Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
META FINANCIAL GROUP, INC®.
AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
Meta Financial Group, Inc.
®
, (“Meta Financial” or “the Company” or “us”) and its wholly-owned subsidiary, MetaBank® (the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, 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 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 or similar expressions. You 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 differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, 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 Meta Payment Systems® (“MPS”), a division of the Bank; 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 materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the risk that loan production levels and other anticipated benefits related to the recent agreements signed with H&R Block and Jackson Hewitt may not be as much as anticipated, and that the Company may incur unanticipated or unknown risks, losses or liabilities in connection with such transactions; maintaining our executive management team; the strength of the United States' economy, in general, and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), as well as efforts of the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely development of, and acceptance of new products and services offered by the Company, as well as risks (including reputational 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; 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, 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.
The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report speak only as of the date hereof. 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 included under the caption "Risk Factors" and in other sections of the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
and in other filings made 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, whether as a result of new information, changed circumstances or future events or for any other reason.
GENERAL
The Company, a registered unitary savings and loan holding company, 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 direct or indirect subsidiaries of Meta Financial on a consolidated basis.
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.”
The following discussion focuses on the consolidated financial condition of the Company at
March 31, 2017
, compared to
September 30, 2016
, and the consolidated results of operations for the
three and six
months ended
March 31, 2017
and
2016
. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended
September 30, 2016
and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
OVERVIEW OF FINANCIAL PERFORMANCE
The Company recorded net income of
$32.1 million
, or
$3.42
per diluted share, for the three months ended
March 31, 2017
, compared to net income of
$14.3 million
, or
$1.67
per diluted share, for the three months ended
March 31, 2016
. The 2017 fiscal second quarter pre-tax results included
$7.1 million
in amortization of intangibles, which the Company anticipates will decrease by $5.2 million to $1.9 million for each of the third and fourth quarters of 2017,
$2.3 million
in non-cash stock-related compensation associated with employment agreements for three executive officers,
$2.1 million
in excess funding expenses related to the tax season,
$0.8 million
in expenses related to due diligence efforts, including legal expenses for a potential acquisition opportunity which the Company is no longer pursuing,
$0.1 million
of additional expenses related to the acquisitions closed in the first quarter of 2017 and
$0.1 million
in securities losses.
Tax product fee income increased
$42.5 million
, or
202%
, for the 2017 fiscal second quarter when compared to the same quarter in 2016. The increase was mainly driven by growth in taxpayer advance fee income and refund transfer fee income from our multiple tax distribution channels and partnerships.
Card fee income
increased
$8.0 million
, or
43%
, for the
2017
fiscal
second
quarter when compared to the same quarter in 2016, continuing growth seen in the prior year. This increase was primarily driven by income generated by our tax season card programs, a wind down of one of our non-strategic partners, and a promotional campaign by one of our partners.
Net interest income was
$24.0 million
in the
2017
fiscal
second
quarter, an increase of
$4.1 million
, or
20%
, compared to the
second
quarter of 2016. The increase was primarily driven by higher volumes in the loan portfolio, growth in specialty finance loans and yields attained, which includes a full quarter of the student loan portfolio purchased in December 2016, and higher volume and yields attained from investments, primarily in high credit quality, tax-exempt municipal bonds and floating rate asset backed securities. Additionally, the overall increase was driven by a better mix and higher percentage of loans and higher yielding investments primarily in high credit quality tax-exempt municipal bonds.
The Company's fiscal 2017
second
quarter average assets grew to
$4.41 billion
, compared to
$3.08 billion
in the
2016
second
quarter, an increase of
43%
.
Total loans receivable, net of allowance for loan losses, increased
$359.1 million
, or
46%
, at
March 31, 2017
, compared to
March 31, 2016
. This increase was primarily related to growth in consumer loans of
$146.2 million
, of which
$131.1 million
was attributable to the student loan portfolio purchased in December 2016 and $11.1 million of the growth was due to refund advances. Growth in commercial real estate loans of
$118.3 million
, or
33%
, and premium finance loans of
$65.5 million
, or
54%
, also contributed to the increase in loans compared to
March 31, 2016
. Retail bank loans at
March 31, 2017
were up
$154.9 million
, or
24%
, compared to
March 31, 2016
. Excluding the purchased student loan portfolio and refund advance loans, total loans receivable, net of allowance for loan losses, at
March 31, 2017
were up
$223.9 million
, or
29%
, compared to
March 31, 2016
.
Non-performing assets (“NPAs”) were
0.12%
of total assets at
March 31, 2017
, compared to
0.15%
at
March 31, 2016
.
FINANCIAL CONDITION
At
March 31, 2017
, the Company’s assets decreased by
$20.8 million
, or
1%
, to
$3.99 billion
compared to
$4.01 billion
at
September 30, 2016
. The decrease in assets was due to a significant reduction in total cash and cash equivalents that was offset by increases in investments, loans receivable, and goodwill and intangible assets associated with the acquisitions in the first quarter of fiscal 2017.
Total cash and cash equivalents were
$67.3 million
at
March 31, 2017
, a
decrease
of
$706.5 million
, or
91%
, from
$773.8 million
at
September 30, 2016
. The
decrease
was primarily the result of the Company’s decreased balances maintained in other banking institutions. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the Federal Reserve Bank. At
March 31, 2017
, the Company had $493.0 million in federal funds purchased compared to $992.0 million in federal funds purchased at September 30, 2016.
The total of mortgage-backed securities (“MBS”) and investment securities
increased
$335.0 million
, or
16.0%
, to
$2.42 billion
at
March 31, 2017
, compared to
$2.09 billion
at
September 30, 2016
, as purchases exceeded maturities, sales, and principal pay downs. The Company’s portfolio of investment securities and MBS securities consists primarily of U.S. Government agency and instrumentality MBS, which have relatively short expected lives, U.S. Government related asset backed securities, U.S. Government agency or instrumentality collateralized housing related municipal securities, and high quality non-bank qualified obligations of states and political subdivisions (“NBQ”), which mature in approximately 15 years or less. Of the total MBS,
$642.8 million
were classified as available for sale, and
$122.5 million
were classified as held to maturity. Of the total investment securities,
$1.18 billion
were classified as available for sale and
$474.3 million
were classified as held to maturity. During the
six
month period ended
March 31, 2017
, the Company purchased $208.6 million of MBS securities and $370.3 million of investment securities available for sale, with the available for sale investment security purchases consisting primarily of Ginnie Mae (“GNMA”) convertible and collateralized municipal housing securities and other municipal housing securities fully collateralized by U.S. agency and instrumentality securities.
The Company’s portfolio of net loans receivable
increased
$217.1 million
, or
23%
, to
$1.14 billion
at
March 31, 2017
, from
$919.5 million
at
September 30, 2016
. This increase was primarily attributable to a
$145.1 million
increase in consumer loans primarily due to the student loan portfolio purchase, a
$50.1 million
, or
12%
, increase in commercial real estate loans, a
$16.0 million
, or
10%
, increase in residential mortgage loans, a
$15.4 million
, or
9%
, increase in premium finance loans, and a
$2.6 million
, or
8%
, increase in commercial operating loans, offset in part by a
$2.8 million
, or
3%
, decrease in total agricultural loans, during this period. Retail bank loans increased
$64.7 million
, or
9%
, during this period. Excluding the student loan portfolio and refund advances, total loans receivable, net of allowance for loan losses, increased
$81.0 million
, or
9%
, from
September 30, 2016
to
March 31, 2017
. Of the
$473.1 million
in commercial and multi-family real estate loans at
March 31, 2017
,
$69.1 million
were considered high-volatility commercial real estate (“HVCRE”) loans. While such HVCRE loans are risk-weighted at 150% rather than 100%, as is customary for non-HVCRE commercial loans, the increase to the Company’s risk-weighted assets has been inconsequential in terms of the Company’s capital ratios.
