 2005 of $10.5 million substandard, $248,000
doubtful and none as loss.
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
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Bank and its borrowers operate.
At June 30, 2006, the Company has established an allowance for loan losses
totaling $6.1 million compared to $7.2 million at September 30, 2005. The
allowance represents approximately 146% of the total non-performing loans at
June 30, 2006. The allowance at September 30, 2005 represented approximately
1,067% of the total non-performing loans at that date.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the three-and nine-month periods ended June 30,
2006 and June 30, 2005:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2006 2005 2006 2005
---------------------- ---- ---- ---- ----
Beginning balance $ 5,998 $ 5,797 $ 7,222 $ 5,371
Provision charged (credited) to operations -- 4,956 (310) 5,391
Loans charged-off (14) (1,300) (1,129) (1,313)
Recoveries 127 116 328 120
------- ------- ------- -------
Ending balance $ 6,111 $ 9,569 $ 6,111 $ 9,569
======= ======= ======= =======
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
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 non-performing
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including
19
economic conditions throughout the Midwest and, in particular, the state of
certain industries. Size and complexity of individual credits in relation to
loan structure, existing loan policies, and pace of portfolio growth are other
qualitative factors that are considered in the methodology. As the Company adds
new products and increases the complexity of its loan portfolio it will enhance
its methodology accordingly. Management may have reported a materially different
amount for the provision for loan losses in the statement of operations to
change the allowance for loan losses if its assessment of the above factors were
different. This discussion and analysis should be read in conjunction with the
Company's financial statements and the accompanying notes presented elsewhere
herein, as well as the portion of this Management's Discussion and Analysis
section entitled "Non-performing Assets and Allowance for Loan Losses." Although
management believes the levels of the allowance as of both June 30, 2006 and
September 30, 2005 were adequate to absorb probable losses inherent in the loan
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses.
Goodwill represents the excess of acquisition costs over the fair value of the
net assets acquired in a purchase acquisition. Goodwill is tested annually for
impairment.
RESULTS OF OPERATIONS
General. For the three months ended June 30, 2006, the Company recorded net
income of $2.48 million, or $0.98 per diluted share, compared to a net loss of
$2.31 million, or $0.94 per diluted share, for the same period in 2005. Earnings
in the current period were impacted by non-recurring and recurring fee income,
partially offset by higher compensation, legal, and consulting expenses.
Earnings in the prior period were reduced by a higher provision for loan losses
arising from the Company's loans to three companies involved in the sales,
service, and financing of automobiles. Earnings for the nine month period ended
June 30, 2006 were $3.26 million, or $1.30 per diluted share, compared to a net
loss of $1.47 million, or $0.60 per diluted share for the same period last year.
For the third fiscal quarter of 2006, Meta Payment Systems, a separate
reportable segment, recorded net income of $2.57 million, or $1.02 per diluted
share, compared to a loss of $0.15 million, or $0.06 per diluted share for the
third fiscal quarter of 2005. Meta Payment Systems' results for the current
period included non-recurring pre-tax fee income of $2.57 million, which is
discussed below. For the nine month period ended June 30, 2006, Meta Payment
Systems recorded net income of $3.42 million, or $1.36 per diluted share,
compared to a loss of $0.87 million, or $0.35 per diluted share, for the nine
month period ended June 30, 2005.
Net interest income. Meta Financial Group's net interest income for the third
quarter of fiscal year 2006 was $5.12 million, compared to $5.12 million for the
same quarter in fiscal year 2005. For the nine month period ended June 30, 2006
net interest income totaled $14.83 million compared to $14.79 million for the
same period in 2005. While net interest income has remained relatively unchanged
on a comparable period basis, the current period's results reflect higher
margins on decreased average assets. Margin improvement has arisen from a more
favorable funding mix, resulting primarily from growth in the Company's low-cost
demand deposits, a decrease in low-margin wholesale investments and borrowings,
and a rising interest rate environment.
