DISCIPLINED
GROWTH
A N N UA L R E P O RT
2017
Company Profile
Meta Financial Group, Inc.® (NASDAQ Global Market®: CASH), headquartered in Sioux Falls, S.D., isD., is
nts wi
for MetaBank®, a federally chartered savings bank, Member FDIC. MetaBank operates in segments wi
and Payments industries through: MetaBank, its traditional retail banking operation; Meta Payment Syste
ent Syste
payments division; AFS/IBEX, its insurance premium financing division; and Refund Advantage, EPS Financanc
EPS Fina
Consumer Services, its tax-related financial solutions divisions.
Falls, S.D
F
es in
segmen
n; Meta
a Payme
fu
und Adva
antage,
within both the Banking
stems, its electroninicc
ancial and d SpSpecialty
, is the holding company
MetaBank, the retail banking division, operates 10 retail branches in four market areas: Central Iowa; Storm Lake, Io
Brookings, S.D.; and Sioux Falls, S.D. MetaBank offers traditional bankin
agricultural and business depositors and borrowers.
owa; Stor
erve the
entral Io
ned to se
areas: Ce
s design
market
services
rm Lake
needs o
r
king
e, IoIowa;
of indndividual,
ndi
repa
ent solutionsns
Meta Payment Systems (MPS) is a recognized leader in the prepaid card industry and provides innovative payment solutions
artner
delivered nationally in collaboration with market-leading part
utions
e
ectronic f
in the following areas: prepaid cards, credit products, elect
y and pro
on offeri
nd ATM
nnovativ
cific prod
rship.
aid card
s. MPS f
funds tra
industry
ocuses o
ansfer a
ovides in
ng spec
sponsor
ve paym
duct solu
AFS/IBEX provides short-term, collateralized financin
casualty and liability risk. Based in Dallas, Texas, AF
insurance agencies.
cing to
AFS/IBE
o facilita
EX origin
ate the p
nates loa
purchase
ans throu
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ugh a na
rance for
ational ne
r comme
etwork o
ercial pro
of indepp
opertrtyy,
enendent
y
Refund Advantage, based in Louisville, Ky.,
Ky., provid
Originators and their customers. These p
e p
roducts
refund-transfers a year.
des tax r
are used
refund-t
d in over
ransfer s
r 10,000
software
0 location
e and rela
ns nation
ated pro
nwide aann
oducuctts fo
ndnd proce
or Electr
esses ov
ronic Return
er one millioon
EPS Financial (EPS) provides co
of solutions include refund set
settle
in Easton, Pa.
com
mprehen
ment pr
nsive tax
oducts,
-related
prepaid
financia
payroll
al transac
card sol
ction so
utionss aa
lutitioons. E
nd merc
EPS’ inn
chant ser
ovative,
rvices. E
full-suit
EPS is he
e
adquartered
s (SC
Specialty Consumer Services
. Ba
and loan management system. B
CS) provi
ased in H
ides con
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exas, SCS
ax advan
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for no-f
ough its
ee refun
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tary und
nce prod
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ucts.s.
nnggg model
ancial
MetaBank’s vision is to promote financ
100 Fastest-Growing Companies (Fortun
un
prepaid card issuers in the United States an
inclusio
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and hahas
on forr eev
zininee). Me
s the larg
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eta Paym
gest “wh
™. In 2017
ment Sys
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7, Meta F
stems co
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onsistent
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ly rankss
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waw s s nnam
aas one o
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Forward-Looking Statements
Meta Financial Group, Inc. (the “Company”) from time to time may make written or oral “forward-looking
statements,” including statements contained in its filings with the Securities and Exchange Commission (“SEC”),
in its reports to shareholders, in this annual report and in other communications by the Company, which are made
in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform
Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,”
“plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative
of those terms or other words of similar meaning. You should read statements that contain these words carefully,
because they discuss our future expectations or state other “forward-looking” information. These forward-looking
statements include statements with respect to the Company’s beliefs, expectations, estimates and intentions that
are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which
are beyond the Company’s control. Discussions of factors affecting the Company’s business and prospects
are contained in the Company’s Annual report on Form 10-K and other periodic filings with the SEC. The Company
expressly disclaims any intent or obligation to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of the Company or its subsidiaries.
TO OUR SHAREHOLDERS
As another year closes, I can’t help but take a look back on what we have accomplished in fiscal 2017. We saw continued
strong growth from all of our businesses plus two acquisitions, as well as many new and expanded relationships
with business partners, all of which resulted in delivering yet another record-breaking year. This included the successful
integration of the two acquisitions, EPS Financial (EPS) and Specialty Consumer Services (SCS), which we completed
in our first quarter and seamlessly executed during tax season. These transactions helped solidify Meta as a leader in the tax
payments space. Our many multi-year strategic partnerships with industry leading companies propelled our business this
year and provide a bright future, too.
Company Highlights
Net income was $44.9 million, by far the highest earnings in Meta history and a significant 35% increase over
the previous high. Contributing to this achievement was not only our successful acquisitions and solid tax season results
but strong growth in our other business lines. We grew our loan portfolio by 43% during 2017 while also increasing
non-interest income as a percent of total revenue from 57% in 2016 to 65% in 2017.
Payment Highlights
Our payments division provides a successful platform to achieve our vision of financial inclusion for everyone™.
We saw continued growth in our existing prepaid business and experienced the synergies of the tax payments business
in our second fiscal quarter. Card fee income grew 34% in 2017 and average deposits increased 12% in the division
year-over-year.
In 2017, we expanded our presence in the tax services space through acquisitions and partnerships with leading franchises
and independent tax preparers. We provided underwriting for and originated approximately $1.3 billion of interest-free
refund advance loans for the 2017 tax season up from under $100 million in 2016. We were also pleased to be able
to announce that we are a party to multi-year agreements with all existing refund advance loan partners, which we expect
will provide a growing annuity stream in future years.
Banking Highlights
Our banking segment, comprised of the Retail Bank and Specialty Finance portfolios, continued to experience strong growth
in 2017. Retail Bank loans increased 26% from September 30, 2016 to September 30, 2017, while premium finance loans grew
by 46% over the same time period. We continue to grow our loan portfolios as our low-cost deposit base allows us
to provide competitive terms without sacrificing credit quality. Our asset quality is sound and our approach to loan
structuring with borrowers remains strong.
In December 2016, we purchased, net of purchase discount, a $134.0 million seasoned, floating rate, private student loan
portfolio. We also announced in our fourth quarter earnings release that in October 2017, we purchased an insured $73.0
million seasoned, floating rate, private portfolio that is structured similar to our prior purchase. These student loan portfolios
are generating attractive returns while risk has been reduced through portfolio insurance. We will continue to remain
opportunistic and disciplined when evaluating loan pool deal flow and additional lending opportunities.
Disciplined Growth
In 2017, we experienced what I like to call disciplined growth. We grew non-interest income at a faster rate than deposits
which provides us with additional capital capacity. Our outlook for 2018 will focus on expanding our emphasis on
non-interest income growth, loan and earning asset generation, delivering another exceptional tax season and building
innovative credit products. This gives us the flexibility to look at opportunities that will continue to grow the business
and create shareholder value without raising additional capital.
We continue to add staff at all levels of the organization to provide the needed expertise to help us deliver flawless and
seamless execution and deliver on our strategic initiatives. We remain disciplined in pursuing potential acquisitions and other
deals that will continue to enhance our business model and leverage synergies with our existing business well into the future.
It is important to note that we will always do what is in the best long-term interest of our company and its shareholders to
build and invest for a more profitable future.
I am confident and energized by all of the opportunities to achieve our strategic goals. I strongly believe we are well
positioned to continue to bring value to our shareholders. We look forward to building on our past success into 2018
and beyond.
I want to take this opportunity to thank our board members, employees, partners, customers, and shareholders for
another record-breaking year. Thank you for all you do for Meta.
Sincerely,
J. Tyler Haahr
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Meta Financial Group, Inc. and MetaBank
J. Tyler Haahr
Chairman of the Board and
Chief Executive Officer
of Meta Financial Group, Inc.
(MFG) and MetaBank.
He has held this position
since 2011. Mr. Haahr joined
MFG and its affiliates in 1997.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Share and Per Share Data)
2017
2016
2015
2014
2013
AT SEPTEMBER 30
Total assets
Loans receivable, net
Deposits
$5,228,332
$4,006,419
$2,529,705
$2,054,031
$1,691,989
1,317,837
919,470
706,255
493,007
380,428
3,223,424
2,430,082
1,657,534
1,366,541
1,315,283
Total annual average non-interest bearing deposits
2,286,358
2,017,977
1,632,130
1,317,468
Shareholders’ equity
Book value per common share outstanding at end of year
Total equity to assets
FOR THE FISCAL YEAR
Net interest income
Non-interest income
Income, net of tax
Diluted earnings per share
Return on average assets
Return on average equity
Net interest margin
INVESTOR INFORMATION
Annual Meeting of Shareholders
The Annual Meeting of Shareholders will convene
at 1 p.m., on Monday, January 22, 2018. The meeting
will be held at the MetaBank Corporate Services
building, 5501 South Broadband Lane, Sioux Falls, SD.
Further information with regard to this meeting can
be found in the proxy statement.
Independent Auditors
KPMG LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, IA 50309-2372
Form 10-K
Copies of the company’s Annual Report on Form 10-K
for the year ended September 30, 2017
(excluding exhibits thereto), may be obtained from
metafinancialgroup.com.
434,496
334,975
45.15
8.31%
39.30
8.36%
93,230
172,172
44,917
77,305
100,770
33,220
271,335
33.24
10.73%
59,220
58,174
18,055
174,802
28.33
8.51%
46,262
51,738
15,713
1,191,437
142,984
23.55
8.45%
36,022
55,503
13,418
4.83
3.91
2.66
2.53
2.38
1.13%
11.20%
3.05%
1.10%
10.80%
3.19%
0.78%
8.83%
3.03%
0.81%
10.01%
2.80%
0.78%
9.36%
2.48%
Shareholder Services
Shareholders desiring to change the name, address
or ownership of stock; to report lost certificates;
or to consolidate accounts should contact
the corporation’s transfer agent:
Computershare Investor Services
462 South 4th Street Suite 1600
Louisville, KY 40202
Telephone: 800.522.6645
www-us.computershare.com/investor/Contact/Enquiry
Investor Relations
Requests for Form 10-K, other inquiries or investor
comments are welcome and should be directed to:
MetaBank Corporate Services
Brittany K. Elsasser
Director of Investor Relations
5501 South Broadband Lane
Sioux Falls, SD 57108
Telephone: 605.362.2423
InvestorRelations@metabank.com
metafinancialgroup.com
LEADERSHIP
BOARD OF DIRECTORS
Executive Directors
J. Tyler Haahr
Chairman of the Board and
Chief Executive Officer
Meta Financial Group, Inc.
and MetaBank
Independent Directors/Committee Membership
Douglas J. Hajek
Partner at Davenport, Evans,
Hurwitz & Smith, LLP
• Compensation Committee
• Nominating Committee
Frederick V. Moore
Executive Search Consultant, AGB Search
Vice Chairman of the Board, Meta
Financial Group, Inc. and MetaBank
• Lead Independent Director
• Audit Committee
• Compensation Committee, Chair
• Nominating Committee
Kendall E. Stork
Retired President Citibank SD, NA
and Sioux Falls Site President
• Audit Committee, Chair
• Compensation Committee
• Nominating Committee
Brad C. Hanson
President
Meta Financial Group, Inc.,
MetaBank and Meta Payment Systems
Elizabeth G. Hoople
Consultant and retired Senior Vice
President, Marketing Wells Fargo
• Audit Committee
• Compensation Committee
• Nominating Committee, Chair
Becky S. Schulman
Chief Financial Officer and Chief
Operations Officer, Card Compliant, LLC
• Audit Committee
• Compensation Committee
• Nominating Committee
SENIOR LEADERSHIP TEAM
J. Tyler Haahr
Chief Executive Officer
Brad C. Hanson
President
Glen W. Herrick
Chief Financial Officer
M. Brent Turner
Sheree S. Thornsberry
Shelly A. Schneekloth
Head of Consumer Lending
Head of Payments
Head of Technology and Operations
UNITED STATT TESAA
SECURITIES AND EXCHANGE COMMISSION
WW
Washington, D.C. 20549
FORM 10 K
ANNUAL REPORTRR PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal
r
r
year ended September
r
30, 2017
OR
TRANSITION REPORTRR PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period
r
from _______ to _______
Commission file number 0r
22140.
®
L
METATT FINANCIAL
A
PP
GROUP
, INC.
(Name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
r
5501 South Broadband Lane, Sioux Falls, SD
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
r
57108
(Zip Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Registrant’s telephone number: (605) 782 1767
Title of Class
Name of each exchange on which registered
e
Common Stock, par value $0.01 per shar
r
NASDAQ Global Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
NO
YES
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 and Section 15(d) of the Act.
NO
YES
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
NO
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate WebWW site, if any,yy
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T during the
preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES
NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10 K or any amendment to this Form 10 K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non accelerated filer,
smaller reporting company, or an emer
ging growth company. (Check one):
yy
If an emerging growth company, yy indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act). YES
NO
As of March 31, 2017, the aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed
by reference to the average of the closing bid and asked prices of such stock on the NASDAQ Global Market as of such
date, was $762.6 million.
ff
As of November 24, 2017, there were 9,666,462 shares of the Registrant’s Common Stock outstanding.
Y
DOCUMENTS INCORPORATED BY
AA
REFERENCE
TRR III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 22, 2018
PARPP
are incorporated by reference into Part III of this report.
L
METATT FINANCIAL
A
PP
GROUP
, INC.
FORM 10-K
TT
Table of Contents
PARPP
TRR IT
PARPP
TRR IIT
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
ff
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
yy
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With W Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
PARPP
TRR IIIT
Directors, Executive Officers and Corporate Governance
ff
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
TT
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PARPP
TRR IV
i
Pageg
No.
3
49
69
69
70
70
71
73
74
91
93
150
150
151
153
153
153
154
154
154
155
Forward-Looking Statements
Meta Financial Group, Inc.® (“Meta Financial” or “the Company” or “us”) and its wholly-owned subsidiary, yy MetaBank®
(the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements
contained in this Annual Report on Form 10-K, in its other filings with the Securities and Exchange Commission (“SEC”), in its
reports to stockholders, and in other communications by the Company and the Bank, which are made in good faith by the Company
pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
You YY can identify forward-looking statements by words such as “may,”yy
“hope,” “will,” “should,” “expect,” “plan,”
“anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms,
or other words of similar meaning or similar expressions. You YY should carefully read statements that contain these words because
they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on
information currently available to us and assumptions about future events, and include statements with respect to the Company’s
beliefs, expectations, estimates, and intentions, which 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 risks, uncertainties and other factors may cause
our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to
ff materially from those expressed in, or implied by,yy these forward-looking statements. Such statements address, among others,
differ
the following subjects: future operating results; customer retention; loan and other product demand; important components of the
Company's statements of financial condition and operations; growth and expansion; new products and services, such as those
offered
by the Bank or the Company's Payments divisions (which includes Meta Payments Systems (“MPS”), Refund Advantage,
ff
EPS Financial (“EPS”) and Specialty Consumer Services (“SCS”)); credit quality and adequacy of reserves; technology; and the
Company's employees. The following factors, among others, could cause the Company's financial performance and results of
operations to differ
ff materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the
risk that we are unable to recoup a significant portion of the lost earnings associated with the non-renewal of the agreement with
H&R Block through agreements with new tax partners and expanded relationships with existing tax partners; the risk that loan
production levels and other anticipated benefits related to the agreement with Jackson Hewitt Tax TT Service®, as extended, may not
be as much as anticipated; maintaining our executive management team; the strength of the United States' economy,yy in general,
and the strength of the local economies in which the Company conducts operations; the effects
of, and changes in, trade, monetary, yy
and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal
in conjunction with bank regulatory agencies to stimulate
TT
Reserve”), as well as efforts
the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely and economical
development of, and acceptance of new products and services offered
by the Company,yy as well as risks (including reputational
ff
and litigation) attendant thereto, and the perceived overall value of these products and services by users; the risks of dealing with
or utilizing third parties, including, in connection with the Company’s refund advance business, the risk of reduced volume of
refund advance loans as a result of reduced customer demand for or acceptance of usage of Meta’s strategic partners’ refund
advance products, including as a result of pending tax legislation in the U.S. Congress; any actions which may be initiated by our
regulators in the future; the impact of changes in financial services laws and regulations, including, but not limited to, laws and
regulations relating to the tax refund industry and the insurance premium finance industry,yy our relationship with our primary
regulators, the Office
of the Comptroller of the Currency (“OCC”) and the Federal Reserve, as well as the Federal Deposit Insurance
Corporation (“FDIC”), which insures the Bank’s deposit accounts up to applicable limits; technological changes, including, but
not limited to, the protection of electronic files or databases; acquisitions; litigation risk, in general, including, but not limited to,
those risks involving the Bank's divisions; the growth of the Company’s business, as well as expenses related thereto; continued
maintenance by the Bank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion
of which has been characterized as “brokered”; changes in consumer spending and saving habits; and the success of the Company
at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.
of the U.S. Congress, United States Treasury
ff
ff
ff
These statements are based on information currently available to us and are subject to various risks, uncertainties, and
other factors, including, but not limited to, those discussed herein under the caption “Risk Factors” that could cause our actual
growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ
materially from those expressed in, or implied by, these statements.
yy
ff
The foregoing list of factors is not exclusive. WeWW caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable
to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred
to in this section. Additional discussions of factors affecting
the Company’s business and prospects are contained herein, including
under the caption “Risk Factors,” and in the Company’s periodic filings with the SEC. The Company expressly disclaims any
intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or
on behalf of the Company or its subsidiaries.
ff
2
Item 1.
Business
General
PARPP
TRR I
Meta Financial, a registered unitary savings and loan holding company,yy was incorporated in Delaware on June 14, 1993,
the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank, the accounts of which
are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. Unless the context otherwise requires,
references herein to the Company include Meta Financial and the Bank, and all subsidiaries of Meta Financial, direct or indirect,
on a consolidated basis.
ff
The Bank, a wholly-owned full-service banking subsidiary of Meta Financial, is both a community-oriented financial
institution offering
a variety of financial services to meet the needs of the communities it serves and a payments company providing
services on a nationwide basis, as further described below. The business of the Bank consists of attracting retail deposits from
the general public and investing those funds primarily in one-to-four family residential mortgage loans, commercial and multi-
family real estate, agricultural operations and real estate, construction, consumer loans (including tax refund advance loans),
commercial operating loans, and premium finance loans. In addition to originating loans, the Bank also has contracted to sell
loans, in this case principally tax refund advance loans, to third party buyers. The Bank also sells and purchases loan participations
from time to time to and from other financial institutions, as well as mortgage-backed securities and other investments permissible
under applicable regulations.
TT
AA
Machines (“ATMs”)
In addition to its lending and deposit gathering activities, the Bank’s various divisions issue prepaid cards, design
innovative consumer credit products, sponsor Automatic Teller
tax
refund-transfer services and other payment industry products and services. Through its activities, the Meta Payment Systems
(“MPS”) division of the Bank generates both fee income and low- and no cost deposits for the Bank. On September 8, 2015, the
Bank purchased substantially all of the assets and related liabilities of Fort Knox Financial Services Corporation and its subsidiary, yy
Tax TT Product Services, LLC (together “Refund Advantage”). The assets acquired by MetaBank in the acquisition include the Fort
Knox operating platform and trade name, Refund Advantage®, and other assets. On November 1, 2016, the Bank purchased
substantially all of the assets and certain liabilities of EPS Financial, LLC ("EPS") from privately held Drake Enterprises, Ltd.
("Drake"). The assets acquired by MetaBank in the EPS acquisition include the EPS trade name, operating platform, and other
assets. Also, on December 14, 2016, the Bank purchased substantially all of the assets and specified liabilities of privately-held
Specialty Consumer Services LP ("SCS") relating to its consumer lending and tax advance business. All of these transactions
expanded the Company’s business into providing tax refund-transfer and lending services for its customers.
into various debit networks, and offer
ff
First Midwest Financial Capital Trust,
T
also a wholly-owned subsidiary of Meta Financial, was established in July 2001
for the purpose of issuing trust preferred securities.
In April 2017, the Company formed a new entity, yy Meta Capital, LLC, that is a wholly-owned service corporation subsidiary
of MetaBank. Meta Capital was formed for the purposes of investing in financial technology companies.
Meta Financial and the Bank are subject to comprehensive regulation and supervision. See “Regulation” herein.
The principal executive office
ff
of the Company is located at 5501 South Broadband Lane, Sioux Falls, South Dakota
57108. Its telephone number at that address is (605) 782-1767.
Market Areas
ff
The Bank’s home office
is located at 5501 South Broadband Lane, Sioux Falls, South Dakota. The Banking segment
consists of the retail bank, the AFS/IBEX division, as well as other specialty finance loans. The retail bank’s locations include
in Storm Lake, Iowa, Brookings, South Dakota, Sioux Falls, South Dakota and the Des Moines, Iowa area. AFS/IBEX
ff
offices
operates an office
prepaid cards, tax refund-
transfer services, and other payment industry products and services nationwide and includes the MPS, Refund Advantage, EPS
Financial and SCS divisions. It operates out of Sioux Falls, South Dakota, with offices
in Louisville, Kentucky, yy Easton,
Pennsylvania and Hurst, Texas.
and Newport Beach, California. The Payments segment offers
in both Dallas, Texas
TT
TT
ff
ff
ff
3
Lending Activities
General. The Company originates both fixed-rate and adjustable-rate (“ARM”) loans in response to consumer demand.
At September 30, 2017, the Company had $1.12 billion in fixed-rate loans and $205.6 million in ARM loans. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Annual Report on
Form 10-K for further information on Asset/Liability Management.
In addition, the Company has more recently focused its lending activities on the origination of commercial and multi-
family real estate loans, one-to-four family mortgage loans, commercial operating loans, premium finance loans, and tax refund
advance loans. The Company also continues to originate traditional consumer loans and agricultural-related loans. The Company
originates most of its retail bank loans in the primary market areas in Storm Lake, IA, Brookings, SD, Sioux Falls, SD, and Des
Moines, IA. At September 30, 2017, the Company’s net loan portfolio totaled $1.32 billion, or 25% of the Company’s total assets,
as compared to $919.5 million, or 23%, at September 30, 2016. The Bank recently signed an agreement extension to originate tax
refund advance loans to customers of Jackson Hewitt TaxTT Service through the 2020 tax season. The Bank also purchased two
separate student loan portfolios, one in fiscal year 2017 and one in the beginning of fiscal year 2018. The loans included in each
of these loan portfolios are serviced by ReliaMax Lending Services, LLC, and the loans are insured by ReliaMax Surety Company.
ff
Loan applications are initially considered and approved at various levels of authority,yy depending on the type and amount
of the loan. The Company has a loan committee consisting of senior lenders and Market Presidents, and is led by the Chief Lending
Officer
. Loans in excess of certain amounts require approval by at least two members of the loan committee, a majority of the
loan committee, or by the Company’s Board Loan Committee, which has responsibility for the overall supervision of the loan
portfolio. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors. The Company
also created a Specialty Lending committee to oversee its insurance premium finance division and other specialized lending
activities in which the Company may become involved. The Committee consists of senior personnel with diverse backgrounds
well suited for oversight of these types of activities. Insurance premium finance loans in excess of certain amounts require approval
from one or more members of the Committee.
At September 30, 2017, the Company’s largest lending relationship to a single borrower or group of related borrowers
totaled $50.8 million. The Company had 24 other lending relationships in excess of $9.1 million as of September 30, 2017. At
September 30, 2017, one of these relationships, which had loans that totaled $27.8 million at September 30, 2017, was classified
as substandard. See “Non-Performing Assets, Other Loans of Concern, and Classified Assets.”
Loan Portfolio Composition. The following table provides information about the composition of the Company’s loan
portfolio in dollar amounts and in percentages as of the dates indicated. In general, for the fiscal year ended September 30, 2017,
the aggregate principal amounts in all categories of loans discussed below,ww except agriculture real estate and agriculture operating
loans, increased over levels from the prior fiscal year.
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One-to-Four Family Residential Mortgage Lending. One-to-four family residential mortgage loan originations are
generated by the Company’s marketing efforts,
fixed-
rate loans and ARM loans for both permanent structures and those under construction. The Company’s one-to-four family residential
mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
its present customers, walk-in customers and referrals. The Company offers
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At September 30, 2017, the Company’s one-to-four family residential mortgage loan portfolio totaled $196.7 million, or
14.8% of the Company’s total loans. During the year ended September 30, 2017, the Company originated $21.3 million of
adjustable-rate loans and $74.3 million of fixed-rate loans secured by one-to-four family residential real estate. See “Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities.” As of the same date, the average outstanding principal
balance of a one-to-four family residential mortgage loan was approximately $0.2 million.
The Company originates one-to-four family residential mortgage loans with terms up to a maximum of 30 years and with
loan-to-value ratios up to 100% of the lesser of the appraised value of the property securing the loan or the contract price. However,
the vast majority of these loans are originated with loan-to-value ratios below 80%. The Company generally requires that private
to reduce the Company’s exposure to at or below the 80% loan to value
mortgage insurance be obtained in an amount sufficient
fixed-
level. Residential loans generally do not include prepayment penalties. Due to consumer demand, the Company also offers
rate mortgage loans with terms up to 30 years, most of which conform to secondary market standards such as Fannie Mae, Ginnie
Mae, and Freddie Mac standards. The Company typically holds all fixed-rate mortgage loans and does not engage in secondary
market sales. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.
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The Company currently offers
five- and ten-year ARM loans. These loans have a fixed-rate for the stated period and,
thereafter, adjust annually. These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600
basis points over the initial rate. As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may
not be as rate sensitive as the Company’s cost of funds. The Company’s ARMs do not permit negative amortization of principal
and are not convertible into fixed-rate loans. The Company’s delinquency experience on its ARM loans has generally been similar
to its experience on fixed-rate residential loans. The current low mortgage interest rate environment makes ARM loans relatively
unattractive and very few are currently being originated.
In underwriting one-to-four family residential real estate loans, the Company evaluates both the borrower’s ability to
make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company
are appraised by independent appraisers approved by the Board of Directors of the Company. The Company generally requires
borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance,
if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a
“due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security
property. The Company has not engaged in sub-prime residential mortgage originations. At September 30, 2017, there were no
one-to-four family residential mortgage loans that were non-performing.
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Commercial
and Multi-Family Real Estate Lending. The Company engages in commercial and multi-family real estate
lending in its primary market areas and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan
and participation interests in loans from other financial institutions. The purchased loans and loan participation interests are
generally secured by properties located in the Midwest. See “Originations, Purchases, Sales and Servicing of Loans and Mortgage-
Backed Securities.”
At September 30, 2017, the Company’s commercial and multi-family real estate loan portfolio totaled $585.5 million,
or 44.1%, of the Company’s total loans. At September 30, 2017, the Company’s largest commercial and multi-family real estate
lending relationship totaled $47.2 million and was secured by real estate. As of the same date, the average outstanding principal
balance of a commercial or multi-family real estate loan held by the Company was approximately $1.8 million.
The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office
buildings, and hotels. Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20
years, have loan-to-value ratios of up to 80% of the appraised value of the property securing the loan, and are typically secured
by guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and
multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of
indices. In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit
different
history,yy and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties
securing commercial real estate loans originated by the Company are performed by independent appraisers.
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of general economic conditions on income producing properties and the increased difficulty
Commercial and multi-family 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 evaluating
and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is
typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to
fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired. At September 30, 2017, there were $0.7
million of commercial and multi family real estate loans that were non-performing. See “Non-Performing Assets, Other Loans
of Concern and Classified Assets.”
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Agricultural Lending. The Company originates loans to finance the purchase of farmland, livestock, farm machinery
and equipment, seed, fertilizer, and other farm-related products, primarily in its market areas. Agricultural operating loans are
originated at either an adjustable or fixed-rate of interest for up to a one-year term or, in the case of livestock, are due upon sale.
Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original
term is less than one year. Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up
to seven years.
At September 30, 2017, the Company had agricultural real estate loans secured by farmland of $61.8 million or 4.7% of
the Company’s total loans. At the same date, $33.6 million, or 2.5%, of the Company’s total loans consisted of secured loans
agricultural-related lending constituted 7.2% of total loans at September 30, 2017. At
related to agricultural operations. Total
September 30, 2017, the Company’s largest agricultural real estate and agricultural operating loan relationship was $27.8 million,
which is currently non-performing (as it is more than 90 days past due) but still accruing. Given the underlying values of collateral
(primarily land related to our agricultural loans), we believe that we have minimal loss exposure on this agricultural relationship .
At the same date, the average outstanding principal balance of an agricultural real estate loan and agricultural operating loan held
by the Company was approximately $0.6 million and $0.2 million, respectively.
TT
Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally,yy such loans provide
for a fixed rate of interest for the first five to ten years, after which the loan will balloon or the interest rate will adjust annually.
These loans generally amortize over a period of 20 to 25 years. Fixed-rate agricultural real estate loans typically have terms up
to ten years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
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Agricultural lending affords
the Company the opportunity to earn yields higher than those obtainable on one-to-four
family residential lending, but involves a greater degree of risk than one-to-four family residential mortgage loans because of the
typically larger loan amount. In addition, payments on loans are dependent on the successful operation or management of the
by many
farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected
factors outside the control of the borrower.
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Weather
presents one of the greatest risks as hail, drought, floods, or other conditions can severely limit crop yields and
thus impair loan repayments and the value of the underlying collateral. The farmer can reduce this risk with a variety of insurance
coverages which can help to ensure loan repayment. Both government support programs, as well as the Company,yy typically require
farmers to procure crop insurance coverage. Grain and livestock prices also present a risk as prices may decline prior to sale,
resulting in a failure to cover production costs. These risks may be reduced, by the farmer, with the use of futures contracts or
options to mitigate price risk. The Company frequently requires borrowers to use futures contracts or options to reduce price risk
and help ensure loan repayment. The uncertainty of government programs and other regulations is also a risk. During periods of
low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan
payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result. Finally, yy
many farms are dependent on a limited number of key individuals whose injury or death may result in an inability to successfully
operate the farm. At September 30, 2017, $34.2 million of the Company’s agricultural real estate loans and $0.1 million of
agricultural operating loans were non-performing. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Consumer Lending. The Company originates a variety of secured consumer loans, including home equity, yy home
improvement, automobile, boat and loans secured by savings deposits. In addition, the Company offers
other secured and unsecured
consumer loans and currently originates most of its retail bank consumer loans in its primary market areas and surrounding areas.
In addition, at September 30, 2017, the Company's consumer lending portfolio included a purchased student loan portfolio, along
with consumer lending products offered through
its Payments segment.
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9
On December 20, 2016, the Bank purchased, net of purchase discount, a $134.0 million seasoned, floating rate, private
student loan portfolio. This portfolio is serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company.
All the loans in this portfolio are floating rate and indexed to the three-month LIBOR plus various margins. On October 11, 2017,
the Bank purchased a second student loan portfolio. See also Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," under the caption “Overview of Corporate Developments Since Fiscal Year 2016.”
YY
At September 30, 2017, the Company's consumer loan portfolio totaled $163.0 million, or 12.3% of its total loans including
the student loan portfolio purchased in December 2016. Excluding the December 2016 purchased student loan portfolio of $123.7
million, the Bank's consumer loan portfolio at September 30, 2017 consisted of $24.7 million in short- and intermediate-term,
fixed-rate loans and $14.6 million in adjustable-rate loans.
The Company's retail bank consumer loan portfolio consists primarily of home equity loans and lines of credit.
Substantially all of the Company’s home equity loans and lines of credit are secured by second mortgages on principal residences.
The Bank will lend amounts which, together with all prior liens, may be up to 90% of the appraised value of the property securing
the loan. Home equity loans and lines of credit generally have maximum terms of five years.
The Company primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which
are made when the Company purchases loan contracts, often at a discount, from automobile dealers which have extended credit
to their customers. The Company's automobile loans typically are originated at fixed interest rates with terms up to 60 months
for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of
the automobile securing the loan.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the
applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison
yy
of the value of the security, if any
, in relation
to the proposed loan amount.
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Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans
which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases,
any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are
by adverse personal circumstances.
dependent on the borrower’s continuing financial stability,yy and thus more likely to be affected
Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
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At September 30, 2017, $1.4 million of the Bank’s consumer loans were non-performing. The Bank's non-performing
consumer loans, at September 30, 2017, were primarily comprised of purchased student loans that are serviced by ReliaMax
Lending Services, LLC and insured by ReliaMax Surety Company; accordingly, yy the Company believes that its exposure to realizable
losses with respect to these loans is low. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Through its Payments segment, the Bank strives to offer
consumers innovative payment products, including credit
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products. The Payments segment continues its development of new alternative lending products primarily to serve its customer
base and to provide innovative lending solutions to the unbanked and under-banked segment.
The Payments segment also provides short-term consumer refund advance loans. Taxpayers
are underwritten to determine
eligibility for the unsecured loans which are by design interest and fee-free to the consumer. Due to the nature of consumer advance
loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the
return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer.
Generally,yy when the refund advance loan becomes delinquent for 180 days or more, or when collection of principal becomes
doubtful, the Company will charge off the loan
balance.
TT
ff
No Payments segment credit products were non-performing as of September 30, 2017. There were no taxpayer advances
outstanding as of September 30, 2017.
10
rr
Commercial
Operating Lending. The Company also originates its Banking segment's commercial operating loans
primarily in its market areas. Most of these commercial operating loans have been extended to finance local and regional businesses
and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial
loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in
expanding companies. The Company also extends short-term commercial Electronic Return Originator ("EROs") advance loans
to their clients on a nationwide basis through its Payments segment. At September 30, 2017, $35.8 million, or 2.7% of the
Company’s total loans, were comprised of commercial operating loans.
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such
yy
machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year
. The loan-to-value ratio
on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. ERO loans are
not collateralized. The Company’s commercial operating lending policy includes credit file documentation and analysis of the
borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation
of conditions affecting the borrower
of the Company’s current credit analysis. As described further below, such loans are believed to carry higher credit risk than
more traditional lending activities.
. Analysis of the borrower’s past, present and future cash flows is also an important aspect
ww
ff
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment
from his or her employment and other income and which are secured by real property whose value tends to be more easily
ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the
cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial operating loans may
be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company’s commercial operating loans are usually,yy but not always, secured by business assets and personal
guarantees. However, the collateral securing the loans may depreciate over time, may be difficult
to appraise and may fluctuate
in value based on the success of the business. At September 30, 2017, the average outstanding principal balance of a commercial
operating loan held by the Company's Banking segment was approximately $0.2 million.
ff
Through its Payments segment, the Company also provides short-term ERO advance loans on a nation-wide basis. These
for the upcoming tax season. EROs go
loans are typically utilized to purchase tax preparation software and to prepare tax offices
through an underwriting process to determine eligibility for the unsecured advances. Collection on ERO advances begins once
the ERO begins to process refund transfers. Generally, yy when the ERO advance loan becomes delinquent for 120 days or more, or
when collection of principal becomes doubtful, the Company will charge off ff the loan balance. There were $0.2 million of ERO
advances outstanding as of September 30, 2017.
ff
At September 30, 2017, none of the Company’s commercial operating loans were non-performing.
rr
Premium
Finance Lending. Through its AFS/IBEX division, the Company provides short-term, primarily collateralized
financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as insurance
premium financing. This includes, but is not limited to, policies for commercial property,yy casualty and liability risk. The AFS/
IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms,
cost and ease of operation. At September 30, 2017, the four largest market areas for the Company with respect to premium finance
loans were California, Texas, Florida
and New York.YY
TT
At September 30, 2017, $250.5 million, or 18.9% of the Company’s total loans, were comprised of premium finance
loans. The largest premium finance exposure outstanding at September 30, 2017, was a $4.6 million loan relationship secured by
the related insurance policy of the borrower. At the same date, the average outstanding principal balance of a premium finance
loan held by the Company was approximately $9,900. During fiscal year 2017, the average balance of a premium finance loan
originated was approximately $20,500.
Insurance premium financing is the business of extending credit to a policyholder to pay for insurance premiums when
the insurance carrier requires payment in full at inception of coverage. Premiums are advanced either directly to the insurance
carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder
generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to ten months on
to cover the
average. The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient
loan balance and accrued interest.
ff
11
Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-210 days to convert
the collateral into cash. In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy
and establish a first position lien on the unearned portion of the premium from the insurance carrier. In the event of cancellation,
to cover the receivable balance,
the cash returned in payment of the unearned premium by the insurer has typically been sufficient
the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables
will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Generally,yy when a
premium finance loan becomes delinquent for 210 days or more, or when collection of principal or interest becomes doubtful, the
Company will charge off ff the loan balance and any remaining interest and fees after applying any collection from the insurance
company. At September 30, 2017, $1.2 million of the Company’s premium finance loans were non-performing.
ff
Originations, Sales and Servicing of Loans
At the retail bank, loans are generally originated by the Company’s staff ff of loan officers.
Loan applications are taken
and processed in the branches and the main office
of the Company. While the Company originates both adjustable-rate and fixed-
rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market. Demand is affected
by the interest rate and economic environment.
ff
ff
ff
The Company, yy from time to time, sells loan participations, generally without recourse. At September 30, 2017, there
were no loans outstanding sold with recourse. When loans are sold, the Company may retain the responsibility for collecting and
remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing
the loans. The servicing fee is recognized as income over the life of the loans. The Company services loans that it originated and
sold totaling $21.8 million at September 30, 2017, of which $3.2 million were sold to Fannie Mae and $18.6 million were sold to
others.
On October 26, 2016, MetaBank entered into an agreement with certain H&R Block entities to originate up to $1.45
billion and retain up to $750 million of interest-free tax advance loans for H&R Block tax preparation customers during the 2017
tax season. On July 27, 2017, MetaBank announced the H&R Block agreement would not be renewed for the 2018 tax season.
On August 2, 2017, MetaBank announced an extension through the 2020 tax season of its current agreement with Jackson
on an annual basis up to $750 million of interest-free tax advance loans, an increase of $300 million
ff
Hewitt TaxTT Service to offer
over the prior year.
In periods of economic uncertainty,yy the Company’s ability to originate large dollar volumes of loans may be substantially
reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition,
the Company’s ability to sell loans may substantially decrease if potential buyers (principally government agencies) reduce their
purchasing activities.
12
The following table shows the loan originations (including draws, loan renewals, and undisbursed portions of loans in
process), purchases, and sales and repayment activities of the Company for the periods indicated.
Originations by
y Type:ypTT
g
Adjustable Rate:
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Consumer
Commercial Operating
Agricultural Operating
Total Adjustable Rate
Fixed Rate:
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Agricultural Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
Total Fixed-Rate
Total Loans Originated
Purchases:
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Consumer
Premium Finance
Total Loans Purchased
Sales and Repayments:
p y
Sales:
Commercial and Multi-Family Real Estate
Agricultural Real Estate
Consumer
Agricultural Operating
Total Loan Sales
Repayments:
Loan Principal Repayments
Total Principal Repayments
Total Reductions
(Decrease) increase in Other Items, Net
Net Increase
r
Years Ended September
YY
30,
2017
2016
2015
(Dollars in Thousands)
$
21,324
$
15,276
$
6,014
9
168,136
23,513
218,996
74,294
190,618
5,033
1,505,247
54,866
16,340
535,339
2,381,737
2,600,733
540
7,078
133,785
—
141,403
4,720
—
685,934
—
690,654
1,652,674
1,652,674
2,343,328
(441)
398,367
$
13
2,460
13
35,433
21,954
75,136
81,218
154,478
4,216
222,391
42,775
30,889
357,252
893,219
968,355
—
—
—
—
—
—
—
17,611
83
17,694
737,853
737,853
755,547
408
$
213,216
$
15,360
5,575
13
20,219
12,347
53,514
48,576
109,173
12,877
204,258
15,533
20,646
208,183
619,246
672,760
—
—
—
74,120
74,120
4,843
520
11,650
99
17,112
515,883
515,883
532,995
(637)
213,248
At September 30, 2017, approximately $134.5 million, or 10%, of the Company’s loan portfolio consisted of purchased
loans, including the purchased student loan portfolio balance of $123.7 million. The remainder of the Company's purchased loan
portfolio is secured by properties located in Iowa, North Dakota and South Dakota. The Company believes that purchasing loans
on the Company’s
outside of its market areas assists the Company in diversifying its portfolio and may lessen the adverse effects
business or operations which could result in the event of a downturn or weakening of the local economy in which the Company
conducts its primary operations. However, additional risks are associated with purchasing loans outside of the Company’s market
areas, including the lack of knowledge of the local market and difficulty
in monitoring and inspecting the property securing the
loans. During fiscal 2017, the Company purchased a $148.7 million student loan portfolio discounted to $133.8 million, $7.1
million of commercial real estate participation loans and $0.5 million of other loans.
ff
ff
Non-Performing Assets, Other Loans of Concern and Classified
r
Assets
When a borrower fails to make a required payment on retail bank real estate secured loans and consumer loans within
16 days after the payment is due, the Company generally initiates collection procedures by mailing a delinquency notice. The
customer is contacted again, by written notice or telephone, before the payment is 30 days past due and again before 60 days past
due. Generally, yy delinquencies are cured promptly; however, if a loan has been delinquent for more than 90 days, satisfactory
payment arrangements must be adhered to or the Company may initiate foreclosure or repossession. For premium finance loans,
a notice of cancellation is sent 18 days after the missed payment. If the account is not brought current, the Company may cancel
the underlying insurance policy.
The following table sets forth the Company’s loan delinquencies by type, by amount and by percentage of type at
September 30, 2017.
30-59 Days (1)
Loans Delinquent For:
60-89 Days (2)
90 Days and Over (3)
Number
Amount
Category Number
Amount
Category Number
Amount
Percent
of
Percent
of
Percent
of
Category
(Dollars in Thousands)
1
$
370
8.4%
1
$
79
2.6%
— $
—
—%
—
—
82
—
—
—
—%
—%
2,512
57.2%
—
—%
—
—
21
—
—
—
558
—
—%
—%
18.1%
—%
327
410
$
1,509
4,391
34.4%
100.0%
241
263
$
2,442
3,079
79.3%
100.0%
3
13
51
1
685
34,198
1,406
97
1,010
1,205
1.8%
91.0%
3.7%
0.3%
3.2%
1,078
$ 37,591
100.0%
Real Estate:
1-4 Family
Commercial
& Multi-
Family
Agricultural
Consumer
Agricultural
Operating
Premium
Finance
TotalTT
(1) As of September 30, 2017, 80 of the consumer loans, which totaled $2.5 million, were student loans that are insured by
ReliaMax Surety.
(2) As of September 30, 2017, 20 of the consumer loans, which totaled $0.1 million, were student loans that are insured by
ReliaMax Surety.
(3) As of September 30, 2017, 50 of the consumer loans, which totaled $1.4 million were student loans that are insured by
ReliaMax Surety.
Delinquencies 90 days and over constituted 2.8% of total loans and 0.72% of total assets. Excluding the insured student
loans, delinquencies 90 days and over would have constituted 2.7% of total loans and 0.70% of total assets.
14
Generally, yy when a loan becomes delinquent 90 days or more for retail bank loans or when the collection of principal or
interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is reversed against current income. The loan will generally remain on a non-accrual status until six months
of good payment history has been established. Certain relationships in the table above are over 90 days past due and still accruing.
The Company considers these relationships as being in the process of collection. Specialty finance loans and Payments segment
loans are generally not placed on non-accrual status, but are instead written off ff when the collection of principal and interest become
doubtful.
The table below sets forth the amounts and categories of the Company’s non-performing assets.
Non-Performing Loans
g
(Dollars in Thousands)
2017
2016
2015
2014
2013
At September 30,
Non-Accruing Loans:
1-4 Family Real Estate
Commercial & Multi-Family Real
Estate
Agricultural Operating
Commercial Operating
Total
Accruing Loans Delinquent 90 Days or
More:
Agricultural Real Estate
Consumer
Agricultural Operating
Premium Finance
Total
Total Non-Performing Loans
Other Assets
Foreclosed Assets:
1-4 Family Real Estate
Commercial & Multi-Family Real
Estate
TotalTT
Total Other Assets
$
— $
685
—
—
685
34,198
1,406
97
1,205
36,906
37,591
62
230
292
292
83
—
—
—
83
—
53
—
965
1,018
1,101
76
—
76
76
$
24
$
281
$
904
5,132
—
6,060
—
13
—
1,728
1,741
7,801
—
—
—
—
312
340
—
933
—
54
—
—
54
—
15
15
15
987
692
Total Non-Performing Assets
$
37,883
$
1,177
$
7,801
$
1,002
$
TT
Total as a Percentage of
TT
Total
Assets
0.72%
0.03%
0.31%
0.05%
Total Non-Performing
TT
TT
Percentage of Total
insured loans (1)
Assets as a
Assets - excluding
0.70%
0.03%
0.31%
0.05%
0.05%
(1) Excludes from non-performing assets the student loans that are insured by ReliaMax Surety Company.
15
245
427
—
7
679
—
13
—
—
13
—
116
116
116
808
0.05%
For the year ended September 30, 2017, gross interest income that would have been recorded had the non-accruing loans
been current in accordance with their original terms amounted to approximately $13,000, none of which was included in interest
income.
Non-Accruing Loans. At September 30, 2017, the Company had $0.7 million in non-accruing loans, which constituted
less than 0.1% of the Company's gross loan portfolio and total assets. At September 30, 2016, the Company had $0.1 million in
non-accruing loans which also constituted less than 0.1% of its gross loans portfolio and total assets. The fiscal 2017 increase in
non-accruing loans relates to an increase in non-accruing loans in the commercial real estate category of $0.7 million.
Accruing Loans Delinquent 90 Days or Morerr . At September 30, 2017, the Company had $1.2 million in accruing premium
finance loans delinquent 90 days or more. At the same date, the Company also had $36.9 million in agricultural loans related to
two large relationships that were more than 90 days past due and still accruing. One of these agricultural relationships, which
represented an outstanding loan balance of about $7 million at September 30, 2017, was paid in full on November 1, 2017. The
Company received all principal, accrued interest, legal, and other expenses at the closing. The Company also believes that its
strong collateral position on the other relationship (less than 75% loan-to-value ("LTV")
secured by agricultural real estate) and
active collection process with the borrower supports the decision to continue to accrue interest on such loan. Given the underlying
values of collateral (primarily land related to our agricultural loans), we believe that we have minimal loss exposure on this
agricultural relationship and expect to receive all principal, accrued interest, legal, and other expenses. It is possible the collateral
will go through a deed-in-lieu of foreclosure process in the near future. In addition to the principal balance, this relationship also
had accrued interest of $1.8 million as of September 30, 2017 that the Company, as noted above,
expects to collect.
LL
yy
Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity
securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each
such classification dependent on the facts and circumstances surrounding the assets in question.An asset is considered “substandard”
if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
“Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the
deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,”
with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing
facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible”
and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
General allowances represent loss allowances which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are
classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge off ff such amount. The Bank’s determinations as to the classification of its assets and the amount
of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional
general or specific loss allowances.
On the basis of management’s review of its classified assets, at September 30, 2017, the Company had classified loans
of $40.6 million as substandard and none as doubtful or loss. Further, at September 30, 2017, the Bank owned real estate or other
assets as a result of foreclosure of loans with a value of $292,000.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on
management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity,yy including
those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which
full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an
appropriate loan loss allowance.
Management closely monitors economic developments both regionally and nationwide, and considers these factors when
assessing the appropriateness of its allowance for loan losses. The current economic environment continues to show signs of
stability and improvement in the Bank’s markets. The Bank’s average loss rates over the past three years were low relative to
industry averages for such years, offset, in
the case of fiscal 2016, with a higher agricultural loss rate driven by the charge off of
one relationship. The Bank does not believe it is likely these low loss conditions will continue indefinitely. Each loan segment is
evaluated using both historical loss factors as well as other qualitative factors in order to determine the amount of risk the Company
believes exists within that segment.
ff
ff
16
Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic
conditions, the size of the loan portfolio and other factors, the level of the allowance for loan losses at September 30, 2017 reflected
an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan
losses at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses
will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition,
the Company’s determination of the allowance for loan losses is subject to review by the OCC, which can require the establishment
of additional general or specific allowances.
Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is
will be charged to the allowance for loan losses at the time of transfer.
are periodically updated by management and, if the value declines, a specific provision for losses on such property is
lower than the balance of the related loan, the difference
Valuations
VV
established by a charge to operations.
ff
The following table sets forth an analysis of the Company’s allowance for loan losses.
Balance at Beginning of Period
$
5,635
$
6,255
$
5,397
$
3,930
$
3,971
September 30,
2017
2016
2015
2014
2013
(Dollars in Thousands)
Charge Offs:
ff
1-4 Family Real Estate
Commercial & Multi-Family Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
Total Charge Of
fsff
r
Recoveries:
1-4 Family Real Estate
Commercial & Multi-Family Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
Total Recoveries
—
(138)
(7,084)
(1,149)
—
(626)
(8,997)
—
—
209
25
12
61
307
(32)
(385)
(728)
(249)
(3,252)
(726)
(5,372)
—
27
11
—
2
107
147
(45)
(214)
—
—
(186)
(285)
(730)
—
6
—
3
—
114
123
—
—
—
—
(50)
—
(50)
2
347
—
18
—
—
367
ff
Net (Charge Offs) Recoveries
Provision Charged to Expense
Balance at End of Period
(8,690)
10,589
(5,225)
4,605
(607)
1,465
$
7,534
$
5,635
$
6,255
$
317
1,150
5,397
(25)
(194)
(1)
—
—
—
(220)
2
113
1
63
—
—
179
(41)
—
$
3,930
Ratio of Net Charge Offs During the Period to
ff
AA
Average Loans Outstanding During the Period
Ratio of Net Charge Offs During the Period to
ff
Non-Performing Assets at Year End
YY
0.73%
0.06%
0.10%
(0.07)%
0.01%
22.94%
443.84%
7.78%
(31.66)%
5.07%
Allowance to Total Loans
TT
0.57%
0.61%
0.88%
1.08 %
1.02%
Allowance to Total Loans - excluding insured
loans (1)
TT
0.63%
0.61%
0.88%
1.08 %
1.02%
(1) Excludes from the total loan balance student loans that are insured by ReliaMax Surety Company.
17
For more information on the Provision for Loan Losses, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which is included in Item 7 of this Annual Report on Form 10-K.
The distribution of the Company’s allowance for losses on loans at the dates indicated is summarized as follows:
At September 30,
2017
2016
2015
2014
2013
Percent
of
Loans in
Each
Category
of TotalTT
Loans
Amount
Percent
of
Loans in
Each
Category
of TotalTT
Loans
Amount
Percent
of
Loans in
Each
Category
of TotalTT
Loans
(Dollars in Thousands)
Amount
Percent
of
Loans in
Each
Category
of TotalTT
Loans
Amount
Percent
of
Loans in
Each
Category
of TotalTT
Loans
Amount
$
803
14.8% $
654
17.5% $
278
17.5% $
552
23.3% $
333
21.4%
1-4 Family
Real Estate
Commercial
& Multi-
Family Real
Estate
Agricultural
Real Estate
Consumer
Commercial
Operating
Agricultural
Operating
Premium
Finance
Unallocated
2,670
1,390
6
158
1,184
796
527
44.1
4.7
12.3
2.7
2.5
18.9
—
2,198
45.7
1,187
43.5
1,575
142
51
117
1,332
588
553
6.9
4.0
3.4
4.0
18.5
—
163
20
28
3,537
293
749
9.0
4.7
4.2
6.1
15.0
—
263
78
93
719
—
2,117
44.9
11.2
5.9
6.2
8.5
—
—
1,937
50.1
112
74
49
267
—
1,158
3,930
7.6
7.9
4.2
8.8
—
—
100.0%
TotalTT
$
7,534
100.0% $
5,635
100.0% $
6,255
100.0% $
5,397
100.0% $
Investment Activities
General. The investment policy of the Company generally is to invest funds among various categories of investments
and maturities based upon the Company’s need for liquidity,yy to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings and to fulfill the Company’s asset/liability management policies. The
Company’s investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy
adopted by the Board of Directors, which is implemented by members of the Company’s Investment Committee. The Company
closely monitors balances in these accounts, and maintains a portfolio of highly liquid assets to fund potential deposit outflows
or other liquidity needs. To TT date, the Company has not experienced any significant outflows related to the MPS division deposits,
though no assurance can be given that this will continue to be the case.
As of September 30, 2017, investment and mortgage-backed securities with fair values of approximately $1.07 billion,
$325.4 million, and $9.5 million were pledged as collateral for the Bank’s Federal Home Loan Bank of Des Moines (“FHLB”)
advances, Federal Reserve Bank (“FRB”) advances and collateral for securities sold under agreements to repurchase, respectively.
For additional information regarding the Company’s collateralization of borrowings, see Notes 8 and 9 to the “Notes to Consolidated
Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report
on Form 10-K.
Investment Securities. It is the Company’s general policy to purchase investment securities which are U.S. Government-
related securities, U.S. Government-related agency and instrumentality securities, U.S. Government-related agency or
instrumentality collateralized securities, state and local government obligations, commercial paper, corporate debt securities and
overnight federal funds.
18
The Company continues to execute its investment strategy of primarily purchasing U.S. Government-related securities
and U.S. Government-related MBS, as well as AAA and AA rated NBQ municipal bonds; however, the Company also reviews
opportunities to add other diverse, high-quality securities at attractive relative rates when opportunities arise. As of September 30,
2017, the Company had total investment securities, excluding mortgage-backed securities, with an amortized cost of $1.54 billion
compared to $1.37 billion as of September 30, 2016. At September 30, 2017, $838.8 million, or 57%, of the Company’s investment
securities were pledged to secure various obligations of the Company.