Total deposits
increased
$442.1 million
, or
18%
, at
March 31, 2017
, to
$2.87 billion
from
$2.43 billion
at
September 30, 2016
, primarily related to an increase of
$469.6 million
in non-interest bearing deposits and a
$21.9 million
increase in wholesale deposits. The increase in total deposits was partially offset by a decrease of
$64.8 million
in certificates of deposits, the majority of which were public funds and were utilized as part of the funding strategy for the 2017 tax season. Deposits attributable to the Payments segment increased by
$475.6 million
, or
22%
, to
$2.61 billion
at
March 31, 2017
, compared to
$2.13 billion
at
September 30, 2016
. The average balance of total deposits and interest-bearing liabilities was
$3.48 billion
for the
six
month period ended
March 31, 2017
, compared to
$2.56 billion
for the same period in the prior year. The average balance of non-interest bearing deposits for the
six
month period ended
March 31, 2017
increase
d by
$288.3 million
, or
14%
to
$2.28 billion
at
March 31, 2017
, compared to
$1.99 billion
for the same period in the prior year.
Total borrowings
decreased
$600.2 million
, or
51%
, from
$1.19 billion
at
September 30, 2016
to
$587.4 million
at
March 31, 2017
, primarily due to the decrease of federal funds purchased. At September 30, 2016, the Company's cash balances were much higher than normal due to the temporary repositioning of the balance sheet as part of its preparations for the tax season. The Company also added temporary wholesale deposits throughout the first and second quarters of fiscal 2017 which, as expected, have nearly all diminished from the balance sheet as of March 31, 2017. The Company’s overnight federal funds purchased fluctuates 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 volume of overnight federal funds purchased on Monday through Wednesday, which are typically paid down on Thursday and Friday. Secondarily, a portion of certain programs are prefunded, typically in the final week of the month and the corresponding deposits are received typically on the first day of the following month causing a temporary increased need for overnight borrowings. Accordingly, our level of borrowings may fluctuate significantly on any particular quarter end date.
At
March 31, 2017
, the Company’s stockholders’ equity totaled
$411.7 million
, an increase of
$76.7 million
, from
$335.0 million
at
September 30, 2016
. The increase was attributable to net earnings and an increase in additional paid-in capital due to the Company's fiscal first quarter acquisitions, offset by dividends paid. At
March 31, 2017
, the Bank continued to exceed all regulatory requirements for classification as a well‑capitalized institution. See “Liquidity and Capital Resources” for further information.
Non-performing Assets and Allowance for Loan Losses
Generally, for the majority of loan segments, when a loan becomes delinquent 90 days or more (210 days or more for premium finance 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 in non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance, typically after six months.
Consumer tax advance loans, originated through the Company's tax divisions, are 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 to collect. In the event of default, MetaBank has no recourse with the tax consumer. Generally, when the refund advance loan becomes delinquent for 90 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
The Company believes that the level of allowance for loan losses at
March 31, 2017
was appropriate and reflected probable losses related to these loans; however, there can be no assurance that all loans will be fully collectible or that the present level of the allowance will be adequate in the future. See “Allowance for Loan Losses” below.
The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio as of the dates set forth. Foreclosed assets include assets acquired in settlement of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets As Of
|
|
|
March 31, 2017
|
|
September 30, 2016
|
|
Non-Performing Loans
|
(Dollars in Thousands)
|
|
|
|
|
|
|
Non-Accruing Loans:
|
|
|
|
|
1-4 Family Real Estate
|
$
|
112
|
|
|
$
|
83
|
|
|
Commercial and Multi-Family Real Estate
|
155
|
|
|
—
|
|
|
Agricultural Real Estate
|
3,461
|
|
|
—
|
|
|
Commercial Operating
|
147
|
|
|
—
|
|
|
Agricultural Operating
|
97
|
|
|
—
|
|
|
Total
(1)
|
3,972
|
|
|
83
|
|
|
|
|
|
|
|
Accruing Loans Delinquent 90 Days or More
|
|
|
|
|
|
|
Commercial Operating
|
284
|
|
|
53
|
|
|
Premium Finance
|
723
|
|
|
965
|
|
|
Total
|
1,007
|
|
|
1,018
|
|
|
|
|
|
|
|
Total Non-Performing Loans
|
4,979
|
|
|
1,101
|
|
|
|
|
|
|
|
Other Assets
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Foreclosed Assets:
|
|
|
|
|
1-4 Family Real Estate
|
—
|
|
|
76
|
|
|
Total
|
—
|
|
|
76
|
|
|
|
|
|
|
|
Total Other Assets
|
$
|
—
|
|
|
$
|
76
|
|
|
|
|
|
|
|
Total Non-Performing Assets
|
$
|
4,979
|
|
|
$
|
1,177
|
|
|
Total as a Percentage of Total Assets
|
0.12
|
%
|
|
0.03
|
%
|
|
|
|
|
(1)
|
During the three-month periods ended
March 31, 2017
and
September 30, 2016
, the Company had no loans modified in a troubled debt restructurings ("TDRs"). In addition, the Company had
$0.5 million
of TDRs performing in accordance with their terms at each of the periods ended
March 31, 2017
and
September 30, 2016
.
|
At
March 31, 2017
, non-performing loans totaled
$5.0 million
, representing
0.43%
of total loans, compared to
$1.1 million
, or 0.12% of total loans at
September 30, 2016
. This increase in non-performing loans was primarily due to a downgrade of a large agricultural relationship.
Classified Assets
. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss.” 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 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 loans and other assets, at
March 31, 2017
, the Company had classified
$48.7 million
of its assets as substandard and
$0.1 million
as doubtful and did not classify any assets as loss. At
September 30, 2016
, the Company classified
$9.0 million
of its assets as substandard and did not classify any assets as doubtful or loss. The increase in assets classified as substandard was primarily due to a downgrade of a large agricultural relationship.
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, 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, involves consideration of, 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. While management believes that there are aspects of the current economic environment that may cause a drag on the market, it has continued to show signs of improvement in the Bank’s markets over the last several years. The Bank’s loss rates over the past seven years have been relatively low for all loan segments, although the Company did have a significant charge off of an agriculture relationship during fiscal year 2016. Notwithstanding these signs of improvement, the Bank does not believe that these low loss conditions are likely to continue indefinitely. Although the Bank’s four market areas have indirectly benefited from a relatively stable agricultural market, the market has become somewhat more stressed with lower commodity prices over the last couple of years and commodity prices remain lower than a few years ago. Management expects that future losses in this portfolio could be higher than recent historical experience. Management believes the low commodity prices and high land rents have the potential to negatively impact the economies of our agricultural markets.