The primary driver of the Company's higher net interest margin has been the
improvement of the Company's funding mix toward low- or no-cost demand deposits
and away from higher costing time and public funds deposits. Similarly, the
decrease in wholesale borrowings and investments has improved the Company's
capital and risk profile, while reducing reliance on lower spread assets and
funding vehicles. Additionally, much of the Company's loan portfolio adjusts
with the Prime rate of interest. As the Prime rate has increased over the past
year, loan yields have risen accordingly, positively impacting the Company's
margin.
20
The following table presents the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the three-month periods ended June 30, 2006 and June 30, 2005, respectively.
2006 2005
Average Annualized Average Annualized
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable $413,200 $ 7,526 7.30% $457,398 $ 7,932 6.95%
Mortgage-backed securities 174,566 1,667 3.82 250,616 2,418 3.86
Other investments 105,087 1,122 4.27 35,089 463 5.28
-------- -------- -------- -------- -------- --------
Total interest-earning assets $692,853 $ 10,315 5.97% $743,103 $ 10,813 5.83%
Non-interest-earning assets 56,364 50,104
-------- --------
Total assets $749,217 $793,207
======== ========
Non-interest bearing deposits $170,464 -- -- $ 31,306 -- --
Interest-bearing liabilities:
Deposits 386,770 3,414 3.54 466,215 3,106 2.67
Other borrowings 145,460 1,777 4.83 247,696 2,591 4.14
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $532,230 $ 5,191 3.89% $713,911 $ 5,697 3.18%
Total deposits and
interest-bearing liabilities $702,694 $ 5,191 2.95% $745,217 $ 5,697 3.05%
Other non-interest bearing
liabilities 3,714 3,355
-------- --------
Total liabilities $706,408 $748,572
Stockholders' equity 42,809 44,635
Total liabilities and
stockholders' equity $749,217 $793,207
======== ========
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 5,124 3.02% $ 5,116 2.78%
======== ======== ======== ========
Net interest margin 2.97% 2.78%
======== ========
21
The following table presents the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the nine-month periods ended June 30, 2006 and June 30, 2005, respectively.
2006 2005
Average Annualized Average Annualized
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable $423,325 $ 22,578 7.13% $440,359 $ 22,031 6.69%
Mortgage-backed securities 188,719 5,322 3.76 271,865 7,747 3.80
Other investments 90,833 2,786 4.09 36,478 1,192 4.36
-------- -------- -------- -------- -------- --------
Total interest-earning assets $702,877 $ 30,686 5.83% $748,702 $ 30,970 5.53%
Non-interest-earning assets 49,660 47,958
-------- --------
Total assets $752,537 $796,660
======== ========
Non-interest bearing deposits $139,477 -- -- $ 26,978 -- --
Interest-bearing liabilities:
Deposits 406,817 10,097 3.32 466,997 8,694 2.49
Other borrowings 162,184 5,755 4.68 253,613 7,484 3.89
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $569,001 $ 15,852 3.71% $720,610 $ 16,178 2.98%
Total deposits and
interest-bearing liabilities $708,478 $ 15,852 2.98% $747,588 $ 16,178 2.87%
Other non-interest bearing
liabilities 1,357 3,300
-------- --------
Total liabilities $709,835 $750,888
Stockholders' equity 42,702 45,772
Total liabilities and
stockholders' equity $752,537 $796,660
======== ========
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 14,834 2.85% $ 14,792 2.66%
======== ======== ======== ========
Net interest margin 2.83% 2.65%
======== ========
Provision for loan loss. During the third fiscal quarter of 2006, Meta Financial
Group recorded no provision for loan losses. During the third fiscal quarter of
2005, the Company recorded a provision for loan losses of $4.96 million stemming
primarily from loans to three companies involved in the sales, service, and
financing of automobiles.
During the nine month period ended June 30, 2006, the Company recorded a
negative loan loss provision of $0.31 million. The Company recorded a provision
for loan losses of $5.39 million for the same period in 2005. See
"Non-Performing Assets and Allowance for Loan Losses" herein.