A large portion of this investment strategy involves the purchase of non-bank qualified municipal housing bonds backed
by Fannie Mae, Freddie Mac, and or Ginnie Mae or convertible directly into Ginnie Mae securities that also provide monthly cash
flow in the form of principal and interest payments. These bonds are issued in larger denominations than bank qualified obligations
of political subdivisions, which allows for the purchase of larger blocks. These larger blocks of municipal bonds are typically
issued in larger denominations by well-known issuers with reputable reporting and in turn, tend to be more liquid, which helps
reduce price risk. These municipal bonds are tax-exempt and as such have a tax equivalent yield higher than their book yield.
The tax equivalent yield calculation uses the Company’s cost of funds as one of its components. Given the Company’s relatively
low cost of funds due to the volume of interest-free deposits generated by the MPS division, the tax equivalent yield for these
bonds is higher than a similar term investment in other investment categories. Many of the Company’s municipal holdings are
able to be pledged at both the Federal Reserve and the Federal Home Loan Bank.
As of September 30, 2017, the Company held obligations of states and political subdivisions of $1.40 billion, representing
securities. This amount is spread among 48 of the 50 states of
90.0% of total investment securities, excluding mortgage backed
the U.S. and the District of Columbia, with no individual state (excluding agency backed and/or convertible municipal securities)
having a concentration higher than 10% of the total carrying value of the municipal portfolio. The Company has no direct municipal
bond exposure in Detroit or Puerto Rico, which are municipalities that have had recent financial troubles and carry a higher than
normal risk of the principal not being returned to the investor. Management believes this geographical diversification lessens the
credit risk associated with these investments. The Company also monitors concentrations of the ultimate borrower and exposure
to counties within each state to further enhance proper diversification.
b
19
The following table sets forth the carrying value of the Company’s investment securities portfolio, excluding mortgage-
backed securities and other Benefit Equalization Plan equity securities, at the dates indicated.
At September 30,
2017
2016
2015
(Dollars in Thousands)
Investment Securities AFS
Trust preferred and corporate securities
$
— $
12,978
$
13,944
Asset backed securities
Small business administration securities
Non-bank qualified obligations of states and political subdivisions
Common equities and mutual funds
Subtotal AFS
Investment Securities HTM
Obligations of states and political subdivisions
Non-bank qualified obligations of states and political subdivisions (1)
Subtotal HTM
FHLB Stock
96,832
57,871
950,829
1,445
1,106,977
19,247
430,593
449,840
116,815
80,719
698,672
1,125
910,309
20,626
465,469
486,095
—
56,056
608,590
914
679,504
19,540
259,627
279,167
61,123
47,512
24,410
TT
Total Investment Securities and FHLB Stock
$
1,617,940
$
1,443,916
$
983,081
Other Interest-Earning Assets:
Interest bearing deposits in other financial institutions and Federal Funds
Sold (2)
$
1,227,308
$
513,441
$
10,051
(1) Includes $3.1 million of taxable obligations of states and political subdivisions.
(2) From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including
the FHLB, the FRB, and other private institutions. At September 30, 2017, the Company had $1.23 billion in interest bearing
deposits held at the FRB and $0.5 million at other institutions. At September 30, 2017, the Company did not have interest
bearing deposits held at the FHLB and had no federal funds sold at a private institution.
20
The composition and maturities of the Company’s available for sale and held to maturity investment securities portfolio,
excluding equity securities, FHLB stock and mortgage-backed securities, are indicated in the following table. The actual maturity
of certain municipal housing related securities are typically less than its stated contractual maturity due to scheduled principal
payments and prepayments of the underlying mortgages.
September 30, 2017
After 1 YearYY
Through 5
YearsYY
After 5
YearsYY
Through 10
YearsYY
After 10
YearsYY
Total Investment Securities
Carrying
Value
Carrying
Value
Carrying
Value
Amortized
Cost
Fair ValueVV
1 YearYY orr
Less
Carrying
Value
AA
Available for Sale
(Dollars in Thousands)
Asset backed securities
Small business administration
securities
Non-bank qualified
obligations of states and
political subdivisions
Total Investment Securities
TT
AFS
WW
Weighted
AA
Average
YY
Yield
(1)
Held to Maturityy
Obligations of states and
political subdivisions
Non-bank qualified
obligations of states and
political subdivisions
Total Investment Securities
TT
HTM
—
—
—
—
—
—
96,832
94,451
96,832
43,160
14,711
57,046
57,871
37,674
315,038
598,117
938,883
950,829
$
— $
37,674
$
358,198
$
709,660
$ 1,090,380
$ 1,105,532
—%
1.38%
1.89%
2.75%
2.67%
2.39%
September 30, 2017
After 1 YearYY
Through 5
YearsYY
After 5
YearsYY
Through 10
YearsYY
After 10
YearsYY
Total Investment Securities
Carrying
Value
Carrying
Value
Carrying
Value
Amortized
Cost
Fair ValueVV
(Dollars in Thousands)
1 YearYY orr
Less
Carrying
Value
$
1,483
$
5,893
$
8,473
$
3,398
$
19,247
$
19,368
—
12,033
136,523
282,037
430,593
432,361
$
1,483
$
17,926
$
144,996
$
285,435
$
449,840
$
451,729
WW
Weighted
AA
Average
YieldYY
(1)
1.43%
1.83%
2.19%
2.90%
2.62%
2.41%
(1) Yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
YY
Mortgage-Backed Securities. The Company’s mortgage-backed and related securities portfolio as of September 30, 2017
consisted entirely of securities issued by U.S. Government agencies or instrumentalities, including those of Ginnie Mae, Fannie
Mae, Freddie Mac and Farmer Mac. The Ginnie Mae, Fannie Mae, Freddie Mac and Farmer Mac certificates are modified
pass through mortgage-backed securities representing undivided interests in underlying pools of fixed rate, or certain types of
adjustable-rate, predominantly single-family mortgages issued by these U.S. Government agencies or instrumentalities.
At September 30, 2017, the Company had a diverse portfolio of mortgage-backed securities with an amortized cost of
$702.6 million, all at fixed rates of interest. At September 30, 2017, the Company held primarily seasoned 20-year, 30-year, and
40-year pass through mortgage-backed securities. Coupons on these securities ranged from below 3% to 4.5%.
21
Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees
that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations
of the Company. At September 30, 2017, $514.4 million, or 74%, of the Company’s mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject
to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution and other
underwriting risks inherent in the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect
both the prepayment speed, and value, of such securities. The prepayment risk associated with mortgage-backed securities is
continually monitored, and prepayment rate assumptions are adjusted as appropriate to update the Company’s mortgage-backed
securities accounting and asset/liability reports.
ff
The following table sets forth the carrying value of the Company’s mortgage-backed securities at the dates indicated.
AA
Available for Sale
Held to Maturity
Freddie Mac
Fannie Mae
Fannie Mae DUS
TotalTT
AFS
Farmer Mac
Fannie Mae
Ginnie Mae
TT
Total HTM
At September 30,
2017
2016
2015
(Dollars in Thousands)
100,287
$
164,577
$
486,167
394,363
—
—
174,322
391,846
10,415
586,454
$
558,940
$
576,583
At September 30,
2017
2016
2015
(Dollars in Thousands)
61,295
$
71,011
$
43,458
8,936
51,894
10,853
113,689
$
133,758
$
—
61,026
5,551
66,577
$
$
$
$
22
The following table sets forth the contractual maturities of the Company’s mortgage-backed securities at September 30,
of prepayments, periodic principal repayments and the
ff
2017. Not considered in the preparation of the table below is the effect
adjustable-rate nature of these instruments, all of which typically lower the average life of these securities.
September 30, 2017
1 YearYY orr
Less
Carrying
Value
After 1 YearYY
Through 5
YearsYY
Carrying
Value
After 5 YearsYY
Through 10
YearsYY
Carrying
Value
After 10
YearsYY
Carrying
Value
Total Investment Securities
Amortized
Cost
Fair ValueVV
AA
Available for Sale
(Dollars in Thousands)
$
$
$
$
Freddie Mac
Fannie Mae
Total Investment
Securities
Weighted
WW
YieldYY
AA
Average
Held to Maturity
Farmer Mac
Fannie Mae
Ginnie Mae
Total Investment
Securities
Weighted
WW
YieldYY
AA
Average
— $
—
— $
—
— $
100,287
—
486,167
— $
— $
— $
586,454
$
$
102,385
486,533
588,918
$
$
100,287
486,167
586,454
—%
—%
—%
2.73%
2.64%
2.73%
September 30, 2017
1 YearYY orr
Less
Carrying
Value
After 1 YearYY
Through 5
YearsYY
Carrying
Value
After 5 YearsYY
Through 10
YearsYY
Carrying
Value
After 10
YearsYY
Carrying
Value
(Dollars in Thousands)
Total Investment Securities
Amortized
Cost
Fair ValueVV
— $
— $
— $
—
—
—
—
—
—
$
61,295
43,458
8,936
$
61,295
43,458
8,936
60,733
42,894
8,829
— $
— $
— $
113,689
$
113,689
$
112,456
—%
—%
—%
2.64%
2.64%
2.73%
ff
b
than anticipated will affect
At September 30, 2017, the contractual maturity of all of the Company’s mortgage backed
securities was in excess of
ten years. The actual maturity of a mortgage-backed security is typically less than its stated contractual maturity due to scheduled
principal payments and prepayments of the underlying mortgages. Prepayments that are different
the
yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the
mortgage-backed security. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), premiums and discounts
are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts can significantly affect
the yield of mortgage-
backed securities, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, borrower credit scores, loan to
premises value, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and
general levels of market interest rates, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage
for mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered
loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under
such circumstances, the Company may be subject to reinvestment risk because, to the extent that the Company’s mortgage-backed
securities amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments
and prepayments at a comparable rate. During periods of rising interest rates, these prepayments tend to decelerate as the prevailing
market interest rates for mortgage rates increase and prepayment incentives dissipate.
ff
ff
ff
ff
23
Management has implemented a process to identify securities with potential credit impairment that are other-than-
temporary. This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized
cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook
of the security, yy monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is
more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may
extend to maturity. To TT the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment
loss is recognized.
For all securities considered temporarily impaired, the Company does not intend to sell these securities and it is not more
likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at
maturity. The Company believes it will collect all principal and interest due on all investments with amortized cost in excess of
fair value and considered only temporarily impaired.
In fiscal 2017, 2016 and 2015, there were no other-than-temporary impairments recorded. Fannie Mae and Freddie Mac,
which are both in conservatorship, generally provide the certificate holder a guarantee of timely payments of interest, whether or
not collected. Ginnie Mae’s guarantee to the holder is timely payments of principal and interest, backed by the full faith and credit
of the U.S. Government.
Sources of Funds
General. The Company’s sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest
earned on or maturation of investment securities and short-term investments, mortgage-backed securities and funds provided from
operations.
Borrowings, including FHLB advances, repurchase agreements, other short-term borrowings, and funds available through
the FRB Discount WindowW
, ww may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, may be used on a longer-term basis to support expanded lending activities, and may also be used to match the
funding of a corresponding asset.
ff
Deposits. The Company offers
a variety of deposit accounts having a wide range of interest rates and terms. The
Company’s deposits consist of statement savings accounts, money market savings accounts, NOW and regular checking accounts,
deposits related to prepaid cards primarily categorized as checking accounts and certificate accounts currently ranging in terms
from 3 months to 5 years. The Company solicits deposits from its primary market area and relies primarily on competitive pricing
policies, advertising and high-quality customer service to attract and retain these deposits. In addition, the Company may
periodically utilize brokered deposits to target strategic maturities related to our seasonal tax advance lending. The tax advance
lending season typically lasts six weeks or less and it is generally more efficient
to fund these short-term loans by using brokered
deposits rather than by selling investment securities. As of September 30, 2017, $255.3 million of the Company's brokered
certificates of deposits are scheduled to mature during the second quarter of fiscal 2018 to coincide with a significant paydown
of the principal balances on these tax advances. Other sources of brokered deposits may also be utilized periodically to take
advantage of balance sheet funding opportunities.
ff
The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing
interest rates, and competition.
ff
The variety of deposit accounts offered
by the Company has allowed it to be competitive in obtaining funds and to respond
with flexibility to changes in consumer demand. The Company endeavors to manage the pricing of its deposits in keeping with
its asset/liability management and profitability objectives. Based on its experience, the Company believes that its savings, money
market accounts, NOW,WW regular checking accounts and deposits related to prepaid cards are relatively stable sources of deposits.
However, the ability of the Company to attract and maintain certificates of deposit and the rates paid on these deposits has been
and will continue to be significantly affected by market
conditions.
ff
24
At September 30, 2017, $2.44 billion of the Company’s $3.22 billion deposit portfolio was attributable to the Payments
segment. The majority of these deposits represent funds available to spend on prepaid debit cards and other stored value products,
of which $2.39 billion are included with non-interest-bearing checking accounts and $20.2 million are included with savings
deposits on the Company’s Consolidated Statement of Financial Condition. Generally,yy these deposits do not pay interest. The
Payments segment originates debit card programs through outside sales agents and other financial institutions. As such, these
deposits carry a somewhat higher degree of concentration risk than traditional consumer products. If a major client or card program
were to leave the Bank, deposit outflows could be more significant than if the Bank were to lose a more traditional customer,
although it is considered unlikely that all deposits related to a program would leave the Bank without significant advance notification.
As such, and as historical results indicate, the Company believes that its deposit portfolio attributable to the Payments segment is
stable. The increase in deposits arising from Payments has allowed the Bank to reduce its reliance on certificates of deposits and
public funds, which typically have relatively higher costs. See “Regulation – FDIC Deposit Classification Guidance.”
The following table sets forth the deposit flows at the Company during the periods indicated.
Opening Balance
Deposits
Withdrawals
Interest Credited
Ending Balance
Net Increase
Percent Increase
September 30,
2017
2016
2015
(Dollars in Thousands)
$
2,430,082
$
1,657,534
$
1,366,541
418,732,743
(417,941,472)
2,071
418,950,277
(418,178,086)
357
315,944,447
(315,653,993)
539
$
$
3,223,424
793,342
$
$
2,430,082
772,548
$
$
1,657,534
290,993
32.65%
46.61%
21.29%
25
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered
ff
by the
Company for the periods indicated.
2017
September 30,
2016
2015
Amount
Percent of
TotalTT
Amount
Percent of
TotalTT
Amount
Percent of
TotalTT
(Dollars in Thousands)
$ 2,454,057
76.1% $ 2,167,522
89.2% $ 1,449,101
67,294
53,505
48,758
18,245
2.1%
1.7%
1.5%
0.6%
38,077
50,742
47,749
—
1.6%
2.1%
1.9%
—%
33,320
41,720
42,222
—
87.4%
2.0%
2.5%
2.6%
—%
$ 2,641,859
82.0% $ 2,304,090
94.8% $ 1,566,363
94.5%
Transactions and Savingsg
p
Deposits:
Non-Interest Bearing
Checking
Interest Bearing Checking
Savings Deposits
Money Market Deposits
Wholesale transaction and
savings deposits
Total Non-Certificate
Deposits
Time Certificates of Deposit:
p
VV
Variable
0.00 - 0.99%
1.00 - 1.99%
2.00 - 2.99%
103
58,745
522,393
324
—%
1.8%
16.2%
—%
124
125,519
349
—
—%
5.2%
—%
—%
192
89,044
1,935
—
—%
5.4%
0.1%
—%
Time Certificates of
Total
TT
Deposits (1)
TT
Total Deposits
$
581,565
$ 3,223,424
18.0% $
125,992
5.2% $
91,171
100.0% $ 2,430,082
100.0% $ 1,657,534
5.5%
100.0%
(1) As of September 30, 2017, total time certificates of deposits included $457.9 million of brokered certificates of deposits.
26
The following table shows rate and maturity information for the Company’s certificates of deposit as of September 30,
2017.
Variable
0.00- 0.99% 1.00 - 1.99% 2.00 - 2.99%
TotalTT
(Dollars in Thousands)
Percent of
TotalTT
Certificate accounts maturing
in quarter ending:
December 31, 2017
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020
September 30, 2020
Thereafter
34
18
8
26
9
8
—
—
—
—
—
—
—
42,083
2,093
4,700
1,324
2,673
498
1,386
501
1,647
269
829
135
607
174,877
298,302
35,743
1,617
3,417
831
1,620
—
1,397
36
757
82
3,714
— $
—
—
—
—
—
—
—
7
—
—
—
317
216,994
300,413
40,451
2,967
6,099
1,337
3,006
501
3,051
305
1,586
217
4,638
37.3%
51.7%
7.0%
0.5%
1.1%
0.2%
0.5%
0.1%
0.5%
0.1%
0.3%
—%
0.8%
Total
$
103
$
58,745
$
522,393
$
324
$
581,565
100.0%
Percent of total
—%
10.1%
89.8%
0.1%
100.0%
The following table indicates the amount of the Company’s certificates of deposit and other deposits by time remaining
until maturity as of September 30, 2017.
Maturity
3 Months or
Less
After 3 to 6
r
Months
r
After 6 to 12
Months
After 12
Months
TotalTT
(Dollars in Thousands)
$
193,317
$
257,999
$
26,928
$
18,117
$
496,361
Certificates of deposit less than
$250,000
Certificates of deposit of $250,000 or
more
TT
Total certificates of deposit
$
216,994
$
300,413
$
43,418
$
20,740
23,677
42,414
16,490
2,623
$
$
85,204
581,565
At September 30, 2017, there were $80.4 million in deposits from governmental and other public entities included in
certificates of deposit.
rr
Borrowings
. Although deposits are the Company’s primary source of funds, the Company’s practice has been to utilize
borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company
desires additional capacity to fund loan demand. Borrowings from various sources mature based on stated payment schedules.
The Company’s borrowings have historically consisted primarily of advances from the FHLB upon the security of a
blanket collateral agreement of a percentage of unencumbered loans and the pledge of specific investment securities. Such advances
can be made pursuant to several different
credit programs, each of which has its own interest rate and range of maturities. At
September 30, 2017, the Bank had $415.0 million of term advances, $987.0 million of overnight borrowings and the ability to
borrow up to an approximate additional $0.4 million from the FHLB. During the fourth quarter of fiscal 2017, the Company
incurred a $0.8 million prepayment expense related to the early extinguishment of longer term FHLB debt, which had a balance
of $7.0 million at a weighted average interest rate of 6.98%.
ff
27
The Company completed the public offering
of $75 million of 5.75% fixed-to-floating rate subordinated debentures
during fiscal year 2016. These notes are due August 15, 2026. The subordinated debentures were sold at par, resulting in net
proceeds of approximately $73.9 million. At September 30, 2017, $73.3 million in subordinated debentures, net of issuance costs
of $1.7 million, were outstanding.
ff
ff
TT
On July 16, 2001, the Company issued all of the 10,310 authorized shares of Company Obligated Mandatorily Redeemable
Preferred Securities of First Midwest Financial Capital Trust
I (preferred securities of subsidiary trust) holding solely trust preferred
securities. Distributions are paid semi annually. Cumulative cash distributions are calculated at a variable rate of the London
Interbank Offered
Rate (“LIBOR”) plus 3.75%, not to exceed 12.5%. The Company may,yy at one or more times, defer interest
payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any
deferral period, all accumulated and unpaid distributions must be paid. The capital securities are required to be redeemed on July
25, 2031; however, the Company has a semi annual option to shorten the maturity date. The option has not been exercised as of
the date of this filing. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date
of redemption. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all
of the Company’s indebtedness and senior to the Company’s common stock. The trust preferred securities have been includable
in the Company’s capital calculations since they were issued. The preferential capital treatment of the Company’s trust preferred
securities was grandfathered under recent banking legislation.
From time to time, the Company has offered
retail repurchase agreements to its customers. These agreements typically
in minimum amounts of $100,000. The proceeds of
range from 14 days to five years in term, and typically have been offered
these transactions are used to meet cash flow needs of the Company. At September 30, 2017, the Company had $2.5 million of
retail repurchase agreements outstanding.
ff
ff
The Company had three capital leases as of September 30, 2017, two equipment leases and one property lease. At
September 30, 2017, the portion of the liability expected to be expensed and amortized over the next 12 months is approximately
$62,000, while the portion of the liability expected to be expensed and amortized beyond 12 months is $1.9 million. The majority
of the $1.9 million liability is related to the Urbandale, Iowa retail branch location.
The following table sets forth the maximum month-end balance and average balance of FHLB advances, retail and reverse
repurchase agreements, trust preferred securities, subordinated debentures, capital leases, and overnight fed funds purchased for
the periods indicated.
Maximum Balance:
FHLB advances
Repurchase agreements
Trust preferred securities
Subordinated debentures
Capital leases
Other overnight borrowings
Overnight fed funds purchased
AA
Average Balance:
g
FHLB advances
Repurchase agreements
Trust preferred securities
Subordinated debentures
Capital leases
Other overnight borrowings
Overnight fed funds purchased
September 30,
2017
2016
2015
(Dollars in Thousands)
$
415,000
$
107,000
$
3,782
10,310
73,347
2,012
20,000
3,468
10,310
73,211
2,137
—
7,000
17,400
10,310
—
2,247
—
987,000
992,000
540,000
$
52,956
$
61,454
$
2,225
10,310
73,273
1,979
1,425
2,179
10,310
9,437
2,086
—
7,000
10,884
10,310
—
1,993
—
259,378
339,035
234,025
28
The following table sets forth certain information as to the Company’s FHLB advances, retail and reverse repurchase
agreements, trust preferred securities, subordinated debentures, capital leases, and overnight fed funds purchased at the dates
indicated.
FHLB advances
Repurchase agreements
Trust preferred securities
Subordinated debentures
Capital leases
September 30,
2017
2016
2015
(Dollars in Thousands)
$
415,000
$
107,000
$
2,472
10,310
73,347
1,938
3,039
10,310
73,211
2,018
7,000
4,007
10,310
—
2,143
Overnight fed funds purchased
987,000
992,000
540,000
TT
Total borrowings
$ 1,490,067
$ 1,187,578
$
563,460
Weighted average interest rate of FHLB advances
1.27%
0.89%
6.98%
Weighted average interest rate of repurchase agreements
0.98%
0.60%
0.52%
Weighted average interest rate of trust preferred securities
5.26%
4.99%
4.28%
Weighted average interest rate of subordinated debentures
5.75%
5.75%
—%
WW
Weighted average interest rate of overnight fed funds purchased
1.33%
0.45%
0.30%
Subsidiary Activities
The subsidiaries of the Company are the Bank and First Midwest Financial Capital Trust I.
TT
Payments Overview
ff
The Company, yy through the MPS division of the Bank, is focused on innovation in the fintech and payments industries.
MPS offers
a complement of prepaid cards, consumer credit products and other payment industry- related products and services
that are marketed to consumers through financial institutions and other commercial entities on a nationwide basis. The products
by MPS are generally designed to facilitate the processing and settlement of authorized electronic transactions
and services offered
specific product solutions in the following areas: (i) prepaid cards, (ii) consumer
involving the movement of funds. MPS offers
credit products, (iii) ATM AA
sponsorship, (iv) tax refund transfers and (v) interest-free tax refund loans. MPS’ products and services
generally target banks, card processors, third parties that market and distribute the cards, resellers and independent tax preparers
(EROs).
ff
ff
Each line of MPS’ business is discussed generally below. With W respect to the lines of business, there is a significant
amount of cross-utilization of personnel and resources (e.g., MPS may develop products for both prepaid and consumer credit
needs pursuant to a client's request).
29
rr
Cardsrr
Prepaid
. As one of the largest issuers of prepaid cards in the United States, MPS has issued over 870 million
prepaid cards since MPS first began issuing prepaid cards. Prepaid cards are debit cards that are embedded with a magnetic stripe
which encodes relevant card data (which may or may not include information about the user and/or purchaser of such card), or
an EMV chip, which is equipped with a microprocessor chip and the technology used to authenticate chip card transactions. When
the holder of such a card attempts a permitted transaction, necessary information, including the authorization for such transaction,
is shared between the “point of use” or “point of sale” and authorization systems maintaining the account of record. Most recently,yy
“virtual” prepaid cards have become popular in the industry. Virtual
prepaid cards are used in both the consumer space, for example
as a gift card, and in the commercial arena to facilitate accounts payable and vendor payments.
VV
The funds associated with such cards are typically held in pooled accounts at the Bank representing the aggregate value
of all cards issued in connection with particular products or programs. Although the funds are held in pooled accounts, the account
of record indicates the funds held by each individual card. The cards may work in a closed loop (e.g., the card will only work at
one particular merchant and will not work anywhere else), a "Restricted Access Network" (e.g., the card will only work at a specific
set of merchants such as a shopping mall), or in an open loop which functions as a Visa,VV MasterCard, or Discover branded debit
card that will work wherever such cards are accepted for payment. Most of MPS’ prepaid cards are open-loop.
The MPS prepaid card business can generally be divided into two categories: Consumer Use and Business Use products.
These programs are typically offered via a
ff
third-party relationship.
Consumer Use. Examples of consumer use prepaid card programs include payroll, General Purpose Reloadable ("GPR"),
Reward, Gift and Benefit/HSA cards. Payroll cards are a product whereby an employee’s payroll is loaded to the card by their
employer utilizing direct deposit. GPR cards are usually distributed by retailers and can be reloaded an indefinite number of times
at participating retail load networks. Other examples of reloadable cards are travel cards which are used to replace traveler’s
checks and can be reloaded a predetermined number of times, as well as tax-related cards where a taxpayer’s refund is placed on
or purchase goods and
the card. Reloadable cards are generally open- loop cards that consumers can use to obtain cash at ATMsAA
services wherever such cards are accepted for payment.
Business or Commercial
Use. Prepaid cards are also frequently used by businesses for travel and entertainment, accounts
payable and B2B settlement products. For example, virtual prepaid cards are used to facilitate one-time payments between a
company and its vendors for monthly settlement. Travel
and Entertainment cards, alternatively, yy are reloadable by the company
for use by its employees to travel for business.
TT
rr
rr
Products
Consumer Credit
. In its belief that credit programs can help meet legitimate credit needs for prime and sub-
rr
the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to
prime borrowers, and afford
ff
economic downturns, the Company has offered
certain credit programs that were designed to accomplish these objectives, although
only one such program existed as of September 30, 2017.
ff
ff
MPS has strived to offer
consumers innovative payment products, including credit products. Most credit products have
historically fallen into one of two general categories: (1) sponsorship lending and (2) portfolio lending. In a sponsorship lending
model, MPS typically originates loans and sells (without recourse) the resulting receivables to third-party investors equipped to
take the associated credit risk. MPS discontinued most sponsorship lending programs in fiscal year 2012 with only one run-off ff
portfolio still in existence. A Portfolio Credit Policy which has been approved by the Board of Directors governs portfolio credit
initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying
source of repayment.
ATM Sponsorship. MPS sponsors ATM AA
independent sales organizations (“ISOs”) into various networks and provides
associated sponsorships of encryption support organizations and third-party processors in support of the financial institutions and
ISO sponsorships. Sponsorship consists of the review and oversight of entities participating in debit and credit networks.
the ATM AA
In certain instances, MPS also has certain leasehold interests in certain ATMsAA
which require bank ownership and registration for
compliance with applicable state law.
While the Company has adopted policies and procedures to manage and monitor the risks attendant to this line of business,
and the executives who manage the Company’s program have years of experience in this area of the Company's business, no
guarantee can be made that the Company will not experience losses in the MPS division. MPS has signed agreements with terms
extending through the next few years with several of its largest sales agents/program managers, which the Company expects will
help mitigate this risk. See “- Regulation - Proposal Prepaid Payments Regulation.”
30
TT
Tax TT Refund Transfers
and Lending. With W the acquisitions of Refund Advantage in September 2015, EPS Financial in
November 2016, and SCS in December 2016, the Company is a leading provider of professional tax refund-transfer software used
by independent EROs. Both Refund Advantage and EPS offer
tax refund-transfer solutions through ACH direct deposit, check
0% APR tax refund loans to consumers through marketing programs with national consumer
and prepaid card. The Bank offers
tax preparation companies, including Jackson Hewitt and MetaBank's own refund transfer companies, Refund Advantage and
EPS.
ff
ff
Regulation
General
The Company is broadly regulated as a savings and loan holding company by the Federal Reserve, and is required to file
reports with and otherwise comply with the rules and regulations of the Federal Reserve applicable to such companies. As a
reporting company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company is also required
to file reports with the SEC and otherwise comply with federal securities laws. The Bank is a federally chartered thrift institution
that is subject to broad federal regulation and oversight extending to all of its operations by the OCC, its primary federal regulator,
and by the FDIC as deposit insurer. The Bank is also a member of the FHLB. See “Risk Factors” which is included in Item 1A
of this Annual Report on Form 10-K.
The legislative and regulatory enactments described below have had and are expected to continue to have a material
impact upon the operations of the Company and the Bank.
rr
rr
Dodd-Frank Wall WW Street
Reform and Consumer Protection
Act of 2010 (“the Dodd-Frank Act”). In response to the
national and international economic recession that began in 2007-2008 and to strengthen supervision of financial institutions and
systemically important non-bank financial institutions, Congress and the U.S. Government took a variety of actions, including the
enactment of the Dodd-Frank Act on July 21, 2010. The Dodd-Frank Act represented the most comprehensive change to banking
laws since the Great Depression of the 1930s and mandated changes in several key areas: regulation and compliance (both with
respect to financial institutions and systemically important non-bank financial companies), securities regulation, executive
deposit insurance assessments and
compensation, regulation of derivatives, corporate governance, transactions with affiliates,
consumer protection. Importantly for the Bank, the Dodd-Frank Act also abolished the Office
of Thrift Supervision (the “OTS”)
on July 21, 2011, and transferred rulemaking authority and regulatory oversight to the OCC with respect to federal savings banks,
such as the Bank, and to the Board of Governors of the Federal Reserve System with respect to savings and loan holding companies,
such as the Company. While the changes in the law required by the Dodd-Frank Act have had a major impact on large institutions,
even relatively smaller institutions such as ours have been affected.
ff
ff
ff
Pursuant to the Dodd-Frank Act, the Bank is subject to regulations promulgated by the Consumer Financial Protection
Bureau (the “Bureau” or “CFPB”). The Bureau has consolidated rules and orders with respect to consumer financial products
and services and has substantial power to define the rights of consumers and responsibilities of lending institutions, such as the
Bank. The Bureau does not, however, examine or supervise the Bank for compliance with such regulations; rather, based on the
Bank’s size (less than $10 billion in assets), enforcement authority remains with the OCC although the Bank may be required to
submit reports or other materials to the Bureau upon its request. Notwithstanding jurisdictional limitations set forth in the Dodd-
Frank Act, the Bureau and federal banking regulators may endeavor to work jointly in investigating and resolving cases as they
arise.
The Dodd-Frank Act included provisions which restrict interchange fees to those which are “reasonable and proportionate”
for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing (known as the
“Durbin Amendment”). The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the
final rule, interchange fees for debit card transactions were capped at $0.21 plus five basis points to be eligible for a “safe harbor”
such that the fee is conclusively reasonable and proportionate. Another related rule also permits an additional $0.01 per transaction
“fraud prevention adjustment” to the interchange fee if certain standards designed by the Federal Reserve are implemented including
an annual review of fraud prevention policies and procedures. With W respect to network exclusivity and merchant routing restrictions,
it is now required that all debit cards participate in at least two unaffiliated
networks so that the transactions initiated using those
debit cards will have at least two independent routing channels. Notably,yy the interchange fee restrictions in the Durbin Amendment
do not apply to the Bank because debit card issuers with total worldwide assets of less than $10 billion are exempt.
ff
The Dodd-Frank Act also included a provision that supplements the Federal Trade
Commission Act’s prohibitions against
practices that are unfair or deceptive by also prohibiting practices that are “abusive.” The Bureau’s Director, Richard Cordray,yy
has publicly stated that this term will not be defined by regulation but will, instead, be illuminated by the enforcement actions the
Bureau initiates.
TT
31
The extent to which new legislation, existing and planned governmental initiatives, and a new presidential administration
result in an improvement in the national economy is uncertain. In addition, because some components of the Dodd-Frank Act still
have not been finalized, it is difficult
of the Dodd-Frank Act on us or the Bank at this time, although
recent public statements by federal regulators have expressed recognition that regulatory relief is needed for smaller financial
institutions (e.g., those with less than $10 billion in assets, like the Bank).
to predict the ultimate effect
ff
ff
WW
Pennsylvania and Washington,
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was enacted in response to
D.C., which occurred on September 11, 2001. The Patriot Act
the terrorist attacks in New York,YY
is intended to strengthen U.S. law enforcement’s and the intelligence communities’abilities to work cohesively to combat terrorism
on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide-ranging.
The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and rules to promote cooperation among financial
institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Among other provisions, the Patriot Act requires financial institutions to have anti-money laundering programs in place and requires
banking regulators to consider a holding company’s effectiveness
in combating money laundering when ruling on certain merger
or acquisition applications.
ff
Privacy. The Bank is required by statute and regulation to disclose its privacy policies to its customers on an annual
third parties for marketing
basis. The Bank does not share nonpublic personal information about its customers with non-affiliated
purposes. The Bank is also required to appropriately safeguard its customers’ personal information.
ff
ff
rr
Preemption
requiring that federal
. On July 21, 2011, the preemption provisions of the Dodd-Frank Act became effective,
savings associations be subject to the same preemption standards as national banks, with respect to the application of state consumer
laws to the interstate activities of federally chartered depository institutions. Under the preemption standards established under
the Dodd Frank Act for both national banks and federal savings associations, preemption of a state consumer financial law is
permissible only if: (1) application of the state law would have a discriminatory effect
on national banks or federal thrifts as
compared to state banks; (2) the state law is preempted under a judicial standard that requires a state consumer financial law to
prevent or significantly interfere with the exercise of the national bank’s or federal thrift’s powers before it can be preempted, with
case”
such preemption determination being made by the OCC (by regulation or order) or by a court, in either case on a “case byb
basis; or (3) the state law is preempted by another provision of federal law other than Title X of the Dodd-Frank Act. Additionally,yy
the Dodd-Frank Act specifies that such preemption standards only apply to national banks and federal thrifts themselves, and not
their non-depository institution subsidiaries or affiliates.
Specifically,yy operating subsidiaries of national banks and federal thrifts
that are not themselves chartered as a national bank or federal thrift may no longer benefit from federal preemption of state
consumer financial laws, which now apply to such subsidiaries (or affiliates)
to the same extent that they apply to any person,
corporation or entity subject to such state laws. The Bank has one wholly owned service corporation subsidiary at present.
ff
ff
ff
rr
Prohibition
on Unfair, rr Deceptive and Abusive Acts and Practices. July 21, 2011 was the designated transfer date under
the Dodd-Frank Act for the formal transfer of rulemaking functions under the federal consumer financial laws from each of the
various federal banking agencies to the Bureau, which is charged with the mission of protecting consumer interests. The Bureau
is responsible for administering and carrying out the purposes and objectives of the federal consumer financial laws and to prevent
financial products and services to consumers. The Bureau is
ff
evasions thereof, with respect to all financial institutions that offer
also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices
that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service,
or the offering
of a consumer financial product or service. With W its broad rulemaking and enforcement powers coupled with a six-
ff
year operational history,yy the Bureau has redrawn the consumer financial laws through rulemaking and enforcement actions, which
may directly impact the business operations of financial institutions offering
consumer financial products or services including
the Bank and its divisions.
ff
rr
rr
Prepaid
TT
Fund Transfer
Accounts under the Electronic
In Lending Act (Regulation Z).
On October 5, 2016, the CFPB issued a final rule which supplemented the existing regulatory framework pursuant to which prepaid
and serviced. Importantly for the Bank, the rule
products (both cards and other delivery methods, including codes) are offered
Act by adding a
brought prepaid products fully within Regulation E, which implements the federal Electronic Funds Transfer
TT
in connection
definition for “prepaid account”. In addition, prepaid products that have a credit component, like some of those offered
in Lending
with an existing program manager agreement, are now regulated by Regulation Z, which implements the federal TruthTT
Act.
Act (Regulation E) and the Truth
TT
ff
ff
32
Pursuant to the Prepaid Accounts Rule, the CFPB requires that the consumer be presented with a new “Know Before YouYY
Owe” disclosure. Financial institutions, such as the Bank, must provide certain account information in a short form disclosure,
in close proximity to the short-form disclosure, and in a long form disclosure to consumers before they acquire a prepaid account,
unless specifically exempted. The rule generally extended Regulation E’s error resolution and limited liability requirements to
all prepaid accounts, regardless of whether the financial institution has completed its consumer identification and verification
process with respect to the account. In addition, the Prepaid Accounts Rule extended Regulation E’s three tiers of liability for
unauthorized transfers to prepaid accounts, depending on when the consumer reported the error. The rule also extended Regulation
E’s periodic statement requirement to prepaid accounts. Under the final rule, financial institutions must, at no additional charge
or fee, provide prepaid account holders with (i) periodic account statements, or (ii) access to his or her account balance through
a readily available telephone line and written and electronic records of the account history. The rule also extended Regulation Z’s
credit card rules and disclosure requirements to prepaid accounts that provide overdraft services and other credit features. The
prepaid card program agreements on their
rule also requires account issuers, such as the Bank, to post their publicly offered
websites, make them available to consumers upon request, and provide copies of all publicly offered
prepaid card program
agreements to the CFPB. Most of the rule's provisions took effect
on October 1, 2017.
ff
ff
ff
rr
rr
for Holders of Prepaid
Customer Identification Programs
. On March 21, 2016, the federal banking agencies,
including the OCC and the Federal Reserve, issued Interagency Guidance to Issuing Banks on Applying Customer Identification
. This guidance extends the requirements of the Customer Identification
Program
Program required by Section 326 of the USA Patriot Act to prepaid accounts where the cardholder has either the (i) ability to
reload funds, or (ii) access to credit or overdraft features. If either of these features is present, the issuer must verify the identity
of the named account holder.
to Holders of Prepaid
rr
Requirements
Cardsrr
Cardsrr
rr
rr
Incentive-Based Compensation Restrictions. On June 10, 2016, the federal banking regulators, including the Federal
Reserve and the OCC, issued a proposed rule related to incentive-based compensation (the original proposed rule was published
in April 2011). A rule related to incentive-based compensation is required by Dodd-Frank. According to the banking agencies,
the rule is intended to (1) prohibit incentive-based payment arrangements that the Agencies determine could encourage certain
financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss,
(2) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based
compensation, and (3) require those financial institutions to disclose information concerning incentive-based compensation
arrangements to the appropriate Federal regulator.
The banking regulators have tailored the requirements of the proposed rule to the size and complexity of the covered
institution. As currently contemplated, the Company and the Bank would be Level 3 covered institutions under the proposal
because both have an average total consolidated assets between $1 and $50 billion. As a Level 3 covered institution, the proposal
subjects the Company and the Bank to only the basic set of prohibitions and requirements, which prohibit “excessive compensation,
fees, or benefits” or any compensation agreement that “could lead to material financial loss.”
The proposal also would require that the Company’s board of directors, or a committee thereof, conduct oversight of its
incentive-based compensation program and approve incentive-based compensation arrangements for senior executive officers.
Additionally,yy the Company and the Bank would be required to create and maintain records that document the structure of all of
the incentive-based compensation arrangements, demonstrate compliance with the final rule, and disclose those records to the
appropriate Federal regulator upon request.
ff
rr
Third-Party
Examination Guidance for
Lending. On July 29, 2016, the FDIC issued revised examination guidance related
to third-party lending relationships (e.g., lending arrangements that rely on a third party to perform a significant aspect of the
lending process). Similar to guidance published by the OCC in 2013, these regulatory materials generally require that financial
institutions ensure that risks related to such programs are evaluated, including the type of lending activity,yy the complexity of the
lending program, the projected and realized volume created by the relationship, and the number of third-party lending relationships
the institution has in place.
Other Regulation. The Bank is also subject to a variety of other regulations with respect to its business operations
in Savings Act, the Equal Credit Opportunity Act, the Electronic
including, but not limited to, the Truth
Funds Transfer
Act, the Military Lending Act, the Servicemembers’ Civil Relief Act, the Fair Housing Act, the Home Mortgage
TT
Disclosure Act, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. As discussed below,ww any change in the
ff
regulations affecting the
Bank’s operations is not predictable and could affect
the Bank’s operations and profitability.
in Lending Act, the TruthTT
TT
ff
33
Bank Supervision & Regulation
The Bank is a federally chartered thrift institution that is subject to broad federal regulation and oversight extending to
all of its operations by its primary federal regulator, the OCC, and by its deposit insurer, the FDIC. Such regulation covers all
aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates
and conduct and qualifications of personnel. The Bank pays assessment fees both to the OCC and the FDIC, and the level of such
assessments reflects the condition of the Bank. If the condition of the Bank were to deteriorate, the level of such assessments
on the Company’s financial condition and results of operations. The
ff
could increase significantly, yy having a material adverse effect
Bank is also a member of the FHLB System and is subject to certain limited regulation by the Federal Reserve.
ff
Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the banking industry,yy including, but not limited to, the
imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the adequacy of an
institution’s allowance for loan losses. Typically
, yy these actions are undertaken due to violations of laws or regulations or conduct
of operations in an unsafe or unsound manner. The OCC has announced that supervisory strategies for 2018 will focus on the
following: (i) cybersecurity and operational resiliency; (ii) retail credit loan underwriting and concentration risk management; (iii)
business model sustainability; (iv) BSA/AML compliance management; and (v) change management processes to address new
regulatory requirements.
TT
Any change in the nature of such regulation and oversight, such as the items mentioned above, whether by the OCC, the
FDIC, the Federal Reserve, or legislatively by Congress, could have a material impact on the Company or the Bank and their
respective operations. The discussion herein of the regulatory and supervisory structure within which the Bank operates is general
and does not purport to be exhaustive or a complete description of the laws and regulations involved in the Bank’s operations.
The discussion is qualified in its entirety by the actual laws and regulations.
Federal Regulation of the Bank. As the primary federal regulator for federal savings associations, the OCC has extensive
authority over the operations of federal savings associations, such as the Bank. This regulation and supervision establishes a
comprehensive framework for activities in which a federal savings association can engage and is intended primarily for the
protection of the DIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies.
In connection with its assumption of responsibility for the ongoing examination, supervision and regulation of federal
savings associations, the OCC published a final rule on July 21, 2011, that republishes those OTS regulations that the OCC has
the authority to promulgate and enforce as of the July 21, 2011 transfer date, with nomenclature and other technical amendments
to reflect OCC supervision of federal savings associations. In addition, on May 17, 2012, November 20, 2013, June 2, 2015 and
March 14, 2016, the OCC rescinded additional OTS documents that formerly applied to federal savings and loan associations,
and applied new policy guidance where policy guidance did not already exist. With W respect to the 2015 rules, the OCC streamlined
requirements (where permitted) to provide integrated treatment to national banks and federal savings associations with respect to
certain corporate activities and transactions. The new regulations define an “eligible savings association” as one that: (i) is well
capitalized as defined in 12 CFR 6.4; (ii) has a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System
(“CAMELS”); (iii) has a Community Reinvestment Act (“CRA”), 12 U.S.C. 2901 et seq., rating of ‘‘Outstanding’’or ‘‘Satisfactory,’yy ’
if applicable; (iv) has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System;
and (v) is not subject to a cease and desist order, consent order, formal written agreement, or Prompt Corrective Action directive
or, if subject to any such order, agreement, or directive, is informed in writing by the OCC that the savings association may be
treated as an ‘‘eligible bank or eligible savings association’’ for purposes of the regulation. With W respect to the 2016 rule changes,
the OCC removed unnecessary regulatory reporting, accounting and management policy requirements and integrated and updated
transactions. The OCC undertook this integration to promote fairness in supervision, reduce
rules related to insiders and affiliate
regulatory duplication and create efficiencies
for national banks and federal savings associations, as well as the OCC. Once
ff
finalized, the OCC’s regulations and guidance supersede that of OTS and are indicative of the OCC’s goal of one integrated policy
platform for national banks and savings associations.
ff
It is possible that additional rulemaking could require significant revisions to the regulations under which the Bank
operates and is supervised. Any change in such laws and regulations or interpretations thereof negatively impacting the Bank's
or the Company's current operations, whether by the OCC, the FDIC, the Bureau, the Federal Reserve or through legislation, could
have a material adverse impact on the Bank and its operations and on the Company and its stockholders.
34
Business Activities
The activities of federal savings associations are generally governed by federal laws and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal savings associations may engage. In particular, many
types of lending authority for federal savings associations are limited to a specified percentage of the institution’s capital or assets.
Loan and Investment Powers
The Bank derives its lending and investment powers from the Home Owners’ Loan Act (“HOLA”) and the OCC’s
implementing regulations thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets.
The Bank may also establish service corporations that are permitted to engage in activities not otherwise permissible for the Bank,
including certain real estate equity investments and securities and insurance brokerage activities; provided, however, that such
investments are limited to 3% of the association's assets. These investment powers are subject to various limitations, including
(i) a prohibition against the acquisition of any corporate debt security unless, prior to acquisition, the savings association has
determined that the investment is safe and sound and suitable for the institution and that the issuer has adequate resources and
willingness to provide all required payments on its obligations in a timely manner; (ii) a limit of 400% of an association’s capital
on the aggregate amount of loans secured by non-residential real estate property; (iii) a limit of 20% of an association’s assets on
the aggregate amount of commercial and agricultural loans and leases with the amount of commercial loans in excess of 10% of
assets being limited to small business loans; (iv) a limit of 35% of an association’s assets on the aggregate amount of secured
consumer loans and acquisitions of certain debt securities, with amounts in excess of 30% of assets being limited to loans made
directly to the original obligor and where no third-party finder or referral fees were paid; (v) a limit of 5% of assets on non-
conforming loans (loans in excess of the specific limitations of the HOLA); and (vi) a limit of the greater of 5% of assets or an
association’s capital on certain construction loans made for the purpose of financing what is or is expected to become residential
property. In addition, the HOLA and the OCC regulations provide that a federal savings association may invest up to 10% of its
assets in tangible personal property for leasing purposes.
The Bank’s general permissible lending limit to one borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to
25% of unimpaired capital and surplus). At September 30, 2017, the Bank’s lending limit under these restrictions was $57.2
million. The Bank is in compliance with this lending limit.
Federal Deposit Insurance and Other Regulatory Requirements
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of the DIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the
United States Government. While not our primary federal regulator, the FDIC as insurer imposes deposit insurance premiums
and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The
FDIC also has authority to initiate enforcement actions against any FDIC-insured institution after giving its primary federal
regulator the opportunity to take such action, and may seek to terminate the deposit insurance if it determines that the institution
has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
Under the Dodd-Frank Act, a permanent increase in deposit insurance was authorized to $250,000. The coverage limit
is per depositor, per insured depository institution for each account ownership category. The Dodd-Frank Act also set a new
minimum DIF reserve ratio at 1.35% of estimated insured deposits. The FDIC is required to attain this ratio by September 30,
2020. In connection with this requirement, in November 2015, the FDIC released a proposed rulemaking (1) raising the minimum
reserve ratio from 1.15% to 1.35%; (2) requiring that the reserve ratio reach 1.35% by September 30, 2020; and (3) requiring that
the FDIC offset
of the increase in the minimum reserve ratio on insured depository institutions with less than $10 billion
in assets, like the Bank. The Board of the FDIC voted to increase the reserve ratio to 1.35% in October 2015. The reserve ratio
reached 1.15% on June 30, 2016 and it is anticipated to reach the statutory mandate of 1.35% by December 31, 2018.
ff
the effect
ff
35
ff
The FDIC imposes an assessment against all depository institutions for deposit insurance. Pursuant to changes adopted
July 1, 2016, in connection with the achievement of a 1.15% reserve ratio, the initial base rate for
by the FDIC that were effective
deposit insurance is between 3-30 basis points. Total
base assessment after possible adjustments now ranges between 1.5-40.0
basis points. For established smaller institutions, like the Bank, CAMELS composite ratings are used along with (i) an initial base
assessment rate, (ii) an unsecured debt adjustment (can be positive or negative), and (iii) a brokered deposit adjustment rate, to
calculate a total base assessment rate. Note that the final rule states that it is “revenue neutral” in that it leaves aggregate assessment
revenue collected from small banks approximately as it would have been absent the final rule. Risk categorization for purposes
of deposit insurance are no longer utilized.
TT
As noted above, brokered deposits are subject to an adjustment rate in the calculation of deposit insurance premiums.
Based upon guidance issued by the FDIC, some of Meta’s prepaid deposits are deemed to be “brokered” deposits. As discussed
below, ww should the Bank fail to maintain its well capitalized status, limitations related to brokered deposits would automatically
trigger which could have a material adverse effect on the
Bank and the Company.
ff
Under the Federal Deposit Insurance Act (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated
any applicable law,ww regulation, rule, order or condition imposed by the FDIC or the OCC. Management of the Bank does not
know of any practice, condition or violation that might lead to termination of deposit insurance.
A significant increase in DIF insurance premiums would have an adverse effect
ff
on the operating expenses and results of
operations of the Bank.
DIF-insured institutions pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued
to resolve thrift failures in the 1980s. At September 30, 2017, the FICO assessment was equal to 0.54 basis points for each $100
of its total assessment base of approximately $3.62 billion. These assessments will continue until the bonds mature in 2019.
rr
Interest
Rate Risk Management. The OCC requires federal savings banks, like the Bank, to have an effective
and sound
interest rate risk management program, including appropriate measurement and reporting, robust and meaningful stress testing,
assumption development reflecting the institution’s experience, and comprehensive model valuation. Interest rate risk exposure
is supposed to be managed using processes and systems commensurate with their earnings and capital levels; complexity; business
model; risk profile; and scope of operations. As of March 31, 2012, federal savings banks are required to have an independent
interest rate risk management process in place that measures both earnings and capital at risk.
ff
rr
Stress
TT
Testing
. Although the Dodd-Frank Act requires institutions with more than $10 billion in assets to conduct stress
testing, the OCC expects every bank, regardless of its size or risk profile, to have an effective
internal process to (1) assess its
capital adequacy in relation to its overall risks at least annually,yy and (2) to plan for maintaining appropriate capital levels. It is the
OCC’s belief that stress testing permits community banks to identify their key vulnerabilities to market forces and assess how to
effectively
manage those risks should they emerge. If stress testing results indicate that capital ratios could fall below the level
ff
needed to adequately support the bank’s overall risk profile, the OCC believes the bank’s board and management should take
appropriate steps to protect the bank from such an occurrence, including establishing a plan that requires closer monitoring of
market information, adjusting strategic and capital plans to mitigate risk, changing risk appetite and risk tolerance levels, limiting
or stopping loan growth or adjusting the portfolio mix, adjusting underwriting standards, raising more capital and selling or hedging
loans to reduce the potential impact from such stress events.
ff
Assessments. The Dodd-Frank Act provides that, in establishing the amount of an assessment, the Comptroller of the
Currency may consider the nature and scope of the activities of the entity,yy the amount and type of assets it holds, the financial and
managerial condition of the entity and any other factor that is appropriate. The Bank’s assessment (standard assessment) at
September 30, 2017, was $368,373.
rr
Basel III Capital Requirements.
2017 is the third year of implementation of the bank capital rules (the “Basel III Capital
Rules”) adopted in July 2013 by our primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator, the
OCC. The Basel III Capital Rules established a new comprehensive capital framework for U.S. banking organizations and generally
implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework
referred to as “Basel III” for strengthening international capital standards. The Basel III Capital Rules substantially increased the
risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including us
and the Bank. The Basel III Capital Rules became effective
for us and the Bank on January 1, 2015, subject to phase-in periods
ff
for certain of their components and other provisions.
36
The Basel III Capital Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1
Capital”), (2) additional tier 1 capital, and (3) tier 2 capital. Tier 1 capital is the sum of CET1 Capital and additional tier 1 capital
instruments meeting certain revised requirements. Total
capital is the sum of tier 1 capital and tier 2 capital. Under the Basel III
Capital Rules, for most banking organizations, the most common form of additional tier 1 capital is non-cumulative perpetual
preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for loan and lease
losses, in each case, subject to the Basel III Capital Rules’ specific requirements. CET1 Capital, tier 1 capital, and total capital
serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized
approach in the Basel III Capital Rules for us and the Bank, provide the denominator for such ratios. There is also a leverage ratio
that compares tier 1 capital to average total assets.
TT
Failure by our Company or Bank to meet minimum capital requirements set by the Basel III Capital Rules could result
on our
in certain mandatory and/or discretionary disciplinary actions by our regulators that could have a material adverse effect
business and our consolidated financial position. Under the capital requirements and the regulatory framework for prompt corrective
action, our Company and Bank must meet specific capital guidelines that involve quantitative measures of our Company and
Bank’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our Company’s
and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk
weightings and other factors.
ff
ff
Beginning January 1, 2016, we and the Bank became required to maintain a capital conservation buffer
above the
minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and
discretionary bonus payments to executive officers.
is exclusively composed of CET1 Capital,
applies to each of the three risk-based capital ratios (but not the leverage ratio), and increases the minimum requirement of the
three risk-based capital ratios by 0.625% for each year through 2019. On January 1, 2017, the Company and Bank complied with
the capital conservation buffer requirement
The capital conservation buffer
for 2017.
ff
ff
ff
ff
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1 Capital. These include,
for example, the requirement that deferred tax assets arising from temporary differences
that could not be realized through net
operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 Capital to the
extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1 Capital. See
Note 13 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
ff
ff
Pursuant to the Basel III Capital Rules, the effects
of certain accumulated other comprehensive income or loss (“AOCI”)
items are not excluded; however, “non-advanced approaches banking organizations,” including us and the Bank, may make a one-
time permanent election to continue to exclude these items. This election was made concurrently with the first filing of certain
of our and the Bank’s periodic regulatory reports in the beginning of 2015 in order to avoid significant variations in the level of
capital depending upon the impact of interest rate fluctuations on the fair value of their securities portfolio. The Basel III Capital
Rules also preclude certain hybrid securities, such as trust preferred securities issued prior to May 19, 2010, from inclusion in our
Tier 1 capital, subject to grandfathering in the case of companies, such as us, that had less than $15 billion in total consolidated
assets as of December 31, 2009.