At
March 31, 2017
, the Company had established an allowance for loan losses totaling
$14.6 million
, compared to
$5.6 million
at
September 30, 2016
. This increase related primarily to our taxpayer advance loans. During the three months ended
March 31, 2017
, the Company recorded a provision for loan losses of
$8.6 million
, partially offset by
$0.5 million
of net charge offs, compared to
$0.4 million
of net charge offs for the three months ended
March 31, 2016
. The provision expense was primarily driven by a $7.9 million reserve related to tax advance loans. In addition, the downgrade of a significant agriculture relationship during the quarter ended March 31, 2017 contributed to an increased provision. Downgrades in agricultural loans were related primarily to losses incurred due to lower commodity prices in recent years, notwithstanding record yields for many producers in our markets. Given underlying collateral values related to our agricultural loans, we believe we have minimal loss exposure in the portfolio at this time. 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 current level of the allowance for loan losses at
March 31, 2017
reflected an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, 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.
The allowance for loan losses reflects management’s best estimate of probable losses inherent in the portfolio based on currently available information. In addition to the factors mentioned above, future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. In addition, our regulators have the ability to order us to increase our allowance.
CRITICAL ACCOUNTING ESTIMATES
The Company’s financial statements are prepared in accordance with U.S. 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. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the year ended
September 30, 2016
, and information contained herein.
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 trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the methodology. Although management believes the levels of the allowance at both
March 31, 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 losses in excess of the applicable allowance.
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.
In addition, goodwill and intangible assets are tested annually 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.
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 Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.
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, the Company reviews the intangible assets for events or circumstances that may indicate a change in recoverability of the underlying basis.
Deferred Tax Assets
. 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.
Security Impairment
. Management 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, 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 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 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.
Level 3 Fair Value Measurement
. U.S. GAAP requires the Company to measure the fair value of financial instruments under a standard which 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.
RESULTS OF OPERATIONS
General
. The Company recorded net income of
$32.1 million
, or
$3.42
per diluted share, for the three months ended
March 31, 2017
, compared to net income of
$14.3 million
, or
$1.67
per diluted share, for the three months ended
March 31, 2016
. The 2017 fiscal second quarter pre-tax results included
$7.1 million
of amortization of intangible assets, which the Company anticipates to decrease by $5.2 million to $1.9 million for each of the third and fourth quarters of 2017,
$2.1 million
in excess funding expenses related to the 2017 tax season and
$0.8 million
in expenses related to due diligence efforts, including legal expenses for a potential acquisition opportunity which the Company is no longer pursuing. In addition, pre-tax results included
$2.3 million
in non-cash stock related compensation associated with stock awards granted in connection with the Company's three highest paid executives signing long-term employment agreements in the first and second quarters of fiscal 2017. Total revenue for the fiscal 2017 second quarter was
$116.1 million
, compared to
$60.8 million
for the same quarter in 2016, an increase of
$55.3 million
, or
91%
, primarily due to growth in tax product fee income, card fee income, income from tax-exempt securities (included in other investment securities), and interest from loans.
The Company recorded net income of
$33.4 million
, or
$3.63
per diluted share, for the
six months ended March 31, 2017
, compared to
$18.3 million
, or
$2.17
per diluted share, for the same period in fiscal year 2016. The increase in net earnings for the six months ended March 31, 2017 was primarily due to increases of
$53.8 million
in non-interest income and
$6.3 million
in net interest income, offset by an increase of
$31.9 million
in non-interest expense. Total revenue for the six months ended March 31, 2017 was
$155.3 million
, compared to
$95.2 million
for the same period of the prior year, an increase of
$60.1 million
, or
63%
, primarily from growth in tax product fee income and card fee income.
Seasonality
. In the industries for electronic payments processing and tax refund processing, companies commonly experience seasonal fluctuations in revenue. For example, in recent years, our results of operations for the first half of each fiscal year have been favorably affected by large numbers of taxpayers electing to receive their tax refunds via direct deposit on our pre-paid cards, which caused our operating revenues to be typically higher in the first half of those years than they were in the corresponding second half of those years. The 2017 fiscal second quarter results highlight the increased seasonality of the Company's revenue due to the addition of EPS, SCS and other tax-related programs. Our tax business is expected to continue to generate the vast majority of its revenues in the Company's fiscal second quarter, with some additional revenues in the third quarter, while most expenses are spread throughout the year with some elevated expenses in the December and March quarters. We expect our revenue to continue to be based on seasonal factors that affect the electronic payments processing and tax refund processing industries as a whole. We and our tax preparation partners rely on the Internal Revenue Service (the “IRS”), technology, and employees when processing and preparing tax refunds and tax-related products and services.
Net Interest Income
. Net interest income for the fiscal
2017
second
quarter increased by
$4.1 million
, or
20%
, to
$24.0 million
from
$19.9 million
for the same period in the prior fiscal year primarily due to increases of volume and overall yields in the specialty finance loan segment, which includes the premium finance and purchased student loan portfolio, as well as growth in investment security balances and yields attained particularly in tax exempt and asset backed securities. Additionally, the overall increase was driven by a better mix and higher percentage of loans and higher yielding investments primarily in high credit quality tax-exempt municipal bonds. Net interest income for the fiscal 2017 second quarter was up $4.1 million from the Company's fiscal 2017 first quarter, as anticipated, due to the student loan portfolio purchase as well as deferred securities purchases, which historically took place in the August to December months, but occurred in the Company's fiscal 2017 second quarter at significantly higher yields than were available in the August to November months. Also a tailwind from rate increases in the fiscal 2017 first quarter to the fiscal 2017 second quarter, created significantly higher realized yields, as expected, on the Company's MBS portfolio.
Net Interest Margin (“NIM”) decreased from
3.22%
in the fiscal
2016
second
quarter to
2.91%
in the fiscal
2017
second
quarter. The Company estimates, when adjusting for certain seasonal tax program related items, a normalized NIM for the 2017 fiscal second quarter would have been between 3.29% - 3.32%. These adjustments include removing the impact of zero interest tax advances (13 - 14 basis points), normalizing cash balance (13 - 14 basis points), and making borrowing adjustments by removing wholesale deposit costs and replacing with FHLB overnight borrowing costs as well as removing borrowing expense if cash balances were available (12 - 13 basis points). Due to the timing of investment purchases and slowing prepayment speeds on the MBS portfolio, a normalized NIM for the month of March, was higher than the quarterly average. Excluding the subordinated debt issuance in 2016, NIM would have been 11 basis points higher for the 2017 second quarter, the impact of which is not reflected in the normalized NIM projection. The Company expects improved estimates surrounding the tax season refund advance product, which should mitigate excess cash balances in the future.
The overall reported tax equivalent yield (“TEY”) on average earning asset yields decreased by one basis point to 3.30% when comparing the fiscal 2017 second quarter to the 2016 second quarter, primarily due to the drag of the aforementioned higher cash balance in concert with the zero interest tax loans included in that earning assets. Adjusting for a lowered cash balance and removing the zero interest tax loans, the Company estimates the quarterly TEY earning asset yield would have been between 30 to 32 basis points higher for an estimated, normalized TEY between 3.59% - 3.61%.
The fiscal 2017 second quarter TEY on the securities portfolio increased by 25 basis points compared to the comparable prior year fiscal quarter primarily due to a shifting mix in the investment portfolio with new investments in overall higher yielding investment securities, primarily mortgage related, tax exempt municipal securities rather than traditional agency MBS. The TEY on the securities portfolio increased by 32 basis points from 2.92% to 3.24% comparing the 2017 fiscal second quarter to the 2017 fiscal first quarter as other investment securities increased in TEY yield by 23 basis points from 3.43% to 3.66% and MBS yields increased by 47 basis points from 1.91% to 2.38, as expected.