Non-interest income. For the three months ended June 30, 2006, non-interest
income totaled $5.74 million, compared to $0.95 million for the three months
ended June 30, 2005. A large portion of the $4.79 million increase arose from
non-recurring fee income at Meta Payment Systems of $2.57 million. The
non-recurring income relates to charges on a purchased portfolio of prepaid
debit cards. Absent this non-recurring item, non-interest income for the third
fiscal quarter of 2006 totaled $3.17 million, compared to $0.95 million for the
same period in 2005. The majority of this increase relates to card fee income
from Meta Payment Systems, and is attributable to the significant growth in that
division. For the nine months ended June 30, 2006, non-interest income totaled
$9.78 million, compared to $2.23 million for the same period in 2005. As of June
2006, the Company had over 5.2 million active prepaid debit cards.
Non-interest expense. Non-interest expense for the third fiscal quarter of 2006
totaled $6.92 million, compared to $4.66 million for the same quarter in fiscal
year 2005. Higher compensation expense, card processing expense, and
22
legal and consulting expense were the main contributors to this increase. For
the nine months ended June 30,2006, non-interest expense totaled $19.92 million,
compared to $14.01 million for the same period in the prior year.
The Company's compensation expense for the third fiscal quarter of 2006 totaled
$3.68 million, which reflected a $0.75 million increase compared to the same
quarter in fiscal 2005. For the first nine months of fiscal year 2006,
compensation expense totaled $10.30 million, which reflected an increase of
$1.69 million compared to the same period in fiscal year 2005. The increase was
primarily the result of staff acquisition costs and recruitment expenses related
to the growth at Meta Payment Systems, non-recurring severance expenses, and the
full-staffing of two de novo branch facilities in the Sioux Falls market.
The Company also incurred higher legal and consulting expenses in the third
fiscal quarter of 2006. These expenses rose $0.76 million from $0.09 million in
the third fiscal quarter of 2005 to $0.85 million. The vast majority of the
increase in the third quarter arose from consulting work related to section 404
of the Sarbanes-Oxley Act. The Company has contracted with an outside consulting
firm to complete its internal audit work and implementation work relating to the
Sarbanes-Oxley Act. These expenses are not expected to continue at this level
over the long-term. For the nine month period ended June 30, 2006, legal and
consulting expenses rose $2.15 million from $0.25 million for the same period in
fiscal year 2005 to $2.40 million. In addition to higher consulting expenses
from Sarbanes-Oxley implementation, the Company also incurred higher legal
expenses related to the aforementioned auto-related loans. The Company has been
named in several lawsuits by participant banks related to these loans, and the
Company is vigorously defending these claims. See "Legal Proceedings" herein. At
this time, the Company continues to expect that total cash expenditures on
collection efforts related to these loans will range between $750,000 and
$1,100,000.
Income tax expense. Income tax expense was $1.45 million for the three months
ended June 30, 2006, compared to a net benefit of $1.24 million for the same
period in 2005. Income tax expense for the nine-month period ended June 30, 2006
was $1.75 million, compared to a net benefit of $0.91 million for the same
period in fiscal year 2005.
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 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 June 30, 2006, the Company had
commitments to originate and purchase loans totaling $50.4 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 June 30, 2006 which, at that date,
exceeded the minimum capital adequacy requirements.
23
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
At June 30, 2006 Amount Ratio Amount Ratio Amount Ratio
---------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
MetaBank
--------
Tier 1 (Core) Capital (to adjusted total assets) $48,550 6.90% $28,164 4.00% $35,205 5.00%
Total Risk Based Capital (to risk weighted assets) 54,441 11.21 38,842 8.00 48,553 10.00
MetaBank West Central
---------------------
Tier 1 Capital (to average assets) 3,993 8.93 1,788 4.00 2,235 5.00
Tier 1 Risk Based Capital (to risk weighted assets) 3,993 13.82 1,156 4.00 1,734 6.00
Total Risk Based Capital (to risk weighted assets) 4,285 14.83 2,312 8.00 2,889 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 June 30, 2006, the Company, MetaBank, and MetaBank
WC exceeded minimum requirements for the well-capitalized category.