Implementation of the deductions and other adjustments to CET1 Capital began on January 1, 2015, and are being phased
in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter). The implementation
of the capital conservation buffer
increases by 0.625% on each
ff
subsequent January 1, until it reaches 2.5% on January 1, 2019.
began on January 1, 2016, at the 0.625% level and the buffer
ff
With W respect to the Bank, the Basel III Capital Rules apply to and revised the Prompt Corrective Action (“PCA”)
regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 Capital ratio requirement
at each PCA category (other than critically undercapitalized), with the required CET1 Capital ratio being 6.5% for well-capitalized
status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category,yy with the minimum Tier 1 capital ratio for
well-capitalized status being 8% (as compared to the previous 6%); and (iii) eliminating the provision that provides that a bank
with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital
.
Rules did not change the total risk-based capital requirement for any PCA category
A
The Basel III Capital Rules prescribe a standardized approach for risk weightings for a large and risk-sensitive number
of categories, depending on the nature of the assets, generally ranging from 0% for U.S. Government and agency securities, to
600% for certain equity exposures, and resulting in high-risk weights for a variety of asset classes.
37
As of September 30, 2017, the Bank exceeded all of its regulatory capital requirements as showing in the table below
and was designated as “well-capitalized” under federal guidelines. The table below includes certain non-GAAP financial measures
that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies.
Management reviews these measures along with other measures of capital as part of its financial analysis. See Note 13 to the
“Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data”
of this Annual Report on Form 10-K.
Regulatory Capital Data
Minimum
Requirement For
Capital Adequacy
Purposes
Minimum
Requirement
To Be
Well WW
TT
Capitalized
Under Prr
ompt
Corrective Action
Provisions
Ratio
Ratio
Company
(Actual)
Ratio
Bank
(Actual)
Ratio
(Dollars in Thousands)
7.64%
13.97%
14.46%
18.41%
9.64%
18.22%
18.22%
18.59%
4.00%
4.50%
6.00%
8.00%
5.00%
6.50%
8.00%
10.00%
r
September 30, 2017
Tier 1 leverage ratio
Common equity Tier 1 capital ratio
Tier 1 capital ratio
TT
Total qualifying capital ratio
The following table provides a reconciliation of the amounts included in the table above.
Reconciliation:
Total equity
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities
LESS: Certain other intangible assets
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
LESS: Net unrealized gains (losses) on available-for-sale securities
Common Equity Tier 1 (1)
Long-term debt and other instruments qualifying as Tier 1
LESS: Additional tier 1 capital deductions
Total Tier 1 capital
Allowance for loan losses
Subordinated debentures (net of issuance costs)
TT
Total qualifying capital
Standardized Approach (1)
r
September 30, 2017
(Dollars in Thousands)
$
434,496
95,332
41,743
1,495
9,166
286,760
10,310
374
296,696
7,718
73,347
377,761
(1) Capital ratios were determined using the Basel III Capital Rules that became effective on January 1, 2015. Basel III revised
the definition of capital, increased minimum capital ratios, and introduced a minimum CET1 ratio; those changes are being
fully phased in through the end of 2021.
ff
38
The following table provides a reconciliation of tangible common equity used in calculating tangible book value data.
Total Stockholders' Equity
Less: Goodwill
Less: Intangible assets
Tangible common equity
Less: AOCI
TT
Tangible common equity excluding
AOCI
$
r
September 30, 2017
(Dollars in Thousands)
434,496
98,723
52,178
283,595
9,166
274,429
Due to the predictable, quarterly cyclicality of MPS deposits in connection with tax season business activity, management
believes that a six-month capital calculation is a useful metric to monitor the Company’s overall capital management process.
As such, the Bank’s six-month average Tier 1 leverage ratio, Common equity Tier 1 capital ratio, Tier 1 capital ratio, and Total
qualifying capital ratio as of September 30, 2017 were 9.70%, 18.99%, 18.99%, and 19.39%, respectively.
TT
yy
Recent Releases Related to Capital Rules. On November 21, 2017, the federal banking agencies released a final rule
finalizing certain capital rule transitions related to regulatory capital deductions and risk weights for banking organizations,
including federal savings banks (like the Bank) and savings and loan holding companies (like the Company), that are not subject
to the advanced approaches capital rule. Specifically, yy the final rule extends existing capital provisions for mortgage servicing
assets, certain deferred tax assets, non-significant investments in the capital instruments of unconsolidated financial institutions,
and minority interests. Without
adoption of this final rule, new requirements that included significantly higher risks ratings for
the affected assets would have become
on January 1, 2018.
ff
effective
W
ff
In September 2017, the federal banking agencies, including the OCC, the FDIC, and the Federal Reserve, released for
comment a proposed rule that would simplify certain aspects of the agencies’ capital rules as they relate to federal savings banks
and savings and loan holding companies. The proposal is designed to simplify and clarify certain complex aspects of the existing
capital rules. Among other proposed changes, the proposal would replace the definition of high volatility commercial real estate
exposure in the standardized approaches capital framework with a straightforward definition of highly volatile acquisition,
development or construction; these exposures would receive a 130% risk weighting instead of the current 150% risk weighting
such assets receive now. In addition, the proposal would simplify threshold deduction treatment for mortgage servicing assets
and certain tax deferred assets; it would also simplify limits on minority interests included in regulatory capital. The comment
period is currently scheduled to close on this proposal on December 26, 2017.
ff
rr
Prompt
rr
Corrective
Action. Federal banking regulators are authorized and, under certain circumstances, required to take
December 19, 1992, (and revised as described
certain actions against banks that fail to meet their capital requirements. Effective
above) the federal banking agencies were given additional enforcement authority with respect to undercapitalized depository
institutions. Under the current regulations, an institution is deemed to be (a) “well-capitalized” if it has total risk-based capital of
10.0% or more, has a Tier 1 risk-based capital ratio of 8.0% or more, has a CET1 risk based capital ratio of 6.5% or more, and
has leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure; (b) “adequately capitalized” if it has a total Capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 6.0% or more, a CET1 risk based capital ratio of 4.5% or more and has a leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of well-capitalized; (c) “undercapitalized” if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 6.0%, a CET1 Capital ratio less than
4.5% or a Tier 1 leverage capital ratio that is less than 4.0%; (d) “significantly undercapitalized” if it has a total risk-based capital
ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, a CET1 Capital ratio less than 3% or a Tier 1
leverage capital ratio that is less than 3.0%; and (e) “critically undercapitalized” if it has a ratio of tangible equity to total assets
that is equal to or less than 2.0%. In certain situations, a federal banking agency may reclassify a well-capitalized institution as
adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with supervisory actions
as if the institution were in the next lower category.
The federal banking agencies are generally required to take action to restrict the activities of an “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized” bank. Any such bank must submit a capital restoration plan that
is guaranteed by the parent holding company and such holding company has provided appropriate assurances of performances.
Until such plan is approved, it may not increase its assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The banking regulators are authorized to impose additional restrictions,
discussed below, that
are applicable to significantly undercapitalized institutions.
ww
39
Adequately capitalized banks cannot normally pay dividends or make any capital contributions that would leave them
undercapitalized; they cannot pay a management fee to a controlling person if, after paying the fee, they would be undercapitalized;
and they cannot accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver by the
FDIC. The FDIC has defined the “national rate” for all interest-bearing deposits held by less-than-well-capitalized institutions as
“a simple average of rates paid by all insured depository institutions and branches for which data are available” and has stated
that its presumption is that this national rate is the prevailing rate in any market. As such, less-than-well-capitalized institutions
that are permitted to accept, renew or rollover brokered deposits via FDIC waiver generally may not pay an interest rate in excess
of the national rate plus 75 basis points on such brokered deposits.
ff
Undercapitalized banks may not accept, renew or rollover brokered deposits, and are subject to restrictions on the soliciting
of deposits over prevailing rates. In addition, undercapitalized banks are subject to certain regulatory restrictions. These restrictions
include, among others, that such a bank generally may not make any capital distributions, must submit an acceptable capital
restoration plan to the FDIC, may not increase its average total assets during a calendar quarter in excess of its average total assets
during the preceding calendar quarter unless any increase in total assets is consistent with a capital restoration plan approved by
the FDIC and the bank’s ratio of equity to total assets increases during the calendar quarter at a rate sufficient
to enable the bank
to become adequately capitalized within a reasonable time. In addition, such banks may not acquire a business, establish or acquire
a branch office
or engage in a new line of business without regulatory approval. Further, as part of a capital restoration plan, the
bank’s holding company must generally guarantee that the bank will return to adequately capitalized status and provide appropriate
assurances of performance of that guarantee. If a capital restoration plan is not approved, or if the bank fails to implement the
plan in any material respect, the bank would be treated as if it were “significantly undercapitalized,” which would result in the
imposition of a number of additional requirements and restrictions. It should also be noted all FDIC-insured institutions are
assigned an assessment risk category. In general, weaker banks (those with a higher assessment risk category) are subject to higher
assessments than stronger banks. An adverse change in category can lead to materially higher expenses for insured institutions.
Finally, yy bank regulatory agencies have the ability to seek to impose higher than normal capital requirements known as individual
minimum capital requirements (“IMCR”) for institutions with higher risk profiles. If the Bank’s capital status – well-capitalized
– changes as a result of future operations or regulatory order, or if it becomes subject to an IMCR, the Company’s financial
condition or results of operations could be adversely affected.
ff
ff
Any institution that fails to comply with its capital plan or is “significantly undercapitalized” (i.e., Tier 1 risk-based ratio
of less than 4% or CET1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating restrictions mandated by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”). These actions and restrictions include requiring the issuance of additional
voting securities; limitations on asset growth; mandated asset reduction; changes in senior management; divestiture, merger or
acquisition of the association; restrictions on executive compensation; and any other action the OCC deems appropriate. An
institution that becomes “critically undercapitalized” is subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In addition, the appropriate banking regulator must appoint a
receiver (or conservator with the FDIC’s concurrence) for an institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also subject to other possible enforcement actions,
including the appointment of a receiver or conservator. The appropriate regulator is also generally authorized to reclassify an
institution into a lower capital category and impose restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition of any of these measures on the Bank may have a substantial adverse effect
on it and on the Company’s
operations and profitability. Meta Financial stockholders do not have preemptive rights and, therefore, if Meta Financial is directed
by its regulators to issue additional shares of common stock, such issuance may result in the dilution in stockholders’ percentage
of ownership of Meta Financial.
ff
rr
Institutions in TrTT oubled
Condition. Certain events, including entering into a formal written agreement with a bank’s
regulator that requires action to improve the bank’s financial condition, or simply being informed by the regulator that the bank
is in troubled condition, will automatically result in limitations on so-called “golden parachute” agreements pursuant to Section
18(K) of the FDIA. In addition, organizations that are not in compliance with minimum capital requirements, or are otherwise in
a troubled condition, must give 90 days’ written notice before appointing a Director or Senior Executive Officer
, pursuant to the
OCC’s regulations.
ff
40
Branching by Federal Savings Associations. Subject to certain limitations, the HOLA and the OCC regulations permit
federally chartered savings associations to establish branches in any state of the United States. The authority to establish such
branches is available if the law of the state in which the branch is located, or is to be located, would permit establishment of the
branch if the savings association were a state savings association chartered by such state or if the association qualifies as a “domestic
building and loan association” under the Internal Revenue Code of 1986, as amended, which imposes qualification requirements
similar to those for a “qualified thrift lender” under the HOLA. See “—Qualified Thrift Lender TestTT .” The branching authority
under the HOLA and the OCC regulations preempts any state law purporting to regulate branching by federal savings associations.
rr
for
Standardsrr
for Safety and Soundness. The federal banking agencies have adopted the Interagency Guidelines Establishing
Standards
Safety and Soundness. The guidelines establish certain safety and soundness standards for all depository institutions.
The operational and managerial standards in the guidelines generally relate to the following: (1) internal controls and information
systems; (2) internal audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate exposure; (6) asset growth;
(7) compensation, fees and benefits; (8) asset quality; and (9) earnings. Again, rather than providing specific rules, the guidelines
set forth basic compliance considerations and guidance with respect to a depository institution. Failure to meet the standards in
the guidelines, however, could result in a request by the OCC to the Bank to provide a written compliance plan to demonstrate its
ff
efforts to come
into compliance with such guidelines.
ff
Civil Money Penalties. The OCC has the authority to assess civil money penalties (“CMPs”) against any national bank,
parties (“IAP”). In addition, the OCC has the authority to assess CMPs
federal savings bank or any of their institution-affiliated
party to correct violations, unsafe or
against bank service companies and service providers. CMPs may encourage an affected
unsound practices or breaches of fiduciary duty. CMPs also serve as a deterrent to future violations of law,ww regulation, orders and
other conditions. When determining CMP amounts, the OCC is required by statute to consider the following four factors: (1) the
size and financial resources and good faith of the institution or IAP charged; (2) the gravity of the violation; (3) the history of
previous violations; and (4) such other matters as justice may require. In addition to these factors there are other factors that the
FFIEC has adopted that banking agencies should consider. If the Bank, the Company or any of its IAPs were to have CMPs
imposed, such penalties could be material.
ff
Limitations on Dividends and Other Capital Distributions. Federal regulations govern the permissibility of capital
distributions by a federal savings association. Pursuant to the Dodd-Frank Act, savings associations that are part of a savings and
loan holding company structure must now file a notice of a declaration of a dividend with the Federal Reserve at least 30 days
before the proposed dividend declaration by the Bank’s board of directors. In the case of cash dividends, OCC regulations require
that federal savings associations that are subsidiaries of a stock savings and loan holding company must file an informational copy
of that notice with the OCC at the same time the notice is filed with the Federal Reserve. OCC regulations further set forth the
circumstances under which a federal savings association is required to submit an application or notice before it may make a capital
distribution.
A federal savings association proposing to make a capital distribution is required to submit an application to the OCC if:
the association does not qualify for expedited treatment pursuant to criteria set forth in OCC regulations; the total amount of all
of the association’s capital distributions (including the proposed capital distribution) for the applicable calendar year exceeds the
association’s net income for that year to date plus the association’s retained net income for the preceding two years; the association
would not be at least adequately capitalized following the distribution; or the proposed capital distribution would violate a
prohibition contained in any applicable statute, regulation or agreement between the association and the OCC or the Company’s
and Bank’s former regulator, the OTS, or violate a condition imposed on the association in an application or notice approved by
the OCC or the OTS.
A federal savings association proposing to make a capital distribution is required to submit a prior notice to the OCC if:
the association would not be well-capitalized following the distribution; the proposed capital distribution would reduce the amount
of or retire any part of the association’s common or preferred stock or retire any part of debt instruments such as notes or subordinate
debentures included in the association’s capital (other than regular payments required under a debt instrument); or the association
is a subsidiary of a federally chartered mutual savings and loan holding company; however, where a savings association subsidiary
of a stock savings and loan holding company is proposing to pay a cash dividend that does not require an application or a notice
filing, only an informational filing is required.
41
Each of the Federal Reserve and OCC have primary reviewing responsibility for the applications or notices required to
be submitted to them by savings associations relating to a proposed distribution. The Federal Reserve may disapprove of a notice,
and the OCC may disapprove of a notice or deny an application, if:
•
•
•
the savings association would be undercapitalized, significantly undercapitalized or critically undercapitalized following
the distribution;
the proposed distribution raises safety and soundness concerns; or
the proposed distribution violates a prohibition contained in any statute, regulation, enforcement action or agreement
between the savings association (or its holding company,yy in the case of the Federal Reserve) and the entity’s primary
federal regulator, or a condition imposed on the savings association (or its holding company,yy in the case of the Federal
Reserve) in an application or notice approved by the entity’s primary federal regulator.
Under current regulations, the Bank is not permitted to pay dividends on its stock if its regulatory capital would fall below
the amount required for the liquidation account established to provide a limited priority claim to the assets of the Bank to qualifying
depositors at March 31, 1992, who continue to maintain deposits at the Bank after its conversion from a federal mutual savings
and loan association to a federal stock savings bank pursuant to its Plan of Conversion adopted August 21, 1991.
During the fiscal year ended September 30, 2017, the Bank paid no cash dividends to the Company, yy as the Company
utilized existing cash holdings for payment of dividends to the Company’s stockholders and other holding company expenses.
The Company does not currently anticipate that it will need dividends from the Bank in order to fund dividends to the Company’s
stockholders. To TT declare a dividend under new rules adopted in 2015 by the OCC, an institution must file a notice with the OCC
as an “eligible savings association” (as defined in the OCC’s regulations) if, among other things, it would not remain well-capitalized
or would not be an eligible savings association upon the distribution. An application to the OCC is required prior to a capital
distribution if, among other things, a federal savings association is not an “eligible savings association.” If neither of these are
triggered, an institution does not need to file a notice or an application before declaring a dividend or otherwise making a capital
distribution.
Qualified Thrift Lender TestTT . All savings associations, including the Bank, are required to meet a qualified thrift lender
(“QTL”) test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments (primarily residential mortgages and related investments,
including certain mortgage-backed securities) on a monthly average for nine out of every 12 months on a rolling basis or meet
the requirements for a domestic building and loan association under the Internal Revenue Code. Under either test, the required
assets primarily consist of residential housing related to loans and investments. At September 30, 2017, the Bank met the test and
always has since its inception.
Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it qualifies as a
QTL within one year and thereafter remains a QTL, or limits its new investments and activities to those permissible for both a
savings association and a national bank. In addition, the association is subject to national bank limits for payment of dividends
and branching authority. If such association has not requalified or converted to a national bank within three years after the failure,
it must divest all investments and cease all activities not permissible for a national bank or federal savings association. The Bank
currently meets its QTL requirement and
expects to do so for the foreseeable future.
L
Community Reinvestment Act. Under the Community Reinvestment Act (the “CRA”), the Bank is evaluated periodically
by its primary federal banking regulator to determine if it is meeting its continuing and affirmative
obligation consistent with its
safe and sound operation to help meet the credit needs of its assessment areas, including low and moderate income neighborhoods.
The Bank received a “Satisfactory” rating during its most recent Performance Evaluation dated January 3, 2017. A copy of the
Bank’s most recent Performance Evaluation is available as part of its Public File.
ff
42
VV
VV
VV
Volcker
Rule. On December 10, 2013, five financial regulatory agencies, including our primary federal regulators the
Federal Reserve and the OCC, adopted final rules implementing the so-called Volcker
Rule embodied in Section 13 of the Bank
Holding Company Act (“BHCA”), which was added by Section 619 of the Dodd-Frank Act. The final rules prohibit banking
entities from (1) engaging in short-term proprietary trading for their own accounts and (2) having certain ownership interests in
and relationships with hedge funds or private equity funds (“covered funds”). The final rules are intended to provide greater clarity
with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. The final rules also
require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in
which must include (for the largest entities) making regular reports about those activities
activities covered by the Volcker Rule,
to regulators. Community and small banks, such as MetaBank, are afforded
some relief under the final rules. If such banks are
engaged only in exempted proprietary trading, such as trading in U.S. Government, agency,yy state and municipal obligations, they
are exempt entirely from compliance program requirements. Moreover, even if a community or small bank engages in proprietary
Rule into their existing
trading or covered fund activities under the rule, they need only incorporate references to the Volcker
policies and procedures. The compliance date for banks to conform to the Volcker
Rule was July 21, 2015, but the regulators
granted multiple extensions until July 21, 2017 for conformance of relationships with covered funds that existed prior to December
31, 2013 (this was the final extension granted in connection with such "legacy" covered funds). Beginning June 30, 2014, banking
entities with $50 billion or more in trading assets and liabilities were required to report quantitative metrics; on April 30, 2016,
banking entities with at least $25 billion but less than $50 billion were required to report; and on December 31, 2016, banking
entities with at least $10 billion but less than $25 billion were required to report. The Company does not at this time expect the
VV
Volcker Rule
to have a material impact on its operations.
VV
VV
ff
Interstate Banking and Branching. The FRB may approve an application of an adequately capitalized and adequately
managed savings and loan holding company to acquire control of, or acquire all or substantially all of the assets of, a bank or
savings association located in a state other than such holding company’s home state, without regard to whether the transaction is
prohibited by the laws of any state. In general, the FRB may not approve the acquisition of a bank that has not been in existence
for the minimum time period (not exceeding five years) specified by the statutory law of the host state or if the applicant (and its
depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.
ff
The federal banking agencies are also generally authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state. Interstate acquisitions of branches or the establishment of a new
branch is permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and
branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above. South
Dakota permits interstate branching only by merger.
ff
ff
of the Bank for these purposes). Transactions
with Affiliates. The Bank must comply with Sections 23A and 23B of the Federal Reserve Act relative to
Transactions
TT
generally defined to mean any company that controls or is under common control with the institution
transactions with “affiliates,”
ff
between an institution or its subsidiaries and
TT
(as such, Meta Financial is an affiliate
are required to be on terms as favorable to the Bank as terms prevailing at the time for transactions with non-affiliates.
its affiliates
are restricted to a percentage of the institutions’ capital (e.g., the
In addition, certain transactions, such as loans to an affiliate,
is limited to 10% of the capital and surplus of the institution;
aggregate amount of covered transactions with any individual affiliate
ff
is limited to 20% of the institution’s capital and surplus). In
the aggregate amount of covered transactions with all affiliates
ff
addition, a savings and loan holding company may not lend to any affiliate
engaged in activities not permissible for a savings and
loan holding company or acquire the securities of most affiliates.
The OCC has the discretion to treat subsidiaries of savings
institutions as affiliates
on a case-by-case basis.
ff
ff
ff
ff
ff
The Dodd-Frank Act also included specific changes to the law related to the definition of “covered transaction” in Sections
23A and 23B and limitations on asset purchases from insiders. With W respect to the definition of “covered transaction,” the Dodd-
as collateral for a bank’s loan
Frank Act now defines that term to include the acceptance of debt obligations issued by an affiliate
or extension of credit to another person or company. In addition, a “derivative transaction” with an affiliate
is now deemed to be
a “covered transaction” to the extent that such a transaction causes a bank or its subsidiary to have a credit exposure to the affiliate.
A separate provision of the Dodd-Frank Act states that an insured depository institution may not “purchase an asset from, or sell
an asset to” a bank insider (or their related interests) unless (1) the transaction is conducted on market terms between the parties,
and (2) if the proposed transaction represents more than 10% of the capital stock and surplus of the insured institution, it has been
approved in advance by a majority of the institution’s non-interested directors.
ff
ff
ff
Certain transactions with directors, officers
or controlling persons are also subject to conflict of interest regulations.
These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests.
individuals and must
Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated
not create an abnormal risk of repayment or other unfavorable features for the Bank.
ff
ff
43
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, one of 11 regional FHLBs that
administers the home financing credit function of savings associations that is subject to supervision and regulation by the Federal
Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by
the FHLB. In addition, all long-term advances must be used for residential home financing.
ff
As members of the FHLB System, the Bank is required to purchase and maintain activity-based capital stock in the FHLB
in the amount specified by the applicable Federal Home Loan Bank's capital plan. At September 30, 2017, the Bank had in the
aggregate $61.1 million in FHLB stock, which was in compliance with the Federal Home Loan Bank of Des Moines' requirement.
For the fiscal year ended September 30, 2017, dividends paid by the FHLB to the Bank totaled $538,434. In June 2015, the FHLB
of Des Moines and the FHLB of Seattle merged into the FHLB of Des Moines. Notably, yy pursuant to certain integration rules
adopted by the OCC in 2015, federal savings associations are no longer required to become members of a Federal Home Loan
Bank.
Under federal law, ww the FHLBs are required to provide funds for the resolution of troubled savings associations and to
contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for
adversely the level
community investment and low- and moderate-income housing projects. These contributions have affected
of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect
on the
value of FHLB stock in the future. A reduction in value of the Bank’s FHLB stock may result in a corresponding reduction in the
Bank’s capital. In addition, the federal agency that regulates the FHLBs has required each FHLB to register its stock with the
SEC, which has increased the costs of each FHLB and may have other effects that are
not possible to predict at this time.
ff
ff
ff
Federal Securities Law. The common stock of Meta Financial is registered with the SEC under the Exchange Act, as
amended. Meta Financial is subject to the information, proxy solicitation, insider trading restrictions and other requirements under
the Exchange Act.
Meta Financial’s stock held by persons who are affiliates
directors and principal stockholders) of the
Company may not be resold without registration unless sold in accordance with certain resale restrictions. If Meta Financial meets
specified current public information requirements, each affiliate of
the Company,yy subject to certain requirements, will be able to
sell, in the public market, without registration, a limited number of shares in any three-month period.
(generally officers,
ff
ff
ff
FDIC Deposit Classification Guidance
On January 5, 2015, the Federal Deposit Insurance Corporation (“FDIC”) published initial industry guidance (the
“Guidance”) in the form of Frequently Asked Questions with respect to the categorization of deposit liabilities as "brokered"
deposits. This guidance was later supplemented on November 13, 2015, and was finalized on June 30, 2016. As of September 30,
2017, the Bank categorized $1.47 billion, or 45.7% of its deposit liabilities, as brokered deposits.
Due to the Bank’s status as a "well-capitalized" institution under the new Basel III Capital Rules, and further with respect
to the Bank’s financial condition in general, the Company does not at this time anticipate that the Guidance will have a material
adverse impact on the Company’s liquidity, yy statements of financial condition or results of operations going forward. However,
should the Bank ever fail to be well-capitalized in the future as a result of not meeting the well-capitalized requirements or the
imposition of an individual minimum capital requirement or a similar formal requirement, then, notwithstanding that the Bank
has capital in excess of the well-capitalized minimum requirements, the Bank would be prohibited, absent waiver from the FDIC,
from utilizing brokered deposits (i.e., no insured depository institution that is deemed to be less than “well-capitalized” may accept,
renew or rollover brokered deposits absent a waiver from the FDIC). In such event, unless the Bank were to receive a suitable
waiver from the FDIC, such a result could produce serious material adverse consequences for the Bank with respect to liquidity
and could also have serious material adverse effects
on the Company’s financial condition and results of operations. Further, and
in general, depending on the Bank’s condition in the future, the FDIC could increase the surcharge on our brokered deposits up
to thirty basis points. The Company will monitor any future clarifications, rulings and interpretations, including whether institutions
would be expected by the FDIC to amend prior call reports. If we are required to amend previous call reports with respect to our
level of brokered deposits, which the Company does not expect, or we are ever required to pay higher surcharge assessments with
respect to these deposits, such payments could be material and therefore could have a material adverse effect
on our financial
condition and results of operations.
ff
ff
44
Holding Company Supervision & Regulation
We WW are a registered unitary savings and loan holding company, yy and as such we are subject to Federal Reserve examination,
supervision, and certain reporting requirements. In addition, the Federal Reserve has enforcement authority over us and any of
our non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,yy soundness or stability of a subsidiary savings association.
The Federal Reserve has responsibility for the primary supervision and regulation of all savings and loan holding
companies, including the Company. In connection with its assumption of responsibility for the ongoing examination, supervision
and regulation of savings and loan holding companies, the Federal Reserve has published an interim final rule (“Regulation LL”,
which, as of the date of this filing, has still not been adopted in final form) that provides for the corresponding transfer from the
OTS to the Federal Reserve of the regulations necessary for the Federal Reserve to administer the statutes governing savings and
loan holding companies. Related to this authority, yy the Federal Reserve issued on November 7, 2014, a list identifying the supervisory
guidance documents issued by it prior to July 21, 2011 that are now applicable to savings and loan holding companies such as the
Company. The FRB stated that, among other things, this list was part of their initiative to establish a savings and loan holding
company supervisory program similar in nature to its “long-established supervisory program for bank holding companies.”
Restrictions Applicable to All Savings and Loan Holding Companies.
Federal law prohibits a savings and loan holding company, including
yy
us, directly or indirectly, from acquiring:
yy
•
•
•
control (as defined under the HOLA) of another savings institution (or a holding company parent) without prior Federal
Reserve approval;
through merger, consolidation or purchase of assets another savings institution or a holding company thereof, or acquiring
all or substantially all of the assets of such institution (or a holding company) without prior Federal Reserve approval;
or
control of any depository institution not insured by the FDIC (except through a merger with and into the holding company’s
savings institution subsidiary that is approved by the Federal Reserve).
A savings and loan holding company may not acquire as a separate subsidiary an FDIC-insured institution that has a
ff
principal office outside
of the state where the principal office of its subsidiary
ff
institution is located, except:
•
•
•
in the case of certain emergency acquisitions approved by the FDIC;
if such holding company controls a savings institution subsidiary that operated a home or branch office
state as of March 5, 1987; or
ff
in such additional
if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution
chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution
or savings and loan holding company is located, or by a holding company that controls such a state-chartered association.
The HOLA also prohibits a savings and loan holding company (directly or indirectly,yy or through one or more subsidiaries)
from acquiring or retaining, with certain exceptions, more than 5% of the voting shares of a non subsidiary savings association,
a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by the HOLA.
In evaluating applications by holding companies to acquire savings associations, the Federal Reserve must consider the financial
and managerial resources and future prospects of the company and institution involved, the effect
of the acquisition on the risk to
the DIF, the convenience and needs of the community and competitive factors.
ff
Failure to Meet QTL Test.TT
If a banking subsidiary of a savings and loan holding company fails to meet the QTL test, the holding company must
register with the FRB as a bank holding company within one year of the savings institution’s failure to comply.
45
Activities Restrictions.
Prior to the Dodd-Frank Act, savings and loan holding companies were generally permitted to engage in a wider array
of activities than those permissible for their bank holding company counterparts and could have concentrations in real estate
lending that are not typical for bank holding companies. Section 606 of the Dodd-Frank Act amended the HOLA and requires
that covered savings and loan holding companies (e.g., those that are not exempt from activities restrictions under the HOLA) that
intend to engage in activities that are permissible only for a financial holding company under Section 4(k) of the BHCA do so
only if the covered company meets all of the criteria to qualify as a financial holding company,yy and complies with all of the
requirements applicable to a financial holding company as if the covered savings and loan holding company was a bank holding
company. Savings and loan holding companies engaging in new Section 4(k) activities permissible for bank holding companies
will need to comply with notice and filing requirements of the Federal Reserve.
If the Federal Reserve believes that an activity of a savings and loan holding company or a non-bank subsidiary constitutes
a serious risk to the financial safety, yy soundness or stability of a subsidiary savings association and is inconsistent with the principles
of sound banking, the purposes of the HOLA or other applicable statutes, the Federal Reserve may require the savings and loan
holding company to terminate the activity or divest control of the non-banking subsidiary. This obligation is established in Section
10(g)(5) of the HOLA and bank holding companies are subject to equivalent obligations under the BHCA and the Federal Reserve’s
Regulation Y.YY
Source of Strength and Capital Requirements.
The Dodd-Frank Act requires all companies, including savings and loan holding companies, that directly or indirectly
control an insured depository institution to serve as a source of financial and managerial strength to its subsidiary savings
associations; to date, however, specific regulations implementing this requirement have not been published. Moreover, pursuant
to the Dodd-Frank Act, savings and loan holding companies are generally subject to the same capital and activity requirements
as those applicable to bank holding companies.
New rules promulgated by the Federal Reserve related to capital requirements that were required by the Dodd-Frank Act
a summary of the applicable changes, see “Risk Factors – Risks Related to Our Industry and
ff
have also become effective. For
Business.”
Examination.
The Federal Reserve has stated that it intends, to the greatest extent possible, taking into account any unique characteristics
of savings and loan holding companies and the requirements of the HOLA, to assess the condition, performance and activities of
savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal Reserve’s established
risk-based approach regarding bank holding company supervision. As with bank holding companies, the Federal Reserve’s
objective will be to ensure that a savings and loan holding company and its non-depository subsidiaries are effectively
supervised
and can serve as a source of strength for, and do not threaten the soundness of, its subsidiary depository institution(s).
ff
In accordance with its goal to assess the condition, performance and activities of savings and loan holding companies on
a consolidated basis in a manner that is consistent with the Federal Reserve’s established risk-based approach regarding bank
holding company supervision, the Federal Reserve announced in 2013 that it will use the “RFI/C(D)” rating system (commonly
referred to as “RFI”) to assign indicative ratings to such companies. On December 9, 2016, the Federal Reserve issued a proposal
to fully apply its existing rating system for bank holding companies to savings and loan holding companies on a fully implemented
basis (the "Ratings Proposal"). If adopted as proposed, indicative ratings would no longer be used to evaluate the Company.
46
In late 2013, the Federal Reserve announced that, with respect to savings and loan holding companies with less than $10
billion in assets (like the Company), such companies’ inspection frequency and scope requirements will be the same as those for
bank holding companies of the same asset size. The FRB will also determine whether or not a savings and loan holding company
is “complex” as determined by certain factors enumerated by the Federal Reserve. According to the Federal Reserve, with respect
to institutions with less than $10 billion in assets (such as the Company), the determination of whether a holding company is
"complex" versus "noncomplex" is made at least annually on a case-by-case basis taking into account and weighing a number of
considerations, such as: the size and structure of the holding company; the extent of intercompany transactions between insured
depository institution subsidiaries and the holding company or uninsured subsidiaries of the holding company; the nature and scale
of any non-bank activities, including whether the activities are subject to review by another regulator and the extent to which the
holding company is conducting Gramm-Leach-Bliley authorized activities (e.g., insurance, securities, merchant banking); whether
risk management processes for the holding company are consolidated; and whether the holding company has material debt
outstanding to the public. The Federal Reserve has advised savings and loan holding companies with less than $10 billion in assets
(like the Company) to refer to this supervisory guidance until the Ratings Proposal is finalized. As of the date of this filing, the
FRB has not advised the Company that it is complex.
Change of Control.
The federal banking laws require that appropriate regulatory approvals must be obtained before an individual or company
may take actions to “control” a bank or savings association. The definition of control found in the HOLA is similar to that found
in the BHCA for bank holding companies. Both statutes apply a similar three-prong test for determining when a company controls
a bank or savings association. Specifically, a company
has control over either a bank or savings association if the company:
yy
(1)
or more of the voting securities of a company;
directly or indirectly or acting in concert with one or more persons, owns, controls or has the power to vote 25%
(2)
functions in respect of any company, including a trustee
yy
controls in any manner the election of a majority of the directors (or any individual who performs similar
under a trust) of the board; or
(3)
directly or indirectly exercises a controlling influence over the management or policies of the bank.
Regulation LL, the interim final rule discussed above, implements the HOLA to govern the operations of savings and
loan holding companies. Regulation LL includes a specific definition of “control” similar to the statutory definition, with certain
additional provisions. Additionally, yy Regulation LLmodifies the regulations previously used by the OTS for purposes of determining
when a company or natural person acquires control of a savings association or savings and loan holding company under the HOLA
or the Change in Bank Control Act (“CBCA”). In light of the similarity between the statutes governing bank holding companies
and savings and loan holding companies, the Federal Reserve proposed to use its established rules and processes with respect to
control determinations under the HOLA and the CBCA to ensure consistency between equivalent statutes administered by the
same agency.
The Federal Reserve stated in connection with its issuance of Regulation LL that it will review investments and
relationships with savings and loan holding companies by companies using the current practices and policies applicable to bank
holding companies to the extent possible. Overall, the indicia of control used by the Federal Reserve under the BHCA to determine
whether a company has a controlling influence over the management or policies of a banking organization (which, for Federal
Reserve purposes, will now include savings associations and savings and loan holding companies) are similar to the control factors
review process
found in OTS regulations. However, the OTS rules weighed these factors somewhat differently
designed to be more mechanical.
and used a different
ff
ff
ff
Among the differences
highlighted by the Federal Reserve with respect to OTS procedures on determinations of control,
the Federal Reserve noted that it does not limit its review of companies with the potential to have a controlling influence to the
two largest stockholders. Specifically, yy the Federal Reserve reviews all investors based on all of the facts and circumstances to
determine if a controlling influence is present.
47
Moreover, unlike the OTS control rules, the Federal Reserve does not have a separate application process for rebutting
control under the BHCA and Regulation LL does not include such a process. Under the former OTS rules, investors that triggered
a control factor under the rules could submit an application to the OTS requesting a determination that they have successfully
rebutted control under the HOLA. This separate application process is not available under Regulation LL. Given that Federal
Reserve practice is to consider potential control relationships for all investors in connection with applications submitted under the
BHCA, the Federal Reserve will review potential control relationships for all investors in connection with applications submitted
to the Federal Reserve under Section 10(e) or 10(o) of the HOLA. The Federal Reserve may obtain a series of passivity commitments
from investors seeking to purchase in excess of 5% of the issued and outstanding common stock of savings and loan holding
companies and bank holding companies.
Management
On August 9, 2017, the Federal Reserve published proposed guidance related to supervisory expectations for board of
directors, including boards of directors of savings and loan holding companies. The proposal seeks to clarify supervisory
expectations of boards and distinguish the roles held by senior management to allow boards to focus on fulfilling their core
responsibilities. The comment period closes on February 15, 2018.
Federal and State Taxation
TT
TT
Federal and State Taxation
. Meta Financial and its subsidiaries file a consolidated federal and various consolidated state
income tax returns. Additionally, yy Meta Financial or its subsidiaries file separate company income tax returns in states where
required. All returns are filed on a fiscal year basis using the accrual method of accounting. We WW monitor relevant tax authorities
and change our estimate of accrued income tax due to changes in income or franchise tax laws and their interpretation by the
courts and regulatory authorities. In addition to the regular income tax, corporations, including savings banks such as the Bank,
generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation’s regular taxable income (with certain adjustments) and tax preference
items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation’s regular
income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
ff
To TT the extent earnings appropriated to a savings bank’s bad debt reserves and deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience method and to the extent of the bank’s supplemental
reserves for losses on loans (“Excess”), such Excess may not, without adverse tax consequences, be utilized for the payment of
cash dividends or other distributions to a stockholder (including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). As of September 30, 2017, the Bank’s Excess for tax purposes totaled
approximately $6.7 million.
Competition
The Company’s Retail Banking operation faces strong competition, both in originating real estate and other loans and in
attracting deposits. Competition in originating real estate loans comes primarily from commercial banks, savings banks, credit
unions, captive finance companies, insurance companies and mortgage bankers making loans secured by real estate located in the
Company’s market area. Commercial banks and credit unions provide vigorous competition in consumer lending. The Company
competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, interest rates
and loan fees it charges, and the types of loans it originates.
The Company’s Retail Banking operation attracts deposits through its Retail Banking offices,
communities in which those Retail Banking offices
commercial banks, savings banks, credit unions and brokerage offices
for these deposits by offering
locations with interbranch deposit and withdrawal privileges at each.
primarily from the
are located; therefore, competition for those deposits is principally from other
located in the same communities. The Company competes
a variety of deposit accounts at competitive rates, convenient business hours and convenient branch
ff
ff
ff
ff
The Company’s MPS division serves customers nationally and also faces strong competition from large commercial
banks and specialty providers of electronic payments processing and servicing, including prepaid, debit and credit card issuers,
network sponsors. Many of these national players are aggressive
Automated Clearing House (“ACH”) processors and ATM AA
competitors, leveraging relationships and economies of scale.
It is also expected that the Bank will continue to experience strong competition for its AFS/IBEX division with respect
to financing insurance premiums and for its Refund Advantage, EPS, and SCS businesses with respect to tax return processing
services.
48
Employees
At September 30, 2017, the Company and its subsidiaries had a total of 827 full-time equivalent employees, an increase
of 155 employees, or 23%, from September 30, 2016. The Company’s employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
AA
Available
Information
The Company’s website address is www.metafinancialgroup.com. The Company makes available, through a link with
the SEC’s EDGAR database, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and statements
of ownership on Forms 3, 4, and 5. Investors are encouraged to access these reports and other information about our business on
our website. The information found on the Company’s website is not incorporated by reference in this or any other report the
Company files or furnishes to the SEC. We WW also will provide copies of our Annual Report on Form 10-K, free of charge, upon
written request to Brittany Kelly Elsasser, Director of Investor Relations, at the Company’s address. Also posted on our website,
among other things, are the charters of our committees of the Board of Directors, as well as the Company's and the Bank's Codes
of Ethics.
Item 1A.
Risk Factors
Factors that, individually or in the aggregate, we think could cause our actual results to differ
ff materially from expected
or historical results include those described below as well as other risks and factors identified from time to time in our SEC filings.
The Company’s business could be harmed, perhaps materially, yy by any of these risks, as well as other risks that we have not
identified, whether due to such risks not presently being known to us, because we do not currently believe such risks to be material
or otherwise. The trading price of the Company’s common stock could decline due to any of these risks, and you may lose all or
part of your investment. The risks discussed below also include forward-looking statements, and actual results and events may
substantially from those discussed or highlighted in these forward-looking statements. In assessing these risks, you should
ff
differ
also refer to the other information contained in this annual report on Form 10-K, including the Company’s financial statements
and related notes. Before making an investment decision with respect to any of our securities, you should carefully consider the
following risks and uncertainties described below and elsewhere in this annual report on Form 10-K. See also “Forward-Looking
Statements.”
Risks Related to Our Industry
r
and Business
Our growth has been robust, and failure to generate sufficient
in maintaining regulatory capital compliance and meeting our capital requirements, and adversely affect
prospects.
capital to support anticipated growth could cause us difficulty
our earnings and
ff
ff
ff
The Company has continued to experience considerable growth recently, yy having increased its assets from $4.01 billion
at September 30, 2016 to $5.23 billion at September 30, 2017. Funded primarily by growth of low- and no-cost deposits, the
proceeds thereof have been invested primarily in loans, municipal bonds, mortgage-backed securities (“MBS”) and investment
securities available for sale. The Company’s asset growth has required and, if continued as expected, will continue to generate a
need for higher levels of capital which management believes may not be met through earnings retention alone. Additionally, yy our
asset mix has changed, and we expect will continue to change, as we increase commercial and consumer loans, especially in our
tax-related financial solutions divisions; such loans carry risk weights far in excess of traditional one- to four- family loans, and
to maintain regulatory capital compliance. Consideration of maintaining compliance with capital
as a result it will be more difficult
requirements, in August 2016, the Company completed the public offering
of $75 million of its 5.75% fixed-to-floating rate
approximately $73.9 million, qualifying as Tier
subordinated debentures due August 15, 2026, with the proceeds of the offering,
2 capital for regulatory purposes at the Company level, and as Tier 1 capital as invested by the Company in the Bank. In addition,
the Company privately placed 266,430 shares of common stock to several institutional investors during fiscal 2016. There can be
no assurance, however, that the Company will be able to continue to access sources of capital, private or public. Failure to remain
well-capitalized, or to attain potentially even higher levels of capitalization that are or will be required in the future under regulatory
initiatives mandated by Congress, our regulatory agencies, or under the Basel accords, could adversely affect
the Company’s
earnings and prospects.
ff
ff
ff
ff
49
We WW may have difficulty
to expand our operations successfully.yy
ff
continuing to grow,ww and even if we do grow,ww our growth may strain our resources and limit our ability
As described above, we have experienced significant growth in the amount of our assets; this is also the case with the
level of our deposits. Our future profitability will depend in part on our continued ability to grow in both of these categories, as
well as in other categories; including through expansion of our business through acquisitions and other strategic transactions. See
“Acquisitions could disrupt our business and harm our financial condition.” We WW may not, however, be able to sustain our historical
growth rate or be able to grow at all. In addition, we believe that our future success will depend on competitive factors and on the
ability of our senior management to continue to maintain a robust system of internal controls and procedures and manage a growing
number of customer relationships. See “The Company operates in an extremely competitive market, and the Company’s business
.” We WW may not be able to implement changes or improvements to these internal
will suffer
or timely manner and may discover deficiencies in existing systems and controls.
controls and procedures in an efficient
Consequently, yy continued growth, if achieved, may place a strain on our operational infrastructure, which could have a material
adverse effect
on our financial condition and results of operations.
if it is unable to compete effectively
ff
ff
ff
ff
We WW incur significant costs and demands upon management and accounting and finance resources as a result of complying
with the laws and regulations affecting
internal controls, our
ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our
ability to operate our business and our reputation.
public companies; if we fail to maintain proper and effective
ff
ff
As an SEC reporting company,yy we are required to, among other things, maintain a system of effective
internal control over
financial reporting, which requires annual management and independent registered public accounting firm assessments of the
of our internal controls. Ensuring that we have adequate internal financial and accounting controls and procedures
effectiveness
ff
in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort
that needs
to be re-evaluated frequently. WeWW have historically dedicated a significant amount of time and resources to implement our internal
financial and accounting controls and procedures. Substantial work may continue to be required to further implement, document,
assess, test and remediate our system of internal controls. WeWW may also need to retain additional finance and accounting personnel
in the future.
ff
ff
If our internal control over financial reporting is not effective,
we may be unable to issue our financial statements in a timely
manner, we may be unable to obtain the required audit or review of our financial statements by our independent registered public
accounting firm in a timely manner or we may be otherwise unable to comply with the periodic reporting requirements of the
SEC, our common stock listing on the NASDAQ Global Select Market could be suspended or terminated and our stock price
could materially suffer
. In addition, we or members of our management could be subject to investigation and sanction by the SEC
and other regulatory authorities and to claims by stockholders, which could impose significant additional costs on us and divert
our management's attention.
ff
ff
In addition, see "Item 9A. Controls and Pr
rr
ocedur
es-Management’
rr
Reporting" for inherent limitations in a control system.
rr
s Annual Report on Internal Control over Financial
rr
The Company is required to serve as a “source of strength” for the Bank.
Federal banking law codifies a requirement that savings and loan holding companies (like the Company) act as a financial
“source of strength” for its FDIC-insured depository institution subsidiaries (like the Bank). The term “source of financial strength”
is defined in the relevant statute as the ability of a company to provide financial assistance to such insured depository institution
in the event of the financial distress of such insured depository institution. The statute permits the OCC, as the Bank’s primary
federal regulator, to request reports from the Company to assess its ability to serve as a source of strength and to enforce compliance
with these statutory requirements. To TT date, no regulations have been proposed in connection with this statutory requirement,
although it is widely assumed that the Federal Reserve would enforce its prior guidance regarding the applicability of this doctrine
to bank holding companies in connection with the rule’s application to savings and loan holding companies.
Given the power provided to the federal banking agencies in this provision, it is possible that the Company could be
required to serve as a source of strength when it might not otherwise voluntarily choose to do so. Specifically,yy the imposition of
such financial requirements might require the Company to raise additional capital to support the Bank at a time when it is not
otherwise prudent for the Company to do so; for example, such raise could be on terms that are not favorable or typical in the
existing market. Further, any capital provided by the Company would be subordinate to others with interest in the Bank, including
its depositors. In addition, in the event of the bankruptcy of the Company at a time when it had a commitment to one of the Bank’s
regulators to maintain the capital of the Bank, the regulators’ claims against the Company may be entitled to priority status over
other obligations.
50
Our loan portfolio has grown substantially, and our underwriting practices may not prevent future losses in our loan
portfolio.
yy
Over the last several fiscal years, our loan portfolio has grown substantially with new loan originations. Our underwriting
practices are designed to mitigate risk by adhering to specific loan parameters. Components of our underwriting program include,
where appropriate, an analysis of the borrower and their creditworthiness, a financial statement review,ww and, if applicable, cash
flow projections and a valuation of collateral. Other lending programs, particularly in the Bank's divisions, rely on experience and
quantitative data. We WW may incur losses in our loan portfolio, especially the new portions thereof, if our underwriting practices or
criteria fail to identify credit risks. It is also possible that losses will exceed the amounts the Bank has set aside for loss reserves
and result in reduced interest income and increased provision for loan losses, which could have an adverse effect
on our financial
condition and results of operations. Deterioration in our loan portfolio could also cause a decrease in our capital, which would
make it more difficult
to maintain regulatory capital compliance.
ff
ff
The bulk of our retail bank lending operations is concentrated in Iowa and South Dakota.
Our retail bank lending activities are largely based in Iowa and South Dakota. As a result, and notwithstanding lending
in our AFS/IBEX division and lending in our tax-related financial solutions divisions, our financial performance depends to a
large degree on the economic conditions in these areas. If local economic conditions worsen it could cause us to experience an
increase in the number of borrowers who default on their loans along with a reduction in the value of the collateral securing such
on our financial condition and results of operations. Lending
loans, which could decrease our capital and have an adverse effect
by AFS/IBEX is concentrated in California, Texas,
while lending by Refund Advantage, EPS Financial
and SCS is nationwide.
ff
Florida and New York,YY
TT
Economic and market conditions could adversely affect our industry and
ff
regulatory costs and could continue to increase.
General economic trends, low national economic growth and reduced availability of commercial credit could negatively
impact the credit performance of commercial and consumer credit in general, which could lead to increased commercial and
consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business
activity. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may
our business, financial condition, results of operations and stock price. A worsening of these conditions would
adversely affect
likely exacerbate the adverse effects
market conditions on us and others in the financial institutions industry. In
particular, we may face the following risks in connection with these events:
of these difficult
ff
ff
ff
• We WW have faced increased regulation of our industry. Although it is possible that the effect
of the November 2016 federal
elections may curtail such events, compliance with existing and expected regulations may increase our costs and limit
our ability to pursue business opportunities;
ff
•
•
•
•
Customer demand for loans secured by real estate could be reduced due to weaker economic conditions, an increase in
unemployment, a decrease in real estate values or an increase in interest rates;
subjective and complex judgments,
ff
The process we use to estimate losses inherent in our credit exposure requires difficult,
including forecasts of economic conditions, and whether economic conditions might impair the ability of our borrowers
to repay their loans. The level of uncertainty concerning economic conditions may adversely affect
the accuracy of our
estimates which may, yy in turn, impact the reliability of the process. Further, a new method of determining loan loss
allowances, expected to be implemented in fiscal year 2020, could decrease our profitability.
ff
The value of the portfolio of investment securities that we hold, and which constitute a large percentage of our assets,
may be adversely affected;
and
ff
If we experience financial setbacks or regulatory action in the future, we may be required to pay significantly higher
FDIC insurance premiums than we currently pay due, in part, to our significant level of brokered deposits. See “–
Regulation.”
51
The full impact of the Dodd-Frank Act is still unknown.
While regulatory agencies have made considerable progress in implementing the Dodd-Frank Act, the full compliance
burden and impact on our operations and profitability are still not known. Hundreds of new federal regulations, studies and reports
were required under the Dodd-Frank Act and not all of them have been finalized; some rules and policies will be further developing
for months and years to come. Based on the provisions of the Dodd-Frank Act that have already been implemented as well as
anticipated regulations, and notwithstanding the recent Presidential election results of 2016, it is likely that banks and thrifts as
well as their holding companies will continue to be subject to regulation and compliance obligations that expose us to higher costs
as well as noncompliance risk and consequences.
The Consumer Financial Protection Bureau is reshaping the consumer financial laws through rulemaking and enforcement
against unfair, rr deceptive or abusive practices, which may directly impact the business operations of depository
ff
of prohibitions
ff
institutions offering consumer financial products or services, including
the Bank.
The Bureau has broad rulemaking authority to administer and carry out the purposes and objectives of “federal consumer
financial products and services
financial laws, and to prevent evasions thereof” with respect to all financial institutions that offer
to consumers. The Bureau is also authorized to prescribe rules, applicable to any covered person or service provider, identifying
and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a
of a consumer financial product or service (“UDAAP authority”). The term
consumer financial product or service, or the offering
“abusive” is new and developing and because Bureau officials
have indicated that compliance will be achieved through enforcement
ff
actions rather than the issuance of regulations, we cannot predict to what extent the Bureau’s future actions will have on the banking
industry or the Company. Notwithstanding that insured depository institutions with assets of $10 billion or less (such as the Bank)
will continue to be supervised and examined by their primary federal regulators, the full reach and impact of the Bureau’s broad
new rulemaking powers and UDAAP authority on the operations of financial institutions offering
consumer financial products or
services are currently unknown.
ff
ff
ff
AA
In addition to taking many enforcement actions and finalizing regulation covering prepaid payments, described below,ww
the Bureau finalized its ability to repay (“ATR”)
rule as well as its qualified mortgage rule in January 2013. The ATR AA rule applies
to residential mortgage loan applications received after January 10, 2014. The scope of the rule specifically applies to loans
securing one-to-four unit dwellings and includes purchases, refinances and home equity loans for principal or second homes.
Under the ATR AA
rules, a lender may not make a residential mortgage loan unless the lender makes a reasonable and good faith
determination that is based on verified, documented information at or before consummation that the borrower has a reasonable
ability to repay. The eight underwriting factors that must be considered and verified include the following: (1) income and assets:
(2) employment status; (3) monthly payment of loan; (4) monthly payment of any simultaneous loan secured by the same property;
(5) monthly payment for other mortgage-related obligations like property taxes and insurance; (6) current debt obligations; (7)
monthly debt to income ratio; and (8) credit history (although eight factors are delineated, the ATR AA
rule does not dictate that a
lender follow a particular underwriting model). Liability for violations of the ATR AA rule include actual damages, statutory damages,
court costs and attorneys’ fees.
Additionally, yy the Bureau published regulations required by the Dodd-Frank Act related to “qualified mortgages,” which
rules. Pursuant to Dodd-Frank, qualified
are mortgages for which there is a presumption that the lender has satisfied the ATR AA
mortgages (“QMs”) must have certain product-feature prerequisites and affordability
underwriting requirements. Generally, yy to
meet the QM test, the lender must calculate the monthly payments based on the highest payment that will apply in the first five
years and the consumer must have a total debt-to-income ratio that is less than or equal to 43%. The QM rule provides a safe
harbor for lenders that make loans that satisfy the definition of a QM and are not higher priced. With W respect to higher-priced
mortgage loans, there is a rebuttable presumption of compliance available to the lender with respect to compliance with the ATR AA
rule.
ff
With W respect to final regulations that affect
insured depository institutions such as the Bank, the Bureau also issued a
final rule related to international remittances, which covers entities that provide at least 100 remittance transfers per calendar year.