We believe that the Company's expanded portfolio of floating rate assets provides a runway for higher NIM levels should short term interest rates continue to rise. The Company also seeks to remain diligent and disciplined when evaluating loan pool deal flow to continue to optimize the deployment of our national, non-interest bearing deposit base. We anticipate that many of these loan pools could add immediate earnings accretion with acceptable risk parameters, as we believe to be the case with the recent student loan portfolio purchase.
While the subordinated debt issuance in 2016 increased the cost of funds at the Company level, MetaBank's cost of funds remained at levels much lower than the overall Company cost of funds, though somewhat higher than historical levels due to the current, seasonal tax season funding programs.
The Company’s average interest-earning assets for the fiscal
2017
second
quarter increased by
$1.10 billion
, or
38%
, to
$3.96 billion
, up from
$2.86 billion
during the same quarter last fiscal year, primarily from growth in loan portfolios, tax-exempt investments securities, and cash and fed funds sold of
$527.6 million
,
$287.5 million
, and
$233.4 million
, respectively.
The Company’s average total deposits and interest-bearing liabilities for the
2017
second
fiscal quarter increased
$1.18 billion
, or
43%
, to
$3.92 billion
from
$2.74 billion
for the same quarter of the prior fiscal year. A portion of the growth is directly related to the implementation of new funding programs to support the committed capacity of interest and fee free refund advance loans along with an increase in non-interest bearing deposits driven by the Company's MPS and tax deposits, as well as the Company's completion of the public offering of its subordinated debt in August 2016, which are due August 15, 2026. Average wholesale deposits increased
$986.9 million
for the three months ended
March 31, 2017
compared to the same period of the prior year. Average quarterly deposits in the Payments segment increased in the fiscal
2017
second
quarter by $252.6 million, or 11%, from the same period last year. This increase resulted almost entirely from growth in core prepaid card programs and also growth in tax season deposits. Overall, rates on all deposits and interest-bearing liabilities increased by
29
basis points from
0.10%
in the fiscal
2016
second
quarter to
0.39%
in the comparable
2017
period. The implementation of wholesale deposits during the first and second quarters of 2017 impacted this increase by
20
basis points and the subordinated debt issuance in 2016 also had an impact on this increase of
11
basis points. At
March 31, 2017
and
2016
, low-cost checking deposits represented
95%
and
94%
of total deposits, respectively.
For the six months ended March 31, 2017, net interest income was
$43.8 million
compared to
$37.5 million
for the same period in the prior year. This increase was primarily due to increases of volume and overall yields in the specialty finance loan segment, which includes the premium finance and purchased student loan portfolio, as well as growth in investment security balances and yields attained particularly in tax exempt and asset backed securities. The TEY of MBS and other investments was
3.09%
for the six months ended March 31, 2017, compared to
2.95%
for the same period of 2016.
The following tables present, for the periods indicated, the Company’s 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. Tax equivalent adjustments have been made in yield on interest bearing assets and net interest margin. Non-accruing loans have been included in the table as loans carrying a zero yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Finance Loans*
|
$
|
326,495
|
|
|
$
|
4,475
|
|
|
5.56
|
%
|
|
$
|
120,165
|
|
|
$
|
1,623
|
|
|
5.43
|
%
|
|
Tax Advance Loans
|
177,193
|
|
|
11
|
|
|
0.02
|
%
|
|
10,266
|
|
|
—
|
|
|
—
|
%
|
|
Retail Bank Loans
|
798,125
|
|
|
8,287
|
|
|
4.21
|
%
|
|
643,766
|
|
|
6,925
|
|
|
4.36
|
%
|
|
Mortgage-Backed Securities
|
764,742
|
|
|
4,480
|
|
|
2.38
|
%
|
|
800,685
|
|
|
4,768
|
|
|
2.39
|
%
|
|
Tax Exempt Investment Securities
|
1,349,034
|
|
|
8,325
|
|
|
3.85
|
%
|
|
1,061,529
|
|
|
6,171
|
|
|
3.56
|
%
|
|
Asset-Backed Securities
|
117,940
|
|
|
723
|
|
|
2.49
|
%
|
|
55,952
|
|
|
285
|
|
|
2.05
|
%
|
|
Other Investment Securities
|
125,792
|
|
|
824
|
|
|
2.66
|
%
|
|
102,310
|
|
|
642
|
|
|
2.52
|
%
|
|
Cash & Fed Funds Sold
|
302,890
|
|
|
593
|
|
|
0.79
|
%
|
|
69,449
|
|
|
215
|
|
|
1.25
|
%
|
|
Total interest-earning assets
|
3,962,211
|
|
|
$
|
27,718
|
|
|
3.30
|
%
|
|
2,864,122
|
|
|
$
|
20,629
|
|
|
3.31
|
%
|
|
Non-interest-earning assets
|
451,508
|
|
|
|
|
|
|
214,333
|
|
|
|
|
|
|
Total assets
|
$
|
4,413,719
|
|
|
|
|
|
|
$
|
3,078,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
$
|
2,512,934
|
|
|
$
|
—
|
|
|
0.00
|
%
|
|
$
|
2,232,131
|
|
|
$
|
—
|
|
|
0.00
|
%
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
42,515
|
|
|
42
|
|
|
0.40
|
%
|
|
36,563
|
|
|
21
|
|
|
0.23
|
%
|
|
Savings
|
58,718
|
|
|
8
|
|
|
0.06
|
%
|
|
62,636
|
|
|
5
|
|
|
0.04
|
%
|
|
Money markets
|
45,913
|
|
|
20
|
|
|
0.17
|
%
|
|
46,308
|
|
|
19
|
|
|
0.16
|
%
|
|
Time deposits
|
101,546
|
|
|
172
|
|
|
0.69
|
%
|
|
58,580
|
|
|
90
|
|
|
0.62
|
%
|
|
Wholesale deposits
|
986,908
|
|
|
1,942
|
|
|
0.80
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
FHLB advances
|
7,000
|
|
|
122
|
|
|
7.08
|
%
|
|
8,648
|
|
|
126
|
|
|
5.84
|
%
|
|
Overnight fed funds purchased
|
73,033
|
|
|
168
|
|
|
0.93
|
%
|
|
277,681
|
|
|
315
|
|
|
0.46
|
%
|
|
Subordinated debentures
|
73,256
|
|
|
1,112
|
|
|
6.16
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
Other borrowings
|
13,930
|
|
|
166
|
|
|
4.84
|
%
|
|
13,641
|
|
|
115
|
|
|
3.40
|
%
|
|
Total interest-bearing liabilities
|
1,402,819
|
|
|
3,752
|
|
|
1.08
|
%
|
|
504,057
|
|
|
691
|
|
|
0.55
|
%
|
|
Total deposits and interest-bearing liabilities
|
3,915,753
|
|
|
$
|
3,752
|
|
|
0.39
|
%
|
|
2,736,188
|
|
|
$
|
691
|
|
|
0.10
|
%
|
|
Other non-interest bearing liabilities