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.
24
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 currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet the Company's cash demands. This portfolio may also
be used in the ongoing management of changes to the Company's asset/liability
mix. The investment policy generally calls for funds to be invested among
various categories of security types and maturities based upon the Company's
need for liquidity, desire to achieve a proper balance between minimizing risk
while maximizing yield, the need to provide collateral for borrowings, and to
fulfill the Company's asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, and checking
accounts and, subject to market conditions, certificates of deposit with
maturities of three months through five years, principally from its primary
market area. The checking and savings accounts tend to be less susceptible to
rapid changes in interest rates. As discussed previously, the bank continues to
emphasize such deposits due to their low cost as well as their relative
stability in volatile interest rate environments.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. The Company has established limits, which may
change from time to time, on the level of acceptable interest rate risk. There
can be no assurance, however, that, in the event of an adverse change in
interest rates, the Company's efforts to limit interest rate risk will be
successful.
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. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
Presented below, as of June 30, 2006 and September 30, 2005, 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. As interest rates have moved
higher during this fiscal year, the Company's interest rate risk profile has
shifted from one more exposed to downward rate movements as of September 30,
2005 to a more balanced position as of June 30, 2006. This shift is primarily
the result of the
25
Company's Base Case position moving along the market value curve as rates have
risen. Between September 30, 2005, and June 30, 2006, the Federal Funds rate
rose 150 bp from 3.75% to 5.25%. Similarly, the 10 year Treasury note yield rose
81 bp from 4.33% on September 30, 2005 to 5.14% on June 30, 2006. As a
consequence, what was the Company's Base Case position at September 30, 2005 is
more similar to the Company's Down 100 position as of June 30, 2006.
Some changes in company's balance sheet since September 30, 2005 have also
created shifts in the Company's interest rate risk profile. The decrease in
mortgage-backed securities and callable wholesale borrowings has reduced the
company's exposure to option risk. As of June 30, 2006 and September 30, 2005,
the Company and its subsidiaries were within the interest rate risk limits set
forth by the Board of Directors and banking regulations.
Change in Interest Rates Board Limit At June 30, 2006 At September 30, 2005
------------------------ ----------- ---------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in thousands)
+200 bp (40)% $(3,546) (5)% $(1,904) (3)%
+100 bp (25) (1,291) (2) (411) (1)
0 bp (Base Case) -- -- -- -- --
-100 bp (25) (580) (1) (2,773) (5)
-200 bp (40) (5,342) (7) (9,183) (16)
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.
26
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 June 30, 2006 our disclosure controls and
procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
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.
27
META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings - 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 March 10, 2006, plaintiffs filed five class-action suits
on behalf of themselves and all other purchasers of vehicles from
Prairie Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s Rapid
City, South Dakota location, and other not-yet-identified auto sales
entities owned or operated by defendants. The complaints are styled
as follows: Ronald Archulleta, et al. v. Prairie Auto Group, Inc.,
et al. - In the Tribal Court for the Oglala Sioux Tribe, Pine Ridge
Indian Reservation; Cedar Around Him, et al. v. Prairie Auto Group,
Inc., et al. - In the Tribal Court for the Rosebud Sioux Tribe,
Rosebud Indian Reservation; Chris Dengler, et al. v. Prairie Auto
Group, Inc. - Circuit Court of the Second Judicial Circuit,
Minnehaha County, South Dakota; Lucinda Janis, et al. v. Prairie
Auto Group, Inc., et al. - File No. C-157-04; In the Tribal Court
for the Cheyenne River Sioux Indian Reservation, Eagle Butte, South
Dakota; and Kali Treetop, et al. v. Prairie Auto Group, Inc., et al.