As such, the Bank is subject to the rule.
ff
52
Our most recent CRA rating was “Satisfactory.”
OCC’s review of certain
banking applications.
’’
yy A less than “Satisfactory” CRA rating could have a negative effect
ff
on the
ff
Under the CRA, the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting
its continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit needs of its entire
community, yy including low- and moderate-income neighborhoods. In the Bank’s most recent CRA examination dated January 3,
2017, the Bank received an overall rating of “Satisfactory.” If the Bank were to receive a future CRA rating of less than
“Satisfactory,”yy the CRA requires the OCC to take such rating into account in considering an application for any of the following:
(i) the establishment of a domestic branch; (ii) the relocation of its main office
or of a branch; (iii) the merger or consolidation
with or acquisition of assets or assumption of liabilities of an insured depository institution; or (iv) the conversion of the Bank to
a national charter.
ff
Legislative and regulatory initiatives taken to date, including with respect to capital requirements may not achieve their intended
objective.
ff
Under the Basel III Capital Rules, minimum requirements have increased for both the quantity and quality of capital held
by banking organizations. The Basel III Capital Rules include a new minimum ratio of CET1 Capital to risk-weighted assets of
4.5% and a capital conservation buffer
of which is .0625% for 2016, rising by .0625% per year to 2.5% of risk-weighted assets
for 2019 and later years. The Rules also impose a minimum ratio of tier 1 capital to risk-weighted assets of 6% and includes a
minimum leverage ratio (tier 1 capital to average total assets) of 4% for all banking organizations. The Rules also emphasize
CET1 Capital and implement strict eligibility criteria for regulatory capital instruments. The minimum total capital ratio remains
at 8% but the general PCA framework has been changed to incorporate these increased minimum requirements. The Basel III
Capital Rules phase-in period for smaller, less complex banking organizations like the Company and the Bank began in January
2015. The phase-in will gradually increase capital requirements for the Company and the Bank, making compliance and future
to achieve. Should the Company or the Bank fail to meet the requirements of the Basel III Capital Rules,
growth more difficult
including the application of well-capitalized levels in connection with such rules, the Company and the Bank would be subject to
adverse regulatory action by our regulators, which action could result in material adverse consequences for us, the Bank, and our
shareholders.
ff
WW
We have a concentration
of our assets in mortgage-backed securities and municipal securities.
As of September 30, 2017, approximately 13.4% of the Company’s assets were invested in mortgage backed
securities,
compared to 17.3% at September 30, 2016. The Company’s mortgage-backed and related securities portfolio consists primarily
of securities issued by U.S. Government instrumentalities, including those of Fannie Mae and Freddie Mac which are in
conservatorship. The Fannie Mae and Freddie Mac certificates are modified pass-through mortgage-backed securities that represent
undivided interests in underlying pools of fixed-rate, or certain types of adjustable-rate, predominantly single-family and, to a
lesser extent, multi-family residential mortgages issued by these U.S. Government instrumentalities.
b
Mortgage-backed securities remain subject to credit risk, and to the risk that a fluctuating interest rate environment, along
with other risk factors such as the geographic distribution of the underlying mortgage loans may alter the prepayment rate of such
mortgage loans and so affect both
the prepayment speed, and value, of such securities.
ff
As of September 30, 2017, approximately 26.8% of the Bank’s assets were invested in municipal securities, compared
to approximately 29.6% at September 30, 2016. As of September 30, 2017, 26.4% of the Bank’s assets invested in municipal
securities were non-bank qualified obligations.
Municipal securities remain subject to the risk that a fluctuating interest rate environment may alter the value of the
securities.
53
Our reputation and business could be damaged by negative publicity.yy
Reputational risk, including as a result of negative publicity,yy is inherent in our business. Negative publicity can result
from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate
governance, litigation, inadequate protection of customer data, illegal or unauthorized acts taken by third parties that supply
products or services to the Company or the Bank, ethical behavior of our employees and from actions taken by regulators and
others as a result of that conduct. Damage to our reputation could adversely impact our ability to attract new and maintain existing
loan and deposit customers, employees and business relationships, and, particularly with respect to our MPS division, could result
in the imposition of new regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties.
Such damage could also adversely affect
our ability to raise additional capital. Any such damage to our reputation could have a
material adverse effect on our financial
condition and results of operations.
ff
ff
We WW are subject to certain operational risks, including, but not limited to, data processing system failures, errors, breaches and
customer or employee fraud.
There have been a number of publicized cases involving errors, fraud or other misconduct by employees of financial
services firms in recent years. Misconduct by our employees could include hiding unauthorized activities from us, improper or
unauthorized activities on behalf of our customers or improper use of confidential information. Employee fraud, errors and
employee and customer misconduct could subject us to financial losses or regulatory sanctions and significantly harm our reputation.
It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity
may not be effective
in all cases. Employee errors could also subject us to civil claims for negligence.
ff
Although we maintain a system of internal controls and procedures designed to reduce the risk of loss from employee or
customer fraud or misconduct and employee errors, and maintain insurance coverage to mitigate losses that may be attributable
to operational risks, including data processing system failures and errors and customer or employee fraud, these internal controls
may fail to prevent or detect such an occurrence, or such an occurrence may not be insured or exceed applicable insurance limits.
In addition, there have also been a number of cases where financial institutions have been the victim of fraud related to
unauthorized wire and automated clearinghouse transactions. The facts and circumstances of each case vary but generally involve
criminals posing as customers (i.e., stealing bank customers’ identities) to transfer funds out of the institution quickly in an effort
to place the funds beyond recovery prior to detection. Although we have policies and procedures in place to verify the authenticity
of our customers and prevent identity theft, we can provide no assurances that these policies and procedures will prevent all
fraudulent transfers. In addition, our computer systems could be infiltrated by hackers or other intruders. We WW can provide no
assurances that the safeguards we have in place or may implement in the future will prevent all unauthorized infiltrations or
breaches. Identity theft, successful unauthorized intrusions and similar unauthorized conduct could result in reputational damage
and financial losses to the Company. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”
ff
Changes in economic and political conditions could adversely affect
ability to repay loans and the value of the collateral securing the Company’s loans
’’
ff
decline.
the Company’s’’ earnings, as the Company’s’’ borrowers’
The Company’s success depends, to a certain extent, upon economic and political conditions, local and national, as well
as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money
supply and other factors beyond the Company’s control may adversely affect
the Company’s asset quality,yy deposit levels, products
and loan demand and, therefore, the Company’s earnings. Because the Company has a significant amount of real estate loans,
the value of property used as collateral. Among other things, adverse changes
ff
decreases in real estate values could adversely affect
in the economy may also have a negative effect
on the ability of the Company’s borrowers to make timely repayments of their
loans, which would have an adverse impact on the Company’s earnings. In addition, at the present, the vast majority of the
Company’s loans are to individuals and businesses in the Company’s market areas. Consequently, yy any economic decline in the
Company’s market areas could have an adverse impact on the Company’s earnings. During the 2017 tax season, we made a large
amount of no-interest, 0% APR tax refund loans in connection with a program agreement with a national tax preparation company.
Although we have developed policies and procedures related to the underwriting and making of these loans, this is still a relatively
new business line for us, and unexpected events could cause unanticipated losses or issues related to such loans.
ff
ff
54
’’
Changes in interest rates could adversely affect the Company’
s results
ff
of operations and financial condition.
The Company’s earnings depend substantially on the Company’s interest rate spread, which is the difference
between (i)
the rates we earn on loans, securities and other earning assets, and (ii) the interest rates we pay on deposits and other borrowings.
These rates are highly sensitive to many factors beyond the Company’s control, including general economic conditions and the
policies of various governmental and regulatory authorities. As market interest rates rise, we will have competitive pressures to
increase the rates we pay on deposits, especially at our retail bank, which may result in a decrease of the Company’s net interest
income. Conversely, yy if interest rates fall, yields on loans and investments may fall. Although the Bank continues to monitor its
interest rate risk exposure and has undertaken additional analyses and implemented additional controls to improve its core earnings
from interest income, the Bank can provide no assurance that its efforts
will appropriately protect the Bank in the future from
interest rate risk exposure. For additional information, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About
Market Risk.”
ff
ff
The Company operates in a highly regulated environment, and changes in laws and regulations to which we are subject may
adversely affect the Company’
s’’ results of operations.
ff
ff
The Company and the Bank operate in a highly regulated environment and are subject to extensive regulation, supervision
and examination by the OCC and the Federal Reserve. In addition, the Bank is subject to regulation by the FDIC and the Bureau.
See Item 1 “Business – Regulation” herein. Applicable laws and regulations may change and the enforcement of existing laws
and regulations may vary when actions are evaluated by these regulators, and there is no assurance that such changes will not
the Company’s business. Regulatory authorities have extensive discretion in connection with their supervisory
adversely affect
and enforcement activities, including but not limited to the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such
regulation and oversight, whether in the form of restrictions on activities, regulatory policy,yy regulations or legislation, could have
a material impact on the Company’s operations. Notwithstanding the recent Presidential election, it is unknown at this time to
what extent new legislation will be passed into law or pending or new regulatory proposals will be adopted, or the effect
that such
passage or adoption will have, positively or negatively, on the banking industry
or the Company.
yy
ff
Changes in technology could be costly.yy
The banking industry is undergoing technological innovation at a fast pace. To TT keep up with its competition, the Company
needs to stay abreast of innovations and evaluate those technologies that will enable it to compete on a cost-effective
basis. This
is especially true with respect to our MPS division. The cost of such technology,yy including personnel, has been high in both
absolute and relative terms and additional funds continue to be used to enhance existing management information systems. There
can be no assurance, given the fast pace of change and innovation, that the Company’s technology,yy either purchased or developed
internally,yy will meet the needs of the Company, yy in a timely,yy cost-effective
manner. During the course of implementing new
technology into the Company’s or the Bank’s operations, we may experience system interruptions and failures. In addition, there
can be no assurances that we will recognize, in a timely manner or at all, the benefits that we may expect as a result of our
implementing new technology into our operations.
ff
ff
The OCC and Federal Reserve are our primary banking regulators and we may not be able to comply with applicable banking
regulations to their satisfaction.
Our primary regulators have broad discretionary powers to enforce banking laws and regulations and may seek to take
informal or formal supervisory action if they deem such actions are necessary or required. If imposed in the future, corrective
steps could result in additional regulatory requirements, operational restrictions, a consent order, enhanced supervision and/or
civil money penalties. If imposed, additional resources, both economic and in terms of personnel, would be expended by the
.
Company and the Bank and such regulatory actions could have a material adverse effect on the Company
ff
WW
We are a party to certain legal matters and are subject to additional litigation risk.
From time to time, the Company,yy the Bank or our other subsidiaries are subject to certain legal proceedings and claims
in the ordinary course of business. While most matters are now resolved, an adverse resolution in remaining litigation or other
litigation, including litigation brought by the Company’s shareholders, could result in substantial damages negatively or otherwise
impact our business, reputation and financial condition. See also Part I, Item 3, "Legal Proceedings."
55
Contracts with third parties, some of which are material to the Company,yy may not be renewed, may be renegotiated on terms
that are not as favorable, may not be fulfilled or could be subject to modification or cancellation by regulatory authorities.
WW
The Bank has entered into numerous contracts with third parties with respect to the operations of its business. In some
instances, the third parties provide services to the Bank and its divisions; in other instances, the Bank and its divisions provide
products and services to such third parties. Were such agreements not to
be renewed by the third party or were such agreements
to be renewed on terms less favorable, such actions could have an adverse material impact on the Bank, its divisions and, ultimately,yy
the Company. For example, in July 2017, the Bank announced that it would not be providing interest-free Refund Advance loans
for H&R Block tax preparation customers during the 2018 tax season. The Company’s relationship with H&R Block represented
approximately $12.0 million in net earnings during fiscal year 2017. Given the loss of this relationship, the Company recognized
a total impairment charge of $10.2 million, which was expensed during the 2017 fiscal fourth quarter. Similarly,yy were one of these
third-parties unable to meet their obligations to us for any reason (including but not limited to bankruptcy,yy computer or other
technological interruptions or failures, personnel loss or acts of God), we may need to seek alternative service providers.
We WW may not be able to secure alternate service providers, and, even if we do, the terms with such alternate providers may
not be as favorable as those currently in place. In addition, were we to lose any of our important third-party providers, it could
cause a material disruption in our own ability to service our customers, which also could have an adverse material impact on the
Bank, its divisions and, ultimately, yy the Company. Moreover, were the disruptions in our ability to provide services significant,
this could negatively affect
on
our business.
the perception of our business, which could result in a loss of confidence and other adverse effects
ff
ff
Additionally, yy our agreements with third-party vendors could come under scrutiny by our regulators. If a regulator should
raise an issue with, or object to, any term or provision in such agreement or any action taken by such third party vis-à-vis the
Bank’s operations or customers, this could result in a material adverse effect
to the Company including, but not limited to, the
ff
imposition of fines and/or penalties and the termination of such agreement.
Finally, yy we may be held responsible for actions of our third party vendors (e.g., EROs) for activity they undertake on
behalf of the Bank, notwithstanding the Bank's onboarding and review program.
The Company operates in an extremely competitive market, and the Company’s’’ business will suffer
.yy
effectively
ff
ff
if it is unable to compete
The Company encounters significant competition in the Company’s market area from other commercial banks, savings
and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance
companies, money market mutual funds and other financial intermediaries. Many of the Company’s competitors have substantially
greater resources and lending limits and may offer
services that the Company does not or cannot provide. The Company’s
profitability depends upon the Company’s continued ability to compete successfully in the Company’s market area. The Bank's
divisions operate on a national scale against competitors with substantially greater resources. The success of the Bank's divisions
depends upon the Company’s, the Bank’s and the MPS division’s ability to compete in such an environment.
ff
Several banking institutions have adopted business strategies that are similar to ours, particularly with respect to the MPS
division. As a consequence, we have encountered competition in this area and anticipate that we will continue to do so in the
future. This competition may increase our costs, reduce our revenues or revenue growth, or make it difficult
for us to compete
ff
effectively
in obtaining additional customer relationships.
ff
56
A substantial portion of the Company's deposit liabilities are classified as brokered deposits, and failure
status as a "well-capitalized" institution could have a serious adverse effect
on the Company.yy
d
ff
to maintain the Bank's
FF
On January 5, 2015, the FDIC published industry guidance in the form of Frequently Asked Questions (“FAQs”)
with
respect to, among other things, the categorization of deposit liabilities as “brokered” deposits. This guidance was later supplemented
on November 13, 2015, and June 30, 2016. Based on the noted guidance, as of September 30, 2017, the Bank classified $1.47
billion, or 45.6%, of its deposit liabilities as brokered deposits. Due to the Bank’s current status as a “well-capitalized” institution
under the FDIC’s prompt corrective action regulations, management believes the guidance does not pose a risk to the Bank.
However, should the Bank ever fail to be well-capitalized in the future as a result of not meeting the well-capitalized requirements
or the imposition of an individual minimum capital requirement or similar formal requirement, then, notwithstanding that the Bank
has capital in excess of the well-capitalized minimum requirements, the Bank would be prohibited, absent waiver from the FDIC,
from utilizing brokered deposits (i.e., no insured depository institution that is deemed to be less than “well-capitalized” may accept,
renew or rollover brokered deposits absent a waiver from the FDIC). In such event, unless the Bank were to receive a suitable
waiver from the FDIC, such a result could produce serious material adverse consequences for the Bank with respect to liquidity
and could also have serious material adverse effects
on the Company’s financial condition and results of operations. Further, and
in general, depending on the Bank’s condition in the future, the FDIC could increase the surcharge on our brokered deposits up
to thirty basis points. For the year ended September 30, 2017, the Company estimates that the additional surcharge attributable to
the Bank’s brokered deposits was approximately $0.5 million, after tax. The Company will monitor any future clarifications,
rulings and interpretations, including whether institutions would be expected by the FDIC to amend prior call reports. If we are
required to amend previous call reports with respect to our level of brokered deposits, which the Company does not expect, or we
are ever required to pay higher surcharge assessments with respect to these deposits, such payments could be material and therefore
could have a material adverse effect
on our financial condition and results of operations.
ff
ff
We WW derive a significant percentage of our deposits, total assets and income from deposit accounts that we generate through
MPS’ customer relationships, of which four are particularly significant
to our operations.
’
We WW derive a significant percentage of our deposits, total assets and income from deposit accounts we generate through
program manager relationships between third parties and MPS. Deposits related to our top four program managers (each, a
significant program manager) totaled $1.38 billion at September 30, 2017. We WW provide oversight and auditing of such third-party
relationships and all such relationships must meet all internal and regulatory requirements. We WW may exit these relationships if
such requirements are not met or if required to do so by our regulators. We WW perform liquidity reporting and planning daily and
identify and monitor contingent sources of liquidity, yy such as national CDs, fed fund lines or public fund CDs. If one of these
significant program manager relationships were to be terminated, it could materially reduce our deposits, assets and income.
Similarly,yy if a significant program manager was not replaced, we may be required to seek higher-rate funding sources as compared
to the existing program manager, and interest expense might increase. We WW may also be required to sell securities or other assets
which would reduce revenues and potentially generate losses.
Fraud and other illegal activity involving our tax preparation partners or products could lead to a regulatory investigation and
reputational damage to us, reduce the use and acceptance of our cards and reload network, reduce the use of our services, and
may adversely affect our financial position
and results of operations.
ff
Criminals are using increasingly sophisticated methods to engage in illegal activities involving prepaid cards, reload
products, and tax refunds. Illegal activities involving such products and services include malicious social engineering schemes,
where people are asked to provide a prepaid card or reload product in order to obtain a loan or purchase goods or services. Illegal
activities may also include fraudulent payment or refund schemes and identity theft. We WW rely upon third party tax preparers for
tax preparation and other services, which subjects us to risks related to the vulnerabilities of those third parties. Even a single
significant instance of fraud could theoretically result in reputational damage to us, which could reduce the use and acceptance
of our cards and other products and services, cause retail distributors or their customers to cease doing business with us or them,
or could lead to greater regulation that would increase our compliance costs. Fraudulent activity could also result in the imposition
of regulatory sanctions, including significant monetary fines, which could adversely affect
our business, operating results and
financial condition.
ff
57
The student loan portfolio purchases present certain risks to the Bank.
The Bank purchased two separate student loan portfolios in fiscal year 2017 and the beginning of fiscal year 2018. The
first of which portfolios included seasoned loans that were taken by medical school students who enrolled in non-U.S. medical
schools and the second included more traditional loans made to higher education students. The servicing of these loans remains
with ReliaMax Lending Services, LLC, and are insured by ReliaMax Surety Company. To TT the extent there are any issues raised
in connection with the origination, transfer or servicing of the loans constituting these portfolios, and to the extent any related
losses were not deemed to be insured losses pursuant to the surety agreement and other insurance applicable to these loans, such
a determination could have a material adverse effect on the
Bank and the Company.
ff
A data security breach involving the Company,yy the Bank or any of our tax preparation partners could expose use to liability
and protracted and costly litigation, and could adversely affect our reputation and operating revenues.
ff
In connection with the Company’s and the Bank’s businesses, we collect and retain significant volumes of personally
identifiable information, including social security numbers of our customers and other personally identifiable information of our
customers and employees. We WW and our tax preparation partners may experience security breaches involving the receipt, transmission
and storage of confidential customer and other personally identifiable information. The continued occurrence of high-profile data
breaches provides evidence of the serious threats to information security. Our customers and employees, and those of our tax
preparation partners, expect that we and our partners will adequately protect their personal information, and the regulatory
environment surrounding information security and privacy is increasingly demanding. Improper access to our or the tax preparation
partner’s systems or databases could result in the theft, publication, deletion or modification of confidential customer and other
information. In addition, a data security breach at the tax preparation partners could result in significant reputational harm to us
and cause the use and acceptance of our tax-related products and services to decline, either of which could have an adverse impact
on our operating revenues and future growth prospects.
Agency, yy technological, or human error could lead to tax refund processing delays, which could adversely affect
and operating revenues.
ff
our reputation
We WW and our tax preparation partners rely on the Internal Revenue Services (the “IRS”), technology, yy and employees when
processing and preparing tax refunds and tax-related products and services. Any delays during the processing or preparation period
could result in reputational damage to us or to our tax preparation partners, which could reduce the use and acceptance of our
cards and tax-related products and services, either of which could have a significant adverse impact on our operating revenues
and future growth prospects. An IRS delay in processing tax returns this season could result in a smaller percentage of expected
revenues flowing into our third fiscal quarter.
Changes in laws and regulations, or our failure to comply with existing laws and regulations, that govern or are otherwise
on our business, prospects, results of operations
applicable to our tax refund-related services could have a material adverse effect
and financial condition.
ff
ff
We WW derive a significant portion of our total operating revenues and earnings from tax refund processing and settlement
services. The tax preparation industry is highly regulated under a variety of statutes and regulations, all of which are subject to
change, which may impose significant costs, limitations or prohibitions on the way we conduct or expand our tax refund processing
and related services. Any new requirements or rules, changes in such requirements or rules, new interpretations of existing
requirements or rules, failure to follow requirements or rules, or future lawsuits or rulings could increase our compliance and other
costs of doing business, require significant systems redevelopment, render our products or services less profitable or obsolete or
on our business, prospects, results of operations, and financial condition. In addition,
otherwise have a material adverse effect
changes in the U.S. tax laws, as a result of pending tax legislation in the U.S. Congress or otherwise, may adversely impact our
tax refund processing and settlement business, including to the extent that any such changes may reduce customer demand for the
.
Company’s strategic partner’s refund advance products, thereby reducing the volume of refund advance loans that we may offer
ff
ff
58
Tax TT advance loans represent a significant credit risk, and if we are unable to collect a significant portion of the tax return
advances, it would materially negatively impact earnings.
There is a credit risk associated with a tax refund advance because the funds are disbursed to the customer prior to the
Company receiving the customer’s refund from the IRS. Because there is no recourse to the customer if the tax refund advance
is not paid in full with the proceeds of the customer’s tax refund, the Company may not collect all of its payments related to the
tax refund advances from the IRS and state revenue departments. Losses will generally occur on tax refund advances when the
Company does not receive payment from the IRS or state revenue department due to a number of reasons, such as IRS revenue
protection strategies including audits of returns, errors in the tax return, tax return fraud and tax debts not previously disclosed to
the Company during its underwriting process. Although the Company’s underwriting takes these factors into consideration during
the tax refund advance approval process, if the IRS significantly alters its revenue protection strategies for a given tax season, or
the Company is incorrect in its underwriting assumptions, the Company could experience higher loan loss provisions above those
projected. In addition, a consumer could exercise its rights and withdraw its ACH authorization provided in connection with a tax
refund advance, meaning the Bank could no longer collect the payments related to the tax return advances via a direct debit to the
designated bank account, which could result in additional losses.
Acquisitions could disrupt our business and harm our financial condition.
As part of our general growth strategy, yy we have expanded our business in part through acquisitions. Since December
2014, we have completed the acquisition of substantially all of the commercial loan portfolio and related assets of AFS/IBEX
Financial Services, Inc., and completed the acquisition of the assets of Fort Knox Financial Services Corporation and its subsidiary, yy
Tax TT Products Services LLC, in September 2015. More recently, yy we completed the acquisition of substantially all the assets and
certain liabilities of EPS Financial in November 2016 and completed the acquisition of substantially all of the assets and specified
liabilities of SCS in December 2016.
In addition to the transactions noted above, we may engage in additional acquisitions that we believe provide a strategic
or geographic fit with our business. We WW cannot predict the number, size or timing of acquisitions. To TT the extent that we grow
through acquisitions, we cannot assure that we will be able to adequately and profitably manage this growth. Acquiring other
businesses will involve risks commonly associated with acquisitions, including:
•
•
•
•
•
•
•
•
•
•
•
•
increased capital needs;
increased and new regulatory and compliance requirements;
implementation or remediation of controls, procedures and policies at the acquired company;
diversion of management time and focus from operation of our then-existing business to acquisition-integration
challenges;
coordination of product, sales, marketing and program and systems management functions;
transition of the acquired company’s users and customers onto our systems;
retention of employees from the acquired company;
integration of employees from the acquired company into our organization;
integration of the acquired company’s accounting, information management, human resources and other
administrative systems and operations with ours;
potential liability for activities of the acquired company prior to the acquisition, including violations of law,ww
commercial disputes and tax and other known and unknown liabilities;
potential increased litigation or other claims in connection with the acquired company, including claims brought
by terminated employees, customers, former stockholders, vendors, or other third parties; and
yy
goodwill impairment
59
ff
ff
If we are unable to successfully integrate an acquired business or technology,yy or otherwise address these difficulties
and
challenges or other problems encountered in connection with an acquisition, we might not realize the anticipated benefits of that
acquisition, we might incur unanticipated liabilities or we might otherwise suffer
harm to our business generally, yy which could
ff
on our business, prospects, financial condition and results of operations. Unanticipated costs, delays,
have a material adverse effect
regulatory review and examination, or other operational or financial problems related to integrating the acquired company and
business with our company,yy may result in the diversion of our management's attention from other business issues and opportunities.
To TT integrate acquired businesses, we must implement our technology and compliance systems in the acquired operations and
cultures of acquired
integrate and manage the personnel of the acquired operations. WeWW also must effectively
business organizations into our own in a way that aligns various interests and may need to enter new markets in which we have
no or limited experience and where competitors in such markets have stronger market positions. Failures or difficulties
in integrating
programs, financial systems,
the operations of the businesses that we acquire, including their personnel, technology, compliance
our ability
ff
distribution and general business operations and procedures, marketing, promotion and other relationships, may affect
to grow and may result in us incurring asset impairment or restructuring charges. Furthermore, acquisitions and investments are
often speculative in nature and the actual benefits we derive from them could be lower or take longer to materialize than we expect.
integrate the different
yy
ff
ff
ff
To TT the extent we pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of
cash available to us for other purposes. Future acquisitions or investments could also result in dilutive issuances of our equity
securities or the incurrence of debt, contingent liabilities, amortization expenses or impairment charges against goodwill on our
balance sheet, any of which could harm our financial condition and negatively impact our stockholders.
An impairment charge of goodwill or other intangibles could have a material adverse impact on our financial condition and
results of operations.
Because we have recently grown in part through acquisitions, goodwill and intangible assets are now a portion of our
consolidated assets. Our goodwill and intangible assets were $150.9 million as of September 30, 2017. Under accounting principles
generally accepted in the United States, or U.S. GAAP, PP we are required to test the carrying value of goodwill and intangible assets
at least annually or sooner if events occur that indicate impairment could exist. These events or circumstances could include a
significant change in the business climate, including sustained decline in a reporting unit’s fair value, legal and regulatory factors,
operating performance indicators, competition and other factors. U.S. GAAP requires us to assign and then test goodwill at the
reporting unit level. If over a sustained period of time we experience a decrease in our stock price and market capitalization, which
may serve as an estimate of the fair value of our reporting unit, this may be an indication of impairment. If the fair value of our
reporting unit is less than its net book value, we may be required to record goodwill impairment charges in the future. In addition,
to support its net book value, we
if the revenue and cash flows generated from any of our other intangible assets is not sufficient
may be required to record an impairment charge. For example, in the fiscal 2017 fourth quarter, we recognized a $10.2 million
intangible impairment charge related to the non-renewal of the H&R Block relationship. The amount of any impairment charge
could be significant and could have a material adverse impact on our financial condition and results of operations for the period
in which the charge is taken.
ff
New lines of business or new products and services may subject us to additional risks.
ff
From time to time, we may implement new lines of business or offer
new products and services within existing lines of
business. Substantial risks and uncertainties are associated with developing and marketing new lines of business or new products
or services, particularly in instances where the markets are not fully developed, and we may be required to invest significant time
and resources. Initial timetables for the introduction and development of new lines of business or new products or services may
not be achieved and price and profitability targets may not prove feasible. External factors, such as regulatory reception, compliance
with regulations and guidance (such as the OCC’s guidance released in August 2015 related to the offering
of tax refund-related
products), competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line
of business or a new product or service. Furthermore, any new line of business or new product or service could have a significant
impact on the effectiveness
of our system of internal controls. Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or services could reduce our revenues and potentially generate losses.
ff
ff
Existing insurance policies may not adequately protect the Company and its subsidiaries.
Fidelity,yy business interruption, cybersecurity and property insurance policies are in place with respect to the operations
of the Company. Should any event triggering such policies occur, however, it is possible that our policies would not fully reimburse
us for the losses we could sustain due to deductible limits, policy limits, coverage limits or other factors. We WW generally renew our
insurance policies on an annual basis. If the cost of coverage becomes too high, we may need to reduce our policy limits, increase
the deductibles or agree to certain exclusions from our coverage in order to reduce the premiums to an acceptable amount.
60
The loss of key members of the Company’s’’ senior management team, or our ability to attract and retain qualified personnel,
’’
could adversely affect the Company’
s business.
ff
We WW believe that the Company’s success depends largely on the efforts
and abilities of the Company’s senior executive
management team. Their experience and industry contacts significantly benefit us. Our future success also depends in large part
on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our
operations, we may require personnel with different
skills and experiences, with a sound understanding of our business and the
industries in which we operate. The competition for qualified personnel in the financial services industry is intense, and the loss
of any of the Company’s key personnel or an inability to continue to attract, retain and motivate key personnel could adversely
ff
affect
the Company’s business.
ff
ff
The Company’s’’ loan portfolio includes loans with a higher risk of loss.
The Company originates commercial mortgage loans, commercial loans, consumer loans, agricultural real estate loans,
agricultural loans and residential mortgage loans. Commercial mortgage, commercial, consumer, agricultural real estate and
agricultural loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral
securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential
real estate for the following reasons:
•
•
•
•
•
•
•
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Commercial
operating expenses and debt service.
Mortgage Loans. Repayment is dependent upon income being generated in amounts sufficient
ff
to cover
Commercial Loans
rr
. Repayment is dependent upon the successful operation of the borrower’s business.
Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not
provide an adequate source of payment of the loan due to depreciation, damage or loss.
Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent
on many things outside the control of either the Bank or the borrowers. These factors include weather, commodity prices
and interest rates, among others.
rr
Premium Finance
since the loan is secured by the unamortized portion of the underlying insurance policy.
Loans. Repayment is dependent upon the successful operations of the business. The risk is mitigated
Student Loans. Repayment is dependent upon the obligor’s fulfillment of its contractual payment obligations.
Refund Advance Loans. Repayment is dependent upon an income tax refund being approved and paid by the Internal
Revenue Service or a state tax authority.
Premium financing activity may result in increased exposure to credit risk and fraud.
The Company acquired the premium finance loan portfolio and related assets of AFS/IBEX Financial Services, Inc., and
continues, through that platform, to serve businesses and insurance agencies nationwide with commercial insurance premium
financing. The Company is reliant on insurance agents and brokers to produce these commercial loans, which are made to borrowers
the financing arrangement with the
who borrow funds to pay premiums on property and casualty insurance policies. Typically
borrower provides for periodic payments to the lender to secure the insurance policy with an insurer, and that the lender is entitled
to any unearned premium due from the insurer in the event of policy cancellation with any excess returned to the insured/borrower
after the loan has been paid off.ff The financing arrangement typically includes a limited power of attorney to permit the lender to
,yy premium finance loans are designed to amortize faster than the
cancel the insurance policy in the event of default. Typically
unearned premium that has been paid, either as a down payment, or periodically is earned, so that the value of the unearned
premium exceeds the outstanding financed amount, providing collateral to the lender. If the borrower fails to pay on the premium
finance loan, then the financed insurance policy must be cancelled to avoid losses with respect to unearned premiums. The Company
must consider both the creditworthiness of the borrower, and the creditworthiness of the insurer (for the ability to return the
unearned premium). There is also an operational risk of assuring that the insurance policy is cancelled on a timely basis to prevent
unearned premium from dissipating once the policy can be cancelled. Further, the Company is not involved in the production of
the loans, and is therefore exposed to the risk of fraud by producers.
TT
TT
61
If the Company’s’’ actual loan losses exceed the Company’s’’ allowance for loan losses, the Company’s’’ net income will decrease.
ff
ff
The Company makes various assumptions and judgments about the collectability of the Company’s loan portfolio,
including the creditworthiness of the Company’s borrowers and the value of the real estate and other assets serving as collateral
for the repayment of the Company’s loans. Despite the Company’s underwriting and monitoring practices, the Company’s loan
customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be
to pay any remaining loan balance. The Company may experience significant loan losses, which could have a material
insufficient
on its operating results. Because the Company must use assumptions regarding individual loans and the economy,yy
adverse effect
the current allowance for loan losses may not be sufficient
to cover actual loan losses, and increases in the allowance may be
necessary. The Company may need to significantly increase the Company’s provision for losses on loans if one or more of the
Company’s larger loans or credit relationships becomes impaired or if we continue to expand the Company’s commercial real
estate and commercial lending or enter new lines of lending. In addition, federal and state regulators periodically review the
Company’s allowance for loan losses and may require the Company to increase the Company’s provision for loan losses or
recognize loan charge-offs.
ff Material additions to the Company’s allowance would materially decrease the Company’s net income.
The Company cannot assure you that its monitoring procedures and policies will reduce certain lending risks or that the Company’s
allowance for loan losses will be adequate to cover actual losses.
ff
If the Company forecloses on and takes ownership of real estate collateral property,yy it may be subject to the increased costs
associated with the ownership of real property, resulting in reduced revenues.
yy
The Company may have to foreclose on collateral property to protect its investment and may thereafter own and operate
such property. In such case, the Company will be exposed to the risks inherent in the ownership of real estate. The amount that
the Company, yy as a mortgagee, may realize after a default is dependent upon factors outside of the Company’s control, including,
but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates;
(v) operating expenses of the mortgaged properties; (vi) supply of and demand for rental units or properties; (vii) ability to obtain
and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies;
and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance
costs, may adversely affect
the income from the real estate. Therefore, the cost of operating a real property may exceed the rental
income earned from such property, yy and the Company may have to advance funds in order to protect the Company’s investment,
or may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect
the
Company’s ability to generate revenues, resulting in reduced levels of profitability.
ff
ff
Our agricultural loans are subject to factors beyond the Company’s control.
’’
The agricultural community is subject to commodity price fluctuations. Extended periods of low commodity prices,
higher input costs or poor weather conditions could result in reduced profit margins, reducing demand for goods and services
other businesses in the Company’s market area. Any
provided by agriculture-related businesses, which, in turn, could affect
combination of these factors could produce losses within the Company's agricultural loan portfolios.
ff
Environmental liability associated with commercial lending could have a material adverse effect on the Company’
s’’
business, financial condition and results of operations.
ff
In the course of the Company’s business, it may acquire, through foreclosure, commercial properties securing loans that
are in default. There is a risk that hazardous substances could be discovered on those properties. In this event, the Company could
be required to remove the substances from and remediate the properties at its own cost and expense. The cost of removal and
environmental remediation could be substantial. The Company may not have adequate remedies against the owners of the properties
or other responsible parties and could find it difficult
properties. These events could have a
material adverse effect on the Company’
s business, financial condition and operating results.
or impossible to sell the affected
ff
ff
ff
New products and services are expensive to implement and are closely scrutinized by the OCC.
The Bank operates in an environment that is reliant upon innovative products and services that complement and enhance
existing product and service offerings.
The investments we make in these new products and services are often expensive and we
can never be certain that products or services will be acceptable to our regulators or will realize commercial success. In addition,
the OCC has stated that new products and services must be undertaken only after the appropriate controls are in place (which can
often be time-consuming and expensive to implement).
ff
62
Our framework for managing risks may not be effective
ff
in mitigating risk and loss to us.
We WW have established processes and procedures intended to identify,yy measure, monitor, report and analyze the types of
risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance
risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our
risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified.
For example, the 2008 financial and credit crisis and resulting regulatory reform highlighted both the importance and certain
unexpected
limitations of managing unanticipated risks. If our risk management framework proves ineffective,
on our financial condition and results of operations.
losses which could have a material adverse effect
we could suffer
ff
ff
ff
yy
A breach of information security, compliance breach, or error by one of the Company’
’’
s agents or vendors could negatively
’’
affect the Company’
s reputation and business.
ff
The Company depends on data processing, communication and information exchange on a variety of computing platforms
and networks and over the Internet. Despite safeguards, no system, including ours, is entirely free from vulnerability to attack or
error. Additionally, yy the Company relies on and does business with a variety of third-party service providers, agents and vendors
with respect to the Company’s business, data and communications needs. If information security is breached, or one of the
Company’s agents or vendors breaches compliance procedures, or otherwise errs, information could be lost or misappropriated,
resulting in financial loss or costs to the Company or damages to others. These costs or losses could materially exceed the
Company’s amount of insurance coverage, if any, which would adversely
Company’s business.
ff
affect the
yy
Other “high profile” data breaches during recent years have raised interest in new legislation at both the federal and state
level. To TT the extent additional requirements are imposed on the Bank as a result of such legislation, these costs could have an
adverse impact on the Bank.
Changes in accounting policies or accounting standards, or changes in how accounting standards are interpreted or applied,
could materially affect
how we report our financial results and condition.
ff
ff
FF
FF
Our accounting policies are fundamental to determining and understanding our financial results and condition. Some of
ff
these policies require use of estimates and assumptions that may affect
the value of our assets or liabilities and financial results.
Any changes in our accounting policies could materially affect
our financial statements. From time to time, the Financial
Accounting Standards Board (the “FASB”)
and the SEC change the financial accounting and reporting standards that govern the
preparation of our financial statements. In addition, accounting standard setters and those who interpret the accounting standards
(such as the FASB,
the SEC, banking regulators and our outside auditors) may change or even reverse their previous interpretations
or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in
current interpretations may be beyond our control, can be difficult
how we report our financial
results and condition. We WW may be required to apply a new or revised standard retroactively or apply an existing standard differently
and retroactively, yy which may result in the Company being required to restate prior period financial statements in material amounts.
issued a rule in 2016 requiring companies to estimate current expected credit losses. The rule, which is a
In particular, the FASBFF
major change for banking organizations, becomes effective
for the Company on October 1, 2020. The new standard is likely to
result in more timely recognition of credit losses than under the previous incurred loss model, and the Company is evaluating the
extent to which the new rule will affect
to predict and could materially affect
its results of operations.
ff
ff
ff
ff
ff
Our network of tax preparation partners is extensive but it may be difficult to manage and retain such marketing partners
because of competitive market forces.
ff
As of the date of this filing, the Bank has a network of over 10,000 active EROs that utilize its services and it is expected
that this number will increase for the 2018 tax season. Although each ERO undergoes an analysis of its operations prior to marketing
the Bank’s products, it is possible that certain EROs will facilitate or engage in tax-related malfeasance or offer
the Bank's products
and services in a manner that does not comply with law or contractual representations, warranties and covenants. In addition, it
the tax-related products of other companies who provide products and services
is possible that the EROs may choose to offer
similar to the Bank’s for pricing or other competitive reasons. The effect
of any of these events, were they to be realized in the
future, could potentially result in material adverse consequences to the Company.
ff
ff
ff
63
Catastrophic events could occur and impact either our or our vendors’ operations.
’
Catastrophic events (including those that are weather related as well as those that are geopolitical related) could have an
adverse impact on both the Bank’s and its vendors’ ability to provide necessary services to support the operation of the Bank and
provide products and services to the Bank’s customers. These events, which are beyond our control, could be short-term in nature
or longer term, lasting for significant periods of time. Although insurance coverage may provide some protection in light of such
events, it cannot be determined whether insurance proceeds would adequately compensate the Bank for the losses it incurred as
a result of such events. Moreover, the damage cause by such events may not be directly compensable, such as damage to our
reputation as a result of such events.
Risks Related to the Company’s Stock
The price of the Company’s common stock may
’’
be volatile, which may result in losses for investors.
The market price for shares of the Company’s common stock has been volatile in the past, and several factors could cause
the price to fluctuate substantially in the future. These factors include:
announcements of developments related to the Company’s business;
the initiation, pendency or outcome of litigation, regulatory reviews, inquiries and investigations, and any related adverse
publicity;
fluctuations in the Company’s results of operations;
sales of substantial amounts of the Company’s securities into the marketplace;
general conditions in the Company’s banking niche or the worldwide economy;
a shortfall in revenues or earnings compared to securities analysts’ expectations;
lack of an active trading market for the common stock;
changes in analysts’ recommendations or projections; and
the Company’s announcement of new acquisitions or other projects.
•
•
•
•
•
•
•
•
•
The market price of the Company’s common stock may fluctuate significantly in the future, and these fluctuations may
be unrelated to the Company’s performance. General market price declines or market volatility in the future could adversely affect
the price of the Company’s common stock, and the current market price may not be indicative of future market prices.
ff
An investment in Company common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance
fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this
“Risk Factors” section and is subject to market forces that affect
the price of common stock in any company. As a result, if you
hold or acquire our common stock, it is possible that you may lose all or a portion of your investment.
ff
The Company’s’’ common stock is thinly traded, and thus your ability to sell shares or purchase
common stock will be limited, and the market price at any time may not reflect true value.
r
additional shares of the
ff
Company’s’’
Your YY
ability to sell shares of the Company’s common stock or purchase additional shares largely depends upon the
existence of an active market for the common stock. The Company’s common stock is quoted on the NASDAQ Global Select
Market, but the volume of trades on any given day is relatively light, and you may be unable to find a buyer for shares you wish
to sell or a seller of additional shares you wish to purchase. In addition, a fair valuation of the purchase or sales price of a share
of common stock also depends upon active trading, and thus the price you receive for a relatively thinly traded stock, such as the
Company’s common stock, may not reflect its true value.
64
Future sales or additional issuances of the Company’s capital stock may depress prices of shares of the Company’
’’
s common
stock or otherwise dilute the book value of shares then outstanding.
’’
Sales of a substantial amount of the Company’s capital stock in the public market or the issuance of a significant number
of shares could adversely affect
the market price for shares of the Company’s common stock. As of September 30, 2017, the
Company was authorized to issue up to 15,000,000 shares of common stock, of which 9,622,595 shares were outstanding, and
3,836 shares were held as treasury stock. The Company was also authorized to issue up to 3,000,000 shares of preferred stock
and 3,000,000 shares of non-voting common stock, none of which were outstanding or reserved for issuance. Future sales or
additional issuances of stock may affect the
market price for shares of the Company’s common stock.
ff
ff
Federal regulations and our organic corporate documents may inhibit a takeover,rr prevent a transaction you may favor or limit
the Company’s’’ growth opportunities, which could cause the market price of the Company’s common stock to decline.
’’
ff
Certain provisions of the Company’s charter documents and federal regulations could have the effect
of making it more
difficult
for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. In
addition, the Company may need to obtain approval from regulatory authorities before it can acquire control of any other company.
Such approvals could involve significant expenses related to diligence, legal compliance and the submission of required applications
and could be conditioned on acts or practices that limit or otherwise constrain the Company’s or the Bank’s operations.
ff
The Company may not be able to pay dividends in the future in accordance with past practice.
The Company pays a quarterly dividend to stockholders. The payment of dividends is subject to legal and regulatory
restrictions. Any payment of dividends in the future will depend, in large part, on the Company’s earnings, capital requirements,
financial condition, regulatory review, and
other factors considered relevant by the Company’s Board of Directors.
ww
Risks Related to the Bank's divisions
Our divisional products and services are highly regulated financial products subject to extensive supervision and regulation
and are costly to maintain.
The products and services offered
by several of our divisions are highly regulated by federal banking agencies, the Bureau
and some state regulators. Some of the laws and related regulations affecting
its operations include consumer protection laws,
escheat laws, privacy laws, anti-money laundering laws and data protection laws. Compliance with the relevant legal paradigm
in which our divisions operate is costly and requires significant personnel resources, as well as extensive contacts with outside
lawyers and consultants to stay abreast of the applicable regulatory schemes.
ff
ff
ff
The Bureau's Prepaid Accounts Rule impacts the Bank’s of
fering of prepaid cards.
’’
As described above, the Bureau issued a final rule on October 5, 2016, which supplemented the existing regulatory
framework pursuant to which prepaid products (both cards and other delivery methods, including codes) are offered
and serviced.
The Prepaid Accounts Rule brought prepaid products fully within Regulation E, which implements the federal Electronic Funds
Transfer
Act, and, for prepaid products that have a “credit” component, within Regulation Z, which implements the federal TruthT
T
in Lending Act. The Prepaid Accounts Rule created tailored provisions which (1) created a definition for a “prepaid account” in
Regulation E, (2) required certain disclosures to consumers before such consumer acquires a prepaid card account, (3) extended
Regulation E’s limited liability and error resolution provisions to certain registered prepaid accounts, (4) regulated the provision
of billing statements, and (5) extended Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide
overdraft services and other credit features (the Bank currently issues a card with an overdraft feature that is marketed by a third
party program manager.) The Prepaid Accounts Rule also required account issuers to post their publicly offered
prepaid card
program agreements on their own websites and make them available to consumers upon request and to provide copies of all
on October 1, 2017,
publicly offered
and compliance with the Prepaid Accounts Rule has resulted in additional costs.
prepaid card program agreements to the Bureau. The Prepaid Accounts Rule became effective
ff
ff
ff
ff
65
In addition to the CFPB’s final prepaid regulation (discussed above), it is possible that new legislation or more stringent
focus by banking agencies could further restrict our current operations or change the regulatory environment in which our
customers operate.
’’
Although it is possible that some legislation under consideration could have either a positive or de minimis impact on its
operations and profitability,yy it is also possible that any new legislation affecting
our operations or our customers, some of which
are also regulated entities, would have a negative impact on the conduct of the relevant business. There is no way to quantify the
impact that such changes could have on our profitability or operations at this time given the unpredictable nature of the risk.
ff
TT
In addition to the relevant legal paradigm set forth above, it should also be noted that there has been concern within the
bank regulatory environment over the use of credit and, in particular, prepaid cards as a means by which to illegally launder and
s Financial Crimes Enforcement Network issued rules related to providers of “prepaid access”
move money. The U.S. Treasury’
which have left certain issues unresolved related to its regulatory requirements. It is likely that any changes to the regulatory
environment related to the offering
of prepaid cards will increase the Bank’s compliance and operational costs. Although the Bank
will continue to work with its regulators to provide information about its operations as well as the state of the prepaid card industry,yy
we believe such concerns in general will continue for the foreseeable future for the entire banking industry,yy with a continued
emphasis on heightened compliance expectations, resulting in higher compliance costs. See “Business Regulation – Bank
Supervision and Regulation” which is included in Item 1 of this Annual Report on Form 10-K.
ff
Our tax refund-related business is concentrated in a limited number of partners and our success will depend upon the
maintenance of those agreements.
If any of the companies through which we offer
tax refund-related products to consumers and commercial entities were
to significantly decrease the size of our existing or projected relationship, such a decrease would likely have a significant impact
on our financial condition. For example, the Bank’s agreement with Jackson Hewitt Tax TT Service extends through the 2020 tax
season, but the loss of this relationship prior to such time for a contractual or other reason would have a materially adverse impact
on the Bank’s results of operation.
ff
The CFPB’s’’ recently published final rule related to certain small dollar loans will impact certain processes used by the Bank
and could materially impact the Bank’s ability
to grow certain aspects of the Payments division.
’’
On October 5, 2017, the CFPB issued its final rule related to certain small dollar loans. Affecting
primarily shorter term
(e.g., 45 days or less) loans with an Annual Percentage Rate of 36% or more, the rule generally requires a provider of such loans
to determine the consumer borrower’s ability to repay; an alternative to the ability-to-repay determination is provided for loans
that do not exceed $500 and meet certain other requirements.
ff
In addition to these restrictions, the CFPB also imposes certain requirements related to the collection of longer-term loans
with an Annual Percentage Rate of 36% or more; specifically,yy the final rule requires that, where the creditor (like the Bank) has
access to the consumer’s bank account for repayment of the loan proceeds, the creditor must provide certain notices to the consumer
about upcoming payments and transactions via model forms the CFPB also published. In addition, a creditor is prohibited from
attempting to withdraw payment from a consumer’s bank account where such repayment has been declined for two consecutive
payment attempts. At such time, the creditor is required to get a new, ww specific authorization from the consumer to debit the bank
account.
If the OCC finalizes rules related to the application process for the acceptance of “fintech” charters, entities that receive such
charters could encroach upon the Bank’s business.
’’
Although the OCC has publicly stated in court filings that it is not yet accepting applications for a “fintech” charter, the
recent Acting Comptroller of the Currency has stated that the agency continues to evaluate the benefits and risks of providing
national charters to companies that do not exercise the full range of traditional banking powers. Were WW the OCC to accept such
specific banking products and services (including
applications from companies that sought a national platform from which to offer
payment processing services), such new fintech companies could engage in operations or bring products to the market that could
materially impact the Bank’s financial performance.
ff
66
The Bank owns or is seeking a number of patents, trademarks and other forms of intellectual property with respect to the
operation of its business and the protection of such intellectual property may in the future require material expenditures.
In their operations, our divisions, through the Bank, seek protection for various forms of intellectual property from time
to time. No assurance can be given that such protection will be granted. In addition, given the competitive market environment
of its business, the Bank must be vigilant in ensuring that its patents and other intellectual property are protected and not exploited
by unlicensed third parties.
The Bank must also protect itself and defend against intellectual property challenges initiated by third parties making
various claims against it. WithW respect to these claims, regardless of whether we are pursuing our claims against perceived infringers
or defending our intellectual property from third parties asserting various claims of infringement, it is possible that significant
personnel time and monetary resources could be used to pursue or defend such claims.
It should also be noted that intellectual property risks extend to foreign countries whose protections of such property are
not as extensive as those in the United States. As such, the Bank may need to spend additional sums to ensure that its intellectual
property protections are maximized globally. Moreover, should there be a material, improper use of the Bank’s intellectual property, yy
this could have an impact on our divisions' operations and the Bank.
Costs of conforming products and services to the Payment Card Industry Data Security Standards (the “PCI DSS”) are costly
and could continue to affect
the operations of MPS.
ff
The PCI DSS is a multifaceted standard that includes data security management, policies and procedures as well as other
protective measures, that was created by the largest credit card associations in the world in an effort
to protect the nonpublic
personal information of all types of cardholders, including prepaid cardholders and holders of network branded credit cards (such
The PCI DSS mandates a prescribed technical foundation for the collection, storage and
as Discover, MasterCard and Visa).
transmission of cardholder data and also contains significant provisions regarding the testing of security protections by various
entities in the payment card industry, yy including MPS. Compliance with the PCI DSS is costly and changes to the standards could
of the relevant business division.
have an equal, or greater, effect on profitability
VV
ff
ff
The potential for fraud in the card payment industry is significant.
Issuers of prepaid and credit cards have suffered
significant losses in recent years with respect to the theft of cardholder
not only
data that has been illegally exploited for personal gain. The theft of such information is regularly reported and affects
individuals but businesses as well. Many types of credit card fraud exist, including the counterfeiting of cards and “skimming.”
ff
ff
Losses from fraud have been substantial for certain card industry participants. Although fraud has not had a material
impact on the profitability of the Bank, it is possible that such activity could adversely impact in the future, notwithstanding, our
recent introduction of EMV ((i.e., chip-enabled) cards and the broader acceptance of such cards in the U.S. and international
markets.
Part of our business depends on sales agents who do not sell our products exclusively.yy
Our business model, to some degree, depends upon the use of sales agents who are not our employees. These agents sell
the products and services of many different
processors to merchants and other parties in need of card services. Failure to maintain
good relations with such sales agents or the perceived or actual malfeasance of such agents could have a negative impact on our
business.
ff
ff
Products and services offered by MPS involve
many business parties and the possibility of collusion exists.
As described above, the theft of cardholder data is a significant threat in the industry in which MPS operates. This threat
also includes the possibility that there is collusion between certain participants in the card system to act illegally. Although MPS
is not aware of any instances to date, it is possible that such activities could occur in the future, thereby impacting its operation
and profitability.
67
Competition in the card industry is significant. In order to maintain an edge to its products and offerings,
significantly in technology and research and development.
ff
MPS must invest
The heavy emphasis upon technology in the products and services offered
by MPS requires significant expenditures with
respect to research and development both to exploit technological gains and to develop new products and services to meet customers’
needs. As is common with most research and development, while some efforts
may yield substantial benefits for the division,
others will not, thereby resulting in expenditures for which profits will not be realized. MPS is not able to predict with any degree
will cost, or
of certainty as to the level of research and development that will be required in the future, how much those efforts
how profitable such developments will be for the division once undertaken.
ff
ff
ff
Our business could suffer
ff
prepaid financial services industry in general.
if there is a decline in the use of prepaid
ff
cards or there are adverse developments with respect to the
As the prepaid financial services industry evolves, consumers may find prepaid financial services to be less attractive
than other financial services. Consumers might not use prepaid financial services for any number of reasons. For example, negative
publicity surrounding the Company or other prepaid financial service providers could impact MPS’ business and prospects for
growth to the extent it adversely impacts the perception of prepaid financial services. If consumers do not continue or increase
their usage of prepaid cards, MPS’operating revenues may remain at current levels or decline. Growth of prepaid financial services
as an electronic payment mechanism may not occur or may occur more slowly than estimated. If there is a shift in the mix of
payment forms used by consumers (i.e., cash, credit cards, traditional debit cards and prepaid cards) away from products and
services offered
by MPS, such a shift could have a material adverse effect on our financial
condition and results of operations.
ff
ff
FTC legal action against a major program manager offering Bank-issued prepaid cards requires heightened review and
oversight
ff
On November 10, 2016, the Federal Trade
Commission filed suit in federal court in Georgia against NetSpend, a significant
program manager for the Bank, alleging that NetSpend engaged in deceptive marketing and servicing in connection with Bank
and other-branded prepaid cards issued pursuant to such program agreement. No allegations against the Bank are included in the
complaint but it is possible in the future that other third parties with which the Bank has contractual agreements are accused or
found to have engaged in illegal practices.