|
106,700
|
|
|
|
|
|
|
40,813
|
|
|
|
|
|
|
Total liabilities
|
4,022,453
|
|
|
|
|
|
|
2,777,001
|
|
|
|
|
|
|
Shareholders' equity
|
391,266
|
|
|
|
|
|
|
301,454
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
4,413,719
|
|
|
|
|
|
|
$
|
3,078,455
|
|
|
|
|
|
|
|
|
Net interest income and net interest rate spread including non-interest bearing deposits
|
|
|
$
|
23,966
|
|
|
2.91
|
%
|
|
|
|
$
|
19,938
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
3.22
|
%
|
*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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Finance Loans*
|
$
|
263,034
|
|
|
$
|
6,984
|
|
|
5.32
|
%
|
|
$
|
117,023
|
|
|
$
|
3,246
|
|
|
5.55
|
%
|
|
Tax Advance Loans
|
90,440
|
|
|
11
|
|
|
0.02
|
%
|
|
6,374
|
|
|
—
|
|
|
—
|
%
|
|
Retail Bank Loans
|
780,449
|
|
|
16,456
|
|
|
4.23
|
%
|
|
630,986
|
|
|
13,621
|
|
|
4.32
|
%
|
|
Mortgage-Backed Securities
|
726,766
|
|
|
7,801
|
|
|
2.15
|
%
|
|
739,557
|
|
|
8,481
|
|
|
2.29
|
%
|
|
Tax Exempt Investment Securities
|
1,259,672
|
|
|
15,227
|
|
|
3.73
|
%
|
|
1,001,429
|
|
|
11,599
|
|
|
3.56
|
%
|
|
Asset-Backed Securities
|
117,934
|
|
|
1,418
|
|
|
2.41
|
%
|
|
27,823
|
|
|
285
|
|
|
2.05
|
%
|
|
Other Investment Securities
|
106,198
|
|
|
1,413
|
|
|
2.67
|
%
|
|
101,983
|
|
|
1,278
|
|
|
2.51
|
%
|
|
Cash & Fed Funds Sold
|
244,088
|
|
|
983
|
|
|
0.81
|
%
|
|
57,522
|
|
|
394
|
|
|
1.37
|
%
|
|
Total interest-earning assets
|
3,588,581
|
|
|
$
|
50,293
|
|
|
3.27
|
%
|
|
2,682,697
|
|
|
$
|
38,904
|
|
|
3.32
|
%
|
|
Non-interest-earning assets
|
358,720
|
|
|
|
|
|
|
198,816
|
|
|
|
|
|
|
Total assets
|
$
|
3,947,301
|
|
|
|
|
|
|
$
|
2,881,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
$
|
2,281,877
|
|
|
$
|
—
|
|
|
0.00
|
%
|
|
$
|
1,993,571
|
|
|
$
|
—
|
|
|
0.00
|
%
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
40,348
|
|
|
81
|
|
|
0.40
|
%
|
|
35,544
|
|
|
42
|
|
|
0.24
|
%
|
|
Savings
|
54,578
|
|
|
15
|
|
|
0.06
|
%
|
|
54,071
|
|
|
11
|
|
|
0.04
|
%
|
|
Money markets
|
46,768
|
|
|
41
|
|
|
0.18
|
%
|
|
45,573
|
|
|
37
|
|
|
0.16
|
%
|
|
Time deposits
|
116,520
|
|
|
431
|
|
|
0.74
|
%
|
|
72,192
|
|
|
208
|
|
|
0.58
|
%
|
|
Wholesale funding
|
668,606
|
|
|
2,554
|
|
|
0.77
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
FHLB advances
|
13,593
|
|
|
264
|
|
|
3.89
|
%
|
|
63,557
|
|
|
331
|
|
|
1.04
|
%
|
|
Overnight fed funds purchased
|
173,242
|
|
|
559
|
|
|
0.65
|
%
|
|
278,306
|
|
|
554
|
|
|
0.40
|
%
|
|
Subordinated debentures
|
73,239
|
|
|
2,223
|
|
|
6.09
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
Other borrowings
|
14,765
|
|
|
326
|
|
|
4.42
|
%
|
|
14,666
|
|
|
228
|
|
|
3.12
|
%
|
|
Total interest-bearing liabilities
|
1,201,659
|
|
|
6,494
|
|
|
1.08
|
%
|
|
563,909
|
|
|
1,411
|
|
|
0.50
|
%
|
|
Total deposits and interest-bearing liabilities
|
3,483,536
|
|
|
$
|
6,494
|
|
|
0.37
|
%
|
|
2,557,480
|
|
|
$
|
1,411
|
|
|
0.11
|
%
|
|
Other non-interest bearing liabilities
|
92,303
|
|
|
|
|
|
|
35,985
|
|
|
|
|
|
|
Total liabilities
|
3,575,839
|
|
|
|
|
|
|
2,593,465
|
|
|
|
|
|
|
Shareholders' equity
|
371,462
|
|
|
|
|
|
|
288,048
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
3,947,301
|
|
|
|
|
|
|
$
|
2,881,513
|
|
|
|
|
|
|
|
|
Net interest income and net interest rate spread including non-interest bearing deposits
|
|
|
$
|
43,799
|
|
|
2.90
|
%
|
|
|
|
$
|
37,493
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
3.22
|
%
|
*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.
The following table presents, for the periods indicated, the Company’s total dollar amount of interest income from average securities portfolio assets and the resulting yields expressed both in dollars and rates. Tax equivalent adjustments have been made in the yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
(1)
|
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
(2)
|
|
Securities Portfolio Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
|
764,741
|
|
|
$
|
4,480
|
|
|
2.38
|
%
|
|
$
|
800,685
|
|
|
$
|
4,768
|
|
|
2.39
|
%
|
|
*Other investments
|
1,592,767
|
|
|
9,872
|
|
|
3.66
|
%
|
|
1,219,791
|
|
|
7,097
|
|
|
3.39
|
%
|
|
Total Securities Portfolio Assets
|
$
|
2,357,508
|
|
|
$
|
14,352
|
|
|
3.24
|
%
|
|
$
|
2,020,476
|
|
|
$
|
11,865
|
|
|
2.99
|
%
|
|
*Excludes FHLB Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Tax rate used to arrive at a TEY for three months ended
March 31, 2017
is 35%
|
|
|
|
|
(2)
|
Tax rate used to arrive at a TEY for three months ended
March 31, 2016
is 34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
(1)
|
|
Average
Outstanding
Balance
|
|
Interest
Earned /
Paid
|
|
Yield /
Rate
(2)
|
|
Securities Portfolio Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
|
726,766
|
|
|
$
|
7,801
|
|
|
2.15
|
%
|
|
$
|
739,557
|
|
|
$
|
8,481
|
|
|
2.29
|
%
|
|
*Other investments
|
1,483,804
|
|
|
18,058
|
|
|
3.55
|
%
|
|
1,131,236
|
|
|
13,162
|
|
|
3.38
|
%
|
|
Total Securities Portfolio Assets
|
$
|
2,210,570
|
|
|
$
|
25,859
|
|
|
3.09
|
%
|
|
$
|
1,870,793
|
|
|
$
|
21,643
|
|
|
2.95
|
%
|
|
*Excludes FHLB Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Tax rate used to arrive at a TEY for six months ended
March 31, 2017
is 35%
|
|
|
|
|
(2)
|
Tax rate used to arrive at a TEY for six months ended
March 31, 2016
is 34%
|
Provision for Loan Losses
. The Company recorded a
$8.6 million
and a
$9.5 million
provision for loan losses in the
three and six
month periods ended
March 31, 2017
, respectively, as compared to a
$1.2 million
and
$2.0 million
provision for loan losses in the three and six month periods ended
March 31, 2016
, respectively. The majority of the provision expense, during the three and six month periods ended March 31, 2017, was primarily driven by a $7.9 million reserve taken during the second quarter of 2017 related to tax season loans. In addition, the downgrade of a significant agriculture relationship during the second quarter of fiscal 2017 also contributed to an increased provision. See Note 4 to the Condensed Consolidated Financial Statements.