- File No. 01-970; Circuit Court for the Seventh Judicial Circuit,
Pennington County, South Dakota. Except for the named plaintiffs,
each of the complaints is essentially identical to the others. The
nature of the allegations are the same, and the same fourteen legal
claims are sought to be pled in each.
Each complaint states that it is a "companion" to the other four and
names the same defendants (approximately twenty-five) including the
Registrant and affiliates thereof (the "MetaBank Defendants"). None
of these complaints has yet been served on any of the MetaBank
Defendants. The thrust of the complaints is that plaintiffs
allegedly suffered damages as a result of a scheme by defendants to
use fraudulent statements, misrepresentations and omissions to sell
vehicles and extended warranties to plaintiffs. Plaintiffs claim
that they and other similarly situated purchasers paid too much for
their vehicles and were induced to buy warranties that were not
honored and otherwise proved worthless. Plaintiffs allege that
defendants reaped considerable profits through fraudulent sales
methods; by refusing to make warrantied repairs; and by engaging in
usurious repossession and resale practices. Plaintiffs allege that
these practices were part of a business plan that originated with
the franchisor-defendants and was purchased and employed by the
franchisee-defendants. It appears that the principal basis for
naming the MetaBank Defendants is that they loaned money to finance
some of the defendants' business operations, purportedly with some
degree of knowledge about the defendants' allegedly abusive consumer
practices.
The complaints allege that the described transactions are typical of
defendants' business and were part of a deliberate scheme directed
primarily at Native American customers. The complaints allege that
the franchisee-defendants engaged in coercive, fraudulent and other
illegal activities in connection with the automobile sales, and each
seeks to state claims for: (1) breach of express warranty; (2)
breach of implied warranty of merchantability; (3) deceit/fraud; (4)
violation of applicable deceptive trade laws; (5) breach of the
implied covenant of good faith and fair dealing; (6) conversion; (7)
civil conspiracy under tribal and state common law; (8) negligent
hiring, training and supervision of employees; (9) violation of the
Federal Equal Credit Opportunity Act; (10) invasion of privacy; (11)
violation of the Racketeer Influenced and Corrupt Organizations Act
(RICO); (12)
28
violation of the Magnuson-Moss Act; (13) violation of the Federal
Truth and Lending Act's (TILA) Three Day Rescission Period; and (14)
violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary damages
including the initial purchase price warranty charges, finance costs
and related repossession and other charges; costs of allegedly
warrantied repairs that were not made by defendants; consequential
damages relating to the alleged wrongful repossession of vehicles
and deficiency judgments associated therewith; damages for emotional
and mental suffering; punitive and treble damages; and attorneys'
fees. The amount of the alleged damages is not specified in the
complaints.
With respect to the first matter described under "Corporate
Development in Fiscal 2005" in the Company's Annual Report of Form
10-K for the fiscal year ended September 30, 2005 in Part II, Item 7
thereof, 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, 2006, 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. The
fourth complaint alleges patent infringement. All four actions are
in their infancy and materiality 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 Dan Nelson Automotive Group ("DNAG") and
South Dakota Acceptance Corporation ("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.
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
29
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.
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.
Subject to a reservation of rights, our 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.
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.
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, 2005.
On March 15, 2006, the Federal Housing Finance Board, the federal
regulator of the 12 Federal Home Loan Banks, 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. If
adopted, dividends paid to the Company by the FHLB of Des Moines, of
which the Company is a member, could be reduced, thereby negatively
impacting the Company's earnings.
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
30
banks have recently 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 9 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 would affect overall profitability.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds - None
----------------------------------------------------------
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
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.
31
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: August 14, 2006 By: /s/ J. Tyler Haah
----------------- --------------------------------
J. Tyler Haahr, President,
and Chief Executive Officer
Date: August 14, 2006 By: /s/ Jonathan M. Gaiser
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Jonathan M. Gaiser, Senior Vice President,
Secretary, Treasurer, and Chief Financial
Officer
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