TT
VV
Discover, MasterCard and V
rr
isa, as well as other electronic
funds networks in which MPS operates, could change their rules.
Pursuant to the agreements between MPS and Discover, MasterCard, VisaVV and other card networks, these third parties
typically have retained the right to prescribe certain business practices and procedures with respect to parties such as MPS. Such
prescribed terms include, but are not limited to, a contracting party’s level of capital as well as other business requirements.
Discover, MasterCard and VisaVV also retain the right in their agreements with industry participants such as MPS to
unilaterally change the rules under which such transactions are processed with little or no advance warning. This power includes
the power to prevent MPS from accessing their networks in order to process transactions as well as the power to revise, replace
or alter existing card interchange rates and rules. Should any third party choose to invoke this right unilaterally, yy such changes
could materially impact the operations of MPS.
Our business is heavily dependent upon the Internet and any negative disruptions to its operation could negatively impact our
business.
Much of our business, especially at the divisional level, depends upon transactions being processed through the Internet.
Like nearly all other commercial enterprises, we rely upon others to provide the Internet so that commerce can be conducted.
Were WW there to be a failure in the operation of the Internet or a significant impairment in our ability to move information on the
Internet or our ability to do so in accordance with customer safeguard protocols, we would need to develop alternative processes
during which time revenues and profitability may be lower.
Our ability to process transactions requires functioning communication and electricity lines.
The nature of the banking industry in general, and the credit card and debit card industry in particular, is that it must be
operational every day of the week and every hour of the week. Any disruption in the utilities utilized by the Bank or its divisions
could have a negative effect
our operations, and have a material
adverse effect
on our operations and extensive disruptions could materially affect
on our financial condition and results of operations.
ff
ff
ff
68
Data encryption technology has not been perfected and vigilance in MPS’ information technology
’
systems is costly.yy
The Bank and its divisions hold holds sensitive business and personal information with respect to the products and services
This information, which is generally digitally encrypted, is passed along various technology channels, including the
ff
it offers.
Internet. Although we encrypt its customer and other sensitive information and expend significant financial and personnel resources
to maintain the integrity of its technology networks and the confidentiality of nonpublic customer information, because such
information may travel on public technology and other non-secure channels, the confidential information is potentially susceptible
to hacking and other illegal intrusions. Were WW such a security breach to occur, the provision of products and services to our customers
would be impaired. In addition, were a breach to occur, we could incur significant fines from the electronic funds associations
involved, or from federal and/or state regulators, and be subject to other prohibitions, as well as extensive litigation from commercial
parties and consumers affected
on our financial condition and
by such breach. Such actions would have a material adverse effect
results of operations.
ff
ff
Unclaimed funds represented by unused value on the cards presents compliance and other risks.
The concept of escheatment involves the reporting and delivery of property to states that is abandoned when its rightful
owner cannot be readily located and/or identified. In the context of prepaid cards, the funds in connection with such cards can
sometimes be “abandoned” or unused for the relevant period of time set forth in each applicable state’s abandoned property laws.
MPS utilizes automated programs to ensure its operations are compliant with such applicable laws and regulations. There appears,
however, to be a movement among some state regulators to interpret definitions in escheatment statutes and regulations in a manner
that is more aggressive. Should such state regulators choose to do so, they may initiate collection or other litigation action against
prepaid card issuers for unreported abandoned property. Such actions may seek to assess fines and penalties.
MPS Revenue Concentration.
MPS works with a large number of business partners to derive its revenue. The Company believes four of its partners
have reached a size that, should these partners’ business with the Company end or there is a significant decrease in revenues
associated with any of these business relationships, the earnings attributable to them would have a material effect
on the financial
results of the Company.
ff
ATM fraud is becoming both more sophisticated and more prevalent.
Although the Bank has not been the subject of any widespread or concerted ATM AA
fraud has shown a marked
attack, ATM AA
networks continue. It is estimated that global losses from ATM AA
increase and threats to the network of entities that comprise ATM AA
skimming alone are over $2 billion annually and are expected to grow. Although most ATM AA
fraud continues to involve skimming
(whereby a skimmer reads a debit card's encoded mag stripe and a camera records the PIN that is entered by a customer), new
frauds including those perpetrated by Wi-Fi WW scanners and the cracking of encryption software, are being perpetrated against global
banks and their customers. The Bank continues to monitor these developments and has a program in place to monitor for debit
and credit card fraud. Even with such policies and procedures in place, however, there can be no assurance that the Bank, its
AA
customers or the ATM networks in
which it participates will not be the victims of an ATM-based crime.
AA
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
p
Properties
ff
ff
The Company's home office
located in South Dakota, Texas,
is located at 5501 South Broadband Lane in Sioux Falls, South Dakota. The Bank is a
in four market areas: Storm Lake and Des
federally chartered savings bank which operates 10 full-service branch banking offices
and seven
TT
Moines, Iowa and Brookings and Sioux Falls, South Dakota, one non-retail service branch in Memphis, Tennessee,
are related
non-branch offices
California, Kentucky, yy and Pennsylvania. The non-branch offices
to the following divisions of MetaBank: MPS, Refund Advantage, EPS Financial, SCS, and AFS/IBEX. Our MPS division offers
ff
prepaid cards, along with other payment industry products and services with operations in two offices
in Sioux Falls, South Dakota.
located in
Refund Advantage and EPS Financial offer
Louisville, Kentucky,yy and Easton, Pennsylvania. SCS provides consumer credit services through its propriety underwriting model
with an office
Our AFS/IBEX division provides nationwide commercial insurance premium financing for
business and insurance agencies and has two agency offices, one in Dallas,
tax payment industry products and services nationwide, with offices
TT
Texas, and one in Newport Beach,
located in Hurst, Texas.
California.
TT
TT
ff
ff
ff
ff
ff
ff
ff
69
Of the Company's 19 properties, the Company leases 15 of them, all on market terms. See Note 7 to the “Notes to
Consolidated Financial Statements” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K.
Though the Company has experienced rapid growth in both of its payments and banking segments, management believes
current facilities are adequate to meet its present needs.
The Bank maintains an online database with a service bureau, whose primary business is providing such services to
financial institutions.
Item 3.
g
Legal Pr
oceedingsg
TT
Restraining Order and Temporary
The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank,
TT
The Plaintiffff ’s
BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County,yy Texas.
Second Amended Original Petition and Application for Temporary
Injunction adds both
MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager
and processor for both Inter National Bank ("INB") and MetaBank. According to the Petition, NetSpend has informed INB that
the depository accounts at INB for the NetSpend program supposedly contained $10.5 million less than they should. INB alleges
that NetSpend has breached its fiduciary duty by making affirmative
misrepresentations to INB about the safety and stability of
the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to
cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing
procedures. To TT the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for
portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have
been unjustly enriched. The Bank is vigorously contesting this matter. In January 2014, NetSpend was granted summary judgment
in this matter which is under appeal. Because the theory of liability against both NetSpend and the Bank is the same, the Bank
views the NetSpend summary judgment as a positive in support of our position. An estimate of a range of reasonably possible loss
cannot be made at this stage of the litigation because discovery is still being conducted.
TT
ff
The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment
Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former
prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that after all
of the programs were wound down, there were two accounts with a positive balance to which they are entitled. The Bank’s position
is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is
entitled is $4,001,025. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot
be made at this stage of the litigation because discovery is still being conducted.
From time to time, the Company or its subsidiaries are subject to certain legal proceedings and claims in the ordinary
course of business. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While management
currently believes that the ultimate outcome of these proceedings will not have a material adverse effect
on the Company’s financial
position or its results of operations, legal proceedings are inherently uncertain and unfavorable resolution of some or all of these
matters could, individually or in the aggregate, have a material adverse effect
on the Company’s and its subsidiaries’ respective
businesses, financial condition or results of operations.
ff
ff
Item 4.
y
Mine Safety Disclosur
es
Not applicable.
70
PARPP
TRR II
Item 5.
Securities
r
Market for Registrant’
g
r
y, Related Stockholder
,yyy
s Common Equity
q
r
Matters and Issuer
Pur
y
chases of Equity
q
The Company’s common stock trades on the NASDAQ Global Market® under the symbol “CASH.” Quarterly dividends
for 2017 and 2016 were $0.13. The quarterly high and low sales prices per share of the common stock, as reported on the NASDAQ
Global Market, was as follows for the periods presented below:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal YearYY 2017
r
Fiscal YearYY 2016
r
Low
High
Low
High
$
60.20
$
106.85
$
39.10
$
76.56
82.40
60.70
106.90
93.20
95.00
36.22
43.55
48.97
49.67
46.53
53.76
62.62
Prices disclose inter-dealer quotations without retail mark-up, mark-down or commissions and do not necessarily represent
actual transactions.
Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition,
market considerations and regulatory restrictions.
As of November 24, 2017, the Company had (i) 9,666,462 shares of common stock outstanding, which were held by
approximately 213 stockholders of record, (ii) no shares of nonvoting common stock outstanding, and (iii) 18,936 shares of
common stock held in treasury.
The transfer agent for the Company’s common stock is Computershare Investor Services, 462 South 4th Street, Suite
1600, Louisville, KY 40202.
Y
There were no purchases by the Company during the fiscal year ended September 30, 2017, of equity securities that are
registered by the Company pursuant to Section 12 of the Exchange Act.
TT
Total Stock Return Performance Graph
The following graph compares the cumulative total stockholder return on Meta Financial common stock over the last
five fiscal years with the cumulative total return of the NASDAQ Composite Index and the NASDAQ ABA Community Bank
Index (assuming the investment of $100 in each index on October 1, 2012 and reinvestment of all dividends). The stock price
performance reflected below is based on historical results and is not necessarily indicative of future stock price performance.
The information contained in this section, including the following line graph, shall not be deemed to be "soliciting
in future rr filings of Meta Financial with the SEC, or subject to the liabilities of
into a document filed under the
material" or "filed" or incorporated by refer
rr
ence
Section 18 of the Exchange Act, except to the extent we specifically incorporate it by refer
rr
ence
Securities Act of 1933, as amended, or the Exchange Act.
rr
rr
71
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100 September 2017
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
2014
2015
2016
2017
Meta Financial Group, Inc.
NASDAQ Composite Index
NASDAQ ABA Community Bank Index
Index
Meta Financial Group
NASDAQ Composite Index
NASDAQ ABA Community Bank Index
2012
2013
2014
2015
2016
2017
$
100.00 $
159.75 $
150.22 $
180.37 $
264.51 $
100.00
100.00
122.77
126.80
148.08
136.75
153.99
157.73
179.29
174.20
344.36
221.75
226.50
Year Ended September 30,
72
Item 6.
Selected Financial Data
September 30,
2017
2016 (1)
2015
2014
2013
SELECTED FINANCIAL CONDITION
DATA
(Dollars in Thousands)
Total assets
Loans receivable, net
Securities available for sale
Securities held to maturity
Goodwill and intangible assets
Deposits
Total borrowings
Stockholders' equity
$ 5,228,332
$ 4,006,419
$ 2,529,705
$ 2,054,031
$ 1,691,989
1,317,837
1,693,431
563,529
150,901
3,223,424
1,490,067
434,496
919,470
706,255
493,007
1,469,249
1,256,087
1,140,216
619,853
65,849
2,430,082
1,187,578
334,975
345,744
70,505
282,933
2,588
1,657,534
1,366,541
1,315,283
561,317
271,335
497,721
174,802
216,456
142,984
380,428
881,193
288,026
2,339
Year Ended September 30,
2017
2016
2015
2014
2013
SELECTED OPERATIONS DATA
(Dollars in Thousands, Except Per Share Data)
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Total non-interest income
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
$
108,103
$
81,396
$
61,607
$
48,660
$
14,873
93,230
10,589
82,641
172,172
199,663
55,150
10,233
44,917
4,091
77,305
4,605
72,700
100,770
134,648
38,822
5,602
33,220
2,387
59,220
1,465
57,755
58,174
96,506
19,423
1,368
18,055
2,398
46,262
1,150
45,112
51,738
78,231
18,619
2,906
15,713
38,976
2,954
36,022
—
36,022
55,503
74,403
17,122
3,704
13,418
$
$
4.86
4.83
$
$
3.93
3.91
$
$
2.68
2.66
$
$
2.57
2.53
$
$
2.40
2.38
(1) See Reclassification and Revision of Prior Period Balances under Note 1 Summary of Significant Accounting Policies for
additional information describing adjustments made to the Company's EPS calculation. 2016 YTD basic EPS of $3.95 was corrected
to $3.93 and diluted EPS of $3.92 was corrected to $3.91.
73
r
YearYY Ended September
r
30,
2017
2016
2015
2014
2013
SELECTED FINANCIAL RAL
AA
OTHER DATAA ATT
TIOS
AND
PERFORMANCE RATIOS
AA
Return on average assets
Return on average equity
Net interest margin, tax equivalent
AA
QUALITY RAY
TIOS
Non-performing assets to total assets
Allowance for loan losses to total loans
Allowance for loan losses to non-performing
loans
Excluding insured loans
rr
(1)
Non-performing assets to total assets (2)
Allowance for loan losses to total loans (3)
Allowance for loan losses to non-performing
loans (4)
1.13%
11.20%
3.05%
1.10%
10.80%
3.19%
0.72%
0.57%
0.03%
0.61%
0.78%
8.83%
3.03%
0.31%
0.88%
0.81%
10.01%
2.80%
0.05%
1.08%
0.78%
9.36%
2.48%
0.05%
1.02%
20%
479%
80%
547%
568%
0.70%
0.63%
0.03%
0.61%
0.31%
0.88%
0.05%
1.08%
0.05%
1.02%
21%
479%
80%
547%
568%
CAPITALTT
AA
RAL
TIOS
Stockholders' equity to total assets
AA
Average stockholders' equity to average assets
8.31%
10.07%
8.36%
10.19%
10.73%
8.81%
8.51%
8.14%
8.45%
8.37%
OTHER DATAA ATT
Book value per common share outstanding at end
of year
Tangible book value per common share
outstanding at end of year
Dividends declared per share at end of year
Number of full-service offices at end of year
ff
$
$
$
$
45.15
29.47
0.52
10
$
$
39.30
31.57
0.52
10
$
$
33.24
24.60
0.52
10
$
$
28.33
27.91
0.52
11
23.55
23.17
0.52
11
Common Shares Outstanding
9,622,595
8,523,641
8,163,022
6,169,604
6,070,654
(1) Excludes student loans that are insured by ReliaMax Surety Company.
(2) The insured student loans that are 90 or more days past due are excluded from non-performing assets.
(3) The insured student loan balance of $123.7 million is excluded from the total loan balance.
(4) The insured student loans that are 90 or more days past due are excluded from non-performing loans.
Item 7.
g
Management’
s Discussion and Analysis of Financial Condition and Results of Operations
p
y
This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8 “Financial Statements
and Supplementary Data,” Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part I, Item 1
“Business.”
General
The Company, yy a registered unitary savings and loan holding company,yy is a Delaware corporation, the principal assets of
which are all the issued and outstanding shares of the Bank, a federal savings bank. Unless the context otherwise requires, references
herein to the Company include Meta Financial and the Bank, and all subsidiaries of Meta Financial, direct or indirect, on a
consolidated basis.
74
Overview of Corporate Developments Since Fiscal YearYY 2016
r
On November 1, 2016, MetaBank completed the acquisition of substantially all of the assets and certain liabilities of EPS
Financial, LLC (“EPS”) from privately-held Drake Enterprises, Ltd. (“Drake”). The assets acquired by MetaBank in the EPS
acquisition include the EPS trade name, operating platform, and other assets. The EPS management team and other employees
were hired by MetaBank and EPS operations have continued to be based out of Easton, PA. PP The purchase price for the acquisition
of approximately $42.5 million included the payment of approximately $21.3 million in cash and the issuance of 369,179 shares
of Meta Financial common stock to Drake. The cash portion of the purchase price was funded from the proceeds of the previously
announced subordinated debt issuance.
On December 14, 2016, MetaBank completed the acquisition of substantially all of the assets and specified liabilities of
SCS, a fintech provider of consumer tax advances and other consumer credit services through its propriety underwriting model
and loan management system. The assets acquired by MetaBank in the SCS acquisition include the SCS trade name, propriety
underwriting model and loan management system and other assets. The purchase price for the acquisition included the payment
of approximately $7.5 million in cash to SCS and the issuance of 113,328 shares of Meta Financial common stock to SCS’
stakeholders on behalf of SCS. In addition, MetaBank paid out $17.5 million of contingent cash consideration and 264,431 shares
of Meta Financial common stock due to the achievement of certain performance benchmarks during fiscal year 2017. MetaBank
acquired SCS assets with estimated fair values of $28.1 million of intangible assets, including customer relationships, trademark,
and non-compete agreements, and negligible other assets, resulting in goodwill of $31.6 million.
On December 20, 2016, MetaBank purchased, net of purchase discount, a $133.8 million seasoned, floating rate, private
student loan portfolio. All loans are indexed to three-month LIBOR plus various margins. The portfolio is serviced by ReliaMax
Lending Services, LLC and insured by ReliaMax Surety Company.
On July 27, 2017, MetaBank was advised they will not be providing interest-free tax advance loans for H&R Block tax
preparation customers during the 2018 tax season. The Company’s relationship with H&R Block represented approximately $12.0
million in net earnings during fiscal year 2017. Given the loss of this relationship, the Company recognized a total impairment
charge of $10.2 million, which was expensed during the 2017 fiscal fourth quarter.
On August 2, 2017, MetaBank, entered into an extension to its current agreement with Jackson Hewitt Tax TT Service to
offer
on an annual basis up to $750 million of interest-free refund advance loans, an increase of $300 million in available funds
ff
over last year. The agreement includes underwriting, origination, servicing, and loan retention, and is supported by Specialty
Consumer Services, a division of MetaBank. Under the extended agreement, MetaBank will continue to provide these services
through the 2020 tax season.
On September 25, 2017, Sheree Thornsberry joined the Company as Executive Vice VV President and Head of Payments.
Ms. Thornsberry is responsible for the prepaid, debit, correspondent and ATM business lines.
AA
On October 11, 2017, the Company completed the purchase of a $73 million, seasoned, floating rate, private student loan
portfolio. All loans are indexed to one-month LIBOR. The portfolio is serviced by ReliaMax Lending Services LLC and insured
by ReliaMax Surety Company. The Company expects to realize initial net yields of over 6%. This portfolio purchase builds on
our existing student loan platform and we expect that the acquired loan portfolio will be easily integrated with minimal impact to
the business.
On November 13, 2017, Shelly Schneekloth joined the Company as Executive ViceVV President and Head of Technology
and Operations. Ms. Schneekloth is responsible for directing information technology and operations initiatives to align and support
business strategies.
TT
The Company recorded net income of $44.9 million in fiscal 2017 compared to $33.2 million in fiscal 2016. The increase
in net income was primarily due to increases in non-interest income and net interest income. In fiscal 2017, non-interest income
increased to $172.2 million from $100.8 million in fiscal 2016, primarily due to increases in tax advance product fee income, card
fee income and refund transfer product fee income. The Company’s net interest income grew to $93.2 million in fiscal 2017,
compared to $77.3 million in fiscal 2016. The increase was driven by growth in both loan and investment volumes as well as
increased yields in the investment portfolio. Additionally,yy the continuous improvement in the overall interest-earning asset mix
contributed to the increased net interest income, primarily due to loan growth, including as a result of the December 2016 purchased
student loan portfolio, and purchases of highly rated tax-exempt municipal securities at relatively high tax equivalent yields.
Partially offsetting
the higher non-interest income and net interest income was non-interest expense, which rose $65.0 million,
ff
from $134.6 million in fiscal 2016 to $199.7 million in fiscal 2017, and income tax expense which rose from $5.6 million to $10.2
million year over year.
75
Overall, the cost of funds at MetaBank averaged 0.43% during fiscal 2017, compared to 0.15% for 2016. This increase
was primarily due to a combination of the issuance of the Company's subordinated debt in the fourth quarter of fiscal year 2016,
the addition of wholesale deposits, and an increase in short-term borrowing rates.
TT
Tangible
book value per common share decreased by $2.10, or 7%, to $29.47 per share at September 30, 2017, from
$31.57 per share at September 30, 2016. This decrease was driven by an increase in common shares outstanding along with
increases in goodwill and intangible assets, which for this calculation, are excluded from total stockholders' equity. The increases
in common shares outstanding, goodwill and intangible assets were primarily attributable to the EPS and SCS acquisitions completed
during fiscal 2017. Book value per common share outstanding increased by $5.85, or 15%, to $45.15 per share at September 30,
2017, from $39.30 per share at September 30, 2016.
The Company’s non-performing assets (“NPAs”)
were 0.72% of total assets at September 30, 2017, compared to 0.03%
at September 30, 2016. The increase in NPAsPP was primarily related to two large agricultural relationships becoming more than 90
days past due. These loan relationships were both still accruing in the fourth fiscal quarter. One of these relationships was paid
in full on November 1, 2017, and it is possible the collateral related to the other relationship could go through a deed in lieu of
foreclosure process in the near future.
PP
Financial Condition
As of September 30, 2017, the Company’s assets grew by $1.22 billion, or 30%, to $5.23 billion, compared to $4.01
billion at September 30, 2016. The growth in assets resulted from a variety of factors, including increases in the Company’s cash
and cash equivalents, loan balances, and investment securities portfolio.
TT
Total
cash and cash equivalents was $1.27 billion at September 30, 2017, an increase of $493.8 million from $773.8
million at September 30, 2016. The majority of this increase was related to a temporary repositioning of the balance sheet in
September 2017, similar to what was done in fiscal year 2016, to prepare the Company for the upcoming 2018 seasonal tax lending
activity. The Company anticipated utilizing excess cash it held at its fiscal year end to repay overnight borrowings in October
2017. In general, the Company maintains its cash investments in interest-bearing overnight deposits with the FHLB and the FRB.
At September 30, 2017, the Company had no federal funds sold.
The total of MBS and investment securities increased $167.9 million, or 8%, to $2.26 billion at September 30, 2017,
compared to September 30, 2016, as investment purchases exceeded related maturities, sales and principal pay downs. The
Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated
final maturity,yy non-bank qualified obligations of states and political subdivisions (“NBQ”) which mature in approximately 15 years
or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their
stated final maturities. All MBS held by the Company at September 30, 2017 were issued by a U.S. Government agency or
instrumentality. Of the total $700.1 million of MBS at September 30, 2017, $586.5 million were classified as available for sale
(“AFS”), and $113.7 million were classified as held to maturity (“HTM”). Of the total $1.56 billion of investment securities, $1.11
billion were classified as AFS and $449.8 million were classified as HTM. During fiscal 2017, the Company purchased an aggregate
of $292.2 million of MBS securities, of which $131.4 million have an average life estimated at approximately five years or less
or stated final maturities of approximately 30 years or less, and sold MBS in the amount of $90.0 million. In addition, the Company
purchased $557.4 million of investment securities which are principally comprised of tax exempt municipal bonds primarily backed
by, yy and/or convertible into, Ginnie Mae, Fannie Mae, or Freddie Mac MBS securities, government related and guaranteed floating
rate securities, and smaller portions of other security types. See Note 6 to the “Notes to Consolidated Financial Statements,” which
is included in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The Company’s portfolio of net loans receivable increased by $398.4 million, or 43%, to $1.32 billion at September 30,
2017, from $919.5 million at September 30, 2016. This growth was driven by increases in commercial real estate loans of $162.6
million, consumer loans of $125.9 million, residential mortgage loans of $34.4 million and commercial operating loans of $4.5
million, along with growth in premium finance loans of $78.9 million. The growth in consumer loans was primarily related to the
by a decrease in
student loan portfolio purchase in December 2016. The increase in net loans receivable was partially offset
agricultural loans of $5.3 million. See Note 3 to the “Notes to Consolidated Financial Statements,” which is included in Part II,
Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
ff
Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking
system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in such
stock increased $13.6 million, or 29%, to $61.1 million at September 30, 2017, from $47.5 million at September 30, 2016. The
increase directly correlates with the higher short-term borrowings balances.
76
TT
Total
deposits increased by $793.3 million, or 33%, to $3.22 billion at September 30, 2017, from $2.43 billion at
September 30, 2016. The increase in end-of-period deposits was primarily the result of an increase in wholesale deposits of $476.2
million, an increase in non-interest bearing checking deposits of $286.5 million, and a $29.2 million increase in interest-bearing
checking deposits. Wholesale deposits were added during fiscal year 2017 at advantageous rates when compared to the overnight
borrowing rates, thereby lowering funding costs, or to target strategic maturities which are expected to aid in tax season tax advance
loan funding. Deposits attributable to the Payments divisions were up $305.9 million, or 14%, at September 30, 2017, as compared
to September 30, 2016. The increase is due to continued growth in our core business relationships related to the Payments divisions.
The Company’s total borrowings increased $302.5 million, or 25%, from $1.19 billion at September 30, 2016, to $1.49
billion at September 30, 2017, primarily due to the increases in short-term advances from the FHLB, which was done as part of a
temporary repositioning of the balance sheet, as noted above. The Company’s short-term borrowings fluctuate on a daily basis
due to the nature of a portion of its non-interest-bearing deposit base, primarily related to payroll processing timing with a higher
,yy which are typically paid down throughout the week. This predictable
volume of short-term borrowings on Monday and Tuesday
fluctuation may be augmented near a month-end by a prefunding of certain programs.
TT
See Notes 8 and 9 to the “Notes to Consolidated Financial Statements,” which are included in Part II, Item 8 “Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K.
At September 30, 2017, the Company’s stockholders’ equity totaled $434.5 million, an increase of $99.5 million from
$335.0 million at September 30, 2016. Stockholders’ equity increased primarily as a result of an increase in additional paid-in
capital and retained earnings. At September 30, 2017, the Bank continued to meet regulatory requirements for classification as a
well-capitalized institution. See Note 13 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item
8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Results of Operations
The Company’s results of operations are dependent on net interest income, provision for loan losses, non-interest income,
or spread, between the average yield on interest-
non-interest expense and income tax expense. Net interest income is the difference,
earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected
by regulatory,yy economic
and competitive factors that influence interest rates, loan demand and deposit flows. Notwithstanding that a significant amount
of the Company’s deposits, primarily those attributable to the Payments divisions, pay relatively low rates of interest or none at
all, the Company,yy like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature
or reprice at different
basis, than its interest-bearing liabilities. The provision for loan loss is the adjustment
to the allowance for loan loss balance for the applicable period. The allowance for loan loss is management’s estimate of probable
loan losses in the loan portfolio based upon loan losses that have been incurred as of the balance sheet date.
times, or on a different
ff
ff
ff
ff
The Company’s non-interest income is derived primarily from tax product fees, prepaid cards, credit products, ATM AA
fees
attributable to the MPS division and fees charged on bank loans and transaction accounts. Non-interest income is also derived
from net gains on the sale of securities available for sale as well as the Company’s holdings of bank-owned life insurance. This
ff
income is offset
by non-interest expenses, such as compensation and occupancy expenses associated with additional personnel
and office
locations as well as card processing expenses attributable to Payments. Non-interest expense is also impacted by
ff
acquisition-related expenses, occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses.
77
Tax Advance Loans
Retail Bank Loans
Mortgage-backed
securities
AA
Average
Balances, Interest Rates and Yields
YY
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-
earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. Only the yield/rate have tax equivalent adjustments. Non-Accruing loans have been included in the table as
loans carrying a zero yield.
r
YearYY
r
Ended September
30,
(Dollars in Thousands)
Interest-earning assets:
AA
Average
Outstanding
Balance
2017
Interest
Earned /
Paid
Yield /
YY
Rate
Average
AA
Outstanding
Balance
2016
Interest
Earned /
Paid
Yield /
YY
Rate
Average
AA
Outstanding
Balance
2015
Interest
Earned /
Paid
Specialty Finance Loans*
$
317,293
$
16,903
5.33 % $
135,334
$
7,276
5.38 % $
74,537
$
6,037
49,026
820,980
11
35,203
0.02 %
4.29 %
3,804
671,308
—
— %
—
—
28,911
4.31 %
543,329
23,528
Yield /
YY
Rate
8.10 %
— %
4.33 %
747,027
16,571
2.22 %
728,738
15,771
2.16 %
695,539
13,979
2.01 %
Tax-Exempt Investment
Securities
1,303,830
Asset-Backed Securities
115,716
Other investments and fed
funds sold
Cash & Fed Funds Sold
115,958
150,338
31,930
2,999
3,104
1,382
3.77 % 1,061,198
2.59 %
54,993
2.68 %
0.92 %
101,258
66,759
24,965
1,199
2,537
737
3.56 %
2.18 %
2.51 %
1.54 %
704,529
15,730
—
72,954
127,901
—
1,742
591
3.38 %
— %
2.39 %
0.51 %
Total interest-earning
rr
assets
Non-interest-earning
assets
Total assets
Non-interest bearing
deposits
Interest-bearing
liabilities:
Interest-bearing checking
Savings
Money markets
Time deposits
Wholesale deposits
FHLB advances
Overnight fed funds
purchased
Subordinated debentures
Other borrowings
Total interest-bearing
rr
liabilities
Total deposits and
interest-bearing liabilities
Other non-interest bearing
liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income and
net interest rate spread
including non-interest
bearing deposits
Net interest margin, tax
equivalent
3,620,168
$
108,103
3.46% 2,823,392
$
81,396
3.34% 2,218,789
$
61,607
3.14%
362,133
$ 3,982,301
193,286
$ 3,016,678
103,138
$ 2,321,927
$ 2,286,358
$
—
— % $ 2,017,977
$
—
0.00 % $ 1,632,130
$
—
—%
42,231
55,484
46,466
103,115
558,855
52,956
259,378
73,273
15,939
172
31
87
830
4,931
1,045
2,649
4,448
680
0.41 %
0.06 %
0.19 %
0.80 %
0.88 %
1.97 %
1.02 %
6.07 %
4.27 %
36,317
59,670
46,115
79,825
—
61,454
339,035
9,437
14,575
97
24
75
418
—
709
1,607
539
622
0.27 %
0.04 %
0.16 %
0.52 %
— %
1.15 %
0.47 %
5.71 %
4.27 %
35,610
34,129
39,401
85,843
—
7,000
234,025
—
21,193
88
40
61
537
—
495
691
—
475
0.25 %
0.12 %
0.15 %
0.63 %
— %
7.07 %
0.30 %
— %
2.05 %
1,207,697
14,873
1.23%
646,428
4,091
0.63%
457,201
2,387
0.56%
3,494,055
$
14,873
0.43% 2,664,405
$
4,091
0.15% 2,089,331
$
2,387
0.11%
87,084
3,581,139
401,162
$ 3,982,301
44,786
2,709,191
307,487
$ 3,016,678
28,009
2,117,340
204,587
$ 2,321,927
$
93,230
3.04%
$
77,305
3.18%
$
59,220
3.03%
3.05%
3.19%
3.03%
*Specialty Finance Loan Receivables include loan portfolios the Company deems as non-retail bank product offerings or loans not generated
by the Retail Bank itself (for example, premium finance and purchased loan portfolios). The loan receivables included in this line item are
included in the customary loan categories presented elsewhere in this report.
ff
78
VV
Rate / Volume
Analysis
The following table presents, for the periods presented, the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the change
related to higher outstanding balances and the change due to the levels and volatility of interest rates. For each category of interest-
earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes
in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this
table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change
due to volume and the change due to rate.
VV
Rate / Volume
r
YearYY Ended September
r
30,
2017 vs. 2016
Increase /
(Decrease)
Due to
VV
Volume
Increase /
(Decrease)
Due to
Rate
TotalTT
Increase /
(Decrease)
2016 vs. 2015 (1)
Increase /
(Decrease)
Due to
Rate
Increase /
(Decrease)
Due to
VV
Volume
TotalTT
Increase /
(Decrease)
Interest-earning assets
Specialty Finance Loans
Tax Advance Loans
Retail Bank Loans
Mortgage-backed securities
Tax-Exempt Investment Securities
Asset-Backed Securities
Other investments and fed funds sold
Cash & Fed Funds Sold
Total interest-earning assets
Interest-bearing liabilities
Interest-bearing checking
Savings
Money markets
Time deposits
Wholesale deposits
FHLB advances
Overnight fed funds purchased
Subordinated Debt
Other borrowings
Total interest-bearing liabilities
Net effect on net interest income
$
9,699
$
—
6,441
385
5,576
1,537
389
1,115
25,142
$
18
$
(2)
1
145
4,931
(109)
(451)
3,873
58
8,464
16,678
$
$
$
$
$
$
9,627
$
3,751
$
(72) $
11
(149)
415
$
$
1,389
263
178
(470)
1,565
57
10
10
267
—
445
1,493
36
—
2,318
11
6,292
800
6,965
1,800
567
645
26,707
75
8
11
412
4,931
336
1,042
3,909
5,513
—
687
8,115
1,199
705
(508)
19,462
2
20
11
(36)
—
941
389
22
(234)
1,115
18,347
$
$
$
$
$
$
$
$
1,237
5,385
—
1,792
9,235
1,199
795
146
19,789
9
(17)
15
(119)
—
213
915
22
(2,514) $
(128)
—
$
$
1,105
1,120
—
90
654
327
7
(37)
4
(83)
—
(728)
526
—
900
589
58
10,782
$
666
1,704
$
(753) $
15,925
(262) $
18,085
(1) Due to the change in categorization of the Average Balances, Interest Rates and
have been conformed to be consistent with the updated categorization.
AA
YY
Yields table, 2016 vs. 2015 rate/volume calculation results
Comparison of Operating Results for the
r
September 30, 2017, and September
r
30, 2016
r
YY
Years Ended
General. The Company recorded net income of $44.9 million, or $4.83 per diluted share, for the year ended September 30, 2017,
compared to $33.2 million, or $3.91 per diluted share, for the year ended September 30, 2016, an increase of $11.7 million. The
increase in net income was primarily caused by an increase in tax advance fee income of $30.3 million, a $24.2 million increase
in card fee income, a $15.9 million increase in net interest income, and a $15.6 million increase in refund advance fee income.
The net income increase was offset
in part by an increase in compensation and benefits expense of $27.1 million, a $10.2 million
intangible impairment expense, a $7.5 million increase in amortization expense, and an increase in other expense of $5.5 million.
ff
79
Net Interest Income. Net interest income for fiscal 2017 increased by $15.9 million, or 21%, to $93.2 million from $77.3 million
for the prior year. Net interest margin decreased to 3.05% in fiscal 2017 as compared to 3.19% in 2016. The increase in net interest
income was primarily due to an increase in interest income of $26.7 million to $108.1 million from $81.4 million for the prior
year. The increase in interest income was primarily due to an increase in the Company’s average earning assets of $796.8 million,
or 28%, to $3.62 billion during fiscal 2017 from $2.82 billion during 2016. This was due to a significant increase in volume in
commercial real estate loans and specialty finance loans, which includes premium finance loans and the December 2016 purchased
student loan portfolio. Growth in investment security balances and yields attained on those investment securities also contributed
to the increase in net interest income. The increase in interest income was partially offset
by an increase in interest expense of
$10.8 million, to $14.9 million from $4.1 million for the prior year.
ff
Overall, when using a taxable equivalent yield (“TEY”), the Company’s interest earning asset yield increased by 12 basis
points due to improved yields achieved within the securities portfolio and a shift in the earning asset mix due to increased volume
in loans. The yield on non-MBS investment securities increased by 19 basis points on a TEY basis. The yield on government-
related MBS increased six basis points while longer-term interest rates generally decreased throughout the fiscal year. Average
TEY on the securities portfolio increased by 20 basis points in fiscal 2017 compared to fiscal 2016. The increased volume in loans
receivable reflects the growth in specialty finance loans, which includes premium finance loans and the purchased student loan
portfolio, as well as growth in the typical retail banking sectors.
AA
ff
ff
The Company’s average balance of total deposits and interest-bearing liabilities increased $829.7 million, or 31%, to
$3.49 billion during fiscal 2017 from $2.66 billion during 2016. A portion of this increase was due to the utilization of advantageous
pricing and strategic maturities on certain wholesale deposits, an increase in average non-interest bearing deposits and the
Company's completion of the public offering
of its subordinated notes in August 2016, which are due August 15, 2026. This increase
was partially offset
by a decrease of $79.7 million in the average balance of overnight fed funds purchased. The average outstanding
balance of non-interest-bearing deposits increased from $2.02 billion in fiscal 2016 to $2.29 billion in fiscal 2017. The Company’s
cost of total deposits and interest-bearing liabilities increased 28 basis points to 0.43% during fiscal 2017 from 0.15% during 2016.
This increase was primarily due to a combination of the issuance of the Company's subordinated debt in the fourth quarter of fiscal
2016, the addition of wholesale deposits, an increase in the overnight borrowing rates and higher average overall funding balances
due to the Company's utilization of more of its capital during non-tax season with higher investment balances and funding.
Notwithstanding this increase, the Company believes that its growing, lower-cost deposit base gives it a distinct and significant
competitive advantage, and even more so if interest rates continue to rise, because the Company anticipates that its cost of funds
at many other banks.
will likely remain relatively low, increasing less than
ww
Provision for Loan Losses. In fiscal 2017, the Company recorded $10.6 million in provision for loan losses, compared to $4.6
million in 2016. The increase in provision expense was primarily driven by higher seasonal volumes in tax season loans. The
growth in the Banking segment loans, as well as the downgrade of a significant agriculture relationship during the second quarter
of fiscal 2017 also contributed to an increased provision in fiscal 2017.
Income. Non-interest income increased by $71.4 million, or 71%, to $172.2 million for fiscal 2017 from $100.8
I
Non Interest
million for 2016. This increase was primarily due to an increase in tax advance fee income of $30.3 million, a $24.2 million increase
in card fee income, and a $15.6 million increase in refund transfer product fee income. The increases in tax advance fee income
and refund transfer product fee income were related to the acquisitions of EPS and SCS during the fiscal 2017 first quarter. Card
fee income primarily grew due to a wind-down of one of our non-strategic partners and also due to continued strong growth in
our core business relationships.
Non-Interest Expense. Non-interest expense increased by $65.0 million, or 48%, to $199.7 million for fiscal 2017 from $134.6
million for fiscal 2016. This increase in non-interest expense from 2016 to 2017 was largely driven by an increase in compensation
expense of $27.1 million, an increase in amortization expense of $7.5 million, and an increase in other expense of $5.5 million.
The increases in these categories were principally due to the EPS Financial and SCS acquisitions, which occurred in the first
quarter of fiscal 2017. The increase in compensation was also driven by non-cash stock-related compensation expense associated
with three executive officers
signing long-term employment agreements in the first and second quarters of fiscal 2017. Also leading
to the increase in non-interest expense when comparing 2017 to 2016 was a $10.2 million intangible impairment charge related
to the non-renewal of the H&R Block relationship during the fiscal 2017 fourth quarter. In addition, and to a lesser extent, non-
interest expense also increased year over year due to increases in legal and consulting expense, tax advance product expense,
refund transfer product expense, occupancy and equipment expense, and card processing expense.
ff
tax rate of 18.6%, compared
Income Tax TT Expense. Income tax expense for fiscal 2017 was $10.2 million, resulting in an effective
tax rate of 14.4%, in fiscal 2016. The increase in the Company’s recorded income
to a tax expense of $5.6 million and an effective
tax expense for 2017 was primarily attributable to an increase in earnings; however, the increase was partially offset
by the effects
of adopting ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” for recording excess tax benefits as
a reduction to income tax expense.
ff
ff
ff
ff
80
Comparison of Operating Results for the
r
September 30, 2016, and September
r
30, 2015
r
YY
Years Ended
General. The Company recorded net income of $33.2 million, or $3.92 per diluted share, for the year ended September 30, 2016,
compared to $18.1 million, or $2.66 per diluted share, for the year ended September 30, 2015, an increase of $15.1 million. The
increase in net income was primarily caused by tax product fee income of $23.3 million, a $16.0 million increase in card fee
income, a $13.2 million increase in interest income from the securities portfolio, and a $6.6 million increase in loan interest income.
The net income increase was offset
in part by an increase in compensation and benefits expense of $15.2 million, tax product
expense of $8.6 million, and increased card processing expense of $5.8 million.
ff
Net Interest Income. Net interest income for fiscal 2016 increased by $18.1 million, or 31%, to $77.3 million from $59.2 million
for the prior year. Net interest margin increased to 3.19% in fiscal 2016 as compared to 3.03% in 2015. The increase was mainly
due to growth in loans receivable and a higher volume of other investments (primarily high credit quality municipal bonds). An
improved mix of earning assets complemented the higher volume of investments, adding to the overall increase.
The Company’s average earning assets increased $604.6 million, or 27%, to $2.82 billion during fiscal 2016 from $2.22
billion during 2015. The increase is primarily the result of the increase in the Company’s investment securities and non-bank
qualified, high-quality municipal portfolios as well as loans receivable.
The Company’s average total deposits and interest-bearing liabilities increased $575.1 million, or 28%, to $2.66 billion
during fiscal 2016 from $2.09 billion during 2015. The increase resulted mainly from an increase in the Company’s non-interest-
bearing deposits. The average outstanding balance of non-interest-bearing deposits increased from $1.63 billion in fiscal 2015 to
$2.02 billion in fiscal 2016. The Company’s cost of total deposits and interest-bearing liabilities increased four basis points to
0.15% during fiscal 2016 from 0.11% during 2015, primarily due to an increase in the overnight borrowing rate as well as the
issuance of the Company's subordinated debt.
Provision for Loan Losses. In fiscal 2016, the Company recorded $4.6 million in provision for loan losses, compared to $1.5
million in 2015. The increased provision was primarily due to loan growth as well as seasonal charge-offs
related to refund advance
loan programs, and also partially due to a write down and eventual charge-off of a lar
ge agriculture relationship.
ff
ff
Non-Interest Income. Non-interest income increased by $42.6 million, or 73%, to $100.8 million for fiscal 2016 from $58.2
million for 2015 primarily due to tax product fee income of $23.3 million related to the acquisition of Refund Advantage in
September 2015, an increase in fees earned on prepaid debit cards, credit products and other payment systems products of $16.0
million due to the addition of multiple new partners and growth in existing Payments programs. Loan fees also increased by $2.9
million from retail and premium finance loan growth.
Non-Interest Expense. Non-interest expense increased by $38.1 million, or 40%, to $134.6 million for fiscal 2016 from $96.5
million for fiscal 2015. Compensation expense increased $15.2 million during fiscal 2016 compared to 2015, and occupancy and
equipment increased $2.6 million. The increases in these categories were principally due to a full year of expenses associated with
the Refund Advantage and AFS/IBEX operations and due to additional product development and IT developer staffing
to support
the Company’s growth initiatives and prepare for other business opportunities. In addition, tax product expense increased $8.6
million due to the Refund Advantage acquisition, card-processing expense increased $5.8 million, and other expense increased
$2.2 million primarily due to intangibles amortization and overall Company growth initiatives. A significant portion of the increase
in card-processing expense was due to sales promotions from one of our largest partners and is a variable expense directly tied to
the fee income growth.
ff
tax rate of 14%, compared
Income Tax TT Expense. Income tax expense for fiscal 2016 was $5.6 million, resulting in an effective
to a tax expense of $1.4 million and an effective
tax rate of 7%, in fiscal 2015. The increase in the Company’s recorded income
tax expense for 2016 was impacted primarily by an increase in earnings and also by higher year-to-date income than what was
projected; however, the increase was partially reduced by an increase in tax-exempt income, highlighting one of the benefits of
our growing tax-exempt municipal securities portfolio.
ff
ff
81
Critical Accounting Policies
The Company’s financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles
("GAAP"). The financial information contained within these financial statements is, to a significant extent, based on approximate
measures of the financial effects
of transactions and events that have already occurred. Management has identified the policies
described below as Critical Accounting Policies. These policies involve complex and subjective decisions and assessments. Some
of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material
impact on the financial statements.
ff
Allowance for Loan Losses. The Company’s allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate
at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off ff trends,
collateral values, changes in non-performing loans and other factors. Quantitative factors also incorporate known information
about individual loans, including borrowers’sensitivity to interest rate movements. Qualitative factors include the general economic
environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of
certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio
growth are other qualitative factors that are considered in the methodology. Although management believes the levels of the
allowance as of both September 30, 2017, and September 30, 2016, 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 and Intangible Assets. Each quarter, the Company evaluates the estimated useful lives of its amortizable
intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In
accordance with ASC 350, Intangibles – Goodwill and Other, recoverability of these assets is measured by comparison of the
carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to
be impaired, the amount of any impairment is measured as the difference
between the carrying value and the fair value of the
impaired asset. The Company was advised on July 27, 2017 that they will not be providing interest-free Refund Advance loans
for H&R Block tax preparation customers during the 2018 tax season. Given the loss of this relationship, the Company reviewed
the intangible asset relating to this relationship for impairment, which resulted in an impairment charge of $10.2 million during
the fourth quarter of fiscal year 2017.
ff
In addition, goodwill and intangible assets are tested annually, yy as of our fiscal year end, for impairment or more often if
conditions indicate a possible impairment. Determining the fair value of a reporting unit involves the use of significant estimates
and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate future
cash flows, risk-adjusted discount rates, future economic and market conditions, comparison of the Company’s market value to
book value and determination of appropriate market comparables. Actual future results may differ from those estimates.
ff
Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-
lived assets are complex and subjective. They can be affected
by a variety of factors, including external factors such as industry
and economic trends, and internal factors such as changes in the Company’s business strategy and internal forecasts. Although the
assumptions and estimates
Company believes the historical assumptions and estimates used are reasonable and appropriate, different
could materially impact the reported financial results.
ff
ff
Customer relationship, trademark, and non-compete intangibles are amortized over the periods in which the asset is
expected to meaningfully contribute to the business as a whole, using either the present value of excess earnings or straight line
amortization, depending on the nature of the intangible asset. Patents are estimated to have a useful life of 20 years, beginning on
the date the patent application is originally filed. Thus, patents are amortized based on the remaining useful life once granted.
Periodically,yy the Company reviews the intangible assets for events or circumstances that may indicate a change in recoverability
of the underlying basis.
Deferred
rr Tax TT Assets and Liabilities. The Company accounts for income taxes according to the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences
are expected to be recovered or settled. Deferred tax assets are recognized subject to management’s judgment that realization is
more likely than not. An estimate of probable income tax benefits that will not be realized in future years is required in determining
the necessity for a valuation allowance.
ff
ff
82
Security Impairment. Management continually monitors the investment securities portfolio for impairment on a security-
by-security basis. Management has a process in place to identify securities that could potentially have a credit impairment that is
other-than-temporary. This process involves the length of time and extent to which the fair value has been less than the amortized
cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security,yy
monitoring changes in value, cash flow projections and the Company’s intent to sell a security or whether it is more likely than
not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend
to maturity. To TT the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is
recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a
security before the recovery of its amortized cost, the Company recognizes an other-than-temporary impairment in earnings for
the difference
between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to
ff
sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of
its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates
the total impairment into a credit loss component recognized in earnings, and the amount of the loss related to other factors is
recognized in other comprehensive income net of taxes.
The amount of the credit loss component of a debt security impairment is estimated as the difference
between amortized
cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of
cash flows discounted at the effective
interest rate implicit to the security at the date of purchase or the current yield to accrete an
asset-backed or floating rate security. Cash flow estimates for trust preferred securities are derived from scenario-based outcomes
of forecasted default rates, loss severity, prepayment
speeds and structural support.
yy
ff
ff
In fiscal 2017, 2016 and 2015, there were no other-than-temporary impairment losses.
VV
rr
Measurement
Level 3 Fair Value
. U.S. GAAP requires the Company to measure the fair value of financial instruments
under a standard that describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes
significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would
use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using
pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. Although management believes that it uses a best estimate of
information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may
differ significantly
from other methodologies and still produce an estimate that is in accordance with U.S. GAAP.PP
ff
Interest Rate Risk (“IRR”)
Overview. ww The Company actively manages interest rate risk, as changes in market interest rates can have a significant
impact on reported earnings. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-
bearing liabilities mature or reprice more rapidly than its interest-earning assets. The interest rate risk process is designed to
compare income simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as
well as the slope of the yield curve. The Company does not currently engage in trading activities to control interest rate risk
although it may do so in the future, if deemed necessary, to help manage
interest rate risk.
yy
Earnings at risk and economic value analysis. As a continuing part of its financial strategy, yy the Bank considers methods
of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to monitor
interest rate risk, the Board of Directors has created an Investment Committee whose principal responsibilities are to assess the
Bank’s asset/liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes
in interest rates.
ff
The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value
of Equity (“EVE analysis”). Under EAR analysis, net interest income is calculated for each interest rate scenario to the net interest
income forecast in the base case. EAR analysis measures the sensitivity of interest-sensitive earnings over a one-year minimum
by projected rates, prepayments, caps and floors. Management exercises its best judgement
time horizon. The results are affected
in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricing, as well as
events outside of management's control, such as customer behavior on loan and deposit activity and the effect
that competition
has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will
from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions,
ff
differ
customer behavior and management strategies, among other factors. We WW perform various sensitivity analyses on assumptions of
deposit attrition and deposit re-pricing. Market-implied forward rates and various likely and extreme interest rate scenarios can
be used for EAR analysis. These likely and extreme scenarios can include rapid and gradual interest rate ramps, rate shocks and
yield curve twists.
VV
ff
83
The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management.
It models -100, +100, +200, +300 and +400 basis point parallel shifts in market interest rates over the next one-year period. Due
to the current low level of interest rates, only a 100 basis point parallel shift is represented.
The Company is within Board approved policy limits for all interest rate scenarios using the snapshot as of September 30,
2017. The tables below show the results of the scenarios as of September 30, 2017 and 2016:
Net Sensitive Earnings at Risk
Balances as of September 30, 2017
r
Net Sensitive Earnings at Risk
Standard (Parallel Shift) YearYY 1r
Net Interest Income at Risk%
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
-6.6%
-8.0%
3.7%
-8.0%
6.0%
-10.0%
8.4%
-15.0%
10.9%
-20.0%
Balances as of September 30, 2016
r
Standard (Parallel Shift) YearYY 1r
Net Sensitive Earnings at Risk
Percent Change Scenario
Board Policy Limits
-100
-4.5%
-5.0%
Net Interest Income at Risk%
+200
+300
+100
0.5%
-5.0%
-0.9%
-10.0%
-2.2%
-15.0%
+400
-2.8%
-20.0%
The EAR analysis reported at September 30, 2017, shows that in an increasing +100, +200, +300, and +400 interest rate
environment, more assets than liabilities will reprice over the modeled one-year period.
IRR is a snapshot in time. The Company’s business and deposits are very predictably cyclical on a weekly,yy monthly and
yearly basis. The Company’s static IRR results could vary depending on which day of the week and timing in relation to certain
payrolls, as well as time of the month in regard to early funding of certain programs, when this snapshot is taken. The Company’s
overnight federal funds purchased fluctuates on a predictable daily and monthly basis due to fluctuations in a portion of its non-
interest bearing deposit base, primarily related to payroll processing and timing of when certain programs are prefunded and when
the funds are received. Fiscal fourth quarter 2017 results do not necessarily show the typical effect
of day of week cyclicality due
to the temporary repositioning of the balance sheet, as previously noted. Owing to the snapshot nature of IRR, as is required by
regulators, in concert with the Company’s predictable weekly,yy monthly and yearly fluctuating deposit base and overnight
borrowings, the results produced by static IRR analysis are not necessarily representative of what management, the Board of
Directors and others would view as the Company’s true IRR positioning. Management and the Board are aware of and understand
these typical borrowing and deposit fluctuations as well as the point in time nature of IRR analysis and anticipated an outcome
where the Company may temporarily be outside of Board policy limits based on a snapshot analysis.
ff
For management to better understand the IRR position of the Bank, an alternative IRR run was completed, for which all
September 30, 2017, values were utilized with the exception of overnight borrowings, non-interest bearing deposits, brokered
deposits, cash due from banks, non-earning assets, and non-paying liabilities. To TT diminish potential issues documented above,
quarterly average balances were utilized for overnight borrowings, non-interest-bearing deposits, brokered deposits and cash due
from banks. Non-earning assets and non-paying liabilities were used to balance the balance sheet. Management believes this view
on IRR, while still subject to some yearly cyclicality, yy more accurately portrays the Bank's IRR position. As noted in the below
chart, the alternative EAR results are more normalized and slightly improved in the -100 interest rate shock compared to the static
results, as timing issues in deposits and overnight borrowings are diminished and lower balances in cash and due from banks are
observed.
The Company would be within policy limits in all scenarios utilizing the alternative IRR scenario run for management
purposes. The tables below highlight those results for September 30, 2017 and 2016.
84
Alternative Net Sensitive Earnings at Risk
Balances as of September 30, 2017
Alternative IRR Results
Standard (Parallel Shift) YearYY
1r
Net Interest Income at Risk%
Net Sensitive Earnings at Risk
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
-1.8%
-8.0%
3.4%
-8.0%
5.4%
-10.0%
5.7%
-15.0%
6.3%
-20.0%
Balances as of September 30, 2016
Alternative IRR Results
Standard (Parallel Shift) YearYY 1r
Net Interest Income at Risk%
Net Sensitive Earnings at Risk
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
-4.6%
-5.0%
0.9%
-5.0%
-0.2%
-10.0%
-1.2%
-15.0%
-1.4%
-20.0%
The alternative EAR analysis reported at September 30, 2017 shows that in an increasing +100, +200, +300, and +400
interest rate environment, more assets than liabilities will reprice over the modeled one-year period.