Non-Interest Income
. Non-interest income for the fiscal
2017
second
quarter increased by
$51.3 million
, or
125%
, to
$92.2 million
from
$40.9 million
for the same period in the prior fiscal year. The increase was primarily due to an increase in tax product fee income of
$42.5 million
, predominantly from growth within taxpayer advances and refund transfer fee income, and an increase in card fee income of
$8.0 million
, or
43%
, largely driven by income generated by our tax season card programs, a wind down of one of our non-strategic partners, and a large promotional campaign by one of our partners.
Non-interest income for the
six months ended March 31, 2017
of
$111.5 million
, increased
$53.8 million
from
$57.7 million
in the same period in the prior fiscal year, due mostly to an increase in tax product fee income and card fee income. Tax product fee income increased
$43.0 million
, or
203%
, and card fee income increased
$11.1 million
, or
33%
.
Non-Interest Expense
. Non-interest expense increased
$25.2 million
, or
60%
, to
$66.9 million
, for the
second
quarter of fiscal year
2017
, as compared to
$41.8 million
for the same period in
2016
. The primary components driving the difference between quarters was an increase in compensation expense of
$9.7 million
, a
$5.9 million
increase in amortization of intangible asset expense, and a
$5.1 million
increase in tax product expense. The vast majority of the intangible amortization expensed during the second quarter of 2017 was directly related to the seasonality of our tax business. The increase in tax product expense was related to the increased activity from our tax distribution channels and recent tax partnerships. Compensation expense primarily increased due to the EPS and SCS acquisitions, non-cash stock related compensation associated with three executives signing long-term employment agreements, and additional staffing to support the Company’s growth initiatives. Excluding potential acquisitions, we expect the growth rate in compensation expense to decrease during the remainder of 2017. Other factors influencing the overall non-interest expense increase was a
$2.2 million
increase in other expense, driven by seasonal tax expenses to execute our tax lending strategy, a
$1.0 million
increase in card processing expenses, an increase in legal and consulting expense of
$0.6 million
, due primarily to due diligence efforts for a potential acquisition the Company is no longer pursuing, and an increase in occupancy and equipment expense of
$0.5 million
mainly due to a full quarter of expense for the recent acquisitions of SCS and EPS.
Non-interest expense for the
six months ended March 31, 2017
increased by
$31.9 million
, or
44%
, to
$103.7 million
compared to the same period in the prior fiscal year. Compensation and benefits expense increased
$12.9 million
, or
40%
, for the 2017 six-month period, versus the same period last year due primarily to a 23% increase in overall staffing, the previously mentioned non-cash stock related compensation, and compensation paid to staff employed on a temporary basis as part of our seasonal tax business. The increase in overall staffing was largely driven by the additional employees hired as part of the EPS and SCS acquisitions. In addition, intangibles amortization increased
$6.2 million
, tax product expense increased
$5.1 million
, and legal and consulting expense increased
$2.2 million
. These increases were primarily related to the EPS and SCS acquisitions and the aforementioned potential acquisition opportunity.
Income Tax
. Income tax expense for the
second
quarter of fiscal
2017
was
$8.4 million
, for an effective tax rate of
20.7%
, compared to
$3.6 million
, or an effective tax rate of
20.1%
, for the same period in the prior year. The effective tax rate is expected to stay approximately at that level for the remainder of fiscal 2017. For the first six months of fiscal year 2017, the effective tax rate was
20.7%
.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, derived principally through its MPS division, and to a lesser extent through its Retail Bank division and tax divisions, borrowings, principal and interest payments on loans, mortgage-backed securities and certain housing related municipal securities which also pay monthly principal and interest, as well as maturing investment securities. In addition, the Company periodically utilizes wholesale deposit sources to help with temporary funding needs 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 uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At
March 31, 2017
, the Company had commitments to originate and purchase loans and unused lines of credit totaling $
236.3 million
. The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.
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 revise the risk-based capital requirements applicable to financial institution holding companies and their depository institution subsidiaries, including us and the Bank, as compared to the current U.S. general risk-based capital rules. The Basel III Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace 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 implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection 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 and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.
Pursuant to the Basel III Capital Rules, the Company and Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. Failure by the 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 the 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 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.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) to average assets (as defined). At
March 31, 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 tables below include 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
Requirement to Be
|
|
|
|
|
|
|
Minimum
|
|
Well Capitalized
|
|
|
|
|
|
|
Requirement For
|
|
Under Prompt
|
|
|
|
|
|
|
Capital Adequacy
|
|
Corrective Action
|
|
At March 31, 2017
|
Company
|
|
Bank
|
|
Purposes
|
|
Provisions
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
6.44
|
%
|
|
8.20
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
Common equity Tier 1 capital ratio
|
14.14
|
|
|
18.95
|
|
|
4.50
|
|
|
6.50
|
|
|
Tier 1 capital ratio
|
14.68
|
|
|
18.95
|
|
|
6.00
|
|
|
8.00
|
|
|
Total qualifying capital ratio
|
19.46
|
|
|
19.76
|
|
|
8.00
|
|
|
10.00
|
|
The following table provides certain non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP:
|
|
|
|
|
|
|
|
|
Standardized Approach (1)
March 31, 2017
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Total equity
|
$
|
411,748
|
|
|
Adjustments:
|
|
|
|
LESS: Goodwill, net of associated deferred tax liabilities
|
96,693
|
|
|
LESS: Certain other intangible assets
|
53,307
|
|
|
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
|
1,109
|
|
|
LESS: Net unrealized gains (losses) on available-for-sale securities
|
14
|
|
|
Common Equity Tier 1
(1)
|
260,625
|
|
|
Long-term debt and other instruments qualifying as Tier 1
|
10,310
|
|
|
LESS: Additional tier 1 capital deductions
|
277
|
|
|
Total Tier 1 capital
|
270,658
|
|
|
Allowance for loan losses
|
14,858
|
|
|
Subordinated debentures (net of issuance costs)
|
73,278
|
|
|
Total qualifying capital
|
358,794
|
|
|
|
|
|
(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.
|
The following table provides a reconciliation of tangible common equity used in calculating tangible book value data to Total Stockholders' Equity.
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
(Dollars in Thousands)
|
|
Total Stockholders' Equity
|
$
|
411,748
|
|
|
LESS: Goodwill
|
98,723
|
|
|
LESS: Intangible assets
|
66,633
|
|
|
Tangible common equity
|
246,392
|
|
|
LESS: AOCI
|
14
|
|
|
Tangible common equity excluding AOCI
|
246,378
|
|
Due to the predictable, quarterly cyclicality of MPS deposits in conjunction 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 March 31, 2017 were
9.11%
,
19.28%
,
19.28%
, and
20.10%
, respectively.
Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations 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. The capital conservation buffer is required to be 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 complied with the capital conservation buffer requirement, which increases the three risk-based capital ratios by 0.625% each year through 2019, equivalent to 2.5% of risk-weighted assets in addition to the minimum risk-based capital ratios, at which point, the requirement for 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.
Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will be able to meet targeted capital ratios required by the revised requirements, as they become effective.
CONTRACTUAL OBLIGATIONS
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations
"
in the Company’s Annual Report on Form 10-K for its fiscal year ended
September 30, 2016
for a summary of our contractual obligations as of
September 30, 2016
. There were no material changes outside the ordinary course of our business in contractual obligations from
September 30, 2016
through
March 31, 2017
.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
For discussion of the Company’s off-balance sheet financing arrangements as of
March 31, 2017
, see Note 7 to our consolidated financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 7 occur, the effect on the Company’s capital and net income could be significant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
MARKET RISK
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, 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.
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, 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, generally five years or less, though the Company will consider ten year fixed-rate loans for high quality agricultural and commercial borrowers so long as the loan agreements have an appropriate structure and prepayment penalties. This theoretically allows the Company to maintain a portfolio of loans that will have relatively little sensitivity to changes in the level of interest rates, while providing a reasonable spread to the cost of liabilities used to fund the loans.
The Company’s primary objective for its investment portfolio is to provide 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, 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 non-MPS 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 in to 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, 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.
Interest Rate Risk (“IRR”)
Overview.
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.
Earnings at risk and economic value analysis.
As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to properly 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.
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 time horizon. The results are affected by projected rates, prepayments, caps and floors. 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.
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 policy limits for all rate scenarios using the snapshot as of
March 31, 2017
as required by regulation. The table below shows the results of the scenarios as of
March 31, 2017
:
Net Sensitive Earnings at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sensitive Earnings at Risk
|
|
Balances as of March 31, 2017
|
Standard (Parallel Shift) Year 1
|
|
|
Net Interest Income at Risk%
|
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Basis Point Change Scenario
|
-5.2
|
%
|
|
2.1
|
%
|
|
3.6
|
%
|
|
5.1
|
%
|
|
7.6
|
%
|
|
Board Policy Limits
|
-8.0
|
%
|
|
-8.0
|
%
|
|
-10.0
|
%
|
|
-15.0
|
%
|
|
-20.0
|
%
|
The EAR analysis reported at
March 31, 2017
, shows that in all rising rate scenarios, 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, 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. Unlike the Company's fiscal first quarter of 2017, the fiscal second quarter of 2017 snapshot results were not affected by testing and implementation of material wholesale deposits utilized for the tax season refund advance commitments.
Owing to the snapshot nature of IRR, as is required by regulators, in concert with the Company’s predictable weekly, 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 have anticipated outcomes where the Company may temporarily be outside of Board policy limits based on a snapshot analysis.
For management to better understand the IRR position of the Bank, an alternative IRR analysis was completed whereby all
March 31, 2017
values were utilized with the exception of overnight borrowings, total deposits, cash due from banks, non-earning assets, and non-paying liabilities. To diminish potential issues documented above, quarterly average balances were utilized for overnight borrowings, total 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, typically, more accurately portrays the Bank’s IRR position. However, the impact of the sizable wholesale deposits, some of which inflated cash balances for a period of time, tested and implemented in the fiscal first quarter of 2017, somewhat mitigate the usefulness of this view in this particular quarter. Due to this, the Company feels the snapshot view is more reflective of the Company's current IRR position.
The Company would have been within policy limits as of March 31, 2017 in all scenarios utilizing the alternative IRR scenario run. The table below highlights those results:
Alternative Net Sensitive Earnings at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sensitive Earnings at Risk
|
|
Alternative IRR Results
|
Standard (Parallel Shift) Year 1
|
|
|
Net Interest Income at Risk%
|
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Basis Point Change Scenario
|
-5.1
|
%
|
|
0.6
|
%
|
|
0.5
|
%
|
|
0.4
|
%
|
|
1.4
|
%
|
|
Board Policy Limits
|
-8.0
|
%
|
|
-8.0
|
%
|
|
-10.0
|
%
|
|
-15.0
|
%
|
|
-20.0
|
%
|
The alternative EAR analysis reported at
March 31, 2017
shows that in an all increasing interest rate environment, more assets than liabilities would reprice over the modeled one-year period.
The Company anticipates solid EAR results in a rising rate environment due to continued premium finance loan growth, the addition of loans and securities indexed to LIBOR, slower premium amortization on higher coupon, fixed rate, agency MBS, continued growth of non-interest bearing MPS deposits, and the sustained execution on its strategic plan.
Net Sensitive Earnings at Risk as of
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Change in Interest Income/Expense
for a given change in interest rates
|
|
|
|
|
Total Earning
|
|
Total Earning
|
|
Over / (Under) Base Case Parallel Ramp
|
|
|
|
Basis Point Change Scenario
|
Assets (in $000's)
|
|
Assets
|
|
-100
|
|
Base
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Total Loans
|
1,132,618
|
|
|
33.0
|
%
|
|
57,388
|
|
|
61,651
|
|
|
66,073
|
|
|
70,486
|
|
|
74,837
|
|
|
79,286
|
|
|
Total Investments (non-TEY) and other Earning Assets
|
2,295,859
|
|
|
67.0
|
%
|
|
49,801
|
|
|
56,844
|
|
|
60,774
|
|
|
63,932
|
|
|
67,236
|
|
|
71,535
|
|
|
Total Interest-Sensitive Income
|
3,428,477
|
|
|
100.0
|
%
|
|
107,189
|
|
|
118,495
|
|
|
126,847
|
|
|
134,418
|
|
|
142,073
|
|
|
150,821
|
|
|
Total Interest-Bearing Deposits
|
235,064
|
|
|
32.0
|
%
|
|
380
|
|
|
886
|
|
|
1,920
|
|
|
2,954
|
|
|
3,988
|
|
|
5,023
|
|
|
Total Borrowings
|
500,000
|
|
|
68.0
|
%
|
|
784
|
|
|
5,715
|
|
|
10,644
|
|
|
15,574
|
|
|
20,504
|
|
|
25,434
|
|
|
Total Interest-Sensitive Expense
|
735,064
|
|
|
100.0
|
%
|
|
1,164
|
|
|
6,601
|
|
|
12,564
|
|
|
18,528
|
|
|
24,492
|
|
|
30,457
|
|
Alternative Net Sensitive Earnings at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative IRR Results
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Change in Interest Income/Expense
for a given change in interest rates
|
|
|
|
|
Total Earning
|
|
Total Earning
|
|
Over / (Under) Base Case Parallel Ramp
|
|
|
|
Basis Point Change Scenario
|
Assets (in $000's)
|
|
Assets
|
|
-100
|
|
Base
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Total Loans
|
1,132,618
|
|
|
30.5
|
%
|
|
57,388
|
|
|
61,651
|
|
|
66,073
|
|
|
70,486
|
|
|
74,837
|
|
|
79,286
|
|
|
Total Investments (non-TEY) and other Earning Assets
|
2,581,295
|
|
|
69.5
|
%
|
|
49,801
|
|
|
59,694
|
|
|
66,464
|
|
|
72,452
|
|
|
78,575
|
|
|
85,682
|
|
|
Total Interest-Sensitive Income
|
3,713,913
|
|
|
100.0
|
%
|
|
107,189
|
|
|
121,345
|
|
|
132,537
|
|
|
142,938
|
|
|
153,412
|
|
|
164,968
|
|
|
Total Interest-Bearing Deposits
|
1,235,599
|
|
|
93.9
|
%
|
|
1,558
|
|
|
9,343
|
|
|
19,139
|
|
|
28,937
|
|
|
38,734
|
|
|
48,532
|
|
|
Total Borrowings
|
80,033
|
|
|
6.1
|
%
|
|
533
|
|
|
1,263
|
|
|
1,993
|
|
|
2,724
|
|
|
3,454
|
|
|
4,184
|
|
|
Total Interest-Sensitive Expense
|
1,315,632
|
|
|
100.0
|
%
|
|
2,091
|
|
|
10,606
|
|
|
21,132
|
|
|
31,661
|
|
|
42,188
|
|
|
52,716
|
|
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, with less increase expected relative to many other banks. When unable 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 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 sheet instruments, is derived under each rate scenario. The economic value of equity is calculated as the difference between the estimated market value of assets and liabilities, net of the impact of off-balance sheet instruments.