Net Sensitive Earnings at Risk as of September 30, 2017
r
Balances as of September 30, 2017
% of
Change in Interest Income/Expense
est rates
for a given change in inter
r
Basis Point Change Scenario
Total Loans
Total Investments (non-TEY) and other
Earning Assets
Total
Earning
Total
Earning
Over / (Under) Base Case Parallel Ramp
Assets (in
$000's)
1,317,152
Assets
-100
Base
+100
+200
+300
+400
28.0%
62,784
67,489
72,240
76,914
81,601
86,378
3,390,010
72.0%
49,427
69,628
86,760
102,502
118,174
134,059
Total Interest -Sensitive Income
4,707,162
100.0% 112,211
137,117
159,000
179,416
199,775
220,437
Total Interest-Bearing Deposits
Total Borrowings
743,831
1,402,000
34.7%
65.3%
TT
Total Interest-Sensitive Expense
2,145,831
100.0%
3,700
5,706
9,406
7,304
19,726
27,030
11,111
33,746
44,857
14,917
47,766
62,683
18,724
61,768
80,492
22,530
75,806
98,336
Alternative Net Sensitive Earnings at Risk
Alternative IRR Results
Basis Point Change Scenario
Total Loans
Total Investments (non-TEY) and other
Earning Assets
% of
Total
Earning
Total
Earning
Change in Interest Income/Expense
est rates
for a given change in inter
r
Over / (Under) Base Case Parallel Ramp
Assets (in
$000's)
1,317,152
Assets
-100
Base
+100
+200
+300
+400
37.4%
62,784
67,489
72,240
76,914
81,601
86,378
2,206,516
62.6%
46,468
54,826
60,100
63,968
67,751
71,732
Total Interest -Sensitive Income
3,523,668
100.0% 109,252
122,315
132,340
140,882
149,352
158,110
Total Interest-Bearing Deposits
Total Borrowings
817,480
357,207
69.6%
30.4%
TT
Total Interest-Sensitive Expense
1,174,687
100.0%
872
1,997
2,869
8,386
5,569
13,955
12,950
7,354
20,304
17,515
9,141
26,656
22,079
12,713
34,792
26,643
16,285
42,928
85
The Company believes that its growing portfolio of non-interest bearing deposits provides a stable and profitable funding
vehicle and a significant competitive advantage in a rising interest rate environment as the Company’s cost of funds will likely
remain relatively low, ww with less increase expected relative to other banks. When not able to match loan growth to deposit growth,
the Company continues to execute its investment strategy of primarily purchasing NBQ municipal bonds and agency MBS, however,
the Bank reviews opportunities to add diverse, high quality securities at attractive relative rates when opportunities present
themselves. The NBQ municipal bonds are tax exempt and as such have a tax equivalent yield higher than their book yield. The
tax equivalent yield calculation for NBQ municipal bonds uses the Company’s cost of funds as one of its components. With W the
Company’s large volume of non-interest bearing deposits, the tax equivalent yield for these NBQ municipal bonds is higher than
a similar term investment in other investment categories of similar risk and higher than most other banks can realize and sustain
on the same or similar instruments. The above interest income figures are quoted on a pre-tax basis which is particularly notable
due to the size of the Company’s tax-exempt municipal portfolio.
Under EVE analysis, the economic value of financial assets, liabilities and off-balance
each rate scenario. The economic value of equity is calculated as the difference
liabilities, net of the impact of off-balance
sheet instruments.
ff
ff
ff
sheet instruments is derived under
between the estimated market value of assets and
The EVE analysis used in the following table reflects the required analysis used no less than quarterly by management.
It models immediate -100, +100, +200, 300 and +400 basis point parallel shifts in market interest rates. Due to the current low
level of interest rates, only a -100 basis point parallel shift is represented.
The Company is within Board policy limits for all scenarios. The tables below show the results of the scenario as of
September 30, 2017 and 2016:
Economic Value Sensitivity
VV
Balances as of September 30, 2017
r
Percent Change Scenario
Board Policy Limits
Balances as of September 30, 2016
r
Standard (Parallel Shift)
Economic Value of Equity at Risk%
-100
+100
+200
+300
+400
-3.2%
-10.0%
-0.8%
-10.0%
-3.8%
-20.0%
-7.8%
-30.0%
-10.7%
-40.0%
Standard (Parallel Shift)
Economic Value of Equity at Risk%
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
1.6%
-10.0%
-3.7%
-10.0%
-8.3%
-20.0%
-13.1%
-30.0%
-17.2%
-40.0%
The EVE at risk reported at September 30, 2017, shows that as interest rates increase immediately, yy the economic value
of equity position will decrease from the base, partially due to the degree of the economic value of its base asset size in relation
to the economic value of its base liabilities.
The Company would be within policy limits in all scenarios utilizing the alternative IRR scenario run for management
purposes. The tables below highlight those results for September 30, 2017 and 2016:
Alternative Economic Value
VV
Sensitivity
Balances as of September 30, 2017
Alternative IRR Results
Standard (Parallel Shift)
Economic Value of Equity at Risk%
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
-2.2%
-10.0%
-1.9%
-10.0%
-6.0%
-20.0%
-10.9%
-30.0%
-14.7%
-40.0%
86
Balances as of September 30, 2016
Alternative IRR Results
Standard (Parallel Shift)
Economic Value of Equity at Risk%
Percent Change Scenario
Board Policy Limits
-100
+100
+200
+300
+400
2.1%
-10.0%
-4.2%
-10.0%
-9.4%
-20.0%
-14.7%
-30.0%
-19.3%
-40.0%
The EVE at risk reported using the alternative methodology used for management purposes shows that as interest rates
increase immediately,yy the economic value of equity position will decrease from the base, partially due to the degree of the economic
value of its base asset size in relation to the economic value of its base liabilities. These results under the rising scenarios are
marginally more sensitive than the static snapshot as the effects
of the temporary balance sheet repositioning noted above are
diminished.
ff
Detailed Economic Value Sensitivity
VV
as of September 30, 2017
r
The following table details the economic value sensitivity to changes in market interest rates at September 30, 2017, for
loans, investments, deposits, borrowings and other assets and liabilities (dollars in thousands). The analysis reflects the temporary
balance sheet positioning of cash and due from bank in total investments, and the added economic value creation of the Bank’s
non-interest bearing deposit base under a rising rate environment relative to other aspects of the balance sheet.
Change in Economic ValueVV
Balances as of September 30, 2017
Basis Point Change Scenario
Total Loans
Total Investment
Other Assets
Assets
Interest Bearing Deposits
Non-Interest Bearing Deposits
Total Borrowings & Other Liabilities
Liabilities
Book
Value (in
$000's)
1,317,152
3,390,010
508,410
5,215,572
743,831
2,480,087
1,470,633
4,694,551
Detailed Alternative Economic Value Sensitivity
VV
% of
Total
for a given change in inter
r
est rates
Over / (Under) Base Case Parallel Ramp
Assets
-100
+100
+200
+300
+400
25%
65%
10%
100%
16%
53%
31%
100%
2.0%
2.4%
—%
2.1%
1.0%
6.4%
—%
3.3%
-2.0%
-3.1%
—%
-2.6%
-0.7%
-5.9%
—%
-3.0%
-4.1%
-6.3%
—%
-5.3%
-1.4%
-6.0%
-9.7%
—%
-8.1%
-2.1%
-11.2%
-16.1%
—%
-5.7%
—%
-8.2%
-7.8%
-12.5%
—%
-10.5%
-2.8%
-20.6%
—%
-10.4%
The following is EVE at risk reported using the alternative methodology used for management purposes, for loans,
investments, deposits, borrowings, and other assets and liabilities (dollars in thousands). The analysis reflects the more evenly
matched changes in value of the Bank’s non-interest bearing deposit base under a rising rate environment relative to changes in
value observed in total investments, which is adjusted for the temporary increased portion of cash and due from bank at period
end.
Alternative IRR Results
Economic Value Sensitivity
Basis Point Change Scenario
Total Loans
Total Investment
Other Assets
Assets
Interest Bearing Deposits
Non-Interest Bearing Deposits
Total Borrowings & Other Liabilities
Liabilities
Book
Value (in
$000's)
1,317,152
2,206,516
1,691,904
5,215,572
817,480
2,291,115
1,585,956
4,694,551
% of
Total
Change in Economic ValueVV
for a given change in inter
r
est rates
Over / (Under) Base Case Parallel Ramp
Assets
-100
+100
+200
+300
+400
2.0%
3.6%
—%
2.1%
0.9%
6.4%
—%
3.0%
-2.0%
-4.6%
—%
-2.6%
-0.7%
-5.8%
—%
-2.7%
-4.1%
-9.5%
—%
-5.3%
-1.3%
-6.0%
-14.5%
—%
-8.1%
-1.9%
-11.2%
-16.1%
—%
-5.2%
—%
-7.5%
-7.8%
-18.8%
—%
-10.5%
-2.5%
-20.5%
—%
-9.6%
25%
42%
32%
100%
17%
49%
34%
100%
87
Certain shortcomings are inherent in the method of analysis discussed above and as presented in the 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, yy certain assets,
such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life
of the asset. Furthermore, although management has estimated changes in the levels of prepayments and early withdrawal in these
rate environments, such levels would likely deviate from those assumed in calculating the table. Finally,yy the ability of some
borrowers to service their debt may decrease in the event of an interest rate increase.
ff
The above EAR and EVE measures do not include all actions that management may undertake to manage interest rate
risk in response to anticipated changes in interest rates.
Asset Quality
At September 30, 2017, non-performing assets, consisting of impaired/non-accruing loans, accruing loans delinquent 90
days or more, foreclosed real estate and repossessed consumer property totaled $37.9 million, or 0.72% of total assets, compared
to $1.2 million, or 0.03% of total assets, at September 30, 2016. The increase in NPAsPP was primarily related to two large, well-
collateralized agricultural relationships that became more than 90 days past due. These loan relationships were both still accruing
in the fourth fiscal quarter and one was paid in full on November 1, 2017. The majority of the past due receivables related to AFS/
IBEX are due to the notification requirements and processing time by most insurance carriers while the insurer is processing the
return of the unearned premium. Management will continue to accrue interest until maturity as the unearned premium is ordinarily
sufficient
balance and the contractual interest due.
to pay off the outstanding
ff
ff
Non-accruing loans at September 30, 2017, totaled approximately $0.7 million. The Company had repossessed assets of
approximately $0.3 million at September 30, 2017.
The Company maintains an allowance for loan losses because it is probable that some loans may not be repaid in full.
At September 30, 2017, the Company had an allowance for loan losses of $7.5 million as compared to $5.6 million at September 30,
2016. This increase was mainly due to loan growth and a downgrade of a large well-collateralized agricultural relationship, as
mentioned previously. Management’s periodic review of the allowance for loan losses is based on various subjective and objective
factors including the Company’s past loss experience, known and inherent risks in the portfolio, adverse situations that may affect
the borrower’s ability to repay, yy the estimated value of any underlying collateral and current economic conditions. While
management may allocate portions of the allowance for specifically identified problem loan situations, the majority of the allowance
that
is based on both subjective and objective factors related to the overall loan portfolio and is available for any loan charge-offsff
may occur. As stated previously,yy there can be no assurance future losses will not exceed estimated amounts, or that additional
provisions for loan losses will not be required in future periods. In addition, the Bank is subject to review by the OCC, which has
the authority to require management to make changes to the allowance for loan losses, and the Company is subject to similar
review by the Federal Reserve.
ff
In determining the allowance for loan losses, the Company specifically identifies loans it considers to have potential
collectability problems. Based on criteria established by ASC 310, Receivables, some of these loans are considered to be “impaired”
while others are not considered to be impaired, but possess weaknesses that the Company believes merit additional analysis in
establishing the allowance for loan losses. All other loans are evaluated by applying estimated loss ratios to various pools of loans.
The Company then analyzes other applicable qualitative factors (such as economic conditions) in determining the aggregate amount
of the allowance needed.
At September 30, 2017, none of the allowance for loan losses was allocated to impaired loans. See Note 3 of the “Notes
to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K. Of the allowance, $2.0 million was allocated to other identified problem loans and loan
relationships, representing 3.5% of the related loan balances, and $5.5 million, representing 0.4% of the related loan balances, was
allocated to the remaining overall loan portfolio based on historical loss experience and qualitative factors. At September 30,
2016, $0.01 million of the allowance for loan losses was allocated to impaired loans, representing 1.7% of the related loan balances.
$0.9 million was allocated to other identified problem loan situations or 1.9% of related loan balances, and $4.7 million, representing
0.5%, was allocated against losses from the overall loan portfolio based on historical loss experience and qualitative factors.
The Company maintains an internal loan review and classification process which involves multiple officers
of the Company
and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans.
All loan officers
are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively
or negatively, on an ongoing basis as conditions
warrant.
yy
ff
ff
88
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan
portfolio and in determining the appropriate level of the allowance for loan losses. Potential problem loans are generally defined
by management to include loans rated as substandard by management that are not considered impaired (i.e., non-accrual loans and
accruing troubled debt restructurings), but there are circumstances present to create doubt as to the ability of the borrower to comply
with present repayment terms. The decision of management to include performing loans in potential problem loans does not
necessarily mean that the Company expects losses to occur, but that management recognizes a higher degree or risk associated
with these loans. The loans that have been reported as potential problem loans are predominantly commercial loans covering a
diverse range of businesses and real estate property types. At September 30, 2017, potential problem loans totaled $39.5 million
compared to $8.9 million at September 30, 2016. The $30.6 million increase in potential problem loans since September 30, 2016,
was primarily due to the previously mentioned large, well-collateralized agriculture relationship that was downgraded during fiscal
2017. This relationship also had accrued interest of $1.8 million as of September 30, 2017, which is expected to be collected. It
is possible the collateral will go though a deed in lieu of foreclosure in the near future.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser
extent through its retail bank division, borrowings, principal and interest payments on loans and mortgage-backed securities, and
maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when
necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and
competition.
The Company relies on advertising, quality customer service, convenient locations and competitive pricing to attract and
retain its retail bank deposits and primarily solicits these deposits from its core market areas. Based on its experience, the Company
believes that its consumer checking, savings and money market accounts are relatively stable sources of deposits. The Company’s
by market conditions. However, the Company
ability to attract and retain time deposits has been, and will continue to be, affected
does not foresee any significant retail bank funding issues resulting from the sensitivity of time deposits to such market factors.
ff
The low-cost checking deposits generated through the Company's Payments divisions may carry a greater degree of
concentration risk than traditional consumer checking deposits but, based on experience, the Company believes that
Payments generated deposits are a stable source of funding. To TT date, the Company has not experienced any material net outflows
related to Payments-generated deposits, though no assurance can be given that this will continue to be the case.
The Bank is required by regulation to maintain sufficient
of management, the Bank is in compliance with this requirement.
ff
liquidity to assure its safe and sound operation. In the opinion
Liquidity management is both a daily and long-term function of the Company’s management strategy. The Company
adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) the projected
availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the
objectives of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits
and other short-term government agency or instrumentality obligations. If the Company requires funds beyond its ability to
generate them internally,yy it has additional borrowing capacity with the FHLB and other wholesale funding sources. The Company
is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company’s liquidity or its ability
to borrow additional funds.
The primary investing activities of the Company are the origination of loans, the acquisitions of companies and the
purchase of securities. During the years ended September 30, 2017, 2016 and 2015, the Company originated loans totaling $2.6
billion, $968.4 million and $672.8 million, respectively. Purchases of loans totaled $141.4 million, and $74.1 million during the
years ended September 30, 2017 and 2015, respectively, yy and the Company did not purchase any loans during the year ended
September 30, 2016. During the years ended September 30, 2017, 2016 and 2015, the Company purchased mortgage-backed
securities and other securities in the amount of $849.5 million, $902.9 million and $894.3 million, respectively. Of these purchases
in 2017, 2016 and 2015, $0.9 million, $298.9 million and $75.8 million, respectively, yy were securities designated as held to maturity.
89
At September 30, 2017, the Company had unfunded loan commitments of $233.2 million. See Note 14 to the “Notes to
Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K. Certificates of deposit scheduled to mature in one year or less from September 30, 2017 totaled
$560.8 million, $457.9 million of which are brokered certificates of deposit, with $255.3 million of the $457.9 million brokered
certificates of deposit structured to mature during the second quarter of fiscal 2018, to coincide with the funding of seasonal tax
advance loans. Retail bank certificates of deposit scheduled to mature in one year or less from September 30, 2017 totaled $102.9
million and based on its historical experience, management believes that a significant portion of such deposits will remain with
the Company; however, there can be no assurance that the Company can retain all such deposits. Management believes that loan
repayment and other sources of funds will be adequate to meet the Company’s foreseeable short- and long-term liquidity needs.
The following table summarizes the Company’s significant contractual obligations at September 30, 2017 (dollars in
thousands)
Contractual Obligations
Total
Less than 1
year
1 to 3 years
3 to 5 years
More than 5
years
Time deposits
Long-term debt
Short-term debt
Operating leases
Data processing services
TotalTT
$
581,565
$
557,858
$
19,069
$
4,638
$
85,533
—
1,404,534
1,404,534
29,009
27,789
2,486
3,369
137
—
4,576
14,762
159
—
4,025
9,658
—
85,237
—
17,922
—
$
2,128,430
$
1,968,247
$
38,544
$
18,480
$
103,159
During July 2001, the Company’s unconsolidated trust subsidiary,yy First Midwest Financial Capital Trust
I, sold $10.3
million in floating-rate cumulative preferred securities. Proceeds from the sale were used to purchase trust preferred securities of
the Company, yy which mature in 2031, and are redeemable at any time after five years. The capital securities are required to be
redeemed on July 25, 2031; however, the Company has the option to redeem them earlier. The Company used the proceeds for
general corporate purposes.
TT
On August 15, 2016, the Company announced that it had completed the public offering
ff
of $75 million of its 5.75% fixed-
to-floating rate subordinated debentures due August 15, 2026. Use of proceeds from the offering
was for general purposes,
acquisitions and investments in MetaBank as Tier 1 capital to support growth. See Note 9 to the “Notes to Consolidated Financial
Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form
10-K.
ff
The Company and the Bank met regulatory requirements for classification as well-capitalized institutions at September 30,
2017. See Note 13 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements
and Supplementary Data” of this Annual Report on Form 10-K.
The payment of dividends and repurchase of shares have the effect
ff
of reducing stockholders’ equity. Prior to authorizing
the dividend or repurchase of shares would have on liquidity and
such transactions, the Board of Directors considers the effect
regulatory capital ratios.
ff
The Board of Directors approved a minimum management target, reflected in its capital plan, for the Bank to stay at or
above an 8% Tier 1 capital to adjusted total assets ratio during fiscal 2017. Adjusted total assets are calculated based on a rolling
six month average basis.
Management and the Board of Directors are also mindful of new capital rules that will increase bank and holding company
capital requirements and liquidity requirements. No assurance can be given that our regulators will consider our liquidity level,
or our capital level, though substantially in excess of current rules pursuant to which we are considered “well-capitalized,” to be
sufficiently
high in the future.
ff
Off-Balance Sheet Financing Arrangements
For discussion of the Company’s off-balance
sheet financing arrangements, see Note 14 of “Notes to Consolidated
Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report
on Form 10-K. Depending on the extent to which the commitments or contingencies described in Note 14 occur, the effect
on the
Company’s capital and net income could be significant.
ff
ff
90
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented in this Annual Report have been prepared in
accordance with U.S. GAAP, PP which require the measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact
of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the
assets and liabilities of the Company are monetary in nature. As a result, interest rates generally have a more significant impact
of general levels of inflation. Interest rates do not necessarily move in
on a financial institution’s performance than do the effects
on Meta's
the same direction, or to the same extent, as the prices of goods and services. There have not been any material effects
business due to inflation during any of the last three fiscal years.
ff
ff
Impact of New Accounting Standards
See Note 1 to the Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Item 7A.
Q
Quantitative and Qualitative Disclosur
Q
es About Market Risk
As stated above, the Company derives a portion of its income from the excess of interest collected over interest paid.
The rates of interest the Company earns on assets and pays on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Accordingly, yy the Company’s results of operations, like those of most financial
institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. The risk associated
with changes in interest rates and the Company’s ability to adapt to these changes is known as interest rate risk and is the Company’s
only significant “market” risk.
The Company monitors and measures its exposure to changes in interest rates in order to comply with applicable
government regulations and risk policies established by the Board of Directors, and in order to preserve stockholder value. In
monitoring interest rate risk, the Company analyzes assets and liabilities based on characteristics including size, coupon rate,
repricing frequency, maturity
date and likelihood of prepayment.
yy
If the Company’s assets mature or reprice more rapidly or to a greater extent than its liabilities, then economic value of
equity and net interest income would tend to increase during periods of rising rates and decrease during periods of falling interest
rates. Conversely, yy if the Company’s assets mature or reprice more slowly or to a lesser extent than its liabilities, then economic
value of equity and net interest income would tend to decrease during periods of rising interest rates and increase during periods
of falling interest rates.
The Company currently focuses lending efforts
toward originating and purchasing competitively priced adjustable-rate
and fixed-rate loan products with short to intermediate terms to maturity,yy and may originate loans with terms longer than five years
for borrowers that have a strong credit profile and typically lower loan-to-value ratios. This approach allows the Company to better
maintain a portfolio of loans that will have less sensitivity to changes in the level of interest rates, while providing a reasonable
spread to the cost of liabilities used to fund the loans.
ff
The Company’s primary objective for its investment portfolio is to provide a source of liquidity for the Company. In
addition, the investment portfolio may be used in the management of the Company’s interest rate risk profile. 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, yy 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, and due to the relatively short-term nature of its borrowed funds. The Company believes that its growing portfolio of
low-cost deposits provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest
rate environment than it would otherwise have without this portfolio. This risk is due to the fact that, while asset yields may
decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with these deposits,
which thereby compresses the Company’s net interest margin. As a result of the Company’s interest rate risk exposure in this
regard, the Company has elected not to enter into any new longer-term wholesale borrowings, and generally has not emphasized
longer-term time deposit products.
The Board of Directors and relevant government regulations establish limits on the level of acceptable interest rate risk
at the Company,yy to which management adheres. 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.
ff
91
See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the
caption “Interest Rate Risk ("IRR").”
92
Item 8.
Financial Statements and Supplementary Data
TT
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Statements of Financial Condition
Statements of Operations
Statements of Comprehensive Income
Statements of Changes in Stockholders’ Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
93
KPMG LLP
2500 Ruan Center
666 Grand Avenue
AA
Des Moines, IA 50309
A
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Meta Financial Group, Inc.:
WeWW have audited the accompanying consolidated statements of financial condition of Meta Financial Group, Inc. and subsidiaries
(the Company) as of September 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income,
changes in stockholders’ equity,yy and cash flows for each of the years in the three year period ended September 30, 2017. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
WeWW conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We WW believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly,yy in all material respects, the financial position
of Meta Financial Group, Inc. and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their
cash flows for each of the years in the three year period ended September 30, 2017, in conformity with U.S. generally accepted
accounting principles.
WeWW also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Meta
Financial Group, Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal
Control rr
Commission
(COSO), and our report dated November 29, 2017 expressed an unqualified opinion on the effectiveness
of the Company’s internal
control over financial reporting.
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
T
ff
Des Moines, Iowa
November 29, 2017
/s/ KPMG LLP
94
A
L
METATT FINANCIAL
PP
GROUP
AND SUBSIDIARIES
AA
F
ATT TEMENTS OF
, INC.
CONSOLIDATED ST
AA
L
FINANCIAL
CONDITION
(Dollars in Thousands, Except Share and Per Share Data)
ASSETS
Cash and cash equivalents
Investment securities available-for-sale
Mortgage-backed securities available-for-sale
Investment securities held to maturity
Mortgage-backed securities held to maturity
Loans receivable
Allowance for loan losses
Federal Home Loan Bank stock, at cost
Accrued interest receivable
Premises, furniture, and equipment, net
Bank-owned life insurance
Foreclosed real estate and repossessed assets
Goodwill
Intangible assets
Prepaid assets
Deferred taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing checking
Interest-bearing checking
Savings deposits
Money market deposits
Time certificates of deposit
Wholesale deposits
Total deposits
Short-term debt
Long-term debt
Accrued interest payable
Deferred taxes
Accrued expenses and other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
’
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at September 30, 2017 and 2016,
respectively
Common stock, $.01 par value; 15,000,000 shares authorized, 9,626,431 and 8,523,641 shares issued, 9,622,595 and
8,523,641 shares outstanding at September 30, 2017 and 2016, respectively
Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at September
30, 2017 and 2016, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
TT
Treasury stock, at cost, 3,836 common shares at September 30, 2017 and none at September 30, 2016
Total stockholders’ equity
’
’
Total liabilities and stockholders’
equity
TT
See Notes to Consolidated Financial Statements.
95
September 30,
2017
September 30,
2016
r
$
1,267,586
$
1,106,977
586,454
449,840
113,689
1,325,371
773,830
910,309
558,940
486,095
133,758
925,105
(7,534)
(5,635)
61,123
19,380
19,320
84,702
292
98,723
52,178
28,392
9,101
12,738
47,512
17,199
18,626
57,486
76
36,928
28,921
9,443
—
7,826
$
5,228,332
$
4,006,419
$
2,454,057
$
2,167,522
67,294
53,505
48,758
123,637
476,173
3,223,424
1,404,534
85,533
2,280
—
78,065
38,077
50,742
47,749
125,992
—
2,430,082
1,095,118
92,460
875
4,600
48,309
4,793,836
3,671,444
—
96
—
258,336
167,164
9,166
(266)
—
85
—
184,780
127,190
22,920
—
434,496
334,975
$
5,228,332
$
4,006,419
L
METATT FINANCIAL
PP
GROUP
A
AND SUBSIDIARIES
F
ATT TEMENTS OF
AA
AA
CONSOLIDATED ST
, INC
AA
OPERA
TIONS
(Dollars in Thousands, Except Share and Per Share Data)
2017
2016
r
For the Years Ended September
YY
$
52,117
$
36,187
$
16,571
39,415
108,103
6,051
8,822
14,873
15,771
29,438
81,396
614
3,477
4,091
30,
2015
29,565
13,979
18,063
61,607
726
1,661
2,387
93,230
77,305
59,220
10,589
4,605
1,465
Interest and dividend income:
Loans receivable, including fees
Mortgage-backed securities
Other investments
Interest expense:
Deposits
FHLB advances and other borrowings
Net interest income
Provision for loan losses
Net interest income after prr
r
ovision for loan losses
82,641
72,700
57,755
Non-interest income:
Refund transfer product fees
Tax advance product fees
Card fees
Loan fees
Bank-owned life insurance income
Deposit fees
Loss on sale of securities available-for-sale, net (Includes ($493), ($326), and ($1,634) reclassified
from accumulated other comprehensive income (loss) for net gains (losses) on available for sale
securities for the fiscal years ended September 30, 2017, 2016 and 2015, respectively)
Loss (gain) on foreclosed real estate
Other income
Total non-interest income
Non-interest expense:
Compensation and benefits
Refund transfer product expense
Tax advance product expense
Card processing expense
Occupancy and equipment expense
Legal and consulting expense
Marketing
Data processing expense
Amortization expense
Intangible impairment
Other expense
Total non-interest expense
38,956
31,913
94,707
3,882
2,216
736
(493)
(6)
261
23,347
1,575
70,533
3,374
1,656
603
(326)
—
8
172,172
100,770
88,728
11,885
3,241
24,130
16,465
8,384
2,117
1,449
12,362
10,248
20,654
199,663
61,675
8,648
—
22,263
13,999
4,824
1,972
1,334
4,828
—
15,105
134,648
63
—
54,542
2,348
2,030
593
(1,634)
28
204
58,174
46,493
3
—
16,508
11,399
4,978
1,537
1,347
1,349
—
12,892
96,506
Income before income tax expense
55,150
38,822
19,423
Income tax expense (Includes ($185), ($118), and ($597) income tax expense (benefit) reclassified
from accumulated other comprehensive income (loss) for the fiscal years ended September 30, 2017,
2016 and 2015, respectively)
Net income
r
Earnings per common shar
e (1):
Basic
Diluted
10,233
5,602
1,368
44,917
$
33,220
$
18,055
4.86
4.83
$
$
3.93
3.91
$
$
2.68
2.66
$
$
$
(1) See Reclassification and Revision of Prior Period Balances under Note 1 Summary of Significant Accounting Policies for additional information describing
adjustments made to the Company's EPS calculation. Basic EPS for the fiscal year ended September 30, 2016 of $3.95 was corrected to $3.93 and diluted EPS of
$3.92 was corrected to $3.91.
See Notes to Consolidated Financial Statements.
96
A
L
METATT FINANCIAL
PP
GROUP
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
, INC.
Net income
Other comprehensive (loss) income:
Change in net unrealized gain on securities
Losses realized in net income
Deferred income tax effect
ff
TT
Total other comprehensive (loss) income
TT
Total comprehensive income
See Notes to Consolidated Financial Statements.
r
For Years Ended September
YY
2017
2016
30,
2015
$
44,917
$
33,220
$
18,055
(21,661)
493
(21,168)
(7,414)
(13,754)
31,163
$
31,965
326
32,291
11,826
20,465
7,723
1,634
9,357
3,493
5,864
$
53,685
$
23,919
97
A
L
METATT FINANCIAL
PP
GROUP
Consolidated Statements of Changes in Stockholders' Equity
AND SUBSIDIARIES
, INC.
r
For the
r
Years Ended September
YY
30, 2015, 2016 and 2017
(Dollars in Thousands, Except Share and Per Share Data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of TaxTT
TrTT easury
Stock
TotalTT
Stockholders’
Equity
Balance, September 30, 2014
$
62
$
95,079
$
83,797
$
(3,409) $
(727) $
174,802
Cash dividends declared on common stock ($0.52 per share)
Issuance of common shares from the sales of equity securities
Issuance of common shares due to issuance of stock options and
restricted stock
Issuance of common shares due to acquisition
Stock compensation
Net change in unrealized gains (losses) on securities, net of income
taxes
Net income
Balance, September 30, 2015
Balance, September 30, 2015
Cash dividends declared on common stock ($0.52 per share)
Issuance of common shares from the sales of equity securities
Issuance of common shares due to issuance of stock options and
restricted stock
Stock compensation
Net change in unrealized gains (losses) on securities, net of income
taxes
Net income
Balance, September 30, 2016
Balance, September 30, 2016
Adoption of Accounting Standards Update 2016-09
Cash dividends declared on common stock ($0.52 per share)
Issuance of common shares due to exercise of stock options
Issuance of common shares due to restricted stock
Issuance of common shares due to ESOP
Issuance of common shares due to acquisition
Contingent consideration equity earnout due to acquisition
Shares repurchased for tax withholdings on stock compensation
Stock compensation
Net change in unrealized gains on securities, net of income taxes
Net income
—
14
—
6
—
—
—
—
(3,493)
50,737
378
24,297
258
—
—
—
—
—
—
—
18,055
—
—
—
—
—
5,864
—
—
417
—
—
—
—
—
(3,493)
51,168
378
24,303
258
5,864
18,055
$
$
$
$
82
$ 170,749
82
$ 170,749
$
$
98,359
98,359
$
$
2,455
2,455
$
$
(310) $
271,335
(310) $
271,335
—
2
1
—
—
—
—
(4,389)
11,498
2,046
487
—
—
—
—
—
—
33,220
—
—
—
—
20,465
—
—
—
310
—
—
—
(4,389)
11,500
2,357
487
20,465
33,220
85
$ 184,780
$ 127,190
85
$ 184,780
$ 127,190
$
$
22,920
22,920
$
$
— $
334,975
— $
334,975
—
—
—
4
—
7
—
—
—
—
—
104
—
650
—
1,174
37,289
24,142
(204)
10,401
—
—
(104)
(4,839)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(13,754)
44,917
—
—
—
—
—
—
—
—
—
(4,839)
650
4
1,174
37,296
24,142
(266)
(470)
—
—
—
10,401
(13,754)
44,917
Balance, September 30, 2017
r
$
96
$ 258,336
$ 167,164
$
9,166
$
(266) $
434,496
See Notes to Consolidated Financial Statements.
98
A
L
METATT FINANCIAL
PP
GROUP
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
, INC.
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net
Stock compensation
Provision for loan losses
Recovery for deferred taxes
Loss on other assets
Loss (Gain) on foreclosed real estate
Loss on sale of securities available-for-sale, net
Gain on sale of securities held-to-maturity, net
Net change in accrued interest receivable
Impairment of intangibles
Fair value adjustment of foreclosed real estate
Originations of loans held for sale
Proceeds from sales of loans held for sale
Change in bank-owned life insurance value
Net change in other assets
Net change in accrued interest payable
Excess contingent consideration paid
Net change in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of securities available-for-sale
Proceeds from sales of securities available-for-sale
Proceeds from maturities and principal repayments of securities available-for-sale
Purchase of securities held to maturity
Proceeds from sales of securities held-to-maturity
Proceeds from maturities and principal repayments of securities held to maturity
Purchase of bank-owned life insurance
Proceeds from bank-owned life insurance death benefit
Loans purchased
Proceeds from loans sold
Net change in loans receivable
Proceeds from sales of foreclosed real estate
Cash paid for acquisitions
Cash received upon acquisitions
Federal Home Loan Bank stock purchases
Federal Home Loan Bank stock redemptions
Proceeds from the sale of premises and equipment
Purchase of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in checking, savings, and money market deposits
Net change in time deposits
Net change in wholesale deposits
Net change of FHLB and other borrowings
Net change in federal funds
Net change in securities sold under agreements to repurchase
Proceeds from long term debt
Payment of debt issuance costs
Payment of debt extinguishment costs
Principal payments on capital lease obligations
Cash dividends paid
99
r
For the Years Ended September
YY
30,
2017
2016
2015
$
44,917
$
33,220
$
18,055
45,048
10,401
10,589
(6,286)
406
6
537
(44)
(2,181)
10,248
18
(685,934)
685,934
(2,216)
(23,408)
1,405
(248)
30,806
119,998
35,617
487
4,605
(230)
104
—
326
—
(3,847)
—
—
—
—
(1,656)
(1,968)
603
—
11,237
78,498
28,882
258
1,465
(3,896)
6
(28)
1,634
—
(2,130)
—
—
—
—
(1,225)
(672)
(46)
—
6,911
49,214
(848,613)
(603,995)
(810,624)
457,306
126,420
285,508
116,333
566,371
124,558
(932)
(298,869)
(72,759)
5,870
45,615
(25,000)
—
(141,403)
4,720
(274,840)
200
(29,425)
—
(715,891)
702,280
58
—
20,465
(10,000)
—
—
89
(217,985)
—
—
—
(860,902)
837,800
55
(6,798)
(6,979)
—
9,879
(10,000)
864
—
5,462
(146,111)
86
(125,314)
9,768
(544,324)
541,160
2,100
(5,031)
(700,433)
(738,480)
(453,915)
319,524
(2,355)
476,173
308,000
(5,000)
(565)
—
—
(772)
(80)
737,727
34,821
—
100,000
452,000
(969)
75,000
(1,767)
—
(126)
334,375
(43,382)
—
—
70,000
(6,404)
—
—
—
(116)
(4,839)
(4,389)
(3,493)
Purchase of shares by ESOP
Issuance of restricted stock
Proceeds from exercise of stock options and issuance of common stock
Shares repurchased for tax withholdings on stock compensation
Contingent consideration - cash paid
Net cash provided by financing activities
1,174
4
650
(470)
(17,253)
—
—
—
—
13,857
51,547
—
—
—
—
1,074,191
1,406,154
402,527
Net change in cash and cash equivalents
493,756
746,172
(2,174)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
773,830
27,658
$ 1,267,586
$
773,830
$
29,832
27,658
100
A
L
METATT FINANCIAL
PP
GROUP
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Con't.)
(Dollars in Thousands)
, INC.
YY
30,
For the Years Ended September
r
2015
2017
2016
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest
Income taxes
Franchise taxes
Other taxes
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to foreclosed real estate
Common stock issued for acquisition
Contingent consideration - equity
Capital lease obligation
Securities transferred from available-for-sale to held to maturity
Purchase of available-for-sale securities accrued, not paid
$
16,278
$
3,488
$
20,058
187
290
$
440
(37,296)
(24,142)
—
—
—
5,898
98
79
76
—
—
—
—
—
Purchase of held-to-maturity securities accrued, not paid
$
— $
— $
See Notes to Consolidated Financial Statements.
2,433
5,277
98
48
54
(24,303)
—
(2,259)
310
(7,877)
(3,000)
101
NOTES TO CONSOLIDATED FINANCIAL
AA
STL ATT TEMENTS
AA
F
NOTE 1. SUMMARYRR OFY
SIGNIFICANT
ACCOUNTING POLICIES
AA
PRINCIPLES OF CONSOLIDA
F
TION
The consolidated financial statements include the accounts of Meta Financial Group, Inc. (the “Company”), a unitary
savings and loan holding company located in Sioux Falls, South Dakota, and its wholly-owned subsidiaries which include MetaBank
(the “Bank”), a federally chartered savings bank whose primary federal regulator is the Office
of the Comptroller of the Currency,yy
and Meta Capital, LLC, a wholly owned service corporation subsidiary of MetaBank which invests in financial technology
companies. The Company also owns 100% of First Midwest Financial Capital Trust
which was formed in July
is not included in the consolidated financial statements of the
2001 for the purpose of issuing trust preferred securities. The Trust
Company. All significant intercompany balances and transactions have been eliminated.
TT
I (the “Trust”),
TT
TT
ff
F
NATURE OF
AA
BUSINESS
AND INDUSTRYRR SEGMENT
Y
INFORMATION
AA
The primary source of income relates to payment processing services for prepaid debit cards, ATMAA
sponsorship, tax
refund transfer and other money transfer systems and services. Additionally,yy a significant source of income for the Company is
interest from the purchase or origination of consumer, commercial, agricultural, commercial real estate, residential real estate, and
premium finance loans. The Company accepts deposits from customers in the normal course of business primarily in northwest
and central Iowa, and eastern South Dakota and on a national basis through its MPS and tax services divisions. The Company
operates in the banking industry, yy which accounts for the majority of its revenues and assets. The Company uses the “management
approach” for reporting information about segments in annual and interim financial statements. The management approach is
based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and
assessing performance. Reportable segments are based on products and services, geography,yy legal structure, management structure
and any other manner in which management disaggregates a company. Based on the management approach model, the Company
has determined that its business is comprised of three reporting segments.
AA
USE OF ESTIMA
F
PP
TES IN PREP
ARING
FINANCIAL STL ATT TEMENTS
AA
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect
the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ
from those estimates. Certain significant estimates include the allowance for loan losses, the valuation of goodwill
and intangible assets and the fair values of securities and other financial instruments. These estimates are reviewed by management
regularly; however, they are particularly susceptible to significant changes in the future.
ff
ff
CASH AND CASH EQUIVALENTS
VV
AND FEDERAL FUNDS
L
SOLD
For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company’s cash on hand and
due from financial institutions and short-term interest-bearing deposits in other financial institutions. The Company reports cash
flows net for customer loan transactions, securities purchased under agreement to resell, federal funds purchased, deposit
transactions, securities sold under agreements to repurchase, and Federal Home Loan Bank ("FHLB") advances with terms less
than 90 days. The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank ("FRB"),
based on a percentage of deposits. The total of those reserve balances was $1.5 million at September 30, 2017, and there were no
such reserve balances at September 30, 2016. The Company at times maintains balances in excess of insured limits at various
financial institutions including the FHLB, the FRB and other private institutions. At September 30, 2017, the Company had no
interest-bearing deposits held at the FHLB and $1.23 billion in interest-bearing deposits held at the FRB. At September 30, 2017,
the Company had no federal funds sold. The Company does not believe these instruments carry a significant risk of loss, but
cannot provide assurances that no losses could occur if these institutions were to become insolvent.
SECURITIES
for Sale
GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: Available
(“AFS”), Held to Maturity (“HTM”) or trading. AFS securities are carried at fair value on the consolidated statements of financial
condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity
in accumulated other comprehensive income (loss) (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS
and HTM are subject to review for other-than-temporary impairment. Meta Financial did not hold trading securities at September
30, 2017.
AA
102
The Company classifies the majority of its securities as AFS. AFS securities are those the Company may decide to sell
if needed for liquidity, yy asset-liability management or other reasons. Prior to June 30, 2013, the Basel III Accord was finalized and
regulatory capital for those companies that opt out of the
ff
clarified that unrealized losses and gains on securities will not affect
requirement, which the Company has done.
Gains and losses on the sale of securities are determined using the specific identification method based on amortized cost
and are reflected in results of operations at the time of sale. Interest and dividend income, adjusted by amortization of purchase
premium or discount over the estimated life of the security using the level yield method, is included in income as earned.
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs), or based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and model-based valuation techniques for which significant assumptions are
observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third-party provider that utilizes
several sources for valuing fixed-income securities. Sources utilized by the third-party provider include pricing models that vary
based on asset class and include available trade, bid, and other market information. This methodology includes broker quotes,
proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs.
Securities Impairment
Management continually monitors the investment securities portfolio for impairment on a security-by-security basis and
has a process in place to identify securities that could potentially have a credit impairment that is other-than-temporary. This
process involves the consideration of the length of time and extent to which the fair value has been less than the amortized cost
basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, yy monitoring
changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the
Company will be required to sell the security before the recovery of its amortized cost, which, in some cases, may extend to
maturity. To TT the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment
loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to
sell a security before the recovery of its amortized cost, the Company recognizes an other-than-temporary impairment for the
difference
between amortized cost and fair value. If the Company does not expect to recover the amortized cost basis, does not
plan to sell the security and if it is not more likely than not that the Company would be required to sell the security before the
recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the
Company separates the total impairment into a credit loss component recognized in net income, and the amount of the loss related
to other factors is recognized in other comprehensive income, net of taxes.
ff
The amount of the credit loss component of a debt security impairment is estimated as the difference
between amortized
cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of
cash flows discounted at the effective
interest rate implicit to the security at the date of purchase or the current yield to accrete an
asset-backed or floating rate security. In fiscal 2017, 2016 and 2015, there was no other-than-temporary impairment recorded.
ff
ff
LOANS RECEIVABLE
VV
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-
off ff are reported at their outstanding principal balances reduced by the allowance for loan losses and any deferred fees or costs on
originated loans.
Interest income on loans is accrued over the term of the loans based upon the amount of principal outstanding except
when serious doubt exists as to the collectability of a loan, in which case the accrual of interest is discontinued. Interest income
is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower has
demonstrated a continued ability to make contractual interest and principal payments, in which case the loan is returned to accrual
status.
Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to
interest income using the interest method.
103
As part of the Company’s ongoing risk management practices, management attempts to work with borrowers when
necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans
are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique
to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is
experiencing financial difficulty
, yy the Company identifies and reports that loan as a troubled debt restructuring (“TDR”).
Management considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As
such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified
terms of the loan. Additionally, yy the Company structures loan modifications with the intent of strengthening repayment prospects.
ff
ff
The Company considers whether a borrower is experiencing financial difficulties,
as well as whether a concession has
been granted to a borrower determined to be troubled, when determining whether a modification meets the criteria of being a TDR.
For such purposes, evidence which may indicate that a borrower is troubled includes, among other factors, the borrower’s default
on debt, the borrower’s declaration of bankruptcy or preparation for the declaration of bankruptcy,yy the borrower’s forecast that
to service the related debt, or the borrower’s inability to obtain funds from sources
entity-specific cash flows will be insufficient
other than existing creditors at an effective
interest rate equal to the current market interest rate for similar debt for a non-troubled
debtor. If a borrower is determined to be troubled based on such factors or similar evidence, a concession will be deemed to have
been granted if a modification of the terms of the debt occurred that management would not otherwise consider. Such concessions
may include, among other modifications, a reduction of the stated interest for the remaining original life of the debt, an extension
of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, a reduction of accrued
interest, or a reduction of the face amount or maturity amount of the debt.
ff
ff
Loans that are reported as TDRs apply the identical criteria in the determination of whether the loan should be accruing
or not accruing. The event of classifying the loan as a TDR due to a modification of terms may be independent from the determination
of accruing interest on a loan.
Generally, yy when a loan becomes delinquent 90 days or more for retail bank loans or when the collection of principal or
interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is reversed against current income. The loan will remain on a non-accrual status until six months of good
payment history. Specialty finance loans and Payment segment loans are generally not placed on non-accrual status, but are instead
written off when the collection
of principal and interest becomes doubtful.
ff
RR
MORTGAGE SER
RR
VICING
AND TRANSFERS OF FINANCIAL
F
ASSETS
The Company, yy from time to time, sells loan participations, generally without recourse. Sold loans are not included in
the consolidated financial statements. The Bank generally retains the right to service the sold loans for a fee. At September 30,
2017 and 2016, the Bank was servicing loans for others with aggregate unpaid principal balances of $21.8 million and $19.4
million, respectively.
WW
ALLOWANCE
FOR LOAN LOSSES
The allowance for loan losses represents management’s estimate of probable loan losses that have been incurred as of
the date of the consolidated financial statements. The allowance for loan losses is increased by a provision for loan losses charged
to expense and decreased by charge-offsff
(net of recoveries). Estimating the risk of loss and the amount of loss on any loan is
necessarily subjective. Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s and
the borrower’s
peer group’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect
ability to repay,yy the estimated value of any underlying collateral, and current economic conditions. While management may
periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan
charge-offsff
that occur. The allowance consists of specific, general and unallocated components.
ff
The specific component relates to impaired loans. Loans are generally considered impaired if full principal or interest
payments are not probable in accordance with the contractual loan terms. Often this is associated with a delay or shortfall in
payments of 90 days or more for retail bank loans categories. Non-accrual loans and all TDRs are considered impaired. Impaired
loans, or portions thereof, are charged off ff when deemed uncollectible. Impaired loans are carried at the present value of expected
interest rate or at the fair value of the collateral if the loan is collateral dependent.
future cash flows discounted at the loan’s effective
For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan.
ff
104
The general reserve covers retail bank loans not considered impaired and is determined based upon both quantitative and
qualitative analysis. A separate general reserve analysis is performed for individual classified non-impaired loans and for non-
classified smaller-balance homogeneous loans. The three main assumptions for the quantitative components for 2017 and 2016
are historical loss rates, the look back period (“LBP”) and the loss emergence period (“LEP”).
•
•
•
The historical loss experience is determined by portfolio segment and is based on the actual loss history of the
Company over the past seven years. For the individual classified loans, historic charge-off ff rates for the Company’s
classified loan population are utilized.
A seven-year LBP is appropriate as it captures the Company’s ability to workout troubled loans or relationships
while continuing to factor in the loss experience resulting from varying economic cycles and other factors.
The weighted average LEP is an estimate of the average amount of time from the point the Company identifies a
credit event of the borrower to the point the loss is confirmed by the Company weighted by the dollar value of
applied to the non-classified loan general reserve.
the write off. ff The LEP is only
P
Qualitative adjustment considerations for the general reserve include considerations of changes in lending policies and
procedures, changes in national and local economic and business conditions and developments, changes in the nature and volume
of the loan portfolio, changes in lending management and staff,ff
trending in past due, classified, nonaccrual, and other loan categories,
changes in the Company’s loan review system and oversight, changes in collateral values, credit concentration risk, and the
regulatory and legal requirements and environment.
An unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable
losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating specific and general losses in the portfolio.
ff
The other loan portfolios primarily utilize a general reserve process that primarily uses historical factors related to the
specific loan portfolio, although other qualitative factors may be considered in the final loss rate used to calculate the reserve on
these portfolios. Loans in these portfolios are generally not placed on non-accrual status or impaired. The balances are written
off ff after a loan becomes past due greater than 210 days for premium finance loans, 180 days for tax and other specialty lending
loans and 90 days for other loans.
FORECLOSED REAL EST
L
ATT TE AA
AND REPOSSESSED ASSETS
Real estate properties and repossessed assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair
value less selling costs at the date of foreclosure, establishing a new cost basis. Any reduction to fair value from the carrying
value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses.
Valuations
are periodically performed by management and valuation allowances are increased through a charge to income for
VV
reductions in fair value or increases in estimated selling costs.
INCOME TAXES
TT
The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed
based on the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and
liabilities, using enacted tax rates. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ff
In accordance with ASC 740, Income Taxes
, the Company recognizes a tax position as a benefit only if it is more likely
than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For
tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.
TT
105
PREMISES, FURNITURE AND EQUIPMENT
Land is carried at cost. Buildings, furniture, fixtures, leasehold improvements and equipment are carried at cost, less
accumulated depreciation and amortization. Capital leases, where we are the lessee, are included in premises and equipment at
the capitalized amount less accumulated amortization. WeWW primarily use the straight-line method of depreciation over the estimated
useful lives of the assets, which range from 10 to 40 years for buildings, and 2 to 15 years for leasehold improvements, and for
furniture, fixtures and equipment. We WW amortize capitalized leased assets on a straight-line basis over the lives of the respective
leases. Assets are reviewed for impairment when events indicate the carrying amount may not be recoverable.
TRANSFERS OF FINANCIAL
F
ASSETS
T
Transfers
of financial assets are accounted for as sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Company,yy (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase
them before their maturity.
ff
BANK-OWNED LIFE INSURANCE
Bank-owned life insurance represents the cash surrender value of investments in life insurance contracts. Earnings on
the contracts are based on the earnings on the cash surrender value, less mortality costs.
EMPLOYEE STOCK OWNERSHIP PLAN (“ESOP”)
P
The cost of shares issued to the ESOP, PP but not yet allocated to participants, are presented in the consolidated statements
of financial condition as a reduction of stockholders’ equity. Compensation expense is recorded based on the market price of the
shares as they are committed to be released for allocation to participant accounts. The difference
between the market price and
the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings. Dividends on unallocated shares are used to reduce the accrued
interest and principal amount of the ESOP’s loan payable to the Company. At September 30, 2017 and 2016, all shares in the
ESOP were allocated.
P
ff
FINANCIAL INSTRUMENTS
L
WITH OFF-BALANCE SHEET RISK
The Company, yy in the normal course of business, makes commitments to make loans which are not reflected in the
consolidated financial statements.
GOODWILL
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in
transactions accounted for as business acquisitions. Goodwill is evaluated annually for impairment. The Company performs its
impairment evaluation as of September 30 of each fiscal year. If the implied fair value of goodwill is lower than its carrying
amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in
goodwill are not recognized in the consolidated financial statements. No goodwill impairment was recognized during the years
ended September 30, 2017, 2016 or 2015.
INTANGIBLE
TT
ASSETS
Intangible assets other than goodwill are amortized over their respective estimated lives. All intangible assets are subject
to an impairment test at least annually or more often if conditions indicate a possible impairment.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase with primary dealers only, yy which provide
for the repurchase of the same security. Securities sold under agreements to repurchase identical securities are collateralized by
assets which are held in safekeeping in the name of the Bank or by the dealers who arranged the transaction. Securities sold under
agreements to repurchase are treated as financings, and the obligations to repurchase such securities are reflected as a liability.
The securities underlying the agreements remain in the asset accounts of the Company.
106
REVENUE RECOGNITION
Interest revenue from loans and investments is recognized on the accrual basis of accounting as the interest is earned
according to the terms of the particular loan or investment. Income from service and other customer charges is recognized as
earned. Revenue within the Payments segment is recognized as services are performed and service charges are earned in accordance
with the terms of the various programs.
EARNINGS PER COMMON SHARE (“EPS”)
Basic earnings per share is computed by dividing income available to common stockholders after the allocation of
dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect
of the Company’s
stock options and after the allocation of earnings to the participating securities.
ff
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other comprehensive income or loss. Other comprehensive
income includes the change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments
Accumulated other comprehensive income (loss) is recognized as a separate component of stockholders’ equity.
ff
and tax effects.
STOCK COMPENSATION
AA
Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the
time of grant. The exercise price of options or fair value of nonvested restricted shares granted under the Company’s incentive
plans is equal to the fair market value of the underlying stock at the grant date.
RECLASSIFICATION
AA
AND REVISION OF PRIOR PERIOD BALANCES
F
The Company reclassified insignificant electronic return originator ("ERO") and taxpayer advance fee income and related
expenses during fiscal year 2017 from loan fees and other income to tax product fees and other expenses to tax product expense.
Prior period amounts have also been reclassified.
As of March 31, 2017, certain insignificant adjustments to previously reported Earnings Per Share ("EPS") have been
made to correctly reflect the effect
of participating securities on basic and diluted EPS calculations in accordance with ASC 260.
These changes were immaterial to the overall EPS calculation. Basic EPS for the fiscal year ended September 30, 2016 of $3.95
was corrected to $3.93 and diluted EPS of $3.92 was corrected to $3.91.
ff
TT
In fiscal 2017, the Company early adopted Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock
Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting." The requirement to report the excess
tax benefit related to settlements of share-based payment awards in earnings as an increase or (decrease) to income tax expense
has been applied utilizing the prospective method. While the adoption of ASU 2016-09 requires retrospective application to all
fiscal year periods presented, the Company elected to not recast previously reported financial statements as the impact was
considered insignificant. However, the Company reclassified stock compensation from financing to operating activities on the
Consolidated Statement of Cash Flows as of September 30, 2016 and September 30, 2015.
The Company reclassified goodwill, intangibles, and related amortization expenses during fiscal year 2017 from the
Corporate Services / Other segment to Payments and Banking based on how the Company performs its annual impairment testing.
Prior period amounts have also been reclassified to conform to the current year presentation.
107
In fiscal year 2016, the Company disclosed $89 thousand for proceeds from loan sales as a negative adjustment to net
cash used in investing activities in the Consolidated Statements of Cash Flows. In fiscal 2017, the Company has corrected the
fiscal year 2016 cash flow presentation to appropriately disclose this amount as a positive adjustment to net cash used in investing
activities. As a result, the prior period amount for net changes in loans receivable has been adjusted from $(217,807) thousand,
as previously reported, to $(217,985) thousand. These adjustments are considered to be prior period immaterial corrections and
do not have any impact on fiscal year 2017 net cash provided by (used in) operating activities, investing activities, and financing
activities. In fiscal year 2015, the Company disclosed $5,462 thousand for proceeds from loan sales as a negative adjustment to
net cash used in investing activities. In fiscal year 2017, the Company has corrected the fiscal year 2015 cash flow presentation
to appropriately disclose this amount as a positive adjustment to net cash used in investing activities. As a result, the prior period
amount for net changes in loans receivable has been adjusted from $(135,187) thousand, as previously reported, to $(146,111)
thousand. These adjustments are considered to be prior period immaterial corrections and do not have any impact on fiscal year
2017 net cash provided by (used in) operating activities, investing activities, and financing activities.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326):
TT
Measurement of Credit Losses on Financial Instruments
This ASU requires organizations to replace the incurred loss impairment methodology with a methodology reflecting
expected credit losses with considerations for a broader range of reasonable and supportable information to substantiate credit
loss estimates. This ASU is effective
for annual reporting periods beginning after December 15, 2019. The Company is currently
undertaking a data analysis and ensuring its systems are capturing data applicable to the standard. In addition, the Company is
undergoing a readiness assessment with an external consultant that began in the first quarter of fiscal 2018.
ff
ASU No. 2016-04, Extinguishment of liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid
Stored-Value Products
VV
This ASU requires organizations to derecognize the deposit liabilities for unredeemed prepaid stored-value products (i.e.
Contracts with Customers. This ASU is effective
– breakage) consistently with breakage guidance in TopicTT
606, Revenue from
for annual reporting periods beginning after December 15, 2017, and the Company expects the impact to the consolidated financial
statements to be minimal.
rr
ff
ASU No. 2016-02, Leases (Topic 842):
TT
Amendments to the Leases Analysis
This ASU requires organizations to recognize lease assets and lease liabilities on the balance sheet, along with disclosing
key information about leasing arrangements. This update is effective
for annual reporting periods beginning after December 15,
2018, including interim periods within that reporting period, and the Company has finalized their initial assessment of the ASU
and expects that the standard will be immaterial to the consolidated financial statements with the Company's current leases.
ff
ASU No. 2014-9, Revenue Recognition – Revenue from Contracts with Customers (Topic
TT
606)
This ASU provides guidance on when to recognize revenue from contracts with customers. The objective of this ASU
is to eliminate diversity in practice related to this topic and to develop guidance that would streamline and enhance revenue
recognition requirements. The ASU defines five steps to recognize revenue, including identify the contract with a customer,
identify the performance obligations in the contract, determine a transaction price, allocate the transaction price to the performance
obligations and then recognize the revenue when or as the entity satisfies a performance obligation. This update is effective
for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the
Company is currently assessing all income streams, including different
prepaid card programs so as to ascertain how breakage
ff
will be recognized under the standard.
ff
TT
ASU 2015-17, Income Taxes (T
TT
opic 740): Balance Sheet Classification
of Deferred Taxes
TT
This ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent.
for annual and interim periods in fiscal years beginning after December 15, 2016, and the Company has
This update is effective
determined that this update will not have an impact on the consolidated financial statements.
ff
108
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
TT
Accounting
FF
s
This ASU provides guidance to improve the accounting for share-based payment transactions as part of the FASB’
simplification initiative. The ASU changes seven aspects of the accounting for share-based payment award transactions, including:
(1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum
statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer
withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic companies only); and (7) intrinsic
for annual and interim periods in fiscal years beginning after December
value (nonpublic companies only). This update is effective
15, 2016, and the Company early adopted the standard in the Company's third quarter of fiscal year 2017. Under the new standard,
excess tax benefits and deficiencies related to employee stock-based compensation will be recognized directly within income tax
expense or benefit in the consolidated statement of operations, rather than within additional paid-in capital. Additionally,yy as
permitted under the new standard, the Company made an accounting policy election to account for forfeitures of awards as they
occur, which represents a change from the current requirement to estimate forfeitures when recognizing compensation expense.
The impact of applying that guidance reduced reported income tax expense by $0.5 million for the quarter ended June 30, 2017.
All income tax-related cash flows resulting from share-based payments are reported as an operating activity in the consolidated
statements of cash flows. The Company elected to adopt the change in cash flow classification on a prospective basis, which
resulted in an increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in
the accompanying consolidated statement of cash flows.
ff
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
TT
This ASU addresses eight classification issues related to the statement of cash flows including; debt prepayment or debt
extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination,
proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including
bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization
transactions, and separately identifiable cash flows and application of the predominance principle. This update is effective
for
annual periods and interim periods in fiscal years beginning after December 15, 2017, and the Company is currently assessing the
potential impact to the consolidated financial statements.
ff
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities
This ASU requires entities to shorten the amortization period for certain callable debt securities held at a premium.
Specifically, yy the amendments in this update require the premium to be amortized to the earliest call date. The amendments do not
require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments
in this update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and
is not expected to have an impact on the consolidated financial statements.
ff
TT
ASU 2017-12, Derivatives and Hedging (Topic 815): T
TT
argeted Improvements to
Accounting for Hedging Activities
This ASU targets improving the accounting treatment for hedging activities and provides more flexibility in defining
hedges, and less arduous documentation requirements. The ASU
what can be hedged, less earnings volatility due to ineffective
the ability to reclassify prepayable debt securities from HTM to AFS and subsequently sell the securities, as long as
also offers
ff
for annual periods and interim periods in fiscal years beginning
the securities are eligible to be hedged. This update is effective
after December 15, 2018, with early adoption permitted in any interim period or fiscal year before the effective
date. The Company
is currently assessing the potential impact of early adoption for reclassification of certain prepayable debt securities from HTM
to AFS.
ff
ff
ff
109
NOTE 2. ACQUISITIONS
The Company completed two acquisitions for the fiscal year ended September 30, 2017. The two purchase transactions
are detailed below.
EPS Financial
On November 1, 2016, the Company,yy through MetaBank, completed the acquisition of substantially all of the assets and
certain liabilities of EPS Financial, LLC ("EPS") from privately-held Drake Enterprises, Ltd. ("Drake"). The assets acquired by
MetaBank in the EPS acquisition include the EPS trade name, operating platform, and other assets. EPS is a leading provider of
comprehensive tax-related financial transaction solutions for over 10,000 ERO's nationwide, offering
a one-stop-shop for all tax
preparer financial transactions. These solutions include a full-suite of refund settlement products, prepaid payroll card solutions
and merchant services.
ff
Under the terms of the purchase agreement, the aggregate purchase price, which was based upon the November 1, 2016
tangible book value of EPS, included the payment of $21.9 million in cash, after adjustments, and the issuance of 369,179 shares
of Meta Financial common stock. The Company acquired assets with approximate fair values of $17.9 million of intangible assets,
including customer relationships, trademark, and non-compete agreements, and $0.1 million of other assets, resulting in $30.4
million of goodwill.
The following table represents the approximate fair value of assets acquired and liabilities assumed of EPS on the
consolidated balance sheet as of November 1, 2016:
Fair value of consideration paid
Cash
Stock issued
Total consideration paid
Fair value of assets acquired
Intangible assets
Other assets
TT
Total assets
Fair value of net assets acquired
Goodwill resulting from acquisition
As of November 1, 2016
r
(Dollars in Thousands)
$
$
21,877
26,507
48,384
17,930
79
18,009
18,009
30,375
The Company has included the financial results of EPS in its consolidated financial statements subsequent to the acquisition
date. The EPS transaction has been accounted for under the acquisition method of accounting. The assets and liabilities, both
tangible and intangible, were recorded at their estimated fair values as of the transaction date. The Company made significant
estimates and exercised judgment in estimating fair values and accounting for such acquired assets and liabilities.
The Company recognized goodwill of $30.4 million as of November 1, 2016, which is calculated as the excess of both
the consideration exchanged and the liabilities assumed, which were negligible, as compared to the fair value of identifiable assets
acquired. Goodwill resulted from expected operational synergies and expanded product lines and is expected to be deductible for
tax purposes. See Note 20 to the Consolidated Financial Statements for further information on goodwill.
The Company recognized $0.5 million of pre-tax transaction-related expenses during fiscal 2017. The transaction expenses
are reflected on the consolidated statement of operations primarily under legal and consulting.
110
SCS
On December 14, 2016, the Company, yy through MetaBank, completed the acquisition of substantially all of the assets
and specified liabilities of Specialty Consumer Services LP ("SCS"). The assets acquired by MetaBank in the SCS acquisition
include the SCS trade name, propriety underwriting model and loan management system and other assets. SCS primarily provides
consumer tax advance and other consumer credit services through its loan management services and other financial products.
Under the terms of the purchase agreement, the aggregate purchase price paid at closing, which was based upon the
December 14, 2016 tangible book value of SCS, was approximately $7.5 million in cash and the issuance of 113,328 shares of
Meta Financial common stock. In addition, contingent cash consideration of $17.5 million was paid out in the third quarter of
fiscal 2017 and equity contingent consideration of 264,431 shares of Meta Financial common stock was paid in the fourth quarter
of fiscal 2017 following the achievement of specified performance benchmarks (described more fully below). The Company
acquired assets with approximate fair values of $28.3 million of intangible assets, including customer relationships, trademark,
and non-compete agreements, and negligible other assets, resulting in goodwill of $31.4 million. All amounts are at estimated fair
market values.
Subject to the equity earn-out terms of the purchase agreement, SCS was eligible to receive up to an aggregate of 264,431
shares of Meta Financial common stock within 20 days after the applicable equity earn-out statement was deemed final if certain
targets achieved. The equity earn-out measurements were as follows; 1) if, as of an equity earn-out measurement date, the
anticipated 2018 measured gross profit met or exceeded the statement amount, MetaBank would deliver to SCS a stated number
of shares of Meta Financial common stock; 2) if, as of an equity earn-out measurement date, the aggregate anticipated loan volume
under all 2018 eligible contracts was greater than or equal to the agreed upon volume amount, then MetaBank would deliver to
SCS a stated number of shares of Meta Financial common stock; and 3) if, as of an equity earn-out measurement date, each
agreement specified in the contract was in effect
and none of such agreements was amended or modified as of such time (except
as approved in writing by the President of MetaBank, in his or her sole discretion), then MetaBank would deliver to SCS a stated
number of shares of Meta Financial common stock. None of the equity earn-out payments was contingent on the achievement of
any of the other equity earn-out targets. Upon the determined equity earn-out measurement date, MetaBank determined that each
of the three earn-out measurement targets was achieved and the Company issued an aggregate of 264,431 shares of Meta Financial
common stock in the fourth quarter of fiscal 2017.
ff
Subject to the cash earn-out terms of the purchase agreement, MetaBank agreed to pay to SCS an amount equal to 100%
of the 2017 measured business gross profit up to a maximum of $17.5 million within 20 days after the date on which each
determination of the cash earn-out payment was deemed final. During the third quarter of fiscal 2017, MetaBank paid out the
$17.5 million of contingent cash consideration to SCS based upon the measured business gross profit.
The Company has included the financial results of SCS in its consolidated financial statements subsequent to the
acquisition date. The fair value of the liability for the cash contingent consideration was approximately $17.3 million and was
included in other liabilities in the Company's consolidated statement of financial condition. The fair value of the equity contingent
consideration was approximately $24.1 million at closing and was included in additional paid-in capital in the Company's
consolidated statement of financial condition. The respective fair values of the liability and equity were estimated using an option-
based income valuation method with significant inputs that were not observable in the market and thus represent a Level 3 fair
value measurement as defined in the FASB's
Measurements and
Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included the Company's probability
assessments of the expected future cash flows related to the Company's acquisition of SCS during the earn-out period.
Accounting Standards Codification ("ASC") 820, Fair ValueVV
FF
The following table represents the approximate fair value of assets acquired from and liabilities recorded of SCS on
the consolidated statement of financial condition as of December 14, 2016.
111
Fair value of consideration paid
Cash
Stock issued
Paid Consideration
Contingent consideration - cash
Contingent consideration - equity
Contingent consideration payable
Total consideration paid
Fair value of assets acquired
Intangible assets
Other assets
TT
Total assets
Fair value of net assets acquired
Goodwill resulting from acquisition
As of December 14, 2016
r
(Dollars in Thousands)
$
$
7,548
10,789
18,337
17,252
24,142
41,394
59,731
28,310
2
28,312
28,312
31,419
The SCS transaction has been accounted for under the acquisition method of accounting. The assets and liabilities, both
tangible and intangible, were recorded at their estimated fair values as of the transaction date. The Company made significant
estimates and exercised judgment in estimating fair values and accounting for such acquired assets and liabilities. Upon receipt
of final fair value estimates on certain assets, liabilities, and contingent considerations, which must be within one year of the
acquisition date, the Company made final adjustments to the purchase price allocation and retrospectively adjusted the recorded
goodwill.
The Company recognized goodwill of $31.4 million as of December 14, 2016, which was calculated as the excess of
both the adjusted consideration exchanged and the liabilities recorded as compared to the fair value of identifiable assets acquired.
Goodwill resulted from expected operational synergies and expanded product lines and is expected to be deductible for tax purposes.
See Note 20 to the Consolidated Financial Statements for further information on goodwill.
The Company recognized $0.8 million of pre-tax transaction related expenses during the fiscal year ended 2017. The
transaction expenses are reflected on the consolidated statement of operations primarily under legal and consulting.
112
September 30, 2017
r
September 30, 2016
(Dollars in Thousands)
$
196,706
$
585,510
61,800
163,004
35,759
33,594
250,459
1,326,832
(7,534)
(1,461)
1,317,837
$
162,298
422,932
63,612
37,094
31,271
37,083
171,604
925,894
(5,635)
(789)
919,470
2017
2016
2015
(Dollars in Thousands)
5,635
$
6,255
$
10,589
307
(8,997)
7,534
$
4,605
147
(5,372)
5,635
$
5,397
1,465
123
(730)
6,255
$
$
$
NOTE 3. LOANS RECEIVABLE, NET
VV
YearYY -end loans receivable were as follows:
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Agricultural Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
Total Loans Receivable
Allowance for Loan Losses
Net Deferred Loan Origination Fees
TT
Total Loans Receivable, Net
Annual activity in the allowance for loan losses was as follows:
r
YearYY ended September
r
30,
Beginning balance
Provision for loan losses
Recoveries
Charge offsff
Ending balance
113
Allowance for Loan Losses and Recorded Investment in loans at September 30, 2017 and 2016 were as follows:
Commercial
and
Multi-
Family
Real Estate
1-4 Family
Real Estate
Agricultural
Real Estate
Consumer
Commercial
Operating
Agricultural
Operating
Premium
Finance
Unallocated
TotalTT
(Dollars in Thousands)
r
YearYY Ended
September 30, 2017
Allowance for loan
losses:
Beginning balance
$
654
$
2,198
$
142
$
51
$
117
$
1,332
$
588
$
553
$
5,635
Provision (recovery)
for loan losses
Charge offsff
Recoveries
149
—
—
610
(138)
—
1,248
—
—
6,830
(7,084)
209
1,165
(1,149)
25
(160)
—
12
773
(626)
61
(26)
—
—
10,589
(8,997)
307
Ending balance
$
803
$
2,670
$
1,390
$
6
$
158
$
1,184
$
796
$
527
$
7,534
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Total
Loans:
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
—
803
803
$
—
—
2,670
1,390
$
2,670
$
1,390
$
—
6
6
$
—
158
158
—
—
—
—
1,184
$
1,184
$
796
796
$
527
527
$
7,534
7,534
72
1,109
—
—
—
—
—
—
1,181
196,634
584,401
61,800
163,004
35,759
33,594
250,459
— 1,325,651
TotalTT
$
196,706
$
585,510
$
61,800
$
163,004
$
35,759
$
33,594
$
250,459
$
— $ 1,326,832
114
Ending balance:
individually
evaluated for
impairment
Ending balance:
collectively
evaluated for
impairment
Total
$
Loans:
Ending balance:
individually
evaluated for
impairment
Ending balance:
collectively
evaluated for
impairment
1-4 Family
Real
Estate
Commercial
and
Multi-
Family
Real Estate
Agricultural
Real Estate
Consumer
Commercial
Operating
Agricultural
Operating
Premium
Finance
Unallocated
TotalTT
(Dollars in Thousands)
r
YearYY Ended
September 30, 2016
Allowance for loan
losses:
Beginning balance
$
278
$
1,187
$
163
$
20
$
28
$
3,537
$
293
$
749
$
6,255
Provision
(recovery) for loan
losses
Charge offsff
Recoveries
408
(32)
—
1,369
(385)
27
(21)
—
—
Ending balance
$
654
$
2,198
$
142
$
748
(728)
11
51
—
51
51
338
(249)
—
1,045
(3,252)
2
$
117
$
1,332
$
914
(726)
107
588
(196)
—
—
4,605
(5,372)
147
$
553
$
5,635
—
—
—
—
10
117
117
$
1,332
$
1,332
$
588
588
$
553
553
$
5,625
5,635
10
—
—
644
654
2,198
$
2,198
$
142
142
$
162
433
—
—
—
—
—
—
595
162,136
422,499
63,612
37,094
31,271
37,083
171,604
—
925,299
TotalTT
$
162,298
$
422,932
$
63,612
$
37,094
$
31,271
$
37,083
$
171,604
$
— $
925,894
The asset classification of loans at September 30, 2017, and 2016, were as follows:
r
September 30, 2017
1-4 Family
Real Estate
Commercial
and
Multi-
Family
Real Estate
Agricultural
Real Estate
Consumer
Commercial
Operating
Agricultural
Operating
Premium
Finance
TotalTT
(Dollars in Thousands)
Pass
Watch
Special Mention
Substandard
Doubtful
$
195,838
$
574,730
$
27,376
$
163,004
$
35,759
$
18,394
$
250,459
$
1,265,560
525
247
96
—
10,200
201
379
—
2,006
2,939
29,479
—
—
—
—
—
—
—
—
—
4,541
—
10,659
—
—
—
—
—
17,272
3,387
40,613
—
$
196,706
$
585,510
$
61,800
$
163,004
$
35,759
$
33,594
$
250,459
$
1,326,832
115
r
September 30, 2016
1-4 Family
Real Estate
Commercial
and
Multi-
Family
Real Estate
Agricultural
Real Estate
Consumer
Commercial
Operating
Agricultural
Operating
Premium
Finance
TotalTT
(Dollars in Thousands)
Pass
Watch
Special Mention
Substandard
Doubtful
$
161,255
$
421,577
$
34,421
$
37,094
$
30,574
$
19,669
$
171,604
$
876,194
200
666
177
—
72
962
321
—
2,934
25,675
582
—
—
—
—
—
184
—
513
—
4,625
5,407
7,382
—
—
—
—
—
8,015
32,710
8,975
—
$
162,298
$
422,932
$
63,612
$
37,094
$
31,271
$
37,083
$
171,604
$
925,894
Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered
of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,”
by the Bank's regulator, the Office
“doubtful” or “loss.” The loan classification and risk rating definitions are as follows:
ff
Pass- A pass asset is of sufficient
adverse rating.
ff
quality in terms of repayment, collateral and management to preclude a special mention or an
A watch asset is generally a credit performing well under current terms and conditions but with identifiable weakness
Watch-WW
meriting additional scrutiny and corrective measures. Watch WW is not a regulatory classification but can be used to designate assets
that are exhibiting one or more weaknesses that deserve management’s attention. These assets are of better quality than special
mention assets.
Special Mention- Special mention assets are a credit with potential weaknesses deserving management’s close attention and, if
left uncorrected, may result in deterioration of the repayment prospects for the asset. Special mention assets are not adversely
classified and do not expose an institution to sufficient
risk to warrant adverse classification. Special mention is a temporary status
with aggressive credit management required to garner adequate progress and move to watch or higher.
ff
The adverse classifications are as follows:
Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral
position. Assets so classified will have well-defined weaknesses creating a distinct possibility the Bank will sustain some loss if
the weaknesses are not corrected. Loss potential does not have to exist for an asset to be classified as substandard.
Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely
loss of some principal in any reasonable collection effort.
Due to pending factors, the asset’s classification as loss is not yet
appropriate.
ff
Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is
no longer warranted. This classification does not necessarily mean an asset has no recovery or salvage value leaving room for
future collection efforts.
ff
Generally, yy when a loan becomes delinquent 90 days or more for retail bank loans or when the collection of principal or
interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is reversed against current income. Specialty finance loans and Payment segment loans are generally not
placed on non-accrual status but written off when the
collection of principal and interest become doubtful.
ff
116
Past due loans at September 30, 2017 and 2016 were as follows:
r
September 30, 2017
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
TT
Due
Current
Non-
Accrual
Loans
Total
TT
Loans
Receivable
(Dollars in Thousands)
1-4 Family Real Estate
$
370
$
79
$
— $
449
$
196,257
$
— $
196,706
Commercial and Multi-Family Real
Estate
Agricultural Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
—
—
2,512
—
—
—
—
558
—
—
—
34,198
1,406
—
97
—
34,198
4,476
—
97
584,825
27,602
158,528
35,759
33,497
1,509
2,442
1,205
5,156
245,303
685
—
—
—
—
—
585,510
61,800
163,004
35,759
33,594
250,459
TotalTT
$
4,391
$
3,079
$
36,906
$
44,376
$ 1,281,771
$
685
$ 1,326,832
r
September 30, 2016
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
TT
Due
Current
Non-
Accrual
Loans
Total
TT
Loans
Receivable
(Dollars in Thousands)
1-4 Family Real Estate
$
— $
30
$
— $
30
$
162,185
$
83
$
162,298
Commercial and Multi-Family Real
Estate
Agricultural Real Estate
Consumer
Commercial Operating
Agricultural Operating
Premium Finance
—
—
—
151
—
1,398
TotalTT
$
1,549
$
—
—
—
354
—
275
659
—
—
53
—
—
—
—
53
505
—
422,932
63,612
37,041
30,766
37,083
965
2,638
168,966
$
1,018
$
3,226
$
922,585
$
—
—
—
—
—
—
83
422,932
63,612
37,094
31,271
37,083
171,604
$
925,894
When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s
business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with
a delay or shortfall in payments 90 days or more for retail bank loans. Specialty finance loans and Payment segment loans are
generally not impaired but written off ff when the collection of principal and interest become doubtful. As of September 30, 2017,
there were no specialty finance loans greater than 210 days past due and the Payment segment had no loans past due.
Impaired loans at September 30, 2017 and 2016 were as follows:
r
September 30, 2017
Loans without a specific valuation allowance
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Total
Loans with a specific valuation allowance
TotalTT
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
(Dollars in Thousands)
$
$
$
72
1,109
1,181
$
$
72
1,109
1,181
$
$
— $
— $
—
—
—
—
117
r
September 30, 2016
Loans without a specific valuation allowance
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Total
Loans with a specific valuation allowance
1-4 Family Real Estate
TotalTT
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
(Dollars in Thousands)
$
$
$
$
84
433
517
78
78
$
$
$
$
84
433
517
78
78
$
$
$
$
—
—
—
10
10
Cash interest collected on impaired loans was not material during the years ended September 30, 2017 and 2016.
The following table provides the average recorded investment in impaired loans for the years ended September 30, 2017
and 2016.
1-4 Family Real Estate
Commercial and Multi-Family Real Estate
Agricultural Real Estate
Commercial Operating
Agricultural Operating
TotalTT
r
YearYY Ended September
r
30,
2017
Average
AA
Recorded
Investment
2016
Average
AA
Recorded
Investment
$
$
176
883
146
202
268
$
1,675
$
144
1,117
—
6
2,919
4,186
For fiscal 2017 and 2016, the Company’s TDRs (which involved forgiving a portion of interest or principal on any loans
or making loans at a rate materially less than that of market rates) are included in the table above.
No TDRs were recorded during fiscal 2017 or 2016. Also, no TDRs which had been modified during the 12-month period
prior to default had a payment default during fiscal 2017 or 2016.
In December 2016, MetaBank purchased, net of purchase discount, a $134.0 million seasoned, floating rate, private
student loan portfolio. All loans are indexed to three-month LIBOR plus various margins. The portfolio is serviced by ReliaMax
Lending Services, LLC and insured by ReliaMax Surety Company.
The majority of the Company’s retail bank originated loans are to Iowa- and South Dakota-based individuals and
organizations. Excluding the purchased student loan balance of $123.7 million at September 30, 2017, the Company’s purchased
loans portfolio totaled $10.7 million at September 30, 2017, which were secured by properties located in Iowa, North Dakota, and
South Dakota.
The Company originates and purchases commercial real estate loans. These loans are considered by management to be
of somewhat greater risk of not being collected due to the dependency on income production. The Company’s commercial real
estate loans included $110.2 million of loans secured by hotel properties and $156.4 million of multi-family properties at
September 30, 2017. The Company’s commercial real estate loans included $65.4 million of loans secured by hotel properties
and $112.6 million of multi-family properties at September 30, 2016. The remainder of the commercial real estate portfolio is
diversified by industry. The Company’s policy for requiring collateral and guarantees varies with the creditworthiness of each
borrower.
118
Non-accruing loans were $0.7 million and $0.1 million at September 30, 2017 and 2016, respectively. There were $36.9
million and $1.0 million in accruing loans delinquent 90 days or more at September 30, 2017 and 2016, respectively. For the year
ended September 30, 2017, gross interest income which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to approximately $13,000, none of which was included in interest income.
NOTE 4. LOAN SERVICING
RR
Loans serviced for others are not reported as assets. The unpaid principal balances of these loans at year-end were as
follows:
September 30,
r
2017
2016
(Dollars in Thousands)
$
$
3,980
15,452
19,432
$
3,162
18,649
21,811
$
2015
5,055
17,156
22,211
Mortgage loan portfolios serviced for Fannie Mae
Other
$
$
NOTE 5. EARNINGS PER COMMON SHARE
EPS is computed after deducting dividends. The Company has granted restricted share awards with dividend rights that
are considered to be participating securities. Accordingly, yy a portion of the Company’s earnings is allocated to those participating
securities in the EPS calculation. Basic earnings per share is computed by dividing income available to common stockholders
after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average
of the Company’s stock options and after the allocation of earnings to the participating securities. Antidilutive
dilutive effect
options are disregarded in the EPS calculations.
ff
A reconciliation of the net income and common stock share amounts used in the computation of basic and diluted EPS
for the fiscal years ended September 30, 2017, 2016 and 2015 is presented below.
Basic income per common share:
Net income attributable to Meta Financial Group, Inc.
Weighted average common shares outstanding
Basic income per common share
Diluted income per common shar
r
e:
Net income attributable to Meta Financial Group, Inc.
Weighted average common shares outstanding
Outstanding options - based upon the two-class method
WW
Weighted average diluted common shares outstanding
Diluted income per common share
2017
2016 (1)
(Dollars in Thousands, Except Share and Per
Share Data)
2015
$
$
$
$
44,917
9,247,092
4.86
$
$
33,220
8,443,956
3.93
$
$
18,055
6,730,086
2.68
44,917
$
33,220
$
18,055
9,247,092
8,443,956
6,730,086
55,652
53,390
61,499
9,302,744
8,497,346
6,791,585
4.83
$
3.91
$
2.66
(1) See Reclassification and Revision of Prior Period Balances under Note 1 Summary of Significant Accounting Policies for additional
information describing adjustments made to the Company's EPS calculation. Basic EPS for the fiscal year ended September 30, 2016 of $3.95
was corrected to $3.93 and diluted EPS of $3.92 was corrected to $3.91.
All stock options were considered in computing diluted EPS for the years ended September 30, 2017 and September 30,
2016. Stock options totaling 28,891 were not considered in computing diluted earnings per common share for the year ended
September 30, 2015 because they were anti-dilutive.
119
NOTE 6. SECURITIES
Securities available for sale at September 30, 2017 and 2016 were as follows:
r
Available For
Sale
AA
At September 30, 2017
r
Debt securities
Small business administration securities
Non-bank qualified obligations of states and political
subdivisions
Asset-backed securities
Mortgage-backed securities
Total debt securities
Common equities and mutual funds
TT
Total available for sale securities
GROSS
GROSS
AMORTIZED
UNREALIZED
UNREALIZED
COST
GAINS
(LOSSES)
FAIR
VV
VALUE
(Dollars in Thousands)
57,046
938,883
94,451
588,918
1,679,298
1,009
825
14,983
2,381
1,259
19,448
436
—
57,871
(3,037)
—
(3,723)
(6,760)
—
950,829
96,832
586,454
1,691,986
1,445
$
1,680,307
$
19,884
$
(6,760) $
1,693,431
At September 30, 2016
r
Debt securities
AMORTIZED
GROSS
UNREALIZED
GROSS
UNREALIZED
COST
GAINS
(LOSSES)
(Dollars in Thousands)
Trust preferred and corporate securities
$
14,935
$
— $
(1,957) $
Small business administration securities
Non-bank qualified obligations of states and political
subdivisions
Asset-backed securities
Mortgage-backed securities
Total debt securities
Common equities and mutual funds
TT
Total available for sale securities
78,431
668,628
117,487
555,036
1,434,517
755
2,288
30,141
73
4,382
36,884
373
—
(97)
(745)
(478)
(3,277)
(3)
FAIR
VV
VALUE
12,978
80,719
698,672
116,815
558,940
1,468,124
1,125
$
1,435,272
$
37,257
$
(3,280) $
1,469,249
Securities held to maturity at September 30, 2017 and 2016 were as follows:
Held to Maturity
At September 30, 2017
r
Debt securities
GROSS
GROSS
AMORTIZED
UNREALIZED
UNREALIZED
COST
GAINS
(LOSSES)
FAIR
VV
VALUE
(Dollars in Thousands)
Obligations of states and political subdivisions
Non-bank qualified obligations of states and political
subdivisions
Mortgage-backed securities
TT
Total held to maturity securities
$
$
19,247
$
157
$
(36) $
19,368
430,593
113,689
4,744
—
(2,976)
(1,233)
563,529
$
4,901
$
(4,245) $
432,361
112,456
564,185
120
At September 30, 2016
r
Debt securities
AMORTIZED
GROSS
UNREALIZED
GROSS
UNREALIZED
COST
GAINS
(LOSSES)
FAIR
VV
VALUE
(Dollars in Thousands)
Obligations of states and political subdivisions
Non-bank qualified obligations of states and political
subdivisions
Mortgage-backed securities
TT
Total held to maturity securities
$
$
20,626
$
355
$
(44) $
20,937
465,469
133,758
11,744
708
619,853
$
12,807
$
(11)
(31)
(86) $
477,202
134,435
632,574
Included in securities available for sale are trust preferred securities as follows:
At September 30, 2016
r
Issuer(1)
Key Corp. Capital I
Huntington Capital Trust II SE
PNC Capital Trust
TotalTT
Amortized
Cost
Fair Value
Unrealized
Gain (Loss)
S&P
Credit Rating
Moody's
Credit Rating
(Dollars in Thousands)
$
$
4,987
$
4,189
$
4,981
4,968
4,077
4,712
(798) BB+
(904) BB
(256) BBB-
14,936
$
12,978
$
(1,958)
Baa2
Baa2
Baa1
(1) Trust preferred
TT
securities are single-issuance. There are no known deferrals, defaults or excess subordination.
The Company sold all of its trust preferred securities during the first quarter of fiscal year 2017.
Management has implemented processes to identify securities that could potentially have a credit impairment that is
other-than-temporary. This process can include, but is not limited to, evaluating the length of time and extent to which the fair
value has been less than the amortized cost basis, reviewing available information regarding the financial position of the issuer,
interest or dividend payment status, monitoring the rating of the security, yy monitoring changes in value, and projecting cash flows.
Management also determines whether the Company intends to sell a security or whether it is more likely than not we will be
required to sell the security before the recovery of its amortized cost basis which, in some cases, may extend to maturity. ToTT the
extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.
For all securities considered temporarily impaired, the Company does not intend to sell these securities and it is not more
likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at
maturity. The Company believes collection will occur for all principal and interest due on all investments with amortized cost in
excess of fair value and considered only temporarily impaired.
Generally accepted accounting principles require that, at acquisition, an enterprise classify debt securities into one of
three categories: available for sale, held to maturity or trading. AFS securities are carried at fair value on the consolidated statements
of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component
of equity in accumulated other comprehensive income. HTM debt securities are measured at amortized cost. Both AFS and HTM
are subject to review for other-than-temporary impairment. Meta Financial did not have any trading securities at September 30,
2017.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities
have been in continuous unrealized loss position at September 30, 2017, and 2016, were as follows:
121
r
Available For
Sale
AA
LESS THAN 12 MONTHS
OVER 12 MONTHS
TOTALTT
At September 30, 2017
r
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
(Dollars in Thousands)
Debt securities
Non-bank qualified
obligations of states and
political subdivisions
Mortgage-backed securities
Total debt securities
TT
Total available for sale
securities
280,900
237,897
518,797
(2,887)
(1,625)
(4,512)
5,853
100,287
106,140
(150)
(2,098)
(2,248)
286,753
338,184
624,937
(3,037)
(3,723)
(6,760)
$
518,797
$
(4,512) $
106,140
$
(2,248) $
624,937
$
(6,760)
At September 30, 2016
r
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
LESS THAN 12 MONTHS
OVER 12 MONTHS
TOTALTT
(Dollars in Thousands)
Debt securities
Trust preferred and corporate
securities
$
— $
— $
12,978
$
(1,957) $
12,978
$
(1,957)
Non-bank qualified
obligations of states and
political subdivisions
Asset-backed securities
Mortgage-backed securities
Total debt securities
Common equities and mutual
funds
TT
Total available for sale
securities
8,481
89,403
54,065
151,949
(58)
(745)
(230)
(1,033)
2,688
—
36,979
52,645
(39)
—
(248)
(2,244)
11,169
89,403
91,044
204,594
(97)
(745)
(478)
(3,277)
—
—
125
(3)
125
(3)
$
151,949
$
(1,033) $
52,770
$
(2,247) $
204,719
$
(3,280)
Held To Maturity
LESS THAN 12 MONTHS
OVER 12 MONTHS
TOTALTT
At September 30, 2017
r
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
(Dollars in Thousands)
Debt securities
Obligations of states and
political subdivisions
Non-bank qualified
obligations of states and
political subdivisions
Mortgage-backed securities
Total held to maturity
TT
securities
$
1,364
$
(6) $
4,089
$
(30) $
5,453
$
(36)
202,018
112,456
(2,783)
(1,233)
6,206
—
(193)
—
208,224
112,456
(2,976)
(1,233)
$
315,838
$
(4,022) $
10,295
$
(223) $
326,133
$
(4,245)
122
At September 30, 2016
r
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
Fair
ValueVV
Unrealized
(Losses)
LESS THAN 12 MONTHS
OVER 12 MONTHS
TOTALTT
(Dollars in Thousands)
Debt securities
Obligations of states and
political subdivisions
Non-bank qualified
obligations of states and
political subdivisions
Mortgage-backed securities
Total held to maturity
TT
securities
$
2,909
$
(13) $
2,256
$
(31) $
5,165
$
(44)
1,294
20,061
(11)
(31)
—
—
—
—
1,294
20,061
$
24,264
$
(55) $
2,256
$
(31) $
26,520
$
(11)
(31)
(86)
As of September 30, 2017 and 2016, the investment portfolio included securities with current unrealized losses which
have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Because the declines in
fair value were due to changes in market interest rates, not in estimated cash flows, and the Company does not intend to sell these
securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security
before recovery of its amortized cost basis, which may occur at maturity,yy no other-than-temporary impairment was recorded at
September 30, 2017 or 2016.
The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have
from contractual maturities
call features which allow the issuer to call the security prior to maturity. Expected maturities may differ
in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.
The expected maturities of certain Small Business Administration securities may differ
from contractual maturities because the
borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
ff
ff
r
Available For
Sale
AA
At September 30, 2017
r
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Common equities and mutual funds
TT
Total available for sale securities
AMORTIZED
RR
COST
FAIRFF
VV
VALUE
(Dollars in Thousands)
$
— $
36,586
347,831
705,963
—
37,674
358,198
709,660
1,090,380
1,105,532
588,918
1,009
586,454
1,445
$
1,680,307
$
1,693,431
123
AMORTIZED
RR
COST
FAIRFF
VV
VALUE
(Dollars in Thousands)
$
— $
17,370
426,034
436,077
879,481
555,036
755
—
17,897
446,771
444,516
909,184
558,940
1,125
$
1,435,272
$
1,469,249
AMORTIZED
RR
COST
FAIRFF
VV
VALUE
(Dollars in Thousands)
$
1,483
$
17,926
144,996
285,435
449,840
113,689
$
563,529
$
1,480
18,160
147,832
284,257
451,729
112,456
564,185
AMORTIZED
RR
COST
FAIRFF
VV
VALUE
(Dollars in Thousands)
$
472
$
12,502
157,944
315,177
486,095
133,758
$
619,853
$
471
12,696
163,806
321,166
498,139
134,435
632,574
At September 30, 2016
r
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Common equities and mutual funds
TT
Total available for sale securities
Held To Maturity
TT
At September 30, 2017
r
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
TT
Total held to maturity securities
At September 30, 2016
r
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
TT
Total held to maturity securities
124
Activities related to the sale of securities are summarized below.
September 30,
r
Available For
Sale
AA
Proceeds from sales
Gross gains on sales
Gross losses on sales
Net (loss) on available for sale securities
Held To Maturity
Net carrying amount of securities sold
Gross realized gain on sales
Gross realized losses on sales
Net gain on held to maturity securities
2017
2016
2015
(Dollars in Thousands)
$
457,306
$
285,508
$
566,371
4,091
4,628
(537)
1,459
1,785
(326)
2,753
4,387
(1,634)
$
5,826
$
— $
92
48
44
—
—
—
—
—
—
—
The Company's decision to sell securities held to maturity in the fourth quarter of fiscal 2017 was due to credit
deteriorations of the securities based on the Company's internal credit analysis as well as respective downgrades from credit
agencies.
NOTE 7. PREMISES, FURNITURE AND EQUIPMENT, NET
TT
YearYY -end premises and equipment were as follows:
September 30,
r
Land
Buildings
Furniture, fixtures, and equipment
Capitalized leases
Less: accumulated depreciation and amortization
Net book value
2017
2016
(Dollars in Thousands)
$
1,578
$
10,642
46,934
2,259
61,413
(42,093)
19,320
$
$
1,578
10,482
41,756
2,259
56,075
(37,449)
18,626
Depreciation expense of premises, furniture and equipment included in occupancy and equipment expense was
approximately $5.5 million, $5.4 million and $4.6 million for the years ended September 30, 2017, 2016 and 2015, respectively.
Amortization expense on capitalized leases for the years ended September 30, 2017, 2016 and 2015, was $0.1 million, $0.2 million
and $0.2 million, respectively, yy and is included in occupancy and equipment expense. Substantially all of the Company's capitalized
leases at September 30, 2017 were building leases.
125
AA
NOTE 8. TIME CERTIFICA
RR
F
TES OF
DEPOSITS
Time certificates of deposits in denominations of $250,000 or more were approximately $85.2 million and $44.5 million
at September 30, 2017, and 2016, respectively.
At September 30, 2017, the scheduled maturities of time certificates of deposits were as follows for the years ending:
As of September 30,
r
(Dollars in Thousands)
2018
2019
2020
2021
2022
Thereafter
$
560,825
10,943
5,158
2,412
2,227
—
(1)
TT
Total Certificates
(1) As of September 30, 2017, total certificates of deposits included $457.9 million of brokered certificates of deposits, which
are recored in Wholesale deposits on the consolidated statements of financial condition.
581,565
$
Under the Dodd-Frank Act, IRA and non-IRA deposit accounts are permanently insured up to $250,000 by the DIF under
management of the FDIC.
NOTE 9. SHORTRR TERM DEBT AND LONG TERM DEBT
Short Term Debt
TT
September 30,
r
Overnight federal funds purchased
Short-term FHLB advances
Short-term capital lease
Repurchase agreements
TotalTT
2017
2016
$
987,000
$
415,000
62
2,472
992,000
100,000
79
3,039
1,404,534
1,095,118
The Company had $987.0 million of overnight federal funds purchased from the FHLB as of September 30, 2017. The
Company had $992.0 million in overnight federal funds purchased from the FHLB at September 30, 2016. At September 30, 2017,
the Company’s short-term advances from the FHLB totaled $415.0 million and carried a net weighted average rate of 1.27%. The
Company had $100.0 million in short-term advances from the FHLB at September 30, 2016.
The Bank has executed blanket pledge agreements whereby the Bank assigns, transfers, and pledges to the FHLB and
grants to the FHLB a security interest in all mortgage collateral and securities collateral. The Bank has the right to use, commingle,
and dispose of the collateral it has assigned to the FHLB. Under the agreement, the Bank must maintain “eligible collateral” that
has a “lending value” at least equal to the “required collateral amount,” all as defined by the agreement.
At fiscal year-end 2017 and 2016, the Bank pledged securities with fair values of approximately $1.07 billion and $824.5
million, respectively, yy against specific FHLB advances. In addition, qualifying mortgage loans of approximately $628.0 million,
and $501.0 million were pledged as collateral at September 30, 2017, and 2016, respectively.
As of September 30, 2017, the Company had three capital leases, two equipment leases and one property lease. At
September 30, 2017, the portion of the liability expected to be expensed and amortized over the next 12 months is approximately
$79,507.
126
Securities sold under agreements to repurchase totaled approximately $2.5 million and $3.0 million at September 30,
2017, and 2016, respectively.
An analysis of securities sold under agreements to repurchase at September 30, 2017 and 2016 follows:
September 30,
r
Highest month-end balance
AA
Average balance
Weighted average interest rate for the year
WW
Weighted average interest rate at year end
2017
2016
(Dollars in Thousands)
$
$
3,782
2,225
0.98%
1.59%
3,468
2,179
0.60%
0.61%
The Company pledged securities with fair values of approximately $9.3 million at September 30, 2017, as collateral for
securities sold under agreements to repurchase. There were $9.2 million of securities pledged as collateral for securities sold under
agreements to repurchase at September 30, 2016.
Long Term Debt
TT
September 30,
r
(Dollars in Thousands)
Long-term FHLB advances
Trust preferred securities
Subordinated debentures (net of issuance costs)
Long-term capital lease
TotalTT
2017
2016
$
— $
10,310
73,347
1,876
85,533
7,000
10,310
73,211
1,939
92,460
At September 30, 2017, the Company had no long-term advances from the FHLB. The Company had $7.0 million in
long-term advances from the FHLB at September 30, 2016 which carried a weighted average rate of 6.98%. The $7.0 million of
long-term advances were paid off by the Company during the
fourth quarter of 2017.
ff
At September 30, 2017, the scheduled maturities of the Company's long-term debt were as follows for the years ending:
September 30,
r
(Dollars in Thousands)
2018
2019
2020
2021
2022
Thereafter
TT
Total long-term debt
Trust preferred
securities
Subordinated
debentures
Long-term
capital lease
TotalTT
$
$
— $
—
—
—
—
— $
—
—
—
—
10,310
10,310 $
73,347
73,347 $
— $
65
72
77
82
1,580
1,876 $
—
65
72
77
82
85,237
85,533
T
Trust
I, a 100%-owned nonconsolidated subsidiary
preferred securities are due to First Midwest Financial Capital Trust
of the Company. The securities were issued in 2001 in conjunction with the Trust’
Preferred
s issuance of 10,000 shares of Trust
Securities. The securities bear the same interest rate and terms as the trust preferred securities. The securities are included on the
consolidated statements of financial condition as liabilities.
TT
T
T
127
The Company issued all of the 10,310 authorized shares of trust preferred securities of First Midwest Financial Capital
I holding solely securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a variable
Trust
T
rate of London Interbank Offered
Rate (“LIBOR”) plus 3.75% (5.22% at September 30, 2017, and 4.99% at September 30, 2016),
not to exceed 12.5%. The Company may,yy at one or more times, defer interest payments on the capital securities for up to 10
consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid
distributions are required to be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company
has a semi-annual option to shorten the maturity date. The redemption price is $1,000 per capital security plus any accrued and
unpaid distributions to the date of redemption.
ff
Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the
Company’s indebtedness and senior to the Company’s common stock.
Although the securities issued by the Trust
T
are not included as a component of stockholders’ equity,yy the securities are
treated as capital for regulatory purposes, subject to certain limitations.
The Company completed the public offering
of $75.0 million of 5.75% fixed-to-floating rate subordinated debentures
during fiscal year 2016. These notes are due August 15, 2026. The subordinated debentures were sold at par, resulting in net
proceeds of approximately $73.9 million. At September 30, 2017, the Company had $73.3 million in subordinated debentures,
net of issuance costs of $1.7 million. Accumulated interest expense on the subordinated debentures was $4.3 million as of September
30, 2017.
ff
As of September 30, 2017, the Company had three capital leases, two equipment leases and one property lease. At
September 30, 2017, the portion of the liability expected to be expensed and amortized beyond 12 months is $1.9 million. The
majority of the $1.9 million is related to the Urbandale, Iowa retail branch location.
NOTE 10. EMPLOYEE STOCK OWNERSHIP AND PROFIT SHARING PLANS
The Company maintains an Employee Stock Ownership Plan (“ESOP”) for eligible employees who have 1000 hours of
employment with the Bank, have worked at least one year at the Bank and who have attained age 21. ESOP expense of $1,668,000,
$1,150,000 and $994,000 was recorded for the years ended September 30, 2017, 2016 and 2015, respectively. Contributions of
$1,606,102, $1,174,682 and $992,038 were made to the ESOP during the years ended September 30, 2017, 2016 and 2015,
respectively.
Contributions to the ESOP and shares released from suspense are allocated among ESOP participants on the basis of
compensation in the year of allocation. Benefits generally become 100% vested after seven years of credited service. Prior to the
completion of seven years of credited service, a participant who terminates employment for reasons other than death or disability
receives a reduced benefit based on the ESOP’s vesting schedule. Forfeitures are reallocated among remaining participating
employees in the same proportion as contributions. Benefits are payable in the form of stock upon termination of employment.
The Company’s contributions to the ESOP are not fixed, so benefits
P
payable under the ESOP cannot be estimated.
P
For the years ended September 30, 2017, 2016 and 2015, 20,486 shares, 19,381 shares and 23,750 shares, from the
suspense account, with a fair value of $78.40, $60.61 and $41.77 per share, respectively,yy were released. For the years ended
September 30, 2017, 2016 and 2015, allocated shares and total ESOP shares reflect 14,126 shares, 15,502 shares and 10,294 shares,
respectively, yy withdrawn from the ESOP by participants who were no longer with the Company or by participants diversifying
their holdings. At September 30, 2017, 2016 and 2015, there were 1,479, 2,710 and 2,974 shares purchased, respectively,yy for
dividend reinvestment.
YearYY -end ESOP shares are as follows:
P
At September 30,
r
Allocated shares
Unearned shares
Total ESOP shares
P
2017
2016
2015
(Dollars in Thousands)
256,219
262,872
256,283
—
—
—
256,219
262,872
256,283
Fair value of unearned shares
$
— $
— $
—
128
The Company also has a profit sharing plan covering substantially all full-time employees. Contribution expense to the
profit sharing plan, included in compensation and benefits, for the years ended September 30, 2017, 2016 and 2015 was $1.61
million, $1.26 million and $1.10 million, respectively.
NOTE 11. SHARE-BASED COMPENSATION PLANS
AA
The Company maintains the 2002 Omnibus Incentive Plan, as amended and restated, which, among other things, provides
for the awarding of stock options and nonvested (restricted) shares to certain officers
are
granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other
relevant factors.
and directors of the Company. Awards
AA
ff
The following table shows the effect
ff
to income, net of tax benefits, of share-based expense recorded in the years ended
September 30, 2017, 2017 and 2016.
r
YearYY Ended September
r
30,
2017
2016
2015
(Dollars in Thousands)
Total employee stock-based compensation expense recognized in income,
TT
net of tax effects of $3,907, $192, and $66, respectively
ff
$
6,486
$
559
$
334
As of September 30, 2017, stock-based compensation expense not yet recognized in income totaled $16.9 million, which
is expected to be recognized over a weighted-average remaining period of 4.08 years.
At grant date, the fair value of options awarded to recipients is estimated using a Black-Scholes valuation model. The
exercise price of stock options equals the fair market value of the underlying stock at the date of grant. Options are issued for 10-
year periods with 100% vesting generally occurring either at grant date or over a four-year period. No options were granted during
the years ended September 30, 2017, 2016 or 2015. The intrinsic value of options exercised during the years ended September 30,
2017, 2016 and 2015 were $1.8 million, $1.5 million and $0.9 million, respectively.
Shares have previously been granted each year to executives and senior leadership members under the applicable Company
incentive plan. These shares vest at various times ranging from immediately to four years based on circumstances at time of grant.
The fair value is determined based on the fair market value of the Company’s stock on the grant date. Director shares are issued
to the Company’s directors, and these shares vest immediately. The total fair value of director’s shares granted during the years
ended September 30, 2017, 2016 and 2015 was $0.5 million, $0.2 million and $0.1 million, respectively.
In addition to the Company’s 2002 Omnibus Incentive Plan, the Company also maintains the 1995 Stock Option and
Incentive Plan. No new options were, or could have been, awarded under the 1995 plan during the year ended September 30,
2017; however, previously awarded options were exercised under this plan during the year ended September 30, 2017.
In addition, during the first and second quarters of fiscal 2017, shares were granted to certain named executive officers
(“NEOs”) of the Company in connection with their signing of employment agreements with the Company. These stock awards
vest in equal installments over eight years.
ff
The following tables show the activity of options and share awards (including shares of restricted stock subject to vesting
and fully-vested restricted stock) granted, exercised or forfeited under all of the Company’s option and incentive plans during the
years ended September 30, 2017 and 2016.
129
Options outstanding, September 30, 2016
Granted
Exercised
Forfeited or expired
Options outstanding, September 30, 2017
Options exercisable end of year
Options outstanding, September 30, 2015
Granted
Exercised
Forfeited or expired
Options outstanding, September 30, 2016
Options exercisable end of year
Number
of
Shares
WW
Weighted
Average
AA
Exercise
Price
WW
Weighted
AA
Average
Remaining
Contractual
TT
Term (Yrs)
Aggregate
Intrinsic
ValueVV
(Dollars in Thousands, Except Share and Per Share Data)
125,560
$
—
(29,386)
(20,417)
75,757
75,757
$
$
25.73
—
33.38
26.25
22.62
22.62
2.68
$
—
—
—
2.28
2.28
$
$
4,379
—
1,790
1,464
4,225
4,225
Number
of
Shares
WW
Weighted
AA
Average
Exercise
Price
WW
Weighted
AA
Average
Remaining
Contractual
TT
Term (Yrs)
Aggregate
Intrinsic
ValueVV
(Dollars in Thousands, Except Share and Per Share Data)
189,088
$
—
(63,528)
—
125,560
125,560
$
$
25.74
—
25.77
—
25.73
25.73
3.16
$
—
—
—
2.68
2.68
$
$
3,027
—
1,510
—
4,379
4,379
Number ofr
Shares
Weighted
WW
VV
Fair Value
Average
AA
At Grant
(Dollars in Thousands, Except Share and Per Share Data)
Nonvested shares outstanding, September 30, 2016
Granted
VV
Vested
Forfeited or expired
Nonvested shares outstanding, September 30, 2017
20,656
$
316,604
(29,135)
(3,599)
304,526
$
41.37
87.49
64.22
56.39
86.96
Nonvested shares outstanding, September 30, 2015
Granted
VV
Vested
Forfeited or expired
Nonvested shares outstanding, September 30, 2016
130
Number ofr
Shares
Weighted
WW
VV
Fair Value
Average
AA
At Grant
(Dollars in Thousands, Except Share and Per Share Data)
44,002
$
8,154
(33,666)
2,166
20,656
$
40.80
42.49
40.93
46.98
41.37
NOTE 12. INCOME TAXES
TT
The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis. The provision for
income taxes for the years presented below consisted of the following:
r
Years ended September
YY
30,
Federal:
Current
Deferred
State:
Current
Deferred
2017
2016
2015
(Dollars in Thousands)
$
$
12,153
(5,040)
7,113
$
4,410
(440)
3,970
4,217
(3,896)
321
4,366
(1,246)
3,120
1,422
210
1,632
1,048
(1)
1,047
Income tax expense
$
10,233
$
5,602
$
1,368
TT
Total income
tax expense differs from the statutory
ff
federal income tax rate as follows:
r
Years ended September
YY
30,
Income tax expense at federal tax rate
Increase (decrease) resulting from:
State income taxes net of federal benefit
Nontaxable buildup in cash surrender value
Stock based compensation
Tax exempt income
Nondeductible expenses
Other, net
TT
Total income tax expense
2017
2016
2015
(Dollars in Thousands)
$
19,303
$
13,588
$
6,798
2,014
(776)
(593)
(9,991)
316
(40)
10,233
$
933
(580)
(66)
(8,257)
196
(212)
5,602
$
692
(711)
(37)
(5,230)
188
(332)
1,368
$
131
The components of the net deferred tax asset (liability) at September 30, 2017 and 2016 were:
September 30,
Deferred tax assets:
Bad debts
Deferred compensation
Stock based compensation
Operational reserve
AMT Credit
Intangibles
Indirect tax benefits of unrecognized tax positions
Other assets
Deferred tax liabilities:
FHLB stock dividend
Premises and equipment
Patents
Prepaid expenses
Net unrealized gains on securities available for sale
2017
2016
(Dollars in Thousands)
$
2,832
$
1,548
3,436
645
1,869
5,235
266
1,933
17,764
(425)
(1,789)
(842)
(673)
(4,934)
(8,663)
2,044
1,345
265
540
5,563
393
216
1,362
11,728
(411)
(1,913)
(988)
(668)
(12,348)
(16,328)
Net deferred tax assets (liabilities)
$
9,101
$
(4,600)
As of September 30, 2017 and 2016, the Company had a gross deferred tax asset of $1.3 million and $0.9 million,
respectively, yy for separate company state cumulative net operating loss carryforwards, which was fully reserved for as the Company
does not anticipate any state taxable income at the holding company level in future periods.
In general, management believes that the realization of its deferred tax assets is more likely than not based on the
expectations as to future taxable income; therefore, there was no deferred tax valuation allowance at September 30, 2017, or 2016
with the exception of the state cumulative net operating loss carryforwards discussed above.
Federal income tax laws provided savings banks with additional bad debt deductions through September 30, 1987, totaling
$6.7 million for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which
liability otherwise would total approximately $2.3 million at September 30, 2017 and 2016. If the Bank were to be liquidated or
otherwise cease to be a bank, or if tax laws were to change, the $2.3 million would be recorded as expense.