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 was within Board policy limits for all scenarios. The table below shows the results of the scenarios as of
March 31, 2017
:
Economic Value Sensitivity as of
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2017
|
Standard (Parallel Shift)
|
|
|
Economic Value of Equity at Risk%
|
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Basis Point Change Scenario
|
-2.3
|
%
|
|
-1.1
|
%
|
|
-3.7
|
%
|
|
-7.2
|
%
|
|
-10.1
|
%
|
|
Board Policy Limits
|
-10.0
|
%
|
|
-10.0
|
%
|
|
-20.0
|
%
|
|
-30.0
|
%
|
|
-40.0
|
%
|
The EVE at risk reported at
March 31, 2017
shows that as interest rates increase, the economic value of equity position will decrease from the base, primarily due to the degree of the economic value of its base asset size in relation to the economic value of its base liability size. When viewing total asset versus total liability economic value, projected total assets are less negatively affected on a percentage basis than projected total liabilities in a rising rate environment.
The Company would have been within policy limits in all scenarios utilizing the alternative IRR scenario run for management purposes. The table below highlights those results:
Alternative Economic Value Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative IRR Results
|
Standard (Parallel Shift)
|
|
|
Economic Value of Equity at Risk%
|
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Basis Point Change Scenario
|
-1.6
|
%
|
|
-1.8
|
%
|
|
-5.0
|
%
|
|
-9.2
|
%
|
|
-12.6
|
%
|
|
Board Policy Limits
|
-10.0
|
%
|
|
-10.0
|
%
|
|
-20.0
|
%
|
|
-30.0
|
%
|
|
-40.0
|
%
|
The EVE at risk reported using the alternative methodology used for management purposes shows that as interest rates increase immediately, 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 size.
Detailed Economic Value Sensitivity
The following table details the economic value sensitivity to changes in market interest rates at
March 31, 2017
, for loans, investments, deposits, borrowings, and other assets and liabilities (dollars in thousands). The analysis reflects that in all rising rate scenarios, total assets are less sensitive than total liabilities. Asset sensitivity is offset by the non-interest bearing deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Change in Economic Value
for a given change in interest rates
|
|
|
|
|
Book
|
|
Total
|
|
Over / (Under) Base Case Parallel Ramp
|
|
|
|
Basis Point Change Scenario
|
Value (in $000's)
|
|
Assets
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Total Loans
|
1,132,618
|
|
|
28
|
%
|
|
1.7
|
%
|
|
-1.8
|
%
|
|
-3.5
|
%
|
|
-5.3
|
%
|
|
-6.9
|
%
|
|
Total Investment
|
2,295,859
|
|
|
58
|
%
|
|
4.3
|
%
|
|
-5.0
|
%
|
|
-10.1
|
%
|
|
-15.2
|
%
|
|
-19.7
|
%
|
|
Other Assets
|
545,994
|
|
|
14
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Assets
|
3,974,471
|
|
|
100
|
%
|
|
3.1
|
%
|
|
-3.6
|
%
|
|
-7.3
|
%
|
|
-10.9
|
%
|
|
-14.2
|
%
|
|
Interest Bearing Deposits
|
235,064
|
|
|
7
|
%
|
|
2.9
|
%
|
|
-1.9
|
%
|
|
-3.6
|
%
|
|
-5.2
|
%
|
|
-6.6
|
%
|
|
Non-Interest Bearing Deposits
|
2,643,790
|
|
|
76
|
%
|
|
6.4
|
%
|
|
-5.8
|
%
|
|
-11.2
|
%
|
|
-16.1
|
%
|
|
-20.6
|
%
|
|
Total Borrowings & Other Liabilities
|
595,536
|
|
|
17
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
-0.1
|
%
|
|
-0.1
|
%
|
|
-0.1
|
%
|
|
Liabilities
|
3,474,390
|
|
|
100
|
%
|
|
4.9
|
%
|
|
-4.4
|
%
|
|
-8.4
|
%
|
|
-12.1
|
%
|
|
-15.5
|
%
|
Detailed Alternative Economic Value Sensitivity
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 that in all interest rate scenarios, total assets are less sensitive, than total liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative IRR Results
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Change in Economic Value
for a given change in interest rates
|
|
|
|
|
Book
|
|
Total
|
|
Over / (Under) Base Case Parallel Ramp
|
|
|
|
Basis Point Change Scenario
|
Value (in $000's)
|
|
Assets
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
+400
|
|
Total Loans
|
1,132,618
|
|
|
28
|
%
|
|
1.7
|
%
|
|
-1.8
|
%
|
|
-3.5
|
%
|
|
-5.3
|
%
|
|
-6.9
|
%
|
|
Total Investment
|
2,581,295
|
|
|
65
|
%
|
|
3.8
|
%
|
|
-4.5
|
%
|
|
-9.0
|
%
|
|
-13.6
|
%
|
|
-17.7
|
%
|
|
Other Assets
|
260,558
|
|
|
7
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Assets
|
3,974,471
|
|
|
100
|
%
|
|
3.1
|
%
|
|
-3.6
|
%
|
|
-7.3
|
%
|
|
-10.9
|
%
|
|
-14.2
|
%
|
|
Interest Bearing Deposits
|
1,235,599
|
|
|
36
|
%
|
|
0.5
|
%
|
|
-0.4
|
%
|
|
-0.7
|
%
|
|
-1.0
|
%
|
|
-1.3
|
%
|
|
Non-Interest Bearing Deposits
|
2,521,721
|
|
|
73
|
%
|
|
6.4
|
%
|
|
-5.8
|
%
|
|
-11.1
|
%
|
|
-16.0
|
%
|
|
-20.5
|
%
|
|
Total Borrowings & Other Liabilities
|
(282,931
|
)
|
|
(8
|
)%
|
|
-0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.2
|
%
|
|
0.3
|
%
|
|
Liabilities
|
3,474,389
|
|
|
100
|
%
|
|
4.6
|
%
|
|
-4.2
|
%
|
|
-8.0
|
%
|
|
-11.5
|
%
|
|
-14.7
|
%
|
Certain shortcomings are inherent in the method of analysis discussed above and as presented in the tables above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features 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 tables above. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.
Item 4. Controls and Procedures.
CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at
March 31, 2017
, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended
March 31, 2017
, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
META FINANCIAL GROUP, INC.