The provisions of ASC 740, Income Taxes,
address the determination of how tax benefits claimed or expected to be
claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740, the Company recognizes
the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon
examination, with a tax examination being presumed to occur, including the resolution of any related appeals or litigation. The
tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has
a greater than 50% likelihood of being realized upon ultimate resolution.
TT
The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial
review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance
that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve.
With W respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from
material changes during the period in the facts and circumstances surrounding a tax issue, and (ii) any difference
from the Company’s
tax position as recorded in the consolidated financial statements and the final resolution of a tax issue during the period.
ff
132
The tax years ended September 30, 2014 and later remain subject to examination by the Internal Revenue Service. For
state purposes, the tax years ended September 30, 2014 and later remain open for examination, with few exceptions.
A reconciliation of the beginning and ending balances for liabilities associated with unrecognized tax benefits for the
years ended September 30, 2017, and 2016 follows:
September 30,
r
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions related to the prior years
Reductions for tax positions due to settlement with taxing authorities
Reductions for tax positions related to prior years
Balance at end of year
2017
2016
(Dollars in Thousands)
525
192
31
—
(103)
645
$
$
974
63
—
(372)
(140)
525
$
$
The total amount of unrecognized tax benefits that, if recognized, would impact the effective
rate was $460,000 as of
September 30, 2017. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense.
The amount of accrued interest related to unrecognized tax benefits was $114,000 as of September 30, 2017. The Company does
not anticipate any significant change in the total amount of unrecognized tax benefits within the next 12 months.
ff
L
NOTE 13. CAPITALTT REQUIREMENTS
AND RESTRICTIONS ON RETAINED
TT
EARNINGS
In July 2013, the Company’s primary federal regulator, the Federal Reserve and the Bank’s primary federal regulator,
the OCC, approved final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking
organizations. The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel
Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards.
The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to financial institution holding
companies and their depository institution subsidiaries, including us and the Bank, as compared to U.S. general risk-based capital
rules. The Basel III Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other
the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also addressed asset
ff
issues affecting
risk weights and other matters affecting
the denominator in banking institutions’ regulatory capital ratios and replaced the existing
general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-
sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In
addition, the Basel III Capital Rules implemented certain provisions of the Dodd-Frank Act, including the requirements of Section
939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rules became effective
for us
ff
and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.
ff
Pursuant to the Basel III Capital Rules, the Company and Bank, respectively,yy are subject to new regulatory capital adequacy
requirements promulgated by the Federal Reserve and the OCC. Failure by our Company or Bank to meet minimum capital
requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect
on our consolidated financial statements. Prior to January 1, 2015, our Bank was subject to capital requirements under Basel I and
there were no capital requirements for our Company. Under the capital requirements and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s
and Bank’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components,
risk weightings and other factors.
ff
ff
133
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain
minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). At
September 30, 2017, both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified
as well-capitalized under the prompt corrective action requirements. The Company and the Bank took the accumulated other
comprehensive income (“AOCI”) opt-out election; under the rule, non-advanced approach banking organizations were given a
one-time option to exclude certain AOCI components. The table below includes certain non-GAAP financial measures that are
used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management
reviews these measures along with other measures of capital as part of its financial analyses and has included this non-GAAP
financial information, and the corresponding reconciliation to total equity.
Minimum
Requirement For
Capital Adequacy
Purposes
Minimum
Requirement
Well WW
TT
To Be
Capitalized
Under Prr
ompt
Corrective Action
Provisions
Company
Bank
7.64%
13.97
14.46
18.41
8.35%
17.28
17.82
23.17
9.64%
18.22
18.22
18.59
10.35%
21.95
21.95
22.35
4.00%
4.50
6.00
8.00
4.00%
4.50
6.00
8.00
5.00%
6.50
8.00
10.00
5.00%
6.50
8.00
10.00
September 30, 2017
Tier 1 leverage ratio
Common equity Tier 1 capital ratio
Tier 1 capital ratio
Total qualifying capital ratio
r
September 30, 2016
Tier 1 leverage ratio
Common equity Tier 1 capital ratio
Tier 1 capital ratio
TT
Total qualifying capital ratio
The following table provides a reconciliation of the amounts included in the table above for the Company.
Standardized Approach (1)
r
September 30, 2017
(Dollars in Thousands)
Total equity
Adjustments:
$
LESS: Goodwill, net of associated deferred tax liabilities
LESS: Certain other intangible assets
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
LESS: Net unrealized gains (losses) on available-for-sale securities
Common Equity Tier 1 (1)
Long-term debt and other instruments qualifying as Tier 1
LESS: Additional tier 1 capital deductions
Total Tier 1 capital
Allowance for loan losses
Subordinated debentures (net of issuance costs)
TT
Total qualifying capital
134
434,496
95,332
41,743
1,495
9,166
286,760
10,310
374
296,696
7,718
73,347
377,761
(1) The Basel III Capital Rules revised the definition of capital, increased minimum capital ratios, and introduced a minimum
CET1 ratio. Those changes became effective
for the Company on January 1, 2015, and are being fully phased in through the end
of 2021. The capital ratios were determined using the Basel III Capital Rules that became effective
on January 1, 2015.
ff
ff
ff
Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital
above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions,
conservation buffer
stock repurchases and discretionary bonus payments to executive officers.
is exclusively composed
of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. On January
1, 2016, the Company and Bank were expected to comply with the capital conservation buffer
requirement, which increased the
three risk-based capital ratios by 0.625% each year through 2019, at which point the Common Equity Tier 1 risk-based, Tier 1
risk-based and total risk-based capital ratios will be 7.0%, 8.5% and 10.5%, respectively.
The capital conservation buffer
ff
ff
ff
NOTE 14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes various commitments to extend credit which are not reflected in the
accompanying consolidated financial statements.
At September 30, 2017 and 2016, unfunded loan commitments approximated $233.2 million and $182.9 million,
respectively, yy excluding undisbursed portions of loans in process. Commitments, which are disbursed subject to certain limitations,
extend over various periods of time. Generally, yy unused commitments are cancelled upon expiration of the commitment term as
outlined in each individual contract.
The Company had no commitments to purchase or sell securities at September 30, 2017 or September 30, 2016.
The exposure to credit loss in the event of non-performance by other parties to financial instruments for commitments
to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements
are used in making commitments and conditional obligations as are used for on-balance-sheet instruments. Management monitors
credit exposures, including, but not limited to,
ff
several factors when estimating its allowance for uncollectible off-balance-sheet
economic developments and historical loss rates.
Since certain commitments to make loans and to fund lines of credit expire without being used, the amount does not
necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the contract.
Securities with fair values of approximately $5.7 million and $5.8 million at September 30, 2017 and 2016, respectively,yy
were pledged as collateral for public funds on deposit. Securities with fair values of approximately $3.8 million and $3.4 million
at September 30, 2017, and 2016, respectively, were pledged
as collateral for individual, trust and estate deposits.
yy
Legal Proceedings
TT
Restraining Order and Temporary
The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank,
TT
The Plaintiffff ’s
BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County,yy Texas.
Injunction adds both
Second Amended Original Petition and Application for Temporary
MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager
and processor for both INB and MetaBank. According to the Petition, NetSpend has informed Inter National Bank (“INB”) that
the depository accounts at INB for the NetSpend program supposedly contained $10.5 million less than they should. INB alleges
that NetSpend has breached its fiduciary duty by making affirmative
misrepresentations to INB about the safety and stability of
the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to
cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing
procedures. To TT the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for
portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have
been unjustly enriched. The Bank is vigorously contesting this matter. In January 2014, NetSpend was granted summary judgment
in this matter which is under appeal. Because the theory of liability against both NetSpend and the Bank is the same, the Bank
views the NetSpend summary judgment as a positive in support of our position. An estimate of a range of reasonably possible
loss cannot be made at this stage of the litigation because discovery is still being conducted.
TT
ff
135
The Bank was served on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment
Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by former
prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that after all
of the programs have been wound down, there are two accounts with a positive balance to which they are entitled. The Bank’s
position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited
claims it is entitled is $4,001,025. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible
loss cannot be made at this stage of the litigation because discovery is still being conducted.
Other than the matters set forth above and litigation routine to the Company's or its subsidiaries' respective businesses,
there are no other new material pending legal proceedings or updates to which the Company or its subsidiaries is a party.
NOTE 15. LEASE COMMITMENTS
The Company has leased property under various non-cancelable operating lease agreements which expire at various times
through 2036, and require annual rentals ranging from $12,000 to $789,000 plus the payment of the property taxes, normal
maintenance, and insurance on certain properties. The Company also entered into capital lease agreements during the fiscal year
ended September 30, 2015, for building and equipment expiring at various times through fiscal year 2035. Amortization expense
for these capital leases was $0.1 million for the fiscal year ended September 30, 2017, and included in interest expense.
In November 2014, the Company entered into a sale-leaseback transaction for one of its retail bank locations in the Des
Moines area. This lease meets the requirements of a capital lease and has been reflected as such in the financial statements. The
original term of the lease is 20 years and does not contain any penalties for failure to renew after the initial 20 year term where
guarantees or loans from the lessee to the lessor are expected to be outstanding. The Company has the option to extend the lease
for four additional five year terms at the conclusion of the original lease term.
The following table shows the total minimum rental commitment for our operating and capital leases for each of the years
presented below as of September 30, 2017.
2018
2019
2020
2021
2022
Thereafter
Total Leases Commitments
Amounts representing interest
Present value of net minimum lease payments
NOTE 16. SEGMENT REPORTING
RR
r
YearYY Ended September
r
30,
(Dollars in Thousands)
Operating
Leases
Capital
Leases
$
2,486
$
2,287
2,289
2,143
1,882
17,922
29,009
$
$
$
179
179
182
182
182
2,240
3,144
1,206
1,938
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 reports its results of operations through the following three business segments: Payments, Banking, and
Corporate Services/Other.rr Certain shared services, including the investment portfolio, wholesale deposits and borrowings, are
included in Corporate Services/Other.rr Specialty Lending and Retail Bank are reported in the Banking segment. MPS, Refund
Advantage, EPS, SCS, and other tax businesses are reported in the Payments segment.
136
The Company reclassified goodwill, intangibles, and related amortization expenses during fiscal year 2017 from the
Corporate Services / Other segment to Payments and Banking based on how annual impairment testing is performed. Prior period
amounts have also been reclassified to conform to the current year presentation.
r
YearYY Ended September
r
30, 2017
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense (benefit)
Total assets
Total goodwill
TT
Total deposits
r
YearYY Ended September
r
30, 2016
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense (benefit)
Total assets
Total goodwill
TT
Total deposits
Payments
Banking
Corporate
Services/
Other
TotalTT
$
13,845
$
52,231
$
42,027
$
108,103
503
13,342
7,613
165,707
132,984
38,452
2,723
49,508
2,976
4,685
24,520
26,697
11,647
30,380
—
1,780
42,159
(9,999)
14,873
93,230
10,589
172,172
199,663
55,150
185,521
87,145
2,436,893
1,343,968
3,698,843
11,578
229,969
—
556,562
5,228,332
98,723
3,223,424
Payments
Banking
Corporate
Services/
Other
TotalTT
$
9,711
$
38,321
$
33,364
$
2,579
30,785
—
1,229
34,236
(2,222)
81,396
4,091
77,305
4,605
100,770
134,648
38,822
2,972,688
4,006,419
—
10
36,928
2,430,082
181
9,530
971
95,261
77,411
26,409
87,311
25,350
2,131,042
1,331
36,990
3,634
4,280
23,001
14,635
946,420
11,578
299,030
137
r
YearYY Ended September
r
30, 2015
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense (benefit)
Total assets
Total goodwill
TT
Total deposits
Payments
Banking
Corporate
Services/
Other
TotalTT
$
7,261
$
31,394
$
22,952
$
169
7,092
—
54,417
47,731
13,778
93,336
25,350
1,424,304
1,377
30,017
689
3,358
19,028
13,658
724,834
11,578
233,235
841
22,111
776
399
29,747
(8,013)
61,607
2,387
59,220
1,465
58,174
96,506
19,423
1,711,535
2,529,705
—
(5)
36,928
1,657,534
NOTE 17. PARENT
PP
Y
COMPANYPP
FINANCIAL
STL ATT TEMENTS
AA
Presented below are condensed financial statements for the parent company, yy Meta Financial, at the dates and for the years
presented below.
F
CONDENSED STATT TEMENTS OF
AA
L
FINANCIAL
CONDITION
September 30,
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long term debt
Other liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
T
Treasury stock, at cost
Total stockholders' equity
TT
Total liabilities and stockholders' equity
138
2017
2016
(Dollars in Thousands)
14,569
$
521,021
406
535,996
83,657
17,843
101,500
$
$
$
96
$
258,336
167,164
9,166
(266)
434,496
535,996
$
$
15,716
403,574
413
419,703
83,521
1,207
84,728
85
184,780
127,190
22,920
—
334,975
419,703
$
$
$
$
$
$
$
F
CONDENSED STATT TEMENTS OF
AA
AA
OPERA
TIONS
r
Years Ended September
YY
30,
Interest expense
Other expense
Total expense
2017
2016
2015
(Dollars in Thousands)
$
4,959
$
1,022
$
440
5,399
382
1,404
Gain (loss) before income taxes and equity in undistributed net
income of subsidiaries
(5,399)
(1,404)
Income tax (benefit)
(1,935)
Gain (loss) before equity in undistributed net income of subsidiaries
(3,464)
(519)
(885)
418
269
687
(687)
(324)
(363)
Equity in undistributed net income of subsidiaries
48,381
34,105
18,418
Net income
$
44,917
$
33,220
$
18,055
139
F
CONDENSED STATT TEMENTS OF
AA
CASH FLOWS
r
For the Years Ended September
YY
30,
CASH FLOWS FROM OPERATING ACTIVITIES
2017
2016
2015
(Dollars in Thousands)
Net income
$
44,917
$
33,220
$
18,055
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation, amortization and accretion, net
Equity in undistributed net income of subsidiaries
Stock compensation
Change in other assets
Change in other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITES
Capital contributions to subsidiaries
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid
Purchase of shares by ESOP
Proceeds from contingent consideration - equity
Proceeds from exercise of stock options & issuance of common stock
Issuance of common shares due to acquisition
Issuance of restricted stock
Proceeds from long term debt
Payment of debt issuance costs
Shares repurchased for tax withholdings on stock compensation
Other, net
Net cash provided by financing activities
Net change in cash and cash equivalents
CASH AND CASH EQUIVALENTS
VV
Beginning of year
End of year
136
(48,381)
10,401
7
16,636
23,716
(22)
(34,105)
427
(5)
541
56
—
(18,418)
253
(15)
378
253
(82,820)
(82,820)
(81,000)
(81,000)
(67,600)
(67,600)
(4,839)
1,174
24,142
650
37,296
4
—
—
(470)
—
57,957
(4,389)
—
—
13,536
—
—
75,000
(1,767)
—
—
82,380
(3,493)
—
—
75,681
—
—
—
—
—
—
72,188
$
$
$
(1,147) $
1,436
$
4,841
15,716
14,569
$
$
14,280
15,716
$
$
9,439
14,280
The extent to which the Company may pay cash dividends to stockholders will depend on the cash currently available
ability of the Bank to pay dividends to the Company. For further discussion, see Note 13 herein.
yy
at the Company, as well as the
140
NOTE 18. SELECTED QUARTERL
RR
YLL FINANCIAL
Y
DAL
TAA ATT (UNAUDITED)
A
Fiscal YearYY 2017
r
Interest income
Interest expense
Net interest income
Provision (recovery) for loan losses
Net Income
Earnings per common and common equivalent share
Basic
Diluted
Dividend declared per share
Fiscal YearYY 2016
r
Interest income
Interest expense
Net interest income
Provision for loan losses
Net Income
Earnings per common and common equivalent share
Basic
Diluted
Dividend declared per share
Fiscal YearYY 2015
r
Interest income
Interest expense
Net interest income
Provision for loan losses
Net Income
December 31
QUARTER ENDED
March 31
June 30
(Dollars in Thousands)
September 30r
$
22,575
$
27,718
$
28,861
$
2,742
19,833
843
1,244
3,752
23,966
8,649
32,142
3,918
24,943
1,240
9,787
$
$
0.14
0.14
0.13
$
3.44
3.42
0.13
$
1.05
1.04
0.13
$
18,275
$
20,629
$
20,763
$
720
17,555
786
4,058
691
19,938
1,173
14,283
844
19,919
2,098
8,873
$
$
0.49
0.49
0.13
$
1.68
1.67
0.13
$
1.04
1.04
0.13
28,949
4,461
24,488
(144)
1,744
0.19
0.19
0.13
21,729
1,836
19,893
548
6,006
0.70
0.70
0.13
$
14,232
$
15,758
$
15,254
$
16,363
661
13,571
48
3,595
473
15,285
593
5,181
593
14,661
700
4,640
660
15,703
124
4,639
0.64
0.63
0.13
Earnings per common and common equivalent share
Basic
Diluted
Dividend declared per share
$
$
0.58
0.58
0.13
$
0.79
0.78
0.13
$
0.67
0.66
0.13
NOTE 19. FAIR
FF
VV
VALUES
L
OF FINANCIAL
F
INSTRUMENTS
Accounting Standards Codification (“ASC”) 820, Fair Value
defines fair value, establishes a framework
VV
for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement.
It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the market in which the reporting entity transacts.
rr
Measurements
The fair value hierarchy is as follows:
Level 1 Inputsp
– Valuation
VV
is based upon quoted prices for identical instruments traded in active markets that the Company
has the ability to access at measurement date.
141
Level 2 Inputsp
is based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active and model-based valuation techniques for which significant assumptions are
observable in the market.
– Valuation
VV
VV
– Valuation
Level 3 Inputsp
is generated from model-based techniques that use significant assumptions not observable in
the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the
Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation
techniques
include use of option pricing models, discounted cash flow models and similar techniques.
VV
There were no transfers between levels of the fair value hierarchy for the years ended September 30, 2017 or 2016.
Securities Available for Sale and Held to Maturity. Securities available for sale are recorded at fair value on a recurring basis and
securities held to maturity are carried at amortized cost. Fair value measurement is based upon quoted prices, if available. If
quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2
securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including
but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The
Company’s Level 1 securities include equity securities and mutual funds. The Company’s Level 2 securities include U.S.
Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities,
municipal bonds, corporate debt securities and trust preferred securities. The Company had no Level 3 securities at September 30,
2017, or 2016.
The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges
(Level 1 inputs), or valuation based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and model based
valuation techniques for which significant assumptions are
b
observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third-party provider which
utilizes several sources for valuing fixed-income securities. These sources include Interactive Data Corporation, Reuters, Standard
and Poor’s, Bloomberg Financial Markets, Street Software Technology
provider’s own matrix and desk pricing.
The Company, yy no less than annually, yy reviews the third party’s methods and source’s methodology for reasonableness and to ensure
an understanding of inputs utilized in determining fair value. Sources utilized by the third-party provider include but are not
limited to pricing models that vary based on asset class and include available trade, bid, and other market information. This
methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well
as extensive quality control programs. Monthly,yy the Company receives and compares prices provided by multiple securities dealers
and pricing providers to validate the accuracy and reasonableness of prices received from the third-party provider. On a monthly
basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.
and the third party
TT
p
The following table summarizes the fair values of securities available for sale and held to maturity at September 30, 2017
and 2016. Securities available for sale are measured at fair value on a recurring basis, while securities held to maturity are carried
at amortized cost in the consolidated statements of financial condition.
(Dollars in Thousands)
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Fair Value At September 30, 2017
r
r
Available For
Sale
AA
Held to Maturity
Debt securities
Small business administration
securities
Obligations of states and
political subdivisions
Non-bank qualified obligations
of states and political
subdivisions
Asset-backed securities
Mortgage-backed securities
57,871
—
950,829
96,832
586,454
—
—
—
—
—
57,871
—
950,829
96,832
586,454
Total debt securities
1,691,986
— 1,691,986
Common equities and mutual
funds
1,445
1,445
—
—
—
—
—
—
—
—
—
19,368
432,361
—
112,456
564,185
—
—
—
—
—
—
—
—
—
19,368
432,361
—
112,456
564,185
—
TT
Total securities
$1,693,431
$
1,445
$1,691,986
$
— $ 564,185
$
— $ 564,185
$
—
—
—
—
—
—
—
—
142
(Dollars in Thousands)
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Fair Value At September 30, 2016
r
r
Available For
Sale
AA
Held to Maturity
$
12,978
$
— $
12,978
$
— $
— $
— $
— $
Debt securities
Trust preferred and corporate
securities
Small business administration
securities
Obligations of states and
political subdivisions
Non-bank qualified obligations
of states and political
subdivisions
Asset-backed securities
Mortgage-backed securities
80,719
—
698,672
116,815
558,940
—
—
—
—
—
80,719
—
698,672
116,815
558,940
Total debt securities
1,468,124
— 1,468,124
Common equities and mutual
funds
1,125
1,125
—
—
—
—
—
—
—
—
—
20,937
477,202
—
134,435
632,574
—
—
—
—
—
—
—
—
—
20,937
477,202
—
134,435
632,574
—
—
—
—
—
—
—
—
—
—
TT
Total securities
$1,469,249
$
1,125
$1,468,124
$
— $ 632,574
$
— $ 632,574
$
rr
Foreclosed
Real Estate and Repossessed Assets. Real estate properties and repossessed assets are initially recorded at the fair
value less selling costs at the date of foreclosure, establishing a new cost basis. The carrying amount represents the lower of the
new cost basis or the fair value less selling costs of foreclosed assets that were measured at fair value subsequent to their initial
classification as foreclosed assets.
Loans. The Company does not record loans at fair value on a recurring basis. However, if a loan is considered impaired, an
allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in
accordance with ASC 310, Receivables.
The following table summarizes the assets of the Company that are measured at fair value in the consolidated statements
of financial condition on a non-recurring basis as of September 30, 2017 and 2016.
(Dollars in Thousands)
Impaired Loans, net
Foreclosed Assets, net
TotalTT
(Dollars in Thousands)
Impaired Loans, net
1-4 family real estate
Total
Foreclosed Assets, net
TotalTT
Fair Value at September 30, 2017
r
Total
Level 1
Level 2
Level 3
292
292
$
—
— $
—
— $
292
292
Fair Value At September 30, 2016
r
Total
Level 1
Level 2
Level 3
68
68
76
$
— $
— $
—
—
—
—
144
$
— $
— $
68
68
76
144
$
$
$
143
Quantitative Information About Level 3 Fair Value Measur
VV
(Dollars in Thousands)
Fair Value at
VV
r
September 30, 2017
Fair Value at
VV
r
September 30, 2016
Valuation
VV
TT
Technique
Impaired Loans, net
$
Foreclosed Assets, net
— $
292
68 Market approach
76 Market approach
ements
Unobservable
Input
Appraised values (1)
Appraised values (1)
(1) The Company generally relies on external appraisers to develop this information. Management reduced the appraised
value by estimated selling costs in a range of 4% to 10%.
The following tables disclose the Company’s estimated fair value amounts of its financial instruments at the dates provided.
It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available
to the Company as of September 30, 2017 and 2016, as more fully described below. The operations of the Company are managed
from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented
could be substantially different
when actually recognized over time through the normal course of operations. Additionally, yy a
substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value. Neither of these components
have been given consideration in the presentation of fair values below.
ff
144
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company
at September 30, 2017 and 2016.
September 30, 2017
Carrying
Amount
Estimated
Fair ValueVV
Level 1
Level 2
Level 3
(Dollars in Thousands)
Financial assets
Cash and cash equivalents
$ 1,267,586
$ 1,267,586
$ 1,267,586
$
— $
Securities available for sale
Securities held to maturity
Total securities
Loans receivable:
1,693,431
1,693,431
563,529
564,185
2,256,960
2,257,616
1,445
—
1,445
1,691,986
564,185
2,256,171
—
—
—
—
One to four family residential mortgage loans
196,706
196,970
Commercial and multi-family real estate
loans
Agricultural real estate loans
Consumer loans
Commercial operating loans
Agricultural operating loans
Premium finance loans
Total loans receivable
585,510
61,800
163,004
35,759
33,594
250,459
576,330
61,584
163,961
35,723
32,870
250,964
1,326,832
1,318,402
Federal Home Loan Bank stock
Accrued interest receivable
61,123
19,380
61,123
19,380
—
—
—
—
—
—
—
—
—
19,380
Financial liabilities
Non-interest bearing demand deposits
2,454,057
2,454,057
2,454,057
Interest bearing demand deposits, savings,
and money markets
Certificates of deposit
Wholesale non-maturing deposits
Wholesale certificates of deposits
169,557
123,637
18,245
457,928
169,557
123,094
18,245
457,509
169,557
—
18,245
—
TT
Total deposits
3,223,424
3,222,462
2,641,859
61,123
—
—
—
123,094
—
457,509
580,603
Advances from Federal Home Loan Bank
Federal funds purchased
Securities sold under agreements to
repurchase
Capital leases
Trust preferred securities
Subordinated debentures
Accrued interest payable
415,000
987,000
415,003
987,000
—
415,003
987,000
—
2,472
1,938
10,310
73,347
2,280
2,472
1,938
10,447
76,500
2,280
—
—
—
—
2,280
2,472
1,938
10,447
76,500
—
145
—
—
—
—
—
—
—
—
196,970
576,330
61,584
163,961
35,723
32,870
250,964
1,318,402
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
September 30, 2016
Carrying
Amount
Estimated
Fair ValueVV
Level 1
Level 2
Level 3
(Dollars in Thousands)
Financial assets
Cash and cash equivalents
$
773,830
$
773,830
$
773,830
$
— $
Securities available for sale
Securities held to maturity
Total securities
1,469,249
1,469,249
619,853
632,574
2,089,102
2,101,823
1,125
—
1,125
1,468,124
632,574
2,100,698
Loans receivable:
One to four family residential mortgage
loans
Commercial and multi-family real estate
loans
Agricultural real estate loans
Consumer loans
Commercial operating loans
Agricultural operating loans
Premium finance loans
TT
Total loans receivable
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities
162,298
163,886
422,932
422,307
63,612
37,094
31,271
37,083
171,604
925,894
47,512
17,199
63,868
36,738
31,108
36,897
172,000
926,803
47,512
17,199
—
—
—
—
—
—
—
—
—
17,199
Non-interest bearing demand deposits
2,167,522
2,167,522
2,167,522
Interest bearing demand deposits, savings,
and money markets
Certificates of deposit
TT
Total deposits
Advances from Federal Home Loan Bank
Federal funds purchased
Securities sold under agreements to
repurchase
Capital leases
Trust preferred
Subordinated debentures
Accrued interest payable
136,568
125,992
136,568
125,772
136,568
—
2,430,082
2,429,862
2,304,090
107,000
992,000
108,168
992,000
—
108,168
992,000
—
3,039
2,018
10,310
73,211
875
3,039
2,018
10,437
77,250
875
—
—
—
—
875
3,039
2,018
10,437
77,250
—
—
—
—
—
—
—
—
—
47,512
—
—
—
125,772
125,772
—
—
—
—
163,886
422,307
63,868
36,738
31,108
36,897
172,000
926,803
—
—
—
—
—
—
—
—
—
—
—
—
—
The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s
financial instruments at September 30, 2017 and 2016.
146
CASH AND CASH EQUIVALENTS
VV
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
SECURITIES AVAA AILABLE
VV
FOR SALE AND HELD TO MATURITY
AA
Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at
amortized cost. Fair values for investment securities are based on obtaining quoted prices on nationally recognized securities
exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark
quoted securities.
LOANS RECEIVABLE, NET
VV
The fair value of loans is estimated using a historical or replacement cost basis concept (i.e., an entrance price concept).
The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would
be made to borrowers and for similar remaining maturities. When using the discounting method to determine fair value, loans
were grouped by homogeneous loans with similar terms and conditions and discounted at a target rate at which similar loans would
be made to borrowers at September 30, 2017 and 2016. In addition, when computing the estimated fair value for all loans,
allowances for loan losses have been subtracted from the calculated fair value as a result of the discounted cash flow which
approximates the fair value adjustment for the credit quality component.
FHLB STOCK
The fair value of such stock is assumed to approximate book value since the Company is generally able to redeem this
stock at par value.
ACCRUED INTEREST RECEIVABLE
VV
The carrying amount of accrued interest receivable is assumed to approximate the fair value.
DEPOSITS
The carrying values of non-interest-bearing checking deposits, interest-bearing checking deposits, savings, money
markets, and wholesale non-maturing deposits are assumed to approximate fair value, since such deposits are immediately
withdrawable without penalty. The fair value of time certificates of deposit and wholesale certificates of deposit were estimated
on certificates of deposit with similar remaining maturities.
ff
by discounting expected future cash flows by the current rates offered
In accordance with ASC 825, Financial Instruments, no value has been assigned to the Company’s long-term relationships
with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under
ASC 825.
ADVANCES FROM FHLB
VV
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates
for advances with similar terms and remaining maturities.
L
FEDERAL FUNDS
PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, CAPITALTT
DEBENTURES AND TRUST PREFERRED SECURITIES
LEASES, SUBORDINATED
AA
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest
rates approximating market over the contractual maturity of such borrowings.
147
ACCRUED INTEREST PAPP YAA ABLE
YY
The carrying amount of accrued interest payable is assumed to approximate the fair value.
AA
LIMITATT TIONS
Fair value estimates are made at a specific point in time, based on relevant market information about the financial
sheet financial instruments without
instrument. Additionally, yy fair value estimates are based on existing on- and off-balance
attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that
are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering
the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for
certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a
high level of precision. Changes in assumptions as well as tax considerations could significantly affect
the estimates. Accordingly, yy
based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of
the Company, on either a going
concern or a liquidation basis.
yy
ff
ff
ff
NOTE 20. GOODWILL AND INTANGIBLE
TT
ASSETS
The Company had a total of $98.7 million of goodwill as of September 30, 2017. The recorded goodwill was due to two
separate business combinations during fiscal 2015 and two separate business combinations during the first quarter of fiscal 2017.
The fiscal 2015 business combinations included $11.6 million of goodwill in connection with the purchase of substantially all of
the commercial loan portfolio and related assets of AFS/IBEX on December 2, 2014, and $25.4 million in goodwill in connection
with the purchase of substantially all of the assets and liabilities of Refund Advantage on September 8, 2015. The fiscal 2017
business combinations included $30.4 million of goodwill in connection with the purchase of substantially all of the assets of EPS
on November 1, 2016, and $31.4 million of goodwill in connection with the purchase of substantially all of the assets and specified
liabilities of SCS on December 14, 2016. The goodwill associated with these transactions are deductible for tax purposes.
The changes in the carrying amount of the Company’s goodwill and intangible assets for the years ended September 30,
2017 and 2016 are as follows:
Goodwill
Beginning balance
Acquisitions during the period
ff
Write-of
fs during the period
WW
Ending balance
September 30,
2017
2016
(Dollars in Thousands)
$
$
36,928
$
36,928
61,795
—
—
—
98,723
$
36,928
The Company completed an annual goodwill impairment test for the fiscal year ended September 30, 2017. Based on
the results of the qualitative analysis, it was identified that it was more likely than not the fair value of the goodwill recorded
exceeded the current carrying value. The Company concluded a quantitative analysis was not required and no impairment existed.
148
Intangibles
Balance as of September 30, 2016
Acquisitions during the period
Amortization during the period
ff
Write-of
fs during the period
WW
Balance as of September 30, 2017
Balance upon acquisition
Accumulated amortization
Accumulated impairment
Balance as of September 30, 2017
TT
Trademark
(1)
Non-
Compete (2)
Customer
Relationships (3)
gg
Technology/
TT
Other (4)
TotalTT
$
$
$
$
$
$
5,149
$
127
$
20,590
$
3,055
$
5,500
(598)
—
10,051
10,990
$
$
(939) $
— $
10,051
$
2,180
(525)
—
1,782
$
$
2,480
(698) $
— $
1,782
$
31,770
(10,405)
(10,248)
31,707
$
$
57,810
(15,855) $
(10,248) $
$
31,707
6,947
(835)
(529)
8,638
$
$
10,502
(1,335) $
(529) $
$
8,638
28,921
46,397
(12,363)
(10,777)
52,178
81,782
(18,827)
(10,777)
52,178
(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3-5 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.
Intangibles
Balance as of September 30, 2015
Acquisitions during the period
Amortization during the period
ff
Write-of
fs during the period
WW
Balance as of September 30, 2016
Balance upon acquisition
Accumulated amortization
Balance as of September 30, 2016
TT
Trademark
(1)
Non-
Compete (2)
Customer
Relationships (3)
gg
Technology/
TT
Other (4)
TotalTT
$
$
$
$
$
5,439
$
227
$
24,811
$
3,100
$
—
(290)
—
5,149
5,490
$
$
(341) $
5,149
$
—
(100)
—
—
(4,221)
—
172
(217)
—
127
$
20,590
$
3,055
$
300
$
(173) $
$
127
26,040
$
(5,450) $
$
20,590
3,539
$
(484) $
$
3,055
33,577
172
(4,828)
—
28,921
35,369
(6,448)
28,921
(1) Book amortization period of 15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.
The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible
impairment. The Company recorded a $10.2 million intangible impairment charge during the fourth quarter of fiscal 2017 related
to the non-renewal of the H&R Block relationship.
The weighted-average amortization period, by major intangible asset class and in total, for each of the acquisitions
during fiscal year 2017 were as follows:
Weighted Average
AA
Amortization Period
Intangible
EPS
SCS
Trademark
Non-Compete
Customer Relationships
Technology/Other
TotalTT
15.0
3.0
20.0
3.0
16.1
5.0
4.1
9.1
15.0
10.2
149
The anticipated future amortization of intangibles is as follows:
2018
2019
2020
2021
2022
Thereafter
TT
Total anticipated intangible amortization
NOTE 21. SUBSEQUENT EVENTS
September
30,
(Dollars in
Thousands)
$
$
7,706
7,147
5,749
5,179
4,257
22,140
52,178
On October 11, 2017, the Company completed the purchase of a $73 million, seasoned, floating rate, private student loan
portfolio. All loans are indexed to one-month LIBOR. The portfolio is serviced by ReliaMax Lending Services LLC and insured
by ReliaMax Surety Company. This portfolio purchase builds on the Company's existing student loan platform.
Item 9.
Changes in and
g
e
Disagrg eements With Accountants on Accounting and Financial Disclosur
g
None.
Item 9A.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
Management, under the direction of its Chief Executive Officer
, is responsible for maintaining
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “1934 Act”) that are designed to ensure that information required to be disclosed in reports filed or submitted under
the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that
and Chief
such information is accumulated and communicated to management, including the Company’s Chief Executive Officer
Financial Officer
, to allow timely decisions regarding required disclosures.
and Chief Financial Officer
ff
ff
ff
ff
ff
to determine the effectiveness,
In connection with the preparation of this Annual Report on Form 10-K, management evaluated the Company’s disclosure controls
and procedures. The evaluation was performed under the direction of the Company’s Chief Executive Officer
and Chief Financial
as of September 30, 2017, of the design and operation of the Company’s disclosure controls
Officer
and procedures. Based upon that evaluation, the Chief Executive Officer
concluded that the Company’s
disclosure controls and procedures were effective
in timely alerting them to the material information relating to the Company
required to be included in the Company’s periodic SEC filings.
and Chief Financial Officer
ff
ff
ff
ff
ff
(b)
Management’s’’ Annual Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining effective
internal control over financial
reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. PP
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, PP and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company assets that could have a material effect
on the financial statements.
ff
ff
150
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of such inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
ff
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of September 30,
2017, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in “Internal
Control Integrated Framework (2013).” Based on this assessment, our management concluded that our internal control over
financial reporting was effective
as of September 30, 2017.
T
ff
ff
ff
The effectiveness
of the Company’s internal control over financial reporting as of September 30, 2017, has been audited
by KPMG LLP,PP the independent registered public accounting firm that also has audited the Company’s consolidated financial
statements included in this Annual Report on Form 10-K. KPMG LLP’s report on the Company’s internal control over financial
reporting appears below.
(c)
Changes in Internal Control over Financial Reporting.
There were no changes in the Company's internal control over financial reporting that occurred during the fourth quarter
the Company's internal control over financial reporting.
ff
or are reasonably likely to materially affect,
that have materially affected,
ff
Item 9B.
Other Information
r
None.
151
KPMG LLP
2500 Ruan Center
666 Grand Avenue
AA
Des Moines, IA 50309
A
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Meta Financial Group, Inc.:
WeWW have audited Meta Financial Group, Inc.’s (the Company) internal control over financial reporting as of September 30, 2017,
- Integrated Framework (2013) issued by the Committee of Sponsoring
based on criteria established in Internal Control rr
Organizations of the Treadway
internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
Commission (COSO). The Company’s management is responsible for maintaining effective
T
ff
ff
WeWW conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we
ff
considered necessary in the circumstances. We WW believe that our audit provides a reasonable basis for our opinion.
ff
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect
on the financial statements.
ff
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
to future periods are subject to the risk that controls may become inadequate because
projections of any evaluation of effectiveness
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ff
In our opinion, Meta Financial Group, Inc. maintained, in all material respects, effective
as of September 30, 2017, based on criteria established in Internal Control rr
TT
of Sponsoring Organizations of the Treadway
Commission (COSO).
ff
internal control over financial reporting
- Integrated Framework (2013) issued by the Committee
WeWW also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of Meta Financial Group, Inc. and subsidiaries as of September 30, 2017 and 2016,
and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity,yy and cash flows for
each of the years in the three-year period ended September 30, 2017, and our report dated November 29, 2017 expressed an
unqualified opinion on those consolidated financial statements.
Des Moines, Iowa
November 29, 2017
/s/ KPMG LLP
152
Directors, Executive Officers and Corporate Governance
,
TRR III
PARPP
p
Item 10.
Directors
Information concerning directors of the Company required by this item will be included under the captions “Election of
Directors,” “Communicating with Our Directors” and “Stockholder Proposals For The Year YY
2018 Annual Meeting” in the
Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 2018 (the “2017 Proxy
Statement”), a copy of which will be filed not later than 120 days after September 30, 2017, and is incorporated herein by reference.
Executive Officers
ff
Information concerning the executive officers
ff
of the Company required by this item will be included under the captions
ff
“Executive Officers” and
“Election of Directors” in the 2017 Proxy Statement and is incorporated herein by reference.
( )
Compliance with Section 16(a)
p
Information required by this item regarding compliance with Section 16(a) of the Exchange Act will be included under
the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2017 Proxy Statement and is
incorporated herein by reference.
Audit Committee Financial Expert
Information regarding the audit committee of the Company’s Board of Directors, including information regarding
Frederick Moore, Becky Shulman and Kendall Stork, the audit committee financial experts serving on the audit committee for
fiscal 2017, will be included under the captions “Meetings and Committees” and “Election of Directors” in the Company’s 2017
Proxy Statement and is incorporated herein by reference.
Code of Ethics
Information regarding the Company’s Code of Ethics will be included under the caption “Corporate Governance” in the
Company’s 2017 Proxy Statement and is incorporated herein by reference.
Item 11.
Executive Compensation
p
Information concerning executive and director compensation will be included under the captions “Compensation of
Directors” and “Executive Compensation” in the Company’s 2017 Proxy Statement and is incorporated herein by reference.
Item 12.
r
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
p
g
y
Matters
(a) Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included under the caption “Stock Ownership” in the Company’s 2017
Proxy Statement and is incorporated herein by reference.
(b) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any persons of securities of the
yy
result in a change in control of the Registrant.
yy
operation of which may, at a subsequent date,
Company, the
(c) Equity Compensation Plan Information
The Company maintains the 2002 Omnibus Incentive Plan for purposes of issuing stock-based compensation to employees
and directors. An amendment to this plan, authorizing an additional 750,000 shares to be issued under this plan, was approved
by the Board of Directors on November 30, 2007, and by the stockholders at the annual meeting held February 12, 2008. The
Company also has unexercised options outstanding under a previous stock option plan. The following table provides information
about the Company’s common stock that may be issued under the Company’s omnibus incentive plans.
153
r
Number of
securities
to be issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted-average
WW
exercise price of
outstanding
options,
warrants and
rights
r
Number of
securities
remaining
available
for futur
r
e issuance
under equity
r
compensation
plan
excluding
securities
reflected in (a)
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
75,757
$
— $
22.62
—
188,152
—
Item 13.
Certain Relationships and Related
p
TT
Transactions, and Dir
,
p
ector Independence
r
The information required by this item will be included under the captions “Election of Directors,” “Meetings and
in the Company’s 2017 Proxy Statement and is incorporated herein by reference.
Committees” and “Related Person Transactions”
T
Item 14.
Principal p Accountant Fees and Services
The information required by this item will be included under the caption “Independent Registered Public Accounting
Firm” in the Company’s 2017 Proxy Statement and is incorporated herein by reference.
PARPP
TRR IV
Item 15.
Exhibits and Financial Statement Schedules
The following is a list of documents filed as Part of this report:
(a) Financial Statements:
The following financial statements are included under Part II, Item 8 of this Annual Report on Form 10-K:
1.
2.
3.
4.
5.
6.
7.
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of September 30, 2017, and 2016.
Consolidated Statements of Operations for the Years Ended
YY
September 30, 2017, 2016, and 2015.
Consolidated Statements of Comprehensive Income for the YearsYY
and 2015.
ended September 30, 2017, 2016,
Consolidated Statements of Changes in Stockholders’ Equity for the Years
2016, and 2015.
YY
Ended September 30, 2017,
Consolidated Statements of Cash Flows for the YearsYY
Ended September 30, 2017, 2016, and 2015.
Notes to Consolidated Financial Statements.
(b) Exhibits:
See Index to Exhibits.
(c) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions or
is inapplicable.
154
Item 16.
Form 10-K Summaryy
None.
155
Pursuant to the requirements of Section 13 or 15(d) 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.
AA
SIGNATURES
L
METATT FINANCIAL
A
GROUP
, INC.
Date: November 29, 2017
By:
/s/ J. Tyler Haahr
TT
rr
J. Tyler Haahr
, Chairman of the Board
TT
and Chief Executive Officer
ff
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
By:
/s/ J. Tyler Haahr
TT
Date: November 29, 2017
TT
rr
J. Tyler Haahr
, Chairman of the Board
and Chief Executive Officer
ff
(Principal Executive Officer)
ff
By:
/s/ Bradley C. Hanson
Date: November 29, 2017
Bradley C. Hanson, President and Director
By:
/s/ Douglas J. Hajek
Douglas J. Hajek, Director
By:
/s/ Elizabeth G. Hoople
Elizabeth G. Hoople, Director
By:
/s/ Frederick V. Moore
Frederick V. Moore, Director
By:
/s/ Becky S. Shulman
Becky S. Shulman, Director
By:
/s/ Kendall E. Stork
Kendall E. Stork, Director
Date: November 29, 2017
Date: November 29, 2017
Date: November 29, 2017
Date: November 29, 2017
Date: November 29, 2017
By:
/s/ Glen W. Herrick
Date: November 29, 2017
Glen W. Herrick, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
ff
By:
/s/ Sonja A. Theisen
Date: November 29, 2017
Sonja A. Theisen, Senior Vice President
and Chief Accounting Officer
(Principal Accounting Officer)
ff
156
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
3.3
4.1
4.2
4.3
4.4
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
INDEX TO EXHIBITS
Description
Asset Purchase Agreement, dated as of July 15, 2015, by and among Meta Financial Group, Inc., MetaBank, Fort Knox Financial
Services Corporation, Tax Product Services LLC, Alan D. Lodge Family Trust, Michael E. Boone, Michael J. Boone, Cary
Shields and Alan D. Lodge filed on July 16, 2015 as an exhibit to the Registrant’s Current Report on Form 8 K, is incorporated
herein by reference. Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant
will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request by the Commission.
Asset Purchase Agreement, dated as of October 1, 2016, by and among Meta Financial Group, Inc., MetaBank, Drake
Enterprises, Ltd., and EPS Financial, LLC filed on November 3, 2016 as an exhibit to the Registrant’s Current Report on Form
8-K, is incorporated herein by reference. Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation
S-K. The Registrant will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request
by the Commission.
Asset Purchase Agreement dated as of November 9, 2016, by and among Meta Financial Group, Inc., MetaBank, and Specialty
Consumer Services LP filed on November 10, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated
herein by reference. Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant
will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request by the Commission.
Registrant’s Certificate of Incorporation, as amended, filed on May 10, 2013 as an exhibit to the Registrant’s registration
statement on Form S-3 (Commission File No. 333-188535), is incorporated herein by reference.
Registrant’s Certificate of Amendment to the Certificate of Incorporation, as amended, filed on January 26, 2016 as an exhibit
to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Registrant’s Amended and Restated By-laws, as amended, filed on December 14, 2015 as an exhibit to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2015, is incorporated herein by reference.
Registrant’s Specimen Stock Certificate, filed on June 26, 2016 as an exhibit to the Registrant’s registration statement on Form
S-3 (Commission File No. 333-212269), is incorporated herein by reference.
Indenture, dated as of August 15, 2016, by and between the Registrant and U.S. Bank National Association, as trustee, filed
on August 15, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
First Supplemental Indenture, dated as of August 15, 2016, by and between the Registrant and U.S. Bank National Association,
as trustee, filed on August 15, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by
reference.
Form of Global Note of the Registrant representing the 5.75% Fixed-to-Floating Rate Subordinated Notes due August 15,
2026, filed on August 15, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Registrant’s 1995 Stock Option and Incentive Plan, filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1996, is incorporated herein by reference
Employment Agreement between MetaBank and J. Tyler
an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Haahr, dated as of October 1, 2016, filed on November 18, 2016 as
TT
Employment Agreement between MetaBank and Bradley C. Hanson, dated as of October 1, 2016, filed on November 18, 2016
as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Employment Agreement between MetaBank and Glen W. Herrick, dated as of October 1, 2016, filed on December 6, 2016 as
an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Performance-Based Restricted Stock Agreement between Meta and J. Tyler
November 18, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Haahr, dated as of November 16, 2016, filed on
TT
Performance-Based Restricted Stock Agreement between Meta and Bradley C. Hanson, dated as of November 16, 2016, filed
on November 18, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference
Performance-Based Restricted Stock Agreement between Meta and Glen W. Herrick, dated as of December 2, 2016, filed
on December 6, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference
Registrant’s Supplemental Employees’ Investment Plan, originally filed as an exhibit to the Registrant’s Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1994. First amendment to such agreement, filed as an exhibit to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, is incorporated herein by reference.
*10.9
10.10
10.11
10.12
10.13
*10.14
*10.15
*10.16
*10.17
11
21
23.1
31.1
31.2
32.1
32.2
Registrant’s 2002 Omnibus Incentive Plan, as amended and restated effective
as Appendix A to the Registrant’s Schedule 14A (DEF 14A) Proxy Statement, is incorporated herein by reference.
November 24, 2014, filed on December 16, 2014
ff
Registration Rights Agreement by and among Meta Financial Group, Inc., BEP IV LLC and BEP Investors, LLC, dated as of
December 17, 2015, filed on December 17, 2015 as an exhibit to the Registrant’s Current Report on Form 8 K, is incorporated
herein by reference.
Investor Rights Agreement by and among Meta Financial Group, Inc., BEP IV LLC and BEP Investors, LLC, dated as of
December 17, 2015, filed on December 17, 2015 as an exhibit to the Registrant’s Current Report on Form 8 K, is incorporated
herein by reference.
Securities Purchase Agreement by and between Meta Financial Group, Inc. and Nantahala Capital Partners SI, LP, dated as of
December 7, 2015, filed on December 8, 2015 as an exhibit to the Registrant’s Current Report on Form 8 K, is incorporated
herein by reference.
Registration Rights Agreement by and between Meta Financial Group, Inc. and Nantahala Capital Partners SI, LP, dated as of
December 17, 2015, filed on December 17, 2015 as an exhibit to the Registrant’s Current Report on Form 8 K, is incorporated
herein by reference.
Separation and General Release Agreement dated as of September 9, 2016, by and among the Company, MetaBank and Ira D.
Frericks. filed on September 9, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by
reference.
Separation and General Release Agreement dated as of September 30, 2016, by and among the Company, MetaBank and Troy
Moore III, filed on September 30, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein
by reference.
Severance and General Release Agreement dated as of August 30, 2017, by and between the MetaBank and Cynthia Smith,
filed on September 8, 2017 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Form of Restricted Stock Agreement under Meta Financial Group, Inc. 2002 Omnibus Incentive Plan filed on August 2, 2016
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, is incorporated herein by reference.
Statement re: computation of per share earnings (See Note 5 of “Notes to Consolidated Financial Statements,” which is included
in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K).
Subsidiaries of the Registrant is filed herewith.
Consent of Independent Registered Public Accounting Firm is filed herewith.
Certification of Principal Executive Officer
ff
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 is filed herewith.
Certification of Principal Financial Officer
ff
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 is filed herewith.
Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.
Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.
101.INS
Instance Document Filed Herewith.
101.SCH
TT
XBRL Taxonomy
Extension Schema Document Filed Herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document Filed Herewith.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document Filed Herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document Filed Herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document Filed Herewith.
TT
* Management Contract or Compensatory Plan or Agreement
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
Parent
Subsidiary
Percentage
of
Ownership
State of
Incorporation or
Organization
Meta Financial Group, Inc.
MetaBank
100%
Federal
Meta Financial Group, Inc.
First Midwest Financial
Capital Trust I
100%
Delaware
The financial statements of Meta Financial Group, Inc. are consolidated with those of MetaBank, but not those of First
Midwest Financial Capital Trust I.
TT
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Meta Financial Group, Inc.
We WW consent to the incorporation by reference in the registration statements pertaining to the Meta Financial Group, Inc. 1995 Stock
Option and Incentive Plan (No. 333 22523) and the Meta Financial Group, Inc. 2002 Omnibus Incentive Plan (No. 333-110200,
No. 333-141407 and No. 333-151604) of Meta Financial Group, Inc. on Form S-8 and in the registration statements (No. 333-188535
and No. 333-212269) of Meta Financial Group, Inc. on Form S-3 of our reports dated November 29, 2017, with respect to the
consolidated statements of financial condition of Meta Financial Group, Inc. and subsidiaries as of September 30, 2017 and 2016,
and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity,yy and cash flows for
each of the years in the three-year period ended September 30, 2017, and the effectiveness
of internal control over financial
reporting as of September 30, 2017, which reports appear in the Annual Report on Form 10 K of Meta Financial Group, Inc. for
the fiscal year ended September 30, 2017.
ff
Des Moines, Iowa
November 29, 2017
/s/ KPMG LLP
Exhibit 31.1
AA
CERTIFICA
RR
F
TION OF
PRINCIP
L
ALPP
EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
F
I, J. Tyler Haahr
TT
, certify that:
1. I have reviewed this Annual Report on Form 10-K of Meta Financial Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this annual report;
4. The Registrant’s other certifying officers
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
ff
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness
ff
conclusions about the effectiveness
such evaluation; and
ff
of the Registrant’s disclosure controls and procedures and presented in this report our
of the disclosure and procedures, as of the end of the period covered by this report based on
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during
the Registrant issuer’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected,
Registrant’s internal control over financial reporting; and
or is reasonably likely to materially affect, the
ff
ff
5. The Registrant’s other certifying officers
and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing
the equivalent function):
ff
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial
the Registrant’s ability to record, process, summarize and report financial
ff
reporting which are reasonably likely to adversely affect
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: November 29, 2017
By:
TT
/s/ J. Tyler Haahr
J. Tyler Haahr
rr
, Chairman of the Board
and Chief Executive Officer
TT
ff
Exhibit 31.2
AA
CERTIFICA
RR
F
TION OF
PRINCIP
L
ALPP
L
FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
F
I, Glen W. Herrick, certify
WW
that:
1. I have reviewed this Annual Report on Form 10-K of Meta Financial Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented
in this annual report;
4. The Registrant’s other certifying officers
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
ff
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness
ff
conclusions about the effectiveness
such evaluation; and
ff
of the Registrant’s disclosure controls and procedures and presented in this report our
of the disclosure and procedures, as of the end of the period covered by this report based on
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during
the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially
ff
affected,
or is reasonably likely to materially affect, the Registrant’
s internal control over financial reporting; and
ff
5. The Registrant’s other certifying officers
and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing
the equivalent function):
ff
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial
the Registrant’s ability to record, process, summarize and report financial
reporting which are reasonably likely to adversely affect
information; and
ff
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: November 29, 2017
By:
/s/ Glen W. Herrick
Glen W. Herrick, Executive Vice President and Chief
Financial Officer
ff
AA
CERTIFICA
RR
TION PURSUANT
Exhibit 32.1
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
F
In connection with the Annual Report of Meta Financial Group, Inc. (the “Company”) on Form 10-K for the year ended September
30, 2017, as filed with the Securities and Exchange Commission on the date of this Certification (the “Report”), I, J. Tyler
Haahr,
of the Company, yy certify,yy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Chief Executive Officer
the Sarbanes-Oxley Act of 2002, that:
TT
ff
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
By:
TT
/s/ J. Tyler Haahr
TT
Name: J. Tyler Haahr
Chairman of the Board and Chief Executive Officer
November 29, 2017
ff
AA
CERTIFICA
RR
TION PURSUANT
Exhibit 32.2
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
F
In connection with the Annual Report of Meta Financial Group, Inc. (the “Company”) on Form 10-K for the year ended
September 30, 2017, as filed with the Securities and Exchange Commission on the date of this Certification (the “Report”), I, Glen
of the Company, yy certify,yy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
W. WW Herrick, the Chief Financial Officer
906 of the Sarbanes-Oxley Act of 2002, that:
ff
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
By:
/s/ Glen W. Herrick
WW
Name: Glen W. Herrick
Executive Vice President and Chief Financial
VV
Officer
November 29, 2017
WW
ff
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
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